What is the Legal Standard that the Tax Court Applies for Motions to Dismiss for Failure to State a Claim?

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We welcome back frequent guest blogger, Carl Smith.  Carl’s post today focuses on the correct standard for dismissing a case for failure to state a claim.  Back in the late 1970s I worked in the Portland office of Chief Counsel, IRS and our office had a decent number of cases involving petitioners who we then called tax protestors.  I sent a motion to dismiss for failure to state a claim to the Tax Court.  Not too long thereafter the National Office contacted me and my manager to let us know that the office did not file this type of motion.  Times have changed.  Chief Counsel’s office now files this type of motion regularly and the Court grants them.  Carl’s concern focuses on the reason for granting the motion and the proper standard.  Keith 

I clearly have a pet peeve about this, but for years, I have been complaining that the Tax Court has not been clear about the legal standard that it is imposing when ruling on motions to dismiss for failure to state a claim on which relief could be granted.  This is a topic that has never come up before on PT, and would never come up in a case where a lawyer represented the taxpayer, since the lawyer would never (I hope) draft a pleading that would fail to meet any Tax Court pleading standard.  (And the Tax Court typically first orders the taxpayer to perfect or correct incomprehensible pleadings before ruling on any such motion to dismiss.)  But, an unpublished designated order by Judge Carluzzo issued in McRae v. Commissioner, Docket No. 21799-16, on June 1, once again presents the issue of the standard that the court applies when deciding such motions.  The choices for the standard are:  (1) the notice pleadings standard of Conley v. Gibson, 355 U.S. 41 (1957), or (2) the plausibility pleading standard that replaced Conley in Bell Atlantic Corp. v. Twombly, 550 U.S 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009).  In his order, Judge Carluzzo cited Twombly, but did not mention its standard.  Anything that would pass the Twombly standard would pass the Conley standard, as well, so one can’t take this as a clarification by the Tax Court of which standard it applies.

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I first wrote about this topic in a 2012 article in Tax Notes Today entitled, “The Tax Court Should Reject Twombly/Iqbal Plausibility Pleading”, 2012 TNT 159-4.  Updating my article, I took the same position in a letter that I wrote to the Tax Court in 2015 as a topic to address in the next set of rules changes issued by the court (for which we are still awaiting issuance).  For those interested in greater detail, here’s a link to my letter.

To summarize, in Conley, the Supreme Court adopted what in law school most of us knew as the notice pleading regime.  Conley stated:

[T]he Federal Rules of Civil Procedure do not require a claimant to set out in detail the facts upon which he bases his claim.  To the contrary, all the Rules require is “a short and plain statement of the claim” that will give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests.  The illustrative forms appended to the Rules plainly demonstrate this.  Such simplified “notice pleading” is made possible by the liberal opportunity for discovery and the other pretrial procedures established by the Rules to disclose more precisely the basis of both claim and defense and to define more narrowly the disputed facts and issues.

355 U.S. 47-48 (footnotes omitted).  Conley also famously stated that “a complaint should not be dismissed for failure to state a claim [under FRCP Rule 12(b)(6)] unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”. Id., at 45-46.

By 2007, the Supreme Court was fed up with discovery abuses and nuisance settlements generated by the notice pleading standard and, in Twombly (an antitrust case), “retired” the famous statement from Conley in favor of a new standard:  Even though the courts should assume for purposes of such a motion that all facts stated in a complaint are true, there should be enough facts stated to plausibly infer that a cause of action could be proved after discovery.  No more simply stating legal conclusions as facts.  In 2009, in Iqbal, the Supreme Court clarified that this new plausibility pleading standard did not just apply to antitrust suits, but applied to all civil suits brought in federal district court.

As my letter to the Tax Court details, all pleadings in civil tax suits in district courts since 2009 have been governed by the plausibility standard, and the Court of Federal Claims has adopted it, as well.  But, most state courts to have faced the question since 2009 have resisted abandoning notice pleading, and there is considerable academic debate about the wisdom of the new plausibility standard.

In my letter to the Tax Court, I noted that, while the Tax Court has decided motions to dismiss for failure to state a claim in published opinions that cited Conley’s notice pleading standard, the last published opinion on such a motion was in 2003, in Carskadon v. Commissioner, T.C. Memo. 2003-237.  Since then, the Tax Court has only ruled on such motions in unpublished orders.  Since 2011, all such orders have become searchable, yet only cite Conley and/or its progeny.  Before June 1, there were two exceptions to the prior sentence:  Judge Carluzzo cited Twombly in two orders in 2012 and 2013, but not in any way that indicated that he thought he was applying a different standard.  Most orders these days still cite Conley and/or its progeny as the standard the Tax Court is applying to these motions.

In his June 1 order in McRae, Judge Carluzzo cited Twombly again.  But, he did not say that the new standard for Tax Court pleading was plausibility instead of notice.  Further, since he ruled for the taxpayer that the petition, at least in part, satisfied the relevant pleading standard, it is clear that he would have reached the same result under Conley.

In McRae, Judge Carluzzo wrote, in part:

According to respondent’s motion, petitioner “makes no factual claims of error in the petition but argues only law and legal conclusions therein.” This is true for most of the statements contained in the section of the petition entitled “IV Allegations/Assignments of Error”, but in the last full paragraph on page 5 of part A of that section of the petition, petitioner alleges, in part, that “on information and belief” the notice of deficiency (notice) that forms the basis of this case “was issued on the basis of inaccurate and unreliable records”.

According to the notice, petitioner failed to file a Federal income tax return for the year here in issue, so respondent “used Information Return Documents filed by payers as reported under * * * [petitioner’s] Social Security Number to determine * * * [his] income.”  The details of the information reported on the “Information Return Documents”, however, are not set forth in the copy of the notice attached to respondent’s motion, which is the only copy of the notice currently in the record. That being so, and giving petitioner the benefit of every doubt as we are required to do in our consideration of respondent’s motion, see Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), the above-referenced allegation gives rise to a justiciable issue, that is, whether the information return reports relied upon by respondent are accurate and reliable. Consequently, resolving this case in summary fashion, as respondent’s motion would have us do, is inappropriate at this stage of the proceedings.

Nevertheless, respondent’s motion calls to the Court’s attention much of the impertinent, if not frivolous matter contained in the petition, and that matter will be stricken.

In my letter to the Tax Court I urged it to stick with the Conley notice pleading standard for several reasons, among them:  (1) the difficulty in figuring out how to apply the plausibility standard to the Tax Court, where a petition is more like an answer to a notice of deficiency than a district court complaint stating a cause of action, (2) the lack of discovery abuses in the Tax Court or instances where the IRS is forced to engage in nuisance settlements in response to a petition, and (3) the many unrepresented people who file petitions in the Tax Court who barely write a few sentences on the simplified petition (Form 2) in the limited space provided.  For other reasons, please read my letter.

I still wish the Tax Court would either say something about which standard it applies (notice or plausibility) when it next revises its rules or, better yet, issue a T.C. opinion addressing this matter the next time it has to rule on a motion to dismiss a petition for failure to state a claim on which relief can be granted under Tax Court Rule 40.

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