This is the second installment of a post I began yesterday on Rand and the benefit of requesting the Small Tax Case procedure (S procedure) if your client has the penalty issue raised in that case. I finished yesterday’s post talking about the effort by the IRS to remove cases from the S Procedure in Lantz after the Tax Court struck down a regulation impacting innocent spouse cases and about the case and legislative history of this issue.
I looked unsuccessfully for a reported case resulting from CC-2010-011, the Chief Counsel Notice in which it told its field attorneys to file motions to remove the S procedure if taxpayers with the Lantz issue had requested it. I blogged in November about the Tax Court’s electronic access and complained about it because I want more access than is current available. Today, I write to praise a really nice feature of the Tax Court’s electronic system, which is the ability to search for orders. This is a remarkable feature of the Tax Court electronic system unlike search capabilities in other electronic court databases and deserves high praise. It can be accessed from the home page of the Tax Court web site. So, I went there looking for orders in Lantz cases where the Government sought to remove the Small Tax Case status in cases with the 6015(f) issue because of CC-2010-011.
The search feature for orders was adopted by the Tax Court in June 2011 about six weeks before the IRS conceded the Lantz issue. During the time period when the Court made the orders available in this searchable format and the time of the concession, I could not find any orders addressing the specific issue of removal based on a desire by the IRS for a chance to go to an appellate court. Others may be able to fill this gap in my research with personal case stories. Based on my research, I do not know what the Tax Court will do if the IRS decides to try to remove the S procedure in Rand cases similar to the decision it made to remove the S procedure in the Lantz cases.
Assuming that the IRS is unable to persuade the Tax Court to remove the S procedure in Rand type cases in order to preserve the issue for appeal, any taxpayer with this issue who makes the election and whose case is decided prior to a circuit decision in the circuit to which their case would be appealed, should succeed in having the penalty removed. I strongly recommend reviewing any Tax Court cases already pending which contain the Rand issue to make consider whether a request to proceed under the S procedure should be made.
Current status of Rand and similar cases in the system
Carl Smith has alerted me to other cases pending or previously decided that have the Rand issue. In the Rand case the parties have filed an agreed Rule 155 calculation. The IRS has not made any public pronunciations about its view of the Tax Court’s decision and may not determine for some time whether it will acquiesce in that decision.
Some cases in the Tax Court involving the Rand issue have been resolved favorably to the taxpayer applying Rand. See Li v Commissioner, T.C. Summary Opinion 2013-97. One case was decided unfavorably to the taxpayer shortly before the publication of Rand and is now on appeal to the 9th Circuit. Here is a run down of the situation according to Carl:
I am representing, pro bono, a couple named Morales who had the 6662 penalty imposed on their disallowed FTHBC by Judge Kroupa in December 2012 (before the Rand opinion was issued and when the couple was pro se) without any discussion of whether there was an “underpayment”. See Morales v. Commissioner, T.C. Memo. 2012-341. I then entered an appearance for them after reading the opinion and moved for reconsideration on the ground that the judge should have imposed on the IRS the burden under 7491(c) of showing there was an “underpayment”, even though the taxpayers — like every pro se taxpayer — would never have thought to specifically have raised the lack of “underpayment” issue. In August 2013 (also before the Rand opinion was issued), Judge Kroupa refused the motion for reconsideration — saying that I was raising a newly-minted issue. See Morales v. Commissioner, T.C. Memo. 2013-192. Last month, I appealed the Morales cases to the 9th Cir., where my opening brief is due on March 3 and probably my reply brief will be due in mid-April — still before the IRS decides on what to do about Rand. The DOJ attorney in my case has said that because he has no instructions from the IRS on what to do about Rand penalties, he plans to oppose my effort to remove the penalties — both on the ground that Rand was wrongly decided and on the ground that my clients waived the right to have the IRS have to prove an “underpayment” by not specifically raising the issue in their pleadings. I just wanted to keep you updated on developments in the Morales cases, as they may result in the litigation of the Rand issue in the 9th Cir. Rand itself is appealable to the 7th Cir.
In Weisinger v. Commissioner, T.C. Docket No. 15555-11S, Judge Gale on Nov. 22, 2103 dismissed a case for failure to properly prosecute pursuant to a motion made by the IRS in Feb. 2013. In March 2013, the judge ordered the taxpayer to respond (she didn’t) and ordered the IRS to show there was an “underpayment” — this indicating that Judge Gale knew as early as Feb. 2013 that the Rand issue was before the Court. In the Nov. 22 order, the judge cited Rand and sua sponte reduced the 6662 penalty to the extent that it violated Rand. See https://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=6149897.
In Faecher v. Commissioner, T.C. Docket No. 16049-12 (a regular case that could be an appellate vehicle for a Rand issue in the D.C. Cir., since I think the taxpayer was not a US resident), the taxpayer and New York counsel attorneys submitted a stipulated decision agreeing to deficiencies and 6662 penalties to Judge Gale at his September 30, 2013 NY calendar. The Judge, sua sponte, sat on the stipulated decision and did not enter it. Then, on Nov. 21, 2013 (a few days after Rand was decided), Judge Gale issued an order to the IRS to either concede the 6662 penalty or show cause why there was an “underpayment” on which the penalty could apply in light of the court’s holding in Rand. See https://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=6149886. On Jan. 2, 2014, the IRS filed a response to the Judge’s order. The number of pages in the IRS response, seven, suggests that the IRS is opposing rather than conceding. This response might be the first indication of whether the IRS will fight Rand in the appellate courts — though the IRS might just give up the penalty in this case so the court doesn’t formally rule against it.
There were 3 S case opinion issued in the ’00s in which three separate STJs, each, apparently sua sponte, raised the Rand issue and decided it against the IRS. In the first two of these cases, the Tax Court no longer has the petition. I got from the Tax Court a copy of the petition in the third case, and the taxpayer (no surprise) did not raise the Rand issue. The opinions are: Solomon v. Commissioner, Quintero v. Commissioner, and Akhter v. Commissioner.
Removal of Penalty in Frozen Refund cases
Even before the Rand decision, the IRS had announced that it was conceding the penalty issue in these type cases where the IRS froze the refund. So, while it continued to litigate that refundable credit cases resulted in an underpayment of tax in those situations in which the refund was issued to taxpayers, it acknowledged that when no refund went out to the taxpayers, no underpayment existed upon which it could base the accuracy related penalty. The National Taxpayer Advocate has been tracking and commenting on this issue for some time and pushed for the IRS to identify in its system the taxpayers penalized in this situation and abate the penalties for the cases in which it conceded the issue. Because a high percentage of refundable credit cases involve low income taxpayers, a low percentage of cases result in litigation and most default into assessment and a low percentage of low income taxpayers would know to track this issue, affirmative action by the IRS to remove the penalty in this situation is necessary to keep many individuals from having penalties which were automatically assessed by the IRS based on a misguided view of the law from continuing to haunt these taxpayers. The National Taxpayer Advocate’s recent annual report devotes a sizeable section to this issue. See http://www.taxpayeradvocate.irs.gov/userfiles/file/2013FullReport/ACCURACY-RELATED-PENALTIES-The-IRS-Assessed-Penalties-Improperly%2C-Refused-to-Abate-Them%2C-and-Still-Assesses-Penalties-Automatically.pdf at page 187.
If the IRS decides to concede the Rand case, many of the most vulnerable taxpayers will have this penalty assessed against them and probably not know that they could move to have it abated. One can only hope that the IRS has begun the programming to identify them in order to abate their penalties without request.