What Happens After Boechler – Part 4: The IRS Argues That Equitable Tolling Would Not Apply in Deficiency Cases

As discussed in the prior three posts of this series, the Supreme Court decision in Boechler clearly rejected the Tax Court’s position set out in the portion of its opinion in Guralnik v. Commissioner, 146 T.C. 230 (2016) that held the time period for filing a petition in the Tax Court in a Collection Due Process (CDP) case is jurisdictional.  Petitioners who file a late Tax Court petition in a CDP case, joining petitioners in whistleblower cases and passport cases, will no longer find themselves tossed from the court automatically based on the date of court filing, but still face significant hurdles.  Petitioners seeking relief in the Tax Court outside of the three types of cases where decisions have removed the time period as a jurisdictional barrier still have some work to do in persuading the Tax Court as to how far the Boechler opinion applies.  Today’s post, part 4 in a four part series looking at the impact of Boechler, discusses the Supreme Court’s approach to the application of equitable tolling, including what CDP petitioners must do to overcome the hurdle of equitable tolling and the application of equitable tolling to deficiency proceedings once the courts determine the time for filing no longer provides a barrier. 

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The Tax Clinic at the Legal Services Center of Harvard Law School wrote its entire amicus brief in the Boechler case on the equitable tolling issue.  It did so because of the importance that the Supreme Court determine not only that the time for filing a petition pursuant to IRC 6330 does not create a jurisdictional barrier but also that petitioners could demonstrate through equitable factors the right to have the merits of their case heard by the Tax Court.  The IRS argued that even if the statute did not create a jurisdictional barrier petitioners should nonetheless still not have the opportunity to come into Tax Court because equitable tolling should not apply to a tax case.  The IRS relied on the Supreme Court’s decision in United States v. Brockamp, 519 U.S. 347 (1997).  The IRS has cited to Brockamp in every case leading up to and including Boechler, essentially arguing that it created a special exception for tax cases making equitable tolling inapplicable.  The Supreme Court soundly rejected this argument.

The Supreme Court started the equitable tolling section of the opinion with a broad statement about the general applicability of equitable tolling:

Equitable tolling is a traditional feature of American jurisprudence and a background principle against which Congress drafts limitations periods. Lozano, 572 U. S., at 10–11. Because we do not understand Con­gress to alter that backdrop lightly, nonjurisdictional limi­tations periods are presumptively subject to equitable toll­ing. Irwin v. Department of Veterans Affairs, 498 U. S. 89, 95–96 (1990).

In a footnote it took a mild swipe at a passing argument by the IRS that equitable tolling only applies in Article III courts, noting that it had already applied equitable tolling to non-Article III courts and citing, inter alia, to its decision in favor of the IRS in Young v. United States, 535 U.S. 43, 47 (2002) in which it, at the request of the IRS, granted equitable tolling to determine that the IRS could have a priority claim in a bankruptcy case.  It’s hard to imagine how the IRS could even make a passing argument on this issue given that it sought, and received, equitable tolling in a non-Article III court just two decades ago.

Applying the general principle of equitable tolling to the CDP statute the Supreme Court said:

We see nothing to rebut the presumption here. Section 6330(d)(1) does not expressly prohibit equitable tolling, and its short, 30-day time limit is directed at the taxpayer, not the court. Cf. id., at 94–96 (holding that a statutory time limit with the same characteristics is subject to equitable tolling). The deadline also appears in a section of the Tax Code that is “‘“unusually protective”’” of taxpayers and a scheme in which “‘laymen, unassisted by trained lawyers,’” often “‘initiate the process.’” Auburn, 568 U. S., at 160. This context does nothing to rebut the presumption that nonjurisdictional deadlines can be equitably tolled.

Count on the IRS arguing that the “unusually protective” aspect of CDP prevents equitable tolling from applying in deficiency cases.  As I discussed in the first post of this series, however, CDP should not be viewed as a unique provision and the same reasons that equitable tolling applies in a CDP case should also apply to deficiency cases.

The Court spent the next couple paragraphs explaining why Brockamp does not apply to CDP cases.  For the same reasons discussed in Boechler, Brockamp should not apply in deficiency cases.  Even though far more deficiency cases are filed in Tax Court than CDP cases, the total number of cases bears no comparison to the number of refund claims at issue in Brockamp.  One can only hope that this explanation resonates with the IRS, and it will refrain from citing Brockamp every time someone wants equitable tolling.  We will soon find out.

The Court then addressed the IRS’s final argument regarding equitable tolling – that creating uncertainty in the timing of the collection injunction of IRC 6330(d)(1) will cause big problems.  Here the Court states:

The Commissioner protests that if equitable tolling is available, the IRS will not know whether it can proceed with a collection action after §6330(d)(1)’s deadline passes. The Commissioner acknowledges that the deadline is al­ready subject to tolling provisions found elsewhere in the Tax Code—for example, tolling is available to taxpayers lo­cated in a combat zone or disaster area. Tr. of Oral Arg.37–40. But he says that the IRS can easily account for these contingencies because it continuously monitors whether any taxpayer is in a combat zone or disaster area. Ibid. Tolling the §6330(d)(1) deadline outside these circum­stances, the Commissioner insists, would create much more uncertainty.

In its brief to the Supreme Court the Solicitor General cited unsupported data not in the record of the case about numbers of cases and IRS internal processes.  I do not understand how that is allowed.  This is not information the Supreme Court could take judicial notice of.  In reviewing the information provided, I did not understand how the IRS arrived at the information the Solicitor General cited to the Supreme Court.  The information did not seem correct but it’s hard to argue against unsupported information that just magically appears. 

Aside from the fact that the Solicitor General feels it is appropriate to raise new information not in the record and not publicly available in its brief, which undermines the whole point of having a record, the data was, in fact, wrong.  It later sent a letter to the Supreme Court walking back the information in its brief and stating that the data was wrong but offering new unsupported data.  I found this offensive to the system.  The Court did not comment on it.  Perhaps it’s normal for the Solicitor General and the agency to toss non-public data into a Supreme Court brief, but I cannot understand how that is appropriate.

The IRS has to deal with uncertainty that a Tax Court case has begun and the collection injunction has come into existence all the time.  No better example exists than what has happened at the Tax Court during the pandemic.  By failing to notify the IRS of the filing of a Tax Court petition for a few months, the Tax Court set the IRS off into collection mode.  This has created problems for taxpayers and for the IRS but they are problems that get worked out and this has happened with thousands of cases.  Arguing that allowing the taxpayer to raise equitable tolling because it will create a problem when the problem already exists and gets fixed on a regular basis should not serve as a reason for preventing equitable tolling.  That solution is anything but equitable for individuals who miss the deadline for a good reason.

In responding to the IRS’s equitable tolling statute of limitations and levy authority uncertainty argument, the Supreme Court avoided discussing the two statutory extensions that the IRS said it could easily deal with (i.e., the IRC 7508 combat zone and IRC 7508A disaster declaration extensions) and simply focused on the more common statutory extension provided in IRC 7502, the timely-mailing-is-timely-filing extension.  The Court wrote:

We are not convinced that the possibility of equitable tolling for the relatively small number of petitions at issue in this case will appreciably add to the uncertainty already present in the process. To take the most obvious example, petitions for review are considered filed when mailed. 26 U. S. C. §7502(a)(1). The 30-day deadline thus may come and go before a petition “filed” within that time comes to the IRS’s attention. Presumably, the IRS does not monitor when petitions for review are mailed. So it is not as if the IRS can confidently rush to seize property on day 31 anyway.

Thus, one would expect that the equitable tolling statute of limitations and levy authority uncertainty argument will be rejected as well in a future court case involving equitable tolling of the IRC 6213(a) deficiency petition filing deadline.

The Supreme Court’s decision sends the Boechler law firm back to the Tax Court which will now decide if the late petition meets the equitable tolling tests.  Because the Tax Court has previously determined all of its deadlines for hearing cases are jurisdictional, it has not developed a body of law on equitable tolling.  Undoubtedly, it will now look to equitable tolling jurisprudence developed in other jurisdictions that did not bar its consideration.  What should we expect?

As the Tax Clinic’s brief points out, courts have generally developed three bases for applying equitable tolling: 1) actively misleading taxpayers about the filing deadline as the IRS did in Rubel, Matuszak and Nauflett; 2) extraordinary circumstances which prevent taxpayers from timely filing as occurred in Castillo and Atuke; and 3) timely filing petitions in the wrong forum as regularly happens and as we discussed here.

One of the first cases that the Tax Court may hear is the Castillo case which has been held by the Second Circuit awaiting the decision in Boechler.  The Fordham Tax Clinic represents Ms. Castillo who has yet to receive her CDP notice of determination even though it was mailed by the IRS to her last known address more than two years ago.  Postal records show it has never been delivered.  She filed her CDP petition late after finding out about the CDP notice of determination through an informal channel long after the deadline for filing passed. Castillo should provide the Tax Court with a slam dunk opportunity to grant equitable tolling and begin to develop its jurisprudence on this issue.  Undoubtedly petitioners will seek the benefit of equitable tolling without the favorable facts present in the Castillo case and the Tax Court will have the opportunity over the next few years to set the standards it will apply in letting in the handful of cases with deserving facts.  If you are bringing an equitable tolling case to the Tax Court look at the factors other courts have developed and bring deserving cases to the Court with well-developed arguments.

What Happens After Boechler – Part 3:  The IRS Argues that IRC 7459 Requires that IRC 6213(a) Treat the Time for Filing a Tax Court Petition as Jurisdictional

After Congress created the predecessor statute to IRC 6213 in 1924 (and created the Board of Tax Appeals – the predecessor to the Tax Court) it came back in 1926 and 1928 to create a separate statute which is now IRC 7459.  Section 7459 provides that a dismissal from a Tax Court case on jurisdictional grounds does not prevent the taxpayer from paying the tax and suing for refund.

When Carl Smith and I began making the argument that time periods for filing a Tax Court petition are not jurisdictional time periods, we initially confined our arguments to Collection Due Process (CDP) and innocent spouse cases out of concern that succeeding in deficiency cases might harm taxpayers because of 7459.  As we thought about this further over time, we could not remember a single incidence of a taxpayer being dismissed from the Tax Court on jurisdictional grounds and subsequently full paying the tax and suing for refund.  Of course, this does not mean it has never happened, but it does suggest it happens rarely.

This post will explain why IRC 7459 should not factor into the decision of whether IRC 6213 is a jurisdictional provision or a claims processing rule.  That conclusion results from both the language of the two statutes as well as the goal to protect taxpayers.

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In the prior two posts we have explained why the Supreme Court’s decision in Boechler knocks out all of the arguments that IRC 6213 is a jurisdictional provision previously made by the IRS, the Tax Court, and other courts, including the 9th Circuit in Organic Cannabis.  This post looks at the arguments regarding IRC 7459 and the cases the Tax Court dismisses in order to provide an explanation for removing the last argument from consideration.

In Organic Cannabis the 9th Circuit explained the various types of suits a taxpayer could bring to contest a tax liability and pointed out that:

if the taxpayer does file a petition in the Tax Court, then a decision “dismissing the proceeding shall be considered as its decision that the deficiency is the amount determined by the [IRS],” id. § 7459(d), and such decision as to “amount” is entitled to preclusive effect in subsequent proceedings between the taxpayer and the IRS, see Malat v. Commissioner, 302 F.2d 700, 706 (9th Cir. 1962). [emphasis added]

We have written before about the effect of a Tax Court dismissal, and we have explained that petitioners to the Tax Court cannot voluntarily dismiss a Tax Court case once jurisdiction has attached.  After setting up the general rule, the 9th Circuit went on to explain the exception in IRC 7459(d) when the Tax Court dismisses a case because it lacks jurisdiction:

there is no such “decision” as to “amount,” and no preclusive effect, if the Tax Court’s “dismissal is for lack of jurisdiction.” 26 U.S.C. § 7459(d) (emphasis added)

Then the 9th Circuit used as one of its bases for finding IRC 6213 to be a jurisdictional provision with regard to the time of filing the problem that would attach if it were not jurisdictional:

Under Appellants’ non-jurisdictional reading of § 6213(a), the Tax Court’s dismissal of a petition as untimely could potentially have the perverse effect of barring the taxpayer from later challenging the amount in a refund suit—ironically yielding precisely the sort of “harsh consequence[]” that the Supreme Court’s recent “jurisdictional” jurisprudence has sought to avoid.  Kwai Fun Wong, 575 U.S. at 409.  That peculiar outcome is avoided if § 6213(a) is read as being jurisdictional, because then dismissals for failure to meet its timing requirement would fall within § 7459(d)’s safe-harbor denying preclusive effect to Tax Court dismissals “for lack of jurisdiction.” 

So, the 9th Circuit used what it thought would be a negative effect of finding IRC 6213 to be a claims processing rule as a basis for justifying its decision.  This is wrong both as statutory interpretation and wrong in thinking that keeping IRC 6213 as a jurisdictional provision would not harm taxpayers, while making that deadline non-jurisdictional would harm taxpayers.

With respect to statutory interpretation, IRC 7459 simply has no role to play.  The argument for the role of IRC 7459(d), at least based on the IRS argument, is that interpreting the jurisdictional dismissal exception of that subsection to exclude dismissals for late filing would render the exception superfluous.  The IRS has argued that the only dismissals that are currently jurisdictional (other than those when no notice of deficiency was issued and so the amount of a deficiency cannot be set out in the dismissal order) are from late filing. This argument fails because many reasons exist why a petition may be dismissed for lack of jurisdiction other than merely late filing or the lack of a notice of deficiency.  The most obvious situation occurs when the Tax Court dismisses a petition for lack of jurisdiction due to an invalid notice of deficiency because the IRS did not send the notice to the taxpayer’s last known address.  See, e.g., Crum v. Commissioner, 635 F.2d 895 (D.C. Cir. 1980).  Another example occurs when the automatic stay in bankruptcy bars the filing of a Tax Court petition, see, e.g., Halpern v. Commissioner, 96 T.C. 895 (1991).  Another example occurs when a corporation lacks capacity to file the petition, see, e.g., Vahlco Corp. v. Commissioner, 97 T.C. 428 (1991) (Texas law).  The biggest reason for dismissal from Tax Court for lack of jurisdiction occurs for failure to pay the filing fee – almost 2/3rds of the dismissals occur for this reason.  So, the IRS is wrong when it argues that determining IRC 6213 is a claims processing rule renders IRC 7459(d) superfluous.

The legislative history of IRC 7459(d) also does not support the conclusion that Congress enacted the statute to preserve the rights of taxpayers who file late in the Tax Court to avoid res judicata in a subsequent refund suit involving the same deficiency.  There is no such legislative history.  There is also nothing in the language of IRC 7459 that speaks to the time frame for filing a Tax Court petition as a jurisdictional time frame.  There is simply no language to parse.

After you leave the legal arguments that have no merit, you move to the apparent presumption by the 9th Circuit that somehow IRC 7459 helped taxpayers.  First, there’s the problem that Congress gave no indication it sought that result, either in the language of the statute or its legislative history. Second, the actual effect of the 9th Circuit’s take on the statute hurts far more taxpayers than it helps.

Carl Smith looked at the dismissals for lack of jurisdiction due to late filing in February and March of 2022 searching DAWSON using the search words “lack of jurisdiction and timely.”  He found 103 cases which suggests 618 dismissals over the entire year or some similar number.  Each of those individuals could theoretically be adversely impacted if section 7459(d)’s exception for jurisdictional dismissal could not apply, so that res judicata would prohibit their filing later refund suits.

To know how the loss of 7459(d) protection could adversely impact this group, it’s necessary to know how many taxpayers in this group paid the tax and filed a suit for refund.  For this fiscal year ending September 30, 2020, 188 refund suits in total were brought in the Court of Federal Claims and the district courts.  Not all of the 188 complainants filed after a prior Tax Court dismissal for late filing and perhaps none of them did.  Indeed, Carl looked at all district court and CFC opinions issued in 2021 using the search terms “refund and (Tax Court) and dismiss!” and could not find a single refund suit in which it was clear that the IRS had issued a notice of deficiency, the taxpayer had then late-filed a Tax Court suit, and, after the suit’s dismissal, the taxpayer sued for a refund. 

Carl did come across one 2021 opinion where a taxpayer’s Tax Court deficiency suit had been dismissed for lack of jurisdiction, purportedly for late filing, and a CFC refund suit ensued — see my post of June 4, 2021 on the case, Jolly.  However, in that case, it was unclear whether the IRS had ever issued a notice of deficiency, with the IRS arguing in the Tax Court that a notice of deficiency had been issued, but arguing in the CFC that the IRS had never issued one and that the Tax Court dismissal was wrong for saying there had been a late-filed petition rather than a petition lacking an underlying notice of deficiency.  And, in Jolly, the taxpayer did not fully pay the tax before bringing the CFC suit.    Reading the 2021 opinions, Carl also found a citation to a pre-2021 opinion in a refund suit where a taxpayer brought a CFC suit after his Tax Court deficiency suit was dismissed for lack of jurisdiction for late filing and where there was no dispute that a notice of deficiency had been issued, Wall v. United States, 141 Fed. Cl. 585 (2019), but the taxpayer in the suit was only seeking relief from liens, not a refund, and, in any event, had not fully paid the deficiency before bringing the suit.

It’s probable that no refund suits resulted from the Tax Court dismissals for failure to timely file the petition because a very high percentage of the petitioners dismissed were pro se taxpayers who lack knowledge of tax procedure and funds to full pay.  Only in a rare cases does the taxpayer benefit from IRC 7459(d), and not one that we know of.  Yet, we know there are cases in which taxpayers could benefit from the interpretation of IRC 6213 as a claims processing rule.

Petitioners who would especially benefit from the interpretation of IRC 6213 as a claims processing rule are petitioners with a good basis for equitable tolling.  While this is not a large number, the individuals with a good reason for filing late present very sympathetic cases in which the petitioners deserve the chance to have the merits of their case heard.  The next post will talk about the equitable tolling rules and who these petitioners might be. 

In addition, petitioners who would benefit are the petitioners dismissed because the Tax Court spent the time and effort to carefully review each case to determine if it had jurisdiction and issued an order to show cause when it had concerns about its jurisdiction even though Chief Counsel did not raise an issue.  In February and March of 2022, Carl searched for this type of order to show cause and found 34 cases.  This means that about 204 petitioners a year might benefit if the Tax Court did not need to spend time carefully scouring each case to check on its jurisdiction.  This would not only give these taxpayers a chance to have the merits of their argument heard but would save the Tax Court all of the time it currently spends looking at each case to determine if it has jurisdiction. 

To determine how many of the cases in which the Tax Court show cause orders resulted in a dismissal, Carl went back to April and May of 2021 expecting that most of those cases would have cleared through the system by now, offering a percentage of cases dismissed after a show cause order.  His research suggests that about 75% of the cases identified were dismissed as untimely.  The 9th Circuit’s effort to “help” taxpayers by citing to IRC 7459(d) instead created a misguided view of the system.  The actual cases show that few, if any, taxpayers receive a benefit from IRC 7459(d) but quite a few taxpayers might benefit from a claims processing rule, either because they have a basis for equitable tolling or, more likely assuming the Chief Counsel attorneys continue to fail to identify issues of timely filing, because taxpayers will no longer face orders to show cause for dismissal for lack of jurisdiction on account of late filing.

What Happens After Boechler – Part 2:  The IRS Argues the Floodgates Will Open if the Tax Court Follows Boechler in Interpreting IRC 6213(a)

Boechler involves the Tax Court’s jurisdiction in Collection Due Process (CDP) cases.  The Tax Court Congressional Budget Justification Fiscal Year 2023 (Feb. 28, 2022), at page 19 reports that CDP cases filed in the fiscal year ended 9/30/21 made up 3.29% of its total caseload and deficiency cases made up 96.46% of its total caseload (though the Tax Court overstates the deficiency case figure by apparently including in that deficiency figure all dockets that do not have letters at the end of their docket numbers — which would mean that the deficiency figure erroneously also sweeps in 6015(e) cases and all those cases later dismissed for LOJ because no ticket to the Tax Court under any jurisdiction had been issued). If the Tax Court determines that the time period for filing petitions in deficiency cases is not a jurisdictional time period, many more petitioners will have the opportunity to argue that the Court should hear their late petition than would have the opportunity in CDP cases – almost 20 times as many.  What does the floodgate argument really mean here?  Should it make a difference?

There are at least two parts to the question of the impact of finding that the time period for filing a Tax Court petition in a deficiency case is not jurisdictional.  One, what is the volume of late filed cases?  Two, how many of the late filed cases have a marginally meritorious case that will require actual resources at the Court and at Chief Counsel, IRS to resolve?  One possible result, discussed below, is that the net effect will cause little if any additional work for the Court or Chief Counsel.  If the Tax Court finds or is instructed that 6213(a) is not a statute in which the time for filing creates a jurisdictional bar, the net result of any additional work should not be significant.

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The Tax Clinic at the Legal Services Center of Harvard Law School has been looking at Tax Court dismissals for several years, monitoring the cases in search of meritorious cases that might provide a challenge to the Court’s view that all of its bases for jurisdiction have a jurisdictional time frame.  Looking at the cases primarily means Carl Smith reviewing the daily docket, Carl passing to me any cases that look like they were dismissed for a reason based on late filing where the petitioner has raised some type of excuse that seems more than frivolous, me ordering the documents from the Court that led to the Court’s order, Carl and me reviewing the documents to decide if the case has a potentially meritorious argument on the excuse and on the merits, me calling the taxpayers with a potentially meritorious case to get further information and a sense of their interest in pursuing the case further and a follow up discussion between Carl and me on whether to move forward with the case.  We find very few cases that meet our criteria – less than 10 each year in all Tax Court bases for jurisdiction combined.

Backing up from our criteria to the criteria that will cause work for the Court and Chief Counsel, it’s necessary to decide how many cases will have an argument for equitable tolling that requires a hearing of some type.  When Chief Counsel identifies a case as late filed, more about why I say only Chief Counsel below, it will make affirmative allegations in its answer that the petition was untimely.  It already spends at least as much time as the affirmative allegations will take by filing a motion to dismiss on all of the cases it determines were filed late.  So, no additional work there.  The taxpayer will, or should, respond to the affirmative allegations setting forth the defense(s) that the petition was timely filed and/or that the time for filing should be equitably tolled.  This process saves the Court the time it takes to produce and send out show cause orders.  At some point the Court will rule on the effect of late filing.  The Court already rules on this issue after the show cause order.  So, no additional work there.

Not all taxpayers will file a response to the answer.  Taxpayers who do not respond will cause the IRS to file a Rule 37(c) motion.  This may cause the Court to give the taxpayers a second chance to respond or may cause the Court to rule at that point.  The filing of this motion will cause Chief Counsel a little more work.  If the Court issues an order giving taxpayers a second chance to respond, this will cause the Court a little more work.

Taxpayers who do respond will now respond with different/additional information from the information provided in responses prior to a change in the jurisdictional nature of IRC 6213.  Some taxpayers will respond with a detailed explanation of the reason for the late filing.  Some of these responses will make clear that the taxpayers do not fit into the Court’s criteria for equitable tolling.  It will take the Court several opinions in the early years after determining IRC 6213 does not have a jurisdictional time frame for the Court to develop a body of jurisprudence on equitable tolling.  It must do so now for IRC 6330 cases.  It’s worth noting that the Tax Court could have been building its body of equitable tolling law since the D.C. Circuit’s decision regarding whistleblower petitions in the Myers case.  It has not and may have been holding the Myers case in abeyance pending the outcome of Boechler but that is another source of equitable tolling jurisprudence that can inform IRC 6213 cases.  There is no indication that in the whistleblower or passport cases, both areas of Tax Court jurisdiction with relatively low filing numbers, that a stampede of equitable tolling requests, or any such requests, has occurred. 

So, developing this body of jurisprudence should not add much to the burden of the Tax Court.  Once it has established its criteria for reviewing cases for equitable tolling, it will be able to dismiss some cases in which taxpayers response to the affirmative allegations in the answer discloses a reason for filing a late petition that does not fit within the established bases for accepting the case.  Making decisions on these cases will not cause much additional work and probably will occur in the office of the Chief Judge with the attorneys who work there.  This will cause little or no additional work for Chief Counsel attorneys.

Unquestionably, some cases will respond to the motion and raise enough concerns about the nature of their argument for jurisdiction that the Court will need to schedule a hearing in order to take evidence and to allow further argument.  These cases will cause more work for the Court and for Chief Counsel.  In order to guess how many cases we might be talking about here, it is necessary to start with the number of cases typically dismissed for lack of jurisdiction based on an untimely petition.  No need to look at other bases for dismissal since they are not implicated by the Boechler decisions.

Carl Smith did research on the number of dismissals for lack of jurisdiction based on timeliness and found 103 cases in February and March of 2022.  At that pace one might expect about 600 cases in a year.  Based on these raw numbers, we need to determine how many of the petitioners filed a response that would require more work of the Court and Chief Counsel.  Carl Smith has been reviewing all orders of dismissal for the last four months for late filing under all jurisdictions, and he estimates he has seen only about 30 orders where taxpayers have tried to provide a good excuse for late filing.  Assuming that number holds and that similar numbers of articulated excuses in future cases will require the litigation of equitable tolling if the filing deadlines are no longer jurisdictional, that means that about 90 cases a year will involve parties doing filings relating to the assertion of equitable tolling.  So, probably there would be 87 cases a year that would require additional work from the Tax Court and Chief Counsel to deal with taxpayer-pleaded equitable tolling defenses if IRC 6213 creates a claims processing rule.  Under Boechler, about 3 cases a year will probably be CDP cases in which a taxpayer pleads equitable tolling.  That low CDP number may surprise a lot of people who thought Boechler would open floodgates under CDP.  Of course, the new legal possibility of equitable tolling under all jurisdictions may bring additional taxpayers to assert facts that can give rise to equitable tolling, but it is hard to believe that these new assertions would any more than double the number of cases each year where equitable tolling would be argued.  Further, probably only a third of such cases will actually be granted equitable tolling (30).  There will be additional work to Counsel and the Court on the merits in such cases, but 30 cases is only 0.1% of the Tax Court’s docket each year.  So, given that over 90% of cases settle on the merits anyway, the additional work will probably not involve more than a single extra merits trial a year.

Tomorrow’s post will explain in more detail why Chief Counsel must make its objection early in the case.  Chief Counsel attorneys will also have a time savings because they will no longer need to respond to orders to show cause in cases where they do not raise the issue in the answer.  For reasons discussed in the next post, the failure to raise the timing of the filing in the answer will probably end any argument on timing allowing the parties to focus on the merits.

What Happens After Boechler – Part 1: The IRS Argues IRC 6330 is Unique

In Boechler, the Supreme Court parsed the language of IRC 6330 looking for a clear statement from Congress that Congress intended to make into a jurisdictional limit the 30-day deadline to file a Tax Court petition after a Collection Due Process (CDP) notice of determination.   It did not find that clear statement. 

The next big fight will be interpreting IRC 6213(a) to determine if Congress made a clear statement in that provision.  In today’s blog post and in the posts in this series that will follow, I will examine the arguments the IRS will make based on the arguments it has made previously.  The posts will focus on the clear statement rule since the Supreme Court has held on numerous occasions that two tests apply in determining if a statute provides a jurisdictional time frame.  Carl Smith blogged about the jurisdictional nature of the time period in IRC 6213(a) two years ago when the Tax Clinic at the Legal Services Center filed motions for reconsideration in three cases with strong equitable facts and favorable merits arguments. 

In addition to the clear statement rule, the second test – whether controlling Supreme Court jurisprudence exists to create a stare decisis exception to the general rule that filing deadlines are not jurisdictional – clearly does not apply to IRC 6213(a), since the question of whether the time period for filing a petition in Tax Court is jurisdictional has never resulted in a Supreme Court decision.  The Tax Court (in Guralnik) and the IRS have pointed to a long list of lower court opinions holding the IRC 6213(a) filing deadline jurisdictional.  Those cases do not qualify for the stare decisis exception. 

In Boechler, the IRS also cited that IRC 6213(a) precedent to the Supreme Court when arguing that Congress in 1998 intended to make the CDP filing deadline jurisdictional.  The Court not only rejected this argument, but also dismissed giving any deference to the IRC 6213(a) authority as follows:

The Commissioner’s weakest argument is his last: He insists that § 6330(d)(1)’s filing deadline is jurisdictional because at the time that deadline was enacted, lower courts had held that an analogous tax provision regarding IRS deficiency determinations is jurisdictional. (That provision says that “[w]ithin 90 days . . . the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency.” 26 U.S.C. § 6213(a).) According to the Commissioner, Congress was aware of these lower court cases and expected § 6330(d)(1)’s time limit to have the same effect. So, he says, the statutory backdrop resolves any doubt that might linger in the text.

The Commissioner’s argument misses the mark. The cases he cites almost all predate this Court’s effort to “bring some discipline” to the use of the term “jurisdictional.”  Henderson, 562 U.S., at 435. And while this Court has been willing to treat “‘a long line of [Supreme] Cour[t] decisions left undisturbed by Congress’” as a clear indication that a requirement is jurisdictional, Fort Bend County v. Davis, 587 U.S. ___, ___, 139 S. Ct. 1843 (2019), no such “long line” of authority exists here.

So, I will spend no further time on the second test and focus exclusively on the clear statement rule.  I assume the IRS will do the same.

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The IRS will argue that Congress created IRC 6330 as a benefit for taxpayers uniquely crafted to play a highly protective role by a Congress seeking to remedy perceived IRS abuses.  This makes IRC 6330 special and the outcome in Boechler limited. 

Looking back almost 100 years, you can find that the deficiency procedure created in 1924 also resulted from a Congress that sought to protect taxpayers from having to pay the relatively new income and estate taxes before contesting IRS adjustments.  The legislative history has statements about allowing taxpayers to avoid the need to go into bankruptcy because of an inability to pay and an inability to contest the additional taxes in court without first paying.  While the general perception sees the CDP provisions as taxpayer friendly ones and perceives, at this point in time, the deficiency procedures simply as the way the code is structured, both provisions arose out of a desire to protect taxpayer rights.  CDP provisions arrived later after Congress began enacting assessable penalties that skirted the deficiency procedures and after it broadened the scope of citizens impacted by taxes from the narrow band of high income individuals taxed in 1924 to the entire populace by 1998.  So, we shouldn’t dismiss Boechler as unique because it pertains to a provision designed to protect taxpayers.

Parsing IRC 6213(a) looking for a link between the grant of jurisdiction and the time period for filing presents an even greater challenge for the IRS than IRC 6330.  IRC 6213(a) just doesn’t link the time period for filing the petition with the grant of jurisdiction.  Bryan Camp’s article New Thinking About Jurisdictional Time Periods in the Tax Code (January 21, 2019), 73 The Tax Lawyer 1 (2019) parses several Tax Court jurisdictional provisions and determines that IRC 6213 does not link the time period to the grant of jurisdiction.  In getting to the parsing of the current language, Bryan takes a long walk through the history of IRC 6213(a) and how it arrived at its current language.  He then walks through the current language of this section of the Code:

The text of sentence (1) is not the kind of text that the Supreme Court has ever held to speak in jurisdictional terms. It contains no mandatory language, such as “the taxpayer must file . . . .” Even if it had mandatory language, the Court has repeatedly said that “Congress must do something special, beyond setting an exception-free deadline, to tag a statute of limitations as jurisdictional and so prohibit a court from tolling it.” 101 And there is nothing special about the text in sentence (1) of section 6213(a). It says nothing about what powers the Tax Court has. It says only what a taxpayer must do: petition for redetermination.

Sentence (4) does contain the magic word “jurisdiction.” The new thinking teaches that even the magic word “jurisdiction” appearing somewhere in the statute is not the kind of “clear statement” needed to overcome the presumption unless it hooks up to the limitations period tightly. At first glance, sentence (4) appears to contain the requisite connection because it references the need for a “timely petition.”

A closer look at what sentence (4) does dispels the appearance. The sentence removes power from the Tax Court in the face of an untimely petition. What power? Why, the power granted the Tax Court in sentence (3), the power to enjoin the Service. Sentence (4) does not say that the Tax Court shall have no powers at all in the face of an untimely petition, just that it will not have jurisdiction to enjoin or order a refund. The word jurisdiction in sentence (4) thus quite reasonably links to the Tax Court’s power to enjoin given in sentence (3). But nothing in sentence (4) hooks the timing requirements in sentence (1) to the jurisdictional grant in section 6214 to redetermine a deficiency.

Bryan discusses the link between IRC 6213 and 6214.  He finds that each provision contains a separate grant of jurisdiction.  Section 6213 creates jurisdiction to prohibit assessment with an injunction while section 6214 gives jurisdiction to redetermine a deficiency.  The injunction power, another taxpayer friendly provision, was added to the Code in 1988 as part of the first Taxpayer Bill of Rights.  Bryan points out that the word jurisdiction refers to the Tax Court’s power to enjoin and to issue a refund and not time limitations.  Even the title of the provision supports this reading – “Restrictions Applicable to Deficiencies: Petition to Tax Court.”

The Supreme Court’s precedent on jurisdiction does not turn on whether a statute seeks to assist or other factors that might make certain provisions unique.  Instead, it starts with a presumption that a time period is not jurisdictional.  It moves from that presumption to examining the statute to determine whether Congress has made a clear statement.  Making the determination requires carefully examining the text of the statute.  As described above in the language quoted from Bryan’s article, the text does not lead to the conclusion that IRC 6213(a) links the 90-day period to filing a petition to the grant of jurisdiction.

Not only is the text important but context is as well.  How does the time period relate to the statutory scheme surrounding the provision?  Bryan’s article looks at legislative context, judicial context and statutory context in explaining why, in none of these contexts, IRC 6213 provides the type of language or history that suggests the 90-day period for filing of petition creates a jurisdictional rule.

The main reason why the courts of appeal in Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017), and Organic Cannabis Foundation v. Commissioner, 962 F.3d 1082 (9th Cir. 2020), held the IRC 6213(a) filing deadline jurisdictional under the “clear statement” exception despite the first sentence of that section not even containing the word “jurisdiction” – is the word “jurisdiction” in the fourth sentence of IRC 6213(a), which limits the Tax Court’s injunctive jurisdiction to cases in which the petition in the main Tax Court action under the first sentence is “timely filed”.  But, that logic can no longer be relied on after Boechler.  IRC 6330(e)(1) contains copycat language giving the Tax Court jurisdiction to enjoin the IRS from improper levying during a CDP case in the Tax Court only if there was a “timely petition” in the main CDP action under IRC 6330(d).  Boechler’s demolition of the argument that IRC 6330(e)(1) language can cause the IRC 6330(d)(1) filing deadline to be jurisdictional should fully undermine the argument that similar language in the fourth sentence of IRC 6213(a) makes the filing deadline in the first sentence of that subsection jurisdictional.  Here’s what the Court wrote about this in Boechler:

The Commissioner contends that a neighboring provision clarifies the jurisdictional effect of the filing deadline.  Section 6330(e)(1) provides that “if a [collection due process] hearing is requested . . . the levy actions which are the subject of the requested hearing . . . shall be suspended for the period during which such hearing, and appeals therein, are pending.” To enforce that suspension, a “proper court, including the Tax Court,” may “enjoi[n]” a “levy or proceeding during the time the suspension . . . is in force,” but “[t]he Tax Court shall have no jurisdiction under this paragraph to enjoin any action or proceeding unless a timely appeal has been filed under subsection (d)(1).” § 6330(e)(1).

Section 6330(e)(1) thus plainly conditions the Tax Court’s jurisdiction to enjoin a levy on a timely filing under § 6330(d)(1). According to the Commissioner, this suggests that § 6330(d)(1)’s filing deadline is also jurisdictional. It would be strange, the Commissioner says, to make the deadline a jurisdictional requirement for a particular remedy (an injunction), but not for the underlying merits proceeding itself. If that were so, the Tax Court could accept late-filed petitions but would lack jurisdiction to enjoin collection in such cases. So if the IRS disobeyed § 6330(e)(1)’s instruction to suspend the levy during the hearing and any appeal, the taxpayer would have to initiate a new proceeding in district court to make the IRS stop.

We are unmoved—and not only because the scenario the Commissioner posits would arise from the IRS’s own recalcitrance. The possibility of dual-track jurisdiction might strengthen the Commissioner’s argument that his interpretation is superior to Boechler’s. Yet as we have already explained, the Commissioner’s interpretation must be not only better, but also clear. And the prospect that § 6330(e)(1) deprives the Tax Court of authority to issue an injunction in a subset of appeals (where a petition for review is both filed late and accepted on equitable tolling grounds) does not carry the Commissioner over that line. If anything, § 6330(e)(1)’s clear statement—that “[t]he Tax Court shall have no jurisdiction . . . to enjoin any action or proceeding unless a timely appeal has been filed”—highlights the lack of such clarity in § 6330(d)(1).

Think of IRC 6213(a) when you read the quote.

Avoid thinking about IRC 6330 as somehow a unique tax statute creating a time period for filing a Tax Court petition that is not jurisdictional.  Instead, focus on the purpose and the language of IRC 6213(a) in recognizing that for the same reason, though parsing though different statutory language, that the CDP provision does not create a jurisdictional time period for filing a petition, neither does the deficiency statute.

Winning Boechler Took a Village

Today we welcome back retired blogger, Carl Smith.  Carl was the architect of the argument that time periods for filing a petition in Tax Court are not jurisdictional based on his reading of Supreme Court cases coming out in other areas of the law.  He worked with the Tax Clinic at the Legal Services Center of Harvard Law School to assist in writing briefs and preparing the students to make oral arguments to Circuit courts.  He worked to identify cases in which we should make the arguments, including the first case it entered (as an amicus), Guralnik v. Commissioner, in which the Tax Clinic made the argument in a case involving a snow day and the Tax Court rejected our argument 17-0.  He also worked with attorneys around the country who had these cases helping them craft their arguments and helping the Harvard students write amicus briefs.  Today’s post is Carl recognizing the village, but I want to recognize him for creating the legal designs that ultimately led to the Supreme Court’s decision.  Keith

In Boechler v. Commissioner, the Supreme Court held that the filing deadline for a Tax Court Collection Due Process petition is not jurisdictional and is subject to equitable tolling.  This victory was about 15 years in the making, and it took a village of almost all pro bono attorneys and clinicians to make it happen.  I wanted to send out thanks to those who helped along the way:

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Jason Grimes – the young pro bono Florida attorney who first made the argument, in a district court suit brought by the IRS to collect taxes, that one of the taxpayers should be entitled to raise section 6015 innocent spouse relief as a defense.  The district court (I think, erroneously) concluded that it lacked jurisdiction to consider relief under section 6015.  Jason persuaded the district court to equitably toll the section 6015(e) filing deadline so that the taxpayer could belatedly file a Tax Court petition.  United States v. Pollock, 2007 U.S. Dist. LEXIS 98153 (S.D. Fla. 2007).  When Jason filed the Tax Court petition on behalf of Mrs. Pollock, he argued that the recent Supreme Court non-tax case law making filing deadlines usually not jurisdictional required the Tax Court to accept the case.  The Tax Court rejected accepting the case, holding the deadline jurisdictional and not subject to equitable tolling.  Pollock v. Commissioner, 132 T.C. 21 (2009).  I became aware of the argument that Tax Court filing deadlines might no longer be jurisdictional when I read the Pollock opinion and the recent Supreme Court non-tax opinions concerning jurisdiction, and I made the same argument Jason did (also unsuccessfully) for a client of the Cardozo Tax Clinic in Gormeley v. Commissioner, T.C. Memo. 2009-252.  (By the way, appeals were docketed from both the Pollock and Gormeley opinions, but the taxpayer appeals were dropped before opinion after the IRS stopped pursuing Mrs. Pollock for collection and the IRS belatedly discovered (at my insistence that they look) that they had never sent Ms. Gormeley the notice of deficiency that underlay her section 6015 relief request.)

Keith Fogg – who, as the Director of the Tax Clinic at the Legal Services Center of Harvard Law School, agreed to lend his clinic’s name and assistance to an amicus brief that he and I filed in the Tax Court case of Guralnik v. Commissioner, 146 T.C. 230 (2016), arguing that the section 6330(d)(1) deadline to file a Tax Court Collection Due Process (CDP) petition is not jurisdictional and is subject to equitable tolling under the recent Supreme Court non-tax case law on jurisdiction and equitable tolling.  We lost that argument in the case by a vote of 17 judges to zero, which might have deterred Keith from ever making the argument again, but he persisted in lending the clinic’s name and students to many later cases in which the clinic  argued (either as counsel for taxpayers or as amicus) that the Tax Court filing deadlines for innocent spouse, CDP, deficiency, and whistleblower awards petitions are not jurisdictional and are subject to equitable tolling.  In addition to Boechler v. Commissioner, 967 F.3d 760 (8th Cir. 2020) (CDP), the Harvard clinic was involved in Organic Cannabis Foundation LLC v. Commissioner, 962 F.3d 1082 (9th Cir. 2020) (deficiency); Myers v. Commissioner, 928 F.3d 1025 (9th Cir. 2019) (whistleblower award); Nauflett v. Commissioner, 892 F.3d 649 (4th Cir. 2018) (innocent spouse); Cunningham v. Commissioner, 716 Fed. Appx. 182 (4th Cir. 2018) (CDP); Duggan v. Commissioner, 879 F.3d 1029 (9th Cir. 2018) (CDP); Matuszak v. Commissioner, 862 F.3d 192 (2d Cir. 2017) (innocent spouse); and Rubel v. Commissioner, 856 F.3d 301 (3d Cir. 2017) (innocent spouse).

Amy Feinberg – a student of Keith’s in the Tax Clinic who did oral argument to the 4th Cir. in Cunningham while a Harvard Law student, and then, while at Latham & Watkins, persuaded her firm to allow her to do the oral argument in the 8th Cir. in Boechler pro bono.  Amy also persuaded her firm to do the Supreme Court Boechler case pro bono.  Amy also helped draft the taxpayer’s Supreme Court filings.  In addition to Amy, Harvard Law Students Jeff Zink, now an associate with Covington and Burling in D.C., argued the Matuszak case before the Second Circuit and Allison Bray, now an associate with Kirkland and Ellis in San Francisco, argued the Nauflett case before the Fourth Circuit.  Numerous students at the Tax Clinic assisted in writing amicus briefs over the six years since the Tax Clinic began pursuing this issue.  Jonathan Blake and Nathan Raab worked on the amicus brief in Boechler following a long line of prior clinic students. 

Melissa Sherry – the Latham attorney who took on the Supreme Court Boechler case pro bono and did one of the most outstanding oral arguments I have ever heard and who did briefing in the Supreme Court case that improved on several of the arguments that Keith and I had first made in Guralnik.

Carolyn Flynn – a Latham attorney who helped write the Supreme Court briefs in Boechler.

Joseph DiRuzzo – who, at my suggestion, entered a pro bono appearance for the petitioner in Myers v. Commissioner, where Joe successfully argued that the whistleblower award filing deadline at section 7623(b)(4) is not jurisdictional and is subject to equitable tolling.  Myers created the Circuit split that caused the Supreme Court to grant review in Boechler, since there is no practical difference between the language of sections 6330(d)(1) and 7623(b)(4).

David Clark Thompson – who represented the taxpayer in Boechler in the Tax Court and 8th Cir. and had the wisdom to make the argument that the Harvard clinic had made in Duggan to the 9th Cir.

Elizabeth Maresca – Director of the tax clinic at Fordham, who decided to pursue the argument that the CDP petition filing deadline is not jurisdictional and is subject to equitable tolling in the factually-appealing case of Castillo v. Commissioner (currently pending in the 2d Cir., waiting the Boechler ruling) – a case much cited in the briefs in the Supreme Court in Boechler.

Nina Olson – who, as IRS National Taxpayer Advocate, argued that Congress should clarify that all Tax Court petition filing deadlines are not jurisdictional and are subject to equitable tolling.  Later, as the Director of the Center for Taxpayer Rights, Nina also lent her organization’s name to briefs drafted by Keith, me, and students in the Harvard clinic in Boechler.

Frank Agostino – who, acting pro bono, raised the Boechler argument in a late-filed CDP case apparently appealable to the D.C. Circuit, Amanasu Environment Crop. v. Commissioner, T.C. Docket No. 5192-20L, even before the Supreme Court granted cert. in Boechler.  Frank was hoping not only to benefit the taxpayer, but create a direct Circuit split with the 8th Cir. Opinion in Boechler over the section 6330(d)(1) filing deadline – on the assumption that the D.C. Circuit panel would feel compelled to follow a prior panel’s Myers opinion involving the whistleblower award filing deadline.  To this end, in April 2021, Frank also successfully made a motion to remove the case’s original small tax case designation.  However, the Tax Court deferred deciding the pending motion to dismiss in the case until after the Boechler opinion was issued.

Lavar Taylor and team at Skadden, Arps, Slate, Meagher & Flom LLP (Sam Auld, Peter Bruland, Shay Dvoretzky and Emily Kennedy) – who wrote excellent amicus briefs in support of Boechler.

Supreme Court Decides Boechler Case

The Supreme Court held 9-0 that the time for filing a petition in a Collection Due Process case is not a jurisdictional time period.  It also held that late filing is subject to equitable tolling.  A copy of the opinion is here.  We will have more about the case in days to come.

Public Policy and Not in the Best Interest of the Government Offer in Compromise Rejections

In the first year of this blog, I wrote a post on the case of Anderson v. Commissioner, 2013-261, questioning why the Settlement Officer (SO) in Appeals did not reject a taxpayer’s offer by citing public policy grounds.  In that case the Tax Court remanded a Collection Due Process (CDP) determination because the SO’s basis for rejecting an offer of a very sick taxpayer did not provide sufficient reasoning.  I pointed out in my post that the SO could have rejected the offer based on public policy grounds, and I thought it unlikely the Tax Court would second guess such a determination by the SO on the facts of that case since the taxpayer had criminal tax convictions.

Today, I write about a case in which the IRS rejected the taxpayer’s offer as not in the best interest of the government (NIBIG), a policy-based decision but one separate from public policy rejection according to the Internal Revenue Manual as discussed below.  The Tax Court sustains the determination in a CDP case.  The case of O’Donnell v. Commissioner, T.C. Memo 2021-134, does not involve an individual convicted of a tax crime, which I think provides a strong cover for the IRS in a challenge to a NIBIG or public policy rejection, but does involve someone with a long history of bad tax behavior.  Since many offer candidates come hat in hand seeking an offer after long periods of bad tax behavior, I found today’s case interesting.  The relative ease with which the Tax Court sustained the NIBIG rejection suggests to me that it will rarely second guess such a determination by the IRS.

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I don’t know how many offers get rejected each year on NIBIG or public policy grounds.  As discussed in my recent post on the EPIC case, and the post to which it links discussing a TIGTA report with a suggestion to put this information online, public information about offers is hard to come by, making it difficult, if not impossible, to ascertain this type of information without trying a FOIA request.  Even if you get to the publicly available information, all you find is the rather sparse set of information on Form 7249 (Rev. 3-2017) (irs.gov)

No information is publicly available on rejected offers.  So, much of the information about IRS offer practice is passed from practitioner to practitioner by word of mouth.  Practices that handle large volumes of offers will have a better sense of what the IRS will accept but the information available reminds me a bit of the situation with private letter rulings.  While a prior post discusses the history behind making offers public through IRC 6103(k), that code section came into existence long before the modern offer practice at the IRS, which did not develop until 1990.  It might be time to take another look at not only how the IRS makes the information public but what information should be public.  Should the act of making an offer be public?

I mentioned in the Anderson post that at the time I wrote that post in 2013 I had recently represented an individual with a history of very bad tax behavior including a criminal tax conviction and the SO in that case had raised the specter of a public policy rejection.  Though the Villanova and Harvard tax clinics I have directed over the past decade have submitted a couple dozen offers each year, I have not since had an offer examiner or SO raise public policy as a basis for rejecting an offer.  I thought a few of the cases might have drawn such an objection based on the client’s history.  When with Chief Counsel’s Office, I reviewed hundreds of offers over a period of 15 years prior to retirement, suggested to collection that it consider a public policy rejection a few times, but rarely witnessed the IRS using public policy as a stated basis for rejection.   

So, based on my limited experience representing taxpayers, the IRS does not play the public policy rejection card very often.  Whether it formally states this as a basis for rejection, I believe that a taxpayer’s behavior giving rise to the liability for which a compromise is sought does factor into the offer examiner’s and SO’s position in unstated ways.  In the O’Donnell case, however, we have an explicit statement from the IRS rejecting his offer because of his bad behavior, allowing us to look at the reasoning behind the public policy rejection as well as the level of scrutiny the Tax Court applies in reviewing that decision.

Treas. Reg. 301.7122-1(c)(3)(ii)(A) provides that a “history of noncompliance with the filing and payment requirements of the Internal Revenue Code” indicates that acceptance of the offer would tend to undermine compliance with the tax laws.  The IRS signals that it does not want its offer examiners using this basis for rejection lightly by requiring the approval of the second level manager if the examiner seeks to reject an offer as NIBIG or on public policy grounds. 

IRM 5.8.7.7 gives details about offer rejections.  Since over half of submitted offers that pass the processability review get rejected, this IRM provision gets a fair amount of use.  IRM 5.8.7.7.1 details the basis for a NIBIG rejection while IRM 5.8.7.7.2 details the basis for public policy rejections.  I confess some confusion on the reason the IRS would choose a NIBIG rejection over a public policy rejection.  In the first paragraph describing NIBIG rejections the manual cites to Rev. Proc. 2003-71 and states:

The decision whether and when to accept an offer to compromise a liability is within the discretion of the Service. In keeping with IRM 1.2.14.1.17, Policy Statement P-5-100, an offer will only be accepted if it is determined to be in the best interest of both the taxpayer and the Service. In addition to the criteria discussed in Section 4.02, the Service may take into account public policy and tax administration concerns in determining whether an offer to compromise is acceptable.

This seems like public policy to me, but the manual clearly distinguishes between the two types of rejections.  While I mentioned above that a criminal tax conviction could provide an easy basis for a public policy rejection, the manual provision dealing with public policy rejections, IRM 5.8.7.7.3 provides

(4) An offer will not be rejected on public policy grounds solely because:

– It would generate considerable public interest, some of it critical.

– A taxpayer was criminally prosecuted for a tax or non-tax violation.

You should definitely read the manual provisions if you have a client facing a potential NIBIG or public policy rejection.  Because case law on offers only occurs in the context of CDP, the decisional law remains sparse, making the O’Donnell case all the more important for the potential insight into this type of decision that it provides.

Judge Lauber describes Mr. O’Donnell’s tax behavior in his opinion:

Petitioner failed to comply with his Federal income tax obligations for a very long time. For two decades (if not longer) he failed to file returns and failed to pay the tax shown on substitutes for return (SFRs) that the IRS prepared for him. Among the years for which he failed to meet his obligations were 2006, 2010, 2011, 2013, and 2014. The IRS for those years assessed deficiencies, additions to tax, and interest totaling more than $430,000. As of May 2016 petitioner’s outstanding liabilities for all open years exceeded $2 million.

Pretty bad but not so bad that the IRS sought to bring a criminal case against him for failure to file or evasion of payment.  As the manual suggests the IRS need not have a criminal case in order to reject based on NIBIG or public policy and a criminal conviction does not automatically result in such a rejection.

When Mr. O’Donnell submitted his offer, the IRS first rejected it because he had not paid his estimated taxes for the year of the submission.  Offer examiners love this type of rejection because it requires little effort in order to move a case off of their desk.  Unfortunately, Mr. O’Donnell’s representative wrote back and pointed out he did not have an obligation to make estimated tax payments during the year at issue, sending the offer examiner back to the drawing board.  Despite his long-term bad tax behavior, Mr. O’Donnell offered the IRS $280,000, which is not chump change and the IRS calculated that his reasonable collection potential (RCP) was $286,744.  So, his offered amount closely fit the IRS criteria.  Mr. O’Donnell’s licenses related to his insurance and financial business had been revoked so his representative argued that his future earnings potential was not at all clear. 

Upon reconsideration, the offer examiner, presumably having gotten the higher level approvals required by the manual, rejected the offer on a NIBIG basis.  Because a notice of federal tax lien (NFTL) had been filed while the offer was pending (raising serious questions why the NFTL had not been previously filed with an outstanding liability of this amount), Mr. O’Donnell took the opportunity to bring a CDP case.  The SO reviewing his case sustained the determination to reject the offer, stating:

acceptance of his offer was not in the Government’s best interest given his history of “blatant disregard for voluntary compliance.” Because offer acceptance reports are available to the public under section 6103(k)(1), the Appeals Office concluded that acceptance of petitioner’s OIC would “diminish future voluntary compliance.”

Apparently, the SO had not read my prior blog post or the TIGTA report and did not realize how few people actually read offer acceptance reports and how little those reports could possibly diminish the public’s view of voluntary compliance, but it’s hard to argue with the conclusion that Mr. O’Donnell had exhibited a blatant disregard for voluntary compliance.  Despite the determination, the SO offered a partial pay installment agreement that seemed pretty reasonable.  While orally agreeing to this offer, Mr. O’Donnell did not follow through to sign the agreement, resulting in the determination letter sustaining the filing of the NFTL.

In the Tax Court, the IRS filed a motion for summary judgment.  The Tax Court notes that it is only looking to see if the decision to reject the offer was “arbitrary, capricious, or without sound basis in fact or law.”  Mr. O’Donnell argued that he offered an amount equal to 97.6% of the RCP.  The Court cites to the NIBIG manual provisions discussed above and to Mr. O’Donnell’s long history of non-compliance while he ran a successful insurance and finance business in finding that the decision to reject the offer was “well within the guidelines set forth in the IRM. We have repeatedly held that an SO does not abuse his discretion when he adheres to published IRM collection guidelines.”

The decision does not surprise me.  I think the hardest thing for the IRS was having an offer examiner willing to get the necessary approvals for the NIBIG rejection but after that, with these facts, the result was hard for Appeals or the Tax Court to second guess.  Although the IRS’ abysmal practices in the public display of offer information makes it impossible to easily know how many times it makes a NIBIG or public policy rejection, my experience tells me it does not do so very often.  When it does, the taxpayer will struggle to overcome the determination even when offering an amount equal to the RCP.  To get this offer accepted, I think Mr. O’Donnell may have needed to have offered something high enough above the RCP to make it an offer the IRS could not refuse.

Confusion Over Attorney’s Fees in Ninth Circuit Stems from Statute and Regulation…

Today we welcome back Maria Dooner.  Maria is a practitioner-in-residence at the Janet R. Spragens Federal Tax Clinic at American University’s Washington College of Law.  She returns to help us understand the 9th Circuit’s recent decision regarding attorney’s fees.  Keith

As Keith discussed here, the Ninth Circuit recently issued its opinion on Tung Dang and Hieu Pham Dang v. Commissioner, T.C. Memo. 2020-150. By finding the plaintiffs ineligible for an award of administrative and litigation costs, the court brought closure to the Dangs’ final pursuit of attorney’s fees. Yet, in doing so, it created some confusion (in its majority opinion) and clarity (in its concurrence) and provided another reason why the statute and regulation involving the recovery of administrative costs from administrative proceedings should be changed.

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The Ninth Circuit’s Majority Opinion…

When explaining the Dangs’ ineligibility for administrative costs from the collection dispute, the court states the following:

…they are ineligible because no costs were incurred before the commencement date for the relevant administrative proceeding.

However, the parties were not simply disputing whether costs were incurred before the commencement datefor the relevant proceeding, which was a Collection Due Process (CDP) hearing. Rather, the parties were debating the definition of reasonable administrative costs – they were specifically disputing the starting point in which reasonable administrative costs were incurred, if at all, in the context of a CDP hearing. For example, the government argued that the starting point was the notice of determination, which is the conclusion of the administrative proceeding in a collections matter. According to the government, the Dangs were ineligible for administrative costs because no costs were incurred after the issuance of the notice of determination. 

In contrast, the Dangs argued that the commencement date for administrative costs in a collections matter was the 30-day letter, which allowed the taxpayer the opportunity for administrative review in the Internal Revenue Service Office of Appeals. The Dangs proclaimed that when Congress altered the definition of the commencement date within IRC § 7430(c)(2) to include the first letter of proposed deficiency (a 30-day letter)under the IRS Restructuring and Reform Act of 1998 this also encompassed a 30-day letter that provided an administrative review to a CDP hearing.

Unfortunately for the Dangs, this argument not only failed to resonate with the court, but it also confused them. The court felt the Dangs were contesting administrative costs in a former examination dispute and included the following in its opinion:

To the extent that they seek administrative costs for their examination dispute with the IRS, their request is untimely, and they were not the prevailing party.

But, at no point in the Dangs’ brief did they argue that they were entitled to administrative costs from the examination dispute. And, at no point did the government rebut this. The statement of issues was confined to the administrative and litigation costs related to the collection proceeding. (By way of background, the IRS erred in this proceeding and this was recognized by IRS Counsel as well as Judge Armen in the U.S. Tax Court.)

Within its majority opinion, the court missed an opportunity to define administrative costs and explain why the Dangs were ineligible to recover them. The court stated that the Dangs had not incurred any costs prior to the commencement of the relevant proceeding, but what was its opinion on the time (and costs) incurred during the CDP Hearing, which occurred after its commencement? Or, did the court agree with the government that the starting point was the notice of determination and that no costs were incurred after the notice of determination? 

Judge O’Scannlain’s Concurrence

Some clarity is provided within Judge O’Scannlain’s concurrence, which addresses the timing rule and the validity of the regulation (26 C.F.R. § 301.7430-3).

Judge O’Scannlain states that the regulation (26 CFR § 301.7430-3), which the government relies upon in its brief,is not a “permissible construction” of IRC § 7430. Though Judge O’Scannlain agrees with the government’s interpretation of the hanging paragraph, which precludes the recovery of administrative costs in collection hearings, he states that the regulation, which excludes collection hearings from the definition of administrative proceedings, contradicts the plain language of the statute.

Confusion over the recovery of attorney’s fees stems from the statute itself (IRC § 7430) and regulation (26 C.F.R. § 301.7430-3)

First, the statute is confusing with respect to the recovery of administrative costs from collection proceedings. The statute begins by stating that a prevailing party may be awarded administrative costs from an administrative proceeding (see IRC § 7430(a)(1)). Then, it proceeds to eliminate most administrative costs from collection proceedings due to a timing rule (see hanging paragraph of IRC § 7430(c)(2)). But then, it reiterates that administrative proceeding means any administrative proceeding (see IRC § 7430(c)(5)).

Second, taxpayers struggle to make sense of a confusing statute and tackle the timing rule.  For instance, the Dangs emphasized the statute’s broad coverage of administrative proceedings and how it explicitly includes the recovery of costs related to the collection of any tax (see IRC § 7430(a)(1)). To satisfy the timing rule, the Dangs stated that it is not the notice of determination that is relevant but the first letter of proposed deficiency because this is synonymous with any 30-day letter, which opens the door to an administrative proceeding. So rather than conflating a collection proceeding with a deficiency one (which may have been the belief of the court), the Dangs were essentially making a substance over form argument that if embraced by the court would have facilitated the recovery of the administrative costs from the CDP hearing.  

Third, the government places significant reliance on a regulation (26 C.F.R. § 301.7430-3) that redefines “administrative proceeding” and excludes most collection proceedings from this definition. As Judge O’Scannlain articulates in his concurrence, the regulation is not aligned with the statute. (Remember, this conflicts with the statute that defines administrative proceeding as any administrative proceeding and specifically references the collection of tax.) So, in addition to the statute, the regulation is also a source of confusion in these cases.  

This confusion is heightened by one of the regulation’s exceptions – it recognizes a CDP hearing, which specifically disputes the validity of the tax assessment under IRC § 6330 and IRC § 6320, as an administrative proceeding. (IRC § 6330(c)(2)(b) provides the opportunity for a taxpayer to contest the validity of the tax liability if the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”) Here, the regulation changes the fundamental nature of a CDP hearing to fit its definition of an administrative proceeding. Under the regulation, a CDP hearing that involves a dispute over the underlying tax liability is considered an administrative proceeding (and not a collection action) whereas one that involves a pure collection dispute is not an administrative proceeding. This does not make logical sense because regardless of whether the taxpayer is disputing the underlying tax or providing a collection alternative within a CDP hearing, the taxpayer is still very much in the heart of a collection proceeding. The taxpayer is ultimately contesting a notice of intent to levy or notice of federal tax lien, has only 30 days (not 90 days) to petition to the U.S. Tax Court and still receives a notice of determination (not a notice of deficiency) at the end of the matter. IRC § 6330(d)(1).

Though the above exception is favorable to the taxpayer, there is also the question of how this exception satisfies the timing rule within IRC § 7430(c)(2). Ironically (for the Dangs), the IRS appears to be embracing a substance over form interpretation of the hanging paragraph of IRC § 7430(c)(2) and is viewing the notice of intent to levy or notice of federal tax lien as a notice of deficiency for those who did not have an opportunity to dispute their underlying tax under IRC § 6330(c)(2)(b). However, if taxpayers, such as the Dangs, attempt to raise this argument in their favor, such as viewing a 30-day letter, which provides an opportunity into a collection proceeding, as a first letter of proposed deficiency, they will most likely confuse the court.

The regulation (26 C.F.R. § 301.7430-3) should be altered…

While the government may believe it is simplifying (and perhaps streamlining) the law by relying on a regulation that eliminates most collection actions from the definition of administrative proceeding, the government’s reliance on this regulation only compounds the confusion that already stems from the statute. Since it is an inaccurate interpretation of the statute (as Judge O’Scannlain conveys in his concurrence), it forces an unnecessary dispute over the definition of an administrative proceeding when the real dispute should be over what constitutes reasonable administrative costs due to a timing rule.

Instead of defining the administrative proceeding as one that excluded most collection proceedings, the IRS should address the impact of statute’s timing rule within the regulation’s definition of administrative costs (26 CFR § 301.7430-4). By addressing it within “administrative costs,” the regulation would be more aligned with the statute.  Again, there is no limitation on the definition of administrative proceeding in the statute – in fact, the statute states any (see IRC § 7430(c)(5)). Further, it is the subsection on administrative costs (IRC § 7430(c)(2)) where the hanging paragraph on the timing rule resides.

But better yet, Congress should change the statute to encompass the recovery of administrative costs from collection proceedings…

Without a modification to the timing rule within the statute, it seems nearly impossible to recover administrative costs related to the collection of tax.

While a notice of proposed levy may be viewed as notice of deficiency when a taxpayer is disputing the validity of the tax in a collection proceeding (and did not have the opportunity to do so earlier), taxpayers (like the Dangs) who are purely disputing the proposed collection action (and not the underlying tax) will face an uphill battle when trying to convince a court that the first letter of proposed deficiency in the law should be viewed as any 30-day letter into a collection proceeding. 

Again, Congress could incorporate language, such as “the date of receipt by the taxpayer of a right to a Collection Due Process (CDP) hearing” into the hanging paragraph of IRC § 7430(c)(2). Though taxpayers will continue to face challenges related to the prevailing party rules and “substantial justification” exception for the government, this will at least facilitate an opportunity to recover administrative costs, such as in the Dangs’ case.

As a final reminder, the Dangs asked for a levy on their retirement, which would have paid the tax in full. While the IRS is cautious with levying retirement accounts as a matter of policy, resistance to it as a collection alternative (when a taxpayer specifically requests it) is at odds with its intention to collect taxes as efficiently as possible. The agency needs additional incentives to follow published guidance in collection due process hearings, and by not allowing the recovery of administrative costs, Congress may not only harm taxpayers but also the IRS. By allowing for the recovery of administrative costs from a CDP hearing, Congress may see an added benefit that goes beyond just discouraging overreaching and abusive actions by the IRS it may just enhance the efficiency of tax collection – a core purpose of the agency.