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Doing the Right Thing

Posted on Nov. 18, 2016

We criticize the IRS regularly here, but today want to point out a case illustrating the effort the IRS and its attorneys at Chief Counsel’s office will go to in order to do the right thing.  When I worked there, a strong culture existed to find the right answer or do the right thing.  The case I will discuss today demonstrates that the culture still exists even in the face of the cuts to the budget and the unrelenting criticism.

The Chief Counsel attorney, Nicholas Rosado, did the right thing in the context of a Rule 155 computation.  We have not talked before about Rule 155 comps and this case also offers the chance to do that.

Chief Special Trial Judge Panuthos issued an opinion in the case of Mameri v. Commissioner, T.C. Summary Opinion 2016-47.  As we have discussed before, it is a summary opinion because petitioner filed the case using the small tax case procedures of IRC 7463.  No matter whether regular, memorandum or summary, Tax Court opinions do not come with a calculation of the tax liability.  The Tax Court judges decide the issues but do not calculate the tax resulting from their decision.  In many cases, the Tax Court decides completely for the taxpayer or completely for the IRS.  In those cases, no calculation needs to precede the entry of the decision since the decision document will reflect a zero dollar liability where the taxpayer wins and a liability that mirrors the notice of deficiency where the IRS wins.

If the result of a Tax Court case splits the decision between the parties, then someone has to calculate the impact of the issues determined by the judge on the amount of deficiency proposed in the notice of deficiency in order for the parties to know the correct amount of tax the IRS may assess. Tax Court Rule 155 creates the process for making that calculation and presenting the results to the Court.  In most cases, the Chief Counsel attorney sends the opinion to a computation specialist in Appeals who turns the issues into a new liability number.  After the attorney receives the computation back from Appeals, the attorney sends that computation to the taxpayer, or the representative, who reviews the computation for correctness.  If the taxpayer thinks that the computation does not correctly calculate the tax based on the Court’s opinion, the taxpayer will bring the problem to the attention of the Chief Counsel attorney who, in consultation with the computation specialist, will agree with the taxpayer or disagree.  In most cases, and especially in cases involving pro se taxpayers such as Mr. Mameri, the taxpayer accepts the computation provided by the Chief Counsel attorney without question.  The Chief Counsel attorney then prepares a decision document which the parties sign reflecting their agreement with the amount of tax and then the Court signs the document entering the decision amount.

In a small number of cases, the parties cannot reach an agreement on the amount of the tax resulting from the opinion.  In those cases, the Court holds a Rule 155 hearing in order to rule on the computation of the parties and resolve the dispute as to the amount of tax created by the opinion.  Sometimes the dispute exists because the original opinion did not sufficiently address all of the issues and sometimes the dispute exists because one party wants to interpret the opinion in a manner not intended.  In an even smaller number of cases, there may be a disagreement about what the Tax Court can decide in a Rule 155 hearing.  Many years ago Les was involved in a Rule 155 contest in the case of Erhard v. Commissioner involving the famous Werner Erhard of EST for those of you looking for a throw-back to the 1980s. Generally, the Tax Court in a Rule 155 hearing is bound to make its computations from the evidence in the record and the opinion itself. The Tax Court case does not become final until the entry of the decision and when the amount to be placed on the decision remains in dispute, the resolution of that dispute is a predicate to finalizing the case.

In Mr. Mameri’s case, Judge Panuthos entered an opinion that required the calculation of the correct amount of tax.  At issue in the case were education credits claimed by petitioner for tuition cost and for the purchase of a computer.  The opinion allowed the cost of tuition based on the testimony of the petitioner and a letter from an instructor; however, the Court did not allow the credit for the purchase of the computer because petitioner could not show that the purchase of the computer was a requirement of the educational program as opposed to a convenience.  The Chief Counsel attorney set out to obtain the calculation resulting from the Court’s opinion.

In the course of obtaining the Rule 155 computation, the Chief Counsel attorney bumped into a proposed regulation promulgated on August 2, 2016, just three weeks before the Court had rendered its opinion on August 24, 2016.  Remember that the opinion would have been written several months after the trial of the case.  While the parties could have brought an important ruling or regulation to the attention of the Court while the case sat with the judge during the deliberative phase, the chances of a pro se taxpayer picking up on something of that nature approach zero.  The Chief Counsel attorney would have had other cases to work on and could easily miss a matter that might have impact.

The proposed regulation regarding education expenses and the credit allowed thereunder provided:

In the preparation for the Rule 155 computation, counsel for respondent brought to the

Court’s attention proposed regulation section 1.25A-1(d)(3) issued August 2, 2016. The proposed regulation interprets the meaning of “required for enrollment or attendance” as set forth in section 25A(f)(1)(A) and (i)(3) to mean that “the course materials are needed for meaningful attendance or enrollment in course of study, regardless of whether the course materials are purchased from the institution”. Respondent proposes to concede that petitioner is entitled to an education credit for the purchase of the laptop computer since petitioner satisfies the requirements of the proposed regulation.

The Court, in an order dated November 4, 2016, accepted a concession by the Government in Mr. Mameri’s case based on the proposed regulation and entered a decision in the case granting Mr. Mameri the education credit for the purchase of the computer.  During the course of having the Rule 155 computation prepared, the Chief Counsel attorney or someone in his office or in Appeals must have noticed the newly issued proposed regulation (note that the concession is based on a proposed and not final regulation) and decided that Mr. Mameri should have won the issue regarding the computer in his Tax Court case.  I am sure Mr. Mameri appreciates the concession by the Government in his case and we can all feel a little bit better about the tax system because of the actions of the Chief Counsel attorney, Nicholas Rosado.

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