Carlton Smith

About Carlton Smith

Carlton M. Smith worked (as an associate and partner) at Roberts & Holland LLP in Manhattan from 1983-1999. From 2003 to 2013, he was the Director of the Cardozo School of Law tax clinic. In his retirement, he volunteers with the tax clinic at Harvard, where he was Acting Director from January to June 2019.

Seventh Circuit Affirms Tax Court’s Discretion to Weigh Actual Knowledge More Heavily than Four Positive Factors for Innocent Spouse Relief

Last summer, I alerted PT readers here to an innocent spouse case, Jacobsen v. Commissioner, T.C. Memo. 2018-115, that Keith and I were litigating in the Seventh Circuit on behalf of the Harvard tax clinic.  We took on the appeal of one year (2011) where the taxpayer did not get equitable innocent spouse relief from the Tax Court under section 6015(f) from the unreported taxes on the taxpayer’s former wife’s embezzlement income.  For that year, the Tax Court held that because the former wife was already jailed when the return was filed and because the taxpayer helped a CPA prepare the return, the taxpayer had actual knowledge of the deficiency.  Of course, while actual knowledge is fatal to relief under subsections (b) and (c), it is not supposed to be fatal under subsection (f) equitable relief.  Knowledge (whether actual or reason to know) is only supposed to be one factor of seven factors to consider under subsection (f), as elaborated on by Rev. Proc. 2013-34, 2013-2 C.B. 397.  Under the liberalizing 2013 Rev. Proc., unlike under the earlier Rev. Proc. 2003-61, 2003-2 C.B. 296, actual knowledge was now to be weighed no more heavily than reason to know in the factor analysis.  And, in the case, the Tax Court held that of the remaining factors, four were positive for relief – marital status, lack of significant benefit, compliance with future tax filing and payment obligations, and serious health issues.  So, it struck Keith and me as wrong – and as not consistent with what most Tax Court judges were doing – for the court to have still denied relief in this case.  It seemed to us that the Tax Court had not, in substance, applied the Rev. Proc. (which, concededly is not binding on the court, but which the court generally follows and purported to follow in the case).

Keith and I hoped a reversal of the Tax Court in the Jacobsen case would have a salutary effect on Tax Court judges not to overweigh the actual knowledge factor.  And, this would be the first appeals court to ever have to apply Rev. Proc. 2013-34 (surprisingly).  Then, during briefing of the appeal, Congress enacted the Taxpayer First Act, which amended section 6015(e) to add paragraph (7) providing that the Tax Court should decide innocent spouse cases on a de novo standard and a supplemented administrative record.  Because the amendment applied to pending cases, the Jacobsen Seventh Circuit opinion would also be the first to consider the impact of subsection (e)(7) on appellate review.

Well, we lost. In Jacobsen v. Commissioner, 2020 U.S. App. LEXIS 4544 (7th Cir. Feb. 13, 2020), in a published opinion, the Seventh Circuit upheld the Tax Court’s ruling, though noted that this was a close case and that, had it been the trier of fact (and not employing deferential appellate review), it might have ruled for the taxpayer.

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Given Jacobsen, I am not sure that any court of appeals will ever reverse the Tax Court on a section 6015 ruling against a taxpayer.  My research before the clinic’s taking on the appeal revealed that, while taxpayers occasionally obtained a reversal of the Tax Court under the former innocent spouse provision at section 6013(e) (in effect from 1971 to 1998); see, e.g., Resser v. Commissioner, 74 F.3d 1528 (7th Cir. 1996); no taxpayer since 1998, in 14 tries, had obtained a reversal of the Tax Court under section 6015.  See Asad v. Commissioner, 751 Fed. Appx. 339 (3d Cir. 2018); Nunez v. Commissioner, 599 Fed. Appx. 629 (9th Cir. 2015); Deihl v. Commissioner, 603 Fed. Appx. 527 (9th Cir. 2015); Karam v. Commissioner, 504 Fed. Appx. 416 (6th Cir. 2012); Maluda v. Commissioner, 431 Fed. Appx. 130 (3d Cir. 2011); Greer v. Commissioner, 595 F.3d 338 (6th Cir. 2010); Golden v. Commissioner, 548 F.3d 487 (6th Cir. 2008); Aranda v. Commissioner, 432 F.3d 1140 (10th Cir. 2005); Feldman v. Commissioner, 152 Fed. Appx. 622 (9th Cir. 2005); Alt v. Commissioner, 101 Fed. Appx. 34 (6th Cir. 2004); Doyle v. Commissioner, 94 Fed. Appx. 949 (3d Cir. 2004); Mitchell v. Commissioner, 292 F.3d 800 (D.C. Cir. 2002); Cheshire v. Commissioner, 282 F.3d 326 (5th Cir. 2002); Wiksell v. Commissioner, 2000 U.S. App. LEXIS 5857 (9th Cir. 2000).  The taxpayer losing string continues.

An interesting issue in the Seventh Circuit in Jacobsen was its discussion of the appellate standard of review in light of section 6015(e)(7).  As to what would be “inequitable” under section 6015(f), the IRS argued for abuse of discretion review, and the taxpayer argued for clear error review.  There isn’t much of a difference between the two standards, but (e)(7) was designed to prevent the Tax Court from giving deference to IRS rulings under (f), which had been held though, until Porter v. Commissioner, 132 T.C. 203 (2009), to be reviewed by the Tax Court on an abuse of IRS discretion standard.  In Porter, the Tax Court held it would henceforth decide (f) issues on a de novo standard – the position adopted by statute in (e)(7).  And at least some Tax Court judges had said that the Tax Court does not exercise equitable discretion under (f), but merely makes a factual finding of what would be “unfair”.  Cf. Hall v. Commissioner, 135 T.C. 374, 391-392 (2010) (Thornton and Holmes, JJ., dissenting) (arguing that by using the word “inequitable” in § 6015(f), Congress did not imply the rules of equity practice, but rather only meant that it would be “unfair” to hold the taxpayer liable;  “A request for relief under section 6015(f) is called a request for ‘equitable relief’ not because it is a request for reformation, rescission, specific performance, or accounting, but because to a reasonable decisionmaker at the IRS it would be unfair to hold one spouse jointly liable with another for a particular tax debt.”).  Factual findings are usually reviewed by appellate courts for clear error.  

In Jacobsen, the Seventh Circuit dodged the appellate review standard issue in the following discussion:

Although the parties agree generally that we review the Tax Court’s decisions “in the same manner and to the same extent as we review district court decisions from the bench in civil actions,” 26 U.S.C. § 7482(a)(1); Gyorgy v. C.I.R., 779 F.3d 466, 472–73 (7th Cir. 2015); Resser, 74 F.3d at 1535, they disagree as to whether that means we review the denial of relief under § 6015(f) for clear error or an abuse of discretion.

The parties’ differing views on the standard of review hinge in part on the Taxpayer First Act, legislation that was passed shortly after the parties filed their briefs. See Pub. L. No. 116-25, 133 Stat. 981 (July 1, 2019). As relevant here, § 1203 of the Taxpayer First Act added a new paragraph at the end of § 6015(e) codifying the existing practice of de novo review by the Tax Court of appeals from the denial of innocent spouse relief. Because this addition to § 6015 simply “clarified,” see Pub. L. No. 116-25, § 1203 (“Clarification of equitable relief from joint liability.”), the existing standard and scope of Tax Court review, the Commissioner maintains it has no effect on our standard of review. Thus, argues the Commissioner, denial of relief under § 6015(f) should be reviewed in the same manner as any determination of equitable relief in the district court—for abuse of discretion. See, e.g., Bowes v. Ind. Sec. of State, 837 F.3d 813, 817 (7th Cir. 2016) (explaining general applicability of abuse of discretion standard to equitable determinations).

Jacobsen, however, insists that the Taxpayer First Act confirms his position that we review decisions under § 6015(f) for clear error. Jacobsen explains his reasoning as follows: (1) the Taxpayer First Act makes equitable relief under § 6015(f) mandatory as opposed to discretionary; (2) mandatory relief under subsection (f) “is now the same as mandatory relief under subsection (b),” which also contains an inequity condition; and so (3) Tax Court rulings under subsection (f) should be reviewed under the same standard as subsection (b). Jacobsen finds further support for his position with the fact that subsection (b) is a continuation and expansion of former § 6013(e), which we held in Resser was subject to clear error review, 74 F.3d at 1535.

We are unconvinced, however, that the Taxpayer First Act (which settled only the Tax Court’s standard of review of IRS determinations) sheds any particular light on our standard of review as to relief under § 6015(f), which multiple courts have recognized as for abuse of discretion. See Greer v. C.I.R., 595 F.3d 398, 344 (6th Cir. 2010) (innocent spouse relief under § 6015(b) reviewed for clear error but equitable relief under § 6015(f) reviewed for abuse of discretion); Cheshire v. C.I.R., 282 F.3d 326, 338 (5th Cir. 2002) (same). Fortunately, we need not resolve the issue today, as we would affirm the Tax Court’s decision under either deferential standard.

Slip op. at 9-11 (emphasis in original; some citations omitted).

As to the underlying issue of whether the Tax Court could let actual knowledge outweigh four positive factors for relief, the Seventh Circuit wrote:

Because each of the factors for consideration was either neutral or favored relief, Jacobsen claims the Tax Court must have weighed knowledge more heavily than the other factors, in contravention of Rev. Proc. 2013-34 § 4.03(2)(c)(i)(A). Nothing in the Tax Court’s opinion, however, suggests that it believed knowledge of the embezzled funds necessarily precluded Jacobsen from equitable relief or automatically outweighed the other factors for consideration. Although the 2013 regulations make clear that knowledge is no longer necessarily a strong factor weighing against relief, as Jacobsen himself acknowledges in his brief, they do not prohibit the Tax Court from assigning more weight to petitioner’s knowledge if such a conclusion is supported by the totality of the circumstances. As explained in the Revenue Procedures, “no one factor or a majority of factors necessarily determines the outcome.” Rev. Proc. 2013-34 § 4.03. And although knowledge no longer weighs heavily against relief, nothing in the statute or revenue procedures forecloses the decisionmaker from concluding that in light of “all the facts and circumstances,” § 6015(f), knowledge of the understatement weighs heavily against granting equitable relief. There is thus no reason to believe the Tax Court’s decision was necessarily erroneous because only one of the nonexhaustive factors for consideration weighed against relief.

Jacobsen also suggests it was inappropriate for the Tax Court to factor his “participation in preparing the 2011 return” into its assessment, characterizing it as “another way for the court to extra-count” Jacobsen’s knowledge of the embezzlement. In assessing the role of Jacobsen’s knowledge in his entitlement to equitable relief, the court noted that in addition to Jacobsen’s actual knowledge on account of Lemmens’ criminal conviction and sentence, in 2011 Jacobsen himself provided the tax information to the paid preparer, whereas in previous years Lemmens had always prepared and submitted the tax information. Far from demonstrating that the Tax Court erred, the court’s consideration of his role in preparing the 2011 return demonstrates its commitment to heed the Revenue Procedure’s directive that the seven listed factors merely provide “guides” as opposed to an “exclusive list” and that “[o]ther factors relevant to a specific claim for relief may also be taken into account.” Rev. Proc. 2013-34 § 4.03(2).

It is clear from its opinion that the Tax Court considered the factors relevant to Jacobsen’s specific claim for relief. The court considered Jacobsen’s individual circumstances as it analyzed each of the listed factors. Jacobsen does not argue, nor could he, that the Tax Court misapprehended the facts or otherwise overlooked information relevant to Jacobsen’s claim.

We are sympathetic to Jacobsen’s situation, and recognize that the Tax Court could have easily decided on this record that Jacobsen was entitled to equitable relief under § 6015(f). Indeed, were we deciding the case in the first instance as opposed to on deferential review, we may have decided the case differently. But notwithstanding the existence of many factors favoring relief and only Jacobsen’s knowledge counseling against it, nothing in the record indicates the Tax Court misapprehended the weight to be accorded Jacobsen’s knowledge or treated it as a decisive factor barring relief. Indeed, its discussion of each of the factors as well as the relevance of Jacobsen’s involvement in preparing the 2011 taxes demonstrate that the Tax Court did not engage in a mechanical balancing of the factors where the number of factors favoring relief necessarily counterbalanced the ultimate question of whether it was inequitable to hold Jacobsen liable for the 2011 deficiencies. We thus cannot say the Tax Court either abused its discretion or clearly erred in its denial of relief for 2011.

Slip op. at 16-18 (emphasis in original; some citations omitted).

Based on our research (much of which we incorporated in the briefing in Jacobsen), the Jacobsen case is unusual in letting so many positive factors be outweighed by only one negative factor.  But, if other Circuits are going to be so deferential in reviewing the Tax Court’s weighing of factors, it is hard to imagine any taxpayer ever being able to mount a successful attack on a Tax Court judge’s weighing of the factors.  About the only chance for reversing the Tax Court may be if the Tax Court made a factual error as to whether a particular factor was positive, negative, or neutral for relief.

That brings me to Sleeth v. Commissioner, T.C. Memo. 2019-138.  Like Jacobsen, Sleeth is one of those outlier cases where the Tax Court unusually treated knowledge as outweighing multiple other factors for relief.  Sleeth is an underpayment case, where the taxpayer signed returns showing balances due (two of which were being filed late), but where the taxpayer’s husband, a doctor making $418,000 a year, failed to later fully pay the balances due that initially aggregated, in tax alone, about $354,000.  The Tax Court held that the taxpayer had reason to know that the taxes would never be fully paid because the taxpayer knew that in a prior year, the husband had once used an installment agreement.  As in Jacobsen, the Tax Court in Sleeth held that the taxpayer had not proved she would suffer economic hardship if forced to pay the liabilities, so this factor was neutral.  As in Jacobsen, the court in Sleeth found three other factors favored relief:  marital status, lack of significant benefit, and compliance with later tax return filing and payment obligations.  The main difference between the two cases is that, while Jacobsen had a serious health issue that favored relief, Sleeth did not.

Sleeth had paid counsel in the Tax Court, but she could not afford to pay counsel for an appeal.  The Harvard tax clinic, pro bono, is now representing her in an appeal to the Eleventh Circuit (Docket No. 20-10221).  If the Eleventh Circuit is as deferential as to the weighing of factors as the Seventh Circuit was in Jacobsen, Sleeth will have a hard time in obtaining victory.  However, there are arguments that the Tax Court erred in its holdings with respect to the knowledge and financial hardship factors.  So, it is still possible that Sleeth will break the unbroken string of taxpayer losses in appeals of innocent spouse cases from the Tax Court.  The appellate briefing in Sleeth has only just begun.

District Court Reverses Its Section 6511(b)(2)(A) Ruling and Excoriates IRS and DOJ for Not Citing Relevant Authority

People ask me what I do in my retirement to keep my mind active.  In addition to a lot of pleasure reading, I keep up with the tax law, blog here, and engage in impact litigation with the Harvard tax clinic, usually in the appellate courts.  Getting an appellate court to overturn a lower court ruling is almost a mug’s game.  Gil Rothenberg of the DOJ reported last fall that of taxpayer appeals in the fiscal year ended September 30, 2019, the DOJ won 94% of the time.  I usually get involved in hard cases, seeking to overturn settled law.  But, my winning percentage is far better than 6% – though still well below 50%, as any appellant would expect.  I tell people that I am a sort of Don Quixote, often falling off my Rosinante or mistaking a barber’s basin for the Golden Helmet of Mambrino.  But, sometimes, I do save a damsel in distress.  I just did.

Indeed, I just got a district court reversal even without entering an appearance in the case, even as an amicus.  And I got a scathing opinion from the judge against the government, to boot.  (I was not looking for the scathing tone, but the judge is right.)

You may recall my recent post involving a case named Harrison v. United States, W.D. Wisconsin Docket No. 19-cv-194.  In the case, the taxpayers mailed a late 2012 original return containing a refund claim for withheld taxes just before the end of a period of 3 years after the return’s due date plus the length of an extension they had obtained to file the return (but had not used).  The return arrived at the IRS a few days after the period expired.  The court correctly ruled that the claim was timely filed under section 6511(a) because it was filed within 3 years after the return was filed – indeed, both were filed the same day.  But, the court then misapplied the lookback rule of section 6511(b)(2)(A) to hold that the claim was limited to taxes deemed paid in a period looking back 3 years plus the extension period from the date the IRS received the claim.  No tax was deemed paid in that period, so the over-$7,000 refund was limited to $0, said the court.  The taxpayers had correctly argued that section 7502’s timely mailing rules apply such that the lookback period should begin from the date the return was mailed (not received), so the entire refund should be allowed.  Apparently, the IRS’ only objection to paying the refund was the amount limitation. 

Unfortunately, neither party cited to the district court the most relevant case law, Weisbart v. United States, 222 F.3d 93 (2d Cir. 2000), or pertinent regulations that had been adopted in 2001 to embody the holding of Weisbart.  And you would not expect a district court judge to be an expert on tax procedure.

I contacted the taxpayers’ attorney on January 13 to point out the correct authority and suggested that he move for reconsideration.  He did so here on January 15.  On January 24, the DOJ filed a notice that it did not object to the motion for reconsideration because the DOJ had the law wrong.  In part, the DOJ Tax Division blamed the IRS lawyers for not telling the DOJ the correct law.  On January 29, the district court entered a revised order, granting the motion for reconsideration and also amended the judgment to find the government owes the taxpayers the tax refund they sought, plus interest from April 15, 2013.

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The district court ruled for the taxpayers not just relying on Weisbart and the 2001 regulations that I discussed in my post, but the earlier, less clear regulations that Weisbart interpreted as providing for this result. This could have been a two-page order.  But, it wasn’t.  The judge was boiling mad at the government.  He ordered that his revised opinion be sent to every IRS and DOJ Tax Division attorney for reading for ethical training.  Because you don’t see this too often, I quote here what the judge wrote about the government lawyers (omitting footnotes; emphasis added):

Regrettably, not only did plaintiff fail to bring this case and the regulations to the court’s attention in their previous briefing on defendant’s motion to dismiss or for summary judgment, but the IRS and the U.S. Department of Justice, whose respective jobs include promulgating and enforcing the applicable regulation, also did not. Still, presented with the regulations, defendant concedes it has no basis to oppose the motion for reconsideration, and the IRS has confirmed that it is prepared to issue a refund in the amount sought in plaintiffs complaint, plus statutory interest. (Def.’s Resp. (dkt. #25) ¶ 18.) While there is no question that this is the appropriate response and course of action, the court remains troubled by defendant’s failure to alert the court to the Weisbart case and even more the regulations. In its submission, defendant represents that the IRS did not identify the Weisbart case, the Chief Counsel’s Notice or the regulations, but acknowledges that counsel for defendant did identify the Weisbart case in their own research, and chose not to disclose it in their briefing because it is not “controlling” in the Seventh Circuit. (Id. ¶¶ 13-14.) This might be a viable defense if: (1) the failure to cite Weisbart were the only failure and; (2) the U.S. Department of Justice’s and IRS’s aspirations only were not to fall below the bare minimum ethical threshold. See Am. Bar Assoc. Rule 3.3 (“A lawyer should not knowingly . . . fail to disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel.”). 

More critically, however, the Weisbart court relied on a Treasury Regulation, which is controlling authority on both the IRS and this court. Defendant explains that the Chief Counsel’s Notice announcing a change in its litigation position and the amendment to 26 C.F.R. § 301.7502-1(f) occurred after the Weisbart opinion, but the language in 26 C.F.R. § 301.6402-3(a)(5), on which the Second Circuit in part relied, remains in place today, and defendant failed to alert the court of this regulation. Thus, the conduct of defendant’s counsel here falls below even a bare minimum ethical standard, something counsel would have discovered by reading Weisbart and the current versions of the regulations cited in that case closely, rather than dismissing it as an inconvenient contrary authority that they were not ethically required to cite to the court. Even if this were not so, defendant cited a number of cases from other circuits that were also not controlling in this court in support of its erroneous argument that the administrative complaint was filed on the date it was received by the IRS.

These egregious missteps in defendant’s response were enough to prompt this court to consider whether an award of attorney’s fees incurred in responding to the motion for summary judgment and in bringing their motion for reconsideration would be appropriate under 28 U.S.C. § 1927. However, this would require a finding of actual bad faith to shift fees to plaintiff. See Boyer v. BNSF Ry. Co., 824 F.3d 694, 708 (7th Cir.), opinion modified on reh’g, 832 F.3d 699 (7th Cir. 2016) (“If a lawyer pursues a path that a reasonably careful attorney would have known, after appropriate inquiry, to be unsound, the conduct is objectively unreasonable and vexatious. To put this a little differently, a lawyer engages in bad faith by acting recklessly or with indifference to the law, as well as by acting in the teeth of what he knows to be the law[.]” (internal citation omitted). Instead, defendant’s counsel’s representations show negligence, which is not sufficient to invoke fees under § 1927. Id. Plus, counsel at least confessed error when plaintiff finally discovered the controlling regulation and brought it to defendant’s and the court’s attention. 

Nevertheless the court will require defendant to circulate this opinion and order, along with the Chief Counsel’s Notice and 26 C.F.R. §§ 301.7502-1(f) and § 301.6402- 3(a)(5) to all attorneys in the IRS Office of Chief Counsel and to the Tax Division of the U.S. Department of Justice in hopes that these actions will prevent future opposition to meritorious claims for refunds, as well as any instinct to ignore the duty of candor to the court by burying precedent no matter how well reasoned, helpful or directly on point it may be simply because one is not ethically bound to disclose it. In their prayer for relief in their complaint, plaintiffs requested attorney’s fees, but cited no support for this request. (Compl. (dkt. #1) 3.) In their motion for reconsideration, plaintiffs simply request $7,386.48 and statutory interest. (Pls.’ Mot. (dkt. #24) 4.)

Observation

I am glad the court corrected this injustice.  However, I would point out that district courts still need guidance on issues like interest.  It is usually the case that overpayment interest is payable to a taxpayer from the date the tax was overpaid.  But, in 1982, Congress specifically added new paragraph (3) to section 6611(b) providing that in the case of late returns, interest is payable from the date the return is filed.  Thus, the amended judgment has the wrong interest accrual date.  I refuse to do the research necessary to figure out if the interest accrual date (i.e., the date the return is “filed”) is the date the return was mailed or the date the IRS received the return.  Basta!

District Court Gets Timely Mailing Is Timely Filing Rule of Section 7502 Wrong as Applied to Refund Claim Lookback Period of Section 6511(b)(2)(A)

I remember when I was a young associate at Roberts & Holland LLP in 1983 and marveled at how Sidney Roberts could remember developments in the tax law from as much as 40 years earlier.  Well, now I am approaching 40 years of doing tax procedure, and I marvel at long-ago fights that I still remember.  One of those fights just came up in a district court case in the Western District of Wisconsin, Harrison v. United States, No. 19-cv-00194 (W.D. Wis. Jan. 9, 2020), and, sadly, the court got the upshot wrong.  The exact issue in the case was definitively resolved the other way in regulations adopted in 2001 that followed a once-controversial Second Circuit opinion.  Neither the DOJ nor the district court in Harrison seems to be aware of the Second Circuit opinion or the relevant regulation.  Sad.

The issue is how the refund claim limitations at section 6511(a) and (b) and the timely mailing is timely filing rules of section 7502(a) interact when a late original return was filed seeking a refund, and the return was mailed out only a few days before the expiration of the period that is 3 years plus the amount of any extension to file after the return’s original due date, where the return/claim is received by the IRS and filed after that period.  The DOJ and the district court correctly recognized that the refund claim is timely under section 6511(a) because it was filed on the same date the return was filed – i.e., that a late return is still a return for purposes of section 6511(a).  See Rev. Rul. 76-511, 1976-2 C.B. 428 (itself trying to resolve a Circuit split on this issue that still continued for almost 30 years after its issuance).  But, then the DOJ argued (and the district court agreed) that the 3 year plus extension lookback period of section 6511(b)(2)(A) looks back from the date of IRS receipt, and since the taxes were deemed paid on the original due date of the return, the refund claim is limited to $0 because no taxes were paid or deemed paid in that lookback period.  It is this second holding that is manifestly incorrect.

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Harrison Facts

The Harrison facts are quite simple and typical:  All of the 2012 taxes at issue were withheld from wages or other income.  Thus, section 6513(b)(1) deems them paid as of April 15, 2013.  The taxpayers obtained a 6-month extension to file their return, but then did not mail an original return under that extension.  Rather, they filed a very late return in 2016.  It showed an overpayment of $7,386.48, which they asked to be refunded.  The return was sent by certified mail on October 11, 2016, and was received by the IRS on October 17, 2016.

The taxpayers argued that, under the timely mailing is timely filing rules of section 7502(a), the 3 years plus 6 month lookback period for taxes paid begins from the October 11, 2016 date of mailing (making the refund amount limit $7,386.48), while the DOJ argued that the 3 years plus 6 month lookback period for taxes paid begins from October 17, 2016 because section 7502(a) has no application in this case (making the refund amount $0).  The DOJ moved (1) to dismiss the case for failure to state a claim on which relief could be granted (i.e., under FRCP 12(b)(6)) – a merits dismissal – or (2), in the alternative, for summary judgment that the claim was limited to $0 (also a merits ruling).

Harrison Ruling

The district court correctly noted that there is no Seventh Circuit authority directly answering the question of the date from which the lookback is determined on these facts.  The district court then reasoned that October 15 or 17, 2016, was not the due date for the return – October 15, 2013 was (taking into account the 6-month extension).  The court concluded that section 7502(a) had no application here.  That statute only provides that if a return or claim is delivered to the IRS after the due date, then the date of the United States postmark is deemed the date of delivery.  However, this rule only applies if the postmark falls on or before the due date of the return or claim.  (For certified mail, used herein, the date on the certified mail receipt, not the postmark, is used.  Section 7502(c).)

What does the district court cite in support of its holding under section 6511(b)(2)(A)?  It cites (1) Pitre v. IRS, 938 F. Supp. 95 (D.N.H. 1996), an on point opinion decided before the Second Circuit’s opinion in Weisbart v. United States Dept. of Treasury, 222 F.3d 93 (2d Cir. 2000) (discussed below) and (2) two opinions reaching the right result (i.e., no refund) – Washington v. United States, 123 AFTR 2d 2019-1585 (S.D.N.Y. 2019), and Doyle v. United States, 88 Fed. Cl. 314 (2009) – but where the mailing date was after the 3 years plus any extension period, so the courts’ statements therein that the even-later received date governed under section 6511(b)(2)(A) were correct because section 7502(a)’s extension does not apply if the mailing is after such date. 

Weisbart and the Regulation

The district court in Harrison neither discussed the Weisbart opinion nor the regulations under section 7502.  Had the district court done so, I expect that it would have reached a different result. 

Weisbart is on all fours with Harrison as to its facts.  In Weisbart, to quote the court:

Emanuel Weisbart’s 1991 income tax return was due on April 15, 1992, but he obtained an automatic extension until August 17, 1992. Despite the extension, Weisbart did not file his return by the August 1992 deadline. Tarrying three years, he mailed his 1991 return to the IRS on August 17, 1995. The tax return was submitted on the customary Form 1040 and included a refund claim for $4,867 from the $12,477 in taxes that had been previously withheld from Weisbart’s 1991 wages. The IRS received the return on August 21, 1995.

222 F.3d at 94.

The Weisbart court, relying on regulations that have since been clarified and expanded, reasoned that the rules of section 7502 apply in this case to make the amount paid on the due date within the period provided by section 6511(b)(2)(A) – i.e. that the lookback date is the date of mailing, not the date the IRS received the refund claim.  The court wrote:

The Service argues, and the district court held, that the “prescribed” period applicable to Weisbart’s tax return should also apply to the refund claim. Applying this construction, Weisbart’s refund claim would not enjoy the benefit of the mailbox rule, and would therefore be barred. . . .

Taken together, these two Treasury Regulations provide that the applicability of the mailbox rule to the refund claim should be analyzed independently of the timeliness of the tax return itself, regardless of whether they are in the same document. As such, even though Weisbart’s tax return was untimely filed, his refund claim enjoys the benefit of the mailbox rule, and is deemed filed on August 17, 1995. Because that date is within 3 years of the date when Weisbart is deemed to have paid his withheld employment taxes, he may recover any overpayment included in those taxes under the look back provisions of section 6511(b)(2)(A).

222 F.3d at 97 (citation omitted).

The Treasury decided to accept the Weisbart holding, and so, in 2001, promulgated T.D. 8932, 66 FR 2257.  The Treasury decision stated:

[T]he IRS and the Treasury Department have determined that, in certain situations, a claim for credit or refund made on a late filed original income tax return should be treated under section 7502 as timely filed on the postmark date for purposes of section 6511(b)(2)(A). This is consistent with the opinion of the United States Court of Appeals for the Second Circuit in Weisbart v. United States Department of Treasury and Internal Revenue Service, 222 F.3d 93 (2d Cir. 2000), rev’g 99-1 USTC (CCH) P50,549 (E.D.N.Y. 1999), AOD-CC-2000-09 (Nov. 13, 2000).

66 FR at 2258.  The Treasury Decision added a new subsection (f) to Reg. section 301.7502-1.  I won’t quote the technical language of the regulation, but I will quote the one on point example at subsection (f)(3). It reads:

(i) Taxpayer A, an individual, mailed his 2001 Form 1040, “U.S. Individual Income Tax Return,” on April 15, 2005, claiming a refund of amounts paid through withholding during 2001. The date of the postmark on the envelope containing the return and claim for refund is April 15, 2005. The return and claim for refund are received by the Internal Revenue Service (IRS) on April 18, 2005. Amounts withheld in 2001 exceeded A’s tax liability for 2001 and are treated as paid on April 15, 2002, pursuant to section 6513.


(ii) Even though the date of the postmark on the envelope is after the due date of the return, the claim for refund and the late filed return are treated as filed on the postmark date for purposes of this paragraph (f). Accordingly, the return will be treated as filed on April 15, 2005. In addition, the claim for refund will be treated as timely filed on April 15, 2005. Further, the entire amount of the refund attributable to withholding is allowable as a refund under section 6511(b)(2)(A).

Emphasis added.

Observations

Before berating the district judge, who is no doubt not a tax procedure specialist, I would point out that the parties’ briefing on the motion did not mention either the Second Circuit’s opinion in Weisbart or the regulation under section 7502.  The brief accompanying the motion is here, the taxpayers’ brief is here, and the government’s reply brief is here.  I am quite dismayed, though, that the DOJ Trial Section attorney did not know of the relevant authority.  I have sent an e-mail to the Harrisons’ counsel suggesting a motion for reconsideration or an appeal to the Seventh Circuit.

The district court in Harrison did do something else right, though:  It did not treat compliance with the tax paid amounts rules of section 6511(b) as jurisdictional.  Rather, both the DOJ and the court (unlike many other courts) treated compliance with these rules as a merits issue.  The court granted the DOJ’s motion on the ground of summary judgment, not FRCP 12(b)(1) (lack of jurisdiction) or 12(b)(6) (failure to state a claim).  In not treating the rules of section 6511(b) as jurisdictional, the Harrison court followed Seventh Circuit precedent, stating:

In reviewing the caselaw, requiring administrative exhaustion of a refund claim may be a jurisdictional requirement. See Gillespie v. United States, 670 Fed. App’x 393 (7th Cir. 2016) (acknowledging that recent Supreme Court developments “may cast doubt on the line of cases suggesting that § 7422(a) is jurisdiction”). However, the Seventh Circuit has treated whether there are any tax payments within the “look back period” as an element of the claim. See Gessert v. United States, 703 F.3d 1028, 1036-37 (7th Cir. 2013) (holding that the claims do “not meet the [timing] requirements of the statute,” despite headnotes that describe it as a jurisdictional defect); Curry v. United States, 774 F.2d 852, 855 (7th Cir. 1985) (holding court lacks jurisdiction because plaintiffs failed to exhaust their claims, but even if they had exhausted, they would be barred from obtaining a refund because of the time requirements under § 6511). As such, the merits of plaintiffs’ claim appear to be properly before the court.

Footnote 2 (emphasis in original).

The Federal Circuit took a similar position (i.e., that compliance with the section 6511(b) tax payment rules is not jurisdictional) in Boeri v. United States, 724 F.3d 1367, 1369 (Fed. Cir. 2013), a case on which Stephen blogged here.  For a discussion of the Gillespie case cited by the Harrison court, see my prior post here.

Does Judge Toro Misunderstand Guralnik?

There’s a pro se deficiency case set for trial in San Francisco before Judge Toro in the week beginning February 3, 2020, Gebreyesus v. Commissioner, Docket No. 1883-19.  Although the IRS had not moved to dismiss the petition for lack of jurisdiction, Judge Toro, has essentially issued an order to show cause why he shouldn’t dismiss the case for lack of jurisdiction because of an untimely petition.  The Judge thinks the petition would be untimely if the notice of deficiency had been mailed to the taxpayer on the date shown on the notice of deficiency – October 22, 2018 – so the judge asks that proof of mailing be submitted to him by January 21, 2020.

This case gets into a particular issue of how the government shutdown interacts with (1) Guralnik v. Commissioner, 146 T.C. 230 (2016) (en banc), and (2) section 7502.  I think it pretty clear that the judge, who seems vaguely aware of Guralnik (but doesn’t cite the opinion), has the analysis wrong, and that there is no way this petition is untimely.  I hope the IRS lawyers in the case explain it to the judge, but just in case they don’t, I hope the judge gets to read this post before he rules.  No pro se taxpayer is likely to be able to explain about how Guralnik should work in this case.  Keith has blogged here, here, and here on the interaction of Guralnik and the recent government shutdown, but not on the facts of Gebreyesus.

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Gebreyesus Facts

Let’s assume that the IRS has documentary proof that it mailed the notice of deficiency on the date shown on the notice – October 22, 2018.  You would probably think the taxpayer has until January 20, 2019 (90 days) to file the petition in person, place it in the mails, or place it with a designated private delivery service.  But, January 20, 2019 was a Sunday, and the 21st was Martin Luther King Jr.’s Birthday – both of which under section 7503 can’t be the last date to file.  Interestingly, the notice of deficiency correctly stated that the last date to file was Tuesday, January 22, 2019.

But, then, the government (including the Tax Court) shut down in late December.  As a result, the Tax Court’s Clerk’s Office was not open again until Monday, January 28, 2019.

Judge Toro just noticed that on January 23, 2019, the petition was placed with a FedEx service that is a qualifying private delivery service under section 7502(f).  Had the government not shut down, the petition no doubt would have been delivered to the court overnight on Wednesday, January 24, 2019.  But, the petition arrived at the Tax Court instead on Monday, January 28, 2019 – the date the Clerk’s Office reopened – and was filed on that date.

Judge Toro’s Analysis

In his order, Judge Toro writes:

If the notice of deficiency was mailed on October 22, 2018 (that is, on the date shown on the notice of deficiency), then the 90-day period under section 6213(a) would have expired on January 22, 2019 (taking into account that January 20, 2019, was a Sunday and January 21, 2019, was a holiday in the District of Columbia).  Because the ship date reflected on the FedEx envelope – January 23, 2019 -is one day after January 22, 2019, the petition would be untimely under section 6213(a) and the rules of section 7502(a) and (f).
 
If, however, the notice was mailed after October 22, 2018, the 90-day period would have expired no earlier than January 23, 2019, and, since the petition was given to FedEx by January 23, 2019, under section 7502(a) and (f) the petition would be treated as having been timely filed. [footnote omitted]

What’s Wrong With This Analysis?

Section 7502 has no application unless the petition arrives after the last date to file.  But, that did not occur in this case.  Under Guralnik, if the Clerk’s Office is not open on what would ordinarily be the last date to file, then the last date to file becomes the date the Clerk’s office reopens – i.e., January 28, 2019 in this case. But, that’s the date the Tax Court physically received and filed the petition.  So, the petition did not arrive after the due date, taking into consideration Guralnik.  It arrived on the (revised) due date.  Effectively, the taxpayer here should be treated as if he personally walked into the Clerk’s Office on January 28, 2019 and handed in the petition for filing.  Clearly, that would be OK under Guralnik.  FedEx merely acted as the taxpayer’s agent in walking the petition in on that last date to file.

This result may strike some as odd – that the taxpayer could mail out the petition the day after the last date to file shown on the notice of deficiency, yet still get the benefit of filing a timely petition.  But, I don’t see how a court could rule any other way.

SG Seeks Extension to File Cert. in Myers

A further quick update:  Today, the Solicitor General asked the Supreme Court to allow it 30 more days (until February 1, 2020) to file a petition for certiorari in Myers.  A copy of the request can be found here.  I am told by people who practice regularly in the Supreme Court that, these days, if the SG is considering filing a cert. petition, he always now first asks for an extension to file.  Thus, the lack of an extension request would indicate that the SG was not going to file a cert. petition.  But, they also tell me that the request for an extension is not always a prelude to an actual cert. petition.  So, stay tuned.

D.C. Cir. Myers Whistleblower Opinion Status Affecting Some Other Tax Court Cases

Just a short update post.  We blogged here last summer when the D.C. Circuit in Myers v. Commissioner, 928 F.3d 1025 (D.C. Cir. 2019), reversed the Tax Court and held that the petition filing deadline at section 7623(b)(4) for a whistleblower award review proceeding is not jurisdictional and is subject to equitable tolling under recent non-tax Supreme Court case law.  We also reported here when the D.C. Circuit rejected a DOJ petition and refused to rehear the case en banc.  The Solicitor General has not yet decided whether to file a petition for cert. in Myers.  He must do so, if at all, by January 2, 2020.  In the meantime, the Tax Court has put all whistleblower cases involving late filing on hold.

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As a result of Myers, the Tax Court has been put in a bit of a quandary as to what to do with late-filed whistleblower award cases (whether or not the petitioners therein have any argument for equitable tolling).  There are currently five whistleblower cases pending in which the IRS has moved to dismiss the case for lack of jurisdiction for being late filed.  Since all whistleblower cases are appealable to the D.C. Circuit under section 7482(b)(1)(flush language), the Tax Court under Golsen will have to follow whatever happens ultimately in Myers.  If the SG does not seek cert. and the petitioners filed late and do not make any successful equitable tolling argument, then the Tax Court will have to dismiss the cases on the merits, not for lack of jurisdiction.  Given that there is no other court in which such petitioners can litigate such awards (or lack thereof), a loss in the Tax Court on the merits or for lack of jurisdiction is probably of no practical difference to the petitioners.  But, the Tax Court cares about whether it has jurisdiction to rule or not.

So, in each of the five cases, the Tax Court has decided simply not to rule on the IRS motions at this time, but to order the IRS to provide status reports on the progress of the Myers opinion becoming final.  See Tax Court orders in Aghadjanian v. Commissioner, Docket No. 9339-18W (dated 9/4/19 and 12/9/19); McCrory v. Commissioner, Docket No. 3443-18W (dated 9/4/19 and 12/6/19); Bond v. Commissioner, Docket No. 5690-19W (dated 10/8/19); Bond v. Commissioner, Docket No. 6267-19W (dated 10/30/19); Bond v. Commissioner, Docket No. 6982-19W (dated 11/5/19).

Although arguably the language in section 7623(b)(4) is virtually identical to that in the Collection Due Process (CDP) provision at section 6330(d)(1), the Tax Court has not been holding up rulings on similar CDP case motions to dismiss – still following its holding in Guralnik v. Commissioner, 146 T.C. 230, 235-238 (2016), that the CDP filing deadline is jurisdictional and not subject to equitable tolling under recent Supreme Court case law.  The Ninth Circuit agreed with Guralnik in Duggan v. Commissioner, 879 F.3d (9th Cir. 2018).  A case on the CDP filing deadline is currently pending before the Eighth Circuit, where briefing is complete, and the case is awaiting oral argument (not yet scheduled).  Boechler, P.C. v. Commissioner, 8th Cir. Docket No. 19-2003.  In Boechler, the taxpayer asks the court to follow Myers and not Duggan.  Here are links to the briefs filed in the Boechler case:  the brief for the appellant, an amicus brief filed by the Harvard clinic, the brief for the appellee, and the reply brief for the appellant.  No doubt, the existence of the Boechler case will be one of the things that the SG will consider in deciding whether to seek cert. in Myers

Whatever the SG does about Myers, the arguments therein are not going away anytime soon with respect to at least some other Tax Court jurisdictions.

At least one other practitioner has contacted Keith and me and is considering raising the Myers arguments in pending Tax Court CDP cases appealable to a Circuit that hasn’t spoken yet on the arguments.  Further, as we have blogged before, there are two late-filed deficiency jurisdiction cases that were argued to the Ninth Circuit on October 22, 2019 in which the Myers arguments were raised.  Organic Cannabis Foundation LLC v. Commissioner, 9th Cir. Docket No. 17-72874, and Northern California Small Business Assistants, Inc. v. Commissioner, 9th Cir. Docket No. 17-72877.  A ruling in those cases could come any day now.

Internal Tracking Data Is Determinative for Designated Private Delivery Services under § 7502(f)

There was a recent Tax Court order (not a designated one) that caught my eye because of the contrast of the ruling with the Seventh Circuit’s ruling a few years ago in Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017).  I blogged on the Seventh Circuit’s Tilden opinion here.  That opinion criticized the use of United States Postal Service (USPS) certified mail internal tracking information as a “postmark” for purposes of determining whether a Tax Court petition was timely filed.  In the recent order in Moncada v. Commissioner, T.C. Docket No. 13303-19 (Nov. 7, 2019), by contrast, the internal tracking information of a Designated Private Delivery Service (DPDS) – here, UPS Next Day Air – was held determinative of the date of the filing of the petition.

Initially, I questioned how these two rulings could be reconciled.   But, I think they are both right.  The different results are the fault of Congress in the adoption of § 7502(f), which allows to IRS to designate private delivery services for purposes of taking advantage of the § 7502(a) timely-mailing-is-timely-filing rule that applies to envelopes sent by USPS mail.

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Tilden Background

There are regulations under § 7502(a) that elaborate on the timely mailing rules when the USPS is used.  The regulations cover four common situations where the Tax Court receives the petition after the last date to file:  (1) where there is only a USPS postmark on the envelope, (2) where there is only a private postmark on the envelope, (3) where there is no postmark (or no legible postmark) on the envelope, and (4) where there is both a USPS and private postmark on the envelope.  See Reg. § 301.7502-1(c)(1)(iii).  In general, if there is a legible USPS postmark, it governs as the date of mailing, and if there isn’t, the envelope better get to the Tax Court within the period that mail ordinarily sent from that address would take to get to the court if the envelope had been mailed on the last date to file.  There are exceptions to this last rule that I won’t get into here, not being relevant.  Further, not relevant to either Moncada or Tilden are the special rules where mail does not arrive at the Tax Court, but had been sent certified or registered mail, and where the taxpayer has a USPS mailing receipt with a legible date stamp.

In Tilden, the envelope containing the deficiency petition bore a private postage label from stamps.com, dated the 90th day.  Apparently, the envelope was placed in the mail by an employee of counsel for the taxpayer, and that employee also affixed to the envelope a Form 3800 certified mail receipt (the white form), on which the employee also handwrote the date that was the 90th day.  The Form 3800 did not bear a stamp from a USPS employee.  Nor did the USPS ever affix a postmark to the envelope.

The envelope arrived at the Tax Court from the USPS.  The USPS had handled the envelope as certified mail.  That meant that the USPS internally tracked the envelope under its “Tracking” service.  Plugging the 20-digit number from the Form 3800 into the USPS website yielded Tracking data showing that the envelope was first recorded in the USPS system on the 92nd day.  The envelope arrived at the Tax Court on the 98th day. 

The IRS later conceded that the taxpayer’s counsel’s employee had brought the envelope to a USPS office on the 90th day.  Eventually, both the taxpayer and IRS argued that the petition should be treated as timely filed under the private postmark rules, since the petition arrived within 8 days of the 90th day, and the IRS agreed that 8 days was within the normal time it takes an envelope to go from Utah to the Tax Court.

The Tax Court, however, viewed the date from the Tracking data to be the equivalent of a USPS postmark and so held that the petition must be treated as having been mailed, late, on the 92nd day.

The Seventh Circuit rejected the Tax Court’s equation of USPS Tracking data and a postmark, writing:

Part [301.7502-1(c)(1)(iii)](B)(3) of the regulation specifies what happens if an envelope has both a private postmark and a postmark from the U.S. Postal Service. Tilden’s envelope had only one postmark. The regulation does not ask whether a date that is not a “postmark” is as good as a postmark. It asks whether there are competing postmarks.

To say “A is as good as B” is not remotely to show that A is B. “Vanilla ice cream is as good as chocolate” does not mean that a customer who orders chocolate must accept vanilla, just because the customer likes both. They are still different. Subsection (B)(3) does not make anything turn on a date as reliable as an official postmark. It makes the outcome turn on the date of an official postmark. If the Postal Service were to treat tracking data as a form of postmark, that might inform our reading of the regulation, but we could not find any evidence that the Postal Service equates the two.

For what it may be worth, we also doubt the Tax Court’s belief that the date an envelope enters the Postal Service’s tracking system is a sure indicator of the date the envelope was placed in the mail. The Postal Service does not say that it enters an item into its tracking system as soon as that item is received—and the IRS concedes in this litigation that the Postal Service did not do so for Tilden’s petition, in particular. Recall that the Commissioner has acknowledged that the envelope was received by the Postal Service on April 21. It took two days for the Postal Service to enter the 20-digit tracking number into its system, a step taken at a facility in zip code 84199, approximately ten miles away from the Arbor Lane post office (zip 84117) where the envelope was handed in.

846 F.3d at 887 (emphasis in original).

So, the Seventh Circuit held that the petition had been timely filed.

Moncada Facts

On April 15, 2019, the IRS mailed a notice of deficiency to the Moncadas.  Ninety days from that date was Sunday, July 14, so under § 7503, the due date for a Tax Court petition became the 91st day, Monday, July 15.

On the 88th day, Friday, July 12, the Moncadas went on line and created a shipping label for UPS Next Day Air, a DPDS.  From here, I quote from the taxpayers’ letter in response to the IRS motion to dismiss the petition:

The petition was prepared, signed and placed in the UPS pick-up box on the afternoon of Friday, July 12, 2019 for pick up at the posted pick-up time of 6:00PM. This action would have resulted in a timely delivery to the tax court on Monday, July 15, 2019.

However, UPS inexplicably did not pick up any packages form the pick-up location on Friday, July 12 or on Monday, July 15.  On Tuesday, July 16 we started to track the package and discovered there was no tracking information in the UPS system. We contacted UPS and asked why there was no tracking information. They had no answer. When the driver showed up on the 16th we discovered that the package was still in the box. UPS admitted that their driver did not stop at the box on Friday the 12th or on Monday the 15th. They shipped the package on July 16, and it arrived on July 17 . . . .

While the Tax Court did not find these letter statements to be facts, the taxpayers also submitted receipts to the Tax Court, dated July 12, generated in preparing the UPS label for shipment.

The IRS attached to its motion to dismiss UPS electronic database tracking information showing that the envelope was shipped (picked up) by UPS on July 16 (the 92nd day).  The envelope arrived at the Tax Court, and the petition was filed, on July 17 (the 93rd day).

Because of the different law that applies to shipment by DPDSs from the law that applies to shipment by the USPS, for purposes of the motion to dismiss, it turns out that whether the letter’s alleged facts were true is irrelevant.

Moncada Holding

Section 7502(f) was adopted in 1996.  It provides for the treatment of envelopes sent to the IRS or the Tax Court by IRS-designated private delivery services.  The IRS has designated UPS Next Day Air to be a DPDS.  Notice 2016-30, 2016-1 C.B. 676

There are several requirements for a service to be designated, among which is that the private service “records electronically to its data base . . . , or marks on the cover in which any item referred to in this section is to be delivered, the date on which such item was given to such trade or business for delivery”.  § 7502(f)(2)(C).  Section 7502(f)(1) provides:

Any reference in this section to the United States mail shall be treated as including a reference to any designated delivery service, and any reference in this section to a postmark by the United States Postal Service shall be treated as including a reference to any date recorded or marked as described in paragraph (2)(C) by any designated delivery service.

Thus, in the absence of a mark on the cover of the envelope (there was none here), tracking data supplies the deemed USPS “postmark”.  This is so clear from the statute that the regulations contain no rules about conflicts between private “postmarks” and DPDS “postmarks”.

Given the statute, the Tax Court had little choice but to rule that the UPS tracking data supplied a deemed USPS postmark of July 16 (the 92nd day), so the petition was not timely sent by UPS.  As noted above, the USPS postmark date always governs under the regulations if there is one.  In its order of dismissal in Moncada, the Tax Court was sympathetic to the taxpayers, but wrote:  “The creation of a label and mere placement in a UPS pick-up box is a risk analogous to that identified in the regulations when a sender affixes USPS postage and drops the items in a mailbox, at the mercy of the USPS to pick up and apply a postmark.”

Thus, even though the Seventh Circuit’s criticism in Tilden of using tracking data may still make sense, Congress has chosen for DPDSs to use tracking data instead of anything like the alternative proof of mailing by USPS in the absence of a true USPS postmark.

The moral of the story is that the still safest way to be certain that a petition will be timely filed in the Tax Court is to bring the envelope containing the petition to a USPS office, send it certified or registered mail, and get a legible postmark date on the mailing receipt from the USPS employee.  In that case, even if the document never gets to the Tax Court, the receipt will be proof of mailing.  § 7502(c) (deeming the date of registration or certification to be “the postmark date”); Reg. § 301.7502-1(c)(2) (deeming the date on the receipt that was placed there by a USPS employee to be the date of registration or certification).  Use of private postmarks is riskier.  And there is no way to make a private postmark that will have any legal effect when one uses a DPDS.  You simply can’t control when a DPDS will pick up an envelope from a drop box and enter the envelope into its electronic database.

Should the Tax Court Allow Remands in Light of the Taxpayer First Act Innocent Spouse Provisions?

The Taxpayer First Act amended section 6015 to add a new subsection (e)(7) that provides for a Tax Court de novo standard of review of a section 6015 determination of the IRS based on (1) “the administrative record established at the time of the determination” and (2) “any additional newly discovered or previously unavailable evidence”.  Thus, the statute appears to contemplate that there be an administrative record in a section 6015 case and that the IRS had made a determination in such case before the Tax Court “review[s]” that determination.  But, the administrative record in section 6015 cases is often incomplete or nonexistent (e.g., in cases where the IRS hadn’t yet ruled after a 6015 request or because 6015 was first raised in response to a notice of deficiency). 

In the past, the Tax Court has never remanded in section 6015(e) stand-alone cases or in deficiency cases seeking innocent spouse relief, but then those cases were not to be tried primarily based on the administrative record.  In Friday v. Commissioner, 124 T.C. 220 (2005), citing the de novo nature of its proceedings under section 6015, the Tax Court denied an IRS motion to remand a stand-alone section 6015(e) case to Cincinnati Centralized Innocent Spouse Office (CCISO). The IRS had argued that CCISO had previously erroneously failed to consider section 6015(f) equitable relief on the merits.  

In light of the Taxpayer First Act amendment no longer making Tax Court innocent spouse proceedings fully de novo, the Tax Court should overrule Friday, and it should also allow remands in deficiency cases, though limited to the section 6015 issue.  Any taxpayer currently facing a limit on getting additional pertinent evidence not in the administrative record before the Tax Court beyond what is indisputably newly discovered or previously unavailable evidence should move to remand his or her case to CCISO and ask the Tax Court to overrule Friday, so that the pertinent evidence can be proffered to the IRS in the remand and become part of the administrative record before the case is returned to the Tax Court (if it returns at all).

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Let me first say that I have read the legislative history of section 1203 of the Taxpayer First Act (the section that added subsection (e)(7)), and it provides no useful guidance or even hints about what Congress had in mind about remands.  The Committee Report just parrots the new statute in explaining the workings of the new subsection.  See H. Rep. 116-39, Part I, at 38-40.

So, let’s begin by looking at the reasons for the Tax Court’s ruling in Friday prohibiting a remand in a section 6015(e) stand-alone case that was not one of the rare ones commenced 6 months after the Form 8857 was filed but before an IRS determination had been issued.  This was a case where the IRS did not consider relief under subsection (f) apparently because the IRS thought the request too late based upon the now-overruled regulation that provided that subsection (f) relief requests had to be made within 2 years of the commencement of “collection activity”.  In McGee v. Commissioner, 123 T.C. 314 (2004), the Tax Court held that an IRS failure to include in a refund offset notice any mention of the offset’s consequences regarding section 6015 relief debarred the IRS from relying on the offset as “collection activity”.  In Friday, the IRS told the court that the case was governed by McGee, presumably meaning CCISO had thought a refund offset taking place more than 2 years before the Form 8857 was filed constituted “collection activity”, but IRS attorneys in the Tax Court now realized the offset notice had not included the proper section 6015 language.  Thus, CCISO had never considered subsection (f) relief on the merits, but should have under McGee.

Here’s what the Tax Court wrote in Friday:

In support of his request, respondent relies on Natl. Nutritional Foods Association v. Weinberger, 512 F.2d 688, 701 (2d Cir. 1975), Camp v. Pitts, 411 U.S. 138, 143 (1973), and Asarco, Inc. v. EPA, 616 F.2d 1153, 1160 (9th Cir. 1980).  Those cases, however, are examples where courts, in reviewing administrative action, remanded for further factual determinations that were deemed necessary to complete an inadequate administrative record or to make an adequate one.

In certain specific cases where statutory provisions reserve jurisdiction to the Commissioner, a case can also be remanded to the Commissioner’s Appeals Office. Under sections 6320(c) and 6330(d)(1), this Court may consider certain collection actions taken or proposed by the Commissioner’s Appeals Office. Under paragraph (2) of section 6330(d), the Commissioner’s Appeals Office retains jurisdiction with respect to the determination made under section 6330. As part of the process, a case may be remanded to the Appeals Office for further consideration. See, e.g., Parker v. Commissioner, T.C. Memo. 2004-226.

The situation is different, however, in a section 6015 proceeding, which is sometimes referred to as a “stand alone” case. Although entitled “Petition for Review by Tax Court”, section 6015(e) gives jurisdiction to the Court “to determine the appropriate relief available to the individual under this section”. The right to petition is “In addition to any other remedy provided by law” and is conditioned upon meeting the time constraints prescribed in section 6015(e)(1)(A)(i) and (ii). Even if the Commissioner fails to do anything for 6 months following the filing of an election for relief (where there is nothing to “review”), the individual may bring an action in this Court. See sec. 6015(b), (e)(1)(A)(i)(II). A petition for a decision as to whether relief is appropriate under section 6015 is generally not a “review” of the Commissioner’s determination in a hearing but is instead an action begun in this Court. There is in section 6015 no analog to section 6330 granting the Court jurisdiction after a hearing at the Commissioner’s Appeals Office.

124 T.C. at 221-222 (footnotes omitted).

After the Taxpayer First Act, the statutory situation is clearly different from that on which the Tax Court relied in Friday.  Section 6015(e)(7) now discusses a “review” by the Tax Court of a “determination made under this section” and specifically mentions an “administrative record” that is part of the basis for the judicial record.  At least for section 6015 cases where there was a determination made and an administrative record created, the Tax Court proceeding is now much more like that of the Tax Court’s Collection Due Process (CDP) jurisdiction.  Although section 6015 does not discuss who in the IRS is to make the determination that is reviewed (unlike section 6330, which makes clear that the IRS Appeals Office both makes the determination and has retained jurisdiction), the Tax Court can fill in that blank by remanding to the case back to the IRS function (either CCISO or the Appeals Office) that made the final determination.

Relying on what the Tax Court has done in CDP cases, the Tax Court should remand such 6015 cases for pretty much any good reason proposed by either party.  See, e.g., Churchill v. Commissioner, T.C. Memo. 2011-182 at *12-*16 (discussing various previous reasons for remanding CDP cases to Appeals and adding a new one – where there were changed financial circumstances such that remand would be “helpful, necessary, or productive”) (Holmes, J.).  And, as in CDP, the IRS should be asked to create a “determination” or “supplemental determination” letter, and the Tax Court should only review the latest IRS determination letter.  Kelby v. Commissioner, 130 T.C. 79, 86 (2008) (“When a [CDP] case is remanded to Appeals and supplemental determinations are issued, the position of the Commissioner that we review is the position taken in the last supplemental determination.”).

In a previous post on the whistleblower award review case of Kasper v. Commissioner, 150 T.C. 8 (2018) (Holmes, J.), Les noted that the Tax Court held that there are numerous judge-created exceptions to the administrative record rule that the Tax Court will follow in whistleblower cases – making the Kasper opinion arguably very important for all Tax Court jurisdictions where the Tax Court review is based on the administrative record.  Those record-review exceptions are also being followed in CDP cases appealable to those the Circuits holding that the Tax Court proceeding is limited to the administrative record. See, e.g., Robinette v. Commissioner, 439 F. 3d 455, 459-462 (8th Cir. 2006) (allowing Tax Court “testimony from the appeals officer that further elucidated his rationale” to supplement the administrative record).  Les has more recently raised the question whether those judicial exceptions to the administrative record rule survive section 6015(e)(7), which, on its face, specifies only two items beyond the administrative record that are to be part of the Tax Court record on review – i.e., newly discovered or previously unavailable evidence.  Arguably, expressio unius est exclusio alterius (the expression of one thing implies the exclusion of another thing).  This is a serious question to which I have no answer, though I certainly hope that the judicial exceptions to the administrative record rule survived the statute’s enactment.  As Les put it in an e-mail to me recently, “Is the concern that the statutory language (previously unavailable or newly discovered) preempts the exceptions Judge Holmes discussed in Kasper? Or is there a desire for systemic pressure on a better administrative process?”

But, this Kasper question of Les’ becomes moot if the Tax Court is willing to remand section 6015 cases to supplement the record not just to address concerns underlying the judicial exceptions to the administrative record rule, but also to add any other pertinent materials to the record that may aid the proper determination.

I would also note that earlier this year, the Tax Court held that it could remand a whistleblower award case to the IRS Whistleblower Office.  Whistleblower 769-16W v. Commissioner, 152 T.C. No. 10 (April 11, 2019).  That opinion compares and contrasts the Tax Court’s CDP and innocent spouse provisions (pre-Taxpayer First Act) and says the Tax Court does not consider it dispositive that section 7623(b)(4) contains no retained jurisdiction provision like section 6330(d)(2) for CDP.  The court points out that section 7623(b)(4) says nothing either way about remands.  The court held that remands were permitted because that is normal when review of agency action is on an abuse of discretion standard and under the administrative record rule.  Those were the standard and scope of review adopted in Kasper.  Section 6015 is somewhere between CDP and section 7623(b)(4), with a de novo standard of review, but a limit mostly to reviewing the administrative record.

I would hope that the Tax Court would liberally remand section 6015 cases to the IRS for the IRS to consider any material not previously included in the administrative record that might significantly alter the outcome of the case.  This would include both newly discovered or previously unavailable evidence, but not be limited to that.  Let me give you an example of material falling outside section 6015(e)(7) of the type I am worried about:  I have seen Tax Court cases that have been brought to me as a clinician after the taxpayer has filed a pro se Tax Court petition.  Pro se petitioners often do a bad job in creating the administrative record.  I have known cases where the taxpayer has been the subject of abuse and there are police records to prove it – in addition sometimes to orders of protection – yet the taxpayer never sent the police records or orders of protection to the CCISO examiner.  Such items are not previously unavailable or newly discovered, but they would likely have strongly affected the IRS’ determination had it seen such documents before issuing the notice of determination denying relief.  It is hard for me to imagine that Congress would have wanted this evidence of abuse to be excluded from the Tax Court record merely because the unrepresented taxpayer did not think to find and submit this evidence to the IRS earlier.  If the Tax Court were to be presented with such documentation, I would think the best course would be to remand the case to the IRS.  There is a good chance such evidence would moot the case, as the IRS would probably concede in most cases.

Next, the statute as written discusses Tax Court review of IRS determinations, but leaves unstated what the scope and standard of Tax Court review is to be where the IRS hasn’t made a determination under section 6015 yet.  This can happen when a taxpayer files a Form 8857 and brings suit after 6 months in the absence of an IRS determination or when the taxpayer responds to a deficiency notice by, for the first time, raising an innocent spouse request in the Tax Court petition.  Legislative history of section 6015(e)(7) does not address these “no determination” situations.  But, for the reasons that Congress thought it would be better for the Tax Court to review IRS determinations (and using the administrative record), I would urge the court to remand all such cases to CCISO for an initial determination.  That way, regardless of the procedure by which the case came to the Tax Court, the case would be decided on a similar standard of review and record of review to the cases Congress specifically addressed.  Current Tax Court case law holds that section 6015 review is done on a de novo record and standard, regardless of the procedure by which the case came to the court.  Porter v. Commissioner, 130 T.C. 115 (2008), and 132 T.C. 203 (2009).  In Porter I, the Tax Court expressed concern that the IRS’ proposal to limit the review of section 6015(f) determinations in cases under section 6015(e) to the administrative record would provide inconsistent procedures in similar cases, since review in deficiency cases or where a case was brought under section 6015(e) before the IRS ruled would be on a de novo record.  130 T.C. at 124-125.  Frankly, if the Tax Court doesn’t allow remands in these “no determination” cases, it appears that the Tax Court is currently bound by its precedent to allow a de novo trial record.

My final observation is one I have been repeating since the adoption of the Taxpayer First Act:  The best solution here is to amend section 6015(e)(7) to provide for a de novo record for Tax Court determinations under section 6015 – thus reestablishing Porter I as the controlling authority for all Tax Court section 6015 cases.  Such an amendment would make the need for remands of such cases moot.