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.

Tax Court Holds That a Notice of Deficiency Stating Taxpayer Owes $.00 Meets Standard

In a fully reviewed case, the Tax Court holds, in a very fractured vote, that an IRS Notice of Deficiency stating the taxpayer owes $.00 is a valid notice of deficiency conferring jurisdiction on the Court. The decision in Dees v. Commissioner, 148 T.C. 1 (2017) finds the judges engaged in a debate about just how bad a Notice of Deficiency can be and still meet the standard of a Notice of Deficiency. In upholding the notice as valid, the split vote came out seven judges in favor of the notice in an opinion by Judge Buch, two judges in favor of the notice in a concurring opinion by Chief Judge Marvel, one judge in favor of the notice in a lengthy concurring opinion by Judge Ashford (for a total of 10) versus seven judges in a dissent by Judge Foley and six of those same judges signing onto a separate dissent written by Judge Gustafson. The result almost reminds you of a presidential election and makes me feel better that the Harvard tax clinic was able to unify the Court in a jurisdictional case last year, Guralnik discussed here, in which it voted 16 to 0 against a position espoused by the clinic.

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One of the interesting aspects of the opinion is the opportunity it gave the Court to recount the many ways in which it has held over the years that bad Notices of Deficiency still conferred jurisdiction. Judge Buch cites to a host of cases in which the IRS screwed up the Notice of Deficiency in one way or the other and yet the Court still found a valid notice existed. Those cases included notices which determined taxes on a calendar year basis even though the taxpayer used a fiscal year (Miles Prod. Co. v. Commissioner, 96 T.C. 595 (1991)); even though the IRS attached pages concerning another taxpayer (Campbell v. Commissioner, 90 T.C. 110 (1988)); and even though the notice attached pages related to a different year from the notice (Erickson v. Commissioner, TCM 1991-97)(citing older Tax Court opinions with the same issue.)

When the IRS makes a mistake in the Notice of Deficiency and the Tax Court nonetheless holds that the notice meets the minimum standard to satisfy the statutory definition of a Notice of Deficiency, the IRS still faces some hurdles in most cases because the burden of proof often shifts to it to prove the basis for the poorly described adjustment. In the Dees case, the various opinions supporting the notice discussed the burden shifting aspect of the Court’s jurisprudence with respect to poorly drafted notices. The judges in the dissent noted the many ways a bad notice can still constitute a valid notice but reached a tipping point with a notice that on its face said that the taxpayer had a $.00 deficiency. I cannot do a great job of distilling all of the arguments presented in the five separate opinions in a blog post but I will try to briefly describe the points made by each opinion.

“Majority” Opinion

Judge Buch’s opinion follows a long line of Tax Court opinions holding that various problems with the Notice of Deficiency do not invalidate the notice. In this regard, the opinion here represents just another small step in a 90-year march to save notices whenever possible while imposing other consequences on the IRS for the failures in its notice. In order to save this notice, Judge Buch looks at the notice as a whole and does not stop on the first page of the notice where the notice states quite clearly that it finds no deficiency. Judge Buch, as the Court has done in many prior opinions, goes into the back pages of the notice to figure out that the IRS really did find something wrong with the taxpayer’s return and that what it found wrong really did result in a deficiency in the taxes reported on the return. This opinion finds that in making the determination to validate a notice a Court looks at both objective and subjective facts. The objective facts include the “package” of the notice as a whole. When read together what does the IRS really say? Here, it found, as is common in the opinions reviewing the validity of notices, that when considered as a whole, the notice made sufficiently clear that the IRS did find the taxpayer had claimed a refundable credit he should not have claimed, the IRS intended to disallow that claim, and that in disallowing that claim the tax result created a liability that meets the definition of deficiency. Judge Buch’s opinion goes on to look at the subjective effect of the notice in order to determine its validity. Here, he found that not only did the notice as a whole evince a deficiency determination but the taxpayer realized what the IRS intended to say even though the IRS drafted an inartful notice. Because this notice met both prongs of the test for a valid notice, Judge Buch and six other judges determined that this notice conferred jurisdiction on the Tax Court.

Concurring Opinions

Chief Judge Marvel agrees with Judge Buch’s opinion to the extent that it discusses the objective test to determine the validity of the notice including the use of material outside the notice itself, but she balks at the second prong. She finds the subjective intent of the taxpayer regarding the notice inappropriate. Those references draw on dicta in earlier opinions and the Court should not elevate “those references into a test that has no place in resolving the real jurisdictional issue – whether the Commissioner in the notice of deficiency made a determination with respect to the taxpayer that confers jurisdiction on this Court.”

Judge Ashford writes alone but also writes the longest of the opinions. At the risk of distilling her argument too far, she seems to say that the title of the document is what really matters. If the IRS sends a letter entitled Notice of Deficiency, the IRS has sent a Notice of Deficiency and the rest of the discussion concerns other issues. She looks hard at the relevant statutes more than prior law. She too disagrees with Judge Buch’s opinion concerning the importance of the taxpayer’s subjective intent. On this point she writes that “we will never find that we lack jurisdiction under it, because we will never be faced with a case in which a taxpayer has not filed a petition.” While it is true that the Tax Court will never be faced with a case in which the taxpayer has not filed a petition, it may be faced with a case in which the taxpayer files a petition long after the 90 days passes and after the statute of limitations on assessment passes in which the taxpayers argues that a timely petition was not filed because the taxpayer did not believe that the document entitled Notice of Deficiency that said the taxpayer owed $.00 was really a Notice of Deficiency. In such a case, the Tax Court would face the intent issue under the view of the Buch opinion.

Dissents

Judge Foley and the other six judges joining in the dissent choke on the notion that a Notice of Deficiency can exist where the notice says $.00 on its face because the notice “does not fairly advise the taxpayer that the Commissioner has, in fact, determined a deficiency and … specify the year and amount.” His opinion points out that the existence of a deficiency represents the most fundamental requirement of a Notice of Deficiency. His opinion finds that “only taxpayers with counsel at the ready and pro se taxpayers with extrasensory perception will be able to divine the meaning of these misleading missives.” Because the Notice of Deficiency is designed to satisfy certain fundamental rights and because a notice that on its face says that the taxpayer owes nothing seems not to satisfy those rights, it is hard to argue with the concerns expressed by the dissent. The dissent is short and does not spend much time with prior precedent because it seems to view that the line crossed here is not one that can be patched up by flipping through the back pages of the notice or relying on the taxpayer understanding the true meaning of what the IRS intended. I interpret the bottom line of this opinion as saying that even though the Tax Court has a long history of precedent looking at the back pages of the Notice of Deficiency to ascertain what it really means or looking at other documents, as Chief Judge Marvel points out, that precedent does not support crossing the line to uphold a notice which on its face says the taxpayer owes $.00. Once the notice says that, it does not warrant further inquiry but simply fails to satisfy a necessary condition.

Judge Gustafson writes a separate dissent in which all of the judges joining in Judge Foley’s dissent also join except for Judge Gale. Judge Gustafson further articulates the importance of putting the $.00 amount on the face of the Notice of Deficiency. He points out that the notice twice states that the deficiency is $.00. “A notice that reports such a zero is not a notice of a deficiency; it is a notice of no deficiency.” (emphasis in original) He looks to the requirement that the IRS mail a Notice of Deficiency. Here it mailed a notice of disallowance and of no deficiency. This meant that the notice lacked a statutory predicate and the Court should dismiss the case.

Conclusion

The Tax Court bends over backwards to determine it has jurisdiction when a taxpayer files something within the time frame set out by the relevant statute – usually 90 days. It treats many types of documents filed by petitioners as petitions, or imperfect petitions, allowing taxpayers to perfect their filing as long as the original document arrives at the Court on time. As pointed out by all of the prior opinions cited in Judge Buch’s opinion, the Court has similarly bent over backwards as it determines jurisdiction when a taxpayer timely files a petition in response to a Notice of Deficiency containing defects by allowing the IRS to repair the damage caused by the inadequacy of its notice.

The Dees case presents a factual situation the Court had not previously faced – a notice that literally says no deficiency exists but which when you dig deeper shows that the IRS really did mean to say a deficiency did exist. The majority views the poorly drafted notice as just one more example of a notice that requires peeking behind the first page and they have plenty of case support for that view. The dissent says there must be some line over which the IRS cannot cross and still have a valid notice and that this notice crosses that line. Because I do not have to vote, I will stop there except to say that to the extent the majority is correct, I think the concurring opinion of Chief Judge Marvel places a reasonable limit on the inquiry to which the Court should go in making its determination. It seems tough enough to determine what the IRS means with the written notice without having to try to figure out what the taxpayer thought the IRS meant and how that matters for purposes of granting the Court jurisdiction.

Podiatrist Has to Foot The Tax Bill: No Settlement and No Basis

A case earlier this week in Tax Court, Namen v Commissioner, presents two issues worthy of highlighting: one concerns when a settlement becomes binding, and the other concerns the taxpayer/podiatrist’s efforts to prove up his basis relating to his interest in an LLC that ran a surgery center.

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First on the settlement issue. The taxpayer’s lawyer argued on brief that he had accepted an IRS offer to settle the case that IRS counsel made after trial.

Counsel for the government disagreed:

[IRS counsel] states in her answering brief that she “made an oral offer of settlement to…[taxpayer’s counsel] based on the parties not writing briefs in this case, as well as on petitioner’s spouse’s consent to the assessment of tax and additions to tax against her.”

According to IRS counsel, taxpayer’s counsel “did not call to accept the offer until the day that briefs were due and after she had already filed her opening brief.” As a result, she claimed that by filing the brief she revoked her offer.

The opinion agreed with the IRS. It did so by first noting that a settlement is a contract subject to general principles of contract law. Citing Dorchester Industries v Commissioner the opinion notes that “contract requires ‘an objective manifestation of mutual assent to its essential terms’, and mutual assent is typically established through an offer and an acceptance.” Keith wrote a three part series on this issue last year, which you can read here, here and here.

A main issue in the case was there was no evidence in the record that would allow the court to find objective manifestation of mutual assent. The taxpayer’s counsel made his argument that the case was settled only on brief, and there was no evidence in the record “apart from the unsworn statements of counsel.” Unfortunately, counsel for the taxpayer did not move to reopen the record, though the opinion notes that counsel for the government failed to move to strike. Even without evidence in the record (and I guess accepting at face value the unsworn allegations), the opinion notes that the parties’ briefs failed to spell out the terms of the alleged settlement. As such, there was not enough for the court to find that the evidence before it proved that the parties’ counsel agreed on a settlement.

The merits issue essentially turned on the podiatrist’s inability to establish his basis in the LLC. The LLC was taxed as a partnership, and the podiatrist attempted to establish that he had a basis in the interest in the LLC to allow him to deduct the distributive share of the LLC’s losses. Losses are allowed to the extent of a member’s basis in the LLC; losses in excess of the basis can be carried forward. Basis can be established by contributions and are increased by the partner’s distributive share of partnership income, and decreased by all cash distributions and the partner’s distributive share of partnership losses. The taxpayer argued as well that he was personally liable for a share of loans that were made to the LLC; that is another way to juice basis in an LLC treated as a partnership.

As with the first issue, the taxpayer lost in part because the record did not support his allegations:

However, no corroborating documents supporting his testimony were admitted into the record. Petitioner also failed to provide any credible testimony or other evidence regarding the amount of his distributive share of partnership losses and the extent of any prior adjustments to his basis. Under these circumstances, we find petitioner’s generally uncorroborated testimony inadequate to establish his basis in RMSC; we also find his testimony inadequate to establish the extent to which he is entitled to a distributive share of any losses.

Parting Thoughts

Facts at trial are key. The record that counsel makes is crucial. If the facts exist outside the record the court will generally not be able to consider those facts in resolving the dispute. Counsel must carefully consider when it wishes to bring facts to the attention of the court and pay attention carefully to evidence beyond testimony, especially when one would expect there to exist corroborating documentation that could have perhaps surfaced. Testimonial evidence can win an issue. For certain issues the court knows that limited, or no, written evidence may exist. The residence test for dependency exemption provides a common example of a situation in which little or no direct evidence often exists. With an issue where the absence of written evidence is common, the court readily accepts testimonial evidence after weighing the credibility of the testimony. By contrast, with issues in which one would expect documentary evidence, testimonial evidence often carries little weight because the absence of the documents itself undercuts the credibility of the testimony. There is an old case the Tax Court sometimes cites in these situations (Wichita Terminal Elevator Co. v Commissioner) which holds that where a party has the ability to bring forward evidence and it does not the failure to bring forward the evidence creates a presumption that the evidence would be unfavorable.

When dealing with settlements, it is important to put offers and acceptances in writing. As Keith discussed in the prior posts dealing with settlements, holding the government to a settlement that did not involve a statement in open court is very difficult. The failure here to accept the settlement prior to the preparation of the briefs may itself prove fatal to the settlement because of the argument that timing was a condition of the settlement but even without that fact the proof here lacked the kind of proof that has formed the basis of binding settlements in earlier cases with this issue. If you want to bind the government, get the offer in writing and, if possible, get the terms before the Court in a manner that implicates the Court’s schedule. Remember that in addition to other considerations you face an argument that the attorney in the case did not have authority to settle the case without the permission of a manager. Here there was no proof of managerial consent to the settlement offer and that might have proved fatal had the issue moved further. The case also lacked the element of reliance. Petitioner showed little or no harm in reliance on the alleged settlement and no action taken in reliance.

A New Small Claims Court

On June 24, 2016, the GOP published “A Better Way – Our Vision for a Confident America” which sets out its vision of a new improved tax system for the United States.  Now that the GOP controls the levers of power, the blueprint it published last summer has more significance in the national debate.   If you have take time to read proposed legislation, which I do not often do, the document is a pretty quick read and has some nice pictures.  Even though PT does not devote much time to proposed legislation, the blueprint contains a curious but little defined provision concerning tax litigation.  I want to talk about that aspect of the blueprint because Congress already created a system designed to handle small cases almost 50 years ago and I wonder what causes Congress to want to fix that system.

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When the blueprint gets to tax administration, it proposes the following:

A New IRS for the 21st Century

A New Tax Administrator for a New Tax Code

An integral element of this Blueprint will be to rebuild the IRS into a modern and efficient 21st century administrator of the nation’s tax system. The new IRS will have a streamlined structure aligned with the simpler and fairer tax system for families and individuals and businesses of all sizes.

Streamlined Taxpayer Service Agency

With a dramatically simpler tax code, the Blueprint will create a new streamlined IRS dedicated to delivering world-class customer service. The new IRS will be centered on three major units: families and individuals, businesses, and an independent “small claims court” unit.

  • The families and individuals unit will focus on providing state of the art customer service so that taxpayers can get efficient help and answers to their tax questions.
  • The business unit will focus on administering the new tax code for businesses of all sizes and types, including specialists with expertise on the issues facing start-up entrepreneurs and small businesses and specialists with expertise on the issues facing large domestic companies and American-based global corporations.
  • The “small claims court” unit will be independent of the new IRS. This will allow routine disputes to be resolved more quickly, so that small businesses no longer spend more in legal fees to resolve a dispute with the IRS than the amount of tax that was at stake.

Together, these three units will be the core of the new IRS’s commitment to Service First. Each will have an efficient and accountable workforce specially trained to handle matters relevant to taxpayers in their particular area of responsibility. And each of these units will have access to a modern taxpayer records system and internal communications that are secure and comply with record-retention requirements.

Making small claims court one of three units of the IRS is astonishing to me as a reorganizational concept.  While it is described in one place as one of the units of the IRS, it is then described as independent of the IRS.  The clarifying description makes it sound something like the Tax Court which has a small tax case procedure created by IRC §7463.  So, I am left wondering what is new and why the GOP thinks that a new procedure for resolving small claims is so important that it makes it into a grouping of only three units in the reorganization of the IRS.

The Tax Court was, for almost the first 50 years of its existence, more like an independent part of the IRS than a separate court.  It was housed for much of that time in the IRS national office.  I had the good fortune during a small part of my tenure with Chief Counsel’s office to occupy the former office of the Chief Judge of the Tax Court.  The office is a corner office in the national headquarters building of the IRS at 1111 Constitution Avenue and the office is located directly below the office of the IRS Commissioner.  Like the Commissioner’s office, it came with its own private bathroom.  It was a nice office for a government attorney.  When Congress made the Tax Court an Article I court in 1969, it appropriated funds for the court to have its own space which it does now in the Judiciary Square section of Washington.

So, in 1969 Congress made the Tax Court truly independent of the IRS and it created a procedure for small claims cases.  For a greater discussion of the background of the changes in 1969 you can read “The History of the Tax Court – An Historical Analysis” (available for purchase here or can be viewed online here) by Washington and Lee Law School Dean Brant Hellwig. What then makes the GOP so unhappy about the small claims provisions that it lists this as a third prong of the tax reorganization process?  The blueprint offers only a few clues.  It talks about allowing routine disputes to be resolved more quickly.  While wanting more speed in the resolution process is a good thing, it is not something that most of my clients complain to me about.  I see two relatively cheap and easy ways in the current model to achieve more speed in the resolution of small tax cases.  One is to require Appeals to meet with the taxpayer shortly after the case is at issue.  Currently, Appeals may take several months before it gets to a docketed case.  During that time, some taxpayers who were gung ho about their case at the time of filing the petition seem to lose interest.  For that reason, I would like to see Appeals involved much quicker  For the purpose of achieving the goal of the blueprint early meetings would mean, in many cases, early resolution.   Currently, the vast majority of Tax Court cases settle and settle with Appeals.  Getting the taxpayer to meet with the Appeals Officer quickly after the case is filed would speed up resolution.  To achieve this goal, Appeals may need additional resources and it may benefit from a legislative mandate to quickly meet with the taxpayer after the case is at issue.  This would be the single biggest way to speed outcomes in the current system.

A second way to speed resolution of small cases is to expand the use of bench opinions.  I have written about bench opinions before and guest blogger Andy Grewal has written about them also.  Many small cases involve issues that the judge can decide almost immediately if the judge has time.  The current system in the Tax Court requires that the judge issue the bench opinion before the calendar session ends during which the case is heard.  Tax Court judges usually like to end the sessions as quickly as possible since that allows them to return home and saves the government money on travel expenses.  Changing the Tax Court rules to allow bench opinions during a short period of time after the end of the calendar would allow the judge to render a bench opinion without having to prolong the calendar in the city where it is heard and give the judge the benefit of working side by side with their clerk in drafting the opinion.  This would make bench opinions more normal, rather than opinions that occur only when a calendar is prolonged and the judge is able to make time without a trial in the city of the calendar.  This could reduce the time of the decision in small cases from several months to several days or a few weeks in the cases susceptible to bench opinions.  In her remarks at a recent ABA conference, Special Trial Judge Leyden expressed a desire to use bench opinions to the fullest extent possible for the very purpose of giving the taxpayer a quick answer after trial.  Because this can occur without a change in the existing statute, IRC §7459, which does not limit the time for issuing bench opinions, it is a relatively easy fix, although undoubtedly involves other considerations within the Court regarding its practices.  Bench opinions do have the ability to detract from the uniformity of decisions the Tax Court was created to promote.

In creating the small claims court, the GOP blueprint also expressed concern that it was needed “so that small businesses no longer spend more in legal fees to resolve a dispute with the IRS than the amount of tax that was at stake.”  Small businesses can use the existing small tax case procedure of the Tax Court when their tax dispute is less than $50,000 for a tax period.  They can do so unrepresented, as do 70% of the litigants at present.  Nothing really keeps them from moving forward under the present system without hiring a representative, but the small business will face the same problems under the present system or a new system of winning the case, or achieving the best outcome, without representation.  Unless Congress is proposing to expand low income taxpayer clinics (LITCs) to allow them to represent businesses, small businesses with tax disputes making it uneconomical to hire a representative will still go before whatever body resolves the case either unrepresented or pay more for the representation than the amount in dispute.  Currently, IRC §7526 limits LITCs to representation of individuals.  I am not campaigning for an expansion of LITC scope into coverage of certain business entities, but providing some form of congressionally supported representation is the only way to solve the problem for small businesses whose tax issue does not involve enough liability to justify hiring a professional.    These taxpayers get a fair hearing before the Tax Court at present.  It is hard to imagine a new tribunal that would improve the fairness of the hearing and I know of no way to resolve the fee issue without providing this group with some sort of free or subsidized representation similar to the representation currently available to low income taxpayers.

It is interesting that the blueprint focuses on small tax cases as such a big part of the administrative fix of the system.  The current system could be changed to speed the process in the ways I described and other ways such as sending out the Tax Court judges more often, which would require more judges.  I am surprised that this was identified as such a big problem and will follow with interest how it is resolved.

Tilden v. Comm’r: Seventh Circuit Reverses Tax Court’s Untimely Mailing Ruling

Frequent guest blogger Carl Smith provides a detailed analysis of Friday’s 7th Circuit opinion in the Tilden case.  The opinion discusses two issues: 1) whether the time to file a petition in Tax Court in a deficiency case is jurisdictional and 2) the proper application of the timely mailing regulations.  Carl analyzes both issues in the case.  Keith

I have blogged on this case four times before here, here, here and here.  In my last post, I said I was grabbing a bowl of popcorn to watch how the Seventh Circuit ruled in the appeal of Tilden v. Commissioner, T.C. Memo. 2015-188. In an opinion issued on January 13, the Seventh Circuit again changed course – abandoning the argument two judges on the panel had raised sua sponte at oral argument – that the time period to file a Tax Court deficiency petition might no longer be jurisdictional under current non-tax Supreme Court case law on jurisdiction.  Instead, the court (following decades of Tax Court and Circuit court precedent) continued to hold that the time period to file a deficiency petition is a jurisdictional requirement.

However, the Seventh Circuit reversed the Tax Court’s holding that the envelope containing the petition was not entitled to the benefit of the timely-mailing-is-timely-filing rules of the regulations under section 7502.  In the case, the Tax Court had held that USPS tracking data showed the envelope placed in the mail beyond the last date to file.  The Seventh Circuit criticized the usage of tracking data as evidence of the date of mailing.  Rather, the Circuit court held that the petition had been timely filed under the private postmark provision of the regulations, not a different provision of the regulations on which the Tax Court had relied.

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Tilden Facts

Tilden is a deficiency case.  The envelope containing the petition bore a private postage label from stamps.com, dated the 90th day.  Apparently, the envelope was placed in the mail by an employee of counsel for the taxpayer, and that employee also affixed to the envelope a Form 3800 certified mail receipt (the white form), on which the employee also handwrote the date that was the 90th day.  The Form 3800 did not bear a stamp from a USPS employee.  Nor did the USPS ever affix a postmark to the envelope.

The envelope arrived at the Tax Court from the USPS.  The USPS had handled the envelope as certified mail.  That meant that the USPS internally tracked the envelope under its “Tracking” service.  Plugging the 20-digit number from the Form 3800 into the USPS website yielded Tracking data showing that the envelope was first recorded in the USPS system on the 92nd day.  The envelope arrived at the Tax Court on the 98th day.

In Tilden, the IRS moved to dismiss the case based on the ground that the USPS Tracking data showed the petition was mailed on the 92nd day.

In his objection, the taxpayer disagreed, arguing that this was a situation covered by Reg. 301.7502-1(c)(1)(iii)(B)(1).  That regulation states:

(B) Postmark made by other than U.S. Postal Service.–(1) In general.–If the postmark on the envelope is made other than by the U.S. Postal Service–

(i) The postmark so made must bear a legible date on or before the last date, or the last day of the period, prescribed for filing the document or making the payment; and

(ii) The document or payment must be received by the agency, officer, or office with which it is required to be filed not later than the time when a document or payment contained in an envelope that is properly addressed, mailed, and sent by the same class of mail would ordinarily be received if it were postmarked at the same point of origin by the U.S. Postal Service on the last date, or the last day of the period, prescribed for filing the document or mailing the payment.

The taxpayer argued that the stamps.com mailing label, combined with the Form 3800, was a “postmark” not made by the USPS that legibly showed a date that was the 90th day and that the 8-day period between the 90th day and receipt by the Tax Court was when mail of such class would “ordinarily be received”.  Thus, under the regulation, the petition was timely filed.

In responding to the objection, the IRS changed position and now argued that the taxpayer had the wrong portion of the regulation, and that the relevant portion of the regulation was actually Reg. 301.7502-1(c)(1)(iii)(B)(2), which provides:

(2) Document or payment received late.–If a document or payment described in paragraph (c)(1)(iii)(B)(1) is received after the time when a document or payment so mailed and so postmarked by the U.S. Postal Service would ordinarily be received, the document or payment is treated as having been received at the time when a document or payment so mailed and so postmarked would ordinarily be received if the person who is required to file the document or make the payment establishes–

(i) That it was actually deposited in the U.S. mail before the last collection of mail from the place of deposit that was postmarked (except for the metered mail) by the U.S. Postal Service on or before the last date, or the last day of the period, prescribed for filing the document or making the payment;

(ii) That the delay in receiving the document or payment was due to a delay in the transmission of the U.S. mail; and

(iii) The cause of the delay.

The IRS argued that the petition had arrived beyond the time it would “ordinarily be received”, triggering the taxpayer’s obligation to prove the three conditions of the relevant portion of the regulation – none of which had been proved.

Tilden Tax Court Ruling 

In his opinion, Judge Armen held that both parties had relied on the wrong portions of the regulation.  He believed the relevant portions of the regulation were found at:

(1) Reg. 301.7502-1(c)(1)(iii)(B)(2), which provides:

(3) U.S. and non-U.S. postmarks.–If the envelope has a postmark made by the U.S. Postal Service in addition to a postmark not so made, the postmark that was not made by the U.S. Postal Service is disregarded, and whether the envelope was mailed in accordance with this paragraph (c)(1)(iii)(B) will be determined solely by applying the rule of paragraph (c)(1)(iii)(A) of this section; and

(2) Reg. 301.7502-1(c)(1)(iii)(A), which provides:

If the postmark does not bear a date on or before the last date, or the last day of the period, prescribed for filing the document or making the payment, the document or payment is considered not to be timely filed or paid, regardless of when the document or payment is deposited in the mail.

Judge Armen admitted that no postmark from the USPS actually appeared on the envelope, but he cited his opinion in Boultbee v. Commissioner, T.C. Memo. 2011-11.  In Boultbee, a deficiency petition was mailed from Canada, but bore no timely postmark from the USPS (only a timely postmark from the Canadian mail service).  Still, the USPS Tracking information showed that the envelope entered the USPS mail stream before the end of the filing period.  The judge held that such tracking information could serve as a postmark of the USPS, making the petition timely mailed.

Relying on Boultbee, he held in Tilden that the envelope was deemed to bear a USPS postmark as of the tracking information date.  Then, relying on the portion of the regulation dealing with a situation where there is both a USPS postmark and a private postmark, he said the USPS postmark (the tracking information date) governed, so the petition was untimely.

Tilden Motion for Reconsideration 

In a motion for reconsideration filed by the taxpayer, the taxpayer, among other things, argued for applying the common law mailbox rule.  The taxpayer reported that the IRS told him that the IRS objected to the granting of the motion for reconsideration.

But, when the IRS actually filed a response to the motion, the IRS changed position again and now did not object to the granting of the motion.  The IRS noted that section 7502 has been held to supersede the common law mailbox rule in most Circuits (with one exception not relevant to this case).  And, in any case, the common law mailbox rule couldn’t apply here where there was actual delivery – and delivery was on a date after the due date.  You still needed section 7502 to make the late envelope timely.

But, the IRS now took the position that the envelope had been received at the limit of, but still within, the time in which the envelope would be expected to “ordinarily be received” if mailed on the 90th day from Utah, where the taxpayer’s attorney’s office was.  In part, the IRS concession was based on the delay to be expected because (as many people forget), since the 2001 anthrax in the mail scare, all mail to the Tax Court gets irradiated.  Thus, the IRS conceded that the taxpayer’s petition was timely under the portion of the regulation on which the taxpayer relied, Reg. 301.7502-1(c)(1)(iii)(B)(1).  The IRS, without mentioning Boultbee, simply told the court that the court had relied on the wrong provisions of the regulation, since there was no actual USPS postmark in this case, just tracking data.

Somewhat incensed that neither party responded to Boultbee — the lynchpin of his prior ruling in Tilden —  Judge Armen denied the motion for reconsideration, telling the parties the truism that the court’s jurisdiction may not be conferred by mere concession by the parties.

Seventh Circuit Oral Argument

At the oral argument in the Seventh Circuit, two judges on the panel, sua sponte, raised a different issue:  Whether the time period in section 6213(a) to file a deficiency petition is still a jurisdictional requirement in light of non-tax Supreme Court case law since 2004 that generally excludes compliance with filing periods from jurisdictional status, unless (1) there is a “clear statement” that Congress wants the particular time period to be jurisdictional or (2) for decades, the Supreme Court in prior rulings has held the particular time period jurisdictional (stare decisis).  Anyone listening to the oral argument (posted on the Seventh Circuit’s website) would tell you that the court was leaning toward holding the time period not jurisdictional and that the IRS had now waived any complaint in the case that the time period (now a mere statute of limitations) had been violated.

But, unbidden, after the oral argument, the parties filed supplemental briefs on this question, with the parties taking opposite views on whether the deficiency filing period is jurisdictional.

Seventh Circuit Holding

Apparently, the panel had second thoughts about what it raised sua sponte.  Instead, it held that the time period in section 6213(a)’s first sentence was a jurisdictional requirement.  After acknowledging that case law cited to it from prior Circuit opinions, including itself, had not discussed the applicability of the current Supreme Court case law on jurisdiction to the Tax Court deficiency filing period, the Seventh Circuit, found three reasons to support its holding:

First, the court implicitly looked to the “clear statement” exception, finding a “magic word” (Slip op. at 5):  There was a reference to “jurisdiction” in a later sentence in section 6213(a) limiting the Tax Court’s power to issue injunctions against premature assessment or collection of the deficiency to when “a timely petition . . . has been filed”.  The Seventh Circuit wrote:  “Tilden does not want either an injunction or a refund; he has yet to pay the assessed deficiencies. But it would be very hard to read §6213(a) as a whole to distinguish these remedies from others, such as ordering the Commissioner to redetermine the deficiency (sic).” Id.  (Comment:  What does the injunctive provision have to do with the first sentence?  Where is the “clear statement” that the first sentence filing period is jurisdictional?  Moreover, “timely” in the injunctive jurisdiction sentence obviously includes filings deemed timely by other Code provisions such as section 7502, 7508 (combat zone extensions), and 7508A (disaster area extensions), so “timely” doesn’t show Congress wanting the 90-day period in the first sentence of section 6213(a) to be rigidly applied.)

Second, the court noted the pre-2004 longstanding holdings of the Tax Court and many Circuits that the time period was jurisdictional (i.e., stare decisis).  “We think that it would be imprudent to reject that body of precedent, which (given John R. Sand & Gravel) places the Tax Court and the Court of Federal Claims, two Article I tribunals, on an equal footing.”  (Slip op. at 6)  In John R. Sand & Gravel Co. v. United States, 552 U.S. 130 (2008), the Supreme Court had held that, purely on a stare decisis basis, it would not follow its current rules on what is jurisdictional because for over 100 years (in multiple opinions), the Court had held the 6-year time period to file a Court of Federal Claims petition under the Tucker Act (28 U.S.C. section 2501) is jurisdictional.  (Comment:  But, in Henderson v. Shinseki, 562 U.S. 428 (2011), the Supreme Court held that the filing period in the Article I Court of Appeals for Veterans Claims is not jurisdictional.  And, for tax cases, the relevant comparable time period to file a refund suit in the Court of Federal Claims is not 28 U.S.C. section 2501, but I.R.C. section 6532(a); Detroit Trust Co. v. United States, 131 Ct. Cl. 223 (1955); on which the Supreme Court has never made a jurisdictional ruling.  Moreover, the stare decisis exception to the current Supreme Court case law is to a long line of Supreme Court precedents on the particular time period, not to precedents of lower courts, on which the Seventh Circuit was relying.)

Third, the Seventh Circuit accepted the conclusion of the Tax Court that the section 6213(a) time period was jurisdictional in the Tax Court’s recent opinion in Guralnik v. Commissioner, 146 T.C. No. 15 (June 2, 2016), which held that the CDP petition filing period under section 6330(d)(1) is jurisdictional in part because of the Tax Court’s reliance on its precedents that all filing periods in the Tax Court are jurisdictional.  (Comment:  This is pretty circular.  Is this even a separate reason, or just a restatement of the previous stare decisis ground?)

As to the section 7502 issues, the Seventh Circuit said the Tax Court had relied on the wrong provisions of the regulation.  The right provision was the one relied on by the taxpayer and, eventually, the IRS – the rules for private postmarks where there is no USPS postmark.  The Seventh Circuit did not consider tracking data to be a USPS postmark, writing, as well:

“For what it may be worth, we also doubt the Tax Court’s belief that the date an envelope enters the Postal Service’s tracking system is a sure indicator of the date the envelope was placed in the mail. The Postal Service does not say that it enters an item into its tracking system as soon as that item is received . . . .” (Slip op. at 7)

The Seventh Circuit acknowledged that parties are not allowed to collude to give a court jurisdiction that it doesn’t otherwise have, but the appellate court held that there was no apparent collusion in this case, and the Tax Court was bound to accept the IRS’ factual concession (after the motion for reconsideration) that the envelope had been placed timely in the mails (a factual concession that had no evidentiary support, by the way).  (Comment:  This holding is going to shock a lot of Tax Court judges.)

Finally, the Seventh Circuit excoriated the lawyers who failed to put a proper postmark on the envelope:  “Stoel Rives was taking an unnecessary risk with Tilden’s money (and its own, in the malpractice claim sure to follow if we had agreed with the Tax Court) by waiting until the last day and then not getting an official postmark or using a delivery service.”  (Slip op. at 8)

Additional Observations             

The Seventh Circuit’s ruling in Tilden certainly doesn’t help the argument that Keith and I are pursuing in the Circuit courts that the time periods in which to file CDP and innocent spouse petitions in the Tax Court are not jurisdictional.  However, a stare decisis argument is harder as to those two filing periods:  There is only one published opinion of a Circuit court holding that the CDP filing period is jurisdictional (and it did not mention the recent Supreme Court case law on jurisdiction) and there are no opinions of any Circuit courts on whether the innocent spouse filing period is jurisdictional.  Keith and I are not giving up.

Without citing Boultbee, the Seventh Circuit casts doubt on Boutlbee’s reliance on USPS tracking data – at least for purposes of finding the Tax Court lacked jurisdiction.  This alone is a major event.

As pointed out in my prior posts, there are a number of cases in the Tax Court where the proceedings have been stayed pending the Seventh Circuit’s ruling in Tilden.  We can expect some of them to generate opinions soon, including possibly a Tax Court court conference opinion discussing whether or not the Tax Court now agrees with the Seventh Circuit as to which regulation provisions govern and how relevant USPS tracking information is.  Ironically, one of the cases awaiting this ruling is factually identical to Tilden and apparently involves the same law firm making the same postmark mistake (though that case would be appealable to the Eighth Circuit).

Finally, a National Office attorney informed me last month that there is a “reverse Tilden case” pending in the Tax Court – i.e., one where the postmark is untimely (not sure if it is USPS or not), but the tracking data shows the envelope in the USPS mail stream before the end of the filing period.  There’s always something . . . .