Search Results for: motion for reconsideration

IRS Files Motion for Reconsideration in Precedential Tax Court Case

On April 19, 2022, the Tax Court issued a precedential opinion in Treece Financial Services Group v. Commissioner, 158 T.C. No. 6.  Since the issuance of the opinion, I intended to write a post about the case but now an additional reason for doing so exists.  On May 19, 2022, the IRS filed a motion for reconsideration.  This is a rare occurrence as I discussed in a post several years ago on this type of motion in which I not only discuss such motions generally but provide some detail regarding my own ill-fated motion for reconsideration several decades ago.

Filing a motion for reconsideration is a rare thing at Chief Counsel.  The Chief Counsel’s Directive Manual at 35.9.1.2.4 describes the filing of such a motion:

(1) In rare instances, it may be necessary to file a motion requesting reconsideration of findings or opinion.  These motions must be recommended by the Division Counsel, reviewed in the appropriate Associate Chief Counsel’s office and approved by the Chief Counsel.  See T.C. Rule 161

(2) Motions for reconsideration of finding or opinion should only be filed in cases of substantial error or where exceptional or compelling circumstances exist.

The fact that Chief Counsel’s office succeeded in getting the Acting Chief Counsel to sign off on this motion within one month after the issuance of the opinion provides a statement of the significance of the motion.  Chief Counsel could have decided to seek an appeal of the decision.  Had it done so it would have had to convince the Department of Justice and potentially had a conference in the Room of Lies, but it would not have needed the approval at Chief Counsel level to initiate the appeal.  If nothing else the decision to file a motion for reconsideration of a precedential opinion decided by the Judge who has just become the Chief Judge signals the depth of the disagreement with the decision.  Now, let’s talk about the opinion itself and see what has riled up Chief Counsel’s office.

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The Treece case concerns another aspect of an issue we have discussed frequently on the blog – the jurisdiction of the Tax Court.  The IRS moved to partially dismiss the case for lack of jurisdiction although it styled its motion as one for summary judgment.  Petitioner filed a response. Meanwhile the taxpayer moved for summary judgment to which the IRS filed a response.  The Court sets up the issue this way:

Respondent contends that this Court lacks jurisdiction in this employment tax case to review respondent’s determination that the Voluntary Classification Settlement Program (VCSP) does not apply to the computation of petitioner’s employment tax liabilities. Petitioner contends that it met all the requirements of the VCSP and respondent does not have the discretion to deny its participation in the VCSP.

In 2019, the IRS notified Treece Financial Services Group (the petitioner) of the reclassification of Dock D. Treece (the taxpayer) from independent contractor to employee for three previous tax years (2015, 2016, 2017).  Mr. Treece is the sole corporate officer of the business.  The company agreed to his treatment as an employee.  The case concerns possible reductions in certain taxes resulting from his reclassification as an employee.  The company sought the reductions through VCSP.

I.R.S. Announcement 2012-45, 2012-51 I.R.B. 724, 724. To be eligible for the VCSP, a taxpayer must: (1) have consistently treated the workers as nonemployees; (2) have filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years; and (3) not currently be under employment tax audit by the Internal Revenue Service (IRS).

The IRS denied Treece the ability to participate in VCSP because at the time it applied it was under an employment tax examination.

The Court first addresses the motion to partially dismiss filed by the IRS.  In doing so it provides a general statement of its jurisdiction in a case like this:

Generally, we have jurisdiction under section 7436(a) to determine: (1) whether an individual providing services to a person is that person’s employee for purposes of subtitle C; (2) whether the person, if an employer, is entitled to relief under section 530 of the Revenue Act of 1978; and (3) the proper amounts of employment taxes which relate to the Commissioner’s determination concerning worker classification.

The Court then moves to a discussion of providing review of a decision made by the IRS:

There is a strong presumption that an act of administrative discretion is subject to judicial review. Trimmer, 148 T.C. at 346; Corbalis v. Commissioner, 142 T.C. 46, 56 (2014) (holding that denials of interest suspension under section 6404(h) are subject to judicial review)….  In 2000 section 7436(a) was amended to provide the Tax Court jurisdiction to “determine whether such a determination by the Secretary is correct and the proper amount of employment tax under such determination.”… The U.S. Court of Appeals for the Ninth Circuit held that the amendment in 2000 “indicates that Congress did not intend to limit the Tax Court’s jurisdiction under section 7436 to determining only whether an individual was an employee.” Charlotte’s Office Boutique, Inc. v. Commissioner, 425 F.3d at 1208.

Don’t you love it when the Court says that Congress did not intend to limit its jurisdiction.  Carl Smith and I have sought to have the Tax Court look at time periods for filing petitions that way for several years.  Looking for more decisions that adopt the Treece view of jurisdiction soon.

Here, the Court finds that because the VCSP eligibility determination directly impacts the amount of tax the company will owe “the procedures that Congress has established for judicial review of the Commissioner’s determinations logically contemplate review of such a denial as one element of the determination.”

After denying the IRS motion to partially dismiss, the Court turned to the motion for summary judgment filed by Treece.  It quickly determines that a material dispute exists concerning the facts.

Motion for Reconsideration

As mentioned above, the IRS did not like the decision in this case and filed an extraordinary motion for reconsideration.  It lists several reasons why the Tax Court got it wrong:

(a) Respondent’s denial of petitioner’s VCSP application does not constitute a “determination” under section 7436(a)1 in connection with an “examination”;

(b) The VCSP is not a determination of the “correct and the proper amount of employment tax.” Treece at 5. Rather, it is a settlement program that allows for taxpayers to voluntarily reclassify their own workers and treat them as employees prospectively in exchange for a settlement payment in an amount that is a significant departure from the employment tax rates imposed by the Code. More specifically, the VCSP results in the parties entering into a closing agreement pursuant to section 7121 that: 1) requires the taxpayer to treat the class(es) of workers as employees beginning on a date chosen by the taxpayer; 2) provides retroactive audit relief for a taxpayer in that the IRS agrees not to disturb the taxpayer’s prior classification of the worker(s) as nonemployees for prior tax periods; and 3) the IRS collects a minimal payment amount equal to only 10 percent of the amount of employment taxes that would have been due on compensation paid to the workers being reclassified for just the most recent tax year prior to the filing of the VCSP application, calculated under reduced rates; and

(c) The VCSP does not reflect an administrative “examination” or “determination” of employment due pursuant to section 7436(a)

The motion for reconsideration explains for the remaining 15 pages why the Tax Court made a mistake when it asserted jurisdiction of the decision of VCSP not to consider this case.  I am not sure that the motion raises any new arguments the IRS did not make prior to the decision but it does signal the depth of the IRS disagreement with the decision. 

One concern that a party has in filing a motion such as this signaling significant disagreement is that it alerts the Court an appeal is coming and allows the Court to shore up its arguments essentially writing its own brief to the appellate court.  We will see if the IRS motion moves the Tax Court.  Very few of these type motions change the mind of the deciding court.  I expect we will be seeing more about this case for some time to come.

Motion for Reconsideration

When a court issues a ruling a party does not like, a “mistaken” ruling, the party has the chance to ask the court to reconsider the error of its ways. I have not done an empirical study regarding the success of motions for reconsideration but I suspect that this particular motion has a very low success rate.  That, of course, does not deter us because as lawyers and competitive spirits we know we are right and that if the court would just think correctly it would see that it erred.

I previously posted on the case of Senyszyn v. Commissioner, 146 T.C. No. 9 (2016) in which the Tax Court declined to apply collateral estoppel to hold the petitioner liable for any tax liability in a case in which the petitioner had pled guilty to a criminal tax violation of tax evasion under I.R.C. 7201 – the most serious of all of the tax crimes.  In that post I noted that the case was unusual both in the facts and the outcome.  The IRS disliked the opinion so much that it filed a motion for reconsideration.  As with the vast majority of motions for reconsideration, the Tax Court denied the motion in an opinion issued by the Judge Halpern on July 21, 2016. Senyszyn v. Commissioner, TC Memo 2016-137. In this post I will talk about making motions for reconsideration and about the opinion the Tax Court just issued upholding its prior opinion in this case.  My discussion of motions for reconsideration will be more about what to consider and less about the technical requirements in the rules.  We have blogged previously on such motions here and here.

Jack Townsend has also blogged on the motion for reconsideration on his Federal Tax Crimes blog.  As usual, he is much quicker than us to post on a case and he provides insights that we miss.

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About 35 years ago I represented the IRS in a small tax case calendar in Roanoke, Virginia. The calendar was memorable to me because in one day Bill Ringuette, the other Chief Counsel attorney, and I tried three essentially similar cases involving the tax ramifications of divorce.  It is not unusual to have divorce proceedings spill over into Tax Court where the divorce lawyers do not do a good job of wrapping up the tax issues or the parties simply feel the need to keep fighting about something.  What was unusual about this day was not only that we had three such cases but that each case represented different strata of the economic ladder.  One couple was economically disadvantaged, one was middle class and one was clearly approaching 1% status.  As I recall we tried them in the order of their economic status with the economically disadvantaged couple going first.

Bill was representing the government in the first case. The courtroom is really not designed well for these type cases because there are sometimes three parties instead of two.  If the government stakes out its normal table that leaves the “happy” couple to sit together at petitioners table.  In many circumstances this is not the ideal configuration.  It was not ideal in this case and the ability of the petitioners to understand the case was not ideal either.  This case was tried in a time before tax clinics came to Virginia.  So, the judge asked me to sit between the couple and to provide them with assistance.  Of course I complied with his request although I found the situation extremely awkward both from the perspective of siting between two warring parties and providing assistance to the opposing party.  Nonetheless, we got through the case and next up was the middle class case.

This case was mine and the petitioner here was the ex-husband. In preparing for the case I had tracked down his ex-wife who happened to live in Richmond.  I felt I needed her as a witness.  On our way to Roanoke, Bill and I had picked her up at her house in Richmond and driven her to Roanoke so she could testify.  I cannot remember if she sat with me at respondent’s table or if she had to wait outside the courtroom until she testified but the awkwardness of the previous case and the following case did not physically manifest itself at petitioner’s table in the courtroom.  We tried the case.  I felt petitioner had not put on enough evidence to win.

Last up was the well to do couple. Each came with their well-coiffed new spouse and with their own counsel.  As government counsel we really had little to do except sit back and watch the fight.

I tell this story because it turned out that in the case of the middle class husband the court made what I thought was a terrible mistake and gave him something where I was certain I should have won the whole case. Naturally, I felt the need to bring this to the court’s attention so it could correct its mistake.  My boss, the district counsel, normally knew the manual that governed our actions backwards and forwards but for some reason he did not know the internal rules on getting permission within Chief Counsel’s Office before moving to reconsider, and I did not bother to consult the manual because it did not occur to me that such a thing required a high level of review.  So, I prepared and filed a motion for reconsideration.  It took the court a very short time to let me know it had not made a mistake and to let me know what it thought of my motion.  Not long thereafter the National Office let me and my boss know what it thought of our filing a motion for reconsideration without getting their permission.  All in all, it was a memorable experience.  (Of course, I am still convinced I was right on the merits.)

So, I come to the discussion of the IRS filing a motion for reconsideration with some background. I know that it does not do so lightly and I knew when I wrote the earlier post on this case that the IRS would not like this outcome.  I previously wrote a two part post about the Room of Lies, here and here.  Part one of those posts is applicable here.  The office that lost this case would have engaged in a discussion with the National Office and a decision, perhaps at the level of Associate Chief Counsel for Procedure and Administration, would have been made to authorize this motion.  There would have been memos and meetings and lots of discussion.  Filing the motion was not the knee jerk reaction of one attorney as with my motion 35 years ago or with motions filed by many petitioners.

Despite the process of vetting that would have occurred prior to the filing of the motion, the IRS lost the motion and, at least in my opinion, it should have lost the motion. The facts in Senyszyn are extremely unusual.  The IRS is not concerned about losing on this fact pattern because this will almost never occur.  The IRS is concerned that the opinion in this case, in which the Court issued a precedential opinion, will impact other cases and cause a lot more litigation in post-conviction cases.  I do not think it will or should because the decision is narrowly based on the unique facts presented.  Nonetheless, the willingness of the IRS to file a motion for reconsideration here, something it does infrequently and only with careful thought and consideration means that the Chief Counsel attorneys will be pushing hard for an appeal when they visit the Room of Lies.  Petitioners here, who are self- represented,  potentially face another hurdle depending on whether the Tax Division of the Department of Justice and the Solicitor General takes up the almost certain request for appeal.

If you plan to file an appeal, you need to think about whether you should file a motion for reconsideration and give the judge the opportunity to improve on the original opinion. You might decide that the mistake you think you see in the original opinion is one that will cause the appellate court to overturn the case.  If so, the motion for reconsideration could make your appeal more difficult if the judge sticks to the original decision but offers a better and more thoroughly reasoned opinion for the decision.  If you think you have that rare case in which the deciding court actually will reconsider, then the motion is certainly worthwhile because it provides a cheaper and faster path to victory than appeal.

In its motion here the IRS brought a few errors to the attention of Judge Halpern. First, it pointed out that he “did not properly apply the standard for collateral estoppel.”  In particular the IRS expressed concern with the Court’s claim of “broad discretion in the application of collateral estoppel” because such a claim contradicts precedent in the Third Circuit, the court of appeals to which this case lies and the court precedent the Tax Court will follow under the Golsen rule.  In addition to this error, the IRS also pointed out that proper application of the rule of collateral estoppel would result in a substantial deficiency for petitioners because that rule would require the Court to accept the dollar amount mention in the plea agreement.

This is one of those cases where making the motion for reconsideration gave the judge the chance to expand upon the reasoning behind the original opinion. Because motions for reconsideration do offer judges this chance, I am sure that they really appreciate it when a party makes this motion.  In arguing that the Court applied the wrong standard for application of collateral estoppel, the IRS argued that the Third Circuit, the circuit to which the appeal in this case lies and therefore the applicable circuit for the Golsen rule, “allows trial courts discretion in the application of collateral estoppel only when the doctrine is asserted by a claimant who was not a party to the prior litigation.”

The Court responded by noting that the motion for reconsideration filed by the IRS left largely unchallenged the Court’s determination that the purposes of collateral do not support applying the doctrine in this case. Where the facts showed that the petitioner did not have a tax liability despite his prior plea, applying collateral estoppel would further injustice for the sake of judicial economy.  The principle of collateral estoppel was created by courts primarily for their benefit so that they would not need to retry matters settled by the same parties in prior litigation.  If the courts created this doctrine, why shouldn’t they be able to use it to fit the circumstances?

The Court goes on to explain that any case raising collateral estoppel requires a court to consider equitable factors “to assure that the doctrine is applied in a manner that will serve the twin goals of fairness and efficient use of private and public litigation resources.” The Court then continued to quote from National R.R. Passenger Corp v. Pa. Pub. Util. Comm’n, 288 F.3d 519 (3rd Cir. 2002) stating “even where the requirements of the general rule of collateral estoppel are satisfied, the Court must consider whether there are special circumstances present which make it inequitable or inappropriate to foreclose relitigation of a previously determined issue.”

Based on this language from a Third Circuit opinion, the Tax Court in responding to the motion for reconsideration goes on to say that the precedent of the circuit does not require that collateral estoppel must be applied even where the requirements for application are met. It remains to be seen whether the IRS will appeal this case but the motion here gave the Tax Court the opportunity to expand upon its reasoning and specifically address the law of the circuit.  Petitioners should be please because the Court has written much of their brief.

The IRS concern that failure to apply collateral estoppel after a criminal conviction will cause many individuals convicted of a tax crime to seek to relitigate aspects of their criminal case in the Tax Court is a concern that the Tax Court undoubtedly shares. The facts here established that the petitioners did not owe any tax.  These facts will almost never exist.  To ignore these facts and use the principle of collateral estoppel to establish a liability that all parties know is wrong seems like an inappropriate application of a principle designed by the courts to add justice.

District Court Reverses Bankruptcy Court and Finds that Emotional Distress Alone Insufficient to Justify Awarding of Damages When IRS Violates Stay on Collection

Earlier this year in Migraine Caused by Improper IRS Collection Action During Bankruptcy Stay Triggers Damages for Emotional Distress I discussed Hunsaker v US, where a bankruptcy court held that IRS was on the hook for damages arising for violations of the stay on collection even when the only damages were from the emotional distress and were not actual economic damages. Last week a district court in Oregon reversed the bankruptcy court, finding that there was no clear waiver of the government’s sovereign immunity  in the absence of direct economic damages.

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In my post earlier this year, I described what led to the Hunsakers suing the government. It started with financial problems when they realized that their “homestead was discovered to be subject to disputed claims by secured creditors, in turn complicated by claims of Marion County, Oregon, that the purchase of the homestead created an unlawful partition.” In September 2012 the Hunsakers filed a Chapter 13 bankruptcy reorganization. IRS received notice of the filing, and it filed a proof of claim for $ 9,301. As I previously discussed, “at the moment of the Chapter 13 filing, the automatic stay under the Bankruptcy Code came into place. In a Chapter 13 case it continues throughout the life of the case, which usually means it lasts for three to five years until completion of the plan or dismissal of the case.”

So IRS had notice of the plan, and should have backed off on collection. IRS however failed to back off and on numerous occasions sought payment and in fact served levies on Social Security payments even though the Hunsakers’ attorney contacted IRS and reminded IRS of the stay and the illegality of the IRS collection actions.

At the Bankruptcy Court, the judge found a specific connection between the IRS misconduct and an increase and aggravation of the Hunsakers’ anxiety and stress and awarded them $4,000 on account of that stress and anxiety, which in the judge’s opinion contributed to the onset and severity of Mrs. Hunsaker’s migraines. In reaching that conclusion, the bankruptcy court relied on and discussed a 9th Circuit case, In re Dawson that, on reconsideration, concluded that emotional distress stemming from violations of the bankruptcy stay can give rise to actual damages even if the debtor suffers no pecuniary losses.

On appeal, the district court noted that Dawson did not address the government’s violations of the stay; that case involved a private creditor. That was a key difference.

I will avoid the temptation to provide the NSFW link to Mel Brooks’ History of the World Part 1 where he reminds us that it is indeed good to be the king. While we no longer have royalty, sovereign immunity remains and limits the opportunities for private parties to sue the government. It stems from the adage that the king can do no wrong. While IRS most certainly can and does do wrong, the principle protects IRS from damages unless there is a specific and clear Congressional expression allowing the government to be sued.

The district court provided the framework:

Section 106(a) of the Bankruptcy Code clearly waives sovereign immunity for some claims under § 362(k). See 11 U.S.C. § 106(a) (“[S]overeign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to . . . [§] 362[.]”). Section 362(k) allows individual debtors injured by a creditor’s willful violation of the automatic stay to recover “actual damages.”

The opinion then goes on to discuss how in Dawson the 9th circuit provided that “allowing emotional distress damages best fulfills legislative intent to protect debtors from excessive psychological and emotional harm.” But that was not enough for the Hunsakers, as the creditor in Dawson was a private party and not Uncle Sam:

That emotional distress damages are available against private parties does not automatically authorize them against the federal government. After all, “when it comes to an award of money damages, sovereign immunity places the Federal Government on an entirely different footing than private parties.” Lane v. Pena, 518 U.S. 187, 196 (1996).

The opinion discusses how that different footing requires a clear expression that Congress meant for the government to be sued, and the district court said that was not present in these circumstances:

The Dawson court concluded the phrase “actual damages” was ambiguous even given the text and context of § 362(k) as a whole. 390 F.3d at 1146. The legislative history discussed in Dawson cannot waive sovereign immunity where the text of § 362(k) otherwise remains ambiguous. See Cooper, 132 S. Ct. at 1448 (“Legislative history cannot supply a waiver that is not clearly evident from the language of the statute.”). Because the phrase “actual damages” is ambiguous, this Court must construe § 362(k) in favor of immunity. See id. (any ambiguities in the statutory language must be strictly construed in favor of immunity, including ambiguities regarding the scope of the waiver). Reinforcing this conclusion is the fact that, before concluding “actual damages” includes emotional distress damages, the Dawson panel came to the opposite conclusion in an opinion it later withdrew. Dawson v. Washington Mutual Bank, F.A., 367 F.3d 1174 (9th Cir.), withdrawn, 385 F.3d 1194 (9th Cir. 2004). The two Dawson opinions provide compelling proof that any waiver of sovereign immunity as to emotional distress damages in § 362(k) is, at best, implicit.

(emphasis added).

The cite in the above block quote is to a 2012 Supreme Court case, F.A.A. v. Cooper, 132 S. Ct. 1441, 1448 (2012). The district court notes that Cooper supports its holding as well, as in that case the Supreme Court in examining a possible cause of action under the Privacy Act looked to “essentially the same question: if a statute waives sovereign immunity for “actual damages,” does that waiver include emotional distress damages? Id. at 1447–48. The Supreme Court answered no.”

Parting Thoughts

For good measure, the Hunsaker opinion discusses how even if there were no sovereign immunity issue it was skeptical that in fact there was an injury that was sufficient to warrant damages anyway, pointing to “alleged only brief losses of appetite, stress, and mounting frustration after receiving the IRS notices.” When I wrote my original post on the bankruptcy court case I said I was somewhat surprised at the outcome and I am not surprised that the district court reversed. On the other hand, the IRS conduct in this case is nothing to write home about.

I understand the government wanting to limit the possibility that other debtors similarly suffering from IRS mistakes in this process would sue and connect their stress from the IRS mistakes to an award, even a smallish one. It does seem that there should be some ramification for IRS mistakes, especially when the mistakes are repeated and the taxpayer/debtor has made a good faith effort to ensure that the government is aware of the stay. I note that Congress last systematically looked at these issues was in 1998 when it added Section 7433(e), allowing for an alternate statutory hook for taxpayers to petition the bankruptcy court for actual, direct economic damages and costs of the action if the IRS willfully violated the automatic stay injunction (7433(e) is also now the exclusive means for IRS violations of the discharge). I am not aware how often IRS whiffs on respecting these provisions so perhaps the issue is one rarely encountered in practice.

The First Reconsideration of a Case Due to Former Judge Kroupa’s Tax Problems

Former Tax Court Judge Kroupa resigned from the Tax Court on June 16, 2014, apparently in response to an IRS criminal investigation concerning the tax liabilities of herself and her husband.  We previously reported on her resignation here.  At the time the indictment came out, some speculation occurred in the tax press about the impact of her tax troubles on the decisions she rendered, see here.  In Eaton Corporation v. Commissioner the first case that we are aware of involving the fallout of Judge Kroupa’s indictment comes before the Tax Court for it to review whether her decision should be reconsidered.  On June 9, 2016, the company filed a motion for reconsideration of an order dated June 26, 2013.  The ordinary time period for filing a motion for reconsideration is 30 days, not 1,083 days.  It will be an interesting case to watch for others who received a ruling from Judge Kroupa they would still like to challenge.

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The request for reconsideration does not dwell on Judge Kroupa’s tax problems but rather on the incorrectness of her ruling.  Yet, her tax problems must be central to this extraordinary request.  While she has been indicted, she has not pled or been determined to have been guilty.  The allegations concerning her tax crimes bear no relation to the issues presented in this motion to reconsider her opinion.  The opinion concerns the burden of proof in an Advance Pricing Agreement.  She held for the IRS for reasons with which Eaton strongly disagrees.

When the opinion came out, Les started a blog post because he recognized the importance of the case which could severely damage the APA program. He did not finish it because we lack expertise in some areas of procedure and sometimes do not have time to do the research necessary to be comfortable with drafts we write. Each of us has drafts left on the cutting room floor which have some value but not enough to make it into the blog. I do not know what has happened to the APA program generally after the decision Eaton because I am not an expert in that area and assume that Eaton’s request here supports the conclusion that this is still a major issue in the transfer pricing arena. Here is the description of the case that Les begun:

The parties differed as to how courts should evaluate whether the IRS was justified in cancelling the agreement.  Here is where an understanding of the procedural context is key. When it believed that Eaton violated the terms of the agreements, IRS issued a deficiency notice with millions of dollars in adjustments, reflecting allocations in a way that differed materially from that the parties had agreed to in the APAs. After Eaton petitioned the Tax Court, both parties filed motions for summary judgment, with Eaton arguing that the APAs were enforceable contracts, and that the IRS needed to show that the cancellations were appropriate under contract law.

In Eaton’s view, the IRS should be held to traditional contract principles, with the party exercising a contractual cancellation provision (here, the IRS) having to “demonstrate that a factual predicate exists to cancel the contract.” IRS argued that the revenue procedures govern the legal effect and administration of the APAs and the cancellations were administrative determinations. In the IRS’s view, the court’s role was limited to determining if IRS abused the discretion to cancel or revoke the APAs.

In essence, the dispute as centered in the summary judgment revolved around who has the burden to prove that there was noncompliance with the APA and the governing revenue procedures. Eaton said the IRS as the party wishing to cancel a contract had to bear the burden of proof; the IRS claimed that the court’s role in considering why the IRS terminated the APAs was more limited, and that Eaton had to prove that the IRS’s actions were not within its considerable discretion.

Yet, is that a reason for reconsidering the case so long after the normal time period for requesting reconsideration?  What has happened in other situations in which sitting federal judges have been indicted or convicted?

Judge G. Tom Porteus, who was a federal district judge in New Orleans, was impeached in 2010.  Prior to his impeachment, he had presided over and decided the case of Turner v. Pleasant.  The judgment in the Turner case was entered in 2001, but in 2011 the Turners sought to reopen the judgment, which was then reversed and remanded (in favor of the Turners).  In this case, the link between the allegations of misconduct by Judge Porteus and the case was strong.  Mrs. Turner brought a personal injury case resulting from a boating incident.  Shortly before trial, the defendant hired an additional attorney who happened to be a close personal friend of the judge.  The attorney hired as a medical expert another individual who happened to be a close personal friend of the judge.  The judge relied on the testimony of this expert in deciding against Mrs. Turner.  The length of time between the decision and the follow-up action was not too long based on the information available to Mrs. Turner.

Judge Samuel Kent was a federal district judge in Galveston, Texas.  He was charged with many acts of sexual harassment related primarily to court clerks.  The process of investigating his actions and making a determination concerning his case took time.  While the process for determining his fate unfolded, a party in a case he had decided file a motion for reconsideration.  Initially, the decision on the motion was deferred until the trial of Judge Kent.  When the judge was indicted on additional charges, the Judicial Council of the Fifth Circuit granted the motion for reconsideration of the case.  Here the charges and the decision regarding the motion had nothing to do with his behavior in the prior case but related to the management of his docket.

There may be many other examples of judges with legal problems and the impact of those problems on the cases they have decided.  We did not do an exhaustive research project on this.  Both of the examples provide logical responses to the circumstances.  In the case before Judge Porteus, it appears quite possible that the outcome of the case was improperly influenced by his relationship to the attorney and the expert witness.  Given the nature of his problems resulting in impeachment, the nature of the case, and the timing of the request, the reversal seems to logically follow.  The granting of the motion for reconsideration in the case before Judge Kent seems unrelated to any prior decision and more related to moving the case along.  It is not clear that these cases provide much guidance in the situation with Judge Kroupa and her decision in Eaton, or that Eaton is seeking to directly tie the two.  Her indictment, however, places her decisions generally in a situation that may cause the Court to look at them with more scrutiny.

It is interesting that Judge Kroupa’s problem came during the debate about the removal powers of Tax Court judges raised in the Kuretski case.  We blogged about the Kuretski case on many occasions here, here, here, here, here, here, here, here, here, here, and here.  Had she not resigned, the language of the statute would have perhaps been tested.  That did not happen, however, and she is simply a judge who resigned who happens to have been indicted after her resignation.  The question is how that impacts the cases she did decide.

Her 2013 decision in Eaton was never appealed.  That decision did not fully dispose of the case.  At the end, the opinion states that a trial will be scheduled in due course, but will not consider the issues presented in the motions on which Judge Kroupa ruled and that an order reflecting the opinion will be issued.

We will watch what happens in this case with interest.  If Eaton succeeds with this motion, the Tax Court may field requests from both sides regarding adverse rulings they would then seek to have the Court reconsider.

Migraine Caused by Improper IRS Collection Action During Bankruptcy Stay Triggers Damages for Emotional Distress

In re Hunsaker No. 12-64782-fra13 (free link not available), a case out of the bankruptcy court in Oregon, caught my attention. It involved Jonathan Hunsaker, a retired Oregon state trooper and his wife Cheryl Hunsaker. The Hunsakers ran into financial problems, leading to a bankruptcy filing. Following the filing, IRS violated the Bankruptcy Code’s stay on collection, leading to a suit where the Hunskakers sought $5,000 in damages. The court held that the Hunsakers were entitled to damages from that the emotional distress that the improper IRS collection efforts caused, and awarded the Hunsakers $4,000.

I describe how it got there below.

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The Hunsaker’s financial problems stemmed from when their “homestead was discovered to be subject to disputed claims by secured creditors, in turn complicated by claims of Marion County, Oregon, that the purchase of the homestead created an unlawful partition.” As a result, in September 2012 the Hunsakers filed a reorganization under Chapter 13 of the Bankruptcy Code. Shortly thereafter, the IRS received notice of the filing, and filed a proof of claim, in the amount of $ 9,301. At the moment of the Chapter 13 filing, the automatic stay under the Bankruptcy Code came into place. In a Chapter 13 case it continues throughout the life of the case which usually means it lasts for three to five years until completion of the plan or dismissal of the case. The Chapter 13 plan was confirmed in the fall of 2014 long after the filing of the petitioner; however, the timing of the confirmation does not impact the existence of the automatic stay if the case remains open.

Sometimes the IRS does things it is not supposed to do and that’s what happened here. Despite the stay, IRS sought collection on the assessed liability on four separate occasions over a one-year period:

  1. December 12, 2013: A notice of intent to levy, and a demand for payment of $ 9,685.65;
  2. February 10, 2014: A notice of levy on Social Security benefits, and a demand for payment of $ 9,814.28;( as a side note, one of the benefits of a Chapter 13 plan is that interest does not run on the claim and if the claim is paid the liability is satisfied. So, the increasing amounts you see on these later notices are amounts the debtor will likely never pay).
  3. September 1, 2014: A notice of intent to seize (“levy”) debtors’ state tax refund “or other property,” demanding $ 10,158.69; and
  4. December 8, 2014: A levy on Social Security benefits, and a demand for payment of $ 10,234.25.

The Hunsakers told their attorney each time; he assured them that the IRS actions were “unlawful.” In addition, in December of 2013 and February of 2014 (around the time of the first two collection actions) the attorney contacted the IRS advising it of the bankruptcy filing and that any collection actions were illegal

The opinion states that the Hunsakers were “adversely affected” by the IRS actions:

The stresses naturally inherent to a complex bankruptcy case were exacerbated by the perceived threat of additional collection actions by the Internal Revenue Service. Mrs. Hunsaker, in particular, testified to the onset of migraine headaches within hours of receipt of each of the notices. Each spouse noted signs of tension and anxiety in the other, which in turn added to his or her own stress. The Plaintiffs were especially concerned with the threat to levy on Mr. Hunsaker’s Social Security income, because loss of a substantial portion of their income would render their plan of reorganization unfeasible. Although their attorney assured them that the automatic stay prevented the actions threatened by the notices, the effect of the attorney’s assurances began to wear thin as the notices continued to come.

Statutes in Effect

The relevant statutes are as follows. Bankruptcy Code section 362(a)(6) prohibits “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.”

Bankruptcy Code section 362(k) [previously found in 362(h)] provides that an individual injured by a willful violation of the stay shall recover actual damages, including costs and attorney’s fees, as well as punitive damages in appropriate circumstances.

The issue in the case was whether the emotional distress the Hunsakers suffered gave rise actual damages under 362(k). The government argued, as you would expect, no, primarily on the basis that the Hunsakers did not suffer any actual damages even though the IRS foot-faulted with its collection action. The Court found to the contrary based on a 2004 case, In re Dawson, 390 F 3d 1139 (9th Cir. 2004). In that case, on reconsideration, the Ninth Circuit held that emotional distress stemming from violations of the stay can give rise to actual damages under Section 362(k) even if there are no pecuniary losses.

I was a bit surprised by that holding, and Dawson itself makes for interesting reading to get to the conclusion that you can suffer “actual damages” under the statute even without pecuniary loss associated with emotional distress, including a look at “contextual clues” of the damage provision (“by limiting damages to individuals Congress emphasized harms that are unique to human beings, [such as] emotional distress, which can be suffered by individuals but not by organizations”) and the stay’s legislative history where Congress discussed both financial and nonfinancial harms that may befall debtors when creditors violate the stay.

Dawson sets out then that pecuniary loss is “not required in order to claim emotional distress damages, [though] not every willful violation merits compensation for emotional distress.” To limit frivolous claims and guide courts, Dawson sets out the following questions as factors that courts weigh to determine if damages are appropriate:

  1. Did the debtor suffer significant harm?
  2. Did the debtor clearly establish the significant harm? and
  3. Did the debtor “demonstrate a causal connection between that significant harm and the violation of the automatic stay (as distinct, for instance, from the anxiety and pressures inherent in the bankruptcy process)”?

Back to Hunsaker

Using Dawson as a guide, the court found that this emotional distress was serious enough to warrant damages, noting that “[t]he injuries described by the Plaintiffs at trial, particularly Mrs. Hunsaker’s migraine headaches, were clearly established as neither trivial nor insubstantial, and are compensable under the Dawson standards.” In addition to Dawson, the Hunsaker court also looked to a 1995 bankruptcy case out of Georgia, In re Flynn, where the court awarded $ 5,000 award of emotional distress damages stemming from IRS stay violations “based on plaintiff’s uncorroborated testimony that she was forced to cancel a child’s birthday party because her checking account had been frozen.”

The main part of the court’s analysis is where the court isolates the effect of the IRS misconduct from the general stress of bankruptcy and a “demonstration of circumstances which may make it obvious that a reasonable person would suffer significant emotional harm.” Here the court looked to the IRS sending four separate notices even though the attorney told the IRS to stop when it improperly sent the first two letters:

In the instant case, the Plaintiffs received four notices from the Internal Revenue Service, each of which indicated that the Service intended to take steps which would, once carried out, likely defeat their efforts to reorganize their finances through Chapter 13. The notices continued notwithstanding their attorney’s efforts to stop them, and it is not unreasonable that they were concerned that the Government might take the action threatened notwithstanding their attorney’s assurances.

The Court of Appeals points out that the harm sustained because of the stay violation must be distinct from the “anxiety and pressures inherent in the bankruptcy process.” This requirement may be satisfied by a showing that the stay violation increased or aggravated the stress and anxiety inherent in the underlying proceedings. It is not, however, necessary that plaintiffs provide corroborating evidence, or establish that the violation was egregious.

From the judge’s perspective, the wife’s testimony was enough to show that the IRS, and not the general stress of the bankruptcy, caused her migraines.

The evidence here sufficiently demonstrates that the “inherent” tension and stress of the Plaintiffs’ bankruptcy was exacerbated by the stay violation. The case was progressing well, and a plan was finally confirmed shortly before the fourth notice was sent. Mrs. Hunsaker testified that she suffered from migraines attributable to the notices.

After establishing that the debtors satisfied the Dawson test (using a clear and convincing standard, and based on their testimony alone), the court turned to damages:

The Plaintiffs seek a modest award of $ 5,000 for the two of them. This circumspect demand is appropriate: while the Court finds that the Plaintiffs have satisfied their burden of establishing that their claim is significant — that is, not trivial or insubstantial — their damages are, compared to many, not overwhelming. Nor is there any reason to find that the Government’s actions were egregious: there was, in fact, no evidence as to why the violations took place, and the events are more likely the result of error and oversight than malice. The evidence established that each of the Plaintiffs, suffered harm, and that, of the two, Mrs. Hunsaker’s was more intense. Considering all the circumstances, Mrs. Hunsaker should be awarded damages of $ 3,000, and Mr. Hunsaker $ 1,000, for a total of $ 4,000.

Brief Analysis

As a longtime migraine sufferer, I sympathize with Mrs. Hunsaker. I understand the court’s inclination to punish the IRS. For many people, collection letters from the IRS cause particular stress. In addition, the Hunsakers promptly told their attorney about the IRS collection efforts, and the attorney told the IRS (in writing) to stop, which the IRS ignored. A number of cases have found that the burden is on the IRS to show that its procedures take into account the stay, and that IRS must establish procedures to avoid violations. Absent imposing some sanction on the IRS, it seems unfair (though certainly not unprecedented) if there is no consequence when IRS violates a clear statute. The stay on collection is a fundamental debtor protection. Perhaps a slap on the wrist for causing a headache is the right result.

In any event, the Hunsaker’s $4,000 damages is likely gross income, given that damages on account of emotional distress, even when accompanied by physical symptoms such as headaches or stomach disorders, do not fit within the definition of damages on account of a physical injury.  That inquiry leads us to a stroll down IRC Section 104(a)(2), legislative history accompanying the 1996 changes to that statute, and a number of cases that parse the difference between a physical symptom of emotional distress and an actual physical injury, though that discussion perhaps waits for another day and another dispute.

 

 

 

 

Update on CIC Services And More On The Legislative vs Interpretive Rule Difference

This is an update on the CIC Services litigation. Following the March 2022 decision where a federal district court granted CIC’s motion for summary judgment and vacated the IRS Notice, the government filed a motion for reconsideration. It did not challenge the underlying merits determination that the IRS violated the APA by issuing the Notice without notice and comment. Nor did it challenge the court’s order to set aside the Notice. Instead, it challenged the court’s decision to order the IRS to return documents and information furnished to the IRS by nonparties pursuant to the Notice.

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The court granted the motion and last week issued a revised order that retracted its mandate that the IRS return the nonparty documents. It did so because CIC’s lawsuit was not brought on behalf of nonparties and was not a class action lawsuit:

Despite possessing a procedural device to assert claims and request injunctive relief on behalf of similarly-situated nonparties, CIC did not do so. As a result, while nonparty taxpayers and material advisors necessarily benefit from CIC successfully demonstrating that the Notice must be set aside and are no longer be required to produce documents and information pursuant to the Notice, CIC does not have any basis to seek affirmative injunctive relief requiring the IRS to return documents to nonparty taxpayers and material advisors.

Despite finding that the court originally overstepped its authority when it ordered the IRS to return what it had received pursuant to the invalidated notice, the court still could not resist taking shots at the IRS for what it perceived as the IRS’s unjust enrichment from issuing a notice that was procedurally invalid:

To be sure, this determination operates as a windfall to the IRS in that it allows the IRS to retain documents and information it was not entitled to collect from nonparty taxpayers and material advisors. If this were simply a matter of determining an equitable result, the IRS would have to return all documents and information produced pursuant to the Notice, especially considering the Sixth Circuit’s observations [ed: citing the circuit in the CIC case] that the IRS has a history of APA noncompliance.

A Different Take On Whether The IRS Was Required to Use Notice And Comment Procedures

One final point addressing whether a reg or IRB guidance requires notice and comment under the APA. I commend readers to a contrarian discussion from Jack Cummings, who, in a letter to Tax Notes [$], and in related work that he and Jack Townsend have separately undertaken (see, e.g., Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration for a deep dive into the issue), argue that courts and many current academic takes are off the mark.  In Cummings’ letter to Tax Notes, he disagrees with the Sixth Circuit in Mann (and other courts) that held that a reg or IRB guidance is deemed legislative and thus requires notice and comment under the APA because not complying with the rule might lead to a penalty or higher taxes. This, to Cummings, proves too much:

But to begin, instead, with the fact that the person owed tax or penalty as a result of the rule, could make every tax rule legislative. Each tax rule has some negative effect on taxpayers.

Under the APA, agency rulemaking is not required to be issued using the notice and comment procedures if the rule is interpretative (or sometimes referred to as interpretive). For decades, IRS, Treasury, and practitioners have thought that most guidance Treasury or IRS issues pursuant to its general rulemaking authority under Section 7805(a) was not required to be issued using notice and comment procedures under 5 USC § 553(b). That historical view was the consensus at the time of the passage of the APA in the mid-20th century.

What constitutes an interpretative rule? Cummings argues that the inquiry should focus more on the statute that triggered the IRS guidance as compared to the possibility of penalties if one chooses not to comply. In Mann and CIC Services, that takes us to Section 6707A and its trigger for reporting on transactions that have a potential for tax avoidance or evasion.

From Cummings’ letter:

It’s reasonable to interpret section 6707A to mean that Congress understood the section’s standard as too vague for taxpayers to enforce on their own. So Congress gave the IRS discretion to select among more or less abusive transactions the ones that should be reported. That’s a grant of legislative rulemaking authority.

In contrast, if the statutory language were capable of interpretation off a starting point that was not hopelessly vague, Cummings would have held that the rule was interpretative (and not required to be issued with notice and comment).

More from Cummings:

If the statute says, in effect, “We’re unsure what the rule should be, so you write it,” then the rule is legislative. If the statute says, for example, that a taxpayer can deduct ordinary and necessary business expenses, and then the agency wrote a regulation stating its views on those words, those views would normally be considered to be interpretive.

So, while Cummings’ approach would not have led to a different conclusion in CIC Services (or Mann), it leads to finding the rule legislative on a different rationale. It would matter a lot in other cases when courts and the agency have to determine whether IRS is required to use notice and comment, and the rule has a statutory starting point capable of agency interpretation.

With colleagues Rochelle Hodes and Greg Armstrong, we are in the process of revising the considerable APA content in an extensive rewrite of Chapters 1 and 3 of Saltzman and Book, IRS Practice and Procedure (the first part of the rewrite on subregulatory guidance will be released this summer). This issue, among many others, will generate heavy discussion, as the relevance of administrative law principles in tax cases continues to become one of the key issues in tax procedure and tax administration.

Can Bankruptcy Trustee Be Held Liable for Trust Fund Recovery Penalty of Responsible Officer?

In In re Big Apple Energy, LLC, No. 8-18-75807 (Bankr. EDNY 2022), the owner of a business that failed to pay the taxes withheld from employees over to the IRS sought an order that the bankruptcy trustee was personally liable for the interest and penalties arising from the failure.  In rejecting this claim, the bankruptcy court found that the trustee could not be held liable for unpaid taxes for which no claim was filed against the estate.  The holding does not mean that a bankruptcy trustee could never have liability for the failure to pay trust fund taxes, but the court does not hold the trustee liable for taxes that arose before he came on the scene and where he fully paid the claim filed by the government entities.

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The debtor initially filed a chapter 11 bankruptcy petition in 2018 but, as often happens, the case was converted to a chapter 7 later that year, at which time a trustee was appointed.  While operating as a chapter 11 the debtor failed to pay over the taxes withheld from its employees.  This failure would have served as an unmistakable statement that the debtor needed to convert to a liquidation.  When the bankruptcy court became aware of the failure, it ordered the owner to segregate money to pay the taxes and hold it in a special account.  When the conversion occurred, the owner turned the segregated account over to the trustee.  The IRS filed claims against the estate for the withheld taxes, as did the state.  Time marched on between the time the taxes were due and when they were ultimately paid.  This caused the accrual of interest and penalties due to the late payment.

In subsequent litigation between the estate and the owner, the parties entered a stipulation identifying the segregated funds and authorized the trustee to pay the IRS and state claims for the unpaid withholding taxes.  Unfortunately, the amount turned over to the trustee in the segregated funds covered only the unpaid tax and not the penalties which accumulated rapidly on the liability.  In a subsequent hearing the owner sought an order that the trustee pay the interest and penalties as well.  The trustee countered that neither the IRS nor the state had amended their claims to add on these amounts.  So, the trustee requested an order allowing him to pay the tax claims as filed.  The court granted this request.

Meanwhile, the IRS ramped up collection on the penalties against the owner while still not amending its claim.  The owner sought reconsideration of the distribution order, arguing:

that the Distribution Motion neglected to mention that the Trustee failed to timely pay the IRS Claims after Ferreira turned over the Segregated Funds. The Trustee’s inaction, Ferreira alleges, resulted in over $54,000 in penalties and interest being “assessed against the Big Apple Estate.” Ferreira argues that because the December 16 Order states the IRS and NYS Claims will be paid “in full and final satisfaction,” the Trustee signaled his intention to also pay the accrued IRS penalties and interest. This language, Ferreira submits, requires the Trustee to pay all interest and penalties that have been and may be assessed on the IRS Claims and NYS Claim. Therefore, Ferreira urges the Court to reconsider the December 16 Order pursuant to Federal Rule of Civil Procedure 59(e) and amend the December 16 Order to require the Trustee to also pay the penalties and interest that have been asserted by the IRS against Ferreira personally, and any that may be asserted in the future against Ferreira by the IRS and NYS for unpaid withholding taxes.

The trustee responded to this argument by pointing out that the order defined claims by referring to the specific claims filed against the estate.  He paid those claims after receiving the court’s permission.  The trustee further argued that the penalties and interest assessed personally against the owner differ, even though they have the same root cause, from the claims against the estate.  The trustee’s obligation is to pay debts of the estate and not collateral debts of the former owner of the company in bankruptcy.  The trustee also argued that the debts resulted from the owner’s failure to pay the taxes while operating the company during the chapter 11 phase of the bankruptcy and that it was the obligation of the owner to pay those taxes as they became due.

The owner replied to the trustee’s response by citing to drafts of the stipulation agreement under which he turned over the money designated for the payment of the taxes.  These drafts were exchanged during a mediation process.  The bankruptcy court found that it could not look at the drafts created during the mediation process because of Rule 408 of the Federal Rules of Evidence, which governs statements made during settlement and mediation discussions.  The bankruptcy court deemed these drafts inadmissible because of Rule 408 and also noted that the owner did not submit them during the process leading up to the distribution order.  In denying the motion for reconsideration, the court stated:

The Court agrees that the Trustee is neither obligated nor authorized to pay the personal penalties imposed on Ferreira from outstanding tax obligations when there are no claims filed against Debtors for such amounts. The Trustee is neither obligated nor authorized to pay claims that are not filed against Debtors’ estates. See generally 11 U.S.C. §§ 704(a)(2); 704(a)(5). Therefore, the Court does not find that there was “mistake” warranting Ferreira relief from the December 16 Order under Rule 60(b)(1).

This leaves the former owner of the business, Mr. Ferreira, holding the bag personally for a fair amount of penalty and interest resulting from the late payment of the taxes withheld from the employees.  Ultimately, the penalties and interest did stem from Mr. Ferreira’s failure to timely pay over the taxes as he was obligated to do as the person who controlled the company during the chapter 11 phase of the bankruptcy case when it operated as a debtor in possession.  The case demonstrates a danger to someone operating as a debtor in possession who does not keep current with the taxes because once the case is converted to a chapter 7 the finances of the company are no longer in their control which can result in significant delays in payment in addition to payment of an amount less than the former owner needed paid in order to avoid personal liability.  So, Mr. Ferreira not only has lost everything he invested in the business but comes out of the business bankruptcy with his own personal liability to the taxing authorities.

The court did not lay out when Mr. Ferreira was assessed the trust fund recovery penalty.  Persons hit with this penalty do receive a break on interest because it does not start running until the assessment against them.  Similarly, the penalties referred to, I believe, are penalties for failure to pay the trust fund liability which would also have run from the date of assessment.  The opinion does not contain enough detail for me to tell if the IRS claim included penalties and interest to a specific date.  Creditors generally lose the ability to claim interest for prepetition debts in a bankruptcy case though they have the ability to claim interest in postpetition debts such as this.  I don’t know if the IRS did claim some postpetition interest or if its claim merely included the unpaid tax.

The case highlights the importance of control.  Mr. Ferreira had control during the chapter 11 and lost it as the case converted to chapter 7.  His decision not to have the company pay the taxes while he had control ultimately leads to him being left holding the bag.  A potentially important lesson for others taking a troubled entity into chapter 11 bankruptcy and making decisions about who to pay and when to shut down.

February 2022 Digest

Hot topics covered by Procedurally Taxing in February included recommendations about how IRS can best move forward, changes the IRS is already implementing, and court decisions that reflect shifting views about a court’s jurisdiction when an informal refund claim is defective or absent.

Recommendations to the IRS

How Did We Get Here? A New Series …: A new series plans to explore the root causes of current IRS problems and envision what the future of our tax system could look like. This introductory post hints that the series will include recommendations for ways the IRS can better utilize the resources it already has, instead of continuing to use a lack of resources as justification for poor organizational performance.

How Did We Get Here? 2-D Barcoding and the Paper Return Backlog – A Missed Opportunity: The NTA began recommending that the IRS use 2-D barcoding as a means of increasing efficiency in the processing of paper returns as early as 2004. If this recommendation had been implemented at any time prior to the pandemic, it would have significantly reduced much of the IRS’s current backlog. The IRS has finally expressed interest in the idea, but issues still loom as Chief Counsel recently concluded the IRS cannot require tax software developers to include barcodes on computer-prepared returns.

Washington Post Editorial With Suggestions for Immediate Ways to Help IRS: This post links to a Washington Post Editorial by Nina titled, “Five Ways to Fix the IRS, Starting with a Halt to Most Audits.”

Current and Future Changes for the IRS

“Empowering” Taxpayers: Reflections on the IRS Strategic Plan Annual Review: The “Putting Taxpayers First” report focuses on the IRS’s larger goals and its strategic plan for accomplishing them. This post looks at the IRS’s wins, losses and ambiguities in accomplishing the first of ten goals, which is “to empower and enable all taxpayers to meet their tax obligations.”

Facial Recognition Is No Longer Coming: Due to privacy and civil rights concerns, the IRS is abandoning its plans to require facial recognition to verify taxpayer accounts and access tax information online.

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Causing Less Work for Themselves and Others: In order to focus efforts on digging out of the pandemic backlog, the IRS has decided to suspend notices in the collection notice stream, including the section 6331(d) notice of intent to levy, among others. This has the effect of delaying collections and potentially creates some opportunities for improvement.

The Taxpayer First Act’s Legacy: What Comes Next: The Taxpayer First Act requires the IRS to provide a Comprehensive Customer Service Strategy, which includes a Taxpayer Experience Strategy. The IRS plans to utilize technology to create a fully digital CAF, improve phone service, and use artificial intelligence to enhance the taxpayer experience.

Making Offers in Compromise Public: TIGTA has suggested that the IRS should make accepted offers available online to provide a meaningful method for public inspection as required by section 6103(k)(1), but unless and until that happens, this post examines the other ways available to inspect offers. In Epic v. IRS a non-profit organization succeeded in having the district court order the IRS to disclose information about all accepted offers relating to the past or present tax liability of Donald Trump pursuant to a FOIA request.

Tax Court Recommendations

DAWSON Continues to Evolve: New features are being added to DAWSON, but the Tax Court disappointingly continues its practice of only making documents generated by the Court (such as, orders and opinions) available online.

Pro Se Petitions in Tax Court: According to the NTA Report, last year 86% of Tax Court petitioners were pro se. This post looks more closely at recent pro se precedential opinions. It also requests that the Court actively seek amicus briefs when it encounters precedential cases brought by pro se petitioners. Doing so would allow the Court to consider meaningful legal arguments from both sides before establishing precedent.

Practitioner and Taxpayer Considerations

Attorneys Behaving Badly: The Tax Court’s press release about suspensions and disbarments was published shortly after the 9th Circuit decided a case involving a former IRS Counsel attorney who committed tax evasion. In United States v. Orrock the statute of limitations to bring criminal prosecution was at issue. Unlike the unlimited assessment statute in the civil context, a limited criminal prosecution statute begins to run on the date of the filing but also begins to run again on the date of each additional affirmative act of evasion.

No Reasonable Cause When Tax Return Preparer Fails to E-file Extension: In Oosterwijk v. United States, the petitioners were not entitled to reasonable cause penalty relief for filing late when their preparer first failed to request a timely extension and later provided them with incorrect advice. The post highlights interesting reasonable cause issues, the divisibility of penalties, the limits of the IRS’s First Time Penalty Abatement policy, and more.

Honest Mistakes Happen, But a Two Million Dollar Difference in Mortgage Interest Will Likely Trigger An Accuracy-Related Penalty: In Busch v. Commissioner, the petitioners were not entitled to reasonable cause penalty relief for an accuracy-related penalty when the tax software they used allegedly converted a number from thousands to millions. The Court finds their mistake was not caused by the tax software, but rather by their failure to carefully review the return. The post further explores whether reliance on tax software could ever insulate a taxpayer from penalties.

Circuit Court Decisions

Two Recent Circuit Level Decisions Appear to Dispute View That the Refund Claim Filing Requirement is Jurisdictional (Part 1): In Morton v. United States,the petitioner appealed the district court’s finding that it lacked jurisdiction because the petitioner had not filed a return before suing. The Third Circuit held that the district court had jurisdiction because the section 7422(a) requirement to file a predicate administrative refund claim is not jurisdictional.

Two Recent Circuit Level Decisions Appear to Dispute View That the Refund Claim Filing Requirement is Jurisdictional (Part 2): The Supreme Court’s decision in Lexmark Int’l, Inc. v. Static Control Components, Inc. clarified that statutory standing defects do not implicate a court’s jurisdiction. This has caused other courts to reexamine their precedent in this area. In Brown v. United States, the Federal Circuit held that the duly filed requirement in section 7422 serves a claim processing rule rather than a jurisdictional requirement. Other relevant cases are also discussed in this post.

Two Circuits Sustain Tax Court’s Inability to Grant Requested Relief: In the Second Circuit case of Ruesch v. Commissioner, the Court sustained the Tax Court’s finding that it did not have jurisdiction to determine an underlying tax liability in a passport revocation case. In the Fourth Circuit case of McLane v. Commissioner, the Court sustained the Tax Court’s finding that it did not have jurisdiction to order an overpayment refund in a Collection Due Process case when the IRS withdrew its notice of federal tax lien. Both cases, however, left open questions about the limits of the Court’s authority which are further considered in this post.

11th Circuit Remands Willful FBAR Penalty Case Back to IRS Due to APA Violation: The role of the Administrative Procedure Act (APA) in FBAR penalty cases is discussed and highlighted in this post about the decision in United States v. Schwarzbaum. In his appeal, the petitioner argued that the IRS’s actions in calculating the penalty were not in accordance with the law.The APA empowers the 11th Circuit to examine whether the IRS’s calculations should be sustained because the FBAR penalty falls under Title 31. This is different from Title 26 penalty cases where the APA does not provide a means for the Court to examine IRS conduct in the same way.

District Court and Claims Court Decisions

District Court in Rewwer Holds Improperly-Signed Timely Forms 843 Can be Informal Refund Claims: This post examines five opposite or contradictory recent decisions involving informal claims that were not properly filed, including the decision in Rewwer v. United States. Rewwer involved a misfiled (on the wrong form with the wrong person signing and verifying) refund claim that was later corrected and held by the district court to be an informal refund claim. The petitioners in the other cases did not get as far.

CFC in Dixon Holds Improperly-Signed Timely Forms 1040-X Cannot Be Informal Refund Claims: The Claims Court in Dixon v. United States helds that the Court lacks jurisdiction in a case involving a defective informal refund claim. This post more closely analyzes the inconsistency of this holding in light of the Federal Circuit decision in the Brown (discussed above).

Low Income Taxpayer Clinics

How a Low Income Tax Clinic Can Help You and Vice Versa: This posts educates readers about Low Income Taxpayer Clinics and encourages practitioners to refer clients and volunteer. The LITC Support Center and LITC Connect are new resources developed by the Center for Taxpayer Rights to help connect LITCs with tax practitioners interested in volunteering.

Bankruptcy and Taxes

The Train Tracks: This post highlights the importance of considering the benefits of certain tax attributes before filing for bankruptcy. In Chow v. Lee a married debtor’s decision to individually file for bankruptcy resulted being required to forgo net operating losses on his joint returns. The post contemplates possible options available to the parties and goes on to separately discuss another aspect of the Court’s analysis of circumstances that are common among modern families.

Discharging Student Loan Debt: In Wheat v. Great Lakes Higher Education Corp the Department of Education lost its motion for reconsideration and the Court highlighted exactly what is required in order to have student loans discharged in bankruptcy.

A New Twist on What Constitutes a Tax Return: The debtor in Sienega v. Cal. Franchise Tax Bd. argued that the bankruptcy court should treat his audit report from the IRS, which he faxed to the California Franchise Tax Board, as his state tax return to allow him to discharge his state tax liabilities. He never filed an actual state return and the Ninth Circuit concludes that the audit report is not a return under the Beard test. The debtor had a decent point in that the audit report allowed the state to assess the tax and gave it adequate time to collect before the bankruptcy was filed, but the state tax debt could not be discharged.

Career Opportunities

Villanova Graduate Tax Program Looking To Hire A Professor of Practice/Faculty Director: Villanova has launched a national search for a new Faculty Director for its Graduate Tax Program. The position is posted here.