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.

Second Circuit Agrees with Third That Time to File an Innocent Spouse Petition is Jurisdictional and Not Subject to Equitable Tolling

We welcome back frequent guest blogger Carl Smith who writes about a case he has assisted the Harvard Tax Clinic in litigating before the Second Circuit.  The court found the time for filing a Tax Court petition is jurisdictional meaning that our client’s reliance on the IRS statement regarding the last date to file her petition has landed her outside of the court without a judicial remedy for review of the innocent spouse determination unless she can come up with the money to fully pay the liability which she cannot.  Keith

This post updates a post on Rubel v. Commissioner, 856 F.3d 301 (3d Cir. May 9, 2017).  In Rubel, the IRS told the taxpayer the wrong date for the end of the 90-day period in section 6015(e)(1)(A) to file a Tax Court innocent spouse petition.  The taxpayer relied on that date – mailing the petition on the last date the IRS told her.  Then, the IRS moved to dismiss her case for lack of jurisdiction as untimely.  In response, the taxpayer argued that the IRS should be estopped from making an untimeliness argument, having caused the late filing.  But, the Tax Court and, later, the Third Circuit held that the filing period is jurisdictional.  Jurisdictional periods are never subject to equitable exceptions.

Keith and I litigated Rubel.  We also litigated a factually virtually-identical case in the Second Circuit named Matuszak v. Commissioner.  On July 5, the Second Circuit reached the identical conclusion as the Third Circuit.

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The reasoning of both opinions is almost the same:  Under recent Supreme Court case law, time periods to file are no longer jurisdictional.  But, there are two exceptions:

One is that if the Supreme Court has called a time period jurisdictional in multiple past opinions issued over decades, the time period is still jurisdictional under stare decisis.  This stare decisis exception can’t apply to the innocent spouse petition filing period because the Supreme Court has never called any time period to file in the Tax Court jurisdictional or not jurisdictional.

The other exception is the “rare” case where Congress makes a “clear statement” that it wants a time period to be jurisdictional, notwithstanding the ordinary rule.  Both Rubel and Matuszak rely on the language of section 6015(e)(1)(A) as providing such a clear statement through the words “and the Tax Court shall have jurisdiction . . . if” the petition is filed within 90 days of the notice of determination’s issuance.

Keith and I think this “clear statement” analysis is a bit too pat:  The words “and the Tax Court shall have jurisdiction” appear only in a parenthetical.  Further, the “if” clause does not immediately follow that parenthetical.  We think that, based on Supreme Court case law on this clear statement exception, one can fairly argue that the parenthetical only applies to the language immediately following it – i.e., “to determine the appropriate relief available to the individual under this section” – and which precedes the “if”.  In any case, if the language is not “clear”, then the time period should be held nonjurisdictional.

Both the Rubel and Matuszak opinion also pointed out the provision in section 6015(e)(1)(B)(ii) that gives the Tax Court jurisdiction to enjoin the IRS from collection of the disputed amount while the request for relief and all judicial appeals is pending.  There is a sentence in this provision that limits the Tax Court’s injunctive jurisdiction only to cases of the “timely” filing of a Tax Court petition under section 6015(e)(1)(A).  Keith and I don’t see the relevance of this injunctive provision to the clear statement exception, and we don’t see that “timely” means not considering any extensions provided under statutes (such as sections 7502 (tolling for timely mailing), 7508 (combat zone tolling), or 7508A (disaster zone tolling)) or judicial equitable exceptions.

And as to the context of the statute, remember both (1) that the statute explicitly invokes equity (in subsections (b) and (f)) and (2) that section 6015(e) was adopted joined in the same 1998 act to a legislative overruling of United States v. Brockamp, 519 U.S. 347 (1997).  In Brockamp, the Supreme Court held that, due to the high volume of administrative refund claims and the complexity of section 6511, the time periods therein were not subject to equitable tolling under the presumption in favor of equitable tolling against the government laid down in Irwin v. Department of Veterans Affairs, 498 U.S. 89 (1990).  Congress adopted section 6511(h) to provide what it called a legislative “equitable tolling” in cases of financial disability.  Does anyone think Congress’ desire to overrule the Supreme Court as to equitable tolling in section 6511 means that the same Congress did not want equitable tolling to apply in its new equitable innocent spouse provision?

In Rubel, the Third Circuit also cited Brockamp for the proposition that Congress in 1998 would have thought all time periods in the Internal Revenue Code jurisdictional.  Keith and I pointed out to both Circuits, however, that Brockamp doesn’t even contain the word “jurisdiction” or “jurisdictional”.  About the only significant difference between the opinions of the two Circuits is that the Second Circuit declines to include this questionable characterization of Brockamp.

No other Circuit has yet considered whether the time period in section 6015(e)(1)(A) is jurisdictional or not.  Keith and I are about to litigate the identical issue in the Fourth Circuit.  Clearly, the opinions in Rubel and Matuszak are not helping us.

Taft v. Comm’r: Innocent Spouse Relief Generates a Refund

We welcome back frequent guest blogger Carl Smith who writes about an innocent spouse case in which the Tax Court granted relief under a subsection permitting the innocent taxpayer to obtain a return of money previously taken from her to satisfy the liability caused by her ex-spouse.  Because the IRS frequently defaults to granting relief in a way that prevents the innocent spouse from obtaining refunds, this case shows a path to a more complete victory.  Keith

A number of people have congratulated Keith for contributing to a victory last month for a taxpayer seeking a $1,500 refund under the innocent spouse provisions at section 6015See Taft v. Commissioner, T.C. Memo. 2017-66.  Keith and I had filed an amicus brief in the case on behalf of the Harvard Federal Tax Clinic.  In it, we agreed with pro bono Florida attorney Joe DiRuzzo and his firm that a regulation on which the IRS relied to deny the refund under subsection (f) (equitable relief) was invalid – though invalid for different reasons than articulated by Joe and his firm.  But, as noted in footnote 4 near the end of the opinion, Tax Court Judge Vasquez never had to discuss the regulation’s validity, since he found the refund authorized under subsection (b) (traditional relief), even though the taxpayer had also been nominally granted relief under subsection (c) (separation of liability relief), which does not allow for refunds.  So, really, Keith and I did not win this case.  Rather, the taxpayer, aided by Joe and his firm, did.

In any event, the Taft opinion provides a useful reminder of some of the rules on getting a refund under the innocent spouse provisions.  And a post on it may alert others who find themselves in this position to the regulation invalidity argument.

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The traditional way to bring a refund suit is to file an administrative claim, which, if not allowed, forms the basis of a suit for refund in district court or the Court of Federal Claims.  But, when Congress, in section 6015(e)(1)(A), also gave the Tax Court stand-alone jurisdiction to “determine the relief available to the individual under” section 6015, that included also determining whether a taxpayer was due a refund, even in the absence of predicate unpaid taxes.  Thus, Ms. Taft had her choice of bringing this refund action in any of three federal courts.

The pro se Ms. Taft first filed a Form 8857 seeking a refund under section 6015.  Note that she could not have used a Form 1040X to seek the refund, since the year involved, 2010, was one in which she had filed a joint return, and she did not want to file a joint amended return with the former husband that she had divorced in 2013.  The IRS treats a Form 8857 as a refund claim for purposes of the section 6511 statute of limitations.  Prop. Reg. § 1.6015-1(k)(4) (Nov. 19, 2015) (“Generally the filing of Form 8857, ‘Request for Innocent Spouse Relief,’ will be treated as the filing of a claim for credit or refund even if the requesting spouse does not specifically request a credit or refund.”).  Her refund request was timely because the IRS had taken about $1,500 of her reported overpayment on her 2012 return (filed in 2013) and applied it to fully pay the 2010 joint deficiency at issue.  She filed the Form 8857 less than two years after the overpayment was applied, so she qualified under the 2-years-from-payment refund statute of limitations in section 6511(a).

Since, by the time she filed the Form 8857, she was divorced, she was entitled to elect (c) (separation of liability) relief.  This led to the first complication, since relief under (b) and (f) can entitle a taxpayer to a refund, but relief under (c) cannot.  Section 6015(g)(3).  The reason why Congress made a refund under (c) unallowable is because it made relief under (c) so easy to obtain.

Relief under (c) applies to deficiencies when, at the time the Form 8857 is filed, the taxpayer is divorced, legally separated, or has been living apart from the taxpayer’s spouse for at least 12 months.  For relief under (c), a taxpayer merely elects to separate his or her liability from that of his or her spouse based on their respective contributions to causing the deficiency.  In this case, the deficiency was tax on about $4,500 of unreported dividends from stock Mr. Taft owned and that he had acquired as an employee of the supermarket chain, Publix.  Mr. Taft had worked for many years at Publix until he was fired in 2009.  Relief is available under (c) even where it would not be inequitable to hold the electing spouse liable (e.g., where he or she significantly benefited from the underpayment and would have no hardship in paying the amount).  The only way the IRS can deny relief under (c) is for it to prove (note the burden shift) that the taxpayer had actual knowledge of the item giving rise to the deficiency.  The IRS concluded that Ms. Taft did not see the statements addressed to Mr. Taft that would have shown the exact amount of dividends that were unreported, so, in the notice of determination, the IRS conceded that Ms. Taft was entitled to relief under (c) because she did not have actual knowledge.  But, that relief under (c) did absolutely nothing for Ms. Taft, since she had (involuntarily) already fully paid the deficiency and was only seeking a refund, which could not be granted under (c).

The IRS then went on to deny Ms. Taft the refund under (b).  Under (b), relief is only available in the case of deficiencies if, among other things, a taxpayer had no reason to know of the deficiency and it would be inequitable to hold the taxpayer liable for the deficiency.  The IRS argued that she should have known that there were unreported dividends from Publix because for many prior years she had signed joint returns that reported such dividends.  The IRS also argued that it would not be inequitable to hold Ms. Taft liable for the deficiency.

Relief under subsection (f) (including refunds) is available if only two conditions are met:  First, relief is “not available” under subsections (b) or (c).  Second, it would be inequitable to hold the taxpayer liable for the deficiency or underpayment.  Reg. § 1.6015-4(b) (which applies to relief under (f)), states:  “This section may not be used to circumvent the limitation of § 1.6015-3(c)(1) (i.e., no refunds under § 1.6015-3) [i.e., the regulations under subsection (c)]. Therefore, relief is not available under this section to obtain a refund of liabilities already paid, for which the requesting spouse would otherwise qualify for relief under § 1.6015-3.”  This regulation was controversial before it was enacted in 2002.  It seems to prohibit a refund under (f) – even if the taxpayer can show that it would be inequitable for the taxpayer to be held liable for the deficiency – because of qualification for nonexistent relief under (c) (which does not require proof of inequity).  The IRS argued that since relief had been “available” to Ms. Taft under (c), she was not entitled to a refund attributable to the Publix dividend underreporting deficiency.  The IRS also argued that it was not inequitable to hold Ms. Taft liable, in any event.

Judge Vasquez held that, even though Ms. Taft could not get a refund under (c), she could get a refund under (b).  Mr. Taft had started an affair, which Ms. Taft discovered in 2011.  During 2010, Mr. Taft, unbeknownst to Ms. Taft, liquidated all the family savings (including the Publix stock) and spent them on himself and his girlfriend.  Wanting to conceal his affairs (both emotional and financial) from Ms. Taft, when it came time to prepare the 2010 joint Form 1040, he did so with the long-time accountant without her present and had the return e-filed.  That return revealed all the income from liquidating the family assets, though mistakenly left off the Publix dividends.  Mr. Taft did not let Ms. Taft see a copy of the return, though he assured her that it had been properly prepared by the long-time accountant.  Given all this secretiveness, Judge Vasquez held that Ms. Taft had no reason to know of the deficiency for purposes of that requirement for (b) relief.

Given the fact that Mr. Taft had wasted the family assets in his affair and so Ms. Taft did not benefit in the slightest from the Publix dividends and Ms. Taft’s lack of knowledge of the underreporting, Judge Vasquez also held that it would have been inequitable to hold Ms. Taft liable – another condition for (b) relief.

Since the judge granted Ms. Taft a refund under (b), he no longer had to reach the issue of refunds under (f) and the possible invalidity of the regulation under (f).

The Regulation’s Possible Invalidity

Joe DiRuzzo took on the Taft case pro bono at a Tax Court calendar call.  It was his first innocent spouse case, so, knowing I was experienced in this area, he gave me a call about it later that day.  We both were worried that the judge might find that Ms. Taft should have known about the unreported Publix dividends based on the prior-year reporting of similar dividends.  In that event, Ms. Taft could not get relief under (b), and the issue of relief under (f) (and the validity of the regulation under (f) possibly prohibiting a refund) would be squarely presented.

Despite the small amount involved in the case, Joe asked the court for permission to do post-trial briefs.  And he then immediately did a FOIA request of the IRS for all comments submitted on the proposed regulations that were finalized in 2002.  Finding a few comments objecting to the proposed (f) refund regulation limitation and not feeling the IRS had adequately responded to those comments, in his brief in Taft, Joe challenged the validity of the regulation under the Administrative Procedure Act.  He made the same argument that had recently been successful in Altera Corp. v. Commissioner, 145 T.C. 91 (2015) (currently on appeal in the Ninth Circuit):  that the IRS had not sufficiently responded to the comments or provided a “reasoned explanation” for why it reached the result that it did under the standard set out in Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29 (1983).

Keith and I then got permission from the court to weigh in as amicus, arguing in our brief in Taft that the regulation was invalid under the tests of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).  We argued that the regulation added a limitation on getting a refund under (f) that was not in the statute – i.e., preventing circumvention of the no refund rule of subsection (c).  We pointed out that there could be no circumvention because a refund under (f) was not automatic, since, under (f), one had to prove inequity (something that was irrelevant under (c)).  We cited to the Tax Court’s opinions in Lantz v. Commissioner, 132 T.C. 131 (2009), revd. 607 F.3d 479 (7th Cir. 2010), and Hall v. Commissioner, 135 T.C. 374 (2010), which made similar points that the 2-year period for requesting (f) relief imposed by § 1.6015-5(b)(1) did not need to be imposed to prevent the circumvention of the 2-year periods provided by statute for (b) and (c) relief because (f) relief (by contrast) requires additional proof of a number of events that may occur years after the returns are filed.

In the end, the work that Joe DiRuzzo and his firm and that Keith and I did was irrelevant to the court’s decision to grant a refund in Taft under (b).  But, we know this situation occurs now and then.  Recently, at least one attorney with a section 6015 refund case contacted me with the same problem concerning refunds under the regulation under (f) where useless (c) relief was arguably “available”.  I have linked to the two briefs filed in the Taft case, just in case anyone might be helped in a future litigation by seeing the arguments we raised.  And readers should also know that Joe DiRuzzo has on a disk copies of all the comments made on the section 6015 regulations that were adopted in 2002, which is not only a resource for this issue under the (f) regulations, but for any other challenge to the 2002 regulations.

Finally, I would note that the IRS proposed new section 6015 regulations on November 19, 2015, that are still awaiting adoption.  The proposed regulations retain the current sentences quoted above, but add this:  “For purposes of determining whether the requesting spouse qualifies for relief under § 1.6015-3, the fact that a refund was barred by section 6015(g)(2) [res judicata] and paragraph (k)(2) of this section [no refunds under (c)] does not mean that the requesting spouse did not receive full relief.” Prop. Reg. § 1.6015-1(k)(3).  The IRS is trying to buttress its argument that even relief under (c) that is, as a practical matter, useless (because no refund is allowed under (c)), is relief that precludes a refund under (f).

 

Tax Court Won’t Certify Battat for Interlocutory Appeal

We welcome back frequent guest blogger Carl Smith who writes today in continuation of coverage concerning the status of the Tax Court within the constitutional framework.  We especially thank Carl for his timely guest post as Les presents on taxpayer rights in Vienna, Steve shovels out in Philadelphia, and I visit warmer climes for spring break.  Keith

In Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017), on which we blogged here and here, the Tax Court (Judge Colvin) held that there is no constitutional separation of powers problem in the President’s holding a removal power under section 7443(f) with respect to its judges.  Battat holds that the Tax Court is not a part of the Executive Branch — unlike the D.C. Circuit in Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), which held that the Tax Court was still an Executive Branch entity.

Joe DiRuzzo is the lawyer for the Battats and several additional clients in whose cases he raised the same constitutional argument.  He has cases that could be appealed to several different Circuits.  His cases are before Judges Colvin, Jacobs, and Wherry, and Chief Judge Marvel.  After the Battat opinion, Joe moved for permission to file an interlocutory appeal on this separation of powers issue in the cases that are before Judges Colvin, Jacobs, and Wherry.  Interlocutory appeal orders are not granted automatically, and must be issued under section 7482(a)(2)(A).  The court should grant an interlocutory appeal motion if (1) a controlling question of law is involved, (2) substantial grounds for a difference of opinion are present, and (3) an immediate appeal may materially advance the ultimate termination of the litigation.

In First Western Government Securities v. Commissioner, 94 T.C. 549 (1990), affd. sub nom. Samuels, Kramer & Co. v. Commissioner, 930 F.2d 975 (2d Cir. 1991), the Tax Court had held, unanimously and en banc, that it is a Court of Law for purposes of the Appointments Clause, so there is no problem with the Chief Judge’s appointment of its Special Trial Judges.  Despite the absence of any contrary holding at the time, the Tax Court in First Western certified an interlocutory appeal of its holding because of the importance of the issue — eventually leading to the Supreme Court’s opinion in Freytag v. Commissioner, 501 U.S. 868 (1991). See 94 T.C. at 569 (Appendix E) for the interlocutory certification.

On March 14, Judges Colvin, Jacobs, and Wherry each denied Joe DiRuzzo’s motions to certify the Kuretski/Battat issues in his cases for immediate interlocutory appeal.  Here’s a link to the order in Battat, though the orders are identical in each case.  The orders admit that there is a divergence in the reasoning between the Tax Court and D.C. Circuit as to how both courts get to the conclusion that there is no constitutional problem in the removal power.  But, the Tax Court judges do not think that divergence enough to warrant interlocutory appeals.  The orders simply state:

The Court of Appeals in Kuretski applied a different analysis, but it rejected, as did this Court, the contention that Presidential removal authority is unconstitutional. Petitioners cite, and we are aware, of no legal authority supporting petitioners’ contention regarding the controlling issue of law in this case. Thus, we conclude that the second requirement of section 7482(a)(2), the presence of “substantial grounds for a difference of opinion”, is not met.

I beg to differ, and so, doubtless, would the late Justice Scalia.  He wrote in his concurrence in Freytag:

When the Tax Court was statutorily denominated an “Article I Court” in 1969, its judges did not magically acquire the judicial power. They still lack life tenure; their salaries may still be diminished; they are still removable by the President for “inefficiency, neglect of duty, or malfeasance in office.” 26 U.S.C. § 7443(f).   (In Bowsher v. Synar, supra, [478 U.S. 714] at 729 [(1986)], we held that these latter terms are “very broad” and “could sustain removal . . . for any number of actual or perceived transgressions.”) How anyone with these characteristics can exercise judicial power “independent . . . [of] the Executive Branch” is a complete mystery. It seems to me entirely obvious that the Tax Court, like the Internal Revenue Service, the FCC, and the NLRB, exercises executive power.

501 U.S. at 912 (emphasis in original; some citations omitted).

I am surprised that the orders make no mention of the interlocutory appeal certification granted in First Western.  I think that this, at the very least, is inconsistent behavior by the Tax Court as to allowing interlocutory appeals.

 

Tax Court Holds President’s Removal Power Constitutional, Part II

Here is part 2 of a two part post by frequent guest blogger Carl Smith on last week’s important decision on the location of the Tax Court within our constitutional framework.  Keith 

This is part two of a post on the Tax Court’s recent opinion in Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017), where the Tax Court disagreed with the D.C. Circuit’s reasoning in Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), cert. denied, 135 S. Ct. 2309 (2015), but came to the same result.  In this part of the post, I explain the reactions of Congress to the Kuretski D.C. Circuit opinion and the reaction of Florida attorney Joe DiRuzzo, who decided to raise the Kuretski Presidential removal power issue in a number of his pending Tax Court cases, including Battat. Then, I set out in detail the Tax Court’s reasoning in Battat.

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The D.C. Circuit’s opinion in Kuretski was issued in June 2014.  On November 26, 2014, the Kuretskis filed a petition for certiorari, arguing that the D.C. Circuit had misapplied the Supreme Court’s holding in Freytag v. Commissioner, 501 U.S. 868 (1991).

Florida tax attorney Joseph A. DiRuzzo, III and other lawyers at the firm at which he works, Fuerst Ittleman David & Joseph, PL, read the Kuretski cert. petition and thought the constitutional argument in it had merit.  On their own (not with my prodding), they decided to borrow the argument from the cert. petition and include it as an argument in some Tax Court cases that their firm had pending at the pretrial stage.  There were motions on other issues already pending in some of those cases.  The cases were both deficiency and Collection Due Process cases.  The taxpayers lived in a number of Circuits around the country.  Joe did not count on the Supreme Court granting cert. in Kuretski without a Circuit split.  (He was right.)  The lawyers hoped that the Tax Court would issue a ruling disagreeing with the D.C. Circuit and that courts of appeals outside D.C. would also disagree with the D.C. Circuit – leading to a grant of cert. in one of these cases.

The first case in which Joe and his firm raised the Kuretski removal power issue was a Collection Due Process case named Elmes v. Commissioner, Tax Court Docket No. 24872-14L, where, on December 19, 2014, Joe and his firm filed a “Motion to Disqualify & Motion to Declare 26 U.S.C. § 7443(f) Unconstitutional”.  The motions in Elmes prayed that “this Court . . . declare 26 U.S.C. § 7443(f) unconstitutional and disqualify all the judges of the Tax Court until such time as § 7443(f)’s constitutional infirmity is cured”.

Over the next few weeks, Joe and his firm filed similar motions in about a dozen other cases.  By filing each motion pretrial, they hoped to avoid getting a ruling that the motion was filed too late in the case for the Tax Court to have to address it – the kind of ruling Judge Wherry had issued to the Kuretskis in an unpublished order.

On May 18, 2015, the Supreme Court denied cert. in Kuretski.

On September 1, 2015, the Chief Judge assigned the Battat case to Judge Colvin.

The Tax Court was annoyed enough with the D.C. Circuit’s calling the Tax Court still an Executive Branch entity that, before any judge ruled on any of Joe’s firm’s motions, the Tax Court asked for, and obtained from Congress (in December 2015), an amendment to section 7441 that added the following sentence (which the legislative history said was to clarify the status of the Tax Court in light of Kuretski):  “The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government.”

Battat and Thompson Rulings 

More than two years after Joe and his firm began filing these section 7443(f) motions, the Tax Court ruled on two of them on February 2, 2017, in Battat and Thompson v. Commissioner, 148 T.C. No. 3.

Thompson is a deficiency-jurisdiction opinion by Judge Wherry that primarily addresses a motion that Joe and his firm filed concerning the constitutionality of the penalty at section 6662A under the Eighth Amendment’s Excessive Fines Clause.  In the opinion, Judge Wherry denies the section 6662A motion and also denies the section 7443(f) motion.  For the latter ruling, he merely cites to the court’s simultaneous opinion in Battat.  Thus, Battat is currently the only Tax Court opinion that gives reasoning for the rulings on the section 7443(f) motions.

The Thompsons resided in California when they filed their Tax Court petition, so an appeal of their case would go to the Ninth Circuit.  The Battats, whose case is also a deficiency case, resided in Florida when they filed their petition, so an appeal of their case would go to the Eleventh Circuit.  Thompson involves income tax deficiencies and penalties for the tax years 2003-2007 of nearly $400,000, in aggregate.  Battat involves income tax deficiencies and penalties for 2008 exceeding $2 million, in aggregate.  So, there is enough at stake in the cases to justify the costs of appeals.  Hereafter, I will ignore Thompson (which may be the subject of someone else’s post on the section 6662A issue).

Battat is an oddly-written 45-page opinion.  Since there are no facts in dispute, the opinion is divided into the usual Background and Discussion sections.  However, in the Background section, Judge Colvin gives a running commentary on the significance of the recited background and takes issue frequently with the Kuretski opinion on a number of points.  One might normally expect these disagreements to be raised in the Discussion section.  With apologies to Judge Colvin, I will summarize the Battat case in an order that makes more sense to me for a summary.

The Discussion section of Battat begins with Judge Colvin observing that all Tax Court judges are potentially affected by the ruling in the case.  There is a judicial rule of necessity that provides that when all possible judges have a conflict (such as in cases deciding their salary issues), since it is necessary that some judge decide the case, any judge may decide the case.  Therefore, Judge Colvin rules that he may decide the case.  Interestingly, the opinion does not discuss a suggestion by the taxpayers that a district court judge (who would have no conflict) be assigned over to the Tax Court to decide the Battat motion.

In the Discussion part of his opinion, Judge Colvin then notes that the Tax Court is one of those “public rights” courts where all litigation involves suits between citizens and the sovereign. The Supreme Court has held that, since, at common law, such suits need not have been heard by regular court judges, it is acceptable for Congress to assign public rights cases to special tribunals, either to Article I courts or Executive agenciesNorthern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S.50, 67-70 (1982) (involving bankruptcy courts).  Thus, the Tax Court is constitutional.

In the Background section of the opinion, Judge Colvin laid out much of the history of the Tax Court and its judges.  There, Judge Colvin interpreted Freytag v. Commissioner, 501 U.S. 868 (1991), to hold that the Tax Court is not a part of the Executive Branch.  This reading is contrary to the reading of the D.C. Circuit in Kuretski, which held that the Tax Court is still in the Executive Branch, notwithstanding the 1969 amendment to section 7441.  Judge Colvin wrote:

[I]n the 1969 Act Congress deleted the designation of the Tax Court as an “independent agency in the Executive Branch of the Government”. The only amendment needed if Congress had intended to establish the Tax Court as an Article I court located in the executive branch would have been deletion of the words “as an independent agency”. If only those words had been deleted, section 7441 would have said the Tax Court “shall be continued * * * in the Executive Branch of the Government”. But that is not what Congress did. Congress also deleted from section 7441 the words “in the Executive Branch of the Government”. That additional change would have been superfluous if Congress had intended for the Tax Court to remain within the executive branch.

Slip op. at 10.

Judge Colvin also buttressed his holding that the Tax Court was not in the Executive Branch by citing the 2015 amendment to section 7441 and a number of amendments to the Internal Revenue Code since 2006 that align the Tax Court’s functioning more closely with that of Article III courts.

Judge Colvin took issue with the D.C. Circuit in Kuretski’s comparing the Tax Court, for location purposes, to the Article I Court of Appeals for the Armed Forces:

10 U.S.C. sec. 946 (2012) requires judges of the Court of Appeals for the Armed Forces to meet annually with the Judge Advocates General and two members of the public appointed by the Secretary of Defense to “survey the operation” of the military justice system. Edmond [v. United States], 520 U.S. [651] at 664 n.2 [(1997)]. This contrasts with the Tax Court, which “exercises judicial power to the exclusion of any other function”, Freytag v. Commissioner, 501 U.S. at 891, and which has no statutory mandate to survey the operation of the IRS or any of its offices. These statutory differences led the Supreme Court to conclude that the Tax Court is independent of the executive branch and the Court of Military Appeals for the Armed Forces is within the executive branch.

Slip op. at 17 (footnote omitted).

Judge Colvin also took issue with Kuretski’s comparing the Tax Court to other Executive Branch agencies:

[I]ndependent executive branch agencies perform substantial nonadjudicatory functions, e.g., rulemaking, while the Tax Court “exercises judicial power to the exclusion of any other function.” Freytag v. Commissioner, 501 U.S. at 891.

In considering the relationship between independent executive branch agencies and other executive branch agencies, the Court of Appeals in Kuretski v. Commissioner, 755 F.3d at 944, said that Congress may allow independent executive branch agencies “a measure of independence from other executive actors”. Presumably, “a measure of independence” means less than total independence. If the Tax Court were in the executive branch, the relevant “other executive actor” would be the IRS. Surely any taxpayer would find it repugnant if the Tax Court, which by congressional design is the Federal court which decides the most taxpayer disputes with the IRS, has only some nebulous “measure of independence” from the IRS.

Slip op. at 30-31 (footnote omitted).

One gets the impression that the Tax Court was more concerned to issue an opinion declaring its independence from the Executive Branch than worrying about the specific removal power at issue in the case.  But, interestingly, Judge Colvin refuses to hold in which other Branch the Tax Court might be located.  It is unnecessary to his analysis, since all he felt he needed to discuss was case law, like Bowsher v. Synar, 478 U.S. 714 (1986), holding that interbranch removal powers were problematic under the separation of powers.  Once the Tax Court is not located in the Executive Branch, an interbranch removal power is at issue in the case, not the less problematic intrabranch removal power that Kuretski addressed.

Judge Colvin noted that the Supreme Court has held that not all interbranch removal powers are unconstitutional under Bowsher.  Judge Colvin highlighted the opinion in Mistretta v. United States, 488 U.S. 361 (1989).  Mistretta involved the seven-member U.S. Sentencing Commission – the commission that drafts the sentencing guidelines.  Congress placed the Sentencing Commission in Article III and peopled it with at least three Article III judges, the Attorney General, and others appointed by the President.  The President held for cause removal power over its members similar to that in section 7443(f), which meant that he could remove an Article III judge from the Article III Sentencing Commission.  This posed the potential interbranch Bowsher violation.  But, the Supreme Court held there was no violation of the separation of powers because the activities of the Sentencing Commission were not core functions of the Judicial Branch, but rather Executive functions.  Removing a judge from the Commission would not interfere with the judge’s core judicial functions.

In Battat, Judge Colvin extended Mistretta’s teaching as follows:

Presidential authority to remove Tax Court Judges for cause does not violate separation of powers principles. We so conclude because, even though Congress has assigned to the Tax Court a portion of the judicial power of the United States, Freytag v. Commissioner, 501 U.S. at 890, the portion of that power assigned to the Tax Court includes only public law disputes and does not include matters which are reserved by the Constitution to Article III courts.

Slip op. at 43.

Like the D.C. Circuit, the Tax Court in Battat did not discuss at all the fact that Article III judges of the Federal Circuit are permitted to remove for cause Article I Court of Federal Claims judges.  I continue to wonder how two similar Article I courts can have different removal actors in different Branches.

Observations 

I agree heartily with what Judge Colvin says in Battat right up to the point of his discussion of Misretta, but I think his holding extending Mistretta, with all due respect, is not defensible.  Indeed, note that he cites no other court opinion (or even a law review article) to support his holding that removing a Tax Court judge for what is his core function (not a side administrative function, as in Mistretta) is permissible.  I don’t think it logically follows that because the removal power only affects public rights court cases, there is no problem.  That seems to reintroduce the idea (rejected in Freytag) that the Tax Court doesn’t exercise the “real” Judicial Power of the United States, which is held only by Article III judges.  Query:  Under Judge Colvin’s theory, could Congress constitutionally pass a law that says that Article III judges can decide public rights cases, such as tax refund cases, and that the President is free to remove them from those cases for cause?  That would certainly bother me greatly, but would seem allowed under Judge Colvin’s theory.  However, maybe he is right.  Further litigation in the courts of appeals, and possibly, eventually, the Supreme Court, will give the answer.

Note:  The day after the Battat opinion, Judge Jacobs denied similar section 7443(f) motions made by Joe DiRuzzo and his firm in three other of their cases, Elmes v. Commissioner, Docket No. 22003-11; Lewis Teffau v. Commissioner, Docket No. 27904-10; and Linda Teffau v. Commissioner, Docket No. 27905-10.  The Elmes case docket in this note is not the Elmes CDP case docket mentioned above.  Elmes lives in the Eleventh Circuit.  The Teffaus live in the Fourth Circuit.  These cases appear to involve the U.S. taxation of people apparently claiming to be residents of the U.S.V.I., possibly similar to the issues litigated by the firm in the case of Cooper v. Commissioner, T,C, Memo. 2015-72.

Tax Court Holds President’s Removal Power Constitutional, Part I

We welcome back frequent guest blogger, Carl Smith.  When Carl, Frank Agostino, and my Villanova colleague, Tuan Samahon, began making the removal argument in the Kuretski case, I confess I thought it was “Much Ado about Nothing.”  That was before the guilty plea of a Tax Court judge for actions I never expected and before we elected a Chief Executive who likes to take on judges and has a TV show inspired reputation for firing people.  If you want more background on Kuretski, I recommend the recent article published by Tax Court scholar and Washington and Lee Dean, Brant Hellwig, in which Les says Brant basically throws up his hands saying any home is troublesome. 

In communicating with Carl about this case, he told me that the situation reminded him of a famous line from a Broadway musical.  He was reluctant to use the line because he was not sure about being misunderstood if he brought up Nathan Detroit in Guys and Dolls running the “Oldest Established Permanent Floating Crap Game in New York”.  After Judge Colvin in Battat held that the Tax Court isn’t in the Executive Branch, but says he won’t say where it is, Carl allowed me to include the query in the introduction of whether the Tax Court is now running the “Oldest Established Permanent Floating Court in the United States”.  For those of you who are fans of Guys and Dolls or just fans of the Tax Court, here is the latest on where the Tax Court fits into the federal judiciary.  Keith  

In Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), cert. denied, 135 S. Ct. 2309 (2015), the D.C. Circuit held that the Tax Court is an Executive Branch entity, so there is no separation of powers problem in the fact that, under section 7443(f), the President – the head of the Executive Branch – can remove a Tax Court judge on the grounds of “inefficiency, neglect of duty, or malfeasance in office”.  Deciding to face the issue for the first time, last week in Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017), the Tax Court disagreed with the D.C. Circuit’s reasoning, but came to the same result.  The Tax Court held that it does not reside in the Executive Branch (though the Tax Court wouldn’t say where it did reside).  However, the Tax Court held that, while its judges exercise a portion of the judicial power of the United States; Freytag v. Commissioner, 501 U.S. 868, 890-891 (1991); its judges exercise no portion of the judicial power reserved to Article III judges.  Thus, Presidential removal authority cannot interfere with the Article III judicial power, regardless of the Tax Court’s placement in the Branches of Government.

This Tax Court holding in Battat and similar holdings in other cases brought by the same attorney, Joe DiRuzzo, including Thompson v. Commissioner, 148 T.C. No. 3 (also decided on Feb. 2, 2017), are destined to be appealed to several Circuit courts of appeals other than the D.C. Circuit.  Joe is seeking a split among the Circuits that only the Supreme Court can resolve.

In part one of this two-part post, I provide the taxpayers’ argument and what the D.C. Circuit held in Kuretski.  In the second part of the post, I set out in detail (and comment on) the Tax Court’s reasoning in Battat.

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Warning:  This is a biased post, since I was one of three principal attorneys who brought the constitutional argument initially in Kuretski – the other two attorneys being Professor Tuan Samahon of Villanova (who developed the taxpayers’ argument from a comment of Justice Scalia’s in his Freytag concurrence) and Frank Agostino.  But, I will try to be fair to all sides.  Indeed, even though I disagree with parts of the Battat opinion, I commend Judge Colvin (its author) for doing an excellent and exceedingly fair job of summarizing the Tax Court’s history and the pertinent separation of powers case law.  He presents far more information than was in the D.C. Circuit’s Kuretski opinion or was in the parties’ briefs in Battat.  Indeed, he even, unbidden, went back and read the briefing in Kuretski to determine what in fact had been argued in Kuretski.

There have been, to date, 32 posts on PT that mentioned one aspect or another of the Kuretski case – which must be a record.  However, I won’t refer you back to any, but I will here provide a condensed version of the Kuretski case, both at the Tax Court and the D.C. Circuit. This is necessary to understand how the reasoning in the Battat opinion significantly differs from that of the D.C. Circuit’s opinion in Kuretski.

Separation of Powers Theory

There are at least half a dozen highly-relevant Supreme Court opinions on the separation of powers doctrine, and the Kuretski and Battat opinions discuss them.  However, for this post, I will just point to Bowsher v. Synar, 478 U.S. 714 (1986) (authored by Chief Justice Berger) and Freytag.

The Framers envisioned a government in which three powers – the Legislative Power, the Executive Power, and the Judicial Power – each balanced the other.  As Judge Colvin notes in Battat, the Framers generally spoke about “Powers”, not using the more modern references to three “Branches” of government.  This distinction is important, since Congress sometimes creates entities that hold one or more powers, but which are placed in a Branch that one would not expect.  That’s permissible.  What’s not permissible is for actors holding one power to have control over actors holding another power.  That can upset the separation of the powers.  The powers must stay separated to function properly.

In Bowsher v. Synar, a mid-1980s balanced budget law gave to a Congressional employee, the Comptroller General, certain additional powers to cut expenditures that the Court held were Executive Powers.  Congress, which holds the Legislative Power, had long possessed statutory authority to remove the Comptroller General for cause, including for inefficiency, neglect of duty, and malfeasance in office – the same grounds specified for removal of Tax Court judges in section 7443(f).  The Court held this arrangement unconstitutional as a violation of the separation of powers, since, it observed, a person who is subject to a removal power is likely to act subservient to the actor who has the power to remove him or her.  It is a subtle pressure, one that can upset the balance of the powers.  In Bowsher, Congress (holding the Legislative Power) had removal power over a person in its Branch, but who held a portion of the Executive Power.  In response to the argument that the for-cause limitations were a sufficient check on Congress abusing its power, the Court wrote:  “[T]he dissent’s assessment of the statute fails to recognize the breadth of the grounds for removal. The statute permits removal for ‘inefficiency,’ ‘neglect of duty,’ or ‘malfeasance.’ These terms are very broad and, as interpreted by Congress, could sustain removal of a Comptroller General for any number of actual or perceived transgressions of the legislative will.” 478 U.S. at 729.

In Freytag, the issue was whether Tax Court Special Trial Judges needed to be appointed under the Constitution’s Appointments Clause.  The Supreme Court held that they did, which next raised the question of whether their appointment was consistent with the limitations of the Appointments Clause because Tax Court STJs are appointed by the Chief Judge of the Tax Court.  The Appointments Clause permits Congress to delegate power to appoint such “inferior Officers” only to the President, the “Heads of [Executive] Departments”, or “the Courts of Law”.  Thus, the statutory appointment power would only be valid if the Tax Court Chief Judge was either the head of an Executive Department or acted for one of the Courts of Law.

As originally created, the Board of Tax Appeals was made an “independent agency” in the Executive Branch.  In 1969, however, Congress amended what is now section 7441 to instead provide:  “There is hereby established, under article I of the Constitution of the United States, a court of record to be known as the United States Tax Court.”  Using a largely functional analysis, in Freytag, the Supreme Court held that the Tax Court performs judicial functions to the exclusion of any Legislative or Executive functions, even though the Tax Court is not an Article III court where judges have life tenure.  The Supreme Court rejected the government’s argument that the Tax Court was an Executive Department, but instead found that the Tax Court was one of the Courts of Law.  It wrote:

The Tax Court exercises judicial, rather than executive, legislative, or administrative, power. It was established by Congress to interpret and apply the Internal Revenue Code in disputes between taxpayers and the Government. By resolving these disputes, the court exercises a portion of the judicial power of the United States. . . .

The Tax Court remains independent of the Executive and Legislative Branches. . . .

The Tax Court’s exclusively judicial role distinguishes it from other non-Article III tribunals that perform multiple functions . . . .

501 U.S. 890-892.

In a concurring opinion, Justice Scalia held that the appointment of Special Trial Judges was valid, but only because the Tax Court was still, after 1969, an Executive Department.  He scoffed at the idea that any non-Article III actor could hold any portion of the Judicial Power.  In attacking the majority opinion, he wrote:

When the Tax Court was statutorily denominated an “Article I Court” in 1969, its judges did not magically acquire the judicial power. They still lack life tenure; their salaries may still be diminished; they are still removable by the President for “inefficiency, neglect of duty, or malfeasance in office.” 26 U.S.C. § 7443(f).   (In Bowsher v. Synar, supra, at 729, we held that these latter terms are “very broad” and “could sustain removal . . . for any number of actual or perceived transgressions.”) How anyone with these characteristics can exercise judicial power “independent . . . [of] the Executive Branch” is a complete mystery. It seems to me entirely obvious that the Tax Court, like the Internal Revenue Service, the FCC, and the NLRB, exercises executive power.

501 U.S. at 912 (emphasis in original; some citations omitted).

Kuretski in the Tax Court                                  

Professor Tuan Samahon of Villanova, who is a separation of powers scholar (not a tax professor), noticed Justice Scalia’s comment that the Freytag majority’s holding seemed incompatible with the Presidential removal power over Tax Court judges, and, in 2012, mentioned this issue to me.  Frank Agostino had just lost a Collection Due Process case before Judge Wherry, Kuretski v. Commissioner, T.C. Memo. 2012-262.  Frank was about to file a motion for reconsideration on certain other issues.  I persuaded him to add to that motion a motion to vacate the decision on the ground that the Tax Court was impermissibly and unconstitutionally biased against taxpayers because the judges operated under a removal power subtly pressuring them to rule for the IRS, the President’s instrument.  We moved for the Tax Court to declare the power unconstitutional and inoperative.  We argued that the Tax Court was likely in the Judicial or Legislative Branch, but even if it was in the Executive Branch, since the President held the Executive Power, and the Tax Court held a portion of the Judicial Power, just as in Bowsher (where the Congress and Comptroller General were in the same Branch), the removal power violated Bowsher and could not be rescued by its for cause limitations.

In an unpublished order, Judge Wherry denied both motions.  He thought the motion for reconsideration was just a rehash of arguments that he had already rejected.  With respect to the removal power argument in the motion to vacate, he held that it was raised too late in the case for him to consider it, and, since the argument was that he was biased, he questioned whether he should be the person issuing a ruling on the issue.  That is why Battat is the first opinion of the Tax Court that actually addresses the removal power argument.

Kuretski in the D.C. Circuit

The Kuretskis appealed to the D.C. Circuit.  There, the D.C. Circuit also made quick work of their arguments not involving the removal power.  But, as to the removal power, the court held that it could exercise its discretion to hear separation of powers arguments at any point in a case (as was done in Freytag).  It also held that the taxpayers’ proposed remedy – striking the removal power – was a permissible cure for the problem, if there was a problem.  But, the D.C. Circuit found no constitutional problem.  It did so in a curious way:

First, as noted by Judge Colvin in footnote 29 of Battat, the D.C. Circuit mischaracterized the Kuretskis’ primary argument as being that the Tax Court exercises a portion of the Judicial Power under Article III.  Writes Judge Colvin:  “It is not apparent to us that the taxpayers in that case made that obviously incorrect argument. In fact, in their answering brief at p. 11 the Kuretskis state that they ‘do not challenge the Tax Court Judges’ non-Article III status.’”

Next, the D.C. Circuit rejected the argument that the Tax Court Judges are in the Article III Judicial Branch, observing that Tax Court judges don’t possess life tenure, so can’t be.

Third, the D.C. Circuit rejected an alternative argument made by the Kuretskis that the Tax Court was part of the Legislative Branch.  The D.C. Circuit also correctly observed that the Tax Court does no legislating.  As to the fact that section 7441 purports to establish the Tax Court as a court of record “under Article I,” the D.C. Circuit felt that this was just a statement that the Tax Court was established pursuant to Congress’ Article I powers to lay and collect taxes and make necessary and proper laws for carrying into execution the taxing power.  The D.C. Circuit did not think this meant that the Tax Court was established in the Legislative Branch.

So, by process of elimination, the Tax Court was still an Executive Branch entity (though the Circuit court carefully never called the Tax Court an “agency” anymore).

The D.C. Circuit wrote:  “We need not explore the precise circumstances in which interbranch removal may present a separation-of-powers concern because this case does not involve the prospect of presidential removal of officers in another branch. Rather, the Kuretskis have failed to persuade us that Tax Court judges exercise their authority as part of any branch other than the Executive.”  755 F.3d at 939.

The D.C. Circuit noted that the Supreme Court has stated that Congress may give non-Article III tribunals jurisdiction to hear “public rights” cases – i.e., cases involving disputes between the citizen and sovereign, which did not exist at common law.  The D.C. Circuit saw no problem with the Tax Court sitting in review of other Executive agencies, noting that other Executive agencies do so – like the Merit Systems Protection Board and the Federal Labor Relations Authority.

The D.C. Circuit observed that the Tax Court was like another Article I court, the Court of Appeals for the Armed Forces, which the Supreme Court had held to be in the Executive Branch in Edmond v. United States, 520 U.S. 651 (1997).  The D.C. Circuit failed to discuss the Court of Federal Claims, which, the Kuretskis pointed out, was an Article I court whose judges are removable, for similar causes, by judges of the Article III Court of Appeals for the Federal Circuit, under 28 U.S.C. § 176(a).  The Kuretskis couldn’t see how the Court of Federal Claims should have judicial actors holding a judicial removal power, while the Tax Court should have an Executive actor holding a judicial removal power.  Both can’t be constitutional.

The D.C. Circuit admitted that the Supreme Court’s opinion in Freytag “adds a wrinkle to what would otherwise be a straightforward analysis”; 755 F.3d at 940; but the D.C. Circuit thought the majority opinion in Freytag could be harmonized with the D.C. Circuit’s holding that the Tax Court was still in the Executive Branch:

The Freytag majority rejected the argument that the Tax Court is an executive “Department” for purposes of the Appointments Clause.  But, the majority also made clear that an entity can be a part of the Executive Branch without being an executive “Department.” See id.at 885 (“We cannot accept the Commissioner’s assumption that every part of the Executive Branch is a department, the head of which is eligible to receive the appointment power.”) . . . .

The Freytag majority also observed that the Tax Court “remains independent of the Executive . . . Branch[],” and in that sense exercises something other than “executive” power. 501 U.S. at 891. We understand that statement to describe the Tax Court’s functional independence rather than to speak to its constitutional status. The Supreme Court has used similar language to describe “quasilegislative” and “quasijudicial” agencies such as the Federal Trade Commission, noting that such agencies are “wholly disconnected from the executive department” and that their members must “act in discharge of their duties independently of executive control.”

755 F.3d at 943 (some citations omitted).

A number of independent observers who read the D.C. Circuit’s opinion, however, felt that it essentially adopted the reasoning of Justice Scalia’s Freytag concurrence concerning the location of the Tax Court, not the Freytag majority opinion.

Moreover, the D.C. Circuit wholly failed to discuss the Kuretskis’ further argument that, even if the Tax Court is located in the Executive Branch, Bowsher v. Synar indicates that intrabranch removal powers can be unconstitutional when actors holding one power hold removal power over actors holding a different constitutional power – the situation that would be presented with the President holding the Executive Power and the Tax Court holding a portion of the Judicial Power while being in the Executive Branch.

In the second part of this post, I will explain both Congress’ and Joe DiRuzzo’s responses to the D.C. Circuit’s Kuretski opinion and the Tax Court’s new opinion in Battat, which disagrees with much of the reasoning of the D.C. Circuit in Kuretski.

Tilden v. Comm’r: Seventh Circuit Reverses Tax Court’s Untimely Mailing Ruling

Frequent guest blogger Carl Smith provides a detailed analysis of Friday’s 7th Circuit opinion in the Tilden case.  The opinion discusses two issues: 1) whether the time to file a petition in Tax Court in a deficiency case is jurisdictional and 2) the proper application of the timely mailing regulations.  Carl analyzes both issues in the case.  Keith

I have blogged on this case four times before here, here, here and here.  In my last post, I said I was grabbing a bowl of popcorn to watch how the Seventh Circuit ruled in the appeal of Tilden v. Commissioner, T.C. Memo. 2015-188. In an opinion issued on January 13, the Seventh Circuit again changed course – abandoning the argument two judges on the panel had raised sua sponte at oral argument – that the time period to file a Tax Court deficiency petition might no longer be jurisdictional under current non-tax Supreme Court case law on jurisdiction.  Instead, the court (following decades of Tax Court and Circuit court precedent) continued to hold that the time period to file a deficiency petition is a jurisdictional requirement.

However, the Seventh Circuit reversed the Tax Court’s holding that the envelope containing the petition was not entitled to the benefit of the timely-mailing-is-timely-filing rules of the regulations under section 7502.  In the case, the Tax Court had held that USPS tracking data showed the envelope placed in the mail beyond the last date to file.  The Seventh Circuit criticized the usage of tracking data as evidence of the date of mailing.  Rather, the Circuit court held that the petition had been timely filed under the private postmark provision of the regulations, not a different provision of the regulations on which the Tax Court had relied.

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Tilden Facts

Tilden is a deficiency case.  The envelope containing the petition bore a private postage label from stamps.com, dated the 90th day.  Apparently, the envelope was placed in the mail by an employee of counsel for the taxpayer, and that employee also affixed to the envelope a Form 3800 certified mail receipt (the white form), on which the employee also handwrote the date that was the 90th day.  The Form 3800 did not bear a stamp from a USPS employee.  Nor did the USPS ever affix a postmark to the envelope.

The envelope arrived at the Tax Court from the USPS.  The USPS had handled the envelope as certified mail.  That meant that the USPS internally tracked the envelope under its “Tracking” service.  Plugging the 20-digit number from the Form 3800 into the USPS website yielded Tracking data showing that the envelope was first recorded in the USPS system on the 92nd day.  The envelope arrived at the Tax Court on the 98th day.

In Tilden, the IRS moved to dismiss the case based on the ground that the USPS Tracking data showed the petition was mailed on the 92nd day.

In his objection, the taxpayer disagreed, arguing that this was a situation covered by Reg. 301.7502-1(c)(1)(iii)(B)(1).  That regulation states:

(B) Postmark made by other than U.S. Postal Service.–(1) In general.–If the postmark on the envelope is made other than by the U.S. Postal Service–

(i) The postmark so made must bear a legible date on or before the last date, or the last day of the period, prescribed for filing the document or making the payment; and

(ii) The document or payment must be received by the agency, officer, or office with which it is required to be filed not later than the time when a document or payment contained in an envelope that is properly addressed, mailed, and sent by the same class of mail would ordinarily be received if it were postmarked at the same point of origin by the U.S. Postal Service on the last date, or the last day of the period, prescribed for filing the document or mailing the payment.

The taxpayer argued that the stamps.com mailing label, combined with the Form 3800, was a “postmark” not made by the USPS that legibly showed a date that was the 90th day and that the 8-day period between the 90th day and receipt by the Tax Court was when mail of such class would “ordinarily be received”.  Thus, under the regulation, the petition was timely filed.

In responding to the objection, the IRS changed position and now argued that the taxpayer had the wrong portion of the regulation, and that the relevant portion of the regulation was actually Reg. 301.7502-1(c)(1)(iii)(B)(2), which provides:

(2) Document or payment received late.–If a document or payment described in paragraph (c)(1)(iii)(B)(1) is received after the time when a document or payment so mailed and so postmarked by the U.S. Postal Service would ordinarily be received, the document or payment is treated as having been received at the time when a document or payment so mailed and so postmarked would ordinarily be received if the person who is required to file the document or make the payment establishes–

(i) That it was actually deposited in the U.S. mail before the last collection of mail from the place of deposit that was postmarked (except for the metered mail) by the U.S. Postal Service on or before the last date, or the last day of the period, prescribed for filing the document or making the payment;

(ii) That the delay in receiving the document or payment was due to a delay in the transmission of the U.S. mail; and

(iii) The cause of the delay.

The IRS argued that the petition had arrived beyond the time it would “ordinarily be received”, triggering the taxpayer’s obligation to prove the three conditions of the relevant portion of the regulation – none of which had been proved.

Tilden Tax Court Ruling 

In his opinion, Judge Armen held that both parties had relied on the wrong portions of the regulation.  He believed the relevant portions of the regulation were found at:

(1) Reg. 301.7502-1(c)(1)(iii)(B)(2), which provides:

(3) U.S. and non-U.S. postmarks.–If the envelope has a postmark made by the U.S. Postal Service in addition to a postmark not so made, the postmark that was not made by the U.S. Postal Service is disregarded, and whether the envelope was mailed in accordance with this paragraph (c)(1)(iii)(B) will be determined solely by applying the rule of paragraph (c)(1)(iii)(A) of this section; and

(2) Reg. 301.7502-1(c)(1)(iii)(A), which provides:

If the postmark does not bear a date on or before the last date, or the last day of the period, prescribed for filing the document or making the payment, the document or payment is considered not to be timely filed or paid, regardless of when the document or payment is deposited in the mail.

Judge Armen admitted that no postmark from the USPS actually appeared on the envelope, but he cited his opinion in Boultbee v. Commissioner, T.C. Memo. 2011-11.  In Boultbee, a deficiency petition was mailed from Canada, but bore no timely postmark from the USPS (only a timely postmark from the Canadian mail service).  Still, the USPS Tracking information showed that the envelope entered the USPS mail stream before the end of the filing period.  The judge held that such tracking information could serve as a postmark of the USPS, making the petition timely mailed.

Relying on Boultbee, he held in Tilden that the envelope was deemed to bear a USPS postmark as of the tracking information date.  Then, relying on the portion of the regulation dealing with a situation where there is both a USPS postmark and a private postmark, he said the USPS postmark (the tracking information date) governed, so the petition was untimely.

Tilden Motion for Reconsideration 

In a motion for reconsideration filed by the taxpayer, the taxpayer, among other things, argued for applying the common law mailbox rule.  The taxpayer reported that the IRS told him that the IRS objected to the granting of the motion for reconsideration.

But, when the IRS actually filed a response to the motion, the IRS changed position again and now did not object to the granting of the motion.  The IRS noted that section 7502 has been held to supersede the common law mailbox rule in most Circuits (with one exception not relevant to this case).  And, in any case, the common law mailbox rule couldn’t apply here where there was actual delivery – and delivery was on a date after the due date.  You still needed section 7502 to make the late envelope timely.

But, the IRS now took the position that the envelope had been received at the limit of, but still within, the time in which the envelope would be expected to “ordinarily be received” if mailed on the 90th day from Utah, where the taxpayer’s attorney’s office was.  In part, the IRS concession was based on the delay to be expected because (as many people forget), since the 2001 anthrax in the mail scare, all mail to the Tax Court gets irradiated.  Thus, the IRS conceded that the taxpayer’s petition was timely under the portion of the regulation on which the taxpayer relied, Reg. 301.7502-1(c)(1)(iii)(B)(1).  The IRS, without mentioning Boultbee, simply told the court that the court had relied on the wrong provisions of the regulation, since there was no actual USPS postmark in this case, just tracking data.

Somewhat incensed that neither party responded to Boultbee — the lynchpin of his prior ruling in Tilden —  Judge Armen denied the motion for reconsideration, telling the parties the truism that the court’s jurisdiction may not be conferred by mere concession by the parties.

Seventh Circuit Oral Argument

At the oral argument in the Seventh Circuit, two judges on the panel, sua sponte, raised a different issue:  Whether the time period in section 6213(a) to file a deficiency petition is still a jurisdictional requirement in light of non-tax Supreme Court case law since 2004 that generally excludes compliance with filing periods from jurisdictional status, unless (1) there is a “clear statement” that Congress wants the particular time period to be jurisdictional or (2) for decades, the Supreme Court in prior rulings has held the particular time period jurisdictional (stare decisis).  Anyone listening to the oral argument (posted on the Seventh Circuit’s website) would tell you that the court was leaning toward holding the time period not jurisdictional and that the IRS had now waived any complaint in the case that the time period (now a mere statute of limitations) had been violated.

But, unbidden, after the oral argument, the parties filed supplemental briefs on this question, with the parties taking opposite views on whether the deficiency filing period is jurisdictional.

Seventh Circuit Holding

Apparently, the panel had second thoughts about what it raised sua sponte.  Instead, it held that the time period in section 6213(a)’s first sentence was a jurisdictional requirement.  After acknowledging that case law cited to it from prior Circuit opinions, including itself, had not discussed the applicability of the current Supreme Court case law on jurisdiction to the Tax Court deficiency filing period, the Seventh Circuit, found three reasons to support its holding:

First, the court implicitly looked to the “clear statement” exception, finding a “magic word” (Slip op. at 5):  There was a reference to “jurisdiction” in a later sentence in section 6213(a) limiting the Tax Court’s power to issue injunctions against premature assessment or collection of the deficiency to when “a timely petition . . . has been filed”.  The Seventh Circuit wrote:  “Tilden does not want either an injunction or a refund; he has yet to pay the assessed deficiencies. But it would be very hard to read §6213(a) as a whole to distinguish these remedies from others, such as ordering the Commissioner to redetermine the deficiency (sic).” Id.  (Comment:  What does the injunctive provision have to do with the first sentence?  Where is the “clear statement” that the first sentence filing period is jurisdictional?  Moreover, “timely” in the injunctive jurisdiction sentence obviously includes filings deemed timely by other Code provisions such as section 7502, 7508 (combat zone extensions), and 7508A (disaster area extensions), so “timely” doesn’t show Congress wanting the 90-day period in the first sentence of section 6213(a) to be rigidly applied.)

Second, the court noted the pre-2004 longstanding holdings of the Tax Court and many Circuits that the time period was jurisdictional (i.e., stare decisis).  “We think that it would be imprudent to reject that body of precedent, which (given John R. Sand & Gravel) places the Tax Court and the Court of Federal Claims, two Article I tribunals, on an equal footing.”  (Slip op. at 6)  In John R. Sand & Gravel Co. v. United States, 552 U.S. 130 (2008), the Supreme Court had held that, purely on a stare decisis basis, it would not follow its current rules on what is jurisdictional because for over 100 years (in multiple opinions), the Court had held the 6-year time period to file a Court of Federal Claims petition under the Tucker Act (28 U.S.C. section 2501) is jurisdictional.  (Comment:  But, in Henderson v. Shinseki, 562 U.S. 428 (2011), the Supreme Court held that the filing period in the Article I Court of Appeals for Veterans Claims is not jurisdictional.  And, for tax cases, the relevant comparable time period to file a refund suit in the Court of Federal Claims is not 28 U.S.C. section 2501, but I.R.C. section 6532(a); Detroit Trust Co. v. United States, 131 Ct. Cl. 223 (1955); on which the Supreme Court has never made a jurisdictional ruling.  Moreover, the stare decisis exception to the current Supreme Court case law is to a long line of Supreme Court precedents on the particular time period, not to precedents of lower courts, on which the Seventh Circuit was relying.)

Third, the Seventh Circuit accepted the conclusion of the Tax Court that the section 6213(a) time period was jurisdictional in the Tax Court’s recent opinion in Guralnik v. Commissioner, 146 T.C. No. 15 (June 2, 2016), which held that the CDP petition filing period under section 6330(d)(1) is jurisdictional in part because of the Tax Court’s reliance on its precedents that all filing periods in the Tax Court are jurisdictional.  (Comment:  This is pretty circular.  Is this even a separate reason, or just a restatement of the previous stare decisis ground?)

As to the section 7502 issues, the Seventh Circuit said the Tax Court had relied on the wrong provisions of the regulation.  The right provision was the one relied on by the taxpayer and, eventually, the IRS – the rules for private postmarks where there is no USPS postmark.  The Seventh Circuit did not consider tracking data to be a USPS postmark, writing, as well:

“For what it may be worth, we also doubt the Tax Court’s belief that the date an envelope enters the Postal Service’s tracking system is a sure indicator of the date the envelope was placed in the mail. The Postal Service does not say that it enters an item into its tracking system as soon as that item is received . . . .” (Slip op. at 7)

The Seventh Circuit acknowledged that parties are not allowed to collude to give a court jurisdiction that it doesn’t otherwise have, but the appellate court held that there was no apparent collusion in this case, and the Tax Court was bound to accept the IRS’ factual concession (after the motion for reconsideration) that the envelope had been placed timely in the mails (a factual concession that had no evidentiary support, by the way).  (Comment:  This holding is going to shock a lot of Tax Court judges.)

Finally, the Seventh Circuit excoriated the lawyers who failed to put a proper postmark on the envelope:  “Stoel Rives was taking an unnecessary risk with Tilden’s money (and its own, in the malpractice claim sure to follow if we had agreed with the Tax Court) by waiting until the last day and then not getting an official postmark or using a delivery service.”  (Slip op. at 8)

Additional Observations             

The Seventh Circuit’s ruling in Tilden certainly doesn’t help the argument that Keith and I are pursuing in the Circuit courts that the time periods in which to file CDP and innocent spouse petitions in the Tax Court are not jurisdictional.  However, a stare decisis argument is harder as to those two filing periods:  There is only one published opinion of a Circuit court holding that the CDP filing period is jurisdictional (and it did not mention the recent Supreme Court case law on jurisdiction) and there are no opinions of any Circuit courts on whether the innocent spouse filing period is jurisdictional.  Keith and I are not giving up.

Without citing Boultbee, the Seventh Circuit casts doubt on Boutlbee’s reliance on USPS tracking data – at least for purposes of finding the Tax Court lacked jurisdiction.  This alone is a major event.

As pointed out in my prior posts, there are a number of cases in the Tax Court where the proceedings have been stayed pending the Seventh Circuit’s ruling in Tilden.  We can expect some of them to generate opinions soon, including possibly a Tax Court court conference opinion discussing whether or not the Tax Court now agrees with the Seventh Circuit as to which regulation provisions govern and how relevant USPS tracking information is.  Ironically, one of the cases awaiting this ruling is factually identical to Tilden and apparently involves the same law firm making the same postmark mistake (though that case would be appealable to the Eighth Circuit).

Finally, a National Office attorney informed me last month that there is a “reverse Tilden case” pending in the Tax Court – i.e., one where the postmark is untimely (not sure if it is USPS or not), but the tracking data shows the envelope in the USPS mail stream before the end of the filing period.  There’s always something . . . .

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

Frequent guest blogger Carl Smith brings us up to date with what has been happening in the litigation concerning administrative law judges (ALJs) and whether their selection meets the requirements of the Appointments Clause of the Constitution.  Although tax practitioners do not routinely encounter ALJs in their practice and probably hope never to encounter them because such encounters usually occur in disciplinary proceedings, these decisions do have meaning in the tax area and deserve attention.  Keith

In three prior posts beginning in September 2015, which can be found here, here, and here, I have reported on challenges brought under the Constitution’s Appointments Clause to SEC ALJs.  This is to report that on December 27, in a case named Bandimere v. SEC, a divided panel of the Tenth Circuit held that SEC ALJs are inferior officers who need to be (but are not currently) appointed under the Constitution’s Appointments Clause.  This creates a direct Circuit split with the D.C. Circuit, which held last August that SEC ALJs are not inferior officers needing appointment.  Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277, 283-89 (D.C. Cir. 2016).  Thus, the issue of which, if any, of the nearly 2,000 federal government ALJs need to be appointed under the Appointments Clause appears headed to the Supreme Court.

The IRS uses ALJs to hold hearings on Circular 230 violations.  Anyone representing a person in such a Circular 230 proceeding should probably forthwith do some discovery to get into the record how, if at all, those ALJs were appointed or hired.  The resolution of the issue for SEC ALJs may dictate a similar resolution for IRS ALJs, though, in my second post, I explained why there might be some differences.

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Dodd-Frank created the system of having SEC ALJs decide many SEC sanctions cases in the first instance, rather than having the SEC sue in the district courts to impose sanctions.  If an SEC ALJ’s ruling is appealed to the full SEC, the full SEC reviews the ALJ de novo, though giving some deference to the ALJ on factual findings.   Review of the SEC’s rulings can be had directly in the Circuit courts of appeals.

In my first two posts, I reported that in the summer of 2015, two district courts held the ALJs to be inferior officers of the United States who need to be appointed under the Appointments Clause.  The SEC concedes that its judges were not so appointed.

Much of the time between my first two posts and my third post was taken up by Circuit court opinions holding that district courts in these and in other collateral proceedings lacked jurisdiction to decide the constitutional issue.  Hill v. SEC, 825 F.3d 1236 (11th Cir. 2016); Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016); Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015); Bebo v. SEC, 799 F.3d 765 (7th Cir. 2015). (Hill was issued two days after my last post.)

But, in August of 2016 (also after my last post), the D.C. Circuit, in a case on direct review of an SEC order affirming the sanctions imposed by an SEC ALJ, held that under the Supreme Court’s “significant authority” standard used in Freytag v. Commissioner, 501 U.S. 868 (1991), SEC ALJs were not inferior officers because they could not render final decisions in their cases.  Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277, 283-89 (D.C. Cir. 2016).  In Freytag, the Supreme Court held that Tax Court Special Trial Judges (STJs) were inferior officers exercising significant authority on behalf of the United States because of the many judge-like powers they possessed, including their wide discretion to issue rulings.

The Freytag opinion was admittedly less than clear in whether, to be an inferior officer, a person needed the ability to render final decisions binding the government.  In 2000, a divided panel of the D.C. Circuit in Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), had held that FDIC ALJs did not need to be appointed – based on the panel’s interpretation of Freytag to require final decision-making authority in a person to render that person an officer of the United States.

In an opinion issued by a divided panel of the Tenth Circuit on December 27, in Bandimere v. SEC, the Tenth Circuit rejected Landry’s holding and held that Freytag did not require that inferior officers need the power to render final decisions.  Rather, the Bandimere majority said that, in Freytag, the Supreme Court discussed the finality of STJ rulings under what is now section 7443A(b)(7) only in response to a government concession – and not as part of the Supreme Court’s actual holding in the case.  (I agree.)  Thus, while having the ability to enter final, binding orders was one factor that could lead to a finding that a person was an officer, it was not a “but for” requirement, according to Bandimere.  And, in any event, even though the SEC had the authority to do de novo review, Bandimere pointed out that in about 90% of cases either there was no SEC review of the ALJ or the SEC review resulted in upholding the ALJ verbatim, so it is really the ALJ who effectively binds the government in the vast majority of SEC cases.  Further, even the de novo review of the ALJ that the SEC gives is one in which the SEC in fact gives deferential review of facts found by the ALJ.  This is similar to the deferential review on factual issues of STJs by Tax Court judges.

The dissenting judge in Bandimere worried that the ruling of the majority would lead to all ALJs in the federal government needing to be appointed.  This particularly would affect the Social Security Administration, where over 1,500 such ALJs are located.  (The SEC only has 5 ALJs at present.)  I am not so sure other ALJs lack proper appointment under the Appointments Clause.  5 USC § 3105 authorizes agencies to appoint ALJs.  Systems of hiring or appointment may vary by agency.  Moreover, I don’t think the result worried about by the dissent would surprise the Supreme Court.  Even Justice Scalia, in his Freytag concurrence (joined by three other Justices), noted:  “Today, the Federal Government has a corps of administrative law judges numbering more than 1,000, whose principal statutory function is the conduct of adjudication under the Administrative Procedure Act (APA), see 5 U.S.C. §§ 554, 3105. They are all executive officers.”  Freytag, 501 U.S. at 910 (emphasis in original).

Observations

While the holding of Bandimere primarily impacts, for tax practitioners, only the IRS ALJs who try Circular 230 violations, the Tax Court’s ruling in Tucker v. Commissioner, 135 T.C. 114 (2010), affd. 676 F.3d 1129 (D.C. Cir. 2012) (in which I represented the taxpayer), is now called somewhat into question.  In Tucker, the Tax Court refused to hold that the IRS Settlement Officers and their Appeals Team Managers who hold CDP hearings and render determinations therein were individuals needing to be appointed under the Appointments Clause.  The Tax Court’s reasoning, in part, was that these IRS employees do not render final rulings, but Landry v. FDIC held that the ability to enter final orders was a necessary requirement for a person to be an inferior officer.  See 135 T.C. at 162-165.  “Since we find persuasive the reasoning of the Court of Appeals for the District of Columbia Circuit in its determination that ALJs for the FDIC do not exercise ‘significant authority’, we hold that the lesser position of CDP ‘appeals officer’ (‘or employee’) within the Office of Appeals likewise does not exercise ‘significant authority’”.  Id. at 165.

In the D.C. Circuit’s affirmance of the Tucker opinion, however, the D.C. Circuit disagreed with the Tax Court and held that such Appeals personnel did have final authority, just that the authority was on issues (1) not of constitutional significance (collection) or (2) where their discretion was too circumscribed by IRS Counsel’s potential involvement (liability determinations).  “[W]e conclude that the lack of discretion is determinative, offsetting the effective finality of Appeals employees’ decisions within the executive branch.”  676 F.3d at 1134.

The Supreme Court denied cert. in Tucker, and no taxpayer has again made the same argument that I made therein.  But, the intrepid pro se taxpayer Ronald Byers has a CDP case in the Tax Court (not the same one that he took to the D.C. Circuit), in which he tells me that he plans to raise the same Appointments Clause argument that I raised in Tucker with respect to CDP Appeals Office personnel.  He will appeal this case to the Eight Circuit (where he lives).  He may try to create a Circuit split.  He may get the Tax Court to address the effect of Bandimere on his argument, as well.