Almost Immediate Impact of Chai

On March 21, Steve blogged about the important decision of the 2nd Circuit in  Chai v. Commissioner on March 20, holding that the IRS most show, as required by IRC 6721(b), that the immediate manager approved the imposition of a penalty.  In a designated order enter on March 22, 2017, in Henderson v. Commissioner, Docket No. 14187-16L, Judge Cohen cites to the Chai decision in a ruling on the motion for summary judgment filed by the IRS in this Collection Due Process Case.  Like the order in Vigon v. Commissioner issued by Judge Gustafson which we blogged about here, Judge Cohen requires the IRS to address the requirement of IRC 6751(b).  Specifically, she orders “on or before April 10, 2017, respondent may supplement the motion for summary judgment with any additional affidavit or argument concerning compliance with the requirements of law and administrative procedures supporting the notice of determination in this case, specifically with respect to compliance with Internal Revenue Code Section 6751(b)(1)….”

The fact that she added the requirement to show appropriate approval and that she made this order a designated order, signals what may be an important shift on the Court regarding the practice it will now take regarding the IRS obligation to prove the appropriate approval of penalties.  We will continue to monitor this issue because it suggests a potentially huge shift in practice.  Kudos again to Frank Agostino and the attorneys in his office for identifying and pursuing the argument in a statute that lay forgotten for almost 20 years.

For those of you not familiar with designated orders, the Tax Court has a wonderful feature available on the front page of its web site in which it posts the orders entered each day and provides a feature making the orders are searchable.  The searchable feature of the orders makes the Tax Court’s treatment of them vastly superior to PACER.  The feature became available in 2011 limiting the lookback period but that limitation grows less important with each passing day.  As the orders get posted, the judge issuing the order has the opportunity to “designate” the order.  If the judge designates the order, the judge is signaling that the order is somewhat special – at least in the view of that judge.  Keep in mind that orders do not go through the review in the Chief Judge’s office prior to issuance as is required with opinions.  Matters decided by orders also do not have precedential value as we have discussed before.  Yet, a not insignificant percentage of Tax Court cases get resolved through dispositive orders rather than opinions.  Designated orders allow the judge to alert practitioners that something about the order deserves attention; however, the designation of the order does not require, or really provide for, the judge to state explicitly why the judge has labeled it as a designated order.  The reader must surmise from context why the judge has chosen to designate the order.  On any given day the Tax Court may post five orders and maybe one order will be designated.

In the case of the order in the Henderson I surmise that Judge Cohen designated it because of the citation to Chai and the requirement that the IRS put on its proof about the authorization of the penalty.  This blog has regularly mined orders, and especially designated orders, as a source of information about Tax Court procedure that often goes unnoticed.  As mentioned before, Carl Smith has generally served as our eyes and ears on the Court’s orders.  We have decided to begin regularly posting about designated orders from the prior week in order to alert readers to those orders the judges on the Court deem most important.

The Henderson order, citing to Chai in a case which appears appealable to the 9th Circuit and not the 2nd, suggests a new day has dawned for the IRS in meeting its obligation when it asserts a penalty.  We will be watching closely for other orders and opinions.

A Crack in the Glass Ceiling – Victory in a Financial Disability Case

We have reported before here, here, here and here about the IRS’ unbroken string of victories in cases involving a claim of financial disability.  The first two posts listed in this string, a two-part series by Carl Smith, has a particularly important connection to the opinion reported in this post. While taxpayers have obtained relief from the statutory period for filing a refund claim in administrative decisions by the IRS, no one had won a 6511(h) case in court – until now and this victory is one that opens the door of the court but does not grant relief.  In Hoff Stauffer, Administrator of the Estate of Carlton Stauffer v. IRS, a magistrate judge in the District of Massachusetts has recommended that the court has jurisdiction to hear a case involving 6511(h) in the face of a motion to dismiss for lack of jurisdiction.

Because this is the recommendation of a magistrate judge, the district court must accept it before it becomes final; however, the decision here coupled with the order entered by Judge Gustafson in another Boston case, Kurko v. Commissioner, suggests that perhaps a new day is dawning for those seeking relief for financial disability.  Because the IRS has only issued guidance in the form of an onerous revenue procedure and has never allowed public comment on the now 20-year old provision of the law and because most of the cases have been brought pro se, it has taken a long time to crack the ceiling and take steps toward meaningful administration of this provision.

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Carlton Stauffer passed away in 2012 at the age of 90.  His son, Hoff, discovered that the father had not filed a return since 2006 and proceeded to prepare the outstanding returns as was his fiduciary duty.  In 2013, Hoff Stauffer filed several back returns for his father’s estate and requested refund of an overpayment exceeding $100,000 for 2006.  The IRS disallowed the claim as untimely and declined to hold open the statute using 6511(h).  As a part of the process of appealing the denial of the claim, Hoff submitted a written explanation from a licensed psychologist who had treated his father from 2001 until his death.  The psychologist explained in his report that the father had a variety of mental and physical conditions which prevented him from properly managing his affairs from at least 2006 until his death.  The IRS rejected the explanation, citing to Rev. Proc. 99-21 which requires a statement from a physician and not a psychologist.

Tom Crice, a local Boston attorney whom I had met because of his pro bono work on behalf of low income taxpayers, brought suit for the estate after the denial of the claim.  Tom practiced as a criminal prosecutor and an actuary before settling into tax controversy work.  His background may have helped in the attack he took on Rev. Proc. 99-21.  The IRS filed a motion to dismiss for lack of jurisdiction because the claim for refund was untimely.  This caused the Court to examine 6511(h) which suspends the time frame if the claimant was financially disabled.  Examining the statute led to an examination of Rev. Proc. 99-21 which “sets forth in detail the form and manner in which proof of financial disability must be provided.”  The Rev. Proc. states that the claimant must submit “a written statement by a physician (as defined in section 1861(r)(1) of the Social Security Act, 42 U.S.C. 1395x(r), qualified to make such determination…”  The court noted that the Rev. Proc. does not define “physician” but borrows the definition from the Social Security statute.  The reference to section 1861(r)(1) creates confusion because that section does not have subsections.  Instead it has one large paragraph defining physician that includes five categories: (1) “a doctor of medicine or osteopathy,” (2) a doctor of dental surgery or of dental medicine,” (3) “a doctor of podiatric medicine,” (4) “a doctor of optometry,” and (5) “a chiropractor.”

The Court states that it assumes the IRS intends to refer to the first category but notes that the Rev. Proc. introduces further confusion by linking section 1861(r)(1) to 42 U.S.C. 1395x(r) because the latter provision “essentially tracks verbatim the wording and format of section 1861(r), but does not contain a corresponding reference to a subsection one.  Indeed, section 1395x(r), like section 1861(r), does not formally contain any subsections.”  This raises questions of whether the reference to 1861(r)(1) is a scrivener’s error or intended to narrow the scope of physician.

The court notes that the Rev. Proc. does not receive Chevron deference because it expresses the view of one employee and not the view of the agency.  The Rev. Proc. receives deference “only to the extent that those interpretations have the power to persuade.”  The court then explains how the Rev. Proc. fails to persuade:

section 6511(h) allows a disability to be based on a showing of a  ‘mental impairment’ and Revenue Procedure 99-21 directly undermines that goal where it demands a note from a physician but then defines that term to exclude a whole class of professionals generally considered competent to opine on the existence of a mental impairment.  On the record before the Court, there is no evidence that the IRS has considered the implications of its interpretation of the word ‘physician’ as used in the revenue procedure.  On the contrary, and as noted, Revenue Procedure 99-21 was drafted principally by a single IRS employee who without elaboration or explanation selected a definition of ‘physician’ as used by the SSA.  In the absence of additional information, there is just no basis to assess the soundness of the IRS’s interpretation of the work ‘physician’ in Revenue Procedure 99-21.

The court goes on to say that if the IRS sought to find someone competent to render an opinion on a physical or mental impairment it could have looked elsewhere in the rules governing Social Security cases.  Social Security regulation 20 CFR 404.1527(a)(2) provides “medical opinions are statements from physicians and psychologists or other acceptable medical sources that reflect judgments about the nature and severity of your impairment(s)….”  The court also cites to case law accepting the opinion of the treating psychologist while noting that the SSA and IRS definitions of disability are virtually identical.  So, the limitation argued by the IRS in its Rev. Proc. does not make sense and is inconsistent with the SSA rules it apparently sought to mimic.

The court states that the IRS may have reasons for limiting the opinions in financial disability cases to physicians but it does not explain those reasons in the Rev. Proc.  Without a reasoned explanation and in light of the fact that the opinion of psychologist in these types cases is viewed as acceptable in other contexts, the Rev. Proc. does not provide persuasive authority.  The court states “I conclude that the defendant’s interpretation of the term ‘physician’ in Revenue Procedure 99-21 is not entitled to deference here.  I conclude further that to the extent the psychologist’s statement the plaintiff submitted supports a financial disability based on a mental impairment, the IRS was not required to reject it on the ground that it did not constitute a ‘physician’s statement.  Consequently, I find no basis on this record to deem the plaintiff’s claim for refund untimely under section 6511(h), and thus do not agree that the Court lacks jurisdiction to hear the plaintiff’s suit.”

The IRS made a couple more arguments that the court rejected.  First, it argued that the psychologist’s statement failed because the estate did not submit the statement at the same time as the claim for refund but only submitted it with the initial appeal.  The court noted other cases that had rejected this technical argument by the IRS stating that “the practice is to accept the missing information at a later stage so it and the taxpayer’s claim may be considered.”

Second, the IRS argued in a footnote that the psychologist was unqualified to opine on the disability because he appeared to base the opinion in part on the taxpayer’s physical ailments and this is outside of the psychologist expertise.  The court rejects this argument because the sufficiency of the statement was not before the court and because the mental impairments alone may have been sufficient to support the financial disability determination.

Under Federal Rule of Civil Procedure 72(b), the IRS was to file an objection to this recommendation within 14 days of the receipt of the report.    On February 27, 2017, the IRS filed its objection to the magistrate judge’s report.  It took issue with just about every aspect of the report but most strongly objected to the failure of the court to bow down to Rev. Proc. 99-21 as controlling:

The United States has numerous objections to the Report. First, the United States objects to Magistrate Judge Cabell’s interpretation of Congress’ delegation to the Secretary. The Report misapprehends the plain language of § 6511(h) and the Secretary’s authority under that statute. The Secretary did what Congress told it to do and, as discussed in greater detail below, there is no reason to expand § 6511(h) beyond what is prescribed in Rev. Rule. 99-21, which is something that the Report attempts to do. Neither the language of § 6511(h) nor Rev. Proc. 99- 21 support Magistrate Judge Cabell’s view that a psychologist is permitted to medically determine a mental impairment. The Report’s discussion regarding the proper level of deference afforded to Rev. Proc. 99-21 is simply irrelevant pursuant to § 6511(h). In short, a psychologist’s statement is invalid pursuant to § 6511(h). Accordingly, the plaintiff’s failure to comply with Proc. 99–21 is fatal to its refund claim because federal courts have no jurisdiction over a tax refund suit until a claim for refund or credit has been “duly filed” with the Secretary. Second, the United States objects to Magistrate Judge Cabell’s conclusion that the Eighth Circuits decision in Abston v. Commissioner, 691 F.3d 992 (8th Cir. 2012), is distinguishable from the case at bar. Contrary to the Report, the Eighth Circuit, as well as numerous other federal courts, have found that taxpayers cannot establish a medical disability under § 6511(h) without submitting a “doctor’s note” as required by Rev. Proc. 99-21. The plaintiff did not provide a doctor’s note as it was required to do. Third, the United States objects to Magistrate Judge Cabell’s rejection of the United States’ alternative argument. Even if the psychologist’s statement at issue could be considered a “doctor’s note,” it continues to be deficient pursuant to Rev. Rule 99-21.

Plaintiff’s response to the IRS motion is also attached.

While Judge Gustafson cracked the glass in the 6511(h) ceiling with his order in the Kurko case, Magistrate Judge Cabell punches his fist through the glass.  This may allow others to follow and finally break the choke hold in this area.  Perhaps the IRS will consider, after two decades, the idea of getting comments on what a reasonable rule would look like and talk to the representatives who assist individuals with financial disability.  Taxpayers claiming this exception, by definition, face difficulties.  Rev. Proc. 99-21 adds to those difficulties and does not provide a reasonable basis for working through this issue.  The facts here follow fairly closely the facts in the case Brockamp v. United States, 519 U.S. 347 (1997), in which another 90 year old gentleman failed to timely file a refund claim and the failure was discovered by his executor after the ordinary statute of limitations had expired.  The facts of that case so moved Congress that it created the statutory exception in 6511(h).  Let’s work together to find a reasonable way to allow those with valid claims for refund and legitimate reasons for filing late to get their money without imposing undue barriers.

 

 

What is a Taxpayer Assistance Order?

A recent Program Manager Technical Assistance (PMTA) opinion (CC:NTA-POSTN-132247-16) issued by the attorney to the National Taxpayer Advocate provides insight on taxpayer assistance orders (TAOs).  Only select employees of the Taxpayer Advocate Service (TAS) can issue TAOs.  Taxpayer representatives benefit from understanding TAOs because having the authorized TAS employee issue a TAO on behalf of your client can go a long way toward resolving a case in which the IRS has taken an incorrect or unreasonable position that you cannot otherwise convince it to reverse.  The PMTA does not describe how to obtain a TAO but instead describes the process within TAS and the operating division after the issuance of a TAO.  This post will discuss the process of obtaining a TAO and then the path that the TAO might follow.

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Around the country there are Local Taxpayer Advocates (LTAs) in every state.  Larger states have more than one and every service center has one.  There are a total of 84 LTAs.  If you do not know the LTA for your area, you might want to get to know them because this person will assist you when your client has a serious hardship.  Better to know your LTA and develop a relationship of trust before you face the pressure of seeking their assistance with a time sensitive hardship matter.  The LTAs constantly have outreach efforts so that representatives in the area of their geographical coverage do know who they are and what they can accomplish.

If your taxpayer experiences significant hardship because of IRS action, and this does not just include collection action, although that is traditionally a source of hardship, and if your client’s case meets TAS case criteria for acceptance, then the LTA can initiate a TAO ordering the appropriate IRS operating unit to take action or to stop action in order to alleviate the hardship.  The power of the LTA to do this derives from IRC 7811 and delegation from the National Taxpayer Advocate.  The delegation does not go below the LTA so case advocates working the case with the taxpayer or the representative do not have the authority to issue a TAO but must convince the head of their office, the LTA, to do so.

The LTA will only issue the TAO if convinced that the operating division has acted incorrectly based on the Code or, more likely, the Internal Revenue Manual.  The more research you provide to the TAS caseworker and the LTA showing that the IRS has acted inappropriately, the more likely the LTA will consider a TAO.  The LTA does not want to issue a TAO and have the operating division point out the basis for the TAO is incorrect since the LTA will lose credibility.    Some LTAs issue TAOs regularly and some almost never.  In addition to getting to know your LTA, you want to get a sense of whether your LTA has demonstrated a willingness to issue TAOs and under what circumstances.

The PMTA describes the process of what happens after TAS issues the TAO.  Before issuing the TAO, the LTA will call the impacted operating division.  Let’s say that your small business client was the victim of a fraudulent payroll services provider similar to the unfortunate McDonald’s franchisee I blogged about last year.  Your client now owes $40,000 in payroll taxes to the IRS it paid to the payroll services provider but which was stolen.  Your client’s business has more than $40,000 in equity and income resources so that it does not qualify for an offer in compromise on doubt as to collectability; however, if it pays over another $40,000 the payment will severely cripple the company.  The company makes an effective tax administration offer in compromise of $5,000 which the special OIC unit for ETA offers rejects.  You bring the case to the LTA and point out the IRM provisions that suggest the IRS will consider an ETA under these circumstances.

The LTA can issue a TAO to the OIC unit that considers ETA offers asking that it reconsider the OIC taking into account the IRM provisions.  First, the LTA will call.  After being rebuffed, the LTA will write up the TAO citing to the IRM provisions and detailing the hardship created by the embezzlement.  If the manager of the OIC unit refuses to reconsider the OIC, the normal path is for the LTA to forward the TAO to his or her manager, the Deputy Executive Director Case Advocacy (DEDCA).  The refusal process may involve phone discussions between the LTA and the OIC manager after receipt of the TAO or it may simply involve a written response denying (appealing) the requested action in the TAO.  The LTA cannot accept the OIC but can only use the TAO process to direct and persuade the appropriate function within the IRS to take the action that the LTA thinks would appropriately follow the rules and regulations governing the IRS.  When the LTA receives the appeal of the TAO from the operating unit, the LTA can modify or rescind the TAO, or sustain the appeal.  If the LTA disagrees with the response, the LTA forwards the appealed TAO to the DEDCA for review.  The PMTA describes the process in detail.

If the TAO moves from the LTA to the DEDCA, the DEDCA reviews the TAO to determine its correctness.  This process might involve a fair amount of back and forth between the LTA and the DEDCA.  Just as the LTA must be persuaded that issuing the TAO will not create an embarrassment, so must the LTA now persuade the DEDCA.  The more persuasive the LTA can present the facts and the law (or the IRM) the more likely that the LTA will convince the DEDCA that the TAO should be sustained.  If the DEDCA agrees with the TAO, the DEDCA will raise it to the level of the territory manager.  The manager of the offer unit knows that this is a possibility from the start and knows that if the OIC unit has followed the wrong process or made a boneheaded decision, this process will shine a light on that fact.  Conversely, if the head of the OIC unit feels strongly that they have correctly interpreted the applicable rules and evaluated the circumstances surrounding the OIC, the manager will deny the TAO and stand ready to face the scrutiny from the territory manager.  The elevation of the TAO will cause one or more conversations between the territory manager and the OIC manager about the case which may result in acceptance of the TAO or rejection and the rejection may, or may not, include new facts not previously mentioned.

If the territory manager rejects the TAO, then the DEDCA must decide whether to send it to the NTA.  If the TAO goes forward to the NTA, she raises it to the Commissioner or Deputy Commissioner.  The process provides an interesting dance of competing bureaucratic emotions.  The operating divisions hate being told what to do and that they have done something wrong.  Many can be quite smug about the correctness with which they handle the matters coming through their office but at the same time they also hate shining the light on their practices to their boss and their boss’ boss.  The practice can have good effect of fixing bad practices, it can expose TAS as too overbearing if it pushes a TAO not properly grounded and it can create animosity between TAS and the operating division rather than a spirit of cooperation to reach the right result.  Sometimes, TAS becomes more the “enemy” than the taxpayer.

The PMTA focuses on what to do when new facts come to light during the process of the TAO.  Because the TAO causes the operating division to carefully look at what it did and to justify its actions, the possibility exists that the action it took was correct for a reason it did not mention to the taxpayer or even to the LTA when the TAO was first issued.  The PMTA opines that when the operating division raises new facts in response to a TAO or the appeal of a TAO, the appropriate person within TAS has the ability to go back to same level of employee within the operating division with a supplemental memo “to the same official addressing the concerns raised in the response and ordering that the official reconsider the matter again in light of the new information before modifying or sustain the TAO to the next level IRS official for further consideration.”

The current IRM does not address the situation of sending the case back from the same level for reconsideration.  The IRM contemplates a back and forth but does not mention this formal move seeking reconsideration.  The guidance here is not radical and simply formalizes what probably was happening in a less formal way.  It does provide a formal opportunity for clarification and resolution of the issue at lower levels.  Such a resolution is good for the taxpayer and the IRS.  Because the TAS is a voice for taxpayers behind the curtain of the IRS, we do not get to see what goes on between the two sides in the TAO disputes.  The PMTA gives a good description of the process.  For taxpayers being “represented” by TAS in this process and for taxpayers or representatives considering the use of TAS to resolve a problem, understanding the process and the possibilities makes use of the process more possible.  If done correctly, it has the ability to greatly assist taxpayers, to fix systemic problems within the IRS and to avoid litigation or feelings of utter frustration.

Update on the Issue of the Prior Opportunity to Dispute a Liability in a Collection Due Process Case

On February 28, 2017, I wrote about the Keller Tank case in which the 10th Circuit followed prior Tax Court precedent and the language of the collection due process (CDP) regulations in denying a taxpayer the opportunity to raise the merits of underlying liability in a CDP case where the taxpayer had the administrative, but not judicial, opportunity to raise the issue prior to the CDP case.  In that post, I noted that Lavar Taylor argued three cases in different circuits with this identical issue in a very short time span.  On March 7, 2017, the 4th Circuit issued its opinion in Iames v. Commissioner, No. 16-1154, the second of those three cases.  The 4th Circuit reached the same conclusion as the 10th Circuit validating the regulation as a reasonable interpretation of the statute.  You can hear the oral argument here.  Judge Wilkinson wrote a strong opinion explaining the basis for his decision.  He not only supported the position of the IRS based on IRC 6330(c)(2) but also bought the government’s secondary argument under IRC 6330 (c)(4) which the 10th Circuit did not reach.  This leaves taxpayers hoping for relief through the CDP process with only one circuit remaining to change the course of the discussion at least in this round of attacks on the governing regulation.  The 4th Circuit had no discomfort creating a distinction between taxpayers with deficiency procedure taxes versus those whose liabilities do not use those procedures.  For those interested in a full blown discussion of this issue, come to the Pro Bono and Tax Clinics Committee meeting on Saturday May 13 at the ABA Tax Section meeting in DC or order the recording of the discussion.

Tax Court Calendar Call Program

At the recent ABA Tax Section meeting in Orlando, the Pro Bono and Tax Clinic Committee had a panel on the Tax Court calendar call program to celebrate the 25th anniversary of the program.  The twenty five year celebration was a little squishy in terms of a precise time frame because of the informality with which the program began but it allowed the panelist to talk about an action begun by one person that has turned into an opportunity for pro se litigants that no other federal court offers.  The panel showcased again how pro se friendly the Tax Court is to the 70% of its petitioners who enter its doors with no representative but also how the Court, before embracing this program, took slow steps at first out of concerns for those taxpayers.

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Karen Hawkins, who is the chair elect of the Tax Section, got the calendar call program started in the early 1990s in San Francisco.  She had a tax controversy practice in that area that regularly brought her to Tax Court calendar calls.  At those calendar calls she observed that unrepresented taxpayers appeared who had no idea what to do.  So, she began trying to assist them by giving them advice on a quick, informal and pro bono basis.  The problem she observed in San Francisco was occurring throughout the United States.  I noted in a prior post that one Tax Court judge’s solution in a case in which the petitioners were particularly clueless was to have me as Government’s counsel waiting to try the next case sit with petitioners at their table and explain what was happening in the case.

Karen not only identified the problem faced by pro se petitioners at calendar call but she brought it to the attention of the Tax Section of the California Bar.  Representing the California Bar, she approached then Chief Judge Hamblin and asked him for permission to have the program of assisting pro se petitioners at calendar call recognized by the Tax Court.  He said no.   In the panel discussion Karen mentioned an incident that occurred before Judge Cohen in which an attorney came to a calendar call ostensibly to assist a pro se petitioner and ended up charging a fee.  This type of anecdotal experience would naturally have a dampening impact on the interest of the Court in such a program.

Chief Judge Hamblin’s concerns would have been similar to the concerns of the Tax Court judges when the first low income taxpayer clinics were established 15 years earlier.  I wrote about those concerns in an article on the history of the clinics.  The concerns arise from the cautious nature of a body like the Court and the need to protect the litigants before it as well as the institution of the Court itself.  Fortunately, Judge Swift, who came from California, stepped up and said that he would conduct a pilot to allow the Court to determine if providing some assistance to pro se petitioners at calendar call would benefit the petitioners and the proceeding.  For the first few calendar calls Karen was person who came and who met with taxpayers.  She did not have a group of volunteers with her.  She gave only her first name and did not give out a business card because one of the concerns centered on the possible use of the calendar call program as a business building exercise.  Pete Bakutes, the District Counsel for the IRS in San Francisco, was very supportive of the effort and that made a difference.  Before the Court arrived in San Francisco, Karen, Pete and Judge Swift had a conference call to discuss who the judge would announce the availability of Karen to unrepresented petitioners.

Judge Swift reported back to the Court that the assistance at calendar call was a success.  Not too long thereafter, Judge Nims visited San Francisco.  On his calendar was a taxpayer who, at that time, would have been called a tax protestor.  Having seen a few trials involving tax protestors, I am sure that Tax Court judges do not look forward to them.  One of the volunteer attorneys who came to that calendar convinced the tax protestor to concede (something I have had almost no success in doing in that same roll.)  The actions of that volunteer at the calendar call convinced Judge Nims on the benefits of the program, and he returned to DC to tell others on the Court.

Karen brought the idea of the calendar call program to the ABA Tax Section to try to get it to adopt the program as a section activity, but the Tax Section was not ready.  The program continued to evolve in San Francisco and in pockets around the country but did not have broad institutional support.  In Richmond in the mid-1990s Nina Olson participated in calendar call with the Community Tax Law Project.  She and I would call each judge coming for a calendar call in Richmond and most were receptive to announcing the presence of attorneys to assist pro se taxpayers.  Like the Court and the ABA Tax Section, Chief Counsel’s office did not wholeheartedly embrace the idea of the calendar call in the early years.  Part of the success of the program in San Francisco would have been due to the forward looking vision of Pete Bakutes who headed the Chief Counsel office there.  The struggle to get it going and accepted by the institutional players followed a similar path to the struggle to get the low income tax clinics going as discussed above.  Chief Special Trial Judge Panuthos was an early supporter on the Court for this and most programs to assist pro se petitioners.

The program got its institutional boost when Judge Colvin became the Chief Judge.  He saw, in many ways, the benefits to the Court and to the system of representation for the pro se petitioners.  He institutionalized the program at the Court in a way the Court had recently institutionalized its relationship with clinics.  At almost the same time that the Court embraced the calendar call program in a formal manner, the Tax Section of the Texas Bar stepped up and decided that it wanted to adopt this as a formal program of its Section.  Elizabeth Copeland was persuaded to spearhead that effort and she did a great job in organizing attorneys across a state that has the most Tax Court places of trial of any state.  During the panel discussion Elizabeth described all of the steps she took to get that program off of the ground which included attending all of the calendar calls held in the state for the first couple of years.  The organization and efficiency of the program in Texas remains a model for other programs.  The success of program in Texas and in New York City under the guidance of Frank Agostino spurred the creation of programs elsewhere.  The Low Income Taxpayer Committee of the Tax Section began to work with tax clinics and bar programs around the country to insure 100% coverage for Tax Court calendars.  Former committee chair Andy Roberson, who played a role in the effort to get 100% coverage even in cities with no local bar or LITC calendar call program, continues to update the coverage list for all 74 cities and the committee works to make sure that full participation exists.

Now that calendar call programs exist throughout the country in every Tax Court place of trial, and now that the Tax Court, the ABA Tax Section and Chief Counsel, IRS agree that the program provides a benefit to the petitioners and the system, the challenge centers on improving the program rather than building it.  Chief Judge Marvel spoke during the panel about a study conducted in the early 1980s which looked at why cases went to trial.  She spoke of ways the groups involved can continue to study the system looking for improvements.  Chief Special Trial Judge Panuthos, who was also on the panel, reminded the clinicians attending the program of their opportunity each year in their participation letters to provide ideas for improvement of the program.  Of course, the Tax Court does not limit its receipt of ideas and suggestions to that group or to that submission.

Bruce Meneely, who heads the Chief Counsel’s SBSE division, spoke on the panel about changes his office seeks to make in an effort to better engage with pro se taxpayers.  His office is going to call petitioners immediately after the filing of the petition to engage the petitioners.  His office is working with Appeals to determine why Counsel ends up settling some cases instead of Appeals and how the process could change to achieve settlement at an earlier stage.  Chief Counsel’s SBSE division just hired 30 paralegals to assist with small cases which he hopes will also lead to earlier resolution before the need to involve attorneys.  He solicited ideas on how to reach pro se petitioners prior to calendar call because everyone has an interest in resolving the cases as early in the process as possible.  He spoke of the possibility of a status conference with the Court prior to calendar call which some Tax Court judges have adopted as another way to foster resolution before calendar call.

Many tax lawyers around the country now attend calendar call when the Tax Court comes to their city.  The program does a good job of assisting those who come to Court unrepresented and still needing to resolve their case.  As the panel discussed, even better results for everyone can occur if pro se taxpayers can be linked to legal advice earlier in the process in a setting that does not put the pressure of an almost immediate trial on the parties.  As the Court, the bar and Chief Counsel’s office continue to evolve in their efforts to create a more perfect union of taxpayers and representatives, the calendar call program continues to stand out as a significant effort which distinguishes both the Tax Court and the members of its bar for their service to otherwise unrepresented individuals caught up in a process that can overwhelm those individuals.  It is interesting to see how the vision of Karen Hawkins in starting this program, like the vision of Stuart Filler who started the first low income taxpayer clinic at Hofstra Law School in 1974, has created a better environment for taxpayers trying to resolve a dispute with the IRS.

 

Finding the Right Appraiser and Writing the Report Correctly

The recent case of Estate of Kollsman v. Commissioner, T.C. Memo 2017-40 shows the perils to a taxpayer of a disregarded expert.  Judge Gale found petitioner’s expert unreliable for several reasons, not including his basic qualifications as an expert, and relied, essentially exclusively, on the expert testimony offered by the IRS.  Naturally, the estate did not benefit from this outcome.  Why did the Court reject the testimony of petitioner’s expert and how can you make sure that your expert will not suffer the same fate?  This post will focus on answering those questions.

I wrote a post recently on the IRS Art Advisory Panel.  That post focuses on some of the work the IRS does to determine value.  Today, the focus is on the taxpayer side although the same rules and concepts apply to respondent when hiring experts.

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The estate owned two paintings by “Old Masters” that became the subject of a valuation case in Tax Court.  The estate hired a very qualified expert who was a “vice president of Sotheby’s North America and South America and cochairman of Sotheby’s Old Master Paintings Worldwide.”  In addition, petitioner’s expert had known the decedent for many years and had periodically seen the paintings in decedent’s home for almost 25 years before her death.  On the date Ms. Kollsman died, the expert wrote a letter to the executor providing preliminary estimates of the paintings if they were sold that winter by his auction house.  The estate’s expert wrote two additional letters to the executor about four weeks after Ms. Kollsman died providing values for the paintings which the estate attached to its returns and providing an agreement for sale through his auction house.

The Court found the valuation letter and the agreement to use the auction house providing the appraisal too cozy.  After walking through the basis for his opinion in the report, the Court states:

“We find Mr. Wachter’s valuations unreliable and unpersuasive for several reasons.  First, he had a significant conflict of interest that could cause a reasonable person to questions his objectivity.  Mr. Wachter first gave his fair market value estimates for the paintings at the time of decedent’s death (in amounts that remained unchanged in his expert report prepared for trial).  His correspondence with Mr. Hyland [the executor] during that period demonstrates that the two had previously discussed the disposition of Maypole and Orpheus upon decedent’s death and that Mr. Hyland was considering selling the paintings.  Mr. Wachter provided his fair market value estimates at the same time he was soliciting Mr. Hyland for the exclusive rights for five years to auction the paintings in the event they were sold….  Thus, Mr. Wachter, on behalf of his firm, had a direct financial incentive to curry favor with Mr. Hyland by providing fair market value estimates that benefited his interests as the estate’s residual beneficiary – that is to say, ‘lowball’ estimates that would lessen the Federal estate tax burden borne by the estate…. The fact that Mr. Wachter simultaneously presented Mr. Hyland with these fair market value estimates and his pitch for exclusive auction rights for Sotheby’s gives rise to an inference that the latter affected the former.”

Strong stuff, and Judge Gale did not stop there.  He then pointed out problems with the valuation itself including an overstatement of the dirtiness of the paintings and the problems cleaning them might cause plus his failure to provide comparable sales supporting his valuations.  Judge Gale points out that “we have repeatedly found sale prices for comparable works quite important to determining the value of art.”

With respect to the simultaneous valuation and business solicitation, the lesson from the Kollsman case is easy to draw.  Do not use as your valuation expert someone who seeks to benefit from the relationship in ways that extend beyond compensation for services as an expert witness.  The opponent in a valuation case always looks for ways to show that the expert is biased.  Here, petitioners served up that basis on a silver platter.  It is fine to use someone like Mr. Wachter to get an idea of the value of the paintings and fine to use him to assist in finding an expert.  It might even be fine to use someone like Mr. Wachter to value the property on the return though I would not recommend it, but it was not fine not to use him as the expert at trial.  For trial, the estate needed an expert whose testimony could not be impeached on the basis of a simultaneous business transaction.

Judge Gale’s concern that Mr. Wachter’s overstated the devaluation of the paintings based on their dirtiness is no doubt real but it serves, for me at least, to provide more support for the Court’s conclusion and not enough of a basis from which to draw general conclusions about experts.  On the other hand, the judge’s observation about the absence of comparable sales in the expert report deserves attention.

Tax Court Rule 143 sets out the way expert testimony comes into evidence in Tax Court cases.  The rule provides that the report of the expert serves as the expert’s direct testimony.  For this reason, it is imperative that the expert write a comprehensive report that sets out the basis for the appraisal included comparable sales.  While the attorney hiring the expert must be careful not to dictate the report, the attorney must also be careful to impress upon the expert the need for a full and complete report that documents the basis for the findings in the report.  The Tax Court came to this approach after tiring of experts who played hide the ball with their reports and then came to Court and testified about many things on direct including the underlying basis for their conclusions.

I have not seen the report submitted by the estate in this case but the description by Judge Gale makes me believe that the report was short and conclusory.  A person like Mr. Wachter with clear expertise concerning the subject matter but who may not serve often as an expert may have expected his clear expertise to carry the day in convincing the Court.  While the depth of his expertise clearly matters, so does his report.  Here, the description makes it sound as though the report lacked a major element and the Tax Court rules would prevent Mr. Wachter from fixing this mistake with his testimony.

After dismissing petitioner’s expert, the Court essentially embraces the report of the expert hired by the IRS.  This result does not necessarily follow.  There are times when the Court dismisses or heavily discounts the experts of both sides, but here the IRS expert proved persuasive.  The Court discounts his opinions based on certain factors but uses the IRS expert report as the basis from which to build its determination.

It is worth noting that the IRS valuation report exceeded the amount determined as the value of the paintings in the notice of deficiency.  This happens regularly because the IRS will rely on the Art Advisory Panel or other in house experts during the examination phase and not hire an expert until the case goes to court.  The hired expert determined higher values that the IRS determined in the notice which would have caused the IRS to amend it answer to the petition in order to assert a higher deficiency and to take on the burden of proof with respect to the additional amounts.  Of course, the additional burden does not mean much in a valuation case of this type.   Here, the IRS made its motion on March 11, 2011, about two months before the trial.

Notice that it took the Court about five and one-half years after the trial in order to render the opinion in this case.  While I do not think that is a record, it is certainly a long time to wait for an opinion.  I have written before about the language in IRC 7459 which talks about the Tax Court deciding cases as quickly as practicable.

Conclusion

Practitioners headed into litigation need to vet the expert to make sure that nothing prevents the expert from rendering an impartial opinion.  The petitioner is already paying for the opinion and an expert worth hiring will know what outcome the petitioner would like.  No further incentive for the expert to reach a beneficial result for the petitioner should exist.  Additionally, petitioners need to impress upon the expert what the report must contain and how the report will serve as the direct testimony of the expert in a Tax Court trial.  Here, an individual with great qualifications as an expert in the field of art relating to the specific paintings at issue got disqualified for avoidable reasons.

Getting Suspended From a Practice That Did Not Exist

In the case of Bowman v. Iddon, No. 15-7118 (D.C. Cir. 2017), Mr. Bowman seeks to recover damages based on a wrongful suspension from practice in a situation in which he never had authority to engage in that practice before the suspension.  The D.C. Circuit decided that appellant was not entitled to damages for reasons that made good sense to me.  The case leaves you scratching your head at how it could come to exist.  The post will discuss Bivens actions against government employees, something I have posted on before, and the suspension from practice mechanism of the Office of Professional Responsibility (OPR).  Read this post for amusement and not enlightenment.

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The underlying suit seeks damages from five IRS employees who allegedly barred Mr. Bowman from representing taxpayers before the IRS without due process of law.  That premise for the suit and a several page opinion enticed me to read further.  The problem with Mr. Bowman’s theory of the case stems from the fact that before he was allegedly suspended from practice without due process he did not have the authority to engage in practice before the IRS anyway because he had never become an attorney, CPA or enrolled agent.  He was a return preparer.

It is easy to poke holes in Mr. Bowman’s theory of the case but it makes you wonder why the IRS, or at least 5 employees alleged to have taken this action, suspended him from a practice in which he was not authorized to engage.  It seems that while Mr. Bowman was working as a return preparer in 2005, he pled guilty to mail fraud, wire fraud and money laundering.  He received a sentence of 57 months and began to serve in August 2005.  I did not go and look for details of his criminal activity beyond those described in the opinion but his return prep business must have been an interesting one.

Shortly after Mr. Bowman went to the big house, Revenue Agent Iddon sent OPR a report of Mr. Bowman’s misconduct.  The form she used required her to check a box indicting that he was an attorney, CPA, enrolled agent or enrolled actuary.  She checked the box for enrolled agent citing personal knowledge as her basis for knowing this and attaching articles about his prosecution.  Unfortunately, or maybe fortunately for those of us who like to believe the 4th Estate is mostly trustworthy, the articles did not state that he was an enrolled agent and she never searched the IRS records to confirm his status.

After receipt of this report, OPR began disciplinary proceedings against Mr. Bowman to suspend him from practicing as an enrolled agent.  Apparently, part of the investigation did not involve double checking to make sure he was an enrolled agent.  Additionally, although it was clear from the newspaper articles attached to the initiating document that he now resided at the big house, apparently no one looked to correct his address from the business address he used as a return preparer.  This caused the correspondence about the proposed disciplinary action to go unanswered since it did not make its way to Mr. Bowman.

Because he did not answer the charges against him, OPR issued a decision by default suspending him from practicing as an enrolled agent and OPR published this decision in the quarterly bulletin identifying practitioners with disciplinary problems.  One of the defendants, an OPR manager, also emailed the announcement to 20 people asking them to further disseminate the information.

When Mr. Bowman left prison in 2011, he did what every prisoner does (?), he sent a FOIA request to the IRS and through that request learned for the first time that he was suspended from practice as an enrolled agent.  This is where the facts get a little crazy, because those of you who are tax history buffs will remember that shortly before Mr. Bowman’s release, the IRS had promulgated the rule extended Circular 230 to tax preparers.  So, now the mistaken suspension may have actually become a suspension that mattered to Mr. Bowman vis a vis his livelihood as a tax preparer.  So, in November of 2012, he filed a petition for reinstatement with OPR.

Fast forward a couple of years and the D.C. Circuit strikes down the rule extending Circular 230 coverage over return preparers.  After that decision, the IRS writes to Mr. Bowman recognizing that he was never an enrolled agent and informing him that he may not practice as an enrolled agent.  It also restored his “ability to engage in limited practice before the IRS, as defined in section 10.7 of Circular 230, by removing [his] name from the list of individuals currently barred from practice before the IRS.”  Just when it seemed normalcy might return to the practice world, Mr. Bowman decided to further complicate matters by suing the IRS officials he identified as causing his wrongful suspension.  The mechanism he chose for bringing the suit was a Bivens action.

He argued that the named IRS employees violated the 5th Amendment by “harming his reputation and business without due process.”  The defendants moved to dismiss the complaint and the District Court granted the motion concluding that the remedial scheme under Circular 230 precluded any Bivens remedy even though some mistakes occurred here.  Mr. Bowman brought the matter pro se.  On Appeal the court appointed an amicus to assist it in understanding the issues.

The D.C. Circuit decided that it did not need to reach the issue of whether a Bivens action could succeed under these circumstances because the complaint failed to state a claim on which relief could be granted.  It stated that accepting all of the factual statements as true he must lose because “he identifies no constitutionally protected interest lost through Defendants’ actions.”  Since he was never an enrolled agent the misguided actions of the IRS employees suspending him from a status he never held had no impact on his property rights.

Amicus brought up that although misguided in suspending him as an enrolled agent, the actions had an impact on him for the period of time the IRS sought to regulate mere preparers.  The Court pointed out that although this was possible, it was not what he alleged in his complaint.  Two judges wrote separately to explain that if he had alleged “that Defendants barred him from preparing taxes, I would have concluded that he was entitled to pursue his claim against Defendants.”  The concurring opinion concluded by saying that “had Bowman alleged that Defendants disciplined him without authority and barred him from preparing taxes, I would have concluded that Circular 230’s remedial scheme presents no bar to a Bivens claim in the narrow and unique circumstances of this case.”  So, it looks like the IRS employees dodged a bullet because Mr. Bowman did not plead correctly.

We do not often focus on pleadings but they do matter as this case points out.  I see it often in Tax Court cases because we regularly come into cases after the taxpayer has filed a pro se petition.  Taxpayers will fail to contest penalties or other matters in the notice of deficiency.  If we are actually going to take the case to trial, we must seek permission from the court and file amended pleadings alleging all of the matters in the notice of deficiency with which the taxpayer has a dispute.

Mr. Bowman’s case is unusual.  I suspect it has led to some procedural changes in OPR regarding double checks concerning the status of alleged wrongdoers and addresses of wrongdoers brought to its attention who are incarcerated.  If it has not brought about those changes, perhaps we will see a successful Bivens suit at some point in the future.

How Does the IRS Decide Which Amended Returns to Examine

A report of the Treasury Inspector General for Tax Administration (TIGTA) from May 16, 2016, entitled “Improvements are Necessary to Ensure That Individual Amended Returns with Claims for Refunds and Abatements of Taxes are Properly Reviewed” provides significant insight into the handling of refund claims by the IRS.  The report itself follows the typical TIGTA style of reviewing actions by the IRS and finding fault with those actions; however, in describing what the IRS does with amended returns, the reports offers a detailed view of what happens once the amended return arrives at the IRS.  For that reason, the report may interest readers who want to know more about that process.  In this post, I will talk about the process and also about why auditing amended returns may matter more than auditing original returns.

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Why the IRS Should Audit More Amended Returns

The report criticizes the IRS for accepting certain amended returns without auditing them or providing any explanation for making the decision not to audit.  The report acknowledges that some of the decisions may result from resource limitations but still decries the lack of documentation surrounding the decision.  It details the reasons for its concerns but does not discuss the collection criteria applicable to audits.  I see a link between this report and the report I discussed in a recent post concerning the requirement that the IRS make a collectability determination prior to starting an examination.

In the amended return context, the taxpayer has made the collectability determination for the IRS.  The IRS holds the taxpayer’s money, which the taxpayer wants back.  If the IRS audits this return and makes adjustments, the collection division never becomes involved.  For this reason alone, amended returns should receive more scrutiny in a world where collectability provides a finger on the decision making scale of which returns to examine.  The reasons for filing amended returns vary greatly and do not by any means involve bad motives.   I could even argue that because practitioners generally, and I think correctly, believe that filing an amended returns brings scrutiny to the return that filing an original return does not, that amended returns have a greater likelihood of accuracy than original returns.  Since I believe that the IRS should take collectability into account in making audit determinations, I think the IRS should audit a higher percentage of amended returns than original returns since the collectability factor will always support auditing the amended return, but, other factors matter as well and I am not arguing for the audit of all amended returns.

Other factors may override collectability but on that one factor, the decision is clear.  While not clearly articulated in the IRS guidance or in this report, this factor has always played a role in making the scrutiny of amended returns higher than that of original returns.  Just reading the process of review of amended returns, whether or not selected for audit, provides plenty of support for the conclusion that the IRS guards the money it already has more than it looks for money it might obtain through an audit.

The Process of Reviewing Amended Returns

The report gives a fairly detailed walk through of the procedures that the IRS uses to pipeline an amended return.  The report suggests that tax examiners manually review each claim.  That process obviously provides greater scrutiny than original returns receive.  Claims that the initial reviewers list as Category A go on to additional review and possible audit, while claims that avoid Category A in the initial screening apparently move forward for acceptance.  Figure 1 of the report provides a flow chart of the processing of amended returns that receive the Category A classification.  I.R.M. 4.4.4.5.3 provides guidance to the IRS employees processing amended returns.  The initial review also checks for timeliness of the claim which could result in a denial of the claim at the initial review if the claim is deemed untimely.

The report does not talk about how long after the filing of the amended return this initial screening takes place.  The IRS now has a handy track my amended return feature on its web site.  I have not yet used that feature to track a refund and do not have a sense of how quickly someone can obtain a refund.  The TIGTA report reads as though the refund could occur relatively quickly if the initial screeners do not put the amended return into Category A.

For amended returns falling into Category A, the IRS sends them to field or campus exam depending on the type of case.  The chart suggests that all Category A claims going to campus exam get audited, while cases going to field exam get another level of review once they reach the field.  The written report does not make this distinction.

For field exam cases, two additional levels of review occur after the initial screening has designated the case as Category A.  The case first goes through the Planning and Special Programs (PSP) office and then, potentially, to the field exam group.  PSP could survey the return if it determines that an audit of the amended return would not result in a material change.  In reviewing the amended return, PSP should also review the original return and other relevant case file material.  If PSP does not survey the case – survey meaning accept the amended return after the PSP review – then it goes to the group manager of the group assigned to the case.

The group manager gives the amended return another review, which includes the review done by PSP for risk analysis, but the group manager must also “plan, monitor, and direct the input of work to accomplish program priorities and effectively utilize resources….”  This means that the group manager’s decision to assign the amended return for examination not only includes a determination of the need for examination of the amended return, but balances that need against other workload priorities with the group.  The group manager could conclude that the risk analysis does support examination of the amended return but still survey the return because of other priority work within the group.

The report does not talk about time frames but they will enter into the equation.  The statute does not require the IRS to examine the amended return within any set time.  The IRS can simply sit on an amended return forever if it chooses to do so and need not act.  Of course, sitting on amended returns forever would be a bad practice for the IRS to adopt, but when a group manager considers priorities, the statute of limitations for making an assessment provides a bright line for decision making about auditing original returns, while the absence of such a bright line for amended returns slightly changes the equation.  The group manager will have internal guidance driving the decision but has a bit more leeway with amended returns.

The system established by the IRS provides three cut points for the amended return headed to field exam, i.e., those amended returns with larger and more complicated refund claims, to get sent for acceptance without an audit.  TIGTA’s concerns about the IRS process for surveying amended returns focuses on the cases getting sent for acceptance because the IRS did not adequately document that decision.  The further the case gets into the process, the greater the concern because the more likely that an audit of the amended return would result in adjustments.  Because the acceptance of an amended return means handing over money, TIGTA wants more documentation of the decision to accept the refund claim without an audit.

Timing of Refund and Choices between Original and Amended Returns

Of course, a very high percentage of original returns also involve handing over money, meaning that these returns are also refund claims, yet the system does not require the same type of review and documentation for handing over money as the result of an initial return.  When taxpayers file the initial return, the IRS, as with the amended return, has no statutory time pressure within which it must accept the return.  Mild pressure exists in both circumstances based on interest which will accrue.  Stronger pressure exists with original return based on social expectations that have developed over decades and systems the IRS has created to send back refunds as quickly as possible, but the statute does not require that the IRS race to refund money with original returns yet carefully scrutinize refund requests on amended returns.

With the PATH Act, Congress signaled that it wanted to slow down the payment of refunds on certain original returns and stop the race that happens at the opening of filing season.  The PATH Act concerns focus on refundable credits which cause the same concerns in many ways as amended returns.  Yet, the biggest part of the tax gap does not exist because of amended returns or refundable credits.  It exists with self-employed.  TIGTA’s concerns about documentation of amended returns being surveyed has a legitimate basis because of the likelihood that amended returns surveyed after making the cut to Category A probably contain mistakes.  It makes sense, if resources permit, for the IRS to internally explain why it allows the payment of a refund in those cases.  Except for the distinction concerning collection, it would also make sense to explain why the IRS does not examine original returns with an equal likelihood of adjustable mistakes, but the TIGTA report focuses only on amended returns and not original ones.