Ninth Circuit Declines to Reach Constitutionality of President’s Removal Power Over Tax Court Judges

Frequent guest blogger Carl Smith brings us up to date on litigation over the constitutionality of IRC section 7443(f), giving the President removal power over Tax Court judges. Christine

In a post from September I alerted PT readers that two of the cases in which Joe DiRuzzo had again raised the issue of the constitutionality of the President’s removal power over Tax Court judges were set for oral argument before the Ninth Circuit. The constitutional separation of powers issue was decided against the taxpayers in both Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), and Battat v. Commissioner, 148 T.C. No. 2 (2017) – though, on different reasoning as to which Branch of government in which the Tax Court is located, if any.

Well, the Ninth Circuit panel removed both of Joe’s cases from the oral argument calendar, and it just issued two unpublished opinions. In both of the opinions, the Ninth Circuit avoided addressing the constitutional question.

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In Thompson v. Commissioner, Ninth Cir. Docket No. 17-71027 (Nov. 14, 2018), Joe had moved to recuse all Tax Court judges because, in light of the President’s removal power, the judges were being subtlely pressured to rule in favor of the IRS. When the Tax Court denied the motion (citing Battat), Joe brought an interlocutory appeal. Consistent with the results of all other interlocutory appeals that Joe has brought on this issue to date, the Ninth Circuit refused to rule on the constitutional issue. Joe tried to fit this case into an exception from the rule that, ordinarily, interlocutory appeals are prohibited. However, the Ninth Circuit found that no exception applied. Nor did it think a writ of mandamus should issue. The court wrote: “The Thompsons do not explain how their challenge to the constitutionality of the Tax Court cannot be adequately reviewed or possibly corrected on direct appeal.”

In Crim v. Commissioner, Ninth Cir. Docket No. 17-72701 (Nov. 14, 2018), the taxpayer submitted an OIC, and, after it was not accepted, went to Appeals. Appeals confirmed the OIC denial. Despite the fact that the OIC was not part of a Collection Due Process (CDP) hearing, the taxpayer petitioned the Tax Court for review. In the case, Joe also moved for recusal of all Tax Court judges on the constitutional issue. Citing Battat, the Tax Court first denied the constitutional motion in an unpublished order. Then, the court issued a second unpublished order holding that, in the absence of a CDP proceeding, the Tax Court lacked jurisdiction to review Appeals’ denial of an OIC. Crim’s appeal to the Ninth Circuit was thus not an interlocutory one. However, it fared no better. The court did not reach the constitutional issue because it held that the Tax Court had properly dismissed the case for lack of jurisdiction. The Ninth Circuit wrote:

Because Crim has not presented any evidence that the IRS filed a notice of a federal tax lien or a final intent to levy against him, that he requested a collection due process hearing with the IRS Office of Appeals, that he attended an Office of Appeals collection due process hearing, or that the Office of Appeals made any “determination” addressing a disputed lien or levy, the Tax Court lacked jurisdiction over Crim’s petition under 26 U.S.C. § 6320 and § 6330. Any argument that Craig v. Commissioner, 119 T.C. 252 (2002), commands a different result has been forfeited. See Christian Legal Soc’y Chapter of Univ. of Cal. v. Wu, 626 F.3d 483, 487-88 (9th Cir. 2010). Crim also forfeited the arguments raised for the first time in his reply brief that the Administrative Procedures Act, 5 U.S.C. § 706(1), and the All Writs Act, 28 U.S.C. § 1651, provide jurisdiction here. The failure to find jurisdiction on these grounds was not plain error. . . .

Given that the Tax Court lacked jurisdiction over Crim’s petition, we decline to exercise our “discretionary jurisdiction” over the recusal motion. See Gruver v. Lesman Fisheries Inc., 489 F.3d 978, 981 n.4 (9th Cir. 2007).

To get the constitutional issue adjudicated, it looks like Joe or somebody else will have to appeal any Tax Court ruling on the constitutional issue after a final decision is entered in a Tax Court case over which the court clearly had jurisdiction.

Designated Orders: 10/15 – 10/19/2018 and Statistics from the Project’s First Year

Guest blogger Patrick Thomas of Notre Dame Law School brings us this week’s few designated orders. He then reviews the development of the Designated Order blogging project and reports the data that the team has gathered so far. There are some interesting statistics on Designated Orders that deserve some attention.

In related news, Paul Merrion at MLEX US Tax Watch recently wrote about (login required) the Tax Court’s new contract with Flexion, Inc. to develop a new electronic filing and case management system. The two-sentence announcement on the Tax Court’s homepage had escaped my notice. Paul’s article summarizes the request for proposals, which can be found here. While the Tax Court declined to comment on the article, this development may be a sign of greater openness to come. Christine

Designated Orders: 10/15 – 10/19/2018

The Tax Court issued only two designated orders during this week, both of which Judge Armen wrote. I will not discuss either in depth here. For posterity’s sake, Judge Armen upheld the Office of Appeals’ decision to sustain a levy in Cheshier v. Commissioner, a Collection Due Process case in which the Petitioner did not provide financial information or tax returns in the CDP hearing. In contrast, the second case, Levin v. Commissioner, involved a very responsive CDP petitioner. In Tax Court, the parties disagreed as to the financial analysis, the propriety of filing a NFTL after entering into an installment agreement, and the necessity of filing business tax returns. Alas, the Tax Court agreed with Respondent on all counts. The order from Judge Armen merely finalized Judge Ashford’s opinion in this case (T.C. Memo. 2018-172), which I would recommend for further reading.

The Designated Orders Project & Statistics

With such a light week, this provides an opportunity to take stock of our Designated Orders blogging project, which began in May 2017. Since then, Samantha Galvin, William (Bill) Schmidt, Caleb Smith, and I have tracked every order designated on the Tax Court’s website. As of October 30, 2018, there have been 623 designated orders—though many orders occur in consolidated cases, causing the number of “unique” orders to be substantially less at approximately 525.

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Why do we track these orders? First, the orders often deal with substantive issues of tax procedure. Some orders could very well be reported opinions. Many of these issues—especially those arising in CDP cases—receive comparatively less coverage in the Tax Court’s opinions. Indeed, through “designating” an order, the individual judge indicates that the order is more important than a routine order (of which the Tax Court issues hundreds each day). The orders can often reveal the direction in which an individual judge or the Court is tracking on certain issues.

Given the importance of the orders, one might surmise that the Tax Court’s website could filter the designated orders from those not designated. One would be mistaken. The Order Search tool on the website does not distinguish between designated and undesignated orders. (I am told, however, that internal users within the Tax Court can search and filter Orders by whether they were designated.)

Instead, orders are listed on the “Today’s Designated Orders” page each weekday after 3:30pm Eastern time (or, a message appears that no orders were designated on that day). At some unspecified time overnight, any record of these orders disappears. Of course, the underlying orders are themselves maintained within the dockets of their respective cases. But without knowing which orders were designated, it becomes impossible to discover them.

As an aside: no compelling reason exists to hide the designated status of an order from the public. Professor Lederman’s recent post nicely encapsulates the continuing (though progressively fewer) transparency concerns that the Tax Court faces. This certainly is another; yet the Court’s historic rationale for preventing disclosure of information (the valid concern with taxpayer privacy) simply does not apply here.

So, Caleb, Samantha, Bill, and I began tracking every order each weekday in May 2017. We have logged the date, docket number, petitioner, judge, and hyperlink for every designated order since then.

This summer, I cleaned and analyzed one year of designated orders data from April 15, 2017 until April 15, 2018. (I acknowledge help from Bill in initially looking at this data, along with substantial work from my research assistant, Chris Zhao). In addition to the above data, I added data regarding the jurisdictional type, whether the case was a small case under IRC § 7463, and whether the order merely transmitted a bench opinion under IRC § 7459(b). I present those initial findings below. In later work, I will compare the designated orders with opinions and “undesignated” orders (some of which are indeed just as substantive as designated orders, as Bob Kamman has routinely pointed out to us).

The dataset revealed 319 unique orders during the research period. In terms of content, we have not systemically tracked the subject matter of designated orders in our dataset. From our experience, the vast majority of orders deal with substantive, often tricky issues. The one major exception is found in Judge Jacobs’ orders, which are often routine scheduling orders. We are not sure why these orders are designated, presuming the purpose of designating an order is to highlight an important case or issue.

While we did not track individual issues, the dataset does contain a jurisdictional breakdown. Deficiency and CDP cases accounted for the vast majority of orders (51.10% and 37.30%, respectively). Other case types included partnership proceedings, whistleblower, standalone innocent spouse, retirement plan qualification review, 501(c)(3) status revocation, and others that involved multiple jurisdictional types.

12.85% of orders were for a small tax case under section 7463. Small cases are underrepresented, compared with the Court’s 37% share of such cases generally (as of April 30, 2018, according to Judge Carluzzo’s presentation to the ABA Tax Section’s Pro Bono and Tax Clinics Committee).

Certain judges used Designated Orders much more frequently than others during the period reviewed. Judges Gustafson, Holmes, and Carluzzo lead the pack, having issued 46.40% of all designated orders, at 21%, 13.17%, and 12.23%, respectively. Thirteen judges (a substantial minority of the 31 active judges) did not designate a single order during the research period. Almost half of the regular judges—Judges Foley, Goeke, Nega, Paris, Pugh, Thornton, and Vasquez—issued no designated orders at all. (The Chief Judge, given their increased administrative duties, receives fewer individual cases. Further, Judge Thornton did designate two orders during May and June 2018. Judges Goeke and Vasquez, while currently on senior status, are classified in the dataset as regular judges, as they retired on April 21 and June 24, 2018, respectively.) Over half of the senior judges issued no designated orders. All of the Special Trial Judges designated orders and did so frequently, accounting for 29.47% of all designated orders.

Judges have also used Designated Orders to highlight bench opinions with substantive tax issues. A bench opinion is one rendered orally at a trial session that disposes of the entire case. After the transcript is prepared, the judge then orders transmittal of the bench opinion to the parties under Rule 152(b). For an example, see Chief Special Trial Judge Carluzzo’s order in Garza v. Commissioner. These transmittal orders represent 8.46% of all designated orders.

Judge Carluzzo issued 11 such orders, followed closed by Judges Gustafson and Buch at 9 and 6 orders, respectively. Judges Carluzzo, Gustafson, and Holmes designated every order that transmitted a bench opinion, while Judge Buch had some undesignated bench opinions (there were 80 other undesignated bench opinions from other judges, which represent the vast majority).

Some cases are repeat players in designated orders. Twenty-nine dockets received more than one designated order during the research period. Three dockets received three or more orders, two of which were among the most well-known cases then before the Tax Court: Docket No. 18254-17L, Kestin v. Commissioner (three orders); Docket No. 31183-15, Coca-Cola Co. v. Commissioner (three orders); and Docket No. 17152-13, Estate of Michael Jackson v. Commissioner (seven orders).

From a timing perspective, the Court’s orders seem to peak in December and March and drop off in January and May—both for regular and S cases. I’ll leave it to those with access to better data to inform us whether this corresponds with the Tax Court’s overall production during these times.

What do these data tell us? I’ll venture a few broad conclusions and raise further questions:

  1. A substantial number of judges do not designate orders at all, or do so very seldom. Do these judges issue substantially more opinions? Are these judges’ workloads substantively different from those who do issue more designated orders?
  2. Three judges (Judges Gustafson, Holmes, and Carluzzo) accounted for nearly half of all designated orders. Why is there such a disparity between these judges and the rest of the Court?
  3. Judges issued only 112 bench opinions during the research period. (To get this figure I searched for “152(b)” on the Order Search tool for each judge between April 15, 2017 and April 15, 2018.) This strikes me as minute compared with the overall number of cases (2,244 cases closed during April 2018 alone). Keith has long argued to increase the use of bench opinions to resolve cases; the Court appears to have disregarded his advice. Of the 112 bench opinions, only 26 (23%) were designated. Judges might consider designating these orders such that they highlight their bench opinions to the public.
  4. There is a large disparity in small cases on the docket (37% of all cases) with designated orders in small tax cases (12.85% of all designated orders). Are small cases simply too “routine” and less deserving of highlighting to the public?

Ideally, the Tax Court would publish its own statistical analysis of its cases, orders, and opinions, as Professor Lederman suggests. Perhaps the Court can discuss and address some of my questions above in so doing. In addition, the Court should allow public users to filter orders on the Tax Court’s website by whether the orders were designated.

In the meantime, we will continue to track these orders so that practitioners and researchers alike keep abreast of important developments at the Court. We’ve learned a great deal about certain substantive topics through this project —especially about penalty approval under section 6751.

I further hope these statistics on designated orders shed some light on the Court’s sometimes opaque operations. Unless the Court, as it should, decides to take up the mantle itself, we’ll continue to track, summarize, and look at trends stemming from these orders.

Vested or Distributed Value, Post-Computation Procedures and a Lien in Limbo. Designated Orders, October 22-26

This week’s designated order post is brought to us by Professor Samantha Galvin from the University of Denver Sturm School of Law. The second order she describes involves one of those technical procedures on which it is easy to make a mistake. Here, the mistake is by respondent’s counsel but the fix is also easy. Keith

During the week of October 25, 2018 there were four orders designated. Three are discussed below. The only order not discussed (here) addresses a trial transcript that was incorrectly attached to a joint status report.

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Vested or Distributed Value

Docket 10488-10: Rui-Kang Zhang & Jua-Fei Chen v. C.I.R. (here)

First is the most substantive of the orders designated during my week. This case is about the value of life insurance policies that were distributed to petitioners in 2004. Petitioners and respondent agree the distribution created taxable income, but the amount is in dispute. The Court analyzes whether respondent is entitled to summary judgment as a matter of law.

Petitioners were shareholders and employees of an S corporation that had a benefit plan and trust agreement paid for by the corporation which provided life insurance for petitioners. The corporation took deductions for the cost of the two policies, which were owned by a non-exempt trust. The IRS began scrutinizing plans like this because they often consisted of multiple single-employer plans dressed up as a single multiple-employer plan and used to obtain tax advantages under sections 419 and 491A.

In the present case, petitioners’ corporation wound down its involvement in this plan in 2004 and petitioners were entitled to receive a share of the plan’s assets. The plan administrator transferred ownership of the life insurance policies from the plan’s trustee to the individual petitioners. Petitioners reported the plan’s fair market value at distribution as $160,000 (this is the net value after subtracting the policies’ surrender charges) and a severance cash distribution of $30,000, but the IRS argues that the total amount should be closer to $550,000.

Because the policies were owned by a non-exempt trust, section 402(b) is used to determine the value of the policies, but the statutory cross references are particularly important. Section 402(b)(1) governs the value of an employee’s rights to assets still held in trust at the time those rights become vested, and cross references section 83, which states the value is the fair market value of such property determined without regard to any lapse restrictions.

Whereas section 402(b)(2) governs the value of assets that are distributed and not still held in trust, and cross references section 72, which states the value is the “amount actually distributed.” This was defined in Schwab v. Commissioner, 136 T.C. 120 (2011), aff’d, 715 F.3d 1169, 1179 (9th Cir. 2013) as the fair market value of what was actually distributed (taking into account the taxpayer’s initial investment, insurance rates, and the dates covered after the distribution).

In other words, the amount included in petitioners’ table income should either be the vested value or the distributed value. Respondent argues that both sections of 402(b) should apply and petitioners should include the higher vested value as income, because once the corporation notified the plan of the withdrawal the petitioners became beneficial owners which created a vesting event that was later followed by a distribution event.

Court says this is counterintuitive because the same property cannot be both distributed and be owned by a trustee for the benefit of the person to whom it is distributed. Respondent’s logic would also make section 402(b)(2) superfluous because it would make all distributions of pension assets taxable in a two-step process: first, taxable as vested when the plan cuts the check (which make it transferable and not subject to a substantial risk of forfeiture) and then, taxable as distributed when the taxpayer actually receives the payment.

The Court identifies four relevant cases on this issue and determines that section 402(b)(2) should apply because the policies were distributed to and owned by the individual taxpayers. This means that the amount included in petitioners’ income should be the fair market value of what was actually distributed.

The Court denies respondent’s motion for summary judgment and order the parties to file a status report about whether the parties will settle or go to trial.

Post-Computation Procedures

Docket No. 14704-14: Damon R. Becnel v. CIR (here)

In this order the Court clarifies the proper procedure to be used when a petitioner is not responsive after the IRS submits computations. The Court released its opinion in this case but was waiting on the computations before it could enter the final decision. Petitioner has not approved the computations but it is unclear whether petitioner’s lack of approval is intentional, if he is simply nonresponsive, or if there is some misunderstanding.

Respondent moves for an entry of decision, but that is not actually the proper procedure to use in this situation. Computations are governed by Tax Court rule 155. Rule 155(b) states that when there is an absence of agreement between the parties the clerk will serve upon the opposite party a notice of the filing of computations and if the opposite party fails to object or submit alternative computations, then the Court may enter a decision in accordance with the computations already submitted.

In this case, the petitioner was never given notice so the Court recharacterizes IRS’s motion, orders the clerk to serve the petitioner with notice, and will enter a decision in accordance to the computations if petitioner fails to respond.

A Lien in Limbo

Docket: 681-18L, Douglas C. Hendriks v. CIR (here)

Next the Court evaluates the undisputed facts to determine whether to grant respondent’s motion for summary judgment in a collection due process case.

The petitioner filed two CDP hearing requests one in response to an intent to levy, and another in response to the intent to file a notice of federal tax lien. The IRS only responded to and issued a notice of determination for the levy CDP request, but did not respond to nor issue a notice of determination on the lien filing.

The Court finds that the lack of information about the lien CDP request is a genuine issue of material fact that could result in a remand to appeals. As a result, summary judgment is not appropriate under these circumstances and the Court denies respondent’s motion.

 

Can A Lawyer’s Representation Be So Bad That It Is A Fraud on the Court? Designated Orders, October 8 – 12

Caleb Smith at the University of Minnesota brings us this week’s designated orders. Caleb highlights one case involving a lawyer whose removal from the Tax Court bar we have previously discussed. As he notes, the lawyer was a problem but competent return preparation could have perhaps avoided the whole problem. The more cases I see the more I am convinced that getting the return right is the key to having the tax system work properly and smoothly. To the extent that we can provide the resources and direction to assist people in filing a correct return, everyone will reap rewards from the creation of competent preparation. Keith 

“My Lawyer’s A Fraud!” Brown v. C.I.R., Dkt. # 28934-10 (here)

Much of the general public is probably aware of the right to effective counsel. As with many legal issues, popular understanding is cultivated by crime shows like Making a Murderer. Of course, in the very civil world of Tax Court no such right exists. And yet, apart from firing the attorney, might not the petitioner have some recourse for counsel that is so inept as to ruin their case?

This, at least, is the premise that the petitioners in Brown v. C.I.R. would like Judge Halpern to entertain. Their legal theory being that the representation was so bad as to be a fraud on the court, such that the prior decision should be vacated. Indeed, their attorney (Mr. Aka) was so inept that he was disbarred from the Tax Court in a case that was previously covered in Procedurally Taxing here.

But is doing your job poorly the same (or similar enough) as perpetrating a fraud on the court?

To that question, Judge Halpern provides a resounding “no.” And for good reason.

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The petitioners in this case appear to be grasping at straws. To be sure, Mr. Aka’s representation seems at best to be ineffective. A glance at the docket shows the situation getting off to a rocky start at an early date with missed deadlines and a frequent failure to respond. Apparently, after trial Judge Halpern even took the extra step of encouraging the petitioner to “supplement [their counsel] with someone with the skills perhaps to reach a settlement” with the IRS. But petitioner took no such action, and his faith in his counsel went unrewarded: shortly thereafter, Mr. Aka missed the deadline to file an opening brief. Instead, one month after the deadline, Mr. Aka filed a motion to extend the time to file an opening brief… and then, before the Tax Court had ruled on the motion, filed this opening brief… after the deadline he had requested. Judge Halpern was unswayed by this attempt, and struck the opening brief as untimely, while taking the extra step of ensuring that petitioner was personally delivered his order striking it. This step was taken so that petitioners could be made all-the-more aware of their attorney’s poor behavior.

When the Judge is implicitly and explicitly telling you your attorney is no good, that is probably because the attorney behaving egregiously bad. And yet, I opened the prior paragraph insisting that the petitioners were grasping in this case by arguing for vacating the decision on grounds of fraud. And that remains so for at least two reasons: (1) the legal standard for fraud on the court doesn’t sync up with the petitioner’s allegations, and (2) petitioners themselves don’t seem particularly sympathetic.

Beginning with the law, what do the petitioners need to show in this case? Quite a bit, actually. Judge Halpern provides various iterations of what fraud on the court is, mostly quoting Abatti v. Commissioner, 859 F.2d 115 (9th Cir. 1988). But really it boils down to proving, through clear and convincing evidence, that there was an intentional plan of deception to improperly influence the Court in its decision, and that the deception actually worked.

It isn’t immediately clear what the petitioner’s think their lawyer’s intentional plan of deception (henceforth, “scheme”) was, and much less clear to see how it “worked” (that is, resulted in the desired outcome by improperly influencing the Court). Petitioner’s offer that the scheme of the attorney was just to cover up his own incompetence.

Maybe.

But did that influence the Court in its decision? If it did, it must not have been in the way intended: the petitioner’s pretty much lost on all issues and Mr. Aka was subsequently disbarred. There is little doubt that Mr. Aka lied (in his excuses about missing deadlines). But to the extent that these lies constitute a scheme, they certainly didn’t work: that is, they did not influence the Court’s decision.

And that is the crux of the issue, and consequently where petitioners begin to appear less sympathetic than they otherwise would. For one, as has already been noted, the Court gave repeated notice to the petitioners that their counsel was inept throughout the proceedings. Petitioners simply decided not to act on those warnings. Only now that everything has (irreversibly) fallen apart, they appear to bring up some novel and serious allegations: namely, that Mr. Aka (1) didn’t offer evidence at trial that would have won the case, and (2) stipulated to facts that petitioners would never have agreed to.

Pretty serious allegations of professional misconduct, if not actually fraud. The only problem is that (1) the petitioners can’t actually point to what this unoffered evidence was, and (2) petitioner signed the stipulation of facts. The stipulated issues were, moreover, read at trial while the petitioner was there, who voiced no objection. These sorts of arguments resemble more and more a taxpayer that is grasping for a lifeline.

Which leads to the final point in this sad saga. It is pretty clear from reading over the actual decision in the case (here) that petitioners would have benefitted tremendously from competent counsel AND competent tax preparation. On the facts as presented in the decision, they almost certainly owe substantial additional tax, but (through their own mistakes), it is difficult to know how much. The returns are a morass of improper Schedule C deductions, impossible-to-align corporate tax returns, and poorly documented management fees. The extraordinarily poorly prepared returns (it is unclear if they were self-prepared) set the stage for the tangled mess that gets to Judge Halpern’s door. A competent tax return preparer could have likely nipped this in the bud (albeit with a tax bill the petitioners would have to contend with), thus saving years of time and resources (of the judiciary, the IRS and the petitioners themselves). For the petitioners in this case it is not clear why they did not avail themselves of competent tax preparation (or counsel): they certainly have the money. It is important to recognize that is not always the case…

When You Can’t Afford Tax Preparation: Hermit v. C.I.R., Dkt. # 15998-17SL (here)

Before becoming a lawyer, I worked at a non-profit that primarily focused on preparing tax returns for low-income taxpayers. The organization was originally founded by accountants in the late 1970s, with the refreshingly non-partisan idea that the ability of people to comply with their tax obligations should not depend on their ability to pay competent professionals. Over time and largely in step with the expansion of the Earned Income Tax Credit, organizations like this expanded nationwide and often took on more of a “financial empowerment” mission. Today, this network generally falls under the umbrella of “VITA” (Volunteer Income Tax Assistance), which must follow certain guidelines to receive blessing from the IRS. But the guidelines on who VITA organizations can serve, particularly with regards to self-employed taxpayers, leave many low-income taxpayers out in the cold. The National Taxpayer Advocate has previously listed this as a “most serious problem” in her annual report to Congress For these taxpayers, their options are (1) hire someone at a rate they can’t afford to prepare their taxes (especially true since these returns implicate Schedule C, which many preparers charge extra for), or (2) try filing on your own, which for many people is akin to being told “try reading Mandarin on your own.”

In Hermit, you have a petitioner that (potentially) falls in this trap. Mr. Hermit did not file a return for 2012, so the IRS did him the favor and sent a SFR based on “nonemployee compensation” (i.e. a 1099-Misc that the IRS had). Mr. Hermit responded to the SFR by requesting that the IRS send him the documents needed to prepare a return on his own since (1) he could not afford a preparer, and (2) he was “alarmed” by the tax on the SFR -which is understandable since it would be treated as 100% profit from self-employment, and wholly subject to SE tax.

Unfortunately, requesting the needed forms is about as far as Mr. Hermit goes in resolving this matter. He does not file any returns, and instead signs and mails a Notice of Deficiency Waiver (Form 5564), along with a request to enter an Installment Agreement at $200/month.

Mr. Hermit, at this point, seems fairly sympathetic taxpayer that is trying to comply. And maybe that accurately summarizes his intentions (I won’t play armchair psychologist any further). But for whatever reason compliance does not ensue. No payments are made on the Installment Agreement and no returns are filed for subsequent years. The story takes a familiar turn: no action from the taxpayer until a Collection Due Process letter is sent, at which point Mr. Hermit states “I have no money to pay this [tax liability].”

I won’t rehash the determination of the CDP hearing, or the Tax Court’s order granting the IRS summary judgment, other than to say that your collection alternatives are limited when you fail to file tax returns, which is what happened here. And although the order does not exactly paint the picture of a blameless petitioner in this case, I can’t help but wonder if, much like the prior case, everything could have been fixed years ago with only the proper tax preparation…

Quick Hits, Long Order: Lamprecht v. C.I.R., Dkt. # 14410-15 (here)

When I saw the name “Lamprecht” I immediately thought I was in for an order dealing with Graev (see previous post by William Schmidt here.) I was surprised when I saw that the order was in response to an IRS motion to compel discovery: what documents could the IRS possibly want from the taxpayer to show IRS supervisory approval?

Of course, there is much more to the world of tax than Graev, and the 20 page order deals not with IRC 6751, but contours of what is and is not an acceptable discovery request. Without going into detail, I will simply note that discovery requests that are “unlimited in time” (for example, “all documents relating to Blackacre, EVER”) are likely to be struck as overly burdensome. I will also note that, while the IRS can use discovery as a way to learn about other taxpayers that may have committed fraud, it cannot make such discovery requests for the sole purpose of discovering information about other taxpayers that aren’t in the case at hand. In other words, when the IRS wants to fish for other bad-actors in a tax case it has to hook them with something pertinent to the case at hand.

The two other orders issued during the week of October 8 – 12 concerned a summary judgment motion for a taxpayer that didn’t like having a notice of federal tax lien filed, but gave no alternative for the IRS (or Tax Court) to consider. They can be found (here) and (here) but will not be discussed in detail.

 

Increased Transparency in the U.S. Tax Court: Has the Moment Arrived?

Today’s guest post is by Leandra Lederman, the William W. Oliver Professor of Tax Law at Indiana University Maurer School of Law in Bloomington. Professor Lederman is a prolific tax scholar and has written some of the most cited and influential articles on tax procedure and tax compliance, among other topics. In today’s guest post, she discusses Tax Court transparency, a topic she has also written about for many years.

This post originally appeared here on the Surly Subgroup, a blog where she and a number of tax academics write on a variety of tax issues. We highly recommend you adding it to your regular blog reads. Les

Transparency is a widely accepted judicial norm. It increases courts’ accountability and thereby increases the confidence and trust litigants and the general public have in courts’ decisionmaking. The comparatively limited access afforded to Tax Court documents is a longstanding issue. The reason Tax Court transparency differs from that of other courts is partly structural, in that the Tax Court isn’t as neatly situated in the federal government’s org chart as Article III courts, administrative agencies, or even Article I courts such as the Court of Federal Claims. (In fact, even which branch of government the Tax Court is located in has presented a puzzle.) Accordingly, the Tax Court traditionally has created many of its own rules and procedures, such as ones governing access to its documents. This means that the question is also partly cultural. As discussed below, access to Tax Court documents has increased over time, and the appointment of several new Tax Court judges may mean that we see further changes in the future.

In the past, the Tax Court’s more limited transparency has sometimes violated judicial norms and has sometimes created access inequities. For example, although the Tax Court is required by statute to make its reports and evidence “public records open to the inspection of the public,” for years the Tax Court kept its Summary Opinions confidential, which I protested in 1998 in a short Tax Notes article called “Tax Court S Cases: Does the ‘S’ Stand For Secret?”.  Although Summary Opinions lack precedential value, they are Tax Court opinions, revealing how the judge deciding the case (typically a Special Trial Judge) thinks about the issues. The Tax Court’s practice of sharing those opinions only with the parties to the case meant that the IRS had a copy of every Summary Opinion but taxpayers typically could not access the opinions in other Small Tax Cases (S cases). This created an uneven playing field. Secrecy can also lead to suspicion of favoritism or other inequities, concerns that existed in an analogous situation, in the era when the IRS did not make Private Letter Rulings (PLRs) public but large firms collected them. Litigation challenging this lack of transparency resulted in legislation, requiring PLRs to be disclosed (with taxpayer information redacted).

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In the Tax Court context, at the time I wrote my 1998 article, legislation already required public access to all Tax Court opinions and case files that weren’t under seal. The Tax Court reportedly began making Summary Opinions and the underlying files publicly accessible shortly after that article was published. That change ensures that interested parties can see both if similarly situated taxpayers are being treated similarly, and if S case outcomes differ from those of regular cases (the issue I had wanted to study when I tried to obtain access to S cases before 1998; I ended up having to focus that study only on regular cases).

A more recent example of a Tax Court violation of judicial norms was revealed by Ballard v. Commissioner, which went to the U.S. Supreme Court. (Disclosure: I filed an amicus brief in that case in support of the taxpayers.) In the Ballard litigation, taxpayers’ counsel was attempting to obtain the factfinding report of the judge who had presided over the trial in a consolidated multimillion dollar fraud case. Although the decision the Tax Court had issued after trial said that it “agrees with and adopts” the Special Trial Judge’s report, taxpayers’ counsel had reason to believe that the result in the opinion (that the IRS had proven fraud by clear and convincing evidence) was not what the report had actually found. Such reports were kept confidential following an internal rule change by the Tax Court in 1983. That rule change also resulted in the report being excluded from the record on appeal, as I explained in a 2004 Tax Notes article. So, no one outside the Tax Court could access the trial judge’s report in these (large) Rule 183 cases. In Ballard, the U.S. Supreme Court agreed with the taxpayer that the STJ’s factfinding could not be secret. On remand, the Court of Appeals for the Eleventh Circuit ordered the Tax Court to disclose the original report. That report had in fact found in favor of the taxpayer.

The Tax Court has made tremendous strides in the decades since I first argued for increased transparency. The Tax Court currently provides on its website a searchable database to locate opinions in its cases, and Summary Opinions are available for decisions on or after January 10, 2001. The Tax Court’s TC and memorandum opinions are available there, too, and go back farther—to September 25, 1995. More recently, the Tax Court made available a searchable database containing “all orders issued after June 17, 2011” except for “computer-generated mailings of form orders.” And the Tax Court does not charge for access to its online documents.

The Tax Court’s online Docket Inquiry System was another terrific addition. It allows searches by docket number, individual party name, and corporate name keyword, and it goes back to the 1980s: the website states that “Docket records are available for cases filed on or after May 1, 1986.” It is also very helpful that the Docket Inquiry System now includes a link to the stipulated decision in a settled case, which, when I conducted empirical studies of Tax Court cases, had to be accessed in hard copy from the Tax Court’s public files office in Washington, D.C. The Tax Court states that the Docket Inquiry System provides access to decisions and orders issued after March 1, 2008. (For an example, see the stipulated decision in docket number 4358-10, or the docket entries for that case.)

Unfortunately, however, the Docket Inquiry System has some major limitations. First, for those not logged into the system as a representative, it currently allows access to only two cases in short succession. On searching for the third in a row, it says “Access frequency exceeded. Please try again later.” This restriction presents obvious difficulties for researchers and journalists, among others. While an access frequency limit may be intended to prevent denial-of-service and other cyber-attacks, the limit of two docket numbers seems unnecessarily low. Even password-protected websites following best practices give more than two tries (e.g., ten) before locking out a user.

Second, the Tax Court’s Docket Inquiry System does not provide electronic access to many types of documents. It does currently link both the decision and orders in the case, which is a very helpful feature. However, non-party access to materials from the Tax Court public files, such as other documents listed there, calls for accessing them from the Office of the Clerk of the Court in Washington, D.C. during business hours. This not only limits the access researchers, journalists, and the general public, it restricts the access of attorneys who have not yet entered an appearance. It is not unusual for a taxpayer to petition the Tax Court pro se and seek counsel later, as Keith Fogg has pointed out. This is likely because the time within which to file a petition is short; the “Last date to petition Tax Court” is required by an off-Code provision to be stated on the notice of deficiency; the notice of deficiency does not say that there is also a refund option available (as noted here on pp.902-903); and the Tax Court helps facilitate filing with a simplified petition form that is available online.

It is possible to physically go to the Clerk’s Office to view Tax Court case documents, but, as Keith Fogg has pointed out, that is expensive if you don’t live in the Washington, D.C. area or have a friend there who is willing to do this kind of task for you. Copies obtained from the Tax Court cost 50 cents per page, which is another economic barrier to access. Keith blogged about going to the court and taking photos with his phone of relevant documents in case files. However, he points out in a comment that he later learned that the Tax Court does not permit that.

This limited electronic access to Tax Court filings is in stark contrast with PACER (Public Access to Court Electronic Records), which is managed by the Administrative Office of US Courts. In the words of the PACER website, “PACER hosts millions of case file documents and docket information for all district, bankruptcy, and appellate courts. These are available immediately after they have been electronically filed.” PACER thus facilitates quick electronic access to numerous documents in a case file. PACER also has a fee schedule that is significantly below 50 cents per page:

Access to case information costs $0.10 per page. The cost to access a single document is capped at $3.00, the equivalent of 30 pages. The cap does not apply to name searches, reports that are not case-specific, and transcripts of federal court proceedings.

By Judicial Conference policy, if your usage does not exceed $15 in a quarter, fees are waived.

Of course, this means that PACER starts charging a user to access electronic documents after $15 worth in a 3-month period (equivalent to 150 pages, assuming that no individual document reaches the $3 capped per-document fee). The Tax Court does not charge at all for electronic access, as noted above. However, as Peter Reilly pointed out last year, “In PACER, almost all the docket entries will have a link like that [to documents in the case]. In the Tax Court most of them do not.” It is worth remembering, however, that the Tax Court provides a free, searchable database of its orders, as noted above.

Complaints about the Tax Court’s comparative lack of online access is a longstanding issue, as this 2012 Reuters article by Kim Dixon explains. As I explained in a 2008 article in Wash. U. Law Review titled “Tax Appeal: A Proposal to Make the United States Tax Court More Judicial,” The Tax Court has never been included in PACER or the oversight of the Administrative Office of U.S. Courts (AOUSC). By contrast, the Court of Federal Claims, which is also an Article I court that hears tax cases, is on PACER. In my 2008 article, I proposed to align treatment of the Tax Court with that of the Court of Federal Claims.

The Tax Court has raised the privacy and security of taxpayer information as a concern that raises a potential barrier, and that is an important issue worth serious consideration. Of course, what’s currently at stake isn’t whether public Tax Court documents are available at all, it’s whether they’re available electronically. But providing online access certainly increases the potential exposure for a document.  The Tax Court has an undated notice on its website that, in part, “encourage[s parties] to refrain from including or to take appropriate steps to redact” private information, such as Social Security numbers. PACER has had to address this issue, too, of course. Its website states “Certain personal identifiers are removed or redacted before the record becomes public, including Social Security number, financial account numbers, the name of a minor, date of birth, and home addresses in a criminal case.”

The Tax Court also currently does not publish case statistics on its website, although such aggregate statistics do not raise concerns about personal information such as Social Security or bank account numbers. The Tax Court’s opacity in this regards contrasts with the AOUSC and the Court of Federal Claims, both of which make statistical documents available on their websites from drop down menus. Tax Court statistics can be valuable both to litigants and researchers interested in trends over time and differences in results in pro se and other cases, as well as in regular and S cases. I have heard the Chief Judge of the Tax Court provide a Tax Court update at the Court Procedure and Practice Committee session at ABA Tax Section meetings, but these are general statistics and do not seem to be accompanied by documents available in the meeting materials. The Tax Court has produced more detailed statistical documents at times, but there does not seem to be a regularized system for doing so, or for accessing them (as discussed on pages 1213-14 of my 2008 article). Nor can the Freedom of Information Act readily be used to obtain these or other documents from the Tax Court; the Tax Court isn’t subject to statutes governing administrative agencies because it is not an executive agency.

What’s past is prologue, however. The Tax Court’s broad self-governance also means that it has the power to greatly increase its transparency. Les Book has blogged that, at the Tax Court Judicial Conference in March of this year, some of the judges expressed interest in increased electronic access. And the addition of new Tax Court judges could give rise to further cultural changes. Two new judges have been sworn in in the past month or so: Judge Patrick Urda on September 27 and Judge Elizabeth Copeland on October 12. That still leaves the 19-member court with 4 vacancies, but President Trump has announced 4 nominees. With so much new blood, the Tax Court’s self-governance could move in new directions. Perhaps we will see increased Tax Court transparency in the near future. That would be a very welcome development!

Designated Orders: Penalties Imposed and Analysis of an Investment Firm (10/1/18 to 10/5/18)

Designated Order blogger William Schmidt from the Legal Aid Society of Kansas brings us this week’s orders. Keith

This week provides 4 designated orders. The batch includes two related orders regarding penalties for the same petitioner, analysis of an investment firm and an order concerning specific memos required before trial (Order Here). That order is a good example of what is needed in a pretrial memo in a case under regular tax case procedures: issues of fact and law, each party’s position and theories, expert witness testimony anticipated, and status of stipulations of facts.

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Tax Court Penalties Imposed

Docket # 16108-14 L, Rodney P. Walker v. C.I.R. (Order and Decision Here).

Docket # 9435-15 L, Rodney P. Walker v. C.I.R. (Order and Decision Here).

While there have been previous designated orders for Mr. Walker, his cases were not discussed here before. Each of the two cases are collection due process cases. One case concerns collection by levy for Mr. Walker’s unpaid 2007 and 2009 income taxes (16108-14) while the other case concerns collection by lien of his unpaid 2001 through 2007 income taxes. Otherwise, the orders are virtually identical yet ordered on two separate days.

Originally, Mr. Walker’s cases were remanded to IRS Appeals for a supplemental hearing on the issues listed above. The settlement officer provided him an explanation of how his 2007 and 2009 taxes were calculated and afforded him the opportunity to file returns claiming lesser taxes but he did not file those returns. Mr. Walker instead used the hearing to raise an issue previously ruled on by the Court.

The Court believed Mr. Walker used the period of remand primarily for delay and issued an order on August 27 to show cause that it was not a frivolous argument and why no penalty should be imposed. In fact, the penalty in question is from Internal Revenue Code (IRC) section 6673(a)(1). The section authorizes a penalty of up to $25,000 if the taxpayer has instituted or maintained proceedings before the Tax Court primarily for delay or if the taxpayer’s position is frivolous or groundless.

Mr. Walker did not respond to the August 27 order to show cause. The Court then imposes a section 6673(a)(1) penalty of $5,000 (it is my understanding that even though these are separate orders there would only be one penalty imposed). The Court orders that the IRS may proceed with the collection actions for the years in question.

Takeaway: The Tax Court is showing its teeth with regard to frivolous or groundless filings. While it is doubtful a petitioner that would file such a case is a reader of this blog site, it is worthwhile to note that the Tax Court is not afraid to impose penalties on petitioners trying to use the Tax Court just as a means of delaying IRS taking collection actions. While other cases have brought up the penalty without imposing it (giving little more than a slap on the wrist), this is a time where the Court made use of this power and imposed a decent penalty.

Was it a “Trade or Business”?

Docket # 8486-17, 8489-17, 8494-17, 8497-17, Richard M. Hellmann & Dianna G. Hellmann, et al., v. C.I.R. (Order Here).

GF Family Management, LLC (GFM) is an investment management firm owned and operated by members of the same family (the petitioners) and it is a family office as defined by federal securities law. The petitioners each hold a 25% profits interest in GFM and the assets managed by GFM were held by six investment partnerships. GFM held a 1% interest in each partnership, and trusts where the petitioners are the beneficiaries held (individually or collectively) the remaining 99% of each partnership.

GFM claimed expense deductions as a “trade or business” under IRC section 162. That would allow for GFM to claim ordinary business expense deductions for operating costs such as salaries, rent or investment expenses. The IRS contends GFM was actually engaged in activity “for the production or collection of income” or “for the management, conservation, or maintenance of property held for the production of income” under IRC section 212. That treatment would mean GFM’s expenses would be treated as miscellaneous itemized deductions subject to the 2% floor imposed by IRC section 67(a). The treatment will also be limited by application of the alternative minimum tax. Carryover of net operating losses are only permitted for a trade or business so that would also be limited for GFM.

Within this order, there is comparison to the fact situation in Lender Management, LLC v. C.I.R. Within that case, the Court emphasized the need to examine each case individually. In that case, the Court determined that it was in fact a trade or business.

Overall, the question is whether the owners of the family office are “actively engaged in providing services to others” (citing Lender Management) or are simply providing services to themselves. The Court provides factors for its analysis and proceeds to list factual issues it would like answered.

The parties are ordered to provide a joint status report by November 5. Within the report they are to express whether the facts will need to be developed at trial or to supplement the factual record through a stipulation of facts. Also, the parties will need to state whether the stipulation of facts could be submitted for decision without trial under Rule 122.

Takeaway: The IRS examination of this investment firm seems logical as the structure provides benefits to its family members. Is the firm actually a “trade or business” or is functioning in more of a self-serving capacity? The Court’s stance also sounds logical as the facts do not necessarily parallel the Lender Management facts so it is necessary to do further factual investigation to determine what kind of role the firm functions under. It is worth noting the major tax implications such a decision will result in for GFM, as listed above.

 

 

Tax Court Clarifies Standard of Review in CDP Payment Disputes

Two recent opinions in Melasky v. Commissioner, Docket No. 12777-12L offer a cornucopia of issues for tax procedure watchers to digest. The Melaskys appealed a Collection Due Process (CDP) determination and ultimately lost. On its way to upholding the IRS determination, the Tax Court tackled several unresolved questions in two precedential opinions.  In its preliminary opinion in Melasky (151 T.C. No. 8), the Tax Court decided the standard of review when the dispute concerns the correct application of a payment. This sets the stage for the Court’s opinion on the merits of the Melaskys’ contentions, which we’ll cover in later posts.  

The facts of the case are unusual. The Melaskys hand-delivered a check for $18,000 to their local IRS office on Thursday, January 27, 2011, with direction to apply the check to their 2009 income tax liability. Unfortunately, on Monday, January 31 the IRS issued a notice of levy to the bank on which the check was drawn, which prevented the check from being honored. The IRS applied the bank levy proceeds to an earlier tax year, not 2009. Subsequently a notice of intent to levy was issued for several tax years including 2009. The Melaskys requested a CDP appeal. They argued that the proposed levy should not be sustained as to 2009 because they had no balance for that year after proper application of their payment. 

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Before we get to the caselaw, it’s helpful to review a little background. For both lien and levy notices, section 6330(c) sets out the matters to be considered in a CDP hearing: 

(c)Matters considered at hearing. In the case of any hearing conducted under this section—

(1) Requirement of investigation. The appeals officer shall at the hearing obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met.

(2) Issues at hearing

(A) In general. The person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy, including—

(i) appropriate spousal defenses;

(ii) challenges to the appropriateness of collection actions; and

(iii) offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise.

(B) Underlying liability. The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.

So, issues raised by the taxpayer under 6330(c)(2) fall into two separate buckets: “any relevant issue relating to the unpaid tax” under 6330(c)(2)(A); and “challenges to the existence or amount of the underlying tax liability” under 6330(c)(2)(B).  

Why does it matter which bucket the taxpayer’s argument falls into? It matters for a couple of reasons, one of which is the standard of judicial review. In sections 6330 and 6320 Congress failed to specify the standard that the Tax Court should use in reviewing CDP determinations. However, the legislative history provides clear direction, which the Tax Court recognized and adopted in Goza v. Commissioner, 114 T.C. 176 (2000):

The conferees expect the appeals officer will prepare a written determination addressing the issues presented by the taxpayer and considered at the hearing. … Where the validity of the tax liability was properly at issue in the hearing, and where the determination with regard to the tax liability is part of the appeal, no levy may take place during the pendency of the appeal. The amount of the tax liability will in such cases be reviewed by the appropriate court on a de novo basis. Where the validity of the tax liability is not properly part of the appeal, the taxpayer may challenge the determination of the appeals officer for abuse of discretion. 

(quoting H. Conf. Rept. 105-599, at 266 (1998)). Therefore, whether a taxpayer’s argument falls under 6330(c)(2)(A) or 6330(c)(2)(B) determines the Tax Court’s standard of review. Taxpayers prefer de novo review since there is a relatively lower hurdle for success. Of course, sometimes review of the underlying liability is not available to the taxpayer under the terms of section 6330(c)(2)(B), and in those situations a taxpayer would prefer to have their contentions reviewed for abuse of discretion than not at all.   

This brings us back to the Melaskys. The proper application of the $18,000 taken from the Melaskys’ bank account is disputed, and if the taxpayers’ view prevails they will have no unpaid liability for the 2009 tax year. Does this dispute fall under 6330(c)(2)(A) – “any relevant issue relating to the unpaid tax”? Or does it fall under 6330(c)(2)(B) – a challenge to “the existence or amount of the underlying tax liability”? It cannot be both, since the statute restricts when a taxpayer may challenge the underlying liability.  

A few months ago, Judge Lauber noted in Morgan v. Comm’r, T.C. Memo. 2018-98 that the Tax Court’s caselaw on this issue has been inconsistent, citing cases as far back as 2001. This is a debate that has been brewing for some time.  

It is worth noting that there was no dispute between the parties to the Melasky case over the standard of review. Both parties agreed that for the 2009 liability, the Court’s review should be de novo because “the Melaskys argue that they had no 2009 tax liability.” (Slip op. at 5) This opinion is a good reminder that the Court is not bound by the parties’ views of the law.  

So, the Court considers the question despite nobody asking, and answers it here in a precedential opinion. In his opinion, Judge Holmes cites his earlier case of Kovacevich v. Commissioner, T.C. Memo. 2009-160. It is worth reviewing Kovacevich for a more thorough understanding of Judge Homes’s reasoning.  

Mr. Kovacevich argued that the IRS had not properly applied five payments he’d made by check. In order to parse section 6330 and figure out which category of argument this fit into, the Court first needed to define the term “tax liability.” Judge Holmes looks to the IRC and finds that “[a] tax liability is the tax imposed by the Code on a particular taxpayer for a particular tax year. Sec. 26(b)(1).” With that definition in mind,

challenges to the proper crediting of checks that a taxpayer sends to the IRS are not ‘challenges to the underlying liability,’ because they don’t raise questions of the amount of tax imposed by the Code for a particular tax year. They raise, instead, questions of whether that liability remains unpaid. 

Kovacevich, slip op at 14. In the Kovacevich litigation and in a 2014 Chief Counsel Notice, the IRS agrees, and further argues that this conclusion finds support in the structure of section 6330(c). See Notice CC-2014-002 (May 5, 2014).  

Judge Holmes has not changed his mind since deciding Kovacevich and he reiterates his earlier reasoning and conclusion in Melasky. Despite the agreement of the IRS and the taxpayer, the Melaskys will receive abuse of discretion review for all tax years, including 2009.  

Judge Holmes’s analysis in Kovacevich and Melasky is consistent with the IRS’s views set out in Notice CC-2014-002, except for one point: whether overpayment credits are different from payments such that they fall into a different 6330(c)(2) bucket.  

Melasky did not involve overpayment credits, so the opinion naturally does not analyze the issue. However, Judge Holmes does take pains to distinguish it. The main puzzle for me in both the Kovacevich and Melasky opinions is Judge Holmes’ deferential treatment of Landry v. Commissioner, 116 T.C. 60 (2001). Both opinions distinguish LandryLandry involved a taxpayer who elected to apply his tax refunds to his estimated tax for the following year. Things did not go smoothly for Mr. Landry and he ended up in CDP arguing about his entitlement to some of these credits. The Landry opinion takes just one sentence plus a cite to Goza to conclude that a dispute regarding the amount unpaid after application of overpayment credits places “the validity of the underlying tax liability” at issue. Slip. Op. at 5. There is no analysis of the issue or recognition that some might argue otherwise. It is quite a contrast to the detailed parsing and analysis of the Kovacevich opinion.  

In an income tax case, if the underlying liability is the “tax imposed under subtitle A” of the Code, it is not obvious to me that disputes about overpayment credits are disputes regarding the underlying liability. Under section 6513(d), overpayment credits applied from a prior year return “shall be considered as a payment of the income tax for the succeeding taxable year…” (emphasis added). In contrast, the Code uses different language to describe refundable credits (which are also listed as “payments” on Form 1040, alongside estimated taxes). For example, section 32 begins, “In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year…”

The Landry opinion seems to me inconsistent with the reasoning in Kovacevich, and it is plainly inconsistent with the Chief Counsel’s position. Notice CC-2014-002 argues that, “payments and overpayment credits and their proper application have no effect on how much tax is imposed by the Code.” No distinction is made between payments and overpayment credits. This approach seems right to me under the analytical framework used by both the IRS and Judge Holmes. However, I welcome comments on this. There may be Tax Court opinions addressing this issue in depth which I did not find.  

If overpayment credit disputes under section 6513 are subject to de novo review but also the limitations of 6330(c)(2)(B), you could have situations where a taxpayer ends up in very different places depending on whether they elected to have their refund credited to next year’s taxes or whether they got the cash and then paid estimated taxes with it. This does not seem ideal from a taxpayer fairness point of view, since nearly identical taxpayers will get different levels of judicial review. It reminds me of an earlier post, where the distinction between an overpayment credit and a refund made all the difference.  

For now, the Tax Court has decided that payment disputes are not “challenges to the existence or amount of the underlying liability,” but are instead “a relevant issue relating to the unpaid tax.” The law is clearer than it was, although many disputes remain to be litigated.

Tax Court Urged to Permit Limited Scope Appearances by Counsel

We welcome first-time guest blogger James Creech to Procedurally Taxing. James is a tax controversy attorney in solo practice in San Francisco and Chicago. He currently chairs the Individual and Family Tax Committee of the ABA Section of Taxation. Here James discusses comments submitted by the ABA Tax Section urging the adoption of a limited appearance rule in Tax Court, and he explains his support for the proposal from the perspective of a pro bono calendar call attorney. As one of the authors of the comments I hope the Court agrees with James. Christine

On October 3rd, the ABA Section of Taxation submitted comments to the Tax Court urging the court to amend Tax Court Rule 24 in order to create a new limited scope appearance. The comments are primarily aimed at allowing pro-bono volunteers to speak on the record during a calendar call without having to worry about broader ethical issues and without worrying about assuming responsibility beyond a solitary appearance. Importantly, while calendar calls are the primary focus, the Tax Section recommendation does not restrict the use of limited scope appearances to only calendar calls. The comments urge permission for limited scope representation in any situation where 1. the limitation is reasonable given the circumstances; 2. the limitation does not preclude competent representation or violate other rules; and 3. the client gives informed consent. This broader request would allow pro-bono volunteers to not only assist during the trial setting session but would open the door to assisting during trial itself, or during appeals hearings in docketed tax court matters.

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A limited scope representation rule could help a large number of taxpayers. According to the comment 69% of all petitioners are unrepresented. When looking only at S cases that number jumps to 91%. Currently during the typical calendar call session there is a limited amount of time where petitioners can meet with a pro-bono attorney and often they are overwhelmed with the process. Allowing limited scope representations would allow pro-bono volunteers to increase their assistance and reduce the burden on both petitioners and the Court.

Under the Tax Section’s proposal, beginning a limited scope representation would require the pro-bono volunteer to complete a Tax Court form that clearly identified the date, the time period of the representation, the activity, and the subject matter. On the sample forms attached to the comments, these lines are prominently displayed and are likely to reduce much of the client’s uncertainty the limited representation. This form would then be signed by the pro-bono attorney and served on both the Court and opposing counsel. For representations that are part of the calendar call program, the ABA Tax Section comment language specifically states that the representation ends at the conclusion of the calendar call. If a practitioner wishes to extend the representation through trial a separate notice of completion must be filed with the Court and served upon respondent.

As a frequent calendar call volunteer, the recommendations made in the ABA Tax Section comment are welcome and frankly overdue. One of the biggest frustrations of a calendar call pro-bono attorney is the inability to speak to the court on behalf of a pro-se litigant even when it comes to something as simple as requesting a continuance. Calendar Call volunteers often spend a significant amount of time with a pro-se litigant teaching them the basics of Tax Court procedure, what facts are relevant, and what the roles of Chief Counsel attorneys and the Court are. At the conclusion of the meeting it is not unusual to wait in the back of the courtroom only to watch them step up to the podium and start rehashing irrelevant facts that are unhelpful to the Court. It then takes time for the Judge to give the opportunity for the litigant to speak, inform them why they are in court today, and to ask questions about what their goals are. Often what should be a two minute request for a specific trial day or a continuance can turn in to ten minutes of the Judge trying to get a sense of the evidentiary issues and if trial is the fairest way to resolve the case. Allowing a pro-bono attorney to approach the podium with the petitioner would eliminate these issues. I believe a limited scope rule would give petitioners a better sense that they were able to communicate their needs and that they had a fair opportunity to be heard both of which are essential to due process.

Enacting the ABA Tax Section’s proposal for limited scope representation would benefit volunteers, pro-se taxpayers, chief counsel, as well as the Court. Volunteers would more certainty that their time would be put to good use. Pro se litigants would get a fairer outcome because they would be able to better communicate their needs to the Court and explain the relevant facts in their case. Finally, the Court would benefit from increased efficiency and a trial record that better reflected what the parties believed the facts to be.

Overall the Tax Section comment does a great job of striking a balance between the needs of volunteer attorneys ethical compliance and workload considerations with their desire to help pro-se petitioners. The inclusion of clear sample forms gives the Court and pro-bono volunteers a better idea of how this rule could be implemented and what pro-se litigants might expect should this proposal be adopted. In my opinion the Tax Court should implement a limited scope rule that is substantially similar to what the ABA Tax Section proposes.