White House Oversight of Tax Regulations

One of the more significant tax procedure developments of the past year is the new centralized OMB review  that applies to some tax regulations. In this post, Professor Clint Wallace from the University of South Carolina School of Law describes the new framework and notes the many areas that await further clarification. Clint discusses this in greater detail in Centralized Review of Tax Regulations, forthcoming in the Alabama Law Review. Clint is an important voice in the academy on tax administration and tax procedure. His article Congressional Control of Tax Rulemaking appeared this past year in the Tax Law Review. In that piece Clint discussed the special institutional capacity that the Joint Committee on Tax plays in tax legislation, situating the JCT in the context of administrative law and principles of statutory interpretation. Les

Earlier this month, the Treasury Department and the Office of Management and Budget announced a “new framework” that appears likely require many more tax regulations to undergo OMB review.  In other contexts—for example, environmental or workplace rules—this sort of consultation between agency regulation-writers and OMB is commonplace.  Dating back to the Reagan administration, centralized review has been mandated for many regulations.  (The fountainhead of OMB’s authority to impose this review is Executive Order 12,866, which has been modified in some minor respects by subsequent EOs, but remains in effect).  When OMB reviews a “significant” regulation, it requires the drafting agency to quantify the costs and benefits of the rule, and it facilitates a process whereby other departments can weigh in on the proposals.  But OMB has never before required tax regulations to be subjected to this sort of review.

Some political commentators saw the framework as OMB winning a turf war against Treasury, and some tax professionals reacted with dismay that additional layers of analysis will delay new regulations.  Delays are a particular concern in the tax community right now because Treasury is scrambling to produce reams of important regulations to fill in the many blanks that Congress left when it hastily enacted the Tax Cuts and Jobs Act at the end of 2017.

But treating this as either an issue of shifting political power or simply a matter of stretching out a bureaucratic process both undersells and oversells the potential import of this move.  As of now, no one really knows what it means for the implementation of the Tax Cuts and Jobs Act, nor for the development of regulatory tax policy more generally.

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The framework has three major components.  First, it requires Treasury to keep the Office of Information and Regulatory Affairs (the office within OMB charged with central authority to review regulations)abreast of its agenda by submitting quarterly “notices” of all “planned tax regulatory actions.”  This, of course, does not mark a significant change from current Treasury and IRS practices: Treasury and the IRS already produce an annual “Priority Guidance Plan,” with quarterly updates.  Further, these documents are already robust and useful versions of the sort of regulatory agenda-setting prescribed under Executive Order 12,866: Treasury does a good job of soliciting public input on agenda items, makes fairly accurate predictions of its capacity, and follows through on the items it places on the agenda. It looks like the new framework does not change anything about this agenda-setting process, but rather simply mandates that Treasury should provide the (already publicly available) agenda and updates directly to OIRA.  The framework specifies that “[a]t the election of the OIRA administrator, Treasury will engage in substantive consultation with OIRA regarding any” regulatory action that appears on the agenda.  It is not clear from the memorandum what such engagement might consist of; regardless, such engagement was not prohibited previously.

The second component of the framework is that it provides that OIRA will review any regulatory actions that “create a serious inconsistency or otherwise interfere with an action taken or planned by another agency,” or that “raise novel legal or policy issues, such as by prescribing a rule of conduct backed by an assessable payment.”  The treatment of this category of tax regulatory actions corresponds with the treatment of “significant” rules under E.O. 12,866.  Along similar lines, the third element of the framework requires that regulatory actions that have “an annual non-revenue effect on the economy of $100 million or more,” be subject to the comprehensive review that is required for “economically significant” regulations under E.O. 12,866.  This review calls for the drafting agency (i.e., Treasury) to produce quantified cost-benefit analysis of the proposed regulation and alternatives.   The framework provides OIRA with 45 days to review each rule, with additional time provided as necessary, and allows Treasury to request an “expedited” 10-business-day review—this is notably shorter than the standard 90-day review period provided for regulations from other agencies, which suggests Treasury and OIRA were mindful of timing concerns expressed from the tax community.

These changes potentially mark a sea-change in the process for producing tax regulations.  However, many important details—which could impact the effectiveness and significance of this new world of centralized review—remain to be determined.  Most prominently, the categories of tax regulatory actions subject to review are ill-defined:

  • The first category of tax regulations that OIRA plans to review—i.e., the category that aligns with “significant” regulations under Executive Order 12,866—applies if a proposed regulation presents a “serious inconsistency” with action taken by another agency. But it is unclear how OIRA will distinguish between serious and minor potential inconsistencies.  The other definitional prong is similarly vague: a “novel legal or policy issue” appears straightforward, but is then exemplified as a “rule of conduct backed by an assessable payment.”  In tax administration, such a rule is not novel; it is a tax or a penalty.  It is unclear whether OIRA intends to (or believes it is authorized to require) review of any rule that can affect the amount of tax or penalty owed, or if this is more limited.
  • The second category of tax regulations includes no explanation of how the “non-revenue effect on the economy of $100 million or more” will be calculated. The first descriptor, “non-revenue effect” makes clear that revenue estimates are not relevant.  Presumably this means that Treasury will be focused on the costs and benefits of compliance and behavioral changes.  If Treasury relies on its existing compliance cost estimates, this requirement will simply weight review towards regulations that affect more taxpayers.
  • Further, the $100 million amount is measured again a “no action” baseline, but it is unclear what sort of action that refers to—Does that mean a state of the world where Congress has not enacted a provision that requires regulatory action?Or where Congress has acted but Treasury provides no further guidance?  If it is the latter, then the baseline will often be defined by partial compliance with a law as enacted.

Additionally, a central feature of centralized review is quantified cost-benefit analysis.  But for most tax regulations, current CBA practices will not yield any benefits—a tax creates deadweight loss, and imposes compliance and administrative costs, and CBA does not account for benefits flowing from transfers to the government.  So how will CBA be used in the tax regulatory process?

The way that OMB and Treasury construe these provisions could be the difference between almost all regulations proposed this year and next being subject to centralized review, or almost none, so these are significant questions.

The framework allows OIRA to defer the “economically significant” style of review for up to a year (until April 2019), in order for Treasury and OIRA to hire necessary personnel. And shortly after the framework was released, OIRA announced that Kristin Hickman is acting as an advisor, presumably sorting through these sorts of issues.  I address many of these challenges in my forthcoming piece Centralized Review of Tax Regulations(this linked version is newly updated – the previous version was written prior to the release of Trump administration framework).

Updates on Collection Issues

The IRS has recently updated several matters that impact taxpayers in collection. This post pulls together some of the newly available information.  The areas discussed in this post are the financial standards, the updated offer in compromise booklet, the impact of the new law on amounts exempt from levy and the impact of the new law on the time to file wrongful levy claims.

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Financial Standards

On March 26, 2018 the IRS issued new financial standards to be used in collection cases.  The new standards provide guidance to individuals seeking to prepare a collection information statement in order to convince the IRS to grant an offer in compromise, an installment agreement, to make a currently not collectible determination or to otherwise decide the appropriate course of action in a collection case.  The financial standards have their roots in information published by the Bureau of Labor Statistics.  Congress also makes them applicable in bankruptcy cases for certain purposes.

Offer in Compromise

On March 25, 2018, the IRS issued a new Offer in Compromise Booklet. The updated booklet contains the following changes:

Form 656, Section 6, Filing Requirements – “I have filed all required tax returns and have included a complete copy of any tax return filed within 60 days prior to this offer submission.”

This is also addressed in the opening Q&A section under “Other Important Facts”:

“Note: If you have filed your tax returns but you have not received a bill for at least one tax debt included on your offer, your offer and application fee may be returned and any initial payment sent with your offer will be applied to your tax debt. Include a complete copy of any tax return filed within 60 days prior to this offer submission.”

WHAT YOU NEED TO KNOW, Q&A Section, Bankruptcy, Open Audit or Innocent Spouse Claim – “If you currently have any open audit or outstanding innocent spouse claim, wait for those issues to be resolved before you submit an offer.”

PAYING FOR YOUR OFFER – There is better highlighting of the Low-Income Certification option, with emphasis that low income certification means no money need be sent with the offer.

Because the IRS will not work an offer if a taxpayer has not complied with tax laws by filing all necessary returns, many taxpayers file returns immediately prior to the filing of an offer in compromise. The IRS does not always process past due returns with haste because it puts more focus on processing the currently due returns.  The new requirement that a taxpayer attach returns filed within 60 days of the submission of the offer allows the IRS offer group to avoid rejecting cases for lack of filing compliance and to get a view of the liabilities the taxpayer owes in advance of the actual assessment.

The warning about waiting for the resolution of outstanding audits or claims should be considered in the context that an offer in compromise acts as a closing agreement resolving all matters concerning the years covered by the offer. A taxpayer cannot go back and seek a refund after obtaining an offer and the IRS cannot go back and seek an additional assessment.  It is important to resolve all issues for the years covered by the offer but many taxpayers do not appreciate the scope of the offer with respect to the years it covers.

Low income taxpayers continue to receive a benefit when applying for an offer because they do not have to pay a fee for the offer or remit a percentage of the offer. Almost all practitioners know this but many individuals filing offers pro se may not appreciate this benefit and the new booklet tries to make it clearer.

Each of the changes seem appropriate and helpful.

Exemption from Levy

The exemption from levy is tied to the personal exemption. The personal exemption went up last year and the IRS has published guidance on how that change impacts the amount of the exemption from levy in a wage levy situation.  This creates a windfall for individuals subject to a wage levy that Congress probably did not think about when it passed the law.  Of course, windfall may be the wrong term when talking about a provision that can bring a taxpayer to their knees.  Here is the IRS description of the way the wage levy provisions will now work:

Public Law Number 115‐97, TAX CUTS AND JOBS ACT OF 2017, signed by President Trump on December 22, 2017, temporarily increases the basic standard deduction applicable to the 2018 taxable year [IRC § 63(c)(2); Rev. Proc. 2016‐ 55] across all filing categories:

  • From $6,350 to $12,000 for single individuals and married individuals filing separate returns;
  • From $9,350 to $18,000 for heads of households; and
  • From $12,700 to $24,000 for married individuals filing a joint return and surviving spouses.

The Act also suspends personal exemption deductions. Both changes, the increase in the standard deduction and the suspension of the personal exemption, are effective for taxable years beginning after December 31, 2017, and before January 1, 2026. These two changes impact how a recipient of a levy will figure the amount of income exempt from levy. Prior to the change in the law, the amount that was exempt from levy was calculated by taking into consideration both the standard deduction and the total exemptions of the payee. With the elimination of personal and dependency exemptions, a new method for determining the amount of income exempt from levy was needed.

As part of the Tax Cuts and Jobs Act, Congress amended §6334 to provide that from January 1, 2018 through December 31, 2025 employers and other recipients of levies would exclude from levy $4,150 per dependent per year in addition to the amount excluded based upon the standard deduction for the filing status of the person subject to levy. The amount exempt from levy each pay period is calculated by dividing the total amount exempt from levy for the year by the number of pay periods. Publication 1494, Table for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income has been updated. Changes are also being made to Forms 668-W(c), 668-W(c)(DO), 668-W (ICS) and Form 668-W, Notice of Levy on Wages, Salary, and Other Income, along with the instructions.  Due to the increase in the standard deduction amount, in most cases, the taxpayer will have more take-home pay that is exempt from levy.

Employers or others receiving levies will need to figure the amount of income exempt from levy. To do so the recipient  must determine what the payee’s filing status will be (The amount exempt from levy is based upon the standard deduction for that filing status); the frequency of payments, Daily (260), Weekly (52), Bi-Weekly (26), Bi-Monthly (24), Monthly (12); and lastly, the number of dependents that the payee will claim. In this example, the employer knows that the employee will claim the married filing joint standard deduction and has two dependents.

STEP 1: Determine the filing status of the payee.

STEP 2: Find the amount exempt from levy based upon how often taxpayer is paid:

Married Filing Jointly:

STEP 3: The taxpayer is entitled to exclude $4,150 per year per dependent. This chart shows the amount that can be excluded each pay period based upon pay frequency. The amount from far the right-hand column for the correct pay frequency will need to be multiplied by the number of dependents to arrive at the total amount exempt from levy that is attributable to the payee’s dependents.

Amount Exempt from Levy per Dependent:

Step 4:

Amount Exempt from levy from Bi-Weekly Pay:

Add the amount exempt per pay period based upon the payee’s filing status, plus the amount exempt per pay period per dependent to arrive at the total amount of take-home pay that is exempt from levy. A taxpayer that is married, files jointly, is paid $1,500 bi-weekly, and claims two dependents will receive $1,242.32 and will have $257.68 ($1,500-$1242.32) levied.

Wrongful Levy Claims

IRC § 6343(b) previously required taxpayers to make a wrongful levy claim within nine months of the taking of the property. For some people, this time frame was too short because they did not even learn about the taking during that time.  In response, Congress increased the amount of time taxpayers have to seek the return of property when they believe the IRS has wrongfully taken their property while trying to collect from a taxpayer.

Public Law 115-97, the Tax Cuts and Jobs Act extends the period for making an administrative claim to two years and if the taxpayer makes an administrative claim during that period the time to bring suit is extended for 12 months from the date of filing of the claim or for six months from the disallowance of the claim, whichever is shorter. The change applies to levies made after December 22, 2017, and to levies made prior to that date if the nine month period under the prior law had not yet expired.  The IRS issued IR-2018-126 to discuss the change and has revised Publication 4528 to reflect the change.

 

Fourth Circuit Joins Second and Third in Holding Innocent Spouse Suit Filing Deadline Jurisdictional

We welcome frequent guest blogger Carl Smith back to the blog. Today he writes about our most recent loss in our effort to knock down jurisdictional walls in situations where taxpayers have a strong equitable reason for missing a court deadline. Keith

In a case litigated by the Harvard Federal Tax Clinic, the Fourth Circuit in Nauflett v. Commissioner, affirmed, in a published opinion, two unpublished orders of the Tax Court (found here and here) holding that the 90-day period in section 6015(e) in which to file a Tax Court innocent spouse petition is jurisdictional and not subject to equitable tolling. The Fourth Circuit thus joins the two other Circuits to have addressed these questions – in other cases litigated by the clinic – Rubel v. Commissioner, 856 F.3d 301 (3d Cir. 2017) (on which we blogged here) and Matuszak v. Commissioner, 862 F.3d 192 (2d Cir. 2017) (on which we blogged here).

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In all three cases, the IRS misled a pro se taxpayer into filing a late Tax Court petition.

The Nauflett opinion basically just follows what was said by those prior Circuits, finding in the words of the statute a clear statement that excepts this filing deadline from the current Supreme Court general rule that filing deadlines are no longer jurisdictional. Section 6015(e) provides that an “individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section if the petition is filed” within 90 days of the issuance of a notice of determination (or after the taxpayer’s request for relief hasn’t been ruled on for 6 months). The Fourth Circuit noted the word “jurisdiction” in the sentence creating the filing deadline and felt that the word “if” in the sentence conditioned the Tax Court’s jurisdiction on timely filing. The court did not think the fact that the word “jurisdiction” was in a parenthetical mattered, and it did not credit (or even discuss) the taxpayer’s argument that the word “jurisdiction” was arguably addressed only to the words immediately following the parenthetical (“to determine the appropriate relief available to the individual under this section”), which made the sentence ambiguous – i.e., not “clear”, as required for a Supreme Court exception to apply. As we have noted previously, jurisdictional filing deadlines can never be subject to equitable tolling or estoppel.

Observations

All three opinions omit discussion the clinic’s assertion that Congress, in drafting section 6015(e) in 1998, would likely have been shocked to hear that its language precluded equitable tolling, since section 6015 was an equitable provision enacted as section 3201 of the IRS Restructuring and Reform Act of 1998 and was explicitly paired with section 3202, which amended section 6511 to add subsection (h), providing for equitable tolling of the tax refund claim filing deadline in cases of financial disability. The latter provision was to overrule United States v. Brockamp, 519 U.S. 347 (1997), which held that the refund claim filing deadline could not be equitably tolled. Section 6015(e) was drafted in 1998 with none of the features that led the Brockamp court to reject judicial equitable tolling of the refund claim filing period.

I hope this third loss on the section 6015(e) issue can at least be of use in lobbying Congress for Nina Olson’s proposed legislative fix to make the filing deadlines for all tax suits not jurisdictional and subject to equitable tolling. For her proposal, see the link in our blog here.

Keith and I have no further cases to litigate on this section 6015(e) filing deadline. We cry “uncle” on section 6015(e)’s filing deadline.

However, only as amici, we are still litigating the jurisdictional nature of several other judicial tax filing deadlines:

  1. Section 6213(a) (the Tax Court deficiency suit filing deadline, in the Ninth Circuit related cases of Organic Cannabis Foundation v. Commissioner, Docket No. 17-72874, and Northern California Small Business Assistants v. Commissioner, Docket No. 17-72877 – both reviewing unpublished orders of the Tax Court dismissing allegedly-late petitions for lack of jurisdiction);
  2. Section 6532(a) (the district court refund suit filing deadline, in the Second Circuit case of Pfizer Inc. v. United States, Docket No. 17-2307 – reviewing unpublished orders of the district court for the Southern District of New York that dismissed an allegedly-late complaint for lack of jurisdiction); and
  3. Section 7623(b)(4) (the Tax Court whistleblower award deadline in the D.C. Circuit case of Myers v. Commissioner, Docket No. 18-1003 – reviewing the ruling in Myers v. Commissioner, 148 T.C. No. 20 (June 5, 2017), dismissing a late petition for lack of jurisdiction (on which we blogged here).

All of those cases present statutes that are easier for us to win under than section 6015(e) (the hardest). We are expecting a ruling in Pfizer any moment, since it was argued on February 13. But, it is possible in each of these cases that the court will affirm or reverse on some other ground, so that the jurisdictional issue is not reached.

Finally, I wish to thank Harvard Law student Allison Bray for her excellent oral argument in the Nauflett case. Nauflett’s was the third court of appeals oral argument done by a Harvard Law student in the last 14 months. Hear Allison’s oral argument here. Prior to Allison, two other tax clinic students argued similar cases.  Hear Amy Feinberg’s oral argument to the 4th Circuit regarding jurisdiction in the CDP context here. Hear Jeff Zink’s argument to the 2nd Circuit in Matuszak regarding section 6015 jurisdiction here.

Designated Orders: 5/21/18 to 5/25/18 by Caleb Smith

In this installment of designated orders covering the week of May 21, guest blogger Caleb Smith of the University of Minnesota covers several deficiency cases in which the taxpayer failed to carry their burden of proof. Professor Smith also updates us on a few Graev issues including a Chief Counsel Notice from June 6 which will be the subject of additional discussion on this blog and elsewhere. Christine

Knowing When To Hold ‘Em and When To Fold ‘Em

Chief Special Trial Judge Carluzzo cleaned house with designated orders through three bench opinions on S-Cases. These cases didn’t have much in common except that the taxpayer probably never should have gone to trial. Two of the cases deal mostly with evidence and credibility issues (and the same IRS trial attorney for both), and one deals with too-good-to-be true legal arguments. We’ll start with the evidence/credibility issues.

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It is not uncommon that I come across IRS examiners (or law students) that harbor the belief that there is one particular document (and one particular document only) that a taxpayer needs in order to “prove” something. For law students, I suspect this is an offshoot of reading mostly appellate decisions where the facts are already set in stone. For IRS examiners, I suspect this is an offshoot of reading mostly the IRM and mistaking it for the law.

In any event, most of the time there are some documents that are better than others and some sources of evidence that are more reliable (and likely to be considered credible) than others, but usually your job is simply to show something convincing to the finder of fact. Where documentary evidence should exist (for example, a lease or bank records) you can be sure that the IRS is going to bring that issue up. Part of being a lawyer is gauging the likelihood of success on the evidence you do have, and if there is a compelling and credible narrative for why certain documents don’t exist, advising and planning accordingly. Fuller v. C.I.R. (dkt. # 14627-17S) is one instance where candid advice on review of the evidence would be “you have no chance in court.” Hadrami v. C.I.R. (dkt. # 11377-17S) is another.

In Fuller, the taxpayer claimed some rather large itemized deductions – the size of which (relative to income) likely tripped up the IRS smell-test known as Discriminant Inventory Function (DIF) selection. Here, we are not given the taxpayer’s reported income, but we do have some fairly eye-popping deductions: $41,628 for medical, $24,237 for charitable contributions, and $12,567 for unreimbursed employee expenses. Oh, and $850 in tax preparation fees for purchasing tax preparation software (the Turbo-Tax super-elite premium package?). Failing the smell-test, what evidence does the taxpayer have to convince the fact-finder of the propriety of her deductions?

Not a scrap of paper. And testimony that basically works against her as a matter of law. These are not auspicious circumstances.

To begin with, the charitable deductions already present an uphill battle since they require strict substantiation. Ms. Fuller has nothing for them, but does have the (apparent) excuse that her records have been destroyed by household floods. The loss of records in a flood or disaster area is an actual, recognized exception, but it isn’t going to do the trick here – at least in part because the taxpayer can’t explain why other third party records (presumably not subject to floods) don’t exist. Why no bank records of these massive contributions? The same question applies with equal force to the medical expenses and tax preparation fees.

The unreimbursed employee expenses of $12,567 present a different issue. Apparently these expenses stem from a home office. Two immediate legal issues come up: (1) as an employee, is this home office maintained for the convenience of the employer (see Hamacher v. C.I.R., 94 T.C. 348, (1990)), and (2) the usual killer, is the home office exclusively used on a regular basis as the principal place of business (see IRC 280A(c)(1))? Since the taxpayer’s own testimony is that the “home office” is her dining room table where she worked a couple days a week, winning advice would be that she is “unlikely” to succeed. And sure enough, she does not.

Hadrami is a twist on Fuller: documents exist and are introduced by the taxpayer, but they only serve to undermine his testimony. Hadrami was (or claimed to be) a limousine driver, providing his lucky riders a taste of the good life in a 2003 Lincoln Town Car… that had at least 291,380 miles on it in 2012. When Hadrami claims to have purchased the car from the limousine operating company, “Rim Limo,” in 2013 the odometer (allegedly) read 320,673 miles. Interestingly enough, when the DMV has record of the taxpayer purchasing the car in 2014, the odometer continued to read 320,673 miles. Judge Carluzzo notes that something is amiss.

Judge Carluzzo determines that it is doubtful that the taxpayer actually owned the vehicle for the tax year in question (2013). This is especially so as the Rim Limo job required him to park the limo and “return home” in his own car. The mileage log offered by the taxpayer “raises more questions than it answers.” One interesting substantive legal note in this case deserves mention on that point, which is that these expenses were NOT subject to the strict substantiation requirements we usually see trip up taxpayers, and accordingly the Cohan rule would apply. Judge Carluzzo notes that the definition of passenger automobiles (i.e. the listed property usually prompting strict substantiation) does NOT include vehicles used by the taxpayer directly in the trade or business of transporting persons for compensation or hire. See IRC 280F(d)(5)(B). As someone who routinely comes across Uber drivers subject to audit with partial, but not sterling, records of expenses, I find this to be a noteworthy point.

The taxpayer also offers his Wells Fargo bank records to substantiate other expenses (for example, over $1000 in meals and entertainment)… but apparently does not actually delineate where in his records those expenses are to be found. Handing a stack of papers to someone and saying “please find deductions for me” is what you do with your tax preparer, not a Tax Court Judge or IRS attorney. Speaking of tax preparers…

The return that prompted this whole ordeal apparently was prepared with the help of a tax “professional.” As usual, the “professional” saw nothing wrong with claiming (and the taxpayer nothing wrong with incurring) a $22,253 net loss from driving a limo. I suppose one goes into the limo business more for the love of carting around prom-goers than for the money. That, or some people just can’t say no to tax outcomes that seem too good to be true…

Which brings us to the last in Judge Carluzzo’s trilogy of bench opinions: Rykert v. C.I.R., Dkt. # 10427-17. Rather than a “tax professional” preparing questionable returns, Judge Carluzzo worries that Mr. Rykert may have been taken in by “advice he was receiving from an organization whose status to practice law is questionable.” In other words, the “only suckers pay tax” crowd that appear to have found technicalities with every aspect of our tax administration. This particular strain appears to be challenging who actually has the authority to sign a Notice of Deficiency at the IRS and what makes for a valid Notice of Deficiency (the taxpayer does not appear to disagree with any of the substantive items therein).

With what appears to be very genuine concern for a misguided petitioner, Judge Carluzzo does not throw out the case but instead grants an oral motion for continuance in the hope that Petitioner secures counsel and the matter resolves itself without trial. Presumably, that counsel will know whether to hold or fold. As to whether petitioner heeds that advice, one can only hope. A similar designated order (this time from Judge Cohen) suggests that some taxpayers probably just won’t take advice when it isn’t the outcome they want. In Loetscher v. C.I.R., dkt. # 10197-17L, the petitioner raises numerous tax protestor or otherwise frivolous arguments, and is warned of the possibility of penalties up to $25,000. Judge Cohen tries valiantly to bring the light of reason to the petitioner, but notes that the petitioner “failed to consult with the volunteer lawyers present and available” and “when the Court made a last attempt to persuade her to abandon the erroneous approach she [the petitioner] responded ‘I’m sticking to what I said about that.’” Not surprisingly, petitioner soon lost her case.

Graev Updates

The most substantive Graev order (found here and dealing with jeopardy assessments) has already been dealt with earlier in a stand-alone post here. I commend readers that haven’t had a chance to read it, and particularly the insightful comments posted thereunder.

A second Graev designated order was issued by Judge Holmes in Humiston v. C.I.R., dkt. # 25787-16L. This order provides still more insight on this rapidly developing area of law. It does so on two areas: (1) under what circumstances a taxpayer must specifically raise the issue of IRC 6571(b) compliance, and (2) with much less detail, what penalties are exempt IRC 6751(b)(2)(B) as “automatically calculated by electronic means.”

On the issue of whether a taxpayer must specifically raise the issue of IRC 6751 compliance, Judge Holmes raises a few questions. First, Judge Holmes notes that the taxpayer did not put IRC 6751 compliance at issue, and that generally that means it must be conceded. Since it is a summary judgement motion by the IRS, the taxpayer is pro se, and the issue is “cutting edge,” Judge Holmes ultimately lets the taxpayer off the hook for that potential problem. But what is interesting to me is how Judge Holmes phrases what the “error” is. This is a collection due process case, and the problem isn’t that the taxpayer specifically fails to put the penalty at issue. It is that the taxpayer doesn’t raise the issue of the settlement officer (SO) failing to verify all applicable law was followed per IRC 6330(c)(1). This potentially bolsters the reading that in a CDP case, verifying IRC 6751(b) compliance is part and parcel of the SO’s responsibilities under IRC 6330(c)(1) -which would be especially important for taxpayers who failed to challenge a penalty on a Notice of Deficiency that they previously (actually) received. The recently decided precedential opinion in Blackburn v. C.I.R., 150 T.C. No. 9 (2018) somewhat addresses this issue, but that case mostly stands for the proposition that there is no requirement to “look behind” the supervisory approval, if it exists. Although the boilerplate “I verified that all applicable law was followed” will not suffice on its own, some written record of supervisory approval is likely enough. A very recent Chief Counsel memorandum (CC-2018-006) describes the section 6751(b) verification requirement in a CDP case as as part of the section 6330(c) requirement even where the liability is not at issue, but notes that the IRS does not have the burden of production in such a case. In other words, the taxpayer may need to do a little more to put it at issue before the court.

Although it was only a footnote in a non-precedential designated order, one other aspect of the Humiston decision bears mention. It isn’t immediately clear whether the IRS argued that the penalty at issue (in this case, a Trust Fund Recovery Penalty (TFRP)) did not need section 6751 compliance, and it appears as if the SO simply failed to consider it at all. Nonetheless, Judge Holmes puts a stamp of disapproval on the notion that TFRPs would not need to meet IRC 6751(b) requirements,  both because they are penalties “under the code” and because it is doubtful to Judge Holmes’ mind that they could be automatically calculated through electronic means (the IRC 6751(b)(2)(B)) exception). This is important because in Blackburn the IRS explicitly made the argument in the alternative that IRC 6751 didn’t apply to TFRPs. The Court didn’t rule on that issue because it found compliance by the IRS anyway. My reading of the not-so-subtle tea leaves in Judge Holmes’ designated order is that the Court would almost certainly find section 6751 to apply to TFRPs if that issue was squarely before it.

Final Clean Up

There were two other designated orders for the week of May 21 that will not be discussed in this post. One was from Judge Jacobs granting a motion for continuance and remand (found here), and one was from Judge Thornton denying a motion to vacate or revise the Court’s opinion (found here).

Eleventh Circuit Says Untimely-Made CDP Arguments “May Deserve Attention from the Bench and Bar”

We welcome back frequent guest blogger Carl Smith. Today, Carl discusses a recent decision on appeal from dismissal by the Tax Court for untimely filing a CDP request. The taxpayer timely filed the request after receipt but not within the applicable time from mailing. The facts make for a compelling case and maybe the next person with this problem now has a basis for winning this argument. We also wish to thank Tax Notes for allowing us to link to an comments to proposed regulations referred to at the bottom of this post. Keith 

Here’s something you don’t see every day: The Eleventh Circuit faced two CDP arguments that it held were raised too late for it to consider on appeal. Yet the court was so bothered by the possible correctness of the arguments that it deliberately wrote a published opinion explaining the arguments. Here’s the penultimate paragraph of the opinion:

We do not reach the due process or legislative history arguments because Mr. Berkun did not properly raise them in the tax court. Given the lack of any substantive ruling on our part, this may seem like an opinion “about nothing.” Cf. Seinfeld: The Pitch (NBC television broadcast Sept. 16, 1992). And maybe it is. But we have chosen to publish it because the issues that Mr. Berkun attempts to raise on appeal may deserve attention from the bench and bar.

Berkun v. Commissioner, 2018 U.S. App. LEXIS 13910 (11th Cir. May 25, 2018) (slip op. at 12). This post will set out the arguments to publicize them – in hopes that practitioners and Tax Court judges dealing with pro se petitioners will consider raising the arguments timely in future Tax Court cases. For the Tax Court to accept one of the arguments, though, it will have to overrule one of its prior T.C. opinions.

In a nutshell, the first argument is that when the IRS puts a person in prison for tax fraud, Due Process requires that any notice of intention to levy (NOIL), if mailed, be mailed to him or her in prison and not merely to the residential address shown on the most recent tax return (where the IRS knows he or she is not currently living).

The second argument is one that has come up a number of times. In the innocent spouse case of Mannella v. Commissioner, 132 T.C. 196, 200 (2009), rev’d and remanded on other issue, 631 F.3d 115 (3d Cir. 2011), the Tax Court wrote:

If the [NOIL] is properly sent to the taxpayer’s last known address or left at the taxpayer’s dwelling or usual place of business, it is sufficient to start the 30-day period within which an Appeals hearing may be requested. Sec. 301.6330-1(a)(3), A-A9, Proced. & Admin. Regs. Actual receipt of the notice of intent to levy is not required for the notice to be valid for purposes of starting the 30-day period. Id. We see no reason the notice of intent to levy, including information about her right to section 6015 relief, mailed to petitioner at her last known address but not received by her should start the 30-day period to request an Appeals hearing but not start the 2-year period to request relief under section 6015(b) or (c).

In Berkun, the second argument was that both the structure of CDP and a sentence from its legislative history (one that was not discussed in the pro se case of Mannella), indicate that, contrary to Mannella, a NOIL mailed to a last known address but not actually received by the taxpayer in the 30-day period in which to request a CDP hearing does not cut off the right of the taxpayer to later request a CDP hearing (i.e., not an equivalent hearing), and the CDP regulation cited in Mannella is either distinguishable or invalid.

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Berkun Facts

Alan Berkun had been convicted in New York of securities and tax fraud. The judge imposed restitution both to his victims and to the IRS. The IRS assessed the restitution under section 6201(a)(4). At the time of his incarceration, Berkun had been living with his girlfriend and their three mutual children in a house he owned in Florida, so he was incarcerated in Florida for a number of years.

While in jail, he wrote the IRS a letter asking that all correspondence concerning his tax issues be sent to him in jail. However, the income tax returns that he filed for the last two years prior to his release showed his address as the Florida house in which his girlfriend and children lived. He expected to move back into that house when he got out of prison, but shortly before release, his girlfriend ended the relationship and refused to let him move back in.

Shortly before Berkun’s release, a Revenue Officer (RO) was assigned to try to collect the restitution assessment. The RO learned that Berkun was in jail, but wanted to issue a NOIL. The RO decided to mail the NOIL to Berkun’s Florida house, without even copying Berkun in jail. Berkun’s girlfriend got the NOIL and threw it in the garbage, not telling Berkun about it.

A few months later, Berkun was released to live in his mother’s house. The RO visited him there and brought a copy of the NOIL, which he gave to Berkun. This was the first Berkun heard of the NOIL. Berkun promptly hired an attorney, who got a Form 12153 requesting a CDP hearing into the IRS’ possession within 30 days after the meeting. Berkun was not seeking to deny the correctness of the restitution assessment, but just to arrange for a collection alternative to immediate full payment through levy. One of the arguments that Berkun made was that his former girlfriend had converted a large amount of his property (including a valuable stamp collection) shortly after she learned of the NOIL, and he wanted the IRS to pursue her for collection of part of the liability.

Appeals held a hearing in which it did not agree to the collection alternative proposed or to pursue the former girlfriend. After the hearing, Appeals issued a decision letter, taking the position that the hearing was an equivalent hearing, not a CDP hearing, since Berkun had not filed his Form 12153 within 30 days of the mailing of the NOIL to his Florida house.

Tax Court Proceedings

Berkun’s lawyer filed a petition with the Tax Court and argued, under Craig v. Commissioner, 119 T.C. 252 (2002), that the decision letter should be treated as a CDP notice of determination giving the right to Tax Court review because Berkun had timely requested a CDP hearing within 30 days of actually receiving the NOIL. Berkun’s lawyer argued that, based on prior cases involving prisoners put in jail by the IRS, the last known address for Berkun on the day that the NOIL was mailed was prison, not the Florida house; thus, the NOIL that was mailed was invalid, and the NOIL that was hand-delivered was the first valid NOIL, as to which a timely Form 12153 had been filed.

In an unpublished order, Judge Carluzzo dismissed the petition for lack of jurisdiction, holding on these facts that the NOIL was mailed to Berkun’s last known address, since it was mailed to the address shown on his most recent tax return.

Keith and I read the unpublished order and realized that Berkun had a second argument for why the Tax Court had jurisdiction that Judge Carluzzo had not discussed (naturally, since Berkun’s then-lawyer did not know about the argument). We contacted Berkun and his lawyer and made them aware of the argument. Berkun’s lawyer moved to vacate the order of dismissal, making this new argument – that, even if the NOIL was mailed to Berkun’s last known address, because he did not actually receive it during the 30-day period, he was entitled to a CDP hearing by requesting one within 30 days after actual receipt. A copy of a 51-page memorandum of law that accompanied the motion to vacate can be found here.

The memorandum was so long because it takes a lot of time to explain this argument. I will not go into the argument in great detail. Instead, the reader may read the memorandum or a more detailed summary of it in a prior post I did on it here in connection with unpublished orders in a case named Godfrey v. Commissioner, Tax Court Docket No. 21507-13L. As noted in the post, Godfrey was a case where the NOIL, although mailed to the taxpayer’s last known address, was not actually received during the 30-day period. The post noted that the same had happened in Mannella and in Roberts v. Commissioner, T.C. Summary Op. 2010-21. In each case, the Tax Court cited the CDP regulation saying that an NOIL that was mailed to the last known address was valid, even if not received. But, the court did not discuss the structure of CDP or the legislative history that suggests that the regulation is distinguishable or invalid as to cutting off the right of a taxpayer in such a case to get a CDP hearing if the taxpayer did not file a hearing request within 30 days of the NOIL’s mailing.

Just to whet the reader’s appetite, here is from the Conference Committee report, where Congress wrote:

If a return receipt [for mailing the NOIL by certified mail] is not returned, the Secretary may proceed to levy on the taxpayer’s property or rights to property 30 days after the Notice of Intent to Levy was mailed. The Secretary must provide a hearing equivalent to the pre-levy hearing if later requested by the taxpayer. However, the Secretary is not required to suspend the levy process pending the completion of a hearing that is not requested within 30 days of the mailing of the Notice. If the taxpayer did not receive the required notice and requests a hearing after collection activity has begun, then collection shall be suspended and a hearing provided to the taxpayer.

H.R. Rep. (Conf.) 105-599, 105th Cong., 2nd Sess. (1998) at 266, 1998-3 C.B. at 1020 (emphasis added).

The second and third sentences of the above-quoted language are the origin of the equivalent hearing, discussed in detail at Reg. § 301.6330-1(i). The last sentence, though, appears to be a command to hold a regular CDP hearing when a properly addressed NOIL was not received within the 30-day period. Only in a real CDP hearing must the IRS suspend collection action under section section 6330(e)(1). Thus, while it is true that an NOIL that is not received in the 30-day period is valid for some purposes (e.g., to allow the IRS to start collection), it should not be valid for purposes of cutting off a right to a CDP hearing when one is requested later, after the NOIL is actually received.

Moreover, Congress was clearly concerned that nonreceipt of important IRS notices could deprive a taxpayer of prepayment Tax Court review. For that reason, Congress explicitly provided that, in a CDP hearing, the taxpayer may raise a challenge to the underlying liability if the taxpayer did not actually receive a notice of deficiency. Section 6330(c)(2)(B). It would be inconsistent with the purposes of CDP to allow Tax Court prepayment challenges to happen when a notice of deficiency was not actually received, but not when a NOIL was not actually received.

Judge Carluzzo wanted no part of this argument, so he denied the motion to vacate in a brief paragraph in an unpublished order, as follows:

In the face of seemingly plain statutory language and even plainer regulations”, Andre v. Commissioner, 127 T.C. 68, 71 (2006), petitioner, in his motion to vacate filed May 12, 2016, challenges our order of dismissal for lack of jurisdiction, entered April 15, 2016, that is supported by that plain statutory language, even plainer regulations, and numerous opinions of this Court. In support of his motion petitioner relies upon certain legislative history that his memorandum of authorities, also filed May 12, 2016, shows to raise more questions than it answers. Otherwise if, as in this case, the notice referenced in I.R.C. §6330(a)(1) & (2) is properly mailed to the taxpayer, we are aware of no authority for petitioner’s argument that the period referenced in I.R.C. §6330(a)(3)(B) should take into account the date the notice is received by the taxpayer rather than the date the notice is mailed by the Commissioner. 

Appellate Proceedings 

On appeal to the Eleventh Circuit, Berkun retained Joe DiRuzzo, who was admitted to that Circuit and had extensive appellate experience. Joe made the decision not to argue that the NOIL was not mailed to the last known address, but Joe incorporated into his brief the argument that an NOIL that is not timely received can still give rise to a CDP hearing and a new Due Process argument.

The Due Process argument was based on non-tax case law from forfeiture cases that holds that a notice of forfeiture, to satisfy Due Process, must be sent to an incarcerated person in jail. See, e.g., Dusenbery v. United States, 534 U.S. 161, 164-69 (2002) (Due Process satisfied by mailing a notice of forfeiture to a claimant by certified mail to the prison where he was incarcerated, to the residence where the claimant’s arrest occurred, and to the home where the claimant’s mother lived); United States v. McGlory, 202 F.3d 664, 672, 674 (3d Cir. 2000); Weng v. United States, 137 F.3d 709, 714 (2d Cir. 1998). Joe argued that these Due Process cases should be extended to serving NOILs, as well.

As noted above, the Eleventh Circuit held that both the legislative history and Due Process arguments should have been raised in the Tax Court before Judge Carluzzo’s order of dismissal, and the judge was within his rights not to consider the legislative history argument in a motion for reconsideration (though, query whether the judge actually considered it and rejected it on the merits?). But, the Eleventh Circuit was obviously troubled by the possible merit of these two arguments. So, it wrote it published opinion “about nothing” to make the bench and bar aware of the arguments.

Observation

The legislative history argument is not a new one to the IRS. As noted in my prior Godfrey post, in August 2013, the IRS proposed changes to the innocent spouse regulations under section 6015. See REG-132251-11, 78 F.R. 49242-49248, 2013-37 I.R.B. 191. Among the proposed changes was one to Reg. § 1.6015-5(b)(3)(ii) to “clarify” that the 2-year period of section 6015(b) or (c) starts irrespective of an electing spouse’s actual receipt of the NOIL, if it was sent by certified or registered mail to the electing spouse’s last known address. This proposal was explicitly proposed to align the regulations to the holding in Mannella. On January 30, 2014, a number of low-income taxpayer clinicians (including Keith and I) submitted combined comments on the proposed regulations that, among other things, argued that Mannella was wrongly decided and the CDP regulation about non-receipt of NOILs was inconsistent with the legislative history. We recommended that, if an NOIL is considered a collection activity, the 2-year period start from the date of actual receipt of the NOIL. Our comments were published in Tax Notes Today, where they can be found at 2014 TNT 22-64. The proposed regulations are still outstanding, and the IRS has not responded to our comments.

 

Requesting Innocent Spouse Relief

The National Taxpayer Advocate posted a blog detailing the impact of the change in the time period for requesting innocent spouse relief as a result of the litigation concerning the regulation under IRC 6015(f). The result of the study regarding the volume of the requests made after the change in the regulation makes clear that opening the time period for requesting relief under (f) from two years to the full period of the statute of limitations on collection has not had a material impact on the number of requests for innocent spouse relief. This information refutes concerns raised by the IRS in the litigation that opening up the time period would open the floodgates of cases seeking 6015 relief. The IRS makes similar floodgate arguments in the equitable tolling cases with similar empirical data to support its claim.

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For those not familiar with the issue, the 1998 Restructuring and Reform Act significantly changed the innocent spouse provisions and created three forms of relief available under subsections (b), (c) and (f) of IRC 6015. The legislation capped the time period for taxpayers to claim relief under (b) and (c) but was silent regarding (f) relief. The IRS promulgated regulations providing a two year period for seeking relief under (f) to match the time period under the other subsections. Low income taxpayer advocates Paul Kohlhoff and Bob Nadler attacked the regulation in the case of Lantz v. Commissioner, 132 T.C. 131 (2009), rev’d, 607 F.3d 479 (7th Cir. 2010). Although they convinced the Tax Court that this provision of the regulation was contrary to the statute, the Seventh Circuit reversed and upheld the regulations. Two other circuits upheld the regulations and cases were pending in other circuits when a letter from numerous members of Congress convinced the IRS to reverse its position and pull the regulation. [As a side note, the IRS issued Rev. Proc. 2013-34 following its change in course but has yet to publish a new regulation despite seeking comments several years ago.]

Since (f) relief is available to individuals who cannot obtain (b) or (c) relief, one of the IRS arguments in support of the two year limit on (f) relief was that it was necessary in order to avoid an end-run around the time limitation and open the door to a high volume of innocent spouse requests. The statistics published in the NTA’s blog suggest that the IRS fears of a high volume of requests due to the expanded time frame have not materialized. The relatively flat number of requests for relief before and after the change in the regulation suggest no need exists for Congress to amend (f) in order to protect the integrity of the innocent spouse statute.

The lack of any material change suggests that most individuals seeking relief do so relatively shortly after learning of their liability for a tax debt they believe they should not owe. My own experience with individuals seeking this relief supports this conclusion. Most of the time these individuals have ended the marriage and they seek to correct the problem as soon as possible. This is not something about which they procrastinate. The receipt of the IRS notice and demand letter individually and the prospect of facing the IRS collection system usually drive them to seek relief as soon as possible.

The post by the NTA also contains statistics concerning the percentages related to granting of innocent spouse relief. These statistics show a recent decline in the number of cases in which the IRS has granted relief. The statistics match the anecdotal concerns of advocates requesting innocent spouse relief. It is not clear if the quality of the requests has gone down, the review has become tougher or some other factor has influenced the rate at which the IRS grants these requests. As with most matters, it does make a difference if the individual is represented. I would be curious if statistics exist showing whether the number of requests from individuals representing themselves have increased or if the decline in acceptance of these requests reflects an across the board decline. My clinic usually gets involved in these cases when the individuals learn of the clinic after filing a Tax Court petition. Finding a way to have qualified individuals seeking this relief to come to clinics at an earlier stage in the process might improve the success rate of those seeking innocent spouse relief.

 

 

Does the Tax Court Sometimes Have Refund Jurisdiction in CDP Cases?

Frequent contributor Carl Smith discusses a case implicating the Tax Court’s ability to determine and order the credit or refund of an overpayment in a CDP case. Les

In 2006, in a court-reviewed opinion, the Tax Court in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), held that the Tax Court lacked jurisdiction to determine an overpayment in a Collection Due Process (“CDP”) case. Although section 6512(b) gives the Tax Court overpayment jurisdiction, the court held that section 6512(b) was limited in application to deficiency cases and interest abatement cases, where it is specifically referenced in section 6404(h)(2)(B). The Tax Court has never reexamined its Greene-Thapedi holding, and the holding was adopted only in a D.C. Circuit opinion, Willson v. Commissioner, 805 F.3d 316 (D.C. Cir. 2015), presenting a highly unusual fact pattern. A case named McLane v. Commissioner, Docket No. 20317-13L, currently pending before Judge Halpern may lead to consideration of Greene-Thapedi’s holding in the Fourth Circuit in a case with a more typical fact pattern than that presented in either Greene-Thapedi or Willson.

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The McLane case is not new to readers of PT. A March designated order in the case was discussed by Samantha Galvin in her post on April 5. But, that post did not discuss Greene-Thapedi, so I think another post expanding on McLane is called for.

In Greene-Thapdei, a taxpayer complained during a CDP hearing of alleged excess interest and late-payment penalty that she had been charged after she settled a Tax Court deficiency case.  The IRS had assessed the agreed tax, as well as interest and late-payment penalty thereon.  During the Tax Court CDP case, the balance charged was fully paid by a credit that the IRS took from a later taxable year, so the Tax Court dismissed the case as moot, concluding that it had no overpayment jurisdiction in CDP.  But, a curious footnote (19) in the majority opinion may have tried to leave open the issue of overpayment jurisdiction in cases where the taxpayer did not receive a notice of deficiency and so could challenge the underlying liability in CDP. However, the footnote is far from clear.  The footnote reads:

We do not mean to suggest that this Court is foreclosed from considering whether the taxpayer has paid more than was owed, where such a determination is necessary for a correct and complete determination of whether the proposed collection action should proceed. Conceivably, there could be a collection action review proceeding where (unlike the instant case) the proposed collection action is not moot and where pursuant to sec. 6330(c)(2)(B), the taxpayer is entitled to challenge “the existence or amount of the underlying tax liability”. In such a case, the validity of the proposed collection action might depend upon whether the taxpayer has any unpaid balance, which might implicate the question of whether the taxpayer has paid more than was owed.

Judge Halpern joined nearly every other judge in the majority opinion.  Judge Vasquez filed a dissent arguing that the Tax Court implicitly had jurisdiction to determine an overpayment in CDP.

In McLane, the IRS says it issued a notice of deficiency to McLane’s last known address, but, when he never filed a Tax Court petition, it assessed the income tax deficiency.  It later sent him a notice of intention to levy.  In the CDP case in Tax Court, the IRS conceded that he did not receive the notice of deficiency so could challenge the underlying liability.  After a trial, the IRS conceded that McLane proved not only the disputed deductions in the notice of deficiency, but also that he had more deductions than were reported on his return and so overpaid his taxes by about $2,500.  After the post-trial briefs were in (but before any opinion was issued), the parties held a conference call with Judge Halpern about what to do.  The IRS took the position that the Tax Court had no jurisdiction to find an overpayment and any claim filed today would be time barred.  After the conference call, the Judge in March issued an order asking for the parties to file memoranda addressing whether the court had overpayment jurisdiction.  The 6-page order did not mention Greene-Thapedi, but stated:

Because the question of our jurisdiction in a collection due process (CDP) case to determine and order the credit or refund of an overpayment appears to be a novel one, we will require the parties to submit supplemental briefs addressing the issue before we resolve it.

Judge Halpern doesn’t usually forget about relevant opinions, so I suspect that he may be thinking that Greene-Thapedi is distinguishable (maybe under footnote 19?).  In the order, the judge also suggested that the pro se taxpayer consult a tax clinic in the Baltimore or D.C. area before submitting his memorandum.

Although the taxpayer spoke to the tax clinic at the University of the District of Columbia, he decided not to retain that clinic and stayed pro se.

In response to the judge’s order, three memoranda were eventually filed with the Tax Court: (1) an IRS’ memorandum, (2) the taxpayer’s memorandum, and (3) an amicus memorandum that the judge allowed the UDC clinic to submit. Full disclosure: Although the amicus memorandum was written primarily by UDC law student Roxy Araghi and her clinic director, Jacqueline Lainez, since I assisted them significantly, I am also listed as of counsel on the memorandum.

Essentially, the IRS simply points to Greene-Thapedi as controlling and argues that the Tax Court lacks overpayment jurisdiction in CDP for the reasons stated by the majority in that opinion.

The IRS also cites and relies on Willson. In Willson, the IRS erroneously sent the taxpayer refund checks for two taxable years, when it should have sent only one refund check. Later realizing its mistake, the IRS assessed in the earlier year the erroneous payment amount. The taxpayer eventually realized that one of the two refunds checks was erroneous, and he voluntarily sent the IRS some money for the year for which the IRS had set up the assessment. When the IRS did not get back the rest of the assessment from the taxpayer, it issued a notice of intention to levy for the balance. During the Tax Court CDP case, the Tax Court held that assessment was not a proper way of collecting back the erroneous refund. And appropriate methods (such as a suit for erroneous refund) were now time-barred. So, the IRS abated the assessment. Then, the IRS argued that the case was moot. But, at that point, the taxpayer contended that he had overpaid his tax (the voluntary payments), and he asked the Tax Court to so hold, citing the Tax Court’s authority under section 6330(c)(2)(B) to consider challenges to the underlying liability. The Tax Court dismissed the CDP case as moot, without finding an overpayment.

The D.C. Circuit in Willson agreed with the Tax Court, but stated: “The IRS retained the $5,100 not to satisfy a tax liability but to recover an erroneous refund sent as a result of a clerical error. The debt created by such an erroneous refund is not a tax liability.” 805 F.3d at 320 (emphasis in original).

Since Willson does not involve a deficiency in tax and may not even involve underlying tax liability at all, it may not be controlling in McLane.

And, no other Court of Appeals has considered Greene-Thapedi’s Tax Court jurisdictional issue.

The McLane taxpayer and UDC amicus memoranda argue that Greene-Thapedi is distinguishable from McLane on the facts or was, simply, wrongly decided. The taxpayer’s memorandum also distinguishes Willson factually in a footnote. Both memoranda make many of the arguments that Judge Vasquez included in his dissents in Greene-Thapedi for why the Tax Court has inherent overpayment jurisdiction in a CDP case – especially one where a taxpayer is litigating a deficiency because he did not receive a notice of deficiency.

As I see it, either way Judge Halpern rules, there is a good chance that the losing party will take this issue up to the Fourth Circuit on appeal, where we might finally get a ruling on whether the Greene-Thapedi opinion is right or not after all.

 

Tax Court Order Highlights Faulty Stat Notice Issued to Married Taxpayers

What happens when IRS wishes to issue stat notice to taxpayers who filed joint returns? Section 6212(b)(2) provides that the notice may be a single joint notice, except if the IRS has been notified that the spouses live separately. IRS Restructuring Act of 1998 in an off-Code provision states that IRS is required, “whenever practicable,” to send “any notice” relating to a joint return separately to each spouse.  When taxpayers file joint returns, and IRS issues a stat notice, IRS policy is to send duplicate notices to each spouse even if they live at the same address.

Parson v Commissioner is a recent undesignated Tax Court order that highlights the risks to the IRS when it does not strictly follow its procedures for issuing separate notices.

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Here are the facts. Parson involved married taxpayers who lived at the same address. In 2014, the husband filed a MFS return and the wife did not file a return; in 2015 they filed a joint return. IRS examined the husband’s 2014 MFS return and the 2015 joint return. IRS issued and sent a single stat notice that covered the husband’s 2014 MFS return and the joint return. The letter portion of the stat notice was addressed only to the husband. The waiver allowing immediate assessment only listed the husband as the sole taxpayer. Accompanying the letter were two separate Forms 4549 A, Income Tax Examination Changes, one for 2014 in the husband’s name and the other for 2015 that referred to both husband and wife.

The Parsons together filed and signed a single petition; the petition swept in both years. For 2014, IRS moved to dismiss the case for the wife, which the Tax Court granted, given that in 2014 the examination pertained to the husband’s MFS return.

Special Trial Judge Armen on his own raised the issue of a jurisdiction for the wife for 2015 given that the stat notice letter only listed the husband’s name. IRS claimed that the Tax Court had jurisdiction over the wife for 2015 because the Income Tax Examination Change Form 4549 A for 2015 also had her name on it and that she was not misled or confused—after all she did file a petition the Tax Court.

Judge Armen disagreed:

However, the Court views the matter differently. First and foremost, it is clear that the . . . notice of deficiency was addressed solely to [husband]. See I.R.C. sec. 6212(a) and (b). Second, the Commissioner is obliged, “wherever practicable, [to] send any notice relating to a joint return under section 6013 of the Internal Revenue Code of 1986 separately to each individual filing the joint return.” Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, sec. 3201(d), 112 Stat. at 740. This was not done in the present case.

The order thus dismissed the wife’s case for lack of jurisdiction; the order goes on to state that of course IRS could issue a separate stat notice to the wife and that if she wishes to challenge that in Tax Court she will have to timely file a new petition.

Observations and Conclusion

RRA 98’s off Code provision requiring “wherever practicable” that IRS issue separate notices related to a joint return is an important protection from abusive or controlling spouses that may not share correspondence (IRS by the way interprets “any notice” relating to a joint return as only notices required by statute). The separate notice requirement is not an absolute directive and Section 6212 allows a single joint notice when IRS does not know that spouses live separately. The order in Parson highlights the risk to IRS when its stat notice itself fails to explicitly list both spouses’ names, and IRS fails to send separate letters. Parson also is a reminder to practitioners to review carefully IRS correspondence to make sure that IRS complied with its notice requirements. Query how Judge Armen would have ruled if the IRS had sent a duplicate copy of the stat notice addressed to the wife that failed to include her name on the letter portion of the notice.

Hat tip to Lew Taishoff who flagged this order on his blog.