Another Circuit Weighs in on the Discharge of Unfiled Returns

We have discussed how courts, IRS and debtors are struggling with Bankruptcy § 523(a) and its infamous hanging paragraph. Addressing exceptions to discharge that language states the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). A number of courts have held that unless a return is filed by the appropriate due date, the tax liability is not eligible for discharge; other courts have pushed back on the one-day rule.

In Giacchi v. United States, the Third Circuit continued a trend away from the one-day rule and held that the debtor’s taxes were non-dischargeable based on the application of the Beard test.  Following the pattern of other recent cases on this issue discussed here and here, the Third Circuit stated that it did not need to reach the one-day rule because it found that the Forms 1040 filed by Mr. Giacchi after the IRS had already assessed the taxes based on IRC 6020(b) determination of the liability and a failure by Mr. Giacchi to petition the Tax Court in response to a statutory notice of deficiency were not a genuine effort to file a tax return but were simply forms filed to qualify Mr. Giacchi for discharge.  Of course, the Court could have avoided having to make the determination based on the valid return issue if it had decided based on the one-day rule.  So, the decision, like the recent decisions in other circuits, serves as an implicit repudiation of the one-day rule even though the Third Circuit does not directly take on the statutory language and seek to resolve the issue directly.


As discussed before, the resolution of the issue in the manner in which the Third Circuit resolves this case does little to fix the problem the IRS has of administering discharges to determine when it may write off tax liabilities.  The Court did not adopt the bright line rule sought by the IRS that would make any Form 1040 filed after the IRS makes an IRC 6020(b) assessment unqualified to meet the test of a return; however the Court comes about as close as you can come to setting out that conclusion without explicitly doing so.  The case presents a strong victory for the IRS and will prevent just about any taxpayer in the Third Circuit from getting a discharge once the IRS makes an IRC 6020(b) assessment.

The facts of this case follow the normal fact pattern for someone filing a late return and seeking discharge.  He failed to file returns for 2000, 2001, and 2002.  In 2004, the IRS prepared substitute returns for 2000 and 2001, sent him a statutory notice of deficiency, he defaulted on that notice and then filed the Forms 1040 for 2000 and 2001 about one month after the IRS assessed the taxes based on the defaulted notice.  The only thing unusual about these facts is how quickly he filed the returns after the assessment.  The assessment would have triggered a notice and demand letter but he should also have received several letters leading up to and including the notice of deficiency.  So, it is not clear why the notice and demand letter would have prompted action.  The IRS went through the same process for the unfiled 2002 return.  It ended up assessing that liability in 2005 and he filed the delinquent Form 1040 in 2006.  He filed a chapter 7 bankruptcy in 2010.  When the IRS did not remove the tax liabilities for these three years, he then brought an adversary proceeding against the IRS seeking to have the court determine that the taxes were discharged.  The bankruptcy court and the district court held the taxes were excepted from discharge.

Mr. Giacchi made three arguments which the court rejected in relatively short order.  First, he argued that the filing of the returns represented an honest attempt to comply with the tax law.  In rejecting this argument, the Third Circuit specifically declined to follow the Eighth Circuit decision in Colsen v. United States, 446 F.3d 836 (8th Cir. 2006).  This repudiation of Colsen definitely benefits the IRS as it tries to consolidate the Circuit court opinions and the reasoning, similar to the Fourth Circuit’s decision in In re Moroney, 352 F.3d 902, 905-6, leaves little room for any taxpayer who files a Form 1040 after an IRC 6020(b) assessment.

Second, Mr. Giacchi argued that because his late filed Forms 1040 showed less taxes than the amounts assessed by the IRS and the IRS abated the taxes down to the amounts on the late filed returns, the documents had meaning and should be treated as returns.  This situation almost always arises when taxpayers file the late Forms 1040.  The court noted that he should not benefit just because the IRS made an imprecise estimate of his liability (and because it abated his liabilities in response to the late filed Forms 1040.)

Lastly, Mr. Giacchi argued that he should be excused because of his emotional state during the years.  The Court did not describe his emotional state.  In effect, Mr. Giacchi seeks an IRC 6511(h)-like suspension of the time to file due to his incapacitating emotional condition.  The Court suggested that under the right circumstances someone might be able to demonstrate a good faith effort to comply with the tax laws but his emotional state did not fit the bill.

Unless Mr. Giacchi succeeds in convincing the Supreme Court to take his case, the circuit split between the three “one-day rule” circuits, the Eighth Circuit in Colsen and the five or so relatively pure Hindenlang circuits will persist.  Look at earlier posts here, here, and here for a greater discussion of this issue.

Almost immediately after the Giacchi decision, a bankruptcy court in the Northern District of California cited to the Giacchi decision favorably in the case of Van Arsdale v. Internal Revenue Service.  Mr. Van Arsdale, whose facts were essentially similar to the Giacchi facts, argued that he panicked because he did not have enough money to pay his taxes for the year at issue and then he stuck his head in the sand until after the IRS made the assessment.  In citing to Giacchi, the bankruptcy court found that this explanation, without more, simply did not help.  The Ninth Circuit decision in In re Smith, 828 F.3d 1094 (2016) sets up a test similar to the one adopted by the Third Circuit.  The decision in Van Arsdale was very predictable based on circuit precedent but shows continuing attempts to seek discharge even in circuits that have recently made pronouncements on this issue.

Follow Up on Recent Posts

On March 28, I wrote a post about an innocent spouse/injured spouse case, Palomares v. Commissioner, pending before the 9th Circuit.  The case has been argued and the oral argument is available here for those who have an interest in this issue.

On May 23, I wrote a post about a fully stipulated collection due process case, Low v. Commissioner, in which the Court remanded the case because the stipulation was incomplete.  Counsel for the petitioner commented on the case and has provided access to certain documents in that case for those with further interest.  The first stipulation of facts, the briefs, and the briefs in a related case are available through these links.

On May 18, Les wrote a post about the statute of limitations where the taxpayer failed to file the correct form with the IRS, May v. United States.  We received a lengthy and thoughtful comment about the matter from occasional guest blogger Stu Bassin.  For those interested in this case, we recommend reading his comment.

We bring this up occasionally but the people providing comments on the blog post bring up many relevant insights about the matters on which we post.  If you are not regularly reading the comments or at least looking for comments on posts of interest to you, you are missing some important information.  Thank you again to those of you who take the time to comment for your thoughtful insights on the posts.  Please remember if you make a comment that we do request that you identify yourself because we find that self- identification keeps the comments more civil in tone.  We hope that you find the blog provides civil discourse about tax procedure issues and that the comments continue that civil discourse about important tax procedure issues.

In addition to soliciting your comments, we also welcome guest bloggers.  If there is a tax procedure issue about which you would like to write a blog post for our site, please contact one of us with your idea or your post.

Changing of the (Special Trial Judge) Guard

At the recent meeting of the ABA Tax Section, Chief Judge Marvel announced that Chief Special Trial Judge Peter Panuthos is stepping down from his position as Chief of the special trial judges and returning to the ranks of “regular” Special Trial Judge.  The Tax Court also posted an announcement of this on its web site.

Replacing Judge Panuthos as Chief Special Trial Judge is Judge Carluzzo.  By chance, both judges, along with former Chief Judge Colvin, were on a panel at the Pro Bono and Low Income Tax Clinics Committee to celebrate 25 years of service by Judge Panuthos in the role of Chief Special Trial Judge.  I want to take this opportunity to join in the celebration of his service and also to look forward to the tenure of Judge Carluzzo as he assumes that role.


Judge Panuthos worked for Chief Counsel, IRS before he was selected as a Special Trial Judge in 1983.  Although he is from New York, he worked in the Boston office and became an assistant district counsel in that office before departing for the bench.  At the time he started in Chief Counsel’s Office, the office had a “home state rule” that prevented attorneys from working in an office located in their home state.  Although I do not remember speaking to him about it, I am almost certain he ended up in Boston because of that rule.

Today, there are five special trial judges.  At the time Judge Panuthos became the Chief Special Trial Judge in 1992 there were almost three times that number.  It is easy to forget today how much TEFRA has changed the Tax Court’s docket.  The tax shelter wars of the 1980s coupled with the need to send a notice of deficiency to each individual partner caused the Tax Court’s docket in the 1980s to balloon to almost three times its current size.  The Court used special trial judges to deal with the expanded docket and has watched their ranks diminish as the number of cases has declined and as the number of senior judges has expanded.

At the ABA meeting, Judge Marvel also noted that Court receipts are down this year and that the Court is closing cases at a faster clip than it receives them.  Since IRS activity drives receipts and since the IRS budget may cause a reduced number of notices of deficiency and determination for the foreseeable future, it seems unlikely that the number of special trial judges will expand unless the Congressional inability to approve judges causes their ranks to swell.  Unlike “regular” Tax Court judges who must go through the Presidential appointment and the Senate approval process, Special Trial Judges are hired by the Tax Court which allows the Court, assuming its budget permits, to fill necessary vacancies as case receipts dictate.

Judge Panuthos has a well-deserved reputation as someone who has championed the cause of the unrepresented.  He has played a giant sized role in making the Tax Court a model among federal courts (and all courts) for its treatment of pro se litigants and for creating an atmosphere of access to justice for unrepresented individuals filing petitions without representation.  His tenure matches almost exactly with the expansion of the earned income credit (EIC) in the mid-1990s with the creation of the welfare to work laws and with the expansion of small case jurisdiction to $50,000 in 1998.  The EIC expansion changed the IRS audit focus and consequently changed the Tax Court’s docket.  With approximately 70% of its petitioners coming into the door unrepresented, the Tax Court more than most federal courts has had to adjust to working with unrepresented individuals and trying to get them positioned to adequately present their cases.

Judge Panuthos has worked closely with low income tax clinics during his tenure as they expanded from about a dozen when he became Chief Special Trial Judge to over 140.  He worked to build the Court’s web site with FAQs and a video to explain what happens during a Tax Court proceeding.  He worked to create the “stuffer” notice alerting unrepresented taxpayers to the clinic resources in their locality.  For this work he has been recognized by the ABA Tax Section as the only judge to receive the Janet Spragens award for Pro Bono Service and by the Tax Court itself with the J. Edgar Murdock award.  Because of the length of his tenure as Chief Special Trial Judge, the significant changes happening to the Court’s docket during that tenure and his remarkable and compassionate response to those changes, he has transformed the position.

Judge Carluzzo will follow Judge Panuthos as the Chief Special Trial Judge.  Those who have heard him speak and who have practiced before him know that he also shares a passion of access to justice.  Judge Carluzzo also worked in Chief Counsel, IRS before moving to the Tax Court.  Because he worked in District of Columbia field office of Chief Counsel which was a neighboring office to the Richmond office where I worked, I knew him as one of the top trial lawyers in the office.  He joined the Tax Court in 1994 so he brings plenty of experience to the position.  In 2008, I started a Tax Court Litigation class at Villanova primarily to teach clinicians working at low income taxpayer clinics who try cases in Tax Court.  Judge Carluzzo has volunteered his time for every class to assist in training clinicians to practice before the Court.  He is a marvelous teacher.  He wants low income taxpayers to be represented, and well represented.  He will continue to tradition that Judge Panuthos has started and will keep the Tax Court in the forefront of access to justice.  We are fortunate that Chief Judge Marvel had the opportunity to fill the position of Chief Special Trial Judge with someone who shares the passion that Judge Panuthos brought for unrepresented petitioners.



Submitting a Tax Court Case Fully Stipulated

A recent order issued by Judge Nega in the case of Low v. Commissioner points to the perils of submitting a case fully stipulated under Tax Court Rule 122.  Rule 122 allows the parties in a Tax Court case to fully stipulate a case and avoid the messy issues that can arise at trial.  When done correctly, fully stipulating a case provides a simple and easy method for submitting a case to the Tax Court.  When done poorly, a party can learn to its detriment that it has made an incomplete stipulation leading to an avoidable loss.

A typical case in which the parties use Rule 122 involves a case in which the parties dispute one or more discreet legal principles but have no disagreement on the facts.  Of course, it is possible to go to trial and neglect to put on necessary facts, but submitting a case fully stipulated may make it easier to overlook necessary facts.  The Low case involves a Collection Due Process (CDP) determination.  Here, respondent overlooked including the administrative record in making the Rule 122 submission and the court finds that oversight troublesome.

I submitted a case fully stipulated once when working for Chief Counsel, IRS and the case included the negligence penalty.  The case arose before 1998 and the change in the burden of persuasion on penalty issues.  Petitioner’s counsel did not request that we stipulate to any facts that would support a basis for the court to find reasonable cause or another basis for striking the penalty.  Several weeks after the case was submitted fully stipulated, he realized that he needed more facts in order to give the court a basis for finding in his favor.  The additional facts he wanted to stipulate were, after some discussion and narrowing, facts with which I agreed.  We submitted a supplemental stipulation.  In the Low case, however, the parties never realized that their stipulated facts did not fully present the issue.  This caused a problem for Judge Nega.  He resolved it by remanding the case which he could do because it was a Collection Due Process (CDP) case.  I do not recall a previous case which the Court remanded due to an incomplete stipulation.  So, I thought I would write about this non-precedential order.


As mentioned above, the Low case involves CDP.  CDP cases do not naturally lend themselves to submission under Rule 122 and I do not remember seeing a fully stipulated CDP case previously much less one that was remanded.  The fact that CDP cases do not regularly use Rule 122 does not mean that its use here was inappropriate.  The factual nature of CDP cases usually involves a petitioner who wants or needs to testify – assuming they get past the now routine motion for summary judgment.  A CDP case contesting the merits of the liability could easily qualify for Rule 122 treatment.

The failure to submit the administrative record as part of the Rule 122 submission leaves the judge less than satisfied with the record he must work with to make a decision.  He states:

In the notice of determination, the AO provides a perfunctory statement asserting she verified respondent’s compliance with the “requirements of any applicable law or administrative procedure” by reviewing petitioner’s account transcripts. Petitioner’s transcripts are not included in the record before us. In fact, we were not provided any of the documents that ordinarily comprise the administrative record, that corroborate and support an appeals officer’s findings and determinations. See IRM pt. (Sept. 18, 2012)(when litigating a CDP action respondent ought to provide the Court with a substantive and authenticated copy of the administrative record as described in IRM pt. (July 25, 2012)(e.g.: Forms 4340, Case Activity Record Prints)). The stipulated record is astonishingly thin, composed of only four exhibits: two letters from petitioner, the levy notice, and the notice of determination. A clear record is necessary for review of any administrative proceeding. Here, the paucity of the record before the Court provides anything but clarity. It is within the Court’s discretion to remand cases to respondent’s Office of Appeals for clarification and supplementation of the administrative record as appropriate. See Wadleigh v. Commissioner, 134 T.C. 280, 299 (2010); Hoyle v. Commissioner, 131 T.C. 197 (2008); see also Gurule v. Commissioner, T.C. Memo. 2015-61 (remand is appropriate when the appeals officer failed to develop an administrative record sufficient for judicial review). Because the administrative record is insufficient, and we are unable to properly evaluate whether the AO abused her discretion, we will remand this case.

The quoted material contained two footnotes.  The first footnote addressed the material the IRM suggests should be made part of the record and provides the following:

IRM pt. directs respondent’s counsel, when attempting to dispose of a CDP case by means of summary judgment, to provide this Court with supporting declarations and an authenticated copy of the comprehensive administrative record. See also Rule 121(d). It would seem appropriate to expect the same when a case is similarly submitted for disposition without trial under Rule 122.

The second footnote addressed the failure of respondent to discuss the proof issue raised in Chai v. Commissioner regarding the authorization of the penalty asserted by the IRS.

It is clear that the IRS attorney has work to do here.  We have addressed in several posts the additional work needed by the IRS in its summary judgment motions under Rule 121 as pointed out by several orders issued by Judge Gustafson.  Now, Judge Nega points out the many missing pieces when the IRS seeks instead to use the fully stipulated Rule 122 procedure.  The regularity of these orders suggests that Chief Counsel attorneys may need to step back and think more deeply about what they must prove in submitting cases.

The decision in Chai changes the game somewhat but the problems go deeper.  Here, the Court allows/orders the parties to resubmit a fully stipulated case.  In some ways this is like having a trial and then getting a do over.  It does not reflect well on the IRS that it cannot identify the facts necessary to prove its case and that it has submitted a case fully stipulated which falls so far short of the necessary proof.

Rule 122, when used properly, allows the parties to save time and money by not having to go through a trial.  When submitting a case fully stipulated, however, you must go through all of the same steps regarding proof that you would do if you had a trial.  You must carefully analyze each issue in the case and make sure that you have put in evidence that will support your position on the issue.  The failure to do so creates a disaster.  Having a Rule 122 case returned as an inadequate submission is not something I remember seeing before.  The IRS looks really bad here.

The taxpayer represented himself and made frivolous arguments.  The Court admonishes him to stop making such arguments or face a penalty.  The Court remands the case to Appeals.  I am sure the IRS will do a better job when/if the case comes back to the Court but surprised that it missed the mark so widely in this first attempt.

Getting the Bum’s Rush in a Collection Due Process Case

Collection Due Process (CDP) cases have the ability to remind you of the axiom often associated with military service “hurry up and wait.”  Carl Smith and I wrote about this several years ago in a pair of articles for Tax Notes, in which we looked at the amount of time it took for a CDP case to get through Appeals and the amount of time it took a CDP case to get through Tax Court.  While Congress seemed to have the idea that CDP cases would move swiftly so they did not slow down collection and created a very short period of time, only 30 days, for the taxpayer to request a CDP hearing and to petition the Tax Court after a determination, Congress placed no restrictions on the amount of time a CDP case could sit in Appeals or sit in Tax Court.  So, the taxpayer must hurry up and request an Appeals hearing only to wait quite some time in many cases before the hearing occurs and then hurry up and request a CDP hearing only to have the case sit in the Tax Court inventory longer than a deficiency case.

Some taxpayers may not mind the slow movement of their cases in Appeals and the Tax Court.  Taxpayers in receipt of a notice of intent to levy who have no real plan for payment of the tax and no desire to start making payments may rejoice in the slow process.  Taxpayers in receipt of a notice of federal tax lien who would like to address the lien and remove the notice through withdrawal, or remove the lien by showing the underlying liability does not exist, or some other meaningful remedy may want a much more expedited hearing schedule.

In a designated order recently issued by Judge Gustafson in an S case, Petitioner Keith Brown got through Appeals with lightning speed only to see his case come to a halt after filing his Tax Court petition.  The facts are not too unusual, but the outcome is.  I will set out the Judge’s take on this fact pattern and how it has resulted in a trial in which the taxpayer will have the opportunity to explain his situation.


Mr. Brown owed taxes and the IRS filed a notice of federal tax lien (NFTL).  The NFTL prevented him from borrowing money which he needed to do in order to make money – he is in the construction business.  He timely requested a CDP hearing and about two months later Appeals sent him a letter scheduling a telephonic hearing on January 13, 2016.  The letter explained that if he wanted an offer in compromise he needed to become compliant with his tax filing and file his 2014 return.  The telephone conference took place on the appointed date; however, he had not yet filed his 2014 return.  He asked the Settlement Officer to give him 30 additional days to file it but she said she would “have to issue a determination letter sustaining the lien [meaning sustaining the filing of the notice of federal tax lien].”  She issued the determination letter 14 days later.  This is really fast and could have been just what Mr. Brown wanted if he had been ready with his 2014 return.

Mr. Brown filed his 2014 return on February 25th and his Tax Court petition on the same day.  The case slowed down considerably as it was scheduled for trial in June of 2017.  The IRS attorney filed a motion for summary judgment on April 13 the last day based on the Tax Court Rule 121(a) for filing such a motion.  The judge noted that Mr. Brown had elected small case status and that motions for summary judgement were permitted but less common.

The judge noted that when he received the letter from Appeals setting the CDP conference, he was told to produce his late return less than one month later.  He was denied a requested extension.  The Settlement Officer did not provide any reasons for denying his request for additional time.  So, the court had no basis for understanding its reason and no indication of unresponsiveness or other delays on the part of Mr. Brown.

“Setting unreasonable deadlines can constitute an abuse of discretion.”  Ang v. Commissioner, T.C. Memo. 2014-53.  The judge noted that the month-and-a half duration of the CDP case from the date of the opening letter to the date of the determination letter seemed very short but invited the IRS to correct his impression at trial.  He noted not only the speed of the action by Appeals but the slowness of the action by IRS Counsel in determining that the failure to grant Mr. Brown more time in this circumstance was an abuse of discretion.

The denial of summary judgment does not signify a victory for Mr. Brown.  He must go to trial.  Assuming that at the trial the court determines that Appeals did abuse its discretion, he is not relieved of the liability nor is the lien withdrawn.  He simply receives a chance for a remand and a further discussion with Appeals about the best way to resolve his collection case.  During all of this time, Mr. Brown has had to live with the NFTL tying up his credit.

I applaud Appeals for giving him such a quick conference.  While the title of this post suggests the taxpayer received the bum’s rush, I wish all CDP lien cases were heard this quickly by Appeals.  I know when I file the request that all returns must be filed.  I have the taxpayer working on return preparation of any past due returns from the time we plan to file the CDP request.  I hope that by the time of letter from the Settlement Officer setting the hearing that all past due returns have been filed, the offer form (if that is the requested remedy) has been completed and the package of materials is ready and waiting by the time Appeals reaches out.  The Settlement Officer could have waited another couple of weeks and avoided the concern expressed here of abusing discretion.  I often think that the refusal of additional time stems from a need for the IRS employee to meet internal deadlines for case processing.  That could not have been the reason here.

Perhaps the IRS would better position itself if it put some warning on the Form 12153 or sent out an early letter alerting taxpayers to the need to be compliant in their tax filing if they wanted to request a collection alternative.  Practitioners know that filing compliance must pre-date a successful request for a collection alternative but pro se petitioners may not.  Had the IRS proven, or if at trial it does prove, that it had told Mr. Brown about this requirement prior to the short time span between the initial Appeals letter and the hearing, perhaps the Court would have found or will find the failure to grant a request for more time reasonable.

CDP lien cases should move quickly because the lien ties up the taxpayer’s credit as Mr. Brown alleges here.  It would be nice if the Court could develop some system to hear lien cases quickly.  Having to wait 14 months after the petition for a trial is not unreasonable in most cases but can really hurt someone trying to get relief from the impact of a NFTL. I do not have any wonderful suggestions but do see this as one type of case where the taxpayer is harmed by the normal rhythm of Tax Court case processing.

The decision showcases the need for Appeals to be reasonable when a petitioner requests more time in a CDP case or at least to document the record if it is denying a request for additional time.  Although this opinion provides no precedent, it does provide a good reminder of another circumstance in which a taxpayer can argue abuse of discretion.



Bias Creating Remand


I wrote last August about the first case in the Tax Court involving a motion for reconsideration based on a decision by former Judge Kroupa alleging that the petitioner lost the case due to bias because at the time of the issuance of the opinion the IRS had begun its investigation.  The docket sheet suggests that the case is moving toward a new trial.   Occasional guest blogger Andy Roberson of McDermott Will and Emery posted on his law firm blog another case in which the petitioner sought remand due to the alleged bias of former Judge Kroupa.  The party argued that a decision by former Judge Kroupa in a different case with a similar issue should not be followed because of her bias which impacted the outcome of her opinion, making her opinion one on which the 1st Circuit should not rely in reaching its decision in the Santander case.  Despite seeking to have former Judge Kroupa’s bias somehow impact the outcome of a case with a related issue, the effort to argue her bias did not stop the 1st Circuit from reversing the decision of the district court.

Andy also blogged about the Tax Court’s new rules for judicial conduct adopted in 2016 after the indictment of former Judge Kroupa.  My research assistant looked for other cases in which parties had alleged bias by former Judge Kroupa should result in a reversal of the initial opinion.  She did not find any other cases raising this issue.


On March 6, 2017, the Supreme Court issued a per curiam order in the case of Rippo v. Baker in which it reversed the decision of the Supreme Court of Nevada on the basis that the judge presiding over the state court trial of Mr. Rippo was the target of a federal bribery probe at the time of his case.  Mr. Rippo argued that, even though he was being tried in the state system and his judge was being investigated by the feds, the local DA’s office was playing a role in the federal investigation and that connection prevented the judge from acting impartially.  The judge declined to recuse himself.  After the judge’s indictment, a different judge denied Rippo’s motion for a new trial.  The Nevada Supreme Court affirmed the denial of a new trial.  Mr. Rippo continued to advance his argument in seeking post-conviction relief.  The state courts continued to deny him relief and likened his defense to the ‘camouflaging bias’ theory discussed in Bracy v. Gramley, 520 U.S. 899 (1997) where the Court stated:

The Bracy petitioner argued that a judge who accepts bribes to rule in favor of some defendants would seek to disguise that favorable treatment by ruling against defendants who did not bribe him.  Id., at 905.  We explained that despite the ‘speculative’ nature of that theory, the petitioner was entitled to discovery because he had also alleged specific facts suggesting that the judge may have colluded with defense counsel to rush the petitioner’s case to trial.  See id., at 905-909.  The Nevada Supreme Court reasoned that, in contrast, Rippo was not entitled to discovery or an evidentiary hearing because his allegations ‘did not support the assertion that the trial judge was actually biased in this case’  132 Nev., at __, 368 P. 3d, at 744.

Bracy is a criminal case and we could not find where the rule in Bracy had been applied in a civil proceeding.

The Supreme Court vacated the decision of the Nevada Supreme Court because it applied the wrong standard, stating that “the Due Process Clause may sometimes demand recusal even when a judge ‘has no actual bias.’” Citing to Aetna Life Ins. Co. v. Lavoie, 475 U.S. 813, 825 (1986) the Court went on to state that “[r]ecusal is required when, objectively speaking, ‘the probability of actual bias on the part of the judge or decisionmaker is too high to be constitutionally tolerable.’”  Aetna Life was a civil proceeding in which one of the judges had a significant personal interest in a class action against Blue Cross and decided against the insurance company.  Interestingly, the other judges in the case also had some interest because they were connected or covered by Blue Cross but it was determined that their connection was remote and minimal so it did not reach the bias threshold.

The Court went on to talk about the risk being too high that bias might exist to be constitutionally tolerable as it remanded the case for further proceedings.  The Rippo case differs from the cases alleging bias by former Judge Kroupa both because it involves a criminal matter and the person claiming bias did so at the outset of the proceeding.  Still, Rippo shows the struggles that occur when sorting out possible motives for a judge to rule in a case where objectivity comes into question.  The fallout from former Judge Kroupa’s actions may now be limited to the Eaton case.  Other petitioners in the cases she decided and the IRS do not seem to have brought any cases alleging bias and enough time has now passed that it seems unlikely that additional parties will allege bias because of the criminal investigation.  The Tax Court showed its willingness in Eaton to give the taxpayers a second chance with a new judge.  Rippo demonstrates that the Supreme Court has little tolerance for biased judges, but that case involves criminal liability.  It will be hard to demonstrate that former Judge Kroupa’s decisions resulted from bias because of the criminal investigation.  Maybe this chapter of troubles for the Tax Court resulting from former Judge Kroupa’s action will end with Eaton.



From A to Z the IRS Throws Every Possible Argument at the Court in Unsuccessful Attempt to Avoid Attorney’s Fees

We have talked about what it takes to recover attorney’s fees from the IRS in prior posts here, here, and here.  The recent Court of Claims case of BASR Partnership v. United States, takes almost all possible defenses to attorney’s fees and puts them on display in one case.  For that reason the case deserves discussion.  One reason the IRS may have tried so hard to avoid attorney’s fees in this case stems from the fact that the taxpayer engaged in what the IRS no doubt considered abusive tax shelter activity and only avoided tax and penalties due to a snafu.  So, the fight over fees just added insult to injury with the IRS feeling that the taxpayers should have paid significant liabilities for its activities and yet ending up with no tax as well as payment by the IRS for the representation it received.


In 2013, the Court of Federal Claims determined that the IRS did not timely issue an FPAA to BASR.  The IRS appealed to the Federal Circuit and lost again.  The IRS requested a Petition for En Banc Rehearing and the court denied that as well.   The government does not lightly seek en banc review.  It must have felt strongly on the merits of the FPAA issue, but I am not going to discuss that issue in this post.

After winning these significant victories which kept the IRS from making adjustments to the partnership for what the IRS viewed as abusive tax shelter activities, the taxpayer and its attorneys at Sutherland Asbill & Brennan sought attorney’s fees, and they sought fees at a higher rate than the statutory rate for attorney’s fees.  The IRS filed a motion to conduct limited discovery concerning the fees and the taxpayer responded.  After a conference with the court the taxpayer was required to “produce the client’s fee agreement, a copy of all legal bills sent to the client, and any proof of payment from the client.”  Then the IRS filed an objection to the motion for litigation costs and requested oral argument.  The taxpayer requested “fees for fees” seeking to add to its recovery and get reimbursed for the cost of fighting about the existence and amount of the fee award.

The first thing the taxpayer needs to do in seeking to recover fees is show that it is a “prevailing party” which means it must have (1) substantially prevailed with respect to the amount in controversy; (2) the IRS position was not substantially justified; and (3) the statutory requirements regarding net worth are met.  The taxpayer can meet the first two parts of this test, which are otherwise quite difficult to meet, if it makes a proper qualified offer and that is why we have discussed qualified offers to a significant extent in the prior posts cited above.  Making a qualified offer is the most direct path to obtaining fees since it moves the taxpayer past the substantially justified barrier.  In this case BASR made a qualified offer of $1 to the IRS to settle the FPAA issue.  As you can tell from the litigation I described above, the IRS did not settle the FPAA issue and fought it all the way to making the request for en banc reconsideration.  Because the IRS lost completely on the statute of limitation issue, the effect of its loss was that the taxpayer did better in the litigation than the $1 offer it made to the IRS since it owed $0 after winning the statute of limitation argument.  This put the taxpayer over a big hurdle to becoming a prevailing party and appeared to leave it only with net worth requirement.

In addition to showing that it was the prevailing party, BASR also needed to meet statutory tests set out in IRC 7430(b) involving (1) exhaustion of administrative remedies, (2) showing the fees and costs are allocable to the IRS and (3) showing that it did not unreasonably protract the proceeding.  My clients often fail the exhaustion of administrative remedies test because they do not avail themselves of the opportunity to go to Appeals prior to going to Tax Court.  Here, the IRS foreclosed the taxpayer’s option of using Appeals because it said that Appeals would not consider Son of Boss transactions.

Taxpayer argued that it needed the increased fee because it could not find any attorneys with expertise on this issue willing to take the case at the statutory rate.  Because of the billing rates of the firm it used, BASR seeks fees at a rate essentially twice what the statute suggests.  Almost no tax firm bills out at the statutory rate and taxpayers will always argue that their case is novel or complex but getting a higher rate than the one set in the statute is not necessarily easy just because the rate is out of sync with today’s fee schedules.

The IRS makes an argument regarding every possible issue that would prevent BASR from obtaining fees.  First, it argued that BASR did not pay or incur any litigation costs because the engagement letter was with William Pettinati, his wife and his son.  Second, the IRS argued that BASR was not a real party in interest because all of the fees were paid by these individuals.  Third, the IRS argues that the real parties in interest have net worths in excess of the statutory maximum.  Forth, the IRS argues that BASR did not make a qualified offer because the case did not involve a tax liability and the qualified offer provision does not apply to “any proceeding in which the amount of tax liability is not in issue.”  A clear example of this language would be a collection due process case in which the underlying merits of the liability were not at issue.  Fifth, the IRS argued that offer to settle for $1 was not made during the qualified offer period because the IRS never sent a letter of proposed deficiency so no qualified offer period ever began.  Sixth, the IRS argued that the offer of $1 was a sham since it was so low as to not be meaningful or in good faith.  Since I regularly make $1 offers when I make a qualified offer, I followed this particular argument with interest.  I have not encountered this argument from the IRS in the cases in which I have sought recovery.  Seventh, the IRS argued that the court should exercise its discretion not to award attorney’s fees since doing so would be unjust because of taxpayer’s participation in an invalid Son of Boss tax scheme.  Eighth, the IRS argued that the requested fees were unreasonable both because they exceeded the statutory maximum and because some were not in connection with a court proceeding.  Ninth, the IRS argued that BASR should not get paralegal fees for clerical tasks and tenth it argued that it should not receive fees for fighting the fee request.

The court walks through the responses filed by BASR before getting to its own conclusions on each of the issues raised by the IRS.  I will skip the responses and head straight to the court’s analysis.  Spoiler alert – the taxpayer gets attorney’s fees.

The Court found BASR was a prevailing party looking at partnership law.  It found that the individuals paid the costs because BASR was essentially defunct but that under Texas partnership law they had the right to bring the action on behalf of the partnership and to be reimbursed for doing so.  The Court was not persuaded that the form of the action trumped the substance.  It found that BASR had no money and therefore its net worth did not exceed the statutory maximum.  It found that BASR did have a liability at issue and that the offer was made during the qualified offer period.  It found that an offer of $1 was a reasonable amount to offer for a party that thought it did not owe the liability.  It found that even though the taxpayer may have engaged in tax shelter activities, the issue in this case was liability and it was not liable for the taxes so no basis existed for denying the fees on the basis of the shelter scheme.  It found that the fees were reasonable under the circumstances and that the paralegal fees were also reasonable.  It did make slight downward adjustments in fees and costs but these adjustments were minor in the scheme of the requested fees.  Finally, it found, what other courts have also found, that a prevailing party can receive fees for fighting fees.

This case is a handbook for those battling about attorney fees.  While giving fees to a tax shelter promoter may seem galling, the fees result here from the untimeliness of the IRS action.  The case not only provides an issue by issue review of almost all of the issues that come up in an attorney’s fee case but also stands for the proposition that courts should not look at the equities of the underlying tax in determining if the taxpayer should receive attorney’s fees.


Representing Your Client in Tax Court with a Power of Attorney

In the tax clinic, we file very few Tax Court petitions because our clients do not come to us at the stage of receiving a notice of deficiency.  When we do file a Tax Court petition in response to a notice of deficiency, we sign the petition unless the taxpayer comes to us at the last second, preventing us from verifying the information in the petition.  In cases where the taxpayer shows up at the last second, we will assist the taxpayer in preparing a petition, have the taxpayer file the petition pro se, and obtain a power of attorney.  In most Tax Court cases worked by the clinic, the taxpayer comes to us because of the stuffer notice issued by the Tax Court after the individual has filed their petition.  In those cases, we do not typically enter an appearance but rather obtain a power of attorney.  I use the power of attorney rather than entering an appearance because I want the taxpayer to demonstrate to me that they will work with me to resolve the case and also because I want time to verify the information the taxpayer brings to the initial meeting before I jump in with an entry of appearance that requires court permission to undo.  For a cautionary tale on entering an appearance in a Tax Court case before you know your client see the post by guest blogger Scott Schumacher.

Chief Counsel’s office has struggled over the past decade in which I have worked in tax clinics about what to do with practitioners who obtain a power of attorney but do not enter an appearance in the Tax Court case.  On April 18, 2017, it issued Notice CC-2017-006 which is the latest, and the best, statement about how it will deal with practitioners like me who seek to represent clients in Tax Court cases using a power of attorney.  The latest notice supplements Chief Counsel Notice CC-2014-003 which replaced Chief Counsel Notice CC-2013-005.  I blogged about the 2013 notice here.  The latest notice amends prior notices based on the American Bar Association (ABA) Committee on Ethics and Professional Responsibility Formal Opinion 472 which provides guidance with respect to communication to persons receiving limited scope legal services.

For those of you following changes in the leadership of Chief Counsel’s Office, Notice CC-2017-006 is signed by Kathy Zuba as the Acting Associate Chief Counsel (Procedure & Administration).  Kathy replaces Drita Tonuzi who has become the Deputy Chief Counsel (Operations) following the retirement of Debra Moe.


Tax Court Rule 201(a) tells practitioners before the Court to practice in accordance with the ABA Model Rules of Professional conduct making the opinions of the ABA Ethics committee more important in Tax Court practice than they might be elsewhere.  ABA Model Rule 4.2 provides that, “in representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order.”  The requirement that a lawyer (government or private) communicate with a party’s representative only applies to communications covered by the scope of the representation and only where “the lawyers knows that the person is in fact represented in the matter to be discussed.”

ABA Formal Opinion 472 gives guidance in situations in which the represented party has an attorney for some but not all aspects of the matter.  The Opinion requires the attorney to communicate with the opponent’s attorney if the communication concerns “an issue, decision, or action” covered by the limited representation.  If the matter is outside the scope of the limited representation then Model Rule 4.3, not 4.2, governs the communication.  The Opinion provides that when an attorney has “reason to know” the other party “may be represented with respect to some portion of a matter” the attorney should inquire about the nature and scope of the representation and not close their eyes to the obvious.

ABA Model Rule 4.2 must be read in conjunction with the Tax Court rules on representation in a Tax Court proceeding.  Tax Court Rule 24(b) provides that a petitioner who has not had counsel enter an appearance is deemed to be appearing “on the party’s own behalf.”  This rule limits what a representative with only a POA can do in Tax Court.  Such a representative cannot sign documents filed with the court such as a stipulation of fact or a decision document.  Such a representative also cannot stand up in court and speak on behalf of the client.

The Notice concludes, that despite the limitations placed on a representative operating only with a POA in the Tax Court case, Opinion 472 requires Chief Counsel attorneys to communicate with the limited scope representative “when the communication concerns an issue, decision, or action that is within the scope of the limited representation.”  The Notices also directs Chief Counsel attorneys to ask the taxpayer if he or she is represented “in some or all aspects of the Tax Court case” and further directs them to contact the limited scope representative if the taxpayer’s response does not make the scope clear.

Most Chief Counsel offices have probably already been operating more or less as the Notice provides.  For the offices that have not treated the POA as something requiring  recognition in a Tax Court case, the new Notice will make it easier for the POA to handle the case.  Working with a POA should generally make it easier for the Chief Counsel attorney.  I have experienced very little difficulty working with Chief Counsel’s office with a POA and hope the attorneys there with whom I have worked feel the same in working with the clinic.  We understand the limitations and regularly enter an appearance at some point after starting out with a POA.  The POA gives flexibility in situations in which the client needs immediate assistance but you are trying to come to an understanding of the case and sometimes an understanding of the client.  It allows you to give and get information from Chief Counsel and Appeals as you make a decision concerning whether to enter an appearance and provide full scope representation.  The Notice may not change the practice in many places but does provide a good statement of how the parties can work together in a Tax Court case even without an entry of appearance.