About Leslie Book

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

Senate Finance Committee Tax Gap Hearing Today

Last month Commissioner Rettig testified before the Senate Finance Committee, and he stated that the tax gap could be approaching $1 trillion annually. That got a lot of attention, especially as the IRS’s own official tax gap estimates pegged the average gross tax gap at $441 billion per year, though it is based on data from 2011-2013.  There’s also a lot of attention in general to possible changes to the Code as a part of the administration’s proposed legislation including many recommendations related to tax procedure. Some people are predicting that this could be the biggest year for changes to tax procedure since 1998. 

Today the Senate Finance Committee’s Subcommittee on Taxation and IRS Oversight will be holding a follow up hearing on the tax gap. The testimony will be live streamed starting at 2:30. 

We will update this post later with links to the written testimony of the witnesses.

Here is the witness line up for today:

Barry Johnson, Acting Chief, Research And Analytics Officer, Internal Revenue Service

Doug O’Donnell, Deputy Commissioner, Services & Enforcement, Internal Revenue Service

J. Russell George,Treasury Inspector General For Tax Administration

Nina E. Olson, Executive Director, Center for Taxpayer Rights

Charles O. Rossotti, Former Commissioner (1997-2002), Internal Revenue Service

UPDATE: See here for a link to a recording of the testimony https://www.youtube.com/watch?v=frlZ6GQnd6A

The Fatty Rule for Post TFA Innocent Spouse Cases? An Early Look at the Otherwise Unavailable Evidence Exception

The Taxpayer First Act changed the scope of review in innocent spouse cases. Rather than allow parties to introduce evidence at trial, as we have discussed (see for example Christine’s post Taxpayer First Act Update: Innocent Spouse Tangles Begin) the TFA restricts the parties to the administrative record. TFA contains two exceptions: when there is evidence that is newly discovered or was otherwise unavailable.  There is considerable uncertainty surrounding this new rule, as well as how the Tax Court will define and apply the newly discovered and otherwise unavailable exceptions.

This past March in Fatty v Commissioner, Judge Holmes issued a bench opinion in an S case that gives an early nonprecedential look at the otherwise unavailable exception. 

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The case itself is a fairly straightforward application of the equitable relief factors arising from an approximately $7,000 reported liability attributable to the withdrawal of funds from Mrs. Fatty’s retirement account. At the time the then-married Mr. and Mrs. Fatty used the money to pay for expenses associated with the purchase a house. They later divorced, and pursuant to the divorce agreement Mrs. Fatty, who retained ownership of the home, was responsible for the tax liability. 

Despite Mr. and Mrs. Fatty entering into and complying with an installment agreement (with Mrs. Fatty paying the monthly amounts) Mr. Fatty sought relief from the joint and several liability. Mrs. Fatty intervened and the case went to trial. 

In normal deficiency cases, and in innocent spouse cases prior to the TFA changes, at trial, Mr. Fatty would have the opportunity to testify and introduce other evidence. In setting up the opinion, Judge Holmes summarized the TFA changes:

Until recently, the scope of review in a Tax Court case involving a request for innocent spouse relief is also de novo. People would come, they’d introduce evidence, and I as a judge would look at it with fresh eyes. Congress has more recently changed that scope of review. Now I am supposed to look at what is called the administrative record. The administrative record consists of all the documents and the evidence that the IRS looked at when Mr. Fatty first applied for relief.

Judge Holmes also explained the two exceptions to the TFA record rule:

I am supposed to look only at the administrative record, with two exceptions. And those two exceptions are evidence that is newly discovered or evidence that was previously unavailable. This is a change in the law, and the Fattys are one of the first cases to come after this change in the law.

Here is where the opinion gets interesting. As I mentioned, the TFA does little to expand upon what either exception means.  As a practical matter, these exceptions will likely be important, especially with pro se taxpayers who may fail to develop a case before the centralized and correspondence based IRS innocent spouse unit.

In Fatty, Judge Holmes takes a very generous view of  the meaning of otherwise unavailable, offering one approach that takes into account the absence of trial like procedures in IS administrative determinations:

However, in this particular case, I just assumed that testimony given under oath and subject to cross-examination, like the testimony given by both Mr. and Mrs. Fatty, is this newly available evidence, because when Mr. Fatty applied for innocent spouse relief, he wasn’t able to give sworn testimony and neither he nor his wife were subject to cross-examination

This approach, if adopted in other cases, leaves open the possibility for witness testimony, given the absence of sworn testimony and the right of cross examination in administrative IS determinations.  

To be sure, it is hard to read too much into this: this is just a bench opinion in an S case and the language discussing the exception is a bit garbled. Judge Holmes notes the limits: “As I said, I’m not deciding this for all cases in the future. This is an S case.” Yet for practitioners this is an important early development. It provides a convincing approach to allow parties to testify despite the TFA record rule limiting the scope to the record below. We will see if the Tax Court adopts it, or whether other Tax Court judges apply it in future nonprecedential opinions. 

What about the Fattys’ case? As with many Judge Holmes opinions he transparently discusses his approach, which is refreshing in a case implicating a multi-factor balancing test.

What I look at, and what I think is the appropriate fulcrum, is the extent to which the economic immunity of a household that files a joint return has been broken down by the actions of the non-requesting spouse in a way that didn’t allow the requesting spouse’s reasonable exit from having joint returns and a joint liability.

The opinion notes that the parties equally enjoyed the benefits of the income and explains that the IRS is not bound by the parties’ divorce agreement. After walking through the factors and emphasizing that Mr. Fatty had remedies under state law if Mrs. Fatty failed to pay on the agreement and the IRS collected from him, Judge Holmes held that Mr. Fatty was not entitled to relief. 

Reliance and Omitted Income: Taxpayer Cannot Avoid Penalties Even When Using Longtime Preparer

I do not prepare tax returns. But I feel for the long-suffering preparers who try their best to get the information from clients to prepare an accurate tax return.  For people with a variety of sources of income, like self-employed consultants with multiple clients, the process is burdensome—at least when compared to employees who more or less automatically get W-2s with withholding that tends to approximate liability.  I also feel for taxpayers who have income from a myriad of sources because collecting and insuring that the income from each source that gets reported can prove difficult.  Neither taxpayers nor preparers have a computer system akin to the IRS underreporter program that matches all of their third party returns against the amounts reported on the returns.  If such a program existed presubmission to the IRS, returns would be much more accurate.

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The recent case of Walton v Commissioner involved a psychologist whose 2015 tax return failed to include almost $170,000 in compensation. Prior to 2015, Walton had been employed with a consulting firm. In 2015 she went out on her own and had multiple clients. When it came time to file her 2015 return, she attempted to give all her information to her preparer but, as we will see below, she may not have given all of her 1099’s and the preparer failed to include a sizable chunk of her income. The issue in the case involved substantial understatement penalties-namely whether the IRS satisfied the supervisory approval requirement under 6751(b) or whether her omission should be excused by good faith reliance on her longtime experienced CPA return preparer.

In this post I will discuss the latter issue though I note the opinion discusses that the 6751(b) approval was not necessary because of the exception to the supervisory approval requirement for a “penalty automatically calculated through electronic means.” The opinion discusses how Walton’s omission was flagged by the IRS’s Automatic Underreporting Program (AUR) and thus was “determined mathematically by a computer software program without the involvement of an IRS examiner” leading it to conclude that the penalty was “automatically calculated through electronic means.” (citing Walquist v Comm’r, which Keith discussed in Automatically Generated Penalties Do not Require Managerial Approval and which Bob Kamman also addressed in Some Facts About the Walquist Case, Along with Some Nuance).

After rejecting the 6751(b) defense the court turned to whether Walton had reasonable cause for the omission and whether she acted in good faith. In setting up the issue the opinion notes that reliance of a qualified and competent preparer is not enough; there must be evidence that the taxpayer acted with diligence and prudence. 

In evaluating whether she acted with both prudence and diligence, the opinion discusses the back and forth between Walton and her preparer. As a starting point the atmosphere here is bad: the return left off almost 1/3 of her total compensation. Yet the exchange showed she gave her preparer a starting point on income that was well in excess of the 1099’s she had sent over. In January of 2016 she sent an email to her preparer stating that “I am sure I need to pay taxes. If I did the math right, I earned about $525k in 1099 pay.” A month later Walton sent over a W-2 showing some income from her former employer as well as five 1099 MISC’s totaling over $350,000.  Fast forward to April 12: another CPA at the firm sent Walton an email asking a bunch of questions on unrelated issues as well as if she was sure that she had sent all the 1099’s as the total was well below the 525,000 estimate in her January email. 

Two days later Walton responded to the questions but did not answer the 1099 MISC question.  After that exchange the CPA firm obtained an extension to October 15th. On September 29 her preparer (who had done her taxes for twenty years and prepares over 1,000 returns a year) emailed Walton a list of things he needed to complete the return. That did not include a specific ask for 1099 MISC’s but instead focused on 1099- DIV, business and travel expenses and other issues. Walton responded and said that she “attached the 1099s to the last emails”, and the preparer replied that “I have all the 1099s and the kids accounts, … the taxes and interest on the house …[and] the charities as well.”

The opinion notes that it is the preparer’s practice when there is a discrepancy between a client estimate and documentation to rely on the numbers in the document. Unfortunately for Walton, she testified that she did not review the return before the preparer e-filed it as she trusted his expertise.  That admission was fatal to the defense—even though there was some uncertainty as to whether she gave all 1099 MISC’s to her preparer, the failure on Walton’s part to review the return led to a finding that she failed to act with the prudence and diligence necessary to avoid the penalty.

Conclusion

In reading this opinion I was reminded of one of my early blog posts back in 2013,  Omitted Income, Accuracy-Related Penalties and Reasonable Cause. That post discussed Andersen v Comm’r, a summary opinion where a taxpayer also used a longtime preparer and left off a significant amount of W-2 income (about $28,000) from the return, but the court still found that they should not be subject to civil penalties. The opinion found that the taxpayer acted with reasonable cause and good faith, looking to an almost 50 year record of taxpayer compliance, only a slight difference in income from the year in question and the prior year’s return and circumstances that showed how the preparer mistakenly believed that he had all the information returns from the taxpayers. 

All of these cases are fact specific. Walton does reveal how burdensome our filing system is. The amount of time necessary to fish for all information returns is wasteful and prone to error. Taxpayers can set up online accounts with the IRS so that they (and their preparers) can see what information returns IRS has received, but that system is not easily accessible. While I understand the court’s conclusion in Walton, we would all be better off if taxpayers and their preparers could easily see all information returns on file. Our system does not make it easy. I am glad I do not prepare tax returns for a living.

Sixth Circuit Holds that State Court Judge’s Failure To Pay Taxes Was Willful for Purposes of Bankruptcy Discharge Rule

Your bloggers have had lots on their plate this week, so we apologize for the lighter than usual coverage. Luckily, others, like Jack Townsend, who in addition to working with me to cover criminal tax in Saltzman and Book, has his own terrific blog, Federal Tax Crimes. Over there today he discusses United States v Helton, an unpublished Sixth Circuit opinion that addresses the exception for bankruptcy discharge in Bankruptcy Code Section 523(a)(1)(C) for a debt “with respect to which the debtor . . . willfully attempted in any manner to evade or defeat such tax.”  

The issue in these cases turns on what is needed to prove willfulness. In 2014 guest poster Lavar Taylor discussed the Ninth Circuit’s approach in What Constitutes An Attempt To Evade Or Defeat Taxes For Purposes Of Section 523(a)(1)(C) Of The Bankruptcy Code: The Ninth Circuit Parts Company With Other Circuits, Part 1 and Part 2  

Helton involves a Georgia state court judge who prior to his time on the bench ran up some pretty significant income tax debts. At the same time the taxpayer often frequented restaurants, drove a Mercedes, and made sizable charitable contributions. The case turned on whether Helton voluntarily and intentionally violated the duty to pay taxes.  According to the Sixth Circuit (internal cites omitted), “[t]hat element is met when the taxpayer has the financial means to meet his outstanding tax liabilities but makes a conscious decision not to apply those monies toward his tax debt.”

The opinion concluded that Helton’s “discretionary spending—lavish when compared to the pittance he allocated toward his taxes—amply supported the district court’s finding that Helton’s violation of his duty to pay taxes was voluntary and intentional.”

As the Sixth Circuit discusses, the excuse from the taxpayer, that he was busy with work and occasionally depressed, was not enough to escape the finding that he intentionally violated his tax paying duty. It was not necessary for the court to conclude that his lifestyle spending was undertaken specifically to avoid paying taxes.

Sixth Circuit Weighs in On Sovereign Immunity and Exceptions to Notice in Third-Party Summons Case

When IRS issues a summons to third parties it generally has to notify the taxpayer whose records are identified. That right to notice is key, as it triggers a correlative right to bring an action in district court to challenge the summons and allows for limited judicial review of IRS’s vast information gathering powers.

It may come as a surprise that not all summonses the IRS issues result in notice to the taxpayer. Section 7609(c)(2) excludes five categories of summonses. I discuss this extensively in Chapter 13 of Saltzman and Book IRS Practice and Procedure. Gaetano v US, a recent Sixth Circuit case, discusses the nature of the exclusion and its relationship to subject matter jurisdiction, standing and sovereign immunity. It also highlights inconsistent approaches that courts have taken to characterizing the exceptions, and concludes that the 7609(c)(2) notice exceptions relate to the court’s underlying jurisdiction to hear challenges to the summons.

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Gaetano involves an IRS criminal tax investigation into the taxpayers’ Michigan-based cannabis dispensary business. IRS sought the records pertaining to the Gaetanos from Portal 42, a software company that provides the cannabis industry with point-of-sale systems. Those systems allow businesses to track customer sales data or delete the data remotely with a “kill switch.”

The opinion discusses how an IRS CID agent interviewed the owners of Portal 42 and then served a summons ordering that the owners “give testimony and produce various records “and other data relating to the tax liability or the collection of the tax liability or for the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws concerning [the Gaetanos] for the periods shown.”

The IRS did not notify the Gaetanos, but within two weeks of the service of the summons on Portal 42, the taxpayers filed a petition to quash, alleging that IRS should have given them notice and alleging that the summons was issued in bad faith.

The district court, adopting the magistrate judge’s key holding, dismissed the Gaetanos’ petition to quash, and concluded that they did not have standing under 7609(c)(2)(E).

The (E) exception to notice applies when the summons issued by an IRS criminal investigator in connection with an IRS criminal investigation and the summoned party is not a third-party recordkeeper. Portal 42 was not a third-party recordkeeper (that is statutorily defined in 7603(b)(2)).

There was a dispute about whether the summons was issued in connection a criminal investigation. The Gaetanos’ main argument was that the summons was deficient because it failed to specify the tax periods that the IRS was criminally investigating, but the opinion held that the statute only required that the summons identify the tax periods which IRS sought information.

The Sixth Circuit opinion affirms the district court but in so doing explores and clarifies the import of the five exceptions to notice in Section 7609(c)(2).  As the opinion notes, courts have viewed the exceptions as either “limitations on statutory standing or (as the Government argues) exceptions to [Section 7609’s] sovereign immunity waiver.”

The opinion nicely collects cases that have viewed the exceptions to notice as triggering standing limits or sovereign immunity waivers.

The lower court opinion, in dismissing the challenge for lack of subject matter jurisdiction, was not clear if the dismissal relied exclusively on standing or was also based on the sovereign immunity waiver. The Sixth Circuit viewed this issue as a matter of first impression, and while the result in this case did not hinge on the difference, the opinion discusses why the difference matters, including most importantly that 1) the government cannot waive sovereign immunity and 2) a court can bring that jurisdictional issue up at any stage of litigation.

As we have discussed numerous times, the Supreme Court’s case law on whether a statute confers jurisdictional status has evolved over time. As the opinion notes, the “Supreme Court, however, has cautioned that a statutory condition — even one attached to a waiver of the United States’ sovereign immunity — is not accorded jurisdictional status unless “Congress has ‘clearly state[d]’ as much.” United States v. Kwai Fun Wong, 575 U.S. 402, 409, 418-20 (2015) (citation omitted).

Gaetano analogizes the language in the 7609(c) exceptions as similar to the Federal Tort Claims Act, where the Court has found that the exceptions suspend the whole statute, leaving the “bar of sovereign immunity” and hence concluding that the (c)(2) exceptions are jurisdictional.

The opinion has one more wrinkle. While typically a plaintiff bears the burden of proving that there is a waiver of sovereign immunity, Gaetano holds that the government has the burden for establishing that the exception applies when the petition to quash is not facially within one of the exceptions:

The basic rationale for treating sovereign immunity exceptions as affirmative defenses is that a plaintiff should not be required to prove a negative for each enumerated exception, and the government will generally possess the relevant facts to prove that a particular exception does apply. 

That burden for the government is pretty low, and the CID agent’s affidavit was sufficient to connect the summons to a criminal investigation. That the CID agent may have not fully complied with the IRM (including specifying all time periods involved in the investigation) and “goes to the merits of whether a summons should be enforced or quashed. We cannot proceed to the Powell test when 7609 does not confer jurisdiction over this action.”

Lawyers, Coins and Dead Presidents: IRS Agent Seizes Valuable Coins and Taxpayer Sues for Conversion

Willis v Boyd, an opinion from the 8th Circuit Court of Appeals, is not a typical tax collection case. The opinion involves an IRS agent who seized 364,000 one dollar coins that were issued to commemorate US presidents. After seizing the coins, which were in special boxes in original packaging consisting of 1,000 coins, another IRS employee removed the coins from their packaging, put the coins through a coin counter, and deposited  $364,000 to be credited against the taxpayer’s sizeable liability. The taxpayer claimed that the coins had significantly greater value and sued the government under the Federal Tort Claims Act for conversion. After winning on the merits at the district court, the government appealed, claiming that the FTCA did not act to waive sovereign immunity. On appeal, the circuit court agreed with the government. 

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Sovereign immunity allows the government to escape suits unless there is a clear waiver. The FTCA waives sovereign immunity in suits seeking money damages against the federal government “for injury or loss of property . . . caused by the negligent or wrongful act or omission of any employee of the Government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant.”

The waiver does not apply to all negligent actions, or wrongful acts or omissions. Under the statute the FTCA waiver does not apply when the government action is “based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused.”   

The Supreme Court, however, has held that not all discretionary actions trigger the exception to the waiver. Wanting to avoid courts second guessing policy choices, the Court has held the decision must be “of the kind that the discretionary function exception was designed to shield.”  What does that mean?  Even though for example there is discretion associated with driving, the government cannot escape litigation in all instances when an employee exercises some discretion; a government employee negligently operating a vehicle is different from an employee unreasonably exercising discretion in a way closely connected to policy choices related to the employee’s job.

To help determine which discretionary acts trigger an exception to the waiver, , the Supreme Court requires courts to employ a two-part analysis: 

  1. Whether the challenged conduct or omission is ‘truly discretionary'” in that “it involves an element of judgment or choice instead of being controlled by mandatory statutes or regulations.” 
  2. If the answer to the first question is yes, then courts consider whether the employee’s judgment or choice could be “based on considerations of social, economic, and political policy.” 

If the government employee’s discretionary choice or action is based on social, economic or political policy, then the exception applies, and the government will not be deemed to have waived its immunity.

Bringing that back to the coins led the 8th Circuit to explore IRM policy. As the opinion discusses, the IRM does contain guidance on the seizure of property that may be a collectible, but it fails to instruct IRS employees on how to determine whether the coins are in fact collectible. Here is what the IRM says:

“[D]omestic and foreign currency seized for forfeiture, except where it is . . . held as a ‘collectible asset,’ must be expeditiously counted, processed, and deposited . . . within 5 days of seizure.” See Internal Revenue Manual § 9.7.4.6.1(2).

It does not provide guidance or instructions on how to determine whether the coins are considered collectible:

[The IRM] never spells out when additional investigatory duties are triggered, or what an additional investigation might look like; rather, it apparently gives an agent discretion to determine whether seized currencies’ face value is a realistic estimate of its worth or whether an investigation into its value as a collectible asset is needed and what it might entail.

The IRM does provide additional guidance on what to do after an IRS employee determines that coins are collectible. But the absence of guidance on collectability is key, even if the facts suggested that the IRS employee should have done more –and it is easy to make the case that the coins placement in the collectors’ boxes should have led to some additional inquiry:

[W]e do not think, as just explained, that the manual required the agent to do more than he did when he categorized the coins. Even if the decision was carelessly made or was uninformed, the agent’s negligence in making it is irrelevant.

As to the second factor that needs to apply for the discretionary exception to apply the appeals court noted that the district court erred in applying a subjective test to the inquiry. In other words, it did not matter that the IRS employee failed to consider the policy choices; the key is “whether the decision in question is by its nature as an objective matter susceptible to policy analysis.” To that point, the opinion stated that “agents who seize currency must balance the competing interests of expeditious deposit on the one hand and preserving property on the other—a calculation that plainly involves questions of social, economic, and political policies.”

Conclusion

I find it hard to be too disappointed in the outcome. I did not dig into the details of the case history but I suspect the taxpayer had ample opportunity to pay the assessed liability. The failure of the taxpayer to sell the coins on her own dime was in her control. In addition, the seizure and application to the tax liability allows the taxpayer to escape the income tax liability associated with the coins’ inherent gain.  I also suspect that a cooperative taxpayer may have been more engaged with a revenue officer and may have had opportunity to let the RO know about the value and allow for the government to treat the coins as collectibles rather than just cash.

Update: The factual summary and original conclusion to the post, as some of the comments have noted, are off the mark. My failure to read the district court opinion contributed to some misstatements.

As commenter Michelle Wynn notes:

The District Court Decision made clear that Ms. Willis did not have any tax liability, the coins were seized while other law enforcement agencies were executing a search warrant for “papers and documents” related to non-tax crimes (though embezzlement can often lead to tax crimes relations), there appeared to be no justification for the seizure of the coins which were not covered by the warrant (though the District Court seemed to conclude that possible forfeiture was the only reasonable explanation), and the warrant was related to the Plaintiff’s ex-husband who did not reside at the residence. The “value of the coins” was later returned to the Plaintiff, but only for their face-value rather that what she believed to be their much higher collector’s value. However, because the Appeals Court found that sovereign immunity applied based upon the discretionary exception, it did not discuss any of the reasons that the initial seizure may have been inappropriate or any of the other arguments against sovereign immunity discussed in the District Court Decision. 

Biden Administration Floats Refundable Pet Tax Credit Idea to Boost Child Tax Credit

Last week, Assistant Secretary for Tax Policy nominee Lily Batchelder floated the latest in the Biden Administration’s efforts to provide tax relief to the nation’s millions of people suffering due to the pandemic: a $250 refundable tax credit for families with children under the age of 18 who have pets in their household.

President Biden with his dog, Major
Photo by Stephanie Gomez/Delaware Humane Association, via NY Times/Associated Press
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In speaking at the Tax Policy Center webinar entitled “Thinking Outside the Box Tax Policy Ideas”, Batchelder cited the overwhelming research showing that the presence of certain family pets has a strong correlation with positive outcomes in children, including health, education and lifetime earnings. (See, for example this recent research study by Robert Matchock, Pet Ownership and Physical Health)

Insisting that the Biden Administration will continue its evidence based approach to good governance, current Assistant Secretary Mark Mazur noted that evidence has tied positive outcomes to only certain pets-namely dogs and cats. As such, the Treasury officials expected that the legislative language they would support would not extend to other household friends. Mazur acknowledged that the research to date has not studied other animals nearly as much as dogs and cats although there is preliminary research showing that larger rodents (such as chinchillas) have had a positive impact on mental health across age ranges.

Facing questions about whether this might be expanded to older Americans, as the data strongly correlates pet ownership with positive health outcomes among seniors, Mazur was noncommittal, though he emphasized that the Administration’s focus in the near term was on improving conditions for families with children.

“It might be the camel’s nose in the tent,” said Mazur, “but for now we are tying this to our proposals to make permanent the expanded child tax credit that Congress enacted last month.”

Needless to say the proposal generated quite a stir in the webinar. Former NTA and current Executive Director of the Center for Taxpayer Rights Nina Olson asked if Treasury expected IRS to expand its nonfiler portal to allow nonfiling taxpayers to enter pet information alongside their children. Commissioner Rettig, also on the panel, in noting that he is the first Commissioner in IRS history to own not one but two adopted retired Greyhound racers, suggested that Congress should allocate an additional $100 million to its proposed upgrade of technology in order to allow it to build the pet database. 

Panelist and Tax Notes’ tax historian Joseph Thorndike noted that many of these pets may be the direct descendants of pets removed from being claimed as dependents in 1986 when Congress began requiring taxpayers to list the social security number of dependents which caused almost seven million dependents to disappear in one year.  He noted that the ancestors of today’s household pets would no doubt be smiling down as pets once again returned to the 1040.

While not on the panel, former Treasury Secretary Larry Summers, who was slated to speak on a separate panel with former Commissioner Rossotti about the Rossotti/Sarin/Summers tax gap proposal, interrupted Batchelder, stating that the “last thing poor people need is more money in their pockets. I worry about the inflationary impact in the important pet sector.”

As with any proposed credit expansion, there are lots of ancillary issues. PT’s own Keith Fogg notes that “in the 1860s in the predecessor to Section 6334 Congress allowed as part of the property exempt from levy one cow, three pigs, five sheep and the wool thereon. Although that was changed to livestock in 1954 it’s good to see animals formally entering the code again.”

Click here for a link to a video of the webinar.

Right to Jury Trial Does Not Extend to Certain Federal Tax Collection Suits

Dombrowski v US, a recent case out of a federal district court in Michigan, highlights how the right to a jury trial differs in certain collection suits as compared to refund suits.

Dombrowski lives with Ronald Matheson, who owes money to the IRS. In 2013, Dombrowski purchased the house she and Matheson live in with funds transferred to her from Matheson. IRS filed a tax lien that reached the house Dombrowski purchased, claiming that Matheson had an ownership interest in the house. Dombrowski claimed that the funds she used to purchase the house stemmed from a prior debt that Matheson owed to her and her brother. To resolve the issue, she filed an action to quiet title to the property, and the government counterclaimed seeking to enforce the tax lien. Dombrowski’s complaint included a jury demand; the government moved to strike that demand.

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The right to a jury trial is found in the Seventh Amendment to the constitution and is incorporated in Fed Rule of Civil Procedure 38, which provides that a party may demand the right to a jury if it is required under the constitution or otherwise statutorily created.

The quiet title action was brought pursuant to 28 USC 2401(a)(1). The government’s suit to enforce the lien was brought pursuant to 26 USC 7403(a). Neither provides for a statutory right to a jury trial. This is in contrast with 28 USC 2402 which specifically authorizes jury trials in tax refund suits brought in federal district courts.

The opinion concludes that in the absence of statutory language that explicitly gives an individual the right to a jury, the Seventh Amendment guarantees the right to a trial by jury only as it existed at common law.  The opinion then traces the historical roots of quiet title and lien enforcement actions. Both actions are equitable in nature:

“Like actions for quiet title, courts have consistently held that actions brought by the government to impose federal tax liens are closely related to historical suits in equity used in the enforcement of debt collection; similarly, discharging a lien is an equitable remedy.” 

The opinion goes on to explain that in any event the Seventh Amendment does not apply to actions against the sovereign, even those that have their roots in the common law.

I had not thought about this issue, and while I have some passing familiarity with the history of both causes of action, the opinion nicely explores the intersection of the Seventh Amendment, tax collection litigation and the separate statutory right to a jury trial that is embodied in refund litigation brought in federal district courts.  

This case now proceeds to the merits, with the judge having sole responsibility to determine whether and to what Dombrowski’s house is an asset that the government can reach to satisfy Matheson’s tax debt. The merits include a state law inquiry into whether money she used purchase the property was fraudulently transferred in violation of the Michigan Uniform Voidable Transfers Act. 

One other consideration here is Dombrowski’s decision to bring the quiet title action.  In a situation like this the IRS would file a nominee lien in order to reach the property.  In a prior post we described the nominee lien as the lis pendens of the tax world.  The nominee lien would encumber the property and should cause the IRS to bring the lien foreclosure case itself but would not necessarily trigger a quick filing of a suit on the property.  By bringing the quiet title, Dombrowski triggered the certain response of a lien foreclosure request.  If the IRS has filed a nominee lien, be sure you are ready for the counterclaim when you bring a suit against it.  If you have significant concerns about the transaction, you may want to sit tight and wait for the IRS to make the first move.  The lien does not present much of a problem if you are not planning to sell or encumber the property.  The nominee lien is specific to the property and does not extend to other property that the alleged nominee owns.

Update: To reflect the learned comment of Jack Townsend I have modified the post to make clear that the lack of a right to a jury trial depends on the type of collection suit. I have not chased down the issues Jack ably raises.