Two Circuits Sustain Tax Court’s Inability to Grant Requested Relief

Within the span of a few days the 2nd Circuit and the 4th Circuit each sustained a decision of the Tax Court that it lacked jurisdiction to grant the taxpayer the requested relief.  The cases arise out of different sources of the Court’s jurisdiction and deal with different requests yet provide a common theme regarding the limits of the Tax Court’s authority.  In McLane v. Commissioner, No. 20-1074 (4th Cir. 2022) the 4th Circuit sustains the Tax Court’s decision that it lacks the ability to order an overpayment refund in a Collection Due Process (CDP) case in which the IRS withdrew its notice of federal tax lien.  We blogged the McLane case here following the Tax Court memorandum opinion.  In Ruesch v. Commissioner, Dk. No. 20-3493 (2nd Cir. 2022), the 2nd Circuit sustains the Tax Court’s decision that it lacks the ability to determine the underlying tax liability in a passport revocation case.  We blogged the Ruesch case here following the Tax Court precedential decision.

Neither opinion provides a lot of reasoning and both opinions appear to leave open the question of whether the Tax Court could still decide the issues if the IRS had not withdrawn the lien or reversed the certification.  To the extent the decisions left the door open a crack, that’s the silver lining in cases otherwise disappointing to the taxpayers.


In McLane, the petitioner proceeded pro se in the Tax Court and into the Circuit Court before Daniel Lader of Diruzzo & Company signed on for pro bono representation.  Amicus briefs were filed in support of the petitioner by the American College of Tax Counsel and the Tax Freedoms Institute, signaling an issue of some importance to the practitioner community.  The issue here was first decided by the Tax Court in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), a case in which the taxpayer also proceeded pro se.  The 4th Circuit said the case presented a single issue:

whether, after the Commissioner of Internal Revenue conceded that a taxpayer owed $0 and was entitled to the removal of any lien or levy, the United States Tax Court had jurisdiction to determine that the taxpayer overpaid and order a refund.

Although the IRS sent Mr. McLane a notice of deficiency to his last known address, all parties agreed that he never received it.  This fact allows him to contest the liability in a CDP hearing, which he did.  He presented enough information to support the losses claimed on his return and the IRS conceded that he owed no taxes for the year at issue.  He claimed that he had overpaid, and the IRS argued the Tax Court lacked jurisdiction to hear whether he had overpaid.  The Tax Court agreed with the IRS.  The 4th Circuit said it would review this decision de novo.  After reciting the facts, it states:

When as here, the Commissioner has already conceded that a taxpayer has no tax liability and the lien should be removed, any appeal to the Tax Court of the Appeals Office’s determination as to the collection action is moot.

The Court stated that it could not interpret the phrase “underlying tax liability’ in isolation but must read it in “the specific context in which that language is used.”  It then concluded the phrase “does not provide the Tax Court jurisdiction over independent overpayment claims when the collection action no longer exists.”

The glimmer of hope on the issue for future taxpayers seeking a refund in a CDP case is found in a footnote designated with a *.  The court says:

Here, we believe it is unnecessary to decide the “[m]ore fundamental[]” question of whether § 6330 ever grants the Tax Court jurisdiction to determine an overpayment or to order a refund given that § 6330 so clearly cannot confer such jurisdiction when no active collection action persists. 

Not a lot of reasoning in this opinion with which to work.

In Ruesch, the 2nd Circuit issues a per curiam opinion.  Frank Agostino argues the case for the petitioner/appellant.  The taxpayer’s underling problems stem from penalties under IRC 6038 for failure to file information returns concerning controlling interests in foreign businesses.  She received a CDP notice and timely requested a hearing, but the IRS misplaced her request.  Because it thought it had not heard from her, it certified her debt as seriously delinquent tax debt.  She filed a Tax Court petition in response to this determination.  While her Tax Court case was pending, the IRS discovered her CDP request and reversed her certification to the State Department since its policy was not to certify debt while a CDP matter was pending.

Having reversed the certification, the IRS moved to dismiss her Tax Court petition for lack of jurisdiction and for mootness.  The Tax Court granted the IRS motions, determining that IRC 7435 did not authorize it to rule on the merits of the underlying liability and that the case was moot since the IRS had withdrawn certification.  She appealed, arguing that the Tax Court should make a determination on the merits of her liability.  She argued that the voluntary cessation doctrine should apply to keep her passport claim alive.

The voluntary cessation doctrine provides an exception to mootness if a party can prove that the defendant voluntarily ceases the offending conduct in order to evade judicial review “by temporarily altering questionable behavior.” Connecticut Citizens Def. League, Inc. v. Lamont, 6 F.4th 439, 446 (2d Cir. 2021).  The court explains that the doctrine is not absolute.  It’s still possible for a case to be moot even if the defendant concedes if the defendant can demonstrate (1) “interim relief or events have completely and irrevocably eradicated the effects of the alleged violation” and (2) “there is no reasonable expectation that the alleged violation will recur.”  Here, the Second Circuit agrees with the Tax Court that both conditions are satisfied and affirms the dismissal of the challenge to the certification to revoke the passport as moot.  The court indicates that if the IRS, after the conclusion of the CDP hearing, again tries to certify the debt to the State Department for passport revocation, the taxpayer at that time can bring a new Tax Court suit under IRC 7435.

Then, the Second Circuit takes up the issue of the challenge to the underlying liability.  It finds that at the time of dismissal she had already received the only relief available, making her claims on this point moot, but in footnote 3 notes that she

may yet have the chance to challenge her underlying liability in court. That liability is currently the subject of an IRS appeals process that has still to run its course. See 26 U.S.C. § 6320. After receiving a final determination through that process, Ruesch will be able, if necessary, to “petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter).” Id. § 6330(d)(1); see id. § 6320(c). If Ruesch continues to object to the IRS’s position regarding her underlying liability, she will eventually have her day in court. For now, however, there is nothing further for our Court or the Tax Court to do.

I am not convinced she will have the opportunity to litigate the merits of her liability in a CDP case.  That’s for another day, however.  The lesson from this case is that the Tax Court is not the place to go to litigate the merits of the underlying liability if you get into Tax Court because your passport was certified to the State Department.

I don’t expect either of these cases to go beyond the circuit stage at this point.  No conflict exists.  The cases do not have high administrative importance, which is not to say they are unimportant.  However, the issue decided in McLane is headed to the Third and Ninth Circuits, which have never ruled on the issue, in Ahmed, T.C. Memo 2021-142, appeal pending (3rd Cir.) and Brown, T.C. Memo 2021-112, appeal pending (9th Cir.).  It will not surprise me to see a few more tries at the appellate level on that issue.

Limitation on Issues Taxpayer Can Raise in Passport Case

The case of Shitrit v. Commissioner, T.C. Memo 2021-63, points out the limitations on raising issues other than the revocation of the passport when coming into the Tax Court under the jurisdiction of the passport provision.  Petitioner here tries to persuade the Tax Court to order the issuance of a refund but gets rebuffed due to the Court’s view of the scope of its jurisdiction in this type of case.


Petitioner filed his case in Tax Court seeking to reverse certification, to determine he is not liable for any taxes for 2006, and to obtain a $3,000 refund.  While the case was pending, the IRS sent to the Secretary of State a reversal of the certification of petitioner as a seriously delinquent taxpayer.  After sending the letter reversing certification, the IRS moved to dismiss the Tax Court case as moot. 

This motion was consistent with prior Tax Court precedent established in the case of Ruesch v. Commissioner, 154 T.C. 280 (2020). In the Ruesch case, petitioner came into the Tax Court under the jurisdiction of the passport provision and asked the Court to determine whether the IRS had erred in certifying her as a person owing a seriously delinquent tax debt. Petitioner also asked the Court to issue a ruling to determine her underlying tax liability. The IRS had since reversed its classification of petitioner as seriously delinquent, informed the Secretary of State, and moved to dismiss the case as moot. The Court agreed with the IRS and dismissed petitioner’s case, holding that it lacked jurisdiction under IRC 7345 to determine petitioner’s underlying tax liability. The dispute did not, in the Court’s view, give rise to a justiciable controversy because no relief, other than reversal of the erroneous classification (which had already been granted by the IRS), could be granted by the court.

Based on the position of the Tax Court staked out in the Ruesch case, the Court granted the motion of the IRS but gave background on petitioner’s case nonetheless. Petitioner lives in Israel and is a dual citizen of Israel and the US. He did not file a 2006 US federal tax return. The IRS, however, had received third party information returns from three separate parties indicating that he had US income. For his convenience, the IRS prepared an IRC 6020(b) tax return for him.

I am sure that this happened after the IRS mailed him correspondence and probably several pieces of correspondence. Because of where he lived, it is likely he did not receive this correspondence. After sending a notice of deficiency, the IRS assessed the liability it had calculated and eventually the liability, because of the high dollar amount, was assigned to a revenue officer for collection. The IRS sent him a CDP notice which he did not claim.

In 2017, Mr. Shitrit filed US federal income tax returns for 2014, 2015, and 2016 showing his address in Israel. It is worth notice here that being outside of the US for more than six months triggers one of the provisions in IRC 6503 suspending the statute of limitations on collection. The IRS does not always know if a taxpayer is out of the country for more than six months but when it knows this it will input the information so that the collection statute is suspended. The IRS needs this suspension because of the difficulty it has in collecting taxes from taxpayers residing outside of the country. As we have discussed before, the IRS has only built collection language into five of the treaties it has with other countries. In countries with whom it lacks a collection treaty, the IRS can only collect if it can find assets of the taxpayer in the US. One of the benefits to the IRS of the passport provision is that it gives the IRS leverage over individuals in a situation in which it may have almost no leverage in its effort to collect delinquent taxes.

In this case, Mr. Shitrit did not owe the taxes, so the IRS did not need leverage, but the passport provision did cause him to become aware of the problem and to address it. It is unfortunate that the assessment existed since it did not exist through the fault of either the taxpayer or the IRS, but rather through the fault of a third party who stole his identity, triggering the information returns that were sent to the IRS, implicating Mr. Shitrit as someone who earned money and failed to file a return. Everything came to a head when the returns were filed in 2017 because he claimed a $3,000 refund. No surprise that the IRS offset the refund against the outstanding liability created for 2006 with the substitute for return.

Now that it had his correct address, the IRS sent him the seriously delinquent passport notice. He filed the Tax Court petition to address this notice. He retained the law firm of Frank Agostino and, although the opinion does not make this clear, I surmise that Frank’s firm figured out what happened to create the liability and took the steps to unwind the assessment, convincing the IRS that it was not Mr. Shitrit’s income. That worked well for ending the primary problem presented with passport revocation, but the small matter of the $3,000 refund still existed, and Mr. Shitrit sought to have the Tax Court make a determination that he was entitled to that refund.

The Court says that nothing in IRC 7345 establishing jurisdiction for passport revocation cases authorizes the court to redetermine a liability or to determine an overpayment. Among the other cases it cites following this statement, the Court cites to a Collection Due Process case, Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), which this blog has often criticized. See prior discussions of this issue in the CDP context here and here. There are significant differences between the passport statute and the CDP statute, making some of the criticisms of the decision in Greene-Thapedi not as applicable in this context.

Mr. Shitrit argues that despite prior decisions, IRC 6512 grants the Tax Court jurisdiction to determine an overpayment and IRC 6402 gives the Court the power to order the overpayment. The Court disagrees. Arguments regarding mootness and voluntary cessation follow, with the IRS arguing the decertification has mooted the case and petitioner arguing that voluntary cessation by one party does not necessarily moot a case.

I expect that the IRS will refund the overpayment to Mr. Shitrit as it abates the 2006 liability, since an overpayment will be sitting on that account and the taxpayer has requested the money within the applicable refund period. If it does not, then Mr. Shitrit must incur the time and expense to go back into a different court to seek an order granting him the refund. It’s unfortunate that he could not wrap everything up in one proceeding.

Curtain Finally Comes Down On Schaeffler Privilege Dispute

Readers may recall the dispute involving the IRS and richest man in Germany, Georg Schaeffler. Schaeffler and the IRS disagreed on the the scope of the attorney-client privilege and work product protection after IRS looked into the tax consequences of a restructuring transaction following the 2008 stock market collapse that landed right in the middle of Schaeffler’s bid to buy German company Continetal AG .

The issue of waiver in the context of complex commercial transactions when there are teams of advisors is one that has troubled the courts. To ensure the possible existence of privilege, parties working in tandem need to demonstrate a common legal interest. Guest poster Ben Bolas discussed the Second Circuit Schaeffler opinion that pushed back on some other cases that essentially concluded that the existence of a common commercial interest invalidated a common legal interest.

The Second Circuit Schaeffler opinion did not cover all the documents at issue in the summons; that led to a remand to the district court to determine whether other documents were protected by the attorney client privilege or work product doctrine. Following the remand, IRS withdrew the summons and moved to dismiss the petition to quash the summons due to mootness. (As background, a case becomes moot and a court loses jurisdiction if issues presented are no longer live or the parties lack a legally cognizable interest in the outcome).

Schaeffler opposed the motion to dismiss and sought a judgment quashing the summons. The district court found for the IRS, looking to a long line of cases that held that a withdrawal of a summons moots the case.

Last summer in Update on Schaeffler Privilege and Work Product Dispute I discussed that somewhat odd aspect of the dispute; in my post I leaned on my colleague Jack Townsend (and lead author in the revised criminal section of the IRS Practice & Procedure treatise) who suggested that Schaeffler wanted to get some assurance going forward that the IRS would not be able to access certain documents in a subsequent audit.

Schaeffler appealed the district court holding on mootness. In a summary order  from earlier this week, the Second Circuit affirmed the district court. In so doing, the order discussed the “voluntary cessation of illegal activity” exception to the mootness doctrine. That exception states “[a]s a general rule, ‘voluntary cessation of allegedly illegal conduct does not deprive the tribunal of power to hear and determine the case, i.e., does not make the case moot.’”

In making its case on appeal, Schaeffler did not argue that the summons power in and of itself was illegal; instead it argued that by summonsing certain documents it was not entitled to receive (due to privilege) the exception came into play. The Second Circuit did not agree:

Schaeffler contends that by summonsing some documents that may or may not be subject to the attorney-client or work-product privileges, the summons became “illegal.” We cannot endorse such a tortured under- standing of illegality. If the IRS were to exercise its lawful authority and issue a summons in the future, privilege issues could be litigated then. Doing so here, in the absence of a summons, would result in an impermissible advisory opinion.

The Second Circuit was reluctant to issue a blanket rule that would have expanded the considerable scope of its earlier opinion. While the earlier Second Circuit opinion meant that Schaeffler enjoyed a considerable victory, it was not meant to provide carte blanche protection.  In the future, the courts could entertain specific disputes if they were to arise.

While this ends the dispute without the complete victory that Schaeffler sought, the order notes that the IRS had assured the court during oral argument that the case was effectively over and it would not reissue a summons. With the withdrawal came the end of the Schaeffler group’s obligation to turn over documents, and if the IRS keeps to its word the fight over documents pertaining to the restructuring.