Professor Caleb Smith from the University of Minnesota Law School presents this week’s edition of Designated Orders; in addition to thinking about the challenges of substantiating expenses (and how the world shifts starting in 2018 for unreimbursed employee expenses), the post considers a healthy dose of Graev/Chai issues, a topic that Caleb discussed in a well-attended panel at the recent ABA Tax Section meeting. Les
It was a prolific week for designated orders from April 23 through April 27, with 10 issued. Here are the highlights:
The Benefits of an S-Case: Morgan v. C.I.R., Dkt. # 7695-17S (here)
We begin with an order addressing a very common issue: substantiating business expenses, particularly of the dreaded IRC 274 variety. This designated order and bench opinion from Judge Carluzzo is a good example of the power (and limitations) of an S-Case when you have a fairly sympathetic taxpayer situation.
When a taxpayer clearly has expenses but kept poor records (worse, no records) it strikes many as extremely unfair that they should be fully disallowed any deduction of those expenses. Sometimes taxpayers can rely on Cohan in those circumstances. But, as has been discussed by Professor Bryan Camp elsewherethe Cohan doctrine only goes so far: especially with “listed” expenses. A Tax Court Judge may well believe that you had (otherwise) deductible expenses, but disallow any deduction because you didn’t meet substantiation requirements. That is the law, after all, and the law is what a Judge must apply, even in S-Cases.
So what good are the relaxed rules of an S-case for substantiation (rather than strictly evidence) issues?
I think Morgan gives a good taste of why an S-case still has value in such instances. It has less to do with evidence, and more to do with S-cases being non-precedential. Here, the taxpayer arguably meets the strict substantiation requirements of IRC 274… but just barely, if not without some charity from Judge Carluzzo. I am not so sure such treatment would be afforded in a regular (potentially precedential) case.
The taxpayer in Morgan worked in asbestos remediation. His job is exactly the sort that requires frequent travel and has no regular place of employment: on any given day, Mr. Morgan would receive his marching orders (“go remove the flooring from 123 Main Street”) and head on his way. Over the course of the year he went to about 25 different locations, some which were fairly far from his residence (up to 58 miles away). Mr. Morgan kept track of the dates and locations of travel, occasionally accompanied by the name of the customer, on loose-leaf paper. He then calculated the mileage by plugging the information into MapQuest.
Is that good enough under IRC 274? There are at least a couple reasons to think not.
First the IRS calls into question just how “contemporaneous” these records really are, apparently having elicited some questionable testimony to that point during cross-exam. Judge Carluzzo notes this as a “serious concern,” but ultimately decides that the records are still “reliable enough.”
Then, and most importantly, there is the legal question of whether the records actually show deductible mileage in the first place. Because Mr. Morgan had no regular place of employment, his travel from home to a temporary site would be deductible (rather than commuting) mileage ONLY if the temporary site was “outside of the metropolitan area” that Mr. Morgan lived in. The records as submitted show mileage and location, but apparently not whether that location was “outside of the metropolitan area where the taxpayer normally lives and works.”
Judge Carluzzo could, at this point, say the records aren’t enough: the taxpayer has the burden of proof to show that they are entitled to the deduction, showing that they traveled outside the metro area they normally live and work in is an element of the deduction, and they failed to show demonstrate that. I think in a non-S Case that may well have been the outcome. Instead, Judge Carluzzo finds that it would “be unfair to deny the entire deduction because we lack that specific information.” His creative (and I’d say fair) solution is to infer that mileage logs showing a distance greater than 40 miles are likely outside of the metro area, and therefore allowed. Not a perfect solution, but an equitable one. He leaves it to the IRS and the petitioner to recalculate the deductible expenses based on that understanding (I question how much, if any, will actually be deductible thereafter, since Mr. Morgan was an employee that will have to deduct the mileage as a miscellaneous itemized expense subject to the 2% AGI floor. Note also that beginning this year, regardless of how wonderful Mr. Morgan’s records are (or if all locations are outside the metro) he will not be allowed any deduction since the “Tax Cuts and Jobs Act” completely eliminated it.)
In any event, Morganshows the ability of S-cases to allow for equitable solutions where taxpayers are caught between fairly esoteric law and the general notion that such law, if strictly applied, would appear to result being taxed on more net income than you really had. The S-case designation won’t save you from IRC 274, but it just may give you more wiggle room thereafter.
As an aside, the rule that the temporary work location must be “outside” the metro area has never sat particularly well with me. The metro area requirement is written nowhere in statute but was put forth by the IRS in Rev. Rul. 99-7as a way for determining personal vs business mileage. The need to promulgate somesort of distinction between non-deductible personal (commuting) expense and “away from home” deductible mileage is understandable given the vagaries of the Code on that issue. I’m just not so sure using “metropolitan area” as the touchstone strikes a desired balance between administrative workability and fairness.
On the “administratively workable” side, it seems odd to use the somewhat mushy “metro area” (nowhere further defined) rather than, say, just a set number of miles from the taxpayer’s actual residence. Similarly, on the “fairness” side it seems to penalize those that live in large metro areas (for example, Los Angeles). Is it really less of “commuting” if the new job location is across a river/state line 10 miles away in a rural area versus across town but 60 miles away? What if you live at the edge of the “metro area?”
Apparently, these are the thoughts that keep me awake at night…
For those needing their weekly fix of Chai (more accurately Graev, but that doesn’t work as a pun) Judge Ashford and Judge Halpern provide the fix.
By way of extremely brief background, after Graev III the burden of proof is on the IRS to show supervisory approval of penalties under IRC 6751. These two orders don’t break any new ground on that issue, but do provide useful primers on a hot issue that practitioners need to be aware of.
With Collins, we see the usual (and likely to be dwindling) arguments on whether the Tax Court should reopen the record for cases with one foot in the Graev (that is those that took place before Graevwas decided but remained open after Graev III). These cases are, of course, finite and largely coming to an end, so in a sense have mostly historical value. However, they may also provide some insights to petitioners in future sure-to-be frequent fights over evidentiary proof of supervisory approval under IRC 6751.
Collins provides the usual script, with Judge Ashford punctuating a few keys points. First, the usual: IRS moves to reopen the record because they didn’t originally introduce evidence of supervisory approval of a penalty on the very-reasonable ground that at the time the Court had hitherto said they didn’t need to. Second, the petitioner tries very hard to come up with a reason why the IRS shouldn’t now be allowed to reopen the record. Third, the Tax Court says, “we have discretion to open the record, and petitioner’s reasons not to just aren’t good enough.”
In future IRC 6751 litigation, the IRS shouldn’t need to reopen the record to introduce evidence of supervisory approval: Graev IIImakes clear they should do that upfront. Nonetheless, where the IRS seeks to submit into evidence a Civil Penalty Approval Form that purports to show proper supervisory approval under IRC 6751, the petitioner will need to think critically about what arguments they may still be able to make to show a failure of IRC 6751 compliance. Collinsprovides a little insight on what those arguments may be and their likelihood of success.
First, it is clear that objecting to the introduction of a Civil Penalty Approval Form on hearsay grounds won’t work. The exception offered by the IRS and readily accepted by Judge Ashford is FRE 803(6) often referred to as the “business records rule.” That is enough for the IRS to carry the day on hearsay objections, though frankly I think it is more than the IRS actually needs.
Judge Ashford takes as a given that the Civil Penalty Approval Form is “inadmissible hearsay” absent an exception applying. I’m not so sure that is correct: how is it that the IRS could have a legal requirement under IRC § 6751 to show “written approval” and yet the written approval itself be inadmissible hearsay absent exception? I think most law students taking evidence would similarly find that result puzzling, though begrudgingly accept it because hearsay doctrine is mostly incomprehensible. However, for the student sticking with that initial reaction (“it seems wrong that this would generally be hearsay”), I think they may be on to something.
Without going into too great depth, I will say that I think the Civil Penalty Approval Form may not be hearsay at all because it has “independent legal significance.” The IRS is offering the form essentially because the IRS has to, as an element of its case, much in the same way that contract and defamation cases necessarily have to introduce out-of-court statements. If those statements were treated as hearsay (thus requiring an exception for admissibility) many would likely fail because they weren’t business records, etc. To me, the crux of the issue is simply “does written approval exist?” and the IRS Civil Penalty Approval Form is submitted for that purpose. That is arguably a “non-hearsay use” of the Civil Penalty Approval Form and should therefore not be evaluated as hearsay needing an exception for admission.
And this gets to the second point: what are you really trying to argue when the IRS offers a Civil Penalty Approval Form? In Collins, the objection was really about the authenticityof the document -not whether it purports to show supervisory approval. The IRS included a statement from the supervisor that signed the document attesting to its authenticity. Because Judge Ashford approached the Civil Penalty Approval Form as hearsay admissible only under FRE 803(6), this statement (or something similar) is required as certification under FRE 902(11)and thus admissible (and sufficient, in this case to show that the form was authentic).
The authentication argument (as well as the hearsay argument) in Collinsis a loser, and I believe will almost always be a loser in future cases absent extremely bad actors in the IRS. So what can we take from Collins? To me, it is the primacy of the written document in IRC 6751 cases. As a taxpayer, saying “I don’t trust it,” probably won’t work. But, there are other rules of evidence (and tactical approaches) that may.
IRS records can be pretty bad at times. My assumption is that, moving forward, where the IRS cannot provide ANY written approval of the penalty they will concede the issue or argue no approval is needed under IRC 6751(b)(2). But the more interesting cases may be where the IRS has some written record that, taken as a whole, seems to show supervisory approval -but not a clear, single “Civil Penalty Approval Form.” In those cases I think the rules of evidence give practitioners new potential methods for attack. The question of “why isn’tthere a single approval form?” comes to mind. If that is the “regularly conducted activity” of the IRS (under FRE 803(6)), absence of those regular entries seems all the more important (and testimony from the IRS about the absence would appear to be admissible under FRE 803(7). I have seen the IRS provide any number of different forms of “written approval” (including what seem to just be case notes) for the penalty. If it is the practice to have an actual, standard approval form, one might hold the IRS’s feet to the fire when they fail to do so and instead try to provide other corroborating (written) evidence. I daresay in these circumstances, litigants may need to reacquaint themselves not only with hearsay but also the best evidence doctrines.
I’m sure such issues will play out to the delight of the Tax Court in the not so distant future.
The second designated order involving Graev again brings up problems that will soon be relics of history. Although the order doesn’t break much new ground, Judge Halpern does provide a helpful timeline of the Graev/Chai saga, as well as a reference to a far-less-frequently cited case that touches on IRC § 6751 pre-Chai: Legg v. C.I.R., 145 T.C. 344. I assume the reason Legg did not result in the firestorm Graev has is because Legg found that the requirements of IRC § 6751 were met by the IRS, and didn’t touch whether they were applicable in the first place: everything in Legg hinged on whether the approval was part of the “initial determination.”
The Weaver situation blissfully will soon be a thing of the past. Weaver had its trial after Chai, but before Graev I. The briefing was completed after the second Circuit reversed Chai, but before the Graev III about-face. The question posed by Judge Halpern, as it so often has been, is “How does Graev III affect this case?” Since the case was not yet decided when Graev III was decided, I assume the answer will be that the IRS needs to comply with IRC 6751 (with a motion to reopen the record) or the penalty falls under the automated exception of IRC 6751(b)(2).
Insisting a Little Too Much on Your Day in Court: Ryskamp v. C.I.R., Dkt. # 20628-17 (here)
When you frequently comb through the US Tax Court orders archive some names begin to seem familiar. Ryskamp is one such name, and the accompanying order illustrates why. The order itself is fairly routine: taxpayer wants to get into Tax Court on a CDP case without having the proper “ticket”: that is, a Notice of Determination (or letter that should be a notice of determination). Rather, Mr. Ryskamp has only Notice LT16, which he attempts to pass off as a Notice of Determination. This is akin to trying to get into a Hamilton by presenting an expired bus ticket. And the Court is not having it. And for good reason.
This does not appear to be a taxpayer that is (justifiably) confused about the limits of Tax Court jurisdiction -what IRS letters serve as tickets and what IRS letters don’t. Rather, Mr. Ryskamp ALREADY had petitioned (and had his day in court) for nearly all of the years at issue after a previous CDP hearing and judicial review. But that happened in 2014… perhaps Mr. Ryskamp forgot, or believed he had a new opportunity?
Doubtful: he appealed his original CDP case to the D.C. Circuit in 2015. Then, losing on appeal, Mr. Ryskamp petitioned the Supreme Court in 2016 (cert denied, as one might expect).
So why does Mr. Ryskamp believe the Tax Court should now, at long last, once more hear his arguments about why he shouldn’t pay his 2003, 2005, 2006 and 2009 taxes? Because, Mr. Ryskamp asserts, “when a petition raises substantive due process arguments, the Tax Court must address them.” Interesting premise, although he could not have picked a less amenable (or appropriate) forum to make them in.
One feels for both the IRS, Judge Guy, and frankly honest taxpayers everywhere in cases like these: resources are wasted addressing inane and time-consuming arguments by serial tax-delinquents. It is easy enough for Judge Guy to resolve this issue (the boilerplate “Tax Court is a court of limited jurisdiction” does the trick), but simply finding in favor of the IRS/dismissing the case does not seem a full remedy. Depending on one’s constitution, readers may feel a twinge of retributive justice was later served Mr. Ryskamp,in the form of a $1000 penalty for challenging a collection action for the “2018 tax year” (somehow). A tip of the hat for my Designated Orders colleague William Schmidt for directing me to that outcome.
Odds and Ends: Remaining Designated Orders
How to Compel Discovery
Judge Jacobs issued two orders: onedenying a pro se petitioner’s motion to compel discovery from the IRS (presumably because they did not try to use informal means of discovery first), and onegranting the IRS’s motion to compel discovery from the taxpayer (after fairly extensive attempts to utilize informal means of discover). They don’t provide too much insight on the issues, but are a reminder of the Tax Court imperative to use informal methods of discovery as much as possible.
How Not to Move for Summary Judgment:Lamprecht v. C.I.R., Dkt. # 14410-15 (here)
Knowing when is appropriate to move for summary judgment can be difficult even for trained attorneys. Through denying a pro se petitioner’s motion in Lamprecht, Judge Gustafson lays out a few more helpful tips. In Lamprecht, one of the petitioner’s wanted SJ against the IRS, and explicitly “assumed” that the Tax Court (or IRS) was already aware of the relevant facts thus far developed. If your SJ motion really just says “Judge, you’ve heard us talk enough by now, you know what is relevant and what isn’t, please make your decision,” it is not likely to pass muster. Perhaps you are right, and all the relevant issues/facts have been established… but it is your responsibility to show what those are and (equally importantly) why they mean you should win. As Judge Gustafson writes, “the task of extracting from prior filings “the facts in this action that are relevant to [a summary judgment] motion” and then the task of searching the record to see whether those alleged facts can be supported by materials in the record” are the responsibility of the moving party.
Two designated orders from Judge Carluzzo (a bench opinion finding against a taxpayer that never showed up for trial here, and an order amending a caption here) are not discussed. There is an additional order addressing waiver of CDP rights; that will serve as a standalone post at a later time.