In Person Hearing Inconveniences Appeals Witness

November 15, 2021 by 2 Comments

As is often the case, commenter in chief, Bob Kamman, brought to my attention an order that prior to DAWSON would probably have received the designated order label.  DAWSON did away with designated orders, as we have discussed before, but did not stop the Tax Court from issuing important and interesting orders.  The lack of a place for Tax Court judges to park their interesting orders creates more difficulty in identifying the orders that might be of assistance to the broader community of practitioners who follow the Tax Court, but it doesn’t mean the orders are totally unavailable. 

The feature that existed prior to DAWSON that has still not returned and that provides a critical resource for researching orders is the search function.  It would be nice to know when that feature will return.  Searching orders by issue, by judge, or by key word cannot really be done anywhere else.

The order Bob found has a few interesting aspects.  First, the order signals the return of in person hearings in the Tax Court even before the announced return date.  Second, it provides a window into the IRS view of CDP and the perhaps slightly different view of what is needed in a CDP case from the Court’s perspective.  Lastly, it provides a lesson on how not to respond to a status report.

read more...

The order at issue is not long.  I will copy it in full here in order to provide context and to let the Judge’s voice come through in full fashion:

Wendell C. Robinson & May T. Jung-Robinson  Docket No. 6446-19L

ORDER

Petitioners requested a Collection Due Process hearing on Form 12153 (Doc. 52 at 56), on which they gave their address in Washington, D.C. Thereafter paperwork from IRS Appeals was evidently generated by various personnel in Holtsville (Doc. 52 at 65, 139, 144) and Philadelphia (id. at 138; see also id. at 99, 187). See also id. at 85 (Austin). Appeals issued a notice of determination; petitioners commenced this case; and the case has been set for trial in Washington, D.C. In a telephone conference on November 9, 2021, petitioners expressed a preference for an in-person trial (rather than a remote trial via zoomgov.com), and the undersigned judge stated an intention to hold an in-person trial. On November 12, 2021, the Commissioner filed a status report that states: “Respondent’s Settlement Officer is unable to travel to Washington, DC in order to testify in person during the December 13, 2021, trial session. The Settlement Officer is available to testify remotely during such trial session.” It is

ORDERED that, as soon as possible, and in any event no later than November 19, 2021, the Commissioner shall file a supplement to his status report that shall :   (1) identify the (unnamed) Settlement Officer to whom the Commissioner refers,  (2) explain why that Settlement Officer (rather than another Settlement Officer) is needed as a witness, (3) give a summary of the testimony that the Commissioner expects to offer through this Settlement Officer, (4) explain the reasons that this testimony is important to the Commissioner’s case at trial, (5) explain the reason that the Settlement Officer is “unable to travel to Washington, DC”, though able to testify remotely, (6) explain why the IRS chose the Holtsville Appeals Office for the handling of petitioners’ request, rather than one closer to their residence, and (6) state whether, if the Court is unwilling to allow this Settlement Officer to testify remotely in an otherwise in-person trial, the Commissioner would prefer a general continuance rather than proceeding without this witness.

(Signed) David Gustafson

Judge

Served 11/12/2021

We posted the Tax Court’s announcement recently that it intends to begin holding in person trials again in January 2022 and traveling out to the 74 cities where it sits to hear cases around the country.  What’s mildly surprising about this order is that the Court is holding an in person trial in 2021 or at least attempting to do so.  This is the first in person trial since March 13, 2020 of which I am aware but, of course, there could be numerous in person trials happening that I would not know about.  I take the order to signal that the Court is serious about getting back into the real rather than virtual courtroom.  Another sign we are opening back up.

The second part of the order is the more interesting and amusing.  In this CDP case the IRS attorney wants the Settlement Officer to testify.  It’s not clear from the order why the IRS wants the SO to testify or why the SO cannot do so on that date.  It’s a bit unusual to have the Settlement Officer testify.  Nonetheless, the Settlement Officer is unavailable on December 13.  That trial date comes pretty close to the end of the government leave year.  Perhaps the SO has use or lose leave with plans not to be in the office for the last few weeks of the year.  Perhaps the IRS travel budget does not allow bringing in an SO remote to DC to make a minor point. 

The unavailability of the particular SO to attend leaves the Court asking why another person from Appeals could not testify.  This goes to why the IRS wants the SO to testify in the first place, but also to whether travel funds entered into the response.  If the purpose of the testimony is merely to establish matters almost any IRS could attest, why not have someone else come and testify who is available and local?  We can find out later this week when the IRS files its supplemental status report.

The lesson here may be principally about status reports and how much detail to include.  The IRS clearly did not include enough information in its status report and may have annoyed the Court by failing to do so.  Most, if not all, of the Tax Court judges monitor the cases in which they retain jurisdiction by requiring status reports of the parties.  As a government attorney, I knew I had to always file a status report by the date requested even though almost no pro se petitioners file the ordered reports and many represented parties fail to do so. 

Filing a helpful status report allows the judge handling the case to know what to expect and when.  It’s not a bad idea to anticipate what the judge needs and wants to know and include that in the status report even if it was not the precise information requested.  In pro se cases, the IRS regularly gets a public form of ex parte communication since the other side is usually silent.  Here, the government’s status report was too cryptic and seemed to assume that the Court would go along.  If the status report had reported why the specific witness could not attend on the scheduled day and why that witness brought important information to the CDP case, the judge could have made a decision about moving forward based on that information.  The incomplete information provided only led to a request for more information and put the government on its back foot.

Filed Under: Appeals, Designated Orders, Tax Court

Nuance in Determining the Taxpayers Last Known Address – Designated Orders, November 2, 2020

June 17, 2021 by 3 Comments

There was only one designated order for the week of November 2, 2020 (Reddix-Smalls v. C.I.R., Dkt. # 17975-18L (docket with link here)). In it, Judge Gustafson ruled on whether a petitioner (allegedly) telling an Appeals Officer (AO) of a new address during a telephonic Collection Due Process hearing would legally change the individuals “last known address.”

Spoiler: it did not.

Second Spoiler: I’m still going to write about it, because there are a lot of interesting lessons to take from the order. The designated order provides a great opportunity to walk-through the statutory, regulatory and sub-regulatory guidance on point. It also gives us a chance to reflect on some of the recent legal developments in that area.

“read

The Importance of the “Last Known Address” I teach my students that many of the important “milestones” in federal tax procedure are hit by the IRS mailing a letter. This is seen with the Notice of Deficiency -the letter which generally makes assessment possible for the IRS in deficiency cases. IRC § 6212(b) lays out where a Notice of Deficiency should be mailed to, noting that the taxpayer’s “last known address” is sufficient. The statute says effectively nothing about what someone’s last known address should be, so the Treasury Regulations and other guidance pick up the slack. The stakes are high (potentially invalidating the deficiency assessment), so determining exactly what the last known address is can be a very contentious issue.

So it is in the case of Reddix-Smalls, though not with regards to a Notice of Deficiency. In this instance Ms. Reddix-Smalls needs to show that a Collection Due Process “Notice of Determination” was not sent to her last known address. If it was sent to her last known address she arguably failed to clear the second “timeliness hurdle” (see post here) for petitioning the Tax Court, ruining jurisdiction and dismissing her case.

Dismissal would effectively result in the IRS Notice of Determination being upheld -in this, case the determination to levy. It isn’t clear that Ms. Reddix-Smalls has any great arguments as to why levy is inappropriate, but I’d note that all of the important events (CDP hearing, determination, petition) in this instance took place in 2018… and this order for dismissal came in November 2020. It is fair to say that a lot may have changed for Ms. Reddix-Smalls in those tumultuous intervening two years -perhaps even a change in circumstance that would warrant a remand for a supplemental CDP hearing.

Alas, the Tax Court cannot order a remand for a supplemental CDP hearing without jurisdiction over the matter to begin with. And the first order of business, in essentially any case, is determining if the court has the power to hear the case at all.

(As an aside, query whether Ms. Reddix-Smalls could get a supplemental hearing even without the Tax Court under IRS Appeals “retained jurisdiction.” See IRC § 6330(d)(3). I’ve written previously about the nuance of Appeals retained jurisdiction and when it can be invoked, but I’ve never tried it myself.)

Determining the Last Known Address

Usually, determining the taxpayer’s last known address is pretty straightforward: the “general rule” that the last known address is whatever was on the most recently processed tax return covers the majority of taxpayers. See Treas. Reg. § 301.6212-2(a).   On occasion the facts can get convoluted, particularly when the taxpayer has hinted to the IRS that a different address might be best. Are these hints enough to be “clear and concise notification” as required by the regulation? That can be a highly factual inquiry, and the exact contours are still being determined. For a while, filing Form 2848 with the IRS listing a different address for the taxpayer appeared to be sufficient. Then the Tax Court said “no” in Gregory v. Commissioner, 152 T.C. No. 7 (2019). Then the 3rd Circuit said “maybe” and reversed the Tax Court in Gregory (as covered here). I’d say the present state of affairs on the issue is a bit unsettled.

Obviously, the designated order in Reddix-Smalls is not precedential (neither was the 3rd Circuit decision reversing Gregory). But since we are living in an uncertain world where we must weigh specific facts and circumstances to see if they may be enough to qualify as “clear and concise” notification to the IRS, orders like Reddix-Smalls are still helpful in gauging how Tax Court judges are likely to rule.

There appear to be two potential “last-known” addresses for Ms. Reddix-Smalls. One in North Carolina (NC) and one in South Carolina (SC). Timelines matter in these inquiries, and here the timeline is as follows: in 2017 Ms. Reddix-Smalls filed a change of address with the U.S. Postal Service listing the NC address. In April 2018, however, Ms. Reddix-Smalls filed a joint tax return listing the SC address. In August 2018 the IRS sent the Notice of Determination to that SC address…

If those were the only facts here it would be an easy case: the “last known” address was the SC address, since it was most recent update with the IRS at the time of the Notice of Determination. But there is an additional wrinkle: Ms. Reddix-Smalls insists that she specifically told the AO that she changed her address to NC during her Collection Due Process hearing.

Assuming that’s true, wouldn’t that be “clear and concise” notification?

Maybe not. Though the parties dispute that fact, Judge Gustafson determines that even if Ms. Reddix-Smalls did tell the AO of the changed address that would not be sufficient.

Can that really be so? Literally telling the person at the IRS sending the letter “my address has changed” is not “clear and concise” notification of a change in address? Judge Gustafson asks the parties to explain their thoughts on this before he rules on the matter.

The IRS argument largely hinges on the fact that the AO doesn’t have access to the “Service Master File,” and therefore can’t change the address on file for the agency. Remember, the IRS is a pretty big bureaucracy: perhaps it would be unfair to impute the knowledge of a different address from one individual to the entire agency. There is a way for the AO to request that the IRS change the address agency-wide (apparently by sending “Form 2363” to Account and processing Support). But the AO didn’t fill out or send that form anywhere, so the address didn’t change -or more accurately, under IRS processes the address shouldn’t change.

This might seem a bit ridiculous to the general public: if I told an Appeals Officer at the IRS my address changed but they didn’t take any steps to affect that change in their database I’m out of luck? But the IRS argument is backed up by… IRS guidance. Specifically, Rev. Proc. 2010-06 which provides that telephonic changes of address (1) need to be done with employees that have access to the Service Master File, and (2) must include a fair amount of information about the new address and their identification. (Lingering in the background of this order are questions of whether Ms. Reddix-Smalls actually gave the IRS any address at all during the CDP hearing.)

And so, as Judge Gustafson rules, it doesn’t actually matter if Ms. Reddix-Smalls told the AO of her new address, because the AO (1) didn’t have access to the Service Master File, and (2) took no steps to get that information to IRS employees that do have such access. The Notice of Determination was sent to the proper last known address on file and was therefore effective. The petition was late based on the 30 days running from the (effective) mailing. Case dismissed.

What are some things we can glean from this ordeal?

One is a reminder of the lesson that it’s always wise to thoroughly document and memorialize (with a letter or fax) the conversations you have with the IRS. I’ve written about the importance of the administrative record in Collection Due Process before. Here, the issue arguably isn’t the Tax Court’s scope of review and whether it is limited to the administrative record, because the issue isn’t a review of the hearing, but of jurisdiction: was the Notice of Determination sent to the last known address? Yet the lesson of documenting everything holds just as true. The case would be bolstered immensely (possibly on appeal, as was done in the aforementioned Gregory v. C.I.R. decision) if there were a paper trail. A fax to the AO showing that Ms. Reddix-Smalls insisted that her address is somewhere else (and actually listing it) is simply a stronger form of “clear and concise notification” than a he-said-she-said phone call log (from the IRS AO, no less). Particularly if it was the AO that prepared and mailed the Notice of Determination (and not some other function of the IRS), one might ask why clear and concise notification to that employee shouldn’t suffice.

Relatedly, this order may serve to remind us that the IRS is a massive agency which makes it extremely cumbersome to (1) impute knowledge from one employee to the agency as a whole, and (2) get a firm grasp on exactly what authorizations any given employee has. The latter point is sometimes demonstrated in issues with settlement authority (see Keith’s post here as but one example). Here it is demonstrated in issues with changing your address on file… and the consequences that emanate therefrom.

Filed Under: Designated Orders, Last Known Address

Continuances in the Age of Remote Trials: Designated Orders, October 5 – 9, 2020

April 30, 2021 by 1 Comment

Months ago, I heard an interview with the NYU Professor Scott Galloway about what the world may look like post-Covid. One of the main takeaways was to think of the pandemic not as a “change agent,” but rather as “accelerant” of trends that were already underway. I’d say this holds true with the government embrace of technology in tax controversy: from the momentous leap of fax to email, to the ability to sign documents electronically (see posts here and here).

While many of these changes were long overdue and will likely remain post-Covid, not all of these changes are here to stay. Or at least not in their current form. Virtual Tax Court trials are a good example of one such change that will almost certainly not remain as the default but may well continue in some form or another. The ease of access for virtual trials (and thus its ability to efficiently resolve cases) may be too attractive to the Tax Court to abolish it altogether.

One question is how or if such changes may affect motions for continuance. To get a sense of what may happen in the future, let’s take a look at the past. Specifically, two designated orders denying such motions in calendared virtual trials.

read more…

Tax Court Rule 133 provides that continuances are “granted only in exceptional circumstances.” While this may make it seem that continuances are extraordinarily rare, in my experience the Tax Court is generally amenable to them so long as either (1) there is a serious prospect the case will resolve without trial, or (2) the parties can demonstrate they are making progress on the case, which would make for a more resolution (be it by trial or otherwise). When I draft continuance motions, I generally try to hit on those two points, demonstrating why it is in the Tax Court’s interest (ultimately, as a matter of efficiency) to grant the continuance.

If you cannot show that you are actively engaged in the case and making a good faith effort to move things forwards the Tax Court is unlikely to grant a continuance motion. Call me a cynic, but I’d venture there are some petitioners out there that would rather have their case languish than hear what the court has to say about their case.

But perhaps the reason things have stalled are out of your control. In my experience, this sometimes arises from logistical issues in receiving the administrative file from the IRS. As I’ve detailed before, the contents of the administrative file can be a sticky issue, and also directly informs many arguments you may want to raise. (The ABA Tax Section also recently held a free webinar on the topic, which I’d highly recommend.)

Bringing things back to virtual trials, petitioners may be inclined to argue for continuances based on technological issues beyond their control. Though it is generally difficult to argue, ahead of the calendar, that you “anticipate” technological trouble that would preclude attending virtual trials, some of these may be legitimate. Where the parties have time-and-time again failed to engage or exhibit other delay tactics, however, the Tax Court is sure to look with a critical eye on these sorts of arguments. The two designated orders give, I believe, excellent examples of the limits of Tax Court patience in granting continuances.

Let’s start with Griggs v. C.I.R., Dkt. # 18035-16 (order here). First off, glancing at the docket number informs us that this case has been circulating since 2016. For context, at that time very few people on earth knew what a “coronavirus” was, and Barack Obama was handing over the keys to the White House to Donald Trump. Suffice it to say, 2016 was a while ago.

Flash forward to October, 2020 and Mr. Griggs still wants more time to get things in order. And for a while, where it seemed the case may be moving forwards, the Tax Court obliged. A continuance was granted in January 2018 after a motion for partial summary judgment by petitioners was denied. Then another continuance was granted in November 2018. Then partial summary judgment granted to the IRS…

After that, Mr. Griggs seemed less inclined to move things towards a final resolution. First, he makes numerous requests for additional time (not to be confused with continuances: see Rule 25(c)) on filing status reports. Then, almost exactly one month before the case is set for trial, Mr. Griggs moves again for a continuance. His reasons fall within the “circumstances outside my control” category: (1) the law libraries in Oregon are closed because of the pandemic, and (2) the forest fires will (somehow) keep him from attending the trial.

The Tax Court isn’t having it. The first reason is unpersuasive because it is apparently a pure substantiation case, where legal research isn’t really in play. The second reason is unpersuasive because… well, you have to actually explain why all the bad-things happening in the world specifically effect you, rather than just listing off Billy Joel style those bad things in the abstract. Mr. Griggs does not do so.

The motion is denied. Maybe our second petitioner (Ononuju v. C.I.R., Dkt. # 22414-18 (here) has better luck?

From the outset it may appear that Mr. Ononuju has a compelling case for continuance. He lives in Nigeria and, because of the pandemic cannot get a flight into the United States. Of course, since this trial is going to be virtual it doesn’t much matter where he physically is, so long as he has phone or internet access. But perhaps such access is lacking in Nigeria?

Not so, the Tax Court finds -or at least not in Mr. Ononuju’s instance. Some reasons why “I’m in Nigeria” is not sufficient, on its own, to show lack of remote access include (1) he lives in the capital city, which certainly has phone access, and (2) he was able to communicate with the IRS by phone and email while in Nigeria (where he has lived since 2017) up to then. The Tax Court is not swayed and is particularly dismayed that Mr. Ononuju didn’t even try to show up to trial and express his concerns with phone or email access so that arrangements could be made.

In my experience, the Tax Court is very understanding when these issues are expressed in good faith. And reading between the lines, the “good-faith” of Mr. Ononuju seems to be called into question here. Although Mr. Ononuju doesn’t show up for trial, his wife does and testifies that he was presently providing medical care in rural areas to people in need.

How noble! Only the Tax Court doesn’t find her testimony credible, so maybe not. A very brief look at taxes at issue might give some hints as to the credibility gaps.

Mr. Ononuju founded and was president of the non-profit “American Medical Missionary Care, Inc.” Again, how noble! Except, at least according to the IRS, Mr. Ononuju engaged in “excess benefit transactions” under IRC § 4958. I don’t work with non-profit tax issues, but under IRC § 4958(c), these appear to be transactions where someone with control over the non-profit uses the non-profit for undue personal gain. The penalties are stiff: a 25 percent excise tax on the prohibited transaction under the “first-tier,” and a 200 percent(!) second tier excise tax if you don’t correct the excess benefit transaction -which apparently Mr. Ononuju never did. I have no insight on whether these taxes were appropriate, or the merits of the case generally, but things seem to have been unraveling for Mr. Onounju: Michigan revoked his medical license at about the same time the IRS examination appeared to be going on.

The IRS asserted a deficiency of over $1.5 million for 2014. Usually that’s a large enough number to keep people engaged. And though Mr. Ononuju was for a time, that appears to have stopped right when the parties got to fact stipulation. After that, radio silence…

Much of Tax Court litigation occurs without the active involvement of the Tax Court itself. Unlike in federal district court, the parties are mostly entrusted to work out the facts between themselves without formal discovery -or at least try to, before getting the court involved. Trial can then largely be reserved to those factual issues the parties could not (reasonably) agree on. But woe onto those who do not engage in the stipulation process, and then ask the Tax Court to postpone the trial. That the (eventual) trial will be virtual doesn’t really play into that equation.

And so we have yet another denied motion for continuance.

To me, virtual trials will just be an extra tool in the Tax Court toolbox: one that could especially benefit places like Minnesota, where the trials are infrequent. As the Tax Court shifts back to on-site calendars, however, I think the possibility of virtual trials could be reason for the Tax Court to be more comfortable in granting continuances -so long as the petitioner is engaged in the process. Imagine the petitioner shows up to calendar after largely being uncommunicative and makes a motion for continuance that very day. Maybe they have a lot of really good reasons for being uncommunicative, and maybe it seems like their case has some merit. In places like Minnesota, Tax Court judges are in a bit of a bind in those instances. If they grant the motion to continue it might not be set for trial for another 6 months to a year. Usually, the Tax Court puts the case on “status report” track to try and keep the parties engaged in the interim.

Virtual trials could go one step further, particularly for those parties that are actually engaged in the process, and perhaps even more so for those that are linked with pro bono counsel at calendar call. Now, instead of scrambling to put together a case that day or week, theoretically pro bono counsel could make a motion for continuance with the understanding that a virtual trial will be held in two or three months -usually enough time to actually sort things out, without being so far in the distance that one of the parties disappears.

For petitioners like Mr. Griggs and Mr. Ononju where continuances may just be a tactic of indefinite delay, they can and should be denied -virtual trial or not. But for engaged petitioners that just need some more time (or assistance from free counsel), the availability of virtual trials may actually provide more cushion for continuances to be granted -at least from the perspective of efficiently resolving cases.

Filed Under: Designated Orders

Accepting Gifts from the IRS: Ethical Considerations (Part Two)

April 21, 2021 by 4 Comments

Previously, we discussed the two categories of IRS “gifts” that taxpayers cannot accept: clerical gifts and purely computational gifts. We left, however, with the cliffhanger that computational gifts may become “conceptual” gifts, which attorneys often can accept. Today, we’ll look closer at what a conceptual gift is and whether it is what was at issue in the Householder case (covered here).

read more…

Conceptual Gifts

Each step away from the strictly arithmetic computational gift takes you closer to the conceptual. Facts and circumstances are critical in determining which category the gift best falls into. So much of tax calculation involves the interplay of disparate statutes and facts, which may or may not have been explicitly covered in the settlement and negotiation. What first appears to be a matter of computation can often be a matter of concept: for example, the failure of the IRS to raise an issue that at first seemed ancillary but ultimately is determinative.

For example, imagine you are settling a deficiency case where your client filed their return late. Both parties have agreed on the deficiency amount, but never really discussed (or settled on) the exact date the return was filed. The IRS prepares a settlement document that reflects the deficiency agreed on but has a lower IRC § 6651(a)(1) late-filing penalty than you expected. Is this a computational error or a conceptual error?

At first blush, failure-to-file penalties seem like basic arithmetic: essentially, you look at the total amount of tax that should have been reported (and paid) and multiply that by 5% for each month the return is late. In the above hypothetical you’ve reached a determination of the amount of tax that should have been reported when you settled on the deficiency amount. But it isn’t clear that you ever discussed or determined exactly when the return was filed -that is, how late the return is, and by consequence how many months the penalty applies. That value could be subject to reasonable dispute. Exactly when a return is “filed” can be contentious. If the return was truly “late-filed” the issue would be when the IRS received it… but even that date isn’t always clear, especially post-Fowler (see coverage here).

Reverse engineering the late-filing penalty calculations may help in this case: how many months does the penalty amount proposed by the IRS equal? Is it a mathematically impossible number under the statute? (IRC § 6651(a)(1) rounds each fraction to a full month, so if you are 32 days late it is the equivalent of two months.) If so, it is likely a computational error.

Likely a computational error. But not definitely.

Again, conceptual errors may linger behind even the most seemingly mathematical mistakes. The IRS could conceivably have decided on a penalty amount that doesn’t immediately appear to add-up. For example, maybe the parties agree that the return was three months late, but the IRS believes there are significant hazards of litigation on a “reasonable cause” argument. In that case, the IRS may settle on a penalty that doesn’t otherwise make mathematical sense: a penalty of only 60% of the amount due for a three month-late return, accounting for the 40% chance that the petitioner may prevail on a reasonable cause argument in court.

The thing is, as a matter of negotiation the IRS pretty much always has discretion to settle on dollar amounts that won’t “make sense” in a winner-takes-all application of the Code. Left unbounded, the unscrupulous tax attorney could always say, “it wasn’t an arithmetic error: they were just scared I might win!” This line of argument should not always be availing. Whether an attorney can shoehorn a computational error into the conceptual category depends on the facts and circumstances of the case at issue, and the actual conduct of the parties in reaching their settlement.

First though, it is important to recognize why tax attorneys may be so tempted to categorize gifts as “conceptual” in the first place. The biggest reason? These are the gifts you can (in some sense, “must”) accept from the IRS. They are (generally) client confidences that do not raise to the level of misrepresentation to the court. Unless the client wants you to disclose the issue, you shouldn’t. Admittedly, different people in the tax world have different views on your responsibilities to the client and tax administration more broadly. The 2020 Erwin Griswold Lecture gives an interesting overview of the opinions of some prominent tax personalities on that point.

ABA Statement 1999-1 uses the example of a Schedule C deduction to illustrate. In the example the parties eventually agree that the deduction should be allowed, but counsel for the taxpayer believes (secretly) that the deduction likely should be due to passive activity under IRC § 469, and therefore wouldn’t benefit the client. The IRS doesn’t raise this issue, and neither does counsel. ABA Statement 1999-1 advances this as a “conceptual” error: counsel must not disclose unless their client expressly consents to their doing so.

To me, this is a roundabout way of asking whether the conceptual error might not be an “error” at all. As the ABA Statement notes, passive activity issues are highly factual and “subject to some reasonable dispute.” That seems less like a conceptual “error” on the IRS’s point, and more like a conceptual “weakness.” In the ABA’s example the wiggle room is in the reasonable dispute on a highly factual question of law. But that isn’t always how conceptual errors work, particularly when you “know” the key facts at issue.

For example, imagine the IRS audits your client claiming their niece as a qualifying child for the Earned Income Tax Credit. All the IRS is putting at issue is whether the niece lived with your client. Later in the process, you learn that the real problem with your client’s return is that they are legally married and needs to file married filing separate (which disallows the EITC). The IRS, however, doesn’t think to raise this issue. Note that this is essentially what happened in Tsehay v. C.I.R., discussed here. Even though that may be a “conceptual” error you still are not completely off the hook. I would argue that you cannot enter a decision with the court failing to correct that mistake. Recall your obligations to the court under MRCP 3.3 and note especially Rule 3.3(a)(2): the prohibition on failing to disclose adverse controlling legal authority.

In sum, the only time you may be completely free is where it is a conceptual “weakness” rather than an outright error: those instances where you could argue “maybe, just maybe, it wasn’t a mistake at all.” Let’s see if that’s what happened with the Householders.

As Applied to the Householders

The gift to the Householders was in the form of a very messy Notice of Deficiency. Most pertinently, it involved the transformation of a gain (reported by the taxpayer) into a rather large, favorable loss that never seems to have been claimed by the taxpayer at all. The Notice of Deficiency explanation illustrates the confusion: “It is determined that the amount of $317,029 claimed on your return as a loss resulting from the sale of your business is allowable.” The problem is that loss was not claimed on the return.

How did this mistake come to be? Was it from dueling legal theories for calculating the gain on the sale? I am operating from imperfect information, but the order would suggest otherwise. The working theory is that the IRS revenue agent was looking at an unsigned Form 1040 that had been submitted during examination negotiations, and not the actual Form 1040 that had been filed.

One may be tempted to call this a “clerical” mistake: a typo transposing numbers from the actual filed return and one that was just floating in the revenue agent’s file. But one can also imagine facts that would shift this into the world of “conceptual” errors. If there was a return floating around the revenue agent’s file that took the position there was a $317,029 loss, it is conceivable that the IRS simply agreed with that position. How are you to know if the IRS agreement was inadvertent? More facts would certainly be needed surrounding the transaction at issue to determine if it were a conceptual or clerical error.

A core question Householder raises is whether by filing a petition and invoking the power of a tribunal (and thus MRPC Rule 3.3), you are under any sort of obligation to correct errors on a Notice of Deficiency: computational, clerical, or otherwise.  A secondary question is whether silence on such a mistake is the same as prohibited “misrepresentation” to the court. I don’t think it is always so simple as to say “it’s not my job to fix the IRS’s mistakes.”    

In any event, by the time Householder gets to the Tax Court, Judge Holmes is essentially handcuffed in getting to the right number. Particularly where settlement is done on issues rather than bottom line numbers, it appears that silence on an error concerning how those issues will ultimately “add up” under Rule 155 computations is not going to be upset by the court. See Stamm Int’l Corp. v. C.I.R., 90 T.C. 315 (1988).

But that’s not what this foray into ethics is all about. This is not about what the Tax Court can do, but what a tax attorney should do under their professional obligations. I certainly do not have enough facts to know whether Householder involved conceptual, computational, or clerical mistakes. I do know that these sorts of gifts raise all sorts of ethical issues and are not as fun to receive as one may think.

Filed Under: Circular 230, Designated Orders, Tax Court

Accepting Gifts from the IRS: Ethical Considerations (Part One)

April 20, 2021 by Leave a Comment

Previously, I wrote about the strange case of Householder v. C.I.R (here). As a refresher, the Householders tried to take about half-a-million dollars in nonsense deductions for their horse breeding/leasing “business,” and the Tax Court disallowed them. This, of course, resulted in a $0 deficiency after running Rule 155 computations.

Wait, what?

Yes, that’s right: there was no deficiency for the Householders even after “losing” on a half-million dollar deduction because the IRS made a serious mistake in their Notice of Deficiency. Essentially, the IRS “gifted” the Householders a tax loss unrelated to the one at issue before the court. In the previous post we mostly looked at whether the IRS could take back or otherwise undo their gift. This time, we’ll look at ethical considerations for counsel in accepting these gifts.

read more…

It took all my willpower not to name this blog “Emily Post’s Guide to Accepting Gifts From the IRS.” However, the real concerns for counsel in these situations are less matters of etiquette and more the competing obligations of confidentiality with your client and candor to the court.

As a human in the world, I might think morality dictates I should tell the IRS of an erroneous “gift” so they can (presumably) rescind it. But as a lawyer in the world, professional rules dictate otherwise- something that may be thought of as a “loophole” in morality. (I can’t help myself: I was a philosophy major with a focus on applied ethics and I’m still paying off those loans. Any reference I can make to something I learned in undergrad eases the pain.)

Without being able to heavily rely on our gut moral compass, it can be difficult to know what is required of you as a lawyer on ethical issues. Lawyers have to think in terms of what “is or isn’t” in accordance with the Model Rules of Professional Conduct (MRPC). And even within the constrained universe of the MRPC it can be difficult to know what your ethical responsibilities are: as the Minnesota Rules of Professional Conduct state, these are “rules of reason.” See MRPC “Scope” [14]. In most situations attorneys must work backwards from the general principles of the MRPC to arrive at an answer.

Fortunately, there is an ABA Statement almost directly on point for the sorts of issues at play in Householder. This is ABA Statement 1999-1.The money quote from that statement is as follows:

“A client should not profit from a clear unilateral arithmetic or clerical error made by the Service and a lawyer may not knowingly assist the client in doing so. This is not the case, however, if the computational error is conceptual, such that a reasonable dispute still exists concerning the calculation.”

The ABA Statement creates a typology of “gifts,” each with different characteristics and ethical considerations. The differences are important primarily in how they determine what duties you owe the client, the IRS, and the court. Those different varieties are (a) computational gifts, (b) clerical gifts, and (c) conceptual gifts. Let’s take a look at each before figuring out which one the Householders received.

Clerical Gifts

Let’s begin with the easiest one to classify and respond to: clerical gifts. These can be thought of as typos, and they are not the sort of gifts you are allowed to accept. If my client and the IRS settle on a refund of $1,000 and the IRS types up a decision document accidentally listing a refund of $100,000 my role is clear: Let the IRS know of the mistake. I don’t even need to consult my client on that. The decision document would be entered in court and failing to correct this mistake would be in violation of my duty of candor to the court. MRPC 3.3.

You might be thinking to yourself, “but what about your duty to the client? Shouldn’t they get the final say as to whether to accept this payday since the mistake is a client confidence?”

Not so. Where the court is involved, such client confidences are explicitly overruled by MRPC 3.3(c). In fact, because you’d already reached a settlement amount with the client and IRS, you don’t even need to disclose the issue to your client: you have implied authority to make the fix on your own. See MRPC 1.6(b)(3). As we’ll see with the other varieties of gifts, this issue of maintaining a client confidence can be a serious sticking point.

If the matter didn’t involve entering a decision document in court (and therefore candor towards a tribunal), the answer may be different. In that case, you’d want to have a long chat with the client about the criminality of cashing a government check they aren’t entitled to. And as a tax lawyer you’d probably want to drop the case because of Circular 230 concerns. But that isn’t what we’re dealing with for the purposes of this blog. For now, playing the role of Emily Post, if the IRS gives you a clerical gift, one must politely say “I could never accept such generosity.”

Computational Gifts

Computational gifts may be “squishier” than clerical gifts and entail a broader range of mistakes. On one end of the spectrum the mistake may be simple arithmetic: 2 + 2 = 5. This isn’t a far-cry from a clerical mistake, and identical ethical considerations apply: you cannot accept such generosity, and you must disclose (if in court). Most of the time, however, the arithmetic isn’t so cut-and-dry. What if the issue isn’t failure to correctly add two numbers, but failure to consider a code section that would introduce another variable to the equation? In other words, what if the correct computation is 5 + 3 x 0 but the IRS doesn’t recognize a law providing the zero multiplier, and only adds 5 + 3? Computational, to be sure, but not strictly so…

Which leads us to the final category: “Conceptual Gifts.” These are the gifts attorneys want to receive from the IRS, because in some circumstances they can actually accept them. Was the Householder’s erroneous Notice of Deficiency one such conceptual gift? We’ll take a deeper look at what exactly distinguishes conceptual gifts from purely computational ones in the next post.

Filed Under: Circular 230, Designated Orders, Tax Court

Incapacitation, Death and the End of an Era, Designated Orders November 16 – 21, 2020, Part II

February 17, 2021 by 1 Comment

The week of November 16, 2020 was the week preceding Thanksgiving and the Tax Court’s transition to Dawson was looming, which meant orders would no longer be “designated” on a daily basis. The judges knew it may be one of their last opportunities to alert the public (and Procedurally Taxing) to an order. Many lengthy, novel and diverse orders were designated. As a result, my week in November warranted two parts, and this second part is my last post on designated orders ever. I’ve learned a lot over the last three and a half years, and I hope you all have too.

read more…

Answering Interrogatories while Incapacitated

In consolidated Docket No. 26812-12, 29644-12, 26052-13, 27243-15, 5314-16, 5315-16, 5136-16, 5318-16, Deerco, Inc., et al. v. CIR, the case involves the acquisition of a corporation and the subsequent removal of substantial plan assets (over $24 million) from the acquired corporation’s pension plan in 2008.

The petitioner who is the focus of this order was the President of the acquiring corporation and the trustee for the pension plan of the acquired corporation in control of the disposition of assets, so naturally, the IRS is very interested in what he has to say. Unfortunately, he is incapacitated. His counsel answered some of the IRS’s interrogatories on behalf of all the petitioners (individuals and entities) in this consolidated case by stating that they lack information or knowledge.

The IRS and Court find petitioners’ counsel’s answers to be insufficient for a couple reasons:

1) Rule 71(b) requires the answering party to make reasonable inquiry and ascertain readily available information. A party cannot simply state they lack the information without explaining the efforts they have made to obtain the information. Even though the petitioner is incapable of responding, the Court thinks he should have documents or records that would enable his counsel to answer the substance of the interrogatories. Petitioner also had an attorney and accountant assisting him during the transaction at issue, and those individuals may have useful information, documents, or records.

2) The Court also finds the answers are procedurally defective. The procedures, found in Rule 71(c), differ depending on whether an individual or an entity is providing the answer. In this case, petitioners’ counsel has signed under oath the answers on behalf of all petitioners. Counsel is permitted to answer and sign under oath for entities, but not for individuals. Individuals must sign and swear under oath themselves. The petitioner in this case can’t do that, but his wife has been appointed as his guardian, so she can.

There are other issues raised (such attorney-client privilege concerns), but the prevailing message is that the Court thinks petitioner’s counsel can do better and outlines the ways in which they can provide more adequate answers.

We Cannot See A Transferee

In consolidated Docket No. 19035-13, 19036-13, 19037-13, 19038-13, 19058-13, 19171-13, 19232-13, 19237-13,  Liao, Transferees, et al. v. CIR, the IRS tries several avenues to prove that petitioners, who consist of the estate and heirs of a taxpayer who owned a holding company, called Carnes Oil, should be liable as transferees when an acquisition company ultimately sold the company’s assets and tried to use a tax shelter to offset the capital gains.

In this case, initially, a company called MidCoast offered to buy Carnes Oil’s shares. MidCoast has a history of facilitating a tax shelter known as an “intermediary transaction.” In another post for PT (here), Marilyn Ames covers a Sixth Circuit decision in Hawk, which involved MidCoast, intermediary transactions, and some implications under section 6901. In Hawk, the Court affirmed the Tax Court’s decision and held that petitioners’ lack of intent or knowledge cannot shield them from transferee liability when the substance of the transaction supports such a finding.

In this case, petitioners have moved for summary judgment, and their lack of knowledge is one of the factors the Court uses to ultimately determine petitioners should not be held liable as transferees. Petitioners’ case is distinguishable from Hawk, because the Court determines, in substance, the transaction was a real sale.  

Petitioners didn’t accept MidCoast’s offer, but instead accepted an offer from another company called ASI. More details are fleshed out below, but long story short- the IRS argues an “intermediary transaction” occurred. In support of this the IRS insists that the economic substance doctrine (a question of law) and substance over form analysis (a question of fact) show that what looked like a sale of stock for money was really the sale of Carnes Oil’s assets followed by a liquidating distribution directly from the company to petitioners. The IRS seeks to reclassify the estate and heirs from sellers to transferees to hold them liable.

Even viewing the facts in a light most favorable to the IRS, the Court disagrees under both analyses. The heirs reside in different states, so the appellate jurisdiction varies. The Court acknowledges that they may have to contend with subtle conflicts among the jurisdictions, but regardless of the jurisdiction, whether a transaction has economic substance requires a close examination of the facts.

The facts show that when petitioners sold their stock the company still had non-cash assets, and those assets weren’t liquidated until after ASI controlled it. Petitioners also weren’t shareholders of the dissolved corporation, because it continued to exist for over a year after they sold it.

The facts are not clear as to where ASI got the money to pay petitioners, but after tracing the funds from relevant bank accounts, the Court determined it did not come from Carnes Oil, or a loan secured by their shares.

Neither the petitioners nor their advisers had actual knowledge of what ASI was planning to do. The IRS says there were red flags and petitioners should have known, but the Court finds Carnes Oil was a family company using local lawyers in a small town, and the shareholders reasonably accepted the highest bid.

It was a real sale. The company got an asset-rich corporation and petitioners got cash. The Court grants petitioners’ motion for summary judgment – a win for petitioners in an increasingly pro-IRS realm.

Gone and Abandoned

In Docket No. 23676-18, Miller v. CIR, the Court dismisses a deceased petitioner’s case for lack of prosecution despite his wife being appointed as his personal representative. Petitioner died less than a month after petitioning the Tax Court in 2018 and after some digging the IRS found information about petitioner’s wife.

The Court reached out to her and warned that if she failed to respond the case was at risk of being dismissed with a decision entered in respondent’s favor. The Court did not receive a response.

Rule 63(a) governs when a petitioner dies and allows the Court to order a substitution of the proper parties. Local law determines who can be a substitute. The Court’s jurisdiction continues when someone is deceased, but someone must be lawfully authorized to act on behalf of the estate. If no one steps up the prosecution of the case is deemed to be abandoned.

The Court finds petitioner is liable for the deficiency amount, but it’s not a total loss for the estate, because IRS can’t prove they complied with section 6751(b) so the proposed accuracy-related penalty is not sustained.

All’s Fair in Love and SNOD

In consolidated Docket No. 7671-17 and 10878-16, Roman et. al. v. CIR, a pro se married couple with separate, but consolidated Tax Court matters moves the Court to reconsider its decision to deny petitioners’ earlier motions to dismiss for lack of jurisdiction. The motions were disposed of by bench opinion.

The Court reviews the record and determines that petitioner made objections that have yet to be ruled on.

First, however, it explains that there are two procedural reasons for why petitioner motions could be denied. Petitioners filed the present motion under Rule 183, but that rule only applies to cases tried before a Special Trial Judge. Petitioners in this case have not yet had a trial, the bench opinion only exists to dispose of petitioners’ motions to dismiss, so Rule 183 is not applicable. Additionally, the motions for reconsideration were filed more than 30 days after the petitioners received the transcripts in their case, so they were not timely under rule 161.

Even though the motions could be denied for those reasons, the Court goes on to consider the merits of petitioners’ arguments.

Petitioners’ argue that the Court lacks jurisdiction because their notices of deficiency were invalid because they were not issued under Secretary’s authority as required by section 6212(a).   

Petitioner wife argues her notice of deficiency is invalid because it originated from an Automated Underreported (AUR) department and was issued by a computer system, which is not a under a permissible delegation of the Secretary’s authority.  

Petitioner husband’s notice of deficiency was issued by a Revenue Agent Reviewers about a year later. He argues that his notice is invalid because the person who signed the notice was not named on the notice and she did not have delegated authority to issue the notice. The IRS was not sure who issued the notice, but there were three possibilities. Petitioner husband says not knowing who specifically issued the notice constitutes fraud.

After reviewing the code, regulations, extensive case law, and the Internal Revenue Manual the Court concludes both notices were issued under permissible delegations of the Secretary’s authority and the case can proceed to trial.

Orders not discussed:

  • In Docket No. 25660-17, Belmont Interests, Inc. v. CIR, the Court needs more information from the IRS about how it plans to use the exhibits which petitioner wants deemed inadmissible. According to IRS, the exhibits support the duty of consistency related to representations made by petitioner. Petitioner states the exhibits include representations made in negotiations directed toward the resolution of prior cases involving the same or very similar issues and the F.R.E. 408(a) bars their admission.  
  • Docket No. 10204-19, Spagnoletti v. CIR (order here) petitioner moves to vacate or revise the decision in his CDP case based on arguments made in the original opinion which the Court found were not raised during in the CDP hearing nor supported by the record, so the Court denies the motion.
  • Docket No. 11183-19, Bright v. CIR and Docket No. 18783-19, Williams v. CIR, two bench opinions in which petitioners were denied work-related deductions primarily due to lack of proper proof.  
Filed Under: Designated Orders, Notice of deficiency, Tax Court, Transferee Liability

Contracts and the Court, Designated Orders November 16 – 21, 2020, Part I

January 21, 2021 by Leave a Comment

Changes made during transition to the Tax Court’s new website prevent us from easily linking to the orders discussed in this post, but if you are interested in seeing an order you can search the case’s docket number on the Court’s website to find it.

Almost every area of law requires some knowledge of the tax code, especially contract law, and many of the orders designated during the week of November 16th demonstrate that. Summary judgment is not appropriate when a genuine dispute of a material fact exists, so can a genuine dispute exist when a case involves a legal writing, such as contract, deed, or agreement? The validity of the legal writing is not being questioned in any of these cases, but the Court reviews the legal writings to determine whether summary judgment is appropriate.

read more…

Conservation Easement Deeds

The Court has been reviewing conservation easement deeds for perpetuity requirement violations for a while now and has been consistently granting summary judgment in favor of respondent. But the tides may be changing, in Docket No. 20849-17, St. Andrews Plantation, LLC v. CIR, the Court denies respondent’s summary judgment motion on this issue.

As we’ve seen and blogged about before, the deed in this case contains the “forbidden language” which fails to guarantee the donee its proportionate share of proceeds if the conservation easement is extinguished. This violates the perpetuity requirement and causes the donor organization to lose its charitable contribution deduction. For background information the posts here and here are most helpful.

So why isn’t this case another slam-dunk for respondent? According to the Court, “the deed in this case is different than the deeds in other cases,” because the “deeds in other cases contemplated future improvements that had obvious value.”

The language in the deed at issue in this case only permits maintenance of existing modest improvements, which consist entirely of a forest paths, gravel and other permeable-base roads, drainage ditches, and a metal entrance gate.

Unlike the more elaborate improvement possibilities in other cases (such as, natural gas wells, cell phone towers and additional structures) the options available in the deed in this case could not increase the fair market value of the subject property, or any increase would be de minimis. As a result, the improvements clause would not necessarily cause the donee organization to receive less than its proportionate share of proceeds in the event the property was sold following judicial extinguishment of the easement.

In Docket No. 14179-17, 901 South Broadway Limited Partnership, Standard Development, LLC v. CIR. The Court reviews the language of a deed for a façade easement and denies the IRS’s summary judgment motion while taking petitioner’s motion under consideration.

A façade easement it involves a different analysis for when it has a conservation purpose which is found in section 170(h)(4)(B) and requires that the building be listed in the National Register or be certified as having historic significance. Further section 170(h)(4)(C)(ii) requires non-National Register buildings to meet two additional requirements regarding preservation of the building’s exterior and “prohibits any change in the exterior of the building which is inconsistent with [its] historical character…”

Respondent argues that language in the deed related to the second additional requirement violates the perpetuity requirement. The deed requires the grantor to obtain prior express written approval from the grantee before it can make any changes to the building’s exterior, however, if the grantee fails respond to the request within 30 days the request is deemed approved (the “deemed approval provision”). Respondent argues that this means the grantor can make changes inconsistent with the building’s historical character if the grantee fails to respond.

But in a later section of the deed, the grantor is specifically prohibited from making any changes inconsistent the building’s historical character (the “prohibition provision”).

Both petitioner and respondent make arguments based on the deed’s construction, conflicting clauses, and the effect under California law, but the Court steps in to say none of that is necessary. The Court does not see any conflict between the deemed approval provision and the prohibition provision, because the prohibition provision limits both parties from permitting or making changes that are inconsistent with the building’s historical character so the grantee cannot be deemed to approve any request which it lacks the authority to approve.

Another order was designated in this case asking questions of respondent and setting a pre-trial conference for January 6, 2021. During the conference, IRS conveyed that they have abandoned the argument that the deed violates the perpetuity requirement argument, but they identified new issues under section 170(f) which the parties are working to resolve. 

Divorce and Separation Agreements

In Docket No. 13901-17, Redleaf v. CIR, the Court had to review the language in a divorce agreement to determine whether allocations made to petitioner were alimony or property settlements. Although the Court outlined the steps it must take when reviewing divorce agreements for characterization questions, the language in the agreement itself (referring to the allocations as “property settlement,” “division of assets,” “property division,” etc.) influenced the Court’s decision to grant summary judgment to petitioner.

In Docket No. 20452-18S, Valente v. CIR, the Court to review the terms of a separation agreement to determine whether payments made to petitioner were alimony or child support. In this case, an enrolled agent either didn’t understand, or didn’t follow, the separation agreement’s terms when he prepared petitioner’s tax return and treated a portion of what should have been alimony as child support because it produced a better result for her children’s college financial aid application. The Court determined there was nothing in the language of the separation agreement that would have allowed the alimony payments to be treated as child support payments and decided for respondent.

Contracts related to Research and Experimentation Credits

In Docket No. 7805-16, Meyer, Borgman & Johnson, Inc. v. CIR, the Court looks petitioner’s contracts to determine whether research was “funded” as defined in section 41(d)(4)(H). If the research was funded by petitioner’s clients, then petitioner is ineligible for the research credit.

The regulations instruct that “all agreements (not only research contracts) entered into between the taxpayers performing the research and other persons shall be considered in determine the extent to which research is funded,” and “amounts payable under any agreement that are contingent on the success of the research and thus considered to be paid for the product or result of the research are not treated as funding.”

The Court entertains many of petitioner’s arguments, but ultimately looks to the contracts and finds that none of them expressly make payments contingent on the success of petitioner’s research. Use of express terms have been identified as important in the case law that exists in this area. As a result, it finds there are no genuine issues of material fact and grants summary judgment to respondent.

The designated order in Consolidated Docket No. 27268-13, 27390-13, 27371-13, 27373-13, 27374-13, 27375-13, Tangle, et. al. v. CIR, also involved the research credit, but for the question of whether the qualified research tests were met and Section 41 exclusions avoided. Since it didn’t involve a contract, I don’t discuss it in detail.

Other Orders Not Discussed

There were three orders designated during the week of October 19-23, 2020:

Docket No. 2018-17L, Means v. CIR, petitioner’s case for very old tax years was dismissed after a lengthy history of non-compliance with Court orders.

Docket No. 25934-17, Tobin v. CIR, the Court grants IRS’s protective order requesting that they not be required to respond to petitioner’s request for admissions which perpetuate frivolous arguments.  

Docket No. 19697, Kalivas v. CIR, the Court denies petitioner’s motion for leave to file an amendment to petition because he failed to comply with the Court’s order, rules and more.

Filed Under: Designated Orders

Making All Your Arguments in Collection Due Process Cases. Designated Orders, August 10 – 14, 2020 (Part Three)

January 13, 2021 by 1 Comment

The first two installments of this trilogy covered arguments that you are likely to raise in the hearing itself (the underlying liability), then moved to issues you might not be aware of until after the notice of determination is issued (procedural defects in assessment, or at least defects in the Appeals Officer verifying that the “applicable law or administrative procedures have been met.” IRC § 6330(c)(1). We end with an issue that is really only relevant after the hearing and in litigation: the record the Court will be able to review.

read more…

Issue Three: The Administrative Record is Incomplete (Mitich v. C.I.R., Dkt. # 4489-19W (here))

Full disclosure: this order is not a CDP case (it’s a whistleblower case). But the admin record is critical for CDP cases. (And whistleblower cases. And innocent spouse cases.) So questions on the completeness of the administrative record are worth focusing on.

In cases where the reviewing court is confined to the administrative record, the agency is the party that submits that record. But that doesn’t mean the agency gets to dictate everything that is or should be in it. Still, the agency does have a fair amount of control over that record. And perhaps (though perhaps not -more on that later) the agency has even more control over what constitutes the administrative record in the first place when they promulgate regulations specifically defining the contents of administrative record.

It just so happens that whistleblower cases (like CDP cases) have a regulation on point for what comprises the administrative record. For whistleblower cases, the regulation is at Treas. Reg. § 301.7623-3(e) which provides in relevant part that the administrative record is comprised of “all information contained in the administrative claim file that is relevant to the award determination and not protected by one or more common law or statutory privileges.” In turn, the “administrative claim file” includes pretty much everything the Whistleblower Office reviews, as well as a final, catch-all category of all “other information considered by the official making the award determination.”

In the Mitich order, the whistleblower-petitioner thinks the tax return of the person they “blew the whistle” on should be in the administrative record. The IRS thinks that the return is not part of the administrative record, because the return was “not considered” in denying the whistleblower’s request. That may appear to be something of a head-scratcher, because in this instance the IRS clearly looked at the return (and the whistleblower’s information pertaining to it) before deciding not to pursue the tip. Indeed, the initial notes recommending denying pursuing the tip state “Rejecting claim as speculative after reviewing the taxpayers returns.” [emphasis added.]

There is nuance to the IRS’s position, however. The IRS argues that the official making the award determination didn’t rely on the return but rather relied on the initial employee (the “classifier”). Yes, the classifier relied on the return, but the classifier isn’t the official that made the determination, and in this case isn’t even a member of the IRS Whistleblower Office.

Judge Halpern isn’t entirely sold on that rationale, which leads to this order: that the parties provide a legal memo on why the return is or is not a part of the administrative record. This isn’t the first time the Tax Court has grappled with these sorts of issues. I was reminded of a previous order I covered in Whistleblower 6388-17W v. C.I.R. There, Judge Guy assigned extra homework to the parties (again, legal memos) on the tensions between IRC § 6103 and the parties’ (specifically, the whistleblowers) need to see the administrative file. Obviously, the IRS does not want to disclose any protected, confidential information, which may also provide some reason for them pushing so hard on why the tax return is not part of the administrative record here.

In any event, I somewhat doubt that whether the return is part of the record will have any bearing on Ms. Mitich getting any money. If the IRS never acted on her tip, and no proceeds were ever recovered, I am at a loss for how the tax returns help her. Yet looking at the order more broadly one can draw some other important lessons relevant beyond just the whistleblower context.

And this is where I return to the question, teased earlier: how much (legal) control does an agency have to restrict the administrative record? Because judicial review of whistleblower cases is limited by the “record rule,” exactly what the administrative record is and contains carries great importance. Two issues come to mind on that.

First, there is the issue of what should be in the record when both parties agree on the types of information that comprise the record rule but disagree on the contents. When problems arise under this category, the dispute is usually about the “completeness” of the record, and not the sorts of things that properly should be in it. For example, if both parties agree that all communications between the taxpayer and Appeals should be part of the record but a fax that the taxpayer sent to Appeals is not included, that would be an argument about completeness. This can be more fraught than it would otherwise appear.

One reason for discord is that the agency is generally the custodian of the administrative record. Taxpayers should be vigilant and keep their own “mirror” file and be ready to challenge the IRS’s version. And the Tax Court will likely entertain these challenges: in whistleblower cases, the Tax Court has held that “the Commissioner cannot unilaterally decide what constitutes an administrative record.” (T.C. 145 No. 8 (2015)) Problem (basically) solved.

But there is a second issue that I think is worth exploring: when the parties dispute the scope of the administrative record. Specifically, my concern is whether an agency can shield information from court review through promulgation of regulations narrowly defining the administrative record. Because I am more familiar with CDP than whistleblower cases, I will use CDP as the example.

The applicable regulation (Treas. Reg. § 301.6330-1(f)(2)(A-F4)), defines the administrative record in CDP cases pretty broadly, so arguments about its scope would likely be rare. Further, even where the “record rule” is in effect, it doesn’t render the administrative record unassailable: a petitioner can supplement the record where something needs to be explained. This, I believe, is most common with “call notes” from Appeals. Whatever notes Appeals takes during a call are part of the administrative record. Notes from the petitioner… not so much (at least not under the regulation). As a matter of course, my tax clinic always sends a fax to Appeals memorializing the conversation after a call so that it becomes “written communication […] submitted in connection with the CDP hearing.”

To be sure, I don’t have serious problems with the definition of the administrative record as provided by the regulation. But it isn’t impossible for me to imagine things I’d like to have as part of the administrative record which, by a strict reading of the regulation, might not be. One that comes to mind are communications made with Appeals after the Notice of Determination. On this point you may say, “well those conversations are plainly irrelevant since the Court is only looking at the Notice of Determination. Also, didn’t you write something about the Chenery doctrine before?”

I have. Also, it is entirely plausible to read the regulation such that those conversations would be part of the administrative file. My cause for concern is that when you’re dealing with a genuine abuse of discretion from IRS Appeals, you are often dealing with a constellation of questionable behaviors that does not end with the Notice of Determination. When IRS Appeals is being unreasonable I want every incidence of their unreasonable behavior to be in the administrative record. “Abuse of discretion” is a mushy and extremely difficult standard for the Tax Court (or practitioners) to work with. I would argue that demonstrating a pattern of IRS Appeals behavior, even if some if it occurs after the Notice of Determination is written, is relevant to that determination. I also think that regulations limiting court review, absent pretty explicit Congressional language supporting it, raises separation of powers concerns and arguably could be subject to being stricken down (see Carl Smith’s post on a related matter, here.)

Perhaps I am making a big deal of nothing in the CDP context, given the expansive language of the regulation. But what about in Innocent Spouse cases?

Recall that the Taxpayer First Act changed the scope of review in Innocent Spouse cases to “the administrative record established at the time of the [IRS] determination.” (IRC § 6015(e)(7)(A)) What does that administrative record entail?

Bad news for those who look to the regulations: they haven’t been updated since 2002. At numerous points, the regulations do not apply present law and are essentially obsolete. The regulation specifically dealing with Tax Court review (Treas. Reg. § 1.6015-7) provides one such example, taking the position that collection activity need not be suspended while requests are pending for equitable relief under IRC § 6015(f). This is not the case under the law as it currently stands (see IRC § 6015(e)(1)(B)(i)).

But apart from getting the law wrong, the regulation is also completely silent on the issue of what comprises the administrative record. Perhaps after the IRS crawls out from the heap of CARES Act and other guidance projects it has been tasked with, updates to that regulation may also be in order (it isn’t presently on the IRS priority guidance plan). But what is the Tax Court to do until then? What should be in the administrative record?

The Supreme Court has provided a little guidance on that topic. Judge Halpern cites to Citizens to Protect Overton Park v. Volpe, 401 U.S. 402, 420 (1971) for the proposition that “the record amassed by the agency consists of ‘the full administrative record’ before the agency.” Judge Halpern emphasizes the word “full” and notes that lower courts have interpreted that “fullness” to entail “all documents and materials that the agency directly or indirectly considered.” That seems pretty expansive. But I suppose we’ll have to wait and see… the issue is likely to come up sooner than later now that petitions being filed are subject to this record rule (see Christine’s post here).

Filed Under: Designated Orders
Next Page »