Summonsing Records for the French Taxing Authority

A couple years ago, I wrote a post about the efforts of the IRS to assist the Danish tax agency to collect from a taxpayer in the United States. That case involved a levy on the taxpayer’s assets. Recently, another one of the five countries that have collection treaties with the IRS had an opinion issued based on the efforts of the IRS to assist it in collecting taxes due to France. In the case of Hanse v. United States, No. 1:17-cv-04573 (N.D. Ill. March 5, 2018), the court analyzes the treaty provisions in the context of a summons enforcement case. The application of the summons laws in this case results in an order that the information sought be provided to the IRS/France.

I wrote a post almost four years ago on the failure of tax administration to negotiate collection provisions into every tax treaty and not just have it in five treaties that happen to have been written at a time when someone thought this was a good idea. In a global economy, it still seems like a good idea. We have passed laws seeking to ensure that we know about the income of U.S. citizens around the world and leaned on other countries to cooperate in helping the IRS know of the income. To complement that effort, the IRS needs to have the treaty tools to collect when assets exist overseas and it cannot obtain personal jurisdiction over the taxpayer. The absence of collection language in our tax treaties makes it difficult, and at times impossible, for the IRS to collect from taxpayers who park their assets in the vast majority of countries since the IRS lacks a mechanism for reaching those assets.


France is investigating the potential wealth tax and income tax liabilities of Mr. Hanse for the years 2013-15. The French tax authorities sent to the IRS an exchange of information request seeking information in connection with its investigation. France particularly wanted information about two transfers by Mr. Hanse totaling over 500,000 €. The request stated that Mr. Hanse was a French citizen and that the French tax authorities had exhausted the remedies domestically available for gathering the information. The IRS did not have the information requested. The U.S. competent authority determined that the request was proper under the treaty provisions. So, the IRS served a summons on the party to whom the funds were transferred, a third party in the US, and sent notice to the taxpayer at the address provided by the French authorities.

The taxpayer timely filed a petition to quash the summons raising three objections: 1) the IRS failed to comply with the administrative steps necessary for a valid summons under the IRC because it contacted third parties without providing advanced notice under IRC 7602(c)(1); 2) France could not obtain the information through its own laws so it should not use the treaty to accomplish what it could not do if this were an entirely domestic situation; and 3) the summonsed party is a law firm and some of the materials requested by the summons required protection from disclosure by the attorney client privilege.

The IRS moved to dismiss and attached to its motion affidavits from the competent authority and the revenue agent serving the summons. The court decided to treat this as a motion for summary judgment which is normal in most contexts, though not as normal in a summary proceeding such as a summons enforcement.

Before addressing the first argument, the court notes that the IRS must meet the four elements of the Powell test. We have discussed those elements before. A similar notice argument was addressed in a recent post written by Les. The court notes that the burden on the IRS with respect to the summons remains the same whether the summons involves a “normal” U.S. taxpayer or is done at the request of a treaty partner. Here, the court finds that the affidavits allow the IRS to meet its burden under the Powell test, which it acknowledges is not a heavy burden.

Good Faith of French Investigation

The taxpayer argues that French law would not allow the French authorities to obtain the information sought through the summons and, therefore, those authorities should not circumvent French law and obtain the information just because the U.S. laws do permit the gathering of the information. The court takes this as a challenge to the “legitimate purpose” element of the Powell test. This is where a treaty summons gets a little interesting. Looking at prior case law involving other treaty summonses issued on behalf of France, the court finds that to satisfy the Powell test it need not look at the good faith of the treaty partner but only at whether the IRS acted in good faith in issuing the summons. Since the taxpayer did not challenge whether the IRS issued the summons in good faith and the court saw no indication of bad faith, it finds that this challenge fails.

Compliance with IRC

Petitioner challenges the issuance of a summons to a third party where the IRS has not provided the taxpayer with a notice pursuant to IRC 7602(c)(1). We have written very little about IRC 7602(c), which is a provision that came into the code in the 1998 Restructuring and Reform Act. Les addressed it in an earlier post and notes at least one case that has held the taxpayer should receive specific notice of contact of third parties. Most issues involving this code section, which requires the IRS to notify taxpayers before it contacts thirds parties about them looking for information, concern the IRS position that Pub 1 generically informs them of the possibility that the IRS might do this (thus satisfying the statutory requirement) versus the need, in the view of some taxpayers, for the IRS to specifically tell them who it intends to contact.

Here, the IRS neither generically nor specifically informed the taxpayer of its intent to contact a third party by serving the summons. The taxpayer argues that this failure makes the summons unenforceable. The IRS argues that the protection of IRC 7602(c) does not extend to the taxpayer because it “does not include the liability for any tax imposed by any other jurisdiction.” 26 C.F.R. 301.7602-2(c)(3)(C). The court agrees with the IRS. This creates an interesting exception for taxpayers whose summons cases arise under treaty language

Attorney Client Privilege

I recently wrote on another summons case in which the taxpayer sought to keep the IRS from information based on the attorney-client privilege. The court here notes that a blanket assertion of attorney-client privilege does not work and that the taxpayer needs to assert the privilege on a document by document basis. Because the taxpayer did not support the privilege claim with “any facts from which the Court could find a privilege attaches to the documents that are requested in the summons” the court rejects his privilege argument.


Some aspects of the treaty summons differ from a “normal” summons in their application because of the interplay of the code with non-US taxpayers. Here, the summons gets enforced and presumably France gets the information it needs in order to move forward with its tax investigation. Only a handful of these cases have been reported, suggesting either that countries do not need to resort to the treaty very often in order to complete their investigations or that investigators do not use this tool as effectively as they might. As the global economy continues to push through borders, we should expect more of these cases and there could be many more if we negotiated different treaty language regarding collection.




Dischargeability of the First Time Homebuyer Recapture Liability

In Betancourt v. United States, the bankruptcy court for the Western District of Missouri addresses an issue of the character of a debt owed to the IRS as it determines the dischargeability of that debt.

The taxpayer seeks a determination that this type of debt gets discharged in bankruptcy because it does not fall within any of the enumerated exceptions to discharge that apply to taxes. The court finds for the taxpayer. Although the issue here is narrow and has scarcely be litigated, it points to the problem the IRS can have when a debt does not conform to norms for tax debt and the IRS seeks to prevent a discharge.


Ms. Betancourt purchased a home in Liberty, Missouri in 2008. She claimed the first-time homebuyer credit and received a $7,500 credit on her 2008 return. To obtain the credit, she needed to purchase a home for the “first time”, between April 9, 2008 and May 1, 2010. However, Congress was not just concerned with the initial purchase and added in the law a requirement for repayment of the credit over a 15-year period in certain circumstances. For those unfamiliar with this credit, some links to the IRS descriptions of the credit, here, here, here and here, may help in understanding the issue. Ms. Betancourt argues that the debt for repayment of the credit relates either to 2008 when she received the credit or 2010 when her repayment period began. Based on when she incurred the debt she argues that it is not entitled to priority status and neither is it excepted from discharge.

The IRS argues that the recapture obligation arises each year and that for the years starting with 2017, when she filed bankruptcy, the debt is a future debt contingent upon events that have not yet occurred and, therefore, it did not need to file a claim for this future debt and the future debt was not discharged by the bankruptcy case. It filed a claim for $39.00 as a priority amount because that was the amount of unpaid repayment due at the time of the filing of the bankruptcy petition. The IRS relied on the decision in In re Bryan, 2014 WL 789089 (Bankr. N.D. Cal. 2014), in which the court characterized the obligation to repay the new homebuyer’s credit as a non-dischargeable tax rather than a dischargeable general obligation. Bryan held that the obligation to repay was a tax obligation and that characterization triggers the application of the discharge provisions for taxes rather than for general claims.

At issue here is both the character of the debt as tax and the character of the debt as a fixed future obligation or an obligation so contingent as to fail to meet the broad definition of the word claim. Rather than viewing the repayment obligation as a tax obligation, the court in Betancourt views the transaction as a loan when viewing all of the parts of the transaction. If the credit and its repayment obligation has the character of a loan rather than a tax, then the bankruptcy outcome is completely different. The court cited an IRS Information Release, IR-2008-106, which states “the credit operates much like an interest free loan because it must be repaid over a 15 year period.” Form 5405 is subtitled “Repayment for the First Time Homebuyer Credit” and the instructions for the Form repeat the term “repayment.” There are other bankruptcy cases in which the courts have looked at the substance of the transaction in characterizing the nature of a liability in order to determine its status as a claim in the bankruptcy case. Two of the most famous examples of this are Sotelo v. United States, 436 U.S. 268 (1978), in which the Supreme Court characterized the trust fund recovery penalty of IRC 6672 as a tax rather than a penalty because it is a provision designed to allow the IRS to collect the underlying tax and not one imposing a penalty on the person assessed. In 1996, the Supreme Court in United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213 (1996) determined that the excise tax imposed by IRC 4971 for late payment of funds into a pension plan was not a tax but rather was a penalty, calling into question the character, for purposes of filing a bankruptcy claim, of a whole host of excise taxes imposed for wrongful behavior or to discourage “sin,” such as the excise taxes on cigarettes and alcohol.

In addition to the tax versus loan issue, the court also raises the issue of what constitutes a debt. This is a much litigated issue in bankruptcy because it goes to the core of when a claim must be filed and when the discharge provisions come into play. The court cites to the precedent on this issue in support of its conclusion that the IRS possesses a right to payment which triggers an obligation to file a claim against the estate and not to rely on future repayment as a basis for arguing the debt is not a claim.

The court finds that the right to payment arose before the filing of the bankruptcy petition, which fits within the definition of claim in B.C. 101(5)(A). It determines that this prepetition debt is not a priority tax obligation but a non-tax one. Stripped of its tax veneer, the debt loses its exception to discharge and the court determines that the repayment obligation is dischargeable.


I do not know if the IRS will appeal this decision. The decision could impact a decent number of individuals who benefitted from the first time homebuyer credit and whose obligation to repay has not yet run. Any dischargeability determination like this has consequences for anyone who has gone through bankruptcy with this type of debt since they could still bring a discharge action even if the bankruptcy ended some time ago. If correct, the decision would mean that the IRS probably has a number of discharged debts on its books that it continues to attempt to collect in violation of the discharge injunction. The decision could also implicate other situations in which Congress chooses to use the tax code to front money to taxpayers as it did here in an attempt to spend our way out of the great recession. If Congress is concerned about the loss of priority status here, it may need to structure similar provisions differently in the future to make sure that they do not lose their character as tax debt and to make sure, if they want these types of debt to retain priority claim status throughout the repayment period, that the debt arises anew each year (or something to keep it new enough for priority status). The court seems clearly right on the issue of whether this debt meets the requirements of being a claim. The tax versus non-tax character of the debt is closer since the taxpayer is repaying a tax benefit, but I cannot say that the court was wrong on that aspect of its decision either.


Using an Affidavit to Avoid Summary Judgment

We have been requested to notify you that the USD School of Law-RJS Law Tax Controversy Institute will take place this summer on July 20, 2018 at the University of San Diego School of Law Campus. Some PT guest bloggers will be speaking as will Chief Judge Paige Marvel of the Tax Court. For more information about the conference go here.  It is nice to have a conference that focuses on the issues discussed in this blog.

In United States v. Stein, the 11th Circuit reverses longstanding precedent in that circuit and allows a taxpayer to get past a summary judgment motion filed by the IRS and reach the jury. The decision may not result in a victory for Mrs. Stein in the long run but it allows her, and other similarly situated taxpayers (as well as litigants in non-tax cases), to put on their case.

As I will discuss further below, the concurring opinion of Judge Pryor in this en banc opinion provides a history lesson supporting the reasoning of the Court’s opinion and gives interesting insight into the relationship between the dreaded Stamp Act and Mrs. Stein’s ability to move past summary judgment.


The IRS brings relatively few affirmative suits to collect. It does so when the amounts justify the expenditure of effort, the potential to actually collect exists, and, usually, the taxpayer’s cooperation with administrative collection efforts has been less than robust. In this case, the IRS sues Mrs. Stein seeking to reduce its assessment of approximately $220,000 to judgment. It alleged that she had unpaid taxes for 1996 and 1999-2002.

As is normal in these cases, the IRS submitted account transcripts showing her outstanding liabilities and an affidavit from an IRS officer supporting and explaining the transcripts. It moved early in the case for summary judgment based on this information. Mrs. Stein, in response, filed an affidavit in which she stated that to the best of her recollection she paid the taxes at issue. Her affidavit addressed each year in turn with such a statement; however, it did not contain any corroborating evidence of payment.

The district court granted the IRS summary judgment concluding that the evidence presented by the IRS created a presumption that the assessments were correct and that Mrs. Stein “did not produce any evidence documenting said payments.” Her lack of documentation did not allow her to overcome the presumption of correctness. So, the district court determined there was no genuine dispute as to any material fact making the IRS entitled to summary judgment as a matter of law.

She appealed the district court’s decision to the 11th Circuit but lost her appeal. She requested en banc review of the decision. The en banc review resulted in a reversal of the prior decisions in her case and a reversal of Mays v. United States, 763 F.2d 1295 (11th Cir. 1985). In reversing, the panel examined FRCP 56 which governs summary judgment and determined that “nothing in Rule 56 prohibits an otherwise admissible affidavit from being self-serving. And, if there is a corroboration requirement for an affidavit, it must come from a source other than Rule 56.”

The panel states that it makes no difference that this is a tax case. The same summary judgment standard applies in tax cases as in other areas of the law. Doubling back to its earlier statement on corroborating, the panel says Rule 56 simply has no such requirement and that “a non-conclusory affidavit that complies with Rule 56 can create a genuine dispute concerning an issue of material fact, even if it is self-serving and/or uncorroborated.” Of course, this does not mean Mrs. Stein will win her case – far from it. Unless she obtains some proof of her payment of the liabilities or finds a basis for attacking the assessments beyond the statements in her affidavit, I expect she will lose in the end.

Getting past summary judgment is still a big deal. It allows her to gather evidence in support of her payments she may not have done before and it allows her to tell her story to a jury which is where Judge Pryor’s concurrence comes into play.

Judge Pryor states that he writes “to highlight the irony of our earlier precedent when viewed in the light of the history of the Seventh Amendment.” He explains that in the decades before the American Revolution, parliament grew tired of American juries which held for American interests in tax case. So, it expanded the jurisdiction of the Admiralty Courts, which sat without juries, to include trade cases even though those cases would have resulted in jury trials in England. It later expanded the jurisdiction of Admiralty Courts in America to cover matters involving the Sugar Act and the Stamp Act, seeking to avoid “friendly” juries in America.

The colonies strenuously objected to these measures and the right to a jury trial became one of the chief complaints leading up to the revolution. It became an issue in the Constitutional Convention as well and Alexander Hamilton wrote about it in the Federalist Papers. He equated the granting of summary judgment in these circumstances to the type of behavior that our forefathers sought to avoid in overthrowing the yoke of British rule. Judge Pryor’s concurring opinion is a good read for history buffs and perhaps for any lawyer wanting to know more about the origins of American law and how to craft an argument.

By seeking en banc review, Mrs. Stein not only overturned three decades of 11th Circuit precedent but got us a history lesson as well. I wish her the best in finding proof that she did pay the taxes so that her story has a happy ending.  Perhaps, if victorious, she will celebrate by drinking some tea and reflecting fondly on our forefathers.  I would like to expand Judge Pryor’s logic to beat back the government’s current view of the Flora rule where taxpayers such as Mr. Larson are denied an opportunity to even step into court to dispute their tax liability without shelling over millions and millions of dollars.


Clash Between Claim of Attorney Client Privilege and Summons Power

In an unpublished opinion in United States v. Servin (No. 2-16-cv-05615), the Third Circuit upheld the enforcement of a summons against a Pennsylvania attorney. This case does not break new ground but serves as a reminder of the power of the IRS summons and the limitations of the attorney-client privilege. Mr. Servin did receive some relief from the summons so his efforts in contesting it were not entirely without success.


Mr. Servin must owe a decent amount of taxes since his case is in the hands of a revenue officer. Today, taxpayers often must owe in excess of $100,000 to have their case handled by a revenue officer, although that amount can vary based on location and other factors. I have commented before that having a revenue officer assigned to your case is like getting concierge service because you have a knowledgeable individual to work with to resolve the issues rather than having to deal with the Automated Collection Site (ACS); however, my comment was somewhat tongue in cheek because having a revenue officer assigned to your case, particularly if you are not working to resolve the matter, can cause a taxpayer many problems as the knowledgeable revenue officer uses the powerful collection tools at the disposal of the IRS. Here, the taxpayer feels the effect of having his account assigned to a revenue officer rather than to ACS.

This case involves a collection summons which seeks to obtain from him information that would allow the IRS to collect the outstanding liability. Specifically, the revenue officer wants from him information about which clients owe him so that the revenue officer can send a levy to these individuals and businesses in order to collect the outstanding taxes Mr. Servin has not voluntarily paid. The summons requests Mr. Servin’s current client list, including names and addresses of all of the clients and a list of his cases that will be settling or have settled within a specified time period, including names and addresses of the parties to the case (who would also be persons the revenue officer would levy.) Undoubtedly, having levies served on all of your clients and opposing parties would not enhance Mr. Servin’s business. Preventing that from happening would protect his business and professional interest, in addition to client confidentiality which is why we have this summons case on which to report.

Mr. Servin does not contest that the IRS meets the general Powell standards for issuing the summons. The meet the Powell requirements, the government must show that the summons: (1) is issued for a legitimate purpose; (2) seeks information that may be relevant to that purpose; (3) seeks information that is not already within the IRS’s possession; and (4) satisfies all administrative steps required by the Internal Revenue Code. United States v. Powell, 379 U.S. 48, 57-58 (1964). He argues narrowly based upon the defense of attorney-client privilege. Unfortunately for Mr. Servin, the Third Circuit has pre-existing precedent on the issue of using the attorney-client privilege to protect client identities from summons enforcement in the case of United States v. Liebman, 742 F.2d 807 (3d Cir. 1984). The precedent does not favor the outcome he seeks. The Third Circuit precedent is similar to precedent that exists in other circuits.

The general rule does not permit an attorney to protect client names and addresses from summons enforcement based on attorney client privilege. The Third Circuit finds that Mr. Servin fails to identify any circumstances that would cause his case to fall out of the general rule and allow him to shield his client information. The Pennsylvania Rules of Professional Conduct do not prevent this disclosure despite his desire to use those rules and his citation to them.

He does win a partial victory because the court modifies the summons to eliminate the name of individuals that have not yet settled but will settle in the future. This victory reflects the concerns that the IRS limit its intrusion into client information of an attorney. The IRS does not often or lightly summons attorneys for client information. The revenue officer who wants to summons an attorney must persist in order to obtain permission to do so. Summonsing an attorney results in reviews by both Chief Counsel and Tax Division lawyers before the summons is allowed. IRM & 15 discusses some of the special issues related to summonses issued to attorneys. The reason that the IRM requires much higher level of review of summonses issued to attorneys stems from the very matter at issue in this case. The IRS recognizes the sensitivity of client information and does not want to let revenue officers run loose in seeking this information. So, it wants a review before it seeks enforcement. The IRS also does not like to issue summonses that it does not enforce since doing so undermines the authority of its summonses. This causes it to require review of summonses in sensitive areas.

Here, the revenue officer seeks information that the attorney cannot protect. The summons victory may cause Mr. Servin to full pay the liability in order to avoid having levies issued to many of his clients. If so, the summons itself may serve as a very valuable collection tool. If it does not cause Mr. Servin to full pay the liability, his clients and many individuals in his community may be about to learn about their attorney’s tax compliance or tax dispute. It is possible that he could still contest the liability and prove that he does not owe. It’s hard, however, to unring the bell and explain to a host of people that he did not owe when they receive a levy seeking payment of the liability which is why this is a very sensitive matter even if the names are not protected by attorney-client privilege.

The discussion of the relationship between Pennsylvania’s Rules of Professional Conduct serves as an important reminder that those rules too have limits, especially when they run into a valid investigation of an attorney’s conduct. PA Rule of Professional Conduct 1.6 is broader than the attorney client privilege; it provides that “A lawyer shall not reveal information relating to representation of a client unless the client gives informed consent, except for disclosures that are impliedly authorized in order to carry out the representation.”

Servin claimed “in the absence of the client’s informed consent the lawyer must not reveal information relating to the representation – moreover a presumption exists against such disclosure.”

The opinion notes however that the Rules of Professional Conduct are not relevant in the court’s consideration of whether to enforce a summons; rather those rules relate to a state’s possible disciplinary proceedings against a lawyer. Comments to PA Rule 1.6 specifically provide that the scope of the rule is limited by substantive law, and numerous PA cases provide that the Professional Conduct Rules do not govern or affect the application of the attorney-client privilege.



The Freedom of Information Act and the Office of Professional Responsibility

Working for over three decades for Chief Counsel’s office, one of my goals was to avoid disclosure issues both on a personal and professional level. On a personal level, I wanted to know enough to keep out of trouble and on a professional level I wanted to avoid getting labeled as someone who knew disclosure law because that could lead to more assignments regarding disclosure issues which I did not want. At Chief Counsel’s office, FOIA was lumped in with IRC 6103 and the Privacy Act. Practicing at a clinic, I only want to know enough about the Office of Professional Responsibility (OPR) to avoid having contact with it. Just as I did not want to know more about section 6103 than I needed in order to avoid trouble while working at Chief Counsel’s office, I do not want to learn more about OPR. I want to know the ethical rules but not what happens when you break them, because I hope that is knowledge I will never need.

Today’s case takes me into the confluence of two things I try to avoid and yet the case has important lessons worth discussion. In Waterman v. IRS, 121 AFTR2d 2018-__(D.D.C. 1-24-2018), the issue before the court is a request for records from OPR regarding an investigation of an attorney. The attorney, Brad Waterman, practices in D.C. and has for several decades. He graduated from my law school the year before me and we have met on several occasions. He has an excellent practice and the last time we met he was splitting his time between D.C. and Florida, depending on the season. The fact that he is seeking records from OPR concerning an investigation does not mean he engaged in inappropriate behavior. I know nothing about the investigation other than it was quickly closed which, it turns out, is his problem in this case. His case caused OPR to change its procedures despite, or maybe because of, his FOIA difficulties to make it easier for someone in his situation to obtain records from OPR.


In representing a client in a matter involving a tax exempt bond, Mr. Waterman caused the revenue agent in the IRS Tax Exempt Bond office to feel that Mr. Waterman engaged in misconduct. The revenue agent, through his manager, made a referral to OPR. After investigation, OPR determined that “the allegation against Waterman did not warrant further inquiries or action.” I recently attended the ABA Tax Section meeting, at which I attended the Standards of Practice committee meeting in an effort to keep up on ethical issues. At that meeting, the director of OPR, Steve Whitlock, spoke and he talked about this case. I began writing this post on the plane to San Diego to attend the meeting. So, when the director started talking about this case, I woke up from my normal meeting stupor and started listening carefully. I hope I heard and understood him correctly.

Apparently, OPR decided not to pursue this case without sending out a letter to Mr. Waterman asking him for information. OPR regularly determines that many of the referrals it receives do not warrant further investigation and do not require making the referred individual submit material. When it makes this decision at the internal investigation stage, the case is closed with a letter to the individual informing the individual of the closure of the case without need for input from the individual. This was the normal procedure at the time OPR closed Mr. Waterman’s case. It was also, and still is I believe, the normal procedure for the OPR letter informing the individual of its conclusion to also inform the individual that OPR would retain the file on the matter for 25 years and that it reserved the right to reference the file in any future OPR investigations. Ouch. I suspect that receiving such a letter with the language about retention drove Mr. Waterman to want to know as much about the referral and investigation as possible in the event that it might have future ramifications.

The problem Mr. Waterman faced in trying to obtain information about the referral is that because OPR closed its investigation at the time of the sending of the letter, he could not use the section 6103 procedures, see here and here, that OPR suggests individuals use to obtain information about the referral. Had his case not been closed with an early letter, he would have instead received a far more ominous letter informing him of the investigation and asking him to respond to the allegations. In that situation, OPR would not have a closed investigation but a very open one. During an open investigation, OPR suggests that individuals use the section 6103 process to obtain information about the investigation. Because his investigation was closed by the time Mr. Waterman knew he wanted information, he could not use the section 6103 procedure and instead had to revert to FOIA in order to try to obtain the information.

The OPR director stated at the ABA meeting that because of this case, OPR was changing its procedures. Now, instead of issuing the one letter and closing the case immediately, it is going to issue a preliminary letter giving the target individual 60 days to make a statement to OPR and to obtain information about the investigation through section 6103. See the following paragraph for a link to this letter. Now, a recipient of this “good” OPR letter, if there is such a thing, can use the section 6103 procedures for obtaining information before OPR closes its case 60 days later. If someone receiving this good letter fails to ask for information about the investigation under section 6103 during that 60 day period, then they will face the same FOIA obstacles which Mr. Waterman encountered and which I will discuss below. I hope that neither I nor any reader will need the benefit of this knowledge, but just in case I provide it for any who have the misfortune of a referral.

Attached to the outline created by the director of OPR for his presentation at the ABA meeting were samples of the three letters sent by OPR. The first letter is called the pre-allegation letter. This is the letter alerting the recipient of an OPR investigation that is not being dropped after the initial internal review by OPR. The second letter is called the “soft conduct letter – initial” This is the letter giving the recipient the chance to request information from OPR using IRC 6103 and avoiding the problems faced by Mr. Waterman. This letter would be sent to someone that OPR determines not to investigate further after reviewing the incoming allegations. The third letter is called the “soft conduct letter” which should be sent about 60 days after the initial soft conduct letter and which would inform the recipient that OPR was closing its investigation.

The FOIA case does not discuss the merits of the investigation. From the opinion, it is clear that Mr. Waterman made informal requests for information about the investigation and did not receive everything that he wanted. So, he made a formal FOIA request. In responding to the FOIA request, the IRS withheld certain information asserting primarily FOIA exemption 5, which “allows agencies to withhold information that would not be available by law to a party … in litigation with the agency.”

In the FOIA case, Mr. Waterman agreed that the IRS search for the requested records was adequate. I want to take a brief detour here to mention another recent FOIA case, Ayyad v. IRS, No. 8-16-cv-03032 (D. Md. 2-2-2018). In the Ayyad case, the requester did not agree that the search for the records was adequate and for good reason. An examination of the taxpayer was pending for about a decade when they filed the FOIA request seeking records, which included the administrative file developed by the revenue agent including all written correspondence relating to the examination. With relatively amazing speed for a FOIA case, the IRS identified 2,885 pages of responsive records but did not produce a Vaughn index detailing the redacted and withheld records. After the taxpayers filed their FOIA suit, the IRS informed the Court it found an additional 872 pages. Later, after the taxpayer stated records were still missing, the IRS found another 6,568 pages. Needless to say, the IRS did not cover itself in glory in this case and did not prevail. Its inadequate searches and its failures to submit proper Vaughan indices resulted in an unfavorable FOIA decision. So, it is not unimportant that Mr. Waterman agreed with the IRS search. His case was much less involved and he undoubtedly knew what records were out there, but the Ayyad case provides a note of caution in relying on the first submission of records from the IRS.

In Mr. Waterman’s case, the court found that the Vaughn index properly described the withheld documents and the basis for the exemption (also a major issue in the Ayyad case). The documents at issue were pre-deliberative and involved material created by the revenue agent who made the referral, his manager, preliminary findings of the OPR investigator, and an email between OPR and counsel. The court finds all of the documents meet the test under FOIA exemption 5. If I understood Mr. Whitlock correctly, Mr. Waterman would have received the referring documents under a section 6103 request made during an open OPR investigation. I do not believe he would receive the other two documents under section 6103.

I am very sympathetic with Mr. Waterman’s right to know the basis for the investigation. Because OPR is retaining the records for 25 years, he has genuine concerns. I applaud OPR for changing its procedures to allow other similarly situated individuals to obtain records under the more friendly section 6103 procedures. I hope the information in this post is information you and I will never need to know.


The Newly Nominated Commissioner

The press reports that President Trump would nominate Chuck Rettig as the new IRS Commissioner were followed with a formal announcement. Assuming he is confirmed, Mr. Rettig will serve as the first tax lawyer in this position in the new millennium. I applaud the return to having someone run the IRS who has a deep understanding of tax law but perhaps this shows my age rather than my management acumen. In addition to applauding the return to the position of commissioner someone who has a career in tax law, I also applaud the selection of Mr. Rettig who will perform ably in this position based on his experience and demeanor.

For those interested in tax procedure and tax controversy, it is especially notable that the President has nominated Mr. Rettig. Even in the bygone era of tax lawyers as commissioners, it was not necessarily the norm to appoint a tax lawyer who specialized in controversy rather than tax planning. This is an important opportunity for the shaping of tax administration by someone very familiar with tax procedure and the issues created when taxpayers have a problem with the IRS. One earlier commissioner with a litigation background (having taken Flora v. United States to the Supreme Court twice) who served with distinction and stood up to President Nixon when he sought to use the IRS to torment his “enemies” was Randolph Thrower. It is a proud tradition to uphold.


Since the appointment of Charles Rossotti in 1999, Presidents have appointed a series of individuals with management experience but not tax experience. Mark Everson became commissioner in 2003 with a fair amount of government management experience, Douglas Shulman in 2008 with public and private management experience, and John Koskinen in 2013 with significant public and private management experience. Each of the “management” commissioners over the past two decades had the type of experience necessary to run a large organization, but a steep learning curve on the culture of the IRS and the tax laws it administers. With the exception of Commissioner Everson, I met each of the others briefly and formed favorable impressions. Commissioner Koskinen seemed terrific but could not shake the real or apparent hatred of several vocal members of Congress.

From the time I started working at the IRS and for several decades before, the traditional appointee to the position of Commissioner was a tax lawyer. Usually someone from a big firm and someone with decades of tax experience. Even a lawyer at a big firm, however, has no experience managing a large organization like the IRS with many components. As the information technology component of the administration of the IRS became more and more important, the desire for a tax lawyer became less and less. So, for the past two decades we have had a commissioner who was a management specialist rather than a tax specialist who might surround themselves with others with strong management experience. It’s past time to try a tax lawyer again.

So, who are getting? I had the pleasure to serve with Mr. Rettig on the ABA Tax Section governing council first as co-fellows at large and then with Mr. Rettig elevated to the executive leadership of the section in charge of the finances. He took on the leadership position at a time of challenging finances for the section and he immediately took on the hard task of finding places to cut the budget and seeking new sources of revenue. He has done an excellent job in this position. He has management experience as the managing partner of his firm. He has quite a resume of service to the profession and to the government on advisory boards. He has also been one of the creative forces and leaders behind a very successful ABA conference on offshore issues.

Much of Mr. Rettig’s practice in the past several years has centered on representing individuals with assets offshore who needed to reach an agreement with the IRS. In this type of practice he must learn criminal tax law, civil tax procedure, tax litigation, and a lot of client management. My friend John McDougal who spearheaded the IRS efforts in offshore identification and compliance prior to his retirement has nothing but good things to say about Mr. Rettig as a practitioner having worked with him closely on a number of matters. Praise from John is not easy to come by. I have heard praise for Mr. Rettig from those who work closely with him on many occasions.

Mr. Rettig has a great personality and the kind of personality that will allow him to build the kind of rapport with Congress that the IRS desperately needs in order to get back to proper funding levels. I do not mean to suggest that I think he can charm his way to greater budgets, but I think he will figure out how to work with the appropriate people to make it possible to make a winning pitch for the type of support and the amount of funding that the IRS needs to properly do its job.

The non-tax background commissioners of the past two decades have been smart people with lots of relevant experience in running an organization but it will be refreshing to have a leader of the IRS who knows the tax system from the trenches. He is someone who can quickly size up the proposals being made to him from the compliance and taxpayer assistance functions. Having worked with many clients seeking to hide their money offshore and seeking to fix a problem of having an offshore account created by someone else, he will be able to size up the types of strategies that will allow the IRS to put resources into the proper place to promote compliance based not just on reports from various IRS functions but from decades of working with taxpayers seeking to comply (or not) with the tax laws.

The President has made a great choice. I hope Congress will quickly confirm the choice so that the IRS does not go too long without leadership.

Data from ABA Tax Section Meeting

February 8-10 the Tax Section held its mid-year meeting in San Diego. Here are a few items of interest from the meeting concerning the Tax Court, the Department of Justice Tax Division, the revocation of passports and the National Taxpayer Advocate’s annual report.


Tax Court

The Court had about 22,000 cases pending at the end of October. It continues to close cases faster than it receives them. There are three openings at the moment to fill the empty seats on the 19 judge roster of the court and there are three nominations pending. I got the impression from a separate conversation that perhaps the nominations would move forward in late March based on the current schedule in the Senate. Tax Court nominations go through the Senate Finance Committee rather than through the Judiciary Committee. In addition to the three current openings, Chief Judge Marvel reported that she anticipates the possibility of three additional openings on the Court this year because one judge will turn 70 – the mandatory age for Tax Court judges and the point at which a Tax Court judge turns into a senior judge or retires altogether – and two judges come to the end of their 15-year terms. Chief Judge Marvel observed that it is possible that the makeup of the Court will change by almost 1/3, depending on how the administration deals with the judges whose terms are expiring, and that would be an extraordinary amount of turnover for the Court. (Some administrations have almost automatically reappointed Tax Court judges as their terms expired and some have almost automatically replaced judges as their terms expired. We will soon find out how the current administration approaches the matter.)

Department of Justice

The Tax Division of the Department of Justice was ably led by Dave Hubbert for many months while it was without a political appointee. Dave continues to serve as the deputy in charge of Civil Matters as he did, since 2012, before he was acting as the head of the Tax Division. On December 17, 2017, Richard Zuckerman joined the Tax Division as the Deputy Assistant Attorney General for Criminal Matters and became the Division’s Principal Deputy in charge of the Division. Read more about him here. The Tax Division has three priorities for the coming year: 1) offshore compliance; 2) employment taxes; and 3) return preparers. These priorities are not especially new but continue as areas of emphasis in enforcing the tax laws.


I attended a panel discussion devoted to the enforcement of the provision which will revoke or deny a passport for individuals with seriously delinquent tax debt. The principal panelist was Drita Tonuzi, the Deputy Chief Counsel for Operations. Drita has held this position for almost one year. So, the panel could hardly have been more authoritative. We have discussed this issue before here and here. The IRS will certify taxpayers to the State Department if the taxpayer owes more than $50,000 and their CDP rights are exhausted, except for taxpayers who fall into certain statutory and administrative exceptions.

The statutory exceptions listed in IRC 7435(b)(2) include debts being paid in an installment agreement (IA) or offer in compromise (OIC) on which the taxpayer is up to date, debts being contested in a Collection Due Process (CDP) hearing and in an innocent spouse request. The manual also notes that the IRS will not refer taxpayers currently serving in a combat zone because of the suspension of action against these individuals in IRC 7508(a). The IRS has created a list of eight administrative exceptions in IRM which it published on December 12, 2017. These exceptions are cases in currently not collectible status; cases involving identity theft; cases in which a bankruptcy case is pending; debt of a deceased taxpayer (the IRM specifically limits this exception to the deceased taxpayer himself or herself and makes me wonder how many of these taxpayers have concerns about their passports but I will refrain from making further remarks on this exception); pending OICs and IAs; pending adjustments that will fully pay the liability and taxpayers residing in a disaster zone.

The panel indicated that the letters would be going to the State Department “soon,” which may mean before the end of February.

When the IRS sends a certification to the State Department that a taxpayer is seriously delinquent, it simultaneously will send a letter to the taxpayer. This letter, which will be sent by regular (not certified) mail to the taxpayer’s last known address will give the taxpayer the opportunity to file a petition in Tax Court to contest the decision. The taxpayer has the right to file a petition in Tax Court or in the District Court. The panel stated that the time to go to court is open-ended. It also speculated that most taxpayers will go to District Court because of the desire for speed that would not be afforded under normal Tax Court procedures. The panel stressed that the IRS is just one part of this process and the State Department is the place where the denial or the revocation of the passport occurs. For IRS procedures, look at IRM

National Taxpayer Advocate’s Report

I was extremely glad that the government shutdown that occurred during the Tax Section meeting lasted only a few hours. Had the shutdown continued, I was slated to attempt to fill in for the National Taxpayer Advocate on a couple of panels and that would not have been good for those attending. Since the shutdown ended, the National Taxpayer Advocate was able to deliver the presentation about her report. This will be a glancing blow on the topics covered and I hope to have some individual posts regarding some of the topics needing a longer discussion.

One of her findings this year concerned the reports we have become accustomed to hearing that the IRS audits less than 1% of the returns filed. In her annual report and her discussion, she debunked this myth by pointing out the actual number of returns on which the IRS makes adjustments approaches 7%. She also pointed out that 76% of audits are done by correspondence and that we should be focusing on not just the number of contacts made by the IRS but the nature of the contacts. The contacts are an opportunity for the IRS to educate and to bring taxpayers into long-term compliance but contacts by correspondence have much less of a chance of accomplishing this purpose.

The IRS has decided that it has authority to do retroactive math error adjustments. In 2017, there were a number of filers who used ITINs without updating them as instructed. Chief Counsel has issued an opinion that nothing prohibits retroactive math error adjustments. The IRS intends to send such notices to the individuals who used invalid ITINs in 2017 and then just summarily assess liabilities against the individuals who received refunds.

The 2017 filing season was the first one in which the IRS held up refunds in which the taxpayer sought refundable credits until February 15th. The purpose of the delay in issuing the refunds until that date was to give the IRS time to match third-party data against the returns to cull out bad refund claims. By February 15th, the IRS still did not have the data it needed in order to perform the match with respect to many taxpayers. If the employer or other third party submitted the information returns by paper, the IRS did not have time to transfer that information into its digital file in order to perform the match. The NTA recommends reducing the number of employees, from 50 to 5, an employer can have and still use paper.

The NTA also talked about the new “Purple Book” that was issued as a part of her report. The color was chosen as a blend of red and blue to signify the bi-partisan nature of the legislative suggestions. The book puts together the suggestions from a compilation of suggestions made during the period of the NTA’s service in that position and it provides the suggestions to Congress in a ready to use format. The NTA credits Ken Drexler, who heads up the legislative liaison work in her office, for the idea but noted that its inclusion caused a lot of additional work for the staff. Two of the provisions in the book were passed by Congress during the Tax Section meeting and I will talk about those provisions in a separate post.


Bankruptcy Cases Involving Evasion of Payment and Classification of the Failure to File Penalty

A pair of recent bankruptcy cases deserve some mention. Conard v. IRS and In re Colony Beach & Tennis Club take a look at IRS claims from two perspectives and provide some insight on whether a bankruptcy petition will prove beneficial in certain circumstances. In the Conard case, the husband gets no relief but his wife will get the opportunity to fully litigate the issue of discharge. In Colony Beach, a defunct partnership’s liability gets classified in a way that will help other creditors of the debtor if not the debtor itself; however, in fashioning the equitable remedy that subordinates the IRS claim, the bankruptcy court loses sight of the true party to blame for the problem and creates an inequitable result at odds with earlier precedent and good sense.


Evasion of Payment

Conard involves the application of facts to BC 523(a)(1)(C). This bankruptcy code section excepts from discharge tax debts incurred through evasion of a tax debt either in the filing or a return or the payment of the tax. The Conrads’ case involves evasion of a tax debt though efforts taken not to pay the tax. The amount of the liability was not in dispute and the IRS did not argue that the Conards did anything to keep the IRS from knowing the correct amount of the liability. Instead, the IRS seeks to deny the Conards a discharge because they have attempted to evade payment of the debt prior to filing their bankruptcy petition. The IRS must prove by a preponderance of the evidence that the Conards did not pay their taxes in an improper effort to avoid doing so. Guest blogger Lavar Taylor discussed this issue previously here and here. I wrote about it here, in a case involving evasion of the creation of the liability and not evasion of payment but the post has links to a couple of earlier discussions of the issue.

Mr. Conard operated a life insurance agency in Northern Virginia. The case caused me to notice that in the district where I practiced bankruptcy law while representing the IRS a new bankruptcy judge had been appointed, Judge Keith Phillips, who I knew and liked as a practitioner. Judge Phillips describes Mr. Conard as someone who “chose to put his federal tax obligations ‘on the back burner’ in favor of paying business expenses ‘to keep the business … afloat’ and expanding his business to generate more income.” Mr. Conard placed his federal taxes so far on the back burner that by the time he arrives in bankruptcy court he owed the IRS almost $700,000 for the years 2004-2009.

Of course, as is common in these types of cases, he made purchases that make it very difficult to have sympathy for him. He bought an $86,000 Mercedes Benz, a $47,000 BMW, a $50,000 Buick Lacrosse, and a $4,000 Harley motorcycle. In addition, he spent $48,000 on his son’s tuition as well as a litany of other goods and services that did not reflect the lifestyle of someone scuffling to get by. Judge Phillips found Mr. Conard’s case so straightforward that he ruled for the IRS on a motion for summary judgment. He finds, citing cases from the 3rd, 5th, 6th and 10th Circuits, that the IRS need to meet the criminal standard of beyond a reasonable doubt for evasion of payment.  The IRS needs to prove that Mr. Conrad attempted to evade the payment of his taxes – essentially the same, if not the same, proof as in a 7201 evasion of payment case; however, the proof does not need to be beyond a reasonable doubt or even clear and convincing in order to have the taxes determined to be excepted from discharge under BC 523(a)(1)(C).  The IRS can have the taxes excepted from discharge if they can prove the attempt to evade payment by a preponderance of the evidence.

However, the Court determined that the IRS had not shown that Mrs. Conard was sufficiently willful in not paying her taxes. It refused to rule on summary judgment with her and will hold a trial to determine her role in the non-payment. I do not know enough about the case against her to have an opinion. With respect to Mr. Conard, he presents the classic case of someone excepted for discharge for seeking to avoid the payment of taxes. If you are not going to pay your taxes, try not to purchase expensive cars and other big ticket items during the period of non-payment.

Reasonable Cause and Equitable Subordination

The Colony Beach case involves a situation in which the IRS seeks to have a penalty claim elevated to administrative claim status. If the claim achieves that status, it will get paid before all other unsecured claims. The debtor, a limited partnership, filed its chapter 11 bankruptcy petition in October, 2009, but by August of 2010 it followed the path of many businesses that start in chapter 11 and converted to a chapter 7 liquidation. It was a fiscal year taxpayer whose year ended on April 30. The return for the year ending in 2011 was initially due July 15 and the extended due date, had it requested an extension, would have been due on January 15, 2012. The trustee filed the return on January 7, 2012 apparently operating under the mistaken impression that his accountant had requested an extension. Because neither the trustee nor his accountants requested an extension, even though they could have done so, and because this penalty applies at the partnership level, the IRS filed a proof of claim for a penalty of $356,695.46.

The trustee, the same person who filed the return late, objected to the claim arguing that reasonable cause existed for late filing. Additionally, the trustee argued that it would be inequitable to allow the IRS to have a priority claim for the penalty and get paid ahead of all other unsecured creditors of the bankruptcy estate. (I do not know exactly how much money was in the estate but it is possible that the penalty claim made the estate “administratively insolvent” which would have meant the trustee would not receive his full fees.)

The first sentence of the reasonable cause portion of the opinion contained a citation to Boyle, which I have noted before is almost always a signal that things will not go well for the party arguing reasonable cause. My use of Boyle as a predictor on this point proved accurate again. The trustee argued that he was involved in “complex litigation which required his full attention.” He also argued that the business was in disarray impeding his ability to reconcile accounts. These all seem like reasons for requesting an extension of time to file which would only have taken a few moments and would have bought the trustee the time he needed to put things together. The court pointed out that the trustee did not file an application to employ accountants to prepare and file the 2011 return until five days before the extended deadline for filing the return. He testified that he thought the debtor’s former accountants would take care of requesting an extension though he never checked on whether they had done so. Consequently, the court had little trouble turning back his reasonable cause claim.

“Nevertheless, it is appropriate in this case to deny the United States’ claim as an administrative expense under 503(b) and to equitably subordinate it.” So, losing the reasonable cause argument in this case does not have any apparent negative impact on the trustee or most of the creditors of the estate. The court notes that penalties can achieve administrative claim status; however, to do so they must relate to a tax incurred by the estate. Here, the taxes related to the late file return are the responsibility of the partners and not the partnership in bankruptcy. So, the claim does not qualify for administrative claim status under section 503((b)(1)(C).

The IRS wants this money so it argued even if the penalty claim does not qualify under (b)(1)(C) it should qualify as a “generic” administrative expense, citing In re, Inc., 527 B.R. 701, 702 (Bankr. S.D. Cal. 2015). That case involved a late filed S Corporation return which had the same tax passthroughs as the partnership return and the same late filing penalty application at the corporate level. The bankruptcy court here, acknowledging the appropriateness of the citation, declines to accept the reasoning of that case concluding that “it is appropriate to give meaning to the exclusion of penalties that are unrelated to taxes owed by the bankruptcy estate.” The court also points out the real elephant in the room which is the impact of allowing the penalty claim as an administrative claim on the unsecured creditors who had no hand in the late filing of the return.

Here is where I disagree with the court. It states that in the case “the impact of the penalty fell on the trustee because the claim, as an administrative expense, reduced the trustee’s compensation.” The court further states that in this case “the trustee will be paid in full, regardless of the United States’ claim receiving administrative status or not….” That makes no sense. The court could have the IRS claim for the late penalty paid in lieu of the trustee’s payment and subordinate the trustee’s payment, to the extent of the penalty claim to general unsecured status. The trustee in this case need not be paid in full while the IRS gets stiffed on its penalty claim that arose because of the trustee’s failure. I totally agree with the court that this penalty should not be borne by the other unsecured claimants but allowing the trustee to take ahead of the IRS cannot be reconciled with equity.


The bankruptcy court in understood how to fashion an equitable remedy in this situation. I hope the IRS appeals the case to a district judge who has a similar understanding of equity. If the trustee in a situation like this receives his full fee, he learns that filing late has no consequence. That should not be the lesson learned from filing late. This court loses sight of how to fashion an equitable remedy no matter how sorry one feels for a busy trustee.