Professor Patrick Thomas brings us this week’s Designated Orders, which this week touch on challenges to the amount or existence of a liability in a CDP case without the right to that review, a pro se taxpayer fighting through a blizzard of a few differing assessments and an offset, and the somewhat odd case of the IRS arguing that a taxpayer’s mailing was within a 30-day statutory period to petition a determination notice. Les
Thank goodness for Judge Armen’s designated orders last Wednesday. In addition to Judge Halpern’s order in the Gebman case on the same day (which Bryan Camp recently blogged about in detail), Judge Armen’s three orders were the only designated orders for the entire week.
A Review of the Underlying Liability, without a Statutory Right
Dkt. # 7500-16L, Curran v. C.I.R. (Order Here)
The Curran order presents a fairly typical CDP case, though both the IRS, and I’d argue the Court, give the Petitioners a bit more than they were entitled to under the law. Mr. Curran was disabled in 2011, and received nearly $100,000 in disability payments from his employer, Jet Blue. Under section 104(a)(3), such payments are included in gross income if the employer paid the premiums for the disability policy (or otherwise contributed to the cost of the eventual disability payments). If the employee, on the other hand, paid the premiums, the benefits are excluded from gross income.
It appears that Jet Blue paid for Mr. Curran’s benefits, but Mr. Curran did not report these on his 2011 Form 1040. Unfortunately for Mr. Curran, employers (or, in this case, insurance companies contracted with the employer to provide disability benefits) are required to report these benefits on a Form W-2. The IRS noticed the W-2, audited Mr. Curran, and issued a Notice of Deficiency by certified mail to Mr. Curran’s last known address, to which he did not respond. The IRS then began collection procedures, ultimately issuing a Notice of Intent to Levy under section 6330 and a Notice of Determination upholding the levy.
The Court does not critically examine the last known address issue, but presumes that the Petitioner has lived at the same address since filing the return in 2012. So, ordinarily, Petitioners would not have had the opportunity to challenge the liability, either in the CDP hearing or in the Tax Court.
Nevertheless, the IRS did analyze the underlying liability in the CDP hearing, yet concluded that Mr. Curran’s disability payments were included in gross income under section 104(a)(3). The Court also examines the substantive issue regarding the underlying liability, though notes that Petitioners do not have the authority to raise the liability issue. Of particular note, the IRS’s consideration of the liability does not waive the bar to consideration of the liability, and most importantly, does not grant the Court any additional jurisdiction to consider that challenge. Yet, Judge Armen still engages in a substantive analysis, concluding that Petitioners’ arguments on the merits would fail.
It’s also worth noting that the Petitioners provided convincing evidence that, at some point after 2011, they repaid some of the disability benefits (likely because he also received Social Security Disability payments, and his contract with the insurance company required repayment commensurate with those SSDI benefits). Under the claim of right rule, Petitioners were required to report the benefits as income in the year of receipt. Repayment of the benefits in a latter year does not affect taxation in that earlier year; rather, the Petitioners were authorized to claim a deduction (for the benefits repaid) or a credit (for the allocable taxes paid) in the year of repayment.
Three Assessments, Two Refund Offsets, and One Confused Taxpayer
Dkt. # 24295-16, McDonald v. C.I.R. (Order Here)
In LITC practice, we often encounter taxpayers who are confused as to why the IRS is bothering them, what the problem is, and even why they’re in Tax Court. Indeed, at a recent calendar call I attended, a pro se taxpayer asked the judge for permission to file a “Petition”. This mystified the judge for a moment; further colloquy revealed the Petitioner actually desired a continuance.
In McDonald, we see a similarly confused taxpayer, though I must also admit confusion in how the taxpayer’s controversy came to be. Initially, the taxpayer filed a 2014 return that reported taxable income of $24,662, but a tax of $40.35. Anyone who has prepared a tax return can immediately see a problem; while tax reform proposals currently abound, no one has proposed a tax bracket or rate of 0.16%. Additionally, Mr. McDonald did self-report an Individual Shared Responsibility Payment (ISRP) under section 5000A of nearly $1,000 for failure to maintain minimum essential health coverage during 2014.
So, the IRS reasonably concluded that Mr. McDonald made a mathematical error as to his income tax, and assessed tax under section 6213(b)(1). Such assessments are not subject to deficiency procedures. Because the assessment meant that Mr. McDonald owed additional tax, the IRS offset his 2015 tax refund to satisfy the liability. Another portion of his refund was offset to his ISRP liability (which appeared on a separate account transcript—likely further confusing matters for Mr. McDonald).
But then the IRS noticed, very likely through its Automated Underreporter program, that Mr. McDonald did not report his Social Security income for 2014. Unreported income does not constitute a mathematical error, and so the IRS had to use deficiency procedures to assess this tax. The IRS sent Mr. McDonald a Notice of Deficiency, from which he petitioned the Tax Court.
Mr. McDonald filed for summary judgment, pro se, arguing that he had already paid the tax in question. Indeed, he had paid some unreported tax—but not the tax at issue in this deficiency proceeding. Rather, this was the tax that had already been assessed, pursuant to the Service’s math error authority—and of course the ISRP, that Mr. McDonald self-assessed. Accordingly, Judge Armen denied summary judgment, since Petitioner could not prove his entitlement to the relief he sought.
Headline: IRS Argues for the Petitioner; Loses
Dkt. # 23413-16SL, Matta v. C.I.R. (Order Here)
I just taught sections 7502 and 7503 to my class, so this order is fairly timely. Judge Armen ordered the parties to show cause why the case shouldn’t be dismissed for lack of jurisdiction due to an untimely petition.
Now why the Petition was filed in the first instance, I can’t quite discern. The Notice of Determination, upon which the Petition was based, determined that the taxpayer was entitled to an installment agreement, and did not sustain the levy. The Notice was dated on September 12, 2016, but the mailing date was unclear. (This is where the eventual dispute lies).
A petition was received by the Court on October 31, 2016. Clearly, this date is beyond the 30-day period in section 6330(d) to petition from a Notice of Determination. However, the Court found that the mailing date of the petition was October 13, 2016, as noted on the envelope. The mail must have been particularly slow then. This creates a much closer call.
The twist that I can’t quite figure out is that it’s the Service here that’s arguing for the Petitioner’s case to be saved, rather than the Petitioner, who doesn’t respond. The Service argues that, although the Notice was issued on September 12, it wasn’t actually mailed until September 13—which would cause the October 13 petition to fall within the 30-day period. The Service argues that because the Notice arrived at the USPS on September 13, that’s the mailing date.
But Judge Armen digs a bit deeper, noting that the USPS facility the Service references is the “mid-processing and distribution center”, and that it arrived there at 1:55a.m. Piecing things together, Judge Armen surmises that the certified mail receipt, showing mailing on September 12, must mean that the Notice was accepted for mailing by the USPS on September 12, and then early the next morning, sent to the next stage in the mailing chain. That means the Notice was mailed on September 12, and that accordingly, the Petition was mailed 31 days after the determination.
Helpfully for Petitioner, it looks as if decision documents were executed in this case, as Judge Armen orders those to be nullified. Perhaps the Service and the Petitioner can come to an agreement administratively after all, as Judge Armen suggests.