APA and FBAR Skirmishes Continue in Schwarzbaum v US

A couple of months ago in 11th Circuit Remands Willful FBAR Penalty Case Back to IRS Due to APA Violation I blogged about Schwarzbaum v United States, where the Eleventh Circuit held that Schwarzbaum willfully violated his FBAR reporting obligations for three years but that the IRS miscalculated the FBAR penalties. As I discussed, the FBAR statute itself pegs the maximum penalty to each account’s balance as of the date that the taxpayer failed to file the FBAR, a date that IRS neglected in calculating his penalty.

The court considered the IRS’s actions as not in accordance with the law and arbitrary and capricious under the APA. It ordered that the case be remanded to the IRS for the purpose of recalculating the penalties.

Following the decision, the government filed a motion with the 11th Circuit asking that the district court retain jurisdiction pending the outcome of the remand. Schwarzbaum  opposed the motion.  What is at stake with this skirmish?

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It appears the parties are gearing up over a possible SOL issue. The 11th Circuit’s opinion suggested that a remand for purposes of recalculating the willfulness penalty would not trigger a new assessment. That was important, because a new assessment would be barred under the under the six-year statute of limitations on FBAR assessments. See 31 U.S.C. § 5321(b)(1).

In its reply brief filed last week, the government suggests that by opposing the government’s motion, Schwarzbaum is teeing up for a different SOL challenge:

Perhaps recognizing the statute of limitations does not prevent the IRS from recalculating the penalties, Schwarzbaum intends to employ a different, albeit equally spurious, strategy. If this Court were to decline to retain jurisdiction, Schwarzbaum will likely assert that the Government is time-barred from bringing a new suit to collect the recalculated penalties. See 31 U.S.C. § 5321(b)(2)(A) (collection action must be brought within two years after assessment). That argument directly contradicts the Eleventh Circuit decision, which recognized that Schwarzbaum was not entitled to a judgment in his favor and that the IRS had a right to recalculate the FBAR penalties.

In arguing that the court should retain jurisdiction, the government acknowledges that in typical APA cases courts do not retain jurisdiction when there has been a remand. The government’s reply brief distinguishes more typical APA challenges to agency action from the APA’s role in evaluating IRS FBAR penalty calculations:

As the United States noted in its moving papers, APA cases often involve a party challenging government agency action and typically the plaintiff is requesting that a court set that action aside. The challenger prevails when the court sets aside the agency action and remands the case to the agency. In such cases, courts generally do not retain jurisdiction during remand because once the action is set aside there is nothing left to review. Any post-remand proceeding would essentially start from scratch and focus on the action the agency took on remand.

Continuing to contrast the typical APA cases, the government argues that what is at stake in FBAR cases is very different:

Here, the remand is limited to the narrow issue of recalculation of the FBAR penalties consistent with the Eleventh Circuit decision. The IRS has not been instructed to develop a new administrative record or conduct a new willfulness analysis. Unlike in the typical APA case brought by a challenger to agency action, the United States brought a common-law action to reduce a liability to judgment. There is an outstanding question, not about whether Schwarzbaum must pay, but rather about how much Schwarzbaum must pay. Unlike an APA case in which the parties’ claims are resolved when the court either upholds or sets aside the agency action with a remand, this case is not resolved until the Court enters a monetary judgment. 

As the government suggests, the APA’s role differs considerably in this case as compared to typical actions to set aside agency conduct. This case, and others like it, will assist in clarifying the somewhat different ways that the APA is likely to apply to evaluate IRS conduct in the types of its actions that are subject to APA scrutiny.

March 2022 Digest

Spring has arrived and the Tax Court has resumed in-person sessions for many locations. In Denver, we have our first in-person calendar call on Monday. I’m looking forward to it, but also need figure out if any of my suits still fit. PT’s March posts focused on issues with examinations, IRS answers, and more.

A Time Sensitive Opportunity

Loretta Collins Argrett Fellowship: The Loretta Collins Argrett Fellowship seeks to support the inclusiveness of the tax profession by encouraging underrepresented individuals to join and actively participate in the ABA Tax Section and Tax Section leadership by providing fellowship opportunities. More information about the fellowships and how to apply are in the post. Applications are due April 3.

Taxpayer Rights

The 7th International Conference on Taxpayer Rights: Tax Collection & Taxpayer Rights in the Post-COVID World: The virtual online conference is from May 18 – 20 and focuses on the actual collection of tax. The agenda and the link to register are in the post. Additionally, the Center for Taxpayer Rights is hosting a free workshop called The Role of Tax Clinics and Taxpayer Ombuds/Advocates in Protecting Taxpayer Rights in Collection Matters on May 16 and a link to register is also in the post.

How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 1: Correspondence exams now account for 85% of all audits, up from about 80% in the previous two years. This post looks at data on correspondence audits and identifies a disproportionate emphasis on EITC audits which burden and harm low income taxpayers. 

How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 2: This post considers the long-term goal of audits, along with recommendations for how the IRS can improve correspondence exams. Such recommendations include utilizing virtual office audits; using plain language, tailored, and helpful audit notices; and assigning the audit to one specific person at the IRS. Making correspondence audits more customer friendly could fall under the purview of the newly created IRS Customer Experience Office.

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Opportunities for Improving Referrals by VITA Sites to LITCs: Taxpayer rights could be better protected if VITA sites better understood when a referral to an LITC may be necessary and how to make such a referral. This post explores opportunities to improve this process, including a training initiative begun by the Center for Taxpayer Rights.

Tax Court Updates and Information

Tax Court is on the Road Again: The Tax Court officially resumed in-person calendars on Monday, February 28, but select calendars are still being conducted remotely. Practitioners who have recently attended in-person calendars share more information about what it’s like to be back.

Ordering Documents from the Tax Court: A “how to” on ordering documents from the Court. Phone requests are currently the only way, but in-person requests may resume once the Court reopens to the public. Both options come with a per page or per document fee.

Tax Court Proposed Rule Changes: The Tax Court has proposed rule changes which are largely intended to clean up language or more closely conform the Tax Court rules to the Federal Rules of Civil Procedure. It invites public comments on the proposals by May 25, 2022.

Tax Court Decisions

Tax Court Takes Almost Five Years to Decide a Dependency Exemption Case: Hicks v. Commissioner highlights the procedures required to claim a qualified child as a dependent when the child does not reside with the taxpayer. The case is noteworthy for the length of time it took the Court to issue an opinion, especially because there were no continuances or other reasons for a delay.

Jeopardy Assessment Case Originating in the Tax Court: The opinion Yerushalmi v. Commissioner is rare because the Tax Court reviews whether jeopardy exists in the first instance, rather than following a district court decision. The post looks at the case, the standard of review, and the facts that can be relevant to the Tax Court when it must decide whether the IRS’s jeopardy assessment was reasonable.

Tax Court Answers

Tax Court Answers: There are issues caused by requiring the IRS to file answers in small tax cases. It delays a review of the case on its merits, the process is slow and impersonal, and there are risks that a taxpayer won’t understand what the answer says. The Court should consider conducting an empirical study, engaging with taxpayer representatives, or forming a judicial advisory committee to identify best practices.

Making the IRS Answer to Taxpayers…By Making the IRS Answer: In the first of a three-part series looking at issues with IRS Counsel answers, Caleb looks at the case of Vermouth v. Commissioner. The case emphasizes the importance of the administrative file during the pleading stages of litigation. Cases involving bad answers and their impact on the burden of proof and burden of production are also discussed.

Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire: Tax Court Rule 33(b) requires a signer of a pleading to reasonably inquire into the truth of the facts stated therein. To what degree are IRS Counsel attorneys required to reasonably inquire when filing an answer? This post explores that question and sheds some light on the Court’s expectations.  

Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire (Part Two): Continuing the discussion of the IRS’s responsibilities under Rule 33(b), this post looks closer at the consequences to the IRS when a bad answer is filed. Caleb examines the Court’s response in cases where an administrative file was excessively lengthy or not available quickly enough and shares the lessons to be learned.

Circuit Court Decisions

Naked Owners Lose Wrongful Levy Appeal: Goodrich et. al. v. United States demonstrates the interplay of state and federal law upon lien and levy law under the Internal Revenue Code. The 5th Circuit affirmed that a taxpayer’s children had a claim against their father’s property, but only as unsecured creditors according to state law. As a result, the children’s interests were not sufficient to sustain a wrongful levy claim.

Confusion Over Attorney’s Fees in Ninth Circuit Stems from Statute and Regulation…: In Dang v. Commissioner the parties debated the starting point in which reasonable administrative costs are incurred in the context of a CDP hearing. The IRS argued it’s after the notice of determination. Petitioners argued it’s after the 30-day notice which provides the right to request a CDP hearing. The Court decided no costs were incurred before the commencement date of the relevant proceeding without deciding when that date was. The case provides another reason why the statute and regulation involving the recovery of administrative costs from administrative proceedings should be changed.

Attorney’s Fees Cases in the Ninth Circuit and Requesting a Retirement Account Levy: The concurring judge in Dang demonstrates that he understands the entire argument and finds that the exclusion of collection action from the definition of administrative proceedings is contrary to the plain language of the statute. 

Oh Mann: The Sixth Circuit Holds IRS Notice Issued in Violation of the APA; District Court in CIC Services Finds Case is Binding Precedent: The decision Mann v. United States is binding on CIC Services and is examined more closely in this post. In Mann, the Sixth Circuit found that the IRS notice at issue was invalid because the public was not provided a notice and comment opportunity. The case is significant because it is another circuit court opinion that applies general administrative law principles to the IRS.

You Call That “Notice”? Seriously?:  General Mills, Inc. v. United States involves refund claims that were made within the two-year period under section 6511, but outside of the six-month period which starts when a notice of computational adjustment is issued to partners. The Court seemingly concluded that notices, unless misleading, need only to comport with statutory requirements regardless of due process considerations. The post also evaluates and discusses the adequacy of common notices in relation to the notice of computational adjustment.

No Rehearing En Banc for Goldring: Is Supreme Court Review Possible?: The issue in Goldring was how underpayment interest should be computed on a later assessed deficiency when a taxpayer elects to credit forward an overpayment from an earlier filed return. The government’s rehearing en banc petition was denied leaving in place the circuit split. IRS Counsel has advised that there are thousands of similar cases, which could result in refunds of multiple millions of dollars, so it is yet to been seen if the government will petition the Supreme Court.

Challenging Levy Compliance: In Nicholson v. Unify Financial Credit Union the Fourth Circuit affirmed the dismissal of a suit to stop a levy brought by a taxpayer against his credit union. The law requires a third party to turn over the property to the IRS and then allows the taxpayer whose property was wrongfully taken to seek the return of that property from the IRS, so suing the credit union is not an effective avenue.

Offers in Compromise

Suspension of Statute of Limitations Due to an Offer in Compromise: The statute of limitations on when the IRS can bring suit to reduce a liability to judgment is at issue in United States v. Park. An offer in compromise suspends the collection statute and can give the IRS more time than a taxpayer would expect. It’s good idea to consider the risks before submitting an offer.

Public Policy and Not in the Best Interest of the Government Offer in Compromise Rejections: Cases where the IRS rejects an offer in compromise based on public policy or for not being in the best interest of the government are reviewed to better understand the reasons for such rejections. The IRS may look at past and future voluntary compliance and criminal tax convictions. The IRS should make offer decisions easily reviewable to provide more transparency in this area.

Correction on Making Offers in Compromise Public: Keith has learned that the IRS has updated the way in which the public can inspect accepted offers. It is by requesting an Offer Acceptance Report by fax or mail. The report, however, only contains limited and targeted information, so FOIA is still the only way to receive broad and general information.

Bankruptcy and Taxes

General Discharge Denial in Chapter 7 Based on Taxes: In Kresock v. United States, a bankruptcy court’s denial of discharge was sustained by an appellate panel due tothe debtor’s bad behavior in connection with his tax debts. It is seemingly unusual for a general discharge denial to occur where the basis for denial is tax related.

Miscellaneous

The Passing of Michael Mulroney: Les and Keith share remembrances of Michael Mulroney, an emeritus professor at Villanova Law School.

Congress Should Make 2022 Donations to Ukraine Relief Deductible in 2021: In order to encourage taxpayers to make donations in support of Ukraine, this post recommends that Congress create a deduction similar to the one permitted for the Indian Ocean Tsunami Act, which allowed deductions made in the current tax year to be claimed on the prior year’s return.

Oh Mann: The Sixth Circuit Holds IRS Notice Issued in Violation of the APA; District Court in CIC Services Finds Case is Binding Precedent

Preface: This discussion of Mann Construction v US discusses the possible implications of the opinion on the remanded case of CIC Services v IRS, mentioned in the conclusion of this post. Last night in CIC Services v IRS, a federal district court in Tennessee held that the opinion in Mann Construction “is binding on this Court and applies equally to the arguments advanced by the IRS regarding Notice 2016-66 in this case. Accordingly, and for the same reasons previously stated by the Court in granting CIC’s motion for preliminary injunction…, Notice 2016-66 is a legislative rule that is invalid because the IRS failed to observe notice-and-comment procedures required by the APA. ” The district court also held that the notice was “set aside under the APA because the IRS acted arbitrarily and capriciously in issuing the Notice.” In finding that the IRS acted arbitrarily and capriciously, the court explained that the IRS insufficiently examined the relevant data and failed to articulate a satisfactory explanation for its decision to designate micro-captive transactions as a “transaction of interest” based on the potential for tax avoidance or evasion. In fashioning relief, the court decided to vacate the notice in its entirety, resolving the debate discussed below as to the appropriate remedy. We will discuss CIC Services v IRS more in a later post. Les

In reversing a federal district court opinion, the Sixth Circuit in Mann Construction v US held that the IRS’s issuance of a 2007 notice including certain employee-benefit plans featuring cash-value life insurance policies as listed transactions was invalid because the IRS issued it without providing notice or the opportunity for comment. The case is significant; it is a forceful repudiation of the IRS’s penchant for sidestepping the normal regulatory process and yet another circuit court opinion that views IRS action through the same administrative law prism that applies to other agencies.

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As background, Congress added Section 6707A to the Code to help fight shelters and abusive transactions. The statute permits the IRS to penalize the failure to provide information concerning “reportable” and “listed” transactions. While reportable and listed transactions are statutorily defined, over the years the IRS has issued notices, rather than regulations after notice and comment, to identify reportable and listed transactions that in the absence of recordkeeping and reporting can generate hefty civil penalties.

Mann Construction, and its owners, failed to comply with the reporting obligations for its investment in the employee-benefit plan that was identified in the 2007 notice.

The IRS assessed penalties, and Mann Construction filed a refund claim and eventually a suit that after some preliminary procedural skirmishes was narrowed to considering whether the 2007 notice was a legislative rule under the APA that was improperly issued without public notice and comment.

At the district court, the IRS argued that its notice was an interpretive rule, such that it was not required to issue and promulgate the rule only after notice and comment.

In the alternative, the IRS argued that Congress excepted the IRS from the normal notice and comment requirements when it came to fighting the scourge of tax shelters. That alternative argument brings into sharp focus 5 USC § 559, which limits the ability of a subsequent statute (like IRC § 6707A) to modify or supersede the APA’s procedures “except to the extent that it does so expressly.” 

The district court opinion rejected the government’s primary argument that the notice was an interpretive rule, but still held in favor of the government because it agreed with the government’s alternative argument.

At the district court, the opinion referred to the 2004 addition of Section 6707A, which defined “reportable transactions” by reference to Treasury regulations that had been issued following notice and comment and permitted the IRS to identify those transactions through “notice, regulation, or other form of published guidance.”

In summary, the district court found that in adding Section 6707A, and in subsequent legislative amendments to the statute, Congress expressed a clear intent to deviate from the norm of notice and comment rulemaking.  In essence, the district court found that there was enough evidence to find an express legislative directive for the IRS to skip notice and comment when it came to identifying reportable and listed transactions.

On appeal, the Sixth Circuit panel reversed. First, like the district court below, it rejected the government’s primary argument that the rules themselves were interpretive and not required to be issued after notice and comment:

The Notice has the force and effect of law. It defines a set of transactions that taxpayers must report, and that duty did not arise from a statute or a notice-and-comment rule. It springs from the IRS’s own Notice. Taxpayers like Mann Construction had no obligation to provide information regarding listed transactions like this one to the IRS before the Notice. They have such a duty after the Notice. Obeying these new duties can “involve significant time and expense,” and failure to comply comes with the risk of penalties and criminal sanctions, all characteristics of legislative rules.

(Citing Kristin Hickman’s article Unpacking the Force of Law, 66 Vand. L. Rev. 465, 524 (2013))

I will not dig deeper into the legislative versus interpretive muddy waters other than to note that not everyone agrees with the Sixth Circuit’s approach; see Jack Townsend, Sixth Circuit Invalidates Notice Identifying Listed Transaction Requiring Reporting and Potential Penalties:

There is no question that the Treasury made a rule by regulation that, under any fair reading, permits Treasury to identify listed transactions subject to the reporting requirement by guidance documents, such as Notices, without notice-and-comment regulations. Since Congress clearly intended Treasury to have law-making authority as to reporting transactions within the scope of § 6011(a) and, as a result, permitting penalties for failure to meet the requirements, it seems to me that the “law” is (or should be) that persons subject to the reporting requirement in the regulation by identification in the Notice is sufficient to sustain the penalties.

(For those wanting a deeper dive from Jack, see The Report of the Death of the Interpretive Regulation Is an Exaggeration, which is up on SSRN).

Where the Sixth Circuit parted with the court below is that it held that Congress’s actions did not amount to an express repudiation of the APA’s notice and comment requirements.  In finding that Congress in Section 6707A did not disrupt the APA’s requirement for an agency to issue a legislative rule using notice and comment, the Sixth Circuit held that the statute did not expressly deviate from that norm:

Note to begin the absence of any express variation of the APA’s notice-and-comment procedures. The statutes do not say anything, expressly or otherwise, that modifies the baseline procedure for rulemaking established by the APA. Id. §§ 6011, 6707A. Nor did Congress expressly displace those requirements by creating a new procedure for these regulations. The statutes do not provide any “express direction to the” agency “regarding its procedure” for identifying reportable and listed transactions, let alone procedures “that cannot be reconciled with” notice-and-comment requirements or any other indication within the statutory text that “plainly expresses a congressional intent to depart from” the normal APA procedures. Asiana Airlines, 134 F.3d at 398. The statutes merely establish a disclosure and penalty regime for the IRS to administer. As to the statutory text, Congress did not change the background procedural requirements of the APA or otherwise indicate an exemption from those requirements in a “clear” or “plain” way that would make the APA’s procedures inapplicable to the IRS. See Lockhart, 546 U.S. at 145–46.

The opinion acknowledged that Congress was aware of the regulatory directive giving IRS the power to identify listed transactions using notices issued without notice or comment, like in this case. Yet Congressional awareness of those regulations and even subsequent acquiescence after amendments to IRC 6707A was not tantamount to the express exemption from the APA’s rules that 5 USC 559 requires.

Conclusion

As PT readers are likely aware, this is not the only high profile case involving a challenge to the IRS’s issuance of a notice to identify transactions subject to the 6707A reporting regime. The CIC Services case, currently on remand to a district court in Tennessee in a case that is appealable to the Sixth Circuit, involves another APA challenge. Unlike Mann Construction, which comes from a refund suit, CIC Services involves a pre-enforcement challenge to a 2016 notice. As you may recall CIC Services generated an important Supreme Court decision on the scope of the AIA, which allowed its pre-enforcement proceeding to survive. We now await a merits determination following cross motions for summary judgment after the district court granted a request for a preliminary injunction.

Tax Notes’ Kristen Parillo reported last week ($$) that both the government and the CIC Services have filed documents with the district court on the impact of Mann Construction. CIC Services argues that the case is fully dispositive of the issues and the Justice Department cautions the district court that there is time for the government to decide whether to seek en banc review or file a petition for certiorari with the Supreme Court.

The Justice Department response to CIC Services’ filing also highlights an issue I have previously discussed, namely the scope of a court’s remedial powers if it finds that the IRS’s notice (or other rule) was improperly issued without notice and comment or otherwise in violation of the APA.  In Mann Construction, the Sixth Circuit stated in conclusion that the notice should be “set aside”. In its letter to the CIC Services district court, the DOJ referred to the “set aside” conclusion as dicta given that the only cause of action was a refund suit and thus should not be controlling precedent. That distinction seems, at least on the surface, to matter because in Mann Construction the court was specifically applying its analysis in the context of the individualized request for relief in the form of a refund and not injunctive relief.

The skirmish on the scope of a court’s remedy should it find that the IRS acted in violation of the APA in a pre enforcement challenge is a hot issue generally in administrative law. See my post from last year, Update on CIC Services: The Scope of Relief Available if A Court Finds That An Agency’s Rulemaking Violates the APA.  We will be closely watching for further developments as APA litigation continues to make inroads in the tax realm.   

January 2022 Digest

A lot has happened in the tax world since the year began, then filing season began last week, and the ABA Tax Section 2022 Virtual Midyear Meeting began yesterday. There are no signs that things will slow down soon, except for (maybe) IRS notices.

Procedurally Taxing will continually provide comprehensive updates and information, but if you fall behind with your reading or struggle to keep up- I’ll be digesting each month’s posts from here on out.

January’s posts highlighted the NTA’s Report, the ongoing impact of the pandemic, and recent Circuit splits.

National Taxpayer Advocate’s Report

NTA Report Released: Essential Reading: The Report is available and contains new features, including an enhanced summary of the Ten Most Serious Problems and a change in the methodology used to determine the Most Litigated Issues.

What are the Most Litigated Issues and What’s Happening in Collection?: A closer look at the Most Litigated Issues. EITC issues are often petitioned but rarely result in an opinion, suggesting that most are settled before trial. In Collection, lien cases referred to the DOJ have declined substantially over the years corresponding with the decline in Revenue Officers and resources.

Who Settles Cases – Appeals or Counsel (and Why?): An analysis of data on the number of Tax Court cases settled by Appeals or Counsel. An increasing percentage of settlements are handled by Counsel, but why? Possible reasons and possible solutions are considered.

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Where Have Tax Court Deficiency Cases Come from in the Past Decade?: Most deficiency cases have come from correspondence exams of low- and middle-income pro se taxpayers. The focus of IRS examinations over the past decade has influenced the cases that end up in Tax Court. A shift in focus may be coming as IRS seeks to hire attorneys to specifically combat syndicated conservation easements, abusive micro-captive insurance arrangements and other tax schemes.

The Melt – Cases That Drop Away in Tax Court: Around 20% of Tax Court cases get dismissed each year- likely due, in part, to untimely filed petitions. Also due to a failure to prosecute, that is the petitioner abandoned the process somewhere along the way. Ways to address this issue are worth exploring, such as increasing access to representation and implementing a model utilized by the Veterans Court of Appeals.

Supreme Court Updates and Information

Who Qualifies as Press and the Boechler Supreme Court Argument Today: Being consider a member of the press comes with benefits, including the option to attend Supreme Court arguments with a press day pass when Covid-restrictions end. In lieu of being there in person, real-time broadcast links of Oral Arguments are made available on the Supreme Court website.

Transcript of Boechler Oral Argument: A link to the transcript of the Boechler Oral Argument is provided and Keith shares his in-person experiences observing the Supreme Court and the options available to others who are interested in doing so when Covid-restrictions end.

Pandemic-Related Considerations

Refund Claims and Section 7508A: A well-informed analysis of the disaster area suspensions under section 7508A and the refund lookback limits. Does the language in section 7508A allow for an extended lookback period? The IRS Office of Chief Counsel doesn’t think so, but TAS has recommended that Congress amend section 6511(b)(2)(A) for that purpose, and there is an argument that a regulatory solution is already available.

 Making Additional Work for Yourself and Others: The IRS has been cashing taxpayer payments without acknowledging receipt of the associated return. This improper recordkeeping resulted in the IRS sending CP80 notices to taxpayers requesting duplicate returns. This created more work for the IRS, practitioners, and clients. The IRS, however, recently announced it would stop doing this, as summarized directly below.

IRS Announces Stoppage of Notice to Paper Filers Who Remitted Payment and Tax Court Announces Continued Zooming: The IRS will stop requesting duplicate returns from paper filers who remitted payments with their original returns. Members of Congress also made specific requests to the IRS with the goal of providing relief to taxpayers until the IRS backlog is resolved, including temporarily halting automated collections, among other things. The Tax Court announced all February trial sessions will be by Zoom.

Practice and Procedure Considerations

“But I’ve Always Done It That Way!” Practitioner Considerations on Subsequent Year Exams: A TIGTA recommended change to IRS procedure may increase the audit risk for taxpayers who do not respond to audit notices. There is no blanket prohibition on telling clients about audit rates and general likelihoods of audit, so practitioners should be able to advise their clients of this potentially emerging risk and ways to avoid it.

New Rules in Effect for Refund Claims For Section 41 Research Credits Raise A Number of Procedural Issues: New rules for research credit refund claims require extensive documentation which increases costs and the risk of a deficient claim determination. Procedures for determinations were issued at the beginning of the month and have generated concern among practitioners because a determination cannot be challenged with a traditional refund suit and because the IRS modified regulatory requirements without utilizing formal notice and comment procedures.

Tax Court News

Tax Court Going Remote for the Remainder of January[and February]: January calendars (and now February, as mentioned above) scheduled in-person sessions have switched to remote sessions due to ongoing Covid-concerns.

Tax Court Orders and Decisions

The Tacit Consent Doctrine May Extend Far Beyond Signing a Joint Return: The Court in Soni v. Commissioner, allowed the tacit consent doctrine (where facts and circumstances led to finding of consent on the part of a non-signing spouse) to apply to returns, power of attorney authorizations and forms 872. The doctrine could be expanded in future cases, so it should be kept in mind when representing innocent spouses.

Timely TFRP Appeal?: The administrative 60-day deadline to respond to TFRP notices is discussed in an order requesting that the IRS supplement its motion for summary judgment. The origin of a deadline is important. Jurisdictional deadlines are different from administrative deadlines, and cases involving administrative deadlines can be reviewed for abuse of discretion.

Circuit Court Decisions

Eleventh Circuit finds Regulation Invalid under APA: The Eleventh Circuit, in Hewitt, calls into question who has the burden to show that a comment made during a notice and comment period: 1) was significant, and 2) consideration of it was adequate. The Tax Courts says it’s the taxpayer, the Eleventh Circuit says it’s the IRS, but what does this mean for everyone else?

The Fifth Circuit Parts Ways with the Ninth Circuit Regarding the Non-Willful FBAR Penalty: A difference in statutory interpretation results in a recent split between the Ninth and Fifth Circuits over whether the non-willful penalty under section 5321(a)(5)(A) should be assessed on a per-form or per-account basis. The Ninth Circuit held that legislative history, purpose, and fairness support a per-form penalty, but the Fifth Circuit held that Congress’ intent and the objective of the penalty support a finding that it’s per-account.

Goldring is Back with a Circuit Split: The Fifth Circuit addresses how underpayment interest should be computed on a later assessed deficiency when a taxpayer elects to credit forward an overpayment from an earlier filed return. It held “a taxpayer is liable for interest only when the Government does not have the use of money it is lawfully due.” This contrasts with other Circuits which have decided that the law allows the IRS to begin computing interest when an amount is “due and unpaid.”

Polselli v US: Circuit Split on Notice Rules for Summonses to Aid Collection: A recent Sixth Circuit decision continues a circuit split on a fundamental issue in IRS summons practice: does the IRS have to give notice when it issues a summons on accounts owned by third parties in the aid of collecting an assessed tax? The Sixth, Seventh and Tenth Circuits read section 7609 notice requirements and its exclusion without limitations, which contrasts with the Ninth Circuit’s more narrow interpretation.

D.C. Circuit Narrows Tax Court Whistleblower Award Jurisdiction: The D.C. Circuit overturns Tax Court precedent by holding that the Tax Court lacks jurisdiction over appeals of threshold rejections of whistleblower requests. Since all appeals of whistleblower cases go to the D.C. Circuit, the Tax Court is bound by the decision unless the Supreme Court takes up the issue. 

Liens and Judgments

Local Taxes and the Federal Tax Lien: The effect of the Tax Lien Act of 1966 was reiterated in United States v. Tilley.  Section 6323(a) sets up the first in time rule of law, but 6323(b) provides ten exceptions, including one for local property taxes, which allows a local lien to defeat a federal tax lien even when the local lien comes later in time.

Tax Judgments and Quiet Titles: Tax judgments can benefit the IRS beyond the 10-year federal collection statute of limitations. Boykin v. United States, like Tilley, involves real property held by nominal owners. The taxpayer brought suit to quiet title, the IRS counterclaimed that the money used to purchase the property was fraudulently transferred, and the taxpayer argued that a state statute of limitations prevented the IRS’s argument. The Boykin Court disagreed with the taxpayer relying upon Supreme Court precedent that state statutes do not override controlling federal statutes.

Bankruptcy and Taxes

Diving Beneath the Surface of In re Webb: An in-depth analysis of a technical bankruptcy issue that can impact taxes involving an election under section 1305, which allows postpetition tax claims to be deemed prepetition claims. The classification of the claims impacts whether a subsequent IRS refund offset violates a debtor’s rights.

Eleventh Circuit Finds Regulation Invalid Under the APA

One of the most significant tax cases of 2020 was Oakbrook Land Holdings, a case involving a challenge to regulations in a conservation easement deduction dispute. In Oakbrook, the Tax Court held that the regulation was properly promulgated under the Administrative Procedure Act. In today’s guest post Monte Jackel of Leo Berwick discusses  Hewitt, an important case out of the 11th Circuit, where the appellate court reached a different conclusion. Les

In a prior post on May 15, 2020 “Conservation Easement Donation and the Validity of Tax Regulations”, I wrote about the Oakbrook Land Holdings Tax Court case (154 T.C. 180 (2020), decided a few days earlier.

The Oakbrook court dealt with the same regulation as the Hewitt case (No. 20-13700, 11th Cir. 2021) that is the subject of this follow up commentary.

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The issue presented is whether, as required by the Administrative Procedure Act (APA), the IRS considered and responded in the final regulations to all “significant” comments to the proposed regulations relating to the extinguishment rule under the conservation easement deduction regulation that requires a proportion of the extinguishment proceeds to include donor improvements to the property. The IRS and Treasury in the final regulations did not address comments that addressed this rule in its “concise general statement of its [the regulation’s] basis and purpose”. This concise general statement is supposed to allow one to see the objections made to the proposed rule and why the agency, in this case the IRS, reacted to those comments as it did. The IRS, just like any other federal agencies, is required to give adequate reasons for its decisions and it is required to rebut vital relevant or significant comments. All the IRS is to state in the final regulation preamble that it “considered all comments” but the IRS did not respond specifically to the comment.

The Tax Court in Oakbrook Land Holdings ruled that either the comment not specifically responded to was not significant or, if it was significant, it was adequately responded to by the general statement that it considered all comments and by taking into account the administrative record. The Tax Court in that case gave the IRS the benefit of the doubt. However, the Eleventh Circuit Court of Appeals in Hewitt required a specific response to the comments made on the issue and put the burden on the IRS to show that it had adequately responded. Since the latter court held that the response was not adequate, the court held that the regulation was arbitrary, capricious, and/or an abuse of discretion under APA 706(2)(A) and was thus invalid.

And so, what does this all mean? There appear to be two choices. Either the taxpayer has the burden to establish that the comment made was significant and that it was not adequately addressed and the administrative record can be used to justify the IRS action. That is Oakbrook Land Holdings. The other approach is that the IRS must establish why the comment was not significant and why its response was adequate. That is Hewitt. And the reviewing court has the last word on whether the comments made were or were not significant-a huge dose of second-guessing.

What does this all mean for the future? The Hewitt case was an Eleventh Circuit opinion and so, under the Golsen rule, the Tax Court does not have to follow that case for taxpayers not within that circuit. But given the circuit court opinion, will this opinion effectively require the IRS to respond to almost every comment made and give a reason directed to that comment or otherwise risk invalidation of the regulation? That seems to be the risk the IRS will be taking if it does not act conservatively and respond to everything. The very recent foreign tax credit regulations seem to have taken the respond to everything approach and that does add pages and pages onto the regulation and become repetitive in a number of cases.

To make matters worse, the reviewing court will have the final say on what was significant and whether it was adequately responded to. Trying to avoid this issue by saying that a regulation was not a legislative rule does not seem to be a favored position in the courts. Can the OIRA review process help avoid mis-steps by the IRS in this area? That also remains to be seen but as I understand it that is where the burden of compliance should be in the current regulation process.

Will this process eat up precious IRS resources better spent elsewhere? Yes it will. Is it good for the tax system? That remains to be seen. The door is now wide open for taxpayers to step in and test the waters.

Update on CIC Services: The Scope of Relief Available if A Court Finds That An Agency’s Rulemaking Violates the APA

Following the Supreme Court decision in CIC Services, the matter was remanded back to the district court. Last month the district court granted CIC Services’ motion for preliminary injunction, finding that the Notice 2016-66 was a legislative rule and its issuance violates the notice-and-comment provisions of the APA.  Following CIC Services’ victory, however, it filed a motion to reconsider.

Why would CIC file a motion for reconsideration? Last month’s district court’s opinion narrowly enjoined the IRS from enforcing the Notice against CIC Services. In its motion, CIC Services has requested that the court broaden the relief and issue a national outright injunction that would prevent the IRS from enforcing it against anyone.

Readers may recall that in CIC Services: Now that AIA Issue Resolved, On to Some Meaty Administrative Law Issues I discussed the lurking issue as to the extent of any relief that a court could grant if it were to find that the IRS issuance of the notice violated the APA. In that piece I pointed to an excellent Notice & Comment blog post, Do you C what I C? – CIC Services v. IRS and Remedies Under the APA. In the post Professor Mila Sohoni provides context on the debate within administrative law. She argues that a district court has the power to set aside the Notice for everyone and should not be constrained to focus only on the application of the Notice to the plaintiff.

In the motion CIC Services acknowledges that there is uncertainty as to the scope of relief but argues that the court’s power to vacate the notice is broad (citing to the Notice & Comment blog). It also discusses the particular harm that CIC Services faces in the absence of a national injunction, including how it must incur costs to assist its nationwide clients who still have to comply and how the order “does not explicitly relieve CIC Services of the on-going and compulsory record-keeping that Notice 2016-66 requires.”

This is an important issue not only for tax administration. It has wide implications for administrative law.

CIC Services: Now that AIA Issue Resolved, On to Some Meaty Administrative Law Issues

We have followed the CIC Services case for years, starting with the first district court opinion through the recent Supreme Court opinion. Following the unanimous Supreme Court opinion, the case has been remanded to the district court, and CIC Services has filed a motion for a preliminary injunction.

There are a few important issues at the intersection of tax procedure and administrative law that the court will address. For example, is the Notice a legislative rule under the APA, and if it is, do the regulations that allow the IRS to define reportable transaction through other IRB guidance satisfy the notice and comment requirements? (For brief background, see my post here.)

There is another issue that has received less attention in the tax community lurking in the CIC Services case. That issue pertains to the nature of the relief that a court can grant when it finds that the IRS (or another agency) has failed to comply with the procedural requirements under the APA.  That gets to the scope of an injunction that a court may issue if it finds that CIC Services is correct on the merits.

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The IRS in the briefing following the remand has argued that if CIC Services prevails on getting the court to issue an injunction, any injunction should be limited to CIC Services and not have universal application. CIC Services, however, has argued for a broader sweep, and has asked that the court set aside the Notice not only for it specifically, but for everyone.

This an issue that is hot among some administrative law scholars. I flagged the issue in a post earlier this summer. In that post I discussed the terrific Notice & Comment blog post, Do you C what I C? – CIC Services v. IRS and Remedies Under the APA. In the post Associate Dean and Professor Mila Sohoni of the University of San Diego Law School provides context on the debate within administrative law and argues that a district court has the power to set aside the Notice for everyone and should not be constrained to focus only on the application of the Notice to the plaintiff.

Essentially Professor Sohoni notes that the Supreme Court in CIC Services views the request for injunctive relief and the request to set aside the Notice as two sides of the same coin. Professor Sohoni has written more extensively on the broader topic concerning the remedy of universal vacatur in APA challenges. See, for example, a 2020 George Washington Law Review article, The Power to Vacate a Rule.

As the briefing on the preliminary injunction has concluded, the court is likely to issue an order soon.

How Tax Regulations Are Made

Today’s post is by frequent guest poster Monte Jackel, Of Counsel at Leo Berwick. In today’s post, Monte discusses his reactions to an article written by Shu-Yi Oei of Boston College Law School and Leigh Osofsky of the University of North Carolina at Chapel Hill. A few years ago they wrote an insightful article on the process that led to the 199A regs; Keith discussed their article in a 2019 post. In this post Monte draws on his decades both in and out of the government to suggest changes to the process of reg drafting. Les

A relatively recent article (Shu-Yi Dei and Leigh Osofsky, Legislation and Comment: The Making of the §199A Regulations-Article ) provides a useful discussion of how public commentary, both pre and post the issuance of proposed regulations, affects the ultimate content of final Treasury regulations. 

For me, having experienced this process firsthand, the following reforms should be seriously studied and if appropriate instituted:

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1. The most important reform that could be instituted would require the Congress to amend the Freedom of Information (FOIA) part of the Administrative Procedure Act, 5 USC 552 (APA), to require disclosure by the tax agency holding the government record, the IRS and/or Office of Chief Counsel, to proactively disclose those records to the public (either through the Federal Register or the Internal Revenue Bulletin), instead of the current law which requires that the record relating to pre-proposed regulations comments be disclosed to the public  only upon a FOIA request (post-proposed regulations are generally required by law to be disclosed in the Federal Register as part of final regulations). What a reader of, for example, Tax Notes typically sees is that this tax publication was sent a separate copy of the comment letter or other government record so it could publish it in the public interest (which it often does). But the problem with waiting for a FOIA request to disclose government records is that often the requestor would need to know a record exists before requesting it. That is backwards. See references in the Internal Revenue Manual

2. Under 5 USC 552(f)(2), a “record” and any other term used in reference to information includes—(A) any information that would be an agency record subject to these requirements when maintained by an agency in any format, including an electronic format; and (B) any information described under subparagraph (A) that is maintained for an agency by an entity under Government contract, for the purposes of records management. The term “records” are defined in various statutes, including the Federal Records Act and the Freedom of Information Act.

Although there is a required collection of emails and such (and voice discussions should be documented as well) by the tax agency, all that is done at present, to my understanding, is to send the material (such as an email from an outside party on a substantive issue) to the Procedure and Administration units at IRS Chief Counsel to be available if and when there is a FOIA request. See IRM 30.11.1 FOIA Requests for Chief Counsel Records, and FOIA Guidelines.  This practice should be changed to make the disclosure of such records proactive without request to the agency. Appropriate FOIA protections would continue to apply.

3. There is a practice by some to take oral comments and not document them in writing or to return written materials to the presenter at a private meeting with outside parties and then take the position that FOIA is not required-ever. That practice should be negated via a change to the APA. 

4. Pre-proposed regulatory meetings and commentary should be discouraged unless immediate public disclosure also occurs. That is item 1 above. The argument against this is that no one will comment during that period if it became public but, assuming that is true, the question comes down to whether public disclosure is more important to the process than is feedback from outside technical experts and “those in the know”.  Those comments do add value but at what cost? 

5. The agency should have a duty to search for articles and similar commentary and take those comments and commentary into account in drafting proposed and final regulations. Due diligence is all this would require. Current law would allow articles to be ignored unless they are part of the proposed regulation comment process.

6. Most technical and substantive regulations have a very limited number of readers and there are few in number who will truly read and understand the regulations. In light of that reality, substantive regulations should, generally, be made more general principles oriented as compared to innumerable and detailed rules.