The recent decision in Rand v. Commissioner blogged here raises the issue of what to do if you represent someone currently in Tax Court litigating over penalties imposed on refundable credits. This issue prominently presented itself a couple of years ago in the innocent spouse litigation concerning the regulations issued under IRC 6015(f) after the Tax Court’s decision in Lantz that the regulations were invalid.
In November I wrote about the Byers case and the Golson rule. Under the Golson rule, the Tax Court will apply the rule of law of the Circuit to which the case is appealable in deciding a case before the Tax Court even if the Circuit authority conflicts with decisional authority of the Tax Court.
IRC 7463(a) creates a special procedure for cases in which less than $50,000 is in dispute for each taxable period, the Small Tax Case procedure (S procedure – so named because of the S that appears after the Tax Court docket number of these cases.) To qualify for the S procedure the taxpayer must make an election to use this procedure and the Tax Court must concur. The election usually occurs at the time the petition is filed but may be made at any time prior to the trial of the case pursuant to the statute and Tax Court Rule 171(b). If the taxpayer elects the S procedure and if neither the taxpayer nor the Government requests the discontinuation of such procedure prior to the entry of the case as permitted by IRC 7463(d), then the decision of the Tax Court is the final decision of the case pursuant to IRC 7463(b) and is not subject to appeal. There are two excellent articles exploring the issue of the Golson rule and the S procedure. Carl Smith, Does the Tax Court’s Use of its Golsen rule in Unappealable Small Tax Cases Hurt the Poor?, 11 J. Tax Prac. & Proc. 35 (2009-2010) and Saul Mezei and Joseph Judkins, “A Square Peg in a Round Hole: The Golsen Rule in S Cases” Tax Notes Today, January 8, 2012. While it is unclear why the Tax Court decided to apply the Golson rule to cases that cannot receive appellate review, it is clear that it does so and has consistently done so for over 40 years.
When you have a Tax Court decision like Rand that will almost exclusively impact low dollar disputes, taxpayers should strongly consider electing the S procedure when they file their Tax Court petition or should request a switch to the S procedure if they did not initially elect that procedure. Taxpayers should make this forum shopping decision within the Tax Court because the decision of the Tax Court in S cases is final and the Tax Court has already signaled how it will decide the issue. In situations like Rand with no Circuit authority, it is easy to predict the outcome in the Tax Court and the outcome for taxpayers similarly situated to Rand is a good outcome. Even if adverse Circuit authority exists, as long as the Circuit to which your client’s case will be appealed has not ruled, the taxpayer will win in the Tax Court.
After the Tax Court decision in Lantz, clinicians began to request the S procedure in order to “lock in” the benefits of that decision to clients seeking to obtain IRC 6015(f) relief more than two years after the beginning of collection activity. While the 7th Circuit ultimately reversed Lantz and the Third and Fourth Circuits ultimately upheld the regulation at issue, those litigating in other circuits whose cases had no controlling precedent had a clear path to certain victory through the S procedure. Like almost all taxpayers impacted by the Rand case, almost all taxpayer fighting the IRC 6015(f) regulations had less than $50,000 at issue for each period.
The Government knew what would happen in Lantz type cases where the petitioners elected the S procedure in a Circuit with no precedent and issued a notice advising its lawyers to file a motion to remove the S procedure in the Lantz type cases. Chief Counsel Notice 2010-011 (June 18, 2010) Although this notice has been removed from the IRS website, it was eventually revoked when the IRS conceded the Lantz issue. Chief Counsel Notice 2011-17 (July 25, 2011) The Government has not yet issued a similar notice for Rand cases. I do not know if its failure to try to block the S procedure in Rand cases stems from a view that this was a failed strategy in Lantz, if it is too soon to worry about it or some other reason.
Attempts by IRS to Remove Cases from S Procedure – Case Precedent and Legislative History
Case precedent suggests that removing the small case designation requested by a taxpayer does not come automatically or easily. One of the earliest cases in which the IRS filed such a motion was Dressler v. Commissioner, 56 T.C. 210 (1971). The taxpayer, a Methodist choir director, wanted the benefit of the minister’s housing allowance. The IRS argued that the issue was novel and continuing as a basis for removing the S procedure. The Tax Court declined the invitation to remove the S procedure saying that the issue was primarily factual and the fact that the issue would continue to exist for this taxpayer was insufficient to support granting the motion. Subsequent cases have not signaled a great willingness by the Tax Court to remove the S procedure. See Kallich v. Commissioner, 89 T.C. 676 (1987) in which Chief Judge Sterrett stated:
Petitioners’ option to elect the small tax case procedure is not unlimited, even when the jurisdictional maximum for a small tax case has not been exceeded, as the election must be concurred in by the Court. Page v. Commissioner, 86 T.C. 1, 13 (1986). Respondent therefore could attempt to show the Court that the case should not be tried as a small tax case due to the importance of the issue to be determined, Earl v. Commissioner, 78 T.C. 1014, 1020 (1982); or because the issue is common to other cases before the Court, Page v. Commissioner, supra at 13; or because determination of the issue will establish a principle of law applicable to other cases, Dressler v. Commissioner, 56 T.C. 210, 212 (1971). See also H. Rept. 95-1800 (1978), 1978-3 C.B. (Vol. 1) 521, 612. Respondent has not made such argument here.
The Senate Finance Committee Report on IRC 7463 when it originally passed provided:
If it becomes evident to the Court during, or at the end of, the trial of a small claim case that the deficiency or overpayment should be increased by more than $1,000 (the then-applicable limit), then the Court has discretion to shift the case to the procedures for regular Tax Court cases. This discretion is expected to be exercised only in unusual cases, where the Court deems it appropriate, taking into account all considerations bearing on the fairness of the change, including the costs involved for all parties. (S. Rept. 91-552 (1969), 1969-3 C.B. 423, 615.)
In the Revenue Reform Act of 1998 Congress increased the dollar limit for qualification of the S procedure from $10,000 to $50,000 in Section 3103 of the House Bill. In doing so, it made the following statement about removal of a case from the S procedure:
Present Law
Taxpayers may choose to contest many tax disputes in the Tax Court. Special small case procedures apply to disputes involving $10,000 or less, if the taxpayer chooses to utilize these procedures (and the Tax Court concurs) (sec. 7463). The IRS cannot require the taxpayer to use the small case procedures. The Tax Court generally concurs with the taxpayer’s request to use the small case procedures, unless it decides that the case involves an issue that should be heard under the normal procedures. After the case has commenced, the Tax Court may order that the small case procedures should be discontinued only if (1) there is reason to believe that the amount in controversy will exceed $10,000 or (2) justice would require the change in procedure.
Small tax cases are conducted as informally as possible. Neither briefs nor oral arguments are required and strict rules of evidence are not applied. Most taxpayers represent themselves in small tax cases, although they may be represented by anyone admitted to practice before the Tax Court. Decisions in a case conducted under small case procedures are neither precedent for future cases nor reviewable upon appeal by either the government or the taxpayer.
Reasons for Change
The Committee believes that use of the small case procedures should be expanded.
Explanation of Provision
The provision increases the cap for small case treatment from $10,000 to $50,000. The Committee recognizes that an increase of this size may encompass a small number of cases of significant precedential value. Accordingly, the Committee anticipates that the Tax Court will carefully consider IRS objections to small case treatment, such as objections based upon the potential precedential value of the case. (Emphasis added)
For a discussion of the workings of the S procedures within the Tax Court as well as the collateral estoppel effect of decisions under that procedure see Judge Holmes concurring opinion in Mitchell v. Commissioner, 131 T.C. 215.
Tomorrow I will continue this post with a discussion of my research into the cases attempting to follow Chief Counsel Notice 2010-011 and the current state of the Rand issue.