Tax Court Going Remote for the Remainder of January

In an announcement that did not surprise me, or maybe only surprised me in that I thought I might see it last week, the Tax Court has announced that it will go remote for the remainder of January.  This decision makes total sense given what is happening with the pandemic now and may signal more remote proceedings in the months to come as the pandemic drags on.  The good news, in a continued dreary picture resulting from the pandemic, is that the Court knows how to pivot and how to handle remote proceedings.

The press release is reproduced below the fold.

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UNITED STATES TAX COURT
Washington, D.C. 20217

January 12, 2022

After assessing public health and other factors relating to the rapid nationwide increase of COVID-19 cases, the U.S. Tax Court has determined that it is not appropriate to conduct in-person proceedings in January 2022. Accordingly, these trial sessions are modified as follows:

Trial SessionCalendarChange
January 18, 2022San Francisco (Special) Docket No. 21959-16In-person to remote on January 31, 2022
January 24, 2022Houston (Regular)In-person to remote
January 31, 2022San Diego (Small)In-person to remote
January 31, 2022Seattle (Regular)In-person to remote

Appropriate notices will be issued in each case remaining on the above-referenced calendars. General information about remote proceedings is on the Tax Court website (https://ustaxcourt.gov/) under Rules & Guidance/COVID-19 Resources.

Questions regarding cases calendared for the impacted trial sessions should be directed to the appropriate chambers, and general inquiries should be sent to the Public Affairs Office at publicaffairs@ustaxcourt.gov.

 

Who Qualifies as Press and the Boechler Supreme Court Argument Today

When Les and I went to the last Tax Court judicial conference, we were told that we needed to follow the rules of the press at the conference which involved, inter alia, not attributing comments to specific speakers so everyone felt comfortable in the space.  It felt funny to be treated as part of the press, but there can be advantages.  Recently, a FOIA request was made in which PT asked to be treated as the press to obtain expedited treatment.  A request was also made by PT regarding early receipt of the National Taxpayer Advocate’s annual report.  The IRS agreed to both requests.  With thousands of subscribers, millions of page views, and a body of posts, I think it is fair to say that we qualify as the press and there is some court precedent supporting bloggers as members of the press as well as blog posts suggesting bloggers are members of the press.

Today, the Boechler case is being argued in the Supreme Court.  The issue is one the Harvard Tax Clinic has been working on for six years, and I wanted to attend the hearing.  The problem with attending the hearing is that because of the pandemic the justices would just as soon not sit in a room filled with hundreds of strangers, so the hearings before the Supreme Court at present are ones in which only essential Court personnel, the litigants and the press can attend. 

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Press Passes

A nice Tax Court judge who heard me talk about my desire to watch the Boechler oral argument suggested to me that perhaps I should seek to attend the hearing as a member of the press.  After all, no news outlet has provided more coverage of this case than PT, even if our audience may not be as large as some news vendors.  So I thought why not ask.  It turns out the Supreme Court has two categories of press passes – day passes and hard passes.  There’s a reason they are called hard passes.  They are definitely hard to come by.  Here is a list of the persons holding hard passes.  No bloggers on there, not even someone from the SCOTUSblog. For a SCOTUSblog post on the case, look here.

I thought I might have a shot at a day pass, and maybe I did; you can see the requirements here with additional details here, and I had a need to report from the Court for all of you – our faithful readers, but unfortunately the current restrictions only allow members of the press with hard passes and not day passes.  When I spoke to the friendly person at the Supreme Court about attendance, I did not get warm fuzzy feelings that she was interested in having me attend, but she did point me to the broadcast of the argument.  I pass along to any of you who have not listened to Supreme Court arguments but who might be interested in listening to this morning’s argument that same possibility.

The Argument

If you go to this link at 10:00 AM ET this morning, you should be able to hear the oral argument.  Melissa Sherry of Latham & Watkins is making the argument for the petitioner.  She and her team of Caroline Flynn and Amy Feinberg, a former student of the Harvard Tax Clinic who argued this issue before the 4th Circuit while a student and this case before the 8th Circuit remotely during the pandemic, have done an outstanding job of briefing the case.  I anticipate Melissa will make an excellent argument.  When I have had the opportunity to go to the Supreme Court in person in the past and see oral arguments, the person arguing for the Solicitor General’s office has always done an excellent job.  I expect no less today.

I provided links to the opening brief by the petitioner and the amicus briefs in this post.  Here are the answering brief of the government and the reply brief of the petitioner for those of you interested in a complete set.  At the ABA Tax Section mid-year meeting which starts at the end of this month, I will join Bryan Camp, Kandyce Korotky and Amy Feinberg on a panel taking place on February 2, 2022, from 12:30 – 2:00 PM ET to discuss the case and its possible impact.  You can register for the meeting here.

2021 Year in Review – Administrative Matters Part 2

This part includes some Tax Court administrative matters in addition to those at the IRS.  Also included in this part is a reminder of the problems with the calculation of the statute of limitations on collection, changes to the FAQ policy and the new policy on offset in offer in compromise cases.

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Collection Statute of Limitations

The NTA published the National Taxpayer Advocate Objectives Report to Congress (Fiscal Year 2022) which provides some information on the glitch causing the IRS to improperly record the collection statute of limitations.  The glitch was first publicly identified in a blog post by then-NTA Nina Olson.  In that post, Nina said the IRS was working to address a glitch that was causing the IRS computer system not to recognize the CSED in certain cases in which taxpayers had sought installment agreements.  She indicated in her post that the issue surfaced two years prior in 2016 and her office had been working to identify cases. 

Her blog post identified five different buckets of cases in which the IRS was incorrectly calculating the CSED:

  • Bucket 1 = multiple pending IAs with only one corresponding rejected IA determination
  • Bucket 2 = one pending IA and one approved IA where 52 or more weeks have passed
  • Bucket 3 = multiple pending IAs with one approved IA, where 26 or more weeks have passed
  • Bucket 4 = one pending IA with one rejected IA, at least 52 weeks later
  • Bucket 5 = one pending IA, with no other action on the IA request for at least 52 weeks

Prior to her post, the IRS had agreed to review the cases TAS identified in Bucket 3 and found that 83% had incorrect CSEDs.

In 2017, TAS identified a population of taxpayer accounts with unreversed or improperly reversed pending IAs that led to incorrect CSED calculations and erroneously added time to the tax debt collection period. TAS also found inconsistent IRS procedures related to CSED guidance. The IRS agreed to correct taxpayer accounts with erroneous CSEDs and the underlying problems that led to the miscalculations.

In July 2020, TAS identified and provided the IRS with over 6,000 taxpayer accounts with CSEDs erroneously extended by one year or more. As of December 2020, the IRS had not finished reviewing and correcting these cases. TAS has recently provided the IRS with several thousand more taxpayer accounts that appear to have the CSED incorrectly extended by a year or more. Despite efforts to find and correct unreversed and improperly reversed pending IAs, TAS continues to find errors, resulting in incorrect CSED extensions of a year or more.  Even the most sophisticated taxpayers face challenges in calculating the CSED because of its complexity, as noted in this post from several years ago. 

IRS Update on FAQs

One of most commonly utilized IRS methods of explaining the tax law when it needs to get out guidance quickly has become FAQs.  Everyone understands the need for quick guidance and the fact that because of the speed in issuing guidance through FAQs the IRS does not want to be bound by this type of guidance.  It should not be bound by this type of guidance and should be applauded for quickly issuing guidance.  The concerns come when taxpayers follow this type of guidance and then the IRS changes its position.  The IRS has taken the position that taxpayers should rely on those FAQs at their own peril, as there would be no relief if the guidance turned out to be incorrect.

On Friday, October 15, 2021, the IRS finally issued guidance addressing the controversial issue of taxpayer reliance on positions the agency announces in FAQs, which are published on its website (IR-2021-202, IRS updates process for frequently asked questions on legislation and addresses reliance concerns.  The new guidance accepts two of the three recommendations made by the National Taxpayer Advocate Erin Collins in her July 7, 2020 blogpost. But, unfortunately, the new guidance suffers from the same shortcomings that attended the NTA’s recommendations.

During the week of October 19, 2021, we published a series of comments on the FAQ guidance which you can find here, here, here and here.  It was interesting for us because it was maybe the first time we had received multiple requests to publish posts on an issue.  All of the posts provide thoughtful takes on the procedure and the IRS position regarding this guidance.

Change to Offer in Compromise Policy

The new policy regarding offset in OICs represents a significant shift in collection policy for the benefit of taxpayers with accepted offers.  Kudos to the decision makers behind this policy shift.  A recent blog post from the National Taxpayer Advocate sets out the shift in policy and does a nice job of providing background as well as summarizing the new policy.  This post seeks to complement the information provided by the NTA but is somewhat duplicative.  Christine wrote a two-part blog post on offers and refunds, here and here, if you want more background on this subject.

The specific language developed by the IRS regarding the commitment of the taxpayer to give up their refund in the year of the OIC acceptance is found on page 5 of the form in section 7(e), which states:

The IRS will keep any refund, including interest, that I might be due for tax periods extending through the calendar year in which the IRS accepts my offer. I cannot designate that the refund be applied to estimated tax payments for the following year or the accepted offer amount. If I receive a refund after I submit this offer for any tax period extending through the calendar year in which the IRS accepts my offer, I will return the refund within 30 days of notification.

Even though the IRS rarely accepted OICs prior to the change in its policy in 1992, it did have an OIC program.  In the Sarmiento case, discussed below, the clinic traced this language back to at least 1964.  At that time, however, refundable credits did not exist and the policy as originally designed would not have been intended to claw them back after OIC acceptance.

For OICs accepted after November 1, 2021, the IRS will forego taking the post-OIC acceptance refund for the year of acceptance.  It will still take refunds for the periods leading up to the acceptance of the OIC (subject to the discussion of Offset Bypass Refunds (OBRs) discussed below).  The benefit to taxpayers varies based on the amount of refund they might have received for the year of OIC acceptance.  The NTA’s blog has some statistics on this; however, the individuals receiving significant refunds based on refundable credits, usually among the poorest of the taxpayers receiving acceptances, will definitely benefit.

The new policy does make clear that the IRS expects to offset any refunds related to pre-OIC acceptance tax years.  This policy makes sense.  It prevents taxpayers from delaying the submission of amended returns until after an OIC acceptance in an effort to circumvent having the refund offset.  In this way, the policy operates similarly to the requirement that taxpayers disclose their interest in potential lawsuits and other claims not yet turned into a definite amount at the time of making the OIC.  The IRS should receive these monies or at least know about them and make a judgment.  See our full post on this issue here.

Premature Assessments

The IRS was not the only place backed up because of the pandemic.  During 2020, the IRS held off on sending out notices of deficiency because of the pandemic.  Those notices went out late in 2020 and during 2021, creating a significant increase in the number of new Tax Court petitions, especially during the first half of 2021.  The Tax Court clerk’s office, like the IRS Service Centers, is not working at full strength during the pandemic because of efforts to ensure the safety of the employees.  The combination of a much higher volume of cases to process and the pandemic work restrictions created significant delays in the processing of new petitions from the Tax Court to IRS Chief Counsel, which meant that the IRS treated taxpayers as not having petitioned the Tax Court, resulting in premature assessments or inappropriate collection.

The Tax Court could have done a better job of alerting the practitioner community to the problem earlier but eventually began putting out news releases and working with Chief Counsel to notify it of new cases even before formally processing them and serving the answers.  Both the IRS and the Court react quickly to information about a premature assessment or collection; however, the high volume of pro se taxpayers filing petitions who do not know that a premature assessment should not have occurred hinders the process of identifying all of the problem cases. 

The Court’s dedicated email address for dealing with premature assessments created is taxcourt.petitioner.premature.assessment@irs.gov.  In addition to contacting the Court, reaching out to the local Chief Counsel Office will also result in assistance in fixing a premature assessment.  On December 9, 2021, the Tax Court issued a news release focused on the number of petitions filed in 2021 and the method of filing those petitions.  By the end of November, the Court had received 33,000 petitions, a significant increase from 2020 when filings were down due to COVID suppressing IRS issuance of notices that would lead to the filing of petitions.  The increase in filings coupled with the work restrictions brought on by the pandemic have led to delays in processing petitions which we have reported on previously here and here.

To provide some perspective based on recent years, below are the statistics for filing for the previous five years.  This information is taken from page 21 of the Congressional Budget Justification for Fiscal Year 2022, submitted by the Court on April 5, 2021.  This report has quite a bit of data about the Tax Court for those interested in the Court’s budget and operations.

TAX COURT CASES FILED AND CLOSED
FISCAL YEAR                         FILED              CLOSED
2016                                      28,831                       33,038
2017                                      27,091                       29,037
2018                                      25,422                       26,259
2019                                      24,364                       21,740
2020                                      16,988                       19,568


In FY 2020, of the 16,988 cases filed, 10,061 were regular cases and 6,927 were small cases. The overwhelming majority, 95%, of the cases filed in FY 2020 were based on the Court’s original deficiency jurisdiction granted by Congress.  The mix of regular and small cases filed in 2020 veers away from the mix in recent years which has run closer to 50-50.  The percentage of deficiency cases is higher than normal, reflecting the shutdown of collection for much of the year.

Tax Court Proceedings

The Tax Court stopped holding in-person trials in March of 2020 as the world recognized the dangers posed by COVID.  It cancelled the remaining trial calendars in the Winter session that year and all of the calendars in the Spring session, using the time to develop an online platform for interacting with taxpayers and the IRS.  It held all of its 2021 trial calendars remotely using the online platform before announcing a return to in-person proceedings at the beginning of 2022.  We discuss the announcement here.  As it returns to in-person proceedings, the Court remains willing to hold remote proceedings at the request of the parties.  Many of the hearings the Court holds can occur just as effectively in a remote setting as in-person.  The pandemic may have hastened a move to hybrid court proceedings that could make the Tax Court more efficient.  It has also caused many, if not more or all, of the judges to begin interacting with petitioners on a regular basis prior to calendar call.  This is a good thing.

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.

2021 Year in Review – Graev

Maybe it’s too much to devote one year in review post to a single issue, but Graev has dominated case decisions the past few years and maybe, maybe not, is on its way out.  As we reported and blogged about here, the now stalled Build Back Better legislation has a provision that will eliminate Graev, not just going forward, but going back over 20 years.  Not since the retroactive elimination of the telephone excise tax has Congress tried to undo itself in such a grand way.  Since this may be the last hurrah for Graev, why not send it out in style or, if it remains, why not remind ourselves how a poorly worded piece of legislation can cause so much havoc.

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Since the IRS has noticed the existence of IRC 6751(b), it seems now to have procedures in place to ensure that the immediate supervisor of the employee imposing the penalty actually approves the penalty imposition.  If the IRS has finally figured this out, why then repeal the legislation now and why does it receive a relatively high score from Congress for repealing it?  One suggestion concerns a whole bunch of old shelter cases that exist out there in pre-notice of deficiency status in which the IRS failed to follow the now more clearly defined rules of IRC 6751(b).  If true, it becomes easier to see why the administration would push for retroactive repeal and why certain groups of taxpayers would push back.  While we contemplate what might happen in the future, let’s look at the more important Graev decisions of 2021.

Graev and the Fraud Penalty

I posted on a decision that troubled me because when the IRS pursues a taxpayer criminally, the case goes through a myriad set of approvals.  Yet in Minemyer v. Commissioner, T.C. Memo 2020-99 – a case that took 10 years to decide – the Court found that the IRS did not follow IRC 6751(b) and stripped off the civil fraud penalty following a criminal tax case.  I wrote about the Minemyer case here and expressed surprise that IRC 6751(b) would stop the application of the fraud penalty in a case that involved a prior prosecution of the taxpayer, since the assertion of the fraud penalty following prosecution occurred automatically, with the hands of the agent and the agent’s supervisor essentially tied.  Of course, the statute does not specifically address prior criminal cases or create any special exception for them.

The Tax Court followed up the Minemyer case with a precedential decision in Beland v. Commissioner, 156 T.C. No. 5 (2021), where the Tax Court determined that the fraud penalty the IRS sought to assert failed the requirements of IRC 6751(b) allowing the taxpayers to avoid the 75% penalty proposed by the IRS without getting to the merits.  The Court issued this opinion granting partial summary judgment on the fraud issue five years after the case was filed. 

When a revenue agent seeks to impose the fraud penalty, the agent must send the case from exam over to obtain approval from the fraud technical advisor (FTA).  The FTA is a Small Business/Self Employed revenue agent specially trained on tax fraud issues. The IRS set up the system of having agents refer cases to FTAs so that an investigator trained specifically in fraud detection could determine if the revenue agent had gathered enough information to support the fraud penalty and to allow the FTA to determine if this case should chart a path toward criminal prosecution prior to imposition of the civil fraud penalty. See IRM 25.1.2.2 (08-12-2016).

Requiring that the imposition of the fraud penalty first go through an FTA seems to provide even better protection against the use of the fraud penalty as a bargaining chip than having the immediate supervisor sign off on the penalty, but the statute has a specific structure applicable to all penalties.  Striking the fraud penalty in this situation may be part of what’s causing Congress to rethink its passage of IRC 6751(b), but for the reasons discussed in a post by Nina Olson, that seems too radical a fix to a problem that it could resolve with better statutory language.

Graev and the Early Withdrawal Excise Tax

Pulling money out of a retirement account before reaching 59 and ½ and without meeting one of the statutory exceptions in IRC 72(t) triggers a 10% excise tax usually referred to as a penalty and determined by bankruptcy courts to be a penalty for purposes of priority classification.  In Grajales v. Commissioner, 156 T.C. No. 3 (2021), the Tax Court determined that the 10% exaction imposed under IRC 72(t) is not a penalty for purposes of whether the IRS must obtain supervisory approval prior to its imposition.  The amount at issue in this precedential opinion was $90.86 and the case was litigated by Frank Agostino, the godfather of IRC 6751(b) litigation. See Frank’s brief here, and the government’s here.  Frank lost this one but given the way that most people look at this exaction, his arguments were not illogical.

Conservation Easement Cases

In Oconee Landing Property LLC et al v. Commissioner, Dk. No. 11814-19, the Tax Court entered a very substantive order granting partial summary judgment to the IRS on the issue of penalty approval.  If the Court still designated orders, I suspect it would have designated this one.

The taxpayer does not argue in this case that the IRS did not obtain the penalty approvals prior to the communication with it that the IRS had asserted a penalty.  Although the prior approval issue exists in most IRC 6751(b) cases, here the issue focuses on the form and manner of the approval, particularly as it relates to summary judgment.  It asserts that the penalty lead sheet in the file “does not identify Ms. Smithson’s [the immediate supervisor] role … or even a date of signature.”

In this case, the approval occurred through email rather than by a signing of the same paper by the agent and the immediate supervisor.  This type of approval has no doubt become quite common during the pandemic while many employees and managers have been working remotely.  It could also be common in situations where the employee and the manager work out of different offices.  Obtaining acceptance of this type of approval is important for the IRS.  One hurdle it has here and in many other cases involves proving that the person signing the approval is, in fact, the immediate supervisor of the employee imposing the penalty.

When is Supervisory Approval Necessary

In Walquist v. Commissioner, 152 T.C. No. 3 (2021), the issue focused on the IRS’s Automated Correspondence Exam (ACE) software. ACE automatically processes taxpayer returns. In many cases, ACE handles returns from receipt to closing with “minimal to no tax examiner involvement.” In Walquist, ACE processed the taxpayer’s 2014 tax return, assessed a §6662 penalty, and issued the notice of deficiency automatically and without any human interaction. The Tax Court found that because the penalty was determined mathematically by a computer software program without the involvement of a human IRS examiner, the penalty was “automatically calculated through electronic means.”

This decision creates a dichotomy between low-income taxpayers whose cases are regularly handled by somewhat automated processes and higher income taxpayers whose cases are not.  The Court did not need to issue a precedential opinion in a case in which the taxpayers were unrepresented tax protestors, yet decided to do so despite the inability of the adversarial process to work effectively.  The Court heard only from the government and clearly expressed displeasure at the unfounded arguments advanced by these taxpayers.  The decision leaves a bad taste in my mouth for the way it casually treats an issue involving many low-income taxpayers without giving lawyers for low-income taxpayers the opportunity to present arguments explaining why this result should not attach.  I have a working paper on the topic of precedential opinions in pro se cases and possible solutions to the creation of precedent where only the government has a real voice.

Tax Court Filing Update

On December 9, 2021, the Tax Court issued a news release focused on the number of petitions filed in 2021 and the method of filing those petitions.  By the end of November, the Court had received 33,000 petitions a significant increase from 2020 when filings were down due to COVID suppressing IRS issuance of notices that would lead to the filing of petitions.  The increase in filings coupled with the work restrictions brought on by the pandemic have led to delays in processing petitions which we have reported on previously here and here.

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Case Filing Statistics

To provide some perspective based on recent years, below are the statistics for filing for the previous five years.  This information is taken from page 21 of the Congressional Budget Justification for Fiscal Year 2022 submitted by the Court on April 5, 2021.  This report has quite a bit of data about the Tax Court for those interested in the Court’s budget and operations.

TAX COURT CASES FILED AND CLOSED
FISCAL YEAR                         FILED              CLOSED
2016                                      28,831                       33,038
2017                                      27,091                       29,037
2018                                      25,422                       26,259
2019                                      24,364                       21,740
2020                                      16,988                       19,568

In FY 2020, of the 16,988 cases filed, 10,061 were regular cases and 6,927 were small cases. The overwhelming majority, 95%, of the cases filed in FY 2020 were based on the Court’s original deficiency jurisdiction granted by Congress.

The mix of regular and small cases filed in 2020 veers away from the mix in recent years which has run closer to 50-50.  The percentage of deficiency cases is higher than normal reflecting the shutdown of collection for much of the year. I applaud the Court for its news release on December 9 because information from the Court will help in tracking the premature assessment problem created by the delay in processing petitions.  The Court and Chief Counsel IRS are engaged with the problem but getting the word out when so many petitioners to the Court are pro se is difficult.  I felt the Court was slow to acknowledge the problem earlier in the year and appreciate the information update provided by the recent news release.

The news release provides information on the number of electronically filed petitions and the benefits of filing electronically.  The ability to file petitions electronically provides a huge benefit to petitioners.  You don’t need to worry about whether a snow flake has fallen in Washington closing the Court on the last day to file or whether a construction project blocks entry to the Court building or whether the post office has lost your mail or whether your students have addressed the petition package to a city other than Washington.  You do have to worry about DAWSON shutting down but you will know that your petition has failed to make it through giving you a chance to use a surface option unless you have waited until the very last second to file.  I cannot imagine filing a petition any way other than electronically because it lets me know the petition has arrived.  We have written about too many cases involving late filing of the petition for me to want to file other than electronically and receive notification of receipt.

Despite the fact that I think electronic filing is the only way to go, my practice remains in the distinct minority of filers to date.  The news release states that approximately 20% of petitions filed to date used the electronic option.  This undoubtedly disappoints the Court since electronically filed petitions move quickly through the system while paper filed petitions continue to stack up.  Recent filing data provides good news on this front. The news release states that the percentage of electronic petitions filed increased to 30% in October and 36% in November.  In addition to having the certainty of filing on time, petitioners filing electronically will have their petitions sent to IRS Chief Counsel quickly and will avoid, or are much more likely to avoid, the premature assessment problem plaguing the system this year.

Suggestions

The notice of deficiency and other Court triggering notices issued by the IRS recently do not inform taxpayers about filing a petition with the Tax Court.  It takes a while for the IRS to change a form or a letter but having the notices that trigger Tax Court filing provide taxpayers with information about filing electronically would seem like a means to drive greater traffic toward electronic filing of the petition.

I think the Tax Court could provide a better explanation in its petition package.  The package mentions electronic filing but provides little information.  Here’s what it says:

Information About Filing a Case in the United States Tax Court

Attached are the forms to use in filing your case in the United States Tax Court. It is very important that you take time to carefully read the information on this page and that you properly complete and submit these forms to the United States Tax Court, 400 Second Street, N.W., Washington, D.C. 20217, or file the forms electronically pursuant to the Court’s eFiling provisions. [Emphasis added]

If the information packet provided more instructions and perhaps an explanation of the benefits of electronic filing, that might signal to taxpayers to use this option.  The current language does not beat the drum very hard for electronic filing.

I am encouraged with the recent increase but with so many pro se petitioners filing only one petition per lifetime with the Court, getting the information out to this group about the possibility of electronic filing and the benefits is a big challenge for the Court.

Premature Assessments

The news release provides a reminder of the Court’s dedicated email address for dealing with premature assessments created in October of 2020.  This not so easy to remember address is taxcourt.petitioner.premature.assessment@irs.gov.  In addition to contacting the Court, reaching out to the local Chief Counsel Office will also result in assistance in fixing a premature assessment.  In non-deficiency cases, the problem of notification of the filing results in premature collection which can have even more profound consequences to the taxpayer.

New Special Trial Judges and the Honoring of a Current One

On Monday, December 6, the Tax Court announced the selection of two new Special Trial Judges (STJs).  You can find the announcement here.

Special Trial Judges play a role in the Tax Court similar to the role of magistrates in the federal district court system.  The position is described in IRC 7443A .  The role was litigated all the way to the Supreme Court in Ballard v. Commissioner, 544 U.S. 40 (2005) when a regular Tax Court judge reversed the findings of the STJ without acknowledgment or explanation.  That case provides insight into the position for those who may not be familiar with it. 

In the 1980s when tax shelter cases and the partnership rules caused the Tax Court docket to swell to numbers three times its more recent annual numbers, there were 10 STJs.  The reduction in cases over the years and retirements caused the number of STJs to fall significantly.  The hiring of the two new STJs reflects a need to fill the somewhat depleted ranks.  Prior to the appointment of the two new judges there were four STJs: Chief STJ Carluzzo; STJ Panuthos; STJ Guy (more on him below) and STJ Leyden.  It is my understanding that STJ Guy plans to retire soon which would have left only three STJs had the court not made the new hires.

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Unlike regular Tax Court judges who get to the bench after a Presidential appointment followed by a Senate confirmation hearing, the Chief Judge of the Tax Court itself hires the STJs.  IRC 7443A provides in part:

(a) Appointment

The chief judge may, from time to time, appoint special trial judges who shall proceed under such rules and regulations as may be promulgated by the Tax Court.

(b) Proceedings which may be assigned to special trial judges. The chief judge may assign—

(1) any declaratory judgment proceeding,

(2) any proceeding under section 7463,

(3) any proceeding where neither the amount of the deficiency placed in dispute (within the meaning of section 7463) nor the amount of any claimed overpayment exceeds $50,000,

(4) any proceeding under section 6320 or 6330,

(5) any proceeding under section 7436(c),

(6) any proceeding under section 7623(b)(4), and

(7) any other proceeding which the chief judge may designate,

to be heard by the special trial judges of the court.

(c) Authority to make court decision

The court may authorize a special trial judge to make the decision of the court with respect to any proceeding described in paragraph (1), (2), (3), (4), (5), or (6) of subsection (b), subject to such conditions and review as the court may provide.

Because having a political connection does not play into the selection process, STJs usually come from a background of litigation in the Tax Court which allows them to hit the ground running.  The newly selected STJs have that background although one comes more immediately from a non-litigation position.

New STJ Choi has previously run two low income taxpayer clinics (LITCs), and I know her from her time in those roles.  Most recently, she has served as the Taxpayer Advocate of New York City.  Her career path follows the same path of the most recent previous hire of the Tax Court into the STJ ranks when it selected STJ Leyden.  STJ Leyden ran the LITC at University of Connecticut for many years prior to holding the position of Taxpayer Advocate for New York City for a short period prior to her selection as a member of the Tax Court.  STJ Choi has much less time running a LITC but several years as a taxpayer advocate where she dealt with local tax issues rather than federal ones.  Both positions prepare someone for dealing with the types of taxpayers typical in the cases assigned to STJs. 

The information below is taken from the press release:

Special Trial Judge Choi holds a Bachelor of Arts, magna cum laude, in Political Science from the University of Akron, and both a Juris Doctor and Master of Laws in Taxation from the Washington University School of Law. In addition to time spent in private practice working on a variety of legal issues, Special Trial Judge Choi taught Ethics & Media at Sanford Brown College and was a Lecturer in Law at the Washington University School of Law. Special Trial Judge Choi spent several years working for Low Income Taxpayer Clinics (LITCs), having served as the LITC Program Director for Nevada Legal Services from 2010-2014 and as a Supervising Attorney with the Washington University LITC from 2014-2016. From June 2016 through September 2021, Special Trial Judge Choi was the Taxpayer Advocate in the New York City Department of Finance.

New STJ Landy also has a background somewhat typical of prior STJs.  He comes to the bench from a position as an attorney with the Office of Chief Counsel, IRS.  Both STJs Panuthos and Carluzzo also came to the Tax Court from a background with Chief Counsel’s office though their tenure with Chief Counsel was longer than STJ Landy’s.  Prior to joining Chief Counsel, he worked several years in private practice. 

The information below is taken from the press release:

Special Trial Judge Landy holds a Bachelor of Science in Chemistry and a Master of Science in Sport and Entertainment Management from the University of South Carolina, a Juris Doctor from the University of South Carolina School of Law, and a Master of Laws in Taxation from the Northwestern University Pritzker School of Law. From 2010 to 2016, Special Trial Judge Landy was an Associate Attorney with McNair Law Firm, P.A. (now Burr & Forman, LLP). From August 2016 until he joined the Court, Special Trial Judge Landy was a Senior Attorney with the Internal Revenue Service Office of Chief Counsel.

The Court has received a bumper crop of cases in 2021 many of which are the types of cases handled by STJs.  The addition of two new STJs should be welcome news at the Court and should allow it to better serve the high number of petitioners coming before it recently.  The Court has enjoyed really good STJs over the years I have practiced before it.  I expect that will continue with its newest selections.

Murdock Award

On November 21, 2021, the US Tax Court announced that Special Trial Judge Daniel A. Guy, Jr., received the J. Edgar Murdock Award for his distinguished service to the Tax Court. We are slow in acknowledging this important recognition.  This is not an annual award but one given periodically when the Court seeks to recognize someone special in its ranks.  It’s interesting and appropriate that three of the last four recipients have been STJs. These judges work very hard and handle a high volume of cases – especially pro se cases.  That’s not to say that regular judges do not work hard but rather that the recognition of STJs seems to show the Court’s continued concern for pro se taxpayers who make up such a large part of its docket.

The Murdock Award commemorates Judge John Edgar Murdock, who served on the Tax Court from 1926 to 1968 and, along with Judge Dawson for whom its new court management system is named, was one of the most important judges to serve on the court.  Given some of the problems with DAWSON recently, Judge Murdock may have gotten the better recognition. Further background on Judge Murdock can be found here.

Judge Guy has had a long career with the Court not only as a STJ for the past decade but as a clerk to a judge and as an attorney.  The Court has a number of attorneys who work for it behind the scenes and who do much important work to keep the Court functioning.  The announcement of the award doesn’t specify all of the things that Judge Guy has done over his career to deserve the award but his work as an attorney there as well as his work as an STJ would have been a part of the reason for the recognition.  Congratulations for a well-deserved award.

Was Your Tax Court Petition Due December 7, 2021? Maybe it’s now due December 21!

We welcome back Guest Blogger Charles Markham who last posted on an issue I discussed earlier this week.  Charles practices in the Boston area and has been a volunteer with the Harvard tax clinic over the years.  He is both an Enrolled Agent and a United States Tax Court Practitioner based on having passed the test from the Tax Court.  He raises an interesting issue posed by the recent legislation creating a window of additional time to petition the Tax Court.  The issue here was one I remember discussing when the Guralnik v. Commissioner, 146 T.C. 230 (2016) (en banc) case caused a closure of the Tax Court several years ago due to snow.  If the Tax Court closes for part of a day but not all of a day how does not impact the timing of the filing of a petition.  Maybe we will soon have answers.  Keith

I received a Notice from Taishoff Law’s blog that Dawson was down on December 7, 2021.  I hadn’t been on Dawson in a while but as of 7:45 pm on December 7, 2021, while I was able to search cases, I was unable to log into the website to access my own cases or file a petition. 

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The Tax Court left a series of status messages on the website:

DAWSON OUTAGE

Investigating – We are currently observing issues of users unable to log into DAWSON and handling cases. We are currently investigating the issue.
Dec 7, 12:37 EST

Update – Our service provider is reporting issues with some of the services that DAWSON relies upon. We are working to get DAWSON back online.
Dec 7, 12:40 EST

Identified – Our service provider has reported that they have “identified the root cause and are actively working towards recovery.”
Dec 7, 12:44 EST

Monitoring – Our service provider has indicated that they are starting to see signs of recovery, but do not have an ETA for a full recovery. We are continuing to monitor the situation.
Dec 7, 13:34 EST

Update – Our service provider reports “We have executed a mitigation which is showing significant recovery in the US-EAST-1 Region. We are continuing to closely monitor the health of the network devices and we expect to continue to make progress towards full recovery. We still do not have an ETA for full recovery at this time.”
Dec 7, 17:20 EST

Update – We have been able to restore the public access enabling Case Search and Today’s Orders and Today’s Opinions. We are continuing to work towards a full recovery.
Dec 7, 17:25 EST

Update – It appears systems are recovering and users are able to login and access DAWSON. We are continuing to monitor to ensure the outage is resolved.
Dec 7, 19:49 EST

Update – Still observing some failures with the API. We are continuing to monitor the situation.
Dec 719:57 EST

Resolved – This incident has been resolved. Users can now log back into DAWSON.
Dec 720:36 EST

Actually, a few minutes after I started to write this, I checked again (around 8 pm EST) and I can now file a Tax Court petition–so the crisis appears to have passed.  Although the official website status report did not report full functionality until 8:36 p.m.

Interestingly, the Infrastructure Investment and Jobs Act, which was signed by President Biden into law (PL 117-58) on November 15, 2021 includes a new provision that appears directly on point to this situation:

SEC. 80503. TOLLING OF TIME FOR FILING A PETITION WITH THE TAX COURT.

a) IN GENERAL.—Section 7451 of the Internal Revenue Code of 1986 is amended […] by adding at the end the following new subsection:

‘‘(b) TOLLING OF TIME IN CERTAIN CASES.— ‘

“(1) IN GENERAL.—Notwithstanding any other provision of this title, in any case (including by reason of a lapse in appropriations) in which a filing location is inaccessible or otherwise unavailable to the general public on the date a petition is due, the relevant time period for filing such petition shall be tolled for the number of days within the period of inaccessibility plus an additional 14 days.

“(2) FILING LOCATION.—For purposes of this subsection, the term ‘filing location’ means—

“(A) the office of the clerk of the Tax Court, or

‘‘(B) any on-line portal made available by the Tax Court for electronic filing of petitions.’’.

“(c) EFFECTIVE DATE.—The amendments made by this section shall apply to petitions required to be timely filed (determined without regard to the amendments made by this section) after the date of enactment of this Act.

Note that the filing location in the new Internal Revenue Code Section 7451(b)(2) is the office of the clerk of the Tax Court or (author’s emphasis)“any on-line portal made available by the Tax Court for the electronic filing of petitions”.  That refers of course to DAWSON.  While the author believes this legislative provision was in response to Boechler and ongoing concerns about government funding shutdowns as well as significant weather events, it appears to be more far ranging.

IRC 7451(b)(1) states (author’s emphasis) that “in any case…in which a filing location [note—DAWSON] is inaccessible or otherwise unavailable to the general public on the date a petition is due…the relevant time period shall be tolled for…an additional 14 days”.

The author argues that if a Tax Court petition was due on December 7th that the eight hour downtime would trigger this two week tolling event.

Will the Tax Court see it this way?  Time will tell.  There will likely be some filings that find themselves in this fact pattern.  There may even be other cases:  petitions due today but inadvertently get postmarked late that will unintentionally get the windfall of this reprieve. 

But this does beg the question, how long does DAWSON need to be offline to trigger this provision.  DAWSON was offline for at least eight hours today and arguably most of the business day, but it is available now.  What about an hour offline?  The Tax Court should probably develop a bright line test for when 7451(b) applies and when it won’t.