Invalidating an IRS Notice: Lessons and What’s to Come from Feigh v. C.I.R.

A few weeks ago, the United States Tax Court decided Feigh v. Commissioner, 152 T.C. No. 15 (2019): a precedential opinion on a novel issue involving the Earned Income Tax Credit (EITC) and its interplay with an IRS Notice (Notice 2014-7). The petitioners in the case just so happened to be represented by my clinic, and the case just so happened to be a A Law Student’s Dream: fully stipulated (no pesky issues of fact), and essentially a single (and novel) legal issue. Because the opinion will affect a large number of taxpayers, I commend those working in low-income tax to read it. What I hope to do in this blog post is give a little inside-baseball on the case and, in keeping with the theme of this blog, tie it in a bit with procedural issues.

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Posture of the Case

I frequently sing the praises of Tax Court judges in working with pro se taxpayers. This case provides yet another example. My clinic received a call from the petitioners less than a week before calendar. Apparently, the Tax Court (specifically Judge Goeke) had recognized that this was a novel issue of law and suggested to the low-income, pro se petitioners that they may benefit from contacting a Low-Income Taxpayer Clinic for help with the briefing.

By the time the client contacted me (again, only a few days before calendar) the IRS had moved for the case to be submitted fully stipulated under Rule 122. The Court had not yet ruled on the motion but I mostly found the stipulations unobjectionable (with one minor change, which the IRS graciously did not object to). Rather, what concerned me was the fact that it was designated as an “S-Case.” I wanted this case to be precedential, and I wanted to be able to appeal –neither of which are possible for S-Cases. See IRC § 7463(b). Yes, the Court can remove the designation in its own discretion (see post here), but I didn’t want to leave anything to chance. After consulting with my clients the first order of business was to move to have the S designation removed -which again saw no objection from the IRS. Now the table was set for briefing on the novel issue.

What’s At Issue?

I’m going to try hard not to dwell on the substantive legal issues in this case, important though they are. Nevertheless, an ever-so-brief primer on what was going on is necessary.

Our client (husband and wife) received Medicaid Waiver Payments for the services the wife provided to her disabled (non-foster) child. From conversations with local VITA organizations I already anecdotally knew that some people received these payments, but since taking this case on I have come to appreciate exactly how vast the Medicaid Waiver program is. For our client, the Medicaid Waiver Payments were made in the form of rather meager wages (a little over $7,000) that were subject (rightly or wrongly) to FICA. They were the only wages my clients had. When my clients went to file their income tax return, however, it looked like they were getting a fairly raw deal: namely, missing out on an EITC and Child Tax Credits cumulatively worth almost $4,000. Why? Because in 2014 the IRS decided that these Medicaid Waiver Payments were excluded from income as IRC § 131 “Foster Care” payments.

An exclusion from income sounds to most taxpayers like a good thing: it’s always better to have less taxable income, right? But the tax code is a complicated animal, and for lower-income taxpayers the exclusion of wages was actually a curse: to be considered “earned income” for both the EITC and Child Tax Credit (CTC), wages must be “includible” in income. By the IRS’s logic, this meant that you must exclude your $7,000 Medicaid Waiver Payment (with a tax benefit of $0 in some cases) and couldn’t thereafter “double-benefit” by also getting the EITC/CTC for those excluded wages.

It doesn’t quite seem fair for those who saw little or no tax benefit from the exclusion.

It seems even less fair when you consider that those who would actually phase out of the EITC (say, by receiving a large Medicaid Waiver Payment over $52,000, which has happened) not only would get a larger tax benefit from the exclusion, but could still potentially get the EITC if they had other wages (say, from the other spouse). Theoretically, a couple making $100,000 could get the EITC in this case if the greater portion of the income were Medicaid Waiver Payments. This would be the case because such payments would be disregarded for EITC eligibility calculation altogether. Probably not what Congress (or even the IRS) had in mind.

My clients felt like they should do something about this unfairness. So they did: they took both the exclusion of IRS Notice 2014-7 and the EITC based on the excluded wages. This of course led to a notice of deficiency and culminated in the precedential Feigh decision.

Our Legal Arguments

Because of our client’s novel stance, we had two points we had to make for our client to win: (1) that the wages could be included in income, and (2) basically, that was it. We wanted to make it a simple statutory argument: If the wages could be included, then they were “includible,” and that was all that was required of the EITC under IRC § 32(c)(2)(A)(i).

As to the first point -whether the payments could (maybe, should) be “included” in income- history was on our side. Prior to 2014 courts and the IRS agreed that such payments had to be included in income. Payments for adopted or biological children clearly did not meet the statutory language of excluded “Foster Care Payments” under IRC § 131. The only thing that changed in the intervening years was the IRS issuance of Notice 2014-7: there was no “statutory, regulatory, or judicial authority” that could anchor the change in treatment. As we argued, the IRS essentially transformed “earned income” into “unearned income” on its own. And that sort of change is a massive bridge too far through subregulatory guidance.

We won on that first issue handily. The Court noted that “IRS notices –as mere statements of the Commissioner’s position—lack the force of law.” Then, the Court applied Skidmore deference (see Skidmore v. Swift & Co., 323 U.S. 134 (1944)) to see whether the interpretation set forth by IRS Notice 2014-7 was persuasive.

It was not.

And the IRS could not, through the notice, “remove a statutory benefit provided by Congress” -like, say, eligibility for the EITC. That sort of thing has to be done through statute. For administrative law-hawks, the Tax Court reigning in the IRS’s attempts to rule-make without going through the proper procedures is probably the bigger win. (As an aside, I’m not entirely positive even a full notice-and-comment regulation could do what Notice 2014-7 tries to: I don’t think any amount of deference would allow a reading of IRC § 131 the way Notice 2014-7 does.)

So we cleared the first hurdle: the IRS can’t magically decree that what was once earned income is no more through the issuance of subregulatory guidance. But what of the second hurdle -the fact that our client undeniably did not include the wages in gross income?

Courts have (rightly) treated the terms “allowable” and “allowed” differently, as well as “excludible” vs. “excluded” in previous cases. The breakdown is that the suffix “able” means “capable of” whereas the suffix “ed” means “actually occurred.” See Lenz v. C.I.R., 101 T.C. 260 (1993). Coming into this case I was keenly aware of this distinction because of a law review article I read while writing a chapter on the EITC for Effectively Representing Your Client Before the IRS. Indeed, it was that aspect of the EITC statutory language (and not my familiarity with Notice 2014-7 or Medicaid Waiver Payments) which made me want to take this case from the beginning. I feel compelled to raise the value of that law review article (James Maule, “No Thanks, Uncle Sam, You Can Keep Your Tax Break,”) because so many law professors joke that no one reads law review articles, or that most articles are impractical (no comment on the latter).

Consistently with the distinction of “allowed” vs. “allowable,” the Court has previously ruled on the nuance of “included” vs. “includible.” See Venture Funding, Ltd. v. C.I.R., 110 T.C. No. 19 (1998). “Included” means it was reported as income, “includible” means that it could/should be reported in income. Since the Tax Court already found that we met the first hurdle (our client could include the payments in income and Notice 2014-7 can’t take that away), we were in the clear: it was “includible.”

And so our client has excluded income and the earned income credit derived from it… Impermissible double-benefit, you (and the IRS brief) say?

I disagree. Not only does treating excluded payments as earned income apply the statutory language correctly, and more in line with what Congress would want, I contend that it is the better way to protect the integrity of the EITC. To see why this is you have to look again at how the EITC is calculated, and how the phase-out applies. In so doing we see that the real problem would be in disregarding excluded income altogether.

The Integrity of the EITC

The EITC is means tested, but it calculates the taxpayers means through two separate numbers: (1) “earned income” and (2) “adjusted gross income (AGI).” See IRC § 32(a)(2) and (f).  Excluded income isn’t reflected in AGI, so people with high amounts of excluded income might escape the AGI means testing prong of the EITC -unless the excluded income is specifically caught through other IRC 32 provisions like limits on investment income or foreign income exclusions. (Note that excluded alimony payments post TCJA would not be incorporated in the means testing.)

However, if excluded income like Medicaid waiver payments is considered “earned income” (that is, if we don’t require that earned income be “included”) then people with large amounts of excluded earned income do begin to phase out under the “earned income” means testing prong. In other words, it more appropriately reserves the credit only for those who working and are (truly) of limited means, while denying it to those who (truly) are not. I think Congress would approve. I’d also note that the exclusion is necessarily worth more to higher income earners than to lower-income earners -and frequently worthless to EITC recipients, many of whom may not actually have a tax liability at all (thus providing a $0 benefit to the exclusion).

Finally, I’d note (and did in the brief) that Congress has essentially addressed this problem of excluded earned income before -only with non-taxable Combat Pay. A little history is helpful on that point.

For the majority of the EITC’s existence (from 1978 to 2001), earned income actually didn’t have to be “includible” in gross income. Then, in an effort to make the credit easier to compute (not an effort to limit eligibility), Congress added the includible requirement as part of the Economic Growth and Tax Relief Reconciliation Act of 2001. Mostly, Congress made this change because it wanted information returns to give taxpayers (and the IRS) all the information needed for calculating the EITC.

Unfortunately, this meant that active duty soldiers receiving combat pay (which is a mandatory statutory exclusion, and thus not “includible” under IRC § 112) could not treat that pay as qualifying for the EITC. A GAO report noted that this was likely an unintended consequence (see page 2), that accrued the bulk of the benefits to those that made the most money. The Congressional fix was IRC § 32(c)(2)(B)(vi), which allows taxpayers to “elect” to treat excluded combat pay as earned income (it still isn’t taxed). Congress had to make this change to fix an unintended consequence of their own (statutory) making. However, it would be absurd (we argued) to require Congress to fix an unintended consequence wholly created by the IRS through Notice 2014-7.

What Happens Next?

I’ve been in contact with the local VITA providers in my community that see Medicaid Waiver Payments on the front lines -apparently fairly frequently. Their main question is a practical one: what do we tell taxpayers now? The IRS VITA guidance before had been “you can’t get credit for those payments towards the EITC.” In the aftermath of Feigh, can they both exclude and get credit now (as my client did)?

That is an excellent question, which brings up some excellent procedural issues (finally: I promised I’d get to them). The main issue is whether the IRS may now consider Notice 2014-7 completely moribund, such that there is no exclusion period and the Medicaid Waiver Payments must be included. The Court noted that the IRS did not raise the argument that the payments should be includible in income for my client, so it was conceded. But is the IRS stuck with that position now? Can the IRS take a position that is contrary to its own published guidance? What if that guidance is essentially invalidated?

The best case on point for this sort of situation may be Rauenhorst v. Commissioner, 119 T.C. 157 (2002). In that case, the IRS essentially said it wasn’t bound by its own guidance (in that instance in the form of a Revenue Ruling) when the Commissioner took a litigating position directly contrary to it. After receiving something of a slap-down from the Tax Court, the IRS issued Chief Counsel Notice CC-2003-014 (sorry, I couldn’t find any free links), which provided that “Chief Counsel attorneys may not argue contrary to final guidance.” Final guidance includes “IRB notices” (i.e. notices that are published in the Internal Revenue Bulletin), which Notice 2014-7 was.

Further, it does not appear to matter that Feigh essentially invalidated Notice 2014-7. The Chief Counsel Notice specifically includes a section headed “Case law invalidating or disagreeing with the Service’s published guidance does not alter” the rule that Chief Counsel shouldn’t take a contrary position that is unfriendly to taxpayers. In other words, so long as IRS Counsel follows the CC Notice, they should continue to let taxpayers exclude the Medicaid Waiver Payments… And since they’ve already lost on whether those excluded payments are earned income, it is perhaps best of both worlds for taxpayers moving forwards.


Perhaps. But I’m not sure I’d bet the farm on the IRS following the Chief Counsel’s Notice in all cases (and especially for taxpayers working with IRS agents or appeals, rather than Counsel).

But the final procedural point I want to make takes the long-view of things: which is that this never should have happened in the first place, because the IRS never should have overstepped its powers by issuing Notice 2014-7 masquerading as substantive law without, at the very least, following the rigorous notice and comment procedures required of substantive regulations. Had the IRS done so the tax community could well have seen this before the regulation was finalized and it could have been addressed. This may echo from my soapbox, but Notice 2014-7 undoubtedly caused real harm to some of the most vulnerable taxpayers. I know from conversations in the tax community that many low-income earners lost out on a credit they rightfully deserved. I don’t think for a second that was the intention of the IRS when they issued Notice 2014-7. Nor does Judge Goeke in the opinion (see footnote 7).

But, again, tax is a complicated animal: legislating new rules should not be done lightly. Procedure, in other words, matters.

IRS Can File a Proof of Claim in Bankruptcy Court for the Full Amount of Tax Liability Even After an Accepted Offer in Compromise

Guest blogger Ted Afield today discusses the intersection of offers in compromise with bankruptcy. Professor Afield (with co-author Nancy Ryan) will be creating a chapter on Offers in Compromise for the next edition of Effectively Representing Your Client Before the IRS. Christine

In our clinic at GSU, we do a lot of collections work and routinely submit offers in compromise, which the IRS often accepts, on behalf of our clients. While our hope is always that the accepted offer will be a critical step that allows the taxpayer to get back in compliance with his or her tax obligations and get out from under the weight of a detrimental financial liability, unfortunately the accepted offer is sometimes not enough to prevent a taxpayer from continuing to be overwhelmed by other financial obligations. In situations like these, the taxpayer may in fact file bankruptcy during the 5-year compliance window for the offer in compromise. If this happens, the IRS potentially has a claim in the bankruptcy proceeding because the offer in compromise may have already been defaulted or may be defaulted in the future if the taxpayer fails to file tax returns and timely pay taxes. Accordingly, the IRS will file a proof of claim in the bankruptcy proceeding, which raises the question of should this proof of claim be for the full amount of the tax liability or for the compromised amount of the tax liability.

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This was the question recently taken up in a memorandum opinion by the Bankruptcy Court for the Southern District of Texas, Houston Division, in In Re: Curtis Cole, No: 18-35182 (May 29, 2019). In this case, Mr. Cole and the IRS had entered into a compromise of tax liabilities for 2003-2014 totaling over $100,000 for the much more manageable sum of $1,000. During the five-year monitoring period, Mr. Cole started off well and timely filed and paid his 2016 income tax. For 2017, however, Mr. Cole recognized that he would not be able to timely file a return, and he accordingly requested and was granted an extension. Mr. Cole did then file his 2017 return and pay his 2017 tax bill on October 15, 2018.

PT readers who do a lot of OIC work will immediately recognize the potential problem that Mr. Cole created for his offer because an extension of time to file is not an extension of the time to pay taxes, raising the possibility that the IRS would default Mr. Cole’s offer for failing to pay his 2017 taxes in a timely manner. Compounding the problem was that Mr. Cole had filed for Chapter 13 bankruptcy one month earlier, on September 15, 2018. As a result, the IRS filed a proof of claim in the bankruptcy proceeding for the full amount of the original tax liability that was compromised under exactly that theory (i.e., that Mr. Cole’s late payment of 2017 taxes caused his offer to default and thus caused the amount of the IRS’s claim to be the full amount of the tax liability).

Mr. Cole was not happy with this development and attempted to raise a couple of equitable arguments that did not have much of a leg to stand on. Mr. Cole’s first hope was that he would be simply forgiven his confusion over whether a filing extension also constituted a payment extension. This did not have much resonance in light of the fact that it is well established that filing extensions are not in fact payment extensions. Mr. Cole also attempted to argue that he effectively had rights under the Internal Revenue Manual by asserting that the IRS violated its own procedures when it did not offer him any opportunity to cure his late payment before declaring the offer to be in default. See I.R.M. 5.19.7.2.20, which states that in the event of a breach of the offer’s terms, the IRS should send the taxpayer a notice letter and provide an opportunity to cure before defaulting the offer. Again, this argument could not carry much weight in light of the well-established principle that the IRM does not give taxpayers any rights, and thus the IRS was not obligated to provide an opportunity to cure the default. Ghandour v. United States, 37 Fed. Cl. 121, 126 n.14 (1997).

Mr. Cole’s strongest argument was based on his reliance on a bankruptcy court opinion from the Eastern District of North Carolina that had ruled on a similar issue and had concluded that the proof of claim should be for the compromised amount rather than the full amount of the tax liability. In re Mead, No. 12-01222-8-JRL, 2013 WL 64758 (Bankr. E.D.N.C. Jan. 4, 2013). The Mead court found that the contractual language in Form 656 stating that the IRS may file a “tax claim” for the full amount of the tax liability if a taxpayer files for bankruptcy before the offer’s terms expire is ambiguous in regards to whether the “tax claim” refers to the full liability or the compromise amount. Accordingly, the Mead court held that the IRS violated the nondiscrimination rule of 11 U.S.C. § 525(a), on the grounds that it appeared that the IRS was trying to collect the full amount of the tax liability, rather than the compromised amount, solely because the taxpayer was in bankruptcy.

The Cole court, however, was not persuaded by its sister court in North Carolina and held that Mead was both distinguishable and simply incorrect.  Mead was distinguishable because, unlike in Cole, there was not an issue of whether the offer had been defaulted. However, even without that distinguishing characteristic, the Cole court noted that the outcome would be the same. In other words, regardless of whether the offer was in default, if the terms of the offer had not yet expired, the IRS would still need to file a proof of claim for the full amount of the tax liability in order to preserve its rights in case the taxpayer did subsequently default the offer. This is why the terms of the offer explicitly state in Section 7: “If I file for bankruptcy before the terms and conditions of the offer are met, I agree that the IRS may file a claim for the full amount of the tax liability, accrued penalties and interest, and that any claim the IRS files in the bankruptcy proceeding will be a tax claim.” I do not agree with the Mead court’s assertion that this language is ambiguous.

It’s not that the issue of whether the offer has been defaulted is irrelevant. Rather, that issue is simply premature at the moment when the IRS files its proof of claim. Even if the offer has unequivocally not yet been defaulted, the IRS must file a proof of claim for the full amount of the liability to protect its right to recover the full amount, should a default occur. So when can Mr. Cole attempt to make his likely to be very uphill arguments that he has not defaulted the offer? As the court notes, he does this when he submits his Chapter 13 plan, in which he will propose how to treat the IRS’s claim. If he believes he has not defaulted his offer, he can propose that the IRS only receive what it is owed if the offer is still in force. The IRS can then object if it believes that the offer is in default, and the issue can then be decided.

In comparing Cole and Mead, I think the Cole court likely has the better argument. The contractual language in Form 656 pretty unambiguously gives the IRS the right to file a claim for the full amount of the tax liability in a bankruptcy proceeding during the five-year monitoring period. That does not mean that the IRS will recover the full amount if the offer is not in default, but taxpayers should certainly expect such a claim to be filed and that they will have to litigate whether the offer is defaulted when they propose their bankruptcy plan.

The Benefits of Tax Court… Designated Orders April 22 – 26, 2019

There are numerous benefits of having your case before the Tax Court, rather than Federal District court. In case books, those benefits are usually distilled to (1) the fact that Tax Court is a pre-payment forum, and (2) the expertise of the Tax Court judges (as opposed to generalists in federal court) in dealing with tax law. At least three of the six designated orders issued during the final week of April 2019 exemplify the latter benefit. The remaining orders, however, demonstrate a third, equally important but often unspoken benefit of Tax Court as a venue for disputes: the patience and experience of Tax Court judges in working with pro se petitioners.

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The Patience (and Boundaries) of the Tax Court. Brown v. C.I.R., Dkt. # 20102-17 (order here)

In some ways, the deeper structural value of our judicial system is simply the feeling that you have a chance to be heard. It may be less about the dollars at issue than the sense that you are being treated unfairly by the IRS -likely on matters that you don’t fully understand. So it is in the above case, where Judge Gustafson goes to great lengths to allow the petitioners their chance to be heard -where others may say that they have already had more than their fair share of that chance.

In this case, the IRS had conceded back in February that there was no deficiency due from the taxpayers… and so moved for an entry of decision to that effect. However, the taxpayers didn’t take “no deficiency” as a (good enough) answer, thereafter (and apparently for the first time) raising the issue that they actually should be due a refund. To get to the bottom of the issue, the Court asked the petitioners for a “succinct statement of the decision that they believe the Court should enter[.]”

Suffice it to say, the taxpayers did not comply with that directive, and instead brought up a lot of extraneous issues and general legal gripes (for example, seeking to bring in the petitioner’s employer as a defendant). This led to an entry of decision confirming that the petitioners didn’t have a deficiency, but also weren’t getting anything else refunded to them.

Petitioners weren’t happy with this, and so filed a motion to vacate, this time sufficiently bringing up the overpayment issue -or at least sufficiently for Judge Gustafson to calendar the motion to be heard in Court. Because the overpayment issue wasn’t properly raised in pleadings, Judge Gustafson even gives a few extra tips to the petitioners on what they’d need to do should they prevail on their motion to vacate -namely, file a motion to amend their petition under Rule 41.

And for what has this intricate, time-consuming, and costly sequence of events revolved around? A potential refund that Judge Gustafson calculates as, at a maximum, $92. Since the dispute only concerns $232 of allegedly over-stated wages, this refund amount would result only if the taxpayers are in the highest marginal bracket (which is doubtful).

But that isn’t the point. The point is that the taxpayers feel wronged and want their day in court to be heard. Kudos to Judge Gustafson in taking that right seriously.

(UPDATE: Judge Gustafson ended up granting the motion to vacate (order here) and both parties eventually agreed to a small “overassessment to be abated” of $65 (see decision here). Still no refund, however, as apparently the petitioner had self-reported a fairly large liability to begin with… Hat-tip to Bob Kamman for following up on this case and sending it my direction.)

Of course, Judge Gustafson’s patience is not boundless, nor should it be. In two other designated orders that don’t warrant great detail (here and here) where the petitioner failed to show up for trial -that is, to exercise their rights- Judge Gustafson had no problem dismissing for lack of prosecution. 

Tax Court Expertise: Showing Your Work on Qualified Dividends. Bara v. C.I.R., Dkt. # 17107-17SL (order here)

Bara involves the somewhat rare Collection Due Process review where the underlying tax is (perhaps) properly at issue under IRC § 6330(c)(2)(B). Or at least the parties act as if the underlying liability is properly at issue – Chief Special Trial Judge Carluzzo hints that it is perhaps an unsettled question. Since the deficiency appears to have been determined by a Math Error notice, and not a Notice of Deficiency, the question would be resolved based on whether the taxpayer had a “prior opportunity to dispute the tax” –which can be a rather murky inquiry. See posts here, here, and here. But rather than upset the apple cart, Special Trial Judge Carluzzo simply says he will “follow the lead” of the parties and treat the liability as if it were properly at issue.

Both parties filed motions for summary judgement on the issue of whether petitioner had properly computed his tax on qualified dividends. Since the material facts were not at issue on that matter, it was ripe for Judge Carluzzo to render a decision… which he does in a tremendous example of statutory analysis.

One would think that calculating the tax on qualified dividends is fairly simple. Generally, we entrust it to our tax software and don’t give it a second thought. But were you to try to figure out solely by reading the statute at issue (IRC § 1(h)), you may be excused if you were left with a headache and confusion. Judge Carluzzo “shows his work” in how to compute the tax under the relevant statute with almost four pages of walkthrough on how the code section works. I won’t repeat it here, but I will commend others to take a look. It is a startling example of how something seemingly so simple (a preferential tax rate) can be so convoluted.

It isn’t clear how the taxpayer made the mistake of treating the qualified dividends as taxed at a zero rate -it appears that he did, in fact, report the dividends on his return, so it wasn’t simply an omission. And unless you are Judge Carluzzo, these calculations are best done by computers -ergo the “math error” treatment by the IRS under IRC § 6213. Kudos to Judge Carluzzo, in any case, for walking through why it should be calculated the way the IRS did, and showing the work we generally entrust software to do for us.

Expertise of the Tax Court, By Necessity. Whistleblower 6388-17W v. C.I.R. (order here)

On other areas of tax law the Tax Court necessarily has more expertise than federal district courts, because they have sole jurisdiction over the subject matter. This includes whistleblower and Collection Due Process cases (the latter could go to District Courts until 2006, but cannot any longer). Like Collection Due Process, the whistleblower statute is still being developed. One issue that has been recently determined is the scope of review of whistleblower actions which, in accordance with Kasper v. C.I.R., 150 T.C. 8 (2018) is limited to the administrative record.

As Judge Guy notes, there is a natural tension in whistleblower cases “between the general rule of protection prescribed in section 6103(a) [e.g. confidentiality of other people’s tax return information] and the parties’ obligations to exchange information in a good-faith effort to arrive at basis for settlement[.]” This tension manifests itself when, as here, the IRS heavily redacts the administrative record (which the whistleblower would rely on) on the grounds that the information is protected under IRC § 6103.

And so, to get clarity on these competing concerns (petitioner’s ability to properly prosecute a whistleblower case and respondent’s imperative to protect certain tax information), Judge Guy essentially orders a summer exam for the parties. Both are to write separate memoranda “providing a comprehensive discussion and analysis of the applicability or nonapplicability (as the case may be) of the provisions of section 6103, and particularly the exceptions prescribed in section 6103(h)(4)(A), (B), and (C), both in the broad context of this whistleblower action and with regard to the specific categories of redacted documents [at issue in the order.]” If that looks like a law-school exam prompt, it gets even better: the parties are expected to “address the plain language of the statute, legislative history, and significant legal precedent in support of their positions.” A happy summer to all…

Expertise on Assessment Issues in Collection Due Process. Jarvis v. C.I.R., Dkt. # 19387-18SL (order here)

I noted above that I find it somewhat rare for a petitioner to successfully or appropriately raise the underlying liability in a Collection Due Process hearing. The order in the Jarvis case is an example of the more common outcome: you had your chance to argue the liability before, and you don’t get a second bite at the apple. In Jarvis, however, it appears that petitioner actually wants a third bite. To wit, the taxpayer had already argued the liability in a previous Tax Court deficiency proceeding (which was dismissed for failure to prosecute when the taxpayer didn’t show up for trial), raised again on a motion to vacate, and raised still another time when the taxpayer appealed to the Second Circuit. The appeal to the Second Circuit, after failing to prosecute the case, begins to seem like a delay tactic on paying… which is not successful because, as Judge Armen points out, an appeal does not stay assessment and collection unless you post bond. See IRC § 7485(a). Since petitioner didn’t post bond (that is, put some skin in the game rather than indefinitely delay the IRS from collecting) AND petitioner has not raised any issues about collection alternatives, the proposed levy is appropriate.

No third bite of the apple for the taxpayer in this case. And no more patience from the Court needed.

Implications for the Tax World of New Supreme Court Opinion Finding Another Claims Processing Rule Not Jurisdictional

I know some of you think I have “jurisdiction” on the brain. However, anyone who reads Supreme Court opinions over the last 15 years should also have that malady by now, since over that period the Court seems to have issued at least one opinion a year on the question of whether a particular rule of federal litigation is jurisdictional or a mandatory non-jurisdictional claims processing rule. Keith and I recognized that this question inevitably also applies to the tax world, where much discussion of the question in court opinions preceded the current thinking making claims processing rules presumptively not jurisdictional. We have tried to alert the lower courts (including the Tax Court) to these Supreme Court developments. Since 2014, tax opinions have begun to follow the developing Supreme Court non-tax authority in analyzing the tax statute requirements. Compare Lippolis v. Commissioner, 143 T.C. 393 (2014) ($2 million amount in dispute whistleblower award threshold in section 7623(b)(5) is not jurisdictional) and Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015) (section 6532(c) wrongful levy judicial filing deadline is not jurisdictional and is subject to equitable tolling) with Duggan v. Commissioner, 879 F.3d 1029 (9th Cir. 2018) (section 6330(d)(1) CDP filing deadline is jurisdictional and not subject to equitable tolling) and Rubel v. Commissioner, 856 F.3d 301 (3d Cir. 2017) (section 6015(e)(1)(A) innocent spouse filing deadline is jurisdictional and not subject to estoppel).

Well, the Supreme Court just issued its second “jurisdictional” ruling of the current Term, Fort Bend County v. Davis, Docket No. 18-525 (June 3, 2019). The first ruling was in Nutraceutical Corp. v. Lambert, 139 S. Ct. 710 (Feb. 26, 2019). The Court in both cases held mandatory claims processing rules non-jurisdictional. Could these cases contribute to a larger effect in the tax world, since they underscore that almost no claims processing rule is held jurisdictional by the Court these days?

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First, a reminder of the principal differences between jurisdictional rules and non-jurisdictional rules. Non-jurisdictional rules are subject to waiver and also are subject to forfeiture if not raised soon enough in a case; courts need not police these rules. By contrast, courts must independently police jurisdictional rules, and complaints about lack of jurisdiction can be raised at any time during a case – either by the defendant or the court. Some non-jurisdictional claims processing rules are also subject to the equitable exceptions of estoppel and, in the case of rules that are filing deadlines, equitable tolling, but this is a separate issue. The Court in Nutraceutical, for example, held a deadline in which to ask permission from a court of appeal to appeal a district court denial of class certification not jurisdictional and yet still not subject to equitable tolling.

Second, before getting deep into this subject, I highly recommend to readers Bryan Camp’s forthcoming article in The Tax Lawyer (for the Summer 2019 issue) entitled, “New Thinking About Jurisdictional Time Periods in the Tax Code”, where he argues that the filing deadlines for Tax Court deficiency and CDP cases should not be jurisdictional under the new thinking, but that the filing deadline for a stand-alone innocent spouse case should be jurisdictional, and the district court refund suit filing deadline in section 6532(a) should not be jurisdictional.

Fort Bend Facts

Lois Davis worked for Fort Bend County. She filed with the EEOC two documents complaining that she was being harassed and retaliated against, since she had complained of another worker’s sexual harassment, after which the other worker quit. The first document was an intake questionnaire; the second, a formal “charge”.

Subsequent to the EEOC filings, she was ordered to work on a Sunday, when she had a planned church function. When she went to the church function, rather than work, the county fired her. She then went back and tried to amend the EEOC intake questionnaire by handwriting “religion” on it, but she made no similar amendment to the EEOC charge.

A few months later, the DOJ notified her of her right to sue in district court, and she did – arguing both retaliation and religious discrimination. The district court granted the county’s summary judgment motion, but the court of appeals reversed the grant as to the religious discrimination claim. The county then sought cert. on the issue, but cert. was denied.

On remand, the county for the first time moved the district court to dismiss the religious discrimination claim for lack of jurisdiction because Ms. Davis had not alleged religious discrimination in the EEOC charge. The district court dismissed the case for lack of jurisdiction, but on a second trip to the court of appeals, the court of appeals held that the requirement to file an EEOC charge before filing suit was not jurisdictional, but a mandatory claims processing suit. The court of appeals held that the county had forfeited the right to complain about non-compliance with this requirement by waiting until after the case had already gone once through a round of appeals all the way to the Supreme Court. Because other Circuits had held the EEOC charge-filing requirement jurisdictional, the Supreme Court granted cert. this time to resolve the split.

Fort Bend Opinion

The Supreme Court issued a unanimous opinion, authored by Justice Ginsburg – who is the first Justice to have raised the issue of the overuse of the word “jurisdictional” by the courts. Her Fort Bend opinion, therefore, follows her earlier views, which all of the Justices have since adopted. Under those views (the adopted legal standard since 2004), mandatory claims processing rules are not jurisdictional unless either (1) Congress makes a “clear statement” that it wants the rule to be jurisdictional (a rare event, according to the Court) or (2) there exists a long line of Supreme Court precedent over many years holding the rule jurisdictional (a stare decisis exception). Since there was no previous Supreme Court authority on this EEOC requirement, the county only argued for the clear statement exception.

Before deciding the case, the Court noted:

The Court has characterized as nonjurisdictional an array of mandatory claim-processing rules and other preconditions to relief. These include: the Copyright Act’s requirement that parties register their copyrights (or receive a denial of registration from the Copyright Register) before commencing an infringement action, Reed Elsevier, Inc. v. Muchnick, 559 U.S. 154, 157, 163–164 (2010); the Railway Labor Act’s direction that, before arbitrating, parties to certain railroad labor disputes “attempt settlement ‘in conference,’” Union Pacific, 558 U.S., at 82 (quoting 45 U.S.C. §152); the Clean Air Act’s instruction that, to maintain an objection in court on certain issues, one must first raise the objection “with reasonable specificity” during agency rulemaking, EPA v. EME Homer City Generation, L. P., 572 U.S. 489, 511–512 (2014) (quoting 42 U.S.C. § 7607(d)(7)(B)); the Antiterrorism and Effective Death Penalty Act’s requirement that a certificate of appealability “indicate [the] specific issue” warranting issuance of the certificate, Gonzalez, 565 U.S., at 137 (quoting 28 U.S.C. § 2253(c)(3)); Title VII’s limitation of covered “employer[s]” to those with 15 or more employees, Arbaugh v. Y & H Corp., 546 U.S. 500, 503– 504 (2006) (quoting 42 U.S.C. § 2000e(b)); Title VII’s time limit for filing a charge with the EEOC, Zipes v. Trans World Airlines, Inc., 455 U.S. 385, 393 (1982); and several other time prescriptions for procedural steps in judicial or agency forums. See, e.g., Hamer v. Neighborhood Housing Servs. of Chicago, 583 U.S. ___, ___ (2017) (slip op., at 1); Musacchio v. United States, 577 U.S. ___, ___ (2016) (slip op., at 8); Kwai Fun Wong, 575 U.S., at ___ (slip op., at 9); Auburn, 568 U.S., at 149; Henderson, 562 U.S., at 431; Eberhart, 546 U.S., at 13; Scarborough v. Principi, 541 U.S. 401, 414 (2004); Kontrick, 540 U.S., at 447.6/

__________ 6. “If a time prescription governing the transfer of adjudicatory authority from one Article III court to another appears in a statute, the limitation [will rank as] jurisdictional; otherwise, the time specification fits within the claim-processing category.” Hamer, 583 U.S., at ___ (slip op., at 8) (citation omitted).

Slip op. at 7-8.

As to the particular EEOC rule at issue in Fort Bend, the Court wrote:

Title VII’s charge-filing requirement is not of jurisdictional cast. Federal courts exercise jurisdiction over Title VII actions pursuant to 28 U.S.C. § 1331’s grant of general federal-question jurisdiction, and Title VII’s own jurisdictional provision, 42 U.S C. § 2000e–5(f )(3) (giving federal courts “jurisdiction [over] actions brought under this subchapter”). Separate provisions of Title VII, § 2000e–5(e)(1) and (f )(1), contain the Act’s charge-filing requirement. Those provisions “d[o] not speak to a court’s authority,” EME Homer, 572 U.S., at 512, or “refer in any way to the jurisdiction of the district courts,” Arbaugh, 546 U.S., at 515 (quoting Zipes, 455 U.S., at 394). Instead, Title VII’s charge-filing provisions “speak to . . . a party’s procedural obligations.” EME Homer, 572 U.S., at 512. They require complainants to submit information to the EEOC and to wait a specified period before commencing a civil action. Like kindred provisions directing parties to raise objections in agency rulemaking, id., at 511–512; follow procedures governing copyright registration, Reed Elsevier, 559 U.S., at 157; or attempt settlement, Union Pacific, 558 U.S., at 82, Title VII’s charge filing requirement is a processing rule, albeit a mandatory one, not a jurisdictional prescription delineating the adjudicatory authority of courts.

Slip op. at 9-10 (footnotes omitted).

In Zipes and later cases, the Court has stated that the separation of a claims processing rule from a jurisdictional grant is a strong indication that the claims processing rule is not jurisdictional.

Impact of Fort Bend on Tax Rules

Any tax lawyer reading Fort Bend will instantly recognize the similarity between the EEOC charge stating rule and the tax refund claim rule of section 7422(a), requiring an administrative claim to have been filed before a refund suit is brought. In United States v. Dalm, 494 U.S. 596 (1990) (involving equitable recoupment jurisdiction), the Court stated that the section 7422(a) requirement is jurisdictional, but the Court’s statement was not really important to the outcome of the case, since the taxpayer would lose whether the section 7422(a) requirement was jurisdictional or not. Dalm is likely one of the opinions that the current Court would call “drive-by jurisdictional rulings”, entitled to no weight since the new rules of jurisdiction have applied. In Gillespie v. United States, 670 Fed. Appx. 393 (7th Cir. 2016), the Seventh Circuit recently observed (in dicta) that recent Supreme Court case law on jurisdiction “may cast doubt on the line of cases suggesting that § 7422(a) is jurisdictional”, including Dalm. Fort Bend throws more shade on this statement in Dalm.

Tax lawyers reading Fort Bend will also recognize the similarity between the EEOC charge stating rule and the rule (related to that of section 7422(a)) that a tax refund suit cannot have its basis be at substantial variance with the basis for the refund set out in the administrative claim. I have not made a study of all case law on the substantial variance rule, but I do know that the Federal Circuit treats that rule as jurisdictional. See Ottawa Silica Co. v. United States, 699 F.2d 1124, 1135-1136 (Fed. Cir. 1983). It also seems doubtful that such rule is jurisdictional after Fort Bend.

Finally, Fort Bend may help the D.C. Circuit resolve an issue presented to it in an appeal of the opinion of the Tax Court in Myers v. Commissioner, 148 T.C. 438 (a section 7623(b)(4) whistleblower action, previously discussed on PT here and here). The issue is whether the appeal to the D.C. Circuit was taken timely under section 7483, which provides only 90 days after the Tax Court decision is entered to file a notice of appeal. The jurisdictional grant for courts of appeals to hear appeals from the Tax Court is elsewhere, at section 7482(a)(1), and the word “jurisdiction” does not appear in section 7483. Section 7483 appears to be a mere run-of-the-mill, non-jurisdictional claims processing rule. Yet the D.C. Circuit has no precedent on this section 7483 jurisdictional issue, and the notice of appeal was filed more than 90 days after the Tax Court decision was entered.

FRAP 13(a)(1)(B) provides: “If, under Tax Court rules, a party makes a timely motion to vacate or revise the Tax Court’s decision, the time to file a notice of appeal runs from the entry of the order disposing of the motion or from the entry of a new decision, whichever is later.” After the Tax Court decision was entered, Mr. Myers had made a timely motion that he styled one for reconsideration (not to vacate). He filed his notice of appeal within 90 days of the Tax Court’s denial of this motion.

The D.C. Circuit raised sua sponte during the Myers appeal whether the notice of appeal was timely filed – something the court may do only if the filing deadline is jurisdictional. Both parties argue that the appeal was timely brought – with the DOJ arguing that the motion for reconsideration should be treated as a motion to vacate, as a practical matter, for purposes of FRAP 13(a)(1)(B). If the appellate filing deadline is not jurisdictional, the DOJ is clearly validly waiving any complaint about late filing.

But, at oral argument this past December, judges on the panel thought that maybe section 7483’s deadline is jurisdictional. If it is, then the judges did not see how a mere FRAP could extend the statutory 90-day period. Further, in Bowles v. Russell, 551 U.S. 205 (2007), creating the stare decisis exception to the new jurisdictional rules, the Supreme Court held that a deadline in 28 U.S.C. section 2107 to file a civil appeal from a federal district court to a court of appeal is jurisdictional because for over 100 years, in multiple opinions, the Supreme Court had called that deadline jurisdictional. The Myers judges wondered why Bowles does not dictate that section 7483’s filing deadline is also jurisdictional because this is a civil appeal.

In response, Mr. Myers’ counsel, Joe DiRuzzo, argued that Bowles only applied to appeals between Article III courts, and did not apply to an appeal from an Article I court (the Tax Court) to an Article III court. Mr. DiRuzzo noted a footnote in Hamer v. Neighborhood Housing Servs. of Chicago, 138 S. Ct. 13, 20 n.9 (2017), suggesting that Bowles only applied to appeals between Article III courts. The Myers judges seemed not impressed by this footnote, correctly noting that it was dicta. However, it is interesting that Justice Ginsburg, in footnote 6 of Fort Bend (quoted above), again states this limitation (between Article III courts), citing Hamer. Again, Justice Ginsburg’s statement constitutes dicta, but how many courts of appeal will disregard well-considered, repeated dicta of the Supreme Court characterizing the scope of the Court’s own precedent?

The opinion of the D.C. Circuit in Myers is by now overdue. We shall see what it decides.

Note that the D.C. Circuit is not hostile to the new Supreme Court jurisdictional rules in tax cases. In Kim v. United States, 632 F.3d 713 (D.C. Cir. 2011), that court held that failure to comply with the administrative exhaustion requirement of section 7433(d)(1) before bringing a suit for damages for wrongful collection actions is a merits affirmative defense. Further, the next year, the court held that the filing deadline for such a suit at section 7433(d)(3) is also not jurisdictional – citing recent Supreme Court case law. Keohane v. United States, 669 F.3d 325, 330 (D.C. Cir. 2012).

An IRC 6751 Decision Regarding the Initial Penalty Determination

In Palmolive Building Investors, LLC v. Commissioner, 152 T.C. No. 4 (2019) the Tax Court addressed one of the issues presented by the language of IRC 6751 regarding the initial determination of a penalty. Unlike the Walquist case involving IRC 6751 discussed here, the petitioner in the Palmolive case had excellent counsel and pursued the case without the distractions present in Walquist. Still, the taxpayer lost in is effort to knock out the penalty for IRS’s failing to follow the statute.

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The petitioner in Palmolive filed a partnership return claiming a huge charitable contribution for a façade easement. In an earlier decision the Tax Court sustained the IRS determination disallowing the deduction. At issue in this opinion is the correctness of the related penalty determination. The IRS not only disallowed the claimed contribution deduction, but the revenue agent (RA) examining the case asserted two penalties in the alternative – a 40% penalty for gross valuation misstatement and a 20% negligence penalty. The RA obtained the approval of the immediate supervisor on a Form 5701 attached to the Notice of Proposed Adjustments.

Petitioner requested an Appeals conference. The Appeals Officer (AO) proposed issuing an FPAA asserting four alternative penalties: the two proposed by the RA plus penalties for substantial understatement and substantial valuation misstatement. The AO’s immediate supervisor signed Form 5402-c on the approval line and an FPAA was eventually issued determining the imposition of all four penalties in the alternative.

An issue that the court does not decide concerns whether the 40% gross valuation misstatement also includes the 20% penalty. The IRS position was that approval of the 40% penalty necessarily included the lesser penalty if the valuation ultimately supported the lower penalty amount. Taxpayer contested this assertion. The court found that since the notice issued by Appeals included both and since the court found the additional penalties added by Appeals met the requirements of IRC 6751, deciding the issue of whether the 40% penalty necessarily included the lower penalty was unnecessary here.

The Tax Court begins its analysis by noting the statutory language.

Section 6751(b)(1) provides: No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination * * * .

At issue here is whether there can be more than one initial determination. The court noted that Congress sought to keep the IRS from using penalties as a bargaining chip in passing IRC 6751. The court finds:

on the undisputed facts, we hold that the “initial determinations” are those by Agent Wozek on or before July 2008 and by Appeals Officer Holliday in June 2014.

Petitioner argued that the RA did not propose and his supervisor did not approve all of the penalties. Therefore, because the RA’s determination was the initial determination, the subsequent determination by the AO does not meet the requirement of the statute. The court dismisses this argument stating:

Section 6751(b)(1) includes no requirement that all potential penalties be initially determined by the same individual nor at the same time.

Petitioner also argued that the IRS failed to follow its Internal Revenue Manual provisions which require that the case history reflect the decision to impose the penalty. The court replied that the IRM

does not have the force of law, is not binding on the IRS, and confers no rights on taxpayers.’” Thompson v. Commissioner, 140 T.C. 173, 190 n.16 (2013) (quoting McGaughy v. Commissioner, T.C. Memo. 2010-183, slip op. at 20).

The court found that the supervisory approval need not occur on a specific form and that the form used need not reference the employee recommending the imposition of a penalty.

This decision gives the IRS much more flexibility in meeting the requirement of IRC 6751 than the taxpayer’s arguments would have permitted. The IRS still must show supervisory approval at each level at which a new penalty is imposed, but the decision provides it with much latitude in how to accomplish the approval. The term “initial” in the statute does not limit the IRS to getting it right at the first step or else forgoing a penalty. The decision lines up with the purpose of the statute. Since the statute provides a difficult procedural roadmap for the court to follow, perhaps having the decision line up with the purpose is the primary goal to seek when writing an opinion on this topic.

Automatically Generated Penalties Do not Require Managerial Approval

This is the first of several posts on precedential cases decided by the Tax Court earlier this year regarding the IRC 6751 provision requiring preapproval by a manager before the assertion of certain penalties. The case of Walquist v. Commissioner, 152 T.C. No. 3 (February 25, 2019) represents the type of case that one might wish had been litigated by a petitioner other than a pro se petitioner that did not engage in the process; however, the outcome would almost certainly have been the same with a more robust litigation participant. In the Walquist case the Tax Court addresses the imposition of a penalty in a setting in which the IRS argues that automation removes the need for prior managerial approval. The court agreed.

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The IRS sent the Walquists a statutory notice of deficiency for 2014 determining a liability over $13,000 and a related accuracy penalty. Although petitioners earned almost $100,000 in 2014, on their return they claimed a deduction for almost the same amount based upon a “Remand for Lawful Money Reduction,” a tax protestor type claim. The IRS disallowed this claimed deduction resulting in the deficiency determined. The IRS handled the case through its Automated Exam Correspondence Unit designed to minimize the amount of human involvement in the audit.

The Automated Exam process generated a 30-day letter to petitioners. Because the amount of the liability determined through the process exceeded $5,000, the program automatically placed on the notice an accuracy related penalty of 20% of the liability. Petitioners did not respond to the 30-day letter, resulting in the issuance of the SNOD. Petitioners timely filed a petition with the Tax Court in which they continued to assert tax protestor type arguments. The tax protestor activity did not stop and the court gives a detailed accounting of the time wasting efforts of petitioners before it ultimately imposes the IRC 6673 penalty because of their post-petition actions. I will not describe this aspect of the case as it is relatively boring.

The ultimate finding of the court with respect to the requirement for managerial approval is that:

Because the penalty was determined mathematically by a computer software program without the involvement of a human IRS examiner, we conclude that the penalty was ‘automatically calculated through electronic means,’ sec. 6751(b)(2)(B), as the plain text of the statutory exception requires.

The court goes on to say that this conclusion is consistent with the description of the imposition of a penalty in this situation as described in the Internal Revenue Manual and the context in which the statutory exception appears in IRC 6751. Computer generated penalties do not raise the concerns that caused Congress to enact IRC 6751 because no one is imposing them in order to influence to taxpayer to accept the liability or otherwise to coerce an outcome. The court stated that if the penalty imposed under these circumstances fails to meet the statutory exception it is difficult to imagine a penalty that would meet the exception.

The court noted that its conclusion in this precedential opinion was consistent with unpublished orders that it had issued in recent years. Another reason for paying attention to those orders.

The result here makes perfect sense. The IRS did not impose this penalty as a bargaining chip. The court provides a detailed analysis for its decision. Perhaps the only thing surprising about the opinion is that a precedential opinion on this issue did not previously exist. Although petitioners did nothing to advance their argument that the exception should not apply, their failure did not create the result in this case.

The decision here was the first of several precedential IRC 6751 opinions issues in the first few months of the year as the court continues to answer the questions raised by this unusual statute. We will cover all of the opinions in the coming days.

Five Things to Know About FedEx and the Tax Court

Today Bob Kamman explores FedEx issues in Tax Court and brings us several interesting findings. The bottom line for practitioners (as always) is to be aware of the jurisdictional perils that await those who cut it close without carefully checking the list of designated private delivery services. Christine

Inspired by Keith Fogg’s post about the Tax Court petition that could not be delivered by FedEx during the January 2019 government shutdown, I searched recent Tax Court orders for similar cases. Here are five things I learned.

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1) You can’t always trust word searches on the Tax Court website.

I searched for orders with the word “FedEx” from October 1, 2018 through May 28, 2019.  The search returned three hits.  Then I searched for “FedEx” from April 30, 2019 through May 28, 2019.  That search returned ten hits.  So I searched for “FedEx” from only November 1 through December 31, 2018.  That search returned five hits, none of which were in my first search.

My conclusion, or at least hypothesis, is that the search “times out” after a certain number of orders are searched.  Results will be more accurate if done by month, rather than for longer periods. 

2) The case described in Keith’s post is not unique.

In the Awad case, in response to an earlier order the Court writes

The petition, filed January 30, 2019, arrived at the Court in an envelope with a FedEx ship date of January 29, 2019. . . . petitioners indicated that the petition was originally mailed to the Tax Court on January 16, 2019, (2) petitioners provided respondent a copy of the envelope in which the petition was originally sent to the Tax Court on January 16, 2019, a copy of which was attached to the Response, and (3) petitioners also provided respondent a copy of the envelope in which the petition was returned to them, a copy of which was attached to the Response.

It is not clear whether the first attempt was through the U.S. Postal Service, or through FedEx.

And then there is the unfortunate petitioner in Chicas, whose deadline for filing was December 31, 2018 – a date the government was closed.  He used UPS Ground to send his petition on January 3, 2019.  It was returned by UPS, and he sent it again by UPS Ground on February 22, 2019.  He was late the first time, and UPS Ground is not an acceptable service anyway. 

3) IRS does not always question jurisdiction.  Sometimes it needs help from the Tax Court.

That is what happened in Powerhouse Mortgage Corporation.  In dismissing the case on November 29, 2018,  Judge Foley explained,

Attached to the petition was a notice of determination concerning collection action dated July 17, 2018 . . .The petition had been received by the Court in an envelope sent by FedEx Express Standard Overnight and bearing a ship date of August 17, 2018. An answer to the petition followed on October 9, 2018, but did not address jurisdictional matters. Nonetheless, because review of the record suggested a fundamental jurisdictional defect, the Court by Order dated October 12, 2018, directed the parties, on or before November 2, 2018, to show cause in writing why this case should not be dismissed for lack of jurisdiction, . . .Shortly thereafter and in lieu of a response, respondent on October 17, 2018, filed a Motion To Dismiss for Lack of Jurisdiction on the identical ground of an untimely petition.. . .petitioner was afforded additional time, until November 9, 2018, to object to respondent’s motion as well. 

The petitioner did not respond, and the motion to dismiss was granted.

See also Jones, dismissed by Judge Foley on December 3, 2018.  IRS didn’t notice that the petitioners not only were late, but used the wrong FedEx service.  However, the Court did:

The petition in the above-docketed proceeding was filed on September 4, 2018. Therein, petitioners alleged dispute with a notice of deficiency dated June 1, 2018, issued with respect to the 2015 and 2016 taxable years. The petition had been received by the Court in an envelope sent by FedEx Express Saver and bearing a ship date of September 1, 2018. Unexpectedly, respondent thereafter on September 21, 2018, filed an answer to the petition, not addressing the matter of timeliness.

Nonetheless, because review of the record continued to suggest a fundamental jurisdictional defect, the Court at that juncture issued an Order To Show Cause dated October 24, 2018, directing the parties to show cause in writing why this case should not be dismissed for lack of jurisdiction, on the ground that the petition was not filed within the time prescribed by section 6213(a) or 7502. . . . In particular, the Order To Show Cause noted, first, that the date of the notice of deficiency underlying this proceeding indicated a statutory deadline for filing a petition pursuant to section 6213(a) . . .that expired on August 30, 2018, and, second, that FedEx Express Saver is not a designated private delivery service for purposes of the section 7502 . . . timely mailing provisions.

Substantially the same facts have also led Judge Foley to request both parties in Rodriguez to explain by June 11 why the case should not be dismissed when FedEx Express Saver was used and the petition was not received by the required date.  This May 22, 2019 order is somewhat confusing because it states the FedEx envelope “reflects a ship date of August 25, 2019.

I am sure that will be cleared up in later proceedings.  Maybe it was just another FedEx mistake, as happened in Muramota.  In that case, the petition was “in an envelope indicating that the petition was received and processed by FedEx on May 15, 2018, for delivery by FedEx 2-day mail.”  But when Judge Thornton questioned jurisdiction, because the last date to petition was May 14, 2018, “the parties are in agreement that the petition was delivered to FedEx on May 14, 2018, as evidenced by a receipt provided by petitioners’ counsel, and the petition was therefore timely mailed.”  A stipulated decision was entered the same day.

4) Petitioners continue to use FedEx services that do not qualify for “timely mailed” recognition.

Judge Foley’s four-page order of February 25, 2019,  dismissing the Thompson case explains why FedEx Express Saver service is not a qualified “private delivery service.”  The petitioners had noted that they followed the instructions on the second page of their Notice of Deficiency, which apparently did not explain “private delivery service” limitations.  I looked at a couple Notices of Deficiency from 2018 and did not find a reference to private delivery services on them. 

Similar language was used by Judge Foley in his four-page order of February 4, 2019, dismissing Griffiths.

5) The Tax Court uses FedEx also.

When it absolutely positively has to get there faster than the Postal Service can deliver, or when there may be other benefits, the Tax Court uses FedEx to contact Petitioners.  (It probably gets a discounted government rate.)  

For example, in McPhee,  “On May 7, 2019, the Court was informed of an unsuccessful delivery attempt by FedEx of the Notice of Change of Beginning Date of Session, served on petitioners on May 1, 2019. Petitioners subsequently advised the Court that their address has changed. . . .”

Designated Orders: Whether to Set Items Aside and Denied Motions for Summary Judgment (4/15/19 to 4/19/19)

This week brought a series of five designated orders. The subjects include Collection Due Process, Notices of Federal Tax Lien, settlements agreements, innocent spouse analysis, and denied motions for summary judgment.

Setting Aside a Notice of Federal Tax Lien?
Docket No. 3402-18 L, Esteban Baeza v. C.I.R., Order & Decision available here.

This case concerns Collection Due Process (CDP) for a notice of federal tax lien for years 2012 to 2015.

Mr. Baeza’s issues for 2012 are quickly dealt with. For 2012, Mr. Baeza filed an amended tax return that took care of his liability and resulted in a tax refund. The lien has been released so the IRS moved that the case be dismissed for that year on grounds of mootness. Mr. Baeza did not object so the Court granted that motion.

For years 2013 to 2015, Mr. Baeza had liabilities for those years and eventually entered into an installment agreement concerning the three years. However, the IRS machinery was already working and days before he entered into the installment agreement, they sent him a Notice of Federal Tax Lien, showing liabilities totaling about $58,000 for the three years. It is presumed he did not have that notice before entering into the installment agreement.

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Mr. Baeza’s representative sent a form 12153 to the IRS, requesting a Collection Due Process hearing. The form requested withdrawal of the lien because of the installment agreement. There was no dispute of the liability or proposal of collection alternative (beyond the installment agreement in place). The argument was that the lien was improper due to the pending installment agreement.

IRS Appeals determined that all required legal procedures were followed in filing the notice of federal tax lien. The notice of determination had an attachment explaining why withdrawal was not appropriate.

The IRS filed a motion for summary judgment but Mr. Baeza did not respond. Because it is reasonable the IRS filed a notice of lien in order to protect its ability to collect in the event Mr. Baeza fails to fulfill the terms of the installment agreement and Mr. Baeza also did not provide arguments against that filing, Judge Gustafson granted the motion for summary judgment concerning tax years 2013 to 2015.

Takeaway: The notice of federal tax lien filing is routine for the IRS in collection cases, even when a taxpayer sets up an installment agreement. As the standard of review in Tax Court for these CDP cases is abuse of discretion by the IRS, the petitioner will need to actually make an argument concerning an abusive IRS practice in order to overcome the IRS motion for summary judgment.

Setting Aside a Signed Settlement?
Docket No. 27486-16, Edward Roberson & Connie Roberson v. C.I.R., Order and Decision available here.

The IRS sent the Robersons a notice of deficiency for 2011 and 2012 and Mr. Roberson a notice of deficiency for 2013 and 2014. The Robersons timely petitioned the Tax Court for a redetermination of both notices of deficiency. The IRS eventually amended its answer to assert Schedule C gross receipts for 2014.

The case was calendared for trial and called on November 5, 2018. After the case was called but before trial, the parties submitted a signed stipulation of settlement. The parties agreed in the stipulation that Mr. Robersons’ 2014 Schedule C gross receipts were $108,717 and gross expenses were $30,616. Counsel for both parties signed the stipulation. The Court gave the parties until January 7, 2019, to submit a decision reflecting the stipulation.

In November 2018, the IRS mailed the Robersons a proposed decision reflecting the stipulation for all years at issue. The IRS returned to work on January 28, 2019, (following the government shutdown) and found the Robersons had not signed the decision. They informed the IRS they would not sign the proposed decision.

The IRS filed a motion, asking the Court to enter a decision pursuant to the stipulation of settlement. The Robersons responded to the motion with new calculations adjusting the 2014 Schedule C gross receipts from $108,717 to $68,019 and gross expenses from $30,616 to $55,268, with penalties and interest adjusted accordingly.

Judge Buch analyzed the situation, stating that the claim of an error in the stipulation does not relieve the Robersons from responsibility for signing the stipulation. The Court may modify or set aside a stipulation that is clearly contrary to the facts, but does not set aside a stipulation consistent with the record simply because one party claims the stipulation is erroneous. They may grant relief if a party asserts contractual defenses, but a unilateral mistake of fact in a binding, unambiguous stipulation is not a ground for relief.

In this case, the Robersons did not present contractual defenses. They raised the issue of the error only after entering into the stipulation. Their unilateral mistake (if there is one) is not grounds to set aside a contract. The Court is unlikely to grant relief from a stipulation entered into after considerable negotiation. The Robersons note that the stipulation was following a “take-it-or-leave-it” offer by the IRS. Judge Buch points out the Robersons and their counsel were on notice of the IRS amended answer so all parties signed the stipulation long after being aware of what was at issue and had ability to go to trial. The judge was reluctant to relieve the petitioners from a stipulation after already entering into the stipulation with full knowledge of the relevant facts, so granted the IRS motion for entry of decision.

Takeaway: This case details the difficulties to avoid signing a decision after signing a stipulation. The stipulation will generally bind the parties and the judge detailed the few exceptions. One should expect to sign the decision after signing a stipulation in a Tax Court case.

Innocent Spouse Analysis
Docket No. 5680-18S, Elaine S. Thomas, Petitioner, & Robert Roy Thomas, Intervenor, v. C.I.R., Order (bench decision) available here.

The petitioner and intervenor married in 1987 and divorced in 2016. The parties filed a joint tax return in 2012 and had a liability for that year of $5,551, which the parties stipulate was due to the intervenor.

The petitioner had filed for innocent spouse relief for that year, which was denied by the IRS, and filed a subsequent petition to Tax Court concerning that decision and the intervenor filed to be a party to the Tax Court case.
Judge Carluzzo agrees with much of the analysis and conclusions in the IRS pretrial memorandum and comments on the areas of disagreement. First, the judge finds that petitioner did not know, or have reason to know, that the intervenor would not pay the unpaid liability shown on the return. The judge considers the factor neutral, rather than weighing against relief, as the IRS categorized it.

In the marital separation agreement, both former spouses agreed to split the IRS liability. The judge weighs this factor against granting relief, though the IRS categorized it as neutral.

The judge notes that he arrived at the same score of factors as the IRS – one in favor, one (possibly two) against relief, and the rest neutral – but the analysis is not simply mathematical.

The judge details what influenced him concerning the case. He is particularly influenced by petitioner’s agreement to pay half the 2012 liability. Next, by the decision of the spouses to pay other expenses than the 2012 income tax liability as they had the resources to pay the liability but chose to save or allocate funds for other purposes. Finally, that the liability is mostly, or entirely, due to intervenor.

Giving effect to the marital settlement agreement, the judge sees no reason why it is inequitable to hold the parties liable for their shares of the debt. The decision is then to provide innocent spouse relief to petitioner regarding the excess of one-half of the unpaid 2012 federal income tax liability reported on the 2012 tax return. Essentially, each of the former spouses is liable for one-half of the tax debt, reflecting their marital settlement agreement.

Takeaway: As noted, innocent spouse relief is not a mathematical decision concerning what is in one column or another. The judge will consider the facts and circumstances to determine what will weigh heaviest concerning relief.

Denied IRS Motions for Summary Judgment
1. Docket No. 19146-18 L, Jason E. Shepherd v. C.I.R., Order available here.
In this Collection Due Process case before Tax Court, Petitioner filed for review of a Notice of Federal Tax Lien concerning unpaid employment taxes and trust fund penalties concerning unpaid employment taxes quarterly periods from 9/2010 through 12/2011. The IRS filed a motion for summary judgment and Petitioner opposed the motion by asserting challenges to material facts.

Of note for trust fund penalties is that a Letter 1153 must either be personally served on the responsible person or sent by certified mail to the responsible person’s last known address. In the record on the IRS’s motion there is no copy of a Letter 1153 or any proof that it was either personally served on the petitioner or sent by certified mail to his last known address. Since the record did not prove that the Appeals Officer verified all applicable laws or administrative procedures were met concerning the assessment of the section 6672 penalties, Judge Leyden denied the IRS motion for summary judgment without prejudice.

2. Docket No. 1781-14, John Edward Barrington & Deanna Barrie Barrington v. C.I.R., Order available here.

The petitioners have previously been convicted for tax evasion based on guilty pleas – John Barrington for tax year 2005 and Deanna Barrington for tax years 2003 through 2005. The Court granted in part and denied in part an IRS Motion for Partial Summary Judgment through its order dated June 19, 2015. The order held the IRS was entitled to summary judgment so far as the petitioners fraudulently failed to file tax returns. The order denied the request to the extent the IRS sought to collaterally estop the petitioners from contesting they failed to report certain amounts of income for the years at issue and further collaterally estop John Barrington from contesting he fraudulently failed to file tax returns for tax years 2003 and 2004.

The IRS filed a new Motion for Summary Judgment on February 22, 2019. This motion included several of the same arguments and factual assertions as before, but now includes the argument that John Barrington made “judicial admissions” at a hearing held December 17, 2018 (with those admissions eliminating the need for trial). IRS Counsel cites his statements of “…I’m not arguing the fraud amount” and “…cannot argue the fraud on it, which we’re not.”

Judge Panuthos reviewed the 28 page transcript and did not come to the conclusion that John Barrington made a clear, deliberate and unequivocal factual assertion relating to the issue of fraudulent failing to file federal income tax returns for tax years 2003 and 2004. Since there is a dispute as to material fact, the Court denied the IRS’s motion.

Takeaway: These look to be times the IRS either tried to rush procedure or believed there was no dispute as to material fact and lost regarding motions for summary judgment.