Substantive Rights or Normative Policy? The TBOR’s contribution to federal tax compliance and enforcement

Today we welcome Guest Blogger Christina Thompson. Christina teaches at Michigan State and assists in running the low income taxpayer clinic there. Today she writes about a recent article published that addresses the importance of the Taxpayer Bill of Rights Congress passed in 2015. Her review of this article dovetails nicely with yesterday’s post on the possible uses of those rights in litigation. This is also an opportunity to point out that you can find a discussion of those rights in the National Taxpayer Advocate’s annual reports here, here, here and here. The NTA is hosting the third conference on Taxpayer Rights in Amsterdam in May. You can find out more about that conference here. Les and I will be joining the NTA and Judge Panuthos to talk about taxpayer rights at the upcoming Tax Court Judicial conference at the end of March. The ABA Tax Section is hosting panels on this topic in their upcoming February meeting next week. I suspect we will be talking about the impact of the passage of the rights for years to come. Keith

In Embracing the TBOR (Taxpayer Bill of Rights), Alice G. Abreu and Richard K. Greenstein grapple with the question of whether the TBOR adds anything to the tax code. Their answer is yes – but with qualifications. Instead, Abreu and Greenstein appear to be making a normative argument, i.e., that the TBOR enhances compliance by fostering taxpayer confidence and enhancing the demand for remedies.

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The Value of the TBOR

The authors counter two criticisms of the TBOR: it does not introduce new rights, and does not provide remedies for violation of those rights. It is true that the TBOR does not purport to add rights to the code (or does it? That is one of the questions I will explore later in this post). It gathers taxpayers’ existing rights into one easy-to-understand document. The TBOR was originally championed by the Taxpayer Advocate Nina Olson. In her proposal to Congress, Ms. Olson argued that because the rights already existed elsewhere in the code, there should be no objection to gathering those rights together in a Bill of Rights. Abreu and Greenstein point out that while that argument likely led to a speedy codification, practitioners may have seen it as merely a reminder to the commissioner to do his job. But the authors of this article suggest there is more to it.

The authors give three reasons demonstrating the value of the TBOR: it supports voluntary compliance, it creates a normative basis for enforcement, and it may create new rights.

Supporting Voluntary Compliance

Nina Olson discussed how the TBOR supports voluntary compliance in her 2013 annual report to Congress:

“Taxpayer rights are central to voluntary compliance. If taxpayers believe they are treated, or can be treated, in an arbitrary and capricious manner, they will mistrust the tax system and be less likely to comply with the laws voluntarily. If taxpayers have confidence in the fairness and integrity of the tax system, they will be more likely to comply.”

Abreu and Greenstein list three ways the TBOR can enhance voluntary compliance. The first way is through taxpayer awareness of their rights (and not merely awareness that the rights exist, but also an awareness of how to use them), an essential ingredient in achieving better taxpayer outcomes.

The second way the TBOR enhances voluntary compliance is through the use of the language of “rights.” As the authors pointed out earlier, the TBOR does not create new rights – it is a compendium of rights that already exist in the code. These “rights” come from legal obligations imposed on the Treasury. The use of the word “rights” turns a Treasury obligation into a taxpayer’s entitlement – listing the rights in terms of a Bill of Rights likens the document to the Constitution’s Bill of Rights, giving the TBOR greater legitimacy.

Finally, the TBOR enhances voluntary compliance by allowing the taxpayer to demand procedural justice. It assures taxpayers that outcomes should be fair and just for both sides.

Creating A Normative Basis for Enforcement

After discussing how the TBOR can enhance voluntary compliance, Abreu and Greenstein examine how the rights create a normative basis for enforcement. Even though no remedies are provided, the very fact that the rights exist creates a more welcoming environment for the taxpayer to demand a remedy, i.e., enforcement of enumerated rights. And using the language of positive taxpayer rights, as opposed to mere duties of officials, emphasizes that those rights are connected to procedural protections (and ultimately, justice). Thus, linking the rights to notions of justice means that the failure to enforce a taxpayer right is a failure of justice itself.

Abreu and Greenstein argue that the lack of remedy now does not mean the lack of remedy in the future. Perhaps a future court will see fit to craft a remedy. Indeed, Facebook cited in a district court complaint the taxpayer’s right to appeal an IRS decision in an independent forum. Another taxpayer cites his right to challenge an IRS decision and be heard under §7803a)(3) in his reply to a supplemental brief in US Tax Court. Lawrence G. Graev & Lorna Graev v. Commissioner of Internal Revenue, Docket No. 30638-08 (2017). The authors do not suggest that a remedy is appropriate for every violation, but the rights’ codification allows a taxpayer to demand a remedy.

It is not that the authors see codification of these rights as meaningless or devoid of content, but rather that the TBOR may not add anything new. Their suggestion invites the reader to question whether the TBOR accomplishes what the authors suggest, or if barriers remain between taxpayers and full realization of their rights. And even if taxpayers are aware of their rights as such, one might also ask whether they have a sufficient understanding of their mechanical operation.

The suggestion that the TBOR’s contribution is strictly normative is a fine argument on its own. Indeed, there is reason to think that it is true – both in its description of taxpayer/government relationships and prescription for stronger tax compliance. But the authors appear to reach for more – i.e., assert that the TBOR adds substantive legal rights.

Creating New Rights

Abreu and Greenstein next tackle the idea that perhaps the TBOR does not simply restate rights found elsewhere in the code, but actually creates new rights. The authors argue that the answer depends on how the relationship between the taxpayer and the taxing authority is conceived. Here, the authors set up competing poles for understanding the TBOR’s value. On the one hand, they seem to suggest that the world of tax enforcement/compliance is Hegelian, which is to say, a world of mutual recognition by taxpayers and the taxing authority of their respective rights and obligations. In this world, positive rights are implied by governmental duties and need no separate/affirmative declaration.

At the other end of spectrum, they describe a distinctly American conception of tax compliance and enforcement. That is to say: a world in which the primary ingredient is distrust. In this world, there is no mutual recognition and no rights by implication: the individual requires procedural protection from the levies of government. The government poses a constant threat to individual liberty, and rights must exist to protect from government abuses of power. It is necessarily government over-against the individual, i.e., the taxing authority over-against the taxpayer. Rights are not left to contingency: they must be specifically and affirmatively articulated, in the absence of which the “duties” of the taxing authority are no more than ostensible.  The authors cite Supreme Court case of Richardson as an example: while a government official had the constitutional duty to keep a particular record, that duty did not give rise to a substantive right for the individual. United States v. Richardson, 418 U.S. 166 (1974). Thus, something more is needed to actually confer rights.

The First Amendment, for example, states in part “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof.” The authors note the absence of a “right” to anything. No positive right is conferred by that language. It restricts the government’s actions – it is a negative obligation. Other rights in the Bill of Rights do not contain the word “right.” The Amendments need ‘something more’ – and Abreu and Greenstein argue the Ninth Amendment is that ‘something more.’ The Ninth Amendment states that the “enumeration in the Constitution of certain rights, shall not be construed to deny or disparage others reserved by the people.” The Ninth Amendment designates the previous eight amendments “rights.” It confers positive rights. Similarly, the TBOR seeks to codify certain rights as positive rights, i.e., not merely implied or based on a negative formulation, but instead actionable as such. In sum: the authors assert the value of the TBOR is that it supports voluntary compliance, creates a normative basis for enforcement, and may even create new rights.

Taxpayer Obligations

The authors conclude by noting that the adopted TBOR does not contain a list of taxpayer obligations. Ms. Olson’s original vision included not only rights but obligations for the taxpayer. The obligations included the obligation to be honest, cooperative, provide accurate and timely information and documents, keep records, and pay on time. Her reason for including them was simple: it put forth a partnership between the taxpayer, advisor, and tax administrator – working together in a balanced and constructive relationship. The obligations laid out taxpayers’ legal obligations but also remind them of what they ought to do. But these obligations did not make it into the final codified language and Abreu and Greenstein give two reasons.

The Failure to Internalize Sharing Norms 

The first reason is our failure to internalize sharing norms. Abreu and Greenstein believe that unlike other areas of law, the norms that define income taxation have not generally been internalized by taxpayers. “Internalizing” means that people develop a psychological need or motive to conform to a set of shared norms. Acting in accordance with those norms is “good,” and acting outside those norms is “bad,” and people follow social norms not only because they want to but because it is consistent with their values.

The authors argue that tax laws are not internalized – these laws seem external, and compliance feels coerced. Public legal norms of tax do not coincide with personal moral norms. The authors use the example of murder. Laws against murder are reinforced by an internalized moral norm against killing. Tax sharing norms are not internalized to the same extent. For example, most people would not voluntarily transfer property to the government if no legal obligation exists. The two social norms involved with tax laws are the sharing of resources (sharing wealth for the public good) and the sharing of private information (sharing information with the government for the collection of tax). Abreu and Greenstein believe Americans are ingrained with notions of private property and privacy, which prevent tax law norms from being internalized.

The Prejudice Against Affirmative Duties 

The second reason is a prejudice against affirmative duties. Put simply, Americans do not like being told what to do. As the authors point out, requiring a person to do something limits liberty more than prohibiting an individual from doing something. Thus, Americans’ sense of liberty militates against affirmative duties.

The authors suggest that the fact that the taxpayer obligations did not make it into the final bill portends the “contentious” relationship between the taxing authority and the taxpayer, which resonates with deep cultural, political, and legal traditions in the US. The focus on rights implies an imbalance in power and infringement of liberty.

In short: The authors link the lack of taxpayer obligations to integral American values.

Conclusion

In conclusion, Abreu and Greenstein believe Ms. Olson accomplished more than she realized. Whether you carry the paradigm of a “cooperative” or “contentious” relationship, the codified TBOR is helpful to both. With increased taxpayer awareness, the TBOR fosters voluntary compliance and may change the taxpayer’s view of the taxing system – in addition to facilitating an environment wherein taxpayers can more readily enforce their rights. Tax professionals should be aware of these rights, help inform the public of their existence and proper usage, and lead the charge in demanding remedies in court for their violation.

 

Housing Law May Provide a Model for Application of the Taxpayer Bill of Rights in Litigation

We welcome first time guest blogger Steve Sharpe, who works for the low-income taxpayer clinic covering Southwest Ohio, including Cincinnati. Steve also has significant experience in housing and consumer advocacy. It’s not unusual for an attorney at a low income tax clinic housed in a legal services organization to arrive in the tax clinic with the type of background Steve possesses rather than a solely tax background. Steve’s cross functional knowledge allows him to provide us with an interesting insight into the importance of the taxpayer bill of rights (TBOR).  

If you read the IRM, you quickly become aware that TBOR is making a difference in tax administration at the IRS in the way it now frames its discussion of many issues concerning taxpayers. You can also find mention of it in GAO reports and TIGTA reports. Since the IRS adoption of TBOR in June of 2014 and its codification in 2015, there has been a debate on whether TBOR will make a difference in case outcomes in litigation. Special Trial Judge Panuthos has mentioned it in a Tax Court case. Facebook mentions it in a complaint it filed in November, 2017, seeking to cause the IRS to allow it the opportunity to meet with Appeals. Maybe over time, other litigants will make more direct arguments about the protections afforded by TBOR and more court opinions will address those protections. Steve provides insight into how TBOR might follow a similar path to an aspirational type of law that exists in the housing arena and provide protections many may not have imagined when TBOR was passed. Keith

As the IRS enters into an intense period of rulemaking and implementation following the passage of the tax overhaul, advocates for taxpayers must be vigilant and ensure that any new rules or other IRS decisions protect our clients’ basic rights.

Advocates will naturally look to the Taxpayer Bill of Rights for guidance, and I suggest we evaluate whether Congress’s decision to codify the Taxpayer Bill of Rights into a statute impacts how the IRS must act. Looking at litigation under Congress’s longstanding national housing policy codified at 42 USC 1441 (hereinafter, the “National Housing Goals”) may be particularly useful and relevant. Under this frame, the Taxpayer Bill of Rights may provide more than general standards and may provide additional legal support for taxpayers challenging IRS decisions, including rulemaking, pursuant to the Administrative Procedure Act (“APA”).

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It is important to note up front that I have not completed a broad survey of recent APA litigation or research into the legislative history for the Taxpayer Bill of Rights. I may be missing something very obvious. The goal of this post is to raise some ideas for people to explore. Obviously, significant research is needed before taking any action.

In 2015, Congress passed the Taxpayer Bill of Rights that were incorporated in 26 U.S.C. 7803(a)(3). The statute codifies basic concepts to ensure that people are treated fairly, pay only the amount of tax they owe, and have the ability address errors, among other things. On their own and divorced from specific procedures, they are important and provide fundamental ideas for the tax system to include.

The impact of the Taxpayer Bill of Rights, however, may reach well beyond overarching goals and should directly impact actions taken by the IRS. This is not an argument without precedent. Rather, the Taxpayer Bill of Rights shares a similar structure with the National Housing Goals, which have been the subject of housing litigation. According to the Taxpayer Bill of Rights,

In discharging his duties, the Commissioner shall ensure that employees of the Internal Revenue Service are familiar with and act in accord with taxpayer rights as afforded by other provisions of this title, including…

26 U.S.C. 7803(a)(3) (emphasis added). The statute then lists the particular rights that the Commissioner must protect when discharging its duties.

Similarly, the National Housing Goals provide directives for federal agencies addressing housing.

The Department of Housing and Urban Development, and any other departments or agencies of the Federal Government having powers, functions, or duties with respect to housing, shall exercise their powers, functions, and duties under this or any other law, consistently with the national housing policy declared by this Act and in such manner as will facilitate sustained progress in attaining the national housing objective hereby established . . .

42 U.S.C. 1441 (emphasis added). As with the Taxpayer Bill of Rights, the National Housing Goals then list specific objectives for housing agencies to attain.

The National Housing Goals have not simply served as lofty goals that lack practical meeting. Rather, Courts have looked to the National Housing Goals in evaluating whether a housing agency has acted appropriately. For example, in United States v. Winthrop Towers, 628 F.2d 1028 (7th Circuit 1980), HUD sued to foreclose on a low-income housing development. The owner of the development argued that the decision to foreclose was not completely committed to agency discretion. Even if there was no law to apply, the owner argued that the agency had to act consistent with National Housing Goals. The court agreed and stated:

In this case the law to be applied includes s 2 of the National Housing Act, 42            U.S.C. s 1441, which contains a detailed statement of national housing objectives, as well as 42 U.S.C. s 1441a, 42 U.S.C. s 1437 and 12 U.S.C. s 1715l (a). Section 1441 specifically provides that HUD shall exercise its powers and perform its duties “consistently with the national housing policy declared by this Act. . . .” This language compels our conclusion that HUD’s decision to foreclose may be reviewed to determine whether it is consistent with national housing objectives.

Id. at 1034-35 (emphasis added). Simply put, the National Housing Goals went beyond providing general standards – the goals impacted review of agency action. As the Seventh Circuit stated, “the language of s 1441 ‘is not precatory; HUD is obliged to follow these policies. Action taken without consideration of them, or in conflict with them, will not stand.’” Id. at 1035 (emphasis added) (quoting Commonwealth of Pennsylvania v. Lynn, 501 F.2d 848, 855 (D.C.Cir.1974)); see also Russell v. Landrieu, 621 F.2d 1037 (9th Cir. 1980); Lee v. Kemp, 731 F.Supp. 1101 (D.D.C. 1989).

The National Housing Goals have specifically limited agency action in rulemaking as well. In United States v. Garner, 767 F.2d 104 (5th Cir. 1985), borrowers with loans from the Farmers Home Administration (“FmHA”), a subdivision of the USDA, challenged the validity of a regulation that prevented the agency from refinancing its own loans. In reviewing whether the agency acted in an arbitrary and capricious manner, the Fifth Circuit noted that

[I]n enacting the section 502 loan program and its amendments, Congress generally intended the Secretary to exercise his refinancing authority in accordance with the goals of national housing policy as defined in the Act. For our purposes, the most important among these is providing government credit to responsible rural borrowers in jeopardy of losing their homes through no fault of their own. See 42 U.S.C. § 1441.”

Id. at 121. After considering the record, the Fifth Circuit held “the government has failed to demonstrate that regulation 7 C.F.R. § 1944.22(a), prohibiting the FmHA from refinancing its own loans, is a product of reasoned decision making.” Id. at 123.

Again, a substantial amount of research is necessary before advocates start raising these issues. That said, advocates should at least consider the impact of codifying the Taxpayer Bill of Rights on the IRS, and the National Housing Goals provide a useful first step.

 

Flora and Preparer Penalties: Preparer Two Weeks Late to File Suit in District Court

As we move into tax season, it is worth remembering that IRS has a significant arsenal of civil and criminal penalties to address misbehaving preparers. I recently came across a federal district court case, Bailey v. United States that discussed an exception to the Flora full payment rule for preparers subject to penalties for preparing tax returns or refund claims that have understatements stemming from unreasonable positions or willful/reckless conduct. For preparers, that penalty can be fairly sizeable, as under Section 6694 the amount of the penalty is the greater of $1,000 for each return or refund claim ($5,000 if the understatement is due to willful or reckless conduct) or 50% (75% for willful/reckless conduct) of the income derived by the tax return preparer with respect to the return or claim for refund.

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These penalties are not subject to the deficiency procedures, meaning that if IRS examines a preparer and determines that the preparer’s conduct in preparing the return or refund claim warrants a penalty, the preparer will generally have to pursue a refund suit to guarantee judicial review of the penalty. (I’ll skip the CDP discussion on this, a topic we also have discussed, which turns on whether a preparer has previously had an opportunity to dispute the penalty through its rights to have Appeals consider the matter).

We have often discussed the Flora rule, which requires full payment to ensure jurisdiction for a refund suit. Flora presents a considerable barrier, especially for moderate income persons subject to the penalty but also stemming from the fact that some civil penalties, including the variety of penalties preparers are subject to, can be very significant; Keith has written about that before here, suggesting perhaps it is time to rethink Flora in light of the impact and potential unfairness of requiring full payment to get a court to review the Service’s penalty determination.

Bailey implicates an implicit statutory exception to Flora for the 6694 penalties. IRS asserted $70,000 in penalties due to what IRS felt was his willful or reckless conduct. As per Section 6694(c)(1), if a preparer pays at least 15% of the Section 6694 penalty within 30 days of IRS making notice and demand, the preparer can stay collection and file a refund claim. Section 6694(c)(2) also provides that if a preparer fails to file suit in district court within the earlier of (1) 30 days after the Service denies his claim for refund or 30 days of the expiration of 6 months after the day on which he filed the claim for refund, then paragraph (1) of Section 6694(c) no longer applies. That suggests that a preparer can avoid the full payment rule; to that end see note 1 of the 2016 Bailey opinion, discussing the logical Flora implication of Section 6694(c)(2).

In Bailey, the preparer paid $10,500, or 15 percent of the penalty within 30 days of the IRS notice. He filed a refund claim on March 28, 2014. At the time of the suit, IRS did not deny the claim. Thirty days after the expiration of 6 months (and a day) from the time he filed his claim was October 29, 2014. Bailey filed his refund suit in district court on November 12, 2014. That filing was two weeks late, and he no longer was eligible to take advantage of the exception to Flora.

Because the preparer missed the deadline, the district court granted the government’s motion to dismiss the suit. The failure to comply with the time requirements in Section 6694(c)(2) meant that absent the preparer’s full payment of the penalty, the district court did not have subject matter jurisdiction over the suit. Because the dismissal was without prejudice, the preparer could cure his error by fully paying the balance and refiling his complaint.

Instead of full paying, the preparer filed another action in federal court in 2017; this time, the suit alleged personal misconduct among IRS employees; in light of a motion to dismiss the preparer filed a motion to substitute the US as a party to the suit and restated his allegations that his conduct did not warrant a penalty. In November of last year the court dismissed that suit.

Winning Attorney’s Fees the Old Fashioned Way

For those who enjoy watching basketball, you occasionally hear the announcer say that a player has completed a 3 point play the old fashioned way.  Fans who are old enough to remember a time before the institution of the three point line allowing shots behind that line to receive 3 points if made understand that the announcer is referring to a play in which the player shooting the ball is fouled while shooting and making a basket.  The foul allows the player to make a third point from the free throw line.  This type of three point play has existed for many decades while the 3 point shot from behind a certain line is only a few decades old.  A similar situation exists with respect to attorney’s fees.  The ability to obtain attorney’s fees has existed for several decades; however, the creation of qualified offers a couple of decades ago changed the game and only occasionally does someone win attorneys fees the old fashioned way – without the aid of a qualified offer.

We have written several times about attorney’s fees issues, here, here, here, and here. In writing about attorney’s fees, we have almost always referenced the qualified offer provisions because obtaining attorney’s fees without a qualified offer is very difficult to do. In fact, that difficulty led to the creation of the qualified offer provisions which allow a prevailing taxpayer to overcome the substantially justified language in IRC 7430. Many taxpayers prevail and meet all of the other criteria for an award of attorney’s fees; however, few taxpayers can show, without the benefit of a qualified offer, that the position of the IRS was not substantially justified. The case of United States v. Johnson, No. 2:11-cv-00087 (D. Utah 2018) provides a rare example of a taxpayer who obtains attorney’s fees without the benefit of a qualified offer.

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The IRS brought this suit against the children of Anna S. Smith, seeking to collect an estate tax deficiency. The complaint was brought on January 21, 2011. Ms. Smith died in 1991. Not surprisingly, the defendants filed a motion to dismiss arguing that the IRS suit was time barred. They also argued that they had no personal liability with respect to funds from the estate except for insurance proceeds and that because the estate had sufficient assets to pay the taxes at the time of their distribution the personal liability provisions of 31 USC 3713 did not apply. The court initially found for the IRS. The defendants filed an amended answer asserting that they had a defense to personal liability because they tendered a special lien under IRC 6324A. After further argument, the court reversed and found for the defendants on all counts except for some of the life insurance benefits. The defendants requested attorney’s fees, which the court addresses in this memorandum opinion.

The court finds that the defendants meet the definition of prevailing party based on the dollar amounts and issues in controversy. It finds that that the defendants have a net worth less than $2 million and settles into a lengthy discussion of the issue of substantial justification that usually trips up taxpayers seeking fees. The court notes that the IRS position should be presumed not to have substantial justification if the IRS did not follow its published guidance, which is defined as “regulations, revenue rulings, revenue procedures, information releases, notices, and announcements.”

The defendants wisely segregated their fee requests according to the claims at issue in the case. They did not request fees on the issues of statute of limitations, transferee liability, discovery, and other uncategorized issues. Their fee request focused on the issues of whether the trust assets were includible in the estate, whether the beneficiaries received a discharge because of the special lien, and whether attempts to enforce the distribution agreement were improper. The court, in turn, addressed each of the three bases for fees. Although it is not clear exactly how the court calculated the amount of fees it ultimately awarded, the defendants would have had to provide the time spent by their attorneys on each of these issues with specificity in order to obtain the award.

IRS position on discharge of fiduciary liability was not substantially justified

The IRS argued that the defendants never made a written application for discharge and that it never accepted the proposed section 6324A lien. The court found that the IRS never identified any “form, method, procedure, or policy by which a ‘written application’” is properly made nor did it point to any specific format, form or wording to make the application. It stated “this is nearly fatal to the government’s claim that it had a reasonable basis in law and fact for its position.” The IRS pointed to the case of Baccei v. United States, 632 F.3d 1140, 1145-6 (9th Cir. 2011) in support of its position and the court examined that case. The court found that Baccei “placed the government on notice that in the absence of a ‘clear statutory prerequisite that is known to the party seeking to apply the doctrine,’ combined with the government’s utter inability to identify an ‘proper’ form or method of providing a written application for discharge, its position on this point was not substantially justified.” The court also found that its position that it could reject the section 6324A lien “contradicted its own published guidance, misinterpreted the plain language of statues and regulations, ignored relevant provisions of other statutes and regulations and conflicted with the undisputed purpose of section 6166.”

IRS position on liability as trustees was not substantially justified

The court acknowledged that this issue was difficult but still concludes that the IRS position was not substantially justified. The defendants acknowledged that the issue of the proper code section of inclusion was a novel issue but the IRS position merely restated their litigating position without discussing how their litigating position was reasonable. This is a very taxpayer favorable determination after an acknowledgement that the court struggled to find the right answer and that the taxpayer’s position was novel. Both of those factors normally preclude a determination that the IRS was not substantially justified. The court points to its conclusion that the IRS position contradicted a technical advice memorandum and a revenue ruling.

IRS attempts to enforce the distribution agreement and foreclose its tax lien were not substantially justified

The court found that the IRS sat too long on its right to enforce the distribution agreement and failed to release the tax lien twice. It found a parade of legal and factual errors in the way it pursued the agreement and the lien that was not overcome by the IRS arguments that recited the same facts contained in their losing brief.

Conclusion

This case should give heart to those pursuing attorney’s fees after successful litigation that if you can find something in the IRS actions that does not follow its own rules you can succeed in obtaining attorney’s fees even without the assistance of a qualified offer. Of course, the taxpayers’ victory here does not suggest the better course is not to file a qualified offer but this case does offer hope that fees are a possibility even without such an offer.

 

Extended Statute of Limitations for Unreported Income Does not Apply to Gross Income for Failure to Report Foreign Financial Assets before Enactment of IRC 6038D

In a precedential opinion, the Tax Court in RAFIZADEH v. Commissioner, 150 T.C. No. 1 (2018) held that the petitioner’s failure to report income from foreign financial assets did not hold open the statute of limitations on assessment. Because the IRS took more than three years after the timely filing of his returns for the years at issue before it issued the notice of deficiency, the statute expired prior to the notice. The taxpayer won a complete victory. The case is narrow in its holding and the tax years to which it applies have now run, but the victory is certainly important for this taxpayer and perhaps for others whose foreign income was discovered through the use of summons after the ordinary statute of limitations had expired.

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Petitioner timely filed his 2006 through 2009 returns. It seems rare to state someone timely filed their returns in this blog even though timely filing is the norm for the vast majority of taxpayers. The timely filing of the returns proves important for petitioner here. On the timely filed returns petitioner did not report income earned on a foreign account that he owned. That unreported income forms the bases of the notice of deficiency that the IRS ultimately sent.

Over the past 15 or more years, the IRS has used John Doe summonses to obtain information about U.S. taxpayers with accounts overseas. It issued such a summons at some point and obtained information on November 16, 2010. The receipt of information from a John Doe summons is a starting point and not an ending point. Once the information is received, it can take the IRS quite some time to process that information and match it with specific taxpayers. In this case it took four years from the receipt of the John Doe information until the issuance of a notice of deficiency to petitioner on December 8, 2014, with respect to the tax years 2006-2009. In the notice the IRS asserted accuracy related penalties but did not assert the fraud penalty.

Had it asserted the fraud penalty, and had it succeeded in proving fraud in the failure to report the income from the foreign based assets, the statute of limitations would have remained open based on the fraud exception, which creates an unlimited time period within which the IRS can assess. Instead, the IRS argued that the statute was held open by the six year statute of limitations found in IRC 6501(e)(1)(A)(ii) which applies in situations in which the taxpayer omits “specified foreign financial assets” required to be reported by IRC 6038D.

The issuance of the John Doe summons suspended the running of the statute of limitations pursuant to 7609(e)(2)(A), but because of its resolution in 2010, that suspension was insufficient to keep the statute open until the issuance of the notice of deficiency. In order to keep the statute open until the notice of deficiency was issued, the IRS needed the special provision related to foreign assets which was not enacted until March 18, 2010. I assume from the lack of discussion that the amount of the omitted income was insufficient to trigger the six year statute of limitations based on a 25% omission of gross income. The liabilities in the notice, which range from $10,934 to $1,619, suggest that the amount of omitted income was not huge.

Section 6038D is effective for taxable years beginning after March 18, 2010 which was the date of its enactment. Section 6501(e)(1)(A)(ii) applies to returns filed after March 18, 2010, and also to “returns filed on or before …[March 18, 2010] if the period specified in section 6501 of the Internal Revenue Code of 1986 (determined without such regard to such amendments) for assessment of such taxes has not expired as of such date.”

Petitioner argues that the effective date of section 6038D precludes the application of the six year statute of limitations. Specifically, petitioner argues that the phrase in section 6501(e)(1)(A)(ii) which states “assets with respect to which information is required to be reported under section 6038D at the time the income was omitted” requires that the extension only apply to years after the effective date of 6038D. Since petitioner did not have a requirement under section 6038D to report these assets for the tax years 2006-2009, he could not have trigger the six year period under the complimentary statute.

The Tax Court agrees with the petitioner, stating “we must give effect to all of the words in the key phrase before us – ‘assets with respect to which information is required to be reported under section 6038D.’” The Court finds that even though the effective date of section 6038D was not imported by the cross-reference to section 6038D, the most natural reading of the phrase is that the six year statute only applies if a section 6038D reporting requirement exists.

The IRS also argued that the reporting requirement in section 6501(c)(8) shows that Congress did not link the statute extension in section 6501(e)(1)(A)(ii) to the failure to satisfy section 6038D, but the Tax Court does not buy this argument finding instead that the failure to report under section 6501(c)(8) has its own limitations period. The Court points out that it addressed a similar statute of limitations issue involving cross referencing in the case of Blak Invs. v. Commissioner, 133 T.C. 431 (2009). In that case, the issue was section 6707A and the limitation period in section 6501(c)(10). The Court finds the decision in Blak instructive. In section 6501(c)(10), Congress used the phrase “for any taxable year” but in section 6501(e)(1)(A)(ii) the language does not broaden to “any” taxable year. The statute in Blak also involved a preexisting obligation to report information whereas in this case petitioner had no preexisting duty to report the information now required by IRC 6038D.

The case is precedential because it decides a matter not previously addressed by the Court. The issue is unlikely to arise in the future now that we are seven years into the reporting requirements of section 6038D. The statutory analysis used to reach the conclusion in the case may be useful to others seeking to attack a statute of limitation extension. Congress has demonstrated a willingness in recent years to create an extended statute for new reporting requirements. To the extent you are faced with a similar situation, the RAFIZADEH case provides a possible path to victory.

 

 

Designated Orders: 1/8 – 1/12/2018—Shutdown Special Edition

We welcome Patrick Thomas at Notre Dame who brings us this week’s designated order post.  Keith

I’ve complained before about “light” weeks in designated orders from the Tax Court. But this week was truly a nothingburger: two orders from Judge Jacobs in two separate consolidated cases, along with an order from Judge Gustafson dismissing a deficiency case because neither the petitioner nor an attorney for the petitioner showed up to calendar call. That’s it.

Docket No. 24347-17, Oliver v. C.I.R.

So, our duty of recording each designated order fulfilled, we’ve decided to hit an “undesignated” order today, as well as muse generally regarding the Tax Court’s procedures during the short-lived, though perhaps recurring, government shutdown. Bob Kamman identified an order from Chief Judge Marvel regarding an IRS motion to dismiss for lack of jurisdiction, due to the petitioner’s alleged failure to timely file. The Service argued that, based on the mailing address on the petition, and the time it takes to mail documentation from that address to the Tax Court in Washington, the petition must have arrived by June 30, 2017 for it to be timely.

However, the Court notes that the Service didn’t provide any information “with respect to the additional time required for the petition to undergo the irradiation process that is required for mail sent to the Tax Court.” I apparently showed my age in asking Keith just what an “irradiation process” was. This process derives from the anthrax attacks in 2001, which killed five people and injured 17. Currently, the Postal Service irradiates mail sent via certain mailing methods to certain government offices in the DC area—which, according to Chief Judge Marvel, includes the Tax Court. Apparently that process may delay the usual mail processing time.

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That’s all well and good. However, the petition in this case was filed on December 7, 2017. Over five months after the Service calculated that the petition was due. Any seasoned practitioner would raise an eyebrow if the filing of a petition in the Tax Court was delayed by more than a couple weeks after mailing.

Is there any reason that the petition’s filing date could be so delayed, yet the petitioner still timely mailed the petition? If not, it appears that this litigant’s Tax Court case—like his petition—may end up irradiated as well. 

Shutdown: Past, Present, and Future(?)

I was not quite yet in practice during the 2013 shutdown. As the specter of the 2018 shutdown approached on Friday, I caught myself realizing that (1) I hadn’t thought much about the consequences of a shutdown on my practice, it being the beginning of a new and hectic semester, and (2) I had some Tax Court petitions to file and other deadlines coming up this week.

I was heartened to see that the Tax Court has a separate funding allocation that allowed its continued operation for the shutdown’s relatively limited duration. So those cases continued apace. Though apparently, it’s not always been the case that such funding exists; Carl Smith tells me that, when he was a Tax Court clerk for Judge Nims in 1982, the court underwent a three-day shutdown because the government was closed and there was at that time no special funding for the court to continue operations. All employees of the court were told not to come in. But, the judges came in and limited their work to stamping the mail received (nothing else).

In researching the consequences of the 2013 shutdown, I noted some lessons for practitioners and petitioners in interfacing with both the Court and Service during these periods. Given that current funding lasts until February 8—and the still unresolved nature of the fundamental differences between the parties—practitioners may do well to prepare for another shutdown in the near future.

  1. Keith has a great piece on a calendar call that occurred immediately prior to and after the 2013 shutdown in Philadelphia. I suggest reading it in full for a sense of pressure it applies to litigants and Tax Court judges at calendar call.
  2. The shutdown may not automatically extend the jurisdictional deadline in which to file a petition. Taxpayers and practitioners should continue to mail petitions to the Court to meet their statutory deadlines—especially if the Tax Court instructs petitions to do so on their website.

In McCoy v. Commissioner, the taxpayer’s attorney first attempted to e-file a petition (then and now, impossible), and that having failed, sought to hand-deliver the petition to the Tax Court’s courthouse in Washington, D.C. on October 11, 2013—during the middle of the shutdown. I’m not sure whether the Court’s funding had run out entirely, or whether it had furloughed its public-facing employees. Regardless, the Court was closed, and the attorney was unable to deliver the petition.

Meanwhile, the 90 day period after issuance of the Notice of Deficiency expired on October 15. Once the government reopened, the attorney hand-delivered the petition to the Court on November 4 (though the shutdown ended on October 17).

The Tax Court dismissed the case for lack of jurisdiction. It noted that, though hand-delivery was impossible, the petitioner could have filed a petition like the majority of petitioners who neither reside nor have counsel in the Washington, D.C. area: by mailing the petition to the Tax Court. Indeed, the Tax Court instructed litigants to do just that. The Postal Service operates on revenue, and so is unaffected by a shutdown. Presumably, as long as USPS actually delivers a petition bearing an appropriate date, the petition would be timely. I wonder, though, what the process of delivering/collecting the mail at the Tax Court during a shutdown looks like now, and whether petitions could be lost in the mix. Do judges continue to come in to stamp the mail, as they did in 1982?

McCoy’s very belated delivery aside, taxpayers who run into shutdown-related snafus with their petition dates should look to Guralnik v. Commissioner, which was decided after McCoy. Guralnik holds that a “snow day,” during which the Tax Court was closed, rendered the Court “inaccessible” under Federal Rule of Civil Procedure 6(a)(3). Thus, the last date to file was extended to the next day the Court was open (and happily enough, the petition was received by the Court on that date).

Still, as noted above, the Court continues to operate from allocated funding during the initial stages of a shutdown. For those days that the Court is open, it is “accessible” under FRCP 6(a)(3). So, practitioners and petitioners shouldn’t assume that a shutdown automatically translates to additional time.

  1. Even if the Tax Court has reserve funding, your local counsel’s office, appeals office, and certainly the IRS campuses, do not. Monday was, thus, a rather lonely day at the Clinic.

Indeed, in 2013, the entirety of the Taxpayer Advocate Service, Automated Collection Systems, and other core functions of the Service were furloughed. As the National Taxpayer Advocate noted in the 2015 Objectives Report to Congress, however, automated collections actions continued apace—but there were no human beings to call—either in TAS or ACS—to request relief from that automated collection. During the two-week shutdown period, there were 3,902 Social Security levies, 5,455 levies on financial accounts, 7,025 wage levies, and 4,099 Notices of Federal Tax Liens filed. If any of these actions presented the kind of economic hardship that I routinely see in my Clinic (e.g., inability to pay rent, utilities, or other necessary living expenses), there was simply no immediate recourse for these taxpayers.

Given that, it’s probably a good idea to move quickly on cases where a levy can be proactively prevented—i.e., if a practitioner is sitting on a February 8 deadline to file a request for a Collection Due Process hearing (which would prevent a levy), it might be better to mail that request this week, rather than the deadline.

  1. Relatedly, it remains an open question whether the Commissioner has the authority to furlough the National Taxpayer Advocate or her staff. If not, this would certainly help with the problems identified above.

That’s all for this edition of Designated Orders. Here’s to another three weeks of a functioning government. And hopefully, in the meantime, a few more substantive orders from the Tax Court.

 

Fourth Circuit Declines to Rule on Whether CDP Filing Period is Jurisdictional, but Holds Against Taxpayer, Since It Says Facts Do Not Justify Equitable Tolling

We welcome back frequent guest blogger Carl Smith who discusses the most recent circuit court opinion regarding the jurisdictional nature of the time frames for filing a petition in Tax Court. The Fourth Circuit takes a different tack but reaches the same result as prior cases. Keith 

A few days ago, I did a post on the Ninth Circuit opinion in Duggan v. Commissioner, 2018 U.S. App. LEXIS 886 (9th Cir. 1/12/18). In Duggan, a pro se taxpayer mailed a Collection Due Process (CDP) petition to the Tax Court one day late, relying on language in the notice of determination that stated that the 30-day period to file a petition did not start until the day after the notice of determination. He read this to mean that he had 31 days to file after the date of the notice of determination. Keith and I filed an amicus brief in Duggan arguing that (1) the filing deadline in section 6330(d)(1) is not jurisdictional, (2) the deadline is subject to equitable tolling, and (3) in light of the fact that 7 other pro se taxpayers over the last 2 ½ years read the notice the same way, the IRS misled the taxpayer into filing a day late – justifying equitable tolling on these facts to make the filing timely. In Duggan, the Ninth Circuit did not have to reach the second or third arguments, since it held that the language of section 6330(d)(1) made its filing deadline jurisdictional under a “clear statement” exception to the Supreme Court’s usual rule (since 2004) that filing deadlines are no longer jurisdictional. Thus, the Ninth Circuit affirmed the Tax Court’s dismissal of the case for lack of jurisdiction – a dismissal that had originally been done in an unpublished order.

Keith and I represented a formerly-pro se taxpayer in the Fourth Circuit who had a case on all fours with Duggan, Cunningham v. Commissioner. In another unpublished Tax Court order, she also had her CDP petition dismissed for lack of jurisdiction as untimely. Like the Ninth Circuit, the Fourth Circuit had no precedent on whether the CDP filing deadline is jurisdictional or subject to equitable tolling. Only days after the Ninth Circuit’s published opinion in Duggan, the Fourth Circuit, on January 18, 2018, issued an unpublished opinion in Cunningham affirming the Tax Court. But, the Fourth Circuit avoided the tricky issues of whether the filing deadline is jurisdictional or whether it might be subject to equitable tolling in an appropriate case. Instead, the Fourth Circuit held that Ms. Cunningham has misread a clear notice of determination and that her mere error was not a fact sufficient to sustain a holding of equitable tolling, even assuming (without deciding) that the filing deadline might be nonjurisdictional and might be subject to equitable tolling in an appropriate case.

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The opinions in Duggan and Cunningham do not mention the significant number of pro se taxpayers who have recently read the notice of determination filing period language differently, although the Cunningham opinion acknowledges that “other taxpayers” (number unspecified) have read the language like Ms. Cunningham.

The key passage in the Cunningham opinion states:

We have said that equitable tolling is appropriate “in those rare instances where—due to circumstances external to the party’s own conduct—it would be unconscionable to enforce the limitation period against the party and gross injustice would result.” Whiteside v. United States, 775 F.3d 180, 184 (4th Cir. 2014) (en banc) (internal quotation marks omitted).

We find these considerations to be wholly absent here. There is no suggestion of extraordinary circumstances that prevented Cunningham from timely filing her appeal, nor of circumstances external to her own conduct. Cunningham simply points to the language in the IRS’s letter, which she claims is misleading and tricked her and other taxpayers into filing late. But we see nothing misleading about it.

The letter informed Cunningham that she had “a 30-day period beginning the day after the date of this letter” to file an appeal. J.A. 5. We think the only reasonable reading of that language requires counting the day after the date of the letter (here, May 17) as “day one,” the following day (May 18) as “day two,” and so on up to “day thirty”—June 15. Cunningham claims she understood the language in the IRS letter to essentially count May 17 as “day zero,” and onward from there, resulting in a cutoff date one day later than the true deadline. Such a method of counting is certainly contrary to the practice set forth in Rule 25(a) of the Tax Court Rules of Practice and Procedure. See United States v. Sosa, 364 F.3d 507, 512 (4th Cir. 2004) (“[I]gnorance of the law is not a basis for equitable tolling.”). We think it is also contrary to the plain language of the IRS letter and to principles of common sense.2

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2Cunningham also points out (correctly) that the language in the letter is not identical to the language in the statute. But it need not be, and Cunningham fails to explain why the difference in wording matters. In our view, the language of the letter and the language of the statute are two commonsense ways of expressing the same message.

 

After the Duggan opinion was issued, the DOJ filed a FRAP 28(j) letter in the Fourth Circuit to alert the latter court to the ruling of the former. But, pointedly, the Fourth Circuit in Cunningham does not mention Duggan, even for contrast.

Since there is no Circuit split between Duggan and Cunningham (just different reasoning for affirming the Tax Court’s dismissals), it is almost certain that the Supreme Court would never grant cert. to review either of these opinions. Thus, no cert. petitions will be filed.

Keith and I want to thank Harvard Law student Amy Feinberg, who did the oral argument in Cunningham before the Fourth Circuit on December 5, 2017.

Keith and I also represent in the Fourth Circuit another formerly-pro se taxpayer who filed her Tax Court petition late. In the case of Nauflett v. Commissioner, Fourth Circuit Docket No. 17-1986, however, the notice of determination was issued under the innocent spouse provisions, and the language governing her filing deadline is contained in section 6015(e)(1)(A). In Ms. Nauflett’s case, there is a better argument for equitable tolling because (1) notes of a TAS employee clearly show that, prior to the last date to file (a date also not shown on the innocent spouse notice of determination), that TAS employee told Ms. Nauflett the wrong last date to file, on which she relied, and (2) Ms. Nauflett alleges by affidavit that the IRS CCISO employee who actually issued the notice of determination also told Ms. Nauflett (over the telephone) the identical wrong last date to file. The Tax Court, in an unpublished order, dismissed Ms. Nauflett’s petition for lack of jurisdiction as untimely. We are arguing in the case that, under recent Supreme Court case law, the innocent spouse filing period is not jurisdictional and is subject to equitable tolling, and the facts in her case justify equitable tolling. It may be harder for the Fourth Circuit to avoid issuing a ruling in Nauflett on whether or not the filing period is jurisdictional or subject, theoretically, to equitable tolling in the right case. Nauflett is fully briefed. It is not yet clear whether or when oral argument will be scheduled in the case.

Nauflett will no doubt be another uphill battle for Keith and me, however, since last year, two Circuits, in two other cases where we represented the taxpayers, held that the filing deadline in section 6015(e)(1)(A) is jurisdictional under current Supreme Court case law. Rubel v. Commissioner, 856 F.3d 301 (3d Cir. 2017); Matuszak v. Commissioner, 862 F.3d 192 (2d Cir. 2017).

Despite recent setbacks in court, I do not consider Keith and my litigation of the nature of tax suit filing deadlines under current Supreme Court case law to be a waste of time. Clearly, although we have not (yet) convinced any Circuit court to find the innocent spouse or CDP Tax Court petition filing deadline not to be jurisdictional, we have highlighted problems in those areas that have led Nina Olson to propose two legislative fixes.

Further, there is a much better case under current Supreme Court case law for finding district court filing deadlines under section 6532 nonjurisdictional and subject to equitable exceptions like tolling or estoppel. As an amicus in Volpicelli v. Commissioner, 777 F.3d 1042 (9th Cir. 2015), I helped persuade the Ninth Circuit to hold that the period in section 6532(c) in which to file a district court wrongful levy suit is nonjurisdictional and subject to equitable tolling. And, if the court reaches the issue, Keith and I hope, as amicus, to help persuade the Second Circuit to hold that the 2-year period in section 6532(a) in which to file a district court refund suit is nonjurisdictional and subject to estoppel. In both section 6532 instances, by contrast to sections 6015(e)(1)(A) and 6330(d)(1), the sentence containing the filing deadline does not also contain the word “jurisdiction”, and the jurisdictional grants to hear such suits are far away (in 28 U.S.C. section 1346) – key factors under current Supreme Court case law demonstrating that filing deadlines are not jurisdictional. As I noted in my post on Duggan, the jurisdictional and estoppel issues under section 6532(a) are among the issues presented in Pfizer v. United States, Second Circuit Docket No. 17-2307, where oral argument is scheduled for February 13.

 

Tax Court Determines IRS Actions Do Not Violate Restrictions on Second Examinations

The moral of the story in Planty v. Commissioner, T.C. Memo. 2017-240 is that if you ask the IRS to take another look at your return you cannot successfully claim that this “look” is a second examination of the return subject to the rules and approvals that limit the IRS’s ability to take a second look. In this case, the IRS examined the taxpayers’ return and seemed to have some difficulty coming to the final answer. After some fits and starts, the IRS made a determination and an assessment of $2,755. I could not determine from the description of the case how the IRS obtained permission to make the assessment but it does not seem to be a troublesome aspect of the case for the parties or the court.

After the IRS made the assessment and before paying the additional assessed tax, the taxpayers immediately submitted a Form 1040X claiming a refund of $1,560. The IRS treated the Form 1040X as a request for abatement. After looking at the request, the IRS decided that the taxpayer really owed a corrected tax liability of $64,704. Petitioners concede that the adjustment is correct subject to their argument that the adjustment resulted from an impermissible second examination of the tax year. Additionally, the IRS imposed an accuracy related penalty on this additional tax.

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Second Exam

The Court states that “we may deal summarily with petitioners’ claim that they were subjected to an impermissible second examination of their 2010 return.” The Court cites to IRC 7605(b) which sets out the rules on second exams. The Code does not prohibit second exams but does require that the IRS go through a high level approval process. Most of the time the IRS will not do this because it spotlights that the original examiner and exam manager made a large mistake and provides proof of the mistake to their high level manager. Bureaucrats do not like to highlight their mistakes to high level management since doing so has a tendency to suppress future advancement and current bonuses.

In response to the taxpayers’ argument that the IRS engaged in an impermissible second examination, the IRS responded that IRC 7605 has “no bearing upon the Commissioner’s authority to examine tax returns already in his possession.” The Court points out that it would have been very difficult for the IRS to make a determination regarding their claim for refund without pulling the return and looking at it. Since the IRS was looking at the return to satisfy petitioners’ own request, doing so did not run afoul of IRC 7605.

Petitioners’ actions here point to the problem taxpayers have when they want to file an amended return. They think they are due a refund which they would like to receive ASAP; however, making the request for the refund will cause the IRS to scrutinize their return. Here, the quest for a $1,500 refund results in a $64,000 liability, plus a 20% penalty for good measure. Petitioners should have waited to file their request until the statute of limitations on assessment was about to expire. Had they waited, the IRS would still have denied their refund request but would not have hit them with the large assessment. Their impatience proves very costly.

So, the lesson here is not only should you not argue about an impermissible second exam when you have caused the IRS to look at the return but you should not make the request with gobs of time left on the assessment statute of limitations.

Accuracy Related Penalty

Taxpayers here not only brought unnecessary attention on their return costing themselves over $60,000, but they ramped up the liability to the point where the IRS felt obliged to penalize them adding insult to injury regarding their mistake for filing the Form 1040X too early. The Court finds that taxpayers’ return contains an understatement of the tax. It states that based on the proof provided by the IRS, taxpayers’ only hope of averting the penalty is to mount a credible defense based on substantial authority, adequate disclosure, or reasonable cause.

Taxpayers’ understatement resulted from their erroneous claim of almost $150,000 of real estate losses. The Court quoted from the regulations on the standard for substantial authority which requires that “the weight of authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment.” The Court also pointed out that this is an objective and not subjective standard, and that the existence of a legal opinion does not by itself create substantial authority. Here, the IRS disallowed the loss because of the passive activity loss rules. As authority, taxpayers pointed to an opinion from a tax attorney and the failure of the IRS to notice the issue when it first looked at their return.

Unfortunately, at trial taxpayers did not call the tax attorney to testify. So, the Court says it does not have any evidence to know why she gave the advice and whether her opinion had a basis in tax authorities that would allow the taxpayers to meet the substantial authority test. The Court also finds that the failure of the IRS to notice the issue initially does not constitute substantial authority pointing to provisions in the regulations on precisely this point.

The Court points out that adequate disclosure has no effect unless the return position has a reasonable basis and the failure of the tax attorney to testify leaves the Court without an ability to determine if there was a reasonable basis. With respect to reasonable cause, the taxpayers admitted that the tax attorney did not prepare their return and they could not show that the return preparer gave them advice with respect to this item that could cloak them with a reason for taking the erroneous position on their return.

Conclusion

The penalty portion of the opinion follows routine patterns but points to the need to obtain the testimony of any tax professional upon whom the taxpayer relies for the position taken on the return. It is not clear that taxpayers would have won if the professional had testified, but without the testimony a loss on the penalty issue was almost a foregone conclusion costing the taxpayers another $10,000 on top of the over $50,000 liability they picked up by filing the amended return.