What Happens After Boechler – Part 2:  The IRS Argues the Floodgates Will Open if the Tax Court Follows Boechler in Interpreting IRC 6213(a)

Boechler involves the Tax Court’s jurisdiction in Collection Due Process (CDP) cases.  The Tax Court Congressional Budget Justification Fiscal Year 2023 (Feb. 28, 2022), at page 19 reports that CDP cases filed in the fiscal year ended 9/30/21 made up 3.29% of its total caseload and deficiency cases made up 96.46% of its total caseload (though the Tax Court overstates the deficiency case figure by apparently including in that deficiency figure all dockets that do not have letters at the end of their docket numbers — which would mean that the deficiency figure erroneously also sweeps in 6015(e) cases and all those cases later dismissed for LOJ because no ticket to the Tax Court under any jurisdiction had been issued). If the Tax Court determines that the time period for filing petitions in deficiency cases is not a jurisdictional time period, many more petitioners will have the opportunity to argue that the Court should hear their late petition than would have the opportunity in CDP cases – almost 20 times as many.  What does the floodgate argument really mean here?  Should it make a difference?

There are at least two parts to the question of the impact of finding that the time period for filing a Tax Court petition in a deficiency case is not jurisdictional.  One, what is the volume of late filed cases?  Two, how many of the late filed cases have a marginally meritorious case that will require actual resources at the Court and at Chief Counsel, IRS to resolve?  One possible result, discussed below, is that the net effect will cause little if any additional work for the Court or Chief Counsel.  If the Tax Court finds or is instructed that 6213(a) is not a statute in which the time for filing creates a jurisdictional bar, the net result of any additional work should not be significant.

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The Tax Clinic at the Legal Services Center of Harvard Law School has been looking at Tax Court dismissals for several years, monitoring the cases in search of meritorious cases that might provide a challenge to the Court’s view that all of its bases for jurisdiction have a jurisdictional time frame.  Looking at the cases primarily means Carl Smith reviewing the daily docket, Carl passing to me any cases that look like they were dismissed for a reason based on late filing where the petitioner has raised some type of excuse that seems more than frivolous, me ordering the documents from the Court that led to the Court’s order, Carl and me reviewing the documents to decide if the case has a potentially meritorious argument on the excuse and on the merits, me calling the taxpayers with a potentially meritorious case to get further information and a sense of their interest in pursuing the case further and a follow up discussion between Carl and me on whether to move forward with the case.  We find very few cases that meet our criteria – less than 10 each year in all Tax Court bases for jurisdiction combined.

Backing up from our criteria to the criteria that will cause work for the Court and Chief Counsel, it’s necessary to decide how many cases will have an argument for equitable tolling that requires a hearing of some type.  When Chief Counsel identifies a case as late filed, more about why I say only Chief Counsel below, it will make affirmative allegations in its answer that the petition was untimely.  It already spends at least as much time as the affirmative allegations will take by filing a motion to dismiss on all of the cases it determines were filed late.  So, no additional work there.  The taxpayer will, or should, respond to the affirmative allegations setting forth the defense(s) that the petition was timely filed and/or that the time for filing should be equitably tolled.  This process saves the Court the time it takes to produce and send out show cause orders.  At some point the Court will rule on the effect of late filing.  The Court already rules on this issue after the show cause order.  So, no additional work there.

Not all taxpayers will file a response to the answer.  Taxpayers who do not respond will cause the IRS to file a Rule 37(c) motion.  This may cause the Court to give the taxpayers a second chance to respond or may cause the Court to rule at that point.  The filing of this motion will cause Chief Counsel a little more work.  If the Court issues an order giving taxpayers a second chance to respond, this will cause the Court a little more work.

Taxpayers who do respond will now respond with different/additional information from the information provided in responses prior to a change in the jurisdictional nature of IRC 6213.  Some taxpayers will respond with a detailed explanation of the reason for the late filing.  Some of these responses will make clear that the taxpayers do not fit into the Court’s criteria for equitable tolling.  It will take the Court several opinions in the early years after determining IRC 6213 does not have a jurisdictional time frame for the Court to develop a body of jurisprudence on equitable tolling.  It must do so now for IRC 6330 cases.  It’s worth noting that the Tax Court could have been building its body of equitable tolling law since the D.C. Circuit’s decision regarding whistleblower petitions in the Myers case.  It has not and may have been holding the Myers case in abeyance pending the outcome of Boechler but that is another source of equitable tolling jurisprudence that can inform IRC 6213 cases.  There is no indication that in the whistleblower or passport cases, both areas of Tax Court jurisdiction with relatively low filing numbers, that a stampede of equitable tolling requests, or any such requests, has occurred. 

So, developing this body of jurisprudence should not add much to the burden of the Tax Court.  Once it has established its criteria for reviewing cases for equitable tolling, it will be able to dismiss some cases in which taxpayers response to the affirmative allegations in the answer discloses a reason for filing a late petition that does not fit within the established bases for accepting the case.  Making decisions on these cases will not cause much additional work and probably will occur in the office of the Chief Judge with the attorneys who work there.  This will cause little or no additional work for Chief Counsel attorneys.

Unquestionably, some cases will respond to the motion and raise enough concerns about the nature of their argument for jurisdiction that the Court will need to schedule a hearing in order to take evidence and to allow further argument.  These cases will cause more work for the Court and for Chief Counsel.  In order to guess how many cases we might be talking about here, it is necessary to start with the number of cases typically dismissed for lack of jurisdiction based on an untimely petition.  No need to look at other bases for dismissal since they are not implicated by the Boechler decisions.

Carl Smith did research on the number of dismissals for lack of jurisdiction based on timeliness and found 103 cases in February and March of 2022.  At that pace one might expect about 600 cases in a year.  Based on these raw numbers, we need to determine how many of the petitioners filed a response that would require more work of the Court and Chief Counsel.  Carl Smith has been reviewing all orders of dismissal for the last four months for late filing under all jurisdictions, and he estimates he has seen only about 30 orders where taxpayers have tried to provide a good excuse for late filing.  Assuming that number holds and that similar numbers of articulated excuses in future cases will require the litigation of equitable tolling if the filing deadlines are no longer jurisdictional, that means that about 90 cases a year will involve parties doing filings relating to the assertion of equitable tolling.  So, probably there would be 87 cases a year that would require additional work from the Tax Court and Chief Counsel to deal with taxpayer-pleaded equitable tolling defenses if IRC 6213 creates a claims processing rule.  Under Boechler, about 3 cases a year will probably be CDP cases in which a taxpayer pleads equitable tolling.  That low CDP number may surprise a lot of people who thought Boechler would open floodgates under CDP.  Of course, the new legal possibility of equitable tolling under all jurisdictions may bring additional taxpayers to assert facts that can give rise to equitable tolling, but it is hard to believe that these new assertions would any more than double the number of cases each year where equitable tolling would be argued.  Further, probably only a third of such cases will actually be granted equitable tolling (30).  There will be additional work to Counsel and the Court on the merits in such cases, but 30 cases is only 0.1% of the Tax Court’s docket each year.  So, given that over 90% of cases settle on the merits anyway, the additional work will probably not involve more than a single extra merits trial a year.

Tomorrow’s post will explain in more detail why Chief Counsel must make its objection early in the case.  Chief Counsel attorneys will also have a time savings because they will no longer need to respond to orders to show cause in cases where they do not raise the issue in the answer.  For reasons discussed in the next post, the failure to raise the timing of the filing in the answer will probably end any argument on timing allowing the parties to focus on the merits.

What Happens After Boechler – Part 1: The IRS Argues IRC 6330 is Unique

In Boechler, the Supreme Court parsed the language of IRC 6330 looking for a clear statement from Congress that Congress intended to make into a jurisdictional limit the 30-day deadline to file a Tax Court petition after a Collection Due Process (CDP) notice of determination.   It did not find that clear statement. 

The next big fight will be interpreting IRC 6213(a) to determine if Congress made a clear statement in that provision.  In today’s blog post and in the posts in this series that will follow, I will examine the arguments the IRS will make based on the arguments it has made previously.  The posts will focus on the clear statement rule since the Supreme Court has held on numerous occasions that two tests apply in determining if a statute provides a jurisdictional time frame.  Carl Smith blogged about the jurisdictional nature of the time period in IRC 6213(a) two years ago when the Tax Clinic at the Legal Services Center filed motions for reconsideration in three cases with strong equitable facts and favorable merits arguments. 

In addition to the clear statement rule, the second test – whether controlling Supreme Court jurisprudence exists to create a stare decisis exception to the general rule that filing deadlines are not jurisdictional – clearly does not apply to IRC 6213(a), since the question of whether the time period for filing a petition in Tax Court is jurisdictional has never resulted in a Supreme Court decision.  The Tax Court (in Guralnik) and the IRS have pointed to a long list of lower court opinions holding the IRC 6213(a) filing deadline jurisdictional.  Those cases do not qualify for the stare decisis exception. 

In Boechler, the IRS also cited that IRC 6213(a) precedent to the Supreme Court when arguing that Congress in 1998 intended to make the CDP filing deadline jurisdictional.  The Court not only rejected this argument, but also dismissed giving any deference to the IRC 6213(a) authority as follows:

The Commissioner’s weakest argument is his last: He insists that § 6330(d)(1)’s filing deadline is jurisdictional because at the time that deadline was enacted, lower courts had held that an analogous tax provision regarding IRS deficiency determinations is jurisdictional. (That provision says that “[w]ithin 90 days . . . the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency.” 26 U.S.C. § 6213(a).) According to the Commissioner, Congress was aware of these lower court cases and expected § 6330(d)(1)’s time limit to have the same effect. So, he says, the statutory backdrop resolves any doubt that might linger in the text.

The Commissioner’s argument misses the mark. The cases he cites almost all predate this Court’s effort to “bring some discipline” to the use of the term “jurisdictional.”  Henderson, 562 U.S., at 435. And while this Court has been willing to treat “‘a long line of [Supreme] Cour[t] decisions left undisturbed by Congress’” as a clear indication that a requirement is jurisdictional, Fort Bend County v. Davis, 587 U.S. ___, ___, 139 S. Ct. 1843 (2019), no such “long line” of authority exists here.

So, I will spend no further time on the second test and focus exclusively on the clear statement rule.  I assume the IRS will do the same.

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The IRS will argue that Congress created IRC 6330 as a benefit for taxpayers uniquely crafted to play a highly protective role by a Congress seeking to remedy perceived IRS abuses.  This makes IRC 6330 special and the outcome in Boechler limited. 

Looking back almost 100 years, you can find that the deficiency procedure created in 1924 also resulted from a Congress that sought to protect taxpayers from having to pay the relatively new income and estate taxes before contesting IRS adjustments.  The legislative history has statements about allowing taxpayers to avoid the need to go into bankruptcy because of an inability to pay and an inability to contest the additional taxes in court without first paying.  While the general perception sees the CDP provisions as taxpayer friendly ones and perceives, at this point in time, the deficiency procedures simply as the way the code is structured, both provisions arose out of a desire to protect taxpayer rights.  CDP provisions arrived later after Congress began enacting assessable penalties that skirted the deficiency procedures and after it broadened the scope of citizens impacted by taxes from the narrow band of high income individuals taxed in 1924 to the entire populace by 1998.  So, we shouldn’t dismiss Boechler as unique because it pertains to a provision designed to protect taxpayers.

Parsing IRC 6213(a) looking for a link between the grant of jurisdiction and the time period for filing presents an even greater challenge for the IRS than IRC 6330.  IRC 6213(a) just doesn’t link the time period for filing the petition with the grant of jurisdiction.  Bryan Camp’s article New Thinking About Jurisdictional Time Periods in the Tax Code (January 21, 2019), 73 The Tax Lawyer 1 (2019) parses several Tax Court jurisdictional provisions and determines that IRC 6213 does not link the time period to the grant of jurisdiction.  In getting to the parsing of the current language, Bryan takes a long walk through the history of IRC 6213(a) and how it arrived at its current language.  He then walks through the current language of this section of the Code:

The text of sentence (1) is not the kind of text that the Supreme Court has ever held to speak in jurisdictional terms. It contains no mandatory language, such as “the taxpayer must file . . . .” Even if it had mandatory language, the Court has repeatedly said that “Congress must do something special, beyond setting an exception-free deadline, to tag a statute of limitations as jurisdictional and so prohibit a court from tolling it.” 101 And there is nothing special about the text in sentence (1) of section 6213(a). It says nothing about what powers the Tax Court has. It says only what a taxpayer must do: petition for redetermination.

Sentence (4) does contain the magic word “jurisdiction.” The new thinking teaches that even the magic word “jurisdiction” appearing somewhere in the statute is not the kind of “clear statement” needed to overcome the presumption unless it hooks up to the limitations period tightly. At first glance, sentence (4) appears to contain the requisite connection because it references the need for a “timely petition.”

A closer look at what sentence (4) does dispels the appearance. The sentence removes power from the Tax Court in the face of an untimely petition. What power? Why, the power granted the Tax Court in sentence (3), the power to enjoin the Service. Sentence (4) does not say that the Tax Court shall have no powers at all in the face of an untimely petition, just that it will not have jurisdiction to enjoin or order a refund. The word jurisdiction in sentence (4) thus quite reasonably links to the Tax Court’s power to enjoin given in sentence (3). But nothing in sentence (4) hooks the timing requirements in sentence (1) to the jurisdictional grant in section 6214 to redetermine a deficiency.

Bryan discusses the link between IRC 6213 and 6214.  He finds that each provision contains a separate grant of jurisdiction.  Section 6213 creates jurisdiction to prohibit assessment with an injunction while section 6214 gives jurisdiction to redetermine a deficiency.  The injunction power, another taxpayer friendly provision, was added to the Code in 1988 as part of the first Taxpayer Bill of Rights.  Bryan points out that the word jurisdiction refers to the Tax Court’s power to enjoin and to issue a refund and not time limitations.  Even the title of the provision supports this reading – “Restrictions Applicable to Deficiencies: Petition to Tax Court.”

The Supreme Court’s precedent on jurisdiction does not turn on whether a statute seeks to assist or other factors that might make certain provisions unique.  Instead, it starts with a presumption that a time period is not jurisdictional.  It moves from that presumption to examining the statute to determine whether Congress has made a clear statement.  Making the determination requires carefully examining the text of the statute.  As described above in the language quoted from Bryan’s article, the text does not lead to the conclusion that IRC 6213(a) links the 90-day period to filing a petition to the grant of jurisdiction.

Not only is the text important but context is as well.  How does the time period relate to the statutory scheme surrounding the provision?  Bryan’s article looks at legislative context, judicial context and statutory context in explaining why, in none of these contexts, IRC 6213 provides the type of language or history that suggests the 90-day period for filing of petition creates a jurisdictional rule.

The main reason why the courts of appeal in Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017), and Organic Cannabis Foundation v. Commissioner, 962 F.3d 1082 (9th Cir. 2020), held the IRC 6213(a) filing deadline jurisdictional under the “clear statement” exception despite the first sentence of that section not even containing the word “jurisdiction” – is the word “jurisdiction” in the fourth sentence of IRC 6213(a), which limits the Tax Court’s injunctive jurisdiction to cases in which the petition in the main Tax Court action under the first sentence is “timely filed”.  But, that logic can no longer be relied on after Boechler.  IRC 6330(e)(1) contains copycat language giving the Tax Court jurisdiction to enjoin the IRS from improper levying during a CDP case in the Tax Court only if there was a “timely petition” in the main CDP action under IRC 6330(d).  Boechler’s demolition of the argument that IRC 6330(e)(1) language can cause the IRC 6330(d)(1) filing deadline to be jurisdictional should fully undermine the argument that similar language in the fourth sentence of IRC 6213(a) makes the filing deadline in the first sentence of that subsection jurisdictional.  Here’s what the Court wrote about this in Boechler:

The Commissioner contends that a neighboring provision clarifies the jurisdictional effect of the filing deadline.  Section 6330(e)(1) provides that “if a [collection due process] hearing is requested . . . the levy actions which are the subject of the requested hearing . . . shall be suspended for the period during which such hearing, and appeals therein, are pending.” To enforce that suspension, a “proper court, including the Tax Court,” may “enjoi[n]” a “levy or proceeding during the time the suspension . . . is in force,” but “[t]he Tax Court shall have no jurisdiction under this paragraph to enjoin any action or proceeding unless a timely appeal has been filed under subsection (d)(1).” § 6330(e)(1).

Section 6330(e)(1) thus plainly conditions the Tax Court’s jurisdiction to enjoin a levy on a timely filing under § 6330(d)(1). According to the Commissioner, this suggests that § 6330(d)(1)’s filing deadline is also jurisdictional. It would be strange, the Commissioner says, to make the deadline a jurisdictional requirement for a particular remedy (an injunction), but not for the underlying merits proceeding itself. If that were so, the Tax Court could accept late-filed petitions but would lack jurisdiction to enjoin collection in such cases. So if the IRS disobeyed § 6330(e)(1)’s instruction to suspend the levy during the hearing and any appeal, the taxpayer would have to initiate a new proceeding in district court to make the IRS stop.

We are unmoved—and not only because the scenario the Commissioner posits would arise from the IRS’s own recalcitrance. The possibility of dual-track jurisdiction might strengthen the Commissioner’s argument that his interpretation is superior to Boechler’s. Yet as we have already explained, the Commissioner’s interpretation must be not only better, but also clear. And the prospect that § 6330(e)(1) deprives the Tax Court of authority to issue an injunction in a subset of appeals (where a petition for review is both filed late and accepted on equitable tolling grounds) does not carry the Commissioner over that line. If anything, § 6330(e)(1)’s clear statement—that “[t]he Tax Court shall have no jurisdiction . . . to enjoin any action or proceeding unless a timely appeal has been filed”—highlights the lack of such clarity in § 6330(d)(1).

Think of IRC 6213(a) when you read the quote.

Avoid thinking about IRC 6330 as somehow a unique tax statute creating a time period for filing a Tax Court petition that is not jurisdictional.  Instead, focus on the purpose and the language of IRC 6213(a) in recognizing that for the same reason, though parsing though different statutory language, that the CDP provision does not create a jurisdictional time period for filing a petition, neither does the deficiency statute.

Eliminating Answers in Certain District Court Cases

We have written quite a bit about answers in Tax Court cases recently.  I wrote a post about answers describing how little help they provided.  In that post I provided some history about answers and some suggestions present and past on how to improve the system.  Caleb Smith followed my post with a three part series, found here, here and here, in which he focused on the failure of Chief Counsel attorneys to engage in the type of due diligence and duty for reasonable inquiry regarding alleged facts that one may expect with respect to answers.  Christine wrote a post in 2018 about the EZ Answer procedures adopted by Chief Counsel for answering small tax cases.  (In that post Christine reports on the surprise Judge Leyden had about the number of petitioners who disappear, who I refer to as melting away in a recent post.) 

Because I think there is a correlation between the melting away of petitioners and the answer, recent activity regarding answers in a different federal court has brought me back to the topic of answers and my continued desire for a better procedure.  Since the Tax Court purports to look to Social Security cases as the basis for its rules for denying electronic access to documents (see my article available through a link in this post), I thought that perhaps it would find interesting the discourse happening in federal district courts regarding answers in cases brought to challenge Social Security determinations under 42 USC 405(g).

I thank Carl Smith for pointing me to the rule change and my research assistant Grace Heinerikson for running down all of the comments.

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The Supreme Court forwarded a rule change to Congress which will take place on December 1, 2022, absent action to stop it.  Here’s the pertinent rule change for purposes of the discussion in this post:

SUPPLEMENTAL RULES FOR SOCIAL SECURITY ACTIONS UNDER 42 U.S.C. § 405(g)

Rule 1. Review of Social Security Decisions Under 42 U.S.C. § 405(g)

(a) Applicability of These Rules. These rules govern an action under 42 U.S.C. § 405(g) for review on the
record of a final decision of the Commissioner of Social Security that presents only an individual claim.
(b) Federal Rules of Civil Procedure. The Federal Rules of Civil Procedure also apply to a proceeding
under these rules, except to the extent that they are inconsistent with these rules.

Rule 2. Complaint
(a) Commencing Action. An action for review under these rules is commenced by filing a complaint with the court.
(b) Contents.
(1) The complaint must:
(A) state that the action is brought under § 405(g);
(B) identify the final decision to be reviewed, including any identifying designation provided by the Commissioner with the final decision;
(C) state the name and the county of residence of the person for whom benefits are claimed;
(D) name the person on whose wage record benefits are claimed; and

(E) state the type of benefits claimed.
(2) The complaint may include a short and plain statement of the grounds for relief.

Rule 3. Service
The court must notify the Commissioner of the commencement of the action by transmitting a Notice of Electronic Filing to the appropriate office within the Social Security Administration’s Office of General Counsel and to the United States Attorney for the district where the action is filed. If the complaint was not filed electronically, the court must notify the plaintiff of the transmission. The plaintiff need not serve a summons and complaint under Civil Rule 4.

Rule 4. Answer; Motions; Time

(a) Serving the Answer. An answer must be served on the plaintiff within 60 days after notice of the action is given under Rule 3.
(b) The Answer. An answer may be limited to a certified copy of the administrative record, and to any affirmative defenses under Civil Rule 8(c). Civil Rule 8(b) does not apply.
(c) Motions Under Civil Rule 12. A motion under Civil Rule 12 must be made within 60 days after notice of the action is given under Rule 3.
(d) Time to Answer After a Motion Under Rule 4(c). Unless the court sets a different time, serving a
motion under Rule 4(c) alters the time to answer as provided by Civil Rule 12(a)(4).

Rule 5. Presenting the Action for Decision
The action is presented for decision by the parties’ briefs. A brief must support assertions of fact by citations to particular parts of the record.

Rule 6. Plaintiff’s Brief
The plaintiff must file and serve on the Commissioner a brief for the requested relief within 30 days after the answer is filed or 30 days after entry of an order disposing of the last remaining motion filed under Rule 4(c), whichever is later.

I bolded the provision regarding the Answer, which requires merely that the government attach a copy of the record and set forth any affirmative defenses.  Contrast this proposal with Tax Court Rules 34 and 36 on which the Tax Court proposed amendments recently here.  For the reasons discussed in the first post linked above, the Tax Court will want more than the FRCP amendment copied above requires for a petition in a social security case in order to determine if it has jurisdiction, but what about the idea of a simple answer such as the Supreme Court has now proposed in these Social Security cases proceeding in district court?

The new rule seems designed to simplify (a good thing and something Chief Counsel’s Office would probably get behind) and to speed up (another good thing and a reason for some of the Melt) the filings and rulings in these cases.

Might the Tax Court look to the newly adopted rules for Social Security cases as a basis for thinking again about the answer procedures in small tax cases and perhaps petitions as well?  With IRS continuing to provide heavy audit coverage of the least among us and 75-80% of petitions filed by pro se petitioners, it’s not only the answers that might benefit from a make-over.  Pro se petitioners don’t exactly write the kind of petitions lawyers might want which makes it harder to write good answers.  Why not examine the whole process of how to get a case underway?

Maybe the petition should simply state what the petitioner thinks is the problem, and the answer should simply attach pertinent documents and make affirmative allegations.  New Rule 2(b)(2) for Social Security cases states:  “(2) The complaint may include a short and plain statement of the grounds for relief.” Maybe the Tax Court should no longer treat the failure to raise an item from the notice of deficiency in the petition as a concession of the item.  Could we just make getting the small tax case underway as simple as possible and then sort it out?  That seems to be the process the Supreme Court has adopted for Social Security cases filed under 42 USC 405(g).

The proposed rules drew a number of comments, linked here:

American Association for Justice

Aderant

Judge Patricia Barksdale

Empire Justice Center

Federal Magistrate Judges Association

Judge Frank P. Geraci, Jr.

NAACP Legal Defense & Educational Fund

Jeffrey Marion

Judge Ricardo S. Martinez

Alan B. Morrison

National Organization of Social Security Claimants’ Representatives

New York City Bar

Public Counsel

Jean Publieee

Anthony Ramos

Joanna L. Suyes

Social Security Administration

Not every comment specifically addresses the petition and answer aspect of 42 USC 405(g) and not every comment was supportive.  Of particular importance was the comment submitted by the Social Security Administration – the last of the comments linked above.  In the SSA’s comment was the following paragraph:

With respect to the Commissioner’s initial response to the complaint, the Supplemental Rules strike an appropriate balance. In the vast majority of cases, an answer from the Commissioner is unnecessary, and the parties are able to proceed to briefing as soon as the administrative record is filed because the legal issue is defined by statute. At least 25 Federal districts currently allow for the administrative record to serve as the Commissioner’s answer without any issue. In the rare case that warrants an affirmative defense, Supplemental Rule 4(b) preserves the Commissioner’s ability to assert one.

SSA reports that there are about 18,000 district court review cases filed each year.  This number is not appreciably different from the number of small tax cases filed each year.  While there are certainly differences in the procedural posture of SSA appeal cases and small tax cases, many similarities also exist.  The FRCP rule changes present an opportunity for study of the Tax Court rules regarding small tax cases.  Maybe the Tax Court should use this as an opportunity to study ways to improve the process for all parties, including the Court.  What’s the harm in taking a close look by studying the issue?

Supreme Court Decides Boechler Case

The Supreme Court held 9-0 that the time for filing a petition in a Collection Due Process case is not a jurisdictional time period.  It also held that late filing is subject to equitable tolling.  A copy of the opinion is here.  We will have more about the case in days to come.

Can Bankruptcy Trustee Be Held Liable for Trust Fund Recovery Penalty of Responsible Officer?

In In re Big Apple Energy, LLC, No. 8-18-75807 (Bankr. EDNY 2022), the owner of a business that failed to pay the taxes withheld from employees over to the IRS sought an order that the bankruptcy trustee was personally liable for the interest and penalties arising from the failure.  In rejecting this claim, the bankruptcy court found that the trustee could not be held liable for unpaid taxes for which no claim was filed against the estate.  The holding does not mean that a bankruptcy trustee could never have liability for the failure to pay trust fund taxes, but the court does not hold the trustee liable for taxes that arose before he came on the scene and where he fully paid the claim filed by the government entities.

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The debtor initially filed a chapter 11 bankruptcy petition in 2018 but, as often happens, the case was converted to a chapter 7 later that year, at which time a trustee was appointed.  While operating as a chapter 11 the debtor failed to pay over the taxes withheld from its employees.  This failure would have served as an unmistakable statement that the debtor needed to convert to a liquidation.  When the bankruptcy court became aware of the failure, it ordered the owner to segregate money to pay the taxes and hold it in a special account.  When the conversion occurred, the owner turned the segregated account over to the trustee.  The IRS filed claims against the estate for the withheld taxes, as did the state.  Time marched on between the time the taxes were due and when they were ultimately paid.  This caused the accrual of interest and penalties due to the late payment.

In subsequent litigation between the estate and the owner, the parties entered a stipulation identifying the segregated funds and authorized the trustee to pay the IRS and state claims for the unpaid withholding taxes.  Unfortunately, the amount turned over to the trustee in the segregated funds covered only the unpaid tax and not the penalties which accumulated rapidly on the liability.  In a subsequent hearing the owner sought an order that the trustee pay the interest and penalties as well.  The trustee countered that neither the IRS nor the state had amended their claims to add on these amounts.  So, the trustee requested an order allowing him to pay the tax claims as filed.  The court granted this request.

Meanwhile, the IRS ramped up collection on the penalties against the owner while still not amending its claim.  The owner sought reconsideration of the distribution order, arguing:

that the Distribution Motion neglected to mention that the Trustee failed to timely pay the IRS Claims after Ferreira turned over the Segregated Funds. The Trustee’s inaction, Ferreira alleges, resulted in over $54,000 in penalties and interest being “assessed against the Big Apple Estate.” Ferreira argues that because the December 16 Order states the IRS and NYS Claims will be paid “in full and final satisfaction,” the Trustee signaled his intention to also pay the accrued IRS penalties and interest. This language, Ferreira submits, requires the Trustee to pay all interest and penalties that have been and may be assessed on the IRS Claims and NYS Claim. Therefore, Ferreira urges the Court to reconsider the December 16 Order pursuant to Federal Rule of Civil Procedure 59(e) and amend the December 16 Order to require the Trustee to also pay the penalties and interest that have been asserted by the IRS against Ferreira personally, and any that may be asserted in the future against Ferreira by the IRS and NYS for unpaid withholding taxes.

The trustee responded to this argument by pointing out that the order defined claims by referring to the specific claims filed against the estate.  He paid those claims after receiving the court’s permission.  The trustee further argued that the penalties and interest assessed personally against the owner differ, even though they have the same root cause, from the claims against the estate.  The trustee’s obligation is to pay debts of the estate and not collateral debts of the former owner of the company in bankruptcy.  The trustee also argued that the debts resulted from the owner’s failure to pay the taxes while operating the company during the chapter 11 phase of the bankruptcy and that it was the obligation of the owner to pay those taxes as they became due.

The owner replied to the trustee’s response by citing to drafts of the stipulation agreement under which he turned over the money designated for the payment of the taxes.  These drafts were exchanged during a mediation process.  The bankruptcy court found that it could not look at the drafts created during the mediation process because of Rule 408 of the Federal Rules of Evidence, which governs statements made during settlement and mediation discussions.  The bankruptcy court deemed these drafts inadmissible because of Rule 408 and also noted that the owner did not submit them during the process leading up to the distribution order.  In denying the motion for reconsideration, the court stated:

The Court agrees that the Trustee is neither obligated nor authorized to pay the personal penalties imposed on Ferreira from outstanding tax obligations when there are no claims filed against Debtors for such amounts. The Trustee is neither obligated nor authorized to pay claims that are not filed against Debtors’ estates. See generally 11 U.S.C. §§ 704(a)(2); 704(a)(5). Therefore, the Court does not find that there was “mistake” warranting Ferreira relief from the December 16 Order under Rule 60(b)(1).

This leaves the former owner of the business, Mr. Ferreira, holding the bag personally for a fair amount of penalty and interest resulting from the late payment of the taxes withheld from the employees.  Ultimately, the penalties and interest did stem from Mr. Ferreira’s failure to timely pay over the taxes as he was obligated to do as the person who controlled the company during the chapter 11 phase of the bankruptcy case when it operated as a debtor in possession.  The case demonstrates a danger to someone operating as a debtor in possession who does not keep current with the taxes because once the case is converted to a chapter 7 the finances of the company are no longer in their control which can result in significant delays in payment in addition to payment of an amount less than the former owner needed paid in order to avoid personal liability.  So, Mr. Ferreira not only has lost everything he invested in the business but comes out of the business bankruptcy with his own personal liability to the taxing authorities.

The court did not lay out when Mr. Ferreira was assessed the trust fund recovery penalty.  Persons hit with this penalty do receive a break on interest because it does not start running until the assessment against them.  Similarly, the penalties referred to, I believe, are penalties for failure to pay the trust fund liability which would also have run from the date of assessment.  The opinion does not contain enough detail for me to tell if the IRS claim included penalties and interest to a specific date.  Creditors generally lose the ability to claim interest for prepetition debts in a bankruptcy case though they have the ability to claim interest in postpetition debts such as this.  I don’t know if the IRS did claim some postpetition interest or if its claim merely included the unpaid tax.

The case highlights the importance of control.  Mr. Ferreira had control during the chapter 11 and lost it as the case converted to chapter 7.  His decision not to have the company pay the taxes while he had control ultimately leads to him being left holding the bag.  A potentially important lesson for others taking a troubled entity into chapter 11 bankruptcy and making decisions about who to pay and when to shut down.

Ninth Circuit Reverses Tax Court Interpretation of IRC 6751(b)

The question of when a supervisor must give approval for imposition of a penalty has created much litigation in the Tax Court as taxpayers try to remove a penalty proposal by using the failure of the IRS to comply with the IRC 6751(b) approval process.  In Laidlaw’s Harley Davidson Sales v. Commissioner, No. 20-73420 (9th Cir. 2022) the court reversed the decision of the Tax Court in a precedential opinion reported at 154 T.C. 68 (2020) (knocking out the penalty for failing to follow the approval process required by the statute.)  We discussed the Tax Court decision here

The Ninth Circuit decision casts into doubt the approach the Tax Court has developed through litigation over the past several years.  It remains to be seen whether the Tax Court will reverse its approach based on the Ninth Circuit opinion, an outcome I view as unlikely, or stay the course creating an exception and perhaps a split that will require resolution in the Supreme Court.  Of course, all of this is against a backdrop of Congress seriously considering eliminating IRC 6751(b) reported here and here

Laidlaw involves the reportable transaction penalty imposed under IRC 6707A.  This penalty can be quite large.  As mentioned in the earlier post, the year at issue is 2008 before petitioners and the IRS began focusing on IRC 6751(b).  Bryan Camp has written an excellent post on the Ninth Circuit’s opinion which you can read here.  His post provides good background on the issue of approval timing in general and discusses two recent TC Memo opinions on the topic. 

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Laidlaw participated in a listed transaction but failed to alert the IRS about its participation.  The Revenue Agent auditing Laidlaw’s return issued a 30 day letter notifying Laidlaw of the intention to impose the IRC 6707A penalty.  The Agent did not obtain a supervisor’s signature prior to the issuance of the 30 day letter but the supervisor did sign off on the penalty thereafter once Laidlaw filed its protest to the letter.  The administrative appeals did not succeed and the IRS assessed the penalty which led to collection action.

Laidlaw submitted a Collection Due Process (CDP) request and petitioned the Tax Court after receiving a determination upholding the proposed levy action.  The Tax Court held that the IRS had not met the requirement of IRC 6751(b) that the supervisor approve the penalty prior to the 30-day letter.  The Ninth Circuit described the Tax Court decision as follows:

The Tax Court rejected the Commissioner’s argument that § 6751(b)(1) requires that the IRS secure supervisory approval only before the assessment of a penalty. The Tax Court reasoned that the statute’s legislative history, as analyzed in Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), “strongly rebuts” the Commissioner’s argument because the statute “would make little sense if it permitted approval of an ‘initial’ penalty determination up until and even contemporaneously with the IRS’s final determination.” The Tax Court also rejected the Commissioner’s argument that under Chai the timeliness of written supervisory approval hinges on whether the supervisor retained authority to give approval because “[t]o so suggest would be to ignore the paramount role that the legislative history of section 6751(b)(1) played in Chai’s analysis.”

The fact that the IRS appealed the decision speaks to the importance of the issue to the IRS and to the government’s deeply held disagreement with the Tax Court’s approach to the timing of supervisory approval.  In addition to disagreeing with the Tax Court’s legal conclusion, the issue has significant administrative importance because of the amount of money at stake and the impact of letting so many taxpayers who committed inappropriate actions with respect to their taxes off of the hook.

Before the Ninth Circuit the IRS argued:

The Commissioner argues that in this case § 6751(b)(1) permitted written supervisory approval at any time before the assessment of the penalty. However, the Commissioner acknowledges that because the initial determination must be “approved” by a supervisor, a penalty cannot be assessed unless supervisory approval occurs at a time when the supervisor still has discretion whether to approve the subordinate IRS official’s initial penalty determination.

As we have discussed in many posts, IRC 6751(b) fails to provide clear guidance.  The Tax Court and the Ninth Circuit struggle to interpret the meaning of adjective “initial” which describes the determination by which the supervisor must provide a signed approval.  In rejecting the Tax Court’s interpretation of initial, the Ninth Circuit states:

the language of the statute provides no reason to conclude that an “initial determination” is transformed into “something more like a final determination” simply because the revenue agent who made the initial determination subsequently mailed a letter to the taxpayer describing it. We think “initial,” as used in § 6751(b)(1)’s phrase “initial determination,” more naturally indicates that a subordinate’s determination to assert a penalty lacks the imprimatur of having received supervisory approval, rather than that the determination has not yet been formally communicated to the taxpayer. Moreover, Taxpayer does not argue that the “determination” that Supervisor Korzec approved differed in any way from RA Czora’s initial determination to assert the § 6707A penalty. Finally, this case does not involve a notice of deficiency, which, as discussed above, could limit a supervisor’s discretion to prevent the assessment of a penalty.

The Ninth Circuit acknowledges that its interpretation allows a revenue agent to signal penalty imposition without first obtaining approval – the concern expressed by Congress in enacting the provision but it falls back on its conclusion that the law as written does not require approval before the matter procedurally moves out of the supervisors hands.  Here, the supervisor had the authority to approve or deny the penalty prior to assessment.

The IRS has more administrative leeway in imposing an assessable penalty than a liability handled by the deficiency process.  Up until the moment of assessment, the IRS can make decisions that impact the assessment.  By holding that the approval just needs to occur before assessment, the Ninth Circuit gives the IRS the approval it needs not only to save the penalty in the Laidlaw case but also numerous other cases involving assessable penalties. 

What impact will Laidlaw’s approach to interpreting when an “initial” determination arises in cases that are subject to deficiency procedures? In a deficiency case the IRS loses control long before the assessment occurs.  Once the notice of deficiency is sent, the taxpayer can file a Tax Court petition and the IRS has no more ability to control the assessment.  So, this decision makes a clear distinction between cases based on the procedural path they take toward assessment.  The Tax Court’s approach focuses on the 30-day letter as the initial determination moving the timing of the approval to a stage that can be well before assessment but at a point that could impact the discussion/negotiation of the outcome.  The Ninth Circuit, by focusing on assessment or the point at which the IRS has lost control of assessment provides a greater cushion for the IRS to come into compliance.

Assuming this taxpayer does not take the case to the Supreme Court or does not obtain certiorari, the possibility remains that on this legal issue of the interpretation of “initial” a future case may go up to the Supreme Court because of a split in the circuits.

Challenging Levy Compliance

The IRS regularly issues levies to banks and to employers.  Taxpayers subject to the levy have almost no way to stop the levy by suing the party receiving the levy.  Similarly, the party receiving the levy has almost no way to avoid making payment on the levy without running into trouble.  We have discussed the issue of suing to stop the levy before here (raising possibility that such a suit could prevail against a bank levy if the account was filled with funds exempt from levy).  Most cases in which taxpayers sue to stop a levy are relatively straightforward and today I write about one of those cases.  The Fourth Circuit recently affirmed the district court decision in the case of Nicholson v. Unify Financial Credit Union, No. 21-2095 (4th Cir. 2022) holding, per curiam, that the suit by the taxpayer against the credit union to stop the credit union from paying the IRS should be tossed.

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Mr. Nicholson, acting pro se, brought a suit against his credit union related to the surrender of the money in his account to the IRS pursuant to a levy.  No doubt Mr. Nicholson was dismayed to find his account essentially wiped out by the levy; however, his effort to recover the money by suing the credit union does not fare well.  It does show, however, that in complying with the levy provisions the credit union has a good defense to such suits but still must engage lawyers to help it defend itself.  Occasionally, the US Attorney’s office might assist with the defense.

Mr. Nicholson alleges the credit union breached its fiduciary duty to him, violated IRS code provisions and violated the constitution by paying money over to the IRS in response to a levy.

The credit union countered that it had a mandatory obligation to comply with the levy under IRC 6332(c).  It further argues that IRC 6332(e) provides a complete shield of liability to Mr. Nicholson:

(e) Effect of honoring levy.

Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made who, upon demand by the Secretary, surrenders such property or rights to property (or discharges such obligation) to the Secretary (or who pays a liability under subsection (d)(1)) shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.

Because of the mandatory requirement to comply and the shield provided by IRC 6332(e), the credit union moved to dismiss the suit under Federal Rule of Civil Procedure 12(b)(6). 

Mr. Nicholson responded with some standard tax protestor arguments that the income tax laws do not apply to him, but he also cited Treasury Regulation § 301.6332-1(c)(2)(3). The regulations cited by Plaintiff provide, in relevant part, that:

(2) Exception for certain incorrectly surrendered property. Any person who surrenders to the Internal Revenue Service property or rights to property not properly subject to levy in which the delinquent taxpayer has no apparent interest is not relieved of liability to a third party who has an interest in the property.

(3) Remedy. In situations described in paragraphs (c)(1) and (c)(2) of this section, taxpayers and third parties who have an interest in property surrendered in response to a levy may secure from the Internal Revenue Service the administrative relief provided for in section 6343(b) or may bring suit to recover the property under section 7426.

The court makes relatively quick work of his attempt to use the wrongful levy provisions in this case pointing out their inapplicability because he has an interest in the property.  He had previously sued the IRS seeking a return of his property.  He faces the additional problem that a wrongful levy action needs to be brought against the IRS and not the third party such as the credit union.  The statutory scheme essentially requires the third party to turn over the property to the IRS and then allows a party whose property was wrongfully taken to seek the return of that property from the IRS.

The court not only finds for the credit union but determines that Mr. Nicholson’s argument has so little merit that it does not afford him the opportunity to amend his complaint.  The court had some familiarity with Mr. Nicholson from prior tax protestor type litigation.  The failure of the district court or the Fourth Circuit to sanction Mr. Nicholson surprises me a little bit, but perhaps the courts knew that he had no ability to pay for any sanctions imposed.

While not remarkable, the case shows what should happen in a straightforward challenge of a levy.  The quick dismissal saves the credit union from the burden of additional expenses.  Mr. Nicholson can pursue his case against the IRS if he has one while allowing the party that received and paid the levy to stand on the sidelines of the dispute.

Correction on Making Offers in Compromise Public

On February 21, 2022, I wrote a post because of the FOIA case involving EPIC v. IRS, 128 AFTR 2d 2021-6808 (DDC 2021).  My description of the EPIC case was accurate and my conclusion on how to get information about offers in compromise from the IRS was accurate – use FOIA; however, my description of the IRS method for delivering information about accepted offers in compromise was outdated.  I thank Steve Bauman of IRS SB/SE Collection for setting me straight.

In the earlier post I wrote about the system the IRS had devised for allowing public inspection of accepted offers.  The system did not make sense to me and was criticized in a TIGTA report in 2016 to which I cited in the post.  The IRS took the criticism from TIGTA to heart and revamped the system for accessing accepted offers.  I cannot say that I find the new system very user friendly for reasons I will describe further below, but it is not a system which will cost $100,000 per offer viewed which is what TIGTA calculated was the per view cost of the prior system.

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The IRS closed the public reading rooms as the depository of accepted offers back in 2018 and now keeps all accepted offers in a computer database that inquiring persons can access through the process described below:

Public Inspection files contain limited information regarding accepted Offers in Compromise such as the taxpayer name, city/state/zip, liability amount, and offer terms. View a sample Form 7249, Offer Acceptance Report PDF, to see the information you will receive by requesting a copy of a public inspection file.

The IRS makes available for public inspection a copy of Form 7249, Offer Acceptance Report, for one year after the date of acceptance.

If you wish to submit a request, complete and send the Offer in Compromise Public Inspection File Form PDF [aka Form 15086.] We will respond in 15 business days. Fax is the preferred method; if mailing, allow an additional 5 business days for a response.

If you link to the Offer Acceptance Report, you will see that you obtain very little information about the person or the offer.  As I mentioned in my original post several years ago about making offers public, I don’t find the information the IRS chooses to make public particularly helpful for stopping the type of abuse and scandal that caused offers to be made public in the first place.  Here’s my brief discussion of the history behind making offers public:

In the early 1950s, a scandal came to light in which an IRS employee used the compromise provisions to write off the liabilities of members of the criminal element.  The employee was prosecuted (see page 148 for a brief discussion of the events) and President Truman issued an executive order requiring that the IRS make accepted offers public.  Subsequently, Congress passed IRC 6103(K)(1) which provides for public inspection and copying of accepted OICs. 

You can look at the information provided on Form 7249 and decide for yourself if that information will assist in ferreting out inappropriate offers that might cause a scandal.

Moving past the information on the publicly available form which has not changed, I need to explain how the IRS has made its offer disclosure system better.  I think it is better but still not what it should be.  Gone are the remote reading rooms.  In their place the IRS has digitized its system for storing and retrieving Forms 7249.  Now, you send a request to the IRS via fax using the inspection file form linked above.  The problem with this form is that it will only cause the IRS to send you information about offers you already know about.  The first box on the form requests you to

Identify the Accepted Offer in Compromise (e.g. offer number, name, state) as specifically as possible below.

You can only do that if you already know about the offer.  How many people are looking for offers who already know an offer exists.  Maybe lots of people but I am unconvinced.  There is now way to browse through accepted offers to try to get a sense of what was accepted.  You must make a targeted request to use the new system.

The new system eliminates the wasteful reading room.  For that it is to be applauded.  If the goal is to prevent another scandal like the one in the 1950s, I think more information needs to be provided on Form 7249 and the accepted forms need to be browsed.

The IRM was updated in December of 2019 and provides the following guidance:

5.8.8.9 (12-17-2019)

Public Inspection File

1. Public inspection of certain information regarding all offers accepted under IRC § 7122 is authorized by IRC § 6103(k)(1).

2. Treasury Reg. § 601.702 (d) (8) requires that for one year after the date of execution, a copy of Form 7249 Offer Acceptance Report, for each accepted offer with respect to any liability for a tax imposed by Title 26, shall be made available for inspection and copying. A separate file of accepted offer records will be maintained for this purpose and made available to the public for a period of one year.

Note: 

Revenue Ruling 117, 1953-1 C.B. 498 complements Treasury Reg. § 601.702(d)(8) and explains that Form 7249 serves two different purposes. First, it provides the format for public inspection, which is mandated by Executive Order 10386. Second, it satisfies the filing requirement and other criteria arising under section 7122(b).

3. For each accepted offer, a copy of the Form 7249 should be uploaded to the PIF SharePoint site. Form 7249 must be free of any PII.

4. The office that has accepted the offer will be responsible for providing the Form 7249. The PIFs should be uploaded, without delay, to the PIF SharePoint site after acceptance.

5. The PIF must be:

– Maintained for one-year.

– Uploaded in the appropriate monthly folder and designated location based on the taxpayer’s entity address at the time of acceptance.

– Created with the established naming convention for uploading documents to the PIF SharePoint site.(Offer number. Name Control. Date Accepted) i.e. (1234567890.ABCD.MMDDYY)

– If within one year of acceptance a Form 7249 needs to be corrected (e.g. to remove periods that were discharged in bankruptcy, compromise of a compromise, or to obtain the signatures required in Delegation Order 5-1), the original Form 7249 should be deleted from the PIF SharePoint site, and the corrected Form 7249 uploaded with the same naming convention

6. Due to the potential disclosure of Personal Identifiable Information (PII) the Form 7249 will be reviewed and any PII will be redacted.

7. Memphis COIC will be the centralized PIF site which will monitor and track all Form 15086 PIF requests. Requests for OIC PIF will be provided by mail or fax per the instructions on www.irs.gov, the taxpayer will complete and submit Form 15086. If a request is received to copy more than 100 pages, contact OIC Collection Policy.

Note: 

A visitors log with the Form 15086 information will be retained on the PIF Sharepoint site. The visitor log book and the Form 15086 will be maintained by Memphis COIC.

I asked Steve how someone would make a broad request.  He said that for those seeking large volumes of data that would point to trends such as numbers of offer accepted, submitting a FOIA request would be necessary.  That’s why I said at the outset that although I wrongly described the continued existence of the reading rooms, the bottom line is that FOIA may be the only way to obtain meaningful information about accepted offers (as meaningful as you can get with the information provided on Form 7249) is by making a FOIA request.  I didn’t ask and it’s not clear to me if a FOIA request can allow someone to obtain information about offers going back past one year

Aside from my continued disappointment at the amount of information available and the process for getting the information, I want to thank Steve for taking the time to set me straight.  He disclosed useful information to me about the process of obtaining information about offers.