T he T ax C ourt : A V iew F rom the B ench

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1 n s t i t u t e I N Y C L A - C L E T he T ax C ourt : A V iew F rom the B ench Prepared in connection with a Continuing Legal Education course presented at New York County Lawyers Association, 14 Vesey Street, New York, NY presented on Monday, September 23, S p ecial G u e s t S p ea k e r : Hon. John O. Colvin, Chief Judge, U.S. Tax Court; Monica Koch, IRS Counsel M o d e r at o r : Frank Agostino, Agostino & Associates, PC 2 TRANSITIONAL & NON-TRANSITIONAL MCLE CREDITS: This course has been approved in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 2 Transitional & Non-Transitional credit hours: 1 Ethics; 1 Skills This program has been approved by the Board of Continuing Legal Education of the Supreme Court of New Jersey for 2 hours of total CLE credit. Of these, 1 qualify as hours of credit for Ethics/Professionalism, and 0 qualify as hours of credit toward certification in civil trial law, criminal trial law, workers compensation law and/or matrimonial law.

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3 Information Regarding CLE Credits and Certification The Tax Court: A View from the Bench September 23, 2013; 6:00 PM to 8:00 PM The New York State CLE Board Regulations require all accredited CLE providers to provide documentation that CLE course attendees are, in fact, present during the course. Please review the following NYCLA rules for MCLE credit allocation and certificate distribution. i. You must sign-in and note the time of arrival to receive your course materials and receive MCLE credit. The time will be verified by the Program Assistant. ii. iii. iv. You will receive your MCLE certificate as you exit the room at the end of the course. The certificates will bear your name and will be arranged in alphabetical order on the tables directly outside the auditorium. If you arrive after the course has begun, you must sign-in and note the time of your arrival. The time will be verified by the Program Assistant. If it has been determined that you will still receive educational value by attending a portion of the program, you will receive a pro-rated CLE certificate. Please note: We can only certify MCLE credit for the actual time you are in attendance. If you leave before the end of the course, you must sign-out and enter the time you are leaving. The time will be verified by the Program Assistant. Again, if it has been determined that you received educational value from attending a portion of the program, your CLE credits will be pro-rated and the certificate will be mailed to you within one week. v. If you leave early and do not sign out, we will assume that you left at the midpoint of the course. If it has been determined that you received educational value from the portion of the program you attended, we will pro-rate the credits accordingly, unless you can provide verification of course completion. Your certificate will be mailed to you within one week. Thank you for choosing NYCLA as your CLE provider!

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5 New York County Lawyers Association Continuing Legal Education Institute 14 Vesey Street, New York, N.Y (212) The Tax Court: A View from the Bench September 23, :00 PM-8:00 PM AGENDA Moderator: Faculty: Frank Agostino, Agostino & Associates PC Hon. John O. Colvin, Chief Judge, U.S. Tax Court Monica Koch, IRS Counsel 5:30 PM 6:00 PM Registration 6:00 PM 8:00 PM Introductions and Discussion **** Reception to follow immediately after the program

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7 A View From the Bench The Trial of the Tax Court Case and Ethical Considerations September 23, Tax Court Jurisdiction 2

8 Common Notices Which Are Predicates to US Tax Court Jurisdiction Notice of deficiency - Before the IRS can assess and collect certain types of taxes (e.g., income tax, estate and gift tax), a notice of deficiency must be issued to the taxpayer or a notice of liability to a transferee. If a notice of deficiency is issued, the recipients have the right, within specified time limits, to litigate the correctness of the deficiency, or the extent of transferee liability in the Tax Court without first paying the tax. IRC 6213(a) Notice of Determination - The Tax Court has jurisdiction under IRC 6330(d)(1) with respect to a timely filed petition disputing a valid notice of determination issued by an Appeals officer. See Lunsford v. CIR, 117 T.C. 159 (2001) Final Notice of Determination with Respect to IRC 6015 relief. IRC U.S. Tax Court Petition 4

9 Petition Filing Fee The Tax Court recently simplified the Application for Waiving of Filing Fee so that it is easier to fill out. General Deficiency or Liability Action Should conform to Form 1 shown in Appendix I of the Tax Court Rules, and Shall comply with the requirements of the Rules relating to Pleadings. 5 Content of Petition in Deficiency or Liability Action Individual Petitioner s name. State of legal residence. Mailing address. The office of the IRS with which the tax return for the period in controversy was filed. The date of the Notice of Deficiency or liability, or other proper allegations showing jurisdiction of the Court, and the City and State of the Office of the IRS which issued the Notice. The amount of the deficiency or liability. 6

10 Content of Petition in Deficiency or Liability Action, cont. The nature of the tax. The year or years for which the determination was made. Clear and concise assignments of each and every error which the petitioner alleges to have been committed by the Commissioner in the determination of the deficiency or liability. Any issued not raised in the assignment of error shall be deemed to be conceded. Clear and concise statements of the facts on which the petitioner bases the assignment of error, except for issues to which the burden of proof is on the Commissioner. A prayer setting forth the relief sought by the petitioner. The signature, mailing address, and telephone number of each petitioner or petitioner s counsel as well as counsel s Tax Court bar number. A copy of the Notice of deficiency or liability. 7 Rule 33(a) and Rule 23(g) Rule 33(a) was amended July 6, 2012 to state that Each pleading shall be signed in the manner provided in Rule 23. Where there is more than one attorney of record, the signature of only one is required. Except when otherwise specifically directed by the Court, pleadings need not be verified or accompanied by affidavit or declaration. Rule 23(g): Effective as of July 6, Prohibits the Clerk from refusing to file a paper because it is not in the form prescribed by the Rules. 8

11 Answer The Commissioner shall have 60 days from the date of service of the date of service of the petition within which to file an answer, or 45 days from that date within which to move with respect to the petition. Form and Content The answer should be drawn so that it will advise the petitioner and the Court fully of the nature of the defense. Effect: every material allegation set out in the petition and not expressly admitted or denied in the answer shall be deemed to be admitted. 9 Reply Time to Reply or Move Petitioner shall have 45 days from the date of service of the answer within which to file a reply, or 30 days from that date within which to move with respect to the answer. 10

12 Reply, cont. Form and Content: In response to each material allegation in the answer and the facts in support thereof on which the Commissioner has the burden of proof, the reply shall contain a specific admission or denial. If the petitioner is without knowledge or information sufficient to form a belief as to the truth of the allegation, the petitioner shall so state. New Material: Any new material contained in the reply shall be deemed to be denied. 11 Timely Petition Required In all cases, the jurisdiction of the Court also depends on the timely filing of a petition. Contempt of Court: may be punished by fine or imprisonment within the scope of IRC 7456(c). Misbehavior of any person in its presence or so near thereto as to obstruct the administration of justice Misbehavior of any of its officers in their official transactions; or Disobedience or resistance to its lawful writ, process, order, rule, decree, or command. Bankruptcy and Receivership For bankruptcy, see 11 U.S.C. 362(a)(8) and IRC 6213(f)(1). For receivership, see IRC 6871(c)(2). 12

13 Pleadings Initial Pleadings Petition (90 days). Rule 20. Answer (60 days). Rule 36. Reply (45 days). Rule 37. General rules Purpose of pleadings is to give the parties and the Court fair notice of the matters in controversy and the basis for their respective positions. Each averment to a pleading shall be simple, concise, and direct. There are no technical forms of pleading Consistency: A party may set forth two or more statements of a claim or defense alternatively or hypothetically. If two or more statements are made in the alternative and one of them would be sufficient if made independently, the pleading is not made insufficient by the insufficiency of one or more of the alternative claims. Rule 31(c). All pleadings shall be so construed as to do substantial justice. 13 Pleadings: Form Rule 32 Caption; Names of parties: every pleading must contain a caption setting forth: The name of the Court The title of the case The docket number, and A designation to show the nature of the pleading. Separate statement: all averments of claim or defense, and supporting statements, shall be made in separately designated paragraphs. Each paragraph should be limited to a single item or single set of circumstances. Adoption by reference: statements may be adopted by reference in a different part of the same pleading or in another pleading or in any motion. 14

14 Signing of Pleadings The signature of counsel or a party constitutes a certificate by the signer that the signer has: read the pleading, and that, to the best of the signer s knowledge, information, and belief formed after reasonable inquiry, it is well grounded in fact and is warranted by existing law, or a good faith argument for an extension, modification, or reversal of existing law; and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. The signature of counsel constitutes a representation by counsel that counsel is authorized to represent the party on whose behalf the pleading is filed. 15 Standing Pretrial Order Issued with notice of trial at the direction of the trial judge to facilitate the orderly and efficient disposition of all cases on the trial calendar. Failure to comply with the standing pretrial order may subject a party or counsel to sanctions. Rule

15 Pre-Trial Motions 17 Motion for Judgment on the Pleadings - TC Rule 120 Motion for summary judgment Matters outside the pleading are presented to the Court with supporting affidavits. Summary judgment may be requested upon all or any part of the legal issues in controversy. If faced with a motion for summary judgment, practitioners should be prepared to argue that a genuine issue of material facts does exists necessitating trial Decision will be rendered as a matter of law if there is no genuine issue as to any material fact - Tax Court Rule

16 Motion for Judgment on the Pleadings - TC Rule 120, cont. Motion to Submit Case Without Trial Party may move to submit case without trial if the submission of evidence is not needed because sufficient facts have been admitted, stipulated, established by deposition, or included in the record in some other way - Tax Court Rule 122. Motion in Limine Motion to exclude certain evidence or expert report on grounds that it is privileged, its relevance is outweighed by risk of prejudice or confusion, or it is cumulative. 19 Pre-Trial Activities 20

17 Duty to Disclose/Informal Discovery The Court expects the parties to attempt to attain the objective of discovery through informal consultation or communication before using the Tax Court discovery rules. See Branerton v. Commissioner, 61 T.C (1974). The standing pretrial order typically requires the parties to exchange all documents and other evidence that they intend to use at trial (except for impeachment purposes) at least 14 days before trial. The Court may exclude documents not exchanged in accordance with standing pretrial order unless good cause is shown. 21 Formal Discovery Interrogatories - Tax Ct. R. 71 Unless otherwise stipulated or ordered by the Court, a party may serve upon any other party no more than 25 written interrogatories, including all discrete subparts but excluding interrogatories described in paragraph (d) of this Rule, to be answered by the party served or, if the party served is a public or private corporation or a partnership or association or governmental agency, by an officer or agent who shall furnish such information as is available to the party. A motion for leave to serve additional interrogatories may be granted by the Court to the extent consistent with Rule 70(c)(1). Requests for Production of Documents or Things. Tax Ct. R

18 Tax Ct. R. 70 Recent Amendments Tax Ct. R. 70(a)(2) Discovery shall not be commenced, without leave of Court, before the expiration of 30 days after joinder of issue (see Rule 38). Discovery shall be completed and any motion to compel or any other motion with respect to such discovery shall be filed, unless otherwise authorized by the Court, no later than 45 days prior to the date set for call of the case from a trial calendar. Discovery by a deposition under Rule 74(c) may not be commenced before a notice of trial has been issued or the case has been assigned to a Judge or Special Trial Judge and any motion to compel or any other motion with respect to such discovery shall be filed within the time provided by the preceding sentence. Discovery of matters which are relevant only to the issue of a party's entitlement to reasonable litigation or administrative costs shall not be commenced, without leave of Court, before a motion for reasonable litigation or administrative costs has been noticed for a hearing, and discovery shall be completed and any motion to compel or any other motion with respect to such discovery shall be filed, unless otherwise authorized by the Court, no later than 45 days prior to the date set for hearing. 23 Tax Ct. R. 70 Recent Amendments Tax Ct. R. 70(b): The information or response sought through discovery may concern any matter not privileged and which is relevant to the subject matter involved in the pending case. It is not ground for objection that the information or response sought will be inadmissible at the trial, if that information or response appears reasonably calculated to lead to discovery of admissible evidence, regardless of the burden of proof involved. If the information or response sought is otherwise proper, it is not objectionable merely because the information or response involves an opinion or contention that relates to fact or to the application of law to fact. But the Court may order that the information or response sought need not be furnished or made until some designated time or a particular stage has been reached in the case or until a specified step has been taken by a party. 24

19 Tax Ct. R. 70 Recent Amendments Tax Ct. R. 70(c): The frequency or extent of use of the discovery methods set forth in paragraph (a) shall be limited by the Court if it determines that: (A) The discovery sought is unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenient, less burdensome, or less expensive; (B) the party seeking discovery has had ample opportunity by discovery in the action to obtain the information sought; or (C) the discovery is unduly burdensome or expensive, taking into account the needs of the case, the amount in controversy, limitations on the parties' resources, and the importance of the issues at stake in the litigation. The Court may act upon its own initiative after reasonable notice or pursuant to a motion under Rule Formal Discovery Requests for Admissions. Tax Ct. R. 90. Witness Interviews Depositions Allowed with consent of the parties Expert witness on its own motion 26

20 Stipulations 27 Rule 91 Required: Parties are required to stipulate, to the fullest extent to which complete or qualified agreement can or fairly should be reached, all matters not privileged which are relevant to the pending case, regardless of whether such matters involve fact or opinion or the application of law to fact. Comprehensive: the fact that any matter may have been obtained through discovery or requests for admission is not grounds for omitting such matter from the stipulation. 28

21 Rule 91, cont. Form: In writing Signed by the parties thereto or by their counsel. Shall observe the requirements of Tax Court Rule 23 as to form and style of papers, except the stipulation shall be filed in duplicate but only one set of exhibits shall be filed. Filing: Shall be filed by the parties at or before the commencement of trial. A stipulation, when filed, does not need to be offered formally to be considered in evidence. 29 Rule 91, cont. Objections Any objection to all or part of a stipulation should be noted in the stipulation. Binding Effect A stipulation shall be treated as a conclusive admission by the parties to the stipulation. Noncompliance by a party: Motion to Compel Stipulation: If, after the date of issuance of trial notice in a case, a party has refused or failed to confer with an adversary with respect to entering into a stipulation, the party proposing stipulation may file a motion to compel stipulation not less than 45 days prior to the date set for call of the case from a trial calendar. 30

22 Branerton Conference Bedrock of Tax Court practice. See Branerton Corp. v. Commissioner, 61 T.C. 691 (1974). Discovery and requests for admissions may not be commenced by a party until after that party has made a meaningful, good faith attempt to attain the objectives of discovery through informal consultation or communication. 31 Petitioner s Counsel Room What is available in Petitioner s counsel room to help draft a stipulation? Transcripts Practitioners should have access to computer for internet access and word processing program. Tax Court website 32

23 Trial 33 Tax Court Stuffer Notice The Tax Court recently updated its procedures with respect to low-income taxpayers and access to Low Income Taxpayer Clinics ( LITC ). The Tax Section of the ABA, the Office of Chief Counsel and the Taxpayer Advocate were all concerned that low income taxpayers were not given enough notice of the existence of LITCs. Currently the Tax Court sends stuffer notices to selfrepresented taxpayers upon acknowledgment of the filing of a petition and when the case is calendared for trial. Beginning October 1, 2013 the Court will start sending stuffer notices 30 days in advance of trial. 34

24 Use of Counsel Rooms LITCs and Bar sponsored calendar call programs have use of petitioner s counsel room on the morning of the calendar call. 35 Change of Address The Court will send a change of address form (Form 10) with the acknowledgment of the petition to remind petitioners that they need to notify the Court when they change their address. Tax Ct. R. 21(b)(4) requires petitioners to inform the Court of a change of address. 36

25 Time Call of the Calendar The new 30 day notice of LITCs sent to self-represented taxpayers encourages the taxpayer to arrive by 9AM on the date of the calendar call. The Court is now requesting practitioners participating in a calendar call program to arrive at the Court at least one hour before the beginning of the calendar call. 37 Call of the Calendar, cont. A regular trial session of the Tax Court is ordinarily scheduled for one to two weeks. Trial session commences with call of the calendar. When a case is called at the calendar, the taxpayer s counsel (or taxpayer if pro se) and respondent s counsel must be prepared to inform the judge whether the case has been settled and, if so, to state for the record the basis of the settlement or to submit a written stipulation of the settlement. If the parties have not reached a basis of settlement, the case will be set for trial. Stipulation of Facts Pro se taxpayers routinely do not prepare stipulations of fact. Respondent prepares Stipulations of fact for taxpayers to sign. Petitioner s counsel must counsel taxpayers on the need to stipulate and the binding nature of stipulations. 38

26 Standards of Review Deficiency Montgomery v. CIR, 122 T.C. 1 (2004) A person who has not received a notice of deficiency and has not had a prior administrative or judicial opportunity to challenge the amounts assessed may challenge the liability as part of the collection review procedure. Innocent Spouse relief under IRC 6015(f) De novo. See Porter v. Commissioner, 132 T.C. No. 11. Innocent Spouse relief under 6015(b) and (c): De novo. See Porter v. Commissioner, 132 T.C. No. 11. When reviewing IRS determination under IRC 6330/ CDP Abuse of discretion Reliance on a failure to pay current taxes in rejecting a collection alternative does not constitute an abuse of discretion. See Orum v. Commissioner, 123 T.C. 1 (2004). 39 Burden of Proof: TC Rule 142 In general the burden of proof is on the petitioner, except as otherwise provided for by statute or determined by the Court. Exceptions: New matters Increase in deficiency Affirmative defenses Fraud In any case involving fraud with intent to evade tax, the burden of proof is on the respondent. Standard is clear and convincing evidence. Transferee liability Burden of proof is on the respondent to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax. See IRC 6901(a). 40

27 Burden of Proof: IRC 7491(a) Taxpayer can shift the burden to respondent if, in any court proceeding,: Taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer. Taxpayer has complied with requirements of the Code to substantiate any item. Taxpayer has maintained all records required under the code. See Sec. 6001; Sec (a), Income Tax Regs. for record keeping requirements. Taxpayer has cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings and interviews, and In the case of a partnership, corporation, or trust, the taxpayer is described in IRC 7430(c)(4)(A)(ii). See Jones, The Burden of Proof 10 Years After the Shift, 121 Tax Notes 287 (October 20, 2008) for an analysis leading to the conclusion that in most cases the shift has had no impact and the decision is ultimately based on the preponderance of the evidence. See Knudsen v. Commissioner, T.C. Memo and 131 T.C. 185 (2008) (supplemental op.). See Higbee v. Commissioner, 116 T.C. No. 28 (2001). 41 Burden of Proof: IRC 7491(b) Secretary has the burden of proof in any court proceeding with respect to any item of income which was reconstructed by the Secretary solely through the use of statistical information of unrelated taxpayers. 42

28 Burden of Proof: IRC 7491(c) Penalties Secretary has the burden of production with respect to liability for penalties, additions to tax, or additional amounts imposed. Higbee v. Commissioner, 116 T.C. No. 28 (2001).: Commissioner must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty. Once the Commissioner meets his burden of production, the taxpayer must come forward with evidence sufficient to persuade a Court that the Commissioner s determination if incorrect. See Higbee v. Commissioner, 116 T.C. No. 128 (2001). 43 IRC 6201(d) If an information return serves as the basis for the determination of a deficiency, IRC 6201(d) provides that in any court proceeding, if: Taxpayer asserts a reasonable dispute with respect to income reported on an information return, and Taxpayer has fully cooperated with the Commissioner, Then the Commissioner has the burden of producing reasonable and probative information in addition to the information return. 44

29 Evidence Rule 143: Trials before the Court will be conducted in accordance with the rules of evidence applicable in trials without a jury in the U.S. District Court for the District of Columbia. 45 Evidence: Hearsay FRE 802: an out of court statement introduced to prove the truth of that statement. Exceptions applicable to certain self-represented taxpayers: FRE 803(6) Business Records A memorandum, report, record, or data compilation, in any form of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business to make the record The records can be introduced with the testimony of the custodian of records or by certification that complies with FRE 902(11), FRE 902(12), or a statute permitting certification, unless the source indicates untrustworthiness. FRE 902(11) A party intending to offer into evidence under this rule must provide written notice of that intention to all adverse parties, and must make the record and declaration available for inspection sufficiently in advance of their offer into evidence to provide an adverse party the opportunity to challenge them. Tax returns: A tax return is generally considered inadmissible hearsay with the exception that the return may constitute an admission by the taxpayer or someone on the taxpayer s behalf. Note: if the taxpayer stipulates to the tax return, they have waived any hearsay argument. 46

30 Opening Statement Should start with a theme and end with that same theme. Provide a roadmap for the Court of how and why the decision should be written in your favor. Personalize your client It will be more difficult for the Court to find for the government if you depict your client in a positive light. Will adverse decision affect third parties? Taxpayer s employees Taxpayer s family 47 Opening Statement, cont. Do not abandon an issue. After petitioner s opening statement, respondent will ask the Court whether petitioner has conceded any issue not discussed in their opening statement. IRM ( ). If petitioner raises a new issue without having amended his pleadings and respondent is prejudiced by surprise, respondent will argue that the new issue is not before the court. 48

31 Tax Court Rule 155 Rule 155 Computations If the parties are not in agreement as to the amount to be included in the decision in accordance with the findings and conclusions of the Court, then each party shall file with the Court a computation of the amount believed by such party to be in accordance with the Court's findings and conclusions. In the case of an overpayment, the computation shall also include the amount and date of each payment made by the petitioner. A party shall file such party's computation within 90 days of service of the opinion or order, unless otherwise directed by the Court. 49 Procedures Involving Taxpayer Interviews 50

32 IRC 7521 Section 7521(a) Recording of Interview by Taxpayer: any officer or employee of the IRS shall allow the taxpayer to make an audio recording: Upon advance request At taxpayer s expense With taxpayer s own equipment Taxpayers are entitled to record face-to-face CDP hearings. See Keene v. Commissioner, 121 T.C. at 14. In-person interview refers to an interview in which the IRS representative and taxpayer are face-to-face. Taxpayers are not entitled to record telephone CDP hearings. See Calafati v. Commissioner, 127 T.C. No IRC 7521, cont. 7521(b) Safeguards: an officer or employee of the IRS shall provide to the taxpayer prior to the interview: In the case of an interview relating to the determination of tax, an explanation of the audit process and the taxpayer s rights under such process, or In the case of an interview relating to the collection of tax, an explanation of the collection process and the taxpayer s rights under such process. Section 7521(a) applies to representatives. This section does not apply to criminal investigations. 52

33 Giamelli v. Commissioner, 129 T.C. 14 (2007) Tax Court held that their review is limited to the determination issued by respondent s Appeals Office. Since the only issue raised at Appeals was an installment agreement, petitioner cannot then raise a new issue in Tax Court. The original taxpayer died after his CDP hearing. At Tax Court, his estate attempted to argue that the estate was a different person and therefore had not had the opportunity to raise the issue. The Court disagreed. 53 Chenery Doctrine An administrative law principle that says a reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, must judge the propriety of such action by the grounds invoked by the agency. SEC v. Chenery Corp., 332 U.S. 194 (1947). Antioco v. Commissioner, T.C. Memo : The Tax Court determined that the Chenery Doctrine applied in the CDP context and therefore the Court cannot uphold a notice of determination on grounds other than those actually relied upon by the Appeals Officer. 54

34 Trial of S Cases 55 The Small Tax Case Both the Code and the Tax Court rules contain special provisions applicable to small tax cases. A small tax case is one in which neither the amount of the deficiency placed in dispute nor the amount of any claimed overpayment exceeds $50,000. Small case procedures are also available for a petitioner for innocent spouse relief under IRC 6015(e) where the amount of relief sought does not exceed $50,000. Small case procedure are available for CDP appeals under IRC 6320(c) or IRC 6330 (d) where the unpaid tax does not exceed $50,

35 Small Case Procedures are Elective Limitations: In small tax cases the Court does not have jurisdiction to enter a decision finding a deficiency or overpayment greater than the $50,000 jurisdictional amount. Small case decisions are not reviewable by an appellate court and are not precedent for any other case. Election is made on the petition or after the petition but before trial. Tax Court has the authority to revoke small case election on its own motion before trial. Tax Court rejected small tax case status where the issues were common to other cases pending before it. Page v. Commissioner, 86 T.C. 1, 12 (1986). Practice Tip: A taxpayer can obtain small tax case status where a deficiency notice determines a deficiency greater than the statutory amount by contesting an amount less than the statutory amount, even if there is only one legal issue underlying the entire determined deficiency. Kallich v. Commissioner, 89 T.C. 676 (1987), acq., C.B Rule 177 Rule 177 provides that trials of small tax cases will be conducted as informally as possible, consistent with orderly procedures, and any evidence deemed by the court to have probative value will be admissible. IRM ( ) states that where a pro se petitioner is doing his best to present his case to the court, technical evidentiary or procedural objections should not be made. Respondent s counsel should assist the pro se petitioner to bring out all of the facts, and cross-examination should be for the purpose of presenting to the court all the pertinent and competent evidence. 58

36 Common Issues in S Cases: Collection Due Process After a CDP hearing, the Appeals Officer will issue a Notice of Determination which advises the taxpayer of their right to seek judicial review within 30 days after the date of the Notice of Determination. The timing of a request for Tax Court Review concerning denials of relief under IRC 6015 is 90 days. The request for review must be filed within 30 days if relief is requested for other issues raised in the CDP hearing. Treas. Reg (f)(2), Q&A-F2. The Tax Court reviews the Appeals Officer s determination under an abuse of discretion standard. In its review for abuse of discretion, the Tax Court generally only considers arguments and issues that were raised at the CDP hearing or otherwise brought to the attention to the Appeals office. 59 Common Issues in S Cases: Collection Due Process, cont. Robinette v. Commissioner, 123 T.C. 85 (2004): There is a disagreement between the Tax Court, and the IRS, Eighth Circuit and other courts concerning the scope of the record on which such review should be based. The Tax Court has held that it may review new evidence in the course of reviewing whether an appeals officer abused his discretion, i.e., its review is not limited to evidence presented during the administrative appeal. The Eighth Circuit, in Robinette v. Commissioner, 439 F.3d 445 (8th Cir. 2006), reversed the Tax Court taking the position that, consistent with general principles of administrative law and the Administrative Procedures Act, judicial review of the IRS s decision should be limited to the administrative record developed at the hearing before Appeals. 60

37 Common Issues in S Cases: Substantiation Taxpayer bears the burden of proving the entitlement to claimed deductions. See Tax Court Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). IRC 6001 Every taxpayer liable for any tax under the Internal Revenue Code, or for collection thereof, shall keep records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. 61 Substantiation: Cohan Rule When the taxpayer establishes that the Taxpayer paid or incurred deductible expenses but does not establish the amount of the deduction to which the taxpayer is entitled, the Taxpayer may be entitled to estimate the amount allowable. Cohan v. Commissioner, 39 F.2d 540 (2d. Cir. 1930). The taxpayer must present sufficient evidence for the Court to make an estimate because without such a basis, any allowance would amount to largesse. 62

38 Substantiation: Car Expense Adams v. Commissioner, T.C. Memo Mileage log that only indicates the state visited does not substantiate under Treas. Reg T(b)(6)(i)(B). Furthermore, the general lack of business purpose contained in the Taxpayer s ledger was grounds for finding that she did not substantiate. 63 Substantiation: Medical Expenses Taxpayers are entitled to deduct the amount of the taxpayer s and the taxpayer s spouse or dependent s medical care expenses to the extent those expenses exceed 10% of the taxpayers AGI. Examples: Cost of diagnosis, cure, mitigation, treatment, or prevention of disease, and costs for treatments affecting any structure or function of the body. IRC 213 (d)(1)(a). Two-part but for test in Jacobs v. Commissioner, 62 T.C. 813, 819 (1974). Petitioner must prove expenditures: Were an essential element of the treatment, and Would not otherwise been incurred for non-medical reasons. 64

39 Substantiation: Charitable Deductions - IRC 170 Charitable contribution is the voluntary transfer of property without adequate consideration. Payments to a qualified organization are deductible as charitable contributions to the extent that they exceed the fair market value of any material benefit received in return. A 170 deduction for the full amount is allowed only if the donor receives no substantial benefit from the contribution. If the taxpayer receives an item of value for a payment to a charitable organization: Payment is not deductible unless taxpayer intends to make a gift, and Any deduction is limited to the excess of the payment over the fair market value of what is received in exchange. 65 Substantiation: Charitable Deductions, cont. Charitable deductions are allowed as a deduction only if verified under regulations prescribed by the Secretary. The obligation to substantiate charitable contribution deductions are clear and unambiguous. No disclosure statement is required when: The goods or services given to a donor meet the standards for insubstantial value There is no donative element involved in a particular transaction with a charity, or There is only an intangible religious benefit provided to the donor. Taxpayer shall maintain for each contribution one of the following: Cancelled check Receipt from the donee charitable organization showing the name of the donee, date of contribution and amount of contribution. In the absence of a cancelled check or receipt from the donee, other reliable written records showing the name of the donee, the date of contribution and amount of the contribution.. Non-Cash Charitable Contributions Value is the fair market value at the time of the contribution. Need name of donee, date and location of the contribution, and description of the property. 66

40 Substantiation: Employee Business Expenses - Form 2106 Purpose: Form is used if the taxpayer is an employee deducting ordinary and necessary expenses for their job. Ordinary Expense: common and accepted in the taxpayer s trade or business Must be of a common or frequent occurrence in the type of business involved Necessary Expense: helpful and appropriate for the taxpayer s business Must be directly connected with or pertaining to the taxpayer s trade or business. 67 Substantiation: Business Use of a Home Qualifying for a Deduction for Business Use of a Home: Taxpayer must use part of the home: Exclusively and regularly as principal place of business. Exclusively and regularly as the place where taxpayers meets or deals with patients, clients, or customers in the normal course of trade or business. In the case of separate structure not attached to the home, in connection with trade or business. On a regular basis for certain storage use. For rental use. As a daycare facility. Where taxpayer s business is conducted in part at a home office and in part at other locations, the following two primary factors are considered in determining whether the home office qualifies under IRC 280A(c)(1)(A) as the taxpayer s principal place of business: Relative importance of activities performed at each business location, and Amount of time spent at each location. 68

41 Substantiation: Business Use of a Home, cont. Exclusive Use Test To qualify, taxpayer must use a specific area of home solely for the purpose of carrying on a trade or business. Taxpayer does not meet requirements of exclusive use test if taxpayer uses the area in question both for business and personal purposes. Exception: If taxpayer uses part of the home for storage of inventory or product samples, the taxpayer can deduct expenses for the business use of the taxpayer s home without the exclusive use test it the taxpayer: Sells products at wholesale or retail as trade or business Keeps inventory or product samples in the home as trade or business Taxpayer s home is the only fixed location of trade or business Taxpayers uses the storage space on a regular basis, and The space taxpayer uses is a separately identifiable space suitable for storage. Regular Use Test Taxpayer must use specific area of taxpayer s home for business on a regular basis. Incidental or occasional business use of not regular use. Use must be continuous, ongoing, or recurring. 69 Substantiation: Travel and Entertainment Expenses Taxpayer can deduct ordinary and necessary expenses incurred while away from home in the pursuit of a trade or business. To deduct travel and entertainment expenses, taxpayer must not only satisfy the general requirements of IRC 162 but also the strict substantiation requirements of IRC 274(d). The Cohan Doctrine cannot be used to estimate a deduction for travel expenses. Schladweiler v. Commissioner, T.C. Memo , affd. 28 Fed. Appx. 602 (8th Cir. 2002). No deduction is allowed for travel and entertainment unless the taxpayer substantiates by adequate records or sufficient evidence corroborating the taxpayer s own statement, the following elements: Amount of each separate expenditure Date of departure and return and the number of days spent on business The place of destination of city, and The business reason or expected business benefit from the travel. 70

42 Substantiation: Travel and Entertainment Expenses, cont. A contemporaneous log is not required, but corroborative evidence used to support the deduction must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous log. Travel away from the home generally requires that the taxpayer remain either overnight or for a period requiring sleep or rest. Taxpayers cannot deduct the daily cost of commuting to and from work, as such expenses is considered to be personal and nondeductible. Brockman v. Commissioner, T.C. Memo ; Commissioner v. Flowers, 326 U.S. 465, (1946). Taxpayers cannot deduct travel expenses for a spouse or dependent unless those person are employees or have a bona fide business purpose. IRC 274(m)(3)(A) & (B). 71 Substantiation: Entertainment Expenses Taxpayer can deduct entertainment expenses if they are both ordinary and necessary and meet one of the following tests. Expenses must be directly related to the active conduct of the taxpayer s trade or business, or Taxpayer must have had more than a generalized expectation of deriving income or a specific benefit at some indefinite future time from those entertained. Expenses for entertainment, even if connected with the taxpayers trade or business, will generally be considered not directly related to active conduct of taxpayers trade or business if the entertainment occurred under circumstances where the was little or no possibility of engaging in the active conduct of trade or business. Meeting or discussion at a sporting event is generally considered a circumstance where there is little or no possibility of engaging in the active conduct of a trade or business. Treas. Reg (c)(7)(ii)(a). 72

43 Substantiation: Cellular Phone Cell phones are listed property and require substantiation. Tash v. Commissioner, T.C. Memo Court disallowed claimed cell phone expenses because the record did not indicate whether petitioner used his cellular phone for business and/or personal calls. The employer must require the employee to have the cell phone in order for it to be deductible. 73 Dependency Exemption Section 151(a) and (c) allows a taxpayers an annual exemption deduction for each dependent as defined in section 152. Dependent is either a qualifying child or a qualifying relative. Four requirements: qualifying child means an individual: Who bears a relationship to the taxpayer described in paragraph (2) Who has the same principal place of abode as the taxpayer for more than one-half of such taxable year Who meets the age requirements of paragraph (3) Who has not provided over one-half of such individual s own support for the calendar year in which the taxable year of the taxpayer begins, and Who has not filed a joint return with the individual s spouse under section

44 Section 152(e) Special Rule for Divorced Parents Non-custodial parent may be entitled to claim a dependency exemption deduction for a child notwithstanding the residency requirement of section 152(c)(1)(B), the support requirement of section 152(d)(1)(C), and the so-called tie-breaking rule of section 152(c)(4). A child will be treated as the non-custodial parent s qualifying child or relative if five requirements are. See sec. 152(e)(1) and (2). Section 152(e) A child who receives over one-half of the child s support during the calendar year from the child s parents: Who are divorced or legally separated under a decree of divorce or separate maintenance Who are separated under a written separation agreement, or Who live apart at all times during the last 6 months of the calendar year, and Such child is in the custody of 1 or both of the child s parent for more than one-half of the calendar year, such child shall be treated as being the qualifying child or relative of the non-custodial parent if: The custodial parent signs a written declaration that such custodial parent will not claim such child as a dependent for any taxable year beginning in such calendar year The non-custodial parent attaches such written declaration to the non-custodial parent s return 75 Section 152(e) Special Rule for Divorced Parents, cont. The IRS has issued Form 8332 in order to standardize the written declaration requirement of section 152(e). Form 8332 requires: Name of child. Name and social security number of the non-custodial parent claiming the dependency exemption deduction. Social security number of the custodial parent. Signature of the custodial parent. Date of the custodial parent s signature. The years for which the claims were released. Form 8332 is not required but any other written declaration must conform to the substance of Form See Miller v. Commissioner, 114 T.C. 184, 189 (2000), aff d on another ground sub nom. Judge Vasquez held that attaching proof a custody arrangement does not satisfy Section 152. See Sanatana v. Commissioner, T.C. Memo The Court held that the mediation agreement attached to the return was so ambiguous as to not satisfy the requirements of Section 153(e). 76

45 Free Exercise of Religion Begay v. Commissioner, T.C. Memo Taxpayer argued that her Navajo clan considered a child to be a member of the clan and therefore a qualifying child. Court held that taxpayer not entitled to claim child as dependent. Section 152(c) does not require a taxpayer to forego their religious beliefs nor deny a tax benefit because of such beliefs so exercise of religion argument not valid. 77 Earned Income Credit Section 32(a) provides an earned income credit for an eligible individual for so much of the taxpayer s earned income for the taxable year as does not exceed the earned income amount. Eligibility is based on income and qualifying children. 78

46 First time home buyer credit Section 36 An individual who is a first-time homebuyer of a principal residence in the U.S. shall be allowed a credit of an amount equal to 10% of the purchase price but not exceeding $8,000. First time homebuyer means any individual if such individual had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence. Married Filing Separately: Credit is limited to $4,000. Unmarried individuals allocate the credit. Phase-out for income in excess of $125,000. No credit is allowed for the purchase of an residence if the purchase price exceeds $800,000. Purchaser must be over 18 years of age. Rodriguez v. Commissioner, T.C. Memo The Court held that the purchase of a home by a minor taxpayer s parents by taxpayer s guardian lacked economic substance, and thus under step transaction, taxpayer s subsequent purchase of the home from guardian was effectively a purchase from the taxpayer s parents that prohibited the taxpayer from claiming the first time homebuyer credit. Zampella v Commissioner, T.C. Memo The Tax Court held that the taxpayer did not purchase the home used to claim the credit. The taxpayer inherited a one-half interest in the home from his mother and purchased the other half from his brother. 79 Witnesses To compel the attendance of a witness at trial, a party can obtain a subpoena from the Clerk s office in Washington, D.C. or from the trial clerk at the trial session. As provided for in Tax Court Rule 147, the party must fill out the subpoena and have it served by the marshal or by another person who is not a party. Service is accomplished by delivering a copy of the subpoena to the witness and by tendering the witness s fee for one day s attendance and the mileage allowed by law. There is no geographical limit for service of a Tax Court subpoena. Under Tax Court Rule 147(b), a party may also use a subpoena to require a witness to produce books, papers, documents, electronically stored information, or tangible things. 80

47 Settlement Options 81 Voluntary Binding Arbitration Parties may move that any factual issue in controversy be resolved through voluntary binding arbitration. A joint stipulation must accompany the motion, stating the issues to be resolved through arbitration and the parties agreement to be bound by the findings of the arbitrator. The arbitrator is appointed by Court order. Tax Court Rule 124. Report by Parties: the parties shall promptly report to the Court the findings made by the arbitrator and shall attach to their report any written report or summary that the arbitrator may have prepared. Selection and Payment of the Arbitrator Parties must stipulate to a procedure for jointly selecting the arbitrator with each party agreeing to pay one half of the arbitrator s compensation, expenses and related fees. IRM ( ). 82

48 Voluntary Binding Arbitration, cont. Limitations with Respect to the Arbitrator Information to be considered Parties stipulation should precisely describe the kind of information and any limitations related thereto that the arbitrator is permitted to consider. Contacts with or by the arbitrator Stipulation should prohibit ex parte contacts with the arbitrator. Scope of arbitrator s work Stipulation should reflect that the arbitrator is not permitted to make any findings or provide reasoning that represents an interpretation of the law. Legal Guidance to the arbitrator Any applicable legal guidance should be stipulated beforehand. In extraordinary circumstances when some guidance has been overlooked, the parties may further stipulate to the provision of legal guidance to the arbitrator. General Supervisory Powers of the Court Parties must stipulate to the general supervisory powers of the court. Stipulation should note that the case will be assigned to a particular judge or special trial judge who will have continuing jurisdiction over the case. The court s participation is in the nature of oversight. 83 Mediation Mediation is a confidential process in which a neutral third party directs settlement discussions. Non-binding Agreement to Mediate - IRM ( ) The IRM states that the agreement should be as concise as possible but include the following elements: Specify the issues to be mediated Provide how and when each party will present its case to the mediator Might require each party to submit a list of participants Contain an acknowledgment by the taxpayer that all participants shall have access to all taxpayer s returns Prohibit ex-parte contacts with mediator Acknowledgment of IRC 7214(a)(8) If Appeals mediator is selected, written agreement shall include a statement confirming the employee s proposed service as mediator and waiver of conflicts Agreement should state that mediation is confidential Any party may withdraw at any time Any settlement reached shall not serve as an estoppel in any other proceeding Schedule of dates Nothing contained in Tax Court Rule 124 shall be construed to exclude use by the parties of other forms of voluntary disposition of cases including mediation. 84

49 Negotiating with Respondent s Representatives Recently, Respondent s counsel has brought an Appeals Officer to calendar calls to negotiate with taxpayers. Taxpayers sometimes show up to calendar call with records to substantiate claimed deductions that Respondent s counsel has not previously seen. 85 Remand Absent limiting statutes, courts generally have the inherent authority to issue such orders as they deem necessary and prudent to achieve the orderly and expeditious disposition of cases, Williams v. Commissioner, 92 T.C. 920, 932 (1989) (citing Roadway Express, Inc. v. Piper, 447 U.S. 752, (1980), and quoting Link v. Wabash R.R. Co., 370 U.S. 626, (1962)). The Tax Court noted in Friday v. Commissioner, 124 T.C. 220, (2005), that the Court can remand to an agency if it retains jurisdiction over the underlying case, such as an Appeals Office does in a CDP determination. The Tax Court can remand in CDP cases when an Appeals officer abused his discretion in some way. See Med. Practice Solutions, LLC v. Commissioner, T.C. Memo (remanding because the Appeals officer determined to proceed with collection without making the requisite verifications). Tax Court can remand when the Appeals officer did not develop the record enough for the Court to properly review it. See Hoyle v. Commissioner, 131 T.C. 197, (2008). 86

50 Remand, cont. Tax Court has remanded where the law changed between the CDP hearing and the Tax Court trial if that may have affected a taxpayer s presentation of his case. Harrell v. Commissioner, T.C. Memo Remand is appropriate in cases where there has been a material change in a taxpayers factual circumstances between the time of the hearing and the time a case is put on the trial calendar. See Churchill v. Commissioner, T.C. Memo Court can remand a CDP case for consideration of changed circumstances if it would be helpful, necessary or productive. The hearing on remand provides the parties with the opportunity to complete the initial IRC 6320 hearing while preserving the taxpayer s right to receive judicial review of the ultimate administrative determination. Kelby v. Commissioner, 130 T.C. 79, 86 (2008); Wadleigh v. Commissioner, 134 T.C. 280, 299 (2010). 87 Settlement in S Cases Purpose of the S case procedure is to reduce the time involved in the preparation, execution, and filing of settlement documents in a small case. Computations: small cases may be settled on the basis of a specific dollar amount agreed upon by both parties to approximate the amount that would have been reached if formal computations had been made. Contact with Collection: if it would facilitate the settlement of a small case, consideration should be given to assisting the petitioner in making the initial contact with Collection. Counsel Settlement Memorandum: The Office of Chief Counsel encourages brevity in Counsel Settlement Memoranda in small case. 88

51 Post-Trial Briefing 89 Time for Filing Briefs Simultaneous briefs Opening briefs within 75 days after conclusion of trial Answering briefs 45 days thereafter The Court s preference has been for simultaneous briefs Seriatim briefs Opening briefs within 75 days after conclusion of trial Answering brief within 45 days thereafter Reply brief within 30 days after the due date of the answering brief 90

52 Points Relied Upon Centerpiece of the brief. If reader is not persuaded after reading this section, then brief should be rewritten or practitioner should consider settlement. 91 Requested Findings of Fact If written correctly from a properly tried case, the argument section should be superfluous. Should be viewed as the building one detailed brick at a time. Should be drawn from the record with very little poetic license. Should always be followed by one or more citation to the record 92

53 Argument Carefully structured Easy to follow Precisely researched Should provide the Court with the materials to draft a scholarly opinion in your favor Should provide the Court with powerful quotes or literary allusions Citations must be precise Avoid citing Memorandum decisions where regular opinions are available Argument Start with affirmative contentions Leave rebuttal material to the end or to the reply brief Form and neatness are important Careful thought should be given to how the argument appears on the page Are there visual breaks Are critical elements broken into subsections and underscored Tempo is important Do arguments start strong and end strong? 93 Reply Brief Reply brief should be drawn only after you have outlined the structure of your opponent s argument. Argument in rebuttal should focus upon the critical points in your opponent s structure. Remainder of the argument should seek to undermine the Court s confidence in your opponent. 94

54 Volunteer Attorneys/Students 95 Tax Court Rule 24(a)(5) - Law Student Assistance Effective as of May 5, 2011 With the permission of the presiding Judge or Special Trial Judge, and under the direct supervision of counsel in a case, a law student may assist such counsel by presenting all or any part of the party's case at a hearing or trial. In addition, a law student may assist counsel in a case in drafting a pleading or other document to be filed with the Court. A law student may not, however, enter an appearance in any case, be recognized as counsel in a case, or sign a pleading or other document filed with the Court. The Court may acknowledge the law student assistance. 96

55 Student Participation in Court Proceedings Under the Academic Clinical The Court will permit students who are enrolled in an academic clinic for credit and in good standing with their school to participate in proceedings before the Court pursuant to the following procedures: lead counsel who intends to request permission for a student/fellow to participate in proceeding before the Court shall obtain from the petitioner advance written consent for the student/fellow to participate in the case. This written consent does not need to be submitted to the Court; when a case is called for trial, lead counsel shall answer the calendar call, advise the Court whether the case is ready for hearing or trial, and introduce any student/fellow enrolled in the academic clinic who seeks permission to participate in the proceedings; 97 Academic Clinical, cont. If the Court permits a student/fellow to participate in a case upon compliance with the previous two requirements, lead counsel shall remain in the courtroom at petitioners counsel table at all times during the hearing or trial of the case. A student/fellow who is permitted to participate in a case may, at the discretion of the presiding Judge or Special Trial Judge, present all or any part of a petitioner s case at a hearing or trial. A presiding Judge or Special Trial Judge may at any time exercise discretion to require the student/fellow to step aside and to require lead counsel to complete the hearing or trial. An academic clinic submitting a pleading, motion, stipulation, or other paper to the Court for filing may include a statement in the body of the document including the name of any student/fellow enrolled in the academic clinic who participated in the preparation of the document. However, a student/fellow may not sign a document submitted to the Court for filing. 98

56 Additional Activities Help develop record in petitioner s counsel room Legal research Draft subpoenas Prepare post-trial briefs Deadlines Oversight Prepare witness/petitioner for trial Students can receive special admission from the Court to practice Admitted attorney requests for special admission 99 Appeal 100

57 Appeal No appeal of S cases. Venue is based on location of taxpayer s residence (individuals) or principal place of business (corporations) when petition was filed. Taxpayer and the government may agree to appeal to a different circuit. IRC Notice of appeal must be filed within 90 days after entry of decision. IRC 7483, Tax Court Rule IRC 7482(b) If an issue does not fall under any of the enumerated categories in IRC 7482(b)(1)(A) through (F), then the Court of Appeals for the District of Columbia may review decisions of the Tax Court. IRC 6015 is not included in the enumerated categories. See James Bamberg, A Different Point of Venue: The Plainer Meaning of Section 7482(b)(1), 61 Tax Lawyer 445 (Winter 2008). 102

58 Tax Court Rule 201 Incorporation of Model Rules Practitioners before the Court shall carry on their practice in accordance with the letter and spirit of the Model Rules of Professional Conduct of the American Bar Association ( ABA ). 103 Before the Notice of Deficiency: The Government s Obligation to Examine the Notice of Deficiency and determine if it is supported by competent evidence. 104

59 Greenberg s Express v. Commissioner, 62 T.C. 324 (1974) The petitioners sought an order directing the IRS to produce records relating to the examination of Thomas and Joseph Gambino by the IRS or the DOJ in order to show that the examination was not in good faith and for a legitimate purpose. The Tax Court was not persuaded by mere allegation that the government might destroy evidence supporting the Gambinos claims. Generally the Court will not look behind the Notice of Deficiency to examine the evidence used or the propriety of the IRS s motives or of the administrative policy or procedure involved in making a determination. Human Engineering Institute v. Commissioner, 61 T.C. 61, 66 (1973). The exception to that rule is that on occasion the Court will look behind the Notice of Deficiency when there is substantial evidence of unconstitutional conduct on the IRS s part and the integrity of the judicial process would be impugned. Efrain T. Suarez v. Commissioner, 58 T.C. 792 (1972). 105 Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979) The Naked Notice The Court held that there was no presumption of correctness attached to a naked notice asserting omitted income, unsupported by any predicate evidence and the taxpayer is relieved of the burden of going forward with the evidence. 106

60 Other Cases and Materials I.R.C Burden shifts where taxpayer produces credible evidence. General rule.--if, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue. Limitations.--Paragraph (1) shall apply with respect to an issue only if the taxpayer has complied with the requirements under this title to substantiate any item; the taxpayer has maintained all records required under this title and has cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews; and in the case of a partnership, corporation, or trust, the taxpayer is described in section 7430(c)(4)(A)(ii) Subparagraph (C) shall not apply to any qualified revocable trust (as defined in section 645(b)(1)) with respect to liability for tax for any taxable year ending after the date of the decedent's death and before the applicable date (as defined in section 645(b)(2)). 107 Filing the Tax Court Petition 108

61 Filing the Tax Court Petition Issue: Can you file a Petition if you have no defense to the deficiency? Can you require the government to prove its case? Answer: Probably Not. A petitioner must introduce credible evidence before requiring the government to prove their findings. Nevertheless, the failure to do so will generally not result in a penalty under sec unless the court finds the petitioner is purposely delaying the process with a meritless tax protester claim or known frivolous defenses CFR 10 Practice Before the Internal Revenue Service 31 U.S.C Practice before the Department Under 31 U.S.C. 330, the Secretary of the Treasury has the authority to regulate and sanction all representatives practicing before the Treasury Department, including its agencies such as the IRS, and the applicable regulations are codified under 31 CFR 10. IRS Circular 230, under the authority of 31 CFR 10, spells out the duties and sanctions of all persons representing taxpayers before the Internal Revenue Service. Representatives, as described in the text, covers a wide range of tax practitioners including but not limited to CPA s, tax attorneys, tax preparers, etc. The rules spelled out in this section, for the most part, mimic the candor and professionalism requirements of the ABA rules for Attorney Conduct. Specifically, 31 CFR requires that the practitioner have actual or good faith belief that the information provided to the court is accurate and true, with the following Sec and referring to known client omissions and diligence to checking the accuracy of the information being presented to the court. 110

62 31 CFR 10, cont. Sec further states that a practitioner may not unreasonably delay the prompt disposition of any matter before the Internal Revenue Service. This sub-section, read in conjunction with the preceding ones, prohibits a practitioner from putting forth any matter that he has unreasonably failed check upon its truth and accuracy as it would cause a delay of the process. 31 CFR specifies the types and amount of sanctions that may be imposed on practitioners for a violation of the above rules and regulations. Namely, under this authority, the Secretary may, after notice and opportunity to respond, censure, suspend, or disbar any practitioner from appearing before the Department. Further, the Secretary may impose monetary penalties in an amount not exceed[ing] the gross income derived (or to be derived) from the conduct giving rise to the penalty. 111 I.R.C Sanctions and Costs Awarded by Courts Sec states that the Secretary shall have the burden of proof if the taxpayer introduces credible evidence with respect to any factual issues relevant to his tax liability, and sec imposes a penalty of up to $25, on any taxpayer who institutes or maintains a proceeding which is frivolous or groundless, or one brought about primarily for delay. In Coleman v. C.I.R., the Seventh Circuit described a frivolous petition as one that is contrary to established law and unsupported by a reasoned, colorable argument for change in the law. The court further explained that it uses a subjective bad faith test as well as an objective should have known test for determining whether the petitioner should be penalized under sec In the majority of cases where petitioners have been unable to produce credible evidence to support their positions, the court has denied to impose a penalty under sec. 6673, leaving the taxpayers with a stern warning instead. 112

63 I.R.C. 6673, cont. That was the case in Stewart v. C.I.R., where the court decided not to impose penalties since at least one of the petitioner s arguments was not frivolous. The court nevertheless stated that [it] may impose this penalty in the future if he makes frivolous arguments or institutes proceedings primarily for delay. Several courts however have penalized petitioners for advancing tax protester claims, or repeated groundless claims, or wholly frivolous claims for the sole purpose of causing delay. In Sauers v. C.I.R., the court penalized the petitioner under sec for filing memos with his petition regarding tax protester arguments, and filing several lengthy documents purporting to be motions. Similarly in Wetzel v. C.I.R., the court imposed the penalty since Petitioner [was] a professional tax return preparer who knew or should have known that his arguments are frivolous. 113 ABA Rules of Attorney Conduct ABA Model Rule 3.3 Candor Toward The Tribunal A lawyer shall not knowingly: make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer 114

64 I.R.C General rule.--if, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue. 115 I.R.C Cont. Limitations - Paragraph (1) shall apply with respect to an issue only if: the taxpayer has complied with the requirements under this title to substantiate any item; the taxpayer has maintained all records required under this title and has cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews; and in the case of a partnership, corporation, or trust, the taxpayer is described in section 7430(c)(4)(A)(ii) Subparagraph (C) shall not apply to any qualified revocable trust (as defined in section 645(b)(1)) with respect to liability for tax for any taxable year ending after the date of the decedent's death and before the applicable date (as defined in section 645(b)(2)). 116

65 I.R.C Tax Court proceedings Procedures instituted primarily for delay, etc.-- Whenever it appears to the Tax Court that proceedings before it have been instituted or maintained by the taxpayer primarily for delay, the taxpayer's position in such proceeding is frivolous or groundless, or the taxpayer unreasonably failed to pursue available administrative remedies, the Tax Court, in its decision, may require the taxpayer to pay to the United States a penalty not in excess of $25, ABA Model Rule Expediting Litigation A lawyer shall make reasonable efforts to expedite litigation consistent with the interests of the client. 118

66 Abrams v. Comm'r of Internal Revenue, 82 T.C. 403 (1984) Court reprimanding petitioner saying that [w]hen the costs incurred by this Court and respondent are taken into consideration, the maximum damages authorized by the statute do not begin to indemnify the United States for the expenses which petitioner's frivolous and groundless action has occasioned. 119 Smith v. C.I.R., 80 T.C.M. (CCH) 377 (T.C. 2000) Concluding that petitioner's position is frivolous and groundless and was instituted primarily for delay, and setting a penalty of $3,500 under sec

67 Holmes v. C.I.R., 91 T.C.M. (CCH) 1050 (T.C. 2006) Finding petitioner liable for instituting the procedures primarily for delay. 121 Answering the Petition 122

68 Issue Does the government have to admit that documents necessary to calculate deficiency or statute of limitations are "lost? Answer: Probably Not. Are there any civil counterparts to Brady, Jencks and Giglio? 123 Brady, Jencks and Giglio The discovery obligations of federal prosecutors are generally established by Federal Rules of Criminal Procedure 16 and 26.2, 18 U.S.C (the Jencks Act), Brady v. Maryland, 373 U.S. 83 (1963), and Giglio v. United States, 405 U.S. 150 (1972). Are there any civil counterparts to Brady, Jencks and Giglio? 124

69 Answer Although there is considerable debate over whether government agencies are even held to the same standards as criminal prosecutors when handling evidence, it is largely accepted that mere negligence, without more, is not grounds for a finding of Due Process violation. There seems to be no settled law on this issue, as explained in Garavaglia v. C.I.R., however a closer analysis of related legal principles may provide a glimpse into a yet to be determined area of tax court procedure. 125 IRM / 1203 Employee Misconduct Allegation Internal sources, taxpayers, or third parties may refer improper behavior by an IRS agent to his manager or the Human Capital Office, Employee Conduct and Compliance Office (ECCO) pursuant to 1203 by filling a Form Sec covers the following types of IRS agent and employee misconduct: False statements under oath; Falsification of documents; Assault or battery; Misuse of IRC 6103 (Disclosure); Threat of Audit; Seizure violations; Infringement of taxpayer s constitutional rights; Harassment/Retaliation; Discrimination; Failure to file; or Understatement of liability. 126

70 Brady Rule Consideration Most courts have rejected the application of Brady to civil and administrative hearings. In Mister Disc. Stockbrokers, Inc. v. S.E.C., the Seventh Circuit very methodically disclaimed the petitioner s argument. First, the court noted that the Federal Rules of Civil and Criminal Procedure are not applicable in administrative hearings, and that each agency can create their own discovery rules so long as they insure that fundamental fairness is met as required for due process. Also, the court pointed out that administrative proceedings do not warrant such extensive discovery rules as criminal proceedings since the possible penalties are not as severe, even if they are quasi-criminal as described by the petitioner in the case. In U.S. ex rel. (Redacted) v. (Redacted), the court once again pointed to the fundamentally different consequences of a civil case from a criminal sanction as the reason for denying a Brady-like discovery request. In Tandon v. C.I.R., the application of the Brady rule was denied simply because the [c]ircuit has never applied the Brady rule to a civil proceeding for determining the amount of one's tax liability. 127 Brady Rule Consideration, cont. Only a few courts have dared to rule that the Brady rule should also apply to civil and administrative hearings, the most notable being the Southern District Court of New York in Sperry & Hutchinson Co. v. FTC. In Sperry, the court said that the essentials of due process at the administrative level require similar disclosures by the agency where consistent with the public interest. In civil actions, also, the ultimate objective is not that Government shall win a case, but that justice shall be done. Similarly, in Equal Employment Opportunity Comm'n v. Los Alamos Constructors, Inc., ruling on an appeal from an administrative hearing, the court firmly believed that the responsibilities of government lawyers [are] fully applicable to government counsel in civil cases. This was based on the idea that U.S. Attorneys are representatives of a sovereignty and thus should be impartial in all dealings. This line of argument has gained little traction in recent years, as civil and administrative courts seem to favor judicial economy. 128

71 Other Cases and Materials Ferguson v. Roper, 400 F.3d 635 (8th Cir. 2005). Court did not find a Due Process violation in the prosecution s loss of potentially exculpatory evidence [a]bsent a showing of bad faith on the part of the police or prosecutor, which petitioner could not provide. Dixon v. C.I.R., 316 F.3d 1041 (9th Cir. 2003). Court imposed sanctions upon Respondents in Tax Court for manipulating witnesses and destroying or hiding exculpatory evidence stating that When we conclude that the integrity of the judicial process has been harmed, however, and the fraud rises to the level of an unconscionable plan or scheme which is designed to improperly influence the court in its decisions, we not only can act, we should. 129 Other Cases and Materials, cont. N.L.R.B. v. Nueva Eng'g, Inc., 761 F.2d 961 (4th Cir. 1985). On appeal from an administrative hearing, court finds Brady rule request meritless stating that an action for violations of the National Labor Relations Act is civil in nature, does not involve potential incarceration and violation of the Act does not carry with it the stigma of a criminal conviction. Demjanjuk v. Petrovsky, 10 F.3d 338 (6th Cir. 1993). Court finding in favor of applying the Brady rule considering that the consequences of denaturalization and extradition [are] equal or exceed those of most criminal convictions. 130

72 Other Cases and Materials, cont. Justin Goetz, Hold Fast the Keys to the Kingdom: Federal Administrative Agencies and the Need for Brady Disclosure, 95 Minn. L. Rev. 1424, (2011). Article explores the role of Brady/Giglio in administrative court hearings by comparing several agencies procedures with the Federal Rules, ultimately declaring this results in two separate standards for civil defendants--greater protections in Article III courts and lesser protections in the Article I courts hitherto profiled in addition to the substantial differences in due process protections between Brady criminal defendants and civil enforcement defendants. 131 ABA Model Rule 3.3 Candor Toward The Tribunal A lawyer shall not knowingly: make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer; fail to disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel; or offer evidence that the lawyer knows to be false. If a lawyer, the lawyer s client, or a witness called by the lawyer, has offered material evidence and the lawyer comes to know of its falsity, the lawyer shall take reasonable remedial measures, including, if necessary, disclosure to the tribunal. A lawyer may refuse to offer evidence, other than the testimony of a defendant in a criminal matter, that the lawyer reasonably believes is false. 132

73 ABA Model Rule 3.3, cont. A lawyer who represents a client in an adjudicative proceeding and who knows that a person intends to engage, is engaging or has engaged in criminal or fraudulent conduct related to the proceeding shall take reasonable remedial measures, including, if necessary, disclosure to the tribunal. The duties stated in paragraphs (a) and (b) continue to the conclusion of the proceeding, and apply even if compliance requires disclosure of information otherwise protected by Rule 1.6. In an ex parte proceeding, a lawyer shall inform the tribunal of all material facts known to the lawyer that will enable the tribunal to make an informed decision, whether or not the facts are adverse. 133 ABA Model Rule 3.4 Fairness to Opposing Party and Counsel A lawyer shall not: unlawfully obstruct another party s access to evidence or unlawfully alter, destroy or conceal a document or other material having potential evidentiary value. A lawyer shall not counsel or assist another person to do any such act; falsify evidence, counsel or assist a witness to testify falsely, or offer an inducement to a witness that is prohibited by law; knowingly disobey an obligation under the rules of a tribunal, except for an open refusal based on an assertion that no valid obligation exists; in pretrial procedure, make a frivolous discovery request or fail to make reasonably diligent effort to comply with a legally proper discovery request by an opposing party; 134

74 ABA Model Rule 3.4, cont. A lawyer shall not: in trial, allude to any matter that the lawyer does not reasonably believe is relevant or that will not be supported by admissible evidence, assert personal knowledge of facts in issue except when testifying as a witness, or state a personal opinion as to the justness of a cause, the credibility of a witness, the culpability of a civil litigant or the guilt or innocence of an accused; or request a person other than a client to refrain from voluntarily giving relevant information to another party unless: the person is a relative or an employee or other agent of a client; and the lawyer reasonably believes that the person s interests will not be adversely affected by refraining from giving such information. 135 Backdating a/k/a Temporal Modification of Documents Not necessarily illegal or unethical if the document seeks to be effective as of a prior date. A document may be backdated to memorialize past action or intent. The threshold question is whether the event occurred on the backdate or whether the event occurred on another date. 136

75 Backdating That Fabricates U.S. Projector & Elec. Corp. v. Commissioner, T.C. Memo for the finding that the act of executing rescission agreement fixed petitioner s liability to return funds previously received, the event which determined the timing of a tax deduction. The back dating was the event that fixed the resulting tax treatment, not memorializing it. United States v. Wilson, 118 F.3d 228 (4th Cir. 1997) involved an attorney who sought to conceal his client s assets from the IRS by backdating promissory notes to make it appear that the client was obligated to repay certain unconditionally received amounts. Medieval Attraction N.V. v. Commissioner, 72 T.C.M. (CCH) 924 (1996) involved an effort to claim tax deductions by backdating documents to make it appear that intangible property had been transferred to a related party so that payments to the related party could be treated as tax deductible royalties. 137 Other Taxpayers' Files (Offensive and Defensive Use of sec. 6103) 138

76 Issue Under what circumstances can the government use information in another taxpayer's files against a petitioner in Tax Court? Under what circumstances can the petitioner in Tax Court access information in another taxpayer's file? Prior reports of IRS agents acting as government experts. 139 Answer The analysis of I.R.C inherently begins with 5 U.S.C. 552, commonly known as the Freedom of Information Act (FOIA). Requests for tax returns and other documents held by Federal Agencies are done under FOIA and thus, all of its exemptions apply. Of particular interest to tax petitioners are Exemptions 3 and 5. Under Exemption 3, the government may prevent the release of records that are specifically exempted from disclosure by statute. In this light, sec becomes relevant in that it requires that returns and return information remain confidential unless otherwise authorized by Title 26. Exemption 5 protects inter-or intra-agency letters or memoranda which would not be available by law to a party... in litigation with the agency. 140

77 Answer, cont. The government may access information in another taxpayers return if the information fits within the parameters of sec. 6103(h)(4), allowing disclosure of a return (B) if the treatment of an item reflected on such return is directly related to the resolution of an issue in the proceeding; (C) if such return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding. In In re U.S., the court, following a lengthy statutory de-construction analysis, held that directly related language should be read narrowly, saying that [t]he disclosure of a third party return in a tax proceeding will be subject to [an items-test], except that such items... must have a direct relationship to the resolution of an issue of the taxpayer's liability. Violation of Sec disclosure rules is among the listed grounds for a Sec Complaint against an IRS Agent/ employee. 141 IRS Reports under FOIA IRS reports have been generally held as attorneywork product or as part of the agency s deliberative process and privileged under FOIA Exemption 5.1 The protection of reports as deliberative process is designed to prevent the release of inter or intraagency communication made as part of the government s decision and policy making process. A document is predecisional if it was prepared in order to assist an agency decisionmaker in arriving at his decision, rather than to support a decision already made. 142

78 Other Cases and Materials ABA Model Rule 3.4 See above ABA Model Rule 4.4 Respect For Rights Of Third Persons In representing a client, a lawyer shall not use means that have no substantial purpose other than to embarrass, delay, or burden a third person, or use methods of obtaining evidence that violate the legal rights of such a person. A lawyer who receives a document or electronically stored information relating to the representation of the lawyer's client and knows or reasonably should know that the document or electronically stored information was inadvertently sent shall promptly notify the sender. 143 What third-party contacts must the government disclose? Does I.R.C apply in Tax Court? 144

79 Westreco, Inc. v. Commissioner, T.C. Memo Counsel for Respondent was actively involved in an audit of the taxpayer for years subsequent to what the Court was considering. During the audit process counsel for Respondent issued administrative summonses for documents and testimony of the taxpayers employees under I.R.C The issues before the Court and with the audit were substantially similar. The Tax Court held that counsel s participation in the audit undermined the Tax Court s rules of discovery. The Tax Court was also concerned that the stipulation process would be made more difficult and greatly delayed while subsequent years summons were pursued. Respondent would also be unable to provide a full and timely response to the taxpayer s discovery request. Respondent s litigating posture would be continually be delayed and would depend on the progress of the subsequent year examination. 145 Mary Kay Ash v. Commissioner, 96 T.C. 459 (1991) The Court found that summons issued before the filing of petition were not subject to Westreco restrictions. The Court was also unwilling to restrict information gathered through issuance of summons before the petition was filed but resulted in information being gathered post-petition. The Court noted that it was unable to enforce its discovery rules prior to the filing of a petition. The opinion was reviewed by the Court with Judges Nims, Korner, Shields, Hamblen, Cohen, Clapp, Gerber, Jacobs, Parr, Wells, Colvin, and Halpern agreeing with the majority. 146

80 Protective Orders Excessive Discovery The Tax Court may order a protective order where the IRS engages in inappropriate and excessive formal discovery without any conference between the parties. Protective orders from other courts The Tax Court has allowed the Commissioner access to documents in another case that was subject to a protective order by the other court. 147 Communication with Persons Represented by Counsel 148

81 Can the Government contact employees of the Taxpayer? ABA Model Rule of Professional Conduct 4.2: In representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order. 149 Can the Government contact employees of the Taxpayer, cont. Comment [7] provides: In the case of a represented organization, this Rule prohibits communications with a constituent of the organization who supervises, directs or regularly consults with the organization s lawyer concerning the matter or has authority to obligate the organization with respect to the matter or whose act or omission in connection with the matter may be imputed to the organization for purposes of civil or criminal liability. Consent of the organization s lawyer is not required for communication with a former constituent. If a constituent of the organization is represented in the matter by his or her own counsel, the consent by that counsel to a communication will be sufficient for purposes of this Rule. Compare Rule 3.4(f). In communicating with a current or former constituent of an organization, a lawyer must not use methods of obtaining evidence that violate the legal rights of the organization. See Rule

82 Model Rule 4.2 advances the well recognized public policy favoring the preservation and protection of the attorney-client relationship. See Cram v. Lamson & Sessions Co., 148 F.R.D. 259, 260 (S.D.Iowa 1993). 151 Communicating with Former Employees - FU Investment Co., Ltd. v. Commissioner, 104 T.C. 408 (1995) The Tax Court was asked to address whether the protection of Model Rule 4.2 extended to former employees of a corporation/petitioner. The Court in holding that Rule 4.2 does not extend to former employees, cited the ABA Standing Committee on Ethics and Professional Responsibility, Formal Opinion in which the ABA takes the view that Rule 4.2 should not be interpreted to prohibit ex-parte communications with former employees. The Court was cautious in that they recognized that circumstances may arise where certain precautions (including a narrowly drawn protective order) may be warranted to ensure that such ex-parte contacts are not simply a forum for counsel to seek information protected by the attorneyclient privilege. The Court advised Respondent that they must advise former employees that respondent and petitioner are adverse parties to a proceeding and that the attorney must conduct the interview in conformity with Model Rule 4.3 (Dealing with Unrepresented Persons). 152

83 Henthorn Motions U.S. v. Henthorn, 931 F.2d 29 (9th Cir. 1991) provides that, in the context of a criminal case, the government must disclose information favorable to the defense that meets the appropriate standard of materiality. The government is obligated upon a defendant s request to examine the personnel files of government employees it intends to call as witnesses in a criminal trial in order to determine if any portions of the files ought to be made available to the defense for impeachment purposes once the defense has made a demand for their production. 153 IRS Treatment of Requests for Personnel Records IRM ( ) Requests and demands for testimony and/or production of personnel and payroll records in private litigation or administrative proceedings is coordinated by the IRS Disclosure Office with the Transactional Processing Center (TPC). The Office of Personnel Management regulations require that subpoenas for personnel records must be approved by a judge or magistrate of a court of competent jurisdiction in order to meet the court order exception in the Privacy Act (5 U.S.C. 552a(b)(11)). 154

84 5 U.S.C. 552a - FOIA Exemption 11 No agency shall disclose any record which is contained in a system of records by any means of communication to any person, or to another agency, except pursuant to a written request by, or with the prior written consent of, the individual to whom the record pertains, unless disclosure of the record would be pursuant to the order of a court of competent jurisdiction. 155 FOIA Exemption 6 5 U.S.C. 552(b)(6) generally prohibits the disclosure of personnel and medical files and similar files the disclosure of which would constitute a clearly unwarranted invasion of privacy. 156

85 IRS Employee Timesheets Federal Courts have held that disclosure of an IRS employees time sheets, which are similar to personnel files, would constitute a clearly unwarranted invasion of personal privacy. 157 Immunizing Witnesses What efforts can and should the government take to immunize witnesses needed by a taxpayer? In the context of criminal cases 18 U.S.C grants prosecutors broad discretion to grant immunity to a witness, but grants no right to defendant to do the same. 158

86 Immunizing Witnesses, cont. The Third Circuit has recognized a judicial authority to grant immunity when it is found that a potential defense witness can offer testimony which is clearly exculpatory and essential to the defense case and when the government has not strong interest in withholding immunity. See Gov t of V.I. v. Smith, 615 F.2d 964, 974 (3d Cir. 1980). United States v. Burke, 425 F.3d 400 (7th Cir. 2005) recognizes the principle that, although the court cannot order the government to immunize a defense witness, courts can dismiss an indictment where the prosecutor s refusal to grant immunity has violated the defendant s right to due process. 159

87 A VIEW FROM THE BENCH WHEN: WHERE: Monday, September 23, 2013, 6:00 PM 9:00 PM Seminar from 6:00 PM 8:00 PM Reception from 8:00 PM 9:00 PM New York County Lawyers Association 14 Vesey Street New York, NY FEATURING: THE HONORABLE JOHN COLVIN United States Tax Court TOPICS: How to Effectively Represent the Previously Self-Represented Ethical Issues Concerning Pro Bono Representation RECEPTION SPONSORED BY: