Top of the Order: Designated Orders: 5/15/2017 – 5/19/2017

We welcome guest blogger William Schmidt, one of the four new low income tax clinicians working on our designated order project.  William is Clinic Director of the LITC at Kansas Legal Services, a clinic begun in 2015 that is the only LITC for the state of Kansas.  William also co-authored the chapter “Securing Information From the IRS by Taxpayers” with Megan Brackney for the upcoming 7th edition of Effectively Representing Your Client Before the IRS. Keith

In both designated orders last week, the Tax Court granted motions for the IRS.  One was a motion to dismiss for lack of jurisdiction and the other was a motion for summary judgment.  In each case, greater attention to detail from the petitioner(s) could have preserved their cases.

File Your Petition on Time

Docket # 23648-16, Franklin v. C.I.R. (Order and Decision Here)

Our first case involves the Franklins, a married couple, filing their Tax Court petition pro se.  Their case will remind you of the mailbox rule from Contracts class as their delay in sending the petition led to dismissal of their case.

The IRS sent a statutory Notice of Deficiency (NOD) to the Franklins on July 25, 2016, by certified mail.  The NOD gave a Tax Court petition deadline of October 24, 2016.  The response envelope sent by the Franklins that included the petition had a postage meter date of October 19, 2016.  The petition had signature dates of October 24, 2016.  The United States Postal Service postmark was dated October 28, 2016.  The Tax Court received the petition on November 2, 2016.  The IRS filed a motion to dismiss for lack of jurisdiction on April 20, 2017, on the grounds that the Franklins did not timely file their petition.

The Court’s analysis takes note that the Franklins delayed several days in the time of signing the petition, metering the envelope and mailing the petition to the Tax Court.  They state that the deadline will not be satisfied by printing off the postage before the deadline’s expiration date when they are going to hold on to the petition further before mailing.  The rule for Tax Court petitions is that the United States Postal Service postmark date stamped on the envelope (or other delivery mechanism) will count as the date of delivery to the Tax Court.

Take-away points:

  • A timely filed petition is necessary to continue in Tax Court or there will be a motion to dismiss for lack of jurisdiction in your future. Waiting until the final days of the Tax Court deadline means playing with the fire of a dismissed case.
  • The United States Postal Service postmark stamp on the envelope delivered to the Tax Court will be what counts as the delivery date. The postage meter stamp and the signature dates on the petition do not count.

Not Enough Responsive Paperwork

Docket # 15186-16L, Shoreman v. C.I.R. (Order and Decision Here)

The other case was filed by Mr. Shoreman pro se in response to an IRS notice of federal tax lien for tax years 2003 and 2008 through 2012.  The IRS issued a Notice of Determination on June 2, 2016.  Following the petition filed July 5, 2016, the IRS filed a motion for summary judgment on April 11, 2017 and the Petitioner filed a response to the motion May 5, 2017.

Within Mr. Shoreman’s response, he refers to a letter from the settlement officer dated March 24, 2016.  He also states, “…I do not believe that I was advised that any information beyond Forms 1040 for the years 2013, 2014 and 2015 was required to be submitted prior to the issuance of the Notice of Determination of June 2, 2016.”

Mr. Shoreman originally stated he was not liable for all or part of the tax liability.  One instruction in the March 24 letter is that because his tax returns were self-assessed, any incorrect tax liability means he would need to amend for each tax year in question.

Another instruction in the March 24 letter is that collection alternatives such as an installment agreement or offer in compromise may be discussed.  In order to discuss those alternatives, he would need to provide a completed Form 433-A (Collection Information Statement), proof that estimated tax payments are paid in full, and current documentation for the past 3 months.  That documentation includes earning statements, pay stubs, other income statements, bank statements, and billing statements for utilities, rent, insurance, court orders, etc.  As he stated he paid a portion of the taxes owed, there was also a request for both sides of cancelled checks to be provided.

Mr. Shoreman responded by providing a form 1040 for tax years 2013 and 2014.  He did not include Schedule C even though business income was his only source of reported income.

In the Court’s analysis, the burden is generally on the taxpayer to provide requested financial information to the IRS to facilitate evaluation for any collection alternatives.  For collection alternatives to be considered, the taxpayer must also be current on estimated tax payments.

Because Mr. Shoreman did not amend the tax returns in question or submit any other supporting documentation, he did not provide proof the existing liability was overstated.  While the standard to remove the tax lien is discretionary rather than mandatory, Mr. Shoreman did not present anything to prove that withdrawal was appropriate.

The Court sustained the IRS determination that the filing of the tax lien was not an abuse of discretion.  The next conclusion was that there were not genuine issues of material fact so the IRS was entitled to judgment as a matter of law.  The motion for summary judgment was granted for the IRS and the Court decided the IRS could proceed with the lien filing with respect to the six tax years.

Take-away points:

  • A self-assessed tax return is a tax return where the taxpayer is responsible for correctly reporting his or her liability to a revenue collection agency. In this instance, the advice to Mr. Shoreman was that an amended return may be necessary to address any of his liability issues.  It should be noted that it may not be necessary in everyone’s circumstances to file an amended return.  What the taxpayer must do is raise the issues (such as income, credits, or deductions) that give rise to increasing or decreasing the liability reported on the tax return during the Collection Due Process hearing.  While an amended return may be helpful, it is not an absolute requirement.
  • When the IRS provides a list of supporting documentation in order to discuss collection alternatives, it is best to provide those documents. While the list may be substantial, there needs to be a response that matches.  Otherwise, it will likely not be abuse of discretion for a tax lien to be filed rather than to qualify for a collection alternative.

 

Top of the Order – Tax Court Designated Orders 5/8/2017 – 5/12/2017

Today we continue our reporting on designated orders.  Guest blogger Samantha Galvin reports on three cases.  Professor Galvin teaches and represents low income taxpayers in the tax clinic at the Sturm College of Law at the University of Denver – one of the oldest and best tax clinics for low income taxpayers.  Keith.

 

Designated Orders: 5/8/2017 – 5/12/2017

Two out of three of last week’s designated orders involved the IRS moving to dismiss the case, in part, for lack of jurisdiction because the taxpayers did not petition the Tax Court on a Notice of Deficiency but ended up in Tax Court after walking down a different procedural path. In these types of cases, the IRS wants to ensure that all parties understand which issue(s) is in front of the Court.

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Choose Your Procedural Path Carefully

Docket # 4354-16L, Schwartz v. C.I.R. (Order and Decision Here)

The first case is a fairly common scenario, but it is a scenario in which new practitioners (and pro se petitioners) should be careful.  Petitioners’ original 2013 tax return showed a balance due of approximately $44,000, but they did not make any payments. They received a Final Notice of Intent to Levy and timely requested a collection due process (CDP) hearing asking for an installment agreement or an offer in compromise.

As part of the normal process, the IRS Appeals Office requested that the taxpayers submit a financial form and substantiation but taxpayers did not respond, nor did they participate in their CDP hearing phone conference. In October of 2015 (mistakenly referred to as 2016 in the Order and Decision), the taxpayers finally submitted a financial form, but again did not submit any substantiation.  In December of 2015, the taxpayers received a statutory Notice of Deficiency (NOD) for tax year 2013 proposing to assess an additional $7,058 in tax and penalties. Taxpayers’ failed to timely petition the Tax Court for a redetermination pursuant to the NOD.

On January 22, 2016 (less than a week after the deadline to petition the Tax Court on the NOD had passed), the IRS Appeals Office issued a notice of determination concluding the CDPhearing in which it sustained the proposed levy because the taxpayers did not submit any substantiation and because they had sufficient assets to pay the balance. This time the taxpayers petitioned the Tax Court claiming the IRS unfairly assessed penalties and seeking review of the NOD.

The IRS moved to dismiss the case for lack of jurisdiction to the extent the matter related to the NOD and the Tax Court granted the motion. Additionally because the taxpayer did not raise the issue of penalties during the administrative process, the Court held they were precluded from doing so in Tax Court.

The IRS’s motion to dismiss not only prevented the taxpayers from disputing the underlying liability, but also impacted the standard of review used by the Tax Court. On a deficiency case, the standard of review is “de novo” which generally means the Court will review the case without being bound by what the IRS or taxpayer has done to resolve the case prior to coming to Court. On a CDP hearing case, such as this when the underlying liability is not properly at issue, the Court reviews the case for an “abuse of discretion” which is whether the exercise of discretion by IRS Appeals was without sounds basis in fact or law.

The court reviewed the notice of determination for abuse of discretion and found that Appeals did not abuse its discretion in sustaining the proposed levy, since the taxpayers failed to participate in the CDP hearing and did not submit financial information or substantiation. As a result, the Court granted the IRS summary judgment.

Take-away points:

  • Be cognizant of the procedural path down which you are walking. It can get confusing especially if the taxpayer is in collections for a portion of liability, but another portion has not yet been assessed. If you want to dispute the underlying liability, then petition the Tax Court on an NOD rather than a notice of determination. It is rare that liability disputes can be raised in a collection due process hearing and it can really only be done if a taxpayer did not receive an NOD or did not otherwise have an opportunity to dispute the liability, an issue PT has covered extensively; see Keith’s post from this past March, for example. This is true even if a practitioner begins representing a client after the right to petition Tax Court pursuant to an NOD has expired.
  • Penalty abatement can be raised in a CDP hearing, but if it is not raised it may be precluded from being raised in Tax Court.
  • If a dispute to liability exists but the right to go to Tax Court on an NOD has expired, a practitioner or taxpayer should dispute the liability through audit reconsideration or a doubt as to liability offer in compromise instead.
  • Don’t petition Tax Court on a CDP hearing unless the IRS abused its discretion, which means it did not consider the facts or law in an appropriate way.

Innocent Spouse Relief is the Only Dispute

Docket # 15590-16, Starczewski v. C.I.R. (Order Here)

Similar to the Schwartz case (above) this is another case where the taxpayers did not petition the Tax Court on a Notice of Deficiency (NOD), but unlike the Schwartz case it seems like the taxpayers did not intend to dispute the underlying liability. In this case taxpayer wife and taxpayer husband ended up in Tax Court after the taxpayer wife’s request for innocent spouse relief was denied by the IRS (presumably this means the case involves taxpayer ex-wife and taxpayer ex-husband). Taxpayer husband intervened, which is permissible in an innocent spouse case and allows the non-requesting spouse the opportunity to testify about why the requesting spouse should not be granted relief. When an intervening spouse is successful, both spouses remain jointly and severally liable for the deficiency.

The IRS filed a motion to dismiss for lack of jurisdiction as to the NOD, stating that the Tax Court only had the jurisdiction to determine whether petitioner (taxpayer wife) should be relieved of liability.

The Tax Court gave the petitioner (taxpayer wife) and intervenor (taxpayer husband) an opportunity to respond and neither did, but later in a telephone conference taxpayer husband had no objections and taxpayer wife’s counsel affirmatively consented to the Court granting the IRS’s motion.

Once all parties were made aware that a dispute to the liability was not before the Tax Court, the Court allowed the innocent spouse relief question to proceed to trial.

Take-away points:

  • In this case it is unclear if a dispute to the liability was raised in the petition, or if IRS always requests a motion to dismiss for lack of jurisdiction in these case just so the taxpayers (and perhaps, the Court) are clear about what is really at issue.
  • The IRS is required to send separate original notices of deficiency to each spouse at their last known address (pursuant to I.R.M. 4.8.9.8.2.7), so even if taxpayers were divorced or separated at the time both taxpayers would have had the opportunity to petition the Tax Court on the NOD.

 

When Petitioners are Prisoners

Docket # 29472-12, Martinez v. C.I.R. (Order and Decision Here)

This case involves a taxpayer/petitioner who is currently an inmate in the Texas prison system, but the deficiency arose from tax years 2009 and 2010 (only 2009 was still at issue, because IRS had been granted summary judgment for 2010). In those years, the taxpayer was not yet in prison and he was a school teacher. The IRS sent him a Notice of Deficiency (NOD) after he began serving time and he timely petitioned the Tax Court asking for the deficiency to be redetermined. The deficiency arose from the taxpayer’s failure to substantiate gross receipts on his Schedule C and expenses on his Schedule C and Schedule A.

The Tax Court prefers to resolve cases expeditiously, even when a taxpayer is in prison. In this case, the taxpayer petitioned the Tax Court in 2012 and the decision was issued in 2017 so this case had been going on for a while. The Court worked with the taxpayer through the stipulation and summary judgment process (presumably for 2010) but then ordered the taxpayer to file written testimony stating his disagreement of the NOD for 2009 but the taxpayer failed to do so.

The Tax Court used its Rule 123(a) power which allowed the Court to default the taxpayer’s case, and pursuant to that rule, enter a decision against him.

Taxpayers without substantiation are a common phenomenon even when they are not in prison, so it was likely nearly impossible for the petitioner in this case to retrieve old records – but to view this as just another lack of substantiation case may be incorrect, because the Court took the time to describe the difficulties involved in resolving cases when a taxpayer/petitioner is in prison.

The Court referenced the BTK serial killer’s Tax Court case (in which the Court allowed the BTK killer to participate in trial via phone pursuant to Tax Court Rule 143). The Court also discussed that writs of habeaus corpus ad testificandum, which is an order from the court that a prisoner be brought to court to testify, are difficult to manage and security concerns make transportation difficult. Those concerns allow the Court to weigh the amount at issue with the need to find economical solutions for resolving the case.

Take-away points:

  • If a practitioner has a client in prison, the Tax Court may use Rule 143 in order to resolve the case without requiring the petitioner to be there in person.
  • These types of cases present potential substantiation-related issues and may require some creativity on the part of the practitioner.

 

There is another way to deal with prisoners, which is to try the case inside the prison.  In the Richmond office, we had more than our fair share of spy cases in which the spy neglected to report the income from spying on their tax return.  In the case of master spy, Aldrich Ames, he sought to contest the determination of additional income in Tax Court.  The Court decided to try the case inside the maximum security prison in Allenwood, PA.  John McDougal and Richard Stein tried the case for the office against Mr. Ames who represented himself.  The opinion is reported here.  Keith

Taxpayer Who Detrimentally Relied on IRS Erroneous Filing Information Properly Tossed from Tax Court

Frequent guest poster Carl Smith updates us on the Third Circuit’s decision last week in Rubel v Commissioner, which considers whether IRS mistakes when it communicates deadlines to people seeking relief from joint and several liability could be subject to equitable tolling. As we have discussed in prior posts, Carl and Keith have been actively litigating this issue; Rubel is the first circuit court opinion on the issue. Les

As you may recall from my post of last September, Keith and I have appeared pro bono in several Tax Court cases presenting the issue of whether, under current non-tax Supreme Court case law on jurisdiction, the time period to file an innocent spouse petition in the Tax Court under § 6015(e) is jurisdictional or subject to equitable tolling. This is an issue of first impression in the Circuit courts, though the Tax Court has held the period jurisdictional and not subject to equitable tolling since Pollock v. Commissioner, 132 T.C. 131 (2009). Two of our cases were in the courts of appeals, Rubel v. Commissioner, Third Circuit Docket No. 16-3526, and Matuszak v. Commissioner, Second Circuit Docket No. 16-3034, where the oral arguments were held on March 16 and April 20, respectively.

In both cases, during the 90-day period to file, an IRS employee told the taxpayers a date for the end of the 90-day period that was erroneous, and the taxpayers relied on that date in filing their petitions. In both cases, the Tax Court dismissed the cases for lack of jurisdiction as having been filed late — considering the timely filing requirement to be a jurisdictional one. Jurisdictional time periods can never be equitably tolled or subject to estoppel. A common ground for equitable tolling outside the tax area is when the defendant actively misleads the plaintiff as to a filing deadline.

In Rubel v. Commissioner, the Third Circuit has just affirmed the Tax Court.

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Background

For decades, both the Tax Court and the Circuit courts have held that the Tax Court, being a court of limited jurisdiction, has only such jurisdiction as is provided by Congress and that absent compliance with the time period to file a deficiency petition, the Tax Court lacks jurisdiction (i.e., the power to act). But, more recently, in Kontrick v. Ryan, 540 U.S. 443, 454-455 (2004), the Supreme Court held that both it and lower courts had overused the word “jurisdictional”; henceforth, the Supreme Court insisted that “jurisdiction” only be used to denote subject matter and personal jurisdiction, not claims-processing rules that Congress imposes to move litigation along. The Supreme Court has since called filing deadlines “quintessential claims-processing rules”. Henderson v. Shinseki, 562 U.S. 428, 435 (2011).

The Supreme Court has recognized two exceptions to its current jurisdictional rules: First, Congress may overrule the Supreme Court’s preference by making a “clear statement” that a claims-processing rule is intended to be jurisdictional. Arbaugh v. Y & H Corp., 546 U.S. 500, 515-516 (2006). Second, if a long line of Supreme Court precedents over 100 years has called a time period jurisdictional, it will remain so under stare decisis. Bowles v. Russell, 551 U.S. 207 (2007); John R. Sand & Gravel Co, v. United States, 552 U.S. 130 (2008). Still, the Supreme Court has noted the “rarity of jurisdictional time limits” under the clear statement exception; United States v. Wong, 135 S. Ct. 1625, 1632 (2015); and stated that “Congress must do something special, beyond setting an exception-free deadline, to tag a statute of limitations as jurisdictional and so prohibit a court from tolling it.” Id.

In fact, in about a dozen cases, beginning with Kontrick, the Supreme Court has never found that any claims-processing rule is jurisdictional under the “clear statement” exception. So, for now, that exception is only a theoretical one, with no concrete examples from the Supreme Court. And the Supreme Court has never expressed any view on whether either a Tax Court or Board of Tax Appeals filing deadline is jurisdictional.

Rubel Holding

In both Rubel and Matuszak, the IRS has argued that both exceptions to the Kontrick rule apply to make the 90-day period in § 6015(e) jurisdictional and not subject to equitable tolling.

At least one bright spot (to me) of the holding in Rubel is no mention in the opinion of the stare decisis exception’s application. The IRS had argued that the Second and Third Circuits should give stare decisis deference to all the rulings from the Tax Court and Circuit courts that have held the deficiency filing period jurisdictional and more recent Tax Court opinions holding the § 6015(e) and § 6330(d)(1) (for Collection Due Process (CDP)) time periods jurisdictional. I assume the Third Circuit in Rubel steered away from discussing this because there is no Supreme Court opinion that articulates this stare decisis exception as applying to rulings of courts below the Supreme Court. See Reed Elsevier, Inc. v. Muchnick, 559 U.S. 154, 173-174 (2010) (Ginsburg, J, concurring, joined by Stevens and Breyer, JJ.) (“[I]n Bowles and John R. Sand & Gravel Co. . . . we relied on longstanding decisions of this Court typing the relevant prescriptions ‘jurisdictional.’ Amicus cites well over 200 opinions that characterize § 411(a) as jurisdictional, but not one is from this Court. . . .”; emphasis in original; citations omitted). However, in doing so, the Rubel opinion differs from the recent opinions in Guralnik v. Commissioner, 146 T.C. No. 15 (2016) (holding § 6330(d)(1) time period jurisdictional in part by applying stare decisis exception to rulings of lower courts in CDP and deficiency opinions), and Tilden v. Commissioner, 846 F.3d 882, 886 (7th Cir. 2017) (holding § 6213(a) time period jurisdictional in part by applying stare decisis exception to rulings of lower courts in deficiency opinions).

Section 6015(e)(1) provides that:

In the case of an individual . . . who requests equitable relief [,(the kind requested by Ms. Rubel)] . . . the 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 such petition is filed . . . not later than the close of the 90th day after the date [on which the IRS mails notice of its final determination of relief available to the individual].

The Third Circuit found two reasons for interpreting the time provision in this sentence as jurisdictional:

First, the context of the provision—how § 6015(e)(1)(A) fits within the statute as a whole—shows that it is jurisdictional. The statute’s grant of jurisdiction to the Tax Court and the time limit for activating that jurisdiction are located within the same provision. Moreover, the provision is located within the same subsection of § 6015 that sets forth other conditions that trigger or limit the Tax Court’s jurisdiction. § 6015(e)(3) (setting forth the limitations on the Tax Court’s jurisdiction). In addition, the filing period and the filing of the petition itself impacts the IRS’s ability to begin its collection efforts. More specifically, § 6015(e)(1)(B)(i) provides that no levy or collection proceeding can commence during the ninety-day window to petition for relief or, if a petition is filed in the Tax Court, until the Tax Court’s decision becomes final. This further reflects that the ninety-day period is meant to allocate when different components of the tax system have the authority to act and further supports the view that § 6015(e) is jurisdictional. Thus, the structure of § 6015 reflects Congress’s intent to set the boundaries of the Tax Court’s authority.

. . . .

Second, the Supreme Court has historically found that filing deadlines in tax statutes are jurisdictional because allowing case-specific exceptions and individualized equities could lead to unending claims and challenges and upset the IRS’s need for “finality and certainty.” Becton Dickinson & Co. v. Wolckenhauer, 215 F.3d 340, 351 (3d Cir. 2000); accord United States v. Brockamp, 519 U.S. 347, 349-54 (1997) (“Tax law . . . is not normally characterized by case-specific exceptions reflecting individualized equities.”). Rigid deadlines, such as those embodied in the tax law’s jurisdictional requirements, promote predictability of the revenue stream, which is vital to the government. See Becton Dickinson, 215 F.3d at 348 (stating that “the nature of the underlying subject matter—tax collection” underscores the need for an emphatic deadline (quoting Brockamp, 519 U.S. at 352)).

Slip op. at pp 8-11 (some citations omitted).

In a footnote, the Third Circuit provided rather cold comfort to Ms. Rubel: “While the Tax Court and this Court cannot alter a jurisdictional deadline, and the taxpayer is responsible for calculating when the deadline expires, we remind the IRS to exercise care when drafting correspondence to a taxpayer to assure it is accurate. “ Slip op. at p. 11 n.8.

Observations

Keith and I think the Rubel opinion is wrong for many reasons. We particularly think the court does not do an adequate job of distinguishing the Supreme Court opinion on which we principally relied, Sebelius v. Auburn Regional Medical Center, 133 S. Ct. 817 (2013). In Auburn, a single sentence in a subsection of the U.S. Code authorized a Medicare provider who was unhappy with the amount of reimbursement received to bring an action before a board “if” three conditions were met, one of which was meeting a 180-day filing deadline. There was no other provision in the U.S. Code that authorized the board to hold such hearings, so the sentence, in effect, created an implicit jurisdictional grant. The Supreme Court did not contradict the amicus, who argued that the first two conditions of the sentence were jurisdictional in nature. But, the Supreme Court took issue with the amicus’ argument that this made the filing period in the sentence also jurisdictional, noting that it wrote in Gonzalez v. Thaler, 565 U.S. 134, 147 (2012), that “[m]ere proximity will not turn a rule that speaks in nonjurisdictional terms into a jurisdictional hurdle.” The Rubel court distinguished Auburn by saying that, by contrast, § 6015(e) includes an explicit, not implicit, jurisdictional grant. Slip op. at p. 9-10 n.7. But, Keith and I don’t see why that should make a big difference, since in both statutes, the power of the court or board is authorized by the same sentence that contains the jurisdictional grant (implicit or explicit) and is followed by the condition “if” a time period is met. We don’t think the Supreme Court would want to make only this slight difference of the additional use of the word “jurisdiction” somewhere before the time period enough to satisfy the clear statement exception.

Moreover, the Supreme Court has also emphasized that in interpreting a statute’s time period as jurisdictional, the context of the entire action should be considered. In Henderson v. Shinseki, supra, the Court found the time period for veterans to file an appeal of a denial of benefits in the Court of Appeals for Veterans Claims nonjurisdictional, in part, because of the long period Congress gave for veterans to raise their claims and the solicitous nature of Congress toward veterans. Taxpayers who request innocent spouse relief can do so at any time during the 10-year period in which collection may be made under § 6502. And Congress has made equity a major reason for the granting of innocent spouse relief. Surely, it seems odd that equitable tolling would not be allowed in an area of the Tax Code providing unusual equitable relief.

The Rubel opinion’s citation to Becton Dickinson and Brockamp for the proposition that all Tax Code time periods are jurisdictional is also problematic. Brockamp never said that. Indeed, the words “jurisdiction” and “jurisdictional” do not even appear in the Brockamp opinion. That opinion merely held that the period to file a refund claim in § 6511(a) is not subject to equitable tolling under the presumption in favor of equitable tolling of nonjurisdictional statutes of limitations laid out in Irwin v. Dept. of Veterans Affairs, 498 U.S. 89 (1990), because of the many complicated rules already set out in the statute and the administrative problems that would ensue as to the then nearly 100 million refund returns filed annually, which would all have to be considered eligible for equitable tolling when filed late. There is no similar administrative problem with Tax Court innocent spouse suits because there appear to be only about 500 filed annually. And I checked that in the last 12 months, only 15 such suits have been dismissed for lack of jurisdictional as untimely (either late or premature), and only four such suits (including Rubel and Matuszak) presented any fact pattern approaching one where the Tax Court might have to consider equitable tolling.

The Rubel court also did not consider the context of the enactment of § 6015. It seems wrong to assume that Congress would want the time period not to be subject to equitable tolling, since the equitable provision, § 6015, was enacted by Pub. L. 105-206, § 3201, paired with § 3202, under the heading “Relief for Innocent Spouses and for Taxpayers Unable to Manage Their Financial Affairs Due to Disabilities” in H.R. Conf. Rept. 105-599 at 249. Section 3202 amended I.R.C. § 6511 to add a new subjection (h) to legislatively overrule the result in Brockamp as to financially disabled taxpayers. It is implausible that Congress would want the refund claim statute of limitations to be subject to equitable tolling yet want the time period in the related new equitable innocent spouse statute not to be subject to equitable tolling.

Finally, Becton Dickinson in 2000 held that the 9-month time period in § 6532(c) in which to bring a wrongful levy suit in district court is jurisdictional and not subject to equitable tolling. But, recently, the Ninth Circuit completely disagreed with that holding in Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015), holding that, under more recent Supreme Court case law, the time period is not jurisdictional and is subject to equitable tolling under the Irwin presumption. The Third Circuit should have read Volpicelli (which we cited) and realized that Becton Dickinson can’t stand up under current Supreme Court case law. Indeed, Volpicelli wrote:

The [Supreme] Court may in time decide that Congress did not intend equitable tolling to be available with respect to any tax-related statute of limitations. But that’s not what the Court held in Brockamp. It instead engaged in a statute-specific analysis of the factors that indicated Congress did not want equitable tolling to be available under § 6511. The Court later made clear in Holland [v. Florida] that the “‘underlying subject matter’” of § 6511—tax law—was only one of those factors. 560 U.S. at 646, 130 S. Ct. 2549 (quoting Brockamp, 519 U.S. at 352).   As we have explained, the other factors on which the Court relied are not a close enough fit with § 6532(c) to render Brockamp controlling here.

777 F.3d at 1046.

Absent generating a Circuit split, though, Keith and I are unlikely to seek Supreme Court review of Rubel.

If we lose everywhere, we will probably urge a legislative fix.

FDCPA’s Application to IRS’ New Private Debt Collectors

Today we welcome first time guest blogger Chi Chi Wu.  Ms. Wu is an attorney at the National Consumer Law Center (NCLC.)  While her primary portfolio centers on issues involving consumer law, she is the point person at the NCLC when tax law issues cross over into consumer law.  Some of her previous advocacy focused on tax-time financial products, such as refund anticipation loans.  She writes today about private debt collectors because their use raises consumer rights issues.  As all of our readers know the IRS has begun hiring private collectors to collect on delinquent tax obligations, and this post explains why these collectors are subject to Fair Debt Collection Practices Act requirements and remedies.  Keith

The Internal Revenue Service (IRS) has begun placing federal tax debts with private debt collectors.  One critical question is whether the Fair Debt Collection Practices Act (FDCPA) and its private remedies apply to these private debt collectors.

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Background

Internal Revenue Code (IRC) § 6306 requires the IRS to outsource the collection of certain federal tax debts. The IRS must enter into one or more “qualified tax collection contracts” with private agencies for the collection of “inactive tax receivables.” 26 U.S.C. § 6306(c). Inactive tax receivables are any tax debts in the IRS “potentially collectible inventory” that meet at least one of these criteria:

  • The tax debt has been removed from active inventory by the IRS for lack of resources or inability to locate the taxpayer;
  • More than one-third of the applicable statute of limitations has lapsed and the tax debt has not been by assigned to an IRS employee for collection; or
  • More than one year has passed without an interaction with the taxpayer or a third party for purposes of collecting the debt.

Certain taxpayers are statutorily exempt from the program. See NCLC’s Fair Debt Collection § 8.10.1.

The only activities that the IRC authorizes private debt collectors to perform are locating and contacting taxpayers, requesting full payment or offering installment agreements lasting up to five years, and obtaining financial information about the taxpayer. 26 U.S.C. § 6306(b).

Any amount collected from a taxpayer must be fully credited toward the taxpayer’s tax debt; in other words, collection fees will not be deducted from the amount paid by the taxpayer. 26 U.S.C. § 6306(e).The IRS is permitted to pay private collectors up to twenty-five percent of the amount of tax debt collected.

According to an IRS analysis, 79% of the cases that are likely to be referred to private debt collectors involve taxpayers with incomes below 250% of the federal poverty level. See Letter from Nina Olson, National Taxpayer Advocate, to Senate Committee on Finance and House Ways & Means Committee 8 (May 13, 1994).

This is not the first time the IRS has tried to use private collectors, and such prior efforts were far from successful.  For a history of prior IRS efforts to use private collectors, see Fair Debt Collection § 8.10.2.

FDCPA Applicability and Other Taxpayer Protections

Any contract between the IRS and a private collector must prohibit the collector from committing any act or omission that IRS employees are prohibited from committing in the performance of similar duties. 26 U.S.C. § 6306(b)(2). These prohibitions include communicating at inconvenient times and places; contacting represented debtors (with certain exceptions); calling the debtor at work if the collector knows the debtor’s employer prohibits such calls; and various other types of harassment and abuse  See 26 U.S.C. § 6304. See also NCLC’s Collection Actions § 10.2.13.10.

In addition, the IRS Code provides that “[t]he provisions of the Fair Debt Collection Practices Act shall apply to any qualified tax collection contract.” 26 U.S.C. § 6306(g).  While the law says that the FDCPA shall apply to the contract, the legislative history shows that Congress meant by this language that provisions of the FDCPA “apply to the private debt collection company.” Conference Rep. No. 108-755 (2004).

Thus, the FDCPA should apply to private collectors of IRS tax debts, despite the fact that the FDCPA normally does not apply to tax debts. See Fair Debt Collection § 4.4.2.3.

There is an exception to the extent that the FDCPA is superseded by: (1) IRC § 6304, which establishes the prohibitions discussed above that are very similar to the FDCPA; (2) IRC § 7602(c) governing contact with third parties; and (3) “any other provision” of the IRC.  See 26 U.S.C. § 6306(g), cross-referencing 26 U.S.C. §§ 6304, 7602(c).

Remedies for Violations by Private Collectors

The IRC includes a civil remedy against a debt collector who recklessly, intentionally, or negligently disregards any provision of the tax code or any regulation under it. 26 U.S.C. §§ 7433A, 7433(a).  The taxpayer has the right to bring suit in federal court for “actual, direct economic damages,” with a cap of $1,000,000 ($100,000 in the case of negligence), plus costs.  26 U.S.C. § 7433, incorporated by reference in 26 U.S.C. § 7433A(a).

Unlike suits when the misdeeds are committed by IRS employees, the plaintiff need not exhaust administrative remedies. However, the law insulates the IRS from liability for any misconduct by the private collector, permitting suit to be brought against the private tax collector only, not against the United States. 26 U.S.C. § 7433A(b)(1), (4). See also 26 U.S.C. § 6306(f).

FDCPA private remedies should also apply to private collectors when collecting tax debts.  The IRC makes the FDCPA applicable to the private debt collection program. 26 U.S.C. § 6306(g).   There is an exception to the extent that the FDCPA is superseded by, inter alia, “any other provision” of the IRC, which would include the civil remedy discussed above. 26 U.S.C. § 6306(g), cross-referencing 26 U.S.C. §§ 6304, 7602(c).

This section provides that “such civil action shall be the exclusive remedy for recovering damages resulting from such actions.”  26 U.S.C. § 7433(a).  However, the IRS private collection provision specifically refers to IRC § 7433A to establish a civil remedy. See 26 U.S.C. § 6306(k)(1). Section 7433A in turn states that “[s]uch civil action shall not be an exclusive remedy with respect to such person.” 26 U.S.C. § 7433A(b)(3).

Thus, a taxpayer’s remedy for unlawful debt collection activities is not limited to the IRC’s civil remedy provision, and FDCPA civil remedies should be applicable for private collectors conduct in collecting IRS tax debts.  This is important because the IRC civil remedy provision does not provide for statutory damages or attorney fees. 26 U.S.C. § 7433(b). Private collectors should also be liable for common law torts committed in the course of collecting tax debts, whose remedies might include punitive damages.

 

 

Top of the Order – Tax Court Designated Orders

Top of the Order is a round-up of the Tax Court’s “designated orders” from the prior week. This feature is based on the premise that if a Tax Court Judge thinks something is important, you should probably pay attention to it. We generally won’t try to play the role of pop-psychologist in determining why the particular judge may have thought the order was important enough to “designate” it, but we will give a synopsis of the points and lessons that stood out to us. For those looking to gaze deeper into the crystal ball, links to each order is provided.

This post begins a new feature which will be written in rotation by four relatively new attorneys working in the low income taxpayer area:  Samatha Galvin of Denver University Law School; Caleb Smith; William Schmidt of Kansas Legal Services; and Patrick Thomas of Notre Dame Law School.  Today’s post is written by Caleb Smith.  Caleb is currently the clinic fellow in the Federal Tax Clinic at the Legal Services Center of Harvard Law School.  He will soon be leaving Harvard to become the director of the tax clinic at the University of Minnesota.  Caleb has written guest posts before and we welcome him back to kick off this new feature of PT.  We invite reader feedback on this feature and other possible features for the site.  Keith

Designated Orders: 4/24/2017 – 4/28/2017

S-Case Bumped Up to the Big Leagues: Precedential Decision Forthcoming

Docket # 015944-16, Skaggs v. C.I.R. (Order Here)

The decision to try a case as an “S” (or “Small”) case is sometimes a tactical choice. The relaxed evidentiary rules of an S-case mean that a client with a good story may find fewer hurdles or restrictions in presenting that story. See bottom paragraphs of Procedurally Taxing Post (Here). Also, because an S-Case cannot be appealed there may be a tactical opportunity for a quick win if the Tax Court has previously ruled on the issue but the circuit court that would have jurisdiction on appeal has not. Usually (at least in my experience) the taxpayer doesn’t much care that the S designation also means the decision cannot serve as precedent.

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Judges, however, do care about precedent. Thus we have the designated order from Judge Buch removing the S-designation because the case “presents an issue of first impression.” You’ll have to hold your breath on what that novel issue is. (Actually, you don’t. If you’re short of breath you can read the decision here. Spoiler: it involves what qualifies as “income received while an inmate” for purposes of the Earned Income Credit). But the designated order on its own is worth a review for those that routinely work with cases that qualify for S-treatment (Rules found here).

A couple take-away points:

(1) You can request the S-designation be removed (or changed from regular to S) really late in the process. In fact, the rules say that the request can be made “at any time after the petition is filed and before the trial commences.” This doesn’t mean, however, that the motion will be granted that late in the game. (Keith has a story of making the request to the judge when the case was called for trial and the judge asked if there were any preliminary matters on a case he picked up earlier in the day at calendar call.  He sought to change the case to S status on the basis that it was prior to trial. As may be expected, the motion was not granted.) Which leads to the second point:

(2) The IRS may oppose the S-designation, and the taxpayer may need to show why it should be a small case. Anecdotally, I have witnessed IRS recalcitrance on S-case designation at least once in the past where it was not entirely clear to me why they cared. The order provides a helpful review of what factors are in play when weighing the decision to remove an S-case designation by citing to the 1978 Congressional Conference report on point. Addressing these factors should help a taxpayer respond to a motion either in favor of S-case designation or removal of it.

Lawyer Behaving Badly

Docket # 005880-16 L, Baity v. C.I.R. (Order Here)

For those of you that routinely monitor designated orders, this one may seem like deja-vu. And that’s because it basically is. This is merely the latest in a line of designated orders pertaining to one lawyer trying seven different cases, all of which will be lost at the summary judgment stage.

In fact, the taxpayers already HAVE lost, but the Court is simply holding back from entering the decision so that the cases remain on calendar. Why? Solely so that the lawyer can show up and explain why there should not be sanctions and a referral to the ethics committee. Ouch.

At absolute best, it appears that the lawyer has been completely invisible as an advocate in the case, failing to respond to the IRS motion for summary judgment and Tax Court order that he so respond. The court cannot determine if counsel is “unaware of or is ignoring the Court’s orders.” At worst, the Court suggests that the lawyer may have knowingly brought merit-less claims using CDP judicial review inappropriately to evade collection, giving rise to sanctions under IRC § 6673.

A couple of observations:

  • Attorneys, remember FRCP Rule 11 when deciding to take a case and prepare a petition… And relatedly:
  • Attorneys: remember the difficulties of getting out of a case when you’ve entered an appearance. When you don’t yet have all the facts and a petition deadline is looming, the better option can be limited representation through Form 2848, written about here. But, no matter what you do, at the very least RESPOND to the Tax Court (and show up).

When the Court Bolds Instructions, You Should Probably Pay Attention to Them

Docket # 021815-15, Kanofsky v. C.I.R. (Order Here)

An uncharitable recap of this order would be as follows: Court orders a pro se petitioner to respond to the IRS’s motion for summary judgment. Pro se petitioner responds, but did not follow the instructions of the Court’s order close enough. Court grants motion for summary judgment.

Harsh result?

Not quite. In fact, there appears to be quite a lot of hand-holding from the Court leading up to this outcome. First, the Court denies the IRS motion for summary judgment because the motion would not be easy for the petitioner to respond to. (More on that below). Then, when the IRS makes a second, clearer motion, the Court specifically bolds what and how it wants the petitioner to respond. The Court even includes a Q&A printout on what a motion for summary judgment is and how to respond to it. The taxpayer appears to be familiar with (or at least make frequent use of) the court. (An earlier order from the court shows that the IRS has had previous run-ins with the taxpayer, and the taxpayer also appears to refer to himself as an accomplished whistleblower.) All things considered, this appears to be an instance of the Court doing what it can to help a pro se taxpayer help themselves.

If anything a take away from this case is a parable on “the value of specificity.” Number and separate your assertions so that the Court (and the opposing party) can respond to the discrete issues.

The first substantive order of the court was a denial of the IRS motion for summary judgment, without even directing the petitioner to respond. Why? Because the IRS motion was sloppily drafted: misusing terms of art, and bringing up facts that were irrelevant to the issues at hand. All the Court wants is a motion for summary judgment with assertions that can be responded to, by number, with reason and evidence for the disagreement. The original IRS motion for summary judgment is not congenial to such a response, so the Court (looking out for the pro se petitioner), says “try again.”

When the IRS did try again (this time adequately), the table was set. If the petitioner couldn’t comply with the order to respond with specificity, summary judgment would be warranted. And thus you have the designated order above.

Reminder: Timely CDP Requests Yield Notice of Determination, Not Decision Letter

Docket # 026578-16 L, Allen v. C.I.R. (Order Here)

This designated order from Special Trial Judge Armen looks at the jurisdiction of the Tax Court to review a CDP hearing that was timely requested with Appeals, but (for unknown reasons) a decision letter rather than a notice of determination was issued. A decision letter is typically what the IRS issues when the taxpayer has an “Equivalent” hearing rather than a full-fledged CDP hearing. (More on equivalent hearings can be found here.) Unlike CDP hearings, equivalent hearings cannot be reviewed by the Tax Court (thus the jurisdictional argument).

It is unclear from the available documents both why IRS counsel believes the Tax Court doesn’t have jurisdiction and why IRS Appeals issued a decision letter in the first place. If IRS counsel’s argument is that a (form-over-substance) “notice of determination” letter is required Special Judge Armen disposes of that with a reference to Craig v. Commissioner, standing for the proposition that a decision letter will be treated as a notice of determination if it was from a CDP hearing (and not an “equivalent” hearing).

Some thoughts and crystal ball gazing: This request was sent right at the buzzer, but ultimately was timely mailed (and received). What would the IRS have to do to show that the taxpayer WANTED an equivalent hearing even though the request would qualify for a full CDP?

As mentioned above, it is not immediately clear why the IRS thinks the Tax Court lacks jurisdiction. This may be a case where the IRS has created more work for itself by trying to dispose of something quickly, rather than correctly. The taxpayer is pro se and appears to want to argue tax years other than the one for which the proposed levy relates. The court quickly disposes of its jurisdiction to hear any of those other years. The taxpayer also appears to have checked pretty much every conceivable box for the court’s jurisdiction when filing her amended petition (e.g. Notice of Deficiency, Notice of Determination Concerning Collection Action, Notice of Determination Concerning Your Request for Relief From Joint and Several Liability, and Notice of Final Determination Not To Abate Interest (see order here)). It wouldn’t surprise me to see the Form 12153 CDP Request falling into a similar pattern…

 

 

Taft v. Comm’r: Innocent Spouse Relief Generates a Refund

We welcome back frequent guest blogger Carl Smith who writes about an innocent spouse case in which the Tax Court granted relief under a subsection permitting the innocent taxpayer to obtain a return of money previously taken from her to satisfy the liability caused by her ex-spouse.  Because the IRS frequently defaults to granting relief in a way that prevents the innocent spouse from obtaining refunds, this case shows a path to a more complete victory.  Keith

A number of people have congratulated Keith for contributing to a victory last month for a taxpayer seeking a $1,500 refund under the innocent spouse provisions at section 6015See Taft v. Commissioner, T.C. Memo. 2017-66.  Keith and I had filed an amicus brief in the case on behalf of the Harvard Federal Tax Clinic.  In it, we agreed with pro bono Florida attorney Joe DiRuzzo and his firm that a regulation on which the IRS relied to deny the refund under subsection (f) (equitable relief) was invalid – though invalid for different reasons than articulated by Joe and his firm.  But, as noted in footnote 4 near the end of the opinion, Tax Court Judge Vasquez never had to discuss the regulation’s validity, since he found the refund authorized under subsection (b) (traditional relief), even though the taxpayer had also been nominally granted relief under subsection (c) (separation of liability relief), which does not allow for refunds.  So, really, Keith and I did not win this case.  Rather, the taxpayer, aided by Joe and his firm, did.

In any event, the Taft opinion provides a useful reminder of some of the rules on getting a refund under the innocent spouse provisions.  And a post on it may alert others who find themselves in this position to the regulation invalidity argument.

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The traditional way to bring a refund suit is to file an administrative claim, which, if not allowed, forms the basis of a suit for refund in district court or the Court of Federal Claims.  But, when Congress, in section 6015(e)(1)(A), also gave the Tax Court stand-alone jurisdiction to “determine the relief available to the individual under” section 6015, that included also determining whether a taxpayer was due a refund, even in the absence of predicate unpaid taxes.  Thus, Ms. Taft had her choice of bringing this refund action in any of three federal courts.

The pro se Ms. Taft first filed a Form 8857 seeking a refund under section 6015.  Note that she could not have used a Form 1040X to seek the refund, since the year involved, 2010, was one in which she had filed a joint return, and she did not want to file a joint amended return with the former husband that she had divorced in 2013.  The IRS treats a Form 8857 as a refund claim for purposes of the section 6511 statute of limitations.  Prop. Reg. § 1.6015-1(k)(4) (Nov. 19, 2015) (“Generally the filing of Form 8857, ‘Request for Innocent Spouse Relief,’ will be treated as the filing of a claim for credit or refund even if the requesting spouse does not specifically request a credit or refund.”).  Her refund request was timely because the IRS had taken about $1,500 of her reported overpayment on her 2012 return (filed in 2013) and applied it to fully pay the 2010 joint deficiency at issue.  She filed the Form 8857 less than two years after the overpayment was applied, so she qualified under the 2-years-from-payment refund statute of limitations in section 6511(a).

Since, by the time she filed the Form 8857, she was divorced, she was entitled to elect (c) (separation of liability) relief.  This led to the first complication, since relief under (b) and (f) can entitle a taxpayer to a refund, but relief under (c) cannot.  Section 6015(g)(3).  The reason why Congress made a refund under (c) unallowable is because it made relief under (c) so easy to obtain.

Relief under (c) applies to deficiencies when, at the time the Form 8857 is filed, the taxpayer is divorced, legally separated, or has been living apart from the taxpayer’s spouse for at least 12 months.  For relief under (c), a taxpayer merely elects to separate his or her liability from that of his or her spouse based on their respective contributions to causing the deficiency.  In this case, the deficiency was tax on about $4,500 of unreported dividends from stock Mr. Taft owned and that he had acquired as an employee of the supermarket chain, Publix.  Mr. Taft had worked for many years at Publix until he was fired in 2009.  Relief is available under (c) even where it would not be inequitable to hold the electing spouse liable (e.g., where he or she significantly benefited from the underpayment and would have no hardship in paying the amount).  The only way the IRS can deny relief under (c) is for it to prove (note the burden shift) that the taxpayer had actual knowledge of the item giving rise to the deficiency.  The IRS concluded that Ms. Taft did not see the statements addressed to Mr. Taft that would have shown the exact amount of dividends that were unreported, so, in the notice of determination, the IRS conceded that Ms. Taft was entitled to relief under (c) because she did not have actual knowledge.  But, that relief under (c) did absolutely nothing for Ms. Taft, since she had (involuntarily) already fully paid the deficiency and was only seeking a refund, which could not be granted under (c).

The IRS then went on to deny Ms. Taft the refund under (b).  Under (b), relief is only available in the case of deficiencies if, among other things, a taxpayer had no reason to know of the deficiency and it would be inequitable to hold the taxpayer liable for the deficiency.  The IRS argued that she should have known that there were unreported dividends from Publix because for many prior years she had signed joint returns that reported such dividends.  The IRS also argued that it would not be inequitable to hold Ms. Taft liable for the deficiency.

Relief under subsection (f) (including refunds) is available if only two conditions are met:  First, relief is “not available” under subsections (b) or (c).  Second, it would be inequitable to hold the taxpayer liable for the deficiency or underpayment.  Reg. § 1.6015-4(b) (which applies to relief under (f)), states:  “This section may not be used to circumvent the limitation of § 1.6015-3(c)(1) (i.e., no refunds under § 1.6015-3) [i.e., the regulations under subsection (c)]. Therefore, relief is not available under this section to obtain a refund of liabilities already paid, for which the requesting spouse would otherwise qualify for relief under § 1.6015-3.”  This regulation was controversial before it was enacted in 2002.  It seems to prohibit a refund under (f) – even if the taxpayer can show that it would be inequitable for the taxpayer to be held liable for the deficiency – because of qualification for nonexistent relief under (c) (which does not require proof of inequity).  The IRS argued that since relief had been “available” to Ms. Taft under (c), she was not entitled to a refund attributable to the Publix dividend underreporting deficiency.  The IRS also argued that it was not inequitable to hold Ms. Taft liable, in any event.

Judge Vasquez held that, even though Ms. Taft could not get a refund under (c), she could get a refund under (b).  Mr. Taft had started an affair, which Ms. Taft discovered in 2011.  During 2010, Mr. Taft, unbeknownst to Ms. Taft, liquidated all the family savings (including the Publix stock) and spent them on himself and his girlfriend.  Wanting to conceal his affairs (both emotional and financial) from Ms. Taft, when it came time to prepare the 2010 joint Form 1040, he did so with the long-time accountant without her present and had the return e-filed.  That return revealed all the income from liquidating the family assets, though mistakenly left off the Publix dividends.  Mr. Taft did not let Ms. Taft see a copy of the return, though he assured her that it had been properly prepared by the long-time accountant.  Given all this secretiveness, Judge Vasquez held that Ms. Taft had no reason to know of the deficiency for purposes of that requirement for (b) relief.

Given the fact that Mr. Taft had wasted the family assets in his affair and so Ms. Taft did not benefit in the slightest from the Publix dividends and Ms. Taft’s lack of knowledge of the underreporting, Judge Vasquez also held that it would have been inequitable to hold Ms. Taft liable – another condition for (b) relief.

Since the judge granted Ms. Taft a refund under (b), he no longer had to reach the issue of refunds under (f) and the possible invalidity of the regulation under (f).

The Regulation’s Possible Invalidity

Joe DiRuzzo took on the Taft case pro bono at a Tax Court calendar call.  It was his first innocent spouse case, so, knowing I was experienced in this area, he gave me a call about it later that day.  We both were worried that the judge might find that Ms. Taft should have known about the unreported Publix dividends based on the prior-year reporting of similar dividends.  In that event, Ms. Taft could not get relief under (b), and the issue of relief under (f) (and the validity of the regulation under (f) possibly prohibiting a refund) would be squarely presented.

Despite the small amount involved in the case, Joe asked the court for permission to do post-trial briefs.  And he then immediately did a FOIA request of the IRS for all comments submitted on the proposed regulations that were finalized in 2002.  Finding a few comments objecting to the proposed (f) refund regulation limitation and not feeling the IRS had adequately responded to those comments, in his brief in Taft, Joe challenged the validity of the regulation under the Administrative Procedure Act.  He made the same argument that had recently been successful in Altera Corp. v. Commissioner, 145 T.C. 91 (2015) (currently on appeal in the Ninth Circuit):  that the IRS had not sufficiently responded to the comments or provided a “reasoned explanation” for why it reached the result that it did under the standard set out in Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29 (1983).

Keith and I then got permission from the court to weigh in as amicus, arguing in our brief in Taft that the regulation was invalid under the tests of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).  We argued that the regulation added a limitation on getting a refund under (f) that was not in the statute – i.e., preventing circumvention of the no refund rule of subsection (c).  We pointed out that there could be no circumvention because a refund under (f) was not automatic, since, under (f), one had to prove inequity (something that was irrelevant under (c)).  We cited to the Tax Court’s opinions in Lantz v. Commissioner, 132 T.C. 131 (2009), revd. 607 F.3d 479 (7th Cir. 2010), and Hall v. Commissioner, 135 T.C. 374 (2010), which made similar points that the 2-year period for requesting (f) relief imposed by § 1.6015-5(b)(1) did not need to be imposed to prevent the circumvention of the 2-year periods provided by statute for (b) and (c) relief because (f) relief (by contrast) requires additional proof of a number of events that may occur years after the returns are filed.

In the end, the work that Joe DiRuzzo and his firm and that Keith and I did was irrelevant to the court’s decision to grant a refund in Taft under (b).  But, we know this situation occurs now and then.  Recently, at least one attorney with a section 6015 refund case contacted me with the same problem concerning refunds under the regulation under (f) where useless (c) relief was arguably “available”.  I have linked to the two briefs filed in the Taft case, just in case anyone might be helped in a future litigation by seeing the arguments we raised.  And readers should also know that Joe DiRuzzo has on a disk copies of all the comments made on the section 6015 regulations that were adopted in 2002, which is not only a resource for this issue under the (f) regulations, but for any other challenge to the 2002 regulations.

Finally, I would note that the IRS proposed new section 6015 regulations on November 19, 2015, that are still awaiting adoption.  The proposed regulations retain the current sentences quoted above, but add this:  “For purposes of determining whether the requesting spouse qualifies for relief under § 1.6015-3, the fact that a refund was barred by section 6015(g)(2) [res judicata] and paragraph (k)(2) of this section [no refunds under (c)] does not mean that the requesting spouse did not receive full relief.” Prop. Reg. § 1.6015-1(k)(3).  The IRS is trying to buttress its argument that even relief under (c) that is, as a practical matter, useless (because no refund is allowed under (c)), is relief that precludes a refund under (f).

 

Tax Enforcement Needs Qui Tam Lawsuits

Today’s Op-Ed guest post comes from Eric L. Young and James J. McEldrew, III, who are partners at the Philadelphia law firm McEldrew Young. The firm focuses on various types of complex litigation, including whistleblower suits.  Attorney Young represented the first whistleblower award recipient under Section 7623(b).  Attorney McEldrew has represented many clients in whistleblower claims, and previously served as President of the Philadelphia Trial Lawyers Association.  In this post, Messrs. Young and McEldrew argue that the current tax whistleblower regime is insufficient, and allowing qui tam suits under the FCA or similar statute could decrease fraud and help the nations bottom line.  Stephen

President Trump introduced his tax proposal, which includes a deep reduction in business tax rates with a 15% flat tax for all businesses, in April.  After the announcement, the Wall Street Journal reported that the plan would decrease government revenue by $288 billion in its first year.  The Trump administration can offset this decline and make these tax cuts more palatable with a stronger enforcement scheme built on qui tam lawsuits from tax whistleblowers.

A qui tam lawsuit is an enforcement action initiated by an individual on behalf of the government.  It is a shortened version of a Latin phrase that can be translated as “[he] who sues in this matter for the king as well as for himself.”  Qui tam lawsuits are the primary mechanism for enforcement of the False Claims Act, the nation’s leading tool in the fight against fraud.

However, the Federal False Claims Act specifically excludes tax claims.  It “does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.”  31 U.S.C. 3729(d).  Most states have followed the lead of the United States and barred qui tam lawsuits over tax claims.

In 2006, Congress chose to create the IRS whistleblower program to funnel tips about tax noncompliance to the IRS rather than extend the False Claims Act to tax evasion.  Since the establishment of the IRS Office of the Whistleblower, the IRS has received thousands of tips and whistleblowers have helped the IRS collect more than $3 billion in taxes.  The Dodd-Frank whistleblower programs at the SEC and CFTC were modeled after the IRS program.

However, the IRS program has fallen short of expectations to this point.  Senator Chuck Grassley, the nation’s leading advocate in Congress for whistleblowers and the author of the 2006 provisions that created the section 7623(b) program for tax noncompliance over $2 million, criticized the “trickle” of whistleblower payments in 2015.  Grassley blamed slow processing of tips, insufficient communications with whistleblowers and hyper technical arguments made to justify denying awards.

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If handled properly, whistleblowers could be a boon for the IRS.  Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said recently in a press release, “Whistleblowers with specialized experience or expertise can help us expend fewer resources in our investigations and bring enforcement actions more efficiently.”  The SEC has already paid out $150 million to 43 whistleblowers.

One problem with the IRS whistleblower program is that it relies exclusively on government enforcement and enforcement actions are expensive. Earlier this year, Aitan Goelman, the former head of enforcement at the CFTC, told Reuters that the derivatives regulator had to triage cases because of a lack of resources.  In the interview, he cited two cases that would have used up half of the 2017 operating budget for CFTC enforcement if they were taken to trial.

Like the CFTC, the IRS has had to make due with limited budget resources recently.  Since 2010, Congress has cut the IRS budget by approximately $2.4 billion.  Adjusted for inflation, that is a 17 percent decrease from its 2010 budget.  The decrease in funding has translated into 13,000 fewer employees enforcing the tax laws and providing taxpayer services.

Tax noncompliance is a serious problem and limited resources only make it worse.  Between 2008 and 2010, the estimated average annual tax gap – the difference between total taxes owed and collected – was $406 billion. The number has likely increased since then. In 2016, the total number of tax audits of individuals fell for the fifth year in a row.  The IRS’ Large Business & International (LB&I) Division is also undergoing a significant makeover.  Driven by resource constraints and personnel reductions, it is moving to issue-based examinations.

Ten years after the creation of the IRS whistleblower program, the time is ripe for improvements. In March, Senators Grassley and Ron Wyden proposed the IRS Whistleblower Improvements Act of 2017 to (1) enhance communications between the IRS and whistleblowers; and (2) provide anti-retaliation protections for tax whistleblowers.  These changes could be bolstered by allowing qui tam lawsuits.

For the past few years, New York State has led the charge against tax evasion through whistleblower usage of its qui tam statute.  New York has one of the only False Claims Act laws to allow the recovery of taxes through a qui tam lawsuit after it amended its statute in 2010 to allow them.  New York targeted large scale corporate tax schemes, requiring the defendant to have more than $1 million in income and have deprived the state of more than $350,000 in revenue.

On April 19, 2017, New York announced the largest settlement ever of a tax claim initiated by a whistleblower under its False Claims Act.  The $40 million settlement covered unpaid taxes, penalties, and interest on hundreds of millions in income which hedge fund Harbinger Capital Partners did not report to New York State between 2004 and 2009.  New York paid the tax whistleblower $8.8 million for bringing the matter to the attention of the State.

The IRS could operate more efficiently with its limited resources if it adopted the New York approach and utilized qui tam lawsuits for tax noncompliance.  The IRS is already outsourcing more services than it ever did before.  In a controversial move, the IRS hired law firm Quinn Emanuel in May 2014 to serve as a litigation consultant in an audit of Microsoft.  More recently, it is about to outsource debt collection to four private companies to recover money owed by hundreds of thousands of people.

Qui tams are already used to fight billions of dollars in Medicare and Medicaid fraud annually.  The system perfected in the fight against fraudulent claims for payment could be adapted and used to recover unpaid taxes as well.  When the United States concludes that it does not have the time or resources to expend in pursuit of tax evasion, the whistleblower and their counsel could pursue collection of the tax on behalf of the United States.

If the IRS had unlimited resources, there would be no need for qui tam lawsuits.  However, it does not.  Budgetary shortfalls demand nimble and thoughtful approaches to regulatory enforcement.  In 1986, Congress recognized that government spending was fraught with problems and strengthened the public-private partnership between the government and whistleblowers.  It must do so again now with tax evasion and whistleblowers.

The False Claims Act is America’s most important tool to fight fraud against taxpayers. Congress and more state legislatures should put its terms to use in the fight against fraud by taxpayers.

 

 

Multiple Appellate Courts Again to Weigh in on Meaning of Freytag

We welcome back frequent guest blogger, Carl Smith.  Carl writes about the ongoing litigation seeking an answer to the status of the Tax Court within our constitutional framework and other issues spun out by Freytag.  Keith 

In Freytag v. Commissioner, 501 U.S. 868 (1991), the Supreme Court held that the Appointments Clause did not prohibit the Tax Court’s Chief Judge from appointing Special Trial Judges because the Tax Court was one of the “Courts of Law” mentioned in the Clause and because the Chief Judge could act for the Tax Court.  In reaching these rulings, the Supreme Court made subsidiary holdings that have puzzled the lower courts.  Two subsidiary holdings in particular are being disputed currently in the Courts of Appeals:

First:  Did the Supreme Court’s observation that Tax Court Special Trial  Judges can enter final decisions in some cases under what is today § 7443A(b)(7) mean that, in order to be an “Officer” of the United States subject to the Appointments Clause procedures (as opposed to being a mere employee), a government worker must have the power to enter final rulings on behalf of the government?

Second:  Subsidiary to its holding that the Tax Court was one of the Courts of Law, in which, if any, Branch of the federal government did the Supreme Court place the Tax Court?

This brief post tells the reader where and when the Freytag subsidiary holdings are currently being litigated in the Courts of Appeals.

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Who is an Officer?

As to the first subsidiary issue – the finality of rulings to be an Officer – in 2000, the D.C. Circuit in Landry v. FDIC, 204 F.3d 1125, held that Freytag required that Officers have final ruling authority, and since FDIC ALJs did not have such authority, FDIC ALJs need not be appointed under the Appointments Clause.  Relying on Landry, the Tax Court in Tucker v. Commissioner, 135 T.C. 114, 165 (2010), affd. on different reasoning 676 F.3d 1129 (D.C. Cir. 2012), held that because rulings by Appeals in CDP are not “final” (according to the Tax Court), Appeals Team Managers and Settlement Officers conducting CDP hearings need not be appointed, either.  Also relying on Landry, the D.C. Circuit last year in Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277, held that because SEC ALJs do not exercise final authority (the SEC does), SEC ALJs do not need to be appointed.

I have reported on the fight over the constitutionality of the lack of appointment of SEC ALJs and its possible impact on whether ALJs borrowed by the Treasury to hold Circular 230 sanctions hearings need to be appointed, as well, in several blog posts (here, here, here, and here).  In my most recent post, I noted that the Tenth Circuit in Bandimere v. SEC, 844 F.3d 1168 (Dec. 27, 2016), rejected Landry and held that Freytag does not require that a federal worker exercise final ruling authority before having to be appointed under the Appointments Clause, and so SEC ALJs, because of their extensive judge-like powers on important topics, needed to be appointed.  I predicted that this Circuit split over SEC ALJs would shorty end up before the Supreme Court.

Well, I was at least premature.  The D.C. Circuit is trying to avoid the Circuit split.  Instead, on May 24, it will rehear Lucia en banc over the issues of whether Landry misinterpreted Freytag and whether the D.C. Circuit should overrule Landry in favor of the Bandimere holding.

As an aside for those interested in separation of powers issues, the D.C. Circuit that day will also rehear en banc the earlier panel holding that the Consumer Financial Protection Bureau is not constitutionally formed because the Bureau is headed only by a single Director.  PHH Corp. v. CFPB, 839 F.3d 1 (Oct. 11, 2016) and 2017 U.S. App. LEXIS 2733 (Feb. 16, 2017) (“If the en banc court, which has today separately ordered en banc consideration of Lucia v. SEC, 832 F.3d 277 (D.C. Cir. 2016), concludes in that case that the administrative law judge who handled that case was an inferior officer rather than an employee, what is the appropriate disposition of this case?”).

In Which Branch is the Tax Court Located?

As to the issue in Freytag about the Branch in which the Tax Court is located, this issue has come up in litigation over the validity of the President having a removal power over Tax Court judges in § 7443(f).  In Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), cert denied 135 S. Ct. 2309 (2015) (on PT last blogged here and here, the D.C. Circuit found that there was no interbranch removal separation of powers issue because the Tax Court, like the President, was located in the Executive Branch – and Freytag’s language was not to the contrary.  In Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017), the Tax Court recently rejected Kuretski’s holding that the Tax Court per Freytag was part of the Executive Branch and instead held that per Freytag the Tax Court was located somewhere else (though the Tax Court wouldn’t say exactly where).  Still, the Tax Court in Battat felt that the removal power, even though interbranch, did not run afoul of the separation of powers doctrine because the Tax Court doesn’t decide cases that could be heard by courts at common law.

In a recent post, I noted that Joe DiRuzzo and his firm had a number of cases in which the removal power issue was challenged pre-trial (as in their Battat case).  Joe had sought permission from the Tax Court for interlocutory appeals under § 7482(a)(2)(A), but the Tax Court had refused to authorize interlocutory appeals.  Well, Joe doesn’t easily take “no” for an answer.  And in light of the fact that the Tax Court said it only could decide the removal power issue under the rule of necessity – since all of its judges were inherently implicated and biased by the potential validity of the removal power – I don’t blame Joe for not taking a “no” from the Tax Court this time.  He has in fact appealed four of his firm’s cases that present the Battat issue, on an interlocutory basis, to three different Courts of Appeals:  Teffeau v. Commissioner, Tax Court Docket No. 27904-10, Fourth Cir. Docket No. 17-1463 (opening brief due May 22); Elmes v. Commissioner, Tax Court Docket No. 22003-11, Eleventh Cir. Docket No. 17-11648 (opening brief due May 22); Thompson v. Commissioner, Tax Court Docket No. 6613-13, Ninth Cir. Docket No. 17-71027 (opening brief due June 29); and Battat v. Commissioner, Tax Court Docket No. 17784-13, appealed to the Eleventh Circuit, but no docket number yet available from the Eleventh Circuit.  Interestingly, Joe had moved to invalidate the notice of deficiency in Elmes under the reasoning of Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), but that motion was denied in an order (found here:  https://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=7089658) issued on April 17, 2017 – several days after Joe appealed the case to the Eleventh Circuit.

We will keep you updated on developments in all of these Freytag-related appeals.