IRS Asks Tax Court To Reconsider Green Valley v Commissioner

Not dead yet. That is what the IRS’s latest filing in Green Valley v Commissioner indicates, as the IRS is not throwing in the towel in its efforts to defend the validity of its listing notices despite its loss in Green Valley.

Last week in IRS Announces It Will Start Following the Law (With Respect to Identifying Some Listed Transactions) Jonathan Black discussed how following its loss in Green Valley, the IRS issued an announcement identifying certain syndicated conservation easement (“SCE”) transactions as listed transactions. It simultaneously filed for publication with the Federal Register a Notice of Proposed Rulemaking (“NPRM”) – REG-106134-22, Syndicated Conservation Easement Transactions as Listed Transactions – formally designating SCEs as listed transactions in proposed regulations.

In its announcement the IRS stated  that “Treasury and the IRS disagree with the Tax Court’s decision in Green Valley and the Sixth Circuit’s decision in Mann Construction, and are continuing to defend the validity of existing listing notices in circuits other than the Sixth Circuit.”

And as part of the IRS’s disagreement with the Tax Court (and Sixth Circuit), last week IRS filed a motion in Tax Court asking that the Tax Court reconsider its Green Valley opinion. Its motion highlights arguments the government made in a supplement to its earlier motion in opposition to summary judgment. The motion also questions whether Tax Court judges actually read its argument, given that none of the multiple Green Valley opinions addressed or cited it, and the summary of the procedural history fails to identify the government’s supplemental filing.

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As to the merits, in its motion the IRS does not challenge the Tax Court’s conclusion that guidance would generally subject to the APA’s notice and comment requirements; instead, it argued that the Tax Court failed to “consider statutory text evidencing Congress’s clear intent that such notices need not follow notice-and-comment procedures….” in this particular context.

All of this brings into question the APA, at 5 USC § 559, which provides that a subsequent statute is not to displace the APA “except to the extent that it does so expressly.”

According to the motion, 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.”

This is not the first time that the government has highlighted this legislative context. It raised them below in its supplemental objection for partial summary judgment. In its supplement, the IRS focused on legislative context that in its view demonstrated that Congress expressly intended to displace the APA’s notice and comment requirements when it came to identifying listed transactions:

As previously explained in Respondent’s Objection, Section 6662A, which imposes an accuracy-related penalty on understatements attributable to reportable transactions, was enacted as part of the AJCA, which was passed in part to “provide the Treasury Department with additional tools to assist its efforts to curtail abusive transactions.” S. Rep. No. 108-192, at 90. To this end, the AJCA also included other provisions, such as Section 6707A (penalizing failure to disclose a reportable transaction), Section 6501(c)(10) (extending the assessment statute of limitations for listed transactions), and Section 6404(g)(2)(E) (creating an exception from underpayment interest suspension for listed transactions). See AJCA, § 811(a), Pub. L. 108-357, 118 Stat. 1418, 1575, 1580, 1581, 1652. Section 6662A, as well as other AJCA provisions, incorporated by reference Section 6707A’s definitions of “reportable transaction” and “listed transaction,” terms that originated from the Treasury regulation. I.R.C. § 6662A(d); 65 Fed. Reg. 11207 (Mar. 2, 2000).

In its motion for reconsideration, IRS also took a shot at the Sixth Circuit’s Mann opinion, and its similar failure to address the broader legislative context:

The Mann court focused exclusively on Section 6707A, but that provision was not the only part of the AJCA enacted to combat abusive tax shelters, nor the only one to endorse the IRS’s identification of listed transactions by notice. Other provisions in the statute make clear that Congress viewed the listing notices that existed at the time the AJCA was passed — none of which had gone through notice-and-comment — as validly issued. If those notices were invalid, Congress passed dead letters.

The motion highlights Section 6501(c)(10), which “holds the statute of limitations for assessing a tax deficiency open until one year after the taxpayer’s participation in a listed transaction was disclosed.” As the motion notes,

Congress lengthened the assessment period for taxpayers who had failed to comply with the IRS’s listed transaction disclosure requirements before October 22, 2004. If Congress believed the existing notices identifying listed transactions were invalid, then there would have been no listed transaction to which Section 6501(c)(10) could apply when AJCA was enacted.

The motion also discusses how the AJCA created a new exception to the suspension of the accrual of interest on a liability if the IRS fails to notify the taxpayer of the liability within a certain time. In ACJA, Congress provided that

[i]nterest now continues to accrue on a tax liability relating to a listed transaction regardless of how long it takes for the IRS to notify the taxpayer of that liability, and regardless of whether the taxpayer complies with the IRS’s disclosure requirements. AJCA § 903(c), 118 Stat. at 1652 (codified at 26 U.S.C. § 6404(g)(2)(E)). This new exception applied with respect to interest accruing after October 3, 2004. AJCA § 903(d)(2). This effective date shows that Congress’s target included taxpayers who had already participated in listed transactions identified by notice.

Conclusion

Requests to reconsider face a high hurdle, requiring that the opinion contain substantial errors in fact or law. Perhaps the Tax Court’s earlier failure to address these points was deliberate; if it was an oversight it might be enough to get the Tax Court to reconsider. And even if the Tax Court does not reconsider its opinion, the motion spells out what is likely to be the government’s primary argument on appeal.

Stay tuned.

IRS Announces It Will Start Following the Law (With Respect to Identifying Some Listed Transactions)

Today’s guest post is from Jonathan Black, a senior associate in the Washington DC office of Caplin & Drysdale. Jon discusses the IRS’s latest efforts to address conservation easements, a topic that has generated considerable litigation and discussion on the blog. As Jon notes, the implications of the IRS’s actions this week may have significance in areas beyond listed transactions. Les

On December 6, 2022, less than a month after its prognosticated loss in the Tax Court case of Green Valley Investors LLC v. Commissioner, 159 T.C. No. 5 (2022), the IRS released Announcement 2022-28, IRB 2022-52, identifying certain syndicated conservation easement (“SCE”) transactions as listed transactions.  Is anyone having Déjà vu?

If the IRS had just issued an announcement, we would simply be seeing Notice 2017-10 all over again.  That is not the case, however.  Instead of merely issuing an Announcement, IRB Notice, News Release, Post-it note, table-napkin scrawling, or other “sub-regulatory” guidance, the IRS also filed for publication with the Federal Register a Notice of Proposed Rulemaking (“NPRM”) – REG-106134-22, Syndicated Conservation Easement Transactions as Listed Transactions – formally designating SCEs as listed transactions in proposed regulations.  The NPRM announced a 60-day public comment period, to be followed by a public hearing, after which the government promises to issue final regulations in 2023.  Surprisingly, the NPRM was not accompanied by a temporary regulation purporting to have immediate efficacy.  As an early holiday gift to taxpayers and practitioners, the IRS also announced that it would soon be publishing more notices of proposed rulemaking to identify other listed transactions.

In other words, the IRS is actually going to follow the law.

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As background, the Administrative Procedure Act (“APA”) generally requires that, for a government agency to issue Rules, the agency must first publish an NPRM in the Federal Register and provide the public an opportunity to comment.  The agency must then consider the public comments and publish a short explanation of whether it agrees with those comments when it publishes the final Rule.  Unless the agency publishes with the Rule a statement of good cause for why the rule must be effective sooner, a Rule that can be enforced against the public (as opposed to one that relieves a restriction or merely states the agency’s position) cannot be effective until at least 30 days after its publication in the Federal Register.  In the case of Treasury Regulations, I.R.C. section 7805 contains additional restrictions on when a regulation may be effective.  The IRS has traditionally relied on section 7805(e) as authority for publishing immediately effective temporary regulations simultaneously with its NPRMs without complying with the APA, and continued to do so even after it lost Chamber of Commerce v. Commissioner, No. 1:16-CV-944-LY, 2017 WL 4682050 (W.D. Tex. Sept. 29, 2017). The IRS is a sizable organization, and it has built up some inertia; it changes its position about as readily as the fabled political uncle at the Thanksgiving table.  Since at least as early as CIC

Services, LLC brought its original suit against the IRS seeking to set aside Notice 2016-66 in December of 2016, the IRS has been on notice that its preferred method of identifying reportable transactions (and, by extension, listed transactions)—publishing IRB Notices—does not comply with the APA.  Yet the IRS resolutely refused to change its procedures, lest tax practitioners take note and treat its “protective” use of Federal Register publication, statements of good cause, and the opportunity for public comment as an admission that it had been doing things wrong all along.

The proverbial chickens have come home to roost.  This year, the IRS lost a slew of APA cases, including CIC Services, LLC v. Commissioner, No. 3:17-cv-110, slip op. (E.D. Tenn. Mar. 21, 2022) (setting aside Notice 2016-66, which identified certain captive insurance arrangements as transactions of interest (a type of reportable transaction)), Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022) (setting aside Notice 2007-83, which identifies certain employee benefit plans with cash-value life insurance policies as listed transactions); Green Valley Investors, LLC v. Commissioner (setting aside Notice 2017-10, which identified certain SCEs as listed transactions); and GBX Associates, LLC v. United States, No. 1:22-cv-401, slip op. (N.D. Ohio Nov. 14, 2022) (same).  Finally, although the IRS purports to disagree with the holdings in these cases, it is issuing proposed regulations “to eliminate any confusion and ensure consistent enforcement of the tax laws throughout the nation.”

Certainly, taxpayers who have paid penalties for failure to file the myriad reports required for participation in various reportable transactions should consider filing protective claims for refund, because the period of limitations on refund may be running.  But the same reasoning that is causing the courts to reject reportable transactions and their associated penalties may also apply in other situations.  For example, taxpayers who receive gifts from foreign persons or distributions from trusts, and taxpayers treated as the United States owners of foreign trusts, but who were unaware of the existence of Forms 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, may have found themselves subject to astronomical penalties as the IRS has taken a hard line on information reporting penalties in recent years.  As the IRS recognizes that that it is not above the law where reportable transactions are concerned, it may reevaluate the hazards posed by its reliance on Notice 97-34, Information Reporting on Transactions With Foreign Trusts and on Large Foreign Gifts, which has served as its basis for requiring taxpayers to file these forms.

May the magic of the holiday season continue to inspire you and yours (and the IRS) to comply with the law!

Tax Court Hands IRS Major Defeat In Its Battle Against Conservation Easement Transactions

Yesterday in Green Valley Investors v Commissioner, a reviewed opinion, the Tax Court held the IRS violated the APA when it issued Notice 2017-10 without complying with the notice and comment provisions of the APA or otherwise establishing that it was not required to subject the rule to the APA’s notice and comment procedures. The opinion is a major defeat for the IRS and is an important decision applying administrative law principles to IRS guidance.

The opinion follows up on recent cases like Mann Construction (blogged here) where other federal courts have held that the IRS’s issuance of a Notice ran afoul of the APA. Tax Notes’ Kristen Parillo does a bang-up job summarizing [$] and placing the opinions and dissents in that context. The opinion deserves a major write up, and I may return to do so in PT but in the interest of getting something to our readers here are a few initial observations and thoughts.

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In addition to the APA issue, the taxpayer also argued that penalties the IRS imposed under section 6662A were improper because they were assessed retroactively after the issuance of Notice 2017-10. The retroactivity issue is a tough one for taxpayers, but the Tax Court was able to sidestep the issue by holding that the IRS violated the APA with respect to the Notice’s issuance.

While there are two concurring opinions and a dissenting opinion, no opinion agreed with the IRS view that the rule in question was interpretive and thus not generally required to be issued under notice and comment. As such, Green Valley is another firm rebuke of the IRS’s take on how its subregulatory guidance fits in with broader administrative law and APA norms and requirements. The majority opinion defines a legislative rule as one that “impose[s] new rights or duties and change the legal status of regulated parties.” That low bar easily put the Notice at issue in that camp.

Elaborating on its holding that the Notice is a legislative rule, the majority states that “the act of identifying a transaction as a listed transaction by the IRS, by its very nature, is the creation of a substantive (i.e., legislative) rule and not merely an interpretative rule.” To reinforce its conclusion, the opinion details the effect of the IRS’s classification in the Notice on taxpayers and material advisors.

That majority’s framing suggests that many more pieces of subregulatory guidance are subject to procedural APA attacks.

The statutory framework at issue in this and other challenges highlights a separate legal question, namely whether Congress intended to displace the APA’s notice and comment regime. Section 6707A(c)(1) permits the Secretary to define reportable transactions “under regulations,” and respondent pointed out that Congress remained silent after Treasury issued regulations allowing the agency to define that crucial term through essentially any type of guidance, including IRB guidance at issue in this and other similar cases.

Displacing the APA is the prerogative of Congress, not the IRS. It is here that the Tax Court (and other courts) divided. For an agency to issue a legislative rule without notice and comment (and without good cause for skipping it) there needs to be an express statutory displacement of the APA. The different opinions in this case explore how or whether this principle should apply here. There is more nuance to unpack, and in a future post I may revisit the topic, but for now, the takeaway is that the majority opinion sets that hurdle pretty high.

Finding a violation of the APA leads to the hot issue of remedy, and whether a court could set aside the tainted IRS Notice for all, or only for those taxpayers who brought the challenge. The majority did not wade deeply into that issue but in footnote 22 essentially told the IRS that its opinion has the similar effect as vacating broadly, stating that “[a]lthough this decision and subsequent order are applicable only to petitioner, the Court intends to apply this decision setting aside Notice 2017-10 to the benefit of all similarly situated taxpayers who come before us.”

This is a major development. But it is not the last development, for sure, either in the ongoing battle between IRS and those engaging or participating in easement transactions or in the broader issue of IRS compliance with the APA’s procedural requirements associated with rulemaking.

Appeals Removes Challenges to Validity To Regs or IRB Guidance From Hazards of Litigation Analysis

On Wednesday, November 16, 2022 from noon to 1:15 the Tax Court will hold a webinar panel discussion moderated by Chief Judge Kerrigan highlighting changes to Tax Court practice made in response to the pandemic.  Christine Speidel will be among the panelist.  Registration is required.  Information about registration is available on the QR code in this document announcing the program

The other day I discussed a recent ABA Tax Section panel that addressed the growing number of procedural challenges to both regulations and guidance that the IRS issues in the Internal Revenue Bulletin. The challenges focus on whether the IRS failed to use the APA’s notice and comment procedures, or even if it did use those procedures, whether the IRS failed to do what was required under those procedures, such as responding to significant comments.

While the courts tackle these issues, IRS recently announced in both proposed regulations and interim guidance that the IRS Independent Office of Appeals is not to take into account the validity of regulations or IRB guidance in applying the hazards of litigation for possible settlement.

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To be sure, the regulations provide an exception if “there is an unreviewable decision from a Federal court” that  accepts the taxpayer’s position on the validity of the regulation or IRB guidance. But this rule limits Appeals’ discretion to resolve matters that may present significant litigation risks for the government.

Why take this off the table? The preamble explains that while Appeals is independent it is “an office within the Treasury Department and the IRS,” and is bound to follow the decisions of senior-level Treasury and IRS officials. In the interim guidance, IRS distinguishes challenges that implicate other substantive issues and states that “the judicial process is the appropriate forum for addressing taxpayer challenges regarding the validity of Treasury regulations or procedural validity of IRB notices and revenue procedures in the first instance.”

While I briefly discussed the proposed regulations when they came out, since then there has been some immediate reaction from some practitioners. In an excellent article in Tax Notes [$ paywall], Jeffrey Luechtefeld of Chamberlain Hrdlicka argues that the policy will curtail Appeals’ ability to resolve cases without litigation and have a longer term negative impact on tax administration:

The proposed regulations do not discuss or even acknowledge the potential negative effect on tax administration that will likely result from this invasion of Appeals’ independence. Taxpayers may well question whether a restrained Appeals function is capable of fairly resolving their case if one of these issues is present.

On Twitter, Professor Kristin Hickman, one of my co panelists on the ABA panel and a leading critic of the IRS for failing to comply with the APA, states that “Treasury and IRS have an established history of APA noncompliance, and it places a heavy burden on individual taxpayers to bear the litigation costs of taking these challenges to court when they could be settled as part of the IRS Appeals process.”

On the other hand, Professor Hickman also tweeted that “forcing these challenges into federal court is more transparent and long term will likely lead Treasury & IRS to better APA compliance. And my sense is lots of agency adjudicators are required to assume the validity of agency rules.” 

Conclusion

The proposed regulations comment period is open until November 14, and I suspect that the comments will largely be critical of the IRS position.

For what it is worth, I come down on the side of the IRS’s proposed position. To be sure, it does place an additional burden on taxpayers who may have good faith and reasonable disputes about the validity of guidance. Yet in my view the courts are in the best position to address these complex issues. The circuit split in Hewitt and Oakbrook Land Holdings, and the differing approaches that leading commentators have taken concerning whether guidance is indeed required to be issued under notice and comment, suggest a need for either a legislative fix or for the Supreme Court to clarify these challenging administrative law issues. While the proposed regulations and interim guidance limit Appeals’ independence, I wonder whether Appeals has previously factored the validity of regulations or other guidance into its settlement considerations.  If it did not, at least this puts parties on notice and can help focus litigation strategy. If it did, my sense is that Appeals would likely have a different perspective on the risks that a court would invalidate the rule in question.

Taxpayer Seeks Supreme Court Review in Oakbrook Land Holdings v Commissioner

At the most recent ABA Tax Section meeting in Dallas there were multiple panels exploring the intersection of administrative law and tax procedure. One of the hottest issues is the continued attack on the IRS for issuing Internal Revenue Bulletin (IRB) guidance and regulations for violating requirements under the APA and related case law. It is squarely at issue in Oakbrook Land Holdings v Commissioner, where the Sixth Circuit upheld the validity of a 1980’s era regulation addressing the contribution of conservation easements. The Oakbrook court directly disagreed with the Eleventh Circuit’s approach in Hewitt, setting up a circuit split and the possibility of the Supreme Court wading into some murky waters.

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As a quick refresher, under 5 USC § 553, the APA ensures public participation in the informal rulemaking process, requiring agencies to provide the public with adequate notice of a proposed rule followed by a meaningful opportunity to comment on the rule’s content. After comment, the APA directs the agency to consider the “relevant matter presented” and incorporate into the adopted rule a “concise general statement” of the “basis and purpose” of the final rule. As an aside, the APA does have separate trial-like formal rulemaking requirements, but those apply in very limited circumstances, generally requiring explicit Congressional requirements and rarely at issue.

So, most of what agencies do in the rulemaking sphere is classified as informal. Not all informal agency rulemaking is required to be issued under the notice and comment process. Agencies can issue rules without notice and comment if they are “interpretative”, “general statements of policy”, or rules of agency “organization, procedure, or practice”. In addition, an agency, including the IRS, can dispense with the notice and comment requirements if it has good cause and explains why the “notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.”

Whether an agency rule is interpretative and thus exempt from the notice and comment procedures is a difficult issue. It was the subject of a Teaching Tax Committee panel I moderated at the recent ABA Tax Section meeting in Dallas. That panel grew from a series of Procedurally Taxing blog posts this past summer from Professor Kristin Hickman, Professor Bryan Camp and Jack Townsend concerning the proper classification of tax regulations. Suffice to say, reasonable people disagree as to whether all tax regulations are required to be issued under notice and comment. (See Bryan’s last post, The More Things Change The More They Remain The Same, which links the series)

On the panel I moderated, Professor Hickman and Jack, joined with Gil Rothenberg, the former head of DOJ Tax Division Appellate Section, had a spirited and informative discussion. We highlighted some recent developments, including the recent filing of a cert petition in Oakbrook Land Holdings.

Recall the Sixth Circuit in Oakbrook and Eleventh Circuit in Hewitt have split on whether the IRS violated the APA by failing to address comments concerning how a donor should divvy up the proceeds if a conservation easement was judicially extinguished. The proposed and final regs basically provide that on extinguishment, the value of any improvements to the underlying property do not revert to the donor. Many deeds, including the one in Oakbrook, do not conform to the regulation’s requirements for dividing the proceeds in the unlikely event of the easement’s extinguishment. Some of the comments disagreed with that regulatory approach. Whether a comment is significant, and thus warrants an agency discussion, is the key point of divergence in Hewitt and Oakbrook. If the Supreme Court grants cert, the Court will have an opportunity to expand on when and how extensively an agency must respond in the comment process, an issue that is important not just for tax but all agencies.

Conclusion

Not at issue in Oakbrook is whether the regulation at issue was in fact required to be issued using notice and comment. The IRS position is that most of its regulations are interpretative, thus not compelling the agency to subject the regs to the notice and comment process. Yet IRS almost always use the notice and comment process, as it did in the Section 170 reg project at issue in Oakbrook. And if uses that process, even it was not required to do so, an agency that ignores meaningful comments is at risk that a court would find its actions arbitrary and capricious. In any event, the government seems to have abandoned arguing in court that its regs are interpretative, thus in effect conceding that in most cases its regulations are subject to the notice and comment regime.

The tax regulatory process has changed considerably in the past few decades, with preambles now more extensive and engaging. It seems odd indeed for litigants and courts to be wrangling over four-decade old rules and whether the government did enough for its actions to pass muster. With the IRS on notice that parties are gearing up to challenge it for procedural irregularities, modern day preambles more closely resemble documents that the agency expects to be the subject of litigation.

The effect of the above and IRS now gearing up for procedural APA challenges to its regs is that the future APA struggles concern whether IRB guidance is required to be issued under the notice and comment procedures. Those issues are front and center in other cases like CIC Services. That issue that will continue to be one that courts confront. To be sure, to the extent that a taxpayer faces adverse consequences from the application of an old reg, taxpayers and their advisors will likely consider and raise APA procedural challenges similar to the issue in Oakbrook. In a follow up post, I will discuss recent Appeals proposed policy to remove APA validity issues from its hazards of litigation equation. That has generated some practitioner blowback for what some argue is an intrusion with Appeals’ independence and discretion to settle cases.

Harper v Rettig Update: Government Petitions For Rehearing

This past August I discussed the government’s loss in Harper v Rettig. In Harper, the taxpayer sought a court order directing the IRS to expunge financial information allegedly obtained through  a John Doe summons. In reversing the district court, the First Circuit held that the Anti-Injunction Act was not a jurisdictional bar to a taxpayer’s suit challenging the summons.

Last week the government filed a petition for a panel rehearing. The government claims that even absent the AIA, the Administrative Procedure Act would not waive the government’s sovereign immunity. This led the government to request that the panel modify its remand order to direct the district court to consider an alternate ground for dismissal.

In its petition the government stated that it is “highly questionable whether the APA provides a basis for exercising jurisdiction in this case, and it is unclear from this Court’s opinion whether this Court definitively held that the APA provides jurisdiction. Moreover, this Court has previously held, in a case involving different facts, that the APA did not provide a basis for challenging an IRS summons.”

The issue turns on the relationship between the APA and Section 7609, the provision that opens the door to third party and taxpayer challenges to the IRS’s vast summons power.

APA Section 702 waives sovereign immunity for suits seeking nonmonetary relief and alleging wrongdoing by a federal agency. In its opinion, after concluding that the AIA did not bar the suit, the First Circuit stated that the taxpayer’s suit “appears to fit comfortably within the plain language of th[e] waiver” in Section 702.” 

Section 702 of the APA, however, also disclaims any “authority to grant relief if any other statute that grants consent to suit expressly or impliedly forbids the relief which is sought.” To similar effect is 701(a)(1), which state that provisions of APA do not apply where “statutes preclude judicial review”.  In its petition the government argues that Section 7609 is the exclusive means to challenge the government’s summons power, and that Congress protects third parties through the JDS ex parte approval process:

In Section 7609, Congress carefully delineated the limits of the waiver of sovereign immunity for challenging third-party summonses and chose not to provide persons (like taxpayer) who are not named in a summons with a procedure for challenging the summons. Instead, Congress chose to entrust the district courts with protecting the interests of third parties, such as taxpayer, whose information may be covered by a John Doe summons, by requiring that the ex parte procedures in § 7609(f) be satisfied before the summons may issue. I.R.C. § 7609(h). 

In discussing the issue, the government points to prior case law where the circuit has held that 7609 is the exclusive means for challenging a summons and that the APA did not provide jurisdiction for a challenge that was beyond the 7609 time limits.

In its petition, the government requests that permission to brief the panel so that it may wish to expand its remand order and asks that the lower court consider whether the intersection of 7609 and the APA is alternative grounds for dismissal for lack of subject-matter jurisdiction.

I suspect that the government’s failure to raise this issue previously relates to its pre and maybe even post CIC Services confidence that the AIA would independently bar a challenge to a summons. The petition is a reminder that even with the AIA not as formidable as it once was, it may not be easy to get into court to challenge what looks like an increasingly robust government use of its John Doe summons powers.

We will keep an eye on how this plays out.

Out of Time? APA Challenges to Old Tax Guidance and the Six-Year Default Limitations Period

We welcome back previous guest blogger Susan C. Morse, who is the Angus G. Wynne Sr. Professor in Civil Jurisprudence and Associate Dean for Academic Affairs at the University of Texas at Austin School of Law.

Is it ever too late to raise an administrative procedure challenge to an old tax regulation?

Consider the pair of cases that has produced a circuit split between the Sixth and the Eleventh Circuits over the adequacy of notice-and-comment for a conservation easement final regulation. (Prior Procedurally Taxing coverage here and here.) The Sixth Circuit held in Oakbrook that the notice-and-comment process was sufficient. In contrast, the Eleventh Circuit concluded in Hewitt that Treasury “violated the Administrative Procedure Act’s requirements” when it promulgated the regulation and that therefore the IRS Commissioner’s application of the regulation was “invalid.” But neither court addressed the question of time. The regulation was promulgated in 1986 – decades before any of the facts arose in either case.

Does time ever limit taxpayers’ ability to raise administrative procedure challenges long after the promulgation of a regulation? Consider 28 U.S.C. § 2401(a), the default limitations period for suits against the federal government. It provides that “every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues.”

The limitations period analysis turns on when the “right of action” to raise an administrative procedure challenge to a regulation “first accrues.” For instance, in Oakbrook and Hewitt, if this right accrued in 1986, when Treasury promulgated the regulation at issue, then the taxpayers’ claims should have been time-barred. On this theory, the taxpayers were allowed to litigate because the government did not raise 28 U.S.C. § 2401(a) as a defense. (The government can waive the defense, as it’s not jurisdictional.) If the government had raised the six-year limitations period defense, the Oakbrook or Hewitt taxpayer would have had to argue that the right of action first accrued later, when the regulation was applied to the taxpayer’s case, or that an exception to the limitations period should apply.

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Now the government has begun to raise the six-year limitations period defense, first in July 2022, in the Govig case, pending in the federal district court in Arizona. Govig involves Notice 2007-83, which was issued nine years before penalties were first proposed on Govig for the 2016 tax year, relating to the employee welfare benefit arrangement established by the taxpayer in 2015. In Govig, the taxpayer claims that the Notice is invalid because it was issued without notice and comment, and relies on the Sixth Circuit’s decision in Mann Construction. In Mann Construction, though, the government did not raise the six-year limitations period defense.

More than half the Courts of Appeal – the Second, Fourth, Fifth, Sixth, Ninth, Eleventh, D.C., and Federal Circuits – have accepted that for administrative procedure claims, the default six-year limitations period begins to run when the challenged regulation or guidance issues, in other words at the time of final agency action. This limitations period statute exists against the background of sovereign immunity, meaning that it is an exercise of Congressional power to specify on what terms the federal government may be sued. In contrast, for certain other claims, such as claims that the agency exceeded its statutory authority, the limitations period begins to run when the regulation or guidance is applied. This is called the Wind River doctrine after a key 1991 Ninth Circuit case. The Wind River doctrine would say that the limitations period for an administrative procedure challenge to Notice 2007-83 began to run in 2007 and expired in 2013, before any relevant facts arose in the Govig case.

It may seem an awkward reading to suggest that a “right of action first accrues” with the earlier issuance of a Notice, especially when the specific controversy between the taxpayer and the government arises from later enforcement proceedings. And yet that is what the cases hold. As an example, consider Sai Kwan Wong, a 2009 Second Circuit case where the plaintiff sought to challenge a Medicaid rule that treated social security disability income as an amount that offsets Medicaid funding of nursing home care, even if that income was deposited into a special needs trust. The Department of Health and Human Services had promulgated a rule providing this offset treatment in 1980, apparently without using notice and comment. The plaintiff did not have standing until 2006, when his legal guardian began to direct the plaintiff’s disability income to a special needs trust, thus raising the question of whether the offset rule would apply. The Second Circuit held that the six-year limitation period began to run in 1980, when the guidance issued, and not in 2006, when the plaintiff had standing. It then barred the plaintiff’s administrative procedure claim.

The theory that underpins cases like Sai Kwan Wong is articulated in Shiny Rock, a 1990 Ninth Circuit case that preceded Wind River by one year. There, the court explained that any injury “was that incurred by all persons .. in 1964” when the Bureau of Land Management issued a public land order – not in 1979, when Bureau applied the order to deny the plaintiff’s mineral patent application. The Shiny Rock court suggests that the rights that are vindicated by an administrative procedure challenge are the general public rights to participate in the administrative procedure process. A later-accrual approach, added the Shiny Rock court, “would virtually nullify the statute of limitations,” since it would always be possible for the old administrative order to applied later, to a new plaintiff who had later gained standing. Viewed this way, the case law consensus that the limitations period begins to accrue when a regulation is promulgated makes sense.

An alternative reading of 28 U.S.C. § 2401(a) might be that a particular plaintiff’s right of action cannot accrue until the plaintiff has standing. This reading is grounded in a private law understanding of the statutory provision, which envisions the government as party to a contract or tort action that arises from a specific transaction or interaction between the government and a plaintiff. But administrative procedure violations are not like these private law causes of action. They arise not from a specific interaction between government and plaintiff, but rather from the alleged failure of a process that is supposed to serve the general public function of producing better administrative law.

Thus, in Govig, if the District of Arizona follows Ninth Circuit precedent, it should conclude that the administrative procedure challenge to Notice 2007-83 is time-barred – unless, of course, the Govig plaintiffs can persuade the court that an exception to the limitations period applies. There is little in the facts of Govig that would support an equitable tolling or equitable estoppel argument. For instance, the government did not hide information or delay enforcement in order to wait out the limitations period. Instead, the facts of the case did not arise until after the limitations period had expired.

An issue that may arise in Govig relates to intervening case law. This is because the Govig plaintiff arguably relies on CIC Services, a 2021 Supreme Court case that held that some facial or pre-enforcement challenges are permitted in tax, despite the Anti-Injunction Act. (Prior Procedurally Taxing coverage here, here, and here).Historically, intervening case law has restarted the 28 U.S.C. § 2401(a) limitations period when a case has only prospective effect – but not if the case has (as is typical) retroactive effect. Plus, more recent Supreme Court precedent emphasizes that its applications of federal law “must be given full retroactive effect …as to all events, regardless of whether such events predate or postdate the announcement of the rule.” The intervening case law argument seems unlikely to offer the Govig plaintiff an exception to the time limitation of 28 U.S.C. § 2401(a).

The Govig case is one to watch. If the Arizona federal district court follows prevailing case law, it will likely allow the government’s limitations period defense and time bar the plaintiff’s administrative procedure claim. The availability of such time bars would reshape the landscape of administrative procedure in tax by putting APA claims on the clock and replacing the assumption that the government will waive the 28 U.S.C. § 2401(a) limitations period defense.

For further reading, if of interest: I have posted a preliminary draft here with additional analysis of this limitations period issue.

Another Offer Denied, Another Reason for Submitting in Collection Due Process

I keep something of a running tally of cases where my clients would have been unjustly treated if not for the protections of Collection Due Process (CDP) hearings. As a practitioner, I think it helps me in advising and counseling my clients on a course of action: what are the pros and cons of proposing a “collection alternative” prior to doing so in a CDP hearing?

The main “con” is pretty straightforward: if the IRS does something crazy, you’re stuck arguing with the IRS (and not a court) about it. The recent case Richard Dillon et al. v. United States et al. illustrates that point nicely, both in terms of how impossible it is to get judicial review on Offers in Compromise outside of CDP, and how stuck you can be with a completely unreasoned IRS determination.

read more…

The Dillons apparently wanted to submit an Offer but couldn’t get their feet in the door -it was returned as non-processible. Rather than give up on it, they went to federal district court on an Administrative Procedure Act (APA) argument. The Dillon opinion resolves on a jurisdictional issue: whether there is a waiver of sovereign immunity. This, in turn, involves the intersection of the Anti-Injunction Act and the APA. While the APA generally waives sovereign immunity when there is an allegation of agency error and the requested relief is not for money damages, the waiver does not apply “if any other statute that grants consent to suit expressly or impliedly forbids the relief which is sought.” The Dillon court, like other federal courts before, concluded in part that the Anti-injunction Act and the tax exception to the Declaratory Judgment Act directly applied and thus under the APA “forbids the relief” that the Dillons sought.

Because of this jurisdictional issue the underlying substance of the complaint concerning the Offer is not given much attention. However, from the opinion we can glean the following:

The Dillons are married, live in St. Paul and owe about $150,000 in back taxes from 2011 – 2017. They are also “approaching retirement” and have about $180,000 in their retirement account. Every other aspect of their finances goes largely unsaid and apparently did not much matter.

I am not a financial advisor, but that vignette conjures up a married couple that will likely struggle during retirement. Were they to liquidate their retirement accounts to pay their back debts they would have virtually nothing left after taxes. On these facts alone, liquidating their retirement accounts would very likely cause economic hardship in the Dillons most vulnerable years (i.e. during retirement). That’s how I see it, and that is also apparently how the Dillons’ attorney framed the Offer to the IRS.

Fortunately, the Treasury Regulations provide for exactly these sorts of Offers -ones where the taxpayer could theoretically full-pay, but a parade of horribles would ensue if they did. They are called “Effective Tax Administration” Offers and some examples are provided at Treas. Reg. § 301.7122-1(c)(3).

Unfortunately, the IRS is often loathe to accept Effective Tax Administration Offers. From both anecdotal evidence and this rather dated article the evidence suggests that getting an Effective Tax Administration Offer accepted is a massively uphill battle.

At its worst, the Dillon case shows just how bad the IRS may be at evaluating these Offers. Apparently, the Offer was “returned” (that is, not processed) without Appeal rights because the IRS determined that it was submitted “solely to hinder or delay” collection. See IRC § 7122(g) and Treas. Reg. § 301.7122-1(f)(5)(ii).

That’s pretty bold, and given the scant information I have, pretty ridiculous. For one, the debts aren’t likely to expire imminently. For two, the stated rationale (“we can collect more than you’re offering”) obviates the entire purpose of ETA Offers, which will always involve an Offer less than “Reasonable Collection Potential” -that’s their whole raison d’etre. Virtually every ETA Offer would be denied (indeed, go unprocessed) if submitting one for less than RCP was seen as intended to hinder or delay collection.

However, I’ve also been informed by those in the know that the IRS tends not to make “solely to hinder or delay” determinations lightly. Sometimes this appears to happen when the taxpayers account was assigned to a Revenue Officer (RO) and the taxpayers file an Offer to essentially take the matter out of the RO’s hands. If the RO has seen some bad taxpayer behavior (transferring property to nominees, etc.) they will reach out to the Offer unit and advise them to make a “solely to hinder or delay” determination.

So perhaps there are good reasons why the Offer unit didn’t let this ETA Offer through the door. I’d sure like to see some more facts…

Alas, no more facts are to be found. Indeed, the Dillons want more than just additional reasoning behind the IRS conclusion: they demand that the Offer be processed via a “writ or order” of the court. That remedy is why they went to court, and ultimately why they are unsuccessful on jurisdictional grounds. Note that if they were in the Tax Court on a CDP determination, however, not only would jurisdiction be clear cut, but the reasoning behind the “solely to hinder or delay” determination would be front and center. And to me, that would provide an important check on what may (or may not) be an irrational decision by the IRS that you’re otherwise stuck with.

Lessons Learned: Advising Clients on Offers

In the past, I mostly considered how “complex” my client’s Offer was in my advice about whether it was worthwhile to wait for a CDP hearing. If it was even remotely complex there was a good reason to wait for CDP.

Dillon emphasizes how low of a bar “complex” is in the Offer context. In my experience, virtually any Offer where the client wasn’t going to pay the full present value of their retirement account (say, because they were entering retirement) or the full equity in their home (say, because they had horrible credit and couldn’t borrow against it) has been enough of a reason to counsel waiting for CDP. I have seen too many times where the IRS review is just to look at the far-right column of the Form 433-A OIC and compare it to the total liability, ignoring any reasons why that is inappropriate that we’ve put forth in a narrative, and leave it at that: “Oh, you’re 64 and have $40,000 in retirement? Then it should be no problem at all to full pay a $30,000 liability.” I assure you this is barely a caricature of how the analysis tends to play out.

But Dillon (and to an extent, the Brown saga) raise other reasons to wait on CDP even if it isn’t a “complex” Offer. Two reasons immediately come to mind.

First, and obviously, in the absence of CDP you are stuck with bad or unjustifiable preliminary decisions made by the IRS as to whether your Offer is “processible.” Without CDP you can’t even get your foot in the door to dispute it, no matter how slam-dunk the underlying Offer may be.

Dillon underscores that problem. I’ve had cases where obvious Offer candidates are “returned without appeal rights” for failing to make quarterly payments where no such payments were required or failing to file a return when they did, in fact, file but the IRS rejected the return for ID verification issues. One was saved by the grace of CDP. The other will have a student assigned to it this semester.

Second, CDP keeps the IRS honest. And frankly, I’ve seen time-and-again that such value cannot be understated. Many of my clients just want to be heard: none of them are doing particularly well financially as virtually all of my clients being under 250% of the federal poverty line, per IRC § 7526. Yes, the IRS has a fair amount of latitude in when to accept an Offer, but if it is going to be rejected my client and I want to know the reasons why. Absent CDP I find that we are never given anything beyond a boilerplate “we’ve considered your circumstances and determined they do not justify accepting your Offer.” When pressed on this (which I really only can do with any value in CDP reviewing the administrative file) I often find that the IRS never really appeared to “consider the circumstances” at all.

A Parting Thought: The Value of Judicial Review on Collection Actions

As an academic who cares about tax administration, I’m not a huge fan of incentivizing people to “wait” on addressing their tax problems. It’s inefficient and costly.

(Note that the Tax Court may have inadvertently (and in my opinion incorrectly) further incentivized waiting until CDP in the context of arguing the underlying merits of the liability under IRC § 6330(c)(2)(B). As covered here, here, and here, if you are proactive in arguing against the underlying tax you may miss out on the chance to get court review later. I definitely don’t trust IRS Appeals enough on deficiency issues with low-income taxpayers (the common “prove the kid lived with you” scenario) to foreclose judicial review.)

I hope that the (much needed) increase in IRS funding (see Les’s post) will ameliorate some of the issues I’ve seen through better training and support. But even if it improves the quality of review on collection issues (a big “if” since it isn’t clear how much of that money would be going to exam, etc.) I believe the need for judicial review of collection actions remains. If you ever have a position contrary to the IRM, you have virtually no chance of success without judicial review.

And sometimes the IRS rules, frankly, are nonsensical or needlessly hurt low-income taxpayers. Vinatieri is the classic example, and Keith has noted other times where it seems that those in positions of power seem to just “make-up” rules. A judiciary check against that power, even if modest, I think, is in order. Most of my low-income clients are collection cases, and collection (the actual taking of their modest property) is a serious concern that can carry serious consequences if you get “the wrong person” at the IRS reviewing the case.

As a parting example, I once submitted an Offer for a homeless client. It was preliminarily rejected by the IRS on their determination that the taxpayer had disposable income because… yep, they weren’t paying for housing. Because the IRM (basically) says “take actual housing expenses,” and since stable housing was just a dream of theirs, they shouldn’t be allowed $1,000 in anticipated monthly housing costs while trying to leave a domestic violence shelter.

I kid you not.

I am convinced this particular case was resolved favorably only because I was able to say to Appeals, as they informed me they were upholding the determination: “do you really want this to play before a Tax Court judge?” I have heard from other colleagues (especially in California) that they’ve run into the homelessness housing expense issue before, with both failure and success. I don’t think the IRS, as an entity, endorses the position that homeless people shouldn’t be allowed the means to pay for housing. But that’s what the frontline workers (and the “Independent Office of Appeals”) end up doing based on their reading of the IRM. Part of me wished my case went to trial so that it could have gained some notoriety, and either led to the IRS changing the IRM on its own or a Tax Court decision that forced its hand.

But for now, I’ll settle for the fact that at least my particular client was given a positive outcome that would not have occurred in the absence of CDP. I’m sure there are other such examples from practitioners nationwide.