Justify the IRS’ Confusion
No, this is not a political rant; I’ve said it many times, this is a non-political blog. I grind no axes here. But today I hearken back to the National Taxpayer Advocate, Nina (“The Big O”) Olson, and her tale of woe, recounted in pertinent part, as the high-priced lawyers say, in my blogpost “Come Sit Down Beside Me And Hear My Sad Story”, 1/13/12.
Let me quote myself: “The Big O laments that Congress has starved IRS for funds; tweaked, tinkered, tortured and generally mucked IRC about so that IRS spends too much time explaining and generating forms and instructions, and trying to stop the fraudsters and gameplayers who are looking for the seams in IRS’ zone defense among these continual outbursts of unguided Congressional largesse.”
I had hoped that the First Time Home Buyer Tax Credit Second Iteration, known to the cognoscenti as FTHBTC2, had, like the Marxist state, withered away. Alas not, and here’s proof of what IRS had to deal with in that particular Congressional coruscation.
I respectfully direct the reader’s attention to Elizabeth H. Ratcliffe a.k.a. Elizabeth H. Hiatt, 2012 T. C. Memo. 349, filed 10/18/12. And this case is a debut for Special Trial Judge Daniel A. (“Yuda”) Guy; see my blogpost “Welcome Judge Guy”, 4/24/12.
Eliza married Ian and went to live in his house, which he owned before the marriage. Cf. our old friends Bob and Marianna Packard, stars of my blogpost “Old Tax Credits Never Die”, 11/6/12. Eliza claimed she had no ownership interest in the house, but when Ian refinanced the mortgage, Eliza signed aboard the Deed of Trust (what we hereabouts call a mortgage).
Marriage blows up in 2008, Eliza gets a divorce in September, 2009, and buys a new house for herself in October, 2009, but claims the FTHBTC2 for 2008, relying on the Section 36(g) look-back that allowed someone buying in 2009 to claim the 2008 version of the FTHBTC2.
IRS claims she co-owned Ian’s house per the Deed of Trust, and also couldn’t use the look-back because she was still married to Ian in 2008, so gives her a SNOD and an Appeals hearing.
Eliza hires an attorney (good move, Eliza!), who wows IRS and gets Eliza her $8K credit, with a lesson on the law of dower and rights of a surviving spouse in North Carolina thrown in which is why wives sign deeds of trust in North Carolina.
Eliza’s attorney wants $5K under Section 7430, the “wrestled and prevailed” statute.
No go, says Yuda. The magic date for determining whether IRS’ position was “substantially justified” was the date IRS issued the SNOD. Appeals never issued a NOD, because IRS timely and properly folded at the Appeal stage when Eliza’s lawyer trotted out the North Carolina statutes and precedents and Federal cases in support thereof.
OK, so Eliza prevailed, and she didn’t prolong the proceedings, and she and her attorney cooperated with IRS, but IRS was substantially justified before Eliza’s lawyer worked his magic.
“Respondent [IRS] maintains that (1) although the FTHBC was enacted in July 2008, by early 2011 the IRS was still in the process of finalizing FTHBC policy positions and coordinating those policies with IRS personnel across the country, and (2) during the period in question there was no meaningful body of caselaw interpreting section 36, particularly with regard to the proper application of the FTHBC provisions in cases involving various marital property rights under State law. Respondent avers that the facts in petitioner’s case, including her election to claim the credit in a taxable year in which she was married to Mr. Ratcliffe, and questions related to the nature of her interest in Mr. Ratcliffe’s residence, required coordination with the Commissioner’s National Office to ensure consistency and uniformity in the treatment of similarly situated taxpayers.” 2012 T. C. Memo. 349, at p. 15.
“Considering the complexity of the applicable statutory provisions, the facts underlying petitioner’s case, and the novel issues presented, we conclude that respondent’s position disallowing the credit was reasonable and represented a goodfaith effort to enforce the internal revenue laws.” 2012 T. C. Memo. 349, at p. 18.
“We reject petitioner’s assertion that respondent should have discovered the deed of trust and conceded that she was entitled to the FTHBC before issuing the notice of deficiency. Deductions and credits are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction or credit claimed. Although the record shows that petitioner was cooperative and responsive to the examining agent’s request for information, there is no indication that she offered independent corroboration of her assertion that she did not own an interest in Mr. Ratcliffe’s residence, nor did she offer to explain the genesis of the deed of trust or the nature of her interest in Mr. Ratcliffe’s residence before [the SO] raised the matter with [Eliza’s attorney] in her letter dated October 14, 2011.” 2012 T. C. Memo. 349, at p. 19.
And though IRS did publish guidance on its website that might have supported Eliza’s lawyer, “(W)e have reviewed the IRS articles and materials that petitioner cites and find that they are not controlling with regard to the finer points of law presented in her case.” 2012 T. C. Memo. 349, at p. 20.
So what’s a taxpayer to do when the IRS is as clueless as they are? More to come when the “fiscal cliff” is bridged, and we all have to tease out what the law will be.