Chai not Gaining Traction with Tax Court or IRS

Back in March, Steve blogged about the 2nd Circuit’s decision in Chai v. Commissioner reversing the Tax Court and finding that the IRS had a duty to prove that the immediate supervisor of the employee imposing a penalty met the requirements of the previously long forgotten IRC 6751.  The Chai decision came shortly after a fully reviewed Tax Court opinion in which the Court, in Graev v. Commissioner, held that the IRS did not have a duty to prove that the immediate supervisor had signed.  See my blog post here.  The 2nd Circuit essentially adopted the views of the dissent in Graev.  Because appellate venue for Graev lies in the 2nd Circuit, the decision in that case will unlikely stand; however, the opinion can still provide precedent for Tax Court cases appealable to other circuits as the Tax Court applies its Golsen rule.  This post will focus on what is happening post-Chai and how that might impact your clients who are unable to move to New York City or other fine locations in the 2nd Circuit.

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The first matter to discuss is Graev.  The IRS has chosen not to roll over and accept Chai as applying in a way that resolves the Graev case.  The IRS filed a motion with the Tax Court asking it to reconsider its opinion in Graev in light of the Chai decision.  The critical paragraph of the motion states:

“Respondent requests that the Court vacate its decision in this case and order additional briefing on what steps the Court should take in this case in light of the Chai opinion. Respondent has views which it believes will benefit the Court to consider in the changed circumstances of this case.”

The Tax Court granted this motion and issued an order vacating the decision and requiring the parties to file simultaneous briefs by June 1, 2017.  The petitioner and respondent timely filed these briefs.  The Court ordered the parties to file responsive briefs by June 20; however, petitioner filed a motion requesting until June 30 to file responsive briefs and permission to file a response to the responsive briefs by July 31.  The Court granted petitioner’s request so it will be at least a month before this case becomes fully at issue again.

The vacation of the decision raises an interesting question with respect to the Golsen rule.  Does the Graev opinion control future decisions of the Tax Court if the decision in the case is vacated at the request of the government?  The answer to that question appears to be yes as discussed further below.

While you might have expected that the IRS requested the vacation of the decision in Graev so that it could concede the IRC 6751 issue, the IRS has taken the fight to a new level, and in fact, in the first post-Chai brief filed in the Graev case, the IRS did not even cite to Golsen.  The brief filed by Frank Agostino’s firm cited Golsen four times and devoted the first of six sections of the brief to this issue.  In the statement of the case, petitioner’s brief states:

The issue is whether the rule in Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), and the United States Court of Appeals for the Second Circuit’s opinion in Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), aff’a in part and rev’a in part, T.C. Memo. 2015-42, 109 T.C.M. (CCH) 1206 (2015), require this Court to vacate its decision determining the Graevs liable for 20% accuracy-related penalties under section 6662(a) and instead enter a decision for the Graevs adjudging them not liable for the penalties because the Commissioner failed to comply with the written-approval requirements of section 6751(b)(1).

So, the next opinion by the Tax Court in this case will have the opportunity to decide a number of issues concerning the application of the 2nd Circuit’s decision on the these types of cases.  Petitioner frames the issues in this manner:

The Second Circuit’s opinion in Chai requires this Court to vacate the March 7th Decision for five reasons. First, Chai is controlling in this case pursuant to the rule in Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), because this case is appealable to the Second Circuit, because the holdings in Chai are squarely on point and the facts are indistinguishable, and because the failure to follow Chai would result in inevitable reversal upon appeal.

Next, in rejecting the majority’s holding and reasoning in Graev II that the 6751(b)(1) issue was not ripe in a deficiency proceeding (i.e., it was premature), the Second Circuit in Chai held that the issue of the Commissioner’s compliance with the requirements of section 6751(b)(1) is ripe for review in a deficiency proceeding.

Third, by rejecting the concurrence’s holding and reasoning in Graev II that the Commissioner’s failure to comply with the written-approval requirements of section 6751(b)(1) is excusable as harmless error, the Chai Court held that the written-approval requirement in section 6751(b)(1) is a “mandatory, statutory element of a penalty claim” that is not subject to harmless error analysis.

Fourth, the facts of this case, as found in Graev I and Graev II, require a holding that the Commissioner did not comply with the requirements of section 6751(b)(1) in determining the 20% accuracy-related penalties at issue.

Fifth, the Chai Court rejected the Commissioner’s contention that an amended answer filed by his attorneys can cure his failure to comply with the written-approval requirement of section 6751(b)(1) because compliance at the time of the initial determination is a “mandatory, statutory element.” Thus, the Court must vacate the March 7th Decision and its determination that the 20% accuracy related penalties may be assessed.

In contrast, the IRS frames the issues as follows:

Because this case is appealable to the Second Circuit, this Court’s holding in Graev v. Commissioner, 147 T.C. No. 16 (2016), regarding the timing of the supervisory approval of the initial determination of a penalty assessment cannot stand on appeal. Therefore, this Court must face additional issues regarding whether there was adequate supervisory approval of the initial determination of a penalty assessment in this case.

Those issues are: (1) whether the timely supervisory approval of a 40 percent accuracy-related penalty was, in effect, approval of the alternative position of the 20 percent penalty; (2) whether an attorney’s recommendation to include the 20 percent penalty in the statutory notice of deficiency, which recommendation was approved and adopted, can constitute the initial determination of the penalty assessment in this case; and (3) if a penalty assessment arises from an assertion raised in the amendment to answer in this case, whether the initial determination of that penalty assessment was made by the attorney who asserted the penalty in the amendment to answer. To avoid the potential for piecemeal litigation of these issues, respondent requests a ruling on each one even if the Court decides more than one issue in respondent’s favor.

So, the next phase of Graev could focus on the ability of the Chief Counsel attorney and the supervisor of that attorney to initiate and provide the appropriate supervisory approval.  If the IRS wins this argument, it will win the case and it will avoid the problem that occurs in cases in which Chief Counsel attorneys in the answer or subsequent pleadings change the penalty from the penalty imposed by the Commissioner in the notice of deficiency.  We will closely watch the case and keep you informed.

Meanwhile, there are many other cases in which petitioners have suddenly decided to raise the failure of the IRS to obtain the proper supervisory approval for a penalty.  We blogged about such a case decided almost immediately after Chai.  A more recent case shows another side.  On June 12, 2017, Judge Lauber issued an order in the case of Zolghadr v. Commissioner in which he rejected their Chai argument for two reasons.  First, petitioners did not raise the argument in time in a deficiency case.  Remember that both Chai and Graev were also deficiency cases where  the timing of raising the argument was also a concern.  Second, and more important for this discussion, he addressed the merits and the current viability of Graev stating:

“Alternatively, even if petitioners’ argument were timely, their reliance on Chai is misplaced because this case is appealable to the U.S. Court of Appeals for the fourth Circuit, not to the U.S. Court of Appeals for the second circuit, which decided the chai case.  For cases in which the appellate venue is a court of appeals other than the second Circuit, the applicable Tax Court rule is that enunciated in Graev v. Commissioner, 147 T.C. (slip. Op. at 42 n.25).  Under that case respondent has no burden of production to demonstrate compliance with section 6751(b).”

While we are waiting for the “final answer” in Graev, you should not wait to raise the IRC 6751 argument in your case.  In addition, you now know that at least one judge on the Tax Court views Graev as controlling which means you may have to move your case into the applicable circuit court if your client lives outside the Second Circuit.  I think Judge Lauber’s view of the current applicability of the Golsen rule as it applies to Graev is a view shared by other judges on the Tax Court.  Do not expect to roll into Tax Court citing Chai and automatically winning.

Sentencing Fight in Former Judge Kroupa’s Criminal Case

We have reported before on the rather shocking criminal tax case of a former Tax Court judge.  We reported on her indictment in April of last year, her guilty plea in the fall of last year and of the fallout in some of her cases stemming from the criminal matter.  The case has moved into the phase in which the judge must sentence former Judge Kroupa for the crime to which she plead guilty.  The sentencing phase has moved slower in this case than I would have anticipated; however, it has been many years since I worked regularly on criminal tax cases and my expectation of the tempo may be outdated.

The sentencing phase usually involves a review of the situation and then a write-up of facts and recommendations by a probation officer followed by an opportunity for the defendant and the government to offer comments on a proposed sentence.  At the time of the plea, the parties knew that the sentencing guidelines would produce a recommended prison sentence in the range of 30-37 months.  Although the guidelines do not bind the judge, the parties know that the guidelines have a significant influence in most cases and certainly serve as a starting point for the judge’s decision.  Based on the crime to which she pled guilty and some upward and downward adjustments for knowledge, position and cooperation, the parties knew when they reached the plea agreement where the starting point for sentencing would place this case.

In recent filings with the district court, the defendant and the government have set out their positions.  The defendant takes the position that 20 months would be an appropriate sentence under the circumstances.  The government argues for the guideline amount of time in prison.  Both documents bear reading if you want to gain a better understanding of the process in general.  The document filed by former Judge Kroupa lays open her life in a way that you would not want to do unless compelled to do so by the circumstances existing here.

In recent posts, we have talked about privacy of information in a court proceeding.  In last Friday’s post concerning designated orders, Samantha Galvin described for us a recent order concerning the privacy of information.  In a post earlier this week, I described the efforts of a taxpayer in a refund suit to keep his name out of the public record.  In this criminal case where the defendant fights for her freedom with a difference of potentially 17 months (or more because the sentencing judge is not bound by the guidelines or the recommendation of the government) of incarceration hanging in the balance, she does not raise privacy as a concern.  The case demonstrates how naked one becomes in a criminal case and how rights of privacy that can cause such concern in a civil case do not apply.  Because our blog focuses on civil and not criminal tax matters, we will not delve further into the arguments by the parties.  Even for those of us who practice in the civil arena, knowing what happens in the worst case, a criminal indictment, benefits us and our clients as we work to keep them from committing a tax crime.

Remaining Anonymous While Suing the IRS

In the recent case of John Doe v. United States, No. 1:16-cv-07256 (SDNY), the plaintiff requested that the court allow him to pursue the case without having his name made public.  The court said no.  It would not allow him to proceed anonymously for reasons discussed below.  At the last Tax Court regular trial session in Boston, I watched as someone, for reasons similar to Mr. Doe’s, asked that the court seal the record and the court said no.  We have blogged before on the rules for sealing the record in Tax Court.    John Doe’s case points out some of the policy considerations present in trying to hide your name or your personal medical information while pursuing a judicial remedy.  In general, courts seem to take a very different view of the protection of personal medical information than we do as a society after the passage of the HIPPA laws.  Where is the right balance in opening up personal medical information or keeping things discreet?

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John Doe filed a claim for refund which the IRS denied because he filed it after the applicable time period.  He sought to hold open the time period arguing that the delay resulted from his financial disability as described in IRC 6511(h).  We have blogged before, here, here, here and here, about 6511(h) and the difficulties most taxpayers have in meeting the criteria for relief the IRS has imposed in Rev. Proc. 99-21.

To meet the criteria for financial disability, the taxpayer must provide the IRS with detailed medical information.  This medical information supports taxpayer’s failure to follow through with routine responsibilities that could have a direct correlation to work activities.  Putting such information in the public domain could easily have the effect of limiting an individual’s future job prospects. While a taxpayer might feel uncomfortable turning over lots of sensitive personal medical information to the IRS in order to provide that the criteria for financial disability exists, at least taxpayers should feel comfortable knowing that providing their personal medical information to the IRS cloaks it with the protections of IRC 6103 and makes it as private as President Trump’s returns.

If a taxpayer seeking to use the financial disability provisions to hold open the statute fails to convince the IRS and must move forward to court to seek relief from the agency decision, the protections regarding that personal medical information can become subordinate to the public’s right to know.  In Sealed Plaintiff v. Sealed Defendant, 537 F.3d 185,188-189 (2nd Cir. 2008), the Court stated “[T]he interests of both the public and the opposing party should be considered when determining whether to grant an application to proceed under a pseudonym.”

In John Doe’s case, the Court notes that the 2nd Circuit has created a non-exhaustive list of factors to consider when deciding whether to allow a party to proceed anonymously.  This list includes:

  • “Whether the litigation involves matters that are highly sensitive and of a personal nature”;
  • “Whether identification poses a risk of retaliatory physical or mental harm to the party seeking to proceed anonymously or even more critically, to innocent non-parties”;
  • “Whether identification presents other harms and the likely severity of those harms”;
  • Whether the plaintiff is particularly vulnerable to the possible harms of disclosure, particularly in light of the plaintiff’s age”;
  • “Whether the suit is challenging the actions of the government or that of private parties”;
  • “Whether the defendant is prejudiced by allowing the plaintiff to press his claims anonymously, whether the nature of that prejudice differs at an particular stage of the litigation”;
  • “Whether the plaintiff’s identity has thus far been kept confidential”;
  • “Whether the public’s interest in the litigation is furthered by requiring the plaintiff to disclose his identity”;
  • “Whether, due to the purely legal nature of the issues presented or otherwise, there is an atypically weak public interest in knowing the litigants’ identities”; and
  • “Whether there are any alternative mechanisms for protecting the confidentiality of the plaintiff.”

Think about these factors in the context of a whistleblower case where the effective default is anonymity.  In John Doe’s case the court found that “alternative mechanisms for protecting the confidentiality of the plaintiff weighs against allowing anonymity.”

Plaintiff argued that disclosing his identity would impact his future career prospects because of the personal and sensitive medical information that he would have to show in order to prove his case.  The court noted that redacting and sealing submissions regarding sensitive medical information happens routinely.  In the Tax Court case I watched a couple of months ago, a pro se litigant’s request to seal medical records was summarily denied with little discussion.  The decision may have been the right decision but forcing someone to lay bare their medical history in order to succeed in a case puts the individual to hard choices about the importance of the current case versus the long term consequences of making the medical information public.

Tax Court Rule 27 protects the disclosure of the identity of minors and a host of other information.  Prior to filing a petition or submitting information to the Tax Court take a careful look at the list of information protected and the means of protecting the information.  The Tax Court protects the social security number of petitioners and has a special form to use to disclose the number to the court but not the public.  The Tax Court is concerned about inadvertent disclosure of the social security number and other sensitive information, and directs petitioners (and respondent) to redact such information before filing documents with the court.  The Tax Court practice concerning access to documents filed in its cases seeks to protect the information of litigants at the expense of full public access in its balancing of the competing interests regarding the information.  How does sensitive medical information fit into this scheme of protection about which the Court has given much thought?

The comments in the John Doe case by the district court in the Southern District of New York point to the different standards between requesting anonymity as a party and requesting redaction or sealing of records that come into a case.  In addressing each of the concerns raised by Mr. Doe, the court points to the ability to redact or seal information as an adequate remedy that will protect the sensitive information without creating the serious issues courts have with permitting a plaintiff to proceed anonymously.

Conclusion

The case, and the cases cited in the opinion, point to the very high bar that a plaintiff faces in seeking to proceed anonymously.  At the same time everyone has rights regarding their medical information.  Like corporations that seek to seal a court record regarding proprietary information, individuals have rights to protect medical information that could have an adverse commercial or personal impact.  By raising the concerns at the outset of the case, the individual plaintiff sets the stage for success on motions to seal or redact the medical information.  Even though John Doe loses his motion to protect his identity, he has certainly heightened the awareness of the court to the need to protect his medical information.

If you know that you have sensitive information you want to keep out of the public record, having a conversation with the court and the opposing party early in the proceeding will allow the court to reflect on how best to protect the information and not place the judge in the position of having to rule on such a motion during trial or as a trial begins.  Pro se litigants will struggle to understand the importance of this timing but representatives should not.

 

Seventh Circuit Sustains Tax Court Decision Enforcing Stipulation

In Shamrock v. Commissioner, No. 16-3811 (7th Cir. Mar. 14, 2017), the Seventh Circuit affirmed the decision of the Tax Court in T.C. Memo. 2016-193. The case has an interesting history because of the representative chosen by petitioners.  Petitioners filed their Tax Court petition pro se but were assisted in their case by Grant Niehus.  Mr. Niehus is a lawyer, and was at all relevant time, but is not licensed to practice in Illinois.  I note that it is likely that although this is a case set for trial in Chicago, it would not surprise me to learn that the lawyer representing the IRS in the Chicago office of Chief Counsel is also not licensed to practice in Illinois.  Because federal tax practice is a federal practice, lawyers can represent taxpayers nationwide on federal tax issues in the U.S. Tax Court and are not limited to practicing in states in which they are licensed.  Working for Chief Counsel, attorneys must be licensed in one state, a member in good standing, and an active member of the bar but Chief Counsel attorneys need not be a member of the bar of the state in which they are practicing.  So, I do not find that statement that Mr. Niehus is not licensed to practice in Illinois to be especially important.  He did, however, have another problem and that caused the Tax Court to do a lot more work in this case.

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It is important that a lawyer properly hold himself out to his clients.  There were concerns that Mr. Niehus did not properly explain his status to his clients.  The Circuit Court opinion states that Mr. Niehus, in addition to not having a license to practice in Illinois, was not admitted before the Tax Court.  It is his inability to practice before the Tax Court that greatly concerned the 7th Circuit when it looked at the first appeal. It should be noted that getting admitted to practice before the Tax Court generally takes little effort if you are admitted and in good standing before the highest bar of one state.

He advised the taxpayers to stipulate that only half of the relief they sought in the Tax Court was appropriate.  They did that and the Tax Court accepted their stipulation.  After entering into that stipulation, the taxpayers discovered that Mr. Niehus was not licensed to practice in Illinois and requested that the Tax Court set aside their stipulation.  The Tax Court refused to set aside the stipulation – a decision consistent with its general treatment of such requests – and the taxpayers appealed.  On appeal, the 7th Circuit reversed and remanded the case.  The 7th Circuit criticized the Tax Court for enforcing the stipulation without considering the possible deceit of Mr. Niehus.

On remand the taxpayers chose another somewhat non-traditional representative.  They chose a CPA authorized to practice before the Tax Court.  I have written before about the ability of non-attorneys to practice before the Tax Court and if you go back to 1924 when the Board of Tax Appeals was created, CPAs were authorized to represent clients before Board.  Their ability to do so based on the professional designation continued into the 1940s when it was removed and a successful passage of a test was required for non-attorneys to represent clients before the Tax court.  The taxpayers’ new representative, Sheldon Drobny, was one of the small percentage of individuals who passed this test.

After a hearing, the Tax Court issued a brief 99 page opinion explaining that the advice the taxpayers received from their original representative was good advice.  The taxpayers did not agree with the Tax Court and went for a second round before the 7th Circuit.  Now in possession of a detailed explanation of tax issues and how the advice of Mr. Niehus lined up with the correct tax result, the 7th Circuit agreed with the Tax Court.  The 7th Circuit notes that the taxpayers did not accuse Mr. Niehus of malpractice, that the Tax Court found he provided “competent, valuable, diligent and effective” assistance.  It holds the “dispositive principle is ‘no harm no foul.’”

The case deserves some attention because of the tension between stipulations and effective representation.  The Tax Court relies heavily on the stipulation process.  Tax Court Rule 91 requires the parties to stipulate to the fullest extent possible.  When the parties submit a stipulation, the Court does not easily allow one party to back out of it after submission.  See, e.g., Muldavin v. Commissioner, T.C. Memo 1997-531  It does not want to look behind each stipulation to determine if the facts are correct or what motivated the stipulation of the facts.

However, when a taxpayer’s representative has not accurately represented himself to the taxpayer in terms of his capacity competing concerns arise which cause the Court to need to look into the statements by the representative as they impact the integrity of the system.  The system relies on appropriate representation and if a taxpayer is duped or inappropriately represented the Court must step in to rectify the situation.  The recent case of Liu v. Commissioner  presented this issue to the 5th Circuit which refused to set aside a stipulated decision based on the alleged bias of petitioners’ former attorney because it found the attorney did not cause the stipulation.  This is also why the removal of a representation from the ability to practice before the Court is important as discussed in an earlier post which case was affirmed on appeal by the D.C. Circuit.

The 7th Circuit’s concerns were legitimate and caused the Tax Court to go behind the stipulation in great depth.  In the end, the Tax Court’s lengthy opinion essentially proves that Mr. Niehus gave proper advice and gets the parties back to where they were at the time of the original stipulation but now without concerns that the integrity of the system was impugned.  This case shows how much additional work can result when accusations of attorney or judicial misconduct arise.

 

 

 

Having a Correct Statute of Limitations Date on the IRS System

Chief Counsel Advice 2017040416063446 points to an error in the current IRS calculation of the collection statute of limitations.  The advice concludes with a statement that the author of the relevant IRM provision is “open to revising” the IRM and related exhibit in order to clarify the correct time frame.  This is a rather casual statement regarding something that matters a great deal in certain circumstances.  While it’s nice to learn that the IRS is open to having the collection statute calculated correctly on its system, I would hope it would be desperate to ensure the accuracy of its systems, because otherwise many challenges to its calculations will result.

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Guest blogger Patrick Thomas wrote about the collection statute of limitations previously and the difficulty in calculating this period.  His post includes links to studies by the National Taxpayer Advocate and the Treasury Inspector General for Tax Administration finding that the IRS regularly makes mistakes in calculating the collection statute of limitations.  Les wrote about a case the IRS lost because it incorrectly calculated the collection statute of limitations including the suspension triggered by installment agreements.  The recent CCA points to one of the difficulties and strongly suggests that the IRS current system incorrectly calculates the collection statute of limitations.  Yet, the author of the relevant section of the internal revenue manual governing the calculation of the statute of limitations is merely “open to revising” the manual.

The problem identified in the CCA concerns installment agreement; however, it is a potential problem for many of the IRS systems.  When a taxpayer requests an installment agreement, the statute of limitations on collection gets suspended for the period of time the IRS considers the IA because the IRS is prohibited by IRC 6331(k)(2)(B) from levying on a taxpayer’s property while the IA offer is pending and “if such offer is rejected by the Secretary, during the 30 days thereafter (and, if an appeal of such rejection is filed within such 30 days, during the period that such appeal is pending.)”

Because the IRS wants to make sure that it does not levy if the taxpayer has requested an appeal during the 30 day period, it builds 45 days into its system before it takes collection action after rejecting an IA.  This reasonable decision, which exists in other situations than just the IA, bleeds over into the way the IRS system now calculates the collection statute of limitations.  Instead of suspending the statute of limitations on its system for the period the IA is pending plus 30 days, the statutory time period of suspension, the IRS system suspends the statute of limitations for the period the IA is pending plus 45 days, which includes an extra 15 days for the administrative but not statutory period of suspension.  This extra 15 should not appear in the calculation of the statute of limitations but does.

Someone at the IRS noticed the problem and brought it to the attention of Chief Counsel’s office who, in turn, brought it to the attention of the person with the IRS responsible for setting the time frames on the collection statute of limitations.  The casual response does not leave me with a comfortable feeling that the problem will soon be fixed or that the person is scouring the system to find other instances of the same problem.  Yet, there are times when the IRS takes collection action at or near the last day of the collection statute of limitations.

The timing issue I encountered most often when working for Chief Counsel involved the filing of collection suits.  Department of Justice Tax Division attorneys burdened with many cases and accustomed to working with deadlines routinely filed collection suits very close to the statute of limitations on collection.  They rely, or at least pay attention to, the collection statute of limitations date provided to them in the suit letter by the Chief Counsel attorney who frequently relies on the collection statute of limitations date provided by the client.  Here is one example of how that date is routinely calculated incorrectly.  I suspect there are many others and the earlier work referenced by the NTA and TIGTA would attest to that fact.

The more suspension periods Congress creates the more difficult it is to correctly calculate the statute of limitations, but the IRS must build a proper system or it will routinely seek to collect from taxpayers who no longer owe the tax.  Doing so would violate the taxpayer bill of rights and just be wrong.  The IRS should not be casual about getting the statutory periods correct.  This should be a high priority.

When Do Attorney’s Fees Start

In Fitzpatrick v. Commissioner, TCM 2017-88, the Tax Court took up the issue of the timing of attorney’s fees in a case in which the taxpayer made a qualified offer several months after the representation had begun.  The Tax Court previously found, in a seven day trial on the merits in a Collection Due Process (CDP) case, that the taxpayer was not a responsible officer.  The Tax Court tries a relatively small number of Trust Fund Recovery Penalty (TFRP) cases and probably a very small number of those cases involve a seven day trial.  A couple of other interesting aspects of this case from the underlying merits perspective are that the Court’s electronic docket sheet goes on for eight pages.  Only a small number of cases have that many entries.  The merits opinion leads me to believe that Ms. Fitzpatrick was the last remaining responsible officer because the IRS had determined the other possible responsible officers were not liable.  If I am correct in that determination, it could explain the effort the IRS put into her case.

Although this attorney’s fees opinion does not break significant new ground, hence its designation as a memorandum opinion, it does provide a good basis for discussion of when the fees begin as well as a few other fee related issues.

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Ms. Fitzpatrick held a position with a company that failed to pay over the withheld income and employment taxes from its employees.  From footnote 3 of the most recent opinion, I draw the conclusion that other persons working at the business sought to pin responsibility on her and made statements which the Court characterized as “misinformation.”  Of course, these statements would also have had the collateral effect of demonstrating that the persons making the statements were not themselves responsible.  The statements became a part of the revenue officer’s report – a report which the Court also indicated may not have provided the appropriate characterization of her role with the business.  For readers wanting more information about the underlying assessment, go to the opinion written last year.

After the IRS made its preliminary determination of liability, it would have mailed that determination to Ms. Fitzpatrick’s last known address.  The case does not find that the IRS improperly mailed the notice, but it does find that she did not receive it.  Her failure to receive the TFRP notice, much like the failure to receive a notice of deficiency, entitles her to litigate the merits of the assessment in her CDP case.  In Mason v. Commissioner, the Tax Court had previously decided, and we posted, that a proposed responsible officer who does not receive the notice proposing the liability and offering an opportunity to go to Appeals prior to the assessment may raise the merits of the TFRP liability in a CDP case.

The IRS did not take issue with her ability to raise the merits, and she made a presentation about the merits of her case to the Settlement Officer in the CDP hearing before she filed the Tax Court case.  Here, the filing of the notice of federal tax lien by the IRS triggered her CDP rights including the right to contest the underlying assessment.

She filed her request for a CDP hearing on July 25, 2012 within 30 days of receiving the CDP notice.  It is worth mentioning that the notice of federal tax lien would have remained on the public record for the four year period between the time of its filing and the decision of the Tax Court that she had no liability for the TFRP.  The filed notice of federal tax lien would have depressed her credit score, her general credit, limited her potential employment opportunities, and generally made life financially difficult for that entire period, which is why I have previously advocated for some type of expedited procedure in CDP cases involving liens.

The parties agreed that she made a qualified offer on November 7, 2012.  The date of the qualified offer comes about three and one half months after the filing of CDP request.  This period likely involved a fair amount of work for her attorney coming up to speed on the case and making a decision on her likely prospects for success but because of the way the qualified offer provisions work, she cannot recover attorney’s fees from the IRS for this period unless she can show that the position of the IRS lacked substantial justification.  After looking at the facts, the Court determined that the Settlement Officer had a file that contained sufficient facts to make the position of the IRS substantially justified.  So, the fees do not begin until the date of the letter.

Section 7430 provides guidance on when a taxpayer can file a qualified offer.  The taxpayer cannot make a qualified offer at the first minute the IRS raises an issue on audit or when the IRS issues a notice and demand.  A qualified offer can only occur at certain stages in the tax procedure continuum.  The time period for filing a qualified offer is set out in subparagraph 7430(g)(2) entitled “Qualified Offer Period.”  That subparagraph provides:

(2) Qualified offer period.  For purposes of this subsection, the term “qualified offer period” means the period—

(A)

beginning on the date on which the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals is sent, and

(B)

ending on the date which is 30 days before the date the case is first set for trial.

This provision really provides guidance regarding deficiency proceedings and not TFRP cases or CDP cases.  The IRS and the Courts agree that a taxpayer cannot make a qualified offer in a CDP case that simply contests collection alternatives.  [find authority]  Other courts have found that a taxpayer can request a qualified offer as a part of contesting a TFRP determination even though the statute does not appear to contemplate such a result.  [find authority]  Here, the IRS does not contest the ability of the taxpayer to make a qualified offer and does not contest that the timing of the offer is valid.  Based on earlier cases, it appears that the earliest a qualified offer could have been made in Ms. Fitzpatrick’s cases was the time of making the CDP request contesting the merits of the underlying TFRP liability.  The taxpayer waited three months after bring the CDP action before making the qualified offer but considering the circumstances, did not wait very long before making the qualified offer.

This aspect of the statute regarding the making of a qualified offer puts pressure on a representative who wants to protect the client’s ability to recover fees.  The representative does not want to make a qualified offer that has no basis in fact or law but while the representative researches the facts and the law before making the offer, the client must cover those costs unless the representative can ultimately overcome the high hurdle of showing that the IRS lacked substantial justification.  The representative must consider the timing of the qualified offer and make it as quickly as possible after expending as few billable hours as possible and yet not make an offer that will disadvantage their client.  If the representative makes a qualified offer that fails to take into account the litigation risks, then it is possible that through settlement or trial, the IRS will exceed the amount of the offer and the qualified offer provisions which eliminate the need to prove the IRS lacked substantial justification will not apply.  Conversely, if the representative makes an offer that is too high, the IRS might accept the offer to the client’s disadvantage.

After the Court explains why the IRS had substantial justification for its position that Ms. Fitzpatrick owed the TFRP, the Court then turned to other arguments of petitioner most of which arise frequently in these cases.  Petitioner argued the amount of the award should exceed the statutory amount because in Jacksonville, Florida only a limited number of attorneys could have handled a case such as this.  The Court did not agree.  Petitioner argued that her attorney possessed exceptional qualities enabling him to succeed in this case.  Again, the Court found that although her attorney was a qualified attorney he did not have the nonlegal or technical ability referred to by the statute as creating a basis for enhancement based on qualifications.  Petitioner argued that the issue in her case was difficult and that “this was not a simple case to try.”  The Court pointed out that TFRP cases are basically a dime a dozen.  Petitioner argued that the case was undesirable because she did not have the money to front to the firm and it had to absorb significant costs to keep the case going.  The Court found that undesirability of a case does not constitute a special factor warranting an enhanced fee.  Lastly, petitioner argued that the IRS took an unusually litigious position.  The Court basically said that if the IRS prolonged the case through its overly litigious position, her attorneys would receive compensation for the additional hours they spent responding to the positions raised by the IRS.  Here, the length of the trial and the other work done by petitioner’s counsel does result in a fee award of approximately $179,000.  The Court does not say that the IRS took an unreasonable litigation position.

The arguments over enhancements here sound like arguments made in other similar cases in which the Court has made awards.  The interesting feature of this case for me is the timing of the qualified offer.  The decision points to the benefits of an early submission of such a letter although tensions will exist concerning when the practitioner will have enough information to make an informed offer.  Winning a TFRP case is not easy.  Winning and getting attorney’s fees paid for most of the representation deserves recognition.

National Taxpayer Advocate Blogging Again

We do not often write about competing bloggers, but it is worth mentioning that the National Taxpayer Advocate, Nina Olson, is an occasional blogger and has just put up a new post.  Her post addresses the still relatively new and uncharted collection enforcement tool of revoking or denying a passport from a seriously delinquent taxpayer.  This is an issue on which we have posted before.  We have also written briefly about the new Tax Court rules for those who contest revocation or denial of their passport.  To my knowledge there have not been any Tax Court cases yet but to paraphrase from a HBO TV series “Denial is coming.”

Because Nina has an insider’s perspective, her blog may be worth a look (after, of course, you read ours.)

Ninth Circuit Reverses Tax Court on Informal Claim Determination 

We wrote recently about the Tax Court’s decision in Palomares v. Commissioner, TCM 2014-243 in which the taxpayer incorrectly filed the injured spouse form instead of the innocent spouse form. We have also provided a link to the oral argument in the 9th Circuit by a student from the Gonzaga Law School Tax Clinic. By the time Ms. Palomares filed the corrected form, the time for claiming certain refunds had expired. The Tax Court declined to treat the filing of the injured spouse form as an informal claim for refund that would have provided her the opportunity to still receive the otherwise late refund claims.

Today, the 9th Circuit in an opinion found here reversed the Tax Court holding that the filing of the injured spouse form constituted an informal claim. Citing to a leading tax procedure treatise, the Court described the informal claim doctrine:

The informal claim doctrine permits a taxpayer to avoid the limitations of Section 6511(a) if the taxpayer filed a written refund request that was “sufficient to apprise the Service that a refund is being claimed,” and “specifies the tax and the year or years for which the refund is being sought sufficiently so that the Service can investigate the claim.” Michael I. Saltzman, IRS Prac. & Proc. ¶ 11.08(2); see United States v. Kales, 314 U.S. 186, 194 (1941).

After stating the principle of the informal claim doctrine, the Court went on to hold:

We conclude that Palomares’s Form 8379 fairly apprised the Commissioner that Palomares was seeking innocent spouse relief from her 1996 liability for two reasons. First, the Commissioner had been crediting Palomares’s tax overpayments—which were associated with returns she filed separately—to liability on the 1996 return that she filed jointly. The only form of relief that made any sense under these circumstances was innocent-spouse relief. Second, in responding to Palomares’s Form 8379, the Commissioner informed Palomares that to request innocent-spouse relief, she should file a Form 8857, not a Form 8379.

The Court pointed out that the equities were clearly in favor of granting her the refund. She was the subject of domestic abuse – something that impacted her ability to timely and correctly file her claim. English was not her first language and not a language with which she was comfortable. She was not liable for the 1996 liability. She received wrong advice from a volunteer attorney and the incorrect form she filed gave the IRS notice of her real problem. In fact, the mixing up of the injured spouse and innocent spouse forms occurs with enough frequency that the IRS addresses the problem in its instructions.

Here’s from the instructions on the current 8379:

Innocent Spouse Relief

Do not file Form 8379 if you are claiming innocent spouse relief. Instead, file Form 8857. Generally, both spouses are responsible for paying the full amount of tax, interest, and penalties due on your joint return. However, if you qualify for innocent spouse relief, you may be relieved of part or all of the joint liability. You may qualify for relief from the joint tax liability if any of the following apply.

There is an understatement of tax because your spouse omitted income or claimed false deductions or credits, and you did not know or have reason to know of the understatement.

There is an understatement of tax and you are divorced, separated, or no longer living with your spouse.

Given all the facts and circumstances, it would not be fair to hold you liable for the tax.

See Pub. 971 for more details.

The Ninth Circuit corrected an injustice. I do not believe that anyone at the IRS or the Tax Court wanted the outcome that Ms. Palomares received administratively or from the Tax Court. By applying the informal claim doctrine in these circumstances in a manner that allows Ms. Palomares to receive the refund she deserved the 9th Circuit has corrected a mistake the others did not feel empowered to correct. I wish the 9th Circuit had made this a precedential opinion. I do not understand its decision in that regard. It could have made a more sweeping statement about the confusion that impacts many people in Ms. Palomares circumstances regarding the distinction between injured spouse and innocent spouse. A broader statement about that confusion (which obviously occurred even with a member of the bar volunteering to assist) and the informal claim doctrine might have made it easier for the IRS to grant relief to others similarly situated who may now have to pursue the same hand to hand combat in litigation that Ms. Palomares faced.

Fortunately for her she found the Gonzaga clinic. Kudos to the clinic for its successful representation of her in this case.  That clinic is led by Jennifer Gellner.  The following students, spanning a period of five years, worked with her on this case:

2012  Amber Rush    Innocent Spouse Appeals hearing

2013   Derek Johnson   Tax Court Petition

2013  Natalie Lane & Kate Sender   Tax Court Trial

2014  Derek Johnson (again)  Tax Court brief

2015  Davis Mills   Ninth Circuit Brief and Mediation

2017 Meagan Nibarger   Ninth Circuit Oral Argument

Additional research and support:

2014  Tyler Smith

2015 Aaron Jones, James Schutt, Stevie Swift

2017  Dylan Broyles