Appeal of $90 tax court ruling shows pro bono lawyer’s passion
An appeal of a Tax Court decision by a taxpayer who the Tax Court found he owed $90.86 should have an interesting story. After all, the fee for filing the appeal is $500. And the story behind Grajales v. Internal Revenue Commissioner is good enough because we can learn how the system works and doesn’t work for ordinary taxpayers who get caught in the trap.
where does it start
Kirgizia I Grajales needed to borrow money from her retirement plan with New York State to pay for her mother’s funeral. The New York State & Local Retirement System filed a 1099 that treated the loans as a taxable distribution in the amount of $9,025.86. This prompted the IRS to issue a deficiency notice in the amount of $3,030 on July 10, 2017 on its 2015 filing. Ms. Grajales responded with a motion to the Tax Court.
Tax Court opinions are my favorite form of literature, but there are things about the process that I’m not familiar with, one of them is “calendar appeal”. It appears Ms Grajales had a lucky break during a ‘calendar call’. Through the appeal, we have access to the Tax Court file of a handy 399-page document dump.
On November 26, 2018, Ms. Grajales appeared before Judge Michael Thornton at the Jacob Javits Federal Building in New York’s Financial District. Judge Thornton told Ms Grajales that there were representatives of the New York County Bar Association available to consult with people who do not have a lawyer.
She was a little hesitant but he encouraged her:
THE COURT: If any of them are willing to talk to you, why don’t you take a few minutes? Are some of the reps that are still there—could you see that Kathy is still there. We will call your case back directly after you have had a chance to talk to them.
The case ended for the day with a lawsuit giving Ms Grajales time to submit documents she was struggling to get from New York State.
Enter the Jersey Boys
When the Tax Court resumes the case on April 15, 2019, Philip Colsanto is representing Ms Grajales. Phillip is a partner at Agostino & Associates PC of Hackensack NJ. Lew Taishoff, who blogs extensively about the Tax Court, calls this team the “Jersey Boys”. Frank Agostino, who runs the company, is passionate about providing quality pro bono services to low-income people. He thinks low-income people deserve the same level of representation as billionaires. Ms. Grajales had been unable to obtain any documents from New York State, so the box was again returned.
And that’s where having an avocado starts to pay off. On May 3, 2019, the Jersey boys, on behalf of Ms. Grajales, served subpoenas to the New York State Department of Tax and Finance, Local Retirement System and New State. York and the New York State Deferred Compensation Plan. On June 3, 2019, Frank Agostino himself stepped in with a motion to address Ms. Grajales’ failure to properly respond to an IRS admission request.
The case continues
On June 3, 2019, it was Frank Agostino at bat. One of the New York agencies had responded correctly to the subpoena. Another had responded by sending something directly to the Tax Court, which no one at the Court could find. Judge John Colvin took it all under advisement as he kicked the box further down the road. It took eight minutes.
Frank was back less than two hours later. One of the state agencies was willing to email a response, but only to the court. They walked out of the case after three minutes so the judge would give Frank the email address to use. He was back two hours later. The IRS was accepting the admissions motion and they were about to have all the facts that might resolve the question of whether the loan might be a taxable distribution. The New York State Department of Tax and Finance has yet to respond to the subpoena. They discussed the subpoena enforcement process. They were done in nine minutes.
A joint status report signed by Frank and the IRS attorney on July 15 indicated that the New York State Department of Tax and Finance was still struggling. They indicated that if there was no settlement, they would be ready for trial on October 28, 2019.
The attorneys appeared on October 28, 2019 and informed the court that they would be ready on November 6 to submit the case under Rule 122. This would mean that the taxpayer and the IRS agreed on the facts but not on the law. They submitted the joint stipulation on November 6, as promised. They agreed that Ms. Grajales was taxable on $908.62. This was the amount by which his loan balance exceeded $10,000. There were a number of other facts they agreed on, but that was the most important. Less important in dollar terms was this:
There is no memorandum under section 6751(b) indicating management’s written approval for the additional tax determined under section 72
Frank had lowered the $3,030 to $225.86, but he wanted to knock it down another $90.86. The Jersey Boys had taken good care of Mrs. Grajales, but they wanted to do more. Moving on a bit, a footnote in their brief explains why the issue is so important.
Although the $90.00 amount in dispute may seem inconsequential, issues revolving around 72
Hey IRS, if someone takes money out of their IRA or 401(k) or whatever before they turn 59½, have a manager think about it before giving them a penalty. The IRS and the Jersey boys have agreed to inform about this issue alone.
At the time, it looked like IRS agents would use the penalties as a bargaining chip to get taxpayers to make concessions and get a deal. Someone must have thought that was a bad thing, so the IRS Restructuring and Reform Act of 1998 added section 6765(b)(1) which says, in general:
No penalty under this title shall be imposed unless the initial determination of such an assessment is personally approved (in writing) by the immediate supervisor of the person making this determination or by a higher level official than the Secretary can designate.
The argument ends up being whether what we loosely call the 10% early withdrawal penalty under Section 72
What the courts say
I really cannot do justice to the full textual arguments that the parties present in the case.
The opinion of Judge Thornton of the Tax Court was released on January 25, 2021.
Shutdown: The IRC sec. 72
On August 24, 2022, a panel of the United States Court of Appeals for the Second Circuit upheld the Tax Court. Everything is very textual.
This appeal concerns the interpretation of three statutory provisions of the Code: section 72
The terms “penalty”, “additional amount” and “addition to tax” do not appear in section 72
The plain language of section 72
The appeal panel said in a footnote that there was no hard feelings for the Jersey Boys to raise the argument.
With the assistance of the New York County Lawyers Association, Agostino & Associates, PC represented the petitioner in this matter on a pro bono basis. The Court thanks them both for their courtesy and professionalism.
Convenient to take
Ms. Grajales filed Form 1040EZ, which is not required to report pension income. It’s understandable since she thought she had just borrowed money. If I had made the statement, I would have tried to have an argument with New York State over taxation before filing. I would like to think that I would have ended up declaring the gross distribution on 1040 with a lower taxable amount, maybe attaching something to it. This homage to computer pairing could have avoided the problem altogether.
Lew Taishoff covered the initial Tax Court ruling – EVEN HER HAIRDRESSER SURELY DOESN’T KNOW.
So today ex-Ch J Michael B. (“Iron Mike”) Thornton faces the same question, albeit in the context of 72
And who better to engage with Boss Hossery than this prominent law firm and legal adviser, Frantic Frank Agostino and The Jersey Boys?
Mr. Taishoff forwarded the cover of the appeal decision by writing to me:
As you know, I generally do not publish appeals in circuit courts unless they pass a sweeping rejection of previous tax court law, like Hewitt. The signing of Section 67561(b) Boss Hoss has become exactly what Judge Holmes predicted, a massive churn of silt. Note that the appellant was represented by Frantic Frank Agostino, Esq., the initiator of the Boss Hoss defense.