Caleb Smith of the University of Minnesota brings us this week’s designated order blog post. The Nordberg case Professor Smith discuses was tried at the most recent Boston calendar where my students were watching the case with me. I told them that as a retired federal employee, I was 100% behind Mr. Nordberg and as a tax professor I was 100% sure he would lose. I do not often have that degree of certainty. Keith
Is It Enough That The Parties Agree There Is No Issue of Material Fact? Gage v. C.I.R., Dkt. # 23874-17 (here)
There have been no shortage of orders denying summary judgment to the IRS covered at PT (Judge Gustafson, as covered here, has been one of the leading proponents). What makes the order in Gage slightly different is that both parties move for summary judgment, and neither receive it.
As a matter of policy, the purpose of summary judgment is fairly straightforward: to preserve judicial resources and avoid needless trials when there really isn’t anything else needed for the Court to render a decision. Even so, as demonstrated in Gage, parties can’t simply agree to the applicability of summary judgment as a “shortcut” to an early decision.
Gage involves what appears to be a simple (or at least narrow) legal question: whether a particular $875,000 payment to the US government is deductible as a business expense. The payment arose from a lawsuit brought against the petitioner’s business by the U.S. government under the National Housing Act. The record in Gage appears to be fairly developed at the time of the summary judgment motions, and much, if not all, of the case appears to hinge on the nature of the resulting settlement payment. In a nutshell, if the payment at issue was a “fine or similar penalty” to the government then the payment is not deductible and the petitioner loses. See IRC 162(f) and Treas. Reg. 1.162-21. The case, therefore, is almost entirely an issue of the characterization of the payment.
In dismissing both motions for summary judgment, Judge Panuthos lists three large issues of “material fact” that he believes continue to be genuinely in dispute: “(1) the characterization and purpose of the $875,000 settlement payment made by petitioners to the government; (2) whether that $875,000 payment represented compensation to the government or double damages; and (3) if that $875,000 payment represents double damages, whether the parties to the settlement agreement intended the payment to compensate the government for its losses or to deter and punish defendants for their conduct.”
I’m not positive, however, that I agree with Judge Panuthos in describing these three outstanding issues as ones of “material fact.” The problem with characterization cases like this is the blurring/blending of issues of “fact” and issues of “law.” Is the first point Judge Panuthos lists (the “characterization and purpose of the $875,000 settlement payment”) really an issue of “material fact” or a matter of law? I would say the petitioner is arguing that the (undisputed) facts in the record necessarily lead to the characterization of the payment as compensatory damages. If the fact that the payment was compensatory damage is found, the law should apply in their favor. Full stop. Conversely, the IRS is arguing that those same (undisputed) facts necessarily lead to the characterization of the payment as a fine or penalty. If that fact is found the law should apply in their favor. Full stop. In other words, the parties are agreeing on the “facts” (the background of the settlement) but disagreeing on how they should be interpreted as “ultimate facts” leading necessarily to the legal outcome. One may wonder if a dispute on the “ultimate facts” isn’t the same as a dispute on the law as applied to the facts. If that were the case, this could be a good candidate for summary judgment: the Court would simply fulfill its role as arbiter of determining the side that was “entitled to a judgment as a matter of law.”
And yet, both summary judgment motions are denied. Why might this be?
In the end, I think the parties are arguing that there are enough undisputed facts in the record for the Court to reach a judgment as a matter of law and Special Trial Judge Panuthos is just saying, “No: the Court needs more.” It isn’t necessarily that there remains a disputed issue of material fact, but just that there aren’t enough facts in the record for either side to prevail. All Judge Panuthos has is the background facts of the transaction -but the characterization issue requires a lot more before anyone is “entitled to judgement as a matter of law.” I’d note that this is the case even though the burden is on the petitioner to show that they are entitled to the deduction. (See INDOPCO, Inc. v. C.I.R., 503 U.S. 79 (1992).) It would be a different case if it were being submitted fully stipulated under T.C. Rule 122 rather than summary judgment under T.C. Rule 121. The IRS can’t say “the petitioner hasn’t met their burden, so we are entitled to judgment” at the earlier stage, since the petitioner still could put evidence into the record. In that respect, even though this order denies the IRS summary judgment, I’d read this as a warning to petitioner: you probably won’t win unless you put a little more into the record.
All of which may all be my long-winded way of saying that blended issues of law and fact are generally bad candidates for summary judgment.
Another Characterization Issue: Is Your Underperforming Pension Really a Roth IRA? Nordberg v. C.I.R., Dkt. No. 1426-17 (here)
Procedurally, there isn’t much of interest to this order -a bench decision finding against the taxpayer on a novel legal argument. Further, there wasn’t really much suspense to the decision: the novel argument put forth by the taxpayer (that his government pension should be taxed the same as a Roth IRA) was pretty quickly dismissed by Judge Gustafson.
However, the case does provide one more addition to the list of judicial phrases that signal you’re going to lose, or at least going to lose in Tax Court. To wit: “The principle flaw in [the petitioner’s] argument is that there is no basis for it in the Code.” That is a pretty big flaw when arguing in Tax Court. And in that way Nordberg serves as a somewhat useful teaching tool: a reminder that the Tax Court is not a court of equity, and not all arguments are created equally.
Although doomed to fail, it is possible the pro-se petitioner had a greater legal background (or at least believed he did) than most: Mr. Nordberg was an employee of a member of the US House of Representatives for almost 20 years. But a little knowledge can be a dangerous thing, and the style of argument put forth by Mr. Nordberg demonstrates that.
Mr. Nordberg’s primary argument is based on “general principles” of the Code, rather than focusing on the specific Code sections at issue. With regards to retirement income, Mr. Nordberg has derived the following general principle from the Code: if your contributions to the retirement plan are deductible, you have an IRA with the interest and principal taxable on receipt. If your contributions to the retirement plan are non-deductible, you have a Roth IRA with neither the interest or the principal taxable on receipt.
Mr. Nordberg made non-deductible contributions to his pension so, he reasons, all of his pension should be taxed like a Roth IRA. To repeat Judge Gustafson, the problem with this argument is that it has no basis for it in the Code. A second problem, however, is that it also only looks at half of the contributions to the pension (conveniently, the non-deductible portion).
Mr. Nordberg had a government pension through the Civil Service Retirement System (CSRS). The terms of the pension were that Mr. Nordberg made mandatory after-tax contributions (somewhat similarly to a Roth IRA). However, the employer also matched these payments (which were effectively “pre-tax” to Mr. Nordberg). The Code and the court in Malbon v. U.S., 43 F.3d 466 (9th Cir. 1994), treat annuity payments from these arrangements as partially taxable and partially non-taxable. The non-taxable portion being only that amount which represents the post-tax contributions by the taxpayer (with that amount determined pro-rata based on life-expectancy tables). Everything that isn’t the taxpayer’s contribution (including interest) is taxable. As Judge Gustafson puts it, Malbon “resolves the issues in this case: Mr. Nordberg’s CSRS annuity payments are not excluded from taxable income. Only a portion of them are non-taxable.” In other words, the Code and case law conclusively determines that an annuity payment is taxed unlike either a Roth IRA or regular IRA. There is no “general principle” of tax law that will save you when Congress and the Courts have spoken otherwise.
Similarly, and as a closing point, arguing about general notions of fairness is unlikely to get you very far in Tax Court. One of the main concerns of Mr. Nordberg appeared to be both that his government pensions rate of return was less than a private Roth IRA may have been, and that he perceived the tax consequences to be worse. Without a hint of irony speaking to a long-time employee of a US House Representative, Judge Gustafson notes that the Court doesn’t have the “authority to depart from the law Congress has enacted and to instead devise rules of taxation based on felt fairness.” In other words, if you want fairness take it up with your former boss.
Odds and Ends: Failing to Show Up
The remaining four designated orders concerned taxpayers that failed to show up, literally or figuratively, for their case. On the literal side, you have Nuss v. C.I.R., Dkt. No. 22655-17S (here): a bench opinion by Judge Carluzzo against a petitioner that didn’t show up for his own trial. Similarly, Judge Gustafson dismissed the petitioners case in Hochschild v. C.I.R. (here) for failure to properly prosecute when the taxpayer failed to show up to trial or otherwise respond to numerous inquiries about her case. Moving to the more figurative side of failing to show up, you have McHenry Jr. v. C.I.R. (here) granting the IRS summary judgment in a CDP case where the petitioner didn’t provide IRS appeals any financial information, but insisted they should be placed in Currently Not Collectible status.
Lastly, and decidedly on the figurative side of the failing-to-show-up spectrum, you have Tunsill v. C.I.R. (here), which involves the increasingly popular motion of dismissing for failure to state a claim on which relief can be granted. The petitioner, perhaps dazzled by the claims of hobbyist tax “lawyers” found online, goes out of their way to make clear that they are not, in any real way, showing up for their tax court case. Generally when a taxpayer feels the need to state, in their petition, that they are “making a special appearance before the court” (perhaps intending to demonstrate that they are not consenting to jurisdiction by sending a petition?) it actually means they aren’t really showing up at all. This case does not appear to be an exception, and Judge Leyden grants the dismissal.
The petition reads slightly unlike most tax protestor arguments, but maintains that same critical misunderstanding of what a Notice of Deficiency (and indeed, tax assessment) entails. The taxpayer’s words in their petition illustrates the confusion better than I could hope to: “In conclusion, [the taxpayer] is being accused of a commercial crime (offense against revenue laws). Pursuant to law, the person making the claim must register their claim to make a proper assessment, so that there can be a demand for performance. Without a demand for performance, there can be no neglect. Without neglect, there can be no crime. Without a crime, there can be no court proceeding.”
Tax law and tax procedure is confusing, even for those that work in the field. That the petitioner in this case referenced things like a phantom Form 1099 OID, the UCC and the 4th and 5th Amendments leads me to believe that he may have been the victim of some dubious online research. I commend the Tax Court for reaching out to the taxpayer and IRS with a conference call before moving forward with the dismissal. Psychologically it is much easier to believe things that benefit you: like the tax protestor that recently assured me that he does not need to file or pay taxes because of the “privacy act.” I only hope Mr. Tunsill’s dismissed case will be the wake-up call to seek qualified professional advice rather than a signal to him that the Court systems are a part of the IRS conspiracy.