Shades of Graev and Whistleblower Awards: Designated Orders 6/10/19 to 6/14/19

While we come to another week for designated orders, this week only had a set of three released on the same day.  Two of the designated orders are based on bench opinions from Judge Carluzzo while another order comes from Judge Gustafson.  I will begin with Judge Carluzzo’s bench opinions, which touch on Graev regarding supervisor approval.  At the end, Judge Gustafson’s order delves into IRS approvals of a different sort, this time for whistleblower awards.

Taxpayer Substantations and Supervisor Approval for More Graev Considerations

Docket No. 13675-18S, Michael Hanna & Christina Hanna v. C.I.R., Order available here.

The first order does not stand out at the beginning as Mr. Hanna testified regarding his medical expenses and employee business expenses.  He provided no other proof regarding his medical expenses, vehicle expense deduction, or purchases of tools and supplies.  Since there was no substantiation, the judge sustained those denied deductions.

read more...

Docket No. 11648-18S, David L. McCrea & Denise McCrea v. C.I.R., Order available here.

The second order also does not seem terribly noteworthy.  Ms. McCrea ran a business as a wholesale seller of herbal medical products.  At first, the McCreas disagreed with an IRS assessment of their beginning inventory and purchases, but came to accept the IRS adjustments. 

The McCreas still disagreed with the IRS regarding their ending inventory.  The McCreas want the value to be the amount on their Schedule C for 2014.  The IRS, however, provided a different exhibit received by the IRS revenue agent during the course of examination.  The document is a physical inventory, which the petitioners claim is taken at the end of each year.  The results are provided each year on a document to their return preparer, who claimed he used the document to prepare their tax return, but did not supply the document to the IRS.  In fact, it seems a mystery for the petitioners who provided the document to the IRS.  Even though the parties’ exhibits are similar, there are items omitted from the Schedule C document that are on the IRS exhibit.  The difference between the two values is $21,112.

Judge Carluzzo finds a compromise.  The ending value on the Schedule C shall be supplemented with the items on the IRS exhibit that are not shown on the Schedule C.  The result needs to be calculated and will either match the Schedule C or a lesser amount.

The likely reason both orders were designated by Judge Carluzzo comes from an examination in both cases of 6662(a) penalties.  The evidence in each case showed that a supervisor approved imposition of a penalty on a date that preceded the issuance of the notice of deficiency.  The petitioners for each case were first formally advised regarding the imposition of the penalty on a date that preceded issuance of the notes.  As a result, the IRS imposition of the section 6662(a) penalties were rejected.

Takeaway:  Judge Carluzzo is reviewing 6662(a) penalties and will reject those penalties if they do not line up correctly in the timeline.

Whistleblower Claim Remanded to Whistleblower Office for Further Consideration

Docket No. 13513-16W, Loys Vallee v. C.I.R., Order available here.

In a whistleblower case, one of the main questions under IRC section 7623(b) is “whether the IRS collected proceeds as the result of an administrative or judicial action using the whistleblower’s information.”

Petitioner Loys Vallee provided information to the Whistleblower Office, but he was denied a claim by the IRS for a whistleblower award.  At issue before the Tax Court is the completeness of the administrative record.  Mr. Vallee filed a motion to compel production of documents in 2017 that led to what the IRS contends is the complete administrative record in 2018.  The parties filed their responses concerning the completeness of the record and it is now before the judge to make a decision.

The debate concerns the number of individuals who received the information and whether they forwarded that information to other IRS employees.  Partially, this debate is supported by the fact that not all the declarations stated that they did not forward Mr. Vallee’s filed information to any other group or person than those stated in the declaration.  Mr. Vallee provides his own list of individuals who had access to the information he provided.

Mr. Vallee makes statements concerning Corporation D, Related A, and Related B in his submissions to the Court.  Corporate D and Related A consolidated and he argued the consolidation allowed Corporate D to use Related A’s accumulated tax credits to satisfy its own tax liability in a method known as refund netting.  The Tax Court notes that Mr. Vallee did not use the term refund netting in his Form 211 or the lengthy attachments so cannot advance a new claim or try to cure deficiencies in previous claims.

The Court reviews the information from the IRS and notes there is an issue with what they provided.  The IRS states that the four individuals they cite that received the information followed the protocol of the Internal Revenue Manual (IRM) and kept the petitioner’s information confidential.  They have provided a declaration for one individual named and state there was no need to follow up with the other three individuals since her form provides feedback about the division.  Judge Gustafson disagrees, stating that while the actions discussed indicate the individuals followed IRM provisions, the IRS needs to provide affidavits or declarations concerning the other three individuals.  The declaration in question provided cannot cover personal knowledge about the actions of the other three individuals.

The judge says that there are still two unanswered questions regarding Mr. Vallee’s entitlement to a whistleblower award.  Who received the Form 211 information and what did they do with it?  Was that information used in an examination that resulted in the collection of proceeds?  Even though Mr. Vallee argues against remand, the judge shows that it is proper in a whistleblower award determination for remand regarding an insufficient administrative record.

Ultimately, the case is remanded to the Whistleblower Office for further consideration of those two questions and development of the administrative record.  The Whistleblower Office is to issue a supplemental determination with an explanation of the determination regarding the two questions.  They are to certify additions to the administrative record and that what has been provided constitutes the entire administrative record.  The judge ends by requiring the parties to provide (joint or separate) timetables for further administrative proceedings.

Takeaway:  There have been several looks at whistleblower claims in designated order blog posts in Procedurally Taxing.  While I do not know how much the IRS approves whistleblower claims, we get to review the denials.  From this vantage point, it seems like the IRS will fight the claims as much as possible.  The IRS basically attacks the claims on either of two fronts: (1) no action was taken by the IRS against anyone mentioned in the information provided or (2) any actions taken by the IRS concerning the individuals or businesses mentioned in the information provided by the whistleblower was based on other information and not based on the information provided by the whistleblower.

Mr. Vallee is fighting in Tax Court concerning the completeness of the administrative record and Judge Gustafson supports that fight by requiring the IRS to update who received that information and what actions they took.  Ultimately, the answer to be settled is whether the IRS took action against the businesses in question based on Mr. Vallee’s submission, settling whether he truly has a whistleblower claim.

Not All Who Wander Are Lost; But At What Cost? – Designated Orders: June 24 – 28, 2019

We have four designated orders this week covering a wide array of substantive and procedural issues. Highlights include a review of allowable expenses for over-the-road truckers; the continuing (and perhaps now ended?) saga of Bhramba v. Commissioner in our Designated Orders; and a couple of permutations on our old friend, section 6751(b).

read more...

Docket No. 15601-17L, Horner v. C.I.R. (Order Here)

This order from Judge Armen grants Respondent’s motion for summary judgment. It’s fairly unremarkable—a nonresponsive Petitioner often loses on a motion for summary judgment in a CDP case. Here, however, the summary judgment motion followed a supplemental CDP hearing, which Respondent’s counsel requested to determine the merits of the underlying liability. Apparently, Counsel couldn’t find in its records that the Petitioner had received the Notice; so the underlying liability could be at issue.

One is left to wonder why Respondent’s counsel did that. Introducing the Notice of Deficiency into evidence creates a presumption that the taxpayer received the notice (so long as Respondent mailed it via certified mail). See Conn v. Commissioner, T.C. Memo. 2008-186.The taxpayer may, of course, rebut that presumption. But that’s hard to do when one doesn’t meaningfully participate in the administrative or judicial proceedings, as it seems Petitioner failed to do.

Alas, Petitioner also failed to meaningfully participate in the supplemental CDP hearing, making allegations that tended towards tax protesting. According to the settlement officer and Judge Armen, the underlying liability was originally assessed pursuant to a substitute-for-return, which in turn was based on three Forms 1099-MISC.  To hammer the point home that Petitioner was, in fact, in the moving business, Judge Armen quoted extensively from Petitioner’s website that advertised his business.

Docket  No. 5849-09, Davidson v. C.I.R. (Order Here)

Judge Leyden resolves this discovery dispute in a fair manner—at least, for the time being. Respondent sent Petitioner a request for admissions, to which Petitioner responded. Apparently, Respondent thought that the responses were inappropriate, and so filed a motion under Rule 90(e) to review the sufficiency of the answers and/or objections. Petitioner objected to the motion, noting that he is incarcerated until December 2019. As such, it’s difficult for him to accurately answer the questions that Respondent poses.

Judge Leyden agrees with Petitioner and orders instead that Petitioner serve an amended response on Respondent on January 22, 2020—30 days after his released from incarceration. This seems like a fair resolution—though we’ll need to set our Designated Order alarms to check in this January.

Docket No. 6174-18S, Gillespie v. C.I.R. (Order Here)

Judge Leyden provides another Designated Order through this bench opinion, which involves travel expenses deducted as unreimbursed employee expenses under section 162 and the accuracy penalty under section 6662(a).

This over-the-road trucker deducted $40,897 as unreimbursed employee expenses—including $16,001 of meals and entertainment expenses, calculated at 80% of the national per diem rate (transportation workers may deduct 80% of these costs, rather than the normal 50% of meal and entertainment costs for other taxpayers), and $24,896 for other travel expenses. These latter expenses included hotel costs and rental car expenses.  He primarily slept in his truck, but would rent a hotel when his truck had to undergo a repair overnight. During these times, he’d also rent a car to “see the sights” in whatever locale he happened to stop. Petitioner essentially lived in his truck year-round, though he rented a room near Salt Lake City for 26 days in the tax year. His employer didn’t reimburse their employees for any expenses, including hotels, meals, or other travel expenses.

Judge Leyden denies the deduction for all claimed expenses because Petitioner was never “away from home” such that he would qualify to claim any travel expenses—whether lodging, meals, or otherwise. See, e.g., Barone v. Commissioner, 85 T.C. 462, 465 (1985).The Tax Court has long held that to claim travel expenses, taxpayers must be “away from home” when they incur those expenses. And if a taxpayer doesn’t have a “home”, then as a logical consequence, they can never be “away from home.”

But where is a taxpayer’s “home”? It’s primarily a taxpayer’s principal place of business. Howard v. Commissioner, T.C. Memo. 2015-38. If the taxpayer doesn’t have a principal place of business, it’s their permanent place of residence—a useful fallback for the vast majority of taxpayers. Barone,85 T.C. at 465.

But to use this fallback, taxpayers must incur substantial continuing living expenses. James v. United States, 308 F.2d 204, 207-08 (9th Cir. 1962); Sapson v. Commissioner, 49 T.C. 636, 640 (1968). Petitioner’s 26 days in Salt Lake City were apparently not substantial and continuous enough to place his principal place of residence at the rented room. So on these issues, he’s out of luck.

For taxpayers who are truly transient, the Tax Court has long held that these taxpayers are never “away from home” and therefore cannot deduct any travel expenses whatsoever. And for taxpayers like Petitioner here, failure to establish a permanent place of residence (or principal place of business) translates to thousands of dollars in additional tax. The deficiency in this case is over $7,000; this doesn’t take any additional state tax into account. In some cases, it may be possible to incur housing costs that are substantially less than any additional tax amount caused by failure to establish a permanent place of residence.

It’s also important to note that this is a largely moot point for employee truck drivers during tax years 2018 to 2025, as miscellaneous itemized deductions, such as the deduction for unreimbursed employee expenses, are unavailable to claim because of the 2017 tax law.  Still, the implications here drastically affect self-employed over-the-road truck drivers, who may continue to deduct their operating expenses.

Petitioner also lost on his other claimed deductions: (1) for cell phone expenses for failure to their prove business use and to prove that his employer didn’t reimburse him; (2) truck repair expenses for failure to prove that his employer didn’t reimburse him; and (3) rental car expenses because they were personal expenses.

What about the accuracy penalty in this case? Judge Leyden quickly disposes of this issue—and this time in Petitioner’s favor. Fatal in this case were the timing issues with managerial approval of penalties under section 6751(b) that arose in Clay v. Commissioner, 152 T.C. No. 13 (2019). Samantha Galvin blogged about Clay last month.

To recap the issue, Respondent did introduce evidence of managerial approval, dated November 6, 2017. So what’s the problem? The statute requires that a manager approve in writing the initial determination of any asserted penalty. And Respondent also introduced evidence of a 30-day letter asserting the penalty, which was issued on October 2, 2017. No evidence of managerial approval prior thereto. So Judge Leyden quickly notes that Respondent failed to meet his burden of production, and finds no penalty for Petitioner.

Docket No. 1395-16L, Bhambra v. C.I.R. (Order Here)

Bhambra is now a familiar name in the Designated Orders series, though this may be his last appearance. I previously covered this case in a post from July 2018, where Judge Halpern granted Petitioner’s motion to remand the case to consider the underlying liability—here, a civil fraud penalty under section 6663. Bill Schmidt covered the case in a post from February 2019, carrying the apt subtitle, “How Not to Deal with Tax Fraud”. As one might expect from the title, the Tax Court entered a decision upholding the civil fraud penalty in March of this year.

Apparently Petitioner has read up on section 6751(b)’s recent legal development, and so he filed a motion to vacate the Tax Court’s decision, because—allegedly—the Tax Court didn’t require Respondent to comply with the supervisory approval requirements of section 6751(b). Respondent objected to the motion on the basis of timeliness, not on the merits. Petitioner, it seems, postmarked the motion one day after the 30-day deadline applicable to motions to vacate under Tax Court Rule 162. So, the Court denied the motion on that basis (and because Petitioner filed no motion for leave to file the motion to vacate out of time). Judge Halpern also noted that Respondent included a penalty approval form that demonstrates managerial approval regarding the penalties in question. This seems to leave the door open for Petitioner to file a motion for leave; are there perhaps Clay problems lurking here as well? I wouldn’t foreclose the prospect of further activity in this docket.  

Jurisdiction Cannot Be Manufactured: Designated Orders 6/3/19 – 6/7/19

The most exciting designated order during the week of June 3, 2019, by far, was in Docket No. 14307-18, Scott Allan Webber v. CIR. It was so exciting that it was worthy of its own post, which is here (and I’m thankful to William Schmidt for giving it the attention it deserves).

Docket No. 15445-18, Stephen E. Haney v. CIR (order here), Docket No. 15435-18, Ricardo C. Lacey & Cynthia V. Lacey v. CIR (order here), and Docket No. 15315-18, Steven E. Ayers & Donna J. Ayers v. CIR (order here)

Typically, when I come across three designated orders with nearly identical language it is because the same order was issued in a consolidated docket. But that was not the case during the week of June 3; rather there were three separate cases involving the same bad actor. What he did was bad, but not bad enough to rise to the level of the Court making a Department of Justice referral – which is a little surprising.

read more…

Detailed facts about each petitioner’s specific case were not included in the orders, but each one is before the Court on a motion to dismiss for lack of jurisdiction, and the same oddity happened in all three cases. A petition was filed with the Court, which included a copy of a notice of deficiency, but the date on the petitioner’s notice of deficiency didn’t match the date on the version the IRS had. The IRS produced its version as well as a certified mailing list reflecting the date that matched the IRS’s version.

The Court conducted an evidentiary hearing to develop a record that would explain why there was a discrepancy between the dates on the notices.

The Court noted other similarities in the cases: all three petitions originated from the same tax preparation company (according to the return address labels), and appear to have been signed by the same person, but there are no markings or disclosures to indicate that a third party signed on behalf of the petitioners.

In an effort to gather information, the IRS subpoenaed the accountant associated with the tax preparation company (the “accountant”) on the return address labels. They directed him to appear and testify at the evidentiary hearing, but he did not.

Instead, a taxpayer unrelated to any of the three cases came to testify for the IRS about his experience with the accountant. In his testimony, the taxpayer explained that he invested in a company and later took substantial losses related to the investment on his federal income tax return. The IRS proposed to disallow the losses and on the advice of his tax preparer, the taxpayer met with the accountant (who was the tax preparer for the company the taxpayer invested in). The accountant assured him that the IRS was incorrect, and he would take care of the matter and the taxpayer signed a power of attorney allowing the accountant to represent him.

Then, the taxpayer received a notice of deficiency and forwarded it to the accountant, who he believed was still his representative at the time. The taxpayer reached out to the accountant several times to inquire about whether a petition had been filed with the Court and did not receive a response from the accountant but did receive a bill from the IRS.

Sometime later, the taxpayer received notice from the Court that it had received a petition on the taxpayer’s behalf. The IRS filed a motion to dismiss in the case alleging that the petition was not timely filed. The IRS alleged that the notice of deficiency had been altered to make it appear timely filed. The taxpayer hired an attorney to help him respond to the motion, and in his response claimed that he believed his former representative, the accountant, had altered the dates.

Based on the taxpayer’s testimony and IRS records, the Court finds that the accountant was responsible for altering the dates in all three designated order cases. The Court also warns the accountant against misleading the Court, harming taxpayers and wasting the Court’s and IRS’s resources in the future.

It is unclear from the orders (and from some additional research) whether the accountant actually has the authority to represent individuals before the IRS and Tax Court. In all three cases petitioners are designated as pro se, and presumably, the petitioners would have needed to ratify their petitions if they did not authorize the initial petition’s filing.

One last oddity is that motions for continuance were filed by petitioners in all three cases on the exact same day, a week after the orders were issued and the cases had been dismissed, which may suggest an attempt at continued involvement by the accountant.

Docket No. 19502-17, Cross Refined Coal, LLC, USA Refined Coal, LLC, Tax Matters Partner v. CIR (order here)

This next order addresses discovery motions; more specifically, both parties’ motion to compel the production of documents. The parties have decided to utilize a “quick peek” review and the Court approves. Procedurally Taxing covered this uncommon procedure back in 2016 in a post by Les, here. Since it has been a few years (and I assume educating the public on this option was the reason the Court designated the order), here is a quick refresher:

The procedure originates from Federal Rule of Evidence 502, which states, “A federal court may order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court.”  As a result, the procedure can speed up the discovery process by allowing parties to review substantial amounts of information without the risk of waiving any privilege.

In the remaining designated orders, the Court calculates the value of a donated building façade in a case involving a disputed charitable contribution deduction after the parties couldn’t reach an agreement (order here), and the Court grants a summary judgment motion in a CDP special circumstances offer in compromise case (order here).

Losing Jurisdiction through Excessive Payments – Designated Orders: May 27 – 31, 2019

Another week with only two designated orders (likely caused by the Memorial Day holiday). The first comes from Judge Carluzzo, but is a fairly unremarkable order that grants a petitioner’s motion to dismiss his own CDP case. There was a motion for summary judgment pending from Respondent; perhaps Petitioner agreed to a collection alternative or otherwise came to a realization that defending against summary judgment would be futile. We don’t know, as there remains no electronic access to documents on the Tax Court’s docket other than orders and opinions.

The other order from Judge Leyden likewise dismisses a case, but for a different reason: the petitioners in this deficiency case had paid the Service’s proposed tax before it issued a notice of deficiency. Nevertheless, the Service ended up issuing a Notice of Deficiency, from which the Petitioners timely petitioned the Tax Court.

Ordinarily, when dealing with jurisdictional motions in the deficiency context, we see two failures of jurisdiction: (1) the Petitioner hasn’t timely filed their petition, or (2) the Service issued an invalid notice of deficiency—most often because the Service failed to mail the notice to the Petitioner’s last known address.

Here, Respondent filed a motion to dismiss for lack of jurisdiction. Judge Leyden finds the Notice of Deficiency is invalid, but not because it was inappropriately mailed. Rather, the Notice is invalid because, the Court concludes, no deficiency exists.

Conceptually, this feels a bit like putting the cart before the horse. Isn’t the question of whether a deficiency exists a determination to be made on the merits? Why is the Court deprived of jurisdiction? Payment of a deficiency and the deficiency itself seem to be independent concepts. Why is the Tax Court not empowered, as a statutory matter, to determine the propriety of a deficiency—even if it’s been paid before the Notice of Deficiency is issued?

The Court doesn’t cite to any caselaw in the order, but a number of Courts of Appeals agree with Judge Leyden’s analysis. For example, in Conklin v. Commissioner,  897 F.2d 1027 (10th Cir. 1990), a Notice of Deficiency was issued for a joint liability. However, prior to the Notice of Deficiency, the wife paid the entire proposed joint liability in full. The husband sought to challenge the liability in Tax Court. The Tax Court determined the merits of the issue, but the 10th Circuit reversed, holding that the no deficiency existed under I.R.C. § 6211, because it had been fully paid prior to the husband’s Notice of Deficiency. Therefore, the Tax Court had no jurisdiction to hear the case and determine the merits.

What’s the statutory underpinning of this decision? It begins and ends with IRC § 6211, which defines a deficiency. I teach this section each year to my Tax Clinic class, which results in some mild bewilderment. Let’s look at the statute:

For purposes of this title in the case of income . . . taxes imposed by subtitles A… the term “deficiency” means the amount by which the tax imposed by subtitle A …exceeds the excess of—

  • The sum of  
  •  The amount shown as the tax by the taxpayer upon his return . . . plus
  • The amounts previously assessed (or collected without assessment) as a deficiency, over—
  • The amount of rebates, as defined in subsection (b)(2), made.

Clear as mud. I try to frame this as a mathematical equation in class. As elements in the equation, we have:

  1. TaxA: The tax imposed by subtitle A—i.e., what the tax actually should be, under the Internal Revenue Code;
  2. TaxR: The amount shown as the tax by the taxpayer upon his return;
  3. A: Amounts previously assessed as a deficiency;
  4. C: Amounts collected without assessment—the critical issue in this order; and
  5. R: The amount of rebates.

As much as I try to tell students wanting to enroll in Tax Clinic that there’s minimal math involved, it’s time to express this as a proper equation.

Deficiency = TaxA  – ((TaxR  + A + C) – R)  

And, remembering with much appreciation my high school algebra classes, we can simply the equation as follows:

Deficiency = TaxA  – TaxR  – A – C + R  

(My wife—who majored in mathematics—tells me that this is an example of the “distributive property”.)

For simple cases, this makes some conceptual sense. A deficiency primarily equals the tax under subtitle A, less the tax that the taxpayer reported on the tax return.

Let’s add some complexity. If there were previous deficiency assessments made, then those amounts should be reduced from the new deficiency. If there were rebates made (as would occur if, for example, a previous audit resulted in an additional refund to the taxpayer), those amounts should be added to the new deficiency.

That brings us to the issue in this case—“amounts previously . . . collected without assessment.” Those too must be reduced from the definition of a deficiency under section 6211. And if the Notice of Deficiency is issued after the “amounts collected without assessment” exceed the amount of any proposed deficiency, then no deficiency existed when the Notice was issued—or at least, no deficiency that the Commissioner is asserting.  In effect, the Notice is asserting something that cannot exist under section 6211, and it’s therefore invalid. In contrast, if payment occurs after the Notice is issued, the Notice itself remains valid as a deficiency existed at the time of the Notice.

Ultimately, taxpayers in this situation still have an option to dispute the merits of an IRS audit determination: they may file a refund claim with the Service and (upon denial) sue for a refund in District Court or the Court of Federal Claims. This isn’t the most helpful result for pro se taxpayers, given the relative procedural complexity in those courts. Yet, it remains the sole option for these taxpayers.

There are some practical problems with this approach, however. In Judge Leyden’s order, the Petitioners didn’t object to Respondent’s motion. Presumably they agreed that they owed a deficiency, had paid it, and wanted to simply finalize the matter with the IRS.

But there’s still a potential problem. The Service issued a Notice of Deficiency several months after the Petitioners fully paid the proposed deficiency. It seems likely that when they made the payment the Petitioners would have signed Form 4549, Income Tax Examination Changes, which waives the restrictions in section 6213 on assessment and collection. If they did, and the IRS made an assessment pursuant to the Form 4549 at that time, then there is potentially a risk that the Service could assess the same tax again subsequent to the Notice of Deficiency. Stranger things have happened; indeed, Judge Leyden references this possibility in the order itself, and notes that the Service has assured the Court it will take care not to make a duplicate assessment.

What happens if the Service does make that mistake? Can the Petitioner return to Tax Court to enforce the Service’s promise reflected in the order? Maybe, as a practical matter. Perhaps the Court would exercise such jurisdiction as in similar cases involving improper mailings that invalidate the Notice of Deficiency.

At present, this case represents a cautionary tale to taxpayers and their representatives wishing to dispute a tax deficiency in the U.S. Tax Court, yet also wish to prevent the running of penalties and interest. Either (1) they should designate their payment as a “deposit” or (2) they should wait until after issuance of the Notice of Deficiency to make payment. Otherwise, any dispute is heading to District Court or the Court of Federal Claims.


A Tale of Two (Types of) Taxpayers: Designated Orders May 20 – 24

I always try to look for a theme running through the disparate designated orders I cover. Sometimes one readily presents itself, as it did the penultimate week of May: broadly speaking, the different ways that well-represented and unrepresented taxpayers use (one may uncharitably say, waste) the Court’s time. The four designated orders of the week give a perfect glimpse into the differing tactics and consequences that well-heeled, fully-lawyered taxpayers face compared to the more common “tax protestors.” We’ll begin with examining the latter.

read more...

(Potential) Consequences to Tax Protestor Arguments: Sanctions and Penalties

Procedurally, there isn’t too much novel going on in the two tax protestor cases. Both are collection due process cases where the taxpayer isn’t arguing for a collection alternative, but just repeating tax protestor rhetoric about taxes being illegal or immoral in some sense. 

As usual, the Court has given both parties more than a few opportunities to get things right (Judge Leyden even went so far as to have her case once remanded to Appeals to confirm penalty approval under IRC § 6751). Also as usual, there are some moments of levity in the Court’s recounting of the reasons why the petitioners believe they shouldn’t have to pay taxes. A few of the highlights:

From the Harris v. Commissioner order, a “sovereign citizen” style protestor:

  1. No taxes owed because the IRS is actually a trust domiciled in Puerto Rico
  2. No taxes owed because petitioner “revoked” his “election” to be a U.S. Citizen taxpayer
  3. No taxes because nothing in the Internal Revenue Code applies to “natural persons,” (unlike, presumably, the rest of us fakers).

From the Cotter v. Commissioner order, a “religious duty not to pay tax” style protestor who stopped paying taxes in 2009 (I wonder what led her to believe the government became evil at that point…):

  1. I’ll pay taxes (gifts from “The People” for God’s glory) but I won’t pay “tribute money to extend The Devil’s Kingdom on earth” 
  2. I can’t pay taxes because “I cannot give God’s money for foolish, wicked, wasteful evil practices.”

Ok. So a lot of nonsense from both pro se parties. The Court and the IRS’s time have been sufficiently wasted. And for the petitioners there are consequences to these actions, though the consequences are procedurally distinct. 

For Mrs. Cotter, the consequence is a penalty of $5000 because her reason for requesting the CDP hearing was designated a frivolous position by the IRS under Notice 2008-14. It therefore meets the rules of a “frivolous submission” under IRC § 6702(b)

Mrs. Cotter only owed $348 going into the CDP hearing: she now owes over 14 times that because of the reasons she put forward for not having to pay taxes (even more mind-boggling, since she made a payment of $1,826 with the original return). These are real-life costs for conveniently reading “render unto Caesar” with an addendum of “unless you don’t like Caesar.”

For Mr. Harris, there are no IRC § 6702 penalties because his original CDP request actually specified potentially legitimate reasons for the hearing: in particular, that he never received a notice of deficiency. Rather, it is all of Mr. Harris’s behavior once he is before the Court that leads to a penalty on IRS counsel’s motion under IRC § 6673. Judge Halpern grants the motion and awards a penalty of $15,000. Ouch.

Of course, the Court doesn’t just issue $15,000 penalties to pro se taxpayers for the fun of it. Mr. Harris has been warned numerous times by the Court, resulting in two previous Court decisions (here and here), and is a serial non-filer. The Court has previously found that Mr. Harris has “attempted to turn the IRS and this Court into a mockery for his shopworn tax-protestor rhetoric.” It is unclear why Mr. Harris continues to make these obviously ineffective arguments (he is apparently a West Point graduate, so one may think he would know better) but if it is a hobby, it is fast becoming an expensive one.

Potential Consequences to Hardball Practices: Losing the Court’s Favor: Cross Refined Coal, LLC v. C.I.R., Dkt. # 19502-17

From unrepresented taxpayers we move to very-lucratively represented taxpayers with eight (!!!) attorneys on the case from both Mayer-Brown and Skadden. The Court has only slightly more patience for the positions and use of time by lawyers in this case than that of the unrepresented taxpayers. 

The Cross Refined Coal case actually provided two designated orders the week of May 20th. Both resulted from motions made by the petitioner: a motion for discovery (here) and a motion to strike (here). Both also resulted in, shall we say, stern language from Judge Gustafson almost entirely denying the motions. We will begin with the motion to compel discovery to see why Judge Gustafson was not impressed. 

Usually when I see the Court denying a motion to compel discovery it is because the parties haven’t exhausted informal discovery before asking the court to step in (see Rule70(a)). Here, however, the issue is not with the procedure, but with the contents of the discovery request -I too was a little baffled by what the taxpayer was hoping to get out of the documents.

The case revolves around what I can only imagine to be immensely valuable “refined coal” tax-credits claimed by the taxpayer but disallowed by the IRS for 2011 and 2012. Apart from the aforementioned stature and number of attorneys on this case, one may surmise the dollars at issue based on the amount of IRS attention the issue has received. In 2017, the IRS issued a Technical Advice Memorandum (TAM 201729020) that explained why the IRS was (soon thereafter) going to disallow the credits in a Notice of Final Partnership Administrative Adjustment. A year later, the IRS issued a Chief Counsel Memorandum (CCM AM2018-002) that provided further explanation and analysis for analyzing the rather complex transactions at hand, providing that for other taxpayers (i.e. not Cross Coal) with other different facts, the credits may be allowed. It is the TAM and CCM that is at the heart of this discovery dispute.

Petitioner wants basically everything that the IRS used to reach its conclusions in the CCM and TAM, going so far as proposing to conduct a deposition of an IRS designee concerning the CCM meaning and terms. They also served admissions regarding the conclusions in the TAM and CCM, with questions about “what Congress intended” in enacting the statute at play, IRC § 45(e).

Completely devoid of any understanding of IRC § 45(e), I still couldn’t help but feel like all of the requested information focusing on the genesis and reasoning of the CCM was largely irrelevant to the Tax Court case at hand. Judge Gustafson, apparently, felt that way as well, and describes his consternation this way:

“The court will not adjudicate the correctness of the CCM. […] If the CCM was factually unsupported and legally without merit, that would not help Cross; and if instead the CCM was factually impeccable and legally brilliant, that fact would not help the Commissioner. Consequently, Cross’s efforts in discovery to learn more about the background of the CCM are misdirected.”

Because the taxpayer is represented by such sophisticated counsel, I found myself second-guessing my original impulse that this was obviously a flawed discovery request. I thought something I wasn’t seeing must be going on. What was lurking in the background, it appears, was a simultaneous FOIA dispute. Since the taxpayer is already running into roadblocks with FOIA, wouldn’t it just be more efficient to have the Tax Court fix the issue now, rather than wait for further litigation in the FOIA suit?

Judge Gustafson is not amenable to the proposal of taking work away from other (proper) court venues, and saves his most critical language for the idea: “today we must decline to overlook the palpable irrelevance of the requests at issue and must decline to become, in effect, a proxy for a district court adjudicating a FOIA dispute (in which context relevance is not an issue). We will not use the resources and authority of the Tax Court to compel disclosures extraneous to our proper business.”

And so the motion to compel is not surprisingly denied.

If one feels some frustration from Judge Gustafson at the use of the court (and parties) time in that order, it is amplified in a second order issued two days later on the same docket. This time the order concerns the petitioner’s motion to strike, and this time it is frustration with the uncharitable positions the petitioner is taking.

Again, this circles around discovery. The parties were originally supposed to serve requests for documents no later than January 30, 2019. As some may recall, there was a government shutdown from December 22, 2018 through January 25, 2019. Shortly after the month-long government shutdown hit, but after the January 30 deadline, the IRS requested a continuance of the case and all pretrial deadlines. The Tax Court said, effectively, “how about you two work together to adjust your pretrial schedule, recognizing that it isn’t the IRS’s fault they were locked out of the building?”

But the parties couldn’t come to an agreement: petitioners maintained that document requests made by IRS a few weeks after the shutdown were not timely, and they weren’t budging. This led to some acrimony and motion practice between the parties, with the IRS arguing that petitioners were taking a “hardline” approach and questioning, among other things, their good faith in the process. 

Which brings us to the actual motion to strike. 

Petitioners appeared offended by the IRS’s characterization of the issue, and note that they have always reserved their timeliness objection. Judge Gustafson agrees that the timeliness objection has been reserved, but beyond that asks “is there really any reason to file a motion to strike on those grounds?” In Judge Gustafson’s words, “[w]e think that the pending motion to strike was not a good expenditure of petitioner’s counsel’s time and that it required from the Court attention that would have been better spent on the remaining motions to compel.” 

Ouch. 

But if that doesn’t hurt enough, Judge Gustafson also lets drop that a loss on the untimeliness objection is likely coming down the pike. Sometimes the fine line of being a zealous advocate and playing hardball comes with consequences -perhaps, of losing some favor with the Judge. 

Designated Orders: Another Graev Issue and More Petitioners Refusing to Sign a Decision (5/13/19 to 5/17/19)

This week had only three designated orders. The subjects include further Graev analysis, an issue again before Judge Buch where petitioners signed a stipulation but refuse to sign the decision, and a short order concerning odd behavior by petitioners.

Graev Issues Affect Rich and Famous Petitioners
Docket No. 17514-15, Hisham N. Ashkouri & Ann C. Draper v. C.I.R., Order available here.

Caleb Smith previously blogged on this case, noting the celebrity nature of the petitioners here. Without digging too deep into the nature of the case, I will say that it is another notice of deficiency Tax Case falling under Graev analysis concerning IRS supervisory approval for section 6662 penalties.
In this case, the IRS seeks to introduce evidence of supervisory approval into the record. The petitioners argue that Appeals amended the tax liability by offering to reduce the deficiencies by 50% of what was previously stated. They argue that offer amounts to a fundamental change and it supersedes the prior 30-day letter.

read more...

The Court’s analysis is that it is not a fundamental redetermination of the tax liabilities, but a simple offer reducing the proposed adjustment in half. The Court determination is that the evidence the IRS seeks to introduce concerning supervisory approval is not cumulative or impeaching, is material to the penalty issues, and has potential to change the Tax Court decision concerning the penalties by establishing IRS compliance (the evidence concerning one of the supervisors would not have been sufficient and would have been late but opening the record would include the second supervisor’s statement, which will bolster the record).

The Court’s order is to reopen the record and, because petitioners have no grounds for exclusion, the declarations by both supervisors with accompanying attachments will be received into evidence. Also, it is found as a fact that the penalties determined in the notice of deficiency were proposed, then approved by the immediate supervisor.

Takeaway: Being rich and famous may mean raising better arguments than low income taxpayers, but that doesn’t mean you will automatically win in a Graev/Chai ghoul case.

Déjà Vu – Judge Buch Set Aside Another Signed Stipulation?
Docket No. 5629-17, Thomas L. Kitts & Amanda M. Kitts v. C.I.R., Order and Decision available here.

In a bit of a repeat of my April posting on designated orders, Judge Buch is again in the position where petitioners have signed a stipulation with the IRS but do not want to sign the decision. Will Judge Buch come to the same decision here?

The parties were scheduled for a trial December 10, 2018, but signed and submitted a stipulation of settled issues. The case was not called and the Court gave the parties until February 8, 2019, to submit a decision based on the stipulation.

In December, the IRS mailed to the Kitts a proposed decision with accompanying computations. The Kitts did not sign the decision. In February, their accountant sent to the IRS a letter stating they did not agree with the decision because they felt they received misrepresented information in the stipulation mainly because they did not have income tax computations at that time.

After the IRS received the letter, the parties held a conference call with the Court. The IRS agreed to correct a computational error in the proposed decision. The IRS later filed a motion asking for entry of a decision under Rule 50 pursuant to the stipulation and in accordance with the corrected proposed decision. The Kitts filed a motion to be relieved of the stipulation with claims of IRS misrepresentation.

Within the analysis, the judge states the Court uses broad discretion to permit relief from a stipulation only when necessary to prevent manifest injustice. While damaging relief upon a false or untrue representation of a party is ground for relief from a stipulation, the Kitts did not provide basis to support their claim of misrepresentation. They may have misunderstood the tax effect of their stipulation but their unilateral mistake (if there is one) is not grounds to set aside the stipulation. The Court is unlikely to grant relief from a stipulation entered into through considerable negotiation. Here, the parties freely and fairly signed the stipulation after both parties were aware of what was at issue.

The Kitts contend the IRS did not follow their internal rules for Rule 155 computations or the Department of Justice Tax Division Settlement Reference Manual regarding timely supplying Rule 155 computations. The judge states these contentions are irrelevant and not binding on the IRS.
The parties had opportunity to negotiate or go to trial, choosing to stipulate to resolve all issues. The judge determines that manifest injustice will not result from enforcement of the stipulation and orders that the IRS motion for entry of decision is granted.

Takeaway: Again, it will be difficult to avoid signing a decision after signing a stipulation in Tax Court. The burden to prove manifest injustice will result by signing a decision is high so petitioners should expect to sign the decision after signing a stipulation.

Short Take
Docket No. 19951-18SL, William B. Recarde & Dorothy A. Recarde v. C.I.R., Order of Dismissal available here.

The petitioners filed their “Petitioners’ Withdrawal of Case.” Judge Carluzzo reads it as their request for the case to be dismissed, so he orders that their case is dismissed and that their motion to compel is moot.

Carl Smith reminded me that this would be a Collection Due Process (CDP) case as the Tax Court has held that a taxpayer may voluntarily dismiss a CDP or whistleblower award case at any time (so long as it is not prejudicial to the IRS), but not a deficiency or a transferee liability case.

Takeaway: I’m not sure if this is a case of being careful what you wish for or not. Since the petitioners filed to withdraw their case, that is what they got. Be sure that what you file with Tax Court is consistent with what you want.

Clay v. Commissioner: Section 6751(b) Approval Required before 30-Day Letter

Oh boy, another section 6751(b) issue and it’s the storm Judge Holmes foresaw coming. It has arrived, in the Graev of Thrones, winter is here.

The only designated order during the week of May 6 was in Docket No: 427-17, Michael K. Simpson & Cynthia R. Simpson v. CIR (order here). The order itself was not very substantive and only one page long. The case was already tried on April 18, 2019 in Salt Lake City, but on April 24, 2019 the Court issued its opinion in Clay v. Commissioner so it orders the parties to file responses addressing the effect of Clay as it relates to section 6751(b).

So, what happened in Clay?

read more...

Clay’s trial was held before the Court’s opinion in Graev III was issued, so in due course the Court ordered the IRS to address the effect of section 6751(b) and show any evidence of supervisory approval in the record. The IRS couldn’t produce any evidence in the record that satisfied the burden for section 6751(b)(1), but moved to reopen the record and admit two Civil Penalty Approval Forms accompanied by declarations for two of the years at issue.

Petitioners did not oppose the motion but raised issues with the documents the IRS produced in support of 6751(b) compliance. The Court permitted petitioner to conduct additional discovery and granted petitioner’s motion to reopen the record to include documents relating to the review of the penalties to support petitioner’s argument that the supervisory approval was not timely.

Section 6751(b) requires that no penalty be assessed, “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.” Graev III held that the initial determination is no later than the date the IRS issues the notice of deficiency (although the IRS can still assert penalties in an answer or amended answer in Tax Court). Clay takes this a step further, and asks, should the initial determination occur earlier than the notice of deficiency?

In other words, is penalty approval required before an agent sends a taxpayer a 30-day letter with a Revenue Agent Report (RAR) attached which proposes adjustments and includes penalties?

The petitioner thinks so and argues that the initial determination of a penalty is “the first time an IRS official introduced the penalty into the conversation.” Graev III, 149 T.C. at 500, 501. In Clay, the RAR was the first correspondence that introduced penalties into the conversation and so it should be considered the initial determination under section 6751(b).

The Court agrees and points out that the determinations made in a notice of deficiency typically are based on the adjustments proposed in an RAR. In situations where an agent sends a taxpayer a formal communication proposing adjustments which advises the taxpayer that penalties will be proposed and advises the taxpayer of the right to appeal them (via a 30-day letter to which the RAR is attached), then the issue of penalties is officially on the table. In other words, Clay requires the IRS to get written supervisory approval before it issues a 30-day letter with an RAR, if the RAR proposes penalties (and most, if not all, of the RARs that I have seen do).

Luckily for the petitioners in Clay, although the Civil Penalty Approval form was initialed before the NOD, it was after the 30-day letter and RAR were issued, and therefore, the Court held supervisory approval was not timely under 6751(b).

Returning to the week of May 6th’s only designated order, the Court orders the parties to identify whether any notice conferring the opportunity for administrative appeal was issued to petitioner, and if so, the parties should direct the Court’s attention to any such notice in evidence. Presumably this is so that the parties can demonstrate whether written supervisory approval was timely obtained under the new standard established by Clay.

The Perils of Sealing (and Designated Orders: April 29 – May 3, 2019)

Bill Schmidt and I had been debating whether the Tax Court judges had grown tired of my writing style. No designated orders at all were issued in my last assigned week of April 1 through 5, and no orders were released through May 1 either. But thankfully for our loyal readers, Judges Buch and Halpern each came through with an order on May 2.  Judge Halpern’s order discusses a clarification in this CDP case as to the proper scope of Appeals’ review on remand. The order itself is not very substantive. So let’s move on to Judge Buch’s order…

read more...

Docket No. 4891-18W, Whistleblower 4891-18W v. C.I.R. (Order Here)

Well, we did have two cases this week. At some point between when our Designated Orders team logged the cases and now, Judge Buch ordered this docket to be sealed—a relatively rare occurrence in the U.S. Tax Court, but certainly one that occurs more often in the whistleblower context. It’s unclear whether the order of May 2 itself ordered sealing (if so, why designate the order?) or if that came in a subsequent order. Moving forward, I’ll remember to actually download whistleblower orders rather than simply noting the web link. Otherwise, I might again feel like Obi-Wan Kenobi looking for hidden records in the Jedi archives.

Since there’s nothing more to discuss regarding the order itself, I’ll use the remainder of this post to discuss the logistics of seeking to seal part (or all) of a record in Tax Court. I will also suggest changes for the Court’s sealing process in whistleblower cases.  Prior posts from Sean Akins and Bob Kamman discuss the substantive rationales for sealing or redacting documents in Tax Court.

Privacy Protections in the Tax Court

Whistleblowers often have an incentive to seal the information disclosed in a Tax Court case, especially their identity. After all, the Whistleblower has revealed damaging information about another taxpayer and understandably might face adverse consequences if the taxpayer learns of it. Yet, the Tax Court has ruled that not all Whistleblower cases are automatically sealed and not all taxpayers may proceed anonymously. See Whistleblower 14377-16W v. C.I.R., 148 T.C. 510 (2017).

So, how does one seal all or part of a case in the Tax Court? There are different rules for different case types. Tax Court Rule 345 sets forth privacy protections for petitioners in a Whistleblower action; Rule 103 governs Protective Orders in discovery disputes; and Rule 27 governs privacy protections generally, including redactions, sealing individual documents, and limiting electronic access to case information.  

Let’s put aside those categorizations for a moment and think about these protections functionally. Conceptually, there could be three possible levels of privacy protection:

  • Level 1: Redaction or abbreviation of sensitive information within a publicly available document.
  • Level 2A: Sealing or redaction of an entire document, within a publicly available docket.
  • Level 2B: Sealing of all documents within a publicly available docket.
  • Level 3: Sealing the entire docket, with no public access to the docket.

Most Tax Court practitioners are familiar with Level 1 privacy protections. These appear routinely for LITCs that file petitions for taxpayers challenging the denial of refundable tax credits. We must often allege facts regarding minor children (i.e., where the child lived, their age, and their relationship to the taxpayer). Rule 27(a) provides that filings “should refrain from including or should take appropriate steps to redact . . . [1] Taxpayer identification numbers, [2] Dates of birth, [3] Names of minor children, and [4] Financial account numbers,” and provides guidance on how to redact this information (e.g., listing a child’s initials instead of the full name). Beyond these prescribed redactions, the Court may also require further redactions under Rule 27(d), including issuing a protective order under Rule 103(a).

Rule 27(c) also provides the possibility of Level 2 protection for information protected under Rule 27(a) if the Court orders it. The party would file an unredacted document under seal, while filing a redacted copy publicly. Presumably, this would allow the Court to view the unredacted information to the extent that the information would prove useful to a case’s disposition.

In the discovery context, Rule 103(a) provides for both Level 1 and Level 2 protection, within the discretion of the Court. For example, the Court may order “that a deposition or other written materials, after being sealed, be opened only by order of the Court.” Rule 103(a)(6). The Rule provides for other instances whereby the Court can order nondisclosure of a certain fact—which could presumably be accomplished by either Level 1 or Level 2 protection, again subject to the Court’s discretion.

Finally, Rule 345 provides for Level 2A and 2B protections in the Whistleblower context. While Rule 340 through 344 were promulgated shortly after the introduction of the Tax Court’s whistleblower jurisdiction in 2008, Rule 345 was promulgated in 2012 after the IRS and the National Taxpayer Advocate raised concerns primarily regarding the confidentiality of the target taxpayer, who is not a party to a whistleblower proceeding. Accordingly, Rule 345(b) provides protections for the taxpayer against whom the whistle was blown. The Rule specifically requires that parties “shall refrain from including … the name, address, and other identifying information of the taxpayer to whom the claim relates.” The Rule also requires filers to include a reference list, to be filed under seal, such that each redaction is appropriately identified.  Note the difference between Rule 27(a) (“should refrain from including, or should take appropriate steps to redact”) and Rule 345(b) (“shall refrain from including, or shall take appropriate steps to redact…”). Rule 345 redactions are mandatory.

Rule 345(a) Motions to Proceed Anonymously—and the Related Sealing of the Tax Court Docket

On the other hand—and at issue in the whistleblower cases I discuss below—Rule 345(a) provides anonymity to the whistleblower only if he or she asks for it in the Tax Court proceeding and the Tax Court deems an anonymous proceeding appropriate. (The explanatory note accompanying Rule 345’s promulgation does not fully explain the necessity for or expound on the mechanics of an anonymity motion—though it does so for Rule 345(b)). To proceed anonymously, the petitioner must, along with the petition, file a motion, which must set forth “a sufficient, fact-specific basis for anonymity.” Upon filing the motion “the petition and all other filings shall be temporarily sealed pending a ruling by the Court . . . .” (emphasis added).

This seems to require automatic Level 2B protection (i.e., sealing all documents in the record), but not necessarily Level 3 protection (i.e., sealing the record itself) while the motion is adjudicated. But after the Court rules on the motion, there is no provision within Rule 345(a) for further privacy protections beyond anonymity of the petitioner and accompanying redactions in filed documents.

Nevertheless, the Tax Court’s current practice—as I discovered with the designated order this week—is to seal the entire docket pending resolution of the motion—and potentially thereafter as well. Because the entire docket is sealed, it’s frankly hard to tell when or why the Court would unseal a docket. Had Judge Buch’s order not been publicly accessible weeks earlier when we noted its existence, we wouldn’t even know that this particular docket existed.

What would justify an anonymous proceeding under Rule 345(a)? The Court engages in a balancing test between (1) the public’s right to know the whistleblower’s identity and (2) the potential harm to the whistleblower if his or her identity is revealed. See Whistleblower 14377-16W v. Comm’r, 148 T.C. 510, 512 (2017). The whistleblower, per Rule 345(a) must allege a “sufficient, fact-specific basis for anonymity.” The Court has determined that plausible threats of physical harm (see Whistleblower 12568-16W v. Comm’r, 148 T.C. 103, 107 (2017); Whistleblower 11332-13W v. Comm’r, 142 T.C. 396, 398 (2014); Whistleblower 10949-13W v. Comm’r, T.C. Memo. 2014-94), damage to employment relationships (see Whistleblower 14106-10W v. Comm’r, 137 T.C. 183 (2011)), and risk of losing employment-related benefits (see Whistleblower 13412-12W v. Comm’r, T.C. Memo. 2014-93) all constitute sufficient privacy interests for the petitioner to proceed anonymously.

But under this analysis, it’s merely the petitioner’s identity that remains confidential. Upon filing a motion to proceed anonymously, the record is automatically sealed as a precautionary matter, even though Rule 345(a) does not mandate this practice (“The petition and all other filings shall be temporarily sealed . . . .”) Sealing the record as a substantive matter is another question entirely. The Court addressed this matter in Whistleblower 14106-10W v. Commissioner, where the petitioner had requested the record to be sealed and, in the alternative, to proceed anonymously. The Court granted petitioner the alternative relief sought, as a “less drastic” form of relief that would still preserve the public’s right to an open court system. See Whistleblower 14106-10W, 137 T.C. at 189-91, 206-07. (This case occurred before the Court’s introduction of Tax Court Rule 345 in 2012.) Unfortunately, the Court didn’t delve too deeply into possible considerations that would justifying sealing the record.

So, here we are. The Tax Court apparently believes it has the inherent authority to seal the record in its entirety (as its current practice makes abundantly clear). As a statutory matter, notwithstanding any textual deficiency in Rule 345(a), the Tax Court could rely on its broad authority under section 7461(b)(1), and under its own rules. The Court can, under Rule 27(d), “require redaction of additional information” and may issue a protective order under Rule 103(a). That “additional information” and/or the protective order could presumably cover the entire docket.

Why Seal the Entire Docket? A Proposal for Change

What’s the normative basis for withholding all information from the public after a motion to proceed anonymously has been filed? There could be information in the petition or other filings that reveal the Whistleblower’s identity, trade secrets, or other confidential information. This is an understandable concern. However, the Rule’s automatic and complete approach sweeps too far against the public’s right to an open court system, including access to court records.

Under the common law, the public has a right to access judicial records. Openness and access are the baselines. As Judge Thornton intones in Whistleblower 14106-10W:

“[T]his country has a long tradition of open trials and public access to court records. This tradition is embedded in the common law, the statutory law, and the U.S. Constitution . . . . Consistent with these principles, section 7458 provides that hearings before the Tax Court shall be open to the public. And section 7461(a) provides generally that all reports of the Tax Court and all evidence received by the Tax Court shall be public records open to the inspection of the public.”

Whistleblower 14106-10W at 189-90.

Indeed, secret dockets were completely unheard of in English common law or during the country’s founding. See Press-Enterprise Co. v. Sup. Ct. Cal., 464 U.S. 501, 505-08 (1984). For an entertaining dive into this history and a review of other sealed dockets in more recent history, see Stephen W. Smith, Kudzu in the Courthouse: Judgments Made in the Shade, 3 Fed. Cts. L. Rev. 177 (2009).

This history has provided a basis for some courts to find that sealing dockets in their entirety violates the public’s First Amendment right of access to the courts. For example, Connecticut state courts maintained a “secret docket” throughout the 80s and 90s, hiding the misadventures of the state’s rich and famous litigants. The Second Circuit held that the public generally had a First Amendment right to access the courts’ docket information, subject to a case-by-case balancing of the individual litigants’ privacy interests. See Hartford Courant Co. v. Pellegrino, 380 F.3d 83 (2d. Cir. 2004). Additionally, the Eleventh Circuit held that the Middle District of Florida’s completely sealed criminal docket violated the First Amendment. See United States v. Valenti, 987 F.2d 708, 715 (11th Cir. 1993).

Of course, any court, including the Tax Court, may seal as much of the record as necessary. The Tax Court possesses statutory authority to do so in IRC § 7461(b)(1) and under its own Rules as previously described. The Supreme Court has recognized that a right of public access must be balanced against other interests. See Globe Newspaper Co. v. Sup. Ct., 457 U.S. 596, 606-07 (1982); Press-Enterprise Co., 464 U.S. at 510.

But when is sealing necessary and to what extent? No statutory mandate binds the Tax Court’s hands (unlike in, for example, qui tam actions under 31 U.S.C. § 3730(b), which in a 2009 study represented a plurality of sealed civil cases in federal district court). The appropriate use of its sealing authority lies entirely in the Court’s discretion.

Outside the Tax Court, openness of records is a presumption, able to be overcome only “where countervailing interests heavily outweigh the public interests in access.”  United States v. Pickard, 733 F.3d 1297, 1302 (10th Cir. 2013) (citing Colony Ins. Co. v. Burke, 698 F.3d 1222, 1241 (10th Cir. 2012). Other circuits have adopted the Supreme Court’s test from the criminal context in Globe Newspaper Co., where the Court held that “the presumption of openness may be overcome only by an overriding interest based on findings that closure is essential to preserve higher values and isnarrowly tailored to serve that interest.” 457 U.S. at 606-07; see, e.g., United States v. Ochoa-Vasquez, 428 F.3d 1015, 1030 (11th Cir. 2005).

The Court’s current approach strikes the wrong balance, as it hides cases from public view in their entirety. This automatic and complete approach also portends serious First Amendment concerns. This prophylactic approach allows for no individualized assessment of the privacy interests at stake; while that interest is adjudicated later, this only relates to the anonymity decision, not whether to seal the entire docket. Further, the automatic and complete sealing that occurs seems decidedly untailored.  

In my view, a more reasonable and less constitutionally problematic approach would be that of the U.S. Court of Appeals for the D.C. Circuit. We can run through an example to see this difference. In Tax Court Docket 14377-16W, the case is sealed. Trying to pull up the case on the Tax Court’s website reveals the following:

But, we have some insight into what occurred in this case because the Court issued a reviewed opinion in Whistleblower 14377-16W v. Commissioner, 148 T.C. 510 (2017). The Court denied petitioner’s motion to proceed anonymously, but, allowing for the possibility that petitioner would appeal that interlocutory decision, changed the case’s caption and continued to seal the docket to preserve petitioner’s anonymity.

Petitioner took the Tax Court up on its invitation and appealed the decision to the Eighth Circuit. The IRS objected to venue, because under the catchall provision of section 7482, proper venue for whistleblower cases lies in the D.C. Circuit, where the case was eventually transferred.

The dockets for both the Eighth Circuit and D.C. Circuit proceedings are partially open to the public—or at least, the part of the public that pays for PACER access. The Eighth Circuit docket even allows for access to some underlying motions, orders, and other documents. Notably, the Tax Court record and petitioner’s appellate motion to proceed under seal themselves remain sealed. This approach has some drawbacks, however, as petitioner revealed his identity in one of the unsealed filings. I will not do the same on this blog, but the filing remains available to anyone with a PACER account. Additionally, petitioner’s address is listed on the docket itself. While the former may be a foot fault on petitioner’s part, the latter seems an oversight by the Eighth Circuit. 

The D.C. Circuit docket, in contrast, allows for no public access to any underlying document. It does helpfully list every proceeding on the docket itself. For example, we know that after the initial briefs were filed, the D.C. Circuit appointed an amicus to argue petitioner’s position (and file subsequent briefs). Oral argument was held on April 2, 2019 in a sealed courtroom and we’re now awaiting the D.C. Circuit’s opinion.

Could the Tax Court follow suit? The Court need not amend its Rule 345(a) to do so, given that textually, it requires only that the underlying filings are sealed. If the Court is concerned about petitioners inadvertently disclosing their private information, the Court may wish to amend Rule 345(b), which requires the filing of various identifying information on the petition itself in all cases. The Court could require any petitioner seeking anonymity to file an original petition under seal, while filing a redacted petition for public view. The petitions are not available online in any case, and so the Court could alternatively deny access to the underlying filings to parties who request hard copies while it adjudicates the motion for anonymity.

Anonymity would still need to be maintained online, but only orders and opinions are available online to non-parties. For these documents, the Court would have responsibility to ensure appropriate redactions. The Petitioner is also identified in the online docket, but it seems easy enough to change a petitioner’s name to “Whistleblower [Docket Number]” online.

The D.C. Circuit’s approach seems to strike the right balance: let the public know what’s going on generally, while preserving petitioners’ potential right to anonymity. By releasing select, non-sensitive information, the Court instills confidence in the public that secrecy has not affected the Court’s adherence to procedure and precedent. The Tax Court, which has in the past remedied its prior opaque nature, seems to have the legal and technical ability to follow the same approach; it ought to do so.