When is a Case Settled? When a Taxpayer Sends a Check (No) And When a Taxpayer Sends a Letter Reflecting Agreement With US Attorney (Yes)

Disputes with the IRS often involve negotiations and correspondence regarding settlement. Two recent cases involving unrepresented taxpayers demonstrate that at times the taxpayers may not fully understand the consequences of corresponding with the government. In many instances courts will turn to contract principles to examine whether the correspondence can demonstrate that the parties have a binding settlement agreement.

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In Longino v Commissioner a taxpayer sent a check and cover letter to the IRS essentially saying that if IRS cashed the check it agreed with him that he owed no additional money to the IRS. IRS cashed the check but also sought to collect on an assessment that stemmed from a case that the taxpayer lost in Tax Court. In this post I will explain how the taxpayer’s unilateral actions did not constitute a settlement, even when the IRS cashed the check.

In this case, Mr. Longino filed two tax returns for 2006, a 1040 and an amended return on October 17, 2007, a few days after filing the original return. IRS processed the returns separately. The amended return requested a refund of approximately $1,396, which the IRS sent to Mr. Longino, who cashed the check. IRS also examined Mr. Longino’s original 2006 tax return and proposed a deficiency of about $39,000, as well as an accuracy-related penalty.

Years later, in 2013, after Longino had filed a petition challenging the proposed deficiency but prior to the Tax Court rendering a decision, IRS also sent a letter to Mr. Longino informing him that he was not entitled to the $1,396 refund he claimed on the 1040X. Mr. Longino responded with a letter and included a check to the IRS for the $1,396. The letter also asked the IRS to “confirm…that we are now concluded on this tax return issue and we won’t have any more issues with IRS on that year.”  He asked the IRS to return the check to him uncashed if the IRS disagreed with him.

IRS ignored the letter, assessed the tax (it can do so when there is a Tax Court petition filed under Section 6213(b)(4)), and cashed the check. The deficiency case proceeded to trial. Mr. Longino lost. IRS attempted to collect on the unpaid assessed deficiency and filed a notice of federal tax lien. Longino filed a CDP request claiming that his letter and the IRS cashing of the $1396 check meant that he no longer had a liability for 2006. He argued that the cashing of the check in light of his letter demonstrated that the matter was resolved. He raised no other issues in the CDP request. Appeals disagreed and Mr. Longino petitioned the Tax Court again, essentially asking that the collection action was unwarranted because there was no liability.

The Tax Court disagreed, noting that he tried his deficiency case in Tax Court and lost; while there may be settlement of a Tax Court case through offer and acceptance, that was not present here. In addition, notwithstanding his letter to the IRS, and the IRS’s cashing of the check, the Tax Court held that there was no settlement as a result of his unilateral correspondence with the IRS Service Center:

Nor did petitioner reach a settlement with the IRS employee with whom he exchanged correspondence in May 2013. That correspondence occurred after we had issued our opinion in his deficiency case but before we entered our decision. The IRS service center employee with whom he corresponded did not offer to settle any tax liability. The IRS simply sent him a bill for $1,396, and he paid that bill.

The opinion cites a line of cases that establishes that submission of a check to the IRS and IRS cashing of the check is not enough to show that there was assent to the offer to settle the matter.

For good measure, the opinion notes that even if the IRS employee who reviewed the letter and authorized cashing the check were attempting to settle the case on behalf of the IRS, that employee lacked the authority to do so.

Taxpayers in Bauer Do Not Want Correspondence to Be Treated as a Settlement

The Longino case is to be contrasted with the Bauer case  out of the district court in Arizona, also decided last month. In this case the taxpayers owed over $800,000 to the IRS, and the government brought a collection suit. Federal liens attached to the property of the husband and wife; the main property was a principal residence owned by the husband but which the wife had some interest in due to her funding some of the renovations on the house.

The US attorney assigned to the case and the taxpayers themselves spoke directly after the government filed its complaint. They began settlement negotiations and the US attorney sent a letter with a proposed deal essentially requiring the Bauers to get a $250,000 home equity loan and pay that money to the government within 6 months. In exchange the government would withdraw its order of foreclosure and foreclosure claim and subordinate its liens. In addition, the letter set forth the understanding that after the payment of the $250,000 the parties would be free to negotiate the payment of the balance that was owed.

The US attorney asked the Bauers to review the letter, sign the letter and return it to him. By the terms of the letter, the letter stated that it was not an offer or acceptance of an offer; instead, by signing the letter and returning it to the government it would constitute an offer from the taxpayers, which the government would then “consider and act on the settlement offer once it has received [their] signature making the offer.”

The letter also spelled out that the Bauers did not have to agree to return the letter but if they did not do so the government would pursue summary judgment.The Bauers returned the letter and also forwarded a copy of the letter to the US attorney with the subject matter of the email noted as “agreement.”

Unfortunately for the Bauers they had a change of heart and shortly after sought to renege on the deal. In part, it appeared that they were unable to secure a $250,000 loan, and were only able to get a commitment for about half of that.  The Bauers sent an email saying they were not honoring the deal. The US filed a motion seeking to enforce what it claimed was a binding agreement.

The court agreed with the US and issued an order granting the motion to enforce. In doing so, the court reviewed settlement principles and held that the parties had entered into a binding contract.  In response to the motion the Bauers argued that they were coerced into entering into the agreement and the agreement was predicated on the government’s misrepresentations about the loan (namely that the Bauers could secure the financing). As to the US attorney’s views about the viability of the loan, the court stated that under contract principles a recipient of another party’s opinion  “is not justified in relying on the other party’s assertion of opinion because the recipient has as good a basis for forming his own opinion”). Further, the court noted that the Bauers should have independently investigated the possibility of getting financing before signing the letter:

Rather than taking Mr. Stevko’s advice as a guarantee that they would be able to secure adequate financing on the home, Defendants could have used their own knowledge about the market value of their home and looked into that question for themselves. They did not inquire about loans with banks until after making the offer to the United States and did not seek to withdraw from the agreement once they discovered they could not secure more than $126,000 from such a loan.

As to the claim that they were coerced, the opinion notes that the US attorney’s statement that if the Bauers did not enter into the agreement the government would pursue summary judgment did not in itself amount to coercion. Contract principles are clear that a party’s threat of civil process does not amount to duress unless that is done in bad faith. There was nothing to suggest bad faith in this case.

Conclusion

Taxpayers when interacting with the IRS or the government may be uncertain of the impact of what they are doing. Unilateral actions such as a notation on a check and cover letter may be sufficient to designate a payment for some purposes but are not enough to settle a case.  A signed letter reflecting an agreement that the taxpayer and the government attorney negotiated is quite different and the government can seek a court order that will require the taxpayers to abide by the terms of a settled case.

 

 

The Intersection of Foreclosure and Innocent Spouse

In United States v. Charles LeBeau, No. 3:17-cv-01046 (S.D. Cal. Oct. 16, 2018) the district court stayed a foreclosure action brought by the IRS to allow the taxpayer’s wife to pursue her innocent spouse claim. Because the innocent spouse claim has a ways to go from a procedural perspective, it may be some time before the foreclosure case starts back up. The case provides an interesting look at the intersection of foreclosure and innocent spouse and deserves some discussion.

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Victoria and Charles LeBeau were married at some point prior to 1980. They remain married though they are now legally separated. While the separation is legal, they continue to reside in the same house in La Jolla, California. For anyone not familiar with La Jolla, it generally has very nice houses near the ocean just north of San Diego. I will leave it to Bob Kamman to fill in the rest of the story on the value and location of the house. I am sure that Bob will find some interesting facts here that the opinion does not contain and that I am not tracking down. Keep a lookout in the comment section.

They bought the house in 1980 as joint tenants; however, they deeded the house to Victoria for no consideration in 1987. In 1988 Victoria transferred the property back to both of them for no consideration. Five days later they executed a deed of trust in favor of Security Allied Services to secure a loan of just over $300,000. In August of 1989, the couple transferred the property solely to Victoria again for no consideration. Charles created an entity known as Casa de Erin, LLC which the court describes as the alter ego/nominee of Charles and/or Victoria and in 2003 Victoria transferred the property to Casa de Erin for no consideration. In 2006 Casa de Erin rescinded the deed and transferred the property back to Victoria for no consideration and she remains the property’s nominal owner. The court notes that “upon information and belief, Charles LeBeau has continued to reside at the Property and has retained all the benefits and burdens of ownership.”

The IRS has already reduced its assessments to judgment and this case seeks to foreclose its lien on the property.

Given the recitation of facts in this case, I would not place a high value on Victoria’s chances of achieving innocent spouse status. If she was actively engaged in all of these transfers, innocence is not the word that comes to mind. In fact, the IRS denied her request for relief for many years though it did apparently grant her partial, but significant ($193,272) relief for 1995. She filed a petition with the Tax Court seeking review of the denial of relief on June 22, 2018. Charles has intervened in her Tax Court case presumably to argue that she should not be relieved of liability. (This is one of those cases where it might be really interesting to follow the pleadings if it did not require a trip to DC to the clerk’s office and 50 cents per page.) She asks that the district court stay the foreclosure of what I am presuming is a very nice place where they live and engage in deed swapping at a prodigious pace.

In the discussion section of the opinion the court first says that “the district court has no jurisdiction to decide an innocent spouse claim” citing to United States v. Boynton, 2007 WL 737725 (S.D. Cal. 2007) and Andrews v. United States, 69 F.Supp. 2d 972 (N.D. Ohio 1999). I do not necessarily agree with the court on this issue as discussed in the post in the Chandler case; however, the DOJ Trial Section attorney would have had difficulty arguing the opposite side of that issue.

The court next notes that it has broad discretion to stay proceedings noting that it must consider:

  • the possible damage which may result from the granting of a stay, (2) the hardship or inequity which a party may suffer in being required to go forward, and (3) the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay.

The defendants made the following arguments in support of a stay:

On the third factor, Defendants seek a stay pending resolution of the issues of “fraudulent transfers” and “nominee theory of ownership” now before the U.S. Tax Court arguing that Court lacks jurisdiction to consider these issues and a stay would avoid inconsistent rulings. On the second factor, they argue that a stay would cause hardship by being required to pursue litigation in two different courts. Lastly, on the first factor, Defendants content that a stay would not prejudice the government.

The court cites the Supreme Court’s decision in United States v. Rodgers, 461 U.S. 677 (1983) regarding its discretion to foreclose a federal tax lien on taxpayer’s property. We have discussed Rodgers before here in a case blogged by Les with some similarities to the LeBeau’s situation. After discussing the general Rodgers factors a court should weigh in deciding whether to permit foreclosure, the district court here cites to two prior cases in which someone claiming innocent spouse status sought to use that status as a basis for postponing foreclosure based on the Rodgers’ factors. In the first case, United States v. Battersby, 390 F. Supp. 2d 865 (N.D. Ohio 2005) the court did stay the action while in the second case, United States v. McGrew, 2014 WL 7877053 (C.D. Cal. 2014), aff’d, 669 Fed. App’x 831 (9th Cir. 2016) the court concluded Rodgers was inapplicable stating that “innocent spouse protection does not entitle [non-liable spouse] to prevent foreclosure on the Government’s tax liens.”

A third case exists out of South Carolina, which the LeBeau court does not mention, in which Carl Smith and Joe DiRizzo sought to assist the wife in her effort to stop foreclosure and seek innocent spouse relief, United States v. Dew. The IRS brought a foreclosure proceeding to sell some jointly owned property for liabilities of both Mr. and Mrs. Dew.  Late during the proceeding, Mrs. Dew filed a Form 8857, which had not yet been ruled on by the IRS.  The DOJ first asked the district court to ignore this belated filing.  And the court essentially did so in 2015 U.S. Dist. LEXIS 112979 (D. S.C. 2015), where it wrote in footnote 1:

The Court notes that Mrs. Dew filed objections asserting an “innocent spouse” defense pursuant to 26 U.S.C. § 6015(f). Even assuming such a claim can properly be raised for the first time in the objections, the innocent spouse defense cannot be considered by this Court because it lies within the exclusive jurisdiction of the tax court. See Jones v. C.I.R., 642 F.3d 459, 461 (4th Cir. 2011) (noting that § 6015(f) authorizes the “Secretary of the Treasury” to grant an innocent spouse relief; see also United States v. Elman, No. 10 CV 6369, 2012 U.S. Dist. LEXIS 173026, 2012 WL 6055782, at *4 (N.D. Ill. Dec. 6, 2012) (stating that “exclusive jurisdiction over [the defendant’s] innocent spouse defense under § 6015(f) lies with the Tax Court.”).

The Dews filed an appeal to the 4th Circuit arguing that the collection suit could not go forward.  Section 6015(e)(1)(B)(i) provides:

Except as otherwise provided in section 6851 or 6861 [26 USCS § 6851 or 6861], no levy or proceeding in court shall be made, begun, or prosecuted against the individual making an election under subsection (b) or (c) or requesting equitable relief under subsection (f) for collection of any assessment to which such election or request relates until the close of the 90-day period referred to in subparagraph (A)(ii), or, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final.

Mrs. Dew filed a response with the District Court arguing that 6015(e)(1)(B) was mandatory and asked, therefore, that foreclosure be stayed.  In response to this filing, the government finally agreed that it could not pursue collection against her for the taxes subject to the Form 8857, but still asked the court to foreclose and sell the property to satisfy Mr. Dew’s tax debts and Mrs. Dew’s tax debts that were not covered by the Form 8857.  See attached response. The court went ahead with the sale and instructed the distribution of proceeds in accordance with the government’s revised listing (excluding the Form 8857 liabilities). See the final revised order confirming the sale here.  The 4th Cir. then decided the appeal and held against the Dews.  670 Fed. Appx. 170 (4th Cir. 2016).  The entire text of the 4th Cir. opinion is as follows:

James and Veronica Dew (Appellants) appeal the district court’s order and judgment granting the United States’ motion for summary judgment in the United States’ action seeking to reduce to judgment Appellants’ federal income tax liabilities, and to foreclose the federal tax liens securing those liabilities on Appellants’ jointly owned real property. We have reviewed the record and have considered the parties’ arguments and discern no reversible error. Accordingly, we grant James Dew’s application to proceed in forma pauperis and affirm the district court’s amended judgment. United States v. Dew, No. 4:14-cv-00166-TLW (D.S.C. May 19, 2016). We dispense with oral argument because the facts [**2]  and legal contentions are adequately presented in the materials before this court and argument would not aid the decisional process.

In the Lebeau’s case the district court determined that the foreclosure case should be stayed against the LeBeaus until the end of the innocent spouse case. I do not find this result satisfying. Even if the Tax Court finds Victoria innocent, the IRS can still foreclose on the house and sell it subject to her interest. The decision would be much more satisfying if the court had explained why the Rodgers factors might weigh against allowing foreclosure to go forward. Was there something special about Victoria’s need for the house or even Charles’ need? I am assuming that they are not young at this point since they bought the house almost 40 years ago. Absent something special, I would allow the sale to go forward and hold her half in escrow. Since the innocent spouse determination does not prevent the sale, it does not seem that, by itself, it should hold up the sale.

It is possible that I am also someone jaundiced about her innocence given all of the transfers of the property recounted by the court but I recognize that there could be facts that would support a finding of innocent spouse status not brought out in this opinion. The significant delay that the court has provided here does prejudice the IRS unless one assumes that the property will continue to go up in value and that delay will ultimately benefit the IRS in that fashion.

 

Bankruptcy Court Declines to Exclude Retirement Plan from Estate

Congratulations to Keith Fogg on his new grandchild, Samuel! And now, back to tax procedure. Christine  

The case of In re Xiao, No. 13-51186 (Bankr. D. Conn 2018) presents the unusual situation of a bankruptcy court analyzing whether the pension plan of debtor’s corporation met the qualifications required by the Internal Revenue Code for such a plan. Here, it was not the IRS attacking the validity of the pension plan, though it might have if it had noticed. Rather, the bankruptcy trustee brought the action seeking a determination that the plan did not qualify in order to bring the money in the pension plan into the bankruptcy estate. Because the plan held over $400,000 in assets, it provided a rich target for creditors of the estate. Of course, the trustee also has a financial incentive to bring assets into the estate since the more assets the estate contains the larger the fee received by the trustee. Regardless of the financial incentive, bringing the asset into the estate for use to pay the unsecured creditors also fulfills the trustee’s obligation to the estate.

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As a general rule B.C. 541(c)(2) excludes a debtor’s pension plan from the bankruptcy estate. The Supreme Court confirmed this reading of the statute a quarter of a century ago in Patterson v. Shumate, 504 U.S. 753 (1992). The exclusion from the bankruptcy estate does not cover everything labeled as a pension plan. Excluded plans must meet certain criteria. Even if not excluded by BC 541(c)(2), funds could be exempted from the estate under B.C. 522. Few cases exist in which trustees have successfully attacked a plan to bring its assets into the bankruptcy estate. The trustee’s success in this case demonstrates the possibilities of such an action and also the perils to someone who fails to follow all of the necessary formalities for maintaining a proper plan. Even if you believe that the IRS has so few people looking at these plans that the chances of an IRS audit remain slim, the Xiao case shows another way in which failure to properly maintain a pension plan can create problems.

The court here spends several pages recounting the inappropriate manner in which the pension plan of debtor’s corporation was established and administered. The details of the administration of this plan suggested many lapses in following the necessary formalities to properly maintain a plan. The trustee hired an expert to examine plan activity and to testify concerning plan failures. In effect, the expert hired by the trustee acted like a revenue agent performing an audit of the plan. He explained in great detail the plan’s failures. The trustee charges the estate for the cost of the expert and the cost of the litigation attacking the plan. In essence, the plan assets will pay for the cost of the attack. The debtor’s creditors do not mind because even though these costs reduce the funds available from the plan, the trustee still brings into the estate money not otherwise available. The loser here is the debtor who sees his entire pension plan used to fund the attack on the plan and to pay creditors who would not otherwise have had the opportunity to get paid from this asset.

Debtor also hired an expert who testified about the plan in order to prove it was appropriately administered. Debtor himself testified on this point as well. The court did not find the debtor credible and did not find his expert persuasive.

After a detailed examination of the plan, the court found that it did not operate in a manner that allowed the debtor to exclude or exempt this asset. The concluding paragraph of the opinion provides the best overview of the court’s reasoning:

…the Plan failures at issue in this case do not merely constitute technical defaults, but instead are operational failures that ‘are substantial violations of the core qualification requirements for a retirement’ plan as set forth in the IRC Section 401(a)(2). … it appears that LXEng [debtor’s corporation] operated the Plan in order to solely benefit Mr. Xiao and his then spouse, Ms. Chen. According to the Treasury Regulations, a plan cannot act as a subterfuge for the distribution of profits to the owners of the employer. 26 C.F.R 1.401-1(b)(3). It appears to have been so here.

The opinion does not explain how the trustee came to the conclusion that the debtor’s plan did not meet muster. Because I have seen few of these cases over the years, I do not think that many trustees key in on this issue and perhaps the taxpayer’s failure to follow plan formalities represents a rare aberration. I suspect that there may be a number of plans of small businesses with problems that could be attacked by a trustee if the business owner seeks bankruptcy relief and tries to shelter assets in a pension plan. The former employees of the business that this plan did not properly cover could have had claims against the bankruptcy estate. Such employees may have provided the trustee a roadmap to unlocking the assets in the plan. While I am just speculating that one of the employees the plan sought to stiff provided critical information about the inadequacies of the plan, this serves as yet another reminder why employers should keep employees happy and not overtly antagonize them.

The court stresses that it tests qualification of the plan as of the date of the filing of the bankruptcy petition. For any small business where the owner is headed for bankruptcy, the Xiao case should serve as a significant wake-up call regarding the proper administration of a pension plan. The debtor here loses an asset that the creditors could not have reached had the plan been properly administered. Conversely, the case also serves as a reminder to attorneys for creditors that they should pay attention to pension plans in the case of small businesses to look for improper administration of the plan as a way to pull the asset into the bankruptcy estate that might otherwise have few assets for the unsecured creditors. Hiring an expert to do the analysis of the plan and pursuing the litigation to get information about the plan serve as barriers where the plan assets are not significant and information about plan administration does not suggest problems worth pursuing.

 

Ninth Circuit Declines to Reach Constitutionality of President’s Removal Power Over Tax Court Judges

Frequent guest blogger Carl Smith brings us up to date on litigation over the constitutionality of IRC section 7443(f), giving the President removal power over Tax Court judges. Christine

In a post from September I alerted PT readers that two of the cases in which Joe DiRuzzo had again raised the issue of the constitutionality of the President’s removal power over Tax Court judges were set for oral argument before the Ninth Circuit. The constitutional separation of powers issue was decided against the taxpayers in both Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), and Battat v. Commissioner, 148 T.C. No. 2 (2017) – though, on different reasoning as to which Branch of government in which the Tax Court is located, if any.

Well, the Ninth Circuit panel removed both of Joe’s cases from the oral argument calendar, and it just issued two unpublished opinions. In both of the opinions, the Ninth Circuit avoided addressing the constitutional question.

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In Thompson v. Commissioner, Ninth Cir. Docket No. 17-71027 (Nov. 14, 2018), Joe had moved to recuse all Tax Court judges because, in light of the President’s removal power, the judges were being subtlely pressured to rule in favor of the IRS. When the Tax Court denied the motion (citing Battat), Joe brought an interlocutory appeal. Consistent with the results of all other interlocutory appeals that Joe has brought on this issue to date, the Ninth Circuit refused to rule on the constitutional issue. Joe tried to fit this case into an exception from the rule that, ordinarily, interlocutory appeals are prohibited. However, the Ninth Circuit found that no exception applied. Nor did it think a writ of mandamus should issue. The court wrote: “The Thompsons do not explain how their challenge to the constitutionality of the Tax Court cannot be adequately reviewed or possibly corrected on direct appeal.”

In Crim v. Commissioner, Ninth Cir. Docket No. 17-72701 (Nov. 14, 2018), the taxpayer submitted an OIC, and, after it was not accepted, went to Appeals. Appeals confirmed the OIC denial. Despite the fact that the OIC was not part of a Collection Due Process (CDP) hearing, the taxpayer petitioned the Tax Court for review. In the case, Joe also moved for recusal of all Tax Court judges on the constitutional issue. Citing Battat, the Tax Court first denied the constitutional motion in an unpublished order. Then, the court issued a second unpublished order holding that, in the absence of a CDP proceeding, the Tax Court lacked jurisdiction to review Appeals’ denial of an OIC. Crim’s appeal to the Ninth Circuit was thus not an interlocutory one. However, it fared no better. The court did not reach the constitutional issue because it held that the Tax Court had properly dismissed the case for lack of jurisdiction. The Ninth Circuit wrote:

Because Crim has not presented any evidence that the IRS filed a notice of a federal tax lien or a final intent to levy against him, that he requested a collection due process hearing with the IRS Office of Appeals, that he attended an Office of Appeals collection due process hearing, or that the Office of Appeals made any “determination” addressing a disputed lien or levy, the Tax Court lacked jurisdiction over Crim’s petition under 26 U.S.C. § 6320 and § 6330. Any argument that Craig v. Commissioner, 119 T.C. 252 (2002), commands a different result has been forfeited. See Christian Legal Soc’y Chapter of Univ. of Cal. v. Wu, 626 F.3d 483, 487-88 (9th Cir. 2010). Crim also forfeited the arguments raised for the first time in his reply brief that the Administrative Procedures Act, 5 U.S.C. § 706(1), and the All Writs Act, 28 U.S.C. § 1651, provide jurisdiction here. The failure to find jurisdiction on these grounds was not plain error. . . .

Given that the Tax Court lacked jurisdiction over Crim’s petition, we decline to exercise our “discretionary jurisdiction” over the recusal motion. See Gruver v. Lesman Fisheries Inc., 489 F.3d 978, 981 n.4 (9th Cir. 2007).

To get the constitutional issue adjudicated, it looks like Joe or somebody else will have to appeal any Tax Court ruling on the constitutional issue after a final decision is entered in a Tax Court case over which the court clearly had jurisdiction.

Can the House Obtain and Release President Trump’s Tax Returns?

Guest poster Stu Bassin continues the discussion about possible ways that President Trump’s tax returns may see the light of day. In this post Stu suggests an approach that does not rely on the Congressional right within Section 6103(f) but instead looks to the possibility of serving a subpoena on advisors. Les

Minutes after the networks announced that the Democrats had retaken the House of Representatives, the commentators began discussing whether the Democrats in control of the House could obtain and release President Trump’s tax returns.  Recognizing that the discussion focused upon one of my favorite obscure tangents of the tax law, I pulled out my tattered copy of the Internal Revenue Code and looked for an answer.

I have previously explained on Procedurally Taxing that the Section 6103 prohibition against disclosure of tax returns and return information provides only limited protection for the President’s tax returns. Section 6103 (b) establishes that the only protected returns and return information are those filed with the Service. Identical copies of the same documents which are not filed with the Service are not protected.  Further, the statute establishes many detailed exceptions to the prohibition against disclosure.

Most of the commentary has focused upon the Section 6103(f) exception to the prohibition against disclosure which authorizes Congress to obtain returns and return information.  Under the statute, the Service must provide the Chairman of the House Ways and Means Committee any returns and return information specifically requested in writing, presumably including the President’s returns and any related audit files.  The statute provides that any information in those documents identifying the taxpayer (i.e., the President) can be provided to the committee only when it is sitting in closed executive session.  Interestingly, the statute does not contain any prohibition against further disclosure of the documents to the remainder of the Congress or disclosure of the information by the Congress to the general public.  And, as Professor Yin has reported,Congress has occasionally read the statute as allowing it to disclose returns and return information to the public. Less formally, the documents might “leak.”

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Given the sensitivity of this information, one can imagine a scenario where the President (or his appointees at Treasury and the Service) refused to produce the requested documents, contending that Section 6103 protected the documents from disclosure.  I see no merit in such an argument because the statute is clear on its face.  Even if they objected, the Committee and the House would likely seek to enforce its request and find the administration in contempt.  The dispute would likely find its way into the courts, years of political debate would ensue, and the courts would be asked to sort out the statutory construction issues (along with any related separation of powers issues).

I believe, however, that the House has another alternative which could fast-track resolution of the disclosure.  It could serve document subpoenas upon the accounting firm which prepared the returns and the law or accounting firms representing the President in his audit disputes with the Service.   The firms (and the President) could not assert Section 6103 to resist the subpoena because copies of the returns and audit documents in their possession are not protected by the statute.  Likewise, any attorney-client privilege claim would be deemed waived because identical copies of the returns and audit documents had already been disclosed to the Service—an entity outside any privileged relationship.   Further, an effort to quash the subpoena as politically motivated would almost surely fail because decades of summons enforcement case law establishes an almost insurmountable legal burden for taxpayers asserting such claims.  The House could persuasively defend its inquiry as a proper investigation of potential conflicts of interest of an executive branch employee (i.e., the President).

Finally, even if the President attempted to intervene in the court to assert a separation of powers argument, this blogger’s inclination is that the President’s argument would fail.  The documents subject to the subpoena have nothing to do with the President’s conduct of his official functions.  Even if the documents dealt with Presidential conduct, the Supreme Court decision in United States v. Nixon 418 U.S.  663 (1974) would appear decisive.  The Constitution simply does not protect documents unrelated to the conduct of official business and which are possessed by people outside the government, even if they refer to the conduct of the President.

Stay tuned.

“Defense to Repayment” Protects Taxpayers with Defaulted Student Loans from Treasury Offset Program

Professor Michelle Drumbl who teaches at Washington & Lee University School of Law and who runs the low income taxpayer clinic there brings us a guest post on an interesting case regarding the intersection of the earned income tax credit, defaulted student loan debt and the Treasury Offset Program. I am privileged to work at the Legal Services Center of Harvard Law School with a group of amazing lawyers who represent individuals who have attended for profit colleges and who have not received the bargained for benefits of higher education. As Professor Drumbl describes and as they posted, my colleagues recently won an important case protecting the tax refunds of students of a for profit college. I hope that this case, and others, will help create a movement to protect the earned income tax credit from the offset program. For those interested in this issue look for a deeper discussion in Professor Drumbl’s book which will be published next year by Cambridge University Press. Keith

Individuals expecting a tax refund are sometimes unpleasantly surprised to learn the refund instead has been applied to another outstanding debt. Internal Revenue Code section 6402(a) authorizes the Department of Treasury to offset an “overpayment” (generally speaking, the amount of refund shown as due on the return) against any outstanding federal tax, addition to tax, or interest owed by the taxpayer. If the taxpayer does not have any outstanding federal tax debts, or if any amount of refund remains after those debts are paid, section 6402(c)-(f) provide that the overpayment is then subject to the Treasury Offset Program in the following order of priority: 1) past-due child support payments; 2) outstanding debts to other federal agencies, including federal student loan debt; 3) outstanding state income tax debt; and 4) outstanding unemployment compensation debt owed to a state.

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Keith blogged about section 6402 nearly three years ago in a post that drew a few dozen comments, including many from return filers who had experienced various types of refund offsets. In my view, the refund offset rules are troubling because they capture the refundable portion of the earned income tax credit (EITC) and the child tax credit. These two refundable credits constitute important social benefits for millions of working Americans. Administered by the IRS and delivered as part of the tax return filing process, these credits are a critical part of the U.S. social safety net.

In its 1986 decision Sorenson v. Secretary of the Treasury, the Supreme Court held that the refundable portion of the earned income tax credit is an “overpayment” for purposes of section 6402(c). Sorenson involved a challenge brought by a married taxpayer who filed a joint income tax return with her husband; their expected tax refund was offset and applied toward her husband’s past-due child support obligation. Mrs. Sorenson protested, and because they lived in Washington state, the IRS determined she was entitled to one-half of the joint refund under the state’s community property laws. But Mrs. Sorenson was unsatisfied with that outcome and filed suit in federal court, arguing that Congress did not intend for section 6402(c) to reach the earned income tax credit. On appeal to the Supreme Court, Mrs. Sorenson made a statutory interpretation argument and also argued that “permitting interception of an earned-income credit would frustrate Congress’ aims in providing the credit.” The Court rejected both of these arguments. While the Court acknowledged the “undeniably important” objectives of the EITC, it also noted that the “ordering of competing social policies is a quintessentially legislative function.” In particular, it is for Congress, not the Court, to decide whether the goals of the EITC outweigh the offset program’s goals of “securing child support from absent parents whenever possible.” After all – as the decision alludes – securing child support from absent parents also reduces the number of families on welfare (just as the EITC does). Following Sorenson, it is clear that it would be up to Congress to explicitly carve out the EITC from the definition of overpayment for purposes of section 6402. In the meantime, taxpayers subject to refund offsets will continue to lose this valuable social benefit which they otherwise are entitled to receive.

In my forthcoming book, Improving Tax Credits for the Working Poor, I argue that Congress should indeed consider protecting the EITC from offset, at least in part, and at least with respect to certain types of debts. I acknowledge, though, that Sorenson presented the most morally troublesome argument for protection from offset, because the underlying debt at issue was past-due child support. It is difficult to argue that a taxpayer should receive the EITC in support of a child who currently resides with him or her if the alternative is to divert the EITC to a child for whom the taxpayer is delinquent on child-support obligations.

In contrast, I highlight student loan defaulters as a relatively sympathetic case for which to carve out EITC offset protection. My proposals are inspired in part by informative National Consumer Law Center (NCLC) reports available here and here, from which I learned that approximately 1.3 million individuals in student loan default were subject to tax refund offsets in 2017. We do not know how many of those 1.3 million individuals were also EITC recipients, but surely there is some significant overlap between low-income working families and student loan defaulters. Among the most vulnerable student loan borrowers are those who borrow to attend for-profit institutions. As NCLC attorney Persis Yu describes in her March 2018 report, some of these borrowers are denied the promised benefits of their education when a fraudulent school closes in mid-course.

Thus, I was thrilled recently to learn that Keith’s colleagues Toby Merrill and Alec Harris are succeeding in some of their consumer protection efforts against the for-profit college industry. Toby and Alec, who have also blogged on the issue of refund offsets previously, work for the Project on Predatory Student Lending, which is part of the Legal Services Center of Harvard Law School. Among other cases, the Project on Predatory Student Lending has represented individuals who borrowed money to attend Corinthian College, a now-defunct for-profit company that operated post-secondary schools around the country, including a school called Everest Institute in Massachusetts.

The Massachusetts Attorney General’s office spent several years investigating Everest Institute for its deceptive recruiting and marketing practices. On March 25, 2016, Massachusetts Attorney General Maura Healey and U.S. Department of Education Secretary John B. King announced that students who were defrauded by Corinthian campuses nationwide (including the two Everest Institute campuses in Massachusetts) would be eligible for forgiveness of those federal loans. While this sweeping announcement was great news for borrowers, the details remained to be seen as to how and when this relief would apply.

Darnell Williams and Yessenia Taveras were among the thousands of students who had attended programs at Everest Institute. Williams and Taveras each took out federal student loans to pay for their program. Both individuals defaulted on their loans in the fall of 2014, before Healey’s office had completed its investigation of the Everest Institute campuses. Following their default, in August of 2015 the Department of Education sent Williams and Taveras the required notice of intent to turn the defaulted debt over to the Treasury Offset Program (TOP). Once the Department of Education certifies to the TOP that the debt meets certain requirements, the debt becomes subject to section 6402 offset procedures in the manner I describe above. Neither Williams nor Taveras individually filed an objection to the Department of Education notice within the prescribed 65-day deadline.

After the 65-day window to file an objection, but before the Department certified Williams’ and Taveras’ student loan debts to the TOP, Healey wrote to the Secretary of Education to request immediate and automatic discharge of all federal student loans borrowed to attend Everest Institute in Massachusetts (note that this November 2015 request of Healey’s also predates the aforementioned joint announcement with the Department of Education). Healey referred to her written request as a “defense to repayment” application on behalf of the student borrowers. Healey’s defense to repayment application included, among other exhibits, a list of names of more than 7,000 student borrowers who had attended Everest Institute, including Williams and Taveras. The Department of Education nonetheless certified the Williams’ and Taveras’ debts for collection by the TOP without deciding on the merits of Healey’s letter.

The following spring, in April and May of 2016, Williams and Taveras each filed income tax returns showing refunds due. Because the Secretary of Education had certified the defaulted debts to the TOP, the taxpayers’ refunds were offset against their outstanding loans. The amounts they lost were significant: Williams’ offset was in the amount of $1,263, and Taveras’ offset was in the amount of $4,999.

At issue in Williams v. Devos is whether Attorney General Healey successfully raised a borrower defense proceeding on behalf of the thousands of individuals listed in her exhibit, including Williams and Taveras. The Project on Predatory Lending represented Williams and Taveras in the matter in federal court, arguing that the Secretary of Education improperly certified their student loan debts as legally enforceable for purposes of the TOP program.

Last month, the judge in this case ruled that Healey’s November 2015 submission did invoke a borrower defense proceeding as to Williams and Taveras, and that the Secretary’s certification of the debt to the TOP without consideration of Healey’s submission was arbitrary and capricious. The court order vacated the certifications for refund offset for Williams and Taveras and remanded the matter to the Department of Education for a consideration of the borrower defense asserted by Healey.

Congratulations to Toby, Alec, and all at the Project on Predatory Student Lending on this ruling in Williams v. Devos. This is a significant victory for student borrowers challenging the validity of their loans. Though not strictly speaking a tax case, this development has important collateral consequences for low-income taxpayers who are eligible for refundable credits. As Keith has written recently in the offer in compromise context, and as I contemplate in my book, the fact that the EITC is an anti-poverty supplement for working families provides a compelling argument to protect it from offset, at least in certain circumstances. While I would like to see Congress act to at least partially exempt the EITC from offset against any federal student loan default, this ruling is an important and tangible step forward, as it is precedent for protecting student loan defaulters from tax refund offset while a borrower defense proceeding is pending.

 

Application of Chenery to Supervisory Affidavits in Graev Cases

Ray Cohen, a faithful reader and a CPA in Paramus, New Jersey, asks the following question of other readers and invites them to send comments to the post to help him work through the answer. Keith

When the original signature of the immediate supervisor is missing, the IRS attempts to get around this by using an affidavit of the immediate supervisor. Attempts have been made to defeat the affidavit by calling it hearsay. Unfortunately, the court have not accepted this argument. SEC v Chenery Corp (Chenery II) 332 U.S.194 (1947) might be the answer. Does anybody think so?

Section 6751(b)(1) states that “[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination….”
According to Notice CC-2018-006 from the Office of Chief Counsel, supervisory approval is required when the IRS “files an answer or amended answer asserting penalties. In Graev v Commissioner III, it states that “IRC Sec. ‘6751(b)(1) requires written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency ((or files an answer or amended answer)asserting such penalty’, id. At 221.

While the Federal Rules of evidence permit the use of affidavits, the IRS rules and chief counsel require original signatures in asserting a penalty.

SEC v Chenery Corp (Chenery II)332 U.S.194 (1947) states “ That rule is to the effect that a reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency. If those grounds are inadequate or improper, the court is powerless to affirm the administrative action by substituting what it considers to be a more adequate or proper basis. To do so would propel the court into the domain which Congress has set aside exclusively for the administrative agency.“

Annual Low-Income Taxpayer Representation Workshop

For the last several years, the ABA Section of Taxation Pro Bono & Tax Clinics committee has organized a Low-Income Taxpayer Representation Workshop in early December in Washington, D.C. Keith, Les, and I have all been involved with the committee and the workshop at various times over the years. The workshop is a nice opportunity for practitioners interested in low-income taxpayer representation issues to come together for an afternoon of learning and conversation.

This year’s workshop will be on Monday afternoon, December 3, at the D.C. offices of Morgan, Lewis & Bockius LLP. Workshop organizer Caleb Smith has lined up four hours of CLE/CPE with exciting speakers on important topics including section 199A, tax litigation, and collection due process. While the workshop is designed for practioners who represent low-income taxpayers through a Low-Income Tax Clinic or other pro bono program, all are welcome to attend.

Registration is a bargain at $30, reflecting the Tax Section’s commitment to supporting low-income taxpayer representation, and also Morgan Lewis’s generous hosting. (Shout out also to the workshop’s longtime past host McDermott Will & Emery.)

Preliminary Agenda

1:00 p.m. The 2017 Tax Act and Self‐Employed Workers
This panel will discuss new code section 199A as well as tax planning issues for self‐employed and “gig economy” workers in light of the changes made by the 2017 tax act. The panel will also discuss how these changes in the tax law will be reflected during the filing season on the draft 2018 Form 1040.
Moderator: Caleb Smith, Ronald M. Mankoff Tax Clinic, University of Minnesota Law School, Minneapolis, MN
Panelists: Joseph Tiberio, IRS SB/SE, Washington, DC; Caroline Bruckner, American University Kogod School of Business, Washington, DC; Lisa Sperow, Cal Poly Low Income Taxpayer Clinic, San Luis Obispo, CA.

2:00 p.m. Collectability as a Litigation Tool: Settling with DOJ vs. IRS
This panel will discuss taxpayer collectability as a factor in litigation with the Internal Revenue Service in pre‐assessment Tax Court cases, and with the Department of Justice in post-assessment District Court litigation. The panel will discuss differences in the IRS and DOJ approaches on how to treat a taxpayer’s collection potential as a factor in settling cases.
Moderator: Tameka Lester, Georgia State University College of Law, Atlanta, GA
Panelists: Valerie Vlasenko, Agostino & Associates, Hackensack, NJ; Erin Stearns, Director, University of Denver Low Income Taxpayer Clinic, Denver, CO; Carol Koehler Ide, Assistant Chief, Civil Trial Section, Tax Division, U.S. Department of Justice; additional panelists TBA

3:30 p.m. Break (no CLE/CPE)

3:45 p.m. New Trends and Tactics in CDP Litigation
This panel will discuss emerging trends in Collection Due Process litigation, recent precedential court decisions, and identify traps for the unwary.
Moderator: Omeed Firouzi, Christine A. Brunswick Public Service Fellow, Philadelphia Legal Assistance, Philadelphia, PA
Panelists: Keith Fogg, Director Harvard Federal Tax Clinic, Jamaica Plain, MA; Tom Thomas, University of Missouri, Kansas City; Steve Milgrom, Legal Aid Society of San Diego, San Diego, CA; additional panelists TBA

5:15 p.m. Networking Reception (no CLE/CPE)