A Terrible (But Apparently Effective) Way to Thwart the IRS’ Civil Fraud Penalty

This post originally appeared on Forbes on December 17, 2014, and can be found here.

Frivolous arguments are not ‘How to STOP the IRS,’ but saying them loudly enough and often enough might prevent the fraud penalty.  The Tax Court in Kernan v. Commissioner recently had the opportunity to review the case of Eugene Kernan.  Mr. Kernan seems to have a lot of interesting ideas, which you can find at this webpage, www.theamericanrepublic.com (absolutely not an endorsement).   Some of Mr. Kernan’s ideas pertain to his not having to file tax returns or pay taxes.  You too can learn how to stop paying taxes for the low price of $1,295.00 by purchasing “How to STOP the IRS” on CD-Rom…

I know that seems like an exciting offer, but, as most readers have probably surmised, Mr. Kernan eventually drew the IRS’ ire, and was assessed taxes, penalties and interest for many of the past years where he was implementing his “How to STOP the IRS” strategies.  Many of the readers–and the author of this post—are probably happy to see Mr. Kernan forced to fulfil one of his civic duties, and there is some entertainment value in person who is smug but incorrect being publicly reprimanded, but we focus on tax procedure and not humiliation.  Thankfully, this backdrop provides an interesting tax procedure issue—whether or not Mr. Kernan’s proselytizing about his improper tax scheme to everyone who would listen, including on TV and to the IRS, was sufficient to insulate him from the civil fraud penalty.


The Facts

Around 1993, Mr. Kernan ceased filing returns, and years 2001 through 2006 were at issue in the Tax Court case.  Mr. Kernan’s interpretation of the Code was that Section 6001 required the Commissioner of the IRS to personally invite him to file a return before he was required to file or pay any tax.  Contrary to Mr. Kernan’s tax philosophy, the Service issued notices of deficiency for each year for the tax due.  The noticed included the failure to pay estimated taxes penalty, the failure to file penalty, the failure to pay penalty, and the applicable interest.  The Service also imposed the fraudulent failure to file penalty under Section 6651(f).

Before issuing the notice, the IRS had recreated Mr. Kernan’s income by reviewing deposits made into his bank account.  Kernan refused to provide records (apparently, that request too should have come from the Commish), so the IRS summonsed the information from his banks.   The IRS found he had two sources of income, from which he seemed to earn a fairly nice living.  First, he sold various tax avoidance products (a fool and his money are soon parted).  Second, he acted as a paralegal, advising folks in IRS matters, and apparently setting up companies, trusts, doing estate planning, and other legal work.

As stated above, Mr. Kernan did not report any of this income, did not file returns, and did not pay tax.  Mr. Kernan did however share this thought on Section 6001 with the Social Security Administration and the IRS by letter – perhaps multiple times.  He also went on TV and discussed his strategy, and plastered his scheme all over his web page.

Before the Court, Mr. Kernan advanced his argument that he was not required to file a return until the Commissioner personally notified him that the IRS would like to review his tax information.  The Tax Court tossed Mr. Kernan’s briefs and refused to review them; generally, not a strong start to a case.  As a side note, the holding has an interesting discussion about the Court’s ability to do this when a party ignores the specific filing requirements.  Here, the Court noted Kernan greatly exceeded the “generous page limits” for briefs that the Court had allowed in this case.  The Court also stated that striking the brief didn’t matter much, because all 88 pages of initial brief and 88 pages of reply brief were garbage.

The tax, interest, and all penalties, except for the fraud penalty, were upheld.  Although Mr. Kernan’s briefs were tossed, the Court did still address whether or not tax and each of the penalties should have been imposed.

The Law

As stated above, the fraud penalty was imposed but not upheld by the Court.  The penalty under Section 6651(f) increases the failure to file penalty from 25% to 75% of the unpaid tax when the failure is fraudulent.  The government must show by clear and convincing evidence that the “taxpayer deliberately failed to file, and…that…the taxpayer intended to evade tax that he knew was owed.”

The Court first reviewed Mr. Kernan’s disclosure as a potential mitigating factor for fraud.  The Third Circuit, which is where I am located but not where Kernan’s case would be appealed, has held that disclosure can be a mitigating factor for fraud in tax protestor failure to file cases.  See Raley v. Comm’r, 676 F2d 980 (3d Cir. 1982).  In the Third Circuit case, the taxpayer sent multiple letters to the IRS, to the Secretary of Treasury, and various other federal officials, in which he claimed taxes were unconstitutional.  The taxpayer later filed returns, but failed to sign the returns and did not include any income.  After the taxpayer pled (or pleaded) guilty to criminal failure to file, he challenged the imposition of the civil fraud penalty.  The Third Circuit held:

[he] went out of his way to inform every person involved in the collection process that he was not going to pay any federal income taxes.  The letters do not support a claim of fraud; to the contrary, they make it clear that [the (non)-taxpayer] intended to call attention to his failure to pay taxes.  It would be anomalous to suggest that [his] numerous attempts to notify the Government are supportive, let alone suggestive, of an intent to defraud.

Although not discussed in detail in the Kernan case, other courts have come to this same conclusion regarding protestors failing to file, requiring an affirmative act of misrepresentation.  See Zell v. Comm’r, 763 F2d 1139 (10th 1985).

Other courts, including the Ninth Circuit, the Seventh Circuit, and the Tax Court when not appealable to the Third or Tenth, have found that disclosure was not sufficient in these cases to prevent the imposition of the fraud penalty.  The Ninth Circuit stated, “disclosed defiance, standing alone, would not bar a finding of fraud.”  Further, fraudulent intent “does not require the taxpayer hide his defiance from the IRS.”  Edelson v. Comm’r, 829 F2d 828 (9th Cir. 1987).

It does not appear that the Ninth, Seventh or Tax Court holdings create a bright line that disclosure will never prohibit the imposition of the fraud penalty.  Likewise,  I would not be confident that the Third Circuit or Tenth Circuit opinions require the penalty to be waived in all protestor disclosures.  For instance, the Third Circuit relied heavily upon the non-taxpayer’s various (and entertaining) letters, indicating those were sufficient to “dilute” the government’s case to the point where it had not proven fraud by clear and convincing evidence.  Where there was less disclosure, the disclosure was less clear, there was stronger evidence of fraudulent intent, or the disclosure was simply an effort to reduce penalties, I would not be surprised if the Third and Tenth held the opposite.

It should also be noted that disclosure does not fix all fraud.  For instance, if a fraudulent return is filed, and then the taxpayer attempts to disclose and fix the fraud, the Service may still be able to impose the fraud penalty, and the statute of limitations will almost certainly still be extended because of the initial fraud.  This holding, and the cases discussed above, pertain to a more narrow fact pattern.

The Court in Kenan held the disclosure did not automatically mitigate the fraud, and went on to determine if the taxpayer had the customary badges of fraud required for the imposition of the penalty.  The Court determined, probably correctly, that Mr. Kenan in good faith believed his interpretation was correct, which was sufficient to erode the government’s attempt to show the intent to defraud by clear and convincing evidence.

A few parting thoughts.  Depending on where you reside, if you espouse your cockamamie tax ideas loud enough and often enough (and actually believe them), the fraud penalty may not be upheld; however, that is not a sure thing in any jurisdiction in my mind.  In addition, unless you have a new tax protestor idea, the Service can use your statements against you, as the rehashed failed protestor arguments can be an evidence of an intent to defraud on the part of the taxpayer – this does still generally require an affirmative action indicting something false to the IRS though.

Congress has also enacted a specific Code Section for protestors.  Section 6702 allows for an additional $5,000 penalty for frivolous returns or other submissions if they are based on positions identified as being frivolous in a published list, or reflect a desire to delay or impede tax administration.  Again, being creative and original in your balderdash should help.

Interestingly, had Mr. Kernan argued he was doing this as a “test case” for his position, which was also his livelihood, the Tax Court may have also considered that as a mitigating factor for fraud.  This would have shown a different intent.  The Tax Court has stated that full truthful disclosure of an intention to present a test case could be a mitigating factor in a fraud penalty case.  See Habersham-Bey v. Comm’r, 78 TC 304 (1982).  I’m not aware of any actual holdings in favor of taxpayers on that argument, but it is possible.

And to conclude, the IRS and the Tax Court do not believe “How to STOP the IRS” is an accurate title, but Mr. Kernan was successful in thwarting the fraud penalty—there was, however, a substantial cost in other penalties, interest, time and perhaps some embarrassment in obtaining that Pyrrhic victory.

Collection Due Process Determination and Decision Letters Redux

Not long ago, I posted on the Reinhart case in which the IRS erroneously issued a decision letter in a collection due process case (CDP) when it should have issued a determination letter.  That post drew a number of comments and the commenters made several references to the Ziegler case.  In Ziegler the Tax Court refused to dismiss a Tax Court case for lack of jurisdiction and instead granted summary judgment to the IRS.  Zeigler is a CDP case where the IRS erroneously issued a determination letter to the taxpayer when it should have issued a decision letter.  The taxpayer deserved a decision letter because he filed his request for a CDP hearing too late.  The jurisdiction issue presented here continues a discussion raised in an earlier post by guest blogger Carl Smith on the Lippolis case.

Perhaps these cases point to the need for some training in Appeals concerning which letter to queue up in the typewriter, but I will set that issue to the side.


The IRS sent Mr. Ziegler a Notice of Intent to Levy (NOIL) either on June 10, 2011 or June 13, 2011. I will spend a moment wading through the thicket of when the notice was mailed and who screwed up but you can skip this paragraph because in the end it does not matter.  The NOIL bears the date June 13 on the first page next to the heading “Notice Date.”  I have seen enough notices from the IRS to know that the date on the letter and the date the letter is actually mailed do not necessarily bear any relation to each other.  The IRS sometimes mails letters before the date on the letter and even more frequently mails letters after the date on the letter.  I imagine it occasionally even mails letters on the actual date stamped on the letter.  In any event, the post office stamped June 10 on the certified mailing records to indicate that the NOIL went out on that date.

Interestingly, the IRS argued that it thought the post office “may have erroneously reflected a date of June 10, 2011 because the post office failed to reset its date stamp to June 13, 2011.” (In 2011 June 10 fell on Friday and June 13 fell on a Monday if that matters to anyone.)  Given that the IRS regularly relies on the correctness of the postmark in arguing that the postmark sets the time frame for a certain action, and given that it did not matter here whether the date was June 10 or June 13, I question the wisdom of placing the blame for the differing dates on the post office but maybe that is just me.  See Proving That You Mailed Tax Court Petition within 90 Days and Still Getting Dismissed as Untimely (forthcoming).

So, either on June 10 or June 13 the CDP notice went to Mr. Ziegler. The Tax Court found that the post office delivered the NOIL to Mr. Ziegler’s address on June 14.  Mr. Ziegler, unfortunately, mailed his request for a CDP hearing to the IRS on July 14 and the IRS received it on either July 19 or 20 depending on whether the IRS employee handwritten note or its date stamp controls.  It does not matter.

Appeals worked the CDP case with its usual alacrity and issued a determination letter 14 months later on September 28, 2012.  Mr. Ziegler timely filed a Tax Court petition within 30 days on October 26, 2012.  At some point between October and February 2013 the Chief Counsel attorney assigned to the case realized that the request for the CDP hearing came 31 days after the date of the NOIL.  Based on that discovery, the IRS filed a motion to dismiss for lack of jurisdiction.

In the case of Kim v. Commissioner, the Tax Court addressed the issue of a motion to dismiss for lack of jurisdiction where the taxpayer timely petitioned the determination letter but the IRS should not have sent a determination letter.  In the Kim case the Tax Court held that it had jurisdiction over the case in this situation even though the taxpayer had failed to timely file the CDP request.

The decision here is inconsistent, or at least arguably so, with the Tax Court’s decision in Boyd which found that missing the 30 day period to petition the Tax Court after the issuance of a determination letter does create a basis for dismissing the case for lack of jurisdiction.  However the decision here is consistent with Lippolis.  In a prior post, Carl Smith discussed the inconsistency between the Boyd and Lippolis decisions.  No doubt the Chief Counsel attorney filed the wrong motion because of this type of confusion.  At least, Zeigler provides an opinion in which the Tax Court does not find a time period contained in the same code section dealing with a Tax Court time frame as creating a jurisdictional barrier.

Even though the Tax Court has jurisdiction of Mr. Ziegler’s case, does the mistake by Appeals in sending out the notice of determination letter instead of the notice of decision letter allow him to argue in Tax Court for the correctness of the collection alternative to levy that he proposes? No.  It had not reached that issue in Kim but did reach that decision in this case.  It changed the motion of the IRS to a motion for summary judgment and then went through an analysis to determine if it should grant that motion.  Because of the late request for a CDP hearing, it looked for authority for the IRS to extend the 30 day period within which to make such a request and found none.

It found that Mr. Ziegler’s CDP request would have been timely if received by the IRS within the 30 day period from the date of the NOIL or if mailed during that time. In addressing that question, the Court looked at the issue of “what the date of the CDP notice [here the NOIL]” means.  “Is it the date a notice is mailed by the IRS?  Is it the date appearing on the face of the notice?  Is it the date the notice is received by the taxpayer?”

The IRS took the position in its motion that the date of the NOIL is the date written on the face of the notice even though the regulations suggest that the date of the NOIL is the date the IRS mailed the notice. See Treas. Regs. § 301.6330-1(c)(3), Q&A Ex. 1.  The Court noted that whether it went with the date on the NOIL or the unclear date on which the NOIL got mailed in this case it still came to the result that Mr. Ziegler did not send in his request within 30 days.  I realize that the Court did not need to make a decision on this issue in order to decide this case but it would be nice 16 years after the statute came into existence to have the answer to this rather basic issue.  I have trouble not believing that the regulations suggest the right answer here.

If the 30 day period runs from the date the IRS happens to stamp on the letter without regard to when the IRS actually mails out the letter, taxpayers could have their time to make a CDP request severely shortened if something caused a delay in the IRS mailing after it stamp dated the letter. As mentioned above, I have seen enough letters dated with a date that bore no relationship to the actual mailing date to fear a different result.  By the same token, I would not advise my client to rely on the mailing date unless absolutely necessary because the date on the IRS letter provides a safe haven.  Note that Congress did not mandate the IRS to state on the CDP determination letter the last date for filing a Tax Court petition the same way it mandated the IRS do that in sending out the notice of deficiency.  Because Congress did not mandate that date and because of all of the issues that come up when the IRS incorrectly calculates that date as it sometimes does on the notice of deficiency, I do not expect the IRS to start putting the last date to petition the Tax Court on the CDP determination letter.

So Mr. Ziegler loses his attempt to get into Tax Court to discuss other ways to collect from him than levy. How did the treatment of his case as a CDP case rather than an equivalent hearing impact the statute of limitations on collection?  In a CDP case the statute of limitations on collection gets suspended for the period of time the case works its way through Appeals and, where applicable, the Court.  Here, Mr. Ziegler did not have a CDP case even though he and the Settlement Officer in Appeals may not have known that.  He had an equivalent hearing that should have resulted in a Decision letter rather than a Determination letter.  I sometimes choose not to make a CDP case a regular case because I want the statute of limitations on collection to continue to run.  Did it run here?  If so, Mr. Ziegler, while losing the case, did manage to shave about three and one half years off of the collection statute.  While not a complete victory, it may serve as a partial one.  Assuming I am right on the statute of limitations, it also probably allowed the time frames to run for this liability to meet the priority criteria under Bankruptcy Code section 507(a)(8).  This tax year is probably now old enough to qualify as a general unsecured claim dischargeable in bankruptcy.  That may help him if he goes into bankruptcy or if he makes an offer in compromise and points to discharge as a reason for the IRS to take a harder look at his offer.


Bankruptcy Court Grants IRS Equitable Tolling and Denies Discharge on Late Return

I have written before about the controversy current surrounding the ability to discharge late filed returns. See What is a Return – The Long Slow Fight in the Bankruptcy Courts (Dec. 4, 2013); A Cogent Look at the “What is a Return?” Question (Sept. 26, 2014); Willful Attempt to Evade or Defeat the Payment of Tax (Sept. 8, 2014).  On the blog we have also written about equitable tolling and the strong position the IRS takes when taxpayers seek equitable tolling. See Boeri: Not a citizen, Never Lived or Worked in the US? IRS Will Still Keep Your Money (Aug. 26, 2014); Supreme Court Will Hear Federal Tort Claims Act Equitable Tolling Cases, Which Could Affect Tax Refund Suits (July 2, 2014); Supreme Court’s Likely Review of Rulings Equitably Tolling FTCA Claims May Impact Tax Refund Suits (May 1, 2014); Timely Filing a Tax Court Petition from Prison (Apr. 16, 2014).  The Ollie-Barnes case involves a situation in which the IRS requests the bankruptcy court equitably toll the time period on a discharge provision governing untimely returns and it obtains a decision significantly extending the IRSs’ ability to prevent discharge in this area.


Bankruptcy generally grants a discharge as its pot of gold at the end of the rainbow but not all debts get included in the pot of gold. Section 523(a)(1) provides the rules for individuals seeking a discharge of taxes and has three separate hurdles that a debtor must cross: 1) no discharge for taxes entitled to priority status in the bankruptcy case generally meaning that the taxes arose within three years of the bankruptcy petition but many exceptions to that generalization exists; 2) no discharge where the taxpayer failed to file a return or filed it late and within two years of the bankruptcy petition; and 3) no discharge if the taxpayer filed a fraudulent return or attempted to evade or defeat the payment of taxes.  For a detailed discussion on how section 523(a)(1)(C) should be interpreted, compare A. Lavar Taylor, What Constitutes an Attempt to Evade or Defeat Taxes for Purposes of Section 523(a)(1)(C) of the Bankruptcy Code: The Ninth Circuit Parts Company with Other Circuits (Part 2) (Sept. 14, 2014) with Bryan Camp, Taking Issue with the Ninth Circuit and Lavar Taylor’s View of a Willful Attempt to Evade or Defeat Tax (Oct. 6, 2014).

The second of the three bases for discharge presents itself in the Ollie-Barnes case. She filed her returns late; however, she filed them long before the filing of the bankruptcy petition so the two-year rule potentially causing the exception of her debts from discharge only applies if something suspends the two-year period.  The IRS successfully argued that prior bankruptcy cases suspended that time period.  This argument has a history spanning over two decades including one Supreme Court case and one major bankruptcy reform act which partially addressed this issue.  Yet, the Ollie-Barnes case represents a new strain on the IRS argument regarding equitable tolling for prior bankruptcy filings.

The first case in which the IRS argued that a prior bankruptcy proceeding tolled bankruptcy time period related to tax occurred in Brickley.  In that case the IRS first argued that it did not get the full opportunity to collect on a tax prior to the time the liability lost its priority status under bankruptcy code section 507(a)(8) (formerly section 507(a)(7)).  The priority scheme of the 1978 bankruptcy code allowed taxes as a priority claim but only if they met certain criteria.  Generally, taxes have priority status when a petitioner files bankruptcy if they arose within three years of the filing of the bankruptcy petition or were assessed within 240 days of the bankruptcy petition.  Once taxes age beyond the time set out in the priority provision, they lose their special status and become general unsecured claims, making them much less likely to receive a distribution from the estate and eligible for discharge.  In Brickley, the IRS argued that since the test for determining if taxes had priority status generally turned on the age of the tax events that intervened during the relevant time period keeping the IRS from quickly collecting should equitably toll the priority time period.  The court explained that Congress wanted to give the IRS a fair shot at collecting the tax before it aged into general unsecured status, and since a prior bankruptcy case created an automatic stay preventing the IRS from collecting taxes, the time period in 507(a)(8) should not run, or equitable tolling should occur, if a taxpayer sat in bankruptcy prior to the current bankruptcy case.

Let me illustrate the issue. Assume a taxpayer timely filed their 2009 tax return on April 15, 2010, reporting a liability of $10,000 which the taxpayer does not pay.  That liability has priority status in any bankruptcy filed prior to April 16, 2013.  As mentioned above, a major benefit to the IRS of having priority status is that bankruptcy does not discharge the debt even if the IRS does not get paid in the bankruptcy.  Assume on these facts that the taxpayer filed a chapter 13 bankruptcy petition on May 15, 2010 and the bankruptcy case was dismissed on March 15, 2013.  During that entire period the automatic stay would have prevented the IRS from collecting from the taxpayer except by receiving distributions from the bankruptcy estate (and possibly excepting offset, but set that aside for this discussion).  Assume further that taxpayer files another bankruptcy case on April 16, 2013.  Under these facts the IRS had only two months to try to collect the 2009 liability prior to the filing of the second bankruptcy.  In the second bankruptcy the IRS claim for 2009 has lost its priority status due to age.  By sitting in bankruptcy for almost three years, even though the taxpayer may not have paid creditors during that period, the taxpayer has transformed a perfectly good priority tax claim into a horrible (from the IRS’s perspective) general unsecured claim which will receive little payment in bankruptcy and get discharged.

You can see why the IRS wants to toll the time period for priority status while bankruptcy cases exist during that period.  After Brickley, cases were fought on this issue all over the country and this issue eventually culminated into the Young case, where the Supreme Court issued a decision favorable to the IRS.  Most of the litigation took place during the time the Bankruptcy Commission (created by the Bankruptcy Reform Act of 1994) sought to reform the bankruptcy code and the commission proposed an amendment to 507(a)(8) to address the problem.  That proposed amendment was adopted in 2005, which provided:

An otherwise applicable time period specified in this paragraph shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days.

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 2005 Pub. L. 109-8, § 705(2).  Throughout the litigation and the legislation, the priority status of the IRS claim served as the focal point of the equitable tolling argument although the priority status of that claim does serve as a basis for excepting the claim from discharge under 523(a)(1)(A).

Now, the IRS seeks to take the hard fought and somewhat long ago victory it won regarding the priority status of its claim and import that logic to the purely discharge situation presented with the late-filed return provision of 523(a)(1)(B)(ii). This argument creates an end run around, or certainly an extension of, the 240 day provision in the priority provisions that comes over into the discharge provisions through 523(a)(1)(A).  Here, the timing of the late filed returns (and the assessment of the liabilities on those returns) and the timing of the intervening bankruptcy cases creates a period greater than 240 days from the assessment, but less than two years from the filing of the returns.  That 16 month window is the only time the IRS would need to make this argument.

The facts in the Ollie-Brown case match the situation I describe above. An understanding the facts provides a critical basis for understanding what the IRS sought.

Ollie-Brown Timeline

Date Event
1-26-2003 1995 return filed
3-31-2003 1st bankruptcy filed
3-24-2004 1st bankruptcy dismissed
5-6-2004 1993, 1998, 1999, 2000, and 2001 returns filed
5-20-2004 2nd bankruptcy filed
8-29-2008 2nd bankruptcy dismissed
12-9-2009 3rd (and so far final) bankruptcy filed – this is the case with the discharge issue
7-22-2013 Final decree stating that she fulfilled Ch. 13 obligations and received discharge


The opinion contains a discrepancy in describing the time periods. At one point it says Ms. Ollie-Barnes was out of bankruptcy only five months between the time of the filing of the returns for 1993, 1998, 1999, 2000, and 2001.  I calculate that she was out of bankruptcy for approximately 16 months for these periods before the filing of the final petition.  I calculate a period of almost 20 months for the 1995 return.  Both the 16 and 20 month periods are less than two years yet greater than 240 days which is why the IRS makes the tolling argument under the discharge provision of 523(a)(1)(B)(ii) in this case.

The Court makes relatively quick work of the tolling argument. It finds it has the equitable power to toll.  It finds this situation consistent with Young and that it had decided this issue earlier in 2014 in In re Putnam.  It spends no time or energy worrying about the fact that the tolling provisions in Young related to priority status and that different considerations might exists in a pure discharge setting.

This issue bears watching. While the circumstances here may not arise with great frequency, they do come up regularly.  If the IRS loses its arguments under Hindenlang and its progeny, debtors filing multiple bankruptcy petitions must still carefully count the days to avoid falling into the extension of the exception to discharge rule presented on these facts.  I expected more pushback and more analysis than the Ollie-Barnes case offered for an extension of this equitable tolling provision into the discharge rules where expansion of the provisions are generally interpreted in the least favorable manner for the creditor.  The issue also has importance because of the IRS view of equitable tolling when it comes to the Internal Revenue Code.  The IRS takes the position that equitable tolling does not apply to taxes when taxpayers seek this remedy.  This facet of tax exceptionalism gets harder to swallow the more the IRS uses equitable tolling for its own purposes.


CDP and Installment Agreements: Sometimes Court Review is Crucial; Other Times Not So Much

This past week the Tax Court issued an opinion in a collection due process (CDP) case, Hosie v Commissioner. The case is a bad case for those who support CDP. The taxpayers in Hosie are lawyers with lots of income who did not file tax returns for a bunch of years. Two of the years ended up in Tax Court, and the unpaid tax in those years was over $800,000 in one year and over $700,000 in another.  The taxpayers had previously defaulted on four installment agreements. The unpaid liabilities triggered notices of intent to levy, and the  filing of a request for a CDP hearing. At the hearing, the taxpayers sought another installment agreement, this time for $15,000 per month.

The taxpayers had lots of assets, including a personal residence with a fmv of over $6.5 million and a vacation home with a fmv of over $3.8 million (and over $9 million in equity in the houses). Appeals rejected the request and the taxpayers petitioned to Tax Court. I’ll talk more about the particulars below. What is more interesting to me is what the case represents.


Controversy Over CDP

CDP was and is pretty controversial. I have commented before about how I think CDP injects needed rule of law principles into what had largely been an area where IRS had more or less unfettered discretion. The opportunity for judicial review, albeit a limited review, is in my view an important opportunity for checking against agency abuse. Moreover, the very threat of court review, with the judicial attention on agency practice, is itself a lever to ensure better agency practice in the first place.

Others have commented that CDP, with its potential to delay collection, was more or less just a symbolic piece of IRS-bashing legislation that places lots of costs on the courts and IRS, and allows taxpayers to stall without meaningful review of agency action anyway. (If you have an appetite for more on this debate, Professor Bryan Camp and I had an exchange on this point and related points in the Indiana Law Review a few years ago; Bryan’s article The Failure of Adversarial Process in the Administrative State; my article A Response to Professor Camp: The Importance of Oversight) 

CDP: What is it Good For?

CDP supporters can point to cases where the Tax Court has remanded matters to Appeals when collection determinations are patently unfair or contrary to established procedures. A few weeks ago, for example, Keith wrote about installment greements and the sad tale of Ms. Antioco in his post Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreements:

The order [that Keith wrote about in the post-Les] entered on November 17 came as a response to the third visit of this case before the Tax Court. The first time this case came to the Tax Court Ms. Antioco represented herself.  She argued that the Settlement Officer in Appeals never asked her to submit a revised Form 433-A (Collection Information Statement) and that she would experience great economic hardship if she could not obtain an installment agreement.  Before the case went to trial, the IRS asked that the Court remand the case because the SO’s failure to request the updated Collection Information Statement created an abuse of discretion.  The Court granted the motion and remanded the case to Appeals.

On February 4, 2013, Judge Holmes issued a memorandum opinion on the case when it came back to him after the remand.  Because Appeals had not followed his instructions in remanding the case, Judge Holmes was not kind in his evaluation of the work of the SO who handled the remand.  In the order issued on November 17, 2014, Judge Holmes returns to his criticism of the handling of the case: “The Court has already detailed the poor conduct of the Commissioner and his agent . . . .  Suffice it to say that [the SO] behaved very badly.”

CDP: Good for Nothing?

Antioco and others like it show CDP’s value as a safety valve when the IRS’s actions are wrong and potentially can cause real damage. On the other hand Hosie is the kind of case that makes the point that Professor Camp and others have made. Here are some more of the facts from the opinion:

On March 29, 2013, the parties held a CDP hearing. Petitioners’ representative did not contest petitioners’ underlying tax liability for either 2006 or 2011 but instead proposed an installment agreement with a payment of $15,000 per month. By this time petitioners had defaulted on four previous installment agreements, all involving their 2006 tax liability. These prior agreements, executed in July 2009, April 2010, March 2011, and December 2011, required monthly payments ranging between $10,000 and $50,000 plus certain lump-sum payments. In each case, petitioners had made no payments or quickly reneged on their promises.

The SO indicated that any new installment agreement would have to include all outstanding tax liabilities and would be considered only if petitioners made a substantial upfront payment. The SO directed petitioners’ attention to the $9.3 million of equity in their real estate as a source of funds to pay their tax liabilities. Petitioners stated their intention to sell their personal residence but requested that sale of their vacation home be delayed. They had previously informed the IRS of plans to sell their personal residence in order to pay their tax liabilities but had never followed through on those plans.

After the hearing the taxpayers’ representative said they would get back to Appeals; over 3.5 months passed and there was no follow up and Appeals issued a determination sustaining the collection action and rejecting the installment agreement.

On summary judgment, the Tax Court sustained the determination. The guts of the opinion talks of how the court is not supposed to substitute its judgment for the IRS’s when it comes to the particulars of accepting or rejecting a collection alternative like an installment agreement. There is a fairly concise statement of relevant authorities when it comes to court review of rejected installment agreements:

The SO rejected petitioners’ proposed installment agreement after determining that their tax liabilities could be fully or partially satisfied by liquidating or borrowing against their assets ($9.3 million of equity in their residence and vacation home). See Internal Revenue Manual (IRM) pt. (5) and (6) (June 1, 2010) (“Taxpayers do not qualify for installment agreements if balance due accounts can be fully or partially satisfied by liquidating assets[.]”); Boulware v. Commissioner, T.C. Memo. 2014-80 (finding that settlement officer’s reliance on this IRM provision was not an abuse of discretion). Petitioners made no showing of ill health, economic hardship, or other circumstance warranting an exception from this general rule. See Eichler v. Commissioner, 143 T.C. __, __ (slip op. at 16-17) (July 23, 2014); IRM pt. (Apr. 1, 2011); id. pt. and (6). Between 2009 and 2013 petitioners had defaulted on four previous installment agreements, one of which involved lower monthly payments than the $15,000 they now promised to make. The SO did not abuse his discretion in rejecting this offer.


CDP is an important tool for practitioners and taxpayers facing enforced collection. Consideration of collection alternatives sits in an uneasy place in tax administration and procedure. Taxpayers can obtain limited court review of agency rejections of collection alternatives if the determination is made in the context of CDP. If the request is outside CDP, then there is no court review. Cases like Hosie suggest that there is limited or no benefit to court review and highlight CDP’s costs. Cases like Antioco suggest otherwise. In the right hands and with the right taxpayers, CDP can prevent erroneous and devastating deprivations of property. In the wrong hands and with the wrong taxpayers, CDP does little systemic good and allows for delays for taxpayers who do not deserve the extra time.




Bankruptcy’s Bar to Filing a Tax Court Petition

The case of Perry v. Commissioner reopens the curious link between the Tax Court and the bankruptcy courts regarding the timing of the filing of a Tax Court petition.  The Tax Court appropriately treats the decision as a memo opinion because the case does not break new ground but I had not noticed one of these cases recently.  The issue in the case arises from section 362(a)(8) of the Bankruptcy Code.  This section is the 8th and final provision of the items Congress listed as stopped – or automatically stayed – when a bankruptcy petition is filed.  The provision regarding the automatic stay and the Tax Court did not develop with the other automatic stay provisions during the legislative process and does not logically follow.  Congress made a minor change to this provision when it amended the Bankruptcy Code in 2005 but the provision still sticks out a bit as an anomaly among the stay provisions.

The IRS motion here completely surprises me. I did not think it would take the position asserted in this case and am not certain that the position taken here represents the official position of the Office of Chief Counsel or the misguided filing by an attorney in a field office.  The Court’s response correctly rebuffed the motion to dismiss filed by the IRS.  Because the issue has some interesting history and because knowing the rules governing the interplay of the Tax Court and bankruptcy court at the point of filing a Tax Court petition can provide some benefit, the case deserves attention.


Perry presents a simple, if unusual, fact pattern. Ms. Perry woke up on June 6, 2014, in a fighting mode.  That day was the 70th anniversary of D-day and perhaps an excellent day for someone in the U.S. to exhibit a fighting spirit.  What Ms. Perry did that day out of her ordinary pattern, and out of the ordinary pattern of almost everyone in the U.S., was to file both a Tax Court petition and a bankruptcy petition.  She filed these petitions within 3 hours and 25 minutes of each other and almost 3,000 miles apart in terms of the courts she chose.

The Tax Court, a Court located in Washington, D.C., does not explain in the opinion how it determined that her Tax Court petition was filed at 1:48 PM EDT that day. I am guessing that given the location of her bankruptcy case and the fact that she apparently resides in California that she did not personally deliver her petition to the Tax Court that afternoon.  I further guess that 1:48 PM EDT is the moment at which a person in the clerk’s office of the Tax Court happened to open the envelope containing her petition and stamp the petition “filed” with the Tax Court.  No explanation is found in the opinion which provides answers to the timing of opening of a Tax Court case.  Please do not rely upon my uneducated guess.

Since the Tax Court does not allow electronic filing of the petition, the only two options she had for filing that petition were hand delivery or mail. The fact that the person in the Tax Court clerk’s office happened to open that envelope at 1:48 PM EDT and stamp it turns out to be the crucial link in her victory with respect to the motion to dismiss her Tax Court petition.  So, it is possible that she did not wake up on June 6 knowing that she was going to file petitions in two courts that day.

At 2:11 PM PDT Ms. Perry filed her chapter 7 petition in the Bankruptcy Court for the Northern District of California. How she filed her petition in that court is also not explained in the opinion.  Bankruptcy court does permit electronic filing of petitions so it is possible she flew to DC to personally file the Tax Court petition and then went to Starbucks in DC to electronically file her bankruptcy petition a few hours later.  PACER suggests that the bankruptcy petition was electronically filed by her attorney which is consistent with the way most bankruptcy cases are filed.

In any event she clearly filed the Tax Court petition prior to the filing of the bankruptcy petition and that fact stands at the center of the Tax Court’s opinion denying the motion to dismiss filed by the IRS. As I mentioned above, I cannot understand why the IRS filed a motion to dismiss on these facts.  Perhaps the timing of the filing was not so clear to the attorney who filed the motion although I believe that the Tax Court clerk’s office would have orally provided information on the timing of the petition filed there.

The legal basis for the motion goes back to the automatic stay provisions. Congress decided that among all of the Courts in the United States, it did not want debtors filing a petition in the United States Tax Court when the automatic stay was in effect.  So, it created 362(a)(8) which says that “the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.”  The automatic stay comes into effect at the moment that a bankruptcy petition is filed but not before that moment.  If the filing of the bankruptcy case had preceded the filing of the Tax Court case, then the filing of the Tax Court case would have violated the automatic stay.  If the Tax Court petition filing violated the automatic stay, then the Tax Court would have lacked jurisdiction and should have granted the IRS motion to dismiss the case.

Over the years the Tax Court has dismissed a number of cases when Tax Court petitions arrived during the time in which the automatic stay existed. Frequently, the IRS and the Tax Court have a difficult time knowing that a bankruptcy case (and the automatic stay) exists at the time of the Tax Court petition.  Motions to dismiss because of the filing of a Tax Court petition during the pendency of the automatic stay often occur some months or even years after the filing of the Tax Court petition.  Most Tax Court petitioners have no idea that the existence of the automatic stay bars the filing of a Tax Court petition.

One unfortunate petitioner, Mr. Chamberlain filed his Tax Court petition while the automatic stay still existed. The IRS moved to dismiss his Tax Court case for lack of jurisdiction.  He asked the bankruptcy court to lift the stay which it obligingly did.  He took the stay lift order back to the Tax Court to show it in order that it would allow him to remain in Tax Court.  His bankruptcy case ended many months before the Tax Court got around to ruling on his response to the IRS motion to dismiss.  When the Tax Court finally did rule on the motion to dismiss, it ruled that the order lifting the automatic stay could not retroactively confer jurisdiction upon the Tax Court and since the automatic stay existed at the time of the filing of Mr. Chamberlain’s petition, the Tax Court lacked jurisdiction and must dismiss the case.  The opinion in this case came out as a Memorandum sur Order which I no longer have.  Based on memory, the order was issued in the early 1990s but I do not know how to retrieve it at this point.

Mr. Chamberlain’s problem was that even though the time to file a Tax Court petition is stayed because of B.C. 362(a)(8) and he had 90 days (plus an extra 60 stemming from the automatic stay) within which to file a Tax Court petition because of IRC 6213(f)(1) that 150 day time period had passed by the time he learned he was being kicked out of Tax Court. So, not only did he lose his chance to go to Tax Court, he also lost his chance to litigate the liability in bankruptcy court pursuant to bankruptcy code section 505 since he was no longer in bankruptcy court.

The stay created by 362(a)(8) creates a potential trap for the unwary and a trap that falls particularly hard on persons going into chapter 7. The vast majority of chapter 7 petitioners file no asset cases.  They have minimal representation in the bankruptcy case which usually results in a quick in and out proceeding.  If they happen to file a Tax Court petition while the automatic stay triggered by the chapter 7 petition still exists, they can lose their opportunity to go to Tax Court even though they generally have no opportunity to litigate the merits of their tax liability in bankruptcy and even though their tax issues have little or nothing to do with the bankruptcy proceeding since unsecured creditors will get nothing from the bankruptcy proceeding and any tax liabilities asserted in a notice of deficiency pending at the time of the bankruptcy petition will almost certainly be excepted from discharge.

These problems impact a small number of persons based on the cases reported, yet the reason for the Tax Court to be singled out in the automatic stay remains a solution in search of a good question. The better result might be to eliminate 362(a)(8) and let the Tax Court deal with any bankruptcy proceeding the same way that all other courts do.


The Grinch That Stole Their Reasonable Cause…

Today we welcome first time guest blogger Brad Ridlehoover. Brad works in my hometown, Richmond, Virginia, where he is a business tax associate at McGuireWoods LLP with a practice focused heavily on tax controversy.  He co-authored the chapter on penalties in the forthcoming 6th Edition of Effectively Representing Your Client before the IRS. He also teaches practice and procedure in the School of Business at Virginia Commonwealth University (a class I previously taught there) and is heavily invested in pro bono work with The Community Tax Law Project (the first non-academic clinic representing low income taxpayers that Nina Olson founded over two decades ago.)

While Brad writes the post in the spirit of the season, the outcome does not match traditional holiday stories. At the end of the post he alludes to the last-ditch attempt by the taxpayers to latch on to a concession in a similar case by the IRS. We hope to come back with a later post to discuss the impact of a concession in one case on subsequent cases involving different taxpayers. When can such concessions cause the Grinch to bring seasonal joy? Keith

All Mr. Reisner and Ms. Weintraub wanted for the holidays was to have the Tax Court accept their claims of reasonable cause for underpayments attributable to a gross valuation misstatement.  Instead, the Tax Court handed out coal and stated that Congress’ 2006 amendments to Section 6662(h) stole their ability to claim a reasonable cause defense to the imposition of these accuracy-related penalties.  Reisner, et al. v. Comm’r, T.C. Memo. 2014-230 (Nov. 6, 2014).  The Tax Court rejected the taxpayers’ argument that Congress did not intend to eliminate the reasonable cause defense for underpayments resulting from carryover deductions attributable to events that occurred years before the statute was amended.  Whenever Congress makes changes to the Code, taxpayers should review, prior to filing a tax return, the nature of any carryover deductions.

While this case is in the context of a gross valuation misstatement penalty, a broader principle should be observed that filing a return taking advantage of carryover deductions of any kind is a reaffirmation of the validity of the initial claiming of such deduction and can subject the taxpayer to penalties.


In 2004, the taxpayers entered into a preservation restriction agreement with the National Architectural Trust pursuant to which they granted to it a façade easement on their townhouse in Brooklyn, New York.  For the 2004 tax year the taxpayers claimed charitable contribution deduction which resulted in the claiming of carryover deductions in 2005 and 2006.  The IRS challenged the value of the façade easement and asserted accuracy-related penalties for the underpayment of tax attributable to the claimed charitable deduction.

As part of the fully-stipulated case, the taxpayers conceded that the $190,000 noncash charitable contribution they claimed in 2004 for their donation of a façade easement should be disallowed as the donation had zero value.  The parties further agreed that there would not be an imposition of the gross valuation misstatement penalty for either 2004 or 2005 because the taxpayers satisfied the reasonable cause exception of sections 6664(c)(1) and (2).  The only dispute left for the Tax Court to decide related to the imposition of penalties for the 2006 tax year.  Section 6662(h)(1) imposes a 40% penalty on the portion of an underpayment of tax that is attributable to a gross valuation misstatement.  To determine if a gross valuation misstatement penalty is applicable, the value of the property claimed on the return must be 200% or more of the amount determined to be the correct value.

Generally, section 6664(c)(1) provides that no penalty will be imposed under section 6662 if the taxpayer can show that there was reasonable cause for the underpayment and that the taxpayer acted in good faith.  Prior to the enactment of Pension Protection Act of 2006, Pub. L. No. 109-280, 120 Stat. 780 (“PPA”), taxpayers could assert a reasonable cause defense to the imposition of a gross valuation misstatement penalty if they could show that the claimed value of the property was based on a qualified appraisal by a qualified appraiser and the taxpayer made a good-faith investigation of the value of the property.  The PPA eliminated the reasonable cause exception in its entirety for underpayment attributable to gross valuation misstatement of charitable deduction property.  The elimination of the reasonable cause exception applies to returns filed after July 25, 2006.

Note — If the overvaluation is substantial but not a gross misstatement, the taxpayers can still assert a reasonable cause defense (150% overvaluation instead of 200% ).  See section 6662(e)(1)(A))).

In Reisner, the taxpayers argued that their claiming of a carryover charitable deduction based on their 2004 donation of the façade easement was not precluded by the PPA’s changes to section 6664 even though they filed their return after July 25, 2006.  They claimed that imposing such a strict liability on taxpayers is not a required construction of the statute and in essence is a retroactive imposition of a penalty on conduct that occurred before the enactment of PPA.  They asserted that this result was contrary to Congress’ intent.  As a basis for this argument, the taxpayers asked the Court to look at the other changes contained in the PPA.  For example, the new rules requiring contributed easements to include a restriction that preserves the entire exterior of a building rather than simple its façade applied to contributions made after July 25, 2006.  Therefore, Congress must have intended that the “after July 25, 2006” effective date of the elimination of the reasonable cause defense meant to only apply to the claiming of deductions for events that occurred after July 25, 2006.

The Tax Court was not persuaded by the taxpayers’ arguments and stated that their claims cannot be “reconciled with the statute’s clear terms.”  The revisions to this section were intended to apply to tax returns filed after July 25, 2006 and it is irrelevant when the activity occurred that gave rise to the deduction.

The Tax Court further held that the imposition of the penalty was not retroactive as the taxpayers claimed.  Citing to Chandler v. Comm’r, 142 T.C. No. 16 (slip op. at 25) (May 14, 2014), the Tax Court said that the taxpayers “reaffirmed” their gross valuation overstatement when they filed the 2006 tax return after the enactment of PPA.  Taxpayers do not have to take advantage of carryover deductions when filing a return; it is a choice.  The Tax Court stated that the taxpayers could have chosen not to claim the carryover deduction for 2006 in view of the change in the law.  Their choice to claim the carryover deduction caused the imposition of the penalty.

In a final effort to give the Tax Court a basis to hold in their favor, the taxpayers in Reisner argued that the Court must agree with them because in a factually similar case, Pollard v. Comm’r, T.C. Memo 2013-38, the Tax Court did not impose a gross valuation misstatement penalty for 2006 and 2007.  The Tax Court stated that the basis for not imposing the penalty in Pollard was based on the IRS’ stipulated concession of the gross valuation misstatement penalties for 2006 and 2007 provided that the taxpayer proved reasonable cause existed for 2003, 2004, and 2005.  The Court determined that the taxpayer had shown reasonable cause for the prior years resulting in no penalties imposed for the later years by concession of the IRS.

Unfortunately for the taxpayers in Reisner, the IRS’ made no concessions.





Madoff Fallout Continues in Tax Court

An earlier version of the following post appeared on the Forbes Procedurally Taxing site on December 8, 2014.

Bernard Madoff’s sister-in-law recently filed suit against the IRS. The suit stands out not only because the name of the taxpayer and the infamy of her brother-in-law (See Patricia Hurtado Peter Madoff Admits Aiding Brother’s Ponzi Scheme, Bloomberg (June 30, 2012)Walter Pavlo, Peter Madoff Gets What He Expected – 10 Years Prison, Forbes (Dec. 20, 2012), but because the suit reveals an incompetence that makes me wonder if Appeals is capable of achieving its self-described goal of becoming more judicial. Its actions in this case and others suggest that it is far from judicial. I feel sorry for Ms. Madoff, who has likely had to incur substantial costs to prove what should not have required a federal lawsuit to establish. While she may ultimately lose on the merits of the tax issue she seeks to raise, the Appeals division of IRS mishandled her attempt to raise the correctness of the underlying liability in this collection case, foisting the issue off on the Tax Court prematurely.

Her Collection Due Process (CDP) Tax Court case results from a notice of intent to levy. Following receipt of that notice she timely requested a hearing with Appeals. In a determination letter, Appeals rejected Ms. Madoff’s proposed alternative to levy.

The determination letter issued by Appeals in response to her request for a CDP hearing demonstrates a lack of quality. I thought this level of quality was reserved for low-income cases in which the taxpayers represented themselves. In some ways seeing that a relatively high dollar case with an excellent representative would receive a determination of this quality made me feel better that my clients received the same treatment. Of course, one never feels great when viewing work of poor quality. Perhaps I should celebrate that all taxpayers receive equal service from Appeals.

I do not intend this post to simply serve as a bashing of Appeals. Appeals, like the rest of the IRS, faces severe financial constraints. I get it. Still, this case, the Antioco case, other cases we have blogged, and cases I see coming through my office point to a problem that should not occur at the top level of the IRS food chain. See Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement, Procedurally Taxing (Dec. 1, 2014). Appeals considers itself almost judicial officers. See Appeals Judicial Approach and Culture Project (AJAC) Implementation, Procedurally Taxing (Sept. 4, 2014). To have others join in that perception, it needs to produce written products that support such a status. Ms. Madoff’s case will not advance that ball.


The determination letter appears to contain two serious flaws. First, it mischaracterizes Ms. Madoff’s attempt to discuss the merits of the underlying liability. Second, it mischaracterizes the exchange between the settlement officer (SO) and the representative if the allegations stated in the petition accurately depict the exchange. Because of the surrounding circumstances, the description of the exchange in the petition makes much more sense.

In her CDP case Ms. Madoff sought to address the merits of the liability underlying the collection action. Because the petition and the determination letter do not describe the situation with sufficient detail to allow certainty, I make some assumptions concerning the merits case. I requested information from Ms. Madoff’s representative but did not receive it due to Ms. Madoff’s understandable desire for privacy. I respect that decision and apologize for inaccuracies resulting from my assumptions.

The liability at issue here stems from the closing of two IRA accounts in the name of Ms. Madoff that the government took as a part of the forfeiture proceedings relating to the criminal sentence of her husband. When she filed her CDP request on April 30, 2014, Ms. Madoff alerted the IRS in Form 12153 (the request for the CDP hearing) that she might amend her 2012 return, the return for the year at issue, and seek a refund based on a recently decided Court of Federal Claims case, Nacchio v. United StatesSee Insider Trading and Forfeiture of Millions in Stock Gains Runs into Section 1341 and Issue Preclusion, Procedurally Taxing (Mar. 17, 2014). The petition states that the amended return was filed on June 17, 2014 and that “if accepted, will reduce her tax liability to zero.” At the time of filing the petition she alleges that the IRS had not yet processed the amended return.

Without getting too far into the substance of the amended return, Ms. Madoff claims that she should get a credit recomputation under Section 1341 for the amount of the forfeited assets based on the reasoning of the Nacchio decision and that such a credit would eliminate her tax liability. In other words she would get to decrease her liability in later year by the amount of the tax increase as a result of the inclusion in the earlier year (restoring an amount previously received under a claim of right). The determination letter states that the “tax portion was paid when return prepared and filed.” That leads me to believe that the liability at issue in the CDP case stems from a penalty or from the early distribution excise tax imposed by IRC 72(t). The important issue here centers on the fact that the liability results from a position taken on the original return that Ms. Madoff has not previously contested. The Tax Court has held that a taxpayer who did not previously have the opportunity to contest a liability, even if the taxpayer self-reported the liability, may raise the correctness of the liability in a CDP case. See Busche v. C.I.R., T.C. Memo. 2011-285Montgomery v. C.I.R., 122 T.C. 1 (2004). A recent case also made clear that if Appeals considers the appeal of the denial of a refund claim simultaneously with a CDP hearing, the hearing on the refund claim is not a prior opportunity to contest the liability. See Mason v. Commissioner, 132 T.C. 14 (2009)see also Litigating the Merits of a Trust Fund Recovery Penalty Case in CDP When the Taxpayer Fails to Receive the Notice, Procedurally Taxing (Dec. 4, 2014).

In Ms. Madoff’s case Appeals determined that “[Ms. Madoff] submitted an amended tax return to the Service Center in which [sic] is under review for acceptance. This is considered a prior opportunity in challenging the tax liability.” Yes. This SO considers the mere submission of an amended return, even though the amended return had not yet received any form of review – much less Appeals review – to bar Ms. Madoff from consideration of the merits of her case. As discussed in Mason,the Tax Court permitted a merits case to move forward to Tax Court under IRC 6330(c)(2) even where the Appeals officer simultaneously considered the merits in a separate refund matter. The circumstances here cannot possibly fit within the statutory language applicable to denying a merits review since no SO, or any IRS employee, has considered the merits of the argument in Ms. Madoff’s amended return. This determination ignores the statute and cites nothing in support of its decision.

Moving on from the bad substantive determination, the determination letter only gets worse because of the complete misunderstanding of the position of Ms. Madoff’s representative as seen when comparing the petition with the determination. In the petition Ms. Madoff’s counsel alleges that she requested the CDP case pause to allow consideration of the amended return. The petition states,

Petitioner’s counsel provided the Appeals Officer with a copy of the amended return for 2012, and requested that respondent stay the Collection Due Process Hearing until after the Service had acted on the amended return because petition may have no tax liability for 2012. Petitioner further requested, alternatively, that she be afforded an opportunity to submit an Offer in Compromise based on extreme hardship and exceptional circumstances.

Contrast that with the determination letter which states, “Your representative, Megan Brackney, represented to the Settlement Officer, Ms. Perez, you agree with the case resolution described below.” The description below says, “The taxpayer agrees to full pay the balance due of $128,585.43 by October 28, 2014.” The phone lines between New York City and Fresno must have had a lot of static that day.

Is it an abuse of discretion to ignore the taxpayer’s request in such a cavalier way? I hope so. At the time I reviewed the file the IRS had not yet filed an answer in this case. One hopes the answer simply requests an immediate remand and does not simply deny all of the facts alleged for lack of knowledge. This case raises serious issues concerning the ability of Appeals to properly perform their work.

Appeals should seek to have the taxpayer sign a consent form if the taxpayer agrees to full payment as the disposition just as it has taxpayers sign a consent agreeing to a deficiency. Appeals has a form, Form 12256 and the Internal Revenue Manual (IRM) states that Appeals will use this form when it requests taxpayers sign to withdraw their case when they no longer seek to pursue a CDP hearing. The IRM also provides that Appeals uses Form 12257 when it requests that a taxpayer waive their right to a judicial hearing. The petition and determination letter do not make clear if Appeals sought Ms. Madoff’s signature on either of these forms. If Appeals sought consent to terminate the CDP hearing or to waive the determination letter leading to a judicial hearing and she refused, that should signal the need for a determination of something other than agreement with the determination. If Appeals did not seek Ms. Madoff’s signature on either of these forms, it should consider creating a similar form when a taxpayer agrees to the determination – particularly a decision to fully pay the liability. This is not the first case I have seen in which an SO has stated the taxpayer agreed to full pay as the disposition and the taxpayer has stated no such agreement existed because the taxpayer still disagrees with the outcome.

What does it mean when the determination finds the taxpayer agrees and the taxpayer does not agree? Is that an automatic remand so that Appeals can actually make a determination? Why does Appeals make this type of determination without documenting the concession? Is this what a judicial officer would do?

Summary Opinions for 11/21/14 to 12/5/14

Once again, trying to catch up and cover a few weeks in one SumOp post.  Before getting to the new items from the last three weeks, I wanted to give a short update on Hawkins v. Franchise Tax Board.  In September, A. Lavar Taylor wrote a two part guest post on the 9th Circuit’s holding, which can be found here and here.  The case deals with, as the guest post title indicates, “What Constitutes An Attempt to Evade or Defeat Taxes for Purposes of Section 523(a)(1)(C) of the Bankruptcy Code,” and a split found between the recent holding and other Circuits.  Carlton Smith shared with us last week that the Government sought en banc review, the debtor has responded, and the petition is now before the entire 9th Circuit to decide whether the review is appropriate or not.  Either way, some court may be reviewing soon, and we will let you know if we hear more.


I also want to highlight some really strong guest posts over the last three weeks, and thank all of our guest posters again!  The aforementioned Carlton Smith wrote on the Lippolis Tax Court jurisdiction case relating to the $2MM Whistleblower amount limitation.  Professor Andy Grewal covered the recent Petaluma FX Partners oral argument in the DC Circuit, regarding the scope of TEFRA jurisdiction when the underlying partnership is a sham.

A few first time guest posters also contributed over the last few weeks.  Rachel Partain, an attorney at Caplin & Drysdale, wrote on the LB&I policy restricting informal refund claims for taxpayers in exam.  And, finally, Jeffrey Sklarz, of Green and Sklarz, touched on the interaction between Section 6020(b) and Deficiency Assessments in the recent Radar case.

To the other procedure.


  • PWC provided a fairly comprehensive overview regarding the new information document request process.  The document outlines the history behind the changes, how the process works, and what occurs if the IDR is not responded to in a manner the IRS finds acceptable.
  • As I mentioned above, Carlton Smith had a write up on PT regarding the Lippolis case.  Tax Litigation Survey has added its thoughts here.
  • Two weeks ago, Jack Townsend on his Federal Tax Crimes Blog posted about a FOIA information dump regarding FBAR audits found on Dennis Brager’s web page.  You can find Jack’s post about it here.  The FOIA request resulted in over 6,500 pages of info.  Jack’s page has some good comments and responses.
  • Chief Counsel has taken the position that a company which acquired, pursuant to Section 381, another company that had taken TARP funds was subject to the same restrictions as the TARP company regarding NOL carrybacks.
  • Tax Girl has a well written story on Forbes about the Whistleblower case brought against Vanguard.  Vanguard is a huge financial company located in Chester County (same as me), which is known for its low cost investing options.  A prior in house tax attorney, David Danon, has brought an action under the New York False Claims Act regarding its internal transfer pricing for investment services, which he claims caused Vanguard to underpay its taxes substantially.  The New York statute was expanded in 2010 to include tax claims.  Last year, this expanded statute was discussed on the whistleblower panel at the VLS Shachoy symposium, although this case was under seal at that time (if it had been filed), and was not discussed.  There is probably a IRS and SEC action moving forward, although those were not highlighted in the story.
  • This story deals with a few Golden Corral restaurants.  Apparently the slogan there is “Help Yourself to Happiness,” which is a reference to its all you can eat buffet.  The one time I went to the Corral, that didn’t summarize my experience, but it seems like a popular chain, so others would probably disagree with me.  Also interesting, there is a lot of internet debate out there about the fact that Golden Corral no longer allows people to bring guns into its establishments.  This really pisses people off.

In Erwin v. United States, 114 AFTR2d 2014-6630 (MD NC), a general manager (a gent named Pintner) of a company that owned five GC restaurants (these are franchises) was found to be a responsible person for the TFRP.  He clearly handled day to day operations, oversaw payroll, could hire and fire, and could write checks.  The fact that the owners and officers indicated they would take care of the issue did not mitigate the responsibility.  There was an argument about whether he knew of the debt in June or October of the year in question, but the Court directed that did not matter, which is somewhat interesting because he left the company two months after finding out about the issue.  Tough holding for the manager, as the amount was substantial, and his knowledge may have been less than 60 days.  Should have left the Corral sooner.  Keith had a good post a few months ago about postponing the assessment of the TFRP when others might be liable (and hopefully pay), which can be found here.  I bet most folks in the manager’s position would be surprised to know this is how the law works.

  • Foundation was granted reasonable cause relief to abate first-tier excise taxes under Section 4943 by the Service.  The TAM found that the foundation had reasonably relied on a memorandum that incorrectly determined the attribution rules regarding excess business holdings, and how the percentage applied.  The memorandum was made by a qualified tax preparer.  The foundation realized the error and fixed the issue.  The Service determined there was not willful neglect, and the error was due to reasonable cause.
  • The Service issued Announcement 2014-34 discussing the realignment of technical work between TE/GE and Chief Counsel to shift authority for preparing revenue rulings, revenue procedures, announcements, notices, technical advice, and certain letter rulings relating to exempt orgs and certain qualified plans.
  • Occasionally, a nice woman from accounting-degree.org sends me a link to infographics they have created, which are usually interesting.  This one is a fairly simple chart regarding entity choice, including the tax impacts.  Unlike most similar lists, this one covers cooperatives…which are useful if you want to be a snooty building or start an organic farm in a vacant lot.