Monday, March 18, 2019
Generally, it’s nice to be noticed. Tomorrow is my 24th wedding anniversary and I remain truly grateful that my wife noticed me one day long ago at a contra dance at Glen Echo. That notice continues to this day, fully reciprocated.
But sometimes it’s not so nice, such as when the notice comes from the IRS. And when Congress wants the IRS to “notice” taxpayers (pun intended), it generally requires the IRS to send that notice to their last known address.
The last known address rule is critical to learn. Congress puts that rule in about 20 different statutes, helpfully listed in Rev. Proc. 2010-16. The governing regulation generally allows the IRS to comply with the rule by using the address in its Master File database. There are some exceptions. In a blog last November, I discussed one exception: certain events can trigger an IRS duty of due diligence to go beyond the address in its database.
Last week the Tax Court taught us about another exception in Damian K. Gregory and Shayla A. Gregory v. Commissioner, 152 T.C. No. 7 (Mar. 13, 2019) (Judge Buch). There, Tax Court let us know, in a fully reviewed opinion, that a Power of Attorney (Form 2848) does not have the legal effect of telling the IRS that a taxpayer has changed their official address of record. This is important because, as long-time practitioners know, Form 2848 used to work for that purpose (albeit as a backstop). Time to unlearn that old lesson! Details below the fold.
March 18, 2019 in Bryan Camp, New Cases, Scholarship, Tax Practice And Procedure | Permalink
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Monday, March 11, 2019
When something goes right most of the time, we generally are not prepared for when it goes wrong. Last week’s opinion in Teri Jordan v. Commissioner, T.C. Memo. 2019-15 (Mar. 4, 2019) (Judge Buch) teaches that lesson as applied to the §7502 statutory mailbox rule. It also teaches us what we need to know to avoid the unhappy outcome for Ms. Jordan.
Most folks know something about the statutory mailbox rule in §7502. Or at least think they do. Almost everyone has a general idea if they mail their tax returns or, as here, their Tax Court petition on the last day of the deadline for filing, all will be well. That generally works out for them because the U.S. mail is reliable. That reliability leads many folks to think they can print off a stamp or postage label from an internet provider and drop the petition off at their nearest U.S. Post Office (USPS). Or taking it to the counter of a Fed Ex or UPS “store” is the same as taking it to a USPS counter. Again, those actions usually result in a timely petition.
More savvy (or cautious) taxpayers, however, not only know the mailbox rule, they also know Murphy’s law. They know the best way to beat Murphy’s law of mailing is to use Registered Mail or Certified Mail. Ms. Jordan was not one of the savvy. She used a private postage label printed out from Endicia.com to mail her Tax Court petition. That proved to be a mistake. To see how her case is a lesson for all of us, read on.
March 11, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, March 4, 2019
Section 6751(b)(1) prohibits the IRS from assessing any penalty against a taxpayer “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination...” The Tax Court will not sustain a penalty unless the IRS produces evidence that the required personal approval has taken place before the IRS first notifies the taxpayer (typically in either a 30-day letter or the NOD) about the penalty. Section 6751(b)(2) provides an exception to the personal approval requirement for “any...penalty automatically calculated through electronic means.”
Craig S. Walquist and Maria L. Walquist v. Commissioner, 152 T.C. No. 3 (Feb. 25, 2019) (Judge Lauber) was one of two reviewed opinions issued last week that gave the IRS important wins on the scope of §6751. In Walquist the Automated Correspondence Exam (ACE) system hit the taxpayers with a §6662 substantial understatement penalty. No IRS employee even knew about it until after the taxpayers petitioned Tax Court in response to the automated NOD. Thus, there was no supervisory approval as required by §6751(b)(1). The Court decided, however, that the IRS was entitled to the §6751(b)(2) automatic computation exception to the supervisory approval requirement.
At one level, this was an easy case against two unsympathetic taxpayer hobbyists. At another level, however, the decision may create problems down the road because the facts of the case are more modest than the scope of the Court’s language. That tension between facts and language may end up harming other taxpayers ensnared by the IRS automated processes. As usual, you will find the more complete story below the fold.
March 4, 2019 in Bryan Camp, New Cases, Scholarship, Tax Practice And Procedure | Permalink
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Monday, February 25, 2019
Tax law often involves line drawing. Doyle v. Commissioner, T.C. Memo. 2019-8 (Feb. 6, 2019) (Judge Holmes) teaches two line-drawing lessons, one about the §104(a)(2) exclusion for payments received on account of physical injury and the other about “above-the-line” vs. “below-the-line” deductions.
Mr. Doyle was a whistle-blower who sued his former employer after it fired him. The parties settled the case without trial. The former employer agreed to pay Mr. Doyle a total of $350,000 for lost wages and another $250,000 for emotional distress. The payments were each split evenly between 2010 and 2011. For each year the employer sent Mr. Doyle a W-2 for $175,000 and a 1099-MISC for $125,000. In addition, Mr. Doyle paid some amount in attorneys fees.
The issue litigated in Tax Court was about the $125,000 emotional distress payments in each year. It appears Mr. Doyle’s tax return preparer, one Herbert Hunter, took what can only be described as a bizarre reporting position. No. Wait. It can also be described more kindly as “weird.” That’s how Judge Holmes puts it. A Judge with a less generous disposition might use the word “fraudulent.”
You be the judge. To deal with the $125,000 payments for emotional distress, Mr. Hunter created a fake Schedule C, with a “999999” NAICS code (“unclassified establishment”). On the 2010 Schedule C he reported the $125,000 payment, and then zeroed it out by two offsetting deductions: one for $23,584 for “legal and professional services,” and one for $101,416 for “personal injury.” Mr. Hunter prepared the 2011 in much the same way, only then the deduction for legal fees was $33,000. ”Weird”? “Bizarre”? “Fraudulent”? Take your pick.
By the time Mr. Doyle got to Tax Court, he at least had an attorney who understood the difference between an exclusion and a deduction. One issue was whether the emotional distress payments were excludable under §104(a)(2). The resolution of that issue is one of the line-drawing lessons today.
But there was a second issue in the case, one that teaches a second line-drawing lesson. Mr. Doyle’s attorney, one Steven G. Early, seems to have totally missed the second issue, involving the proper place to deduct attorneys fees. Judge Holmes missed that as well. Sadly, I must confess I also missed it. But Professor Gregg Polsky caught it (and I thank him for bringing it to my attention). So I will pass that lesson on to you. Keep reading.
February 25, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, February 18, 2019
Last week’s case of Steven Samaniego v. Commissioner, T.C. Memo. 2019-7 (Feb. 6, 2019) (Judge Lauber) teaches a great (and short) lesson about the Tax Court’s subject matter jurisdiction. Mr. Samaniego had asked for a CDP hearing but the Office of Appeals thought his request was untimely. So it gave him an Equivalent Hearing and issued a Determination Letter to reflect its decision. Mr. Samaniego petitioned the Tax Court. Problem: the Tax Court does not have jurisdiction to review an Equivalent Hearing. Solution: Judge Lauber treated the hearing as a CDP hearing because he found that the Office of Appeals had miscounted the applicable time period. Hey Presto! Jurisdiction. But getting Tax Court review turned out to be a Pyrrhic victory for the taxpayer, because Judge Lauber found no error.
As we gear up for post-shutdown litigation over late-filed petitions this case is a useful lesson about how the Tax Court will take seriously its obligation to determine the scope of its own jurisdiction. The case also shows the Court's willingness to look through form to substance when doing so. I see the case as a direct descendant of Marbury v. Madison, 5 U.S. 138 (1803). Details below the fold.
February 18, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, February 11, 2019
Those who perform shell games often view them as games of skill. Those who lose money view them as blue collar swindles. I personally lost money at one on the streets of New York in the early 1980’s, a tuition payment to the School of Hard Knocks.
Sophisticated taxpayers use shells—layers of entities—to protect assets in a white collar version of the shell game. In last week’s Campbell v. Commissioner, T.C. Memo. 2019-4 (Feb. 4, 2019) (Judge Kerrigan), it looks like the IRS lost money to one. There, in a CDP proceeding, the Court found that the IRS abused its discretion in refusing an OIC of $12,600 to satisfy a $1.1 million tax liability. The interesting part of the decision for me was trying to figure out how the taxpayer’s various shells affected the ability of the federal tax lien to attach to property or rights to property of the taxpayer. Just based on what the Court wrote in its opinion, I think it possible that the IRS Chief Counsel attorney did not do enough to educate the Court on how to properly analyze the extent of IRS collection powers.
Of course, I am always trepidatious when critiquing an opinion, especially when the opinion is missing information that might well fix some of the problems I see. Here, in particular, it may be me who is confused by the taxpayer’s shell game. As usual, I welcome anyone who spots holes in my thinking to comment.
February 11, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, February 4, 2019
There are two pains in life. There is the pain of discipline and the pain of disappointment. If you can handle the pain of discipline, then you’ll never have to deal with the pain of disappointment.
Nick Saban may be a great coach, but that aphorism is unhelpful in its opaqueness. Perhaps he means that if you are disciplined enough, or prepared enough, no type of disappointment can hurt you because you will have done your best. If that’s his idea, litigators likely disagree. The pain of disappointment permeates any litigator’s professional life. Even the most disciplined litigators have to deal with the disappointment of adverse fact finding by a judge or jury.
Last week it was government litigators’ turn to feel the pain of disappointment, in the case of 2590 Associates v. Commissioner, T.C. Memo. 2019-3 (Jan. 31, 2019). The case teaches a substantive lesson about the §166 bad debt deduction and a procedural lesson about the power of fact-finders, here Judge Goeke. It's a fun case to follow a Super Bowl Sunday because it tangentially involves Nick Saben. The mainstream press erroneously types it as Nick Saban's win over the IRS. That is wrong. Saban was neither a party to the litigation nor did its outcome affect his taxes. He had already taken his winnings long before the litigation even commenced. Details and lessons below the fold.
February 4, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, January 14, 2019
Alas! A closed Tax Court issued no opinions last week. Curse that federal shutdown! But the federal district courts did issue opinions. The Administrative Office of the U.S. Courts website says they have enough money (from fees) to run through January 18th. And their opinions teach lessons as well.
Today’s lesson comes from a lawsuit filed against the United States by Mr. Nicholas Morales, Jr. in 2017. He sued under §7433, a statute that gives taxpayers a cause of action against the government when any IRS employee negligently, recklessly, or willfully "disregards" any statute or associated regulation in title 26 “in connection with any collection of Federal tax.” His Complaint alleged that IRS employees had disregarded §7122 in refusing his Offer In Compromise.
The Federal District Court for the District of New Jersey has issued two opinions in the case: Morales v. United States (Morales I) on March 26, 2018 and Morales v. United States (Morales II) on January 2, 2019. Both opinions are marked “Not for Publication.” They are not, however, marked “Not for Blogging”! That’s a good thing because they actually make for a good basic lesson about the scope and limits of §7433. You will find the lesson below the fold.
January 14, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, January 7, 2019
Courts and commentators often tout the voluntary nature of the United States tax system. In one sense, the claim is true. The tax determination process ultimately rests on taxpayers disclosing their financial affairs and paying what they owe---through withholding or otherwise---without overt government compulsion. It is voluntary just like stopping one's car at a red light---at midnight with no traffic---is voluntary. It takes each citizen's disciplined self-enforcement of the legal duty to keep both the tax and transportation systems running smoothly.
But saying the system is voluntary is also misleading. The discipline of self-reporting and payment cannot be divorced from the constant coercive threat of discovery and the resulting civil or criminal sanctions. It's Bentham’s Panopticon. Congress weaves together civil and criminal penalties to enforce the legal duties to report and pay taxes. It leaves the ever unpopular IRS to swing the net. By my count, Chapter 68 of the Tax Code contains 48 separate civil penalty provisions to catch out taxpayers.
Today’s lesson concerns the §6663 fraud penalty. On December 26, 2018, the Tax Court issued its opinion in Richard C. Mathews v. Commissioner, T.C. Memo 2018-212. The decision was a holiday gift to a pro se taxpayer who was contesting deficiencies (and fraud penalties) assessed well after the normal three year limitation period had expired. The IRS relied on the fraud exception in §6501(c)(1) but was unable to convince Judge Vasquez that the taxpayer had the necessary fraudulent intent. This was likely a surprising result to the IRS because the taxpayer had: (1) lied to IRS agents; (2) massively unreported gross receipts for the two years at issue and many years before that; and (3) been convicted of the §7206 crime of subscribing to false tax returns for the years at issue. To find out how the taxpayer dodged the fraud penalty bullet, read on.
January 7, 2019 in Bryan Camp, New Cases, Scholarship, Tax Practice And Procedure | Permalink
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Monday, December 3, 2018
This will be my last Lesson From The Tax Court for 2018. Exam-grading season has started and I need every hour to give student exams the time and attention they deserve. I will emerge from the flood of exams by January 4th and so my next Lesson will likely appear on Monday, January 7th. Writing these blog posts is loads of fun and I appreciate the opportunity Paul has given me for sharing my thoughts with you.
For my last Lesson this year, I have saved some cases that I think will make your head shake in disbelief (SMH in text parlance). Sometimes such cases teach a useful lesson, such as the one where the taxpayer took over $100,000 in charitable deductions over several years by using the original prices of clothing she bought on clearance. That taught a useful lesson about valuation and about substantiation, so I blogged it here.
The cases today are simply object lessons. Practitioners probably don’t need this lesson. But still, it may be useful to be reminded that there are perfectly ordinary people out there---folks you might well enjoy spending the holidays with or who might make a marvelous mincemeat pie---who are either so overconfident or greedy when it comes to taxes that they end up being an object lesson for the rest of us. So as you read about the following cases, I invite you to consider whether these taxpayers (and sometimes their attorneys) were unlucky, overconfident, greedy or something else, and whether, but for the grace of God, it could have been you or one of your clients?
December 3, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, November 26, 2018
One of the challenges of administering the tax laws to hundreds of millions of taxpayers is recordkeeping. Since the 1960’s the IRS has increasingly met this challenge by computerizing its systems of records. As a consequence, it often no longer keeps paper copies of important documents but instead relies on accurate recordation of those documents in its computerized system of accounts. For example, when the IRS sends out a Notice of Deficiency (NOD), an IRS employee inputs data to reflect the content of the NOD and inputs to reflect the issuance of the NOD. If a taxpayer (or representative) later wants to see what was in that particular NOD, the IRS can re-print the content of that NOD but does so on a new form. That’s not a copy. It’s a reprint.
The difference between a copy and a reprint was an important to last week’s case of Jeffrey D. Gregory v. Commissioner, T.C. Memo 2018-192 (Nov. 20, 2018). There, Mr. Gregory contested the Office of Appeals’ CDP determination that the IRS had taken the proper administrative steps to assess his 2009 tax liability. In particular, Mr. Gregory argued that because the IRS was unable to produce an actual copy of the actual NOD it actually sent him, the Office of Appeals could not credibly verify that the IRS had properly sent the NOD. The IRS argued that its computer records created all the evidence necessary for the Court to apply a strong presumption of correctness that the NOD existed and had been properly mailed.
Judge Halpern’s careful and thorough opinion is well worth your time, but in case you have too much holiday shopping yet to do, today’s blog will give you the short of it. The takeaway lesson here is that the IRS does not have to have an actual copy of an NOD to show it complied with administrative requirements, so long as it has sufficient other evidence to trigger a strong presumption of correctness the courts give to IRS records.
November 26, 2018 in Bryan Camp, New Cases, Scholarship, Tax Practice And Procedure | Permalink
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Monday, November 19, 2018
As a young child I counted the days to Christmas starting December 1st, using advent calendars. As I grew older, advertisements taught me that not all days were equal; one counted “shopping days” differently than calendar days. As I now grow old, the Christmas season starts the day after Halloween, briefly tolled by days around Thanksgiving.
Counting days is important in tax law, both for substance (e.g. figuring holding periods, allocating expenses between business days and personal days) and procedure (e.g. applying limitation periods). Fortunately, how one counts days in tax has not changed much since I was a child. So the lesson we find in last week’s case of Randy Richardson and Melisa Richardson v. Commissioner, T.C. Memo. 2018-189 (Nov. 13, 2018), should stick with us for a while.
Richardson involves a married couple who filed a CDP petition contesting NFTLs filed against them. Shortly after filing their CDP petition they filed a bankruptcy petition and received a discharge. When the IRS denied CDP relief, the Richardsons sought Tax Court review, arguing that the IRS did not correctly account for the discharge they got in bankruptcy. They ended up before Judge Lauber. The resulting lesson is how counting days can be important to resolving the question of what taxes the IRS can later collect. Even more important, it’s a lesson on when NOT to use CDP, but to instead request an “Equivalent Hearing.” Details below the fold. You can count on it.
November 19, 2018 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, November 12, 2018
I love classic rock from the 70’s. Not just for all the great music, but for the way that the bands help me teach tax. For example, Fleetwood Mac teaches a lesson about §162 deductions for uniforms. I know, I know, you would think that lesson would come from the Village People, but it was Stevie Nicks who filed a petition in Tax Court after the IRS disallowed her deduction for stage clothing.
The Eagles’ classic “Hotel California” provides an excellent way to think about Tax Court procedure, as we can learn from the recent case of Daniel Sadek v. Commissioner, T.C. Memo. 2018-174 (Oct. 16, 2018). In that case, the Tax Court dismissed as untimely Mr. Sadek’s 2017 petition contesting a 2011 NOD that the IRS had sent Mr. Sadek. The NOD was for $25 million and Mr. Sadek has not yet had a day in court to contest that amount. Oh, sure, he can sue for a refund but only if he fully pays the deficiency. Flora v. United States, 362 U.S. 145 (1960). He could also file bankruptcy and ask the bankruptcy court to determine his tax liability under its powers in 11 U.S.C. §505. But Mr. Sadek’s best hope might come in a CDP hearing. That is what I want to explore in this post.
I think this case teaches a lesson about the relationship between the Tax Court’s deficiency jurisdiction and its CDP jurisdiction. The question is whether Mr. Sadek, who has now lost in Tax Court, will be able to contest the merits of the $25 million in a CDP hearing. To answer that question, we need to understand the Hotel California rule and how it affects a taxpayer’s ability to turn what is ostensibly a hearing about collection into a hearing about tax liability.
November 12, 2018 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, November 5, 2018
The rich really are different, and not just because they don't cut coupons. It often seems that they escape the rules that apply to the rest of us. Thus, there is understandable fascination when rich bad actors get a comeuppance. That is probably why so many folks blogged last week's decision about Wesley Snipes, where the Tax Court found that the Office of Appeals did not abuse its discretion in rejecting Snipes' OIC that would pay less than 4% of his $23.5 million tax liability. "Tax Girl" Kelly Erb put up this terrific post if you want the salacious details.
Today I want to look at a different bad actor, one just as rich as Snipes, albeit a bit less famous. The recent case of Daniel Sadek v. Commissioner, T.C. Memo. 2018-174 (Oct. 16, 2018), raises the question of whether the IRS is entitled to rely upon its records when sending an NOD to a rich and famous taxpayer who “everyone knew” had fled to Lebanon to ride out an FBI investigation.
In 2011 the IRS sent Mr. Sadek an NOD for over $25 million in tax deficiencies for the year 2005 and 2006. Mr. Sadek did not file his Tax Court petition until 2017. The IRS moved to dismiss because, it said, the petition was filed way after the expiration of the §6212 period to petition the Tax Court. Mr. Sadek also moved to dismiss because, he said, the NOD was not sent to his last known address. The IRS had sent the NOD to an address Mr. Sadek had left long before 2011.
The Tax Court indeed dismissed the case for lack of jurisdiction. But since the Tax Court might lack jurisdiction either because of an IRS screw-up (not properly sending the NOD) or because of a taxpayer screw-up (not timely filing a petition) it is important to understand which party messed up and why.
The case teaches a useful lesson about when and how the IRS can rely on its own records in order to meet the last known address requirement. I think Judge Goeke here got the right result, but I do question how he got there and so I offer what I (oh so modestly) believe is a better path.
November 5, 2018 in Bryan Camp, New Cases, Scholarship, Tax Practice And Procedure | Permalink
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Monday, October 29, 2018
I don’t think Jesus ever charged for his services. Jesus instead lived off of gifts. Sure, some gifts got him in trouble, such as when Mary gave him expensive perfume and his followers complained he should have sold it to raise money for the poor. See John 12:1-8 (dramatized in this clip from Jesus Christ, Superstar). But mostly Jesus worked off a sandal-strap budget. He trusted in the generosity of those he encountered on the way.
Modern preachers usually take a salary for their services. Churches systematically solicit money from their congregation, both during each worship service and by encouraging yearly pledges. And the main component of at least most Protestant church budgets (at least based on my experience) is personnel costs, the largest one being compensation for the pastor or minister.
But modern preachers can receive gifts as well. And while salary is taxable, gifts are not, thanks to §102. The question becomes when are payments salary and when are they gifts? In the recent case of Wayne R. Felton and Deondra J. Felton v. Commissioner, T.C. Memo. 2018-168 (Oct. 10, 2018), Judge Holmes teaches a great lesson how to answer that question.
October 29, 2018 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, October 22, 2018
In last week's blog post about Loveland v. Commissioner, we learned that declining the opportunity to go to Appeals for a post-assessment hearing did not bar the taxpayer from raising the non-appealed issue in a later CDP hearing. This was good for the taxpayer because the declined hearing was non-reviewable whereas the CDP hearing was reviewable (albeit lightly) by the Tax Court. And we all clapped when the Tax Court remanded the case to Appeals to properly consider the OIC issue and gave Appeals some guidance on how to do that. The Tax Court thought that lesson so important that it made Loveland a reviewed opinion.
This week gives a contrasting lesson. The contrast will not have you clapping. This week's case involves the more common lesson that that a pre-assessment opportunity for a hearing with Appeals does indeed preclude the taxpayer from raising the issue in a later CDP hearing. So it is not a reviewed opinion. But I also see a second lesson here, about exposure to the Trust Fund Recovery Penalty (TFRP). I see this case as one about a Payroll Service Provider who went too far in accommodating her client's needs and thereby exposed herself to the TFRP, perhaps needlessly. This lesson may make you put you hands together, but more likely in prayer for your clients who are in the business of providing payroll services.
The case is Joanna Kane v. Commissioner, T.C. Memo. 2018-122 (Aug. 6, 2018), and the details, as usual, lie below the fold.
October 22, 2018 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, October 15, 2018
I am not a fan of the Collection Due Process (CDP) provisions Congress stuffed into the Code in 1998. I call them “Collection Delay Process.” It’s not that I favor taxpayer abuse! But I think the source of abuse is rarely bad-acting IRS employees. Bulk processing is generally the culprit. The combination of computer-processing and over-whelmed employees creates an assessment process that runs over taxpayers who do not understand how to stop it or slow it down and who cannot afford to hire lawyers to do that for them. And then, the end of that assessment process starts the engine of the collection train. CDP is designed to keep the train from going down the wrong collection track before it leaves the station. But CDP is a badly designed mechanism. That was my conclusion in 2009, after I studied almost 1,000 CDP cases. I have seen nothing in the past 10 years to change my mind.
Those who disagree with me point to cases like the one I’m blogging about today: James Loveland Jr., and Tina C. Loveland v. Commissioner, 151 T.C. No. 7 (Sept. 25, 2018), a reviewed decision written by Judge Buch. This is one of the rare cases where the Tax Court found that the IRS had abused its discretion in deciding to proceed with collection. Here it looks like CDP prevented the collection train from running over the Lovelands. The case provides a good lesson for what works, and what does not work, about CDP. Keith Fogg also has a good post on this case over at Procedurally Taxing, explaining why it is a reviewed opinion.
The case is also an interesting lesson about Tax Court Procedure. While the case is ostensibly a ruling on an IRS motion for Summary Judgment, Judge Buch effectively grants Summary Judgment to the taxpayers...who never asked for it. This disposition—while sensible enough---is apparently an unwritten rule of Tax Court procedure. At least I did not see a rule. Nothing in 121. Maybe I missed it. But I think the Court is silently borrowing from Federal Rules of Civil Procedure 56.
October 15, 2018 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink
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Monday, October 1, 2018
In 2015, Congress added what is commonly called the “Taxpayer Bill of Rights” to the Tax Code. Currently codified in §7803(a)(3), it lays upon the IRS Commissioner the duty to ensure that IRS employees “are familiar with and act in accord with taxpayer rights as afforded by other provisions of this title.” Section 7803(a)(3) then lists 10 (natch!) rights including “the right to be informed” and “the right to appeal a decision of the Internal Revenue Service in an independent forum.” I wonder whether the person who drafted that last quoted language, or any of the folks who reviewed it, discussed whether it makes any grammatical sense for one to “appeal...in” a forum?
Putting aside the grammatical question, readers might well question the impact of these rights on IRS operations. The recent case of Paul T. Venable, II v. Commissioner, T. C. Memo. 2018-144 (Sept. 10, 2018), suggests an answer for the two rights I quoted above: the right to be informed and the right to appeal an IRS decision to an independent forum. It teaches a lesson about the rare situation where the lack of actual receipt of an IRS notice can be important to a taxpayer’s ability to get judicial review of an IRS decision. But the lesson does not come from the language in §7803(a)(3). Nope, the lesson comes from language in “other provisions” in the Code, notably the CDP provisions in §6330(c).
October 1, 2018 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, September 24, 2018
The great philosopher George Carlin understands the problem of stuff. My wife and I have too much stuff. My wife, however, hates yard sales. And we cannot afford a bigger house. So we give a lot of stuff away.
When Congress ratcheted up the substantiation requirements for deducting non-cash charitable contributions in 1993, we stopped giving to Goodwill. That is because Goodwill did not change their pre-printed receipt form to say the now-required magic language “no goods or services were given in exchange for this donation.” While some of our donations were below the $250 threshold, the aggregate value of our donations of similar items regularly exceeded that amount. I remember one year I had to go up several layers of management to even get a letter with that language sent to me before I could file my taxes. So we now favor other charities.
I was not just being picky in wanting a proper contemporaneous receipt, as the recent case of Estelle C. Grainger v. Commissioner, T.C. Memo. 2018-117 (July 30, 2018) demonstrates. The taxpayer there was massively confused about the basic valuation rules for donations of property. That’s one lesson here. But I think another important lesson in this case is just how difficult the substantiation rules in §170 can be for substantial amounts of non-cash charitable contributions. It was certainly an eye-opener for me, particularly the lesson about Form 8283.
September 24, 2018 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, September 10, 2018
The recent case of Harbor Lofts Associates, Crowninshield Corporation, Tax Matters Partner v. Commissioner, 151 T.C. No. 3 (Aug. 27, 2018) teaches yet another lesson on the importance of the perpetuity requirements when claiming a charitable deduction for the donation of a conservation easement. Last October I blogged about another conservation easement case, Palmolive Building Investors v. Commissioner, 149 T.C. No. 18 (Oct. 10, 2017). I did not get into the substance of the law in that blog, but instead focused on the Golsen rule and why the Tax Court needed to put its best analytical foot forward. I referred readers to Peter Reilly’s great blog post on Palmolive for the substance.
I encourage readers who don't know the Golsen rule to review the Golsen post, because Harbor Lofts is a case that the taxpayers may appeal to the First Circuit Court of Appeals. That is important because it’s the First Circuit who disagreed with the Tax Court’s position regarding the subordination requirement at issue in Palmolive. While today’s case involves a different part of the perpetuity requirement (and so there is no First Circuit precedent to bind the Tax Court), the Tax Court is again agreeing with the IRS in reading the perpetuity requirement strictly, this time finding that a long-term lease is not sufficient to meet the perpetuity requirements. If the Tax Court’s opinion is appealed to the First Circuit, the First Circuit may decide to take the same liberal interpretation of the perpetuity requirement as it did in Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012), the case that was like Palmolive.
Today’s post will therefore comment on the Tax Court’s approach to interpreting the perpetuity requirements for conservation easements. Long story short, I agree with it. The First Circuit’s liberal approach, while understandable, is wrong. This post will explain why. To do so, I will have to dip into the substantive law with the caveat, as always, that what I say is subject to correction from alert readers who know this area better than I do. In particular, I will doubtless expose my ignorance by asking why the taxpayers did not structure the donation differently. It was likely for a reason that I just cannot see. The fun starts below the fold.
September 10, 2018 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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Monday, July 30, 2018
This past week I learned a lesson about partnership tax returns from the case of Inman Partners, RCB Investments, LLC, Tax Matters Partner, v. Commissioner, T.C. Memo. 2018-114 (July 23, 2018). Partnership taxation is definitely out of my comfort zone, so I am quite grateful for the help of my colleagues on the double-super-secret-tax-profs-rule-the-world listserv that Paul Caron started back in 1995, shortly after the internet got its graphical interface. They got me straight on some terminology and sent me off reading some cool stuff. Still, readers may well spot error, and if you do, please give a correction in the comments. I am especially hesitant when I think I spot an error in a Tax Court opinion as I did here. I know full well the error could be mine.
Inman is a case where the partners, but not the partnership, had signed a Form 872 waiver for their 2000 tax year. The IRS issued a FPAA to Inman Partners. Inman petitioned the Tax Court and it’s argument was a procedural one: the FPAA was too late because it was issued more than three years after the due date of the Partnership Return. In response the IRS said “Hey, we got these here waivers!” Inman said: “those were just signed by the individual partners and were not signed by the partnership and so they cannot waive the limitation period for the FPAA against the Partnership.”
Judge Holmes held that the language in the Form 872 was strong enough to also waive the limitation on assessment for the related partnership for an earlier tax period. It might be, however, that the language worked only because of the statutory scheme then in place for partnership audits. Congress nuked that scheme in the December 2017 tax reform legislation. Does Inman give us any insights on whether the Form 872 language still works? For a quick swim through the murky waters of partnership procedure, I invite you to dive below the fold.
July 30, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, July 9, 2018
The Notice of Deficiency (NOD) is almost always clothed with a presumption of correctness. Some might say “cloaked” or “shrouded” are a better terms because what the presumption does is shield all that happened prior to the NOD from judicial scrutiny. Courts will generally not go behind the NOD to examine how the IRS came up with its numbers unless and until the taxpayer gives the court a good reason to disbelieve the NOD (or successfully invokes §7491(a), the provision that shifts the burden of production from the taxpayer to the IRS).
It is easy to apply the presumption of correctness in situations where the NOD is simply denying deductions or exclusions. That is because the taxpayer already bears the burden of proving an entitlement to deductions and exclusions. So if the taxpayer cannot come up with the proof, then too bad, so sad.
It is more difficult to apply the presumption in situations where the NOD asserts that the taxpayer failed to report gross income. In that situation, the IRS must have some basis for the assertion of omitted income. That is, the presumption of correctness does not allow the IRS to just make up numbers. In the seminal case of United States v. Janis, 428 U.S. 433 (1976), the Supreme Court said that “where the assessment is shown to be naked and without any foundation” then the burden shifts to the IRS to show facts that link the taxpayer to the alleged omitted income. I really love the delightfully mixed metaphor the Fifth Circuit used in Carson v. Commissioner, 560 F.2d 693, 696 (5th Cir. 1977): "The tax collector's presumption of correctness has a herculean muscularity of Goliath-like reach, but we strike an Achilles' heel when we find no muscles, no tendons, no ligaments of fact."
Two recent Tax Court cases teach a lesson on what “ligaments of fact” suffice to prevent an NOD from being “naked and without any foundation.” In both of these omitted income cases, the IRS was able to produce enough facts to get back the presumption, but in very different ways. The cases are: Gerald Nelson v. Commissioner, T.C. Memo. 2018-95 (June 28, 2018); and Mohammad Najafpir v. Commissioner, T.C. Memo. 2018-103 (July 3, 2018).
July 9, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, July 2, 2018
Sometimes I get irritated. When I do I speak in short sentences. Really short. So when I read Judge Buch’s opinion in the recent case of Gary Gaskin and Jessie Gaskin v. Commissioner, T.C. Memo. 2018-89 (June 20, 2018), I was struck by his frequent use of short sentences. Really short. Kinda like he was really irritated. And why wouldn’t he be? Mr. Gaskin had filed admittedly fraudulent tax returns but now wanted to contest the fraud penalties! Mr. Gaskin thought he should escape fraud penalties because he had later filed amended returns that had, in his view, cured the fraud. Judge Buch's opinion teaches an important lesson we should all learn. I call it the “one return rule.” It’s a short lesson. You will find it below the fold.
July 2, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, June 4, 2018
Four cases from the last couple of weeks illustrate the continued fallout from the Tax Court’s recent about-face in its reading of §6751(b)(1). Graev v. Commissioner, 149 T.C. No. 23 (Dec. 20, 2017)(commonly called Graev III because it was the Tax Court’s third published opinion regarding Mr. Graev’s case). The good folks at Procedurally Taxing have been following Graev III’s impact here, here and here (to name a few). These four cases add a new wrinkle.
In all four cases, the Service had failed to produce evidence in the initial trial that it had complied with §6751(b)(1). And for good reason. All four cases had gone to trial before the Court issued its opinion in Graev III. At the time of trial the Tax Court’s fully reviewed position on §6751(b)(1) was that consideration of penalty approval was premature when contesting an NOD.
In all four cases the Service asked the Tax Court to re-open the record to allow it to introduce the theretofore-unrequired-but-now-required evidence. The cases were heard by three different Tax Court judges. In two cases, the Court allowed the record to be reopened and in two cases the Court refused. Taken together, the cases illustrate how the fallout from the Tax Court’s Graev decision continues to elevate procedure over substance. As a result, similarly situated taxpayers receive very different outcomes based both on which IRS attorneys work the cases, what information the attorneys have, perhaps most importantly, which Tax Court judge decides. Four cases, three judges, two opposing outcomes, all in one discussion, waiting for you below the fold.
June 4, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, May 14, 2018
Justice Holmes famously said that people “must turn square corners when they deal with the government.” It is no coincidence that he said that in this 1920 tax case. Tax law has many sharp corners that frustrate both taxpayers and the IRS alike. For an example of where the sharp corners of procedure caused the IRS to lose a $10 million assessment, see Philadelphia-Reading Corp. v. Beck, 676 F.2d 1159 (3rd Cir. 1982).
But equity can sand down some of those sharp corners. Last week's post looked at the innocent spouse case of the Commie L. Minton a.k.a. Connie L. Keeney v. Commissioner, T.C. Memo. 2018-15 (Feb. 5, 2018). That case illustrated how Congress had inserted a statutory command for the IRS and the Tax Court to use equity to relieve a spouse of an otherwise jointly owed liability. This week, the case of Emery Celli Cuti Brinckerhoff & Abady, P.C. v. Commissioner, T.C. Memo. 2018-55 (Apr. 24, 2018), teaches another lesson about equity in the Tax Law. Here, there is no Congressional command to use equity. Instead, the Tax Court uses a long-standing principle of equity created and apply by the courts. It is called equitable recoupment.
May 14, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, May 7, 2018
For various reasons that legal historians can drone on about for hours, the United States legal system started out in 1789 as not one system of courts but two systems of courts. One was system was made up of courts of law, staffed by folks with titles like “Judge” or “Justice.” The other system was made up of courts of equity, staffed by folks with titles like “Chancellor” or “Vice Chancellor.” The basic idea was that each system had its own set of powers and you could only get to the equity courts if the law courts lacked the power to give you the relief you sought.
This was a really awkward relationship and a constant source of embarrassment and confusion. The great legal historian F. W. Maitland put it this way in his 1910 Lectures On Equity: “I do not think that any one has expounded or ever will expound equity as a single, consistent system, an articulate body of law. It is a collection of appendixes between which there is no very close connection.” (p. 19) And in this 1913 law review article, Professor Wesley Newcomb Hohfeld discussed the difficulty of teaching equity as a system of rules separate from legal rules.
One awkwardness was that often the same individual would wear both hats. For example, you might file an action at law and have proceedings before the “Judge” sitting as a court of law. The Judge had power to award damages but did not have power to order depositions. So you would need to file a completely separate proceeding in equity, seeking a “Bill of Discovery” from the Vice Chancellor because the Vice Chancellor had the power to order depositions (but had no power to award damages). But you would file that in the same building and be heard by the same individual. So one day the “Judge” would say “I have no power to order discovery” but the next day the very same individual, sitting as “Vice Chancellor,” would suddenly have the power to grant your Bill.
I tell you all this because although the two systems have been merged in federal courts since 1938 (although some states, such as Delaware and Mississippi, keep the two systems separate) federal judges still tend to compartmentalize the two. The Tax Court in particular has wrestled with the role of equity from its inception. Two recent Tax Court cases teach useful lessons about the role of equity in Tax Court proceedings. This week I will look at the innocent spouse case of the Connie L. Minton a.k.a. Connie L. Keeney v. Commissioner, T.C. Memo. 2018-15 (Feb. 5, 2018). Next week I will discuss the very interesting case of Emery Celli Cuti Brinckerhoff & Abady, P.C. v. Commissioner, T.C. Memo 2018-55 (Apr. 24, 2018), a case that will introduce us to the doctrine of equitable recoupment.
May 7, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, April 9, 2018
Last week the Tax Court issued 19 opinions, including one articulate opinion on Collection Due Process that teaches an interesting, albeit esoteric, lesson about the bulk-processing nature of tax administration. I will save that case, Scott T. Blackburn, v. Commissioner, 150 T.C. No. 9, for another week, or perhaps our colleagues over at Procedurally Taxing will blog it.
In today’s post I want to look at two of last week’s opinions that I think teach a more basic lesson about the important way in which each tax year is separate from all others. The two cases are: (1) Shane Havener and Amy E. Costa v. Commissioner, T.C. Sum. Op. 2018-17 (Apr. 4, 2018); and (2) Gary K. Sherman and Gwendolyn L. Sherman v. Commissioner, T.C. Sum. Op. 2018-15 (Apr. 2, 2018).
Notice that both of these are what are called “Summary” Opinions. That means the taxpayer in each one elected the small case procedures allowed by IRC §7463 and implemented by Tax Court Rules 170 et. seq. As most readers no doubt know, the upside of that election is relaxed procedural rules (notably rules of evidence) and the downside is that the loser may not appeal to a higher court. The idea is that these are cases where the dispute between the taxpayer and the IRS is really one about factual matters and not about the law. That is why when you access these cases through the Tax Court website, the website pops up the following message in all-caps: “Pursuant To Internal Revenue Code Section 7463(b), This Opinion May Not Be Treated As Precedent For Any Other Case.”
The very reason why these cases make for lousy precedent, however, is why they often make for good lessons about basic tax concepts. The lesson I see in these two cases is about the appropriate accounting period, a particularly timely lesson this week since April 16th (the deadline for filing returns this year since April 15th falls on a Sunday) is right around the proverbial corner.
To economists, the most accurate accounting period is one’s lifetime. That is, the best measure of income is what happens over our lifetime. But because governments need revenue sooner, because not all taxpayers die (think corporations), and because even if tax revenue would even out in the long, long, long run, the transition costs to a lifetime accounting period would be untenable, Congress created a yearly accounting period for income tax (and shorter accounting periods for excise taxes such as the employment tax).
That yearly period ends on December 31st for most of us mere mortals. The yearly questions we ask are “how much income did I have during the last year?” and “what expenditures did I make that I can deduct from the income I made?” The point of today's lesson is that we must ask those questions every year and just because we get a wrong answer in one year does not entitle us to continue using that wrong answer in later years.
More below the fold.
April 9, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, February 26, 2018
Last week’s lesson was about the tax consequences to the borrower when the lender cancels the debt. This week’s case looks at the other side of the transaction to teach a lesson about what constitutes debt. Section 166 allows a lender who gives up trying to get back borrowed money to deduct the bad debt, effectively treating current income as a return of the lost capital. Similarly, a lender who sells debt to a third party for less than basis can calculate a loss under §1001 and may be able to treat that loss as a long-term capital loss.
But to have either a bad debt under §166 or a loss under §1001, there must be a “debt” in the first place. That is the lesson from last week’s case of Michael J. Burke and Jane S. Burke v. Commissioner, T.C. Memo. 2018-18. There, the taxpayer attempted to take both long-term and short-term capital losses in 2010 and 2011 through a mix of §166 deductions and claimed capital losses from sale of debt at less than basis. The alleged bad debts arose in connection with a scuba diving business in Belize. On audit, the IRS disallowed the deductions, creating a deficiency in taxes totaling some $444,000. The dispute was whether the Burkes had “debt” to lose. Judge Holmes’ opinion does a deep dive into the meaning of “debt” and shows why the taxpayer’s arguments here were all wet. If you think I’ve gone overboard in my water metaphors, Judge Holmes’ opinion is drenched with them. Makes for a splashy opinion.
More below the fold.
February 26, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, February 12, 2018
One common error my students make is to confuse asserting an argument with supporting the argument. For example, a student on my Civil Procedure exam might write “We will argue that the Plaintiff’s domicile is in Texas and not Oklahoma.” That sentence tells me only that an argument exists. It does not support the argument with an explanation about why Plaintiff’s domicile might be thought to be in Texas. I try to teach my students they must connect assertions with the evidence necessary to show why the assertions are true. So I feel like a failure when I read exam answers like that. I think most profs have similar feelings when grading.
Lawyers sometimes make a similar error when representing clients in court: they make assertions and even spin a plausible story, but neglect to support those assertions or the story with credible evidence. To be fair, sometimes an attorney has no choice: the client may simply not have provided the needed information, and the attorney must nonetheless argue something! But arguments are not evidence.
Last week’s decision in Brandon Brown and Christi Cloaninger Brown v. Commissioner, T.C. Sum. Op. 2018-6 (Feb. 5, 2018), teaches this lesson. Sure, it’s “just” an S case, but even if those cases are not formal precedent, they can still teach valuable lessons. Here, the case is also a nice illustration of when it makes sense to use the §7463 Small Case procedures and how the burden shift in §7491(a) can sometimes actually be important.
I’ll consider each lesson below the fold.
February 12, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, February 5, 2018
Law is often a mixture of form and function. Formalist rules help create order and certainty but sometimes do so at the expense of justice and meaning. Discerning and following the function or purpose of the law may create juster outcomes but sometimes does so at the expense of certainty. All can agree that there is a time and a place for each mode of analysis, but the devil is in the details.
The speed limit sign to the right illustrates the difference. It's a sign you might have encountered driving through Montana up until 1999 when the Montana Supreme Court ruled that the "reasonable & prudent" rule was unconstitutionally vague. It gives two rules for drivers: a bright-line night rule that you may not drive faster than 65 mph and a fuzzy day rule that gives no set speed limit but just says you may not drive unreasonably or imprudently.
In applying the speed limit sign, formalists and functionalist might disagree on when the night rule applies. A formalist might look to the dictionary definition of night as the period between sunset and sunrise and so apply the night rule at the minute after sunset. But a functionalist might say that the purpose of the night rule is to set a limit when night-time conditions make it presumptively unsafe to drive faster. So a functionalist might not apply the night rule until later after sunset, and might also apply it during the “day” when a weather event, such as a haboob or an eclipse, creates sufficiently night-like conditions. Of course, formalist thinkers might disagree among themselves if they use different dictionary definitions of “night." Likewise, functionalist thinkers might disagree among themselves if they have different ideas about the purpose of the night rule.
Last week’s reviewed opinion Melissa Coffey Hulett a.k.a. Melissa Coffey, et al v. Commissioner, 150 T.C. No. 4 (January 20th, 2018) is a case where the Tax Court takes a largely functional approach to IRC §6501(a) statute of limitations on assessment and yet the functionalists on the Court disagree with each other about the proper outcome. Section 6501(a) says that the IRS has a period of three years “after the return was filed” to assess “any tax imposed by this title.” The opinion for the Court, authored by Judge Holmes, is a mix of formalism and functionalism, using the passive voice in the statutory language as an opening to implement one important purpose of §6501: closure. A concurring opinion by Judge Thornton gives a more robustly functionalist view, resting entirely on the closure purpose of the statute. And a spirited dissent, authored by Chief Judge Marvel, also presents a functionalist analysis but one that focuses on a different purpose of the statute to come to a different outcome in the case.
What I find particularly interesting about this case is how all three approaches seem to be inconsistent with the Tax Court’s approach to interpreting the §6501(c) exception to §6501(a)’s general three year rule. That statute presents a similar question of statutory interpretation but all of the opinions in last week’s case are contrary to the Tax Court’s rationale in Allen v. Commissioner, 128 T.C. 37 (2007).
Details below the fold.
February 5, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, January 22, 2018
No doubt there is a lot of dirty bathwater in the Treasury Regulations, codified in title 26 of the Code of Federal Regulations (CFR). The upside of the current administration’s anti-regulation focus is that it is allows Treasury to prioritize scrubbing unneeded regulations. Treasury reported on its progress in October noting that “the IRS Office of Chief Counsel has already identified over 200 regulations for potential revocation, most of which have been outstanding for many years.”
To be sure, it’s a small upside. Some regulations become outdated because they are simply overtaken by statutory changes. For example, Treas. Reg. 1.217-2(b)(1) allows taxpayers to deduct the cost of meals when moving to start a new job. That was fine under the statute Congress originally enacted in 1969, but it became obsolete when Congress modified the statute in 1986 to specifically disallow meal expenses as a deductible item. And now, of course, Congress has repealed the moving expense deduction entirely, but the regulations will still be there.
Other regulations become outdated because of societal change. My favorite example is former Treas. Reg. 1.162-6 which started off this way: “A professional man may claim as deductions the cost of supplies used by him....” To modern eyes, that regulation obviously denied deductions to taxpayers not in the trade or business of being a “professional man” ...such as anyone who was only a man as a hobby and not as profession. Think Victor, Victoria. Treasury nuked that reg in 2011.
The scrubbing effort carries a small upside because outdated regulations generally do little harm. I tell my students that is why you have to read the actual statutory language first. In real life, of course, tax practitioners rely on the commercial services like BNA, CCH or RIA to summarize the rules and those services keep current. Taxpayers reporting their 2017 taxes are unlikely be blindsided by the moving regulations into trying to deduct meal expenses in a move. Likewise, taxpayers reporting their 2018 taxes are unlikely to try and deduct moving expenses at all, much less in reliance on the regulations.
But the focus on throwing out the bathwater presents an obvious danger to the baby. The ham-fisted 2-for-1 requirement of Executive Order 13711 is not just focused, it’s myopic. Another danger is posed by the myopic thinking that the word “regulation” has the same meaning for all agencies and that the Administrative Procedure Act (APA) applies in lock-step to all agencies. Both myopias ignore the vast difference in purpose of regulations issued by different agencies.
Last week’s Tax Court opinion in SIH Partners LLLP, et al. v. Commissioner, 150 T.C. No. 3, January nicely illustrates the purpose and use of tax regulations. In it, the taxpayer tried to invalidate a 45 year old regulation for failing to meet APA requirements. The Tax Court has a nice opinion applying the APA with sensitivity to the tax regulation process and suggests a clearer view of what makes tax regulations different from those of many other agencies.
More below the fold.
January 22, 2018 in Bryan Camp, IRS News, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, January 15, 2018
I tell my students to be careful with personal pronouns, especially now that the pronoun “they” may properly refer to a singular antecedent. An unclear antecedent can confuse readers.
Today I may have confused you. When you read this post's title, you may have thought “they” refers to “Tax Court.” Maybe you thought this would be a critique of a Tax Court opinion like last week’s post. It’s not. Sorry.
The “they” in the title is deliberately ambiguous, however, because it points to two different antecedents, neither being the Tax Court. First, it points to three taxpayers whose cases were decided last week by the Tax Court. Each case has at least one fact that is so amazing it will leaving you shaking your head (or "SMH" in modern texting parlance) and asking yourself “what were they thinking.”
Second, “they” means Congress. For the past 8 years Congress has adopted a policy of “starving the beast” and forcing the IRS to reduce its workforce. I wrote about that a couple of years ago here. These cases teach us why that Congressional policy is a thoughtless one.
Each of these three cases shows an educated middle-class taxpayer trying to game the tax system in ways that require significant human resources to combat. In two cases it took human IRS employees to spot the games and defeat them. In the third case, the taxpayer is “winning” his game, at least temporarily, thanks to the Collection Due Process provisions. It will likely take significant additional human effort to collect this taxpayer’s unpaid tax liabilities.
More below the fold.
January 15, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, January 8, 2018
My daughter worked part-time this past year for a woman who paid her about $500 cash. My daughter was not happy to learn from me that she has to report that as gross income. My daughter says “but my employer is not giving me a W-2 or 1099!” I am sure many of us have heard that from clients. Last week, the Tax Court issued an opinion that may give unintended support for my daughter’s assertion that there is no obligation to report income unless there is a concomitant obligation to file a related information return.
In 2010 Congress enacted the Hiring Incentives to Restore Employment Act (HIRE), 124 Stat. 71. Subtitle A of HIRE (§501 et. seq.) implemented what had been a separate bill called the Foreign Account Tax Compliance Act (FATCA). FATCA requires many individuals to report their foreign financial assets under certain circumstances. Violation of the reporting requirements carries several consequences, including monetary penalties and an extension of the limitation period for the IRS to audit a return. That’s the issue in last week’s case of Mehrdad Rafizadeh v. Commissioner, 150 T.C. No. 1 (January 2, 2018). In Rafizadeh, the IRS seemed to try and use that latter consequence to crack open otherwise closed years. At least that is what the Tax Court appears to believe. The sticking point was that the years at issue were years before the FATCA reporting requirements took effect. See below the fold for why the IRS thought that the FATCA provisions extending the limitation period applied, and why the Tax Court held otherwise.
January 8, 2018 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink
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Friday, December 22, 2017
Once upon a time in West Texas there lived a farmer. In addition to raising crops, he kept a collection of interesting animals as a hobby. Always keen to make some money, however, he used the output of the animals for compost and sold the excess to surrounding farms. More about that below the fold. But first I need to tell you about the farmer’s pickup truck, “Iris.”
The farmer’s dad had bought a fine Ford F250 in the early 2000’s. His dad was very fond of the truck and called it “Iris.” But the farmer did not like Iris and so he used it exclusively to haul the animal product to market. Of course that meant Iris stank. The stink offended people, who thought Iris was to blame for payload the farmer asked Iris to carry.
When the farmer took over farming operations from his dad in 2008 he began neglecting Iris by not putting in the money to make needed upkeep and repairs. For example, he used a really cheap motor oil because he liked its name “Liberty,” and he liked the pennies he saved. But that oil actually did the exact opposite of what oils are supposed to do: it exacerbated the wear on the engine Then the farmer started using an even cheaper lubricant: chicken grease. When the once proud 5.2L Voodoo V8 engine failed, the farmer replaced it with an 4-cylinder engine taken from a Ford Fiesta, ‘cause that was cheap. More pennies saved! As parts failed, Iris became increasingly unreliable. Still, the farmer kept relying on Iris to carry the load for him.
And now, for the Elephant part, below the fold.
December 22, 2017 in Bryan Camp, IRS News, Tax, Tax Policy in the Trump Administration, Tax Practice And Procedure | Permalink
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Monday, December 11, 2017
Note: Due to my need to grade exams and turn in grades by January 2nd, this will be my last “Lesson From the Tax Court” post this year. I plan to resume on January 8th.
In law, “SOL” is an all too appropriate acronym for “Statute Of Limitations.” Tax law is full of SOL traps for taxpayers. A couple of weeks ago the Tax Court issued two opinions addressing a common SOL trap for taxpayers: the §6213 rule that taxpayers within the U.S. have 90 days from the date the IRS sends out a Notice of Deficiency (NOD) to petition the Tax Court for a redetermination of the deficiency. Of course, we all know the period is really shorter than 90 days on the front end because the 90 days starts running on the day the IRS sends the NOD not the day the taxpayer opens the NOD after returning from vacation and says “OMG”!
The reason §6213 is a trap is because the general rule for filing is the “physical delivery rule”: a petition is not filed until is had been physically received by the Tax Court’s Clerk’s office before the 90th day is over. Tax Court Rule 22. If that were the only rule, then taxpayers who cannot personally file their petitions by walking into the Tax Court Clerk’s office at 400 2nd St. S.W. in Washington D.C., would live in uncertainty about whether their mailed petitions would reach the Tax Court in time.
That’s where §7502 comes in. It is true that if the Tax Court Clerk’s office receives a petition after the 90 period, that petition is late, but Tax Court Rule 22 provides that the Tax Court will pretend the petition is timely if the reason for the late delivery falls under “the circumstances under which timely mailed papers will be treated as having been timely filed, see Code section 7502.” Section 7502 is one of those rescue rules you hope never to have to use, but if you need it, you really need to know how to make it work for you, to beat the SOL.
The cases of Lincoln C. Pearson And Victoria K. Pearson v. Commissioner, 149 T.C. No. 40 (Nov. 29, 2017) (before Judge Lauber) and Matthew Eric Baham and Jennifer Michelle Baham v. Commissioner, T.C. Summ. Op. 2017-85 (Nov. 29, 2017) (before Judge Wherry) both teach a lesson in how the Tax Court interprets §7502 and how taxpayers can use that statute to turn a late-filed petition into a timely-filed petition. Section 7502 is a pretty confusing statute and the Treasury regulations appear very strict. These cases show the wiggle room in the regulations and give guidance on how taxpayers should approach using §7502. I will explain §7502 and the interesting take-aways from these cases below the fold.
December 11, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Tuesday, November 28, 2017
Monday, November 27, 2017
Last week’s lesson was about “self-assessment.” The idea was that even though it’s the IRS’s job to assess taxes, our system nonetheless depends upon taxpayers truthfully reporting the substance of their financial affairs.
Undergirding that idea is another idea: that for every taxpayer there exists a correct tax liability. The goal of tax administration is to get to the substance of taxpayer’s transactions to determine that correct amount of taxes due. For those interested, I explore this idea in my article Tax Administration as Inquisitorial Process ..., 56 Fla. L. Rev. 1 (2004).
The process of getting to that truth involves many forms, and not just the famous 1040. In 2016 the IRS processed over 244 million tax returns of various sorts. 2016 IRS Data Book Table 2, And that figure does not include all the other Forms that are important to tax administration.
This week’s lesson is about one of those other Forms. The case of Craig K. Potts and Kristen H. Potts v. Commissioner, T.C. Memo. 2017-228 (Nov. 20, 2017), teaches the importance the Form 870-AD, both to taxpayers and to tax administrators. The Form has a purpose and that purpose can, as it did in this case, trump substance. More below the fold.
November 27, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink
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Monday, November 20, 2017
Myths are not reality, even if they do reflect basic truths. A cherished myth in tax law is that ours is a system of “voluntary self-assessment.” Last week’s opinion in Ramsay v. Commissioner, T.C. Memo. 2017-223 (Nov. 15, 2017), teaches a lesson about that myth.
This myth is not reality. Despite the rhetoric of hobbyists, it is not as though taxpayers have any legal choice in the matter: the law requires them to file returns, report their income and deductions, calculate their taxes, and pay any amounts owed when the return is filed. IRC §§ 6201-6204. Congress weaves together civil and criminal penalties to enforce these duties and leaves the ever unpopular IRS to swing the net. Like Bentham’s Panopticon, the discipline of self-reporting and payment cannot be divorced from the constant coercive threat of discovery and the resulting civil or criminal sanctions.
But there is a basic truth behind the myth. Tax administration rests on taxpayers truthfully disclosing their financial affairs and paying what they owe — through withholding or otherwise — without overt government compulsion. It is “voluntary” in the same sense that stopping one’s car at a red light — at midnight with no traffic and no one looking — is voluntary. It is each citizen’s self-enforcement of the legal duty that keeps both the tax and transportation systems running smoothly. With hundreds of millions of returns filed each year, the system depends on the veracity, not the kindness, of taxpayers.
The myth exists because of IRS decisions just after World War I to start accepting initial returns as presumptively accurate if properly filed. For those interested I explain both the history of tax return processing, and how it started the myth in Theory and Practice in Tax Administration, 29 Va. Tax Rev. 227 (2009).
Mr. Ramsay appears to be the kind of taxpayer who helps the system work. He filed his returns timely. He was careful to be in an overpayment posture at the end of each year. He cautiously directed that part of each year’s overpayment be applied to the following year’s tax liability. He appears to be a model of a taxpayer working within the system.
But when Mr. Ramsay made two mistakes on his 2011 return, he discovered he was unable to fix one of them precisely because ours is not a “self-assessment” system. When a taxpayer attempts to correct a mistake by amending a return, the IRS does not use the same presumption it uses when processing the initial return. Mr. Ramsay learned that lesson the hard way. You can learn it by clicking below the fold.
November 20, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink
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Monday, November 6, 2017
Last week, the Court decided Carlos Alamo v. Commissioner, T.C. Memo. 2017-215 (Oct. 31, 2017). This is a case worth remembering for at least two reasons. First, it teaches a lesson about how sticking to your guns can get very expensive because of the accumulation of penalties and interest. No matter how hard to work to contest a tax, penalties and interest work harder.
In this case Mr. Alamo worked very hard to contest his 2009 taxes. But his refusal to ever file a 2009 return resulted in some astonishing additions to his basic liability of $86,651 in unpaid taxes for that year. The Service's levy CDP notice, issued on November 1, 2012, reflected accumulated penalties and interest of $46,474. That equals 54% of his unpaid taxes. And who knows what the total looks like now, some five years later.
The lesson, then, can borrow from the great American roots musician Ry Cooder’s classic “The Taxes on The Farmer Feed Us All.” It might go like this:
We worked through Spring and Winter, through Summer and through Fall
But those penalties and interest worked the hardest of us all
They worked on nights and Sundays, they worked each holiday
They settled down among us and they never went away
The second lesson is about how the Service proves compliance with § 6212 notice requirements. It appears that Mr. Alamo is a hobbyist, albeit more clever than most. He tried to play the proof game. He lost. Still, his stubborn refusal to concede that the Service had properly sent him a Notice of Deficiency (NOD) is a great lesson in how to attack the adequacy of notice but also a warning that an obdurate refusal to cooperate during the CDP hearing can destroy the last chance to get the correct tax liability. By insisting on his perceived “right” to make the Service prove compliance with procedure, Mr. Alamo lost this chance to get his tax liability corrected. For more details on this second lesson, see below the fold:
November 6, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Tuesday, October 31, 2017
The IRS does not have an easy job. Remember, it's NOT the "IRS Code" because the IRS is just the agency stuck with the task of carrying out the will of Congress. And the IRS must do this job all while being a political soccer ball — and since the mid-1990's the Republican team has hogged that ball, kicking with more enthusiasm than enlightenment. So it was nice to see a positive story about tax administration picked up by USA Today, especially because USA stories also appear in little town newspapers, like the one I read here in Lubbock, Texas (the Lubbock Avalanche-Journal: IRS: Public-private Crackdown Slashes Identity Theft, Tax Refund Fraud, the story comes from a press release by the IRS that explained:
October 31, 2017 in Bryan Camp, IRS News, Tax, Tax Practice And Procedure | Permalink
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Tuesday, October 17, 2017
Nina Olson, the National Taxpayer Advocate (as if you did not know), had a great blog last week describing a really cool study her office conducted on how to improve taxpayer compliance with the Earned Income Tax Credit (ETIC ... again, as if you did not know).
The basic idea was to see if a simple letter mailed to taxpayers who had demonstrated some identifiable error in their 2014 EITC claims would result in them making fewer errors in their 2015 EITC claims. Not only that, but the study compared that group to a control group of similar taxpayers who made similar errors but who were not sent a letter explaining where they went wrong.
Certainly, my intuition as a teacher is that when you give feedback on what students do wrong, they tend to do better. The study supports that intuition’s application to taxpayers: tell them what they were doing wrong and they will do better overall and will certainly do better than those who get no such feedback.
What struck me as particularly interesting and worth further comment was the feature of just how the Taxpayer Advocate Service sent the letter to the taxpayers. Nina gives this description:
October 17, 2017 in Bryan Camp, Gov't Reports, Tax, Tax Practice And Procedure | Permalink
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Monday, October 2, 2017
In a fully reviewed 28 page opinion released Thursday, September 28, 2017, the Tax Court gave full attention to an important problem: when a married taxpayer files a return with an impermissible filing status (such as single or head of household) can the spouses later still elect to file jointly or do the restrictions in §6013(b)(2) apply?
The case is Fansu Camara and Aminata Jatta v. Commissioner. The opinion is worth your time not only for the well-reasoned outcome, but also for its neat demonstration of how precedent sometimes operates like a game of telephone. First I will need to sketch out the facts and holding for you. And then I will have one tax policy observation about the outcome. But I promise it won’t be 28 pages. So, if you are brave, you will continue reading below the fold.
October 2, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Friday, September 29, 2017
Last week the Tax Court issued an opinion in Williams v. Commissioner, T.C. Memo 2017-182. Although it involves small amounts, the opinion teaches a big lesson about the IRS power of offset
Mr. Williams filed his 2013 return reporting $503 of taxable income and withholding of $1,214. So he claimed an overpayment of $711. The IRS accepted his return as filed but did not refund the $711. Instead, it used its offset powers under section 6402(a) to credit that supposed $711 overpayment against Mr. Williams' unpaid tax liabilities from 2011. Later, the IRS audited Mr. Williams' return and proposed a deficiency of $1,403. Mr. Williams' protest to Tax Court was not the usual one. He agreed with the amount of the deficiency, but he thought that since there was not actually an overpayment, per the audit, then the IRS should not have credited that $711 to his 2011 liability but should instead apply it to his 2013 liability. After all, it was part of the wage withholding for 2013. Note that it was to Mr. Williams' benefit to pay off the most recent tax liabilities to increase the chances that the older ones would age out.
September 29, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Thursday, September 28, 2017
Generally, the Tax Code contains statutory consequences for taxpayers who fail to obey statutory commands. Most of those statutory consequences are in the form of: "Additions to Tax" found in sections 6651-6658; "Accuracy-Related and Fraud Penalties" found in sections 6662-6664; "Assessable Penalties" found in sections 6671-6725; and, of course, all the various criminal and forfeiture statutes found in 7201-7345.
But what about statutory commands imposed on the IRS? It turns out not all such commands carry a statutory hammer. Let me give one example. When the IRS assesses a tax and the tax is unpaid, section 6303 requires the IRS to send the taxpayer notice and demand for the unpaid tax within 60 days of the assessment. But the statute is silent as to what consequence, if any, should occur if the IRS sends the notice and demand later than 60 days. Treas. Reg. 301.6303-1 provides "the failure to give notice within 60 days does not invalidate the notice."
September 28, 2017 in Bryan Camp, Tax, Tax Practice And Procedure | Permalink
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Wednesday, September 27, 2017
I previously blogged about a great panel presentation I attended at the Fall ABA Tax Section Meeting in Austin. The presentation was about how to sue someone under § 7434 for filing a false information return.
This past week one of the panelists, Stephen Olson, has blogged more about this subject here and here. The blogs are worth calling to your attention. He dives a bit deeper into this subject to look at whether an Information Return that states the correct payment amount but is otherwise false and misleading, is sufficient to support suit under § 7434.
September 27, 2017 in ABA Tax Section, Bryan Camp, Tax, Tax Practice And Procedure | Permalink
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Thursday, September 21, 2017
Last week I went to the ABA Tax Section Meeting in Austin and really enjoyed attending a terrific panel on Section 7434. The moderator was Professor Leslie Book, of Villanova School of Law and the presenters were Stephen Olsen, of Gawthrop Greenwood, PC; and Mandi Matlock, of Texas RioGrande Legal Aid Inc., Austin, TX.
September 21, 2017 in ABA Tax Section, Bryan Camp, Tax, Tax Practice And Procedure | Permalink
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Friday, September 15, 2017
Wednesday, September 13, 2017
The current discussion about tax reform is focused on reforming substantive tax law and not tax administration. Last April, however, a group of tax practitioner organizations put out a paper calling for tax administration reform. You can find the proposal on the AICPA website here.
The nine practitioner organizations include the AICPA, the National Association of Enrolled Agents, and the National Association of Tax Professionals. Notably absent from the list of practitioner groups are the main tax lawyer organization, the ABA Section on Taxation.
September 13, 2017 in ABA Tax Section, Bryan Camp, IRS News, Tax, Tax Practice And Procedure | Permalink
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Monday, September 11, 2017
Broadly speaking, tax administration (as currently structured) consists of two main functions: determining tax liability and collecting the tax liabilities so determined. There is, however, some overlap because taxpayers sometimes have the opportunity during the tax collection process to get a re-determination of the underlying tax liability. The main opportunity comes in the Collection Due Process (CDP) hearing. This is an administrative hearing conducted by the IRS Office of Appeals and is subject to judicial review by the Tax Court. Two recent Tax Court cases — Mohamed v. Commissioner (TC Sum. Op. 2017-69) and Bruce v. Commissioner (TC Memo. 2017-172) — illustrate just how narrow this opportunity is for taxpayers. To me, they teach the take-home lesson that the best shot taxpayers have at getting the most favorable result is to respond early and often to tax notices. Taxpayers who wait are the taxpayers who cry. For a lesson that Mohamed teaches about tax return preparer penalties see Les Book's great post here. More below the fold.
September 11, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink
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