There were five designated orders in the second week of September, and some of them were fairly substantial (one was even covered in Tax Notes). In fact, they were substantive enough to warrant three separate posts. This first of three will focus on the same order covered by Tax Notes. Since this blog focuses on procedure (and the Tax Notes coverage was mostly pertaining to the interesting “substantive” tax issues) we’ll be taking a look at it from a different angle.
Substantive Issues in Designated Orders: A Different Perspective. Conyers v. C.I.R., Dkt. # 13969-18 (order here)
Conyers involves a fact situation you are likely to encounter on a Fed. Income Tax I exam. The petitioner was awarded a brand-new car after winning a local car dealers competition for high school seniors excelling (or apparently just showing up 100% of the time) in class. The petitioner didn’t actually enter the competition (her name was entered by the school), but that didn’t stop her from accepting the 2016 Jeep Renegade. And who can blame her?
Conversely, however, who can blame the IRS for saying “you’re going to have to pay tax on that” after they get tipped off to the transaction via a 1099-MISC. Students and practitioners alike may think to themselves “non-taxable gift!” at this point and run through the troublesome “Duberstein” tests.
Judge Buch, however, does a wonderful job of walking through the difference between a non-taxable gift under IRC 102 and a taxable “prize or award” under IRC 74, and why this falls into the latter. I highly commend reading the order for those that are interested in the history and substantive niceties of IRC 74 (and why it came about as a result of the frequent confusion between “gifts” and “prizes”). I get the feeling that it is because of that analysis that Tax Notes Today covered the case (fairly obviously, no free links available to that).
However, as a Tax Procedure blogger something else caught my eye in reading this, which was that it was disposed of in a motion for summary judgment. Judge Buch convincingly comes to a conclusion on the merits (that this Jeep Renegade is, in fact, a taxable prize). But that by itself does not resolve the case or mean that summary judgment is appropriate. And that is because there a second issue lurking behind the legal conclusion of whether the Jeep Renegade is a gift or taxable award: even if it is taxable, how much is the Jeep Renegade worth? That is much more of a question of fact, which generally ruins summary judgment motions.
Petitioner raises the issue of valuation in her objection to summary judgment, but Judge Buch disposes of it in one rather short paragraph: “Ms. Conyers claims a genuine dispute exists as to the value of her car. But Ms. Conyers provides only her bare allegation and does not provide an alternate valuation of any evidence of erroneous valuation by the Commissioner. Ms. Conyers may not rest on mere allegations or denials.”
So the question becomes, how far does one have to go to raise a genuine dispute of material fact that cannot be resolved in summary judgment?
We’ve seen that a self-serving affidavit may be enough to defeat a motion for summary judgment, in the right circumstances. See Keith’s post here. That case involved the FRCP 56 not Tax Court Rule 121, but because the rules are essentially identical the analysis should remain the same: both allow for affidavits to be used in opposition, so long as they are based on personal knowledge and set forth facts that would be admissible in evidence.
It isn’t immediately clear if any affidavit was filed in opposition to the summary judgment motion, though the docket listing “exhibits” to the petitioner’s response and Judge Buch’s reference to Ms. Conyer’s “allegation” lead me to believe that it is likely. If so, the question shifts to what the affidavit would need to contain to defeat the motion. Judge Buch says it needs to be more than just a denial of the IRS’s position, and then seems to imply that it also needs to affirmatively provide either (1) a correct valuation, or (2) evidence that the IRS’s valuation is incorrect. Saying just “the IRS’s valuation is wrong” would not meet that requirement -it would simply be an “allegation or denial” of the moving party’s pleading, which Rule 121(d) forbids. So, had petitioner’s affidavit provided “I think the car is worth [x]” (i.e. an affirmative valuation) that would appear to be enough to preclude summary judgment.
Of course, you can’t just pick a number out of the air to defeat summary judgment and then swear in an affidavit that the number is correct based on your personal knowledge. That would clearly be an affidavit “made in bad faith” under Rule 121(f), which opens up a lot of collateral issues (like possibly having to pay the other side’s attorney fees, being subject to contempt, or otherwise disciplined by the Court).
But what if you are convinced that the car is worth less than the IRS’s valuation, but haven’t had the time to come up with an affirmative valuation of your own (that you could swear to in the affidavit)? Are you out of luck just because the IRS pushed the issue with a summary judgment motion?
Possibly not. Rule 121(e) provides exceptions to providing an affidavit like the one Judge Buch would seem to require when such “affidavit or declaration [is] unavailable”. This rule allows the Court to find a genuine dispute of material fact if the non-moving party could only be expected to put the facts at issue through cross-examination or through information from a third party that cannot (yet?) be secured. The Court also may deny the motion or provide a continuance to get an affidavit, as the circumstances demand.
Because it does not appear that petitioner, in this case, could provide an affidavit that really put the value of the car at issue (other than by saying “the IRS is wrong”) Rule 121(e) may have been the only saving grace… And even that may have been fleeting. Since the car was brand new, and presumably was going to be sold at a set price by the dealership, arguing a value apart from what the dealership reported to the IRS was going to be an uphill battle. Maybe an appraiser could say the dealership marked it up too much. Maybe the taxpayer could testify that this specific car (and not the model generally) had some defects that should lower the value. But the petitioner had to say something credible on those matters, and if it was based on personal knowledge it isn’t clear why they couldn’t have been in an affidavit in opposition (that is, it isn’t clear why they’d need more time under Rule 121(e)).
And so this interesting case ends in summary judgment against the petitioner, as the IRS was entitled to judgment as a matter of law. Though the final finding necessary for summary judgment (no genuine issue of material fact) only warranted one paragraph in the order, hopefully this post elucidates how much may lurk behind that.