Representing Your Client in Tax Court with a Power of Attorney

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

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

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

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

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

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

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

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

Multiple Appellate Courts Again to Weigh in on Meaning of Freytag

We welcome back frequent guest blogger, Carl Smith.  Carl writes about the ongoing litigation seeking an answer to the status of the Tax Court within our constitutional framework and other issues spun out by Freytag.  Keith 

In Freytag v. Commissioner, 501 U.S. 868 (1991), the Supreme Court held that the Appointments Clause did not prohibit the Tax Court’s Chief Judge from appointing Special Trial Judges because the Tax Court was one of the “Courts of Law” mentioned in the Clause and because the Chief Judge could act for the Tax Court.  In reaching these rulings, the Supreme Court made subsidiary holdings that have puzzled the lower courts.  Two subsidiary holdings in particular are being disputed currently in the Courts of Appeals:

First:  Did the Supreme Court’s observation that Tax Court Special Trial  Judges can enter final decisions in some cases under what is today § 7443A(b)(7) mean that, in order to be an “Officer” of the United States subject to the Appointments Clause procedures (as opposed to being a mere employee), a government worker must have the power to enter final rulings on behalf of the government?

Second:  Subsidiary to its holding that the Tax Court was one of the Courts of Law, in which, if any, Branch of the federal government did the Supreme Court place the Tax Court?

This brief post tells the reader where and when the Freytag subsidiary holdings are currently being litigated in the Courts of Appeals.

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Who is an Officer?

As to the first subsidiary issue – the finality of rulings to be an Officer – in 2000, the D.C. Circuit in Landry v. FDIC, 204 F.3d 1125, held that Freytag required that Officers have final ruling authority, and since FDIC ALJs did not have such authority, FDIC ALJs need not be appointed under the Appointments Clause.  Relying on Landry, the Tax Court in Tucker v. Commissioner, 135 T.C. 114, 165 (2010), affd. on different reasoning 676 F.3d 1129 (D.C. Cir. 2012), held that because rulings by Appeals in CDP are not “final” (according to the Tax Court), Appeals Team Managers and Settlement Officers conducting CDP hearings need not be appointed, either.  Also relying on Landry, the D.C. Circuit last year in Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277, held that because SEC ALJs do not exercise final authority (the SEC does), SEC ALJs do not need to be appointed.

I have reported on the fight over the constitutionality of the lack of appointment of SEC ALJs and its possible impact on whether ALJs borrowed by the Treasury to hold Circular 230 sanctions hearings need to be appointed, as well, in several blog posts (here, here, here, and here).  In my most recent post, I noted that the Tenth Circuit in Bandimere v. SEC, 844 F.3d 1168 (Dec. 27, 2016), rejected Landry and held that Freytag does not require that a federal worker exercise final ruling authority before having to be appointed under the Appointments Clause, and so SEC ALJs, because of their extensive judge-like powers on important topics, needed to be appointed.  I predicted that this Circuit split over SEC ALJs would shorty end up before the Supreme Court.

Well, I was at least premature.  The D.C. Circuit is trying to avoid the Circuit split.  Instead, on May 24, it will rehear Lucia en banc over the issues of whether Landry misinterpreted Freytag and whether the D.C. Circuit should overrule Landry in favor of the Bandimere holding.

As an aside for those interested in separation of powers issues, the D.C. Circuit that day will also rehear en banc the earlier panel holding that the Consumer Financial Protection Bureau is not constitutionally formed because the Bureau is headed only by a single Director.  PHH Corp. v. CFPB, 839 F.3d 1 (Oct. 11, 2016) and 2017 U.S. App. LEXIS 2733 (Feb. 16, 2017) (“If the en banc court, which has today separately ordered en banc consideration of Lucia v. SEC, 832 F.3d 277 (D.C. Cir. 2016), concludes in that case that the administrative law judge who handled that case was an inferior officer rather than an employee, what is the appropriate disposition of this case?”).

In Which Branch is the Tax Court Located?

As to the issue in Freytag about the Branch in which the Tax Court is located, this issue has come up in litigation over the validity of the President having a removal power over Tax Court judges in § 7443(f).  In Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), cert denied 135 S. Ct. 2309 (2015) (on PT last blogged here and here, the D.C. Circuit found that there was no interbranch removal separation of powers issue because the Tax Court, like the President, was located in the Executive Branch – and Freytag’s language was not to the contrary.  In Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017), the Tax Court recently rejected Kuretski’s holding that the Tax Court per Freytag was part of the Executive Branch and instead held that per Freytag the Tax Court was located somewhere else (though the Tax Court wouldn’t say exactly where).  Still, the Tax Court in Battat felt that the removal power, even though interbranch, did not run afoul of the separation of powers doctrine because the Tax Court doesn’t decide cases that could be heard by courts at common law.

In a recent post, I noted that Joe DiRuzzo and his firm had a number of cases in which the removal power issue was challenged pre-trial (as in their Battat case).  Joe had sought permission from the Tax Court for interlocutory appeals under § 7482(a)(2)(A), but the Tax Court had refused to authorize interlocutory appeals.  Well, Joe doesn’t easily take “no” for an answer.  And in light of the fact that the Tax Court said it only could decide the removal power issue under the rule of necessity – since all of its judges were inherently implicated and biased by the potential validity of the removal power – I don’t blame Joe for not taking a “no” from the Tax Court this time.  He has in fact appealed four of his firm’s cases that present the Battat issue, on an interlocutory basis, to three different Courts of Appeals:  Teffeau v. Commissioner, Tax Court Docket No. 27904-10, Fourth Cir. Docket No. 17-1463 (opening brief due May 22); Elmes v. Commissioner, Tax Court Docket No. 22003-11, Eleventh Cir. Docket No. 17-11648 (opening brief due May 22); Thompson v. Commissioner, Tax Court Docket No. 6613-13, Ninth Cir. Docket No. 17-71027 (opening brief due June 29); and Battat v. Commissioner, Tax Court Docket No. 17784-13, appealed to the Eleventh Circuit, but no docket number yet available from the Eleventh Circuit.  Interestingly, Joe had moved to invalidate the notice of deficiency in Elmes under the reasoning of Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), but that motion was denied in an order (found here:  https://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=7089658) issued on April 17, 2017 – several days after Joe appealed the case to the Eleventh Circuit.

We will keep you updated on developments in all of these Freytag-related appeals.

 

Tax Court Won’t Certify Battat for Interlocutory Appeal

We welcome back frequent guest blogger Carl Smith who writes today in continuation of coverage concerning the status of the Tax Court within the constitutional framework.  We especially thank Carl for his timely guest post as Les presents on taxpayer rights in Vienna, Steve shovels out in Philadelphia, and I visit warmer climes for spring break.  Keith

In Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017), on which we blogged here and here, the Tax Court (Judge Colvin) held that there is no constitutional separation of powers problem in the President’s holding a removal power under section 7443(f) with respect to its judges.  Battat holds that the Tax Court is not a part of the Executive Branch — unlike the D.C. Circuit in Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), which held that the Tax Court was still an Executive Branch entity.

Joe DiRuzzo is the lawyer for the Battats and several additional clients in whose cases he raised the same constitutional argument.  He has cases that could be appealed to several different Circuits.  His cases are before Judges Colvin, Jacobs, and Wherry, and Chief Judge Marvel.  After the Battat opinion, Joe moved for permission to file an interlocutory appeal on this separation of powers issue in the cases that are before Judges Colvin, Jacobs, and Wherry.  Interlocutory appeal orders are not granted automatically, and must be issued under section 7482(a)(2)(A).  The court should grant an interlocutory appeal motion if (1) a controlling question of law is involved, (2) substantial grounds for a difference of opinion are present, and (3) an immediate appeal may materially advance the ultimate termination of the litigation.

In First Western Government Securities v. Commissioner, 94 T.C. 549 (1990), affd. sub nom. Samuels, Kramer & Co. v. Commissioner, 930 F.2d 975 (2d Cir. 1991), the Tax Court had held, unanimously and en banc, that it is a Court of Law for purposes of the Appointments Clause, so there is no problem with the Chief Judge’s appointment of its Special Trial Judges.  Despite the absence of any contrary holding at the time, the Tax Court in First Western certified an interlocutory appeal of its holding because of the importance of the issue — eventually leading to the Supreme Court’s opinion in Freytag v. Commissioner, 501 U.S. 868 (1991). See 94 T.C. at 569 (Appendix E) for the interlocutory certification.

On March 14, Judges Colvin, Jacobs, and Wherry each denied Joe DiRuzzo’s motions to certify the Kuretski/Battat issues in his cases for immediate interlocutory appeal.  Here’s a link to the order in Battat, though the orders are identical in each case.  The orders admit that there is a divergence in the reasoning between the Tax Court and D.C. Circuit as to how both courts get to the conclusion that there is no constitutional problem in the removal power.  But, the Tax Court judges do not think that divergence enough to warrant interlocutory appeals.  The orders simply state:

The Court of Appeals in Kuretski applied a different analysis, but it rejected, as did this Court, the contention that Presidential removal authority is unconstitutional. Petitioners cite, and we are aware, of no legal authority supporting petitioners’ contention regarding the controlling issue of law in this case. Thus, we conclude that the second requirement of section 7482(a)(2), the presence of “substantial grounds for a difference of opinion”, is not met.

I beg to differ, and so, doubtless, would the late Justice Scalia.  He wrote in his concurrence in Freytag:

When the Tax Court was statutorily denominated an “Article I Court” in 1969, its judges did not magically acquire the judicial power. They still lack life tenure; their salaries may still be diminished; they are still removable by the President for “inefficiency, neglect of duty, or malfeasance in office.” 26 U.S.C. § 7443(f).   (In Bowsher v. Synar, supra, [478 U.S. 714] at 729 [(1986)], we held that these latter terms are “very broad” and “could sustain removal . . . for any number of actual or perceived transgressions.”) How anyone with these characteristics can exercise judicial power “independent . . . [of] the Executive Branch” is a complete mystery. It seems to me entirely obvious that the Tax Court, like the Internal Revenue Service, the FCC, and the NLRB, exercises executive power.

501 U.S. at 912 (emphasis in original; some citations omitted).

I am surprised that the orders make no mention of the interlocutory appeal certification granted in First Western.  I think that this, at the very least, is inconsistent behavior by the Tax Court as to allowing interlocutory appeals.

 

Tax Court Calendar Call Program

At the recent ABA Tax Section meeting in Orlando, the Pro Bono and Tax Clinic Committee had a panel on the Tax Court calendar call program to celebrate the 25th anniversary of the program.  The twenty five year celebration was a little squishy in terms of a precise time frame because of the informality with which the program began but it allowed the panelist to talk about an action begun by one person that has turned into an opportunity for pro se litigants that no other federal court offers.  The panel showcased again how pro se friendly the Tax Court is to the 70% of its petitioners who enter its doors with no representative but also how the Court, before embracing this program, took slow steps at first out of concerns for those taxpayers.

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Karen Hawkins, who is the chair elect of the Tax Section, got the calendar call program started in the early 1990s in San Francisco.  She had a tax controversy practice in that area that regularly brought her to Tax Court calendar calls.  At those calendar calls she observed that unrepresented taxpayers appeared who had no idea what to do.  So, she began trying to assist them by giving them advice on a quick, informal and pro bono basis.  The problem she observed in San Francisco was occurring throughout the United States.  I noted in a prior post that one Tax Court judge’s solution in a case in which the petitioners were particularly clueless was to have me as Government’s counsel waiting to try the next case sit with petitioners at their table and explain what was happening in the case.

Karen not only identified the problem faced by pro se petitioners at calendar call but she brought it to the attention of the Tax Section of the California Bar.  Representing the California Bar, she approached then Chief Judge Hamblin and asked him for permission to have the program of assisting pro se petitioners at calendar call recognized by the Tax Court.  He said no.   In the panel discussion Karen mentioned an incident that occurred before Judge Cohen in which an attorney came to a calendar call ostensibly to assist a pro se petitioner and ended up charging a fee.  This type of anecdotal experience would naturally have a dampening impact on the interest of the Court in such a program.

Chief Judge Hamblin’s concerns would have been similar to the concerns of the Tax Court judges when the first low income taxpayer clinics were established 15 years earlier.  I wrote about those concerns in an article on the history of the clinics.  The concerns arise from the cautious nature of a body like the Court and the need to protect the litigants before it as well as the institution of the Court itself.  Fortunately, Judge Swift, who came from California, stepped up and said that he would conduct a pilot to allow the Court to determine if providing some assistance to pro se petitioners at calendar call would benefit the petitioners and the proceeding.  For the first few calendar calls Karen was person who came and who met with taxpayers.  She did not have a group of volunteers with her.  She gave only her first name and did not give out a business card because one of the concerns centered on the possible use of the calendar call program as a business building exercise.  Pete Bakutes, the District Counsel for the IRS in San Francisco, was very supportive of the effort and that made a difference.  Before the Court arrived in San Francisco, Karen, Pete and Judge Swift had a conference call to discuss who the judge would announce the availability of Karen to unrepresented petitioners.

Judge Swift reported back to the Court that the assistance at calendar call was a success.  Not too long thereafter, Judge Nims visited San Francisco.  On his calendar was a taxpayer who, at that time, would have been called a tax protestor.  Having seen a few trials involving tax protestors, I am sure that Tax Court judges do not look forward to them.  One of the volunteer attorneys who came to that calendar convinced the tax protestor to concede (something I have had almost no success in doing in that same roll.)  The actions of that volunteer at the calendar call convinced Judge Nims on the benefits of the program, and he returned to DC to tell others on the Court.

Karen brought the idea of the calendar call program to the ABA Tax Section to try to get it to adopt the program as a section activity, but the Tax Section was not ready.  The program continued to evolve in San Francisco and in pockets around the country but did not have broad institutional support.  In Richmond in the mid-1990s Nina Olson participated in calendar call with the Community Tax Law Project.  She and I would call each judge coming for a calendar call in Richmond and most were receptive to announcing the presence of attorneys to assist pro se taxpayers.  Like the Court and the ABA Tax Section, Chief Counsel’s office did not wholeheartedly embrace the idea of the calendar call in the early years.  Part of the success of the program in San Francisco would have been due to the forward looking vision of Pete Bakutes who headed the Chief Counsel office there.  The struggle to get it going and accepted by the institutional players followed a similar path to the struggle to get the low income tax clinics going as discussed above.  Chief Special Trial Judge Panuthos was an early supporter on the Court for this and most programs to assist pro se petitioners.

The program got its institutional boost when Judge Colvin became the Chief Judge.  He saw, in many ways, the benefits to the Court and to the system of representation for the pro se petitioners.  He institutionalized the program at the Court in a way the Court had recently institutionalized its relationship with clinics.  At almost the same time that the Court embraced the calendar call program in a formal manner, the Tax Section of the Texas Bar stepped up and decided that it wanted to adopt this as a formal program of its Section.  Elizabeth Copeland was persuaded to spearhead that effort and she did a great job in organizing attorneys across a state that has the most Tax Court places of trial of any state.  During the panel discussion Elizabeth described all of the steps she took to get that program off of the ground which included attending all of the calendar calls held in the state for the first couple of years.  The organization and efficiency of the program in Texas remains a model for other programs.  The success of program in Texas and in New York City under the guidance of Frank Agostino spurred the creation of programs elsewhere.  The Low Income Taxpayer Committee of the Tax Section began to work with tax clinics and bar programs around the country to insure 100% coverage for Tax Court calendars.  Former committee chair Andy Roberson, who played a role in the effort to get 100% coverage even in cities with no local bar or LITC calendar call program, continues to update the coverage list for all 74 cities and the committee works to make sure that full participation exists.

Now that calendar call programs exist throughout the country in every Tax Court place of trial, and now that the Tax Court, the ABA Tax Section and Chief Counsel, IRS agree that the program provides a benefit to the petitioners and the system, the challenge centers on improving the program rather than building it.  Chief Judge Marvel spoke during the panel about a study conducted in the early 1980s which looked at why cases went to trial.  She spoke of ways the groups involved can continue to study the system looking for improvements.  Chief Special Trial Judge Panuthos, who was also on the panel, reminded the clinicians attending the program of their opportunity each year in their participation letters to provide ideas for improvement of the program.  Of course, the Tax Court does not limit its receipt of ideas and suggestions to that group or to that submission.

Bruce Meneely, who heads the Chief Counsel’s SBSE division, spoke on the panel about changes his office seeks to make in an effort to better engage with pro se taxpayers.  His office is going to call petitioners immediately after the filing of the petition to engage the petitioners.  His office is working with Appeals to determine why Counsel ends up settling some cases instead of Appeals and how the process could change to achieve settlement at an earlier stage.  Chief Counsel’s SBSE division just hired 30 paralegals to assist with small cases which he hopes will also lead to earlier resolution before the need to involve attorneys.  He solicited ideas on how to reach pro se petitioners prior to calendar call because everyone has an interest in resolving the cases as early in the process as possible.  He spoke of the possibility of a status conference with the Court prior to calendar call which some Tax Court judges have adopted as another way to foster resolution before calendar call.

Many tax lawyers around the country now attend calendar call when the Tax Court comes to their city.  The program does a good job of assisting those who come to Court unrepresented and still needing to resolve their case.  As the panel discussed, even better results for everyone can occur if pro se taxpayers can be linked to legal advice earlier in the process in a setting that does not put the pressure of an almost immediate trial on the parties.  As the Court, the bar and Chief Counsel’s office continue to evolve in their efforts to create a more perfect union of taxpayers and representatives, the calendar call program continues to stand out as a significant effort which distinguishes both the Tax Court and the members of its bar for their service to otherwise unrepresented individuals caught up in a process that can overwhelm those individuals.  It is interesting to see how the vision of Karen Hawkins in starting this program, like the vision of Stuart Filler who started the first low income taxpayer clinic at Hofstra Law School in 1974, has created a better environment for taxpayers trying to resolve a dispute with the IRS.

 

Finding the Right Appraiser and Writing the Report Correctly

The recent case of Estate of Kollsman v. Commissioner, T.C. Memo 2017-40 shows the perils to a taxpayer of a disregarded expert.  Judge Gale found petitioner’s expert unreliable for several reasons, not including his basic qualifications as an expert, and relied, essentially exclusively, on the expert testimony offered by the IRS.  Naturally, the estate did not benefit from this outcome.  Why did the Court reject the testimony of petitioner’s expert and how can you make sure that your expert will not suffer the same fate?  This post will focus on answering those questions.

I wrote a post recently on the IRS Art Advisory Panel.  That post focuses on some of the work the IRS does to determine value.  Today, the focus is on the taxpayer side although the same rules and concepts apply to respondent when hiring experts.

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The estate owned two paintings by “Old Masters” that became the subject of a valuation case in Tax Court.  The estate hired a very qualified expert who was a “vice president of Sotheby’s North America and South America and cochairman of Sotheby’s Old Master Paintings Worldwide.”  In addition, petitioner’s expert had known the decedent for many years and had periodically seen the paintings in decedent’s home for almost 25 years before her death.  On the date Ms. Kollsman died, the expert wrote a letter to the executor providing preliminary estimates of the paintings if they were sold that winter by his auction house.  The estate’s expert wrote two additional letters to the executor about four weeks after Ms. Kollsman died providing values for the paintings which the estate attached to its returns and providing an agreement for sale through his auction house.

The Court found the valuation letter and the agreement to use the auction house providing the appraisal too cozy.  After walking through the basis for his opinion in the report, the Court states:

“We find Mr. Wachter’s valuations unreliable and unpersuasive for several reasons.  First, he had a significant conflict of interest that could cause a reasonable person to questions his objectivity.  Mr. Wachter first gave his fair market value estimates for the paintings at the time of decedent’s death (in amounts that remained unchanged in his expert report prepared for trial).  His correspondence with Mr. Hyland [the executor] during that period demonstrates that the two had previously discussed the disposition of Maypole and Orpheus upon decedent’s death and that Mr. Hyland was considering selling the paintings.  Mr. Wachter provided his fair market value estimates at the same time he was soliciting Mr. Hyland for the exclusive rights for five years to auction the paintings in the event they were sold….  Thus, Mr. Wachter, on behalf of his firm, had a direct financial incentive to curry favor with Mr. Hyland by providing fair market value estimates that benefited his interests as the estate’s residual beneficiary – that is to say, ‘lowball’ estimates that would lessen the Federal estate tax burden borne by the estate…. The fact that Mr. Wachter simultaneously presented Mr. Hyland with these fair market value estimates and his pitch for exclusive auction rights for Sotheby’s gives rise to an inference that the latter affected the former.”

Strong stuff, and Judge Gale did not stop there.  He then pointed out problems with the valuation itself including an overstatement of the dirtiness of the paintings and the problems cleaning them might cause plus his failure to provide comparable sales supporting his valuations.  Judge Gale points out that “we have repeatedly found sale prices for comparable works quite important to determining the value of art.”

With respect to the simultaneous valuation and business solicitation, the lesson from the Kollsman case is easy to draw.  Do not use as your valuation expert someone who seeks to benefit from the relationship in ways that extend beyond compensation for services as an expert witness.  The opponent in a valuation case always looks for ways to show that the expert is biased.  Here, petitioners served up that basis on a silver platter.  It is fine to use someone like Mr. Wachter to get an idea of the value of the paintings and fine to use him to assist in finding an expert.  It might even be fine to use someone like Mr. Wachter to value the property on the return though I would not recommend it, but it was not fine not to use him as the expert at trial.  For trial, the estate needed an expert whose testimony could not be impeached on the basis of a simultaneous business transaction.

Judge Gale’s concern that Mr. Wachter’s overstated the devaluation of the paintings based on their dirtiness is no doubt real but it serves, for me at least, to provide more support for the Court’s conclusion and not enough of a basis from which to draw general conclusions about experts.  On the other hand, the judge’s observation about the absence of comparable sales in the expert report deserves attention.

Tax Court Rule 143 sets out the way expert testimony comes into evidence in Tax Court cases.  The rule provides that the report of the expert serves as the expert’s direct testimony.  For this reason, it is imperative that the expert write a comprehensive report that sets out the basis for the appraisal included comparable sales.  While the attorney hiring the expert must be careful not to dictate the report, the attorney must also be careful to impress upon the expert the need for a full and complete report that documents the basis for the findings in the report.  The Tax Court came to this approach after tiring of experts who played hide the ball with their reports and then came to Court and testified about many things on direct including the underlying basis for their conclusions.

I have not seen the report submitted by the estate in this case but the description by Judge Gale makes me believe that the report was short and conclusory.  A person like Mr. Wachter with clear expertise concerning the subject matter but who may not serve often as an expert may have expected his clear expertise to carry the day in convincing the Court.  While the depth of his expertise clearly matters, so does his report.  Here, the description makes it sound as though the report lacked a major element and the Tax Court rules would prevent Mr. Wachter from fixing this mistake with his testimony.

After dismissing petitioner’s expert, the Court essentially embraces the report of the expert hired by the IRS.  This result does not necessarily follow.  There are times when the Court dismisses or heavily discounts the experts of both sides, but here the IRS expert proved persuasive.  The Court discounts his opinions based on certain factors but uses the IRS expert report as the basis from which to build its determination.

It is worth noting that the IRS valuation report exceeded the amount determined as the value of the paintings in the notice of deficiency.  This happens regularly because the IRS will rely on the Art Advisory Panel or other in house experts during the examination phase and not hire an expert until the case goes to court.  The hired expert determined higher values that the IRS determined in the notice which would have caused the IRS to amend it answer to the petition in order to assert a higher deficiency and to take on the burden of proof with respect to the additional amounts.  Of course, the additional burden does not mean much in a valuation case of this type.   Here, the IRS made its motion on March 11, 2011, about two months before the trial.

Notice that it took the Court about five and one-half years after the trial in order to render the opinion in this case.  While I do not think that is a record, it is certainly a long time to wait for an opinion.  I have written before about the language in IRC 7459 which talks about the Tax Court deciding cases as quickly as practicable.

Conclusion

Practitioners headed into litigation need to vet the expert to make sure that nothing prevents the expert from rendering an impartial opinion.  The petitioner is already paying for the opinion and an expert worth hiring will know what outcome the petitioner would like.  No further incentive for the expert to reach a beneficial result for the petitioner should exist.  Additionally, petitioners need to impress upon the expert what the report must contain and how the report will serve as the direct testimony of the expert in a Tax Court trial.  Here, an individual with great qualifications as an expert in the field of art relating to the specific paintings at issue got disqualified for avoidable reasons.

New Trends in Evidence at the Tax Court

We welcome back guest blogger Joni Larson. Professor Larson has graciously provided her insight again into the interpretation of rules at the Tax Court. I reached out to her after reading the opinion by Judge Carluzzo which she addresses at the end of this post. As with her previous posts found here, here, here and here, she takes us into the practical world of interpreting the rules and preparing to present evidence.  She authors the book on evidentiary issues in Tax Court with a new edition coming out shortly.  Professor Larson teaches at Indiana Tech Law School. Keith

Before the PATH Act, the Tax Court conducted trials in accordance with the rules of evidence applicable in trials without a jury in the District Court for the District of Columbia.  IRC § 7453.  The reference in Section 7453 to the District of Columbia was troubling.  Did it mean the Tax Court would apply the rules of evidence as adopted by the District of Columbia?  As interpreted by the District of Columbia?  As interpreted by the Circuit Court of Appeals for the District of Columbia?

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The issue of how to interpret the statute seemed to be squarely before the court in Ad Investment 2000 Fund LLC v. Commissioner, 142 T.C. 248 (2014).  In a Son-of-BOSS tax shelter case, Judge Halpern considered the Commissioner’s motion to compel the production of opinion letters a law firm issued to the taxpayer.  The taxpayer argued the opinions were protected by the attorney-client privilege.  The Commissioner argued the privilege was waived when the taxpayer put the privileged matter in controversy when the taxpayer argued against application of the accuracy-related penalty.  The taxpayer argued it was not using the opinion letters as part of its affirmative defense but was, instead, making a generalized good faith defense.  Accordingly, it believed the opinion letters were not relevant, at issue, or discoverable.

Under Rule 501 of the Federal Rules of Evidence, the common law governs a claim of privilege.  In turn, the disagreement between the parties turned on the interpretation of the attorney-client privilege.  Thus, the disagreement was an evidentiary issue.

The attorney-client privilege exists to protect full and frank communications between attorneys and their clients.  Upjohn v. United States,  449 U.S. 383 (1981).  However, when a party puts into issue his subjective intent in deciding how to comply with the law, he may forfeit the privilege.

In determining if the party has waived, or forfeited, the privilege, the Tax Court uses a three-pronged test.  The privilege is waived if (1) assertion of the privilege was the result of an affirmative act, such as filing suit; (2) through the affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense.  Johnston v. Commissioner,119 T.C. 27 (2002).

The Tax Court’s three-pronged test was endorsed by the D.C. Circuit Court of Appeals in Sanderlin v. United States, 794 F.2d 727 (D.C. Cir. 1986), but explicitly rejected by the Second Circuit in Pritchard v. County of Erie,  546 F.3d 222 (2d Cir. 2008).  Under Pritchard, to show the privilege was waived, the party had to rely on the privileged advice in claiming the defense (which the taxpayers in Ad Investment 2000 Fund LLC argued they were not doing).

The case before Judge Halpern was appealable to the Second Circuit Court of Appeals.  Under the Golsen rule which resulted from the holding in Golsen v. Commissioner, 54 T.C. 742 (1970), when there is a disagreement among appellate courts, the Tax Court will follow the opinion of the Circuit Court of Appeals to which the case could be appealed.  Or if the appellate court has not yet ruled on the issue, the Tax Court can decide on its own how to interpret the rule.  Thus, the issue seemed to be squarely before the Tax Court:  should it follow the holding of the D.C. Circuit Court of Appeals (as Section 7453 suggested) or follow the holding of the Circuit Court to which the case would be appealed, the Second Circuit (as the Golsen rule states).

Unfortunately, even though the question seemed ripe for resolution, Judge Halpern determined that, because the facts were distinguishable from those in Pritchard, the Second Circuit’s holding was neither controlling nor dispositive.

Not long after Ad Investment 2000 Fund LLC was decided, the PATH Act changed the language of Section 7453 [Pub. L. 114–113, div. Q, title IV, § 425(a), Dec. 18, 2015, 129 Stat. 3125].  During a panel discussion at the ABA Section of Taxation and the Trust and Estate Law Division Joint Fall 2016 CLE Meeting (in Boston), Judge Halpern disclosed he was the primary reason the change was made, and his participation in the change makes sense, given the issue potentially before him in Ad Investment 2000 Fund LLC.  The statute no longer contains a reference to the U.S. District Court for the District of Columbia.  However, even so, there seems to still be disagreement over what the new statutory language means.

I have read a lot of Tax Court cases addressing the rules of evidence (perhaps all of them, to one degree or another) and can offer some thoughts about them.  I am not aware of any case in which the Tax Court turned to the U.S. District Court for the District of Columbia or its Circuit Court of Appeals for guidance on evidentiary issues.  There are a small number of cases where the Tax Court looked to the Circuit Court to which the case would be appealed for guidance.  Most often, the Tax Court decided the evidentiary issue without citing any appellate court authority.  Moreover, there are very few cases in which the appellate court reversed an evidentiary decision made by the Tax Court.

I believe the court will use Golsen, just as it has in the past, to resolve issues where the appellate courts disagree, with no deference to the D.C. Circuit Court of Appeals on evidentiary issues.  It did not show any deference when the statutory language suggested it should, so there is no reason to think it would do so now.

A look at the most recent Tax Court cases bears this out and suggests a new trend.  Unlike past cases, the Tax Court now is citing to district court opinions, often from the jurisdiction to which the case would be appealed, and to relevant appellate court opinions.  Citation to district court opinions makes sense, as it is the trial court that is making the evidentiary decision.  And, to the extent the district court has not been overruled by the appellate court, this law would be the controlling law in the jurisdiction.

For example, in CNT Investors, LLC v. Commissioner, 144 T.C. 161 (2015) the venue for appeal was either the Ninth Circuit or the D.C. Circuit Court of Appeals (the court declined to resolve the issue as the holding would be the same regardless of appellate venue).  The court noted that it may take judicial notice of appropriate adjudicative facts at any stage in a proceeding, citing to Rule 201 of the Federal Rules of Evidence.  It then stated that a court may take judicial notice of public records not subject to reasonable dispute, such as county real property title records.  In support of this position, it cited two California district court opinions.  It further noted that it could rely on electronic versions of public records, citing two district court opinions and an Eighth and Sixth Circuit Court of Appeals opinion.  The cited authority allowed the court to consider the online grantor/grantee records of the county in California that showed the LLC held legal title to four parcels of real property in the county.

In determining where certain LLCs were formed, it looked at the online records in each state and found one LLC was formed in Delaware and one in California.  It noted who was listed on the records as the agent for service of process, the entity’s address, and that there was no indication the LLC had been dissolved.  As the basis for taking judicial notice, it cited to three district court opinions in which such judicial notice-taking was permitted.

In Bunch v. Commissioner, T.C. Memo. 2014-177, in explaining the extent to which the court could take judicial notice of pleadings and court orders in related proceedings, the Tax Court cited to appellate and district court opinions, none of which were in D. C.

In S cases, the judges also seem to be willing to turn to holdings in the local jurisdiction for guidance on admissibility of evidence.  This is a curious development, since the Rules of Evidence generally do not apply to small, or “S” cases.  [IRC § 7463; Tax Court Rule 174(c)]  In Lopez v. Commissioner, the taxpayer possessed notarized written statements from her customers and had presented them to the Commissioner during the audit of her returns.  The taxpayer offered the documents at trial, and the Commissioner objected.  The Tax Court admitted the documents, noting that under New York law, if “a document on its face is properly subscribed and bears acknowledgment of a notary public, there is a ‘presumption of due execution, which may be rebutted only upon a showing of clear and convincing evidence to the contrary,’” citing New York state court opinions.  Because the Commissioner had not offered any evidence to rebut the presumption, the notarized statements were admissible.

It seems most likely that the trend of citing to local authority, or at a minimum district court opinions, will continue, and holdings and differences among federal district courts or appellate courts will become even more important when determining evidentiary issues in the Tax Court.

Tax Court Holds President’s Removal Power Constitutional, Part II

Here is part 2 of a two part post by frequent guest blogger Carl Smith on last week’s important decision on the location of the Tax Court within our constitutional framework.  Keith 

This is part two of a post on the Tax Court’s recent opinion in Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017), where the Tax Court disagreed with the D.C. Circuit’s reasoning in Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), cert. denied, 135 S. Ct. 2309 (2015), but came to the same result.  In this part of the post, I explain the reactions of Congress to the Kuretski D.C. Circuit opinion and the reaction of Florida attorney Joe DiRuzzo, who decided to raise the Kuretski Presidential removal power issue in a number of his pending Tax Court cases, including Battat. Then, I set out in detail the Tax Court’s reasoning in Battat.

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The D.C. Circuit’s opinion in Kuretski was issued in June 2014.  On November 26, 2014, the Kuretskis filed a petition for certiorari, arguing that the D.C. Circuit had misapplied the Supreme Court’s holding in Freytag v. Commissioner, 501 U.S. 868 (1991).

Florida tax attorney Joseph A. DiRuzzo, III and other lawyers at the firm at which he works, Fuerst Ittleman David & Joseph, PL, read the Kuretski cert. petition and thought the constitutional argument in it had merit.  On their own (not with my prodding), they decided to borrow the argument from the cert. petition and include it as an argument in some Tax Court cases that their firm had pending at the pretrial stage.  There were motions on other issues already pending in some of those cases.  The cases were both deficiency and Collection Due Process cases.  The taxpayers lived in a number of Circuits around the country.  Joe did not count on the Supreme Court granting cert. in Kuretski without a Circuit split.  (He was right.)  The lawyers hoped that the Tax Court would issue a ruling disagreeing with the D.C. Circuit and that courts of appeals outside D.C. would also disagree with the D.C. Circuit – leading to a grant of cert. in one of these cases.

The first case in which Joe and his firm raised the Kuretski removal power issue was a Collection Due Process case named Elmes v. Commissioner, Tax Court Docket No. 24872-14L, where, on December 19, 2014, Joe and his firm filed a “Motion to Disqualify & Motion to Declare 26 U.S.C. § 7443(f) Unconstitutional”.  The motions in Elmes prayed that “this Court . . . declare 26 U.S.C. § 7443(f) unconstitutional and disqualify all the judges of the Tax Court until such time as § 7443(f)’s constitutional infirmity is cured”.

Over the next few weeks, Joe and his firm filed similar motions in about a dozen other cases.  By filing each motion pretrial, they hoped to avoid getting a ruling that the motion was filed too late in the case for the Tax Court to have to address it – the kind of ruling Judge Wherry had issued to the Kuretskis in an unpublished order.

On May 18, 2015, the Supreme Court denied cert. in Kuretski.

On September 1, 2015, the Chief Judge assigned the Battat case to Judge Colvin.

The Tax Court was annoyed enough with the D.C. Circuit’s calling the Tax Court still an Executive Branch entity that, before any judge ruled on any of Joe’s firm’s motions, the Tax Court asked for, and obtained from Congress (in December 2015), an amendment to section 7441 that added the following sentence (which the legislative history said was to clarify the status of the Tax Court in light of Kuretski):  “The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government.”

Battat and Thompson Rulings 

More than two years after Joe and his firm began filing these section 7443(f) motions, the Tax Court ruled on two of them on February 2, 2017, in Battat and Thompson v. Commissioner, 148 T.C. No. 3.

Thompson is a deficiency-jurisdiction opinion by Judge Wherry that primarily addresses a motion that Joe and his firm filed concerning the constitutionality of the penalty at section 6662A under the Eighth Amendment’s Excessive Fines Clause.  In the opinion, Judge Wherry denies the section 6662A motion and also denies the section 7443(f) motion.  For the latter ruling, he merely cites to the court’s simultaneous opinion in Battat.  Thus, Battat is currently the only Tax Court opinion that gives reasoning for the rulings on the section 7443(f) motions.

The Thompsons resided in California when they filed their Tax Court petition, so an appeal of their case would go to the Ninth Circuit.  The Battats, whose case is also a deficiency case, resided in Florida when they filed their petition, so an appeal of their case would go to the Eleventh Circuit.  Thompson involves income tax deficiencies and penalties for the tax years 2003-2007 of nearly $400,000, in aggregate.  Battat involves income tax deficiencies and penalties for 2008 exceeding $2 million, in aggregate.  So, there is enough at stake in the cases to justify the costs of appeals.  Hereafter, I will ignore Thompson (which may be the subject of someone else’s post on the section 6662A issue).

Battat is an oddly-written 45-page opinion.  Since there are no facts in dispute, the opinion is divided into the usual Background and Discussion sections.  However, in the Background section, Judge Colvin gives a running commentary on the significance of the recited background and takes issue frequently with the Kuretski opinion on a number of points.  One might normally expect these disagreements to be raised in the Discussion section.  With apologies to Judge Colvin, I will summarize the Battat case in an order that makes more sense to me for a summary.

The Discussion section of Battat begins with Judge Colvin observing that all Tax Court judges are potentially affected by the ruling in the case.  There is a judicial rule of necessity that provides that when all possible judges have a conflict (such as in cases deciding their salary issues), since it is necessary that some judge decide the case, any judge may decide the case.  Therefore, Judge Colvin rules that he may decide the case.  Interestingly, the opinion does not discuss a suggestion by the taxpayers that a district court judge (who would have no conflict) be assigned over to the Tax Court to decide the Battat motion.

In the Discussion part of his opinion, Judge Colvin then notes that the Tax Court is one of those “public rights” courts where all litigation involves suits between citizens and the sovereign. The Supreme Court has held that, since, at common law, such suits need not have been heard by regular court judges, it is acceptable for Congress to assign public rights cases to special tribunals, either to Article I courts or Executive agenciesNorthern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S.50, 67-70 (1982) (involving bankruptcy courts).  Thus, the Tax Court is constitutional.

In the Background section of the opinion, Judge Colvin laid out much of the history of the Tax Court and its judges.  There, Judge Colvin interpreted Freytag v. Commissioner, 501 U.S. 868 (1991), to hold that the Tax Court is not a part of the Executive Branch.  This reading is contrary to the reading of the D.C. Circuit in Kuretski, which held that the Tax Court is still in the Executive Branch, notwithstanding the 1969 amendment to section 7441.  Judge Colvin wrote:

[I]n the 1969 Act Congress deleted the designation of the Tax Court as an “independent agency in the Executive Branch of the Government”. The only amendment needed if Congress had intended to establish the Tax Court as an Article I court located in the executive branch would have been deletion of the words “as an independent agency”. If only those words had been deleted, section 7441 would have said the Tax Court “shall be continued * * * in the Executive Branch of the Government”. But that is not what Congress did. Congress also deleted from section 7441 the words “in the Executive Branch of the Government”. That additional change would have been superfluous if Congress had intended for the Tax Court to remain within the executive branch.

Slip op. at 10.

Judge Colvin also buttressed his holding that the Tax Court was not in the Executive Branch by citing the 2015 amendment to section 7441 and a number of amendments to the Internal Revenue Code since 2006 that align the Tax Court’s functioning more closely with that of Article III courts.

Judge Colvin took issue with the D.C. Circuit in Kuretski’s comparing the Tax Court, for location purposes, to the Article I Court of Appeals for the Armed Forces:

10 U.S.C. sec. 946 (2012) requires judges of the Court of Appeals for the Armed Forces to meet annually with the Judge Advocates General and two members of the public appointed by the Secretary of Defense to “survey the operation” of the military justice system. Edmond [v. United States], 520 U.S. [651] at 664 n.2 [(1997)]. This contrasts with the Tax Court, which “exercises judicial power to the exclusion of any other function”, Freytag v. Commissioner, 501 U.S. at 891, and which has no statutory mandate to survey the operation of the IRS or any of its offices. These statutory differences led the Supreme Court to conclude that the Tax Court is independent of the executive branch and the Court of Military Appeals for the Armed Forces is within the executive branch.

Slip op. at 17 (footnote omitted).

Judge Colvin also took issue with Kuretski’s comparing the Tax Court to other Executive Branch agencies:

[I]ndependent executive branch agencies perform substantial nonadjudicatory functions, e.g., rulemaking, while the Tax Court “exercises judicial power to the exclusion of any other function.” Freytag v. Commissioner, 501 U.S. at 891.

In considering the relationship between independent executive branch agencies and other executive branch agencies, the Court of Appeals in Kuretski v. Commissioner, 755 F.3d at 944, said that Congress may allow independent executive branch agencies “a measure of independence from other executive actors”. Presumably, “a measure of independence” means less than total independence. If the Tax Court were in the executive branch, the relevant “other executive actor” would be the IRS. Surely any taxpayer would find it repugnant if the Tax Court, which by congressional design is the Federal court which decides the most taxpayer disputes with the IRS, has only some nebulous “measure of independence” from the IRS.

Slip op. at 30-31 (footnote omitted).

One gets the impression that the Tax Court was more concerned to issue an opinion declaring its independence from the Executive Branch than worrying about the specific removal power at issue in the case.  But, interestingly, Judge Colvin refuses to hold in which other Branch the Tax Court might be located.  It is unnecessary to his analysis, since all he felt he needed to discuss was case law, like Bowsher v. Synar, 478 U.S. 714 (1986), holding that interbranch removal powers were problematic under the separation of powers.  Once the Tax Court is not located in the Executive Branch, an interbranch removal power is at issue in the case, not the less problematic intrabranch removal power that Kuretski addressed.

Judge Colvin noted that the Supreme Court has held that not all interbranch removal powers are unconstitutional under Bowsher.  Judge Colvin highlighted the opinion in Mistretta v. United States, 488 U.S. 361 (1989).  Mistretta involved the seven-member U.S. Sentencing Commission – the commission that drafts the sentencing guidelines.  Congress placed the Sentencing Commission in Article III and peopled it with at least three Article III judges, the Attorney General, and others appointed by the President.  The President held for cause removal power over its members similar to that in section 7443(f), which meant that he could remove an Article III judge from the Article III Sentencing Commission.  This posed the potential interbranch Bowsher violation.  But, the Supreme Court held there was no violation of the separation of powers because the activities of the Sentencing Commission were not core functions of the Judicial Branch, but rather Executive functions.  Removing a judge from the Commission would not interfere with the judge’s core judicial functions.

In Battat, Judge Colvin extended Mistretta’s teaching as follows:

Presidential authority to remove Tax Court Judges for cause does not violate separation of powers principles. We so conclude because, even though Congress has assigned to the Tax Court a portion of the judicial power of the United States, Freytag v. Commissioner, 501 U.S. at 890, the portion of that power assigned to the Tax Court includes only public law disputes and does not include matters which are reserved by the Constitution to Article III courts.

Slip op. at 43.

Like the D.C. Circuit, the Tax Court in Battat did not discuss at all the fact that Article III judges of the Federal Circuit are permitted to remove for cause Article I Court of Federal Claims judges.  I continue to wonder how two similar Article I courts can have different removal actors in different Branches.

Observations 

I agree heartily with what Judge Colvin says in Battat right up to the point of his discussion of Misretta, but I think his holding extending Mistretta, with all due respect, is not defensible.  Indeed, note that he cites no other court opinion (or even a law review article) to support his holding that removing a Tax Court judge for what is his core function (not a side administrative function, as in Mistretta) is permissible.  I don’t think it logically follows that because the removal power only affects public rights court cases, there is no problem.  That seems to reintroduce the idea (rejected in Freytag) that the Tax Court doesn’t exercise the “real” Judicial Power of the United States, which is held only by Article III judges.  Query:  Under Judge Colvin’s theory, could Congress constitutionally pass a law that says that Article III judges can decide public rights cases, such as tax refund cases, and that the President is free to remove them from those cases for cause?  That would certainly bother me greatly, but would seem allowed under Judge Colvin’s theory.  However, maybe he is right.  Further litigation in the courts of appeals, and possibly, eventually, the Supreme Court, will give the answer.

Note:  The day after the Battat opinion, Judge Jacobs denied similar section 7443(f) motions made by Joe DiRuzzo and his firm in three other of their cases, Elmes v. Commissioner, Docket No. 22003-11; Lewis Teffau v. Commissioner, Docket No. 27904-10; and Linda Teffau v. Commissioner, Docket No. 27905-10.  The Elmes case docket in this note is not the Elmes CDP case docket mentioned above.  Elmes lives in the Eleventh Circuit.  The Teffaus live in the Fourth Circuit.  These cases appear to involve the U.S. taxation of people apparently claiming to be residents of the U.S.V.I., possibly similar to the issues litigated by the firm in the case of Cooper v. Commissioner, T,C, Memo. 2015-72.

Tax Court Holds President’s Removal Power Constitutional, Part I

We welcome back frequent guest blogger, Carl Smith.  When Carl, Frank Agostino, and my Villanova colleague, Tuan Samahon, began making the removal argument in the Kuretski case, I confess I thought it was “Much Ado about Nothing.”  That was before the guilty plea of a Tax Court judge for actions I never expected and before we elected a Chief Executive who likes to take on judges and has a TV show inspired reputation for firing people.  If you want more background on Kuretski, I recommend the recent article published by Tax Court scholar and Washington and Lee Dean, Brant Hellwig, in which Les says Brant basically throws up his hands saying any home is troublesome. 

In communicating with Carl about this case, he told me that the situation reminded him of a famous line from a Broadway musical.  He was reluctant to use the line because he was not sure about being misunderstood if he brought up Nathan Detroit in Guys and Dolls running the “Oldest Established Permanent Floating Crap Game in New York”.  After Judge Colvin in Battat held that the Tax Court isn’t in the Executive Branch, but says he won’t say where it is, Carl allowed me to include the query in the introduction of whether the Tax Court is now running the “Oldest Established Permanent Floating Court in the United States”.  For those of you who are fans of Guys and Dolls or just fans of the Tax Court, here is the latest on where the Tax Court fits into the federal judiciary.  Keith  

In Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), cert. denied, 135 S. Ct. 2309 (2015), the D.C. Circuit held that the Tax Court is an Executive Branch entity, so there is no separation of powers problem in the fact that, under section 7443(f), the President – the head of the Executive Branch – can remove a Tax Court judge on the grounds of “inefficiency, neglect of duty, or malfeasance in office”.  Deciding to face the issue for the first time, last week in Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017), the Tax Court disagreed with the D.C. Circuit’s reasoning, but came to the same result.  The Tax Court held that it does not reside in the Executive Branch (though the Tax Court wouldn’t say where it did reside).  However, the Tax Court held that, while its judges exercise a portion of the judicial power of the United States; Freytag v. Commissioner, 501 U.S. 868, 890-891 (1991); its judges exercise no portion of the judicial power reserved to Article III judges.  Thus, Presidential removal authority cannot interfere with the Article III judicial power, regardless of the Tax Court’s placement in the Branches of Government.

This Tax Court holding in Battat and similar holdings in other cases brought by the same attorney, Joe DiRuzzo, including Thompson v. Commissioner, 148 T.C. No. 3 (also decided on Feb. 2, 2017), are destined to be appealed to several Circuit courts of appeals other than the D.C. Circuit.  Joe is seeking a split among the Circuits that only the Supreme Court can resolve.

In part one of this two-part post, I provide the taxpayers’ argument and what the D.C. Circuit held in Kuretski.  In the second part of the post, I set out in detail (and comment on) the Tax Court’s reasoning in Battat.

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Warning:  This is a biased post, since I was one of three principal attorneys who brought the constitutional argument initially in Kuretski – the other two attorneys being Professor Tuan Samahon of Villanova (who developed the taxpayers’ argument from a comment of Justice Scalia’s in his Freytag concurrence) and Frank Agostino.  But, I will try to be fair to all sides.  Indeed, even though I disagree with parts of the Battat opinion, I commend Judge Colvin (its author) for doing an excellent and exceedingly fair job of summarizing the Tax Court’s history and the pertinent separation of powers case law.  He presents far more information than was in the D.C. Circuit’s Kuretski opinion or was in the parties’ briefs in Battat.  Indeed, he even, unbidden, went back and read the briefing in Kuretski to determine what in fact had been argued in Kuretski.

There have been, to date, 32 posts on PT that mentioned one aspect or another of the Kuretski case – which must be a record.  However, I won’t refer you back to any, but I will here provide a condensed version of the Kuretski case, both at the Tax Court and the D.C. Circuit. This is necessary to understand how the reasoning in the Battat opinion significantly differs from that of the D.C. Circuit’s opinion in Kuretski.

Separation of Powers Theory

There are at least half a dozen highly-relevant Supreme Court opinions on the separation of powers doctrine, and the Kuretski and Battat opinions discuss them.  However, for this post, I will just point to Bowsher v. Synar, 478 U.S. 714 (1986) (authored by Chief Justice Berger) and Freytag.

The Framers envisioned a government in which three powers – the Legislative Power, the Executive Power, and the Judicial Power – each balanced the other.  As Judge Colvin notes in Battat, the Framers generally spoke about “Powers”, not using the more modern references to three “Branches” of government.  This distinction is important, since Congress sometimes creates entities that hold one or more powers, but which are placed in a Branch that one would not expect.  That’s permissible.  What’s not permissible is for actors holding one power to have control over actors holding another power.  That can upset the separation of the powers.  The powers must stay separated to function properly.

In Bowsher v. Synar, a mid-1980s balanced budget law gave to a Congressional employee, the Comptroller General, certain additional powers to cut expenditures that the Court held were Executive Powers.  Congress, which holds the Legislative Power, had long possessed statutory authority to remove the Comptroller General for cause, including for inefficiency, neglect of duty, and malfeasance in office – the same grounds specified for removal of Tax Court judges in section 7443(f).  The Court held this arrangement unconstitutional as a violation of the separation of powers, since, it observed, a person who is subject to a removal power is likely to act subservient to the actor who has the power to remove him or her.  It is a subtle pressure, one that can upset the balance of the powers.  In Bowsher, Congress (holding the Legislative Power) had removal power over a person in its Branch, but who held a portion of the Executive Power.  In response to the argument that the for-cause limitations were a sufficient check on Congress abusing its power, the Court wrote:  “[T]he dissent’s assessment of the statute fails to recognize the breadth of the grounds for removal. The statute permits removal for ‘inefficiency,’ ‘neglect of duty,’ or ‘malfeasance.’ These terms are very broad and, as interpreted by Congress, could sustain removal of a Comptroller General for any number of actual or perceived transgressions of the legislative will.” 478 U.S. at 729.

In Freytag, the issue was whether Tax Court Special Trial Judges needed to be appointed under the Constitution’s Appointments Clause.  The Supreme Court held that they did, which next raised the question of whether their appointment was consistent with the limitations of the Appointments Clause because Tax Court STJs are appointed by the Chief Judge of the Tax Court.  The Appointments Clause permits Congress to delegate power to appoint such “inferior Officers” only to the President, the “Heads of [Executive] Departments”, or “the Courts of Law”.  Thus, the statutory appointment power would only be valid if the Tax Court Chief Judge was either the head of an Executive Department or acted for one of the Courts of Law.

As originally created, the Board of Tax Appeals was made an “independent agency” in the Executive Branch.  In 1969, however, Congress amended what is now section 7441 to instead provide:  “There is hereby established, under article I of the Constitution of the United States, a court of record to be known as the United States Tax Court.”  Using a largely functional analysis, in Freytag, the Supreme Court held that the Tax Court performs judicial functions to the exclusion of any Legislative or Executive functions, even though the Tax Court is not an Article III court where judges have life tenure.  The Supreme Court rejected the government’s argument that the Tax Court was an Executive Department, but instead found that the Tax Court was one of the Courts of Law.  It wrote:

The Tax Court exercises judicial, rather than executive, legislative, or administrative, power. It was established by Congress to interpret and apply the Internal Revenue Code in disputes between taxpayers and the Government. By resolving these disputes, the court exercises a portion of the judicial power of the United States. . . .

The Tax Court remains independent of the Executive and Legislative Branches. . . .

The Tax Court’s exclusively judicial role distinguishes it from other non-Article III tribunals that perform multiple functions . . . .

501 U.S. 890-892.

In a concurring opinion, Justice Scalia held that the appointment of Special Trial Judges was valid, but only because the Tax Court was still, after 1969, an Executive Department.  He scoffed at the idea that any non-Article III actor could hold any portion of the Judicial Power.  In attacking the majority opinion, he wrote:

When the Tax Court was statutorily denominated an “Article I Court” in 1969, its judges did not magically acquire the judicial power. They still lack life tenure; their salaries may still be diminished; they are still removable by the President for “inefficiency, neglect of duty, or malfeasance in office.” 26 U.S.C. § 7443(f).   (In Bowsher v. Synar, supra, at 729, we held that these latter terms are “very broad” and “could sustain removal . . . for any number of actual or perceived transgressions.”) How anyone with these characteristics can exercise judicial power “independent . . . [of] the Executive Branch” is a complete mystery. It seems to me entirely obvious that the Tax Court, like the Internal Revenue Service, the FCC, and the NLRB, exercises executive power.

501 U.S. at 912 (emphasis in original; some citations omitted).

Kuretski in the Tax Court                                  

Professor Tuan Samahon of Villanova, who is a separation of powers scholar (not a tax professor), noticed Justice Scalia’s comment that the Freytag majority’s holding seemed incompatible with the Presidential removal power over Tax Court judges, and, in 2012, mentioned this issue to me.  Frank Agostino had just lost a Collection Due Process case before Judge Wherry, Kuretski v. Commissioner, T.C. Memo. 2012-262.  Frank was about to file a motion for reconsideration on certain other issues.  I persuaded him to add to that motion a motion to vacate the decision on the ground that the Tax Court was impermissibly and unconstitutionally biased against taxpayers because the judges operated under a removal power subtly pressuring them to rule for the IRS, the President’s instrument.  We moved for the Tax Court to declare the power unconstitutional and inoperative.  We argued that the Tax Court was likely in the Judicial or Legislative Branch, but even if it was in the Executive Branch, since the President held the Executive Power, and the Tax Court held a portion of the Judicial Power, just as in Bowsher (where the Congress and Comptroller General were in the same Branch), the removal power violated Bowsher and could not be rescued by its for cause limitations.

In an unpublished order, Judge Wherry denied both motions.  He thought the motion for reconsideration was just a rehash of arguments that he had already rejected.  With respect to the removal power argument in the motion to vacate, he held that it was raised too late in the case for him to consider it, and, since the argument was that he was biased, he questioned whether he should be the person issuing a ruling on the issue.  That is why Battat is the first opinion of the Tax Court that actually addresses the removal power argument.

Kuretski in the D.C. Circuit

The Kuretskis appealed to the D.C. Circuit.  There, the D.C. Circuit also made quick work of their arguments not involving the removal power.  But, as to the removal power, the court held that it could exercise its discretion to hear separation of powers arguments at any point in a case (as was done in Freytag).  It also held that the taxpayers’ proposed remedy – striking the removal power – was a permissible cure for the problem, if there was a problem.  But, the D.C. Circuit found no constitutional problem.  It did so in a curious way:

First, as noted by Judge Colvin in footnote 29 of Battat, the D.C. Circuit mischaracterized the Kuretskis’ primary argument as being that the Tax Court exercises a portion of the Judicial Power under Article III.  Writes Judge Colvin:  “It is not apparent to us that the taxpayers in that case made that obviously incorrect argument. In fact, in their answering brief at p. 11 the Kuretskis state that they ‘do not challenge the Tax Court Judges’ non-Article III status.’”

Next, the D.C. Circuit rejected the argument that the Tax Court Judges are in the Article III Judicial Branch, observing that Tax Court judges don’t possess life tenure, so can’t be.

Third, the D.C. Circuit rejected an alternative argument made by the Kuretskis that the Tax Court was part of the Legislative Branch.  The D.C. Circuit also correctly observed that the Tax Court does no legislating.  As to the fact that section 7441 purports to establish the Tax Court as a court of record “under Article I,” the D.C. Circuit felt that this was just a statement that the Tax Court was established pursuant to Congress’ Article I powers to lay and collect taxes and make necessary and proper laws for carrying into execution the taxing power.  The D.C. Circuit did not think this meant that the Tax Court was established in the Legislative Branch.

So, by process of elimination, the Tax Court was still an Executive Branch entity (though the Circuit court carefully never called the Tax Court an “agency” anymore).

The D.C. Circuit wrote:  “We need not explore the precise circumstances in which interbranch removal may present a separation-of-powers concern because this case does not involve the prospect of presidential removal of officers in another branch. Rather, the Kuretskis have failed to persuade us that Tax Court judges exercise their authority as part of any branch other than the Executive.”  755 F.3d at 939.

The D.C. Circuit noted that the Supreme Court has stated that Congress may give non-Article III tribunals jurisdiction to hear “public rights” cases – i.e., cases involving disputes between the citizen and sovereign, which did not exist at common law.  The D.C. Circuit saw no problem with the Tax Court sitting in review of other Executive agencies, noting that other Executive agencies do so – like the Merit Systems Protection Board and the Federal Labor Relations Authority.

The D.C. Circuit observed that the Tax Court was like another Article I court, the Court of Appeals for the Armed Forces, which the Supreme Court had held to be in the Executive Branch in Edmond v. United States, 520 U.S. 651 (1997).  The D.C. Circuit failed to discuss the Court of Federal Claims, which, the Kuretskis pointed out, was an Article I court whose judges are removable, for similar causes, by judges of the Article III Court of Appeals for the Federal Circuit, under 28 U.S.C. § 176(a).  The Kuretskis couldn’t see how the Court of Federal Claims should have judicial actors holding a judicial removal power, while the Tax Court should have an Executive actor holding a judicial removal power.  Both can’t be constitutional.

The D.C. Circuit admitted that the Supreme Court’s opinion in Freytag “adds a wrinkle to what would otherwise be a straightforward analysis”; 755 F.3d at 940; but the D.C. Circuit thought the majority opinion in Freytag could be harmonized with the D.C. Circuit’s holding that the Tax Court was still in the Executive Branch:

The Freytag majority rejected the argument that the Tax Court is an executive “Department” for purposes of the Appointments Clause.  But, the majority also made clear that an entity can be a part of the Executive Branch without being an executive “Department.” See id.at 885 (“We cannot accept the Commissioner’s assumption that every part of the Executive Branch is a department, the head of which is eligible to receive the appointment power.”) . . . .

The Freytag majority also observed that the Tax Court “remains independent of the Executive . . . Branch[],” and in that sense exercises something other than “executive” power. 501 U.S. at 891. We understand that statement to describe the Tax Court’s functional independence rather than to speak to its constitutional status. The Supreme Court has used similar language to describe “quasilegislative” and “quasijudicial” agencies such as the Federal Trade Commission, noting that such agencies are “wholly disconnected from the executive department” and that their members must “act in discharge of their duties independently of executive control.”

755 F.3d at 943 (some citations omitted).

A number of independent observers who read the D.C. Circuit’s opinion, however, felt that it essentially adopted the reasoning of Justice Scalia’s Freytag concurrence concerning the location of the Tax Court, not the Freytag majority opinion.

Moreover, the D.C. Circuit wholly failed to discuss the Kuretskis’ further argument that, even if the Tax Court is located in the Executive Branch, Bowsher v. Synar indicates that intrabranch removal powers can be unconstitutional when actors holding one power hold removal power over actors holding a different constitutional power – the situation that would be presented with the President holding the Executive Power and the Tax Court holding a portion of the Judicial Power while being in the Executive Branch.

In the second part of this post, I will explain both Congress’ and Joe DiRuzzo’s responses to the D.C. Circuit’s Kuretski opinion and the Tax Court’s new opinion in Battat, which disagrees with much of the reasoning of the D.C. Circuit in Kuretski.