Source: https://procedurallytaxing.com/author/williamschmidt/page/2/
Timestamp: 2019-04-20 18:42:22+00:00

Document:
For the week of July 9 through July 13, there were 9 designated orders from the Tax Court. Three rulings on IRS motions for summary judgment include 2 denials because there is a dispute as to a material fact (1st order based on employment taxes here) (2nd order involves petitioners denying both having a tax liability and receiving notice of deficiency for 2012 here) and a granted motion because petitioner was not responsive (order here). What follows are three orders where Judge Holmes takes on Chai ghouls, an exploration of a whistleblower case, and two quick summaries of cases. Overall, the Chai ghoul cases and whistleblower case made for a good week to read judicial analysis.
All three of these are orders from Judge Holmes that deal with Chai and Graev issues. The first two discussed were later in the week and had more analysis. As you are likely aware, the Chai and Graev judicial history in the Tax Court has led to several current cases that need analysis regarding whether there was supervisory approval regarding accuracy-related penalties, as required by Internal Revenue Code section 6751. In each of these cases, the IRS has filed a motion to reopen the case to admit evidence regarding their compliance with 6751(b)(1).
Docket Nos. 11459-15, Hector Baca & Magdalena Baca, v. C.I.R. (Order here).
The Commissioner filed the motion to reopen the record to admit the form. The Bacas couldn’t tell the Commissioner whether or not they objected to the motion. When given a chance to respond, they did not object. The Bacas did not raise Code section 6751 at any stage of the case (petition, amended petition, trial, or brief). The Commissioner conceded 6662(c) (negligence or disregard) penalties because the only penalty-approval form found is the one for 6662(d) (substantial understatement) penalties.
The Court’s analysis sets out the standard for reopening the record. The evidence to be added cannot be merely cumulative or impeaching, must be material to the issues involved, and would probably change the outcome of the case. Additionally, the Court should consider the importance and probative value of the evidence, the reason for the moving party’s failure to introduce the evidence earlier, and the possibility of the prejudice to the non-moving party.
The Court then analyzes those elements set out above. For example, the Court finds the penalty-approval form to be properly authenticated nonhearsay and thus admissible. Ultimately, the Commissioner had less reason to anticipate the importance of section 6751 because it was following Chai and Graev that it was clarified the Commissioner had the burden of production to show compliance with 6751 when wanting to prove a penalty.
In this case, the Court states because the Bacas did not object to the accuracy-related penalties, that is some excuse for the Commissioner’s lack of diligence. Additionally, the Court concludes that it can’t decide the Bacas would be prejudiced because they never said they would be.
Takeaway – Respond when the court requests your opinion or you may suffer consequences that could have been avoided if you had raised your hand and notified the court of your concerns.
Docket Nos. 19150-10, 6541-12, Scott A. Householder & Debra A. Householder, et al., v. C.I.R. (Order here).
This set of consolidated cases differ from the Bacas’ case because of an objection submitted by the petitioners. Arguments by the petitioners begin that the record should not be reopened because the Commissioner’s failure to introduce evidence of compliance with 6751(b)(1) shows a lack of diligence, and the Commissioner doesn’t offer a good reason for failing to introduce the form despite possessing it when trying the cases. They argue they would be prejudiced by reopening the record because they have not had a chance to cross-examine the examining IRS Revenue Agent on their case. They argue the form is unauthenticated and that both the declaration and the form are inadmissible hearsay.
Again, the form is found to be admissible nonhearsay. Regarding the authentication argument, the IRS recordkeeping meets the government’s prima facie showing of authenticity. The Court brings up that the Revenue Agent in question was a witness at trial that the petitioners did cross-examine, it’s just that they did not have section 6751 in mind at the time. In fact, the Court reviews a set of questions the petitioners listed and finds that those answers likely would not have helped them so comes to the conclusion that they would not be prejudiced by admitting the form.
Overall, both parties should have been more diligent to bring up section 6751. Since they did not, the lack of diligence on the Commissioner’s part is counterbalanced by the probative value of the evidence and the lack of prejudice to the petitioners if the record were reopened to admit the form.
Takeaway – The IRS is not the only party on notice of the Chai and Graev issue. Petitioners bear responsibility to raise the issue of supervisory approval just as the IRS has a responsibility to show proper authorization of the penalty. The court seems to be shifting a bit from prior determinations.
Docket Nos. 17753-16, 17754-16, 17755-16, Plentywood Drug, Inc., et al., v. C.I.R. (Order here).
These consolidated cases also deal with the 6751 accuracy-related penalties and the IRS motion to reopen the record to admit penalty-approval forms. While the petitioners originally disputed the penalties, they conceded penalties on some issues but did not want to concede penalties on others. As a result, they did not object to the Commissioner’s motion. The Court did not grant the motion regarding penalties determined against the corporate petitioner as it would not change the outcome of the case. In Dynamo Holdings v. Commissioner, 150 T.C. No. 10 (May 7, 2018), the Court held that section 7491(c)’s burden of production on penalties does not apply to corporate petitioners, so that, in a corporate case, where the taxpayer never asked for proof of managerial approval and so did not get into the record either a form or an admission that no form was signed, the taxpayer had the burden of production on this section 6751(b) issue and had failed. For the penalties determined against the individual petitioners, the Court granted the motion since they did not raise any objections.
In all three cases, the Court orders to grant the IRS motion to reopen the record to admit the penalty-approval form attached to the motion (with the exception of the denial of the application to Plentywood Drug, Inc.).
Comments: I must admit when Judge Holmes mentions Chai ghouls in his orders it makes me think of Ghostbusters (Chai ghoul bustin’ makes him feel good?). In looking over these three cases, it seems to me they have the same result no matter what the petitioners did. It is understandable when the petitioners never objected to the penalties or the approval form. However, the Householders objected and still got the same result. Perhaps I am more sympathetic to the petitioners, but the reasoning also does not follow for me that petitioners would not be prejudiced by admitting a form that allows them to have additional penalties added on to their tax liabilities.
Docket No. 972-17W, Whistleblower 972-17W v. C.I.R. (Order here).
By order dated April 27, 2018, the Court directed respondent to file the administrative record as compiled by the Whistleblower Office. Petitioner filed a motion for leave to conduct discovery, the IRS followed with an opposing response and the petitioner filed a reply to respondent’s response. On June 25, the Court conducted a hearing on petitioner’s motion in Washington, D.C., where both parties appeared and were heard.
Internal Revenue Code section 7623 provides for whistleblower awards (awards to individuals who provide information to the IRS regarding third parties failing to comply with internal revenue laws). Section 7623(b) allows for awards that are at least 15 percent but not more than 30 percent of the proceeds collected as a result of whistleblower action (including any related actions) or from any settlement in response to that action. The whistleblower’s entitlement depends on whether there was a collection of proceeds and whether that collection was attributable (at least in part) to information provided by the whistleblower to the IRS.
On June 27, 2008, the petitioner executed a Form 211, Application for Award for Original Information, and submitted that to the IRS Whistleblower Office with a letter that identified seven individuals who were involved in federal tax evasion schemes. The first time the petitioner met with IRS Special Agents was in 2008 and several meetings followed. The IRS focused on and investigated three of the individuals listed on petitioner’s Form 211 following those initial meetings.
The first taxpayer (and I use that term loosely for these three individuals) was the president of a specific corporation. In 2013, that individual was convicted of tax-related crimes including failing to file personal and corporate tax returns due in 2006, 2007, and 2008. This person received millions of dollars in unreported dividends (from a second corporation, also controlled by this individual). This individual was ordered to pay restitution of $37.8 million.
The second individual was the chief financial officer of the corporation. This person received approximately $13,000 per month from the corporation in tax year 2006 but failed to report that as taxable income, and did not file a tax return in 2007. After amending the 2006 tax return and filing the 2007 tax return, the criminal investigation ended. The Revenue Officer assessed trust fund recovery penalties for the final quarter of tax year 2006 and all four quarters of tax year 2007. This taxpayer filed amended tax returns for 2005 and 2006 in March 2009 and filed delinquent returns for 2007 and 2008 in July 2010. The IRS filed liens to collect trust fund recovery penalties of approximately $657,000 and income tax liabilities of $75,000 for tax years 2005 and 2006.
The third individual was an associate of the first two but had an indirect connection with the corporation. This taxpayer had delinquent returns for 2003-2011 and there was a limited scope audit for tax years 2009 and 2010. The IRS filed tax liens for unpaid income taxes totaling approximately $2.4 million for tax years 2003 to 2011.
For each of the individuals, the IRS executed a Form 11369, Confidential Evaluation Report, on petitioner’s involvement in the investigations. For taxpayer 1, the IRS Special Agent stated that all information was developed by the IRS independent of any information provided by petitioner. For taxpayer 2, the form includes statements the Revenue Officer discovered the unreported income and petitioner’s information was not useful in an exam of the 2009 and 2010 tax returns. For taxpayer 3, the form states the taxpayer was never the subject of a criminal investigation (which is inconsistent with the record) and that petitioner’s information was not helpful to the IRS.
The petitioner seeks discovery in order to supplement the administrative record, contending the record is incomplete and precludes effective judicial review of the disallowance of the claim for a whistleblower award. Respondent asserts the administrative record is the only information taken into account for a whistleblower award so the scope of review is limited to the administrative record and petitioner has failed to establish an exception.
The Court notes the administrative record is expected to include all information provided by the whistleblower (whether the original submission or through subsequent contact with the IRS). The Court’s review of the record in question is that it contains little information, other than the original Form 211, identifying or describing the information petitioner provided to the IRS. While the record indicates that there were multiple meetings concerning the three taxpayers, there are few records of the dates and virtually no documents of the information provided. The Court agreed with the petitioner that the administrative record was materially incomplete and that the circumstances justified a limited departure from the strict application of the rule limiting review to the administrative record.
The Court states the petitioner met the minimal showing of relevant subject matter for discovery since the administrative record was materially incomplete and precluded judicial review. The information petitioner seeks is relevant to the petitioner’s assertion that the information provided led the IRS to civil examinations and criminal investigations for the three taxpayers and led to the assessment and collection of taxes that would justify an award under section 7623(b). The IRS did not deny petitioner’s factual allegations and did not argue the information sought would be irrelevant so failed to carry the burden that the information sought should not be produced.
The Court limited petitioner’s discovery to three interrogatories concerning conversations with a Revenue Officer and two Special Agents, two requests for production of documents concerning notes and records of meetings with those three individuals.
Petitioner sought nonconsensual depositions if the IRS did not comply with the interrogatories and requests for production of documents. Since the Court directed the IRS to respond to the granted discovery requests, it is premature to consider the requests for nonconsensual depositions at this time. The footnote cites Rule 74(c)(1)(B), which calls that “an extraordinary method of discovery” only available where the witness can give testimony not obtained through other forms of discovery.
Respondent is ordered to respond to those specific interrogatories and requests for production of documents by August 17, 2018.
Comment: On the surface, this step forward looks to be a win for the petitioner as there seems to be a cause and effect that justifies a substantial whistleblower award. I discussed the case with an attorney with a whistleblower case in his background who commented that to get a whistleblower award the whistleblower had to be the first one to make the reporting and the information had to be outside public knowledge (though that was outside the tax world). From his experience, the government made it difficult to win a whistleblower award and I would say that looks to be the case here.
The Petitioner Wants to Dismiss? – Docket No. 11487-17, Gary R. Lohse, Petitioner, v. C.I.R. (Order here). Petitioner files a motion to dismiss for lack of jurisdiction, stating the notice of deficiency is not valid. The judge denies his motion because there is a presumption of regularity that attaches to actions by government officials and nothing submitted by the petitioner overcomes that presumption.
Petitioner Wants a Voluntary Audit – Docket No. 24808-16 L, Tom J. Kuechenmeister v. C.I.R. (Order here). Petitioner filed a motion for order of voluntary audit, also claiming that the IRS was negligent in allowing the third party reporter to issue the forms 1099-MISC for truck driving. As Tax Court is a court of limited jurisdiction, the Court cannot order the IRS to conduct a voluntary audit. While the petitioner was previously warned about possible penalties up to $25,000, this motion was filed prior to the warning so no penalty assessed for this motion. Petitioner’s motion is denied.
Takeaway: Each time here, the petitioner does not understand the purpose of the Tax Court. The petitioners may have come to a better result by treating Tax Court motions as surgical tools rather than as blunt weapons.
Docket No. 13502-17W, Gregory Charles Krug v. C.I.R. (Order here).
As promised in Patrick and William’s recent designated orders posts, this post looks at Krug v. Commissioner, a whistleblower case assigned to Judge Halpern, and is co-authored by both Patrick and William.
This order stems from Respondent’s motion for summary judgment, which actually resulted in two designated orders: the June 13 order discussed below, and one from May 29. In both orders, the Court is confused by Respondent’s arguments, and as such, declines to dispose of the motion without further argument. The May 29 order sets the motion for a hearing during a trial session on June 4. The later order discusses that hearing, but still reserves judgment until Respondent provides further information.
Social Security and Medicare wages are excluded from inmate services under the provision of Section 218(c)(6) of the Social Security Act. The Federal income tax withholding is dependent on the amount of wages paid which is less than the minimum wage. FIT on these wages would be dependent on other income (investment) earned by the inmates, and whether or not they file a joint return. Because of these unknown factors, this claim will be declined.
So, it appears the whistleblower notified the IRS that a prison was not withholding Social Security, Medicare, or Federal income taxes on wages paid to inmates. The IRS denied a whistleblower award claim, noting that the prison has no such withholding requirements.
Judge Halpern does not understand the relevance of the explanation. The Federal income tax reference seems inapplicable, he says, given that petitioner’s claim relates to “employment taxes.” He further notes that though section 218(c)(6) of the Social Security Act “does address services by inmates, we do not understand the relevance of the provision to petitioner’s claim.” In the May 29 order, he asked Respondent to clarify its argument at the June 4 trial session.
Apparently, Respondent’s explanation was insufficient. Judge Halpern notes in the June 13 order that, “as indicated in the transcript of the hearing, the Court was not satisfied with counsel’s explanation of why payments for the services of inmates are not subject to withholding for employment taxes.” Petitioner did not appear for the hearing. In fact, the petitioner has not been responsive to orders beginning February 8. Looking at the docket, there could be an issue of whether the Court has the petitioner’s correct address.
To us, it seems that Judge Halpern and Respondent are talking past each other. Judge Halpern is correct, in that, on its face, section 218(c)(6) of the Social Security Act (42 U.S.C. § 418) has nothing to do with withholding obligations. Rather, Section 218 provides a mechanism through which State and local governments may allow their employees to participate in Social Security and Medicare. Originally, States were not automatically obligated to participate in these programs. After the addition of Code section 3121(b)(7)(F) in 1991, with limited exceptions, all state employees are required to participate in Social Security, including its withholding requirements. Today, all states have a Section 218 agreement with the federal government.
Separately, Code section 3101(a) imposes Social Security and Medicare taxes, which section 3102(a) requires to be withheld from employee wages. Section 3121(b) defines “employment” broadly, with a number of exceptions. An exception exists for any employee of “a State . . . or any instrumentality . . . “. IRC § 3121(b)(7). Importantly, an exception to the exception exists for any states who have entered into an agreement with the federal government under Section 218 of the Social Security Act, or where the employee is “not a member of a retirement system of such State . . .” IRC § 3121(b)(7)(E), (F). As noted above, all 50 states have these agreements, and all state employees are generally—agreement or not—required to withhold these taxes.
And there’s where the rubber meets the road: Inmates of penal institutions are, under Social Security Act section 218(c)(6), excluded from any agreement under that section, as the Service notes. Further, even where no agreement is in force, section 3121(b)(7)(F)(ii) specifically exempts withholding obligations for state employers for wages paid to inmates in a penal institution.
Regarding the withholding of federal income tax, while such a tax might not be strictly characterized as an “employment tax”, employers are nevertheless generally obligated to withhold such taxes from employee wages. Reporting such a failure could charitably fall under the ambit of “employment taxes” when a pro se taxpayer uses this term. And further, section 3401 contains no blanket waiver on the definitions of “wages” or “employment” in mandating withholding obligations under section 3402(a)(1).
So, to us, there appears to be a live issue regarding income tax withholding requirements, but a fairly straightforward argument that no Social Security or Medicare tax withholdings were required. The Service says in the Form 11369 that the employer needed more information to make this determination (other income, marital status, etc.). But isn’t it the employer’s problem that they didn’t collect that information?
We’re also confused why the IRS would make only this argument. A whistleblower award under section 7623 is premised upon the IRS “proceed[ing] with any administrative or judicial action described in [7623(a)] based on information brought to the Secretary’s attention by an individual.” The “administrative or judicial action” could include “(1) detecting underpayments of tax, or (2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same…” If Respondent’s argument is that the prison in question wasn’t required to withhold, then surely the IRS also did not take “administrative or judicial action” to detect an underpayment or other malfeasance. That seems a much stronger argument for upholding the denial.
Further, Judge Halpern, in his second order, advises Respondent’s counsel to review Kasper v. Commissioner, 150 No. 2 (2018), which we’ve discussed before. Kasper holds (1) Tax Court review of a whistleblower award denial is generally limited to the administrative record; (2) the standard of review is abuse of discretion; and (3) the Chenery rule applies, meaning that the Tax Court can only uphold the Service’s decision on the same grounds that the Service itself made the decision.
How does Kasper affect this case? Because the standard of review is now conclusively an abuse of discretion standard in the Tax Court, it’s easier for the Tax Court to uphold the denial of a whistleblower claim.
But we may also be missing a critical fact: did the whistleblower’s claim relate to unpaid wages, as in Kasper? Without access to the other documents in the Tax Court’s docket, we can’t know for sure. If so, then Judge Halpern seems to suggest that regardless of whether a prison is required to withhold Social Security and Medicare taxes for wages paid to inmates, the Court could uphold the decision on the basis that no withholding was necessary, because no wages were paid. But, if that’s the case, why not just order that here? If only Tax Court motions and briefs were publicly accessible, we wouldn’t be left to wonder.
The June 13 order requires Respondent and Petitioner to file a memorandum on or before August 3 addressing the Court’s concerns with the Form 11369’s relevance. In the meantime, the Court has taken the motion for summary judgment under advisement.
For the week of June 11 through June 15, only 2 Tax Court orders are noted as designated orders. Perhaps summer vacations caused this week’s decline in designated orders, but this posting will focus on both orders.
This week’s order seemed confusing on its face so this analysis also incorporates the previous order issued on May 29 (here). This is a whistleblower case where the IRS filed a motion for summary judgment. Within that motion, the IRS relies on a Form 11369, Confidential Evaluation Report on Claim for Award. Within that form, there is a statement regarding how inmates earning wages might owe federal income tax (withholding is dependent on the amount of wages paid which is less than the minimum wage). The Court did not see the relevance of the statement about inmates to the case at hand. The May order set the IRS motion for hearing on June 4.
The petitioner did not appear for the hearing. In fact, the petitioner has not been responsive to orders beginning February 8. Looking at the docket, there could be an issue of whether the Court has the petitioner’s correct address.
The June 13 order is that the respondent shall file a memorandum on or before August 3 addressing the Court’s concerns with the Form 11369’s relevance. The petitioner has the same deadline to file a memorandum regarding his position on the form’s relevance. The Court has taken the motion for summary judgment under advisement.
Takeaway: It is unclear on its face the connection between inmate taxation and a whistleblower case so understandably the Court wants an explanation for relevance. It is always best to make arguments that relate to the issues at trial. A longer post dedicated to this case will appear later today.
How Long Can Trial Be Delayed?
Docket No. 1973-10 L, Douglas Stauffer Bell & Nancy Clark Bell v. C.I.R. (Order to Show Cause here).
The Bells filed their petition with Tax Court regarding collection due process regarding notices of levy in January 2010, with a trial scheduled for March 2011. Then, the Bells began to file petitions in bankruptcy court for Chapter 13 bankruptcies. Each time, the automatic stay due to the bankruptcy petition halted proceedings in Tax Court.
First case: The Bells filed in January 2011. The bankruptcy court issued an Order of Dismissal August 11, 2011, stating the Bells failed to comply with the provisions of their Chapter 13 plan or obtain confirmation of a plan. The automatic stay was lifted and the Tax Court case was scheduled for trial May 2012.
Second case: The Bells filed again November 2011. The bankruptcy court Order of Dismissal was issued November 19, 2012, the automatic stay was lifted and the Tax Court case was scheduled for September 2013 trial.
Third case: The Bells filed again June 2013. The bankruptcy court Order of Dismissal was issued February 24, 2016, the automatic stay was lifted and the Tax Court case was scheduled for trial at a session beginning May 22, 2017.
When the case was called, the Court heard the Commissioner’s motion to dismiss, for lack of jurisdiction, the Bells’ contentions regarding notices of lien (since their petition was on notices of levy). The Bells admitted they did not file a petition or anything else on the notices of lien. The Court indicated the motion was granted and the case would proceed only on the levy issues. At the hearing, Ms. Bell indicated her objection to the ruling and desire to appeal. The Court explained their ability to appeal to Ms. Bell. In the Court’s order, the case was remanded to the IRS Appeals Office for an administrative hearing. The remand was effectively a continuance of trial.
With the supplemental hearing, the Bells did not provide a Form 433-A financial information statement so IRS Appeals issued a supplemental notice of determination against the Bells, sustaining the proposed action.
Following this hearing, the Tax Court case was ripe to proceed on trial for the levy issues of 2006 and 2007. However, the Bells filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit on August 23, 2017. The Tax Court explained this was incorrect procedure at the May 22, 2017, hearing and the Court of Appeals dismissed the case as premature on January 22, 2018, with a mandate on March 16 stating they may only exercise jurisdiction over final orders or over certain interlocutory and collateral orders. Since the order was none of those, the case was dismissed for lack of jurisdiction.
The Tax Court held a telephone conference on March 22 with petitioner Nancy Clark Bell and counsel for the Commissioner. The case was set for trial on August 6 at Winston-Salem, North Carolina. The Court’s order stated the parties are to communicate and cooperate, exhausting all possibilities of settlement, urging petitioners to take advantage of settlement offers from respondent’s counsel. Additionally, the petitioners were advised of the North Carolina Central University School of Law, Western North Carolina LITC, and North Carolina Bar Association Tax Court Pro Bono Program as options for volunteers that assist self-represented taxpayers.
The Commissioner’s status report on June 13 stated that the Bells have not been in contact with respondent’s counsel since March 2018. In the Court’s order June 14, there is discussion of the Bells, stating their inaction is unsatisfactory and that their approach has been consistent with their “dilatory handling of this case since filing it more than 8 years ago.” The Court touches on the delay from the 3 bankruptcy filings with eventual dismissals due to failure to comply with the chapter 13 plans, the remand to IRS Appeals with a failure to provide financial information, and the premature and pointless appeal to the U.S. Court of Appeals that was also dismissed.
The Court states the March 22 order was intended to provide the Bells with opportunity to provide information planned for at trial or facilitate settlement, giving them four and a half months before trial, but that has been ignored.
The June 14 order states that the Bells should show cause no later than June 28 why the Court should not dismiss their case for failure to prosecute. The Court instructs the Bells of their options regarding what to do if they disagree with the Commissioner’s report, intend to give up the case, intend to bring the case to trial, or would like a telephone conference.
Takeaway: While the Bells may have been sincere in their varied court filings, the results have been to bring about significant delay in this Tax Court case. It is easy to sympathize with the Court’s frustration over a case that is still not resolved over eight years after the Bells filed their petition. Whether sincere or not, it is best not to use tactics that may delay trial and frustrate a judge. It is also worth following a judge’s advice, ranging from how to appeal a decision to how to prepare for trial or settle a case.
In June, the Memphis IRS Centralized Offer in Compromise telephone number will change from (866) 790-7117 to (844) 398-5025. It is not possible to transfer the prior extensions for each individual Offer Examiner to the new number.
Offer Examiners will need to provide taxpayers and practitioners with their new extensions on the next contact, by letter or phone. In the meantime, taxpayers and practitioners can call the 844 number and press 3 to reach a live employee to ask for an employee’s direct phone number. Please note that Offer Examiner phone numbers are not on a toll-free line.
For the week of May 14 to 18, only 7 Tax Court orders are noted as designated orders. Most of the orders are short so the first three have a couple sentences, the next two have brief items of a procedural note and the last two discuss a reasonable time to provide financial information and the Cohan rule.
The first order grants an IRS motion to dismiss because of an unresponsive petitioner, stating the petitioner can make an oral motion at the upcoming trial session (Order of Dismissal and Decision here). The second order has the IRS motion to dismiss for lack of jurisdiction scheduled for hearing and reminds the parties that if the motion is not granted that the parties must be ready to present their arguments about the tax years in question (Order here). The third order makes a previous order to show cause absolute for the upcoming trial session because the petitioners were nonresponsive (Order here). The takeaway here is to be a responsive petitioner.
Don’t Forget the Intervenor – Docket No. 4045-16, Amy F. Liesman, Petitioner, and Robert M. Liesman, Intervenor v. C.I.R. (Order here). In what looks to be an innocent spouse case, the petitioner filed a motion to dismiss, stating she understands that dismissal of her case will “effectively sustain Respondent’s Final Appeals Determination” and also states Respondent does not object to the motion. However, the motion does not state whether the Intervenor objects to the granting of the motion so the order gives a deadline for the Intervenor to object.
Third Party Filings – Docket No. 5092-17, Chad Loube & Dana M. Loube v. C.I.R. (Order here). Counsel for Second Chance, Inc. electronically filed a notice of election to participate and a brief in support of petitioner’s opposition to respondent’s motion for summary judgment. Since third party filings are to be made by paper filing, the document is procedurally improper and is stricken from the record of the case.
Takeaway: Both of these cases illustrate how various parties did not follow proper procedure. In innocent spouse cases in which an intevenor exists, the moving party needs to state in any motion the position of the intervenor as well as the position of the opposite party. Failing to obtain the view of the intervenor prior to filing the motion will delay entry of an order because the court will do exactly what it did here and seek the views of the intervenor. In talking about potential rule changes at the most recent Tax Court judicial conference, the Court noted the absence of rules for amicus briefs. In the absence of a rule permitting a third party to participate in a case, the default rule requires the third party to file any documents by paper. When in doubt, consult the Tax Court Rules of Practice & Procedure, available on their website here.
Docket No. 12192-16 L, Thomas A. Denney v. C.I.R. (Order and Decision here).
Ultimately, the petitioner was unresponsive, so the Tax Court’s order grants the IRS motion for summary judgment and issued an order permitting the IRS to proceed with collecting on the liability for the 2009 tax year. While the petitioner thought the amount of time was unreasonable, the Court thought that the approximately two months afforded to the petitioner was certainly reasonable to fill out the form.
Takeaway: It is best to be responsive to the IRS when they are requesting financial information. If the petitioner and his accountant had taken the time to fill out the IRS form, they might have been able to set up an installment agreement and been able to avoid litigation or other issues. Even if you fail to respond in the time frame set by Appeals, the failure to respond to the Tax Court’s request will almost always be fatal to the successful outcome of the case.
Docket No. 15580-17S, Stephanie Elizabeth Gentry v. C.I.R. (Order here).
This order is a bench opinion with a transcript of the proceedings. The transcript details how petitioner received a notice of deficiency for her 2014 tax return, with disallowed deductions for unreimbursed employee business expenses and a tax preparation fee. Ms. Gentry provided testimony about her employment as an art consultant and in a boat chartering business during that year. The Court notes that the unreimbursed employee expenses were more than half of her total wages and gross unreimbursed expenditures were 64% of her art consultant wages.
The petitioner provided testimony that her records were unavailable because she suffered a medical injury and then her boyfriend prevented her from having access to the records. She tried to reconstruct the business records from her bank accounts, but her business account also included payments for personal expenses. What she did reconstruct was less than half of the expenses claimed.
The Court uses the Cohan rule in its analysis. The Cohan rule is a judge made rule that allows the Tax Court to estimate the allowable deduction amount when a taxpayer establishes a deductible expense was paid but fails to establish the amount of the deduction. The taxpayer may substantiate deductions through secondary evidence only where the underlying documents were not intentionally lost or destroyed and there must be sufficient evidence to permit the Court to conclude a deductible expense was paid or incurred in at least the amount allowed.
However, the Cohan rule has limitations and Code section 274(d) requires higher substantiation with regard to travel, meals and entertainment, and listed property, including passenger automobiles (in other words, expenses claimed by Ms. Gentry). For these expenses, a taxpayer must be able to prove the amount of each separate expenditure, the amount of each business use, and the business purpose for the expenditure with respect to that property.
Even though the Cohan rule and the relaxed evidentiary standard of an S case might have resulted in a ruling at least partially in Ms. Gentry’s favor, section 274(d) overrode each of the potentially relaxed standards for proving expenses resulting in a bench opinion in which the Court sustained the disallowances of the expenses in the notice of deficiency and decided in favor of the IRS.
Takeaways: For one, a taxpayer needs to be able to substantiate deductions claimed on a tax return. Receipts, bank records and other documents can be the evidence that will make or break a petitioner’s case. Keeping good business records and maintaining a separate business account are essentials to prove business deductions are valid.
The other main takeaway is that a petitioner cannot fully rely on the Cohan rule in Tax Court. While the rule allows the judge some leeway when primary evidence (the documents mentioned above) is unavailable because secondary evidence (such as testimony) may be sufficient, Congress has limited the application of the Cohan rule. There are instances such as the case in question where the Internal Revenue Code spells out higher substantiation requirements and the Cohan rule will not apply.
This week provides 7 designated orders. The batch includes some short items of note, a followup on a previous case, a focus on cancellation of debt/insolvency, and a bit of creative writing. The first order grants the motion for summary judgment from the IRS since the petitioner was non-responsive (Order and Decision here). Another finds that the case is moot, since the liability was satisfied and the proposed levy is unnecessary. Judge Panuthos goes beyond the call of duty by providing an explanation for the petitioner in response to his assertions (Order of Dismissal Here). The third has the petitioner making unfounded claims of misconduct by IRS personnel and requesting a continuance. Since the petitioner previously received a continuance and had filed for bankruptcy (staying the Tax Court case), which was pending for a year before being dismissed without objection, the Court denied petitioner’s request for continuance (Order Here).
Docket # 9118-12, Cecil K. Kyei v. C.I.R. (Order of Dismissal and Decision Here).
I previously wrote about Mr. Kyei’s case here and here. In brief, Mr. Kyei had filed bankruptcy multiple times and one automatic stay from a bankruptcy case potentially voided a settlement agreement with the IRS. Previously, the Tax Court ordered the IRS to address the issue of burden of production as to the penalty for 2010. Mr. Kyei was to file a response to their supplement for the previously filed motion to dismiss.
The IRS supplement stated they could not meet the burden of production and conceded the penalty of $2,614.80 for 2010. Mr. Kyei did not respond. The Court ordered that there were deficiencies in tax for Mr. Kyei for 2008 and 2010 based on the notices of deficiency. All other amounts, including the 2009 deficiency and all three years of penalties were reduced amounts. In total, the 2008 deficiency was $15,518.00, with a 6662(a) penalty of $1,551.80 and a 6651(a)(1) penalty of $4,017.40. The 2009 deficiency was $7,830.00 and 6662(a) penalty of $783.00. The 2010 deficiency was $26,148.00 and there were no listed penalties.
Docket # 15337-16S, Kamal Rashad Ellis v. C.I.R. (Order Here).
Docket # 25294-16S, Terry Thomas Woods v. C.I.R. (Order and Decision Here).
Based on these two orders, I thought I would give a spotlight to some issues regarding cancellation of debt income and insolvency.
The first is based on a bench opinion by Judge Buch. In the opinion, Mr. Ellis testified regarding his Discover cards. He had at least 3 different Discover credit cards and there were two Form 1099-C forms reported to the IRS by Discover Financial Services for two of those cards. Based on $7,347 of cancellation of debt income, that brought $2,058 of additional tax for Mr. Ellis for 2013 so he filed a petition with Tax Court. Mr. Ellis testified he did not receive the 1099-C forms and could not find his Discover Card records because of a house fire. He also testified he previously disputed at least 3 charges in 2006 on one of his cards. Because Mr. Ellis did not provide testimony that sufficiently disputed the cancellation of debt income, the Court found in favor of the IRS.
The second order also concerns cancellation of debt. Mr. Woods defaulted on a car loan with GM Financial. The company cancelled the debt and issued to him a Form 1099-C for $7,559, which was not included on petitioner’s 2014 tax return. The notice of deficiency was for tax of $1,132. After Mr. Woods filed a petition with Tax Court, the parties eventually conferred enough for the IRS to send him decision documents on July 20, 2017. He did not respond and when the IRS called him on September 20, 2017, his stated he “completely forgot about it.” After that point, petitioner was unresponsive. The IRS filed a motion for summary judgment, which the Court granted, deciding the deficiency in tax due for 2014 was $1,132.
I make note of the Court’s discussion of cancellation of debt income and the insolvency exception. To begin, cancellation of debt income is included in a taxpayer’s gross income. An exception is if the discharge of debt occurs when the taxpayer is insolvent. A taxpayer is insolvent to the degree that liabilities exceed the fair market value of assets. The amount of income excluded by virtue of insolvency is not allowed to exceed the actual insolvency amount. Since Mr. Woods did not provide anything to prove his insolvency, the Court had to include the full cancellation of debt income in his gross income as stated by the notice of deficiency.
Takeaway: In my experience, Form 1099-C, bringing cancellation of debt income, can be devastating to low income clients. IRS Publication 4681 details ways to exclude cancellation of debt income. I use the insolvency worksheet (on page 6 of IRS Publication 4681 for tax year 2017) to assist my clients. They fill out the worksheet by listing their debts and the fair market value of assets as of the date the debt was cancelled (not today’s value!). Then, they are to use IRS Form 982, by checking the box for line 1b, and using line 2 to list the smaller amount of the debt cancelled or the amount the client was insolvent. It may be necessary to amend a tax return to attach this form to a client’s tax return. Overall, this method will reduce or eliminate the cancellation of debt income and its related tax liability. This could significantly improve your client’s financial situation.
Docket # 25781-12 L, Estate of Jeanette Ottovich, Deceased, Randy Ottovich, Harvey Ottovich, and Karen Rayl, Executors v. C.I.R. (Order Here).
“We stress this is a metaphor, although we also note that today is the exact bicentennial of the last trial by battle in the English-speaking world. See the onomastically excellent for our Court Ashford v. Thornton, 1 B & Ald. 459 106 E.R. 149 (1818) (Ashford declined battle; Thornton possibly got away with murder and ended up in Baltimore); see also “No ‘Game of Throne’ Throwdown,” Staten Island Advance (March 28, 2016) (NY Sup. Ct.) (acknowledging trial by battle still available in New York State). (The case should be better known by tax lawyers for the opinion of Lord Chief Justice Ellenborough: “it is our duty to pronounce the law as it is, and not as we may wish it to be”).
For the week of March 19 to 23, there were 10 designated orders from the Tax Court. The first order lifted temporary seals and denied petitioner’s motion for protective order in order to seal public records (order here). In the second, petitioner’s protests, including that parts of Pennsylvania were declared a federal disaster area, were in vain (order here). The third order details fallout from the Affordable Care Act – how a woman’s marriage took her over income for the premium tax credit and thus she had to repay it (order and decision here).
Three Year Time Limit – Docket No. 23113-12, Frank W. Dollarhide & Michelle D. Dollarhide v. C.I.R. (Order and Decision here). This order is an illustration of the 3-year limitation on refunds. While the Dollarhides addressed their tax liability when they filed their 2006 tax return in 2011, they were outside the three-year time limit to receive the tax refund they would have been due had they filed a timely tax return.
Docket No. 380-18, John Henry Ryskamp v. C.I.R. (Order of Dismissal for Lack of Jurisdiction here). Mr. Ryskamp’s 2018 case is dismissed because he filed the petition based on an IRS Letter 2802C where the petitioner wrote “Notice of Determination” rather than an official IRS Notice of Determination. Mr. Ryskamp cites his own 2015 case before the U.S. Court of Appeals for the D.C. Circuit to no avail. In fact, the Court notes his 2016 case (7383-16) was also a petition based on a Letter 2802C. While referencing the ability to penalize him a penalty up to $25,000, the Court does not impose a penalty but warns that the Court will strongly consider imposing a penalty if he returns with similar arguments.
Docket No. 23808-17 L, John Henry Ryskamp v. C.I.R. (Order and Order of Dismissal for Lack of Jurisdiction here). In the same week, there is a designated order for Mr. Ryskamp’s 2017 Tax Court case. In the background, the Court elaborates on the 2015 case before the U.S. Court of Appeals for the D.C. Circuit, which was an affirmation of a 2011 Tax Court order and decision which granted summary judgment for the IRS on a notice of deficiency for tax years 2003 to 2006, 2008, and 2009. By the way, Mr. Ryskamp’s petition for writ of certiorari was denied by the U.S. Supreme Court, making the Tax Court decision in that matter final. For this case, Mr. Ryskamp filed a petition based off a Letter 4473C again concerning the 2003 tax year. Since the petition was not based off a proper notice of deficiency, the Court granted the IRS motion to dismiss for lack of jurisdiction. This time, there was no mention of a penalty for the litigious Mr. Ryskamp.
Docket No. 9417-17, Fletcher Hyler v. C.I.R. (Order of Dismissal for Lack of Jurisdiction here). In a similar vein, this designated order tells how petitioner filed a petition based on a math error notice for 2015. Since it was not based off a notice of deficiency, the Court granted the IRS motion to dismiss for lack of jurisdiction.
Takeaway: It is necessary for a petitioner to file the petition based off a valid notice of deficiency or based on another valid issue. A petitioner cannot pick a random mailing from the IRS and file a petition with Tax Court. When a petitioner does, the Tax Court will not have jurisdiction and shall have to dismiss the case (with potential penalties for petitioners like Mr. Ryskamp).
Docket No. 16269-16SL, Bonnie Lou Black v. C.I.R. (Order and Decision here).
In this case, the procedural issues are straightforward. Ms. Black sought review of a notice of intent to levy for her 2012 tax deficiency. Ms. Black did not submit financial information, offer any collection alternatives or agree to a payment plan. Since that was the case, the Tax Court granted the IRS motion for summary judgment.
An issue in the case, though, is that the IRS issued an erroneous CP-22A balance due notice for 2011 stating that $8,384.18 was due to them. The next month, the IRS corrected the error by issuing a CP-21C notice stating there was no balance due for 2011.
Takeaway: IRS actions can affect taxpayers in a variety of ways, sometimes for the worse. It may be necessary to find creative ways to find clients relief. Unfortunately for Ms. Black, Tax Court is not the answer for assisting with her Social Security issues. Hopefully she can find help elsewhere.
How Long Does Petitioner Need to Prepare for Trial?
Docket No. 23475-15, William Budell Markolf v. C.I.R. (Order here).
This case is based on tax liabilities for 2008 through 2011. The IRS issued a notice of deficiency June 16, 2015 and petitioner filed with Tax Court September 15, 2015. The case was set for trial in Columbia, South Carolina, beginning October 17, 2016, with a pretrial order issued May 16, 2016 with a standard notice to exchange trial documents no later than two weeks before the trial session. On September 26, 2016, petitioner’s counsel filed a motion for continuance, explaining the need for additional time to secure documents, estimating three weeks would be necessary (which would be October 17, 2016). Petitioner was to file a supplement describing work toward preparation, which was filed October 3, 2016.
By notice filed April 11, 2017, the trial was rescheduled in Columbia for the session beginning September 11, 2017 with a new pretrial order. On August 8, 2017, respondent mailed a 65 paragraph stipulation of facts and 49 exhibits planned for trial. While there were several phone conferences the Court held, petitioner’s counsel did not respond to respondent’s stipulation or submit exhibits, which were not prepared as of a week before trial.
Then Hurricane Irma was expected to arrive in Columbia, South Carolina on September 11, 2017, prompting the Court to continue the case. The order stated that petitioner had “the unintended consequence” of continuance and he was given more time “which we think he does not deserve.” The court stressed he should not delay and should “complete that work while the iron is hot,” stating he should expect no further continuance or latitude regarding the pretrial order.
On September 15, 2017, respondent sent petitioner two copies of a revised stipulation of facts (now 73 paragraphs) and 49 exhibits. In correspondence sent in September, November, December, and January, respondent requested petitioner to sign and return the revised stipulation, but that did not happen.
By notice December 4, 2017, the Court set the trial in Columbia for April 30, 2018 with the standard pretrial order. On February 21, 2018, the IRS filed a motion for an order to show cause. On February 23, the Court held a phone conference where petitioner’s counsel stated petitioner hired an independent contractor to assist with document preparation and cited a difficulty was petitioner’s recent surgery. The Court granted the motion by ordering that petitioner had to document on or before March 15, 2018, why the IRS stipulation and exhibits should not be deemed admitted for the case.
On March 2, the IRS filed a motion to compel production of documents, which the Court granted in part on March 7, 2018. On March 16, petitioner filed a one-page answer twice with two different cover sheets, one being “Petitioner’s Response to Motion to Compel Production of Documents” and the other “Petitioner’s Reply to Answer.” Despite the second title, the document does not refer to the order to show cause or the motion it granted. It also does not refer by number to the stipulation or to any exhibits. Two documents are attached to the memoranda that are not sworn affidavits or signed under penalty of perjury. One is a purported letter from a physician stating petitioner had surgery on December 6, 2017, and was “released to full-time work” on January 7, 2018. The other details the medical issues of the accountant hired to assist the petitioner. From January through March 2018, the accountant had the flu for two weeks, broke his right ankle, had surgery February 12, and was in physical rehabilitation from February 15 until discharged March 8, returning to work for petitioner on March 13. The accountant cites those issues as reasons for delay in assisting petitioner with the trial document preparation.
The Court reviews these delays, citing that the case was filed 2 and a half years ago and involves tax returns due 6 or more years ago. The petitioner received 2 continuances with admonishments not to delay further the production of documents. The Court notes that the petitioner waited until December to hire an assistant for the document production and not times such as when the returns were prepared, when the IRS examined them, when he received the notice of deficiency, filed the petition, received the first notice of trial with standing pretrial order, the time of the second notice, or when warned there would be no further continuances granted. The Court notes that allowing for the difficulties arising in recent months, those were “long after petitioner’s work on this case should have been largely finished.” The late-occurring mishaps do not explain why petitioner did not cooperate in the stipulation process and did not make an actual response to the order to show cause. The Court ordered that the Order to Show Cause is made absolute and respondent’s proposed stipulation is deemed stipulated for purposes of the pending case.
Takeaway: This case is an illustration on what not to do for a pending Tax Court trial. Basically, read the pretrial order and follow its instructions. Respond to opposing counsel’s stipulations and exhibits. As you need to, provide your own stipulations and exhibits on time. When the judge says to do any of those tasks and that there will be no more continuances, take that seriously and respond accordingly.
This week’s designated order post was prepared by William Schmidt of Kansas Legal Aid Services. Of course, one of the designated orders addresses an issue of interpretation of the Graev case. This week the Court struggles with the concession of the fraud penalty for lack of proper approval and the impact of that concession on the statute of limitations. If the IRS does not obtain the proper approval for imposition of the fraud penalty and if the statute of limitations expires but for the exception provided by proof of fraud, there can be situations in which the IRS must prove fraud for purposes of holding open the statute but not be allowed to impose the fraud penalty for lack of approval.
One pattern for Tax Court is that holiday weeks are light weeks for designated orders. There were 3 designated orders this particular week.
The first, Renee Vento, et al., v. Commissioner (3 consolidated cases), finds the petitioners trying to claim deductions for payments made to the Virgin Islands Bureau of Internal Revenue (VIBIR). They now concede they are cash method taxpayers so would not be eligible to claim deductions on 2001 U.S. tax liability for 2002 payments made to the VIBIR.
The second order, Cecil K. Kyei v. Commissioner, updates a previous designated order report here. To summarize, Mr. Kyei has filed for bankruptcy previously and those time periods have overlapped with his Tax Court cases. Specifically, a previous settlement agreement with the IRS looks to be void because it was during the time period of an automatic stay based on a bankruptcy filing. The parties were to file their recommendations before February 16.
Mr. Kyei has been nonresponsive and the IRS is unable to contact him. The IRS filed their recommendation to proceed with the notices of deficiency for 2008 and 2010, but accept a lower amount for 2009.
The Court’s decision is that the June 2015 agreement is not enforceable because of the automatic stay. The Court denied the IRS motion for entry of decision based on the agreement. The Court is treating the IRS motion, while not styled as a motion for dismissal, as a motion to dismiss for lack of prosecution.
The IRS did not address the 2010 penalty of $2,614.80 so they are ordered to file a supplement to their motion addressing the burden of production for the 2010 penalty no later than March 9, 2018. Mr. Kyei shall file his response to the motion as supplemented no later than March 23, 2018.
Takeaway: Potentially Mr. Kyei had a good settlement agreement in place with the IRS in June 2015. The bankruptcy affecting that time period means that the automatic stay interfered with those settlement negotiations and they are no longer enforceable. Now that the IRS is unable to contact him, Mr. Kyei is likely going to owe once again the original notice of deficiency amounts (with a lower amount in 2009), making part of his actions in vain.
The third order, Johannes Lamprecht & Linda Lamprecht v. Commissioner, further deals with Graev penalties. On February 20, 2018, the IRS filed a status report conceding the requirements of 6751(b)(1) were not met regarding the 6663 fraud penalty for 2006 and 2007. They indicate they are prepared to introduce evidence on compliance with 6751(b)(1) in connection with the 6662 accuracy-related penalty but trial is no longer required as to the fraud penalty. The status report does not comment on the issue of fraud as it relates to the statute of limitations.
The Court’s order is to strike the case from the March 8, 2018, Washington, D.C. Special Session calendar. No later than March 9, 2018, the IRS shall file a status report regarding their position as to the statute of limitations and the arguments relied on to show the statute of limitations does not bar the assessment of the accuracy-related penalty still at issue. The report should explain whether intending to argue fraud for the purpose of 6501(c)(1). If the concession affects the relevance of the information sought in the motions to compel, then that date is a deadline for amended motions to bring the previous motions into conformity with their current position. It is further ordered that the parties shall file a status report no later than March 23, 2018, (or separate reports, if necessary) with their recommendations as to further case proceedings (including a deadline for petitioners’ response to the motions to compel).
Takeaway Summary: There looks to be some IRS give-and-take regarding the 6751(b)(1) penalty in this case regarding Graev fallout. While conceding the 6663 fraud penalty, the IRS has not given up on the 6662 accuracy-related penalty and the Court wants explanation of how the statute of limitations allows them to proceed on that accuracy-related penalty. It is curious how each case develops regarding 6751(b)(1) penalties.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 § 418
 § 3121
 § 3121
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.