When Will the Tax Court Redact?

An order in the case of Boateng v. Commissioner, Dk. No. 37647-21 issued on July 26, 2022, shows the Tax Court’s willingness to redact personal information that the petitioner should have but failed to redact.  Thanks to Carl Smith for bringing this to my attention and to his additional research.

Tax Court Rule 27(a) requires parties to redact certain information such as taxpayer identification numbers and financial account numbers when submitting pleadings and documents to the Court.  Maggie Goff and I published an article in Tax Notes two years ago entitled “Nonparty Remote Electronic Access to Tax Court Records.”  The article suggests that the Tax Court make its records more electronically accessible while still protecting the privacy of individuals in an appropriate manner.  We included slides and information complied by Judge Buch showing how poorly both pro se petitioners and practitioners comply with this rule, regularly placing into the Court’s records information the Rule requires they redact.  Judge Buch cited the poor compliance with this rule as a basis for the Court’s decision not to make its records electronically available.

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Historically, the Court did not redact for petitioners who failed to do so but that seems to be changing.  In the Boateng case, Special Trial Judge Choi identifies documents the petitioners should have redacted.  The case came to her on a motion filed by the IRS to dismiss the case for failure to state a claim.  Petitioners sent to the Court an unredacted copy of the notice of deficiency they received for 2019 together with copies of tax forms for that year.  In reviewing the motion, Judge Choi noticed the non-compliance with the redaction rules which puts the petitioners’ information into a public record.

Judge Choi ordered petitioners to file amended pleadings using the Court’s form petition so they could perfect their imperfect petition and she ordered payment of the filing fee (or the fee waiver form.)  I have written about imperfect petitions previously, here.  The Court then took the IRS motion under advisement pending receipt from petitioners of a corrected or perfected petition.  If they file using the Court’s form, I anticipate the Court will deny the motion.  If they fail to act, it will eventually grant the motion.

In addition to addressing the motion, Judge Choi identifies and addresses the unredacted information.  She states:

Due to the unredacted personal identifying information appearing in the Petition, the Court will take steps to seal petitioners’ petition to protect their information. 

It was this sentence that caught Carl’s eye because he found it unusual, as did I.  In looking further, however, Carl found that at least some judges on the Court had been sealing unredacted information for some time.

He went to DAWSON and put in the word “redact,” searching orders and found 28 orders redacting things in cases during the first four weeks of July 2022.  In the month of January 2021, Judge Leyden redacted two petitions on her own motion.  In January 2022 it appears the Court sealed 10 petitions for failure to properly redact.  It looks like there is a steady trend to redact.

This movement seems to reflect a change in Court policy or may just be the adoption of a practice to redact by certain judges.  From the time of filing until the calendaring of a case, petitions generally sit unassigned in the general portfolio of the Chief Judge.  So, absent an effort by the Chief Judge to root out improperly redacted submissions, orders like the one in the Boateng will be ad hoc.  There was no order in the docket list assigning the Boateng case to Judge Choi but maybe orders are not needed to assign cases to a special trial judge to respond to a motion filed by the IRS.

In any event, the Boateng order suggests an attention to redaction and sealing that is relatively recent and welcome.  The number of redaction orders in no way reflects the number of cases with improper redactions but is still a benefit to the identified petitioners.  It also suggests that some of the judges on the Court are thinking about ways to protect petitioners other than making it difficult to access public records.  District Courts and Circuit Courts routinely require a certification when filing electronically filing documents that the person filing the documents has complied with the redaction rules.  I do not know if requiring the certification would reduce the non-compliance at least among practitioners but it might be worth a try if the Tax Court wanted to look for additional ways to improve compliance with the redaction rule.

Another Update on Boechler Follow-on Litigation – Part 2

This is Part 2 of my post-Boechler litigation update.  Part 1, involving deficiency litigation, ran on August 1, 2022, and can be found here

Today’s post addresses what is happening in the many CDP cases (including Boechler) that are before the courts where the IRS had argued to the Tax Court that the cases should be dismissed for lack of jurisdiction on account of late filing.  As I noted in my Part 1 introduction, the courts have not yet issued any rulings in CDP cases about whether equitable tolling applies on the facts of any case, and I expect we won’t see the first such ruling until 2023.

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Boechler

The taxpayer in Boechler did not put into the record any information as to why it filed late and so deserved equitable tolling.  In its opinion dated April 21, 2022, the Supreme Court remanded the case to the Eighth Circuit to address whether equitable tolling applied on the facts.  There is a May 23, 2022, entry on the Tax Court docket sheet for Boechler (Docket No. 18578-17L) stating, “U.S.C.A. 8th Circuit mandate is recalled, and case is reopened”.  But there have been no further filings in the case in the Tax Court since that date. 

Since the IRS moved to dismiss Boechler before the IRS filed an answer, the next step in the case will be for the IRS to file an answer in which, if it wants, it will plead late filing as a statute of limitations defense.  Tax Court Rule 39 provides that statute of limitations defenses and equitable arguments are “special matters” that the parties must plead.  If the IRS in its answer raises a statute of limitations defense, the taxpayer will have to respond by filing a reply in which the taxpayer pleads equitable tolling and sets out some facts in support. 

It is far from clear that Boechler will ever generate a ruling on whether the facts therein justify equitable tolling.  Recall that parties at any time can settle non-jurisdictional issues, such as late filing or the merits.  My hunch is that the Boechler case settles on remand after the IRS attorney for the first time looks at the taxpayer’s proof that it filed W-2s with the Social Security Administration.  Boechler merely involves a penalty for alleged non-filing with that agency.

Castillo

On May 11, 2022, Les did a post on a district court opinion in Castillo.  In that case, the IRS mailed out a CDP notice of determination to the taxpayer and a copy to the taxpayer’s former POA, but not to her current POA.  USPS records reflect that the notice was never delivered to the taxpayer (it’s still listed as “in transit”), and if the prior POA received his copy of the notice, he never alerted the taxpayer or the current POA. 

The current POA is Elizabeth Maresca, the director of the tax clinic at Fordham.  She was puzzled why she hadn’t seen the notice of determination that she had been expecting, so she ordered a transcript of account and discovered thereon an entry for the issuance of such a notice many months before.  Within 30 days after seeing the transcript (but still not having yet seen a copy of the notice), Elizabeth filed a Tax Court petition and sought equitable tolling of the filing deadline.  She also brought suit against the government in district court for the IRS’ wrongful disclosure of tax information to the prior POA.  Les’ post concerns that wrongful disclosure suit.

The IRS in the Castillo Tax Court case (Docket No. 18336-19L) initially filed an answer.  After the court brought to the IRS’ attention the probable late filing of the petition, the IRS then filed a motion to dismiss for lack of jurisdiction.  The Tax Court then dismissed the case for lack of jurisdiction, and Ms. Castillo appealed to the Second Circuit (Docket No. 20-1635).  In the Second Circuit, the parties briefed the issue of whether the CDP petition filing deadline is jurisdictional or subject to equitable tolling, but then asked the Second Circuit to hold the case in abeyance pending the Supreme Court’s ruling in Boechler

Five days after the Supreme Court issued its Boechler ruling, Ms. Castillo moved the Second Circuit to rule by summary reversal, that her Tax Court petition was timely under equitable tolling and to remand the case to the Tax Court for it to consider the merits of her CDP arguments.  On April 29, 2022, the DOJ responded to the motion and agreed that Boechler applied and that the case should be remanded to the Tax Court, but the DOJ argued that the Tax Court, in the first instance, should decide whether the facts justified equitable tolling.

On August 2, 2022, a 3-judge motions panel of the Second Circuit (with one judge mysteriously recusing himself) issued an order vacating the Tax Court’s dismissal order, denying summary reversal, and remanding the case to the Tax Court “for further proceedings in light of the Supreme Court’s decision in Boechler”.

The Tax Court has long held that non-receipt of a properly-addressed notice of deficiency during the 90-day period to file is no excuse for late filing a Tax Court petition, and all those courts of appeal to have faced the issue have agreed.  See, e.g., Guthrie v. Sawyer, 970 F.2d 733, 737 (10th Cir. 1992); Follum v. Commissioner, 128 F.3d 118, 120 (2d Cir. 1997); United States v. Goldston, 324 F. App’x 835, 837 (11th Cir. 2009) (per curiam) (collecting cases).  In Weber v. Commissioner, 122 T.C. 258 (2004), the Tax Court extended this holding to cover properly-addressed CDP notices of determination not received during the 30-day period to file. 

In her initial Tax Court filings and in the Second Circuit briefing, Ms. Castillo argued that, based on legislative history and the structure of CDP, it was wrong of the Tax Court to extend the deficiency precedent to CDP.  I think that for Ms. Castillo to win on remand, she will also have to get the Tax Court to overrule Weber.  In the Second Circuit, The Center for Taxpayer Rights’ amicus brief was devoted entirely to expanding upon the anti-Weber argument.  While the Second Circuit had once, in an unpublished opinion, followed Weber; Kaplan v. Commissioner, 552 Fed. Appx. 77 (2d Cir. 2014); it did so without discussing whether Congress might have wanted a different rule in CDP cases from the rule in deficiency cases.  And Kaplan was litigated by a pro se taxpayer who never argued that Weber was wrongly decided.  The Weber issue has not yet been addressed in any published opinion of any Circuit court. 

The remand order says nothing about this anti-Weber argument.  I presume that the anti-Weber argument can be considered by the Tax Court under the terms of the Second Circuit’s remand order, but I am not 100% certain, as the order makes no reference to the argument.

In Part 1 of this post, I discussed the Culp case, which is a notice of deficiency case where the taxpayers did not receive the notice during the 90-day period to file.  In their brief to the Third Circuit, the Culps go farther and argue that the deficiency precedent should no longer survive Boechler, since there is precedent outside the tax area that non-receipt or late receipt of governmental “tickets” to court are circumstances beyond the plaintiff’s control that can justify equitable tolling.  See, e.g., Checo v. Shinseki, 748 F.3d 1373 (Fed. Cir. 2014) (en banc) (120-day period to file in the Court of Appeals for Veterans Claims); Kramer v. Commissioner of Soc. Sec., 461 Fed. Appx. 167 (3d Cir. 2012) (60-day period in 42 U.S.C. § 405(g) to challenge denial of Social Security disability benefits in district court).

Amanasu Environment Corp.

 In Amanasu Environment Corp. v Commissioner, Docket No. 5192-20L, on December 13, 2019, the IRS issued a CDP notice of determination to a taxpayer having an address in Vancouver, British Columbia.  Presumably because this was international mail, records of the USPS and Canada Post show that the taxpayer did not receive the notice until January 18, 2020 – several days after the 30-day Tax Court petition filing deadline passed.  On March 13, 2020, the taxpayer mailed a petition to the Tax Court, accompanied by a request for New York City as the place of trial.  On March 17, 2020, the Tax Court received and filed the petition and request.  On September 2, 2020, the IRS surprisingly filed an answer in the case.  (The initial filing of answers in the CDP cases of Castillo and Amanasu and the deficiency case of Gruis — discussed in Part 1 of this post — shows, among other things, how often IRS lawyers miss late filing of petitions.)  On November 19, 2020, the IRS woke up and moved to dismiss the case for lack of jurisdiction for late filing. 

Frank Agostino represents the taxpayer, having picked up the case at a New York City calendar call.  Frank responded to the motion to dismiss by arguing that the CDP filing deadline is not jurisdictional and is subject to equitable tolling and should be tolled in this case.  The Tax Court held the motion in abeyance pending the ruling in Boechler.  On May 18, 2022, Judge Carluzzo issued an order, reading in full:

For the reasons set forth in Boechler, P.C. v. Commissioner, No. 20-1472 (U.S. April 21, 2022), it is

ORDERED that respondent’s motion to dismiss for lack of jurisdiction, filed November 19, 2020 is denied.

It is further ORDERED that jurisdiction in this case is no longer retained by the undersigned.

It is further ORDERED that this case is restored to the general docket for trial or other disposition.

On June 22, 2022, the IRS submitted an unopposed motion for leave to file an amendment to its answer in which it raised the statute of limitations defense.  On July 22, 2022, the Tax Court granted the motion.  Frank will be filing a reply to the amendment to the answer, raising equitable tolling as the taxpayer’s defense to the IRS statute of limitations defense.  Since no one has ever seen what such an amendment to answer pleading a statute of limitations defense on account of a petition’s late filing looks like, I attach a copy of the amendment to answer here, courtesy of Frank.

Myers

The filing deadline under IRC 7623(b)(4) for a Tax Court whistleblower award petition was held not jurisdictional and subject to equitable tolling in Myers v. Commissioner, 928 F.3d 1025 (D.C. Cir. 2019).  However, as in CDP, to date, the Tax Court has not issued a ruling on whether equitable tolling applies on the facts of Myers or any other such whistleblower award case. 

It is my understanding that the Tax Court held off on making any ruling on equitable tolling in Myers, just in case the Supreme Court ruled for the IRS in Boechler.  Had the Supreme Court ruled for the IRS in Boechler, effectively, that would likely have overruled the Myers opinion, since the two filing deadline statutes are worded so similarly. 

In June 2020, the IRS filed an amended answer raising late filing as a statute of limitations defense, and the taxpayer filed a reply seeking equitable tolling.  In November 2020, the IRS moved for summary judgment that the facts alleged in the reply do not give rise to equitable tolling.  That motion is currently pending before Judge Ashford.

Other Cases

By an order dated September 30, 2021, the Supreme Court agreed to hear Boechler.  Shortly thereafter, the Tax Court stopped dismissing late-filed CDP cases for lack of jurisdiction, pending the Supreme Court’s ruling in Boechler

In May and June 2022, after the Supreme Court decided Boechler, the Tax Court issued orders in all of the cases where the motions had been held in abeyance.  There were about 30 such orders, and they all look like the terse order Judge Carluzzo issued in Amanasu (which was one of the 30-or-so cases). 

That there were only about 30 CDP cases with this issue over 7 months confirms that the IRS and DOJ have always vastly overstated to the courts the number of Tax Court cases that would be affected by Boechler annually.  In oral argument at the Supreme Court, the lawyer arguing the case on behalf of the Solicitor General told Justice Thomas that the government estimated that 300 cases a year would be affected by the Boechler ruling.  That figure was obviously wrong because it was an estimate of how many CDP cases are dismissed each year for lack of jurisdiction for any reason, not how many cases are dismissed for lack of jurisdiction for late filing.  Typically, two-thirds of dismissals for lack of jurisdiction are only for failure to pay the filing fee or obtain a fee waiver. 

Keith and I knew that far fewer than 100 CDP cases each year would be affected by Boechler and that the primary effect of the Boechler ruling would be to eliminate the Tax Court’s sua sponte issuing orders to show cause why a CDP case should not be dismissed for lack of jurisdiction for late filing.  Probably a quarter of all dismissals of late-filed CDP and deficiency cases come after the Tax Court has pointed out to the IRS, in an order to show cause, the probable late filing of the petition – a fact which the IRS hadn’t noticed.  After Boechler, such orders to show cause in CDP will be a thing of the past, and so a small but significant number of taxpayers who filed late will stay in the Tax Court, even without having to argue for, or even having facts plausibly justifying, equitable tolling.

In the roughly 30 CDP cases where the IRS moved to dismiss for lack of jurisdiction or the Tax Court issued an order to show cause, the IRS will now have to file answers or amendments to answers if it wants to argue for dismissal for late filing.  Other than Amanasu, I haven’t looked an any of these cases’ docket sheets to see whether the IRS has yet done so.  It is my expectation that the IRS will again complain of late filing in nearly all of these cases.  And it is my further expectation, based on the usual lack of response by taxpayers to motions to dismiss for late filing, that only about 5% of taxpayers will respond with what could be termed an equitable tolling excuse for late filing.  Five percent of 30 is 1.5 cases, and one of those cases is Amanasu.  So, I expect extremely few of the other 30-or-so cases to become litigating vehicles for equitable tolling.  (The number of deficiency equitable tolling cases, if Hallmark goes the taxpayer’s way, will be an order of magnitude higher, though still not back-breaking for the IRS or Tax Court.) 

I think the Tax Court will issue a precedential opinion the first time that it considers whether the facts in any CDP or whistleblower award case qualify for equitable tolling.  A published opinion is needed because it is unclear what law on equitable tolling would apply in the Tax Court.  There appears to be a federal common law of equitable tolling generated outside the tax law that I suspect the Tax Court will adopt.  Among other things, I hope the Tax Court looks to equitable tolling opinions coming out of the Article I Court of Appeals for Veterans Claims and its reviewing court, the Federal Circuit, that have been applied to late-filed petitions in the Veterans Court for decades. 

My guess is that the initial ruling of how the Tax Court will apply the doctrine of equitable tolling will come in Amanasu or Myers, which are furthest along on the newly-required pleading of the issues.  I also guess that the first equitable tolling ruling will come out in 2023.

Another Update on Boechler Follow-on Litigation – Part 1

On June 28, 2022, I did a post summarizing the status of post-Boechler litigation over whether the IRC 6213(a) deficiency petition filing deadline is still jurisdictional and not subject to equitable tolling after Boechler.  There have been a few developments in the two cases discussed in the post, and I wanted to update you and provide links to recent filings.  The short update is that (1) all briefing has been completed in the Hallmark case before Judge Gustafson, and he is presumably already actively working on a Tax Court opinion, and (2) the Culp case in the Third Circuit survived the government’s motion for summary affirmance, and the Culps have filed their opening brief.  The Third Circuit also denied the government’s motion to strike the merits amicus brief of The Center for Taxpayer Rights that had been filed shortly after the government moved for summary affirmance. 

I also wanted to do an initial post on what has been happening after Boechler with CDP cases that present the questions resolved by the Supreme Court.  The short update here is that the courts have not yet issued any rulings in CDP cases about whether equitable tolling applied on the facts of a particular case, and I don’t expect we will see the first such ruling until 2023.  

Because of the length of the update, I am breaking it into two parts.  Part 1 discusses the deficiency litigation.  Part 2 will discuss the CDP litigation.

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Hallmark

In my June 28 post, I wrote that, a few days after Boechler was decided, a taxpayer named Hallmark Research Collective had moved to vacate the Tax Court’s dismissal for lack of jurisdiction of its one-day-late deficiency petition.  Even before the Supreme Court decided Boechler, Hallmark had argued that the deficiency filing deadline is no longer jurisdictional and is subject to equitable tolling.  Hallmark is seeking COVID-related equitable tolling. 

The motion to vacate was assigned to Judge Gustafson, and the Tax Court promptly stopped issuing orders of dismissals for lack of jurisdiction in all other cases where the IRS moved to dismiss a deficiency case for lack of jurisdiction, pending the ruling in Hallmark.  In a post Keith did on Hallmark on May 3, 2022, Keith provided links to the taxpayer’s motion to vacate and its 51-page memorandum of law that accompanied the motion.  In my July 28 post, I provided a link to the IRS’ 18-page response objecting to granting the motion.  On July 15, 2022, the taxpayer filed a 32-page reply to the IRS’ response, which you can find here.

As to why the reply was so long, the main reason is that the taxpayer chose to expand upon its argument that the filing deadline in IRC 6213(a) is not jurisdictional by presenting a more detailed analysis of how the Board of Tax Appeals acquired its deficiency jurisdiction in 1924 and 1926. 

The original Board filing deadline for income tax deficiency petitions was in the second sentence of sec. 274(a) of the Revenue Act of 1924.  The taxpayer argues that the actual jurisdictional grant to the Board to hear deficiency cases was at sec. 900(e) of that act, though neither provision used the word “jurisdiction”.

In the Revenue Act of 1926, sec. 274(a)’s second sentence was amended to prohibit Sundays from being the end of the filing deadline, but Congress did not, when redrafting the sentence, include the word “jurisdiction”.  By contrast, Congress first used the word “jurisdiction” in multiple provision of that act (which made the Board more court-like and provided for Circuit Court direct review of Board rulings).  Congress also enacted in that act the predecessors of IRC 6214(a) and (b) and 6512(b)(2), in each case using the word “jurisdiction”.

Hallmark’s reply also contains several pages of quotes from opinions by Tax Court judges (most currently sitting) calling IRC 6214(a) the source of the Tax Court’s deficiency jurisdiction.  In its response, the IRS had simply ignored the argument that IRC 6214(a) is the source of the Tax Court’s deficiency jurisdiction, not IRC 6213(a).  The IRS argues that IRC 6213(a) is the source of the Tax Court’s deficiency jurisdiction, except in cases where a larger deficiency is sought than is set out in the notice of deficiency, in which case IRC 6214(a) is merely the source of the Tax Court’s jurisdiction for the excess.

Hallmark is now fully briefed.  My expectation is that Judge Gustafson will be drafting an opinion that the Chief Judge will send to the full court for review.  I would love to be proved wrong and see an earlier opinion, but my guess is that the opinion of the full court in Hallmark will not come out before Christmas, even though hundreds of motions to dismiss are probably already currently sitting in limbo pending the opinion and more will be filed in the interim.

Culp

In my June 28 post, I wrote about a pro se appeal of a Tax Court dismissal of a late-filed deficiency case, Culp, that is before the Third Circuit.  The Culps argue that they filed a late Tax Court petition both (1) because before they filed they had never received the original or a copy of the notice of deficiency and (2) because TAS, purporting to help them fight levies, bamboozled them into not going to court.  TAS never told them that a notice of deficiency had been sent.  The Culps seek equitable tolling and a refund of monies taken by (1) levies on their Social Security benefits and (2) an offset of a later-year overpayment against the deficiency.

In my post, I mentioned the DOJ’s motion for summary affirmance.  I also mentioned and provided a link to the merits amicus brief that The Center for Taxpayer Rights filed in the case a few days after the DOJ motion for summary affirmance, but before the Third Circuit had ruled on the motion.  The DOJ had also moved to strike the amicus brief as premature.  On July 6, 2022, a 3-judge motions panel of the Third Circuit denied both DOJ motions, so the case proceeds to regular briefing.

On July 29, 2022, the Culps filed their opening brief for the appellants, which can be found here.  Although the Culps are retired lawyers in their 70s, their specialty was employment discrimination law.  Their pro se brief may disappoint some of us who are tax procedure specialists.

The DOJ’s brief for appellee is due in late August or early September.  (I am not sure the exact date because the Culps filed their brief a few days early, and I don’t know if that impacts the date that the DOJ’s brief is due.)  However, I anticipate that the DOJ will, as usual, ask for and be granted a 21- or 30-day extension to file its brief.

I expect oral argument in Culp will occur in the Third Circuit early next year and an opinion will be issued in the spring.  I expect that the Tax Court’s ruling in Hallmark (1) will precede the Third Circuit’s ruling in Culp and (2) will be brought to the attention of the Third Circuit before it rules.

Other Deficiency Cases

Of course, once an opinion in Hallmark is issued, the Tax Court will likely promptly issue hundreds of similarly-ruling orders in cases in which either the IRS had moved to dismiss a late-filed deficiency petition for lack of jurisdiction or the Tax Court had issued an order to show cause why the deficiency case should not be dismissed for lack of jurisdiction on account of late filing. 

If the Tax Court in Hallmark rules against the taxpayer, those hundreds of orders will be final and immediately appealable to nearly every Circuit Court of Appeals, except the Federal Circuit.  However, I don’t expect many taxpayers to appeal such dismissals.  It would only make sense to appeal such a dismissal if the taxpayer thought he or she had good ground for equitable tolling.  And, I suspect that only about 5% of such dismissals would involve even a plausible argument for equitable tolling. 

Hallmark is appealable to the Ninth Circuit, and I expect that it would be the first case to be appealed.  I would be surprised if more than 5-8 deficiency cases got appealed in 2023 to Circuits other than the Ninth Circuit.  Over time, though, new orders of dismissal in other case would be issued.  If any Circuit disagreed with another Circuit in a post-Boechler ruling, I would anticipate a new Supreme Court opinion to resolve the issue, unless Congress (hopefully) stepped in to resolve the dispute.  I do not look forward to so much future appellate litigation.

If the Tax Court in Hallmark holds that the deficiency filing deadline is no longer jurisdictional and is subject to equitable tolling, the court will deny all of the held-up IRS motions to dismiss and discharge any held-up orders to show cause.  Such rulings allowing the cases to go forward would be interlocutory rulings, not ordinarily subject to immediate review.

IRC 7482(a)(2)(A) states:

When any judge of the Tax Court includes in an interlocutory order a statement that a controlling question of law is involved with respect to which there is a substantial ground for difference of opinion and that an immediate appeal from that order may materially advance the ultimate termination of the litigation, the United States Court of Appeals may, in its discretion, permit an appeal to be taken from such order, if application is made to it within 10 days after the entry of such order.  Neither the application for nor the granting of an appeal under this paragraph shall stay proceedings in the Tax Court, unless a stay is ordered by a judge of the Tax Court or by the United States Court of Appeals which has jurisdiction of the appeal or a judge of that court.

Tax Court Rule 193(a) provides, in part:

For the purpose of seeking the review of any order of the Tax Court which is not otherwise immediately appealable, a party may request the Court to include, or the Court on its own motion may include, a statement in such order that a controlling question of law is involved with respect to which there is a substantial ground for difference of opinion and that an immediate appeal from that order may materially advance the ultimate termination of the litigation.  Any such request by a party shall be made by motion which shall set forth with particularity the grounds therefor and note whether there is any objection thereto.  

Perhaps being over-confident that it will win the Hallmark case, the IRS has not yet filed any motion under Rule 193(a).  It is unclear whether a pro-taxpayer ruling in Hallmark will, without such a motion, contain a statement “that a controlling question of law is involved with respect to which there is a substantial ground for difference of opinion and that an immediate appeal from that order may materially advance the ultimate termination of the litigation.”

It is my hope that, if the Tax Court rules that IRC 6213(a)’s deficiency filing deadline is not jurisdictional and is subject to equitable tolling, both the IRS and DOJ would accept that ruling and would argue in support of that ruling in any appellate court that, on its own, decides to consider the issue.  Perhaps my hope is naïve, but one can always hope.

I am aware of only one other late-filed deficiency case in which the taxpayer is already arguing that the IRC 6213(a) filing deadline is not jurisdictional and is subject to equitable tolling, Gruis v. Commissioner, Tax Court Docket No. 11951-22.  I mentioned Gruis in my June 28 post.  On May 27, 2022, a lawyer for an LITC who is aware of the Boechler opinion late-filed the petition, which asked for equitable tolling.  The case involves HOH status and disallowed EITC and CTC.  It will be appealable to the Eighth Circuit – the same Circuit that got the law wrong on CDP in Boechler.  As an update, surprisingly, on July 15, 2022, the IRS filed an answer in the case.  The IRS has not (yet) moved to dismiss for lack of jurisdiction.  I don’t know where this case might be going.  It may get resolved a different way, though, since the taxpayer also argues that the IRS sent the notice of deficiency to an address that was no longer her last known address (hence, she did not receive the notice in time to timely petition).

Tax Court Refuses to Allow Petitioner to Amend the Petition

Yesterday, I wrote about a case in which the IRS was stuck with a concession even though its proof showed that the concession allowed a deduction it should not have allowed.  In the discussion of the Demuth case in that post I wrote about other times in which the Court did or did not allow changes.  In TBL Licensing v. Commissioner, TC Memo 2022-71 the court refuses to allow a petitioner to amend the petition six and one half years after the filing of the petition and after, in February of this year, it had rendered a precedential decision in the case, 158 T.C. No. 1 (2022).

One could ask why a case was still pending in the Tax Court six and one half years after the filing of the petition.  I have pointed out in enough previous blog posts how slow the Tax Court can be in rendering opinions.  I looked at the docket sheet here to obtain a sense of the case.  The parties have been active as has the court.  Based on an earlier opinion of the court, the case involves over $500 million in tax.  With that amount at issue, it is not surprising to see a long docket sheet with lots of activity.  The case involves an issue of corporate reorganization and resulted in a precedential opinion issued in November 2021, withdrawn shortly thereafter and reissued in February 2022. 

A couple things struck me as unusual from the docket sheet.  Petitioners sent the IRS five separate requests for admission.  That doesn’t happen very often.  The second thing is after the precedential opinion, petitioner moves to amend its petition for the second time in the case.  Why would you amend you petition after losing the case?  Generally, a party would do that after an opinion where the opinion did not cover all of the issues in the case but to find out exactly when, it’s necessary to read the memo opinion.

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In the summary of the case, the court quickly answers my question regarding why petitioner would move the amend the petition after losing the case.  My original guess was wrong.  The precedential opinion did fully resolve the case; however, petitioner had by this point found another issue which might reduce its liability.  Here’s how the court describes it:

P and R each moved for summary judgment on issues regarding the application of I.R.C. § 367(d), which they presented as the sole issues in the case requiring resolution. The Court resolved those issues in TBL Licensing LLC & Subs. v. Commissioner, No. 21146-15, 158 T.C. (Jan. 31, 2022). In March 2022, more than 6½ years after filing its Petition, P moved for leave to amend its Petition to assert a claim for a research credit under I.R.C. § 41. R opposes P’s Motion.

Keep in mind that when you try a Tax Court case the resolution of the case ends the tax year.  After the case neither party can go back and try to change the tax result for the year(s) before the court.  The decision acts as a form of closing agreement ending any further consideration of the year. 

To its credit, petitioner here comes in quickly after losing the case and does not try to obtain a result in a separate proceeding; however, the timing is terrible in general since the case has by this time been pending for over six years with lots of activity and many attorneys representing petitioner.  The memo opinion lists seven attorneys of record for petitioner at the time of its issuance.  So, this is not a case in which an attorney suddenly comes into the picture to assist a previously unrepresented taxpayer.  This is a case with numerous attorneys on both sides and lots of time to uncover issues relating to the 2011 fiscal year.

There was other post-decision action occurring into which petitioner’s motion to amend its petition fits:

On March 4, 2022, respondent filed a Motion asking us to vacate the February 9th Order and Decision and replace it with one that states the amount of the upheld deficiency (rather than simply cross-referencing the notice of deficiency). Petitioner opposed respondent’s Motion to Vacate, alleging that the deficiency should be reduced by a research credit petitioner claimed under section 41 in an amended return petitioner apparently filed in June 2015, after respondent had issued the notice of deficiency but before petitioner had petitioned this Court for redetermination of the deficiency. Petitioner had not made any claim to a research credit for the taxable year in issue in its Petition
or at any other time before March 8, 2022, when petitioner responded to respondent’s Motion to Vacate.

So, not only were lots of attorneys involved for petitioner but the research credit it now wants to add to the case by amending the petition was known to petitioner since before the filing of its initial petition yet it had never raised this issue in its pleadings.

The court granted the IRS motion but held off issuing a new order in order to give petitioner the opportunity to make an appropriate motion.  It did by filing a motion for leave to amend.  In deciding whether to allow the requested amendment the court said:

“[D]etermining the justice of a proposed amendment” requires an “examin[ation of] the particular circumstances in the case.” Estate of Quick v. Commissioner, 110 T.C. 172, 178 (1998), supplemented by 110 T.C. 440 (1998). Among the circumstances considered are “whether an excuse for the delay [in raising the issue] exists and whether the opposing party would suffer unfair surprise, disadvantage, or prejudice if the motion to amend were granted.” Id. We also take into account whether the issue sought to be raised would require the consideration of “stale evidence,” the availability of relevant witnesses or documents, the time passed since the party’s initial pleading, the “remoteness in time of
[the] taxable years involved in the underlying dispute, or [the] completion of discovery and/or trial.” Scar v. Commissioner, 81 T.C. 855, 867 (1983) (Swift, J., concurring), rev’d on other grounds, 814 F.2d 1363 (9th Cir. 1987).

Petitioner argued that the court must allow it to amend the pleadings unless the amendment would prejudice the IRS.  Here, it alleged that no prejudice would exist and justice would best be served by allowing the amendment.  Petitioner argues that the IRS would not be surprised because it knew about the credit argument for seven years since the filing of the amended return.  The IRS has apparently allowed the same credit in other years.

The IRS objected to the amendment pointing out that petitioner offered no explanation for its failure to place this issue before the court at an earlier and more appropriate time.  It says petitioner abandoned the issue by its inaction.  The IRS also pointed to a conversation between counsel in 2015 in which petitioner’s counsel advised the IRS counsel that it had no plans to amend its petition to add this issue.  The IRS did not explain how raising the issue at this point would make it more difficult that if petitioner had raised the issue at the outset.

The court looks at an earlier opinion in which it said that a motion for leave to amend can be denied when absence of excuse and prejudice exists.  But the court distinguished that opinion and held the either the absence of excuse or the existence of prejudice, alone, can justify denial of a motion to amend the pleadings.  Here, the additional factor hurting petitioner is its apparent statement early in the case that it did not intend to raise this issue:

Petitioner’s efforts to elevate prejudice or substantial inconvenience as the sole dispositive factor, coupled with its repeated failures to provide any explanation for its delay in raising before the
Court its claim to a research credit for 2011, convince us that petitioner has no good excuse for its delay. In respondent’s unrefuted telling of the procedural history, petitioner’s failure to have raised the research credit issue reflects a conscious decision not to pursue the issue.

Similar to the Demuth case the denial here of the amendment to the petition probably leaves the petitioner paying more tax than it should.  In Demuth the court stated flatly that the concession gave petitioners a windfall.  A similar statement was not made in TBL Licensing but the implication of the treatment of the credit in earlier years leaves the impression that if timely raised the credit would have been allowed here.  In both cases the court goes for finality over finding the precise right answer.

The Court injected a new consideration into the equation – the impact of the motion on the Court: “Consideration of petitioner’s claim could impose a significant burden on both the Court and respondent.” (emphasis added) The Court explains in some detail the burdens reopening the case would place on the IRS.  It does not explain the burden it would place on the Court but does reference judicial economy and the burden that will be placed on the Court – “a burden likely to be greater than it would have been had petitioner raised the issue in the petition it filed more than 6½ years ago.”  The addition of the burden to the Court, while certainly present in any case in which a party seeks to have a second bite at the apple, has not regularly been a basis for denial of a motion such as this.

I am not troubled by the need for finality and allowing that need to overcome arguments that might get to a more perfect tax answer.  Both parties have a need to bring the issues to the court in a timely fashion.  The failure to do so has consequences as both cases point out.

IRS Stuck with Concession

The case of Estate of Demuth, Jr. v. Commissioner, TC Memo 2022-72 discusses the issue of the impact of a concession by the IRS when the court finds that the conceded item would be taxable but for the concession.  The Tax Court finds the concession binding and allows a reduction of the taxable estate based on the pre-trial concession.  There is some conflicting law.

About four decades ago, I tried a case in which I argued a theory of the case that the revenue agent had not put forward.  The taxpayer in my case had given some property to charity. The agent partially disallowed the deduction based on the value of the property.  I argued that the property was inventory in the hands of the taxpayer and he was limited to his basis in the property which was very close to zero.  I did not amend the pleadings to assert an additional deficiency because the amount of additional tax was small and I raised the theory later than I would have preferred.  The court bought my argument and tacked on the additional tax even though I had not requested it.  The taxpayer in my case engaged in unsavory behavior, and I think that influenced the court’s decision.  The IRS is almost always limited to what it requests and the court is tough on letting the IRS change its mind near to trial. 

Another case I remember from long ago involved the fraud penalty.  My office had handled the criminal case of a very well-known individual but the review of the notice of deficiency went to another office.  That office inexplicably removed the fraud penalty from the case.  I had the Tax Court case transferred back to our office and we filed a motion to add the fraud penalty onto the taxpayer relatively early in the life of the case but the judge would not let us do it. 

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In the Demuth case the decedent made, or attempted to make, several end of life gifts by check.  Ten of the checks were not cashed at the time he died.  The IRS conceded in the stipulation that the estate should get the benefit of three of the checks.  The stipulation in this case was a full stipulation because the case was submitted under Tax Court Rule 122 that allows the parties to submit a case fully stipulated and then brief it.

The IRS convinced the court that under the laws of the state in which the decedent lived none of the gifts were consummated at death.  The court stated:

This statute stands for the proposition that once a check has reached any one of the aforementioned stages in its processing at the time a stop-payment order is made, then the stop-payment order is too late; at that time, a charge may be validly made against the drawer’s account. Therefore, the first (but not the only) possible time at which a gift of a check may be deemed complete is when the drawee bank accepts, certifies, or makes final payment of the check. In this context, acceptance means “the drawee’s signed agreement to pay a draft as presented.” 13 Pa. Cons. Stat. § 3409(a) (2015). Similarly, for a check to be certified means that the check has been “accepted by the bank on which it is drawn.” Id. § 3409(d).

In the instant case, Mighty Oak did not accept, certify, or make final payment on any of the ten checks at issue until after decedent’s death. Consequently, a stop-payment order could have theoretically been placed on any of those checks before final payment. Therefore, under Pennsylvania law, none of the ten checks at issue represented completed gifts prior to decedent’s death.

If we could stop here, we would hold that the full value of all ten checks paid by Mighty Oak after decedent’s death ($436,000) is properly includible in his gross estate.

The court says that the parties seem to have misconstrued the term drawee bank to mean depositary bank and that caused the concession of the three checks.

Then the court moves to the consequence of the stipulation in a setting where the concession is at odds with the applicable law.  The court says this issue has not come before it previously, which makes you think the decision here might be a precedential decision, before it cites to a pair of earlier TC Memo opinions in which the court did not allow the IRS to withdraw a concession during post-trial briefing.  While those cases, Glass v. Commissioner, TC Memo 1988-550 and Cogan v. Commissioner, TC Memo 1980-328, concerned concession made before and during trial in the post-trial brief and while they are not precedential opinions, the court finds they are sufficiently relevant to a Rule 122 case to drive the decision here.  The court was also concerned that accepting a withdrawal of the concession in the stipulation in this case put the petitioner at a disadvantage since the estate relied upon the concession in drafting the brief.

The case shows the power of stipulations to drive an outcome even when the outcome is wrong.  It emphasizes the importance of knowing the law prior to drafting briefs because you often need to know it at the time of drafting the stipulations.  This can present challenges for both respondent’s and petitioner’s counsel because sometimes you do not know everything at the time of the drafting of the stipulations.  When fully stipulating a case, this becomes even more important because you don’t have a trial to perhaps clear up some uncertainty.  In a footnote the court cited to the case of Gale v. Commissioner, TC Memo 2002-54 where information came out at trial different from what the IRS previously understood and the court did allow the IRS to repudiate a concession.  It stated that the facts were different in the Demuth case leading to a different result.

Offer in Compromise Rejection Sustained by Tax Court

For anyone interested in teaching at Harvard Law School, the faculty position from which I retired at the beginning of this month has now been announced. Because the faculty position belongs to the Legal Services Center and not to the Tax Clinic specifically, it’s possible that the new faculty member will direct one of the other clinics but also possible the person would direct the tax clinic. The Legal Services Center is a great place to work and a very supportive environment. I encourage any qualified applicants to apply. Keith

In Serna v. Commissioner, T.C. Memo 2022-66 the Tax Court sustains the rejection of an offer in compromise (OIC) made within the context of a Collection Due Process (CDP) case.  Since the only way to obtain Tax Court review of an offer runs through CDP, the number of decisions regarding OICs is small.  These decisions offer a window into the Court’s thinking on offers which can provide a valuable insight.

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I occasionally have had clients come into the office wanting an offer similar to the one sought by Mr. Serna.  He used all, or most, of a retirement distribution to buy a home and did not save enough from the distribution to pay the tax on the distribution.  He seeks relief from paying tax on the distribution but does not want to pull the equity from the property purchased with the distribution to satisfy the tax.  The IRS does not favor this result and wants him to fully pay his liability by tapping into the equity in the property.  The facts get more complicated and will be explored below but the basic facts present in this case will almost never result in an offer acceptance by the IRS for good reason.

The tax year at issue is 2016.  He paid about half of his approximately $130,000 liability for the year with his return leaving about a $65,000 balance which will have increased since that time due to interest and penalties.  He offered the IRS $10,000.  His initial offer was based on doubt as to collectability the standard basis for an OIC.  He indicated in the offer that he purchased the house for his estranged wife so that she could live there with the couple’s four children and relieve him from paying child support.  He indicated that he had moved back in with his parents and was paying them rent.

The IRS rejected his offer because the equity in the house greatly exceeded the liability even though his monthly expenses exceed his income.  He appealed the rejection and changed his offer from doubt as to collectability to the more appropriate effective tax administration offer provision.  When I say more appropriate, I don’t mean that the IRS should have necessarily accepted the offer but only that because his ability to pay the offer exceeded the amount of the outstanding liability, collection was not in doubt and a doubt as to collectability offer was inappropriate to the circumstances.

Along with changing the type of offer, he provided additional information.  He explained that two of his children sufferance from “significant developmental disabilities and that the house was essential to them for multiple reasons.”  Now, he is beginning to shape arguments that have at the least the potential to succeed but he is seeking the offer pro se and may not have had the tools to harness the most persuasive arguments.  In addition to arguing for acceptance based on the needs of his children, he pointed out a long history of compliance and a lack of understanding of the tax consequence of the withdrawal.

While a long history of compliance coupled with an unusual event triggering the unpaid tax brings in facts that I always like to highlight in the cover letter to an OIC, these facts generally do not overcome the reluctance to accept an offer where sufficient funds or assets exist to satisfy the offer.  The Court noted this in a footnote:

Mr. Serna additionally emphasizes his prior tax compliance in arguing the settlement officer abused her discretion. While we have no reason to doubt his history of compliance, lack of tax compliance is a bar to acceptance of an offer on effective-tax-administration grounds; compliance, conversely, does not alone justify acceptance.

A long history of compliance and a special, one-time event triggering the tax help to put the offer examiner in the right mood for accepting an offer but cannot overcome a clear ability to pay.  A long history of non-compliance, makes it difficult to craft a sympathetic cover letter but, with the right economic facts, even a person with such a history can obtain an OIC.   

While the offer was pending, however, he also had a notice of federal tax lien filed against him which opened up the possibility for a new path to take in seeking offer approval – CDP.  He timely made a CDP request and this gave him another person in Appeals with whom he could discuss his situation.  The change, however, did not help.  The Settlement Officer handling the CDP case:

noted that Mr. Serna had offered no documents to show that he was under any obligation to buy a home for his estranged wife and children. She further suggested that Mr. Serna had timed the home purchase to precede the filing of his 2016 tax return, which would have shown a balance due. The settlement officer explained that this conduct was out of the ordinary, as he had filed early for every prior tax year and employed the same tax return preparer as before.

The Tax Court noted that it reviewed his case for abuse of discretion.  Mr. Serna did not allege that the Settlement Officer failed to properly verify the procedural correctness of the assessment, and the Court found that the SO “thoroughly reviewed Mr. Serna’s information and account transcripts and verified that all applicable requirements were met.”

The Court next reviewed the decision by Appeals.  In doing so it stated:

“We judge the propriety of the [Office of Appeals] determination . . . on the grounds invoked by the Office of Appeals.” Elkins v. Commissioner, T.C. Memo. 2020-110, at *24; see also SEC v. Chenery Corp., 332 U.S. 194, 196 (1947); Antioco v.  Commissioner, T.C. Memo. 2013-35, at *25 (“Applying Chenery in the CDP context means that we can’t uphold a notice of determination on grounds other than
those actually relied upon by the Appeals officer.”). In doing so, we look to the reasons offered in the notice of determination, as further unspooled in the settlement officer’s contemporaneous rejection memorandum and case activity notes. Accord Melasky v. Commissioner, 151 T.C. 93, 106 (2018) (“[W]e will uphold a notice of determination of less than ideal clarity if the basis for the determination may reasonably be discerned . . . .”), aff’d, 803 F. App’x 732 (5th Cir. 2020); Kasper v. Commissioner, 150 T.C. 8, 24–25 (2018) (“Although we may not accept any post hoc rationalizations for agency action provided by the Commissioner’s counsel, we may consider any ‘contemporaneous explanation of the agency decision’ contained in the record.” (quoting Tourus Records, Inc. v. Drug Enf’t Admin., 259 F.3d 731, 738 (D.C. Cir. 2001))); see Elkins, T.C. Memo. 2020-110, at *25–29.

The Court found that the IRS did not abuse its discretion in rejecting the $10,000 offer because the record indicated that he could pay more than that amount without causing economic hardship.  He had enough income to cover his expenses.  The liability could be satisfied by taking the equity in the house without causing him economic hardship.  Although the SO might have accepted the offer, the examples in the applicable regulations did not require acceptance under this circumstance.  The Court found that the SO weighed the circumstances a sale of the property would cause and demonstrated consideration of the necessary factors in determining hardship.  The Court concluded by saying:

We are not blind to the fact that Mr. Serna repeatedly asserted that he was supporting not one, but four children (and his estranged wife) in the house at issue. He claimed only one of these children as a dependent on his tax return, however, and we cannot fault the settlement officer for considering only that child in her evaluation.


Nor are we persuaded by Mr. Serna’s contention that the settlement officer’s refusal to accept the OIC put at risk his children’s access to their current school district. Despite being given multiple opportunities, Mr. Serna failed to provide the settlement officer with sufficient information to credit this assertion and factor it into her evaluation.


In conclusion, we might have reached a different result than the settlement officer had we evaluated the OIC in the first instance. We nonetheless cannot say that the settlement officer abused her discretion in deciding as she did.

What could Mr. Serna have done to succeed?  From the Court’s statements, it would seem that he needed to provide more evidence of what selling the house would do to the rest of his family. He never provided evidence that he had a child support obligation or that buying the house in which his estranged wife could live would satisfy that obligation.  He needed additional evidence of the impact of the sale of the house if the offer were rejected.  Based on his income it does not appear that he could have borrowed money through a home equity line of credit because of an inability to support the loan; however, it does not appear that he presented evidence of an inability to borrow.  Such evidence would have supported the conclusion that if the offer were rejected the only way to satisfy the outstanding debt would be selling the house and displacing his estranged wife and his children.

It’s clear that he should have provided more evidence.  This is a common problem for people representing themselves in an OIC.  It is not clear that providing more evidence would have persuaded the SO nor is it clear that had the additional evidence been present it would have led to a different outcome at the Court but it might have.  The absence of the evidence on the harm made it easy for the Court to support the finding of the SO.

Given that the IRS rarely seizes and sells personal residence, it is also not clear who is the winner here.  The IRS can prevent someone in this situation from receiving an OIC; however, unless it is willing to act to cause the sale of the property, all the rejection does is put the parties back where they were before the submission of the offer.  It could well be that the remainder of the 10 years on the statute of limitations will pass without payment of the tax by Mr. Serna and without sale of the house by the IRS.  Mr. Serna lost this battle but it is unclear whether he will lose the war.

Creativity Is Not Always Rewarded

In June, the Tax Court issued a division opinion in Chavis v. Commissioner, 158 T.C. No. 8, a Collection Due Process case.  The taxpayer, proceeding pro se, raised three arguments.  I’m going to put them in a different order than the Court did, saving the best for last.  First, she sought to challenge the underlying liability.  The IRS argued and the court agreed that she had a prior opportunity to dispute it, even if she hadn’t taken advantage of it.  Under the current status of the law, that result was anticipated, although many of us wish that either the IRS or Congress would change that. 

Second, she requested “currently not collectible” status and withdrawal of the notice of federal tax lien.  Given that the Settlement Officer disagreed and that the abuse of discretion standard applied, you already can guess how that was decided.

Finally, she raised a different – and creative! – argument concerning why she shouldn’t have to pay.  My guess is that this argument is why the Court issued a division opinion instead of a memorandum opinion; it’s also why I chose to write this post.  I’m not sure that argument would have ever occurred to me or that I would have raised it if it had occurred to me.  I’m also not surprised that the argument lost; it was certainly a long shot.

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Background

Ms. Chavis and her former husband worked, as the Secretary and President respectively, at Oasys Information Systems, Inc., a C corporation.  The business address for Oasys was Ms. Chavis’s home address.  Oasys withheld payroll taxes from employees’ wages but never paid the taxes over to the government.  The amount was substantial enough that the IRS pursued trust fund recovery penalties under section 6672 against both Ms. Chavis and her former husband.  The IRS issued Letter 1153 Notice of Trust Fund Recovery Penalty to both Ms. Chavis and her then-husband on July 13, 2015, proposing to assess $146,682 against each of them.

The Letter 1153 informs responsible parties that they can appeal to the local Appeals Office within 60 days and provides detailed instructions on how to do that.  Ms. Chavis did not appeal.  On November 16, 2015, the IRS assessed.  She and her husband divorced in 2016 and the IRS apparently collected some of that amount from the husband.  The IRS filed a notice of federal tax lien on May 29, 2019 and issued Ms. Chavis a collection notice stating her right to a CDP hearing.  She timely requested a hearing and, when Appeals ruled against her, filed a Tax Court petition.

The first two (my order) arguments

These were the easiest for the Court to dispose of. The decision that Ms. Chavis could not challenge the underlying liability was expected.  For assessable penalties, an opportunity to dispute the liability at Appeals is treated as sufficient.  Judicial review in a pre-payment forum – Tax Court – is not required.  The IRS and the Court consider that a settled issue, unfortunately, for assessable penalties, including the TFRP.  If you’d like a refresher on why that’s a bad result, start with a couple of posts (here and here) by Keith.  Ms. Chavis had that opportunity to go to Appeals; she acknowledged receiving the Letter 1153 and signed the return receipt.  So the court didn’t consider this argument.

Similarly, the collection alternatives that Ms. Chavis suggested – CNC status and withdrawal of the NFTL – were rejected by the Settlement Officer and the Court easily concluded that the rejection was not an abuse of discretion.  The SO found that she could pay $1,685 per month toward the liability.  Ms. Chavis argued that the calculation of $1,685 per month available income was “unreasonable and not economically feasible.”  As the Court noted:

In determining this figure, the SO calculated allowable monthly expenses by reference to local standards prevailing in the Missouri county where petitioner resided. . . . The SO was authorized to rely on those standards in assessing petitioner’s ability to pay, and it was her burden to justify a departure from the local standards. . . . Petitioner has not satisfied that burden.

However, it appears that the real issue may have been assets rather than income.  The SO had disallowed home mortgage expenses of $1,611 because Ms. Chavis had not proved that she had no equity in the home.  See IRM 5.16.1.2.9(1): “An account should not be reported as CNC if the taxpayer has income or equity in assets, and enforced collection of the income or assets would not cause hardship.”  Ms. Chavis argued that she did not have “access” to any equity, but she hadn’t submitted evidence during the CDP hearing.  She lived in Missouri, so the court’s review was limited to the administrative record per Robinette v. Commissioner, 439 F.3d 455 (8th Cir. 2006).

The request to withdraw the NFTL also failed.  The Court reviewed the conditions under which a withdrawal is authorized, in section 6323(j), and concluded that all but one either clearly did not apply or had not been asserted by Ms. Chavis.  For that final condition – that withdrawal would facilitate the collection of the tax liability – Ms. Chavis had not presented any evidence in the CDP hearing.

Creativity!

Those arguments didn’t prevail but Ms. Chavis had one more up her sleeve.  You’ve probably guessed even if you didn’t read the opinion.  She was married at the time the TFRP was assessed.  Both she and her then-husband were liable for the entire amount.  What does that suggest?  Relief from joint and several liability under section 6015!

Ms. Chavis checked the box for innocent spouse relief, among others, on her request for a CDP hearing on May 29, 2019.  In July 2019, she submitted Form 8857 to the Cincinnati Centralized Innocent Spouse Operation.  CCISO told her within a few weeks that she did not qualify for section 6015 relief, but Ms. Chavis still argued for it (unsuccessfully) during the CDP hearing.  It’s not clear whether she also argued for it in her response to the government’s motion for summary judgment.

As noted above, the Court rejected the challenge to the underlying liability because Ms. Chavis had a prior opportunity to dispute it.  An innocent spouse claim is a defense against, rather than challenge to, the underlying liability and therefore is not precluded under section 6330(c)(2)(B) from review as part of the CDP hearing. 

As the court pointed out, subsections (b) and (c) of section 6015 both reference the taxpayer filing a joint return (i.e., income tax) and provide for relief for an understatement or deficiency with respect to that return.  Because the deficiency in this case arose from TFRP for the corporation’s payroll taxes, subsections (b) and (c) would not apply.  However, subsection (f) does not include such a reference to a joint return. 

This may remind you of the situation several years ago with respect to the statute of limitations for innocent spouse claims under subsection (f).  The Code provided a two-year statute of limitations for subsection (b) and (c) claims but did not specify a statute of limitations for (f) claims.  So, the IRS and Treasury issued a regulation to establish a two-year statute of limitations for (f) cases as well.  The Tax Court ruled that regulation was invalid, interpreting the “audible silence” by Congress as an indication there should be no statute of limitations for (f) cases.  Despite success in appeals to Circuit Courts, the IRS backed down and decided to limit (f) claims only by the ten-year statute of limitations for collection in section 6502.  The Taxpayer First Act later established, at section 6015(f)(2), a statute of limitations: if unpaid, before the section 6502 collection statute of limitations expires, or if paid, before the section 6511 refund claim statute of limitations expires.  It still doesn’t say anything about income tax or joint return in subsection (f). 

Would the Tax Court refuse to import the “income tax only” provisions in (b) and (c) to (f)?  Unfortunately for Ms. Chavis, the answer was no.  The Court concluded easily that 6015(f) applies only to income tax.  The caption for section 6015 is “Relief from joint and several liability on joint return.”  Captions don’t always carry a lot of weight, but there was much, much more:

The Commissioner has specified, in Rev. Proc. 2013-34, 2013-43 I.R.B. 397, the procedures governing equitable relief. These procedures confirm that subsection (f), like subsections (b) and (c), applies only to joint income tax liabilities. See Rev. Proc. 2013-34, § 1.01, 2013-43 I.R.B. at 397 (“This revenue procedure provides guidance for a taxpayer seeking equitable relief from income tax liability. . . .”). Indeed, the IRS will not consider a taxpayer’s request for equitable relief unless she meets seven “threshold conditions,” one of which is that the “income tax liability from which the requesting spouse seeks relief” is attributable to the non-requesting spouse. Id. § 4.01(7), 2013-43 I.R.B. at 399. Another condition is that “[t]he requesting spouse [must have] filed a joint return for the taxable year” for which relief is sought. Id. § 4.01(1).

There is more than just a Revenue Procedure:

Although a TFRP liability is a form of “unpaid tax,” section 6015(f) applies only to unpaid taxes or deficiencies arising from joint income tax returns. See Treas. Reg. § 1.6015-1(a)(1)(iii) (stating that section 6015(f) applies only to “joint and several liability for Federal income tax”); H.R. Rep. No. 105-599, at 254 (1998) (Conf. Rep.), reprinted in 1998-3 C.B. 747, 1008 (stating that section 6015(f) applies only to “any unpaid tax or deficiency arising from a joint return”).

That seems very persuasive support for the conclusion that section 6015 relief is not available for the TFRP.  Since section 6672 is an assessable penalty not subject to deficiency procedures, there is no judicial review of the validity of the penalty in Tax Court at all.  Although this seems very clear, apparently it had never been decided by the court, which might explain why this was a division opinion instead of a memorandum opinion.  Ms. Chavis seems to be the first one to ever argue in Tax Court for innocent spouse relief from the TFRP.

TFRP is also a divisible tax, so at least the Flora rule is not as much of a hurdle to judicial review, and there’s a right of contribution in section 6672(d).  However, it’s still a nasty penalty and difficult to challenge once you don’t head it off at the interview stage.

Standard/scope of review – CDP versus innocent spouse

The opinion states the standard of review for CDP cases as follows:

Where the validity of the taxpayer’s underlying liability is properly at issue, we review the IRS’s determination de novo.  Goza v. Commissioner, 114 T.C. 176, 181-82 (2000). Where the taxpayer’s underlying liability is not properly at issue, we review the IRS’s decision for abuse of discretion only. Id. at 182.

That comes pretty much straight from the legislative history of the IRS Restructuring and Reform Act of 1998, which enacted the CDP hearing process of section 6330.

The court previously considered stand-alone innocent spouse cases under section 6015(e) de novo for both the standard of review and the scope of review.  Porter v. Commissioner, 132 T.C. 203 (2009).  The Taxpayer First Act of 2019 specified both the standard of review (de novo) and the scope of review (limited to the administrative record plus “any additional newly discovered or previously unavailable evidence”) in new section 6015(e)(7).  The Chavis petition was filed on September 23, 2020, after the effective date of section 6015(e)(7).  For more on the complexities of TFA and innocent spouse relief, start with Christine’s posts here and here.

So, we have two different standards/scopes of review – for CDP and for stand-alone innocent spouse cases.  Which applies when dealing with an innocent spouse claim in a CDP hearing? standard and scope of  It doesn’t matter for this case; although the court included the discussion under a section labeled “Abuse of Discretion,” it also noted in footnote 2:

We need not decide whether the SO’s resolution of petitioner’s spousal defense challenge should be reviewed de novo rather than for abuse of discretion. We would decide this issue the same way under either standard because (as explained in the text) it presents a purely legal question.

It does matter, though, when taxpayers have an innocent spouse claim with respect to income taxes in a CDP case. 

A quick check of Effectively Representing Your Client Before the IRS turned up Francel v. Commissioner, T.C. Memo 2019-35, which had already addressed this same scenario.  The taxpayer in that case filed a request for innocent spouse relief before receiving the final notice of intent to levy.  The request for a CDP hearing asked for innocent spouse relief.   The court concluded that it had jurisdiction with respect to the innocent spouse issue under both section 6330(d)(1) and section 6015(e).  The IRS argued that the standard of review should be abuse of discretion and the scope of review should be limited to the administrative record.  (Dr. Francel lived in Missouri, as did Ms. Chavis, so the Eighth Circuit’s decision in Robinette applied.).  The court concluded that both the standard of review and the scope of review would be de novo because the petition was (in part) a petition under section 6015(e)(1).  

Francel was decided (a) before the Taxpayer First Act, which restricted the scope of review in innocent spouse cases, and (b) in one of the three circuits that restrict the scope of review to the administrative record in a CDP case.  After the Taxpayer First Act, and in one of the other circuits, it’s possible to have a situation in which:

  • The standard of review is more favorable to the taxpayer under section 6015(e) – de novo – rather than under section 6330(d)(1) – abuse of discretion.
  • The scope of review is more favorable to the taxpayer under section 6330(d)(1) – de novo – than under section 6015(e) – limited evidence beyond the administrative record.

In a situation like that, how should the court evaluate the standard and scope of review?  All or nothing, whether section 6330(d)(1) or section 6015(e)?  Or mix-and-match, with the most favorable to the taxpayer for both standard of review (section 6015(e)) and scope of review (section 6330(d)(1))?

Footnote 2 in the Chavis case, quoted above, avoids deciding which standard and scope of review would apply in these situations.  It didn’t matter for Ms. Chavis’s situation.  Now that we have the Taxpayer First Act, will the court want to re-visit this question in a future case where the decision on the merits is not a purely legal question?

Protecting Tax Court Litigants and Revealing Records: A Conundrum for the Tax Court with a Simple Solution.

We have reported before here (reporting on the Estate of Michael Jackson) on a glitch in DAWSON, the Tax Court’s docket system, where the entire docket becomes sealed when the intent is to seal a specific document.  Recently, Chief Judge Kerrigan spoke at the NYU Tax Conference and indicated this glitch has been fixed or almost fixed, and the Court will begin unsealing dockets allowing non-parties to see the docket sheet and to potentially obtain unsealed documents in cases with one or more sealed documents.  Because I did not attend the conference, I am relying on an article in Tax Notes by Nathan Richman for this information.

This post will branch away from the sealing glitch to talk about Tax Court records in general and protecting certain documents currently available to the public.

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Unsealing Dockets

It may take longer for some dockets to be unsealed because of their size.  For example, whistleblower cases frequently have one or more sealed documents but generally do not have sizeable dockets.  Cases involving large corporations, by contrast, may have only one sealed document but typically have huge dockets.  Apparently, unsealing a docket takes a bit of effort in cases with hundreds of entries. Of course, some judges will review and unseal their dockets more quickly than others.

General Public Access to Documents

According to Nathan’s article, former Chief Counsel Michael Desmond asked the Chief Judge if the DAWSON developments will lead to a new policy regarding public access to Tax Court documents (similar to PACER and other courts that allow remote electronic access to case documents).  The article states:

Kerrigan noted that there’s a kiosk in the court’s Washington courthouse that allows more electronic access than is available to taxpayers using just the court’s website. She said she hopes that will help but that she isn’t sure if the court’s rules committee has rethought its position on remote electronic access.

The “kiosk” is a table in the tiny foyer of the Tax Court’s record office on its ground floor which houses two computer terminals that allow access to essentially all unsealed documents in the Court’s docket at no charge.  Printing was not available the last time I was there, which was pre-pandemic.  Someone using these terminals must take notes on the files they view or order the documents from the clerk’s office on a form which is readily available, but at a cost of $.50 per page capped at $3.00 per document.  Several years ago the Court posted signs warning users not to take pictures of the documents, perhaps in response to an earlier post.

Of course, unsaid in the Chief Judge’s quote regarding the kiosk is the fact that that the Tax Court building has been inaccessible to the public for most of the past two years making access to the terminals impossible. Further, just getting to the Court is expensive and time consuming for most taxpayers and practitioners. I still do not understand why the Court cannot provide access in the same way as PACER so that filings may be accessed wherever the requestor may be. This limitation is especially confounding now that the Court has started embracing the modern era by hosting zoom-based trials. My views are not new; I have written on several occasions about the lack of public access.   

It was interesting to see a quote in the article from the National Taxpayer Advocate, who also seeks greater access:

Afterward, National Taxpayer Advocate Erin Collins told Tax Notes that her lack of access to case dockets beyond what’s now publicly available impedes her statutory duty to report on the most litigated issues in Tax Court. “Furthermore, the whole taxpayer public suffers from the lack of open access to non-sealed filings in the Tax Court,” she said. “I’d encourage the court to use DAWSON to increase electronic access to filings.”

Sealing or Protecting More Documents

As important as access to documents may be, it is even more important that taxpayers know they can seek Tax Court review without fear for their personal safety. Sealing documents filed by individual taxpayers protects the important statutory right to Tax Court review. The sealing process and the general process of deciding what is public plays a critical role in protecting taxpayer rights beyond providing general record access. 

Before discussing the importance of circumscribing access to pleadings, let’s look at some history. Back in the pre-DAWSON era when the Court was issuing designated orders, Patrick Thomas wrote a thorough post looking at the levels of sealing, how the Tax Court went about it, and how some other courts considered this issue.  He had some suggestions for the Tax Court on how to approach sealing that still maintain currency.  Commenter-in-Chief Bob Kamman wrote a post on sealing records, particularly with regard to sealing the taxpayer’s address.  His post includes thoughtful comments on the process.  I also thought about that issue in a Tax Notes article linked through this post.  Guest blogger Sean Akins wrote the first post on sealing that we published, and infused it with his knowledge of physics as well as explaining the applicable rules. 

Sealing records, particularly protecting a party’s location information, takes on crucial importance when protecting the information of taxpayers who are domestic abuse survivors, whether they are litigating an innocent spouse issue or another matter. Former National Taxpayer Advocate Nina Olson recently participated in a call with a nationwide group of advocates for survivors of domestic abuse talking about the particular challenges their clientele faces.  In preparing this post, I reached out to Nina by email and she responded by writing that the group spent time

discussing the barriers these folks face in receiving the CTC [Child Tax Credit] and RRC [Rebate Recovery Credit], where the abusers have received these payments instead.  As we talked through the ability to litigate these cases, the advocates made clear how many survivors will not seek judicial review because of fear of retribution by the abuser – especially where there are few guarantees of protection of identity/location etc.

Think about it: even the place of trial may reveal the taxpayer’s location. (I save for another day my views on the need for the Court to maintain the availability of zoom trials, which I note are especially important for this cohort of taxpayers.)

Thus I make three recommendations to the Court. First, the Court should require individual litigants to provide their address on a separate form. The Court already requires that petitioners redact their social security numbers and provide it separately on Form 4, Statement of Taxpayer Identification Number, which it shields. At least one LITC has steadfastly maintained that the Court should designate a similar form for taxpayer addresses, and also requiring that addresses, like SSNs, be redacted from the SNOD, NOD, or other notices the petitioner may submit to the Court.

Second, the Court should automatically seal its Application for Waiver of Filing Fee. This Form seeks information that could lead to determining a litigant’s whereabouts. Question 3, for example, asks the litigant to describe real estate that party may own. Presumably, this would include that property’s address. The Form also requests income information by source. There is no need for this information to be viewable by prowlers, be they abusive partners or even strangers. The Court already recognizes the need for some privacy on this Form by requesting that the litigant list, by initials rather than by name, minors who depend on the litigant for support. It’s an easy step for the Court to protect the entirety of this Form and treat it as it does Form 4. And it would not be the only court to protect this piece of litigants’ personal information. The US Court of Appeals for the Federal Circuit protects access to a filed fee waiver form.  (I think the practice of the Federal Circuit, which was reported to me by a former student who is clerking there, is widespread among federal courts.  I sent a message to the PACER administrators seeking clarification but have not had a response as yet.) Alternatively, the Court could adopt the form used by the Court of Veterans Appeals. That Court’s Form 4, Declaration of Financial Hardship, simply asks the litigant to attest that payment of the $50 filing fee would be a financial hardship.

Third, the Court must offer litigants the opportunity to file their pleadings under seal from the very start of a case. A check box on its form petition, and a corresponding amendment to Rule 34, could include a requirement that individual petitioners request that the pleadings remain under seal, much the same way the Court has a case designation checkbox. With over 70% of Tax Court petitions filed pro se, it’s not enough for that the Tax Court’s Rule 103 allows a party to file a motion for a protective order.

We don’t want petitioners to forego their right to obtain significant benefits delivered through the tax system because danger might result if they reveal identifying information as a result of a Tax Court filing.  Creating a process for unrepresented taxpayers in all types of cases to alert the Court to the need for protection of certain information that would otherwise become publicly available could help remove some of the barriers to exercising taxpayer rights. I urge the Court to solicit the expertise of organizations who work with domestic abuse survivors in order to work through these issues and develop effective strategies that safely keep the Court doors open for all litigants.