Chai not Gaining Traction with Tax Court or IRS

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

read more...

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

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

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

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

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

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

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

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

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

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

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

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

In contrast, the IRS frames the issues as follows:

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

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

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

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

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

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

IRS Argues That Tax Court Is Located in the Executive Branch

Carl Smith brings readers up to date on some of the consequences of last year’s Kuretski case. Les

In a prior post, I noted that the issue raised in Kuretski v. Commissioner, 755 F.3d 529 (D.C. Cir. 2014), was not going to go away, even if the Supreme Court declined to grant cert. in that case (as it did on May 18).  The issue in Kuretski was whether the President’s power to remove Tax Court judges for cause under section 7443(f) violated the Constitution’s separation-of-powers doctrine. In Kuretski, the D.C. Circuit held that there was no impermissible inter-branch removal power because the Tax Court was an agency or Article I court located in the Executive Branch with the President.

In order to try to create a Circuit split, lawyers from Fuesrt Ittleman David & Joseph, PL in Miami filed identical motions in seven Tax Court dockets over the last few months asking the Tax Court to declare section 7443(f) unconstitutional for the same reasons articulated by the taxpayers in Kuretski.  For a copy of one such motion, see here.  The motions also sought recusal of all Tax Court judges until the constitutional issue was clarified.  Although Kuretski began as a Tax Court case, the Tax Court decided not to rule on the constitutional issue there, holding that the taxpayers had raised the issue too late.  Accordingly, to date, the Tax Court has not yet stated its views on section 7443(f)’s constitutionality.  Notably, in the Tax Court in Kuretski, the IRS refused to discuss the constitutionality of section 7443(f), as well — instead arguing that the taxpayers raised the argument too late, lacked standing to raise the argument, had waived the argument by filing in the Tax Court, and were making an argument that the courts could not redress.

The IRS was under orders in three of the Fuerst Ittleman cases to file a response to the taxpayers’ motions by an extended due date of May 8.  On June 2, the IRS lodged responses, along with motions for leave to file out of time, which were granted.  This post reports what positions the IRS took in its identical responses. In a nutshell, the IRS has finally argued to the Tax Court that the Tax Court is an Article I court located within the Executive Branch — consistent with the conclusion of the D.C. Circuit in Kuretski (though carefully not ever calling the Tax Court an “agency” in its papers).

read more...

I won’t use this post to rehash the pros and cons of the various arguments that the IRS made.  But, I did want to note a few things different from Kuretski.  In Kuretski, the D.C. Circuit rejected DOJ’s arguments that the taxpayers (1) raised the constitutional issue too late, (2) lacked standing to raise the argument, and (3) had waived the argument by filing in the Tax Court. Because they are deficiency cases, the Battat and  Meggs cases will be appealable to the Eleventh Circuit. The Elmes case will also be appealable to the Eleventh Circuit, unless, applying Byers v. Commissioner, 740 F.3d 668 (D.C. Cir. 2014), the  Elmes case (a CDP case not involving underlying liability) is held to be appealable solely to the D.C. Circuit.  Although at least Battat and Meggs will go to a Circuit that has not yet ruled on the constitutional issue, the IRS has not made any of these procedural arguments against the Tax Court reaching the merits of the constitutional issue. This makes it far more likely that the Tax Court will reach the constitutional issue this time, as the D.C. Circuit did in Kuretski.

Indeed, the IRS in the current cases has taken the exact opposite position of one of its prior procedural arguments.  In Kuretski, the IRS and DOJ argued that if section 7443(f) was unconstitutional, then the entire Tax Court would have to go out of business. This argument was made as part of the claim that any constitutional problem was not judicially redressable.  In the three current cases, the IRS instead argues that the relief requested by the taxpayers — recusal of all Tax Court judges — is not the appropriate relief if section 7443(f) is unconstitutional, but rather severing that provision would be appropriate — the position taken by the D.C. Circuit in Kuretski in rejecting the argument that any constitutional violation was not judicially redressable.

Thus, even though the IRS didn’t need to (because at least two of these cases are going to a Circuit other than D.C.), the IRS has adopted every holding of the D.C. Circuit in Kuretski — whether the holding was for or against the government’s position there.

In its responses in Elmes, Battat, and Meggs, the IRS has finally argued that the Tax Court is an Article I court located within the Executive Branch — consistent with the conclusion of the D.C. Circuit in Kuretski.  The IRS responses making this argument are largely cut and pasted from the D.C. Circuit’s reasoning in Kuretski. However, the IRS is more careful than the D.C. Circuit never to call the Tax Court an “agency” in the Executive Branch (apparently realizing that such a label might sound insulting to the judges).

The IRS does address one additional argument:  In Kuretski, the D.C. Circuit opinion mysteriously did not address the argument (presented in the taxpayers’ opening brief) that, even if the Tax Court was located in the Executive Branch, there could be a separation of powers problem where an intra-branch removal power involved an actor holding one power (the executive power) who was able to remove an actor holding a different power (the judicial power).  The Kuretskis and Fuerst Ittleman noted that in Bowsher v. Synar, 478 U.S. 714 (1986), the Supreme Court found unconstitutional Congress’ removal power over the Comptroller General (an actor also within the Legislative Branch) because, by legislation, Congress had also conferred on him some executive powers. The argument is that the doctrine is one of separation of powers, not separation of branches. Sometimes, parts of one branch hold powers normally held by other branches. I am unpersuaded, though, that such cases can be distinguished — particularly on the grounds argued by the IRS.

The IRS, in its response in Elmes, did not take the bait offered by Fuerst Ittlemen to argue that the Tax Court should, under the CDP venue holding in Byers, hold that the Elmes case is appealable to the D.C. Circuit, so, under the Golsen rule, the Tax Court is required to follow  Kuretski in that case.  The Elmes response cites neither Byers nor Golsen.

This has prompted Fuerst Ittlemen to try to force the IRS and the Tax Court to take positions on the proper venue on appeal for the Elmes CDP case. On June 3, the taxpayer’s lawyers filed a motion “to establish appellate venue” in Elmes, asking the Tax Court to decide, before anything else, where the case will go on appeal for purposes of Golsen. In the motion, the taxpayer notes his contention that the case should be appealed to his Circuit of residence, the Eleventh, though, under the Byers opinion, appeal should go to the D.C. Circuit. The motion notes that it is normal for the Tax Court to state the place of appeal for purposes of Golsen’s application and that the Tax Court in Murphy v. Commissioner, 125 T.C. 301, 313 n.6 (2005), aff’d on other issues 469 F.3d 27 (1st Cir. 2006), and many later cases has held that under Golsen, CDP appeals all go to the Circuit of residence. To date, the Tax Court has studiously avoided addressing the argument, first made and accepted by the D.C. Circuit in Byers, that CDP cases that do not involve challenges to the underlying liability are not ones for “redetermination of tax liability” within the meaning of section 7482(b)(1)(A), so, by default, are appealable to the D.C. Circuit. The most recent instance of the Tax Court ignoring Byers for Golsen purposes occurred on June 9 in an order in Wolkenbrod v. Commissioner, Docket No. 23767-13L. Perhaps the Tax Court is hoping that Byers will be overruled by statute before the Tax Court has to address this issue. S. 903 (awaiting Senate floor action) contains a provision to amend section 7482(b)(1) to add a new subparagraph specifically directing all CDP appeals to the Circuit of residence, though only with a prospective effective date for petitions filed after the date of enactment. It is assumed that the Tax Court itself asked for this legislation, though I oppose it because, as I have blogged before, if Byers is accepted as correct, then the Tax Court, for people living countrywide, will not limit evidence at CDP trials in the Tax Court to the administrative record. The Elmes motion notes the effect of Byers on the record rule in CDP cases. Will the IRS argue for Byers governing venue on appeal for purposes of Elmes being bound by Kuretski, when the acceptance of such an argument will kill the IRS’ ability to limit to the administrative record CDP cases for residents of three Circuits?

We will keep readers posted of further important developments in these section 7443(f) cases.  Stay tuned.

Summary Opinions for 4/18/2014

VillanovaWildcatsIt is absolutely gorgeous out today.  A great day to run the Boston Marathon, which my mother-in-law is doing this morning.  Go Jean!  I can’t imagine how the environment feels, with such emotion following last year.  My house will be cheering all the runners and the City of Boston today.

Last week had two great guest posts, for which we are grateful.  Professors Stephanie Hoffer and Christopher Walker of Ohio State posted the first part of their two part article on the Death of Tax Exceptionalism and the Tax Court.  These are teaser posts for a full article to be published soon. Professors Hoffer and Walker argue forcefully that the Tax Court and some circuit courts have failed to situate  court review of IRS determinations as within the mainstream of administrative law. We believe the article is important and practical procedural scholarship and recommend a read.  And, our (guest) blogger, Carlton Smith posted on timely filing from prison and the recent Sharma case.  Mr. Smith’s most recent post highlights this interesting specific issue, but, of course, also provides great insight into a range of other procedure areas like equitable tolling, appellate venue, and the Golsen rule.

To the other procedure items from last week:

read more...
  • Sticking with Carlton Smith. He sent us an email earlier this week updating us on the cases currently considering Rand and penalties.  Carl has written on this before for us, most recently in his very well received post, “Seven Tax Court Judges Depart From the Court’s Penalty Precedents.”  This week, the Tax Court published its decision in Faecher v. Comm’r, following Rand and indicating the Court has some duty to remove penalties even when not plead by the taxpayer, stating: 

The Commissioner generally bears the burden of production with respect to the liability of any individual for any penalty or addition to tax. Sec. 7491(c).  However, we have held that where the taxpayer fails to state a claim with respect to a penalty or addition to tax, the Commissioner incurs no obligation to produce evidence in support of the individual’s liability pursuant to section 7491(c), see Funk v. Commissioner, 123 T.C. 213, 216-218 (2004); Swain v. Commissioner, 118 T.C. 358, 364-365 (2002), at least where nothing in the record suggests the addition or penalty has been incorrectly computed. Where, as here, the record demonstrates that the penalty sought by respondent is erroneously calculated, we conclude that it should not be sustained, without regard to whether petitioner has stated a claim in the petition concerning the penalty. 

    Later in the week, other orders were issued in similar cases, with similar results.  Appeals in these cases can go to various courts, including the DC Circuit,      Second Circuit and Seventh Circuit.  I am sure Mr. Smith will continue to monitor on this matter, and provide us with additional insight.

  • I am happy to engage in some self-promotion for Villanova here (although somewhat envious, because Villanova wasn’t throwing this cash around when I was going through).  The Grad Tax Program has announced its Villanova Graduate Tax Program Assistantships for 2014-2015.  The program provides tuition scholarship  for up to two (2) full-time LL.M. students.  The recipients receive a complete waiver of tuition and academic fees for the Villanova Graduate Tax Program courses that will fulfill the requirements of the degree program (24 credits).  In exchange for the free tuition, you are enslaved to Keith Fogg for  20 hours of service per week in the Villanova Federal Tax Clinic for case-related and research work.  I jest, but the Villanova Federal Tax Clinic provides some of the best preparation for the actual practice of law, and prospective students would be hard pressed to find a better clinic director than Keith Fogg (apart from Les who directed when I was there).  Interested students must apply to the Villanova Graduate Tax Program  and indicate an interest in this assistantship on the program application in order to be considered.  The application deadline for Fall is July 31st.  Please email graduatetaxprogram@law.villanova.edu with any questions. 
  • Reuben Miller posted the final order to a LinkedIn group in Jackson v. Comm’r, the case where the Court questioned whether Notice 3219 was a valid SNOD.  We previously covered this case here, and here.  The Court held that the taxpayers were not mislead by the notice, it had jurisdiction to review the matter, and appears to have taken into consideration the fact that the Service will no longer be using the language in the form that it found questionable in coming to those determinations.   A nod should be given to the Tax Court for prodding the Service to fix a faulty form, and the Service should be commended for its prompt response to the problem (assuming reports are correct that the form has been retired and/or reworked).  Interesting, the Hoffer/Walker article I discussed above makes the point that the Tax Court could be doing more of this institutional prodding if the APA were held to apply to Tax Court proceedings.
  • The Tax Court last week in Ad Investment 2000 Fund, LLC v. Comm’r agreed with the IRS that taxpayers waived attorney-client privilege with respect to opinion letters from a law firm when the taxpayers attempted to invoke the affirmative defenses of good faith and state of mind even though the taxpayers were not raising a reliance of counsel defense.  This case will garner some attention, and we hope to have some follow up content in the near future. 
  • Slovakia has found a way to turn tax procedure into a successful game show, which the country seems to love and has assisted the taxing authority in increasing compliance.  I have not fact checked any of this, and it is all taken from a NYT blog found here.  The government had been losing revenue from its VAT because taxpayers were failing to comply with the reporting requirements.  Auditing and prosecuting was an expensive way to handle the issue, so Slovakia created a lottery where the government selected winners based on VAT receipts submitted to the government.  Each citizen (not the merchant) submits the receipts, which are then checked against the merchant’s filings.  Any purchase over one Euro can be submitted.  Every month, a receipt is selected, and the taxpayer either receives a car, or a chance to be on the Slovakian version of the Price is Right (I’m picturing Borat meets Bob Barker, which is probably totally wrong, and offensive to the Slovakians).  Although the article provides no direct proof, VAT collections are way up since the start, and many taxpayers have complained about merchants providing fake receipts or no receipts, making it easier to focus on cheats.  I’m not sure which is more effective, but Slovakia’s plan is certainly more interesting than the IRS YouTube videos. 
  • The Tax Court has found that an estate was not eligible to pay its estate tax installments under Section 6166, as it failed to make the election on a timely filed Form 706.  In Estate of W. R. Woodbury v. Comm’r, the estate did include a letter indicating its intent to make a Section 6166 election when it made its extension request.  Two and half years after the extension period passed, the estate filed its return and elected Section 6166.  The Court did consider whether the letter was an effective election under Section 6166, but it failed to include the requirements found under the statute and under Treas. Reg. § 20.6166-1.  Specifically, the applicable assets and their values were not included in the transmittals. 
  • Additional IRS notice regarding the various phone scams targeting taxpayers. The Service reiterated that it always sends written notices regarding amounts outstanding, and never asks for credit card information over the phone.  The notice also notes that the scammers are threatening deportation, arrest, shutting off utilities, and revoking driver’s licenses.

 

Timely Filing a Tax Court Petition from Prison

Today, we welcome back frequent guest blogger, Carl Smith.  The title does not do the post justice because of the many issues raised by the “untimely” petition filed from prison.  Carl discusses a range of issues raised by this case including the prison mailing rule, equitable tolling, appellate venue and the Golsen rule.  All of these issues come together in this case in which the taxpayer misses his opportunity to obtain a Collection Due Process (CDP) hearing in the Tax Court in part because of bad advice he received from the Appeals Division.  While this post does not offer any great answers to taxpayers receiving bad advice from the IRS on a critical issue such as the timely filing of a Tax Court petition, Carl’s discussion of equitable tolling shows the path to overcoming the inequity of bad advice.  Allowing equitable tolling in a situation such as this would not hurt the IRS in any material way and would make all taxpayers, not just those with the peculiar problems of prisoners, feel better about the system we have for resolution of tax disputes.  In this post, Carl cites to some of the articles he has written on this subject.  I have also written on this subject.  When Taxpayer Bill of Rights 4 gets passed, this issue should be front and center.  Keith

On April 11, Judge Gustafson, in a long unpublished order, “reluctantly” dismissed a CDP case because the petitioner filed his petition late.  See Harsh Sharma v. Commissioner, Tax Court Docket No. 5163-11L. To me, the ruling is subject to question on two grounds on which I have written or I have litigated in the past — i.e., (1) what is the correct venue on appeal in CDP cases and (2) can the 30-day period under section 6330(d)(1) in which to file a CDP petition be equitably tolled?  But, even if Mr. Sharma prevailed on appeal — such that the appeals court held that Judge Gustafson was wrong on both the grounds that I question — the taxpayer’s petition still would end up being dismissed.  So, I wouldn’t recommend he file an appeal.

read more...

The first thing about this case (a thing that is amazing) is that it took the IRS until November 2013 to move to dismiss for lack of jurisdiction — more than 2 1/2 years after the petition was filed and after the Tax Court had granted 4 IRS motions to continue scheduled trials (and this case deals with a jeopardy levy!).

The second thing about this case (a thing that is annoying) is that the IRS sent notices of determination sustaining both the jeopardy levy and upholding the filing of a notice of tax lien on January 11, 2011, thus statutorily requiring the taxpayer to file a petition in 30 days (i.e., February 10, 2011).  However, the taxpayer wrote to Appeals before February 1, 2011, asking for more time to file a petition.  In a February 1, 2011 letter, Appeals wrote back to the taxpayer and warned him that the filing period could not be extended, but incorrectly stated that the petition had to be filed in the Tax Court “within 30 days of this letter” (i.e., March 3, 2011).  This error really bothered Judge Gustafson, since the Tax Court received an imperfect petition on March 2, 2011.  It had been mailed from the Georgia prison in which the taxpayer was housed, and the envelope in which it came bore a prison stamp of February 24, 2011.  The taxpayer testified that he handed the imperfect petition to the prison authorities to mail on February 1, 2011 (apparently not waiting to hear back from Appeals about the extension), but the judge found this testimony uncorroborated and, sadly, irrelevant.  Why?

In 1988, the Supreme Court ruled that a prison inmate’s notice of appeal in a habeas corpus case was deemed filed at the time he delivered it to prison authorities for mailing to the court. Houston v. Lack, 487 U.S. 266, 270, 276 (1988).  The prison mailbox rule was subsequently extended and codified in Rules 4(c)(1) and 25(a)(2)(C) of the Federal Rules of Appellate Procedure.  In Crook v. Commissioner, 173 Fed. Appx. 653, 655 (10th Cir. 2006), the Tenth Circuit held that this prison mailbox rule, however, did not extend to filings in the Tax Court.  Rather, the section 7502 rule that timely mailing is timely filing applied, and, under it, the postmark on the envelope is treated as the date of filing.  Long before either opinion, in Rich v. Commissioner, 250 F.2d 170 (5th Cir. 1957), the Fifth Circuit had a deficiency case where there was evidence that a taxpayer delivered a Tax Court petition to prison officials for mailing a full 12 days before it was due to be mailed, but then the prison accidentally failed to mail it until contacted by the taxpayer’s lawyer sometime after the 90-day period lapsed.  In Rich, the Fifth Circuit, though angry with the government and finding the equities all on the taxpayers’ side, held that the petition was untimely and the case must be dismissed for lack of jurisdiction.  As noted by Judge Gustafson, this holding in Rich has never again been cited by the Fifth Circuit.  But, as Judge Gustafson also noted, under Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981), the Eleventh Circuit (which encompasses where Mr. Sharma was living) is required to follow the precedent of the Fifth Circuit from before the time the Eleventh Circuit was formed.  Judge Gustafson held that, since Mr. Sharma’s case was appealable to the Eleventh Circuit, under the Tax Court’s Golsen doctrine (Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. on other issues 445 F.2d 985 (10th Cir. 1971)), the Tax Court was obligated to follow Rich and dismiss the petition because it was deemed mailed on the prison-stamped date of February 24, 2011 — two weeks after it was due to be mailed.  (Parenthetically, at least the Fourth Circuit has criticized and declined to follow Rich in the case of an incarcerated Tax Court deficiency-jurisdiction petitioner and has held that delivery to the prison authorities for mailing is the timely filing date — either under section 7502 or principles of equitable tolling. Curry v. Commissioner, 571 F.2d 1306 (4th Cir. 1978)).

In making this ruling applying the Golsen rule, Judge Gustafson mysteriously did not cite or discuss the recent case of Byers v. Commissioner, 740 F.3d 668 (D.C. Cir. 2014), in which the D.C. Circuit held that appeals of CDP cases from the Tax Court — where the case does not include a challenge to the underlying liability — are only properly appealable to the D.C. Circuit, not the Circuit of residence.  Although the D.C. Circuit has not had a case involving the prison mailbox rule and filings in the Tax Court, the D.C. Circuit has ruled (citing the Supreme Court’s opinion in Houston v. Lack) that an F.R.C.P. 59(e) motion to alter or amend a judgment — one filed in a district court by a prisoner in a 42 U.S.C. section 1983 case — is deemed filed in the district court at the time the motion is handed to prison authorities for mailing.  Anyanwutaku v. Moore, 151 F.3d 1053 (D.C. Cir. 1998). Thus, there is a good chance that, if Mr. Sharma appeals the dismissal to the D.C. Circuit, it would extend this prison mailbox rule to Tax Court petitions.  One difficulty in Mr. Sharma’s appeal may be what is in his amended petition.  Judge Gustafson’s order does not mention whether Mr. Sharma raised a challenge to the underlying liability therein; if he did so, the D.C. Circuit would transfer any appeal to it to the Eleventh Circuit.

Unfortunately, as I see it, even if Mr. Sharma could convince either the D.C. Circuit or the Eleventh Circuit to apply the prison mailbox rule, he would not win his case.  Judge Gustafson found no corroborating evidence from the prison that would support Mr. Shamra’s testimony that he gave the imperfect petition to the prison for mailing on February 1, 2011 (which would have been a timely mailing date).  Thus, Mr. Sharma will lose this issue either on a legal or factual basis.

Two pages of Judge Gustafson’s order are also addressed to the issue of the letter from Appeals that gave Mr. Sharma incorrect information about when he must file.  It was clear that Mr. Sharma’s imperfect petition was filed a day before the due date set out in that letter.  A frequent reason for applying the doctrine of equitable tolling is the defendant’s misleading the plaintiff as to the correct filing date.  This letter was clearly misleading.  Citing Tax Court case law involving deficiency, CDP, and whistleblower jurisdiction cases, however, Judge Gustafson held that the 30-day period in which to file a Tax Court petition under section 6330(d)(1) was jurisdictional.  A jurisdictional time period cannot be equitably tolled.  I was disappointed to see, however, that Judge Gustafson did not reconsider the CDP authority in light of recent case law from the Supreme Court that has severely limited the “jurisdictional” label generally to subject matter and personal jurisdiction — not “claims processing rules” like time periods in which to file.  (For an example of a recent opinion holding a filing period in an administrative agency not to be jurisdictional, see Sebelius v. Auburn Regional Medical Center, 133 S. Ct. 817 (2013).)  I have previously written articles in Tax Notes Today making the argument that under this recent Supreme Court case law, the periods in which to file a Tax Court petition under its innocent spouse (section 6015(e)(1)), CDP (section 6330(d)(1)), and whistleblower jurisdictions (section 7623(b)(4)) are not jurisdictional and are subject to equitable tolling.  See “Equitable Tolling Innocent Spouse and Collection Due Process Periods”, 2010 TNT 41-8 (March 3, 2010), and Friedland:  Did the Tax Court Blow Its Whistleblower Jurisdiction?”, 2011 TNT 100-10 (May 24, 2011) (Friedland, which I specifically criticized in this article, was one of the opinions that Judge Gustafson relied on in his order).  While Judge Gustafson ruled that the CDP-filing time period was jurisdictional — so could not be extended by the equities — he also wrote:

An error of this sort is most unfortunate. An agency charged with broad nation-wide responsibility and necessarily staffed by fallible humans can never avoid such errors entirely; but the discovery of such an error should incline the IRS to take action within its discretion to compensate for the error and to provide reasonable remedies for a taxpayer who has been disadvantaged by the agency error.

I am not sure what remedy the IRS could give Mr. Sharma for this error, since he has already been before Appeals, and the IRS cannot recompense him by offering him Tax Court review.  Now, I have an argument that subsequent Appeals CDP retained jurisdiction hearing notices under section 6330(d)(2) are appealable to the Tax Court, notwithstanding a contrary IRS regulation at section 301.6330-1(h)(2)(A-H2), but I am not sure that such an argument will win, even if the IRS were to give Mr. Sharma another hearing at Appeals.  Note, though, the recent opinion in SECC Corp. v. Commissioner, 142 T.C. No. 12 (Apr. 3, 2014), in which the Tax Court held that it need not give any deference to an IRS Revenue Procedure that appeared to limit the Tax Court’s jurisdiction to hear employee/independent contractor disputes under its jurisdiction at section 7436 (“We owe no deference to what an administrative agency says about our jurisdictional bounds.  See Fox Television Stations, Inc. v. FCC, 280 F.3d 1027, 1038-1039 (D.C. Cir. 2002)”; slip op. at p. 16 n. 5).

Nevertheless, even if Mr. Sharma were to be able to convince an appeals court that the period at section 6330(d)(1) to file a Tax Court petition was not jurisdictional and could be equitably tolled, I don’t think Mr. Sharma could get equitable tolling.  It was Mr. Sharma’s testimony that he gave the imperfect petition to the prison on February 1. Thus, he could not have detrimentally relied on the Appeals letter giving him an incorrect later date that was only mailed to him on that same date.

In sum, it is sad that Mr. Sharma has lost his Tax Court case, and disappointing that Judge Gustasfon did not discuss (1) whether Byers affected his Golsen holding or (2) whether Tax Court case law on what is “jurisdictional” is still good after recent Supreme Court case law on the subject, but Mr. Sharma would apparently lose an appeal no matter which way Judge Gustafson ruled on these issues.  Now that I am retired, though, I urge other practitioners to make these arguments to the Tax Court for it to consider in appropriate future cases.

 

Appeals and Impartiality: Tax Court Finds Appeals’ Procedures Inadequate But Punts on Other Issues

Last week I discussed how courts are wrestling with when a prior Appeals employee’s involvement will trigger a finding that the Appeals’ employee is not impartial in a subsequent collection due process (CDP) case.  In Cox v Commissioner, the Tax Court took a narrow view of what is necessary to ensure that Appeals meets the impartiality requirement. In reversing the Tax Court, the Tenth Circuit took a more expansive view of CDP, and situated its procedural protections as part of a broader due process framework.

Last week the Tax  Court had a chance to revisit the impartiality of Appeals’ employees in the case of Moosally v Commissioner.  In Moosally, the Tax Court held that an Appeals employee who had earlier considered a taxpayer’s appeal of a denied offer in compromise could not preside over a later CDP hearing that involved the same issue and years. The case is easier than Cox because under either a narrow or expansive view of impartiality, what Appeals did in that case was improper. In this post, I will discuss Moosally, and why in that case the Tax Court found Appeals’ procedures inadequate even under the standards the Tax Court applied in Cox.

I will also discuss what Moosally fails to do.  Moosally sidesteps the Tenth Circuit’s finding in Cox that part of the CDP regulations are invalid. In addition, Moosally does not directly address a recent DC Circuit Court of Appeals decision which upends the venue of CDP cases on appeal.  As I describe below, Moosally is likely more significant for what it fails to do than its actual holding on impartiality, as it kicks these issues down the road for future litigants.

read more...

Summary of Facts

Moosally had run up about $40,000 in liabilities relating mostly to two quarters of unpaid trust fund taxes from 2000 and a small amount of income tax from 2008. In June of 2010, Moosally submitted an offer to compromise the two quarters of trust fund liabilities for $200 based on doubt as to collectability(it was not clear why she left off the small income tax liability from the original offer).  In late May 2011, IRS’s centralized offer unit rejected the offer because it determined Moosally’s collection potential to be slightly under $35,000.

In late June 2011, Moosally appealed the rejection of the offer, and in the appeal, she requested Appeals consideration of both the trust fund liabilities and small individual tax liability in its offer review.  She also provided additional documents and explained that her circumstances had changed for the worse  as she had lost her job.  Appeals confirmed receipt of the offer appeal and told Moosally that it assigned a settlement officer to the case, settlement officer Smeck (SO 1).

Here is where things start to get messy. In July of 2011, while the offer was being appealed, as a result of the unpaid liabilities that were the subject of the prior offer, the IRS issued a notice of federal tax lien (NFTL). The NFTL gave Moosally the right to a CDP hearing. She timely filed a request for a CDP hearing; in the CDP request she asked IRS to compromise the liabilities that were part of her appeal before the first settlement officer, SO 1. Appeals assigned the CDP case to a new settlement officer, SO 2.

In late August, the CDP case began to move forward. At around the same time, the first settlement officer, SO 1, and Moosally exchanged letters relating to the appeal of the offer, and Moosally provided the SO1 with updated financial information.  A few days after Moosally sent SO 1 updated financial information, SO 2 sent Moosally a letter saying that the CDP case was being reassigned to the first settlement officer because that settlement officer already had Moosally’s offer under Appeals consideration.

From Appeals’ perspective, taking the CDP case away from SO 2 and giving it to SO 1 made sense because SO 1 was familiar with Moosally and was reviewing her updated financial information.

SO 1 eventually issued a CDP determination sustaining the IRS’s rejection of the offer. Moosally petitioned the Tax Court on the basis that SO 1 was not impartial due to her prior involvement with the tax and periods that were at issue in the CDP determination.  She asked that the Tax Court remand the case back to Appeals with an order that an Appeals employee other than SO 1 preside over the CDP hearing

The Tax Court Finds That There was Prior Involvement

Moosally essentially argued that when the first settlement officer considered the denied offer as part of her appeal outside the CDP proceedings, she had prior involvement with the case and was no longer impartial.  The IRS argued that the first settlement officer did not have prior involvement because she had not made a determination with respect to the original appeal when Appeals transferred the CDP case to her.

The statute provides that an impartial officer or employee is one who has had “no prior involvement with respect to the unpaid tax…before the first [CDP]hearing.” The statute does not define “prior involvement” but the regulations state the following:

Prior involvement by an Appeals officer or employee includes participation or involvement in a matter (other than a CDP hearing held under either section 6320 or section 6330) that the taxpayer may have had with respect to the tax and tax period shown on the CDP Notice.

The case confronts the legacy of Cox, where as I described in my post last week What is a Fair Hearing  the Tenth Circuit in a divided opinion reversed the Tax Court and found that in a CDP hearing involving review of an offer in compromise, an Appeals Officer’s consideration of future years’ delinquent returns constituted prior involvement when those later years came before the same Appeals Officer in a new CDP case involving a new offer in compromise.   Cox reflects two differing approaches to impartiality. The Tax Court found no violation of the impartiality requirement principally because it viewed the Appeals’ Officer’s initial consideration of the delinquent returns as peripheral to the later CDP case. In contrast, the Tenth Circuit  “found that the no prior-involvement requirement was a broad restriction that should not be limited to involvement in a prior hearing or administrative matter” but should include any “substantive and material involvement with a taxpayer’s liability, regardless of whether the liability is the liability currently under official review by the Appeals Officer.” In so finding, the Tenth Circuit opined that the regulatory requirement tethering prior involvement to a particular matter was inconsistent with the statutory language and invalid.

Moosally thus presented the Tax Court with a chance to address the merits of the Tenth Circuit’s approach and consider its view of the regulations defining prior involvement.   The Tax Court declined to do so, however.  As the case was not appealable to the Tenth Circuit, the Tax Court stated that it was not bound to follow the appellate court’s approach to the issue. Instead, it found for Moosally even under the regulations and under the Tax Court’s approach to “prior involvement” as reflected in its Cox opinion.

I will tease out the Tax Court’s analysis, summarizing some of the arguments. I leave out some of the arguments that the IRS made; the opinion is complicated and I suggest for readers wanting more to read the opinion, but here is the nutshell.

As Moosally describes, the Tax Court in Cox found no violation of the impartiality requirement based on two differing rationales:

[T]he Tax Court in Cox determined that there was no violation of the impartial officer requirement because (1) the officer’s prior involvement was only peripheral to, and not the subject of or directly in dispute in, a proceeding before the Court, and (2) there was no greater or different harm where both the officer’s prior involvement and current consideration were in the context of a CDP hearing.

As to the first rationale after distinguishing the facts from Cox, Moosally then lays out why the Tax Court approach in Cox warrants a finding that there was impermissible prior involvement in this case:

Smeck [SO 1] reviewed petitioner’s appeal of her rejected OIC for the periods in issue for nearly three months before petitioner’s CDP hearing for the same periods in issue was also transferred to her. During those three months, Ms. Smeck requested from petitioner and evaluated various documents, forms, and other financial information to calculate petitioner’s reasonable collection potential and evaluate petitioner’s rejected OIC. Accordingly, through her review of petitioner’s rejected OIC, Ms. Smeck had prior involvement with petitioner’s unpaid tax liabilities for the periods in issue before she was assigned to handle petitioner’s CDP hearing for the same taxes and periods in issue. Consequently, we hold that, pursuant to section 301.6320- 1(d)(2), Proced. & Admin. Regs., Ms. Smeck is not an impartial officer pursuant to section 6320(b)(3) and petitioner is entitled to a new CDP hearing before an impartial officer.

In an effort to find the first settlement officer’s involvement as permissible, IRS attempted to distinguish current involvement from prior involvement:

Respondent contends that Ms. Smeck was an impartial officer because she had not yet issued a determination regarding petitioner’s rejected OIC and that  there is “current” involvement, but no “prior” involvement, when an officer has not made any determination regarding a rejected OIC. We disagree. The regulations plainly prohibit “prior involvement” and do not specify that the involvement must culminate in the issuance of a determination of any sort (emphasis added).

The opinion also addressed the second rationale that the Tax Court relied on in Cox, namely that the regulations and legislative history contemplate separate CDP proceedings before the same Appeals’ employee. It did acknowledge that it looked at the same legislative history in finding for the IRS in Cox. It notes, however, that the legislative history does not contemplate  “the combination of CDP hearings with non-CDP matters, such as the OIC rejection appeal involved in the instant case. Ms. Smeck [SO 1] began handling petitioner’s non- CDP appeal of her rejected OIC before she was later assigned petitioner’s CDP hearing.”

In note 9 it goes into further detail, indicating that it is not using Moosally as an opportunity to revisit whether the legislative history supports a more permissive standard when the differing matters are CDP cases, as it offered for support of its holding in Cox:

[in Cox] we referred to this same legislative history for the proposition that “both the statutory and the regulatory language suggest a relatively permissive standard under which participation in earlier collection proceedings would not constitute disqualifying prior involvement for purposes of section 6320 or 6330.” We do not opine on whether the legislative history supports a permissive standard or whether we will continue to apply a permissive standard to situations similar to Cox that involve two CDP matters. However, we conclude that the flexibility contemplated by Congress and provided in sec. 301.6320-1(d)(1), Proced. & Admin. Regs., as plainly stated in the regulation, applies only to situations involving two or more CDP matters.

Keeping its options open, the Tax Court in Moosally stated that given it was deciding the case based on its Cox rationale, it was not taking any position on the merits of the Tenth Circuit’s approach to impartiality:

For clarity, we note that we have not decided whether we will apply the Tenth Circuit Court of Appeals’ analysis to facts similar to those in Cox arising in cases appealable in circuits other than the Tenth Circuit or instead continue to follow the standard and rationale set forth in our Opinion in that case. We find no need to confront that issue in the instant case because we would reach the same conclusion whether we apply our rationale set forth in our Opinion in Cox or the “broad restriction” standard set forth in the Court of Appeals’ opinion in Cox. Accordingly, our conclusions in the instant case do not conflict with the rationale and conclusion set forth in our Opinion in Cox.

Some Parting Thoughts

Moosally does help define what will constitute prior involvement.  Absent a taxpayer’s waiver an Appeals employee who is considering  matters in a non-CDP appeal will not be permitted to be involved in a later CDP case involving the same years and tax. It does not address how much Appeals’ involvement is necessary when there is not a formal matter in Appeals’ jurisdiction.  It does not address the Tenth Circuit’s statement that in its view the CDP regulations are invalid insofar they provide that prior involvement “exists only when the taxpayer, the tax and the tax period at issue in the CDP hearing also were at issue in the prior non-CDP matter.”  See Cox Tenth Circuit opinion at note 10, referring to Treas. Reg. § 301.6330-1(d)(2). Moreover, it does not address the limits of the Tax Court’s second rationale in Cox, that is, whether prior Appeals’ involvement if it arises in a separate CDP case should be less worrisome than prior non-CDP Appeals’ involvement.  I would not be surprised that given the still divergent views of the Tax Court and Tenth Circuit, and that Appeals’ docket is increasingly crowded with both CDP and non-CDP collection matters, that the Tax Court will at some point have to confront these issues again and will not be able to avoid addressing the Tenth Circuit’s approach.

By pointing to the open questions still after Moosally, I do not mean to criticize either the case’s outcome or the Court’s approach in the case at hand. The Tax Court’s approach in Moosally resolves a dispute in the narrowest way possible. What is somewhat hard to square, however, is part of the Tax Court’s rationale for avoiding having to address the Tenth Circuit’s view of impartiality.  The opinion states that Moosally is appealable to the Sixth Circuit under the Golsen rule. As discussed in a prior post, the DC Circuit Court of Appeals in Byers v Commissioner held that in CDP cases where there is no challenge to the underlying liability, venue for an appeal is the DC Circuit Court of Appeals, unless the parties stipulate otherwise.  As there is no DC Circuit court precedent in the issue, the venue statement in Moosally has no practical effect in the case, though it leaves unanswered how the Tax Court views venue in CDP cases.  I would expect that the Tax Court would confront the venue issue in other CDP cases, especially when venue may have a major impact on the case’s outcome, given how many circuit courts of appeal disagree with the Tax Court on the appropriate scope of review in CDP cases, as guest blogger Carlton Smith discussed extensively in Tax Court Dodges CDP Record Rule Ruling.

Byers thus may loom large in these disputes. If Byers stands for the proposition that appeals of CDP cases not involving liability should go to the DC Circuit, then under the Golsen rule, the Tenth Circuit’s view in Cox will not likely control the outcome of a particular case. While absent adverse authority the Tax Court can continue to apply its approach in disputes about the reach of impartiality, taxpayers would be well-advised in the appropriate case to ask the Tax Court to reconsider in light of what I believe to be a well-reasoned and persuasive appellate Tenth Circuit opinion.

Summary Opinions for 3/14/14

Nova IRS B day2Happy Birthday I.R.S.!!  The photo is from yesterday’s annual Villanova Law School’s Tax Law Society sponsored IRS birthday bash (which perhaps coincidentally coincides with St. Patrick’s Day), where things got just as crazy as you are imagining.  The last year wasn’t a banner year for the Service; hopefully, next year will be a bit better. As always, a thank you here is appropriate to Mr. Carlton Smith, for his guest post this week on some intricacies of the Golsen rule and the recent Dalla case.  To the tax procedure.

 

read more...

 

  • Last week, the Tenth Circuit decided US v. ConocoPhillips, which looked to the federal common law to determine the validity and effect of a closing agreement.  The Court reviewed the opening paragraph, recital clauses, and signature page as evidence of the parties’ intent to create a closing document and did a textual, purpose-based analysis of the document to determine the meaning of a disputed undefined term of “successors in interest”. We have not discussed closing agreements  in the blog; look for a future post that goes into them and returns to this interesting case that relates to hudndreds of millions of dollars in costs attributable to the eventual removal of the Alaskan oil pipeline.
  • Accounting Today has a good refresher on what a third party designation authorizing the preparer to speak to the Service actually does. 
  • In a somewhat run of the mill penalty and reasonable cause case, the Tax Court in The Estate of Richmond held a valuation obtained by the estate’s accountant that was in draft form and not signed could not be relied upon for reasonable cause for the accuracy related penalties.  The Court noted the accountant did have appraisal experience, but it found that a case of this size and magnitude required a more formal appraisal, most likely from a certified appraiser. 
  • From Accounting Today a review of a recent TIGTA report on IRS collection actions with taxpayers who were in bankruptcy showed that the IRS specialists did not always follow the appropriate procedures.  The report, however, did not find any specific abuse of taxpayer rights, nor did it find that the government’s interests were not properly protected, but it did note that failure to follow the procedures could increase the risk of such things happening. 
  • The audit dirty dozen from the WSJ via TaxProfBlog.  Twelve items that are sure to attract IRS attention. 
  • You know what sucks about being poor…most things…but also not living as long as the wealthy.  The NYT has an article on income inequality, and the effects on life expectancy.

 

Tax Court dodges CDP record rule ruling

Today we welcome back guest blogger Carlton Smith with another discussion of the Golsen rule.  Because of the uncertainty surrounding the Tax Court’s appellate venue at this point with respect to certain issues, we continue to visit cases where the Golsen rule can have a hand in the outcome or at least be lurking in the background.  Here the importance of the Golsen rule interplays with the administrative law record rule.  We thank Carl for his observations on the way appellate venue can influence the outcome of a case before the Tax Court.  Keith

There have been several blog posts on the interplay of the Tax Court’s Golsen rule and the issue of whether the Tax Court, in reviewing an Appeals Settlement Officer’s actions at a Collection Due Process hearing, may take in additional evidence that was not part of the administrative record at Appeals.  Those posts were in connection with a litigation in the D.C. Circuit over the proper Circuit to which a Tax Court CDP decision is appealable.  In Byers v. Commissioner, 740 F.3d 668 (Jan. 17, 2014), the D.C. Circuit recently held that it — and not the regional Circuit in which the taxpayer lived — was the proper venue on appeal for those CDP Tax Court cases in which the taxpayer was not raising any issues about the underlying liability.  In an opinion issued by Tax Court Judge Cohen this week, Dalla v. Commissioner, T.C. Memo. 2014-37, she cleverly avoided wading into the issue of whether the Tax Court agrees with the Byers opinion.  Dalla was the first case in the Tax Court presenting the conundrum created by the Byers ruling.

read more...

First, though, back to the record rule:  In Robinette v. Commissioner, 123 T.C. 85 (2004), the Tax Court held that a CDP proceeding in the Tax Court is a trial de novo as to evidence (though limited to the issues raised at the Appeals Office CDP hearing).  However, the Eight Circuit reversed the Tax Court in Robinette, holding that a Tax Court CDP proceeding is generally limited to the administrative record. 439 F.3d 459 (8th Cir. 2006).  Two other Circuits have agreed with the Eighth Circuit.  See Murphy v. Commissioner, 469 F.3d 27, 31 (1st Cir. 2006), and Keller v. Commissioner, 568 F.3d 710, 718 (9th Cir. 2009).  None of the other regional Circuits or the D.C. Circuit has ruled one way or the other on this Tax Court CDP “record rule” issue.

Under its Golsen doctrine (Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. on other issue, 445 F.2d 985 (10th Cir. 1971)), the Tax Court follows its own precedent — except in the case where a court of appeals to which the Tax Court case is appealable has ruled to the contrary.  Ever since it decided Robinette, the Tax Court has applied its Golsen rule such that it follows its own precedent (i.e., trial de novo) in CDP proceedings where the taxpayer lives in the D.C. Circuit or the eight other regional Circuits that have not decided the issue and follows the rule limiting its CDP proceedings to the administrative record for taxpayers who reside in the First, Eighth, and Ninth Circuits.  The Tax Court has done so under the undiscussed assumption that venue on appeal from one of its CDP decisions is to the regional Circuit in which the taxpayer lives.  The regional Circuits are where, since 1999, nearly every one of the 600-plus CDP appeals has been taken.  Since Byers was decided, the Tax Court has not revisited how it would apply the Golsen rule in a CDP case before it that, like Byers, only involved a complaint about a collection alternative (not the underlying tax).  Dalla was such a case.

In Dalla, two taxpayers residing in Nevada (the Ninth Circuit) complained of the Settlement Officer’s calculation of their monthly income available to pay back taxes.  Although they also initially challenged that underlying liability at Appeals, they gave up that challenge during the Appeals CDP hearing and did not raise the challenge again in their Tax Court petition.  To the Settlement Officer and the Tax Court, the taxpayers had also argued that they should have been put into currently not collectible (CNC) status.  The Settlement Officer had determined that the taxapyers could make monthly payments that would fully pay off the taxes owed.  The Tax Court litigation was merely over the issue of whether the taxpayers were entitled to CNC status.

During the Tax Court trial, one of the taxpayers testified and tried to introduce documents.  The IRS promptly objected to expanding on the administrative record — no doubt citing the Ninth Circuit’s Keller opinion holding that a Tax Court CDP proceeding is limited to the administrative record.  Judge Cohen took in the evidence (testimony and documents) without ruling yet on the IRS’ objection.  I speculate that she did not immediately rule that the evidence was excluded under Keller (following it under Golsen) because she had read a law review article in 2008 that had argued that CDP cases were appealable only to the D.C. Circuit (the same article relied on by Mr. Byers and the D.C. Circuit).  If she were to hold under Golsen that the D.C. Circuit was the correct venue on appeal for the Dalla case, then, since the D.C. Circuit had never addressed the record rule issue, Judge Cohen would be bound by the Tax Court’s Robinette opinion allowing the expansion of the administrative record.

When she wrote her opinion, though, she managed to dodge the record rule issue.  Without even citing Keller, Robinette, Golsen, or Byers, she merely observed:  “[W]e conclude that consideration of the testimony and additional arguments and exhibits offered by petitioners would not affect our conclusion and that respondent’s objection, which we took under advisement, has been rendered moot.”  Slip op. at *10.  She held that, with or without this non-record evidence, the taxpayers had not shown the Settlement Officer abused his discretion in finding that the taxpayers were not entitled to CNC status.

I would not be surprised if other Tax Court judges, in appropriate cases, for some time take the way out that Judge Cohen found to avoid deciding the CDP record rule issue after Byers.  But, eventually, someday, that way out won’t be available; the additional non-record evidence presented by a taxpayer will require the Tax Court to rule differently than if it only considered the administrative record.  When that day comes, the Tax Court will have to decide either (1) whether it agrees with Byers that CDP cases not challenging underlying liability are all appealable to the D.C. Circuit, so under Golsen, the Tax Court should apply its own Robinette precedent allowing supplementing the record, (2) whether the Tax Court disagrees with Byers, so the Tax Court must follow the precedent (if any) of the Circuit in which the taxpayer lives, or (3) without deciding whether the Tax Court agrees with Byers, since the Tax Court can’t control the Circuit to which a party will appeal (i.e., regional or D.C. Circuit), the Tax Court should just ignore Golsen‘s command to follow the precedent of a Circuit contrary to the Tax Court’s precedent.  After all, Golsen is simply a rule of convenience to avoid automatic reversals.  If the Tax Court can’t tell which Circuit will review it — so that automatic reversal is not inevitable — it would seem that the Tax Court should follow its own precedent (the one it thinks is right as a legal matter).

 

Another Update on Rand Cases in Tax Court

(Today we welcome back Guest Blogger Carl Smith to bring us up to date on the Rand litigation.  We will continue to track this issue in future posts.)

On January 15, Keith did an Update blog post on all of the cases in the Tax Court that have come to light since November 18, 2013 that present the same issue decided that day in Rand v. Commissioner, 141 T.C. No. 12.  In Rand, the Tax Court held that disallowed refundable tax credits can generate “underpayments” under section 6664(a) on which a 20% section 6662(a) penalty can be imposed only to the extent the credits were used by the taxpayer to bring his or her tax liability down to zero — but not to the extent that the credits generated refunds.  Even though it is only three weeks since Keith’s update, I think it is time for another update, since seven more Tax Court dockets have come to light with the issue just since Keith’s last post.

But, first, the key issue right now is whether the IRS will seek to appeal Rand to the 7th Circuit (where the Rands live).  In addition to appeal, there are three other alternatives that the IRS is likely considering:  (1) The IRS may decide just to live with Rand.  (2) It may try to adopt a regulation under section 6664(a) overruling Rand (which would likely have prospective effect — and which the Tax Court said in Rand might or might not be invalid).  (3) The IRS may seek corrective legislation to overrule Rand (probably the slowest route to a fix).

read more...

As of today, the IRS has not decided what to do about Rand.  The “decision” document in the Rand Tax Court case was entered on Jan. 15, so the IRS only has until Apr. 15 (90 days) to file a notice of appeal.

On page 187 of her Dec. 31, 2013 annual report to Congress, Nina Olson urged: “[T]he IRS should direct attorneys handling refundable credit cases involving IRC § 6662 penalties to notify the court and opposing counsel (or pro se petitioner) if the IRS is pursuing a larger penalty than would apply under the Tax Court’s recent analysis in Rand.”  From what I have seen, it appears that the IRS attorneys are currently doing this.  But, it also appears that judges are reviewing dockets themselves to locate Rand-type cases.

In this update, I wanted to review all such Rand-type cases that have come up since Nov. 18.  The way I located the dockets is through opinions (there were two) or through orders issued by Tax Court judges specifically mentioning the Rand case’s effects on the docket.  I found these orders using the Tax Court’s order search function by searching for the word “Rand”.  So as not to make the reader go back to Keith’s earlier blog, I am going to combine the seven more recent dockets with those discussed in Keith’s blog.  And I will group the dockets by category.

Cases in the Courts of Appeals Already

Before the Rand case was decided, I noticed that the issue was present, but undiscussed, in an opinion decided by Judge Kroupa in Dec. 2012, Morales v. Commissioner, T.C. Memo. 2012-341, Tax Court Docket Nos. 4225-12 and 5316-12.  In the opinion, she held that the taxpayers improperly claimed first time homebuyer credits and should pay section 6662(a) penalties on the disallowed credits because they were negligent.  I then entered an appearance for the taxpayers and moved for reconsideration only of the imposition of the penalties.  I argued that the judge should have imposed on the IRS the burden under 7491(c) of showing there was an “underpayment”, even though the taxpayers — like every pro se taxpayer — would never have thought to specifically have raised the lack of “underpayment” issue.  In Aug. 2013 (also before the Rand opinion was issued), Judge Kroupa denied the motion for reconsideration — saying that I was improperly raising a newly-minted issue.  See Morales v. Commissioner, T.C. Memo. 2013-192.  In Dec. 2013, I appealed the Morales cases to the 9th Cir., where my opening brief is due on Mar. 3.  The 9th Cir. Docket Nos. are 13-74283 and 13-74284. Whether or not the DOJ will file the appellee’s brief in the case will likely depend on the IRS decision about appealing Rand.  If the IRS appeals Rand, the DOJ in Morlaes will both argue that Rand was wrong and argue that I raised the Rand issue too late to be considered.

Regular Tax Court Cases That May Be Appealed

In addition to Rand and Morales, there are now four other Tax Court dockets in regular cases in which the Tax Court or IRS has identified a Rand issue.  If the IRS decides to appeal Rand, it will likely want to appeal the Tax Court’s actions in removing penalties in each of these four other cases.  Three of the dockets involve taxpayers living overseas, so the appeals by the IRS would go to the D.C. Circuit under the default rule of section 7482(b)(1) where the taxpayer does not reside in any Circuit.  Faecher, Docket No. 16049-12, Aumann, Docket No. 23021-10, and Bukshpan, Docket No. 24533-10.  One docket involves a taxpayer who lives in the Seventh Circuit, Bertram, Docket No. 24697-12.  In all four cases, the Tax Court judge issued an order to show cause mentioning Rand, but in no case has the decision been entered, so the time to appeal has not started.  In an IRS report filed in Faecher, on Jan. 2, the IRS conceded that the Tax Court, if following its own Rand precedent, should enter a decision without any penalties.   But, in the report, the IRS started that it reserved the right to appeal the decision.  Even though over a month has passed since this report, the Tax Court has not yet entered the Faecher decision.

Thus, currently, if all appeals go forward in all these six cases, the Rand issue may be considered by the Seventh, Ninth, and D.C. Circuits.  And, of course, if there is any Circuit split, a Supreme Court opinion might be needed to resolve that split.

S Cases That May Not Be Appealed

Keith has pointed out the current advantage of being an S status case under section 7463 if there is a Rand issue in the case.  The Tax Court will follow its own precedent in Rand, removing or lowering the penalty, and the IRS can’t appeal.  Thus, taxpayers should fight any efforts by the IRS to remove S status from Rand-type cases already filed and should file any new Rand-type cases seeking S status.  I am not aware that the IRS is yet moving to remove the S status in Rand-type cases, but that is what the IRS did in 2009-2011 when it decided to appeal Lantz v. Commissioner, 132 T.C. 131 (2009), and all Lantz-type cases involving the validity of the 2-year period to request section 6015(f) equitable innocent spouse relief imposed by an IRS regulation (since abandoned).  As far as I am aware, no judges ever granted the IRS motions to remove S status in the Lantz-type cases. So, the odds are that the judges won’t remove S status in Rand-type cases, either.

There have already been two published opinion in S cases following the Rand holding with respect to the penalties:  Li v. Commissioner, T.C. Summary Op. 2013-97, and Richardson v. Commissioner, T.C. Summary Op. 2014-9.

In another case, Weisinger, Docket No. 15555-11S, the Tax Court dismissed a petition for failure to properly prosecute, but in doing so, removed a proposed section 6662(a) penalty — citing Rand.

In three other S cases, the Rand issue has been identified, but the IRS is being given until April 14 (the day before Rand must be appealed if it is going to be) to decide what to do about the issue.  All three of these cases appeared on Judge Lauber’s Nov. 18, 2013 New York calendar, and the parties had reported a basis of settlement that included the penalties that would now be improper under the Tax Court’s view in RandSchutz, Docket No. 30420-12S, Zyslin, Docket No. 30026-12S, and Braitman, Docket No. 21779-12S.  It is unclear to me why Judge Lauber is allowing more time for either the entry of a decision or an IRS status report, since, unless the IRS asks to be relieved of the settlement or to remove the S status, nothing prevents the Judge from insisting the filed settlement immediately be incorporated into decisions, but without (or reducing) the penalties, consistent with Rand.

I may periodically do further updates on Rand-type cases between now and the time that the IRS decides whether to appeal Rand.  In the 2009-2011 period, I appointed myself to keep track of the Lantz-type cases in all of the Circuits (and eventually to litigate one in the Second Circuit — one that, ironically, never got decided).  Keeping track was a useful project because once the IRS decided to litigate the Lantz issue in all possible Circuits, I could contact all the taxpayers or their counsel to make sure that everyone on the taxpayers’ side knew what was being argued in all Circuits and had representation.  This put taxpayers on the same footing as the IRS and DOJ in coordinating a response (though taxpayers could not force other taxpayers to make any particular arguments).  I hope that we are not headed to a similar multi-Circuit litigation here on the Rand issue, but you never know. Other than in Rand and Morales, all the other taxpayers mentioned above are currently pro se.  If the IRS decides to appeal their cases (or to try to appeal by fist moving to remove S status), I may use this list as a list for obtaining volunteer pro bono counsel for these people.

Stay tuned . . . .