ASK THE EDD ATTORNEY – WHEN WILL EMOTIONAL DEPRESSION CONSTITUTE REASONABLE CAUSE FOR THE ABATEMENT OF PENALTIES? THE TRIMMER CASE – PART 2
By Robert S. Schriebman
It does not happen very often in the world of tax controversies, but when it does, it is a major event! I am talking about a tax case that is of major consequences. The case of John C. Trimmer, decided by the US Tax Court in April 2017 was such a case. In the Trimmer case, the US Tax Court ruled that emotional depression may constitute reasonable cause for the abatement of IRS penalties. John C. Trimmer and Susan Trimmer v. Commissioner 148 TC – No. 14 April 20, 2017.
Depression. It is something that we have all experienced, especially in today’s world where it seems that you cannot pick up a newspaper without reading about something very depressing. I am reminded of President Abraham Lincoln, who constantly suffered from bouts of depression, then medically diagnosed as melancholy. Between the poor beginnings of the Civil War for the North, the death of his sons, and his emotionally challenged spouse, Mr. Lincoln had good reason for being depressed.
Mr. Trimmer, as we will see in this series of articles, had his challenges. The IRS was not sympathetic, and IRS lawyers threw up many road blocks in his attempts to remove penalties assessed against him for failing to timely set up an IRA. However, a wise and understanding US Tax Court judge eventually ruled that Mr. Trimmer’s depression constituted reasonable cause for the abatement of penalties relating to his IRA contributions.
The facts in the Trimmer matter are extensive and will not be repeated here. I recommend that you review Part 1 before reviewing Part 2.
IRS Argument Number 1: The Trimmers Did Not Use the Proper “Form” When Asking for a Waiver
Before addressing this issue, the Tax Court judge wanted to make sure that the Internal Revenue Code (IRC) provides for IRS’ ability to waive penalties in late IRA rollovers. The Court pointed out that under IRC § 61(a) pension benefits will be considered as taxable income unless excluded by law. The Court then went on to state that IRC § 402(a) provides that pension benefits can be excluded under IRC § 402(c) if they are rolled over into an IRA within 60 days following the day the pension benefits are received. Failure to timely rollover those benefits are subject to a penalty unless a taxpayer can show a “hardship exception.” What does this mean? The waiver of the penalty must be due to equity or good conscious including casualty, disaster, or other events beyond the reasonable control of the taxpayer. To challenge the IRS’ refusal to waive the penalty, the taxpayer must show that the refusal constituted an abuse of discretion.
The IRS lawyers argued that the waiver should not apply to the Trimmers because they failed to follow a 2003 internal IRS published revenue procedure, requiring submitting a request for a private letter ruling and payment of a fee as outlined in Rev. Proc 2003-4, 2003-1 C.B. 123. To this argument the Court said that the Trimmers are exempt from the procedure because the IRS operations manager wrote back to them to tell them that their letter was sufficient and that he would get back to them within 60 days. The IRS manager said, “…you don’t have to do anything else for now. We will contact you within 60 days to let you know what action we are taking.” The IRS did not tell them that they had to use a special form or follow another procedure.
The IRS then argued that the internal procedure should apply to the Trimmers because the IRS can only remove or waive the penalty after it has examined a taxpayer’s return. To this the Court stated that when the IRS initially notified the Trimmers of the proposed penalty the IRS had done so after reviewing the filed tax return. So, the IRS argument was not valid.
IRS Argument Number 2: The US Tax Court Has No Jurisdiction to Consider Penalty Waiver Matters.
To finalize its proposed assessment, the IRS issued a deficiency notice (90-Day Letter). In response the Trimmers timely filed their petition with the US Tax Court.
When a petition is filed concerning a specific tax year, and tax return, everything on that tax return is subject to attack by the IRS and judicial review. In a way, it is almost like opening up Pandora’s Box. The Tax Court has jurisdiction over everything. The IRS argued that the waiver matter was not part of a filed tax return and that the IRS’ discretion, in denying the waiver, was not subject to judicial review.
There is a strong presumption that an act of administrative discretion is subject to judicial review. The IRS’ refusal to grant a penalty waiver is a matter of discretion. There is nothing in IRC § 402(c) that expressively precludes judicial review over the IRS’ refusal to waive a penalty. Because the denial of a hardship waiver can affect directly the existence and amount of any asserted deficiency it is open season for judicial review. So the Tax Court judge was correct when he denied the IRS’ argument and held that the Court can determine whether the IRS, in denying a penalty waiver to the Trimmers, acted arbitrarily, capriciously or without sound basis in law or fact.
The IRS then argued that the judge could not find any abuse of discretion because, “No administrative determination was made, and therefore no abuse of discretion can be determined.” The IRs further argued that the Trimmers failed to provide any documentary proof of John’s depression. The judge though that this argument was a bit silly because the Trimmers received a second letter from the IRS refusing to grant a penalty waiver. This was an administrative determination. The operations manager never requested any proof of depression or other information. The IRS simply said, “Case closed.”
In Part 3 we will look at how the IRS lawyers tried to attack the Trimmer’s argument because the medical evidence furnished at the trial was, in the IRS’ opinion not good enough.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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