Thumbs Up on No Income Even When IRS Serves up 1099 DIV: Ebert v Commissioner

An earlier version of this  post originally appeared on the Forbes PT site on January 26, 2015.

It is not unusual at this time of year for taxpayers to get an information return reflecting some payments that are long forgotten. With the memory jogged, the taxpayer may place the Form 1099 in a file and use it later when it comes time to file the return.

Sometimes there is a disconnect between a 1099 and what a taxpayer thinks actually happened. We wrote about that earlier this month when we looked at a disabled vet who sued Bank of America after receiving a 1099 for the cancellation of a credit card account he claimed to have never opened. Other problems may arise too. Sometimes, a taxpayer may claim to have never received the 1099. That happened in Ebert v Commissioner, a Tax Court case from earlier this month where the taxpayer admitted in 2009 to having owned over 1100 shares of Burlington Northern Santa Fe Corp (BNSF) stock. The registered agent of BNSF had a record of issuing 1099 DIV for four quarterly dividend payments to Ebert at his correct address. Mr. Ebert was convinced that in 2009 he had only received one of the $470 quarterly payments, and he claimed to have never received the 1099 DIV showing payment of the other three quarterly dividends. On his 2009 tax return, Ebert filed his return reflecting the receipt of only $470 of the BNSF dividends.

Not surprisingly, the mismatch generated a deficiency notice stating that Ebert owed the tax on the other three quarterly dividend payments. Ebert petitioned the Tax Court. This case involves whether a taxpayer’s testimony alone may overcome documentary evidence that suggested the taxpayer received the dividends.

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Prior to trial, IRS counsel helpfully requested and received from the paying agent a copy of the properly addressed 1099 DIV showing a record of four payments being made to Ebert. Prior to trial, counsel presented the 1099 DIV to Ebert. Ebert attempted to call the paying agent; as is often the case, there was a new paying agent, and to complicate matters Berkshire Hathaway acquired BNSF in 2010 and Ebert did not get any useful information regarding the mystery dividends. The case went to trial, where Ebert testified that he did not receive any of the other three quarterly dividend payments, nor did he receive the Form 1099 DIV.

The Law

Taxpayers generally have the burden of proving an IRS determination is incorrect. Section 7491(a) provides for a shifting of the burden of proof if the taxpayer has cooperated with the IRS and “introduces credible evidence with respect to any factual issue relevant to ascertaining the liability.” Under Section 6201(d), there is also a shift in the burden of production if a taxpayer asserts a reasonable dispute with respect to any third-party item reported on an information return and the taxpayer has cooperated with the IRS. In that situation, the IRS has the burden of producing reasonable and probative information in addition to the information return.

Some brief background on burden of proof: the Wex legal dictionary refers to burden of proof as relating to “the threshold that a party seeking to prove a fact in court must reach in order to have that fact legally established; that has two distinct components, the burden of production and the burden of persuasion. TheWex legal dictionary refers to burden of production as a “party’s obligation to come forward with sufficient evidence to support a particular proposition of fact”; burden of persuasion is the “obligation of a party to introduce evidence that persuades the factfinder, to a requisite degree of belief, that a particular proposition of fact is true.”

In civil tax cases, the burden of persuasion is the “preponderance of evidence” standard. What exactly does preponderance of evidence mean? Well, again practitioners’ views may vary on its practical import, but it generally means (and I borrow from the Wex legal dictionary again) that the evidence in the record is “just enough . . . to make it more likely than not that the fact the claimant seeks to prove is true.”

There has been some vigorous debate in this blog about how useful burden shifting is for taxpayers. The general view among most practitioners is that the shift does not do much in actual disputes; as comments to one of our prior posts reflect, however, that is not shared by all. It would seem, however that it might make a difference in a case like Ebert when a taxpayer has to prove the negative. The IRS in those cases generally is only going to have a copy of the 1099 and a taxpayer will only have his or her own testimony unless IRS does some digging.

In Ebert, however, the Tax Court punted on whether 7491(a) and 6201(d) applied, finding that Ebert’s testimony was credible and enough to carry the day even if the taxpayer’s burden was the normal “preponderance of evidence” standard.

I was somewhat surprised that the Tax Court found in favor of Ebert, especially with no shift in burden; there are countless cases where the Tax Court discounts a taxpayer’s own testimony as self-serving. In addition, the payor and its agent were major corporations and there was no dispute regarding receipt of at least one of the quarterly dividend payments. There was also no reported change of residences in 2009, and the evidence suggested that the 1099 DIV was mailed to the taxpayer’s correct address.

Yet, cases are not tried on paper, and the opportunity to tell it to the judge may make a difference no matter which party has the burden of proof or production. Like Ebert, a credible taxpayer who has made efforts on his own to get information relating to the payment (Ebert credibly testified that he had “unsuccessful attempts” to contact the paying agent prior to trial) may be enough to carry the day, especially if the amount in question is relatively small. As the court explained, Ebert

has devoted a substantial amount of time to contest the relatively small amount of tax liability at issue here, and he testified consistently, clearly, and with considerable conviction in explaining the negative–that he did not receive the disputed dividend payments. He has persuaded us that he did not receive the disputed dividend payments in 2009.

Conclusion

The case demonstrates a few important points. One, a taxpayer who has been a good taxpayer over a long period of time, whose story is consistent – particularly on a small amount of money where contesting the liability may be costing the taxpayer more than the amount at issue – and where the IRS relies on a piece of paper to disprove the taxpayer – can win a fact based determination. Another important point is cooperation. Here, the taxpayer cooperated at the examination level which allowed section 6201(d) to come into play and the taxpayer tried to find the information from the issuing corporation only to be frustrated in the attempt. It can never hurt to have 6201(d) in your corner when you are fighting a battle concerning the correctness of a Form 1099. Courts have a long history (see Portillo v Commissioner) of skepticism of the correctness of these forms and expect the IRS to go to some lengths including a possible source of funds analysis or cash expenditure analysis to support a naked allegation in Form 1099 where the taxpayer disagrees. Finally, opinions do not have an ability to easily express the impression a fact witness makes on them. Where your client makes an excellent fact witness, your case has a significant opportunity for success if the decision turns on the interpretation of the facts. The IRS will almost always have significant trouble finding witnesses to overcome good fact testimony.

Tax Court Bench Opinions

The Tax Court has several ways in which it issues opinions on the cases tried before it. I recently looked at the least publicized of these opinions, Bench Opinions, and provide here a preliminary report on my findings.  The Tax Court requires the issuance of an order in conjunction with a Bench Opinion.  The Order tab on the Tax Court web site created in June 2011 now allows dynamic searching of orders and makes retrieval of Bench Opinions possible without searching every docket in a specific year.  While the data reported here requires checking and refinement, it offers a glimpse at the number of Bench Opinions issued by the Tax Court over a given period.  My research assistant used the following parameters in searching the data reported here:

From the Tax Court website under the tab Orders Search, I changed the Date Search to 1/1/2011 to 1/1/2013. I also placed in the text search box “Bench Opinion” and changed the number of hits to display to 1. This method yielded almost 300 results. From there I went through each one of those individually to determine if the result was actually a bench opinion or the result was only referring to a bench opinion.  I recorded the docket number, the date, the case name, and the judge for each bench opinion.  I repeated this process, but changed my text search from “Bench Opinion” to “152(b).” 152(b) is the rule judges reference when they write a bench opinion.  The second search yielded numerous repeat results from the first search.

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At the highest end of the pecking order of Tax Court opinions are precedential opinions which come in two flavors – fully reviewed and division.  By their nature, the court issues these opinions only in “regular” cases and not in small tax cases.  The Court issues a handful of fully reviewed opinions each year in which all 19 (or however many non-recused or excluded sitting judges exist at the time of the review) of the judges weigh in on the outcome of the case including dissents and concurrences.  A division opinion provides the opinion of one of the 19 judges.  Whether the regular opinion issues as fully reviewed or the opinion from one division, it represents a decision by the chief judge and the lawyers working with the chief judge that the opinion provides Tax Court insight into a previously undiscussed area of the law or offers a change in a position previously taken.  For an excellent discussion of the workings of the Tax Court in deciding which type of opinion to issue see the article by former chief judge Mary Ann Cohen. The Government Printing Office publishes these opinions.  They are cited as xxx T.C. xxx (20xx) and carry the name TC opinions or full TC opinions because of their citation form.

Next in the Tax Court’s pecking order of opinions come Memorandum opinions. Memorandum opinions also get issued only when the taxpayer has filed the Tax Court case as a regular and not a small tax case.  These opinions reflect the view of the judge (or division) issuing the opinion.  The Chief Judge has decided that the matter covered by the opinion involves routine or already decided issues.  Memorandum opinions do not carry the precedential weight of the opinions discussed above although occasionally a memorandum opinion will cover new and important ground.  These opinions are published by commercial publishers.  They are cited as T.C. Memo 20xx-xxx or TCM 20xx-xxx and carry the name TC Memo or TCM opinions.

Generally thought of as last and least are Summary opinions. These opinions get issued in cases in which the taxpayer has elected the small case procedure because the amount at issue (since 1998) is less than $50,000 per year or per case in CDP cases.  The Tax Court did not make these opinions public prior to 2001.  Perhaps because of the number of earned income tax credit cases and other cases involving individual income tax issues that usually had small dollars at issue, the court decided that making these opinions public would aid taxpayers and representatives in predicting outcomes of certain issues where the precedential opinions rarely, if ever, came out.  I agree with their decision and think that making these opinions public has had a positive impact on practitioners who primarily deal with small cases such as those of us representing taxpayers in low income taxpayer clinics.  If you read Judge Cohen’s article, you can see that it came out shortly before the Court changed its mind on this issue.

So, this is a long build up to the topic of this blog which is Bench Opinions. Bench Opinions have become public if you troll the Orders tab of the Tax Court web site but these opinions do not become public in the traditional sense.  Tax Court judges issue Bench Opinions when the case raises legal and factual issues the judge can quickly resolve.  The Tax Court Rules permit the judge to go on the record and read the opinion into the record as a Bench Opinion if the judge can do it during the same calendar in which the trial of the case takes place. For example, if the Tax Court comes to Philadelphia on Monday January 26 to hold a calendar, it will generally begin the calendar with a calendar call at 10:00 AM that morning.  After listening to the cases still for trial, it will set the cases for trial that week.

Suppose five cases exist for trial. The judge may set two or three on Monday, one on Tuesday and one on Wednesday.  Suppose further that one of the cases tried on Monday presents a very common situation and the Court quickly decide that the IRS or (much more unlikely in a bench opinion case) the taxpayer should win.  Assume further that the judge has some time Tuesday afternoon because the trial that day ends at noon.  Rather than walk around Philadelphia and see the sights, the judge writes out the bench opinion, notifies the parties by phone and goes back on the record.  The judge will sit on the bench from which the cases are tried, recall the case and then read into the record of the case the opinion.  This may occur in a courtroom populated only by the judge, the trial clerk and the court reporter.  It must occur before the judge terminates the calendar meaning that before the judge makes the formal statement that the January 26 trial calendar in Philadelphia is over the judge must go on the record and read the Bench Opinion.

The procedure makes sense as a quick way to resolve cases that really do not need to wait for further development. The preliminary statistics from my research show that some judges on the Tax Court use this procedure regularly some do not use it and one former judge used it frequently.  Here is the result of the initial research just showing raw cases and not type of case or other information:

Judge # of Bench Opinions
Armen Jr. 12
Carluzzo 22
Cohen 1
Crewson Paris 1
Gale 4
Goeke 29
Gustafason 22
Guy Jr. 2
Halpern 8
Holmes 14
Kroupa 60
Laro 4
Marvel 12
Morrisson 7
Vasquez 7
Wells 1
Whalen 12
Wherry Jr. 1
Thorton 3
Total 222

 

Bench Opinions can issue in regular or small tax cases. Because small tax cases, which comprise about 50% of the Tax Court’s inventory of cases, have many recurring issues, in some ways the number of bench opinions seems small.  Bench Opinions seem to slip under the radar.  I hope to provide more information after going through the cases in more detail.

 

 

The Gift that Keeps on Taking–Does Section 6324(b) Limit Gift Tax to the Value of the Gift or Can the IRS Take More?

AP,Webber Photography / AP

AP,Webber Photography / AP

In November, in US v. Marshall, the Fifth Circuit added to the split in circuits regarding the extent of a transferee’s liability for gift tax- specifically, whether the total amount of tax due can surpass the amount of the gift because of interest. The case likely will garner some attention, surprisingly not for the tax procedure issue, but because the underlying gift was made by J. Howard Marshall.  Mr. Marshall was an oilman, who made a fair portion of his fortune by partnering up (in the business sense) with the Koch bros. Later in life, he famously partnered up with Anna Nicole Smith (in the marriage sense).  Although that marriage only lasted fourteen months, it resulted in litigation lasting substantially longer– but the former Playmate and somewhat tragic figure was not involved in this litigation.  The indirect gift in question occurred in 1995 before their nuptials, and was made to various other relatives and trusts held for the benefit of his relatives.

The procedural issue of interest in Marshall deals with a donee’s liability for transfer taxes due on a gift “to the extent of the value of such gift” under Section 6324(b), and if that amount can surpass the value of the original gift because of interest.  The Courts have disagreed.

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The Facts

Perhaps not as splashy as a story about a buxom blond, but still interesting, Mr. Marshall sold his shares in Marshall Petroleum Inc.  (MPI) back to MPI in 1995.  Years later, it was determined that the sale was well below the fair market value of the stock, which indirectly increased the value of the stock for the remaining shareholders.  Those other shareholders were E. Pierce Marshall (his son), Eleanor Pierce Stevens (ex-wife), Elaine T. Marshall (daughter-in-law), the Preston Marshall Trust (trust fbo a grandson), and the E. Pierce Marshall, Jr. Trust (trust fbo a grandson).  Because everything is bigger in Texas, an agreed settlement with the IRS found that the indirect gift to all beneficiaries in 1995 totaled around $83MM, for which no gift tax had been paid.  There are a lot of tangential issues in the case, but for purposes of this write up, some of the donees paid around $45MM to the IRS, representing the amount of the gifts each received.  The IRS, unhappy with a host of issues, filed suit, alleging in one count that the government was entitled to charge interest on the amounts due from the donees, which was not capped at the amount of the gift – meaning the donees needed to cough up another Texas’ sized heaping of cash to get the feds of their backs.  The donees, already lamenting the lightness in their wallets, disagreed.

The Law

Under Section 6324(b), the Service can impose a tax lien for gift tax due on the donor’s assets, but also the donee, making the donee secondarily liable for the transfer tax.  Section 6324(b)  states:

[U]nless the gift tax…is sooner paid in full or becomes unenforceable by reason of lapse of time, such tax shall be a lien upon all gifts made during the period for which the return was filed, for 10 years from the date the gifts are made.  If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift.

The argument boils down to the donees believing the final sentence above makes the donee liable for the donor’s tax debt, but only “to the extent of the value of such gift”.  The government, however, argued that Section 6324(b) creates a separate tax liability for the donee, which it can then impose interest on under Section 6511.

The donees advanced various arguments in favor of their position, but the primary argument was that Section 6324(b) is clear on its face in imposing a single liability for the donor’s tax and interest, which is capped at the value of the gift- no separate liability in the donee.    This was the position taken by the Third Circuit in Poinier v. Comm’r, where the Court held that no separate liability was created, but instead “merely a new procedure by which the Government may collect taxes.”  To the Third Circuit, “tax” included interest, but that also was limited to the value of the gift. Following the Third Circuit holding, the government attempted to bring Poinier before SCOTUS, but cert was denied. The Eighth Circuit, in Baptiste, held in line with Poinier.

The government’s position was that the language was not that plain and did not actually resolve the issue.  It argued that Section 6324(b) had to be read in conjunction with Section 6901 and Section 6601.  Section 6601 is the Code Section imposing interest in general, while Section 6901 provides that, “liabilities shall…be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred…[including][t]he liability, at law or in equity, of a transferee of property…of a donor in the case of…[gift tax].”  The Court sided with the government’s contention that when reading Section 6324(b) with Section 6901 there were two separate liabilities, and the donees’ were responsible for interest on its liability.  The Eleventh Circuit has also agreed with this line of reasoning (also a Baptiste).

Although the language may not be completely clear, it strikes me that most tax practitioners reading Section 6324 would view the language as limiting the potential amount outstanding that the donee could have to pay, and would view this more as a collection mechanism (similar to what the Third Circuit stated about Section 6324).  Congress is fairly good at creating liabilities clearly.

I also did not fully understand how the limitation under Section 6324(b) relating to the donor’s liability is meaningful under the Court’s holding.   The tax due on the gift would only be able to reach the value of the gift because of the addition of interest.  The Court noted that Congress had repealed the specific prohibition on interest being paid on interest, and enacted compounding interest, finding Congress was not against the double imposition of interest.  In reading the opinion, it seemed to me the Court was saying interest could be charged twice on the same amount (which is different than compound interest)—once on the donor’s debt up until the value of the gift, and then concurrently on the donee’s liability (which  based on this reading of creating a liability would start when the tax was due and unpaid also).  That would create an interest rate for some period of double the stated rate (significantly higher than corporate rates and the overpayment rate, which was statutorily brought in line with the underpayment rate for individuals).  I can’t imagine that is correct, and perhaps is contrary to other statutes.  If that is not what the Court intended, but the interest can run on the donee from the date of the return, I do not know how the limitation to the value of the gift would have meaning, unless interest can only start running on the donee’s liability after it stops running on the donor’s liability.  I’m not aware of a statutory provision indicating as much, and the Court did not indicate that.  Perhaps I am missing something here.

The donees also argued that reading Section 6901 and Section 6324 together in this way was inappropriate, because the Service did not rely on Section 6901 to collect the tax, and instead used a direct judgment under Section 7402 based on the amount outstanding under Section 6324(b).  The donees argued that Section 6901 requires assessment and collection in the normal fashion, which creates procedural safeguards, including notice and review.  The Service elected not to bother with those procedures.  In my mind, this is compelling.  Section 6901 may create rights for the Service, but it does so by also requiring the burdens of assessment and collection.  Section 6324(b) has no such requirement of assessment.  The Court was not persuaded, and held that it was not inappropriate and that Section 6901 could still provide guidance on the liability created under Section 6901.

Although I disagree with the holding, it is possible to massage the statute to create the Court’s result.  It seems significantly easier though to come to the result that the language limits the amount due by the value of the gift.

Perhaps SCOTUS will be more willing to review this matter now that the 5th has weighed in.

Tax Court Addresses Verification Requirement in Trust Fund CDP Case

Seventeen years into CDP and the Tax Court is still issuing a healthy dose of full TC CDP opinions. Yesterday was another, with the court in Lee v Commissioner listing precisely what Appeals has to verify in cases involving trust fund penalty assessments and also clarifying that it will have jurisdiction to consider whether Appeals satisfied its verification requirements even if the taxpayer does not explicitly raise that issue in its administrative request for CDP review. The case distinguished the court’s jurisdiction over matters that taxpayers must affirmatively raise on appeal under Section 6330(c)(2) (such as collection alternatives, spousal relief and challenges to the underlying liability) with the requirement under Section 6330(c)(1) that Appeals must verify that IRS has met the requirements of “any applicable law or administrative procedure” in making the assessment. Lee thus clarifies jurisdictional implications of the distinction between the court’s power to consider Appeals’ verification requirement from other issues which the taxpayer must affirmatively raise.

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We have discussed CDP extensively over the last few months. The cases seem to come fast and furious. CDP cases consume a healthy dose of administrative and judicial resources; as the recent NTA Annual Report describes, CDP was the 5th most litigated issue last year, though the number of CDP cases issued in 2014 declined somewhat from the prior year. In fact, in the revised Saltzman and Book, Keith is the principal drafter of a new standalone chapter on CDP (the CDP chapter coming out via Checkpoint later this spring).

Keith discussed Mason v Commissioner last month and how taxpayers can litigate the merits of a trust fund recovery penalty when the taxpayer fails to receive a proposed assessment of a trust fund recovery penalty (IRM provisions in 5.7.6 describe that process in detail). Assessment of a trust fund recovery penalty is not subject to deficiency procedures, though the statute refers to the deficiency procedures because the IRS must issue the notice to an “address as determined under section 6212(b).” Alternatively, the statute says that the notice can be given “in person.”

What is Lee about? In Lee, IRS admitted that it did not mail the proposed assessment but claimed to have personally delivered the notice of proposed assessment of trust fund penalties (issued in Letter 1153 and Form 2751 though sometimes referred to generally as Form 1153) to Mr. Lee at a meeting on March 30, 2010. Mr. Lee claims that the IRS did not serve him the 1153. In any event, IRS assessed the penalty about three months after it claims to have served the proposed assessment; it then soon thereafter issued a notice of intent to levy and notice of federal tax lien that Lee responded to by filing a request for a CDP hearing. At the hearing there was back and forth regarding a collection alternative. Appeals issued a determination sustaining the assessment; Lee petitioned to Tax Court claiming in part that another employee was the responsible person but that the other employee’s health problems led to the shortfall. The Tax Court remanded the matter back to Appeals to consider whether Lee received 1153, whether he had an opportunity to challenge the assessment, and application of a payment to the assessment.

On remand, Appeals held a supplemental hearing, and a settlement officer received the case transcript which stated that Lee was personally served with the 1153 on March 30; the officer also faxed Lee an unsigned copy of the 1153 that was dated March 30, 2010. As the opinion describes, the settlement officer “determined that petitioner had received the Letter 1153, that the Letter 1153 had afforded petitioner appeal rights which he failed to exercise, and that petitioner therefore could not raise at the supplemental hearing the underlying liabilities for the trust fund recovery penalties assessed against him.”

After a Tax Court status report reflecting the supplemental hearing, IRS filed a motion for summary judgment stating that there were no disputed issues of material fact and the levy and NFTL should be sustained as a matter of law. In response to a motion for summary judgment, Lee argued that he was not a responsible person.

In the opinion yesterday, the Court held that there was some uncertainty regarding the supposed personal delivery of the 1153:

We conclude that the record is not sufficient for us to decide that the Letter 1153 was served on petitioner. For example, respondent has not provided the Court with a copy of the Letter 1153 that respondent contends was personally delivered to petitioner. Nor has respondent provided a statement, under oath, by the revenue officer, that he personally served the Letter 1153 on petitioner on March 30, 2010. Instead, the record contains only a copy of the ICS Transcript entry on March 31, 2010, the day after the meeting was held, stating that the Letter 1153 had been previously served on petitioner at the meeting. Indeed, the entry on March 30, 2010, the date of the actual meeting, contains no statement regarding the personal delivery of the Letter 1153 to petitioner. Moreover, neither entry, on either date, identifies the person who respondent contends delivered the Letter 1153 to petitioner.

More importantly though the case fleshes out the verification requirements in trust fund CDP cases:

In a hearing held pursuant to section 6330 to collect trust fund recovery penalties, the basic requirements the Appeals officer must verify include: (1) the Service’s proper assessment of the trust fund recovery penalties, see, e.g., secs., 6201(a)(1), 6672(b); (2) the responsible person’s failure to pay the liability after notice and demand for payment of the liability, see secs. 6303, 6321, 6331(a); and (3) the Service’s notice to the responsible person of the NFTL or the intent to levy…

Lee likely rose to a full TC opinion because it extended the Tax Court’s discussion of verification requirements that have arisen in deficiency cases to 6672 cases:

Because the Service uses Letter 1153 to provide the required notice, the proper issuance of the Letter 1153 to petitioner is a requirement of law and administrative procedure whose execution the Appeals officer must verify. See sec. 6330(c)(1); Dinino v. Commissioner, As we stated in Dinino, pursuant to our holding in Hoyle v. Commissioner, 131 T.C. 197 (2008), this Court will review any verification issue even if the taxpayer did not raise the issue at the hearing. See sec. 6330(c)(2)(B); Dinino v. Commissioner, 2009 WL 4723652, at *7-*8.

Lee goes on to discuss Hoyle and Giamelli and the rationale distinguishing between court review of 6330(c)(1) and (c)(2):

In Hoyle, the taxpayer asserted that the Service had failed to properly mail a notice of deficiency before assessing the income tax in issue. Hoyle v. Commissioner, 131 T.C. at 200. In Hoyle, following the rule in Giamelli v. Commissioner, 129 T.C. 107 (2007), the Commissioner argued that the taxpayer could not raise the issue of receipt of the notice of deficiency because the taxpayer had not raised it at the hearing. Hoyle v. Commissioner, 131 T.C. at 200.

The Court explained in Hoyle that the Giamelli rule, which prohibits taxpayers from raising in Court any issues not raised at the hearing, applies only to “any relevant issue relating to the unpaid tax” which the taxpayer “may raise” under section 6330(c)(2), not to the verification requirements of section 6330(c)(1). Hoyle v. Commissioner, 131 T.C. at 201-202. Section 6330(c)(2) issues such as spousal defenses or collection alternatives cannot be a part of the Appeals officer’s determination unless raised by the taxpayer. Id. The concern underpinning our holding in Giamelli is that litigating new issues in Court without any prior consideration by the Service would frustrate the administrative review process created by section 6330. Id. In contrast, the section 6330(c)(1) verification requirements will always form part of the determination because the statute requires their consideration at the hearing regardless of whether the taxpayer raises the issue. Id. Because section 6330 requires Appeals officers to independently consider section 6330(c)(1) issues at the hearing, they are not “new” when asserted in Court and there is no danger of frustrating the administrative review process.

Conclusion

The takeaway is that in trust fund CDP cases Appeals should in its determination satisfy the specific verification requirements that Lee identifies. A failure to do so could generate a remand. If there is some uncertainty as to whether a person has received a proposed assessment that IRS claims was served in person, then it is likely as in Lee the matter may not be appropriate for summary judgment, though one might expect in future cases IRS counsel to include along with the summary judgment motion a sworn statement from the revenue officer attesting to that fact.

How Long Does a CDP Case Toll the Statute of Limitations on Collection?

The Ninth Circuit in United States v. Kollman adopted the view of the IRS on the statute of limitations tolling impact of Collection Due Process (CDP) cases. The case provides a simple affirmation of the regulations with no curves but deserves mention because the length of the tolling can matter in other cases as it did here.  The IRS and Department of Justice have a habit of bringing suits at or near what they calculate as the last possible moment.  Double checking their calculation provides the taxpayer an important service in cases that usually have little basis for defense on the merits.

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This case represents one of the very first CDP notices issued by the IRS. Mr. Kollman owed taxes for 1996 which the IRS assessed on November 24, 1997.  Normally, the statute of limitations on collection runs for 10 years and would have expired on November 24, 2007, absent something extending that date.  On March 18, 1999, less than two months after the IRS began issuing CDP notices in January of that year on the effect date of RRA 98, Mr. Kollman filed a CDP request.  He could have received the CDP request as much as 30 days before that date and the IRS did not get off to a fast start when it started the process of sending CDP notices.  So, he must have received one of the very first ones.

Because he filed one of the first CDP cases, Appeals jumped right on his case. By June 18, 1999, it had made its determination sustaining the collection action proposed by the IRS.  It sent him a notice of determination on that date giving him 30 days to petition the Tax Court.  He did not file a petition in Tax Court.  He also did not pay some or all of the taxes at issue, and, as the statute of limitations on collection wound down, the IRS decided to bring a suit to reduce the assessment to judgment to buy more time to collect from him.  The issue in this case turns on the timeliness of the filing of the suit on March 12, 2008, which turns on the suspension of the statute of limitations on collection caused by the CDP request.

Section 6330(e) provides for the statute of limitations suspension when a taxpayer makes CDP request; however, it does not specific exactly how long the suspension lasts. In the regulation at 301.6330-1(g)(1) the IRS gets very specific about the period of the suspension.  The regulation provides that the statute suspension lasts from the date of the request until 30 days after the date of the notice of determination in situations in which the taxpayer does not petition the Tax Court.  The specific language suspends the statute until “the determination resulting from the CDP hearing becomes final by expiration of the time for seeking judicial review.”  Had the taxpayer petitioned the Tax Court the suspension would have continued until “the exhaustion of any rights to appeals following judicial review.”

The period from the receipt of the request for the CDP hearing on March 18, 1999, until 30 days after June 18, 1999, is 123 days. Adding 123 days to the normal statute expiration date of November 24, 2007, yields March 26, 2008.  The suit was filed on March 12, 2008, within the extended time period for collection in this case.

Mr. Kollman argued that the language of the statute clearly stated the tolling period would run during the time of the hearing citing to the statutory language – “shall be suspended for the period during which such hearing and appeals therein are pending.” He needs the court to find this language so clear that any regulation reaching a different conclusion must fail under the Chevron test.  Neither the district nor the circuit court found that kind of clarity sought by Mr. Kollman.  As a result they turned to the regulation for an explanation of the period of tolling.  The regulation, as quoted above, provides clear guidance on this point.

Having determined under the first test of Chevron that the statute did not clearly provide an answer to the question posed here, it moved on to the second step of Chevron – did the regulation provide a permissible construction of the statute? On that point it found for the IRS as well.  The construction of the statute by the IRS provided a reasonable basis for interpreting an unclear provision.  The interpretation was consistent with other regulations providing guidance in similar circumstances.  Further, the court went on to find the interpretation consistent with the legislative history.

In all, the decision of the court provides no surprises. It also provides judicial authority now for a well settled interpretation of the how the statute suspension works when someone makes a CDP request.  Because the statute suspension of CDP can impact a taxpayer, it must be considered prior to making a CDP request.  Many times, you might accomplish your goal in a CDP request through an equivalent hearing.  Within the short 30 day span allowed after the CDP notice, one of the things to think about with a client is the benefit of making a CDP request because of the downside of the suspension of the statute of limitations.  The case provides no information about the reasons for Mr. Kollman’s request.  Had he decided not to make a CDP request, the IRS would probably have made its decision to file suit with the normal 10 year time frame.  The suspension here may not have made a difference, but it is something to think about when deciding to make a CDP request particularly because some of the same collection goals may be attainable in an equivalent hearing without the suspension of the statute of limitations.

 

Summary Opinions for 12/19/14 to 1/05/15

Back in the saddle after quite a few weeks off.  Holidays, home renovations, and the passing of my maternal grandfather (phenomenal guy, who will be incredibly missed by everyone who knew him) took priority over blogging.  SumOp isn’t usually that time sensitive though, so we can pack three weeks into one post.

Here are the items we found interesting that we didn’t otherwise cover over:

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  • Let’s start off with Jack Townsend’s Federal Tax Crimes blog, and his post on Muncy v. Comm’r, which can be found here.  This Muncy is a gentleman who was not fond of following tax laws, and not the quaint town in north central Pennsylvania where I lived as a teenager.  Leroy Muncy created some type of fake employment agency and amazingly convinced his employer to pay his wages to this fake company in an effort to stop paying employment taxes.  I would guess he ran inflated expenses through the company to decrease his income taxes also, but that is just speculation.  When his fake employment company concept failed, he claimed he was a “sovereign living soul”, not subject to the rules of his home state of Arkansas or the United States of America. The civil court found he had failed his sovereign citizenship test (because it is made up and never recognized as a valid argument). Fast forward a few years, and there was criminal tax restitution and a potentially larger civil liability outstanding.  The Tax Court discussed the new legislation allowing immediate tax restitution on the criminal amount, and the issues that could cause in requiring a notice of deficiency for the full civil amount (which includes the criminal restitution amount).  Jack discusses the issue and provides his thoughts in the post.
  • Chief Counsel determined that employment tax liabilities and worker classifications were not partnership items under TEFRA, as they were items imposed and determined under Subtitle C, whereas TEFRA partnership items are those found under Subtitle A.  See LAFA 20145001F.  This general position has been stated before.  For an interesting discussion regarding this topic, and when related items of income may require TEFRA proceedings see CC Memo 200215053.
  • The Service shared its international tax training materials, which are found here.  There is a lot of material, and I have not gotten through it all yet.  The Service did caution that such training does not constitute pronouncements of law, and cannot be relied upon…but it will show how your agent will be approaching your audit.  Some of the units provide good overviews, while others dig down into specifics, like “Disposition of a Portion of an Integrated Hedge.”  My wife literally fell asleep when I was explaining that unit to her (or pretended to be asleep so I would stop talking).
  • The Fourth Circuit, in Wolff v. US,  in early December had a bankruptcy holding that I doubt is breaking new ground regarding preferential transfers (see Begier v. IRS. 496 US 53, cited by the 4th Cir.), but I hadn’t reviewed a case on the specific matter before.  The issue and holding, as outlined by the Court were:

whether the trustee in bankruptcy may reclaim as property of the debtor the approximately $28 million transferred by the debtor to the IRS during the 90 days preceding the filing of the bankruptcy petition. We agree with the bankruptcy court and the district court that, as a matter of law, the debtor lacked an equitable interest in the funds paid over to the IRS, and therefore we affirm the judgment.

The Fourth Circuit found that the property lacked the prerequisite of being the debtor’s property, because under applicable state law it held the funds in express trust and had no interest in the assets or discretion to use those funds for anything other than paying the government.

  • In US v. Titan International, the Service sought to obtain enforcement of its summons looking for the company’s 2009 airplane flight logs and general ledger in connection with its 2010 audit.  The taxpayer objected, as the Service has previously audited its 2009 return, and reviewed the requested documents. The taxpayer attempted to rely upon Section 7605(b), which generally states taxpayers do not have to hand over their books and records multiple times for the same year.  In Titan, the IRS argued it needed the documents to verify a 2010 deduction, and did not intend to review 2009 again.  The Court found the testimony and reasoning of the Service valid, and enforced the summons. This drives me crazy also (especially when they ask for the return), though the law (as Titan explains) gives the Service quite a bit of leeway to examine records from a previously examined year if the records relate to another possible year’s liability.
  • “Double-D Ranch” seems like a place in Nevada my wife would be very upset to find credit card receipts from, but it was apparently a far less seedy tax shelter for the one-time American Home Products (Wyeth) owner, Albert Diebold.  The Ninth Circuit found that shareholders, here the Salus Mundi Foundation, were responsible for a corporation’s taxes based on the state fraudulent conveyance statute and the transferee liability rules. See Salus Mundi Foundation v. Comm’r.   Peter Reilly has coverage at Forbes, where he loops in Frodo Baggins, all the tax shelter goodness, and the Diebold family history, found here.  If this all sounds familiar, it’s because the Second Circuit reviewed the exact same facts in Diebold Foundation v. Comm’r from 2013, which the Ninth Circuit looked to in its holding.
  • Southern District of Mississippi denied the Government’s motion to dismiss a taxpayer’s son’s action for quiet title on property the IRS was trying to foreclose its liens upon for the father’s taxes based on nominee theory; the Government argued that Sections 6325(b)(4) and Section 7426(b)(4) relating to some expedited lien remedies were the only remedies available to the taxpayer.  The Court in US v. McFarland disagreed, holding those were available remedies, but did not foreclose a quiet title action under 28 USC 2410.
  • In Larry J. Austin v. Comm’r (there was a Larry P. Austin case decided a few days later by the Tax Court – little confusing), the IRS prevailed in showing it was substantially justified in its position regarding foreign interest on accounts held in the name of the taxpayer, even though the interest was not actually taxable to the taxpayer.  Although the taxpayer prevailed on the item and amount in controversy, and met the financial thresholds for fees, the Service position was reasonable enough to prevent the imposition of costs.  A qualified offer was presumably not provided in this matter; although, there was a stipulated settlement, so the Service could have argued the concession was not the taxpayer prevailing, perhaps making such an offer useless.  We’ve discussed that before here and here (and I don’t like the court holdings very much).
  • John Doe is apparently involved in shipping, not just banking.  The DOJ has issued summonses to FedEx, DHL, and UPS to obtain information about clients who may be facilitating illegal activity resulting in tax fraud.  Robert Woods at Forbes has coverage here.

Eskimos and the IRS: A Winter’s Tale

This post is not about tax procedure issues in the native American population in Alaska but a recent Treasury Inspector General for Tax Administration (TIGTA) report concerning frozen credits at the IRS made me think about the number of ways Eskimos have to say snow. Anyway, I always wanted to have Eskimos in the title of a paper and this seemed like a good way.

Eskimos have a lot of words for snow as we all learned as little children when our teachers sought to impress or depress us as they introduced yet another English word meaning the same thing as something else. It turns out the IRS has over sixty kinds of freezes.  When I read this, I immediately thought of the many ways Eskimos could say snow.  All of the thoughts of snow and freezing make for a good tax story this time of year.

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The TIGTA report determines that “further actions are needed to resolve millions of dollars of frozen credits in taxpayer accounts.” This report centers on a part of the IRS that we do not write about enough because this part really stands at the center of all the IRS does – Accounts Management.  The reports states that there are more than 60 freeze conditions that can apply to a taxpayer’s account.  That’s a lot of frozen money sitting with the IRS that someone would probably like to have as their own.  The report only focuses on three of the types of freezes the IRS employs.  If you ever have a client not receiving funds from the IRS they expected, you may have need to look into one of the many ways that the IRS holds taxpayer funds through the various types of freezes.  I will not try to discuss them here, but merely highlight the process.

Most freezes have a relatively short life span. They should because the nature of a freeze on an account does not seek to make a final determination of the outcome of the funds but merely to hold them pending some other event.  Still, the amounts at issue are staggering.  TIGTA reported that at the end of FY 2012 the IRS had approximately 8.6 million in business master file (BMF) tax modules containing $736 billion and 13 million in individual master file (IMF) tax modules containing $293 billion frozen for six months or less.  The amount of money sitting in some time of freeze is astonishing.  As the IRS suffers cutbacks, the amount of time to process the freezes will no doubt grow making for many more unhappy customers.  Understanding what causes a freeze and how to thaw one can serve as important skills in a time of shrinking government resources to close the accounts correctly.

One of the areas where the IRS uses a freeze includes identity theft. If the IRS identifies a return as one potentially filed by someone using a stolen identity, it freezes the refund claimed on the return while it works out its position regarding the return. Another common situation in which the IRS freezes a refund occurs with returns claiming the earned income tax credit (EITC).  The IRS routinely freezes the refundable credit claimed through the EITC while it audits the return (and litigates the result of the audit.) This freeze has a major impact on low-income taxpayers for whom the refund might represent a third of their annual income.  Not only is getting the freeze lifted a critical part of the case but the existence of the freeze can drive an outcome because the taxpayer needs or wants some funds quickly.  Low income taxpayers will resolve these cases at an early stage because of the freeze in order to gain access to some of the funds.  So the freeze can have unintended consequences.

The TIGTA report focuses on only three types of freezes and I will discuss two of those: 1) accounts with no return filed and 2) bankruptcy.  As it happens these two conditions were the subjects of a recent post regarding bankruptcy discharge. Here the two conditions do not carry a link except that they independently form bases for the application of a freeze.  If the taxpayer has withholdings, or estimated payments associated with his account, and does not file a return or if the return fails to post, any credits related to that module will freeze pending the filing or posting of the return.  If the taxpayer never files a return, the frozen credits will eventually, years later, move from the account into the general Treasury fund for excess collections.  When the taxpayer has failed to file a return, the freeze provides the only logical way for the IRS to deal with the funds pending a proper claim for their return or application to an account.  Because millions of people fail to file returns each year and many have withholding credits on the system, this freeze occurs frequently.  The report provides statistics on the numbers and types of these freezes.

When a taxpayer files a petition in bankruptcy, the IRS must stop all collection action because of the automatic stay in Bankruptcy Code 362(a)(6). The automatic stay also stays others actions of the IRS although no has the sweeping impact of the stay on collection.  Until 2005 the code prevented offset during the stay and the IRS routinely froze refunds in that circumstance in order to hold onto the money pending the lifting of the stay.  Sometimes those types of freezes could occur for years.

Because of the number of different types of credits and the different reasons for imposing or lifting the credits, most of the work on accounts management with respect to the freezing and releasing of credits occurs as a result of computer programming rather than human intervention. Because the computer starts the freeze and will likely end the freeze the programming serves a vital and sometime incorrect link in the system of freezes.  Of the sample of cases reviewed by TIGTA, the IRS mishandled a decent number of the accounts.  Sometimes the mishandling benefits the taxpayer such as the failure of the IRS to restart collection action after the lifting of the automatic stay and sometimes it has a harmful impact on the taxpayer.

You cannot assume that the sixty plus freezes occur correctly. While not surprising news, this will probably occur with more frequency as the IRS deals with workload issues.  If a client’s account remains frozen improperly, it becomes important to identify the source of the freeze and the mechanism for lifting it in order for this winter’s tale to have a happy ending.

 

 

 

NTA Annual Report To Congress Issued Yesterday

The National Taxpayer Advocate released its annual report to Congress yesterday. The report is in two volumes; the first volume lists most serious problems, provides legislative recommendations, and provides some workload information, including listing the most litigated issues over the past year and a breakdown of TAS activities.

The second volume discusses TAS research studies. The TAS research studies examine the population eligible to seek assistance from low income taxpayer clinics, the impact of audits on subsequent sole proprietor compliance behavior, and a statistical analysis of id theft case closings as of mid-year 2014.

The report discusses a number of issues that we featured in PT this past year, including a discussion of Byers v Commissioner and the issue of appellate venue in CDP cases (TAS recommends a legislative fix to tie venue to place of taxpayer residence); and a discussion of Ibrahim v Commissioner and filing status issues for taxpayers who file a petition to Tax Court (TAS recommends legislation that would “allow taxpayers who petition the Tax Court in response to a SNOD to change their filing status to MFJ in accordance with the practices and procedures of the Tax Court.”)

The TAS research study on sole proprietor compliance looks particularly interesting. Sole proprietor income underreporting  is by far the biggest contributor to the tax gap. The study suggests that the impact of audits on future years’ compliance is quite limited. I have not had the chance to read the research study though its summary of the impact of audits on future years’ compliance is sobering:

Our study findings suggest that overall IRS audits have a modest deterrent effect that diminishes in the years following the audit, disappearing altogether by year five . This suggests that any initial impact of the audit on compliance is short lived.

After we have the chance to read the report fully, we will likely discuss individual sections in further detail.