Ninth Circuit Declines to Reach Constitutionality of President’s Removal Power Over Tax Court Judges

Frequent guest blogger Carl Smith brings us up to date on litigation over the constitutionality of IRC section 7443(f), giving the President removal power over Tax Court judges. Christine

In a post from September I alerted PT readers that two of the cases in which Joe DiRuzzo had again raised the issue of the constitutionality of the President’s removal power over Tax Court judges were set for oral argument before the Ninth Circuit. The constitutional separation of powers issue was decided against the taxpayers in both Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), and Battat v. Commissioner, 148 T.C. No. 2 (2017) – though, on different reasoning as to which Branch of government in which the Tax Court is located, if any.

Well, the Ninth Circuit panel removed both of Joe’s cases from the oral argument calendar, and it just issued two unpublished opinions. In both of the opinions, the Ninth Circuit avoided addressing the constitutional question.

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In Thompson v. Commissioner, Ninth Cir. Docket No. 17-71027 (Nov. 14, 2018), Joe had moved to recuse all Tax Court judges because, in light of the President’s removal power, the judges were being subtlely pressured to rule in favor of the IRS. When the Tax Court denied the motion (citing Battat), Joe brought an interlocutory appeal. Consistent with the results of all other interlocutory appeals that Joe has brought on this issue to date, the Ninth Circuit refused to rule on the constitutional issue. Joe tried to fit this case into an exception from the rule that, ordinarily, interlocutory appeals are prohibited. However, the Ninth Circuit found that no exception applied. Nor did it think a writ of mandamus should issue. The court wrote: “The Thompsons do not explain how their challenge to the constitutionality of the Tax Court cannot be adequately reviewed or possibly corrected on direct appeal.”

In Crim v. Commissioner, Ninth Cir. Docket No. 17-72701 (Nov. 14, 2018), the taxpayer submitted an OIC, and, after it was not accepted, went to Appeals. Appeals confirmed the OIC denial. Despite the fact that the OIC was not part of a Collection Due Process (CDP) hearing, the taxpayer petitioned the Tax Court for review. In the case, Joe also moved for recusal of all Tax Court judges on the constitutional issue. Citing Battat, the Tax Court first denied the constitutional motion in an unpublished order. Then, the court issued a second unpublished order holding that, in the absence of a CDP proceeding, the Tax Court lacked jurisdiction to review Appeals’ denial of an OIC. Crim’s appeal to the Ninth Circuit was thus not an interlocutory one. However, it fared no better. The court did not reach the constitutional issue because it held that the Tax Court had properly dismissed the case for lack of jurisdiction. The Ninth Circuit wrote:

Because Crim has not presented any evidence that the IRS filed a notice of a federal tax lien or a final intent to levy against him, that he requested a collection due process hearing with the IRS Office of Appeals, that he attended an Office of Appeals collection due process hearing, or that the Office of Appeals made any “determination” addressing a disputed lien or levy, the Tax Court lacked jurisdiction over Crim’s petition under 26 U.S.C. § 6320 and § 6330. Any argument that Craig v. Commissioner, 119 T.C. 252 (2002), commands a different result has been forfeited. See Christian Legal Soc’y Chapter of Univ. of Cal. v. Wu, 626 F.3d 483, 487-88 (9th Cir. 2010). Crim also forfeited the arguments raised for the first time in his reply brief that the Administrative Procedures Act, 5 U.S.C. § 706(1), and the All Writs Act, 28 U.S.C. § 1651, provide jurisdiction here. The failure to find jurisdiction on these grounds was not plain error. . . .

Given that the Tax Court lacked jurisdiction over Crim’s petition, we decline to exercise our “discretionary jurisdiction” over the recusal motion. See Gruver v. Lesman Fisheries Inc., 489 F.3d 978, 981 n.4 (9th Cir. 2007).

To get the constitutional issue adjudicated, it looks like Joe or somebody else will have to appeal any Tax Court ruling on the constitutional issue after a final decision is entered in a Tax Court case over which the court clearly had jurisdiction.

Can the House Obtain and Release President Trump’s Tax Returns?

Guest poster Stu Bassin continues the discussion about possible ways that President Trump’s tax returns may see the light of day. In this post Stu suggests an approach that does not rely on the Congressional right within Section 6103(f) but instead looks to the possibility of serving a subpoena on advisors. Les

Minutes after the networks announced that the Democrats had retaken the House of Representatives, the commentators began discussing whether the Democrats in control of the House could obtain and release President Trump’s tax returns.  Recognizing that the discussion focused upon one of my favorite obscure tangents of the tax law, I pulled out my tattered copy of the Internal Revenue Code and looked for an answer.

I have previously explained on Procedurally Taxing that the Section 6103 prohibition against disclosure of tax returns and return information provides only limited protection for the President’s tax returns. Section 6103 (b) establishes that the only protected returns and return information are those filed with the Service. Identical copies of the same documents which are not filed with the Service are not protected.  Further, the statute establishes many detailed exceptions to the prohibition against disclosure.

Most of the commentary has focused upon the Section 6103(f) exception to the prohibition against disclosure which authorizes Congress to obtain returns and return information.  Under the statute, the Service must provide the Chairman of the House Ways and Means Committee any returns and return information specifically requested in writing, presumably including the President’s returns and any related audit files.  The statute provides that any information in those documents identifying the taxpayer (i.e., the President) can be provided to the committee only when it is sitting in closed executive session.  Interestingly, the statute does not contain any prohibition against further disclosure of the documents to the remainder of the Congress or disclosure of the information by the Congress to the general public.  And, as Professor Yin has reported,Congress has occasionally read the statute as allowing it to disclose returns and return information to the public. Less formally, the documents might “leak.”

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Given the sensitivity of this information, one can imagine a scenario where the President (or his appointees at Treasury and the Service) refused to produce the requested documents, contending that Section 6103 protected the documents from disclosure.  I see no merit in such an argument because the statute is clear on its face.  Even if they objected, the Committee and the House would likely seek to enforce its request and find the administration in contempt.  The dispute would likely find its way into the courts, years of political debate would ensue, and the courts would be asked to sort out the statutory construction issues (along with any related separation of powers issues).

I believe, however, that the House has another alternative which could fast-track resolution of the disclosure.  It could serve document subpoenas upon the accounting firm which prepared the returns and the law or accounting firms representing the President in his audit disputes with the Service.   The firms (and the President) could not assert Section 6103 to resist the subpoena because copies of the returns and audit documents in their possession are not protected by the statute.  Likewise, any attorney-client privilege claim would be deemed waived because identical copies of the returns and audit documents had already been disclosed to the Service—an entity outside any privileged relationship.   Further, an effort to quash the subpoena as politically motivated would almost surely fail because decades of summons enforcement case law establishes an almost insurmountable legal burden for taxpayers asserting such claims.  The House could persuasively defend its inquiry as a proper investigation of potential conflicts of interest of an executive branch employee (i.e., the President).

Finally, even if the President attempted to intervene in the court to assert a separation of powers argument, this blogger’s inclination is that the President’s argument would fail.  The documents subject to the subpoena have nothing to do with the President’s conduct of his official functions.  Even if the documents dealt with Presidential conduct, the Supreme Court decision in United States v. Nixon 418 U.S.  663 (1974) would appear decisive.  The Constitution simply does not protect documents unrelated to the conduct of official business and which are possessed by people outside the government, even if they refer to the conduct of the President.

Stay tuned.

“Defense to Repayment” Protects Taxpayers with Defaulted Student Loans from Treasury Offset Program

Professor Michelle Drumbl who teaches at Washington & Lee University School of Law and who runs the low income taxpayer clinic there brings us a guest post on an interesting case regarding the intersection of the earned income tax credit, defaulted student loan debt and the Treasury Offset Program. I am privileged to work at the Legal Services Center of Harvard Law School with a group of amazing lawyers who represent individuals who have attended for profit colleges and who have not received the bargained for benefits of higher education. As Professor Drumbl describes and as they posted, my colleagues recently won an important case protecting the tax refunds of students of a for profit college. I hope that this case, and others, will help create a movement to protect the earned income tax credit from the offset program. For those interested in this issue look for a deeper discussion in Professor Drumbl’s book which will be published next year by Cambridge University Press. Keith

Individuals expecting a tax refund are sometimes unpleasantly surprised to learn the refund instead has been applied to another outstanding debt. Internal Revenue Code section 6402(a) authorizes the Department of Treasury to offset an “overpayment” (generally speaking, the amount of refund shown as due on the return) against any outstanding federal tax, addition to tax, or interest owed by the taxpayer. If the taxpayer does not have any outstanding federal tax debts, or if any amount of refund remains after those debts are paid, section 6402(c)-(f) provide that the overpayment is then subject to the Treasury Offset Program in the following order of priority: 1) past-due child support payments; 2) outstanding debts to other federal agencies, including federal student loan debt; 3) outstanding state income tax debt; and 4) outstanding unemployment compensation debt owed to a state.

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Keith blogged about section 6402 nearly three years ago in a post that drew a few dozen comments, including many from return filers who had experienced various types of refund offsets. In my view, the refund offset rules are troubling because they capture the refundable portion of the earned income tax credit (EITC) and the child tax credit. These two refundable credits constitute important social benefits for millions of working Americans. Administered by the IRS and delivered as part of the tax return filing process, these credits are a critical part of the U.S. social safety net.

In its 1986 decision Sorenson v. Secretary of the Treasury, the Supreme Court held that the refundable portion of the earned income tax credit is an “overpayment” for purposes of section 6402(c). Sorenson involved a challenge brought by a married taxpayer who filed a joint income tax return with her husband; their expected tax refund was offset and applied toward her husband’s past-due child support obligation. Mrs. Sorenson protested, and because they lived in Washington state, the IRS determined she was entitled to one-half of the joint refund under the state’s community property laws. But Mrs. Sorenson was unsatisfied with that outcome and filed suit in federal court, arguing that Congress did not intend for section 6402(c) to reach the earned income tax credit. On appeal to the Supreme Court, Mrs. Sorenson made a statutory interpretation argument and also argued that “permitting interception of an earned-income credit would frustrate Congress’ aims in providing the credit.” The Court rejected both of these arguments. While the Court acknowledged the “undeniably important” objectives of the EITC, it also noted that the “ordering of competing social policies is a quintessentially legislative function.” In particular, it is for Congress, not the Court, to decide whether the goals of the EITC outweigh the offset program’s goals of “securing child support from absent parents whenever possible.” After all – as the decision alludes – securing child support from absent parents also reduces the number of families on welfare (just as the EITC does). Following Sorenson, it is clear that it would be up to Congress to explicitly carve out the EITC from the definition of overpayment for purposes of section 6402. In the meantime, taxpayers subject to refund offsets will continue to lose this valuable social benefit which they otherwise are entitled to receive.

In my forthcoming book, Improving Tax Credits for the Working Poor, I argue that Congress should indeed consider protecting the EITC from offset, at least in part, and at least with respect to certain types of debts. I acknowledge, though, that Sorenson presented the most morally troublesome argument for protection from offset, because the underlying debt at issue was past-due child support. It is difficult to argue that a taxpayer should receive the EITC in support of a child who currently resides with him or her if the alternative is to divert the EITC to a child for whom the taxpayer is delinquent on child-support obligations.

In contrast, I highlight student loan defaulters as a relatively sympathetic case for which to carve out EITC offset protection. My proposals are inspired in part by informative National Consumer Law Center (NCLC) reports available here and here, from which I learned that approximately 1.3 million individuals in student loan default were subject to tax refund offsets in 2017. We do not know how many of those 1.3 million individuals were also EITC recipients, but surely there is some significant overlap between low-income working families and student loan defaulters. Among the most vulnerable student loan borrowers are those who borrow to attend for-profit institutions. As NCLC attorney Persis Yu describes in her March 2018 report, some of these borrowers are denied the promised benefits of their education when a fraudulent school closes in mid-course.

Thus, I was thrilled recently to learn that Keith’s colleagues Toby Merrill and Alec Harris are succeeding in some of their consumer protection efforts against the for-profit college industry. Toby and Alec, who have also blogged on the issue of refund offsets previously, work for the Project on Predatory Student Lending, which is part of the Legal Services Center of Harvard Law School. Among other cases, the Project on Predatory Student Lending has represented individuals who borrowed money to attend Corinthian College, a now-defunct for-profit company that operated post-secondary schools around the country, including a school called Everest Institute in Massachusetts.

The Massachusetts Attorney General’s office spent several years investigating Everest Institute for its deceptive recruiting and marketing practices. On March 25, 2016, Massachusetts Attorney General Maura Healey and U.S. Department of Education Secretary John B. King announced that students who were defrauded by Corinthian campuses nationwide (including the two Everest Institute campuses in Massachusetts) would be eligible for forgiveness of those federal loans. While this sweeping announcement was great news for borrowers, the details remained to be seen as to how and when this relief would apply.

Darnell Williams and Yessenia Taveras were among the thousands of students who had attended programs at Everest Institute. Williams and Taveras each took out federal student loans to pay for their program. Both individuals defaulted on their loans in the fall of 2014, before Healey’s office had completed its investigation of the Everest Institute campuses. Following their default, in August of 2015 the Department of Education sent Williams and Taveras the required notice of intent to turn the defaulted debt over to the Treasury Offset Program (TOP). Once the Department of Education certifies to the TOP that the debt meets certain requirements, the debt becomes subject to section 6402 offset procedures in the manner I describe above. Neither Williams nor Taveras individually filed an objection to the Department of Education notice within the prescribed 65-day deadline.

After the 65-day window to file an objection, but before the Department certified Williams’ and Taveras’ student loan debts to the TOP, Healey wrote to the Secretary of Education to request immediate and automatic discharge of all federal student loans borrowed to attend Everest Institute in Massachusetts (note that this November 2015 request of Healey’s also predates the aforementioned joint announcement with the Department of Education). Healey referred to her written request as a “defense to repayment” application on behalf of the student borrowers. Healey’s defense to repayment application included, among other exhibits, a list of names of more than 7,000 student borrowers who had attended Everest Institute, including Williams and Taveras. The Department of Education nonetheless certified the Williams’ and Taveras’ debts for collection by the TOP without deciding on the merits of Healey’s letter.

The following spring, in April and May of 2016, Williams and Taveras each filed income tax returns showing refunds due. Because the Secretary of Education had certified the defaulted debts to the TOP, the taxpayers’ refunds were offset against their outstanding loans. The amounts they lost were significant: Williams’ offset was in the amount of $1,263, and Taveras’ offset was in the amount of $4,999.

At issue in Williams v. Devos is whether Attorney General Healey successfully raised a borrower defense proceeding on behalf of the thousands of individuals listed in her exhibit, including Williams and Taveras. The Project on Predatory Lending represented Williams and Taveras in the matter in federal court, arguing that the Secretary of Education improperly certified their student loan debts as legally enforceable for purposes of the TOP program.

Last month, the judge in this case ruled that Healey’s November 2015 submission did invoke a borrower defense proceeding as to Williams and Taveras, and that the Secretary’s certification of the debt to the TOP without consideration of Healey’s submission was arbitrary and capricious. The court order vacated the certifications for refund offset for Williams and Taveras and remanded the matter to the Department of Education for a consideration of the borrower defense asserted by Healey.

Congratulations to Toby, Alec, and all at the Project on Predatory Student Lending on this ruling in Williams v. Devos. This is a significant victory for student borrowers challenging the validity of their loans. Though not strictly speaking a tax case, this development has important collateral consequences for low-income taxpayers who are eligible for refundable credits. As Keith has written recently in the offer in compromise context, and as I contemplate in my book, the fact that the EITC is an anti-poverty supplement for working families provides a compelling argument to protect it from offset, at least in certain circumstances. While I would like to see Congress act to at least partially exempt the EITC from offset against any federal student loan default, this ruling is an important and tangible step forward, as it is precedent for protecting student loan defaulters from tax refund offset while a borrower defense proceeding is pending.

 

Application of Chenery to Supervisory Affidavits in Graev Cases

Ray Cohen, a faithful reader and a CPA in Paramus, New Jersey, asks the following question of other readers and invites them to send comments to the post to help him work through the answer. Keith

When the original signature of the immediate supervisor is missing, the IRS attempts to get around this by using an affidavit of the immediate supervisor. Attempts have been made to defeat the affidavit by calling it hearsay. Unfortunately, the court have not accepted this argument. SEC v Chenery Corp (Chenery II) 332 U.S.194 (1947) might be the answer. Does anybody think so?

Section 6751(b)(1) states that “[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination….”
According to Notice CC-2018-006 from the Office of Chief Counsel, supervisory approval is required when the IRS “files an answer or amended answer asserting penalties. In Graev v Commissioner III, it states that “IRC Sec. ‘6751(b)(1) requires written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency ((or files an answer or amended answer)asserting such penalty’, id. At 221.

While the Federal Rules of evidence permit the use of affidavits, the IRS rules and chief counsel require original signatures in asserting a penalty.

SEC v Chenery Corp (Chenery II)332 U.S.194 (1947) states “ That rule is to the effect that 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 solely by the grounds invoked by the agency. If those grounds are inadequate or improper, the court is powerless to affirm the administrative action by substituting what it considers to be a more adequate or proper basis. To do so would propel the court into the domain which Congress has set aside exclusively for the administrative agency.“

Annual Low-Income Taxpayer Representation Workshop

For the last several years, the ABA Section of Taxation Pro Bono & Tax Clinics committee has organized a Low-Income Taxpayer Representation Workshop in early December in Washington, D.C. Keith, Les, and I have all been involved with the committee and the workshop at various times over the years. The workshop is a nice opportunity for practitioners interested in low-income taxpayer representation issues to come together for an afternoon of learning and conversation.

This year’s workshop will be on Monday afternoon, December 3, at the D.C. offices of Morgan, Lewis & Bockius LLP. Workshop organizer Caleb Smith has lined up four hours of CLE/CPE with exciting speakers on important topics including section 199A, tax litigation, and collection due process. While the workshop is designed for practioners who represent low-income taxpayers through a Low-Income Tax Clinic or other pro bono program, all are welcome to attend.

Registration is a bargain at $30, reflecting the Tax Section’s commitment to supporting low-income taxpayer representation, and also Morgan Lewis’s generous hosting. (Shout out also to the workshop’s longtime past host McDermott Will & Emery.)

Preliminary Agenda

1:00 p.m. The 2017 Tax Act and Self‐Employed Workers
This panel will discuss new code section 199A as well as tax planning issues for self‐employed and “gig economy” workers in light of the changes made by the 2017 tax act. The panel will also discuss how these changes in the tax law will be reflected during the filing season on the draft 2018 Form 1040.
Moderator: Caleb Smith, Ronald M. Mankoff Tax Clinic, University of Minnesota Law School, Minneapolis, MN
Panelists: Joseph Tiberio, IRS SB/SE, Washington, DC; Caroline Bruckner, American University Kogod School of Business, Washington, DC; Lisa Sperow, Cal Poly Low Income Taxpayer Clinic, San Luis Obispo, CA.

2:00 p.m. Collectability as a Litigation Tool: Settling with DOJ vs. IRS
This panel will discuss taxpayer collectability as a factor in litigation with the Internal Revenue Service in pre‐assessment Tax Court cases, and with the Department of Justice in post-assessment District Court litigation. The panel will discuss differences in the IRS and DOJ approaches on how to treat a taxpayer’s collection potential as a factor in settling cases.
Moderator: Tameka Lester, Georgia State University College of Law, Atlanta, GA
Panelists: Valerie Vlasenko, Agostino & Associates, Hackensack, NJ; Erin Stearns, Director, University of Denver Low Income Taxpayer Clinic, Denver, CO; Carol Koehler Ide, Assistant Chief, Civil Trial Section, Tax Division, U.S. Department of Justice; additional panelists TBA

3:30 p.m. Break (no CLE/CPE)

3:45 p.m. New Trends and Tactics in CDP Litigation
This panel will discuss emerging trends in Collection Due Process litigation, recent precedential court decisions, and identify traps for the unwary.
Moderator: Omeed Firouzi, Christine A. Brunswick Public Service Fellow, Philadelphia Legal Assistance, Philadelphia, PA
Panelists: Keith Fogg, Director Harvard Federal Tax Clinic, Jamaica Plain, MA; Tom Thomas, University of Missouri, Kansas City; Steve Milgrom, Legal Aid Society of San Diego, San Diego, CA; additional panelists TBA

5:15 p.m. Networking Reception (no CLE/CPE)

Session on Tax Implications of Gig Economy At Tax Policy Center

On October 23 there was a conference at the Tax Policy Center on Taxing the Gig Economy. There were two panels, one on the size and scope of the gig economy and the other on tax administration issues.

Here is a link for those who would like to listen to the event. I recommend the entire conference, which runs about 2 hours and 40 minutes. The first part of the panel lays out the data around the size of the gig economy, including a slide deck presented by Michael Udell that lists out trends in self-employment income over the past thirty years. The part that I found most interesting was the discussion of tax administration issues that begins at about 1 hour and nine minutes into the session.

The tax administration panel consisted of Dave Williams, Chief Tax Officer at Intuit, Nina Olson, National Taxpayer Advocate, Caroline Bruckner, a professor at American University who has written extensively on tax issues in the gig economy, and Pooja Kondabolu, who is the Senior Tax Policy Manager at Airbnb. It was moderated by Howard Gleckman, a senior fellow at Brookings.

A few of the highlights of the discussion included Intuit’s Dave Williams perceptively commenting on the lack of knowledge around tax issues among many of the service providers (e.g., Lyft drivers, Airbnb hosts), and how in the current environment many of the service providers simply do not know what they do not know. Professor Bruckner’s prior work Shortchanged lays out in great detail some of the difficulties facing sellers and service providers. Professor Bruckner recently testified in the Senate on some the issues she discussed on the panel (written testimony here). At the panel, she spoke about the possibility of changes to information reporting and dates for estimated payments to help people comply.

The National Taxpayer Advocate spoke about how the IRS could make the system better by facilitating compliance through a better and targeted use of technology for those who enter the tax system after getting an EIN, with things like wizards, email reminders about estimated taxes and the possibility of salient online account portals that could actually be used to help people comply.

What stood out to me in the discussion is how challenging some of the compliance issues are for self-employed taxpayers generally, and how there are many differing ways to improve the outcome. None of the measures alone however can work.

Designated Orders: 10/15 – 10/19/2018 and Statistics from the Project’s First Year

Guest blogger Patrick Thomas of Notre Dame Law School brings us this week’s few designated orders. He then reviews the development of the Designated Order blogging project and reports the data that the team has gathered so far. There are some interesting statistics on Designated Orders that deserve some attention.

In related news, Paul Merrion at MLEX US Tax Watch recently wrote about (login required) the Tax Court’s new contract with Flexion, Inc. to develop a new electronic filing and case management system. The two-sentence announcement on the Tax Court’s homepage had escaped my notice. Paul’s article summarizes the request for proposals, which can be found here. While the Tax Court declined to comment on the article, this development may be a sign of greater openness to come. Christine

Designated Orders: 10/15 – 10/19/2018

The Tax Court issued only two designated orders during this week, both of which Judge Armen wrote. I will not discuss either in depth here. For posterity’s sake, Judge Armen upheld the Office of Appeals’ decision to sustain a levy in Cheshier v. Commissioner, a Collection Due Process case in which the Petitioner did not provide financial information or tax returns in the CDP hearing. In contrast, the second case, Levin v. Commissioner, involved a very responsive CDP petitioner. In Tax Court, the parties disagreed as to the financial analysis, the propriety of filing a NFTL after entering into an installment agreement, and the necessity of filing business tax returns. Alas, the Tax Court agreed with Respondent on all counts. The order from Judge Armen merely finalized Judge Ashford’s opinion in this case (T.C. Memo. 2018-172), which I would recommend for further reading.

The Designated Orders Project & Statistics

With such a light week, this provides an opportunity to take stock of our Designated Orders blogging project, which began in May 2017. Since then, Samantha Galvin, William (Bill) Schmidt, Caleb Smith, and I have tracked every order designated on the Tax Court’s website. As of October 30, 2018, there have been 623 designated orders—though many orders occur in consolidated cases, causing the number of “unique” orders to be substantially less at approximately 525.

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Why do we track these orders? First, the orders often deal with substantive issues of tax procedure. Some orders could very well be reported opinions. Many of these issues—especially those arising in CDP cases—receive comparatively less coverage in the Tax Court’s opinions. Indeed, through “designating” an order, the individual judge indicates that the order is more important than a routine order (of which the Tax Court issues hundreds each day). The orders can often reveal the direction in which an individual judge or the Court is tracking on certain issues.

Given the importance of the orders, one might surmise that the Tax Court’s website could filter the designated orders from those not designated. One would be mistaken. The Order Search tool on the website does not distinguish between designated and undesignated orders. (I am told, however, that internal users within the Tax Court can search and filter Orders by whether they were designated.)

Instead, orders are listed on the “Today’s Designated Orders” page each weekday after 3:30pm Eastern time (or, a message appears that no orders were designated on that day). At some unspecified time overnight, any record of these orders disappears. Of course, the underlying orders are themselves maintained within the dockets of their respective cases. But without knowing which orders were designated, it becomes impossible to discover them.

As an aside: no compelling reason exists to hide the designated status of an order from the public. Professor Lederman’s recent post nicely encapsulates the continuing (though progressively fewer) transparency concerns that the Tax Court faces. This certainly is another; yet the Court’s historic rationale for preventing disclosure of information (the valid concern with taxpayer privacy) simply does not apply here.

So, Caleb, Samantha, Bill, and I began tracking every order each weekday in May 2017. We have logged the date, docket number, petitioner, judge, and hyperlink for every designated order since then.

This summer, I cleaned and analyzed one year of designated orders data from April 15, 2017 until April 15, 2018. (I acknowledge help from Bill in initially looking at this data, along with substantial work from my research assistant, Chris Zhao). In addition to the above data, I added data regarding the jurisdictional type, whether the case was a small case under IRC § 7463, and whether the order merely transmitted a bench opinion under IRC § 7459(b). I present those initial findings below. In later work, I will compare the designated orders with opinions and “undesignated” orders (some of which are indeed just as substantive as designated orders, as Bob Kamman has routinely pointed out to us).

The dataset revealed 319 unique orders during the research period. In terms of content, we have not systemically tracked the subject matter of designated orders in our dataset. From our experience, the vast majority of orders deal with substantive, often tricky issues. The one major exception is found in Judge Jacobs’ orders, which are often routine scheduling orders. We are not sure why these orders are designated, presuming the purpose of designating an order is to highlight an important case or issue.

While we did not track individual issues, the dataset does contain a jurisdictional breakdown. Deficiency and CDP cases accounted for the vast majority of orders (51.10% and 37.30%, respectively). Other case types included partnership proceedings, whistleblower, standalone innocent spouse, retirement plan qualification review, 501(c)(3) status revocation, and others that involved multiple jurisdictional types.

12.85% of orders were for a small tax case under section 7463. Small cases are underrepresented, compared with the Court’s 37% share of such cases generally (as of April 30, 2018, according to Judge Carluzzo’s presentation to the ABA Tax Section’s Pro Bono and Tax Clinics Committee).

Certain judges used Designated Orders much more frequently than others during the period reviewed. Judges Gustafson, Holmes, and Carluzzo lead the pack, having issued 46.40% of all designated orders, at 21%, 13.17%, and 12.23%, respectively. Thirteen judges (a substantial minority of the 31 active judges) did not designate a single order during the research period. Almost half of the regular judges—Judges Foley, Goeke, Nega, Paris, Pugh, Thornton, and Vasquez—issued no designated orders at all. (The Chief Judge, given their increased administrative duties, receives fewer individual cases. Further, Judge Thornton did designate two orders during May and June 2018. Judges Goeke and Vasquez, while currently on senior status, are classified in the dataset as regular judges, as they retired on April 21 and June 24, 2018, respectively.) Over half of the senior judges issued no designated orders. All of the Special Trial Judges designated orders and did so frequently, accounting for 29.47% of all designated orders.

Judges have also used Designated Orders to highlight bench opinions with substantive tax issues. A bench opinion is one rendered orally at a trial session that disposes of the entire case. After the transcript is prepared, the judge then orders transmittal of the bench opinion to the parties under Rule 152(b). For an example, see Chief Special Trial Judge Carluzzo’s order in Garza v. Commissioner. These transmittal orders represent 8.46% of all designated orders.

Judge Carluzzo issued 11 such orders, followed closed by Judges Gustafson and Buch at 9 and 6 orders, respectively. Judges Carluzzo, Gustafson, and Holmes designated every order that transmitted a bench opinion, while Judge Buch had some undesignated bench opinions (there were 80 other undesignated bench opinions from other judges, which represent the vast majority).

Some cases are repeat players in designated orders. Twenty-nine dockets received more than one designated order during the research period. Three dockets received three or more orders, two of which were among the most well-known cases then before the Tax Court: Docket No. 18254-17L, Kestin v. Commissioner (three orders); Docket No. 31183-15, Coca-Cola Co. v. Commissioner (three orders); and Docket No. 17152-13, Estate of Michael Jackson v. Commissioner (seven orders).

From a timing perspective, the Court’s orders seem to peak in December and March and drop off in January and May—both for regular and S cases. I’ll leave it to those with access to better data to inform us whether this corresponds with the Tax Court’s overall production during these times.

What do these data tell us? I’ll venture a few broad conclusions and raise further questions:

  1. A substantial number of judges do not designate orders at all, or do so very seldom. Do these judges issue substantially more opinions? Are these judges’ workloads substantively different from those who do issue more designated orders?
  2. Three judges (Judges Gustafson, Holmes, and Carluzzo) accounted for nearly half of all designated orders. Why is there such a disparity between these judges and the rest of the Court?
  3. Judges issued only 112 bench opinions during the research period. (To get this figure I searched for “152(b)” on the Order Search tool for each judge between April 15, 2017 and April 15, 2018.) This strikes me as minute compared with the overall number of cases (2,244 cases closed during April 2018 alone). Keith has long argued to increase the use of bench opinions to resolve cases; the Court appears to have disregarded his advice. Of the 112 bench opinions, only 26 (23%) were designated. Judges might consider designating these orders such that they highlight their bench opinions to the public.
  4. There is a large disparity in small cases on the docket (37% of all cases) with designated orders in small tax cases (12.85% of all designated orders). Are small cases simply too “routine” and less deserving of highlighting to the public?

Ideally, the Tax Court would publish its own statistical analysis of its cases, orders, and opinions, as Professor Lederman suggests. Perhaps the Court can discuss and address some of my questions above in so doing. In addition, the Court should allow public users to filter orders on the Tax Court’s website by whether the orders were designated.

In the meantime, we will continue to track these orders so that practitioners and researchers alike keep abreast of important developments at the Court. We’ve learned a great deal about certain substantive topics through this project —especially about penalty approval under section 6751.

I further hope these statistics on designated orders shed some light on the Court’s sometimes opaque operations. Unless the Court, as it should, decides to take up the mantle itself, we’ll continue to track, summarize, and look at trends stemming from these orders.

Vested or Distributed Value, Post-Computation Procedures and a Lien in Limbo. Designated Orders, October 22-26

This week’s designated order post is brought to us by Professor Samantha Galvin from the University of Denver Sturm School of Law. The second order she describes involves one of those technical procedures on which it is easy to make a mistake. Here, the mistake is by respondent’s counsel but the fix is also easy. Keith

During the week of October 25, 2018 there were four orders designated. Three are discussed below. The only order not discussed (here) addresses a trial transcript that was incorrectly attached to a joint status report.

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Vested or Distributed Value

Docket 10488-10: Rui-Kang Zhang & Jua-Fei Chen v. C.I.R. (here)

First is the most substantive of the orders designated during my week. This case is about the value of life insurance policies that were distributed to petitioners in 2004. Petitioners and respondent agree the distribution created taxable income, but the amount is in dispute. The Court analyzes whether respondent is entitled to summary judgment as a matter of law.

Petitioners were shareholders and employees of an S corporation that had a benefit plan and trust agreement paid for by the corporation which provided life insurance for petitioners. The corporation took deductions for the cost of the two policies, which were owned by a non-exempt trust. The IRS began scrutinizing plans like this because they often consisted of multiple single-employer plans dressed up as a single multiple-employer plan and used to obtain tax advantages under sections 419 and 491A.

In the present case, petitioners’ corporation wound down its involvement in this plan in 2004 and petitioners were entitled to receive a share of the plan’s assets. The plan administrator transferred ownership of the life insurance policies from the plan’s trustee to the individual petitioners. Petitioners reported the plan’s fair market value at distribution as $160,000 (this is the net value after subtracting the policies’ surrender charges) and a severance cash distribution of $30,000, but the IRS argues that the total amount should be closer to $550,000.

Because the policies were owned by a non-exempt trust, section 402(b) is used to determine the value of the policies, but the statutory cross references are particularly important. Section 402(b)(1) governs the value of an employee’s rights to assets still held in trust at the time those rights become vested, and cross references section 83, which states the value is the fair market value of such property determined without regard to any lapse restrictions.

Whereas section 402(b)(2) governs the value of assets that are distributed and not still held in trust, and cross references section 72, which states the value is the “amount actually distributed.” This was defined in Schwab v. Commissioner, 136 T.C. 120 (2011), aff’d, 715 F.3d 1169, 1179 (9th Cir. 2013) as the fair market value of what was actually distributed (taking into account the taxpayer’s initial investment, insurance rates, and the dates covered after the distribution).

In other words, the amount included in petitioners’ table income should either be the vested value or the distributed value. Respondent argues that both sections of 402(b) should apply and petitioners should include the higher vested value as income, because once the corporation notified the plan of the withdrawal the petitioners became beneficial owners which created a vesting event that was later followed by a distribution event.

Court says this is counterintuitive because the same property cannot be both distributed and be owned by a trustee for the benefit of the person to whom it is distributed. Respondent’s logic would also make section 402(b)(2) superfluous because it would make all distributions of pension assets taxable in a two-step process: first, taxable as vested when the plan cuts the check (which make it transferable and not subject to a substantial risk of forfeiture) and then, taxable as distributed when the taxpayer actually receives the payment.

The Court identifies four relevant cases on this issue and determines that section 402(b)(2) should apply because the policies were distributed to and owned by the individual taxpayers. This means that the amount included in petitioners’ income should be the fair market value of what was actually distributed.

The Court denies respondent’s motion for summary judgment and order the parties to file a status report about whether the parties will settle or go to trial.

Post-Computation Procedures

Docket No. 14704-14: Damon R. Becnel v. CIR (here)

In this order the Court clarifies the proper procedure to be used when a petitioner is not responsive after the IRS submits computations. The Court released its opinion in this case but was waiting on the computations before it could enter the final decision. Petitioner has not approved the computations but it is unclear whether petitioner’s lack of approval is intentional, if he is simply nonresponsive, or if there is some misunderstanding.

Respondent moves for an entry of decision, but that is not actually the proper procedure to use in this situation. Computations are governed by Tax Court rule 155. Rule 155(b) states that when there is an absence of agreement between the parties the clerk will serve upon the opposite party a notice of the filing of computations and if the opposite party fails to object or submit alternative computations, then the Court may enter a decision in accordance with the computations already submitted.

In this case, the petitioner was never given notice so the Court recharacterizes IRS’s motion, orders the clerk to serve the petitioner with notice, and will enter a decision in accordance to the computations if petitioner fails to respond.

A Lien in Limbo

Docket: 681-18L, Douglas C. Hendriks v. CIR (here)

Next the Court evaluates the undisputed facts to determine whether to grant respondent’s motion for summary judgment in a collection due process case.

The petitioner filed two CDP hearing requests one in response to an intent to levy, and another in response to the intent to file a notice of federal tax lien. The IRS only responded to and issued a notice of determination for the levy CDP request, but did not respond to nor issue a notice of determination on the lien filing.

The Court finds that the lack of information about the lien CDP request is a genuine issue of material fact that could result in a remand to appeals. As a result, summary judgment is not appropriate under these circumstances and the Court denies respondent’s motion.