Who Gets to Decide What is Frivolous

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In 1998 Congress created the Collection Due Process (CDP) procedures giving taxpayers the opportunity to talk to Appeals and to go to Tax Court to discuss appropriate collection alternatives.  Within a very short time, some taxpayers began using the CDP procedures for delay making arguments about taxes that had no chance of success and, frequently, were grounded in long discredited constitutional arguments.  In 2006 Congress decided to stop those making frivolous arguments from getting the benefits of CDP and passed 6330(g) denying the opportunity to go to Tax Court for those who made frivolous arguments.

This seems logical and is not something most practitioners care much about since practitioners do not last long in the profession by making frivolous arguments; however, the issue arose whether the Tax Court had jurisdiction to review the IRS determination of frivolous.  After all, if the IRS has unbridled discretion to determine what is frivolous, it could deny even those with arguably non-frivolous arguments from moving forward in the CDP process of seeking collection relief.  In 2010 the Tax Court decided in Thornberry v. Commissioner that it had the authority to review the decision of Appeals that the taxpayer’s arguments were frivolous.  In the recently decided case of Ryskamp (August 14, 2015) the D.C. Circuit had the opportunity to review the Tax Court’s decision concerning its jurisdiction.  In a 2-1 decision, the Circuit court upheld the Tax Court’s view of its jurisdiction of frivolous cases.  Both the majority and the dissent write well-reasoned opinions in support of their positions.  So, we have the chance to examine what Congress meant when it said taxpayers making frivolous arguments cannot appeal their determinations.

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The Ryskamp case presents an unusual case in the frivolous arena because the taxpayer does not make traditional tax protestor type arguments.  Instead, he makes an unusual argument about how the IRS should look at CDP cases.  The argument seems misguided and both the Tax Court and the Circuit court reject the argument but it is not facially the “normal” type of frivolous argument.  This fact makes Ryskamp interesting and important.  I have had cases where the IRS imposed the frivolous return penalty on a taxpayer who was seeking to do the right thing but who was utterly confused.  Frivolous is in the eye of the beholder and if it is only in the eye of the IRS the lens is sometimes too narrow.  That concern impacts both the decision of the Tax Court and the majority of the D.C. Circuit.  The dissent notes the concern, says Congress may have made a bad decision giving so much authority to the IRS, but determines that even though Congress may have made an unwise decision the decision concerning jurisdiction belongs to Congress and not to the courts.

Let’s examine the taxpayer’s argument before going to the argument used by the Court to determine it had limited jurisdiction over the case.  Mr. Ryskamp owes taxes for 2003-2009 due to inadequate withholding and failure to make estimated tax payments.  His original request for a CDP hearing was lost by the IRS according to the D.C. Circuit but was rejected pursuant to subsection (g).  The IRS told him that he had not offered any legitimate reasons for a CDP hearing and asked that he withdraw his frivolous reasons and submit legitimate ones.  He submitted an amended request indicating that he sought to submit legitimate grounds but that “without further information from you [about the basis of your frivolousness determinations] I cannot decide which, if any are the frivolous desire-to-delay issues I presented in my [original] Request.”  That sounds very reasonable but that is also typical of tax protestors.  A common tax protestor tactic, in my experience, was to repeatedly ask the IRS to explain its position.  When you feel that someone seeks an explanation solely for the purpose of putting you through the paces and without a desire to actually listen to what you are saying, the “hollow” requests draws a pretty shallow response.  The IRS in responding to Mr. Ryskamp’s letter seeking further explanation let him know it viewed his amendment as frivolous as well and provided him with possible reasons that would not be viewed as frivolous.  He petitioned the Tax Court despite receiving a 6330(g) determination which says he does not have that right.

Before going further with Mr. Ryskamp’s case, I want to draw brief attention to a case decided by the Tax Court at almost the same time of the D.C. Circuit’s opinion, Lunnon v. Commissioner, T.C. Memo 2015-156.  In Lunnon the taxpayer wrote to the revenue officer handling the case calling that individual the “devil’s spawn” and attaching a tax protester document published by Truth Attack entitled “The Real Truth About the IRS’s Truth About Frivolous Tax Arguments.”  Despite displaying serious tax protestor proclivities during the pre-CDP phase of the case on the Form 12153 the taxpayer used neutral language “I do not understand any basis for the claims made in the FINAL NOTICE, and do not believe I owe them.”  During the CDP conference the Appeals employee warned Mr. Lunnon about making frivolous arguments but Mr. Lunnon “wanted to discuss only constitutional challenges to his tax liabilities and how he disagreed with Revenue Officer Lyons’ ‘intrusive’ investigation.”  Nonetheless, the appeals employee in New Mexico, admittedly a state with many UFOs which may engender more tolerance, does not appear to have invoked 6330(g) but instead made a determination on the merits allowing Mr. Lunnon to go forward to the Tax Court without having to argue about its jurisdiction over frivolous cases.  The contrast of the handling of these two cases shows how difficult administering the frivolous provisions must be for appeals employees facing someone with a possible problem who articulates it inappropriately.

Back to the Ryskamp case where the Tax Court, in seeking to give meaning to the position put forward by the taxpayer there, described his argument as “the law of the minimization of the risk of loss of ‘collection financial standards facts.’”  The Tax Court characterized itself as “deeply unclear” what that taxpayer meant by this phrase.  I am sure the Appeals employee was also deeply unclear and the Circuit Court did not seem clear either.  If Mr. Ryskamp has a clear idea of the meaning of his arguments, it did not come out in reading the opinion.  So, he is making a weird, non-meaningful argument to those versed in collection law but does that make it frivolous or does the IRS simply have the ability to call this frivolous and everyone must stand back?  Does the taxpayer need to make a standard argument or can he attack the financial standards that apply to everyone in a way that may not make sense to the Appeals employee but might possibly have some merit?  Does his argument need merit to pass the frivolous standard?

Congress directed the IRS to publish a list of frivolous positions providing that any position on the IRS’s published list or that otherwise “reflects a desire to delay or impede the administration of Federal tax laws” fits within the definition of frivolous.  The IRS periodically publishes the list.  Most recently, it did so in IRS Notice 2010-33, 2010-17 I.R.B. 609.  For the period covered by Mr. Ryskamp’s request, IRS Notice 2008-14, 2008-1 C.B. 310 provided the grounds.  Essentially, all of the grounds listed were typical tax protestor grounds and none related specifically to the argument he seemed to be trying to make concerning the financial standards.  The fact that his argument did not line up in every way with the items listed in the notice should not bar the IRS from making a determination that his arguments were frivolous but perhaps the “otherwise” cases place a higher burden on the IRS to explain the basis for its determination.  The Tax Court honed in on the explanation, or lack of one.

It stated that “at the bottom of this extraordinary swirl of motions” Ryskamp “does find one devastatingly good point – [he] was sent [a] boilerplate [letter from the IRS] in which there was no statement… as to why [his] reasons for the request… were illegitimate.”  I wonder if the Tax Court would have felt this way if his reasons were that taxes were unconstitutional or another item listed in the Notice.  There the IRS could merely cite to the Notice and the statute and that would seemingly answer anyone’s question about why the IRS made the frivolous determination.  Since his argument fell outside the list, the IRS may need to provide some guidance to the taxpayer explaining why it views an argument as frivolous even though it has not previously identified it as such.

The Tax Court found the form letter sent to Mr. Ryskamp failed to inform him why his argument was frivolous but in remanding the case, it did order him to file a request “setting forth the specific issue and grounds for requesting” a CDP hearing.  On remand Mr. Ryskamp essentially continued with the same argument.  The Appeals office did a much more thorough job of explaining why his submissions were frivolous but returned to the same conclusion.  The Tax Court, however, had already decided that it had jurisdiction to look to decide if something was frivolous in Thornberry so it did not need to do much analysis to conclude it could review the work of Appeals despite the language in the statute which seemed to bar such a review.  After reviewing the merits of the case the Tax Court sustained the determination of the IRS.  The DC Circuit, however, was facing this issue for the first time and did take a hard look at the issue of jurisdiction.

After taking that hard look, the DC Circuit held that “subsection (g) does not strip the courts of jurisdiction to review the narrow question whether the Service Correctly determined that all of a taxpayer’s arguments are frivolous.”  It further found that in reviewing such a case “the court may evaluate whether the Service’s characterization of an argument as frivolous is facially plausible – i.e., whether the Service meaningfully identified how the request is frivolous and whether it overlooked a non-frivolous argument…A reviewing court cannot, however, reach the merits of any argument it deems to be non-frivolous.”

In reaching this conclusion the DC Circuit looked at the term “determination” in IRC 6330.  It concluded that “it also includes a determination made under subsection (g), under which the Service ‘determines’ whether a portion of a taxpayer’s hearing request contains frivolous arguments… Congress in subsection (g) could have used another term – such as ‘decides’ or ‘concludes’ – to describe the Service’s assessment of frivolousness.  It chose to use the word ‘determines’ and ‘determinations’ are reviewable by the tax court.’

In addition to its overall conclusion regarding the Tax Court’s ability to review determinations, the Circuit Court also looked at what (g) said and did not say.  It found that (g) “does not state that the IRS’s frivolousness determinations are shielded from review.  Rather, the statute says that the ‘portion’ of a request that is frivolous ‘shall not be subject to any further administrative or judicial review.’”  It found this phrase to shield the content of the request from review but not the Service’s threshold determination of frivolousness holding that the plain language of the statute leaves this threshold determination subject to review.  The Circuit Court went on to specifically uphold the specific treatment of Mr. Ryskamp in this case.

Whether the analysis is right or wrong, the DC Circuit provides a much stronger analysis than the Tax Court did in Thornburg and has likely settled the issue.  The dissent is thoughtful and goes back to the language of (g) stating that after the IRS makes its frivolous determination it “shall not be subject to any further administrative or judicial review.”  Building from this rather forceful language, which caused the government to take an appeal on an issue that might not have much administrative importance, the dissent carefully explains why the Tax Court’s hands are tied – for better or for worse.  I do not think the government will fight this issue further but the dissent shows why the government chose to fight.

 

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