Seeking Attorney’s Fees for Violation of Automatic Stay

What does a court do when the statute requires exhaustion of administrative remedies before a grant of attorney’s fees and the administrative agency (here the IRS) guides people to perform an impossible act in order to seek to exhaust administrative remedies?  That was the issue facing the bankruptcy court in Langston v. Internal Revenue Service, Case No. 17-10236-B-13 (Bankr. E.D. Cal. 2019).  In the end, the court denied the request for attorney’s fees because of precedent in the 9th Circuit but the courts are split on the issue and the IRS is about a decade behind in updating its guidance to the public on how to make an administrative request to fix a problem it creates by violating the automatic stay. Outdated language referencing the non-existent “Chief, Local Insolvency Unit” role remains in the current version of the CFR.

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Mr. Langston is a retired federal employee who also owed federal taxes.  I don’t think he is the only retired federal employee with this issue, but the government especially wants individuals to whom it is paying a pension to pay their taxes.  So, it has a program for taking from their pension payments to satisfy the outstanding tax debt.  The program is a perfectly legitimate method for the IRS to collect past due taxes except when used while the automatic stay comes into effect.  That’s what caused the problem here.

Mr. Langston and his wife filed a Chapter 13 bankruptcy case in January 2017.  The bankruptcy court notified the IRS within two weeks of the filing and the IRS filed a proof of claim one week thereafter.  So, it is indisputable that the IRS knew about the automatic stay.  Normal procedures would have had it input a code into its computer system almost immediately after learning of the case.  Here, it is not the IRS specifically that took the action violating the stay.  The agency taking from his pension and sending the money to the IRS was the Office of Personnel Management (OPM).  It could well be that the debt offset indicator arrived at the OPM before the bankruptcy case and there was a delay in that office in taking action.  It is also possible that there was a delay at the IRS getting information about the stay to OPM or a delay at OPM in putting the stay into its system.  The bankruptcy court does not go into the details of how the problem occurred and it really does not matter in the resolution of the case, but it should matter to the IRS and OPM so that a system exists to immediately notify OPM of the stay and for OPM to immediately put the stay into its system. 

For undescribed reasons, OPM sent to Mr. Langston a letter he received in early April saying that it would withhold a part of his pension to satisfy the outstanding federal tax debt. OPM withheld almost $400 a month for four months starting in April 2017.  The Langstons’ bankruptcy lawyer filed an adversary proceeding in May 2017 after informally trying to convince the IRS to stop taking the money.  Their representative did not seek to formally stop the taking of the pension funds prior to bringing the suit.  The IRS eventually gave back all of the money taken by OPM.  In responding to the complaint which undoubtedly included a request for monetary damages, the IRS would have pointed out that the Langstons did not first try to resolve the problem administratively.  Apparently, in doing so the IRS informed the Langstons that they were supposed to send a request to the “Chief, Local Insolvency Unit” of their district.

A few reorganizations ago, there existed in every IRS district (also a thing of the past) an insolvency unit that handled bankruptcy cases and a few other related proceedings.  Most of the IRS bankruptcy function was centralized some time ago, and local offices no longer had someone with the title “Chief, Local Insolvency Unit.”  Of course, if you weren’t following the staffing flows of the IRS, you would have no easy way of knowing this and that was the problem the Langstons faced in trying to make their administrative request for relief.  Here’s what the court said about it:

Then, Langstons’ counsel tried without success to find the right “Chief, Local Insolvency Unit” to receive an administrative claim. Many web searches and even formal discovery was met with no identified “Chief, Local Insolvency Unit.” Exasperated, Langstons’ counsel sent the administrative claim addressed to “Chief, Local Insolvency Unit” to every IRS office located within this district. The IRS admitted in discovery that to their knowledge no employee retains the title of “Chief Local Insolvency Unit” after the IRS reorganized in 2010. The IRS instead referred debtors’ counsel to a listing of “Collection Advisory Groups.” The IRS did respond after receiving debtor’s administrative claim noting they were referring it to the “Local Insolvency Unit.” But the IRS did not name a “Chief” of that unit. And so, it goes.

The Langstons could not show they had actual damages from the taking of $400 of his pension for four months.  Of course, they did incur attorney’s fees as their attorney tried to get the IRS to stop taking their money.  So, they sought attorney’s fees even though they were not entitled to damages.  The IRS fought the payment of attorney’s fees stating:

… [the] court does not yet have subject matter jurisdiction to decide the attorney’s fees issue because the debtors filed this adversary proceeding before filing an administrative claim with the IRS. They reason that their waiver of sovereign immunity under § 106(a)(1) for attorney’s fees claims stemming from automatic stay violations is conditioned upon a debtor’s compliance with 26 U.S.C. §§ 7430 and 7433 and the applicable regulations before filing suit. Counsel for the United States noted in oral argument that the Plaintiffs have now complied with the exhaustion requirement because they filed the administrative claim, albeit at the wrong time and that more than six months have passed with no action by the IRS. 26 C.F.R 301-7433-2(d)(ii).

The debtors must have wondered, “Wait a minute, how could we file an administrative claim prior to filing suit when your instructions told us to file the claim with someone who does not exist?”  Seems like a reasonable question to ask.

The IRS responded with two arguments.  First, it argued

“all that is required to satisfy the plain language of the regulation is that a writing be sent to ‘Chief, Local Insolvency Unit’,” the actual existence of an individual with that title being immaterial for compliance. 

[Keep that in mind because this is not the only place where the title in the regulations or other IRS guidance does not match the actual lineup at the IRS. Of course, the IRS did not say where the taxpayers should mail this letter and that could become an issue in a future case.]

Second, the IRS argued that the debtors’ reliance on Hunsaker v. United States, 902 F.3d 963, 968 (9th Cir. 2018) was misplaced.  Les blogged the district court opinion in Hunsaker here and the bankruptcy court opinion here.  We did not blog the 9th Circuit’s opinion in Hunsaker, in which it reversed the district court and determined that the bankruptcy code did waive sovereign immunity to obtain damages for emotional distress.  The IRS argued that the Langstons’ reliance on the 9th Circuit opinion was misplaced because Hunsaker did not address the situation where the only issue involved attorney’s fees.  It determined that there was a waiver for emotional damages, but here that issue does not exist.

The bankruptcy court looked at the litigation on this issue around the country and found that courts are split over the sovereign immunity argument.  Focusing on 9th Circuit jurisprudence, it found a 1992 opinion, Conforte v. United States, 979 F.2d 1375, 1377 (9th Cir. 1992) (almost all cases involving Conforte are worth reading if you enjoy cases with lurid details) holding that debtors must exhaust administrative remedies in order to receive attorney’s fees.  So, on the legal aspect of the IRS argument, the court finds that the IRS is correct in the precedent controlling it.

Then the court addressed the factual issue of whether the debtors did try to exhaust administrative remedies despite the barriers imposed by the IRS.  It stated:

In none of the cases previously discussed have the courts examined this issue raised by Plaintiffs — that complying with the statute is impossible. The courts either found that the taxpayer made no attempt (see Swensen v. United States (In re Swensen), 438 B.R. 195, 198 (Bankr. N.D. Iowa 2010); In re Rae v. United States, 436 B.R. 266, 275 (Bankr. D. Conn. 2010); Kight v. Dep’t of Treasury/IRS (In re Kight), 460 B.R. 555, 566 (Bankr. M.D. Fla. 2011)), or found that the taxpayer’s attempt was deficient for a number of reasons (see Klauer v. United States (In re Klauer), 23 Fla. L. Weekly Fed. D 153, at *11-14 (M.D. Fla. 2007); Don Johnson Motors, Inc. v. United States, 532 F. Supp. 2d 844, 883 (S.D. Tex. 2007); McIver v. United States, 650 F. Supp. 2d 587, 593 (N.D. Tex. 2009); Barcelos v. United States (In re Barcelos), 576 B.R. 854, 857-58 (Bankr. E.D. Cal. 2017); Galvez v. IRS, 448 F. App’x 880, 886 (11th Cir. 2011); Kuhl v. United States, 467 F.3d 145, 148 (2d Cir. 2006); In re Lowthorp, 332 B.R. 656, 659-61 (Bankr. M.D. Fla. 2005)), but no court addressed whether compliance was possible because the tax-payer was required to send the documents to a person that did not exist, nor was that argument ever raised.

Because the debtors’ original and amended complaint did not allege that they exhausted their administrative remedies, the court ultimately concludes that it cannot award attorney’s fees.  But it does not stop there.  Before dismissing the case without prejudice, it finds that

Plaintiff actually did send such a notice but after the lawsuit was filed. The IRS now admits Plaintiffs have complied and could proceed with another action for attorney’s fees.

I do not know if that means we should stay tuned for the second suit for attorney’s fees or that the Langstons can get fees if the IRS does not adequately resolve the matter.  In any event, it’s clear that the law here is not clear.  It’s also clear that the IRS paints itself into a corner when it asks people to do the impossible. 

Another Return Preparer Fails to Take Advantage of Special Time for Filing Refund Suit under 6694

Carl wrote last summer about a 9th Circuit case in which a return preparer failed to take advantage of the special rule for filing a refund suit under IRC 6694.  Les wrote about the same issue last winter.  As a result of failing to take advantage of the special path to contesting a refund claim under IRC 6694, the return preparers in the cases described by Carl and Les fell back into the full payment rule of Flora which we have discussed at some length in earlier posts such as the ones here and here

Now another 6694 case has come to the same sad ending where the return preparer paid the 15% which would have triggered the exception to the Flora rule, but did not file the complaint timely, resulting in a dismissal with a remonstration to fully pay the tax before coming back to have the court take a look at the merits.  The return preparer in Riter v. United States, No. 2:17-cv-01265 (D. Utah March 15, 2019) did not give up easily.  He made arguments challenging the Flora rule and requesting equitable tolling, but he lost all of his arguments.  The case points out once again the somewhat tricky exception to Flora created by IRC 6694 (also created in IRC 6703) and the carefully prescribed steps a penalized return preparer must take to comply.  The existence of three cases with the same problem in one year points out that the perceived benefit of the Flora exception in IRC 6694 can be somewhat illusory unless you follow the precise steps Congress set out for this section alone.  While it’s worth asking why Congress created a unique path to refund litigation for one section, these cases show why it’s not worth litigating the issue to ask the court to answer that question.

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Mr. Riter may be a subscriber to this blog because he makes an equitable tolling argument not made in the prior two cases mentioned above.  Before getting to his argument and the court’s response, here is the succinct statement of the facts set out in the magistrate judge’s report:

In this case, on June 27, 2016, the United States assessed Mr. Riter penalties under 26 U.S.C. § 6694(b) for tax years 2010 through 2014 in the amount of $5,000 for each year, or a combined total of $25,000. (Compl., ¶ 13, ECF No. 2.) In compliance with § 6694(c)(1), Mr. Riter, on July 22, 2016, filed a claim for refund and paid $750, or 15% of the total penalty, for each tax year, totaling $3,750 for the five tax years. (Id., ¶ 15.) However, Mr. Riter did not satisfy the prerequisites of § 6694(c)(2). That provision required Mr. Riter to file his lawsuit by the earlier of either (1) thirty days after the United Sates denied his refund claim, or (2) thirty days after six months from the date he filed his refund claim. The United States denied Mr. Riter’s refund claim on November 16, 2017. (Id., ¶ 26.) Thirty days after this date is December 16, 2017. Mr. Riter filed his refund claim on July 22, 2016. Thirty days after six months from July 22, 2016 is February 27, 2017. February 27, 2017 is clearly the earlier of the two dates. However, Mr. Riter did not file this lawsuit seeking a refund of the penalties until December 8, 2017, (see id.), well beyond the February 27, 2017 deadline to do so. After February 27, 2017, the 15% limited exception to the full payment rule “cease[d] to apply with respect to such penalty,” meaning that the full payment rule applied after that time. 26 U.S.C. § 6694(c)(2). However, Mr. Riter admits he paid only 15% of the penalties, (see Compl., ¶ 15, ECF No. 2), thereby conceding he did not comply § 1346(a)(1) and Flora’s full payment requirement.

If not before then certainly by the time the IRS filed its motion to dismiss for lack of jurisdiction, Mr. Riter knew that he had not followed the very precise rules required to satisfy the exception to the Flora rule available in IRC 6694.  In order to move his case forward, he did not argue that he complied with the IRC 6694 provisions, but instead argued that they were claims processing rules rather than a jurisdictional requirement.  He cited to United States v. Wong, 575 U.S. __, 135 S. Ct. 1625, 1632 (2015), arguing that because IRC 6694 does not use the word jurisdictional, the court has the ability to determine that his late performance of the requirements of IRC 6694 could be excused under the principle of equitable tolling.

Responding to this argument, the magistrate judge stated:

…as the United States points out, Wong involved a failure to comply with the Federal Tort Claims Act statute of limitations, and § 6694(c) is not a statute of limitations similar to the one at issue in Wong. (Reply in Supp. of Pl.’s Mem. in Opp’n to United States’ Mot. to Dismiss for Lack of Subject Matter Jurisdiction 4, ECF No. 12.) Significantly, Mr. Riter does not cite to any case law finding that § 6694(c) or the nearly identical § 6703(c) constitute merely claims processing rules.

The fact that 6694 is in the Internal Revenue Code and not the Federal Tort Claims Act should not control the outcome, nor should the fact that no one had previously successfully argued the claims processing issue.  The specificity of the statute and the fact that Congress knew it was creating an exception to a jurisdictional rule support the court’s conclusion.  I am troubled by the court’s view of the statement that Congress must make about jurisdiction.  It stated “If the Supreme Court considers § 6694(c) a claims processing rule and not jurisdictional, it will need to state as much explicitly before a lower court can make such a finding.”  This reverses the normal rule which requires Congress to make it clear a provision is jurisdictional and not make it clear that one is not.  The court gets to this twist because it views the law as well established that Flora is a jurisdictional requirement and sees 6694 as an exception to that requirement.

Going beyond the claim processing issue, Mr. Riter does not appear to have offered the court much, if any, reason that he missed the statutory time periods.  For his argument to succeed, assuming he were to get past the jurisdictional issue, he still must show the court why it should give him relief.  Just saying a statute is a claims processing rule does not win the day.  Someone who misses the deadline for a claims processing rule must still demonstrate a reason why they deserve relief.  He does not seem to have done this.

In losing, Mr. Riter shows that he learned from the earlier cases and made arguments attacking the standard interpretation of the statute.  Unfortunately, his argument was unsuccessful, perhaps because he did not have the facts to support the equitable tolling.  The case reminds us again of the care required from individuals assessed a penalty under IRC 6694 or 6703 if they wish to contest the penalty without fully paying it.

Tax Court Holds Power of Attorney Form Inadequate to Change a Taxpayer’s Address

In a precedential opinion in the case of Gregory v. Commissioner, 152 T.C. No. 7 (2019), the Tax Court has held that sending a power of attorney (POA) form to the IRS with a new address for the taxpayer does not put the IRS on notice with respect to the change of address such that it must use that address in corresponding with the taxpayer in a notice required to be sent to the taxpayer’s last known address. Bryan Camp has a nice write up of the case on the Tax Prof blog if you want an expanded take on the case and you have an interest in knowing how Bryan met his wife.

Before going into an explanation of the basis for the Court’s opinion and why it issued a precedential opinion on this issue, I found it worth noting what was not discussed in this case. Since it was not discussed, I do not know why and would welcome comments from any reader who might know. Because the issue in the case is whether the POA form can change a taxpayer’s address, I would guess that a valid POA existed at the time the notice of deficiency at issue in this case was mailed. If a valid POA existed at the time of the issuance of the notice, why didn’t the POA receive the notice in time to file the Tax Court petition?

The IRS position is that its failure to send a copy of the notice of deficiency to the POA does not invalidate the notice and does not save the taxpayer who files late. See IRM 4.8.9.11.4 (providing that notice may be invalid if not mailed to last known address of taxpayer or if not mailed by certified or registered mail) and IRM 4.8.9.11.2 (providing that copies of the notice are sent to the POA via regular mail). Here, it is not clear if there was a valid POA at the time of the notice, if the POA was timely notified or if the IRS failed to send a copy to the POA. If a POA existed and the IRS timely sent a copy to the POA, maybe this was really a case seeking to protect the POA from exposure. If a POA existed and the IRS did not send a timely notice to the POA, I am surprised that the taxpayer did not at least make an argument regarding that failure. If the notice were a notice of determination in a CDP case, IRC 6304 might come into play if the IRS failed to timely notice the POA. See IRC 6304(a)(2); but cf. Bletsas v. Commissioner, T.C. Memo 2018-128 (2018) (rejecting taxpayer’s argument that IRC 6304 required the IRS to mail a notice of lien to her POA).

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The Gregorys filed their return for 2014 after they moved from Jersey City, New Jersey to Rutherford, New Jersey in 2015; however, on the 2014 return they put their Jersey City address. The opinion did not provide an explanation for why they did this but right off the bat they have created a problem for themselves. During the course of the examination, the Gregorys submitted two POAs to the IRS and each POA listed their new address in Rutherford. During the examination, they also filed a request for extension of time to file their 2015 return and that request also listed their Rutherford address. When the IRS issued the notice of deficiency on October 13, 2016, it had not yet received their 2015 return and it had not received a formal change of address notification from the Gregorys.

The IRS sent the SNOD to Jersey City. The Gregorys did not receive it until after 90 days had run. They filed their Tax Court petition immediately upon receipt of the SNOD. The IRS moved to dismiss the petition as untimely. Both parties agreed it was untimely and that the Tax Court case became one that would decide whether the notice was sent to their last known address and not one which would determine the merits.

The Court here relies on the statute, the regulations under the statute and the Rev. Proc. promulgated in furtherance of the regulations. Bryan Camp’s post does an excellent job walking through those provisions and I will not duplicate it here. The result of the application of the statute, the reg and the Rev. Proc., as well as the language on the POA form and the application for extension form, is that these forms are not returns. Putting a new address on these forms does not provide the type of notice requiring the IRS to adjust its records. Because the POA form and the application for extension form do not require the IRS to adjust its record of a taxpayer’s address, the sending of the SNOD to the Jersey City address met the statutory requirement of sending the notice to the taxpayer’s last known address. Since it met that requirement, the SNOD provided a valid basis for the IRS to assess the liability shown thereon. The taxpayers can still litigate about the underlying liability. They must fully pay first and file a refund claim in order to litigate the issue through the refund process. Alternatively, since they did not receive the SNOD, they can litigate the merits in a Collection Due Process case once the IRS sends notice of intent to levy or files a notice of federal tax lien. Depending on whether a copy of the SNOD was timely sent to a representative, they may find their representative anxious to assist them in obtaining an opportunity to litigate the merits.

The decision here suggests to practitioners that they should take the opportunity of sending in a POA to review the client’s last known address and the practitioner should consider including with the POA a formal notice of the change of address where appropriate.

The case does not address the situation of conversations with the IRS. When I speak with someone at the IRS and I am confirming my ability to represent the taxpayer, I frequently get quizzed about the POA. One part of the quiz is the taxpayer information. If the POA does not contain the taxpayer’s phone number, I get quizzed about their phone number and sometimes about their address. If a representative talks to a human at the IRS about the taxpayer’s address on a POA, I wonder if that might change the outcome here. The issue of last known address has many permutations. In the book Effectively Representing Your Client before the IRS an entire chapter is devoted to this topic. No one wants to be relying on a last known address argument but this issue comes up with frequency.

 

Financial Disability Argument Loses Because Taxpayer Husband Did not even Allege Disability

We have written several posts about the financial disability provision set forth in IRC 6511(h) which allows a taxpayer to file a refund claim after the normal statute of limitations has expired if the taxpayer missed the deadline because of a disabling condition. Some of the prior posts are here, here and here. Taxpayers have a long string of losses in the decided cases and the case of Rhandall Thorpe et ux. v. Dept. of Treasury et al.; No. 2:18-cv-04956 (D. N.J. 2019) adds to the list of taxpayer losses. As with the majority of reported cases, these taxpayers proceeded pro se. Based on the facts set out by the court, they would have benefited from the advice of counsel but the benefit may have been conceding their case earlier in the process.

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The Thorpes filed returns for several years in which they self-reported the penalty for an early withdrawal from an IRA. At some point long after the expiration of the period for timely filing a refund claim, the Thorpes discovered that they need not have paid the penalty for making an early withdrawal from their retirement account and they sought to recover the payments that they made. The IRS denied their claims as untimely and they brought a suit for refund in district court.

As we have mentioned before in discussing these cases the IRS has not written any regulations in the two plus decades since IRC 6511(h) was enacted but it issued Rev. Proc. 99-21 setting out what it thought taxpayer should show in order to meet the requirements of IRC 6511(h). The Rev. Proc. requires that the taxpayer provide:

(1) a written statement by a physician (as defined in § 1861(r)(1) of the Social Security Act, 42 U.S.C. § 1395x(r)), qualified to make the determination, that sets forth:

(a) the name and a description of the taxpayer’s physical or mental impairment;

(b) the physician’s medical opinion that the physical or mental impairment prevented the taxpayer from managing the taxpayer’s financial affairs;

(c) the physician’s medical opinion that the physical or mental impairment was or can be expected to result in death, or that it has lasted (or can be expected to last) for a continuous period of not less than 12 months;

(d) to the best of the physician’s knowledge, the specific time period during which the taxpayer was prevented by such physical or mental impairment from managing the taxpayer’s financial affairs; and

(e) the following certification, signed by the physician:

I hereby certify that, to the best of my knowledge and belief, the above representations are true, correct, and complete.

(2) A written statement by the person signing the claim for credit or refund that no person, including the taxpayer’s spouse, was authorized to act on behalf of the taxpayer in financial matters during the period described in paragraph (1)(d) of this section. Alternatively, if a person was authorized to act on behalf of the taxpayer in financial matters during any part of the period described in paragraph (1)(d), the beginning and ending dates of the period of time the person was so authorized.

The Thorpes basically complied with none of the requirements set out by the IRS in the Rev. Proc. They also did not attack the Rev. Proc. and argue that the requirements in the Rev. Proc. were not entitled to deference since the IRS did not go through notice and comment in adopting the requirements listed there. Based on their facts such an argument would have been unavailing since they only argued that Mrs. Thorpe had a medical condition and made no effort to show why Mr. Thorpe could not have addressed the claim for refund sooner. In the paragraph setting out its conclusions the court summed up the weak facts in the case very nicely:

The plaintiffs have never complied with these requirements. First, they claim disability only as to Ms. Thorpe; for all that appears here, there is no impairment that prevented Mr. Thorpe from managing the couple’s affairs, and no showing was made to the IRS that he could not. See 26 U.S.C. § 6511(h)(2)(B) (no tolling where “individual’s spouse or any other person is authorized to act” for the person in financial matters).7 Second, they supply three letters from a physician, Dr. Martin Mayer, regarding her condition (DE 1-2, 1-3) These relate certain ailments, but they do not state anywhere that Ms. Thorpe was or is unable to manage her financial affairs, and they do not include the certification required by Rev. Proc. 99-21. Third, there is no indication that the required showing was made in connection with the refund claims themselves, as opposed to here in court. See Chan v. Commissioner, 693 F. App’x 752, 756 (10th Cir. 2017) (“The district court cannot make a determination of financial disability if [the taxpayer] did not first provide the requisite proof to the IRS.”). Fourth, I observe that this claim of medical disability is an anomalous one. The plaintiffs do not claim they were unable to deal with their financial affairs and file their returns; indeed, they did file their returns, using a paid preparer. Their claim, then, is not one of inability to cope with the demands of financial recordkeeping or filing, but merely that their returns contained a mistake.

This was a case that should never have been filed. Although the loss adds to the tally of taxpayer losses in IRC 6511(h) cases, the DOJ attorney would have expended little effort in preparing the responsive pleadings and motion to dispose of this case.

Problems exist with the Rev. Proc. which were exposed in the Stauffer, Kurko and Milton cases discussed here. Taxpayers with legitimate reasons for failing to meet a refund filing deadline should look to those cases in crafting arguments in support of IRC 6511(h) relief and should not be cowed by failures to follow all of the rules the IRS created 20 years ago without notice and comment and which do not internally make sense. The Thorpes’ problem was a basic problem with the statute because Mr. Thorpe provided no evidence of his disability and poor evidence of his wife’s. The case stands for little more than the statute means what it says. Future litigants who fail to provide evidence of the disability of all parties who could fix the mistake should expect similar results. Parties with real disability claims should continue to pursue their claims and litigate the intent of IRC 6511(h) if the IRS denies their claim administratively based on the narrow rules set out in Rev. Proc. 99-21.

 

 

Seeking a Federal Tax Refund via Habeas Corpus – Reminder of the Injured Spouse Remedy

In the recent case of Turner v. United States, (N.D. Cal. 2019) a prisoner sought to obtain a refund of money for his wife using the remedy of habeas corpus. Mr. Turner’s effort to obtain the refund through this process failed but in his predictable failure a few points can be made about the process. The main point that jumped out from the case concerns the issue of injured spouse relief. In reading the case I did not get the impression that the judge was aware of injured spouse relief. This makes sense because the judge is a district court judge. It also did not appear that the DOJ Tax Division attorney mentioned it though any mention may have been made informally. In case we have any readers who are unaware of injured spouse relief, I thought I would briefly review the grounds for this relief since this is the time of year when such relief is most important. We have written about it before here and here.

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Mr. Turner was sent to prison almost two decades ago as a result of a conviction for first degree murder. While in prison he apparently met and married Regina in 2017. She filed a return for that year claiming him as a dependent. The facts as presented in the opinion state that she did not file a joint return although on the facts that would have been the correct filing status and that would have made what happened next easier to understand.

When Mrs. Turner filed her 2017 return, she apparently claimed a large refund which Mr. Turner alleges that the IRS took to satisfy Mr. Turner’s outstanding federal tax liability. I would not expect someone in prison for murder for 20 years to have an outstanding federal tax liability. It is possible that he had another type of liability that comes within the offset provisions and it is also possible that he totally misconstrued the reason the IRS hung onto her refund. Aside from the puzzling aspect of someone in prison so long having a liability, there is the issue that this was not a joint return raising the question of what would have triggered the offset to his outstanding debt.

The court took very little time disposing of the case because habeas corpus relief does not extend to tax refunds. Because it’s so clear that relief could not be granted on the basis requested, I think the court did very little to flush out the correct facts and perhaps untangle the situation for a confused petitioner.

Still, the case can provide a basis for discussing the injured spouse provisions which often confuse taxpayers and occasionally confuse practitioners. Perhaps the best way to avoid injured spouse issues is to carefully vet any prospective marital partner to ascertain what debts the partner brings into the marriage. A partner coming into the marriage with tax debts, student loan debts, outstanding child support or any of the types of debts that trigger offset is a partner for whom the taxpayer must be very careful when filing the tax return. Filing a joint return with someone who owes a type of debt subject to offset means that any refund on the return will be taken and applied to the outstanding debt unless the parties affirmatively alert the IRS that it should not.

The injured spouse provisions often get confused with the innocent spouse provisions of IRC 6015. In an innocent spouse case a married couple has filed a joint return on which they owe more money either as a result of an additional assessment or an underpayment. One of the spouses (sometimes both) seek to limit their exposure to the liability for the reasons provided in IRC 6015. In contrast the injured spouse provisions arise when a married couple files a joint return on which they report a refund due to them. The IRS takes all or part of the refund to satisfy the outstanding debt of one of the spouses, the liable spouse. The non-liable spouse is injured because all or part of the refund results from their payment and the non-liable spouse seeks a return of the portion of the refund attributable to him or her. Unlike the innocent spouse provisions, the injured spouse provisions are a creature of administrative practice and not the statute.

If the refund on the joint return results wholly or partially because of the spouse who does not owe a debt to the government, the spouse who does not owe the debt should file a Form 8379 with the tax return. This means filing the return by paper and waiting a long period for the refund. The extra delay will be worth it if the form prevents the IRS from offsetting the refund of the non-liable spouse. Some taxpayers will not know about the Form 8379 or will not know that they spouse has an outstanding liability. So, the IRS will make the offset and send them a notice of what was done. For the non-liable spouse in this situation whose refund has been partially or wholly taken to satisfy the separate liability of their spouse, the possibility of the return of the money still exists. In this situation the injured spouse should file the Form 8379 after learning of the taking of the refund. The IRS will require the injured spouse to provide the portion of the refund attributable to that spouse. Assuming that the injured spouse can successfully prove to the IRS that all or part of the offset refund was generated by the party with no liability, the IRS will release the appropriate refund to the injured spouse and increase the debt owed by other spouse.

Because the process of requesting injured spouse relief is a bit cumbersome, some spouses take the tack that the safest path with a spouse who owes outstanding debts is a married filing separate return. Using the injured spouse provision, the non-liable spouse can obtain the benefit of the joint return rates while still getting back the refund resulting from their efforts. Of course, if the existence of the other spouse’s debt has caused them to lose confidence in their spouse, opting for a married filing separate return may be best for other reasons.

It’s not clear to me if Ms. Turner has the ability to seek a return of her refund based on the injured spouse provisions but based on the arguments made by her husband she should at least look into the injured spouse provisions to determine if they would form the basis for relief.

 

Reflections on Nina Olson as the National Taxpayer Advocate

Les, Christine and I are each writing to share our reflections on Nina as the National Taxpayer Advocate (NTA).  We each know her well and each from a slightly different perspective.  We all agree that she has provided a tremendous voice for taxpayers during her tenure as our advocate and that finding someone to pick up that voice with the same level of passion and knowledge she has brought to the position will be quite a challenge.

Keith

Nina called me out of the blue one day in 1992 and that’s how we met.  She had an idea to start a freestanding tax clinic in Richmond, Virginia.  Someone at Georgetown Law School where she was pursuing her LLM and where I taught as an adjunct professor suggested that she call because I was the District Counsel for the IRS in Richmond.  We talked for about an hour and her passion came through the phone with no trouble.  I thought she had a great idea and offered her some suggestions of people to contact not knowing if anything would come of this conversation.  I soon found out.

Nina did start a low-income taxpayer clinic (LITC) in Richmond.  It was not the first LITC but it was the first one that was not based at an academic institution.  As she had explained to me on the phone, she was appalled that tax lawyers would be called upon to work on landlord tenant cases or criminal cases in order to perform pro bono work.  She wanted a clinic that marshalled the tax bar into a force to fight for low income taxpayers.  I got to watch her do this with a front row seat.  As she built her clinic, she was regularly the representative of taxpayers whose cases were being handled by my office.  Today, we think of Nina as an advocate for all taxpayers but I experienced her as the advocate for individual taxpayers that her clinic represented.  As you can imagine she provides knowledgeable and passionate representation for her clients.  Not everyone at the IRS in Richmond hailed the coming of the new tax clinic.

Starting from scratch she built the Community Tax Law Project into a statewide clinic seeking to assist taxpayers who would otherwise go unrepresented.  She not only chased down tax lawyers to join her pro bono panel but she chased down donors from many different sources.  Even though she received enough donations and pro bono volunteers to keep the doors open, she hardly had enough to pay herself.  She lived a Spartan existence.  I have joked with her that I invited her regularly to come and speak to the students who volunteered at my office because that way we could feed her.  When IRC 7526 providing funding for LITCs came into existence, thanks in no small part to her efforts, she finally had a stable financial base for her clinic.  I remember her telling me of the shopping spree she was going to have to finally buy furniture for her office.  Even then her discussion was of funds for the clinic and not a decent salary for herself.

Eighteen years ago I attended her investiture at the IRS building in the theater on the 7th floor.  By that point she had made a name for herself testifying before Congress in the run up to the Restructuring and Reform Act of 1998 but few people in the tax world knew what they were in for when she became the second NTA.  The first NTA served only for a short time and operated pretty much under the radar of the tax world.  Nina was able to take the structure he had begun to build and turn it into a powerful voice for taxpayers that Congress could only have imagined when writing the statute creating the position.

When I began teaching at Villanova in 2007, my role vis a vis Nina had come full circle.  Now she was the IRS and I was the clinician.  One of her many jobs as NTA is to oversee the administration of the grant funds created by IRC 7526.  Just as she worked hard to create the grant funds, she has worked hard to maintain and increase those funds.  She was not my adversary the way I had been hers when she was a clinician but she was my grant funder.  Never having taken a clinic in law school, I took from Nina’s model in developing my role as a clinician.  She has done a great job of nurturing clinicians and clinics around the country.  While she has many responsibilities as the NTA, I suspect that few of her responsibilities hold the same place in her heart as clinics and the low income taxpayers they serve.

Nina’s achievements as the NTA are many.  Her annual reports provide an amazing resource to Congress, the IRS, academics and anyone interested in taxes.  The Taxpayer Bill of Rights which she promoted and sheparded into adoption by the IRS and then by Congress creates aspirational goals for the relationship between taxpayers and the IRS and will continue to evolve as a resource for taxpayers with conflicts with the IRS.  Her many, many times testifying before Congress to explain the importance of some act or some omission has helped to guide legislation in ways that we can only guess.  Of course, her work inside 1111 Constitution Avenue is probably the most important but the most difficult for outsiders to assess.

Hat’s off, Nina.  You have had a great run.

The Supreme Court Clears the Way for a State Tax Refund to a Class of Federal Employees

Thanks to Carl Smith for bringing the case of Dawson v. Steager to my attention.  This case was decided by the Supreme Court on February 20 in a unanimous victory for a federal marshal who retired to West Virginia.  Even though the issue in the case concerns a refund of state taxes, it has a procedural aspect and deserves some attention.  I do not know if the decision has implications beyond West Virginia but knowing about the decision will allow you to check to see if any problems continue to exist with the laws in your state. 

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Mr. Dawson spent the bulk of his career as a federal marshal.  After retiring to West Virginia, he noticed that the state had a law that exempted from taxation the pensions of certain law enforcement officials who retired after working for the state of West Virginia.  It’s not clear how he knew about the Supreme Court precedent in this area or maybe he just felt the law was unfair and happened to bring the issue up across the dinner table from a tax lawyer with knowledge of the precedent but his case follows closely behind a Supreme Court case decided three decades ago, Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989). 

 Justice Gorsuch, rendering the opinion for a unanimous court, framed the issue as follows: 

If you spent your career as a state law enforcement officer in West Virginia, you’re likely to be eligible for a generous tax exemption when you retire. But if you served in federal law enforcement, West Virginia will deny you the same benefit. The question we face is whether a State may discriminate against federal retirees in that way. 

The problem for West Virginia is that 30 years ago the Supreme Court faced a very similar issue concerning state employees in Michigan whose pensions were exempted by state statue there and retired federal employees living in Michigan whose pensions were not exempted.  In the Davis case the Supreme Court decided that the state could not exempt the pensions of its employees while taxing the pensions of federal employees because of 4 USC 111.  Describing that statute Justice Gorsuch stated:  

In that statute, the United States has consented to state taxation of the “pay or compensation” of “officer[s] or employee[s] of the United States,” but only if the “taxation does not discriminate against the officer or employee because of the source of the pay or compensation.” §111(a). 

He provided background for the adoption of section 111: 

Section 111 codifies a legal doctrine almost as old as the Nation. In McCulloch v. Maryland, 4 Wheat. 316 (1819), this Court invoked the Constitution’s Supremacy Clause to invalidate Maryland’s effort to levy a tax on the Bank of the United States. Chief Justice Marshall explained that “the power to tax involves the power to destroy,” and he reasoned that if States could tax the Bank they could “defeat” the federal legislative policy establishing it. Id., at 431–432. For the next few decades, this Court interpreted McCulloch “to bar most taxation by one sovereign of the employees of another.” Davis v. Michigan Dept. of Treasury, 489 U. S. 803, 810 (1989). In time, though, the Court softened its stance and upheld neutral income taxes—those that treated federal and state employees with an even hand. See Helvering v. Gerhardt, 304 U. S. 405 (1938); Graves v. New York ex rel. O’Keefe, 306 U. S. 466 (1939). So eventually the intergovernmental tax immunity doctrine came to be understood to bar only discriminatory taxes. It was this understanding that Congress “consciously . . . drew upon” when adopting §111 in 1939. Davis, 489 U. S., at 813. 

In Mr. Dawson’s case the trial court in West Virginia determined that his duties were essentially similar to the duties of the state law enforcement officers whose pensions were exempted.  Based on that determination the trial court held for Mr. Dawson applying the Davis precedent; however, the Supreme Court of West Virginia reversed finding that the state did not intend to discriminate against this class of retired federal employees but only intended to benefit certain state law enforcement retirees.  The Supreme Court was not buying what West Virginia was selling and reversed the decision of the state supreme court.  Read the opinion to see the other arguments made by the state but the Supreme Court rightly dismissed them with little effort.   

I have to think that this decision did not come as a big surprise in West Virginia.  It’s possible that other federal law enforcement officers who have retired to West Virginia will seek to show that their duties paralleled the duties of the individuals exempted by the state.  I do not know if the fight will now morph to see how close others may be to federal marshals or if the state will amend its statute to eliminate the exemption altogether.  Given the small number of individuals covered here and the types of work performed by those individuals, I doubt that the state will eliminate the exemption just because of this opinion. 

So, Mr. Dawson is going to get a refund of taxes he has paid; however, the procedural issue facing him and others who are similarly situated is how far back can he go?  In the Davis case federal retirees could not obtain the state taxes they had paid for every year but were limited to the years for which the refund statute remained open.  So, retired federal law enforcement officials in West Virginia who were not already clued into this case need to file their refund claims ASAP in order to preserve the right to obtain as many years of refunds as possible. 

After the Davis case came out, and not before it because his son was not paying attention to the issue, my father, a retired federal employee living in Virginia filed claims for all open years and eventually received a nice refund.  It took several years before he received his refund because of the high number of federal employees in Virginia and the strong efforts by Virginia to obtain a ruling from the Supreme Court that the Davis case did not apply in Virginia for a variety of reasons similar in spirit to the arguments made by West Virginia in the Dawson case. 

Restitution Order, IRA Account, Community Property = Unfortunate Result for Non-Liable Spouse

It’s never a good thing for your spouse to be the subject of a $2,165,126 restitution order. You know when that comes out in the first few sentences of an opinion that things do not look good for the non-liable spouse. That proves true in United States v. Berry, No. 4:17-cr-00385 (S.D. Tex. 2018).

From the perspective of the IRS, this case presents the not always available situation of a wayward party who still has assets after a criminal prosecution. Here, the asset takes the form of an IRA. An IRA generally does not provide the best place to hold assets if you seek to protect them from creditors. Here, the court mentions the general rule that ERISA does not govern IRAs as a shorthand way to state that the substantial protections from creditors afforded to individuals holding assets in an account covered by ERISA do not apply when the retirement account instead exists in an IRA. The court does not make mention of the fact that ERISA’s protections do not insulate a taxpayer from the collection tools available to the IRS. Because of the way this case arises, I am unsure if the IRS tools are available here. So, the fact the account existed in an IRA could make a crucial difference not always present in federal tax collection cases.

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The Berrys live in Texas although I am unsure where Mrs. Berry is serving her 51 month sentence for wire fraud, mail fraud and filing a false tax return in violation of IRC 7206. In this case the government seeks to obtain 100% of Mrs. Berry’s retirement account and 50% of Mr. Berry’s account. The Berrys make four legal arguments and one equitable argument in an effort to protect their accounts. I will go through the arguments in the order presented by the court. Spoiler alert – none of the arguments work for the Berrys.

Federal Pre-emption

They argue that retirement funds are not community property. The retirement accounts are IRAs. The court finds that because the funds are held in IRAs and not ERISA protected retirement accounts, no pre-emption of state community property laws exists.

State Law

They argue that the retirement accounts are governed by Pennsylvania law because the custodial agreement says that the funds are governed by the law of that state which happens to be the state where Vanguard is located. Mrs. Berry argues that Pennsylvania law (and Texas law if PA law does not apply) waives her rights in the accounts and removes them from community property. She did not sign a specific waiver of her community interest in the property. Because she did not waive her interest in community property, the court finds that the retirement accounts are community property allowing the restitution liens to attach. The court cites United States v. Elashi, 789 F.3d 537, 551 (5th Cir. 2015) in support of its position. Since Mrs. Berry had a ½ interest in Mr. Berry’s solely managed community property, the government can seek to obtain her half interest in that account.

Consumer Credit Protection Act

The Berrys argue that even if the government can reach half of Mr. Berry’s retirement account despite the previous two arguments, its ability to reach Mrs. Berry’s community property interest in Mr. Berry’s property is limited to no more than 25% pursuant to section 30 of the Consumer Credit Protection Act. This Act limits the maximum garnishment to 25% of the earnings for that week. The court finds that the weekly limitation imposed by this act depends on whether Mr. Berry is limited to receiving periodic payments or has the ability to cash out. Because he has the ability to take out the entire amount at any time, the government is not limited in the amount of Mrs. Berry’s interest that it can obtain.

Facially Invalid

The Berrys argue that the writ of garnishment issued in this case overstates the amount due because it includes a future debt to the IRS not currently due. The court finds that the amount listed does not invalidate the writ of garnishment.

Equity for Mr. Berry

The Berrys argue that even if their legal arguments do not prevail it would be a significant strain on Mr. Berry to allow the government to take half of his retirement account. The case does not make clear how his finances would be impacted by the taking of half of this account. Certainly taking half of funds in his IRA limits his future ability to take distributions but what that does to his finances is unclear. Perhaps the court does not go into this type of detail because the court finds this type of equitable argument to be unavailing where the government has the legal right to take the property. It seems that the Berrys were essentially asking for the court to create something akin to the Rodgers factors and apply them to this situation.

I think that something could be made of the Rodgers factors in a case like this if the facts support Mr. Berry’s need for the funds in order to avoid seeking benefits from the state. The equitable portion of the opinion is too short to provide an adequate description of the arguments made by the Berrys or the thought process of the court.

Conclusion

Similar to the result in bankruptcy, holding funds in an IRA provides little more protection from creditors than holding funds in an ordinary bank account. Because the government is collecting pursuant to a restitution order rather than a tax assessment, its ability to use the powerful collection tools of the IRC may be limited but that does not matter here. The court does not discuss whether the restitution order would allow the IRS to assess all of part of the amount in the order. If some or all of the restitution order covered taxes, then it could have gone about collection by first assessing the taxes and then pursuing normal federal tax collection alternatives as discussed here.