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opinions appear to leave open the question of whether the Tax Court could still decide the issues if the IRS had not withdrawn the lien or reversed the certification.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.

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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.

2021 Year in Review – Cases

Despite the ability to access most courts only remotely for much if not all of the year, 2021 still produced a number of important tax procedure decisions.  Perhaps judges could produce more opinions because they did not need to travel or to hold lengthy in-person trials.  This post shows that not all cases are Graev cases.

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Supreme Court matters

The Supreme Court handed down a unanimous opinion in CIC Services.  The Court holds that the Anti-Injunction Act does not bar a suit challenging an IRS notice that requires a non-taxpayer to provide information even though the failure to provide the information could result in a penalty.  Posts can be found  here, here, here and here.

The Supreme Court rejected the request for certiorari in Organic Cannabis v. Commissioner seeking a determination that the time period for filing a petition in Tax Court in a deficiency case is a claims processing period rather than a jurisdictional one but granted certiorari in Boechler v. Commissioner regarding the same issue but in the collection due process context.  The Boechler case will be argued before the Supreme Court on January 12, 2022.

Circuit Court matters

Coffey v. Commissioner, –F.3d – (8th Cir. 2021)  – in a case that fractured the Tax Court about as badly as it can be fractured, the Eighth Circuit, after initially projecting harmony and uniformity in its decision, fractured as well, reversing its initial decision which overturned the Tax Court’s fully reviewed opinion.  This action briefly reopened the door on the question of adequate filing of a return for purposes of triggering the statute of limitations, before reinstating the original holding through a new opinion by the panel. That new panel opinion can be found here. 

Taxpayers claimed that they were residents of the US Virgin Islands in 2003 and 2004 and filed returns with the Virgin Islands tax authority.  That taxing authority has a symbiotic relationship with the IRS and sent to the IRS some of the documents it received.  The IRS took the documents it received and concluded that M/M Coffey should have filed a US tax return.  Based on that conclusion, it sent the Coffeys a notice of deficiency.  The Coffeys argued that the notice of deficiency was sent beyond the statute of limitations on assessment since their filing with the US Virgin Islands tax authority also served as a filing with the IRS, starting the normal assessment statute.  The government argued that because the Coffeys did not file a return with the US, no statute of limitations on assessment existed.  After only eight years, the Tax Court sided with the Coffeys.  A mere three years later, the Eighth Circuit reversed in a unanimous three judge panel. 

On February 10, 2021, the Eighth Circuit granted a panel rehearing but denied a rehearing en banc.  Disagreements with the outcome of a circuit court usually result in a request for a rehearing en banc rather than a rehearing with the very panel that entered the decision.  So, this is a bit of an unusual twist in a case with many twists. After the vacating of the original opinion, the same panel issued a new opinion with some minor differences.

The result of the Eighth Circuit’s decision allows the IRS to come in many years later to challenge residence of individuals claiming Virgin Islands residence.  If the Coffeys had succeeded in this case, the procedural issue would have turned into a substantive victory, since the IRS would not have been able to make an assessment against them for the years at issue.

Gregory v. Commissioner, — F.3d – (3rd Cir. 2020) – This case was decided at the very end of 2020 so it is included here as it came out during last year’s end of year review and also because it is a case argued on appeal by the Tax Clinic at Harvard so including it provides another opportunity to showcase the work of the students.  The issue before the Third Circuit was whether the taxpayers’ use of Forms 2848 Power of Attorney and 4868 Request for Extension of Time constituted “clear and concise notice” of a change of address to the IRS pursuant to Treasury Regulation §301.6212-2.  Although filed as a non-precedential opinion, the outcome is a clear example of how the IRS cannot simply ignore the actual knowledge it has of a taxpayer’s address when issuing a Statutory Notice of Deficiency pursuant to I.R.C. §6212(b)(1), even if that taxpayer failed to follow the IRS’ prescribed procedures for changing their address. 

An odd ending to this case occurred when the Third Circuit returned it to the Tax Court.  Rather than simply entering an opinion for the taxpayers, the Court issued an order restoring the case to the general docket.  That order made no sense because the Gregorys unquestionably filed their Tax Court petition late.  This required the filing of a motion to have the court make a determination that the notice of deficiency was invalid, which it eventually did with no opposition from an equally confused government counsel.

In Patrick’s Payroll Services, Inc., v. Commissioner, No. 20-1772 (6th Cir. 2021), the Sixth Circuit upheld the decision of the Tax Court denying the taxpayer the opportunity to litigate the merits of the underlying tax because of a prior opportunity to discuss settlement with Appeals.  Guest blogger Chaim Gordon wrote about this case after the Tax Court’s decision and while the case was pending before the Sixth Circuit.  Chaim pointed out some of the novel arguments the taxpayer was making.  Unfortunately for the taxpayer, the Sixth Circuit was not buying what they were selling.

The 11th Circuit upheld the decision of the Tax Court in Sleeth v. Commissioner, — F.3d — 2021 WL 1049815 (11th Cir. 2021), holding that Ms. Sleeth was not an innocent spouse.  The Sleeth case continues the run of unsuccessful taxpayer appeals of innocent spouse cases following the major structural changes to the law in 1998. The Tax Court found three positive factors and only one negative factor applying the tests of Rev. Proc. 2013-34.  Yet, despite the multitude of factors favoring relief in each case, the Tax Court found that the negative knowledge factor required denial of relief.  This case follows the decision in the Jacobsen case from 2020 in which the Tax Court denied relief to someone with four positive factors for relief and only knowledge as a negative factor.  The pattern developing in these cases suggests that the Tax Court views the knowledge factor as a super factor, despite changes in IRS guidance no longer describing it as such.  Only economic hardship seems capable of overcoming a negative determination on knowledge.  In this post, Carl Smith discussed the Seventh Circuit’s decision in the Jacobsen case.  Both cases were argued on appeal by the Tax Clinic at Harvard.  The clinic also filed an amicus brief in the case of Jones v. Commissioner, TC Memo 2019-139, set to be argued soon before the 9th Circuit.

Lindsay v. U.S. is the latest case to apply the principle that United States v. Boyle essentially stands for the position that taxpayers have a nondelegable duty to be aware of tax deadlines. An agent’s incompetence or willful misconduct will not excuse the taxpayer from delinquency penalties.  Lindsay was incarcerated and executed a POA to Bertelson, an attorney, to manage his affairs, including filing his tax returns.  The attorney assured Lindsay he was doing so for the years 2012-15; instead he failed to file the returns and for good measure embezzled hundreds of thousands of dollars. The actions resulted in Lindsay receiving $705,414.61 in actual damages and $1 million in punitive damages.  Lindsay eventually filed his tax returns and paid over $425,000 in delinquency penalties. He filed a claim for refund; IRS rejected and he filed a suit in district court. The district court, contrary to the magistrate’s recommendation, granted the government’s motion to dismiss, citing Boyle as precluding a claim for relief. Following a timely appeal, the Fifth Circuit affirmed. In so doing, it applied Boyle to Lindsay’s somewhat sympathetic circumstances.

Tax Court

In Ramey v Commissioner, 156 T.C. No. 1 (2021), the Tax Court determined in a precedential opinion that when the IRS issues a notice of decision rather than a notice of determination and the taxpayer has filed the collection due process (CDP) request late, the Court lacks jurisdiction to hear the case.  The taxpayer, a lawyer, represented himself and pegged his arguments to last known address rather than jurisdiction.  Nonetheless, the decision expands the Court’s narrow view of jurisdiction to another setting without addressing the Supreme Court precedent on jurisdiction and its impact on the timing of the filing of documents.

Galloway v Commissioner, TC Memo 2021-24: This case holds that a taxpayer cannot use the CDP process to rehash a previously rejected offer in compromise (OIC).  Mr. Galloway actually submitted two OICs that the IRS rejected.  As an aside, from the description of the OICs in the Court’s opinion, the rejections seemed appropriate strictly from an asset perspective, since he did not want to include the value of a car he owned but allowed his daughter to use. 

The case of Mason v. Commissioner, T.C.M. 2021-64 shows at least one benefit of submitting an offer in compromise (OIC) through a request for a collection due process (CDP) hearing.  As part of his lessons from the Tax Court series, Bryan Camp has written an excellent post both on the case and the history of offers. 

Friendship Creative Printers v. Commissioner, TC Memo 2021-19: This case holds that the taxpayer could raise the merits of delinquency penalties by the backhanded method of challenging the application of payments.  Taxpayer failed to pay employment taxes over an extended period of time and failed to file the necessary returns but at some point made payments on the earliest periods.  In the CDP hearing, taxpayer argued satisfaction of the earliest periods and eventually provided an analysis showing payments equal to the tax paid.

The Court treated this as a challenge to the merits of the delinquency penalties imposed.  Unfortunately, the taxpayer did not designate its payments, which meant that the payments it made were not applied in the manner it expected and argued in the CDP hearing.  Taxpayer also looked at the transcripts without appreciating the impact of accruals not reflected in the assessed portion of the transcript but accruing nonetheless.

Reynolds v. Commissioner, TC Memo 2021-10: This case holds that the IRS can collect on restitution based assessments even when the taxpayer has an agreement with the Department of Justice to make payments on the restitution award.  Taxpayer’s prosecution resulted in a significant restitution order. He agreed to pay DOJ $100 a month or 10% of his income.  At the time of the CDP case he was not working and did not appear to have many prospects for future employment. Citing Carpenter v. Commissioner, 152 T.C. 202 (2019), the Tax Court said that the IRS did have the right to pursue collection from him.  Obviously that right, at least with respect to levy, is tempered by the requirement in IRC 6343 not to levy when it would place someone in financial hardship, but no blanket prohibition existed to stop the IRS from collecting and therefore to stop it from making a CDP determination in support of lien or levy. The case is a good one to read for anyone dealing with a restitution based assessment to show the interplay between DOJ and IRS in the collection of this type of assessment, as well as to show the limitations of restitution based assessments compared to “regular” assessments.

BM Construction v. Commissioner, TC Memo 2021-13: This case involves, inter alia, a business owned by a single individual and the mailing of the CDP notice to the business owner rather than the business.  The Tax Court finds that sending the CDP notice to the individual rather than the business does not create a problem here, since the sole owner of the business would receive the notice were it addressed to the business rather than to him personally.

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.

The case of Garcia v. Commissioner, 157 T.C. No. 1 (2021) provides clarity and guidance on the Tax Court’s jurisdiction in passport cases as the Court issues a precedential opinion to make clear some of the things that can and cannot happen in a contest regarding the certification of passport revocation.  I did not find the decision surprising.  The Court’s passport jurisdiction is quite limited.  Petitioners will generally be disappointed in the scope of relief available through this new type of Tax Court jurisdiction. 

Other Courts

In Mendu v. United States, No. 1:17-cv-00738 (Ct. Fd. Claims April 7, 2021) the Court of Federal Claims held that FBAR penalties are not taxes for purposes of applying the Flora rule.  In arguing for the imposition of the Flora rule, the taxpayer, in a twist of sides, sought to have the court require that the individual against whom the penalties were imposed fully pay the penalties before being allowed to challenge the penalties in court.  The FBAR penalties are not imposed under title 26 of the United States Code, which most of us shorthand into the Internal Revenue Code, but rather are imposed under Title 31 as part of the Bank Secrecy Act.

The case of In re Bowman, No. 20-11512 (E.D. La. 2021) denies debtor’s motion for summary judgment that Ms. Bowman deserves innocent spouse relief.  On its own, the court reviews the issue of its jurisdiction to hear an innocent spouse issue as part of her chapter 13 bankruptcy case and decides that it has jurisdiction to make such a decision.  The parties did not raise the jurisdiction issue, which is not surprising from the perspective of the plaintiff, but may signal a shift in the government’s position since it had previously opposed the jurisdiction of courts other than the Tax Court to hear innocent spouse cases.

Passport Revocation Cases Part 2

Yesterday, I discussed two recent passport revocation cases, United States v. Hupp and Franklin v. United States. Today, I look at Tenth Circuit and Tax Court cases involving similar issues decided earlier this year.

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Rowen

The Tax Court decision in Rowen v. Commissioner, 156 T.C. No. 8 (2021) addresses the constitutionality of the passport revocation provision from the perspective of the power that IRC 7435 gives to the IRS.  Because it finds that the IRS does not play a decisive role in restricting a taxpayer’s right to international travel, the Tax Court grants summary judgment to the IRS on the constitutional argument.

The Rowen case provides some reason for believing that the taxpayer in Maehr had the right idea to sue the State Department rather than the IRS.  The Tax Court states that Mr. Rowen’s argument that IRC 7345 violates the 5th Amendment right to international travel has no merit because:

The plain text of section 7345 imposes no prohibition on international travel. Section 7345 merely provides a process by which the Commissioner may certify to the Secretary of the Treasury the existence of a seriously delinquent tax debt and the Secretary of the Treasury in turn transmits that certification to the Secretary of State.  Section 7345 expressly leaves all passport-related decisions for “action” by the Secretary of State.

Since the statute does not give the IRS power to revoke someone’s passport, the IRS has not violated anyone’s due process rights by simply certifying a case to the State Department.  The court also notes that on the record of this case there is no indication that the State Department has actually revoked his passport.

Mr. Rowen also argued that IRC 7345 violates the Uniform Declaration of Human Rights.  The Tax Court does not agree that IRC 7345 violates the provisions of this treaty but finds that even if it were to violate that treaty, the section does not impose limits on international travel. 

After addressing two other issues raised in the petition but not argued, the Tax Court grants summary judgment to the IRS.  It’s clear that a constitutional argument will go nowhere at the IRS or the Tax Court.  For taxpayers who want to make a constitutional argument regarding IRC 7435, coming to Tax Court will merely be a way station on the road to a circuit court.

Maehr

We have not previously discussed Maehr v. U.S. Dep’t. of State, 5 F.4th 1100, 1119 (10th Cir. 2021) decided in July of 2021.  Of the four cases, it takes the most serious look at the constitutional argument and provides, perhaps, the most hope for future litigants.  Rather than suing the IRS, Mr. Maehr sued the State Department for deciding to revoke.  There the 10th Circuit said:

Passport revocation under the FAST Act is thus an example of a species of tax penalties known as collateral sanctions. “Unlike traditional tax penalties that require noncompliant taxpayers to pay money to the taxing authority, collateral tax sanctions require noncompliant taxpayers to forfeit a nonmonetary government benefit or service.” Joshua D. Blank, Collateral Compliance, 162 U. Pa. L. Rev. 719, 728 (2014). They “increasingly apply to individuals who have failed to obey the tax law,” perhaps because they “can promote voluntary tax compliance more effectively than the threat of additional monetary tax penalties.” Id. at 720. States and the federal government impose a variety of collateral tax sanctions, ranging from diminished housing assistance to the cancelling of driver’s licenses. Id. at 739-40. Passport revocation had not been used to thwart tax delinquency until the FAST Act, but it has been used in the context of non-payment of child support. See 42 U.S.C. § 652(k).

The court first addressed Mr. Maehr’s Privileges and Immunities clause argument.  It finds this argument implausible because:

These clauses apply to states, not the federal government, and Maehr can articulate no way around this fact. Even if the clauses could somehow constrain the federal government, no Supreme Court decision has ever interpreted these clauses as at all relevant to a right to international travel.

Next, Mr. Maehr makes an argument based on the writ ne exeat republica.  I discussed this extraordinary writ here.  This writ allows the government to keep someone from departing or sending their assets out of the US.  It’s a form of civil arrest and in many circuits requires the government to meet the four factor test for a preliminary injunction.  Mr. Maehr wants the court to require the same type of finding with respect to passport revocation that is required by case law regarding the writ ne exeat republica.  The court declines, stating:

Writs of ne exeat differ significantly from FAST Act passport revocations in three ways. First, the scope of ne exeat is much broader, restricting freedom of movement domestically as well as internationally. Second, writs of ne exeat can be issued even if the underlying tax debt is contested by the taxpayer, see, e.g., Shaheen, 445 F.2d at 10, whereas the FAST Act requires that the taxpayer’s rights to challenge a contested liability have lapsed or been exhausted prior to passport revocation. I.R.C. § 7345(c). Third, ne exeat is an essentially equitable common law remedy that has been codified in statute, making it sensible that courts have required showings of evidence paralleling those required for preliminary injunctions. Passport revocation under the FAST Act, in contrast, is a purely statutory and legal scheme with built-in due process protections.

Next, Mr. Maehr argued that the passport revocation infringed his right to travel in violation of substantive due process.  The court spends a fair amount of time discussing the history of the right to international travel for citizens of the US as it searches for the appropriate level of scrutiny.  The court states:

My review of Supreme Court precedent discerns a standard that clearly falls somewhere between rational basis and strict scrutiny. As I read it, the rule the Supreme Court has both announced and remained faithful to is as follows: substantial restrictions on international travel must advance a “legitimate and substantial” interest and must not sweep much more broadly than necessary. Aptheker, 378 U.S. at 508, 84 S.Ct. 1659 (quotation omitted). That rule closely resembles the language used to describe intermediate scrutiny.

Neither party argued for intermediate scrutiny and provided the court with a basis for evaluating how it would apply here.  Under those circumstances, the court decides to uphold the decision of the district court which dismissed his claim on this point as well.  So, Mr. Maehr does not come away with a victory.

The 10th Circuit seems to leave the door ajar for an attack on the passport revocation power under intermediate scrutiny.  It did not make a positive decision that the statute passed the test under that scrutiny.  The 10th Circuit’s decision suggests the possibility that if intermediate scrutiny was applied to the State Department’s role under the statutory scheme, the statute may not satisfy the constitutional requirements; however, I think that outcome is unlikely based on the precedent in the unpaid child support cases that formed part of the basis for this statute and because the 10th Circuit’s decision did not crack the door open very far.  The statute is young.  More litigation will occur, perhaps taking the issue to the Supreme Court.  Because most of the litigants present fairly unsympathetic situations, persons interested in advancing these arguments might search for someone who will evoke more sympathy than Mr. Maehr or Mr. Rowen.

Passport Revocation Cases Part 1

We are in the process of the three times a year exercise of updating the Saltzman and Book treatise “IRS Practice and Procedure.”  As we have mentioned previously, the blog started primarily because we must stay on top of procedural cases in order to update the treatise.  Sometimes the blogging of cases informs the treatise and sometimes the treatise informs the blog.  This post is one in which the treatise informs the blog, as there have been passport cases on which we have not blogged but some of which we are inserting in the treatise and some which were previously inserted.  The cases deserve discussion in order to keep you up to date on what’s happening in this area.  Because there are four cases, I will break the post into two parts.

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Hupp

The IRS sued the Hupps to reduce the $1.1 million tax debt to judgment.  While the suit was pending, their son decided to get married in the Dominican Republic.  Naturally, the Hupps wanted to attend the wedding; however, the passport revocation provisions got in the way.  They filed a motion in the suit brought by the IRS seeking to get the district court to issue an order allowing them to obtain their passports so they could travel to the wedding.  Of course, the court does not want to stand in the way of the Hupps attending their son’s wedding, but the procedural hurdles prove too much to allow the trip to take place.  We don’t learn from the opinion whether the son went forward with the wedding in the Dominican Republic or relocated it to a US destination in order to allow his parents to attend.

The Hupps put the court under some pressure because they filed their motion on June 1, 2021 seeking to attend a wedding scheduled for June 12, 2021.  They noted that they had already purchased their tickets and were scheduled to fly out on June 9, 2021.  It turns out that the IRS response revealed it had only sent the wife’s name to the State Department as having seriously delinquent debt even though her husband is jointly liable.  We also do not learn why the IRS chose only to certify her debt to the State Department.  We also do not learn from the case whether the husband chose to go since he did not have the travel restriction (yet).

The first hurdle they encounter concerns the making of their request as a counterclaim to the suit to foreclose:

While the Hupps have undoubtedly chosen the wrong mechanism to bring their challenge before the Court, the underlying issue—if properly brought—is necessarily not barred by sovereign immunity. The Hupps’ motion might be read as challenging the § 7345 certifications as erroneous—that their debt does not qualify as a “serious delinquent tax debt” under § 7345(b). This challenge itself is not barred by sovereign immunity, as § 7345(e) does expressly allow the Government to be sued to challenge the certification. However, the statute is clear that it must bring a new civil action against the Government. The statute cannot be read to authorize a counterclaim against the Government in a tangentially related suit.

The court skirts the procedural problem to look at the merits of their concern.  It notes that they do not argue the certification of the debt was erroneous.  Instead they argue it was unjustified.  In an effort to potentially assist them, the court interprets this argument as one in which they seek to say the statute infringes on their constitutional right to international travel which cannot be deprived without due process.  The court notes that such a restriction must be rationally related to a legitimate governmental interest.  It finds that:

Here, § 7345 passes the rational basis test. The collection of seriously delinquent tax debts is a legitimate governmental interest. See, e.g., United States v. First Nat’l Bank of Chi., 699 F.2d 341, 346 (7th Cir. 1983) (stating that the United States’ interest in collecting taxes “is of importance to the financial integrity of the nation”); Jones, 2021 WL 864954, at *6. Restricting the issuance and renewals of passports is rationally related to this interest for the very reasons the Hupps offer: (1) apply pressure to resolve tax debt; (2) to avoid hiding and then accessing money in offshore accounts; and (3) to limit one’s ability to flee the country to avoid taxes. The Hupps argue that the statute is not justified as applied to them because they intend to pay their taxes, are not hiding money in offshore accounts, and do not intend to flee the country to avoid their taxes. However, that the Hupps claim they will meet their tax obligations even if the Government does not use this tool to pressure collection, does not make the statute unconstitutional.

So, the court denies their motion.  The IRS probably sought to levy on any refund the Hupps claimed from the airline.

Franklin

In Franklin v. United States, 128 AFTR 2d 2021-6140 (N.D. Tex. 2021) the IRS assessed penalties of over $400,000 based on failure to report income from a foreign trust.  Essentially, Mr. Franklin sought to skirt the Flora full payment rule by bringing a host of actions against the IRS in the hopes that one would allow him to contest the underlying assessment.  He wants to argue that the IRS failed to meet certain procedural requirements, viz. IRC 6751(b), before making the assessment.  The effort to get to an argument about the underlying liability failed.

In total, Mr. Franklin brings a quiet title action under 28 USC 2410, a failure to release lien action under IRC 7432, a wrongful collection action under IRC 7433, a request for declaratory judgment relief, a review under the Administrative Procedure Act, and finally, he throws in a challenge to the revocation of his passport.  The court addresses each in turn, explaining why the government has not waived sovereign immunity for each and why he cannot get anywhere in the suit.  I will provide a discussion of the passport count where he challenged the constitutionality of the statute as violating his procedural and substantive Due Process right to travel internationally.

With respect to procedural due process, the court finds that Collection Due Process gave Mr. Franklin an opportunity to contest the tax debt prior to certification.  With respect to substantive due process, the court finds that the right to international travel is not a fundamental right.  It then finds that the passport statute meets the rational basis test because it serves the legitimate purpose of aiding the government’s revenue stream.  The decision does not break new ground but affirms the decision made in Maehr v. U.S. Dep’t. of State, 5 F.4th 1100, 1119 (10th Cir. 2021).

In tomorrow’s post, I will discuss Maehr and another constitutional challenge in the Tax Court case, Rowen v. Commissioner.

Refining the Tax Court’s Jurisdiction in Passport Cases

The case of Garcia v. Commissioner, 157 T.C. No. 1 (2021) provides clarity and guidance on the Tax Court’s jurisdiction in passport cases as the Court issues a precedential opinion to make clear some of the things that can and cannot happen in a contest regarding the certification of passport revocation.  I did not find the decision surprising.  The Court’s passport jurisdiction is quite limited.  Petitioners will generally be disappointed in the scope of relief available through this new type of Tax Court jurisdiction. 

This is a precedential opinion decided in a case in which the taxpayer was unrepresented.  Precedential opinions in cases in which the taxpayer is unrepresented concern me.  They bind future litigants to a position in which the only arguments to the court may have come from the Government.  Before issuing a precedential opinion, it would seem better for the system if the court would seek an amicus or some voice with the ability to make cogent legal arguments from the taxpayer’s perspective.  In this case, the outcome may not have changed, but maybe arguments on behalf of the taxpayer would have shifted the outcome.

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In early 2020, back when a passport had more meaning than it has had during the pandemic, the IRS certified both Mr. and Mrs. Garcia to the State Department for revocation of their passports because of their joint tax debt, which was seriously delinquent as defined in IRC 7435(b).  They filed a Tax Court petition to contest the revocation.  At some point after filing the petition, Mr. Garcia passed away.

In November of 2020, the IRS reversed its certification because they submitted a processable doubt as to liability offer in compromise.  In January of 2021, the IRS filed a motion to dismiss the Tax Court case on the grounds of mootness, arguing that there was no further relief the Tax Court could grant in this case at this time.

Prior to filing the doubt as to liability offer, petitioners had filed an amended return, which the IRS rejected.  That signals petitioners should not get their hopes too high on the likelihood of a positive outcome based on the doubt as to liability offer.  Nonetheless, the acceptance of the offer for processing serves as a basis for decertification of the passport revocation, leaving them clear to travel in the short term.  If the IRS rejects the doubt as to liability offer, it seems likely that at some point, absent payment of the almost $600,000 liability, the IRS would certify the passport for revocation again.

The court first addresses whether a married couple can file a joint petition in the Tax Court based on separate notices of passport revocation stemming from a joint liability.  The court notes that both the statute and the Tax Court Rules are silent on this point.  The IRS did not object to this aspect of the case but, whether or not the IRS cares, the court cares because it is bound to consider whether it properly has jurisdiction and wants to get this right.  It also footnotes that the statute is silent as to a time frame for filing a passport revocation case, as it had discussed in an earlier passport case of Ruesch v. Commissioner, 154 T.C. 289, 295 (2020).

The court looks to Tax Court Rule 34(a)(1) which governs filing a petition in a “Deficiency or Liability Action.”  After describing the rule, the court noted that the Garcias received substantially identical notices of certification and raised the identical question in their Tax Court case.  It finds that equity and common sense support allowing a joint petition.  It points out that causing them to file separate petitions would result in unnecessary delay and expense.  (Petitioners save the $60 filing fee by jointly filing in addition to other costs duplicate filing would entail.)  It points out that had they filed separately, the court would almost certainly have consolidated their cases which, while true, is something that happens with respect to many petitions that cannot be jointly filed.  It finds an appropriate analogy in Collection Due Process (CDP) cases where neither the statute nor the rules discuss joint filing but where it has nevertheless been allowed.  Interestingly, the court cites only to non-precedential CDP cases in support of the analogy.  So, it holds that petitioners may file a joint petition in a passport case.

Next, it looks at the issue of its authority in a passport case.  It finds that:

If we find that a certification was erroneous, we “may order the Secretary [of the Treasury or her delegate] to notify the Secretary of State that such certification was erroneous.” Sec. 7345(e)(2). The statute specifies no other form of relief that we may grant.

As mentioned above, the relief under this provision is very narrow.  Having confirmed the narrow scope of its jurisdiction in these cases, the court moves on to the mootness question raised by the motion to dismiss.

First, the court notes that the husband’s death might render his case moot.  Hard to argue with that conclusion given the narrow scope of relief the court can grant, but the court cites to a non-tax case where the seemingly obvious conclusion of mootness was found inappropriate since certain rights with respect to a passport might survive death:

In Magnuson v. Baker, 911 F.2d 330, 331-332 (9th Cir. 1990), the State Department revoked the passport of a Canadian citizen, “asserting that the passport had been issued in error.” The passport holder filed suit to challenge the revocation, but later died, and the Government urged that his claim had become moot. Id. at 332 n.4. The Ninth Circuit disagreed, ruling that “various legal interests may still turn on whether * * * [he] could retain his passport.”

So, the court moves forward with respect to both parties and finds that the decertification by the IRS moots the Tax Court case:

Although the Tax Court is an Article I court, the “case or controversy” requirement under Article III applies to the exercise of our judicial power. See Battat v. Commissioner, 148 T.C. 32, 46 (2017) (citing cases). Accordingly, we will dismiss a case as moot if the parties’ subsequent actions have produced a situation in which neither party retains any “legally cognizable interest in the outcome.” City of Erie v. Pap’s A.M., 529 U.S. 277, 287 (2000) (quoting Cty. of Los Angeles v. Davis, 440 U.S. 625, 631 (1979)). A case becomes moot when “the court can provide no effective remedy because a party has already ‘obtained all the relief that [it has] sought.’” Conservation Force, Inc. v. Jewell, 733 F.3d 1200, 1204 (D.C. Cir. 2013) (alteration in original) (quoting Monzillo v. Biller, 735 F.2d 1456, 1459 (D.C. Cir. 1984)).

In the case at hand, the IRS certified petitioners as persons owing a seriously delinquent tax debt. Petitioners, believing those certifications to be erroneous, petitioned this Court for review. The relief that they sought–and the relief that the statute authorizes us to grant, if we determine a certification to have been improper–is an order directing respondent to “notify the Secretary of State that such certification was erroneous.” Sec. 7345(e)(2). Here, the IRS has conceded that its certifications were erroneous because petitioners had submitted an offer-in-compromise of their 2012 tax liability, an offer that had been determined to be processable and remained pending.

Petitioners had already received the relief they requested from the Tax Court, removing any controversy from the proceeding.

Petitioners wanted to argue the merits and argue about the processing of their offer, but that is beyond the scope of what the Tax Court will consider in a passport case.  It notes that if the IRS certifies their case again to the State Department, they, or at least Ms. Garcia, can come back to the Tax Court and argue at that time that the certification was erroneous.

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.

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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.

Travel Restrictions of a Non-COVID Different Kind

As we, hopefully, get nearer to a time when we can travel again, the IRS has announced resumption of referral of cases to the State Department to revoke the passports of seriously delinquent taxpayers.  The announcement comes on a page with many items of information regarding IRS operations during COVID, and you must scroll down to the Enforcement and Compliance Operations section to find the passport announcement.

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The opening paragraph of the announcement states:

The IRS is resuming programming for notifying the State Department of taxpayers certified as owing seriously delinquent tax debt following the temporary suspension of certain collection activities with the March 25, 2020, People First Initiative announcement in response to COVID-19. Beginning the week of March 14, affected taxpayers will receive notices and are encouraged to pay what they owe or enter into a payment agreement with the IRS to avoid putting their passports in jeopardy. 

So, during the past year when you could not travel anyway, the IRS suspended its referral to the State Department of taxpayers with seriously delinquent debt but now that travel might soon be possible again, individuals with this problem have a non-COVID reason for staying home.

Taxpayers impacted by the resumption of referral to the State Department can look for a notice in the mail alerting them to the referral or maybe not based on a recent Tax Court decision regarding notice and the passport revocation statute.

The ability of the IRS to refer a taxpayer for passport revocation derives from IRC Section 7345.  This provisions contains a paragraph governing notice to the individual of the revocation referral:

(d) Contemporaneous notice to individual

The Commissioner shall contemporaneously notify an individual of any certification under subsection (a), or any reversal of certification under subsection (c), with respect to such individual. Such notice shall include a description in simple and nontechnical terms of the right to bring a civil action under subsection (e).

This paragraph does not address the form of the IRS notice, or the manner in which the IRS must deliver the notice, or whether the IRS must address the notice to the taxpayer’s last known address.  In a recent case brought to my attention by Carl Smith, a district court addressed the consequences of sending the notice of passport revocation to an address where the taxpayer had never lived and found that sending the notice to the wrong place had no consequences to the IRS.  (Remember that challenging the revocation of a passport revocation, though limited in scope, may occur in district court or Tax Court.)

Carl also pointed me to the case of Jackson v. Modly, 949 F.3d 763 (D.C. Cir. 2020) which alerted me that under recent precedent in the D.C. Circuit, the taxpayer has an argument for equitable tolling of the 6-year statute of limitations (28 USC 2401(a)) if his 7345 action had been untimely. Since we last wrote about 2401(a)’s application to 7345 (here and here) in 2018, not only the D.C. Circuit but the Second, Sixth and Tenth Circuits have found the 2401(a) statute of limitations to be non-jurisdictional, thus opening up the possibility of equitable tolling for litigants.   

If you are interested in the D.C. Circuit’s reasoning, read this lengthy quote, if the detailed reasoning does not matter to you skip the quote but remember the take away that the Supreme Court precedent is beating a drum to make time periods for filing in court something other than jurisdictional:  

The parties do not dispute that Jackson’s APA claim is time-barred by the six-year statute of limitations in 28 U.S.C. § 2401(a) for all civil actions commenced against the United States. Instead, [***25]  they dispute whether § 2401(a)‘s statute of limitations is a jurisdictional bar—thereby divesting the court of jurisdiction as well as its ability to consider an equitable tolling argument—or whether it is non-jurisdictional. 

The long-held rule in our circuit has been “that section 2401(a) creates ‘a jurisdictional condition attached to the government’s waiver of sovereign immunity.'” P & V Enters. v. U.S. Army Corps of Eng’rs, 516 F.3d 1021, 1026, 380 U.S. App. D.C. 96 (D.C. Cir. 2008) (quoting Spannaus v. U.S. Dep’t of Justice, 824 F.2d 52, 55, 262 U.S. App. D.C. 325 (D.C. Cir. 1987)). Recently, however, especially after the Supreme Court’s decision in Kwai Fun Wong, which held the two-year statute of limitations in § 2401(b) to be nonjurisdictional, 575 U.S. at 407, the soundness of our precedent has been called into doubt. See, e.g., Jafarzadeh v. Nielsen, 321 F. Supp. 3d 19, 37 n.7 (D.D.C. 2018) (“Given the Supreme Court’s clear strictures on this issue, which have undermined the foundations of Spannaus and similar cases, the D.C. Circuit ought to reconsider its § 2401(a) precedents.”). Since Kwai Fun Wong, the Sixth and Tenth Circuits have held that, based on the Supreme Court’s opinion in that case, § 2401(a) is not jurisdictional. Chance v. Zinke, 898 F.3d 1025, 1033 (10th Cir. 2018); Herr v. U.S. Forest Serv., 803 F.3d 809, 817-18 (6th Cir. 2015). Although we have previously “questioned the continuing viability” of our rule without addressing the issue directly, see Mendoza v. Perez, 754 F.3d 1002, 1018 n.11, 410 U.S. App. D.C. 210 (D.C. Cir. 2014) (citing P & V Enters., 516 F.3d at 1027 & n.2; Felter v. Kempthorne, 473 F.3d 1255, 1260, 374 U.S. App. D.C. 272 (D.C. Cir. 2007); Harris v. F.A.A., 353 F.3d 1006, 1013 n.7, 359 U.S. App. D.C. 281 (D.C. Cir. 2004)), we now do so. Accordingly, we hold today that HN5 the Supreme Court’s decision in Kwai Fun Wong overrules our precedent treating [***26]  § 2401(a)‘s statute of limitations as jurisdictional.  

 “In recent years,” the Supreme Court has “repeatedly held that procedural rules, including time bars, cabin a court’s power” to hear a case—i.e., subject matter jurisdiction—”only if Congress has ‘clearly state[d]’ as much.” Kwai Fun Wong, 575 U.S. at 409 (alteration in original) (quoting Sebelius v. Auburn Reg’l Med. Cent., 568 U.S. 145, 153, 133 S. Ct. 817, 184 L. Ed. 2d 627 (2013)). Applying this “clear statement rule,” the Court has “made plain that most time bars are nonjurisdictional.” Id. at 410. In Kwai Fun Wong, the Supreme Court explained that “Congress must do something special, beyond setting an exception-free deadline, to tag a statute of limitations as jurisdictional and so prohibit a court from tolling it.” 575 U.S. at 410. Based on that rule, the Court held that the FTCA’s statute of limitations in § 2401(b) was “not a jurisdictional requirement.” Id. at 412

Applying the Court’s ruling in Kwai Fun Wong to § 2401(a), we reach the same conclusion. First, our precedent treating § 2401(a) as a jurisdictional bar was grounded in the belief that the provision is “attached to the government’s waiver of sovereign immunity, and as such must be strictly construed.” Spannaus, 824 F.2d at 55. In Kwai Fun Wong, the Court flatly rejected this reasoning. 575 U.S. at 420 (“[I]t makes [***27]  no difference that a time bar conditions a waiver of sovereign immunity, even if the Congress enacted the measure when different interpretive conventions applied . . . .”). Second, like § 2401(b), § 2401(a) “does not speak in jurisdictional terms or refer in any way to the jurisdiction of the district courts”; rather, it “‘reads like an ordinary, run-of-the-mill statute of limitations,’ spelling out a litigant’s filing obligations without restricting a court’s authority.” Id. at 411 (first quoting Arbaugh, 546 U.S. at 515; then quoting Holland v. Florida, 560 U.S. 631, 647, 130 S. Ct. 2549, 177 L. Ed. 2d 130 (2010)); see 28 U.S.C. § 2401(a) (“[E]very civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues.”). Also like § 2401(b), § 2401(a)‘s filing deadline appears in a section separate from the general jurisdictional grant of civil actions against the federal government, see 28 U.S.C. § 1346; Herr, 803 F.3d at 817, which the Supreme Court found to be an indication “that the time bar is not jurisdictional.” Kwai Fun Wong, 575 U.S. at 411

Third, we conclude that § 2401(a)‘s origins in the Tucker Act do not make it otherwise jurisdictional. We find the in-depth analyses and reasoning of the Sixth and Tenth Circuits on this point—differentiating between the separate provisions of the Big Tucker Act and the [***28]  Little Tucker Act—particularly cogent and persuasive. See Herr, 803 F.3d at 815-17; Chance, 898 F.3d at 1031-33. As those courts explained, although the Supreme Court has affirmed the jurisdictional nature of the Big Tucker Act’s statute of limitations, see 28 U.S.C. § 2501, its affirmance was grounded solely in the doctrine of stare decisis; further, the Congress altered the Little Tucker Act’s statute of limitations—the provision from which § 2401(a) is derived—by separating it from the jurisdictional grant and expanding its reach. See Chance, 898 F.3d at 1032-33; Herr, 803 F.3d at 816-17. As the Sixth Circuit explains, this alteration “demonstrates that § 2401(a) was designed  [*778]   [**211]  to serve as a standard, mine-run statute of limitations without jurisdictional qualities. That leaves us with a statute (§ 2401(a)) that does not clearly impose a jurisdictional limit.” Herr, 803 F.3d at 817

Accordingly, we hold that § 2401(a)‘s time bar is nonjurisdictional and subject to equitable tolling. Our decisions to the contrary, see, e.g., Spannaus, 824 F.2d at 55, are thus overruled.

Because Jackson v. Modly was decided by the D.C. Circuit and because the appeal of all passport cases goes to the D.C. Circuit, there are now two Tax Court filing deadlines that are not jurisdictional.  The Myers case holds that time frame for filing a whistleblower case in Tax Court pursuant to IRC 7623(b)(4) is not jurisdictional and the Jackson case provides the same result in passport cases through IRC 7345’s 6-year filing period of 28 USC 2401(a).

The recent case of McNeil v. United States (D.D.C. 2021) started out as FOIA litigation, because the taxpayer did not receive notice of the revocation.  Through the FOIA case, Mr. McNeil learned that the IRS had sent a passport revocation request to the State Department for his outstanding liability.  He argued unsuccessfully that the revocation should be undone because of the lack of notice.  Here’s what the district court said:

In his opposition, McNeil gives two reasons why he is entitled to the limited relief he still seeks. First, he argues that he was never notified that the IRS had certified to State that he had a seriously delinquent tax debt. Opp’n at 2. McNeil attached to his amended complaint copies of two different IRS Notices that should have informed him of the IRS’s certification of his debt. Am. Compl., Ex. A at 4-9, 12-17. He obtained these through the FOIA request he submitted to the IRS, but he claims he never received copies from the IRS when he should have because the IRS sent them to a Tucson, Arizona address where he has never lived. Am. Compl. at 11-12; Opp’n at 2. The Court takes this fact as true for purposes of this motion. See Iqbal, 556 U.S. at 678.

Even if McNeil is able to prove that he never received these Notices, though, it would not mean that the IRS’s certification was erroneous. As the Government observes, § 7345 does not say that a flawed or failed notice renders a certification erroneous. Reply at 3-4. Subsections (a) and (b) describe when the Secretary of the Treasury must transmit certification to the Secretary of State and identify which debts qualify as “seriously delinquent tax debt.” 26 U.S.C. § 7345(a)(b). Neither subsection says that proper notice is an element of or a prerequisite to a proper certification by the IRS of a seriously delinquent tax debt. In fact, subsection (d) says that notice to the taxpayer should be “contemporaneous [ ]” with certification to State, so it logically cannot be a prerequisite to that certification. 26 U.S.C. § 7345(d). Further, because subsection (e) includes no statute of limitations, there is no reason why improper notice under subsection (d) would prejudice a taxpayer who, like McNeil, does not learn about the certification of his debt in a sufficiently timely manner. See id. § 7345(e). The text of the statute suggests that the purpose of the notice requirement is to inform the debtor “in simple and nontechnical terms of the right to bring a civil action under subsection (e).” Id. Therefore, McNeil’s argument concerning the notice requirement fails because even if notice was not effected here, it would not mean that the IRS’s certification of his debt to the State Department was erroneous.

The scope of the fight over passport revocation in Tax Court or district court is severely limited by the statute.  We have discussed this in earlier posts on passport revocation here (collecting cites to prior posts.)  Of course, no need to worry about the limited scope of the review if you don’t even receive the notice letting you know of the referral to the State Department.

I know of no proposals to amend 7345 and do not believe that seriously delinquent taxpayers have a large lobbying organization representing them before Congress, but it might be a good idea to tighten up the notice provisions should Congress make any corrections to this statute.  With passports and whistleblowers (see this recent post re whistleblower jurisdiction), Congress has been lax in the way it describes the responsibility of the IRS regarding notification and the precise item that provides the ticket to Tax Court.

In his previous post on passport forum shopping Carl gave the advice that taxpayers seeking passport relief should find the circuit with the favorable jurisdictional view of 2401(a).  Now that the DC Circuit has adopted the favorable jurisdictional view of 2401(a), the safest advice is to go to Tax Court since you know what the outcome will be under application of the Golsen rule and you don’t have to guess what your circuit might do if it has not yet faced this issue.

Review of 2019 (Part 4)

In the last two weeks of 2019 we are running material which we have primarily covered during the year but which discusses the important developments during this year.  As we reflect on what has transpired during the year, let’s also think about how we can improve the tax procedure process going forward.

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Qualified offers

In BASR Partnership et al. v. United States, a tax matters partners submitted a nominal $1 qualified offer to the IRS, prevailed at summary judgment, and then successfully moved for award of litigation costs under IRC 7430. Upon appeal to the Federal Circuit, the government argued against the award, asserting, among other things, that the award was abuse of discretion because the nominal offer was not a good faith attempt at settlement. Despite the partnership context, the case has implications for low-income taxpayers, who often utilize nominal qualified offers in frozen refund litigation. If the court accepted the government’s argument, it might cost doubt on the validity of nominal qualified offers and lead to further government arguments in the low-income taxpayer context. However, the court ruled for the taxpayer, holding that the nominal qualified offer was reasonable and the award was not an abuse of discretion.  The tax clinics at Georgia State and at the Legal Services Center of Harvard Law School filed an amicus brief in this case on behalf of BASR.

See Ted Afield, Nominal Qualified Offers and TEFRA, Procedurally Taxing (Feb. 25, 2019), https://procedurallytaxing.com/nominal-qualified-offers-and-tefra/

TBOR

Another important issue is the use of the Taxpayer Bill of Rights in litigation. In Moya v. Commissioner, the Tax Court rejected the taxpayer’s TBOR-based argument in a deficiency case, looking to the history of the TBOR to find that it “accords taxpayers no rights they did not already possess”. The Tax Court may soon face such arguments outside the deficiency context and could rule differently. While thus far, the TBOR has not proven a strong support for taxpayers’ arguments, it will hopefully spur new, more taxpayer-protective changes to regulations and subregulatory guidance.

Keith Fogg, NEO – A Series of Reflections, Procedurally Taxing (July 8, 2019), https://procedurallytaxing.com/neo-a-series-of-reflections/

Keith Fogg, TBOR Provides no Relief in Tax Court Deficiency Proceeding, Procedurally Taxing (May 13, 2019), https://procedurallytaxing.com/tbor-provides-no-relief-in-tax-court-deficiency-proceeding/

Miscellaneous

Litigation of merits in bankruptcy

In Bush v. United States, the 7th Circuit addressed whether a bankruptcy court has jurisdiction to determine a debtors’ tax liability. The 7th Circuit found in the affirmative, determining that the bankruptcy court did have jurisdiction, but found that the court had no reason do so over the Tax Court, where the appellants had originally litigated the separate question of the tax liability. The 7th Circuit’s decision favors taxpayers who may have already lost (or never had in the first place) their statutory right to go to Tax Court, by providing another legal avenue for a redetermination of tax liability.

See Keith Fogg, New Circuit Precedent on Issue of Litigating Tax Merits in Bankruptcy, Procedurally Taxing (Oct. 18, 2019), https://procedurallytaxing.com/new-circuit-precedent-on-issue-of-litigating-tax-merits-in-bankruptcy/

Late e-filed returns and reliance

Generally, taxpayers cannot avoid assessment of a late-filing penalty due to reliance upon a third-party preparer, per the 1985 case United States v. Boyle. Courts have recently begun to address whether this applies to e-filing of tax returns. In Intress v. United States, the taxpayers made the argument that a late filing penalty was inappropriate, because the late filing was due to their tax preparer failing to hit ‘send’ when filing through e-file software. However, the district court was unconvinced, applying Boyle to the e-filing context and rejecting taxpayers’ attempt to avoid the penalty. Nevertheless, as e-filing becomes the dominant form of tax return filing, this issue may increasingly be litigated.

See Keith Fogg, Reliance on Preparer Does Not Excuse Late E-Filing of Return, Procedurally Taxing (Sep. 4, 2019), https://procedurallytaxing.com/reliance-on-preparer-does-not-excuse-late-e-filing-of-return/

Leslie Book, Update on Haynes v US: Fifth Circuit Remands and Punts on Whether Boyle Applies in E-Filing Cases, Procedurally Taxing (Feb. 12, 2019), https://procedurallytaxing.com/update-on-haynes-v-us-fifth-circuit-remands-and-punts-on-whether-boyle-applies-in-e-filing-cases/

Passport revocation

Passport revocation is expected to be an increasingly utilized and contested IRS enforcement technique. In July 2019, the IRS released a revision to the Internal Revenue Manual (5.1.12) that provides guidance on the passport decertification process. Currently, taxpayers with tax debts in excess of $50,000 (and satisfy other criteria listed in the IRM) are considered to have “seriously delinquent tax debts”, which can result in certification of the debt to the State Department. Taxpayers with such debts will eventually receive notices, which carry a right of appeal to the Tax Court or U.S. District Court. The IRM revision details these processes, as well as the process of reversing a passport certification to the State Department.

See Nancy Rossner, IRM Changes to Passport Decertification and Revocation Procedures, Procedurally Taxing (Aug. 27, 2019), https://procedurallytaxing.com/irm-changes-to-passport-decertification-and-revocation-procedures/

Fraud by return preparer

Another potential issue for future litigation is the question of whether tax return preparer fraud triggers the fraud exception to the three-year statute of limitations for assessment. In the most recent instance, Finnegan v. Commissioner, the 11th Circuit briefly addressed the issue but ended up ruling that the taxpayers had failed to preserve the issue for appeal. In 2015, the Federal Circuit addressed the question in a similar case, BASR Partnership v. United States, and found that the fraud exception is not triggered by third party fraud and only applies when the actual taxpayer acts with “intent to evade tax”. The Tax Court, meanwhile, has held to its ruling in Allen v. Commissioner, which held that a fraudulent return triggers the fraud exception, regardless if the taxpayer had the requisite intent or not.

See Keith Fogg, 11th Circuit Affirms Tax Court Decision Regarding Fraud by Preparer, Procedurally Taxing (July 22, 2019), https://procedurallytaxing.com/11th-circuit-affirms-tax-court-decision-regarding-fraud-by-preparer/

Last known address

Another recently litigated question is whether filing a Form 2848 with a new taxpayer address is sufficient to put the IRS on notice of the taxpayer’s last known address. In Gregory v. Commissioner, the taxpayers submitted a new 2848 and a 4868 extension request with their new address, but the IRS did not adjust its records and issued a subsequent notice of deficiency to the taxpayer’s old address. The Tax Court looked to the applicable regulation, 301.6212-2, which defines “last known address” as “the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return”. The Tax Court then found that neither the 2848 nor 4868 constituted a “return” under the regulatory definition and thus did not give notice. The court then proceeded to analyze whether the forms gave “clear and concise notice” of the address change, finding that they did not, in part because both included disclaimers that their filing will not change last known address. The taxpayers have appealed to the 3rd Circuit and are now represented by the tax clinic at the Legal Services Center of Harvard Law School.  The opening brief for the Appellant was filed on November 20.

See Keith Fogg, Tax Court Holds Power of Attorney Form Inadequate to Change a Taxpayer’s Address, Procedurally Taxing (Apr. 2, 2019), https://procedurallytaxing.com/tax-court-holds-power-of-attorney-form-inadequate-to-change-a-taxpayers-address/