Odd Reason To Be In Tax Court

 

Not all accountants practice tax.

To the contrary, I suspect most accountants do not. The confusion, I suspect, has to do with the CPA license. One associates the license with practicing at a CPA firm, but that is not necessarily true. Most accountants do not practice at a firm, and just practicing at a firm does not mean that one works tax. I have worked with a firm my entire career, and there have been many CPAs – auditors, forensics, valuation experts and so on – who have little crossover with tax. Step outside a firm – say internal audit or accounting at a corporate employer – and those numbers only increase.

I am looking at a pro se case in the Tax Court.

We have discussed pro se many times. It is commonly described as a taxpayer representing himself/herself before the Court. That technically is not true. A taxpayer can have professional representation and still be considered pro se. What it means is that the representative does not have a license to independently practice before the Court. The representative can act as an agent, advocating for and advising a taxpayer, but without that license the taxpayer is still considered pro se.

That license requires one to pass an exam, and the Tax Court exam is commonly considered one of the more challenging exams in tax practice. The exam BTW is not about tax law; rather it is about rules and procedures at the Tax Court. I have been involved in this area for decades, and I admit that those rules and procedures can be a bit … arcane.

Eva Zaczek finds herself in Tax Court. There is only one issue: how much does she owe? The answer in turn depends on how much of her Affordable Care (that is, Obamacare) subsidy was overpaid and now has to be returned. The concept is straightforward: make little money and the subsidy might fully pay for the premiums; make too much money and there is no subsidy at all. The rub is that someone is applying for the subsidy early in the tax year, before knowing what income for the year will be. Take a promotion or job change or marriage – or just ignore the too-much-income issue altogether - and the numbers can swing hard.

The IRS sent Eva a Notice of Deficiency for $2,418.

COMMENT: Eva sent a handwritten tax return, and the IRS made mistakes reading her writing.  

To its credit, the IRS admitted its mistake and revised the balance due to $900.

Eva challenged the calculation.

The rub was line 11 of Form 8962 Premium Tax Credit.

Both Eva and the IRS agreed that the number in box 11(b) should be $7,294.

This box represents the maximum premium that can be subsidized.

Both agreed that box 11(c) should be $9,057.

This amount represents the amount of premium the taxpayer is expected to pay himself/herself, without subsidy.

Eva calculated box 11(d) as $1,763 ($9,057 - $7,294).

Eva got the numbers reversed. Box 11(d) should be minus $1,763 ($7,294 - $9,057).

So?

If you read the instructions, box 11(d) cannot go below zero ($-0-).

Eva was convinced she owed the IRS $1,763.

The IRS said no, no: you only owe us $900.

And Eva was in Court arguing that she owed the $1,763 and not the $900 the IRS was seeking.

Here is the Court:

      

I will spare both of us the difference in tax law between a “deficiency” and a “balance due,” other than to point out the IRS notice that got Eva into Tax Court is called a Notice of Deficiency.

Pro se cases have a reputation for being entertaining, and we have looked at a number of them over the years.

But to go to Tax Court to argue that one owes more than the IRS wants? And this action from an accountant?

I consider this to be shade: 

I truly, truly hope that Eva doesn’t practice anywhere near a tax return.

This time we talked about Eva Zaczek v Commissioner, docket 4667-25S, filed 7/15/26.

Proving A Timely Tax Filing

 

I admit that I am biased, but I am not a fan of filing late tax returns.

Call it Murphy’s Law:

If anything can go wrong, it will.”

I am looking at a Tax Court order. An order takes place while the case is at trial. Somebody makes a motion, the Court reviews and decides. That decision is called an order, and they are common.

The IRS filed a motion that it sent a timely Notice of Deficiency to a taxpayer.

COMMENT: A Notice of Deficiency (also called a 90-day letter, a NOD or SNOD) is the IRS determining that you owe additional tax and wanting to reduce it to assessment. Why an assessment? For one thing, the IRS (usually) has 3 years to examine and adjust your return. It has 10 years to collect an assessment. That alone is a powerful incentive.

There are rules, of course. The IRS has only so much time to send the SNOD, and you have only so much time to respond to it. In general, the IRS has three years from when you filed the return or when the return was originally due, whichever is later. There are exceptions. A key one, and one will talk about today, is if you never file a tax return.

Milton Thomas Roberts failed to file a timely return for 2014. He received a notice from the IRS in 2015 asking about it. In February 2016 he went to the post office and mailed four packages: two to the IRS and two to New York state.

COMMENT: He was filing his 2013 and 2014 taxes with the IRS and New York – hence four packages. He did so correctly: he used certified mail. Yes, it costs a few dollars, but – if you ever must prove the mailing – those are the best dollars you ever spent.

About a week later the IRS acknowledged receiving his 2013 return.

COMMENT: Having the benefit of hindsight, one wonders why the IRS did not confirm 2014. To his credit, Roberts went online and confirmed that all four packages had been delivered.

For 2016 through 2019 Robers received notices from the IRS about this tax year or that, but he never received a notice about 2014.

That changed in October 2019, when the IRS sent a notice saying it never received a 2014 return.

Roberts did not immediately respond.

In February 2020, the IRS issued a SNOD showing over $275 grand of tax due.

That caught his attention.

Roberts (re)prepared his 2014 return and sent it to the IRS on or around June 2020. It showed adjusted gross income of $587 grand and a small refund of $804.

What happened to his copy of the original 2014 sent in 2016?

No idea.

Having attracted unwanted attention, Roberts was now audited for 2014. The IRS issued a second SNOD in January 2022 for $79 grand in additional tax, along with the usual interest and penalties.

You already know they are in Tax Court. Both sides agree that Roberts filed a 2014 return. Roberts argues that he filed twice – once in 2016 and again in 2020. The IRS says: nay, nay; he filed only once and that was in June 2020.

Does it matter?

Oh, yes it does.

Remember that the IRS has three years (barring oddities) to adjust his return and assess additional taxes. Roberts asserts that he filed 2014 in February 2016. Add three years and the IRS had until February 2019 to adjust and assess.

Roberts received nothing from the IRS in 2019.

Roberts says the IRS is too late. The second SNOD is incorrect and without effect.

The IRS disagrees. They say they never received the 2014 return until June 2020. Add three years and they had until June 2023 to adjust and assess. They were easily within the window.

The IRS just filed a motion requesting the Tax Court to determine that 2014 was within the window and they had filed a correct and effective SNOD.

Judge Toro denied the motion.

Why?

There is enough doubt as to what happened. Roberts had certified mail receipts, confirmation from New York of receiving 2013 and 2014 returns, confirmation from the delivery company that all four packages had been delivered, as well as a conspicuous absence by the IRS for three ½ years concerning the 2014 tax year.

Judge Toro was not going to say that the IRS had proved their case.

Mind you, that does not mean that Roberts proved his case either.

It does mean that the case revolves on whether there was a 2014 filing in 2016.

The IRS usually has the upper hand in such matters.

But Roberts brings the receipts.

You may wonder: does the IRS sometimes lose returns?

Oh yes. They have done so with me. I remember one client specifically because it impacted a scheduled real estate closing. We resolved the matter, but it involved considerable time and stress.

I will be keeping an eye out for the resolution of the Roberts story.

My hunch: he will win.

But he is in Tax Court. He is not pro se, so he is paying for an attorney. And he will keep paying, as a motion has been decided but the case itself marches on.

Which makes me wonder: could he have avoided this by simply filing a timely tax return?

As I said, I am biased.

Our case (or motion, actually) this time is from Milton Thomas Roberts v Commissioner, Tax Court docket 7011-22.

Valuing a Questionable Business

 

Starting with a 46-page case soon after finishing tax season may not have been my best idea.

Still, the case is a hoot.

Here is the Court:

Backstabbing, infidelity, and blackmail – not the first words that come to mind in relation to a baby products company.”

We are talking about Kaleb Pierce and his (ex) wife Ms. Bosco.

Early on Pierce sought to make money any way he could. At age 16 he purchased an ice cream truck, for example. He met Bosco and they married in 2000. Several children soon followed.

That ice cream truck was not going to suffice. He switched to selling timeshares. He then switched to painting houses.

In 2005 they had another child. Bosco had an idea relating to nursing newborns, and Pierce had his next business idea. He reached out to Chinese manufacturers to make wristbands for nursing mothers. He set up a website, attended tradeshows and whatnot.

His idea was not an initial success.

But there was someone at the tradeshow who was successful. Pierce wanted to partner with them, but they were not interested, Pierce then decided to duplicate their company and run them out of business.

The model was easy enough: he would manufacture the product in China, undercut the existing retail price and then reduce that already-undercut price to zero by use of promotional codes. Where is the money, you ask? He would charge a shipping fee. Considering that the price was already reduced to zero, he figured he could press his thumb on the shipping fee as his profit point.

He was right, but not fully. In the early days, the products were sometimes shipped to customers showing the actual shipping cost. Those customers were not amused.

But Pierce could make money.

And the model was simple: appropriate someone’s product, create a website to pitch it, have the product manufactured cheaply, make money hand over fist. Mind you, the products were all directed at nursing mothers, so the window to market and sell was limited. He had to strike hard and fast. He also had to keep introducing new products, as he continually needed something on which to hang a shipping charge.

The company was called Mothers Lounge (ML). ML sold each product through a different subsidiary. This separation of business was vital to give the appearance that the companies were unrelated. Even so, many customers found that the same company was selling the products. They requested that different orders be shipped together, which ML could not do, of course. ML had reached a point where 97% of its revenues came from that free- just-pay-shipping model.

How did it turn out?

In his own words:

He “never imagined that he was going to be this successful.”

But then ….

Pierce had an extramarital affair.

Someone added a tracker to Pierce’s software that tracked his keystrokes and found out about the affair.

Someone sent a box with a letter demanding $100,000 by the following week or said someone would tell Bosco about the affair.

Pierce told Bosco about the affair first. The news shattered her. She no longer trusted him. She forbade him from attending tradeshows. He responded by sending employees in his place, but it was not the same. His employees were not as … creative … at recognizing … opportunities as Pierce. Eventually he stepped down as CEO to deal with his family.

The business was not the same.

But Pierce and Bosco were still printing money. He did what a nouveau-riche entrepreneur would do: he started estate planning.

It is here that we get back to tax.

They created a trust. The trust in turn created an operating company. Pierce and Bosco each gifted 29.4% ownership to the trust. They also sold a 20.6% interest to the operating company owned by the trust.

The tax lawyers were busy.

There was a gift tax return, which meant that ML needed a valuation.

The IRS selected the gift tax returns (one by each spouse) for audit.

Pierce and Bosco fired their valuation expert and hired another.

That is different, methinks.

The new expert came in with a lower number. Pierce and Bosco told the IRS that – if anything – they had overreported the gift. What was the point of the audit?

The IRS was not buying this. The IRS argued that the two had underreported the gift by almost $5 million. Remember that the gift tax rate is 40%, so this disagreement translated into real money. The IRS also wanted penalties of almost $2 million.

Off to Tax Court they went.

The Court discussed valuation procedures for over twenty pages, the detail of which I will spare us. The Court liked some things about Pierce and Bosco’s valuations (remember they had two) and also liked some things about the IRS valuation. Then you had the unique facts of Mothers Lounge itself, a business which was not really a business but was nonetheless quite profitable. How do you value a business like that, and how do you adjust for the business decline since the blackmail attempt? The IRS argued that ML could return to a more traditional business model. The Court noted that ML could not; it was a different animal altogether.

The decision is a feast for those interested in valuation work. The Court was meticulous in going through the steps, but it was not going to decide a number. Truthfully, it could not: there was too much there.

The Court instead made an interim decision under Rule 155, a Tax Court arcana requiring the two parties to perform – and agree to – calculations consistent with the Court’s reasoning.

And the Court will review those results in a future hearing.

Our case this time was Pierce v Commissioner, T.C. Memo 2025-29.

Electronic Signatures And The Tax Court

I had a moment of dual disbelief and laughter.

At the expense of the IRS and the Tax Court.

Electronic records, cloud computing and work from home (WFH) have and continue to revolutionize the way we practice and work. I have been working, for example, with a CPA firm sponsoring a very robust WFH policy, as well as outsourcing selected tax functions overseas. Mind you, the infrastructure protecting that data transmission and retention is formidable, but woe to the accountant - especially if over age 40 – learning it for the first time.

Let’s go back to 2020. The Tax Court was rolling-in its new electronic platform – called DAWSON - which in turn was based on PACER, used for dockets in other courts. The Court was embracing electronic records, albeit in fits and starts. For example, the initial launch included only records created by the Court itself. It did not include taxpayer-submitted documents, for example. While the intent to protect taxpayer privacy was clear, it was also clear that some compromise was required. Filings containing confidential information could be sealed. If not otherwise pertinent, any confidential information could be redacted in the filing copy.

DAWSON did allow for electronic filing of the court petition itself.               

This was a big deal.

We have spoken many times about a Notice of Deficiency (NOD) or Statutory Notice of Deficiency (SNOD). This is an IRS notice, and it is also known as the 90-Day Letter. That 90 days may well be cast in concrete, as you have 90 days to file with the Tax Court should you choose to contest the matter. The IRS is very unforgiving here: miss the deadline by one day and it is guaranteed that the IRS will move to toss out your petition.

The electronic filing provides some piece of mind, but accidents still happen.

EXAMPLE: Antawn Jaal Sanders was filing electronically with the Tax Court, but Antawn cut it close. The last day to file was December 12, 2022, and Antawn had started downloading the Court forms onto his Android shortly before 10 p.m. Unable to file from his phone, he switched to his computer at 11:56 p.m. It took him a minute to log in and several to return to where he had been. It was after midnight by the time he started uploading to DAWSON. The IRS of course moved to dismiss his petition, and the Court agreed. Antawn might challenge the IRS, but he was not doing it in Tax Court. After midnight was the next day, meaning his petition was late.

Do you wonder how the taxpayer signs that petition in DAWSON?

If it were a paper file, there would be a handwritten signature.

DAWSON does not allow (for now, at least) for a handwritten signature. What it does do is allow a block-letter facsimile of your signature.

Here is the Court:

The combination of DAWSON username (email address) and password serves as the signature of the individual filing the document.”

The Court says it will accept the facsimile as a signature, so that should be the end of it.

Except when it isn’t.

Robert and Kegan Donlan filed their petition on DAWSON, and they took advantage of the electronic signature.

The IRS immediately filed a Motion to Dismiss, arguing that the Court lacked jurisdiction to hear the case because the petition was not property signed.

The Court bounced the IRS motion, of course.

And I find myself wondering – why did the IRS go there? I suppose it simply had to test the lock, fully expecting it to be locked.

And – here is years of CPA practice speaking – whether it was a new attorney who drew the short straw to look foolish in front of the Court.

Our case this time was Donlan v Commissioner, U.S. Tax Court Docket 16579-24, Feb. 19, 2025.

File A Return, Especially If You Have Carryovers

 

Please file a tax return when you have significant carryovers.

Let’s look at the Mosley case.

In 2003 Sonji Mosley bought four residential properties in North Carolina.

In 2007 she bought undeveloped land in South Carolina.

In 2009 all the properties were foreclosed.

On her 2009 return she reported approximately $20 grand of net rental expenses and a capital loss of approximately $182 grand.

On her 2014 return she claimed an (approximately) $17 thousand loss from one of the 2009 foreclosures.

On her 2015 return she claimed an (approximately) $28 thousand loss from one of the 2009 foreclosures.

On to n 2018.

It seemed an ordinary year. She worked for the city of Charlotte. She also broke two retirement accounts. The numbers were as follows: 

            Wages                                                $ 40,656

            Retirement plan distributions              $216,871

The retirement plan distributions were going to hurt as she was under 59 ½ years of age. There would be a 10% penalty for early distribution on top of ordinary income taxes.

Well, there would have been - had she filed a return.

The IRS prepared one for her. The IRS already had her W-2 and 1099s through computer matching, so they prepared something called a Substitute for Return (SFR). Taxes, penalties, and interest added to almost $60 grand. The implicit bias in the SFR is transparent: everything is taxable, nothing is deductible. The IRS wants you to see the SFR, clutch your chest and file an actual return.

To her credit, she did reply. She did not file a return, though; she replied with a letter.

COMMENT: She should have sent a return.

She explained that - yes – she should have filed a return, but the IRS was not giving her credit for prior year carryovers. If anything, she still had a credit with the IRS. She also requested the IRS to remove all penalties and interest.

COMMENT: She definitely should have sent a return.

The IRS could not understand her letter any more than you or I. They sent a Notice of Deficiency, also called a “NOD,” “SNOD,” or “90-day letter.” It is the ticket to Tax Court, as we have discussed before.

Off to Court they went.

Mosley next submitted four handwritten calculations to the IRS.

• The first showed a net operating loss (NOL) of $444,600 and a capital loss of $206,494, both originating in 2009.
• The second and third ones broke down those numbers between South and North Carolina.
• The fourth one was an updated calculation of her 2018 taxes. According to her numbers, she had a remaining NOL of $211,308 going into 2018. Since the total of her 2019 income was approximately $257 grand, she had very much separated the thorn from the stalk.

The IRS had questions. The tax impact of a foreclosure can be nonintuitive, but – in general – there are two tax pieces to a foreclosure:

(1)  The borrower may have income from the cancellation of income. That part makes sense: if the bank settles a $150,000 debt for $100 grand, one can see the $50 grand entering the conversation. Then follows a bramble of tax possibilities – one is insolvent, for example – which might further affect the final tax answer but which we will leave alone for this discussion.

(2)   Believe it or not, the foreclosure is also considered a sale of the property. There might be gain or loss, and the gain might be taxable (or not), and the loss might be deductible (or not). Again, we will avoid this bramble for this discussion.

The IRS looked at her calculations. She had calculated a 2009 NOL of $444,600 and $78,025 capital loss from her North Carolina properties. The IRS recalculated North Carolina and arrived at taxable gain of $55,575.

Not even close.

You can anticipate the skepticism the Tax Court brought to bear:

(1)  She did not file a 2009 return, yet she asserted that there were carryovers from 2009 that affected her 2018 return.

(2)  She reported the same transactions in 2009, 2014 and 2019.

(3)  The tax reporting for foreclosures can be complicated enough, but her situation was further complicated by involving rental properties. Rentals allow for depreciation, which would affect her basis in the property and thereby her gain or loss on the foreclosure of the property.

(4)  The IRS recalculations were brutal.

The Court pointed out the obvious: Mosley had to prove it. The Court did not necessarily want her to recreate the wheel, but it did want to see a wheel.

Here is the Court’s sniff at the net operating loss carryover:

It is apparent that the record is devoid of evidence to properly establish both the existence and the amount of petitioner’s NOLs in 2009.”

Here is the Court on the capital loss carryover:

“ … petitioner initially reported the foreclosure on the South Carolina land resulted in $182,343 of net long-term capital losses, and for each of 2009-17, she claimed $3,000 of that amount as a long-term capital loss deduction pursuant to section 1211(b). But on the 2015 return … petitioner also improperly claimed an ordinary loss deduction of 110,257 from the sale or exchange of the South Carolina land despite the foreclosure on that land in 2009. Thus, petitioner effectively double counted the loss …."

Mosley lost on every count, She owed tax, penalty, and interest.

And there is a lesson. If you have significant tax carryovers spilling over several years, you should file even if the result is no taxable income. The IRS wants to see the numbers play out. Get yourself in hot water and the Tax Court will want to see them play out also.

You might even catch mistakes, like double-counting things.

Our case this time was Mosely v Commissioner, T.C. Memo 2025-7.  

The Change-Of-Address Rules Matter

 

The IRS requests that one alert them of change-of-address when one moves. There is even a form, but I do not often see the form used in practice. Normally the IRS is alerted when one files the next tax return with the new address.

It is, by the way, a good idea to alert the IRS of a change of address in case you have the misfortune of tax notices. There is a clock for certain tax notices, and once they start it can be difficult to reverse the clock.

I will give you one, as it has become more repetitive in practice than I would have liked: the notice of deficiency, also called a “statutory” notice of deficiency. I generally refer to it as the SNOD.

We have talked about the SNOD before. The IRS wants to reduce its tax assessment to a judgement. That requires the intervention of a court - the Tax Court in this case - and the IRS sends out a multipage, impressive, imposing if not intimidating notice to the taxpayer.

Who in turn collects it with other tax documents - unread - and drops the bundle off a-half-year later (or more) when it is time to meet with the CPA.

There is a problem here: one has 90 days to respond to a SNOD.

Which has passed. The level of difficulty has increased. The matter has already defaulted in favor of the IRS, of course, as the taxpayer never responded. The IRS has unleashed its Collections berserkers, who have little interest whether you actually owe the tax or not.

Here is a Collections story from several years ago. The IRS proposed changes to a client’s tax return. Sure enough, the SNOD got lost in the mail, was stolen from the mailbox, was thrown in the trash, whatever. The IRS changed numbers here and there. Some numbers were small and of minor import. Others were 1099s issued to our client but belonging elsewhere among related taxpayers. Then there was the big number: the rollover of a 401(k) or IRA. A 1099 is issued for a rollover, although it is normally a nontaxable event. The 1099 has a unique code for a rollover. The IRS, the taxpayer and accountant see the code, and everybody moves on.

Not this time.

The IRS did not see the code. Underreported income! Fair share! Tax the rich! The IRS went through its dunning notice series, eventually its SNOD, and then Collections activity. They filed a lien. They were irate, as they thought the taxpayer was ignoring them.

The taxpayer had no idea. It was only when trying to sell some real estate that the lien – and the rest of the story - came to light.

We went all Sherlock on what had happened.

We filed an amended return to reverse the IRS adjustment. We had Collections hold back the war dogs to allow the IRS time to process the amended return.

Which never happened. Collections came back more frenzied than before.

The system had failed. We wanted to know where that amended return was. The IRS is not built for self-reflection, BTW, but we eventually found the return. Someone in Kansas City had started to work the file, I presume quitting time arrived and – as an example of why people hate government unions – never got back to our client. Never. As in ever.

Yeah, the matter eventually got resolved, but it had become a sinkhole of professional time. I did talk with a very pleasant IRS attorney from Nashville, who - once the matter got to her - moved heaven and earth to reverse the lien.

And there you have an example of how not responding to a SNOD can sour someone’s life.

And an example of why I believe that the IRS should be required to reimburse a tax professional’s time when the IRS fails to follow procedures or otherwise just do their job.

Let’s look at Keith Phillips.

Phillips went to prison in 2010.

Somewhere in there something else bad happened: he was injured and lost almost all vision in his right eye. He filed a civil lawsuit against the prison and received a $201 thousand settlement in 2014. He did not file a tax return for 2014.

Nor would I. Damages for physical injuries are nontaxable, and this sounds very physical to me.

The IRS thought otherwise and wanted almost $52 grand in tax, plus penalties, interest, a safe room, coloring books and a binkie while they worked through the microaggression.

They sent a SNOD.

Phillips had no idea. He was in prison.

The Tax Court rubber-stamped the assessment. The IRS began collection activity. They sent letters to the same address as the SNOD but heard nothing back. They filed a tax lien. They notified the State Department that Phillips was seriously delinquent, and State should begin revoking his passport. That State Department matter was fortunately sent to Phillip’s correct address.

Now Phillips was wondering what had happened, although he had no plans to travel overseas in the near future. He filed with the Tax Court.

IRS:            More than 90 days have passed. We win, you lose. Why? Because you are a loser, you big loser you.  

Phillips:       Hey, IRS, you sent the SNOD to the wrong address.

IRS:            Nope, we sent it to the right address.

Phillips:       I never lived at this address.

IRS:             You did. We have a USPS notice for change of address.

Phillips:       Let me see it.

IRS:             Knock yourself out, loser.

Phillips:       This is my son. We have the same name. He was living with his mom. I had been here … in prison … years before this change of address was sent.

IRS:             Oops.

If the SNOD is sent to the wrong address, then the SNOD is not valid. To the IRS’ credit, this error is not common, but it happens.

Mind you, this does not technically mean that the matter is over. Phillips never filed a return for 2014, so the statute of limitations has never started for that year. On the other hand, now that the IRS is aware that the settlement was for personal injury – and thus nontaxable – what is the point?

Our case this time was Phillips v Commissioner, T.C. Memo 2024-44.