Treasury Inspector General for Tax Administration Report on Passport Revocation

It’s the season for annual reports from TIGTA.  In 1998, Congress ordered TIGTA to create annual reports on several aspects of IRS operations.  In addition to those mandated reports, many of which would benefit from a longer timeline at this point, TIGTA also performs regular audits to check on IRS performance.  We will be writing on some of the annual reports as we have done in the past.  On September 19, 2019, it issued a report on passport revocation. While this may not have many surprises, it does provide a fair amount of detail on whose tax debts the IRS has targeted for passport revocation, how many have been revoked, and what has happened after the sending of the revocation.

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As of December 20, 2018, the IRS had certified 306,988 taxpayers for passport revocation.  Of those individuals, by that same date the IRS had decertified 68,764 of the cases, or not quite 25%.  By May 17, 2019, the IRS had decertified 99,867 taxpayers.  Before getting too excited about all of the money the IRS must have collected in order to decertify this many taxpayers, you must look at the list TIGTA created of the reasons for decertification.  Here is the breakdown of the bases for decertification:

Decertification Reason Number of Taxpayers Percentage of Decertifications
     
Pending Installment Agreement 18,516 19%
Installment Agreement 8,596 9%
Full Paid 6,815 7%
Pending Offer in Compromise 5,887 6%
Pending Full Pay Adjustment 224 <1%
Accepted Offer in Compromise 24 <1%
     
Total of Compliant Taxpayers 40,062 40%
     
Disaster Zone 27,137 27%
CSED Expiration 11,507 12%
Currently Not Collectible Hardship 8,716 9%
Bankruptcy 3,597 4%
Deceased taxpayer 2,696 3%
CDP Hearing 2,262 2%
Identity Theft 1,663 2%
Threshold18 1,045 1%
Manual Block/Other 472 <1%
Innocent Spouse 438 <1%
Erroneous Decertification 244 <1%
Combat Zone 28 <1%
     
Total of Noncompliant Taxpayers 59,805 60%
     
Total of All Decertifications 99,867 100%

Source: Passport Program Office.

About 40% of the decertifications resulted from actions TIGTA described as compliance, while the remaining 60% resulted from the statutory or administrative basis for recertification other than compliance.  Even within the compliance category, pending or actual installment agreements comprise, by far, the largest number of taxpayers coming into compliance.  So, the revocation of the passports of these taxpayers did not, as of yet, result in many fully paid accounts – only 6,815 of the almost 100,000 cases decertified (or looking at it another way only 6,815 of the over 300,000 taxpayers sent for revocation.  This does not seem like much bang for the passport revocation buck, but the TIGTA report does not approach its investigation in this manner.

We are not provided with how much it has cost the IRS to implement this collection tool nor are we provided with the dollars collected at this point.  Without that type of analysis, it is not possible to draw conclusions on the success of the revocation legislation.  TIGTA does say that the revocation program has brought many taxpayers back into payment compliance and has resulted in hundreds of millions in revenue.  That sounds positive from an enforcement point of view.

The biggest reason for decertifying the revocation surprised me.  Almost 27% of the decertifications resulted from applying the disaster zone rules.  I do not know enough about how many disasters existed.  I would not have expected this many decertifications for this reason, but they may just reflect my ignorance of the coverage of the disaster zones.  The second largest reason, CSED expiration, did not surprise me.  The chart gives a great picture of what happens once the IRS revokes someone’s passport.  The most likely thing to happen, which the chart shows by negative implication, is the taxpayer does not address the revocation and, I assume, does not care or feels powerless to do anything.

Of course, the report finds that the IRS certified some taxpayers for revocation that it should not have.  It identifies most of the problems in this area as a result of not correctly calculating the impact of the statute of limitations on collection.

The other interesting part of the report is the discussion of who the IRS identified for revocation in the first phase of the program and who it has identified next.  The first phase targeted taxpayers with “simple” tax debt in the IRS parlance.  The IRS considers simple debt as debt resulting from “filing single, head of household, married filing separately, or married filing jointly status for which the filing status of the primary and secondary filers is consistent from tax year to tax year.”

Now the IRS has started looking at taxpayers with complex debt.  It considers complex debt as aggregate debt from a variety of filing statuses “on different tax modules with an outstanding tax liability.”  As of March 22, 2019, the IRS had identified 69,460 taxpayers with complex debt of more than $52,000.  The report says that the IRS expects to send notices for these taxpayers starting in September 2019.

The report provides an interesting window into the passport program.  Much more data will inevitably be available in the future.  My limited view of the program suggests that it highly motivates some individuals to come forward and work with the IRS in situations in which they had not previously done.  Because the program limits constitutional rights, I hope that Congress takes a hard look at its success to ensure that increased collection justifies the limitation of travel rights of some.

Second Circuit Reverses Tax Court in Borenstein

This post got lost and so comes onto the cite about six months after I wrote it, but it still might be of interest to some.  Thanks to Jack Townsend for asking about it.  I wrote it just before I took off on my cross country bicycling trip and failed to keep a good track on it as it went to my research assistant.  Keith

The Tax Court held in Borenstein v. Commissioner, 149 T.C. 263 (2017) that a taxpayer who filed her return late and after the IRS had issued a notice of deficiency could not obtain a refund given the specific timing of her late return and the notice of deficiency.  We discussed the case here.  The interpretation of the IRS and the Tax Court in the case created an odd “donut-hole” in the statute during which the taxpayer could not file a late return and obtain a refund if during the applicable time the IRS had sent a notice of deficiency.

The Tax Court reached the decision in the case by interpreting the plain language of the statute and applying an interpretive maxim.  The Second Circuit did not find the language as plain or the maxim as applicable and reversed the decision of the Tax Court allowing Ms. Borenstein to receive a refund of almost $40,000 plus interest.  The tax clinic at the Legal Services Center of Harvard partnered with the tax clinic at Georgia State to file an amicus brief in support of Ms. Borenstein because we thought his issue likely to impact low income taxpayers.

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Ms. Borenstein filed a request to extend the time to file her 2012 individual income tax return from April 15, 2013 to October 15, 2013.  Even though she timely and properly filed the request for an extension of time to file her return, she failed to file the return by the extended due date.  She had a lot of stock sales.  The IRS assigned a zero basis to the stock and eventually sent her a notice of deficiency stating that she owed over $1 million in taxes largely resulting from the sale of stock.  The IRS sent the notice of deficiency on June 19, 2015.  Ms. Borenstein filed her return, showing an almost $40,000 refund because her stock did not have a zero basis, on August 29, 2015.

Because of the timing of the notice of deficiency and of the late filed return, the IRS took the position that IRC 6213(b)(3) prohibited her from obtaining a refund.  The facts in the case were not in dispute.  The only issue was the interpretation of the statute and whether it created an unusual donut-hole time period during which a taxpayer could not file their return and obtain a refund, as the IRS argued, or whether the taxpayer had a continuous time period within which to file the return and still obtain a refund. 

Because this is the first and only case seeking an interpretation of the statute on this issue and because the administrative importance is low as signaled by the lack of litigation over the 20-year span since the statutory provision at issue came into existence, it seems extremely unlikely that the IRS will seek certiorari in this case.  Whether it will make the same argument if the issue arises in another circuit remains to be seen.  I hope that the opinion will cause it to rethink its position.

Congress took a look at IRC 6213 and the refund provision in it after the Supreme Court decided the case of Commissioner v. Lundy, 516 U.S. 235 (1996).  Lundy involved the look back period for refund claims and produced a surprising result causing the changes to the statute.  The Second Circuit described the Congressional intent in changing the statute as follows:

A taxpayer who files a tax return, and within three years after that filing is mailed a notice of deficiency from the Commissioner, is entitled to a look‐back period of at least three years. However, prior to Congress’s amendment of the governing statute, a taxpayer who had not filed a return before the mailing of a notice of deficiency‐‐like Borenstein‐‐was entitled only to a default two‐year look‐back period. Accordingly, Congress, seeking to extend the look‐back period available to such non‐filing taxpayers, provided that if a notice of deficiency is mailed “during the third year after the due date (with extensions) for filing the return,” and if no return was filed before the notice of deficiency was mailed, the applicable look‐back period is three years. This is called the “flush
language” of 26 U.S.C. § 6512(b)(3).

Ms. Borenstein filed her return during the third year after the original due date of the return and after the notice of deficiency.  If Congress had not changed the statute, the Lundy case would have prevented her from obtaining a refund because she filed the return more than two years after the original due date and after the issuance of the statutory notice.  She argued that the change in the statute opened the door for her to obtain the refund, but the IRS said if you carefully looked at the statute it did not work that way for someone who had requested an extension of time to file the return and then filed late.  Looking at the language of the statute quoted above, the IRS argued and the Tax Court accepted that:

“(with extensions)” has the effect of delaying by six
months the beginning of the “third year after the due date, ….”

Under this interpretation, the Tax Court could only look back two years. She had no payments within the two-year period as her payments were deemed made on the original due date of the return.

Borenstein looked at the statute and found different meaning:

Borenstein argues that “(with extensions)” has the effect of extending by six months the “third year after the due date,” and therefore that the notice of deficiency, mailed 26 months after the due date, was mailed during the third year. That would mean that the Tax Court has jurisdiction to look back three years, which would reach the due date and allow Borenstein to recover her overpayment.

The Second Circuit sided with Borenstein but examined the Tax Court decision and explained why it disagreed with that decision.  It described the Tax Court’s basis for the decision as follows:

[T]he Tax Court determined that the meaning of the flush language of 26 U.S.C. § 6512(b)(3) is unambiguous, relying heavily on the canon of statutory construction known as the “rule of the last antecedent” to find that “(with extensions)” modifies only “due date.” However, that canon “is not an absolute and can assuredly be overcome by other indicia of meaning.” Barnhart v. Thomas, 540 U.S. 20, 26 (2003). Here, it does not yield a clear answer.

What the Tax Court found clear, the Second Circuit did not:

While the Tax Court determined that “(with extensions)” modifies the noun “due date,” it is at least as plausible that “(with extensions)” modifies the phrase “third year after the due date,” thereby extending the third year. Accordingly, because the flush language of 26 U.S.C. § 6512(b)(3) supports more than one interpretation, we “consult legislative history and other tools of statutory construction to discern Congress’s meaning.” 

Once it determined it could look at legislative history, the Second Circuit determined that in amending IRC 6213(b)(3) after Lundy, Congress was trying to create a path for taxpayers to have a three-year lookback period in Tax Court in order to obtain their refund.  Congress did not like the fact that a taxpayer had been cut off from obtaining a refund just because the IRS had sent a notice of deficiency prior to the end of three years from the original due date.  Cutting off taxpayers who received a notice of deficiency created disparate treatment among taxpayers who were similarly situated.  Given the Congressional goal in amending the statute, it makes the most sense to read the statute in the way proposed by Ms. Borenstein.  Of course, the Second Circuit needed to throw in a maxim that supported its conclusion and in doing so gave some good language to taxpayers for future cases:

Our conclusion is supported by “the longstanding canon of construction that where ‘the words [of a tax statute] are doubtful, the doubt must be resolved against the government and in favor of the taxpayer,’” a principle of which “we are particularly mindful.” Exxon Mobil Corp. & Affiliated Cos. v. Comm’r of Internal Revenue, 689 F.3d 191, 199‐200 (2d Cir. 2012) (quoting United States v. Merriam, 263 U.S. 179, 188 (1923)). As Borenstein notes, the Tax Court’s interpretation creates a six‐month “black hole” into which her refund disappears, a result that unreasonably harms the taxpayer and is not required by the statutory language.
 
Moreover, the interpretation we adopt is consistent with the language of 26 U.S.C. § 6511(b)(2)(A), which provides for a look‐back period “equal to 3 years plus the period of any extension of time for filing the return.” 26 U.S.C. § 6511(b)(2)(A) (emphasis added). In view of our obligation to resolve doubtful language in tax statutes against the government and in favor of the taxpayer, we conclude that “(with extensions)” has the same effect as does the similar language that existed in § 6511(b)(2)(A) at the time of § 6512(b)(3)’s amendment‐‐that is, the language expand.

The Second Circuit opinion makes sense to me.  I think it achieves the intent of Congress in “fixing” the statute after Lundy.  It also avoids what seems like an absurd result the IRS interpretation achieves by avoiding the six month black hole or donut hole.  Taxpayers should file their returns on time.  If they do not file on time, they can suffer significant consequences including the total loss of their refund if they wait too long.  Taxpayers, however, should receive three years within which to file their late returns and still receive a refund whether or not the IRS issues a notice of deficiency. 

Impact of Fraud Penalty on Only One Spouse

The case of Chico v. Commissioner, T.C. Memo. 2019-123 points out the benefits to the “good” spouse when the other spouse files a fraudulent tax return.  The case follows earlier Tax Court precedent established in the non-precedential case of Said v. Commissioner, T.C. Memo. 2003-148.  Because of the interplay of the fraud penalty and the accuracy related penalties, the “good” spouse gets a pass on penalties on the return.  While this outcome has nothing to do with the innocent spouse provisions, it has the effect of leaving the “good” spouse free of penalties when the fraud on the return relates only to the other spouse.  Thanks to our fellow blogger Jack Townsend for bringing this case to my attention.

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Mr. Chico ran several businesses including a return preparation business.  He filed returns that failed to report income from several sources and otherwise contained errors that caused the IRS to assert the fraud penalty.  When the IRS asserts the fraud penalty on a joint return, it must prove fraud of each spouse in order to have the fraud penalty apply to both spouses.  Here, Mr. Chico’s knowledge of the businesses and of return preparation made him the obvious target of the penalty while the IRS could not overcome the showing that Mrs. Chico had little knowledge of the matters on the return.  So, the court found the fraud penalty with respect to Mr. Chico but not his wife.

The finding of the fraud penalty against Mr. Chico did not end the pursuit of penalties by the IRS.  As it normally does, the IRS had asserted the lesser penalties in the accuracy penalty provisions of IRC 6662 against both husband and wife.  Here, the issue of penalty stacking comes into play.  The IRS cannot hit someone with the fraud penalty and the accuracy related penalty.  It can either obtain the fraud penalty or the accuracy related penalty but not both.  Because of the anti-stacking provision found in IRC 6662(b), the Tax Court found that it could not impose an accuracy related penalty against Ms. Chico since doing so would create a stacking of penalties.

IRC § 6662(b) states the following as it pertains to the imposition of accuracy-related penalties on underpayments.  The IRS may not stack penalties when any of the following apply:

  • When a penalty is imposed under IRC § 6663 (fraud penalties)
  • When a penalty is determined as being a “gross valuation misstatement” as defined under IRC § 6662(h)(2), the portion of the underpayment shall be penalized 40 percent in total (and not an additional 40 percent to the standard 20 percent penalty)
  • When a penalty is determined from a nondisclosed noneconomic substance transaction as defined under IRC § 6662(i), the portion of the underpayment shall be penalized 40 percent in total (and not an additional 40 percent to the standard 20 percent penalty)

Treas. Reg. 1.6662-2(c) is the anti-stacking provision in the CFR as it pertains to accuracy related penalties:

A. If a portion of the underpayment of tax shown on a return is attributable to both negligence and a substantial understatement, the accuracy-related penalty would apply only once at the 20 percent rate to this portion of the underpayment. The examiner should assert the penalty that is most strongly supported by the facts and circumstances and write up the other as an alternative penalty position.


B. The penalty is applied at the 40 percent rate on any portion of the underpayment attributable to a gross valuation misstatement. Any penalty at the 20 percent rate that could have applied to this portion is not asserted except as an alternative penalty position.


C. A penalty is applied at the 75 percent rate on any portion of the underpayment attributable to civil fraud. Any penalty that could have applied to this portion at the 20 or 40 percent rate is not asserted except as an alternative penalty position.

IRM 20.1.5.3.3.1 No Stacking Provision (12-13-2016) sets out the anti-stacking rules for IRS employees to follow. 

The application of the anti-stacking penalties allows Mrs. Chico to avoid having any penalty for filing an improper return assessed against her.  Although the IRS sought the accuracy related penalty against her it does not seem inclined to pursue the issue into the circuit courts to overturn the position stated by the Tax Court that imposing the lesser penalty on the spouse not liable for fraud creates impermissible stacking.  In the absence of a court challenge, the IRS must go to Congress and seek a change in the stacking rules to allow assessment against the spouse who did not commit fraud or forgo any lesser penalty against that spouse in these circumstances.

The spouse who did not commit fraud may still suffer because of the fraud.  Unless that spouse obtains innocent spouse relief, that spouse will owe all of the additional tax assessed as a result of the audit.  Unless the spouse who did not commit the fraud has no withholding and makes no estimated tax payments during the year, that spouse may have to repeatedly apply for injured spouse relief in subsequent years if the couple receives a refund of taxes since the IRS will likely take the whole refund to satisfy the penalty liability of the fraudulent spouse.

Here, the Chico’s filed a joint petition.  Two attorneys are listed in the opinion as representing the taxpayers.  It is not clear if one was representing Mr. Chico and the other Mrs. Chico or if they were both representing both parties.  This is a situation in which the attorneys must be careful because the interests of Mr. and Mrs. Chico do not align. 

This is also a situation in which Mrs. Chico was fortunate to have representation.  Without representation she has little chance of catching the mistake made by the IRS in seeking to impose a lesser included penalty on her.  Perhaps the Tax Court Judge would always or almost always catch this mistake and protect the unrepresented party but that puts a great deal of pressure on the judge which does not belong there.  Just because Tax Court judges do a good job of catching these issues and protecting unrepresented taxpayers does not mean that this is a perfect system.  An unrepresented taxpayer could end up owing a penalty which the IRS should not have imposed.  Even the accuracy related penalty would have been almost $40,000 for the three years at issue in this case.  That would have been a steep price for the unrepresented spouse to pay.

The court stated:

Respondent has not asserted fraud penalties against Ms. Chico but alleges that she is liable for the section 6662(a) accuracy-related penalty for each year at issue.

I interpret the court’s statement to mean that no penalty was asserted against Ms. Chico in the notice of deficiency but the attorney in Chief Counsel’s office decided to pursue the penalty after the filing of the petition.  If I have interpreted the situation correctly, it looks like the notice writers at the IRS read the IRM but the Chief Counsel attorney and supervisor did not or maybe Chief Counsel’s office does not agree with the decision in Said.  If I interpreted the situation correctly, maybe it’s time for a new Chief Counsel notice assuming that Chief Counsel’s office now agrees with this outcome.

The Surprise Bill – Interest Due after Bankruptcy

The case of In re Widick, No. 10-40187 (Bankr. D. Neb 2019) provides a reminder that bankruptcy does not discharge all debts even when the debtor pays all of the tax for the year through the bankruptcy plan.  Mr. and Mrs. Widick completed a chapter 13 plan.  To obtain the plan and to complete the plan, they paid all of the income taxes for two years and all of the trust fund recovery penalties for two quarters.  I suspect that their bankruptcy attorney did not mention to them that paying all of the taxes does not keep the IRS from coming back after the bankruptcy case to collect the interest.  They brought this action to hold the IRS in contempt for violating the discharge injunction due to its efforts to collect from them after the bankruptcy court granted the discharge in this case.  With relative ease, the bankruptcy court delivered to them the sad news that the IRS could continue to collect from them after the discharge and the authority for the IRS actions went back for three decades in the controlling circuit case of Hanna v. United States (In re Hanna), 872 F.3d 829 (8th Cir. 1989).

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In bankruptcy creditors cannot generally collect post-petition interest from a debtor.  An exception to this rule exists if the creditor has a secured claim with enough equity to pay the interest or if the debtor is in chapter 11 where the creditor can receive interest after the plan confirmation (but not for the period from the petition to confirmation.)

Although bankruptcy generally serves as an interest free zone, interest still runs.  The difficult concept for debtors with tax debt comes where the IRS starts pursuing them after discharge to collect interest on a debt that they believe they have satisfied.  Whether the IRS can come after this debt post-discharge depends on whether the debt itself qualified as non-dischargeable debt.  In the case of the Widicks, it did.  Because the debt satisfied the exception to discharge in 523, the IRS could pursue collection of the interest after the granting of the discharge.

The Widicks owed income taxes that were recently incurred.  These income taxes received priority status under B.C. 507(a)(8)(A).  The unpaid TFRP liabilities also attained priority status under B.C. 507(a)(8)(C) and due to their nature have priority status no matter how old they were.  Because the income taxes and TFRP taxes had priority status, the debtors had to provide for payment in full of these taxes and all pre-petition interest in order to obtain confirmation of their plan.  The chapter 13 plan did not require, and could not require, the Widicks to pay the interest that ran on these taxes over the 5 year life of the plan.  Debtors might think that because the plan did not require payment of post-petition interest, they got a pass on this interest.  Because debtors might easily reach this conclusion, their lawyer must carefully advise them of the interest rules with respect to taxes.  Otherwise, they will become quite upset when the IRS offsets post-discharge refunds and takes other collection action.

A similar situation occurs in offers in compromise.  The standard language of the offer in compromise developed by the IRS requires that the debtor forego any refund for the year in which the IRS accepts the offer (and any pre-offer years.)  As with bankruptcy, the taxpayer’s representative must carefully explain to the individual obtaining the offer the consequence of this provision.  The taking of the refund might occur 12 months or more after the offer acceptance.  At that point the taxpayer can easily have forgotten the promise to forego the refund.  For this reason, putting a discussion of the refund taking in the letter closing out the offer provides a good way for the representative to prepare the taxpayer for the future and protect themselves from criticism and anger that occurs when the IRS takes the refund.

Here, the debtors’ chapter 13 attorney did not prepare his clients for the consequence of the post-discharge interest liability.  In its relatively short opinion the court points out that although the Hanna case cited above involved a chapter 7 debtor, case law existed with respect to chapter 11 and 13 cases in their district.  The law here is well settled even if it is surprising.  Clients may not like this aspect of the law, but if they know it’s coming, then they understand it’s part of the bargain of the discharge — just as the taking of the post-offer acceptance refund is part of the bargain of the offer in compromise.

A Pair of Decisions Seeking Anonymity

The cases of John Doe v. United States, No. 1:19-cv-00720 (Ct. Fed. Cl. 7-29-2019) and In re: Sealed Case, No. 17-1212 (D.C. Cir. 7-26-2019) present situations in which the plaintiffs sought awards for information provided to the IRS. They come from different backgrounds to make their requests both in how the information was gathered and how often they provided information to the IRS. In one case the “old” law applied and in the other the new law governed. One plaintiff provided information from public sources and provided information on many different taxpayers. The other plaintiff provided information regarding his employer and continued to work at the employer at the request of the IRS. In one situation the court granted the protection of anonymity while in the other the court remanded the case because it found that the Tax Court considered impermissible factors in denying protection.

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Joe Doe came to the IRS with information and the IRS requested that he keep working for the company so he could continue providing information. He came forward in 2000 prior to the current whistleblower statute. Before the passage of the specific statute providing relief, the IRS had the authority to grant awards but the process was governed by administrative rules developed by the IRS over decades. He alleged that disclosure of his identity would put his or his family’s life at risk. The IRS argued that he did not make an adequate showing of the risk.

The IRS typically opposes motions to remain anonymous because of the general rule that court proceedings should be open. It may not always be vigorous in its arguments but it represents the normative position of openness of the system. In many ways the IRS is a bystander with no particular fight on the issue of anonymity and often some sympathy for the person providing the information. In some cases the IRS perceives that anonymity will make its defense more difficult.

In this case the court applied the five factor test found in the case of Does I through XIII v. Advanced Textile Corp., 214 F.3d 1058, 1067 (9th Cir. 2000). It focused on three of the tests: 1) plaintiffs interest in proceeding anonymously; 2) prejudice to the government and 3) the public interest.

Here, the court found that he made a well-founded interest in preserving his anonymity because of a reasonable fear of physical or economic harm. The court found that allowing the plaintiff to proceed anonymously would not hamstring the government’s ability to defend itself. Finally, the release of redacted documents can balance the public’s need for access with the plaintiff’s privacy concerns.

The John Doe case presents a fairly classic case of a request for protection and the court’s determination that he is entitled to protection. In contrast, the Sealed case sets up a much more difficult case with a much less sympathetic petitioner. I found myself in agreement with the Tax Court’s denial of anonymity. The decision here seems to open the door for anonymity much wider than I would open it.

The D.C. Circuit, in reversing the Tax Court, acknowledged that the petitioner in this case had no connection to the company he suggested to the IRS. In fact, the petitioner, who seemed to be trying to make a living or at least to supplement his income, searched public records for anomalies suggesting underreporting by certain companies. The IRS argued that among other reasons it wanted his name public it felt that the public had the right to know about serial filers of whistleblower claims.

The D.C. Circuit cited the Advanced Textile case but relied primarily on United States v. Microsoft, 56 F.3d 1448 (D.C. Cir. 1995) which makes perfect sense because the decision comes from its circuit. The court stated that the appropriate way to determine whether a litigant may proceed anonymously is “to balance the litigant’s legitimate interest in anonymity against countervailing interests in full disclosure.”

The presumption favors disclosure. Applying the balancing test the D.C. Circuit determines that the Tax Court abused its discretion by focusing on the serial filer issue. It found this focus improper. It also found the Tax Court failed to consider relevant factors in favor of non-disclosure and discounted the possible harm to the informant. The court remands the case for the Tax Court to properly run through the factors in the tests created by prior case law.

I anticipate that the Tax Court will continue to deny the request to proceed anonymously here. In any event the D.C. Circuit has stopped the use of serial filing of whistleblower request as a basis for always disclosing the identity of the informant. Good news for persons engaged in regularly seeking awards as a business model. This gives a fighting chance for these persons to achieve anonymity. That seems appropriate but when a party blows the whistle on an entity with which it has little or no contact, the need for anonymity will be more difficult, though certainly not impossible to demonstrate. The court must continue to run through the tests which properly balance the needs of the parties and not short circuit the test because the person providing the information does so on a regular basis.

Application of Ex Parte Provisions in Collection Due Process Hearing

We have not written much about the ex parte provisions that entered the code in 1998.  We have a couple of posts on the topic here and here.  In the recent case of Stewart v. Commissioner, T.C. Memo. 2019-116 the taxpayer alleges that material in the administrative file created an ex parte communication.  The Tax Court decided that the material did not violate the provision prohibiting ex parte communications between Appeals and other parts of the IRS that might improperly influence Appeals. 

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The Stewarts received a CDP notice of intent to levy for 2015 and a CDP notice of the filing of a notice of federal tax lien for 2015 and 2016.  Although the court doesn’t write about the amount that the Stewarts owe the IRS, my guess is that they owe a fair amount because their case was being handled by a Revenue Officer.  The clients in my clinic usually do not owe enough to have a revenue officer (RO) assigned to their cases.  I prefer cases in which a revenue officer works the case because then I have only one person to deal with and I do not have to contact the Automated Collection Site.  Because ROs have their boots on the ground in the community where the taxpayer lives, it’s also possible for them to understand local issues in a way that someone sitting in a windowless room on the other side of the country might not.  Of course, the down side of a revenue officer is that they see things someone on the other side of the country might not see.

In this case the Stewarts’ representative seems not to have formed a favorable relationship with the revenue officer.  In fact, he invited the RO to leave his office in what the RO describes as a brusque manner.  The RO put his interactions with the representative into his case notes.  When the representative decided he could not achieve his goals for the case with the RO, he let the RO know that his next stop was Appeals.  That stop came as a result of a CDP request.  Unfortunately for the Stewarts the Settlement Officer (SO) in Appeals seemed to see the case similar to the way the RO saw the case.  The representative believes that the RO improperly influenced the SO and raises that issue in the context of ex parte and how the alleged ex parte actions of the RO tainted the CDP hearing.  Here’s how the court characterized the argument:

Petitioners contend that the ICS history transmitted to SO Wert as part of the administrative file was an ex parte communication. They contend that they were not aware that RO Wagner’s “gratuitous characterization” of petitioner’s counsel was part of the administrative record. Petitioners request that their case be remanded to the Appeals Office and assigned to a different settlement officer who has not been exposed to the alleged ex parte communication. Respondent contends that the alleged ex parte communication was a permissible transmittal of petitioners’ administrative file between the revenue officer and the settlement officer during the CDP process.

Congress created restrictions on ex parte communications in the IRS Restructuring and Reform Act of 1998, Pub. L. No. 105-206, sec. 1001(a)(4), 112 Stat. at 689 but the provisions did not make it into the Internal Revenue Code.  Instead, the IRS flushed out the rules regarding CDP in a pair of Revenue Procedures, Rev. Proc. 2000-43, 2000-2 C.B. 404, amplified, modified, and superseded by Rev. Proc. 2012-18, 2012-10 I.R.B. 455. Rev. Proc. 2012-18, sec. 2.01(1), 2012-10 I.R.B. at 456.  The 2012 revenue procedure defines ex parte communication as “a communication that takes place between any Appeals employee * * * and employees of other IRS functions, without the taxpayer * * * [or her] representative being given an opportunity to participate in the communication.” The “communication” referred to in the revenue procedure includes oral and written communications.

The court notes that transmitting the administrative file to Appeals from the appropriate function does not normally create an ex parte communication.  If it did, Appeals employees would operate almost totally in the blind; however, the court also notes that the 2012 revenue procedure provides some guidance about what should not be included in the administrative file such as material “if the substance of the comments would be prohibited if they were communicated to Appeals separate and apart from the administrative file.”  In essence, taxpayers’ representative here argues that the RO by including in his field notes that the representative impolitely asked the RO to leave the office of the representative prejudiced the SO improperly making the communication an ex parte communication.  Stated differently, the representative felt the RO put this into his notes for the purpose of communicating to the SO something other than “just the facts.”

The court is not buying what the representative is selling.  It finds that the RO’s notes were contemporaneous.  They were made according to his duties as an RO.  As such they were an appropriate part of the administrative file and not something the RO created for the purpose of improperly prejudicing the taxpayers in Appeals.  Since this was the only argument the taxpayers made in their CDP case, the court sustained the determination by Appeals to allow the IRS to levy on the taxpayers and to leave in place the notice of federal tax lien.  The outcome here seems appropriate on the facts described.  Certainly, circumstances could exist in which the IRS employee seeks to improperly influence Appeals by putting material into the files that does not belong there, and the court cited to some cases of that type, but this does not appear to fit those circumstances due to the timing of the RO’s notes and the fact that his characterization does not appear challenged.

In the Taxpayer First Act Congress made a brief return to the issue seeks to make Appeals even more independent than it was previously.  To the extent it has even more perceived independence, perhaps the ex parte rules have more importance.  Like the provisions providing taxpayer rights, the ex parte provisions contain no specific remedy for the failure to follow the rules.  Although the Tax Court finds no ex parte violation here and, therefore, fashions no remedy, perhaps its willingness to fashion a remedy for violation of this provision has something to say about remedies it might fashion for a violation of TBOR.  So, far the Tax Court has not looked to fashion remedies for TBOR violations as discussed in prior posts here and here and an article I wrote here.

11th Circuit Reverses and Imposes an Injunction Against a Corporation for Failing to Pay

We have discussed before the increasing practice of the Department of Justice Tax Division to seek an injunction against an operating business that pyramids its tax liabilities.  Pyramiding is the term used for taxpayers who keep building higher and higher tax liabilities by failing to pay period after period.  Usually, it applies to a company that fails to pay employment taxes by failing to withhold the income and employment taxes from its employees and pay the taxes over to the IRS.  Pyramiding typically occurs when a company lacks sufficient cash flow but sometimes it results simply from greed and a belief that the IRS will not catch the person and make them pay.

If a company pyramids its employment taxes and the IRS has no practical means of collecting from the company, the IRS, many years ago, would shut the company down, or attempt to do so, by issuing levies or seizing property even though the company had no equity in seized assets or funds in the bank.  By seizing assets of the business the IRS could effectively close the business temporarily and that might cause it to close permanently.  Other levies would frequently stop suppliers from supplying or banks from lending even if they produced no dollar return.  The goal of these seizures and levies was not to get money but to keep from losing more money.  The practice of no equity seizures went away over 30 years ago.  After the demise of no equity seizures, revenue officers longed for a tool to shut down the taxpayers in situations in which the taxpayer continued to run up liabilities no matter what the revenue officer tried to do. 

Finally, the government, after many years of discussing the possibility, decided that it could bring an injunction action seeking to stop the pyramiding taxpayer from running up additional liabilities.  Doing this through an injunction takes longer and cost more money from the perspective of the time and effort of the Department of Justice trial attorney but can prove an effective method of shutting down a business that continues to ignore the requirement to pay payroll taxes.  In United States v. Askins and Miller Orthapedeatrics, D.C. Docket No. 8:17-cv-00092-JDW-MAP (11th Cir. 2019), the 11th Circuit agreed with the IRS that an injunction of the business was appropriate remedy to stop a business from continuing to incur employment taxes.  In ruling for the IRS, the 11th Circuit reversed the decision of the district court which had denied the IRS injunctive relief.  The case represents an important circuit level discussion of what the IRS needs in order to succeed in obtaining injunctive relief.

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 The business at issue was run by two brothers.  The brothers had caused the business not to pay its employment taxes, both trust fund and non-trust fund, since 2010.  The brothers also created trust and other entity accounts in order to hide the assets of the business.  In many ways the case read as a textbook case for a criminal prosecution against the brothers. A high percentage of injunction cases seem to fit the bill for criminal prosecution and DOJ does prosecute people for failing to pay employment taxes – something it almost never did three decades ago.  I do not know what causes the decision to fall into the injunction box rather than the prosecution box, but here the government chose the civil route.

The court described the situation as follows:

“The IRS has tried several collection strategies over the years. It started with an effort to achieve voluntary compliance: IRS representatives have spoken with the Askins brothers “at least 34 times” since December 2010, including 27 in-person meetings. Twice they entered into installment agreements that set up monthly payments to bring Askins & Miller back into compliance, but the company defaulted both times. Two other times, they warned Askins & Miller that continued noncompliance could prompt the government to seek an injunction.

The IRS has employed more aggressive means as well. It served levies on “approximately two dozen entities,” but most “responded by indicating that there were no funds available to satisfy the levies.” Three entities paid some money, but not nearly enough to satisfy Askins & Miller’s debts or to keep pace with its accrual of new liabilities. Additionally, the IRS’s ability to collect payments through levies has been hampered by the defendants’attempts to hide Askins & Miller’s funds and to keep the balances in Askins & Miller’s accounts low. Between 2014 and 2016, the Askins brothers transferred money from Askins & Miller to “RVA Trust,” which operates a private hunting club for the brothers, and “RVA Investments,” an accounting business associated with their father. The IRS also discovered additional accounts at BankUnited and Stonegate Bank. It did not seek to levy RVA Trust, RVA Investments, or the bank accounts because it discovered them after this case had been referred to the Department of Justice and because the IRS believed that “there is a substantial risk that any new levy would result in opening new undisclosed accounts and moving the money there.”

When the IRS finally gave up on its administrative collection efforts and referred the case to the Department of Justice for the pursuit of an injunction, it met another obstacle.  The district court denied the motion without prejudice finding the declaration conclusory, and finding that the proposed injunction was “effectively an ‘obey-the-law’ injunction.”  The IRS filed a new declaration with the district court trying again to convince it to enjoin the taxpayer’s actions.  The district court again reached the conclusion that the requested injunction served as an order to obey the law.  After the second attempt at the district court, the IRS appealed.  While the case was pending in the district court, the taxpayer ran up even more liabilities.

To obtain a preliminary injunction under “the traditional factors,” the IRS must demonstrate 1) a substantial likelihood of success on the merits, 2) that it will suffer irreparable injury unless the injunction is issued, 3) that the threatened injury to the IRS outweighs whatever harm the proposed injunction might cause the defendants, and 4) that the injunction would not be adverse to the public interest.  The district court noted that the parties essentially agreed that three of the four traditional elements for an injunction case were met by the facts of the case, but felt that the IRS could obtain a judgment for damages and, therefore, did not face irreparable injury.  The IRS argued that such a judgment was meaningless under the circumstances since it had exhausted its administrative efforts with its powerful administrative tools in trying to collect the outstanding debt.

Taxpayers raised a question of whether the closure of their business rendered the case moot.  The court went through a thorough analysis of factors of mootness factors and determined that remanding the case to the district court for a determination of mootness would serve no purpose but delay stating:

“Given the undisputed facts before us, we do not believe that the defendants can satisfy their “heavy” and “formidable” burden of making it “absolutely clear” that their behavior will not recur. And “we are unpersuaded that a remand would further the expeditious resolution of the matter.” Sheely, 505 F.3d at 1188 n.15 (conducting mootness analysis without remanding for further fact finding). The district court already concluded that the defendants have “a proclivity for unlawful conduct” and are “likely to continue ignoring” their tax obligations. The record demonstrates a near-decade-long saga in which the IRS has pursued Askins & Miller time and again. Over that time span, the defendants have funneled money to new accounts and entities as the IRS closed in on the old ones. For at least the time between November 2015 and mid-2018, Askins & Miller continued as a going concern despite reporting “no investments, no accounts or notes receivable, no real estate, and no business equipment.” Against that backdrop — and in light of the defendants’ admissions that Askins & Miller “continues to exist” and that one of the brothers continues to practice medicine — “we can discern no reason for sending the question of mootness back to the district court for further review or fact finding.” Id.

Then the circuit court moved on to examine the issue of whether the IRS had an adequate remedy of law.  Addressing that issue, the court acknowledged that it had not addressed the issue in its past ruling.  It found that prospect of even more losses in the future made a compelling case for granting the injunction stating:

“The fact that the IRS is attempting to avoid future losses is key. As the IRS notes, it “is an involuntary creditor; it does not make a decision to extend credit.” In re Haas, 31 F.3d 1081, 1088 (11th Cir. 1994). As long as the brothers continue to accrue employment taxes, the IRS continues to lose money. This sets the IRS apart from the position of other creditors (who can cut their losses by refusing to extend additional credit), and — crucially — means that the injunction sought is not simply an attempt to provide security for past debts. Rather, the proposed injunction here would staunch the flow of ongoing future losses as the brothers continue to accumulate tax liabilities — unlike in cases where the loss has already been inflicted or would be attributable to a single event, where we have stated that injuries are irreparable only when they “cannot be undone through monetary remedies.” E.g., Scott, 612 F.3d at 1295 (quoting Cunningham v. Adams, 808 F.2d 815, 821 (11th Cir. 1987)).

Indeed, the record and the district court’s own findings demonstrate that the government’s proposed injunctive relief is “appropriate for the enforcement of the internal revenue laws,” 26 U.S.C. § 7402(a), and that the government will likely suffer irreparable injury absent an injunction. Among other things, the district court noted that Askins & Miller had “a proclivity for unlawful conduct,” had “diverted and misappropriated” the employment taxes it had withheld from its employees’ wages, and was “likely to continue ignoring” its employment tax obligations. The IRS’s declaration demonstrates that, over a period of several years, it expended considerable resources making numerous — and unsuccessful — attempts to collect Askins & Miller’s unpaid taxes. And in the face of all that, as the declaration explained, Askins & Miller is effectively judgment-proof. In short, the record amply demonstrates that, absent the requested injunction, the government will continue to suffer harm from Askins & Miller’s willful and continuing failure to comply with its employment tax obligations — including lost tax revenue and the expenditure of a disproportionate amount of its resources monitoring Askins & Miller and attempting to bring it into compliance — and that, in all likelihood, the government will never recoup these losses.”

Having determined that the IRS did not have an adequate remedy at law, the circuit court ended by addressing the district court’s concern that the IRS merely sought an obey the law injunction.  Here, it stated that:

“Finally, the proposed injunction goes well beyond merely requiring compliance with the employment tax laws. In fact, it lists numerous concrete actions for the defendants to take — to name only a few, segregating their funds, informing the IRS of any new business ventures, and filing various periodic affidavits — well beyond what a simple “obey-the-law” injunction would look like. In short, this case does not raise the sort of fair notice concerns that Rule 65(d) is designed to address.”

The Askins and Miller case represents a major victory for the IRS.  The problem with pyramiding business taxes needs a solution.  After many years of floundering to find a solution, the IRS has combined with the Tax Division of the Department of Justice over the past decade (or more) to pursue injunctions against the most egregious taxpayers engaged in pyramiding in situations in which the decision is made not to prosecute.  This is a great development for everyone except the taxpayers who pyramid.  The government needs to aggressively pursue these taxpayers.  Doing so requires significant resources, but success can stop taxpayers who fail to pay year after year.  The 11th Circuit provides a great discussion for how to stop this action.  The effort expended in succeeding here shows the difficulty the government encounters as it seeks to stop this type of taxpayer action and the amount of resources it must expend to do so.

An Estate Cannot Use the Financial Disability Provisions to Toll the Statute of Limitations for Filing a Refund Claim

The case of Carter v. United States, No. 5:18-cv-01380 (N.D. Ala. 8-9-2019) shows a limitation of the financial disability provision set out in IRC 6511(h). Ms. Carter is a personal representative of an estate. She failed to timely file an administrative claim for the estate and sought to use the financial disability provisions to hold open the time frame. The court finds that the language of the statute only applies to individuals. The court also spends a fair amount of time in its lengthy opinion talking about the issue of jurisdiction, a favorite topic at this blog. Both financial disability and jurisdiction will be discussed below. Carl Smith helped significantly in the writing of the jurisdictional portion of this post.

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Financial Disability

The decedent owned a lot of valuable stock in a bank but had the misfortune to pass away in the midst of the financial crisis of 2007-2008. The stock went down precipitously because of the great recession but fell to worthless status when a fraudulent scheme perpetrated on the bank was discovered. The dramatic drop in the value of the stock apparently caused Ms. Carter, the executor of the estate to develop issues that she alleges caused her to be late in submitting an amended return claiming a refund because the value of the stock at the valuation date for the estate tax return was actually lower than the amount reported on the return.

The IRS moved to dismiss because by the time she filed the amended return it was well past the ordinary time for filing a claim for refund. Ms. Carter withdrew her initial claim and filed another one to which she attached a doctor’s note explaining that she, the executor, was suffering from a medical impairment that prevented her from managing the affairs of the estate for five years. She also filed an affidavit with the second claim stating that no one other than her had the authority to act on behalf of the estate during the relevant time period. The IRS did not act on her new amended claim. After waiting six months she filed her complaint and the IRS moved to dismiss for lack of jurisdiction since the claim was filed out of time. The estate claimed a refund of over 3 million dollars stating that the stock was really worthless at the time of valuation based on non-public information that later became available.

We can all sympathize with someone who thought they were inheriting stock worth over $17 million and who found out it was worthless. Compounding this problem, according to footnote 2 of the opinion, was the fact that the bank executives urged Ms. Carter and a co-beneficiary not to sell their stock but to borrow from the bank to pay the estate tax. The two borrowed the money giving personal guarantees and they remain liable on those guarantees. So they not only lost all of the value that they thought the stock had but they owe money (lots of it) to boot. [I doubt they found much solace in the successful prosecution of the person who caused the devaluation.]

Such a turn of events could put someone in a tailspin that might cause some delays. The IRS did not argue that Ms. Carter was wrong in her assertion that she suffered from some unspecified medical impairment that kept her from acting. It essentially argued that this did not matter because the taxpayer was the estate and not an individual. It also did not matter that the stock may have been worthless at the time the estate reported it without knowing of the actions that devalued the stock. What mattered was that the refund claim came too late.

Footnote 6 of the opinion collects the case law on this issue which uniformly holds that the financial disability must belong to the taxpayer and not to some third person. Prior cases on this point include Murdock v. United States, 103 Fed. C. 389 (2012); Alternative Entm’t Enters., Inc. v. United States, 458 F. Supp. 2d 424 (E.D. Mich. 2006), aff’d 277 F. App’x 590 (6th Cir. 2008); Brosi v. Commissioner, 120 T.C. 5, 10 (2003) as well as others I will not detail here. I wrote a law review article several years ago detailing holes in the financial disability statute. This is another hole. I cannot say that Ms. Carter would win her case but if financial disability did keep her from filing her claim on time, and if she can prove the claim was valid, this seems like a worthy exception for Congress to make to allow a taxpayer to obtain the return of money that should not have come to the IRS in the first place. Until the statute changes to include a broader class of taxpayers with financial disability cases like this will continue to occur occasionally. Financial disability cases do not present large numbers and courts can sort through the disability claims. I would let them do it.

Jurisdiction

The court also spent time parsing its jurisdiction. This issue matters because nonjurisdictional filing deadlines are subject to waiver, forfeiture, estoppel, and, usually, equitable tolling. The Supreme Court in Brockamp v. United States, 519 U.S. 347 (1997) (remember it was Brockamp that caused Congress to pass IRC 6511(h) creating financial disability in the first place) merely held that equitable tolling doesn’t apply in 6511 cases, but the Court did not hold the other three defenses don’t apply. Brockamp says nothing about whether the filing deadline is jurisdictional. Indeed, the opinion doesn’t even contain the words “jurisdiction” or “jurisdictional”. Dalm v. United States, 498 U.S. 596 (1990) does contain language calling 6511 rules jurisdictional, but it goes on to reason that it is so because: 

Under settled principles of sovereign immunity, the United States, as sovereign, is immune from suit, save as it consents to be sued . . . and the terms of its consent to be sued in any court define that court’s jurisdiction to entertain the suit. A statute of limitations requiring that a suit against the Government be brought within a certain time period is one of those terms.

494 U.S. at 608 (cleaned up)

That statement is the reverse of good law today. SOLs now are almost never jurisdictional. 

The Supreme Court has not given much thought to the 1990 Dalm opinion in recent years, for if the Court did, the 1997 Brockamp opinion (which doesn’t even mention Dalm) could have been one sentence long: “Since jurisdictional filing deadlines are never subject to equitable tolling, and since, in Dalm, we called the 6511 filing deadlines jurisdictional, those deadlines cannot be equitably tolled.” 

Since the district court opinion did not involve the DOJ waiving or forfeiting the right to raise the untimeliness issue, nor did it involve facts that might cause estoppel, it really did not matter in Ms. Carter’s case whether the filing deadline is jurisdictional.

The district court has serious doubts that 6511 noncompliance arguments go to its jurisdiction. The court in the text relies on statements in Dalm making 6511 jurisdictional, but is sufficiently concerned that 6511 is not, that it goes on to decide the underlying merits against the taxpayer (not sure why it has to do this). Then, the court writes a long footnote about why 6511 might not be jurisdictional:

Supreme Court jurisprudence no longer accords similar limitations periods jurisdictional status. In United States v. Kwai Fun Wong, 135 S. Ct. 1625 (2015), the Supreme Court held the limitations period for filing a Federal Tort Claims Act case is not jurisdictional. The Court determined “the Government must clear a high bar to establish that a statute of limitations is jurisdictional.” Id. at 1632. “In recent years, [the Court has] repeatedly held that procedural rules, including time bars, cabin a court’s power only if Congress has ‘clearly state[d]’ as much.” Id. (citation omitted). “Time and again, [the Court has] described filing deadlines as ‘quintessential claim-processing rules,’ which ‘seek to promote the orderly progress of litigation,’ but do not deprive a court of authority to hear a case.” Id. (citing Henderson v. Shinseki, 562 U.S. 428, 435 (2011)). 

Therefore, to “ward off profligate use of the term ‘jurisdiction,’ [the Court has] adopted a ‘readily administrable bright line’ for determining whether to classify a statutory limitation as jurisdictional. . . . [Courts should] inquire whether Congress has ‘clearly state[d]’ that the rule is jurisdictional; absent such a clear statement, . . . ‘courts should treat the restriction as nonjurisdictional in character.’” Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145, 153 (2013). As a result, the Court has “repeatedly held that filing deadlines ordinarily are not jurisdictional. . . .” Id. at 154. 

Even more recently, the Supreme Court reconfirmed that a statute’s limitations period primarily pertains to claim-processing, not subject matter jurisdiction. See Fort Bend Cty., Texas v. Davis, 139 S. Ct. 1843, 1849 (2019) (“The Court has therefore stressed the distinction between jurisdictional prescriptions and nonjurisdictional claim-processing rules, which ‘seek to promote the orderly progress of litigation by requiring that the parties take certain procedural steps at certain specified times.’” (quoting Henderson v. Shinseki, 562 U.S. 428, 435 (2011))); Nutraceutical Corp. v. Lambert, 139 S. Ct. 710 (2019) (contrasting nonjurisdictional claim-processing rules subject to waiver by an opposing party with court procedural rules which clearly foreclose a flexible equitable tolling approach). “If a time prescription governing the transfer of adjudicatory authority from one Article III court to another appears in a statute, the limitation [will rank as] jurisdictional; otherwise, the time specification fits within the claim-processing category.” Hamer v. Neighborhood Hous. Servs. of Chicago, 583 U.S. at ___, 138 S. Ct. 13, 20 (2017).

Section 6511(a)’s filing deadlines appear to fall within the ambit of a claim-processing rule rather than a jurisdictional prerequisite. As similarly countenanced in Kwai Fun Wong, § 6511(a)’s “text speaks only to a claim’s timeliness, not to a court’s power.” 135 S. Ct. at 1632; see § 6511 (describing the filing deadlines for administrative claims for tax credits and refunds). Section 6511 “‘does not speak in jurisdictional terms or refer in any way to the jurisdiction of the district courts.’” Kwai Fun Wong, 135 S. Ct. at 1633 (citations omitted). Furthermore, § 6511’s limitations periods fall in a different section of the Internal Revenue Code from the jurisdiction granting provisions. See28 U.S.C. § 1346(a)(1); 26 U.S.C. § 7422.

The court cognizes the Supreme Court referred to § 6511’s time limits in jurisdictional terms in Dalm, In Dalm, the Court held the district court did not have jurisdiction over a suit seeking a refund of gift tax, interest, and penalties when the plaintiff did not file suit within the limitations period. Id. at 601. The Eleventh Circuit followed Dalm’s reasoning in dismissing a refund suit for lack of subject matter jurisdiction. Wachovia Bank, N.A. v. United States, 455 F.3d 1261, 1268-69 (11th Cir. 2006). However, the Supreme Court’s recent jurisprudence portrays that courts “once used [the term “jurisdiction”] in a ‘less than meticulous’ manner.” Nutraceutical, 139 S. Ct. at 714 n. 3 (citing Hamer, 583 U.S. at ___, 138 S. Ct. at 21; Kontrick v. Ryan, 540 U.S. 443, 454 (2004)). “Those earlier statements did not necessarily signify that the rules at issue were formally ‘jurisdictional’ as [the Court uses] that term today.” Id.

Nevertheless, the structural interpretation of § 6511(a) as a claims-processing rule may not overcome its prior construal as a jurisdictional provision. See Fort Bend, 139 S. Ct. at 1849 (The “Court has stated it would treat a requirement as ‘jurisdictional’ when ‘a long line of Supreme Court decisions left undisturbed by Congress’ attached a jurisdictional label to the prescription.”) Furthermore, notwithstanding the shadow cast on § 6511(a) as a jurisdictional provision, its limitations period applies to this action as it prescribes mandatory filing deadlines subject to a narrow tolling provision. See Nutraceutical, 139 S. Ct. at __ (“The mere fact that a time limit lacks jurisdictional force, however, does not render it malleable in every respect. Though subject to waiver and forfeiture, some claim-processing rules are “mandatory” — that is, they are “‘unalterable’” if properly raised by an opposing party.” (citing Manrique v. United States, 137 S. Ct. 1266, 1272 (2017); see also Kontrick, 540 U.S. at 456; Eberhart v. United States, 546 U.S. 12, 19 (2005) (per curiam) (A claim-processing rule manifests as “mandatory” when a court must enforce the rule if a party “properly raise[s]” it.). Therefore, Defendant properly raised the limitations period prescribed by 26 U.S.C. § 6511(a), and it applies whether it is designated as a jurisdictional or claim processing rule.

Conclusion

The Carter case provides much thought and analysis on the jurisdictional issue as it applies to refund claims. As you can see from this discussion, it does not simply stop at Brockamp. While the discussion does not help the taxpayer here, it may help to guide future taxpayers seeking to understand the possibilities for pursuing an otherwise late claim.