District Court Allows IRS to Use Glomar Defense In FOIA Suit Seeking Whistleblower Info

This summer I discussed Mongomery v IRS, a FOIA case that was the latest in a long saga of litigation between the Montgomery family and the IRS.  This past month the district court returned to the FOIA dispute and partially resolved the case in favor of the government. In so doing it considered a so-called Glomar defense, when the government seeks to neither confirm nor deny the existence of the records that are the subject of a FOIA request.

As a refresher, the family’s partnership transactions attracted the attention of the IRS, leading to court opinions that upheld the determination that the partnerships were shams and that the IRS properly issued final partnership administrative adjustments, but also a separate refund suit that the IRS ultimately settled, leading to an almost $500,000 refund.  The Montgomerys filed a FOIA claim because they wanted to unearth how the IRS came to scrutinize the transacations, with a particular interest in finding out if there was an informant that spilled some of the partnership beans.

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To that end, they filed FOIA requests for two distinct categories of records: 1) various forms the IRS uses in connection with whistleblower cases and 2) lists, documents and correspondence with third parties concerning the partnership investments or the Montgomerys’ personal tax liability.

This past summer the court denied a summary judgment motion that the IRS filed that claimed that a settlement agreement the IRS and Montgomerys entered into prevented a FOIA suit. That opinion cleared the way for a decision on the merits of the FOIA suit, which takes us up to the district court opinion issued this past month and this post.

The main issue in the case involves the FOIA claims that sought the whistleblower information. IRS took what is known as a Glomar response, which is neither to deny nor confirm the existence of the records. This is a tactic the government has used in other types of cases but to my knowledge not in tax cases. The so-called Glomar response originates from the Cold War and the government’s desire to keep secret its efforts to uncover a sunken Soviet submarine:

In certain circumstances, […] an agency may refuse to confirm or deny that it has relevant records. This “Glomar response” derives from a ship, the Hughes Glomar Explorer, about which the CIA refused to confirm or deny the existence of records. See Phillippi v. CIA, 546 F.2d 1009, 1011 (D.C. Cir. 1976). Such responses are appropriate only when “`confirming or denying the existence of records would’ itself reveal protected information.” Bartko v. DOJ, 62 F. Supp. 3d 134, 141 (D.D.C. 2014) (quoting Nation Magazine v. U.S. Customs Serv., 71 F.3d 885, 893 (D.C. Cir. 1995)).

Despite Glomar having pedigree as a judicial exception to FOIA, the opinion notes that when the government raises a Glomar defense, it still needs to tether the defense to one of the nine statutory FOIA exemptions. In this case, the government asserted Exemption 7D:

Exemption 7(D) excludes from disclosure “records or information compiled for law enforcement purposes, but only to the extent that the production of such law enforcement records or information could reasonably be expected to disclose the identity of a confidential source … [who] furnished information on a confidential basis.” 5 U.S.C § 552(b)(7)(D).

There was no disagreement over whether the records (if they existed) were filed for law enforcement purposes, which is the threshold requirement under 7D. Instead, the opinion turned on whether there was an expectation that the source (again if it or they existed) who spoke to the government expected the information to remain confidential. Yet as my parenthetical notes that question presupposes that an informant exists:

The difficulty here is that if the Government describes its interactions with a specific source, it would thereby undercut the protection that Glomar provides. In other words, because a Glomar response is meant to obscure the very existence of the source (or attempted source), the Government cannot offer any public statement concerning the confidentiality assurances given to that source (or a statement that no source exists). As the Service persuasively argues, even though the identity of an informant may not be at risk in every case, to protect whistleblowers in cases where disclosure of the existence of records could lead to their identification, it must assert Glomar whenever an informant is involved.

The opinion nicely frames how the court must consider not only the content of the documents but the possible harm arising from revealing the very existence of the documents:

For example, in a situation where there is only one suspected whistleblower, the Service’s affirmative or negative response to a request for certain forms would either confirm or refute the suspicion. Either the documents exist, in which case the identity of the informant could be apparent even if the IRS does not release anything, or they do not. Even though the non-existence of records does not implicate a harm cognizable under Exemption 7(D), the IRS can only protect against the damage that confirming such records would engender by asserting Glomar in all situations.

This suggests a robust role for asserting Glomar in the context of FOIA requests seeking information relating to informants. Yet the opinion notes that Glomar is not a blank check for the IRS in these cases, as the government must offer a public explanation why the exemption applies and then provide for in camera review to allow a district court judge to confirm the agency’s conclusions before it will allow Glomar to swat away the FOIA claims.

The government did that in this case, relying on IRS employee affidavits which attested to its policy of asserting Glomar consistently “when a requester seeks records pertaining to a confidential informant in order to protect the identity of whistleblowers” to avoid giving requesters sufficient information “to determine when [it] is protecting records and when there are no records to protect.”

During in camera review, the government was able to establish that either no records existed, or if they did exist, the informant had an express or implied expectation of privacy when dealing with the IRS. As such, the court granted the government’s summary judgment motion as relating to the FOIA request for forms the IRS uses in connection with whistleblower cases.

Conclusion

This is a significant victory for the IRS and paves the way for future Glomar responses in FOIA cases where someone is seeking information to determine if there was an informant that led to an IRS investigation.

It is not, however, the end of the line. Montgomery has also sought information pertaining to correspondence with other third parties concerning the partnership investments or their personal tax liability. That part of the FOIA dispute continues. Stay tuned for at least one more chapter in this case.

Who Owns A Refund? Consolidated Returns and Bankruptcy Add Wrinkles to Refund Dispute

In re United Western Bancorp is an opinion out of the Tenth Circuit Court of Appeals from earlier this year that raises a procedural issue I had not considered: in the consolidated return context who is the true owner of a refund when a refund is wholly attributable to a subsidiary’s net operating losses? Normally, that is not an issue that generates disputes, because affiliated companies have overlapping interests in the refund. In re United Western Bancorp presents facts where this became an issue, because the parent company, UWBI, a bank holding company, filed a petition for Chapter 11 bankruptcy after the Office of Thrift Supervision closed the United Western Bank, the subsidiary/bank of UWBI, and appointed the FDIC as receiver.

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In 2011, after the FDIC came in as receiver, but before the bankruptcy, UWBI filed a refund claim of about $5 million for 2008 due to a carryback of the $35 million that the subsidiary/bank lost in 2010. The IRS had not acted on the refund claim when the parent sought bankruptcy protection.  The FDIC, as receiver for the insolvent subsidiary bank, filed a proof of claim in the UWBI’s bankruptcy case, alleging in main part that the refund stemmed exclusively from the subsidiary bank carrybacks and that it was the true owner of the refund. The IRS granted the refund claim but representatives from UWBI and the bank/subsidiary fought over who should be deemed to own the refund.

The trustee in UWBI’s bankruptcy case initiated an adversary proceeding with the bankruptcy court, which agreed with the trustee and held that the refund was part of UWBI’s bankruptcy estate. The district court reversed and found that the subsidiary bank was the rightful owner of the refund, and the trustee appealed to the Tenth Circuit.

The dispute came down to the issue of whether the refund was part of the parent’s bankruptcy estate under 11 USC § 541(a)(1) which includes “all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case.” 11 USC § 541(d), however carves out from the debtor’s estate property which the debtor only has legal title and not an equitable interest.

The Tenth Circuit in resolving the dispute first looked to the consolidated return rules, an area that I have not had the pleasure of studying since my days in big firm practice in New York. The opinion notes that the consolidated return statute and regs  are silent with respect to legal and equitable ownership of refunds. The opinion notes that federal common law presents a framework for resolving the dispute, looking to the Tenth Circuit in Barnes v Harris, 783 F.3d 1185 (10th Cir. 2015), which itself relied on a 1973 Ninth Circuit opinion In re Bob Richards Plymouth-Chrysler. Barnes v Harris held that “a tax refund due from a joint return generally belongs to the company responsible for the losses that form the basis of the refund.” The Ninth Circuit, in Bob Richards, which also involved a dispute as to the ownership of a refund arising from a bankruptcy within a consolidated group, came up with what the Tenth Circuit refers to as the “Bob Richards Rule”:

Absent any differing agreement we feel that a tax refund resulting solely from offsetting the losses of one member of a consolidated filing group against the income of that same member in a prior or subsequent year should inure to the benefit of that member. Allowing the parent to keep any refunds arising solely from a subsidiary’s losses simply because the parent and subsidiary chose a procedural device to facilitate their income tax reporting unjustly enriches the parent.

Complicating the analysis in In Re United Western Bancorp was that the parent and subsidiary corporation had in fact entered into a tax allocation agreement. The opinion takes a deep dive into the tax allocation agreement that the bank and parent had entered into, and it found that the agreement was ambiguous as to whether it intended to create an agency relationship between the parent holding company and sub/bank, which would in turn vest legal and equitable ownership in refund to the sub/bank, or something akin to a debtor-creditor relationship, which would leave the subsidiary bank only with an unsecured claim against the parent in the amount of the refund that the parent received.

The deep dive that the opinion reveals that the tax allocation agreement is not clear; some parts suggest that it reflects an agency/principal relationship between the parent and sub and other parts point more to a debtor/creditor relationship:

On the one hand, portions of the Agreement quite clearly indicate the intent to create an agency relationship between UWBI [parent] and its regulated, first-tier affiliates. For example, Section A.2 states that “each first-tier subsidiary [is to] be treated as a separate taxpayer with UWBI merely being an intermediary between an Affiliate and the” IRS. Likewise, Section G states that UWBI is being appointed by each affiliate to act as its agent for purposes of filing the consolidated tax return and taking any action in connection therewith. On the other hand, portions of the Agreement arguably suggest the intent for UWBI to retain tax refunds before forwarding them on to regulated, first-tier affiliates. For example, parts of Section A.1 imply that UWBI will retain tax refunds and then later take them into account during the annual settlement process. In addition, the fact that Section A.1 affords UWBI with discretion regarding the amount to refund a regulated, first-tier affiliate (i.e, the exact amount of the refund or a greater amount) seems to suggest something other than an agency relationship. Finally, the ambiguity of the Agreement on this issue is compounded by the fact that it contains no language requiring UWBI to utilize a trust or escrow for tax refunds—which would suggest the existence of an agency or trust relationship—nor does it contain provisions for interest and collateral—which would be indicative of a debtor-creditor relationship.

The agreement does provide however that any ambiguity is to be resolved “with a view to effectuating such intent [i.e., to provide an equitable allocation of the tax liability of the Group among UWBI and the Affiliates], in favor of any insured depository institution.” (emphasis added). In light of that mechanism for resolving the ambiguity  the Tenth Circuit concluded  that it is appropriate to consider the agreement as creating an agency relationship between the parent and sub, with the result that it considered the agreement as not displacing the general rule outlined in Bob Richards and Barnes. By concluding that the tax allocation agreement did not displace the Bob Richards rule the court concluded “that the tax refund at issue belongs to the Bank, and that the FDIC, as receiver for the Bank, was entitled to summary judgment in its favor.”

I note one other interesting part of this opinion. In 2014, the Sixth Circuit, in Fed. Deposit Insurance. Corp. v. AmFin Financial Corp explicitly rejected the Bob Richards Rule because it “is a creature of federal common law” and “federal common law constitutes an unusual exercise of lawmaking which should be indulged only in a few restricted instances.” In note 4 of the United Western Bancorp opinion, the Tenth Circuit declined to step into that issue, noting that the Tenth Circuit’s adoption of the Bob Richards Rule in the earlier Barnes case meant that it was bound to follow the circuit’s precedent.

Temple and Gonzaga Seek Tax Clinicians

Professor Alice Abreu from Temple Beasley School of Law has passed on the news that Temple has an opening for a clinic position. There is no subject matter limitation; the position will be part of the Sheller Center for Social Justice, and the Committee is  interested in considering applications from individuals who propose to establish and run a tax clinic. More information about the Temple position can be found here.

Professor Ann Murphy from Gonzaga also has passed on information about an opening in its existing tax clinic. Gonzaga seeks applicants for a three-quarter-time Lecturer in its Federal Tax Clinic, with flexibility to serve in other areas as needed by the clinical program. More information about the Gonzaga position can be found here.

As the leaves start to fall here in the northeast it is hard to believe that we are now into the third decade of the federally funded low income taxpayer clinic program. For those wanting context Keith wrote a terrific article about the history of tax clinics; a recent blog post from the NTA touts the 20th anniversary of federal matching funding, puts the program in perspective and highlights some recent tax clinic successes.

Villanova Seeks to Hire Faculty Director of Graduate Tax Program

Villanova is seeking to fill a faculty position and is in the process of a national search for a new Faculty Director of the Graduate Tax Program. The Graduate Tax Program is jointly run by the Law School and School of Business, and offers a Masters of Laws for lawyers and Masters in Tax for accountants.

The program is innovative and includes an extensive suite of online classes and classes on the ground. Villanova is looking for an experienced practitioner with teaching experience and management skills.

More information about the position as well as information on how to apply can be found here.

District Court Holds That Premature Withdrawal from Retirement Account Under Threat of Levy Subject to 10 Percent Additional Tax

In this post I will discuss Thompson v US, an opinion from the Northern District of California that explores the limits to an exception to the 10% penalty on early withdrawals from tax favored retirement plans when the distribution is used to pay an assessed federal tax liability on account of a levy.

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The facts of Thompson are straightforward. Facing a significant tax liability and “under imminent threat of levy and lien collection by Field Collections,” the Thompsons withdrew over a million dollars from a retirement account.  There are a number of exceptions to the additional 10% tax on levied on the gross distributions from a retirement plan. The most commonly known is the exception for distributions after an employee turns 59 1/2; another is found in Section 72(t)(2)(A)(vii), which provides that the 10% additional tax does not apply if the distribution is “on account of a levy under Section 6331.”

The Thompons paid the tax and filed a claim for refund, arguing that they were not subject to the early distribution additional tax under the Section 72(t)(2)(A)(vii) “on account of a levy” exception.

After IRS rejected the claim and the Thompsons sued for a refund in federal court, the government filed a motion to dismiss, arguing that the Thompsons’ withdrawal was voluntarily made and thus not “on account” of a levy and thus outside the exception in 72(t)(2)(A)(vii). The Thompsons in response did not deny that there was no actual levy, but instead argued that the government “took all the legally required steps to set in motion a levy, issuing Final Notices/Notices of Intent to Levy on December 12, 2012.” In addition, facing the threat of a Notice of Federal Tax Lien, which posed a “threat to Mr. Thompson’s business, his livelihood and his ability to generate funds sufficient to pay the balance of the liability over time,” meant that the withdrawal was not truly voluntary and and therefore should not be subject to the penalty.

For support, the Thompsons pointed to Murillo v Comm’r, where there was a distribution from a retirement plan that arose due to a forfeiture order and the Tax Court held that the taxpayer was not subject to the penalty, and to an earlier case, Laratonda v Comm’r, where the Tax Court, prior to the statutory exemption for levies now found in Section 72(t)(2)(A)(vii), found that a taxpayer whose funds from a retirement account were withdrawn pursuant to an IRS levy was not subject to the penalty.

The district court distinguished the Thompsons’ facts from the exception the Tax Court fashioned in Murillo and Laratonda:

Plaintiffs rely on the court’s emphasis on the involuntary nature of the withdrawals in Murillo and Laratonda in support of their assertion that they have stated a valid claim. Yet the limited facts alleged here are distinguishable from both Murillo and Laratonda in a crucial respect. Here, Plaintiffs’ retirement account was not, in fact, levied and the distribution was triggered not by any act of the IRS but by Plaintiffs’ own acts. In other words, Plaintiffs were actively involved in the distribution.

For good measure the district court noted that the legislative history to Section 72(t)(2)(A)(vii) explicitly referred to the exception as not applying to voluntary withdrawals to pay in the absence of an actual levy, as well as a 2009 Tax Court case, Willhite v Comm’r, which held that a taxpayer who had withdrawn funds from a retirement account following receipt of a notice of intent to levy was subject to the 10 % penalty.

Conclusion

In finding for the government and granting dismissal of the complaint, the district court did, however, throw a lifeline to the Thompsons. It noted that cases like Murillo suggest that there “may be circumstances other than a levy (for instance, a forfeiture) where a withdrawal is involuntary and therefore does not trigger the 10% penalty under § 72(t).” While noting that the Thompsons did not allege facts to support a plausible inference that the exception applies, it dismissed the complaint without prejudice, meaning that the Thompsons can file an amended complaint, which could include facts that would support such an inference.

In dismissing the complaint the district court held that it “need not decide at this juncture whether Plaintiffs might be able to state a claim based on allegations that the withdrawal was involuntary and coerced for reasons other than the fact that the IRS had set in motion a levy.”

I suspect that the Thompsons may have a difficult time navigating the narrow exception that Murillo supports. The issue of avoiding the 10% additional tax based on the levy exception is one Keith discussed most recently here, when he updated readers on Dang v Commissioner, involving a taxpayer who requested that IRS levy on his retirement account to ensure that the 10% tax did not apply. That post generated thoughtful comments, and Joe Schimmel suggested that perhaps IRS should draft a revenue procedure that allows the taxpayer to elect a levy on a retirement account. If the IRS listened to Joe that would have allowed the Thompsons to avoid what seems like a fairly punitive result of paying what amounts to an additional fairly harsh penalty for their tax troubles–admittedly of their own doing.

One other issue that the Thompons apparently did not raise is whether Section 72(t) is a penalty for purposes of Section 6751(b). As one might expect, another of our longtime readers and pioneer on this issue, Frank Agostino (joined by Malinda Sederquist) has weighed in on this in the latest issue of the Monthly Journal of Tax Controversy. Frank and Malinda point to analogous authority in the bankruptcy context, which has held that Section 72(t) is a penalty for purposes of determining priority status, and they recommend that taxpayers challenge the Section 72(t) 10% addition under Section 6751(b). Frank and Malinda do note that there is a summary non precedential Tax Court opinion holding that Section 72(t) is not a penalty for purposes of Section 6751(b) and they also acknowledge El v Commissioner, a 2015 opinion that held that Section 72(t) is not a penalty for purposes of Section 7491(c).

Whether this can be raised by the Thompsons in an amended complaint is unclear, as they would run into a likely variance challenge if they had not raised the 6751(b) issue in their original claim. I have no doubt, however, that Frank and friends and others will be pressing this issue.

 

 

 

Challenges to Regulations Update: Government Withdraws Appeal in Chamber of Commerce and New Oral Argument Set for Altera

One of the more interesting cases from last year was Chamber of Commerce v IRS, where a federal district court in Texas invalidated temporary regulations that addressed inversion transactions. The case raised a number of interesting procedural issues, including the reach of the Anti-Injunction Act and the relationship between Section 7805(e) and the APA.

Not surprisingly, the government appealed Chamber of Commerce. Over the summer, Treasury issued final regs that were substantively similar to the temporary regs that the district court struck down, and then the government filed a motion with the Fifth Circuit to dismiss its appeal with prejudice.

Last month the Fifth Circuit granted the motion.

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The outcome in Chamber of Commerce illustrates the difficulty that taxpayers face when challenging regulations for process violations (i.e., failing to subject guidance to notice and comment) and in particular challenges to temporary regulations. After all, Treasury can (and did in this case) issue final regs, and Section 7805(b) provides that those regs take effect retroactively upon the earlier of the “date on which any proposed or temporary regulation to which such final regulation relates was filed with the Federal Register” or “the date on which any notice substantially describing the expected contents of any temporary, proposed, or final regulation is issued to the public.”

Chamber of Commerce is to be contrasted with challenges to regs that focus on the substantive way that the regulations interpret a statute; for example, earlier this summer the DC Circuit reversed the Tax Court in Good Fortune Shipping.There, the DC Circuit applied Chevron Step Two and held that Treasury regulations that categorically restricted an exemption to foreign owners of bearer shares unreasonably interpreted the Internal Revenue Code. The taxpayer in Good Fortune challenged the reg the old fashioned way– in a deficiency case as contrasted with the pre-enforcement challenge in Chamber of Commerce.

Probably the most watched procedural case of the year, Altera v Commissioner, also tees up a procedural challenge to regs, and like Good Fortune is also situated in a deficiency case. One of the main arguments that the taxpayer is raising in Altera is a cousin to the challenge in Chamber of Commerce; that is the taxpayer is challenging the way that the reg was promulgated (and the case also involves a Chevron Step Two challenge). In particular, the issue turns on whether the agency action [the regulation] is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 USC 706(2)(A). Altera involves Treasury’s compliance with § 706 of the APA as expanded on in the 1983 Supreme Court State Farm’s “reasoned decisionmaking” understanding of the clause prohibiting “arbitrary” or “capricious” agency action.

As Keith flagged a few weeks ago, after the Ninth Circuit reversed the Tax Court and found that Treasury did enough in its rulemaking and held that the cost-sharing regulation was valid, the Ninth Circuit withdrew the opinion. The Ninth Circuit has now scheduled a new oral argument in Altera for October 16.

Stay tuned.

In Major Victory for IRS DC Circuit Upholds IRS Annual Filing Program

In a major victory for IRS, in AICPA v IRS, the DC Circuit upheld the voluntary annual filing season program. The annual program allows unenrolled preparers to take a competency test and satisfy continuing education requirements in exchange for limited representation rights before Exam and publication in the IRS’s database of preparers, along with enrolled agents, CPAs and attorneys. The opinion reaches the merits of the IRS’s authority to create the annual program. In a prior opinion, the district court had found that AICPA did not have standing to bring the action that challenged the program. The DC Circuit, by reaching the merits of AICPA’s challenge, analyzed the reach of Loving and whether the program was a legislative rule that should have been issued via regulations rather than via a revenue procedure.

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To get to the merits of the dispute the DC Circuit reversed the lower court on statutory standing.  The lower court held that AICPA did not have standing to bring the challenge. The DC Circuit felt that the additional supervisory responsibilities of CPAs and other licensed preparers, and the concomitant possibility that failing to supervise those preparers may bring sanctions under Circular 230, meant that AICPA had enough skin in the game to challenge the program.

The real importance of this decision is twofold:  first, the majority opinion takes a somewhat limited read of Loving, and second, in finding that the program is not a legislative rule for APA purposes and thus was not required to be issued under the APA notice and comment regime, the opinion provides cover for other IRS actions that the IRS may argue are merely interpretive and thus not subject to notice and comment.

As to the AICPA view that the annual program was a backdoor way to avoid Loving and regulate return preparation, the court disagreed, emphasizing that the rules allow for establishing competence in representing taxpayers in the exam process rather than regulate return prep per se:

We see nothing in the Program that attempts to resurrect regulations of the type enjoined in the Loving decisions. Unenrolled tax preparers who participate in the program “consent to be subject to the duties and restrictions relating to practice before the IRS in [certain sections of] Circular 230,”id. § 4.05(4); they do not consent to be governed by Circular 230 insofar as they are engaged in the business of tax preparation.

The Program also ties violations of Circular 230 to the limited practice right, not to the preparation of tax returns: Record of Completion holders “who violate Circular 230 during the course of [their] representation [before the IRS]will have their Record of Completion and ability to represent a taxpayer before the IRS under this revenue procedure revoked.” Id. § 7.01(2). When seen in this light, it is clear that the participants’ commitment to follow Circular 230 is coextensive with the IRS’s authority under § 330(a) to regulate practice before it.

The issue that generated a spirited dissent was whether the program required notice and comment. This case is another in a line of cases where courts (mostly in the nontax context) have struggled to define what in fact is a legislative rule which, under the APA, requires notice and comment, as compared to an interpretive rule that is not required to be issued through notice and comment. Here, that was a crucial issue because the IRS served up these rules via a revenue procedure, rather than via regulations. AICPA argued that the program was in fact a legislative rule and the IRS failure to comply with notice and comment meant that it was improperly established.

The majority’s view that the rules were not legislative stemmed mostly from the voluntary nature of the program:

In this case the Revenue Procedure and associated Program do not bind unenrolled preparers at all; the Program merely provides an opportunity for those unenrolled preparers who both choose to participate and satisfy its requirements.

As to the argument that the rules imposed new burdens on supervisors (more akin to a legislative rule), the majority noted that supervisors had responsibilities under Circular 230 prior to the program, and that the opt in to Circular 230 for the unlicensed preparers who take the annual program does not extend to additional supervisory responsibilities pertaining to return preparation:

Nor does it impose any new or different requirement upon supervisors or unenrolled agents; Circular 230 bound supervisors and unenrolled agents before the Program took effect and continues to bind them now. [note omitted]

In further finding that the rule was interpretive, the majority took a dig at IRS for not being clearer in its revenue procedure that it meant to illustrate the meaning of the statutory term competence:

The AICPA also argues the Revenue Procedure cannot be an interpretive rule, and in its view therefore must be a legislative rule, because it “contains not a word of the reasoned statutory interpretation … that typifies an interpretative rule.” We disagree, although we acknowledge the agency could have been more clear. By clarifying how an unenrolled preparer seeking to practice before the IRS may “demonstrate … necessary qualifications … and competency” within the meaning of § 330(a), the Revenue Procedure “reflects an agency’s construction of a statute that has been entrusted to the agency to administer.” Syncor Int’l Corp. v. Shalala, 127 F.3d 90, 94 (D.C. Cir. 1997); see Interport Inc. v. Magaw, 135 F.3d 826, 828-29 (D.C. Cir. 1998) (holding a rule interpretive where “it explains more specifically what is meant” in another authority, in that case a legislative rule). As stated above, the Program requires unenrolled preparers who want to participate to complete a set number of hours of instruction, on specific topics, and pass a test before gaining the limited practice right. See REV. PROC. 2014-42 §§ 4, 6. Those requirements are the agency’s interpretation of what § 330(a) means by “competency” and the other criteria it lists. [footnote omitted]

The dissent focused on two main issues: first, it noted that the IRS power to allow unenrolled preparers limited rights in examinations initially arose via regulations that were issued with notice and comment, and changes to those rules likewise had to follow from notice and comment. Second, it argued that the majority opinion failed to appreciate the reach of Circular 230 and its possible imposition of monetary sanctions for violations of the annual program.

Practitioners and academics will be digging in deeper on the spirited disagreement between the dissent and majority on whether the program is in fact the product of a legislative rule. The disagreement between the majority and dissent over the reach of Circular 230 (and whether the program imposes the possibility of newer sanctions on supervisors)  reminded me of Karen Hawkins’ insightful 2017 Griswold lecture, where she discussed how “because it has not been amended to reflect current case law, legislation or clarifications….” parts of Circular 230 have “become vague, ambiguous, outdated and, in some instances unadministrable.”

My quick takeaway of the case is that there is significant uncertainty in the reach of Circular 230 and the contours as to what is a legislative rule. IRS should tread carefully when establishing new programs as significant as this. IRS could have benefitted from the input that notice and comment provides, as well as perhaps given it more time to think through how the program could be more effectively administered.

Jurisdiction in the Court of Federal Claims and FBAR Cases

Yesterday, in Paying the Full FBAR Penalty, Keith discussed the Court of Claims opinion in Norman v US, which upheld an FBAR penalty and disagreed with district court opinions in Colliot and Wadhan concerning the intersection of the FBAR regs and the statute.  Keith’s post flags an important split in views concerning the intersection of regs, which cap the penalty at $100,000, and the later-enacted statute, which provides that the maximum penalty “shall be increased” to the greater of $100,000 or 50% of the account.

Keith notes that the case was tried in the Court of Federal Claims; most of the cases concerning FBAR penalties have arisen in federal district courts. There is a side jurisdictional issue in the case, and one of the reasons for the delay between the complaint being filed and the outcome Keith discussed is that the government initially argued in Norman that only federal district courts could hear FBAR cases.

Here is the statutory context of the dispute.

Title 28 Section 1355 states that “district courts shall have original jurisdiction, exclusive of the courts of the States, of any action or proceeding for the recovery or enforcement of any fine, penalty, or forfeiture, pecuniary or otherwise, incurred under any Act of Congress, except matters within the jurisdiction of the Court of International Trade under section 1582 of this title.”

The Tucker Act is also found within Title 28 and waives the federal government’s sovereign immunity from suit and authorizes monetary claims “founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.”  The Court of Federal Claims has trial court jurisdiction over “Big” Tucker Act claims against the United States; district court and the Court of Federal Claims have concurrent jurisdiction over claims for $10,000 (so-called Little Tucker Act claims)

In 2016, the government argued in effect that the Tucker Act was preempted by Section 1355 and sought to dismiss Norman’s complaint; the Court of Federal Claims disagreed, finding that 1355 was not meant to give district courts jurisdiction in all penalty cases and also finding that the FBAR penalties in Title 31 did not reflect a “specific and comprehensive scheme for administrative and judicial review” which could also displace its jurisdiction under the Tucker Act.

The 2016 Norman opinion discusses a handful of cases applying 1355 that limit the Court of Federal Claims’ jurisdiction; ultimately it distinguished those cases from Norman as relating to either forfeiture cases or criminal cases.  There is a bit more to the issue, including a 9thCircuit case that suggests that 1355 is only meant to apply when the government is reducing a penalty to judgment. The 2016 Norman opinion did note that there was tension between Section 1355 and the Tucker Act, and substantial ground for difference of opinion in its view that the CFC had jurisdiction, leading it to conclude that the government could file an interlocutory appeal on the jurisdictional issue, which would have allowed for an appellate opinion on that issue before a trial on the merits.

That appeal never came, as the government abandoned its jurisdictional defense. While the government lost the battle in 2016, as Keith discussed, it won the war of the case—at least for now. One expects that Mrs. Norman may try her luck for an appellate review on the merits of the penalty, and see if the panel agrees with the two district court judges that have capped the penalty in line with the regulations. In addition, if Norman appeals one suspects that the circuit court may take a fresh look at the jurisdictional issue.