Summonsing Records for the French Taxing Authority

A couple years ago, I wrote a post about the efforts of the IRS to assist the Danish tax agency to collect from a taxpayer in the United States. That case involved a levy on the taxpayer’s assets. Recently, another one of the five countries that have collection treaties with the IRS had an opinion issued based on the efforts of the IRS to assist it in collecting taxes due to France. In the case of Hanse v. United States, No. 1:17-cv-04573 (N.D. Ill. March 5, 2018), the court analyzes the treaty provisions in the context of a summons enforcement case. The application of the summons laws in this case results in an order that the information sought be provided to the IRS/France.

I wrote a post almost four years ago on the failure of tax administration to negotiate collection provisions into every tax treaty and not just have it in five treaties that happen to have been written at a time when someone thought this was a good idea. In a global economy, it still seems like a good idea. We have passed laws seeking to ensure that we know about the income of U.S. citizens around the world and leaned on other countries to cooperate in helping the IRS know of the income. To complement that effort, the IRS needs to have the treaty tools to collect when assets exist overseas and it cannot obtain personal jurisdiction over the taxpayer. The absence of collection language in our tax treaties makes it difficult, and at times impossible, for the IRS to collect from taxpayers who park their assets in the vast majority of countries since the IRS lacks a mechanism for reaching those assets.


France is investigating the potential wealth tax and income tax liabilities of Mr. Hanse for the years 2013-15. The French tax authorities sent to the IRS an exchange of information request seeking information in connection with its investigation. France particularly wanted information about two transfers by Mr. Hanse totaling over 500,000 €. The request stated that Mr. Hanse was a French citizen and that the French tax authorities had exhausted the remedies domestically available for gathering the information. The IRS did not have the information requested. The U.S. competent authority determined that the request was proper under the treaty provisions. So, the IRS served a summons on the party to whom the funds were transferred, a third party in the US, and sent notice to the taxpayer at the address provided by the French authorities.

The taxpayer timely filed a petition to quash the summons raising three objections: 1) the IRS failed to comply with the administrative steps necessary for a valid summons under the IRC because it contacted third parties without providing advanced notice under IRC 7602(c)(1); 2) France could not obtain the information through its own laws so it should not use the treaty to accomplish what it could not do if this were an entirely domestic situation; and 3) the summonsed party is a law firm and some of the materials requested by the summons required protection from disclosure by the attorney client privilege.

The IRS moved to dismiss and attached to its motion affidavits from the competent authority and the revenue agent serving the summons. The court decided to treat this as a motion for summary judgment which is normal in most contexts, though not as normal in a summary proceeding such as a summons enforcement.

Before addressing the first argument, the court notes that the IRS must meet the four elements of the Powell test. We have discussed those elements before. A similar notice argument was addressed in a recent post written by Les. The court notes that the burden on the IRS with respect to the summons remains the same whether the summons involves a “normal” U.S. taxpayer or is done at the request of a treaty partner. Here, the court finds that the affidavits allow the IRS to meet its burden under the Powell test, which it acknowledges is not a heavy burden.

Good Faith of French Investigation

The taxpayer argues that French law would not allow the French authorities to obtain the information sought through the summons and, therefore, those authorities should not circumvent French law and obtain the information just because the U.S. laws do permit the gathering of the information. The court takes this as a challenge to the “legitimate purpose” element of the Powell test. This is where a treaty summons gets a little interesting. Looking at prior case law involving other treaty summonses issued on behalf of France, the court finds that to satisfy the Powell test it need not look at the good faith of the treaty partner but only at whether the IRS acted in good faith in issuing the summons. Since the taxpayer did not challenge whether the IRS issued the summons in good faith and the court saw no indication of bad faith, it finds that this challenge fails.

Compliance with IRC

Petitioner challenges the issuance of a summons to a third party where the IRS has not provided the taxpayer with a notice pursuant to IRC 7602(c)(1). We have written very little about IRC 7602(c), which is a provision that came into the code in the 1998 Restructuring and Reform Act. Les addressed it in an earlier post and notes at least one case that has held the taxpayer should receive specific notice of contact of third parties. Most issues involving this code section, which requires the IRS to notify taxpayers before it contacts thirds parties about them looking for information, concern the IRS position that Pub 1 generically informs them of the possibility that the IRS might do this (thus satisfying the statutory requirement) versus the need, in the view of some taxpayers, for the IRS to specifically tell them who it intends to contact.

Here, the IRS neither generically nor specifically informed the taxpayer of its intent to contact a third party by serving the summons. The taxpayer argues that this failure makes the summons unenforceable. The IRS argues that the protection of IRC 7602(c) does not extend to the taxpayer because it “does not include the liability for any tax imposed by any other jurisdiction.” 26 C.F.R. 301.7602-2(c)(3)(C). The court agrees with the IRS. This creates an interesting exception for taxpayers whose summons cases arise under treaty language

Attorney Client Privilege

I recently wrote on another summons case in which the taxpayer sought to keep the IRS from information based on the attorney-client privilege. The court here notes that a blanket assertion of attorney-client privilege does not work and that the taxpayer needs to assert the privilege on a document by document basis. Because the taxpayer did not support the privilege claim with “any facts from which the Court could find a privilege attaches to the documents that are requested in the summons” the court rejects his privilege argument.


Some aspects of the treaty summons differ from a “normal” summons in their application because of the interplay of the code with non-US taxpayers. Here, the summons gets enforced and presumably France gets the information it needs in order to move forward with its tax investigation. Only a handful of these cases have been reported, suggesting either that countries do not need to resort to the treaty very often in order to complete their investigations or that investigators do not use this tool as effectively as they might. As the global economy continues to push through borders, we should expect more of these cases and there could be many more if we negotiated different treaty language regarding collection.




Chamber of Commerce Files Amicus in Facebook Case: In Praise of Appeals

The Chamber of Commerce, no stranger to cases challenging fundamental issues in tax procedure, has filed an amicus brief in the case I discussed earlier this week where Facebook is suing IRS due to the agency denying Facebook access to Appeals.

The amicus largely repeats the substantive arguments Facebook has made though emphasizes 1) the importance that taxpayers place on ensuring access to a fair and impartial Appeals function and 2) the cost to the system if IRS is allowed to bypass Appeals when it in its unreviewable discretion believes that decision is consistent with “sound tax administration.”

The brief highlights how taxpayers value privacy (uhh a privacy argument  in a case involving Facebook?) and unlike cases in federal court, Appeals proceedings are outside the public eye. The brief also discusses how Exam is kept in check by Appeals’ mission to settle cases fairly and on the hazards of litigation, a balancing act that Exam does not apply in evaluating possible resolutions:

Taxpayers no longer can feel confident that they will have access to an independent forum to serve as a safety valve on an overzealous examination team. Taxpayers and examination teams alike may focus more energy on convincing IRS Counsel whether it is in the interests of “sound tax administration” to permit access to IRS Appeals at the expense of devoting effort to developing the merits of the issues in the case. The effects of Revenue Procedure 2016-22 will be felt far beyond those cases in which access to IRS Appeals is actually denied.

The brief also emphasizes the Chamber’s view that IRS is trying to carve out a different path and extend dreaded tax exceptionalism:

The IRS continues to resist application of the APA, arguing in this case that “Congress has provided specific rules for judicial review of tax determinations; those specific rules control over the more general rules for judicial review embodied in the APA.”


Whatever the underlying merits of the IRS Appeals process, and Facebook’s claims in this case, it is nonetheless astonishing for the IRS to argue in its Motion to Dismiss that it has the authority to deny taxpayers access to an independent administrative forum in an arbitrary and capricious manner, and that taxpayers that are adversely impacted by those actions have absolutely no judicial recourse. Whatever one can say about the goals of “sound tax administration,” a system in which the IRS is above the law—the very same law that applies to all administrative agencies of the federal government—is not one that the Supreme Court has approved and is not one that this Court should approve.

The Chamber brief hangs its hat in part on the argument that the courts have been pushing back on tax exceptionalism. That to me is atmpospherically relevant, but it proves too much: administering the tax system is different from say regulating noxious emissions or ensuring airplane safety.  The devil is in the details of the particular procedures or path IRS believes warrant a separate approach.

IRS has not helped itself in this case though by promulgating essentially a standardless standard that allows Counsel to bypass Appeals that as the brief indicates allows Counsel to “mask illegitmate reasons for denying access to Appeals.” Even if in this case the reason for cutting off access to Appeals is legitimate, the lack of guidance on what should inform or explain that bypass decision generates a perception of illegitimacy, and that is not sound tax administration.


Designated Orders Post: Week of 2/26 – 3/2 Estate of Michael Jackson, A New Graev Issue and More

Caleb Smith who teaches and directs the clinic at University of Minnesota bring us this weeks designated order post. He starts with the now obligatory designated order concerning yet another aspect of Graev and ends with orders from two frequently recurring judges in the designated order post, Judges Holmes and Gustafson. Judge Holmes puts up another other in the ever popular Estate of Michael Jackson case. It is a “Thriller.” Keith

There were quite a few designated orders last week, but most warrant only a passing mention. Those that will not be discussed include involve motions for summary judgment, granted in full here and here and in part here and here. Of course, we start our substantive discussion with an order continuing the clean-up of Graev III.

Giving the IRS a Chance: Hendrickson v. C.I.R., Dkt. No. 6863-14 (order here)

It seems fairly clear at this point when the IRS does and does not need supervisory approval for a penalty. I believe there may be a future, litigable question as to when the IRS can bypass the supervisory approval issue by relying on computers instead of humans for the determination, but when fraud is alleged (as it was in this case) it is pretty clear that approval will be needed.

Here, trial took place a week after Chai reversed Graev (but ONLY for the 2nd circuit, which this case would not be appealable to). Later, after the Tax Court reversed itself (Graev III) the court ordered the parties to address what effect that reversal had on their present case. The IRS, quite sensibly, took it to mean “Graev III means we need to introduce evidence of supervisory approval in a deficiency proceeding. So… we need to make a motion reopen the record and introduce that evidence.” The IRS then, quite sensibly, made that motion.


Which brings us the present order…

To some (including a few of my students), insisting on compliance with IRC 6751(b) sometimes looks like a technicality that “bad-actor” taxpayers are trying to take advantage of. In some instances, that may well be so.

Here, with a civil fraud penalty at play, one gets a sense of the “technicality” argument in full force. Judge Buch has little trouble finding that it is within his discretion to open the record in this case (Judge Holmes dealt with a slightly less clear case weeks ago, here). The IRS was playing by the rules that bound the Tax Court at the time of the Hendrickson trial: that is to say, the rules of Graev I and II. Those rules did not require producing evidence of supervisory approval prior to assessment in any case other than those appealable to the 2nd Circuit. When it appears, as is suggested here, that the IRS actually had supervisory approval but failed to introduce it into evidence (in accordance with the Tax Court interpretation of the law, at the time), there isn’t much beyond a technical argument to be made as to why they shouldn’t be allowed to introduce that into evidence now. Kudos to the taxpayers (pro se) in their zealous self-representation… but I surmise they are just accumulating interest on their tax bill at this point.

Volume 36: Estate of Michael Jackson v. C.I.R., Dkt. No. 17152-13 (order here)

We return to another Designated Order favorite: the never-ending saga of Michael Jackson’s estate. Here, after years of motion practice, a trial that produced 36 volumes of transcript, and no less than three separate stipulations of fact, we arrive at the initial stages of post-trial briefing. When you have this voluminous of a record, with evidence so frequently objected to, it is obviously difficult to know what you can (and can’t) rely on as in the record for the brief you are working on. Judge Holmes kindly takes on the task of sorting out one evidentiary issue confronting the parties: resolving the hearsay objections reserved throughout the stipulations.

For practitioners that want an in-depth analysis of numerous hearsay exceptions, I strongly recommend a close reading of Judge Holmes’ order. For tax practitioners generally, I think another aspect is worth highlighting.

And that aspect is the nature of stipulations. This order highlights the proper method of objecting to stipulations on most evidentiary grounds: you note (thereby reserving) your objection, you don’t fail to stipulate. We have seen instances where the two parties fail to get along, and then fail to stipulate, with the Court generally taking a dim view of that approach. Tax Court Rule 91(a) specifically states that an objection may be noted (to relevance or materiality), but that such objection is not, in itself, is not a reason to fail to stipulate.

Stipulations of fact are extremely important in Tax Court cases, and should not be taken lightly in preparing for trial. You should obviously be sure that you’ve stipulated absolutely everything that you need to (if you are submitting fully stipulated), but you also should consider objections and, even then, what your objections have the effect of doing. In this order, with very sophisticated parties (including the newly nominated Commissioner’s firm) it is informative how the taxpayer phrased some of the objections: not that the exhibits were admissible, but only that they could not be cited to as evidence of “truth of the matter asserted.” That is a nuance that often goes missed (but was stressed by the federal district judge that taught my evidence class): the reason you introduce the evidence is critical to whether (and to what extent) it is admissible.

Going Through the Motions: Langdon & Fuller v. C.I.R. (Dkt. No. 22414-15) and York v. C.I.R. (Dkt. No. 2122-17)

Another set of nearly identical orders provide a quick lesson for tax practitioner. As a change to the usual guidance the Tax Court provides to pro se taxpayers, the orders actually give a lesson to IRS counsel. And that lesson is that when you want the court to “do something,” you generally ask through a motion.

Here, a joint status report was given to the court that likely reflected both parties’ near imminent settlement. All that is left is to draft and file a decision document, so the IRS asks for more time to do so in the joint status report. Pretty uncontroversial… but denied, because the request for additional time was not made in a motion.

I tell my students that there aren’t usually “magic words” you need to know when asking the Tax Court to do something: students pull templates off of the internet with archaic “Here comes taxpayer John Smith by his representative Caleb Smith” and worry that if they omit that line the court won’t have any clue what to do with their document. At the same time, though there aren’t magic words, I tell my students to look to the US Tax Court rules to see what, if anything, the Court would want covered in the motion. As an unfortunate example we’ve had to deal with, there are specific things the Court wants in a motion to withdraw (see Rule 24(c)). A quick search of orders citing to that rule shows order after order denying the motion for failure to address something mentioned in the rule. Where there is a specific rule on point, use it as your lodestar.

These orders, denying a request for more time because it was not made in the form of a motion, may seem formulaic (and thus give rise to a “magic word” worry), but Judge Gustafson does a good job of explaining why it isn’t just insistence on form. For one, it makes the job of the judge easier to ask via motion. By using a motion, you also indicate to the court whether the opposing side has an objection (or is aware of the request at all). But perhaps most importantly, by asking the court to do something via motion you ensure that your request is actually seen and heard… With roughly 22,000 cases pending at the end of October, 2017, one can only imagine the amount of paper that accumulates on any given judge’s desk. As Judge Gustafson seems to hint, judges are people too, and if you want to make sure a request isn’t overlooked, you have to give it the bold heading of a request: in other words, a motion.



Returned to Sender: Should the IRS Be Required to Search for A Taxpayer’s New Address Beyond its Own Databases When a Notice is Returned as Undeliverable?

We welcome guest blogger Lisa Perkins who is an Assistant Clinical Professor of Law and Director of the Tax Clinic at University of Connecticut School of Law. Professor Perkins worked for five years in the Criminal Division of Department of Justice Tax Section and over a decade as an AUSA in the Unites States Attorney’s office in Hartford. She joins Sonya Miller of UNLV and Christina Thompson of Michigan State as a writer of posts on tax articles featuring procedure issues. She writes to us today about an article that looks at ways to improve getting notice to taxpayers and a realistic opportunity to contest their tax issue in court. The 7th Edition of “Effectively Representing Your Client before the IRS” is coming out this month. It has an entire chapter on this topic if you are interested in more information on last known address issues. Keith

The IRS is required to send via certified mail to the “last known address” of a taxpayer several notices that contain substantive legal rights, including statutory notices of deficiency, final notices of intent to levy, and notices of filing of federal tax liens. The Code requires a taxpayer to exercise the right to appeal the actions proposed in these notices within very strict time limits. The time limit for claiming the substantive right provided in the notice (e.g., filing a Tax Court petition within 90 days), begins to run on the date of mailing, regardless of whether or when the taxpayer actually receives the notice. The IRS need only exercise reasonable diligence in ascertaining the “last known address” of the taxpayer for purposes of mailing the notice. The Code does not require “actual” receipt.

An expansion of the reasonable diligence standard applicable to determining the “last known address” was proposed by the National Taxpayer Advocate in her 2012 annual report and is the subject of The Last Known Address: A Joint Effort Between the IRS and the U.S. Postal Service, Larry Jones and Rachel Multer Michalewicz. Though the article was published in the April-May 2014 issue of the Journal of Tax Practice & Procedure, the question remains relevant today. Courts beyond the Fifth Circuit Court of Appeals have remained reluctant to require the government, upon return of a notice, to search for a new address for a taxpayer in databases outside of the IRS, such as motor vehicle and real property records, despite the government’s access to and routine use of these databases for other purposes (e.g., to locate assets upon which to levy).


In The Last Known Address: A Joint Effort Between the IRS and the U.S. Postal Service, Jones and Michalewicz discuss what constitutes “clear and concise notification of a change of address” for purposes of the IRS’s burden to send certain notices, including statutory notices of deficiency (SNOD), to a taxpayer’s last known address. In particular, the authors look more closely at the change of address process to IRS records effected by a database maintained by the U.S. Postal Service and claim that errors in the process may prejudice a taxpayer.

As the authors explain, Treas. Reg. 301.6212-2(a) “defines ‘last known address’ as ‘the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return, unless the Internal Revenue Service (IRS) is given clear and concise notification of a different address.’” The IRM applicable to Notices of Deficiency warns “[i]n no event should databases or information outside of the IRS be consulted for addresses. Alternative addresses, to the extent that they are used, must have been provided to the IRS by the taxpayer or his representative (or other agent).” IRM (07-09-2013).

While the IRS generally will not accept change of address information from a third party, an exception is provided in the regulation for regular address updates obtained from the U.S Postal Service (USPS). See Treas. Reg. Sec. 301.6212-2(b)(1) & (2). The USPS maintains a National Change of Address (NCOA) database which is forwarded to the IRS weekly. See IRM (08-11-2016) (SNOD Last Known Address guidance). The article explains how the IRS goes about updating an address from the NCOA database and notes the IRS allows the update to carry through despite the fact that the names may not match exactly.

For instance, as the authors explain, “if the NCOA database shows a Bob Smith who changed from one specific address to another, and the IRS records show a Robert Smith with that same prior address, the IRS can consider that a match and update the records.” The new address from NCOA will be considered the last known address until the taxpayer files a tax return with a different address or gives the IRS “clear and concise notification of a different address.” Contrast this with IRS rules that narrowly restrict attempted changes of address by a taxpayer himself.

For instance, per the Internal Revenue Manual relating to Notices of Deficiency, only the following notices from taxpayers are considered “clear and concise notification” of an address change:

  1. A statement signed by the taxpayer requesting the address change and containing full name, old address and SSN and/or EIN,

IRM (07-09-2013)

On the other hand, standing alone, the following are not considered “clear and concise” notification of a new address:

  1. Letterhead of taxpayer correspondence;

Id. A phone call from the taxpayer requesting an address change is insufficient unless it is made in connection with a conversation about an open account or adjustment and authentication of the caller’s identity is verified using the criteria in IRM and IRM (07-09-2013). See also Rev. Proc. 2010-16, 2010-19 IRB 664.

I can certainly see why many of these restrictions seem appropriate safeguards to preventing theft of taxpayer information. Yet, as the authors point out, allowing the USPS NCOA to effect an automatic update to a taxpayer address without an exact name match is prejudicial to taxpayers and seems inconsistent with these safeguards. Couldn’t a third party file a change of address form for a taxpayer with the local post office resulting in the same identity theft issue (though obviously the IRS would not be responsible)? In my former career as a federal prosecutor, I once handled an identity theft case involving a taxi driver who was doing just that: redirecting other people’s mail to post office boxes he set up for the purpose of collecting their financial information, including credit card cash advance offers that he then used to the detriment of these individuals.

As the authors explain, a taxpayer residing in the Fifth Circuit (Louisiana, Mississippi and Texas), may have the added benefit of the Fifth Circuit Court of Appeal’s more expansive requirement of reasonable diligence in determining the “last known address.” In Mulder v. Commissioner, 855 F.2d 208, 210 (5th Cir. 1988), the Fifth Circuit invalidated a notice of deficiency and held the IRS had a duty to further investigate when the postal service had returned letters to it prior to the mailing of the notice of deficiency. Likewise, in Terrell v. Commissioner, 625 F.3d 254, 257 (5th Cir. 2010), the court held the IRS has a duty to further investigate by, e.g., searching DMV or other records, where the “IRS knows or should know at the time of mailing that taxpayer’s address on file may no longer be valid [due to] previously returned letters, . . . .” Nonetheless, as Jones and Michalewicz explain, even in the Fifth Circuit, taxpayers benefit from this more generous standard only at the time of the original mailing of a notice, not if that notice is then returned to the IRS.

Ultimately, the authors conclude that it would not be unreasonable to require the IRS to investigate further to determine a correct address for a taxpayer upon receipt of an undelivered notice (or other credible information questioning the accuracy of the address information on the IRS’s original notice). As the article points out, the National Taxpayer Advocate has urged Congress to amend the Code to require that the IRS look beyond its own databases to locate potential new addresses for sending taxpayers important notices, such as notices of deficiency.


If the IRS were required to search beyond its own databases to locate a new address for a taxpayer, presumably to send a new notice, how far should it be required to go?  Which databases should the IRS consult?  To be clear, the examples the authors suggested (and the National Taxpayer Advocate has suggested) include motor vehicle records and real property records; they do not suggest the IRS could or should rely on a “Google” search for this information.  Motor vehicle records and real property records typically contain information from the individual to which they pertain.  In the context of low-income taxpayers, who tend to move frequently, and may not file or may not be required to file a tax return each and every year, this would seemingly improve the chances of actual receipt of a notice of deficiency.  But, as the authors note, broader search requirements will also raise more questions, such as whether a second notice to a newly located address re-starts the 90 day window for filing a Tax Court petition, and whether the courts should validate the IRS’s extra search effort, even when the IRS picks the wrong Bob Smith.


Facebook Asserts that TBOR Mandates Right to Appeals

Facebook and IRS are squaring off in Tax Court over billions in taxes relating to its transfer of intangible assets to Irish subsidiaries. That fight has spawned major procedural side skirmishes in a California federal district court, including battles over privilege and IRS’s refusal to allow the social media giant access to Appeals.

Perhaps in a later post I will return to the interesting privilege battles. This post is about the important legal issues in Facebook’s challenge to the IRS’s rules that allow Counsel discretion to eliminate a taxpayer’s right to Appeals.


In its complaint that it filed last November, Facebook seeks a declaratory judgment that IRS unlawfully issued a 2016 revenue procedure that unlawfully denied its access to an administrative forum. IRS began its audit of Facebook in 2011, and Facebook repeatedly sought Appeals consideration. After Facebook declined to extend the SOL on assessment for a sixth time because IRS did not agree to provide a timetable for Appeals consideration, IRS issued its stat notice. Facebook petitioned to Tax Court and renewed its request for Appeals consideration. IRS refused, referring to the 2016 revenue procedure that allowed Counsel to bypass its right to Appeals review in its transfer pricing deficiency case in the interest of “sound tax administration.”

The case tees up Appeals role and whether taxpayers have the right to Appeals’ consideration in light of developments over the last two decades. Prior to 1998, it was generally accepted that the right to Appeals was discretionary, and the product of IRS procedural rules that IRS was not required to follow. The pre-1998 Code barely acknowledged Appeals’ role in tax administration.   When we rewrote the Saltzman and Book IRS Practice and Procedure chapter on Appeals (currently slated for another refresh this summer) we discuss how the 1998 IRS Restructuring and Reform Act of 1998 (RRA 98) changed that through a host of Code provisions that directly mention Appeals and an off Code but still statutory directive to IRS to ensure an independent Appeals function. In addition, the 2015 codification of TBOR in Section 7803(a)(3)(E) requires that the Commissioner ensure that IRS employees be familiar with and act in accord with taxpayer rights, including the “right to appeal a decision of the Internal Revenue Service in an independent forum.”

In its response to government’s motion to dismiss Facebook argues that RRA 98 and Section 7803(a)(3)(E), taken together, mean that IRS is not free to cut off Appeals’ rights as it has done via the revenue procedure (and as an aside in the IRM when it allows for bypassing Appeals in cases designated for litigation). In making its argument, Facebook claims that TBOR itself creates a substantive right. In response to the IRS view that Section 7803(a)(3)(E) does not directly provide a remedy for violations, Facebook argues that when Congress explicitly directs agency action (as it argues was done with Appeals consideration), an agency cannot dismiss that as meaningless. In addition, Facebook claims that Section 7803(a)(3)(E) justifies the court ordering a remedy for agency violations, through Supreme Court precedent that courts should not read language in statutes as “mere surplusage.”  This argument syncs with our recent guest post on the subject.

The government makes a number of arguments in response, including that TBOR merely expresses general principles and does not create binding rights, the TBOR reference to an independent forum refers to judicial and not administrative review, and that in any event Facebook does not have Article III or statutory standing to bring the litigation.

The matter is scheduled for a hearing in April. We will keep a close eye on this litigation.

Even apart from this case, the broader issue of the role of taxpayer rights in tax procedure is an issue that is picking up steam and is likely to become one of the major issues in tax procedure in the next few years. On PT Christina Thompson recently discussed Alice Abreu and Richard Greenstein’s article on taxpayer rights (which flags some of the issues in this litigation). In addition, Keith and I will be on a panel at the Tax Court judicial conference in Chicago later this month that will consider taxpayer rights, and in May Alice and I will be moderating two panels at the ABA Tax Section Individual and Family Tax Committee and Pro Bono and Tax Clinics Committee that will consider rights in controversies and include more on the Facebook litigation. One of the main promoters of taxpayer rights in tax administration, Nina Olson, is convening the third International Taxpayer Rights Conference in May.

Dischargeability of the First Time Homebuyer Recapture Liability

In Betancourt v. United States, the bankruptcy court for the Western District of Missouri addresses an issue of the character of a debt owed to the IRS as it determines the dischargeability of that debt.

The taxpayer seeks a determination that this type of debt gets discharged in bankruptcy because it does not fall within any of the enumerated exceptions to discharge that apply to taxes. The court finds for the taxpayer. Although the issue here is narrow and has scarcely be litigated, it points to the problem the IRS can have when a debt does not conform to norms for tax debt and the IRS seeks to prevent a discharge.


Ms. Betancourt purchased a home in Liberty, Missouri in 2008. She claimed the first-time homebuyer credit and received a $7,500 credit on her 2008 return. To obtain the credit, she needed to purchase a home for the “first time”, between April 9, 2008 and May 1, 2010. However, Congress was not just concerned with the initial purchase and added in the law a requirement for repayment of the credit over a 15-year period in certain circumstances. For those unfamiliar with this credit, some links to the IRS descriptions of the credit, here, here, here and here, may help in understanding the issue. Ms. Betancourt argues that the debt for repayment of the credit relates either to 2008 when she received the credit or 2010 when her repayment period began. Based on when she incurred the debt she argues that it is not entitled to priority status and neither is it excepted from discharge.

The IRS argues that the recapture obligation arises each year and that for the years starting with 2017, when she filed bankruptcy, the debt is a future debt contingent upon events that have not yet occurred and, therefore, it did not need to file a claim for this future debt and the future debt was not discharged by the bankruptcy case. It filed a claim for $39.00 as a priority amount because that was the amount of unpaid repayment due at the time of the filing of the bankruptcy petition. The IRS relied on the decision in In re Bryan, 2014 WL 789089 (Bankr. N.D. Cal. 2014), in which the court characterized the obligation to repay the new homebuyer’s credit as a non-dischargeable tax rather than a dischargeable general obligation. Bryan held that the obligation to repay was a tax obligation and that characterization triggers the application of the discharge provisions for taxes rather than for general claims.

At issue here is both the character of the debt as tax and the character of the debt as a fixed future obligation or an obligation so contingent as to fail to meet the broad definition of the word claim. Rather than viewing the repayment obligation as a tax obligation, the court in Betancourt views the transaction as a loan when viewing all of the parts of the transaction. If the credit and its repayment obligation has the character of a loan rather than a tax, then the bankruptcy outcome is completely different. The court cited an IRS Information Release, IR-2008-106, which states “the credit operates much like an interest free loan because it must be repaid over a 15 year period.” Form 5405 is subtitled “Repayment for the First Time Homebuyer Credit” and the instructions for the Form repeat the term “repayment.” There are other bankruptcy cases in which the courts have looked at the substance of the transaction in characterizing the nature of a liability in order to determine its status as a claim in the bankruptcy case. Two of the most famous examples of this are Sotelo v. United States, 436 U.S. 268 (1978), in which the Supreme Court characterized the trust fund recovery penalty of IRC 6672 as a tax rather than a penalty because it is a provision designed to allow the IRS to collect the underlying tax and not one imposing a penalty on the person assessed. In 1996, the Supreme Court in United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213 (1996) determined that the excise tax imposed by IRC 4971 for late payment of funds into a pension plan was not a tax but rather was a penalty, calling into question the character, for purposes of filing a bankruptcy claim, of a whole host of excise taxes imposed for wrongful behavior or to discourage “sin,” such as the excise taxes on cigarettes and alcohol.

In addition to the tax versus loan issue, the court also raises the issue of what constitutes a debt. This is a much litigated issue in bankruptcy because it goes to the core of when a claim must be filed and when the discharge provisions come into play. The court cites to the precedent on this issue in support of its conclusion that the IRS possesses a right to payment which triggers an obligation to file a claim against the estate and not to rely on future repayment as a basis for arguing the debt is not a claim.

The court finds that the right to payment arose before the filing of the bankruptcy petition, which fits within the definition of claim in B.C. 101(5)(A). It determines that this prepetition debt is not a priority tax obligation but a non-tax one. Stripped of its tax veneer, the debt loses its exception to discharge and the court determines that the repayment obligation is dischargeable.


I do not know if the IRS will appeal this decision. The decision could impact a decent number of individuals who benefitted from the first time homebuyer credit and whose obligation to repay has not yet run. Any dischargeability determination like this has consequences for anyone who has gone through bankruptcy with this type of debt since they could still bring a discharge action even if the bankruptcy ended some time ago. If correct, the decision would mean that the IRS probably has a number of discharged debts on its books that it continues to attempt to collect in violation of the discharge injunction. The decision could also implicate other situations in which Congress chooses to use the tax code to front money to taxpayers as it did here in an attempt to spend our way out of the great recession. If Congress is concerned about the loss of priority status here, it may need to structure similar provisions differently in the future to make sure that they do not lose their character as tax debt and to make sure, if they want these types of debt to retain priority claim status throughout the repayment period, that the debt arises anew each year (or something to keep it new enough for priority status). The court seems clearly right on the issue of whether this debt meets the requirements of being a claim. The tax versus non-tax character of the debt is closer since the taxpayer is repaying a tax benefit, but I cannot say that the court was wrong on that aspect of its decision either.


Boo Boo Busted: Alabama Man Sentenced to Thirty Years for Role in ID Theft Tax Refund Fraud Schemes

Earlier this month, the Department of Justice announced in a press release that William Gosha III, who went by the nickname Boo Boo, was sentenced to 30 years for his role as mastermind in a brazen identity theft ring that resulted in the filing over 8,800 fake tax returns and the receipt of over $9 million in bogus refunds.

The case stands out both for its scope and impact. Co-conspirators included an employee of a hospital in Fort Benning, Georgia, who stole US soldiers’ identities and Social Security numbers. The soldiers’ information enabled Boo Boo and co-conspirators to file fake returns claiming phony refunds, including for soldiers who were stationed in Afghanistan.

The scheme also reached other government agencies, as co-conspirators included an employee of the Georgia Department of Public Health and Georgia Department of Human Services. Gosha also arranged to steal identities from inmates at a local prison and conspired with a US Postal Service employee to get physical addresses for refunds when financial institutions limited his ability to get refunds directly deposited in bank accounts.

Thirty years seems on the high end for sentencing for a crime such as this though I doubt that many schemes have had this deep a reach with other government agencies. In addition, the victim impact statements, including a statement from a parent of a soldier whose identity was stolen and who heard from the IRS while her son was in Afghanistan, must have had a major influence on the sentence:

This news was devastating to think that my [] 19-year-old son[,] who was defending the very freedom this country stands [for] [,] was wronged by one of those people [he] was willing to die for. My whole family could not believe what was happening. We now had to worry about this terrible act by one of our own. As I tried my best to keep composed and handle all of the gruesome mounds of paperwork to get this straightened out with the IRS, [my son] was then denied his tax refund [as result of this scheme]. This created a financial hardship on [him]. We were too afraid to tell [him] while he was deployed because we did not want to worry him and we wanted him to focus only on getting home alive and not have to worry about such an atrocious act by someone who did not even know

Last month IRS announced that in 2017 it has been very successful in cutting back on identity theft based refund fraud. Key indicators show that IRS has turned the tide in the battle:

  • In 2017, the IRS received 242,000 reports from taxpayers compared to 401,000 in 2016 – a 40 percent decline. This was the second year in a row this number fell, dropping from the 677,000 victim reports in 2015. Overall, the number of identity theft victims has fallen nearly 65 percent between 2015 and 2017.
  • The number of tax returns with confirmed identity theft declined to 597,000 in 2017, compared to 883,000 in 2016 – a 32 percent decline. The amount of refunds protected from those fraudulent returns was $6 billion in 2017, compared to $6.4 billion in 2016. In 2015, there were 1.4 million confirmed identity theft returns totaling $8.7 billion in refunds protected. Overall during the 2015-2017 period, the number of confirmed identity theft tax returns fell by 57 percent with more than $20 billion in taxpayer refunds being protected.

As this DOJ Press release shows, identity theft is not a victimless crime. While IRS and its private sector partners are making major headway the problem is still plaguing hundreds of thousands of people, causing direct costs on them and on all of us in the form of significant IRS resources dedicated to this fight.

Using an Affidavit to Avoid Summary Judgment

We have been requested to notify you that the USD School of Law-RJS Law Tax Controversy Institute will take place this summer on July 20, 2018 at the University of San Diego School of Law Campus. Some PT guest bloggers will be speaking as will Chief Judge Paige Marvel of the Tax Court. For more information about the conference go here.  It is nice to have a conference that focuses on the issues discussed in this blog.

In United States v. Stein, the 11th Circuit reverses longstanding precedent in that circuit and allows a taxpayer to get past a summary judgment motion filed by the IRS and reach the jury. The decision may not result in a victory for Mrs. Stein in the long run but it allows her, and other similarly situated taxpayers (as well as litigants in non-tax cases), to put on their case.

As I will discuss further below, the concurring opinion of Judge Pryor in this en banc opinion provides a history lesson supporting the reasoning of the Court’s opinion and gives interesting insight into the relationship between the dreaded Stamp Act and Mrs. Stein’s ability to move past summary judgment.


The IRS brings relatively few affirmative suits to collect. It does so when the amounts justify the expenditure of effort, the potential to actually collect exists, and, usually, the taxpayer’s cooperation with administrative collection efforts has been less than robust. In this case, the IRS sues Mrs. Stein seeking to reduce its assessment of approximately $220,000 to judgment. It alleged that she had unpaid taxes for 1996 and 1999-2002.

As is normal in these cases, the IRS submitted account transcripts showing her outstanding liabilities and an affidavit from an IRS officer supporting and explaining the transcripts. It moved early in the case for summary judgment based on this information. Mrs. Stein, in response, filed an affidavit in which she stated that to the best of her recollection she paid the taxes at issue. Her affidavit addressed each year in turn with such a statement; however, it did not contain any corroborating evidence of payment.

The district court granted the IRS summary judgment concluding that the evidence presented by the IRS created a presumption that the assessments were correct and that Mrs. Stein “did not produce any evidence documenting said payments.” Her lack of documentation did not allow her to overcome the presumption of correctness. So, the district court determined there was no genuine dispute as to any material fact making the IRS entitled to summary judgment as a matter of law.

She appealed the district court’s decision to the 11th Circuit but lost her appeal. She requested en banc review of the decision. The en banc review resulted in a reversal of the prior decisions in her case and a reversal of Mays v. United States, 763 F.2d 1295 (11th Cir. 1985). In reversing, the panel examined FRCP 56 which governs summary judgment and determined that “nothing in Rule 56 prohibits an otherwise admissible affidavit from being self-serving. And, if there is a corroboration requirement for an affidavit, it must come from a source other than Rule 56.”

The panel states that it makes no difference that this is a tax case. The same summary judgment standard applies in tax cases as in other areas of the law. Doubling back to its earlier statement on corroborating, the panel says Rule 56 simply has no such requirement and that “a non-conclusory affidavit that complies with Rule 56 can create a genuine dispute concerning an issue of material fact, even if it is self-serving and/or uncorroborated.” Of course, this does not mean Mrs. Stein will win her case – far from it. Unless she obtains some proof of her payment of the liabilities or finds a basis for attacking the assessments beyond the statements in her affidavit, I expect she will lose in the end.

Getting past summary judgment is still a big deal. It allows her to gather evidence in support of her payments she may not have done before and it allows her to tell her story to a jury which is where Judge Pryor’s concurrence comes into play.

Judge Pryor states that he writes “to highlight the irony of our earlier precedent when viewed in the light of the history of the Seventh Amendment.” He explains that in the decades before the American Revolution, parliament grew tired of American juries which held for American interests in tax case. So, it expanded the jurisdiction of the Admiralty Courts, which sat without juries, to include trade cases even though those cases would have resulted in jury trials in England. It later expanded the jurisdiction of Admiralty Courts in America to cover matters involving the Sugar Act and the Stamp Act, seeking to avoid “friendly” juries in America.

The colonies strenuously objected to these measures and the right to a jury trial became one of the chief complaints leading up to the revolution. It became an issue in the Constitutional Convention as well and Alexander Hamilton wrote about it in the Federalist Papers. He equated the granting of summary judgment in these circumstances to the type of behavior that our forefathers sought to avoid in overthrowing the yoke of British rule. Judge Pryor’s concurring opinion is a good read for history buffs and perhaps for any lawyer wanting to know more about the origins of American law and how to craft an argument.

By seeking en banc review, Mrs. Stein not only overturned three decades of 11th Circuit precedent but got us a history lesson as well. I wish her the best in finding proof that she did pay the taxes so that her story has a happy ending.  Perhaps, if victorious, she will celebrate by drinking some tea and reflecting fondly on our forefathers.  I would like to expand Judge Pryor’s logic to beat back the government’s current view of the Flora rule where taxpayers such as Mr. Larson are denied an opportunity to even step into court to dispute their tax liability without shelling over millions and millions of dollars.