Whistleblower Jurisdiction: Is Anyone Listening? – Designated Orders: July 22 – 26, 2019

This week featured three orders from Judge Armen, along with another brief order from Judge Kerrigan that extended the time for responding to a discovery request.

These will be among the last orders from Judge Armen. The Tax Court recently announced that Judge Armen retired from the bench, effective August 31, 2019. I’ve appeared before Judge Armen numerous times for trial sessions in Chicago. In those sessions, I always found him to be fair, thorough, and thoughtful. He always took time to walk pro se petitioners through the Court’s procedures, carefully listened to them, and explained the applicable law in an approachable manner. His presence on the bench will, indeed, be missed.

His first order is relatively unremarkable, save the exacting detail that Judge Armen uses to walk a pro se taxpayer through a relative simple issue (unsurprising, given his similar willingness to do so at trial sessions). Petitioner had contended that including unemployment income in gross income is “cruel, short-sighted, and runs afoul any theory of economic success.” That may well be, but Judge Armen painstakingly runs through the Code to demonstrate that unemployment income is specifically included in gross income under § 85 (and is otherwise generally includable under § 61(a)).

The other two orders are in pro se Whistleblower cases. Both grant summary judgment to the government because there was no administrative or judicial action to collect unpaid tax or otherwise enforce the internal revenue laws. For the Tax Court to obtain jurisdiction under IRC § 7623(b)(4), the IRS must commence such an action.

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Docket No. 17586-18W, Hammash v. C.I.R. (Order Here)

Petitioner submitted a Form 211, Application for Award for Original Information, with the IRS Whistleblower office, alleging that a certain business underreported taxes, and that the Petitioner had previously reported the business to the “IRS in California”. (One wonders whether Petitioner means an IRS office in California, or the California Franchise Tax Board; my clients often refer to the Indiana Department of Revenue as the “Indiana IRS”.) But, there wasn’t any further explanation or supporting documentation of the alleged malfeasance.

According to Respondent’s exhibits, the Whistleblower Office denied an award and didn’t otherwise refer the case for further investigation. The Petitioner timely filed a petition; from a review of the docket, it seems he may been represented by a POA at the administrative level, as a motion to proceed anonymously was originally filed by someone not admitted to practice before the Tax Court. The Court struck it from the record soon thereafter.

In any case, the particulars don’t really matter here. The limited information provided in the Form 211 isn’t what dooms Petitioner’s case; rather, it’s that the IRS never initiated an administrative or judicial proceeding to collect tax from the allegedly delinquent taxpayer.

For the Tax Court, this is a jurisdictional requirement under IRC § 7623(b)(4). The Tax Court is authorized to review a “determination regarding an award under [§ 7623(b)(1)-(3)]. IRC § 7623(a)(1), (2), and (3) provide for various awards. Paragraph (1) authorizes an award “[i]f the Secretary proceeds with any administrative or judicial action” related to detecting underpayments of tax or detecting and bringing to trial and punishment criminal tax violators. See IRC § 7623(a), (b)(1); see also Cohen v. Commissioner,139 T.C. 299, 302 (2012). Paragraph (2) and (3) awards are likewise premised upon an “action described in paragraph (1)”. Moreover, the government must collect some unpaid tax from the target taxpayer pursuant to such action, for the Tax Court to obtain jurisdiction.  

Neither an investigative action nor collection of proceeds occurred here. Petitioner didn’t provide any evidence to the contrary in the Tax Court proceeding; indeed, after the Tax Court struck his representative’s motion to proceed anonymously, he seemed to not participate at all. Therefore, summary judgment was appropriate and the Court sustained Respondent’s whistleblower determination.

Docket  No. 19512-18W, Elliott v. C.I.R. (Order Here)

This whistleblower claim contained substantially more detail than Hammash, but nevertheless Petitioner finds herself in the same situation.

Petitioner filed a Form 211, which according to the Court, alleged “a brokerage services firm . . . that was custodian for a certain qualified retirement plan was mishandling former plan participants’ accounts.” Unlike in Hammash, where it appears no outside review occurred, here the Whistleblower Office did forward the claim to a Revenue Agent at the IRS Tax Exempt and Government Entities division. The RA sent the claim back to the Whistleblower Office, noting that TEGE does not investigate custodians, but rather investigates qualified plans themselves.

The Whistleblower Office didn’t send the claim on to any other division of the IRS. Instead, it issued a denial letter essentially identical to the one in Hammash, noting that the information provided was speculative, lacked credibility, and/or lacked specificity.

Petitioner argued that her information was, in fact, credible and specific, and asked the Court to compel Respondent to investigate the claim.

While this case involved a much more engaged Petitioner with facially troubling allegations, one fact remains: it’s undisputed that the IRS did not conduct an administrative or judicial action to recoup any unpaid tax or otherwise prosecute violations of the internal revenue laws. No proceeds were collected either. Further, the Court cannot, under the limited jurisdiction provided in IRC § 7623, determine the proper tax liability of the target taxpayer or require the IRS to initiate an investigation. See Cooper v. Commissioner, 136 T.C. 597, 600 (2011).

Thus, the Court granted Respondent’s motion for summary judgment and sustained Respondent’s administrative denial of the whistleblower award claim.

One small nitpick: here and in Hammash, the Court determined that it lacked jurisdiction. Yet it “sustained” Respondent’s administrative determination. While it arrives at the same conclusion, I don’t believe that’s the proper result under Cohen or Cooper. Under those cases, the Court lacks the power to sustain or overturn the determination to deny the claim; it should therefore dismiss the case for lack of jurisdiction, rather than sustaining Respondent’s determination.

Application of Ex Parte Provisions in Collection Due Process Hearing

We have not written much about the ex parte provisions that entered the code in 1998.  We have a couple of posts on the topic here and here.  In the recent case of Stewart v. Commissioner, T.C. Memo. 2019-116 the taxpayer alleges that material in the administrative file created an ex parte communication.  The Tax Court decided that the material did not violate the provision prohibiting ex parte communications between Appeals and other parts of the IRS that might improperly influence Appeals. 

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The Stewarts received a CDP notice of intent to levy for 2015 and a CDP notice of the filing of a notice of federal tax lien for 2015 and 2016.  Although the court doesn’t write about the amount that the Stewarts owe the IRS, my guess is that they owe a fair amount because their case was being handled by a Revenue Officer.  The clients in my clinic usually do not owe enough to have a revenue officer (RO) assigned to their cases.  I prefer cases in which a revenue officer works the case because then I have only one person to deal with and I do not have to contact the Automated Collection Site.  Because ROs have their boots on the ground in the community where the taxpayer lives, it’s also possible for them to understand local issues in a way that someone sitting in a windowless room on the other side of the country might not.  Of course, the down side of a revenue officer is that they see things someone on the other side of the country might not see.

In this case the Stewarts’ representative seems not to have formed a favorable relationship with the revenue officer.  In fact, he invited the RO to leave his office in what the RO describes as a brusque manner.  The RO put his interactions with the representative into his case notes.  When the representative decided he could not achieve his goals for the case with the RO, he let the RO know that his next stop was Appeals.  That stop came as a result of a CDP request.  Unfortunately for the Stewarts the Settlement Officer (SO) in Appeals seemed to see the case similar to the way the RO saw the case.  The representative believes that the RO improperly influenced the SO and raises that issue in the context of ex parte and how the alleged ex parte actions of the RO tainted the CDP hearing.  Here’s how the court characterized the argument:

Petitioners contend that the ICS history transmitted to SO Wert as part of the administrative file was an ex parte communication. They contend that they were not aware that RO Wagner’s “gratuitous characterization” of petitioner’s counsel was part of the administrative record. Petitioners request that their case be remanded to the Appeals Office and assigned to a different settlement officer who has not been exposed to the alleged ex parte communication. Respondent contends that the alleged ex parte communication was a permissible transmittal of petitioners’ administrative file between the revenue officer and the settlement officer during the CDP process.

Congress created restrictions on ex parte communications in the IRS Restructuring and Reform Act of 1998, Pub. L. No. 105-206, sec. 1001(a)(4), 112 Stat. at 689 but the provisions did not make it into the Internal Revenue Code.  Instead, the IRS flushed out the rules regarding CDP in a pair of Revenue Procedures, Rev. Proc. 2000-43, 2000-2 C.B. 404, amplified, modified, and superseded by Rev. Proc. 2012-18, 2012-10 I.R.B. 455. Rev. Proc. 2012-18, sec. 2.01(1), 2012-10 I.R.B. at 456.  The 2012 revenue procedure defines ex parte communication as “a communication that takes place between any Appeals employee * * * and employees of other IRS functions, without the taxpayer * * * [or her] representative being given an opportunity to participate in the communication.” The “communication” referred to in the revenue procedure includes oral and written communications.

The court notes that transmitting the administrative file to Appeals from the appropriate function does not normally create an ex parte communication.  If it did, Appeals employees would operate almost totally in the blind; however, the court also notes that the 2012 revenue procedure provides some guidance about what should not be included in the administrative file such as material “if the substance of the comments would be prohibited if they were communicated to Appeals separate and apart from the administrative file.”  In essence, taxpayers’ representative here argues that the RO by including in his field notes that the representative impolitely asked the RO to leave the office of the representative prejudiced the SO improperly making the communication an ex parte communication.  Stated differently, the representative felt the RO put this into his notes for the purpose of communicating to the SO something other than “just the facts.”

The court is not buying what the representative is selling.  It finds that the RO’s notes were contemporaneous.  They were made according to his duties as an RO.  As such they were an appropriate part of the administrative file and not something the RO created for the purpose of improperly prejudicing the taxpayers in Appeals.  Since this was the only argument the taxpayers made in their CDP case, the court sustained the determination by Appeals to allow the IRS to levy on the taxpayers and to leave in place the notice of federal tax lien.  The outcome here seems appropriate on the facts described.  Certainly, circumstances could exist in which the IRS employee seeks to improperly influence Appeals by putting material into the files that does not belong there, and the court cited to some cases of that type, but this does not appear to fit those circumstances due to the timing of the RO’s notes and the fact that his characterization does not appear challenged.

In the Taxpayer First Act Congress made a brief return to the issue seeks to make Appeals even more independent than it was previously.  To the extent it has even more perceived independence, perhaps the ex parte rules have more importance.  Like the provisions providing taxpayer rights, the ex parte provisions contain no specific remedy for the failure to follow the rules.  Although the Tax Court finds no ex parte violation here and, therefore, fashions no remedy, perhaps its willingness to fashion a remedy for violation of this provision has something to say about remedies it might fashion for a violation of TBOR.  So, far the Tax Court has not looked to fashion remedies for TBOR violations as discussed in prior posts here and here and an article I wrote here.

Innocent Spouse Survives Motion to Dismiss in Jurisdictional Fight with the IRS

We welcome Sarah Lora, Assistant Clinical Professor and Director of Lewis and Clark’s Low Income Taxpayer Clinic and Kevin Fann, 3L at Lewis and Clark Law School.  Their clinic just won an important victory in the innocent spouse arena overcoming an argument from the trial section of the Department of Justice Tax Division that completely disagrees with the arguments made by the appellate section of the Tax Division.  Keith

In his Opinion and Order issued last month in Hockin v. United States, Oregon District Court Judge Michael Simon rejected in part a magistrate judge’s findings and recommendations to dismiss and rejected the DOJ’s argument that the government had not waived sovereign immunity to be sued, holding that a taxpayer could bring an innocent spouse claim in federal district court as part of her larger tax refund claim against the IRS.

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The dispute concerned whether an alleged innocent spouse could follow the Flora rule of “pay first, litigate later” in her § 6015(f) claim.  In the past, the DOJ has presented contradictory arguments for and against the Flora rule in these innocent spouse refund cases, a contradiction highlighted by several advocates, including former NTA Nina Olson as well as Keith and Carl from Harvard’s Low-Income Taxpayer Clinic. In previous cases against clients at Harvard LITC , the DOJ insisted that taxpayers who miss the chance to file in U.S. Tax Court could still pay the assessment and litigate a refund claim in federal district court. In Hockin and several other cases, however, the DOJ turned a 180, arguing exactly the opposite, that the district court has no jurisdiction in innocent spouse refund suits.

Several years ago, Plaintiff Kimberly Hockin filed a claim with the IRS for innocent spouse relief of joint and several liability for tax years 2007 and 2008.  The claims for each year were based on the same facts: she did not sign the return and, in the alternative, she should be relieved of liability anyway based on § 6015(f).  The IRS granted her 2008 claim, but it denied the 2007 claim with no clear explanation for the different outcomes.

Ms. Hockin attempted to appeal the decision by filing a petition in U.S. Tax Court, but she had missed the filing deadline by 555 days. After the Tax Court’s dismissal, Ms. Hockin sought the assistance of the Lewis & Clark Law School LITC. By the time she contacted us, Ms. Hockin had paid the full balance due for 2007 through offset refunds over the years. After filing for a refund administratively, the LITC filed a complaint in U.S. District Court, led by volunteer attorney Scott Moede of the Office of the City Attorney in Portland, Oregon. The complaint sought a refund of her payments for 2007 made within the last two years, citing jurisdictional statutes 28 U.S.C. § 1346(a)(1) and IRC § 7422(a), for three reasons:

  1. Ms. Hockin never signed the return;
  2. the IRS is barred from collecting the tax liability for 2007 under the theory of quasi-estoppel (i.e. it granted relief for tax year 2008 but not 2007 under the same facts); and
  3. the United States erroneously collected taxes she should have been relieved of paying under the rules of innocent spouse relief.

The United States filed a motion to dismiss, arguing that the taxes had not been “illegally or erroneously collected” as required by § 1346(a)(1) for the district court to have subject matter jurisdiction. 

After extensive briefing, including an amicus curiae brief filed by Keith and Carl of the LITC at Harvard Law School, magistrate Judge Jolie Russo held oral arguments. The United States conceded the first claim should go forward. After all, there was a genuine dispute of fact about whether the return had been signed, and no copy of the return had been produced by Ms. Hockin, the IRS, or the ex-spouse. On the claims of quasi-estoppel and innocent spouse, Judge Russo said she leaned toward granting the government’s motion to dismiss and asked Attorney Moede and Lewis and Clark law student John MacMorris-Adix ’19 to convince her otherwise.  Within a few weeks, Judge Russo issued her Findings and Recommendations (F & Rs). She had granted the government’s motion to dismiss the quasi-estoppel and innocent spouse relief.

Undeterred, the clinic objected to Russo’s F & Rs.  The Article III review Judge Michael Simon requested additional briefing, citing part of the government’s original motion to dismiss, which admitted that, if plaintiff had filed her claims in both U.S. Tax Court and U.S. District Court, § 6015(e)(1)(A) cedes jurisdiction to the District Court. Simon asked the parties to answer several questions, including, “[W]hy isn’t Plaintiff’s failure to file a timely petition in U.S. Tax Court excusable neglect of an administrative technicality?” We tried not to get too excited, since it is rare for an Article III judge to disagree with a magistrate’s F & R.

The parties briefed Judge Simon’s questions within about two weeks. Two days after briefing, he issued his ruling, granting the Government’s motion as to the quasi-estoppel claim but denying the Government’s motion as to both the unsigned return and the innocent spouse claim! The opinion relied primarily on Flora v. United States, Wilson v. Comm’r, and Merriam-Webster’s plain-language definition of “wrongfully.”

The court held:

The IRS may grant innocent spouse relief even when the amount of tax assessed or collected was precisely the correct amount that the married couple owed given their financial circumstances. But 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422(a) do not waive sovereign immunity and provide a cause of action solely for claims that a tax was erroneously or illegally assessed. They also apply to claims that the tax was “in any manner wrongfully co[ll]ected.” A claim that “it is inequitable to hold the individual liable” falls within the scope of an allegation that a tax was “in any manner wrongfully collected,” giving “wrongfully” its plain meaning, which would include unfairly or unjustly. See Wrongful, MERRIAM-WEBSTER.COM, https://www.merriam-webster.com/dictionary/wrongful (last visited August 14, 2019) (definition: wrong, unjust).

In addition to the plain-meaning definition of “wrongful,” the court also resisted the Government’s strained logic when it pointed to clear and basic principles of justice and economy. On that point, the court held that tax refund cases could obviously contemplate innocent spouse relief at the same time, because if the two issues were tried separately under separate jurisdictions, contradictory results might occur. The court stated, “If Plaintiff wins on her refund claim, then she must lose on her innocent spouse claim. Were this dispute adjudicated in two different forums, the result could be contradictory rulings.” The Government had produced dozens of pages of logical loopty-loops about why that simple judicial principle should not apply. In the end, the court did not buy it.

The question still arises, however, as to whether this ruling extends to stand-alone innocent spouse claims. Although the court stated that “[n]othing in the innocent spouse statute, or elsewhere in the Tax Code, suggests that a claimant seeking innocent spouse relief cannot opt to ‘pay first [and] litigate later’ in district court,” the court also made a point to recognize that this was not a stand-alone case, because it also involves a “jurisdictionally valid refund claim” for lack of a signature on the return. 

The Hockin case will be set for trial in federal district court early in 2020.

DOJ Seeks En Banc Rehearing of D.C. Cir. Myers Whistleblower Opinion

On July 2, 2019, the D.C. Circuit held that the 30-day filing deadline for bringing a Tax Court whistleblower award review suit at section 7623(b)(4) is not jurisdictional and is subject to equitable tolling. Myers v. Commissioner, 928 F.3d 1025. I blogged on the opinion here. Upset at its first loss in one of the cases in which Keith and I and the Harvard clinic have been making this argument as to various Tax Court filing deadlines (including in our amicus brief in Myers), the DOJ, on September 12, 2019, petitioned the D.C. Circuit to rehear the case en banc as to both the jurisdiction and equitable tolling rulings.

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I won’t repeat in detail from my prior post how the D.C. Circuit reasoned that the filing deadline is not jurisdictional under recent Supreme Court non-tax case law. But, basically, the court held that, while the Code section clearly gave the Tax Court jurisdiction to hear such cases, the Code section was not sufficiently clear, by using the words “such matter” in a parenthetical, that Congress also wanted the filing deadline to be jurisdictional. Absent such a “clear statement”, the Supreme Court’s current position is that filing deadlines are not jurisdictional. In the DOJ’s rehearing petition, the DOJ basically repeats what it argued before – that “such matter” necessarily implies the filing deadline as well as the subject matter of the case.

When the D.C. Circuit ruled (2 to 1) against the DOJ on this argument, the court stated that it recognized how its ruling was “in some tension with” both Duggan v. Commissioner, 879 F.3d 1029 (9th Cir. 2018), and Guralnik v. Commissioner, 146 T.C. 230 (2016), each of which held that the section 6330(d)(1) Collection Due Process Tax Court filing deadline is jurisdictional and not subject to equitable tolling on language virtually identical to that in section 7623(b)(4).

My favorite passage from the rehearing petition is one with which I wholly agree:

The majority recognized that its holding “is in some tension” with that of the Ninth Circuit regarding “a similarly worded provision of the Internal Revenue Code, 26 U.S.C. § 6330(d)(1).” (Add.20.) But that is an understatement (to say the least). It is simply not possible to reconcile the decision in this case with Duggan.

The petition makes no new arguments, with the exception of (in the equitable tolling section) adding information (not previously given to the court) about how many whistleblower award claims are received each year — over 10,000. The DOJ argues that there would be huge administrative problems if equitable tolling were allowed because a lot of those claimants (including ones whose claims were long ago turned down) could now file late in the Tax Court. That, of course, is pure speculation. What the DOJ doesn’t mention is that, up to now, there have only been about 100 whistleblower award cases under 7623(b)(4) pending in the Tax Court at a time. This latter figure appeared in the appellant’s brief from a 2017 report of the whistleblower office.

In its rehearing petition, the DOJ also raised the specter that some awards may already have been given to one whistleblower, but if late Tax Court petitions are allowed, equitable tolling could lead to duplicate awards. I seriously doubt that is a real concern. Equitable tolling is a matter of equity. If a court saw that by a petitioner waiting so long, the IRS could now be in a situation to have to pay two awards, no doubt that is an equitable fact the court would consider in deciding whether tolling should be allowed.

The DOJ also makes an argument that it did not make before to the panel below — that there should be no equitable tolling because there is a cottage industry of lawyers that brings whistleblower award suits. In Sebelius v. Auburn Regional Medical Center, 568 U.S. 145 (2013), the Supreme Court held that there should be no equitable tolling because the Medicare concerns who were seeking reimbursement decision reviews before administrative boards were sophisticated companies who elected continuously to participate in the Medicare system and were well-represented by counsel. The Myers court pointed out that, by contrast, the Tax Court generally is a place where petitions are filed pro se by people who have never filed before — like Myers himself. So, it distinguished Auburn.

It troubles me that the DOJ did not give statistics to support its argument on how many whistleblowers (percentagewise) file pro se and represented Tax Court petitions. In any event, whistleblowers can’t be said to have elected to participate in the award system. Mr. Myers simply felt that his former employer had misclassified both him and other similar workers as independent contractors and suggested an audit.

Observations

I am told by people who do appellate work full time that the D.C. Circuit is stingy with grants of rehearings en banc. So, I am not expecting the petition to be granted. Then, the question will be whether the Solicitor General seeks cert.

This may be a similar situation to when, as an amicus, I helped persuade the Ninth Circuit in Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015), that the filing deadline in section 6532(c) for a district court wrongful levy suit is not jurisdictional and is subject to equitable tolling under recent Supreme Court case law. The DOJ also filed a petition for a rehearing en banc with the Ninth Circuit – pointing to a clear conflict with opinions of other Circuits holding the filing deadline jurisdictional and not subject to equitable tolling (though those opinions predated the 2004 change in Supreme Court case law on jurisdiction). The Ninth Circuit did not grant the en banc rehearing. Then, the DOJ did not pursue the matter by filing a cert. petition.

But, I would be happy to see the jurisdiction and equitable tolling issues elevated to the Supreme Court. So, I am not hoping for a similar SG abandonment of the Myers case. In the rehearing petition, the DOJ argues that this is a matter of exceptional importance to the IRS. But, then, people seeking rehearing always say that.

11th Circuit Reverses and Imposes an Injunction Against a Corporation for Failing to Pay

We have discussed before the increasing practice of the Department of Justice Tax Division to seek an injunction against an operating business that pyramids its tax liabilities.  Pyramiding is the term used for taxpayers who keep building higher and higher tax liabilities by failing to pay period after period.  Usually, it applies to a company that fails to pay employment taxes by failing to withhold the income and employment taxes from its employees and pay the taxes over to the IRS.  Pyramiding typically occurs when a company lacks sufficient cash flow but sometimes it results simply from greed and a belief that the IRS will not catch the person and make them pay.

If a company pyramids its employment taxes and the IRS has no practical means of collecting from the company, the IRS, many years ago, would shut the company down, or attempt to do so, by issuing levies or seizing property even though the company had no equity in seized assets or funds in the bank.  By seizing assets of the business the IRS could effectively close the business temporarily and that might cause it to close permanently.  Other levies would frequently stop suppliers from supplying or banks from lending even if they produced no dollar return.  The goal of these seizures and levies was not to get money but to keep from losing more money.  The practice of no equity seizures went away over 30 years ago.  After the demise of no equity seizures, revenue officers longed for a tool to shut down the taxpayers in situations in which the taxpayer continued to run up liabilities no matter what the revenue officer tried to do. 

Finally, the government, after many years of discussing the possibility, decided that it could bring an injunction action seeking to stop the pyramiding taxpayer from running up additional liabilities.  Doing this through an injunction takes longer and cost more money from the perspective of the time and effort of the Department of Justice trial attorney but can prove an effective method of shutting down a business that continues to ignore the requirement to pay payroll taxes.  In United States v. Askins and Miller Orthapedeatrics, D.C. Docket No. 8:17-cv-00092-JDW-MAP (11th Cir. 2019), the 11th Circuit agreed with the IRS that an injunction of the business was appropriate remedy to stop a business from continuing to incur employment taxes.  In ruling for the IRS, the 11th Circuit reversed the decision of the district court which had denied the IRS injunctive relief.  The case represents an important circuit level discussion of what the IRS needs in order to succeed in obtaining injunctive relief.

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 The business at issue was run by two brothers.  The brothers had caused the business not to pay its employment taxes, both trust fund and non-trust fund, since 2010.  The brothers also created trust and other entity accounts in order to hide the assets of the business.  In many ways the case read as a textbook case for a criminal prosecution against the brothers. A high percentage of injunction cases seem to fit the bill for criminal prosecution and DOJ does prosecute people for failing to pay employment taxes – something it almost never did three decades ago.  I do not know what causes the decision to fall into the injunction box rather than the prosecution box, but here the government chose the civil route.

The court described the situation as follows:

“The IRS has tried several collection strategies over the years. It started with an effort to achieve voluntary compliance: IRS representatives have spoken with the Askins brothers “at least 34 times” since December 2010, including 27 in-person meetings. Twice they entered into installment agreements that set up monthly payments to bring Askins & Miller back into compliance, but the company defaulted both times. Two other times, they warned Askins & Miller that continued noncompliance could prompt the government to seek an injunction.

The IRS has employed more aggressive means as well. It served levies on “approximately two dozen entities,” but most “responded by indicating that there were no funds available to satisfy the levies.” Three entities paid some money, but not nearly enough to satisfy Askins & Miller’s debts or to keep pace with its accrual of new liabilities. Additionally, the IRS’s ability to collect payments through levies has been hampered by the defendants’attempts to hide Askins & Miller’s funds and to keep the balances in Askins & Miller’s accounts low. Between 2014 and 2016, the Askins brothers transferred money from Askins & Miller to “RVA Trust,” which operates a private hunting club for the brothers, and “RVA Investments,” an accounting business associated with their father. The IRS also discovered additional accounts at BankUnited and Stonegate Bank. It did not seek to levy RVA Trust, RVA Investments, or the bank accounts because it discovered them after this case had been referred to the Department of Justice and because the IRS believed that “there is a substantial risk that any new levy would result in opening new undisclosed accounts and moving the money there.”

When the IRS finally gave up on its administrative collection efforts and referred the case to the Department of Justice for the pursuit of an injunction, it met another obstacle.  The district court denied the motion without prejudice finding the declaration conclusory, and finding that the proposed injunction was “effectively an ‘obey-the-law’ injunction.”  The IRS filed a new declaration with the district court trying again to convince it to enjoin the taxpayer’s actions.  The district court again reached the conclusion that the requested injunction served as an order to obey the law.  After the second attempt at the district court, the IRS appealed.  While the case was pending in the district court, the taxpayer ran up even more liabilities.

To obtain a preliminary injunction under “the traditional factors,” the IRS must demonstrate 1) a substantial likelihood of success on the merits, 2) that it will suffer irreparable injury unless the injunction is issued, 3) that the threatened injury to the IRS outweighs whatever harm the proposed injunction might cause the defendants, and 4) that the injunction would not be adverse to the public interest.  The district court noted that the parties essentially agreed that three of the four traditional elements for an injunction case were met by the facts of the case, but felt that the IRS could obtain a judgment for damages and, therefore, did not face irreparable injury.  The IRS argued that such a judgment was meaningless under the circumstances since it had exhausted its administrative efforts with its powerful administrative tools in trying to collect the outstanding debt.

Taxpayers raised a question of whether the closure of their business rendered the case moot.  The court went through a thorough analysis of factors of mootness factors and determined that remanding the case to the district court for a determination of mootness would serve no purpose but delay stating:

“Given the undisputed facts before us, we do not believe that the defendants can satisfy their “heavy” and “formidable” burden of making it “absolutely clear” that their behavior will not recur. And “we are unpersuaded that a remand would further the expeditious resolution of the matter.” Sheely, 505 F.3d at 1188 n.15 (conducting mootness analysis without remanding for further fact finding). The district court already concluded that the defendants have “a proclivity for unlawful conduct” and are “likely to continue ignoring” their tax obligations. The record demonstrates a near-decade-long saga in which the IRS has pursued Askins & Miller time and again. Over that time span, the defendants have funneled money to new accounts and entities as the IRS closed in on the old ones. For at least the time between November 2015 and mid-2018, Askins & Miller continued as a going concern despite reporting “no investments, no accounts or notes receivable, no real estate, and no business equipment.” Against that backdrop — and in light of the defendants’ admissions that Askins & Miller “continues to exist” and that one of the brothers continues to practice medicine — “we can discern no reason for sending the question of mootness back to the district court for further review or fact finding.” Id.

Then the circuit court moved on to examine the issue of whether the IRS had an adequate remedy of law.  Addressing that issue, the court acknowledged that it had not addressed the issue in its past ruling.  It found that prospect of even more losses in the future made a compelling case for granting the injunction stating:

“The fact that the IRS is attempting to avoid future losses is key. As the IRS notes, it “is an involuntary creditor; it does not make a decision to extend credit.” In re Haas, 31 F.3d 1081, 1088 (11th Cir. 1994). As long as the brothers continue to accrue employment taxes, the IRS continues to lose money. This sets the IRS apart from the position of other creditors (who can cut their losses by refusing to extend additional credit), and — crucially — means that the injunction sought is not simply an attempt to provide security for past debts. Rather, the proposed injunction here would staunch the flow of ongoing future losses as the brothers continue to accumulate tax liabilities — unlike in cases where the loss has already been inflicted or would be attributable to a single event, where we have stated that injuries are irreparable only when they “cannot be undone through monetary remedies.” E.g., Scott, 612 F.3d at 1295 (quoting Cunningham v. Adams, 808 F.2d 815, 821 (11th Cir. 1987)).

Indeed, the record and the district court’s own findings demonstrate that the government’s proposed injunctive relief is “appropriate for the enforcement of the internal revenue laws,” 26 U.S.C. § 7402(a), and that the government will likely suffer irreparable injury absent an injunction. Among other things, the district court noted that Askins & Miller had “a proclivity for unlawful conduct,” had “diverted and misappropriated” the employment taxes it had withheld from its employees’ wages, and was “likely to continue ignoring” its employment tax obligations. The IRS’s declaration demonstrates that, over a period of several years, it expended considerable resources making numerous — and unsuccessful — attempts to collect Askins & Miller’s unpaid taxes. And in the face of all that, as the declaration explained, Askins & Miller is effectively judgment-proof. In short, the record amply demonstrates that, absent the requested injunction, the government will continue to suffer harm from Askins & Miller’s willful and continuing failure to comply with its employment tax obligations — including lost tax revenue and the expenditure of a disproportionate amount of its resources monitoring Askins & Miller and attempting to bring it into compliance — and that, in all likelihood, the government will never recoup these losses.”

Having determined that the IRS did not have an adequate remedy at law, the circuit court ended by addressing the district court’s concern that the IRS merely sought an obey the law injunction.  Here, it stated that:

“Finally, the proposed injunction goes well beyond merely requiring compliance with the employment tax laws. In fact, it lists numerous concrete actions for the defendants to take — to name only a few, segregating their funds, informing the IRS of any new business ventures, and filing various periodic affidavits — well beyond what a simple “obey-the-law” injunction would look like. In short, this case does not raise the sort of fair notice concerns that Rule 65(d) is designed to address.”

The Askins and Miller case represents a major victory for the IRS.  The problem with pyramiding business taxes needs a solution.  After many years of floundering to find a solution, the IRS has combined with the Tax Division of the Department of Justice over the past decade (or more) to pursue injunctions against the most egregious taxpayers engaged in pyramiding in situations in which the decision is made not to prosecute.  This is a great development for everyone except the taxpayers who pyramid.  The government needs to aggressively pursue these taxpayers.  Doing so requires significant resources, but success can stop taxpayers who fail to pay year after year.  The 11th Circuit provides a great discussion for how to stop this action.  The effort expended in succeeding here shows the difficulty the government encounters as it seeks to stop this type of taxpayer action and the amount of resources it must expend to do so.

An Estate Cannot Use the Financial Disability Provisions to Toll the Statute of Limitations for Filing a Refund Claim

The case of Carter v. United States, No. 5:18-cv-01380 (N.D. Ala. 8-9-2019) shows a limitation of the financial disability provision set out in IRC 6511(h). Ms. Carter is a personal representative of an estate. She failed to timely file an administrative claim for the estate and sought to use the financial disability provisions to hold open the time frame. The court finds that the language of the statute only applies to individuals. The court also spends a fair amount of time in its lengthy opinion talking about the issue of jurisdiction, a favorite topic at this blog. Both financial disability and jurisdiction will be discussed below. Carl Smith helped significantly in the writing of the jurisdictional portion of this post.

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Financial Disability

The decedent owned a lot of valuable stock in a bank but had the misfortune to pass away in the midst of the financial crisis of 2007-2008. The stock went down precipitously because of the great recession but fell to worthless status when a fraudulent scheme perpetrated on the bank was discovered. The dramatic drop in the value of the stock apparently caused Ms. Carter, the executor of the estate to develop issues that she alleges caused her to be late in submitting an amended return claiming a refund because the value of the stock at the valuation date for the estate tax return was actually lower than the amount reported on the return.

The IRS moved to dismiss because by the time she filed the amended return it was well past the ordinary time for filing a claim for refund. Ms. Carter withdrew her initial claim and filed another one to which she attached a doctor’s note explaining that she, the executor, was suffering from a medical impairment that prevented her from managing the affairs of the estate for five years. She also filed an affidavit with the second claim stating that no one other than her had the authority to act on behalf of the estate during the relevant time period. The IRS did not act on her new amended claim. After waiting six months she filed her complaint and the IRS moved to dismiss for lack of jurisdiction since the claim was filed out of time. The estate claimed a refund of over 3 million dollars stating that the stock was really worthless at the time of valuation based on non-public information that later became available.

We can all sympathize with someone who thought they were inheriting stock worth over $17 million and who found out it was worthless. Compounding this problem, according to footnote 2 of the opinion, was the fact that the bank executives urged Ms. Carter and a co-beneficiary not to sell their stock but to borrow from the bank to pay the estate tax. The two borrowed the money giving personal guarantees and they remain liable on those guarantees. So they not only lost all of the value that they thought the stock had but they owe money (lots of it) to boot. [I doubt they found much solace in the successful prosecution of the person who caused the devaluation.]

Such a turn of events could put someone in a tailspin that might cause some delays. The IRS did not argue that Ms. Carter was wrong in her assertion that she suffered from some unspecified medical impairment that kept her from acting. It essentially argued that this did not matter because the taxpayer was the estate and not an individual. It also did not matter that the stock may have been worthless at the time the estate reported it without knowing of the actions that devalued the stock. What mattered was that the refund claim came too late.

Footnote 6 of the opinion collects the case law on this issue which uniformly holds that the financial disability must belong to the taxpayer and not to some third person. Prior cases on this point include Murdock v. United States, 103 Fed. C. 389 (2012); Alternative Entm’t Enters., Inc. v. United States, 458 F. Supp. 2d 424 (E.D. Mich. 2006), aff’d 277 F. App’x 590 (6th Cir. 2008); Brosi v. Commissioner, 120 T.C. 5, 10 (2003) as well as others I will not detail here. I wrote a law review article several years ago detailing holes in the financial disability statute. This is another hole. I cannot say that Ms. Carter would win her case but if financial disability did keep her from filing her claim on time, and if she can prove the claim was valid, this seems like a worthy exception for Congress to make to allow a taxpayer to obtain the return of money that should not have come to the IRS in the first place. Until the statute changes to include a broader class of taxpayers with financial disability cases like this will continue to occur occasionally. Financial disability cases do not present large numbers and courts can sort through the disability claims. I would let them do it.

Jurisdiction

The court also spent time parsing its jurisdiction. This issue matters because nonjurisdictional filing deadlines are subject to waiver, forfeiture, estoppel, and, usually, equitable tolling. The Supreme Court in Brockamp v. United States, 519 U.S. 347 (1997) (remember it was Brockamp that caused Congress to pass IRC 6511(h) creating financial disability in the first place) merely held that equitable tolling doesn’t apply in 6511 cases, but the Court did not hold the other three defenses don’t apply. Brockamp says nothing about whether the filing deadline is jurisdictional. Indeed, the opinion doesn’t even contain the words “jurisdiction” or “jurisdictional”. Dalm v. United States, 498 U.S. 596 (1990) does contain language calling 6511 rules jurisdictional, but it goes on to reason that it is so because: 

Under settled principles of sovereign immunity, the United States, as sovereign, is immune from suit, save as it consents to be sued . . . and the terms of its consent to be sued in any court define that court’s jurisdiction to entertain the suit. A statute of limitations requiring that a suit against the Government be brought within a certain time period is one of those terms.

494 U.S. at 608 (cleaned up)

That statement is the reverse of good law today. SOLs now are almost never jurisdictional. 

The Supreme Court has not given much thought to the 1990 Dalm opinion in recent years, for if the Court did, the 1997 Brockamp opinion (which doesn’t even mention Dalm) could have been one sentence long: “Since jurisdictional filing deadlines are never subject to equitable tolling, and since, in Dalm, we called the 6511 filing deadlines jurisdictional, those deadlines cannot be equitably tolled.” 

Since the district court opinion did not involve the DOJ waiving or forfeiting the right to raise the untimeliness issue, nor did it involve facts that might cause estoppel, it really did not matter in Ms. Carter’s case whether the filing deadline is jurisdictional.

The district court has serious doubts that 6511 noncompliance arguments go to its jurisdiction. The court in the text relies on statements in Dalm making 6511 jurisdictional, but is sufficiently concerned that 6511 is not, that it goes on to decide the underlying merits against the taxpayer (not sure why it has to do this). Then, the court writes a long footnote about why 6511 might not be jurisdictional:

Supreme Court jurisprudence no longer accords similar limitations periods jurisdictional status. In United States v. Kwai Fun Wong, 135 S. Ct. 1625 (2015), the Supreme Court held the limitations period for filing a Federal Tort Claims Act case is not jurisdictional. The Court determined “the Government must clear a high bar to establish that a statute of limitations is jurisdictional.” Id. at 1632. “In recent years, [the Court has] repeatedly held that procedural rules, including time bars, cabin a court’s power only if Congress has ‘clearly state[d]’ as much.” Id. (citation omitted). “Time and again, [the Court has] described filing deadlines as ‘quintessential claim-processing rules,’ which ‘seek to promote the orderly progress of litigation,’ but do not deprive a court of authority to hear a case.” Id. (citing Henderson v. Shinseki, 562 U.S. 428, 435 (2011)). 

Therefore, to “ward off profligate use of the term ‘jurisdiction,’ [the Court has] adopted a ‘readily administrable bright line’ for determining whether to classify a statutory limitation as jurisdictional. . . . [Courts should] inquire whether Congress has ‘clearly state[d]’ that the rule is jurisdictional; absent such a clear statement, . . . ‘courts should treat the restriction as nonjurisdictional in character.’” Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145, 153 (2013). As a result, the Court has “repeatedly held that filing deadlines ordinarily are not jurisdictional. . . .” Id. at 154. 

Even more recently, the Supreme Court reconfirmed that a statute’s limitations period primarily pertains to claim-processing, not subject matter jurisdiction. See Fort Bend Cty., Texas v. Davis, 139 S. Ct. 1843, 1849 (2019) (“The Court has therefore stressed the distinction between jurisdictional prescriptions and nonjurisdictional claim-processing rules, which ‘seek to promote the orderly progress of litigation by requiring that the parties take certain procedural steps at certain specified times.’” (quoting Henderson v. Shinseki, 562 U.S. 428, 435 (2011))); Nutraceutical Corp. v. Lambert, 139 S. Ct. 710 (2019) (contrasting nonjurisdictional claim-processing rules subject to waiver by an opposing party with court procedural rules which clearly foreclose a flexible equitable tolling approach). “If a time prescription governing the transfer of adjudicatory authority from one Article III court to another appears in a statute, the limitation [will rank as] jurisdictional; otherwise, the time specification fits within the claim-processing category.” Hamer v. Neighborhood Hous. Servs. of Chicago, 583 U.S. at ___, 138 S. Ct. 13, 20 (2017).

Section 6511(a)’s filing deadlines appear to fall within the ambit of a claim-processing rule rather than a jurisdictional prerequisite. As similarly countenanced in Kwai Fun Wong, § 6511(a)’s “text speaks only to a claim’s timeliness, not to a court’s power.” 135 S. Ct. at 1632; see § 6511 (describing the filing deadlines for administrative claims for tax credits and refunds). Section 6511 “‘does not speak in jurisdictional terms or refer in any way to the jurisdiction of the district courts.’” Kwai Fun Wong, 135 S. Ct. at 1633 (citations omitted). Furthermore, § 6511’s limitations periods fall in a different section of the Internal Revenue Code from the jurisdiction granting provisions. See28 U.S.C. § 1346(a)(1); 26 U.S.C. § 7422.

The court cognizes the Supreme Court referred to § 6511’s time limits in jurisdictional terms in Dalm, In Dalm, the Court held the district court did not have jurisdiction over a suit seeking a refund of gift tax, interest, and penalties when the plaintiff did not file suit within the limitations period. Id. at 601. The Eleventh Circuit followed Dalm’s reasoning in dismissing a refund suit for lack of subject matter jurisdiction. Wachovia Bank, N.A. v. United States, 455 F.3d 1261, 1268-69 (11th Cir. 2006). However, the Supreme Court’s recent jurisprudence portrays that courts “once used [the term “jurisdiction”] in a ‘less than meticulous’ manner.” Nutraceutical, 139 S. Ct. at 714 n. 3 (citing Hamer, 583 U.S. at ___, 138 S. Ct. at 21; Kontrick v. Ryan, 540 U.S. 443, 454 (2004)). “Those earlier statements did not necessarily signify that the rules at issue were formally ‘jurisdictional’ as [the Court uses] that term today.” Id.

Nevertheless, the structural interpretation of § 6511(a) as a claims-processing rule may not overcome its prior construal as a jurisdictional provision. See Fort Bend, 139 S. Ct. at 1849 (The “Court has stated it would treat a requirement as ‘jurisdictional’ when ‘a long line of Supreme Court decisions left undisturbed by Congress’ attached a jurisdictional label to the prescription.”) Furthermore, notwithstanding the shadow cast on § 6511(a) as a jurisdictional provision, its limitations period applies to this action as it prescribes mandatory filing deadlines subject to a narrow tolling provision. See Nutraceutical, 139 S. Ct. at __ (“The mere fact that a time limit lacks jurisdictional force, however, does not render it malleable in every respect. Though subject to waiver and forfeiture, some claim-processing rules are “mandatory” — that is, they are “‘unalterable’” if properly raised by an opposing party.” (citing Manrique v. United States, 137 S. Ct. 1266, 1272 (2017); see also Kontrick, 540 U.S. at 456; Eberhart v. United States, 546 U.S. 12, 19 (2005) (per curiam) (A claim-processing rule manifests as “mandatory” when a court must enforce the rule if a party “properly raise[s]” it.). Therefore, Defendant properly raised the limitations period prescribed by 26 U.S.C. § 6511(a), and it applies whether it is designated as a jurisdictional or claim processing rule.

Conclusion

The Carter case provides much thought and analysis on the jurisdictional issue as it applies to refund claims. As you can see from this discussion, it does not simply stop at Brockamp. While the discussion does not help the taxpayer here, it may help to guide future taxpayers seeking to understand the possibilities for pursuing an otherwise late claim.

Sticker Shock and Settling on the Issues: Designated Orders, July 15 – 19

There were five designated orders for the week of July 15, three of which were perfunctory decisions in collection due process cases where the petitioner “filed and forgot” -in other words, after filing the petition, the taxpayer stopped doing much of anything to advance their case or respond to court orders. For the curious, those orders are here, here, and here. The remaining two orders appealed to my dual professional obligations: lessons in working with clients and teaching tax law. We’ll begin with one of the messy issues that arise in working with clients in tax controversy: backing out of settlement.

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Stipulated Issues and Sticker Shock: Kirshenbaum v. C.I.R., Dkt. # 10135-17S (order here)

The parties in this case have agreed on virtually everything, and even signed a stipulated settlement… and yet now the Kirshenbaums are having second thoughts. Why might that be? When the (fairly simple) issues are settled, the amount of tax that results is almost entirely a matter of math. My bet is that the Kirshenbaum’s had second thoughts when the numbers flowing from the stipulated words began to coalesce. A sticker-shock on the tax that would be due… and a sudden (futile) desire to renege. As an attorney, it demonstrates the two different languages you have to speak in settling tax matters: dollars and cents to the client, issues and law to the IRS. The last thing you want is the client backing out of settlement, wanting to argue issues with little merit, because they now realize that the merits mean they will owe more than they’d like.

The Kirshenbaum’s situation demonstrate how quickly taxes and penalties can cascade when there are errors on the return, and the return was late filed. To begin with, for late filers the “failure to file” penalty (IRC 6651(a)(1)) is a much quicker way to increase your bill than just filing on time without paying: the penalty accrues at a 5% monthly rate (to a maximum of 25%) rather than the 0.5% rate for failing to pay. Further, the amount of tax that the failure to file penalty is multiplied against is the amount “required to be shown on the return” (i.e. not necessarily the amount you actually report), so a later audit can retroactively bump up your penalty quite a bit. 

There is really no benefit I can think of to filing late, even if you are going to get late payment penalties. Perhaps the Kirshenbaum’s had a legitimate reason for filing late (though to get out of the penalties for “reasonable cause,” you generally need a really good reason, and demonstrate that you exercised “ordinary business care and prudence.” See Boyle v. C.I.R., 469 U.S. 241 (1985) and Les’s post on issues in the e-file age).

In any event, the Kirshenbaum’s return was both filed late and filled with easily detectable errors. The first easily detected error was a matter of calculation: the amount of taxable social security they reported (note that this wasn’t an instance of omitting social security income, but listing an amount received, and a corresponding “taxable” amount that doesn’t add up). That error was (presumably) fixed through IRC 6213(b)(1) “math error” authority. But then, on second (likely automated) look, the IRS also noticed that the return completely omitted roughly $38,006 of retirement distributions. A notice of deficiency was issued showing the increased tax, as well as increased failure to file penalty, along with an IRC 6662(a) penalty for good measure. That added up to a bill likely over $12,000, which the Kirshenbaums were not going to take lying down.

And their fight may actually have saved them some money, but only with regards to the IRC 6662 penalty. The other issues were largely foregone conclusions: if the additional retirement distribution was received and omitted by the Kirshenbaums, there would be additional tax due on it, as well as an increase in their taxable social security benefits simply as a matter of cold math. Since it was fairly clear that the additional retirement distributions were received (and taxable), the IRS and the Kirshenbaums were able to stipulate all of the issues, with the IRS conceding the IRC 6662 penalty (perhaps in good faith, perhaps because of a procedural infirmity). The Kirshenbaums signed the stipulation of settlement, thus avoiding the need to appear at calendar. All that remained was the decision document with a calculation of the deficiency (per Rule 155).

But when that calculation was done, the Kirshenbaums wanted to backtrack and argue the very issues they had stipulated to. The Tax Court was not having it: “They entered into an agreement, and we will hold them to their word.” Further, as Judge Gustafson alludes, there doesn’t really appear to be a “serious dispute to maintain about the matters[.]” The Kirshenbaums are grasping, agreeing that they received the retirement proceeds but picking fairly arbitrary amounts to treat as taxable. The Court isn’t going to play that game, especially after you fail to show up at trial after agreeing to all the issues. 

The most “difficult” clients I have are the ones that agree to the issues but want me to try to get the IRS to knock a few more dollars off the deficiency purely as a matter of negotiation. When the merits aren’t clear and there are hazards of litigation, there can be some wiggle room (see IRM 35.5.2.4). But where the correct outcome is clear there is really no “art of the deal” magic that can be done. This reality, I think, cuts against the popular conception of what lawyers do in back-room negotiations. At its worst, it can lead to clients wanting to back out of settlement when the issues are clear, as they were in the Kirshenbaum’s case. For an interesting and more detailed look at when settlement becomes binding, including when the IRS unexpectedly backs out, I highly recommend Keith’s piece here.

Bench Opinions, Substantive Law, and Innocent Spouse: Mayer v. C.I.R., Dkt. # 23397-17S (order here)

The crew at Procedurally Taxing have blogged about the value and nuances of S-cases and bench opinions before: here, here, and here. Keith has also written about bench opinions in more detail here. In the above order we have a bench opinion on an innocent spouse case that presents some interesting, though clearly not precedential, substantive application of IRC 6015(b) and (c). Because bench opinions are non-precedential (and not reviewed), the Judges sometimes appear more willing to bite on general equity concerns (even if they don’t present their opinions with that explicit rationale). To me, this opinion had some hints of that, and possibly even gets the law itself a bit wrong. 

The relevant facts can be boiled down to the following: husband (the requesting “innocent” spouse, in this case) and wife want to buy a house. To pay for it, they have to rely on their 401(k)s. Husband decides to borrow against the 401(k), whereas wife just takes a straight withdrawal. Wife pretty much controls the finances, including preparing the tax returns. When it comes time to file, wife omits the 401(k) withdrawal. Husband “paid little or no attention to the return” and signs it. The legal question at issue seems pretty straightforward: did the husband have “reason to know” of the understatement of tax by omitting the 401(k) withdrawal? He clearly knew she received money (i.e. knew of the transaction): is that enough for him to have “reason to know” of the understatement?

Judge Buch says “no, the husband did not have reason to know” because he was “not aware that there was an understatement,” since he did not really pay attention to the return when he signed it. Judge Buch also finds the other elements of IRC 6015(b) are met, including equity concerns, because “there is no indication that [the husband] benefitted in any way from [the 401(k) withdrawal].” 

I question both of those conclusions, but my bigger issue (as I’ll get to) is the legal reasoning applied to IRC 6015(c). For now, I’d say that I find it curious that in this case the husband appears to benefit from “paying little or no attention to the return” rather than asking reasonable questions… like whether his wife borrowed or withdrew the money he knows she took from her 401(k). See Treas. Reg. 1.6015-2(c). Similarly, I find it a bit charitable to say that he did not benefit from the withdrawal, when it went towards the purchase of their marital home. But perhaps there were other facts I am unaware of (including what happened to the home after the fact) that could better lead to those conclusions. 

Still, while there may be additional facts not referenced in the opinion that led to the decision (and the intervening ex-wife may also not have advanced her case well), the application of the law under IRC 6015(c) was a bit more troublesome to me. Generally, IRC 6015(c) relief is easier to get than relief under IRC 6015(b), because under (b) the requesting spouse can’t have “reason to know” of the understatement, whereas under (c) the requesting spouse can’t have “actual knowledge” of the item giving rise to the deficiency. The IRS bears the burden of proof in showing “actual knowledge” of the requesting spouse, which only makes the relief that much easier to come by. 

Judge Buch finds no “actual knowledge” of the item leading to the deficiency in this case because, again, the husband “was not aware that [his wife] took a premature distribution [rather than a loan] from a retirement account.” But is the fact the husband didn’t know (without asking) whether it was a loan and not a taxable distribution relevant, if he clearly knew that she received the money leading to the deficiency? And that is where I believe there was an error in the legal analysis.

Quoting King v. C.I.R., 116 T.C. 198 (2001), Judge Buch describes actual knowledge as “actual knowledge of the factual circumstances which made the item unallowable as a deduction.” He also directs readers to Treas. Reg. 1.6015-3(c)(2)(B) to further bolster the proposition. 

And Judge Buch is correct, as far as deductions go. But the “erroneous item” in this case is not a deduction: it is an omission of income. In fact, one paragraph above the treasury regulation cited to is a completely different standard for omitted income: “knowledge of the item includes knowledge of the receipt of income.” Treas. Reg. 1.6015-3(c)(2)(A). Both King and the regulation cited appear inapposite. In fact, much of King is spent discussing another precedential Tax Court case, Cheshire v. C.I.R, 115 T.C. 183 (2000) that expressly found you don’t need to know the tax consequences of an omitted retirement distribution to have “actual knowledge” of the item. Cheshire seems close to being on all-fours with the husband’s matter. King expressly reaches a different conclusion for actual knowledge of deductions, while preserving Cheshire’s actual knowledge of omitted income inquiry. 

Conceptually, I think there is a pretty good reason to hold taxpayers to a higher standard in relief from omissions of income than improperly taken deductions. I would say this is in part because income is presumably taxable, whereas deductions, as we are frequently told, are matters of legislative grace. In other words, you don’t have to be a tax expert to suspect that income should be on a return, whereas you do have to be closer to an expert to know if most deductions are really allowable.

To me, the innocent spouse husband got a far better deal than he would have if this were not a bench opinion. Apart from not being reviewed by other judges, bench opinions are given without the benefit of briefing from the parties (apart from, perhaps, pre-trial memoranda, which are generally optional in S-Cases like this one). I’d hope that IRS counsel would have hammered home on the distinction between omitted income and erroneous deductions if this were briefed. I am generally a fan of bench opinions when it involves simple questions of fact (and have been on the receiving end of a favorable Buch bench opinion in the past.)

I tell my tax procedure students that innocent spouse is about as far from typical tax law as you can get -that it usually involves equity and factual determinations far more than most other provisions in the Code. It is also fairly convoluted, as a matter of statute and regulation, because “innocent spouse” comes in three flavors. This bench opinion, perhaps, illustrates how easy it is to get tripped up on all the flavors and permutations even as a tax law expert. 

Application of IRC 6015, and particularly equitable relief under IRC 6015(f) is still being developed by the courts (and in some ways, by Congress in the Taxpayer First Act (see post here)). I believe the Court should have found “actual knowledge” from the requesting spouse in the above order, thus ruling out IRC 6015(c) relief. Since “actual knowledge” would necessarily meet the IRC 6015(b) “reason to know” standard, one would think that the only remaining avenue for relief would be “equitable relief” under IRC 6015(f) (Judge Buch found that the taxpayer was eligible for both (b) and (c), which both rules out and makes unnecessary relief under IRC 6015(f)). However, as noted in a previous post, the Tax Court appears to have taken a position that effectively makes “actual knowledge” a trump card, or at least far too heavily weighted as a factor, that may even preclude relief under IRC 6015(f). Keith and Carl have been working with that issue (the interplay of actual knowledge and equitable relief) in a case that is presently before the 7th Circuit. I naively hope that a decision is reached before I teach my class on innocent spouse relief this fall.

Time for the Supreme Court to Step In?: Sixth Circuit Denies Petition for Rehearing in CIC Services v IRS

Last month the Sixth Circuit declined to grant a petition for rehearing en banc in the case of CIC Services v IRS. The case, which I discussed following the original panel decision in In CIC Sixth Circuit Sides With IRS in Major Anti Injunction Act Case, involves the reach of the Anti Injunction Act (AIA). But the frank concurring opinions and the dissent accompanying the denial of the en banc petition reveal differing views on the role of the modern administrative state and how tax administration fits in with broader administrative law norms. At issue is when taxpayers or advisors can challenge tax rules: the AIA has pushed challenges to issues like IRS compliance with the Administrative Procedure Act (APA) rulemaking requirements (including whether the rule was issued under the APA’s notice and comment regime) to deficiency cases or refund proceedings. 

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CIC highlights some differences between the IRS and other federal agencies. First, tax practitioners and the IRS itself refer to regulations as guidance. IRS treats certain non-regulatory guidance published in its Internal Revenue Bulletin, including the Notice in the case at issue, as binding on the IRS (and for that matter taxpayers can rely on it). Other agencies distinguish between regulations and guidance, with those agencies treating regulations as binding but guidance as not.  In addition, other agencies generally expect that they will face pre-enforcement judicial challenges to the regulations that they issue. In contrast, pre-enforcement challenges to tax regulations or other binding IRS guidance are unusual, in large part because the AIA prevents suits to restrain the assessment or collection of tax.

So, tax administration rests somewhat uneasily within the broader framework of administrative law. To recap, the AIA generally pushes challenges to IRS rulemaking to traditional tax controversy venues, that is in Tax Court in deficiency cases (if the tax or penalty is subject to deficiency procedures) or federal courts in refund matters after having to fully pay and comply with the Flora full payment rule. Many other agencies gear up for challenges immediately after they promulgate binding rules rather than having to wait for enforcement proceedings. 

All of this comes into sharp focus in CIC. The IRS issued informal guidance (a Notice) without going through APA notice and comment. The Notice imposed additional reporting obligations on captive insurance companies and their advisors. Failure to comply with the requirements could trigger substantial civil penalties that are not subject to deficiency procedures. Failing to comply with the reporting theoretically could result in criminal sanctions for willful noncompliance. CIC, a manager of captive insurance companies, and an individual who also managed captives and provides tax advice to them, sued. They claimed that the Notice imposed substantial costs and that the IRS effectively promulgated legislative rules without complying with the APA’s notice and comment requirements. The plaintiffs sought to enjoin the IRS from enforcing the Notice and asked the district court to issue a declaratory judgment claiming that the notice was invalid.

The district court dismissed the suit, and the Sixth Circuit affirmed. That led to the petition for rehearing and last month’s brief but telling order accompanied by two concurring opinions and a dissent. In rejecting the petition for rehearing, one of the concurring opinions (authored by Judge Clay, who wrote the majority Sixth Circuit opinion), largely stuck to his guns and framed the issue as one that is covered by existing AIA precedent:

A suit seeking to preemptively challenge the regulatory aspect of a regulatory tax “necessarily” also seeks to preemptively challenge the tax aspect of a regulatory tax because invalidating the former would necessarily also invalidate the latter. Bob Jones Univ.,; see also NFIB, (“The present challenge to the mandate thus seeks to restrain the penalty’s future collection.” (emphasis added)). Otherwise, a taxpayer could simply “characterize” a challenge to a regulatory tax as a challenge to only the regulatory aspect of the tax and thereby evade the AIA. Fla. Bankers,. And “as the Supreme Court has explained time and again . . . the [AIA] is more than a pleading exercise.” see also RYO Machine, LLC v. U.S. Dep’t of Treasury, (6th Cir. 2012) (“Regardless of how the claim is labeled, the effect of an injunction here is to interfere with the assessment or collection of a tax. The plaintiff is not free to define the relief it seeks in terms permitted by the [AIA] while ignoring the ultimate deleterious effect such relief would have on the Government’s taxing ability.” (quotation and many citations omitted)).

Judge Sutton also concurred in the opinion denying the petition but his concurrence has a different flavor altogether.

(As an aside, this summer  I listened to the very entertaining Malcom Gladwell podcast Revisionist History. Season 4 Episode 1 (Puzzle Rush) and Episode 2 (The Tortoise and the Hare) feature Judge Sutton as one of the protagonists in Gladwell’s take down of the LSAT and the metrics for deciding who should gain entry into the nation’s elite law schools. Spoiler: Judge Sutton, who clerked for the late Justice Scalia and who attended the very respectable but not top five Moritz College of Law at THE Ohio State University is Gladwell’s poster child for why the LSAT and for that matter the way most law schools test students are in need of a major makeover).  

For one thing, Judge Sutton states that he agrees with the dissent’s view on the merits of whether the AIA prevents the courts from hearing the challenge to the Notice. Yet, Judge Sutton still believes that the case was not appropriate for an en banc hearing. His reason is that the Supreme Court, rather than the entire Sixth Circuit, should step in: 

[T] his case does not come to us on a fresh slate. Whatever we might do with the issue as an original matter is not the key question. As second-tier judges in a three-tier court system, our task is to figure out what the Supreme Court’s precedents mean in this setting. That is not easy because none of the Court’s precedents is precisely on point and because language from these one-off decisions leans in different directions.

Judge Sutton notes that the views are fairly well drawn on the issue—between the dissent in the panel opinion and the dissent in the denial of the petition by Judge Thapar, as well as the Florida Bankers DC Circuit opinion (authored by now Justice Kavanaugh) there is enough fodder for the Supreme Court to put together the seemingly (although not necessarily) contradictory approaches in the Direct Marketing and circuit court precedent on the reach of the AIA:

The last consideration is that we are not alone. The key complexity in this case—how to interpret Supreme Court decisions interpreting the statute—poses fewer difficulties for the Supreme Court than it does for us. In a dispute in which the Court’s decisions plausibly point in opposite directions, it’s worth asking what value we would add to the mix by en-bancing the case in order to create the very thing that generally prompts more review: a circuit split. As is, we have Judge Thapar’s dissental and Judge Nalbandian’s dissent at the panel stage on one side and Judge Clay’s opinion for the court on the other. These three opinions together with then-Judge Kavanaugh’s opinion say all there is to say about the issue from a lower court judge’s perspective. All of this leaves the Supreme Court in a well-informed position to resolve the point by action or inaction—either by granting review and reversing or by leaving the circuit court decisions in place.

The final part of the denial is Judge Thapar’s stinging dissent. Taking up the mantle of Judge Nalbandian’s dissent in the Sixth Circuit panel opinion, Judge Thapar discusses the differing legal takes on the reach of the AIA (and whether challenges to reporting requirements that are backstopped by penalties really count as a challenge to a tax rather than a challenge to the reporting requirement), but he also ups the rhetoric around how the majority approach to the AIA is out of sorts with broader principles of fairness. He warns of the parade of horribles associated with unchecked IRS power and a read of the AIA that requires parties to violate tax rules (and possibly have to go to jail) to get their day in court. For good measure, he points to how the IRS (at Congress’ direction) has taken on a more expansive role in society beyond collecting revenues.  This mission creep of the IRS makes the exceptional approach to the timing of when agency guidance is subject to challenge less justifiable. Absence of a right to pre-enforcement challenge, according to Judge Thapar, is inconsistent with principles of our constitutional system of checks and balances:

The Founders gave Congress the “Power To lay and collect Taxes.” U.S. Const. art. I , § 8 , cl. 1. They limited this power to Congress because they understood full well that “the power to tax involves the power to destroy.” M’Culloch v. Maryland, 17 U.S. 316 ,431 (1819) (Marshall, C.J.). But today, the IRS (an executive agency) exercises the power to tax and to destroy, in ways that the Founders never would have envisioned. E.g., In re United States ( NorCal Tea Party Patriots ), 817 F.3d 953 (6th Cir. 2016). Courts accepted this departure from constitutional principle on the promise that Congress would still constrain agency power through statutes like the Administrative Procedure Act. 5 U.S.C. § 500 et seq. We now see what many feared: that promise is often illusory.
 

Conclusion

Underlying the technical legal issues surrounding the reach of the AIA are fundamental policy questions concerning the power that the IRS has to issue guidance that is effectively and at times practically absent from meaningful court review. There are many good reasons for rethinking the path that requires taxpayers to not comply before having an institutional check on the IRS’s fidelity to the APA—especially if the challenged tax or penalty is not subject to deficiency procedures. As Judge Clay notes in his opinion affirming the denial of the petition, these policy questions raise issues that seem to call for a legislative fix. I discussed the need for possible legislation in a post earlier this year in the post Is it Time to Reconsider When IRS Guidance is Subject to Court Review?  In the absence of legislation, the opinions accompanying the denial of the request for en banc provide a strong signal that this issue is headed to the Supreme Court. CIC may be the vehicle that gets it there.