Attorney-at-Law

WHO WOULD THESE BURDENS BEAR

In Uncategorized on 06/12/2015 at 05:45

Better Have Evidence and Reasons

As my elder granddaughter has been heard to remark, “because reasons.”

Two out of Tax Court on June 11, 2015, to show that picking up the burden of proof (or showing legally acceptable bases for action) can be more than IRS (or Appeals) can handle.

First up, Denise Celeste McMillan, 2015 T. C. Memo. 109, filed 6/11/15. DC is a horsey type, dressage being her thing, but doesn’t make any money at it.

IRS originally sticks DC with a $457 deficiency based on a retirement account distribution DC took. DC petitions, but later concedes. Meanwhile, IRS unloads $6700 worth of additional deficiency, some of it based on her horsey losses and the rest on her legal fight with her HOA.

But IRS raises the increased deficiency via its answer to DC’s petition. And thereby hangs the tale.

By upping the ante by way of its answer, IRS takes up the burden of proof.

DC spent over $26K tussling with her HOA over misbehaving dogs, and defending herself against criminal charges in connection therewith. And she got off cheap; I’ve seen such fights cost a lot more, even without the criminal charges.

Judge Halpern gives DC half the legals. DC claims 50% home office use of her condo unit (DC is running an IT business that does make money), and IRS didn’t challenge that. And the dog wars did impact DC’s use of the condo unit both for living and working.

IRS wins on the horse, but it’s a squeaker. IRS bested DC in prior years, but can’t use collateral estoppel, as the burden of proof has shifted from DC to IRS. Failure of one side’s proof in a prior case doesn’t give the other side a win in a subsequent case.

I won’t weary you (or me) with Judge Halpern’s trudge through the Section 183 hobby loss factors. Most are neutral, because IRS can’t tip the scales with the evidence it has. Judge Halpern seems to go with DC’s substantial income from her IT business coupled with how much she loves horses. See my blogpost “Too Much Fun, “ 12/31/13.

Next is Quality Software Systems, Inc, 2015 T. C. Memo. 107, filed 6/11/15.

QSS had an OIC that it potentially breached a few times, and finally breached to the extent of a late Form 941 filing, and late payment of a $344 penalty, in the last year of its five-year term.

The OIC was based on collectibility, and IRS took a $208K hit. The deal was that QSS remained current for five years on all 941 filings and payments.

Except QSS didn’t. Judge Halpern has a table showing various QSS miscues over the years, that earn QSS various types of  “default letters”.

Judge Halpern expatiates: “With respect to OICs, the IRS uses the term in two different ways: (1) as modified by the adjective ‘potential’, to signify that a taxpayer is not in compliance with his obligations under an accepted OIC but that the IRS is not ready to terminate the agreement, see, e.g., Internal Revenue Manual (IRM) pt. 5.8.9.3(1)(b) (Jan. 1, 2015), and (2) to signify the termination of the agreement, see, e.g., id. pt. 5.8.9-4 (Sept. 23, 2008) (Default Letter).” 2015 T. C. Memo. 107, at p. 4, footnote 1.

Finally, IRS pulls the plug on QSS’s OIC, and hits QSS with a NFTL for the $208K.

QSS claims it didn’t get the default letter that triggers the NFTL. QSS later comes clean with the Form 941 it missed and the $344 penalty associated therewith, after the NFTL and their CDP request.

The only issue at the CDP was whether nonfiling one quarter and late paying a $344 penalty should torpedo the OIC.

The SO found that all technical requirements were met, but thought it excessive to cancel the OIC just because of the one quarter and the penalty.

QSS says it’s an abuse of discretion to dump the OIC for one little misstep.

IRS says they and Appeals have a consistent policy that once an OIC is breached, they won’t reinstate. Even though they could as a matter of contract law, they don’t have to.

And the OIC says it can be terminated without notice, so whether QSS got notice is immaterial.

QSS breached four times before, and got qualified default letters. Five times is enough.

Judge Halpern agrees. IRS was within its rights to terminate the OIC.

OK, but what about reinstatement?

“The notice of determination states only: ‘Your request for reinstatement of your offer in compromise has been denied. It was determined that you did not comply with the compliance terms and provisions of Form 656, Offer in Compromise.’ The [SO] attachment to the notice offers no further explanation. Mr. [SO] ‘s case activity record, part of the administrative file, indicates his sympathy for reinstating the agreement. …he recorded: ‘I agree that a reinstatement of the TP’s offer is a viable resolution’. Shortly thereafter, on the basis of a discussion with someone in the COIC Unit, he recorded his conclusion that, because the agreement had been terminated, there was no procedural basis for reinstatement.” 2015 T. C. Memo. 107, at p. 18.

But the SO really wasn’t happy about dumping the OIC. “It had been terminated during the last year of petitioner’s five-year compliance term because petitioner had been assessed a Federal tax deposit penalty of $344, which it had paid, and it had not timely filed Form 941, for one quarter, which it had subsequently filed. He recorded his concerns that those breaches of the agreement were de minimis and had been rectified. He worried that, for those reasons, the Tax Court would find that Appeals had abused its discretion in not reinstating the agreement. He concluded his [case activity summary]… entry with a rhetorical question (which he answered): ‘Essentially, would it be fair to reinstate the TP’s offer? In this instance I believe it would be.’ On further consultation with an Appeals colleague, he concluded that reinstating the agreement was not an option since the agreement had properly been terminated. The determination followed.” 2015 T. C. Memo. 107, at p. 19.

You can see where this is going.

“While there may be good reason for Appeals’ blanket rejection of the reinstatement of OIC agreements in cases of breach, we cannot tell that from the record or from respondent’s argument. It is not even clear such a policy exists despite Mr. [SO]’s determination and respondent’s contentions on brief. Cf. Trout v. Commissioner, 131 T.C. at 255 (‘The Appeals officer understood * * * that he had the discretion to excuse the breach of the express condition and reinstate the OIC. He chose not to.’).

“If such a policy does exist, it is not readily apparent what reasons or principles justify the lack of an exception to reinstatement in all circumstances of breach, especially given the individualized analysis afforded the initial termination decisions of breached OIC agreements. See, e.g., IRM pt. 5.8.9.3 (Jan. 1, 2015) (procedures for handling breached but not yet terminated OIC agreements, referred to as ‘Potential Default Cases’); supra pp. 4-5 (petitioner breached several times yet respondent did not terminate the agreement). And if there are no reasons or principles justifying the policy, we point out that one definition of ‘arbitrary’ is, ‘determined by chance, whim, or impulse, and not by necessity, reason, or principle’. The American Heritage Dictionary of the English Language 91 (5th ed. 2011). By having discretion to reinstate OIC agreements, but choosing never to exercise that discretion, without providing any sort of justification, Appeals may be abusing its discretion. In this instance, Appeals has excused itself from stating facts and reasons that respond to the evidence and arguments of petitioner and has deprived us of the opportunity for thoughtful judicial review.” 2015 T. C. Memo. 107, at pp. 20-21.

So, Appeals, it’s back to you. Tell us why you have an inflexible rule, or why this case deserves the treatment it got.

Oh, by the way, didn’t the SO talk to COIC? Isn’t that a prohibited communication per Rev. Proc. 2000-43, sec. 3, Q&A-6, 2000-2 C.B. 404, 406, amplified, modified, and superseded by Rev. Proc. 2012-18, sec. 2.03(10)(a), 2012-10 I.R.B. 455, 460?

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