Innocent Spouse Survives Motion to Dismiss in Jurisdictional Fight with the IRS

We welcome Sarah Lora, Assistant Clinical Professor and Director of Lewis and Clark’s Low Income Taxpayer Clinic and Kevin Fann, 3L at Lewis and Clark Law School.  Their clinic just won an important victory in the innocent spouse arena overcoming an argument from the trial section of the Department of Justice Tax Division that completely disagrees with the arguments made by the appellate section of the Tax Division.  Keith

In his Opinion and Order issued last month in Hockin v. United States, Oregon District Court Judge Michael Simon rejected in part a magistrate judge’s findings and recommendations to dismiss and rejected the DOJ’s argument that the government had not waived sovereign immunity to be sued, holding that a taxpayer could bring an innocent spouse claim in federal district court as part of her larger tax refund claim against the IRS.

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The dispute concerned whether an alleged innocent spouse could follow the Flora rule of “pay first, litigate later” in her § 6015(f) claim.  In the past, the DOJ has presented contradictory arguments for and against the Flora rule in these innocent spouse refund cases, a contradiction highlighted by several advocates, including former NTA Nina Olson as well as Keith and Carl from Harvard’s Low-Income Taxpayer Clinic. In previous cases against clients at Harvard LITC , the DOJ insisted that taxpayers who miss the chance to file in U.S. Tax Court could still pay the assessment and litigate a refund claim in federal district court. In Hockin and several other cases, however, the DOJ turned a 180, arguing exactly the opposite, that the district court has no jurisdiction in innocent spouse refund suits.

Several years ago, Plaintiff Kimberly Hockin filed a claim with the IRS for innocent spouse relief of joint and several liability for tax years 2007 and 2008.  The claims for each year were based on the same facts: she did not sign the return and, in the alternative, she should be relieved of liability anyway based on § 6015(f).  The IRS granted her 2008 claim, but it denied the 2007 claim with no clear explanation for the different outcomes.

Ms. Hockin attempted to appeal the decision by filing a petition in U.S. Tax Court, but she had missed the filing deadline by 555 days. After the Tax Court’s dismissal, Ms. Hockin sought the assistance of the Lewis & Clark Law School LITC. By the time she contacted us, Ms. Hockin had paid the full balance due for 2007 through offset refunds over the years. After filing for a refund administratively, the LITC filed a complaint in U.S. District Court, led by volunteer attorney Scott Moede of the Office of the City Attorney in Portland, Oregon. The complaint sought a refund of her payments for 2007 made within the last two years, citing jurisdictional statutes 28 U.S.C. § 1346(a)(1) and IRC § 7422(a), for three reasons:

  1. Ms. Hockin never signed the return;
  2. the IRS is barred from collecting the tax liability for 2007 under the theory of quasi-estoppel (i.e. it granted relief for tax year 2008 but not 2007 under the same facts); and
  3. the United States erroneously collected taxes she should have been relieved of paying under the rules of innocent spouse relief.

The United States filed a motion to dismiss, arguing that the taxes had not been “illegally or erroneously collected” as required by § 1346(a)(1) for the district court to have subject matter jurisdiction. 

After extensive briefing, including an amicus curiae brief filed by Keith and Carl of the LITC at Harvard Law School, magistrate Judge Jolie Russo held oral arguments. The United States conceded the first claim should go forward. After all, there was a genuine dispute of fact about whether the return had been signed, and no copy of the return had been produced by Ms. Hockin, the IRS, or the ex-spouse. On the claims of quasi-estoppel and innocent spouse, Judge Russo said she leaned toward granting the government’s motion to dismiss and asked Attorney Moede and Lewis and Clark law student John MacMorris-Adix ’19 to convince her otherwise.  Within a few weeks, Judge Russo issued her Findings and Recommendations (F & Rs). She had granted the government’s motion to dismiss the quasi-estoppel and innocent spouse relief.

Undeterred, the clinic objected to Russo’s F & Rs.  The Article III review Judge Michael Simon requested additional briefing, citing part of the government’s original motion to dismiss, which admitted that, if plaintiff had filed her claims in both U.S. Tax Court and U.S. District Court, § 6015(e)(1)(A) cedes jurisdiction to the District Court. Simon asked the parties to answer several questions, including, “[W]hy isn’t Plaintiff’s failure to file a timely petition in U.S. Tax Court excusable neglect of an administrative technicality?” We tried not to get too excited, since it is rare for an Article III judge to disagree with a magistrate’s F & R.

The parties briefed Judge Simon’s questions within about two weeks. Two days after briefing, he issued his ruling, granting the Government’s motion as to the quasi-estoppel claim but denying the Government’s motion as to both the unsigned return and the innocent spouse claim! The opinion relied primarily on Flora v. United States, Wilson v. Comm’r, and Merriam-Webster’s plain-language definition of “wrongfully.”

The court held:

The IRS may grant innocent spouse relief even when the amount of tax assessed or collected was precisely the correct amount that the married couple owed given their financial circumstances. But 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422(a) do not waive sovereign immunity and provide a cause of action solely for claims that a tax was erroneously or illegally assessed. They also apply to claims that the tax was “in any manner wrongfully co[ll]ected.” A claim that “it is inequitable to hold the individual liable” falls within the scope of an allegation that a tax was “in any manner wrongfully collected,” giving “wrongfully” its plain meaning, which would include unfairly or unjustly. See Wrongful, MERRIAM-WEBSTER.COM, https://www.merriam-webster.com/dictionary/wrongful (last visited August 14, 2019) (definition: wrong, unjust).

In addition to the plain-meaning definition of “wrongful,” the court also resisted the Government’s strained logic when it pointed to clear and basic principles of justice and economy. On that point, the court held that tax refund cases could obviously contemplate innocent spouse relief at the same time, because if the two issues were tried separately under separate jurisdictions, contradictory results might occur. The court stated, “If Plaintiff wins on her refund claim, then she must lose on her innocent spouse claim. Were this dispute adjudicated in two different forums, the result could be contradictory rulings.” The Government had produced dozens of pages of logical loopty-loops about why that simple judicial principle should not apply. In the end, the court did not buy it.

The question still arises, however, as to whether this ruling extends to stand-alone innocent spouse claims. Although the court stated that “[n]othing in the innocent spouse statute, or elsewhere in the Tax Code, suggests that a claimant seeking innocent spouse relief cannot opt to ‘pay first [and] litigate later’ in district court,” the court also made a point to recognize that this was not a stand-alone case, because it also involves a “jurisdictionally valid refund claim” for lack of a signature on the return. 

The Hockin case will be set for trial in federal district court early in 2020.

Tax Court Adopts Final Rules For BBA Partnership Audit Regime

Today we welcome Greg Armstrong and Rochelle Hodes to the community of Procedurally Taxing guest posters. Greg is a Director with KPMG, LLP Washington National Tax in the Practice, Procedure, & Administration group in Washington D.C. and former Senior Technician Reviewer with the IRS Office of Chief Counsel. Rochelle is a Principal in Washington National Tax at Crowe LLP and was previously Associate Tax Legislative Counsel with Treasury.  Both Greg and Rochelle in their immediate prior positions with IRS and Treasury respectively spent considerable time working on the new partnership audit regime enacted to replace TEFRA as part of the Bipartisan Budget Act of 2015 (BBA) and as revised in subsequent technical legislative corrections. Rochelle is a Contributing Author on the BBA chapter that will be published this fall for Saltzman and Book IRS Practice & Procedure, and Greg has contributed over the years in updating and revising the treatise.

In this post, Greg and Rochelle discuss the Tax Court’s amendments to its Rules of Practice as relating to the BBA regime. Les

On July 15, 2019 the United States Tax Court announced that it had adopted final amendments to its Rules of Practice and Procedure to address actions under the new partnership audit regime enacted by BBA. The final amendments, which were first introduced as proposed and interim amendments on December 19, 2018, add a new Title XXIV.A (Partnership Actions under BBA Section 1101) and also make conforming and miscellaneous amendments.  New Title XXIV.A is effective as of December 19, 2018 and generally applies to partnership actions commenced with respect to notices of final partnership adjustment (FPAs) for partnership taxable years beginning after December 31, 2017.  The new rules also apply to actions commenced with respect to FPAs for partnership taxable years for which an election under §301.9100-22 is in effect.    

The following post offers a high level summary of the highlights of the Court’s new rules with respect to the BBA regime.  Because this post is focused on the new Tax Court rules, only a summary of the BBA provisions relevant to understanding the Court’s rules are discussed.  For a more robust discussion of the BBA provisions, see the latest update to Saltzman and Book, IRS Practice and Procedure, which includes a new chapter 8A entitled “Examination of Partnership Tax Returns under the Bipartisan Budget Act of 2015”.

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The Tax Court’s rules reflect the prominent and powerful role of the partnership representative (PR) under the BBA.  The PR is the individual or entity that has the sole authority to act on behalf of the partnership for purposes of the BBA and replaces the Tax Matters Partner (TMP) concept that existed under TEFRA.  Pursuant to section 6223(a) and the regulations thereunder, a partnership subject to BBA must designate a PR for each taxable year.  If the IRS determines that there is no PR designation in effect for the taxable year, the IRS may select the PR.  If the partnership designates an entity as the PR, the regulations require that the partnership also appoint a designated individual to act on behalf of the entity PR.

Rule 255.2 provides that a BBA partnership action is commenced like any other action in the Tax Court – by filing a petition.  The caption of the petition, and any other paper filed in a BBA partnership action, must state the name of the partnership as well as the name of the PR.  Rule 255.1(d).  This is consistent with TEFRA Rule 240(d), Form and Style of Papers, which requires the caption to state the name of the partnership and the partner filing the petition, and whether the partner is the TMP.  Since under BBA only a PR can bring a partnership action in Tax Court, and because no partner (unless they are the PR) can file a petition, it makes sense that the PR is named in the caption in addition to the partnership.  The body of the petition must also identify the PR’s place of legal residence or principal place of business if the PR is not an individual.  Rule 255.2(b).  Interestingly, Rule 255.2(b) does not require the petition to provide the name or address of the designated individual.  The rule does require the petition to indicate whether the PR was designated by the partnership or selected by the IRS.

Identification and Removal of a Partnership Representative by the Court

New Rule 255.1(b)(3) defines the PR for purposes of BBA partnership actions to mean the partner (or other person) designated by the partnership or selected by the IRS pursuant to section 6223(a), “or designated by the Court pursuant to Rule 255.6.”  Rule 255.6 sets out circumstances in which the Court may act to identify or remove a PR in a partnership action under BBA.  The first such circumstance is if at the time of commencement of the action the PR is not identified in the petition.  Rule 255.6(a).  The second such circumstance is if after the commencement of the case the Court “may for cause remove a partnership representative for purposes of the partnership action.”  Rule 255.6(b).  The Court’s rule requires that before removal there must be notice and an opportunity for a hearing.  Neither Rule 255.6(b) nor the explanation to the rule delineate what causes would warrant removal.

Rule 255.6(a) provides that where there is no PR identified in the petition at the beginning of the case, the Court “will take such action as may be necessary to establish the identity” of the PR.  Rule 255.6(a) is vague as to what action might be necessary to establish the identity of the PR.  If no PR is identified, one possible outcome may be that the case is dismissed on the ground that a proper party did not file the petition.

Rule 255.6(b) provides that “if a partnership representative’s status is terminated for any reason, including removal by the Court, the partnership shall then designate a successor partnership representative in accordance with the requirements of section 6223 within such period as the Court may direct.”  Rule 255.6(b) does not address what happens if the partnership is unable or unwilling to designate a successor PR.  It is also interesting that Rule 255.6(b), while referencing the requirements of section 6223, only cites the authority of the partnership to designate a PR, and does not cite the Commissioner’s authority to select a PR.  The ability of the Commissioner to select a PR for the partnership raises intriguing issues that also arose in the early days of TEFRA.  See, e.g., Computer Programs Lambda v. Comm’r, 90 TC 1124, 1127-28 (1988).

Per the explanation to Rule 255.6, the authority to identify or remove a PR “flows from the Court’s inherent supervisory authority over cases docketed in the Court.” The explanation to Rule 255.6 also states, however, that the rule “does not take a position on whether the Court may appoint a partnership representative.”  In the context of a TEFRA partnership action, Rule 250 permits the Court to appoint a TMP in certain circumstances.  Notably, Rule 250(a) provides that if there is no TMP at the outset of the TEFRA action, the Court “will effect the appointment of a tax matters partner.”  Similarly, Rule 250(b) provides that where the TMP has been removed by the Court or the TMP’s status has otherwise terminated, the Court “may appoint another partner as the tax matters partner” if the partnership has not designated one in the time frame prescribed by the court.  Consistent with the explanation to Rule 255.6, and unlike Rule 250, Rule 255.6 does not contain language permitting the Court to appoint a partnership representative.   However, the explanation to Rule 255.6 appears to leave the door open for the Court to appoint a PR if the facts warrant such action, though it is unclear what those facts might be.

Jurisdiction Over the Imputed Underpayment and Modifications

Rule 255.2(b) also reflects the fact that the partnership as a result of an action under BBA may be liable for tax, i.e., an imputed underpayment determined under section 6225.  An imputed underpayment is initially computed by the IRS during the administrative proceeding, but may be modified if timely requested by the partnership and approved by the IRS.  The modified imputed underpayment and any modifications approved or denied by the IRS will be reflected in the FPA mailed to the partnership. 

Rule 255.2(b)(5) requires that the petition reflect the amount of the imputed underpayment determined by the Commissioner and “if different from the Commissioner’s determination, the approximate amount of the imputed underpayment in controversy, including any proposed modification of the imputed underpayment that was not approved by the Commissioner.”  Further, Rule 255.2(b)(6) requires the petition to clearly and concisely state each error that the Commissioner allegedly committed in the FPA “and each and every proposed modification of the imputed underpayment to which the Commissioner did not consent.”  Rule 255.2(b)(7) provides the petition should also include “[c]lear and concise lettered statements of the facts on which the petitioner bases the assignments of error and the proposed modifications.”

The petition requirements set forth in Rule 255.2(b) make clear that the Tax Court will have jurisdiction to redetermine an imputed underpayment reflected in the FPA, including any “proposed modifications” to the imputed underpayment that were not approved by the Commissioner.  Prior to the Tax Technical Corrections Act of 2018, Public Law 115-141 (TTCA), the issue of jurisdiction over imputed underpayments and modifications was unsettled.  By amending the definition of partnership-related item to specifically include an imputed underpayment while also amending section 6234(c) to provide the court with jurisdiction “to determine all partnership-related items” for the taxable year to which the FPA relates, the TTCA amendments make clear that the court has jurisdiction to determine an imputed underpayment.  Therefore, the Code provides the court with jurisdiction to determine an imputed underpayment, including any modifications to that imputed underpayment that were denied by the Commissioner.  This is reflected in Rule 255.2(b).   

Binding Effect of Tax Court’s Decision

Rule 255.7 provides that any decision that the Tax Court enters in a partnership action under BBA is binding on the partnership and all of its partners.  The term “partner” is not defined under New Title XXIV.A.  However, under Rule 240 “partner” is defined for purposes of a TEFRA action to mean “a person who was a partner as defined in Code section 6231(a)(2)” at any time during the taxable year before the Court.  Section 6231(a)(2), prior to amendment by the BBA, defined partner for TEFRA purposes to mean a partner in the partnership and “any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership.” 

Unlike TEFRA, the BBA does not define the term “partner”.  However, the BBA does define a partnership-related item broadly to include items or amounts “relevant in determining the tax liability of any person” under chapter 1 (emphasis added).  See section 6241(2)(B)(i).  In addition, the Joint Committee on Taxation explanation accompanying TTCA explicitly states that the scope of BBA is not narrower than TEFRA, “but rather, [is] intended to have a scope sufficient to address those items described as partnership items, affected items, and computational items in the TEFRA context…, as well as any other items meeting the statutory definition of a partnership-related item.” See Technical Explanation of the Revenue Provisions of the House Amendment to the Senate Amendment to H.R. 1625 (Rules Committee Print 115-66), p.37, JCX-6-19 (March 22, 2018). 

Consistent with the broad scope of partnership-related item under BBA, when describing the binding nature of final decisions in proceedings under the BBA, Treas. Reg. §301.6223-2(a) provides that such decisions are binding on the partnership, its partners, and “any other person whose tax liability is determined in whole or in part by taking into account directly or indirectly adjustments determined under the [BBA]”.   Whether the Tax Court follows this regulation in extending the binding effect of its own decisions in BBA partnership actions remains to be seen.

Two tickets to Tax Court, by way of § 6015 and Collection Due Process

Today we again welcome guest blogger Carolyn Lee who practices tax controversy and litigation in the San Francisco offices of Morgan Lewis. Carolyn represents individual and business clients, including pro bono and unrepresented taxpayers while volunteering with the low income tax clinic of the Justice & Diversity Center of The Bar Association of San Francisco.

Carolyn asks that we add a reminder about the CDP Summit Initiative she is involved with, to reform and improve the effectiveness and efficiency of collection due process procedures, benefitting everyone who engages with them. Registration is open for the upcoming ABA Tax Section meeting in San Francisco on October 4 and 5, when there will be three CDP Summit programs. In addition, there will be a CDP Summit in Washington, D.C. on the morning of December 3. Contact Summit participants Carolyn (carolyn.lee@morganlewis.com), William Schmidt schmidtw@klsinc.org, or Erin Stearns (erin.stearns@du.edu) if you would like to be involved. Christine

The recent case of Francel v. Commissioner, T.C. Memo. 2019-35, provides a wealth of tax procedure lessons.  In Francel, a denial of § 6015 relief collided with a CDP determination, resulting in two tickets to Tax Court – one more valuable than the other.

Thomas Francel was (and is) a cosmetic surgeon with a solo practice that generated almost $1 million in income to the Francel household during each of the 2003-2006 tax years in issue. Patients paid their fees in three ways: currency, cashier’s checks (together, “cash”) or credit cards. Fees were accepted by the practice receptionist who turned them over to the office manager, Sharon Garlich. Ms. Garlich entered currency payments less than $100 and cashier’s checks in amounts of $10,000 or greater in the practice’s accounting system. Credit card payments also were entered in the practice’s accounting system. Ms. Garlich gave all other cash to Dr. Francel’s wife (nameless to the Court except as “Francel’s wife”) who also was employed at the medical office. These diverted fees ranged between $194,000 and $264,000 for each of the 2003-2006 tax years.

Ms. Garlich recorded by hand in a green ledger the cash payments she gave to Ms. Francel – or to Dr. Francel if Ms. Francel was not available. The medical practice’s CPA had direct access to the practice’s accounting system. No one gave the CPA the green ledger. No one told the CPA about the cash diverted to Ms. Francel (or Dr. Francel). The Francels filed joint income tax returns. The medical practice filed its tax return as an S corporation, with income passing through to the Francels.

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The Opinion does not indicate whether Dr. Francel personally directed the use of any of the diverted fees, though there are hints he was aware some cash was held separate from the practice’s accounts. For example, Ms. Garlich testified she gave diverted fees to Dr. Francel if Ms. Francel was not at the office. Also, when Ms. Garlich discussed the practice’s cash flow problems with Dr. Francel, she testified that his solution, after speaking with Ms. Francel, was “instead of keeping all of the cash for a while they would just go ahead and put half of it into the business.” Nonetheless, Dr. Francel could have known about the unconventional (in the Court’s view) fee handling method and still have believed the income tax reporting was correct.

The facts do tell us that Ms. Francel had a drug habit, which she kept hidden from Dr. Francel. We also learned that the strain of keeping two sets of books wore on Ms. Garlich, who retained legal counsel and reported the scheme to the US Attorney’s Office and the IRS Criminal Investigation Division.

Further into the engaging 48-page Opinion we learn that Ms. Francel (and not Dr. Francel) was indicted by the US Attorney’s Office and charged with a violation of § 7201, for attempting to evade or defeat federal income tax owed. Ms. Francel plead guilty to the federal tax charges, agreeing that the total tax underpayment for the 2003-2006 tax years was $344,121. Ms. Francel was sentenced to one year and one day imprisonment with supervised release. She was ordered to pay restitution to the government in the amount of $344,124 (the opinion acknowledges the $3.00 difference). Ms. Francel paid the restitution in full, using funds from a 401(k) account she owned. The restitution payments were credited to Dr. Francel’s account since a payment by either jointly liable spouse reduces the liability owed by both spouses. As an aside, Ms. Garlich has a whistleblower claim pending related to her role in securing the collected tax.

Many more pages later, recounting the successful civil litigation brought by Dr. Francel’s medical practice against Ms. Francel for embezzlement; a divorce suit and reconciliation between the Francels (still married and working together at Dr. Francel’s practice); and the recurring appearances of the same few lawyers representing the Francels individually and together and the medical practice, as plaintiff or defense, variously, throughout the years leading to the Tax Court trial (not so subtly noted by the Court), we arrive at the procedural history section of the Opinion. It is a delight for persons interested in the finer technical points of collection due process, § 6015 relief jurisdiction and Tax Court standard and scope and standard of review.

Dr. Francel Engages with the IRS and the Tax Court.

Due to interest and other computational quirks, after the restitution was paid the Francels still owed approximately $144,400 for the 2003-2006 years. Dr. Francel submitted a Form 8857 – Request for Innocent Spouse Relief on May 18, 2015 for all four tax years. The Opinion does not include any facts about an administrative review of the 6015 request by the IRS’s Innocent Spouse unit. We only know Dr. Francel’s claim was assigned to Appeals (“§ 6015 Appeals”).

On September 22, 2015, the IRS mailed Dr. Francel a notice of intent to levy to collect the 2003-2006 income tax liabilities, despite statutory prohibitions and Internal Revenue Manual (IRM) instructions to suspend collection when a processable request for § 6015 relief is received. The Opinion provides no indication of collection jeopardy. See § 6015(e)(B)(i); IRM 25.15.2.4.2; and IRM 8.21.5.5.7. Dr. Francel timely requested a collection due process (CDP) hearing with respect to the notice of intent to levy, asserting that he was entitled to § 6015 relief. The Appeals Officer assigned to the CDP hearing request (the “CDP Appeals Officer”) paused the CDP proceedings pending the decision regarding Dr. Francel’s § 6015 request.

Dr. Francel’s request for relief was denied. A report initiated by the § 6015 Appeals Officer, unsigned and undated, was sent to the CDP Appeals Officer who reviewed the report and adopted the decision without change. (We do not know the basis for the administrative denial.) The CDP Appeals Officer had a telephone conference with the attorney representing Dr. Francel for the CDP hearing, and confirmed the § 6015 request was denied.

On February 14, 2017, the IRS mailed Dr. Francel a notice of determination following the CDP hearing, sustaining the levy collection. This notice of determination with respect to the CDP hearing was a ticket to Tax Court for Dr. Francel, to seek review of the determination.

The notice stated that Dr. Francel would receive a separate “Final Appeals Notice” regarding his rejected relief request. Presumably this communication would have been issued as Notice of Determination by § 6015 Appeals. Such a notice would also have been a ticket to Tax Court for Dr. Francel. The notice was not sent, however. Because the IRS did not issue a response to Dr. Francel regarding the Form 8857, his application for relief itself became a ticket to Tax Court. See § 6015(e).

On March 14, 2017, Dr. Francel petitioned the Court to review the February 14, 2017 notice of determination, asserting error in denying him § 6015 relief. The petition was filed within thirty (30) days of the February notice. Ms. Francel intervened to support his request for relief. (The Francels were living together again.) Ms. Francel failed to appear for trial; she was dismissed as a party for failure to prosecute the case.

Dr. Francel had two tickets to Tax Court. The § 6015 rejection, with or without a formal determination denying relief initiated by § 6015 Appeals, entitled Dr. Francel to Tax Court review under § 6015(e). In addition, the CDP determination allowed Dr. Francel into Tax Court under § 6330(d)(1).

Does it matter which ticket Dr. Francel tendered to the Court?

Two Tickets to Tax Court

Consider the § 6015(e) ticket. First, when is a petition from a 6015 ticket timely? The Court explained a petition pursuant to § 6015(e) was timely regardless of whether there was a final determination issued by § 6015 Appeals (i.e., the promised Final Appeals Notice). The clock to petition for Court review of denial of § 6015 relief starts ticking on the date the IRS mails, by certified or registered mail to the taxpayer’s last known address, notice of the Service’s final determination. The taxpayer may petition for relief not later than the 90th day after such date. Here there was no notice from § 6015 Appeals. But taxpayers are not held hostage by slow determinations of § 6015 applications. Instead, they may petition the Court for review of their requests after six (6) months have passed since the request was made to the IRS. § 6015(e)(A)(i)(II). The Court determined Dr. Francel’s petition was timely pursuant to § 6015(e)(A) because it was filed March 14, 2017; that is, significantly longer than six (6) months after May 18, 2015 when the processable Form 8857 was submitted to the IRS.

Second, what standard and scope of review apply to the 6015 ticket? In cases arising under § 6015(e)(1), the Court employs a de novo standard of review and a de novo scope of review. Porter v. Commissioner, 132 T.C. 203, 210 (2009). (As a bonus for readers, the Porter opinion includes an extensive dissent asserting the proper standard of review for § 6015 cases should be abuse of discretion (with a de novo scope of review) – written by Judge Gustafson and joined by Judge Morrison who decided this Francel case.)

The de novo standard of review and scope of review affords taxpayers the benefit of the Court’s fresh consideration of all relevant evidence. IRS determinations are not granted deference. In some instances, particularly when an administrative record is under-developed when the matter reaches the Court, de novo review can make all the difference with respect to a full hearing of the facts and law, and a decision that is correct on the merits rather than based solely on the administrative record. Unfortunately, this summer Congress limited the Court’s scope of review in § 6015(e) cases so it is no longer fully de novo. It remains to be seen how litigants and the Tax Court will interpret the Taxpayer First Act’s changes to § 6015(e). Steve Milgrom and Carl Smith raised several concerns and questions in a recent PT post.

Now turn to the § 6330(d)(1) CDP ticket to Tax Court. The default application of § 6330(d)(1) provides that a petition must be made within thirty (30) days of a CDP determination – significantly shorter than the period to request review of a § 6015 relief rejection. Nonetheless, Dr. Francel met the 30-day deadline. The Court would have had jurisdiction to review the rejection of § 6015 relief by the CDP Appeals Officer based on Dr. Francel’s § 6330(d)(1) ticket.

The advantage of one ticket over the other in this case comes into sharp relief with respect to the standard and scope of review. In contrast to the Court’s full de novo review of § 6015 matters, collection due process review is constrained. The standard of review when the liability is not at issue – which it was not in Francel – is abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 609-610 (2000), quoting the legislative history of § 6330, because the statute itself does not prescribe the standard the Court should apply when reviewing the IRS’s administrative decisions.

Even more material in CDP matters, the standard of review is abuse of discretion. Sego v. Commissioner, supra; Goza v. Commissioner, 114 T.C. 176, 181-182 (2000); Robinette v. Commissioner, 439 F.3d 455, 459 (8th Cir. 2006, rev’g 123 T.C. 85 (2004). (Of course, review is de novo if the underlying liability is properly at issue.) Also, the Court often is bound by the record rule, in that it may only consider evidence contained in the administrative record if the case is appealable to the 1st, 8th, or 9th Circuits. In cases appealable to the other circuits, the Court does not limit the scope of its review to the administrative record, following Robinette. Judge Halperin recently reviewed the messy case law on scope and standard of review in CDP appeals in Hinerfeld v. Comm’r, T.C. Memo. 2019-47. In many cases, particularly those involving self-represented taxpayers, the record rule forecloses a full hearing of relevant facts. Here, however, Dr. Francel did not suffer from lack of representation.

So for a case involving a § 6015 issue and a CDP issue, one ticket is more valuable than the other. The § 6015(e)(1) ticket offers a longer period to petition for Court review and it offers a de novo standard and scope of review. The § 6030(d)(1) ticket requires a 30-day dash to petition and it is burdened by the abuse of discretion standard and scope of review. In the Francel matter, the § 6015(e)(1) ticket would be more valuable.

In fact, the Court took jurisdiction pursuant to § 6015(e)(1) without an explanation for the selection. Perhaps it did so because the rejected request for § 6015 relief preceded the unfavorable CDP determination which sustained the § 6015 denial. Thus, Dr. Francel had the benefit of the Court’s full de novo review. This may have been small comfort, however, because the Court sides with the IRS, deciding that Dr. Francel did not qualify for any relief.

By comparison to the lead in, a fairly uneventful conclusion

From this point, the Opinion accelerates to a close with the § 6015 analysis. Fundamentally, the unreported income was attributable to Dr. Francel. Relief may not be granted under § 6015(b) or (c) for tax arising from a liability attributable to the requesting spouse. Dr. Francel’s S corporation medical practice was required to report all fees as income. As sole shareholder of the practice, Dr. Francel was then required to include the fees in his income. The question of income attribution did not rest on who was responsible for the under-reporting, or embezzlement, or criminal tax evasion.

In addition, the Court decided it would not be inequitable to hold Dr. Francel liable for the deficiencies. (Section 6015(f) permits relief even when the liability is attributable to the requesting spouse, if an analysis of the facts and circumstances establishes equitable relief is justified.) According to the Court, Dr. Francel benefitted from the unreported cash fees because Ms. Francel spent some of the cash on home improvements for the residence Dr. Francel still occupied. He also owned the car restored using the unreported income. Dr. Francel’s accumulated wealth was attributable in part to the unreported cash and the unpaid tax from the 2003-2006 tax years. These facts weighed against a grant of relief. If Dr. Francel had actual knowledge, or reason to know, of the diverted cash and unreported income as the facts imply, this would have weighed against relief as well. Not mentioned but possibly also a factor: Dr. Francel may have failed the economic hardship test because he had the financial resources to pay the liability and still maintain a standard of living well above IRS national, regional and local standards (remember, Dr. Francel continued his cosmetic surgical medical practice).

In close, what a bountiful Opinion this is, presenting facts that would be NCI-episode-worthy if there had been a dead body; a generous tutorial regarding § 6015 relief, collection due process, as well as standard and scope of Court review; and – best of all – an elegant profiling of two tickets to the Tax Court. As a bonus, for readers who teach professional responsibility for tax practitioners, I recommend mining the Opinion for an exam fact pattern regarding an attorney’s duty of loyalty and conflicts of interest, extracting the many representation scenarios the Court helpfully flags. 

IRM Changes to Passport Decertification and Revocation Procedures

Today we welcome Nancy Rossner who practices with the Community Tax Law Project in Richmond, Virginia.  Nancy is a graduate of the University of Richmond Law School which also happens to be my alma mater.  She recently gave a presentation to the ABA Tax Section Administrative Practice committee as a part of their monthly series of procedure updates and agreed to write this post for us on the topic of her presentation.  We have blogged before about passport revocation here, here, here and here.  As Nancy mentions below, the Tax Court did recently take action to amend the form petition recommended by Carl Smith in one of the earlier post.  Passport cases are now making their way to the Tax Court.  I anticipate we will be blogging about this issue a fair amount over the next couple of years. Keith

Leaving and re-entering the U.S. was made a bit more difficult for Americans by the Fixing America’s Surface Transportation (FAST) Act, signed into law December 4, 2015 and creating IRC Section 7345.  The law requires the IRS to notify the State Department when an individual is certified as owing “seriously delinquent debt,” at which time the State Department then has the authority to deny the individual’s passport application, application for passport renewal, or even revoke any U.S. passport previously issued to that individual.  The IRS recently released a revision to the IRM on July 19, 2019 to provide guidance on passport decertification and revocation. I will be writing about these updates today.  But first, I would like to provide a brief refresher on passport certification and revocation.

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In order to be considered a “seriously delinquent tax debt” resulting in certification to the State Department, the debt must be assessed, unpaid, legally enforceable, in excess of $50,000 (indexed for inflation, which brings it to $52,000 for the current year) and meet other conditions outlined in IRM 5.1.12.27.2.  However, even if a tax debt meets the criteria outlined in IRM 5.1.12.27.2, there are certain statutory exclusions from the certification listed in IRC Section 7345(b)(2).  In addition to the enumerated exclusions in IRC Section 7345(b)(2), the IRS also has discretion under IRC Section 7345 to exclude categories of tax debt from certification, despite meeting the criteria in IRM 5.1.12.27.2. These discretionary exclusions are listed in IRM 5.1.12.27.4.

Now, when the taxpayer is determined to have a seriously delinquent debt, the IRS is supposed to send the taxpayer a Letter CP 508C informing the taxpayer of the debt certification and providing the taxpayer with 30 days to challenge the notice (increased to 90 days if the taxpayer is out of the country).  If the debt remains unresolved, the IRS sends the taxpayer Letter 6152, Notice of Intent to Request U.S. Department of State Revoke Your Passport, to give the taxpayer one last chance to resolve the debt before recommending passport revocation to the State Department. The taxpayer is entitled to appeal the debt certification to the U.S. Tax Court or a U.S. District Court to have a court determine if certification was erroneous or if the IRS failed to reverse the certification under IRC Section 7345(c).  As per the U.S. Tax Court’s press release dated July 15, 2019, the Court adopted final amendments to its Rules of Practice and Procedure and adopted revisions to Form 1(Petition) among other forms.  As a result, Rule 13. Jurisdiction was updated to include “certification actions with respect to passports” and Rule 34. Petition was updated to include “certification actions with respect to passports.”  These changes are also reflected on the new Petition form which now includes a checkbox for “Notice of Certification of Your Seriously Delinquent Tax Debt to the Department of State.”  Yes, Carlton Smith did get his wish from this previous blog post

The new IRM guidance also provides some updates to the reversal of certification of seriously delinquent tax debt as well as expedited decertification.  As per IRM 5.1.12.27.8, the IRS will reverse the certification of seriously delinquent tax debt and notify the State Department within 30 days if the previously certified tax debt is fully satisfied, becomes legally unenforceable or ceases to be seriously delinquent debt (previously delinquent debt ceases to be seriously delinquent tax debt when a statutory exclusion is met).  If the certification is found to be erroneous the IRS will notify the State Department “as soon as practicable” and the IRS will notify the taxpayer once the certification is reversed.  One thing that I have learned as a practitioner at an LITC is that “as soon as practicable” can mean many different things to many different people. The U.S. Tax Court or U.S. District Court may also order the IRS to reverse the certification as a result of tax court litigation.

Importantly, taxpayers may also request expedited decertification, which can shorten the processing time by 2-3 weeks, but the taxpayer must meet all three of the following conditions: 1. The taxpayer meets a condition in 5.1.12.27.8 Reversal of Certification; 2. The taxpayer states that they have foreign travel scheduled within 45 days and can provide proof of travel OR the taxpayer lives outside of the US; and 3. The taxpayer has a pending application for a passport or renewal, has received notification their passport was denied or revoked, and provides a denial letter from the State Department (read: not the CP508-C). The updates to the IRM made proof of travel necessary in 2. and a copy of the State Department denial letter necessary in 3.  There is an exception for taxpayers residing out of the United States who do not have imminent travel plans.  If the taxpayer meets the conditions outlined in IRM 5.1.12.27.3 or IRM 5.1.12.27.4 and expresses an urgent need for decertification the IRS is supposed to request expedited decertification.

One last item of note on this topic, according to a recent memo from Acting Taxpayer Advocate Bridget Roberts (TAS-13-0819-0014), effective July 25, 2019, all open TAS cases with a certified taxpayer will be decertified and new TAS taxpayer cases will also be systemically decertified until further notice. This is something for which former NTA Nina Olson advocated prior to leaving office this year.

Another Court Rules on Jurisdiction for Overpayment Interest Suits – Part Two

Today Bob Probasco continues his update on overpayment interest suits. Part One can be found here Christine

And now Bank of America

Bank of America filed its case in the Western District of North Carolina (WDNC). As noted above, Pfizer chose its forum to take advantage of a favorable Second Circuit precedent; Bank of America likely chose the WDNC to avoid an unfavorable precedent. Approximately $141 million of the $163 million at issue involves interest netting and, as the government pointed out, Bank of America currently has another interest netting case pending in the CFC. 

The case in the WDNC likely raises the “same taxpayer” issue (see discussion here and here). It involved overpayments and underpayments for tax years ranging from 1987 to 2009, for six different entities that ultimately merged into a seventh, the plaintiff. Federal Circuit precedent, from Wells Fargo & Co. v. United States, 827 F.3d 1026 (Fed. Cir. 2016), allows separate companies that merge to be considered the “same taxpayer.” But it also applies a “temporal requirement” that the two entities must be the “same” for the entire period of overlap between the overpayment and the underpayment. Effectively, this means that the latest of the two tax years with balances to be netted must be after the date of the merger. Based on information in the complaint, most of the amount at issue appears to be precluded by the holding in Wells Fargo. Bank of America’s case in the CFC, on the other hand, did not have a Wells Fargo problem. Settlement negotiations began almost immediately and are ongoing.

Bank of America had a strong incentive to file the current case in the WDNC. As I stated before, in my second post on interest netting, I think Wells Fargo was an overly narrow construction of the statute. But the CFC is bound by that precedent, while the WDNC might reach a different conclusion. Unfortunately, the amounts at issue exceeded the limitation on Tucker Act jurisdiction by a district court. Thus, Bank of America had to argue that the case fell under “tax refund jurisdiction” and the government promptly filed a motion to dismiss for lack of jurisdiction, arguing that claims for additional overpayment interest are only cognizable under Tucker Act jurisdiction. A magistrate judge reviewed the motion to dismiss and concluded that “tax refund jurisdiction” encompasses claims for additional overpayment interest. In Bank of America Corp. v. United States, 2019 U.S. Dist. LEXIS 109238, the district court judge agreed and adopted the magistrate judge’s Memorandum and Recommendation.

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The court found the interpretation of § 1346(a)(1) in E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005) persuasive. The statute provides concurrent jurisdiction for district courts and the CFC over actions for the recovery of “any sum alleged to have been excessive . . . under the internal-revenue laws.” The Scripps court concluded that a claim for overpayment interest fit that part of the statute. The “sum” at issue is not the amount of overpayment interest at issue; it is the total balance the United States retained, the net of tax liability, penalties, underpayment interest, and overpayment interest.

That’s a bit abstract; here’s a simple illustration. Say that the taxpayer originally paid $5,000,000 but the IRS eventually determined that the correct tax liability was only $4,500,000 and refunded $500,000. The sum retained by the government is $4,500,000; it received $5,000,000 but then refunded $500,000. But if the government should have paid (but did not) $80,000 of overpayment interest, it should have only retained $4,420,000, the net of $5,000,000 originally received and $580,000 (tax refund plus overpayment interest) paid back to the taxpayer. The sum actually retained ($4,500,000) is “excessive,” more than the proper amount of $4,420,000. I think this is a somewhat strained reading of the statute, but it persuaded the Scripps court and the district court in Bank of America.

The opinion also noted that most courts that have considered the issue have held that claims of additional overpayment interest fall within “tax refund jurisdiction.” Strictly speaking, that may be true, but it fails to address a couple of limitations on that statement. First, only one Circuit Court (the Sixth), and few district courts outside the Sixth Circuit, have directly addressed the issue. Historically, most claims for overpayment interest have been filed in the CFC rather than district court. It’s not at all clear that other Circuit Courts would reach the same conclusion. For example, although technically dicta, in Sunoco, Inc. v. Commissioner, 663 F.3d 181, 190 (3d Cir. 2011) the Third Circuit stated that actions for overpayment interest in district court fall under § 1346(a)(2) rather than § 1346(a)(1).

Second, the CFC (which handles most interest cases) generally won’t have disputes as to which jurisdictional statute applies, for structural reasons. District court jurisdiction is split between § 1346(a)(1), for tax refund actions, and § 1346(a)(2), for Tucker Act claims, because there is a dollar limitation for the latter. The CFC has no such dollar limitation and only has one relevant jurisdictional statute, § 1491(a)(1), which is similar to the language of § 1346(a)(2). When a case includes both underpayment interest and overpayment interest (most interest netting cases do), some practitioners may specify both § 1346(a)(1) – under Chapter 85 of Title 28, governing district court jurisdiction, but referencing the CFC – and § 1491 for jurisdiction, just in case. But the CFC may not address the jurisdictional statute at all in those cases. When it does, it often refers to jurisdiction for both tax refunds and overpayment interest as arising under the Tucker Act, i.e., § 1491; only the underlying cause of action and statute of limitations are different. That was the only jurisdictional basis that Paresky mentioned and there are many other examples.

The government also relied on similar language in § 1346(a)(1) and Code section 7422(a). Here’s § 1346(a)(1), with the relevant language italicized:

Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws

And here’s Code section 7422(a), which states requirements for refund suits, also with the relevant language italicized:

No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.

The government argued that: (a) it is well-established actions for overpayment interest are not refund suits; (b) § 1346(a)(1)’s language is virtually identical to that in section 7422; (c) therefore, § 1346(a)(1) is limited to refund suits, just as section 7422 is; and (d) therefore, district courts only have jurisdiction over actions for overpayment interest under § 1346(a)(2), which is limited to $10,000.

Bank of America circumvented this conclusion by arguing that § 1346(a)(1) includes both refund suits and “non-refund” suits, such as those for overpayment interest. There are very minor differences in the language of the two statutes, but the court identified one significant difference that convinced it to agree with Bank of America’s argument. Section 7422(a) includes a qualifying header: “No suit prior to filing claim for refund.” And § 1346(a)(1) has no header. I’m not sure how much should be read into that; Chapter 85 of Title 28 appears to have no headers or titles at the paragraph level, and few at the subsection level, as opposed to the section level.

These issues might be reviewed by the Fourth Circuit on appeal at some point, but not soon. The WDNC’s opinion just denied the motion to dismiss; now the parties will need to proceed to the merits of the case. The case has more complex facts and legal issues (including the “same taxpayer” issue) than Bank of America’s CFC case, so a final determination might take a long time.

Conclusion

Now we have three recent cases that addressed the issue but with somewhat inconsistent results. Pfizer and Bank of America concluded that district courts’ “tax refund jurisdiction” encompasses claims for overpayment interest. Paresky did not address the jurisdictional statute, because the case was originally filed in the CFC, but may now with the post-transfer motion before the SDF. The CFC and Federal Circuit might view the issue differently than Pfizer and Bank of America did, but their jurisdictional statute doesn’t differentiate as the district court jurisdictional statute does and they will never rule on the district court statute.

Pfizer concluded that the Code statute of limitations applies. Paresky concluded that the general federal 6-year statute of limitations applies, but that may change in the SDF. Bank of America didn’t directly address the statute of limitations, as the government did not assert untimely filing as a basis for the motion to dismiss, but the court certainly suggested that it would not apply the Code statute of limitations.

These issues potentially could be addressed on appeal by three different Circuits – the Second (Pfizer), the Eleventh (Paresky), and the Fourth (Bank of America). So far, only the Sixth Circuit has ruled on whether district court jurisdiction for these cases fits under § 1346(a)(1). It will be interesting to see if a circuit split develops that would give the government an opportunity to overturn Scripps. And we might even see a decision in Bank of America that would create a circuit split on the “same taxpayer” issue and allow taxpayers an opportunity to overturn that part of the Wells Fargo result.

Another Court Rules on Jurisdiction for Overpayment Interest Suits – Part One

We welcome back guest blogger Bob Probasco of Texas A&M University School of Law for an update on taxpayer suits to recover overpayment interest. Today, Part One sets the stage and recaps the status of the ongoing Pfizer and Paresky cases. Christine

Last year, I wrote about the Pfizer and Paresky cases, which involved questions about jurisdiction and statutes of limitations for taxpayer suits seeking interest payable to them by the government for overpayments. Recently, the District Court for the Western District of North Carolina issued its opinion in Bank of America Corp. v. United States, 2019 U.S. Dist. LEXIS 109238 (W.D.N.C. June 30, 2019) addressing the issue.

Setting the stage

There are two district court jurisdictional statutes at issue in these cases. This first is 28 U.S.C. § 1346(a)(1). It has no dollar limitation. That’s the statute we rely on when filing tax refund suits, so I will refer to it as “tax refund jurisdiction.” But I will keep that term in quotes; taxpayers sometimes argue successfully that this covers suits for overpayment interest, although technically those are not refund suits.

The second is § 1346(a)(2), which provides jurisdiction for any claim against the United States “founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department . . . .” This is commonly referred to as “Tucker Act jurisdiction” and for district courts is limited to claims of $10,000 or less. The comparable jurisdictional statute for the Court of Federal Claims, § 1491(a)(1), has no such limitation.

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There are also two different statutes of limitation potentially applicable. The general federal statute of limitations, § 2401 (for district courts or § 2501 for the Court of Federal Claims), requires that complaints be filed within six years after the right of action first accrues. In the Code, section 6532(a)(1) requires the taxpayer to file a refund suit no later than two years after the claim is disallowed.

As a result of all this, not to mention different precedents in different circuits, taxpayers who file suits for overpayment interest may sometimes want to file in district court and other times prefer the Court of Federal Claims. The government’s position is that these claims fit under Tucker Act jurisdiction only, not “tax refund jurisdiction.” And the government may disagree about whether the taxpayer’s preferred venue is available. There may also be a secondary dispute, concerning which statute of limitations applies and whether the suit was filed timely.

Brief recap and current status of Pfizer

The underlying issue in the Pfizer case was straightforward: whether overpayment interest is due when the IRS mails a refund check within the 45-day safe harbor of section 6611(e) but the check is not received by the taxpayer and must be replaced. Pfizer filed suit in the Southern District of New York (SDNY), asserting “tax refund jurisdiction,” to take advantage of a favorable precedent in the Second Circuit. Tucker Act jurisdiction would be available in the SDNY, but is limited to $10,000, and therefore inadequate for this case. The government filed a motion to dismiss for lack of jurisdiction, asserting that standalone suits for overpayment interest do not fall within the scope of “tax refund jurisdiction.” The court agreed with Pfizer and denied that motion to dismiss.

But the government filed a second motion to dismiss for lack of jurisdiction, arguing that the refund statute of limitations in the Code had expired and the suit was not filed timely. Pfizer argued that the general six-year statute of limitations in § 2401 applied even though Pfizer was relying on “tax refund jurisdiction” rather than Tucker Act jurisdiction. The court disagreed with Pfizer, applied the two-year statute of limitations from the Code, and granted the government’s motion to dismiss the case.

The case is currently on appeal. Pfizer asked the court, if it affirms the decision below, to transfer the case to the Court of Federal Claims (CFC). That would allow the case to proceed, as suit was filed within the six-year general statute of limitations for Tucker Act claims, although the Second Circuit precedent Pfizer wanted to rely on would not be binding in the CFC. Keith and Carl filed an amicus brief arguing that even if the filing deadline in section 6532(a) applies, it is not jurisdictional and is subject to estoppel or equitable tolling arguments. At oral arguments on February 13, 2018, the Second Circuit panel asked the parties whether it could assume without deciding that claims for overpayment interest fell within the terms of § 1346(a)(1) and proceed to the statute of limitations issue. Roughly 18 months later, we’re still waiting for an answer.

Brief recap and current status of Paresky

The Pareskys have been trying to resolve these tax issues since 2009, first to claim substantial losses that generated refunds and then to get interest on the refunded amounts. It has been a very long, complicated struggle and makes you wonder what would have happened if they hadn’t been represented by very competent tax advisors. In the course of the attempted resolution, the IRS advised them to file a refund claim and, when the claim was denied in 2015, advised that they had two years to file suit. Relying on those statements, the Pareskys filed suit in 2017 in the CFC. The government filed a motion to dismiss, arguing that the six-year statute of limitations applied and had expired in 2016. The plaintiffs argued that the two-year statute of limitations applied; alternatively, they argued that that the six-year statute of limitations didn’t start in 2010, as the government asserted, or was suspended due to government misconduct.

The first step in the court’s decision was relatively easy, because there are numerous precedents in the Federal Circuit that the six-year statute of limitations applies to claims for overpayment interest. It took more effort to analyze when the claims accrued. The normal documentary evidence was not available because it had been destroyed in the normal course of business, during the very long period this dispute had lasted. The court was left with “complicated factual issues” that it resolved in the government’s favor. Finally, the court concluded that the taxpayers had not met the burden of proof to apply the accrual suspension rule. But the CFC denied as moot the government’s motion to dismiss because it granted the taxpayers’ motion to transfer the case to the District Court for the Southern District of Florida (SDF). That would allow the Pareskys to try to persuade the SDF that “tax refund jurisdiction” covers claims for overpayment interest and that the Code statute of limitations applies.

In Pfizer, the taxpayer appealed to the Second Circuit and the question of whether to transfer to another jurisdiction if that was unsuccessful was deferred. In Paresky, the case was transferred immediately rather than giving the plaintiffs an opportunity to convince the appellate court to rule in their favor on the jurisdictional issue. I don’t know if the plaintiffs’ desires were a deciding factor in that difference between the two cases. But Pfizer clearly wanted to remain in the SDNY if possible, while the Pareskys seemed caught by surprise at the jurisdictional challenge, given the advice they received from the IRS, and were open to immediate transfer. They filed a motion to transfer very soon after the government’s motion to dismiss.

In the SDF case, the Pareskys filed an amended complaint, asserting jurisdiction under §§ 1346 and 1491. (This phrasing provides for alternative theories, as “§ 1346” does not distinguish between “tax refund jurisdiction,” § 1346(a)(1), and Tucker Act jurisdiction, § 1346(a)(2). But § 1491 does not apply in district court.) The government quickly filed a motion to dismiss for lack of jurisdiction, and the parties repeated their arguments over which statute of limitations applied. The parties’ submissions on the motion to dismiss were completed on February 26, 2019. We’re still waiting for the district court’s decision, and possibly an appeal to the Eleventh Circuit.

The Scope of a Power of Attorney: When Can a Representative Sign a Refund Claim?

Today we welcome guest blogger Tameka Lester from the Philip C. Cook Low-Income Taxpayer Clinic at Georgia State University College of Law. With Derek Wheeler of the Erie County Bar Association Volunteer Lawyers Project LITC, Tameka is creating a chapter on Power of Attorney issues for the next edition of Effectively Representing Your Client Before the IRS. In this post she looks at a case where a misunderstanding about the scope of authority under Form 2848 doomed a taxpayer’s refund claim. Christine

A power of attorney allows an authorized representative to step into the shoes of a taxpayer. Once there, the representative can execute many of the same acts normally done by that taxpayer. Form 2848 establishes this authority for purposes of dealing with tax related matters before the Internal Revenue Service (IRS). In addition to working directly with IRS personnel, the Form 2848 allows the representative to complete additional actions such as substituting or adding representatives and signing returns on behalf of the taxpayer. Many issues can arise when utilizing the power of attorney, including whether authority has in fact been conveyed to complete a particular action. This issue is examined in a refund suit before the U.S. Court of Federal Claims, Wilson v. United States (Feb. 27, 2019).

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This case was presented before the Court to review a penalty imposed against the plaintiff for the untimely reporting of his status in reference to a foreign trust. Plaintiff maintained the IRS applied the incorrect percentage of penalties prescribed by IRC 6677. Under this statute, the civil penalty for filing Form 3520 late is “the greater of $10,000 or 35% of the gross reported amount” unless the taxpayer filing the return is an owner/grantor of the foreign trust. Plaintiff maintained that he was the owner/grantor of the trust as opposed to the beneficiary (which would reduce his penalty from 35% to 5%), paid the penalty assessed in June 2017, and instructed his attorney-in-fact to file a claim for refund in August 2017. The attorney-in-fact, who was listed on the plaintiff’s Form 2848 power of attorney, prepared the claim for refund (IRS Form 843), signed on the line provided for the paid preparer, and filed it without the taxpayer’s signature. In response to the suit, the government filed a motion to dismiss for a lack of subject matter jurisdiction on the basis that a claim for refund was not “duly filed.” Their contention was the power of attorney issued by plaintiff did not provide the attorney-in-fact the authority to sign a claim for refund under penalty of perjury as required. The Court considered this a unique issue, as they had not previously encountered a situation where the person signing the return as the paid preparer was also the taxpayer’s attorney-in-fact under a power of attorney.

Upon review, the Court never gets to the merits of the case although the prevailing position is that the document should be signed under penalty of perjury. Instead, the court looks to determine if, by simply executing a general IRS Form 2848, the plaintiff conveyed the necessary authority for his attorney-in-fact to sign a refund claim on his behalf. After reviewing the instructions for the Form 2848, Form 843, and the requisite case law involving similar issues of powers of attorney, the Court granted the Government’s motion to dismiss for lack of subject matter jurisdiction.

The Court arrives at this conclusion by first reviewing the instructions provided for the Form 843. The instructions state that the authorized representative can file the form for the taxpayer as long as he includes a copy of the 2848 authorizing the representative to complete this particular request.

Under the Form 2848 instructions, some actions are considered general grants of authority while others must be specifically stated. The general actions include the authority “to receive and inspect [the taxpayer’s] confidential tax information and to perform acts that [the taxpayer] can perform with respect to the tax matters described below [on the power of attorney].” For purposes of the taxpayer in this case, these general actions included “income tax (Form 1040), civil penalties (From 3520 and 3520-A), and matters relating to foreign banks and financial account reports.” When the Centralized Authorization File system receives a power of attorney with general actions authorized, those authorizations are recorded on the IRS’s systems; however, for specific actions the instructions for Form 2848 provide that if the power of attorney is “a one-time or specific-issue grant of authority to a representative or is a POA that does not relate to a specific tax period…the IRS does not record [it] on the system. Claims for refund are considered a specific-use not recorded on the system.” Because the claim for refund requires a specific grant of authority and the claim must be “duly filed” in order to be considered by the Court, whether the authority was actually given goes to the heart of the issue of subject matter jurisdiction. 26 U.S.C. 7422(a). The burden of establishing jurisdiction falls on the plaintiff to prove it by a preponderance of the evidence. Reynolds v. Army & Air Force Exch. Serv., 846 F. 2d 746, 748 (Fed. Cir. 2008).

In an attempt to establish subject matter jurisdiction, plaintiff cited Aronsohn v. Commissioner. In Aronshohn, the Third Circuit explored the issue of whether a general power of attorney authorized the taxpayer’s authorized representative to sign a waiver (Form 870-
AD), which precludes the taxpayer from later filing a refund claim.   According to that court, “a more specific power of attorney” is not required before the authorized representative could give up the taxpayer’s potential future refund claim. The Government, however, argues that this is only one part of the requirement. It contends in addition to authorizing the representative to sign the claim for refund, the claim for refund must be signed under penalty of perjury like an actual return.

“The statement of the grounds and facts [of the claim] must be verified by a written declaration that it is made under penalties of perjury. A claim which does not comply with this paragraph will be not considered for any purpose for claim for refund or credit.” 26 C.F.R. 301.6402-2(b)(1).

Although plaintiff draws a distinction between returns and refunds that the Court recognizes, the Court follows the guidance provided in the regulations. The Court also reviews the Form 2848 requirements for giving a representative authority to sign a return. The form requires a taxpayer to check a box on line 5 allowing his representative to sign a return and to expressly state the representative is signing the return under penalty of perjury. No such requirement is specifically stated for Form 843; however, since the claim for refund must also be signed under penalty of perjury the Court was not convinced plaintiff provided a reason why an express statement should not also be required. Without the mandate that the claim is being signed under penalty of perjury, Form 2848’s general authority cannot authorize a representative to execute this action or create a “duly filed” claim for refund. As an ancillary matter, the Court noted that even if the POA provided the requisite authority necessary to file the claim for refund, there may be an issue with whether the representative’s signature on the preparer line was sufficient, or if the representative would also have been required to sign the plaintiff’s name on the signature line.

As an additional matter, the Court briefly reviewed the informal claim doctrine (which has been discussed in previous posts on Palomares v. CommissionerandVoulgaris v. United States) to determine whether it should be applied in this case to prevent plaintiff from having to refile the claim. The Court rejects the doctrine’s application and does not use it to remedy the jurisdiction issue, noting that plaintiff still has time to file a timely claim for refund. In fact, prior to the Court’s decision, plaintiff filed an amended claim for refund in January 2019, which he signed under penalty of perjury. Thus, plaintiff must allow the Service to make a determination on the amended claim. If that claim is rejected or not decided within 6 months, plaintiff will be permitted to file a new refund suit.

9th Circuit Affirms Tax Court’s Ruling in Kollsman Disregarding the Report of Taxpayer’s Appraiser

We welcome back guest blogger Cindy Charleston-Rosenberg. Cindy is a past president and a certified member of the International Society of Appraisers. She and I both posted on the Tax Court’s earlier decision in the Kollsman case. Now, the 9th Circuit, in an unpublished opinion, has affirmed the Tax Court’s opinion. I am somewhat surprised that the taxpayer appealed this case because the burden to overturn the Tax Court’s decision was high. The 9th Circuit seemed to have little trouble finding that the Tax Court correctly relied on the appraiser used by the IRS and dismissing the taxpayer’s appraiser who came burdened with conflict problems and a desire not to use comparables in setting a value. The 9th Circuit stated “The Tax Court did not err in rejecting Wachter’s (the petitioner’s appraiser) opinion in part because he did not support his valuations with comparable sales data.” The 9th Circuit did not directly address the conflict of the taxpayer’s appraiser that greatly influenced the Tax Court to ignore or deeply discount his opinion but instead continued to focus on the deficiencies of his opinion stating “the Tax Court did not err in finding that Wachter failed to explain the nearly fivefold increase in value between his valuation and the sale price.” As Cindy explains and as we discussed in the prior posts, getting the right appraiser makes a huge difference in getting the “right” outcome. Trying to fix a problem with an appraisal through an appeal will generally not end well. Keith

On July 26, 2019, The Appraisal Foundation released a press statement urging legal advisors and wealth managers, in light of the recent affirmation of Kollsman v Commissioner, (T.C. Memo. 2017-40) to recognize the primacy of the personal property appraisal profession. The Appraisal Foundation is the nation’s foremost authority on valuation services, authorized by Congress as the source of appraisal standards and appraiser qualification criteria.

The 9th Circuit affirmation of Kollsman establishes that attorneys and other allied professionals should, as a minimum standard of care, recognize appraising as a professional discipline distinct from other types of art market expertise. From the Foundation’s release: 

with this ruling, the competency and professionalism of personal property appraisers has been confirmed for the second time by the judicial system in the United States … wealth managers and estate attorneys now have a greater fiduciary duty to their clients to fully understand appraiser qualification criteria and appraisal standards when vetting personal property appraisal experts.

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The Tax Court decision in Kollsman essentially disregarded an appraisal submitted by a high ranking executive of a premiere auction house as lacking basic qualification, credibility, support and objectivity. The decision relied almost exclusively on the opinion of the IRS expert, who was a relevantly credentialed, professional appraiser. The 9th Circuit opinion found the Tax Court did not err in rejecting the auction house expert’s opinion, in part because it was not supported by comparable sales data and failed to consider relevant past sales. In disregard to established caselaw and standard professional appraisal practice, the auctioneer testified that when he arrived at his valuations, he was “not interested” in comparables, and had only reviewed comparables after the IRS challenged his methodology. In finding the auction house appraisal to be “unreliable and unpersuasive” the Tax Court opinion deemed the omission of comparables supporting the valuations to be “remarkable”, stating; “we have repeatedly found sale prices for comparable works quite important to determining the value of art”. In contrast, the court found the credentialed appraiser engaged by the IRS explained his methodology, relied on comparables, and conducted research as to the impact of the subject property’s condition to an expected level of professional performance and objectivity. 

To help ensure a trustworthy level of professional competency, The Appraisal Foundation’s sponsoring professional personal property organizations, the International Society of Appraisers, the Appraisers Association of America, and the American Society of Appraisers, have embraced and are bound to implement the Personal Property Appraiser Minimum Qualification Criteria in issuing credentials to members. Each organization maintains a public registry where the appraiser’s level of credentialing, areas of specialization, education and experience may be accessed and confirmed. Members of these associations earn their credentials through a stringent admissions, training and testing process. They are required to comply with IRS guidelines and the Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice (USPAP), are bound to continuing education requirements and to submit to the oversight of their professional organization’s ethics committee. 

As a member of the Appraisal Foundation’s Board of Trustees, I welcome the opportunity to collaborate with the legal and wealth management professions on best practices in identifying and engaging qualified appraisers, particularly for IRS use appraisals. As we see here, every appraisal report submitted to the IRS has the potential to become the subject of litigation. Procedurally Taxing readers are invited to review my earlier post for an in-depth analysis of the implications of the original ruling, and Keith Fogg’s earlier coverage of this case highlighting the avoidable perception of bias when engaging an expert seeking any involvement in the sale of purchase of the subject of an appraisal. 

Last September the American College of Trust and Estate Counsel (ACTEC) Regional Meeting in Baltimore hosted a panel addressing this issue. The feedback from the considerable post-presentation engagement from attendees was that the qualification criteria for real property appraisers are well understood by the legal profession. However, qualification criteria and practice standards for personal property and business valuation experts, sourced by the same authority, are clearly less so, often with devastating outcomes for consumers.

In the wake of the Kollsman affirmation,particularly as the ruling applies to the benefits of engaging relevantly credentialed experts for IRS valuations, and critically, the Appraisal Foundation’s now public stance on this issue, it will be increasingly difficult for tax and legal advisors to defend engagement of less than fully qualified valuation experts.