Supreme Court Grants Cert. to Decide Whether SEC ALJs Need to Be Appointed Under the Appointments Clause; SG Changes Position and Now Supports Required Appointment

We welcome frequent guest blogger, Carl Smith, who blogs today on a frequently discussed topic – the Appointments Clause and its application to employees of the IRS office of Appeals. Keith

In six prior posts since September 2015 (here, here, here, here, here, and here), I have blogged about the storm at the SEC over whether its ALJs need to be appointed under the Appointments Clause or are mere “employees”, who do not need to be appointed. This issue could spill over into whether the ALJs that the Treasury uses to try Circular 230 sanctions matters need to be, and are properly, appointed. I suspect that they may not be.

I noted that in the courts of appeals, the government took the position that the SEC ALJs were mere employees, so there was no problem in the fact that SEC ALJs had been issuing recommended rulings on administrative sanctions matters without having first been appointed. Two Circuits had split on this question: The Tenth Circuit held that SEC ALJs need to be appointed; Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016); while the D.C. Circuit held that they did not. Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277 (D.C. Cir. 2016). I correctly predicted that the Supreme Court would grant cert. to resolve this issue. In fact, the Court did so in Lucia on January 12, 2018. But, I never predicted that in the Solicitor General’s response to the cert. petition in Lucia he would change position 180 degrees and now argue that SEC ALJs have to be appointed. Presumably since the government was no longer seeking to reverse the ruling in Bandimere, the Court did not grant the government’s cert. petition in Bandimere.

This means that both of the parties to the Lucia case currently argue for its reversal. Although it has not done so yet, I suspect the Court will appoint an amicus to argue in favor of the ruling below, since the parties won’t. It is expected that Lucia will be heard and decided by the Court before its current Term ends on June 30.

Central to the Lucia case will be what the Court meant in Freytag v. Commissioner, 501 U.S. 868 (1991), when it held that Tax Court Special Trial Judges (STJs) were inferior officers of the United States who need to be appointed.


In Freytag, the Supreme Court held that the Appointments Clause did not prohibit the Tax Court’s Chief Judge from appointing STJs because the Tax Court was one of the “Courts of Law” mentioned in the Clause and because the Chief Judge could act for the Tax Court.  In reaching these rulings, the Supreme Court made a subsidiary holding that STJs are not employees of the government, but inferior officers who need to be appointed. To support its holding that STJs are officers, the Supreme Court cited the many judicial duties that STJs perform.  At the end of this section of the opinion, the Supreme Court also observed that STJs can enter final decisions in some cases under  § 7443A(c). It is this finality observation that has puzzled and split the lower courts.

In Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), a majority of a 3-judge panel of the D.C. Circuit held that the Supreme Court’s observation in Freytag that STJs can rule with finality in some cases meant that being able to make a final ruling was a but for requirement of officer status. Since FDIC ALJs could not enter final rulings, but simply made recommended rulings to the whole FDIC, the majority held that the ALJs were mere employees who did not need to be appointed. The third judge on the panel argued instead that, in Freytag, the Supreme Court had already decided that STJs were officers before it made the observation about STJs being in some cases allowed to enter final orders, so finality was not a but for requirement of an officer.

Like FDIC ALJs, SEC ALJs cannot make final rulings – at least where defendants appeal their proposed ruling to the whole SEC. In Bandimere, the Tenth Circuit disagreed with the Landry majority that being able to issue final rulings was a but for requirement of officer status. The Tenth Circuit held that the SEC ALJs performed nearly all the duties that STJs did, so were also officers who needed to be appointed.

In Lucia, citing Landry, the D.C. Circuit held that SEC ALJs need not be appointed because they did not have final ruling authority. After Bandimere was issued, Lucia moved for reconsideration of the ruling in his case by the full D.C. Circuit. He asked the D.C. Circuit to consider whether it should overrule Landry and agree with the Tenth Circuit in Bandimere. An en banc rehearing was granted. However, the en banc D.C. Circuit split evenly on the question, which left the original holding in Lucia intact. Lucia then sought cert.

In response to Lucia’s cert. petition, the new SG under President Trump surprisingly changed the government’s position – agreeing with the Tenth Circuit that the ability to issue final rulings was not a but for requirement of officer status. The SG felt that the SEC ALJs were sufficiently like Tax Court STJs to have to be appointed. Thus, the SG also sought reversal of the D.C. Circuit. The SG asked the Court to grant cert. in Lucia, even though the parties were no longer in disagreement. (Appointments Clause issues are not jurisdictional, so the courts can accept the parties’ waiver of Appointments Clause arguments.) The SG thinks there is a need for Supreme Court guidance in this area – including issues not discussed below as to removal powers for ALJs, which may now be problematic. A number of Court watchers thought that the issue of appointment of SEC ALJs was now moot and that cert. might not now be granted. However, they were wrong.

But, in granting cert. in Lucia, the Supreme Court did not ask the parties to brief any additional questions – e.g., involving removal powers.

Possible Effect on Appeals Office Personnel Issuing CDP Rulings 

In addition to Lucia’s possible impact on ALJs used by Treasury to hold Circular 230 sanctions hearings, the opinion may have an impact, as well, on an issue that I raised over a decade ago. In a CDP case that I had in the Tax Court, I moved to remand the case to have the CDP hearing redone by a Settlement Officer and Appeals Team Manager who were both appointed consistently with the Appointments Clause. I noted that no Appeals personnel were then appointed. But, citing Freytag, I argued that the duties of Appeals personnel in conducting statutorily-mandated CDP hearings were so similar to the duties of an STJ that such Appeals personnel were also officers for purposes of the Appointments Clause.

In Tucker v. Commissioner, 135 T.C. 114 (2010), the Tax Court rejected my argument for several reasons. For one thing, the court felt that the positions in Appeals were not “established by law” for purposes of the Clause. But, also, the Tax Court held that Appeals personnel in CDP did not make final rulings, and, citing Landry, the Tax Court held that the ability to make a final ruling was a but for requirement of officer status per Freytag.

I appealed Tucker to the D.C. Circuit. That court, at 676 F.3d 1129 (D.C. Cir. 2012), affirmed the Tax Court, but on different reasoning. The D.C. Circuit was troubled by the idea that Congress might be able to get around the Appointment Clause by assigning duties that had to be performed by a constitutional officer to preexisting employees in the bureaucracy. Therefore, the D.C. Circuit bypassed issuing any ruling on whether or not the position of CDP hearing person was “established by law”. The D.C. Circuit next held that collection issues were of too minor importance to require an officer. As to underlying tax liability rulings that could be made in CDP under section 6330(c)(2)(B), Freytag clearly would treat those rulings as ones for which an officer was required. Disagreeing with the Tax Court, the D.C. Circuit held that Appeals Office personnel issuing underlying liability rulings issued rulings with “effective finality”. However, the D.C. Circuit held that the ability to exercise discretion in a tax liability ruling was a but for requirement of officer status – one that was not met by Appeals personnel who ruled under the thumb of IRS Counsel attorneys. It was this lack of discretion that undermined the idea that Appeals personnel in CDP were officers needing to be appointed.

I thought that the D.C. Circuit’s ruling that Appeals exercised little discretion in making CDP underlying liability rulings was not factually supported, and I sought cert. But, cert. was denied.

I had not expected to again litigate the Tucker issue, but Florida attorney Joe DiRuzzo has decided that he wants to relitigate the issue in the Tax Court and in courts of appeals – hoping to create a Circuit split. Before the Supreme Court granted cert. in Lucia, Joe had made motions to remand in (at the moment) four different pending Tax Court CDP cases, arguing that the hearings should be redone by appointed Appeals personnel. The cases are: Thompson, Docket No. 7038-15L (appealable to the Ninth Circuit); Elmes, Docket No. 24872-14L (appealable to the Eleventh Circuitt); Fonticiella, Docket No. 23776-15L (appealable to the Eighth Circuit); and Crim, Docket No. 16574-17L (appealable to the D.C. Circuit). If the Supreme Court agrees with Lucia and the SG that issuing final rulings is not a but for requirement for officer status, then the Tax Court will have to at least revise its rationale for its holding that CDP hearing personnel need not be appointed. Perhaps, after reading the Supreme Court’s Lucia opinion, the Tax Court may also have to rule that CDP hearing personnel need to be appointed. In its lengthy response to the motion to remand (filed on January 5, 2018 in the Thompson case – i.e., a week before the Supreme Court granted cert. in Lucia), the IRS discusses the possible relevance of Lucia and the SG’s change in position, but argues that Landry, Lucia, and both Tucker opinions are, at least at the moment, still good law.


How Does Appeals Notify You of Their Involvement in the Case

Over the past year, the decision by Appeals to no longer hold face to face meetings and the subsequent partial reversal of that decision served as the highest item of interest regarding Appeals. Taxpayers with cases involving controversies large enough to warrant assignment to an Appeals Officer in the field can now obtain a face to face conference with Appeals again. Taxpayers whose cases do not have sufficient dollars at issue continue to be sent to the back of the bus because the low dollar amount of their controversy means their cases get assigned to low graded Appeals employees who reside in the six Service Centers where Appeals has employees.

One of the concerns that Appeals has in allowing the case of a taxpayer with a small amount of tax at issue to meet with a “live” Appeals employee in a face to face meeting is that the case is scored for assignment to a low graded Appeals employee and in the local offices Appeals does not have low graded employees, or enough low graded employees, so it needs to send these case to the Service Centers where the low graded Appeals employees reside. Because of the limited geographical availability of these employees and the fact that Service Centers do not really accommodate meetings with taxpayers, taxpayers with smaller dollars at issue continue to have the pleasure to deal with the IRS via phone and fax just as they did during the examination phase of their case.

On the listserv for clinicians who work on cases involving low income taxpayers, a new issue concerning Appeals emerged recently. The new issue involves the manner in which Appeals notifies the taxpayer, or the representative, of the assignment of the case in Appeals. Several individuals posting to the listserv reported receiving contact via phone instead of mail of the assignment of the Appeals employee and some reported that in that phone contact the Appeals employee also wanted to discuss the merits of the case. Because the phone contact came “out of the blue” with no opportunity for the person receiving the call to prepare for the discussion, the representatives receiving these calls invariably sought to put off the discussion of the case with varying degrees of success. In questioning the Appeals employee about the approach of calling out of the blue to discuss a case with prior correspondence, some representatives received the explanation that Appeals no longer sent letters in order to save money.


Donna Hansberry, the Director of Appeals, attended the most recent Low Income Taxpayer Clinic conference on December 7 to discuss the interplay between Appeals and those representing low income taxpayers. She did not seem to be aware of any changes within Appeals that stopped the employees from sending letters to taxpayers and representatives upon assignment of the case and that encouraged Appeals employees to “cold call” taxpayers or representatives seeking to discuss the case. She asked that attendees send her information about this practice and also solicited comments on what Appeals should adopt as the best practice for notifying taxpayers and representatives of the case assignment as well as notifying them of the time (and for taxpayers owing sufficient money, the place) for holding the Appeals conference.

One of the slides she used in her presentation showed that the number of Appeals employees in the past three years. She said that the number has dropped by 1/3 since 2010. The number of cases has dropped but not by the same percentage.

Another slide she displayed showed the breakdown of the caseload in Appeals which is now heavier on collection cases than examination cases.

Because Donna solicited feedback on this issue, PT will be glad to collect feedback and forward it to her. If you have experienced the type of cold call described above, let us know by sending in a comment. We also will forward to her suggestions on how to make the interaction with Appeals work best. Do you want a letter immediately upon assignment of the case to an Appeals employee letting you know the name, address, fax number and phone number of the employee and then another letter setting up the conference? Is there a way to reduce the number of letters and still allow you to properly prepare for the Appeals conference? Let us know your thoughts so we can pass them along or pass them along directly to Appeals.


Appeals Backtracks on Removing Face to Face Conferences

We discussed last year around this time that Appeals was putting in place procedures that severely limited the opportunity for face to face meetings. Practitioners strongly opposed Appeals’ decision. While this past summer Appeals announced that it was piloting a web based virtual conference option, in the last few weeks leadership in Appeals has told practitioners that it is going to offer face to face in person conferences again for cases in field offices. To reflect the change, we understand that Appeals will soon publish interim guidance. While Appeals has decided not to offer virtual face to face meetings for the issues it handles in Service Centers it did not rule it out in the future if it could work out logistical barriers to doing so.

The decision to review and allow taxpayers the demonstrates that Appeals’ meetings with practitioner groups (such as the ABA Tax Section) was not for show and that despite losing 1/3rd of its staff since 2010 Appeals is committed to trying to work out cases in the most effective manner.


Court Sentences Kroupa; NTA On Appeals’ Changes; Tax Reform Still Percolating

Kroupa Sentenced

Earlier this week Keith discussed the differing views that former Tax Court Judge Kroupa and the government had on sentencing. Yesterday the court, agreeing with the government, sentenced former Judge Kroupa to 34 months. Her ex-husband received 20 months. The Minnesota Lawyer recounts the tale; for those interested our prior posts link to the underlying documents in the case.


NTA Blogs on Appeals’ Changes

I am a keen reader of what the National Taxpayer Advocate writes; her take on tax administration often offers both an insider and outsider perspective. Her recent blog post on Appeals’ changes in bringing in Compliance and Counsel to Appeals conferences does just that; she appreciates what motivated Appeals to make the changes, and then discusses and reflects on why practitioners, such as the ABA Tax Section, have raised concerns. I recommend a full read of this post but this snapshot shows some of the issues she has with the new procedures:

The new approaches being put into place by Appeals make it appear as though Appeals no longer trusts its own Hearing Officers and that these Hearing Officers require the guidance and oversight of Counsel and Compliance to reach the correct determinations. As a former practitioner, I would think long and hard before bringing a case to Appeals under these new rules.

Tax Reform on the Horizon (and Some Thoughts on Tax Administration)

There is lots of talk this week on the Senate’s proposed health care legislation. On a separate legislative track is deeper tax reform for business and individual taxpayers. On Procedurally Taxing we steer clear from most of the big macro policy issues underlying the tax reform policy choices. We have, however, noted that many reform proposals do implicate key issues of tax administration. For example, last year Keith discussed the House Blueprint for tax reform and its proposal to add a new small claims court to hear tax cases.

The other day Speaker Ryan offered his tax reform pitch and assurance that reform will happen in 2017 as part of a talk he gave to the National Association of Manufacturers. Now, I have scratched my head thinking about border adjustability and contemplated the possible ways that service providers may try to shift income into pass through entities in light of some of the specific proposals that many are kicking around. But my ears perked up when I heard the Speaker justify, at least in part, individual tax reform on the difficulties Americans face when they file their tax returns:

Look at what happens during tax season. I could describe the complexity of the code all day, but what really defines our tax code is that sense of dread that you feel. You know that feeling?

You have to navigate long, complicated forms to file your returns. You need to wade through a seemingly endless amount of deductions and credits, each with its own rules and eligibility requirements.

And then, after you tally up those deductions, you are placed in up to seven different federal tax brackets based on your income level.

And at the end you hope—I mean really hope—that you do not owe a bunch this year. You hope, because you do not really know ahead of time. How could you? This whole system is too confusing, and just too darn expensive.

The solution, according to Ryan is to “start over.”

First, we will eliminate harmful, burdensome taxes including the death tax and Alternative Minimum Tax.

Next, we will clear out special interest carve outs and excessive deductions, and focus on keeping those that make the most sense: home ownership, charitable giving, and retirement savings.

We will consolidate the existing seven brackets into three, double the standard deduction, and simplify things to the point that you can do your taxes on a form the size of a postcard. Wouldn’t that be nice?

And finally—and most importantly—we will use the savings from eliminating these loopholes to lower tax rates.

Let me say that again: We are going to cut taxes

I am intrigued by the Speaker’s reference to the way that Americans meet their annual tax return obligations. A brief article  from Bloomberg earlier this year estimates that only 5 million out of the 165 million or so individual returns are done manually.The overwhelming majority of Americans today do not wade through IRS forms. Instead, they answer user friendly prompts generated by increasingly freely provided software; those that do not use a DIY product either pay a preparer or use free preparers at VITA or TCE sites.

The Speaker is thinking about taxpayer burden using a 20th century model; fewer and fewer taxpayers actually work with an actual IRS form. The bigger point the Speaker makes though I think is that despite the decreasing mental burden on Americans in actually filing their tax returns, many Americans are clueless going into filing season when it comes to understanding their individual and family tax situation. Many Americans, especially lower and moderate income Americans, do not grasp the hodgepodge of credits and deductions that Congress has put in the Code for one reason or another.

If thinking about tax administration when it comes time to pass reform, Congress should simplify our tax system so the average American can understand what their return reflects and how their actions may in fact align with tax law. When thinking about tax reform, Congress should strongly consider paring back the myriad credits and deductions that leave most Americans befuddled. In addition, while Congress may choose (and have good reason) to use the IRS to administer social policy provisions, including some credits, actually aligning the substantive provisions with the reality of Americans’ lives would contribute to a tax system that the IRS could administer and the public could understand.

Fast Track Mediation for Collection

In Rev. Proc. 2016-57 the IRS announced a new fast track mediation specifically designed for collection cases (FTMC).  The program will allow taxpayers with issues in offer in compromise (OIC) cases and trust fund recovery penalty (TFRP) cases to go to a mediator in Appeals to try to resolve an issue in their case which could provide the basis for overall resolution if the parties could reach agreement on that issue.  I do not know how much demand exists for this type of mediation, but the effort to provide mediation in these fact intensive situations seems like an idea worth trying.


The Rev. Proc. points out that fast track mediation for SBSE cases has existed as a possibility since 2000 and the program included collection cases; however, mediation occurred in only a small number of collection cases.  In 2011 the IRS introduced fast track settlement for examination cases but that initiative did not include collection cases.  The idea for use of Appeals in FTMC does not include giving the Appeals employee settlement authority but rather to have them serve as a mediator acting as a neutral party to assist the taxpayer and the collection function in reaching agreement on a point of dispute.

Collection and Appeals will jointly administer the FTMC program.  Because SBSE handles all of the collection cases for the IRS, taxpayers falling into any of the stovepipes into which the IRS divided itself in 2000 can use FTMC.  The IRS envisions that FTMC will take place “when all other collection issues are resolved but for the issue(s) for which FTMC is being requested.  The issue(s) to be mediated must be fully developed with clearly defined positions by both parties so the unagreed issues can be resolved quickly.”  To use FTMC, both the IRS and the taxpayer must agree.  Neither party can force the procedure on the other.

The Rev. Proc. provides a list of issues in OIC and TFRP cases for which it contemplates FTMC use.  It does not state whether the list provides the exclusive opportunities for use of FTMC but the manner in which the Rev. Proc. is written makes me believe that engaging in FTMC for issues not on this list will rarely, if ever, occur.  For OIC the list includes the following issues:

  • Valuing the taxpayer’s assets, including those held by third parties;
  • Determining the amount of dissipated assets that the IRS should include in the reasonable collection potential (RCP) calculation;
  • Deciding whether the facts warrant a deviation from the national or local expense standards;
  • Determining the taxpayer’s proportionate interest in jointly held property;
  • Projecting the amount of future income based on projections other than current income;
  • Calculating the taxpayer’s future ability to pay when the taxpayer lives with and shares expenses with a non-liable person;
  • Evaluating doubt as to liability cases worked by Collection, e.g., a case involving TFRP; and
  • A catch-all provision that uses as an example whether a taxpayer’s contributions to a retirement savings account are discretionary or mandatory.

The TFRP list includes the following issues:

  • Whether the person meets the test as a “responsible person” of the business that failed to pay over the trust fund taxes;
  • Whether the person willfully failed to pay over the collected taxes or willfully attempted to evade or defeat the payment; and
  • Whether the taxpayer properly designated a payment.

The Rev. Proc. explains when FTMC will not apply:

  • To determine hazards of litigation or use the Appeals Officer’s settlement authority;
  • For cases referred to the Department of Justice (remember that once a case is referred to the Department of Justice settlement authority resides with the DOJ and while DOJ case refer a matter back to the IRS to obtain the views of the IRS, DOJ has total control of the outcome of the case);
  • For cases worked at an SB/SE Campus site (because almost all OIC cases are worked at campus sites in Brookhaven and Memphis, I assume that this statement in the Rev. Proc. does not apply to the OIC units but the Rev. Proc. does not make this 100% clear. To my knowledge TFRP cases are worked by Revenue Officers assigned to field units and this restriction would not have much impact on TFRP cases.  So, I am having trouble understanding what this restriction covers)
  • To cases in the Collection Appeals Program (OIC cases should not use the CAP program and TFRP cases would only get to the CAP program after the assessment of the TFRP and not before the determination of the liability exists. So, this exclusion would not seem to have much impact);
  • To Collection Due Process cases (this restriction could have a significant impact in the OIC context because many practitioners submit offers during the CDP process. I prefer to submit offers during a CDP case over submitting them outside of CDP.  It is not clear to me why the IRS would exclude offers submitted during a CDP case unless it assumes that the Appeals employee assigned to the CDP case could or would serve this function.  My experience is that the Appeals employee plays a relatively tradition role in CDP cases and does not get involved during the consideration of the offer by the offer unit.  To the extent that having a mediator provides a useful function, it seems that the mediator could assist in an offer arising during a CDP case just as the mediator could assist in other offers);
  • To cases in which the IRS determines the taxpayer has put forward a frivolous issue whether or not the issue makes the list in Rev. Proc. 2016-2 (this makes sense given that either party can nix the use of a mediator and the IRS position here just puts down a marker that it will not go to mediation on something it considers frivolous);
  • To cases in which the taxpayer has failed to respond to IRS communications or to submit documentation (the IRS does not want to use FTMC to allow the taxpayer to stall);
  • To OIC cases involving Effective Tax Administration offers except in limited circumstances, to cases in which the taxpayer refuses to amend the offer yet provides no specific disagreement, to cases in which the IRS has explicit guidance and to cases in which Delegation Order 5-1 requires a level of approval higher than a group manager (almost all of these exceptions involving reasons for which the IRS would not agree to FTMC on an individual case basis and just set out markers so the taxpayer would know in advance);
  • To cases where FTMC use would not be consistent with sound tax administration; and
  • To issues otherwise excluded in subsequent guidance.

A taxpayer can request FTMC after full development of an issue and before Collection makes its final determination.  The IRS has created Form 13369 for use in requesting this process.  Both the taxpayer and the IRS must sign the firm in order to invoke the procedure.  In addition to the form the taxpayer submits a written summary of their position with respect to the disputed issues and the IRS will submit a written summary as well.  Once the parties have prepared the form and the statements, Collection sends the package to the appropriate Appeals office.  The Appeals office decides whether to accept the case for FTMC.  The taxpayer must consent to disclosure of their tax information to participants in the mediation and does this in signing the Form 13369.

The Rev. Proc. goes on to describe the manner of the mediation as well as the post-mediation process.  If the mediation succeeds, it should allow the OIC or the TFRP case to move forward to resolution by removing a roadblock to agreement.  If it does not succeed, the taxpayer still retains the right to appeal the denial of the OIC or to appeal the proposed determination of the TFRP.  In this regard, the mediation seems to have little downside for the taxpayer except to the extent the denial of the mediation is perceived to have solidified the view of Appeals and keep the taxpayer from having a productive Appeals conference at a later stage.    Because I have never used mediation, I have no basis for forming an opinion of the likely success of this new process.  Perhaps those who have used it in the Examination context can comment on how it might work in these two specific collection situations.  I suspect that training of IRS employees to spot situations in which it might assist and to have open minds about using the process will have a high impact on its success.  If the employees considering OICs or TFRP assessments would prefer to move the case to Appeals in a more traditional manner than to have a mediator from Appeals intervene in their cases, the program will not succeed.


Technology and the Tax System: A Less Personal Appeals Office Coming Our Way

In the last month, Appeals has announced plans to shift away from in-person conferences and institute a default rule that sets conferences for telephone and possible virtual conferences.  I will describe the changes and highlight some of the challenges facing the tax system as Appeals and other IRS functions shift even further away from in-person meetings.


Technology is rapidly changing how the IRS intersects with taxpayers. For example, in 2000, only 28% of individual income tax returns were e-filed. In 2005 for the first time more people e-filed than paper, and last filing season over 86% of individual income tax returns were e-filed. We are also seeing an uptick in self-prepared returns, especially among lower-income filers, reflecting perhaps a growing comfort level that many Americans seem to have for DIY and software.

We have discussed the IRS’s big plans for its Future State initiative which is at it describes its overall efforts to “take advantage of the latest technology to move the entire taxpayer experience to a new level.” At the recent ABA Tax Section meeting, the National Taxpayer Advocate announced that its end of year annual report will include its ideas of the future, informed by its public forums.

Appeals also has been thinking about how technology would alter the Appeals experience. It recently revised the Appeals section of the Internal Revenue Manual, and those changes reflect the decreasing use of in-person conferences to resolve Appeals cases. The new default method for Appeals’ conferences is by telephone.

IRM now provides that if a taxpayer requests an in person conference, the taxpayer instead should be offered a virtual service delivery (VSD) conference, if the technology is available (generally defined as within 100 miles of the taxpayer’s address) (for background on VSD, I wrote about it a couple of years ago in Technology and Tax Administration: The Appeals Virtual Service Delivery Program and the National Taxpayer Advocate in a section of the 2014 annual report offered suggestions on ways IRS could better use this technology).

What if a taxpayer within 100 miles does not want to use VSD technology? The new IRM provisions states that taxpayers will get an in-person conference only if the Appeals team manager (ATM) agrees either following a taxpayer or Appeals employee request. The provision then goes on to list factors that the ATM should consider in evaluating the request:

  • There are substantial books and records to review that cannot be easily referenced with page numbers or indices
  • The Appeals Team Employee  cannot judge the credibility of the taxpayer’s oral testimony without an in-person conference
  • The taxpayer has special needs (e.g. disability, hearing impairment) that can only be accommodated with an in-person conference
  • There are numerous conference participants (e.g., witnesses) that create a risk of an unauthorized disclosure or breach of confidentiality
  • An alternative conference procedure (e.g., Post Appeals Mediation (PAM) or Rapid Appeals Process (RAP)) involving separate caucuses will be used
  • Another IRM section specific to the workstream calls for an in-person conference

IRS is also working out the kinks in rules that will generally prevent taxpayers from getting an Appeals case reassigned from a campus to the field. That change would be consistent with the IRM changes already in place relating to initial requests.

Some Observations

I understand the allure of creating efficiency gains through technology and limiting personal contacts, especially as technology improves and Congress continues to squeeze IRS budgets.  I recently oversaw our Graduate Tax Program’s development of an online program. In that program we have created a curriculum that relies on interactive exercises and a real-time (synchronous) weekly session that allows for discussion and a robust give and take with students. I was skeptical of our ability to deliver a high quality experience. I no longer am. The technology is robust.  I am not a technology expert, but I know that it is not easy to teach in a distance platform. For each class we launch we spent hundreds of hours developing the class ahead of time, working with instructional designers who knew nothing about tax or law but who understood education and technology.

The IRS task is much more difficult than ours was in Villanova’s tax program. Our students are self-selecting. We train students in the technology before they start class. IRS generally and Appeals has a much more challenging task in front of it. This is especially true when many taxpayers who interact with IRS do so without the benefit of a representative.

There is substantial push back on these proposed Appeals changes, and especially the default rule setting conferences for telephone conferences and the somewhat narrow circumstances justifying transfer to an in-person meeting. For example in a letter released this past week the American College of Tax Counsel suggested that the Manual should be revised to allow for lower level Appeals employees to allow a transfer and reflect additional considerations for a transfer decision, including the complexity of the case, whether penalties are involved, the taxpayer’s compliance history, and the amount at issue relative to the taxpayer’s income. (For the ACTC letter see here.)

I am not enmeshed in Appeals’ cases these days so I do not know the precise impact of the changes. Nor do I know how flexible Appeals will be when taxpayers request to opt out of the default telephone conference. It does seem, however, that before implementing these rules Appeals would have been well-served to solicit greater input from stakeholders. That likely would generate better substantive rules as well as greater acceptance of the rules.

A good contrast for this is the NTA public forum approach with Future State. By discussing the findings and observations in the next annual report, the NTA ensures that there will be an IRS engagement with the concerns that the forums have raised. Assuming IRS engages with those findings in a serious way, that generates a transparency and discussion that in my view likely leads to better outcomes, and greater confidence and trust in the tax system.



When Does a Settlement Become Binding on a Party in the Tax Court (Part 3)

In prior two posts, the focus was on process and on settlements that were determined to bind the parties.  There are a number of decisions in which the court has decided not to bind the parties and I will end this three-part post with a discussion of those cases.  In general, the earlier the settlement is broken off, the less likely it will bind the parties.  Where all of the discussions about settlement take place outside the presence of the courtroom and the Court is not inconvenienced by the breaking of the settlement, the Court is unlikely to find it a binding agreement.


Cases Where Court Declines to Enforce the Settlement

Estate of Halder v. Commissioner – Petitioner sought to hold an agreement binding regarding the value of the estate’s interest in a partnership on the date of death.  The Appeals Officer spoke with a representative of the estate and stated that he had calculated a value of $1.2 million.  The Appeals Officer offered to fax the basis for the calculation and did so.  The fax mistakenly left off the final page of six which caused the impression that the Appeals Officer determined that the value was $1M and not $1.2M.  Petitioner’s representatives noticed the discrepancy but did not bring it to the AO’s attention.  The representatives then faxed an agreement to the $1M settlement proposal.  The parties never executed any agreement nor did they report to the Court a basis had been reached.  Petitioner then filed a motion to enforce the settlement based on the lower amount.

The court noted that settlement agreements could be reached through correspondence in the absence of a formal agreement citing Manko v. Commissioner.  “A prerequisite to the formation of an agreement is an objective manifestation of mutual assent to its essential terms” i.e., a meeting of the minds.  The court stated that if it enforced a settlement on these facts, it would “allow the estate to take an unfair advantage of a simple, honest error that was immediately corrected.” Citing to Adams, the court quoted “The party seeking modification, however, must show that the failure to allow the modification might prejudice him… Discretion should be exercised to allow modification where no substantial injury will be occasioned to the opposing party; refusal to allow modification might result in injustice to the moving party and the inconvenience to the Court is slight.”

The court pointed out that in eve-of-trial settings, the rules were much more stringent.  Eve-of-trial cases, such as Dorchester and Stamm, also involved the filing of stipulation of settled issues.  Allowing the enforcement of the terms of the mistaken fax would provide an inappropriate advantage to the estate and an injustice would occur.  The Court summed up its view by stating that:

We find those cases [Dorchester and Stamm] distinguishable from the instant case because: (1) The parties did not reach a meeting of minds, execute any settlement agreement, notify the Court that a settlement had been reached, or file a stipulation of settled issues with the Court; (2) the Court did not cancel or delay the trial date because of any settlement between the parties (i.e., the Court granted a continuance in this case because the estate’s expert was ill); and (3) Mr. Lindenbaum contacted Mr. Sherland with regard to the error the next day.


In a footnote, the Court added, “Even if we held there was a meeting of minds, we would deny the estate’s motion because the ‘settlement’ was never signed or approved by, or even submitted to, any Service official authorized to approve it.” The Manko case gives hope to petitioners seeking to hold the Service to a settlement not communicated to the Court through the formality of a pre-trial settlement; however, any tentative agreement must have the approval of the appropriate level of authority or it will fail as a basis for binding the Service to the settlement.

David v. Commissioner – The Appeals Officer sent to the taxpayer’s representative an audit statement and a Form 870-AD together with a transmittal letter that stated the taxpayers would be notified “when the proposed settlement is approved.”  The Appeals Officer did not receive back an executed Form 870-AD and later informed the representative that the settlement was no longer available.   The taxpayer sought to enforce the settlement in Tax Court.  The Court found there was no binding settlement because there was no indication that the appropriate person at the Service had approved the settlement and, in fact, the letter to the taxpayer indicated that the approval had not yet occurred.

The opinion offers nothing of great interest except the attempts by the taxpayer’s representative to turn the offer of settlement into a binding settlement on the basis of the delegation orders in the face of clear language in the transmittal letter that the Appeals Officer still needed authorization on his end. 

Mathia v. Commissioner – The parties in this collection due process case submitted the case fully stipulated under Rule 122.  Although the issue of when a settlement occurred arose in the context of a collection due process case challenging the timeliness of respondent’s assessment, the real issue focused on the TEFRA partnership proceeding that gave rise to the assessment.  Applying the same general rules of contract that control in other circumstances, the Tax Court determined that no binding settlement existed in the TEFRA case at the early date sought by petitioner, and held that the statute of limitations on assessment remained open at the time the Service assessed the liability at issue in the collection due process case.

“A settlement agreement can be reached through offer and acceptance made by letter, or even in the absence of a writing…. Settlement of an issue before the Court does not require the execution of a closing agreement under section 7121, or any other particular method or form….Settlement agreements are effective and binding once there has been an offer and an acceptance, filing the agreement with the Court as a stipulation is not required for the agreement to be effective and binding.”  This description certainly fits the circumstances of the settlement my clinic thought it had with the appeals officer.  There was an offer and acceptance of the offer and even the preparation of computations before the appeals officer suddenly, at a much later point, brought up for the first time the failure of the manager to assent to the agreement.

The court in Mathia carefully examined the correspondence between the partnership and the Service attorney to determine if it had a binding settlement.  It found that the correspondence confirms

that Greenwich and respondent reached an agreement in 1991 to enter into a settlement of the partnership-level proceeding, we remain unconvinced that the agreement was sufficiently fleshed out in 1991 to constitute a binding settlement agreement at that time.  The agreement in principle that was reached in 1991 set forth the parameters of a settlement, but the correspondence described above reflects that negotiations continued between respondent and the attorney representing the Swanton TEFRA partnerships to at least September 3, 1993.  Moreover, the correspondence indicates that the execution of a decision document resolving the partnership litigation depended upon the fulfillment of certain conditions such as the TMP’s ability to represent that all partners consented to the settlement.  Implementing and finalizing the proposed settlement required the collection and analysis of detailed information, the preparation of calculations and agreements, and in some cases, the execution of closing agreement by individual partners.

The court further found that even if it determined that the parties had entered into a binding settlement agreement, it would not qualify as an agreement between a partner and the Service within the meaning of IRC 6231(b)(1)(C).  This section requires an agreement between the Service and a partner not the Service and the partnership.  The case then goes into an analysis of the partnership provisions not relevant to the overall analysis of when an agreement becomes binding because the analysis here is peculiar to the partnership provisions.

Estate of Hunt v. United States, 103 Fed.Appx. 475 (4th Cir.2004)(unpublished opinion)(no free copy of the opinion located) – The taxpayer and the Service entered into a settlement which the parties knew would generate a refund through the operation of the carryback of a loss.  In the settlement discussions, both parties anticipated that the taxpayer would receive interest on the refund payment.  When the Service paid the refund, it paid no interest because the refund occurred within 45 days of the request.  The taxpayer brought suit in federal district court seeking interest arguing the Service was equitably estopped from arguing he should not receive interest and the district court agreed.  The Fourth Circuit reversed finding that employees of the Service could not create a right to interest through their misunderstanding of the application of the refund provisions that was not granted by the statute.  The case shows another limitation on settlement with the government.  Parties cannot rely on every statement that the Service employee makes and use that statement as a basis for relief not otherwise available.

Lessons on Settlement Agreements and Their Binding Effect

If you tell the Tax Court orally or in writing that a basis for settlement exists, you should expect the settlement to bind the parties in the absence of a mutual mistake or fraud.  The difficulty will compound if the Court cancels a scheduled trial time because of representation of settlement; however, do not expect to get out of a settlement reported to the Court just because the reporting of the settlement does not cause postponement of a trial.  You cannot use as an excuse for undoing a settlement that the computations did not turn out the way you expected.  Do the math before telling the Court you have a settlement unless you do not care what the math will bring.

You cannot expect the Court to bind the Service in the same way it might bind the petitioner.  If you expect to bind the Service, you must show that the properly authorized person gave assent to the settlement, see Burton v. Commissioner.  You cannot trick a party into settlement by seeking to use a mistake as the basis for binding a party.  If you know the other side has made a mistake in something you receive, better to clear the air before you try to argue for a binding settlement than to look slick in trying to enforce an agreement you know did not exist in the mind of the other party.  The Court will also not enforce provisions not contained in a settlement document contrary to the statute.

If the Service employee does not affirmatively state to you that a proposed settlement has the approval of the appropriate manager, assume that it does not.  Ask whether such authority exists before taking an offer to your client and suggesting to your client that the Service has agreed to a particular settlement.  The Court precedent suggests little reluctance in enforcing terms recited to the Court and very little appetite for enforcing settlements not yet brought to the Court.  If you want to bind the Service, get it in writing signed by the authorized official or get a statement made by a Chief Counsel attorney to the Court.  Anything else will create problems in trying to enforce it.  A twenty year old letter from practitioners to the Commissioner can still provide some useful basis for thought on this issue.


When Does a Settlement Become Binding on a Party in the Tax Court (Part 2)

During a negotiation with the Service about a case pending in Tax Court, when does the discussion cross the line from tentative agreement to binding agreement? It is very rare that the government will be bound by something other than a statement to the Court.  As with most instances of line drawing, describing the things that clearly fall on either side of the line comes much easier than finding the actual crossing point.  This post does not seek to discuss the settlement process in federal tax cases generally.  For an excellent and in depth article on that process from a broader perspective look at the article “Settling with the IRS: The Importance of Procedure” by Ronald Stein, 2005 Tax Notes Today 123-33 (June 28, 2005).


Clearly Binding Agreements

The poster child for cases clearly creating a binding agreement is the case of Dorchester Industries Inc. v. Commissioner.  The Dorchester case should have notoriety because it served as the springboard for the Service offshore effort which has so successfully identified offshore accounts.  If you want more background on the case and how it led to the volunteer offshore program through which the IRS has collected billions of dollars over the past decade, you can read my article about the agent who worked the Dorchester case.  Instead, the case is best known for the antics of the owner of the business after apparently reaching an agreement and the Tax Court’s response to those antics.

The taxpayer engaged in complicated offshore transactions. The examination went on for about eight years.  The parties obtained a special trial session from the Tax Court because they anticipated a several week trial.  On the eve of trial, the parties reached an agreement to resolve the case.  The agreement principally involved a concession by the taxpayer.  The parties went before the Court and told the Court they had reached a basis for settlement.  The Court accepted their representation and gladly cancelled the special trial session.  The Court ordered the parties to file a decision document within 30 days.  The Government computed the correct tax based on the agreement of the parties and sent the decision document to petitioner.  Petitioner’s owner refused to sign the decision document, or allow its counsel to do so, and the case went back before the Court.  The Service moved to enforce the agreement by entry of a decision and the Court granted the motion.  In doing so, Judge Halpern used strong language about the binding nature of a settlement agreement and that the settlement agreement served as a contract between the parties which the Court could enforce.

The opinion sets out the facts leading up to the agreement reported to the Court in great detail. It does not simply enter the decision without comment, but sets the scene by providing the actions of the parties prior to the moment of reporting the settlement to the Court.  The factual background in Dorchester, and in any case seeking to enforce a settlement, has significance on the decision of the Court to enforce a broken agreement between the parties.  The Court held an evidentiary hearing on the issues leading up to the report of settlement.  The opinion recounts in great detail all of the discussions leading up to, and including, the report to the Court that the parties had reached a basis for settlement and no longer needed the scheduled special trial session.  The Court then examined the actions of the parties in deciding whether these actions added up to an enforceable contract.  It found:

A settlement is a contract and, consequently, general principles of contract law determine whether a settlement has been reached. A prerequisite to the formation of a contract is an objective manifestation of mutual assent to its essential terms. Mutual assent generally requires an offer and an acceptance. “An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.” 1 Restatement, Contracts 2d, sec. 24 (1981).

In a tax case, it “is not necessary that the parties execute a closing agreement under section 7121 in order to settle a case pending before this Court, but, rather, a settlement agreement may be reached through offer and acceptance made by letter, or even in the absence of a writing.” Settlement offers made and accepted by letters are enforced as binding agreements.

The Tax Court went on to say that “A valid settlement, once reached, cannot be repudiated by either party; and after parties have entered into a binding settlement agreement, the actual merits of the settled controversy are without consequence.”

If you attend a Tax Court calendar call, you will almost always see several cases in which the Government offers to the Court a signed stipulation of settled issues or a signed decision document with only faxed signatures. Occasionally, you will see the parties stand in front of the judge and orally explain the basis for settlement issue by issue.  If signed documents get submitted to the Court by the Chief Counsel attorney, it is common that the taxpayers or their representative do not even appear.  The Court accepts these documents or the oral statements of agreed issues and orders the parties to submit a signed decision document within 30 or 60 days.  The Court also removes that case from the trial calendar by doing this and relieves the parties of the necessity of trial even though they have not perfectly completed the case at that point.  This normal action at a trial calendar sets up almost precisely the circumstances that existed in Dorchester.  If either party later tries to back out of the settlement after making that representation to the Court and after the postponement of the trial as a result of the representation, the Court will, in almost all cases, enforce the settlement reflected in the document lodged with the Court at calendar call or in the statements made by the parties.  Exceptions to the enforcement of the settlement will generally only occur if a party can show a misunderstanding of the agreement or some false statement in the formation of the agreement.  Several cases address these situations:

Other Eve of Trial Cases Where the Court Enforces Settlement

Clark v. Commissioner – Judge Haines faced a case similar to Dorchester with petitioners who sought to avoid having an oral statement of settlement as well as a written stipulation of settled issues become binding.  Because the parties anticipated a lengthy trial, they requested and received a special trial session in San Francisco as had the petitioners in Dorchester.  Before the scheduled trial date, taxpayers and counsel agreed to settlement.  The parties informed the Court of the settlement in a conference call, causing the court to cancel the scheduled trial session.  The parties then filed a stipulation of settled issues with the Court.  The attorney for the Office of Chief Counsel sent decision documents to petitioners’ counsel.  Petitioners said they disagreed with the computations but never explained why.  Petitioners found some additional evidence that would have allowed them to obtain a better settlement had they found it before the filing of the stipulation of settled issues. The court found they were bound, stating that, “This Court has declined to set aside a settlement duly executed by the parties and filed with the Court in the absence of fraud, mutual mistake, or other similar ground.” Here, the petitioners found at least two issues they wanted to contest after they agreed to the settlement.  First, they found an application for extension of time to file.  During the settlement negotiations, the Service had stated it would concede a penalty if petitioners produced this document.  Second, they noticed a duplication of rental income in the notice of deficiency.  Based on these items found after they stated the basis for settlement, petitioners sought to unwind the settlement.  At least they offered a concrete basis for their request, but the court rejected their request stating, “If petitioners made a mistake in agreeing to the settlement, respondent contends, and the Court agrees, it was not mutual but unilateral. This Court has previously held that a party may be bound by its agreement although it has made a unilateral mistake in the calculation of a deficiency. Petitioners have not shown that respondent committed fraud or otherwise improperly induced petitioners to agree to the offer.”

Stamm International Corporation v. Commissioner – The parties requested a special trial calendar because of the anticipated length of the trial.  Before the special trial calendar, the parties contacted the Court to state that a basis of settlement was reached and this caused the cancellation of the special trial calendar.  Shortly thereafter, the parties filed a memorandum of settled issues.  After filing the memorandum, respondent began to see the downside of its agreement:

During a meeting on February 12, 1987, among respondent’s counsel, a revenue agent, and petitioner’s accountant, the applicability of section 959 to the calculation of the correct amount of the deficiencies was raised. Prior to this meeting, respondent’s counsel had not taken account of section 959, which, for reasons discussed below, would reduce the total amount to be paid by petitioner to approximately $1.1 or $1.25 million. Petitioner’s attorneys had discussed among themselves the effect of section 959 on the computation prior to execution of the settlement agreement, and they had been aware that respondent’s counsel was not giving effect to that section. They had not, however, discussed section 959 with respondent’s counsel or otherwise called attention to his apparent error.

As a result of realizing the failure to take into account the impact of section 959, which reduced the anticipated liability by 70%, the Service sought to reopen the settlement discussions. Petitioner refused and asked that the Court enforce the settlement.  Because petitioner knew of the impact of section 959 on the settlement, the Court found that this impact was a unilateral mistake.  It refused to negate the settlement based on the failure of one party to understand the computational consequences of the deal.  The parties described the settlement with great specificity in their memorandum of settlement to the Court.  The Court found that the settlement was not ambiguous.

At the hearing on whether to enforce the settlement, the Service argued that the agreement should be set aside 1) based on the unilateral mistake of his counsel which was known by petitioner’s counsel and 2) because the agreement did not mention the application of 959.  Service did not argue that the agreement was not authorized or binding, but rather that, as a matter of contract law, it should be relieved of the agreement.  The Service cited to no authority that the Court should relieve it of the settlement based on the mistake of fact.  There was misleading silence by petitioner’s counsel but no overt misrepresentation.

The court notes that in Saigh v. Commissioner and other cases it unwound a settlement where “excusable damaging silence” upon a false or true representation of the other party, even one innocently made, is recognized as a ground for relief from a settlement stip.  Here, the silence was the not equivalent of a misrepresentation because petitioner’s counsel had no duty to explain the Code to respondent.  The Service cited Adams v. Commissioner for the position that the “primary consideration in determining whether a settlement stipulation should be set aside is whether such action is necessary to prevent manifest injustice…  The determination, however, takes into account the injury to the opposing party and the inconvenience to the Court, as well as possible injustice to the moving party.”  The Court points out that if a computational surprise in the amount of the deficiency by itself were a basis for overturning an agreement, petitioners [or respondent] would make this motion all the time once they received the computations and could see the tax consequences of the issue settlement.  The Court also felt that a party had a very high burden to undo a settlement in the posture of this case unlike the Adams case, which involved a pre-trial motion.  The case points to the need for a party, if money is the driving force – which will almost always be the case for petitioners, to calculate the dollar impact of a settlement before agreeing to the issues in a settlement stipulation filed with the Court.

The Court then looked at what the agreement meant and how to interpret it in the context of the 959 argument. If the agreement was unclear, a trial of the matter might be inevitable, even where the agreement might have otherwise been binding.  The Court found that the agreement was ambiguous and indefinite; however, looking at the Code as a whole in this section, the Court concluded that the most logical reading of the agreement is to view it as allowing the application of 959 in the absence of a clear statement to the contrary.  It appreciated that the Code was complex and understood the failure of respondent’s counsel to appreciate how it would work but, nonetheless, felt that the agreement included related adjustments such as the one in 959.  So, the Court enforced the settlement agreement allowing petitioner to reduce the tax owed by including the 959 adjustments in the computation.  Because the document providing the Court with the settlement agreement would have been reviewed by the party within the Service authorized to settle the case, the argument of lack of approval at the appropriate level was unavailable to the Service and was never made.

The Stamm case demonstrates that if either party pulls out of an eve-of-trial settlement, the Court will enforce the settlement.  In submitting the settlement document to the Court, the Service will necessarily have obtained the necessary approval level for settlement.  So, that argument will never really provide an effective basis for pulling out of a settlement communicated to the Tax Court.