Trust Fund Recovery Penalty Case Wins a Remand in Prior Opportunity CDP case

In the case of Barnhill v. Commissioner, 155 T.C. 1 (2020) the Tax Court determined that the taxpayer never received the letter from the IRS scheduling the conference to dispute the Trust Fund Recovery Penalty (TFRP).  Because the taxpayer did not receive that letter, the taxpayer did not have a prior opportunity to dispute the merits of the TFRP.  Because the Settlement Officer in the Collection Due Process case refused to hear the merits of the TFRP based on the position that the taxpayer had a prior opportunity to dispute the TFRP in Appeals, the Tax Court remanded the case to Appeals to give the taxpayer an opportunity to contest the merits.  Bryan Camp wrote an excellent post on this case which you may want to read instead of this one, but I will try to cover slightly different ground.


The Barnhill case arose in Richmond, Virginia.  I had lunch with Mr. Barnhill’s attorney not long after the opinion was issued.  He indicated that after the opinion, the parties reached a basis for settlement and described the settlement to me.  The Tax Court docket sheet does not yet reflect a settlement but sometimes the settlement of a case can move slowly and particularly now.  The settlement shows the benefit of CDP in a way that we do not talk about often and the prior opportunity aspect of this case stands in contrast to another TFRP case involving prior opportunity now pending before the 4th Circuit.

Mr. Barnhill requested a hearing with Appeals to talk about the imposition of the TFRP against him.  He felt and his ultimate settlement suggests that the TFRP proposed against him was too high.  For reasons unknown he did not receive the invitation to the hearing offered by Appeals.  Because he did not respond to the offer of the hearing, Appeals quite rightly recommended the assessment move forward, which led to the filing of the notice of federal tax lien which led to his request for a CDP hearing. 

Because this is a TFRP case with a divisible tax at issue, Mr. Barnhill had a way to get into court to contest the liability without having to full pay the liability.  He did not face the same mountain of full payment faced by Lavar Taylor’s clients who tried without success to use CDP to resolve the merits of their tax liability as we discussed here, here and here.  Even without the full payment barrier, however, litigation in district court costs much more than litigation in Tax Court in almost every case and certainly more than an administrative hearing.  CDP offered him the chance to have his administrative hearing that he missed.  Once he missed the pre-assessment administrative hearing with Appeals, CDP provided, by far, the cheapest way for him to resolve his dispute over the liability.  It also provided the cheapest way for the IRS to resolve the dispute.

Not every taxpayer has a meritorious argument that the assessed amount overstates the correct liability.  I understand the desire to limit the use of Appeals resources and Counsel resources if a high percentage of cases seeking a merits review lack any merit.  I have no empirical evidence but do not believe that the majority of cases seeking a merits adjustment lack a basis for such an adjustment.  The IRS does taxpayers, and in many cases itself, a disservice by imposing regulations that limit the opportunity to come into Appeals in the CDP context and limit the opportunity to litigate in Tax Court.  Viewed through the lens of taxpayer rights, it has regulations that do not provide taxpayers with their full rights.  This is particularly true in cases with high dollar assessable, non-divisible penalties, but also applies in situations where a simple administrative visit could resolve a matter that otherwise requires expensive district court litigation.

Assuming the information provided to me that the Barnhill case has settled for an amount substantially lower than the assessed amount is correct, the case stands as an example of the benefit of CDP merits opportunities.  Instead of working hard to limit those opportunities, the IRS should reexamine its regulations, perhaps armed with empirical evidence I do not have, and create a better system than exists today.

This leads to the contrast between what has happened in Barnhill and what happened in a CDP case stemming from an Automated Underreporter assessessment, the Zhang case.  Zhang was decided by designated order rather than precedential opinion and was blogged by Caleb Smith here.  Like Mr. Barnhill, Mr. Zhang did not have a pre-assessment hearing with Appeals and sought to raise the merits of his assessment in a CDP case.  The facts in the Zhang case, however, differed slightly and that difference caused the Tax Court to deny him the opportunity to go back to Appeals to work out the issue.  As a result, he decided to take his case into the 4th Circuit (docket no. 20-01453) rather than to start over through the refund route (a route still theoretically open to him should he lose on appeal.)

Among other things, the Zhang case reinforces the importance of the Tax Court’s orders.  While the Barnhill case ends up as a precedential opinion, the Zhang case flies under the radar as an order, albeit a designated one.  In Mr. Zhang’s case he alleges that he did not receive the statutory notice of deficiency.  In most cases, but see the discussion on Landers here, that would afford Mr. Zhang the opportunity to have a hearing with Appeals regarding the merits of the assessment.  Mr. Zhang made a timely CDP request after receiving a notice of intent to levy and asked to discuss the merits of the assessment; however, the individual in Appeals handling his case for some reason did not consider the merits.  The Tax Court seemed to acknowledge that the Appeals mishandled this CDP hearing; however, Mr. Zhang did not petition the Tax Court after receiving the determination letter in this case.

He later received a notice of federal tax lien which caused him to file another CDP request.  He again sought to raise the merits of the assessment.  Here, he gets caught in a Catch-22 situation.  Appeals says maybe we should have listened to you last time, but that time serves as a prior opportunity and it’s too late to raise the merits now.  The Tax Court agreed with Appeals on this point.  The 4th Circuit will have an opportunity to rule on the outcome.

IRS – is this what you want?  Your mistake led the pro se Mr. Zhang to the wrong place and now you are arguing that because the pro se Mr. Zhang did not appeal your mistake he is out of luck on having a prepayment forum to fix his liability.  Yes, he could try audit reconsideration but why make him do that?  His case is an AUR case.  It should be relatively easy to determine if you agree.  Here is the maddening part of prior opportunity, and the game the IRS wants to play with it.  Let’s figure out a way to resolve these cases at the administrative level and not force people into court unnecessarily, particularly when the mistake started with the agency and not the individual.

Mr. Barnhill’s result shows the redeeming feature of CDP.  Mr. Zhang’s case shows the maddening aspect of how it is administered in some cases.  We can make it better.

Claiming a Refund Without Signing the Return

In the refund case of Gregory v. United States, No. 1:19-cv-00386 (Ct. Cl. 2020) the Court of Federal Claims denies the refund claim of a couple because they did not sign the amended return.  The issue of signatures has become more important during the pandemic because of the difficulties of meeting in person.  For the Gregorys the issue probably involved distance because they were working the Australian outback.  Still, the case shows that an actual signature can be an important step in making a request to the IRS.

The outcome for the Gregorys may change for others in their situation in the future.  On August 17, 2020, in IR-2020-182, the IRS announced that ” [m]arking a major milestone in tax administration, the Internal Revenue Service announced today that taxpayers can now submit Form 1040-X electronically with commercial tax-filing software.”  Read on and find out what happened to the Gregorys when electronic filing of amended returns was unavailable.


The Gregorys are U.S. citizens but during the period at issue they worked as defense contractors at a facility near Alice Springs, Australia starting in 2015.  They timely filed their original 2015 return claiming a small refund.  The IRS sent them a notice of adjustment seeking to assess an additional liability.  I suspect the inquiry caused the Gregorys to ask around about their taxes.  This was their first year in Australia on this contract.  If it was their first year filing a non-resident return, they had many things to learn.  Over the course of the next couple of years they started learning them and they hired an accounting firm to review their return.  That firm determined that they had overpaid their taxes by more than $20,000 and prepared an amended return claiming the exclusion for foreign earned income and the exclusion for employer provided housing.  The amended return was signed by an employee of the preparer of the amended return and not by the Gregorys.

The IRS reviewed the amended return and allowed the refund claim but for $1,039 related to the housing exclusion.  They received a check and no doubt happily paid the preparer of their amended return for setting them on the right path in dealing with the special issues raised when working overseas.  For reasons that do not make economic sense to me, the Gregorys decided to file suit to recover the relatively small disallowed amount.  Instead of filing in district court, they filed in the Court of Federal Claims, an alternate forum for refund suits.

The IRS moved to dismiss the case arguing that the Gregorys did not sign the refund claim making the claim invalid.  The Gregorys countered that the IRS accepted the refund claim and paid them a refund of most of the amount claimed and should not, after doing so, raise the issue of valid signature.

The Court of Federal Claims went through the test of what a taxpayer must do in order to file a valid claim and obtain jurisdiction in a refund suit.  First, a taxpayer must meet the Flora full payment rule.  Second, a taxpayer must file a claim.  Third, the taxpayer must provide “the amount, date, and place of each payment to be refunded, as well as a copy of the refund claim when filing suit in the Court of Federal Claims.”  The Gregorys problem stems from the second requirement – a valid claim.

The court then walked through what makes a valid claim stating, inter alia, that it “must be verified by a written declaration that it is made under the penalties of perjury.”  The court explained why having it signed under penalties of perjury is important.  It also referred to the possibility of having the return signed by someone holding a power of attorney if the POA is attached to the return.  Here, it was not.

Then the court addressed the waiver doctrine raised by the taxpayers in their defense.  The court acknowledged that the IRS can waive compliance with its own regulatory requirements but cannot waive compliance with statutory requirements.  IRC 6061 requires “any return, statement or other document required to be made under any provision of the internal revenue laws or regulations shall be signed in accordance with forms or regulations prescribed by the Secretary.”  IRC 6065 provides “[e]xcept as otherwise prescribed by the Secretary, any return, declaration, statement, or other document required to be made under any provision of the internal revenue laws or regulations shall contain or be verified by a written declaration that is made under the penalties of perjury.”  Regulation 301.6402-2(c) allows for someone other than the taxpayer to sign under penalties of perjury only if a POA form accompanies the return.

The IRS argued that in partially allowing the refund claim it waived the regulation requiring the attachment of the POA but that to the extent it did not agree with the claim, it did not, and could not waive the signature requirement in litigation by allowing a part of the claim.  It pointed out the taxpayers’ argument could allow individuals to avoid the penalties of perjury requirement altogether.  The court agreed and dismissed the case.

Signature issues are becoming more and more important.  Electronic signatures are becoming more prevalent.  We now allow remote notarization in many states.  Individuals in many assisted living facilities that have locked down have no practical means of physically signing documents and often do not have computer capabilities.  Getting signatures or some type of verification on documents that allows the government or the interested party to know the validity of the approval while at the same time addressing the practical difficulties created by the pandemic, requires careful attention.

While the IRS allows individuals to file tax returns electronically, it has not historically allowed the filing of amended returns electronically requiring individuals like the Gregorys who live thousands of miles from their preparer to make arrangements to meet the signature requirements.  I don’t fault the IRS for wanting documents signed under penalties of perjury and requiring proof that the person submitting the claim is really the taxpayer.  Electronic signature tools exist.  New rules are coming out. 

The IRS issued a memo on March 27, 2020 that provides a temporary deviation from IRM signature procedures. The memo allows IRS employees on the collection side to accept images of signatures and e-signatures on a number of documents, including SOL assessment/collection extensions, closing statements, POAs, and generally any document collected “outside of standard filing procedures.”  The Tax Court issued a press release on August 6, 2020 which announces that electronically-filed stipulations with digital signatures will be accepted by the Court.  In Massachusetts, the Supreme Judicial Court issued a rule that authorizes e-signatures for all documents filed with Mass. courts. Numerous federal district courts have issued new rules accepting e-signatures, which can be found on this page.

Maybe next time the Gregorys can move forward in a case like this with the friendlier e-file rules, which could allow them to work with their accountant from thousands of miles away and still file a valid amended return.  I remain curious about their decision to sue for such a small amount and wonder about the decision dynamic that led to this case in a refund posture.

An IRC 6511(h) Financial Disability Claim Survives Motion to Dismiss

Rhode Island Legal Services (RILS) is seeking a Managing Attorney and Director for its Low Income Taxpayer Clinic. Please see this job posting for more information. Keith

In Wattleton v. Mnuchin, No. 1:19-cv-01893 (D.D.C 2020) an individual incarcerated following his successful assertion of insanity as a defense to criminal charges survives the motion to dismiss stage of his refund proceeding.  He has a long way to go to win the case, but his success at this level represents a rare victory in a financial disability case.  We have written about financial disability many times.  A sample of posts can be found here, here and here.


Mr. Wattleton was indicted in 1999 for making telephonic threats.  Experts from both sides agreed that he was legally insane at the time of the alleged offense.  He was diagnosed with delusional disorder, persecutory type, a form of mental illness described as very severe.  The jury found him not guilty by reason of insanity.  The court ordered him committed to the custody of the Attorney General under the provision dealing with the criminally insane, and he has remained in custody since, having been currently and indefinitely committed for psychiatric treatment.  This seems like a strong basis for a financial disability case.

He apparently worked and had withholding from 1993 to 1999.  He would now like to obtain a refund for those years almost a quarter century later.  It does not appear that he has filed the back returns, and the court did not clearly explain the filing of the claim for refund part of his case.  Nonetheless, the court moves forward to consider whether the statute of limitations might still be open preserving his right to a refund for these years.

The IRS picks up on language from his allegations and says that he only alleges insanity during the years 1993 to 1999.  This seems a bit disingenuous, since the federal government has been holding him ever since and, although I did not go and read the statute, I sincerely hope it says something to the effect that if you are cured of your mental illness they let you out.  The court picks up on this thought and finds that while true that Mr. Wattleton only specifically mentions 1993-1999 his allegations leave “less clear … when, if at all, plaintiff’s alleged financial disability ended.  Plaintiff alleges, in the present tense, ‘that he suffers from a financial disability.’”  The court also finds that his subsequent pleadings make it clear his mental health issues are ongoing.  It appears he did not have someone to act on his behalf during all of this period – another hurdle he must pass in meeting the statutory requirements for financial disability.

The IRS then argues that without more the mere fact that he has a diagnosed mental health condition does not necessarily equate to financial disability.  The court mistakenly describes Rev. Proc. 99-21 as a regulation.  It is definitely not a regulation, and no regulation exists under this statute, despite it being over two decades old.  In the prior posts we have discussed extensively the shortcomings of this Rev. Proc., as have other courts.

The court notes that its record regarding Mr. Wattleton’s submissions to the IRS raises “significant questions about whether plaintiff has complied with” the Rev. Proc.  My observation of these cases is that financially disabled individuals experience difficulty following the rules set out in the Rev. Proc.  They often lose their cases for failure to follow those rules.  Yet, if they carefully followed those rules, we would question whether they were financially disabled.  This is an area where courts need to provide a plaintiff, particularly one handling all or part of their case pro se, with a reasonable opportunity to put before the court information supporting financial disability.  Certainly, being incarcerated for 20 years because of a severe mental health problem seems like a good start to that proof.

We don’t know why Mr. Wattleton suddenly woke up one morning and decided he wanted his refunds from long ago, but if he did in fact have refunds on his taxes from the years 1993-1999, he should have a reasonable opportunity to obtain them despite their age and trying to knock him out on technical procedural grounds based on a poor Rev. Proc. seems harsh.  I applaud the court for keeping the case open.  Perhaps the opinion or this blog post will inspire someone to come to his aid.

His case is moving locations for the next stage.  He brought the case in the district court in D.C., but it finds that it does not have venue.  Citing a list of cases supporting the concept that a prisoner does not become a resident of the state where they are incarcerated, the court determines that on the available information Mr. Wattleton is a resident of Georgia and transfers the case to the Northern District of Georgia.  (He is incarcerated in Rochester, Minnesota making D.C. the wrong place on several levels.)  The three paragraph discussion of venue in these situations is interesting for those seeking knowledge of the venue of civil suits by incarcerated individuals in federal district court.  In a law office when you dump work off on a colleague, it can create hard feelings.  The venue ruling is not exactly the same thing, but I wonder how judges feel as they pass or receive cases under this circumstance.  Some lucky judge in Georgia is about to receive a case which has a good emotional basis for relief but perhaps a weak procedural one.  It may be that some docket attorney in the Southern Division of Civil Trial Section of the Department of Justice is about to be just as lucky.


A financial disability case brought by someone held in the penal system for two decades because of a mental health problem seems like a strong case at least on the disability side.  Because he did not follow the picky, never commented upon rules of the two-decade old Rev. Proc., the IRS, through the Department of Justice Tax Division, will continue seeking to dismiss the case on procedural grounds.  If it becomes clear that he did in fact have refunds during the years 1993-1999 and if a court looks hard at the Rev. Proc., which the IRS created without input from the community, it may find a way to give him some money.  Should another written opinion occur, I expect we will post again.

Scheduled Relief for Injured Spouses Whose Stimulus Payments Were Sent Elsewhere for Past Due Child Support

When the IRS hastily set up the program for making the stimulus payments authorized by the CARES Act, it did not carefully program its computers to distinguish the cases in which one spouse on a joint return claimed injured spouse status.  If you are not familiar with injured spouse status, find an explanation here.

Given the haste with which the IRS worked to accomplish the task it was given, this oversight is understandable, but it has created a lot of pain among those whose stimulus payments were diverted to pay past due child support of their current spouse.  As a reminder past due child support was the only liability for which the stimulus payments were offset.  We have written about this issue previously here, here and here.  We have received more comments on this issue than any issue on which we have blogged.

In a blog post on Monday, August 10, the National Taxpayer Advocate provides a chart of problems with the stimulus payments that the IRS is fixing or is not fixing.  The problem of wrongly diverting the stimulus payments of injured spouses is one that the IRS is working to fix.  The chart provided by the NTA indicates that the IRS anticipates fixing this problem by the end of August and getting the wrongly diverted checks to these individuals by that time.  It also indicates that individuals who have not received their checks by that point can come into TAS for assistance.


There is still a distinction between individuals who filed the injured spouse form with their return and those who did not.  Many individuals who know that their spouse has an outstanding liability such as child support or a student loan that will cause the offset of their refund year after year, routinely file the injured spouse form with the return so that the refund due to the non-liable spouse will flow through unimpeded by the offset provisions.  In normal circumstances the filing of the injured spouse form with the return keeps the offset from occurring.  Here it did not and that’s what the IRS is working to fix.  For individuals who did not file the injured spouse form with the return perhaps because this is the first year of the joint return, they do not claim a refund or for some other reason, it will be necessary for those individuals to file the injured spouse form in order to obtain the release of their stimulus payment.

TAS has not been accepting cases involving many of the problems created by stimulus payments because it viewed that it had no ability to assist taxpayers with many of those problems.  On an individual case level, there was little or nothing it could do to fix their problems if the IRS had not developed a fix.  On a systemic basis, it could have filed a broader taxpayer directive.  Whether such an act would have sped up the fixing of the problems is unknown.  The chart shows the cases on which the IRS is creating fixes, the time frames and the cases TAS will now accept.  As mentioned above, it also shows the cases that the IRS is not fixing and that TAS will not accept.  Some of those cases are the subject of litigation that we are covering with other post.  Some of those cases are not mentioned in the chart such as the cases of deceased individuals and prisoners.

The chart is helpful both in providing timeframes and in setting a marker for the fixes the IRS is not undertaking.  It’s wonderful that the NTA is giving out this information and providing it in an easy to digest format.  The IRS might consider doing the same in a prominent place on its website since not everyone receives the NTA blog posts.

Charging Fees, Changing Rules and Providing Videos

Several electronic filing/electronic access items emerged last week and this post will talk about three of these items.  First, the Federal Circuit ruled on the PACER litigation which we have discussed before and which has a tangential impact on the fee structure at the Tax Court.  Second, the Tax Court issued a press release providing additional information regarding remote practice procedures.  Third, the Tax Court issued videos depicting the manner in which calendar calls and trials will proceed in the remote environment.



On June 2, 2020, I wrote a post about public access to Tax Court documents. That post was written in part to provide a link to a longer article on the subject I wrote with Maggie Goff and published in Tax Notes on May 4. It was also written to celebrate the new fee schedule adopted by the Tax Court for document requests. The article that Maggie and I wrote had its origins, at least in part, in litigation pending in the Federal Circuit on the amount charged for access to documents in the PACER system. The case in the Federal Circuit resulted from a decision by the Court of Federal Claims that some of the uses of the money the Administrative Office of the Courts made from PACER were appropriate and some were not. This left both parties unhappy as discussed in a post from The Hill here. On August 6, 2020, the Federal Circuit upheld the Court of Federal Claims determining that it got the decision just right. For those interested in understanding PACER and its history, understanding the Little Tucker Act and understanding the nuances of how the federal judiciary spends unappropriated money, the decision is worth reading.

Press Release

On August 6, 2020, the court issued a press release with links to several documents designed to guide practitioners as the Court shifts to remote practice. With all of the material in the links, there is a lot to read and digest as the Court makes this shift. Included in the links are a Practitioner’s Guide, a Petitioner’s Guide, a presentation of documentary evidence guide, a guide for subpoenaing witnesses and a revised Administrative Order.

In the past parties were required to exchange documents in advance of trial and the failure to do so provided a theoretical basis for excluding documents not properly and timely exchanged. Now, the Court wants these non-stipulated documents marked as trial exhibits with exhibit numbers. For a court with 70% pro se petitioners this presents an even greater challenge than the prior rule regarding exhibits. The guidance not only provides information about timing and labeling but also format and size. Practitioners need to be prepared well in advance of trial for these rules governing documents to which the parties cannot stipulate. Getting all documents into stipulations becomes even more important.

Tax Court Videos

Thanks to Amy Spivey the relatively new clinic director at the relatively new clinic at Hastings Law School in San Francisco, I learned that the Tax Court put new videos up on its web site. You can access the videos here. I was a bit disappointed when I saw the new Tax Court web site a couple weeks ago and noticed that the previous video it had for pro se taxpayers was missing. One of the first things I did back in 2007 as a new clinician at Villanova was to write the script for that video. If you listened closely to that video you learned that the fictional taxpayer lived in Villanova. So, I had a soft spot for it. The new videos take the viewers through the Tax Court’s virtual calendar call and trial. Unlike the prior video which was performed by professional actors, these are performed by Tax Court personnel. The videos are a little clunky but I expect the experience of virtual calendar calls and trials to be a little clunky. So, they seemed perfect to me.


The Federal Circuit’s decision upholds the lower court decision placing limits on the use of funds from PACER. The fact that the Administrative Office of the Courts spent some of the PACER funds on inappropriate items does not necessarily mean the fees are too high. PACER could be improved to allow for a better search function. Other permissible expenditures also exist. If the Administrative Office spends the money correctly, it need not lower the fees, though lowering the fees would be welcomed. The Tax Court’s press release provides needed guidance as we head into the fall trial sessions next month. We would welcome posts from readers who encounter the early electronic trial and calendar provisions. Adjusting to remote practice will take effort from all sides. Kudos to the Tax Court for putting up this video and giving us a chance to see what will happen when the Court starts trying cases again. It will be an interesting adventure.

Failing to Keep Current After Obtaining an Offer in Compromise

Thanks to Jack Townsend for alerting me to the case of Sadjadi v. Commissioner, No. 19-60663 (5th Cir. 2020) in which the court affirms the decision of the Tax Court revoking taxpayers’ offer in compromise and allowing the IRS to levy to collect the liability.  Nothing about the case surprises me but it does serve as a reminder of what happens when you fail to keep current after obtaining an offer in compromise.  It also serves as a reminder that the OIC produces a contract, and the terms of that contract clearly obligate the taxpayers to timely file and timely pay for five years after the acceptance of the offer.


Mr. and Mrs. Sadjadi owed taxes for 2008 and 2009 based both on their filed returns and subsequent audits.  They worked with the OIC unit and had an offer accepted.  The offer required payment over time which they did; however, while making the offer payments they failed to pay their 2015 liability.  As a result, the IRS revoked their offer acceptance and sent them a CDP notice which they responded to by requesting a hearing.  At the hearing they requested an Installment Agreement to pay off 2015 but wanted the IRS to recognize the OIC rather than to bring back the liabilities compromised in the agreement.

They offered a rather meager Installment Agreement payment compared to the amount the Settlement Officer calculated they could pay.  Ultimately, the Settlement Officer rejected their proposal and sent the determination letter.  The Tax Court sustained the decision of the IRS and they appealed to the 5th Circuit.  Although the 5th Circuit designated its opinion as non-precedential, it wrote a seven-page opinion analyzing the facts and the offer agreement itself.  In that regard it provides a rare glimpse at offers in compromise from the perspective of a circuit court.

First, the court referred to the OIC form which provides:

The parties used the standard offer-in-compromise form. The left-hand column of the form contained the following statement: “I must comply with my future tax obligations and understand I remain liable for the full amount of my tax debt until all terms and conditions of this offer have been met.” On the opposite side of that statement, the form states, “I will file tax returns and pay required taxes for the five[-]year period beginning with the date of acceptance of this offer.” The left-hand column also contains the following statement: “I understand what will happen if I fail to meet the terms of my offer (e.g., default).” On the opposite side of this statement, the form states, “If I fail to meet any of the terms of this offer, the IRS may levy or sue me to collect any amount ranging from the unpaid balance of the offer to the original amount of the tax debt without further notice of any kind.”

The taxpayers made a simple argument regarding their compliance with the OIC.  They took the position that:

The petitioners now appeal the Tax Court’s judgment, claiming that they complied with all the terms and conditions of the offer-in-compromise because they paid the agreed amount.

The IRS agreed with the taxpayers that they had paid the offer amount but said that was only part of the agreement.  The IRS argued that the OIC required the taxpayers to keep current in their filing and payment obligations for five years after the OIC.  The circuit court agreed, finding the language of the OIC clear.

[T]he offer-in-compromise in this case contains clear and unambiguous language that explains the consequences of default. The form states that the petitioners would “file tax returns and pay required taxes for the five[-]year period beginning with the date of acceptance of this offer.” The form further explains that the petitioners would “comply with [their] future tax obligations and . . . remain liable for the full amount of [their] tax debt until all terms and conditions of this offer have been met.”

The 5th Circuit’s decision here provides a simple straightforward interpretation of language in the contract, which seems simple and straightforward.  Had the court decided any other way, the decision would have been quite surprising.  Our clinic, like all clinics of which I am aware, spends a fair amount of time talking to clients about the need to keep current in filing and paying for five years.  We vet clients concerning this point, since no benefit to the client comes from obtaining an OIC only to see it destroyed by failure to make payments during the five-year period.  Clients who have a history of filing non-compliance sometimes get turned away, because we fear their ability to comply with the OIC terms does not exist. 

Neither the Villanova nor the Harvard clinics where I have worked go to this extreme, but I remember that when Special Trial Judge Leyden ran the clinic at University of Connecticut, she would keep her OIC cases open for the entire five-year period and work with the taxpayer during those five years to make sure that the taxpayer timely filed and paid.  I was impressed with that level of client service though unwilling to offer it myself.  The clinic administrator who worked with me when I first arrived at Villanova would call the clients each year to provide a reminder.  The IRS will give taxpayers a second chance, at least that has been my experience, by notifying them of a failure to file or pay and giving a short curative period.  Such a period is not required by the terms of the offer but does put the clinic, if not the client, into high alert mode to try to fix the problem.  Our clinic has had individuals who fell off the wagon and either lost their offer or worked with us to scramble and cure the default.

Future compliance is one of the reasons the IRS enters into OICs.  Getting people back in the system of timely filing their returns and timely making payments provides the incentive for the IRS to write down the past due liabilities.  The taxpayers’ arguments here essentially attacked the core of the OIC contract.  They failed at the Tax Court and the 5th Circuit, but their failure provides instruction that the courts read the contract in the same manner as practitioners who work with the OIC agreement every day.

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

Update on the Tax Court

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


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

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

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

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

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

United States Senate Committee on Finance
July 21, 2020

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

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

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

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

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

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

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

Senate Committee on Finance
July 21, 2020

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

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

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

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

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

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

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

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