Things That Happen to Your Tax Court Case When You File Bankruptcy or Your Judge Retires: Designated Orders, June 17 – 21

There were six designated orders for the week of June 17 – 21, of which three are worth going into detail on. The remaining three orders can be found here, here, and here. The orders that will be addressed raise some interesting issues with the interplay of bankruptcy and collection due process cases, as well as what happens when the judge that heard your case retires before rendering a decision.

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Does Dismissing a Collection Due Process Case Violate the Automatic Stay of Bankruptcy? Betters v. C.I.R., Docket # 8386-17L (here)

One of the most powerful provisions in the bankruptcy code is the automatic stay at 11 U.S.C. 362. Violating the stay can lead to claims (whether successful or not) of damages and attorney’s fees against the IRS (as Keith blogged here). The automatic stay essentially gives whomever files bankruptcy some “breathing room” from creditors while sorting things out by pausing (or preventing) most collection actions (see Keith’s post on the effect of the automatic stay and a notice of federal tax lien, here). One specific thing that the automatic stay touches is “the commencement or continuation of a proceeding before the United States Tax Court […] concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order of relief” through the bankruptcy court. See 11 U.S.C. 362(a)(8). 

In the order above, the taxpayer filed his Tax Court petition in response to a Collection Due Process determination (that presumably would have upheld a levy action). People who have unpaid taxes frequently have other unpaid debts, and a few years later while the case was still pending in Tax Court the taxpayer filed a petition with the U.S. Bankruptcy Court. Now the taxpayer wants to get out of Tax Court and just deal with the whole thing in Bankruptcy Court. And the IRS has no objection to going that route.

The question is whether the Tax Court can dismiss the case without violating the stay, even if both parties want that result. The answer, according to Chief Special Trial Judge Carluzzo, hinges on the application of Settles v. C.I.R., 138 T.C. 372 (2012). Both the IRS and the petitioner say that Settles applies, such that the case can be dismissed. Judge Carluzzo, however, disagrees.

In Settles, the taxpayer had a collection case he wanted dismissed, while he had a bankruptcy case with a stay still in effect. The Tax Court allowed the voluntary dismissal of the case. The one (big) difference: in Settles the bankruptcy court had already adjudicated the merits of the tax liabilities, and all that was left were non-tax creditors. And that difference is enough for Judge Carluzzo to say that no voluntary dismissal is presently allowed: if you want to dismiss the case, take it up with the bankruptcy court to have them modify the stay.  

So even though the parties want it dismissed, Judge Carluzzo’s hands are tied. I’d note in passing that if the case were a deficiency proceeding, and not a collection action, the option of voluntary dismissal would be more obviously unavailing: once you invoke the Tax Court’s jurisdiction in a deficiency case there is no way out absent a determination by the Tax Court. Compare Estate of Ming v. Commissioner, 62 T.C. 519 (1974) with Wagner v. Commissioner, 118 T.C. 330 (2012).

The other order that involved bankruptcy (Wilson v. C.I.R., dkt. # 25218-18SL (order here)) deserves much less explication, but serves as a warning for taxpayers that think bankruptcy is a cure-all for tax debts. It is another collection action where the petitioners filed bankruptcy involving the tax years at issue, but in this instance the bankruptcy case was over well before the Tax Court order was issued. However, because the tax debts at issue were for returns that were due within three years of the bankruptcy petition they were non-dischargeable in Chapter 7 (see 11 USC 523(a)(1)(A) and 11 USC 507(a)(8)). The Bankruptcy court puts things in plain English for the taxpayer in their “Explanation of Discharge,” which included the sentence “Examples of debts that are not discharged are […] debts for most taxes.” Because one of the two arguments the petitioners want to make is that the debts were discharged in bankruptcy, and because the other argument has already been fixed by the IRS (applying a payment to the correct year) there is nothing left at issue. Summary judgment ensues.

What Happens When the Tax Court Judge Hearing Your Case Retires? Zajac III v. C.I.R., dkt. # 1886-15. (order here)

Judge Chiechi retired effective October 19, 2018 (see press release here). As indicated by the docket number, however, this case has been going on since 2015. The trial took place in early February, 2018 and briefs were submitted in May, 2018. One might ask how much is left to be done in this case (which has a somewhat unusual +100 filings with a pro se party). But the petitioner wants a second-go at the trial. And since the case involves witness credibility determinations the standard it to allow a new trial unless the parties either agree they don’t want to, or (sometimes) if the petitioner fails to ask.

How far will that new trial get the petitioner? If I had to bet, I’d say it is only delaying the inevitable. Why may it be of limited use? Consider the following: 

First, Judge Gale is quick to remind the parties of the “law of the case doctrine.” That doctrine is often raised when a case is on appeal, and stands for the proposition that “when a court decides on a rule of law, that decision should continue to govern the same issues in subsequent stages of the same case.” Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 816 (1988). As Judge Gale explains, in this context it means that “a successor judge generally should not, in the absence of exceptional circumstances, overrule a ruling or decision of the initial judge.” In other words, whatever Judge Chiechi or other judges in the case have already ruled on, Judge Gale isn’t likely to overturn. And at this point, as I alluded to earlier with the +100 filings on the docket, there have been quite a few rulings. 

Second, one of the legal arguments that the petitioner wants to make (and use a new trial to establish) pretty clearly has no traction. Perhaps unsurprisingly, it is a penalty issue that raises the specter of Graev. The petitioner wants to put the IRS supervisor that approved the penalty on the witness stand. One may wonder why the supervisor’s testimony is necessary, when all that is required is written approval under IRC § 6751(b)(1). Indeed, there has already been some case development on this point: see Raifman v. C.I.R., T.C. Memo. 2018-101, Ray v. C.I.R., T.C. Memo. 2019-36, and Alterman v. C.I.R., T.C. Memo. 2018-83, all of which provide some detail to the general rule that the Tax Court isn’t going to “look behind” a document to the reasoning or motives of the penalty approval by the supervisor. The petitioner in this case apparently wants to show that the IRS agent had a conflict of interest and, consequently, the manager shouldn’t have given supervisory approval. That is a lot like looking at the reasoning and motives of the supervisory approval, and I doubt it would succeed regardless of what the questioning elicits. In truth, if the IRC 6662(a) penalty is so ill-conceived, the taxpayer should have some other pretty obvious defenses apart from procedural infirmities… like reasonable cause or simply not having a substantial understatement (or not acting negligently) in the first place. 

But the petitioner isn’t just casually throwing the “conflict of interest” argument around: he has gone so far as to sue the IRS agent in Federal District Court under a Bivens action. That case was dismissed with prejudice. If I were a government employee that was sued by an individual taxpayer I’d probably be pretty upset too… only it appears that the suits were filed after the penalties were already proposed.

The final reason why I’m not so sure the new trial will get to a different outcome than whatever was already coming: this is a case almost entirely about determining the proper amount of self-employed income and expenses. While testimony (particularly credibility) definitely matters in such cases, the most important evidence is usually documentary. There have already been five submissions of stipulated facts and roughly 80+ exhibits. Those are in the record and aren’t going to be changed. Documents don’t always tell the whole story, and credibility determinations matter when those documents are being explained. But at this point most of the work in this 4 year-old case is, thankfully for Judge Gale, likely done.

Another Court Rules on Jurisdiction for Overpayment Interest Suits – Part Two

Today Bob Probasco continues his update on overpayment interest suits. Part One can be found here Christine

And now Bank of America

Bank of America filed its case in the Western District of North Carolina (WDNC). As noted above, Pfizer chose its forum to take advantage of a favorable Second Circuit precedent; Bank of America likely chose the WDNC to avoid an unfavorable precedent. Approximately $141 million of the $163 million at issue involves interest netting and, as the government pointed out, Bank of America currently has another interest netting case pending in the CFC. 

The case in the WDNC likely raises the “same taxpayer” issue (see discussion here and here). It involved overpayments and underpayments for tax years ranging from 1987 to 2009, for six different entities that ultimately merged into a seventh, the plaintiff. Federal Circuit precedent, from Wells Fargo & Co. v. United States, 827 F.3d 1026 (Fed. Cir. 2016), allows separate companies that merge to be considered the “same taxpayer.” But it also applies a “temporal requirement” that the two entities must be the “same” for the entire period of overlap between the overpayment and the underpayment. Effectively, this means that the latest of the two tax years with balances to be netted must be after the date of the merger. Based on information in the complaint, most of the amount at issue appears to be precluded by the holding in Wells Fargo. Bank of America’s case in the CFC, on the other hand, did not have a Wells Fargo problem. Settlement negotiations began almost immediately and are ongoing.

Bank of America had a strong incentive to file the current case in the WDNC. As I stated before, in my second post on interest netting, I think Wells Fargo was an overly narrow construction of the statute. But the CFC is bound by that precedent, while the WDNC might reach a different conclusion. Unfortunately, the amounts at issue exceeded the limitation on Tucker Act jurisdiction by a district court. Thus, Bank of America had to argue that the case fell under “tax refund jurisdiction” and the government promptly filed a motion to dismiss for lack of jurisdiction, arguing that claims for additional overpayment interest are only cognizable under Tucker Act jurisdiction. A magistrate judge reviewed the motion to dismiss and concluded that “tax refund jurisdiction” encompasses claims for additional overpayment interest. In Bank of America Corp. v. United States, 2019 U.S. Dist. LEXIS 109238, the district court judge agreed and adopted the magistrate judge’s Memorandum and Recommendation.

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The court found the interpretation of § 1346(a)(1) in E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005) persuasive. The statute provides concurrent jurisdiction for district courts and the CFC over actions for the recovery of “any sum alleged to have been excessive . . . under the internal-revenue laws.” The Scripps court concluded that a claim for overpayment interest fit that part of the statute. The “sum” at issue is not the amount of overpayment interest at issue; it is the total balance the United States retained, the net of tax liability, penalties, underpayment interest, and overpayment interest.

That’s a bit abstract; here’s a simple illustration. Say that the taxpayer originally paid $5,000,000 but the IRS eventually determined that the correct tax liability was only $4,500,000 and refunded $500,000. The sum retained by the government is $4,500,000; it received $5,000,000 but then refunded $500,000. But if the government should have paid (but did not) $80,000 of overpayment interest, it should have only retained $4,420,000, the net of $5,000,000 originally received and $580,000 (tax refund plus overpayment interest) paid back to the taxpayer. The sum actually retained ($4,500,000) is “excessive,” more than the proper amount of $4,420,000. I think this is a somewhat strained reading of the statute, but it persuaded the Scripps court and the district court in Bank of America.

The opinion also noted that most courts that have considered the issue have held that claims of additional overpayment interest fall within “tax refund jurisdiction.” Strictly speaking, that may be true, but it fails to address a couple of limitations on that statement. First, only one Circuit Court (the Sixth), and few district courts outside the Sixth Circuit, have directly addressed the issue. Historically, most claims for overpayment interest have been filed in the CFC rather than district court. It’s not at all clear that other Circuit Courts would reach the same conclusion. For example, although technically dicta, in Sunoco, Inc. v. Commissioner, 663 F.3d 181, 190 (3d Cir. 2011) the Third Circuit stated that actions for overpayment interest in district court fall under § 1346(a)(2) rather than § 1346(a)(1).

Second, the CFC (which handles most interest cases) generally won’t have disputes as to which jurisdictional statute applies, for structural reasons. District court jurisdiction is split between § 1346(a)(1), for tax refund actions, and § 1346(a)(2), for Tucker Act claims, because there is a dollar limitation for the latter. The CFC has no such dollar limitation and only has one relevant jurisdictional statute, § 1491(a)(1), which is similar to the language of § 1346(a)(2). When a case includes both underpayment interest and overpayment interest (most interest netting cases do), some practitioners may specify both § 1346(a)(1) – under Chapter 85 of Title 28, governing district court jurisdiction, but referencing the CFC – and § 1491 for jurisdiction, just in case. But the CFC may not address the jurisdictional statute at all in those cases. When it does, it often refers to jurisdiction for both tax refunds and overpayment interest as arising under the Tucker Act, i.e., § 1491; only the underlying cause of action and statute of limitations are different. That was the only jurisdictional basis that Paresky mentioned and there are many other examples.

The government also relied on similar language in § 1346(a)(1) and Code section 7422(a). Here’s § 1346(a)(1), with the relevant language italicized:

Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws

And here’s Code section 7422(a), which states requirements for refund suits, also with the relevant language italicized:

No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.

The government argued that: (a) it is well-established actions for overpayment interest are not refund suits; (b) § 1346(a)(1)’s language is virtually identical to that in section 7422; (c) therefore, § 1346(a)(1) is limited to refund suits, just as section 7422 is; and (d) therefore, district courts only have jurisdiction over actions for overpayment interest under § 1346(a)(2), which is limited to $10,000.

Bank of America circumvented this conclusion by arguing that § 1346(a)(1) includes both refund suits and “non-refund” suits, such as those for overpayment interest. There are very minor differences in the language of the two statutes, but the court identified one significant difference that convinced it to agree with Bank of America’s argument. Section 7422(a) includes a qualifying header: “No suit prior to filing claim for refund.” And § 1346(a)(1) has no header. I’m not sure how much should be read into that; Chapter 85 of Title 28 appears to have no headers or titles at the paragraph level, and few at the subsection level, as opposed to the section level.

These issues might be reviewed by the Fourth Circuit on appeal at some point, but not soon. The WDNC’s opinion just denied the motion to dismiss; now the parties will need to proceed to the merits of the case. The case has more complex facts and legal issues (including the “same taxpayer” issue) than Bank of America’s CFC case, so a final determination might take a long time.

Conclusion

Now we have three recent cases that addressed the issue but with somewhat inconsistent results. Pfizer and Bank of America concluded that district courts’ “tax refund jurisdiction” encompasses claims for overpayment interest. Paresky did not address the jurisdictional statute, because the case was originally filed in the CFC, but may now with the post-transfer motion before the SDF. The CFC and Federal Circuit might view the issue differently than Pfizer and Bank of America did, but their jurisdictional statute doesn’t differentiate as the district court jurisdictional statute does and they will never rule on the district court statute.

Pfizer concluded that the Code statute of limitations applies. Paresky concluded that the general federal 6-year statute of limitations applies, but that may change in the SDF. Bank of America didn’t directly address the statute of limitations, as the government did not assert untimely filing as a basis for the motion to dismiss, but the court certainly suggested that it would not apply the Code statute of limitations.

These issues potentially could be addressed on appeal by three different Circuits – the Second (Pfizer), the Eleventh (Paresky), and the Fourth (Bank of America). So far, only the Sixth Circuit has ruled on whether district court jurisdiction for these cases fits under § 1346(a)(1). It will be interesting to see if a circuit split develops that would give the government an opportunity to overturn Scripps. And we might even see a decision in Bank of America that would create a circuit split on the “same taxpayer” issue and allow taxpayers an opportunity to overturn that part of the Wells Fargo result.

Review of Hemel and Kamin’s The False Promise of Presidential Indexation

In The False Promise of Presidential Indexation, which was recently published in the Yale Journal of Regulation, Professors Daniel Hemel and David Kamin have written an important article that considers whether the executive branch has the power to index capital gains for inflation.  In addition to critiquing the measure as a matter of policy, the authors make a persuasive case that Treasury, absent additional legislation, does not have the authority on its own to index capital gains.

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The article raises the question as to which institutional actor in our government should be responsible for generating a change in law that would have a major impact on both the fisc and the tax system.  This question periodically appears in tax administration; longtime readers of the blog may connect this to other issues; for example, in Loving v IRS a DC district court opinion affirmed by the DC Circuit held that without explicit Congressional authority the IRS could not administratively require hundreds of thousands of previously unlicensed preparers to take a competency test and be responsible for continuing education requirements. 

The article provides current and historical context for indexing capital gains, including a 2018 statement by President Trump that he is “thinking about it very strongly” and a discussion of the last time that there seemed to be serious executive consideration of this proposal, in the waning days of the first Bush administration.  The idea seems to be gaining momentum, as  reports from this summer indicate that President Trump has put this issue on the front burner.

The issue of capital gains indexing is really an issue of basis indexing, an issue that would apply to both capital assets and ordinary assets. Since as the authors point out over 98% of the gain reported was on capital assets (2015 figures), the shorthand way to refer to this issue is on the power to index capital gains. The technical issue turns on whether Treasury could index basis for inflation through regulations. 

The authors discuss why at the time of the proposal’s earlier consideration in the 1990’s  there was general (though not uniform) consensus that Treasury did not have the authority to unilaterally index basis for inflation, including legal opinions from Treasury’s General Counsel and the Justice Department’s Office of Legal Counsel (OLC). As I gear up again to teach basic tax for the fall semester, as I tell my students at Villanova, it is crucial to start with the Internal Revenue Code when thinking about this issue. Section 1012(a) (first enacted as part of the Revenue Act of 1918), says that “[t]he basis of property shall be the cost of such property.” 

The article (starting at page 707) nicely summarizes the main reasons why in 1992 the OLC concluded that “cost” was not ambiguous, looking at its dictionary definition, early Treasury practice, court decisions, and other IRC provisions. Absent finding any ambiguity in the term cost, OLC concluded that cost meant the price paid for an item, and Treasury could not on its own change the meaning of it by regulation.

Hemel and Kamin’s article then discusses developments since the first Bush presidency, including case law outside tax that some proponents have suggested supports finding that cost is indeed an ambiguous term, general administrative law developments, and the tax law’s place within administrative law.  

As to general administrative law, the authors persuasively argue that developments since the early 1990’s make it even harder to support a regulation based capital gains indexing. A key part of the discussion is the authors’ discussion of the “major questions” doctrine, where a number of Supreme Court decisions deny Chevron deference to issues that have deep economic and social significance in the absence of clear Congressional direction to agencies. As the authors note, 

[t]he advent of the major questions doctrine is the most significant post-1992 doctrinal development bearing upon the legality of the presidential indexation proposal.  And it does not bode well for the idea. While the exact boundaries of the major questions doctrine remain unclear, there are compelling arguments that the decision to index basis for inflation or not should qualify as a major question.

As support for this type of change being considered within the major questions doctrine, the authors point to estimates that peg the cost of indexing to be in the magnitude of $10-20 billion a year. They also discuss Supreme Court cases warning against reading delegation into cryptic legislative language:

As Justice Scalia wrote for the Court in Whitman v. American Trucking Association, citing to both MCIand Brown &Williamson: “Congress . . . does not alter the fundamental details of a regulatory scheme in vague terms . . . . [I]t does not, one might say, hide elephants in mouseholes.” And as we have emphasized, indexing basis for inflation would indeed be an elephant.

Drilling down deeper, the authors discuss general Chevron developments and the subtle but important difference in now Justice Kavanaugh’s take on the major questions doctrine-developments that they argue make the case for indexing even weaker. While now Justice Kavanaugh (who authored the DC Circuit Loving opinion, which in part relied on the major case doctrine as justification for concluding that IRS acted outside its authority in its efforts to require mandatory testing and education for unlicensed preparers) is just one member of the Court, Hemel and Kamin also discuss the general discomfort that many of the justices feel for Chevron, including their take that the current “judicial zeitgeist…is decidedly anti-Chevron.”

The authors also address somewhat more difficult questions when they consider whether any party would have standing to challenge regulations. After all, the regulations appear to only help taxpayers, and as the authors note, scholars such as Larry Zelenak considering the issue in the 1990’s felt that without there being a disadvantaged taxpayer, it would be difficult to find a party with standing to challenge the regulations. The authors again look to post 1990’s developments to sidestep the need for individual taxpayer harm, including the possibility that Congress or states could have standing to sue. In addition, the authors creatively argue that indexing would harm some, including brokers, who would bear additional costs to comply with reporting obligations, and taxpayers subject to the charitable deduction cap in Section 170.

Conclusion

The Hemel and Kamin article provides important legal context on this issue. If the Trump administration moves forward with the idea, this article will be required reading for those interested in and likely litigating the issue. Even if the Trump Administration declines to move forward with this idea, given current dysfunction in Washington and the strained relations between the branches, I suspect that there will be even greater temptation to use the IRS to sidestep Congress to achieve policy objectives that have at best a tenuous link to the statutory language. As such, the legal issues Hemel and Kamin discuss are generally important for tax administration, and will likely resurface even when this particular debate goes away, or perhaps hibernates for another generation to consider and likely discount.

Another Court Rules on Jurisdiction for Overpayment Interest Suits – Part One

We welcome back guest blogger Bob Probasco of Texas A&M University School of Law for an update on taxpayer suits to recover overpayment interest. Today, Part One sets the stage and recaps the status of the ongoing Pfizer and Paresky cases. Christine

Last year, I wrote about the Pfizer and Paresky cases, which involved questions about jurisdiction and statutes of limitations for taxpayer suits seeking interest payable to them by the government for overpayments. Recently, the District Court for the Western District of North Carolina issued its opinion in Bank of America Corp. v. United States, 2019 U.S. Dist. LEXIS 109238 (W.D.N.C. June 30, 2019) addressing the issue.

Setting the stage

There are two district court jurisdictional statutes at issue in these cases. This first is 28 U.S.C. § 1346(a)(1). It has no dollar limitation. That’s the statute we rely on when filing tax refund suits, so I will refer to it as “tax refund jurisdiction.” But I will keep that term in quotes; taxpayers sometimes argue successfully that this covers suits for overpayment interest, although technically those are not refund suits.

The second is § 1346(a)(2), which provides jurisdiction for any claim against the United States “founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department . . . .” This is commonly referred to as “Tucker Act jurisdiction” and for district courts is limited to claims of $10,000 or less. The comparable jurisdictional statute for the Court of Federal Claims, § 1491(a)(1), has no such limitation.

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There are also two different statutes of limitation potentially applicable. The general federal statute of limitations, § 2401 (for district courts or § 2501 for the Court of Federal Claims), requires that complaints be filed within six years after the right of action first accrues. In the Code, section 6532(a)(1) requires the taxpayer to file a refund suit no later than two years after the claim is disallowed.

As a result of all this, not to mention different precedents in different circuits, taxpayers who file suits for overpayment interest may sometimes want to file in district court and other times prefer the Court of Federal Claims. The government’s position is that these claims fit under Tucker Act jurisdiction only, not “tax refund jurisdiction.” And the government may disagree about whether the taxpayer’s preferred venue is available. There may also be a secondary dispute, concerning which statute of limitations applies and whether the suit was filed timely.

Brief recap and current status of Pfizer

The underlying issue in the Pfizer case was straightforward: whether overpayment interest is due when the IRS mails a refund check within the 45-day safe harbor of section 6611(e) but the check is not received by the taxpayer and must be replaced. Pfizer filed suit in the Southern District of New York (SDNY), asserting “tax refund jurisdiction,” to take advantage of a favorable precedent in the Second Circuit. Tucker Act jurisdiction would be available in the SDNY, but is limited to $10,000, and therefore inadequate for this case. The government filed a motion to dismiss for lack of jurisdiction, asserting that standalone suits for overpayment interest do not fall within the scope of “tax refund jurisdiction.” The court agreed with Pfizer and denied that motion to dismiss.

But the government filed a second motion to dismiss for lack of jurisdiction, arguing that the refund statute of limitations in the Code had expired and the suit was not filed timely. Pfizer argued that the general six-year statute of limitations in § 2401 applied even though Pfizer was relying on “tax refund jurisdiction” rather than Tucker Act jurisdiction. The court disagreed with Pfizer, applied the two-year statute of limitations from the Code, and granted the government’s motion to dismiss the case.

The case is currently on appeal. Pfizer asked the court, if it affirms the decision below, to transfer the case to the Court of Federal Claims (CFC). That would allow the case to proceed, as suit was filed within the six-year general statute of limitations for Tucker Act claims, although the Second Circuit precedent Pfizer wanted to rely on would not be binding in the CFC. Keith and Carl filed an amicus brief arguing that even if the filing deadline in section 6532(a) applies, it is not jurisdictional and is subject to estoppel or equitable tolling arguments. At oral arguments on February 13, 2018, the Second Circuit panel asked the parties whether it could assume without deciding that claims for overpayment interest fell within the terms of § 1346(a)(1) and proceed to the statute of limitations issue. Roughly 18 months later, we’re still waiting for an answer.

Brief recap and current status of Paresky

The Pareskys have been trying to resolve these tax issues since 2009, first to claim substantial losses that generated refunds and then to get interest on the refunded amounts. It has been a very long, complicated struggle and makes you wonder what would have happened if they hadn’t been represented by very competent tax advisors. In the course of the attempted resolution, the IRS advised them to file a refund claim and, when the claim was denied in 2015, advised that they had two years to file suit. Relying on those statements, the Pareskys filed suit in 2017 in the CFC. The government filed a motion to dismiss, arguing that the six-year statute of limitations applied and had expired in 2016. The plaintiffs argued that the two-year statute of limitations applied; alternatively, they argued that that the six-year statute of limitations didn’t start in 2010, as the government asserted, or was suspended due to government misconduct.

The first step in the court’s decision was relatively easy, because there are numerous precedents in the Federal Circuit that the six-year statute of limitations applies to claims for overpayment interest. It took more effort to analyze when the claims accrued. The normal documentary evidence was not available because it had been destroyed in the normal course of business, during the very long period this dispute had lasted. The court was left with “complicated factual issues” that it resolved in the government’s favor. Finally, the court concluded that the taxpayers had not met the burden of proof to apply the accrual suspension rule. But the CFC denied as moot the government’s motion to dismiss because it granted the taxpayers’ motion to transfer the case to the District Court for the Southern District of Florida (SDF). That would allow the Pareskys to try to persuade the SDF that “tax refund jurisdiction” covers claims for overpayment interest and that the Code statute of limitations applies.

In Pfizer, the taxpayer appealed to the Second Circuit and the question of whether to transfer to another jurisdiction if that was unsuccessful was deferred. In Paresky, the case was transferred immediately rather than giving the plaintiffs an opportunity to convince the appellate court to rule in their favor on the jurisdictional issue. I don’t know if the plaintiffs’ desires were a deciding factor in that difference between the two cases. But Pfizer clearly wanted to remain in the SDNY if possible, while the Pareskys seemed caught by surprise at the jurisdictional challenge, given the advice they received from the IRS, and were open to immediate transfer. They filed a motion to transfer very soon after the government’s motion to dismiss.

In the SDF case, the Pareskys filed an amended complaint, asserting jurisdiction under §§ 1346 and 1491. (This phrasing provides for alternative theories, as “§ 1346” does not distinguish between “tax refund jurisdiction,” § 1346(a)(1), and Tucker Act jurisdiction, § 1346(a)(2). But § 1491 does not apply in district court.) The government quickly filed a motion to dismiss for lack of jurisdiction, and the parties repeated their arguments over which statute of limitations applied. The parties’ submissions on the motion to dismiss were completed on February 26, 2019. We’re still waiting for the district court’s decision, and possibly an appeal to the Eleventh Circuit.

Reminder: The Timely Mailing Rules of Section 7502 Do Not Apply in Refund Suits

In Patel v. IRS, 124 AFTR 2d ¶2019-5097 (D. N.J. 7/29/19), a pro se CPA seeking a $4,000 refund of his income taxes found out the hard way that the timely-mailing-is-timely-filing rules of section 7502(a) do not apply to filings in district court. Section 7502(d)(1). Accordingly, even though he mailed his complaint seeking a refund to the district court just days before the 2-year deadline for filing under section 6532(a) was set to expire, because the complaint arrived after the 2-year period ended, the court dismissed his case.

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On October 8, 2015, Mr. Patel filed his original 2011 Form 1040 showing a $4,000 overpayment. One has only three years from the date a return is filed to seek a refund under section 6511(a) (leaving aside the 2 years from payment rule that can also apply in some cases). When an original return is filed late (as in this case), the refund claim shown thereon is treated as filed the same day as the tax return, so the claim is treated as timely under the 3-year rule of section 6511(a). Rev. Rul. 76-511, 1976-2 C.B. 428. But, if one gets an extension to file to October 15, 2012 (as Mr. Patel claimed he had), then the amount of the claim is limited to the tax paid in the three years immediately preceding the claim plus the extension period. Section 6511(b)(2)(A). Since the tax involved was withholding, it was treated as paid on April 15, 2012. Section 6513(b)(1). Therefore, if Mr. Patel had gotten an extension to file, his claim could have been granted in full, since October 8, 2015 is less than three years and six months after April 16, 2012.

However, the IRS said it never got an extension request from Mr. Patel, so the amount limitation in this case reduced the allowable refund to $0 (the tax paid within three years prior to October 8, 2015).

Acting with what I find surprising speed, on December 17, 2015, the IRS sent Mr. Patel a notification of claim disallowance. Under section 6532(a)(1), Mr. Patel then had two years to file a complaint seeking a refund in either the district court or the Court of Federal Claims. The complaint arrived in the mail at the district court on Wednesday, December 20, 2017 – two days past the due date (FRCP 6(a)(1)(C) having extended the due date to Monday, December 18, 2017). The court found that Mr. Patel credibly testified that he put the envelope in the mail on Friday, December 15, 2017 – three days before the filing deadline expired.

In the opinion, the court notes that it is well-settled that district court filings are made on the day the court receives a document – even if the document is sent by mail. McIntosh v. Antonio, 71 F.3d 29, 36 (1st Cir. 1995). So, the court dismissed the case as untimely brought. The court did not decide the other issue of whether the administrative refund claim amount limit was $0 because that would have required an evidentiary hearing, since Mr. Patel showed the court a copy of a Form 4868 extension form for 2011 that he claimed he had filed, while the IRS denied receipt of such form.

Being a tax controversy lawyer, I would have expected the court to discuss the timely-mailing-is-timely-filing rules of section 7502(a). However, the court didn’t, for reasons that become obvious once you read those rules. Section 7502(a)(1) states:

If any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed, or to which such payment is required to be made, the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be.

But, section 7502(d) states, in part: “This section shall not apply with respect to—(1) the filing of a document in, or the making of a payment to, any court other than the Tax Court . . . .” (Emphasis added.) Since I have filed few refund suits in my life, and I have always filed those in person at the local New York district court courthouse, I was never aware of this limitation. Both petitions to the Tax Court and notices of appeals from the Tax Court (which I have more often filed, and always by mail) are filed in the Tax Court, so are subject to the section 7502(a) timely-mailing-is-timely-filing rules. I bet I am not the only tax controversy lawyer who is surprised to find these rule inapplicable to refund lawsuits. So, I write this post as a warning to people like me.

In one of his filings in response to the motion to dismiss, Mr. Patel argued that it must be the case that the district court actually received the mailing within two days, which would make the filing timely (on Monday, December 18, 2017), even if the receipt date governed. As evidence that it usually took only two days to mail something from his home in West New York, New Jersey to the district court in Newark, he attached a printout from a USPS website in connection with his mailing of a document in the refund suit to the court in May, 2019, indicating likely delivery in two days.

The district court in Mr. Patel’s case noted, however, that the mailing done of the complaint was done both over a weekend and at the height of the Christmas mailing season, so the court wouldn’t accept this proof from a more normal time of year. But, the court clearly felt bad for Mr. Patel, writing:

One may sympathize with the plaintiff here. The § 6532(a)(1) deadline, however, is a rigid one; it is not subject to equitable tolling on sympathetic or other grounds. See RHI Holdings, Inc. v. United States, 142 F.3d 1459, 1462 (Fed. Cir. 1998); cf. United States v. Brockamp, 519 U.S. 347, 348 (1997) (analogous statute of limitations in 26 U.S.C. § 6511 not subject to equitable tolling).

Still, the district court found that the filing deadline issue is jurisdictional, so the court dismissed the case for lack of jurisdiction (as opposed to failure to state a claim on which relief could be granted).

Comments

Readers of PT know that Keith and I have litigated whether certain judicial filing deadlines in tax are jurisdictional or subject to equitable tolling in light of Supreme Court changed case law since 2004. Indeed, for over a year now, the Second Circuit has been working on an opinion in Pfizer v. United States, 2d Cir. Docket No. 17-2307, where the Harvard clinic (as amicus) has asked the court to be the first appellate court since the Supreme Court changed the rules to reconsider the issue of whether the section 6532(a) filing deadline is still jurisdictional (as many other courts of appeal had held prior to 2004). In our brief, we criticize RHI Holdings as a case that both predated the 2004 change in the jurisdictional rules and improperly conflated the factors that go into the equitable tolling question with the jurisdictional question. We also found Brockamp distinguishable on many factors that went into the Supreme Court’s analysis there of the section 6511 filing deadline’s ability to be equitable tolled.

And I blogged last November on an opinion in Wagner v. United States, 353 F. Supp. 3d 1062 (E.D. Wash. 2018), where the district court, in a refund suit, considered the recent Supreme Court case law and held that the section 6532(a) filing deadline is not jurisdictional and is subject to equitable tolling (and actually tolled the deadline in the case). So, the Patel case is in clear conflict with Wagner.

It will be interesting to see if Mr. Patel appeals the dismissal. Although the clinic at Harvard doesn’t plan to volunteer to represent him, if he does appeal, we would likely want to file an amicus brief in the Third Circuit arguing that the filing deadline is not jurisdictional and is subject to equitable tolling under the right facts. Anyone else who thinks they want to help the pro se Mr. Patel file an appeal, be our guest.

The Broad Impact of Guralnik

On July 12, 2019, I wrote about one case in which the Tax Court applied the reasoning in Guralnik v. Commissioner to extend the time within which a taxpayer could file their Tax Court petition during the government shutdown. We picked up that case through the Tax Court’s designated order feature. As we have discussed before the order feature of the Tax Court’s web site allows users to perform word searches. Inspired by the first case and expecting there should be others, Carl Smith did such a search and found others to which he alerted me. I had my research assistant, Michael Waalkes, follow up on Carl’s research and this post will identify the cases we have found in which Guralnik has made a difference as well as a few where it did not. Leading into the shutdown, we reminded readers on December 31, 2018, not to forget Guralnik. It’s clear from these orders that the Tax Court did not forget it and that the earlier case we wrote about was part of a concerted effort on the part of the court to identify cases in which the court opened its doors to cases which would otherwise have been late but for the application of Guralnik to the situation.

In each of these cases the IRS moved to dismiss. At some point perhaps the IRS will accept Guralnik and no longer file a motion to dismiss or it will seek to litigate it in the circuits. At least for this round of government shutdown, the IRS seems content to raise the issue in every case but accept the outcome in every case without filing an appeal. Of course, if the IRS accepts Guralnik without filing a motion to dismiss, we would not find the case through an order search so it may have accepted many more cases than it contested. Perhaps the issue is a function of getting the word to the field offices. The possibility also exists that it wants to bring each situation to the court’s attention and have the court make the specific decision allowing the case to move forward.

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Per the search of the Tax Court orders: here are the cases involving Guralnik’s application to the government shutdown, in which the Court denied an IRS motion to dismiss for a petition due during the shutdown: Coleman v. Commissioner, Docket No. 1856-19; Baird v. Commissioner, Docket No. 1706-19; Meaut v. Commissioner, Docket No.: 1851-19; Crager v. Commissioner, Docket No. 2191-19; Vlach v. Commissioner, Docket No. 614-19S; Wilson v. Commissioner, Docket No. 0691-19S; Hamilton v. Commissioner, Docket No. 436-19S; Doherty v. Commissioner, Docket No. 101-19; Cajuste v. Commissioner, Docket No. 2190-19; Witt v. Commissioner, Docket No. 2071-19; Kendrick v. Commissioner, Docket No. 806-19S; Baird v. Commissioner, Docket No. 1706-19; Worku v. Commissioner, Docket No. 1864-19; Gettys v. Commissioner, Docket No.1686-19S; Hager v. Commissioner, Docket No. 1854-19.

The Tax Court appears to have adopted a standard policy in cases where the IRS files a Motion to Dismiss for Lack of Jurisdiction on timeliness for petitions due during the government shutdown. The Court first issues a generic order (sample linked here) citing Guralnik and requiring that the IRS supplement its motion, which leads to the IRS conceding timeliness in its supplement and the Court then denying the motion to dismiss. 

Despite the 14 cases listed above in which the Tax Court did open its doors, some petitioners still remained outside of the benefit created by the extra time resulting from the government shutdown. These cases deserve a closer look since they do not follow the cookie cutter results of the cases listed above. In Bancroft v. Commissioner, Docket No. 2063-19, the Tax Court issued its standard order for the IRS to file a supplement to its motion to dismiss, which the IRS did. The Tax Court then granted the motion to dismiss without issuing an order, so it’s unclear why the Court wasn’t convinced that the shutdown affected the timeliness of the petition filing. It would have been nice to have some reasoning here given the importance of the issue. We did not pay to obtain the response filed by the IRS which might have made it clear why the court granted the motion to dismiss in this case.

And in Barnhart v. Commissioner, Docket No. 5783-19S, in response to an IRS motion to dismiss for late-filing a petition that was due on December 24, 2018 (several days before December 28, 2018 when the Tax Court stopped operating), the petitioners argued that their efforts to administratively resolve their issue with the IRS had been hampered by the government shutdown, as the IRS began its furlough earlier on December 22, 2018, two days before the filing deadline. But Judge Foley granted the motion to dismiss and issued an order finding that a government shutdown at the administrative level was not sufficient to alter the filing deadline with the Tax Court, which at the time was still unaffected. This case demonstrates the confusion that some petitioners might have had between the shutdown of the IRS (and most of the government) and the shutdown of the Tax Court (and most of the courts). The non-budget funds available to the courts allowed them to remain open for a short period after the rest of the government shut its doors. Perhaps this confusion should not matter from a jurisdictional standpoint but the whole issue of shutdown must have caused confusion for some parties seeking a remedy.

Finally, in Janjic v. Commissioner, Docket No. 2003-19, the petitioner was a taxpayer who lived abroad and did not return to the U.S. until during the period of the IRS furlough. The petitioner argued that she was unaware that the Tax Court was still operational during this time and thus the Court should still consider the case. The Tax Court disagreed, and Judge Foley granted the IRS motion to dismiss, while noting his sympathy for the petitioner’s situation. The Janjic case most clearly raises the issue of confusion and provides a possible basis for equitable tolling should the time frame for filing a petition in a deficiency proceeding prove not to be jurisdictional.

The issue of jurisdictional nature of the timing of the filing of a deficiency case will be argued in the 9th Circuit in San Francisco on October 22, 2019, in the cases of Organic Cannabis Foundation LLC v. Commissioner, Ninth Circuit Docket No. 17-72874 and Northern California Small Business Assistants, Inc. v. Commissioner, Ninth Circuit Docket No. 17-72877.  We will be closely watching those cases as the decision there could impact other petitioners like Ms. Janjic who file their Tax Court petitions late but have a reason for doing so that would support a finding of equitable tolling. Although we have not written as standalone post on Organic Cannabis and Northern California Small Business Assistants, we did discuss them in the December 31, 2018 post linked above. Just as a reminder, here is what we wrote in that post:

There are currently before the Ninth Circuit two companion cases of petitions sent in around the same time as Guralnik, also by FedEx First Overnight, that arrived a day late. In these cases, Organic Cannabis Foundation LLC v. Commissioner, Ninth Cir. Docket No. 17-72874, and Northern California Small Business Assistants, Inc. v. Commissioner, Ninth Circuit Docket No. 17-72877, it is not clear why the petitions were filed late, but it appears that the Federal Express driver could not access the open Tax Court Clerk’s Office on the last day – either because of construction work, police activity, or some other reason – so the driver returned the following day (one day too late if section 7502 can’t be used). In unpublished orders issued on July 25, 2017 (here and here), the Tax Court declined to extend Guranik to cover situations where the Clerk’s Office was in fact open.

In the Ninth Circuit, the taxpayers not only seek to extend Guralnik, but also argue (as the tax clinic at Harvard did in Guralnik) that the deficiency petition filing deadline is not jurisdictional and is subject to equitable tolling. The DOJ relies on the holding in Guralnik, but argues that Guralnik cannot be stretched to cover the situation where the Clerk’s office is actually open. Since the parties cannot confer jurisdiction in a case merely by not making certain arguments, it would not be impossible for the Ninth Circuit to eventually rule both in these cases that the filing deadline is jurisdictional and that the Tax Court cannot import into its own rules any rule from the Federal Rules of Civil Procedure that extends the filing deadline when the Clerk’s Office is formally closed. That is, nothing stops the Ninth Circuit from rejecting the latter holding in Guralnik. Thus, until there are some court of appeals rulings on this fact pattern, it may be wise not to try to rely on the closure of the government as a reason for not mailing a Tax Court petition on time or attempting hand delivery to the court on the first date it reopens. The cases before the Ninth Circuit are fully briefed… Among the briefs there are amicus briefs from the Harvard tax clinic arguing that the filing deadline is not jurisdictional and is subject to equitable tolling.

Of course, we are closely following the jurisdictional nature of the timing of filing Tax Court petitions in several of the bases for jurisdiction. With respect to the recent decision of the D.C. Circuit that the time for filing a petition in a whistleblower case is not jurisdictional, blogged here, the Department of Justice has requested more time to decide whether to request an en banc review of the decision. As discussed in the blog post on the Myers case, because the language in the whistleblower statute essentially mirrors the language in the Collection Due Process statute passed several years earlier, the Myers decision essentially sets up a split between the D.C. Circuit and the 9th Circuit on this issue which creates at the least the possibility of a trip to the Supreme Court.

Shades of Graev and Whistleblower Awards: Designated Orders 6/10/19 to 6/14/19

While we come to another week for designated orders, this week only had a set of three released on the same day.  Two of the designated orders are based on bench opinions from Judge Carluzzo while another order comes from Judge Gustafson.  I will begin with Judge Carluzzo’s bench opinions, which touch on Graev regarding supervisor approval.  At the end, Judge Gustafson’s order delves into IRS approvals of a different sort, this time for whistleblower awards.

Taxpayer Substantations and Supervisor Approval for More Graev Considerations

Docket No. 13675-18S, Michael Hanna & Christina Hanna v. C.I.R., Order available here.

The first order does not stand out at the beginning as Mr. Hanna testified regarding his medical expenses and employee business expenses.  He provided no other proof regarding his medical expenses, vehicle expense deduction, or purchases of tools and supplies.  Since there was no substantiation, the judge sustained those denied deductions.

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Docket No. 11648-18S, David L. McCrea & Denise McCrea v. C.I.R., Order available here.

The second order also does not seem terribly noteworthy.  Ms. McCrea ran a business as a wholesale seller of herbal medical products.  At first, the McCreas disagreed with an IRS assessment of their beginning inventory and purchases, but came to accept the IRS adjustments. 

The McCreas still disagreed with the IRS regarding their ending inventory.  The McCreas want the value to be the amount on their Schedule C for 2014.  The IRS, however, provided a different exhibit received by the IRS revenue agent during the course of examination.  The document is a physical inventory, which the petitioners claim is taken at the end of each year.  The results are provided each year on a document to their return preparer, who claimed he used the document to prepare their tax return, but did not supply the document to the IRS.  In fact, it seems a mystery for the petitioners who provided the document to the IRS.  Even though the parties’ exhibits are similar, there are items omitted from the Schedule C document that are on the IRS exhibit.  The difference between the two values is $21,112.

Judge Carluzzo finds a compromise.  The ending value on the Schedule C shall be supplemented with the items on the IRS exhibit that are not shown on the Schedule C.  The result needs to be calculated and will either match the Schedule C or a lesser amount.

The likely reason both orders were designated by Judge Carluzzo comes from an examination in both cases of 6662(a) penalties.  The evidence in each case showed that a supervisor approved imposition of a penalty on a date that preceded the issuance of the notice of deficiency.  The petitioners for each case were first formally advised regarding the imposition of the penalty on a date that preceded issuance of the notes.  As a result, the IRS imposition of the section 6662(a) penalties were rejected.

Takeaway:  Judge Carluzzo is reviewing 6662(a) penalties and will reject those penalties if they do not line up correctly in the timeline.

Whistleblower Claim Remanded to Whistleblower Office for Further Consideration

Docket No. 13513-16W, Loys Vallee v. C.I.R., Order available here.

In a whistleblower case, one of the main questions under IRC section 7623(b) is “whether the IRS collected proceeds as the result of an administrative or judicial action using the whistleblower’s information.”

Petitioner Loys Vallee provided information to the Whistleblower Office, but he was denied a claim by the IRS for a whistleblower award.  At issue before the Tax Court is the completeness of the administrative record.  Mr. Vallee filed a motion to compel production of documents in 2017 that led to what the IRS contends is the complete administrative record in 2018.  The parties filed their responses concerning the completeness of the record and it is now before the judge to make a decision.

The debate concerns the number of individuals who received the information and whether they forwarded that information to other IRS employees.  Partially, this debate is supported by the fact that not all the declarations stated that they did not forward Mr. Vallee’s filed information to any other group or person than those stated in the declaration.  Mr. Vallee provides his own list of individuals who had access to the information he provided.

Mr. Vallee makes statements concerning Corporation D, Related A, and Related B in his submissions to the Court.  Corporate D and Related A consolidated and he argued the consolidation allowed Corporate D to use Related A’s accumulated tax credits to satisfy its own tax liability in a method known as refund netting.  The Tax Court notes that Mr. Vallee did not use the term refund netting in his Form 211 or the lengthy attachments so cannot advance a new claim or try to cure deficiencies in previous claims.

The Court reviews the information from the IRS and notes there is an issue with what they provided.  The IRS states that the four individuals they cite that received the information followed the protocol of the Internal Revenue Manual (IRM) and kept the petitioner’s information confidential.  They have provided a declaration for one individual named and state there was no need to follow up with the other three individuals since her form provides feedback about the division.  Judge Gustafson disagrees, stating that while the actions discussed indicate the individuals followed IRM provisions, the IRS needs to provide affidavits or declarations concerning the other three individuals.  The declaration in question provided cannot cover personal knowledge about the actions of the other three individuals.

The judge says that there are still two unanswered questions regarding Mr. Vallee’s entitlement to a whistleblower award.  Who received the Form 211 information and what did they do with it?  Was that information used in an examination that resulted in the collection of proceeds?  Even though Mr. Vallee argues against remand, the judge shows that it is proper in a whistleblower award determination for remand regarding an insufficient administrative record.

Ultimately, the case is remanded to the Whistleblower Office for further consideration of those two questions and development of the administrative record.  The Whistleblower Office is to issue a supplemental determination with an explanation of the determination regarding the two questions.  They are to certify additions to the administrative record and that what has been provided constitutes the entire administrative record.  The judge ends by requiring the parties to provide (joint or separate) timetables for further administrative proceedings.

Takeaway:  There have been several looks at whistleblower claims in designated order blog posts in Procedurally Taxing.  While I do not know how much the IRS approves whistleblower claims, we get to review the denials.  From this vantage point, it seems like the IRS will fight the claims as much as possible.  The IRS basically attacks the claims on either of two fronts: (1) no action was taken by the IRS against anyone mentioned in the information provided or (2) any actions taken by the IRS concerning the individuals or businesses mentioned in the information provided by the whistleblower was based on other information and not based on the information provided by the whistleblower.

Mr. Vallee is fighting in Tax Court concerning the completeness of the administrative record and Judge Gustafson supports that fight by requiring the IRS to update who received that information and what actions they took.  Ultimately, the answer to be settled is whether the IRS took action against the businesses in question based on Mr. Vallee’s submission, settling whether he truly has a whistleblower claim.

Statistics on Cases in Litigation from ABA Tax Section Meeting in May

In May, the ABA Tax Section held its annual meeting in DC. Because of the location, this meeting has more government attendees than the other two meetings during the year. Since the government attendees were unable to attend the previous ABA meeting due to the shutdown, there was a fair amount of information disseminated by them at this meeting. My comments come from the first session of the Court Procedure and Practice Committee. This committee opens with a panel which includes government representatives from different parts of the tax world. There is a representative from the Office of Chief Counsel, from the Tax Court (usually the Chief Judge) and from the Tax Division of the Department of Justice. Chief Judge Foley announced the Court’s decision to allow limited representation starting in September and focused his remarks on that coming change. I expect that we will be writing more about that in coming weeks.

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Rich Goldman from Procedure and Administration provided lots of statistical information in the form of slides. Because the slides were not made a part of the material available to attendees, I requested them informally. Because the slides were not made available to me based on the informal request, I obtained them through FOIA. For that reason it has taken a little time after the meeting to make these slides available. The slides cover a few different types of cases in litigation and provide different perspectives on the cases. The slides not only provide a perspective of what’s happening in tax litigation over the arc of the last decade but they can provide context in some types of litigation where letting the court know of the numbers of certain types of cases can be useful.

Inventory of Cases in Litigation

The first set of slides (slides 2 and 3) discusses the dollars in dispute pending in Tax Court, the Court of Federal Claims and the district courts filed in the last decade. As you will see in later slides the vast majority of tax litigation by number of cases occurs in the Tax Court. Because so many of the cases in Tax Court involve small dollar amounts the amount of money in dispute in the other two courts can make their dockets look bigger. Just focusing on dollars the Tax Court is the clear winner but the contrast gets much starker when looking at number of case filed which you can find in the following slides, 4 and 5.

The data then moves from graphs to pie charts to provide a greater breakdown of the Tax Court’s inventory (slide 6). The pie chart is followed by another graph showing dollars in dispute by type of Tax Court case. It comes as no surprise that a small percentage of Tax Court cases dominate the amount of dollars at issue (slide 7).

Tax Court Filings by Category

The next slide provides a 10-year arc of the filings in Tax Court by category (slide 8). This graph shows that the number of Tax Court cases have declined in recent years but the decline has not been as significant as I might have expected given the cut back in some of the audit activity by the IRS. These slides do not show the percentage of cases petitioned based on the number of statutory notices or determinations issued by the IRS. A long time ago the percentage of cases filed in the Tax Court by taxpayers receiving notices that provided a ticket to Tax Court was around 3%. If that percentage still holds or provides even a reasonably close approximation of the number of filings per notice, you can see that a drop off at the Tax Court of 1,000 cases reflects a much more significant drop off at the IRS of the number of cases in which it sends a notice.

Receipts and Closures at the Tax Court

A trio of slides shows the number of receipts and closures at the Tax Court (slides 10, 11, and 18). The Tax Court has been closing cases faster than it receives them for several years. I have not seen statistics on how this has impacted the length of time a case spends in the Tax Court. I expect that the length of time from filing to conclusion has decreased but that type of statistic was not included in the package of statistics provided at the ABA meeting. Another pair of slides shows the receipts and closures by case category type (slides 12 & 13).

Sources of Cases Petitioned to Tax Court

One slide shows the sources of case petitioned to the Tax Court. No big surprise that Service Center notices provide the vast majority of cases. I go to the Tax Court fairly regularly and sit in the docket room looking at cases on upcoming calendars in Boston. It’s interesting when you go through a calendar to see the types of case that make it to the Court. I have been struck in the last few years how few earned income tax credit cases appeared on the calendars. A large number of cases involved unreported income picked up by the automated underreporter unit which matches the information returns against the information reported on the return. Without these computer audits, the number of Tax Court cases would plummet.

Settlement

Two of the slides focus on settlements showing cases settled in Appeals and in Chief Counsel’s office (slides 15 & 16). The vast majority of cases do not go through Appeals on the way to Tax Court because the vast majority of cases involve pro se taxpayers who do not avail themselves of the opportunity to go through Appeals. It would be interesting to see what would happen to the Tax Court inventory if exhausting your remedies by going to Appeals was made mandatory instead of voluntary as a part of getting to Tax Court. All Collection Due Process (CDP) cases take the Appeals route prior to coming to court.

Pro Se Cases in Tax Court

One slide shows the number of cases filed by pro se petitioners in Tax Court and the dollars at issues in those cases. While many of the petitioners filing pro se meet the criteria as low-income taxpayers under IRC 7526 which pegs qualification at 250% of poverty, a large percentage of the petitioners in this group file pro se because the cost of representation exceeds the amount at issue. For many middle income or even high income taxpayers a dispute with the IRS that involves less than $15-20,000 may not justify the cost of obtaining representation. For individuals working calendar call, it is not unusual to encounter these petitioners. Of course, many of the more sophisticated pro se petitioners, whether low, middle or high income, can navigate the system and settle with Appeals or IRS Counsel. Still, some of the pro se individuals from each income level need assistance to effectively manage their case to the best result.

Refund Cases

There are five slides depicting various facets of refund litigation (slides 19-23). The striking aspect of refund litigation is how few cases end up in refund litigation anymore. The number of refund cases has historically been much less than the number of Tax Court cases but that trend has significantly accelerated in the past couple of decades. Some cases must go the refund route because the Tax Court route is unavailable, either because of the type of tax or the taxpayer’s initial decision to report the tax and allow the IRS to make an assessment. Larger corporations with sophisticated counsel tended to go the refund route if the forum shopping opportunity provided the best path to victory. The reduction in refund cases may reflect the significant decrease in audits of the types of taxpayers who made this type of choice in years past.

Collection Due Process

Four slides show the numbers of CDP cases in the Tax Court. The number of these cases is not as large as one might expect. It is unclear why so few taxpayer who elect CDP choose to go to Tax Court.

It’s worth noting that the Chief Counsel’s office did not display in any of the slides the number of cases in litigation in the bankruptcy courts. Section 505(a) of the bankruptcy code gives taxpayers going through bankruptcy the opportunity to litigate their liability in bankruptcy. No statistics were provided to show how many and what type of taxpayers avail themselves of this opportunity. Despite this absence, the group of slides provides a fairly detailed look at the tax litigation system and the cases going through it.