Does the Mailbox Rule Survive a 2011 Reg. Under Section 7502?

We welcome back frequest guest blogger Carl Smith who discusses important forthcoming arguments regarding the mailbox rule.  This seemingly simple procedural provision gives rise to its fair share of litigation because it can make or break a case.  The cases that Carl flags are worth watching for those in need of the mailbox rule to preserve the timeliness of a submission.  Keith

 Before section 7502 was added to the Internal Revenue Code in 1954, courts determined the timeliness of various filings required under the Internal Revenue Code under a common law mailbox rule under which, if there was credible extrinsic evidence of timely mailing via the U.S. mails, then a document was presumed to have been delivered (despite denials of receipt), and if the mailing was made before the filing date, the mailing effected a timely filing. Of course, the use of certified or registered mail was excellent proof of timely mailing under the mailbox rule, but testimony about timely use of regular mail could be believed by the court, as well.

Over the years, some Circuits have faced the issue of whether the enactment of the statutory timely-mailing-is-timely-filing provision of section 7502 preempted or supplemented the mailbox rule. Compare Anderson v. United States, 966 F.2d 487 (9thCir. 1992)(mailbox rule still valid); Estate of Wood v. Commissioner, 909 F.2d 1155 (8th Cir. 1990)(same); withMiller v. United States, 784 F.2d 728 (6th Cir. 1986)(mailbox rule preempted by section 7502); Deutsch v. Commissioner, 599 F.2d 44 (2d Cir. 1979)(same). See alsoSorrentino v. Internal Revenue Service, 383 F.3d 1187 (10th Cir. 2004)(carving out a middle position).

In 2011, a Treasury Regulation under section 7502 was amended to specifically provide, in effect, that the common law mailbox rule no longer operated under the Code.  Since then, a few district courts have faced the question of the validity of this regulation.  Two courts have held the regulation valid under the deference rules of Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984).  McBrady v. United States, 167 F. Supp. 3d 1012, 1017 (D. Minn. 2016);Jacob v. United States, No. 15-10895, 2016 WL 6441280 at *2 (E.D. Mich. Nov. 1, 2016).  Another district court, in an unpublished opinion in a tax refund suit, followed Andersonand applied the mailbox rule, without discussing the regulation.  Baldwin v. United States, No. 2:15-CV-06004 (C.D. Cal. 2016).

While no court of appeal has yet ruled on the validity of the regulation, on August 31, 2018, the Ninth Circuit will hear oral argument both on the government’s appeal of Baldwinand the taxpayers’ allegedly late appeal from an unrelated Tax Court Collection Due Process (CDP) case.  Both cases squarely present the issue of whether the Ninth Circuit should hold that its Andersonopinion has been superseded by a Treasury regulation abolishing the mailbox rule – a regulation that must be considered valid under Chevrondeference.

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Baldwin

Baldwin is a tax refund suit.  There, the taxpayers reported a loss on their 2007 income tax return, filed on or before the extended due date of October 15, 2008.  They wished to file an amended return for 2005, carrying back the 2007 loss to generate a refund in 2005.  Under section 6511(d), this had to be done by filing the amended return within three years of the due date of the return generating the loss – i.e., by October 15, 2011.  The taxpayers, while living in Connecticut, had properly filed their original 2005 return with the Andover Service Center, but by 2011, original returns of Connecticut residents needed to be filed at the Kansas City Service Center.  In 2011,Reg. § 301.6402-2(a)(2)provided that “a claim for credit or refund must be filed with the service center serving the internal revenue district in which the tax was paid.” That would be Andover.  But, instructions to the 2010 Form 1040X (the one used by the taxpayers) told Connecticut taxpayers to file those forms with Kansas City, where original Forms 1040 for 2010 were now being filed.  (In 2015, the regulation was amended to provide that amended returns should be filed where the forms direct, not where the tax was paid.)

The taxpayers introduced testimony by one of their employees that the employee mailed the 2005 amended return by regular mail on June 21, 2011 from a Hartford Post Office to the Andover Service Center.  But, the IRS claimed it never received the Form 1040X prior to October 15, 2011, and that the filing was in the wrong Service Center.

The district court credited the testimony of mailing, citing the Anderson Ninth Circuit opinion that allowed for the common law mailbox rule to apply.  The Baldwincourt’s opinion does not mention the August 23, 2011 amendment to the regulation under section 7502 (quoted below) that purports to preempt use of the mailbox rule.  The court went on to find that, given the conflict between the regulation under section 6402 and the form instructions, a taxpayer was then “simply required . . . [to] mail his amended return in such a way that it would, as a matter of course, be delivered to the proper service center to handle the claim within the statutory period.”  Finding that this was done here, the court held the refund claim timely filed.  The Court also observed:  “The fact that the IRS routinely forwards incorrectly addressed refund claims as a matter of course also suggests that the IRS does not consider an address problem to be fatal to a refund claim.”

Then, the Baldwin court, over the government’s objections, found that a net operating loss had been incurred in 2007 and could be carried back to 2005, resulting in a refund due the taxpayers of $167,663.  To add insult to injury, the court also held that the government’s litigating position in the case, after a certain point, was not substantially justified, so the court imposed litigation costs payable to the taxpayers under section 7430 of $25,515.

The government appealed, arguing not only that there was no valid net operating loss in 2007 to be carried back (and so the litigation costs, as well, should not have been imposed), but that the district court lacked jurisdiction because the refund claim was not filed within the time set forth in section 6511(d).

Waltner

The Waltners are a couple who have been to the Tax Court may times, and even have been sanctioned under section 6673for making frivolous arguments (even their attorney has sometimes been sanctioned thereunder).  Their Tax Court case at Docket No. 8726-11L involved an appeal by them of multiple CDP notices of determination involving multiple years of income tax and frivolous return penalties under section 6702.  In an unpublished orderon April 21, 2015, Judge Foley granted the IRS’ motion for summary judgment with respect to some of the notices of determination, but not as to all notices.  The parties later reached a settlement on the other notices, which was embodied in a stipulated decision entered by the court on January 21, 2016.  Under section 7483, this started a 90-day window in which the Waltners had to file any notice of appeal.

An August 9, 2016 unpublished order of then-Chief Judge Marvel describes what happened next:

On August 4, 2016, petitioners electronically filed a Statement Letter to the Clerk of the U.S. Tax Court (With Ex.).  Among other things, in that Statement petitioners assert that: (1) on April 15, 2016, petitioners sent by regular U.S. mail to the Tax Court a notice of appeal in this case to the U.S. Court of Appeals for the Ninth Circuit; and (2) that notice of appeal (a) either may have been lost by the U.S. Postal Service, or (b) may have been lost after delivery to the Tax Court.  Attached to the Declaration of Sarah V. Waltner as Exhibit A, is a copy of Petitioners’ Notice of Appeal to the Court of Appeals for the Ninth Circuit.  Because this case is closed, petitioners’ Statement Letter to the Clerk of the U.S. Tax Court (With Ex.) may not be filed.

On August 15, 2016, the Waltners then admittedly filed a proper notice of appeal with the Tax Court.   But, the Ninth Circuit questioned whether the appeal was timely and sought briefing on this issue.  The DOJ argued that the appellate court lacked jurisdiction because the notice of appeal was untimely.

DOJ Argument

 Here are the links to the Baldwin Ninth Circuit appellant’s brief, appellees’ brief, and the reply brief.  Also, here are the links to the Waltner Ninth Circuit appellants’ brief, appellee’s brief, and the reply brief in the Ninth Circuit.  Although the two cases are not consolidated with each other, they have been scheduled to be argued one after the other before the Ninth Circuit in Pasadena on August 31, 2018.  And the DOJ briefs are clearly coordinated in their argument.

The DOJ arguments are predicated on the Treasury’s section 7502 regulation, Chevron, and Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967 (2005).

As amended by 76 Fed. Reg. 52561-01 (Aug. 23, 2011), Reg. § 301.7502-1(e)(2)(i)provides, in relevant part:

Other than direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a duly designated [private delivery service] . . . are the exclusive means to establish prima facie evidence of delivery of a document to the agency, officer, or office with which the document is required to be filed.  No other evidence of a postmark or of mailing will be prima facie evidence of delivery or raise a presumption that the document was delivered.

The DOJ argues that section 7502, when enacted (and still today) is ambiguous as to whether it preempts the common law mailbox rule.  The DOJ contends that there is thus a gap to fill, which, under Chevron, can be filled by a reasonable regulation. The Circuit split over whether the mailbox rule has been preempted is evidence of two reasonable interpretations of section 7502.  The regulation is valid because it chooses one of those two reasonable interpretations.

In Brand X, the Supreme Court held that Chevron deference must even apply to a regulation that takes a position that has been rejected by a court, so long as the court opinion did not state that it found the statute unambiguous.  If the statute was unambiguous, then there can be no gap under ChevronStep One to fill.  PT readers may remember the extensive discussion of Brand X in the section 6501(e) Treasury Regulation case of United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012).

The DOJ argues that Anderson did not describe its interpretation of section 7502 to still allow the mailbox rule as one required by an unambiguous statute.  Accordingly, under Brand X, the 2011 amendment to the section 7502 regulation is entitled to Chevron deference, in spite of Anderson.

We’ll see in Baldwin and Waltner if the government can effectively overrule Anderson by its regulation.

Observations

I will not needlessly extend this post by explaining my beef with the DOJ’s other arguments that compliance with the filing deadlines for refund claims under section 6511 and for notices of appeal under section 7483 are “jurisdictional” conditions of the courts.  I don’t think that either deadline is jurisdictional under current Supreme Court case law that makes filing deadlines now only rarely jurisdictional.  And, sadly, none of the taxpayers in these two cases made an argument that the filing deadlines are not jurisdictional – probably because it makes no difference in the outcome of their cases whether the filing deadlines are jurisdictional or not.  The taxpayers are not arguing for equitable tolling, just the mailbox rule (which is not an equitable doctrine that would be precluded by a jurisdictional deadline).  I only regret that I did not learn of either of these two cases earlier, when I could have filed amicus briefs raising the issue of whether the two filings deadlines are really jurisdictional.  At least the courts, then, might have noted that it is a debatable question whether these two filing deadlines are jurisdictional.

Supreme Court Holds that SEC ALJs are “Officers” Who Need Constitutional Appointment

Frequent guest blogger Carlton Smith brings us an important development in Appointments Clause litigation that could have implications for employees of the IRS Office of Appeals. Christine

In Lucia v. Securities and Exchange Commission (June 21, 2018), in a 6-3 ruling, the Supreme Court held that Securities and Exchange Commission (SEC) Administrative Law Judges (ALJs) are “Officers of the United States” under the Constitution’s Appointments Clause (Art. II, Sec. 2, cl. 2), so need to be properly appointed by the SEC, not merely hired by SEC staff. In an opinion authored by Justice Kagan that was joined by all five Conservative Justices on the Court, the Court said that its holding was simply one required as a result of the holding in Freytag v. Commissioner, 561 U.S. 868 (1991), that Tax Court Special Trial Judges (STJs) are constitutional officers who need to be appointed pursuant to the Appointments Clause.

Since September 2015, I have been doing posts on the litigation leading up to the Lucia ruling (in chronological order, here, here, here, here, here, here, and here). In those posts, I have pointed out that the litigation leading to Lucia might have a significant impact on the ALJs that the Treasury uses to conduct Circular 230 violation hearings. Although I am not sure, I suspect that only Treasury staff, and not the Secretary of the Treasury (or any other Secretary) has hired those ALJs and that none has been appointed. I also noted that a ruling holding that SEC ALJs need to be appointed may cause the revisiting of the Tax Court’s holding in Tucker v. Commissioner, 135 T.C. 114 (2010), affd. on different reasoning, 676 F.3d 1129 (D.C. Cir. 2012), that Appeals Settlement Officers and their Team Managers conducting Collection Due Process (CDP) hearings need not be appointed.

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In Freytag, the Court held that STJs are “Officers of the United States” who need to be appointed and that the Tax Court Chief Judge was one of “the Courts of Law” to which Congress could delegate this power, since the STJs were “inferior Officers” under the Clause. In making its ruling in Freytag, the Court noted numerous powers of STJs that were similar to those of district court judges (who everyone conceded were officers under the Clause).

However, the Court created confusion in Freytag by also noting that Tax Court judges could enter final decisions in certain Tax Court cases, without review by a regular Tax Court judge. See section 7443A(c). This led to a split by lower courts as to whether SEC ALJs had to be appointed, since the SEC ALJs lacked power to make final decisions. An SEC ALJ’s ruling becomes final only if the SEC declines to hear an appeal from the ruling. In the Lucia case, the D.C. Circuit had followed its ruling in Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), concluding that Freytag held that STJs needed to be appointed only because they entered final decisions in some cases. In Lucia, the Supreme Court (in footnote 4) called the finality mention in Freytag an “alternative holding”, with the primary holding being that STJs needed to be appointed based on their other powers. The Lucia footnote states that Freytag’s “primary analysis explicitly rejects JUSTICE SOTOMAYOR’s theory that final decision making authority is a sine qua non of officer status.” Thus, the Lucia Court rejected Landry’s interpretation of Freytag.

This point is important, since in its opinion in Tucker, the Tax Court held that Appeals Settlement Officers and their Team Managers conducting CDP hearings need not be appointed because they do not (in the Tax Court’s view) have the power to enter final decisions, as required by Landry’s interpretation of the holding of Freytag. The D.C. Circuit in Tucker, however, disagreed with the Tax Court and stated that the IRS personnel had effective final ruling authority in CDP. Instead, the D.C. Circuit in Tucker held that the Appeals personnel need not be appointed because the collection matters they ruled on were not important enough to need a constitutional officer and the tax liability determinations that they made were so restricted by Counsel’s supervisory authority that little discretion was exercised by Appeals personnel in CDP.

In Buckley v. Valeo, 424 U.S. 1 (1976) (per curiam) (involving the Federal Election Commission), the Supreme Court had held that an “Officer” under the Appointments Clause is one who exercises “significant authority” on behalf of the United States. The Lucia Court acknowledged that the “significant authority” standard provides little concrete guidance for how to decide other cases, and the Court did not want to provide more general guidance in Lucia as to what “significant authority” encompassed.

Instead, the Court in Lucia held that the SEC ALJs were so like Tax Court STJs that the holding of Freytag inevitably extended to make SEC ALJs Officers under the Clause. The Court in Lucia noted four powers of the SEC ALJs that were similar to those of Tax Court STJs: (1) taking testimony, (2) conducting trials, (3) ruling on the admissibility of evidence, and (4) having the power to enforce compliance with discovery orders. The Court held that these four powers alone were enough to make the ALJs constitutional officers, without deciding whether each of those four powers was necessary to a determination of officer status. The Court acknowledged that there were some differences between the two types of adjudicators (e.g., the STJs can enforce their discovery orders by contempt, whereas the ALJs can enforce those orders only by lesser means – such as barring the person from the hearing), but did not find these differences of constitutional significance.

This led to the question of remedy: The SEC has since appointed the various ALJs (including the one who decided Lucia’s case) and has purported to ratify all prior rulings entered by ALJs before they were appointed. But, the Court held that a person who brings a successful Appointments Clause challenge is entitled to a remedy, which, it in the past, the Court had held was a trial before an appointed officer. The Lucia Court wanted to make the remedy here one that encourages the brining of successful Appointments Clause challenges. Accordingly, the Court expanded on its prior case law and ordered a new hearing by either a now-appointed ALJ or the SEC itself, but not by the ALJ who originally decided Lucia’s case. The Court thought that the ALJ who decided Lucia’s case, whose underlying rulings had never yet been even criticized in a judicial opinion, would be too likely to simply reissue his opinion unchanged.

Justices Thomas and Gorsuch had joined the majority opinion, but Justice Thomas wrote a concurrence, joined in by Justice Gorsuch, in which he rejected Buckley’s significant authority test. He would have a less restrictive test: Anyone who held a continuing position in the government should be an officer, since that would have been the understanding of the drafters of the Constitution in 1787 as to what they meant by “Officer”.

Justice Breyer wrote a partially dissenting opinion in which he refused to decide the constitutional Appointment Clause issue. He thought that the language of the Administrative Procedure Act that authorized the SEC to appoint ALJs was simply enough to decide the case and that the SEC had not complied with its statutory mandate to appoint, rather than have the staff hire, the ALJs. Justice Breyer felt he could not decide the Appointments Clause issue without also deciding whether, in the event appointment was required, there would be another constitutional issue created concerning the limited for cause removal powers of those ALJs that the SEC possessed. The SG, when he changed the government’s Lucia position to argue that the SEC ALJs need to be appointed, had asked the Court to also decide whether a removal power issue was created if the ALJs needed appointment. The Court explicitly declined to write on removal power issues that might have been created by its ruling. The Court desired that lower courts consider any removal power issue before the Supreme Court is asked to consider it.

It is not clear to me that the Appointments Clause powers need to mesh constitutionally with removal power issues. However, in Kuretski v. Commissioner, 755 F.3d 529 (D.C. Cir. 2014), as counsel for the taxpayers, I had argued that another holding of Freytag – that the Tax Court exercised a portion of the Judicial Power of the United States – means that a for cause removal power applicable to regular Tax Court judges at section 7443(f) violates the separation of powers doctrine and so should be eliminated. There is clearly a reason for harmonizing the appointment and removal power questions, but it is not a foregone conclusion that anyone who exercises a portion of the Judicial Power of the United States, and so who needs to be appointed, cannot be removed by the President under a for cause removal power.

Justice Breyer also disagreed with the majority’s holding that the remedy should be a rehearing by an appointed ALJ or the SEC, but not by the ALJ who ruled after the original hearing. He thought that the remedy chosen by the Court was excessive. A rehearing before any appointed officer, he thought, would be enough of a remedy.

Justice Sotomayor wrote a dissent in which she was joined by Justice Ginsburg. Those two Justices also joined that part of Justice Breyer’s dissent that descried the remedy as excessive. But, Justice Sotomayor, in her dissent, also argued that the ability to render a final decision was a sine qua non of constitutional officer status under her reading of Freytag (which matched that of the D.C. Circuit both in Landry and Lucia). She wrote:

In Freytag, the Court suggested that the Tax Court’s special trial judges (STJs) acted as constitutional officers even in cases where they could not enter final, binding decisions. In such cases, the Court noted, the STJs pre­sided over adversarial proceedings in which they exercised “significant discretion” with respect to “important func­tion,” such as ruling on the admissibility of evidence and hearing and examining witnesses. 501 U. S., at 881–882. That part of the opinion, however, was unnecessary to the result. The Court went on to conclude that even if the STJs’ duties in such cases were “not as significant as [the Court] found them to be,” its conclusion “would be un­changed.” Id., at 882. The Court noted that STJs could enter final decisions in certain types of cases, and that the Government had conceded that the STJs acted as officers with respect to those proceedings. Ibid. Because STJs could not be “officers for purposes of some of their duties . . . , but mere employees with respect to other[s],the Court held they were officers in all respects. Ibid. Freytag is, therefore, consistent with a rule that a prerequisite to officer status is the authority, in at least some instances, to issue final decisions that bind the Government or third parties.

As noted above, though, the Lucia majority rejected this interpretation of Freytag.

As to the direct impact of Lucia on pending Tax Court cases, in my last post on Lucia on January 19, 2018, I noted that Florida attorney Joe DiRuzzo is again raising the Tucker issue (i.e., whether CDP Appeals personnel need to be appointed) in multiple Tax Court cases that would be appealable to other Circuits. Rulings on this issue have in essence been postponed (though not officially) pending the ruling of the Supreme Court in Lucia. Those rulings are now ready for the Tax Court to make.

I don’t know if there are any Circular 230 adjudications going on, so I can’t tell whether or how the Lucia opinion will affect current Circular 230 matters. I am not sure that future Circular 230 sanctions litigants will want to raise issues concerning the ALJs and Appointments Clause. And, of course, it is too soon for the Treasury to have decided whether to change its procedures and appoint its ALJs.

Does IRS Bear the Responsibility to Affirmatively Obtain a Ruling from the Bankruptcy Court before Pursuing Collection after Discharge?

We welcome back guest blogger Marilyn Ames. Marilyn is retired from Chief Counsel’s office and works with Les, Steve and me on updates to the treatise “IRS Practice and Procedure” which Les edits. Since her last guest post, she has moved from Alaska back to Texas where she lives much nearer to her grandchildren. She writes today about a recent First Circuit opinion that imposes a liability on the IRS for failing to prove that a debt was excepted from discharge. The failure of proof resulted from an unusual situation; however, the important issue in the case focuses on the responsibility of the IRS at the conclusion of a bankruptcy case. I have written about the fraud exception to discharge on several occasions. Here is a sample post on the topic if you want background on the underlying discharge issue. Keith

Both the Internal Revenue Code and the Bankruptcy Code are statutory schemes of almost mind-numbing complexity, and when the two collide, the results are generally ugly. Such was the case in Internal Revenue Service v. Murphy, a case of first impression from the First Circuit issued on June 7, 2018, which can be found here. The majority opinion, as noted by the dissent, has the result of “hiding an elephant in a mouse hole” and could significantly change the ability of the Internal Revenue Service to collect debts that are otherwise not discharged in a bankruptcy case.

The hiding of the elephant began in 2005, when Mr. Murphy filed a Chapter 7 bankruptcy, listing debts of $601,861.61. Of that amount, $546,161.61 was owed to the Internal Revenue Service for unpaid taxes for a number of years, and to the State of Maine for one year. The bankruptcy court entered Mr. Murphy’s discharge in February of 2006, which provided that the “discharge prohibits any attempt to collect from the debtor a debt that has been discharged.” For those without either personal or professional experience with a Chapter 7 discharge order, it does not list the specific debts that are or are not discharged. The Internal Revenue Service was given notice of the entry of the discharge.

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For three years after the entry of the discharge, the Internal Revenue Service informed Mr. Murphy that it believed his tax debts were not discharged under the provisions of Bankruptcy Code § 523(a)(1)(C), as Mr. Murphy had either filed fraudulent returns or had made some other “attempt to evade or defeat [these] taxes in any manner.” In 2009, the Internal Revenue Service levied on property belonging to Mr. Murphy, which caused him to file suit against the Internal Revenue Service in the bankruptcy court, seeking a declaration that the tax liability had been discharged. Although the IRS continued to take the position that the taxes were nondischargeable as they were due to Mr. Murphy’s fraudulent actions, the AUSA did little to present evidence to show this when Mr. Murphy filed a motion for summary judgment, and the bankruptcy court granted the summary judgment motion, holding that the taxes were discharged. The government did not appeal. The AUSA was subsequently diagnosed with a form of dementia, and had probably been experiencing it when he defended the Internal Revenue Service in the dischargeability case.

Mr. Murphy then filed a complaint under Internal Revenue Code § 7433(e), seeking damages for willful violation of the injunction created by the discharge in the bankruptcy case. After some initial procedural skirmishing over the effects of the earlier discharge litigation and the AUSA’s illness, the Internal Revenue Service agreed that the summary judgment ruling determined that the taxes were discharged, and to the amount of the damages Mr. Murphy had suffered. The only issue remaining was the question of whether the Internal Revenue Service had willfully violated the discharge injunction such that Mr. Murphy was entitled to monetary damages under Section 7433(e).

The bankruptcy court held that Mr. Murphy was entitled to damages, as the term “willfully violates” means that “when, with knowledge of the discharge, [a creditor] intends to take an action, and that action is determined to be an attempt to collect a discharged debt.” The bankruptcy court’s decision was affirmed by the district court, and the Court of Appeals also found in favor of Mr. Murphy, agreeing that the Internal Revenue Service only had to intend to take the actions resulting in collection of the discharged taxes. A good faith belief that the taxes were not dischargeable was not a defense. The Court of Appeals also rejected the IRS argument that because Section 7433(e) is a waiver of sovereign immunity, it must be construed narrowly by permitting a good faith defense. The end result of the Court of Appeals’ opinion is that, for all practical purposes, the Internal Revenue Service must litigate dischargeability before it begins collection of taxes it reasonably believes have not been discharged, or risk having monetary damages imposed against it. This requirement of pre-collection litigation, not contained in the Bankruptcy Code, is the elephant the dissent believes the majority is hiding in a mouse hole.

As noted by Judge Lynch in the dissenting opinion, the majority got this one wrong. In reaching its decision, the majority opinion creates a standard of near strict liability by stripping the government of a reasonable good faith defense, rather than reading this waiver of sovereign immunity narrowly and construing ambiguities in favor of the sovereign, as generally required. Judge Lynch notes that the majority picks and chooses among circuit and lower court opinions in reaching its definition of willful violation, ignoring a Supreme Court opinion issued in Kawaauha v. Geiger, 523 US 57 (1998), a case decided just months before Section 7433(e) was passed. (This is an interesting omission by the majority, given that retired Supreme Court Justice David Souter was one of the two judges signing on the majority opinion.) In Kawaauhau, which interpreted the phrase “willful injury” in connection with another provision of Bankruptcy Code § 523, the Supreme Court held that the word “willful” modified “injury” and required a deliberate or intentional injury, rather than merely a deliberate or intentional act that leads to injury. The same rationale would appear to apply to Internal Revenue Code § 7433(e), leading to the dissent’s conclusion that a “willful violation” requires a deliberate or intentional violation, not just a deliberate or intentional act. If the IRS acts reasonably and in good faith, the violation cannot be willful. Judge Lynch notes that this conclusion is consistent with other Supreme Court decisions construing the phrase “willful violation.”

But Judge Lynch’s most convincing argument is that the majority’s opinion changes the tax collection scheme without an express mandate from Congress. Under the majority’s opinion, the Internal Revenue Service must first go to court and prove the taxes are still owed before instituting any collection action after a discharge, even though not expressly required by Bankruptcy Code § 523. The treatment of tax liabilities under Section 523(a)(1)(C) should be compared to the debts listed in Bankruptcy Code § 523(c)(1). For these types of debts, Congress has provided that they are automatically deemed to be included in the discharge injunction unless the creditor obtains a judicial determination that the debt is not discharged. When Congress wanted a creditor to sue first, then collect, it knew how to provide for it. It did not hide the requirement in a statute allowing for damages that is not even in the Bankruptcy Code, but in a provision of the Internal Revenue Code. An elephant in a mouse hole, indeed.

 

 

Requesting Innocent Spouse Relief: How long is long enough to request relief? Not two years. Another reflection on the NTA’s recent Innocent Spouse blog

We welcome guest bloggers Robert Horwtiz, Hochman Salkin Rettig Toscher & Perez, P.C., and Carolyn Lee, Morgan, Lewis & Bockius LLP. Both Robert and Carolyn practice tax controversy and litigation in California. They each have extensive experience with section 6015 innocent spouse matters – many involving no- or low-income taxpayers. In addition, they each have a history of pro bono service including volunteering with state and county Bars and low-income tax clinics, and assisting taxpayers during the Tax Court Calendar Call. The comments and recommendations in this post are Robert’s and Carolyn’s personally, and do not represent the views of their firms or any Bar Association. 

Robert and Carolyn reached out to us after the recent post providing statistics on the timing of innocent spouse relief. They are promoting a legislative change to the innocent spouse provisions that eliminates the time limitation for requesting relief. Their proposal, as explained in detail in the post and attachment below, would eliminate a restriction on requesting relief that does not follow the spirit of the statute. In a recent post regarding time frames and notice, Carl Smith discussed Mannella v. Commissioner, 132 T.C. 196, 200 (2009), rev’d and remanded on other issue, 631 F.3d 115 (3d Cir. 2011) as well as the regulation comments that he and I and others made in response to the proposed “new” regulations for 6015 resulting from the IRS pull back of the two year rule formerly applicable by regulation to section 6015(f). Robert and Carolyn take a broader view of the problem and seek legislation to eliminate the time period entirely. Doing so lines up with the goal of innocent spouse relief. For a host of reasons, discussed below, discussed in our regulation comments, discussed by the NTA and highlighted by cases like Mannella, individuals caught up in domestic break ups need time to sort through the resulting problems in their lives. I have not met clients who postponed dealing with their tax issue out of a desire to inconvenience the IRS. Any delay usually results from factors outside the control of the applicant or factors related to the necessity to secure basic human needs such as safety, shelter, food, and employment (recall Maslow’s hierarchy of needs) before getting to the tax problem. By thinking big to address the problem, Robert and Carolyn may convince Congress to set the statute right. Keith  

Recently Procedurally Taxing commented upon the May 23, 2018 National Taxpayer Advocate (NTA) blog discussing current trends in innocent spouse (§6015) determinations of relief. Another feature of the NTA blog was her observation about the effect on application volume of the IRS’s 2011 decision to accept requests for §6015(f) equitable relief through the end of the §6502 statutory collection period – typically at least ten years. The request period for equitable relief is significantly longer than the statutory two-year request period for the other two avenues to §6015 relief, §6015(b) (traditional relief) and §6015(c) (allocated relief). We believe this is a mistake. The §6015 request period should be the same for qualifying requesting spouses regardless of the avenue to relief, and it should extend through the end of the §6502 collection period.

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The NTA noted that extending the equitable relief period from two years to at least ten years did not result in a tsunami of requests. Both the NTA and Procedurally Taxing blogs describe the judicial and legislative route to the longer period to request equitable relief. They observed that §6015(b) and §6015(c) were enacted in 1998 with a two-year request period. Also relevant to the discussion is that the earliest statutory versions of relief from joint and several liability for innocent spouses did not include a two-year limitation on the request period. Inexplicably, the two-year period was included with other, more beneficially expansive revisions to innocent spouse relief with the enactment of §6015 in 1998. The legislative history is silent about the selective limitation. Legend has it there was a concern the Agency would be overwhelmed with requests if the application period were longer. Thanks to the NTA’s research, we know this concern was unfounded.

We see no valid reason to maintain the two-year statutory period to request traditional or allocated relief. A person claiming relief as an innocent spouse under §6015(b), §6015(c) or §6015(f) should be allowed to elect relief at any time during which the IRS has authority to collect the tax underpayment. A truncated period to request relief under two of the three §6015 subsections is at odds with the character of the statute, which is to make the benefits of §6015 relief available to taxpayers who qualify on the merits of their facts and circumstances. A longer statute of limitations acknowledges the complexities of marital relations. Congress enacted three distinct legal remedial forms of §6015 relief. The two-year period to request the benefits of traditional or allocated relief effectively nullifies two §6015 subsections for many requesting spouses.

Last May, as part of the 2018 Washington DC delegation sponsored by the Taxation Section of the California Lawyers Association and the Taxation Committee of the Los Angeles County Bar, we spoke with representatives of the IRS, Treasury, and National Taxpayer Advocate, as well as House and Senate Tax committee staff members about such a change. We advocated for an amendment to §6015 to extend the period of time to request relief for §6015(b) and §6015(c) through the end of the §6502 collection period, as under §6015(f). In a happy coincidence, the Taxpayer First Act, HR 5444, had recently passed the House of Representatives without opposition and was pending in the Senate. The Taxpayer First Act is an ideal legislative vehicle to effect the proposed amendment, including as it does §11303 to codify the extended §6015(f) period to request relief through the end of the §6502 collection period. It is a noncontroversial – dare we say nonpartisan – matter to change §11303 to codify the same extended request period for all three avenues to relief.

Enactment of this simple statutory amendment will bring consistency and increased fairness relative to the statute’s first gate; i.e., the period for requesting relief. The amendment will make relief pursuant to §6015(b) and §6015(c) available to the taxpayers whom these separate forms of relief were intended to benefit, and whose requests are rejected because the two-year application period closed and they cannot qualify for equitable relief pursuant to §6015(f). The change will not increase stress on the IRS or the Tax Court, which have been administering and deciding §6015 matters for almost two decades. Any concern about an overwhelming volume of applications for relief may be assuaged based on data the NTA analyzed. (Please note that the NTA has not commented on the proposal to extend the statutory period of time to request relief from joint and several liability pursuant to §6015(b) and §6015(c).) All the other existing, rigorous requirements to qualify for relief remain the same. This proposal is not a liability give-away. It is no easy task to obtain relief.

The longer request period will make a material difference for requesting spouses who merit relief. Some clients may make a dash for a low-income tax clinic. For those clients, one might conclude the §6015(f) request period could have remained two years. No one is suggesting the NTA’s findings support that argument. However, in our experience, the current two-year request period is too short for most taxpayers dealing with unexpected erroneous tax items, typically during times of family, financial and emotional distress. We find that for every client who acts quickly on IRS collection correspondence there are many dozens more who cannot bring themselves to even open the envelope. Or the second envelope. Paralyzing panic sets in.

The two-year period for seeking relief under §6015(b) and §6015(c) can result in unduly harsh consequences for taxpayers too late to satisfy the statutory two-year period. This is especially true where the spouses do not divorce or become legally separated until after the two-year period, or begin living in separate households more than one year after collection activity begins. In addition, pro se taxpayers – the vast majority of taxpayers who might qualify for relief – likely find the two-year statute a trap for the unknowing. The unintentional adverse collateral consequences of the truncated statute of limitations to request relief pursuant to §6015(b) and §6015(c) have emerged as the law has been applied.

It is important to highlight that §6015(f) equitable relief is not a safety net for requesting spouses after the §6015(b) and §6015(c) gate shuts. Like §6015(b) and §6015(c), equitable relief under §6015(f) serves its own legal purpose, with its own raft of eligibility factors to consider. As applied, §6015(f) is not an avenue to liberally granted relief for requesting spouses who could qualify for traditional or allocated relief but for missing the two-year request period. In fact, §6015(f) expressly is intended to apply when the requesting spouse fails to qualify based on the merits of §6015(b) and §6015(c). For example, requesting spouses may fail to qualify for equitable relief because the requesting spouse has financial resources, which is a factor weighing against equitable relief. Or, the requesting spouse may satisfy the §6015(c) “actual” knowledge test regarding the erroneous item, but fall short on the highly subjective and seemingly all-embracing equitable test for “reason to know” of the erroneous item. There are many circumstances when §6015(f) would not offer a safe harbor to requesting spouses who would qualify for traditional or allocated relief if only they had applied in time.

In addition, §6015(f) as applied by the IRS often fails to serve requesting spouses. The Service simply gets the equitable analysis wrong. As recent examples, two applications for relief were rejected by the IRS Innocent Spouse unit because the requesting spouses failed to establish they suffered abuse. There is no basis in any of the guidance provided by the IRS or the courts to apply a requirement of abuse in order to obtain equitable relief. To the contrary, Revenue Procedure 2013-34 describing factors to consider when determining eligibility for §6015(f) relief expressly expanded the factual parameters pertaining to physical and emotional abuse to make relief more available in such circumstances. Unrepresented taxpayers confronted with incorrect administrative rejections may not have the wherewithal to rebut these determinations, including undertaking the next – potentially remedial but perhaps overwhelming – step of petitioning for Tax Court review.

As another collateral consequence, if the government brings an action to reduce to judgement joint liabilities against a taxpayer who may be eligible for innocent spouse relief after the two-year period for requesting relief, the taxpayer would be unable to defend based upon being an innocent spouse.

We could go on, and did go on during the DC Delegation meetings. We continue to monitor the Taxpayer First Act, with the hope that the legislation will be amended to extend the period of time to request §6015 relief for each of the three avenues to relief to be coterminous with the period of time to collect the tax. Doing so is only fair, and better serves Congress’s wish to put innocent spouses first, thus permitting the IRS to collect tax on erroneous items from the taxpayer responsible for them.

 

 

 

 

White House Oversight of Tax Regulations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Observations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Graev Updates

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

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

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

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

Final Clean Up

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

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

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

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

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

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

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

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

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

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

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Berkun Facts

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

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

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

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

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

Tax Court Proceedings

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

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

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

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

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

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

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

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

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

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

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

Appellate Proceedings 

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

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

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

Observation

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