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 . . . .

Tax Exceptionalism Lives? QinetiQ v. CIR

We welcome back guest blogger Bryan Camp who is the George H. Mahon Professor of Law at Texas Tech.  Professor Camp teaches both tax and administrative law which is why I sought him out for this guest post.  The decision here is important.  The lead attorney for the taxpayer, Jerry Kafka, is one of the best if not the best tax litigators in the country.  Though his client lost this case the arguments made here were not frivolous.  What could have been a game changer had the taxpayer won leaves us in the same posture we were in before the case was brought but with more light shone into the corners of tax and the APA.  Keith

Keith emailed me last week and asked if I would care to blog about a recent 4th Cir. opinion affirming a Tax Court decision that upheld a proposed deficiency in the taxes of QinetiQ US Holdings (Q).  (for previous PT posts on QinetiQ see here, here and here).It seems that Q took a big §83(h) deduction.  On audit, the Service disallowed the deduction and sent Q a Notice of Deficiency (NOD).  In court, Q argued that the NOD violated the Administrative Procedure Act (APA) because the NOD gave no explanation for the disallowance and, oh, by the way, the §83 deduction was proper.  The Tax Court rejected both arguments.  The 4th Cir. affirmed.

Maybe the §83 issue is interesting.  If so, I’m sure the Surly Subgroup will blog it.  To me, however, what makes this 4th Cir. opinion worthy of a shout out is its discussion about the relationship of the Administrative Procedure Act (APA) to tax procedure.  Ever since the Supremes decided Mayo Foundation in 2011, it seems everybody and their little dogs have been declaring that something called “tax exceptionalism” is dead.  The Fourth Circuit’s opinion gives a more nuanced take, one that is worth blogging about for three reasons.  First, it represents a new front on the “tax exceptionalism” debate.  Second, the Circuit’s opinion makes a critically important point about the relationship of the APA to tax procedure.  Third the opinion could affect court review of other types of IRS determinations, such as CDP determinations.

I will consider each of these points in turn.

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  1. A New Front on Tax Exceptionalism Debate

QinectiQ represents a new front in the ongoing debate over the proper relationship of the APA to tax practice and procedure.  Up to now, the debate has been chiefly about tax regulations and tax guidance.  That’s the Mayo case and other cases where taxpayers have sought to challenge the procedure by which Treasury and the IRS have issued regulatory and similar guidance.  This case involves the proper application of the APA to a very different type of agency action: an agency determination.  The APA has some general standards that courts are supposed to use in reviewing agency determinations in particular cases, also known as “agency adjudications.”

Professor Steve Johnson at Florida State has written extensively and lucidly about the tax exceptionalism debate.  In this short Florida Bar Review article from 2014 he encouraged tax practitioners to consider challenging NOD’s under an APA standard.  Apparently the lawyers for Q read his article!

The APA is found at 5 U.S.C. Subchapter II.   Section 706 says that courts should review agency adjudications to be sure they were not made arbitrarily.  To do that, the court needs to see what the agency’s rationale was for its decision.  So over time the Supreme Court has developed the requirement that “an agency provide reasoned explanation for its action.” FCC v. Fox Television, 556 U.S. 502, 515 (2009).

In QinectiQ, the taxpayer argued that the NOD failed the APA §706 standard.  The NOD said only that Q had additional taxable income of “$177,777,501” because Q had “not established that [it was] entitled” to a deduction “under the provisions of [26 U.S.C. §83].” The NOD gave zero explanation for why the Service was disallowing the deduction.  The failure to articulate a rational explanation for its disallowance decision meant that a review court had no way to police the NOD for arbitrariness.

In a short unpublished order, the Tax Court refused to apply the APA standard and held that the NOD was instead subject to the standard provided for in §7522(a). The taxpayer’s argument to the Fourth Circuit was essentially that §7522 and the APA standards were cumulative, not exclusive.

The Fourth Circuit affirmed the Tax Court.  It believed the taxpayer’s attempt to apply the APA standard “fails to consider the unique system of judicial review provided by the Internal Revenue Code for adjudication of the merits of a Notice of Deficiency.” (p. 9 of slip opinion).

The Fourth Circuit thought two features of tax administration made the APA standard inapplicable.  First, “because the Code’s provisions for de novo review in the tax court permit consideration of new evidence and new issues not presented at the agency level, those provisions are incompatible with the limited judicial review of final agency actions allowed under the APA.” (p. 10-11 of slip opinion).  Second, the Tax Code’s provisions for judicial review of NOD’s pre-dated the APA.  “Congress did not intend for the APA ‘to duplicate the previously established special statutory procedures relating to specific agencies.’” (p. 12 of slip opinion, quoting Bowen v. Massachusetts, 487 U.S. 879, 903 (1988)).

The Fourth Circuit’s consideration of these two features of tax administration is the more nuanced understanding that I think is worth commenting on.

  1. The Proper Relationship of the APA to Tax Administration

The nuance is this: the APA is not sui generis.  That is, the APA was enacted on top of existing agency practices and procedures.  One simply cannot pretend that the APA was enacted in a vacuum!  That’s the point I try to make about tax regulations in my article “A History of Tax Regulation Prior the Administrative Procedure Act,” 63 Duke L. J. 1673 (2014)

The APA was enacted on the basis of a massive, massive, study of federal agencies and their operations undertaken by the Attorney General’s Committee on Administrative Law (“the Committee”).  The Committee’s Final Report is generally believed to be the most important influence on the text and application of the APA.

The Final Report grew out of a detailed study of then-existing agencies, a study contained in 27 Monographs written by staff, each running hundreds of pages.  (Monograph 22 focused on the tax administration).  At its inception, the Committee “had initially hoped to be able to suggest uniform rules for agency practice” (quote from Grisinger Law in Action: The Attorney General’s Committee on Administrative Procedure, 20 J. of Policy History 379 (2008)).  In light of the information produced in the 27 monographs, however, the Final Report backed away considerably from that aspiration and instead prescribed a general framework for balancing the goals of agency efficiency and autonomy with the goals of agency transparency and protection of individuals from arbitrary agency actions. That is why the resulting APA was widely understood as standing for the proposition that “procedural uniformity was not well suited to the administrative process.” (Grisinger at 402; one sees the same theme in almost all the contemporary commentaries and reviews of the Final Report).  That is, the APA provided generalized standards for controlling administrative actions rather than detailed prescriptions. This conventional view is elegantly summed up by Professors Hickman and Pierce: “the Administrative Procedure Act is to administrative law what the Constitution is to constitutional law.” Kristin E. Hickman, Richard J. Pierce, Jr., Federal Administrative Law:  Cases and Materials, (Foundation Press, 2010) at 19.

What this means is that while the APA does apply to all agencies, including the IRS, it does not apply in the exact same way to all agencies.  Every agency is “exceptional” in that every agency faces a different set of operational demands and requirements and organic statutory provisions.  All of those variables must be reconciled to the general language of the APA and it should not surprise anyone that different reconciliations lead to different applications of the APA principles to different agencies.   That is why the Supreme Court, in Bowen, said “When Congress enacted the APA to provide a general authorization for review of agency action in the district courts, it did not intend that general grant of jurisdiction to duplicate the previously established special statutory procedures relating to specific agencies.” 847 U.S. 879 at 903.

Put another way, the debate is not “whether” the APA applies, it’s “how” the APA applies.  It is not so much whether the NOD review procedure “comply with” the APA as it is whether the procedures are “consistent with” the APA.  Does the APA displace or otherwise affect otherwise applicable rules that govern what goes into the NOD and how the Tax Court reviews it?

That is what the Fourth Circuit recognizes in QinetiQ.  The Tax Code’s specific statutory review structure makes the APA review standard inapplicable, for both historical and operational reasons.  The historical reason is what I said above: the specific statutory structure for court review of NOD’s pre-dates the APA and the APA was not written to displace prior law.  The operational reason is that taxpayers have the burden to prove entitlement for deductions and have every opportunity to do so in a de novo Tax Court review.  That de novo nature of review is what makes the current practice acceptable.  For example, if the IRS rejects a claimed deduction, tax law does not put the burden on the IRS to prove up the rejection.  The burden remains on the taxpayer to prove up the entitlement, only now in front of the Tax Court (or district court if the taxpayer chooses to pay the deficiency and then go for a refund).  It is the Tax Court’s job to determine or re-determine the taxpayer’s proper tax liability.  That’s why it can either increase the proposed deficiency (§6214(a)) or actually order a refund (§6512(b)).

The Tax Court has recognized these points as well.  It has a nice discussion of this kind of “tax exceptionalism” in Ax v. CIR, 146 T.C. No. 10 (2016) (which Les has previously blogged here and which Professors Stephanie Hoffer and Chris Walker give some very thoughtful comments here). In Ax, the taxpayer objected to the Service raising a new issue before the Tax Court, even though the Service acknowledged it bore the burden of proof.  Like the taxpayer in QinetiQ, the taxpayer in Ax argued that because “the Supreme Court rejected the concept of ‘tax exceptionalism,’ the Administrative Procedure Act and [case law] bar Respondent from raising new grounds to support his final agency action beyond those grounds originally stated in the notice of final agency action” (e.g. the NOD).  The Tax Court’s rejection of that position is worth reading.

III.  The Door Is Still Open: Implications of QinetiQ on Other IRS “NODs”

Have you ever noticed how you need an NOD to get Tax Court review?  I don’t just mean the “Notice of Deficiency.”  I also mean the “Notice of Determination” from a CDP hearing.  That’s a ticket to the Tax Court, too.  But, sorry, a “Determination Letter” is not a ticket.  Likewise, if a taxpayer petitions for “stand alone” spousal relief per §6105(f), the eventual “Notice of Determination” issued by IRS or Appeals is the ticket for Tax Court review (of course, §6105(e) also permits a taxpayer to seek judicial review in cases where the Service has not acted within 6 months of the initial request for spousal relief).

The point is that the Tax Court reviews agency decisions other than deficiency determinations.   QinectiQ deals with only ONE kind of IRS determination (although by far the most frequent).  The inimitable Steve Johnson gives an excellent and in-depth treatment of the variety of ways that the APA §706 might be applicable to a variety of IRS determinations in his Duke L. Rev. article “Reasoned Explanation and IRS Adjudication,” 63 Duke L. J. 1771.

The Fourth Circuit’s rationale for not applying the ABA §706 standard of review in QinectiQ actually suggests the ABA standard may be applicable to court review of some of these other IRS determinations.  One sees this in the opinion’s discussion of Fisher v. Commissioner, 45 F.3d 396 (10th Cir. 1995).  In Fisher, the 10th Circuit held an NOD invalid because the NOD implicitly denied, without explanation, a taxpayer’s request for penalty abatement.  Since the Service has the discretion to grant or deny such requests, the 10th Circuit thought that the failure to explain why the Service was exercising its discretion to deny the relief violated “an elementary principal of administrative law that an administrative agency must provide reasons for its decisions.”  45 F.3d at 397.  Unexplained exercise of discretion is per se arbitrary, says Fisher.

The Fourth Circuit could have just disagreed with Fisher.  The IRS issued a well-reasoned AOD that explained why Fisher was wrong.  AOD-1996-08, 1996 WL 390087.  But the Fourth Circuit instead chose to distinguish Fisher, saying in footnote 6: “we do not read Fisher…as requiring a reasoned explanation in all Notices of Deficiency.”  Hmmmm.  Does that suggest that in situations where the Service is exercising discretion—like refusing to grant a request for spousal relief, or refusing to accept a collection alternative offered in a CDP hearing—that one of those decisions would be subject to the APA §706 standard, even when the Tax Code has very detailed special statutory procedures?  After all, both the CDP provisions and spousal relief provisions were added by Congress after the APA.

Let’s look at CDP procedures.  Currently the Tax Court’s approach to CDP review is both (a) abuse of discretion and (b) de novo.  That’s not quite square with how the APA contemplates the relationship of a reviewing court to agency decisions.  Here’s how the Court explained it in a recent CDP case, Drilling v. Commissioner, T.C. Memo 2016-103:

the standard of review employed by the Tax Court is abuse of discretion, except with respect to the existence or amount of the underlying tax liability, for which the standard of review is de novo. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). The evidentiary scope of review employed by the Tax Court is de novo. Robinette v. Commissioner, 123 T.C. 85, 101 (2004), rev’d, 439 F.3d 455, 459-462 (8th Cir. 2006). That means that the Court’s review is not confined to evidence in the administrative record. See Speltz v. Commissioner, 124 T.C. 165, 177 (2005) (citing Robinette v. Commissioner, 123 T.C. at 94-104), aff’d, 454 F.3d 782 (8th Cir. 2006). If the Court remands a case to the Appeals Office, the further hearing is a supplement to the original hearing, not a new hearing, Kelby v. Commissioner, 130 T.C. 79, 86 (2008), but the position of the Appeals Office that the Court reviews is the position taken in the supplemental determination, id.

Notice that this means if the taxpayer wants to present new information, the Tax Court has the option of hearing that new evidence itself or sending the case to the Appeals Office for a “supplemental” hearing.  See e.g. Drake v. Commissioner, T.C. Memo 2006–151, aff’d 511 F.3d 65 (1st Cir. 2007) (“The resulting section 6330 hearing on remand provides the parties with the opportunity to complete the initial section 6330 hearing while preserving the taxpayer’s right to receive judicial review of the ultimate administrative determination.”)

The Tax Court’s practice of allowing new information is IMHO a perfectly reasonable procedure and it reflects the ongoing nature of both CDP and 6015(f) determinations.  Each of those determinations can be affected by facts that change at any time.  But it is arguably NOT the procedure contemplated by the APA.  Notably, the APA contemplates that the record, once made, is unalterable.  And the danger of allowing an open record is that the Tax Court becomes mired “with tax enforcement details that Congress intended to leave with the IRS.” Robinette v. Commissioner, 439 F.3d 455, 459 (8th Cir. 2006) aff’ing in part 123 TC 85.

Both the CDP and the spousal relief review provisions were added by Congress long after the APA’s enactment.  Perhaps the flip side of pre-existing administrative schemes not being displaced by the APA is that post-APA statutory provisions do not exclude application of APA §706 but incorporate that standard (unless of course Congress says the provisions are to be exclusive).  Of course, the operational reasons for concluding that the §706 standard has been trumped by the specific CDP provisions may remain.

Those of us who study this stuff are not in agreement.  For Les’ take, see here; for Stephanie Hoffer and Chris Walker’s take, see here.  As Keith points out, the CDP procedures have astonishingly large gaps in them.  But IMHO the APA does not mandate a uniform set of rules for the Tax Court to deal with those gaps.  Like the U.S. Constitution, the APA simply provides the touchstone by which to measure any rules or procedures that the Tax Court or IRS come up with in implementing CDP.   Claiming that a procedure violates §706 is like claiming one process or another violates “due process.”  You first have to figure out what process is “due” before you can find a violation.

In sum, I believe the Fourth Circuit’s opinion in QinetiQ leaves open the door to argue that for non-deficiency determinations, APA §706 has greater applicability than for standard Tax Court review of deficiency notices.  Personally, I think that (1) the specificity of the both the CDP and innocent spouse provisions, and (2) the specific relationship that the Tax Court has in supervising so many aspects of tax administration still trump the general provisions in the APA.  But those two reasons for treating current procedure as may not be as applicable to other types of determinations, such as §6672 decisions, or penalty abatement decisions, or other “discretionary” decisions that are not clearly covered by specific Tax Code provisions.

 

The Timing of Penalty Approval

On November 30, 2016, the Tax Court issued a fully reviewed opinion in the case of Graev v. Commissioner, 147 T.C. No. 16 addressing the issue of the requirement for managerial approval of penalties.  In the Restructuring and Reform Act of 1998 (RRA 98), Congress created IRC 6751 which requires managerial approval of penalties.  We have discussed this issue previously here, here and here, one post each by me, frequent guest blogger Carl Smith and Frank Agostino, respectively.  The Court split pretty sharply in its opinion with nine judges in the majority deciding that the IRC 6751(b) argument premature since the IRS had not yet assessed the liability, three judges concurring because the failure to obtain managerial approval did not prejudice the taxpayers and five judges dissenting because the failure to obtain managerial approval prior to the issuance of the notice of deficiency prevented the IRS from asserting this penalty (or the Court from determining that the taxpayer owed the penalty.)

A number of IRC 6751 cases have been bottled up waiting for this opinion.  Look for a number of cases to now come out on this issue and look also for some of these petitioners to take the issue to the next level.

Because I had an extensive email exchange with Carl Smith about this case, I have placed his comments at the end of the post for those interested in a more in depth review of the issues presented.

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This issue first came to my attention through Frank Agostino and fittingly, Frank represents the petitioners in this case.  As we have mentioned in prior posts, this issue essentially went unnoticed for almost 15 years after the passage of RRA 98.  After a TIGTA report highlighted that the IRS had failed to notice and follow this requirement, Frank picked up on the issue and began asserting that the IRS failed to follow the provision.  In Graev he made the argument but with somewhat unusual facts.  I will briefly discuss the facts before getting to the three different views on the issue expressed by the members of the Court followed by views on the opinions by Carl Smith and me.

Facts

Petitioners claimed a charitable contribution for a façade conservation easement on a home they purchased in a historic preservation district in New York City.  The easement was donated to the National Architectural Trust (NAT).  In a previous opinion, Graev v. Commissioner, 140 T.C. 377 (2013), the Tax Court held that petitioners could not claim a charitable contribution deduction for the donation of the easement because NAT gave them a side letter guaranteeing that it would return the contribution if the IRS disallowed the charitable contribution.

At the time of the contribution, some concern existed about the ability to claim a deduction for a contribution of the façade easement because of a Notice the IRS had issued on a different type of conservation easement but one with enough overlap to suggest that the IRS might not allow a charitable contribution deduction for the type of easement being contributed by the Graevs.  The opinion details the letters sent by NAT before and after the donation regarding pronunciations by the IRS and Congress on the donation of easements.  It also recounts the actions, or inaction, of the Graevs in the face of the correspondence.

The IRS did audit the return filed by Graevs claiming the contribution of the easement.  The agent not only proposed disallowing the contribution but also recommended the imposition of the 40% gross valuation misstatement penalty of section 6662(h).  The agent prepared the penalty approval form – a form the IRS devised specifically to meet the requirements of section 6751 – and his manager signed the form.  Because the agent could not reach an agreement with the taxpayers, he prepared a statutory notice of deficiency, which, due to the issue, required Chief Counsel review.  The reviewing attorney agreed with the notice; however, he recommended that the IRS add to it, as an alternative position, the imposition of the 20% penalty under 6662(a) and (b)(1) for negligence or substantial understatement.  The manager in Chief Counsel’s Office agreed with this recommendation.

The IRS added the alternate penalty to the notice of deficiency but the agent did not go back to his manager for approval of the alternate penalty.  In the first Tax Court case the Court determined that petitioners were not entitled to the charitable contribution deduction because the side letter created a subsequent event that was not “so remote as to be negligible.”  Because of the basis for the decision, the IRS conceded that the 40% penalty did not apply and argued that the 20% penalty did.

In defense to the application of the 20% penalty, the Graevs argued that the IRS did not comply with section 6751 because the agent’s manager did not approve the 20% penalty.

Majority

The majority determines that because the IRS has not yet assessed the liability a determination that it has failed to follow the requirements of section 6751 is premature.  The statute requires “written approval of the ‘initial determination of … assessment’ before a penalty can be assessed.  Notably absent from section 6751(b), however, is any requirement that the written approval of the ‘initial determination of … assessment’ occur at any particular time before the ‘assessment’ is made.”

This is a 106 page opinion.  The majority (and the dissent) goes into many aspects of the statute in reaching its conclusion.  The majority also spends time explaining why the dissent is incorrect.  We may come back with subsequent posts about the opinion but at its core is the view that the language of the statute requires approval before assessment and the Tax Court is a pre-assessment forum.  This facially logical view of the statute leads to trouble in the ability of a taxpayer to challenge the application of section 6751 and raises questions about the Tax Court’s role as a pre-assessment forum.  Of course the drafters of the statute might have thought a little more about that before writing it.

Concurrence

The concurring judges looked to the purpose for the statute which is to prevent the use of penalties as bargain chips.  Here, these judges found that even if the IRS did not strictly comply with the requirements of section 6751(b) the failure to do so did not prejudice petitioners.  These judges would defer the detailed analysis of the statute until presented with a case where the facts did raise the possibility of prejudice.

Dissent

The dissent would require that the IRS obtain managerial approval prior to issuing the notice of deficiency.  Because the IRS issued the notice prior to obtaining approval of the alternative position, it would not sustain the penalty.  The dissent discusses the role of the Tax Court in the assessment process and concludes that to properly fulfill that role it should address the penalty issue as presented in the notice of deficiency.

Conclusion

The majority opinion suggests a taxpayer should never raise IRC 6751 in Tax Court, or anywhere, until liability is assessed and raise it instead in the Collection Due Process (CDP) context after assessment.  This seems contrary to the purpose of Tax Court and puts taxpayers in an awkward position.  By allowing assessment to occur, the panoply of IRS collection options becomes available.  The Tax Court may anticipate that CDP is a process available to everyone for reentry into the Court for a determination but for low income taxpayers and taxpayers with relatively low liabilities, the IRS may collect via offset and fully satisfy the liability without the need to send a CDP notice.  Of course, the taxpayer whose liability is fully satisfied can sue for a refund but if the penalty is $1,200 on a liability of $6000 for wrongfully claiming the EITC, how practical is it to file an expensive suit in district court to contest this issue?

The case is before the Tax Court because the penalty, at least the penalty at issue in this case and in many cases, is a part of the notice of deficiency.  For the reasons stated by the dissent, the Tax Court has jurisdiction to decide the issue. This should not be a post-assessment question.  After all, to borrow from Judge Gustafson, section 6501 also precludes an assessment being made after the SOL has expired, but the Tax Court has a long history of considering compliance with section 6501’s requirements during the deficiency case – i.e. pre-assessment.

If the opinion of the majority stands up on appeal, taxpayers who know or think that the IRS did not obtain the appropriate approval prior to issuing the notice of deficiency should consider making no mention of 6751 during the Tax Court case for fear of alerting the IRS to the defect prior to the making of the assessment and allowing it to cure that defect.  Here, I assume that the IRS will obtain managerial approval before it makes the assessment.  One possible outcome of the case if it comes back to the Tax Court in the CDP context is that the post-decision, pre-assessment managerial approval will satisfy the language of the statute in the eyes of the judges in majority, and perhaps concurring, opinion.

Comments on Opinion by Carl Smith

In  footnote 22 on page 40, the court fairly acknowledges that it is likely just kicking the issue of compliance with section 6751(b) (whatever it means) down the road until a post-assessment Collection Due Process proceeding.  Doubtless, the 6751(b) issues that the court avoids today will have to be addressed in a Tax Court CDP opinion — perhaps even one that the Graevs bring after the penalties are formally assessed and a notice of intention to levy or a notice of federal tax lien (i.e., a ticket to a CDP hearings) is issued.  Query, though, whether challenging an assessed penalty under section 6751(b) in a CDP hearing is prohibited by the language of section 6330(c)(2)(B), which prohibits CDP challenges to underlying liability where a taxpayer has received a notice of deficiency — as the Graevs did?  Or is a section 6751(b) challenge one going to the procedural correctness of the assessment under section 6330(c)(1), not a prohibited underlying liability challenge?

In his concurrence, Judge Nega (joined by two other judges) suggests that a CDP case would be an appropriate case in which to decide the issues avoided by the majority.  On page 68, he writes:  “The failure of the IRS to follow the statute or its administrative practices may be challenged as an abuse of discretion in a collection action. That case is not before us.”

If one can’t challenge non-compliance with section 6751(b) through CDP, then Judge Gustafson points out a statute that might also preclude a later refund lawsuit over the penalty.  See his quote and brief discussion of section 6512(a) on page 78. n. 5.

If neither CDP nor a refund suit is the way to challenge non-compliance with section 6751(b), then taxpayers would be left without a remedy.  The anti-injunction act of section 7421(a) has an exception if no adequate remedy exists; however, probably the exception would not apply, and the act would likely preclude a suit to restrain assessment or collection of the penalty.  And section 7433, which provides a suit for damages from wrongful collection actions would not apply, since the issue being challenged here is an assessment issue, not a collection issue.

This opinion has been a long time in coming.  The case was originally with Judge Gustafson.  And he foreshadowed his dissent in a brief order he issued more than two years ago on July 16, 2014. Clearly, he wrote a proposed opinion along the lines of his dissent, but then at court conference, his opinion did not prevail and Judge Thornton got the assignment to write the majority opinion.  On the day the opinion was issued, an order reassigning the case from Judge Gustafson to Judge Thornton was also entered in the case.

There is an interesting new entry on the Tax Court docket sheet accompanying this opinion that I have never seen before when an opinion is issued.  It reads:  “Internet Sources Cited in Opinion”.  The problem of URL links to court opinions disappearing over time has been a large one for all courts.  Perhaps this is a warning to the Tax Court about what it must think about doing when the government printing office formally prints the opinion in a T.C. volume.  Will the Tax Court later be revising its opinions in the same way that Supreme Court judges currently do?  It is my understanding that the Supreme Court recently has changed its practices of modifying opinions that have already been published.  Now, the court will let the public know of the post-issuance changes to the opinions.  Will the Tax Court do the same?  Perhaps it is worth asking the clerk’s office what the purpose of this new entry on the docket sheet implies.

Finally, Judge Gustafson decides a lot of the questions under section 6751(b) on which the majority postpones ruling.  Judge Gustafson’s opinion is joined by four other judges.  Readers of the opinion should not jump to the conclusion that any of the judges in the majority would disagree with those rulings of Judge Gustafson on the issues on which the majority deferred ruling if the arguments are again presented in a case (presumably a CDP case) where those arguments are ripe.  Thus, this victory for the IRS in allowing a deficiency including penalties to be incorporated into the Tax Court decision may turn into no penalties ever being collected by the IRS if a court, in a future case, decides the deferred issues adversely to the IRS.

My worry about whether compliance with 6751(b) is merely a procedural compliance issue in a CDP case is based in part on the way that the Tax Court has treated compliance with 6501.  The Tax Court has refused to consider 6501 arguments in a CDP case if a taxpayer previously received a notice of deficiency.  But, I am pretty sure the Tax Court judges are going to treat 6571(b) compliance as a CDP procedural issue, since to treat it as an issue barred by 6330(c)(2)(B) would be to deprive a taxpayer of any possibility of judicial review of compliance with 6751(b).

 

When to File a Tax Court Petition after Denial of a Whistleblower Claim

Continuing in what seems to be a series of cases on when the Tax Court gets jurisdiction, the appropriately titled case of Whistleblower 26876-15W v. Commissioner provides guidance on how to gain entry into the Tax Court in this relatively new type of case.  The Court finds that it has jurisdiction even though the petitioner argues that it did not.  The petitioner argued that the decision of the IRS to deny an award was “null and void” and seeks to have the Tax Court make that determination as it determines it has no jurisdiction.  The recent post on what the Tax Court can do after it determines it lacks jurisdiction might have come into play here, except that, despite the protestations of the petitioner, the Court determines it has jurisdiction.  This funny role reversal of the petitioner arguing the Tax Court lacks jurisdiction while the IRS argues for jurisdiction also shows that last known address cases arise in the whistleblower arena as well as other types of Tax Court cases.

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Petitioner here filed the IRS Form 211 seeking an award with respect to information provided to the IRS.  The IRS decided that the information did not merit an award and sent the letter denying the claim for award to somewhere other than petitioner’s last known address.  Petitioner did not receive the letter.  Because petitioner did not receive the letter stating that the IRS would not pay an award, the petitioner waited in limbo for quite some time.

Eventually, petitioner contacted the Whistleblower Office seeking information about the claim.  For those of you accustomed to waiting to hear from the IRS about one thing or another, it is easy to step into petitioner’s shoes here as the wait for information gnaws at you.  As an aside, I note that the IRS has recently introduced a feature that allows you to track your amended return.  Here is a link to the place you go to do the tracking.  What a great idea!  I hope it does not take long before a similar tracking system exists for many other types of matters for which taxpayers, and their representatives, wait for the IRS.  Somehow, waiting seems to go more smoothly, up to a point when you can track the matter and not wonder if it is lost somewhere in the IRS system.

The whistleblower in this case gave information that the examination division of the IRS thought had value and it audited at least one of the taxpayers implicated by the information provided.  The audit resulted in adjustments which the taxpayer took to Appeals.  At Appeals, the taxpayer convinced the Appeals Officer that the adjustments lacked merit.  In November 2013, Appeals conceded the case and determined that the case should be “no-changed.” The report written by the Appeals Officer about the case made its way back to the Whistleblower Office at the IRS where, in January 2014, an employee completed Form 11369, Confidential Evaluation Report on Claim for Award, and recommended the denial of the claim.  On May 30, 2014, the IRS sent petitioner a final determination letter with respect to the award denying the claim for award in full.

Petitioner moved in 2013 and properly notified the Whistleblower office of the new address.  My guess is that of the 1% of people who move and who actually notify the IRS of the move, those making whistleblower requests fall into the 1%.  Despite notifying the IRS, when it sent to petitioner the final determination letter, the IRS sent the notice to the prior address.  The patient petitioner, who would have no basis for knowing when the IRS might make a determination regarding the award, waited for almost a year and a half after the IRS sent the notice of final determination before requesting an update on the status of the award request.  In September of 2015, petitioner reached out to the Whistleblower Office seeking an update and on October 15, 2015, the IRS sent a letter informing petitioner that it had denied his claim.  Petitioner alleged that the October 15 letter was the first he learned of the denial and petitioner used that letter as the basis for filing a petition in Tax Court, which was filed on October 26, 2015.

In whistleblower cases, the Tax Court has jurisdiction under IRC 7623(b)(4) if the IRS makes a “determination regarding an award” and “a petition invoking our jurisdiction over that matter is timely filed.”  Petitioner filed the petition hoping for a result similar to the result petitioners receive in Tax Court cases based on a notice of deficiency cases where the IRS sends the notice to someplace other than the taxpayer’s last known address and the Tax Court finds that it lacks jurisdiction for the reason that the notice of deficiency is invalid.  The Court did not go where the petitioner hoped it would go.

Petitioner’s first argument regarding the lack of validity of the notice denying the award did not attack the mailing address but rather the authority of the person signing the notice.  Delegation Order 25-7 delegated the authority to approve or disapprove awards to the Director of the Whistleblower Office.  The notice here was signed by an analyst in the office rather than by the director of the office.  The Court takes little time dispensing with this argument holding that the delegation order gave to the director the authority to approve or disapprove awards but did not require the director to personally sign the letter notifying the taxpayer of the approval or disapproval.  The Court found that the director had signed the Form 11369 determining that the claim was disallowed, and the director’s signature there met the requirements of the delegation order.

Next, the Court turned to the issue of its jurisdiction based on the timing of the filing of the petition.  It noted that generally the 30-day period within which to timely file a whistleblower petition begins on the date the determination is mailed to a claimant’s last known address or is personally delivered to the claimant.  The Tax Court had not previously addressed this question in the whistleblower context.  It noted that the statute at play here closely resembled section 6330(d) controlling jurisdiction in a Collection Due Process (CDP) case, which says that a taxpayer dissatisfied with the CDP determination made by the IRS “may, within 30 days of a determination under this section, appeal such determination to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter.)”  The Court found that neither the CDP nor the whistleblower statutes require the IRS to send the notice of determination by certified mail to the taxpayer’s last known address or to deliver it in any particular way.  Interestingly, the Court went on to find that neither statute requires that the IRS notify the taxpayer (or the claimant) at all.  The statutes only require that the IRS make a determination.

Judge Lauber cites to the case of Bongam v. Commissioner, 146 T.C. 52 (2016) in which the IRS mailed the notice of determination to an address other than the taxpayer’s last known address.  “Several months later … the IRS remailed the notice to the taxpayer’s last known address by regular mail” and the taxpayer received the remailed notice and filed a petition within 18 days of that receipt.  In Bongam, the Tax Court held that the first notice was invalid because it was not sent to taxpayer’s last known address and was not actually received by the taxpayer; however, the remailed notice gave the Court a basis for jurisdiction because the taxpayer petitioned within 30 days of receipt.

The reasoning in Bongam applies to this whistleblower case.  The Court found that the remailed notice of determination which the claimant used as a basis for petitioning validly serves as the notice of determination.  So, the petitioner in this case now has the opportunity to show the determination incorrectly denied the claim even though the claimant did not seek that result.

Doing the Right Thing

We criticize the IRS regularly here, but today want to point out a case illustrating the effort the IRS and its attorneys at Chief Counsel’s office will go to in order to do the right thing.  When I worked there, a strong culture existed to find the right answer or do the right thing.  The case I will discuss today demonstrates that the culture still exists even in the face of the cuts to the budget and the unrelenting criticism.

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The Chief Counsel attorney, Nicholas Rosado, did the right thing in the context of a Rule 155 computation.  We have not talked before about Rule 155 comps and this case also offers the chance to do that.

Chief Special Trial Judge Panuthos issued an opinion in the case of Mameri v. Commissioner, T.C. Summary Opinion 2016-47.  As we have discussed before, it is a summary opinion because petitioner filed the case using the small tax case procedures of IRC 7463.  No matter whether regular, memorandum or summary, Tax Court opinions do not come with a calculation of the tax liability.  The Tax Court judges decide the issues but do not calculate the tax resulting from their decision.  In many cases, the Tax Court decides completely for the taxpayer or completely for the IRS.  In those cases, no calculation needs to precede the entry of the decision since the decision document will reflect a zero dollar liability where the taxpayer wins and a liability that mirrors the notice of deficiency where the IRS wins.

If the result of a Tax Court case splits the decision between the parties, then someone has to calculate the impact of the issues determined by the judge on the amount of deficiency proposed in the notice of deficiency in order for the parties to know the correct amount of tax the IRS may assess. Tax Court Rule 155 creates the process for making that calculation and presenting the results to the Court.  In most cases, the Chief Counsel attorney sends the opinion to a computation specialist in Appeals who turns the issues into a new liability number.  After the attorney receives the computation back from Appeals, the attorney sends that computation to the taxpayer, or the representative, who reviews the computation for correctness.  If the taxpayer thinks that the computation does not correctly calculate the tax based on the Court’s opinion, the taxpayer will bring the problem to the attention of the Chief Counsel attorney who, in consultation with the computation specialist, will agree with the taxpayer or disagree.  In most cases, and especially in cases involving pro se taxpayers such as Mr. Mameri, the taxpayer accepts the computation provided by the Chief Counsel attorney without question.  The Chief Counsel attorney then prepares a decision document which the parties sign reflecting their agreement with the amount of tax and then the Court signs the document entering the decision amount.

In a small number of cases, the parties cannot reach an agreement on the amount of the tax resulting from the opinion.  In those cases, the Court holds a Rule 155 hearing in order to rule on the computation of the parties and resolve the dispute as to the amount of tax created by the opinion.  Sometimes the dispute exists because the original opinion did not sufficiently address all of the issues and sometimes the dispute exists because one party wants to interpret the opinion in a manner not intended.  In an even smaller number of cases, there may be a disagreement about what the Tax Court can decide in a Rule 155 hearing.  Many years ago Les was involved in a Rule 155 contest in the case of Erhard v. Commissioner involving the famous Werner Erhard of EST for those of you looking for a throw-back to the 1980s. Generally, the Tax Court in a Rule 155 hearing is bound to make its computations from the evidence in the record and the opinion itself. The Tax Court case does not become final until the entry of the decision and when the amount to be placed on the decision remains in dispute, the resolution of that dispute is a predicate to finalizing the case.

In Mr. Mameri’s case, Judge Panuthos entered an opinion that required the calculation of the correct amount of tax.  At issue in the case were education credits claimed by petitioner for tuition cost and for the purchase of a computer.  The opinion allowed the cost of tuition based on the testimony of the petitioner and a letter from an instructor; however, the Court did not allow the credit for the purchase of the computer because petitioner could not show that the purchase of the computer was a requirement of the educational program as opposed to a convenience.  The Chief Counsel attorney set out to obtain the calculation resulting from the Court’s opinion.

In the course of obtaining the Rule 155 computation, the Chief Counsel attorney bumped into a proposed regulation promulgated on August 2, 2016, just three weeks before the Court had rendered its opinion on August 24, 2016.  Remember that the opinion would have been written several months after the trial of the case.  While the parties could have brought an important ruling or regulation to the attention of the Court while the case sat with the judge during the deliberative phase, the chances of a pro se taxpayer picking up on something of that nature approach zero.  The Chief Counsel attorney would have had other cases to work on and could easily miss a matter that might have impact.

The proposed regulation regarding education expenses and the credit allowed thereunder provided:

In the preparation for the Rule 155 computation, counsel for respondent brought to the

Court’s attention proposed regulation section 1.25A-1(d)(3) issued August 2, 2016. The proposed regulation interprets the meaning of “required for enrollment or attendance” as set forth in section 25A(f)(1)(A) and (i)(3) to mean that “the course materials are needed for meaningful attendance or enrollment in course of study, regardless of whether the course materials are purchased from the institution”. Respondent proposes to concede that petitioner is entitled to an education credit for the purchase of the laptop computer since petitioner satisfies the requirements of the proposed regulation.

The Court, in an order dated November 4, 2016, accepted a concession by the Government in Mr. Mameri’s case based on the proposed regulation and entered a decision in the case granting Mr. Mameri the education credit for the purchase of the computer.  During the course of having the Rule 155 computation prepared, the Chief Counsel attorney or someone in his office or in Appeals must have noticed the newly issued proposed regulation (note that the concession is based on a proposed and not final regulation) and decided that Mr. Mameri should have won the issue regarding the computer in his Tax Court case.  I am sure Mr. Mameri appreciates the concession by the Government in his case and we can all feel a little bit better about the tax system because of the actions of the Chief Counsel attorney, Nicholas Rosado.

 

Exiting a Tax Court Case as the Representative

A recent Tax Court order shows the Court allowing an attorney to withdraw from a case due to a fee dispute with his clients.  Judge Carluzzo permits the withdrawal because he finds that the “Mr. Pilla’s representation of petitioners in this case cannot continue given the adversity that currently exists between them.”  Before being allowed to withdraw, Mr. Pilla filed a motion to withdraw on June 16, 2016, and two separate supplements in the following months.  I cannot see those documents on the Tax Court website and am drawing conclusions here from the court orders in the case.  Even though it would require a trip to DC to see the full file for free, it is possible to get a picture of the case from the docket sheet and the orders entered by the Court which easily link from the Court’s docket.  The fact that he had to file three separate documents and apparently detail how and on what he spent his time leads me to believe that exiting the case was painful and time consuming for Mr. Pilla.  Perhaps there are lessons for others who might want to withdraw.

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The case bears working through the docket to see how it got to the position of the attorney seeking to withdraw from the case.  Perhaps by working through the docket you get a glimpse of the parties and a better opportunity to understand how they reached the point of departure.  Petitioners filed their Tax Court petition on June 17, 2013.  That fact alone makes the case stand out when reading an order regarding withdrawal of counsel in October of 2016.  The Tax Court generally gets to cases in about one year.  In smaller venues where the Court travels only once a year, the timing of the filing of the petition and the timing of the calendar could move that back or forward.  I was a little surprised to see that it took 16 months for this case to originally appear on the Los Angeles trial calendar but I do not closely follow the time it takes to get to trial in that city.  In any event, very few cases filed in 2013 remain on the Tax Court docket still awaiting trial.

The case landed on a trial calendar set for November 3, 2014, two years before the order on which this post will focus.  At that time petitioners, representing themselves, filed a motion for continuance on October 3, 2014, one day outside the window when the Tax Court rules would deem such a motion as one filed for purposes of delay.  Pro se petitioners do not normally time the filing of their motions to continue with such precision.  So, I conclude petitioners here were either sophisticated or extremely lucky in the timing of their motion.  Filing a motion to continue within the 30 day time period marked off by Tax Court Rule 133 as presumptively filed for delay does not mean that the Court will never grant a continuance, but filing before hitting that marker provides a better chance for relief since the party seeking the continuance does not need to overcome the presumption.

The IRS initially opposed the motion for continuance.  The IRS normally opposes such motions.  The Court scheduled the motion for a hearing at calendar call.  Mrs. Brashear appeared and argued on behalf of the motion.  The IRS relented and said that the parties were working on a stipulation.  In a city like Los Angeles where the Tax Court travels almost monthly, continuing a case does not necessarily mean that the case would experience the year-long delay it might experience in a city the Court sits less frequently.  Judge Marvel granted the continuance and retained jurisdiction.  Judges will generally retain jurisdiction if they believe that the case may resolve itself without need to place it back in the general hopper where another judge would have to pick it up.  When the judge retains jurisdiction, the judge normally orders a status report several weeks or a few months after the continuance to make sure the parties continue on the track they have signaled at the hearing and to make a decision whether to continue retaining the case or to send it back to the general pool for reassignment to another calendar.

The status report indicated that the type of progress hoped for at calendar call did not materialize.  The parties could not agree on a stipulation.  Apparently, they had several calls with Judge Marvel.  Petitioners requested a pre-trial conference pursuant to Tax Court Rule 110.  In an order dated March 31, 2015, Judge Marvel denied the request for the pre-trial conference, recounted the status of the case and cut the case loose from her control back to the general pool of cases for reassignment on a subsequent calendar.  Her order discusses the rule regarding pre-trial conferences and may be of interest to anyone seeking such a conference.

Unlike many petitioners, the petitioners here did not sit around waiting for something to happen.  They were energized by their case.  Almost immediately following Judge Marvel’s order releasing the case from her jurisdiction, petitioners filed four motions and one request.  This activity got the Court’s attention and Judge Carluzzo was assigned to the case by then-Chief Judge Thornton.  Even though Judge Marvel’s order releasing jurisdiction would have placed the case in a general pool of unassigned cases at the Tax Court until placement of the case on another trial calendar in Los Angeles, when a case has this much activity, the Court wants to have someone assigned to manage it so that continuity would exist in the consideration of the multiple motions.  Judge Carluzzo denied all four motions and the request within a relatively short period of time; however, the orders denying the motions do not make their way onto the Court’s docket sheet in a form I can link.

The case then gets set for trial in Los Angeles on January 26, 2016.  That order, as is normal when cases get set on a calendar, comes out on June 30, 2015, approximately six months before the calendar.  Because Judge Carluzzo signed the order and not the Chief Judge, I assume that he had already been assigned to handle the Los Angeles calendar set for January 26, 2016.  This assignment efficiently allows him to hear the trial and continue to manage the case without involving other judges.  At this point, Mr. Pilla, an attorney based in Minnesota, enters the case.  It is unclear from the docket sheet and the orders why petitioners chose an attorney from a remote location.  Federal tax practice is a nationwide practice, however, and this was certainly a permissible, if unusual, selection.  A few months after Mr. Pilla entered the case, the parties jointly filed a motion for continuance of the trial set in January 2016.  Filing a second motion for continuance generally requires a very good reason if you have any expectation of success.  Here, the parties have had a long time, almost two and one half years, to prepare the case and petitioners have had an attorney for about three months at the time of the filing of this motion.  The Court sets the motion for a hearing at calendar call which means that the parties also had to prepare for trial.  They filed pre-trial memorandums required by the Court’s standing order and the IRS filed a stipulation of settled issues signaling some progress had occurred.

At calendar call, the Court granted the motion to continue.  I speculate that the stipulation coupled with promises of future progress convinced Judge Carluzzo the case would settle or the issues would come into sharp focus.  The Court entered an order stating Judge Carluzzo was no longer assigned to the case and two days before that order Mr. Pilla filed his request to withdraw from the case.  He then filed a supplemental request before Chief Judge Thornton issued an order calling for the parties to respond to the request.  The order came from the Chief Judge because the case no longer had a specific judge assigned to it.  The IRS filed a notice of no objection.  Generally, the IRS will object where it believes that withdrawal will delay the resolution of a case.  Here, the case had recently come off a trial calendar and I suspect that the IRS saw no harm to the timing of the resolution of the case in not objecting to withdrawal.

Petitioners, however, must have really liked Mr. Pilla.  As mentioned above, I have not spent the time or money to read the documents in the file, but petitioners filed a notice of objection to the withdrawal of Mr. Pilla, a declaration and a supplemental notice.  One can only assume they were distraught at the prospect of losing their attorney, and, speaking of distraught, Judge Carluzzo reenters the case with the issuance of an order by the Chief Judge reassigning him to the case for the exclusive purpose of resolving the withdrawal of counsel.  According to the docket sheet, he does that in short order denying the request to withdraw on the same day he was reappointed to the case; however, the order described on the docket sheet is not placed there through a link so it is not possible to see why the request was denied from my vantage point.  (An order entered by Judge Carluzzo later in the case describes the denial as a “margin order” which I believe means the word denial was written on the motion with no order generated related to the determination.)

Three days later, Mr. Pilla filed another motion to withdraw which was accompanied by a declaration by Denise Witz who I assume works in his office and has something to do with accounts receivable.  Petitioners dutifully filed an objection to this motion again, presumably, expressing their undying love for Mr. Pilla.  On July 3, 2016, newly appointed Chief Judge Marvel issued an order setting a hearing on the motion to withdraw on October 3, 2016, in Los Angeles.  Note that the order was issued by the Chief Judge and not Judge Carluzzo, presumably because Judge Carluzzo, having ruled on the motion, and having been reassigned solely for the purpose of ruling on the motion, was no longer the judge assigned to the case (sort of).  The order does not mention Judge Carluzzo, however, from the next events, I suspect that he was already assigned to conduct a calendar beginning on October 3, 2016, in Los Angeles.  If my assumption is correct, he must have had feelings that this case was like a bad penny.

Upon reentering the case, Judge Carluzzo enters another order which provides an excellent description of the events of the case to this point and tells the undoubtedly unhappy Mr. Pilla that he must travel to Los Angeles from Minnesota for the hearing on October 3.  The order sympathizes with the cost Mr. Pilla will incur in his continued effort to withdraw from the case but also points out that in choosing to enter an appearance in a case far from his home he should have foreseen the need to possibly travel to the place of trial.  This order makes clear that his reason for seeking to withdraw is the failure of petitioners to pay his bills.  The order also makes clear that petitioners believe they have paid their bills.  So, the case is now more than three years old and poised not for a trial on the merits but rather for a trial on the whether the petitioners have paid the attorney they hired more than two years after filing their petition.

At the hearing on October 3, Mr. Pilla chose not to attend but rather to submit a written statement in addition to the two motions and three supplements he had already filed.  On October 25, 2016, in the order linked at the beginning of this post, Judge Carluzzo granted the motion to withdraw but also ordered Mr. Pilla to return all of petitioners’ files.  Subsequently, the case has been set for trial in March of 2017.  The docket sheet does not indicate that a new representative has entered the scene.

Conclusion

This post is perhaps too long but it demonstrates the difficulty that can be encountered in withdrawing from representation.  Certainly not every request to withdraw involves this much effort, but every request does require thought about whether and when to make the attempt.  Of course, the first step is deciding whether to accept the engagement and enter the appearance.

Unfinished Business in Senate: Time to Approve Nominated Tax Court Judges

Below is a guest post by Professor Danshera Cords, a Professor of Law at Albany Law School who is visiting this year at the University of Pittsburgh School of Law. While there has been a great deal of attention on the Supreme Court vacancy, as the Washington Post reported earlier this year there are many federal judges in limbo awaiting Senate confirmation. Professor Cords reminds us that one byproduct of the partisan divide has been significant delays in the approval of nominated Tax Court judges.  Les

The Senate has pending before it two qualified nominees for the U.S. Tax Court.  These nominees have been fully vetted; in April, hearings were conducted by the Senate Finance Committee. The Finance Committee unanimously voted to send these nominees to the full Senate for approval. Nomination and confirmation of U.S. Tax Court judges has traditionally been a nonpartisan practice and should continue in that manner. Failure to confirm these two nominees before the recess of the 114th Congress will result in a waste of taxpayer resources to identify and vet these extremely well-qualified candidates. It will also cause hardship to taxpayers whose cases accrue interest while their cases are left to linger while new candidates are identified and vetted after the new administration works through its priority nominations. More than 50 tax law professors, academics, and clinicians have signed this letter urging the Senate to immediately schedule a vote on these two nominees.

UPDATE: Our friends over at the Surly Subgroup have also posted on this here