Designated Orders: 7/24 – 7/28/2017

Professor Patrick Thomas of Notre Dame discusses last week’s designated orders. Les

Last week’s orders follow up on some previously covered developments in the Tax Court, including the Vigon opinion on the finality of a CDP case and the ongoing fight over the jurisdictional nature of section 6015(e)(1)(A). We also cover a very odd postal error and highlight remaining uncertainties in the Tax Court’s whistleblower jurisprudence. Other orders this week included a Judge Jacobs order and Judge Wherry’s order in a tax shelter case. The latter case showcases the continuing fallout from the Graev and Chai opinions.


Deposits in a CDP Liability Challenge? – Dkt. # 14945-16L, ASG Services, LLC v. C.I.R. (Order Here)

The first order this week follows on the heels of the Vigon division opinion, about which Keith recently wrote. In a challenge to the underlying liability in a CDP case, ASG paid the liabilities at issue in full in August 2016, and the Service quickly followed with a motion to dismiss for mootness, given that no further collection activity would take place. Judge Gustafson (Vigon’s author) orders ASG to answer three hypotheses, which attempt to distinguish ASG from Vigon.

Judge Gustafson contrasts ASG’s situation with the taxpayer in Vigon, given that the Service has not indicated an inclination to assess the liabilities again in ASG. Indeed, this may be because the IRS cannot assess ASG’s liabilities a second time due to the assessment statute of limitations under section 6501. As a corollary, Judge Gustafson posits that ASG is asking for a refund of the tax, without any contest as to a collection matter. Thus, as in Greene-Thapedi, the court may lack jurisdiction to entertain the refund suit. Finally, the Court notes that even if the refund claim could proceed, ASG would need to show that it had filed a claim for a refund with the Service. Judge Gustafson requests a response from ASG (and the Service) on these suggestions.

Separately, ASG noted in its response to the motion to dismiss that “Petitioner paid the amounts to stop the running of interest.” Judge Gustafson therefore ordered ASG to document whether these remittances were “deposits”, rather than “payments,” along with the effect on mootness. Under section 6603, deposits are remittances to the Service that stop underpayment interest from running. However, deposits are ordinarily always remitted prior to assessment, during an examination. The Service must return the deposit to the taxpayer upon request, and, if at the end of the examination the resulting assessment is less than the deposit, the Service must refund the remainder.

It’s unclear whether a remittance made during a CDP proceeding challenging the underlying liability could be treated as a deposit, though Judge Gustafson seems to be opening the door to this possibility.

The Continuing Saga of Section 6015(e)(1)(A) – Dkt. # 21661-14S, Vu v. C.I.R. (Order Here)

Vu is one of four innocent spouse Tax Court cases in which Keith and Carl Smith have argued that the period under section 6015(e)(1)(A) to petition the Tax Court from the Service’s denial of an innocent spouse request is not jurisdictional. Les wrote previously about this case when Judge Ashford issued an opinion dismissing the case for lack of jurisdiction. Vu is unique among the four cases; in the three other Tax Court dockets (Rubel, Matuszak, and Nauflett), petitioners argue that the time period is not jurisdictional and is subject to equitable tolling in circumstances where the Service misled the taxpayers into filing late. In contrast, Ms. Vu filed too early, but by the time she realized this, it was too late to refile. As a result, Judge Ashford dismissed the case for lack of jurisdiction, because of an untimely petition.

Shortly after the opinion, Keith and Carl entered an appearance in Vu and filed motions to reconsider, vacate, and remove the small tax case designation, arguing that the Service forfeited the right to belatedly raise a nonjurisdictional statute of limitations defense.

Last week, Judge Ashford denied those motions. Substantively, Judge Ashford relied on the opinions of the Second and Third Circuits in Matuszak v. Commissioner and Rubel v. Commissioner, which hold that the time limitation in section 6015(e)(1)(A) is jurisdictional. (The Tax Court also recently ruled against the petitioner in Nauflett, but Keith and Carl plan to appeal this to the Fourth Circuit). Given that, therefore, Judge Ashford believed there to be no “substantial error of fact or law” or “unusual circumstances or substantial error” that would justify granting a motion to reconsider or motion to vacate, she denies those two motions.

To compound matters, Vu also filed her petition requesting a small case designation; decisions in small tax cases are not appealable. While Vu moved to remove the small case designation, Judge Ashford denied that motion as well. The standard for granting a motion to remove a small case designation is whether “the orderly conduct of the work of the Court or the administration of the tax laws would be better served by a regular trial of the case.” In particular, the court may grant such a motion where a regular decision will provide precedent to dispose of a substantial number of other cases. But because Judge Ashford views there to already be substantial precedent against Vu’s position, she denies this motion as well.

Keith and Carl plan to appeal Vu to the Tenth Circuit anyway, arguing that the ban on appeal of small tax cases does not apply where the Tax Court mistakenly ruled that it did not have jurisdiction to hear a case. This argument will be one of first impression.

A second argument will be that the denial of a motion to remove a small case designation is appealable. In Cole v. Commissioner, 958 F.2d 288 (9th Cir. 1992) the Ninth Circuit dismissed an appeal from an S case for lack of jurisdiction, noting that neither party had actually moved to remove the small case designation. In Risley v. Commissioner, 472 Fed. Appx. 557 (9th Cir. 2012), where there is no mention of the issue of a motion to remove the small tax case designation, the court raised, but did not have to decide, whether it could hear an appeal from an S case if there was a due process claim. A due process violation allegation might be another occasion for appealing an S case, but there will be no due process violation alleged in the appeal of Vu.

Keith and Carl also note that they will not be filing a cert petition in either Matuszak or Rubel. They will only do so if they can generate, through Nauflett or Vu, a circuit split on whether the time period under section 6015(e)(1)(A) is jurisdictional.

Postal Error? – Dkt. # 9469-16L Marineau v. C.I.R. (Order Here)

In Marineau, Judge Leyden tackles the Service’s motion for summary judgment in a CDP case. The facts start as is typical: the Service filed a motion for summary judgment, and the Petitioner responded that the Service hadn’t sent the Notice of Deficiency to their last known address in Florida. Dutifully, the Service responded with a copy of the Notice of Deficiency showing the taxpayer’s Florida address and a Form 3877 indicating the NOD was sent by certified mail to that address. Both the NOD and the Form 3877 have the same US Postal Service tracking number.

But then things take a turn. The Service also submitted a copy of the tracking record for that tracking number from the post office. It shows that the NOD was sent from Ogden, Utah, but that it was attempted to be delivered in Michigan, rather than Florida. The NOD was unclaimed and eventually returned to the Service.

Judge Leyden appears to be as perplexed as I am by this situation. So, she ordered the Service to explain what happened. I’ll be looking forward to finding out as well.

Remand and Standard of Review in a Whistleblower Action – Dkt. # 28731-15W Epstein v. C.I.R. (Order Here)

In this whistleblower action, the Service and the Petitioner apparently agreed that the Petitioner was entitled to an award (or perhaps, an increased award). The Service filed a motion to remand the case so that a new final determination letter could be issued. The Petitioner opposed this motion, as he believed that the Tax Court could decide the issue for itself, without need to remand.

Judge Lauber appears to be cautious towards remanding a case, for two reasons: first, it’s unclear whether the Court has the authority to remand a whistleblower case. While CDP cases are subject to remand, due to the abuse of discretion standard applicable in most cases, cases in which the Court may decide an issue de novo are, according to Judge Lauber, generally not subject to remand. (I’m not sure that’s entirely correct, as CDP cases challenging the underlying liability are indeed subject to remand.) Relatedly, the Court isn’t yet even sure what the standard of review for a whistleblower case is.

Judge Lauber manages to avoid these issues. Because the Court retains jurisdiction where the Service changes its mind about the original whistleblower claim post-petition (see Ringo v. Commissioner), Judge Lauber does not believe there’s any point in remanding the case for issuance of a new letter. The Service can simply issue the letter now, and the Court can enforce any resulting settlement through a judgment. Of course, it can’t hurt to not have to decide the tricky issues surrounding the Court’s standard of review and possibility of a remand


Wells Fargo and The Negligence Penalty for A Transaction Lacking Reasonable Basis

Over the last few weeks, Stephen, Keith and I (with some help from others like Jack Townsend who is the lead author on the criminal penalties chapter) are all writing up the next update for IRS Practice and Procedure, and are sorting through and writing about 125 developments from March through early July for addition to the book.


A few of the developments are major ones we did not address in Procedurally Taxing. One is the Wells Fargo case from earlier this spring. You may recall Wells Fargo v US where Stu Bassin in a post on PT discussed the government’s loss in its efforts to use the economic substance doctrine to disallow interest expense deductions for a transaction that lacked a non tax business purpose. The case also has an interesting and important penalty component involving the government’s assertion of a negligence penalty in connection with Wells Fargo’s claiming of disallowed foreign tax credits.

The issue was teed up for the district court in a somewhat odd manner, with Wells Fargo stipulating that if the foreign credit generating transaction was a sham, it should not be subject to the penalty because “there was an objectively reasonable basis for Wells Fargo’s return position under the authorities referenced in § 1.6662–3(b)(3).”

The court held that the foreign credit generating transaction was a sham. Wells Fargo agreed to the stipulation to limit discovery, but the effect of the stipulation prevented it from arguing that it exercised ordinary and reasonable care in the preparation of its tax return. In other words, Wells Fargo felt that the authority for the position was sufficient to shield it from penalties without regard to any independent effort it made to assess the merits of the transaction prior to taking its position on its tax return. Wells Fargo did so because the regulations insulate from negligence a return position that has a reasonable basis; i.e., the position is reasonable based on one or more authorities (as further defined in the regulations).

In the opinion considering the penalties, the district framed the issue as follows:

Is it enough for Wells Fargo to show that its return position had a reasonable basis under the authorities referenced in § 1.6662–3(b)(3)? Or must Wells Fargo prove that it actually consulted those authorities in preparing its tax return?

The district court held that Wells Fargo was subject to the penalty because it had to prove that it in fact consulted with the authorities before adopting its position on the return. This was the view the government urged under the regulations; the taxpayer argued that the statute and regulatory focus is on an objective analysis, with the taxpayer’s efforts beside the point.

The Court found the regulations to be ambiguous, specifically that Treasury Regulation §1.6662-3(b)(3) states a reasonable basis is satisfied if “a return position is reasonably based on one or more” authorities. That was important, because under administrative law principles (so-called Auer deference) an agency is entitled to deference regarding an interpretation of an ambiguous question relating to the meaning of its own regulations.

At or around the time of the opinion, Jim Malone of Post & Schell wrote a terrific blog post critiquing the district court opinion, suggesting that perhaps Wells Fargo deserved to be penalized but that the court’s approach to the issue was “troubling”. There was also a piece in Bloomberg that quoted Jim and former PT guest poster Andy Grewal, with Andy saying that “it would be more sensible to apply Section 1.6662-3(b)(1) in accordance with its plain meaning and examining all relevant authorities supporting the treatment of a position, whether or not the taxpayer was aware of them.”

The Wells Fargo outcome is a departure from the norm in these cases because it has generally been thought that reasonable basis is an objective inquiry; i.e., if the position is more or less plausible based on an authority, then the taxpayer is free from the penalty. As Jim discusses, there are some cases along the lines suggesting that if a taxpayer had some separate reason to do a bit of digging then more than just objective analysis is warranted, yet the Wells Fargo opinion suggests a differing starting point than what many believed to be the case under the regulations.

I am not sure that other courts will follow this approach but it is something that advisers should be aware of when considering the effect of a stipulation as well as what may be necessary to put in the record if one is looking to rely on this defense to penalties.



National Taxpayer Advocate Blogs on Private Debt Collection

On July 5, the National Taxpayer Advocate (NTA) posted a blog on the private debt collection program.  She has followed that up with two more blogs on this subject found here and here.  In June, she posted two blogs, found here and here, about the passport revocation program which contain a number of useful examples about how that program will work.  Because of her position inside the IRS and her knowledge and insight on collection issues, these blogs serve as an important resource for practitioners confronted with these issues.  I have blogged before on private debt collection here and here.  The private debt collectors are now at work contacting taxpayers.  One of our prior clients has received contact which is not surprising as you will find out when I discuss the statistics in her second blog post on this subject.


Nina starts her first blog with a background about the earlier failed effort to use private debt collectors and about the statutory authority surrounding their use.  She notes that it was agreed that the IRS could not use private debt collectors with specific Congressional authorization.  The American Jobs Creation Act in 31 U.S.C. 3718 generally permits federal agency heads to contract with private debt collectors but that act specifically excludes federal tax debts.  Viewed through that lens, IRC 6306 authorizes the IRS to hire private debt collectors for very specific limited activities.

The specific action authorized is entering into “qualified tax collection contracts.”  The statute defines this term as an agreement for services: “(A) to locate and contact a taxpayer; (B) to request full payment from such taxpayer and, if the taxpayer cannot make full payment, to offer the taxpayer an installment agreement for a period not to exceed five years; and (C) to obtain financial information with respect to such taxpayer.”  Nina’s blog takes the position that the IRS has gone beyond the authorization in the statute.

She points first to installment agreements.  The agreement allows the private debt collectors to enter into installment agreements that last up to seven years.  If the agreement for an installment agree goes beyond five years, the private debt collector must obtain approval from an IRS technical analyst.  She feels that allowing this goes beyond the language of the statute but that, even worse, the private debt collectors can monitor the installment agreements that go beyond five years and receive commissions on them even though this monitoring is not specifically authorized by IRC 6306.

When Congress passed the newest version of private debt collection and mandated that the IRS use it, the carrot in the legislation is that the IRS gets to keep 25% of the amounts collected.  This carrot provides an incentive for the IRS to maximize the use of private debt collections and may lead to use of them in a manner not authorized by the statute.

The IRS is not requiring private debt collectors to solicit financial information from debtors even though that is one of the categories of things the private debt collectors are explicitly allowed to do.  This information would allow the IRS to determine a taxpayer’s ability to pay.  Private debt collectors did this the last time they were working tax debts.

Their scripts instruct their employees to “suggest that liquidating assets or borrowing money may be advantageous” and to provide ideas on how and where to borrow including borrowing from a retirement plan or obtaining a second mortgage.  Since the private debt collectors are not gathering information about the taxpayer’s financial situation, unlike the IRS when it is engaged in collection, the private debt collectors might suggest borrowing that would be detrimental to the taxpayer’s financial well-being.  Because of the payment structure, the private debt collectors have an incentive to get the taxpayer to pay even if it would prove to create financial hardship.

As sad as you might be about private debt collectors after reading Nina’s first blog, her second post provides a clearer picture of which accounts are going over to these companies.  Not surprising, the accounts include a high percentage of low income taxpayers.  One of the reasons for the failure of the last effort to use private debt collectors is that they receive the accounts the IRS cannot collect.  A high percentage of those accounts involve individuals who have little or no ability to pay.  The data in her second post makes this clear.  She has had her researchers look at the income levels of the accounts being sent out.  The median income of the group of almost 10,000 taxpayers sent out early in the program was $31,000 and about half of the group fell under 250% of poverty level which means they would qualify for the services of my clinic under the guidelines Congress established in creating the grant funds for low income taxpayer clinics in IRC 7526.

Nina does note that she has once again made being the subject of private debt collection a policy basis for getting assistance from her office even if the taxpayer does not meet the hardship criteria of the statute.  Most of these individuals will not know that or know why they should seek assistance from her office or clinics like mine, but assistance is available for the taxpayers who are the subject of private debt collection.  As Nina points out, the IRS voluntarily agreed to exclude certain taxpayers but declined to exclude others she felt should be added to the list meaning that a fair number of vulnerable individuals will be handed over to the private debt collectors.

In her third and final blog on the subject, she points out that one decision made by the IRS is to send new tax debt out to the private debt collectors in situations where the taxpayer has old debt already in their hands.  The post has an informative chart on the amount of money each of the four notices in the IRS collection stream brings into the coffers.  New debt is much easier to collect for the IRS than old debt.  A statistic I remember from working on similar issues years ago is that the IRS only collections about 15% of debts once they go past two years.  By turning over new debt to the private debt collectors, the IRS is giving them debt the IRS itself might have collected in its notice stream without having to pay the fee to the private debt collectors.

Here is where potential gamesmanship comes into play.  While the new debt might get collected without assistance from the private debt collectors, if they do collect it not only do they get to take out a fee but 25% of the amount collected goes into a fund the IRS can use for its operation.  Going back to 1954, Congress eliminated incentives for tax collectors to collect money to make it a more professional operation.  The new IRC 6306 puts this type of incentive out there for the IRS as a way to augment its budget.  To be sure, none of this 25% directly benefits anyone at the IRS but the system does provide an incentive for the IRS to toss to the private debt collectors some of the “better” debt because the more debt collected by them the more the IRS has additional funds to spend at a time when Congress has decided to starve it.


Villanova Law School Seeks Faculty Member to Direct Tax Clinic

Keith’s departure for Harvard this year means that Villanova Charles Widger School of Law is looking to hire a full time faculty member to run our tax clinic. The posting for the position is here.

It is a great opportunity. Villanova has an excellent Clinical Program and an innovative Graduate Tax Program. Prior to Keith, I directed the Tax Clinic, and Stephen also cut his teeth there as a student many moons ago. The Law School provides significant support to faculty members and expects that the new Tax Clinic Director will continue the Clinic’s place as a national leader in the tax clinic community.

Storm at SEC Over Appointments Clause Violations Concerning Its ALJs and Possible Implications as to Circular 230 ALJs , Part V

Frequent guest poster Carl Smith updates us on important developments concerning SEC ALJs and reminds readers of possible implications for tax procedure. Les

Since September 2015, I have been following and posting about litigation concerning whether SEC ALJs need to be appointed in accordance with the Constitution’s Appointments Clause.  They currently are not appointed.  The SEC doesn’t think its ALJs need to be appointed because arguably its ALJs do not exercise final authority, since the SEC can review their rulings mostly de novo.

In my last post, I noted that the Tenth Circuit has held that these ALJs need to be appointed; Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016); while the D.C. Circuit has held that these ALJs need not be appointed. Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277 (D.C. Cir. 2016).  I pointed out that, to see if it could resolve the Circuit split short of Supreme Court review, the D.C. Circuit agreed to rehear Lucia en banc.  That hearing took place on May 24, 2017.  But, the Circuit split evenly, so on June 26, 2017, it issued an order announcing that it split.  There is no opinion as a result.  This is to report that on July 21, 2017, Lucia filed a petition for cert. I fully expect the Supreme Court to grant that petition.

For more background on these SEC cases and why this may have an impact on ALJs that the Treasury uses to try Circular 230 violations (who also may not be properly appointed), see my prior posts here, here, here, and here.

This all boils down to a fight over the meaning of a part of Freytag v. Commissioner, 501 U.S. 868 (1991).  In Freytag,  the Supreme Court held that the Appointments Clause did not prohibit the Tax Court’s Chief Judge from appointing Special Trial Judges (STJs) because the Tax Court was one of the “Courts of Law” mentioned in the Clause and because the Chief Judge could act for the Tax Court.  Before reaching these rulings, the Supreme Court first had to decide whether the STJs are “Officers” of the United States who need to be appointed under the Clause or are mere government workers, who don’t need to be appointed.  This question turned on the vague standard the Supreme Court has used in recent years to identify Officers – i.e., individuals who “exercise significant authority on behalf of the United States”.

In Freytag, the Supreme Court held that because of the judge-like duties of the STJs, they are Officers needing appointment under the Clause.  In going through a recitation of STJ duties and powers, the Court, at the end, noted that in some cases (under what is now section 7443A(b)(1)-(5)) STJs can make rulings that are final and not reviewable by regular Tax Court judges.  See section 7443A(c).  In deciding whether SEC ALJs are Officers, the D.C. Circuit and Tenth Circuit have split over whether the mention of these final decision instances for Tax Court STJs constituted a holding by the Supreme Court that, in the absence of final authority, no individual can be an Officer.  The Supreme Court in Lucia (if it grants cert.) will have to resolve this split over what it meant by the finality observation in Freytag.

When is a Collection Due Process Case Over

I have written twice before, here and here, about the case of Matthew Vigon.  Mr. Vigon, representing himself, has now moved from the Tax Court order pages into its fully bound volumes of opinions with a full T.C. opinion, Vigon v. Commissioner, 149 T.C. No. 4 (July 24, 2017).  Judge Gustafson continues to use Mr. Vigon’s case to teach us about Collection Due Process (CDP) issues that had previously gone unanswered.  Today’s lesson concerns when does a CDP case end and what effect does an IRS concession on part of the case have on the whole.


The IRS filed a notice of federal tax lien (NFTL) against Mr. Vigon because he did not pay the penalties assessed against him for frivolous tax submissions.  He filed a CDP request and then a CDP petition contesting the penalties.  When we first saw his case early in 2017 with an order linked in the blog above, Judge Gustafson raised the concern that the IRS had not proven that it got the appropriate supervisor approval under IRC 6751 prior to making the assessment.  Now, the IRS has abated the penalties, released the lien and moved to dismiss this case because of mootness.  The IRS does not concede, however, that Mr. Vigon is not liable for the frivolous tax submissions and takes the position that it has the right to reassess the penalties at the conclusion of the case.  The matter before the Court is whether the position of the IRS keeps the case open.  The Court finds that it does and that has a significant impact on the meaning of merits litigation in CDP cases which causes the Court to designate this opinion as one with precedent.

Mr. Vigon lives in Canada and is a citizen of Canada.  He filed nine returns the IRS deemed frivolous.  He argued to Appeals in the CDP case that he filed the returns because he was trying to purchase property in the US and a man named Peter told him he needed to file these returns.  Appeals did not agree with his reason for abating the penalty but when the case moved into Tax Court the Chief Counsel attorney asked to return the case to Appeals for it to make a determination that the penalties were properly authorized.  The Court granted that request.  Appeals determined that the penalties were properly authorized in a supplemental determination.  The IRS then told the Court it had decided to abate the penalties and submitted the motion dismissing the case based on mootness but the Court issued an order stating “It is less clear how a liability challenge under 6330(c)(2)(B) becomes moot merely upon an announced concession, which would not seem to have any res judicata or collateral estoppel effect.  Perhaps a CDP petitioner who makes a liability challenge that the IRS concedes is entitled to decision in his favor on the liability issue.”

In its response the IRS acknowledges that the abatement of the frivolous penalty assessment and the release of the notice of federal tax lien related to the assessment and the dismissal of the CDP case for mootness does not have a res judicata effect.  The IRS argued that could hypothetically reassess the penalties at any time as these penalties do not have a statute of limitations on assessment but that if it did reassess the taxpayer would have the opportunity for another CDP hearing concerning the assessment.  Since, if this were to occur (and the IRS does not indicate that it intends to reassess), petitioner would have the chance to come back to the Tax Court the petitioner’s interests are adequately protected even without res judicata or collateral estoppel.  The IRS argues that “no current case or controversy exists for the Court to adjudicate.”

Before I get to the Court’s response, I want to pause and point out that I am not certain why Mr. Vigon has been able to contest the merits of his IRC 6702 penalty in this CDP case.  If he had been offered a conference with Appeals in conjunction with the assessment of the penalties, the IRS would take the position that the pre-assessment conference with Appeals forecloses the opportunity to raise the merits of the liability in his CDP case and that only by paying the penalty and suing for refund could he contest the merits of the penalty.  Three circuit courts, upholding the decisions of the Tax Court, have recently sustained the regulation on this point and we have discussed the issue in several posts here, here, here and here. So, while Mr. Vigon has the opportunity to contest the IRC 6702 penalty in the current CDP case (“the IRS acknowledges that Mr. Vigon was entitled to challenge the penalty liabilities at the CDP hearing.”), his ability to do so in a future CDP he might bring does not seem clear.

The Court notes that Mr. Vigon did not respond to the motion to dismiss on the grounds of mootness.  He had informed the Court previously of his incarceration in Canada.  The Court speculates that his incarceration may continue and then moves forward with its discussion of the case without the benefit of his input.  The Court also notes that it is not yet called upon to decide whether he is liable for the IRC 6702 penalties and so it will not discuss the principles and standards that apply to the penalty.

The Court points out that Mr. Vigon did not raise a challenge to the appropriateness of collection action but focused his CDP request on the challenge to the liability.  The Court describes the basis for its jurisdiction to decide the merits of a tax liability in the CDP context and notes that “the liability issue may remain even after the collection issues have been resolved or become moot.”  The Court states that “the question now before us is whether the liability issue may remain even after the assessment has been abated.”

The IRS argues that once the collection action goes away the basis for any merits determination goes away with it.  The Court quotes the IRS argument:

In order for the Court to determine a liability in a CDP case notwithstanding the lack of a proposed collection action, the Court must find a specific jurisdictional grant under I.R.C. 6330.  However, section 6330(d)(1) only gives the Tax Court jurisdiction to review the determination referred to in section 6330(c)(3).  Section 6330(c)(3) directs Appeals to determine, inter alia, whether the [“]proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.”  Without an assessment, there can be no collection action and accordingly no valid determination for the Tax Court to review under section 6330(d)(1).  This does not constitute a specific grant of jurisdiction to conclusively determine petitioner’s liability irrespective of the collection action.

The Court points out that 6330(c)(3) is not confined to balancing collection issues but in (B) also permits jurisdiction of the issues raised “under paragraph (2).”  Paragraph (2) allows the petitioner in a CDP case “to raise challenges to the existence or amount of the underlying tax liability for any tax period.”  The Court finds that “having obtained jurisdiction of a liability challenge when the petition was filed, the Tax Court does not lose jurisdiction over it if the IRS releases a lien and ceases collection.”  The Court notes that even if it has jurisdiction it could still dismiss a case if it becomes moot as many CDP cases do.  The Court discusses how CDP cases involving only collection issues typically become moot when the collection issue is resolved.  CDP cases involving a merits challenge typically do not offer the IRS the opportunity to reassess because of the statute of limitations on assessment which has normally run by the time the case gets decided.  If the IRS explicitly disclaims intention to pursue a liability, that could also cause a case to become moot.

This case offers a different situation because of the IRS position that the 6702 penalty has no statute of limitations on assessment.  The Court finds that “here, abatement is a tactical retreat but not a surrender.”  The IRS has not, in Mr. Vigon’s case, disclaimed its interest in making another assessment even while saying such as assessment is unlikely.  The Court asked the IRS to comment on the case of Hotel Conquistador, Inc. v. United States, 597 F.2d 1348 (Ct. C. 1979) and did not like its response.  That case, like this one, involved a party who wanted to shut down a suit but who had the possibility of reopening the same litigation at a later point.  The Court decides that the motion to dismiss the case on the grounds of mootness fails.

This may not be altogether good news for Mr. Vigon.  While the IRS did not promise that it would not reassess the penalties, it signaled that it was unlikely to do so.  Moving forward with a trial on the merits, Mr. Vigon will need to make his case that the penalties do not apply to his actions.  He has been ably “represented” by the Court in three written opinions/orders thus far but he may need more than the Court’s assistance on legal issues to actually win his case on the merits.  The Court’s assistance involves placing checks on IRS actions and not on putting evidence on during a trial.  If the IRS does not file a statement conceding that it will never reassess the frivolous filing penalties, there is more yet to come in this case and that may not be to Mr. Vigon’s advantage.  If he had responded, he might have asked the Court to dismiss the case and let him take his chances with the IRS not assessing again.  I realize the parties do not confer or necessarily terminate the Court’s jurisdiction but worry that Mr. Vigon will lose on the merits unless he steps up his activity in the case or receives representation.


Designated Orders: July 17 – 21 or What’s Happening with 6751?

For those concerned that the summer doldrums are set to descend upon the United States Tax Court, take comfort in knowing that there were six designated orders issued last week. Nevertheless, this post will be fairly short: four of the designated orders will be given no scrutiny (caption change here, motion to withdraw here, correction of a division opinion typo here, and request for legal memorandum here). Only passing mention will be given to one other: the bulk will be devoted to one potentially consequential order dealing with supervisory approval of penalties post-Chai.


After beginning the post by saying that I will essentially ignore five of six designated orders last week, it may be appropriate to explain why designated orders remain an important source of information. To quote a designated order that was issued just last week (found here), it is wise to keep on top of the orders because even though they are not precedential they “may be helpful to the parties in showing the […] judge’s thinking[.]” I couldn’t help but feel validated by Judge Gustafson as he suggested that counsel review past orders on the subject at hand…

A Ripple in Chai… Can the IRS (Still) Just Go Through the Motions?Jaggers v. C.I.R., Dk. # 21873-16 L (found here)

This is a pro se case with what may well involve tax-protester type arguments (it arises from penalties pertaining to frivolous tax submissions). But if there is one thing I have seen again and again in the designated orders I’ve reviewed, it is that the IRS just “goes through the motions” (especially in a CDP context and especially on a motion for summary judgment) the Court is asking questions. The Court takes review of the record seriously: when the IRS says “trust us,” the Court responds “show me.” See, for example, last month’s post designated orders on prior mailing dates and assessment issues here. The following designated order follows this trend, but more importantly brings the requirements of supervisory approval of penalties post-Chai into focus.

Much has been said about how the Tax Court has responded to Chai (see here, here and here). Here, we have an order that provides yet another glimpse into how the emerging importance of IRC 6751 interfaces with somewhat perfunctory IRS procedures. After a CDP hearing, the IRS routinely issues a Notice of Determination containing the boilerplate that Appeals “has verified that the requirements of any applicable law or administrative procedure have been met.” Usually this “verification” statement isn’t different from a conclusory statement of law, and essentially tracks the statutory language verbatim (see IRC 6330(c)(1)). A question may arise as to whether that statement is good enough, or if something more (say, for instance, providing specific facts) that they took the necessary steps to verify needed? When IRC 6751 is at play, even without the petitioner challenging the statement the answer may be “we need more.”

Judge Gustafson notes that the IRS does not specifically mention or reference the supervisory approval needed under IRC 6751 for the penalties at hand anywhere in the Notice of Determination or the motion for summary judgment. This is troubling to Judge Gustafson, and he further notes that the IRS has the burden of production on penalties (IRC 7491(c)). Thus, Judge Gustafson orders that the IRS address that issue by either (1) remanding to Appeals to get verification needed on the approval of the penalties, (2) providing greater detail on why it doesn’t need to get verification to prevail with the facts it currently has, or (3) conceding the penalties. Since the order was issued, the IRS appears to have gone the route of trying to get verification of approval of the penalties: the case has been remanded to Appeals (order here).

As mentioned in the intro to this week’s post, designated orders (and orders in general) are important for providing a glimpse into the judge’s way of thinking. For an emerging issue like supervisory approval post-Chai, this is doubly important because different judges seem to have very different approaches. (A very grateful “tip of the hat” to frequent guest blogger Carl Smith for providing insight on this issue.) Some appear to have no problem with the IRS failing to verify the supervisory approval if the taxpayer did not specifically bring it up, as the issue is then deemed conceded. These judges would appear to include Panuthos (case here) and Lauber (case here). Others, however, put the onus on the IRS to show that IRC 6330(c)(3) was followed by showing supervisory approval (see order from Judge Leyden here). Note that Judge Lauber’s decision also arises in the CDP context such that IRC 6330(c)(3) would apply. There may well be another designated order issued just this week (to be blogged on next week) that could provide more insight on a developing split, if there is one…

Lastly, it is also important to note that this designated order is helpful for practitioners in that it references the governing IRM (IRM for frivolous submission penalties) and IRS form that supervisory approval should be found (i.e. Form 8278). Knowing the IRS Form that is at issue is extremely helpful when making both FOIA and informal requests for documents from the IRS.



Can Tax Preparer Recover Damages for Revoked EFIN

The recent decision rendered by the Court of Federal Claims in Snyder & Associates v. United States provides a stark reminder about the perils of building a business based on a government privilege or license – in this case the ability to electronically file tax returns for clients.  It also provides a reminder of the limitations of federal employees to bind the government for which they work.


Snyder & Associates engaged in return preparation in the Los Angeles area.  It had a symbiotic relationship with a lender that funded refund anticipation loans (RALs).  Even though RALs ended several years ago, at least in their first decade of the 21st Century form, this case relates back to that era.  The same person owned both the return preparation firm and the lender.  Nothing in the opinion suggests that the businesses or the owner of the businesses engaged in inappropriate activity; however, one of the associates of the business, Nancy Hilton, who prepared returns there in the capacity of an independent contractor, did engage in fraudulent activity.

Ms. Hilton approached the IRS criminal investigators and advised them of the scheme in which she participated.  The scheme used stolen identities to seek benefits through tax filing.  After she brought the scheme to the IRS, Special Agents sought to use her to set up a sting.  For the sting to work, the IRS wanted Ms. Hilton’s co-conspirators to cash the checks written as refund anticipation loans.  Cashing those checks meant pulling money out of the lender side of the business.  The owner initially balked at the plan because of concerns of losing the money.  One of the special agents directly stated or implied that the IRS would make the lender whole.  The sting went forward.  In the end, the IRS declined to make the lender whole and, to add insult to injury, it terminated the EFIN license held by Snyder & Associates – an act which effectively terminated the return preparation business.

The business sued to recover the funds lost through the sting operation and to restore its EFIN privileges.  It lost on both counts.

With respect to the money lost in the sting, the issue turned on the authority of the special agent to bind the government.  I am probably oversimplifying this, but my experience working in the federal government for over 30 years suggests that first line employees like special agents, revenue agents, revenue officers, attorneys, etc., have extremely limited ability to bind the government.  Almost everything that they do which might create a monetary liability for the government must first be approved by their supervisors.  The principle extends beyond contracting for repayment of a sting obligation or other monetary obligations to matters such as settlement authority or referral authority.  There is a fairly elaborate system of delegation orders granting authority for certain acts.  The system generally does not go lower than the front line manager and frequently does not go that low.

Snyder & Associates ran full force into this system.  The special agent who told it that the money used to pay the fraudulent RALs would be repaid to the business by the government simply did not have the authority to bind the IRS.  The Court expended little effort in denying this claim for relief because the IRS had not committed itself to repayment of losses.  Based on my experience, the special agent who made the representation will receive counseling about their scope of employment which will include a discussion about not doing this again.  Such counseling will be cold comfort to the business that has lost the money with little or no hope of recovering it from the participants in the fraudulent scheme who will also owe the IRS and whose debt to the IRS will generally have a higher priority than the debt to the business.

Having lost the money spent to support the sting, the business then sought to reobtain the right to electronically file returns which the IRS pulled at approximately the same time the business cooperated with the sting operation.  The business argued that the termination of the EFIN rights was an improper taking of a property interest.  The Court points out that the IRS did not take the business or in any way deny the business use of the business.  The termination of the EFIN certainly impacted the business but the business had “no cognizable property interest in their EFIN in the first place.”  Citing Mitchell Arms v. United States, the Court stated that “when a party receives a permit to engage in an activity ‘which, from the start, is subject to pervasive Government control,’ no cognizable property interest capable of supporting a takings claim ever arises in that permit.”

Although the Mitchell Arms case involved the import and sale of assault rifles rather than electronic filing of returns, the Court found the action of ATF in that case exactly paralleled the action of the IRS in this one.  Because no property interest attached to the EFIN, the termination of the right to electronically file could not constitute a taking under the constitution.


The decision here, though harsh, does not cover new ground.  The business had good reason to expect the IRS would make it whole for assisting with the sting operation based on the representations of the special agent.  Not everyone knows of the limitations governing federal employees.  The case reminds us to take care in contracting or thinking we have contracted with the federal government.  Authority is critical.  Here, the special agent did not have proper authority to bind the IRS and the actions of other IRS officials did not act to ratify the actions of the special agent.

Similarly, licenses like EFINs do not come with a guarantee or with special protections.  When a business relies on the EFIN for its financial life, it must take extreme care to avoid actions that can result in its removal.  Even though the actions here appear to be those of an independent contractor working with the business, the concern of the IRS about fraudulent return filing schemes ends up punishing the business as well as the individual perpetrator in an effort to keep the system clean.  The result here reaches a much different result for the preparer than the D.C. Circuit in Loving because of the difference in the nature of the fight.  In Loving, the IRS sought to assert its authority over a previously unregulated matter – tax return preparation.  Here, the IRS exercised control over use of its electronic filing procedures something which it has carefully regulated from the start.  The challenge was not to the IRS ability to regulate electronic filing but whether the business had a property interest in the ability to electronically file.