Congress to Consign IRC 6751(b) to the Graev?

Carl Smith brought to my attention that one of the provisions in the tax bill currently working its way through Congress proposes to repeal IRC 6751(b) and he provided me with the title to this post.  I joked with others on the email thread that such a repeal could spell the end of our blog.  We have written so many posts on this poorly drafted law that having it repealed could significantly reduce the topics upon which we would write.

The other thought that went through my head was that the IRS had regained its voice in influencing tax legislation.  In the 1960s, 1970s, and into the 1980s perhaps up to the first Taxpayer Bill of Rights legislation, the IRS had less to fear from adverse judicial precedent because it could generally fix bad precedent by going to Congress to reverse the problem caused by adverse precedent.  This influence seemed particularly present when Wilbur Mills chaired the Ways and Means Committee.  I have wondered about the impact of his dip in the Tidal Basin with Fanne Foxe on tax legislation and its trajectory.  For the past couple decades, or more, the IRS seemed to have lost that ability, although there are some notable exceptions.  Maybe it is returning.  Congressman Neal, be careful where and with whom you go swimming.

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Congress passed 6751(b) as a part of the Restructuring and Reform Act of 1998 (RRA 98) in an effort to curb perceived abuse of penalty provisions to pressure taxpayers into conceding tax liabilities.  No doubt some IRS agents used penalties or the prospect of penalties to cajole taxpayers into settlements.  I never perceived this as a common practice, but I may not have been in the best position to observe behaviors regarding this issue.  Whether real or mostly imagined, the statute drafted to fix the alleged problem was drafted by someone with little or no knowledge of tax procedure.  It caused the Tax Court to twist itself into knots in order to interpret it and led Judge Holmes in dissenting from the interpretation in the Graev case to predict that the decision would led to many unpredicted and poor outcomes that he labeled Chai ghouls after the Second Circuit decision on this issue.  He was right, but that’s not to say the majority of the court got the Graev case wrong.  The statute is so poorly worded that no judge could draw the precise meaning.

One thing that saved the tax procedure world from 6751(b) for most of its life was that everyone ignored it.  Neither the IRS nor the bar seemed to pay attention to its requirements, whatever they were or are, for over 15 years.  Thanks to Nina Olson and the annual report to Congress and to Frank Agostino, litigation finally began to seek to provide meaning to the statute.  The cases have led to results that don’t necessarily follow the goal of the statute and that let many taxpayers off the hook for penalties, not because the IRS used them inappropriately as bargaining tools but because it failed to secure the appropriate approvals.  In some instances, the IRS would have had difficulty knowing what approvals would have been appropriate at the time of the imposition of the penalty since the court interpretation of the statute came several years thereafter.  Of course, the IRS could have headed this off with timely regulations that sought to interpret the provision and set up clear rules to follow but it did not create such regulations and suffered in several cases for its inaction.

Maybe this obit for 6751(b) comes too early.  Proposed legislation does not change the law.  Here is the language of the proposed repeal which contains its own surprise:

SEC. 138404. MODIFICATION OF PROCEDURAL REQUIREMENTS RELATING TO ASSESSMENT OF PENALTIES. 

(a) REPEAL OF APPROVAL REQUIREMENT.—Section 6751, as amended by the preceding provision of this Act, is amended by striking subsection (b).  

(b) QUARTERLY CERTIFICATIONS OF COMPLIANCE WITH PROCEDURAL REQUIREMENTS.—Section 6751, as amended by subsection (a) of this section, is amended by inserting after subsection (a) the following new subsection:  

‘‘(b) QUARTERLY CERTIFICATIONS OF COMPLIANCE.—Each appropriate supervisor of employees of the Internal Revenue Service shall certify quarterly by letter to the Commissioner of Internal Revenue whether or not the requirements of subsection (a) have been met with respect to notices of penalty issued by such employees.’’.  

(c) EFFECTIVE DATES.—  

(1) REPEAL OF APPROVAL REQUIREMENT.—   

The amendment made by subsection (a) shall take effect as if included in section 3306 of the Internal Revenue Service Restructuring and Reform Act of 1998.  

(2) QUARTERLY CERTIFICATIONS OF COMPLI ANCE WITH PROCEDURAL REQUIREMENTS.— 

The amendment made by subsection (b) shall apply to notices of penalty issued after the date of the enactment of this Act.

Notice in subsection (c)(1) of the proposed legislation that it repeals 6751(b) back to 1998.  Wow!  While wiping this statute off the books makes Congress look better and gets rid of a provision that makes it look incompetent, few examples exist of such a period of retroactivity.  Might the repeal itself, assuming it occurs, create yet more blog post opportunities for Procedurally Taxing?  Maybe the repeal is a good thing for the blog since the number of different permutations of 6751(b) may be dwindling, reducing the number of future posts if the current law continues unchanged.  A repeal such as this could be just the ticket for an additional round of posts as taxpayers whose cases are currently pending at some point on the continuum of audit or litigation will want to fight for the right to have their penalty removed.

Note also that section 6751(a), which provides that “The Secretary shall include with each notice of penalty under this title information with respect to the name of the penalty, the section of this title under which the penalty is imposed, and a computation of the penalty,” would not be repealed by the proposed legislation. The legislation would merely replace subsection (b) with a certification requirement within the IRS by managers on a quarterly basis as to their employees’ general compliance with subsection (a) – something likely of no use to taxpayers.

What about the sentiment that caused the essentially unanimous passage of RRA 98 regarding using penalties as an inappropriate bargaining chip?  Has the IRS cleaned up its act in this regard over the past quarter century?

We almost never write about pending legislation but with the opportunity to use the title to today’s post coupled with the possible loss of one of the most productive post producers, it seemed appropriate in this instance.  Now that you know about the proposal, you can start your lobbying efforts on behalf of the legislation or against it.  No matter which way this plays out, 6751(b) has to remain among the top few provisions as the worst ever drafted in the tax procedure realm.

10th Circuit Affirms That Nursing Homes and Other Entities Lack Protection from Levy for Hardship

In 2017, the Tax Court issued rulings in several cases regarding the application of IRC 6343(a)(1) to entities.  The lead case was Lindsay Manor Nursing Home, Inc. v. Commissioner, 148 T.C. No. 9 (2017).  I blogged about the group of cases here in a post with a catchy tag line about rolling the wheelchairs and beds to the curb.  Lindsay Manor appealed the decision.  I wrote about the outcome of that appeal which basically vacated the decision because Lindsay Manor was in receivership at the time of the Tax Court’s decision.

Now, another nursing home in the same group of cases, Seminole Nursing Home, Inc., has made its way to the 10th Circuit after being told in the Tax Court that it did not qualify for hardship.  The 10th Circuit decision upholds the decision of the Tax Court and the validity of the Treas. Reg. 301.6343-1(b)(4)(i).  I don’t know if the nursing home has been keeping itself open in the four years since the Tax Court decision, but now it must either succeed in getting the Supreme Court to hear the case, pay the outstanding tax, work out some form of payment agreement or, potentially, watch the IRS shut it down.

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This case came to the Tax Court as a Collection Due Process case.  IRS Appeals rejected Seminole’s offer of an installment agreement prior to the Tax Court case, stating:

Seminole had sufficient assets to pay its tax debt in full; and (2) it was ineligible for an installment agreement because it had not made all its required federal tax deposits for 2014. The Office also rejected Seminole’s economic-hardship argument, explaining that Treasury Regulation § 301.6343-1(b)(4) limits economic-hardship relief to individual taxpayers. And it determined that “[i]n balancing the least intrusive method of collection with the need to efficiently administer the tax laws and the collection of revenue, . . . the balance favors issuance of the levy, and is no more intrusive than necessary.”

The 10th Circuit engaged in a Chevron analysis to determine if the regulation appropriately interpreted the statute.  Seminole argued that the Code provides an unambiguous answer at step one, citing to IRC 7701(a)(14) for support that entities are persons under the IRC.  That section defines person to include “an individual, a trust, estate, partnership, association, company or corporation.”  Seminole also pointed out that IRC 6343(a)(1)(D) makes no distinction between individual and corporate taxpayers.

While the language of the definitional provision in IRC 7701 appears favorable to Seminole’s argument, the 10th Circuit notes that the preface to the definitions says they apply “[w]hen used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof.”  It finds that the use of the word taxpayer elsewhere in the Code makes clear the word can be limited to individuals.  It says that corporations can experience economic hardship, citing an earlier case in which it made such a holding, but looking at the exemptions to levy in IRC 6343, it finds they all essentially apply to individuals and not to entities. 

The court finds it important that Seminole did not attempt to show what economic hardship for entities would look like.  It also noted that no one commenting on the regulation suggested the result for which Seminole argues.  Looking at the situation as a whole, it decides that the statute does not compel a result, leaving the Treasury free to apply its expertise in writing a regulation.

Seminole did not make the argument about disqualification of the Settlement Officer for looking at the file before the hearing that was made in the companion case of Lindsay Manor, but it did make a second argument using the reversal of the Lindsay Manor case as a basis for arguing the underlying Tax Court decision in its case lost its foundation upon the vacating of the Tax Court’s decision in Lindsay Manor for mootness.  The 10th Circuit says, however, that it did not vacate Lindsay Manor on the merits but only because of mootness at the time of the Tax Court’s ruling.  It finds that the adoption of the reasoning of Lindsay Manor to the facts of Seminole did not create an abuse of discretion.

The Seminole case fills the hole created by the mootness of Lindsay Manor.  While the outcome does not provide a surprise, this is a major victory for the IRS regarding the interpretation of the statute.  This doesn’t mean there will not be further challenges in other circuits.  The decision does, however, provide the kind of support that will greatly assist the IRS should those challenges arise.

Limiting economic hardship to individuals seems consistent with the statutory scheme of the levy provisions.  Because of the hardship that closing down a nursing home could create for the individuals living there, nursing home cases provide one of the best litigating vehicles for challenging the limits created by the regulation.  Still, the hardship is directly the hardship of the entity and not of the individuals who reside at the facility.  The situation becomes very sympathetic if the economic hardship experienced by the entity results from government delays.  Other cases have addressed the imposition of the trust fund recovery penalty upon nursing home operators who could not make the necessary tax payments because of significant delays in Medicare payments.  If the cause of the hardship is another part of the government, courts should look for ways to mitigate the taxpayer’s problem even where the taxpayer is an entity but limiting the concept of hardship to individuals generally seems appropriate.  It’s hard to say the 10th Circuit was wrong in upholding the regulation as a reasonable interpretation of the statute.

Proving the Liability – The Presumption of Regularity

I am not sure, but I don’t think we have written about a case from Guam since Les cited one in a post during our first month of existence as a blog.  The case of Government of Guam v. Guerrero, No. 19-16793 (9th Cir. 2021) gives us a chance to make up for lost time regarding tax law and Guam.  Perhaps the first issue to address concerns why we care about Guamanian tax issues.  We care because their tax code essentially mirrors our, similar to other territories, and procedural issues regarding their tax issues decided by the 9th Circuit could impact similar issues arising from the U.S.

At issue in the Guerrero case is whether the government of Guam kept adequate records to prove the liability it asserted and to prove that the statute of limitations remained open for it to act.  The court makes a decision regarding the presumption of regularity that could easily apply to the IRS.  For that reason, this circuit court opinion matters.

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Guam’s Department of Revenue and Taxation (DRT) determined that Mr. Guerrero owes about $3.7 million in unpaid taxes for 1999-2002.  He filed his returns late for those years.  The dispute concerns when the taxes were assessed.  The court states:

the official records are missing, likely due to water, mold, and termite damage at the storage facility where they were housed.

This suggests that Guam does not maintain its tax records on a computer system.  That’s surprising.  Maybe the antiquated IRS system is not the worst system in the world.

The court says that after assessment the DRT filed tax liens (I assume the court meant to say the DRT filed notices of federal tax liens) on various parcels of real property (I assume the DRT simply filed notices against Mr. Guerrero and the liens attached to his real property along with his other property.)  After filing the liens, DRT brought this case to foreclose the liens on the real property to which the liens attached.

Mr. Guerrero asserts that DRT cannot prove that it timely assessed the taxes against him.  DRT acknowledges that it does not have the original certificates of assessment, but invokes the presumption of regularity relying on the DRT procedures:

Guam’s evidence that the Department timely assessed Leon Guerrero’s taxes instead consists only of the Department’s internal documents rather than the certificates of assessment. Guam argues that these internal documents are sufficient evidence that the Department assessed Leon Guerrero’s unpaid taxes in January 2006 and sent the relevant notices before the three-year statute of limitations expired. Guam relies on the Department’s internal registers (record lists of delinquent taxpayers) known as TY53 and TY69 registers, as well as an internal transmittal sheet sent to the collections branch after the TY53 and TY69 notices were sent to Leon Guerrero, to demonstrate both that it followed standard procedure for purposes of the presumption of regularity and to show the assessment dates.

At a meeting on March 10, 2006, DRT learned that the notices of assessment did not reach Mr. Guerrero but instead went to his ex-wife’s address.  During the meeting, DRT gave Mr. Guerrero final demand and notice of intent to file a lien and he signed an acknowledgment.  This meeting took place about two weeks before the expiration of the assessment statute of limitations.  The court describes the testimony of the DRT officials who testified at the two-day trial explaining the system for making assessments and notifying taxpayer.  The statutory scheme, and much of the system, mirrors the system in the U.S. used by the IRS.

Because the assessment certificate itself is missing, DRT seeks to prove that it timely made the assessments in question by some other means, here the presumption of regularity.  The court notes:

We have held that a public actor is entitled to the presumption of regularity where there is some evidence that the public actor properly discharged the relevant official duties, which an opposing party must rebut with clear, affirmative evidence to the contrary….

As previously observed, whether the presumption applies or has been rebutted with clear and affirmative evidence to the contrary are mixed questions of law and fact that may be reviewed for clear error. The clear error standard is significantly deferential, and clear error is not to be found unless the reviewing court is “left with the definite and firm conviction that a mistake has been committed.”

Here, the 9th Circuit is not deciding the case as an initial matter but as a reviewing court.  It finds that the district court did not make clear error but it also finds that the district court’s opinion was “opaque and did not adhere to the proper steps of the analysis.”  So, the 9th Circuit sets out to explain the proper steps for making a presumption of regularity determination.

First, it should have considered if some evidence existed to support timely assessment of the taxes.  Instead, the district court determined the presumption was automatically available.  Despite this misstep, the testimony of the DRT officials did provide evidence in support of a timely assessment.  The district court should have explicitly stated that it relied upon the credibility of the DRT witnesses.

Next, the court should have examined whether Mr. Guerrero rebutted the presumption that could be drawn from the testimony.  At the trial level, he did not argue that the records presented were inaccurate.  Therefore, he waived that argument.  He failed to build the type of record he needed to build at the trial level.  The arguments he does make that are not waived by his prior actions are insufficient to cast adequate doubt on the records of the DRT.

The opinion leaves the impression that no one had a good idea what they were doing at the trial level but that DRT had enough on the ball to put into the record evidence supportive of a conclusion that a timely assessment occurred.  The presumption here is one on which the IRS may need to rely if its records are destroyed or it otherwise suffers a degradation of its system.  The court provides a bit of a roadmap for someone trying to attack a record like an assessment.  Certainly, the attack should be straightforward and clearly done at the trial level.  Mr. Guerrero should have sought the testimony of individuals who could talk about the impact of the lost records and how it cast doubt on the correctness of the entire system.  The importance of an expert testifying on this point to counteract the testimony of the government officials cannot be overstated.  Unless the government officials were destroyed on cross, Mr. Guerrero needed to give the court something to cause it to pause before presuming DRT handled the case correctly.  He gave the court nothing to go on and the 9th Circuit finds that significant.

The dissent picks up on some of the errors by DRT and offers a roadmap for how Mr. Guerrero might have attacked the validity of the assessment.  The dissent provides good lessons for those who find themselves in this situation trying to combat a presumption of this nature.  The case leaves me a little concerned about the use of the presumption of correctness in this situation to prove the timeliness of the assessments.  Like the dissent, I felt the majority made some leaps to get to the favorable result for the DRT.

Credit Carry Forward as Timely Refund Claim

In Libitzky v. United States, No. 3:18-cv-00792 (N. D. Cal. 2021) the district court dismisses cross motions for summary judgment in a refund suit and pushes the case forward for a determination by a jury.  The parties agree that the Libitzkys overpaid their 2011 liability by almost $700,000.  They disagree on the issue of whether the Libitzkys timely filed a claim for refund seeking return of their money.  The court finds the filing of a timely refund claim jurisdictional, a determination at odds with at least one other court.  The court also finds that the possibility exists that the forms filed by the Libitzkys requesting a carryover of their 2011 refund could meet the requirements of an informal claim.  A jury will decide the issue.  The case raises interesting issues regarding both jurisdiction and informal claims.

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The Libitzkys were investors in real estate and did well.  They regularly had income tax liability in the half million dollar range.  Because of the way their investment income fluctuated, making a precise determination of the amount of estimated payments they should pay difficult, they elected each year to roll over their tax refunds to apply the refunds against the estimated tax payments for the subsequent year.  This practice regularly created large refunds for them which they left with the IRS.

Something happened with respect to their 2011 return.  They unquestionably seem to have prepared the return on time in their usual manner.  They requested an extension, sending it by certified mail on April 17, 2012.  The extension estimated a tax liability of about $1.5 million, stated they had made payments of about $1.2 million and included a check for about $300,000.  The taxpayers believe they timely filed their 2011 return before the extended due date but acknowledged that they had no mail receipt showing that they did so.  The return, which may or may not have been filed, showed an overpayment of $692,690 with a request that this amount be applied to their 2012 taxes as per their usual practice.

In 2013, they requested an extension of time to file their 2012 return, estimated a liability of about $500,000 and stated they had made payments already of about $1.15 million.  They did not get around to filing the 2012 return until February 6, 2015.  The filed return reflected almost the same liability and payment amounts as they stated when requesting the extension.  The payment amounts included $692,690 from their 2011 overpayment.  The 2012 return reported an overpayment of $645,119 which they elected to apply to their 2013 estimated taxes.

They filed their 2013 return in December 2014, showing tax owed of about $1 million and payments of $1.12 million which included the $645,119 credit forwarded from the 2012 overpayment.  On December 15, 2014, the IRS sent the taxpayers a notice stating that they owed $577,924.18 based on changes to their 2013 form.  This started a back and forth which led to the discovery that the 2011 return had never been filed. 

On January 20, 2016, a Revenue Officer (RO) showed up at their property (the opinion skips over that the IRS must have sent a series of collection notices including a Collection Due Process (CDP) notice that the Libitskys did not pursue).  On that date, they gave the RO a signed copy of the 2011 return.  The court states that the “Libitzkys’ 2011 return was deemed filed on January 20, 2016”, showing the tax and payments resulting in an overpayment of $692,690.  (Note that handing a signed return to an RO or a revenue agent does not always result in the IRS treating the return as filed.  This is at issue in a case currently before the 9th Circuit – Seaview Trading, LLC, AGK Inve v. CIR, No: 20-72416.)

On April 20, 2016, the IRS issued a letter to the Libitzkys informing them that their claim for the $692,690 could not be allowed because “[y]ou filed your original tax return more than 3 years after the due date. Your tax return showed an overpayment; however, we can’t allow your claim for credit or refund of this overpayment because you filed your return late.” Dkt. No. 1-1, Ex. B. The letter continued, “We can only credit or refund an overpayment on a return you file within 3 years from its due date. We consider tax you withheld and estimated tax as paid on the due date (i.e., April 15) for filing your tax return.” Id.

By letter dated August 3, 2016, plaintiffs’ counsel appealed the denial of the Libitzkys’ $692,690 claim for the 2011 tax year to the IRS. Dkt. No. 1-1, Ex. C. On November 29, 2017, the IRS again determined that there was “no basis to allow any part of your claim” for the $692,690. Dkt. No. 1-1, Ex. D. The letter advised plaintiffs that they could further pursue the matter by filing suit with the district court within two years of the April 20, 2016 claim denial letter. Id.

The 9th Circuit points out that the three year look back rule of IRC 6511(b) presents a problem here since the 2011 return was not deemed filed until January 20, 2016, but the payment giving rise to the overpayment would have been deemed paid on April 17, 2012, more than three years prior to the filing of the claim.

For that reason, the Libitzkys argue that “[w]hether through the 2012 Form 4868, or through the 2012 Form 1040, or the combination thereof, or other documents and communications, [they] made a formal or informal claim (either of which is legally sufficient), timely.” Dkt. No. 51 at 35. Ordinarily the Court would have been inclined to find that what is recoverable is a merits inquiry, while the Section 6511(a) timely claim requirement is satisfied by the 2011 tax return at a minimum, thus establishing the Court’s jurisdiction over this dispute. The circuit has stated, however, that “§ 6511(b)(2)(A) is jurisdictional.” Zeier v. United States Internal Revenue Service, 80 F.3d 1360, 1364 (9th Cir. 1996). As another court has observed, this essentially collapses the jurisdictional and merits inquiries in cases like these. See Stevens v. United States, No. 05-03967 SC, 2006 WL 1766794, at *3 n.3 (N.D. Cal. June 26, 2006) (“accepting that Section 6511(b)(2)(A) creates a jurisdictional bar to Plaintiff’s case, Plaintiff may clear that bar with proof that the estate submitted an adequate informal claim, the same thing it will need to prevail on the merits.”).

The court finds that in order to determine if the overpayment is recoverable questions of fact exist on which a jury will need to decide.  By taking the position that the timeliness of the claim creates a jurisdictional issue, the court makes the inquiry slightly more difficult and places it at odds with at least one other jurisdiction.

The court says it has recognized the informal claim doctrine and that could provide a path forward for the taxpayers.  The IRS counters that neither the 2012 extension request nor the 2012 return could meet the test for an informal claim because neither provides the IRS with the information necessary to determine if the claim is correct.  If the court finds that the subsequent year return can serve as a formal or informal claim for refund for the year in which the taxpayer seeks a credit carryforward on an unfiled return, the decision would expand the informal claim doctrine and would offer a large benefit to taxpayers who fail to timely file their returns. 

The equities are interesting here.  You could say the IRS led the taxpayers on by accepting the 2012 return with the somewhat phantom 2011 overpayment.  The IRS did not start questioning the overpayment until the taxpayers filed their 2013 return, lulling the taxpayers into a false sense of security.  On the other hand, the taxpayers not only failed to file the 2011 return for unknown reasons, but also failed to react quickly when the IRS brought them the problem.

Disallowing the credit would be a harsh result here, particularly if the taxpayers have a history of filing and apparently only missed the 2011 year filing due to inadvertence of some type. For those interested in credit carryover issues, a CDP case involving these issues just had an order entered which you can read here.

Applying the Penalty Approval Provision to a Conservation Easement Case

In Oconee Landing Property LLC et al v. Commissioner, Dk. No. 11814-19 the Tax Court entered a very substantive order granting partial summary judgment to the IRS on the issue of penalty approval.  If the Court still designated orders, I suspect it would have designated this one.

The IRS in this case uses a tactic that has become common in penalty approval cases – seeking partial summary judgment on the penalty issue before heading to trial.  The IRS seeks to lock down that it properly followed the procedures for penalty approval required by IRC 6751(b).  The order entered in this case allows it to do so.

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The taxpayer does not argue in this case that the IRS did not obtain the penalty approvals prior to the communication with it that the IRS had asserted a penalty.  Although the prior approval issue exists in most IRC 6751(b) cases, here the issue focuses on the form and manner of the approval, particularly as it relates to summary judgment.  It asserts that the penalty lead sheet in the file “does not identify Ms. Smithson’s [the immediate supervisor] role … or even a date of signature.”

In this case, the approval occurred through email rather than by a signing of the same paper by the agent and the immediate supervisor.  This type of approval has no doubt become quite common during the pandemic while many employees and managers have been working remotely.  It could also be common in situations where the employee and the manager work out of different offices.  Obtaining acceptance of this type of approval is important for the IRS.  One hurdle it has here and in many other cases involves proving that the person signing the approval is, in fact, the immediate supervisor of the employee imposing the penalty.

To prove this relationship in the summary judgment setting, the IRS had both the supervisor and the agent produce affidavits attesting to their respective roles.  The court finds this adequate.

To prove the date of the approval and, therefore, prove that the penalty received the appropriate approval before being formally communicated to the taxpayer, the IRS provided emails which documented the timing of the approval.  The court finds that the emails provide sufficient corroboration of the timing.

The taxpayer also complained that the approval does not show any analysis of the penalties and, therefore, was inadequate.  The court points to the statute and to earlier cases interpreting the statute, making clear that all that is required is written approval and not a demonstration of the “depth or comprehensiveness of the supervisor’s review.”

The taxpayer argues that the Chief Counsel attorney who reviewed the case and suggested additional penalties to the agent did not obtain supervisory approval to make the suggestion.  That might seem like a wild argument but enough taxpayers have benefited from IRC 6751(b) arguments that no one thought would go anywhere that I applaud the effort.  Unfortunately, the Tax Court does not buy this as a statutory requirement.  The court finds that the additional penalties suggested by the Chief Counsel attorney were appropriate to apply in this case; however, the decision to assert these additional penalties, at least at the stage of the proceeding at which the suggestion occurred, was with the revenue agent and his manager.  The revenue agent did not have an obligation to accept the advice.  Having accepted it, he obtained the appropriate approval in a timely manner.

In addition to the questions raised about the penalties asserted by the revenue agent before the case arrived at the Tax Court, this case also involves a new penalty asserted by Chief Counsel in the answer.  The answer was signed by the line attorney and the acting manager.  Taxpayer argues that summary judgment is inappropriate because of a need to cross examine the attorney and the manager about the assertion of this penalty.  The court finds that cross examination is unnecessary because the answer clearly shows the appropriate approval.

In conjunction with this objection, taxpayer also sought to disqualify the attorney who prepared the answer and his supervisor as necessary witnesses.  The court finds disqualification unnecessary as the answer shows the appropriate approval.  I question what advantage disqualification would bring the taxpayer.  Perhaps it simply served as a part of the request to cross examine the Chief Counsel attorney.  The court notes that obtaining disqualification is “subject to particularly strict judicial scrutiny” because of the possibility of abuse.  I saw these motions a handful of times while working at Chief Counsel.  Almost always they fail.  Even if they succeed, the victory generally brings little or nothing for the taxpayer.  Making this particular motion can taint an otherwise good argument.  Use caution in trying to disqualify the IRS attorney.

A Second Bite at the Innocent Spouse Apple

We regularly have clients who come into the Tax Clinic at the Legal Services Center of Harvard Law School who received a determination in the past that they did not qualify for innocent spouse relief.  These individuals may have what looks to us like a good case, but we struggle to get them a favorable result because they missed the 90-day period for filing a petition in Tax Court following the receipt of the determination letter denying relief.  The manual has a provision for seeking reconsideration of innocent spouse relief similar to that for seeking audit reconsideration.  While I applaud the IRS for giving taxpayers this second chance, it is a second chance for an administration procedure and getting the innocent spouse unit to rule favorably is hard.

So, I read with interest the case of Vera v. Commissioner, 157 T.C. No. 5 (2021) in which the Tax Court in a precedential opinion allows the taxpayer to come into the Tax Court after dismissing her first attempt to come to the Tax Court as untimely.  Why it did so and how she came to receive a second ticket to Tax Court make this an interesting case. So interesting, in fact, is this case that Bryan Camp has also recently written about it in a post which you can find linked here.

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I note that Ms. Vera represented herself in this case.  In reading the opinion I came away with the impression that Judge Buch or his law clerks did a lot of research that might have otherwise been supplied by a represented petitioner.

Ms. Vera submitted joint returns for 2010 and 2013 with her then-spouse.  The IRS adjusted the 2010 return increasing the liability.  The IRS did not adjust the 2013 return; however, the liability reported on the return was not paid in full.

In 2015, Ms. Vera requested innocent spouse relief with respect to 2013.  The IRS denied relief.  She filed a Tax Court petition on the 91st day after the notice of determination and the Tax Court dismissed the case for lack of jurisdiction.

In November of 2016, Ms. Vera requested innocent spouse relief with respect to 2010.  In doing so, she mailed to the IRS several other documents including her request for innocent spouse relief for 2013.

On March 14, 2019, the IRS denied her innocent spouse relief based on the November 2016 submission.  The header of the denial letter specifies 2010; however, the body of the determination letter addresses both 2010 and 2013, stating:

For tax year 2010, the information we have shows that you didn’t meet the requirements for relief.

For tax year 2010, you didn’t have a reasonable expectation that the person you filed the joint return with would or could pay the tax.

For tax year 2013, you didn’t comply with all income tax laws for the tax years that followed the years that are the subject of your claim.

In response to this determination letter, she timely filed a Tax Court petition listing both 2010 and 2013.  She addressed both years in her statement of facts.  In response, the IRS filed a motion to dismiss as to 2013, taking the position that the determination letter is not a second determination for 2013 and that a second request for innocent spouse relief “is available only when seeking to allocate a deficiency.”  Since the 2013 year is an underpayment year, the IRS argued that she could not come to Tax Court on that year after having once received a determination letter that she did not timely petition.

The court begins its discussion of the situation by setting out what is normal in an innocent spouse case and what is unclear from the statute:

Final determinations in innocent spouse cases are typically singular, conclusive decisions. We previously made this observation in dicta in Comparini v. Commissioner, 143 T.C. 274 (2014). Our Opinion in Comparini, a case involving our whistleblower jurisdiction, noted a distinction between the provisions that give us jurisdiction in whistleblower cases and those that pertain to innocent spouse cases. Id. at 281. We observed that the whistleblower provision gives us jurisdiction over any determination, whereas a predicate to our innocent spouse jurisdiction under section 6015(e) is the mailing of a final determination. Id.

Although section 6015(e)(1)(A)(i)(I) refers to a final determination, nothing in that provision prohibits the Commissioner from issuing more than one final determination as to a given tax year. To the extent this provision might be interpreted as allowing for only one final determination, it does not specify whether it is one final determination per request for innocent spouse relief or one final determination per tax year.

The court then looks at the applicable regulation, 1.6015-1(a)(2), and finds that the IRS “believes that more than one final determination can be issued with respect to a single tax year.”  The regulation contemplates that ordinarily the IRS will only make one final determination of innocent spouse status but that it could make a second determination upon a change in marital status among other reasons.  The court points out that IRM 25.15.17.7 states that if the IRS decides to issue a second determination, the second determination does come with the right to petition the Tax Court.

The court discusses the ability of the IRS to reconsider an innocent spouse case and not issue a second determination letter.  It did so in Barnes v. Commissioner, 130 T.C. 248 (2008) and the letter it issued was determined by the Tax Court not to confer upon it jurisdiction.

The court then looks at its whistleblower jurisprudence where it has held that a successive letter purporting to be a final determination confers jurisdiction upon the court as in Comparini v. Commissioner, 143 T.C. 274 (2013).

Although the IRS argues that including mention of 2013 in the second final determination letter sent to Ms. Vega was done in error, the court finds that the notice provides an unambiguous denial of both 2010 and 2013.  The letter does not mention that she sought an improper second request for 2013.  Looking again to whistleblower law, the court notes that it has previously determined in Ringo v. Commissioner, 143 T.C. 297 (2014) that it has jurisdiction to hear a case even when the IRS issues a determination letter by mistake.  It has similar jurisprudence regarding deficiency notices as discussed in Hannan v. Commissioner, 52, T.C. 787 (1969) and in collection due process cases as discussed in Kim v. Commissioner, T.C. Memo. 2005-96.

Because of its consistent case law looking to the notice and not behind it, the court finds that the same principle applies to Ms. Vega’s petition for innocent spouse relief.  The decision does not mean that she has won her request for innocent spouse relief, but only that she will now have the opportunity to prove her case in Tax Court.  If she wants assistance on the merits of her case, I invite her to reach out to the Tax Clinic at the Legal Services Center of Harvard Law School or to her local LITC.  It would be a shame not to obtain a complete victory after her success on the jurisdictional issue.

Because of the case law in other areas of the Tax Court’s jurisdiction, I doubt that the IRS will appeal this decision.  I do not think that too many taxpayers have the good fortune to receive a second notice of determination for the same period by mistake.  My guess is that this situation occurs infrequently and fighting about it further will provide few benefits.  Notices of deficiency and notices of determination do matter.  The IRS can confer on the Tax Court jurisdiction inadvertently.  Congratulations to a pro se taxpayer who has created favorable precedent for others who may find themselves similarly situated.

Disclosure of Collection Activity with Respect to Joint Returns

It’s the annual season for the reports from TIGTA mandated by Congress in 1998 and never unmandated.  So, each year TIGTA dutifully expends its resources on the problems Congress was concerned about in 1998, whether or not anyone is concerned about those issues today.  Some of the issues on which TIGTA writes its reports show that the IRS has persistent problems which, year after year, it cannot seem to fix.  One of the areas on which TIGTA reports annually and which the IRS cannot seem to fix is disclosing information on joint returns.  I wrote about this topic in 2020 and I wrote about this topic in 2018 when the annual TIGTA reports were released.  I probably sound like a broken record by writing on the topic this often, but the IRS needs to train its employees so they understand how the law works. 

Congress recognized that in certain situations the collection of a taxpayer’s liability is tied to payments potentially made by others.  In these situations, prior to the change in the law creating an exception to the disclosure laws and allowing the IRS to provide information to jointly liable parties, it was impossible to obtain information about payments from those jointly liable parties.  The TIGTA report shows that it can still be a practical impossibility to obtain this information, even though Congress opened the door allowing those jointly liable to learn of payments made, or not made, by the jointly liable person.

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The most recent TIGTA report on IRS compliance with the law allowing taxpayers access to information on joint accounts suggests that taxpayers still struggle to obtain this information.  The IRS continues to experience difficulties when it sets up mirrored accounts.  Read the prior post from 2020 linked above if you are unfamiliar with mirrored accounts.  These accounts create difficulty for the IRS and taxpayers alike who do not understand when they exist and how they operate.  Here is the primary finding of this year’s report, which sounds much like the primary finding from each of the last five years:

We reviewed judgmental samples of 124 Accounts Management case histories and 20 Field Assistance case histories documented in the Account Management Services system related to joint filer collection information requests in the W&I Division.7 Based on our review, we determined that employees did not follow the joint return disclosure requirements in 26 (21 percent) of the 124 Accounts Management customer service representatives’ history files and three (15 percent) of the 20 Field Assistance individual taxpayer advisory specialists’ history files. The 29 cases were errors because employees did not provide the requested collection activity to the divorced or separated spouse as required by law. In most cases, employees incorrectly stated that they could not provide any collection activity on the other joint taxpayer, such as whether the other taxpayer made a payment or the current collection status, because the taxpayers were no longer married nor living together. As a result, these 29 taxpayers or their representatives were potentially burdened with additional delays in resolving their respective tax matter. This has been a recurring issue for the last five years and we have made recommendations for the respective IRS business units we have reviewed to update the IRM as well as to provide additional training to their employees. The IRS should continue to address this issue in its respective business unit IRMs that provide guidance to employees who may respond to taxpayer inquiries about a joint return matter.

We also observed that 10 (38 percent) of the 26 cases with disclosure errors in Accounts Management and all three of the cases with disclosure errors in Field Assistance had “mirrored accounts.” Mirroring a joint account sets up two accounts, one for each of the taxpayers. Establishing two separate accounts provides the IRS a means to administer and track collection activity unique to each of the taxpayers. Each taxpayer remains jointly liable for the entire debt; i.e., mirroring an account does not divide the liability in half. Because joint filer taxpayers remain jointly liable, the same collection information, when requested, on mirrored accounts should be disclosed to both taxpayers as would be disclosed on any other jointly filed return, except when the request is for unrelated personal information.

In addition to looking at case files, TIGTA interviewed IRS employees, with 8 out of 24 responding incorrectly regarding information that could be provided to a divorced spouse when the question involved a “regular” account and 15 out of 24 responding incorrectly when the question involved a mirrored account. 

Problems not only occurred when asking the employees questions regarding information that should be disclosed to the former spouse.  TIGTA asked the IRS employees questions that made it clear the employees would provide information they were not authorized to disclose, including:

providing information about the other spouse’s location, name change, or telephone number; information about the other spouse’s employment, income, or assets; the income level of the other spouse at which a currently not collectible module would be reactivated; or the bankruptcy chapter filed by the other spouse.18 When asked questions about a taxpayer who was divorced or separated, five employees (21 percent) of the 24 interviewed responded that they would disclose some of these prohibited items about the other spouse.

This year’s responses continue to point to disclosure of information regarding ex-spouses as a weak point for the IRS.  The law allowing some disclosure of information was enacted 25 years ago.  Almost all of the persons surveyed would have started work at the IRS after the law went into effect.  This is not a case of changes in the law creating confusion.  Yet, confusion continues to persist.

It’s not clear if the problem is that the employees need more training or better training.  The persistent existence of problems in this area which TIGTA identifies year after year should cause the IRS to change its method of training employees so that it can ensure compliance with the law both for the benefit of ex-spouses seeking information and employees trying to keep from violating disclosure laws.

Refund Claims and the Specificity Requirement

A trio of cases have recently seen the IRS raise the specificity requirement in claiming a refund.  In opposition to the motions filed by the IRS, the taxpayers have raised waiver as a defense.  The results are interesting and instructive.  Of course, you don’t want to plan for having to defend against a failure to meet the specificity requirement but understanding how to defend against this argument can be useful.

When a taxpayer seeks a refund, the taxpayer must give the IRS a fair opportunity to administratively determine whether it should grant a refund.  If the claim filed by the taxpayer does not point the IRS in the right direction with enough information to allow to it understand the issue being raised by the taxpayer, then the taxpayer’s claim may fail the specificity test.

In Premier Tech v. United States, No. 2:20-cv-890-TS-CMR (D. Utah 2021); Intermountain Electronics v. United States, No. 2:20-cv-00501-JNP (D. Utah 2021); and Harper v. United States, 847 F. Appx. 408 (9th Cir. 2021) the courts grappled with the claims filed by the taxpayers.  The IRS objected that the claims lacked specificity and that the complaints did as well.

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In Intermountain Electronics, the court held that the IRS had waived the specificity requirement by processing Intermountain’s refund claim, so the court had jurisdiction.  Even though it ruled favorably on the claim itself, the court found that the taxpayer’s complaint was not sufficient to state a claim under Rule 12(b)(6) under the Twombly/Iqbal plausibility pleading standard.  Carl Smith has written about the pleading issues raised by Twombly/Iqbal previously here and Patrick Thomas has written about it here.  The court allows the taxpayer to amend the complaint to make it more detailed and not just spout legal requirements from the research credit statute.

The court states without discussion that the refund claim filing requirement of 7422 is jurisdictional — a point currently pending in the Brown case before the Federal Circuit and a point raised in the cases of Walby v. United States, 2020 U.S. App. LEXIS 13711 (Apr. 29, 2020), which joined a panel of the Seventh Circuit in Gillespie v. United States, 670 F. App’x 393, 394–95 (7th Cir. 2016) questioning this position.  The issue and these cases have previously been discussed here and here.  Although it fails to mention Walby and Gillespie, the court discusses the Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945) opinion of the Supreme Court from 1945, where the Supreme Court held that the specificity requirements for a refund claim are waived if the IRS reviews and denies the claim on the merits because those requirements are only regulatory and therefore subject to waiver.  The district court in Intermountain notes that the taxpayer appears to have done all that was required under IRS forms by filling out the Form 6765 required for claims of research credits and attaching that form to its amended returns.  While the court is skeptical that the taxpayer had to attach a lot more unrequested information than the Form 6765 to create a valid claim, it does not decide that issue, but holds that the IRS waived the specificity requirements, even if the claims were initially insufficient. 

The court writes, as to the facts: 

As a result of the amended returns, the IRS initiated an examination to determine Intermountain’s eligibility for the credits. Over the course of an approximately five-year examination, the IRS requested and received substantial amounts of information from Intermountain. The IRS ultimately disallowed Intermountain’s claim for credits for both years, concluding both that much of the work performed by Intermountain employees did not constitute qualified research and that Intermountain failed to adequately substantiate its claims through the evidence it provided to the IRS. See ECF Nos. 26-3, 26-4, 26-6.  

The court notes that this case is virtually on all fours with a 9th Cir. opinion from earlier this year also involving research credit claims, Harper v. U.S., where the 9th Cir. held that due to a long audit of a Form 6765 attached to a refund claim, the IRS had waived the specificity requirements.  In both cases, the IRS received tons of documents from the taxpayers while the refund claim was audited, and the formal claim disallowance did not mention a specificity requirement defect, just that the taxpayer hadn’t shown entitlement to the claimed refund (which appears to be a denial on the merits).  (A concurring opinion in Harper would have held that the suit was valid because the taxpayer had made an informal claim, not that there had been a waiver.)

In Premier Tech provides a similar opinion decided a day earlier than Intermountain by another judge in the D. Utah, where it appears the judges must have coordinated their opinions. Premier Tech also involves a section 41 research credit refund claim.  Again, the taxpayer filled out a Form 6765 and attached it to the refund claim, and the IRS argues that alone was insufficient to meet the specificity requirement.  Unlike in Intermountain, though, while the IRS also audited the refund claim, the IRS never issued a notice of disallowance to Premier Tech, so suit was brought based on the rule regarding the passage of six months without such notice.  As a result, there is no argument in Premier Tech that the IRS waived the specificity requirement (the Angelus Milling argument).  Thus, the judge in Premier Tech is forced to decide the issue that was dodged in Intermountain — whether the refund claim met the specificity requirement.  The Premier Tech court holds that the specificity requirement was met and, unlike in Intermountain, that the complaint properly states a claim on which relief could be granted.  (In Intermountain, the judge held that the complaint did not state a claim, but allowed the taxpayer to amend the complaint to provide more detail.)  The reasoning in Premier Tech for finding the claim specific enough reads very similar to the reasoning expressed in Intermountain (but which was dicta there):  

Nevertheless, the United States argues that the amended return is not sufficient because Premier did not attach additional documents addressing every single element in 26 U.S.C. § 41, such as describing the research conducted, explaining how that research worked to develop a business component, detailing on whose wages and what supplies the money was spent, and proving the amount spent on research in the prior three tax years. But the United States offers no authority for imposing such a requirement. Form 6765 does not ask taxpayers to provide any of these details. If the IRS wants more information about the research tax credits, the IRS could require that information on Form 6765. It does not, and the IRS cannot now say its own forms are not sufficient to constitute claims for refunds. That would lead to absurd and patently unfair results for taxpayers. Furthermore, under the government’s position, no tax return claiming tax credits for increasing research activities could possibly constitute a claim for a refund. This is directly contradicted by 26 C.F.R. § 301.6402-3(a)(5).

In cases in which the taxpayer provides a wealth of detailed information to the IRS as part of the claims process and in cases in which the IRS rejects the refund claim on the merits, these cases show that the Department of Justice will struggle when it seeks to stop the litigation pointing to defects in the claim itself for failure of the claim to provide the IRS with enough information to adequately consider whether to grant the refund.  Even though DOJ may have correctly identified a poor refund claim, if the IRS acted in such a way that shows it understood what the taxpayer sought in requesting the refund, then courts will struggle to turn the taxpayer away on this basis.  The best practice is to carefully state the basis for the refund claim but where the facts show that the taxpayer provided enough information for the IRS to understand what the taxpayer wanted, the case will likely survive the types of challenges DOJ makes in these cases.