Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire (Part Two)

Lately I’ve been obsessing over how to remedy “bad answers” from the IRS). In my last post, I detailed how IRS counsel’s failure to “reasonably inquire” under Rule 33 before filing a “bad answer” may make them more susceptible to awards of litigation costs under IRC § 7430. Of course, litigation costs come at the end of the ligation process, so that might not seem like a useful remedy for more quickly resolving a case when the IRS files a “bad answer.”

Fortunately, the consequences for failing to reasonably inquire before filing an answer include more than just the heightened possibility of litigation costs. Indeed, far more immediate consequences may ensue. Read on for two more examples, from two more Tax Court orders.


Remedies for Bad Answers: Motion for More Definite Statement

There are a great many lessons that can be gleaned from the case of Patrick McCabe and Zine Magubane v. C.I.R. (Dkt. # 23862-05). I sincerely hope that the Tax Court considers returning to the practice of issuing “designated orders” at some time in the future. I have no idea if the order I am about to cover in detail was “designated” by Judge Panuthos when he issued it in 2006… but it is exactly the sort of order that practitioners would benefit from reading.

For everyone else, the Readers Digest version is as follows:

Petitioners were audited for Schedule C income and deduction issues. The petitioners engaged in the audit process, providing (they allege) adequate substantiation for each issue that ended up on the Notice of Deficiency. Importantly, they alleged that they had adequately substantiated everything and complied with the audit as part of their petition to the Tax Court. Keep my earlier discourse on the limits of burden shifting under IRC § 7491 in the back of your mind…

IRS Counsel asked for more time to file its answer because they didn’t have the administrative file. No one objected, and more time was granted.

Days passed. Again, the IRS can’t find a way to get the administrative file to IRS Counsel. At this point the facts are fairly similar to Vermouth v. C.I.R., 88 T.C. 1488 (1987).

Only now the parties diverge. Rather than file another motion asking for additional time to answer, IRS Counsel decides they’ll just file a “bad answer” instead. In response to all the facts alleged by petitioner, IRS Counsel “denies for lack of sufficient information or knowledge.”

Judge Panuthos and the petitioner are not impressed. Everything from my prior two posts now comes full circle… The interplay of Vermouth and responsive pleadings under Rule 36, as well as the post on reasonable inquiry requirements under Rule 33(b). What a payoff!

Petitioners file a “Motion for More Definite Statement” under Tax Court Rule 51. In that motion, they argue that the IRS’s answer is too vague to allow a reply and that the burden of proof should shift under IRC § 7491.

Note that this burden shift is critical to the Rule 51 motion. You really can’t argue “I need more clarity in order to reply!” (i.e., Rule 51) if a reply doesn’t make sense in the first place, because the burden is on you to prove something you affirmatively alleged. That is your prototypical deficiency case: petitioner alleges facts needed to show no deficiency, etc. When IRS Counsel denies those facts, you do not have to (indeed, shouldn’t) file a “reply.” If there was something more at play than IRS Counsel just saying, “we deny those facts, please uphold the deficiency,” however, Rule 51 might come in handy. From my look over the Tax Court orders, this most often arises with the assertion of fraud, but it could be any number of things (see, e.g., Rule 39). Here, it appears that the only way petitioners can get to Rule 51 is if there is a burden shift for the deficiency.

Whether or not a Rule 51 motion is appropriate in the McCabe/Magubane case isn’t really touched on – though Judge Panuthos seems to think Rule 51 isn’t the way to go in a footnote (that is, no “reply” is needed in this case). In any event, Judge Panuthos is willing to entertain the general notion that the IRS’s answer is deficient. And IRS Counsel’s argument for why the answer is fine is… not impressive. 

In a nutshell, IRS Counsel thinks they should be able to deny everything for lack of sufficient information because they still can’t find the administrative file. Not their fault that someone else at the IRS isn’t doing their job. And this mistake from some other person at the IRS is the reason they (truthfully) don’t have “sufficient information or knowledge.” Things should just be left at that.

But Judge Panuthos doesn’t leave things at that. Instead, he (literally) underscores the requirement of Rule 33(b) that provides the signer’s knowledge or belief should be “formed after a reasonable inquiry.”

And here things go an important step further. It isn’t enough to just say “I don’t have the file, and it’s not my fault it can’t be found.” Judge Panuthos writes:

“The Commissioner’s knowledge includes that of the revenue agent and other IRS personnel involved in the examination in this case. Thus, although the absences of the administrative file may be a direct impediment to the filing of a proper answer, counsel for respondent must avail himself of the other sources of information that would allow him to prepare a proper responsive pleading.”


This is, I think, a fair position to take. Note that it isn’t quite “imputing” full knowledge from one disparate wing of the IRS to another. Rather, it is something of a middle road: if you know that some other wing of the IRS has information/knowledge of the issues at hand, you have to reasonably inquire of those sources.

Similarly, I’d say Judge Panuthos’s ultimate ruling on the motion is also a fair position. He grants the motion, but with (for the time being at least) a less severe remedy than what was asked for by petitioner: the burden doesn’t shift, but the IRS has to file an amended (better) answer in less than a month.

Note that Judge Panuthos’s analysis was squarely on Rule 33, the violation of which allows for a range of sanctions. In other words, you need not go the route of “Motion for More Definite Statement” if the IRS answer has the type of shortfalls outlined above. More thoughts on other options at the conclusion of this post.

So How Far Does an Inquiry Need to Be for it to be Reasonable?

Ultimately, and perhaps unhelpfully, the “test” of reasonable inquiry is one of facts and circumstances. The Supreme Court has said as much with regards to FRCP 11, which is very similar to TC Rule 33. (For the Supreme Court take on Rule 11, see Business Guides, Inc. v. Chromatic Communications Enterprises, Inc., 498 U.S. 533 (1991).

At one extreme, IRS counsel failing to do much of any inquiry after failing to timely receive the administrative file is not good enough. To see something of the opposite extreme, it may be instructive to review the case of Wilmington Partners, L.P., v. C.I.R., Dkt. # 15098-06.

Wilmington was a TEFRA case involving a 65-page petition and 48-page IRS answer. The attorneys in Wilmington didn’t much appreciate that the IRS frequently denied portions of their meticulously laid-out petition for “lack of sufficient information or knowledge.” In particular, they were of the opinion that many of the facts were known to the Commissioner in some capacity or another, over the lifespan of the many exams and hours spent on the myriad partners comprising the case. Since IRS Counsel would have known these facts if they “reasonably inquired,” their denials (“lack of sufficient information”) should be stricken… or perhaps less dramatically, IRS Counsel should have to provide a more definite response.

To this, Judge Carluzzo said “no.” IRS Counsel contended that it reviewed literally thousands of pages contained in the administrative file before filing its 48-page answer. This might be enough to be considered a “reasonable inquiry,” but Judge Carluzzo doesn’t want to go too far down the road of defining that term (and resolves the matter without doing so).

Nonetheless, wading through over a thousand pages of administrative file is likely to be a reasonable inquiry – or at least enough to keep the Tax Court from imposing tough sanctions like striking an allegation. But simply throwing up your hands when the administrative file doesn’t come your way is not.

Moving Forward: Lessons Learned

I hope you’ve enjoyed these last few posts at least as much as I’ve enjoyed writing them during my spring break… We’ve covered a lot of ground, to the extent that I think some recap is in order. For me, the lessons I’ve pulled and plan on incorporating in my practice are as follows:

First and foremost, engage with the IRS during the administrative phase (i.e., exam), even if you are not sanguine on your prospects for success at that level. You cannot expect IRS Counsel to have knowledge of information you allege in your (eventual) petition if you haven’t sent it to the IRS exam or Appeals previously. You also can’t possibly expect to either burden shift or get attorney’s fees if you come late to the game.

Second, and relatedly, think strategically in crafting the facts portion of your petition. Can you allege facts that the IRS should be well aware of from information previously provided? Can you make a case for a burden shift? Can you phrase things in a way that would make it awkward for the IRS to “deny for lack of sufficient information?”

In deficiency cases, there are times where I allege and reference facts that should clearly be in the administrative file (e.g., “Taxpayer responded to the IRS CP2000 Notice on [x] date by sending a letter.”) But these are generally relevant to penalty issues only. (In the above example, it is relevant under IRC § 6751 and Walquist’s take on IRC § 6662 as being “automated” which I take issue with.) I have yet to argue for a burden shift in the petition, though that may change someday soon.

Third, emphasize when the administrative file is directly relevant (perhaps dispositive) to the issue at play in the petition. This is very easily done in most collection cases. Frankly, in my opinion the IRS shouldn’t file an answer to an “abuse of discretion” collection issue before at least reviewing the administrative file. I am almost certain to push back on any answer that denies for “lack of sufficient information” facts that are (1) directly relevant to the merits of the case and (2) necessarily found in the administrative file. The IRS has (indeed, created and maintains) the administrative file that is directly on point for those issues. It really just delays dispositive motion practice to answer a petition before reviewing that file.

Fourth, and finally, genuinely try to work with IRS Counsel before filing some sort of motion in response to a “bad answer.” It is important to keep things collegial before burning bridges, and moving for sanctions is a great way to poison the well (please hold all your “mixed metaphor” comments until the end). Respecting the things that are truly beyond IRS Counsel’s control means suggesting (and freely agreeing to) motions for additional time to file an answer. And although the Tax Court frowns on submitting “exhibits in the nature of evidence” with a petition, there is no reason why you cannot send documents directly to IRS Counsel supporting your petition after you’ve filed and they’ve been served. This isn’t to say that area Counsel will accept those documents… but it can’t hurt.

There are ways to be pro-active, and ways to have a “bad-answer” haunt the IRS. The increased chance of an attorney’s fees award is certainly one negative incentive for the IRS to do better. But another thought is to speed up the discovery process. Petitioners can be the ones to send (and initiate) the Branerton conference. Informally asking IRS Counsel to admit to the obvious facts previously listed on the petition can put them in an awkward space: do they deny and then deal with more formal admissions requests thereafter? Or do they admit to the facts alleged in the petition, thereby essentially conceding that they should have never denied in their answer to begin with?  (Note that this would not come after the IRS had received additional information not already available to them at the answer stage.)

The point of all of this isn’t to catch IRS Counsel on a technicality or punish them for other branches of the IRS failing to send them the administrative file. The point is to make litigation more efficient. The pleading stage should narrow down issues and agree on facts to the greatest extent possible. Presently, at least in low-income cases, it is little more than a perfunctory “I Allege” and “We Deny” dance.

While many low-income cases involve thorny questions of fact, just as often they resolve on documentary evidence that both parties would agree to, if only they looked it over. I have had precious few cases where I’ve ultimately relied on the finder of fact (i.e., Tax Court judge) to make a determination based on testimony. I dream of a day that one of my deficiency cases may be ripe for summary judgment because both parties properly engaged before the case was set for trial…

Making the IRS Answer to Taxpayers…By Making the IRS Answer

Teachers will sometimes say there is no such thing as a bad (or “stupid”) question. I’d say the jury is out on that one.

Everyone, however, can agree that there is such a thing as a bad answer (see Keith’s recent post here). My next few posts will detail a particular kind of “bad answer” and propose ways of addressing it. Specifically, I will address IRS “answers” in Tax Court that appear to put absolutely no effort into investigating the facts alleged before denying them all “for lack of sufficient information.”


When my students draft a petition, it goes through multiple rounds of revision and mark-up, even on the very straightforward cases. Apart from making sure our “facts” are not just legal conclusions, I stress US Tax Court Rule 33 and its requirement to make a “reasonable inquiry.”

So it is, shall we say, a poor learning experience for my students to spend so much time on a petition only to have a pro-forma and frankly worthless answer filed in response. It has become something of a running joke in my Clinic when describing the process to clients: “we’ll file the petition, and in about 60 days the IRS will answer saying they deny literally everything because they don’t have sufficient information. The case will then sit for about five or six months until, maybe, Appeals looks at it. The wheels of tax justice grind slowly.”

But recently, I’ve been inspired to say, “no more!” I credit this inspiration to a student that has spent the better part of this academic year wondering why one of her cases still hasn’t settled, despite the obvious merits if only someone would look for a moment at the facts. (It is an instance of the IRS proposing “zero basis” on stock sales from an Automated Under-Reporter (AUR) Exam…)

I no longer have the heart to tell her, “This is simply the way things go in the tax world.” Because it need not be this way… and the administrative file may be one step towards salvation.

The Answer and the Administrative File

From time to time, I’ve gotten the feeling that the IRS has just ignored information in the administrative file when writing their answers. This is especially the case when I allege something like “the IRS issued a CP2000 Notice on [date]…” and the IRS denies for lack of sufficient information. I got to wondering whether there were any cases that looked at the importance of the administrative file during the pleading stages of litigation.

In my brief research, a case that caught my eye was Vermouth v. C.I.R., 88 T.C. 1488 (1987). Note that it is a precedential opinion.

Most of the events of Vermouth take place in the mid-1980s. For context, at the end of the 1985 fiscal year (9/30/85), I was a few months old. More relevantly, at that time the Tax Court had 72,836 cases pending. The tax shelter sweepstakes of the time undoubtedly kept IRS Counsel busy for the same 14 hours a day I spent sleeping.

And so, with that backdrop, it would not be unreasonable for IRS Counsel to move for additional time to file an answer. So it was in the case of Vermouth, where IRS Counsel had yet to receive the administrative file by the close of the first 60 days after being served with the petition. Both parties and the Tax Court agreed to give IRS Counsel another 60 days to file the answer – a third of a year from the date of being served the petition, for those keeping count.

At the end of those 120 days, however, the petitioner (and Tax Court) were no longer so amenable. Again, IRS Counsel moved for an extension to file an answer on the grounds that they still did not have the administrative file. But this time petitioner’s counsel objected, seeking sanctions.

You may be tempted to ask why it was so important to IRS Counsel that they had the administrative file in the first place. Frequently we receive answers to our petitions where counsel doesn’t yet have the administrative file. Why didn’t they just follow the common practice of “denying for lack of sufficient information?” Was it just a particularly diligent attorney?

In this case it was because the IRS had alleged an addition to tax for fraud, for which the IRS had the burden of proof. (More on that later.) You can’t deny for lack of information something that you have to affirmatively allege facts about to begin with. As Tax Court Rule 36(b) makes clear, the IRS has to provide a “clear and concise statement of every ground, together with the facts in support thereof on which the Commissioner relies and has the burden of proof.”

In Vermouth, petitioner argued that IRS Counsel couldn’t properly allege the facts it needed to support fraud, and it shouldn’t be given 180 days to do so. The Tax Court agreed and precluded the IRS from raising the issue. In other words, petitioner won on a significant issue at the answer stage. Imagine that.

Importantly, the Tax Court found that it wasn’t enough that the IRS Counsel had “asked” (apparently multiple times) for the administrative file from IRS Appeals. Diligence required more, especially as the second extension deadline neared. The money-phrase was that respondent wouldn’t be let off the hook for “bureaucratic inertia.” IRS Counsel can’t just say “I’ve asked IRS Appeals… not my fault they haven’t responded.” A bit more diligence is required. I wonder if that still applies today…

Lessons and Broader Applicability: Burden Shifts

Ok, great. Where the IRS delays in filing an answer, you might be able to get some sanctions. But what does that have to do with the IRS filing bad answers on time?

A lot, I think. But first let me talk about where it probably doesn’t help.

The general rule is that the petitioner has the burden of proof (see Tax Court Rule 142(a)(1)). Furthermore, the notice of deficiency is presumed to be correct (see Welch v. Helvering, 290 U.S. 111 (1933)). However, the burden can shift (and the presumption of correctness can be removed) where the IRS engages in a “naked” assessment (see Prof. Camp’s article here). Though likely rare in most deficiency cases outside of the penalty context, if and when the burden is properly on the IRS a “bad” answer can result in a finding of no deficiency. See, for example, C.I.R. v. Licavoli, 252 F.2d 268 (6th Cir., 1958). These cases, however, are fairly rare.

Note that the Vermouth case was decided in 1987. This predates IRC § 7491, which was enacted in 1998 and shifts the burden of proof for certain issues where the taxpayer has introduced credible evidence. However, if you look up cases referencing IRC § 7491(a), you will find a string of opinions saying, “the burden has not shifted to the IRS in this case.” This is for many reasons, including (1) taxpayers failing to actually allege that the burden has shifted, (2) taxpayers failing to maintain required records, and (3) taxpayers failing to fully cooperate with the IRS on the issue.

Most importantly, however, I am not so sure that the burden could shift under IRC § 7491 at the answer stage of litigation anyway… But that, perhaps, is still to be tested. The few cases I found where the burden did shift under IRC § 7491(a) appear to have happened after trial occurred (Murphy v. C.I.R, T.C. Memo. 2006-243 and Struck v. C.I.R., T.C. Memo. 2007-42).

Answers and the Burden of Production

Usually when I reference IRC § 7491 it is with regards to penalties (IRC § 7491(c)) since that provision automatically shifts the burden without requiring the taxpayer to introduce evidence first. This would seem to present a gold-mine to petitioners arguing against “bad answers,” since there are so many IRC § 6662 penalties asserted on the Notice of Deficiency that just go forgotten on the answer. However, the burden shift for penalties is on the burden of production, not on the burden of proof.

Arguably (I am happy to be second-guessed on this), this means that IRS Counsel does not need to affirmatively plead facts in their answer on burden of production issues, since Rule 36(b) only requires pleading specific facts where the IRS has the burden of proof. The oft-cited penalty case of Higbee v. C.I.R., 116 T.C. 438 (2001), provides an explanation of the difference between the burden of production and the burden of proof and why it might matter.

In Higbee, Judge Vasquez clearly sees a difference between the two burdens. First, Judge Vasquez describes IRC § 7491(c) as placing “only the burden of production” (emphasis added) on the IRS with regards to penalties. Judge Vasquez further reasons that Congress intentionally decided not to place the more general “burden of proof” on the IRS in choosing the “burden of production” language. All the IRS needs to do is put forth some evidence supporting the penalty: the taxpayer still needs to persuade the Tax Court that the penalty is wrong. There are simply different considerations at play for burden of production vs. burden of proof issues. If the IRS has the burden of proof it makes sense that they should have to lay out (with some specificity) the facts they are relying on because the opposing party could prevail solely by responding to those facts – that is, by holding persuasion in equipoise. Not so if the IRS only has the burden of production.

(At least, that is my argument for why there is a meaningful difference. I welcome other’s thoughts.)

Note that the same is arguably true for contested information returns under IRC § 6201(d). That section provides that the IRS will have the “burden of producing reasonable and probative information” pertaining to the deficiency, beyond just the information return it was premised on. That sounds a lot like burden of production at play, rather than burden of proof.

Lessons and Broader Applicability: The Primacy of the Administrative File

Perhaps more important than burden shifting provisions are cases where the administrative file is or will be directly at issue before the Tax Court. I deal with this most often in IRC § 6330 Collection Due Process cases (residing in Minnesota, I am in a “Robinette/Record Rule” jurisdiction). But the administrative file is also critical in Whistleblower cases (see post here) and, more recently under IRC § 6015(e)(7) innocent spouse cases (see post here). These are the sorts of cases where you are likely to raise facts in your petition that refer to or are contained in the administrative file. Unlike deficiency cases, where the administrative file is mostly useful for penalty issues, collection cases put the administrative file front-and-center for the merits.

In collection cases where you raise facts contained in the administrative file in your petition it isn’t “burden-shift” that should require a more detailed answer from IRS Counsel. Rather, instead of Tax Court Rule 36 doing the legwork, we shift to Tax Court Rule 33 and the requirement that the IRS “reasonably inquire” before signing a pleading.

In my next post I’ll go into depth on why.

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.

read more…

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.

Proving the Liability – The Presumption of Regularity

I am not sure, but I don’t think we have written about a case from Guam since Les cited one in a post during our first month of existence as a blog.  The case of Government of Guam v. Guerrero, No. 19-16793 (9th Cir. 2021) gives us a chance to make up for lost time regarding tax law and Guam.  Perhaps the first issue to address concerns why we care about Guamanian tax issues.  We care because their tax code essentially mirrors our, similar to other territories, and procedural issues regarding their tax issues decided by the 9th Circuit could impact similar issues arising from the U.S.

At issue in the Guerrero case is whether the government of Guam kept adequate records to prove the liability it asserted and to prove that the statute of limitations remained open for it to act.  The court makes a decision regarding the presumption of regularity that could easily apply to the IRS.  For that reason, this circuit court opinion matters.


Guam’s Department of Revenue and Taxation (DRT) determined that Mr. Guerrero owes about $3.7 million in unpaid taxes for 1999-2002.  He filed his returns late for those years.  The dispute concerns when the taxes were assessed.  The court states:

the official records are missing, likely due to water, mold, and termite damage at the storage facility where they were housed.

This suggests that Guam does not maintain its tax records on a computer system.  That’s surprising.  Maybe the antiquated IRS system is not the worst system in the world.

The court says that after assessment the DRT filed tax liens (I assume the court meant to say the DRT filed notices of federal tax liens) on various parcels of real property (I assume the DRT simply filed notices against Mr. Guerrero and the liens attached to his real property along with his other property.)  After filing the liens, DRT brought this case to foreclose the liens on the real property to which the liens attached.

Mr. Guerrero asserts that DRT cannot prove that it timely assessed the taxes against him.  DRT acknowledges that it does not have the original certificates of assessment, but invokes the presumption of regularity relying on the DRT procedures:

Guam’s evidence that the Department timely assessed Leon Guerrero’s taxes instead consists only of the Department’s internal documents rather than the certificates of assessment. Guam argues that these internal documents are sufficient evidence that the Department assessed Leon Guerrero’s unpaid taxes in January 2006 and sent the relevant notices before the three-year statute of limitations expired. Guam relies on the Department’s internal registers (record lists of delinquent taxpayers) known as TY53 and TY69 registers, as well as an internal transmittal sheet sent to the collections branch after the TY53 and TY69 notices were sent to Leon Guerrero, to demonstrate both that it followed standard procedure for purposes of the presumption of regularity and to show the assessment dates.

At a meeting on March 10, 2006, DRT learned that the notices of assessment did not reach Mr. Guerrero but instead went to his ex-wife’s address.  During the meeting, DRT gave Mr. Guerrero final demand and notice of intent to file a lien and he signed an acknowledgment.  This meeting took place about two weeks before the expiration of the assessment statute of limitations.  The court describes the testimony of the DRT officials who testified at the two-day trial explaining the system for making assessments and notifying taxpayer.  The statutory scheme, and much of the system, mirrors the system in the U.S. used by the IRS.

Because the assessment certificate itself is missing, DRT seeks to prove that it timely made the assessments in question by some other means, here the presumption of regularity.  The court notes:

We have held that a public actor is entitled to the presumption of regularity where there is some evidence that the public actor properly discharged the relevant official duties, which an opposing party must rebut with clear, affirmative evidence to the contrary….

As previously observed, whether the presumption applies or has been rebutted with clear and affirmative evidence to the contrary are mixed questions of law and fact that may be reviewed for clear error. The clear error standard is significantly deferential, and clear error is not to be found unless the reviewing court is “left with the definite and firm conviction that a mistake has been committed.”

Here, the 9th Circuit is not deciding the case as an initial matter but as a reviewing court.  It finds that the district court did not make clear error but it also finds that the district court’s opinion was “opaque and did not adhere to the proper steps of the analysis.”  So, the 9th Circuit sets out to explain the proper steps for making a presumption of regularity determination.

First, it should have considered if some evidence existed to support timely assessment of the taxes.  Instead, the district court determined the presumption was automatically available.  Despite this misstep, the testimony of the DRT officials did provide evidence in support of a timely assessment.  The district court should have explicitly stated that it relied upon the credibility of the DRT witnesses.

Next, the court should have examined whether Mr. Guerrero rebutted the presumption that could be drawn from the testimony.  At the trial level, he did not argue that the records presented were inaccurate.  Therefore, he waived that argument.  He failed to build the type of record he needed to build at the trial level.  The arguments he does make that are not waived by his prior actions are insufficient to cast adequate doubt on the records of the DRT.

The opinion leaves the impression that no one had a good idea what they were doing at the trial level but that DRT had enough on the ball to put into the record evidence supportive of a conclusion that a timely assessment occurred.  The presumption here is one on which the IRS may need to rely if its records are destroyed or it otherwise suffers a degradation of its system.  The court provides a bit of a roadmap for someone trying to attack a record like an assessment.  Certainly, the attack should be straightforward and clearly done at the trial level.  Mr. Guerrero should have sought the testimony of individuals who could talk about the impact of the lost records and how it cast doubt on the correctness of the entire system.  The importance of an expert testifying on this point to counteract the testimony of the government officials cannot be overstated.  Unless the government officials were destroyed on cross, Mr. Guerrero needed to give the court something to cause it to pause before presuming DRT handled the case correctly.  He gave the court nothing to go on and the 9th Circuit finds that significant.

The dissent picks up on some of the errors by DRT and offers a roadmap for how Mr. Guerrero might have attacked the validity of the assessment.  The dissent provides good lessons for those who find themselves in this situation trying to combat a presumption of this nature.  The case leaves me a little concerned about the use of the presumption of correctness in this situation to prove the timeliness of the assessments.  Like the dissent, I felt the majority made some leaps to get to the favorable result for the DRT.

Wichita Terminal and the Presumption That Occurs When an Available Witness Is Not Called

As a Chief Counsel, IRS attorney one of my favorite cases was Wichita Terminal Elevator, Inc. v. Commissioner, 6 T.C. 1158 (1946).  I am unsure if I ever read the actual opinion prior to writing this post but a decent percentage of briefs written by Chief Counsel, IRS attorneys will contain a cite to this case.  The case stands for the proposition that if a witness exists who could testify to facts that would aid your case, and you do not call that witness then a presumption arises that the witness would testify adversely to the point you are arguing.  Since the burden of proof in most cases fell on the taxpayer, the first line of defense for a government attorney was that the taxpayer simply failed to carry the burden, and Wichita Terminal served as an integral part of that argument since there almost always existed some witness that the taxpayer might have called and did not.


Proud of myself now that I have read the Wichita Terminal case, I must subject you to a part of it.  Here is the important portion for purposes of this case:

If in fact the sale of petitioner’s properties was not negotiated prior to its dissolution, the evidence of such fact is in the possession of petitioner. If that were the fact, it must have been known by petitioner’s officers, who could have testified to that effect, but the only witnesses called at the hearing were its vice president, N. Louise Powell, and its secretary, C. P. Garretson, who were asked by petitioner’s counsel only to identify certain exhibits consisting of minute entries and other documents whereby the dissolution of petitioner was effected and the properties in question conveyed. Petitioner’s counsel invoked the rule forbidding the cross-examination of a witness except as to the matters testified to on direct examination.

Powell, who was the president of the corporation and who is shown to have actually negotiated the sale of the properties, did not testify. This is significant in view of the fact that a witness introduced by respondent testified that Powell had made the statement to him that he had, on June 1, 1944, discussed the sale with one Ross, who wished to buy the Wichita elevator property, and that he had advised Ross that it was their plan to sell the country elevators as well, and that thereupon Ross made an investigation of these four elevators and three or four days later resumed negotiations for their purchase. Petitioner’s counsel argues that this evidence is of no importance because there is no showing that the individual by the name of Ross who was negotiating for the purchase of the properties prior to petitioner’s dissolution was the Paul Ross who entered into the formal contract for their purchase three weeks later on the same day that the dissolution became effective. This argument is without weight. If these negotiations were with interests other than those to whom the properties were ultimately conveyed, this fact could readily have been established by petitioner.

Of course, as the government you do not want to rely exclusively on the burden of proof since that presents too many risks of failure, but you did want to try to win the case on the burden if possible.  A form of this same issue presents itself in the current political discourse.  The Democrats do not want to rest their case for impeachment solely on the failure of the administration to send up witnesses that might provide exculpatory evidence.  Even though they might make a case that the failure of the administration to send witnesses to the Hill to testify under oath means that an impeachable offense occurred, that’s a weak, and quite risky, way to win a case.  Always best to prove that you are right rather that to rely upon the burden of proof; however, you still try to win the easy way if possible.

In the case of Endeavor Partners Fund LLC et al. v. Commissioner; No. 18-1275; No. 18-1276; No. 18-1277; No. 18-1278 (D.C. Cir. 2019) the Tax Court cited to Wichita Terminal and on appeal the taxpayer argued that the reliance on Wichita Terminal was misplaced.  The D.C. Circuit goes into some detail explaining its rules regarding presumptions of this sort and, ultimately, why it doesn’t matter in this case, because if the Tax Court erred on this issue the error was harmless.  For those of you who have cited Wichita Terminal or had it cited against you, it may prove useful to appreciate the nuances that the D.C. Circuit brings to this issue.  Here’s what it had to say:

This leads us to the partnerships’ claim of a faulty evidentiary ruling. The Tax Court went on to note that the partnerships did not call “the most logical witness to testify about Deutsche Bank’s trading practices,” namely someone “from Deutsche Bank.” Id. The court observed “from this we infer that such testimony would not have been helpful to them.” Id. As the partnerships see it, the court thus drew an impermissible adverse inference from the absence of a Deutsche Bank witness. And — they argue — this error is fatal, because the court needed that inference to reach the conclusion that the parties rigged the rates.

But studying the court’s analysis, we conclude that any error was harmless. Under the common law formulation, a fact finder (typically, a jury) may but need not draw an adverse inference from the absence of a witness “if a party has it [1] peculiarly within his power to produce witnesses whose testimony would [2] elucidate the transaction.” United States v. Young, 463 F.2d 934, 939 (D.C. Cir. 1972) (quoting Graves v. United States, 150 U.S. 118, 121 (1893)).

The likely Deutsche Bank witnesses clearly had the potential to “elucidate the transaction” — they could directly address the question whether the rate-rigging had been intentional or accidental. Id. So the pertinent questions are whether the witnesses were “peculiarly within [the partnership’s] power” and, if not, whether the Tax Court’s conclusion rested materially on the adverse inference.

On the facts of this case, neither the partnerships nor the Commissioner peculiarly controlled Deutsche Bank’s employees. The partnerships’ business relationship with Deutsche Bank had long since withered, and the government’s non-prosecution agreement with the Bank did not, by itself, place its employees within the government’s power. See United States v. Tarantino, 846 F.2d 1384, 1404 (D.C. Cir. 1988) (“[N]o automatic inference of exclusive government control arises from the fact that witnesses are acting as government informants, or from a grant of immunity from prosecution.” (citations omitted) (emphasis added)). But see Burgess v. United States, 440 F.2d 226, 232 (D.C. Cir. 1970) (concluding that “[t]he testimony showed a relationship between the Government and the informer which placed it peculiarly within the power of the Government to produce him”); United States v. Williams, 113 F.3d 243, 246 n.2 (D.C. Cir. 1997) (construing Burgess as “alleviat[ing] the need for the defense to seek a witness by subpoena” to secure a missing-witness instruction).

The D.C. Circuit went further than just explaining when the presumption might work against a party and why it did not apply here.  It provided a horn book on this area of the law:

Some courts have relaxed the common law standard and dropped the requirement that the party against whom an inference is drawn have the witness “peculiarly within his power,” thus giving the fact finder fairly broad discretion to draw an inference and to choose the party against whom it is to be drawn. See, e.g., Wilson v. Merrell Dow Pharm. Inc., 893 F.2d 1149, 1152 (10th Cir. 1990) (“When an absent witness is equally available to both parties, either party is open to the inference that the missing testimony would have been adverse to it.”); United States v. Erb, 543 F.2d 438, 444 (2d Cir. 1976) (“[T]he weight of authority in this circuit and the more logical view is that the failure to produce (a witness equally available to both sides) is open to an inference against both parties.” (quotation and citations omitted)); United States v. Cotter, 60 F.2d 689, 692 (2d Cir. 1932) (Hand, J.) (“When both sides fail to call a witness who knows something of the facts, their conduct, like anything else they do, is a circumstance which a jury may use.”); State v. Greer, 922 N.W.2d 312, ¶¶ 18–19 (Wis. Ct. App. 2018) (unpublished).

We have given conflicting signals about whether control over a missing witness is required for a fact finder to draw an inference. Compare Young, 463 F.2d at 943 (“But in the in-between case where each side has the physical capacity to locate and produce the witness, and it is debatable which side might more naturally have been expected to call the witness, there may be latitude for the judge to leave the matter to debate without an instruction, simply permitting each counsel to argue to the jury concerning the ‘natural’ inference of fact to be drawn.”), with United States v. Norris, 873 F.2d 1519, 1522 (D.C. Cir. 1989) (“Exclusivity or peculiarity of power to produce is [ ] one of two necessary predicates for entitlement to the missing witness instruction.” (emphasis added)).
In at least one case involving an agency, we have reversed the National Labor Relations Board when it applied the adverse inference against a party that did not control the witness. Bufco Corp. v. NLRB, 147 F.3d 964, 971 (D.C. Cir. 1998). In the course of our (brief) analysis, we also noted that the Board’s decision conflicted with its own precedent on the subject. Id.
This multiplicity of viewpoints suggests the possibility that we should, in reviewing agency decisions, adopt a rule that saves agencies from undue risk of reversal due to their potential failure to estimate correctly what circuit will review a particular decision. Besides reducing the risk of inadvertent error, such a rule would prevent agencies from having to adopt different evidentiary rules depending on the circuit (or, indeed, multiple circuits) in which an appeal may lie. At least where good arguments exist for and against permitting the inference, we might allow an agency leeway to choose its own path.
Though lodged under Article I, the Tax Court is — in one relevant respect — unusual: Congress has specifically directed us to review that court in the “same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.” 26 U.S.C. § 7482(a)(1). This indicates that, even if we were to adopt the rule discussed above generally, we would still have to apply our circuit’s case law to Tax Court decisions rather than Tax Court precedent. See generally Dang v. Comm’r, 83 T.C.M. (CCH) 1627, 2002 WL 977368, at *3 (T.C. 2002) (concluding, in an unpublished, non-binding memorandum opinion, that “no adverse inference is warranted” if “a witness is equally available to both parties”).

The court then went on to explain why the error of citing to Wichita Terminal was harmless as it sustained the liability against the taxpayer.  I confess I long to cite to Wichita Terminal in the briefs that the clinic writes.  It was always so comforting to put it into a brief knowing that I might win my case simply because the other side did not fully meet their burden.  The Endeavor Partners case is both reassuring and disappointing.  It’s reassuring because it limits the times in which the IRS might be able to successfully cite the Wichita Terminal case against me now that I represent taxpayers.  Of all of the times the Tax Court has cited that case, I suspect that only a small fraction of the cases involve the taxpayer getting a benefit from its citation.  It’s disappointing because the decision makes it even less likely that I will get to cite it ever.  Maybe that’s a good thing.  I tried to throw in into a brief in the past year or two and was told by others working on the brief that it did not belong.  It’s less likely to belong based on the excellent explanation provided by the D.C. Circuit.  Maybe I should be glad.

Oral Persuasion: Taxpayer Testimony and the Burden of Proof

We welcome guest bloggers John A. Clynch, Managing Director, and Scott A. Schumacher, Faculty Director, of the University of Washington School of Law Federal Tax Clinic. John and Scott take us behind the scenes on a recent case where they successfully shifted the burden of proof and convinced the Tax Court that their client did not have income despite its appearance on a Form 1099-MISC. The facts of this case are unusual in several respects, but information return disputes are a regular issue in tax controversy practice and on this blog. Keith collected several previous PT posts here last July. Christine

Unreported income cases are a staple of low-income taxpayer clinics. Low-income individuals often have several jobs of shorter duration, move their residence more often than the general population, and may not be the most adept at recordkeeping. Handling these cases is generally straightforward – obtain the wage and income information from the IRS and match it to the return. These cases can be more challenging if the taxpayer was a victim of identity theft, and the taxpayer must prove they did not receive the income listed in the W-2 or 1099.

But what if there is no dispute that the taxpayer received the money but there is no indication of what payment is for? In Park v. Commissioner, T.C. Summ Op. 2018-46, the Tax Court decided the rather unique question of not whether the amount was received or by whom, but rather what the amount paid was for and thus whether the amount was taxable.


The taxpayer, Jin Park, is an immigrant from South Korea, who served in the U.S. Army. Mr. Park purchased a home in 2008 and took out mortgages with Bank of America. He was paying both principal and interest on the mortgages in 2012 while on military deployment overseas.

In 2014, Mr. Park received a $13,508 check from BOA. Included with the check was a letter that provided, “based on a recent review of your account, we may not have provided you with the level of service that you deserve, and are providing you with this check.” The letter further stated that Mr. Park might wish to consult with someone about any possible tax consequences of receiving the funds, included a number for him to call if he had any questions. The letter concluded by thanking him for his military service. Mr. Park called the phone number provided on several occasions, but he was unable to obtain any further information. He filed his 2014 Federal income tax return without including the $13,508.

The IRS received a Form 1099-MISC from BOA, reporting other income of $12,789 and a Form 1099-INT from BOA, reporting interest income of $719. The IRS duly issued a Notice of Deficiency, and Mr. Park, now represented by the Federal Tax Clinic at the University of Washington, submitted a Tax Court Petition on his behalf.

In preparing the case for trial, the clinic first sought information from BOA by phone. After what appeared to be a successful telephone contact with BOA, all future calls were met with a brick wall. No one at BOA was able (or willing) to provide any information regarding the payments. The clinic subsequently served a subpoena for records on BOA. The bank declined to produce any records, even after being ordered by the Court. In response to the subpoena, BOA stated, “the bank is unable to locate any accounts or records requested with the information provided.” This is quite surprising, especially given that the Bank Secrecy Act requires banks to maintain records for at least five years.

The case proceeded to trial without any further information from BOA. The issue for the Tax Court to decide was whether any part of the $13,508 received by Mr. Park was income. At trial, the IRS relied on the general presumption of correctness afforded a Notice of Deficiency and on the Form 1099-MISC. At trial, Mr. Park presented testimony that he had been making payments to BOA of interest and principal and that the check received from the bank could be a non-taxable return of overpayment of principal.

The case thus, as in many cases like this, turned on the burden of proof. As readers of PT know, section 7491 places the burden of proof on the IRS, subject to several very important conditions, including the requirement that the taxpayer introduce “credible evidence” to dispute the factual issue. Section 6201(d) further provides that if a taxpayer asserts a “reasonable dispute” with respect to any item of income reported on an information return, the IRS has the burden of producing “reasonable and probative information” concerning the deficiency, over and above the information return.

The specific question before the Court was whether Mr. Park produced “credible evidence” that raised a “reasonable dispute” as to the accuracy of the Form 1099-MISC. The Court held that Mr. Park met his burden. The Court held that his testimony “was subjected to cross-examination and was both plausible and credible.” Further, the Court held that BOA’s letter admitted it was correcting a wrong it had committed regarding Mr. Park’s accounts and was returning his money and the interest that had accrued on it. The Court further noted that the IRS did not offer any argument to the contrary and appeared instead to rely on the presumption of correctness. The Court accordingly held that the $12,789 received from BOA was a nontaxable return of principal.

The facts of Park are unique and are unlikely to repeat, although with banks, one never knows. However, the larger lesson from the case is that credible testimony from the taxpayer can be effective in meeting the burden of proof or shifting it to the IRS. Oftentimes it is the only evidence.

IRS Revenue Agent Entitled to Relief from Joint Liability

A recent summary opinion in Tax Court highlights some of the procedural twists that can turn in cases where an ex seeks to challenge a former spouse’s entitlement to relief from joint and several liability.  The case has some added interest because the spouse seeking and getting relief is an IRS revenue agent.

As guest poster Professor Scott Schumacher discussed a few years ago, some times tax cases turn into a “he said she said” dispute. In the tax context, he said/she usually involve cases with disputes over credits or deductions determined with reference to attachment to children and in innocent spouse cases when former spouses disagree about the other’s entitlement to relief from joint and several liability.

Merlo v Comm’r is a recent Tax Court case that involves the latter scenario.  In this case, the ex-husband (Mr. Merlo) is an IRS revenue agent. He prepared the return, and his former spouse (Ms. Nelson) claimed that he had knowledge of $4,629 of disability income she received and they omitted from their 2011 joint return, which was filed on extension in October 2012, when the soon to be divorced Merlos were separated.


The joint return omitted the disability income that had been reported on a W-2. IRS picked up the omission, and issued a stat notice. Mr. Merlo petitioned Tax Court, asserting Section 6015(c) relief as an affirmative defense to the deficiency based on his lack of knowledge of Ms. Nelson’s receipt of the disability income. IRS granted him relief from the liability. Ms. Nelson joined the Tax Court case as an intervenor, and she argued that Mr. Merlo should not be entitled to relief because he had knowledge of her omitted disability income and that he intentionally left it off the return to cause her problems with the IRS.

This involves Section 6015(c), which generally allows a separated or divorced spouse to elect to limit the liability for any deficiency assessed with respect to a joint return to the portion of the deficiency that is properly allocable to the electing individual under Section 6015(d).

Section 6015(c)(3)(C) denies relief to the electing spouse if it is shown that he or she “had actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof) which is not allocable to such individual under subsection (d)”

One of the challenges for the IRS in these cases is that the burden on showing actual knowledge rests with the IRS, and the level of proof the Commissioner needs to establish is a preponderance of the evidence. Here, the Commissioner conceded the issue and agreed that Mr. Merlo did not have actual knowledge of the existence of the disability income.

So how does the court address the issue of burden of proof when the IRS agrees that one of the exes is entitled to relief but the other does not?  The opinion notes that the “[c]ourt has resolved this problem by determining whether actual knowledge has been demonstrated by a preponderance of the evidence as presented by all three parties.”

Typically I suspect that Counsel attorneys let the ex spouses duke it out at trial. That is what seemed to happen in this case, with Ms. Nelson testifying that her ex knew about the omitted disability income and Mr. Merlo claiming that the first time he heard about it was when the IRS sent correspondence after they filed the return.

This required the court to dig into the circumstances of the joint filing. As is not unusual with freshly separated and a soon to be divorced couple the communications between the two were not ideal—the opinion notes that Ms. Nelson moved out of the marital residence in May of 2012 and they “seldom spoke, lived in separate households, and communicated primarily through their divorce counsel.”

The 2011 return was on extension and as the October filing deadline neared Mr. Merlo presented evidence that demonstrated to the court that he did not know about the disability income that was left off the return, including a series of emails and a text message and the existence of separate bank accounts. The messages include an exchange where Ms. Nelson proposed to correct the return after a draft return Mr. Merlo prepared included as a gross amount of Ms. Nelson’s income the disability income and about $1,182 in wages from another source, Ethan Allen:

Early on the morning of October 15, 2012, the due date for filing the 2011 return, Mr. Merlo emailed Ms. Nelson the draft Federal return and draft Michigan return for her to review for accuracy. Ms. Nelson responded by text, informing Mr. Merlo that he had misstated her wages from Ethan Allen on the draft returns as equal to $5,811 rather than $1,182, the correct figure. Mr. Merlo, now believing the draft returns to be incorrect, revised them by reducing Ms. Nelson’s wage income from $5,811 to $1,182, a $4,629 difference. Mr. Merlo thereafter emailed Ms. Nelson a revised draft Form 1040 worksheet for her to review at 7:20 a.m. The worksheet listed the Merlos’ wage income as $108,045, consisting of $106,863 in wages from the Department of the Treasury and $1,182 in wages from Ethan Allen.

The opinion noted that a text message from Ms. Nelson specifically identified the wage income she had received from Ethan Allen and made no mention of any disability income, resulting in Mr. Merlo changing the return to reflect only Ms. Nelson’s $1,182 in wages and not the taxable disability income.

Ms. Nelson also testified that her ex had a copy of the W2 that showed the disability income; that would have meant that he had the knowledge necessary to defeat the relief he was seeking.

The opinion then provides more context as to why the court sided with Mr. Merlo’s version of the facts:

Ms. Nelson testified that when she moved out of the marital residence she left copies of all of her Forms W-2, including those from Ethan Allen and Prudential [Prudential is the source of the disability payments], in a tax file maintained there by Mr. Merlo, retaining the originals for herself. Her testimony is uncorroborated, and it is contradicted by Mr. Merlo’s contemporaneous email of October 12, 2012, in which he stated that he did not have a Form W-2 from her. Moreover, we are not persuaded that Mr. Merlo, an IRS revenue agent, would have prepared worksheets that listed Ms. Nelson’s Ethan Allen wages as $5,811 if he in fact had copies of her Forms W-2 showing that her wage income, while in total equal to $5,811, actually consisted of $1,182 from Ethan Allen and $4,629 from Prudential. Finally, we note that Ms. Nelson, having been provided Mr. Merlo’s worksheet accompanying the draft Federal return that made no mention of the Prudential income, had ample opportunity to alert Mr. Merlo to the omission but failed to do so, even though by her own admission she had the originals of the Forms W-2 that had been issued to her. Her silence tended to confirm Mr. Merlo’s belief that he had merely overstated her Ethan Allen wages in the worksheet and had not omitted income from another source.


Spousal relief and intervenor cases in particular are often tough cases. Context matters greatly. In this case, Mr. Merlo’s work as a revenue agent contributed to the court’s conclusion that it found his version of the facts more likely to be true, as the opinion noted that given his “familiarity with IRS procedures, it is not reasonable to believe he deliberately failed to report Form W-2 income for which he had actual knowledge, as he would have been aware that he was creating the same problems with the IRS for himself as Ms. Nelson speculates he intended to cause for her.”



Second Circuit Tosses Penalties Because of IRS Failure To Obtain Supervisor Approval

–Or, Tax Court Burnt by Second Circuit’s Hot Chai

Yesterday the Second Circuit decided a very important decision in favor of the taxpayer pertaining to the Section 6571 requirement that a direct supervisor approve a penalty before it is assessed.  In Chai v. Commissioner, the Second Circuit reversed the Tax Court, holding the Service’s failure to show penalties were approved by the immediate supervisor prior to issuing a notice of deficiency caused the penalty to fail.  In doing so, the Second Circuit explicitly rejected the recent Tax Court holdings on this matter, including Graev v. Commissioner, determining the matter was ripe for decision and that the Service’s failure prevented the imposition of the penalty.  Chai also has interesting issues involving TEFRA and penalty imposition that will not be covered (at least not today), and is important for the Second Circuit’s rejection of the IRS position that the taxpayer was required to raise the Section 6571 issue.   It is lengthy, but worth a read for practitioners focusing on tax controversy work.

PT regulars know that we have covered this topic on the blog in the past, including the recent taxpayer loss in the very divided Tax Court decision in Graev v. Commissioner.  Keith’s post on Graev from December can be found here.  For readers interested in a full review of that case and the history of this matter, Keith’s blog is a great starting point, and has links to prior posts written by him, Carlton Smith, and Frank Agostino (whose firm handled Graev and also the Chai case). Graev was actually only recently entered, and is appealable to the Second Circuit, so I wouldn’t be surprised if the taxpayer in that case files a motion to vacate based on the Second Circuit’s rejection of the Tax Court’s approach in Greav.


Before discussing the  Second Circuit holding, I will crib some content from Keith, to indicate the status of the law before yesterday.  Here is Keith’s summary of the holding in Graev:

The Court split pretty sharply in its opinion with nine judges in the majority deciding that the IRC 6751(b) argument premature since the IRS had not yet assessed the liability, three judges concurring because the failure to obtain managerial approval did not prejudice the taxpayers and five judges dissenting because the failure to obtain managerial approval prior to the issuance of the notice of deficiency prevented the IRS from asserting this penalty (or the Court from determining that the taxpayer owed the penalty.)

That paragraph from Keith’s post regarding the holding doesn’t cover the lengthy and nuanced discussion, but his full post does for those who are interested.  The Second Circuit essentially rejected every position taken by the majority and concurrence in Graev, and almost completely agreed with the dissenting Tax Court judges (with a  few minor differences in rationale).

For its Section 6751(b) review, the Second Circuit began by reviewing the language of the statute.  It highlighted the fact that the Tax Court did the same, and found the language of the statute unambiguous, a conclusion with which the Second Circuit disagreed.

Section 6751(b)(1) states, in pertinent part:

No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination…[emph. added]

The Tax Court found the lack of specification as to when the approval of the immediate supervisor was required allowed the immediate supervisor to approve the determination at any point, even after the statutory notice of deficiency was issued or the Tax Court reviewed the matter.

The Second Circuit, however, found the language ambiguous, and the lack of specification as to when the approval was required problematic.  The Second Circuit stated “[u]understanding § 6751 and appreciating its ambiguity requires proficiency with the deficiency process,” and then went through a primer on the issue.  To paraphrase the Second Circuit, the assessment occurs when the liability is recorded by the Secretary, which is “essentially a bookkeeping notation.”  It is the last step before the IRS can collect a deficiency.  The Second Circuit stated the deficiency is announced to the taxpayer in a SNOD, along with its intention to assess.  The taxpayer then has 90 days to petition the Tax Court for review.  If there is a petition to the Court, it then becomes the Court’s job to determine the amount outstanding.  As it is the Court’s job to determine the amount of the assessment, the immediate supervisor no longer has the ability to approve or not approve the penalty.  The Second Circuit agreed with the Graev dissent that “[i]n light of the historical meaning of ‘assessment,’” the phrase “initial determination of such assessment” did not make sense.  A deficiency can be determined, as can the decision to make an assessment, but you cannot determine an assessment.

The Second Circuit then looked to the legislative history, and found the requirement was meant to force the supervisor to approve the penalty before it was issued to the taxpayer, not simply before the bookkeeping function was finalized.  The Court further stated, as I noted above, if the supervisor is to give approval, it must be done at a time when the supervisor actually has authority.  As the Court noted, [t]hat discretion is lost once the Tax Court decision becomes final: at that point, § 6215(a) provides that ‘the entire amount redetermined as the deficiency…shall be assessed.”  The supervisor (and the IRS generally) can no longer approve or deny the imposition of the penalty.  The Court further noted, the authority to approve really vanishes upon a taxpayer filing with the Tax Court, as the statute provides approval of “the initial determination of such assessment,” and once the Court is involved it would no longer be the initial determination.  Continuing this line of thought, the Second Circuit stated that the taxpayer can file with the Tax Court immediately after the issuance of the notice of deficiency, so it is really the issuance of the notice of deficiency that is the last time where an initial determination could be approved.

This aspect of the holding is important for two reasons.  First, the Second Circuit is requiring the approval at the time of the NOD, and not allowing it to be done at some later point.  Second, this takes care of the ripeness issue.  If the time is set for approval, and it has passed, then the Court must consider the issue.

Of potentially equal importance in the holding is the fact that the Second Circuit stated unequivocally that the Service had the burden of production on this matter under Section 7491(c) and was responsible for showing the approval. It is fairly clear law that the Service has the burden of production and proof on penalties once a taxpayer challenges the penalties, with taxpayers bearing the burden on affirmative defenses.   The case law on whether the burden of production exists when a taxpayer doesn’t directly contest the penalties is a little more murky (thanks to Carlton Smith for my education on this matter).  The Second Circuit made clear its holding that the burden of production was solely on the Service, and the taxpayer had no obligation to raise the matter nor the burden of proof to show the approval was not given.  The Service had argued the taxpayer waived this issue by not bringing it up earlier in the proceeding, which the Second Circuit found non-persuasive.

As to the substance of the matter, the Second Circuit held the government never once indicated there was any evidence of compliance with Section 6751.  Since the Commissioner failed to meet is burden of production and proof, the penalty could not be assessed and the taxpayer was not responsible for paying it.  A very good holding for taxpayers, and we would expect a handful of other case to come through soon.  Given the division within the Tax Court, and the various rationales, it would not be surprising to see other Circuits hold differently.