Notes and Handouts from the Tax Court Judicial Conference

At the Tax Court Judicial Conference last month, there were several breakout sessions and plenary sessions – many of which provided handouts that some of you might find useful. In this post, I will talk about several of the sessions and attach the documents from the section discussed.

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Future State of the Tax Court

Les wrote a post that covered some of this session. Because there was more and there were several documents, I am going to expand on his post.

The first concern the panel addressed was access to Court records. The outline does an excellent job of laying out the Court’s concerns about making its records as open as the records of other federal courts using the PACER system. The material cites to a couple of administrative courts, social security and immigration, that do not use the PACER system. I do not find those administrative courts to provide a perfect template for the Tax Court but appreciate the Court’s concern about the privacy of taxpayer information since most of the people the Court protects are low-income taxpayers filing pro se. In the recent submission to Congress, the tax clinic at Harvard made proposals on this issue seeking to open up the records to greater electronic access. The clinic’s proposal puts the burden on the IRS to redact. Making public documents submitted by the IRS was proposed by Judge Buch to the panel as Les mentioned in his post. It sounds as if the Canadian Tax Court, which has no electronic access today, plans to put everything online within three years.

The panel next turned to the Tax Court’s Rules. The question before the panel was whether it was time for the Tax Court to reissue its rules, which would allow it to reorder them and to make other logical changes. Since the rules were last created, Congress has added numerous types of jurisdiction to the Court. The press release when the rules were last changed can be found here, and the general categories here. Other events have caused changes to the rules that have resulted in the rules growing in a way that might not create the most orderly statement of what parties practicing before the Court might expect in researching the rules. A proposed topical grouping of Tax Court rules can be found here and guidelines for drafting and editing court rules here. One example given of a needed rule change/addition is the lack of any mention in the Tax Court’s rules of amicus briefs. A couple of years ago, the Court sent out requests for comments on its rules after Chief Counsel’s office wrote to the Court requesting certain rules changes. We discussed the request here. The Court promulgated rules without comment after a recent legislative burst and we wrote about it here. The tax clinic at Harvard has not experienced any difficulty filing amicus briefs in the Tax Court but having a rule laying out the expectations would be a great idea. My takeaway from the discussion is that we should expect an overhaul of the rules in the not too distant future. This endeavor will keep some people at the Court very busy.

The third issue presented by the panel involved reducing the cost of litigation. The panel discussed increased use of the electronic courtroom to reduce travel costs. It also discussed changing the expert witness rules. Because the Chief Judge of the Tax Court of Canada was on the panel, it was interesting to hear the perspective of that court on many issues, including experts and his views on the use of hot tubbing. I did not come away with a feeling of what changes are coming but I expect that changes may come.

The fourth issue concerned the impact of IRS actions on the Court. Attached to the report is a group of related documents among which is the National Taxpayer Advocate’s report on ETIC cases in Tax Court. The IRS puts very little time and effort into auditing cases through its correspondence process, which in turn puts cases into the Tax Court that have not been properly developed. The report details outcomes.

The final issue discussed concerned the impact of globalization on the Tax Court. Because of time, the discussion on the final two issues was relatively short.

Ethics

The panel on ethics gave attendees a PowerPoint presentation attached here. The PowerPoint contains 10 hypotheticals which the panel worked through during this session. The panel also provided the group with authorities for resolving each of the hypotheticals which are attached here, here, here, here, here, and here. If you have to teach tax ethics, this is a great set of materials. If you practice and want to review very relevant problems, these are worth the time. The most interesting and scary set of facts is found in hypothetical #9 and involves the representation of someone who is not the person they purported to be.

Litigation of Individual Tax Issues and TBOR

This session had two panels. Les and I were on the TBOR panel with Special Trial Judge Panuthos and Nina Olson. This session had a PowerPoint presentation, found here. Other materials from this session were a Decision Document Guide; Schedule C examples; an Annotated AUR Notice; a PowerPoint presentation entitled “Effectively Representing the Taxpayer in a Substantiation and Penalty Case”; a Model Stip Decision; and a Bibliography.

Exotic Jurisdictions

Les discussed this session in a previous post found here. This presentation involved a PowerPoint, found here.

Discovery and Stipulation Process

This presentation had a relatively short PowerPoint, found here. It was an excellent session although it is one that is difficult to recapture. The judges and the participants engaged in a good review of the discovery rules and how to put them to best use.

Mediation

This session had a relatively short PowerPoint, found here, and materials, found here. The stories from this panel were good. The Court seems genuinely interested in assisting parties through providing a mediation option. Although I do not see this as a likely avenue for the types of cases I litigate in the Tax Court with the clinic, I came away from the session with a better appreciation of mediation as a viable option. The panelists who had served as mediators spent time describing their special role in that context and how they thought they could best assist the parties in reaching an agreement. Because mediators get to hear both sides in a way that judges do not, this would seem to be a good break for the judges participating from the formal presentation of cases they hear routinely.

 

Lindsay Manor Reprise

Last year, we posted on the Tax Court’s decision in Lindsay Manor v. Commissioner, 148 T.C. 9 (2017). The taxpayer appealed the decision to the 10th Circuit, which has not only dismissed the appeal as moot but also vacated the Tax Court’s decision.

The Tax Court, in a precedential opinion, decided that a corporation could not avail itself of the hardship exception in IRC section 6343(a)(1)(D) holding, in support of Treas. Reg. 301.6343-1, that only individuals may avoid levy based on hardship.

On appeal, the government moved to dismiss the case as moot because Lindsay Manor no longer operated nursing home facilities. The 10th Circuit agreed because Lindsay Manor lacked a “personal stake in the outcome of the lawsuit.” The only issue on appeal was the applicability of IRC section 6343(a)(1)(D) to corporate taxpayers. Lindsay Manor had argued that it qualified for hardship relief only “because imposing the levy would leave it unable to ‘provide adequate care for its patients.’” Since Lindsay Manor no longer has patients this ground for relief does not exist anymore.

In dismissing for mootness, the 10th Circuit looked into the facts surrounding the nursing home Lindsay Manor operated. It turns out that another creditor had a receiver appointed six months before the Tax Court published its opinion. So, the case was moot before the Tax Court published its opinion. In the Tax Court, the IRS filed two motions for summary judgment. The second motion was filed on October 14, 2015 with the response from petitioner on October 28, 2015. The opinion was rendered on March 22, 2017 – about 17 months later. So, Lindsay Manor was operating the nursing home at the time of the last action by the parties prior to the issuance of the opinion. Obviously, neither the petitioner nor the IRS alerted the Tax Court to the change in circumstance.

I looked for a Tax Court Rule obligating the parties to notify the Court but could not find one.  I know that the IRS feels under an obligation to tell the Court when something happens that impacts jurisdiction and provides instructions to Chief Counsel attorneys for notification in the situation presented by this case, bankruptcy filings, etc. The IRS would not necessarily have known about the appointment of the receiver or at least not in a way that would naturally make its way to their Counsel. If petitioner’s counsel knew that his client had been replaced by a receiver, he probably should have notified the Tax Court although I could not file a Rule obliging him to do so.  If either party had notified the Court, I expect that the notification would have caused the Tax Court to not issue the opinion in the first place. Although the 10th Circuit talks below about what the Tax Court should have done, absent notification from one of the parties the Tax Court would have no reason to know of the change in circumstances. A quicker opinion might have averted the problem but this case was one of several with similar issues.  I find the criticism of the Tax Court on this point misplaced.  I was ready to place blame on petitioner’s counsel for not notifying the Court since he was the person most likely to know of the change in circumstances forming a basis for the vacatur but any criticism of petitioner’s counsel would require that they had notice of the receiver coupled with a duty to inform the Court.

The 10th Circuit stated:

“If an actual case or controversy ceases to exist during the course of tax court proceedings, the tax court must dismiss the case as moot.” Willson, 805 F.3d at 320. This case became moot when the court appointed the receiver. After that, Lindsay Manor no longer operated any nursing homes and consequently could not receive economic hardship relief. The Tax Court published its decision on March 23, 2017 – over six months after the receiver had been appointed and after the case had become moot. Rather than deciding the case’s merits, then, the Tax Court should have ‘dismiss[ed] the case as moot.’ Id. Vacatur is therefore appropriate.”

So, we have a sneak peek at what the Tax Court thinks about the regulation but the case itself no longer provides precedent for the position sustaining the regulation that economic hardship does not apply to corporations.

Don’t Expect a Whistleblower Award for Giving the IRS Privileged Information and General Information from the Judicial Conference on this Issue

At the recent Tax Court judicial conference, there was a specific breakout session dedicated to whistleblower cases. I attended the session not because my clinic has, or will ever have, a whistleblower case but because I have blogged a number of these cases which are coming out now with regularity. Since the jurisdictional basis is relatively new, many of the decisions set precedent. From going to this session, I now know that generally we have picked the most important issues to cover with our blog posts. Sadly, we have still not recruited a regular guest poster with expertise who could offer insights someone not litigating this type of case cannot offer. Anyone practicing in this area who would like to send us guest posts would be most welcome.

In addition to discussing and linking to information provided at the Judicial Conference about Whistleblowers, I will discuss a recent case involving the denial of any award. The case points out the difficulty that a claimant will have if the IRS determines that the information is privileged and the claimant disagrees. The Tax Court does not become the forum for litigating whether the IRS made the right decision regarding the privilege just as it does not second guess the IRS on whether it makes a good decision to pursue cases based on the information provided.

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The Conference

The non-judicial panel members for the whistleblower breakout session included: Erica L. Brady, of The Ferraro law Firm (a PT guest blogger); Bryan C. Skarlatos, of Kostelanetz & Fink, LLP; and Robert T. Wearing, of the IRS Office of Chief Counsel. The panel was co-moderated by The Honorable John O. Colvin and The Honorable Daniel A. Guy. During the session, documents were provided to attendees that were useful in following the presentation. The documentation was: first, an outline of the issues in whistleblower litigation; second, accompanying attachments to the outline of the whistleblower litigation issues; third, a general whistleblower outline on representing tax whistleblowers and defending against them; fourth, an outline on IRC section 6103 and the use and protection of taxpayer return information in whistleblower cases; and fifth, a copy of Form 11369 Confidential Evaluation Report on Claim for Award.

The Court provided some statistics on these cases during its presentation. Assuming my handwritten notes correctly captured the data provided, 101 whistleblower cases filed so far have requested permission to proceed anonymously. The Tax Court granted the request in about half of these cases, which is about the same number that were represented. The Court reminded us that the venue for appeal of these cases lies with the D.C. Circuit and stated that three cases were currently on appeal to that court. The number of petitioners seeking relief under this provision increased gradually until 2016 before dropping off in 2017. There were 56 whistleblower petitions filed in 2016 and only 45 in 2017. One panelist suggested fewer claims were filed because taxpayers and practitioners learned more about these claims. The number of IRC section 7623(b) claims has continued to rise each year. One surprising, but not too shocking, statistic was that it takes about seven and one-half years for a claim to go through the process to payout or denial.

Over 14,000 determinations have been made so far by the IRS whistleblower office but it is not clear how many of the determinations are for claims submitted under (a) and how many under (b). It is assumed that most are under (a). Last year the IRS made 242 awards, only 27 of which were under (b). Another thing I learned at the conference, related to the amount of time these cases take, is that the IRS has a relatively new program in which they try to follow up with a whistleblower each year.

The Case

On March 20, 2018, the Tax Court issued its most recent whistleblower opinion in the case of Whistleblower 23711-15W v. Commissioner, T.C. Memo 2018-34. In this sealed case, the Court granted summary judgment to the IRS because it did not initiate administrative or judicial action based on the information provided. The problem with the information was that the whistleblower, an attorney, got the information (in the view of the IRS) in a privileged context. The IRS decided that it could not use the information provided to it in order to create a case. There is not enough information in the opinion to permit a detailed analysis of the information and the privilege. The attorney must have thought that the information was not privileged. The attorney had enough concerns about the information in order to request and receive a sealing of the record of the case but that does not speak to the privilege. The IRS whistleblower office gave the information to Chief Counsel of the IRS, which opined that the privilege attached.

Petitioner had previously been employed as an attorney by the law firm that represented the reported party and alleged, based on information gathered during that relationship, that the taxpayer had “engaged in tax evasion using offshore entities.” Based on the advice received from Chief Counsel’s office, the IRS did not do anything with the information. Since the IRS showed the Tax Court that it did not collect any tax based on the tip, the Court sustained the motion for summary judgment filed by the IRS.

The whistleblower argued that the IRS should have “dug deeper” in reviewing the returns of the reported party but the Court had little trouble brushing aside this argument.

Petitioner disputed that the information was covered by the attorney client privilege. The Court stated “in reviewing the Office’s determination, however, we do not have authority to second guess the IRS’s decision not to proceed with administrative or judicial action. Our authority is limited to ascertaining whether the IRS in fact proceeded with such action and collected proceeds as a result.”

This case shows once again that whistleblowers will not get anywhere arguing to the Tax Court that the IRS failed to make good use of the valuable information provided. It also shows the value of providing the IRS with information about where the information came from and legal support for the ability of the IRS to use the information. The petitioner here disagreed with the determination of the Chief Counsel attorney that the petitioner gathered the information in a privileged setting. Petitioner should have anticipated the concern and provided a detailed legal supporting memo along with the information. Maybe the end result would not have changed, but by heading off concerns at the outset the whistleblower has a better chance that the IRS will accept the information that might otherwise cause it concern. Since the petitioner cannot use the Tax Court to settle any dispute regarding privilege, the petitioner must try to head off the concern before it gets to the stage of keeping the IRS from using the information.

 

Changes Coming on the Tax Court and at Chief Counsel

Congress has under consideration the nominations of three new Tax Court judges: Elizabeth Copeland, Patrick Urda, and Courtney Dunbar Jones for a few months.  This week a fourth new judge, Emin Toro, was nominated. Two of the nominees are graduates of Harvard Law School. I am not sure if this is a court packing scheme on the part of the administration in an effort to help the tax clinic at Harvard which has had its troubles convincing the Tax Court of the correctness of many of its arguments, but the clinic appreciates the efforts of the administration to provide whatever assistance it can.  In addition to the four judicial nominees described below, the administration has nominated a new Chief Counsel, IRS, Michael Desmond, who is also discussed.

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Elizabeth Copeland has the distinction of having been nominated to the Tax Court by both President Obama and President Trump. I suspect she may be the only nominee by these two presidents since their appointments do not ordinarily seem to coincide. Both Presidents made a good choice, which may be why she was renominated by the current administration when her previous nomination lapsed. She has practiced in San Antonio for many years and was named the city’s top tax lawyer in 2017. She is active in the ABA Tax Section and a prior winner of the Janet Spragens Pro Bono award for her work in organizing the Texas Bar to attend and assist at Tax Court calendar calls. Through her practice and her volunteer work, she has a great deal of background in Tax Court issues which will assist her as she assumes her new role. She is the only one of the judicial nominees I personally know, allowing me to attest that the administration has made a great choice. The Committee on Finance unanimously approved her previous nomination, but the nomination was never voted on by the full Senate. Her previous nomination expired with the conclusion of the 114th Congress in January 2017. Copeland is a partner at the law firm Strasburger & Price, LLP. She is a graduate of the University of Texas for both her B.A. and J.D. She worked as an attorney advisor at the Tax Court early in her career.

Courtney Dunbar Jones serves as a senior attorney in the Tax-Exempt and Government Entities division in the Office of Chief Counsel of the Internal Revenue Service. Prior to joining the Chief Counsel’s office six years ago, Ms. Jones practiced for three years in the exempt organizations and intellectual property practice groups of the Washington, D.C.-based firm Caplin & Drysdale. Before relocating to the Washington area, she practiced for four years at Bird, Loechl, Brittain & McCants, a boutique law firm in Atlanta. Since 2015, Ms. Jones has served on the Board of Trustees of Hampton University, where she earned her B.S., magna cum laude, and was the recipient of the President’s Award for Exceptional Achievement. Ms. Jones then earned her J.D. from Harvard Law School, where she served for two years as the editor-in-chief of the Harvard BlackLetter Law Journal, (which has since been renamed the Harvard Journal on Racial & Ethnic Justice). During law school, Ms. Jones was recognized for a variety of achievements; she was named a scholar in the Earl Warren Legal Training Program sponsored by the NAACP Legal Defense and Education Fund, and received the National Bar Institute African American Law Student Fellowship. If confirmed, she will assume the position left vacant by the 2016 retirement of Judge John O. Colvin. Judge Colvin still performs judicial duties as a Senior Judge on recall.

Patrick Urda, serves as counsel to the Deputy Assistant Attorney General in the United States Department of Justice’s Tax Division. Urda received his Bachelor of Arts degree in classics, summa cum laude, from the University of Notre Dame, where he was inducted into Phi Beta Kappa. He received his J.D. from Harvard Law School. At the start of his legal career, Urda spent three years in private practice and served as a law clerk to Judge Daniel A. Manion of the United States Court of Appeals for the Seventh Circuit. In his position as counsel to the Deputy Assistant Attorney General in the U.S. Department of Justice’s Tax Division, Urda advised the Deputy Assistant Attorney General and Tax Division front office on legal and administrative issues facing the Division, particularly regarding appellate and settlement matters. In addition to acting as counsel, he was a member of the Tax Division’s Appellate Section, which he joined in 2006.

While working in the Appellate Section, he has litigated more than eighty appeals from the United States Tax Court and the United States District Courts, and has presented oral argument on behalf of the United States in more than forty-five appeals, including arguments in each of the United States Courts of Appeals. He was also one of the principal drafters of the United States’ successful brief in Hall v. United States, 566 U.S. 506 (2012). Urda is a five-time recipient of the Tax Division’s Outstanding Attorney Award, and has received the IRS’s Mitchell Rogovin Award.

A fourth judge has recently been nominated to fill the seat being vacated by Judge Goeke, whose term expires on April 21. Because the statute requires Tax Court judges to assume senior status at age 70 and because Judge Goeke, like many of us who are baby boomers, is not too far from that age, he may not have sought to go through the nomination process and instead can assume senior status at the end of his appointment. Moving to senior status means that a judge no longer participates in court conferences to decide those cases in which the full court participates; however, it still allows the judge to hear as many cases as he or she may want. The new nominee is Emin Toro. The nomination states the following about Mr. Toro:

Emin Toro is a partner in the Washington, D.C., office of Covington & Burling LLP, where he represents and counsels multinational companies in tax controversies. Mr. Toro’s tax controversy experience includes audits, administrative appeals, litigation, as well as advance pricing agreement and competent authority proceedings. He is also a Fellow of the American College of Tax Counsel. Upon graduation from law school, Mr. Toro served as a law clerk to Judge Karen LeCraft Henderson of the U.S. Court of Appeals for the District of Columbia Circuit and to Justice Clarence Thomas of the Supreme Court of the United States. Mr. Toro earned his B.A., summa cum laude, from Palm Beach Atlantic University and his J.D., with highest honors, from the University of North Carolina School of Law, where he was inducted into the Order of the Coif and served as an articles editor of the North Carolina Law Review.

Adding four judges at once changes the face of the Tax Court in a relatively major way. Other changes to the Court may be coming before long as additional vacancies may be on the horizon.

In addition to the changes at the Tax Court, the President has nominated Michael Desmond for the position of Chief Counsel. No doubt the selection was heavily influenced by the fact that he has been a guest blogger on PT, with posts found here, here and here. Other factors that may have influenced his selection could have been his wide ranging litigation experience at the Department of Justice and private practice, and his additional government experience in the Treasury Department. Like Elizabeth Copeland, he has been active in the Tax Division of the ABA. I am jealous of the fact that he bicycled across the United States a few years ago with Tax Court Judge Buch.  He will form a team with Chuck Rettig, the nominee for IRS Commissioner. As we featured prominently in discussing the nomination of Mr. Rettig, Mr. Desmond has extensive tax procedure experience. Just as previous tax lawyers who have served as Commissioner have not always come with extensive tax litigation and tax procedure experience, the same can be said of prior Chief Counsels. Having two individuals at the top of the IRS with this much practical tax procedure experience should be a good thing for improving processes at the IRS. The most recent Chief Counsel formed a band, The Traveling Helverings, which we have featured before in a post. If the new Chief Counsel and Commissioner, both of whom are coming from the Los Angeles area, decide to form a band maybe it will be known as the Beach Boys if that name is still available.

 

 

 

The Taxpayer First Act

On March 26, 2018, the House of Representatives Committee on Ways and Means Subcommittee on Oversight published a discussion draft entitled “The Taxpayer First Act.” Unlike the recent tax reform legislation, the Act was jointly released by Chairman Lynn Jenkins and Ranking Member John Lewis of this subcommittee in a bipartisan effort to reform tax procedure. It’s nice to see that tax procedure can bring the parties together. The publication of the draft came with an invitation to submit comments and a statement that “Comments would be most helpful if received by April 6, 2018.” That’s a pretty short turnaround time; however the legislation came out just as my clinic class turned to policy. Each semester I try to end with a focus on the policy issues raised by the individual cases on which the students have worked. Writing proposed legislative solutions to policy issues we had encountered seemed like a good way to focus on policy given the invitation from the subcommittee. So, we tried our hand at commenting on the legislation and offering legislative proposals in the tax procedure area that might create a better tax system for the low-income taxpayers we represent. Thanks to Toby Merrill, Sean Akins and Carl Smith who assisted on this project.  On April 6, 2018, the clinic submitted comments to the subcommittee.

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The proposed Act has six parts roughly described as: 1) Independent Appeals; 2) Improved Service; 3) Sensible Enforcement; 4) Cyber Security; 5) Modernization and 6) Tax Court. The Clinic did not comment on all of the proposals. You can read the 49-page document submitted by the Clinic if you want the details, but I will give you a thumbnail sketch here.

Appeals

The subcommittee was concerned about the independence of Appeals. It almost seemed as if much of the concern stemmed from the issues raised in the ongoing Facebook litigation, about which we have blogged before here and here. Low-income taxpayers do not face the same issues of Appeals independence that large corporate taxpayers face. No one in IRS compliance or in Chief Counsel attempts to influence Appeals on an individual case involving a low-income taxpayer because no one at the IRS has worked their case. Their cases are worked in a group setting at correspondence exam. So, the concerns about the independence of Appeals expressed by the subcommittee’s proposal are not concerns that relate to the issues facing low-income taxpayers.

Low-income taxpayers would, however, like the same opportunity as their higher end counterparts to meet with an Appeals officer to discuss their case when a face-to-face meeting would be appropriate. The Appeals employees who work in local offices typically have worked with the IRS for some time and have achieved high grade levels. Appeals does not want these highly-graded employees to spend time working on cases involving low-income taxpayers. Appeals employees with the lower grades generally reside in the work ghettos generally known as service centers. Because of their location, these employees are not accessible to taxpayers. As a result, low-income taxpayers who do not have an individual assigned to their case as they go through the examination process get assigned to someone they never meet face to face and who may work in a community that is across the country creating time zone and community understanding issues. The Clinic suggested that the concerns of low-income taxpayers with Appeals will not be resolved by creating a more independent Appeals but a more accessible one.

Customer Service

Similar to the problem with Appeals, one of the big issues for low-income taxpayers is access to service. We know that Service is the last name of the IRS but it does not have to be the last aspect of focus. The Clinic identified issues that could improve the ability of taxpayers to deal with tax problems. It praised the subcommittee suggestion allowing IRS employees to make referrals to clinics rather than simply passing out a publication. It suggested making eligibility for clinics indexed to local cost of living so that clinics servicing high cost of living areas did not need to turn away individuals living a marginal lifestyle but one slightly above the national average for qualification. Specifically, the Clinic suggested changing the criteria for requiring entities forgiving debt to allow the non-issuance of Form 1099-C in instances of disputed debt. Sending out tens of thousands of Form 1099-C to individuals, usually low-income individuals, relieved of debt in the settlement of a lawsuit disputing that debt causes havoc for the individuals and for the system. This issue is currently playing out in the for-profit school industry where numerous state attorney generals and private parties have challenged the business model and practices of this industry to assist individuals with high debt and little meaningful education to show for it.

The Clinic also suggested changing the litigation path of assessable penalties so that taxpayers do not face insurmountable obstacles in seeking to litigate their dispute with the IRS because of the Flora rule. It suggested changing and clarifying the operation of the I.R.C. section 32(k) penalty for wrongfully claiming the earned income tax credit, arguing that the current penalty operates more like a penalty imposed in the welfare context rather than one imposed by the tax code which causes the IRS trouble is properly administering the penalty. The Clinic also suggested clarification of the provisions regarding taxation of attorney’s fees so that the fees do not create a barrier for low-income individuals seeking remedies for consumer law violations and other similar provisions where the statutory remedy provides a small recovery amount for the individual coupled with statutory attorney’s fees that could trigger tax to the individual in excess of the award amount, that can trigger loss of other public benefits because of the phantom income, and that creates a system of double taxation of the individual and the attorney.

Tax Court

The subcommittee proposals would rename court orders and rename the special trial judges to bring the names more into line with other federal courts. The Clinic made proposals seeking to open up the Tax Court both from a jurisdictional and information perspective. Consistent with the litigation the Clinic has pursued regarding the jurisdiction of the Tax Court, the Clinic suggests that Congress make clear it did not intend the time periods for filing a petition in Tax Court to be jurisdictional. Regarding information availability, the Clinic proposes that all notices giving a taxpayer the right to petition the Tax Court contain the last date for filing the petition, as the notices of deficiency do after the 1998 amendment regarding those notices. Additionally, the Clinic has some suggestions on accessing the Tax Court’s records and other matters.

Conclusion

Although it is now past the requested deadline set by the subcommittee for comments on its legislation, if you agree with any of the proposals of the Clinic, you might consider submitting comments yourself. The portal for sending comments is irsreform@mail.house.gov. Happy commenting.

CP 504

I do not often write an introduction to my own blog post but am making an exception today. Today’s post is short and it is about a taxpayer right’s victory. I want to use the extra space to celebrate some other victories. Of course at PT we are excited about Villanova’s basketball victory for any of you who missed the game. Basketball is a unifying force at the school and a great source of pride. I miss going to the campus gym every morning and walking through the lobby which is a museum of their victories. Villanova had another great victory announcing the selection of Christine Speidel as its new tax clinic director. In addition to joining Villanova to run its tax clinic, Christine is joining procedurallytaxing as a member of our blogging team. She has written several guest posts over the years. Look for many posts by her in the future. As a law student she worked in the Consumer Law Clinic of the Legal Services Center where I now teach. She will bring a lot of new energy to the blog.

Another matter to celebrate is the annual publication of the low income taxpayer report. The report catalogs the work of these clinics and may be of interest to those of you with interest in the tax issues facing individuals. Volume 8 of recent journal article looks at the students who work in clinics and reports on how that work encourages (and discourages) future pro bono efforts of the students exposed to representation during school. Keith

On December 2, 2016, I wrote a strongly worded post about the inappropriate language in Letter CP 504. The CP 504 letter the IRS was sending at the time said that the if the taxpayer did not pay the tax listed on the form the IRS could levy on their property and listed a litany of types of property on which the IRS could levy. The problem with the letter was that the CP 504 letter does not give the IRS that right. The statements made in the letter were legally wrong and could have inappropriately led taxpayers to the wrong conclusion about the action the IRS could take to collect the unpaid assessment of taxes.

In addition to blogging the issue, I had discussions with the appropriate persons at the IRS explaining why I thought the letter was wrong and should be changed to eliminate the language stating that the IRS could levy on a taxpayer’s property. The IRS listened and it made a commitment that it would change the letter to make it accurate. The persons with whom I spoke indicated that the change would not occur until January 2018 – a period approximately one year after committing to the change. I knew that changing an important letter in the collection notice stream would take time and waited.

Recently, one of my clients received the new and improved CP 504 letter. The IRS made the promised changes and no longer tells taxpayers that it can levy on their property in the manner stated in the prior version of this letter. You can see a redacted version of the new letter here. You can find a copy of the prior letter in the earlier post if you want to compare the letters and note the changes.

The IRS deserves credit for changing the letter and appropriately responding to criticism. The collection notice stream is an important part of the collection process. Getting the language in the letters sent during that stream to be accurate as well as persuasive is an important part of the collection function at the IRS.

TBOR and CDP

On March 20, the Tax Court entered an order remanding a Collection Due Process (CDP) case back to Appeals to consider the collection alternative requested by the taxpayer. The remand resulted from the request of the IRS over the strenuous objection of the taxpayer. That’s not the normal scenario for a remand. The taxpayer also sought to have the IRS levy, which it refused to consider at the Appeals level of this CDP case. The facts explain the reason for this seemingly topsy turvy situation. The case also involves significant arguments by the taxpayer about the Taxpayer Bill of Rights and how the actions of the IRS are abrogating those rights. Les and I discussed this case, and others, in our panel presentation this week at the Tax Court Judicial Conference. I will briefly touch on the other cases that we discussed during the panel.

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Mr. Dang is a refugee from Vietnam. After arriving in the United States and quickly integrating, he eventually went into business. Although the business had success initially, it subsequently failed. Mr. Dang had the misfortune to hire a disreputable tax advisor who got him into trouble with the IRS during the period in which the business operated. He has an outstanding liability in the neighborhood of $100,000. That amount of liability allowed Mr. Dang to have his case handled by a revenue officer.

Mr. Dang, through his counsel at a low-income taxpayer clinic, explained to the revenue officer that his IRA was the only asset he had with which he could satisfy his outstanding tax obligation. He asked the revenue officer to levy on his IRA so that he could avoid the 10% (approximately $10,000) excise tax under IRC section 72(t). After some initial resistance, he appeared to have succeeded in convincing the revenue officer to levy on the IRA; however, before the levy occurred, the IRS assigned the case to a new revenue officer and she declined to levy on the retirement account. Instead, she asked Mr. Dang to pull the money out of the IRA and pay off the debt.

Eventually, the IRS issued a CDP notice and Mr. Dang requested a hearing. At the hearing, he requested that the IRS levy on his retirement account. The Appeals employee declined to accept that levying on his retirement account could serve as a collection alternative. He denied relief and issued a determination letter sustaining the right of the IRS to levy on Mr. Dang. A Tax Court petition followed and in their answer to the petition, the lawyers at Chief Counsel IRS admitted that the Appeals employee should have considered Mr. Dang’s request and considered whether a levy on the retirement account would serve as the best way to collect from Mr. Dang. The answer filed on December 1, 2017, stated “respondent will seek to remand this case to Appeals for a supplemental Collection Due Process hearing in which the Settlement Officer’s errors can be corrected.” The answer also stated that respondent “admits petitioner’s CDP hearing was incomplete and did not properly consider all collection alternatives.”

On January 3, 2018, the IRS filed its motion to remand. In that motion, respondent said:

  1. SO True incorrectly believed this request did not qualify as a ‘collection alternative’ and was thus outside the scope of Appeals CDP hearing jurisdiction….
  2. SO True’s determination regarding Appeal’s ability to consider the request was incorrect. Appeals should have evaluated petitioners’ request to pay his liability via a levy on petitioner husband’s Individual Retirement Account and determined whether it was in the best interests of the taxpayers and the government.
  3. Pursuant to Treas. Reg. 301.6330-1€(3) Q&A-E6, taxpayer can request a ‘substitution of assets’ be considered as a collection alternative during a CDP hearing. Requesting respondent collect from a specific revenue source or asset is an acceptable ‘collection alternative’ request and should be considered by Appeals….
  4. A remand for a supplemental hearing is appropriate when it will be helpful or productive…. A remand would be helpful and productive because resolution of this issue would preserve the parties and the Court’s time and resources.”

Petitioners objected to the motion, arguing that it was unnecessary to remand the case and that the Tax Court should simply order the IRS to levy on his retirement account. In the brief filed in support of their objection, petitioners made several arguments and requested “sanctions for violating the Taxpayer Bill of Rights, unnecessarily delaying the resolution of this matter, and needlessly increasing the cost of litigation.” They stated “by refusing to levy on Petitioners’ IRA but insisting upon a voluntary withdrawal from that same IRA, RO Neville rendered meaningless the taxpayer relief enacted by Congress.” They cited to several violations of TBOR, including the right to a fair and just tax system and the right to pay no more than the correct amount of tax.

In remanding the case, the Court gave the IRS a very short time frame to hold the remand hearing and render its opinion regarding taxpayer’s request. Short time frames are a regular feature of CDP cases for taxpayers but not very often for the IRS. It will be interesting to watch this case not only for the substance of the argument that the IRS should levy upon the IRA but also for the role that TBOR might play in the ultimate resolution of the case.

In the panel discussion at the judicial conference, we not only discussed this case but discussed the case of Winthrop Towers previously blogged here, the Harris case  we blogged here and the case of Facebook previously blogged here. It is interesting that in the government brief in opposition to the relief requested by Facebook that it took time to distinguish the Winthrop Tower’s case.

As more and more litigants begin to focus on TBOR, it will be interesting to see how the rights enshrined in legislation in 2015 will impact outcomes of cases (and outcomes of administrative action.) National Taxpayer Advocate Nina Olson, who participated on the panel at the judicial conference said that she did not know how this might turn out but she was watching anxiously. She also said that quotes attributed to her in the government’s brief in opposition quoted her discussing the administrative publication of TBOR and not the legislative enactment. She indicated that by putting it into the Code, Congress changed the impact of TBOR in ways that we do not yet know.

Conclusion

In addition to the CDP and TBOR issues brought to light by this case, the case also raises the issue of levy on retirement accounts. The IRS requires that front line employees get approval two levels up in order to levy on retirement accounts. That approval process generally inures to the benefit of holders of those accounts but serves as a disadvantage to someone like Mr. Dang who wants the IRS to make the levy on his retirement account while the revenue officer does not want to go through the trouble. It seems like there should be a relatively easy path to levy upon a retirement account when it is made at the taxpayer’s request. It is also troubling that those with retirement accounts have their assets more protected from IRS collection action than poorer clients whose only retirement is social security and from whom the IRS can take 15% with no extra approval.

 

Friends of the Benedictines in the Holy Land Wins Tax Exempt Status but Loses Request for Fees Associated with Application Delays

In a precedential opinion, the Tax Court ruled on the request of an applicant for tax-exempt status for administrative and litigation fees. The Court denied those fees in Friends of the Benedictines in the Holy Land, Inc. v. Commissioner, 150 T.C. No. 5 (2018). I think the case merits a precedential opinion because of the ruling on the administrative proceeding period in a case involving exempt status. No aspect of the opinion addresses the substance of the request for exempt status because the IRS conceded that issue at the very outset of the case in the fall of 2013. Since that time, the case focused on whether the taxpayer could receive an award for administrative costs and attorney’s fees.

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Friends of the Benedictines requested exempt status on July 12, 2012, about the time the IRS exempt organization sank deeply into the mire of the allegations of improper treatment of certain applications. Perhaps because of the distractions going at the time in the Exempt Organizations Division of the IRS or perhaps due to the normal time lag for consideration of certain exemption requests, the IRS did not act on the request. The docket sheet in the case indicates that Marcus Owens, a former head of the Exempt Organization Division, was initially counsel in the case. The opinion states that counsel for petitioner called an IRS attorney around September 18, 2013, to ask about the status of the case. Petitioner’s counsel was told that the case was still in process and no definite date of disposition was known.

IRC 7428(a), (b)(2) provides that an applicant for exempt status can petition the Tax Court for a determination of that status if the IRS denies the request or if 270 days passes and the IRS fails to act upon the request. On Friday, September 20, Friends of the Benedictines filed a Tax Court petition. On Sunday, September 22, the IRS issued a determination letter recognizing Friends of the Benedictines as a 501(c)(3) organization. I have occasionally filed petitions which the IRS has conceded before answer but I have never had a two-day turn around with a concession on the weekend. This was impressive. I guess all of the exempt organization people were working overtime anyway to deal with the other problems that existed at the time.

Because of some non-relevant procedural issues, it took three months to get the decision entered by the Court but there was no fight in the Tax Court case since the IRS immediately granted what the taxpayer requested. Having won the substance of the case, taxpayer then requested that the IRS pay its administrative costs and attorney’s fees. Here the IRS balked. There was no two-day turn around to concession on this issue. The case settled in for a 4 and ½ year visit to the Tax Court despite the concession on the merits two days after filing.

Petitioner’s counsel submitted a series of billing statements related to the work done on the case. Some identify a different part as the client. After some back and forth to get more clarity to the billing statements and more clarity concerning the request and whether it was for administrative or litigation expenses, the material was submitted and it became clear that petitioner wanted reimbursement for both administrative and litigation expenses. The court decided the case without hearing based on the materials submitted by April of 2014.

No qualified offer existed in this case. We recently discussed a case in which the taxpayer succeeded in obtaining attorney’s fees without a qualified offer but that is difficult. The Tax Court recounted the statutory requirements of IRC 7430(b) and (c) the petitioner needed to establish in order to win: 1) it is the prevailing party; 2) it did not unreasonably protract the proceedings; 3) the amount of the costs requested is reasonable; and 4) it exhausted the administrative remedies available. The IRS conceded that taxpayer met 2 and 4, but contested the other two elements necessary for petitioner to win. To succeed, the taxpayer must meet all four elements.

The IRS first argued that there were no administrative proceedings in a case involving a request for exempt status. The Court disagreed. Unlike a private letter ruling request that the IRS need pay no attention to, a request for exempt status leads to a Tax Court proceeding if the IRS fails to respond after the appropriate interval and the petitioner wants judicial redress. Looking at all of the elements of the exempt status request and the broad definition of administrative status, the Court concluded that the request did indeed involve an administrative proceeding that could give rise, in appropriate circumstances, to an award of costs.

The IRS then argued that petitioner could not be the prevailing party with respect to administrative costs because the IRS never took a position. How could the petitioner prevail over the IRS which did not say yea or nay to its request? Petitioner argued that administrative costs should not be “limited to those incurred after the issuance or receipt of a notice or letter.” The Court responded to this argument by stating that to agree with petitioner, “we would have to find an unwritten exception to the statute and hold that the notice or letter requirement is inapposite when the claim for administrative costs rests on the fact that the IRS has failed to act.” In the end, however, the Court takes a pass on this issue finding that petitioner only provided evidence of litigation costs.

I wondered how you would measure administrative costs if the administrative issue begins with the submission of the request for exempt status. At the point of submission, all of the initial “administrative” work is done.   In a case like this in which the IRS does not but also requests nothing of the taxpayer, it does not seem as though the taxpayer has administrative costs. It costs nothing to sit and wait, as frustrating as that might be.

Nonetheless, the Court passes over the issue by finding that all of the fee requests from petitioner really relate to the “litigation” of the case. Litigation here is a two-day period over the weekend when the IRS cranks into gear on the exemption requests and pumps out a thumbs up. The IRS argued that its position in the judicial proceeding was substantially justified. The Court notes that the applicable statute, IRC 7430(c)(7), “does not specify when the United States takes a ‘position’ in a judicial proceeding.” The Tax Court has generally held that the IRS establishes its litigating position when it files its answer but notes that it could be established earlier under certain circumstances.

Here, the lightening quick concession of the case, 58 days before the answer was due, establishes that the IRS position in litigation was justified. In reaching this conclusion, the Tax Court rejected the reasoning of a pair of district court cases, Grisanti v. United States, No. 3:05CV12-D-A (N.D. Miss 2006) and Powell v. Commissioner, 791 F.2d 385 (5th Cir. 1986), that held unreasonable delays or positions during the administrative process could not be cured by a quick concession in the court proceeding. The Tax Court said that it bifurcates the administrative and court aspects of a case and could not accept the reasoning of these cases that a bad position during the administrative aspect of a proceeding washes over into a determination of the justification of the IRS’s litigating position.

Before closing, the Tax Court expresses sympathy for the position of the petitioner. Unless a case is brought where the appeal will go to the 5th Circuit, it looks like concessions before or near the filing of the answer will insulate the IRS from attorney’s fees except in those cases in which the taxpayer makes a qualified offer during the pre-notice visit to Appeals. The case shows again the difficulty facing taxpayers who seek attorney’s fees in Tax Court cases.