Prior Opportunity and Receipt of the Notice of Deficiency

In Chinweze v. Commissioner, TC Memo 2022-56 the Tax Court finds that the petitioner received his statutory notice of deficiency even though he stated that he did not.  Proof of non-receipt is generally tricky.  Here, the Court did not need to find that he did not receive the notice in order to deny his request to have the merits of his liability considered during the Collection Due Process (CDP) case.  Mr. Chinweze presents a disorganized and unsympathetic case but the decision could make it tougher for others who make a similar argument of non-receipt.  Perhaps the case relies on the facts and does not set any precedent but it provides a cautionary tale for others seeking to argue non-receipt in order to gain access to the opportunity to argue the merits of their liability in a CDP case.


Mr. Chinweze is a tax lawyer admitted to practice before the Tax Court.  He apparently practiced as a sole practitioner during the years at issue – 2008 to 2010.  He did not file his federal tax returns for those years.  I imagine that this makes the Tax Court a little nervous that one of its bar members falls into the non-filer category.  I have not seen it discipline a practitioner for non-filing in looking at prior disciplinary actions.  It does not take the same tack as the IRS Office of Professional Responsibility nor am I suggesting that it should; however, a Tax Court bar member who fails to file would generally not get a case off on the best footing from a sympathy perspective.

According to the Court, the returns were filed in 2012 without remittance reflecting small liabilities.  The IRS audited the returns proposing relatively substantial increases and certain penalties.  A notice of deficiency was sent on March 4, 2014, by certified mail to an address he subsequently used in his correspondence with Appeals.  Mr. Chinweze did not petition the Tax Court and the IRS assessed the proposed deficiencies.

The IRS sent a notice of intent to levy on March 6, 2015 at which time he owed over $160,000.  On March 17, 2015 it sent a second CDP notice after filing notice of federal tax lien.  He requested a CDP hearing with respect to the second CDP notice.  Even though the CDP notices were sent only 11 days apart, his failure to request a CDP hearing with respect to the first notice created a bar to the litigation of the merits of his tax liability because it served as a prior opportunity to litigate the merits – an opportunity he passed up.  So, even if he could conclusively prove that he did not receive the notice of deficiency, his effort to litigate the merits was never going to get off the ground.

Despite the fact that his merits argument lacked legs, the Settlement Officer (SO) considering his CDP case asked him to submit information supporting his claim that he did not owe the assessed amount.  Mr. Chinweze did not respond the the SO’s attempts to obtain information.  This also could provide a basis for cutting off his effort to litigate the merits of his liability.

After hearing nothing from Mr. Chinweze, the SO sent out the notice of determination and he filed a petition in Tax Court.  The case was remanded to insure proper verification of the assessments and this may have been when the penalties were dropped by the IRS probably because of Graev problem in the approval.  Because of the time from of the case the IRS was not paying careful attention to penalty approval at that time.

In the supplemental hearing the SO gave Mr. Chinweze four dates to comply with sending information.  He never responded.  He has not built a sympathetic case based on his education and professional background or his lack of responsiveness.  Certainly, that must color the decision of the Court.

The Court finds that the IRS records regarding the mailing of the notice of deficiency are not sufficiently complete to create a presumption of proper mailing.  The case provides a detailed list of cases on this issue.  The Court, however, points out that the Form 3877 still provides probative information upon which the Court could concluded the IRS did mail the notice to Mr. Chinweze.  Again the Court provides a detailed list of cases.

Mr. Chinweze’s only evidence is his statement he did not receive the notice.  The Court says:

We are unconvinced. Mr. Chinweze was an experienced tax lawyer and filed a CDP request setting forth specific challenges to the NFTL filing (i.e., the liability amount and mitigating factors). His failure to contest receipt of the notice of deficiency in his CDP request undermines the credibility of his subsequent claim, particularly in light of the compelling evidence of mailing and the accompanying presumption of delivery.

The Court cites several more cases.  If nothing else, this case provides a good roadmap of the challenges for others who want to argue non-receipt.  Undoubtedly, Mr. Chinweze’s unsympathetic background plays a role in this outcome but you can see that the hill is still a steep one to climb even for taxpayers who would invoke much more sympathy.

Having determined that he received the notice, the Court did not need to further explain that he missed the boat by not seeking a CDP hearing from the levy notice but the Court also explains in one paragraph why he loses his opportunity to raise the merits of the liability for a second reason.

If he wants to fight the merits now, he needs to come up with a fair amount of cash in order to full pay the liability allowing him to satisfy the Flora rule and file a claim for refund.  He can full pay any of the three years at issue and fight over that year.  To the extent the issues are the same in each of the years, he could fight and win one and then seek a claim for abatement.  Still, he has a lot of work ahead to fight the merits of this liability.

When Will the Tax Court Redact?

An order in the case of Boateng v. Commissioner, Dk. No. 37647-21 issued on July 26, 2022, shows the Tax Court’s willingness to redact personal information that the petitioner should have but failed to redact.  Thanks to Carl Smith for bringing this to my attention and to his additional research.

Tax Court Rule 27(a) requires parties to redact certain information such as taxpayer identification numbers and financial account numbers when submitting pleadings and documents to the Court.  Maggie Goff and I published an article in Tax Notes two years ago entitled “Nonparty Remote Electronic Access to Tax Court Records.”  The article suggests that the Tax Court make its records more electronically accessible while still protecting the privacy of individuals in an appropriate manner.  We included slides and information complied by Judge Buch showing how poorly both pro se petitioners and practitioners comply with this rule, regularly placing into the Court’s records information the Rule requires they redact.  Judge Buch cited the poor compliance with this rule as a basis for the Court’s decision not to make its records electronically available.


Historically, the Court did not redact for petitioners who failed to do so but that seems to be changing.  In the Boateng case, Special Trial Judge Choi identifies documents the petitioners should have redacted.  The case came to her on a motion filed by the IRS to dismiss the case for failure to state a claim.  Petitioners sent to the Court an unredacted copy of the notice of deficiency they received for 2019 together with copies of tax forms for that year.  In reviewing the motion, Judge Choi noticed the non-compliance with the redaction rules which puts the petitioners’ information into a public record.

Judge Choi ordered petitioners to file amended pleadings using the Court’s form petition so they could perfect their imperfect petition and she ordered payment of the filing fee (or the fee waiver form.)  I have written about imperfect petitions previously, here.  The Court then took the IRS motion under advisement pending receipt from petitioners of a corrected or perfected petition.  If they file using the Court’s form, I anticipate the Court will deny the motion.  If they fail to act, it will eventually grant the motion.

In addition to addressing the motion, Judge Choi identifies and addresses the unredacted information.  She states:

Due to the unredacted personal identifying information appearing in the Petition, the Court will take steps to seal petitioners’ petition to protect their information. 

It was this sentence that caught Carl’s eye because he found it unusual, as did I.  In looking further, however, Carl found that at least some judges on the Court had been sealing unredacted information for some time.

He went to DAWSON and put in the word “redact,” searching orders and found 28 orders redacting things in cases during the first four weeks of July 2022.  In the month of January 2021, Judge Leyden redacted two petitions on her own motion.  In January 2022 it appears the Court sealed 10 petitions for failure to properly redact.  It looks like there is a steady trend to redact.

This movement seems to reflect a change in Court policy or may just be the adoption of a practice to redact by certain judges.  From the time of filing until the calendaring of a case, petitions generally sit unassigned in the general portfolio of the Chief Judge.  So, absent an effort by the Chief Judge to root out improperly redacted submissions, orders like the one in the Boateng will be ad hoc.  There was no order in the docket list assigning the Boateng case to Judge Choi but maybe orders are not needed to assign cases to a special trial judge to respond to a motion filed by the IRS.

In any event, the Boateng order suggests an attention to redaction and sealing that is relatively recent and welcome.  The number of redaction orders in no way reflects the number of cases with improper redactions but is still a benefit to the identified petitioners.  It also suggests that some of the judges on the Court are thinking about ways to protect petitioners other than making it difficult to access public records.  District Courts and Circuit Courts routinely require a certification when filing electronically filing documents that the person filing the documents has complied with the redaction rules.  I do not know if requiring the certification would reduce the non-compliance at least among practitioners but it might be worth a try if the Tax Court wanted to look for additional ways to improve compliance with the redaction rule.

Another Tax Provision Found to Not Create a Jurisdictional Time Period for Filing

In Clark v. United States, No. 9:21-cv-82056 (S.D. Fla. 2022) a tax attorney, Celia Clark, brought an action for unlawful disclosure under IRC 7431.  The IRS moved to dismiss the case for lack of jurisdiction arguing that she waited too long to bring the suit.  The court denied the motion finding that the time period for filing suit under section 7431 is not a jurisdictional time period.


The opinion indicates that during the years 2008 to 2016 Ms. Clark’s tax practice involved assisting small businesses establish microcaptive insurance companies.  It states that the IRS started investigating her in 2012 to determine if she was promoting abusive tax shelters.  Following its investigation, it assessed penalties against her for over $11 million.  She brought a complaint against the IRS alleging the investigation was abusive both because of its length and its failure to take “a firm position on the proper tax treatment of captive insurance companies.”

Relative to the issue here, she also alleged that during the investigation the IRS inappropriately provided information about her to her clients and to others in violation of the disclosure provisions.  During the course of the investigation she had complained to the IRS and to the Treasury Inspector for Tax Administration (TIGTA) alleging disclosure violations.

She filed her complaint in November, 2021 and the IRS filed a motion to dismiss for lack of jurisdiction the disclosure portion of the complaint in February, 2022 alleging that the two-year statute of limitations set out in 7431(d) barred the complaint.  Attached to its motion, the IRS provided the court with five letters sent in 2014 from Mr. Clark’s attorneys at Caplin & Drysdale to the IRS and TIGTA.  The letters complained about communications by IRS agents.  The IRS argued that the letters show the discovery of any disclosure violations occurred in 2014 seven years before she brought suit.

As it does in every case, the IRS argued that the time to bring the disclosure suit is a jurisdictional time frame.  The IRS remains uninterested in Supreme Court opinions regarding jurisdiction.  Ms. Clark cited an opinion from the district court in DC, Bancroft Global Dev. v. United States, 330 F. Supp. 3d 82 (D.D.C. 2018) which analyzed 7431(d) and determined it did not create a jurisdictional time period.  The court states that “The Government did not respond or further address this point in Reply.”  The court in Clark analyzed the Bancroft decision and agreed with it. 

In Bancroft, the district court noted the change in Supreme Court case law since Kontrick v. Ryan, 540 U.S. 443 (2004), and that the Supreme Court now holds that a filing deadline is not jurisdictional unless Congress makes a “clear statement” that it wants the filing deadline to be jurisdictional.  Bancroft applied that case law and found no clear statement from Congress that the deadline in IRC 7431(d) should be jurisdictional, noting, among other things, that the jurisdictional grant for these suits in district court is in IRC 7431(a) and is separate from the filing deadline in IRC 7431(d).  The Bancroft court quoted from Gonzalez v. Thaler, 565 U.S. 134, 146-148 (2012) (comparing the wording of close subparagraphs of a habeous corpus statute), that “[m]ere proximity will not turn a rule that speaks in nonjurisdictional terms into a jurisdictional hurdle”. 

The Bancroft court noted that by 2018, only two Circuits had directly addressed this issue under IRC 7431(d).  In Gandy v. United States, 234 F.3d 281, 283 (5th Cir. 2000) (i.e., decided before Kontrick), the Fifth Circuit held that the filing deadline is jurisdictional.  In Aloe Vera of America, Inc. v. United States (9th Cir. 2009), the Ninth Circuit — much influenced by language in a recent Supreme Court opinion in John R. Sand & Gravel, Inc. v. United States, 552 U.S. 130 (2008) (finding the filing deadline at 28 U.S.C. 2501 jurisdictional) — held the IRC 7431(d) filing deadline jurisdictional.  The Bancroft court noted that more recent Supreme Court opinions make clear that John R. Sand’s holding was based really on an exception to the new jurisdictional rules in the case of a long line of prior Supreme Court cases holding the filing deadline jurisdictional.  But, the Bancroft court stated that, since the Supreme Court has never addressed IRC 7431(d), the John R. Sand case exception does not apply.  The Bancroft court cited several post-2009 Supreme Court opinions making clear how the new jurisdictional rules apply.  Oddly, though, the Bancroft court did not cite a very analogous opinion from its supervising Circuit, the D.C. Circuit, in Keohane v. United States, 669 F.3d 325, 330 (D.C. Cir. 2012), holding the filing deadline in IRC 7433(d) (a provision almost identically-phrased to IRC 7431(d)) not jurisdictional under current Supreme Court case law.

Based on that decision, it refused to dismiss the case based on the Federal Rule of Civil Procedure (FRCP) 12(b)(1) motion submitted by the IRS.

That did not end the inquiry because the court then shifted to an analysis of whether it should dismiss the case under FRCP 12(b)(6).  This rule requires a complaint to provide “a short and plain statement of the claim showing that the pleader is entitled to relief.”  To avoid dismissal under this rule the complaint must state a claim for relief plausible on its face meaning that the complaint will allow the court to draw an inference that the defendant committed an act that could give rise to relief.

The court decided that it could not base a dismissal of the case on the attached letters at this stage of the proceeding.  While Ms. Clark did not challenge the authenticity of the letters the court found that a significant dispute remains regarding the centrality of the letter to her disclosure complaint.  In other words, it’s possible that the IRS made wrongful disclosures after these letters and within the statutory time period for bring suit.  The court’s decision does not mean Ms. Clark will win the case or even that the IRS committed a disclosure violation at any time.  It simply allows the case to proceed so that she can show a disclosure violation occurred and that it did so in the appropriate time frame relative to the bringing of the suit.

Tax Court Refuses to Allow Petitioner to Amend the Petition

Yesterday, I wrote about a case in which the IRS was stuck with a concession even though its proof showed that the concession allowed a deduction it should not have allowed.  In the discussion of the Demuth case in that post I wrote about other times in which the Court did or did not allow changes.  In TBL Licensing v. Commissioner, TC Memo 2022-71 the court refuses to allow a petitioner to amend the petition six and one half years after the filing of the petition and after, in February of this year, it had rendered a precedential decision in the case, 158 T.C. No. 1 (2022).

One could ask why a case was still pending in the Tax Court six and one half years after the filing of the petition.  I have pointed out in enough previous blog posts how slow the Tax Court can be in rendering opinions.  I looked at the docket sheet here to obtain a sense of the case.  The parties have been active as has the court.  Based on an earlier opinion of the court, the case involves over $500 million in tax.  With that amount at issue, it is not surprising to see a long docket sheet with lots of activity.  The case involves an issue of corporate reorganization and resulted in a precedential opinion issued in November 2021, withdrawn shortly thereafter and reissued in February 2022. 

A couple things struck me as unusual from the docket sheet.  Petitioners sent the IRS five separate requests for admission.  That doesn’t happen very often.  The second thing is after the precedential opinion, petitioner moves to amend its petition for the second time in the case.  Why would you amend you petition after losing the case?  Generally, a party would do that after an opinion where the opinion did not cover all of the issues in the case but to find out exactly when, it’s necessary to read the memo opinion.


In the summary of the case, the court quickly answers my question regarding why petitioner would move the amend the petition after losing the case.  My original guess was wrong.  The precedential opinion did fully resolve the case; however, petitioner had by this point found another issue which might reduce its liability.  Here’s how the court describes it:

P and R each moved for summary judgment on issues regarding the application of I.R.C. § 367(d), which they presented as the sole issues in the case requiring resolution. The Court resolved those issues in TBL Licensing LLC & Subs. v. Commissioner, No. 21146-15, 158 T.C. (Jan. 31, 2022). In March 2022, more than 6½ years after filing its Petition, P moved for leave to amend its Petition to assert a claim for a research credit under I.R.C. § 41. R opposes P’s Motion.

Keep in mind that when you try a Tax Court case the resolution of the case ends the tax year.  After the case neither party can go back and try to change the tax result for the year(s) before the court.  The decision acts as a form of closing agreement ending any further consideration of the year. 

To its credit, petitioner here comes in quickly after losing the case and does not try to obtain a result in a separate proceeding; however, the timing is terrible in general since the case has by this time been pending for over six years with lots of activity and many attorneys representing petitioner.  The memo opinion lists seven attorneys of record for petitioner at the time of its issuance.  So, this is not a case in which an attorney suddenly comes into the picture to assist a previously unrepresented taxpayer.  This is a case with numerous attorneys on both sides and lots of time to uncover issues relating to the 2011 fiscal year.

There was other post-decision action occurring into which petitioner’s motion to amend its petition fits:

On March 4, 2022, respondent filed a Motion asking us to vacate the February 9th Order and Decision and replace it with one that states the amount of the upheld deficiency (rather than simply cross-referencing the notice of deficiency). Petitioner opposed respondent’s Motion to Vacate, alleging that the deficiency should be reduced by a research credit petitioner claimed under section 41 in an amended return petitioner apparently filed in June 2015, after respondent had issued the notice of deficiency but before petitioner had petitioned this Court for redetermination of the deficiency. Petitioner had not made any claim to a research credit for the taxable year in issue in its Petition
or at any other time before March 8, 2022, when petitioner responded to respondent’s Motion to Vacate.

So, not only were lots of attorneys involved for petitioner but the research credit it now wants to add to the case by amending the petition was known to petitioner since before the filing of its initial petition yet it had never raised this issue in its pleadings.

The court granted the IRS motion but held off issuing a new order in order to give petitioner the opportunity to make an appropriate motion.  It did by filing a motion for leave to amend.  In deciding whether to allow the requested amendment the court said:

“[D]etermining the justice of a proposed amendment” requires an “examin[ation of] the particular circumstances in the case.” Estate of Quick v. Commissioner, 110 T.C. 172, 178 (1998), supplemented by 110 T.C. 440 (1998). Among the circumstances considered are “whether an excuse for the delay [in raising the issue] exists and whether the opposing party would suffer unfair surprise, disadvantage, or prejudice if the motion to amend were granted.” Id. We also take into account whether the issue sought to be raised would require the consideration of “stale evidence,” the availability of relevant witnesses or documents, the time passed since the party’s initial pleading, the “remoteness in time of
[the] taxable years involved in the underlying dispute, or [the] completion of discovery and/or trial.” Scar v. Commissioner, 81 T.C. 855, 867 (1983) (Swift, J., concurring), rev’d on other grounds, 814 F.2d 1363 (9th Cir. 1987).

Petitioner argued that the court must allow it to amend the pleadings unless the amendment would prejudice the IRS.  Here, it alleged that no prejudice would exist and justice would best be served by allowing the amendment.  Petitioner argues that the IRS would not be surprised because it knew about the credit argument for seven years since the filing of the amended return.  The IRS has apparently allowed the same credit in other years.

The IRS objected to the amendment pointing out that petitioner offered no explanation for its failure to place this issue before the court at an earlier and more appropriate time.  It says petitioner abandoned the issue by its inaction.  The IRS also pointed to a conversation between counsel in 2015 in which petitioner’s counsel advised the IRS counsel that it had no plans to amend its petition to add this issue.  The IRS did not explain how raising the issue at this point would make it more difficult that if petitioner had raised the issue at the outset.

The court looks at an earlier opinion in which it said that a motion for leave to amend can be denied when absence of excuse and prejudice exists.  But the court distinguished that opinion and held the either the absence of excuse or the existence of prejudice, alone, can justify denial of a motion to amend the pleadings.  Here, the additional factor hurting petitioner is its apparent statement early in the case that it did not intend to raise this issue:

Petitioner’s efforts to elevate prejudice or substantial inconvenience as the sole dispositive factor, coupled with its repeated failures to provide any explanation for its delay in raising before the
Court its claim to a research credit for 2011, convince us that petitioner has no good excuse for its delay. In respondent’s unrefuted telling of the procedural history, petitioner’s failure to have raised the research credit issue reflects a conscious decision not to pursue the issue.

Similar to the Demuth case the denial here of the amendment to the petition probably leaves the petitioner paying more tax than it should.  In Demuth the court stated flatly that the concession gave petitioners a windfall.  A similar statement was not made in TBL Licensing but the implication of the treatment of the credit in earlier years leaves the impression that if timely raised the credit would have been allowed here.  In both cases the court goes for finality over finding the precise right answer.

The Court injected a new consideration into the equation – the impact of the motion on the Court: “Consideration of petitioner’s claim could impose a significant burden on both the Court and respondent.” (emphasis added) The Court explains in some detail the burdens reopening the case would place on the IRS.  It does not explain the burden it would place on the Court but does reference judicial economy and the burden that will be placed on the Court – “a burden likely to be greater than it would have been had petitioner raised the issue in the petition it filed more than 6½ years ago.”  The addition of the burden to the Court, while certainly present in any case in which a party seeks to have a second bite at the apple, has not regularly been a basis for denial of a motion such as this.

I am not troubled by the need for finality and allowing that need to overcome arguments that might get to a more perfect tax answer.  Both parties have a need to bring the issues to the court in a timely fashion.  The failure to do so has consequences as both cases point out.

IRS Stuck with Concession

The case of Estate of Demuth, Jr. v. Commissioner, TC Memo 2022-72 discusses the issue of the impact of a concession by the IRS when the court finds that the conceded item would be taxable but for the concession.  The Tax Court finds the concession binding and allows a reduction of the taxable estate based on the pre-trial concession.  There is some conflicting law.

About four decades ago, I tried a case in which I argued a theory of the case that the revenue agent had not put forward.  The taxpayer in my case had given some property to charity. The agent partially disallowed the deduction based on the value of the property.  I argued that the property was inventory in the hands of the taxpayer and he was limited to his basis in the property which was very close to zero.  I did not amend the pleadings to assert an additional deficiency because the amount of additional tax was small and I raised the theory later than I would have preferred.  The court bought my argument and tacked on the additional tax even though I had not requested it.  The taxpayer in my case engaged in unsavory behavior, and I think that influenced the court’s decision.  The IRS is almost always limited to what it requests and the court is tough on letting the IRS change its mind near to trial. 

Another case I remember from long ago involved the fraud penalty.  My office had handled the criminal case of a very well-known individual but the review of the notice of deficiency went to another office.  That office inexplicably removed the fraud penalty from the case.  I had the Tax Court case transferred back to our office and we filed a motion to add the fraud penalty onto the taxpayer relatively early in the life of the case but the judge would not let us do it. 


In the Demuth case the decedent made, or attempted to make, several end of life gifts by check.  Ten of the checks were not cashed at the time he died.  The IRS conceded in the stipulation that the estate should get the benefit of three of the checks.  The stipulation in this case was a full stipulation because the case was submitted under Tax Court Rule 122 that allows the parties to submit a case fully stipulated and then brief it.

The IRS convinced the court that under the laws of the state in which the decedent lived none of the gifts were consummated at death.  The court stated:

This statute stands for the proposition that once a check has reached any one of the aforementioned stages in its processing at the time a stop-payment order is made, then the stop-payment order is too late; at that time, a charge may be validly made against the drawer’s account. Therefore, the first (but not the only) possible time at which a gift of a check may be deemed complete is when the drawee bank accepts, certifies, or makes final payment of the check. In this context, acceptance means “the drawee’s signed agreement to pay a draft as presented.” 13 Pa. Cons. Stat. § 3409(a) (2015). Similarly, for a check to be certified means that the check has been “accepted by the bank on which it is drawn.” Id. § 3409(d).

In the instant case, Mighty Oak did not accept, certify, or make final payment on any of the ten checks at issue until after decedent’s death. Consequently, a stop-payment order could have theoretically been placed on any of those checks before final payment. Therefore, under Pennsylvania law, none of the ten checks at issue represented completed gifts prior to decedent’s death.

If we could stop here, we would hold that the full value of all ten checks paid by Mighty Oak after decedent’s death ($436,000) is properly includible in his gross estate.

The court says that the parties seem to have misconstrued the term drawee bank to mean depositary bank and that caused the concession of the three checks.

Then the court moves to the consequence of the stipulation in a setting where the concession is at odds with the applicable law.  The court says this issue has not come before it previously, which makes you think the decision here might be a precedential decision, before it cites to a pair of earlier TC Memo opinions in which the court did not allow the IRS to withdraw a concession during post-trial briefing.  While those cases, Glass v. Commissioner, TC Memo 1988-550 and Cogan v. Commissioner, TC Memo 1980-328, concerned concession made before and during trial in the post-trial brief and while they are not precedential opinions, the court finds they are sufficiently relevant to a Rule 122 case to drive the decision here.  The court was also concerned that accepting a withdrawal of the concession in the stipulation in this case put the petitioner at a disadvantage since the estate relied upon the concession in drafting the brief.

The case shows the power of stipulations to drive an outcome even when the outcome is wrong.  It emphasizes the importance of knowing the law prior to drafting briefs because you often need to know it at the time of drafting the stipulations.  This can present challenges for both respondent’s and petitioner’s counsel because sometimes you do not know everything at the time of the drafting of the stipulations.  When fully stipulating a case, this becomes even more important because you don’t have a trial to perhaps clear up some uncertainty.  In a footnote the court cited to the case of Gale v. Commissioner, TC Memo 2002-54 where information came out at trial different from what the IRS previously understood and the court did allow the IRS to repudiate a concession.  It stated that the facts were different in the Demuth case leading to a different result.

Letter to IRS from AICPA

The American Institute of Certified Public Accountants (AICPA) wrote a letter to Commissioner Rettig and Assistant Secretary for Tax Policy Lily Batchelder on July 11, 2022, making several requests related to the difficulties at the IRS resulting from the pandemic which has translated into difficulties for taxpayers and their representatives.  The letter makes reasonable requests that deserve attention and that can be addressed through administrative action rather than legislation. 


The AICPA letter did appropriately acknowledge at the outset the difficult circumstances the IRS has faced since the pandemic before making a series of discreet steps that could assist the system.

First, it recommended that the IRS become more transparent about the status of its operations.  Describing current IRS communications on the backlogs that exist the letter provides:

Much of the information provided to the public by the IRS regarding the progress on processing returns can be found at “IRS Operations During COVID-19: Mission-critical functions continue,” which provides some updates on a weekly basis. Other portions have not been updated in months, in some cases even years. The information provided is vague, particularly when describing the length of time taxpayers can expect for processing of returns and responses to taxpayers’ communications.

The letter also notes that there is a weekly news announcement but the announcement is not easy to find and provides only surface details.

In place of the current information flow the AICPA letter recommends: 1) increasing the level of detail on returns processed; 2) providing regular information on the status of processed mail; 3) providing expected times for IRS responses to taxpayers and practitioners regarding correspondence; and 4) providing regular, widely publicized updates on getting back to pre-pandemic inventory levels.

The same problem of communication has existed at the Tax Court as it has tried to manage a surge in inventory.  Agencies (and Courts) struggle to provide practitioners and taxpayers information when they are working hard to dig out from a pile of work but providing information on the scope of the problems and the anticipated time frames is how to manage expectations.  Without regular and substantial information, practitioners cannot keep clients informed.  Operating in the dark creates much unhappiness.  Telling everyone what’s happening doesn’t necessarily make people happy but it creates understanding and more sympathy for the problem.

Second, the AICPA letter recommends continued use of the surge teams to address high volume areas and to process tax returns.  I doubt this recommendation is very controversial.  I imagine the IRS will continue to do this but there are consequences on the enforcement side if it must use enforcement resources in order to populate the surge teams.

Third, it recommends continued suspension of certain automated compliance actions.  The letter suggests that the IRS wait to restart these actions until it is able to respond to taxpayer replies.  I am sure there is pressure within the IRS to restart these compliance actions but I agree with the letter that restarting them without a plan for responding in a reasonable time to the requests these actions will necessarily generate is a bad idea.  The system must take a hit on efficient collection until it can right itself.

Fourth, the letter wants a streamlined provision for reasonable cause penalty requests and it wants this provision for waiving penalties to not impact the current administrative penalty waiver provision of first time abatement.  Basically, the AICPA wants it to become much easier to eliminate penalties until we all get back to normal after the pandemic.  While I don’t have a problem with the suggestion, I see the IRS balking at this one since it would require it to set up a new administrative penalty waiver system parallel to first time abatement and one with an indeterminate end date.  It makes sense to create as much penalty relief as possible during the unprecedented times created by COVID which have not only upended the IRS but individuals and businesses as well.

It will be interesting to see if the IRS reacts to this letter and if the other organizations, such as the Tax Section of the ABA and the National Association of Enrolled Agents, write calling for similar relief.  The IRS granted a significant amount of relief in 2020.  Two years later it still struggles to get back on its feet just as many taxpayers struggle.  The ideas put forward by the AICPA represent a logical mechanism for helping both the IRS and the people it serves. 

A Real Case in Which an Offer Aged into Acceptance

Caleb’s excellent series on the provision that causes offers to age into acceptance has resulted in the receipt of an actual offer acceptance letter based on the IRS failure to accept or reject an offer with 24 months of submission. With permission from Abe Warshenbrot, we are attaching the correspondence he sent to the offer unit requesting it grant his client’s offer based on the passage of time and the offer acceptance letter he received. His letter might serve as a model for anyone in this situation. The letter from the IRS proves that at least once in the pass couple decades someone has benefited from this provision.

Offer in Compromise Rejection Sustained by Tax Court

For anyone interested in teaching at Harvard Law School, the faculty position from which I retired at the beginning of this month has now been announced. Because the faculty position belongs to the Legal Services Center and not to the Tax Clinic specifically, it’s possible that the new faculty member will direct one of the other clinics but also possible the person would direct the tax clinic. The Legal Services Center is a great place to work and a very supportive environment. I encourage any qualified applicants to apply. Keith

In Serna v. Commissioner, T.C. Memo 2022-66 the Tax Court sustains the rejection of an offer in compromise (OIC) made within the context of a Collection Due Process (CDP) case.  Since the only way to obtain Tax Court review of an offer runs through CDP, the number of decisions regarding OICs is small.  These decisions offer a window into the Court’s thinking on offers which can provide a valuable insight.


I occasionally have had clients come into the office wanting an offer similar to the one sought by Mr. Serna.  He used all, or most, of a retirement distribution to buy a home and did not save enough from the distribution to pay the tax on the distribution.  He seeks relief from paying tax on the distribution but does not want to pull the equity from the property purchased with the distribution to satisfy the tax.  The IRS does not favor this result and wants him to fully pay his liability by tapping into the equity in the property.  The facts get more complicated and will be explored below but the basic facts present in this case will almost never result in an offer acceptance by the IRS for good reason.

The tax year at issue is 2016.  He paid about half of his approximately $130,000 liability for the year with his return leaving about a $65,000 balance which will have increased since that time due to interest and penalties.  He offered the IRS $10,000.  His initial offer was based on doubt as to collectability the standard basis for an OIC.  He indicated in the offer that he purchased the house for his estranged wife so that she could live there with the couple’s four children and relieve him from paying child support.  He indicated that he had moved back in with his parents and was paying them rent.

The IRS rejected his offer because the equity in the house greatly exceeded the liability even though his monthly expenses exceed his income.  He appealed the rejection and changed his offer from doubt as to collectability to the more appropriate effective tax administration offer provision.  When I say more appropriate, I don’t mean that the IRS should have necessarily accepted the offer but only that because his ability to pay the offer exceeded the amount of the outstanding liability, collection was not in doubt and a doubt as to collectability offer was inappropriate to the circumstances.

Along with changing the type of offer, he provided additional information.  He explained that two of his children sufferance from “significant developmental disabilities and that the house was essential to them for multiple reasons.”  Now, he is beginning to shape arguments that have at the least the potential to succeed but he is seeking the offer pro se and may not have had the tools to harness the most persuasive arguments.  In addition to arguing for acceptance based on the needs of his children, he pointed out a long history of compliance and a lack of understanding of the tax consequence of the withdrawal.

While a long history of compliance coupled with an unusual event triggering the unpaid tax brings in facts that I always like to highlight in the cover letter to an OIC, these facts generally do not overcome the reluctance to accept an offer where sufficient funds or assets exist to satisfy the offer.  The Court noted this in a footnote:

Mr. Serna additionally emphasizes his prior tax compliance in arguing the settlement officer abused her discretion. While we have no reason to doubt his history of compliance, lack of tax compliance is a bar to acceptance of an offer on effective-tax-administration grounds; compliance, conversely, does not alone justify acceptance.

A long history of compliance and a special, one-time event triggering the tax help to put the offer examiner in the right mood for accepting an offer but cannot overcome a clear ability to pay.  A long history of non-compliance, makes it difficult to craft a sympathetic cover letter but, with the right economic facts, even a person with such a history can obtain an OIC.   

While the offer was pending, however, he also had a notice of federal tax lien filed against him which opened up the possibility for a new path to take in seeking offer approval – CDP.  He timely made a CDP request and this gave him another person in Appeals with whom he could discuss his situation.  The change, however, did not help.  The Settlement Officer handling the CDP case:

noted that Mr. Serna had offered no documents to show that he was under any obligation to buy a home for his estranged wife and children. She further suggested that Mr. Serna had timed the home purchase to precede the filing of his 2016 tax return, which would have shown a balance due. The settlement officer explained that this conduct was out of the ordinary, as he had filed early for every prior tax year and employed the same tax return preparer as before.

The Tax Court noted that it reviewed his case for abuse of discretion.  Mr. Serna did not allege that the Settlement Officer failed to properly verify the procedural correctness of the assessment, and the Court found that the SO “thoroughly reviewed Mr. Serna’s information and account transcripts and verified that all applicable requirements were met.”

The Court next reviewed the decision by Appeals.  In doing so it stated:

“We judge the propriety of the [Office of Appeals] determination . . . on the grounds invoked by the Office of Appeals.” Elkins v. Commissioner, T.C. Memo. 2020-110, at *24; see also SEC v. Chenery Corp., 332 U.S. 194, 196 (1947); Antioco v.  Commissioner, T.C. Memo. 2013-35, at *25 (“Applying Chenery in the CDP context means that we can’t uphold a notice of determination on grounds other than
those actually relied upon by the Appeals officer.”). In doing so, we look to the reasons offered in the notice of determination, as further unspooled in the settlement officer’s contemporaneous rejection memorandum and case activity notes. Accord Melasky v. Commissioner, 151 T.C. 93, 106 (2018) (“[W]e will uphold a notice of determination of less than ideal clarity if the basis for the determination may reasonably be discerned . . . .”), aff’d, 803 F. App’x 732 (5th Cir. 2020); Kasper v. Commissioner, 150 T.C. 8, 24–25 (2018) (“Although we may not accept any post hoc rationalizations for agency action provided by the Commissioner’s counsel, we may consider any ‘contemporaneous explanation of the agency decision’ contained in the record.” (quoting Tourus Records, Inc. v. Drug Enf’t Admin., 259 F.3d 731, 738 (D.C. Cir. 2001))); see Elkins, T.C. Memo. 2020-110, at *25–29.

The Court found that the IRS did not abuse its discretion in rejecting the $10,000 offer because the record indicated that he could pay more than that amount without causing economic hardship.  He had enough income to cover his expenses.  The liability could be satisfied by taking the equity in the house without causing him economic hardship.  Although the SO might have accepted the offer, the examples in the applicable regulations did not require acceptance under this circumstance.  The Court found that the SO weighed the circumstances a sale of the property would cause and demonstrated consideration of the necessary factors in determining hardship.  The Court concluded by saying:

We are not blind to the fact that Mr. Serna repeatedly asserted that he was supporting not one, but four children (and his estranged wife) in the house at issue. He claimed only one of these children as a dependent on his tax return, however, and we cannot fault the settlement officer for considering only that child in her evaluation.

Nor are we persuaded by Mr. Serna’s contention that the settlement officer’s refusal to accept the OIC put at risk his children’s access to their current school district. Despite being given multiple opportunities, Mr. Serna failed to provide the settlement officer with sufficient information to credit this assertion and factor it into her evaluation.

In conclusion, we might have reached a different result than the settlement officer had we evaluated the OIC in the first instance. We nonetheless cannot say that the settlement officer abused her discretion in deciding as she did.

What could Mr. Serna have done to succeed?  From the Court’s statements, it would seem that he needed to provide more evidence of what selling the house would do to the rest of his family. He never provided evidence that he had a child support obligation or that buying the house in which his estranged wife could live would satisfy that obligation.  He needed additional evidence of the impact of the sale of the house if the offer were rejected.  Based on his income it does not appear that he could have borrowed money through a home equity line of credit because of an inability to support the loan; however, it does not appear that he presented evidence of an inability to borrow.  Such evidence would have supported the conclusion that if the offer were rejected the only way to satisfy the outstanding debt would be selling the house and displacing his estranged wife and his children.

It’s clear that he should have provided more evidence.  This is a common problem for people representing themselves in an OIC.  It is not clear that providing more evidence would have persuaded the SO nor is it clear that had the additional evidence been present it would have led to a different outcome at the Court but it might have.  The absence of the evidence on the harm made it easy for the Court to support the finding of the SO.

Given that the IRS rarely seizes and sells personal residence, it is also not clear who is the winner here.  The IRS can prevent someone in this situation from receiving an OIC; however, unless it is willing to act to cause the sale of the property, all the rejection does is put the parties back where they were before the submission of the offer.  It could well be that the remainder of the 10 years on the statute of limitations will pass without payment of the tax by Mr. Serna and without sale of the house by the IRS.  Mr. Serna lost this battle but it is unclear whether he will lose the war.