Revoking the Release of Federal Tax Lien

In Webb v. IRS, No. 1:17-cv-00058 (S.D. Ind. 2020) taxpayers get a sad lesson in the ability of the federal tax lien both to survive bankruptcy and to come back to life after release.  This is not a story of foreclosure, though that chapter may still be written, but rather a story first of what bankruptcy can and cannot do with respect to tax liens (and liens in general) and second of the power of federal tax lien revocation.  When the dust settles, the taxpayers come out of bankruptcy with their discharge, including a discharge of the federal taxes at issue, but with a home (and any other assets they have) still encumbered by the federal tax lien.

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In 2010 the IRS filed notices of federal tax lien (NFTLs) against the Webbs in the jurisdiction where they lived and owned a home.  In 2013 the Webbs jointly filed what must have been a chapter 7 bankruptcy petition.  On their schedules they listed all of their assets and liabilities including their home.  They must have claimed a homestead exemption for all or part of the equity in their home based on Indiana laws.  The exemption varies from state to state, and I did not go and look up the available exemption in Indiana.  On November 4, 2013, the bankruptcy court granted the Webbs a discharge.  The court doesn’t lay out the facts in a way that makes it easy for me to state the years for which the Webbs owed taxes when they filed their petition, but it seems that they owed for several years and that the years were fairly old making them susceptible to discharge.

After the bankruptcy discharge, on February 10, 2014, the IRS abated the tax liabilities and released the tax liens.  The discharge requires the IRS to not seek to collect from the taxpayers any discharged liabilities; however, it does not prevent the IRS from collecting liabilities from property to which its lien attaches.  Apparently, the IRS acted first to avoid violating the discharge injunction and they, two years later, came to the realization that the Webbs retained property after the discharge to which the federal tax liens attached.  After coming to that realization, the IRS needed to reverse the abatement of the taxes and revoke the release of the federal tax lien.  It reversed the abatement in 2016 and revoked the releases in 2017 to 2019.

People filing chapter 7 bankruptcy may spend little time with a lawyer discussing what precise debts will survive bankruptcy.  If they do have this discussion, it often does not include the distinction between discharging the personal liability on the underlying tax and the survival of the lien.  So, many debtors in the Webbs position would expect their tax liabilities to go away and when the IRS wipes away the liabilities immediately after bankruptcy, the action reinforces their expectations.

It is not surprising that the Webbs would react with shock and dismay as the IRS reverses the abatement of their tax liability and reinstates its liens.  Unfortunately, the IRS can do this and their arguments failed.

Discharge of Liens

The Webbs first argue that the IRS cannot reinstate the liens because the tax liabilities were discharged.  This argument fails and it should.  This argument does not make a distinction between the effect of the discharge on their personal liability for the tax debt versus the effect on the lien encumbering their property.  A bankruptcy discharge can wipe out a personal liability but does not affect a lien interest.  The court establishes that the IRS validly established the liens prior to bankruptcy and then describes the law regarding the survival of liens including tax liens.

Reversal of Abatement

The Webbs next argue that the IRS could not reverse the abatement of the assessments because the tax liabilities were discharged.  This argument also fails because the lien interest allows the assessment to survive (or to be reinstated.)  According to the court the IRS did not cite to cases that established this exact point, but it did find other cases regarding reversal of abatement that supported the IRS position.

Revoking the Lien Release

The IRS regularly releases liens it later regrets releasing.  The Webbs continue to argue that the IRS cannot revoke the release because of the effect of the discharge.  IRC 6325(f)(2) allows the IRS to revoke a release if it releases a lien “erroneously or improvidently.  Here, the IRS stated that it acted erroneously or improvidently in releasing the lien initially.  The court finds that the IRS followed the appropriate procedures in reinstating the lien.  Therefore, the court finds the refiling of the liens after the revocation of the release to properly reestablish the liens.

Limitations on Scope of Liens

When the IRS filed its claim in the chapter 7 case it claimed a secured amount of $12,357.00 and a general unsecured amount of $383,527.99.  I cannot say exactly why the IRS filed its claim with those amounts but it normally calculates the equity of its liens based on the statements in the debtor’s schedules.  The IRS does not perform a separate analysis of the value of the debtor’s property in filing its claim form.  Here, the Webbs’ argument is that if the court allows the IRS to reverse the abatement and reinstate its liens, the IRS can only assert a lien interest in the amount listed on its claim.

The court discusses the cases cited by the Webbs but not any cases the IRS might have cited.  It concludes that the IRS can pursue its lien claim in the amount of $395,884.99 the full amount of the lien.  This does not mean that the IRS will collect that amount.  The case does not provide enough information to allow speculation on the amount the IRS will ultimately collect on its lien claim but it could be much closer to $12K than $395K.  The IRS can only collect from assets in existence at the time of the bankruptcy filing.  It cannot collect from the Webbs personally.  Its lien claim does not come ahead of the first mortgage on the Webbs’ home. 

The lien claim probably matches the amount of the Indiana homestead exemptions plus whatever increases in value have occurred with respect to the assets the Webbs protected using their homestead exemption.  Not only does the discharge limit the IRS in the assets from which it can pursue to satisfy the debt but the discharge makes it difficult for the IRS in other ways.  It must make sure that in reinstating the assessment its computer does not offset subsequent refunds due to the Webbs.  In cases of this type the primary available asset of any value may be the Webbs home.  The IRS must now navigate the issues regarding administrative seizure and sale of a home or bring a suit to foreclose its lien on the home.  The IRS does not go after people’s homes that often though certainly it can do so.

The Webbs were right to want to prevent the reassessment of the liability and reattachment of liens but had little defense to this action, which can cruelly come after the victory party they may have held upon receipt of the discharge.  I expect that having gone this far the IRS will pursue collection from their home but that brings another case.  This case simply reestablished the liens.  It did not enforce them.

IRS Cash Pay Alternatives Impose Unnecessary Burdens and Fees on Taxpayers

We welcome guest blogger Elizabeth Maresca.  Professor Maresca runs the tax clinic at Fordham Law School.  She also serves as a Senior Legal Advisor to the National Consumer Law Center.  When I saw the IRS announcement she discusses, I reached out to the National Consumer Law Center to see if it had thoughts on this decision.  We are fortunate that Professor Maresca has provided a response.  We do not always think of taxpayers as consumers but certainly aspects of the role of taxpayer involves consuming tax services.  In that role the way the IRS handles their cases can have an important impact not only on the taxes themselves but collateral matters.  The discussion here points to a potentially negative collateral consequence of the decision for handling cash tax payments.  Keith

Earlier this summer, the IRS announced that it would allow certain “retail partners,” to accept cash tax payments for IRS.  Most disturbingly, these retail partners include payday lenders, in particular ACE Cash Express.  Payday lenders engage in practices that entrap lower-income individuals in a long-term cycle of exorbitantly-priced debt that often brings serious financial harm.  In addition, the IRS use of retail partners imposes a fee on taxpayers, and is cumbersome in that it requires internet access, takes three steps, and several days to complete.

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The Perils of Payday Lending

Payday lenders typically offer their borrowers high-cost loans, often with short terms such as 14-days. The loans are marketed as a quick fix to household financial emergencies with deceptively low fees that appear be less than credit card or utility late fees or overdraft fees.  Background on the abuses of payday loans is available here and in National Consumer Law Center, Consumer Credit Regulation, 2d ed. 2015, Chapter 9.  The loans are marketed to those with little or no savings, but a steady income.

Fees for payday loans generally translate into APRs of 200% to 400%. The payday loan business model requires the borrower to write a post-dated check to the lender – or authorize an electronic withdrawal equivalent – for the amount of the loan plus the finance charge. On the due date (payday), the borrower can allow the lender to deposit the check or debit the account – or the borrower can pay the initial fee and roll the loan over for another pay period and pay an additional fee. The typical loan amount is $350. The typical annual percentage rate on a storefront payday loan is 391%.  

Rollover of payday loans, or the “churning” of existing borrowers’ loans creates a debt treadmill that is difficult to escape: The Consumer Financial Protection Bureau found that over 75% of payday loan fees were generated by borrowers with more than 10 loans a year. And, according to the Center for Responsible Lending, 76% of all payday loans are taken out within two weeks of a previous payday loan with a typical borrower paying $450 in fees for a $350 loan.

Use of Retail Partners Imposes Burden and Fees on Taxpayers

In addition to using these payday lenders as tax payment agents, the new IRS arrangement poses other problems for taxpayers.  Since as early as 2007, the IRS National Taxpayer Advocate has criticized the IRS for the lack of available Taxpayer Assistance Centers that accept cash payments from taxpayers.  Although taxpayers can still pay in cash at some of these Centers, appointment are required, and can take upwards of 30 to 60 days to schedule. 

While the IRS solution of using retail partners reduces costs for the agency, it adds significant costs and burdens on taxpayers.  There is a fee of $3.99 per payment, and each payment is limited to $1,000.  Before using a “retail partner,” the taxpayer must visit the “Official Payments” website, which effectively excludes any taxpayers who are not comfortable with using the Internet.  Emails are then sent from both Official Payments and PayNearMe.  The PayNearMe email includes a payment code that the taxpayer must print or display on a smartphone at the retail partner.  The entire process takes five to seven business days and must be completed before the payment due date.

The IRS should exclude Payday Lenders from Retail Partner Program

Unfortunately, the new IRS arrangement will almost certainly bring new customers into payday lending stores and leave them susceptible to high-cost loan products and the debt treadmill. Indeed, the individuals most likely to pay their tax liability at a retail partner have some of the characteristics – low-income, BIPOC, female, elderly – that make them prime targets for payday lenders.

The IRS should recognize that using payday lenders as tax payment agents poses a threat to low-income taxpayers. Their services can trap them in debt, and jeopardize their ability to pay their tax debts, and other necessary expenses, such as food and rent.  The IRS should stop allowing payday lenders to accept cash payments for federal taxes, but instead should provide taxpayers with safe and convenient alternatives.

Pfizer Again – On to the Substantive Issue

We welcome back guest blogger Bob Probasco with an update on the Pfizer case and its, seemingly, never ending quest for interest on a large refund.  Pfizer has moved past the procedural hurdles and onto the merits of its claim for interest.  As Bob describes below, we have not yet seen the end of the case and our continuing lessons on the payment of interest.  Keith

I’ve discussed a particular jurisdictional issue in the Pfizer case, and others, several times on Procedurally Taxing over the last two years.  That issue was whether taxpayers can file standalone suits for additional overpayment interest, in excess of $10,000, in the Court of Federal Claims as well as District Court.  (If you’re interested in this issue, the PT posts are here, here, here, here, here, here, here, and here.)  Over that period, Pfizer has moved from the Southern District of New York to the Second Circuit to the Court of Federal Claims.  The jurisdictional issue was resolved long ago, at least for this case, and the parties can proceed to the substantive issue. 

When we last visited the status, Pfizer had filed a motion for summary judgment; the government opposed that motion and sought additional discovery.  The CFC issued an opinion and order on September 14, 2020. 

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The substantive issue – overpayment interest when a refund check is re-issued

The case resolves around a refund of $499,528,449.05, resulting from an overpayment on Pfizer’s tax return for 2008, which was timely filed on September 11, 2009.  The government contends that it processed six separate checks – five for $99 million each and the sixth for $4,528,449.05 – and mailed them on October 20, 2009, by first-class mail.  Pfizer contends that its tax department in New York never received the checks.  The government then cancelled the checks and executed an electronic funds transfer for the entire $499,528,449.05 on March 18, 2010, which was deposited into Pfizer’s account on the following day.

The government did not pay overpayment interest on the refund; Pfizer contends it should have. During that period, the overpayment interest rate on large balances (so-called “GATT interest”) was 1.5%.  Even at that low rate, interest on half a billion dollars would have added up; Pfizer’s complaint asked for more than $8 million, “plus statutory interest” which continues to compound. 

The legal dispute comes down to two words, italicized below.  Section 6611(b), which defines the period for which overpayment interest is paid, states in relevant part:

(b) Period  Such interest shall be allowed and paid as follows: . . .

(2) Refunds

In the case of a refund, from the date of the overpayment to a date (to be determined by the Secretary) preceding the date of the refund check by not more than 30 days, whether or not such refund check is accepted by the taxpayer after tender of such check to the taxpayer. The acceptance of such check shall be without prejudice to any right of the taxpayer to claim any additional overpayment and interest thereon.

Meanwhile, Section 6611(e)(1), which is an exception under which overpayment interest will not be paid, states:

Refunds within 45 days after return is filed

If any overpayment of tax imposed by this title is refunded within 45 days after the last day prescribed for filing the return of such tax (determined without regard to any extension of time for filing the return) or, in the case of a return filed after such last date, is refunded within 45 days after the date the return is filed, no interest shall be allowed under subsection (a) on such overpayment.

The conference report for the 1993 amendment to Section 6611(e) describes the provision as:

No interest is paid by the Government on a refund arising from an original income tax return if the return is issued by the 45th day after the later of the due date of the return . . . or the date the return is filed.

The government focuses on the word “issued” in the legislative history for Section 6611(e) and concludes that mailing the refund within 45 days avoids interest, regardless of whether the refund is delivered to the taxpayer.  Pfizer focuses on the word “tender” in Section 6611(b)(2) and concludes that it requires “that a taxpayer has some knowledge of [the refund check] and an opportunity to accept, or decline to accept, the check.”  That quote is from Doolin v. United States, 918 F.2d 15, 18 (2d Cir. 1990).  The Seventh Circuit adopted that analysis in Godfrey v. United States, 997 F.2d 335, 337 (7th Cir. 1993).  The Doolin precedent is why Pfizer originally brought the case in the Southern District of New York instead of the Court of Federal Claims.

This issue appears to have been litigated infrequently, with Pfizer only the third case to address it.  Although he didn’t seem very impressed with the government’s proffered legislative history, Judge Lettow didn’t decide the legal issue.  Material disputes of fact remained.

The Fact Issues

The government offered evidence of the Treasury’s processing and mailing procedures and that Pfizer’s checks were processed accordingly.  But an email from an IRS employee stated that “the checks weren’t sent & stopped the request.”  Further, problems with the Post Office or Pfizer’s mail handling practices might have resulted in one or two missing checks, but there were six missing checks.  That raised questions about whether Treasury’s procedures were really followed.  Pfizer also argued that the usual presumption of delivery should not apply when there is evidence that the mail was not received.

On the other side, the government wanted additional discovery concerning Pfizer’s mail practices, to challenge Pfizer’s assertion that the checks were never delivered.  A third-party contractor picked up all of Pfizer’s mail from the Post Office and took it to Pfizer’s central mailroom, to be sorted and delivered to various offices and departments.  Pfizer’s Tax Department didn’t receive the refund checks but that didn’t necessarily mean Pfizer hadn’t.  During an earlier deposition, an Operations Manager for Pfizer testified that he wasn’t aware of any complaints regarding lost, non-received, or misplaced mail.  But he hadn’t inquired into incidents of lost mail in preparation for the deposition.  The government had asked to examine a Pfizer witness concerning “all incidents in which Pfizer lost or allegedly failed to receive mail addressed to Pfizer” at that address and considered the deposition testimony insufficient.

Conclusion

The judge declined to resolve the statutory interpretation issue on a motion for summary judgment because neither party would have been entitled to summary judgment at this point.  The government could not win because there were genuine disputes of act concerning whether Treasury issued and mailed the checks.  Pfizer could not win because there were genuine disputes of fact concerning whether the checks were appropriately delivered to Pfizer.

As a result, the judge denied Pfizer’s motion for summary judgment and granted the government’s motion to reopen discovery.  The judge ordered the parties to file a proposed schedule for discovery and further proceedings by the end of September.  It may be a while longer before we get a ruling on the legal issue.

Making an Entity Election When the IRS is Closed

Today we welcome guest blogger Kelley Miller.  Kelley is a partner with Reed Smith in Washington, D.C.  I know her through her amazing leadership in assisting exonerees with tax problems and with filing refund claims after the passage of IRC 139F.  We have previously posted about her work here and here.  In January the ABA Tax Section honored Kelley with the Janet Spragens Pro Bono award for her work in this area.  Although I know her for her pro bono work and her leadership in the ABA Tax Section, she has a day job handling tax controversy and business tax matters.  While we have focused quite a bit on the impact of the IRS shut down and the general economic slow-down on individuals, it has also had a significant impact on business.  Kelley writes today about one aspect of the impact on business as businesses seek to follow the procedures for entity election.  Keith

An entity uses a Form 8832 to elect how it will be classified for federal tax purposes: as a corporation, a partnership, or an entity disregarded as separate from its owner. An eligible entity is classified for federal tax purposes under the default rules described below unless it files Form 8832.

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WHEN MUST THE FORM 8832 BE FILED? 

Generally, an election specifying an eligible entity’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. 

An eligible entity may be eligible for late election relief in certain circumstances. 

WHERE AND IN WHAT MANNER MUST THE FORM 8832 BE FILED? 

A Form 8832 is paper-filed with the Internal Revenue Service Center based on the state or jurisdiction where the entity’s principal business, office, or agency is located. 

In addition to timely paper filing, the entity must attach a copy of Form 8832 to its federal tax or information return for the tax year of the election. If the entity is not required to file a return for that year, a copy of its Form 8832 must be attached to the federal tax returns of all direct or indirect owners of the entity for the tax year of the owner that includes the date on which the election took effect. An indirect owner of the electing entity does not have to attach a copy of the Form 8832 to its tax return if an entity in which it has an interest is already filing a copy of the Form 8832 with its return. Failure to attach a copy of Form 8832 will not invalidate an otherwise valid election, but penalties may be assessed against persons who are required to, but do not, attach Form 8832.

FORM 8832 – COVID-19 RELATED QUESTIONS 

HAS THE IRS RELEASED ANY GUIDANCE RELATED TO THE TIMELY FILING OF FORM 8832?

Yes.  Notice 2020-23 (“Notice”), which was released on April 9, 2020, provides that, pursuant to Section 7508A of the Internal Revenue Code, the Secretary of the Treasury may postpone the time for performing certain acts under the internal revenue laws for a taxpayer determined by the Secretary to be affected by a Federally declared disaster as defined in section 165(i)(5) (A). Further, under Section 7508A(a), a period of up to one year may be disregarded in determining whether the performance of certain acts is timely under the internal revenue laws.

The relief provided under section 7508A in Notice 2020-23, as well as related Notices that predated this Notice (specifically, Notice 2020-18 and Notice 2020-20) is limited to the relief explicitly provided for and does not apply with respect to any other type of Federal tax, any other type of Federal tax return, or any other time-sensitive act.

The specific relief provided under Notice 2020-23 is that any person (which includes partnerships, companies and corporations under Section 7701(a)(1)) with a Federal tax return or other form filing obligation specified in section III.A of the Notice (Specified Form), which is due to be performed (originally or pursuant to a valid extension) on or after April 1, 2020, and before July 15, 2020, is affected by the COVID-19 emergency for purposes of the relief described in section III of the Notice (Affected Taxpayer).

Note, however, that Notice 2020-23 does not include Form 8832 in the section III.A list of Specified Forms.  Therefore, the COVID-19 guidance related to timely filing of Form 8832 falls under that applicable to Affected Taxpayers.  

DOES “AFFECTED TAXPAYER” INCLUDE AN ENTITY WITH A FORM 8832 FILING REQUIREMENT? 

Yes, if the Form 8832 would be timely if filed on or after April 1, 2020 and before July 15, 2020. 

Specifically, Notice 2020-23 provides that any person performing a time-sensitive action listed in Rev. Proc. 2018-58, 2018-50 IRB 990 (December 10, 2018), which is due to be performed on or after April 1, 2020, and before July 15, 2020 (Specified Time-Sensitive Action), is an Affected Taxpayer.

Rev. Proc. 2018-58 lists 35 acts under certain statutes related to business and individual tax issues that may be postponed pursuant to Section 7508A when there has been a federally declared disaster.  Act No. 33 of this listing of 35 acts is an election under Treas. Reg. Sec. 301.7701- 3(c), which provides for the time and place for filing of a classification election for federal tax purposes.  

CAN A FORM 8832 BE SIGNED BY PDF SIGNATURE?

No, not at this time.  There is no guidance in either the Treasury Regulations, the IRM or in the

Instructions to Form 8832 (see, Page 6) as to the requirement for original signatures on Form 8832, however, last year the IRS began sending letters to filers requesting original signatures on Form 8832 in order to process the filed Forms.  

In Internal Memorandum NHQ-01-0320-0001 (“Memorandum”) (March 27, 2020), the IRS

Deputy Commissioner for Services and Enforcement announced that pursuant to IRM 1.11.2.2.4, the IRS would accept images of signatures and digital signatures on certain documents related to the determination or collection of tax liability.  Form 8832 was not included among the documents specifically referenced in the Memorandum.  Further, although this Memorandum did provide that “any other statement or form needing the signature of a taxpayer or representative traditionally collected by IRS personnel outside of standard filing procedures” could be signed electronically, this likely does not apply to Form 8832 since the Form is not traditionally collected by IRS personnel outside of the standard filing procedure.  

CAN A FORM 8832 BE FAX-FILED DUE TO COVID-19? 

No, not at this time.  In addition to providing guidance for images of signatures and digital signatures, Internal Memorandum NHQ-01-0320-0001 allows for documents specifically referenced in the Memorandum to be provided electronically to the IRS via email.  Form 8832, however, requires original signatures and is not included in those documents referred to in the Memorandum.  At this time, the IRS has only announced that specific tax forms (Form 1139, Corporation Application for Tentative Refund and Form 1045, Application for Tentative Refund) may be temporarily fax-filed.  

WHAT SHOULD BE DONE IF CLIENT WANTS TO FILE A FORM 8832 BUT CANNOT GET AN EIN? 

As of April 15, 2020, EIN applications are not being processed by mail, telephone or fax.  The IRS locations that receive and process mail applications are closed at this time, and the IRS has turned off the fax lines that receive SS-4 forms.  Mail may be received in the Cincinnati Service Center, but we also have received returned mail sent to that Service Center late last month.  If mail is received (and not returned) there may be significant delay in processing the same.  The only available option to receive an EIN is limited to those entities with a principal place of business, or principal office or agency in any U.S. state.  These applicants may use the IRS online EIN application system.  Due to overwhelming demand, this system has been offline sporadically over the past week.  

Notice 2020-23 and the guidance related to the same provides entities an extension of time to file Form 8832.  Therefore, absent other compelling reasons, clients should take advantage of the additional time afford under the Notice.  

If a client is concerned about relying on the guidance in Notice 2020-23, an overly conservative approach might be to file a protective Form 8832 that omits the EIN.  Note that Forms 8832 for foreign entities are paper filed to the Service Center in Ogden, which is the only Service Center staffed at this time (50% capacity and not processing mail, according to several ROs that I have spoken with).  Accordingly, there is a fair chance that such a Form could be received and processed, however, even if the Form is received and processed, it will certainly be rejected for failure to include an EIN.  At the least, the entity could point to something being filed as reasonable cause basis under Rev. Proc. 2009-41.  Again, taking this action should not be necessary under the guidance of Notice 2020-23.  

WHEN IS THE IRS GOING TO RESUME ASSIGNING EINS BY PHONE AND FAX? 

The IRS Deputy Commissioner for Services and Enforcement as well as the National Taxpayer Advocate are well aware of the issue.  

In order to cure the temporary shutdown of the mail and fax processing systems, as well as the telephone operators, the IRS will either need to bring employees back to work in the Service Center or it will have to arrange for EIN applications or calls to be handled by employees who are eligible for telework.  Unfortunately, the only IRS employees who are eligible for telework are not those who currently receive and process the EIN applications.  While this may change in the near future, for now, the IRS is relying on the extension of time provided for in Notice

2020-23.  

IS THERE ANYTHING ELSE THAT I CAN DO TO ASSIST A FOREIGN ENTITY OBTAIN AN EIN? 

Telephone calls from foreign entities requesting an EIN are only worked by Cincinnati and

Ogden International Units and, as stated above, those individuals are currently not teleworking (and the Ogden Service Center is working at partial capacity).  

There could be an effort made to bring some of these persons back online through telework or in-person staffing as time goes on.  Therefore, the best advice at this time is to stay aware of news and updates from the IRS and also, to periodically attempt calling or submitting the SS-4 via fax.  

As a reminder, the relevant phone and fax numbers for a foreign entity to request an EIN are: 

  • EIN International phone number (267) 941-1099 (not a toll-free number) 
  • Hours of operation 6:00 a.m. to 11:00 p.m. Eastern time Monday through Friday
  • EIN International fax number (855) 215-1627 if faxing from within the U.S. and
  • EIN International fax number (304) 707-9471 if faxing from outside the U.S.
[As an aside, I had trouble weeks ago filing a Form 2848 to the International CAF Unit in Philadelphia, which is also closed.  On a lark, I faxed to the CAF unit in Ogden and my submission was accepted.  This is slightly different as the recording of the declaration of representative is more time-sensitive in an active matter, but if all else fails, and you want to take the most aggressive course of action, you might want to try faxing an SS-4 to the domestic fax number, provided that it is turned back on at some point, which is: Fax: (855) 641-6935.]

This Tax Season May Create Many Superseding Returns

Today we welcome back guest blogger, Nancy Rossner.  Nancy is an attorney with the Community Tax Law project in Richmond, Virginia and a graduate of University of Richmond Law School, my hometown and my alma mater.  She writes to remind everyone of the power of superseding returns and their special importance this year.  Nancy focuses her discussion on spousal abuse situations.  Because of the exclusion from receiving the Cares Act rebate payment in situations in which one of the spouses or dependents on the return lacks a social security number, that is another situation in which superseding returns might be considered.  For additional information see fellow blogger Bryan Camp’s discussion of the one return rule. Keith

The first time I learned of a superseding tax return, I was on the losing side of an income tax controversy case.  My client was on the outs with his wife, but they agreed to file jointly despite no longer living together. He had moved out of the house before the end of the year in question, while his wife remained in the house with their children. They agreed it would be more beneficial to file jointly, as they would be eligible for more credits and benefits related to claiming the children. They were then supposed to share the refund. As it turns out, they filed jointly, but the wife was not happy with the way the refund was ultimately split. She then filed her own separate tax return for the year in question, claiming the children. My client’s tax return was then examined by the IRS, and he contacted our clinic for help. As a then novice tax attorney, I did not realize the significance of the wife filing her own separate tax return prior to the April 15th deadline. However, I quickly learned!

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Superseding returns as defined by the IRM in 21.6.7.4.10 (07-22-2019) are certainly not a new concept. In fact, Keith Fogg wrote about them in a blog post on Procedurally Taxing dating back to 2017. Now is a good time to go back and read that post, as it provides an excellent explanation of what a superseding return actually is and the legal basis for superseding returns. In light of the current coronavirus pandemic, the ability to file a superseding tax return has become increasingly important for taxpayers, especially vulnerable taxpayers like victims of domestic violence. This importance is due to Treasury’s current procedures for issuance of the Economic Impact Payments (“EIPs”), also referred to as the “stimulus payment.” Under the CARES Act, for taxpayers who filed a tax return for 2018 or 2019, the stimulus will generally be issued using the direct deposit information from the most recently filed tax return after January 1, 2018. This includes situations involving married taxpayers who filed jointly in 2019 but are no longer together. The EIP is to be deposited into the bank account listed on the tax return. However, if no account is listed on the tax return and the banking information was not later submitted through the IRS online portal under “Filers: Get Your Payment”, the EIP is supposed to be mailed to the “last known address” the IRS has on file for the taxpayer. This address is usually the address used on the most recently filed tax return. That is unless the taxpayer submitted a Form 8822, Change of Address in time for the IRS to process it before ceasing many operations due to COVID-19, updated their address with the U.S. Postal Service in time for it to be processed before the payment is issued, or the taxpayer updated it via telephone with an IRS representative through oral testimony as permitted by I.R.M. 3.13.5.29 (09-16-2019) prior to IRS ceasing live telephone assistance.

Now, consider a taxpayer who fled an abusive marriage and did not agree to file jointly for 2019 but a joint return was filed anyway or a taxpayer who agreed to file jointly under duress. Yes, there are remedies in the tax code to relieve taxpayers of joint and several liability, such as claims for innocent spouse relief under I.R.C. 6015 in some situations or contesting the validity of the tax return in others. But what of the EIP? In most cases, the EIP of at least $2,400 (for jointly filing taxpayers meeting eligibility for the full amount of the EIP) would be deposited into the bank account listed on the tax return, which is more than likely the account of the abuser. The chances are pretty low that the taxpayer could get her portion of the EIP back from her spouse, if she has fled from the abusive situation. What are the chances the IRS would reissue the taxpayer’s portion of the EIP after disbursing the full amount of the EIP based on the joint tax return? Probably low as well, at least not without a lot of persuasion by the fleeing spouse. Here is where the superseding tax return becomes important.

It would be prudent for a taxpayer in the situation just described to file her own separate and superseding 2019 tax return, whether or not she had income in 2019.  This would serve to reserve her claim to her EIP. She would need to do so by the deadline for filing 2019 individual income tax returns, which was extended to July 15, 2020 via IR 2020-58. Importantly, in the case of a refund or credit being issued with respect to a joint return as per Section 6428(e)(2) of the CARES Act, half of the refund or credit is treated as having been made or allowed to each individual filing the joint return. This is purported to mean that $1,200 would belong to one spouse, and $1,200 would belong to the other spouse. By filing a timely superseding tax return, the taxpayer would essentially reserve her claim to her $1,200 EIP with the IRS. Then, if the IRS incorrectly issues the taxpayer’s EIP to her abusive spouse despite submission of a timely superseding tax return, the taxpayer would still be due her EIP. 

In a situation in which the taxpayer’s SSN was already used on an electronically filed joint tax return, she will likely need to file her superseding tax return by paper (advisably via certified mail to prove timely filing, and with “SUPERSEDING RETURN” clearly written across the top). Unfortunately, at the time of this post, the IRS is not currently processing paper tax returns, but the hope is that the IRS will eventually get back up and running, and begin to process paper tax returns, backdating the tax returns to the date of filing, i.e. the postmark date as per I.R.C. Section 7502.  This makes documentation of mailing extremely important in these situations. 

A late EIP may be better than no EIP, but for victims of domestic violence, this remedy is not good enough. Advocates for this group are already receiving calls that EIPs are being deposited into accounts to which the victims do not have access and there appears to be no immediate remedy. I am hopeful that during these times superseding tax returns can be used as an important tool to protect taxpayers, especially vulnerable taxpayers like victims of domestic violence, though the relief itself will take some time to be received.

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/

Notes from the Fall 2019 ABA Tax Section Meeting

From October 3 to 5 Les, Christine and I attended the tax section meeting in San Francisco.  We were each on different panels and we each enjoyed a delightful dinner cruise on the bay Friday night courtesy of tax procedure guru, Frank Agostino.  During the cruise the three of us had an in depth discussion with Frank about his latest ground-breaking tax procedure initiatives which we hope to highlight in coming posts.

For this post I intend to provide some of the information passed out during the update sessions in the Administrative Practice and Court Procedure Committees.  For anyone interested in more depth or more precision, it is possible to purchase audio tapes of the committee meetings from the tax section.

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Administrative Practice Committee

The discussion initially focused on Appeals and the Taxpayer First legislation seeking to create a more independent Appeals.  Apart from the legislation, Appeals issued a new conferencing initiative on September 19, 2019.  A request for comments on the new process went out. 

The presenter discussed the change to IRC 7803(e)(5)(A) and the right to a hearing in Appeals.  This change resulted from the Facebook case discussed here.  For those who do not remember the Facebook litigation, Chief Counsel denied Facebook the opportunity for a conference with Appeals after Facebook filed its Tax Court petition — even though Facebook had not met with Appeals prior to filing the petition.  The new provision will make it more difficult to deny a taxpayer the opportunity to meet with Appeals in this circumstance.

Another provision of the Taxpayer First Act, IRC 7803(e)(7)(A), grants taxpayers the right to their file 10 days in advance of a meeting with Appeals.  This provision has some income limitations but will generally benefit the vast majority of individual taxpayers.  It seems like a good step forward, though I would like the file much earlier than 10 days before the meeting, and I have had trouble getting it from Appeals in the past.  Some Appeals Officers (AOs) have denied my request for information in the administrative file, even though taxpayers have always had the right to this information.  If the case is in Tax Court, a Branerton letter to the Chief Counsel attorney will almost always result in that attorney calling the AO to tell the AO to send the material.  If you go to Appeals prior to Tax Court and have no Chief Counsel attorney to make this call, I wonder if the legislation will cause Appeals to take the position that a taxpayer cannot receive the material until 10 days prior to the meeting.  This would be a shame, because meetings are much more productive when parties can properly prepare.

The Taxpayer First Act also made changes to the ex parte provisions, set out in 7803(e)(6)(B), first enacted in 1998 as a means of insulating Appeals from the corrupting influence of other parts of the IRS.  The ex parte provisions were previously off-code but picked up by the IRS in a pair of Revenue Procedures describing how they would work.  The new provision allows Appeals to communicate with Chief Counsel’s office in order to obtain a legal opinion as it considers a matter, as long as the Chief Counsel attorney providing the advice was not previously involved in the case.  I don’t think this changes much.  Rev. Proc. 201218 already allowed attorneys in Chief Counsel to provide legal advice to Appeals.  Maybe this makes it clear that Appeals is not so independent that it cannot receive legal advice when it needs it, but it seemed that Chief Counsel and Appeals had already figured that out — even if some taxpayers criticized Appeals for obtaining legal advice.  Of course, when obtaining advice Appeals needs to seek out someone other than the attorney who was providing advice to Examination, in order to avoid having the attorney be the Trojan horse improperly influencing Appeals.

The panel mentioned Amazon v. Commissioner, 2019 U.S. App. Lexis 24453 (9th Cir. 2019). This is an important transfer pricing case clarifying what constitutes an “intangible” that must be valued and included in a buy-in payment to a cost-sharing arrangement between a parent company and its foreign subsidiary entity. The 9th Circuit panel affirmed the Tax Court, declining to apply Auer deference and holding that certain of Amazon’s abstract assets, like its goodwill, innovative culture, and valuable workforce, are not intangibles.

The committee also discussed Chief Counsel Notice CC-2019-006 “Policy Statement on Tax Regulatory Process” (9-17-2019).  A copy of the complete policy statement can be found here.   Each of the four points is important in its own way.  I find number three to be especially important.  We discussed the notice previously in a post here.

A few recent cases were mentioned as especially important to administrative practice:

Mayo Clinic v. United States, 124 AFTR2d 2019-5448 (D. Minn. 2019) provides the most recent interpretation of Mayo and what it means, in the context of whether Mayo Clinic was entitled to an exemption as an “educational organization” under Treas. Reg. § 1.170A-9(c).

Baldwin v. Commissioner, 921 F.3d 836 (9th Cir. 2019) is a mailbox rule case in which the taxpayer seeks to overrule National Cable & Telecommunications Association v. Brand X Internet Services, 545 U.S. 967 (2005).

Bullock v. IRS, 2019 U.S. Dist. LEXIS 126921 (D. Mont. 2019) is a pre-enforcement challenge to Rev. Proc. 2018-38 which relieves 501(c) organizations of the obligation to disclose the names and addresses of their donors.

Court Practice and Procedure Committee

Robin Greenhouse, who now heads Chief Counsel’s LB&I office, gave the report for Chief Counsel’s office.  She read from her notes and provided no PowerPoint presentation or handout material, so this time I cannot FOIA the PowerPoint presentation to provide the data.

She discussed two financial disability decisions which seems like an interesting place to begin.  First she mentioned Carter, as representative for Roper, v. United States, 2019 U.S. Dist. LEXIS 134035 at( N.D. Ala. 2019) in which the court determined that an estate cannot use 6511(h) to assert financial disability because an estate is not an individual.  I wrote a post on this case earlier in the fall.   Next she mentioned the case of Stauffer v. Internal Revenue Service, which I recently wrote about here.  I failed to make notes on the other cases she discussed and I cannot remember why.

Judge Marvel talked about the new Tax Court announcement on limited scope representation and the Chief Counsel Notice, CC-2020-001 on that issue.  During the first month of the fall Tax Court calendar four persons entered a limited appearance, including our own Christine Speidel.  The limited appearance ends when the calendar ends, making it not entirely clear what to do with a decision document.  Some suggested getting the decision document signed by the petitioner was the way to go.

So far the Tax Court has 18 pending passport cases.  Judge Marvel indicated that we might see the first opinion in a passport case soon.

Effective on September 30, 2019 the Tax Court has begun accepting electronic filing of stipulated decisions.  The practical effect of this is that because the IRS always signs the decision document last, it will be the party to submit the document.  I doubt this change will have a profound impact on Tax Court practice but, in general, more electronic filing is better.

Development of the Tax Court’s new case management system is moving quickly.  The court expects it to go online by Spring of 2020.  When implemented, this system will allow parties to file petitions electronically.  Judge Marvel expects that practitioners will like the new system.  The new system may allow changes to the public’s access to documents; however, whether and how that might happen is unclear.

Gil Rothenberg, the head of the Department of Justice Tax Division’s Appellate Section gave an update on things happening at DOJ.  He said there have been 75 FBAR cases filed since 2018 with over $85 million at issue.  Several FBAR cases are now on appeal – Norman (No. 18-02408) (oral argument held on October 4th) and Kimble (No. 19-1590) (oral argument to be scheduled) both in the Federal Circuit; Horowitz (No. 19-1280) (reply brief filed on July 18th) in the 4th Circuit and Boyd (No. 19-55585) (opening brief not yet filed) in the 9th Circuit.

Over 40 bankers and financial advisors have been charged with criminal activity in recent years and the government has collected over $10 billion in the past decade.  I credit a lot of the government’s success in this area to John McDougal discussed here but the Tax Division certainly deserves credit for this success as well.

DOJ has obtained numerous injunctions for unpaid employment taxes in the past decade.  It has brought over 60 injunction cases against tax preparers and obtained over 40 injunctions.  These cases take a fair amount of time and resource on the part of both the IRS and DOJ.  They provide an important bulwark against taxpayers who run businesses and repeatedly fail to pay their employment taxes.  Usually the IRS revenue officers turn to an injunction when the businesses have no assets from which to administratively collect.  We have discussed these cases here.  I applaud DOJ’s efforts to shut down the pyramiding of taxes.  Congress should look to provide a more efficient remedy, however, for addressing taxpayers who engage in this behavior.

He said that while tax shelter litigation was generally down, the Midco cases continued.  He mentioned Marshall v. Commissioner in the 9th Circuit (petition for rehearing en banc was denied on October 2nd) and Hawk v. Commissioner in the 6th Circuit (petition for certiorari was denied by the Supreme Court on October 7th).  We have discussed Midco cases in several posts written by Marilyn Ames.  These cases arise as transferee liability cases.  See our discussion of some past decisions here and here.  My hope is that the government will continue to prevail on these cases as the scheme generally serves as a way to avoid paying taxes in situations with large gains.  I wonder how many of these cases the IRS misses.

In Fiscal 2019 there were 200 appeals.  The government won 94% of the cases appealed by taxpayers and 56% of the cases appealed by the government.  I was naturally disappointed that he only talked about cases in which the government prevailed and did not discuss some of the larger losses such as the one in Myers v. Commissioner discussed here.

He briefly discussed the Supreme Court’s decision in Taggart v. Lorenzen, a bankruptcy case, in which the court held that the proper standard for holding the government in contempt for violating the discharge injunction required mens rea.  This followed the position of the amicus brief submitted by the Solicitor General. The Court declined to adopt the petitioner’s position, which would permit a finding of civil contempt against creditors who are aware of a discharge and intentionally take actions that violate the discharge order. The Court found this proposal to be administratively problematic for bankruptcy courts, distinguishing between the purpose and statutory language of bankruptcy discharge orders (which require mens rea) and automatic stays (which do not).

He ended by announcing that he will retire on November 1, 2019.

Nominal Qualified Offers and TEFRA

We welcome guest blogger Ted Afield. Professor Afield directs the low income taxpayer clinic at Georgia State. The Georgia State tax clinic serves more clients that almost any clinic in the country and provides them with high quality service. The tax clinic at the Legal Services Center at Harvard and the Georgia State tax clinic have partnered on several amicus briefs and it’s always a pleasure to work with their clinic. The case discussed by Professor Afield provides important precedent for successful litigants seeking to recover fees after making a qualified offer. Paying attorney’s fees to a partnership that engaged in an abusive tax shelter promotion makes for a tough pill for the government to swallow which, I believe, caused it to argue the issues discussed here so vigorously. Even though I do not support the underlying tax position taken by the partnership, it had the winning issue on the statute of limitations and that formed the basis for successful litigation on the attorney’s fees issue. Perhaps the benefit of this opinion for parties seeking fees will outweigh the loss to a tax shelter promoter. Keith

The United States Court of Appeals for the Federal Circuit recently issued an opinion in BASR Partnership, William F. Pettinati, Sr., Tax Matters Partner v. United States, in which the court determined whether a partnership was entitled to recover its reasonable litigation costs from the government when it submitted a nominal $1 qualified offer to the government in tax controversy litigation and subsequently prevailed at summary judgment.   This case was a Son of Boss case in which the IRS waited a decade before issuing a Final Partnership Administrative Adjustment (FPAA) disallowing BASR Partnership’s tax benefits.  Accordingly, the tax matters partner, William Pettinati, Sr., challenged the FPAA as untimely pursuant to the three year statute of limitations in IRC § 6501(a).  Given the confidence that the BASR partners had in their statute of limitations argument, they submitted a $1.00 qualified offer to the government, which the government rejected.  As it turns out, the BASR partners’ confidence was indeed justified, and they prevailed on summary judgment and then moved for an award of litigation costs under IRC § 7430(c)(4)(E), which the trial court granted. 

On appeal, the government raised five arguments for why the court should not have awarded litigation costs, three of which being of particular interest in that they explore the relationship between TEFRA and qualified offers as well as whether nominal offers are in fact permissible.  The government’s first argument was that BASR was not a “party” in the litigation because of TEFRA and therefore could not be a “prevailing party” as required under the qualified offer statute.  The government’s second and third arguments were that, even if BASR was a “party,” the tax liability was not “in issue” and BASR did not incur any litigation costs during the underlying TEFRA proceeding.  The government’s remaining arguments were that, even if IRC § 7430(a)’s eligibility requirements were satisfied, the trial court did not apply the real-party-in-interest doctrine and abused its discretion in granting the award.  These arguments presented an opportunity for the Federal Circuit to examine how the TEFRA and qualified offer rules interact with each other and, of particular interest to me and Keith, presented an opportunity for the court to determine whether nominal qualified offers, which are often utilized by low-income taxpayer clinics, would be considered per se unreasonable. 

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The Underlying Partnership is a Prevailing Party 

 The court rejected the government’s argument that only individual partners, rather than the partnership itself, can be parties in a TEFRA proceeding and that, accordingly, BASR Partnership could not be a “prevailing party.”  The court noted that the language in IRC § 6226 that permits individual partners to participate in the proceeding should be read inclusively rather than exclusively (i.e., just because the statute specifically indicates that partners can be parties, that does not mean that it prevents the partnership itself from also being a party).  The court noted that the cost-shifting language of IRC § 7430(c)(4)(A)(ii) supported this interpretation of IRC § 6226 because it specifically contemplated “any partnership” as being included in the definition of “prevailing party.” 

Tax Liability is “In Issue” in a TEFRA Proceeding 

 After determining that BASR Partnership could indeed be a prevailing party, the court next had to consider whether the tax liability was “in issue” in a TEFRA proceeding.  The government contended that the liability was not “in issue” because the tax liability is determined at the partner level rather than at the partnership level in such proceedings.  The Court rejected this narrow reading of the phrase “in issue”, however, and held that actual liability would not have to be determined at the partnership level for it to be “in issue”—rather, it was sufficient that the partnership determination would impact the partners’ individual tax liability. 

The partnership incurred litigation costs despite the fact that the costs were incurred in the partner’s name, and the partnership was the “real party in interest” 

Because the resolution turned more on an issue of contract and state partnership law than an issue of tax procedure, I will not overly dwell on the government’s argument that the partnership did not incur any litigation costs because the costs were incurred by the managing partner individually and the argument that the “real party in interest” doctrine prevented a recovery of costs because the real parties in interest were the partners, whose net worth would have made them ineligible to recover costs under IRC § 7430.  Suffice to say that the court rejected these arguments because the managing partner had brought an action in his capacity as tax matters partner under IRC § 6226, and the partnership agreement and the relevant state partnership law (in this case, it was Texas) obligated the partners to reimburse him for litigation costs.  It is worth noting, however, that the “real party in interest” issue is the one that provoked a dissenting opinion arguing that the fact that the partners were entitled to have their litigation costs reimbursed by the partnership made them the true beneficiaries of the award and thus the real parties in interest. 

Awarding litigation costs was not an abuse of discretion (i.e., the issue causing low-income taxpayer clinics to weigh in) 

The government’s final argument was that awarding litigation costs constituted an abuse of discretion because the taxpayer’s nominal $1.00 qualified offer “was not made in a good-faith attempt to produce a settlement.”  This was the argument that got Keith’s and my attention, because it seemed to us that the government was attempting to argue that nominal qualified offers were per se invalid.  If successful, this argument could have severely hindered a common litigation strategy that low-income taxpayers employ in frozen refund litigation.   

 Accordingly, our clinics (the Philip C. Cook Low-Income Taxpayer Clinic of Georgia State University College of Law and the Harvard Federal Tax Clinic) filed a joint amicus brief in this case solely on the issue of whether taxpayers should be denied reasonable litigation and administrative costs based on the dollar value of a qualified offer.  The clinics argued that none of the requirements of IRC § 7430 state that an offer must be of a minimum amount or of a minimum percentage of the taxpayer’s possible liability in order to be valid.  The clinics were particularly concerned with the potential impact that a rule requiring a minimum qualified offer amount would have on low-income taxpayers, which motived them to submit the brief. Low-income taxpayers who have had their refunds frozen often submit $1 qualified offers when they believe that they will prevail in a tax court case in order to shorten the time it takes for them to resolve their case and receive their frozen refund.  Obtaining these frozen refunds is of critical importance to these vulnerable taxpayers because they often need the tax refunds generated by the earned income tax credit to meet their basic living expenses.  Submitting a qualified offer puts pressure on the government to consider the low-income taxpayer’s case more quickly than it otherwise would because of the risk that the government would have to pay fees and costs if the taxpayer prevails.   

 In looking at this issue, the court agreed that a nominal $1 qualified offer can be reasonable and that awarding litigation fees was not an abuse of discretion.  While the court did not discuss the impacts to low-income taxpayers directly in its opinion, the clinics are pleased that the court reached this result and that nominal qualified offers will remain a viable litigation tool for low-income taxpayers who rely on them to obtain improperly frozen refunds as quickly as possible.