A Fresh Look at Tax Exceptionalism: Tax Is A Little Different

Today we welcome first-time guest poster Professor James Puckett from Penn State Law School.  Past posts have wrestled with tax procedure’s place in the world of broader administrative law principles. James’ thoughtful recent Georgia Law Review article Structural Tax Exceptionalism takes on these issues. Situating tax adjudications and the mix of IRS guidance into broader administrative law norms, James suggests that some of the unique aspects of the IRS’s guidance and review process serve as a check on the wholesale adoption of those norms.

This issue is closely related to the discussion surrounding Treasury and IRS’s longstanding practice of exempting tax regulations from normal agency review procedures, an issue discussed in this month’s GAO report on IRS guidance practice and the subject of a recently released memorandum of understanding between IRS and OMB that dates from 1983. How tax fits in with broader and nontax specific agency practice will be an important issue in tax administration and tax procedure for the foreseeable future. Les

Amid a scholarly near-consensus that tax exceptionalism is dead or dying, my recent article, Structural Tax Exceptionalism examines some of the distinctive features of tax administration that remain viable. “Tax exceptionalism,” as it relates to tax procedure, holds that tax is so different, special, complicated, or important that otherwise applicable administrative law principles do not apply. This kind of tax exceptionalism was probably fatally undermined by the Supreme Court’s 2011 decision in Mayo Foundation v. United States. Perhaps leaving a crack in the door for future litigants to bring an adequate “justification,” the Court declared that it was “not inclined to carve out an approach to administrative review good for tax law only.”

In Structural Tax Exceptionalism, I argue that the peculiarities of tax rulemaking and adjudication severely constrain the potential for effectively mapping general administrative law principles onto tax. To be clear, the intent of the article is not to revive tax exceptionalism as an analytical guide. The APA is essentially a template, and Congress has customized tax rulemaking and adjudication. I argue that these modifications are important and should not be unraveled as a result of looking to the APA to start. In this post, I sketch the atypical features of tax rulemaking and adjudication, as well as their interplay.


A prototypical agency may find rulemaking relatively burdensome and accordingly prefer to fall back on adjudication. Outside of tax, pre-enforcement challenges to rules promulgated by administrative agencies are commonplace. Whereas the Supreme Court has interpreted the Anti-Injunction Act (26 U.S.C. § 7421) broadly to bar pre-enforcement challenges to tax regulations, no such limitation applies under the APA. Moreover, in the event of a successful procedural challenge, assuming the agency tries again, it cannot backdate a newly issued replacement rule. With exceptions for interpretative rules, statements of policy, and “good cause,” APA § 553(d) generally requires publication of a final rule to precede its effective date by at least 30 days. Thus, low-risk pre-enforcement challenges may succeed in pushing back effective dates of legislative rules even if the agency ultimately prevails and the contents of the eventual valid rule come as no surprise to the public.

Even with the risk of post-enforcement litigation, APA challenges to tax rules have multiplied post-Mayo. Sometimes, of course, there will be a more fundamental flaw with the guidance, e.g., that it is unreasonable or contrary to the Code. However, my article argues that in cases involving procedural technicalities, the IRS and Treasury Department may be able to solve some enforcement problems by backdating a replacement rule. Final tax regulations, under the authority of I.R.C. § 7805(b)(1)(B), are routinely backdated to the date of the notice of proposed rulemaking (NPRM). Perhaps in the case of replacement regulations it would be more appropriate to label the NPRM relating to the invalidated regulation a “notice substantially describing the expected contents” of the replacement regulation (I.R.C. § 7805(b)(1)(C)).

Part III.A of the article expands on this and other potential arguments relating to the backdating of tax rules. Beyond the basic § 7805(b) argument outlined above, there are other potential arguments under the Code (e.g., prevention of abuse, as well as the more flexible predecessor to Section 7805(b), which arguably still applies in some cases). Moreover, no examination of rulemaking procedures would be complete without an examination of the vexing legislative-interpretative rule distinction. Although I would not go so far as some in classifying tax rules as legislative, the IRS and Treasury have probably been too quick to claim exemption from the APA for “interpretative rules.”

Outside of tax, a recurring complaint about agencies is that they fail to engage in sufficient rulemaking, instead opting to make policy through case-by-case adjudication. The IRS clearly has to undertake a great deal of adjudicative activity in reviewing tax returns. However, courts review deficiency determinations as well as typical refund claims de novo. Part III.B. of my article expands on how this differs from the deferential judicial review ordinarily afforded to agency formal adjudication.

Stephanie Hoffer and Chris Walker argue in their excellent article on The Death of Tax Court Exceptionalism and in their posts on Procedurally Taxing discussing that article that the Tax Court’s review should be deferential where the APA has not been overridden (e.g., innocent spouse relief and collection due process). Like Hoffer and Walker, I am intrigued by the potential benefits of deferential review and remands in appropriate cases. Moreover, I agree that there may be more room for courts to explore discretionary remands to the IRS.

In any event, for the time being, adjudication does not present the same attraction to the IRS as it would to the prototypical agency. To substantially improve the odds of a court following the IRS’s position on an issue, rulemaking offers more promise. The prospect of de novo review of IRS adjudication, along with the potential flexibility of backdating rules under § 7805(b), represent sticks and carrots that may push the IRS and Treasury toward rulemaking—at least relative to a prototypical agency’s incentives. This may be a good thing, if we are hoping for more published tax guidance.

In Exelon Tax Court Finds Legal Opinion Not Enough to Defeat Penalties 

I will in this post highlight some interesting parts of last week’s Exelon v Comm’r. The case involves Exelon’s seeking to shelter billions in gains on sales of fossil fuel plants by attempting to shoehorn a sale and leasing transaction into a like-kind exchange. In Exelon, the accuracy-related penalties alone were over $87 million, and the Tax Court found that despite a sophisticated law firm’s legal opinion Exelon was liable for the accuracy-related penalty. In discussing Exelon, I will also flag two other recent opinions involving the same issue.

One of the issues in Exelon was the IRS’s assertion of accuracy-related penalties despite Exelon’s receiving a detailed legal opinion blessing the transaction’s tax consequences. A common issue courts consider is whether reliance on a tax advisor will insulate a taxpayer from civil penalties. As with many issues, the black letter law is relatively straightforward. Derived in part from dicta in the Supreme Court Boyle case, the Tax Court relies on a three-part test case that essentially asks the following questions:

  1. Was the advisor a competent professional who had sufficient expertise to justify reliance;
  2. Did the taxpayer provide necessary and accurate information to the advisor;
  3. Did the taxpayer actually rely in good faith on the advisor’s judgment.

Neonatology Assoc. v Comm’r 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002). The cases applying the standard are notoriously fact-specific and difficult to easily synthesize.


Exelon is a case that has generated a great deal of attention, in part because of the sheer amount of the deficiency, which is over $500 million for the two years at issue. The transactions included complicated sale in lease out (SILO) transaction that Exelon entered into so it could identify a replacement property for 1031 purposes to shelter billions in gain on sales of fossil fuel plants. The opinion has over 150 pages detailing and analyzing the complexities of the transactions and how they should be treated for tax purposes. What is key for purposes of this write up however is after the court found in favor of the IRS on the underlying issue (essentially that Exelon did not acquire the beneficial ownership of the properties it leased back to tax-indifferent public entities and thus could not shelter its gain through 1031), was its conclusion that despite an opinion letter from Winston & Strawn it still found the taxpayer liable for the penalty. Some things to highlight:

  1. IRS argued that Winston & Strawn’s involvement in assisting with structuring the transaction was a per se disqualification for considering the advice reasonable. Some cases have held that the advisor is essentially tainted with a scarlet C for conflict of interest. The opinion cites one of those cases, Kerman v. Commissioner, T.C. Memo. 2011- 54, aff’d, 713 F.3d 849 (6th Cir. 2013). This was not one of those cases; even though Winston & Strawn was paid handsomely for its advice it did not bill based upon the transaction closing but rather its fees were based on normal hourly rates. Because W&S billed on an hourly basis and did not tie its fees to the transaction the Tax Court concluded that the advice was not per se disqualified from protecting the taxpayer under the Neonatology test.
  2. Despite not finding a per se disqualification of the advice based on a conflict of interest, the Tax Court did find that W&S’s actions with the appraisers (Deloitte) prior to issuing its legal opinion tainted its advice because these actions rendered the facts and assumptions it relied on as unreasonable. The Tax Court’s opinion focused on W&S’s discussing with Deloitte what values it expected in the appraisals:

We found that Winston & Strawn interfered with the integrity and the independence of the appraisal process by providing Deloitte with a list of conclusions it expected to see in the appraisals to be able to issue tax opinions at the “will” and “should” level. Such interference improperly tainted the Deloitte appraisal, rendering it useless. Further, because Winston & Strawn directed the conclusions that Deloitte had to arrive at, we are highly suspicious that the tax opinions are similarly tainted.

In other words, factor 2 in the Neonatology test for reliance can be a problem if the advisor is seen as influencing the facts and assumptions that are crucial determinants of the substantive tax advice. As I understand, it is not uncommon for advisors to work with appraisers and other agents of the taxpayers. From what I read in the opinion I do not see evidence that the appraiser acted improperly. W&S’s discussion as to what it needed to issue a will or should opinion alone appears to be sufficient to taint or color the facts that it relied on in issuing its opinion. What the Tax Court does in this opinion is suggest that the allure of fees associated with the appraiser’s understanding as to what the advisor needed is enough to conclude that the advisor has not received accurate information from the taxpayer (here, the taxpayer’s agent, Deloitte). That outcome should give pause to legal advisors who may as a matter of course discuss what they need from appraisers to reach comfort to give tax advice.

  1. The Exelon Tax Court opinion, as many before it, looks to the sophistication of the taxpayer to test whether in fact the taxpayer really relied in good faith on the advice that it received. As the opinion discusses, in Boyle the Supreme Court discusses that it is not incumbent on taxpayers to seek a second or third opinion. Yet, as here, when the taxpayer is sophisticated the court will be more skeptical that there was in fact good faith reliance. What is interesting about the Exelon opinion is that sometimes the sophistication goes beyond tax expertise, especially if the transaction’s form depends on outcomes and decisions that are inconsistent with general business practices. Here there was an expectation that the purported sellers of the replacement properties would in fact purchase the properties back from Exelon, a fact that contributed to the Tax Court’s finding against the taxpayer on the merits and on the penalties:

Sophistication and expertise of a taxpayer are important when it comes to determining whether a taxpayer relied on a tax professional in good faith, or simply attempted to purchase an expensive insurance policy for potential future litigation. Petitioner had been involved in the power industry since 1913 and described itself as “an electric utility company with experience in all phases of that industry; from generation, transmission, and distribution to wholesale and retail sales of power.” Although petitioner did not have experience with section 1031 transactions, it certainly had experience in operating power plants and must have understood the concept of obsolescence…

Our analysis of the test transactions shows that petitioner knew or should have known that CPS and MEAG were reasonably likely to exercise their respective cancellation/purchase options because they would not be able to return the Spruce, Scherer, and Wansley power plants to petitioner without incurring significant expenses to meet the return requirements.

At the end of the day, the Tax Court found incredulous that a taxpayer with Exelon’s sophistication would believe the tax opinion it received because the judge did not believe that Exelon bought into the opinion’s assumptions about the transactions’ counterparties. Rather than seek advice, the Exelon opinion suggests that the taxpayer was purchasing penalty insurance through engaging its legal and tax advisors. In language that is direct and deeply critical of what Exelon and its advisors did, the opinion sums up what it thought of the taxpayer and its advisors’ conduct:

We cannot condone the procuring of a tax opinion as an insurance policy against penalties where the taxpayer knew or should have known that the opinion was flawed. A wink-and-a-smile is no replacement for independence when it comes to professional tax opinions.

Exelon also sought to justify its reliance by noting that its auditor did not flag the transaction but the opinion minimizes that fact (see page 172 note 35):

Unlike petitioner, Arthur Andersen did not have the benefit of vast experience in operating power plants and may have overlooked the issue of return conditions. The record is also silent as to what documents related to the transactions were actually reviewed by Arthur Andersen and to what extent. We are thus not persuaded by petitioner’s argument.

The Tax Court found that the above led it to conclude that Exelon “could not have relied on the Winston & Strawn tax opinions in good faith because petitioner, with its expertise and sophistication, knew or should have known that the conclusions in the tax opinions were inconsistent with the terms of the deal. Second, in the light of the previous conclusion, petitioner’s alleged reliance on Winston & Strawn’s tax advice fails the Neonatology test.” At the end of the day, Exelon did not have good faith and reasonable cause under Section 6664(c) and that it was liable for the penalty due to a “disregard of rules and regulations within the meaning of section 6662 with respect to ascertaining the tax consequences of the test transactions.”

Some Parting Thoughts and A Comparison to Some Other Cases Finding in Favor of the Taxpayer

The case is worth a deep read of the facts, including its discussion of how Exelon’s registering the transaction as corporate shelter did not help and that many of the Exelon higher ups did not read the W&S opinion. It also cryptically notes that IRS conceded the substantial understatement leg of the accuracy-related penalty (page 162), but does not state why.

While I will not discuss extensively here, it is worth contrasting the outcome in Exelon with two other recent opinions. One is Boree v Commissioner, which involves the characterization of an individual’s gain on the sale of subdivided property. In Boree, the Eleventh Circuit affirmed the Tax Court’s finding that the sale generated ordinary income but reversed it on the substantial understatement penalties in large part because the individual was able to show that he relied on his longtime tax preparer in treating the gain as capital gain. The other is Collodi v Commissioner, a summary Tax Court opinion where the Tax Court found that a constantly-travelling gas well worker had no tax home and thus could not deduct his costs on the road. Despite denying the deductions, in Collodi the Tax Court found for the taxpayer’s reliance on his tax return preparer was a defense to the accuracy-related penalties for the deficiency attributable to the denied travelling expenses.

In both Boree and Collodi the taxpayers had no tax or accounting experience. Boree was a former logger who went on to develop land. Collodi worked on gas wells. While both were engaged in their business and had expertise in the businesses, the expertise had no bearing on the tax consequences of the positions on the returns. In both cases the taxpayers relied on their longtime preparers who had tax expertise. Boree is perhaps more interesting in that it is an appellate opinion and it reversed the Tax Court; moreover, in Boree there were some inconsistencies in the return itself that might have generated a question as to whether the taxpayer relied in good faith on the advice (namely that the return reflected some trade or business expenses with the development activity which are inconsistent with the capital gain treatment).

What these cases suggest is that courts will be rightfully skeptical of taxpayers like Exelon where the facts suggest that rather than purchasing tax advice they are purchasing penalty insurance in the form of tax advice. For most individuals who come to the table with little financial or tax sophistication and who have a long history of tax compliance and stable tax advisors, courts tend to respect the relationship between advisor and taxpayer and not second guess the advice for penalty purposes.

When Does a Settlement Become Binding on a Party in the Tax Court (Part 3)

In prior two posts, the focus was on process and on settlements that were determined to bind the parties.  There are a number of decisions in which the court has decided not to bind the parties and I will end this three-part post with a discussion of those cases.  In general, the earlier the settlement is broken off, the less likely it will bind the parties.  Where all of the discussions about settlement take place outside the presence of the courtroom and the Court is not inconvenienced by the breaking of the settlement, the Court is unlikely to find it a binding agreement.


Cases Where Court Declines to Enforce the Settlement

Estate of Halder v. Commissioner – Petitioner sought to hold an agreement binding regarding the value of the estate’s interest in a partnership on the date of death.  The Appeals Officer spoke with a representative of the estate and stated that he had calculated a value of $1.2 million.  The Appeals Officer offered to fax the basis for the calculation and did so.  The fax mistakenly left off the final page of six which caused the impression that the Appeals Officer determined that the value was $1M and not $1.2M.  Petitioner’s representatives noticed the discrepancy but did not bring it to the AO’s attention.  The representatives then faxed an agreement to the $1M settlement proposal.  The parties never executed any agreement nor did they report to the Court a basis had been reached.  Petitioner then filed a motion to enforce the settlement based on the lower amount.

The court noted that settlement agreements could be reached through correspondence in the absence of a formal agreement citing Manko v. Commissioner.  “A prerequisite to the formation of an agreement is an objective manifestation of mutual assent to its essential terms” i.e., a meeting of the minds.  The court stated that if it enforced a settlement on these facts, it would “allow the estate to take an unfair advantage of a simple, honest error that was immediately corrected.” Citing to Adams, the court quoted “The party seeking modification, however, must show that the failure to allow the modification might prejudice him… Discretion should be exercised to allow modification where no substantial injury will be occasioned to the opposing party; refusal to allow modification might result in injustice to the moving party and the inconvenience to the Court is slight.”

The court pointed out that in eve-of-trial settings, the rules were much more stringent.  Eve-of-trial cases, such as Dorchester and Stamm, also involved the filing of stipulation of settled issues.  Allowing the enforcement of the terms of the mistaken fax would provide an inappropriate advantage to the estate and an injustice would occur.  The Court summed up its view by stating that:

We find those cases [Dorchester and Stamm] distinguishable from the instant case because: (1) The parties did not reach a meeting of minds, execute any settlement agreement, notify the Court that a settlement had been reached, or file a stipulation of settled issues with the Court; (2) the Court did not cancel or delay the trial date because of any settlement between the parties (i.e., the Court granted a continuance in this case because the estate’s expert was ill); and (3) Mr. Lindenbaum contacted Mr. Sherland with regard to the error the next day.


In a footnote, the Court added, “Even if we held there was a meeting of minds, we would deny the estate’s motion because the ‘settlement’ was never signed or approved by, or even submitted to, any Service official authorized to approve it.” The Manko case gives hope to petitioners seeking to hold the Service to a settlement not communicated to the Court through the formality of a pre-trial settlement; however, any tentative agreement must have the approval of the appropriate level of authority or it will fail as a basis for binding the Service to the settlement.

David v. Commissioner – The Appeals Officer sent to the taxpayer’s representative an audit statement and a Form 870-AD together with a transmittal letter that stated the taxpayers would be notified “when the proposed settlement is approved.”  The Appeals Officer did not receive back an executed Form 870-AD and later informed the representative that the settlement was no longer available.   The taxpayer sought to enforce the settlement in Tax Court.  The Court found there was no binding settlement because there was no indication that the appropriate person at the Service had approved the settlement and, in fact, the letter to the taxpayer indicated that the approval had not yet occurred.

The opinion offers nothing of great interest except the attempts by the taxpayer’s representative to turn the offer of settlement into a binding settlement on the basis of the delegation orders in the face of clear language in the transmittal letter that the Appeals Officer still needed authorization on his end. 

Mathia v. Commissioner – The parties in this collection due process case submitted the case fully stipulated under Rule 122.  Although the issue of when a settlement occurred arose in the context of a collection due process case challenging the timeliness of respondent’s assessment, the real issue focused on the TEFRA partnership proceeding that gave rise to the assessment.  Applying the same general rules of contract that control in other circumstances, the Tax Court determined that no binding settlement existed in the TEFRA case at the early date sought by petitioner, and held that the statute of limitations on assessment remained open at the time the Service assessed the liability at issue in the collection due process case.

“A settlement agreement can be reached through offer and acceptance made by letter, or even in the absence of a writing…. Settlement of an issue before the Court does not require the execution of a closing agreement under section 7121, or any other particular method or form….Settlement agreements are effective and binding once there has been an offer and an acceptance, filing the agreement with the Court as a stipulation is not required for the agreement to be effective and binding.”  This description certainly fits the circumstances of the settlement my clinic thought it had with the appeals officer.  There was an offer and acceptance of the offer and even the preparation of computations before the appeals officer suddenly, at a much later point, brought up for the first time the failure of the manager to assent to the agreement.

The court in Mathia carefully examined the correspondence between the partnership and the Service attorney to determine if it had a binding settlement.  It found that the correspondence confirms

that Greenwich and respondent reached an agreement in 1991 to enter into a settlement of the partnership-level proceeding, we remain unconvinced that the agreement was sufficiently fleshed out in 1991 to constitute a binding settlement agreement at that time.  The agreement in principle that was reached in 1991 set forth the parameters of a settlement, but the correspondence described above reflects that negotiations continued between respondent and the attorney representing the Swanton TEFRA partnerships to at least September 3, 1993.  Moreover, the correspondence indicates that the execution of a decision document resolving the partnership litigation depended upon the fulfillment of certain conditions such as the TMP’s ability to represent that all partners consented to the settlement.  Implementing and finalizing the proposed settlement required the collection and analysis of detailed information, the preparation of calculations and agreements, and in some cases, the execution of closing agreement by individual partners.

The court further found that even if it determined that the parties had entered into a binding settlement agreement, it would not qualify as an agreement between a partner and the Service within the meaning of IRC 6231(b)(1)(C).  This section requires an agreement between the Service and a partner not the Service and the partnership.  The case then goes into an analysis of the partnership provisions not relevant to the overall analysis of when an agreement becomes binding because the analysis here is peculiar to the partnership provisions.

Estate of Hunt v. United States, 103 Fed.Appx. 475 (4th Cir.2004)(unpublished opinion)(no free copy of the opinion located) – The taxpayer and the Service entered into a settlement which the parties knew would generate a refund through the operation of the carryback of a loss.  In the settlement discussions, both parties anticipated that the taxpayer would receive interest on the refund payment.  When the Service paid the refund, it paid no interest because the refund occurred within 45 days of the request.  The taxpayer brought suit in federal district court seeking interest arguing the Service was equitably estopped from arguing he should not receive interest and the district court agreed.  The Fourth Circuit reversed finding that employees of the Service could not create a right to interest through their misunderstanding of the application of the refund provisions that was not granted by the statute.  The case shows another limitation on settlement with the government.  Parties cannot rely on every statement that the Service employee makes and use that statement as a basis for relief not otherwise available.

Lessons on Settlement Agreements and Their Binding Effect

If you tell the Tax Court orally or in writing that a basis for settlement exists, you should expect the settlement to bind the parties in the absence of a mutual mistake or fraud.  The difficulty will compound if the Court cancels a scheduled trial time because of representation of settlement; however, do not expect to get out of a settlement reported to the Court just because the reporting of the settlement does not cause postponement of a trial.  You cannot use as an excuse for undoing a settlement that the computations did not turn out the way you expected.  Do the math before telling the Court you have a settlement unless you do not care what the math will bring.

You cannot expect the Court to bind the Service in the same way it might bind the petitioner.  If you expect to bind the Service, you must show that the properly authorized person gave assent to the settlement, see Burton v. Commissioner.  You cannot trick a party into settlement by seeking to use a mistake as the basis for binding a party.  If you know the other side has made a mistake in something you receive, better to clear the air before you try to argue for a binding settlement than to look slick in trying to enforce an agreement you know did not exist in the mind of the other party.  The Court will also not enforce provisions not contained in a settlement document contrary to the statute.

If the Service employee does not affirmatively state to you that a proposed settlement has the approval of the appropriate manager, assume that it does not.  Ask whether such authority exists before taking an offer to your client and suggesting to your client that the Service has agreed to a particular settlement.  The Court precedent suggests little reluctance in enforcing terms recited to the Court and very little appetite for enforcing settlements not yet brought to the Court.  If you want to bind the Service, get it in writing signed by the authorized official or get a statement made by a Chief Counsel attorney to the Court.  Anything else will create problems in trying to enforce it.  A twenty year old letter from practitioners to the Commissioner can still provide some useful basis for thought on this issue.


Grab Bag: Posts and Articles of Note on EITC, Compliance, IRS Guidance, Alimony, Private Debt Collectors and Tax Return Simplification

Today’s extra post looks to some other blog posts and articles that may be of interest for people looking for some weekend reading.

EITC and Compliance

We have been reading and enjoying many of the posts on the Surly Subgroup Blog. Francine Lipman’s 2015 Poverty Measures Released: Antipoverty Relief Delivered through the IRC = EITC & CTC discusses the anti-poverty effects of refundable credits such as the Earned Income Tax Credit. While not a procedure post, the intersection of tax procedure and administration and refundable credits is a major issue. While I am plugging away on my article on EITC compliance (as Steve discussed last week) there are some really good articles on that topic that have come out in the last few months. Two of the articles that stand out are Steve Holt’s The Role of the IRS as a Social Benefits Administrator and Michelle Drumbl’s Beyond Polemics: Poverty, Taxes and Noncompliance.  For those interested in how recent trends in family life complicate tax administration, and administering refundable credits in particular, I recommend the Tax Policy Center’s report Increasing Family Complexity and Volatility: The Difficulty in Determining Child Tax Benefits. I will be appearing on a panel with Elaine Maag, one of the authors of the Family Complexity paper, at next week’s ABA Tax Section meeting, where we will discuss some of the report’s implications for tax administration as well as some of my research on EITC compliance.

Speaking of noncompliance and more from Surly Subgroup Blog, Shu-Yi Oei in Does Enforcement Reduce Compliance? discusses Leandra Lederman’s draft paper and presentation on that topic at the Boston College Law School Tax Colloquium. I look forward to reading that paper.


Alimony and Tax Compliance Again

Last week I discussed the procedural issues that spun out of Leslie v Commissioner in African Diamond Scam and Millions in Alimony: (and Some Reasonable Cause and Chenery). My Villanova colleague Jim Maule in Mauled Again discusses the alimony issue in his post on the case. As usual, Jim clearly describes the issue and offers some practical advice for practitioners. For good measure, and while relating back to compliance, I recommend Jim’s thought-provoking post from September 2 where he discusses a Washington Post op-ed piece by Catherine Rampell  that offered six reasons why cheating on taxes is likely to increase. Jim’s take, as with many of his posts, takes the reader outside the tax world:

It is the increase in self-focus, the increase in greed, and the increase in harsh economic conditions that coalesce to tempt people to cheat on their taxes. It is the weakening of concerns for integrity and responsibility that make it possible for increasing numbers of people to succumb to that temptation. These are problems that will not go away with a simplified tax law and adequate IRS funding, as Rampell advocates. Of course I support simplifying the tax law and adequate funding of the IRS, but I also support increased attention to tax education in middle and high schools, and a broader dissemination and explanation of what happens with tax revenue. And somehow, some way, the sense of integrity and responsibility that was once a core value of the culture needs to be reinvigorated. That, however, is more than just a tax compliance problem.

IRS Guidance

Former PT guest poster Andy Grewal has a post on Notice & Comment discussing a recent GAO report called Treasury and OMB Need to Reevaluate Long-standing Exemptions of Tax Regulations and Guidance. Andy hits some important points in his post, including his highlighting that “[t]he GAO recognizes that the IRS puts out many forms of guidance, but notes that the IRS’s procedures for choosing one method of guidance (e.g., regulations) as opposed to another (e.g., Revenue Rulings, Announcement, Procedures) is a bit of a mess.”

Litigants are likely to continue to press the adequacy of IRS guidance and the choice IRS makes in issuing that guidance. We discussed this briefly in our latest review of the AICPA litigation challenging the IRS’ voluntary testing and education program for tax return preparers (IRS Wins Latest Battle on Voluntary Return Preparer Testing and Education Though Other Battles Likely Remain). In that case, the district court opinion, while finding against AICPA, suggests that a different litigant could challenge the IRS’s use of a revenue procedure to create the voluntary program.

Private Debt Collectors

Keith has discussed private debt collection a few times, including his most recent this past February Private Debt Collection which noted problems with prior two versions and raised concerns with the new legislation mandating its use. The IRS asked for permission to push back the deadline on implementing the new debt collection program so it has not yet gone live. Last week Accounting Today ran a post Here Come the Private Tax Debt Collectors…Again by H&R Block’s Jim Buttonow, where he discusses how the IRS will select the collectors and the plan is set go live in 2017. In his post, he highlights seven things about the new program, including how IRS and the collectors themselves will be letting people know by snail mail if they have the golden ticket and private debt collectors will be working their accounts. No doubt we will be hearing more about the program in the months ahead.

Simplified Return Filing

Finally, ABA Tax Times this past August has a fascinating point /counterpoint with longtime tax return simplification protagonist (and my former law school professor) Joe Bankman discussing his views on how technology can make tax filing time less painful and my Villanova colleague Jim Maule offering thirteen reasons why he believes Professor Bankman’s proposals make for bad tax policy.

Happy reading and enjoy the weekend.




When Does a Settlement Become Binding on a Party in the Tax Court (Part 2)

During a negotiation with the Service about a case pending in Tax Court, when does the discussion cross the line from tentative agreement to binding agreement? It is very rare that the government will be bound by something other than a statement to the Court.  As with most instances of line drawing, describing the things that clearly fall on either side of the line comes much easier than finding the actual crossing point.  This post does not seek to discuss the settlement process in federal tax cases generally.  For an excellent and in depth article on that process from a broader perspective look at the article “Settling with the IRS: The Importance of Procedure” by Ronald Stein, 2005 Tax Notes Today 123-33 (June 28, 2005).


Clearly Binding Agreements

The poster child for cases clearly creating a binding agreement is the case of Dorchester Industries Inc. v. Commissioner.  The Dorchester case should have notoriety because it served as the springboard for the Service offshore effort which has so successfully identified offshore accounts.  If you want more background on the case and how it led to the volunteer offshore program through which the IRS has collected billions of dollars over the past decade, you can read my article about the agent who worked the Dorchester case.  Instead, the case is best known for the antics of the owner of the business after apparently reaching an agreement and the Tax Court’s response to those antics.

The taxpayer engaged in complicated offshore transactions. The examination went on for about eight years.  The parties obtained a special trial session from the Tax Court because they anticipated a several week trial.  On the eve of trial, the parties reached an agreement to resolve the case.  The agreement principally involved a concession by the taxpayer.  The parties went before the Court and told the Court they had reached a basis for settlement.  The Court accepted their representation and gladly cancelled the special trial session.  The Court ordered the parties to file a decision document within 30 days.  The Government computed the correct tax based on the agreement of the parties and sent the decision document to petitioner.  Petitioner’s owner refused to sign the decision document, or allow its counsel to do so, and the case went back before the Court.  The Service moved to enforce the agreement by entry of a decision and the Court granted the motion.  In doing so, Judge Halpern used strong language about the binding nature of a settlement agreement and that the settlement agreement served as a contract between the parties which the Court could enforce.

The opinion sets out the facts leading up to the agreement reported to the Court in great detail. It does not simply enter the decision without comment, but sets the scene by providing the actions of the parties prior to the moment of reporting the settlement to the Court.  The factual background in Dorchester, and in any case seeking to enforce a settlement, has significance on the decision of the Court to enforce a broken agreement between the parties.  The Court held an evidentiary hearing on the issues leading up to the report of settlement.  The opinion recounts in great detail all of the discussions leading up to, and including, the report to the Court that the parties had reached a basis for settlement and no longer needed the scheduled special trial session.  The Court then examined the actions of the parties in deciding whether these actions added up to an enforceable contract.  It found:

A settlement is a contract and, consequently, general principles of contract law determine whether a settlement has been reached. A prerequisite to the formation of a contract is an objective manifestation of mutual assent to its essential terms. Mutual assent generally requires an offer and an acceptance. “An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.” 1 Restatement, Contracts 2d, sec. 24 (1981).

In a tax case, it “is not necessary that the parties execute a closing agreement under section 7121 in order to settle a case pending before this Court, but, rather, a settlement agreement may be reached through offer and acceptance made by letter, or even in the absence of a writing.” Settlement offers made and accepted by letters are enforced as binding agreements.

The Tax Court went on to say that “A valid settlement, once reached, cannot be repudiated by either party; and after parties have entered into a binding settlement agreement, the actual merits of the settled controversy are without consequence.”

If you attend a Tax Court calendar call, you will almost always see several cases in which the Government offers to the Court a signed stipulation of settled issues or a signed decision document with only faxed signatures. Occasionally, you will see the parties stand in front of the judge and orally explain the basis for settlement issue by issue.  If signed documents get submitted to the Court by the Chief Counsel attorney, it is common that the taxpayers or their representative do not even appear.  The Court accepts these documents or the oral statements of agreed issues and orders the parties to submit a signed decision document within 30 or 60 days.  The Court also removes that case from the trial calendar by doing this and relieves the parties of the necessity of trial even though they have not perfectly completed the case at that point.  This normal action at a trial calendar sets up almost precisely the circumstances that existed in Dorchester.  If either party later tries to back out of the settlement after making that representation to the Court and after the postponement of the trial as a result of the representation, the Court will, in almost all cases, enforce the settlement reflected in the document lodged with the Court at calendar call or in the statements made by the parties.  Exceptions to the enforcement of the settlement will generally only occur if a party can show a misunderstanding of the agreement or some false statement in the formation of the agreement.  Several cases address these situations:

Other Eve of Trial Cases Where the Court Enforces Settlement

Clark v. Commissioner – Judge Haines faced a case similar to Dorchester with petitioners who sought to avoid having an oral statement of settlement as well as a written stipulation of settled issues become binding.  Because the parties anticipated a lengthy trial, they requested and received a special trial session in San Francisco as had the petitioners in Dorchester.  Before the scheduled trial date, taxpayers and counsel agreed to settlement.  The parties informed the Court of the settlement in a conference call, causing the court to cancel the scheduled trial session.  The parties then filed a stipulation of settled issues with the Court.  The attorney for the Office of Chief Counsel sent decision documents to petitioners’ counsel.  Petitioners said they disagreed with the computations but never explained why.  Petitioners found some additional evidence that would have allowed them to obtain a better settlement had they found it before the filing of the stipulation of settled issues. The court found they were bound, stating that, “This Court has declined to set aside a settlement duly executed by the parties and filed with the Court in the absence of fraud, mutual mistake, or other similar ground.” Here, the petitioners found at least two issues they wanted to contest after they agreed to the settlement.  First, they found an application for extension of time to file.  During the settlement negotiations, the Service had stated it would concede a penalty if petitioners produced this document.  Second, they noticed a duplication of rental income in the notice of deficiency.  Based on these items found after they stated the basis for settlement, petitioners sought to unwind the settlement.  At least they offered a concrete basis for their request, but the court rejected their request stating, “If petitioners made a mistake in agreeing to the settlement, respondent contends, and the Court agrees, it was not mutual but unilateral. This Court has previously held that a party may be bound by its agreement although it has made a unilateral mistake in the calculation of a deficiency. Petitioners have not shown that respondent committed fraud or otherwise improperly induced petitioners to agree to the offer.”

Stamm International Corporation v. Commissioner – The parties requested a special trial calendar because of the anticipated length of the trial.  Before the special trial calendar, the parties contacted the Court to state that a basis of settlement was reached and this caused the cancellation of the special trial calendar.  Shortly thereafter, the parties filed a memorandum of settled issues.  After filing the memorandum, respondent began to see the downside of its agreement:

During a meeting on February 12, 1987, among respondent’s counsel, a revenue agent, and petitioner’s accountant, the applicability of section 959 to the calculation of the correct amount of the deficiencies was raised. Prior to this meeting, respondent’s counsel had not taken account of section 959, which, for reasons discussed below, would reduce the total amount to be paid by petitioner to approximately $1.1 or $1.25 million. Petitioner’s attorneys had discussed among themselves the effect of section 959 on the computation prior to execution of the settlement agreement, and they had been aware that respondent’s counsel was not giving effect to that section. They had not, however, discussed section 959 with respondent’s counsel or otherwise called attention to his apparent error.

As a result of realizing the failure to take into account the impact of section 959, which reduced the anticipated liability by 70%, the Service sought to reopen the settlement discussions. Petitioner refused and asked that the Court enforce the settlement.  Because petitioner knew of the impact of section 959 on the settlement, the Court found that this impact was a unilateral mistake.  It refused to negate the settlement based on the failure of one party to understand the computational consequences of the deal.  The parties described the settlement with great specificity in their memorandum of settlement to the Court.  The Court found that the settlement was not ambiguous.

At the hearing on whether to enforce the settlement, the Service argued that the agreement should be set aside 1) based on the unilateral mistake of his counsel which was known by petitioner’s counsel and 2) because the agreement did not mention the application of 959.  Service did not argue that the agreement was not authorized or binding, but rather that, as a matter of contract law, it should be relieved of the agreement.  The Service cited to no authority that the Court should relieve it of the settlement based on the mistake of fact.  There was misleading silence by petitioner’s counsel but no overt misrepresentation.

The court notes that in Saigh v. Commissioner and other cases it unwound a settlement where “excusable damaging silence” upon a false or true representation of the other party, even one innocently made, is recognized as a ground for relief from a settlement stip.  Here, the silence was the not equivalent of a misrepresentation because petitioner’s counsel had no duty to explain the Code to respondent.  The Service cited Adams v. Commissioner for the position that the “primary consideration in determining whether a settlement stipulation should be set aside is whether such action is necessary to prevent manifest injustice…  The determination, however, takes into account the injury to the opposing party and the inconvenience to the Court, as well as possible injustice to the moving party.”  The Court points out that if a computational surprise in the amount of the deficiency by itself were a basis for overturning an agreement, petitioners [or respondent] would make this motion all the time once they received the computations and could see the tax consequences of the issue settlement.  The Court also felt that a party had a very high burden to undo a settlement in the posture of this case unlike the Adams case, which involved a pre-trial motion.  The case points to the need for a party, if money is the driving force – which will almost always be the case for petitioners, to calculate the dollar impact of a settlement before agreeing to the issues in a settlement stipulation filed with the Court.

The Court then looked at what the agreement meant and how to interpret it in the context of the 959 argument. If the agreement was unclear, a trial of the matter might be inevitable, even where the agreement might have otherwise been binding.  The Court found that the agreement was ambiguous and indefinite; however, looking at the Code as a whole in this section, the Court concluded that the most logical reading of the agreement is to view it as allowing the application of 959 in the absence of a clear statement to the contrary.  It appreciated that the Code was complex and understood the failure of respondent’s counsel to appreciate how it would work but, nonetheless, felt that the agreement included related adjustments such as the one in 959.  So, the Court enforced the settlement agreement allowing petitioner to reduce the tax owed by including the 959 adjustments in the computation.  Because the document providing the Court with the settlement agreement would have been reviewed by the party within the Service authorized to settle the case, the argument of lack of approval at the appropriate level was unavailable to the Service and was never made.

The Stamm case demonstrates that if either party pulls out of an eve-of-trial settlement, the Court will enforce the settlement.  In submitting the settlement document to the Court, the Service will necessarily have obtained the necessary approval level for settlement.  So, that argument will never really provide an effective basis for pulling out of a settlement communicated to the Tax Court.

When Does a Settlement Become Binding on a Party in the Tax Court (Part 1)

In handling a case in Tax Court, parties look diligently for a path to settlement. Sometimes settlement proves easy to achieve.  Sometimes settlement seems impossible or nearly impossible.  Sometimes you seem to have a settlement and then either the taxpayer or the IRS backs away.  This three-part post looks at what happens in the last situation – where the parties appeared to have achieved settlement only to have it slip away – with the view of when can the Court bind the parties to a settlement that once existed and then  seemed to disappear.  The answer in these situations generally turns out more favorably for the IRS than for taxpayers, for reasons discussed below.  The discussion in the post appeared in the May-June edition of the Journal of Practice and Procedure.


Settlement Discussions

The research for this post resulted from a failed settlement in a clinic case. The client, a surviving spouse who had relied on her husband to primarily handle the financial matters of the couple, brought to the clinic an issue it had not previously handled concerning the ability to roll over IRA funds after the statutory 60-day period – a topic discussed in a recent guest post.  The Code gives the Service the authority to waive the statutory time frame administratively where it fins the failure to roll over the funds meets certain criteria.  The affirmative authority granted to the Service under Section 408(d)(3)(i) represents a rare instance of the legislative branch specifically ceding authority to the executive branch to override the time frame established by statute.  I think Congress saw too many situations in which taxpayers like my client ended up with a huge, unintended tax bill from small mistakes made by themselves, their financial advisors or the financial institution and created a process for the Service to have a “do-over.”  Every month or so you can see a flurry of these applications posted in Tax Notes or other publications as the Service grants or denies the requests of the individuals who made a mistake.

As the students began the representation, one of the first issues they faced concerned the ability of Appeals, or Chief Counsel, or the Tax Court, to grant the relief the taxpayer sought. The statute provides a method for obtaining a waiver administratively but does not mention relief through judicial action.  We had some concern whether the Appeals Officer had authority to settle this case by granting full or partial relief for the client to roll over the IRA well past the 60-day deadline.  Their research provided no clear answer.  The students did not want to assume that negotiation with the Appeals Officer could result in relief.

They began by providing the Appeals Officer with factual and legal information in support of granting relief and asked for confirmation that this matter could be resolved in a Tax Court proceeding. After hearing their preliminary presentation of the issue and facts, the Appeals Officer indicated that he thought the case was susceptible to settlement in the Tax Court proceeding and that he should be able to come up with a settlement that the client would like.  The discussion went on for a few months at which point it appeared that settlement was reached, allowing the client to roll over a certain percentage of the funds and causing her to take into income the balance.  The client agreed with the proposed settlement but wanted to know the financial impact.  The Appeals Officer made no mention of needing to get approval from his manager and the students did not ask about this.  The Appeals Officer provided a computation, and when the student attorneys pointed out a mistake in the computation he said he would make sure the mistake got fixed in the final computation.  The students notified the Appeals Officer that the client accepted the offer and stood ready to sign the decision document.  The students asked the Appeals Officer to write a letter to the client’s bank stating that it could transfer the funds to the retirement account in accordance with the settlement.  They were calling the Appeals Officer every two weeks trying to get an answer on that question and the Appeals Officer was deferring until he could obtain an answer from the Chief Counsel attorney about that.  At no point did he say that the entire settlement was off or that the settlement turned on getting an answer to this question.

Finally, over two months after the apparent agreement, the Appeals Officer wrote to say that his manager did not agree with the settlement and asked that the client agree to a full concession of her case and that his only concession would be waiving the penalty for substantial understatement. Throughout the negotiations, the Appeals Officer never mentioned that he had not obtained the authority of his supervisor to make the offer that he made to settle the case.  Everything he did suggested that he had authority to reach the proposed settlement.  The sudden and unexpected rejection after the conclusion of the semester left us in a quandary and put the clinic in a tight spot for the early fall trial calendar date because the students who had spent all semester working on this case had finished the class and new students had to start.  As we looked into what we might do, we examined the Tax Court precedent concerning settlements to determine if the Appeals Officer’s actions here might result in a binding settlement.

Guidance to Appeals Officers

The lines of authority for Appeals Officers and Chief Counsel docket attorneys clearly require managerial approval for settlement. I knew this but failed to explicitly mention it to the students working with the Appeals Officer because I thought the Appeals Officer would make clear his authority during the settlement process.  This experience may change my practice in preparing students for this process.  My own practice as a docket attorney and my experience dealing with Appeals Officers and Chief Counsel docket attorneys on many cases is that this approval process was constantly mentioned so that the other side knows a settlement needs further approval.  In circumstances in which the approval exists for the line employee in Appeals or in Counsel to make a settlement offer, my experience is that this is also communicated so that the taxpayer or their counsel knows that the offer already has approval.  As a government employee operating with lines of authority, making clear those lines and the stage of approval of a proposal seems like a best practice and one most employees in those offices follow.

I incorrectly assumed that my students were dealing with someone who would make that clear. The case served as a good learning tool for me and for the students working on it.  We did not necessarily want the lesson that we learned because it felt as though the rug was pulled out from underneath us after a fair negotiation, but we did not have a binding settlement with Appeals and we learned that as we researched the authority for binding settlements.  While I think an Appeals Officer or a docket attorney has a responsibility to make the lines of authority clear when making a proposal, that responsibility does not come from a requirement placed upon the individual in the Internal Revenue Manual or the Code.

The IRM does make some mention of the duty of an Appeals Officer to advise the taxpayer of the scope of their authority, but not on this point. IRM provides that the Appeals Officer should “advise taxpayers that tentative agreements not finalized using Form 870-AD or Form 906 are subject to renegotiation in the circumstances described above.”  Form 870-AD is the consent to assess form used by Appeals that seeks to bind the parties, in a non-docketed phase of the case, to the terms of the agreement so that the taxpayer cannot later bring a refund suit to recover the taxes.  Form 906 is a closing agreement form binding the parties to the agreement pursuant to IRC 7121.  The language of the IRM referring to circumstances described above refers to “Exercise care in a case where a tentative agreement was reached with the taxpayer and a change in the position of an applicable authority occurs which affects the agreement in a substantive and material manner.  If a tentative agreement was not finally reflected on Form 870-AD or Form 906 and signed by a Service official authorized by the Commissioner to approve negotiated settlements, the tentative agreement is subject to modification if the law or legal precedent relied upon to formulate the tentative agreement changes.  If the change is substantive and material, the agreement is renegotiated.  For purposes of this section, the word “substantive” means the change in law or legal precedent results in a meaningful change to Appeals’ assessment of the hazards of litigation.”

We found other IRM provisions addressing settlement and finality but nothing expressly addressing the discussion an Appeals employee might have during settlement negotiations concerning the managerial approval process. IRM discusses how to achieve greater finality in non-docketed cases through the use of Form 870-AD or Form 906 and IRM requiring the manager to review the stipulated decision in a complex Tax Court case.  This provision suggests, by negative implication, that the manager need not review the decision document prepared and sent out by the Appeals Officer in routine cases.  It does not address the issue of whether the manager must approve the settlement before the Appeals Officer sends out the decision document in a routine case.  Creating clear directives on this point in the manual provisions would give needed guidance to Appeals employees about their duties in settlement negotiations.  In docket Tax Court cases, Appeals Offices deal primarily with pro se taxpayers who will never have dealt with Appeals before and will have every reason to believe that the person with whom they are negotiating has the authority to bind the Service.  Creating clarity about when a proposal is, or is not, subject to further approval does not detract from the settlement discussions and avoids situations that can create hard feelings toward the Appeals employee and the government process.

As discussed in part 2 of this post, taxpayers in other cases have also mistakenly thought they had an agreement only to find they did not. Appeals could instruct its employees to make it clear when a proposed settlement needs further approval.  Such a practice would enhance customer service.

Although some strong case law exists on the binding nature of certain actions prior to trial, as discussed below, those cases primarily turn on action by the taxpayer and not by the government. The precedent binding the Government to an agreed settlement provides little relief to taxpayers in most instances.  These posts will examine the circumstances that can bind a party in Tax Court to an agreement as well as the circumstances that do not.  Unfortunately, the circumstances in our case fell into the non-binding category; however, the Chief Counsel attorney ultimately offered the same settlement that Appeals inextricably withdrew leaving our client happy at the end of the day.  The Chief Counsel attorney made it clear that she made the same offer because she thought it was a good offer and not because she thought a binding agreement existed. The discussion here applies only to cases in Tax Court and not to non-docketed discussions with Appeals.  The case law concerns settlement discussions between petitioners and the Government.  Those discussions could occur with either Appeals or Chief Counsel.  The same general principles should apply no matter whether Appeals or Counsel engaged in the negotiations, although interaction with the Court frequently plays a role in the outcome and that implicates Chief Counsel attorneys more than Appeals Officers.

You Can’t Get There From Here: Tax Court Rejects Partial Pay Installment Agreement Request

Last week in Heyl v Commissioner the Tax Court rejected a taxpayer’s request for a partial pay installment agreement (PPIA). We have not discussed that collection tool and the case provides a chance to do so.

Heyl filed returns for three years but failed to pay the tax; he owed about $15,000, including penalties. After receiving a notice of intent to levy and a notice of federal tax lien filing, he requested a CDP hearing. In the hearing request he stated that he could not pay the balance; there was no issue as to the amount he owed. There was a telephone hearing and correspondence; the settlement office requested (and received) other delinquent income tax returns, and Heyl submitted a collection information statement. The collection information statement (the Form 433 series) showed negative monthly income as well as few assets, with one exception: an unoccupied and unleveraged house in Maine that was worth $87,500. It was Heyl’s hope that he could live in retirement at the Maine house, and continue to keep it unleveraged despite the federal tax debt.

IRS had different views, and the order in this case discusses generally what a taxpayer with equity in an asset must demonstrate to keep that asset out of the collection mix.


In one of the letters to the settlement officer (SO), Heyl requested to pay IRS about $100/year for five years. The SO recognized this as a partial pay installment agreement request. A PPIA allows for IRS to accept essentially on a payment plan a series of payments that will result in IRS receiving less than the full amount of the assessed liability. Congress amended the installment agreement and offer statutes in 2004 to allow IRS and taxpayers to enter into those. They are in effect offers in compromise which use the installment agreement process for a mutually agreed upon lesser amount than both the taxpayer and IRS agree is owed. The idea behind the PPIA is that it is better to get something rather than nothing.

The SO rejected the request based on the view that Hoyle should liquidate or leverage the Maine house and use those proceeds to fully pay the tax. Heyl appealed to Tax Court, and the Tax Court sustained the determination on summary judgment. Here’s how the court got there.

As with most installment agreements and with all offers, the IRS has wide discretion in granting an alternative to enforced collection. The discretion is not absolute, however.

The Internal Revenue Manual provides guidance:

[b]efore a PPIA may be granted, equity in assets must be addressed and, if appropriate, be used to make payment. In some cases taxpayers will be required to use equity in assets to pay liabilities.” IRM (Sept. 19, 2014).

Taxpayers can push back on a request to use the equity in assets and withstand requests to leverage or liquidate assets if liquidating or selling would cause “economic hardship.” That is a term of art, and sweeps in standards in the regs under Section 6343 and the IRM. To show economic hardship Heyl would have to demonstrate that the sale or leveraging of the asset would render him unable to meet his necessary living expenses. Those relate to the health, welfare or production of income.

The order in Heyl provides some detail on those concepts:

Necessary expenses are those representing “the minimum a taxpayer and family needs to live.” See Thompson v. Commissioner 140 T.C. 173 (2013) (PPIA only allows for necessary expenses); IRM pt. (Oct. 2, 2009). The regulations and administrative guidance reflect an understanding of economic hardship placing the taxpayer into “dire circumstances,” not merely being forced to change one’s accustomed to or desired lifestyle. See Speltz v. Commissioner, 454 F.3d 782, 786 (8th Cir. 2006) affg 124 T.C. 165 (2005).

Heyl argued that his was a hardship case because “his future retirement will bring a meager social security check, and that living rent or mortgage free upon retirement may make the difference between ‘misery and subsistence.’”

The Tax Court disagreed, though in so doing suggested ways that a taxpayer might be able to show hardship in differing circumstances:

Petitioner failed to allege any specific fact suggesting the sale or leveraging of the unoccupied Maine home will alter his income expense estimates and render him unable to meet his current necessary living expenses…

We also note that petitioner’s filing status is single and he has no dependents. Petitioner is in his early sixties and operates a sole proprietorship. In addition, he does not allege any disability or extraordinary circumstance prevents him from working, or continuing to operate his business. Petitioner argued that the economic downturn impeded his earning potential, but expresses a belief that his “piece of the economy won’t be weak forever.”

Parting Thoughts

The case reminds me that while this did not work out for Heyl, installment agreements generally are a good tool for taxpayers who may have equity in assets but who wish to avoid enforced collection, especially if there are circumstances that support economic hardship. For example, Keith previously discussed the power of installment agreements in our last discussion of the Antioco case in Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement. The PPIA can be a good option, though when there is an asset that can satisfy the liability the taxpayer will have to offer specific evidence as to why selling or borrowing against the asset jeopardizes the taxpayer’s ability to meet current or likely future necessary expenses. The taxpayer will have to put in evidence on, for example, health issues for the taxpayer or a dependent, or an imminent down the road downturn in income. General statements about the difficulties of a future life in retirement are insufficient. Given that in some circuits (as here) the taxpayer was bound to the record below, the offering of that specific evidence has to be done at Appeals, and not at Tax Court. Even with those good bad facts, when a taxpayer has a history of noncompliance, the IRS still has significant discretion to reject the alternative.



Treasury Inspector General Report on Timeliness of Lien Notices

On July 7 the Treasury Inspector General for Tax Administration (TIGTA) issued a report on the timeliness of the IRS in sending out notice to taxpayers and to their representatives after it files the notice of federal tax lien (NFTL).  Section 6320, creating Collection Due Process (CDP) rights following the filing of the NFTL, requires that the IRS send notice of the filing of the NFTL within 5 business days after the filing of the NFTL.  IRS procedures and seemingly Section 6304  require that notice of the NFTL also go to the taxpayer’s representative.  If the IRS fails to send out the notice of the NFTL to the taxpayer who is the subject of the lien or to the taxpayer’s representative, the failure can have consequences to the taxpayer in the effort to pursue rights.

During the past year, I had two cases in which I represented taxpayers against whom the IRS filed an NFTL. In those cases, the notice of the filing was not sent to me until several days after it was mailed to the taxpayer.  By the time I received the notice, 10 days or more of the 30 day period to request a CDP hearing had run.  Because of my experience, I read the TIGTA report with interest.  As discussed below, the Tax Court has held that the failure to notify the representative does not extend the time period within which the taxpayer must exercise their CDP rights.  This makes the study of the IRS effectiveness in providing notice to representatives all the more important.


TIGTA found that of a sample of “162 undelivered lien notices identified nine cases for which lien notices were not timely sent to the taxpayers last known addresses because the lien notices were sent to the taxpayers’ old addresses even though IRS systems reflected their new addresses.” With respect to the notice sent to representatives, TIGTA found that for “six of the 37 sample cases for which the taxpayer had an authorized representative, the IRS did not notify the taxpayers’ representatives of the NFTL filings.  TIGTA estimated that 22,866 taxpayers may have been adversely affected.”

What happens when the representative does not receive a copy of the Notice of Deficiency and the taxpayer fails to timely petition the Tax Court? The failure to send the notice to the representative does not give the taxpayer a basis for getting into the Tax Court after the 90-window has closed, see McDonald v. Commissioner, Bond v. Commissioner (a CDP case refusing to allow taxpayers to raise the merits of a liability based on the failure of the IRS to send the statutory notice of deficiency to petitioner’s representative), Houghton v. Commissioner, and Allen v. Commissioner.

What happens when the representative does not receive a copy of the CDP notice? Unlike the Notice of Deficiency which deals with examination issues, the CDP notice concerns collection.  In 2015, the Tax Court in Godfrey said the failure to provide notice to the authorized representative in a CDP case has the same consequences as the failure to provide notice when sending the notice of deficiency, which is to say that no consequences to the IRS result from that failure.  We posted on Godfrey here, here, and here.  Godfrey does not appear to have appealed the decision.

IRC 6304(a)(2) provides that the IRS “Without the prior consent of the taxpayer given directly to the Secretary or the express permission of a court of competent jurisdiction, the Secretary may not communicate with a taxpayer in connection with the collection of any unpaid tax . . . if the Secretary knows the taxpayer is represented by any person authorized to practice before the Internal Revenue Service with respect to such unpaid tax and has knowledge of, or can readily ascertain, such person’s name and address, unless such person fails to respond within a reasonable period of time to a communication from the Secretary or unless such person consents to direct communication with the taxpayer…”

In a 2001 Chief Counsel Advisory opinion discussed in the Godfrey post, Chief Counsel’s office takes the position in footnote 7 that the 6320 (or 6330) notice must go to the taxpayer by statute and that Section 6304 prohibition on communication with the taxpayer without the consent of the representative does not does not alter that requirement.  A more nuanced argument exists concerning the impact of using the IRS power of attorney form and whether the language of the POA form gives the Service additional rights.

The TIGTA report contains a chart of NFTL filings in the five year period running from 2011 through 2015. NFTLs have dropped by almost half during that period.  The biggest drop resulted from the change in the threshold for filing as a result of the Fresh Start initiative from $5,000 to $10,000.  That change is not hard and fast, as the IRS can file the NFTL at any dollar level and it is not required to file the NFTL at any dollar level; however, in general, IRS employees will follow the manual guidance to the extent they have the ability to work a case.  The dropoff in the most recent years probably reflects some reduced enforcement action due to the reduced staff.

The TIGTA report on providing notice to taxpayers after the filing of the NFTL is one of a number of reports Congress required TIGTA to perform on an annual basis in the Restructuring and Reform Act of 1998 (RRA 98).  TIGTA notes that over the past five years it has found that the IRS almost always complies with the requirement to provide timely notice to the taxpayer but has not always met internal guidelines with respect to practitioner notice.  The report does not address the legal requirement provided in IRC 6304 concerning practitioner notice probably because of the Chief Counsel guidance that IRC 6304 does not create a requirement here.

The error rate for providing notice to authorized representatives in 2016 was consistent with the error rate over the past five years and shows that one in five notices of the filing of the NFTL does not get sent to the authorized representative despite internal guidance and a statute that specifically provide that the notice must be sent to the representative. TIGTA did not make any recommendations concerning the failure to notify authorized representatives this year because it had made them in the past and the IRS system for fixing the problem did not get implemented until after the sample period.  TIGTA indicated that it would revisit the issue next year.

If you do not receive notice as a representative on any collection case in which you have a power of attorney on file with the IRS and have checked the box that you want copies of correspondence, then the IRS has failed to meet its statutory, not internal, requirement. We have posted about IRC 6304 before here, here, and here.  Given the relatively high percentage of cases in which the IRS has not sent out the notice to the POA, a number of these cases should exist.  TIGTA does not address the timeliness of sending out the copy of the notice to the representative.  My impression from the report was the significantly delayed notices I received would count toward the 84% of the cases in which the IRS complied and were not measured by TIGTA as a form of IRS non-compliance.  Yet, a significant delay when the taxpayer has only 30 days to act can have a significant influence on the outcome of a matter.

If you are concerned about receipt of the notice of the filing of an NFTL either by yourself as the representative or by your client, you may want to read this report and possibly some of the prior reports. If Congress is going to require TIGTA to provide us with this information, we should find ways to use it in situations in which the IRS fails to comply with the requirements.  The failure to comply with notice requirements in collection cases may eventually lead to a different outcome than the failure to comply in examination cases.  Godfrey may not be the final word in this litigation.  IRC 6304 does not come with any directions about the remedy for failure to comply with its provisions and little litigation exists in the tax context.  If you seek a remedy because of a violation of IRC 6304, you might look to litigation in the consumer debt collection area after which the statute is patterned.