The Broad Impact of Guralnik

On July 12, 2019, I wrote about one case in which the Tax Court applied the reasoning in Guralnik v. Commissioner to extend the time within which a taxpayer could file their Tax Court petition during the government shutdown. We picked up that case through the Tax Court’s designated order feature. As we have discussed before the order feature of the Tax Court’s web site allows users to perform word searches. Inspired by the first case and expecting there should be others, Carl Smith did such a search and found others to which he alerted me. I had my research assistant, Michael Waalkes, follow up on Carl’s research and this post will identify the cases we have found in which Guralnik has made a difference as well as a few where it did not. Leading into the shutdown, we reminded readers on December 31, 2018, not to forget Guralnik. It’s clear from these orders that the Tax Court did not forget it and that the earlier case we wrote about was part of a concerted effort on the part of the court to identify cases in which the court opened its doors to cases which would otherwise have been late but for the application of Guralnik to the situation.

In each of these cases the IRS moved to dismiss. At some point perhaps the IRS will accept Guralnik and no longer file a motion to dismiss or it will seek to litigate it in the circuits. At least for this round of government shutdown, the IRS seems content to raise the issue in every case but accept the outcome in every case without filing an appeal. Of course, if the IRS accepts Guralnik without filing a motion to dismiss, we would not find the case through an order search so it may have accepted many more cases than it contested. Perhaps the issue is a function of getting the word to the field offices. The possibility also exists that it wants to bring each situation to the court’s attention and have the court make the specific decision allowing the case to move forward.

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Per the search of the Tax Court orders: here are the cases involving Guralnik’s application to the government shutdown, in which the Court denied an IRS motion to dismiss for a petition due during the shutdown: Coleman v. Commissioner, Docket No. 1856-19; Baird v. Commissioner, Docket No. 1706-19; Meaut v. Commissioner, Docket No.: 1851-19; Crager v. Commissioner, Docket No. 2191-19; Vlach v. Commissioner, Docket No. 614-19S; Wilson v. Commissioner, Docket No. 0691-19S; Hamilton v. Commissioner, Docket No. 436-19S; Doherty v. Commissioner, Docket No. 101-19; Cajuste v. Commissioner, Docket No. 2190-19; Witt v. Commissioner, Docket No. 2071-19; Kendrick v. Commissioner, Docket No. 806-19S; Baird v. Commissioner, Docket No. 1706-19; Worku v. Commissioner, Docket No. 1864-19; Gettys v. Commissioner, Docket No.1686-19S; Hager v. Commissioner, Docket No. 1854-19.

The Tax Court appears to have adopted a standard policy in cases where the IRS files a Motion to Dismiss for Lack of Jurisdiction on timeliness for petitions due during the government shutdown. The Court first issues a generic order (sample linked here) citing Guralnik and requiring that the IRS supplement its motion, which leads to the IRS conceding timeliness in its supplement and the Court then denying the motion to dismiss. 

Despite the 14 cases listed above in which the Tax Court did open its doors, some petitioners still remained outside of the benefit created by the extra time resulting from the government shutdown. These cases deserve a closer look since they do not follow the cookie cutter results of the cases listed above. In Bancroft v. Commissioner, Docket No. 2063-19, the Tax Court issued its standard order for the IRS to file a supplement to its motion to dismiss, which the IRS did. The Tax Court then granted the motion to dismiss without issuing an order, so it’s unclear why the Court wasn’t convinced that the shutdown affected the timeliness of the petition filing. It would have been nice to have some reasoning here given the importance of the issue. We did not pay to obtain the response filed by the IRS which might have made it clear why the court granted the motion to dismiss in this case.

And in Barnhart v. Commissioner, Docket No. 5783-19S, in response to an IRS motion to dismiss for late-filing a petition that was due on December 24, 2018 (several days before December 28, 2018 when the Tax Court stopped operating), the petitioners argued that their efforts to administratively resolve their issue with the IRS had been hampered by the government shutdown, as the IRS began its furlough earlier on December 22, 2018, two days before the filing deadline. But Judge Foley granted the motion to dismiss and issued an order finding that a government shutdown at the administrative level was not sufficient to alter the filing deadline with the Tax Court, which at the time was still unaffected. This case demonstrates the confusion that some petitioners might have had between the shutdown of the IRS (and most of the government) and the shutdown of the Tax Court (and most of the courts). The non-budget funds available to the courts allowed them to remain open for a short period after the rest of the government shut its doors. Perhaps this confusion should not matter from a jurisdictional standpoint but the whole issue of shutdown must have caused confusion for some parties seeking a remedy.

Finally, in Janjic v. Commissioner, Docket No. 2003-19, the petitioner was a taxpayer who lived abroad and did not return to the U.S. until during the period of the IRS furlough. The petitioner argued that she was unaware that the Tax Court was still operational during this time and thus the Court should still consider the case. The Tax Court disagreed, and Judge Foley granted the IRS motion to dismiss, while noting his sympathy for the petitioner’s situation. The Janjic case most clearly raises the issue of confusion and provides a possible basis for equitable tolling should the time frame for filing a petition in a deficiency proceeding prove not to be jurisdictional.

The issue of jurisdictional nature of the timing of the filing of a deficiency case will be argued in the 9th Circuit in San Francisco on October 22, 2019, in the cases of Organic Cannabis Foundation LLC v. Commissioner, Ninth Circuit Docket No. 17-72874 and Northern California Small Business Assistants, Inc. v. Commissioner, Ninth Circuit Docket No. 17-72877.  We will be closely watching those cases as the decision there could impact other petitioners like Ms. Janjic who file their Tax Court petitions late but have a reason for doing so that would support a finding of equitable tolling. Although we have not written as standalone post on Organic Cannabis and Northern California Small Business Assistants, we did discuss them in the December 31, 2018 post linked above. Just as a reminder, here is what we wrote in that post:

There are currently before the Ninth Circuit two companion cases of petitions sent in around the same time as Guralnik, also by FedEx First Overnight, that arrived a day late. In these cases, Organic Cannabis Foundation LLC v. Commissioner, Ninth Cir. Docket No. 17-72874, and Northern California Small Business Assistants, Inc. v. Commissioner, Ninth Circuit Docket No. 17-72877, it is not clear why the petitions were filed late, but it appears that the Federal Express driver could not access the open Tax Court Clerk’s Office on the last day – either because of construction work, police activity, or some other reason – so the driver returned the following day (one day too late if section 7502 can’t be used). In unpublished orders issued on July 25, 2017 (here and here), the Tax Court declined to extend Guranik to cover situations where the Clerk’s Office was in fact open.

In the Ninth Circuit, the taxpayers not only seek to extend Guralnik, but also argue (as the tax clinic at Harvard did in Guralnik) that the deficiency petition filing deadline is not jurisdictional and is subject to equitable tolling. The DOJ relies on the holding in Guralnik, but argues that Guralnik cannot be stretched to cover the situation where the Clerk’s office is actually open. Since the parties cannot confer jurisdiction in a case merely by not making certain arguments, it would not be impossible for the Ninth Circuit to eventually rule both in these cases that the filing deadline is jurisdictional and that the Tax Court cannot import into its own rules any rule from the Federal Rules of Civil Procedure that extends the filing deadline when the Clerk’s Office is formally closed. That is, nothing stops the Ninth Circuit from rejecting the latter holding in Guralnik. Thus, until there are some court of appeals rulings on this fact pattern, it may be wise not to try to rely on the closure of the government as a reason for not mailing a Tax Court petition on time or attempting hand delivery to the court on the first date it reopens. The cases before the Ninth Circuit are fully briefed… Among the briefs there are amicus briefs from the Harvard tax clinic arguing that the filing deadline is not jurisdictional and is subject to equitable tolling.

Of course, we are closely following the jurisdictional nature of the timing of filing Tax Court petitions in several of the bases for jurisdiction. With respect to the recent decision of the D.C. Circuit that the time for filing a petition in a whistleblower case is not jurisdictional, blogged here, the Department of Justice has requested more time to decide whether to request an en banc review of the decision. As discussed in the blog post on the Myers case, because the language in the whistleblower statute essentially mirrors the language in the Collection Due Process statute passed several years earlier, the Myers decision essentially sets up a split between the D.C. Circuit and the 9th Circuit on this issue which creates at the least the possibility of a trip to the Supreme Court.

Statistics on Cases in Litigation from ABA Tax Section Meeting in May

In May, the ABA Tax Section held its annual meeting in DC. Because of the location, this meeting has more government attendees than the other two meetings during the year. Since the government attendees were unable to attend the previous ABA meeting due to the shutdown, there was a fair amount of information disseminated by them at this meeting. My comments come from the first session of the Court Procedure and Practice Committee. This committee opens with a panel which includes government representatives from different parts of the tax world. There is a representative from the Office of Chief Counsel, from the Tax Court (usually the Chief Judge) and from the Tax Division of the Department of Justice. Chief Judge Foley announced the Court’s decision to allow limited representation starting in September and focused his remarks on that coming change. I expect that we will be writing more about that in coming weeks.

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Rich Goldman from Procedure and Administration provided lots of statistical information in the form of slides. Because the slides were not made a part of the material available to attendees, I requested them informally. Because the slides were not made available to me based on the informal request, I obtained them through FOIA. For that reason it has taken a little time after the meeting to make these slides available. The slides cover a few different types of cases in litigation and provide different perspectives on the cases. The slides not only provide a perspective of what’s happening in tax litigation over the arc of the last decade but they can provide context in some types of litigation where letting the court know of the numbers of certain types of cases can be useful.

Inventory of Cases in Litigation

The first set of slides (slides 2 and 3) discusses the dollars in dispute pending in Tax Court, the Court of Federal Claims and the district courts filed in the last decade. As you will see in later slides the vast majority of tax litigation by number of cases occurs in the Tax Court. Because so many of the cases in Tax Court involve small dollar amounts the amount of money in dispute in the other two courts can make their dockets look bigger. Just focusing on dollars the Tax Court is the clear winner but the contrast gets much starker when looking at number of case filed which you can find in the following slides, 4 and 5.

The data then moves from graphs to pie charts to provide a greater breakdown of the Tax Court’s inventory (slide 6). The pie chart is followed by another graph showing dollars in dispute by type of Tax Court case. It comes as no surprise that a small percentage of Tax Court cases dominate the amount of dollars at issue (slide 7).

Tax Court Filings by Category

The next slide provides a 10-year arc of the filings in Tax Court by category (slide 8). This graph shows that the number of Tax Court cases have declined in recent years but the decline has not been as significant as I might have expected given the cut back in some of the audit activity by the IRS. These slides do not show the percentage of cases petitioned based on the number of statutory notices or determinations issued by the IRS. A long time ago the percentage of cases filed in the Tax Court by taxpayers receiving notices that provided a ticket to Tax Court was around 3%. If that percentage still holds or provides even a reasonably close approximation of the number of filings per notice, you can see that a drop off at the Tax Court of 1,000 cases reflects a much more significant drop off at the IRS of the number of cases in which it sends a notice.

Receipts and Closures at the Tax Court

A trio of slides shows the number of receipts and closures at the Tax Court (slides 10, 11, and 18). The Tax Court has been closing cases faster than it receives them for several years. I have not seen statistics on how this has impacted the length of time a case spends in the Tax Court. I expect that the length of time from filing to conclusion has decreased but that type of statistic was not included in the package of statistics provided at the ABA meeting. Another pair of slides shows the receipts and closures by case category type (slides 12 & 13).

Sources of Cases Petitioned to Tax Court

One slide shows the sources of case petitioned to the Tax Court. No big surprise that Service Center notices provide the vast majority of cases. I go to the Tax Court fairly regularly and sit in the docket room looking at cases on upcoming calendars in Boston. It’s interesting when you go through a calendar to see the types of case that make it to the Court. I have been struck in the last few years how few earned income tax credit cases appeared on the calendars. A large number of cases involved unreported income picked up by the automated underreporter unit which matches the information returns against the information reported on the return. Without these computer audits, the number of Tax Court cases would plummet.

Settlement

Two of the slides focus on settlements showing cases settled in Appeals and in Chief Counsel’s office (slides 15 & 16). The vast majority of cases do not go through Appeals on the way to Tax Court because the vast majority of cases involve pro se taxpayers who do not avail themselves of the opportunity to go through Appeals. It would be interesting to see what would happen to the Tax Court inventory if exhausting your remedies by going to Appeals was made mandatory instead of voluntary as a part of getting to Tax Court. All Collection Due Process (CDP) cases take the Appeals route prior to coming to court.

Pro Se Cases in Tax Court

One slide shows the number of cases filed by pro se petitioners in Tax Court and the dollars at issues in those cases. While many of the petitioners filing pro se meet the criteria as low-income taxpayers under IRC 7526 which pegs qualification at 250% of poverty, a large percentage of the petitioners in this group file pro se because the cost of representation exceeds the amount at issue. For many middle income or even high income taxpayers a dispute with the IRS that involves less than $15-20,000 may not justify the cost of obtaining representation. For individuals working calendar call, it is not unusual to encounter these petitioners. Of course, many of the more sophisticated pro se petitioners, whether low, middle or high income, can navigate the system and settle with Appeals or IRS Counsel. Still, some of the pro se individuals from each income level need assistance to effectively manage their case to the best result.

Refund Cases

There are five slides depicting various facets of refund litigation (slides 19-23). The striking aspect of refund litigation is how few cases end up in refund litigation anymore. The number of refund cases has historically been much less than the number of Tax Court cases but that trend has significantly accelerated in the past couple of decades. Some cases must go the refund route because the Tax Court route is unavailable, either because of the type of tax or the taxpayer’s initial decision to report the tax and allow the IRS to make an assessment. Larger corporations with sophisticated counsel tended to go the refund route if the forum shopping opportunity provided the best path to victory. The reduction in refund cases may reflect the significant decrease in audits of the types of taxpayers who made this type of choice in years past.

Collection Due Process

Four slides show the numbers of CDP cases in the Tax Court. The number of these cases is not as large as one might expect. It is unclear why so few taxpayer who elect CDP choose to go to Tax Court.

It’s worth noting that the Chief Counsel’s office did not display in any of the slides the number of cases in litigation in the bankruptcy courts. Section 505(a) of the bankruptcy code gives taxpayers going through bankruptcy the opportunity to litigate their liability in bankruptcy. No statistics were provided to show how many and what type of taxpayers avail themselves of this opportunity. Despite this absence, the group of slides provides a fairly detailed look at the tax litigation system and the cases going through it.

Status of Several Issues Pushed by TAS

As regular readers of the blog know, we published reflections on the tenure of Nina Olson throughout the month of July leading up to her retirement.  The reflections came from many different perspectives and offered a variety of thoughts on her tenure.  Thank you to everyone who wrote a reflection or commented on the site.  On her last day, Nina published a blog post providing an update on a number of issues she was working to resolve before she left.  If you have not read her final blog post as NTA, it’s worth reading to learn where the issues stand if you are following an issue about which she commented.  I will briefly recap them below to allow you to decide if she wrote on an issue close to your heart.

One of the issues Nina pushed during her time as NTA was taxpayer rights.  Paul Harrison, the director of the low income taxpayer clinic at Ladder Up in Chicago, wrote a reflection on Nina as a song focusing primarily on taxpayer rights.  The song is included in this post as well.

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Private Debt Collection

On this issue Congress stepped up and took care of a major concern raised by Nina.  It excluded from the list of accounts that the IRS should refer to the private debt collectors taxpayers falling below 200% of poverty.  It also excluded certain taxpayers receiving means tested income.  These changes definitely benefit the low income individuals who will no longer be receiving the multitude of contacts from the collectors.  I think they also benefit the PDCs and the IRS.  Chasing most of these individuals for payment is, more often than not, a losing proposition.

Training on Taxpayer Rights

I have written before about cases in which taxpayers have argued that TBOR has the “teeth” to stop the IRS from certain action or behavior.  In those cases the IRS argues that TBOR lacks teeth to allow the court to stop its action and the taxpayer argues that for TBOR to have meaning it must stop certain types of behavior.  If TBOR has any teeth, it certainly should have teeth regarding the training of IRS employees on the enumerated rights since that is discussed in the statute. Congress stepped in again here and ordered the IRS to develop a plan for training employees on taxpayer rights.

Exclusion of TAS Open Cases from Passport Certification

The IRS has administratively and temporarily pulled cases from the passport certification process if the taxpayer is working with TAS to resolve the issue.  This is a good result for taxpayers trying actively to work out their cases.  It will be interesting to watch and she if this becomes a permanent practice or just a temporary experiment.

Economic Hardship Indicator

Nina sought to have the IRS tag the accounts of qualifying taxpayers and to stop affirmative collection from people with the indicator.  She marks this as unfinished business since the IRS did not adopt her recommendation.

TAS Attorney Hiring Prohibition

Nina hired a number of attorneys to work with her within TAS.  Starting in 2015 Treasury basically stopped allowing her to hire attorneys to work directly under the NTA.  She did not succeed in changing the Treasury policy before she left.  This issue does not have a direct impact on practice before the IRS but, obviously, impacts the functioning of TAS.

Internal Revenue Manual Chapters on Taxpayer Assistance Orders and Taxpayer Advocate Directives

Nina has proposed some changes to the operation of TAOs which the IRS has not yet accepted.

Transparency of Chief Counsel Guidance

In 1998 Congress required many advisory opinions issued by Chief Counsel’s Office be made public.  Some advice is still not seeing the light of day.  Nina suggests that changes are forthcoming.

Conclusion

The details are in her blog post.  The purpose of this post is to alert you to the issues she discusses in case one or more of those issues is of interest to you.   

Now for the promised song about taxpayer rights:

(What’s so Funny ‘Bout) Asserting Taxpayer Rights?

(To the tune of (What’s so Funny ‘Bout) Peace, Love, and Understanding? By Nick Lowe. Famously covered by Elvis Costello & the Attractions of whom, I’ve been told on good authority, the erstwhile NTA was a fan.)

As I read through
The IRC
Searchin’ for fairness or a bit of integrity

I ask myself
Is all hope lost
Is there only debt, dis’lowance, and inequity?

And each time
I feel like this inside,
There’s only one thing I wanna know:

What’s so funny ‘bout asserting taxpayer ri-ights? Ohh!
What’s so funny ‘bout asserting taxpayer ri-ights?

And as I walked on
Through troubled seas
I’m so glad I found the LITC
‘Cause they the strong
And they are the trusted
And they are the LITC
Sweet LITC!

‘cause each time another notice arrives, just makes me wanna cry.
What’s so funny ‘bout asserting taxpayer ri-ights? Ohh!
What’s so funny ‘bout asserting taxpayer ri-ights?

‘Cause they the strong
And they are the trusted
And they are the LITC
Sweet LITC!

‘cause each time another notice arrives, just makes me wanna cry.
What’s so funny ‘bout asserting taxpayer ri-ights/ Ohh!
What’s so funny ‘bout asserting taxpayer ri-ights?

The Muddle of Seeking to Litigate the Merits of a Tax Liability in Collection Due Process Cases

A recent proposed opinion in the Tax Court signals a trap for the unwary for those seeking to litigate the merits of the tax liability stemming from a notice of deficiency in a collection due process (CDP) case.

We have not written much about proposed opinions in the Tax Court. We wrote about the proposed opinion in the Guralnik case. Proposed opinions occur when a case is assigned to a Special Trial Judge who writes the opinion but the opinion waits for a presidentially appointed judge to adopt it as the opinion of the court. The most famous proposed opinion was written in by STJ Couvillion in the Ballard case. The taxpayer in Ballard sought to see the proposed opinion because Judge Dawson, the presidentially appointed Tax Court judge who “adopted” the opinion described the opinion as he wrote as one written by STJ Couvillion. The fight went up to the Supreme Court with the taxpayer ultimately able to show that the opinion of the Tax Court was not the original proposed opinion.

In the case of Lander v. Commissioner, Docket No. 25751-15L, STJ Guy wrote a proposed opinion on July 8, 2019, in which he determines that the Landers cannot litigate the merits of their tax liability in Tax Court in a CDP case because, even though they did not receive the statutory notice of deficiency in time to petition the Tax Court, they made an audit reconsideration request to the IRS after the default assessment of the liability and after the Examination Division of the IRS denied their audit reconsideration request, the Landers appealed the denial to the Appeals Office where they received partial relief. Judge Guy determines that their trip to Appeals as part of the audit reconsideration process provided them with a prior opportunity to have the merits of their case heard even though the audit reconsideration process does not lead to an opportunity to go to Tax Court to contest the determination by the IRS.

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IRC 6330(c)(2)(B) sets out the ability to litigate the merits of the underlying liability in a CDP case. It says:

The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability. (emphasis added)

Treasury Regulation 301.6330-1(e)(3), Q&A-E2, provides that “An opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability” (emphasis added).

The regulation can be read so broadly that it would basically preclude anyone from litigating the merits of the liability since it’s possible to posit the opportunity to get to Appeals in almost all cases including the Landers’ case. The IRS regularly takes the position that an opportunity to go to Appeals prevents the Tax Court from hearing the merits. However, Judge Guy seems to find it important that the Landers availed themselves of the opportunity to go to Appeals. If that’s where his decision rests, and not upon the opportunity to go to Appeals which exists for everyone assessed in their position, then the case serves as a reminder of the trap a taxpayer can fall into if the taxpayer actually goes to Appeals during the audit reconsideration process.

Despite the broad language of the statute and regulation, the Tax Court has sometimes considered whether a taxpayer actually received Appeals review. A couple of earlier cases brought under the small Tax Court procedure did not deny the taxpayer the opportunity to litigate the merits of the liability during a CDP case following audit reconsideration. In Canaday v. Commissioner, T.C. Summary Opinion 2015-57 and Crouch v. Commissioner, T.C. Summary Opinion 2009-143, the IRS appears to have made a similar argument to the one in Landers. The taxpayers were audited and then requested audit reconsideration, which was disallowed, before later requesting a CDP hearing in response to a levy notice. In Canaday, Judge Gerber rejects the IRS argument of preclusion, because taxpayer’s previous contesting on the merits was not before Appeals. And in Crouch, Chief Special Trial Judge Panuthos relies on the audit reconsideration process being contained within the centralized reconsideration unit in Examinations and thus not being an independent review of the merits by Appeals. However, both taxpayers had an opportunity to go to Appeals following their audit reconsideration denial.

The Canday and Crouch cases are instructive because they deal with audit reconsideration, but I do not mean to suggest that the Tax Court ignores the prior opportunity language. In multiple other cases, the Court has quoted the stature or regulation and foreclosed merits review due to a prior opportunity for Appeals review.

Although the proposed opinion recounts the actual trip that the Landers made to the Appeals Office, it’s not an actual trip that always matters in prior opportunity cases. What matters, according to the IRS and numerous prior opinions, is the opportunity to go to Appeals to dispute the liability. The IRS could read the Landers’ case as signaling the end of merits litigation in deficiency cases since every taxpayer who does not actually receive the statutory notice of deficiency sent by the IRS and who, as a result of the failure to receive the notice fails to petition the Tax Court, will have an assessment made against them and will have the post assessment remedy of audit reconsideration including the right to visit Appeals. Since every taxpayer had a prior opportunity to go to Appeals, they do not, according to the broader view of the proposed opinion in Landers, have the opportunity to litigate the merits of their liability in a CDP case.

The broader view of the result here brings the taxpayer’s rights back to the same rights they had regarding the post assessment, pre-payment litigation of the merits of their liability to the time prior to July 21, 1998, when the Restructuring and Reform Act of 1998 added IRC 6320 and 6330. Could this be what Congress intended? The more narrow view brands the taxpayer as someone who made a bad mistake by pursuing an administrative remedy instead of waiting for CDP. The better place to land would be to allow taxpayers who did not have a prior opportunity to contest the merits of their liability in court to come on into Tax Court and contest it there. Getting to the better place would require revisiting earlier Tax Court precedent and challenging the regulation.

The IRS has written the CDP regulations and the Tax Court and some Circuit Courts have interpreted those regulations to restrict the taxpayer’s right to litigate the merits of the underlying liability that the taxpayer never had a right to litigate prior to assessment to the point that the right is almost gone if not gone. In 1998 Congress seemed concerned that a taxpayer could find themselves in a situation in which they owed tax yet never had an opportunity to contest the tax in court. We have now evolved to the situation where the taxpayer’s only right to contest the tax in many cases is to do so in an administrative hearing. Taxpayers had that right prior to the change in 1998. Why would Congress have gone to the trouble of putting in a provision giving taxpayer rights to contest the merits of a liability they never previously had the ability to contest in court if Congress intended us 20 years later to end up back in precisely the situation that existed prior to the legislation?

We have blogged before about Lavar Taylor’s attempts to fight this result in the penalty area. He lost. We have blogged about other cases in which taxpayers were denied the right to contest the merits when they previously had no opportunity to go to court prior to the assessment.

In IRM 5.20.8.8.4, in a provision regarding assessable penalties made under IRC 6700, 6701 and 6702, the IRS has even gone so far as to say that the taxpayer has no right to litigate the underlying merits of those penalties in a CDP case because the taxpayer could pay 15% and litigate the penalty. While some taxpayers would need to pay only a small amount, others with the fraud tag could have to pay large amounts making this result similar to the I rule which stands as a bar to litigation – the bar Congress seemed to want to get around with CDP.

The proposed opinion in the Lander case not only stops the Landers from litigating the merits of the liability assessed against them in which they did not have the opportunity to go to Tax Court prior to the assessment, it paves the way for the IRS and the Tax Court to stop any taxpayer from litigating the merits since they have the opportunity for an administrative appeal. Even if the Tax Court in Landers seeks to make a distinction between taxpayers who visited Appeals with no right to litigate an adverse determination there from those who chose not to visit Appeals, the language of the regulation still seeks to answer the question with opportunity and not action. It could be that only cases not involving a statutory notice of deficiency, such as the case of Hampton Software, and in which audit reconsideration does not apply will be the small subset of cases in which merits litigation in CDP case will continue to exist. Maybe the opinion signals that if a taxpayer does not go the audit reconsideration route and end up in an administrative hearing in Appeals, the taxpayer may still seek to litigate the merits in the Tax Court but that’s not the way the regulation reads nor, I suspect, the way the IRS will interpret and litigate the issue. Let’s strike down the regulation and interpret the language of the statute which says “did not otherwise have an opportunity to dispute such tax liability” to mean did not have a chance to dispute the liability in court. Once you carefully look at the administrative scheme following most assessments, the opportunity to dispute the liability in Appeals exists in most situations including the situation in Landers which seems to be exactly the situation that concerned Congress in the first place. If the Tax Court is interpreting the statute to mean those who availed themselves of the opportunity to go to Appeals, it is already narrowing the plain language of the statute. Why not go all the way. The middle ground is a trap for the unwary and a place that makes neither taxpayers nor the IRS happy. If the IRS and the courts do not change the current status, a legislative change would be appropriate.

Interest and Penalties on Restitution-Based Assessments

On June 27, 2019, the Office of Chief Counsel, IRS published Notice CC-2019-004 to update a notice it issued eight years ago shortly after the IRS was given permission by Congress to make assessments based on restitution orders. We have written about assessments based on restitution orders before here, here and here. The idea to allow the IRS to make assessments based on these orders improved the process for handling the civil side of criminal cases. Before the change in the law, the IRS had to go through the entire deficiency process before it could begin the collection process. Many taxpayers who go through the criminal process already have a significantly diminished ability to satisfy any subsequent assessment of the tax relating to the crime. For those taxpayers who did have the post criminal process ability to pay the tax, the sometimes multiyear process needed by the IRS to achieve an assessment further winnowed the group with an ability to pay.

So, in general, the innovation of restitution-based assessments greatly improved the process; however, these assessments have limitations and almost 10 years after these types of assessments were approved, the limitations are still being refined. This notice addresses limitations on restitution-based assessments when it comes to interest and penalties. Keep in mind that although Congress granted the IRS the ability to make an assessment of tax after the imposition of a restitution order it did not prevent the IRS from continuing to use its traditional bases for making an assessment and those traditional bases could fill the gaps left by restitution based assessments in those situations in which pursuing the additional steps to assessment would make good sense.

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In its original notice regarding restitution based assessments, Notice CC-2011-018, the IRS took the position that underpayment interest under IRC 6601 would accrue on the restitution assessment. In Klein v. Commissioner, 149 T.C. No. 15 (2017), blogged here, the Tax Court disagreed. The new notice states:

Consistent with Klein, if a taxpayer challenges in litigation the accrual of interest on an amount of restitution assessed under section 6201(a)(4)(A), the interest should be abated.

Does this mean that taxpayers who do not challenge the imposition of this interest in litigation must still pay it? Is this an example of Sludge where the IRS knows that it shouldn’t do something but refuses to establish the administrative process for fixing the problem, forcing taxpayers and the courts to do that work for them? I do not understand why the IRS would only eliminate the accrual of this interest in litigation and not just do it or at least do it upon an administrative request by the taxpayer. Perhaps readers will comment on why the IRS has adopted this position which will only benefit taxpayers who bring an action against the IRS in court.

In the following sentence the IRS limits the situations in which it will abate the accrued interest to those situations in which the restitution order does not include interest. I do not know the percentage of restitution orders that mention interest. Obviously, this is something that the IRS would want to work with the U.S. Attorneys around the country to insure is included in restitution orders. Usually, taxpayers would have a very limited ability to keep this language out of the restitution order. So, I see it as a matter of educating the prosecutors to make sure the language appears in the restitution order. If prosecutors become sufficiently educated on the subject, the IRS may have a means of circumventing the adverse decision in Klein or at least setting up for additional litigation over whether 6201(a)(4)(A) allows the assessment of accrued interest.

The new notice does refer back to the original notice on the issue of interest accruing under 18 USC 3612(f) and continues to take the position that even though the United States can seek interest on the restitution ordered amount the IRS cannot assess interest under that provision. The Department of Justice could, however, go after the person to obtain this interest.

The Notice next turns to the failure to pay penalty. For taxpayers assessed in the traditional IRS ways, the making of the assessment will trigger the penalty which runs at .5% per month up to a total of no more than 25% if the assessed amount remains unpaid for 50 months. In Klein the Tax Court also held that the IRS lacks authority to assess and collect this penalty based on a restitution assessment. The penalty applies to the failure to pay the tax required to be shown on a return; however, the restitution assessment is not an assessment of tax. So, the Notice provides that “the failure to pay penalty does not apply to an amount of restitution assessed under section 6201(a)(4)(A).”

Again, the Notice provides that if the restitution order makes this penalty a component of the restitution order “the taxpayer is liable for the failure to pay penalty included in the order.” The Notice notes that these situations will be rare.

Without data regarding how much the IRS collects on restitution orders, it’s hard to say how much the limitation on the collection of interest and penalties based on restitution orders impacts the overall collection of tax liabilities. Because my experience trying to collect from people who have gone through the criminal tax process suggests that collection from these individuals often results in low yields, I think that the limitation on the ability of the IRS to collect certain interest and penalties based on the restitution order does not negatively impact the Service in any significant way. For those individuals for whom it identifies a continued ability to pay it can go through the traditional means of making an assessment while pursuing collection of the tax it has assessed as a result of the restitution order.

The new notice brings the guidance of the Service into line with the decision of the Tax Court. The Tax Court’s decision makes sense. For those individuals assessed between 2010 and the timing of this notice, I expect that it will be difficult to get the Service to abate the interest and penalties it now acknowledges it should not have made. Some of these individuals may be entitled to a refund. Others will want the assessments abated in order to reduce the amount the IRS collects from them. Some will be so judgment proof that this may not matter.

11th Circuit Affirms Tax Court Decision Regarding Fraud by Preparer

The Eleventh Circuit, in Finnegan v. Commissioner, No. 17-10676 (11th Cir. 2019), aff’g T.C. Memo. 2016-118, affirmed the Tax Court’s decision that the statute of limitations period for assessment remained open due to the fraud of the preparers with the intent to evade taxes. Les blogged the earlier decisions regarding the case here and here. The Eleventh Circuit noted the adverse decision of the Federal Circuit which we have discussed here. For the reasons discussed below, the 11th Circuit’s decision does not provide support for the proposition that fraud by someone other than the taxpayer can hold open the statute of limitations nor does it provide support for those arguing that fraud by a third party cannot hold open the statute of limitations. It provides support for the proposition that a taxpayer should timely raise an argument at the lower court if it wants to preserve the argument on appeal. Both sides must wait for the next case to see where this issue will go.

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The Finnegans hired someone to prepare their returns. The individual they hired put false information on their returns which they did not catch. Eventually, the IRS caught the return preparer and successfully prosecuted him. After prosecuting the preparer, the IRS looked to the Finnegans to pay the deficiency in tax that had accumulated over eight years of fraudulent return preparation. The Finnegans argued that the statute of limitations had long since expired by the time that the IRS sought to get them to pay. The IRS argued that the fraud on the return held open the statute of limitations. The 11th Circuit sustains the decision of the Tax Court that fraud by the preparer can hold open the statute of limitations.

The case began as many fraud cases do – with an informant. The taxpayers chose a preparer who, together with associates, prepared about 800 returns a year for 11 years basically all of which had similar fraudulent features. The preparer used large partnership losses to generate lower tax liabilities. The features used by the preparer in the bulk of the returns prepared existed in the Finnegans’ returns. When the IRS cracked the preparer’s fraudulent scheme, it brought a criminal action against him to which he pled guilty and then he started singing in order to reduce his sentence. He testified that “[e]ach and every one” of the returns prepared “contained[ed] some fraudulent entries.”

At the Tax Court trial phase, the taxpayers did not challenge the court’s precedent on the effect of third party fraud on the statute of limitations. They conceded that the case of Allen v. Commissioner applied but argued that the IRS lacked sufficient evidence of the fraudulent nature of their return. After the parties tried the case and submitted their briefs, the Federal Circuit decided BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015). The IRS notified the court of the decision which took the opposite position as Allen v. Commissioner, 128 T.C. 37 (2007)(the Tax Court’s precedential opinion regarding fraud by the preparer). Petitioners did not contend the Tax Court should revisit Allen after the adverse Circuit precedent in BASR.

After the Tax Court found for the IRS on the statute of limitations issue, petitioners obtained new counsel. The new lawyers filed a motion for reconsideration arguing that the Tax Court erred in not revisiting the Allen decision and that the Tax Court should overturn its decision in that case. To avoid the problem that the taxpayers had waived this argument before they arrived on the scene, the new lawyers argued that it would have been unethical for the taxpayers to argue that Allen did not apply until the Federal Circuit ruled in BASR. The Tax Court ultimately rejected this and similar arguments in the motion for reconsideration.

On appeal the taxpayers argued that the fraud exception is only triggered by a taxpayer’s actions and that the Tax Court erred by admitting the return preparer’s out of court statements. With respect to the Allen case the 11th Circuit found that the taxpayers waived this argument. After explaining in some detail why it found the taxpayers waived the argument, the court stated that taxpayers’ best argument “is that we should exercise our discretion and not enforce the waiver doctrine.” The court notes that it has provided five special circumstances in which it will consider a new argument on appeal. It works through those five exceptions and finds they do not apply. Then the court finds that the taxpayers’ argument regarding the Tax Court’s decision to admit the out of court statement was not an abuse of discretion.

Because it sustains the Tax Court on a procedural rather than a substantive basis, the Finnegan case does not provide much support for either the IRS or those seeking to keep a third party’s fraudulent actions from suspending the statute of limitations on assessment. This issue will continue to cause parties to seek circuit level review. The case makes clear that a frontal attack on Allen should occur at the Tax Court level. No big surprise there. The 11th Circuit provides no clues how it might have ruled had taxpayer raised the issue at the Tax Court.

Taxpayer Barred from Raising TEFRA Adjustments in Collection Due Process Hearing

The case of Davison v. Commissioner, T.C. Memo 2019-26 raises the issue of contesting the merits of adjustments contained in a Final Partnership Administrative Adjustment (FPAA). The Tax Court determines that Mr. Davidson cannot raise the merits of those issues which resulted in computational adjustments to his return. He argued that he never had a chance to raise those issues. Essentially, the court says too bad. He also sought to raise the issue of the penalty imposed on him due to the amount of the adjustments. The court signals that he might have been able to raise that issue had he done so when he made his Collection Due Process (CDP) request but having failed to raise the separate penalty issue when he submitted his request he could not do so during the Tax Court proceeding.

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Mr. Davison was a partner in a partnership that had an interest in two other partnerships. The IRS audited the partnerships he did not directly own and made adjustments. Those adjustments flowed through to his individual return through the partnership interest he did own. Although the IRS sent the FPAA regarding the adjustments to the tax matters partners of the two partnerships, no one petitioned the Tax Court.

Years later as the IRS began to collect from him Mr. Davison requested a CDP hearing and sought in the hearing to raise the issue of his underlying liability. The Settlement Officer in Appeals told him that he could not do so and he ultimately petitioned the Tax Court. In Tax Court he tried to raise the issue of the liability arguing that he had not previously had the opportunity to litigate the merits of the tax assessed against him. As with most things involving TEFRA, things get tricky.

This is not the first case involving this issue which does not surprise me given that two decades have passed since Collection Due Process came into existence; however, I had not noticed this issue before. I thought that perhaps others may not have noticed the issue since it does not arise with great frequency in litigation. The prior decisional law drives the outcome in this case.

The Court states:

In Hudspath v. Commissioner, T.C. Memo. 2005-83, aff’d, 177 F. App’x 326 (4th Cir. 2006), we addressed whether a taxpayer may contest his underlying income tax liability in a CDP case to the extent that this liability was based on computational adjustments resulting from a TEFRA proceeding. The case involved only income tax assessments for the taxpayer’s 1996 and 1997 taxable years that were attributable to computational adjustments resulting from two FPAAs. Those FPAAs had been the subject of a TEFRA proceeding that this Court ultimately dismissed for lack of jurisdiction. We held that pursuant to section 6330(c)(2)(B), the taxpayer was precluded from challenging the existence or amount of his 1996 and 1997 underlying income tax liabilities because he had had the opportunity, in the TEFRA proceeding, to challenge the partnership items that were reflected on the two FPAAs.

The instant case is indistinguishable from Hudspath. Pursuant to section 226(a) and (b), within 90 days of the mailing of an FPAA a tax matters partner may file a petition with this Court or other referenced Federal court for readjustment of the partnership items; and if the tax matters partner fails to file such a petition, any notice partner may file a petition for readjustment within 60 days after the 90-day period has closed. Here, the parties stipulated that on October 4 and 20, 2010, the IRS issued the Cedar Valley FPAA and the TARD Properties FPAA, but no petition was ever filed pursuant to this statutory prescription challenging either FPAA. These defaulted FPAAs then became binding and conclusive upon petitioner, allowing the IRS to make the computational adjustments to income that petitioner desires to place in dispute. See sec. 6230(c)(4); Genesis Oil & Gas, Ltd. v. Commissioner, 93 T.C. 562, 565-566 (1989). It is undisputed that petitioner’s income tax liability for 2005 was attributable solely to the computational adjustments resulting from the defaulted Cedar Valley FPAA and the defaulted TARD Properties FPAA. Accordingly, petitioner’s “earlier opportunity to dispute his liability” for income tax for 2005 was the opportunity to commence a TEFRA proceeding challenging the FPAAs upon their issuance.

Mr. Davison’s problem with this analysis stems from his lack of knowledge of the earlier opportunity to go to Tax Court. He complains that he never received notice of the FPAA and had no voice in whether the partnerships would file a Tax Court petition. He contends that he only learned about the FPAAs after the time to petition the Tax Court had passed. The IRS did not put on any evidence to contest his statement on this point – not that it was obligated to do so. There was also no indication that the IRS knew he was an indirect partner of the entities to which it issued the FPAAs. The court explained why this did not matter with respect to the issue of whether Mr. Davison could raise the underlying merits in the CDP case:

Under section 6223(h)(2), the tax matters partner of Six-D [this is the partnership in which Mr. Davison owned an interest] was required to forward copies of the Cedar Valley FPAA and the TARD Properties FPAA to petitioner. Furthermore, in any event, “[t]he failure of a tax matters partner, a pass-thru partner, the representative of a notice group, or any other representative of a partner to provide any notice or perform any act * * * [such as an appeal to an FPAA] does not affect the applicability of any proceeding or adjustment * * * to such partner.” Sec. 6230(f); Kimball v. Commissioner, T.C. Memo. 2008-78, slip op. at 9. Because petitioner indirectly held interests in Cedar Valley and TARD Properties and section 6223(c)(3) is of no avail here, the IRS was not required to provide him individual notice of the FPAAs.

Therefore, we find that petitioner had a prior opportunity to challenge his liability for income tax attributable to the computational adjustments resulting from the defaulted TARD Properties FPAA (as well as the defaulted Cedar Valley FPAA) and is precluded from challenging this liability in this case.

So, Mr. Davison does not have the opportunity to raise the merits of the partnership adjustments in his CDP case. While harsh, this result is the same result outside of CDP and is a feature of the way TEFRA operates with respect to certain affected items. The case does not discuss what possibilities of success Mr. Davison might have had if the court had allowed him to contest the underlying liabilities. It seems that the tax matters partners would have raised the issue if a meritorious case existed. He was removed from those partnerships and would likely have had a difficult time marshalling the evidence to contest the liabilities even if he had been given the opportunity.

In addition to contesting the underlying liability, Mr. Davison sought to contest the accuracy related penalty imposed upon him for one of the years because of the amount of the liability. The court noted that the partnership should also contest the penalty; however, the TEFRA rules that prevent him from contesting the partnership adjustments would not keep him from contesting the application of the penalty in a refund action after he paid the penalty. Unfortunately, he runs into another barrier.

Mr. Davison raised the penalty issue for the first time in his Tax Court petition having failed to mention it in his CDP request. The court stated:

We find that he did not properly raise this issue below and therefore is precluded from challenging his liability for the penalty in this proceeding.

This result flows directly from the CDP regs and serves as a reminder of the need to anticipate all arguments in submitting the Form 12153 at the beginning of the CDP case. The IRS should receive the opportunity to consider all issues the taxpayer seeks to raise as it considers the case during the administrative phase. The court does not want to see an issue for the first time that the taxpayer has failed to previously mention.

How the Government Shutdown Impacted the Tax Court Filing Deadline

Every year the National Taxpayer Advocate prepares an objectives report to Congress and submits it at the end of June. This year’s report contains a discussion of the impact of the longest government shutdown in history on the Taxpayer Advocate Service. We will never really know what happened to everyone trying to petition the Tax Court during the shutdown but it would be interesting to see a report on that as well. We have experienced a significant “climate” change in the government over the past couple of decades and that change has resulted in increased shutdowns with all of the issues resulting therefrom.

We have written about the government shutdown and the Tax Court previously on many occasions. Professor Bryan Camp provided us with a four part series back in January speculating on the impact of the shutdown. See the posts here, here, here and here. The first post directly addresses the impact of the Tax Court’s decision in Guralnik v. Commissioner on government shutdown days. Les wrote a post about the shutdown and the guidance available. On New Year’s Eve I wrote a post reminding readers not to forget Guralnik and Parker during the shutdown. I also wrote a post in May about the shutdown and the odyssey of the petition filed in one case and how that odyssey impacted the court’s jurisdiction.

Now we have a live case involving the shutdown with a motion to dismiss for lack of jurisdiction for late filing a petition during the shutdown, a court order issued two days after the filing of the motion and a government response. I am unsure if this will result in an opinion that anyone can cite to in the future but knowing about the order and the response may assist others with this situation stemming from the most recent shutdown or future shutdowns. It would be nice if Chief Counsel’s office put up a Notice setting out its position on government shutdowns and time frames. Chief Counsel signaled its position in an earlier case which we blogged here. As I suggested in the first paragraph, the last government shutdown has probably not yet occurred.

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Angela Marie Henderson wants to receive innocent spouse status. On October 25, 2018, the IRS sent her a notice of determination denying her the requested status. She sent a petition to the Tax Court which it filed on February 4, 2019 in an envelope bearing a postmark of January 25, 2019. January 25, 2019 was a Friday. That date is 92 days after the mailing of the notice of determination. The 90th day, Wednesday, January 23, 2019, was not a Saturday, Sunday or holiday, but both January 23 and January 25 were days when the United States government, including the Tax Court, was shut down because of the impasse over the budget. The shutdown began on December 22, 2018 and ended on Monday, January 28, 2019. The Tax Court reopened on January 28 with the rest of the federal government. (The Tax Court was shutdown for 31 days and the IRS for 35 days. Because the Tax Court has some non-appropriated funds that it obtains through the collection of fees, it has the ability to remain open for a short period of time during a shutdown when agencies like the IRS must close.)

On June 12, 2019, the IRS filed a motion to dismiss for lack of jurisdiction because Ms. Henderson filed her petition more than 90 days after the issuance of the notice of determination denying her innocent spouse request. On June 14, 2019, Chief Judge Foley, known for his brevity, issued a slightly more than one page order directing Respondent to “discuss fully his position as to the application, if any, of Guralnick to this case.” The swiftness with which the court issued this order surprises me somewhat and suggests that the court had its antenna up for motions to dismiss filed during the shutdown. The citation to the Guralnick case immediately drew my attention given the discussion of that case and its possible impact on the Tax Court’s jurisdiction in our prior posts.

The case also brings back memories of the 16-0 opinion by the Tax Court regarding the argument by the tax clinic at Harvard that the court had jurisdiction to hear a late filed CDP petition. For those who do not remember the Guralnik case, it involved a situation in which petitioner’s counsel went to FedEx on Friday the 13th and purchased the most expense delivery service that FedEx offered, next day-first thing in the morning. The petition in a CDP case was due on Sunday, February 15. Monday the 16th was a federal holiday for President’s Day and on the 17th the Tax Court closed because it snowed in the District of Columbia. As a result the petition arrived at the Court on Wednesday, February 18th. The IRS moved to dismiss because the petition was late. The Tax Court rejected petitioner’s argument regarding timely mailing because the FedEx delivery service chosen by petitioner did not appear on the IRS list of approved delivery services because the IRS had not updated the list in 11 years (it did so while the case was pending in an interesting twist of fate.) The Tax Court rejected the determination of the Special Trial Judge who initially heard the case that a snow day equated to a holiday allowing the filing on the day after the “holiday.” As mentioned above the Tax Court rejected the argument of my clinic that the 30 day time period for filing a CDP petition was not a jurisdictional time period thus allowing the court to accept the case if it determined equitable tolling was appropriate (but see our post on the recent decision of the D.C. Circuit accepting that argument with respect to the identical language of the whistleblower statute.) Finally, after going through all of the reasons it could not accept the case, the Tax Court allowed the Guralnik case to proceed under the reasoning that since it did not have a rule it could look to the federal rules of civil procedure. When the clerk’s office is closed, the rules of civil procedure allow the act to be performed on the next day. Bryan Camp wrote an excellent post explaining the holding in Guralnik. Now Chief Judge Foley wants the IRS to tell the court what the IRS, which did not appeal Guralnik, thinks of the application of that opinion to the closing of the clerk’s office due to the shutdown.

Although Chief Judge Foley’s order gave the IRS until July 8, 2019 to file a response, it did so on June 26, 2019. Ms. Henderson requested place of trial in Boston. So, the original motion and the response were filed by the Chief Counsel’s office in Boston. They made an eight-page response containing 15 numbered paragraphs. The first 14 paragraphs contain a recitation of the facts and the law with minor references to the Guralnik case. Reading those paragraphs I drew the conclusion that the IRS continued to believe the Tax Court lacked jurisdiction in this case despite the position it took in Parker.

Then, in paragraph 15, the IRS stated the following:

As a result, in this case, the deadline for timely mailing the petition to the Court was the first day in which the clerk’s office became accessible following the government shutdown, Monday, January 28, 2019. Because the petition in this case was postmarked before that date, petitioner benefits from the ‘timely mailed, timely file’ rule in section 7502 and her petition was timely.

Now we have an interesting case. This is the first case of which I am aware in which the IRS has acknowledged the impact of Guralnik on filing deadlines covered by a government shutdown although it had signaled this result to those who read the case of Parker v. Commissioner which we discussed in the blog post cited earlier. Reading the response one almost leaps to the conclusion that the author was directed to create an ending different than the one he wanted or planned to create. Either that or the author is a fan of novels with a twist as the ending. As I mentioned before, the position taken by the IRS here should go into a notice so that the world, and all the attorneys in Chief Counsel’s office, know the position of that Chief Counsel’s office will take in situations when a petitioner files a petition during a time the Tax Court clerk’s office is closed. Not all representatives or Chief Counsel attorneys read court orders or this blog.

I do not know how many other petitioners might occupy the same position as Ms. Henderson. If she is the only person who late filed a petition during the government shutdown, I am surprised. More than 2,500 dockets preceded hers in 2019. Although the Tax Court quickly issued the order requesting the views of the IRS in this case, more than two weeks have passed since the IRS responded and the Court has not acted further on this case. Ms. Henderson is now ably represented by my fellow clinician in Boston, Luz Arévalo of Greater Boston Legal Services. This is a case to watch. I hope it will result in pronunciations from the court and the IRS that will make it easy for others to know the impact of a closure of the clerk’s office on their ability to obtain jurisdiction in the Tax Court.