Having worked in the General Litigation Division of the IRS National Office in the early 1980’s, where I carried the bags of the IRS attorneys who met with the attorneys from the Appellate Section of DOJ Tax Division, and having observed strenuous disagreements between these IRS and DOJ attorneys about whether to appeal an adverse ruling, I was quite familiar with the procedure that had to be followed in order to authorize an interlocutory appeal. I knew that lots of government attorneys would be involved and that there would be lots of meetings. Keith Fogg accurately described this process in parts 1 and 2 of The Room of Lies. I sat in the Room of Lies on many occasions, albeit as a lowly bag carrier. Based on my experience, I thought the process might take a few months, six months at most.

Time passed without any decision. In December of 2014, the IRS issued Chief Counsel Notices CC-2014-11 and CC-2015-1, in which IRS Chief Counsel’s Office formally announced to the world that they disagreed with the Tax Court’s holding in the SECC opinion. I waited some more. It was not until March of 2015 that the IRS formally advised the Tax Court that the decision had been made to not pursue an interlocutory appeal of the jurisdictional issue.

What happened? Apparently DOJ and the Solicitor General’s Office disagreed with the IRS. While no one has told me the story, I’m certain I could come up with a fairly accurate script of the conversations that took place. The attorneys in the IRS who were involved in drafting Notice 2002-5, supra, no doubt pushed hard for the SG to pursue an interlocutory appeal. They were vested in their “creation” (the Notice) and pushed hard for what they thought was a righteous cause.

The DOJ Appellate attorneys no doubt had significant reservations about pursuing an interlocutory appeal. The DOJ attorneys were likely concerned about the possibility that SECC might prevail on the jurisdictional issue in the Ninth Circuit. They were also likely concerned about the fact that the Ninth Circuit’s opinion in Charlotte’s Office Boutique, Inc. v. Commissioner, 425 F.3d 1203 (9th Cir. 2005), was, to say the least, somewhat in tension with the position argued by the Commissioner on the jurisdictional issue in the Tax Court. They may have also been concerned about the fact that the Ninth Circuit has not always been particularly kind to the IRS in section 530 cases. Regardless of why the government did not pursue an interlocutory appeal, I was now looking at a Tax Court trial, or, if the Tax Gods were with me, a settlement that my client could live with.

After learning that the IRS would not be pursuing an interlocutory appeal, I learned that the IRS was auditing the income tax returns of cable splicers in southern California. The IRS undoubtedly learned what I had previously learned, namely, that during the quarters at issue in the SECC case, the entire cable splicing industry in southern California treated the cable splicers as “dual status” workers, the same as SECC had done. Thus, the IRS was now aware that I could make a strong “industry practice” showing in support of my section 530 argument, in addition to showing that the IRS advised my client to do business the way that it did, and showing that my client consistently followed all information reporting requirements. The IRS may have also learned that the argument that the cable splicers were in fact independent contractors for all purposes had some merit.

The Government’s Change in Views: The Agreement with the SECC Holding

Near the end of 2015, the IRS issued Chief Counsel Notice CC-2016-002. In this Notice, the IRS announced to the world that it was now in agreement with the Tax Court’s holding in the SECC case! About this time, I had a telephone conversation with the IRS attorney handling the case. As the result of this telephone conversation, I submitted a formal settlement offer to the IRS. The amount of the offer? A total of $25,000 in taxes, spread out over all of the quarters in question. In return, my client would concede that the workers in question were employees for all purposes of Subtitle C during the quarters at issue. (Such a result would have been metaphysically impossible had the case gone to trial. That is why settlements were invented.) Not too long thereafter, the offer was accepted. A similar story played out in the one other case handled by our office that had not previously settled. The SECC case was over.

So what happened? Why the change in position by the IRS on the jurisdictional issue? While no one from the IRS has even hinted to me why this happened, I don’t think it is too hard to surmise why the change in position took place. With the change in position, it is very unlikely that the IRS will ever “blow” a statute of limitations in an employment tax case, and it is unlikely that the Tax Court’s holding in SECC will be reversed by a Court of Appeals any time soon.

It appears from the Tax Court’s opinion in SECC that, once a “determination” is made by the IRS under section 7436(a), the statute of limitations on assessment is suspended. While there may be some practical problems in determining when that suspension begins and ends, the IRS can avoid having to deal with those kinds of issues by requiring taxpayers to sign written extensions of the statute of limitations prior to the earliest possible expiration of the statute of limitations on assessment or, if no written extensions are forthcoming, by issuing a notice of determination to the taxpayer under section 7436(b) prior to the earliest possible expiration of the statute of limitations on assessment. Most taxpayers will sign the statute extensions, in the hope that the case will eventually settle.

The number of Tax Court petitions that will be filed prior to the issuance of a Notice of Determination under section 7436(b) will be small. Most taxpayers will want to try to settle with the Office of Appeals before going to court, and most cases handled by the Office of Appeals will settle. It is very unlikely that rational taxpayers will file a Tax Court petition prior to the issuance of a Notice of Determination under section 7436(b) with the idea that they will thereafter challenge the jurisdiction of the Tax Court on the grounds that no Notice of Determination was issued. Such a taxpayer, after losing on the jurisdictional issue in Tax Court, would then have to appeal the Tax Court’s ruling to a Court of Appeals after going to trial or settling the case. It is unlikely that any appeal would be filed after a settlement has been reached.

Compare that situation with the situation that would have resulted if the IRS had not acquiesced in the Tax Court’s ruling in SECC and had instead continue to argue that no Notice of Determination was required to be issued in cases such as SECC. The Ninth Circuit would have eventually ruled on the jurisdictional issue. If they had ruled in favor of SECC, the employment tax world would again have been thrown into a state of chaos. Statutes of limitations would have been “blown.” Uncertainty regarding the Tax Court’s jurisdiction would have continued, pending an eventual ruling by the Supreme Court in SECC or in some future case. The Supreme Court’s ruling might not have come until after a Circuit split developed. Uncertainty when it comes to the jurisdiction of the Tax Court is not a good thing.

Uncertainty would still have lingered even if the Ninth Circuit had sustained the Tax Court, because the IRS would have continued to challenge the Tax Court’s ruling in SECC. That uncertainty would not have been a good thing.

It is certainly possible that, at some point in the future, a Court of Appeals will have occasion to rule on the jurisdictional issue decided in the SECC case. In any appeal from a decision in a 7436 case where the Tax Court petition was filed without the issuance of a Notice of Determination under section 7436, the Court of Appeals will have an independent duty to determine whether the Tax Court had jurisdiction below. It is possible that the situation will play out in a manner similar to how the case law played out after the IRS acquiesced in the Tax Court’s holding in Fernandez v. Commissioner, 114 T.C. 324 (2000), that it had jurisdiction to review determinations under section 6015(f), only to see the Ninth Circuit later hold that the Tax Court lacked jurisdiction to review such determinations in Commissioner v. Ewing, 439 F.3d 1009 (9th Cir. 2006). But even if that were to happen, the IRS’s recent acquiescence in the Tax Court’s holding in SECC will create much less chaos and uncertainty in the near future than if the IRS had not acquiesced in that holding.

The Resolution of the SECC Case

The IRS’s acquiescence in the Tax Court’s holding in SECC, however, came with a price for the government. In order to avoid having SECC possibly upset the apple cart by appealing the jurisdictional issue to the Ninth Circuit, the IRS had to settle the SECC case (and the related case) on terms that would ensure that SECC would not appeal the jurisdictional issue. To its credit, the IRS did just that. Regardless of the IRS’s motivation for settling on the terms that it did, my own view is that the result in the case was a fair one given the unusual facts of the case, even though the taxpayer had to wait a long time for that result.

Note, however, that future litigants with issues similar to the issues raised in the SECC case will face obstacles not faced by SECC. The IRS, in Chief Counsel Notice CC-2016-002, supra, has indicated that it intends to challenge arguments by taxpayers that they are entitled to section 530 relief or are entitled to section 3509(a) rates in cases with fact patterns similar to the fact pattern in SECC. While I think that Chief Counsel is taking a position that is wrong both legally and from a standpoint of fairness to taxpayers who face situations similar to the situation faced by SECC, that topic is for another day.

Looking Ahead to Future Disputes and a Nod to the Professionalism of the Government Counsel

Perhaps the most interesting cases going forward will focus on when a “determination” has taken place or, more likely, will focus on when the suspension of the statute of limitations on assessment begins and ends. In cases where the IRS has used the “belt and suspenders” approach of obtaining written extensions of the statute of limitations, statute of limitations issues are not likely to arise. But in cases where the IRS relies solely on the Tax Court’s interpretation of section 7436 in SECC to keep the assessment statute of limitations on assessment open, statute of limitations issues could arise. Notably, these issues could arise either in Tax Court litigation or in District Court refund litigation. Thus, it is possible that District Courts will be issuing rulings on statute of limitations issues in situations in which the resolution of the statute of limitations issue will turn on whether the Tax Court decided the jurisdictional issue correctly in SECC.

In closing, I would like to tip my cap to the government counsel with whom I worked in the SECC case and related cases. Their professionalism was greatly appreciated, even when we vehemently disagreed with each other’s legal positions. I would also like to tip my cap to Robert Horwitz and Barry Furman. Robert, who has moved on from our firm after growing tired of driving from Santa Monica to Orange County and back every day for almost 20 years, worked by my side as we crafted our arguments in the SECC case. Barry, who was co-counsel with me, and lead trial counsel, some 22 years ago in the Vendor Surveillance case mentioned earlier, served as a sounding board for our case strategy. Both of these fine attorneys were of great help to me in handling this matter.

The Majority Opinion

The Tax Court issued a reviewed opinion in the SECC case, with the majority opinion (authored by Judge Colvin and joined by 14 other judges) denying both parties’ motions to dismiss and holding that the Court had jurisdiction to determine the merits of the disputed employment tax liabilities. The majority opinion properly noted that it has an independent duty to determine whether it has jurisdiction, even where both parties argue that the Court lacks jurisdiction, and that the Court owes no deference whatsoever to the IRS’s view, whether expressed through regulations or otherwise, as was the case in SECC, see Notice 2002-5, 2002-1 C.B. 320, that the Court lacks jurisdiction over the case.

The majority opinion then held that the Tax Court had jurisdiction to determine the merits of the disputed employment tax audit deficiencies even though the IRS had never issued a Notice of Determination under section 7436(b). The majority opinion pointed out that section 7436(a) gives the Tax Court jurisdiction if there is a “determination” made as the result of an audit and there is an actual controversy regarding whether workers are employees for purposes of Subtitle C or whether the taxpayer is entitled to relief under section 530. That subsection says nothing at all about a “notice of determination.”

Per the majority opinion, the legislative history of section 7436 makes clear that a mere “failure to agree” regarding the result of an employment tax audit could constitute a “determination” under section 7436(a) which would trigger a taxpayer’s right to file a Tax Court petition. Once there has been a “determination,” the taxpayer’s right to file a petition with the Tax Court to challenge the results of the employment tax audit is limited only when the IRS issues a Notice of Determination by certified or registered mail under section 7436. When that happens, the taxpayer must file a petition within 90 days after the date of that notice in order to invoke the Tax Court’s jurisdiction. Thus, per the majority opinion, section 7436 is similar to the statutory scheme governing refund claims. Under that scheme, the taxpayer has the right to go to court at any time after a refund claim has been filed and six months have passed since the filing of the claim, but the taxpayer’s right to go to Court has a two year time limitation once the IRS issues a formal denial of the claim for refund.

The majority opinion also noted that Congress, in section 7436(d), failed to make the principles of section 6212 applicable to determinations under section 7436(a). Rather, Congress incorporated only “the principles of subsections (a), (b), (c), (d), and (f) of section 6213, section 6214(a), section 6215, section 6503(a), section 6512, and section 7481” as applying to proceedings brought under section 7436. The majority opinion also noted that the principles of these sections were to apply in the same manner as if the Secretary’s determination described in subsection (a) were a Notice of Deficiency (emphasis added).

Thus, per the majority opinion, it is a “determination” under subsection (a) of 7436, and not the Notice of Determination under section (b), that triggers, among other things, the taxpayer’s right to file a Tax Court petition and the related restrictions on assessment and collection of the employment taxes which are the subject of the dispute between the IRS and the taxpayer who is being audited. It would appear that the “determination” under subsection (a) also starts the suspension of the statute of limitations on assessment. More on how that might work later.

As for applying these principles to SECC’s case, the majority opinion held that SECC’s petition was timely because the IRS had never sent SECC a Notice of Determination by certified or registered mail as required by subsection 7436(b). There had previously been a “determination” under section 7436(a) in connection with an audit and there was an actual controversy when Appeals issued their letter dated April 15, 2011, and SECC was entitled to file a Tax Court petition at any time thereafter until the 90th day after a notice was sent to SECC by certified or registered mail.

The Concurring Opinion

A concurring opinion, authored by Judge Halpern and joined by eleven other Judges, joined the majority opinion “without reservation” and noted that the majority reached the correct conclusion as a matter of tax policy. Judge Halpern noted that sustaining the IRS’s position would “improperly permit the Commissioner to determine, in his sole discretion, whether a taxpayer shall have access to this Court in order to resolve [a worker classification dispute such as the dispute between SECC and the Commissioner].” Judge Halpern went on to say:

Were we to adopt respondent’s position, the Commissioner, by refusing to issue a notice of determination, would be able to deny the taxpayer access to this Court, which he may be tempted to do whenever he feels his chance of success on a worker classification or RA ’78 sec. 530 issue is better in either the District Court or the Court of Federal Claims than this Court. There is no basis in section 7436 or as a matter of policy for granting the Commissioner this “forum shopping” discretion, and it would thwart the obvious congressional intent embodied in that provision to permit taxpayers, in their discretion, to litigate, in this Court, worker classification and RA ’78 sec. 530 issues that the Commissioner has raised on audit.

The Dissenting Opinion

Judges Goeke and Kerrigan dissented. They stated that the structure of section 7436 indicates that the Court should treat a worker classification determination as if it were a deficiency determination in an income tax case. They expressed concerns that the majority’s approach will result in administrative problems. They posed a number of questions which they thought did not have appropriate answers under the approach taken by the majority, such as whether the IRS would be able to assess a disputed employment tax deficiency after the IRS made a “determination” (without sending a Notice of Determination under section 7436(b)) but the taxpayer failed to file a Tax Court petition within 90 days of the date of the determination. Thus, in their view, the Tax Court should not have jurisdiction over a worker classification case unless the IRS has issued a notice of determination under section 7436(b). Since the parties agreed that no such notice had been issued to SECC, the dissenters would have dismissed the petition for lack of jurisdiction.

As for whether the IRS should have issued a Notice of Determination, the dissenters stated that the Court should not have “delved” into the administrative record to determine whether the IRS had made a “determination” under section 7436(a). Rather, they would have permitted the IRS to decide unilaterally when its examination warrants the issuance of a Notice of Determination, leaving the IRS to bear the consequences associated with making an invalid assessment if it turned out that the IRS was in fact required to issue a Notice of Determination before assessment of the employment tax deficiencies.

The dissenters left little doubt about how they viewed the merits of the dispute. They viewed the case as a pure accountable plan case and believed that the majority’s approach set a “dangerous precedent” which would allow any taxpayer in an accountable plan case to make the arguments that SECC made and transform its case into a worker classification dispute. The dissenters stated that “[t]he IRS could have reasonably concluded that the worker classification arguments were frivolous and did not justify a determination.”

Wait a minute. Stop the presses. Did the dissenters call my arguments frivolous? FRIVOLOUS? My arguments have been called many things over the past 35 years: “creative,” “clever,” “aggressive,” “too cute by half,” even that dreaded five letter word – “wrong.” But my arguments had never before been called “frivolous.” Perhaps the only thing worse would have been if Justice Scalia had called my arguments “legalistic argle-bargle.” See Windsor v. United States, 570 U.S. ___, 133 S.Ct. 2675, 2709 (Scalia dissenting). (Fortunately I escaped that fate. Justice Scalia, like all the other Justices, ignored the amicus brief I filed in the Windsor case.)

I can’t let that characterization of my arguments by the dissenting Judges go unchallenged. Was it “frivolous” to argue that the cable splicers were true independent contractors when the Fifth Circuit had previously held that similarly situated cable splicers were independent contractors? I don’t think it was. Was it “frivolous” to argue that, in the alternative, my client was entitled to section 530 relief when, among other things, a) the entire cable splicing industry in southern California treated the cable splicers the way SECC treated them during the periods in question, b) SECC had always complied with the rules regarding the issuance of information returns such as Forms 1099, c) the IRS had previously told SECC to treat the cable splicers the way they did, and d) there was absolutely no case law which addressed the question of whether SECC was entitled to section 530 relief where it had treated the workers as “dual status” workers for tax reporting purposes? I don’t think it was. Was it “frivolous” to argue in the alternative that the taxes owed by SECC should have been computed based on section 3509(a) rates when SECC believed (based on advice given by the IRS itself) that it had been doing things properly? I don’t think it was. Was it “frivolous” to argue in the alternative that the taxes owed by SECC should have been reduced under section 3402(d)? I don’t think it was.

I really don’t think that the dissenters thought that statement through before they wrote it. And I certainly hope that if any of their friends or neighbors ever run a business and receive a bill from the IRS for $1.5 million in taxes as the result of doing business in the manner in which they were told to do business by the IRS, the dissenters would urge their friends or neighbors to use all arguments at their disposal to fight that bill, just as SECC did. Frivolous? Bah, humbug! I’ll fight that characterization to my dying breath. (Now Keith and Les understand why I did not want to write this post until the case was over.)

Now that I have vented my spleen, I have a more important point to make about the dissent. The dissenters’ suggestion that the IRS can ignore the rules just because the IRS (or a Tax Court Judge) believes that a taxpayer’s argument is frivolous is an extremely dangerous idea that, if adopted by the IRS and the Courts, could seriously damage our voluntary compliance system. The fact that the government must follow proper procedures, and can be held accountable if it fails to do so, is as much a bedrock of our voluntary compliance system as is the willingness of taxpayers to voluntarily file their tax returns and (usually) file an income tax return that consists of non-fiction instead of fiction.

The government doesn’t convict criminal tax defendants and throw them in jail without a trial just because the IRS or a Judge thinks that their arguments are “frivolous.” Instead, the government gives them a trial, along with an opportunity to appeal the result at the trial if they don’t like the outcome of the trial. Nor do we allow the IRS to assess income tax deficiencies without issuing a Notice of Deficiency just because the IRS or a Judge believes that the taxpayer’s arguments are “frivolous.” Rather, the IRS must first issue the taxpayer a Notice of Deficiency, and the taxpayer can file a petition and seek a trial in the Tax Court. If the taxpayer does not like the result there, they can appeal to the Courts of Appeal. And sometimes it turns out that an argument that the lower court thought was “frivolous” turns out to have been a winning argument.

Even where taxpayers lose, and lose badly, however, the taxpayer can say that they had their day in court, and third-party observers can take comfort in the fact that, should they ever end up in a wrestling match with the IRS, the IRS (and the courts) will give them a fair shake by following the rules, instead of bending the rules whenever they don’t think much of the taxpayer’s arguments. When taxpayers are convinced that the IRS does not follow the rules and/or the Courts don’t follow the rules, they are less likely to comply with the law.

In the third and final part, I will discuss the aftermath of the SECC opinion, including the reasons and consequences of the IRS position and the ultimate resolution of the case.

That day has finally arrived. The SECC case has now settled (as have the other two cases), and the stipulated decisions in all of these cases are now final. Those of you who are already familiar with the opinion in SECC understand that, now that the SECC case is resolved and the Tax Court’s stipulated decision is final, the Ninth Circuit Court of Appeals will never opine on the question of whether the Tax Court had jurisdiction in SECC. Whether the Courts of Appeal might rule on that jurisdictional issue in a future case is a topic I discuss later.

This post is the first of three posts discussing the SECC opinion. Part 1 discusses how the case arose and the arguments made by the parties leading up to the issuance of the Court’s opinion in 2014. Part 2 discusses the majority, concurring, and dissenting opinions in the case.  Part 3 discusses the case’s aftermath, the resolution of the case, and the practical effect of the case going forward.

How the Case Arose

The SECC case was a tax procedure nerd’s dream – and a client’s nightmare. Few other cases have taxed my knowledge of tax procedure as this case did. Not all of the tax procedure issues in the case were addressed in the Tax Court’s opinion, as you will see.

The case started innocently enough with an employment tax audit of the company’s Forms 941 for the 1st quarter of 2005 through the 4th quarter of 2007. SECC had cable splicers who it paid two different ways during the quarters at issue. First, the company paid “wages” to the splicers for their labor. These “wages” were reported as wages on the company’s Forms 941, and Forms W-2 were timely issued to all of the splicers. Second, the company paid “rent” to the splicers for their specialized equipment and tools. The equipment and tools generally took the form of specially equipped trucks that were rather expensive to buy. The splicers owned the specially equipped trucks, and there were rental agreements signed by the parties under which SECC paid “rent” to the splicers for the use of their truck. The “rent” that was paid by SECC to the splicers was reported on Forms 1099 that were timely issued to the splicers. SECC’s tax compliance record, from SECC’s perspective, was spotless.

Those of you who deal with employment taxes by now have probably started muttering phrases like “What about an accountable plan?” There was no accountable plan during the quarters at issue. What there was, however, was an employee of SECC (a former employee by the time of the IRS employment tax audit) who had, prior to 2005, called the IRS for instructions on how SECC should treat the “rent” payments to the splicers. This employee, after describing the “dual” arrangement with the splicers to the IRS over the phone, was told by the IRS that the dual status of the workers was proper, and that the “rent” payments should be reported on Forms 1099 issued to the splicers, while the “wages” should be reported on Forms W-2 issued to the splicers. SECC dutifully followed the advice given by the IRS employee.

The company had even undergone an income tax audit prior to the start of the employment tax audit, in which the Revenue Agent asked for copies of the company’s employment tax returns. The company emerged from that income tax audit with a “no change” audit report, believing that the company was correctly reporting both the “wages” and the “rent” paid to the splicers.

Then came the employment tax audit. At the conclusion of that audit, the Revenue Agent issued an audit report reclassifying as “wages” all of the “rent” paid to the splicers during all twelve quarters in the audit. Taxes were computed using the maximum rates, with no adjustments under section 3509. No consideration was given to section 530 of the Revenue Act of 1978. There was no discussion of possibly reducing the assessment under section 3402(d). The proposed employment tax assessments were roughly $1.2 million, plus proposed penalties, and statutory interest. Had these proposed liabilities been sustained, they would exceed $2 million today.

Both Parties’ Arguments At Exam and Appeals

At that point, my firm was retained. We filed a timely protest, arguing, inter alia, that a) the splicers should have been treated as independent contractors for all purposes (i.e., that the payments to the splicers that had been treated as “wages” for employment tax purposes were not in fact “wages” for employment tax purposes because the splicers were actually independent contractors), b) alternatively, the splicers were “dual status” workers, i.e., they were independent contractors with respect to the rent payments even if they were employees with respect to the “wage” payments, see Rev. Rul. 82-83, 1982-1 C.B. 151, c) in the event the splicers were employees with respect to the “wage” payments, section 530 provided complete relief from the proposed assessments, d) in the alternative, section 3509(a) rates applied, or e) in the further alternative, that the assessments should be reduced under section 3402(d) because the splicers had paid their own income taxes on the “rent” income.

The argument that the splicers were independent contractors for all purposes was potentially meritorious. The Fifth Circuit had previously held in Thibault v. BellSouth Telecommunications, Inc., 612 F.3d 843 (5th Cir. 2010), a case not directly involving any tax issues, that cable splicers were independent contractors.

The Office of Appeals ultimately sustained the results of the audit report and notified SECC by letter dated April 15, 2011 that the proposed employment tax liabilities would be assessed as proposed by the Examination Division. The history of the case between the date of the submission of the protest to the audit report and the decision by the Office of Appeals to sustain the results of the audit report is itself rather lengthy. I don’t describe that history in detail here, because that history is not legally relevant to the outcome of the case.

Suffice to say, however, I was not in a good mood by the time Appeals sustained the results of the audit report. Despite the fact that a) the case was handled by three different Appeals Officers, b) the case was returned to the Examination Division for factual development, and c) at one point in time I suggested that Appeals request Technical Advice on the question of whether section 530 relief is available in situations where the taxpayer has treated workers as “dual status” workers for employment tax purposes, the case was never factually developed by the IRS. (Examination returned the case to Appeals without requesting any information from us and without doing any additional work.) It appeared to me that no serious effort was made by anyone in the IRS to look at the issues which were raised in the protest.

I was in an even less charitable mood after the IRS sent bills to SECC totaling roughly $1.5 million, without first issuing a Notice of Determination under section 7436. I picked up my Code and read section 7436, which can be read in relevant part (subsections (a) – (d)) here.

My reading of section 7436 was that the IRS was required to send a Notice of Determination to SECC before assessing any additional employment taxes in this situation. After all, there was a dispute as to whether the splicers were independent contractors or employees and, even if they were employees as to the “rent” payments, there was a dispute as to whether section 530 applied. I discovered, however, that the IRS did not share my view on that point.

In Chief Counsel Advice Memo 200009043 (January 4, 2000), the IRS Chief Counsel’s Office discussed the circumstances under which the IRS believed it was required to issue a Notice of Determination under section 7436 before assessing additional employment taxes against a taxpayer. The memo discussed at length the circumstances under which Chief Counsel’s Office believed there was (or was not) an “actual controversy” within the meaning of section 7436(a) which required the IRS issue a Notice of Determination under that section.

It is clear from reading this Chief Counsel Memo that there had been a debate within Chief Counsel’s Office about the definition of the term “actual controversy.” It is likewise clear that, if a person (whether a worker or a corporate officer) had been treated as an “employee” for employment tax purposes, i.e., the person had been treated by the taxpayer on a Form 941 as having been paid “wages,” Chief Counsel’s Office position was that the IRS was not required to issue a Notice of Determination to the taxpayer before assessing additional employment taxes against the taxpayer based on “non-wage” payments that had been made to the person(s) who had been treated as an employee for employment tax purposes.

I thought the reasoning of the Chief Counsel Memo was faulty. The fact that a person had been treated as an “employee” on a taxpayer’s employment tax return did not preclude that person from being treated as an independent contractor with respect to payments to that person which were not treated as “wages” for employment tax purposes. Situations involving “dual status” workers had been addressed by the IRS for a number of years. See Rev. Rul. 82-83, supra. Furthermore, the Chief Counsel Memo failed to address the fact pattern in the SECC case, where, in response to the issuance of the audit report, SECC took the position that the amounts reported as “wages” on the relevant Forms 941 were not wages at all because the workers in question were independent contractors.

Notwithstanding our disagreement on this point, there was another key point on which I agreed with the IRS. The IRS had previously concluded that the IRS must issue a Notice of Determination under section 7436 before the Tax Court can exercise jurisdiction under section 7436. See Notice 2002-5, 2002-1 C.B. 320 and Notice 98-43, 1998-2 C.B. 207. The Tax Court also apparently agreed with this conclusion in Henry Randolph Consulting v. Commissioner, 113 T.C. 250, (1999), see also Charlotte’s Office Boutique, Inc. v. Commissioner, 425 F.3d 1203 (9th Cir. 2005), affirming 121 T.C. 89 (2003). For what it was worth (which turned out to be nothing), I also agreed with this conclusion.

Based on our belief that the IRS should have issued a Notice of Determination under section 7436 to SECC before assessing additional employment taxes and our belief that the Tax Court could not exercise jurisdiction under section 7436 unless the IRS first issued a Notice of Determination under that section, we decided that the appropriate course of action was for SECC to file a petition with the Tax Court and then seek to dismiss the petition based on the failure of the IRS to issue a valid Notice of Determination prior to assessing the additional taxes against SECC. We hoped that the Court would analogize to the line of cases that permits taxpayers to file a petition and then seek to dismiss that petition for lack of jurisdiction where the IRS failed to issue a valid notice of deficiency to the taxpayer because the notice of deficiency was not sent to the taxpayer’s last known address. See O’Brien v. Commissioner, 62 T.C. 543 (1974). While there were other potential judicial remedies available to challenge the procedural validity of the audit assessments, those other potential remedies posed difficulties. I discuss other potential remedies and the difficulties associated with these potential remedies below.

The Issues Before the Tax Court 

The petition in SECC was filed in February of 2012. (For those of you wondering whether the petition was filed after what we believed was the expiration of the statute of limitations on assessment for the quarters at issue, the answer is yes, it was. Interestingly, the IRS had earlier concluded that the filing of a Tax Court petition under section 7436 by a taxpayer, where the IRS had previously failed to issue a Notice of Determination under section 7436(b) did NOT suspend the running of the statute of limitations on assessment. Chief Counsel Memoranda 200240042, June 28, 2002.) Both parties filed motions to dismiss for lack of jurisdiction.

The IRS argued that the Tax Court lacked jurisdiction because the IRS had never issued a Notice of Determination under section 7436. They further argued that the IRS had not made any “determination” within the meaning of section 7436 but that, if the notice to SECC that the Office of Appeals was sustaining the audit report was a “determination” within the meaning of section 7436, the petition was untimely because it had been filed more than 90 days after the date of the notice.

The IRS also argued that the Tax Court lacked jurisdiction to rule on the question of whether the IRS was required to issue a Notice of Determination to SECC under section 7436 prior to assessing the additional taxes against SECC. Per the IRS, because it was agreed by the parties that no Notice of Determination had been sent to SECC, the Court simply had no jurisdiction to say anything other than it lacked jurisdiction due to the failure of the IRS to issue a Notice of Determination. That argument was troubling to me.

SECC argued that the Tax Court, in dismissing the petition for lack of jurisdiction, was required to address the question of whether the IRS was legally required to issue a notice of determination under section 7436 prior to making the large audit assessments against SECC. In support of that position, SECC cited to Rosewood Hotel, Inc. v. Commissioner, 275 F.2d 786 (9th Cir. 1960).

In Rosewood, the taxpayer filed a petition that was unquestionably late, but the taxpayer argued that the Notice of Deficiency was invalid because it had not been sent to the taxpayer’s last known address. The Tax Court dismissed the petition for lack of jurisdiction as being untimely, without addressing the question of whether the Notice of Deficiency had been sent to the taxpayer’s last known address. On appeal, the Ninth Circuit vacated the dismissal order and remanded the case with instructions to the Tax Court to decide the question of whether the Notice of Deficiency had been sent to the taxpayer’s last known address. By analogy, SECC argued that the Tax Court was required by Ninth Circuit case law to address the question of whether the IRS was required to issue a Notice of Determination to SECC prior to assessing the deficiency in employment taxes.

SECC also argued that, if the Tax Court were to hold that it did not have jurisdiction to rule on whether the IRS was required to issue a notice to SECC under section 7436 prior to assessing the additional taxes, SECC might lack an effective judicial forum in which to challenge the procedural validity of the audit assessments against SECC. First, the Ninth Circuit has held that taxpayer may not use a quiet title action under 28 U.S.C. section 2410 to challenge an income tax deficiency assessment by claiming that the IRS did not send a valid Notice of Deficiency to the taxpayer. See Elias v. Connett, 908 F.2d 521 (9th Cir. 1990), accord, PCCE v. United States, 159 F.3d 425 (9th Cir, 1998), contra, Robinson v. United States, 920 F.2d 1157 (3rd Cir. 1990). Arguably, the Ninth Circuit would similarly bar SECC from challenging the validity of the employment tax assessments through a quiet title action.

Second, the Ninth Circuit has held that, where the IRS has illegally assessed and collected an income tax deficiency in violation of the restrictions on assessment contained in what is now section 6213 of the Code, a taxpayer may not obtain a refund of the taxes illegally assessed and collected in violation of these restrictions unless the taxpayer can demonstrate that the taxpayer is owed a refund based on the merits of the tax liability. Van Antwerp v. United States, 92 F.2d 871 (9th Cir. 1937), contra, United States v. Yellow Cab Company, 90 F.2d 699 (7th Cir. 1937). Thus, in a refund suit, SECC would not be able to challenge the validity of the employment tax assessments unless the government counterclaimed for a judgment of the unpaid portion of these assessments. I previously handled a refund suit where the government purposely did not file a counterclaim in response to the complaint that we filed, in order to prevent our office from the litigating the procedural validity of an assessment under section 6672 of the Code. I have no doubt whatsoever that the government would have not filed a counterclaim for the unpaid portion of the employment tax audit assessments against SECC had we attacked the validity of those assessments in a refund suit. Thus, in the refund suit, we would not have been able to challenge the procedural validity of the assessments.

Third, the Ninth Circuit has held that, where the IRS has illegally assessed income tax deficiencies in violation of the restrictions on what is now section 6213(a) of the Internal Revenue Code, but the taxpayer has not yet paid the illegally assessed taxes, a taxpayer MAY be entitled to injunctive relief. Ventura Consolidated Oil Fields v. Rogan, 86 F.2d 149 (9th Cir. 1936), cert. denied, 300 U.S. 672 (1937). But the Ninth Circuit has also held that no injunctive relief is available unless the taxpayer can show BOTH irreparable injury AND an inadequate remedy at law. Cool Fuel, Inc. v. Connett, 685 F.2d 309 (9th Cir. 1982). Whether SECC would have been able to sustain that burden was at best unclear. My own experience is that the ability of a taxpayer to carry that kind of burden often depends on the proclivities of the judge assigned to the case.

While SECC acknowledged that it might be able to challenge the validity of the unpaid assessments in the context of a Collection Due Process case, the IRS had not conceded that point in the litigation. Also the filing of a lien notice against the company for such a large amount could have effectively destroyed the company, rendering meaningless the ability to challenge the procedural validity of the assessments in a Collection Due Process case.

While the company conceivably could have challenged the validity of the audit assessments in a Chapter 11 bankruptcy, see Bunyan v. United States, 354 F.3d 1149 (9th Cir. 2004), that course of action was not a realistic possibility.

SECC thus argued that, because the IRS had been required to issue a Notice of Determination under section 7436 prior to assessing the additional taxes and had failed to do so, the Tax Court should dismiss the petition for lack of jurisdiction based on the failure of the IRS to issue a valid Notice of Determination prior to assessing the taxes against SECC.

After the parties completed their briefing on the motions to dismiss, the Tax Court issued an Order directing the parties to brief the following two questions: 1) whether a letter from the Office of Appeals indicating that the case with Appeals was being closed constitutes a “determination” under section 7436, and 2) if the Court has jurisdiction under section 7436, what remedies might be available to petitioner in the Tax Court case. Much of the ink spilled in response to this Order regurgitated what was previously argued by the parties. For differing reasons, both parties argued that the IRS had never issued a proper Notice of Determination.

SECC also included the following comments in its supplemental brief:

The language of sections 7436(a) and (b)(2) is somewhat ambiguous. Under one possible reading, subsection (a) would grant the Court jurisdiction over a petition to determine the correctness of the Respondent’s determination at any time after a formal “determination” is made by the IRS, even though a “notice of determination” is never issued under subsection (b)(2). Under this reading, subsection (b)(2) operates only to establish the outer time limit by which an action must be filed in Tax Court to challenge the IRS’s “determination.” The deadline would only be fixed after respondent mails a “notice of determination” to the putative employer. Thus, if a “determination” is made by the Commissioner, but the Commissioner does not issue a “notice of determination,” the putative employer could theoretically file a Tax Court petition at any time after the “determination” is made. Whether the statute of limitations on assessment would ever run under this interpretation of the statute is an issue that is discussed below.

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There would be significant practical problems if the Court were to hold that taxpayers can file a petition at any time after respondent makes a “determination,” even though respondent has not issued a “notice of determination.” First, there could be significant disputes about what constitutes a “determination” which triggers the right of a taxpayer to file a Tax Court petition. Would a preliminary audit report be a “determination”? An audit report? A decision by the Office of Appeals? Something else? **** If the IRS made a “determination” but never issued a “notice of determination,” the period for filing a Tax Court petition could last indefinitely.

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There would also be a related problem involving the statute of limitations on assessment that would be caused by such an interpretation of section 7436. Under section 7436(d), the principles of various other provisions of the Code, including sections 6213(a) and 6503(a), apply as if the “determination described in subsection (a) were a notice of deficiency.” If a taxpayer could file a Tax Court petition once the IRS has made a “determination,” an issue would arise as to whether it is the making of a “determination” or the issuance of a “notice of determination” that operates to suspend the running of the statute of limitations on assessment.

The parties’ supplemental briefs were filed in August of 2013. At the time SECC filed its supplemental brief, I had a very bad case of heartburn. Why? In one of the related cases involving the same issue that was present in the SECC case, and in which the operative facts were almost identical to the facts in the SECC case, the Tax Court had granted the IRS’s motion to dismiss for lack of jurisdiction in May of 2013 in an unpublished Order. That jurisdictional issue had been briefed in that case in a manner similar to the briefing in the SECC case. That Order adopted the arguments made by the IRS on a wholesale basis, and the petition was dismissed for lack of jurisdiction, without the Court addressing the question of whether the IRS was required to issue a Notice of Determination prior to making the employment tax audit assessments against the petitioner. How and why that Order was issued, I don’t know.

Of course, a motion for reconsideration was promptly filed. The parties settled in to wait for the Court to issue an opinion in the SECC case and to see how the Court would deal with the motion for reconsideration in the related case. Given the Court’s ruling in the unpublished Order in the related case, I was concerned about how the Court would ultimately rule, even though I strongly believed that the IRS had improperly assessed the employment tax audit deficiencies against my clients.