Professor Samantha Galvin from University of Denver’s Sturm School of Law brings us this week’s designated orders. Keith
The week of August 27th was light, in typical pre-holiday week fashion, with a total of five orders designated. The two orders not discussed involve: 1) the final decision on a petitioner’s request to dismiss his case without prejudice (a case Patrick Thomas previously blogged about) (here), and 2) an order to show cause for the non-imposition of a section 6673(a)(1) penalty (here).
A Pause for Coffey
Docket No: 7976-14, Bradley A. Hite v. C.I.R. (Order here)
The Tax Court’s opinion in Coffey v. Commissioner issued earlier this year held that U.S. Virgin Island (“USVI”) territorial income tax returns submitted to an IRS office constitute the filing of a federal income tax return and start the clock on the assessment statute under section 6051(a). Patrick Thomas also blogged about two orders that were recently designated as part of the Coffey case here and here and the Coffey case was covered by Kandyce Korotky and Joe DiRuzzo (if interested, see links in Patrick’s first post).
In this designated order the Court contemplates granting respondent’s Motion for Leave to File Out of Time First Amendment to Answer in a case involving USVI returns. The case itself involves a question of whether petitioner’s 2002 and 2003 USVI territorial tax returns should be treated as filed with the IRS. Petitioner had initially alleged that his USVI territorial tax returns should be treated as federal income tax returns for purpose of the assessment statute but did not allege that he had actually filed the returns at issue with the IRS. Petitioner later admitted in a reply to respondent’s answer that he did not file the returns at issue with the IRS.
In response to petitioner’s statements and the decision in Coffey, respondent wants to amend his answer to clarify that if the returns are treated as filed with the IRS, then the January 2014 notice of deficiency was sent before the expiration of the assessment statute under section 6501(a) and the parties executed agreements to extend the assessment statute under section 6501(c)(4). It is a little difficult to discern from the order itself but it appears the reason for this is that even though petitioner admitted to not filing a return with the IRS, if his filing with the Virgin Islands Bureau of Internal Revenue (“VIBIR”) is somehow treated as a filing with the IRS then respondent wants to make it clear that the ASED did not expire before the notice of deficiency was issued.
Pursuant to Rule 41(a) a party can amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires. The Court looks to the underlying circumstances including whether there is a reason for the delay and whether the opposing party would be harmed if the motion to amend was granted.
Here the Court looks to petitioner’s statements and its recent decision in Coffey and finds that respondent’s delay in seeking to amend his answer is understandable. Petitioner’s counsel also concedes that since the case has not been set for trial, allowing respondent to amend his answer will not prejudice petitioner so the Court grants respondent’s motion.
A New Flavor of Chai
Docket Nos: 14619-10, 14687-10, 7527-12, 9921-12, 9922-12, 9977-12, 30196-14, 31483-15, Ernest S. Ryder & Associates, Inc., APLC, et al. v. C.I.R. (Order here)
“This species [of Chai ghoul] involves documentation that we have not seen the Commissioner offer in any other case,” states Judge Holmes in this designated order. I wrote on this case in my April 5, 2018 designated order post and another designated order for this case (which I did not write about) was issued during my last “on” week, but this order deserves some attention.
The cases were tried in two special trial sessions in 2016 and involve all sorts of taxpayers: C Corporations, a TEFRA partnership, and individuals. In all but two of the cases, the IRS asserted accuracy-related and/or fraud penalties.
The parties are now in the briefing process, but respondent has moved for the Court to reopen the record to allow in evidence that shows compliance with section 6751(b)(1) for some of the penalties. Petitioners object to this motion.
The motion is only for penalties asserted against the Ryders individually because respondent’s position is that he doesn’t have the burden to show compliance with section 6751(b)(1) for penalties asserted against a C Corporations and TEFRA partnerships.
The Court outlines the timeline in which that IRS proposed deficiencies and accuracy-related penalties in three separate deficiency notices issued to the Ryders for tax years 2002-2010. The IRS did not propose any section 6663 fraud penalties in any of the deficiency notices but raised the fraud penalties for all years in amended answers on March 21, 2016.
At trial in July and August of 2016, no evidence was raised as to respondent’s compliance with section 6751(b)(1) for the accuracy-related or fraud penalties and the parties did not stipulate to compliance. Then came Graev II and Chai and respondent still did not mention compliance with section 6751(b)(1) in his opening seriatim brief nor amended opening seriatim brief. Then the Court adopted Chai as its own in Graev III.
Due to the complexity of the cases and respondent’s very long opening brief, the Court granted petitioners more time to file their answering brief on three separate occasions, and during this time, the respondent moved to reopen the record.
The Court ponders whether it should reopen the record to admit respondent’s evidence against petitioner’s objection. Petitioner argues that respondent cannot use ignorance of the law as a defense and respondent was aware that section 6751(b)(1) would be an issue, so failure to introduce evidence beforehand shows a lack of diligence. Petitioners also argue that reopening the record would cause them prejudice because do not have a chance to cross-examine the IRS employees who made declarations about the evidence respondent now seeks to admit.
The decision to reopen the record is within the Court’s discretion, but that discretion is not limitless, so the Court evaluates each item.
First is an examination case processing sheet. Respondent has sought to admit penalty approval forms in other post-Graev III cases, and some have been admitted under the business records exception or as a verbal act to show a supervisor approved the penalty (and specifically not used to determine whether the penalty was justified or what the supervisor was thinking when it was approved). The Court does not think the business record or verbal-act analysis applies to the examination case processing sheet because the document itself does not indicate that a supervisor approved the initial determination of penalties. The case processing sheet needs an accompanying declaration from revenue agent, Ms. Phan, (which respondent also seeks to admit, but the Court finds is inadmissible hearsay) to make sense of it.
Second is several documents that allegedly support the section 6663 fraud penalty, the documents consists of: an email with an attached amendment to answer raising fraud, a redacted Significant Case Report, a 2016 employee evaluation, and a declaration from a different IRS employee explaining the significance of these documents.
The Court finds these documents are also inadmissible because they mean nothing without an explanation, and again, finds the IRS employee’s declaration to be inadmissible hearsay.
The Court declines to evaluate whether respondent was diligent or whether admitting the evidence would prejudice the petitioners because it finds that IRS has not shown that admitting this evidence would change the outcome of the case and denies respondent’s amended motion to reopen the record.
Technology Helps the Court
Docket No. 27759-15, George E. Joseph v. C.I.R. (Order here)
The Court has been slow to adopt technological advances and highlights the helpfulness of petitioner providing the cutting-edge technology (sarcasm intended) of a thumb drive containing his brief and exhibits in this designated order.
Petitioner filed a seriatim brief with the Court along with five files containing exhibits, but also mailed the Court a thumb drive containing an electronic version of his brief with hyperlinks to the exhibit files. The Court finds the thumb drive and hyperlinks to be helpful to all involved, but respondent has some objections. Some of the exhibits on the thumb drive are not in the record of the case and other exhibits (which are in the record of the case) contain notations that are not on the original exhibits.
The Court allows petitioner leave to file an amended brief without exhibits and provide a thumb drive with the exhibits that were actually received into evidence. It orders, among other things, that the files not received into evidence be deemed stricken from the case and that the thumb drive be returned to petitioner.