Storm at SEC Over Appointments Clause Violations Concerning Its ALJs and Possible Implications at to Circular 230 ALJs, Part IV

Frequent guest blogger Carl Smith brings us up to date with what has been happening in the litigation concerning administrative law judges (ALJs) and whether their selection meets the requirements of the Appointments Clause of the Constitution.  Although tax practitioners do not routinely encounter ALJs in their practice and probably hope never to encounter them because such encounters usually occur in disciplinary proceedings, these decisions do have meaning in the tax area and deserve attention.  Keith

In three prior posts beginning in September 2015, which can be found here, here, and here, I have reported on challenges brought under the Constitution’s Appointments Clause to SEC ALJs.  This is to report that on December 27, in a case named Bandimere v. SEC, a divided panel of the Tenth Circuit held that SEC ALJs are inferior officers who need to be (but are not currently) appointed under the Constitution’s Appointments Clause.  This creates a direct Circuit split with the D.C. Circuit, which held last August that SEC ALJs are not inferior officers needing appointment.  Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277, 283-89 (D.C. Cir. 2016).  Thus, the issue of which, if any, of the nearly 2,000 federal government ALJs need to be appointed under the Appointments Clause appears headed to the Supreme Court.

The IRS uses ALJs to hold hearings on Circular 230 violations.  Anyone representing a person in such a Circular 230 proceeding should probably forthwith do some discovery to get into the record how, if at all, those ALJs were appointed or hired.  The resolution of the issue for SEC ALJs may dictate a similar resolution for IRS ALJs, though, in my second post, I explained why there might be some differences.


Dodd-Frank created the system of having SEC ALJs decide many SEC sanctions cases in the first instance, rather than having the SEC sue in the district courts to impose sanctions.  If an SEC ALJ’s ruling is appealed to the full SEC, the full SEC reviews the ALJ de novo, though giving some deference to the ALJ on factual findings.   Review of the SEC’s rulings can be had directly in the Circuit courts of appeals.

In my first two posts, I reported that in the summer of 2015, two district courts held the ALJs to be inferior officers of the United States who need to be appointed under the Appointments Clause.  The SEC concedes that its judges were not so appointed.

Much of the time between my first two posts and my third post was taken up by Circuit court opinions holding that district courts in these and in other collateral proceedings lacked jurisdiction to decide the constitutional issue.  Hill v. SEC, 825 F.3d 1236 (11th Cir. 2016); Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016); Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015); Bebo v. SEC, 799 F.3d 765 (7th Cir. 2015). (Hill was issued two days after my last post.)

But, in August of 2016 (also after my last post), the D.C. Circuit, in a case on direct review of an SEC order affirming the sanctions imposed by an SEC ALJ, held that under the Supreme Court’s “significant authority” standard used in Freytag v. Commissioner, 501 U.S. 868 (1991), SEC ALJs were not inferior officers because they could not render final decisions in their cases.  Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277, 283-89 (D.C. Cir. 2016).  In Freytag, the Supreme Court held that Tax Court Special Trial Judges (STJs) were inferior officers exercising significant authority on behalf of the United States because of the many judge-like powers they possessed, including their wide discretion to issue rulings.

The Freytag opinion was admittedly less than clear in whether, to be an inferior officer, a person needed the ability to render final decisions binding the government.  In 2000, a divided panel of the D.C. Circuit in Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), had held that FDIC ALJs did not need to be appointed – based on the panel’s interpretation of Freytag to require final decision-making authority in a person to render that person an officer of the United States.

In an opinion issued by a divided panel of the Tenth Circuit on December 27, in Bandimere v. SEC, the Tenth Circuit rejected Landry’s holding and held that Freytag did not require that inferior officers need the power to render final decisions.  Rather, the Bandimere majority said that, in Freytag, the Supreme Court discussed the finality of STJ rulings under what is now section 7443A(b)(7) only in response to a government concession – and not as part of the Supreme Court’s actual holding in the case.  (I agree.)  Thus, while having the ability to enter final, binding orders was one factor that could lead to a finding that a person was an officer, it was not a “but for” requirement, according to Bandimere.  And, in any event, even though the SEC had the authority to do de novo review, Bandimere pointed out that in about 90% of cases either there was no SEC review of the ALJ or the SEC review resulted in upholding the ALJ verbatim, so it is really the ALJ who effectively binds the government in the vast majority of SEC cases.  Further, even the de novo review of the ALJ that the SEC gives is one in which the SEC in fact gives deferential review of facts found by the ALJ.  This is similar to the deferential review on factual issues of STJs by Tax Court judges.

The dissenting judge in Bandimere worried that the ruling of the majority would lead to all ALJs in the federal government needing to be appointed.  This particularly would affect the Social Security Administration, where over 1,500 such ALJs are located.  (The SEC only has 5 ALJs at present.)  I am not so sure other ALJs lack proper appointment under the Appointments Clause.  5 USC § 3105 authorizes agencies to appoint ALJs.  Systems of hiring or appointment may vary by agency.  Moreover, I don’t think the result worried about by the dissent would surprise the Supreme Court.  Even Justice Scalia, in his Freytag concurrence (joined by three other Justices), noted:  “Today, the Federal Government has a corps of administrative law judges numbering more than 1,000, whose principal statutory function is the conduct of adjudication under the Administrative Procedure Act (APA), see 5 U.S.C. §§ 554, 3105. They are all executive officers.”  Freytag, 501 U.S. at 910 (emphasis in original).


While the holding of Bandimere primarily impacts, for tax practitioners, only the IRS ALJs who try Circular 230 violations, the Tax Court’s ruling in Tucker v. Commissioner, 135 T.C. 114 (2010), affd. 676 F.3d 1129 (D.C. Cir. 2012) (in which I represented the taxpayer), is now called somewhat into question.  In Tucker, the Tax Court refused to hold that the IRS Settlement Officers and their Appeals Team Managers who hold CDP hearings and render determinations therein were individuals needing to be appointed under the Appointments Clause.  The Tax Court’s reasoning, in part, was that these IRS employees do not render final rulings, but Landry v. FDIC held that the ability to enter final orders was a necessary requirement for a person to be an inferior officer.  See 135 T.C. at 162-165.  “Since we find persuasive the reasoning of the Court of Appeals for the District of Columbia Circuit in its determination that ALJs for the FDIC do not exercise ‘significant authority’, we hold that the lesser position of CDP ‘appeals officer’ (‘or employee’) within the Office of Appeals likewise does not exercise ‘significant authority’”.  Id. at 165.

In the D.C. Circuit’s affirmance of the Tucker opinion, however, the D.C. Circuit disagreed with the Tax Court and held that such Appeals personnel did have final authority, just that the authority was on issues (1) not of constitutional significance (collection) or (2) where their discretion was too circumscribed by IRS Counsel’s potential involvement (liability determinations).  “[W]e conclude that the lack of discretion is determinative, offsetting the effective finality of Appeals employees’ decisions within the executive branch.”  676 F.3d at 1134.

The Supreme Court denied cert. in Tucker, and no taxpayer has again made the same argument that I made therein.  But, the intrepid pro se taxpayer Ronald Byers has a CDP case in the Tax Court (not the same one that he took to the D.C. Circuit), in which he tells me that he plans to raise the same Appointments Clause argument that I raised in Tucker with respect to CDP Appeals Office personnel.  He will appeal this case to the Eight Circuit (where he lives).  He may try to create a Circuit split.  He may get the Tax Court to address the effect of Bandimere on his argument, as well.

New York Times Article on Call Center Tax Scams Highlights How Criminals Prey on Our Citizens Fear of IRS

In India’s Call Center Talents Put to A Criminal Use: Swindling Americans New York Times reporter Ellen Barry details the methods and motivations behind the IRS and other federal government employee impersonation scams that have victimized thousands of vulnerable Americans. NYT reporter Barry also speaks with some of the callers, two of whom are Indian teenagers who blew the whistle on the call center operation to American investigators. The article is quite sad, as it includes the stories of some of the victims themselves, one of whom lost her life savings and drained her bank account to avoid threatened prosecution and possible deportation.

One part of the story stood out for me. The key to the success of the scam, according to the Indian teen call center employees, is the “psychological fact” that some Americans deeply fear their government.

That reminds me of a talk I heard Tulane Professor Steve Sheffrin give at the American Tax Policy Institute November conference on Improving the Tax System Using Advances in Social Knowledge and Technology. Professor Sheffrin’s talk is streamed here. In the talk he discussed the spate of IRS impersonation scams. At about the 45 minute mark he emphasized that most call scams are based on greed; for example the Nigerian prince fund transfer scams hook in victims looking to make a quick buck.

Unlike those scams, as Professor Sheffrin and today’s NYT article discuss, the IRS scams prey on the visceral fear that some people feel toward IRS and government in general. Sheffrin considers why some people fear the IRS so much that in a few minute phone call someone who had no knowledge of a tax problem might be inspired to transfer thousands of dollars in I-tune cards to callers thousands of miles away. While he notes that the callers do use effective social engineering techniques (e.g., using 202 area codes for calls and awareness of some individualized information), the prevalence of the scam says quite a bit about how some people view the IRS and the tax system generally. Included in that view is the erroneous sense that IRS power is unbounded, a theme I was familiar with from my time directing a tax clinic when some clients came to us thinking that a correspondence examination or collection letter was the first step in a parade of horribles.  Underlying the fear is the public’s lack of understanding of the tax system and how it works.

These scams suggest to Professor Sheffrin that the IRS has to pay more attention to its image. They also raise questions about how the IRS goes about its daily business of communicating with taxpayers, an issue we have looked at lately with at times the IRS sending misleading or at best confusing compliance letters. Professor Sheffrin contrasts IRS with the California Franchise Tax Board which is much more adept at involving the public in its operations.

As we roll into the new year, a new Congress and new Administration, there is the steady rumble of a possible reform of the IRS as part of overall tax reform. IRS is working hard on building its future state of digital communications with taxpayers. The “success” of the scammers as typified in the NYT article suggests that IRS and Congress face many challenges in rebuilding and rebranding an agency. It is hard to communicate seamlessly with taxpayers if the taxpayers think the IRS is just a phone call away from hauling you to jail or seizing assets on a previously unknown tax bill.


Groundhog Day – Getting Information on Outcomes Back to IRS Employees Working Cases Earlier in the Stream

I referenced the movie Groundhog Day in an earlier post about Appeals employees and the inability of those employees to judge litigating hazards because they rarely, if ever, go to court or follow through with the evidentiary issues presented in their cases.  Because they do not get appropriate feedback on their decisions, they relive decisions over and over thinking that they must have made the correct decision the last time they faced the problem.  The reference to Groundhog Day in this context reflects my interpretation of this phenomenon as one in which the Appeals Officers, like Bill Murray in the movie, repeat the same actions over and over and coming to an awareness of the problem takes a long time because of inadequate feedback.   I bring the movie up again 18 months later to argue for a change in culture at the IRS broadly to create a basis for its employees to see the impact of their decisions in order for the information about the impact to inform their judgment in later cases.  Trying to change the culture on a subject like this no doubt comes from the same hubris that compels me and other attorneys to file motions for reconsideration; however, the topic deserves another shot so I apologize to those of you who read my earlier discussion on which I base these comments.  In today’s post I write more broadly about providing feedback than just about Appeals Officers.  This does not mean I think that things have changed in Appeals since I wrote on this before but simply that the concept of feedback could apply across many parts of the IRS (and many other organizations as well).


One advantage that practitioners have in looking at problems involving tax procedure is that in many instances, though certainly not all, the practitioner will represent the client through the entire process of working with the IRS to resolve a problem.  The practitioner will work with the client in the audit, in the appeal, in Tax Court and in collection until the matter comes to an end or, sometimes, until the client comes to the end of their resources.  While not every practitioner will follow every controversy case from beginning to end, at the IRS the system certainly does not allow the employees to follow the case from beginning to end.  Each employee encountered along the way of the life of a controversy case has a discreet function that may have no, or little, relationship to the function of the other employees engaged in the process.  As a consequence, the employee working on a segment of the case often has little knowledge of how the decisions they make impact the case as a whole.  That is unfortunate.

I think the IRS needs to build into its training and employee evaluation some component that provides the employee with feedback about the downstream actions taken on the cases on which they have worked in order to allow the employees to learn from what happens after they touch a case.  In making this suggestion, I realize that it could be expensive and that only a small percentage of cases go into litigation or go further downstream from the initial employees working the case.  Yet, even though it would cost time and money to establish such a system and even though a high percentage of cases would not result in a change from the position taken at the examination stage, I still think that the benefits to the system outweigh the costs.

On the examination side of this equation, it is interesting to look back to the way the IRS handled cases before the era in which the vast majority of exams occurred through correspondence.  At that time each IRS district had a Review Staff.  As the examining agents issued their reports, the Review Staff would actually review what the agents had done, fix any problems with the work and provide feedback to the agents.  IRS employees working in the Review Staffs were generally not the most beloved by the revenue agents because they caught their mistakes; however, the function of a good review staff, or on the Collection side a good Advisory Unit, was not only to say “Gotcha” but to train the IRS employees who interacted with taxpayers and their representatives.

By moving to Correspondence Examination Units and Automated Collection Sites the IRS gained great efficiencies in the number of cases it could handle per employee but lost almost entirely the benefits of two centers of knowledge and feedback to employees.  Treasury Inspector General for Tax Administration (TIGTA) fills a portion of the gap on a broader scale by doing reviews of the IRS in a manner and scope that did not exist 30 years ago but how many IRS employees do you think have ever read a TIGTA report and reflected on how it should impact their interaction with taxpayers and representatives.  The Taxpayer Advocate Service collects data on systemic problems through its SAMS system where IRS employees as a group have a misunderstanding of how things should work.  The SAMS system and the TIGTA reports, however, provide no information that would assist in training a specific employee about a mistake they have made (once or many times.)  The IRS needs some function that looks at the decisions made by individual employees and how those decisions play out downstream so that it can provide meaningful feedback to those employees and their managers in order to effect a change.

As practitioners we have the ability on a small scale to provide feedback that might impact an employees’ future behavior if we take down the employee number of the person with whom we deal and contact their manager when the employee makes a decision or says something that makes no sense.  Such an ad hoc system of feedback does not seem satisfactory or efficient.  The IRS needs to think about, at level of employee work on taxpayer’s cases, how it can efficiently collect data about the correctness of the employees handling of the case and how it can use the collected data to train its employees on broader issues and individual employees with specific deficiencies.


Immediate Help Needed to File Refund Claims for Individuals Wrongfully Convicted

I received a request for assistance from tax practitioners from the Exonerees Tax Assistance Network.  The individuals in charge of this network are trying to assist individuals who have received money in connection with a wrongful conviction.  Most of the individuals receiving payment for their wrongful conviction reported it on their individual income tax returns.  Last year, Congress passed a law prohibiting the federal government from taxing this compensation; however the last day to file a claim to obtain a refund of taxes paid for a prior year is December 19.  So, you can see why they are scrambling to find tax professionals to assist.  If you are interested in assisting, please read below their announcement of the project and contact the individuals running the project.  Keith 


Background The Wrongful Conviction Tax Relief Act, signed into law in 2015 by President Barack Obama, prohibits the federal government from taxing compensation paid to the wrongfully convicted. Retroactively, it opened the door for all exonerees, no matter the year they were compensated, to request an IRS refund of any tax, interest and penalties paid on that money. Unfortunately, efforts to pass an extender on the amount of time for exonerees to file refund claims failed to pass before the Senate adjourned last Friday (extender legislation did pass in the House). Therefore, all claims for refund must be filed with the Internal Revenue Service by Monday, December 19, 2016. 

What We Need We are seeking tax attorneys, accountants, and enrolled agents who are able to provide pro bono assistance to exonerees determine if they have a claim for refund and, where such claim might exist, to help exonerees prepare claims for refund for filing by December 19, 2016.

If you are able to help, please contact Kelley Miller

( of Reed Smith LLP or Larry Sannicandro

( of Agostino and Associates.

Kelley or Larry will connect you to Jon Eldan at After Innocence

who is working to identify those exonerees who may be impacted by

Section 139F. 


Exonerees Tax Assistance Network ETAN 

The goal of the ETAN is to promote awareness of IRC Section 139F, to help—where and if possible—with referrals to capable tax and accounting professionals willing to help exonerated persons with assistance involving federal and/or state tax-related matters, and to support and encourage extender legislation to allow exonerees time past December 19, 2016 to file amended returns in order to claim refunds for past tax periods where tax was withheld from or paid on settlement amounts received by them. Working with Jon Eldan of After Innocence, members of the Network will help—where and if possible—to provide legal and accounting assistance, or a referral to such resources, for exonerees served by After  Innocence

ABA Names Procedurally Taxing to its List of 100 Favorite Legal Blogs

ABA Top 100 BlawgYou might notice a new logo on our home page.  Last week, Procedurally Taxing was chosen as a top 100 legal blog in the 10th edition of the ABA Law Journal’s survey of legal blogs.  Needless to say we were excited by the recognition.


We want to take a moment at the time of receiving this recognition to thank our readers and our contributors and to reflect briefly about the blog.  The idea for the blog came from Les.  He talked about it for a couple of years before we launched.  Because of his work succeeding the late great Michael Saltzman as the co-author and lead editor of the seminal Thomson Reuters tax procedure treatise “IRS Practice and Procedure” Les saw the need to keep up on procedural issues and he wanted to assist the tax community in keeping up on and thinking about these issues. Prior to the blog, Steve worked with Les and Greg Armstrong on the monumental task of rewriting the treatise and updating it.  After many conversations, Les somehow convinced Steve and me to join him in creating the blog.  After we started the blog, I became, with Steve, one of the contributing authors of the treatise and took the lead in the now-completed task of rewriting the book’s collection chapters.

Convincing Steve to start the blog with us was particularly important because Steve’s law firm hosts the blog.  Without the good graces of Gawthrop Greenwood (where Steve is a partner heading up the firm’s small but excellent tax practice) and Steve’s technical abilities, the blog never would have gotten off the ground and would not have continued.  When we started this in July of 2013, we envisioned something where we would post the occasional thoughts on tax procedure issues and had no idea it would morph into an almost daily event.

One of our readers in those early months, Professor Andy Grewal, occasional guest poster and excellent blogger on his own in Yale’s Notice & Comment blog, suggested that Procedurally Taxing should have a post every day. We have tried to post on most business days, a task that is difficult because of the responsibilities we have beyond the blog. It is safe to say when we started the blog we had no idea of how it would grow nor how much work it would require us to do to keep what we think is a place to not only report or link to developments but generally to try to add value with context and analysis.

We can post regularly on a variety of topics because we have talented guests who bring a wealth of experience and insights.  Of course, our most amazing guest is frequent guest blogger Carl Smith.  While you see posts by Carl more often than any other guest and while Carl’s posts offer an unmatched depth into tax procedure issues, what you may not know is that a high percentage of posts that Les, Steve and I write, result from suggestions by Carl as he reads Tax Court orders and opinions and points us toward cases and issues that would be missed by anyone else without his knowledge of tax procedure.  We have been unsuccessful in convincing Carl to officially join us as a PT blogger rather than a guest, but the blog would not be nearly as successful or provide nearly the coverage without his assistance.

In addition to Carl, however, we are fortunate to have attracted 75 others who have written a guest post for us.  I will not name everyone but you can go to the guest blogger link on our home page and review the list of individuals who have posted with PT.  Including in this list are many leading academic writers, many leading practitioners, several members of the low income taxpayer clinic community and even a few students.  We cannot promise that writing a guest post on PT will lead to a Tax Court judgeship but Judge Diana Leyden wrote for PT before ascending to the bench.  We encourage you to consider writing a guest blog post if you have something to say about tax procedure.

In addition to our guest bloggers, we also want to acknowledge the many readers who have written comments on our site.  If you are not reading the comments, you are missing some of the best procedural insights.  One long term and regular commenter, Bob Kamman, plays a similar role in our commenting section that Carl Smith does as a guest blogger.  He lets us know when we pontificate, stray too far from reality or misspell words.  One day I hope to actually, rather than virtually, meet Bob.  The commenters keep us on our toes, let us know that someone is actually reading what we say, offer insights that we miss and generally add great content that makes the blog a community of individuals interested in understanding and advancing tax procedure issues.

As academic writers Les and I know what it like to write the typical law review article.  It has a similar feel to that high school physics question about whether a tree falling in a forest with no one around actually makes a sound or whether for sound to be produced there must be someone to hear it.  Law review articles too often have the feel of trees falling in an empty forest.  Because of your engagement with the blog, we feel like our writing here has more meaning and impact.  That is not meant to denigrate legal scholarship which can play an important role in advancing issues but it is meant to say that the immediate acknowledgement of our writing and the feeling that our writing may have an actual impact propels us to continue the blog.

Thank you for your interest in our blog.  We look forward to the continued journey.


Retirement of a Friend and Driver Behind the IRS Offshore Program

Today, the IRS is honoring John McDougal, a special trial attorney based in Richmond, Virginia, with a retirement ceremony in the grand foyer of its national office at 1111 Constitution Avenue in Washington, D.C.  I cannot remember another person honored in this way who was not an executive in the organization.  I also cannot imagine a more deserving person for the IRS to honor.

In January, 1980, I moved into the office adjacent to John’s in the Richmond District Counsel Office of IRS.  How fortunate I was.  For almost 30 years I had John as my next door neighbor or nearby neighbor at work.  To have the opportunity to work next to the greatest attorney in all of Chief Counsel’s office certainly made me a better attorney.


Before recounting some of the amazing things John accomplished in his 43 years with Chief Counsel’s Office, I want to go back to the beginning of his tenure and talk about his sleep habits.  John is a night owl.  He does not stay up late to party but he has a bio rhythm that keeps him up into the wee hours of the morning and causes him to want to sleep into the later morning hours.  Today, many employers accommodate personal preferences and rhythms of this type but in the 1970s the world was a much more rigid place.

The official hours of the Richmond office were 8:30 AM to 5:00 PM.  In an effort to accommodate John’s schedule, the head of the Richmond office allowed employees to arrive by 9:00 AM before being charged with annual leave.  Each morning when they arrived for work, the office secretaries would begin calling John’s home in an effort to wake him up so that he could arrive by 9:00 AM.  On many days their efforts failed.  John would arrive at 9:05 AM or later and get charged one hour of annual leave.  He would then stay at the office and work each evening until 9, 10 or 11:00 PM; however, the office had no system of credit hours or comp time to accommodate this deviation from the official schedule and so John worked for several years with no ability to take a vacation because he used all of his leave time arriving late.

John, however, did not complain.  Finally, in the 1980s the office evolved into a form of work flexibility that accommodated John’s bio rhythms and allowed him to take vacations.  I tell this story in part because it is amazing in 2016 to imagine such a work world that would treat its most valued and hard- working employee in such a poor manner but also to make John human since John’s performance as an attorney and a colleague set such a high standard.

At his core, John is a great trial lawyer.  He loves to put a case together and to present it.  He has had many Tax Court trials over his career and taught trial practice skills at Chief Counsel and NITA programs.  He does not, however, love cases involving huge corporations that might take years to develop, teams of lawyers to assemble and lots of national office coordination.  He prefers fact intensive cases and especially fraud cases.  To my knowledge, he is the only special trial attorney in the SBSE stovepipe of Chief Counsel’s office because that designation was reserved for attorneys in the LB&I stovepipe until one Chief Counsel, who had litigated against John before becoming the Chief Counsel, reached out and gave John that designation in recognition of his ability.

In the 1980s John was assigned to a pilot program with the Department of Justice (DOJ) to handle criminal tax cases as a Special Assistant United States Attorney.  About eight attorneys from Chief Counsel offices around the country joined this program.  I believe that John was the only one who actually tried criminal cases.  During the 1980s and 1990s, he tried over 30 criminal cases while continuing to handle a heavy docket of Tax Court cases and advisory work in the office.  This was made possible by his skill, his organization and his hard work.

He went on a special assignment to the Virgin Island tax authority for several months, he went on assignment to the Senate’s Permanent Sub-Committee on Investigations for over a year and he was assigned to assist the Tax Court in handling a disciplinary hearing.

He traveled to the federal prison in Allenwood to try the Tax Court fraud case of master spy Aldrich Ames.  At the request of Washington District Counsel he tried the fraud case of Grossman v. Commissioner I discussed in a post recently.  He picked up a large fraud case on transfer from me where he tried it and won it and then convinced DOJ to have a receiver appointed in Florida to manage the assets of the taxpayer who had hidden them in many far flung ways, including offshore, and he worked with the receiver for over a decade to collect income from and sell the properties.  While working on that same case, he was stabbed and robbed late one night in Tampa but made it to work the following Monday where he showed his scar ala LBJ.  He created the theory that fraud on the tax return by anyone should hold open the statute of limitations and fought hard with the national office to convince it of the correctness of his theory which we have discussed here.

There are many other highlights of his career but I want to focus on his crowning achievement.  All of these special assignments together with his work in Tax Court and district court trials prepared him for his greatest assignment – working on the offshore credit card project and all that followed.

In 2000 when the IRS reorganized, all of the new divisions wanted John because of his reputation as a great attorney but he chose SBSE due to his desire for the types of cases it handled.  At almost that same time Revenue Agent Joe West in New Jersey had figured out how to find taxpayers hiding their assets offshore by obtaining credit card records in the United States.  John got paired to work with Joe and the world of taxpayers parking money offshore was turned upside down.  Though John was by no means the sole force behind the IRS efforts to break through the world of secrecy and offshore parking of assets to avoid taxes, John was a major force in this effort.  With the depth of knowledge he acquired earlier in his career and the penchant for hard work he always had, he played an important role for the past 16 years in changing the offshore landscape.  Through his efforts the IRS has collected billions of dollars.  It is hard to imagine an IRS attorney with greater impact over this time period than John.

As the IRS says farewell to a great attorney, I write to say thanks to a friend and colleague who taught me so much and who helped me in so many ways.

Conference Tomorrow on Improving the Tax System Through Technology and Social Knowledge

Tomorrow the American Tax Policy Institute is sponsoring a conference at the offices of Skadden Arps in Washington DC that will look at ways to improve the tax system using advances in technology. The conference will be streamed here (registration required).

The conference features panels on four themes:

  • how the tax system can use behavioral economics to help tax policy;
  • how social science can improve tax administration and promote compliance;
  • how artificial intelligence and big data can improve compliance; and
  • how the tax system is addressing issues of privacy, identity theft, and data security.

I will be hosting the panel on privacy, where I will be joined by Ken Corbin, Director of IRS’ Return Integrity and Compliance Services, Kathy Pickering and Brice Daise of H&R Block and Professor Michael Hatfield at University of Washington School of Law. IRS and the private sector have teamed up on many issues relating to identity theft and security, and Bruce, Kathy and Ken will explore the challenges and opportunities that spin off that public private partnership. Michael has written thoughtful papers on privacy and tax policy.


The other panels feature interesting researchers from government and the academy, including former guest PT posters Susan Morse and Kathleen DeLaney Thomas, and my former law school professor Joe Bankman, who has co-authored an important article on the use of smart tax returns and software as a way to nudge compliance.

In the waning days of the current administration, President Obama has pointed to technology and its impact on society with increasing frequency. In an interview in Wired last month, he lamented that government in general has not embraced technology in making experiences for people more user friendly, noting that filing taxes should be “at least as easy as ordering a pizza or an airline ticket.” This follows an executive order from 2015 addressing the use of behavioral economics in government, where the President essentially ordered government to embrace its insights into designing and operating federal programs.

We have discussed how the tax system is struggling with technology as it addresses IRS Future State and modifies its procedures in Appeals. I have also been deeply interested in how tax agencies around the world have employed social knowledge and research in areas like behavioral economics to improve tax compliance (see e.g., What Peeing in the Pool Can Teach Us About Tax Compliance and a post discussing research out of the UK called Can IRS Change Taxpayers from Procrastinators to Payors By Drafting Letters that Make Taxpayers Feel Bad?

There is no doubt that in the next administration IRS will be wrestling with how to manage technology and how to better leverage insights from research in many areas to more efficiently administer our complex tax system. Tomorrow’s ATPI conference will I think be an important forum for considering many of these issues.

IRS Art Advisory Panel

I saw a notice that “the IRS Art Advisory Panel plans to hold a closed meeting September 14 in Washington to review and evaluate the fair market value appraisals of works of art involved in federal income, estate, and gift tax returns.” While my low income clients have not in nine years raised any issues that cause me to have any concern about the Art Advisory Panel, I did have cases in which the panel was involved when I work for Chief Counsel. The panel is a rather unique part of the IRS. I thought I would write a post on it for those who have never had a case in which the panel is involved and may not know what it does.

Art is also just a fun topic to discuss. Les alerted me to a tax case involving art. The tax problem in that case is mostly a sales tax case related to state sales taxes and not valuation of art, but I think that art and taxes creates a combination that makes people sit up and listen a little closer. In the tax case in which I encountered the art advisory panel, there were a number of shenanigans going on related to the piece of art but not by the taxpayer. Art is so portable, so difficult to value, and so closely related to rich and famous that it creates its own interest.


The panel consists of up to 25 experts from America’s art world who serve on the panel for no compensation. Based on my observation, the IRS is very fortunate to attract to this panel some of the top experts from the art world. A list of the current panelist is at the back of the current annual report from the Art Advisory Panel. I do not know exactly how the IRS goes about recruiting the experts and convincing them to provide service by participating in this panel and I do not know who came up with the original idea of creating the panel. The goal of the panel is to provide assistance to the IRS in valuing works of art without requiring the IRS to hire experts for all of the cases it works where valuing art becomes important.

The report contains a good description of the way the panel operates and provides figures on the amount of art work the panel appraised last year and the differences between the values it determined and the values provided by taxpayers. While the panel found higher values, the percentage of cases with higher values and the amount of the higher values was lower than I expected. The existence of the panel may discourage taxpayers from low-balling and keep art values submitted to the IRS generally in line with market value. The report did not discuss the types of cases in which the panel provided an opinion. My guess is that estate tax, and perhaps the gift tax, returns brought in most of the work of the panel.

The art advisory panel, or rather its members, does not generally serve as an expert witness for the IRS if it goes to trial but rather it serves as an expert for revenue agents and Estate Tax Attorneys who encounter the artwork during the examination process. The last case I tried when I worked for the Office of Chief Counsel, IRS involved the valuation of a painting. There were many interesting aspects to the discovery of the painting and what happened to the painting after discovery, but the trial essentially involved just the valuation of the painting on the date of death in an estate tax case. During the examination, the art advisory panel had been asked to opine on the value of the painting. The opinions of the experts at trial diverged wildly; however, the value placed on the painting by the Art Advisory Panel seemed quite logical and supportable to me. I was impressed with their work and I felt the panel served as somewhat of a neutral arbiter of value. The panel has no charge but to provide its best opinion of the value of a painting. The report does not provide data on how influential the panel’s valuations are in causing a resolution of the valuation issue. I suspect the panel’s opinions play a large role in reaching resolution in valuation cases involving art.

The values it provides may not always hit the mark but that is true of most experts. I am sure that sometimes artwork does not fit within the scope of expertise of any panel members and then the value provided by the panel loses some of its authority. Generally, a panel member exists in many fields of art in order to provide coverage for all of the types of art it may appraise. The Internal Revenue Manual at 4.48.2 and requires that all cases selected for examination that include an art item with a claimed value of $50,000 or more must be referred to IRS office of Art Appraisal Services for possible review by the panel.

Rev. Proc. 96-15 provides a process for taxpayers to request a review of art valuations. Taxpayers can obtain a Statement of Value from the IRS for an advance review of art valuation claims before filing the return, which may then be used to complete the taxpayer’s return. The taxpayer can request this when the value of the art is $50,000 or more. Art is defined in Section 4.01 of the Rev. Proc. as:

.01 The term “art” includes paintings, sculpture, watercolors, prints, drawings, ceramics, antique furniture, decorative arts, textiles, carpets, silver, rare manuscripts, historical memorabilia, and other similar objects.

The Rev. Proc. details the method for making a request for an art appraisal prior to filing a return. The cost is $2,500.  If you get such an appraisal, you must attach a copy of the appraisal to the return even if you, the taxpayer, disagree with the appraisal.  I do not know how many people use this service.  As a litigator, I do not remember ever having a case in which someone used this service.  I do not know whether that is because almost no one uses it, those who use it do not have problems with valuation or a combination of both.

Bill Branch was the Chief of the Estate and Gift Branch when I was the District Counsel in Richmond. Bill is now retired and he works for McGuire Woods, a law firm in Richmond. I spoke with Bill about this post because I felt that Bill would have had a lot more experience than me dealing with the panel. He forwarded to me a fax and document he recently received from an E&G attorney listing out the items Bill needed to provide for the art advisory panel.   Bill also forwarded to me a short bio of Karen Carolan. Karen headed up the panel for the IRS for many years and was the person who assisted me in the case I had with the panel. Like many people I know from the IRS, she is also retired, but she would be the expert to contact if you had questions about the panel.

PBS must get decent viewer ratings for its antique roadshow program since it has lasted a long time. If they could produce a show based on the meetings of the art advisory panel, I suspect the ratings would be equally as good or better. The panel sees a lot of interesting stuff, it has top experts and mostly it operates under the radar.