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A Tale of Two (Types of) Taxpayers: Designated Orders May 20 – 24

Posted on July 23, 2019

I always try to look for a theme running through the disparate designated orders I cover. Sometimes one readily presents itself, as it did the penultimate week of May: broadly speaking, the different ways that well-represented and unrepresented taxpayers use (one may uncharitably say, waste) the Court’s time. The four designated orders of the week give a perfect glimpse into the differing tactics and consequences that well-heeled, fully-lawyered taxpayers face compared to the more common “tax protestors.” We’ll begin with examining the latter.

(Potential) Consequences to Tax Protestor Arguments: Sanctions and Penalties

Procedurally, there isn’t too much novel going on in the two tax protestor cases. Both are collection due process cases where the taxpayer isn’t arguing for a collection alternative, but just repeating tax protestor rhetoric about taxes being illegal or immoral in some sense.

As usual, the Court has given both parties more than a few opportunities to get things right (Judge Leyden even went so far as to have her case once remanded to Appeals to confirm penalty approval under IRC § 6751). Also as usual, there are some moments of levity in the Court’s recounting of the reasons why the petitioners believe they shouldn’t have to pay taxes. A few of the highlights:

From the Harris v. Commissioner order, a “sovereign citizen” style protestor:

  1. No taxes owed because the IRS is actually a trust domiciled in Puerto Rico
  2. No taxes owed because petitioner “revoked” his “election” to be a U.S. Citizen taxpayer
  3. No taxes because nothing in the Internal Revenue Code applies to “natural persons,” (unlike, presumably, the rest of us fakers).

From the Cotter v. Commissioner order, a “religious duty not to pay tax” style protestor who stopped paying taxes in 2009 (I wonder what led her to believe the government became evil at that point…):

  1. I’ll pay taxes (gifts from “The People” for God’s glory) but I won’t pay “tribute money to extend The Devil’s Kingdom on earth”
  2. I can’t pay taxes because “I cannot give God’s money for foolish, wicked, wasteful evil practices.”

Ok. So a lot of nonsense from both pro se parties. The Court and the IRS’s time have been sufficiently wasted. And for the petitioners there are consequences to these actions, though the consequences are procedurally distinct.

For Mrs. Cotter, the consequence is a penalty of $5000 because her reason for requesting the CDP hearing was designated a frivolous position by the IRS under Notice 2008-14. It therefore meets the rules of a “frivolous submission” under IRC § 6702(b).

Mrs. Cotter only owed $348 going into the CDP hearing: she now owes over 14 times that because of the reasons she put forward for not having to pay taxes (even more mind-boggling, since she made a payment of $1,826 with the original return). These are real-life costs for conveniently reading “render unto Caesar” with an addendum of “unless you don’t like Caesar.”

For Mr. Harris, there are no IRC § 6702 penalties because his original CDP request actually specified potentially legitimate reasons for the hearing: in particular, that he never received a notice of deficiency. Rather, it is all of Mr. Harris’s behavior once he is before the Court that leads to a penalty on IRS counsel’s motion under IRC § 6673. Judge Halpern grants the motion and awards a penalty of $15,000. Ouch.

Of course, the Court doesn’t just issue $15,000 penalties to pro se taxpayers for the fun of it. Mr. Harris has been warned numerous times by the Court, resulting in two previous Court decisions (here and here), and is a serial non-filer. The Court has previously found that Mr. Harris has “attempted to turn the IRS and this Court into a mockery for his shopworn tax-protestor rhetoric.” It is unclear why Mr. Harris continues to make these obviously ineffective arguments (he is apparently a West Point graduate, so one may think he would know better) but if it is a hobby, it is fast becoming an expensive one.

Potential Consequences to Hardball Practices: Losing the Court’s Favor: Cross Refined Coal, LLC v. C.I.R., Dkt. # 19502-17

From unrepresented taxpayers we move to very-lucratively represented taxpayers with eight (!!!) attorneys on the case from both Mayer-Brown and Skadden. The Court has only slightly more patience for the positions and use of time by lawyers in this case than that of the unrepresented taxpayers.

The Cross Refined Coal case actually provided two designated orders the week of May 20th. Both resulted from motions made by the petitioner: a motion for discovery (here) and a motion to strike (here). Both also resulted in, shall we say, stern language from Judge Gustafson almost entirely denying the motions. We will begin with the motion to compel discovery to see why Judge Gustafson was not impressed.

Usually when I see the Court denying a motion to compel discovery it is because the parties haven’t exhausted informal discovery before asking the court to step in (see Rule70(a)). Here, however, the issue is not with the procedure, but with the contents of the discovery request -I too was a little baffled by what the taxpayer was hoping to get out of the documents.

The case revolves around what I can only imagine to be immensely valuable “refined coal” tax-credits claimed by the taxpayer but disallowed by the IRS for 2011 and 2012. Apart from the aforementioned stature and number of attorneys on this case, one may surmise the dollars at issue based on the amount of IRS attention the issue has received. In 2017, the IRS issued a Technical Advice Memorandum (TAM 201729020) that explained why the IRS was (soon thereafter) going to disallow the credits in a Notice of Final Partnership Administrative Adjustment. A year later, the IRS issued a Chief Counsel Memorandum (CCM AM2018-002) that provided further explanation and analysis for analyzing the rather complex transactions at hand, providing that for other taxpayers (i.e. not Cross Coal) with other different facts, the credits may be allowed. It is the TAM and CCM that is at the heart of this discovery dispute.

Petitioner wants basically everything that the IRS used to reach its conclusions in the CCM and TAM, going so far as proposing to conduct a deposition of an IRS designee concerning the CCM meaning and terms. They also served admissions regarding the conclusions in the TAM and CCM, with questions about “what Congress intended” in enacting the statute at play, IRC § 45(e).

Completely devoid of any understanding of IRC § 45(e), I still couldn’t help but feel like all of the requested information focusing on the genesis and reasoning of the CCM was largely irrelevant to the Tax Court case at hand. Judge Gustafson, apparently, felt that way as well, and describes his consternation this way:

“The court will not adjudicate the correctness of the CCM. […] If the CCM was factually unsupported and legally without merit, that would not help Cross; and if instead the CCM was factually impeccable and legally brilliant, that fact would not help the Commissioner. Consequently, Cross’s efforts in discovery to learn more about the background of the CCM are misdirected.”

Because the taxpayer is represented by such sophisticated counsel, I found myself second-guessing my original impulse that this was obviously a flawed discovery request. I thought something I wasn’t seeing must be going on. What was lurking in the background, it appears, was a simultaneous FOIA dispute. Since the taxpayer is already running into roadblocks with FOIA, wouldn’t it just be more efficient to have the Tax Court fix the issue now, rather than wait for further litigation in the FOIA suit?

Judge Gustafson is not amenable to the proposal of taking work away from other (proper) court venues, and saves his most critical language for the idea: “today we must decline to overlook the palpable irrelevance of the requests at issue and must decline to become, in effect, a proxy for a district court adjudicating a FOIA dispute (in which context relevance is not an issue). We will not use the resources and authority of the Tax Court to compel disclosures extraneous to our proper business.”

And so the motion to compel is not surprisingly denied.

If one feels some frustration from Judge Gustafson at the use of the court (and parties) time in that order, it is amplified in a second order issued two days later on the same docket. This time the order concerns the petitioner’s motion to strike, and this time it is frustration with the uncharitable positions the petitioner is taking.

Again, this circles around discovery. The parties were originally supposed to serve requests for documents no later than January 30, 2019. As some may recall, there was a government shutdown from December 22, 2018 through January 25, 2019. Shortly after the month-long government shutdown hit, but after the January 30 deadline, the IRS requested a continuance of the case and all pretrial deadlines. The Tax Court said, effectively, “how about you two work together to adjust your pretrial schedule, recognizing that it isn’t the IRS’s fault they were locked out of the building?”

But the parties couldn’t come to an agreement: petitioners maintained that document requests made by IRS a few weeks after the shutdown were not timely, and they weren’t budging. This led to some acrimony and motion practice between the parties, with the IRS arguing that petitioners were taking a “hardline” approach and questioning, among other things, their good faith in the process.

Which brings us to the actual motion to strike.

Petitioners appeared offended by the IRS’s characterization of the issue, and note that they have always reserved their timeliness objection. Judge Gustafson agrees that the timeliness objection has been reserved, but beyond that asks “is there really any reason to file a motion to strike on those grounds?” In Judge Gustafson’s words, “[w]e think that the pending motion to strike was not a good expenditure of petitioner’s counsel’s time and that it required from the Court attention that would have been better spent on the remaining motions to compel.”


But if that doesn’t hurt enough, Judge Gustafson also lets drop that a loss on the untimeliness objection is likely coming down the pike. Sometimes the fine line of being a zealous advocate and playing hardball comes with consequences -perhaps, of losing some favor with the Judge.

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