The hood in this blogpost being Lincoln Center on the Upper West Side of the Minor US Outlying Island off the Coast of North America, whereon I reside. The guys are student members the Federal Tax Clinic at the Fordham Law School, under the able guidance of Prof. Elizabeth (“Prof Liz”) Maresca.
And I’m giving the guys and Prof. Liz a shout-out, and a Taishoiff “Good Job,” for John C. Trimmer and Susan Trimmer, 2017 T. C. 14, filed 4/20/17. The guys manage to cop a win from ex-Ch J. Michael B. (“Iron Mike”) Thornton, no small feat even for battle-hardened TC vets.
John C. was a NYC police officer who retired to take a job on Wall Street. No, not as a hedge-fund manager or dodge-flogger; John C. was going to be a security guard. But the job fell through and John C. fell into serious depression.
There’s beaucoup evidence of John C.’s disorientation and sad condition, which I won’t rehash here. The guys built a good record, notwithstanding IRS’ beat-down on their expert, of which more hereinafter.
John C. got a couple draws (hi, Judge Holmes) from his pension, let the checks sit on his dresser for a month, deposited them in his checking account, and was late getting the family’s 1040 together. This was usually his job, and Susan thought he was doing it.
When the family’s trusty preparer saw the 1099-Rs with Box 1 (early, no known exception) checked, he told John C. to get the cash into an IRA. John C. did, but IRS hits him with deficiency and 10% Section 72(t) chop.
John C. sent a pathetic letter describing his former and current troubles. Three days after getting the letter, IRS Exam bounced John’s plea, without considering hardship waivers.
IRS, being all heart, argues Exam hasn’t authority to grant hardship waivers, and anyway Tax Court hasn’t jurisdiction to review denials of hardship waivers.
“Respondent [IRS] contends that the hardship waiver provision of section 402(c)(3)(B) is ‘inapplicable’ because Mr. Trimmer failed to apply for relief pursuant to the terms of Rev. Proc. 2003-16, 2003-1 C.B. 359. Respondent also contends that there has been no final administrative determination denying petitioners relief, and that even if there had been, it would not be subject to judicial review. Furthermore, respondent contends, there was no abuse of discretion in denying petitioners the requested waiver, because petitioners have failed to establish that Mr. Trimmer was unable to complete the rollovers within 60 days of the two distributions.” 148 T. C. 14, at p. 12, footnote omitted, but you gotta read this.
“Both before and after trial the Court encouraged the parties to explore further administrative consideration of petitioners’ claim for a hardship waiver, but respondent declined.” 148 T. C. 14, at p. 12, footnote 4.
Word to IRS counsel: When ex-Ch J Iron Mike, not conspicuously friendly to petitioners, tells you to play nice, don’t play the clown. Prof Liz and her guys may just be going for Section 7430 legals, even if they don’t get them. More about that later.
We all know that Rev. Proc. 2003-4, 2003-1 C.B. 123 provides the means for obtaining the waiver, and Rev Proc 2003-8, 2003-1 C.B. 236 sets out the user fee for getting one (if you can find it; the thing is nearly incomprehensible. How a depressed retired patrolman is supposed to find this out is nowhere stated).
Well, John C. didn’t, so IRS says he’s out.
Moreover, IRS says Rev Proc 2016-47, 2016-37 I.R.B., which allows hardship consideration during Exam wasn’t in effect when John C. was under examination, so it doesn’t apply.
Ex-Ch J Iron Mike blows IRS away.
“We are not persuaded. Nothing in Rev. Proc. 2003-16, supra, purports to limit or constrain an IRS examiner’s ability to consider a hardship waiver during the course of an examination. Certainly no such constraint is found in section 402(c)(3)(B). Moreover, respondent’s position appears to be at odds with Internal Revenue Manual (IRM) pt. 22.214.171.124(2) (Jan. 1, 2006), which states: ‘Examiners are given the authority to recommend the proper disposition of all identified issues, as well as any issues raised by the taxpayer.’
“Consequently, the purpose and effect of the 2016 modification of Rev. Proc. 2003-16, supra, we believe, was not to create some new authority that had not previously existed for IRS examiners to consider hardship waivers during examinations, but rather to make clear the existence of that authority. This conclusion is reinforced by careful consideration of the substantive coordination between the two revenue procedures.” 148 T. C. 14, at pp. 14-15. (Emphasis by the Court.)(Footnote omitted, but ex-Ch J Iron Mike asked the parties to brief the impact of Rev Proc 2016-47).
The two Rev Procs are coordinated very carefully, the old self-certification procedure being modified, while the examiner’s (auditor’s) ability to consider any request remains the same.
“Furthermore, the examining agent’s authority to consider a hardship waiver during the examination strongly implies, we believe, that the taxpayer may request the waiver. It would be anomalous if the examining agent could consider the relief only if the taxpayer had not requested it.” 148 T. C. 14, at p. 16.
Only three (count ‘em, three) days after John C.’s pitiable plea, Exam responded with an incomplete legal analysis.
IRS has some cases where failure to apply for hardship waiver for IRA rollovers sank the taxpayer (John C.’s miscue arose from a pension plan, not an IRA). I blogged more than one such; by way of illustration of the foregoing, as my Grey Goose Gibson-gulping high-priced colleagues say, see my blogpost “The Case of the Reluctant Trustee,” 6/6/14. But in none thereof did the petitioner seek the waiver at Exam, by PLR per the Rev Proc, or anywhere else. John C did.
IRS finally claims that the three-day rejection letter said John C could write and tell them if he disagreed, and he didn’t so either there was no final determination or he waived objection.
Ex-Ch J Iron Mike treats that argument with more consideration than it deserves.
“Considering that Mr. Trimmer’s letter had resulted in the IRS’ summarily denying his request on legal grounds that seemed to admit of no possibility of administrative relief, without even acknowledging the specific facts and circumstances spelled out in Mr. Trimmer’s letter, the invitation for petitioners to respond yet again if they disagreed strikes us as an empty gesture or mere boilerplate.” 148 T. C. 14, at p. 19.
As for arguing Tax Court has no jurisdiction to consider the hardship waiver, ex-Ch J Iron Mike blows them off with a laundry list of cases where a SNOD and petition put everything in play.
IRS challenges the guys’ expert witness on credentials and local law. Ex-Ch J Iron Mike, truly in his element, tears up both statutes, regs and dictionary to flatten that attack. True, the expert’s report was eight days beyond the thirty-day deadline, but IRS’ counsel gave the expert a good going-over on cross, so no prejudice.
And it would be against “equity and good conscience” to deny John C the waiver.
Now what may be the saver, when Prof Liz and the guys go for legals. John C failed to disclose $40 in dividends on stock he claimed he bought for his son’s education, but can’t show any proof. So maybe so IRS was partly justified.