Notice is a Big Deal When Dealing With Tax Debts in Bankruptcy

A pair of recent cases demonstrate the importance of notice.  In one case where the outcome shocked me, the IRS loses out on a $90,000 trust fund recovery penalty.  In the second case, which provided a routine result still worth the reminder, the purchaser of property loses in an effort to remove the federal tax lien in a quiet title action.

Notice to the government when trying to obtain relief from something the IRS has done or seeks to do can make or break a case.  Generally speaking, a fair amount of protection exists for the IRS regarding notice, because it needs protection in order to insure that the information gets to the right place in time for the IRS to react properly to the request of a third party seeking to cut off rights the IRS would seek to assert or preserve.  Because it receives such a volume of mail, establishing systems that allow the IRS to properly recognize and respond to important documents plays a huge role in having the system work properly.  One of these cases demonstrates what happens to the IRS when the notice does not arrive at the places set up to respond, while the other cases demonstrates what happens when the party seeking relief fails to follow the very precise rules for providing notice to the IRS when seeking to cut off its lien rights.


Taxpayer Escapes Liability As Court Finds Adequate Notice of Objection to a Proof of IRS’s Claim

In Nicolaus v. United States, No. 19-1155 (8th Cir. 2020) the Eighth Circuit reverses the bankruptcy and district courts handing a victory on procedural grounds to a debtor in a case in which the IRS filed a claim for the Trust Fund Recovery Penalty (TFRP).  We don’t know if the TFRP assessment against Mr. Nicolaus should exist on substantive grounds because the Eighth Circuit determines that the failure of the IRS to respond to his objection to the claim provides a basis for disposing of the claim.  The issue in the case stems from an interpretation of the bankruptcy rules.  As I mentioned above, the outcome shocks me and, I am sure, the government.

Mr. Nicolaus filed bankruptcy.  The IRS timely filed a proof of claim.  Mr. Nicolaus objected to the proof of claim and sent notice of the objection to the IRS at the address listed on the proof of claim.  Although the Eighth Circuit’s opinion does not state this address, it would be an address at the IRS either in the local Iowa office or the centralized bankruptcy office in Indianapolis.  Nothing happened.  After 21 days and no response from the IRS, the bankruptcy court sustained the debtor’s objection and disallowed the claim.  A year later, after the bankruptcy case had closed and Mr. Nicolaus had long since celebrated his easy victory over the large liability, the IRS filed a motion to vacate the order disallowing the claim, based on a lack of personal jurisdiction because of the improper service of the objection to claim.  While it may seem harsh to have a motion filed a year later, the timing does not impede the ability of the IRS to set aside the disallowance and probably reflects the amount of time the case took to cycle from the bankruptcy into collection mode, where someone at the IRS actually took notice of the disallowance.

The bankruptcy court agreed with the IRS that service of the objection was improper and it vacated the order disallowing the claim.  Because of the type of debt, the discharge Mr. Nicolaus received could not discharge the liability which meant that the IRS could come after him post-discharge to collect the debt.  B.C. 507(a)(8)(C) provides that a debt for taxes a taxpayer collects on behalf of the IRS receives treatment as a priority claim no matter how old the debt.  If a debt has priority status, an individual cannot discharge it based on the exception to discharge in B.C. 523(a)(1)(A).  So, the issue of the disallowance of this debt has a significant impact on Mr. Nicolaus.

At the time of filing the objection Federal Rule of Bankruptcy Procedure 3007(a) provided “[a]n objection to the allowance of a claim shall be in writing and filed.  A copy of the objection with notice of the hearing thereon shall be mailed or otherwise delivered to the claimant, the debtor or debtor in possession, and the trustee at least 30 days prior to the hearing.”  I will note that earlier the court described the default occurring after 21 days but don’t focus on that issue.  Footnote 2 of the opinion notes that “[W]ith an effective date of December 1, 2017, an amendment to Rule 3007(a) now expressly requires objections to a federal agency’s claim to be mailed to the Attorney General and the local United States Attorney’s Office. The pre-amendment version applies here, however, because Nicolaus filed his objection before the effective date of the 2017 amendment.

At issue in this case is whether the debtor needed to serve the Attorney General of the United States and the local United States Attorney’s Office under the prior version of the rule.  The lower courts looked at Bankruptcy Rule 9014(b) governing service in contested matters and found that it required service in the manner required by Bankruptcy Rule 7004, which clearly requires service on the AG and US Attorney; however, the Eighth Circuit noted that in 9014(b) the key word was “motion” triggering this type of service and the objection was not a motion.  The Eighth Circuit did not find the advisory notes to the rules controlling but rather the plain language of the rule as it read prior to its amendment.  Accordingly, it reversed and Mr. Nicolaus once again has his victory which through this litigation became a hard earned victory, albeit on procedural rather than substantive grounds.

The amendment to the rules almost certainly means that the government will not seek a ruling from the Supreme Court on this issue.  The rule appears to have been changed to partially resolve a split in authority on how to interpret 3007, with different bankruptcy courts taking contrary approaches. Compare In re Hensley, 356 B.R. 68 (Bankr. Kan. 2006) (holding that service of a claim objection need not follow Rule 7004) with In re Boykin, 246 B.R. 825 (Bankr. E.D. Va. 2000) (holding the reverse). In addition, the Advisory Committee notes for the 2017 amendment suggest a need to centralize and standardize service on the government, stating that “the size and dispersal of the decision-making and litigation authority of the federal government necessitate service on the appropriate United States attorney’s office and the Attorney General[.]”Not many cases will still exist from before 2017.  So, Mr. Nicolaus may be the last beneficiary of the Eighth Circuit’s interpretation of the bankruptcy rule.

Purchaser Loses As Failure to Follow Notice Rules Led To No Extinguishing of Tax Lien

In contrast to the victory achieved by Mr. Nicholas, another case decided on July 6, 2020 went the opposite way based on a failure to give proper notice to the IRS.  In LN Management LLC Series 7241 Brook Crest v. Brandon Jhun, No. 2:14-cv-01936 (D. Nev. 2020) the District Court determined that the purchaser of property could not quiet title to remove the IRS lien.  The plaintiff purchased property at a non-judicial foreclosure sale.  Prior to the foreclosure sale the IRS assessed taxes against the owners of the property for 2008 and 2009 on October 12, 2009 and June 7, 2010, respectively.  The IRS properly recorded its notice of federal tax lien on May 18, 2011.  I previously discussed the notice requirements of 7425 here

The property owners failed to pay their homeowners association fees, and the HOA brought a foreclosure action in 2013.  The HOA did not mail foreclosure notices to the IRS.  The plaintiff bought the property.  At some point, presumably after purchase, the plaintiff noticed the federal tax liens encumbering the property and brought this action.  The law is so well settled on this issue that it’s hard to know why the purchaser bothered with this suit but maybe it hoped for the same luck as Mr. Nicolaus.

In order to extinguish the federal tax lien in a non-judicial foreclosure sale when the IRS has properly filed notice of the lien more than 30 days before the sale, the party bringing the action must give notice to the IRS in the manner described in IRC 7425(b)(1), or the sale will not extinguish the federal tax lien.

A party trying to extinguish the federal tax lien under these circumstances must follow very specific steps for notice.  Once the IRS raised its objection, the plaintiff did not even respond.  At that point it must have realized the futility of its case.  Because the IRS did not seek to foreclose its lien or respond to alternate grounds for relief, the court granted the motion for summary judgement on the quiet title portion of the case but remanded the parties to discuss the remaining issues.

The plaintiff should have performed a title search before purchasing the property, just as the HOA should have done before filing its complaint.  The purchaser may have thought that it bought the property for a bargain.  By now, it has realized that the bargain just embroiled it in a quagmire.  Purchasing property encumbered by the federal tax lien requires careful planning.  That obviously did not occur here because of the failure of notice in the specific manner required by the statute in order to give the IRS the opportunity to participate in the foreclosure proceeding.

Update on the Tax Court

At the ABA online Court Procedure Committee program on July 22, Chief Judge Foley provided some details concerning recent events at the Tax Court. He started by mentioning the hearings that had occurred the previous day in the Senate Finance Committee regarding the two individuals nominated to the Court. Those individuals are Alina Marshall who currently works as an attorney at the Tax Court and Christian Weiler, a tax lawyer practicing in New Orleans. At the end of this post you can find their opening statements to the Committee.


Judge Foley stated that the Tax Court cancelled 80 trial sessions this spring due to the virus, 44 regular sessions, 24 small case sessions and 12 special trial sessions. Starting on March 18, 2020, the Tax Court asked the post office to hold its mail which the post office did until the Clerk’s office reopened on July 10, 2020. At that point the postal service delivered 174 boxes of mail to the Clerk plus the Clerk’s office received mail from the private delivery services. During this 113-day period the court issued 83 opinions compared with 71 opinions issued during the 113-day period immediately preceding the Court’s building closure due to the virus.

As previously posted, the Tax Court updated its web site on July 17,2020. The new case management system that the Court previously announced would be implemented in July is now slated for implementation by the end of the year.

Judge Foley talked about the system for conducting trials online which is coming this fall. The pre-trial process will be modified. Limited entry of appearance may occur earlier. Electronic access will be available throughout the trial. The Court is going to put up mock electronic trial videos on its web site starting Monday, July 27. He described these as in the genre of home movies. He also spoke of Tax Court judges becoming more available to Zoom into classrooms and other settings.

Tax Court trials will be open to the public through an audio stream. The Court’s new online FAQ and example videos address this and many other aspects of Zoomgov trials.

Opening Statement of Alina I. Marshall
Nominee for Judge, United States Tax Court

United States Senate Committee on Finance
July 21, 2020

Chairman Grassley, Ranking Member Wyden, and members of the Finance Committee, thank you for holding this hearing to consider my nomination to serve as a Judge on the United States Tax Court. I am grateful to you and your staff for the opportunity to be here today.

My husband Sean, my daughter Elizabeth, and my son Luke are here with me this morning. Their love and support brighten my days and renew my enthusiasm. My parents Jackie and Florin Ionescu, and my inlaws Michele and George Hall and Barbara and David Marshall, are all supporting me remotely and I remain thankful for their patience and encouragement. I am grateful to Chief Judge Foley, the Judges of the Tax Court and the Tax Court family, who have allowed me to work with them on so many challenging and exciting opinions and projects. I also want to thank my generous and supportive friends and neighbors, especially the Walshes.

I am thankful to President Trump for nominating me to serve on the Tax Court. This chance to chase my dream is truly humbling and a reminder of the opportunities that are uniquely available in the United States. I remain amazed that an immigrant who learned to speak English in the public school system and from Sesame Street would have the chance to meet with you today and, if confirmed, to serve as a Judge. My family’s journey of coming from Romania and building a new life is a tale of the American dream, and the chances and resources given to us inspire me to give back, promote opportunity, and serve others. For much of the last decade, I have had the privilege of serving at the Tax Court.

I have been a member of the Tax Court family since 2010 and have served as Counsel to the Chief Judge since 2013. I have the honor of advising the Chief Judge in the exercise of his statutory duty to review opinions before public release. I also have the privilege of helping with and advising on administrative and policy matters, including as the Court has continued to serve its mission during this pandemic. The Court quickly changed its ways of conducting business, and it has been exhilarating to participate the Court’s adoption of new opinion review, case management, and trial procedures. Given my time at the Tax Court and my experience at both large and small law firms, I believe I would be well-equipped to try cases and dispose of pending motions carefully, accurately, and efficiently if I am confirmed.

The Tax Court is a special place, both because of its feeling of family and because of everyone’s commitment to the Court’s crucial role in supporting the United States’ system of voluntary self- assessment. Everyone works hard to meet the Court’s mission of being “a national forum for the expeditious resolution of disputes between taxpayers and the Internal Revenue Service; for careful consideration of the merits of each case; and to ensure a uniform interpretation of the Internal Revenue Code.” I already seek to serve the Court’s mission by reviewing opinions and advising the Chief Judge, and I believe I could further support the Court’s goals by carefully hearing cases and fairly applying the law to the facts of each case.

Thank you again for your consideration. I look forward to answering the Committee’s questions.

Opening Statement of Christian Weiler
Nominee to be a Judge of the United States Tax Court

Senate Committee on Finance
July 21, 2020

Chairman Grassley, Ranking Member Wyden and to the other Senators on the Finance Committee, thank you for holding this hearing.

I am honored to be nominated to serve as a judge of the United States Tax Court. I would like to also thank my beautiful wife and four children for their love and encouragement throughout my nomination process. I know that I would not be appearing before you without their support.

The role of the Tax Court, albeit limited in scope, is very important. The Tax Court provides a critical independent forum for the resolution of civil tax disputes with the IRS. The Court hears all types of tax cases, which can vary substantially in size and complexity depending on the taxpayer. If confirmed, I pledge to decide all matters in an impartial manner, by applying the facts before me to the relevant provisions of the Tax Code and by also looking to controlling precedent. I genuinely believe the Tax Court serves an important function in safeguarding the fairness of our nation’s tax system.

In my hometown of New Orleans, Louisiana, I have had the pleasure of working with my father and law partner, John Weiler for some fifteen (15) years at the law firm of Weiler & Rees. In working with my father, I have not only had the privilege of being mentored by a truly outstanding tax attorney with unparalleled knowledge and skills; I have also had the privilege of learning from a great human being. By my father’s example, he has shown me how to treat others with respect and kindness in all matters. My father has also shown me the importance of listening to my clients’ problems and how to work alongside them to help guide them to a resolution of their legal issue. In short, I believe the advocacy and personal skills I have acquired while working with my father will serve me well as a judge.

Formed by my strong Christian faith, I believe we are all children of God, and therefore not only do I pledge to serve as an impartial judge, I also pledge to treat all parties and attorneys who may appear before me with respect and kindness.

Also, while the Tax Court hears large and complex tax issues; it most often hears small tax matters filed by self-represented litigants. I am proud of my volunteer work as an attorney with the Southeast Louisiana Legal Services Pro Bono Tax Clinic, where I have gained valuable experience in matters commonly before the Tax Court, such as audits of the earned income tax credit, innocent spouse claims for relief and collection due process appeals. I believe my experience with these specific tax matters will serve me well as a judge.

Finally, if confirmed, I look forward to serving my Country.

Thank you for your time and consideration and I look forward to answering any questions that the committee might have.

Suing to Recover Offset of Tax Refund Against Student Loan Debt

In the case of Nelson v. United States, No. 1:19-cv-00841-EDK (Fed. Cir. June 3, 2020) the Federal Circuit gave a per curiam affirmance of the decision by the Court of Federal Claims dismissing her complaint for lack of subject matter jurisdiction.  Ms. Nelson represented herself seeking to recover her federal tax refund for the years 1988 to 2018 offset to satisfy debt to the Missouri Department of Higher Education.

She initially filed suit in state court in Missouri.  Because she named the Department of Education as a defendant, the case was removed to the United States District Court, which the government will do in essentially every case in which it is sued in state court.  The case there was dismissed because it was barred by the statute of limitations and for other reasons.  The court also granted a motion for summary judgement filed by the Department of Education finding that she “continued to owe money to [the Department of Education] and that [its] continuing efforts to collect that debt [were] justified.”


In the tradition of Elizabeth Warren, Ms. Nelson persisted.  Unfortunately for her, persistence does not equal victory.  In June of 2019 she filed a complaint against the same two parties in the Court of Federal Claims, after her 2018 income tax refund was once again taken to pay past due education loans.  She sought to obtain the return of all of her refunds for a 30-year period, to stop further offset of her refunds, to clear her credit history and to obtain punitive damages for the violation of her 14th Amendment rights.

The Court of Federal Claims dismissed her case for lack of jurisdiction for several reasons.  With respect to the challenge to the offset, it pointed out that IRC 6402(g) “explicitly bars judicial review of [such] action.”  The correct way to attack the offset would have been to sue the Department of Education on the debt itself and not on the offset.  I do not mean to suggest that such a suit would have produced a different result in the end, but she would not have bumped headlong into a bar against litigation.

The Court of Federal Claims dismissed her case for illegal exaction (see prior post here on the meaning of these terms), because of her prior suit against the Department of Education and the result in that suit, which causes issue preclusion in this case and bars her claim.

Finally, the Court of Federal Claims dismissed her case under the 14th Amendment for punitive damages or to clear her credit history because the 14th Amendment “do[es] not mandate payment by the government.”

The Federal Circuit reviews her claims on these various grounds.    First, it agreed that the Court of Federal Claims has no jurisdiction over the Missouri Department of Higher Education.  It also found no jurisdiction against the IRS for offsetting her tax refund based on the Department of Education claim.  This is a point we have discussed before and one that is difficult to explain to clients who come into the office seeking redress for an offset refund against the IRS, thinking that the IRS has failed to give them the refund.  As the court points out, the IRS (or the Treasury Offset Program) is required to offset the funds under IRC 6402(d)(1) upon receiving notice of a past due legally enforceable debt from one of the approved parties in the statute and then IRC 6402(g) bars review of the action.  Finally, it agreed on the issue preclusion aspect of the decision.

This sad result for Ms. Nelson can be traced into the bankruptcy discharge provisions, which make it nearly impossible to discharge student loan debt.  BC 523 (a)(8) prevents an individual from discharging student loan debt:

unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—

(A) (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

So, Ms. Nelson is stuck.  Her federal tax refund will be taken year after year.  Other collection actions will be taken against her to collect this money.  When a debt is excepted from discharge, a debtor faces potentially a lifetime of staring at that debt.  Here, I do not think the statute of limitations on collection will provide much assistance to her because the Department of Education has obtained a judgment.  We don’t learn from this case how she incurred the debt and what happened to the education that caused her to incur it.  The case simply presents the very real and sad situation facing many individuals holding student loan debt.  They cannot meet the near impossible standard to obtain an exception from bankruptcy discharge and cannot show that the educational institution failed to provide the agreed upon education, as some students have successfully argued in for-profit college context.

Ms. Nelson’s case was decided days after President Trump vetoed a bill that would overturn regulations issued by the Department of Education making it more difficult than Obama era regulations to raise the borrower defense.  Congress is currently considering providing relief to student loan borrowers as part of the ongoing COVID-19 response. Because of the large amount of student loan debt, there are significant implications to loosening the ability to obtain relief from student debt.  We have blogged about these issues before here, here and here.  Student loan issues will not go away.  We need to find a way to provide relief for those who deserve the relief in order to avoid cases like Ms. Nelson’s, where we see the 30 year shackles of the debt.  I am not proposing an answer, but it’s a problem that badly needs one.

Timely Requesting a CDP Hearing

Today we celebrate the 7th anniversary of procedurally taxing.  As we have mentioned before, the idea of the blog was the brainchild of Les Book.  Les, Steve and I were, and are, working on the treatise “IRS Practice and Procedure” that Les edits.  From the work we did keeping that treatise updated we decided to put up occasional posts on the new blog site.  From rather modest expectations the blog has grown well beyond our vision of the blog in 2013.  Thank you for joining us in talking, writing and thinking about tax procedure and trying to improve the way we navigate the tax system.  The blog is approaching 3000 subscribers.  Because of tax procedure issues raised by the pandemic, the blog has had many more visits in 2020 than any previous year.

In SBSE-05-0720-0049 the IRS announces changes to IRM regarding the receipt of a request for a CDP hearing.  The changes result from Chief Counsel technical advice memorandum PMTA-2020-02, dated December 12, 2019.  The changes in the IRM take a narrow view of the timeliness of request for a CDP hearing and leave out broader issues of jurisdiction as well as of best practices.

We have discussed this issue previously here, here, here and here.  I wrote an article about this issue in Tax Notes in November of 2018 available here


At one point the IRS took the position that in order to timely request a CDP hearing, the taxpayer had to mail the request to the proper address for requesting a CDP hearing as listed in the CDP notice.  One of the problems with this position stemmed from the CDP notice, which generally contained two or more addresses.  Because the CDP notice serves as much or more as a collection notice demanding payment as it does as a notice of legal rights to a hearing, the notice featured an address where the recipient could mail their payment.  Taxpayers regularly mailed their CDP request to the office listed for mailing payment instead of the office listed for sending the request as discussed here.  Although IRS employees were instructed to quickly resend the request to the appropriate office, this did not always happen.  When the notice reached the correct office after the 30-day period, the IRS argued that the taxpayer should receive only an equivalent hearing.

The PMTA and the changes to the IRM reflect a relaxation of the rule regarding receipt and allow as a timely request the mailing to any address on the CDP notice with a postmark by the 30th day after the notice.  This IRM provision, however, adheres to the narrowest interpretation of the PMTA.  It’s a good first step, but many taxpayers will send their requests to some other address or send it after the 30 days while having a good excuse.  The IRM also allows as timely CDP requests those requests that taxpayers timely fax to a fax number when the CDP request form provides such a number.

Taxpayers should make every effort to mail or fax their CDP request to the proper address or fax number on the CDP notice; however, if the CDP request did not get sent to an address or fax number on the CDP notice by the 30th day, the taxpayer should still consider arguing a timely mailed or faxed notice to the IRS should trigger a CDP hearing rather than an equivalent hearing.  Because the timely CDP request provides one step in the path to jurisdiction of the Tax Court in a CDP petition, the taxpayer should consider making equitable tolling arguments in appropriate circumstances.

The new IRM provisions will allow taxpayers who timely mail their CDP request to an address on the CDP notice; however, we know that many additional permutations exist that could cause late receipt of a CDP request by the IRS.  Because the making of a late CDP request to the IRS should not create a jurisdictional basis for barring a CDP hearing, taxpayers with a good excuse for lateness should seek to preserve their right to a CDP hearing by explaining to the IRS the reason for the late submission of the CDP request.  If the IRS persists in denying a CDP hearing and issues a decision letter rather than a determination letter, the taxpayer should file a petition with the Tax Court within 30 days of the decision letter seeking a determination from the Tax Court regarding the timeliness of the CDP request.  Assuming that the Tax Court agrees with the basis for the late CDP request, the Tax Court can determine that the taxpayer has met the criteria for making a CDP request and remand the case to Appeals for a CDP hearing.

The recent change to the IRS offers a good first step toward improvement of the process of obtaining a CDP hearing.  Taxpayers should continue pushing to make the process even better.

Imposing the Fraud Penalty after Prosecution While Satisfying IRC 6751(b)

In Minemyer v. Commissioner, T.C. Memo 2020-99 the Tax Court determined that the IRS failed to prove it made a timely approval of the fraud penalty and determined that the IRS could not assess the penalty in this case.  Because Mr. Minemyer had the fraud penalty imposed after a successful prosecution of him for tax evasion under IRC 7201, I found the application of IRC 6751(b) here produced a surprising result, though I cannot say the decision is incorrect and sympathize with any effort to parse through the language of this statute.  The Tax Court seeks to enforce a bright line rule even though the circumstances of this case which follows a criminal conviction present a somewhat different situation than the ordinary imposition of a civil penalty


In a case like this, IRS policy ties the hands of the revenue agent and the immediate supervisor making the imposition of the fraud penalty against Mr. Minemyer a foregone conclusion.  In some respects, the imposition of the penalty here acts somewhat like the penalties imposed by computer because the IRS imposes the penalty automatically by virtue of its policy and not imposing the penalty requires the agent to obtain approvals.  The apparent legislative goal in passing IRC 6751(b) was to prevent the IRS from using penalties as a bargaining chip.  The goal serves a laudable purpose and a more clearly written statute enforcing that goal would receive support from everyone.  We have written before on many occasions, samples found here and here, about the defects in the statutory language of IRC 6751(b).

Here, the goal of the statute really plays no part in the imposition of the penalty.  If the IRS makes a determination that someone has committed tax evasion and refers the case to the Department of Justice for prosecution, the imposition of the fraud penalty could come as no surprise – and particularly so when the person is actually convicted of tax evasion.  In a case such as this, the imposition of the penalty must occur pursuant to the Internal Revenue Manual unless the revenue agent or the supervisor get permission at a high level to not impose the fraud penalty.

The revenue agent apparently visited Mr. Minemyer in prison to secure his signature on Form 4549 consenting to the assessment of the tax and the fraud penalty.  Mr. Minemyer apparently did sign the Form 4549 but later withdrew his consent asserting that he signed it under duress.  At the Tax Court trial, the IRS did not produce the Form 4549.

This case involves the tax years 2000 and 2001.  So, the years come after the passage of IRC 6751(b) in 1998 but well before the IRS focused on compliance with IRC 6751(b).  The conviction here occurred in 2009 before the passage of the statute permitting restitution based assessments discussed here.

Nonetheless, the revenue agent actually obtained the signature of the immediate supervisor before the IRS sent the 30-day letter.  The problem the Court has with the penalty approval here turns again on the language of the poorly crafted statute, which requires the supervisor’s signature before the “initial determination” regarding the imposition of the penalty.  Here, the effort to have Mr. Minemyer sign the Form 4549 occurred prior to the sending of the 30-day letter and may have been the initial determination, which may require the IRS demonstrate supervisory approval at an earlier stage than the 30-day letter.  Here’s what the Court says:

In Frost v. Commissioner, 154 T.C. ___, ___ (slip op. at 21-22) (Jan. 7, 2020), we held that “the Commissioner’s introduction of evidence of written approval of a penalty before a formal communication of the penalty to the taxpayer is sufficient to carry his initial burden of production under section 7491(c) to show that he complied with the procedural requirement of section 6751(b)(1).” As in Frost, respondent here introduced evidence of written approval of the penalty before a formal communication (i.e., the 30-day letter). Also as in Frost, petitioner has not claimed that there was a prior initial penalty determination. Unlike Frost, our record does support the conclusion that respondent may have formally communicated his initial penalty determination to petitioner before the 30-day letter. Cf. Frost v. Commissioner, 154 T.C. at ___ (slip op. at 23) (“[P]etitioner has not claimed, nor does the record support a conclusion, that respondent formally communicated his initial penalty determination to petitioner before the date that the examining agent’s manager signed the Civil Penalty Approval Form.” (Emphasis added.)).

When the revenue agent visited petitioner in prison, he provided petitioner a Form 4549, which petitioner signed. Petitioner contends that he was under duress to sign the Form 4549 and for that reason he withdrew his consent. During respondent’s counsel’s opening statement at trial he contended that petitioner [*8] received a preliminary form before the formal communication in the 30-day letter and that petitioner signed it, agreeing to the fraud penalty for 2001. This statement is an acknowledgment that the Form 4549 communicated an intention to impose a penalty.

Respondent did not offer this Form 4549 into evidence. Therefore, we cannot determine whether the Form 4549 or the 30-day letter was the initial determination for the purpose of section 6751(b). Without the Form 4549 we cannot determine whether that form clearly reflected the revenue agent’s conclusion that petitioner should be subject to a penalty. See Carter v. Commissioner, at *30. If the Form 4549 was the initial determination of the fraud penalty for 2001, there is no evidence of its timely written approval. 

Accordingly, we conclude respondent has not met the burden of production for the determination of the section 6663(a) fraud penalty for 2001. Therefore, petitioner is not liable for the fraud penalty for 2001.

The tossing of the fraud penalty against someone convicted of tax evasion on this technicality seems a bit harsh and out of sync with the purpose of the statute but the Court must deal with a poorly written statute and seeks to establish bright line rules.  Perhaps this situation would not occur going forward because of the heightened emphasis on IRC 6751(b) at the IRS due to all of the litigation.  Maybe Congress did not care when the IRS lost lots of penalties due to the application of IRC 6751(b), since the IRS takes an approach to penalties that many might view as too zealous.  Imposing the fraud penalty against someone convicted of tax evasion can hardly fall into the over-zealous category and failing to impose the penalty on a convicted tax felon for a technicality like this should cause Congress to think about writing this provision in language that fits with the language of the tax code.

As mentioned above, the imposition of the fraud penalty against Mr. Minemyer occurred as automatically as the penalty imposed by computers.  Individuals convicted of violations of IRC 7201 always get the fraud penalty.  The IRS views it as inappropriate to ask the Department of Justice to prosecute someone for tax evasion with a guilt beyond a reasonable doubt standard and not pursue the civil fraud penalty thereafter.  My thinking on this case is no doubt colored by my view that to not impose the fraud penalty here the revenue agent and the immediate supervisor would have needed to move heaven and earth and that everyone knew this.  I realize those penalty administrative norms do not match the language of this poorly worded statute, but Mr. Minemyer’s civil fraud penalty was, in reality, approved the day his case was referred to DOJ for prosecution.  The revenue agent and the immediate supervisor served as no more than window dressing in the imposition of the penalty in a case such as this.

The decision in this case was entered on July 1, 2020, just three months and six days short of the 10-year anniversary of the filing of the petition in this case back in October of 2010.  The IRS must regret that the case did not reach a decision point during the first five years of its existence before the jurisprudence on Graev developed.  This would have been a slam dunk case for the IRS back during that period.

Tax Court Website

The Tax Court has been telling us for some time that it was migrating to a new case management system and making other changes starting in July 2020.  On Friday, July 17 it upgraded its website.  This created a problem for frequent visitors to the Court’s website such as Carl Smith and me.  Because of cookies and other helpful messages embedded in our computers, we found that we could access very little at the Court’s website but it seemed like we were in the right place. 

Because both Carl and I were experiencing the essentially the same problem and because we were talking to each other and not to others who might have helped us, I reached out to the Court and received an immediate response suggesting that I close out my currently open Tax Court page and go back into the Court’s website, making sure that there were no words on the access line after

I followed the Court’s instructions and all of my problems went away.  Perhaps Carl and I are the only dinosaurs who experienced this problem but we decided to write this short post to alert any others with our same handicap to the issue.  If you experience problems as you use the new website, the Tax Court seemed quite interested in hearing about any problems or concerns that you have.

Spies and Tax Court Judges

Bob Kamman, our intrepid commenter in chief and occasional guest blogger, alerted me to the announcement last week of the retirement of Tax Court judge Joel Gerber.  Judge Gerber served on the Tax Court from 1984 until his retirement.  He has earned his retirement having worked in one capacity or another for the federal government for 55 years.  Since 2006 he has served as a senior judge on the Tax Court.  The recent announcement tells us he will no longer serve as a senior judge.  He is the only Tax Court judge who had been my boss.  I never tried a case before him and believe I only met him once at a reception.  Still, he presided over a case that my office tried which evokes special memories.


Before he became Judge Gerber, he was a chief counsel attorney.  He went straight from college to law school to Chief Counsel’s office, just as I did.  He started his career in Chief Counsel’s office as a trial attorney in Boston.  When he started, Chief Counsel’s office had a rule that prohibited attorneys from working in their home state.  His home state was Illinois. 

He must have excelled at trial work because he transferred to Atlanta as a Senior Trial Attorney for four years, before becoming the District Counsel in Nashville, Tennessee from 1976 to 1980.  As District Counsel, he would have headed up a group of about 6-10 attorneys who handled all of the Tax Court cases in Tennessee and provided all of the advisory work in that state to the IRS.  It is his next job that represents a remarkable leap.  He moved from District Counsel of a relatively small office to Deputy Chief Counsel – the highest non-political office in all of Chief Counsel.  This leap sits pretty far outside of the norm for a move within Chief Counsel’s Office.  He became my boss when the Chief Counsel resigned in 1983 and he became the Acting Chief Counsel for a year before being appointed by President Regan to the Tax Court.  When I refer to him as my boss, I reference his time as Acting Chief Counsel when he headed the office.  As a lowly trial attorney I was many levels below him and never had contact with him.

The case that evokes special memories of Judge Gerber involved the master spy of the latter half of the 20th century, Aldrich Ames.  For those unfamiliar with Mr. Ames, he worked for the CIA and specialized in the Soviet Union.  Although he made a government employee’s salary, Mr. Ames drove expensive cars, lived in a nice house in a tony neighborhood and in other ways lived a lifestyle inconsistent with the earnings of a government employee.  Eventually, the sharp eyes at the CIA noticed the discrepancy between the pay and the lifestyle, did some probing and determined that he moonlighted as a spy giving information about US operatives around the world to the Soviet Union in return for cash.  The Soviets failed to issue him 1099s for these payments and he forgot to report them on his tax returns.  The Tax Court case concerned the tax on the unreported income from his moonlighting enterprise.

Before Mr. Ames filed his Tax Court petition, he had already moved to Allenwood, Pennsylvania where the government provided him with free housing for life.  The government prosecuted him for spying but included a count of conspiracy to defraud the IRS under 18 U.S.C. § 371 in the charges because, like Al Capone, this charge was solid and essentially took the guesswork out of whether he would be convicted.  When he worked at the CIA, Mr. Ames lived in Northern Virginia.  Because the Richmond District Counsel’s Office handled criminal cases for the entire state of Virginia, we were involved in the development of the criminal case against him.  Before the IRS sends a notice of deficiency pursuing additional tax assessments, it lets the criminal case run its course.  In this instance one result of the criminal case was the forfeiture of everything that Mr. Ames owned.  So, the notice of deficiency had little chance of resulting in payment or making any difference to the lifestyle of Mr. Ames.

I think the only reason Mr. Ames filed a Tax Court petition was a hope that it might allow him to leave the prison for the trial of the case.  No one wanted that to happen.  The prison officials did not want to send him outside the prison walls.  I did not get the impression that the Tax Court was excited at the prospect of hosting him in its building.  As a result, a special trial session occurred in Allenwood penitentiary.  Because few Tax Court trials take place in maximum security prisons, the case had a certain specialness for this reason alone. 

Judge Gerber presided over the trial and wrote the opinion linked above.  At the time of trial, I was the District Counsel in Richmond.  I cannot remember why I did not attend the trial but I sent John McDougal to assist the attorney assigned to the case. It did not come as a surprise that the IRS won the case even though the victory may not have brought funds into the government coffers.  Still, you do not want to lose such a case.

I am sure that Judge Gerber must have tried many interesting cases during his lengthy tenure on the Tax Court.  This one has always been special to me.

Using Bivens to Attack Flora

In Canada v. United States, 125 AFTR2d 2020-960 (5th Cir. 2020) the taxpayer brought a Bivens suit seeking damages against the revenue agents because the agents caused the IRS to assess against him a tax shelter penalty under IRC 6707 in an amount so high payment of the penalty was a practical impossibility. If this story sounds similar, remember the case of Larson v. United States, 2018 U.S. App. LEXIS 10418   (2nd Cir. 2018) discussed here and here.  Larson is not the only other case to reveal this problem.   Other cases with this same problem include Diversified Group Inc. v. United States, 841 F.3d 975 (Fed. Cir. 2016), which tried unsuccessfully to argue that the penalty was divisible, and the three circuit cases litigated by Lavar Taylor seeking unsuccessfully to get a foot in the door using the merit litigation provisions of Collection Due Process discussed here.  The ability of the IRS to assess a non-divisible penalty under IRC 6707 in a staggering amount puts taxpayers back in the boat they were in prior to the creation of the Tax Court. It also reminds us that 100 years ago Senators pushed for the creation of the Tax Court in order to prevent individuals from seeking bankruptcy as a refuge from taxes they could not contest judicially without full payment.


In Canada, bankruptcy is exactly where he went so that he could litigate the merits of his tax liability under B.C. 505(a) since he did not have enough money to meet the Flora rule.  The taxpayer won the merits of his case in bankruptcy beating back the incredibly high penalty amount assessed by the IRS. United States v. Canada (In re Canada), 574 B.R. 620, 623 [119 AFTR 2d 2017-1752] (N.D. Tex. 2017).  After succeeding in essentially eliminating the liability through the bankruptcy proceeding, he turned and argued that the agents who caused the assessment of this penalty knew that he had no prepayment forum where he could litigate the liability and knew they were wrongfully forcing him into bankruptcy.  He brought this Bivens suit seeking to recover damages and attorney’s fees from the individuals he blamed for being forced into bankruptcy.  The Fifth Circuit, affirming the lower courts’ dismissal of the case, carefully analyzed the factors necessary for a Bivens action, before pointing out that precedent in recent decades disfavors expansion of the original decision and two cases decided shortly thereafter.  The court also points out that if successful, his suit would provide an end run around the Flora rule of full payment.

Because I think the Flora rule should not apply to non-deficiency cases, I am not too saddened by an end run around Flora.  I also applaud the ingenuity of the argument here; however, the Supreme Court has made it clear in the decades following Bivens that it does not want to expand the grounds for obtaining recovery from government agents.  The result here comes as no particular surprise.  I found heartening the success of Mr. Canada in removing the penalty at the bankruptcy level.

For anyone not familiar with Bivens cases and the IRS we have discussed them previously here and here.  Government agents at all agencies need protection from personal suits brought concerning actions taken in the scope of their employment.  Interpreting that scope broadly makes sense as we don’t want to chill the government employees from doing their job.  At the same time if government employees do something so egregious and outside the scope of their employment, it also makes sense that at some point the immunity that protects them from personal liability goes away.  Bivens brings out facts where the immunity goes away, but the Supreme Court wants and needs to carefully control the circumstances where that exists.  The Fifth Circuit in Canada looks at the history of the case law after Bivens in concluding that the actions of the revenue agents in assessing the 6707 penalty against Mr. Canada did not rise to the level of action that could give rise to a personal liability against them.

Canada argues that the district court below improperly considered the special factors by applying a “sound reason” standard rather than a “convincing reason” one. Canada asserts the latter is what Ziglar requires.

The Fifth Circuit finds that Canada cannot fit himself into one of the narrow paths for application of Bivens.  It points out that if what he seeks is some form of compensation for his efforts to rid himself of the 6707 assessment, he had other paths available:

It is unclear why Canada did not simply file an application for fees in the bankruptcy court or in the initial district court. Canada states the IRS’s appeal to the district court deprived the bankruptcy court of jurisdiction to consider his fee request. Canada also contends that the appeal forecloses the IRS’s untimeliness argument or is a compelling reason to extend the 26 U.S.C. § 7430‘s 30-day period. These arguments make little sense. He could have filed a motion for the recovery of fees at any time during the pendency of the case in the bankruptcy court. Canada also had the option of moving to reopen the bankruptcy case once the initial district court’s ruling on appeal became unappealable. See 11 U.S.C. § 350(b) (“A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.”). Similarly, Canada had the ability to ask the initial district court to award him fees anytime between the start of the appeal and 30-days after the IRS could no longer appeal the district court’s order. There is no convincing reason why Canada could not have filed an application for fees under 26 U.S.C. § 7430 in one of those two courts before August 2017 because of an appeal that ended on May 8, 2017. Nevertheless, assuming arguendo that his proposition is accurate, he still could have filed this lawsuit before the 30-day time period lapsed.

While I am sympathetic with Mr. Canada because the current interpretation of the Flora rule essentially forced him into bankruptcy, the Fifth Circuit’s opinion makes sense to me.  Bivens does not seem like the right place to go for the wrong he has suffered.  Bringing an application for fees seems more appropriate even though I understand this might not adequately compensate him for the trouble he has endured.  The real answer lies in removing the Flora rules as a barrier to litigating the correctness of certain penalty assessments.  Until that problem goes away, others will use their creative energies similar to the way Mr. Canada has done.  The problem is not the agents.  The problem lies with the current interpretation of Flora which prevents, as a practical matter, taxpayers from contesting certain assessable penalties.  It also lies with Congress which has created the assessable penalties leaving taxpayers no alternative but bankruptcy should they seek to contest the liability.  Congress knew better than this a century ago when it created the predecessor to the Tax Court.