Ninth Circuit Holds Reg. Validly Overrules Case Law; Disallows Parol Evidence of Timely Mailing

In Baldwin v. United States, 2019 U.S. App. LEXIS 11036 (9th Cir. April 16, 2019), in a case of first impression in the appellate courts, the Ninth Circuit has held that a 2011 regulation under section 7502 is valid under the deference rules of Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), and Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967 (2005), and therefore it invalidates all prior case law in some Circuits (including the Ninth) holding that the common law mailbox rule can be used to prove the IRS’ timely receipt of a document by parol evidence. The Circuit reversed the district court and directed it to dismiss the case because the only evidence offered of timely mailing of a Form 1040X refund claim was the testimony of the Baldwins’ employees that they remember timely posting the envelope containing the claim by regular mail months before the claim was due – evidence that is only relevant if the common law mailbox rule still exists in the tax law. I blogged on Baldwin before the oral argument here.

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Facts

Baldwin is a tax refund suit. There, the taxpayers reported a loss on their 2007 income tax return, filed on or before the extended due date of October 15, 2008. They wished to file an amended return for 2005, carrying back the 2007 loss to generate a refund in 2005. Under section 6511(d), this had to be done by filing the amended return within three years of the due date of the return generating the loss – i.e., by October 15, 2011. The taxpayers introduced testimony of their employees that the employees mailed the 2005 amended return by regular mail on June 21, 2011 from a Hartford Post Office to the Andover Service Center. But, the IRS claimed it never received the Form 1040X.

The California district court followed Anderson v. United States, 966 F.2d 487 (9th Cir. 1992), in which the Ninth Circuit had held that the enactment of section 7502 in 1954 did not eliminate the common law mailbox rule and still allowed taxpayers to prove by parol evidence that a document not sent by registered or certified mail or a designated private delivery service was actually mailed and so was presumed to have been received by the IRS prior to the due date. The district court credited the testimony of the employees and held that the refund claim was timely filed. The court later awarded the taxpayers a refund of roughly $167,000 and litigation costs of roughly $25,000.

The DOJ appealed the loss to the Ninth Circuit, where it argued that the suit should have been dismissed because the refund claim was not timely filed. The DOJ argued that in August 2011, the IRS adopted a regulation intended to overrule some Circuit court opinions (including Anderson) that had held that the common law mailbox rule still survived the enactment of section 7502. At least one other Circuit had agreed with Anderson; Estate of Wood v. Commissioner, 909 F.2d 1155 (8th Cir. 1990); but several other Circuits had disagreed and held that the common law mailbox rule did not survive the enactment of section 7502. See Miller v. United States, 784 F.2d 728 (6th Cir. 1986)Deutsch v. Commissioner, 599 F.2d 44 (2d Cir. 1979)See also Sorrentino v. Internal Revenue Service, 383 F.3d 1187 (10th Cir. 2004) (carving out a middle position).

As amended by T.D. 9543 at 76 Fed. Reg. 52,561-52,563 (Aug. 23, 2011), Reg. § 301.7502-1(e)(2)(i) provides, in relevant part:

Other than direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a duly designated [private delivery service] . . . are the exclusive means to establish prima facie evidence of delivery of a document to the agency, officer, or office with which the document is required to be filed. No other evidence of a postmark or of mailing will be prima facie evidence of delivery or raise a presumption that the document was delivered.

Ninth Circuit Opinion

The Ninth Circuit began its analysis with a little history: Prior to 1954, there was no timely-mailing-is-timely-filing provision in the Internal Revenue Code. That meant that the only way to timely file a document was for it to arrive at the IRS on or before the due date. At common law, there is a presumption that a properly-mailed envelope will arrive in the ordinary time for mail to go between its origin and destination. At common law, a party could bring in any evidence (including testimony) to show that the envelope likely arrived at the IRS on or before the due date.

In 1954, Congress added section 7502 to the Code. We all think of it as a provision that allows a mailing made on or before the due date to be treated as timely filed, whether or not the IRS receives the document on, before, or after the due date. But, that is not an accurate summary of the provision. In fact, subsection (a) provides, in general, that if a document is delivered to the IRS by the United States mail after the due date, then the date of the United States postmark on the envelope is deemed to be the date of delivery (i.e., filing). Other rules extend the benefits of subsection (a) to designated private delivery services and electronic filing, but only pursuant to regulations. However, subsection (c) also includes a presumption of delivery that applies in the case of use of certified or registered mail: If an envelope is sent certified or registered mail, then (1) the certification or registration is prima facie evidence that the envelope was delivered to the place to which it was addressed and (2) the date of registration or certification is deemed the date of the postmark for purposes of subsection (a).

In Anderson, the Ninth Circuit had held that subsection (c)’s presumption of delivery language (and the regulations thereunder) did not supplant the common law way to prove delivery on or before the due date. Rather, subsection (c) provided only a safe harbor for proof of delivery if certified or registered mail was used. Where ordinary mail was used, there was no statutory provision presuming or denying proof of delivery, so the common law mailbox rule could still operate to allow proof of timely mailing by any evidence.

In Baldwin, the Ninth Circuit noted that under Chevron Step 2, a court must defer to an agency’s interpretation in a regulation if that interpretation is one of the reasonable ways an ambiguous statute could be interpreted. And in Brand X, the Supreme Court held that, unless an appellate court opinion had said that the statute was unambiguous (and therefore Chevron Step 1 would deny any regulatory input), an agency could issue valid regulations overruling that appellate precedent.

In the case of the 2011 regulation under section 7502, the Ninth Circuit in Baldwin held that an interpretation that section 7502 completely supplanted the common law mailbox rule was one of the reasonable interpretations of that statute and that the Ninth Circuit had not, in its Anderson opinion, rested its holding on the unambiguous nature of section 7502’s language. Therefore, under Chevron and Brand X, the regulation barring the use of the common law mailbox rule was valid.

The taxpayers had two arguments that the Ninth Circuit quickly dismissed:

First, the taxpayers argued that there is a rule of construction that makes repeal of common law rules by statute not to be easily implied. With respect to this argument, the Ninth Circuit noted a contrary rule of construction (one that other Circuits had relied on) that when a statute speaks on an issue and makes an exception, that statutory exception eliminates all nonstatutory exceptions. The Ninth Circuit held that the subsection (c) rules presuming delivery in the case of certified or registered mail could benefit by the latter interpretive rule. Thus, these countervailing statutory rules of construction could lead to two different reasonable interpretations of the statute.

Second, the taxpayers argued that the regulation was improperly being applied retroactively, since they had claimed that they mailed the envelope in June 2011, but the regulation was only adopted in August 2011. But, the Ninth Circuit pointed out that the regulation was effective for all documents mailed after September 21, 2004 (the date the regulation was first proposed), and the court did not find that such retroactive effective date violated section 7805(b)(1)(B), which allows the IRS to make its regulations retroactive to the date they are first proposed.

Observations

Several Supreme Court Justices have recently criticized Chevron and Brand X. It is interesting that Judge Watford, who wrote the Baldwin opinion, only predicated the panel’s ruling for the IRS on the basis of reliance on those two opinions. What, then, happens if Chevron and Brand X are overruled? Will the Ninth Circuit’s precedent then revert to Anderson, which allows use of the common law mailbox rule?

Judge Watford also seems to be deliberately vague in his opinion as to the ground on which the district court should dismiss the case on remand. He does not say the dismissal should be for lack of jurisdiction (FRCP 12(b)(1)) or for failure to state a claim (FRCP 12(b)(6)). It would not much matter in this case whether the section 6511 filing deadline were jurisdictional or not, but it might matter in a future case (e.g., one where there was an argument for waiver, forfeiture, or estoppel, but not equitable tolling (see United States v. Brockamp, 519 U.S. 347 (1997) (holding the deadline not subject to equitable tolling, but not discussing whether the deadline is jurisdictional)). Indeed, Judge Watford’s Baldwin opinion really relies on section 7422(a), which requires the filing of a refund claim before a refund suit may be maintained. The opinion states that section 7422(a) also requires a timely claim. In fact, Judge Watford only writes:

The Baldwins then brought this action against the United States in the district court. Although the doctrine of sovereign immunity would ordinarily bar such a suit, the United States has waived its immunity from suit by allowing a taxpayer to file a civil action to recover “any internal-revenue tax alleged to have been erroneously or illegally assessed or collected.” 28 U.S.C. § 1346(a)(1). Under the Internal Revenue Code (IRC), though, no such action may be maintained in any court “until a claim for refund or credit has been duly filed” with the IRS, in accordance with IRS regulations. 26 U.S.C. § 7422(a); see United States v. Dalm, 494 U.S. 596, 609 (1990). To be “duly filed,” a claim for refund must be filed within the time limit set by law. Yuen v. United States, 825 F.2d 244, 245 (9th Cir. 1987) (per curiam).

Judge Watford is the author of the opinion in Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015), which we blogged on here and where I was amicus. In that opinion, he held that the then-9-month filing deadline to bring a wrongful levy suit in district court is not jurisdictional and is subject to equitable tolling under recent Supreme Court case law making filing deadlines now only rarely jurisdictional. Note that his language above from Baldwin does not mention the word “jurisdictional” with regard to section 7422(a)’s requirement. Judge Watford may not be wanting to say that section 7422(a)’s administrative exhaustion requirement is jurisdictional, rather than a nonjurisdictional mandatory claims processing rule possibly subject to waiver, forfeiture, or estoppel. It is true that in Dalm (which he cites only with a “see”), the Supreme Court called the requirements of sections 7422(a) and 6511 jurisdictional with respect to a refund suit, but the reasoning of Dalm does not accord with current Supreme Court case law. In 2016, the Seventh Circuit questioned whether Dalm is still good law, though it did not reach the question, writing:

The Gillespies do not respond to the government’s renewed argument that § 7422(a) is jurisdictional, though we note that the Supreme Court’s most recent discussion of § 7422(a) does not describe it in this manner, see Unites States v. Clintwood Elkhorn Mining Co., 553 U.S. 1, 4-5, 11-12 (2008). And other recent decisions by the Court construe similar prerequisites as claims-processing rules rather than jurisdictional requirements, see, e.g., United States v. Kwai Fun Wong, 135 S. Ct. 1625, 1632-33 (2015) (concluding that administrative exhaustion requirement of Federal Tort Claims Act is not jurisdictional); Reed Elsevier, Inc. v. Muchnick, 559 U.S. 154, 157 (2010) (concluding that Copyright Act’s registration requirement is not jurisdictional); Arbaugh v. Y&H Corp., 546 U.S. 500, 504 (2006) (concluding that statutory minimum of 50 workers for employer to be subject to Title VII of Civil Rights Act of 1964 is not jurisdictional). These developments may cast doubt on the line of cases suggesting that § 7422(a) is jurisdictional. See, e.g., United States v. Dalm, 494 U.S. 596, 601-02 (1990).

Gillespie v. United States, 670 Fed. Appx. 393, 394-395 (7th Cir. 2016) (some citations omitted). It was this passage from Gillespie that the DOJ cited as grounds for its need to file a post-oral argument memorandum of law in Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017), arguing that the section 6213(a) Tax Court deficiency petition filing deadline is jurisdictional and not subject to waiver. The DOJ won that argument in that case, but it is currently before the Ninth Circuit on the issues of jurisdictional and equitable tolling in companion cases on which we previously blogged here.

IRS’s “Trust Me, it Wasn’t Yours” Defense Doesn’t Fly, Designated Orders 3/11 – 3/15/2019

There were only two orders designated during the week of March 11. The most interesting of the two contains the quote from where the title of this post originates and is potentially a step in the right direction for the whistleblower petitioner. The second order (here) was a bench opinion for an individual non-filer.

In Docket No. 101-18W, Richard G. Saffire, Jr. v. C.I.R. (order here), Judge Armen is not impressed with IRS’s dodgy behavior. The IRS objected to petitioner’s previously filed motion to compel the production of documents, so petitioner is back before the Court with a reply countering that objection. Based on the iteration of what parties have agreed upon and what the record has established, it seems as though the IRS dropped the ball while reviewing petitioner’s whistleblower claim.

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Petitioner is a retired CPA from New York and his whistleblower claim involved an investment company (the target taxpayer), a related entity (the advisor) and allegations of an improperly claimed tax exempt status. The claim was received in January of 2012. After it was submitted, but before it was formally acknowledged, petitioner also met with IRS’s Criminal Investigation Division.

In June 2012, the IRS determined that the claim met the procedural requirements under section 7623(b) and the ball was then passed to the IRS’s compliance function to determine whether the IRS should proceed with an exam or investigation.

In August two attorneys from IRS’s counsel’s office in the Tax Exempt and Government Entities (TEGE) Division, as well as a revenue agent from the TEGE Division, held a lengthy conference call with petitioner at the IRS’s request. According to petitioner, none of the IRS employees acted as though they had heard about the target taxpayer, its advisor, or issues raised by the claim previously. After the call, the IRS requested additional information which petitioner provided at the beginning of September 2012.

A technical review of the claim was completed at the end of September 2012, and the ball was again passed, this time to an IRS operating division for field assignment.

This is where the ball was apparently dropped as far as the claim itself was concerned. For five years petitioner did not receive any concrete information about the claim other than the fact that it was still open, but during that time petitioner learned from public information sources that a large amount of money was collected from the target taxpayer and that the SEC collected more than $1 million from the advisor.

Then in September 2017 petitioner received a preliminary denial letter followed by a final determination denying the claim because the IRS stated the issues raised by petitioner were identified in an ongoing exam prior to receiving petitioner’s information, petitioner’s information did not substantially contribute to the actions taken and there were no changes in the IRS approach to the issue after reviewing petitioner’s information.

Petitioner petitioned the Court. Three months later the Court granted the parties’ joint motion for a protective order allowing respondent to disclose returns, return information and taxpayer return information (as defined in section 6103(b)(1), (2) and (3)) related to the claim.  

Then petitioner requested the administrative file and five categories of documents related to the case. The IRS provided the administrative file, but it was heavily redacted and a large portion of the unredacted parts consisted of copies of the petitioner’s submission. IRS Counsel also sent information on three of the five categories, but it said that two of the categories of documents (regarding the exam of the target taxpayer and its advisor and communications between the IRS and SEC) were outside the scope of the administrative file, irrelevant to the instant litigation and were protected third-party information under section 6103.

IRS acknowledges that section 6103(h)(4)(B) permits disclosure in a Federal judicial proceeding if the treatment of an item on a taxpayer’s return is directly related to the resolution of an issue in the proceeding.

This is where the IRS’s “trust me- it wasn’t yours” defense comes into play. The IRS says the information does not bear on the issue of whether petitioner is entitled to an award because respondent did not use any of petitioner’s information. In other words, the IRS refuses to show the petitioner what information it used to investigate and collect from the target taxpayer, because it wasn’t the petitioner’s information that was used. The IRS also argues that the petitioner’s request is overbroad and unduly burdensome.

The Court finds this explanation insufficient and grants petitioner’s motion to compel discovery (with some limitations) finding that most of the documents that petitioner requests are directly relevant to deciding whether petitioner is entitled to a whistleblower award, and therefore, discoverable. The Court suggests that the information petitioner requests should be disclosed pursuant to section 6103(h)(4)(B). The Court allows respondent to redact some information (mainly, identifying information about the alleged second referral source), but orders respondent to provide an individual and specific basis for each redaction.

It’s a little odd that IRS has been so reluctant to provide the petitioner with information, but it doesn’t necessarily suggest that the reason is because petitioner is in fact entitled to an award. Now that the Court has intervened, hopefully the information will provide petitioner with a satisfactory answer as to why the IRS denied his award. 

Seeking Attorney’s Fees for Violation of Automatic Stay

What does a court do when the statute requires exhaustion of administrative remedies before a grant of attorney’s fees and the administrative agency (here the IRS) guides people to perform an impossible act in order to seek to exhaust administrative remedies?  That was the issue facing the bankruptcy court in Langston v. Internal Revenue Service, Case No. 17-10236-B-13 (Bankr. E.D. Cal. 2019).  In the end, the court denied the request for attorney’s fees because of precedent in the 9th Circuit but the courts are split on the issue and the IRS is about a decade behind in updating its guidance to the public on how to make an administrative request to fix a problem it creates by violating the automatic stay. Outdated language referencing the non-existent “Chief, Local Insolvency Unit” role remains in the current version of the CFR.

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Mr. Langston is a retired federal employee who also owed federal taxes.  I don’t think he is the only retired federal employee with this issue, but the government especially wants individuals to whom it is paying a pension to pay their taxes.  So, it has a program for taking from their pension payments to satisfy the outstanding tax debt.  The program is a perfectly legitimate method for the IRS to collect past due taxes except when used while the automatic stay comes into effect.  That’s what caused the problem here.

Mr. Langston and his wife filed a Chapter 13 bankruptcy case in January 2017.  The bankruptcy court notified the IRS within two weeks of the filing and the IRS filed a proof of claim one week thereafter.  So, it is indisputable that the IRS knew about the automatic stay.  Normal procedures would have had it input a code into its computer system almost immediately after learning of the case.  Here, it is not the IRS specifically that took the action violating the stay.  The agency taking from his pension and sending the money to the IRS was the Office of Personnel Management (OPM).  It could well be that the debt offset indicator arrived at the OPM before the bankruptcy case and there was a delay in that office in taking action.  It is also possible that there was a delay at the IRS getting information about the stay to OPM or a delay at OPM in putting the stay into its system.  The bankruptcy court does not go into the details of how the problem occurred and it really does not matter in the resolution of the case, but it should matter to the IRS and OPM so that a system exists to immediately notify OPM of the stay and for OPM to immediately put the stay into its system. 

For undescribed reasons, OPM sent to Mr. Langston a letter he received in early April saying that it would withhold a part of his pension to satisfy the outstanding federal tax debt. OPM withheld almost $400 a month for four months starting in April 2017.  The Langstons’ bankruptcy lawyer filed an adversary proceeding in May 2017 after informally trying to convince the IRS to stop taking the money.  Their representative did not seek to formally stop the taking of the pension funds prior to bringing the suit.  The IRS eventually gave back all of the money taken by OPM.  In responding to the complaint which undoubtedly included a request for monetary damages, the IRS would have pointed out that the Langstons did not first try to resolve the problem administratively.  Apparently, in doing so the IRS informed the Langstons that they were supposed to send a request to the “Chief, Local Insolvency Unit” of their district.

A few reorganizations ago, there existed in every IRS district (also a thing of the past) an insolvency unit that handled bankruptcy cases and a few other related proceedings.  Most of the IRS bankruptcy function was centralized some time ago, and local offices no longer had someone with the title “Chief, Local Insolvency Unit.”  Of course, if you weren’t following the staffing flows of the IRS, you would have no easy way of knowing this and that was the problem the Langstons faced in trying to make their administrative request for relief.  Here’s what the court said about it:

Then, Langstons’ counsel tried without success to find the right “Chief, Local Insolvency Unit” to receive an administrative claim. Many web searches and even formal discovery was met with no identified “Chief, Local Insolvency Unit.” Exasperated, Langstons’ counsel sent the administrative claim addressed to “Chief, Local Insolvency Unit” to every IRS office located within this district. The IRS admitted in discovery that to their knowledge no employee retains the title of “Chief Local Insolvency Unit” after the IRS reorganized in 2010. The IRS instead referred debtors’ counsel to a listing of “Collection Advisory Groups.” The IRS did respond after receiving debtor’s administrative claim noting they were referring it to the “Local Insolvency Unit.” But the IRS did not name a “Chief” of that unit. And so, it goes.

The Langstons could not show they had actual damages from the taking of $400 of his pension for four months.  Of course, they did incur attorney’s fees as their attorney tried to get the IRS to stop taking their money.  So, they sought attorney’s fees even though they were not entitled to damages.  The IRS fought the payment of attorney’s fees stating:

… [the] court does not yet have subject matter jurisdiction to decide the attorney’s fees issue because the debtors filed this adversary proceeding before filing an administrative claim with the IRS. They reason that their waiver of sovereign immunity under § 106(a)(1) for attorney’s fees claims stemming from automatic stay violations is conditioned upon a debtor’s compliance with 26 U.S.C. §§ 7430 and 7433 and the applicable regulations before filing suit. Counsel for the United States noted in oral argument that the Plaintiffs have now complied with the exhaustion requirement because they filed the administrative claim, albeit at the wrong time and that more than six months have passed with no action by the IRS. 26 C.F.R 301-7433-2(d)(ii).

The debtors must have wondered, “Wait a minute, how could we file an administrative claim prior to filing suit when your instructions told us to file the claim with someone who does not exist?”  Seems like a reasonable question to ask.

The IRS responded with two arguments.  First, it argued

“all that is required to satisfy the plain language of the regulation is that a writing be sent to ‘Chief, Local Insolvency Unit’,” the actual existence of an individual with that title being immaterial for compliance. 

[Keep that in mind because this is not the only place where the title in the regulations or other IRS guidance does not match the actual lineup at the IRS. Of course, the IRS did not say where the taxpayers should mail this letter and that could become an issue in a future case.]

Second, the IRS argued that the debtors’ reliance on Hunsaker v. United States, 902 F.3d 963, 968 (9th Cir. 2018) was misplaced.  Les blogged the district court opinion in Hunsaker here and the bankruptcy court opinion here.  We did not blog the 9th Circuit’s opinion in Hunsaker, in which it reversed the district court and determined that the bankruptcy code did waive sovereign immunity to obtain damages for emotional distress.  The IRS argued that the Langstons’ reliance on the 9th Circuit opinion was misplaced because Hunsaker did not address the situation where the only issue involved attorney’s fees.  It determined that there was a waiver for emotional damages, but here that issue does not exist.

The bankruptcy court looked at the litigation on this issue around the country and found that courts are split over the sovereign immunity argument.  Focusing on 9th Circuit jurisprudence, it found a 1992 opinion, Conforte v. United States, 979 F.2d 1375, 1377 (9th Cir. 1992) (almost all cases involving Conforte are worth reading if you enjoy cases with lurid details) holding that debtors must exhaust administrative remedies in order to receive attorney’s fees.  So, on the legal aspect of the IRS argument, the court finds that the IRS is correct in the precedent controlling it.

Then the court addressed the factual issue of whether the debtors did try to exhaust administrative remedies despite the barriers imposed by the IRS.  It stated:

In none of the cases previously discussed have the courts examined this issue raised by Plaintiffs — that complying with the statute is impossible. The courts either found that the taxpayer made no attempt (see Swensen v. United States (In re Swensen), 438 B.R. 195, 198 (Bankr. N.D. Iowa 2010); In re Rae v. United States, 436 B.R. 266, 275 (Bankr. D. Conn. 2010); Kight v. Dep’t of Treasury/IRS (In re Kight), 460 B.R. 555, 566 (Bankr. M.D. Fla. 2011)), or found that the taxpayer’s attempt was deficient for a number of reasons (see Klauer v. United States (In re Klauer), 23 Fla. L. Weekly Fed. D 153, at *11-14 (M.D. Fla. 2007); Don Johnson Motors, Inc. v. United States, 532 F. Supp. 2d 844, 883 (S.D. Tex. 2007); McIver v. United States, 650 F. Supp. 2d 587, 593 (N.D. Tex. 2009); Barcelos v. United States (In re Barcelos), 576 B.R. 854, 857-58 (Bankr. E.D. Cal. 2017); Galvez v. IRS, 448 F. App’x 880, 886 (11th Cir. 2011); Kuhl v. United States, 467 F.3d 145, 148 (2d Cir. 2006); In re Lowthorp, 332 B.R. 656, 659-61 (Bankr. M.D. Fla. 2005)), but no court addressed whether compliance was possible because the tax-payer was required to send the documents to a person that did not exist, nor was that argument ever raised.

Because the debtors’ original and amended complaint did not allege that they exhausted their administrative remedies, the court ultimately concludes that it cannot award attorney’s fees.  But it does not stop there.  Before dismissing the case without prejudice, it finds that

Plaintiff actually did send such a notice but after the lawsuit was filed. The IRS now admits Plaintiffs have complied and could proceed with another action for attorney’s fees.

I do not know if that means we should stay tuned for the second suit for attorney’s fees or that the Langstons can get fees if the IRS does not adequately resolve the matter.  In any event, it’s clear that the law here is not clear.  It’s also clear that the IRS paints itself into a corner when it asks people to do the impossible. 

Another Return Preparer Fails to Take Advantage of Special Time for Filing Refund Suit under 6694

Carl wrote last summer about a 9th Circuit case in which a return preparer failed to take advantage of the special rule for filing a refund suit under IRC 6694.  Les wrote about the same issue last winter.  As a result of failing to take advantage of the special path to contesting a refund claim under IRC 6694, the return preparers in the cases described by Carl and Les fell back into the full payment rule of Flora which we have discussed at some length in earlier posts such as the ones here and here

Now another 6694 case has come to the same sad ending where the return preparer paid the 15% which would have triggered the exception to the Flora rule, but did not file the complaint timely, resulting in a dismissal with a remonstration to fully pay the tax before coming back to have the court take a look at the merits.  The return preparer in Riter v. United States, No. 2:17-cv-01265 (D. Utah March 15, 2019) did not give up easily.  He made arguments challenging the Flora rule and requesting equitable tolling, but he lost all of his arguments.  The case points out once again the somewhat tricky exception to Flora created by IRC 6694 (also created in IRC 6703) and the carefully prescribed steps a penalized return preparer must take to comply.  The existence of three cases with the same problem in one year points out that the perceived benefit of the Flora exception in IRC 6694 can be somewhat illusory unless you follow the precise steps Congress set out for this section alone.  While it’s worth asking why Congress created a unique path to refund litigation for one section, these cases show why it’s not worth litigating the issue to ask the court to answer that question.

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Mr. Riter may be a subscriber to this blog because he makes an equitable tolling argument not made in the prior two cases mentioned above.  Before getting to his argument and the court’s response, here is the succinct statement of the facts set out in the magistrate judge’s report:

In this case, on June 27, 2016, the United States assessed Mr. Riter penalties under 26 U.S.C. § 6694(b) for tax years 2010 through 2014 in the amount of $5,000 for each year, or a combined total of $25,000. (Compl., ¶ 13, ECF No. 2.) In compliance with § 6694(c)(1), Mr. Riter, on July 22, 2016, filed a claim for refund and paid $750, or 15% of the total penalty, for each tax year, totaling $3,750 for the five tax years. (Id., ¶ 15.) However, Mr. Riter did not satisfy the prerequisites of § 6694(c)(2). That provision required Mr. Riter to file his lawsuit by the earlier of either (1) thirty days after the United Sates denied his refund claim, or (2) thirty days after six months from the date he filed his refund claim. The United States denied Mr. Riter’s refund claim on November 16, 2017. (Id., ¶ 26.) Thirty days after this date is December 16, 2017. Mr. Riter filed his refund claim on July 22, 2016. Thirty days after six months from July 22, 2016 is February 27, 2017. February 27, 2017 is clearly the earlier of the two dates. However, Mr. Riter did not file this lawsuit seeking a refund of the penalties until December 8, 2017, (see id.), well beyond the February 27, 2017 deadline to do so. After February 27, 2017, the 15% limited exception to the full payment rule “cease[d] to apply with respect to such penalty,” meaning that the full payment rule applied after that time. 26 U.S.C. § 6694(c)(2). However, Mr. Riter admits he paid only 15% of the penalties, (see Compl., ¶ 15, ECF No. 2), thereby conceding he did not comply § 1346(a)(1) and Flora’s full payment requirement.

If not before then certainly by the time the IRS filed its motion to dismiss for lack of jurisdiction, Mr. Riter knew that he had not followed the very precise rules required to satisfy the exception to the Flora rule available in IRC 6694.  In order to move his case forward, he did not argue that he complied with the IRC 6694 provisions, but instead argued that they were claims processing rules rather than a jurisdictional requirement.  He cited to United States v. Wong, 575 U.S. __, 135 S. Ct. 1625, 1632 (2015), arguing that because IRC 6694 does not use the word jurisdictional, the court has the ability to determine that his late performance of the requirements of IRC 6694 could be excused under the principle of equitable tolling.

Responding to this argument, the magistrate judge stated:

…as the United States points out, Wong involved a failure to comply with the Federal Tort Claims Act statute of limitations, and § 6694(c) is not a statute of limitations similar to the one at issue in Wong. (Reply in Supp. of Pl.’s Mem. in Opp’n to United States’ Mot. to Dismiss for Lack of Subject Matter Jurisdiction 4, ECF No. 12.) Significantly, Mr. Riter does not cite to any case law finding that § 6694(c) or the nearly identical § 6703(c) constitute merely claims processing rules.

The fact that 6694 is in the Internal Revenue Code and not the Federal Tort Claims Act should not control the outcome, nor should the fact that no one had previously successfully argued the claims processing issue.  The specificity of the statute and the fact that Congress knew it was creating an exception to a jurisdictional rule support the court’s conclusion.  I am troubled by the court’s view of the statement that Congress must make about jurisdiction.  It stated “If the Supreme Court considers § 6694(c) a claims processing rule and not jurisdictional, it will need to state as much explicitly before a lower court can make such a finding.”  This reverses the normal rule which requires Congress to make it clear a provision is jurisdictional and not make it clear that one is not.  The court gets to this twist because it views the law as well established that Flora is a jurisdictional requirement and sees 6694 as an exception to that requirement.

Going beyond the claim processing issue, Mr. Riter does not appear to have offered the court much, if any, reason that he missed the statutory time periods.  For his argument to succeed, assuming he were to get past the jurisdictional issue, he still must show the court why it should give him relief.  Just saying a statute is a claims processing rule does not win the day.  Someone who misses the deadline for a claims processing rule must still demonstrate a reason why they deserve relief.  He does not seem to have done this.

In losing, Mr. Riter shows that he learned from the earlier cases and made arguments attacking the standard interpretation of the statute.  Unfortunately, his argument was unsuccessful, perhaps because he did not have the facts to support the equitable tolling.  The case reminds us again of the care required from individuals assessed a penalty under IRC 6694 or 6703 if they wish to contest the penalty without fully paying it.

Qualified Offers for Wealthy Taxpayers, Looking Behind the Notice of Determination, and Unlawful Levies in CDP – Designated Orders: March 4 – 8, 2019

This week brings five designated orders (technically six, but Judge Gale’s two orders granting Respondent’s motion to dismiss for lack of prosecution in Maldonado are practically identical). I analyze three cases below. In the other case, Judge Guy granted Respondent’s motion to dismiss for lack of jurisdiction in a deficiency case.

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Docket Nos. 10346-10, 28718-10, 5991-11, Metz v. C.I.R. (Order Here)

Judge Holmes returns, as last time, to a motion for administrative and litigation costs under section 7430. The underlying decision was released last year (T.C. Memo. 2015-54) and the parties agreed recently to the precise deficiencies, leaving only this issue outstanding.

Thankfully, none of the TEFRA difficulties that plagued us last time are present today. Judge Holmes also notes that no dispute exists regarding whether a “qualified offer” was made, or whether that amount exceeded the deficiencies actually determined for 2004 and 2005. He also notes that, while taxpayers must exhaust their administrative remedies to claim fees under 7430, Respondent never raised that argument except for 2008 and 2009.

Instead, the net worth requirement under IRC § 7430(c)(4)(A)(ii) bedevils the Court this time. It is ultimately fatal to a claim for fees on any of the tax years. The net worth requirement applies equally to ordinary claims for fees and also to claims premised upon a qualified offer.

 Section 7430 itself contains no explicit net worth requirement, but references the general federal fee shifting statute under 28 U.S.C. § 2412. That statute defines a “party” eligible for fee shifting as “an individual whose net worth did not exceed $2,000,000” or “any owner of an unincorporated business, or any partnership, corporation, association, unit of local government, or organization, the net worth of which did not exceed $7,000,000 at the time the civil action was filed.” 28 U.S.C. § 2412(d)(2)(B).

So, to win fees, Petitioners must be “an individual whose net worth did not exceed $2,000,000 at the time the civil action was filed” or meet the separate $7 million requirement for businesses, if it applies. Petitioners declared in their motion for costs that, at the time of filing the petition, their collective net worth was between $2 million and $4 million.

What limit applies to taxpayers filing a joint federal income tax return? Section 7430(c)(4)(D)(ii) states that “individuals filing a joint return shall be treated as separate individuals for purposes of [the net worth requirement].”  As it turns out, however, there’s much more to the story than meets the eye.

The first question, then, is what limits apply to Petitioners? Petitioners argued that Mrs. Metz was entitled to a $7 million limit, because she was an owner of an S corporation, not the general $2 million limit for individuals. Judge Holmes quickly dispatches this argument; it is the partnership, corporation, or other entity itself that must petition for costs under 7430 to be subject to the $7 million limit. While an “owner of an unincorporated business”, such as a sole proprietorship, could qualify as an individual, Mrs. Metz’s S corporation was incorporated.

But even accepting that the $2 million limit applies, do Petitioners really get a $4 million limit? A prior case, Hong v. C.I.R., holds that the net worth requirement isn’t violated if each spouse, individually, has a net worth below $2 million, but a joint net worth above $2 million. What if one spouse has $3 million and the other $500,000? Does one qualify, but not the other?

Turns out, this is a tricky issue. Hong was decided before Congress inserted section 743)(c)(4)(D)(ii) into the Code. And after Hong, Treasury issued a regulation attempting to overrule it. 26 C.F.R. § 7430(f)(1), T.D. 8542, 1994-29 I.R.B. 14. (“individuals filing a joint return shall be treated as 1 taxpayer.”) Unhelpfully, that regulation only concerned itself with administrative costs, rather than litigation costs. But in 1997, Congress passed the provision in 7430(c)(4)(D)(ii) that treats taxpayers separately. Treasury didn’t get around to conforming the regulation to the statute until 2016; Judge Holmes notes that Petitioners aren’t attempting to rely on this latter regulation, either.  Judge Holmes further questions whether Congress in 1997 attempted to adopt Hong, or simply decided to adopt an aggregate $4 million cap; the latter is supported by a direct quote in the legislative history, which the 2016 regulation adopted.

So, Judge Holmes ends up raising a litany of questions that, while interesting, are somewhat irrelevant to resolution of this case. He finds that the current regulation (applying a $4 million joint net worth limit) didn’t apply when these cases were filed. The old regulation doesn’t apply, because Congress overrode it in 1997 in some respect. And because Hong hasn’t been overruled andit finds a separate $2 million per person net worth requirement, Judge Holmes must defer to that decision. (Judge Holmes also notes that legislative history indicating a preference for a $4 million joint asset requirement cannot override Hong.) As such, he holds that Petitioners have a $2 million net worth requirement each.

Next, Judge Holmes must decide whether Petitioners’ assets exceed the $2 million limit, looking at each Petitioner individually. What counts in the “Net Worth” definition? Congress included more non-statutory language in the legislative history stating that “[i]n determining the value of assets, the cost of acquisition rather than fair market value should be used.” But that’s just non-binding legislative history right?

Both the Ninth Circuit and the Tax Court have issued precedential decisions applying a cost of acquisition value, consistent with the legislative history, rather than a fair market value. United States v. 88.88 Acres of Land, 907 F.2d 106, 107 (9th Cir. 1990); Swanson v. C.I.R., 106 T.C. 76, 96 (1996). So while the legislative history might not be binding, the Tax Court’s own precedent, and the Ninth Circuit’s precedent under the Golsen rule, surely is. 

I will spare readers the level of detail into which Judge Holmes delves to value the Metz’s assets. Suffice to say, Petitioners suffered heavy losses that substantially reduced the fair market value of their assets, to a level where both Petitioners would likely have satisfied the net worth requirement. Under a cost of acquisition valuation (which does allow for certain deductions from the cost alone, such as depreciation), however, both Petitioners have over $4 million in assets each.

Judge Holmes indicates a discomfort with this result as a policy matter, concluding:

There is also an old saw uncertainly attributed to Ambrose Bierce that defines stare decisis as “a legal doctrine according to which a mistake once committed must be repeated until the end of time.”

But because the Tax Court must defer to its precedent, Judge Holmes denies the motion for costs due to Petitioners’ failure to meet the net worth requirements.

As an aside, this case may also represent the first judicial shout-out to the Designated Orders crew. Judge Holmes, in defining the law applicable to Petitioners during the relevant time, notes:

We happily leave the herculean chore of cleaning this stall to any tax proceduralists whose interest in the field is strong enough to impel them to read our nonprecedential orders. But we need do only a quick hosedown.

I’m not sure how I feel about our blog series being compared to intense equine waste management. But as they say, all press is good press.

Docket No. 388-18L, Ansley v. C.I.R. (Order Here)

Judge Urda issued his first designated order in Ansley, and it contains quite the message to Respondent’s counsel.

Respondent filed a motion for summary judgment in this CDP case back in November. In the meantime, the parties held a conference call. Among other items, Petitioner alleged that Respondent levied his Social Security income while his Tax Court case was ongoing. Indeed, Petitioner provided a letter from Respondent’s counsel admitting that the Service had levied Petitioner’s Social Security from February 2018 until November 2018 (totaling nearly $2,200) to satisfy one of the years at issue in the Tax Court case. The letter also noted that the Service eventually issued Petitioner a refund last December.

This is a problem for Respondent, as section 6330(e)(1) prohibits levies after a CDP request is filed in response to a notice of intent to levy. The Service’s conduct here seems fairly egregious; the case was filed in July 2017 in the Tax Court. And because no motion to dismiss for lack of jurisdiction was filed, presumably the CDP request was timely submitted long before this point. The record is unclear on whether the underlying case was in Automated Collection Systems or with a Revenue Officer. So either the Service’s computers were not properly coded or the RO made an egregious error. 

On a closer look, however, we can understand how this could happen. Originally, Petitioner filed a letter on June 5, 2017 with the Tax Court, which the Court docketed at 12702-17L as an imperfect petition for tax years 2012, 2013, and 2014. But the Service hadn’t yet issued a Notice of Determination for those years. So, Respondent filed a motion to dismiss for lack of jurisdiction, which the Court granted on January 10, 2018.

However, in that same order, the Court noted that Petitioner had submitted another letter on July 24, 2017—after the Notice of Determination was issued. As the Tax Court received that letter within 30 days of the Notice of Determination, the Court—in January 2018—filed the letter as a new petition, docketed at 388-18, relating back to the letter’s date, July 24, 2017.

Levies started soon thereafter in February 2018.  One potential explanation is that the Service’s computers simply saw that the levy prohibition from docket 12702-17L had been removed. And because of the unorthodox way in which the new levy prohibition in docket 388-18L arose, they didn’t pick it up. Another could be that the Notice of Determination was listed in Petitioner’s 2012 account transcript as having been issued on September 26, 2017—not July 18, 2017, as it actually was. So perhaps the Service never picked up that a Petition was filed in the first place. The Court and Respondent’s counsel believe that the first explanation is correct, as explained in this order. Respondent’s counsel further assured Judge Urda that this unlawful levy was an “isolated error.”

However, Petitioner sent the Court another set of documents late this February, which included a levy notice for 2012, 2013, and 2014, dated May 18, 2018 to Petitioner’s employer—a separate levy from the Social Security levy previously disclosed.

To sort this out, Judge Urda orders (1) that Respondent may not levy on Petitioner for 2012 through 2014 while this case is pending; (2) that Respondent’s counsel file Petitioner’s Account Transcripts for 2012 through 2014 with the Court; and (3) that Respondent file a status report clarifying a number of uncertainties remaining in this matter, including when Respondent’s counsel first knew that a levy notice was sent to Petitioner’s employer. On March 18, Respondent’s counsel filed a reply. Unfortunately, I cannot access the reply’s text without traveling to Washington, D.C. or shelling out 50 cents per page for a copy of the reply.

Docket No. 9671-18L, Denton v. C.I.R. (Order Here)

Finally, another CDP case, this time from Judge Gustafson. Here, Respondent filed a motion to dismiss for lack of jurisdiction as to the two tax years at issue: 2005 and 2015. Judge Gustafson dismissed 2015; that year just came out of IRS Appeals on a Notice of Determination—long after the petition in this case was filed. Judge Gustafson advised Petitioners to file a new petition should he wish to litigate that year.

For 2005, the Service both issued a notice of intent to levy and filed a notice of federal tax lien. For the levy, Respondent argued the Court lacked jurisdiction because Petitioners did not timely request a CDP hearing. Specifically, Respondent stated that it issued the notice on February 5, 2009, making any CDP request due on March 9, 2009. Also in the record was an envelope from Petitioner to the Service dated March 18, 2009. On this evidence alone, Respondent’s argument seems strong.

But complicatedly for Respondent, they acknowledge that a CDP hearing occurred during 2017 and 2018, and that both 2005 and 2015 were considered. The Service then issued a “Notice of Determination” listing 2005 in May 2018. That’s quite a delay from when the Notice of Intent to Levy was purportedly issued.

Delay or not, Judge Gustafson notes that ordinarily, the Tax Court does not look behind a Notice of Determination based on “facts regarding procedures that were followed prior to the issuance of the notice of determination rather than on the notice of determination itself.” Lunsford v. C.I.R., 117 T.C. 159, 163 (2016). If that’s true, then the Court could, Judge Gustafson suggests, have jurisdiction over 2005. He necessarily implies, therefore, that that is so, even where the Service presents evidence indicating that the CDP hearing request itself was untimely. Therefore, Judge Gustafson denied the motion without prejudice as to 2005.

The Service also filed a NFTL for 2005, which by its terms required a response by April 2, 2009. The Court notes that evidence of a CDP request exists in the envelope dated March 18, 2009, so it’s not clear from the record that no request was filed. The Court also dismissed Respondent’s alternative argument that the lien self-released 10 years after filing. While true, taxpayers may request collection alternatives or other relief in response to a NFTL through a CDP hearing. Because the record was unclear on those points, Judge Gustafson likewise denied the motion to dismiss as to the 2005 lien hearing.

Congress Set to Enact Only Now-Unneeded Innocent Spouse Fixes, Part 2

This is the second part of a two-part post on innocent spouse legislative changes proposed to be made in the Taxpayer First Act of 2019. 

This part of the post discusses the bill’s proposed change that would override an existing IRS regulation that provides for a 2-year limit for filing a request for innocent spouse relief under section 6015(f).  Of course, the IRS has long ago abandoned enforcing that regulation limit and has issued proposed regulations that follow the proposed statutory amendment.  So, this provision is essentially unnecessary, unless you don’t trust the IRS to stick with the position that it has now maintained since 2011. 

This part of the post also details three other proposed changes to the innocent spouse section that Nina Olson has previously sought, but that, sadly, are not included in the bill.

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Background on 2-Year Rule

For a spouse to elect relief under subsection (b) or (c), the statute requires that an election be made no later than 2 years after the IRS commences collection activities. Subsection (f) equitable relief applies only if relief is not available under the other 2 subsections, but the subsection (f) contains no provision for a date by which relief under it must be requested.

In a 2002 regulation (Reg. sec. 1.6015-5(b)(1)), the IRS provided that a request for subsection (f) relief must be made no later than the same 2-year deadline applicable to elections for relief under subsections (b) or (c).

In Additional Legislative Recommendation #1 of her 2006 Annual Report to Congress, at Vol. I, pp. 540-541, Nina Olson first recommend that Congress amend subsection (f) to provide that a taxpayer may request relief thereunder at any time that the collection statute of limitations is open.

Then, in Lantz v. Commissioner, 132 T.C. 131 (2009) (en banc), the Tax Court held that Congress had deliberately spoken by its silence in not providing for a statute of limitations for requesting relief under subsection (f), and, therefore, the regulation was invalid.  

The IRS appealed Lantz and similar Tax Court rulings that followed it to various Circuits. Three Circuits promptly disagreed with the Tax Court and held that the regulation was valid.  Lantz v. Commissioner, 607 F.3d 479 (7th Cir. 2010); Mannella v. Commissioner, 631 F.3d 115 (3d Cir. 2011); Jones v. Commissioner, 642 F.3d 459 (4th Cir. 2011).

Information provided to Congress by Ms. Olson in early 2011 provoked letters from Congress to the Commissioner in April 2011 asking the IRS to withdraw its regulation under subsection (f) as not in accordance with Congressional intent.

A few weeks after those letters, I had a chat with Ms. Olson in the hallway at the May 2011 ABA Tax Section meeting.  She told me that the IRS was worried that if there was no 2-year limit, then taxpayers would forever request relief under subsection (f).  I told Ms. Olson that this was not a real concern, since taxpayers would only request relief from balances due while the collection statute of limitations under section 6502 was still open and would seek refunds only while the statute of limitations for refunds under section 6511 was still open.  I told her that the situation was analogous to that for people seeking relief from penalties under section 6404(f) on account of erroneous IRS written advice. I pointed out to her that there is a regulation under section 6404(f) (Reg. sec. 301.6404-3(e)) that provides: 

An abatement of any penalty or addition to tax pursuant to section 6404(f) and this section shall be allowed only if the request for abatement described in paragraph (d) of this section is submitted within the period allowed for collection of such penalty or addition to tax, or, if the penalty or addition to tax has been paid, the period allowed for claiming a credit or refund of such penalty or addition to tax.

I suggested that such section 6404(f) regulation could be modified for a replacement section 6015(f) regulation. To my embarrassment, minutes later, in a speech she gave to the whole Tax Section, she thanked me for “solving” the Service’s Lantz regulation repeal concern.

Christine and I represented a taxpayer in a Lantz-type case, Ms. Coulter, in the Second Circuit.  After oral argument there (held the day after the Fourth Circuit opinion was filed in Jones), it appeared that the Second Circuit intended to affirm the Tax Court and create a Circuit split.  However, the Second Circuit never ruled in the Coulter case because, in July 2011, the IRS issued Notice 2011-70, 2011-2 C.B. 135, stating that the IRS would no longer argue for any 2-year limit for requesting relief under subsection (f).  The Notice stated: 

Individuals may request equitable relief under section 6015(f) after the date of this notice without regard to when the first collection activity was taken.  Requests must be filed within the period of limitation on collection in section 6502 or, for any credit or refund of tax, within the period of limitation in section 6511.

In 2013, the IRS issued proposed regulations that would incorporate the filing deadlines set out in Notice 2011-70.  REG-132251-11, 2013-2 C.B. 191.  However, those proposed regulations have not yet been finalized.

Proposed Statutory Language on 2-Year Rule Repeal

Despite the legislation probably no longer being needed, section 1203(a)(2) of the Taxpayer First Act of 2019 would amend section 6015(f) to add a new paragraph (2) reading as follows:

(2) LIMITATION. — A request for equitable relief under this subsection may be made with respect to any portion of any liability that —

(A) has not been paid, provided that such request is made before the expiration of the applicable period of limitation under section 6502, or

(B) has been paid, provided that such request is made during the period in which the individual could submit a timely claim for refund or credit of such payment.

Other Needed Statutory Fixes Not Adopted

In prior posts here and here, I have noted that Ms. Olson has also requested that Congress amend section 6015 to:

  1. Make the subsection (e) filing deadline nonjurisdictional and subject to equitable exceptions. NTA 2017 Annual Report to Congress, Legislative Recommendation #3, at Vol. I, pp. 283-292.  This change would result in the overruling of three recent opinions where employees of the IRS accidentally misled taxpayers into filing late by telling the taxpayers the wrong date for the 90th day.  In the cases (where the Harvard clinic was counsel for the taxpayers), the taxpayers argued that the subsection (e) filing deadline is not jurisdictional and is subject to estoppel and equitable tolling.  The appeals courts all held that the filing deadline is jurisdictional, so cannot be subject to equitable exceptions.  Rubel v. Commissioner, 856 F.3d 301 (3d Cir. 2017); Matuszak v. Commissioner, 862 F.3d 192 (2d Cir. 2017); and Nauflett v. Commissioner, 892 F.3d 649 (4th Cir. 2018).
  2. Clarify that section 6015 relief can be raised in district court collection suits brought by the DOJ. NTA 2007 Annual Report to Congress, Additional Legislative Recommendation #3, at Vol. I, pp. 549-550.  This change would overrule a number of district court opinions that have held that they lack jurisdiction to give section 6015 relief in such suits.  See, e.g., United States v. Elman, 110 AFTR 2d 2012-6993 (N.D. Ill. 2012); United States v. LeBeau, 109 AFTR 2d 2012-1369 (S.D. Cal. 2012), and United States v. Stein, 116 AFTR 2d 2015-6504 (W.D. Ky. 2015) 
  3. Clarify that section 6015 relief can be raised in district court and Court of Federal Claims refund suits brought by taxpayers. NTA 2018 Annual Report to Congress, Legislative Recommendation #4, at Vol. I, pp. 387-391.  This change would overrule the district court magistrate’s opinion in Chandler v. United States, 2018 U.S. Dist. LEXIS 174482 (N.D. Tex. 2018), adopted by district court at 2018 U.S. Dist. LEXIS 173880 (N.D. Tex. 2018), which held that district courts lack jurisdiction to consider section 6015 relief in tax refund suits.

It is unfortunate that these more urgent fixes to the statute have been ignored.  I wonder, though, if the reason that these additional proposals have been ignored is that they are opposed by the IRS, but the changes proposed for the Taxpayer First Act of 2019 have not been so opposed (because, really, not changing current IRS practice)?  It would be unfortunate if the Congress is giving the IRS veto power over good ideas to amend section 6015.

Congress Set to Enact Only Now-Unneeded Innocent Spouse Fixes, Part 1

Sometimes, Congress drives me batty.  Its latest silliness is proposing to resolve legislatively two formerly-contested issues under the section 6015 innocent spouse provisions in the taxpayer-favorable ways that the courts and the IRS already had settled those issues many years ago.  

Section 1203 of the new Taxpayer First Act of 2019, as introduced in both houses, proposes to modify section 6015 in two ways: (1) It would codify judicial holdings that reviews of IRS determinations of equitable relief under subsection (f) are de novo as to scope and standard, and (2) It would amend subsection (f) to codify the IRS notice from 2011 that allows essentially unlimited time to request relief — effectively overruling the 2-year limit for requesting such relief contained in Reg. Sec. 1.6015-1(b)(5).  These are proposals that Nina Olson had long ago sought in prior annual reports to Congress (in 2011 and 2006, respectively). The House bill, H.R. 1957, was marked up in the Ways & Means Committee on April 2.  The Senate bill, S. 928, has been introduced by Senator Grassley, the Chair of the Finance Committee, but has not yet been marked up.

Sadly, however, the Taxpayer First Act of 2019 will not also amend section 6015, as Nina Olson has also asked in her annual reports, (1) to make the subsection (e) filing deadline nonjurisdictional and subject to equitable exceptions and (2) to clarify that section 6015 relief can be raised in district court collection suits brought by the DOJ and in district court and Court of Federal Claims refund suits brought by taxpayers. The latter changes would actually modify current case law.

In this first of a two-part post, I will only discuss the scope and standard of review modification.

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Background on Trial Scope and Standard

I apologize to older PT readers who vividly recall the battles described below, but since many of the events happened a decade ago, younger PT readers may be unaware of the battles and the number of en banc Tax Court opinions that formed parts of those battles.  Below is my own description of the background, but you can also find the Joint Committee on Taxation’s description of the background at “Description of H.R. 1957, The ‘Taxpayer First Act of 2019’”, JCX-15-19 (Apr. 1, 2019).

Shortly after the section 6015 innocent spouse provision was enacted in 1998, the courts wrestled with the issue of what is the standard of judicial review under the equitable relief subsection, (f). While the courts and the IRS readily agreed that the standard of judicial review of determinations under subsections (b) and (c) is de novo, the courts decided that the standard of judicial review of determinations under subsection (f) is abuse of discretion. See, e.g., Cheshire v. Commissioner, 282 F.3d 326, 338 (5th Cir. 2002) (in which section 6015(b), (c), and (f) relief were raised as defenses in a Tax Court deficiency proceeding brought under section 6123(a)).  

There was also litigation over whether the Tax Court, in a stand-alone innocent spouse proceeding brought under section 6015(e), had jurisdiction to rule on subsection (f) relief and, if so, was the court limited to reviewing the administrative record, or did it do a trial de novo in which any relevant evidence could be introduced?

In Ewing v. Commissioner, 118 T.C. 494, 498-507 (2002) (en banc), the Tax Court held that it had jurisdiction to decide subsection (f) relief in a proceeding involving relief sought from an underpayment brought under subsection (e).  In a later opinion in the case, the Tax Court also held that the scope of such a proceeding under (f) was the same as that under subsections (b) and (c) — a trial de novo as to evidence — even though the standard of review under subsection (f) was abuse of discretion. 122 T.C. 32 (2004) (en banc).

Ewing was vacated by the Ninth Circuit because that court held that the Tax Court lacked jurisdiction to make subsection (f) determinations in subsection (e) stand-alone proceedings. 439 F.3d 1009 (9th Cir. 2006). Almost immediately thereafter, the Eighth Circuit agreed with the Ninth Circuit; Bartman v. Commissioner, 446 F.3d 785 (8th Cir. 2006); and the Tax Court reversed course on the jurisdictional question and decided to follow those appellate rulings. Billings v. Commissioner, 127 T.C. 7 (2006) (en banc).

In response, in December 2006, Congress amended subsection (e) to explicitly give the Tax Court jurisdiction to consider subsection (f) relief in stand-alone proceedings.

Thereafter, in Porter v. Commissioner (Porter I), 130 T.C. 115 (2008) (en banc), the Tax Court again held that relief under subsection (f) in a proceeding under subsection (e) was to be determined after a trial de novo as to evidence. And, the following year, in Porter v. Commissioner (Porter II), 132 T.C. 203 (2009) (en banc), the Tax Court held that, when Congress amended the statute in 2006, Congress also intended that henceforward the standard of judicial review under subsection (f) — whether in subsection (e) or deficiency proceedings — should be de novo.

The IRS challenged the rulings of both Porter I and II, not by appealing that case, but by appealing rulings in two other cases. However, in Commissioner v. Neal, 557 F.3d 1262 (11th Cir. 2009), relying on the reasoning of Porter I, the Eleventh Circuit held that a proceeding under subsection (e) concerning relief under subsection (f) should be de novo as to evidence admitted. (In Neal, which was argued before the Tax Court decided Porter II, the parties and the court continued to assume that the standard of review in such cases was for abuse of discretion.  See, id., at 1276.)  

And, in Wilson v. Commissioner, 705 F.3d 980 (9th Cir. 2013), the Ninth Circuit both (1) agreed with the Eleventh Circuit in Neal and the Tax Court in Porter I and held that the scope of review of determinations under subsection (f) was now de novo and (2) agreed with the Tax Court in Porter II that the standard of review was also de novo.

In 2011, Nina Olson asked Congress to amend section 6015 to codify the rulings in Porter I and IINTA 2011Annual Report to Congress, Legislative Recommendation #4, at Vol. I, pp. 533-536.

In 2013, the IRS announced that it would no longer contest the rulings in Porter I and II.  Notice CC-2013-011, Litigating Cases that Involve Claims for Relief from Joint and Several Liability Under Section 6015 (June 7, 2013).

However, just “to eliminate any ambiguity and preclude future changes in the IRS’s litigating position”, Nina Olson has continued to call for a legislative codification of the Porter I and II rulings — most recently in her Purple Book accompanying her 2018 Annual Report to Congress, pp. 91-92.

Proposed Statutory Language on Trial Scope and Standard

Section 1203(a)(1) of the Taxpayer First Act of 2019 would amend section 6015(e) to add at the end thereof a new paragraph (7) reading as follows:

(7) STANDARD AND SCOPE OF REVIEW. — Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon —

(A) the administrative record established at the time of the determination, and

(B) any additional newly discovered or previously unavailable evidence.

Tax Court Holds Power of Attorney Form Inadequate to Change a Taxpayer’s Address

In a precedential opinion in the case of Gregory v. Commissioner, 152 T.C. No. 7 (2019), the Tax Court has held that sending a power of attorney (POA) form to the IRS with a new address for the taxpayer does not put the IRS on notice with respect to the change of address such that it must use that address in corresponding with the taxpayer in a notice required to be sent to the taxpayer’s last known address. Bryan Camp has a nice write up of the case on the Tax Prof blog if you want an expanded take on the case and you have an interest in knowing how Bryan met his wife.

Before going into an explanation of the basis for the Court’s opinion and why it issued a precedential opinion on this issue, I found it worth noting what was not discussed in this case. Since it was not discussed, I do not know why and would welcome comments from any reader who might know. Because the issue in the case is whether the POA form can change a taxpayer’s address, I would guess that a valid POA existed at the time the notice of deficiency at issue in this case was mailed. If a valid POA existed at the time of the issuance of the notice, why didn’t the POA receive the notice in time to file the Tax Court petition?

The IRS position is that its failure to send a copy of the notice of deficiency to the POA does not invalidate the notice and does not save the taxpayer who files late. See IRM 4.8.9.11.4 (providing that notice may be invalid if not mailed to last known address of taxpayer or if not mailed by certified or registered mail) and IRM 4.8.9.11.2 (providing that copies of the notice are sent to the POA via regular mail). Here, it is not clear if there was a valid POA at the time of the notice, if the POA was timely notified or if the IRS failed to send a copy to the POA. If a POA existed and the IRS timely sent a copy to the POA, maybe this was really a case seeking to protect the POA from exposure. If a POA existed and the IRS did not send a timely notice to the POA, I am surprised that the taxpayer did not at least make an argument regarding that failure. If the notice were a notice of determination in a CDP case, IRC 6304 might come into play if the IRS failed to timely notice the POA. See IRC 6304(a)(2); but cf. Bletsas v. Commissioner, T.C. Memo 2018-128 (2018) (rejecting taxpayer’s argument that IRC 6304 required the IRS to mail a notice of lien to her POA).

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The Gregorys filed their return for 2014 after they moved from Jersey City, New Jersey to Rutherford, New Jersey in 2015; however, on the 2014 return they put their Jersey City address. The opinion did not provide an explanation for why they did this but right off the bat they have created a problem for themselves. During the course of the examination, the Gregorys submitted two POAs to the IRS and each POA listed their new address in Rutherford. During the examination, they also filed a request for extension of time to file their 2015 return and that request also listed their Rutherford address. When the IRS issued the notice of deficiency on October 13, 2016, it had not yet received their 2015 return and it had not received a formal change of address notification from the Gregorys.

The IRS sent the SNOD to Jersey City. The Gregorys did not receive it until after 90 days had run. They filed their Tax Court petition immediately upon receipt of the SNOD. The IRS moved to dismiss the petition as untimely. Both parties agreed it was untimely and that the Tax Court case became one that would decide whether the notice was sent to their last known address and not one which would determine the merits.

The Court here relies on the statute, the regulations under the statute and the Rev. Proc. promulgated in furtherance of the regulations. Bryan Camp’s post does an excellent job walking through those provisions and I will not duplicate it here. The result of the application of the statute, the reg and the Rev. Proc., as well as the language on the POA form and the application for extension form, is that these forms are not returns. Putting a new address on these forms does not provide the type of notice requiring the IRS to adjust its records. Because the POA form and the application for extension form do not require the IRS to adjust its record of a taxpayer’s address, the sending of the SNOD to the Jersey City address met the statutory requirement of sending the notice to the taxpayer’s last known address. Since it met that requirement, the SNOD provided a valid basis for the IRS to assess the liability shown thereon. The taxpayers can still litigate about the underlying liability. They must fully pay first and file a refund claim in order to litigate the issue through the refund process. Alternatively, since they did not receive the SNOD, they can litigate the merits in a Collection Due Process case once the IRS sends notice of intent to levy or files a notice of federal tax lien. Depending on whether a copy of the SNOD was timely sent to a representative, they may find their representative anxious to assist them in obtaining an opportunity to litigate the merits.

The decision here suggests to practitioners that they should take the opportunity of sending in a POA to review the client’s last known address and the practitioner should consider including with the POA a formal notice of the change of address where appropriate.

The case does not address the situation of conversations with the IRS. When I speak with someone at the IRS and I am confirming my ability to represent the taxpayer, I frequently get quizzed about the POA. One part of the quiz is the taxpayer information. If the POA does not contain the taxpayer’s phone number, I get quizzed about their phone number and sometimes about their address. If a representative talks to a human at the IRS about the taxpayer’s address on a POA, I wonder if that might change the outcome here. The issue of last known address has many permutations. In the book Effectively Representing Your Client before the IRS an entire chapter is devoted to this topic. No one wants to be relying on a last known address argument but this issue comes up with frequency.