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About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Court Invokes Aesop’s Fables In Denying Government’s Request For Injunctive Relief

Recently Keith and Marilyn Ames wrote a separate subchapter in Saltzman and Book IRS Practice and Procedure addressing a district court’s authority to grant the government’s request for injunctive relief. These cases often arise when there are multiple quarters of unpaid employment taxes. In these cases, in addition trying to reduce an assessment to judgement, the government has requested broad injunctive relief to ensure future compliance. If a taxpayer fails to comply with the terms of the injunctive relief, the government can seek judicial sanctions, including imprisonment.

In US v Olson a federal district court in Indiana denied the government’s request for injunctive relief, finding that the government had failed to make the case that relief was necessary or appropriate.


Olson involves Bradley and Shirley Olson and their plumbing businesses. In its complaint the government alleged that the Olsons had about $300,000 in unpaid employment tax obligations over an almost ten-year period. The Olsons failed to respond, and the government requested that the court enter a default judgement for the unpaid assessed tax.

The government also sought injunctive relief, asking the court to compel the Olsons to follow the law in the future, report regularly to the IRS on their compliance, and grant the IRS the right to periodically inspect their books and records.

The district court reduced the assessment to judgement but denied the request for injunctive relief. The government asked the court to reconsider, and the court denied the request.

In denying, the court began its opinion with a tale from Aesop: 

A Dog, to whom the butcher had thrown a bone, was hurrying home with his prize as fast as he could go. As he crossed a narrow footbridge, he happened to look down and saw himself reflected in the quiet water as if in a mirror. But the greedy Dog thought he saw a real Dog carrying a bone much bigger than his own.

If he had stopped to think he would have known better. But instead of thinking, he dropped his bone and sprang at the Dog in the river, only to find himself swimming for dear life to reach the shore. At last he managed to scramble out, and as he stood sadly thinking about the good bone that had been lost, he realized what a stupid Dog he had been.

It is very foolish to be greedy.

Aesop & Milo Winter, The Aesop for Children 96 (1919).

From Aesop to the Tax Code

As we have previously discussed (see, for example, Keith’s 11th Circuit Reverses and Imposes an Injunction Against a Corporation for Failing to Pay), Section 7402(a) gives district courts broad equitable powers “as may be necessary or appropriate for the enforcement of the internal revenue laws.” Under this statutory authority, the government has successfully obtained injunctive-type relief that has resulted in court orders compelling future employment tax compliance that is backstopped by an order requiring more regular taxpayer reporting so the government can keep close watch on any future missteps.

The Olson opinion acknowledges the statutory power, although its initial opinion on the matter focused on a slightly different statutory footing that addresses injunctive powers on third parties like preparers, a remedy that the government has also increasingly sought.

From there, the opinion discussed the standard in the Seventh Circuit to grant injunctive relief, looking to a balance of the harms test, considering the potential harm to the government, the public and the affected parties. In discussing that balancing test, the Olson court notes that the Seventh Circuit invokes the standards for injunctive relief under Federal Rules of Civil Procedure 65(b), which considers the following:

Under Rule 65, “injunctive relief is appropriate if the applicant demonstrates ‘(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.’”

Much of the discussion turns to the government’s allegations that absent an injunction, its remedies are inadequate. The court strongly disagreed, first noting that inadequate is not the same as ineffectual, but rather must be “seriously deficient as compared to the harm suffered.”

And on that standard, the complaint as well as a revenue officer’s declaration came up short:

Here, the Government argues that it does not have an adequate remedy at law because “the IRS’s efforts to bring the Olsons into compliance have failed and because the Olsons will likely continue to obstruct the execution of the federal tax laws through their non-compliance.” Maybe, but none of that proves an inadequate remedy at law. The Government has shown here its ability to calculate Defendants’ tax obligations and to obtain a judgment in that amount. There is no reason to believe the Government couldn’t do so later if it determined that Defendants continued to violate the tax laws.

The opinion distinguishes cases where there was an inadequate remedy stemming from a money judgement alone, looking to cases where the courts blessed injunctions that reached individuals who were peddling tax protestor schemes or who had set up a return preparer shop that specialized in bogus returns.

For good measure, the court sees its role differently than the government:

The Court sees no basis to exercise its discretion to issue the broad injunction requested by the Government. The Court does not read § 7402 as allowing the IRS to deputize the federal courts into its enforcement arm every time a taxpayer is delinquent. To do so would be a waste of this Court’s valuable time and resources. No matter the standard, then, the Government’s request for an injunction is denied.


The court noted that the government did a little better than the dog in Aesop’s fable as “it will keep its original bone—but it will be no more successful at grabbing the illusory bone in the river.”

Employment tax noncompliance is a major IRS compliance focus, and is a big part of the tax gap.  It is not surprising that the government views the equities differently than the district court judge.

We will keep an eye on this to see if the government appeals.

For readers who want to dig deeper on the issue of injunctions, we review the differing standards that courts have applied in government requests for injunctive relief in Chapter 15 of Saltzman and Book.

Government Concedes in Polish Lottery Case

A few months ago in Polish Lottery Winner’s Son Sues Over Penalties For Failing To Report Foreign Gifts I discussed Wrzesinski v US. For those of you who may not remember, the matter involved penalties under Section 6039F for failing to file Form 3520, the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

As I discussed, Krzysztof Wrzesinski emigrated to the US from Poland in 2005 at the age of 19. About five years later his mom, who still lived in Poland, won the Polish lottery. She took the proceeds and made gifts to Krzysztof of $830,000 over the course of 2010 and 2011.

Krzysztof’s tax return preparer told him that he need not file any forms with his tax returns and that the gift proceeds were exempt from gross income. 

While the proceeds were excluded from gross income, Krzysztof was hit with penalties in the amount of $87,500.00 and $120,000.00 for 2010 and 2011. Appeals abated much of those, but not about $45,000.

Turns out that last week DOJ has filed a status report indicating that it has conceded, and that Krzysztof will be receiving a refund in a couple of months.

Hat tip to Dan Price, who, in a post on Linked In, reasonably suggests that he hopes the concession will lead “IRS to acknowledge reasonable cause in more foreign gift penalty cases”.

Tax Court Denies Attorney’s Racing Car Costs Claimed To Be Advertising Expenses For Legal Practice

This one is not so much a procedure case but its facts jumped out at me and is worthy of a blog. In Avery v Commissioner, the Tax Court sustained the IRS’s denial of over $300,000 of a lawyer’s claimed advertising expenses that the taxpayer allegedly incurred during 2008–2013.  

This is a different twist on cases where taxpayers try to overcome the Section 183 hobby loss limitations which shoehorn nonprofit related hobby type expenses into a narrow category of expenses that can (at least prior to 2018) offset that activity’s income, if any. Here, the taxpayer argued that his car racing was essentially done to promote his legal practice.

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Avery is a CDP case where the underlying liability was at issue because the IRS agreed that he had not received the stat notice even though it was sent to his last known address. As readers may recall, and as we have discussed before (see Carl Smith discussing Godfrey v Comm’r),  CDP differs from deficiency cases where the 90-day period in which to file a Tax Court deficiency petition begins when the notice of deficiency is mailed to the taxpayer’s last known address, regardless of its non-receipt. In CDP cases, as here, a taxpayer can challenge an assessed underlying liability where the taxpayer “did not receive any statutory notice of deficiency . . . or did not otherwise have an opportunity to dispute such tax liability”

After overcoming that hurdle, the Avery case turns to the merits. The opinion notes that Avery moved to Indiana starting in around 2005 and did not practice in Indiana. But he did have a practice in Colorado that ramped up when he returned there in 2010.

Part of the costs that Avery claimed as advertising included his purchase price for a Dodge Viper (actually depreciation), as well as parts and labor associated with maintaining the car. IRS essentially agreed that about $50,000 of expenses were substantiated but claimed that the expenses were personal non deductible expenses under Section 262.

The taxpayer argued that car racing would help him meet people who could help his career, and claimed that it would help him obtain personal injury clients who may have seen his law firm decal on the car that he occasionally raced.

The Tax Court, while also noting that Avery failed to race the car much when he returned to Colorado, found that he failed to introduce sufficient evidence that connected the racing to his law practice:

Petitioner allegedly believed that being involved in car racing would enable him to meet lawyers, doctors, and other professionals who could help his career. But he could identify only one instance–involving a Pizza Hut franchisee–in which his racing activity actually intersected with his law practice. And that relationship did not lead to any personal injury litigation, but only to “consultation” about a vendor dispute. 

Petitioner testified that he found car racing to be a good “conversation starter” when meeting with other professionals. But innumerable sports and hobbies could serve the same function–a pastime that a person might enjoy and share with other people, possibly leading to eventual business relationships. That possibility does not convert the costs of pursuing a hobby into deductible advertising expenses.


This case joins one of my favorites in my tax class, Henry v Commissioner, which Paul Caron blogged about a couple of years ago. In that case an accountant attempted to deduct insurance and maintenance costs from his purchase of a yacht on which he flew a red, white, and blue pennant with the numerals ‘1040‘ on it. Henry, like Avery, failed to provide enough evidence to sustain the connection between obtaining clients for his accounting practice and his yachting, and the Tax Court disallowed those expenses as personal nondeductible expenses under Section 262.

All is not lost for some professionals who might want to deduct racing expenses–and maybe even the costs of yacht ownership. Avery notes that the case “is distinguishable from prior cases—e.g., involving car dealerships, construction companies, and companies engaged in the sale and leasing of aircraft—in which we found car or motorcycle racing expenses to be deductible advertising costs.” In those case the taxpayer, through more than vague testimony, established a proximate relationship between the expenses and the business of the taxpayer.

This case reminded me of my and Keith’s late colleague at Villanova, Michael Mulroney. Michael raced his classic British Morgan sports car for his one-man Phlexed Sphincter Racing Team. I recall Michael festooning a bumper sticker on an old Karmann Ghia that he occasionally raced that said “Villanova Graduate Tax Program: Not A Passive Activity.” I do not believe Michael attempted to deduct any of his car racing expenses, but I know he would have enjoyed reading this opinion and sharing it with his students.

Failure to File Information Returns For Foreign Trust Keeps Statute Of Limitations Open For Individual’s Income Tax

Fairbank v Commissioner  is the latest in a long line of important cases originating from the IRS’s use of the John Doe Summons (JDS) process to gather information about US individuals who had money parked in overseas accounts.

Fairbank involves Section 6501(c)(8). That section provides that an individual who fails to file information returns with respect to certain activities, including owning a foreign trust and receiving distributions from an overseas trust, faces an exception to the normal three-year statute of limitation (SOL) on assessment.  When a taxpayer fails to file those information returns, instead of three years from the filing of the income tax return, the clock on the SOL on assessment for income tax does not begin to run until the taxpayer furnishes information to the IRS about the trust investments.

The taxpayer in Fairbank was no stranger to overseas investments and accounts.  In the early 1980’s, when Mrs. Fairbank was married to her first spouse, IRS had issued jeopardy assessments approaching $15 million after the IRS discovered that her ex husband had shifted substantial assets to New Zealand and Switzerland and had not filed tax returns for a few years.


Fast-forward a bit. Mrs. Fairbank and her ex divorced, and as per the divorce negotiations and settlement the ex transferred cash to Mrs. Fairbank. The cash went to a Swiss-based UBS account in the name of Xavana Establishment, an entity formed in Liechtenstein.

In 2008 a federal court approved the IRS issuance of a JDS to UBS, which provided Fairbank’s name to the IRS. That triggered an income tax examination, and Fairbank eventually filed FBAR forms and information returns relating to ownership of and distributions from a foreign corporation, but not the filing of Forms 3520 or 3520A, relating to the ownership of and distributions from a foreign trust.

In 2018, after determining that there was additional income tax due to the overseas accounts, IRS issued notices of deficiency for 2002-09 with taxes and penalties stemming from the income approximating about $120,000. Fairbank had timely filed those individual returns, and in the absence of an exception to the three-year SOL, any assessment with respect to income tax liability would be time barred.

IRS argued that Fairbank’s failure to file the trust information forms meant that Section 6501(c)(8) applied and thus its stat notices preserved the possibility of a timely assessment. Fairbank argued that she effectively provided the information that the IRS required under Section 6048 pertaining to trust ownership and distributions. (As an important aside, she also argued, unsuccessfully, that Xavana was a corporation and not a trust; the opinion found that her control over the corpus and income rendered the trust a grantor trust and not a corporation—much of the opinion digs into entity classification issues.)

In finding that 6501(c)(8) controlled and the SOL on assessment was still open, the opinion declined to definitively state that taxpayers had to file Forms 3520 and 3520 A to avoid the exception in 6501(c)(8) to apply. In footnote 32, however, the opinion did state that analogous case law provides that information can be considered a return for purposes of the SOL rules even if it is not on the specific form the IRS typically requires.

That substance over form approach did not help Fairbank, however, as the opinion concluded that they had not provided enough information about Xavana’s activities:

We conclude that Mrs. Fairbank, as the deemed U.S. owner of Xavana Establishment, has failed to provide any written return to respondent setting forth a full and complete accounting of Xavana Establishment’s activities for the years at issue. See I.R.C. §6048(b)(1).

Similarly, we conclude that Mrs. Fairbank, as Xavana Establishment’s U.S. beneficiary, has failed to make any return that includes the name Xavana Establishment and which outlines the aggregate amount of distributions she received during each of the tax years at issue from Xavana Establishment.

Parting Thoughts

Whether a taxpayer can satisfy the 6501(c)(8) requirement in the absence of filing a specific form presents an interesting issue. While the opinion suggests that a taxpayer who has sufficiently demonstrated that the IRS received all of the information that a form would have provided might have prevailed, in footnote 33 the opinion cautions that even if “we were to accept petitioners’ argument that a specific form is not required to trigger the running of the period of limitations, we would create uncertainty in an area of the law where absolute clarity benefits both the IRS and taxpayers.”

I suspect that Fairbank would be ok with that uncertainty, and while the SOL rules are meant to provide a date certain, it is hard to see why the IRS should have additional time to assess if it has elsewhere received all the information it would have received on a specific form. That issue awaits resolution in another case, however.

One final point. The opinion notes that in 2010 Congress added a reasonable cause exception to 6501(c)(8), but in footnote 30 it states that the taxpayer “did not adequately raise the issue.”  That is tough. The reasonable cause analysis would lean heavily on standards developed in the context of civil penalties, including the seminal 1985 Supreme Court Boyle case. While Boyle generally provides that you cannot delegate tax return filing obligations to a third party, perhaps in Fairbank counsel’s advice in 2014 to only file an information return with respect to a foreign corporation, and not a return with respect to a foreign trust, would have amounted to substantive legal advice, rather than nondelegable advice concerning filing deadlines that was directly at issue in Boyle.

Alleged Monthlong Trip to Mexico To Celebrate Día De Los Muertos Not Enough To Get Extra Sixty Days To File A Petition

In Shead v Commissioner, the Tax Court, by order, dismissed a petition as untimely when the taxpayer failed to prove he was out of the country at the time the IRS mailed the notice of deficiency.  For the reasons discussed below, Keith and I believe that the Court failed to give the petitioner a real opportunity to prove that he was out of the country.  It is our understanding that an LITC is reaching out to Mr. Shead who handled the case pro se up to this point to see if it can assist him in gathering documentation to support a motion for reconsideration.  There may be a follow up post.


Taxpayers have 90 days to timely file a petition to Tax Court in response to a notice of deficiency. The statute gives taxpayers 150 days to file a petition if the taxpayer is out of the country. Case law adds some gloss to the extra sixty-day rule; the notice need not be addressed to a taxpayer residing outside the United States for the 150-day deadline to apply.

And the taxpayer can get the extra sixty days if they are temporarily out of the country when the IRS mails the notice.

This takes us to the recent order in Shead v Commissioner.  In Shead, IRS mailed a notice of deficiency on October 4, 2021. The taxpayer filed a petition with the Tax Court on January 11, 2022, eight days after the 90-day period elapsed. Last December, following the Hallmark Collective decision where the Tax Court confirmed that in its view the 90-day period was jurisdictional and not subject to tolling, the Tax Court issued an order in Shead to show cause why the Court should not dismiss the case for lack of jurisdiction.

Shead responded by claiming that the petition was timely because he was entitled to the extra 60 days to petition the Tax Court. He stated that he was out of the country at the time the IRS mailed the notice. The Tax Court then issued another order, this time directing Shead “to file a response including relevant documents showing proof of travel outside of the United States on October 4, 2021,”  The order did not provide guidance regarding what relevant documents might serve as necessary support.

Shead responded, sending in an affidavit where “he swore that on October 2, 2021, he left the United States with his family and drove to Mexico to celebrate El Día De Los Muertos.” In the affidavit, he swore that he and his family had remained in Mexico until their return to the United States on November 7, 2021.” In addition to the affidavit, the taxpayer included a copy of his passport card.

Judge Choi found that the affidavit and copy of the passport was insufficient to justify finding that Shead was entitled to the extra sixty days. The affidavit, as the order notes, amounts to testimony. While testimony is evidence (despite what IRS often thinks when conducting a correspondence examination), the order found that the supposedly corroborating passport card did not help because it “was not stamped as a paper passport would be” and he failed to provide any other documentation showing he was in Mexico.

In the absence of any documentary evidence corroborating the affidavit, the Tax Court dismissed the petition despite the absence of any evidence contradicting the affidavit.  The Court apparently determined the testimony in the affidavit was not credible without corroborating documentation.  The Court could have held a hearing in order to question the taxpayer further to establish credibility or could have given him direction as to the type of documentation that would support the information in the affidavit.  Instead, it chose simply to dismiss his case giving no credit to his testimony similar to what would happen in a correspondence examination by the IRS. While the dismissal is without prejudice, the chance to get court review of the deficiency is now likely limited via a refund suit.

That seems like a tough outcome, especially as one imagines that if Shead and his family were in Mexico during the festivity, they probably had other evidence that could have tied them to their trip (e.g., social media posts, hotel or VRBO receipts etc). The order is a reminder that while testimony is evidence, in the absence of confirming documentation, a judge may not find it sufficient.  While most cases involving the 150 day rule establishing absence from the United States may be decided by order, there are published opinions that provide guidance regarding the type of information a petitioner could present to satisfy the Court. 

In Smith v. Commissioner, 140 T.C. 48, 50 (2013), the Court applied the 150-day rule (I.R.C. § 6213(a)) in a fully reviewed opinion that collects many of the prior cases regarding this basis for extending the time to file a Tax Court petition.  The case did not discuss the proof submitted as much as the timing of the petitioner’s move to Canada but still provides some instruction on the proof necessary to satisfy the requirement.

In Wade v. Commissioner, TCM 1998-235, the Court had a hearing and did not simply dismiss the case after receipt of an affidavit and an attachment the Court did not find sufficient.  The court found that:

The evidence in this case establishes that petitioner departed on Korean Airlines flight number 11, from Los Angeles, California, to Seoul, South Korea, on March 19, 1997, the day the notice of deficiency was issued. Prior to his departure from the United States, petitioner put his mail delivery on hold at his local post office. Petitioner arrived in the Philippines, his destination on this journey, on March 21, 1997. On April 3, 1997, petitioner left the Philippines and returned directly to the United States. Subsequently, petitioner picked up the notice of deficiency at his local post office on April 7, 1997.

Hat tip to Anna Gooch for bringing this order to our attention. The issue is one that a student raised in my Villanova Tax Procedure class, and Anna has been working with me and Marilyn Ames and attending the class as we prepare to launch a new revised online procedure class next year.

Unscrupulous Return Preparers Draw Attention At The ABA Tax Section Midyear Meeting

The Midyear Meeting of the ABA Tax Section concluded last week. There were many terrific panels that I suspect will generate posts in the next few weeks. The Pro Bono and Tax Clinics Committee had an especially insightful panel entitled “Holding Unscrupulous Tax Preparers Accountable.” Moderated by Mandi Matlock, a federal tax litigator at Texas RioGrande Legal Aid, the panel included David Sieminski from Consumer Financial Protection Bureau, Karyna Lopez from Lone Star Legal Aid, and Laura Baek from Taxpayer Advocate Service.

David offered a consumer law perspective on preparers who often use the return filing process as an opening to sell high priced loan products that can carry outrageously high fees. Karyna discussed how taxpayers can use state law causes of action to go after preparers who violate taxpayers’ trust. Laura discussed TAS’s perspective, including summarizing a special research report that was included in the 2022 NTA’s Annual Report to Congress. That research report included a study that explores dividing the earned income tax credit (EITC) into a separate worker and child component.

Any panel considering unscrupulous preparers and the tax system invariably includes a discussion of the EITC.  


Splitting up its work and child component would likely make the IRS’s task of administering the credit more manageable, a primary consideration TAS has explored previously. For example, when I was Professor in Residence at IRS, we prepared a research report in the 2020 Objectives Report to Congress that recommended a similar bifurcation, though the 2022 study drills down deeper and explores seven possible options for a new structure of determining the EITC amount.

Also in this year’s NTA report to Congress was a recommendation in its Purple Book that Congress authorize the IRS to establish minimum competency standards for federal tax return preparers. At the panel, Laura mentioned that longstanding recommendation, and this year’s Purple Book recommendation includes many others who have similarly proposed that Congress explicitly give the IRS that authority.

This recommendation comes at around the ten-year anniversary of the IRS’s defeat in Loving v IRS, a date noted by Dan Alban at the Institute for Justice (IFJ), a group self-described as “fighting outrageous government abuse” (Dan was the lead attorney who represented Sabina Loving and two other preparers who successfully sued the IRS to shut down the IRS’s testing and continuing education for unlicensed preparers). Tackling what the IFJ believes is anti-competitive and anti-consumer occupational licensing is a core part of its work.

Among the tax community the almost universal support for mandatory continuing education and licensing for unenrolled preparers is met by IFJ’s claim that the IRS’s licensing, testing and education regime would have put some mom and pop preparers out of business or resulted in higher taxpayer preparation costs. IFJ also was skeptical that the regime would have an impact on improving the quality and accuracy of the returns. This policy issue is somewhat unrelated from the legal issue in the Loving case itself, which focused on whether the IRS had the authority to impose the regime rather than its merits.

There is a fair bit of data pointing to problems with non-credentialed preparers. At the panel, Laura referred to data discussed in the report’s Most Serious Problems #8 Return Preparer Oversight, which noted that “paid non-credentialed return preparers prepared almost 79 percent of the prepared 2020 individual income tax returns with Schedule EIC….compared to only 52 percent of the prepared individual income tax returns without a Schedule EIC.” Moreover, while paid “return preparers prepared about 79 percent of 2020 EITC returns…over 92 percent of the total amount of audit adjustments (in dollars) occurred on returns prepared by non-credentialed paid return preparers.”

In addition, the MSP discussed how over 75% of all return preparer penalties that the IRS assessed in calendar year 2021 were assessed against non-credentialed preparers. For good measure, DIF scores (suggestive of noncompliance) are higher for non-credentialed preparers: “non-credentialed paid return preparers prepared about 44 percent of 2020 individual income tax returns in the three highest deciles of DIF scores. This is compared to 36 percent of the returns in those same DIF score deciles prepared by credentialed preparers.”

MSP #8 also referred to a 2014 IRS study that showed that “unaffiliated unenrolled preparers (i.e., non-credentialed preparers who are not affiliated with a national tax return preparation firm) were responsible for “the highest frequency and percentage of EITC overclaims.”  That 2014 study “found that half of the EITC returns prepared by unaffiliated unenrolled preparers contained overclaims, and the overclaims averaged between 33 percent and 40 percent.”

Going forward, one key data point that TAS or IRS may wish to explore in a future study is to examine taxpayer preparation costs, RAC/RAL usage and improper payment rates in the handful of states which themselves have regulated preparers. IRS could compare both improper payment rates and (if available) costs and RAL/RAC take-up in those states with other states that do not impose competency and disclosure requirements on unlicensed preparers. This helpful post from Kay Bell’s Don’t Mess With Taxes blog from 2018 summarizes state licensing/testing regimes as of that date. As Kay notes, California, Maryland, New York and Oregon have been at the lead in imposing requirements on preparers, and twenty other states imposed additional disclosure requirements when preparers offered or facilitated access to refund related products like RALs and RACs.


Even among those skeptical of occupational licensing generally, perhaps additional data can inform the debate. Kudos to TAS for focusing on the challenges IRS faces in administering the EITC; it is time to start meaningfully exploring ways to make things better for taxpayers and the IRS, especially as Congress shows no signs of reducing its reliance on IRS to administer credit-based social policy benefits.

An upcoming Inflation Reduction Act mandated study requires the IRS to work with independent third-party experts to explore the feasibility of an IRS-run “direct file” tax return system. I hope that study, to be released this spring, will generate momentum for a truly free and accessible option for taxpayers. That would likely reduce demand for preparers, including the unscrupulous ones that the ABA panel discussed.

District Court Rejects Claim That Government Must Choose Either Administrative or Judicial Collection Path To Collect An Assessed Tax

Collection suits that the government brings are not rare, but it is much more common for IRS to collect on assessed taxes using its considerable arsenal of administrative powers. Offsets and levies comprise the bulk of enforced collection, and the IRS can also serve to protect its interest by filing a notice of federal tax lien.

Last month I took note of the case of US v Varner, a district court case out of the Northern District of Ohio. In that case, the government sought to collect a few million dollars of income taxes from an old (2003) assessment; there was also a considerable liability due to delinquent employment taxes. The taxpayer was a previously successful car dealer who had fallen on hard times.

In addition to bringing a legal action to reduce the assessment to judgment, the IRS had, prior to bringing the suit, levied on amounts owed to the taxpayer on promissory notes that two entities paid Mr. Varner each month.  The existence of this levy indicates that Mr. Varner had previously received his right to a Collection Due Process hearing and the opportunity it provides to go to Tax Court.

Varner argued that the tax law creates a “two-track system for the United States to collect a tax assessment. In his view, either the IRS may attach a levy or the United States may proceed in federal court, but it may not do both at once.” In essence, his argument was that the levy precluded the judicial collection action.

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To challenge the government’s suit, Varner filed an emergency motion asking the court to return the matter to the IRS Collection division, which would allow Defendant to administratively appeal the attachment of the levies, (he alternatively asked the court to order the government to comply with the prejudgment remedy procedures of the Federal Debt Collection Procedures Act).

In denying the motion, the court first brushed aside the government’s half-hearted attempt to argue that the Anti-Injunction Act barred the motion. The AIA, which bars suits to restrain the assessment or collection, does not typically act to bar a motion that a defendant brings in connection with a collection suit filed by the IRS. 

That conclusion led the court to focus on Varner’s main argument:

Defendant relies on a provision in the Internal Revenue Code providing that the United Sates may collect a tax assessment “by levy or by a proceeding in court.” In relevant part, that statute reads: “Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court[.]” I.R.C. §6502(a). Defendant reads “or” in this statute as exclusive, meaning that the United States may collect its tax assessment either by levy or in court, but not both.

After discussing how the word “or” can be ambiguous, the court discussed how defendant was relying on an SOL provision, not a provision addressing or curtailing how the government may collect.

And more substantively, the court addressed how administrative levy and judicial collection are not mutually exclusive:

Second, the Internal Revenue Code elsewhere provides the circumstances in which a levy may and may not attach. I.R.C. §6331(a). The IRS may place a levy where a “person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand.” Id. That provision continues, “No levy may be made” (subject to exceptions) where the taxpayer has pending a court proceeding “for the recovery” of taxes already paid. Id.§6331(i)(1). Active litigation to collect a tax, however, does not foreclose the IRS‘s ability to levy on property. Nor is the converse true. The United States may bring a civil action “[i]n any case where there has been a refusal or neglect to pay any tax, . . . whether or not levy has been made.” I.R.C. §7403(a). These provisions confirm that federal law enables the United States to attach a levy and to proceed in court to collect a tax assessment. These options are not mutually exclusive. Accordingly, Section 6502(a) uses “or” inclusively to allow the United States to employ both collection methods at the same time.


Varner wanted to get the matter back to Collection, and take advantage of the Collection Appeals Program where he felt he would have more luck with arguments based on his financial hardship. He also invoked the Taxpayer Bill of Rights and its right to appeal matters in an independent forum.

As the court noted, the right to pursue administrative appeals to collection actions is separate from the government’s power to use its judicial collection tools. The paths are distinct, and as the opinion notes, once the government attempts to foreclose on a lien or reduce an assessment to judgment a court is not going to compel the government to dispense with its right use the courts to facilitate a possible payment of an unpaid assessed liability.

Tax Court Denies Reconsideration in Green Valley and More District Courts Invalidate Listing Notices

There are some updates in the ongoing battles concerning the validity of IRS listing notices. As I discussed in December in IRS Asks Tax Court To Reconsider Green Valley v Commissioner, the IRS did not concede following its loss in Green Valley v Commissioner and asked the Tax Court to reconsider its opinion. To be sure, a litigant who leads a reconsideration motion with a suggestion that the Tax Court failed to read some of its filings and address its arguments is facing steep odds. Not surprisingly, in late January, the Tax Court denied the IRS’s motion for reconsideration, noting that it is “irrelevant whether the Opinion does or does not specifically address respondent’s Supplement since we are under no obligation to address each and every argument raised by a party.”

In denying the motion, the Tax Court did, however, address a substantive point IRS had made in its reconsideration motion.

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Recall that according to the motion, the IRS stated that the Tax Court failed “to appreciate the existence and implications of the dozens of listed-transaction notices that had already been issued without notice-and-comment when the American Jobs Creation Act [ACJA] of 2004.”

In denying the motion the Tax Court stated that it was offering “no opinion on whether identifying a transaction as a listed transaction was substantive rulemaking before the enactment of the AJCA or whether Congress expressed its intent to exempt from the standard notice-and-comment procedures transactions that were already listed as of the enactment of the AJCA.”

Shortly following that loss, the courts handed the IRS another loss in Green Rock v IRS, with a federal district court in Alabama also finding that the IRS’s issuance of Notice 2017-10 without going through notice and comment rulemaking violated the APA.

The district court in Green Rock stated that it was  “persuaded by Judges Pugh and Toro’s reasoning in Green Valley that the language in Treasury Regulation § 1.6011-4 permitting issuance of listing notices “by notice” does not irreconcilably conflict with the Administrative Procedure Act’s notice-and-comment requirement.” Judges Pugh and Toro had noted that a “listing notice issued without notice-and-comment under Treasury Regulation § 1.6011-4 could still comply with the Administrative Procedure Act if the IRS set outs its good-cause finding in the listing notice. Green Valley Invs., LLC, 159 T.C. at 25, 30 (Pugh, J., concurring); id. at 34 (Toro, J., concurring)

The district court in Green Rock also dispensed with the IRS’s other arguments that relied on context to supposedly show that Congress intended to preempt the APA’s notice and comment regime:

The IRS’s next argument is that enactment of other statutory tax provisions against the backdrop of Treasury Regulation § 1.6011-4 shows that Congress ratified the IRS’s practice of issuing listing notices without notice-and-comment rulemaking. (Doc. 31 at 28-34). Specifically, the IRS points to two other statutory provisions: (1) 26 U.S.C. §6501(c)(10), which extends the statute of limitations for assessing a tax relating to a taxpayer’s failure to disclose a listed transaction; and (2) 26 U.S.C. §6404(g)(2)(E), which permits accrual of interest on amounts owed with respect to reportable transactions even if the Secretary does not provide the taxpayer a notice within a specific period of time. 

By noting the SOL and interest statutory amendments referred to the IRS practice of identifying listed transactions in IRB guidance rather than issuing regs after notice and comment, the IRS emphasized that those provisions signaled Congress’s decision to override the APA’s general rule that notice and comment was required for IRS to issue a legislative rule in the form of identifying listed transaction:

Voiding listing notices issued without notice-and-comment rulemaking would nullify these two provisions because no valid listing notices would have been in effect when the statutory provisions were enacted…. In other words, the IRS asserts, “the effective date provisions for . . . §§6501 and 6404 . . . are predicated on the validity of the IRS’s regulation and listing notices.”

In discounting the effect of these related provisions, the district court in Green Rock stated that more was needed to prove that Congress blessed an exemption from the APA’s notice and comment requirements:

The sections may have become effective before any enforceable reportable transactions or listed transactions were identified, but they were and they remain effective. In any event, as the Sixth Circuit said in addressing a slightly different ratification argument made by the IRS, “Congress presumably is equally aware of the [Administrative Procedure Act]’s requirement that it must ‘expressly’ override the normal notice-and-comment rules. It takes far more than the clanging silence we have here to infer that Congress has expressly altered the prerequisites for creating a rule that imposes financial and criminal penalties.” Mann Constr., Inc., 27 F.4th at 1147 (citation omitted).

One final important point about Green Rock: in fashioning a remedy, the district court set aside the Notice only with respect to the plaintiff and emphasized that Green Rock “has not requested issuance of an injunction prohibiting the IRS from enforcing Notice 2017-10 elsewhere or against any other party.” It distinguished Green Rock’s equitable relief requested with that of an injunction which is premised on either “affirmatively compelling the doing of some act” or “negatively forbidding continuation of a course of conduct.” As the relief requested did not meet that definition, the court noted that it was not fashioning a nationwide injunction.

Green Rock’s approach to the issue of remedy was similar to another district court case that invalidated the same notice, GBX v IRS (ND Ohio 2022). In GBX, the district court, in a case appealable to the Sixth Circuit, where Mann Construction was decided, said Mann was controlling as to the merits. As to the remedy, the district court questioned whether it had the power to issue a nationwide injunction. As such it invalidated the Notice only with respect to the particular taxpayer.

As this post reflects, there is lots of litigation around these issues. I suspect that the IRS will look to appeal Green Valley, and as I have discussed previously, the issue concerning the scope of the court’s power to fashion a remedy is one that has generated considerable discussion in broader administrative law circles. See CIC Services: Now that AIA Issue Resolved, On to Some Meaty Administrative Law Issues, discussing Professor Mila Sohoni’s article The Power to Vacate a Rule, 88 Geo. Wash. L. Rev. 1121 (2020).

Stay tuned.