Default Judgment

A recent case in which the defendants lost for not responding to a suit filed against them by the IRS caught my eye.  Default judgments are a dime a dozen but this one involved an injunction against a return preparer.  I have recently picked up a case involving a ghost preparer which caused me to take a second look at this case seeking an injunction against the preparer.

Default judgments also represent the flip side of filing a late petition showing that timeliness matters not only in filing the suit but also in responding.  Since we have written so much recently about the importance of timely filing, focusing on the importance of timely responding also deserves a moment in the spotlight.  Don’t get excited, however, if you want to obtain a default judgment against the government.  That is not allowed and for many good reasons.

In United States v. Erica McGowan et al, No. 2:21-cv-10624 (E.D. Mich.), the IRS filed suit on March 22, 2021, seeking:

to obtain (i) an injunction barring Defendants “from engaging in the business of preparing federal tax returns and employing any person acting as a federal tax return preparer” and (ii) an order “requiring Defendants to disgorge to the United States their receipts for preparing federal tax returns making false or fraudulent claims.”

Apparently, one or more of the defendants proved difficult to locate, causing the IRS on June 17, 2021 to seek additional time to serve them.  Service occurred the same day as the motion, making the answer due date July 8, 2021 – 21 days after service.  Defendants failed to file an answer and the IRS obtained a default judgment on August 6, 2021, setting up this case to set aside that judgment.

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On September 1, 2021, defendants filed a motion to set aside the default judgment arguing, inter alia, that the failure to timely file an answer did not result from their culpable conduct.  A reason given for the failure was the mistaken belief that defendants had 60 days to file an answer.  The magistrate judge to whom this motion was assigned was unmoved by this argument because (1) the summons specifically stated the period was 21 days and (2) the defendants did not file an answer within 60 days.

The court looked at three factors in deciding whether to set aside the default judgement:

(1) whether the party seeking relief is culpable; (2) whether the party opposing relief will be prejudiced; and (3) whether the party seeking relief has a meritorious claim or defense.

In order to get to a consideration of factors (2) and (3), the moving party must demonstrate a lack of culpability.  Here, the court found that they could not as it reviewed the determination of the magistrate judge.

Defendants argued that the magistrate judge focused exclusively on their failure to show excusable neglect and did not mention the separate bases for relief of mistake or inadvertence.  The district court, agreeing with the magistrate, pointed out that defendants failed to raise these alternate grounds in its motion.  Having failed to raise them in its argument to the magistrate judge, it could not raise them on appeal.

Defendants then attacked the magistrate judge’s definition of culpability, arguing that the court must find “an intent to thwart judicial proceedings or a reckless disregard for the effect of its conduct on these proceedings.”   Sixth Circuit law, however, does not allow relief from a default judgment where the default results “from a party’s or counsel’s carelessness or ignorance of the law.”  

Defendants next argued that the court should balance the factors necessary for overcoming a default judgment and not stop upon a finding of culpability.  Here again, the district court found that the law clearly created a barrier if the moving party could not overcome the issue of culpability.

In the opinion in this case we don’t even get to learn what the defendants did that caused the IRS to seek the injunction in the first place.  That information can be found in the petition.  The defendant’s motion contains some explanation but their attempt to raise the merits of their possible defense falls to their failure to show good cause for not answering the complaint. 

Twenty one days is not a long time.  It’s even less than the short period allowed for responding to a Collection Due Process notice; however, ignoring the complaint creates a result that proves impossible for the defendants here to overcome.  They needed an excuse similar to the type of excuse we have spoken of in recent posts regarding the late filing of Tax Court petitions and they did not have it.  The case provides another example of the importance of acting on time.  Even if defendants have the greatest reasons for arguing against an injunction barring them from filing tax returns, their failure to respond within the necessary time period keeps them from raising those arguments.

January 2022 Digest

A lot has happened in the tax world since the year began, then filing season began last week, and the ABA Tax Section 2022 Virtual Midyear Meeting began yesterday. There are no signs that things will slow down soon, except for (maybe) IRS notices.

Procedurally Taxing will continually provide comprehensive updates and information, but if you fall behind with your reading or struggle to keep up- I’ll be digesting each month’s posts from here on out.

January’s posts highlighted the NTA’s Report, the ongoing impact of the pandemic, and recent Circuit splits.

National Taxpayer Advocate’s Report

NTA Report Released: Essential Reading: The Report is available and contains new features, including an enhanced summary of the Ten Most Serious Problems and a change in the methodology used to determine the Most Litigated Issues.

What are the Most Litigated Issues and What’s Happening in Collection?: A closer look at the Most Litigated Issues. EITC issues are often petitioned but rarely result in an opinion, suggesting that most are settled before trial. In Collection, lien cases referred to the DOJ have declined substantially over the years corresponding with the decline in Revenue Officers and resources.

Who Settles Cases – Appeals or Counsel (and Why?): An analysis of data on the number of Tax Court cases settled by Appeals or Counsel. An increasing percentage of settlements are handled by Counsel, but why? Possible reasons and possible solutions are considered.

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Where Have Tax Court Deficiency Cases Come from in the Past Decade?: Most deficiency cases have come from correspondence exams of low- and middle-income pro se taxpayers. The focus of IRS examinations over the past decade has influenced the cases that end up in Tax Court. A shift in focus may be coming as IRS seeks to hire attorneys to specifically combat syndicated conservation easements, abusive micro-captive insurance arrangements and other tax schemes.

The Melt – Cases That Drop Away in Tax Court: Around 20% of Tax Court cases get dismissed each year- likely due, in part, to untimely filed petitions. Also due to a failure to prosecute, that is the petitioner abandoned the process somewhere along the way. Ways to address this issue are worth exploring, such as increasing access to representation and implementing a model utilized by the Veterans Court of Appeals.

Supreme Court Updates and Information

Who Qualifies as Press and the Boechler Supreme Court Argument Today: Being consider a member of the press comes with benefits, including the option to attend Supreme Court arguments with a press day pass when Covid-restrictions end. In lieu of being there in person, real-time broadcast links of Oral Arguments are made available on the Supreme Court website.

Transcript of Boechler Oral Argument: A link to the transcript of the Boechler Oral Argument is provided and Keith shares his in-person experiences observing the Supreme Court and the options available to others who are interested in doing so when Covid-restrictions end.

Pandemic-Related Considerations

Refund Claims and Section 7508A: A well-informed analysis of the disaster area suspensions under section 7508A and the refund lookback limits. Does the language in section 7508A allow for an extended lookback period? The IRS Office of Chief Counsel doesn’t think so, but TAS has recommended that Congress amend section 6511(b)(2)(A) for that purpose, and there is an argument that a regulatory solution is already available.

 Making Additional Work for Yourself and Others: The IRS has been cashing taxpayer payments without acknowledging receipt of the associated return. This improper recordkeeping resulted in the IRS sending CP80 notices to taxpayers requesting duplicate returns. This created more work for the IRS, practitioners, and clients. The IRS, however, recently announced it would stop doing this, as summarized directly below.

IRS Announces Stoppage of Notice to Paper Filers Who Remitted Payment and Tax Court Announces Continued Zooming: The IRS will stop requesting duplicate returns from paper filers who remitted payments with their original returns. Members of Congress also made specific requests to the IRS with the goal of providing relief to taxpayers until the IRS backlog is resolved, including temporarily halting automated collections, among other things. The Tax Court announced all February trial sessions will be by Zoom.

Practice and Procedure Considerations

“But I’ve Always Done It That Way!” Practitioner Considerations on Subsequent Year Exams: A TIGTA recommended change to IRS procedure may increase the audit risk for taxpayers who do not respond to audit notices. There is no blanket prohibition on telling clients about audit rates and general likelihoods of audit, so practitioners should be able to advise their clients of this potentially emerging risk and ways to avoid it.

New Rules in Effect for Refund Claims For Section 41 Research Credits Raise A Number of Procedural Issues: New rules for research credit refund claims require extensive documentation which increases costs and the risk of a deficient claim determination. Procedures for determinations were issued at the beginning of the month and have generated concern among practitioners because a determination cannot be challenged with a traditional refund suit and because the IRS modified regulatory requirements without utilizing formal notice and comment procedures.

Tax Court News

Tax Court Going Remote for the Remainder of January[and February]: January calendars (and now February, as mentioned above) scheduled in-person sessions have switched to remote sessions due to ongoing Covid-concerns.

Tax Court Orders and Decisions

The Tacit Consent Doctrine May Extend Far Beyond Signing a Joint Return: The Court in Soni v. Commissioner, allowed the tacit consent doctrine (where facts and circumstances led to finding of consent on the part of a non-signing spouse) to apply to returns, power of attorney authorizations and forms 872. The doctrine could be expanded in future cases, so it should be kept in mind when representing innocent spouses.

Timely TFRP Appeal?: The administrative 60-day deadline to respond to TFRP notices is discussed in an order requesting that the IRS supplement its motion for summary judgment. The origin of a deadline is important. Jurisdictional deadlines are different from administrative deadlines, and cases involving administrative deadlines can be reviewed for abuse of discretion.

Circuit Court Decisions

Eleventh Circuit finds Regulation Invalid under APA: The Eleventh Circuit, in Hewitt, calls into question who has the burden to show that a comment made during a notice and comment period: 1) was significant, and 2) consideration of it was adequate. The Tax Courts says it’s the taxpayer, the Eleventh Circuit says it’s the IRS, but what does this mean for everyone else?

The Fifth Circuit Parts Ways with the Ninth Circuit Regarding the Non-Willful FBAR Penalty: A difference in statutory interpretation results in a recent split between the Ninth and Fifth Circuits over whether the non-willful penalty under section 5321(a)(5)(A) should be assessed on a per-form or per-account basis. The Ninth Circuit held that legislative history, purpose, and fairness support a per-form penalty, but the Fifth Circuit held that Congress’ intent and the objective of the penalty support a finding that it’s per-account.

Goldring is Back with a Circuit Split: The Fifth Circuit addresses how underpayment interest should be computed on a later assessed deficiency when a taxpayer elects to credit forward an overpayment from an earlier filed return. It held “a taxpayer is liable for interest only when the Government does not have the use of money it is lawfully due.” This contrasts with other Circuits which have decided that the law allows the IRS to begin computing interest when an amount is “due and unpaid.”

Polselli v US: Circuit Split on Notice Rules for Summonses to Aid Collection: A recent Sixth Circuit decision continues a circuit split on a fundamental issue in IRS summons practice: does the IRS have to give notice when it issues a summons on accounts owned by third parties in the aid of collecting an assessed tax? The Sixth, Seventh and Tenth Circuits read section 7609 notice requirements and its exclusion without limitations, which contrasts with the Ninth Circuit’s more narrow interpretation.

D.C. Circuit Narrows Tax Court Whistleblower Award Jurisdiction: The D.C. Circuit overturns Tax Court precedent by holding that the Tax Court lacks jurisdiction over appeals of threshold rejections of whistleblower requests. Since all appeals of whistleblower cases go to the D.C. Circuit, the Tax Court is bound by the decision unless the Supreme Court takes up the issue. 

Liens and Judgments

Local Taxes and the Federal Tax Lien: The effect of the Tax Lien Act of 1966 was reiterated in United States v. Tilley.  Section 6323(a) sets up the first in time rule of law, but 6323(b) provides ten exceptions, including one for local property taxes, which allows a local lien to defeat a federal tax lien even when the local lien comes later in time.

Tax Judgments and Quiet Titles: Tax judgments can benefit the IRS beyond the 10-year federal collection statute of limitations. Boykin v. United States, like Tilley, involves real property held by nominal owners. The taxpayer brought suit to quiet title, the IRS counterclaimed that the money used to purchase the property was fraudulently transferred, and the taxpayer argued that a state statute of limitations prevented the IRS’s argument. The Boykin Court disagreed with the taxpayer relying upon Supreme Court precedent that state statutes do not override controlling federal statutes.

Bankruptcy and Taxes

Diving Beneath the Surface of In re Webb: An in-depth analysis of a technical bankruptcy issue that can impact taxes involving an election under section 1305, which allows postpetition tax claims to be deemed prepetition claims. The classification of the claims impacts whether a subsequent IRS refund offset violates a debtor’s rights.

Tax Judgments and Quiet Titles

I have written before about the effect of the IRS obtaining a judgment with respect to a tax assessment.  In Boykin v. United States, No. 5:21-cv-00103 (W.D.N.C. 2022), the fact that the IRS had a judgment carries the day in a contest with a taxpayer involving a quiet title action.  The case provides no great revelations but shows how obtaining a judgment can benefit the IRS many years past the normal 10-year statute of limitations.

Between this case and the Tilley case I recently blogged from the Middle District of North Carolina, it appears that the Chief Counsel office in North Carolina has been busy in pursuing collection against taxpayers using real property held by nominal owners, with both opinions coming out on January 4, 2022.


Mr. Balvich owed the IRS for 1999 through 2006.  The IRS filed an action to reduce the assessments to judgment in 2019 and obtained a judgment on August 6, 2020.  In bringing an action of this type, the IRS must sue before the collection statute expires.  The opinion in the current case doesn’t spell out the status of the statute of limitations on collection of the assessments for the years at issue, but something must have caused the statute to be open for each of the years at the time the IRS brought the suit.  It could have been that the assessments for those years occurred many years after the close of the tax year, or that Mr. Balvich filed bankruptcy or made a CDP request.  Many possibilities exist for the statute on collection to still remain open 20 years after the end of the tax year.

The plaintiff in the quiet title action, Rebecca Boykin, began a relationship with Mr. Balvich in 2010 and eventually married him in 2015.  She worked as an administrative assistant at a company owned by Mr. Balvich.  When they got married, he gifted to her a 50% interest in his medical services business.  He and the business also, according to the IRS, put up the money to buy real property in Boone, North Carolina in which Ms. Boykin is the record owner.  On March 20, 2019, the IRS filed nominee liens encumbering the Boone property.  I have discussed nominee liens previously here

After Ms. Boykin brought suit to quiet title seeking a declaration that the nominee liens were invalid, the IRS filed a counterclaim arguing that the money used to purchase the property was fraudulently transferred from the taxpayer who sought to place his property out of the reach of the IRS.

She argued that the North Carolina Uniform Voidable Transaction Act barred the IRS argument regarding the fraudulent transfer claims because it placed a four-year statute of limitations on such claims.  The district court graciously described her argument as misguided.  It pointed to the Supreme Court case of United States v. Summerlin, 310 U.S. 414, 416 (1940), where the court held:

It is well settled that the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights.

The court followed the Supreme Court cite with a string cite of federal circuit court cases following the Summerlin case and swatting back arguments similar to Ms. Boykin’s that have been made in the eight decades following the Supreme Court’s pronunciation.

Piling on to Ms. Boykin’s legal woes, the court explained further that the judgment obtained by the IRS took its time period for seeking a remedy against this property outside of the mere 10-year period into the much longer period provided to the holder of a judgment:

Additionally, when the United States has obtained a timely judgment, its “subsequent efforts to enforce the liability or judgment against a third party will be considered timely.” United States v. Anderson, 2013 WL 3816733, at *2 (M.D. Fla. July 22, 2013) (holding that civil action to collect federal income taxes of an Estate from the Estate’s beneficiaries as a result of transferee liability under the Uniform Fraudulent Transfer Act was not time barred by the ten-year statute of limitations found in 26 U.S.C. § 6502(a)); see also United States v. Worldwide Lab. Support of Illinois, Inc., 2011 WL 148196, at *2 (S.D. Miss. Jan. 18, 2011) (holding that the ten-year statute of limitation period of “Section 6502 is inapplicable” to an action “against an alleged transferee in aid of collecting a judgment already obtained against the taxpayer”)

The decision here does not mean that the IRS has proven there was a fraudulent transfer, but only that she cannot dismiss the counterclaim based on the statute of limitations.  Perhaps she will concede, knowing that the IRS can prove a fraudulent transfer or fight the next battle in the effort to retain ownership of the property.  I hope that she does not choose to appeal this decision and add to the long string of cases holding that the Supreme Court meant what it said in holding that state statutes of limitations do not override the controlling federal statute here.

To Infinity and Beyond – Judgments

We tend to think of the statute of limitations on collection as expiring ten years after assessment absent something extending it like bankruptcy or an offer in compromise.  Even the ten year period is relatively new.  The statute of limitations was only six years prior to 1990 when Congress amended 6502(a)(1) without any prompting from Treasury and raised it to ten because it thought that would generate more revenue from people who owed taxes.  Unfortunately, the change has the primary impact of leaving debt on the books longer but provides little assistance in collecting taxes most of which go uncollected if the IRS cannot succeed in the first two years.

We also tend to think of tax merits litigation in district courts of divisible taxes and penalties as sort of the equivalent of tax merits litigation in Tax Court.  The taxpayer does not exactly have a prepayment forum but generally has to pay very little in order to get a day in court.  What we do not tend to think about is the collection consequences of litigating the tax merits of a liability in district court rather than Tax Court from the perspective of the amount of time it gives the IRS to collect the tax.  When the taxpayer loses a Tax Court case, the loss allows the IRS to assess and starts the ten year period.  When the taxpayer losses a district court case, the IRS already has an assessment but the loss gives the IRS a judgment against the taxpayer and that ushers in a different time period that taxpayers might not have factored into the equation when they embarked on contesting their responsible officer penalty or other divisible tax liability.


I looked at this issue in order to respond to a friend who was dealing with IRS attempts to collect the tax after the twenty year period of the judgment.  Though the infinite time period to collect gets brief mention in Chapter 14 of Saltzman and Book, it bears discussion in a post for those who may not have encountered it previously.  The judgment has the ability to preserve and extend the federal tax lien as well as the priority offered by filing notice back to the original date of filing.  The time period for extension of the lien is 20 years and the government has the option to pick up an additional 20 years.

Aside from the way the judgment allows the extension of the priority of the federal tax lien during the extra time created by the judgment, the underlying liability gets preserved forever.  Perhaps the best case to examine the way the judgment works here is Beeler v. Commissioner.  In that CDP case the IRS obtained a judgment against the taxpayer as a result of litigation regarding the trust fund recovery penalty (TFRP).  A judgment can also occur because the IRS brings an action to reduce the assessment to judgment or the IRS obtains a judgment in connection with another type of collection suit such as foreclosing the tax lien on property.

Taxpayers bringing refund suits generally do not worry about the creation of a judgment because they have already paid the liability.  Even a partial victory results in the return of money in most cases.  The exception occurs in cases in which the refund suit contests a divisible tax.  Here, the taxpayer has usually paid only  a small fraction of the assessed liability.  Anything but a complete victory in a refund suit contesting divisible taxes will almost always result in a judgment in which the taxpayer still owes the IRS.  This possible outcome should not deter someone who believes they do not owe the tax because the possibility of eliminating the assessment generally outweighs the negative result if a loss creates a judgment.  Still, the possibility of a judgment may cause some taxpayers with the right to bring a refund suit to contest a tax assessment of a divisible tax to pause and calculate whether the opportunity for relief from the assessment outweighs the burden of a judgment with its long lasting effect.  The difference in impact between judgment that occurs following a divisible tax refund suit and the ability to simply assess that occurs after a Tax Court case raises questions about the reason for the disparity and why Congress does not simply open the doors of the Tax Court to create parity.

The most common refund suit for divisible taxes arises in the context of the TFRP.  Persons tagged by the IRS with the TFRP regularly bring suit to contest that assessment.  So, cases involving this penalty provide the most likely circumstances in which a taxpayer will have a judgment rather than simply an assessment.  TFRP cases, however, frequently involve assessments against more than one responsible person.  One or more of the assessed persons in this situation may decide that no point exists in contesting the TFRP and the burden of the potential judgment outweighs the possible benefits of success.  Co-responsible officers do not control their own fate in this matter, however, because the bringing of a suit by one of the responsible persons will often cause the Department of Justice to bring a third party complaint against the other responsible offers and join them into the refund suit.  So, accepting responsibility does not avoid the possibility of a judgment in the TFRP context where multiple responsible officers exist.

These facts occurred in the Beeler case where Mr. Beeler brought the refund suit contesting the TFRP assessments made against him and two other individuals.  The two other individuals were brought into the suit by the Department of Justice.  The timeline for the case is somewhat interesting.  The liabilities related to unpaid employment taxes in 1981 and 1982.  The IRS did not assess the liabilities until 1985.  According to a GAO study, this delay is typical of the time the IRS has historically taken to make TFRP assessment.  I have written before about the consequence of the lengthy delay before assessment.  Mr. Beeler brought the refund action on November 17, 1986.  The SDNY rendered its opinion on August 18, 1995 and the judgment on September 1, 1995 for over $150,000.  I could not tell how what appeared to be a simple, fact based refund suit concerning the TFRP could take almost 9 years.  Absent the refund suit, the collection statute of limitations from the assessment basically ran before the case was decided.

Because he lost the refund suit, the IRS had a judgment against Mr. Beeler and the other two responsible officers.  He did not satisfy the judgment.  In the Tax Court opinion Judge Goeke states that the “account transcripts for Mr. Liebmann and Mr. Ross [the other two responsible officers] on or about November 11, 2007, and May 27, 2002, respectively, contain entries which read: ‘Statute Expired-Clear to zero and Uncollectable Amount Owed.”  I do not know why the IRS zeroed out the account of the other two responsible parties against whom it also had a judgment.  As discussed below Mr. Beeler did not appreciate this action since any payments by the other two responsible parties would have reduced or eliminated his liability. Because the CDP case decided in 2009, almost 30 years after the original non-payment of the trust fund taxes, did not get dismissed as moot, I also assume that Mr. Beeler still owed all or part of the $150,000 liability stated in the judgment which would have grown considerably larger with interest over the following 14 year period.

On February 29, 2000, the IRS filed a certificate of release regarding the notice of federal tax lien it had filed against Mr. Beeler in New York.  On February 22, 2001, it filed a certificate of release regarding the notice of federal tax lien it had filed in Sarasota, Florida.  Despite filing the lien releases and despite writing off the liabilities of the other responsible officers, the IRS continued to collect from Mr. Beeler and sent him a notice of intent to levy on September 25, 2006.  He filed a request for a hearing and argued that the lien releases evidenced that he no longer owed the liability – a position that lines up well with the language of IRC 6325(a) which provides for lien release when “The Secretary finds that the liability for the amount assessed, together with all interest in respect thereof, has been fully satisfied or has become legally unenforceable…”   Unfortunately for Mr. Beeler, the lien release does not mean the liability has actually been satisfied or become legally unenforceable.  It means that the notice of federal tax lien is no longer effective which the IRS conceded.  The Court stated that “the issue here is whether the Forms 668(Z) [the lien release form] extinguished the tax liability.  Petitioner’s contention that the Forms 668(Z) indicates that his liability has been satisfied is incorrect.  The underlying tax liability is not extinguished when a NFTL filed pursuant to section 6323 is released.”  The Court provides numerous cites in support of this conclusion.

Mr. Beeler also argued in the CDP case that the IRS had a duty of consistency regarding the other responsible officers and that his liability should be written off because the IRS wrote off their liabilities.  The Court rejected this argument as well finding that the IRS is free to collect from any of the responsible officers as it sees fit.  While it provides only cold comfort, Mr. Beeler does, after Congress passed 6672(d) in 1996, have the ability to sue his fellow responsible officers for contribution.  The lengthy delay of the TFRP case at least gives him this right he would not have had prior to that amendment.

That still leaves the issue of the judgment and how the IRS can still be collecting on an assessment made in 1985 24 years later in 2009.  The Court found that “respondent’s commencement of this proceeding [the original assessment] within the requisite 6-year period under section 6502(a)(1) served to extend the period for collection until petitioner’s liability is satisfied; petitioner has not satisfied his liability.”  To get to this result the Court examined the changes made to section 6502 in 1988 in the first Taxpayer Bill of Rights. Judge Goeke explains the purpose of the change in the law: “In 1988 Congress amended section 6502 so that a court proceeding filed by the United States during the 6-year period extended the collection period until any liability was satisfied. Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647, sec. 1015(u), 102 Stat. 3373. The purpose of the 1988 amendment was to conform liens and levies. Before the amendment, a judicial proceeding would not toll the limitations period for levies, but would for liens.”  The legislative history provides: “the 1988 amendment was to conform section 6502 so that a court proceeding filed during the 6-year period would keep the collection period open. H. Conf. Rept. 100-1104 (Vol. II), at 5-6 (1988), 1988-3 C.B. 473, 495-496.”

Because the judgment creates an unlimited period of time within which the IRS can collect against Mr. Beeler, his refund suit will haunt him for some time to come.  If the IRS did not collect the tax within the first 24 years after assessment, it seems likely that its failure will continue.