Larson Part I Post: Full-Payment Rule of Refund Suits Held to Apply to Assessable Penalties

Frequent contributor Carlton Smith discusses last month’s Larson v United States out of the Second Circuit. The Larson opinion situates civil penalties in the context of the Flora full payment rule, the APA, the 5th Amendment’s procedural due process protections and the 8th Amendment’s prohibition on excessive fines. Today’s post looks at the Flora full payment issue. Future posts will address the other issues. Les

In Flora v. United States, 357 U.S. 63 (1958) (“Flora I”), and, again, in an expanded opinion at 362 U.S. 145 (1960) (“Flora II”), the Supreme Court held that a jurisdictional predicate to a district court or Court of Federal Claims suit under 28 U.S.C. § 1346(a)(1) for refund of an income tax deficiency is full payment of the tax deficiency.  In oral argument in a later Supreme Court case, Laing v. United States, 423 U.S. 161 (1976), the Solicitor General’s office made clear its position that Flora’s full payment requirement only applies where the taxpayer could have, instead, petitioned the Tax Court to contest the deficiency prepayment, but chose not to.  A recent opinion, Larson v. United States, 2018 U.S. App. LEXIS 10418 (2d Cir., Apr. 25, 2018), involved a tax shelter promoter penalty assessed under section 6707 – one of the many “assessable” penalties that Congress has enacted since Flora that may be assessed without first allowing prepayment review in Tax Court through a notice of deficiency.  In Larson, the DOJ argued contrary to what the SG’s office did in Laing, and the Second Circuit accepted this changed position – holding that the Florafull payment requirement also applies to assessable penalties for which there is no possibility of Tax Court prepayment review through deficiency procedures.

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Larson Facts

The facts of Larson were as follows:  Larson was criminally convicted in connection with promoting several tax shelters.  The IRS later decided to impose assessable penalties under section 6707 for the promoters’ failure to file the necessary form under section 6111 (Form 8918) with the Office of Tax Shelter Analysis in Ogden, Utah alerting the IRS to the shelters.  Under section 6707 at the time (though not currently), the penalty under section 6707 was calculated as 1% of “the aggregate amount [that taxpayers] invested in such tax shelter”.

The IRS proposed to assess penalties of $160 million on a collection of promoters (including Larson), jointly and severally.  This means that the “aggregate amount invested”, according to the IRS, was $16 billion.

Other promoters paid the IRS about $100 million toward the penalty.  Larson contested the $160 million penalty at Appeals, arguing that the amount actually invested in the shelters in cash was only about $700 million, meaning the total penalty should be $7 million.  The rest “invested” was through notes that the courts had now held to be bogus for income tax purposes, so he argued that they were bogus, as well, for purposes of calculating the penalty.  (Of course, the taxpayers must have used those bogus notes to inflate their bases for purposes of claiming deductions far beyond the cash they invested.)

Appeals did not agree with Larson’s argument for lowering the penalties to $7 million, though it did give him credit for the penalties already paid by other promoters, reducing what Larson owed to about $60 million.

Larson District Court Suit

Larson paid $1.4 million toward the penalties, filed a refund claim, and then sued for a refund in the district court of the Southern District of New York.  It is not clear why he paid $1.4 million, but it appears that he thought the section 6707 penalty was “divisible”, and that $1.4 million was enough payment of a divisible tax to give the court jurisdiction.  In a footnote in Flora II, the Supreme Court said that full payment would not be required if a divisible tax was involved — a footnote that many people take advantage of with respect to section 6672 responsible person penalties (which have been held to be divisible).

In his suit, Larson argued that he had made a sufficient jurisdictional payment to commence suit, but that, even if he did not, the court had alternative jurisdiction under the Administrative Procedure Act, mandamus, Due Process, and because the size of the penalty violated the Eight Amendment’s excessive fines clause.

Unfortunately for Larson, shortly after he commenced his suit, the Federal Circuit held in Diversified Group Inc. v. United States, 841 F.3d 975 (Fed. Cir. 2016), that the section 6707 penalty was not divisible, so Flora IIrequired full payment in order to commence a refund suit.  The district court in Larson cited and followed Diversified Group, also rejecting all the other bases for jurisdiction that Larson alleged.  Larson v. United States, 2016 U.S. Dist. LEXIS 179314 (SDNY 2016).  Stephen did a prior post on both Diversified and the Larson district court opinion.

This post will not address the other grounds alleged for jurisdiction, but Les will be doing a later post on at least one of those other grounds.

Larson Appellate Arguments

 In his Second Circuit Appeal, Larson repeated all of his arguments for why the district court had jurisdiction, but abandoned his argument that section 6707 penalties are divisible.  Rather, Larson’s main argument was now that Flora II did not require full payment in a case like section 6707 penalties where no prepayment review was available in the Tax Court through a notice of deficiency.  Larson also argued that he couldn’t afford to pay the roughly $60 million left to make full payment, so requiring him to make full payment would leave him without a practical remedy for judicial review.

Flora II

Flora II expanded upon the opinion in Flora Iand corrected a significant misstatement in the earlier opinion.  Hereafter, I will discuss only Flora II.  In Flora II, the IRS had sent the taxpayer a notice of deficiency for income tax.  He did not file a Tax Court petition, but rather paid part of the deficiency, filed a refund claim, and brought suit for refund in district court. The Supreme Court held that a jurisdictional predicate to a refund suit under 28 U.S.C. § 1346(a)(1) is full payment of the tax.  But, the way it got to this holding was curious.

The statute being interpreted first appeared in the Revenue Act of 1921.  But, the court found that, even though there were statutory antecedents, with regard to whether full payment is required for a refund suit, the actual “statutory language . . . is inconclusive and legislative history . . . is irrelevant”.  Flora II, 362 U.S. at 152.

So, the Court then turned to three subsequent enactments of Congress to conclude that section 1346(a)(1) required full payment:

  • The establishment of the Board of Tax Appeals in 1924, which allowed taxpayers to contest deficiencies without prepayment, seemed to be done with the assumption that the Board was needed because refund suits concerning deficiencies otherwise required full payment.
  • In 1935, Congress amended the Declaratory Judgment Act (28 U.S.C. § 2201) to prohibit declaratory judgments “with respect to taxes”. The Court noted that if full payment were not required, then nothing would stop a taxpayer from paying $1, filing a refund claim, and suing for a refund. The latter would effectively be a suit for a declaratory judgment.
  • The adoption of section 7422(e), which provides that, if a refund lawsuit is underway when the taxpayer receives a notice of deficiency for the same taxable year, the taxpayer may either continue the suit in district court or move it to the Tax Court, but not litigate simultaneously in both courts.The Court concluded that the logic of not requiring full payment for a refund suit would be that a taxpayer could simultaneously conduct a deficiency suit in the Tax Court and a refund suit in the district court – a situation that section 7422(e) does not contemplate.

The Flora II court concluded with the following observation:

A word should also be said about the argument that requiring taxpayers to pay the full assessments before bringing suits will subject some of them to great hardship.  This contention seems to ignore entirely the right of the taxpayer to appeal the deficiency to the Tax Court without paying a cent.  If he permits his time for filing such an appeal to expire, he can hardly complain that he has been unjustly treated, for he is in precisely the same position as any other person who is barred by a statute of limitations.

362 U.S. at 175 (footnote omitted).

Laing

Laing v. United States, 423 U.S. 161(1976), involved income tax termination and jeopardy assessments under section 6851 and 6861 at a time when those sections did not state that the IRS must issue a notice of deficiency in connection with making such assessments.  The IRS had made such an assessment and argued that it was not required to issue a notice of deficiency before or after the assessment.

At the oral argument, the Solicitor General’s Office assured the Court that there would be no problem with the FloraII full payment rule, since Flora II did not require full payment if no deficiency notice could be sent to the taxpayer.  Here is a portion of the SG’s office oral argument that was quoted to the Second Circuit on page 6 of the Larson reply brief:

What this Court held in Flora was that under general circumstances a taxpayer cannot bring a refund suit until he has paid the full amount of the assessment.  In reaching that decision, the Court painstakingly went through the legislative history in connection with the creation of the Board of Tax Appeals, and there were indications going both ways as to what Congress really intended.  But I think that the really operative portion of the Chief Justice’[s] opinion in Flora was the fact that there the taxpayer had another remedy.  He could have gone to the Tax Court, and that made all the difference in Flora . . . .

For those interested, attached are all the briefs filed in Larson:  the appellant’s brief, the appellee’s brief, the reply brief(which contains the entire Laing oral argument transcript as an addendum), and an amicus brieffiled by the tax clinics at Harvard and Georgia State.  I believe that Keith will be doing a further post about what the amicus brief discussed.

The majority in Laing held that the IRS was required to send a notice of deficiency, so it did not reach the issue of whether Flora II required full payment for a refund suit in the absence of the possibility of receiving a notice of deficiency.

But, Justice Blackmun (joined by Chief Justice Berger and Justice Rehnquist) wrote a lengthy dissent in which he argued that no notice of deficiency was required in connection with a termination or jeopardy assessment.  However, he concluded that the taxpayer could bring suit in district court without full payment of the assessment.  After quoting part of the quote that I have quoted above from Flora II, Justice Blackmun wrote:

This passage demonstrates that the full-payment rule applies only where a deficiency has been noticed, that is, only where the taxpayer has access to the Tax Court for redetermination prior to payment.  This is the thrust of the ruling in Flora, which was concerned with the possibility, otherwise, of splitting actions between, and overlapping jurisdiction of, the Tax Court and the district court.  Where, as here, in these terminated period situations, there is no deficiency and no consequent right of access to the Tax Court, there is and can be no requirement of full payment in order to institute a refund suit.

423 U.S. at 208-209 (citation omitted).

Larson Second Circuit Ruling

In its opinion in Larson, the Second Circuit held that Flora II required the full payment of the section 6707 penalty before a refund suit could be brought.  It quoted the passage from Flora IIthat I have quoted above, yet argued that the availability of Tax Court deficiency review was not critical to the holding of Flora II.  The Second Circuit wrote:

While it is true that Flora I and Flora II acknowledge the existence and availability of Tax Court review, see Flora I, 357 U.S. at 75–76; Flora II, 362 U.S. at 175, Tax Court availability was not essential to the Supreme Court’s conclusion in either opinion.  The basis of the Flora decisions is that when Congress enacted § 1346(a)(1) it understood the statute to require full‐payment to maintain “the harmony of our carefully structured twentieth century system of tax litigation,” not that the full‐payment rule only applies when Tax Court review is available. Flora II, 362 U.S. at 176–77.

Slip op. at 10.

The Larson court did not acknowledge that the government had changed position as to the applicability of the full payment rule between Laingto Larson.  The Larson court did quote Justice Blackmun’s statements from his dissent in Laing, but noted:  “Justice Blackmun’s view did not garner majority support.  No subsequent majority of the Supreme Court has adopted that understanding of the statute.” Slip op. at 12 n.8.

As more evidence that full payment was required to commence the section 6707 refund suit, the Second Circuit noted that other assessable penalties have been enacted by Congress since Flora II with specific provisions that allow for payment of 15% before a refund suit can be commenced.  (“[O]ur reading is supported by Congress’s decision to provide partial payment review for other assessable penalties, but not for § 6707. See 26 U.S.C. §§ 6694(c), 6703(c).”  Slip op. at 8.)

After rejecting the other bases alleged by Larson for jurisdiction (which I won’t discuss here), the court concluded that this is a problem for Congress, writing:

We close with a final thought.  The notion that a taxpayer can be assessed a penalty of $61 million or more without any judicial review unless he first pays the penalty in full seems troubling, particularly where, as Larson alleges here, the taxpayer is unable to do so.  But, “[w]hile the Flora rule may result in economic hardship in some cases, it is Congress’ responsibility to amend the law.”  Rocovich v. United States, 933 F.2d 991, 995 (Fed. Cir. 1991).

Slip op. at 22.

Observations

The most surprising thing about the Larson opinion, to me, is that this issue of Flora’s application to assessable penalties has not been litigated before – i.e., until about 60 years later.  But, then most assessable penalties are either severable, require only 15% payment to commence suit, or are rather nominal in amount, so there were few in a position to argue that a full payment requirement to commence an assessable penalty refund suit was neither required by Flora II nor economically practicable.

The second most surprising thing is that both Flora II and Larson defend their statutory interpretation exclusively by reference to understandings of later Congresses when legislating.  I have always read that one is not to pay much attention to what later Congresses think a statute means.

But, ultimately, I was not surprised at the Larson ruling, and I don’t think Keith was either. I refer people to my statutory proposal made some years ago:  “Let the Poor Sue for a Refund Without Full Payment”, Tax Notes Today, 2009 TNT 191-4 (Oct. 6, 2009).  Although my proposal was designed primarily for the poor, it would help Larson (assuming that he gets himself on an installment agreement or in currently not collectible status first).  The opinion in Larson just underscores the need for a legislative fix.

Passport Action Appellate Forum Shopping

Frequent guest blogger Carlton Smith discusses the possibility of appellate forum shopping in passport actions, and alerts us to one pertinent Circuit split that will apply to passport actions. -Christine

Keith did a post discussing CC-2018-005, which gives Chief Counsel advice to IRS attorneys in passport actions brought by taxpayers in the Tax Court under section 7345(e).  Section 7345(a) authorizes the Treasury Secretary to transmit an IRS certification to the Secretary of State that there exists a “seriously delinquent tax debt” “for action with respect to denial, revocation, or limitation of a passport pursuant to section 32101 of the FAST Act.”  Section 7345(d) requires the IRS to “contemporaneously notify an individual of any certification under subsection (a) . . . with respect to such individual.” And section 7345(e) allows a taxpayer to bring a suit to determine whether the certification was erroneous in either a district court or the Tax Court.  Apparently, during this winter or spring, the IRS issued or will issue the first notices to taxpayers under section 7345(d).

Before I read Keith’s post, I had not thought of the possible opportunities that this system of passport action litigation in different courts provides for appellate forum shopping.  I had assumed that Tax Court passport actions would be made appealable to the regional Circuit Courts of Appeals in which the taxpayer resided – i.e., the same appellate court to which the district court would look for controlling authority.  Under Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), the Tax Court will follow the precedent, if there is any, of the Circuit Court to which the Tax Court case is appealable.  Flush language at the end of section 7482(b)(1) provides that if no subparagraph applies to direct venue otherwise (such as subparagraph (A) directing non-corporate deficiency cases to the Circuit of residence), venue on appeal from the Tax Court is only to the D.C. Circuit.  But, as in the case of whistleblower award jurisdiction under section 7623(b)(4), there is no subparagraph of section 7482(b)(1) mentioning passport actions, so the flush language directs all appeals from Tax Court passport actions to the D.C. Circuit.  (The Tax Court has stated that, under that flush language, all whistleblower award actions appear appealable only to the D.C. Circuit.  See Kasper v. Commissioner, 150 T.C. No. 2, at slip op. page 6 n.1 (Jan. 9, 2018).)

This means that one of the considerations in choosing the court in which to bring a passport action will be whether there is more favorable appellate authority for the taxpayer in either the D.C. Circuit or the Circuit of the taxpayer’s residence.  In deficiency cases, appellate forum shopping is discouraged (though not eliminated) by the requirement that to file a refund lawsuit in the district court or the Court of Federal Claims (e.g., to obtain more favorable appellate precedent), one must first pay all the tax under the rule of Flora v. United States, 362 U.S. 145 (1960).  But no full payment rule applies to passport actions.  While the district court filing fee is a few hundred dollars more than the $60 Tax Court filing fee, that will be little discouragement from filing passport actions in the district courts.  So, there may end up quite a lot of passport actions brought in the district courts (by comparison to only about 200 refund suits being brought annually).

The rest of this post will address one issue relevant to passport actions as to which there is already a split of authority between the D.C. Circuit and some regional Circuits – i.e., whether the filing deadline in 28 U.S.C. section 2401(a) is “jurisdictional”.

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PT readers are well aware that Keith and I are in the midst of litigating the issue of whether, under recent nontax Supreme Court case law, many Tax Court and other judicial tax filing deadlines are not jurisdictional and are subject to equitable exceptions (such as tolling or estoppel), waiver, and forfeiture. The Tax Court takes what I believe to be the today untenable position that all of its roughly 20 petition filing deadlines are jurisdictional, regardless of the varying language of the statutes giving the court the power to hear such cases. See Tax Court Rule 13(c).

CC-2018-005 notes that section 7345 contains no judicial filing deadline for a passport action after the notice under section 7345(d) is issued.  The Chief Counsel notice states that, absent a filing deadline in section 7435, the courts must apply the catchall federal judicial 6-year filing deadline contained in 28 U.S.C. section 2401(a).  I agree with Chief Counsel’s analysis that section 2401(a) is the relevant filing deadline for passport actions.

In United States v. Wong, 135 S. Ct. 1625 (2015), the Supreme Court held that the 2-year administrative and 6-month judicial filing deadlines under 28 U.S.C. section 2401(b) (the Federal Tort Claims Act) are not jurisdictional and are subject to equitable tolling — consistent with its current position that filing deadlines are no longer jurisdictional (except for when (1) stare decisis to previous Supreme Court opinions requires or (2) Congress makes a “clear statement” otherwise).

Without making an exhaustive search of every Circuit currently, I note that there has long existed a split in the Circuit courts over whether the 6-year filing deadline of 28 U.S.C. section 2401(a) is jurisdictional.  Here’s from a 2015 opinion of the Sixth Circuit (decided shortly after Wong) that explains where the split then stood and holding that under the recent Supreme Court case law the filing deadline is not jurisdictional:

After today’s decision, it is true, there is a 4-3 circuit split on the point, with four of the circuits favoring the government’s position that § 2401(a) creates a jurisdictional bar. Compare Konecny v. United States, 388 F.2d 59, 61-62 (8th Cir. 1967); Ctr. for Biological Diversity v. Hamilton, 453 F.3d 1331, 1334 (11th Cir. 2006) (per curiam); Mendoza v. Perez, 754 F.3d 1002, 1018, 410 U.S. App. D.C. 210 (D.C. Cir. 2014); and Hopland Band of Pomo Indians v. United States, 855 F.2d 1573, 1576-77 (Fed. Cir. 1988), with Clymore v. United States, 217 F.3d 370, 374 (5th Cir. 2000); Herr v. U.S. Forest Serv., [i.e., this case] (6th Cir. Oct. 9, 2015); and Cedars-Sinai Med. Ctr. v. Shalala, 125 F.3d 765, 770 (9th Cir. 1997). Many of these cases, however, have not grappled with the Supreme Court’s recent cases limiting the concept of jurisdiction. None has considered the impact of Kwai Fun Wong, decided just this year. When the D.C. Circuit has noted the apparent conflict between its decision and the Arbaugh [v. Y & H Corp., 546 U.S. 500 (2006),] line of cases, it has acknowledged the point each time yet steered the basis for decision to other grounds. See Mendoza, 754 F.3d at 1018 n.11; P & V Enters. v. U.S. Army Corps of Eng’rs, 516 F.3d 1021, 1026-27, 380 U.S. App. D.C. 96 & n.2 (D.C. Cir. 2008); Felter v. Kempthorne, 473 F.3d 1255, 1260, 374 U.S. App. D.C. 272 (D.C. Cir. 2007); Harris v. FAA, 353 F.3d 1006, 1013 n.7, 359 U.S. App. D.C. 281 (D.C. Cir. 2004). The Arbaugh rule [(that Congress must make a clear statement to make a claims processing rule, such as a filing deadline, jurisdictional)] together with its application in Kwai Fun Wong gives us comfort in siding with the non-jurisdictional side of this split. Section 2401(a) does not limit a federal court’s subject-matter jurisdiction.

Herr v. U.S. Forest Service, 803 F.3d 809, 817-818 (6th Cir. 2015).

Even since the Herr opinion, the D.C. Circuit has noted its prior holdings that the 6-year filing deadline in section 2401(a) is jurisdictional.  See Owens v. Republic of Sudan, 864 F.3d 751, 802 (D.C. Cir. 2017), noting, without reexamining, the holding of the D.C. Circuit in Spannus v. U.S.D.O.J., 824 F.2d 52 (D.C. Cir. 1987). So, under Golsen, the Tax Court will have to find the 6-year section 7345 action filing deadline in section 2401(a) jurisdictional.

It will be a long time (if ever) before the issue of whether the passport action deadline is jurisdictional comes before a district court or the Tax Court, since the issue will only be relevant if a taxpayer files the action late (i.e., after the 6-year statute has expired) and seeks a judicial extension occasioned by equitable tolling or estoppel.  But, this is only one potential Circuit split as to which appellate forum shopping in passport actions may be beneficial.  There may eventually be others – and ones that come about more rapidly.

Anyway, to eliminate the possibility of appellate form shopping as to passport actions, perhaps it is time for Congress to consider adding section 7345(e) passport actions to the list of subparagraphs in section 7482(b)(1) that direct appeals of Tax Court cases to the Circuit of an individual’s residence.

D.C. Circuit Asked to Agree With Second Circuit and Tax Court About Application of Section 6751(b)

We welcome back frequent guest blogger Carl Smith who brings us up to date on a Graev case headed to the DC Circuit. So far, only the Second Circuit has had the chance to write an opinion on this issue. This will be an important case to watch. Keith

In RERI Holdings I, LLC v. Commissioner, 149 T.C. 1 (2017), the Tax Court disallowed a TEFRA partnership’s $33 million charitable contribution deduction because RERI failed to show on its Form 8283 its cost basis in the property (only $3 million).  The Tax Court also imposed a substantial valuation misstatement penalty under section 6662(h).  In the notice of final partnership administrative adjustment, the IRS had determined a regular valuation misstatement penalty under section 6662(e).  By amended answer, the IRS increased the penalty to a substantial valuation misstatement penalty under section 6662(h).  The case was tried and briefed in 2015 — long before the Tax Court in Graev III (Graev v. Commissioner, 149 T.C. No. 23 (Dec. 20, 2017)) and the Second Circuit in Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), held that, in a deficiency case involving an individual, section 7491(c) imposed the burden of production on the IRS to demonstrate compliance with the managerial approval requirement in section 6751(b) for imposing penalties.  The IRS in RERI had not introduced any evidence that a manager approved either of the penalties under section 6662.

The partnership has appealed both the disallowance of the charitable deduction and the imposition of the penalties to the D.C. Circuit (Docket No. 17-1266).  In its opening brief filed on April 2, 2018, among other arguments, the partnership has for the first time argued that the IRS had an obligation under sections 6751(b) and 7491(c) to introduce in the Tax Court evidence of managerial approval of the penalties.  The IRS having not done so, the partnership seeks to be relieved of any penalties — citing ChaiRERI may thus present the first time after Chai that an appellate court deals with section 6751(b)’s requirements.

Since the DOJ hasn’t yet filed its brief, it is unknown whether the government will agree that it had the burden of production on this approval issue or whether the approval issue can even be considered in a case prior to the assessment of the penalty.  Note, however, that there are two large issues lurking in the case now:  First, do Chai and Graev III, which involved deficiency cases, also extend to TEFRA partnership cases?  Second, does section 7491(c)’s shift in the burden of production extend to TEFRA partnership cases, since that section nominally applies only to cases of an individual?  The tax matters partner of RERI who brought the Tax Court case is an individual.  Does that affect the analysis under section 7491(c)?  These are issues that Judge Holmes recently invited the parties to brief in a designated order he issued on January 5, 2018 in a TEFRA partnership case named Oakbrook Land Holdings, LLC v. Commissioner, Docket No. 5444-13.  Caleb Smith blogged on this designated order in a post on January 17, 2018.  In its opening brief in the D.C. Circuit, RERI does not discuss these two potential issues.  Wisely, RERI is leaving it to the government to raise these issues, if it wants, in its answering brief.

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

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

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

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

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

The key passage in the Cunningham opinion states:

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

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

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

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

 

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

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

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

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

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

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

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

 

Supreme Court Grants Cert. to Decide Whether SEC ALJs Need to Be Appointed Under the Appointments Clause; SG Changes Position and Now Supports Required Appointment

We welcome frequent guest blogger, Carl Smith, who blogs today on a frequently discussed topic – the Appointments Clause and its application to employees of the IRS office of Appeals. Keith

In six prior posts since September 2015 (here, here, here, here, here, and here), I have blogged about the storm at the SEC over whether its ALJs need to be appointed under the Appointments Clause or are mere “employees”, who do not need to be appointed. This issue could spill over into whether the ALJs that the Treasury uses to try Circular 230 sanctions matters need to be, and are properly, appointed. I suspect that they may not be.

I noted that in the courts of appeals, the government took the position that the SEC ALJs were mere employees, so there was no problem in the fact that SEC ALJs had been issuing recommended rulings on administrative sanctions matters without having first been appointed. Two Circuits had split on this question: The Tenth Circuit held that SEC ALJs need to be appointed; Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016); while the D.C. Circuit held that they did not. Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277 (D.C. Cir. 2016). I correctly predicted that the Supreme Court would grant cert. to resolve this issue. In fact, the Court did so in Lucia on January 12, 2018. But, I never predicted that in the Solicitor General’s response to the cert. petition in Lucia he would change position 180 degrees and now argue that SEC ALJs have to be appointed. Presumably since the government was no longer seeking to reverse the ruling in Bandimere, the Court did not grant the government’s cert. petition in Bandimere.

This means that both of the parties to the Lucia case currently argue for its reversal. Although it has not done so yet, I suspect the Court will appoint an amicus to argue in favor of the ruling below, since the parties won’t. It is expected that Lucia will be heard and decided by the Court before its current Term ends on June 30.

Central to the Lucia case will be what the Court meant in Freytag v. Commissioner, 501 U.S. 868 (1991), when it held that Tax Court Special Trial Judges (STJs) were inferior officers of the United States who need to be appointed.

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In Freytag, the Supreme Court held that the Appointments Clause did not prohibit the Tax Court’s Chief Judge from appointing 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.  In reaching these rulings, the Supreme Court made a subsidiary holding that STJs are not employees of the government, but inferior officers who need to be appointed. To support its holding that STJs are officers, the Supreme Court cited the many judicial duties that STJs perform.  At the end of this section of the opinion, the Supreme Court also observed that STJs can enter final decisions in some cases under  § 7443A(c). It is this finality observation that has puzzled and split the lower courts.

In Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), a majority of a 3-judge panel of the D.C. Circuit held that the Supreme Court’s observation in Freytag that STJs can rule with finality in some cases meant that being able to make a final ruling was a but for requirement of officer status. Since FDIC ALJs could not enter final rulings, but simply made recommended rulings to the whole FDIC, the majority held that the ALJs were mere employees who did not need to be appointed. The third judge on the panel argued instead that, in Freytag, the Supreme Court had already decided that STJs were officers before it made the observation about STJs being in some cases allowed to enter final orders, so finality was not a but for requirement of an officer.

Like FDIC ALJs, SEC ALJs cannot make final rulings – at least where defendants appeal their proposed ruling to the whole SEC. In Bandimere, the Tenth Circuit disagreed with the Landry majority that being able to issue final rulings was a but for requirement of officer status. The Tenth Circuit held that the SEC ALJs performed nearly all the duties that STJs did, so were also officers who needed to be appointed.

In Lucia, citing Landry, the D.C. Circuit held that SEC ALJs need not be appointed because they did not have final ruling authority. After Bandimere was issued, Lucia moved for reconsideration of the ruling in his case by the full D.C. Circuit. He asked the D.C. Circuit to consider whether it should overrule Landry and agree with the Tenth Circuit in Bandimere. An en banc rehearing was granted. However, the en banc D.C. Circuit split evenly on the question, which left the original holding in Lucia intact. Lucia then sought cert.

In response to Lucia’s cert. petition, the new SG under President Trump surprisingly changed the government’s position – agreeing with the Tenth Circuit that the ability to issue final rulings was not a but for requirement of officer status. The SG felt that the SEC ALJs were sufficiently like Tax Court STJs to have to be appointed. Thus, the SG also sought reversal of the D.C. Circuit. The SG asked the Court to grant cert. in Lucia, even though the parties were no longer in disagreement. (Appointments Clause issues are not jurisdictional, so the courts can accept the parties’ waiver of Appointments Clause arguments.) The SG thinks there is a need for Supreme Court guidance in this area – including issues not discussed below as to removal powers for ALJs, which may now be problematic. A number of Court watchers thought that the issue of appointment of SEC ALJs was now moot and that cert. might not now be granted. However, they were wrong.

But, in granting cert. in Lucia, the Supreme Court did not ask the parties to brief any additional questions – e.g., involving removal powers.

Possible Effect on Appeals Office Personnel Issuing CDP Rulings 

In addition to Lucia’s possible impact on ALJs used by Treasury to hold Circular 230 sanctions hearings, the opinion may have an impact, as well, on an issue that I raised over a decade ago. In a CDP case that I had in the Tax Court, I moved to remand the case to have the CDP hearing redone by a Settlement Officer and Appeals Team Manager who were both appointed consistently with the Appointments Clause. I noted that no Appeals personnel were then appointed. But, citing Freytag, I argued that the duties of Appeals personnel in conducting statutorily-mandated CDP hearings were so similar to the duties of an STJ that such Appeals personnel were also officers for purposes of the Appointments Clause.

In Tucker v. Commissioner, 135 T.C. 114 (2010), the Tax Court rejected my argument for several reasons. For one thing, the court felt that the positions in Appeals were not “established by law” for purposes of the Clause. But, also, the Tax Court held that Appeals personnel in CDP did not make final rulings, and, citing Landry, the Tax Court held that the ability to make a final ruling was a but for requirement of officer status per Freytag.

I appealed Tucker to the D.C. Circuit. That court, at 676 F.3d 1129 (D.C. Cir. 2012), affirmed the Tax Court, but on different reasoning. The D.C. Circuit was troubled by the idea that Congress might be able to get around the Appointment Clause by assigning duties that had to be performed by a constitutional officer to preexisting employees in the bureaucracy. Therefore, the D.C. Circuit bypassed issuing any ruling on whether or not the position of CDP hearing person was “established by law”. The D.C. Circuit next held that collection issues were of too minor importance to require an officer. As to underlying tax liability rulings that could be made in CDP under section 6330(c)(2)(B), Freytag clearly would treat those rulings as ones for which an officer was required. Disagreeing with the Tax Court, the D.C. Circuit held that Appeals Office personnel issuing underlying liability rulings issued rulings with “effective finality”. However, the D.C. Circuit held that the ability to exercise discretion in a tax liability ruling was a but for requirement of officer status – one that was not met by Appeals personnel who ruled under the thumb of IRS Counsel attorneys. It was this lack of discretion that undermined the idea that Appeals personnel in CDP were officers needing to be appointed.

I thought that the D.C. Circuit’s ruling that Appeals exercised little discretion in making CDP underlying liability rulings was not factually supported, and I sought cert. But, cert. was denied.

I had not expected to again litigate the Tucker issue, but Florida attorney Joe DiRuzzo has decided that he wants to relitigate the issue in the Tax Court and in courts of appeals – hoping to create a Circuit split. Before the Supreme Court granted cert. in Lucia, Joe had made motions to remand in (at the moment) four different pending Tax Court CDP cases, arguing that the hearings should be redone by appointed Appeals personnel. The cases are: Thompson, Docket No. 7038-15L (appealable to the Ninth Circuit); Elmes, Docket No. 24872-14L (appealable to the Eleventh Circuitt); Fonticiella, Docket No. 23776-15L (appealable to the Eighth Circuit); and Crim, Docket No. 16574-17L (appealable to the D.C. Circuit). If the Supreme Court agrees with Lucia and the SG that issuing final rulings is not a but for requirement for officer status, then the Tax Court will have to at least revise its rationale for its holding that CDP hearing personnel need not be appointed. Perhaps, after reading the Supreme Court’s Lucia opinion, the Tax Court may also have to rule that CDP hearing personnel need to be appointed. In its lengthy response to the motion to remand (filed on January 5, 2018 in the Thompson case – i.e., a week before the Supreme Court granted cert. in Lucia), the IRS discusses the possible relevance of Lucia and the SG’s change in position, but argues that Landry, Lucia, and both Tucker opinions are, at least at the moment, still good law.

 

Ninth Circuit Holds Period to File Tax Court Collection Due Process Petition Jurisdictional Under Current Supreme Court Case Law Usually Treating Filing Deadlines as Nonjurisdictional

This will be a very brief post. Today, subsequent to my post on the NTA Report calling for certain legislative fixes, the Ninth Circuit held, in a published opinion in Duggan v. Commissioner, that the 30-day period in section 6330(d) to file a Tax Court Collection Due Process petition is jurisdictional and not subject to equitable tolling under the Supreme Court’s post-2004 case law that generally excludes filing deadlines from jurisdictional status. The Ninth Circuit relied on an exception to the current Supreme Court rule that applies where Congress clearly states that the time period is jurisdictional, although the court admits that language Keith and I suggested in our amicus brief in the case might be clearer. The Ninth Circuit noted that the jurisdictional grant for the Tax Court suit was in the same sentence that set out the filing deadline. We have blogged before on Duggan here. In essence, the Ninth Circuit in Duggan adopts the position that the Tax Court adopted in Guralnik v. Commissioner, 146 T.C. 230 (2016) (where Keith and I filed an amicus brief making the same arguments that were rejected in Duggan).

Mr. Duggan was one of at least eight taxpayers over the last two years who have been misled into filing his or her Tax Court Collection Due Process petition one day late because of confusing language in the current notice of determination – a notice that does not show the last date to file.

The Duggan opinion is not the first court of appeals opinion to hold that Collection Due Process petition filing period jurisdictional. However, it is the first such court of appeals opinion that has considered the interaction of the Supreme Court’s current rules on the usual nonjurisdictional nature of most filing periods with the statutory language in section 6330(d)(1).

As I noted in my post on the NTA report from earlier today, Keith and I are imminently awaiting an opinion from the Fourth Circuit in Cunningham v. Commissioner, 4th Cir. Docket No. 17-1433 (oral argument held on Dec. 5, 2017; the Harvard Federal Tax Clinic is counsel for the taxpayer). Cunningham is on all fours with the facts and legal arguments presented in Duggan. She also argues that she was misled by the IRS through confusing language in the Collection Due Process notice of determination into mailing her Tax Court petitions to the court a day late. Like Duggan, she seeks equitable tolling to make her filing timely.

NTA Calls for Making Judicial Tax Case Filing Deadlines Subject to Forfeiture, Waiver, Estoppel, and Equitable Tolling

We welcome back frequent guest blogger Carl Smith who comments on a portion of the NTA’s recently released annual report relating to the issue of equitable tolling and adequate provision of information to taxpayers facing court filing deadlines.  The Ninth Circuit ruled this morning on this issue in the Duggan case linked below and found IRC 6330 jurisdictional.  More later. Keith

In her annual report to Congress dated December 31, 2017, National Taxpayer Advocate Nina Olson has made two legislative proposals that will, if enacted, address problems that Keith and I have faced in some cases that were are litigating or have recently litigated in the courts of appeals. These cases have been the subject of a number of posts on PT. Thus, even if we never win any of these cases (and we make no promises on that score), at least we may have provoked discussion of legislative fixes.

Among problems that have come up in these cases are ones that flow from the courts’ view that all filing deadlines in the Tax Court are jurisdictional and therefore not subject to the judicial doctrines of forfeiture, waiver, estoppel, and equitable tolling – doctrines that are often applicable to nonjurisdictional statutes of limitations in suits (1) between private parties and (2) outside the tax area, brought against the federal government in such areas of law as Social Security disability benefits, employment discrimination, tort claims, and veterans benefits. The NTA notes that, unlike with the Tax Court, the appellate courts have been divided over whether those doctrines apply to tax case filings in the district courts and the Court of Federal Claims. The NTA has recommended that the Code be amended to provide that all of these tax case judicial filing deadlines be made nonjurisdictional and subject to those doctrines. The portion of her report on this proposal can be found here.

Also, along similar lines, the NTA is recommending a legislative change to require the IRS to show the last date to file any Tax Court petition on all Collection Due Process and innocent spouse notices of determination – just as the IRS has been required (since 1998) to show the last date to file on all notices of deficiency. She would have Congress also amend the Code to state that taxpayers may rely on the last date to file shown in the notice, even if the IRS has given the wrong last date – the same rule (added in 1998) under section 6213(a) applicable to notices of deficiency that show the wrong last date. As part of this proposal, she would also ask Congress to allow persons out of the country an additional 60 days to file Tax Court Collection Due process and innocent spouse petitions. The portion of her report on this proposal can be found here.

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I had thought about extending this post to list all the various cases that Keith and I have litigated or are litigating in this area, but have decided that it makes more sense simply to report on the court rulings when they come down. I will, however, note that we are imminently awaiting rulings in the following three cases:

Duggan v. Commissioner, 9th Cir. Docket No. 15-73819   (submitted without oral argument on Dec. 7, 2017; the Harvard Federal Tax Clinic is amicus), and Cunningham v. Commissioner, 4th Cir. Docket No. 17-1433 (oral argument held on Dec. 5, 2017; the Harvard Federal Tax Clinic is counsel for the taxpayer). In both of these cases, the taxpayers argue that they were misled by the IRS through confusing language in the Collection Due Process notice of determination into mailing their Tax Court petitions to the court a day late. They seek equitable tolling to make their filings timely.

Pfizer v. United States, 2d Cir. Docket No. 17-2307 (oral argument to be held on Feb. 13, 2018; the Harvard Federal Tax Clinic is amicus). There, the IRS issued a notice of disallowance of a claim for overpayment interest under section 6611and told the taxpayer it had 6 years to bring suit on the claim in the district court (under 28 U.S.C. section 2401(a)) or the Court of Federal Claims (under 28 U.S.C. section 2501). That is the position that the IRS has long taken as to the statutes of limitations applicable to overpayment interest suits. See Rev. Rul. 56-506, 1956-2 C.B. 959. When the taxpayer brought suit in the SDNY about 3 years later, the DOJ moved to dismiss the suit for lack of jurisdiction as untimely, arguing that the applicable statute of limitations is the 2-year one of I.R.C. section 6532(a). The taxpayer argues that the applicable statute of limitations is the 6-year one, but if the 2-year statute applies, then that 2-year period is nonjurisdictional and subject to estoppel. The taxpayer points to Miller v. United States, 500 F.2d 1007 (2d Cir. 1974), which held that the 2-year period of section 6532(a) is subject to estoppel. Miller is in conflict with Federal Circuit case law holding that the 2-year period is jurisdictional and not subject to estoppel. See, e.g., RHI Holdings, Inc. v. United States, 142 F.3d 1459 (Fed. Cir. 1998).

 

Must the Taxpayer Mention Section 6751(b)(1) in a Deficiency Case for the Tax Court to Have to Consider Compliance With That Section?

We welcome back frequent guest blogger Carl Smith who raises another Graev III question. The issues raised by that case will continue to present themselves for some time as the Tax Court continues to sort through different scenarios. Keith

There are a lot of questions now about how the Tax Court will administer its recent holding in Graev III (i.e., Graev v. Commissioner, 149 T.C. No. 23 (Dec. 20, 2017)). Graev is a deficiency case in which penalties were sought under section 6662 and where the taxpayer specifically raised the issue before trial that the IRS had not shown compliance with the written penalty supervisor approval requirement set forth in section 6751(b). In Graev III, the Tax Court overruled its immediately-prior opinion in the case and held that the IRS burden of production under section 7491(c) for certain penalties in a deficiency case included showing compliance with section 6751(b)’s approval rules.

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In the days since Graev III, around 30 orders have been issued by various Tax Court judges in deficiency cases that have already been tried, but where the court has not yet ruled. In those orders, a number of judges have solicited the views of the parties as to how, if at all, Graev III applies to the case. The orders generally direct that any motions (presumably by the IRS to supplement the record to show section 6751(b) compliance) be filed very quickly. It is unclear whether such motions will be granted. And, it is unclear whether the taxpayers in some of those cases had raised section 6751(b) noncompliance as an issue earlier in the case. (In other cases, section 6751(b) noncompliance was definitely raised earlier.)

In Collection Due Process cases, Tax Court judges have recently differed as to whether the IRS must come forward to show section 6751(b) compliance where a taxpayer does not mention the section in his or her pleadings or filings. The same question will now be presented in deficiency cases: Will the Tax Court now insist that the IRS show compliance with the section 6751(b) approval requirement in deficiency cases where a taxpayer (unlike in Graev III) never mentions section 6751(b) in any pleadings or filings? This is of great importance to pro se taxpayers, who no doubt will be ignorant of section 6751(b)’s existence.

As of January 8, 2018, there have been two opinions issued by the Tax Court in deficiency cases involving penalties covered by section 6751(b):

In Roth v. Commissioner, T.C. Memo. 2017-248 (Dec. 28, 2017), the Tax Court made specific rulings on whether the IRS had complied with section 6751(b) in a case involving section 6662 penalties. This result was not surprising, however, since the taxpayers had raised possible noncompliance with section 6751(b)’s rules earlier in the case.

But, in Ankerberg v. Commissioner, T.C. Memo. 2018-1 (Jan. 8, 2018), the Tax Court did not discuss compliance with section 6751(b) before imposing a fraud penalty under section 6663. The taxpayer was pro se in this deficiency case and presumably did not mention section 6751(b) in his pleadings or other filings.

Ankerberg is a bad sign for pro se taxpayers. It is also, I would argue, inconsistent with what the Tax Court has understood to be the burden of production under section 7491(c) on other penalty sub-issues when a taxpayer has pleaded merely that he or she contests the penalties (but gives no more details).

Without any prompting, the Tax Court began enforcing 7491(c), starting with Higbee v. Commissioner, 116 T.C. 438 (2001), any time a taxpayer contested the penalties. But, in Swain v. Commissioner, 118 T.C. 358, 364-365 (2002), the court put in a caveat — that if the taxpayer never mentioned contesting penalties, the IRS had no burden of production under 7491(c). In Wheeler v. Commissioner, 127 T.C. 200 (2006), affd. 521 F.3d 1289 (10th Cir. 2008), when a taxpayer merely wrote in the petition: that “[t]he petitioner is not liable for a penalty”, the Tax Court held that this was sufficient to put the IRS to its burden of production on all penalty sub-issues other than reasonable cause. In Wheeler, the Tax Court refused to impose (1) a late-payment penalty because the IRS had failed to show that it had filed a substitute for return, and (2) an estimated tax penalty because the IRS had failed to show that the taxpayer had filed a return for the prior year (necessary to determine the required quarterly estimated tax payment for the current year).

To me, it seems clear that, under Wheeler, proof of compliance with the section 6751(b) approval requirement should be just another penalty sub-issue on which the IRS should have the burden of production, even in cases where a taxpayer does no more than state that he or she thinks the penalty doesn’t apply. I would hope any Tax Court judges reading this post would on their own seriously consider the import of Wheeler when they next face the issue of a penalty under section 6662 or 6663 in a case where the taxpayer is ignorant of section 6751(b), but has manifested an interest to contest the penalty.

UPDATE:  After this post went up, Carl learned that, although the Ankerberg opinion does not discuss section 6751(b) compliance, the parties had stipulated to the signed penalty approval form.  Knowledge of the form’s existence may have led the court into not discussing the section 6751(b) compliance issue.