Information from Court Practice and Procedure Programming at ABA Tax Section Meeting Part 1

This committee put on a panel including representatives from the Tax Court, the Court of Federal Claims, the Tax Division of the Department of Justice and the Procedure and Administration Division of Chief Counsel (P&A).  I took notes while they were speaking and provide you here with what I found important from the discussion.  Today’s post will focus on the comments from the two judges.  Tomorrow’s post will focus on the comments from P&A with lots of charts.

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Tax Court Judge Toro reported that electronic filing of petitions is trending up though the number of electronic filed petitions remains lower than I would expect.  In 2021 the number of electronically filed petitions was 17%.  Electronic petitions provide almost instant confirmation of the filing of the petition.  Filing the petition electronically can eliminate so many problems involving late filing of petitions.  I understand why the Court will struggle to entice pro se petitioners to electronic filing but practitioners should embrace this filing method. 

The comments to the most recently proposed Tax Court rule changes are due by today, Wednesday, May 25, 2022. The comments can be emailed to Rules@ustaxcourt.gov or snail mailed to the Clerk of Court at the usual address. The Tax Clinic at the Legal Services Center of Harvard Law School sent in comments recently. On the point of electronic filing, the Clinic commented that the Court could encourage more electronic filing by pro se petitioners by making its instructions in the petition package more explicit. Others may have better ideas on how to improve the percentage of electronically filed petitions. No doubt, the Court would appreciate your ideas.

Judge Toro said that the Tax Court has now cleared out its backlog of petitions.  I discussed this recently in my post providing an update on premature assessments.  He said the Court closed over 20,000 cases in 2021.  It held 122 regular trial sessions and 78 small tax trial sessions.  It issued 320 opinions in regular cases and 12 summary opinions.  The number of summary opinions seemed too low to me.  He did not mention the number of bench opinions.  I don’t know if special trial judges are rendering more bench opinions than in prior years or if the number of trials in small cases is way down or if many more of the small cases are being decided by other orders.  The Court has not issued a high number of bench opinions in the past though I haven’t checked recently to see if its practice has changed.

In a couple of Dawson updates, Judge Toro said that the clinic letters will now become a visible part of the docket in hopes that this will make it easier for pro se petitioners to find a clinic. I think the letter to which he is referring is the letter that the Court stuffs into the envelope when it sends a new pro se petitioner notice of receipt of their petition and instructions on what will happen. The clinic letter advises petitioners in each of the Court’s 74 locations of the available clinics at that location. He also said that Dawson is now able to accommodate the sealing of a document in a case without sealing the entire case record. He also noted that the Court has added back the feature that allows for searching orders and opinions.

Judge Wolski from the Court of Federal Claims came and spoke about some activity in that court.  This was one of the first times the committee has invited a member of that court to participate in its panel on updates.  I found the presence of Judge Wolski a welcome addition to the panel.  He started by speaking about some rule changes at the court last August prompted by the changes to partnership law in the 2015 Act.  He said the Court of Federal Claims started with Tax Court Rules 251-257.  He invited comments to the Court on additional rules it should adopt.  Tax issues are a minor part of the docket of the Court of Federal Claims and it has not paid as much attention to updating its rules on tax issues as it might have.

Judge Wolski then moved to talking about jurisdiction in light of Boechler.  He was extremely well versed in the law and the special place that the Court of Federal Claims holds due to its precedent.  The Court of Federal Claims has prior Supreme Court precedent on jurisdictional issues regarding the timing of filing a Tucker Act case in the form of Kendall v. United States, 107 U.S. 123 (1883) and John R. Sand and Gravel v. United States,  U.S.  (2008).  As a result of the precedent set by these cases, the Supreme Court’s position is that time periods default to claims processing rules unless Congress makes a clear statement that the time period is jurisdictional.  In issues involving the Tax Court’s jurisdiction no prior Supreme Court precedent exists so courts must look at the clear statement rule.  In the Claims Court the prior Supreme Court precedent will control the Tucker Act cases making the time period in those cases jurisdictional.  There is a deep split, however, regarding the Little Tucker Act through which cases can also enter the district court.  Seven circuits have said the time period is not jurisdictional and three (the 8th, 11th and Federal Circuit) have said that it is.  The recent case of Weston v. United States saw the Federal Circuit holding the time period jurisdictional.  He also spoke about the cases of Walby v. United States and Brown v. United States that I blogged about recently and Carl Smith blogged about two years ago.  Clearly, the issue of jurisdiction has captured the attention of the Court of Federal Claims as well as the Tax Court.

An outline of the cases and material discussed by the two judges is attached.

The Ongoing Effort to Properly Situate the Tax Court

What is the Tax Court?  Does it reside in the judicial branch?  Might it qualify as an executive agency?  Isn’t this issue resolved?

The issue of the proper locus of the Tax Court has rattled around for a few decades now.  The most recent case making a serious effort to resolve the issue was Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), where the D.C. Circuit had held that the President’s power to remove Tax Court judges at section 7443(f) did not violate the separation of powers.  Carl wrote a post when the Supreme Court declined cert.  Bryan Camp wrote a post reacting to the initial legislation proposed after the decision in Kuretski.  As Bryan pointed out the D.C. Circuit decided in Kuretski that the Tax Court “had to be “located” within the Executive branch.”  Almost three decades ago, the Supreme Court in Freytag held that the Tax Court performs a judicial function.

While the uncertainty of the nature of the Tax Court within our constitutional system of three branches of government may leave academics uncomfortable, for most people life goes on and the Tax Court continues to adjudicate tax disputes between taxpayers and the IRS.  It seemed the debate over the status of the Tax Court, which you can read about in more detail in the posts linked here, had fizzled; however, embers from the debate still glow.

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Kuretski was a Collection Due Process case where Frank Agostino was pro bono counsel.  Kuretski is one of many interesting cases Frank has picked up at a New York calendar call over the years.  Eventually, Tuan Samahon, my then colleague at Villanova Law School and constitutional law scholar, and Carl Smith entered appearances in the Tax Court case and argued that the President’s removal power over Tax Court judges at section 7433(f) violates the separation of powers and so should be stricken. 

Even though the Kuretskis lived in Staten Island, an appeal of the Tax Court’s adverse decision on separation of powers issue was taken to the D.C. Circuit.  At the time, section 7482(b)(1) provided no specific venue rule for CDP cases.  This allowed an appeal in Kuretski to the D.C. Circuit under the default language at the end of that paragraph.  Ultimately, the D.C. Circuit held that there was no interbranch removal power problem because the Tax Court (supposedly per Freytag) is an Executive Agency.  As an executive agency, the President should have the constitutional power to remove Tax Court judges.  While that decision satisfied constitutional muster in preserving the Presidential removal power of IRC 7433(f), the Tax Court judges may not have appreciated finding that they were an executive agency rather than a court.  The Supreme Court in Freytag gave them a more comfortable landing place (but for the issue of separation of powers).

Two legislative developments happened as a result of Kuretski:  First, Congress amended section 7441 (effective Dec. 18, 2015) to add the following sentence to section 7441:  “The Tax Court is not an agency of, and shall be independent of the executive branch of the Government.”  Second, Congress amended section 7482(b)(1) to add a new subparagraph (G) that directed appeals in all CDP cases to the Circuit of residence.  This new venue rule applied to all Tax Court CDP petitions filed after Dec. 31, 2017.  So, even though the statutory challenge in Kuretski may have seemed like one that only academics would follow, it had real consequences.

It seemed that the legislation and the Kuretski decision may have provided the end of the story, but it has not.  Enter Florida attorney Joe DiRuzzo who had a number of Tax Court cases in which he wished to get rulings to overturn Kuretski. 

He moved to recuse the judges in all Tax Court cases because of the constitutional issue.  In Battat v. Commissioner, 148 T.C. 32  (one of Joe’s cases), the Tax Court issued an opinion holding that, despite the amendment to section 7441, there was no constitutional problem in the removal power.  The case goes into the history of the Tax Court and the factors necessary for removal of a Tax Court judge from a case.  For that reason alone, the decision provides an interesting read.  You can find our prior posts on Battat here.

However, in Battat, the Tax Court also held that it was not an executive agency — disagreeing with the D.C. Circuit in Kuretski.  The Tax Court refused to state in which branch of government it lay.  The removal argument actually does not depend on whether the Tax Court is in any particular branch, since, in Freytag, the Supreme Court held that the Tax Court exercises a portion of the judicial power.  The real problem is interpower removal, not interbranch removal.

Joe tried to appeal the holding of Battat to an appellate court, but the appellate court wouldn’t hear the case yet because the appeal was interlocutory.  No final decision had been entered by the Tax Court in the case.  Joe got similar rulings from the Tax Court in unpublished orders in several other cases of his, which he also tried to appeal to other Circuits.  However, every Circuit refused to hear the issue on an interlocutory basis.  One of the cases in which Joe tried an appeal was Crim (Tax Court docket no. 1638-15).  This Crim case was a CDP case that the Tax Court had actually dismissed for lack of jurisdiction — a final ruling.  Joe appealed this Crim ruling to the 9th Cir. It affirmed that the Tax Court lacked jurisdiction, so it declined to rule on the recusal issue.  See this ruling in Crim here.

There was a second Crim Tax Court CDP case in which Joe had also made a recusal motion.  The case was filed in the Tax Court in 2017 (Docket No. 16574-17L).  So, Joe could appeal it to D.C., which he did.  On April 21, 2022, in the D.C. Cir. Joe filed his opening brief and the joint appendix (copies attached here and here).  Joe is making the removal power argument, asking for the D.C. Circuit to overrule its Kuretski holding.

Maybe no one cares or maybe this will lead to more interesting discussions about the Tax Court or other matters.  As Carl mentioned in his post about the many people who made a difference leading up to the Boechler decision, it was Joe who took on the appeal of the Myers whistleblower case pro bono which created the conflict that was instrumental in persuading the Supreme Court to accept the Boechler case.  Who knows where Joe’s appeal of Crim may lead?

Things are Different at the Government

Everyone graduating from law school these days must take a course in legal ethics aka professional responsibility.  State bars also require persons seeking admittance to take a standardized test designed to ensure that those entering the profession have the requisite knowledge of the ethical rules that govern legal practice. 

In 2007 when I was retiring from the Office of Chief Counsel, IRS and beginning to teach at Villanova, the law school wanted me to become a member of the Pennsylvania bar.  Thankfully, Pennsylvania allowed members of the Virginia bar with the requisite number of years of practice to waive into the bar; however, they stopped my application because I had not passed the ethics exam.  I pointed out to them that when I joined the bar in 1977 there was no ethics exam.  I politely inquired if, given my age and length of service, I might be grandfathered in without need to take this standardized test.  The bar examiners politely let me know I needed to take the test.  So, shortly before retiring from federal service, I sat in a room filled with people 30 years younger than me who no doubt wondered what ethical lapses had caused this very old person to take the test.  Thankfully, I passed.

One of the ethical rules, Rule 1.4(2) of the ABA model rules, concerns settlement and the requirement that an attorney must bring a settlement offer to the client.  The ethical rules prevent the attorney from simply rejecting the settlement because the attorney does not like it.  In Delponte v. Commissioner, 158 T.C. No. 7 (2022), the Tax Court explains how that rule does not apply to the attorneys in the Office of Chief Counsel handling an innocent spouse case.  Taking it from the innocent spouse issue to the broader issue of cases handled by Chief Counsel, the rule does not apply to any of the cases in Tax Court nor does it apply to the Department of Justice Tax Division attorneys.  Once a case moves into the office of Chief Counsel or DOJ Tax Division, the attorneys are in the driver’s seat in deciding when to settle.   While they may consult with their client at the IRS, the relationship of the government attorney to its client differs dramatically from the relationship of the attorney in private practice to the client.  This proves unfortunate for Ms. Delponte.

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The case goes back to years from two decades ago.  The Tax Court docket numbers, of which there are five, go back to 2005.  Way back when, Ms. Delponte was married to Mr. Goddard who the Court described as “a lawyer who sold exceptionally aggressive tax-avoidance strategies with his business
partner David Greenberg and became very wealthy in the process.”  Mr. Goddard not only sold aggressive tax shelters, he also invested in them.  The IRS examined his returns, which were joint returns with Ms. Delponte, and proposed huge liabilities.

Ms. Delponte’s involvement in the Tax Court cases provides an interesting procedural sidelight.  The notices of deficiency were sent to Mr. Goddard’s law office years after the parties had split.  Mr. Goddard filed several Tax Court petitions as joint petitions without consulting or notifying Ms. Delponte.  Even though he filed the petitions in years 2005 through 2009, she did not become aware of the petitions until November of 2010.  At that  point she ratified the petitions.  Allowing her to ratify the petitions and be treated as if she timely filed them is an interesting feature of Tax Court jurisdiction.

The Tax Court, and the IRS, would not have known that she did not agree to the filing of the joint petition.  The IRS would have held off making an assessment against her, thinking that doing so would violate IRC 6213.  By putting her name on the petition even without her permission, Mr. Goddard not only suspended the statute of limitations on assessment for her liability but also preserved for her the opportunity to accept or reject the Tax Court case over five years after its filing.  You can see the awkward position this puts everyone in.  Yet, in many ways this works to the unknowing spouse’s advantage since it preserves the right to litigate in a prepayment forum.  The suspension of the statute of limitations on assessment is the downside of this action on the unwitting spouse.

Mr. Goddard not only filed joint petitions but he also listed her as an innocent spouse.  I do not know why in the five years between 2005 and 2010 the case had not progressed to a point that someone at Chief Counsel had pressed on the innocent spouse issue in a Branerton conference or otherwise, but at the point when she came fully into the case nothing seemed to have occurred regarding the innocent spouse defense. 

When you raise an innocent spouse defense in a deficiency case, the Chief Counsel attorneys ask that you complete a Form 8857, the innocent spouse relief form, and they send the form off for review by the innocent spouse unit of the IRS located in Covington, Kentucky.  This finally happened in Ms. Delponte’s case in April of 2011 only six years after the filing of the first petition in the case.

The Court points out that when Chief Counsel refers the case to the innocent spouse unit it requests that the unit not issue a determination letter as it would do if the request had arrived outside of a Tax Court deficiency proceeding but rather that the innocent spouse unit simply provide the results of its review to the attorney handling the deficiency case.  Here the innocent spouse unit reviewed the submission and determined that Ms. Delponte met the criteria for relief.

At the Harvard Tax Clinic we handle quite a few innocent spouse cases.  We submit what we believe are good applications but receive a favorable determination from the innocent spouse unit on a distinct minority of cases.  We usually gain relief from Appeals or from Chief Counsel. So, the fact that this unit granted Ms. Delponte relief in no way reflects that her success at this stage was routine.  Nonetheless, the Chief Counsel attorney did not accept the advice of its client and pressed forward with the innocent spouse case.

So, unlike an attorney in private practice who would be bound by the decision of its client, the government attorney is not so bound.  Ms. Delponte disagreed with the refusal of Chief Counsel to accept the decision made by its client that she met the criteria for relief.  She refused to meet with the Chief Counsel attorney to discuss the case, arguing that the additional information it sought “would be superfluous because CCISO (the innocent spouse unit) had already decided she was entitled to relief and its decision was binding on Chief Counsel.”

Because she would not meet, her innocent spouse status remained unresolved while the deficiency case moved forward, ultimately resulting in a large deficiency determination that was upheld on appeal.  Once the underlying tax issue was complete, the Court turned back to her innocent spouse request. The next post on this case will discuss how the Tax Court came to the conclusion that Chief Counsel’s office could ignore the decision of its client and what happened on the merits of the innocent spouse relief request.

Can Intentionally Filing an Improper Information Return Justify a Claim for Damages Under Section 7434?…Continued!

We welcome back guest blogger Omeed Firouzi, who works as a staff attorney at the Taxpayer Support Clinic at Philadelphia Legal Assistance, for a discussion of the latest case involving an information return with improper information.  The question of how far the statute goes in order to protect recipients continues to play out in the district courts with recipients struggling to gain traction through IRC 7434.  Keith

I, among other tax practitioners, have written on this blog several times about 26 U.S.C. Section 7434. Specifically, we’ve written about the debate in district courts as to whether pure misclassification of an employee as an independent contractor is actionable under Sec. 7434.

A central question in courts’ analysis here is how to interpret the language, “with respect to payments purported to be made to any other person.” § 7434(a). At issue in all these cases, including the one below, is whether willful filing of a fraudulent information return covers only payment amounts themselves or whether it can also encompass misclassification itself.

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On December 1, 2021, the U.S. District Court for the Middle District of Florida, Tampa Division, handed down a decision granting summary judgment in favor of a firm that the plaintiff accused of fraudulent misclassification per Sec. 7434. As such, this court joined the (so far) majority of district courts in ruling that misclassification per se is not actionable under Sec. 7434 (although it was a notable departure from other recent Florida cases).

The case revolves around taxpayer Jen Austin and her experience with Metro Development Group. The case also involved an interesting issue as to whether reimbursed expenses can be included on a Form 1099-NEC and questions of state law. For our purposes though, it is important to look at the relevant 7434 aspect of this case. Austin says she was hired as an employee by Metro in 2014 but then she was actually paid as an independent contractor. Notably, Austin herself formed an LLC (Austin Marketing, LLC) for these 1099 payments though she also alleges she complained several times about her classification to no avail. For his part, the defendant, John Ryan, “testified in his deposition that he did not remember Austin asking to be an employee.” Austin worked for Metro until April 2020; she says she was fired “in a private meeting with Defendant Ryan [but] Ryan claims he never fired her.”

Two months later, Austin and her LLC, Austin Marketing LLC, filed suit against Metro and CEO John Ryan in federal district court. Austin and Austin Marketing, LLC sought, among other claims for relief, damages under Sec. 7434. Though the Court dismissed part of the complaint on the grounds that “Austin was not individually injured by any fraudulent tax standing,” the Court did allow Austin Marketing’s claim to be heard. Ultimately, the defendants moved for summary judgment on the matter of Section 7434, partly “on the basis that misclassification does not give rise to a claim under Sec.7434” – and they won.

In an order written by U.S. District Judge Kathryn Kimball Mizelle, who recently earned national attention with her injunction against the CDC’s federal air and public transit mask mandate order, the Court plainly stated that “only claims for fraudulent amounts of payments may proceed” under Sec. 7434. Judge Mizelle wrote that the plain text of the statute supports this conclusion because “with respect to payments” makes clear that a fraudulent information return must be one that has an incorrect amount on it. Mizelle cites not only U.S. Supreme Court interpretation of the phrase “with respect to,” from an unrelated 2021 case involving the Federal Housing Finance Agency, but also the litany of federal district court cases that also found misclassification per se as outside 7434.

Mizelle also focuses on the next part of the statute, specifically “payments purported to be made.” She writes that the phrase “’payments purported to be made’ clarifies that actionable information returns are ones only where the return fraudulently-that is, inaccurately or misleadingly- reports the amount a payer gave to a payee.” Finally, on this specific matter, Mizelle cites the Liverett case, the Eastern District of Virginia case that most courts have followed to rule misclassification out of bounds of 7434. In citing Liverett, Mizelle argues that because Sec. 7434 defines “information return” as “any statement of the amount of payments [Court’s emphasis added],” the statute thus “only gives liability for” fraudulent payments and “not for any willful filing of an information return instead of a W-2.”

Further, Mizelle also finds that, because Austin herself did not have standing as an individual and because the only case before her now is from Austin Marketing, technically Austin Marketing is not a person to whom W-2s could even be issued. She also finds that the Form 1099s “properly included reimbursements for business expenses” and that “even if the law required exclusion of the reimbursed expenses,” there was no willfulness on the part of the defendants. Mizelle writes that “Austin Marketing’s evidence is…scant [and] amount to mere speculation.”

The Austin case is now one of many, that we have analyzed here, that delve into the frustrating question of whether “fraudulent” describes just payment amounts. Even so, even if one were to take a strictly textualist view of the statute, it is not entirely clear that pure misclassification is not compatible with the statute.

As I have noted here before, even a textual reading of the statute could support the notion that misclassification could give rise to a cause of action under this law. When someone is fraudulently misclassified as a 1099 worker when they should have received a W-2, they receive a form that is, in several ways, different in numbers, format, and details than what is appropriate. Notably here, if a misclassified person was hypothetically reclassified as a W-2 worker, it is possible the taxable gross wages that are reported on line 1 of the W-2 would be different than what their 1099-NEC had shown. That is because of course the taxable wages could exclude some pre-tax deductions whereas it is possible that a 1099 compensation amount wouldn’t account for that. That difference is a difference in amount and if an employer willfully, fraudulently misclassifies as a worker and such a difference is conceivable, the 1099 is arguably also fraudulent in amount.

Further, even if the gross compensation would be the same for a misclassified worker on a 1099 or W-2, the misclassified worker is missing out on federal income tax withholding. As such, the misclassified worker lacks the benefit of such a “payment,” a credit they can use on their tax return where their tax withheld is described by the IRS itself as a “payment.” Therefore, it could credibly be argued that “with respect to payments” could theoretically encompass the “payment” that a federal income tax withholding ultimately is. Judge Mizelle took a strict textualist view to find pure misclassification, when the compensation is not in dispute, to be out of scope for this statute. Another court in the future may take a different view even with the same style of statutory interpretation.

Update on Premature Assessments

At the recent ABA Tax Section meeting the Tax Court announced that it had eliminated its backlog of cases which should stop the premature assessment problem it has created during the past two years because of the significant delays in getting petitioners over to IRS Chief Counsel’s office.  As we have discussed before here and here, when the IRS sends out a notice of deficiency, it puts a time frame on hearing that the taxpayer has filed a petition in Tax Court in response to the notice.  The notice suspends the statute of limitations on assessment for 90 days plus 60 days but the IRS must act relatively quickly after the 90 days runs in order to insure that it makes a timely assessment.  So, if it has not heard that the taxpayer filed a Tax Court petition by the date it selects after sending the notice – something like 90 days plus an additional 20 days – it assesses the liability shown in the statutory notice and begins the collection process.

The Tax Court eventually acknowledged the problem its petition processing delays caused the IRS, and hence the petitioner, and several months ago worked out a system for notifying Chief Counsel of new petitions even before it formally sent the petition to Chief Counsel for answer.  The system seems to have worked well and eliminated or significantly reduced the number of premature assessments.  Judge Toro noted in his comments that because the Tax Court has caught up with its backlog, the Court is winding down the early warning system created to avert premature assessments.  In a later panel Paul Butler, an executive with Chief Counsel in SBSE, stated that petitions generally arrive at Chief Counsel now about 3-4 weeks after filing but some still take a few months. So, it seems that we have a happy ending.

Professor Elizabeth Maresca, the director of the tax clinic at Fordham law school, raised an interesting point at the recent ABA Tax Section meeting that I had not considered.  I pass it along in case others have also not thought of the potential problem caused by the premature assessments and the cases in the settlement pipeline.

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The problem of premature assessments has been around for as long as I remember; however, the incidence of premature assessments prior to the pandemic was low.  In my experience, it usually happened for cases filed around the holiday period at the end of the year when the Tax Court clerk’s office probably operated at a skeletal level due to both holiday leave and end of year use or lose leave.  Each year it seemed some cases would not make it from the Tax Court to Chief Counsel.  For represented petitioners the premature assessment usually caused little problem because their representative would contact the local Chief Counsel office and the assigned attorney would fix the problem rather promptly causing an abatement of the assessment.  For pro se taxpayers who did not know the assessment should not have occurred, fixing the problem did not necessarily occur quickly because they failed to ask for an abatement.  The number of problem cases, however, would generally be quite low which does not mean it did not adversely impact individuals unaware that an easy fix existed.

Now we have quite a large number of premature assessments in the system.  Chief Counsel attorneys are on the alert for premature assessments but may not catch them all.  The possibility exists that the IRS has made premature assessments yet to be reversed and it has collected money on those assessments by offset or otherwise.  Now these cases filed a year or two ago are coming to the end which will cause the preparation of a decision document.  I hope that in every case in which the IRS prepares a decision document, it pulls a transcript and carefully checks to determine if a premature assessment occurred and if payments were made that need to be reflected in the decision document.  I am not sure that it does.

Professor Maresca recommended that attorneys representing petitioners in Tax Court cases request from Counsel a transcript of account for the year(s) before the Tax Court in order to make a check for any premature assessment and payment before signing the decision document.  The advice makes sense to me.  If the taxpayer has made payments on the account and the decision document does not reflect those payments, the taxpayer could lose them unless the problem is found within 30 days of the entry of the decision document.

While I mentioned above that the Chief Counsel assigned to the case will quickly fix it if the premature assessment is brought to their attention, the possibility exists that delays will occur.   Chief Counsel’s office has created a form for making a referral of a premature assessment and has a special email address.  You can find the form here.  The email address is on the form.

If calling your favorite Chief Counsel attorney, or the attorney assigned to the case, or emailing the form does not quickly result in fixing the premature assessment, you could consider filing a Tax Court Rule 55 motion.  Here is a template memorandum that could accompany such a motion for anyone in need of this resource.  Thanks to Frank Agostino for providing this resource.

Hopefully, we will soon be back to the good old days of rare premature assessments.  Until we get all of the assessments from the pandemic worked through the system, be on the lookout for problem cases.

Tax Court Temporarily Stops Issuing Dismissals for Lack of Jurisdiction of Late Deficiency Petitions

This is an update to the post of May 3, 2022, which discussed a May 2, 2022 motion to vacate a dismissal for lack of jurisdiction of a late-filed deficiency case in Hallmark Research Collective, Docket No. 21284-21.  In the motion, Hallmark argued that, after Boechler (a Collection Due Process case), the IRC 6213(a) deadline for filing a deficiency petition also is not jurisdictional and is subject to equitable tolling.  The prior post noted that, a day after the motion was filed, the Chief Judge issued an order directing the IRS to file a response within 30 days (i.e., by June 2).  The update is that on May 10, the Chief Judge assigned the motion to Judge Gustafson for purposes of ruling on the motion.    Motions in cases that had been decided by the Chief Judge are usually assigned to Special Trial Judges for disposition, not currently active Tax Court judges.  So, this unusual assignment shows the Court is taking the motion to vacate very seriously.

Simultaneously, it appears that the Tax Court, unannounced, has stopped issuing orders of dismissal for lack of jurisdiction in late-filed deficiency cases until Judge Gustafson (or, more probably, the Tax Court en banc) rules on the Hallmark motion.

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Research shows that the Tax Court in February and March 2022, combined, dismissed 103 late deficiency petitions for lack of jurisdiction – an average dismissal rate of between 2 and 3 cases a business day.  Yet, the last order of dismissal of a deficiency petition for late filing was entered on Friday, May 6. 

PT will post the IRS response to Hallmark’s motion when that response is filed, though PT expects the IRS will ask for and get a bit more time to file its response, to coordinate its response with the National Office.

One effect of the Tax Court’s suspension of ruling on such motions to dismiss in late-filed deficiency cases is that the Court will thus not, for some time, be creating appealable orders which could be challenged by appeals to the Circuit courts as test cases for the IRC 6213(a) issue.  The time is ticking on any appeals that may be filed concerning orders of dismissal entered between mid-February and May 6.

PT is aware of only one case where an order of dismissal has been appealed:  The February 15, 2022 order of dismissal in Culp, Docket No. 14054-21, was timely appealed to the Third Circuit on April 25, 2022 (3d Cir. Docket No. 22-1789).  In Culp, the IRS sent a notice of deficiency to the taxpayers, but the taxpayers say they never received the notice and only became aware of its possible issuance when the IRS started levying.  (We assume that the Culps also did not receive the notice of intention to levy, since they filed no Collection Due Process hearing request.)  They belatedly filed a Tax Court petition, arguing that the IRS had never sent a notice of deficiency to their last known address.  In response, the IRS produced a copy of the notice and proof of proper mailing to their last known address.  So, the court dismissed the petition for lack of jurisdiction for late filing – the long-standing position of the Tax Court and most courts of appeal, pre-Boechler, being that timely filing of a deficiency petition is a necessary predicate to the Tax Court’s jurisdiction. 

The Center for Taxpayer Rights plans to file an amicus brief in Culp (drafted by the Tax Clinic at the Legal Services at Harvard Law School) that sets forth all the arguments made in the memorandum of law filed to accompany the motion to vacate in the Tax Court Hallmark case for why the Tax Court was wrong to treat timely filing as a jurisdictional requirement of a deficiency suit.

IRS Not Giving Up on Thorny SOL Issues When Taxpayer Fails to Backup Withhold

An issue that is often litigated is whether and when a return is deemed filed for purposes of starting the SOL on assessment. In today’s post, I will discuss Quezada v US and the IRS’s decision to publish an Action on Decision disagreeing with the Fifth Circuit.

We have not discussed AOD’s though we have discussed the Quezada case a few times. The most recent is here, where Keith reviewed how the Fifth Circuit held that the Form 1040 filed by the Quezadas and the Forms 1099 issued by his business to its workers that omitted the workers’ tax identification numbers started the running of the statute of limitations for backup withholding.  As readers may know, the Code requires payers to backup withhold at a rate of 24 percent on reportable payments for a payee that refuses or neglects to provide a correct TIN

An AOD is the Service’s way of notifying the public and its employees about the Office of Chief Counsel’s litigating position. When the IRS loses in a circuit court case, as in Quezada, or a precedential Tax Court opinion, if Counsel disagrees with the opinion, an AOD discusses the reasons why. The AOD lets the public and practitioners know that taking a position consistent with the opinion will lead to the IRS challenging the position if the matter is appealable to a different circuit.

Back to Quezada.

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As Keith discussed, the Fifth Circuit based its holding on the view that the combination of Quezada’s 1040 and the business’ deficient 1099’s provided the IRS with sufficient information to determine potential backup withholding liability:

The court decides that the Forms 1040 and 1099 did provide the IRS with enough information to create an informal Form 945.  The forms filed contained enough data to show he had a backup withholding liability.  The Forms 1099 showed the amount paid and the person paid thus allowing the IRS to calculate the amount of backup withholding that Quezada should have made.  Case over.

The AOD that Counsel issued this past February flatly disagrees with the Fifth Circuit’s discussion of the IRS’s ability to determine backup withholding liability based just on the 1040 and Form 1099:

The omission of a payee’s TIN on a Form 1099-MISC does not conclusively establish the payor’s liability for backup withholding. Instead, backup withholding liability arises from the failure to obtain a payee’s TIN, which is not evident on the face of the Form 1099-MISC. I.R.C. § 3406(a)(1)(A); Treas. Reg. § 31.3406(a)-1(b)(1)(i).

As the AOD notes, if upon making payments to the workers the taxpayer had obtained the workers’ TIN but mistakenly omitted the number, there would be no backup withholding liability. In addition, as the AOD notes, the Service could not determine the extent of the liability just by the taxpayer’s filed 1040 and 1099’s.

As Keith discusses in his post, the Fifth Circuit and IRS disagreed about how to apply the 1944 Supreme Court Lane-Wells opinion.  The AOD does not go so far as arguing for a per se rule that would prevent the SOL from running when there is no return filed for the tax liability at issue, but it takes the view that Form 945 is needed for the SOL to start running on backup withholding liability:

Under Lane-Wells, it is inappropriate to treat a payor’s Form 1099-MISC information returns reporting payments to payees, in combination with the payor’s individual income tax return, as “the return” that triggers the running of the period of limitations for assessing backup withholding liability. This is because: (1) the Forms 1040 and 1099-MISC are separate returns that neither reference nor rely upon each other for either return to be complete; (2) neither the Form 1040 nor the Form 1099-MISC requires reporting backup withholding liability; and (3) the Service has prescribed a separate Form 945 for a payor to report backup withholding liability and that is the form to which it looks in determining whether such liability exists.

Conclusion

The Inspector General has reported taxpayers avoiding payment of billions of dollars in backup withholding. TIGTA noted that IRS was developing a cross-functional working group to analyze current backup withholding policies, so the compliance issue is on IRS’s radar.

Of course the Inspector General’s disclosure two weeks ago revealing that IRS destroyed millions of filed information returns does not atmospherically contribute to liberally allowing IRS to chase taxpayers who themselves make mistakes relating to returns akin to information returns (for that bombshell, see A Service-Wide Strategy Is Needed to Address Challenges Limiting Growth in Business Tax Return Electronic Filing at page 2).

This AOD tells us that IRS is likely to press the issue. Stay tuned.

The 9th Circuit Reverses The Tax Court, Finding That The Taxpayer Had Filed A Return When It Provided A Copy To The IRS During Its Examination

We welcome back guest blogger Janice Feldman. Janice is currently a volunteer attorney at the Harvard Law School Federal Tax Clinic and assisted in drafting the amicus brief filed by the clinic on behalf of the Center for Taxpayer Rights in Seaview Trading, LLC v. Commissioner. Prior to volunteering at the clinic, Janice worked for over 30 years in tax administration, first with the Department of Justice, Tax Division and then with the IRS, Office of Chief Counsel. She retired in 2019. At the time of her retirement, Janice was the Division Counsel/Associate Chief Counsel (National Taxpayer Advocate Program) at the Office of Chief Counsel. Keith 

In Seaview Trading, LLC v. Commissioner, the 9th Circuit looked at the age-old tax question of when is a return considered filed for the purposes of starting the assessment statute of limitations. The Center and the Clinic took a keen interest in this case as this issue – when is a return filed — is central to administering a fair and just tax system. Taxpayers and the IRS, alike, need to know what actions are sufficient to trigger the statute of limitations on assessment. Under the Taxpayer Bill of Rights, taxpayers have a right to finality. IRC Section 7803(a)(3)(F). If the taxpayers’ actions are insufficient to trigger the limitations period, then the IRS can make assessments forever.  

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In Seaview, the taxpayer, a partnership, believed it had filed its 2001 partnership tax return in July 2002, but the IRS had no record of the filing. In 2005, the IRS commenced an audit of the taxpayer’s 2001 return. The IRS agent conducting the exam notified the taxpayer that the IRS had no record of the taxpayer filing a 2001 partnership income tax return (Form 1065) and requested a signed copy. In response, the taxpayer faxed a signed copy of the return to the agent. The IRS later relied on the information on the faxed return to propose an additional assessment against the taxpayer. The final partnership administrative adjustment (FPAA) proposing an assessment was issued in 2010, which was more than four years after the taxpayer faxed a signed copy of the return to the revenue agent.

The Tax Court in TC Memo 2019-122 took a draconian view holding that the taxpayer did not “file” a tax return when it faxed a copy to the IRS agent. Furthermore, the Tax Court found that the 2001 return faxed to the agent did not even qualify as a “return” reasoning that the taxpayer did not intend to file a return when it faxed the return to agent because the taxpayer included a copy of the certified mail receipt showing a July 2002 mailing date. Since the tax return faxed to a revenue officer was not a tax return filing nor a return, the Tax Court found that the final partnership administrative adjustment (FPAA) issued in 2010 was not barred by the limitations period under section 6229(a).  The IRS had unlimited time to assess as no return was filed.   

The taxpayer appealed to the Court of Appeals for the 9th Circuit. On May 11, 2022, the 9th Circuit rendered its decision and reversed the decision of the Tax Court. A copy of the 9th Circuit decision is located here

The Ninth Circuit stated that “Based on the ordinary meaning of “filing,” we hold that a delinquent partnership return is “filed” under § 6229(a) when an IRS official authorized to obtain and process a delinquent return asks a partnership for such a return, the partnership delivers the return to the IRS official in the manner requested, and the IRS official receives the return.”

Since the Tax Court had concluded that the signed copy of the Form 1065 faxed to agent was not a return under the Beard test, See Beard v. Commissioner, 82 T.C. 766, 777 (1984), the 9th Circuit went on to analyze this issue. The 9th Circuit found that the Form 1065 that Seaview faxed to agent met all the Beard criteria and therefore was a return.  

I commend the 9th Circuit. This decision is a big victory for the tax system as the audit process needs to be perceived by taxpayers as fair. When a taxpayer has evinced an honest effort to satisfy his obligation to self-report his tax liability and the IRS relies on that submission as a basis of an examination, the taxpayer should be entitled to finality, and the IRS should not have unlimited time to assess. The receipt of the return by the revenue agent in this situation should start the clock running on the assessment period. The IRS will still have three years from receipt to assess, but the IRS will not have all the time in the world. 

The case was decided in a split decision with a vocal dissent.  The dissenter based her position on the language of the regulation.  The majority acknowledge the regulation but pointed out the places in IRS subregulatory guidance in which the IRS and Chief Counsel instructed employees to accept returns in ways that differed from the rigid requirements of the applicable regulation which required submitting the return to the appropriate IRS Service Center in order for it to start the clock.  Because of the importance of the decision to the system, it will be interesting to see if the IRS accepts the decision and acknowledges that its employees are directed to accept returns in certain circumstances. 

The IRS may decide to limit its acquiescence of this decision to the 9th Circuit and continue to fight this issue in other circuits.  It may decide to seek en banc review encouraged by the dissent or to seek Supreme Court review if it has an adequate conflict.  There will be more to come about this case as the IRS reacts to the decision and plots its path forward.