After The Shutdown: Dealing with Time Limitations, Part IV — Equity

In Part IV of the series “After the Shutdown,” Professor Bryan Camp examines the role of equity in addressing time limitations that have become tangled by the shutdown. Christine

It is unconscionable to enforce against taxpayers a statutory time limitation when Congress itself denied taxpayers the ability to protect their rights during all or part of that time period by forcing the closure of the IRS and the Tax Court.  That is, Congress failed to fund either the Tax Court or the IRS, causing both to shut down for between 31 (Tax Court) and 35 (IRS) days.  This failure caused both the agency and the Court to be closed to taxpayer’s attempts to resolve disputes about either the determination or collection of tax.  This failure is an act of Congress just as much as the statutory limitations periods are acts of Congress.  And Congress should not be able to demand that a taxpayer act within a certain time period while at the same time denying the taxpayer any ability to act during all or part of that time period.  Equity should, and I believe can, prevent that result.

The above proposition is the basis for this, my last Post in the “After the Shutdown” series.  Part I discussed how a reopened Tax Court might apply the Guralnik case to ostensibly late-filed petitions.  Part II explained the new thinking about how jurisdictional time periods differ from non-jurisdictional.  Part III explained why the time period to petition the Tax Court in §6213 should no longer be viewed as a jurisdictional limitation.  I invite those readers interested in how the new thinking would apply to the time periods in §6330(d) and §6015(e) to look at my paper posted on SSRN, which I am trying to get published in a Law Review.  Legal academics must publish or perish and, apparently, blogging does not count.

Today’s post explores why the Tax Court should be able to apply equitable principles to evaluate the timeliness of taxpayer petitions filed after the shutdown, regardless of whether any of the applicable limitations periods are jurisdictional or not.

Before diving in to equity, I wanted to point out that Congress itself could actually save a lot of litigation here by passing a very simple off-Code statute that says something like: “For purposes of computing  time limitations imposed in Title 26 on taxpayers to petition the Tax Court, the days between December 22, 2018 and January 28, 2019 shall be disregarded.”  Congress could do that.  Congress should do that (for the reasons I explain below).  But you can bet you sweet bippy that Congress won’t do that.  It made this mess.  But it is unlikely to clean it up.  So it will fall to the Tax Court to sort through cases.  When it does so, I believe the circumstances of the shutdown strongly support the extraordinary remedy of equitable tolling.

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The Tax Court is truly a unique court. It is neither fish nor fowl, as Prof. Brant Hellwig so nicely explains in his article “The Constitutional Nature of the U.S. Tax Court,” 35 Va. Tax Rev. 269 (2015). That is, all efforts to type the Tax Court as part of the Legislative Branch, Judicial Branch, or Executive Branch of the federal government are flawed, both as a matter of theory and as a matter of practice. Channeling Felix Cohen and other Legal Realists, Brant sensibly concludes that we don’t really need to worry about “where” the Tax Court belongs in the Constitutional structure. It’s indeterminate position poses no threat to the structural integrity of the federal government, and its useful work in resolving taxpayer disputes with the IRS does not depend on its precise location in any branch.

But there is no doubt that the Tax Court exercises the “judicial power” of the United States. The Supreme Court said so in Freytag v. Commissioner, 501 U.S. 868 (1991). And part of that “judicial power” is the power to apply equitable principles and doctrines to the disputes that are properly brought before the Court for resolution. Prof. Leandra Lederman has a lovely article on this subject: “Equity and the Article I Court: Is the Tax Court’s. Exercise of Equitable Powers Constitutional?” 5 Fla. Tax Rev. 357 (2001).

It is important to remember that equitable doctrines are not simply free-floating grants of power. Equitable doctrines are linked to, and bounded by, a set of principles. But what distinguishes equitable principles from legal rules is that the application of equity is highly contingent on the facts before the court. The great legal historian F. W. Maitland put it this way in his 1910 Lectures On Equity: “I do not think that any one has expounded or ever will expound equity as a single, consistent system, an articulate body of law. It is a collection of appendixes between which there is no very close connection.” (p. 19) And in this 1913 law review article, Professor Wesley Newcomb Hohfeld discussed the difficulty of teaching equity as a system of rules separate from legal rules. I think it this way: equity fixes problems that legal rules cannot fix.

One equitable doctrine that might apply here is equitable tolling. When litigants show that, despite diligent efforts, some extraordinary circumstance prevented them from protecting their rights by timely filing within a period of limitations, a court will equitably toll the limitation period. See e.g. Holland v. Florida, 560 U.S. 631 (2010). The idea of “tolling” means that the limitations period is suspended for the tolling period. That is, it stops running and then starts running again when the tolling period ends, picking up where it left off. Artis v. District of Columbia, 138 S.Ct. 594 (2018).

Remember, this is equity, not a hard and fast legal rule or doctrine. So how much diligence a litigant must show varies with circumstances. Similarly, how extraordinary the barrier had to be also varies with circumstance. If the Tax Court applies that doctrine, it could decide—consistent with the logic of my very first paragraph—that the days in which Congress’s failure to fund the Court forced it to shut its doors should stop the running of any applicable limitation period. The Court may decline to apply equitable tolling, however, for two reasons.

First, the Tax Court has repeatedly said it cannot equitably toll jurisdictional time periods and it believes that the relevant time periods in the Tax Code are jurisdictional. I believe the Tax Court is simply wrong that the deficiency and CDP time periods are jurisdictional. That’s what I explained in the prior blog posts and in my SSRN paper.

Even if the time periods are jurisdictional, however, I believe there is good authority to toll them nonetheless. The authority is from the Supreme Court. In Honda v. Clark, 386 U.S. 484 (1967), 4,100 plaintiffs of Japanese descent whose assets had been seized by the U.S. during World War II sued for recovery years after the applicable limitation period had ended. The district court dismissed the cases “on the ground that the court lacked jurisdiction over the subject matter of the actions because they were not commenced within the time set forth in section 34(f) of the Trading with the Enemy Act.” 356 F.2d 351, 355 (D.C. Cir. 1966). Both the district court and the D.C. Circuit dismissed their suit for the standard reason: equitable principles did not apply to when limitation periods were a waiver of sovereign immunity. The D.C. Circuit gave the standard analysis: “All conditions of the sovereign’s consent to be sued must be complied with, and the failure to satisfy any such condition is fatal to the court’s jurisdiction.” 356 F.2d at 356.

The Supreme Court disagreed. While noting the general rule, it characterized the rule as a presumption and said that one needed to look at the particular statutory scheme at issue to discern purpose. Whether or not the time period was jurisdictional was totally absent from the Court’s approach to applying equitable tolling. The Court concluded it was “much more consistent with the overall congressional purpose to apply a traditional equitable tolling principle, aptly suited to the particular facts of this case and nowhere eschewed by Congress, to preserve petitioners’ cause of action.” 386 U.S. at 501.

The Supreme Court’s focus in Honda (and later in other cases, as I explain in my paper) was on the relationship between Congress and the limitation period. When you approach the limitation periods in §6213 and §6330(d) in that way, I believe the approach used by the Supreme Court in Honda strongly support application of equitable tolling, in two ways.

First, as I have argued here, the Tax Court itself has relied upon the great remedial purposes of §6213 and §6330 to in fact enlarge what it believes are jurisdictional time periods under certain circumstances. A careful reading of its cases shows that what animates its decisions is the remedial purpose of the statutory scheme that allows taxpayers a day in court before either (1) being forced face a tax assessment and its consequences or (2) being forced to pay an assessed tax. To count the shutdown days as part of a limitations period would run counter to that remedial purpose.

Second, I again restate the idea of my first paragraph. This is not a situation where a taxpayer would seek equitable tolling because of some individual government employee’s bad behavior. This is Congressional bad behavior. Another way to think of the relationship is this: if the time periods are part of Congress’s waiver of Sovereign Immunity, and if only Congress can waive Sovereign Immunity, then one can reasonably find that Congress itself has here waived its immunity by ceasing to fund the government.

The second reason that the Tax Court might look askance at applying equitable tolling here is that the doctrine usually applies in a fact pattern where the party seeking tolling has done all it can. Here, there may be instances where that is not true. For example, a taxpayer may not have even attempted to file a petition when the last day ran during the shutdown period. Or the taxpayer may not have even been prepared to file during the shutdown period and only prepares and files once the shutdown period ends. Most importantly, a taxpayer’s period might have been disrupted by the shutdown period but may not have ended during the shutdown period. How is the Tax Court supposed to measure a taxpayer’s diligence in that situation, when no one knew until Friday that the government would reopen on Monday?

I do not know the answer to these questions because equity is a case-by-case determination. The Tax Court can help avoid the time and effort of applying equitable tolling by applying a uniform counting rule that simply disregards the shutdown days, based on the idea underlying FRCP 6, as I will argue in an article I hope to publish in Tax Notes soon. Even there, however, there will be cases that are not covered even by a broad reading of FRCP 6. That will be the cases where the last day of the period came after the shutdown ended. Yet there may be such cases that command the sympathy of the Tax Court. I think the Court has the power to act and to apply equitable tolling in the cases where the circumstances support it.

Are Nonresident Aliens Exempt From the Loss of Personal Exemptions?

We welcome back guest blogger Robert G. Nassau. Professor Nassau teaches at Syracuse University College of Law and directs its low income taxpayer clinic. Today he discusses a little-known tax increase that the December 2017 tax law may cause for agricultural guest workers who pay taxes as non-US residents. As a former Vermont resident I take issue with Professor Nassau’s maple syrup supremacy claims, but on a professional level I had similar experiences working with Jamaican guest workers who pick Vermont’s apples and other crops, working long, hard hours far from home to support their families in Jamaica. Any tax increase will be sorely felt by these taxpayers. Christine

Until recently, I thought I had left International Tax in my side-view mirror (“rear-view mirror” is a cliché, and I was taught to avoid those).  Back when dinosaurs roamed the Earth and I was a Big Law Tax Associate, three of my “specialties” were Eurodollar transactions, foreign tax credit maximization, and FIRPTA (don’t bother to look it up), none of which was relevant when I moved to Little Law, but all of which validated my bona fides when Syracuse University College of Law was looking for an adjunct to teach International Tax.  Years later, SUCOL had sadly dropped International Tax, but happily added a Low Income Taxpayer Clinic, which I, as the devil they knew, got to direct.  And, as they say, the rest is history.  (So much for avoiding clichés.) 

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Last year, our Clinic formed a relationship with the Legal Aid Society of Mid-New York, through which LASMNY referred to us a number of foreign “temporary agricultural workers.” These gentlemen, mostly from Jamaica, validly reside in the United States and work in our agriculture industry.  They receive H-2A Visas and have Social Security Numbers.  Some come every year; some come for two or three months; and some come for as long as six or seven months.  (For those readers whose notion of New York is Broadway and Wall Street, please note that the Empire State is #2 nationally in apple production, #2 in cabbage (think sauerkraut), #3 in pumpkins and grapes (we have over 400 wineries), and #4 in sweet corn, squash and snap beans.  We are also #1 in the world, both quantitatively and qualitatively, in maple syrup.  Take that Justin Trudeau!)   

For tax purposes, these non-U.S. citizens are classified either as resident aliens, in which case their income tax treatment is nearly identical to that of a citizen, or nonresident aliens, in which case their income tax treatment is governed by special rules in Subchapter N of the Code (Section 861 et seq.).  The definitions of resident alien and nonresident alien are set forth in Section 7701(b), which, for the holder of an H-2A Visa, looks to a formula based on days of physical presence within the United States.  By way of simple example, someone in the U.S. for 90 days a year would always be a nonresident alien (“NRA”), whereas someone in the U.S. for 150 days a year would quickly become a resident alien.   

Among the special rules governing the tax treatment of NRAs are Sections 873(a) and (b), which limit an NRA’s allowable deductions.  For tax years prior to 2018, an NRA was not allowed a standard deduction, but was allowed a personal exemption, pursuant to Section 873(b)(3), which provided – and still provides:

The deduction for personal exemptions allowed by section 151, except that only one exemption shall be allowed under section 151 unless the taxpayer is a resident of a contiguous country or is a national of the United States. 

Now comes TCJA 2018, which, as we all know, was not the poster child for precise statutory draftsmanship, but did, for tax years 2018 through 2025, eliminate personal and dependent exemptions, replacing them with a larger standard deduction and expanded child tax credit.  Or at least it did this for U.S. citizens and resident aliens.  But what about NRAs?  

Congress’ method for eliminating personal exemptions was not to repeal Section 151, but rather, in Section 151(d)(5)(A), to make the “exemption amount” zero for 2018 through 2025.  But that’s not all Congress did.  Realizing that the concepts of “dependent” and “exemption amount” had repercussions throughout the Code, Congress also enacted Section 151(d)(5)(B), which provides:

For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction, under this section. 

During 2018, the Treasury Department released some guidance regarding Section 151(d)(5)(B).  For example, in Notice 2018-70, it announced that the exemption amount should not be treated as zero for purposes of determining whether someone is one’s qualifying relative, which is relevant for the new partial child tax credit for taxpayers who do not have a qualifying child; and in Notice 2018-84, it announced similar principles for purposes of the premium tax credit and shared responsibility payment.   

But crickets regarding Section 873(b)(3) . . . until the recent publication of the tax forms used by NRAs: Form 1040NR and Form 1040NR-EZ.  In each of these Forms, the line once used for claiming personal exemptions is gone.  The IRS has not yet released Instructions for Form 1040NR, but it has for Form 1040NR-EZ, and there, under “What’s New” is the sentence: “For 2018, you cannot claim a personal exemption.” 

So, the IRS has clearly concluded that, notwithstanding Section 151(d)(5)(B), an NRA is no longer entitled to any personal exemptions.  But is that right?  The plain language of Section 151(d)(5)(B) states: “For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable or whether a taxpayer is entitled to a deduction, under this section” (emphasis added).  Certainly, Section 873(b)(3) is an “other provision of this title.”  Can’t one argue that the reduction of the exemption amount to zero is irrelevant for purposes of allowing an NRA to claim personal exemptions, because that reduction is “not to be taken into account in determining whether a deduction is allowed” for purposes of Section 873(b) (an “other provision”)? 

The only relevant Legislative History for Section 151(b)(5)(B) is found in a footnote in the TCJA Conference Report, which states:

The provision also clarifies that, for purposes of taxable years in which the personal exemption is reduced to zero, this should not alter the operation of those provisions of the Code which refer to a taxpayer allowed a deduction (or an individual with respect to whom a taxpayer is allowed a deduction) under section 151.

Section 873(b)(3) does not “refer” to a taxpayer allowed a deduction under Section 151; it actually allows the deduction.  But then, neither does the definition of qualifying relative in Section 152(d) refer to a taxpayer allowed a deduction under Section 151; rather, it refers to the exemption amount, and the Treasury Department has decided that is good enough for Section 151(d)(5)(B) purposes. 

I do not know the answer to this question of statutory interpretation, though I feel there is enough in Section 151(d)(5)(B), and not enough contrary anywhere else, to take a valid reporting position that an NRA is still entitled to a personal exemption.  But, I’m prepared to be proven wrong.   

It would, of course, have been nice if Congress had spoken more clearly on this issue by, perhaps, explicitly suspending Section 873(b)(3) for 2018 through 2025.  Or, in the alternative, Congress could have said it wanted NRAs to start paying tax from Dollar One.  Because the bottom line, if the new Form 1040NR is correct, is that a temporary agricultural worker making $7,000 during his 100 days in America in 2018 will now owe $700 in tax, rather than $285.  Is that really what Congress intended?  Is that really fair?

After The Shutdown: Dealing with Time Limitations, Part III

Today Professor Bryan Camp returns for Part III of the series “After the Shutdown,” in which he examines the time limit for appealing a notice of deficiency. Now that the government has reopened, Professor Camp’s analysis may soon be tested in the Tax Court. The Tax Court’s website advises that the court will resume full operations on Monday, January 28, and that the February 25 trial sessions will proceed as scheduled. Christine

Part I discussed how a reopened Tax Court might apply the Guralnik case to ostensibly late-filed petitions.  The Tax Court is likely to apply Guralnik narrowly which means petitions not filed on the first day the Court reopens will be outside their Statutes of Limitation, putting the SOL in SOL.  Equitable tolling could help cure that problem but the Tax Court takes the position that it cannot apply equitable doctrines to the time periods for taxpayers to petition the Tax Court because, in its view, those time periods are jurisdictional restrictions on its powers.   

Part II explained the new thinking about how jurisdictional time periods differ from non-jurisdictional.  I read the opinions and drew out five indeterminate factors that the Supreme Court instructs lower courts to consider when deciding whether a particular statutory time period is jurisdictional or merely a “claims processing rule.”   

Today’s post applies the rules to the 90/150 day period in §6213.  The most reasonable conclusion under the new thinking is that §6213 is not a jurisdictional time period. That means that the Tax Court can apply equitable principles to decide whether an ostensibly late-filed petition is timely or not.  And when the Tax Court is closed for more than 33 days in a row, that is a big start to an equitable tolling analysis for those cases that cannot fit within a narrow or even a broad application of Guralnik.

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Four of the five factors point to treating §6213 as a claims processing rule.  Again, this is basically a summary of what I have written in this paper posted on SSRN.  As usual, please comment on any errors or omissions that you spot. 

  1. Mandatory Language

As it currently reads, §6213(a) now contains five sentences.  The first sentence contains the limitations period, as follows: “Within 90 days, or 150 days if the notice is addressed to a person outside the United States, after the notice of deficiency authorized in section 6212 is mailed … the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency.” 

Notice there is no mandatory language.  Nothing in that sentence tells the reader what happens if the taxpayer misses the 90/150 day deadline.  And nothing in that sentence gives the Tax Court the power to hear or decide matters raised in the petition. 

  1. Magic Words

The word “jurisdiction” does not appear in the first sentence.  One finds the jurisdictional grant to the Tax Court over in §6214, which provides that the Tax Court has “jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency…and to determine whether any additional amount, or any addition to the tax should be assessed, if claim therefor is asserted by the Secretary at or before the hearing or a rehearing.”  The §6214 power to redetermine a deficiency is simply not hooked into the §6213 timing rule.  

The fourth sentence of §6213 does contain the magic word “jurisdiction.”  But, as I explain in much greater detail in my paper on SSRN, while the word “jurisdiction” does appear in the fourth sentence, it is not there tied to the Court’s power to redetermine a deficiency.  It was added to the Tax Court much, much, later than first sentence and later than the §6214 jurisdictional language.  

  1. Statutory Context

 As I explain in my SSRN paper, Congress first gave the Tax Court jurisdiction to redetermine a proposed deficiency in 1924.  It did that in a statute separate from the 90/150 day limitation period.  The codifiers also put that jurisdictional grant in a separate section of the Tax Code, both in the 1939 Code and the 1954 Code.

Much later, in 1954, Congress added to the Tax Court’s jurisdiction the power to enjoin the IRS from assessing or collecting a tax liability when the taxpayer had filed a timely petition.  The codifiers put that injunctive power in the same statute as the 90/150 limitation period and conditioned that power on a timely petition being filed.  But the Tax Court’s jurisdiction to redetermine a deficiency is still in a separate statute.

As applied to the shutdown, that distinction possibly makes a difference.  The IRS computers will automatically set up an assessment if no IRS employee inputs the Transaction Code (TC) indicating that a petition has been filed in the Tax Court.  To account for notification delays, the computers are programmed to wait 110 days after the NOD date before setting up the assessment.  Readers should understand that assessments are made in bulk.  Each week, all the assessments that are ready to be made are aggregated into a single document that is signed, either physically or electronically, by a designated official and, hey presto, all of the taxpayers who were set up for that week are now assessed.

The problem in the shutdown is that the IRS computers keep counting the shutdown days as part of the 110 days.  So if and when the Tax Court decides that a petition ostensibly filed 140 days late is actually timely, whether under a narrow or broad reading of Guralnik or under equitable principles, the question arises as to what to do about that assessment.  The IRS should abate the assessment as §6404 authorizes when an assessment “is erroneously or illegally assessed.” 

  1. Judicial Context

 This is the only factor that supports reading §6213 as jurisdictional.  But it’s not especially strong because it consists only of lower court precedent that relies on other lower court precedent.  As I explained in Part II, the Supreme Court has not hesitated to scrub even long-standing lower court precedent when it believes the new thinking requires a different result.  The only judicial context that counts for the Supremes is their own former opinions!      

Still, there is plenty of lower court precedent holding that §6213 is jurisdictional.  First, the most recent Tax Court case to express an opinion about §6213 was—you guessed it— Guralnik.  That was in 2016.  But the Court in Gurlanik chose to look exclusively at only this factor and gave no analysis on the other four factors, saying:

In cases too numerous to mention, dating back to 1924, we have held that the statutorily-prescribed filing period in deficiency cases is jurisdictional. See, e.g., Satovsky v. Commissioner, 1 B.T.A. 22, 24 (1924); Block v. Commissioner, 2 T.C. 761, 762 (1943). Even if the “equitable tolling” argument advanced by petitioner and amicus curiae were otherwise persuasive, which it is not, we would decline to adopt that argument solely on grounds of stare decisis.

The error here is in relying on old thinking.  As I explained in Part II and also in my paper, the Supreme Court keeps emphasizing that courts should not rely solely on precedent developed under the old thinking.  In particular, my paper looks at both the cases cited by Guralnik here and not only shows how neither is particularly useful but also discovers that the Tax Court itself no longer follows Block’s rationale on how to count jurisdictional time periods!   

The most recent Circuit Court opinion of note is Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017).  There, Judge Easterbrook gave two reasons for holding that §6213 was jurisdictional.  First, he swooned over the magic word “jurisdiction” in §6213 and totally ignored how it related, or did not relate, to the 90/150 time period.  Second, he relied on—wait for it—wait for it—Guralnik!

For many decades the Tax Court and multiple courts of appeals have deemed § 6213(a) as a whole to be a jurisdictional limit on the Tax Court’s adjudicatory competence. [String cite omitted]. We think that it would be imprudent to reject that body of precedent, which places the Tax Court and the Court of Federal Claims, two Article I tribunals, on an equal footing. So we accept Guralnik’s conclusion and treat the statutory filing deadline as a jurisdictional one.

What is especially sad here is that the string cite that I omitted from the quote does not contain a single case after 1995.  Nor could it.  There is not a single court case—much less one from the Supreme Court—that actually analyzes §6213 under the Supreme Court’s new thinking and applies all the factors.   

  1. Legislative Context

The legislative context of §6213(a) also supports reading the provision as a claims-processing rule and not as a jurisdictional requirement.  The legislative context is very similar to that which the Supreme Court found so important in Henderson v. Shinseki, 562 U.S. 428 (2011) discussed in Part II.  In brief, Congress created the original Board of Tax Appeals to give taxpayers a theretofore unavailable judicial remedy.  The legislation creating the BTA was manifestly remedial.   

The remedial nature of deficiency proceedings has been long recognized by the Supreme Court.  I think Helvering v. Taylor, 293 U.S. 507 (1935) is particularly instructive.  There, the taxpayers proved that the Notice of Deficiency contained significant error.  The government argued that taxpayers had to not just show the NOD was wrong but also had to prove up their correct tax.  The Supreme Court responded this way: “The rule for which the Commissioner here contends is not consonant with the great remedial purposes of the legislation creating the Board of Tax Appeals.”

The Tax Court itself has used the remedial nature of deficiency proceedings to soften the effect of its continued holding that §6213 is jurisdictional.  In effect, the Tax Court “cheats” on applying §6213 by choosing from among multiple starting dates to help taxpayers meet the 90 day requirement.  It does so because it recognizes the legislative context of the deadline.  I explain this in my article Equitable Principles and Jurisdictional Time Periods, Part II, 159 Tax Notes 1581 (free download here).

It would be no stretch at all for the Tax Court to apply that precedent to an analysis of whether §6213 is jurisdictional in the first place.  

Under the new thinking, then, four of the five factors point towards reading §6213 as a claims processing rule and not a jurisdictional rule.

After The Shutdown:  Dealing with Time Limitations, Part II

In the second post of the series “After the Shutdown” Professor Bryan Camp connects the shutdown with the thorny issue of when a time limit is jurisdictional. Les

Part I discussed how a reopened Tax Court might apply the Guralnik case to ostensibly late-filed petitions.  I explained how it might apply the case narrowly or broadly.  This post moves beyond Guralnikand starts exploring the correctness of the Court’s underlying assumption: that time limits in the Tax Code for taxpayers to petition the Tax Court to hear their disputes with the IRS are jurisdictional.  A possible silver lining to the shutdown may be that it gives the Court an opportunity to revisit that assumption.

Guralnik is essentially a work-around to equitable tolling.  The Tax Court says it cannot apply equitable principles to most statutes of limitation in the Tax Code because those statutes are, in its view, part and parcel of the Congressional grant of subject matter jurisdiction to the Tax Court.  I believe that view is based on an outdated understanding of the law.  I have posted a paper on SSRN that goes into great detail on what the current law is and how it should apply to three limitation periods in the Code: §6213, §6330(d), and §6015(e).  Today’s post is a summary of what I call the “new thinking” about jurisdictional time periods that the Supreme Court has been wrestling with for the past 10-15 years. For fuller treatment, please see my paper on SSRN.  For the Cliff Notes version, read on.

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Starting in Kondrick v. Ryan, 540 U.S. 443 (2004), the Supreme Court became obsessed with distinguishing between jurisdictional time periods and “mere” claims processing rules.  At that time, courts routinely presumed that all time limits were jurisdictional in nature. By 2013, however, the Court had totally flipped the traditional presumption.  The new thinking is that time limits are presumed non-jurisdictional unless Congress had done something special to indicate otherwise.  Here is how the Court summed it up in Sebelius v. Auburn Regional Medical Center, 568 U.S. 145 (2013).  Be sure to empty your mouth of liquid before you read on.

To ward off profligate use of the term jurisdiction, we have adopted a readily administrable bright line for determining whether to classify a statutory limitation as jurisdictional. We inquire whether Congress has clearly stated that the rule is jurisdictional; absent such a clear statement, we have cautioned, courts should treat the restriction as nonjurisdictional in character. This is not to say that Congress must incant magic words in order to speak clearly. We consider context, including this Court’s interpretations of similar provisions in many years past, as probative of whether Congress intended a particular provision to rank as jurisdictional. 568 U.S. at 153.

The spit-take is on the phrase “readily administrable bright line.”  It makes you wonder what planet the Justices had just visited.  Folks, there is no bright line.  There are, by my count, five indeterminate factors that the Court instructs lower courts to consider.  But fear not!  The task is not hopeless; it is merely very difficult.

Please note that all my case cites are to Supreme Court cases after 2000.  I’ve read what I think are all the relevant ones in order to synthesize these factors.  Note further that you simply cannot trust any court case before then.  And you cannot really trust many lower court cases before the Supreme Court’s “we-really-mean-it” decisions in 2013 (Auburn Regional) and 2015 (Kwai Fun Wong).  If someone cites a case to you, go look at the date to see if it is even attempting to reflect the Supreme Court’s new thinking.  Here is my summary of that thinking, divided into five factors.

  1. Mandatory Language

 The first factor any court will consider is the text of the relevant statute.  If  the text expressly refers to subject-matter jurisdiction or speaks in jurisdictional terms, then that will generally be the end of the analysis.  Under the old presumption, a statute that used mandatory language was presumed jurisdictional and mandatory language made it difficult to overcome the presumption.  Under the new thinking, however, while mandatory language is still one factor to consider, it is no longer very important.  Words like “shall” or “must” just don’t cut it anymore.  The Supreme Court has repeatedly rejected the idea that mandatory language alone—even really emphatic language—makes a time period jurisdictional. Musacchio v. United States, 136 S.Ct. 709 (2016)(defendant in criminal prosecution not allowed to raise statute of limitations for first time on appeal because the limitation period was not jurisdictional despite its mandatory language); United States v. Kwai Fun Wong, 135 S.Ct. 1625 (2015)(limitations period which said a claim brought after the deadline date “shall be forever barred” was not jurisdictional).

  1. Magic Words

A second factor is the presence or absence of the term “jurisdiction.”  It turns out that while the word “jurisdiction” is important, it is not determinative.  The Supreme Court has found a statute jurisdictional even without the word “jurisdiction” in it. Miller-El v. Cockrell, 537 U.S. 322 (2003)(finding that the statutory context of 28 U.S.C. §2253 made it jurisdictional even though it did not contain the magic word “jurisdiction”).  And on the flip side, the Court has also found a statute of limitations to be non-jurisdictional even though the statute contained the word “jurisdiction” in it! SeeReed Elsevier v. Muchnick, 559 U.S. 154 (2010)(overruling widespread agreement among Circuit Courts to hold that the term “jurisdiction” in 17 U.S.C. §441(a) was not a clear enough statement because it just described a court’s ability to hear a particular issue in a larger copyright infringement suit and not the courts ability to hear the rest of the suit).

  1. Statutory Context

A third important factor to consider is the relationship of the limitation period to the surrounding statutory scheme.  That is statutory context.  The Supreme Court has focused on this factor to explain its reluctance to label a limitation period as “jurisdictional” when the limitation period is present in the same statutory section as a concededly jurisdictional grant.  SeeGonzalez v. Thaler, 565 U.S. 134 (2012)(even though 28 U.S.C. §2253(c)(1) was a jurisdictional provision, the neighboring limitation in §2253(c)(3) was not);Sebelius v. Auburn Regional Medical Center, 568 U.S. 145 (2013)(rejecting argument that proximity of 42 U.S.C. §1395oo(a)(3) to concededly jurisdictional requirements in §1395oo(a)(1) and §1395oo(a)(2) made the (a)(3) time requirements also jurisdictional).

  1. Judicial Context

This is just another word for “precedent.”  The Court has not been reluctant to reverse long-standing precedent…when the precedent is from lower courts.  See e.g.Reed Elsevier v. Muchnick, 559 U.S. 154 (2010).  But it’s a different story when the long-standing precedent is of the Supreme Court’s own making.  SeeBowles v. Russell, 551 U.S. 205 (2007)(deciding that the time limits in 28 U.S.C. §2107 were jurisdictional simply because of “our longstanding treatment of statutory time limits for taking an appeal”); J.R. Sand and Gravel v. United States, 552 U.S. 130 (2008)(holding that time limits in 28 U.S.C. § 2501 were jurisdictional because of four prior Supreme Court cases said so and “petitioner can succeed only by convincing us that this Court has overturned, or that it should now overturn, its earlier precedent.”).

  1. Legislative Context

The final type of context that the Supreme Court has factored into its jurisdictional analysis is what I call the legislative context.  Others might call it legislative purpose.  Whatever you call it, the Court has sometimes looked to see whether finding a limitation period jurisdictional would further or hinder the policy goals of the underlying statutory scheme.   I would not put a whole lotta faith in this factor right now because the current composition of the Supreme Court seems to me (and to this USA Today article) to tilt towards textualists. And textualists don’t seem to like looking to purpose unless they get really desperate.

But there is hope.  I think the clearest example of where the Court found legislative context to be the deciding factor is Henderson v. Shinseki, 562 U.S. 428 (2011).  And that opinion was authored by Justice Alito.  There the Court held that the limitation period in 38 U.S.C. §7266(a) for a veteran to obtain court review from an adverse Veterans Administration agency decision was not jurisdictional.  After first finding that neither the factors of text nor precedent pointed clearly in one direction or another, Justice Alito turned to the legislative context.  “While the terms and placement of §7266 provide some indication of Congress’ intent, what is most telling here are the singular characteristics of the review scheme that Congress created for the adjudication of veterans’ benefits.” Focusing then on the Congressional intent, Justice Alito found that Congress meant for the entire statutory scheme for veterans benefits to be highly remedial.

The reason I go into some detail on the Henderson case is because I think it is pretty relevant to how a court might approach interpreting the limitation provisions in the Tax Code.  After all, the whole point of the U.S. Tax Court’s existence is to give taxpayers a pre-payment remedy.  It’s a big-time remedial scheme.  That is, I think, particularly important when considering the limitation periods in §6213, §6330(d), and §6015(e).  More on that in Part III, coming soon.

After The Shutdown:  Dealing with Time Limitations, Part I

Professor Bryan Camp offers the first of a series of posts discussing the shutdown and its impact on taxpayers receiving IRS stat notices and notices of determinations. This is a particularly timely post as we heard at the ABA Tax Section meeting that IRS and Tax Court staff and practitioners are meeting today to discuss the shutdown. Bryan offers some suggestions to minimize the impact of the shutdown on taxpayers with Tax Court filing deadlines. Les

The Tax Court officially closed its doors on December 28, 2018.  During one of the panels at the ABA Tax Section Pro Bono and Tax Clinics Committee meeting this past weekend in New Orleans, the question arose of how the shutdown affected the various administrative and judicial time periods for taxpayers to take various actions.  For example, if the 90 day period in § 6213 for filing a petition expired during the shutdown, would the taxpayer still be able to file a timely petition on the day the Tax Court reopens?

Like Winter, litigation is coming.  The point of this series of posts is to help readers prepare.

The Tax Court may actually have already given us one answer to the question of how the shutdown affects various time periods.  In Guralnik v. Commissioner, 146 T.C. 230 (2016), the Court held that a day the Tax Court was physically closed would not count as part of the §6330(d) time period to protest a CDP Notice of Determination.

Keith Fogg and I have slightly different takes on how Guralnik might apply and he kindly invited me to post my thoughts on the matter.  Today’s post will explain why I believe that Guralnik is strong support for the proposition that none of the shutdown days are days that count for jurisdictional time periods.

In future posts I will explain how taxpayers and the Tax Court might actually make some lemonade from this lemon of a shutdown.  The Tax Court currently holds that the following time periods are jurisdictional: the 90/150 day period in §6213; the 30 day period in §6330(d); and the 90 day period in §6015(e).  That means that the IRS Office of Chief Counsel cannot simply stipulate away the problem.  The looming litigation gives the Tax Court a wonderful opportunity to revisit its thinking about the jurisdictional nature of these statutes.  So in the next series of posts I will summarize a paper I posted on SSRN that explains: (1) the current Supreme Court doctrine for evaluating whether a statutory time period is truly a limitation on a court’s subject matter jurisdiction; and (2) how that doctrine applies to the time periods in §6213, §6330 and §6015(f).

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Facts and Holding in Guralnik

In Guralnik, the taxpayer (TP) was trying to file a collection due process (CDP) petition.  On the day before the 30thday, the TP sent his petition using Fed Ex “First Overnight” service.  Fed Ex was unable to physically deliver the petition the next day (the last day of the 30 days) because the Tax Court was officially closed that day due to a snowstorm. Fed Ex successfully delivered the petition the next day, one day late.  The question was whether the petition was timely.

The TP first asked for equitable tolling.  Keith Fogg and Carl Smith filed an amicus brief in the case, arguing the Court could do that because the 30 day period was not jurisdictional.  The Tax Court rejected the argument because, it said, §6330(d) made the timely filing of the CDP petition part of the jurisdictional grant. The Tax Court reasoned that while it could apply equitable tolling to what it called “claim-processing rules” it could “not apply equitable tolling to a jurisdictional filing requirement.”

The TP next argued for the §7502 statutory mailbox rule.  The Tax Court rejected that argument because the particular Fed Ex service used (“First Overnight”) was not listed as an approved private delivery service.  If the TP had just used “Standard Overnight” that would have been fine.  But the “First Overnight” was a new service and the IRS had not updated the list of approved private delivery services to include it. And you wonder why people hate lawyers.

The TP next argued that the snow day was a “legal holiday” within the meaning of §7503.  The Tax Court said “nope.”

But the Tax Court then latched onto a really nifty idea.  It decided that Tax Court Rule 1(b) allowed it to adopt the rules for counting days contained in Federal Rules of Civil Procedure (FRCP) 6.  Included in FRCP 6 is a rule for dealing with days when a court is inaccessible.  FRCP 6(a)(3)(A) says that

 Unless the court orders otherwise, if the clerk’s office is inaccessible…on the last day for filing…then the time for filing is extended to the first accessible day that is not a Saturday, Sunday, or legal holiday.

The Tax Court happily reasoned that

procedural rules for computing time are fully applicable where the time period in question embodies a jurisdictional requirement. Rather than expanding a court’s jurisdiction, Civil Rule 6 simply supplies the tools for counting days to determine the precise due date. (Internal quotes and cites omitted).

The Tax Court then applied FRCP 6(a)(3) to the facts of the case and did not count the snow day as part of the 30 day time period set out in §6330(d).  Wrote Judge Lauber:

We conclude that Civil Rule 6(a)(3) is “suitably adaptable” to specify the principle for computing time when our Clerk’s Office is inaccessible because of inclement weather, government closings, or other reasons. Civil Rule 6(a)(3) provides that the time for filing is then “extended to the first accessible day that is not a Saturday, Sunday, or legal holiday.” Because the petition was filed on February 18, 2015, the first accessible day after the Court reopened for business, the petition was timely filed and we have jurisdiction to hear this case.

Application of Guralnik to Shutdown Cases:  The Good, the Bad, and the Different.

One could read Guralnik as a supersized mailbox rule.  It would apply to taxpayers faced with a time period that expired during the shutdown.  Such taxpayers could still successfully file a timely petition so long as they did so on “the first accessible day after the Court reopen[s] for business.” I think this is how Keith and most folks read the case and I admit it’s the most solid reading.  Let’s call it the narrow reading.

The Good

The narrow reading of Guralnik has the advantage of letting the Court avoid messy equitable inquiries.  It’s a bright-line counting rule and could really help process a bunch of cases into the system and get them to a quicker resolution on the merits.  That’s good.  And it will probably give relief to a large number of taxpayers who are actually able to quick-like-a-bunny file on the day the Tax Court reopens.  It will also give relief to taxpayers who have attempted to file but whose petitions were undeliverable because of the shutdown and are being held for re-delivery by their chosen delivery service.  That’s also good.

The Bad

The first downside of the narrow reading is that it would only help those taxpayers whose deadline hit during the shutdown.  While that is likely the largest group of affected taxpayers, there may be some who received their Ticket to the Tax Court (be it a Notice of Determination or Notice of Deficiency or other ticket) at some point during the shutdown but at a time where their deadline comes after the shutdown ends.

For example, let’s say a taxpayer received an NOD 40 days ago, when the shutdown had not begun.  There are still 30 days left to petition the Tax Court, but the shutdown has prevented the taxpayer from dealing with the NOD, either by filing a petition or by going to Appeals.  Or perhaps a taxpayer receives an AUR NOD during the shutdown.  I have heard of taxpayers still receiving automated notices of intent to levy during the shutdown (and having no one to call), but I welcome comments on whether some IRS automated processes are still spitting out NODs.

For these types of taxpayers, the narrow reading of Guralnik means they must ignore the shutdown and plan on the Tax Court reopening in time for them to make a timely filing without having the usual opportunity to resolve the matter with Appeals or other IRS office.

The second downside to the narrow reading is that it requires taxpayers to assiduously monitor the shutdown situation and the Tax Court’s status.  They cannot plan.  They, or their representative must carefully monitor the Tax Court’s status because the shutdown has essentially reduced their limitations period to one day.  Especially if the Tax Court reopens with no warning, very few taxpayers would be able to meet the  “the first accessible day after the Court reopen[s] for business.”  So the cautious use of Guralnik would help only those taxpayers who filed their petition on the FIRST day the Court reopens (hereinafter “the Magic Day”).

One way the Court could ameliorate this second downside is to delay its reopening after the Shutdown Ends.  For example, the Court could post an order that says it will remain closed for the first 10 business days after the President signs an appropriation bill funding the Court.  That would not only allow taxpayers time to get their acts (and petitions) together to file on the Magic Day, it will also allow Tax Court personnel to clear the decks of accumulated work, re-calendar cases, and prepare for the Magic Day snowstorm of filings.  This idea was floated at the ABA Tax Section Meeting last week.  I think Keith came up with it, but cannot recall for sure.

A Different Understanding of Guralnik?

The narrow reading of Guralnik limits its application to only those situations where the last day of the applicable deadline falls on an inaccessible day.  But the Court could also apply Guralnik more broadly, in a way that would ameliorate both downsides.  I take this idea from Judge Lauber’s reasoning: “Rather than expanding a court’s jurisdiction, Civil Rule 6 simply supplies the tools for counting days to determine the precise due date.”  The idea here is to read FRCP 6 as a tolling provision and not just as a bulked-up mailbox rule.

Judge Lauber’s reasoning recognizes the underlying concern of FRCP 6’s counting rule:  unpredictable events should not count against limitation periods.  The idea of unpredictability was central to the D.C. Circuit’s opinion in In re Swine Flu Immunization Prod. Liab. Litig., 880 F.2d 1439 (D.C. Cir. 1989), a case the Tax Court relied on in Guralnik.  The Swine Flu court used Civil Rule 6(a) “as a guide to interpreting the `jurisdictional’ statute establishing the time for filing with the agency,”  (emphasis supplied). The court there  applied the idea of FRCP 6 to an administrative deadline, excluding both the final Sunday and the following day when government offices were closed on account of a snowstorm.  Notice that, by its plain language, FRCP 6 deals only with counting dates relating to court filings.  But the idea of unpredictability is larger than the words.  Put another way, the words of FRCP 6 embody an idea.  The idea of unpredictability.  The D.C. court explained: “we find it inconceivable that Congress would have wished to bar plaintiffs who fail to anticipate on Friday that the Government will decide to close a filing office the following Monday due to a snowstorm.”

Both Judge Lauber’s reasoning and the D.C. Circuit’s reasoning allow for a more generous reading of Guralnik.   If the principle underlying FRCP 6(a)(3) is truly that we do not count inaccessible days that arise because of unpredictable or extraordinary circumstances—whether they be snowstorms or shutdowns—then such days should not count, period.  No logic limits the counting rule to only the situations where the last day of the deadline falls on an inaccessible day.

This broader reading of Guralnik would not be decision that forces the Court to apply equitable principles to each case.  It would be a decision simply about whether the days when the Court is inaccessible were predictable or not.  Saturdays and Sundays and federal holidays are predictable.  They are on the calendar.  But snowstorms and shutdowns are not predictable.  So those days should not “count” for limitation periods.

One obvious barrier to this broader reading of Guralnik is that the text of FRCP 6 talks only about situations where the last day falls on an inaccessible day.  But, again, just as the D.C. Circuit applied FRCP 6 to a situation that was not covered by its plain language, so can the Tax Court here apply the idea of FRCP 6—the purpose of FRCP 6—to the shutdown situation.  Again, in the words of the D.C. Circuit: “Statutory provisions laying down time periods for taking appeals, like any other enactments, must be interpreted and applied by courts; in so doing, we use the federal rules as guides. Surely, the jurisdiction of the federal courts to construe the jurisdictional provisions of a statute cannot be a matter of serious dispute.” (citations and internal quotes omitted).

The insight of the D.C. Circuit, adopted by the Tax Court in Guralnik is that taxpayers should not be held accountable for situations which they cannot neither predict or control.  The unpredictability of the shutdown mirrors the unpredictability of snowstorms.  Nay, it magnifies that unpredictability.  No one can predict precisely when the shutdown will end.  This inability makes it impossible for taxpayers and their representatives to plan their filings.  They simply cannot determine the precise due date.  Every day the shutdown continues is another day that some deadlines have run and is another penultimate day for other deadlines.  Will the shutdown continue the next day?  Will the shutdown continue for three more days?  Who the heck knows!  Similarly, taxpayers subject to a 90 day deadline who received their Tax Court ticket before the shutdown will have unexpectedly lost all the days of the shutdown to resolve their case in the Office of Appeals.

Remember, the FRCP is just a standardized rule of procedure, promulgated by the Supreme Court.  The courts can, and do, regularly interpret the FRCPs using a common law case-by-case approach.  Recent opinions on the meaning and application of FRCP 8(a)(2) are good examples.  So if the D.C. Circuit can apply FRCP 6 to an agency deadline by using the idea that it was “inconceivable” that Congress intended the limitation period to include inaccessible days, the Tax Court can do the same here and for the same reason: it is inconceivable that Congress intended the 30 and 90 day periods within which to petition the Tax Court for relief to be swallowed up by a government shutdown that is now over 30 days in length.  Those shutdown days simply should not count towards the applicable limitation period.

An alternative approach to applying this broader reading of Guralnik to the shutdown situation would also treat FRCP 6 more as a tolling provision, but in a more limited way than allowing any and all inaccessible days to not count towards the applicable limitation period.  Again, keep in mind we are not talking about equitable tolling.  The question is about finding an administrable bright-line counting rule to deal with the cases filed after the shutdown ends, both those cases filed on the Magic Day, and those cases that miss the Magic Day but are still filed timely….if you don’t count the shutdown days.

The alternative approach would recognize that a single inaccessible day in the middle of a 90 day period or 2 year period would be little more than a Saturday or Sunday or holiday in terms of impact.  It would not interfere with planning nor with the ability of the taxpayer to determine the precise due date for the Tax Court petition the way that this interminable shutdown does.  But when, as here, the inaccessible days keep piling up and their end point is unknowable, the FRCP 6(a)(3) could be applied to acknowledge that difference.  One bright line interpretation would stop counting inaccessible days when they reach some percentage of the applicable limitations period, perhaps over a third.  Another bright line would be to say inaccessible days do not count when they are in excess of four in a row (longer than any three day weekend).

Next Posts

The Court could also take an equitable tolling approach by apply FRCP 6 to the Magic Day filings but then evaluating all other filings on a case by case basis.  That would require the Court to depart from its long-standing view that sections 6213, 6330(d) and 6015(e) are jurisdictional statutes.  I think there is a very good case to be made why the first two are not jurisdictional and a very weak case for the third.  That is the subject of future posts in this series.

IRS Updates Contingency Plan

Frequent contributor Bob Kamman discusses the IRS’s updated lapsed appropriations contingency plan for the filing season. Les

The first thing to realize about the IRS Filing Season Contingency Plan is that it is already outdated. As the Overview states,

“The IRS Lapse in Appropriations Contingency Plan describes actions and activities for the first five (5) business days following a lapse in appropriations. The plan is updated annually in accordance with guidance from the Office of Management and Budget (OMB) and the Department of Treasury. While we do not anticipate using the plan, prudent management requires that agencies prepare for this contingency.”

Although the cover sheet is dated January 15, 2019, that excerpt from Page 5 is dated January 11, 2019.  Filing season, it states, runs from January 1 through April 30, 2019.  What happens after the first five days?

“In the event the lapse extends beyond five (5) business days, the Deputy Commissioner for Operations Support will direct the IRS Human Capital Officer to reassess ongoing activities and identify necessary adjustments of excepted positions and personnel.”

In lay terms, this is known as “flying by the seat of your pants.”

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The general rule is that all IRS employees must stay home because they are not essential and there is no money to pay them.  (Of course, history tells us that they will be paid when the shutdown ends.)  The exception to the rule is that they must work, without pay, if they fall into one of several “excepted” categories.

Category “A” includes activities that (A1) are already funded, like those related to TCJA implementation and disaster relief; activities (A2)  “authorized by statutes that expressly permit obligations in advance of appropriations; and the catch-all (A3) “authorized by necessary implication from the specific terms of duties that have been imposed on, or of authorities that have been invested in, the agency.”  Until anyone objects, this A3 means what any given lawyer says it means on any given day.

Then there are “excepted” employees (remember, these are the ones who must show up to work) in Category B.  Their jobs are necessary to safeguard human life (see Police Officers, below) and, more often, to protect government property.

To understand this category, note that “tax revenues constitute Government property which the Service must safeguard.”  But not just money is involved:

 “…the Service may continue processing tax returns to ensure the protection of those returns that contain remittances. Activities necessary to protect other types of Government property, including computer data and Federal lands and buildings, may continue during a shutdown as well.”

In fact, not just money, buildings, and computers are at stake.  It is the IRS reputation itself.  The agency must “maintain the integrity of the federal tax collection process.” (This mostly seems to come under A3, not B, for those keeping score at home.)

Finally, there is the “turn out the lights” Category C, for activities that “provided for the orderly termination of those functions that may not continue” during a shutdown.

Those are the rules.  Here are some examples of how they are being applied.

Category A1: This includes “Income Verification Express Service (IVES) and Revenue & Income Verification Service (RAIVS) Photocopy Programs.”  These allow mortgage lenders  to verify taxpayer incomes.  It was recently determined that this was “excepted” work, perhaps because it is funded by user fees.

Category A2: This one is easy.  IRS does not have any.  It just shows up in the report because Treasury needs it for other reports.

Category A3: “Maintaining minimum staff necessary to handle budget matters related to the lapse in appropriations.”  Presumably these employees will have other work to do, when the lapse ends.

Category A3 also includes “Activities necessary for the payment of refunds, including processing electronic returns through issuance of refunds; processing “Paper Refund Tax Returns” through issuance of refunds; and processing “1040X Amended Refund Returns Adjustments including Carrybacks, Amended Returns, Duplicate Filed Returns (DUPF), Correspondence, Injured Spouse Claims, Disaster Claims, F843 Claim for Refund and Request for Abatement in support of issuing refunds.”

Issuing those refunds is necessary, not because they are government property, but because they are part of a system that maintains IRS integrity.

For Category B, there is a long list of activities necessary for the protection of human life or government property.  “The risk to life or property must be near at hand and demand an immediate response. To ensure that employees only perform functions that meet this requirement, each business unit will conduct regular meetings throughout a lapse in appropriations to identify actual imminent threats and activate excepted personnel only as required to perform related excepted activities.”   Here are just some of these examples:

  • Completion and testing of the upcoming Filing Year programs
  • Processing Remittances including Payment Perfection
  •  Responding to taxpayer filing season questions (call sites)
  • Continuing the IRS’ computer operations to prevent the loss of data
  • Protection of statute expiration, bankruptcy, liens and seizure cases
  •  Protecting Federal lands, buildings, and other property owned by the United States
  • Upcoming Tax Year forms design and printing
  • Maintaining criminal law enforcement and undercover operations

(You might find it odd that designing next year’s forms has at least the same priority as criminal law enforcement.  You will agree, however, once you see this year’s forms.)

Those are the activities that are necessary.  Here are some examples of work that is not:

  •  Non-automated collections
  •  Legal counsel
  • Taxpayer services such as responding to taxpayer questions (call sites) (But only during Non-Filing Season.  During Tax Season, they hope to operate.)
  • All audit functions, examination of returns, and processing of non-electronic tax returns that do not include remittances

So let’s not call it a shutdown.  When audit and collection work is suspended, let’s call it a holiday.  Were it not for the staff trying to prevent statute expirations, we could almost call it amnesty.

Here are some details from the latest plan:

Chief Counsel

“Chief Counsel’s primary responsibility during a lapse is to manage pending litigation, the time-sensitive filing of motions, briefs, answers and other pleadings related to the protection of the government’s material interests. Due to Counsel’s separate litigation function, the number of excepted Counsel positions will not align with excepted activities authorized in other IRS business units. Counsel’s plan assumes that the Federal and District Courts will be open, and that litigation will continue uninterrupted. The plan excepts, on an as needed basis, those personnel assigned to litigation that is scheduled for trial or where there is a court-imposed deadline during the first five days of a lapse. Personnel are not generally excepted to perform litigation activities where a trial or other court-imposed deadline is scheduled more than five days after the start of the lapse. Personnel assigned to those cases should seek continuances as part of an orderly shutdown. If a continuance is denied, the case will be reviewed to determine if work on the case may be excepted. . . .

“Chief Counsel personnel are also excepted, on an as needed basis to provide required legal advice necessary to protect statute expiration, and the government’s interest in bankruptcy, lien, and seizure cases.”

Taxpayer Advocate Service

There are now two “excepted” Category B employees allowed in each local office: The local TA, and either a group manager or a “lead case advocate.”  Their jobs are to “Check mail to comply with the IRS’s requirement to open and process checks during a shutdown while also complying with the statutory requirements that TAS maintain confidential and separate communications with taxpayers and that TAS operate independently of any other IRS office . . .Screen the mail for incoming requests for Taxpayer Assistance Orders and notify the appropriate Business Unit that a request has been made tolling any statute of limitations.”

It doesn’t sound like they are allowed to answer the phone or work cases.  Protecting IRS integrity doesn’t extend this far?

Small Business / Self Employed

In this operating division, 2,614 of the 2,938 Category B employees are in Collection and another 264 are in Examination. But wait – what happened to that  holiday?

Most of them are Collection Representatives who “carry out revenue protection activities that include responding to taxpayers who have received a collection notice through the Automated Collection System and clarifying the payment process; assisting taxpayers with setting up installment agreements for tax payments; assist taxpayers with general collection processes; serve as the gateway for transferring taxpayers to Accounts Management for appropriate filing season inquiries;  and provide assistance with releasing levies and liens as required by law.” In other words, you can contact them but they won’t contact you.

Those in Examination “protect statute expiration/assessment activities, bankruptcy or other revenue generating issues.   Open incoming mail to identify documents required to be processed to protect the government’s interest during shutdown. Complete computer operations required to determine necessary actions, prevent data loss and route documents associated with imminent statutes.”

Wage And Investment

These are the workers at 10 Service Centers and 15 call sites,  most of whom are in Category A3.  IRS hopes that 12,961 show up for Submission Processing, and 17,520 show up for Accounts Management, which includes call sites.

From other sources, I find that at least 6,600 of these employees are seasonal.  Would you take a temporary job with IRS in January, with the hope of being paid by April? It might make a difference if you needed to pay for daycare.

How many in W&I “Refundable Credits Policy & Program Management” will work on “Pre-refund case selection to protect improper payments from being released to ineligible taxpayers and perfect refunds to verify the refund is appropriate”?  An army of 51.

Compare that with the 469 needed for the IVES and RAIVS programs.  IVES “provides express return transcript, W-2 transcript, and 1099 transcript delivery services to mortgage lenders and others within the financial community to confirm the income of a borrower during the processing of a loan application. RAIVS services taxpayer request for copy of tax return.”

Online Services

In Category B, 25 employees are needed because “Online Services (OLS) is responsible for the development and continuity of operations for IRS.gov, which is the agency’s exclusive external facing website servicing the public. IRS.gov is the means in which taxpayers may continue to file returns and submit remittances online. OLS anticipates that 9 employees will be needed for the duration of the shutdown to maintain the IRS.gov website.”

Facilities Management

Did you know IRS has Police Officers?  There are nine of them kept on duty who along with 13 Security Specialists and five Safety Officers “support general security services that increase as the IRS population escalates in excepted employees during the Filing Season.   Additionally, security and emergency response actions are influenced by other external activities such as bomb threats, suspicious packages and threats to employees. Situational Awareness Management Center/Threat Incident Reporting is operational 24/7 during a shutdown.”

Leave (Not Brexit) Policy

Finally, current and former IRS employees should find this interesting.  I am not sure it  is how the situation was handled in previous shutdowns, but maybe I am thinking of snow days.

“Managers should advise employees who are scheduled to be on annual, sick, court, or military leave that, if a lapse in appropriations occurs while they are on leave, their leave will be canceled, and they will be placed in a furlough status. According to 5 CFR § 752.402, a furlough means ‘the placing of an employee in a temporary status without duties and pay because of lack of work or funds or other non-disciplinary reasons.’”

What IRS Taught Me about Building Barriers

During the IRS and Tax Court shutdown, we have less material to work with and more time for observations and reminiscences from readers.  Chronic contributor Bob Kamman assures us that there must be others who can do better than this. 

I have stories about shutdowns that I could tell from my time at the government but mostly my impression of shutdowns is that they are an incredible waste. I feel it would not take much to find a better way to fight over disagreements about the budget.  

Bob tells us a story about barriers and Service Centers. Having been at several Service Centers, I can say that the barriers to entry there pale by comparison to entry to the Martinsburg Computing Center where the IRS stores the masterfile information and creates significant barriers to entry. Keith

Before I get to that story, here is something to watch for when this “partial government shutdown” finally ends.

In November 1995, the IRS was shut down for only four days. Some of the rest of the government then closed again for 22 days, when negotiations between President Clinton and Speaker Gingrich failed, but IRS was spared.

The White House was not reluctant to place blame on Congress, so it released a report showing how much tax was not assessed or collected during the brief furlough of examination and collection employees. The Treasury Department calculated that $400 million was lost by lack of enforcement action by IRS over a four-day period. That round number of $100 million a day translates to $165 million in today’s dollars, or about a billion dollars for every six working days.

This estimate was confirmed in a White House report on the costs of the October 2013 federal government shutdown. “IRS enforcement and other program integrity measures were halted,” it stated. “IRS was unable to conduct most enforcement activities during the shutdown, which normally collect about $1 billion per week.” (Emphasis in original.)

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Will similar numbers be provided this time? Or maybe there will be a compromise. Most federal budget analysts agree that every dollar IRS spends on enforcement brings in about $10 of revenue. The Democrats have offered $1.6 billion for border security. The President could refuse such a large sum. “Just give me $500 million more for IRS,” he could say. “Then let me spend the $5 billion it produces, how I want.”

(Much of that half billion would be paid in salaries and come back to the government anyway. IRS employees are notorious for paying their income taxes.)

But the current impasse reminds me of my IRS days, in the mid-1970s, when I was an intern in the National Office’s Taxpayer Service division. Interns were not unpaid college students brought in for the summer (like my son in 2003, at the White House photo office). We were full-time permanent employees, recruited nationally for training that would create the next generation of IRS leadership. The assignment lasted for a year, followed by placement in some essential program.

There were only three of us in Taxpayer Service, but there were more than 20 “Admin” interns who rotated among what were then the four divisions of the Administration function (if I remember them correctly): Personnel; Facilities Management; Training; and Fiscal.

There were occasional “classes” for interns when senior executives would lead discussions of IRS problems and how they had been solved. When it was the turn for Facilities Management, the topic for discussion was whether a rather large sum should be spent to build fences around Service Centers.

I doubt any of us had ever considered this question. Service Centers are huge buildings on large parcels of real estate. For example, the one in Ogden, Utah, is a single-story brick building with 504,741 gross square feet located on a 60-acre site. It operates 24 hours a day, 7 days a week, and provides work space for approximately 2,500 federal employees.

 

That would require a lot of chain link, we agreed. Of course, security is an important issue for all government buildings, but especially IRS work locations. Who would argue with fencing them off?

But fences are meant either to keep people in (not an issue at IRS) or to keep people out. So whom were we trying to exclude?

This was before daily headlines about terrorist threats. But there have always been angry taxpayers, including some with mental-health issues. And by then the “Anarchist Cookbook” had instructions for building bombs. So fences were necessary.

Or were they? The class was asked to imagine a potential bomber driving past the Service Center, noticing a fence around it, and therefore deciding it was not worth the effort to penetrate. If this person existed, then the cost of the fence would justify discouraging the “casual bomber.” But of course, someone intent on bombing IRS could probably figure out a way to get over, under, around or through that fence.

The point was: The fence is not there for security. It is there to create the appearance of security. The otherwise-determined bomber, it was hoped, would decide that “if there is that much security on the perimeter, there must be a lot more of it inside.” So according to the cost/benefit analysis of the day, the fences were built and the contractors paid.

This anecdote may have nothing to do with current affairs, but for me there are always reminders.   For example, I thought of it when I saw this April 2018 story about what happened to a fence at the Fresno Service Center – which, however, was breached from the inside out.

 

A Question of Identity – Interest Netting, Part 2

Today, guest blogger Bob Probasco brings us the second part of his post on interest netting. At the end of this part he refers to an article in the most recent edition of The Tax Lawyer. If you are a member of the ABA Tax Section you can link through to the article after signing in as a member. If you are not a member but have access to Heinonline, Westlaw or Lexis you can also get to articles of The Tax Lawyer. As the editor of that law review, I invite you to look at the articles there which explore issues in much more depth than we are able to do on the blog. I hope you would agree with me that after 70 years it continues to be a premier tax law review. If you have a law review article on tax you want to publish, consider sending it to The Tax Lawyer. Keith

We’re continuing to explore the “same taxpayer” issue for interest netting under Section 6621(d), for which the Federal Circuit issued an important decision in November. In Part 1 of this two-part series, I discussed other approaches to netting, the background of Section 6621(d), early IRS guidance, and the first of four major cases that have addressed this question. In Part 2, I’ll wrap up with the remaining cases plus some thoughts about the future.

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The evolution of “same taxpayer”

Section 6621(d) allows netting only of equivalent overpayments and underpayments “by the same taxpayer.” Part 1 covered what I consider one of the more interesting attempts at IRS guidance on this issue, Field Service Advice 2002-12028,. It concluded that to qualify for this benefit, one must “both be liable for the underpayment of tax, and entitled to the overpayment of tax.” This kept the restrictive adjective “same” while creating exceptions for mergers and consolidated returns by attributing overpayments or underpayments of one corporation to another. As taxpayers starting filing cases for expansive interpretations of “same taxpayer,” the DOJ retreated from the IRS guidance to very narrow interpretations that would, in practice, make interest netting virtually impossible for the large corporations that most need it.

Balances that arose prior to consolidation: Energy East Corp. v. United States, 645 F.3d 1358 (Fed. Cir. 2011), aff’g 92 Fed. Cl. 29 (2010). This case involved acquisitions in which the subsidiaries survived as members of an affiliated group and tried to net overpayments and underpayments for pre-acquisition tax years. The taxpayers lost. That was probably the right result, although I still have some reservations. The case was decided by a “temporal requirement” that later cases borrowed. Read Part I for the gory details.

And now on to the other three cases.

Attribution of an overpayment on a consolidated return to its members: Magma Power Co. v. United States, 101 Fed. Cl. 562 (2011). Magma Power had an underpayment for its 1993 tax return; it was acquired by CalEnergy on February 24, 1995; it was included thereafter on consolidated tax returns with CalEnergy and other subsidiaries; and the consolidated group overpaid its taxes for 1995-1998. The question was whether Magma’s 1993 underpayment could be netted against the consolidated group’s overpayments. If the situation were reversed – a 1993 overpayment by Magma and consolidated group underpayments for 1995-1998 – it would be an easier decision because all group members are severally liable for group underpayments. But this fact pattern is the one that FSA 200212028 answered as “theoretically possible.”

Magma provided an affidavit to the effect that a substantial portion of the overpayments by the consolidated group were attributable to Magma. How substantial? More than 100% of the reduction of consolidated taxable income resulting in the 1995 and 1997 overpayments; 92% of the reduction of consolidated taxable income resulting in the 1996 overpayment; and 79% of the reduction of consolidated taxable income resulting in the 1998 overpayment. The government disputed the plaintiff’s methodology and amounts but conceded that some portion of the overpayments were attributable to Magma.

The Court of Federal Claims’ opinion is one of the best and most comprehensive analyses of this issue I’ve read – kudos to the court and the litigants. I think it’s also potentially the most important for future developments in interpretation of Section 6621(d). The court interpreted “same taxpayer” as “same TIN.” In that respect it accepted the government’s argument. But the court also concluded that overpayments could be attributed to individual members of a consolidated group, not just underpayments (for which all members are severally liable per regulation); the government appeared to concede neither. The court also rejected the “complete identity” or “exact DNA identity” argument of the government. Key to the decision was the court’s observation that the group is not itself a taxpayer, merely a method of combining all the members for computing tax liability; the members of the group are the taxpayers. Further, the tax liability of the consolidated group must be allocated to individual members as part of tracking E&P for each member pursuant to Section 1552. Either individual members pay their allocated share of the tax liability or the amount they don’t pay would be treated as a contribution from the other member who did pay, Treas. Reg. section 1.1502-33(d)(1). Because the tax liability is allocated and payments by the group are allocated, that should be enough to allocate overpayments to individual members as well, shouldn’t it?

After a careful consideration of legislative history, previous IRS guidance, and the remedial nature of the legislation, the court held that pre-merger Magma Power and post-merger Magma Power “should be properly considered the same taxpayer to the extent the consolidated group’s overpayment can be traced to the company” (emphasis added). Because there had not yet been an agreement by the parties or determination by the court of how much of the overpayments could be attributed, the court ordered the parties to propose further proceedings to resolve the case.

The parties entered a stipulation as to the amount owed about eleven months later – interest computations can be difficult and securing the required government approvals for settlement can drag out – and the court entered judgment. The government filed a notice of appeal on November 20, 2012, and then filed a motion in the Federal Circuit to dismiss the appeal on December 12, 2012. We have no assurance of how the Federal Circuit would rule on this issue but apparently, DOJ was not confident or at least wanted to avoid the risk of an adverse precedent.

This analysis seems to follow the “attribution to a single entity” framing of FSA 200212028 rather than a “two entities are treated as the same taxpayer” framing.

Statutory mergers, various scenarios: Wells Fargo & Co. v. United States, 827 F.3d 1026 (Fed. Cir. 2016), aff’g in part and rev’g in part 119 Fed. Cl. 27 (2014). Stephen Olsen posted here a few years ago when the Court of Federal Claims and Federal Circuit opinions came out.

This case included many different factual circumstances, resulting from a series of seven mergers and 64 separate refund claims. The government and Wells Fargo identified three “test claims”; the principles would govern all of the claims. Wells Fargo (represented by the same firm that represented Magma Power) argued that merged corporations are always treated as the “same taxpayer,” regardless of the timing of the payments. The government argued that taxpayers are only the “same taxpayer” if they have the same TIN at the time of the payments.

Scenario One: Wachovia had an overpayment for 1993; First Union had an underpayment for 1999. The two merged in a statutory merger in 2001, and First Union survived. The government argued that the netting was not available because the two corporations had different TINs and were unaffiliated at the time of both the overpayment and the underpayment.

Scenario Two: First Union had an overpayment for 1993, underwent four statutory mergers between 1993 and 1999 (in each of which it was the surviving corporation), and First Union had an underpayment for 1999. The government conceded the availability of netting in this situation; “the underpaying and overpaying company retained the same TIN because it was the surviving corporation in the mergers.”

Scenario Three: CoreStates had an overpayment for 1992 and merged with First Union in 1998 with First Union surviving. Then First Union had an underpayment for 1999. The government argued that netting was not available because the two corporations had different TINs.

The Federal Circuit mentioned the “same taxpayer = same TIN” rule from Magma Power, without explicitly adopting the rule. But it mischaracterized the Court of Federal Claim’s application of the rule as that “the consolidated group or corporations met the ‘same taxpayer’ requirement because they shared a single TIN.” As discussed above, that is not what the CFC did in Magma Power. The court focused on the TIN of the subsidiary, Magma Power, rather than the consolidated group. It allowed netting, but only if the consolidated return’s overpayment could be traced or attributed to the company.

Based on merger law, the Federal Circuit concluded that two merging corporations are the “same” regardless of which survives. The Court of Federal Claims declined to apply the temporal requirement from Energy East because joining an affiliated group (when both corporations maintain their separate identity) differs from a statutory merger (in which only once corporation survives). But the Federal Circuit disagreed, applied the temporal requirement, and allowed netting in Scenario Three but not in Scenario One.

In Energy East, the Federal Circuit seemed to say that the taxpayer must be the same before both the underpayment and the overpayment. Of course, that was the situation being decided; the court wasn’t dealing with a situation with an overpayment made prior to the acquisition. But in Wells Fargo, the court allowed netting in Scenario Three, when the overpayment was made prior to the merger. Apparently, the requirement is that the taxpayer must be the same when the overpayments or underpayments are made. That seems plausible; there are no overlapping balances to be netted until the second balance comes into existence.

I don’t find the temporal requirement imposed in Energy East and Wells Fargo completely persuasive. The court interpreted an overpayment or underpayment as being associated with a particular date rather than a period. That’s understandable, given the language in Sections 6601(a) and 6611(b). But I think the antiquated language of the Code has effectively been superseded by Avon Products Co. v. United States, 588 F.2d 342 (2d Cir. 1978), and the realities of tax administration. In Avon Products, the Second Circuit concluded that individual transactions must be netted into a single balance before computing interest. The IRS has acquiesced in not only the result of that case but also the reasoning. Over a period of time, the single balance required by Avon Products may change from underpayment to overpayment back to underpayment, and the traditional determinations of the “date” of an overpayment and underpayment no longer fit well. They are better considered in terms of a period rather than a particular date when they arise. Admittedly, no court has yet reached the same conclusion.

Further, the “last antecedent rule” is simply an interpretative standard, not an ironclad rule any more than other canons of statutory construction. Given the remedial nature of netting, it would have been possible to interpret the provision more broadly. Even if both the underpayments and overpayments began before the merger or joining into an affiliated group, netting might be permissible if both are still outstanding afterward. At that point, once the two corporations become the “same taxpayer,” the harm that Section 6621(d) is intended to remedy exists. Netting might be allowed from that point. This argument is likely stronger for mergers than for affiliated groups that file consolidated returns.

But that’s not what the court ruled.

Not part of the parent’s consolidated return: In Ford Motor Company v. United States, 908 F.3d 805 (Fed. Cir. 2018), aff’g 132 Fed. Cl. 104 (2017), the court concluded that Ford Motor Company (“Ford”) and a wholly-owned subsidiary were not the “same taxpayer” for purposes of interest netting. Against the backdrop of the earlier cases, Ford seems an even harder case for the taxpayer to win. Ford formed Ford Export Services B.V. (“Export”), its wholly-owned subsidiary, in 1984 as a foreign sales corporation. Because FSCs must be foreign rather than domestic corporations and a consolidated group cannot include foreign corporations, Ford and Export filed separate U.S. income tax returns between 1990 and 1998. Ford had an overpayment for the 1992 tax year and Export underpaid its taxes for 1990-1993 and 1995-1998. Ford claimed that Ford and Export were the same taxpayer because Ford “exercised near complete control over Export’s operations” and “Export never performed any activity that Ford did not direct.”

Instead of relying on a dictionary, the Federal Circuit concluded that the meaning of “same taxpayer” depended on “background legal principles” at the time Congress enacted Section 6621(d). One of those background legal principles was that a parent corporation and its subsidiaries are separate taxable entities. (Cases cited in the opinion concluded that even if the parent and subsidiaries join to file a consolidated return, the group is not as a single entity and individual members retain their identity.) The court identified “the unique legal effects of a merger” as an exception to that general rule, citing Wells Fargo. Ford argued that the FSC statute was another relevant background legal principle that would constitute an exception to the general rule, but the court disagreed. There was no statutory provision for FSCs comparable to the continuation of the identity of the acquired corporation in the successor corporation after a merger.

The plaintiff’s arguments here were based on control and direction because of the factual situation: Export was not a member of the affiliated group that filed a consolidated return. That suggests that the decision may be relatively narrow in scope and may also help explain why the court reached this decision. This level of “control and direction” will most often occur with a subsidiary that meets the 80% voting and value test for an includible corporation in an affiliated group (even if not includible for other reasons such as being a foreign corporation). Consider three categories such subsidiaries might fall into: (a) included in the affiliated group; (b) not included in the affiliated group but a foreign corporation with no US income; and (c) not included in the affiliated group but a corporation that files a US tax return. If the Federal Circuit eventually blesses netting involving attribution from consolidated returns, similar to FSA 2001-12028 and Magma Power, the effect of the decision in Ford may be limited to category (c). Further, allowing netting based on control and direction, rather than attribution from a consolidated return, would impose more of an administrative burden on the IRS because the factual determination is more difficult. It’s not well suited for a general background legal principle to apply as an interpretation of “same taxpayer.” On the other hand, netting with subsidiaries who meet the 80% test but are not includible for other reasons, might be a viable test.

What does the future hold?

The boundaries of “same taxpayer” are still not entirely clear. Because most netting claims include a request for additional overpayment interest, these cases will usually be brought in the Court of Federal Claims rather than district court. Review by the Supreme Court and legislative action both seem unlikely in the extreme. So the Federal Circuit’s decisions carry a lot of weight. But there are some possibilities the Federal Circuit has not yet ruled on.

In a statutory merger, the Federal Circuit will allow netting of a pre-merger balance against a post-merger balance but not if both balances are from pre-merger years. If a taxpayer or the government wants to change that, it will be difficult to do just through litigation.

The Federal Circuit has never directly ruled on netting in the context of consolidated returns. Energy East and Wells Fargo involved mergers; a Magma Power appeal was dismissed on the government’s request; and Ford involved a subsidiary that was not consolidated. The opinion in Ford seems to suggest that these situations are not an exception to the general rule that a parent and its subsidiaries are separate entities and therefore are not the same taxpayer. I don’t think that necessarily precludes netting, though.

First, I suspect that as a practical matter the IRS has been allowing netting administratively, and thus there have been no lawsuits, in circumstances where one member has an overpayment based on a separate tax return and the consolidated return has an underpayment. We haven’t seen such a case in the Federal Circuit and I would expect to by now if the IRS were disallowing the claims. If that’s correct, I’m not sure that the opinion in Ford will be enough for the IRS to change its administrative practice.

Second, treating a parent and its subsidiaries as separate entities does not preclude netting if you allow attribution of underpayment and overpayments to individual members of the affiliated group. Then, as in Magma Power, you are dealing with a single taxpayer; the attribution results in one taxpayer having equivalent overpayments and underpayments outstanding at the same time. The Federal Circuit has not addressed the attribution theory and, based on its mischaracterization of Magma Power in Wells Fargo, may not have considered it yet.

Netting in the context of consolidated returns, under an attribution theory, will still create administrative issues. Even in simple netting claims, the taxpayer cannot use balances if it has previously used them for netting. For example, if Corporation A nets a 2001 underpayment against a 2004 overpayment, Corporation A cannot later net the same 2001 underpayment against a 2006 overpayment. This would apply for netting under an attribution theory in the context of consolidated returns. Further, the netting claim would have to provide documentation to support the attribution. But such administrative issues should not be an impediment. Revenue Procedure 2000-26 simply shifts the burden to the taxpayer requesting netting. A more significant problem with netting in the context of consolidated returns might arise with respect to disputes between members of the group about the attribution – particularly after a member has left the group but still wants to net past balances as part of the group against post-departure balances.

Are there situations other than mergers and consolidated returns that might supply “background legal principles” to justify netting? Contractual assignments of tax liabilities and the right to refunds of overpayments might be a possibility, although courts are often reluctant to be bound by those when deciding tax issues. There may be others.

Even if the Federal Circuit is unlikely to approve netting in the consolidated return context or other situations, it’s worth still contesting issues on which the Federal Circuit has not yet ruled. Interest disputes for the largest corporations can involve significant amounts, which alone justifies taking a shot. Ford, as an example, involved a $20 million claim while Wells Fargo involved a $350 million claim (although that included items other than netting).

Postscript

As I was finishing this post up, I received the latest volume of The Tax Lawyer, which includes an article “More of the ‘Same’: Section 6621(d) in the Federal Circuit” by David Berke, an associate at Skadden, Arps. He and I are not in complete agreement, but for those with an interest in a different perspective on this topic, it’s worth perusing.