Tax Court Announces Return to In-Person Trials

On August 27, 2021, the Tax Court issued a press released stating that it anticipates returning to in-person proceedings starting with the winter trial sessions for 2022.  In the announcement, the Tax Court also states that it will continue to hold trials remotely where appropriate.

All of the Tax Court calendars scheduled for the Fall 2021 calendars are remote.  Until the August 27 announcement it was unknown when Tax Court judges would begin holding in-person trials again.  It was also unknown if the Tax Court would continue to offer remote proceedings as an option.  In issuing Administrative Order 2021-1 the Tax Court terminated Administrative Order 2020-2 which replaced in-person proceedings with remote proceedings and set a path forward for post-pandemic trials at the Tax Court.  By adopting a rule that allows for both in-person and remote proceedings, the Tax Court follows another Article 1 court, the Court of Veterans Appeals, and provides maximum flexibility for the parties and itself to conduct future proceedings.

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The announcement creates some rules for requesting remote proceedings.  The rules contemplate that starting with the Winter 2022 Tax Court calendars the default setting for a trial will return to in-person proceedings.  Judges and trial clerks will start buying their plane tickets to the 73 cities where the court holds trials outside of D.C.  While in-person proceedings return to the normal Tax Court setting, the announcement provides that either party can request a remote proceeding by filing a motion up to 31 days prior to the first day scheduled for the trial session on which the court sets the case.

The announcement provides that a petitioner could request a remote proceeding at the time of filing the petition or any time between that date and the 31st day before the trial calendar start date on which their case appears.  Although not specifically stated, I assume respondent (the IRS) could request a remote proceeding at the time it answers the case or any time prior to the 31st date before the calendar.  The Court included with the announcement a sample motion that the parties could use to make the request.  It would seem that parties could start making the request now if they knew they wanted a remote proceeding.

Whether to grant the motion for a remote proceeding is at the judge’s discretion.  The announcement doesn’t say which judge would grant the motion if the party makes the motion before assignment of the case.  Typically, Tax Court cases remain unassigned until they appear on a calendar.  Orders issued in unassigned cases usually come from the Chief Judge’s chambers.  Once a case appears on a calendar, the judge assigned to that calendar takes control of the case.  If the party waits for the assignment of a calendar to request a remote proceeding, the judge in charge of that calendar will make the decision whether to put the case for a remote proceeding.

If a case is removed to a remote proceeding, the court indicates that it will seek to place the case on a stand-alone remote trial session “that is at least 5 months away.”  This sounds like a party seeking a remote proceeding after issuance of a calendar will receive a continuance of sorts.  This may be why the court requires the motion be made 31 days in advance.  Motions to continue made in the last 30 days before a trial session are presumed to be for purposes of delay.

The announcement does not make clear whether the trial judge assigned for the in-person calendar would be the same trial judge who would handle the remote calendar.  Depending on how that works, it is possible that filing the motion could not only allow the party more time to get ready for trial but allow the party to obtain a new judge to try the case.  Maybe that’s not such a big deal in the Tax Court as it might be in other courts.  By and large the trial judge in the Tax Court is not very outcome determinative but there could be times when a petitioner or the respondent might want a different judge than the one assigned to the calendar.  This could provide a path to that result if the judge in charge of the remote session is not the same as the judge at the in-person session. 

The announcement does make clear that the presiding judge for a calendar not only makes the decision regarding whether to allow the remote proceeding when the motion is filed after the issuance of the calendar but also can decide whether to handle the remote trial themselves at an agreed upon time or put the case over to the remote calendar.  In addition to the normal considerations regarding how much time a judge has invested in a case, I imagine the size of the trial location could also play a role in this decision.  Small venues that typically have only one trial calendar per year do not normally have a full complement of 100 cases on a calendar.  It may not make sense to create a virtual calendar for those locations that consists of only one or two cases and the presiding judge may default to retaining jurisdiction.

The remote trial sessions will all begin at 1:00 PM ET.  This allows for the sessions to begin at the same time across the country and is a departure from the normal 10:00 AM starting time in the time zone where an in-person trial session is held.  The parties in Hawaii might need to get up a little early under this system but the court has adopted this rule to reduce confusion.

The announcement states that the public will have access to remote proceedings.  I expect the public would have the same type access it has to remote proceedings today.  The court also indicates that it will continue to coordinate with low income tax clinics and local bar sponsored pro bono programs to provide assistance for petitioners who end up on a remote calendar.  I expect the court will do that it much the same way it has done with remote calendars over the past year.

The court’s announcement will undoubtedly get Chief Counsel’s office thinking about the policies it wants to adopt regarding remote proceedings.  When will it make a request for remote proceedings?  When will it oppose remote proceedings?  Sometimes for workload reasons it shifts cases from one office to another requiring it to send attorneys from one city to another at some expense.  Will it request remote proceedings in those situations as a cost savings measure?  Will it request remote proceedings even if the petitioner wants to conduct the trial in person?  Will it object to motions made 31 days in advance of trial as a tactic to obtain a continuance?  It will have lots to consider.

The announcement moves the Tax Court into a new phase.  It now becomes a court that does not need to travel quite as much and can schedule cases remotely.  Will the trial judge with only one case left on the North Dakota calendar exert some pressure on the parties to try the case remotely and save the judge two days of travel time?  Will there be other factors that influence the court in granting or denying requests for remote proceeding?  So far, the switch for remote or in person has been an on/off switch.  The court was either in person or remote but not optional.  It will be interesting to see how the parties and the court adapt to the optional world and where the Tax Court ends up 10 years from now.

Setting Aside a Settlement

Several years ago, a settlement reached by the Villanova clinic with an Appeals Officer was set aside when the AO’s manager would not accept the settlement recommendation.  Every settlement with an AO or a Chief Counsel docket attorney must receive approval from their manager.  Usually, the AO or the Chief Counsel attorney makes explicit statements about the limitations of their authority.  However, when time permits, these individuals also usually discuss a proposed settlement with their manager so that the formal submission of the settlement does not result in a surprise to the taxpayer and the employee.

Following the unpleasant surprise created by the rejection of a settlement that resulted from months of discussion with the AO, the clinic researched when a settlement could bind the government.  The research did not lead us to the conclusion that we could bind the government in this instance, despite the fact that the AO had led us on for some time.  I wrote a three part blog post series, linked here, here, and here, about our case and an article on the binding nature of settlements in general.  Les wrote a subsequent post involving a different case that also raised the binding nature of a settlement.

The recent 9th Circuit decision in Dollarhide v. Commissioner, 18-71722 (9th Cir. 2021) raises this issue in the context of a stipulation of settled issues.  It is a case worth noting.

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In the Tax Court it regularly occurs that the parties reach a settlement at the last minute.  Certainly the Tax Court is not unique in having parties reach a last minute settlement.  What does create more tension in Tax Court settlements is the circuit riding nature of the court.  It only comes to one of the 74 cities in which it sits every few months or every six months or once a year.  Continuing a case to allow the parties to wrap up a settlement could throw the case back on the general docket.  It could also allow the unscrupulous petitioner or representative to appear to settle only to back out when the court leaves town, not to return for quite some time.

To prevent parties from backing out and to cause them to show that they really did have a settlement, the court regularly requests parties to last minute settlements to file with the court a stipulation of settled issues.  Aside from the fact that the Tax Court travels, settlements can take some time because the issues need to be turned into tax computations.  By filing with the court a stipulation of settled issues, the parties essentially leave open the possibility of a Rule 155 argument on the consequence of the computation of the issues but otherwise commit themselves to a settlement.  The trial judge on the calendar typically retains jurisdiction over the case.  In the routine case in which a stipulation of settled issues is filed, the computation occurs within a relatively short time and a decision document is submitted to the court shortly thereafter.  Judges typically give about 30 days from the time of filing the stipulation of settled issues for this to occur, though continuances sometimes occur when something causes a delay.

The Dollarhides entered into a stipulation of settled issues in their Tax Court case.  After doing so, they declined to sign a decision document.  This sounds similar to what happened in the Dorchester Industries case, the seminal Tax Court case regarding the binding nature of certain agreements.  When the Dollarhides declined to sign the decision document, the IRS moved to enforce the settlement agreement and the Tax Court agreed with the IRS.

The Dollarhides appealed the enforcement and the 9th Circuit reviewed the decision for abuse of discretion.  The 9th Circuit found:

The Stipulation of Settled Issues, on which the Tax Court’s order granting the IRS’s motion for entry of decision is premised, says nothing about the key issue in this case: whether the Dollarhides were barred by the statute of limitations set out in 26 U.S.C. § 6511(b)(2) from receiving a refund for tax year 2006. The Dollarhides contested application of the statute of limitations bar in the Tax Court and continue to do so on appeal.

The Commissioner now concedes that there was no conclusive settlement agreement between the parties with respect to whether the Dollarhides were due a refund for tax year 2006. Because there was no settlement agreement between the parties with respect to this disputed issue, it was an abuse of discretion for the Tax Court to grant the Commissioner’s motion and enter a judgment enforcing the parties’ purported settlement of this issue. See Bail Bonds, 820 F.2d at 1547. We thus vacate and remand on this ground and do not reach the Dollarhides’ remaining arguments on appeal.

This is a somewhat shocking result that both the IRS and the Tax Court would miss the fact that a major piece of the settlement of the case was missing.  Since the IRS conceded that this piece was missing, we do not get an opinion from the 9th Circuit that parses the language of the settlement. 

While it’s possible to give the Tax Court a stipulation of settled issues that does not settle all of the issues in a case, when the parties do that they usually make it clear that the stipulation is in partial settlement of the case and does not resolve all issues.  I would have expected the parties to do that here and cannot say why the stipulation would have left the IRS and the Court with the impression that everything was settled.

Certainly, one lesson here is to make clear in submitting the stipulation of settled issues what issues, if any, are reserved by the parties.  Here, the Dollarhides avoid having the settlement foreclose them from making the refund argument but on appeal they faced the daunting task of overcoming an abuse of discretion standard.  Another lesson is that the possibility exists to challenge a decision based on a stipulation of settled issues.  In most cases taxpayers will lose, but the Dollarhide case shows that success is possible.

Is Economic Hardship the Antidote for Knowledge in an Innocent Spouse Case?

A pair of innocent spouse cases just came out, one granting relief, Grady v. Commissioner, T.C. Summ. Op. 2021-29, and one denying relief, Rogers v. Commissioner, No. 20-2789 (7th Cir. 2021).  Neither case reaches a surprising result but the cases do continue trends.  In this post I hope to not only provide some background on these two cases but to also explore the trends that have emerged in innocent spouse cases.

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In the Grady case, a case tried under the small tax case procedures, the Tax Court details a litany of issues that the non-requesting spouse (the ex-husband) caused during the marriage.  In the end, the Tax Court finds that the petitioner knew that the tax liability was not being paid so the knowledge factor is negative but essentially all other factors were positive, including economic hardship.  The Court states that:

While her knowledge when she signed the 2007, 2009, 2010, and 2011 joint Federal income tax returns that the tax due would not be paid weighs against her entitlement to section 6015(f) relief, generally knowledge is only one of the factors and knowledge alone is not determinative of the Court’s decision. See Minton v. Commissioner, T.C. Memo. 2018-15 (granting relief despite the taxpayer’s admitting to knowledge of a balance owed); Demeter v. Commissioner, T.C. Memo. 2014-238 (granting relief despite finding that the taxpayer knew or had reason to know that her ex-husband would have difficulty paying the tax liabilities). Therefore, in considering Ms. Gans’ entitlement to relief under section 6015(f), her knowledge is only one factor among many to be taken into account. As the Court has noted, no one factor, in and of itself, is determinative. See Stolkin v. Commissioner, T.C. Memo. 2008-211; Beatty v. Commissioner, T.C. Memo. 2007-167; Banderas v. Commissioner, T.C. Memo. 2007-129.

As regular readers of this blog know, we believe, and have discussed here and here, that the Tax Court treats knowledge as a super factor in many cases.  Knowledge alone did cause Mr. Jacobsen and Ms. Sleeth to lose their innocent spouse cases despite four (Jacobsen) and three (Sleeth) positive factors. The fact that, even in this case where knowledge is the only negative factor, the Court spends a paragraph explaining that knowledge alone is not determinative, provides insight into the power of the knowledge factor.

The Rogers case continues the unbroken string of losses for taxpayers appealing IRC 6015 cases.  Since the change in the law in 1998 placing the innocent spouse provisions in IRC 6015, no taxpayer has won an appeal from an adverse Tax Court decision.

In Rogers, the 7th Circuit affirms the Tax Court’s holding that the wife of a shelter promoter isn’t entitled to innocent spouse relief.  The court noted that this was not the first visit to the 7th Circuit by one or both members of the marital unit:

Married since 1967, John and Frances Rogers filed joint federal income tax returns for many years. They underreported their tax obligations many times over, and the misreporting was the product of a fraudulent tax scheme designed by John, a Harvard‐trained tax attorney. The fraud did not elude the Internal Revenue Service, though, and the many subsequent collection and enforcement proceedings in the U.S. Tax Court have not gone well for the Rogerses. Our court has affirmed the Tax Court’s rulings every time.

Before us now is another appeal by Frances challenging two Tax Court decisions denying her requests for what the Tax Code calls innocent spouse relief. Our review of the record shows that the Tax Court took considerable care assessing Frances’s pleas for relief, in the end denying them largely on the basis that she was aware of too many facts and too many warning signs during the relevant tax years to escape financial responsibility for the clear fraud perpetrated on the U.S. Treasury. While the tragedy of what Frances has endured over the years is in no way lost on us, we are left to affirm, for the Tax Court got it right.

In one respect, the 7th Cir. disagrees with the Tax Court as to a factor — the substantial benefit factor does not weigh against relief in this case.  But, interestingly, the 7th Cir. never cites or discusses the Rev. Proc. factors.  It limits its discussion to how the Rogers facts compare to a prior 7th Cir. opinion from 1996, Reser, which, of course, involved 6013(e).  The most the 7th Cir. will do is cite a reg. under 6015 concerning significant benefit for purposes of (b), 1.6015-2, that actually derives from language in the Committee reports from 1971 for enacting 6013(e).  The committee reports can be found at H.R. Rep. No. 91-1734, at 2 (1970), and S. Rep. No. 91-1537, at 2 (1970), 1971-1 C.B. 608. The 7th Cir. focuses entirely on the knowledge issue (both for purposes of (b) and (f) relief) as grounds for denying relief.  If there were no other factors negative for relief, though some positive or neutral factors, this would make Rogers a case similar to the Jacobsen case decided by the 7th Cir. two years ago.

Interestingly, the Grady case presented only one negative factor, knowledge, and multiple positive factors, but the Tax Court granted relief.  That’s the exact same situation as in Jacobsen, but the case leads to a different result.  Carl Smith has done a fair amount of research and thinking on this issue.  He concludes that the reason why Grady won while Jacobsen didn’t is that, although Jacobsen had four positive factors for relief, he did not put in the evidence to establish financial hardship, which Grady did.  Research of innocent spouse cases shows that proving financial hardship serves as the only way to guarantee that the taxpayer wins an innocent spouse case where knowledge is a negative factor.  Lack of significant benefit, marital status, and compliance with return filing obligations are not enough to outweigh knowledge in some Tax Court opinions.  Note that, in Sleeth (from the 11th Cir. this year), Ms. Sleeth was also said not to have proved financial hardship, and her case also involved only one negative factor (knowledge), and three positive factors (the ones in the prior sentence). Jacobsen’s positive factors included those from Sleeth, as well as an additional fourth positive factor — for his bad health.

As mentioned above, the Rogers 7th Cir. opinion did not cite or discuss the Rev. Proc. that was applicable.  That seems significant, since the Tax Court almost always discusses each of the Rev. Proc. factors.  In 2011, Carl Smith wrote a Special Report for Tax Notes entitled “Innocent Spouse:  Let’s Bury that Inequitable Revenue Procedure“.  In the article, he called for the courts to return to deciding the equitable factor under common law — using opinions involving 6013(e) and 6015, not the Rev. Proc. factors.  While using the factors of the Rev. Proc. seems appropriate for the IRS in administratively evaluating cases, it seems less appropriate for courts which need not be bound by the IRS’ views of appropriate equitable factors.

In some ways the courts, particularly the Tax Court, seem to apply their own thinking, yet cloak the decisions in the factors of the Rev. Proc.  While the Rev. Proc. may say that knowledge is no longer a super factor and while the Tax Court may say it is applying the Rev. Proc., the outcomes suggest that the court has its own equitable barometer which still places significant weight on knowledge.  If the Tax Court weighs knowledge more heavily, then taxpayers must look for something to countervail knowledge or potentially lose even where they have many positive factors. In cases where knowledge is the only negative factor and there are three or more positive factors (one of which is lack of significant benefit), the taxpayer usually wins, but the taxpayer always wins if one of the positive factors is also financial hardship.  You can find the list of cases where knowledge was the only negative factor in the Jacobsen brief filed by the Harvard Tax Clinic in the appeal to the 7th Circuit.

The Effect of the Missing Postmark

Today’s case highlights the difference in treatment of envelopes with no postmark between the Court of Federal Claims (CFC) and the Tax Court.  It turns out that on this issue, petitioners receive better treatment at the Tax Court.  Of course, it is better not to find out what a court thinks about a missing postmark.  For those filing Tax Court petitions, the ability to electronically file offers an easy way around the postmark/private delivery service/postal delay issue.  Credit to Carl Smith for spotting this case and providing much of the text of this post. 

I have heard that only 15% of Tax Court petitioners have taken advantage of the post-DAWSON ability to electronically file petitions.  The Tax Court is no doubt disappointed at this uptake of a provision that could save it time in processing petitions and in having to decide these types of cases.  For a relatively long time, individuals have been able to file electronically in the Court of Federal Claims, district courts, bankruptcy courts and other federal courts.  Yet, service from the post office continues its siren song for many petitioners.  With the low uptake on the Tax Court’s electronic filing system for petitions, a decent number of practitioners must continue to prefer USPS or a private delivery service, but in many instances the people using the non-electronic filing options are pro se and low income.

The taxpayers in the case at issue did not have an electronic filing option because the document they were filing that causes the problem was not a petition but a refund claim.  As of yet, the IRS does not have a way to electronically file refund claims (amended returns) that go back more than two years, apart from original tax returns.  Even where you cannot electronically file documents with the IRS, faxing documents to the IRS provides a fast way to transmit them and immediately receive a receipt.  But the IRS instructs filers of Form 843 refund claims to mail in the form.  The mailing of documents continues to fill the pages of case books with situations where things do not work out.

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In an opinion issued by the CFC in a refund case, McCaffery v. United States, No. 1:19-cv-01112 (Ct. Fed. Cl. 2021), the issue was whether the taxpayer could introduce extrinsic evidence of the mailing of a refund claim where the claim arrived at the IRS just after the filing deadline, but the envelope in which the claim came had no postmark.  Under regulations, extrinsic evidence is allowed where the postmark is illegible, and the Tax Court has extended the reg.’s reasoning to situations where there is no postmark at all.  The CFC disagrees with the Tax Court’s interpretation and would not accept parol evidence in the absence of a postmark.  The CFC dismisses the case for lack of jurisdiction, without discussing whether a dismissal for failure to state a claim might be more appropriate (i.e., there is no discussion of the Walby Fed. Cir. opinion which we discuss here in a post by Carl). 

Here’s what the CFC wrote about the Tax Court’s position:

Plaintiffs argue that extrinsic evidence may be used to prove the date of mailing for purposes of the deemed delivery rule even when the postmark is absent. They cite a line of cases from the Tax Court holding that extrinsic evidence as to timely mailing must be considered when an envelope contains no postmark at all. Pls.’ Opp. at 5 (citing to Sylvan v. Comm’r, 65 T.C. 548 (1975); Seely v. Comm’r, 119 T.C.M. (CCH) 1031, 2020 WL 201751 (2020); Williams v. Comm’r, 117 T.C.M. (CCH) 1328, 2019 WL 2373552 (2019); Blake v. Comm’r, 94 T.C.M. (CCH) 51, 2007 WL 2011294 (2007); Menard, Inc. v. Comm’r, 41 T.C.M. (CCH) 1279, 1981 WL 10531 (1981); Monasmith v. Comm’r, 38 T.C.M. (CCH) 60, 1979 WL 3117 (1979); Ruegsegger v. Comm’r, 68 T.C. 463 (1977)). That line of cases, however, originates in conceptual errors by the Tax Court in Sylvan.

In that case, much like this one, the Tax Court confronted an envelope with no postmark that was delivered after a deadline. The court found a gap in the statute: “There is nothing at all in the statute or legislative history indicating what Congress intended where the postmark is illegible; where there is no postmark because the petition was inserted in a new postal cover when the original cover was damaged; or where no postmark is affixed due to oversight or malfunction of a machine.” Sylvan, 65 T.C. at 552. “[I]n these circumstances,” the court reasoned, its “task . . . is to ask what Congress would have intended on a point not presented to its mind, if the point had been present.” Id. (quotes omitted). The court concluded, over a dissent, that extrinsic evidence should be admitted to prove the date of mailing for purposes of the deemed delivery rule not only when a postmark is illegible, but where it is absent.

That was erroneous for several reasons. To begin with, the Tax Court was mistaken that the Internal Revenue Code contains “nothing at all . . . indicating what Congress intended” in cases of absent postmarks. Id. Section 6511(a) contains a deadline, and section 7502 contains a deemed-delivery exception that is textually inapplicable when a postmark is missing. There is thus no gap to be filled; a late-received envelope lacking a postmark is simply untimely, whatever the extrinsic evidence might be. When a court treats circumstances covered by a general rule as falling into a gap, the court is not really “ask[ing] what Congress would have intended,” Sylvan, 65 T.C. at 552, but presuming that the statute should say something different.8 See also Antonin Scalia & Bryan Garner, Reading Law: The Interpretation of Legal Texts 94 (2012) (“As Justice Louis Brandeis put the point: ‘A casus omissus does not justify judicial legislation.’ And Brandeis again: ‘To supply omissions transcends the judicial function.’”) (citing Ebert v. Poston, 266 U.S. 548, 554 (1925), and Iselin v. United States, 270 U.S. 245, 251 (1926)).

Besides, when Sylvan was decided, the Treasury had already promulgated the regulation providing for extrinsic evidence of the contents of illegible postmarks, but not absent ones. See Republication, 32 Fed. Reg. 15241, 15355 (Nov. 3, 1967); see also Sylvan, 65 T.C. at 560 (Drennen, J., dissenting) (noting that the regulations then in effect “provide[ ] that if the postmark on the envelope is not legible, the petitioner has the burden of proving the time when the postmark was made”). By sanctioning proof by extrinsic evidence in other circumstances, the Tax Court merely created a new exception that neither Congress nor the administering agency authorized.9 That, too, is inappropriate: A judge should not “elaborate unprovided-for exceptions to a text, as Justice Blackmun noted while a circuit judge: ‘If the Congress had intended to provide additional exceptions, it would have done so in clear language.’” Scalia & Garner, supra, at 93 (citing Petteys v. Butler, 367 F.2d 528, 538 (8th Cir. 1966) (Blackmun, J., dissenting)). Nor should a court assume that because a legislature provided relief from a general rule in one circumstance, similar relief should be applied in other circumstances. See Easterbrook, supra, at 541 (“Legislators seeking only to further the public interest may conclude that the provision of public rules should reach so far and no farther[.]”).

Limiting judicial discretion to elaborate on enacted texts is especially important when it comes to this Court’s jurisdiction. This Court’s authority to hear cases brought against the United States rests on waivers of sovereign immunity which must be interpreted strictly. See Block v. N. Dakota ex rel. Bd. of Univ. & Sch. Lands, 461 U.S. 273, 287 (1983) (“[W]hen Congress attaches conditions to legislation waiving the sovereign immunity of the United States, those conditions must be strictly observed, and exceptions thereto are not to be lightly implied.”); see also, e.g., Sumner v. United States, 71 Fed. Cl. 627, 629 (2006). That makes it inappropriate to find jurisdiction by implying additional exceptions to Plaintiffs’ deadlines, or otherwise enlarging the deemed delivery rule.

In short — contrary to Sylvan — cases like this one are controlled by the plain text of the relevant statutes and regulations. See, e.g., Myore v. Nicholson, 489 F.3d 1207, 1211 (Fed. Cir. 2007) (“If the statutory language is clear and unambiguous, the inquiry ends with the plain meaning.”) (citing Roberto v. Dep’t of the Navy, 440 F.3d 1341, 1350 (Fed. Cir. 2006)).

The result in this case is harsh. Mr. McCaffery has declared — without contradiction, and with some circumstantial corroboration — that he mailed the amended return on a day when it would have been deemed timely, if it only had been postmarked.

In Sylvan, the date of receipt left the court with “no doubt whatsoever” that the envelope was mailed on a day when a contemporaneously applied postmark would have satisfied the deemed delivery rule. 65 T.C. at 550-51. Plaintiffs cite other cases where it seems unfair not to consider evidence of mailing. E.g., Pls.’ Opp. at 8 (citing to Glenn v. Comm’r, 105 T.C.M. (CCH) 1228, 2013 WL 424879 (2013) (noting that the Postal Service’s employee made an error, and but for that error, the envelope in question would have contained a timely postmarked date)). One can even imagine two filings with the same deadline mailed on the same day, one with a missing postmark and one with an illegible postmark, where extrinsic evidence on deemed delivery can only be admitted as to the latter. Like many bright-line rules, the deemed delivery rule might be simple and predictable to administer, but its results are not always satisfying in close cases.

Yet the text controls.

Premature Assessment Announcement from Tax Court

On August 16, 2021, the Tax Court issued the following press release regarding premature assessments:

UNITED STATES TAX COURT

Washington, D.C. 20217

August 16, 2021

PRESS RELEASE

On July 23, 2021, the United States Tax Court issued a press release regarding the significantly increased number of petitions received this year. To date, the Court has received more than 26,000 petitions.

On July 26, 2021, and August 2, 2021, the Court met with various stakeholders, including representatives from the American Bar Association’s Section of Taxation, the Internal Revenue Service, low income taxpayer clinics, and bar-sponsored pro bono programs, to address concerns relating to the increased number of petitions being filed. The Court continues to process petitions expeditiously. It has also begun notifying the IRS of those petitions the Court has received prior to service in order to limit the potential for premature assessment and enforcement action against petitioners.

As a reminder, the IRS created a dedicated email address in October 2020 for petitioners to reach out with concerns about premature assessments or enforcement action: taxcourt.petitioner.premature.assessment@irs.gov.

If you have questions about whether the Court has received your petition, you can contact the Public Affairs Office at (202) 521-3355 or email publicaffairs@ustaxcourt.gov.

The press release primarily provides information we reported in a post on July 28, 2021.  While there is not a lot of new information in the latest press release, the press release itself is a hopeful sign that the Tax Court has set a path to keep the public better informed about the ongoing problem in processing petitions and the efforts to ensure that the problem has the least possible impact on petitioners.

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The most important sentence is the one stating that the Court is notifying the IRS of petitions prior to formal service of the petitions so that the IRS has the opportunity to mark its system and input the proper codes in the computer to prevent assessment and collection barred by the filing of the petition.  Perhaps the system devised by the Court will eliminate or substantially eliminate the problem caused by late notification of the filing of a Tax Court petition.

In the prior post on this subject and in most prior discussions, we have focused on premature assessments.  In the majority of premature assessment cases, the assessment triggers a notice to the taxpayer, the notice and demand letter, but not enforced collection, which will not occur for a few more months while the IRS goes through the collection notice stream.  For most taxpayers in deficiency proceedings who experience a premature assessment, there is time to fix the premature assessment prior to actual collection.  For those taxpayers where the timing of the premature assessment precedes the payment of a refund, the collection issue will occur when the IRS offsets the refund based on the premature assessment.  Offset is the most likely collection damage to occur in the premature assessment situation.

We have not focused our discussion on the taxpayers filing Collection Due Process petitions in response to a notice of intent to levy under IRC 6330.  For these taxpayers the threat of immediate enforced collection action is very real based on the failure of the IRS to input freeze codes resulting from the filing of the Tax Court petition.  CDP levy cases represent less than 5% of the petitions filed, but for taxpayers in these cases, the prospect of significant negative consequences as a result of the late transmittal of information to the IRS is the most urgent.

Stand-alone innocent spouse cases represent another vulnerable group of taxpayers.  Many of these taxpayers have gone through the collection notice stream prior to filing the innocent spouse petition.  The filing of the innocent spouse request puts a hold on collection action, but that hold ends if the IRS rejects their innocent spouse claim and they do not petition the Tax Court.  These cases could go immediately back into the collection stream, resulting in enforced collection prior to the fix of the notification of the petition.

CDP lien cases do not present the same type of urgency.  In CDP lien cases it is the taxpayer who hopes the Court will act quickly to grant relief.  The IRS, by filing the notice of federal tax lien, has already placed itself in the position it needs in order to protect its interest.  So, late notification of the filing of a CDP lien petition is unlikely to have direct adverse consequences on the taxpayer.  It simply delays the date on which the taxpayer might receive some form of relief from the lien filing.

In the stakeholder meetings, which Christine and Caleb attended, the Tax Court indicated that it is processing petitions based on a FIFO system. It is unclear whether the Court will be able to provide pre-service information to the IRS for petitions that were in its backlog at the time the Court’s petition acceptance procedures changed. As the Court works through the petition backlog, it might consider triaging cases to identify the CDP levy cases and stand-alone innocent spouse cases in which taxpayers are most vulnerable.  These CDP levy and innocent spouse petitioners could benefit the most from getting the information about their petitions over to the IRS in time to stop enforced collection.

As the IRS returned to more normal operation last fall, it produced a surge of notices that caused the significant uptick in Tax Court filings in the first half of 2021.  If we are past that surge, and I cannot say if we are with certainty, the balance of the year should return to a more normal filing pattern for the Tax Court and allow the Tax Court clerk’s office to catch up and catch its breath.  If you are filing a petition, lots of reasons exist for filing the petition electronically, but one of those reasons is that it will make it easier for the clerk’s office to process the petition, which should help to more quickly reduce and eliminate the premature assessment problem.  Consider filing your petitions electronically if you haven’t done so previously.

Another Twist on Death and Taxes

In Catlett v. Commissioner, T.C. Memo 2021-102 the Tax Court dismisses a case for lack of prosecution over seven years after the petitioner filed the case.  He participated actively in the case – at least he was active in seeking continuances and some discovery – until he died.  When he died, the Court and the IRS tried to find a family member to take over the case.  When no one would take over the case, the Court dismissed it for failure to properly prosecute.  I think it comes out as an opinion rather than an order because of the Court’s discussion of the burden on the IRS regarding the penalties it sought to impose.

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Mr. Catlett was a serious tax fraudster.  He partnered with an IRS employee to defraud the IRS by creating fictitious losses.  He helped over 250 clients reduce or eliminate their taxes through the fictitious loss scheme.  Eventually, he as caught, convicted by a jury and, in 2011, sentenced to 210 months of imprisonment.  That’s a long time for a tax crime.  He died in prison.

The case doesn’t talk about why the IRS does not seem to have made a restitution assessment.  The timing of his conviction came shortly after these types of assessments became available to the IRS and perhaps it did make a restitution based assessment but it also decided to give his returns a good, old fashioned audit.  As is customary in a criminal case, the IRS did not begin its audit until he was convicted.  So, the IRS decides to dedicate the precious resources of a Revenue Agent (RA) to audit someone who is in prison for almost 20 years and who owes almost $4 million in restitution.  Mr. Catlett fought the audit by refusing to provide documents and by challenging the summonses issued by the RA but the IRS overcame these challenges and obtained voluminous records which it used to reconstruct his income using the bank deposits method. 

Ultimately, the IRS issued a notice of deficiency for 2006-2010 and he petitioned the Tax Court in June, 2014.  Three times his case came up for trial – June 2015; March 2016 and December 2016.  Each time he requested a continuance.  The first two times it was granted.  Trying Tax Court cases involving incarcerated individuals creates many challenges.  It is difficult to get them out of prison and to the Court.  Often, the Court will continue these cases though for someone with a prison sentence the length of Mr. Catlett’s continuance of the case does not make as much sense.  The third time his case was on a calendar Judge Lauber was presiding, and he retained jurisdiction of the case rather than continuing it.  He ordered annual status reports.

That seems better than simply shuffling the case to the next judge when the person will be incarcerated for another 10 years, but 10 years is a long time to hold onto a case.  Judge Lauber is one of the most, if not the most, efficient and productive of Tax Court judges.  I am sure he was not excited about holding onto a case for so long but the choices in these situations are mostly bad choices.  Mr. Catlett’s death serves as the event that moves the case along.

When Mr. Catlett died in 2020, word eventually reached the Tax Court and the IRS.  Here’s what happened at that point:

After an expansive search respondent located three members of petitioner’s family. Respondent’s counsel explained to each of them the posture of this litigation, but they indicated that they wanted nothing to do with the case. When respondent advised them that he intended to file a motion to dismiss, they again confirmed that they would not participate. We gave all three family members notice of the trial and offered them the opportunity to appear. They declined to appear, and no other representative appeared on petitioner’s behalf. Under these circumstances we have no choice but to dismiss the case for lack of prosecution. The decision that we enter will sustain all adjustments insofar as petitioner bears the burden of proof. See Branson v. Commissioner, T.C. Memo. 2012-124, 103 T.C.M. (CCH) 1680, 1684-1685.

It’s hard to blame the family members for not wanting to get involved, and it’s not at all clear that their involvement would be meaningful.  The Court does not talk about any assets owned by Mr. Catlett, but I suspect there were none.  The result of this Tax Court case was almost certain to be an assessment with no prospect of collection.  You might ask yourself why the IRS would dedicate the precious resources of the RA in this pursuit not to mention the time spent by the Chief Counsel attorney over the years and the Tax Court.  Yet, that’s what I think this case was about – assessing an uncollectible tax when the Government already had a $4 million restitution order and was paying to house and feed Mr. Catlett for almost a decade.

My suggestion would have been to skip the audit and all of the efforts of the persons working for the Government over the past decade and focus on collecting the restitution order but that was not the choice made.  Once Mr. Catlett passed away and no family member stepped forward, the IRS moved to dismiss the case for lack of prosecution.  Because it had imposed numerous penalties (additions to tax) on Mr. Catlett, including the fraud penalty, and because of the burden of production with respect to these liabilities was on the IRS, the Court could not simply dismiss the case but had to weigh whether the IRS met its burden.

The Court finds that the IRS did meet its burden.  This exercise requires yet more work for the Chief Counsel attorney and the Court.  It finds the IRS manager gave the appropriate penalty approval required by IRC 6751(b).  It finds the factors necessary to prove fraud for some of the years and negligence for others.  It finds he owes other penalties and provides reasons for each finding. 

The system works.  In this case the system seems like a colossal waste of time.  Now a Revenue Officer will be assigned to this case and an uncollectible assessment will stay on the books for 10 years with required annual reminders and other actions that will not add additional revenue to the coffers.  I hated to work these types of cases because it seemed like such a waste of time and resources.  I can’t imagine those working on the Catlett case feel differently.

BC 507(a)(8)(C) Priority Prevents Discharge under BC 523(a)(1)(A)

Last week I wrote about the case of Lufkin v. Commissioner, T.C. Memo 2021-71, in which the Tax Court ruled on the impact of filing bankruptcy on the statute of limitations.  In that post, I mentioned that Bryan Camp wrote about the case as part of his Lessons from the Tax Court series, which alerted me to the decision.  In that same post Bryan also wrote about Barnes v. Commissioner, T.C. Memo. 2021-49, which Judge Lauber decided on May 4, 2021.  As with the Lufkin case, Bryan has a good write-up, and he provides good bankruptcy background information.  I will try to add a little additional color to the case.

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The Barnes case shows what happens when a taxpayer goes into bankruptcy while still contesting a liability.  As taxpayers learn, the result does not favor the taxpayer in a situation in which the unresolved liability gets resolved after the bankruptcy filing and the resolution allows the IRS to assess an additional amount.  The Tax Court must work through the bankruptcy provisions to get to the correct result which it does as it demonstrates again that bankruptcy discharge issues can find their way into Tax Court decisions requiring the Tax Court judges to understand bankruptcy law as they rule on tax collection issues.

When Mr. and Mrs. Barnes entered bankruptcy, they were still waiting for the Tax Court to make a decision on their 2003 liability.  They filed the Tax Court petition in 2008 and tried the case in June 2009.  They had submitted their briefs in the case when, on July 26, 2010, before the issuance of an opinion, they filed a chapter 11 petition.  The filing of the bankruptcy petition stayed the Tax Court proceeding and would have caused the Tax Court judge working on the opinion in their case to hold onto the opinion.  While the automatic stay stops the Tax Court proceeding, I don’t know if Tax Court judges interpret it as stopping them and their clerks from working on the case, or if it just stops them from issuing an opinion.  My guess is the latter, but I have not spoken with a Tax Court judge about how strictly the Tax Court interprets the stay.  Perhaps the Tax Court judges interpret the stay to require them to completely stop working on the opinion until the stay lifts, or perhaps there is a split among the judges regarding how they interpret the stay when it comes into existence during the opinion-writing stage of a case.

In any event, the existence of the unresolved Tax Court case means that as to the liability at issue in the Tax Court, the debt in the bankruptcy court for that unresolved liability would receive priority status under BC 507(a)(8)(A)(iii) because the liability was not yet assessed but was assessable. Here, the Barnes filed a chapter 11 case, which requires in BC 1129 that they commit in their plan to fully pay all priority claims.  The IRS participated in the plan and filed a proof of claim; however, it failed to include in its claim the 2003 liability.  The Barnes could have filed a claim on behalf of the IRS for 2003 or could have included 2003 in their plan, but the plan did not include the 2003 liability.  It’s hard to know whether this was oversight by one or both of the parties or a calculated decision.  The Barnes may not have wanted to commit to paying the $50K or so the IRS thought was due and may have been stretched to come up with a plan that would have paid it over time.  The IRS may have preferred to collect outside of bankruptcy and not lose the interest it would lose if paid through bankruptcy.  In any event, 2003 was not addressed.

Note that chapter 11 cases for individuals occur relatively infrequently.  If this were a chapter 11 filed by an entity, an oversight of this type could have ended the IRS’s hopes for any recovery on 2003 because of the super discharge available in chapter 11 to entitles.  That super discharge is not, however, available to individuals who must look to BC 523(a) for the discharge provisions and that’s where the Barnes lose their case with respect to the tax.

The chapter 11 plan, silent as to 2003, was confirmed.  The Tax Court says the automatic stay remained in place while the debtors made their plan payments.  In November 2011, the IRS filed a motion to lift the stay to allow the Tax Court case to move forward, which the bankruptcy court granted.  On April 2, 2012, the Tax Court entered its opinion.  Although the Barnes appealed the Tax Court opinion to the D.C. Circuit, they, like 99.9% of Tax Court petitioners who appeal, did not post a bond to stay assessment.  The IRS assessed on August 1, 2012.  The IRS eventually filed a notice of federal tax lien which allowed the Barnes to make a collection due process (CDP) request, which eventually led to the second Tax Court opinion regarding 2003 – this one only 18 years after the tax year, though the delay was not due to the Tax Court, which had acted reasonably expeditiously in both cases.

The Barnes’ first argument in the CDP case was that the 10-year statute of limitations on collection had ended before the IRS filed the notice of federal tax lien.  This argument makes absolutely no sense given that the assessment date for the 2003 liability is in 2012.  The Tax Court was gracious in noting that the collection statute remained open.

Next, the Barnes made another argument that made no sense – that the 2003 liability was discharged by the bankruptcy case.  Again, the Tax Court graciously pointed out that the liability was entitled to priority because it was not yet assessed but still assessable at the time of the bankruptcy petition.  Since they were represented, I am surprised by both arguments.

The Barnes requested an offer in compromise, but the IRS determined they had the ability to fully pay the debt.  Since they did not agree with that determination or did not want to pay the debt in full, the IRS determined the filing of the notice of federal tax lien was valid and the lien did not need to be released or withdrawn.  The Tax Court sustained this determination by ruling for the IRS in response to a motion for summary judgment.

Tax and penalty liability do not travel on the same discharge path in BC 523.  The penalty for late filing and the penalty for accuracy were discharged because they are governed by BC 523(a)(7) rather than 523(a)(1).  The provision for penalties essentially allows their discharge if three years has passed from the due date of the return at the time of the bankruptcy filing.  The Tax Court notes that these two penalties were discharged.  The interest on the penalties would likewise be discharged just as the interest in the tax would not.

Note that if the Barnes had owed taxes based on their return and not their deficiency case, the taxes owed which were shown on their return would have been discharged subject to an argument regarding the one-day rule, which the IRS would not raise and which the D.C. Circuit has not decided.  It’s possible for a taxpayer having liabilities that arise at different points in time to achieve different discharge results based on the timing of the liability vis a vis the timing of the filing of the bankruptcy petition.

If you have not read one of the many posts regarding the one-day rule, you can read one here which links to others.  The late filing of the 2003 return could itself have posed a basis for losing the ability to discharge any taxes due on 2003 had they filed bankruptcy in the 1st, 5th or 10th Circuits.  No one raised that argument in this case, and I mention it just because there was a late filing penalty assessed.

Designation of Payment in Payroll Tax Cases

We have not written about designation of payment in a long time.  Early in the life of the blog we had two posts on the topic which you can find here and here.  Designation of payment for any type of tax could have important consequences for the taxpayer and save lots of money.  For taxpayers who owe employment taxes, or any trust fund tax, or for responsible persons regarding those trust fund taxes, the issue of designation becomes more critical to a successful plan to limit liability.

The IRS allows taxpayers to designate the liability to which a payment is posted if the taxpayer or the person making the payment follows the correct steps.  Policy Statement 5-14 (found at IRM 1.2.1.6.3) sets out the basic policy governing designation of payments.  Essentially, the taxpayer, or the person making the payment, needs to clearly state the liability by tax type and period as well as describe what portion of the liability the person intends to pay, e.g., tax, penalty, or interest.  If properly designated, the IRS will take the funds and apply them in the manner requested by the taxpayer.

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Why does it matter which taxes get paid and what happens if a taxpayer makes a payment and does not designate?

It matters because sometimes a taxpayer owes different types of taxes and sometimes the taxpayer owes for several periods. 

Different taxes – Payroll taxes provide a good example of different types of taxes.  While you might lump payroll taxes together as one tax, it has different components.  Some of the payroll tax is owed because of the trust relationship created by the taxpayer when it withheld taxes from a third party for purposes of paying that tax over to the IRS.  Another part of the payroll tax is the taxpayer’s liability as a party making payroll to pay for the employer’s portion of payroll taxes.  Generally speaking, a payroll tax return (Form 941) will have three separate bases for liability.  Two are based on the trust relationship and stem from the money withheld from the employee to pay 1) income taxes and 2) Social Security and Medicare taxes.  The third portion of the payroll tax liability stems from the direct liability of the taxpayer to pay the employer’s portion of Social Security and Medicare taxes.

Different tax years – A taxpayer might owe income taxes for 2020, 2018, 2016 and 2014.  Attached to each of the income tax liabilities will also likely be interest and penalties.

If the taxpayer owing payroll taxes is Acme, Inc. and Acme’s owner is John, John faces a trust fund recovery penalty for which he has personal liability with respect to the unpaid trust fund portion of Acme’s payroll tax liability.  John cares deeply that Acme satisfy the trust fund portion so that he does not face a personal assessment of that liability.  He may also care about the employer portion of the payroll tax liability if he wants to keep Acme going, but his main concern derives from fear of personal liability.  If Acme has limited funds with which to pay the taxes or John has limited funds to contribute to Acme to pay the payroll taxes, John wants to ensure that the payments apply to the unpaid trust fund portion for which he has personal liability.  Only after the taxpayer penalties and interest of that portion of Acme’s liability is satisfied can he breathe easy regarding his personal liability.

If Acme or John, on behalf of Acme, makes a payment on the payroll tax liability and says nothing, the IRS will apply the payment to the non-trust fund portion of Acme’s liability first until it satisfies that portion.  By doing so, the IRS preserves the greatest possibility for it to collect additional dollars since it can go after either Acme or John on the trust fund portion but can only go after Acme on the non-trust fund portion.  The failure to make the designation could have significant negative consequences for John.

If Bob is the taxpayer owing income taxes for different years, he too might care about which of the four years to which the IRS applies his payment.  In most situations, the IRS will have assessed the earlier tax periods first, which means the statute of limitations on those periods will run first.  If the taxes for these four years were reported on timely filed tax returns, Bob’s 10-year statute of collection would run from about April 15, 2015 for the 2014 liability to April 15, 2021 for the 2020 liability.  The 2014 has less than four years to run before it expires while the 2020 liability has almost 10 years left.  Additionally, should Bob go into bankruptcy, the 2014 and 2016 liabilities would be classified as general unsecured claims which might be dischargeable with no payments made while the 2018 and 2020 would be excepted from discharge if a bankruptcy petition were filed at this time.  So, Bob has an incentive to designate his payments to the more recent periods, allowing the older periods to disappear more quickly due to the statute of limitations on collection or due to the bankruptcy discharge.  If Bob sends money to the IRS and says nothing, the IRS will almost always apply the money to the oldest period, first to taxes, then to penalties and then to interest.  Once the oldest period is paid, the IRS will almost always move to the next oldest period and again apply the payment to taxes, then penalties and then interest and so on until the liability is paid in full.  By applying the payment to the oldest periods first the IRS generally preserves the longest period of collection on the remaining liabilities and reduces the liabilities susceptible to discharge in bankruptcy.

In CCA 2019110508593544, IRS Chief Counsel gives brief advice on the issue of designation.  It states:

[A] question was raised about whether a taxpayer can designate the payment allocation when the taxpayer makes a quarterly federal tax deposit, attributable to a specific payroll, or whether the payment must be applied in the best interests of the government. Please share the response below with your staff.

A taxpayer is permitted to designate a voluntary payment, but in order for such designation to be proper the request or designation for the application of the payment must be specific, in writing, and made at the time of the payment. A taxpayer has no right of designation of payments resulting from enforced collection measures.

If a taxpayer submits a voluntary partial payment when there are assessments for more than one taxable period, and does not provide specific written instructions as to the application of the partial payment, then the payments will be applied in a manner serving the best interests of the government. The payment will generally be applied to satisfy the liability for successive periods in descending order of priority until the payment is absorbed and is applied to non-trust fund taxes first.

Pursuant to Policy Statement 5-14 (found at IRM 1.2.1.6.3), to the extent partial payments exceed the non-trust fund portion of the tax liability, they are deemed to be applied against the trust fund portion of the tax liability (e.g., withheld income tax, employee’s share of FICA, collected excise taxes). Once the non-trust fund and trust fund taxes are paid, the remaining payments will be considered to be applied to assessed fees and collection costs, assessed penalty and interest, and accrued penalty and interest to the date of payment.

For more information, see the following resources:

Rev. Proc. 2002-26, 2002-1 C.B. 746
Salazar v. Comm’r, 338 Fed. Appx. 75, 79 (2d Cir. 2009) (and cases quoted therein)
IRM 5.7.4.3
IRM 8.25.2.4.4

If you represent a taxpayer in a situation in which paying one tax period or one type of tax provides an advantage over letting the IRS choose the application of payment that most benefits it, you should make a clear designation with your payment.  In addition to describing the designation in the cover letter forwarding the check, you might also consider making note of the designation on the check itself in the notes section.

Taxpayers can only make a designation when they make a voluntary payment.  Involuntary payments such as payments pursuant to a levy, pursuant to a sale, pursuant to a bankruptcy distribution, or other similar situations in which the money comes to the IRS from a source other than the taxpayer do not offer the benefit of the opportunity to designate.  This can provide a good reason for the taxpayer to make a payment rather than to wait for the IRS to take the money through some form of collection action.