IRS Request for Stay Pending Appeal in Case of EIP for Incarcerated Individuals

We recently wrote about the significant victory for incarcerated individuals.  The victory opens the door for these individuals to receive the EIP reversing the position the IRS took in an FAQ it first published in May which FAQ reversed the initial position of the IRS regarding the payment of EIP to incarcerated individuals.

Earlier this week the government filed an emergency motion seeking a stay of the district court’s order pending appeal arguing that if a stay was not granted by 1:00 today the IRS would have to take action and warning that the action would be irreversible because it would be unable to recover the payments made to incarcerated individuals.  The government does not focus on the basis for its position that the incarcerated individuals are not entitled to EIP but relies on procedural arguments for its position that it should not be ordered to make payments. 

Counsel for the incarcerated individuals filed a responsive brief yesterday in this super expedited case.  Perhaps by early afternoon, the 9th Circuit will have ruled regarding this unusual request.

Update: The government has filed its reply to plaintiffs’ opposition to the stay.

Tax Court Finalizes Adoption of New Rules

On April 21, 2020, the Tax Court issues proposed amendments to its rules and solicited comments.  The Court received comments from three sources: 1) the ABA Tax Section; 2) the Office of Chief Counsel and 3) the Tax Clinic at the Legal Services Center of Harvard Law School.  On October 6, 2020, the Tax Court issued a press release putting out the final rules which included some revisions based on the comments.  The final rules are in the body of this post below.

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One of the big changes to the rules is the adoption of limited appearance and special appearance opportunities.  We have written about the limited appearance rule change here, here and here.  The Court has been issuing Administrative Orders concerning limited appearance since 2019 but now puts mention of this opportunity into the rules.  It signals in its comments on the rule changes that it will continue to monitor this practice and we may see more Administrative Orders.

I had the chance last fall to enter a limited appearance on behalf of an individual with whom I had consulted to provide some assistance but who was over the income guidelines set out in IRC 7526 keeping me from taking her as a client because her income slightly exceeded the guideline amount.  The limited appearance I made allowed me to speak for her at calendar call where she moved to dismiss her ex-husband as an intervener in her innocent spouse case for failure to appear at calendar call.  I am sure that she could have explained to the court why it should dismiss her ex-husband but the new rule allowed me to do it for her and that made her much more comfortable.  It may have also allowed the case to move along more efficiently benefiting the government and the Court.

I have not had the chance to make a special appearance but can imagine situations in which that might be useful.  In the remote environment it may be especially useful avoiding the need for a limited appearance in situations in which the appearance is extremely limited.  I would be interested in hearing from anyone out there who has made a special appearance and what make it special.

The Rule changes:

1. Service of papers; cross references corrected

Paragraphs (b)(1) and (4) of Rule 21 are deleted and replaced with the following. [Paragraphs (a), (b)(1)(A) through (D) including the flush language, (b)(2), (b)(3), and (b)(5) remain unchanged and are omitted here.]

RULE 21. SERVICE OF PAPERS

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(b) Manner of Service: (1) General: All petitions shall be served by the Clerk. Unless otherwise provided in these Rules or directed by the Court, all other papers required to be served on a party shall be served by the party filing the paper, and the original paper shall be filed with a certificate by a party or a party’s counsel that service of that paper has been made on the party to be served or such party’s counsel. For the form of such certificate of service, see the Appendix, Form 9. Such service may be made by:

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(4) Change of Address: The Court shall be promptly notified, by a notice of change of address filed with the Court, of the change of mailing address of any party, any party’s counsel, or any party’s duly authorized representative in the case of a party other than an individual (see Rule 24(e)). A separate notice of change of address shall be filed for each docket number. For the form of such notice of change of address, see the Appendix, Form 10.

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Explanation

Rule 21(b)(1) and (4) is amended to remove references to Appendix I and replace them with references to the Appendix. Rule 21(b)(4) is amended to revise the reference to Rule 24 to account for changes to that Rule.

2. Appearance and Representation

Rule 24 is deleted and replaced with the following.

RULE 24. APPEARANCE AND REPRESENTATION

(a) Appearance:

(1) General: Counsel may enter an appearance by signing and filing:

(A) the petition or other initial pleading or document;

(B) an entry of appearance; or

(C) a substitution of counsel in accordance with paragraph (d).

See Rules 22, 23, and 26 relating to signing and filing papers with the Court.

(2) Required Information: Any paper that counsel may use to enter an appearance must include:

(A) the case name and docket number (if any); and

(B) counsel’s name, mailing address, email address (if any), telephone number, and Tax Court bar number.

(3) Counsel Not Admitted to Practice: An entry of appearance filed by counsel not admitted to practice before the Court is not effective until counsel is admitted. Where it appears that counsel who is not admitted to practice can and will be promptly admitted to practice, the Court may recognize that counsel in a pending case. See Rule 200 regarding the procedure for admission to practice before the Court and Rule 201(a) regarding conduct of practice before the Court.

(4) Limited Appearance and Special Recognition:

(A) Limited Appearance: Counsel may file a limited entry of appearance to the extent permitted by the Court.

(B) Special Recognition: The Court may, in its discretion, temporarily recognize an individual as the party’s representative, and no entry of appearance is necessary.

(5) Law Student Assistance: A law student may assist counsel with drafting a pleading or other document to be filed with the Court. In addition, with the permission of the presiding Judge or Special Trial Judge, and under counsel’s direct supervision, a law student may present all or any part of the party’s case at a hearing or trial. A law student may not, however, enter an appearance in any case, be recognized as counsel in a case, or sign a pleading or other document filed with the Court.

(b) Representation Without Counsel:

(1) General: A party that is not represented by counsel may proceed as follows:

(A) an individual may represent himself or herself;

(B) an authorized officer may represent a corporation;

(C) an authorized individual may represent an unincorporated association; and

(D) a fiduciary may represent an estate or trust.

See Rule 60 regarding proper parties and capacity.

(2) Required Information:

(A) The initial pleading or other paper filed by a party must include the party’s name, mailing address, email address (if any), and telephone number.

(B) If the initial pleading or other paper is filed by an authorized officer, authorized individual, or fiduciary, it must also include that person’s name, mailing address, email address (if any), telephone number, and capacity in which that person is appearing.

(c) Withdrawal of Counsel:

(1) Notice of Withdrawal as Counsel: Counsel desiring to withdraw as counsel for a party may file a notice of withdrawal as counsel if:

(A) more than one counsel entered appearances for that party and at least one counsel will continue to serve as counsel for that party;

(B) the notice of withdrawal is filed no later than 30 days before the first day of the Court’s session at which the case is calendared for trial; and

(C) there is no objection to the withdrawal.

(2) Motion To Withdraw as Counsel: Counsel desiring to withdraw as counsel for a party but who is ineligible to do so under paragraph (c)(1) must file a motion to withdraw as counsel.

(3) Motion To Withdraw Counsel by Party: A party desiring to withdraw the appearance of that party’s counsel must file a motion to withdraw counsel by party.

(4) General Requirements:

(A) Any notice or motion under this paragraph must include a statement that counsel or the party provided prior notice of the notice or motion to the counsel’s client or the party’s counsel and to each of the other parties to the case or their counsel and whether there is any objection to the motion.

(B) Any motion to withdraw as counsel or to withdraw counsel must also include the party’s then-current mailing address, email address (if any), and telephone number.

(d) Substitution of Counsel:

(1) No later than 30 days before the first day of the Court’s session at which the case is calendared for trial, counsel who has not previously appeared for a party in that case may enter an appearance by filing a substitution of counsel substantially in the form set forth in the Appendix, Form 8.

(2) The substitution of counsel must state that:

(A) substituted counsel enters an appearance for the party;

(B) current counsel’s appearance is withdrawn for the party;

(C) current counsel provided prior notice of the substitution to the counsel’s client and to each other party or their counsel; and

(D) there is no objection to the substitution.

(3) The substitution of counsel must be signed by current counsel and by substituted counsel, contain the information required by paragraph (a)(2), and be filed by the substituted counsel.

(4) Counsel entering an appearance as substituted counsel within 30 days of the first day of the Court’s session at which the case is calendared for trial must file an entry of appearance under paragraph (a), and any related withdrawal of counsel must be undertaken in accordance with paragraph (c).

(e) Change in Required Information: A party or counsel must promptly notify the Clerk in writing of any change in the information required under this Rule, or of the death of counsel, for each docket number involving that party or in which counsel has entered an appearance.

(f) Change in Party or Authorized Representative or Fiduciary: Where (1) a party other than an individual participates in a case through an authorized representative (such as an officer of a corporation or a member of an association) or through a fiduciary, and there is a change in the representative or fiduciary, or

(2) there is a substitution of parties in a pending case, counsel signing the motion resulting in the Court’s approval of the change or substitution will thereafter be deemed first counsel of record for the representative, fiduciary, or party. Counsel of record for the former representative, fiduciary, or party desiring to withdraw as counsel must file a motion in accordance with paragraph (c)(2).

(g) Limitations on Representation:

(1) Conflict of Interest: If any counsel of record (A) was involved in planning or promoting a transaction or operating an entity that is connected to any issue in a case, or (B) represents more than one person with differing interests with respect to any issue in a case, then that counsel must either secure the client’s informed written consent; withdraw from the case; or take whatever other steps are necessary to obviate a conflict of interest or other violation of the ABA Model Rules of Professional Conduct. See Rules 1.7 and 1.8, ABA Model Rules of Professional Conduct. The Court may inquire into the circumstances of counsel’s employment in order to deter such violations. See Rule 201.

(2) Counsel as Witness:

(A) Counsel may not represent a party at trial if the counsel is likely to be a necessary witness within the meaning of the ABA Model Rules of Professional Conduct unless: (i) the testimony relates to an uncontested issue; (ii) the testimony relates to the nature and value of legal services rendered in the case; or (iii) disqualification of counsel would work substantial hardship on the client. See Rule 3.7, ABA Model Rules of Professional Conduct.

(B) Counsel may represent a party at trial in which another professional in the counsel’s firm is likely to be called as a witness unless precluded from doing so under the ABA Model Rules of Professional Conduct. See Rules 1.7 and 1.9, ABA Model Rules of Professional Conduct.

Explanation

Rule 24 is amended stylistically to enhance its readability; to simplify the procedures governing the appearance, substitution, and withdrawal of counsel representing a party; and to clarify certain limitations on counsel’s ability to represent a party.

Rule 24(a)(1)-(3) and (5) reorganizes portions of former paragraph (a) and lists the methods by which counsel may enter an appearance for a party, identifies the information that counsel must provide the Court, and describes the procedures applicable to counsel not admitted to practice before the Court and law student assistance. This reorganization is largely stylistic. Rule 23(a)(3) requires counsel to provide contact information, including an email address, on any paper filed with the Court. Consistent with that requirement, Rule 24(a)(2) is amended to require counsel entering an appearance in a case to provide an email address. Rule 24(a)(4) is new and recognizes the Court’s practice of permitting limited appearances and specially recognizing counsel or other individuals. In May 2019, the Court adopted procedures governing limited entries of appearance and revised those procedures in May and June 2020. See Administrative Order 2020-03, issued May 29, 2020, and revised June 19, 2020, superseding Administrative Order 2019-01, issued May 10, 2019. The Court intends to maintain flexibility regarding the procedures governing limited entries of appearance and will continue to provide guidance through administrative channels. The Rule is further amended to recognize that judges have the discretion to specially recognize counsel or other individuals in appropriate circumstances. For example, a judge may specially recognize counsel at a trial or hearing solely to receive an oral status report or for the submission of documents related to the disposition of the case.

Rule 24(b)(1) and (2) reorganizes former paragraph (b) and describes scenarios in which a party may proceed without counsel and the information that a representative of a party must provide the Court. The Rule includes a new cross reference to Rule 60, which provides a comprehensive discussion of proper parties and capacity to represent a party. This reorganization is largely stylistic, and no substantive change is intended.

Rule 24(c) is amended to provide a simplified procedure for withdrawal of counsel for a party when more than one counsel entered an appearance for that party and at least one counsel will continue to serve in that capacity. In that circumstance, and if there is no objection, counsel may file a notice of withdrawal no later than 30 days before the first day of the trial session at which the case is set for trial. The notice of withdrawal will be effective when it is entered on the docket record for the case.

Rule 24(d) is reorganized and amended to provide for substitution of counsel, if there is no objection, no later than 30 days before the first day of the trial session at which the case is set for trial. The amendment clarifies that the substitution of counsel must be filed by the substituted counsel and must include the signatures of both the current counsel and the substituted counsel. The Rule further provides procedures to be followed if substituted counsel enters an appearance within 30 days of the first day of the trial session at which the case is set for trial.

Rule 24(e) is reorganized and amended to provide that a party or counsel must promptly notify the Court of any change in the information required by the Rule, including notification of the death of counsel.

Rule 24(g)(1) and (2) reorganizes former paragraph (g). Although the amendment is largely stylistic, new paragraph (g)(2) clarifies the restrictions on counsel’s representation of a party where counsel may be called as a witness in a case in which counsel has entered an appearance.

3. Proceeding to enforce overpayment determination; cross references corrected

Paragraph (e) of Rule 260 is deleted and replaced with the following. [Paragraphs (a), (b), (c), (d), and (f) remain unchanged and are omitted here.]

RULE 260. PROCEEDING TO ENFORCE OVERPAYMENT DETERMINATION

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(e) Recognition of Counsel: Counsel recognized by the Court in the action in which the Court determined the overpayment which the petitioner now seeks to enforce will be recognized in a proceeding commenced under this Rule. Counsel not so recognized must file an entry of appearance pursuant to Rule 24(a) or a substitution of counsel pursuant to Rule 24(d).

Explanation

Rule 260(e) is amended to revise the reference to Rule 24 to account for changes to that Rule.

4. Proceeding to redetermine interest; cross references corrected

Paragraph (e) of Rule 261 is deleted and replaced with the following. [Paragraphs (a), (b), (c), and (d) remain unchanged and are omitted here.]

RULE 261. PROCEEDING TO REDETERMINE INTEREST

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(e) Recognition of Counsel: Counsel recognized by the Court in the action in which the Court redetermined the deficiency or determined the overpayment the interest in respect of which the petitioner now seeks a redetermination will be recognized in a proceeding commenced under this Rule. Counsel not so recognized must file an entry of appearance pursuant to Rule 24(a) or a substitution of counsel pursuant to Rule 24(d).

Explanation

Rule 261(e) is amended to revise the reference to Rule 24 to account for changes to that Rule.

5. Proceeding to modify decisions in estate tax case involving section 6166 election; cross references corrected

Paragraph (e) of Rule 262 is deleted and replaced with the following. [Paragraphs (a), (b), (c), (d), and (f) remain unchanged and are omitted here.]

RULE 262. PROCEEDING TO MODIFY DECISION IN ESTATE TAX CASE INVOLVING SECTION 6166 ELECTION

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(e) Recognition of Counsel: Counsel recognized by the Court in the action in which the Court entered the decision which the petitioner now seeks to modify will be recognized in a proceeding commenced under this Rule. Counsel not so recognized must file an entry of appearance pursuant to Rule 24(a) or a substitution of counsel pursuant to Rule 24(d).

* * * * * * *

Explanation

Rule 262(e) is amended to revise the reference to Rule 24 to account for changes to that Rule.

Summary Judgment Victory for Incarcerated Individuals

Two more victories have come in for incarcerated individuals in the short time since our last post on this subject.  Rarely does a case move so fast and so favorably.  It helps that the IRS took a position unsupported by the statute and that it inexplicably reached this position after reversing itself.  Still, it’s been a swift road to justice, up to this point, for incarcerated individuals.  You can access our prior posts on this case here and here.  You can access our initial post on this issue expressing incredulity at the flipped position of the IRS regarding the ability of incarcerated individuals to receive the EIP here.

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Yesterday, the district court for the Northern District of California granted summary judgment in Scholl v. Mnuchin and made the preliminary injunction permanent.  For a case initially filed on August 1, 2020, getting summary judgment in 75 days can make your head spin if you are primarily a Tax Court practitioner but even if you regularly practice in district court.  You can access the decision here.

On Friday the 9th Circuit ruled in an emergency appeal brought by the IRS that the IRS needed to follow an earlier order from the district court and send out notice to the incarcerated individuals.  You can find that opinion here.

Yesterday’s district court opinion follows the path set out by the order granting the preliminary injunction.  First, it addressed standing and ripeness.

In both their stay motion and opposition to plaintiffs’ motion for summary judgment, defendants explain at length why the court’s analysis of title 26 U.S.C. § 6428 was in error and incarcerated individuals are not entitled to an advance refund. See Mtn. at 3–7; Dkt. 70 at 8–11. From that premise, defendants argue that if their interpretation of section 6428 is correct, so too are their arguments regarding ripeness and standing. Mtn. at 7. In other words, if plaintiffs’ interpretation of the CARES Act is correct, then standing would exist. If, however, defendants’ interpretation of the CARES Act is correct, then standing would not exist because if no advance refund is presently owed, then any harm was not actual or imminent.

The court finds again that the failure to disburse the advance refund to the incarcerated individuals created an actual economic injury to them.  While it says that the incarcerated individuals did not need to establish that they were in fact entitled to the injury on the merits to move forward on the standing issue it determines that “they have established a legally cognizable right in the payments that defendants issued and then either intercepted or required to be repaid.”

With respect to ripeness the IRS again argued that the FAQ stating that the incarcerated individuals were not entitled to advance credit in 2020 did not create a reviewable agency act, because the plaintiffs can file their 2020 returns in 2021 seeking the credit.  The IRS also argued that the FAQs were not sufficiently formal administrative action, even though high level officials had stated that these would be the only pronunciations on the CARES Act.  Because the IRS has “already taken concrete action applying their determination to incarcerated individuals,” the court found ripeness satisfied.

It again finds a waiver of sovereign immunity in the APA, that the IRS had taken final agency action regarding the incarcerated individuals, and that no adequate alternative remedy exists, because filing the 2020 return, having the credit denied and suing for refund is quite different than getting a quick injection of cash during an economic crisis.  The court finds staying the action would create irreparable harm.  Because it is granting the motion for summary judgment, the court finds it appropriate to make the injunction permanent.

The court denied the first basis for summary judgment which plaintiffs requested under section 706(1) of the APA.  It did so because it finds that the IRS acted on the CARES Act as a whole.  Based on case law, even if it acted arbitrarily and incorrectly the fact that it acted is sufficient to satisfy the requirements of this provision:

Here, the IRS carried out its statutory responsibility by issuing advance refund payments to millions of Americans. It also acted with regard to incarcerated individuals; the agency initially issued EIPs to incarcerated individuals then changed its decision. Purposefully excluding incarcerated individuals from receiving advance refund payments is akin to drawing a boundary. That boundary might be arbitrary and capricious or contrary to law, but at the very least the agency acted.  

The second APA claim involves section 706(2)(A) and whether the IRS acted contrary to the law and in excess of statutory authority.  Here, the plaintiffs win.  The court addresses the “novel” statutory argument advanced by the IRS.  In doing so it looks back to litigation under the stimulus payment enacted by Congress during the great recession upon which the current stimulus legislation is based.  It finds that the advance refund is a special payment requiring the IRS to send it out as quickly as possible.  It rejects several arguments advanced by the IRS regarding the interpretation of the CARES Act legislation and the timing of the payments.  Then it rejects any argument the IRS may have regarding coverage of the CARES Act and incarcerated individuals.  It finds the action of the IRS to be arbitrary and capricious and reaffirms it prior holding.  It also reaffirms the class certification.  It orders the following:

For the foregoing reasons, defendants’ motion for stay pending appeal is DENIED. Plaintiffs’ motion for summary judgment of their first claim is DENIED and their motion for summary judgment of their second claim is GRANTED. As discussed herein, the court finds and declares that defendants’ policy violated the APA and is hereby VACATED. The Court also vacates the provisional certification of the class and certifies a litigation class for all purposes. Finally, the court enters the following permanent injunction.

PERMANENT INJUNCTION

Defendants Steven Mnuchin, in his official capacity as the Secretary of the U.S. Department of Treasury; Charles Rettig, in his official capacity as U.S. Commissioner of Internal Revenue; the U.S. Department of the Treasury; the U.S. Internal Revenue Service; and the United States of America, are hereby enjoined from withholding benefits pursuant to 26 U.S.C. § 6428 from plaintiffs or any class member on the sole basis of their incarcerated status. Within 30 days of the court’s September 24, 2020 order, defendants shall reconsider advance refund payments to those who are entitled to such payment based on information available in the IRS’s records (i.e., 2018 or 2019 tax returns), but from whom benefits have thus far been withheld, intercepted, or returned on the sole basis of their incarcerated status. Within 30 days of the court’s September 24, 2020 order, defendants shall reconsider any claim filed through the “non-filer” online portal or otherwise that was previously denied solely on the basis of the claimant’s incarcerated status. Defendants shall take all necessary steps to effectuate these reconsiderations, including updates to the IRS website and communicating to federal and state correctional facilities. Within 45 days of the court’s September 24, 2020 order, defendants shall file a declaration confirming these steps have been implemented, including data regarding the number and amount of benefits that have been disbursed.

A number of organizations have geared up over the past week to assist incarcerated individuals in filing to get their request for the EIP in before the portal closes.  The IRS has not stated what it will do with these requests as they arrive.  For a number of reasons, it would be best for the incarcerated individuals to submit their requests this year but they will face significant hurdles in doing so, not taking into account the hurdle of having the IRS approve the payment.  This issue is not over yet both for practical and legal reasons.  Kudos to the district court for acting so quickly that it is possible for many of the incarcerated individuals to make the requests for the EIP.  With over two million incarcerated individuals in the United States, there are a lot of forms to prepare in a short time.

DAWSON is Coming

On October 7 the Tax Court issued a press release announcing that it is about to install and implement its new case management system.  The Tax Court has been talking about its new system for a while now, but the announcement puts a new wrinkle in the situation because of the things the Court and the parties will need to do during the period of installation.  So, even if you do not particularly care that the Tax Court is implementing a new case management system, it’s time to sit up and pay attention so you know what’s happening during the installation process.

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DAWSON is an acronym for Docket Access Within a Secure Online Network and is also a nice tribute to the longest serving judge in Tax Court history, Judge Howard Dawson.  I had my only appearance before Judge Dawson in 1979 in Boise, Idaho.  He was highly regarded then and went on to become a legend at the court.  You can read about him here and here.

The press release informs that public that because of the installation of the new case management system:

To facilitate the transition to DAWSON, beginning at 5:00 PM Eastern Time on November 20, 2020, the current e-filing system will become inaccessible and all electronic files will become read-only. Consistent with current practices, cases will remain electronically viewable. No documents may be e-filed in the current system after that time. The Court does not anticipate issuing any orders or opinions during the time e-filing is inaccessible.

The press release notes that the Chief Judge issued Administrative Order 2020-04 extending the time for the IRS to file answers in all petitions filed between September 21, 202 and October 28, 2020.  It goes on to say that all other documents required to be filed between 5:00 PM ET on November 20, 2020 and whenever DAWSON becomes active must be filed in paper.  The normal rule required leave to file documents in paper is waived during this period.  The Court notes that timely mailing will apply to documents mailed during this period. 

It also acknowledges that going through another period of petitions being filed with the Court without acknowledgement of the filing going to the IRS will trigger another round of premature assessments.  In the notice it cites to the email address created by Chief Counsel, IRS to alert the IRS to a Tax Court filing and the need to abate a premature assessment.  That address is Taxcourt.Petitioner.Premature.Assessment@irs.gov.  It’s nice to see the Court be proactive on this issue and great that Chief Counsel’s office has just set up an address to help in fixing the problem.  Because pro se individuals will struggle to find this address, everyone should keep it in mind when working with a petitioner who files during this period.

Finally, a smaller point to note comes from Judge Buch and Deputy Clerk Jessica Marine, who gave a preview of DAWSON at the Court Procedure and Practice Committee session of the ABA Tax Section Fall Meeting on September 30. They reported that all links (URLs) to Tax Court opinions and orders will be broken after the new system comes in, meaning that existing opinions and orders will have different URLs, and the current URLs will not redirect. So, if you have saved any links to orders or opinions, you may want to download them before the new system goes live at the end of December, or be prepared to run a fresh search when you want to reference the document.

Well, why not do this during 2020.  It’s already a year like no other.  Shutting down the clerk’s office again may be more normal than abnormal in a year like this.  Although the Court does not anticipate issuing opinions or orders during the DAWSON installation period, I can foresee the need for an occasional order.  If you need an order, you should certainly request it.  I do not read the press release as a prohibition against the Court issuing orders. 

Revoking the Release of Federal Tax Lien

In Webb v. IRS, No. 1:17-cv-00058 (S.D. Ind. 2020) taxpayers get a sad lesson in the ability of the federal tax lien both to survive bankruptcy and to come back to life after release.  This is not a story of foreclosure, though that chapter may still be written, but rather a story first of what bankruptcy can and cannot do with respect to tax liens (and liens in general) and second of the power of federal tax lien revocation.  When the dust settles, the taxpayers come out of bankruptcy with their discharge, including a discharge of the federal taxes at issue, but with a home (and any other assets they have) still encumbered by the federal tax lien.

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In 2010 the IRS filed notices of federal tax lien (NFTLs) against the Webbs in the jurisdiction where they lived and owned a home.  In 2013 the Webbs jointly filed what must have been a chapter 7 bankruptcy petition.  On their schedules they listed all of their assets and liabilities including their home.  They must have claimed a homestead exemption for all or part of the equity in their home based on Indiana laws.  The exemption varies from state to state, and I did not go and look up the available exemption in Indiana.  On November 4, 2013, the bankruptcy court granted the Webbs a discharge.  The court doesn’t lay out the facts in a way that makes it easy for me to state the years for which the Webbs owed taxes when they filed their petition, but it seems that they owed for several years and that the years were fairly old making them susceptible to discharge.

After the bankruptcy discharge, on February 10, 2014, the IRS abated the tax liabilities and released the tax liens.  The discharge requires the IRS to not seek to collect from the taxpayers any discharged liabilities; however, it does not prevent the IRS from collecting liabilities from property to which its lien attaches.  Apparently, the IRS acted first to avoid violating the discharge injunction and they, two years later, came to the realization that the Webbs retained property after the discharge to which the federal tax liens attached.  After coming to that realization, the IRS needed to reverse the abatement of the taxes and revoke the release of the federal tax lien.  It reversed the abatement in 2016 and revoked the releases in 2017 to 2019.

People filing chapter 7 bankruptcy may spend little time with a lawyer discussing what precise debts will survive bankruptcy.  If they do have this discussion, it often does not include the distinction between discharging the personal liability on the underlying tax and the survival of the lien.  So, many debtors in the Webbs position would expect their tax liabilities to go away and when the IRS wipes away the liabilities immediately after bankruptcy, the action reinforces their expectations.

It is not surprising that the Webbs would react with shock and dismay as the IRS reverses the abatement of their tax liability and reinstates its liens.  Unfortunately, the IRS can do this and their arguments failed.

Discharge of Liens

The Webbs first argue that the IRS cannot reinstate the liens because the tax liabilities were discharged.  This argument fails and it should.  This argument does not make a distinction between the effect of the discharge on their personal liability for the tax debt versus the effect on the lien encumbering their property.  A bankruptcy discharge can wipe out a personal liability but does not affect a lien interest.  The court establishes that the IRS validly established the liens prior to bankruptcy and then describes the law regarding the survival of liens including tax liens.

Reversal of Abatement

The Webbs next argue that the IRS could not reverse the abatement of the assessments because the tax liabilities were discharged.  This argument also fails because the lien interest allows the assessment to survive (or to be reinstated.)  According to the court the IRS did not cite to cases that established this exact point, but it did find other cases regarding reversal of abatement that supported the IRS position.

Revoking the Lien Release

The IRS regularly releases liens it later regrets releasing.  The Webbs continue to argue that the IRS cannot revoke the release because of the effect of the discharge.  IRC 6325(f)(2) allows the IRS to revoke a release if it releases a lien “erroneously or improvidently.  Here, the IRS stated that it acted erroneously or improvidently in releasing the lien initially.  The court finds that the IRS followed the appropriate procedures in reinstating the lien.  Therefore, the court finds the refiling of the liens after the revocation of the release to properly reestablish the liens.

Limitations on Scope of Liens

When the IRS filed its claim in the chapter 7 case it claimed a secured amount of $12,357.00 and a general unsecured amount of $383,527.99.  I cannot say exactly why the IRS filed its claim with those amounts but it normally calculates the equity of its liens based on the statements in the debtor’s schedules.  The IRS does not perform a separate analysis of the value of the debtor’s property in filing its claim form.  Here, the Webbs’ argument is that if the court allows the IRS to reverse the abatement and reinstate its liens, the IRS can only assert a lien interest in the amount listed on its claim.

The court discusses the cases cited by the Webbs but not any cases the IRS might have cited.  It concludes that the IRS can pursue its lien claim in the amount of $395,884.99 the full amount of the lien.  This does not mean that the IRS will collect that amount.  The case does not provide enough information to allow speculation on the amount the IRS will ultimately collect on its lien claim but it could be much closer to $12K than $395K.  The IRS can only collect from assets in existence at the time of the bankruptcy filing.  It cannot collect from the Webbs personally.  Its lien claim does not come ahead of the first mortgage on the Webbs’ home. 

The lien claim probably matches the amount of the Indiana homestead exemptions plus whatever increases in value have occurred with respect to the assets the Webbs protected using their homestead exemption.  Not only does the discharge limit the IRS in the assets from which it can pursue to satisfy the debt but the discharge makes it difficult for the IRS in other ways.  It must make sure that in reinstating the assessment its computer does not offset subsequent refunds due to the Webbs.  In cases of this type the primary available asset of any value may be the Webbs home.  The IRS must now navigate the issues regarding administrative seizure and sale of a home or bring a suit to foreclose its lien on the home.  The IRS does not go after people’s homes that often though certainly it can do so.

The Webbs were right to want to prevent the reassessment of the liability and reattachment of liens but had little defense to this action, which can cruelly come after the victory party they may have held upon receipt of the discharge.  I expect that having gone this far the IRS will pursue collection from their home but that brings another case.  This case simply reestablished the liens.  It did not enforce them.

Latest Update on Providing Stimulus Payments to Incarcerated Individuals

A couple weeks ago I blogged about the significant victory achieved on behalf of prisoners with the grant of a preliminary injunction ordering the IRS to stop denying stimulus payments to incarcerated individuals.  As discussed previously, the denial of refunds to incarcerated individuals makes little sense when the statutory language provides no basis for excluding them.  The behavior of the IRS here allowing the payments and then deciding about six weeks after the passage of the CARES Act to exclude them also makes for a puzzling situation.  As discussed in the prior post, the judge swatted away all of the arguments made by DOJ in granting a complete victory for the incarcerated individuals.

The government appealed the case on October 1.

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On October 7, 2020, the Court issued its next ruling.  This time it focused on relief.  In its initial ruling the court asked the parties to confer and, if possible, propose agreed upon relief measures.  The parties did not reach agreement but proposed separate plans.  Once again the court did not find the DOJ argument availing. 

Website

The first issue concerned the information on the IRS website about incarcerated individuals.  The FAQ first published by the IRS in early May told incarcerated individuals they were ineligible for the stimulus payment.  The parties were not far apart on how to fix this but the IRS had not gone far enough so:

the court ORDERS defendants to update the IRS.gov website (and any other related page) to state that incarcerated individuals who have not received the advanced refund payment may provide information to the IRS to allow the IRS to consider the individual’s eligibility for the refund. The website shall indicate that individuals may file using the online non-filers tool or by mailing a simplified paper tax return to the IRS. Defendants shall update all FAQs and any other pages that discuss the eligibility of incarcerated individuals for an EIP to reflect the court’s order.

The court gave the IRS until October 8, 2020 to update its website and additionally provided:

Defendants shall also communicate to IRS employees or other federal employees who interact with the public to answer questions regarding EIP in accordance with the guidance posted on the IRS.gov website and the court’s orders.

I know the word is getting out, because we have received calls to the tax clinic from individuals seeking help for their incarcerated family or friends.  Similar messages have appeared elsewhere in LITC information site.

Communication with Prison Officials

Before the litigation the IRS had affirmatively gone out to prison officials to make it clear that incarcerated individuals should not receive the stimulus payments and to solicit their support in intercepting any stimulus payments headed to incarcerated individuals.  Reversing this message is needed not only to allow the incarcerated individuals to receive the checks but also to keep them from any disciplinary measures that might result from requesting the stimulus payment in the face of the IRS position regarding their entitlement prior to the litigation.  The parties again were not miles apart in their request, but the request made by the attorneys representing the incarcerated individuals contained significantly more detail, much of which the court adopted:

the court ORDERS defendants to distribute the following documents to all state and federal correctional facilities for which it maintains any communication channel: (1) a cover letter that includes2 the four main points addressed by plaintiffs in the proposed plan; (2) an electronic version of the simplified paper return (Form 1040/1040-SR) referred to in Rev. Proc. 2020-28 with instructions on how to complete the simplified form; and (3) legal notice, as described below.

The court did not order a specific date by which the this had to occur but ordered the parties to work together expeditiously.

Mailed Notice to Class Members

Here the parties had significant differences of opinion.  Plaintiffs’ lawyers pointed out that the IRS has a database of incarcerated individuals updated at least to October, 2019.  The IRS argued that it did not have current or last known addresses for individuals incarcerated earlier this year but how have been released.  The IRS also said:

in their opposition to plaintiffs’ motion for notice to class, defendants detailed significant obstacles to providing effective individualized notice including outdated addresses, unformatted and invalidated data, and incomplete data. Dkt. 56 at 7. Ordering the IRS to provide individualized notice would force the IRS to reallocate resources from its other commitments to disbursing advance refund payments for eligible individuals. Id. Finally, any mailed notice will not arrive in time to postmark a simplified paper return by October 15, 2020.

The Court accepted the IRS position that it did not have good addresses for everyone but ordered it to send individualized notices to everyone for whom it did have a good address by October 15, 2020.  That puts a lot of pressure on the IRS.  Of course, there is also a fair amount of pressure on the incarcerated individuals if they want to receive the stimulus payment in 2019.

Deadline to Submit Simplified Paper Returns

The IRS had already moved the deadline for seeking the stimulus payment through its portal from October 15 to November 21 but the deadline for paper returns remains at October 15.  Because of their location, incarcerated individuals will struggle to get to an online portal.  Plaintiff’s attorneys sought an ability to submit the request for the stimulus payments by paper at a later date.

The Court pointed to an IRS publication to community organizations extending the time to file by paper to October 30.  Here is a copy of that publication:

Based on the IRS granting to community organizations the deadline of October 30, the court granted to incarcerated individuals that deadline as well.  This is still a tight deadline but is feasible for many.  Of course, missing the deadline does not preclude individuals from obtaining the credit on their 2020 returns filed next year.  Since a high percentage of the incarcerated individuals do not have a return filing obligation, getting the stimulus payment through the submission of a form now provides greater relief.

As with the first order, the judge not only acted quickly but provided almost full relief for the incarcerated individuals.

Acting on the momentum of the earlier decisions, plaintiff’s attorneys filed a motion for summary judgment on September 29.  The government filed its response on October 7.  Plaintiffs filed a reply on October 9 and the Tax Clinic at the Legal Services Center of Harvard Law School filed an amicus brief on behalf of the Center for Taxpayer Rights in support of plaintiffs on that date.  Because the court has acted quickly in its prior decisions, this decision could occur very soon.

The government has not explained why it flip flopped regarding incarcerated individuals last spring (and regarding decedents).  In testimony last week, the Commissioner suggested to the House Committee before whom he was testifying that this was a question best asked of the Treasury Department.  Perhaps the IRS determination of the CARES Act was overruled by Treasury or some higher authority.  So far, this mystery remains unexplained.  Whoever in the government made the decision to flip flop on this issue in the face of very plain language in the statute is learning that at least the district court in the Northern District of California is not buying their interpretation.

Premature Dismissal

I have written before about premature assessments which are one consequence of the closing of the Tax Court clerk’s office during the pandemic.  A separate problem also exists with respect to the timing of appeals from the Tax Court.  So, the pandemic creates problems for cases coming and going in the Tax Court.

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Some problems could result from the closure of the clerk’s office during this period because of the way that appeals from Tax Court cases occur; however, when writing to the circuit courts to explain the problem and urge them not to dismiss appeals that fell due during the period in which IRS Notice 2020-23 extended the period.  In the letter to the circuit courts, the Department of Justice Appellate Section relied on IRC 7508A and the authority of the IRS to extend time frames where an emergency exists to explain to the circuit courts when cases should not be dismissed without a careful review of the dates of filing and how they related to the extension of time granted because of the pandemic.  A copy of the letter from the Tax Section of DOJ to the Second Circuit which was docketed in the appeal of Castillo v. Commission is here

When a taxpayer loses all or part of a Tax Court case and seeks to appeal, the basics of the appeal process are found in IRC 7482 and the specific provision stating that the appeal must be filed in the Tax Court within 90 days of the adverse decision is found in IRC 7483.  Not only does the taxpayer file the appeal with the Tax Court but the taxpayer also pays the filing fee to the Tax Court.  (Unless you can qualify for a fee waive at the circuit court, which is a separate process from requesting a fee waiver with the Tax Court, the taxpayer must pay quite a bit more to appeal than to file the Tax Court case – $505 versus $60.)

The reopening of the Tax Court clerk’s office no doubt caused the clerks not only to find all of the Tax Court petitions filed during the period of the closure of the clerk’s office but also the appeals filed.  The number of appeals filed is not a high number but just as the IRS assessed taxes presuming the taxpayer did not file a Tax Court petition, the circuit courts receiving a notice of appeal that the Tax Court logged in after the pandemic could conclude that the appeal was not timely filed and dismiss it.  This caused the Appellate Section of the Department of Justice to send a letter to the Second Circuit and to the other circuits. 

The letter notifies the Second Circuit of the issue created by the pandemic and of the specific grant of additional time to file the appeal created by Notice 2020-23.  The letter notes that this process is specific to tax and that circuit courts would not be expected to know this nuanced issue regarding tax appeals.

Carl Smith suggested this post to me and provided me with some helpful things to say for which he deserves credit.  He points out that there are many different statutes of limitation (SOLs) for bringing civil and criminal appeals.  For example, the general civil appeals SOL may be found at 28 USC 2107.  Subsection (a) provides the general rule that the appellant has 30 days.  Subsection (b) allows 60 days to appeal when the government is a party.  Subsection (c) allows district courts to extend the SOL under limited circumstances.  In Bowles v. Russell, 551 U.S. 205 (2007), the Supreme Court held that, even though it would not treat the civil appeals filing deadline as jurisdictional if it were applying its current case law on a clean slate, the deadline was still treated as jurisdictional because there were over 100 years of Supreme Court cases holding the filing deadline jurisdictional (a stare decisis exception to the Court’s new rules generally treating filing deadlines as not jurisdictional).

By contrast, the period to file an appeal from the Tax Court is in IRC 7483, which generally provides 90 days from the entry of the Tax Court decision.  Unlike 2107, 7483 does not list any exceptions or extensions.  The Supreme Court has never held the 7483 filing deadline to be jurisdictional, and it is clear that the section’s language would not make it jurisdictional under current Supreme Court case law.  There are some older Circuit court opinions holding the Tax Court appeal filing deadline to be jurisdictional and more recent unpublished Circuit court opinions stating the same, but none discusses the recent Supreme Court case law’s impact on the filing deadline.

There is a special FRAP rule applicable to Tax Court notices of appeal, Rule 13.  FRAP 13(a)(1)(B) provides for a non-statutory extension of the filing deadline as follows:  “If, under Tax Court rules, a party makes a timely motion to vacate or revise the Tax Court’s decision, the time to file a notice of appeal runs from the entry of the order disposing of the motion or from the entry of a new decision, whichever is later.”  In Myers v. Commissioner, 928 F.3d 1025 (D.C. Cir. 2019), the appellate court, sua sponte, raised the question whether it had to dismiss the appeal for lack of jurisdiction because Myers waited to file until after the Tax Court ruled on a post-decision motion to reconsider findings or opinion — at a time beyond 90 days after the decision had been entered.  The D.C. Cir. ultimately held that the appeal was timely because, following the reasoning of another Circuit, motions to reconsider should be deemed the same as motions to vacate for purposes of Rule 13(a)(1)(B).  Had the court not found the filing timely under the rule, it would have had to face the issues (raised by Myers) whether the 90-day period to file the appeal was not jurisdictional, and the DOJ waived any objection as to untimeliness by not raising this issue itself.  The D.C. Cir. deliberately declined to rule on the issue of whether the 90-day filing deadline in 7483 is jurisdictional under recent Supreme Court case law.

The recent Tax Court appeal dismissals for lack of jurisdiction have happened because some Circuits just assume that the filing deadline is jurisdictional and thus the court must independently raise the issue of timeliness.  Since courts of appeals see few Tax Court appeals, they are likely not aware that other provisions of the IRC, such as section 7508A, can provide extensions of the 7483 period — i.e., to look elsewhere before simply assuming all extensions of the 7483 period are located within the statute or Rule 13.

Update on Tax Court from Court Procedure and Practice Committee meeting

As a side note Judge Buch stated on a panel at the ABA Tax Section that the members of the clerk’s office there were working 12 hour days in order to attack the backlog of correspondence waiting for them when they returned.  I understood him to say that the clerk’s office at the Tax Court had worked its way through the backlog and was current.  This is good because he introduced a session on the Tax Court’s new case management system, which will go live in a couple months.  I hope the members of the clerk’s office at the Tax Court were well rested when they returned from the pandemic closure, because they are having to run pretty fast for the remainder of 2020 between catching up on the mail and working through a new management system.

Collection Issues Discussed at Recent ABA Meeting

As mentioned in the prior two posts, here and here, I participated in a panel at last week’s ABA Tax Section meeting on which we discussed the notices sent out with computer generated dates going back to the beginning of the IRS shut down due to the pandemic.  In addition to discussing those notices, the panel discussed a variety of additional collection issues worth their own post.  In this post I will go over the additional collection issues worth consideration.

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Premature assessment of Tax Court Cases

I wrote a post on this issue in June when the issue first caught my eye.  Read that post if you need to come to an understanding of premature assessments.  Here, I seek only to provide an update on what Chief Counsel’s office has done to address the problem.  As I mentioned in that post, Chief Counsel attorneys do a great job of fixing premature assessments brought to their attention.  Because they know of the scope of the problem caused by the pandemic, Chief Counsel’s office has taken proactive measures to find and fix any premature assessments.  They are watching the new petitions to try to catch these assessments.  They have also created an email address that taxpayers can use to send in a problem regarding premature assessments that will cause the case to be worked immediately.  The address is taxcourt.petitioner.premature.assessment@irs.gov.  They ask that this address only be used to report a problem with a premature assessment and not to report other systemic or case related problems.

Suspension of Collection Notices

On August 21, 2020, the IRS temporarily stopped sending balance due notices and announced the scope of this temporary halt. The notice does not say how long the stop will last but this is a welcome development.  As I wrote previously, even though many in the IRS collection function went back to work in mid-July, these collection individuals do not know what a taxpayer might have done during the period of the IRS closure since the IRS continues to work through its backlog of correspondence including checks, requests for an OIC and other correspondence that could impact the need for collection action or the type of collection action.  It makes sense to hold off on many types of collection action until the IRS catches up with the correspondence and knows if anything happened during the period of closure that could impact the need for collection or the type of collection needed.

Offers in Compromise

One of the areas of greatest concern to me was offers, because the tax clinic where I work submitted offers during the pandemic and as much as we try to explain to our clients the potential impact of the pandemic on IRS actions, we cannot sufficiently comfort them regarding the collection action the IRS might take while such action should be suspended during the period of the offer.  The basic problem for these clients is that the offer will not suspend collection until the IRS knows an offer exists.  It will not know of the existence of an offer until it can process its mail.  Just in the past week, the clinic has received notification of the receipt of offers mailed to the IRS six months ago.  Fortunately, in those cases no collection action occurred before the IRS opened its mail and input the receipt of the offers.

We have written before about offers timing out due to the 24-month provision in IRC 7122.  I have wondered how this period is impacted by the pandemic.  If a taxpayer mailed an offer in April 2020 that the IRS opens in October 2020, have six of the 24 months run or does the time period only start in October?  This is more of an academic question than practical one because few offers get even close to the 24-month period, but it is the kind of thing professors can debate.  A related issue is whether the statute of limitations on collection ran during the six-month period while the IRS had the offer but had not opened its mail.  My guess is that the IRS would not treat the statute as suspended during period and that it would not start the 24-month clock running until it opened the mail.

Last week the panel discussed some of the other pandemic issues with offers.  On March 30, 2020, the Director, Headquarters Collection issued a memo providing: 1) taxpayers had until July 15, 2020 to provide information to support pending offers; 2) Pending OIC requests would not be closed before July 15 without taxpayer’s consent; 3) OICs would not be defaulted if the 2018 return was not filed prior to July 15, 2020; and 4) taxpayer could suspend payments on accepted and pending OICs until July 15.  I did not see the OIC unit pushing during the period leading up to July 15.  Since that date I have been contacted by offer examiners on cases.  The examiners have been more generous than usual in the time frames for submission of additional documentation.  Frank Agostino suggested during our panel that the OIC unit had loosened its standards a bit because of the pandemic.  I have not seen enough cases to have an opinion on any change in standards, but it’s a nice thought.

Posting of Payments

The IRS had adopted a taxpayer beneficial position regarding the posting of payments received during the pandemic.  As it opens the vast backlog of mail, it gives taxpayers a payment posting date of date received by the IRS and not the date of opening.  It is also providing relief from the bad check penalty for dishonored checks received between March 1 and July 15, 2020.  It is easy to imagine that someone who sent the IRS a check in April might not be able to cover that check when processed in September or October, 2020.

Equitable Tolling

The panel briefly discussed equitable tolling and the prospect that the pandemic has brought on many opportunities for arguing equitable tolling.  Perhaps a more accurate description would be to say I used the panel as an opportunity to discuss this issue.  My fellow panelists sat politely while I talked about equitable tolling. 

There are two pending cases worth watching both of which involve an effort to have the Tax Court accept late filed CDP cases.  The Castillo case is just getting underway in the Second Circuit.  We wrote briefly about this case here (if you follow the link don’t stop just because the heading of the post concerns grand jury issues.)  So far the amicus brief filed by the tax clinic at Harvard is the only filing of substance in that appeal.  The other case to watch is in the Eighth Circuit where a petition for rehearing en banc was filed in Boechler which we discussed here.  The Eighth Circuit did not dismiss the petition out of hand but has ordered the Department of Justice to respond to the request filed by the petitioner (supported by an amicus brief from the tax clinic at Harvard.)