Getting the Bum’s Rush in a Collection Due Process Case

Collection Due Process (CDP) cases have the ability to remind you of the axiom often associated with military service “hurry up and wait.”  Carl Smith and I wrote about this several years ago in a pair of articles for Tax Notes, in which we looked at the amount of time it took for a CDP case to get through Appeals and the amount of time it took a CDP case to get through Tax Court.  While Congress seemed to have the idea that CDP cases would move swiftly so they did not slow down collection and created a very short period of time, only 30 days, for the taxpayer to request a CDP hearing and to petition the Tax Court after a determination, Congress placed no restrictions on the amount of time a CDP case could sit in Appeals or sit in Tax Court.  So, the taxpayer must hurry up and request an Appeals hearing only to wait quite some time in many cases before the hearing occurs and then hurry up and request a CDP hearing only to have the case sit in the Tax Court inventory longer than a deficiency case.

Some taxpayers may not mind the slow movement of their cases in Appeals and the Tax Court.  Taxpayers in receipt of a notice of intent to levy who have no real plan for payment of the tax and no desire to start making payments may rejoice in the slow process.  Taxpayers in receipt of a notice of federal tax lien who would like to address the lien and remove the notice through withdrawal, or remove the lien by showing the underlying liability does not exist, or some other meaningful remedy may want a much more expedited hearing schedule.

In a designated order recently issued by Judge Gustafson in an S case, Petitioner Keith Brown got through Appeals with lightning speed only to see his case come to a halt after filing his Tax Court petition.  The facts are not too unusual, but the outcome is.  I will set out the Judge’s take on this fact pattern and how it has resulted in a trial in which the taxpayer will have the opportunity to explain his situation.

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Mr. Brown owed taxes and the IRS filed a notice of federal tax lien (NFTL).  The NFTL prevented him from borrowing money which he needed to do in order to make money – he is in the construction business.  He timely requested a CDP hearing and about two months later Appeals sent him a letter scheduling a telephonic hearing on January 13, 2016.  The letter explained that if he wanted an offer in compromise he needed to become compliant with his tax filing and file his 2014 return.  The telephone conference took place on the appointed date; however, he had not yet filed his 2014 return.  He asked the Settlement Officer to give him 30 additional days to file it but she said she would “have to issue a determination letter sustaining the lien [meaning sustaining the filing of the notice of federal tax lien].”  She issued the determination letter 14 days later.  This is really fast and could have been just what Mr. Brown wanted if he had been ready with his 2014 return.

Mr. Brown filed his 2014 return on February 25th and his Tax Court petition on the same day.  The case slowed down considerably as it was scheduled for trial in June of 2017.  The IRS attorney filed a motion for summary judgment on April 13 the last day based on the Tax Court Rule 121(a) for filing such a motion.  The judge noted that Mr. Brown had elected small case status and that motions for summary judgement were permitted but less common.

The judge noted that when he received the letter from Appeals setting the CDP conference, he was told to produce his late return less than one month later.  He was denied a requested extension.  The Settlement Officer did not provide any reasons for denying his request for additional time.  So, the court had no basis for understanding its reason and no indication of unresponsiveness or other delays on the part of Mr. Brown.

“Setting unreasonable deadlines can constitute an abuse of discretion.”  Ang v. Commissioner, T.C. Memo. 2014-53.  The judge noted that the month-and-a half duration of the CDP case from the date of the opening letter to the date of the determination letter seemed very short but invited the IRS to correct his impression at trial.  He noted not only the speed of the action by Appeals but the slowness of the action by IRS Counsel in determining that the failure to grant Mr. Brown more time in this circumstance was an abuse of discretion.

The denial of summary judgment does not signify a victory for Mr. Brown.  He must go to trial.  Assuming that at the trial the court determines that Appeals did abuse its discretion, he is not relieved of the liability nor is the lien withdrawn.  He simply receives a chance for a remand and a further discussion with Appeals about the best way to resolve his collection case.  During all of this time, Mr. Brown has had to live with the NFTL tying up his credit.

I applaud Appeals for giving him such a quick conference.  While the title of this post suggests the taxpayer received the bum’s rush, I wish all CDP lien cases were heard this quickly by Appeals.  I know when I file the request that all returns must be filed.  I have the taxpayer working on return preparation of any past due returns from the time we plan to file the CDP request.  I hope that by the time of letter from the Settlement Officer setting the hearing that all past due returns have been filed, the offer form (if that is the requested remedy) has been completed and the package of materials is ready and waiting by the time Appeals reaches out.  The Settlement Officer could have waited another couple of weeks and avoided the concern expressed here of abusing discretion.  I often think that the refusal of additional time stems from a need for the IRS employee to meet internal deadlines for case processing.  That could not have been the reason here.

Perhaps the IRS would better position itself if it put some warning on the Form 12153 or sent out an early letter alerting taxpayers to the need to be compliant in their tax filing if they wanted to request a collection alternative.  Practitioners know that filing compliance must pre-date a successful request for a collection alternative but pro se petitioners may not.  Had the IRS proven, or if at trial it does prove, that it had told Mr. Brown about this requirement prior to the short time span between the initial Appeals letter and the hearing, perhaps the Court would have found or will find the failure to grant a request for more time reasonable.

CDP lien cases should move quickly because the lien ties up the taxpayer’s credit as Mr. Brown alleges here.  It would be nice if the Court could develop some system to hear lien cases quickly.  Having to wait 14 months after the petition for a trial is not unreasonable in most cases but can really hurt someone trying to get relief from the impact of a NFTL. I do not have any wonderful suggestions but do see this as one type of case where the taxpayer is harmed by the normal rhythm of Tax Court case processing.

The decision showcases the need for Appeals to be reasonable when a petitioner requests more time in a CDP case or at least to document the record if it is denying a request for additional time.  Although this opinion provides no precedent, it does provide a good reminder of another circumstance in which a taxpayer can argue abuse of discretion.

 

 

Oral Argument This Week on State Qui Tam Action Involving Citigroup

Readers may recall from fall of 2015 a post by Professor Eric Rasmusen discussing a New York State False Claim complaint he filed in connection with allegations that the government’s purchase of Citigroup stock should have triggered Section 382 to apply to limit the bank’s net operating losses. The matter has been removed to New York State court and is scheduled for oral argument this Wednesday. Professor Rasmusen has posted lots of useful information (including briefs) about the case here.

The main issues before the court are the following:

1. Does Citigroup owe the taxes?
2. Should Citigroup know it owes the taxes? (scienter)
3. Is the qui tam suit based on information “publicly disclosed in the news media and government reports”?
We will keep you posted.

Taxpayer Who Detrimentally Relied on IRS Erroneous Filing Information Properly Tossed from Tax Court

Frequent guest poster Carl Smith updates us on the Third Circuit’s decision last week in Rubel v Commissioner, which considers whether IRS mistakes when it communicates deadlines to people seeking relief from joint and several liability could be subject to equitable tolling. As we have discussed in prior posts, Carl and Keith have been actively litigating this issue; Rubel is the first circuit court opinion on the issue. Les

As you may recall from my post of last September, Keith and I have appeared pro bono in several Tax Court cases presenting the issue of whether, under current non-tax Supreme Court case law on jurisdiction, the time period to file an innocent spouse petition in the Tax Court under § 6015(e) is jurisdictional or subject to equitable tolling. This is an issue of first impression in the Circuit courts, though the Tax Court has held the period jurisdictional and not subject to equitable tolling since Pollock v. Commissioner, 132 T.C. 131 (2009). Two of our cases were in the courts of appeals, Rubel v. Commissioner, Third Circuit Docket No. 16-3526, and Matuszak v. Commissioner, Second Circuit Docket No. 16-3034, where the oral arguments were held on March 16 and April 20, respectively.

In both cases, during the 90-day period to file, an IRS employee told the taxpayers a date for the end of the 90-day period that was erroneous, and the taxpayers relied on that date in filing their petitions. In both cases, the Tax Court dismissed the cases for lack of jurisdiction as having been filed late — considering the timely filing requirement to be a jurisdictional one. Jurisdictional time periods can never be equitably tolled or subject to estoppel. A common ground for equitable tolling outside the tax area is when the defendant actively misleads the plaintiff as to a filing deadline.

In Rubel v. Commissioner, the Third Circuit has just affirmed the Tax Court.

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Background

For decades, both the Tax Court and the Circuit courts have held that the Tax Court, being a court of limited jurisdiction, has only such jurisdiction as is provided by Congress and that absent compliance with the time period to file a deficiency petition, the Tax Court lacks jurisdiction (i.e., the power to act). But, more recently, in Kontrick v. Ryan, 540 U.S. 443, 454-455 (2004), the Supreme Court held that both it and lower courts had overused the word “jurisdictional”; henceforth, the Supreme Court insisted that “jurisdiction” only be used to denote subject matter and personal jurisdiction, not claims-processing rules that Congress imposes to move litigation along. The Supreme Court has since called filing deadlines “quintessential claims-processing rules”. Henderson v. Shinseki, 562 U.S. 428, 435 (2011).

The Supreme Court has recognized two exceptions to its current jurisdictional rules: First, Congress may overrule the Supreme Court’s preference by making a “clear statement” that a claims-processing rule is intended to be jurisdictional. Arbaugh v. Y & H Corp., 546 U.S. 500, 515-516 (2006). Second, if a long line of Supreme Court precedents over 100 years has called a time period jurisdictional, it will remain so under stare decisis. Bowles v. Russell, 551 U.S. 207 (2007); John R. Sand & Gravel Co, v. United States, 552 U.S. 130 (2008). Still, the Supreme Court has noted the “rarity of jurisdictional time limits” under the clear statement exception; United States v. Wong, 135 S. Ct. 1625, 1632 (2015); and stated that “Congress must do something special, beyond setting an exception-free deadline, to tag a statute of limitations as jurisdictional and so prohibit a court from tolling it.” Id.

In fact, in about a dozen cases, beginning with Kontrick, the Supreme Court has never found that any claims-processing rule is jurisdictional under the “clear statement” exception. So, for now, that exception is only a theoretical one, with no concrete examples from the Supreme Court. And the Supreme Court has never expressed any view on whether either a Tax Court or Board of Tax Appeals filing deadline is jurisdictional.

Rubel Holding

In both Rubel and Matuszak, the IRS has argued that both exceptions to the Kontrick rule apply to make the 90-day period in § 6015(e) jurisdictional and not subject to equitable tolling.

At least one bright spot (to me) of the holding in Rubel is no mention in the opinion of the stare decisis exception’s application. The IRS had argued that the Second and Third Circuits should give stare decisis deference to all the rulings from the Tax Court and Circuit courts that have held the deficiency filing period jurisdictional and more recent Tax Court opinions holding the § 6015(e) and § 6330(d)(1) (for Collection Due Process (CDP)) time periods jurisdictional. I assume the Third Circuit in Rubel steered away from discussing this because there is no Supreme Court opinion that articulates this stare decisis exception as applying to rulings of courts below the Supreme Court. See Reed Elsevier, Inc. v. Muchnick, 559 U.S. 154, 173-174 (2010) (Ginsburg, J, concurring, joined by Stevens and Breyer, JJ.) (“[I]n Bowles and John R. Sand & Gravel Co. . . . we relied on longstanding decisions of this Court typing the relevant prescriptions ‘jurisdictional.’ Amicus cites well over 200 opinions that characterize § 411(a) as jurisdictional, but not one is from this Court. . . .”; emphasis in original; citations omitted). However, in doing so, the Rubel opinion differs from the recent opinions in Guralnik v. Commissioner, 146 T.C. No. 15 (2016) (holding § 6330(d)(1) time period jurisdictional in part by applying stare decisis exception to rulings of lower courts in CDP and deficiency opinions), and Tilden v. Commissioner, 846 F.3d 882, 886 (7th Cir. 2017) (holding § 6213(a) time period jurisdictional in part by applying stare decisis exception to rulings of lower courts in deficiency opinions).

Section 6015(e)(1) provides that:

In the case of an individual . . . who requests equitable relief [,(the kind requested by Ms. Rubel)] . . . the individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section if such petition is filed . . . not later than the close of the 90th day after the date [on which the IRS mails notice of its final determination of relief available to the individual].

The Third Circuit found two reasons for interpreting the time provision in this sentence as jurisdictional:

First, the context of the provision—how § 6015(e)(1)(A) fits within the statute as a whole—shows that it is jurisdictional. The statute’s grant of jurisdiction to the Tax Court and the time limit for activating that jurisdiction are located within the same provision. Moreover, the provision is located within the same subsection of § 6015 that sets forth other conditions that trigger or limit the Tax Court’s jurisdiction. § 6015(e)(3) (setting forth the limitations on the Tax Court’s jurisdiction). In addition, the filing period and the filing of the petition itself impacts the IRS’s ability to begin its collection efforts. More specifically, § 6015(e)(1)(B)(i) provides that no levy or collection proceeding can commence during the ninety-day window to petition for relief or, if a petition is filed in the Tax Court, until the Tax Court’s decision becomes final. This further reflects that the ninety-day period is meant to allocate when different components of the tax system have the authority to act and further supports the view that § 6015(e) is jurisdictional. Thus, the structure of § 6015 reflects Congress’s intent to set the boundaries of the Tax Court’s authority.

. . . .

Second, the Supreme Court has historically found that filing deadlines in tax statutes are jurisdictional because allowing case-specific exceptions and individualized equities could lead to unending claims and challenges and upset the IRS’s need for “finality and certainty.” Becton Dickinson & Co. v. Wolckenhauer, 215 F.3d 340, 351 (3d Cir. 2000); accord United States v. Brockamp, 519 U.S. 347, 349-54 (1997) (“Tax law . . . is not normally characterized by case-specific exceptions reflecting individualized equities.”). Rigid deadlines, such as those embodied in the tax law’s jurisdictional requirements, promote predictability of the revenue stream, which is vital to the government. See Becton Dickinson, 215 F.3d at 348 (stating that “the nature of the underlying subject matter—tax collection” underscores the need for an emphatic deadline (quoting Brockamp, 519 U.S. at 352)).

Slip op. at pp 8-11 (some citations omitted).

In a footnote, the Third Circuit provided rather cold comfort to Ms. Rubel: “While the Tax Court and this Court cannot alter a jurisdictional deadline, and the taxpayer is responsible for calculating when the deadline expires, we remind the IRS to exercise care when drafting correspondence to a taxpayer to assure it is accurate. “ Slip op. at p. 11 n.8.

Observations

Keith and I think the Rubel opinion is wrong for many reasons. We particularly think the court does not do an adequate job of distinguishing the Supreme Court opinion on which we principally relied, Sebelius v. Auburn Regional Medical Center, 133 S. Ct. 817 (2013). In Auburn, a single sentence in a subsection of the U.S. Code authorized a Medicare provider who was unhappy with the amount of reimbursement received to bring an action before a board “if” three conditions were met, one of which was meeting a 180-day filing deadline. There was no other provision in the U.S. Code that authorized the board to hold such hearings, so the sentence, in effect, created an implicit jurisdictional grant. The Supreme Court did not contradict the amicus, who argued that the first two conditions of the sentence were jurisdictional in nature. But, the Supreme Court took issue with the amicus’ argument that this made the filing period in the sentence also jurisdictional, noting that it wrote in Gonzalez v. Thaler, 565 U.S. 134, 147 (2012), that “[m]ere proximity will not turn a rule that speaks in nonjurisdictional terms into a jurisdictional hurdle.” The Rubel court distinguished Auburn by saying that, by contrast, § 6015(e) includes an explicit, not implicit, jurisdictional grant. Slip op. at p. 9-10 n.7. But, Keith and I don’t see why that should make a big difference, since in both statutes, the power of the court or board is authorized by the same sentence that contains the jurisdictional grant (implicit or explicit) and is followed by the condition “if” a time period is met. We don’t think the Supreme Court would want to make only this slight difference of the additional use of the word “jurisdiction” somewhere before the time period enough to satisfy the clear statement exception.

Moreover, the Supreme Court has also emphasized that in interpreting a statute’s time period as jurisdictional, the context of the entire action should be considered. In Henderson v. Shinseki, supra, the Court found the time period for veterans to file an appeal of a denial of benefits in the Court of Appeals for Veterans Claims nonjurisdictional, in part, because of the long period Congress gave for veterans to raise their claims and the solicitous nature of Congress toward veterans. Taxpayers who request innocent spouse relief can do so at any time during the 10-year period in which collection may be made under § 6502. And Congress has made equity a major reason for the granting of innocent spouse relief. Surely, it seems odd that equitable tolling would not be allowed in an area of the Tax Code providing unusual equitable relief.

The Rubel opinion’s citation to Becton Dickinson and Brockamp for the proposition that all Tax Code time periods are jurisdictional is also problematic. Brockamp never said that. Indeed, the words “jurisdiction” and “jurisdictional” do not even appear in the Brockamp opinion. That opinion merely held that the period to file a refund claim in § 6511(a) is not subject to equitable tolling under the presumption in favor of equitable tolling of nonjurisdictional statutes of limitations laid out in Irwin v. Dept. of Veterans Affairs, 498 U.S. 89 (1990), because of the many complicated rules already set out in the statute and the administrative problems that would ensue as to the then nearly 100 million refund returns filed annually, which would all have to be considered eligible for equitable tolling when filed late. There is no similar administrative problem with Tax Court innocent spouse suits because there appear to be only about 500 filed annually. And I checked that in the last 12 months, only 15 such suits have been dismissed for lack of jurisdictional as untimely (either late or premature), and only four such suits (including Rubel and Matuszak) presented any fact pattern approaching one where the Tax Court might have to consider equitable tolling.

The Rubel court also did not consider the context of the enactment of § 6015. It seems wrong to assume that Congress would want the time period not to be subject to equitable tolling, since the equitable provision, § 6015, was enacted by Pub. L. 105-206, § 3201, paired with § 3202, under the heading “Relief for Innocent Spouses and for Taxpayers Unable to Manage Their Financial Affairs Due to Disabilities” in H.R. Conf. Rept. 105-599 at 249. Section 3202 amended I.R.C. § 6511 to add a new subjection (h) to legislatively overrule the result in Brockamp as to financially disabled taxpayers. It is implausible that Congress would want the refund claim statute of limitations to be subject to equitable tolling yet want the time period in the related new equitable innocent spouse statute not to be subject to equitable tolling.

Finally, Becton Dickinson in 2000 held that the 9-month time period in § 6532(c) in which to bring a wrongful levy suit in district court is jurisdictional and not subject to equitable tolling. But, recently, the Ninth Circuit completely disagreed with that holding in Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015), holding that, under more recent Supreme Court case law, the time period is not jurisdictional and is subject to equitable tolling under the Irwin presumption. The Third Circuit should have read Volpicelli (which we cited) and realized that Becton Dickinson can’t stand up under current Supreme Court case law. Indeed, Volpicelli wrote:

The [Supreme] Court may in time decide that Congress did not intend equitable tolling to be available with respect to any tax-related statute of limitations. But that’s not what the Court held in Brockamp. It instead engaged in a statute-specific analysis of the factors that indicated Congress did not want equitable tolling to be available under § 6511. The Court later made clear in Holland [v. Florida] that the “‘underlying subject matter’” of § 6511—tax law—was only one of those factors. 560 U.S. at 646, 130 S. Ct. 2549 (quoting Brockamp, 519 U.S. at 352).   As we have explained, the other factors on which the Court relied are not a close enough fit with § 6532(c) to render Brockamp controlling here.

777 F.3d at 1046.

Absent generating a Circuit split, though, Keith and I are unlikely to seek Supreme Court review of Rubel.

If we lose everywhere, we will probably urge a legislative fix.

ABA Tax Section Preview: Panels of Interest, Appeals Comments and Olson Wins Distinguished Service Award

Keith and I are off to the ABA Tax Section meeting in DC this week. We will report back on some of the highlights; both Keith and I are speaking. Keith is on a panel today discussing issues small businesses confront when things do not go well, including trust fund recovery and bankruptcy issues.

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I am moderating a panel tomorrow that will feature two former PT guest posters, David Vendler and Caleb Smith. David and Caleb will be focusing on information reporting issues; David will be looking at interest reporting arising from transactions relating to homeownership (e.g., loan modifications, short sales). As David has discussed here before, the issue is timely: it is part of the recent IRS guidance priority and David is lead attorney in a class action suit that alleges banks are systematically underreporting interest to millions of consumers. Caleb will be looking at systemic approaches to information reporting, looking at student loan discharge as a case study, a topic he has also discussed in PT here.

On Saturday I will be on a panel moderated by former guest poster, current Tax Court clerk (and Villanova Law alum) Lany Villalobos with the National Taxpayer Advocate Nina Olson, EITC expert Steve Holt, and Congressional Research Service staffer Margot Crandall-Hollick; the panel will focus on tax benefits for working families, with an eye toward future reform proposals.  I will look at two recent cases as a platform to show how the current EITC often entraps individuals, contributing to the high improper payment rate. This is a topic of a brief essay I am finishing and hope to discuss in more detail in PT once it is done.

In addition to hosting meetings, the Tax Section submits many comments. Earlier this week, the Section submitted a set of comments looking at recent Appeals changes and suggesting improvements. Those comments are quite good and are linked here.

Finally, the ABA Tax Section is recognizing National Taxpayer Advocate Nina Olson this weekend with its Distinguished Service Award in honor of her service to the ABA Tax Section, the government and the tax system generally. Former ABA Tax Section Chair Michael Hirschfeld wrote a brief article discussing some of Nina’s career highlights. In it he shares a terrific story involving Keith and Nina meeting years ago to discuss Nina’s prescient idea to have tax clinics help the unrepresented in tax disputes.

District Court Grounds NetJets’ Refund Suit

NetJets Large Aircraft v US, a recent case out of the Southen District of Ohio, [free link not available], illustrates some of the nooks and crannies that taxpayers must navigate in refund suits. Being right on the merits is not enough. Filing a timely claim for refund is a jurisdictional requirement, even when the circumstances are clear that the government knows that a taxpayer wants its money back. Most of the times when there is a dispute about timeliness of a claim the issue revolves around a taxpayer filing a claim too late. Sometimes, as in this case, a claim for refund can also be too early.

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IRS assessed NetJets and related entities air transportation excise taxes on a variety of fees that the fractional jet company collected from its customers. For a court to have jurisdiction over a refund suit, taxpayers must under the Flora rule fully pay the tax, file a refund claim, and if the Service denies the claim, file a refund suit in federal court. As a divisible tax, under Flora, NetJets only needed pay the amount of excise tax due on an individual transaction for each tax quarter at issue to gain standing to challenge the entirety of the assessment.

NetJets payed a representative amount of tax, and then filed a claim for refund on the amounts it paid.(As to whether an amount is considered representative to meet the Flora divisible payment exception see an earlier two-part guest post by Rachael Rubenstien here ). After the Service denied the claim, it filed a suit seeking 1) a refund of the amounts it paid and 2) an abatement of the unpaid amounts the IRS had assessed for other transactions that IRS felt were subject to the excise tax.

Here is where it got tricky for NetJets.

During the pendency of the suit, IRS applied overpayments from other periods to the unpaid assessments that were at issue in the refund suit.  NetJets won on the merits in the refund suit and then filed a motion to make sure that the district court’s final judgment included an order that directed the Service to pay back the tax that were originally listed in the complaint as well as the overpayments that the IRS had applied during the pendency of the suit.

For support for its motion, NetJets relied in part on Fed R Civ Proc 54(c), which states that ‘[e]very . . . final judgment [other than a default judgment] should grant the relief to which each party is entitled, even if the party has not demanded that relief in its pleadings.'”

The Service disagreed, and in opposing the motion argued that the US had not waived sovereign immunity with respect to the overpayments it had applied to the unpaid assessments during the pendency of the refund suit. In particular, the government leaned on the jurisdictional requirement in Section 7422 that a tax refund suit cannot be brought until a claim has been filed and the rule in Section 6511(b)(2) that “no credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in [Section 6511(a)] for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by the taxpayer within such period.”

While the government agreed that NetJets had filed a refund claim, it filed its claim before the Service had applied the later overpayments to the assessments that were at issue in the case. According to the government, its earlier claim was not a claim with respect to the later amounts. The evidence in the record did not indicate that NetJets filed a formal claim for those other applied amounts; nor did it amend its pleadings to specifically allege a return of those funds. While the government agreed to abate the unpaid assessments, it would not refund any of the amounts that were applied to the assessment after NetJets filed its original refund claim because there was no separate claim filed with respect to those latter amounts.

The district court agreed with the government, looking primarily to the statutory language in Section 6511(b)(2). To get around that statute’s rather clear language that tethers the government issuing a refund to a taxpayer filing a claim, NetJets argued that a plain language approach to the issue failed to effectuate legislative intent (preventing the litigation of stale claims) and produced an absurd result. The court disagreed, initially noting that Section 6511(b)(2) had no exception for divisible taxes and that the broad language of the statute suggested perhaps an intent that was not so clear to discern.

As to the absurdity of requiring a taxpayer to file a separate claim when litigation was already pending, the court disagreed with NetJets:

Plaintiffs point to the apparent absurdity of filing a new refund claim when the Court has already determined that the underlying tax assessment cannot be collected. The application of § 6511(b)(2) in this case is, admittedly, tedious. But it is hardly absurd. Where the IRS retains overpayments and applies them toward a divisible tax liability for which a claim has already been filed, the taxpayer, to comply with § 6511(b)(2), must take a simple action: file a new refund claim. And contrary to Plaintiffs assertion, a refund claim is not only a “challenge [to] the lawfulness of an underlying tax assessment.” More mundanely, and as relevant here, a refund claim is a formal request to the IRS for the return of a taxpayer’s money. See 26 C.F.R. 301.6402-2. Filing a refund claim does not become a superfluous task simply because the lawfulness of the underlying assessment has already been determined.

Conclusion

This is a harsh result for NetJets but the opinion suggests that all is not lost. While it is too late to file claim now, the opinion states that the government “hinted” that previously NetJets may indeed have filed another formal claim for some of the amounts. Moreover, the opinion discusses that NetJets may have submitted informal refund claims, though there was insufficient evidence in the record on that point, and a party who files an informal claim must also perfect that informal claim with a formal claim in order for a court to have jurisdiction.

While NetJets may be able to salvage some of its refund the lesson of this case is clear: if litigating a divisible tax refund suit taxpayers should be on the lookout for IRS applying any overpayments to the dispute that is at issue in the suit. Even if the taxpayer wins on the merits, absent a specific refund claim for those amounts, taxpayers are vulnerable to the government’s argument that it has not waived sovereign immunity.

NetJets Large Aircraft v US, 119 AFTR2d 2017-1246 (SD Ohio 2017)

FDCPA’s Application to IRS’ New Private Debt Collectors

Today we welcome first time guest blogger Chi Chi Wu.  Ms. Wu is an attorney at the National Consumer Law Center (NCLC.)  While her primary portfolio centers on issues involving consumer law, she is the point person at the NCLC when tax law issues cross over into consumer law.  Some of her previous advocacy focused on tax-time financial products, such as refund anticipation loans.  She writes today about private debt collectors because their use raises consumer rights issues.  As all of our readers know the IRS has begun hiring private collectors to collect on delinquent tax obligations, and this post explains why these collectors are subject to Fair Debt Collection Practices Act requirements and remedies.  Keith

The Internal Revenue Service (IRS) has begun placing federal tax debts with private debt collectors.  One critical question is whether the Fair Debt Collection Practices Act (FDCPA) and its private remedies apply to these private debt collectors.

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Background

Internal Revenue Code (IRC) § 6306 requires the IRS to outsource the collection of certain federal tax debts. The IRS must enter into one or more “qualified tax collection contracts” with private agencies for the collection of “inactive tax receivables.” 26 U.S.C. § 6306(c). Inactive tax receivables are any tax debts in the IRS “potentially collectible inventory” that meet at least one of these criteria:

  • The tax debt has been removed from active inventory by the IRS for lack of resources or inability to locate the taxpayer;
  • More than one-third of the applicable statute of limitations has lapsed and the tax debt has not been by assigned to an IRS employee for collection; or
  • More than one year has passed without an interaction with the taxpayer or a third party for purposes of collecting the debt.

Certain taxpayers are statutorily exempt from the program. See NCLC’s Fair Debt Collection § 8.10.1.

The only activities that the IRC authorizes private debt collectors to perform are locating and contacting taxpayers, requesting full payment or offering installment agreements lasting up to five years, and obtaining financial information about the taxpayer. 26 U.S.C. § 6306(b).

Any amount collected from a taxpayer must be fully credited toward the taxpayer’s tax debt; in other words, collection fees will not be deducted from the amount paid by the taxpayer. 26 U.S.C. § 6306(e).The IRS is permitted to pay private collectors up to twenty-five percent of the amount of tax debt collected.

According to an IRS analysis, 79% of the cases that are likely to be referred to private debt collectors involve taxpayers with incomes below 250% of the federal poverty level. See Letter from Nina Olson, National Taxpayer Advocate, to Senate Committee on Finance and House Ways & Means Committee 8 (May 13, 1994).

This is not the first time the IRS has tried to use private collectors, and such prior efforts were far from successful.  For a history of prior IRS efforts to use private collectors, see Fair Debt Collection § 8.10.2.

FDCPA Applicability and Other Taxpayer Protections

Any contract between the IRS and a private collector must prohibit the collector from committing any act or omission that IRS employees are prohibited from committing in the performance of similar duties. 26 U.S.C. § 6306(b)(2). These prohibitions include communicating at inconvenient times and places; contacting represented debtors (with certain exceptions); calling the debtor at work if the collector knows the debtor’s employer prohibits such calls; and various other types of harassment and abuse  See 26 U.S.C. § 6304. See also NCLC’s Collection Actions § 10.2.13.10.

In addition, the IRS Code provides that “[t]he provisions of the Fair Debt Collection Practices Act shall apply to any qualified tax collection contract.” 26 U.S.C. § 6306(g).  While the law says that the FDCPA shall apply to the contract, the legislative history shows that Congress meant by this language that provisions of the FDCPA “apply to the private debt collection company.” Conference Rep. No. 108-755 (2004).

Thus, the FDCPA should apply to private collectors of IRS tax debts, despite the fact that the FDCPA normally does not apply to tax debts. See Fair Debt Collection § 4.4.2.3.

There is an exception to the extent that the FDCPA is superseded by: (1) IRC § 6304, which establishes the prohibitions discussed above that are very similar to the FDCPA; (2) IRC § 7602(c) governing contact with third parties; and (3) “any other provision” of the IRC.  See 26 U.S.C. § 6306(g), cross-referencing 26 U.S.C. §§ 6304, 7602(c).

Remedies for Violations by Private Collectors

The IRC includes a civil remedy against a debt collector who recklessly, intentionally, or negligently disregards any provision of the tax code or any regulation under it. 26 U.S.C. §§ 7433A, 7433(a).  The taxpayer has the right to bring suit in federal court for “actual, direct economic damages,” with a cap of $1,000,000 ($100,000 in the case of negligence), plus costs.  26 U.S.C. § 7433, incorporated by reference in 26 U.S.C. § 7433A(a).

Unlike suits when the misdeeds are committed by IRS employees, the plaintiff need not exhaust administrative remedies. However, the law insulates the IRS from liability for any misconduct by the private collector, permitting suit to be brought against the private tax collector only, not against the United States. 26 U.S.C. § 7433A(b)(1), (4). See also 26 U.S.C. § 6306(f).

FDCPA private remedies should also apply to private collectors when collecting tax debts.  The IRC makes the FDCPA applicable to the private debt collection program. 26 U.S.C. § 6306(g).   There is an exception to the extent that the FDCPA is superseded by, inter alia, “any other provision” of the IRC, which would include the civil remedy discussed above. 26 U.S.C. § 6306(g), cross-referencing 26 U.S.C. §§ 6304, 7602(c).

This section provides that “such civil action shall be the exclusive remedy for recovering damages resulting from such actions.”  26 U.S.C. § 7433(a).  However, the IRS private collection provision specifically refers to IRC § 7433A to establish a civil remedy. See 26 U.S.C. § 6306(k)(1). Section 7433A in turn states that “[s]uch civil action shall not be an exclusive remedy with respect to such person.” 26 U.S.C. § 7433A(b)(3).

Thus, a taxpayer’s remedy for unlawful debt collection activities is not limited to the IRC’s civil remedy provision, and FDCPA civil remedies should be applicable for private collectors conduct in collecting IRS tax debts.  This is important because the IRC civil remedy provision does not provide for statutory damages or attorney fees. 26 U.S.C. § 7433(b). Private collectors should also be liable for common law torts committed in the course of collecting tax debts, whose remedies might include punitive damages.

 

 

New Estate Tax Lien Discharge Procedures — Give the IRS All the Monies

In early April, the IRS issued updated guidance relating to the processing of the estate tax liens after June of 2016. See SBSE-05-0417-0011.   In June of 2016, various changes were made to the administration of the estate tax, including which groups in SBSE handled requests for the discharge of the estate tax lien.  The changes to the discharge were fairly drastic in some ways, and the Service took a significant amount of time getting around to announcing the changes (which it states is actually just the correct implementation of the law, perhaps implying the prior handling was incorrect).  The new provisions appear to force prepayment of tax, or at least handing over the funds, in exchange for the discharge of the lien in a broader range of situations, potentially creating a significant hardship for estates.  This has caught many estate administration lawyers off guard, altering sales, and angering many in the professional community.

The estate tax lien is somewhat different than other tax liens, and arises in every estate (you just don’t know it most of the time).  Under Section 6324(a), a lien is immediately imposed on all property in the “gross estate” of the decedent.  This includes property passing through the estate, but also most property passing directly to a beneficiary by operation of law, such as property held joint with right of survivorship, and most property passing by beneficiary designation.  As stated in the IRS guidance:

Unlike other tax liens, no assessment, no notice and no demand for payment are necessary to create the estate tax lien. It attaches at the time of the decedent’s death, before the tax is determined, and is security for any estate taxes that may be determined to be due. It is referred to as the “silent lien” and does not have to be recorded to be enforced.

Sneaky stuff, but arguably provides important protection for the Fed.  This lien attaches and remains in place for ten years after the date of death unless discharged.  There are some provisions extending the lien in circumstances where the estate tax is deferred, such as under Section 6166, but otherwise the use-by date is set at ten years.  As a side note, it is possible for a general tax lien to also be imposed under Section 6321, which could be in place longer, so in dealing with a lien estate tax practitioner must determine if one or both are in place.  See IRM 5.5.8.2.  For those looking to learn more about this lien, Keith and Les recently drafted chapter 14A.20 in SaltzBook, which covers the lien in depth, along with the transferee liability, how to request discharge, and various other interesting aspects of the “silent lien.”

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As indicated above, the lien is imposed immediately, while the audit could take months or years to occur, if ever at all.  Various situations would not be audited or do not require returns.  This can create issues, especially for illiquid estates, that need funds for administration costs.  If a fiduciary sought to transfer assets, especially when finicky title insurance and mortgage companies were involved, assurances would be needed that the property could be transferred free and clear.

Under the old rules, release or discharge was handled by different groups depending on whether a return was filed or audit was occurring.  If no return was filed or a return was under audit, Exam reviewed the request. This used to be outlined in IRM 4.25.14.2, which has subsequently been updated to indicate Exam will no longer be handling discharge requests.  Specialty Collection Advisory used to handle all other requests relating to the estate tax lien, which was covered under IRM 5.5.8 and IRM 5.12.10.

The prior procedures would allow the fiduciary to request a discharge of the lien on the property to be sold by filing a Form 4422, Application for Certificate of Discharging Property Subject to the Estate Tax Lien. This was fairly routine in the past and occurred quickly, allowing property to be sold and estates to obtain the proceeds.  This was allowed under Section 6325 if the lien was “fully satisfied or provided for.”  Presumably, the “provided for” language was what was relied upon prior to payment and the issuance of a closely letter.  The regulations added some additional requirements regarding “necessity” of the estate.

In SBSE-05-0417-0011, the Service outlined the new procedures for requesting discharge, and it appears the conditions for obtaining discharge have become a bit more strict.  Beginning in June of 2016, responsibly for all discharge applications of the estate tax lien were shifted to Advisory to be handled by its “Estate Tax Lien Group.”   Information about requesting the discharge, including the address to send such requests, is found on the IRS webpage here.  The directions provide that such requests must be filed “at least 45 days before the transaction date”, which is roughly a month or more longer than such requests used to take.  This is irksome, but not as problematic as some other changes that have been made.

After noting discharge is completely discretionary, the advice indicates considerations that Advisory may take into account, including situations where Advisory does not need to consult with Exam prior to issuing a discharge, stating:

In many instances, decisions concerning the discharge application can be made from the information provided on the Form 706 (if applicable) and the Form 4422 without the need to coordinate with Examination Estate & Gift. For example, if based on the information provided with the Form 4422 and internal account records you are able to determine that the estate tax liability has been paid, or the estate is not subject to a Form 706 filing requirement, or the value of other property disclosed on the Form 4422 that will remain subject to the estate tax lien is more than ample to protect the government’s interest in the payment of the estate tax, coordination with Examination Estate &Gift is not ordinarily necessary (emph. added).

The advice goes on to cover situations where Advisory will need to coordinate with Exam or Chief Counsel when considering discharge.  I emphasized some language in the above quote, because that language would seem to indicate discharge is appropriate where there is clearly more than sufficient other assets to timely pay the estate tax, which historically occurred.  Other language would give the same impression:

In many instances, in determining whether to grant an estate tax lien discharge, the issue you will need to consider is whether the estate tax liability is adequately provided for, meaning that the government’s interest in collecting the estate tax is secured… In determining whether an estate tax liability is adequately provided for, you have discretion and should exercise your judgment in making that decision based on the particular circumstances…[and] you may also consider the criteria in IRC § 6325(b) as a guideline in making your decision as the estate tax liability will generally be adequately provided for when one or more of the IRC § 6325(b) criteria set forth below is satisfied. In addition, there may be other circumstances where you and your manager determine that the estate tax liability has been adequately provided for under the particular circumstance involved.

This again would indicate payment at the time of discharge is not required, although gets a little thornier perhaps by reference to Section 6325(b), which allows for discharge in various circumstances, such as having double the potential liability available, partial payment, substitution of proceeds at sale, substitution of other assets (deposits, bonds, etc.).

The advice then covers some common scenarios.  For instance, if no Form 706 is required to be filed, no discharge is offered, and instead  Letter 1352 is issued indicating no return must be filed.  When a return is required, but no tax is due, the advice indicates escrow may not be needed.  But, if there are questions as to the veracity of the claim, additional research may be needed, and perhaps escrow.

Then  it starts to get problematic, stating:

if the Form 4422 shows an estimated estate tax greater than the net proceeds from the property being sold, and no estimated payment has been made, then the net proceeds should be paid or escrowed before granting the discharge.

For an estate that is illiquid, holding only real property or closely held business interests, this could be very problematic.  And, anecdotally, it appears some estates are running into this issue.  Although the estate tax is a priority claim, there are various other administration costs that can be paid first (my fave, attorneys’ fees).  It could also impact the payment of state death taxes, the timing of which can be more important that federal taxes.  In Pennsylvania, for instance, prepayment of inheritance tax at the three month mark will provide a five percent discount off the tax bill.  At least one tax practitioner has requested some type of hardship request from having to pay over the funds, and been rebuffed.

It also brings into question what will happen for someone who would have requested an extension to pay tax under Section 6161 or Section 6166.  I suppose the funds could be escrowed until the return is filed, but the funds may have been needed to run a closely held company or pay another debt.

I do not necessarily begrudge the IRS attempting to ensure payment, but this seems like an attempt to solve a problem that may not have existed.  I would be interested in seeing whether or not the IRS often gets stiffed on federal estate tax by people who request a discharge and have indicated tax may be due (my suspicion is no, but I could be wrong).  If this is not a problem, it seems like this change that can drastically and negatively impact estate administration (and potentially the value of estate assets) is misguided.  It would also be good if the IRS became a bit more flexible on a case by case basis – there cannot be that many of these per year — which the guidance seems to still allow.  From the anecdotal evidence, it would seem that the factors in Section 6325(b) may have been applicable in having assets worth double the tax debt still under the lien, but funds have still had to be paid or escrowed.

The take away for now is that 1) you have to apply much more in advance from closing and 2) if you need the proceeds from the sale, you probably need to make a compelling argument under Section 6325(b) why the fisc would be lighter for it.

Top of the Order – Tax Court Designated Orders

Top of the Order is a round-up of the Tax Court’s “designated orders” from the prior week. This feature is based on the premise that if a Tax Court Judge thinks something is important, you should probably pay attention to it. We generally won’t try to play the role of pop-psychologist in determining why the particular judge may have thought the order was important enough to “designate” it, but we will give a synopsis of the points and lessons that stood out to us. For those looking to gaze deeper into the crystal ball, links to each order is provided.

This post begins a new feature which will be written in rotation by four relatively new attorneys working in the low income taxpayer area:  Samatha Galvin of Denver University Law School; Caleb Smith; William Schmidt of Kansas Legal Services; and Patrick Thomas of Notre Dame Law School.  Today’s post is written by Caleb Smith.  Caleb is currently the clinic fellow in the Federal Tax Clinic at the Legal Services Center of Harvard Law School.  He will soon be leaving Harvard to become the director of the tax clinic at the University of Minnesota.  Caleb has written guest posts before and we welcome him back to kick off this new feature of PT.  We invite reader feedback on this feature and other possible features for the site.  Keith

Designated Orders: 4/24/2017 – 4/28/2017

S-Case Bumped Up to the Big Leagues: Precedential Decision Forthcoming

Docket # 015944-16, Skaggs v. C.I.R. (Order Here)

The decision to try a case as an “S” (or “Small”) case is sometimes a tactical choice. The relaxed evidentiary rules of an S-case mean that a client with a good story may find fewer hurdles or restrictions in presenting that story. See bottom paragraphs of Procedurally Taxing Post (Here). Also, because an S-Case cannot be appealed there may be a tactical opportunity for a quick win if the Tax Court has previously ruled on the issue but the circuit court that would have jurisdiction on appeal has not. Usually (at least in my experience) the taxpayer doesn’t much care that the S designation also means the decision cannot serve as precedent.

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Judges, however, do care about precedent. Thus we have the designated order from Judge Buch removing the S-designation because the case “presents an issue of first impression.” You’ll have to hold your breath on what that novel issue is. (Actually, you don’t. If you’re short of breath you can read the decision here. Spoiler: it involves what qualifies as “income received while an inmate” for purposes of the Earned Income Credit). But the designated order on its own is worth a review for those that routinely work with cases that qualify for S-treatment (Rules found here).

A couple take-away points:

(1) You can request the S-designation be removed (or changed from regular to S) really late in the process. In fact, the rules say that the request can be made “at any time after the petition is filed and before the trial commences.” This doesn’t mean, however, that the motion will be granted that late in the game. (Keith has a story of making the request to the judge when the case was called for trial and the judge asked if there were any preliminary matters on a case he picked up earlier in the day at calendar call.  He sought to change the case to S status on the basis that it was prior to trial. As may be expected, the motion was not granted.) Which leads to the second point:

(2) The IRS may oppose the S-designation, and the taxpayer may need to show why it should be a small case. Anecdotally, I have witnessed IRS recalcitrance on S-case designation at least once in the past where it was not entirely clear to me why they cared. The order provides a helpful review of what factors are in play when weighing the decision to remove an S-case designation by citing to the 1978 Congressional Conference report on point. Addressing these factors should help a taxpayer respond to a motion either in favor of S-case designation or removal of it.

Lawyer Behaving Badly

Docket # 005880-16 L, Baity v. C.I.R. (Order Here)

For those of you that routinely monitor designated orders, this one may seem like deja-vu. And that’s because it basically is. This is merely the latest in a line of designated orders pertaining to one lawyer trying seven different cases, all of which will be lost at the summary judgment stage.

In fact, the taxpayers already HAVE lost, but the Court is simply holding back from entering the decision so that the cases remain on calendar. Why? Solely so that the lawyer can show up and explain why there should not be sanctions and a referral to the ethics committee. Ouch.

At absolute best, it appears that the lawyer has been completely invisible as an advocate in the case, failing to respond to the IRS motion for summary judgment and Tax Court order that he so respond. The court cannot determine if counsel is “unaware of or is ignoring the Court’s orders.” At worst, the Court suggests that the lawyer may have knowingly brought merit-less claims using CDP judicial review inappropriately to evade collection, giving rise to sanctions under IRC § 6673.

A couple of observations:

  • Attorneys, remember FRCP Rule 11 when deciding to take a case and prepare a petition… And relatedly:
  • Attorneys: remember the difficulties of getting out of a case when you’ve entered an appearance. When you don’t yet have all the facts and a petition deadline is looming, the better option can be limited representation through Form 2848, written about here. But, no matter what you do, at the very least RESPOND to the Tax Court (and show up).

When the Court Bolds Instructions, You Should Probably Pay Attention to Them

Docket # 021815-15, Kanofsky v. C.I.R. (Order Here)

An uncharitable recap of this order would be as follows: Court orders a pro se petitioner to respond to the IRS’s motion for summary judgment. Pro se petitioner responds, but did not follow the instructions of the Court’s order close enough. Court grants motion for summary judgment.

Harsh result?

Not quite. In fact, there appears to be quite a lot of hand-holding from the Court leading up to this outcome. First, the Court denies the IRS motion for summary judgment because the motion would not be easy for the petitioner to respond to. (More on that below). Then, when the IRS makes a second, clearer motion, the Court specifically bolds what and how it wants the petitioner to respond. The Court even includes a Q&A printout on what a motion for summary judgment is and how to respond to it. The taxpayer appears to be familiar with (or at least make frequent use of) the court. (An earlier order from the court shows that the IRS has had previous run-ins with the taxpayer, and the taxpayer also appears to refer to himself as an accomplished whistleblower.) All things considered, this appears to be an instance of the Court doing what it can to help a pro se taxpayer help themselves.

If anything a take away from this case is a parable on “the value of specificity.” Number and separate your assertions so that the Court (and the opposing party) can respond to the discrete issues.

The first substantive order of the court was a denial of the IRS motion for summary judgment, without even directing the petitioner to respond. Why? Because the IRS motion was sloppily drafted: misusing terms of art, and bringing up facts that were irrelevant to the issues at hand. All the Court wants is a motion for summary judgment with assertions that can be responded to, by number, with reason and evidence for the disagreement. The original IRS motion for summary judgment is not congenial to such a response, so the Court (looking out for the pro se petitioner), says “try again.”

When the IRS did try again (this time adequately), the table was set. If the petitioner couldn’t comply with the order to respond with specificity, summary judgment would be warranted. And thus you have the designated order above.

Reminder: Timely CDP Requests Yield Notice of Determination, Not Decision Letter

Docket # 026578-16 L, Allen v. C.I.R. (Order Here)

This designated order from Special Trial Judge Armen looks at the jurisdiction of the Tax Court to review a CDP hearing that was timely requested with Appeals, but (for unknown reasons) a decision letter rather than a notice of determination was issued. A decision letter is typically what the IRS issues when the taxpayer has an “Equivalent” hearing rather than a full-fledged CDP hearing. (More on equivalent hearings can be found here.) Unlike CDP hearings, equivalent hearings cannot be reviewed by the Tax Court (thus the jurisdictional argument).

It is unclear from the available documents both why IRS counsel believes the Tax Court doesn’t have jurisdiction and why IRS Appeals issued a decision letter in the first place. If IRS counsel’s argument is that a (form-over-substance) “notice of determination” letter is required Special Judge Armen disposes of that with a reference to Craig v. Commissioner, standing for the proposition that a decision letter will be treated as a notice of determination if it was from a CDP hearing (and not an “equivalent” hearing).

Some thoughts and crystal ball gazing: This request was sent right at the buzzer, but ultimately was timely mailed (and received). What would the IRS have to do to show that the taxpayer WANTED an equivalent hearing even though the request would qualify for a full CDP?

As mentioned above, it is not immediately clear why the IRS thinks the Tax Court lacks jurisdiction. This may be a case where the IRS has created more work for itself by trying to dispose of something quickly, rather than correctly. The taxpayer is pro se and appears to want to argue tax years other than the one for which the proposed levy relates. The court quickly disposes of its jurisdiction to hear any of those other years. The taxpayer also appears to have checked pretty much every conceivable box for the court’s jurisdiction when filing her amended petition (e.g. Notice of Deficiency, Notice of Determination Concerning Collection Action, Notice of Determination Concerning Your Request for Relief From Joint and Several Liability, and Notice of Final Determination Not To Abate Interest (see order here)). It wouldn’t surprise me to see the Form 12153 CDP Request falling into a similar pattern…