This week’s designated order post is brought to us by Professor Caleb Smith at the University of Minnesota. Keith
Raising the Wrong Issue in Summary Judgment: Fowler v. C.I.R., Dkt. No. 28935-14L (here)
We have seen no shortage of summary judgment motions in the designated orders section. Some fail because of defects the IRS brought upon itself (for example, here), some fail because the law is particularly complicated and the record needs to be further developed (for example, here). Many succeed. This is particularly when the taxpayer is unrepresented or when the taxpayer does not appear to have fully participated in a collection due process hearing.
Fowler is a slight variation on this theme: it involves unrepresented taxpayers that clearly could have afforded counsel, but decided to go their own way. And in so doing they provide a lesson on how not to respond to a summary judgment motion while simultaneously illustrating the adage “penny wise, pound foolish.”
It isn’t clear exactly where the Fowlers income comes from, but it is safe to bet that they live comfortably. Apart from the fact that they own a vacation home in Los Angeles, one may surmise their wealth from the size of their tax liabilities. For the tax years at issue is in this case there are self-reported liabilities of $274,005 (for 2008), $214,846 (2009), $273,220 (2010), $205,839 (2011), and $289,787 (2012). The Fowlers apparently have enough cash on-hand to make fairly large lump-sum payments, when they feel so inclined (as they did by paying $120,000 on September 24, 2010 and $70,000 on March 22, 2012). Lastly, in 2012, the IRS calculated that the Fowlers were making $83,000… per month.
All of this is to say that the Fowlers (1) can afford to pay a lawyer, and (2) can afford to pay their taxes. Or at least could have afforded to pay their taxes if they hadn’t let them balloon with penalties and interest.
Of course, things change and by the time of the CDP hearing in 2014 the Fowlers had calculated that they could only pay $11,000 a month through an installment agreement. The IRS asked for a bit more information to confirm this payment amount (as is standard, when the liability is that large will not be paid within 72 months). And the Fowlers apparently never responded. Which is typically a recipe for summary judgment should resulting unfavorable CDP determination ever find its way to court review.
And so it was in this case, but with an important twist: the Fowlers did respond to the summary judgment motion, but made the wrong arguments. Mainly, they tried to allege new facts purporting to show abuse of discretion rather than denying (or otherwise addressing) the facts put forth by the IRS in the summary judgment motion.
The crux of the IRS’s motion for summary judgment is “Your collection alternative (installment agreement) could only be considered if you bumped up the monthly amount or provided more information. You did neither. You do not dispute that you did neither. Ergo, summary judgment is appropriate.” The crux of the Fowlers’ argument is “you should have given us more time to submit those documents: the roughly three months you provided was not enough.” The crux of Judge Ashford’s decision is “it sounds like you both agree on the material facts, and those facts lead to a decision that may be rendered as a matter of law.”
The important aspect of Judge Ashford’s decision (and the flaw in the Fowlers argument) is that for summary judgment all that matters are the material facts. Here, the material facts are primarily whether the Fowlers ever provided information after being asked for it. Because the “factual disputes” the Fowlers put forth would not “affect the outcome of the suit under the governing law” (see Anderson v. Liberty Lobby, Inc,, 477 U.S. 242 (1986) (here) they are essentially irrelevant for the purposes of the summary judgment motion.
Quoting Casanova Co. v. C.I.R., 87 T.C. 214 (1986) (here), Judge Ashford notes that the determination of what facts “are material, of course, depends upon the context in which they are raised and the legal issues which exist between the parties.” One may be inclined to think that the amount of time the IRS allows you to provide documents could be a material fact with regards to an abuse of discretion determination. But not in this case, where the IRS has apparently allowed several months and generous extensions already. In the words of Judge Ashford, and quoting numerous cases on point, “This Court has consistently held that Appeals is not required to negotiate indefinitely or wait any specific amount of time before issuing a notice of determination.” I won’t run through the list of cases Judge Ashford cites to prove this point, but they take up essentially a full paragraph running from the bottom of page 14 through the top of page 15 in the order.
While the Fowlers may have benefitted from counsel at an early stage in this controversy, the order also provides a second interesting lesson on the arguments one can make in a CDP case. This time, however, the lesson applies against the IRS. Early in the order (and brushed aside with a footnote), the IRS appears to allege that the Fowlers filed their 2008 taxes late -which would carry huge penalty implications given the $273,005 liability at issue for that year. Indeed, Judge Ashford states that “On December 18, 2009, petitioners filed (on extension) their joint Federal income tax return for 2008[.]” If that is the case, then it is nearly impossible that the Fowlers return was not late, regardless of extension. Unless they were abroad or in a Presidentially declared disaster zone and received an extension, a filing date of December 18 would almost necessarily be late, and reflect the date the return was received by the IRS. See IRC 6072 and IRC 6081.
The late filing would, in turn, make for an assessable penalty of 5% the tax required to be shown on the return, per month delinquent. See IRC 6651(a)(1). Again, a large chunk of change in this instance. I tell my students that with big dollar taxpayers being a day late leaves you far more than a dollar short (Ok, I don’t phrase it exactly that way). See Laidlaw v. C.I.R., T.C. Memo. 2017-167 for a good example of how costly late filing errors can be. But either the IRS is mistaken about the return actually being late (as the Fowlers argue) or someone/some computer gifted the taxpayers a large amount of penalty relief by failing to assess what is generally a pretty automatic penalty. In any event, because it is of no moment to the motion for summary judgment, it is swept aside by Judge Ashford.
Raising the Wrong Issue On Your Petition: Owens v. C.I.R., Dkt. No. 12420-18 (here)
Owens involves an aggrieved taxpayer that filed a petition for redetermination of his deficiency, but on grounds that appear to put him in the company of tax protestors. The disagreement with the IRS (at least as presented on the petition) appears to focus on a supposed failure to send the notice of deficiency by certified mail, and general gripes against the IRS for being unresponsive. These arguments do not, however, appear to allege any actual errors with the IRS determination itself. The result is a rather concise dismissal of the petitioners tax court case for failure to state a claim upon which relief can be granted.
So a (like) tax protestor loses at an early stage for failure to state a claim. Why does that matter? It matters for reasons the intrepid Carl Smith has blogged about before and alerted to me again in writing this post.
The first issue is what standard the Court should apply in determining the sufficiency of the pleading -in a sense, how much do you have to initially put forth for your petition to state a claim on which relief could be granted? Historically, district court’s applied the fairly low-bar “notice pleading” standard put forth by the Supreme Court in Conley v. Gibson. Since my office is directly next to a professor of federal civil procedure, I regularly hear the phrase “Twiqbal” in discussions about the sufficiency of pleadings in federal district court. “Twiqbal” is a mash-up of the two Supreme Court cases that have replaced Conley (Twombley and Iqbal) and incorporated a new, more demanding standard for pleadings to survive. Namely, the Court looks to “whether a complaint states a plausible claim for relief[.]” [Emphasis added.]
The question (addressed by Carl in depth here) is what standard the Tax Court uses to determine the sufficiency of the pleadings. Is it still Conley (which is the case cited to by Judge Guy in this order)? One may reasonably believe that to be the case: I found only one Tax Court case that even mentions Iqbal, and even then it is only quoting the language of petitioner’s (failed) argument. See Cross v. C.I.R., T.C. Memo. 2012-344. Nonetheless, clarification on the applicable standard appears to be lacking.
But there is also a second issue lurking in the dismissal, this time concerning the IRC 6662 penalty asserted in the notice of deficiency. Does the IRS “win” on the penalty with the dismissal of the case? What about their burden of production under IRC 7491(c)? What about Graev III and IRC 6751(b)?
The Tax Court rules instruct petitioners to assign error even to issues “in respect of which the burden of proof is on the Commissioner.” T.C. Rule 34(b)(4). Accordingly, the petitioner should put the penalty at issue in the petition, even if they don’t need to allege any facts relating to it (See T.C. Rule 34(b)(5)). Further, two tax court cases cited by Judge Guy (Funk v. C.I.R. and Swain v. C.I.R.) have already held that the burden of production for penalties does not apply to the IRS when the petition (and/or amended petition) does not “raise any justiciable claims.” In short, if your petition walks and talks like a tax protestor (while failing to specifically assign error to the penalty), the IRS has no burden to produce evidence that the penalty applies before your case gets dismissed.
All of this is, in a sense, a fairly elementary but important lesson on what how the initial stages of litigation work. It may be best to conceptualize the Notice of Deficiency as the complaint: the taxpayer has to answer to avoid default, and in the answer they must take care to respond to everything that is actually at issue or risk conceding it. The petition is not the time to make legal arguments (which is where I see my students most often going astray), but simply to assign error (which is all that is needed for penalties subject to IRC 7491(c)) and allege facts that, if true, would support your claim. Trying to do too much (raising issues that aren’t really in the NOD, making legal arguments rather than alleging facts) will generally do you more harm than if you just succinctly said “the Commissioner erred on x, y and z because of facts a, b and c.”
A Designated Order… Or Not? Whistleblower 11099-13W v. C.I.R., Dkt. No. 11099-13W (here)
There was only one other designated order this week… or was there? What began as a somewhat tantalizing look at the interplay of the APA to whistleblower cases has turned to dust: the Tax Court vacated the order for reasons not particularly illuminated or illuminating (found here).