Today is the last installment of Lavar Taylor’s three-part post on the SECC v Commissioner case, a case that is now a foundational case in understanding the Tax Court’s jurisdiction to hear employment tax disputes. The first two parts of this three-part post can be found here and here. In this post, Lavar explains the aftereffects of the opinion, including the IRS’s about-face on the issue, the likely reasons and consequences of the IRS position and the very successful ultimate resolution of the SECC case. Les
Government Reaction to Tax Court Opinion
Speaking of appeals, I turn now to the government’s reaction to the Tax Court’s opinion in SECC. I’m certain that the IRS was just as surprised as I was at the outcome. I am also certain that they liked the outcome far less than I did. After all, I now had a chance to prove that the IRS should lose on the merits, without having to foray into District Court. (I’ve litigated a worker classification dispute in District Court before. See Vendor Surveillance Corp. v. United States, 97-2 U.S.T.C. ¶50,527 (9th Cir. 1997)(unpublished decision reversing award of attorney’s fees under section 7430 after taxpayer prevailed in a jury trial in a worker classification case). Trying this type of case in District Court is extremely expensive.) If SECC lost at trial, SECC could still appeal the decision on jurisdictional grounds.
The IRS, however, initially was not content to let the matter go to trial and then deal with the jurisdictional issue in a post-trial appeal. Rather, they told me, and the Tax Court, that they were considering seeking leave to file an interlocutory appeal of the jurisdictional issue to the Ninth Circuit. As seasoned tax controversy attorneys know, however, the IRS does not get to decide whether they will ask the Tax Court for leave to file an interlocutory appeal. Only the Solicitor General, after consulting with the Department of Justice Tax Division’s Appellate Section, gets to authorize the pursuit of an interlocutory appeal.read more...
Having worked in the General Litigation Division of the IRS National Office in the early 1980’s, where I carried the bags of the IRS attorneys who met with the attorneys from the Appellate Section of DOJ Tax Division, and having observed strenuous disagreements between these IRS and DOJ attorneys about whether to appeal an adverse ruling, I was quite familiar with the procedure that had to be followed in order to authorize an interlocutory appeal. I knew that lots of government attorneys would be involved and that there would be lots of meetings. Keith Fogg accurately described this process in parts 1 and 2 of The Room of Lies. I sat in the Room of Lies on many occasions, albeit as a lowly bag carrier. Based on my experience, I thought the process might take a few months, six months at most.
Time passed without any decision. In December of 2014, the IRS issued Chief Counsel Notices CC-2014-11 and CC-2015-1, in which IRS Chief Counsel’s Office formally announced to the world that they disagreed with the Tax Court’s holding in the SECC opinion. I waited some more. It was not until March of 2015 that the IRS formally advised the Tax Court that the decision had been made to not pursue an interlocutory appeal of the jurisdictional issue.
What happened? Apparently DOJ and the Solicitor General’s Office disagreed with the IRS. While no one has told me the story, I’m certain I could come up with a fairly accurate script of the conversations that took place. The attorneys in the IRS who were involved in drafting Notice 2002-5, supra, no doubt pushed hard for the SG to pursue an interlocutory appeal. They were vested in their “creation” (the Notice) and pushed hard for what they thought was a righteous cause.
The DOJ Appellate attorneys no doubt had significant reservations about pursuing an interlocutory appeal. The DOJ attorneys were likely concerned about the possibility that SECC might prevail on the jurisdictional issue in the Ninth Circuit. They were also likely concerned about the fact that the Ninth Circuit’s opinion in Charlotte’s Office Boutique, Inc. v. Commissioner, 425 F.3d 1203 (9th Cir. 2005), was, to say the least, somewhat in tension with the position argued by the Commissioner on the jurisdictional issue in the Tax Court. They may have also been concerned about the fact that the Ninth Circuit has not always been particularly kind to the IRS in section 530 cases. Regardless of why the government did not pursue an interlocutory appeal, I was now looking at a Tax Court trial, or, if the Tax Gods were with me, a settlement that my client could live with.
After learning that the IRS would not be pursuing an interlocutory appeal, I learned that the IRS was auditing the income tax returns of cable splicers in southern California. The IRS undoubtedly learned what I had previously learned, namely, that during the quarters at issue in the SECC case, the entire cable splicing industry in southern California treated the cable splicers as “dual status” workers, the same as SECC had done. Thus, the IRS was now aware that I could make a strong “industry practice” showing in support of my section 530 argument, in addition to showing that the IRS advised my client to do business the way that it did, and showing that my client consistently followed all information reporting requirements. The IRS may have also learned that the argument that the cable splicers were in fact independent contractors for all purposes had some merit.
The Government’s Change in Views: The Agreement with the SECC Holding
Near the end of 2015, the IRS issued Chief Counsel Notice CC-2016-002. In this Notice, the IRS announced to the world that it was now in agreement with the Tax Court’s holding in the SECC case! About this time, I had a telephone conversation with the IRS attorney handling the case. As the result of this telephone conversation, I submitted a formal settlement offer to the IRS. The amount of the offer? A total of $25,000 in taxes, spread out over all of the quarters in question. In return, my client would concede that the workers in question were employees for all purposes of Subtitle C during the quarters at issue. (Such a result would have been metaphysically impossible had the case gone to trial. That is why settlements were invented.) Not too long thereafter, the offer was accepted. A similar story played out in the one other case handled by our office that had not previously settled. The SECC case was over.
So what happened? Why the change in position by the IRS on the jurisdictional issue? While no one from the IRS has even hinted to me why this happened, I don’t think it is too hard to surmise why the change in position took place. With the change in position, it is very unlikely that the IRS will ever “blow” a statute of limitations in an employment tax case, and it is unlikely that the Tax Court’s holding in SECC will be reversed by a Court of Appeals any time soon.
It appears from the Tax Court’s opinion in SECC that, once a “determination” is made by the IRS under section 7436(a), the statute of limitations on assessment is suspended. While there may be some practical problems in determining when that suspension begins and ends, the IRS can avoid having to deal with those kinds of issues by requiring taxpayers to sign written extensions of the statute of limitations prior to the earliest possible expiration of the statute of limitations on assessment or, if no written extensions are forthcoming, by issuing a notice of determination to the taxpayer under section 7436(b) prior to the earliest possible expiration of the statute of limitations on assessment. Most taxpayers will sign the statute extensions, in the hope that the case will eventually settle.
The number of Tax Court petitions that will be filed prior to the issuance of a Notice of Determination under section 7436(b) will be small. Most taxpayers will want to try to settle with the Office of Appeals before going to court, and most cases handled by the Office of Appeals will settle. It is very unlikely that rational taxpayers will file a Tax Court petition prior to the issuance of a Notice of Determination under section 7436(b) with the idea that they will thereafter challenge the jurisdiction of the Tax Court on the grounds that no Notice of Determination was issued. Such a taxpayer, after losing on the jurisdictional issue in Tax Court, would then have to appeal the Tax Court’s ruling to a Court of Appeals after going to trial or settling the case. It is unlikely that any appeal would be filed after a settlement has been reached.
Compare that situation with the situation that would have resulted if the IRS had not acquiesced in the Tax Court’s ruling in SECC and had instead continue to argue that no Notice of Determination was required to be issued in cases such as SECC. The Ninth Circuit would have eventually ruled on the jurisdictional issue. If they had ruled in favor of SECC, the employment tax world would again have been thrown into a state of chaos. Statutes of limitations would have been “blown.” Uncertainty regarding the Tax Court’s jurisdiction would have continued, pending an eventual ruling by the Supreme Court in SECC or in some future case. The Supreme Court’s ruling might not have come until after a Circuit split developed. Uncertainty when it comes to the jurisdiction of the Tax Court is not a good thing.
Uncertainty would still have lingered even if the Ninth Circuit had sustained the Tax Court, because the IRS would have continued to challenge the Tax Court’s ruling in SECC. That uncertainty would not have been a good thing.
It is certainly possible that, at some point in the future, a Court of Appeals will have occasion to rule on the jurisdictional issue decided in the SECC case. In any appeal from a decision in a 7436 case where the Tax Court petition was filed without the issuance of a Notice of Determination under section 7436, the Court of Appeals will have an independent duty to determine whether the Tax Court had jurisdiction below. It is possible that the situation will play out in a manner similar to how the case law played out after the IRS acquiesced in the Tax Court’s holding in Fernandez v. Commissioner, 114 T.C. 324 (2000), that it had jurisdiction to review determinations under section 6015(f), only to see the Ninth Circuit later hold that the Tax Court lacked jurisdiction to review such determinations in Commissioner v. Ewing, 439 F.3d 1009 (9th Cir. 2006). But even if that were to happen, the IRS’s recent acquiescence in the Tax Court’s holding in SECC will create much less chaos and uncertainty in the near future than if the IRS had not acquiesced in that holding.
The Resolution of the SECC Case
The IRS’s acquiescence in the Tax Court’s holding in SECC, however, came with a price for the government. In order to avoid having SECC possibly upset the apple cart by appealing the jurisdictional issue to the Ninth Circuit, the IRS had to settle the SECC case (and the related case) on terms that would ensure that SECC would not appeal the jurisdictional issue. To its credit, the IRS did just that. Regardless of the IRS’s motivation for settling on the terms that it did, my own view is that the result in the case was a fair one given the unusual facts of the case, even though the taxpayer had to wait a long time for that result.
Note, however, that future litigants with issues similar to the issues raised in the SECC case will face obstacles not faced by SECC. The IRS, in Chief Counsel Notice CC-2016-002, supra, has indicated that it intends to challenge arguments by taxpayers that they are entitled to section 530 relief or are entitled to section 3509(a) rates in cases with fact patterns similar to the fact pattern in SECC. While I think that Chief Counsel is taking a position that is wrong both legally and from a standpoint of fairness to taxpayers who face situations similar to the situation faced by SECC, that topic is for another day.
Looking Ahead to Future Disputes and a Nod to the Professionalism of the Government Counsel
Perhaps the most interesting cases going forward will focus on when a “determination” has taken place or, more likely, will focus on when the suspension of the statute of limitations on assessment begins and ends. In cases where the IRS has used the “belt and suspenders” approach of obtaining written extensions of the statute of limitations, statute of limitations issues are not likely to arise. But in cases where the IRS relies solely on the Tax Court’s interpretation of section 7436 in SECC to keep the assessment statute of limitations on assessment open, statute of limitations issues could arise. Notably, these issues could arise either in Tax Court litigation or in District Court refund litigation. Thus, it is possible that District Courts will be issuing rulings on statute of limitations issues in situations in which the resolution of the statute of limitations issue will turn on whether the Tax Court decided the jurisdictional issue correctly in SECC.
In closing, I would like to tip my cap to the government counsel with whom I worked in the SECC case and related cases. Their professionalism was greatly appreciated, even when we vehemently disagreed with each other’s legal positions. I would also like to tip my cap to Robert Horwitz and Barry Furman. Robert, who has moved on from our firm after growing tired of driving from Santa Monica to Orange County and back every day for almost 20 years, worked by my side as we crafted our arguments in the SECC case. Barry, who was co-counsel with me, and lead trial counsel, some 22 years ago in the Vendor Surveillance case mentioned earlier, served as a sounding board for our case strategy. Both of these fine attorneys were of great help to me in handling this matter.