Refining the Tax Court’s Jurisdiction in Passport Cases

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IRS Did Not Appeal This Tax Court Decision. They Just Ignored It.

We welcome back commenter in chief Bob Kamman writing today about his experience in a Tax Court case.  One of the benefits of going to Tax Court is getting an attorney from Chief Counsel’s Office assigned to the case.  While not everyone will have a perfect encounter with the attorneys from Chief Counsel’s Office, dealing with them to fix a problem beats almost any other option offered in trying to fix a problem with the IRS.  Sometimes, paying the $60 to get to a Chief Counsel attorney can be worth the cost of admission.  If something goes wrong with the client’s case that relates to a year in Tax Court, don’t try to fix it by calling the place at the IRS that made the mistake or contacting the Taxpayer Advocate’s office, go straight to the Chief Counsel attorney, who will almost always be able to fix the problem with a lot less effort than it would otherwise cost you.  Keith


I’m Nobody! Who are you?

Are you – Nobody – too?

Emily Dickinson

About 20 months and one pandemic ago, I complained here about how IRS did not timely answer a Tax Court petition I had filed.

I feel better now. I’m not the only one IRS ignores. They ignore Tax Court orders also.

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The tardy IRS answer was filed shortly after the blog post appeared. Judge Gustafson initially rejected it because it was not accompanied by a motion to request late filing. IRS Counsel filed a “motion for leave to file out of time answer,” it was granted, and the case proceeded two weeks later.

This case arose from a CP-2000 notice dated July 22, 2019, involving omitted income from a 2017 return. IRS initially proposed an assessment of $4,761 plus interest. On August 6, 2019, we provided documents showing the actual amount owed was only $2,847.

Two months later, the response from IRS was to issue a notice of deficiency dated October 15, 2019, for the same $4,761 shown on the CP-2000. This happened shortly after the end of the fiscal year, but I’m just guessing that timing had something to do with it.

My experience has been that IRS never rescinds a notice of deficiency, even though they have a form (8626) for agreeing to that. As Janet Hagy, a CPA in Austin wrote here, “obtaining a rescission is not an easy process. In most cases, it is probably more expedient to just file a Tax Court petition and use the Appeals process to resolve the case.”

So, in November 2019, my clients sent a check for $2,847 to IRS, identifying it as an advance payment under Section 6603. At the same time, we bought the $60 ticket to Tax Court and filed a petition. Chief Counsel’s January 2020 answer was late, but after that, they were quick to agree with us and stipulate to the $2,847 amount already paid.

On March 3, 2020, Chief Judge Foley signed the stipulated decision that the tax due was $2,847. This was one of his last actions before Covid-19 shut down the Tax Court building and then trials everywhere, within weeks.

My clients had paid the tax, but I told them to wait for a final bill from IRS before paying the exact amount of interest owed. They received a bill and paid it. I should have told them to let me review the bill, but what could go wrong?

What went wrong is that IRS in Ogden, Utah issued a revised CP-2000 five months later, on August 17, 2020, proposing an assessment of $3,057. A tuition tax credit was still being disallowed, although we had addressed that issue with them a year earlier. Then on September 14, 2020, like computer clockwork, a CP-22A first collection notice demanded payment of this amount, less the advance payment of $2,857. My clients paid the additional $210, along with $297 interest, and I did not discover the error until I heard from them again in April 2021 to prepare their 2020 returns.

By then it was a year into the pandemic. I mailed a letter on April 7, 2021, to the Counsel attorney who had handled the case, explaining what had happened and enclosing copies of relevant documents. There was no response.

So, on May 20, 2021, I filed a Form 911 asking my local Taxpayer Advocate for assistance with correcting the error. There was no response to that, either. Such has been my experience in other requests for Taxpayer Advocate help. I attribute it to my lack of academic or tax-clinic credentials.

Surely, I thought, the Tax Court must have some rule governing enforcement of its decisions when IRS ignores them. All I could find, though, was Rule 260, which deals with a “proceeding to enforce an overpayment determination.” There had not been an overpayment determination; my clients had agreed there was a deficiency. They had paid the exact amount ordered by the Tax Court decision. Our problem was with the IRS decision, which was to ignore the case history and demand more tax.

Fortunately, an unexpected development allowed me to suspend my search for possible Tax Court relief. The letter I had sent to the Counsel attorney at his last known address was returned to me as undeliverable, several months later. I checked the Tax Court docket online, and physical addresses no longer appear there. The only contact information is an email address.

So, I emailed my request for help. A couple weeks later, a paralegal specialist called and left a message that they are working on fixing the problem.

Maybe I’m not such a nobody, after all.

A Second Bite at the Innocent Spouse Apple

We regularly have clients who come into the Tax Clinic at the Legal Services Center of Harvard Law School who received a determination in the past that they did not qualify for innocent spouse relief.  These individuals may have what looks to us like a good case, but we struggle to get them a favorable result because they missed the 90-day period for filing a petition in Tax Court following the receipt of the determination letter denying relief.  The manual has a provision for seeking reconsideration of innocent spouse relief similar to that for seeking audit reconsideration.  While I applaud the IRS for giving taxpayers this second chance, it is a second chance for an administration procedure and getting the innocent spouse unit to rule favorably is hard.

So, I read with interest the case of Vera v. Commissioner, 157 T.C. No. 5 (2021) in which the Tax Court in a precedential opinion allows the taxpayer to come into the Tax Court after dismissing her first attempt to come to the Tax Court as untimely.  Why it did so and how she came to receive a second ticket to Tax Court make this an interesting case. So interesting, in fact, is this case that Bryan Camp has also recently written about it in a post which you can find linked here.

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I note that Ms. Vera represented herself in this case.  In reading the opinion I came away with the impression that Judge Buch or his law clerks did a lot of research that might have otherwise been supplied by a represented petitioner.

Ms. Vera submitted joint returns for 2010 and 2013 with her then-spouse.  The IRS adjusted the 2010 return increasing the liability.  The IRS did not adjust the 2013 return; however, the liability reported on the return was not paid in full.

In 2015, Ms. Vera requested innocent spouse relief with respect to 2013.  The IRS denied relief.  She filed a Tax Court petition on the 91st day after the notice of determination and the Tax Court dismissed the case for lack of jurisdiction.

In November of 2016, Ms. Vera requested innocent spouse relief with respect to 2010.  In doing so, she mailed to the IRS several other documents including her request for innocent spouse relief for 2013.

On March 14, 2019, the IRS denied her innocent spouse relief based on the November 2016 submission.  The header of the denial letter specifies 2010; however, the body of the determination letter addresses both 2010 and 2013, stating:

For tax year 2010, the information we have shows that you didn’t meet the requirements for relief.

For tax year 2010, you didn’t have a reasonable expectation that the person you filed the joint return with would or could pay the tax.

For tax year 2013, you didn’t comply with all income tax laws for the tax years that followed the years that are the subject of your claim.

In response to this determination letter, she timely filed a Tax Court petition listing both 2010 and 2013.  She addressed both years in her statement of facts.  In response, the IRS filed a motion to dismiss as to 2013, taking the position that the determination letter is not a second determination for 2013 and that a second request for innocent spouse relief “is available only when seeking to allocate a deficiency.”  Since the 2013 year is an underpayment year, the IRS argued that she could not come to Tax Court on that year after having once received a determination letter that she did not timely petition.

The court begins its discussion of the situation by setting out what is normal in an innocent spouse case and what is unclear from the statute:

Final determinations in innocent spouse cases are typically singular, conclusive decisions. We previously made this observation in dicta in Comparini v. Commissioner, 143 T.C. 274 (2014). Our Opinion in Comparini, a case involving our whistleblower jurisdiction, noted a distinction between the provisions that give us jurisdiction in whistleblower cases and those that pertain to innocent spouse cases. Id. at 281. We observed that the whistleblower provision gives us jurisdiction over any determination, whereas a predicate to our innocent spouse jurisdiction under section 6015(e) is the mailing of a final determination. Id.

Although section 6015(e)(1)(A)(i)(I) refers to a final determination, nothing in that provision prohibits the Commissioner from issuing more than one final determination as to a given tax year. To the extent this provision might be interpreted as allowing for only one final determination, it does not specify whether it is one final determination per request for innocent spouse relief or one final determination per tax year.

The court then looks at the applicable regulation, 1.6015-1(a)(2), and finds that the IRS “believes that more than one final determination can be issued with respect to a single tax year.”  The regulation contemplates that ordinarily the IRS will only make one final determination of innocent spouse status but that it could make a second determination upon a change in marital status among other reasons.  The court points out that IRM 25.15.17.7 states that if the IRS decides to issue a second determination, the second determination does come with the right to petition the Tax Court.

The court discusses the ability of the IRS to reconsider an innocent spouse case and not issue a second determination letter.  It did so in Barnes v. Commissioner, 130 T.C. 248 (2008) and the letter it issued was determined by the Tax Court not to confer upon it jurisdiction.

The court then looks at its whistleblower jurisprudence where it has held that a successive letter purporting to be a final determination confers jurisdiction upon the court as in Comparini v. Commissioner, 143 T.C. 274 (2013).

Although the IRS argues that including mention of 2013 in the second final determination letter sent to Ms. Vega was done in error, the court finds that the notice provides an unambiguous denial of both 2010 and 2013.  The letter does not mention that she sought an improper second request for 2013.  Looking again to whistleblower law, the court notes that it has previously determined in Ringo v. Commissioner, 143 T.C. 297 (2014) that it has jurisdiction to hear a case even when the IRS issues a determination letter by mistake.  It has similar jurisprudence regarding deficiency notices as discussed in Hannan v. Commissioner, 52, T.C. 787 (1969) and in collection due process cases as discussed in Kim v. Commissioner, T.C. Memo. 2005-96.

Because of its consistent case law looking to the notice and not behind it, the court finds that the same principle applies to Ms. Vega’s petition for innocent spouse relief.  The decision does not mean that she has won her request for innocent spouse relief, but only that she will now have the opportunity to prove her case in Tax Court.  If she wants assistance on the merits of her case, I invite her to reach out to the Tax Clinic at the Legal Services Center of Harvard Law School or to her local LITC.  It would be a shame not to obtain a complete victory after her success on the jurisdictional issue.

Because of the case law in other areas of the Tax Court’s jurisdiction, I doubt that the IRS will appeal this decision.  I do not think that too many taxpayers have the good fortune to receive a second notice of determination for the same period by mistake.  My guess is that this situation occurs infrequently and fighting about it further will provide few benefits.  Notices of deficiency and notices of determination do matter.  The IRS can confer on the Tax Court jurisdiction inadvertently.  Congratulations to a pro se taxpayer who has created favorable precedent for others who may find themselves similarly situated.

Tax Court Announces Return to In-Person Trials

On August 27, 2021, the Tax Court issued a press released stating that it anticipates returning to in-person proceedings starting with the winter trial sessions for 2022.  In the announcement, the Tax Court also states that it will continue to hold trials remotely where appropriate.

All of the Tax Court calendars scheduled for the Fall 2021 calendars are remote.  Until the August 27 announcement it was unknown when Tax Court judges would begin holding in-person trials again.  It was also unknown if the Tax Court would continue to offer remote proceedings as an option.  In issuing Administrative Order 2021-1 the Tax Court terminated Administrative Order 2020-2 which replaced in-person proceedings with remote proceedings and set a path forward for post-pandemic trials at the Tax Court.  By adopting a rule that allows for both in-person and remote proceedings, the Tax Court follows another Article 1 court, the Court of Veterans Appeals, and provides maximum flexibility for the parties and itself to conduct future proceedings.

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The announcement creates some rules for requesting remote proceedings.  The rules contemplate that starting with the Winter 2022 Tax Court calendars the default setting for a trial will return to in-person proceedings.  Judges and trial clerks will start buying their plane tickets to the 73 cities where the court holds trials outside of D.C.  While in-person proceedings return to the normal Tax Court setting, the announcement provides that either party can request a remote proceeding by filing a motion up to 31 days prior to the first day scheduled for the trial session on which the court sets the case.

The announcement provides that a petitioner could request a remote proceeding at the time of filing the petition or any time between that date and the 31st day before the trial calendar start date on which their case appears.  Although not specifically stated, I assume respondent (the IRS) could request a remote proceeding at the time it answers the case or any time prior to the 31st date before the calendar.  The Court included with the announcement a sample motion that the parties could use to make the request.  It would seem that parties could start making the request now if they knew they wanted a remote proceeding.

Whether to grant the motion for a remote proceeding is at the judge’s discretion.  The announcement doesn’t say which judge would grant the motion if the party makes the motion before assignment of the case.  Typically, Tax Court cases remain unassigned until they appear on a calendar.  Orders issued in unassigned cases usually come from the Chief Judge’s chambers.  Once a case appears on a calendar, the judge assigned to that calendar takes control of the case.  If the party waits for the assignment of a calendar to request a remote proceeding, the judge in charge of that calendar will make the decision whether to put the case for a remote proceeding.

If a case is removed to a remote proceeding, the court indicates that it will seek to place the case on a stand-alone remote trial session “that is at least 5 months away.”  This sounds like a party seeking a remote proceeding after issuance of a calendar will receive a continuance of sorts.  This may be why the court requires the motion be made 31 days in advance.  Motions to continue made in the last 30 days before a trial session are presumed to be for purposes of delay.

The announcement does not make clear whether the trial judge assigned for the in-person calendar would be the same trial judge who would handle the remote calendar.  Depending on how that works, it is possible that filing the motion could not only allow the party more time to get ready for trial but allow the party to obtain a new judge to try the case.  Maybe that’s not such a big deal in the Tax Court as it might be in other courts.  By and large the trial judge in the Tax Court is not very outcome determinative but there could be times when a petitioner or the respondent might want a different judge than the one assigned to the calendar.  This could provide a path to that result if the judge in charge of the remote session is not the same as the judge at the in-person session. 

The announcement does make clear that the presiding judge for a calendar not only makes the decision regarding whether to allow the remote proceeding when the motion is filed after the issuance of the calendar but also can decide whether to handle the remote trial themselves at an agreed upon time or put the case over to the remote calendar.  In addition to the normal considerations regarding how much time a judge has invested in a case, I imagine the size of the trial location could also play a role in this decision.  Small venues that typically have only one trial calendar per year do not normally have a full complement of 100 cases on a calendar.  It may not make sense to create a virtual calendar for those locations that consists of only one or two cases and the presiding judge may default to retaining jurisdiction.

The remote trial sessions will all begin at 1:00 PM ET.  This allows for the sessions to begin at the same time across the country and is a departure from the normal 10:00 AM starting time in the time zone where an in-person trial session is held.  The parties in Hawaii might need to get up a little early under this system but the court has adopted this rule to reduce confusion.

The announcement states that the public will have access to remote proceedings.  I expect the public would have the same type access it has to remote proceedings today.  The court also indicates that it will continue to coordinate with low income tax clinics and local bar sponsored pro bono programs to provide assistance for petitioners who end up on a remote calendar.  I expect the court will do that it much the same way it has done with remote calendars over the past year.

The court’s announcement will undoubtedly get Chief Counsel’s office thinking about the policies it wants to adopt regarding remote proceedings.  When will it make a request for remote proceedings?  When will it oppose remote proceedings?  Sometimes for workload reasons it shifts cases from one office to another requiring it to send attorneys from one city to another at some expense.  Will it request remote proceedings in those situations as a cost savings measure?  Will it request remote proceedings even if the petitioner wants to conduct the trial in person?  Will it object to motions made 31 days in advance of trial as a tactic to obtain a continuance?  It will have lots to consider.

The announcement moves the Tax Court into a new phase.  It now becomes a court that does not need to travel quite as much and can schedule cases remotely.  Will the trial judge with only one case left on the North Dakota calendar exert some pressure on the parties to try the case remotely and save the judge two days of travel time?  Will there be other factors that influence the court in granting or denying requests for remote proceeding?  So far, the switch for remote or in person has been an on/off switch.  The court was either in person or remote but not optional.  It will be interesting to see how the parties and the court adapt to the optional world and where the Tax Court ends up 10 years from now.

Setting Aside a Settlement

Several years ago, a settlement reached by the Villanova clinic with an Appeals Officer was set aside when the AO’s manager would not accept the settlement recommendation.  Every settlement with an AO or a Chief Counsel docket attorney must receive approval from their manager.  Usually, the AO or the Chief Counsel attorney makes explicit statements about the limitations of their authority.  However, when time permits, these individuals also usually discuss a proposed settlement with their manager so that the formal submission of the settlement does not result in a surprise to the taxpayer and the employee.

Following the unpleasant surprise created by the rejection of a settlement that resulted from months of discussion with the AO, the clinic researched when a settlement could bind the government.  The research did not lead us to the conclusion that we could bind the government in this instance, despite the fact that the AO had led us on for some time.  I wrote a three part blog post series, linked here, here, and here, about our case and an article on the binding nature of settlements in general.  Les wrote a subsequent post involving a different case that also raised the binding nature of a settlement.

The recent 9th Circuit decision in Dollarhide v. Commissioner, 18-71722 (9th Cir. 2021) raises this issue in the context of a stipulation of settled issues.  It is a case worth noting.

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In the Tax Court it regularly occurs that the parties reach a settlement at the last minute.  Certainly the Tax Court is not unique in having parties reach a last minute settlement.  What does create more tension in Tax Court settlements is the circuit riding nature of the court.  It only comes to one of the 74 cities in which it sits every few months or every six months or once a year.  Continuing a case to allow the parties to wrap up a settlement could throw the case back on the general docket.  It could also allow the unscrupulous petitioner or representative to appear to settle only to back out when the court leaves town, not to return for quite some time.

To prevent parties from backing out and to cause them to show that they really did have a settlement, the court regularly requests parties to last minute settlements to file with the court a stipulation of settled issues.  Aside from the fact that the Tax Court travels, settlements can take some time because the issues need to be turned into tax computations.  By filing with the court a stipulation of settled issues, the parties essentially leave open the possibility of a Rule 155 argument on the consequence of the computation of the issues but otherwise commit themselves to a settlement.  The trial judge on the calendar typically retains jurisdiction over the case.  In the routine case in which a stipulation of settled issues is filed, the computation occurs within a relatively short time and a decision document is submitted to the court shortly thereafter.  Judges typically give about 30 days from the time of filing the stipulation of settled issues for this to occur, though continuances sometimes occur when something causes a delay.

The Dollarhides entered into a stipulation of settled issues in their Tax Court case.  After doing so, they declined to sign a decision document.  This sounds similar to what happened in the Dorchester Industries case, the seminal Tax Court case regarding the binding nature of certain agreements.  When the Dollarhides declined to sign the decision document, the IRS moved to enforce the settlement agreement and the Tax Court agreed with the IRS.

The Dollarhides appealed the enforcement and the 9th Circuit reviewed the decision for abuse of discretion.  The 9th Circuit found:

The Stipulation of Settled Issues, on which the Tax Court’s order granting the IRS’s motion for entry of decision is premised, says nothing about the key issue in this case: whether the Dollarhides were barred by the statute of limitations set out in 26 U.S.C. § 6511(b)(2) from receiving a refund for tax year 2006. The Dollarhides contested application of the statute of limitations bar in the Tax Court and continue to do so on appeal.

The Commissioner now concedes that there was no conclusive settlement agreement between the parties with respect to whether the Dollarhides were due a refund for tax year 2006. Because there was no settlement agreement between the parties with respect to this disputed issue, it was an abuse of discretion for the Tax Court to grant the Commissioner’s motion and enter a judgment enforcing the parties’ purported settlement of this issue. See Bail Bonds, 820 F.2d at 1547. We thus vacate and remand on this ground and do not reach the Dollarhides’ remaining arguments on appeal.

This is a somewhat shocking result that both the IRS and the Tax Court would miss the fact that a major piece of the settlement of the case was missing.  Since the IRS conceded that this piece was missing, we do not get an opinion from the 9th Circuit that parses the language of the settlement. 

While it’s possible to give the Tax Court a stipulation of settled issues that does not settle all of the issues in a case, when the parties do that they usually make it clear that the stipulation is in partial settlement of the case and does not resolve all issues.  I would have expected the parties to do that here and cannot say why the stipulation would have left the IRS and the Court with the impression that everything was settled.

Certainly, one lesson here is to make clear in submitting the stipulation of settled issues what issues, if any, are reserved by the parties.  Here, the Dollarhides avoid having the settlement foreclose them from making the refund argument but on appeal they faced the daunting task of overcoming an abuse of discretion standard.  Another lesson is that the possibility exists to challenge a decision based on a stipulation of settled issues.  In most cases taxpayers will lose, but the Dollarhide case shows that success is possible.

Is Economic Hardship the Antidote for Knowledge in an Innocent Spouse Case?

A pair of innocent spouse cases just came out, one granting relief, Grady v. Commissioner, T.C. Summ. Op. 2021-29, and one denying relief, Rogers v. Commissioner, No. 20-2789 (7th Cir. 2021).  Neither case reaches a surprising result but the cases do continue trends.  In this post I hope to not only provide some background on these two cases but to also explore the trends that have emerged in innocent spouse cases.

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In the Grady case, a case tried under the small tax case procedures, the Tax Court details a litany of issues that the non-requesting spouse (the ex-husband) caused during the marriage.  In the end, the Tax Court finds that the petitioner knew that the tax liability was not being paid so the knowledge factor is negative but essentially all other factors were positive, including economic hardship.  The Court states that:

While her knowledge when she signed the 2007, 2009, 2010, and 2011 joint Federal income tax returns that the tax due would not be paid weighs against her entitlement to section 6015(f) relief, generally knowledge is only one of the factors and knowledge alone is not determinative of the Court’s decision. See Minton v. Commissioner, T.C. Memo. 2018-15 (granting relief despite the taxpayer’s admitting to knowledge of a balance owed); Demeter v. Commissioner, T.C. Memo. 2014-238 (granting relief despite finding that the taxpayer knew or had reason to know that her ex-husband would have difficulty paying the tax liabilities). Therefore, in considering Ms. Gans’ entitlement to relief under section 6015(f), her knowledge is only one factor among many to be taken into account. As the Court has noted, no one factor, in and of itself, is determinative. See Stolkin v. Commissioner, T.C. Memo. 2008-211; Beatty v. Commissioner, T.C. Memo. 2007-167; Banderas v. Commissioner, T.C. Memo. 2007-129.

As regular readers of this blog know, we believe, and have discussed here and here, that the Tax Court treats knowledge as a super factor in many cases.  Knowledge alone did cause Mr. Jacobsen and Ms. Sleeth to lose their innocent spouse cases despite four (Jacobsen) and three (Sleeth) positive factors. The fact that, even in this case where knowledge is the only negative factor, the Court spends a paragraph explaining that knowledge alone is not determinative, provides insight into the power of the knowledge factor.

The Rogers case continues the unbroken string of losses for taxpayers appealing IRC 6015 cases.  Since the change in the law in 1998 placing the innocent spouse provisions in IRC 6015, no taxpayer has won an appeal from an adverse Tax Court decision.

In Rogers, the 7th Circuit affirms the Tax Court’s holding that the wife of a shelter promoter isn’t entitled to innocent spouse relief.  The court noted that this was not the first visit to the 7th Circuit by one or both members of the marital unit:

Married since 1967, John and Frances Rogers filed joint federal income tax returns for many years. They underreported their tax obligations many times over, and the misreporting was the product of a fraudulent tax scheme designed by John, a Harvard‐trained tax attorney. The fraud did not elude the Internal Revenue Service, though, and the many subsequent collection and enforcement proceedings in the U.S. Tax Court have not gone well for the Rogerses. Our court has affirmed the Tax Court’s rulings every time.

Before us now is another appeal by Frances challenging two Tax Court decisions denying her requests for what the Tax Code calls innocent spouse relief. Our review of the record shows that the Tax Court took considerable care assessing Frances’s pleas for relief, in the end denying them largely on the basis that she was aware of too many facts and too many warning signs during the relevant tax years to escape financial responsibility for the clear fraud perpetrated on the U.S. Treasury. While the tragedy of what Frances has endured over the years is in no way lost on us, we are left to affirm, for the Tax Court got it right.

In one respect, the 7th Cir. disagrees with the Tax Court as to a factor — the substantial benefit factor does not weigh against relief in this case.  But, interestingly, the 7th Cir. never cites or discusses the Rev. Proc. factors.  It limits its discussion to how the Rogers facts compare to a prior 7th Cir. opinion from 1996, Reser, which, of course, involved 6013(e).  The most the 7th Cir. will do is cite a reg. under 6015 concerning significant benefit for purposes of (b), 1.6015-2, that actually derives from language in the Committee reports from 1971 for enacting 6013(e).  The committee reports can be found at H.R. Rep. No. 91-1734, at 2 (1970), and S. Rep. No. 91-1537, at 2 (1970), 1971-1 C.B. 608. The 7th Cir. focuses entirely on the knowledge issue (both for purposes of (b) and (f) relief) as grounds for denying relief.  If there were no other factors negative for relief, though some positive or neutral factors, this would make Rogers a case similar to the Jacobsen case decided by the 7th Cir. two years ago.

Interestingly, the Grady case presented only one negative factor, knowledge, and multiple positive factors, but the Tax Court granted relief.  That’s the exact same situation as in Jacobsen, but the case leads to a different result.  Carl Smith has done a fair amount of research and thinking on this issue.  He concludes that the reason why Grady won while Jacobsen didn’t is that, although Jacobsen had four positive factors for relief, he did not put in the evidence to establish financial hardship, which Grady did.  Research of innocent spouse cases shows that proving financial hardship serves as the only way to guarantee that the taxpayer wins an innocent spouse case where knowledge is a negative factor.  Lack of significant benefit, marital status, and compliance with return filing obligations are not enough to outweigh knowledge in some Tax Court opinions.  Note that, in Sleeth (from the 11th Cir. this year), Ms. Sleeth was also said not to have proved financial hardship, and her case also involved only one negative factor (knowledge), and three positive factors (the ones in the prior sentence). Jacobsen’s positive factors included those from Sleeth, as well as an additional fourth positive factor — for his bad health.

As mentioned above, the Rogers 7th Cir. opinion did not cite or discuss the Rev. Proc. that was applicable.  That seems significant, since the Tax Court almost always discusses each of the Rev. Proc. factors.  In 2011, Carl Smith wrote a Special Report for Tax Notes entitled “Innocent Spouse:  Let’s Bury that Inequitable Revenue Procedure“.  In the article, he called for the courts to return to deciding the equitable factor under common law — using opinions involving 6013(e) and 6015, not the Rev. Proc. factors.  While using the factors of the Rev. Proc. seems appropriate for the IRS in administratively evaluating cases, it seems less appropriate for courts which need not be bound by the IRS’ views of appropriate equitable factors.

In some ways the courts, particularly the Tax Court, seem to apply their own thinking, yet cloak the decisions in the factors of the Rev. Proc.  While the Rev. Proc. may say that knowledge is no longer a super factor and while the Tax Court may say it is applying the Rev. Proc., the outcomes suggest that the court has its own equitable barometer which still places significant weight on knowledge.  If the Tax Court weighs knowledge more heavily, then taxpayers must look for something to countervail knowledge or potentially lose even where they have many positive factors. In cases where knowledge is the only negative factor and there are three or more positive factors (one of which is lack of significant benefit), the taxpayer usually wins, but the taxpayer always wins if one of the positive factors is also financial hardship.  You can find the list of cases where knowledge was the only negative factor in the Jacobsen brief filed by the Harvard Tax Clinic in the appeal to the 7th Circuit.

The Effect of the Missing Postmark

Today’s case highlights the difference in treatment of envelopes with no postmark between the Court of Federal Claims (CFC) and the Tax Court.  It turns out that on this issue, petitioners receive better treatment at the Tax Court.  Of course, it is better not to find out what a court thinks about a missing postmark.  For those filing Tax Court petitions, the ability to electronically file offers an easy way around the postmark/private delivery service/postal delay issue.  Credit to Carl Smith for spotting this case and providing much of the text of this post. 

I have heard that only 15% of Tax Court petitioners have taken advantage of the post-DAWSON ability to electronically file petitions.  The Tax Court is no doubt disappointed at this uptake of a provision that could save it time in processing petitions and in having to decide these types of cases.  For a relatively long time, individuals have been able to file electronically in the Court of Federal Claims, district courts, bankruptcy courts and other federal courts.  Yet, service from the post office continues its siren song for many petitioners.  With the low uptake on the Tax Court’s electronic filing system for petitions, a decent number of practitioners must continue to prefer USPS or a private delivery service, but in many instances the people using the non-electronic filing options are pro se and low income.

The taxpayers in the case at issue did not have an electronic filing option because the document they were filing that causes the problem was not a petition but a refund claim.  As of yet, the IRS does not have a way to electronically file refund claims (amended returns) that go back more than two years, apart from original tax returns.  Even where you cannot electronically file documents with the IRS, faxing documents to the IRS provides a fast way to transmit them and immediately receive a receipt.  But the IRS instructs filers of Form 843 refund claims to mail in the form.  The mailing of documents continues to fill the pages of case books with situations where things do not work out.

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In an opinion issued by the CFC in a refund case, McCaffery v. United States, No. 1:19-cv-01112 (Ct. Fed. Cl. 2021), the issue was whether the taxpayer could introduce extrinsic evidence of the mailing of a refund claim where the claim arrived at the IRS just after the filing deadline, but the envelope in which the claim came had no postmark.  Under regulations, extrinsic evidence is allowed where the postmark is illegible, and the Tax Court has extended the reg.’s reasoning to situations where there is no postmark at all.  The CFC disagrees with the Tax Court’s interpretation and would not accept parol evidence in the absence of a postmark.  The CFC dismisses the case for lack of jurisdiction, without discussing whether a dismissal for failure to state a claim might be more appropriate (i.e., there is no discussion of the Walby Fed. Cir. opinion which we discuss here in a post by Carl). 

Here’s what the CFC wrote about the Tax Court’s position:

Plaintiffs argue that extrinsic evidence may be used to prove the date of mailing for purposes of the deemed delivery rule even when the postmark is absent. They cite a line of cases from the Tax Court holding that extrinsic evidence as to timely mailing must be considered when an envelope contains no postmark at all. Pls.’ Opp. at 5 (citing to Sylvan v. Comm’r, 65 T.C. 548 (1975); Seely v. Comm’r, 119 T.C.M. (CCH) 1031, 2020 WL 201751 (2020); Williams v. Comm’r, 117 T.C.M. (CCH) 1328, 2019 WL 2373552 (2019); Blake v. Comm’r, 94 T.C.M. (CCH) 51, 2007 WL 2011294 (2007); Menard, Inc. v. Comm’r, 41 T.C.M. (CCH) 1279, 1981 WL 10531 (1981); Monasmith v. Comm’r, 38 T.C.M. (CCH) 60, 1979 WL 3117 (1979); Ruegsegger v. Comm’r, 68 T.C. 463 (1977)). That line of cases, however, originates in conceptual errors by the Tax Court in Sylvan.

In that case, much like this one, the Tax Court confronted an envelope with no postmark that was delivered after a deadline. The court found a gap in the statute: “There is nothing at all in the statute or legislative history indicating what Congress intended where the postmark is illegible; where there is no postmark because the petition was inserted in a new postal cover when the original cover was damaged; or where no postmark is affixed due to oversight or malfunction of a machine.” Sylvan, 65 T.C. at 552. “[I]n these circumstances,” the court reasoned, its “task . . . is to ask what Congress would have intended on a point not presented to its mind, if the point had been present.” Id. (quotes omitted). The court concluded, over a dissent, that extrinsic evidence should be admitted to prove the date of mailing for purposes of the deemed delivery rule not only when a postmark is illegible, but where it is absent.

That was erroneous for several reasons. To begin with, the Tax Court was mistaken that the Internal Revenue Code contains “nothing at all . . . indicating what Congress intended” in cases of absent postmarks. Id. Section 6511(a) contains a deadline, and section 7502 contains a deemed-delivery exception that is textually inapplicable when a postmark is missing. There is thus no gap to be filled; a late-received envelope lacking a postmark is simply untimely, whatever the extrinsic evidence might be. When a court treats circumstances covered by a general rule as falling into a gap, the court is not really “ask[ing] what Congress would have intended,” Sylvan, 65 T.C. at 552, but presuming that the statute should say something different.8 See also Antonin Scalia & Bryan Garner, Reading Law: The Interpretation of Legal Texts 94 (2012) (“As Justice Louis Brandeis put the point: ‘A casus omissus does not justify judicial legislation.’ And Brandeis again: ‘To supply omissions transcends the judicial function.’”) (citing Ebert v. Poston, 266 U.S. 548, 554 (1925), and Iselin v. United States, 270 U.S. 245, 251 (1926)).

Besides, when Sylvan was decided, the Treasury had already promulgated the regulation providing for extrinsic evidence of the contents of illegible postmarks, but not absent ones. See Republication, 32 Fed. Reg. 15241, 15355 (Nov. 3, 1967); see also Sylvan, 65 T.C. at 560 (Drennen, J., dissenting) (noting that the regulations then in effect “provide[ ] that if the postmark on the envelope is not legible, the petitioner has the burden of proving the time when the postmark was made”). By sanctioning proof by extrinsic evidence in other circumstances, the Tax Court merely created a new exception that neither Congress nor the administering agency authorized.9 That, too, is inappropriate: A judge should not “elaborate unprovided-for exceptions to a text, as Justice Blackmun noted while a circuit judge: ‘If the Congress had intended to provide additional exceptions, it would have done so in clear language.’” Scalia & Garner, supra, at 93 (citing Petteys v. Butler, 367 F.2d 528, 538 (8th Cir. 1966) (Blackmun, J., dissenting)). Nor should a court assume that because a legislature provided relief from a general rule in one circumstance, similar relief should be applied in other circumstances. See Easterbrook, supra, at 541 (“Legislators seeking only to further the public interest may conclude that the provision of public rules should reach so far and no farther[.]”).

Limiting judicial discretion to elaborate on enacted texts is especially important when it comes to this Court’s jurisdiction. This Court’s authority to hear cases brought against the United States rests on waivers of sovereign immunity which must be interpreted strictly. See Block v. N. Dakota ex rel. Bd. of Univ. & Sch. Lands, 461 U.S. 273, 287 (1983) (“[W]hen Congress attaches conditions to legislation waiving the sovereign immunity of the United States, those conditions must be strictly observed, and exceptions thereto are not to be lightly implied.”); see also, e.g., Sumner v. United States, 71 Fed. Cl. 627, 629 (2006). That makes it inappropriate to find jurisdiction by implying additional exceptions to Plaintiffs’ deadlines, or otherwise enlarging the deemed delivery rule.

In short — contrary to Sylvan — cases like this one are controlled by the plain text of the relevant statutes and regulations. See, e.g., Myore v. Nicholson, 489 F.3d 1207, 1211 (Fed. Cir. 2007) (“If the statutory language is clear and unambiguous, the inquiry ends with the plain meaning.”) (citing Roberto v. Dep’t of the Navy, 440 F.3d 1341, 1350 (Fed. Cir. 2006)).

The result in this case is harsh. Mr. McCaffery has declared — without contradiction, and with some circumstantial corroboration — that he mailed the amended return on a day when it would have been deemed timely, if it only had been postmarked.

In Sylvan, the date of receipt left the court with “no doubt whatsoever” that the envelope was mailed on a day when a contemporaneously applied postmark would have satisfied the deemed delivery rule. 65 T.C. at 550-51. Plaintiffs cite other cases where it seems unfair not to consider evidence of mailing. E.g., Pls.’ Opp. at 8 (citing to Glenn v. Comm’r, 105 T.C.M. (CCH) 1228, 2013 WL 424879 (2013) (noting that the Postal Service’s employee made an error, and but for that error, the envelope in question would have contained a timely postmarked date)). One can even imagine two filings with the same deadline mailed on the same day, one with a missing postmark and one with an illegible postmark, where extrinsic evidence on deemed delivery can only be admitted as to the latter. Like many bright-line rules, the deemed delivery rule might be simple and predictable to administer, but its results are not always satisfying in close cases.

Yet the text controls.

Premature Assessment Announcement from Tax Court

On August 16, 2021, the Tax Court issued the following press release regarding premature assessments:

UNITED STATES TAX COURT

Washington, D.C. 20217

August 16, 2021

PRESS RELEASE

On July 23, 2021, the United States Tax Court issued a press release regarding the significantly increased number of petitions received this year. To date, the Court has received more than 26,000 petitions.

On July 26, 2021, and August 2, 2021, the Court met with various stakeholders, including representatives from the American Bar Association’s Section of Taxation, the Internal Revenue Service, low income taxpayer clinics, and bar-sponsored pro bono programs, to address concerns relating to the increased number of petitions being filed. The Court continues to process petitions expeditiously. It has also begun notifying the IRS of those petitions the Court has received prior to service in order to limit the potential for premature assessment and enforcement action against petitioners.

As a reminder, the IRS created a dedicated email address in October 2020 for petitioners to reach out with concerns about premature assessments or enforcement action: taxcourt.petitioner.premature.assessment@irs.gov.

If you have questions about whether the Court has received your petition, you can contact the Public Affairs Office at (202) 521-3355 or email publicaffairs@ustaxcourt.gov.

The press release primarily provides information we reported in a post on July 28, 2021.  While there is not a lot of new information in the latest press release, the press release itself is a hopeful sign that the Tax Court has set a path to keep the public better informed about the ongoing problem in processing petitions and the efforts to ensure that the problem has the least possible impact on petitioners.

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The most important sentence is the one stating that the Court is notifying the IRS of petitions prior to formal service of the petitions so that the IRS has the opportunity to mark its system and input the proper codes in the computer to prevent assessment and collection barred by the filing of the petition.  Perhaps the system devised by the Court will eliminate or substantially eliminate the problem caused by late notification of the filing of a Tax Court petition.

In the prior post on this subject and in most prior discussions, we have focused on premature assessments.  In the majority of premature assessment cases, the assessment triggers a notice to the taxpayer, the notice and demand letter, but not enforced collection, which will not occur for a few more months while the IRS goes through the collection notice stream.  For most taxpayers in deficiency proceedings who experience a premature assessment, there is time to fix the premature assessment prior to actual collection.  For those taxpayers where the timing of the premature assessment precedes the payment of a refund, the collection issue will occur when the IRS offsets the refund based on the premature assessment.  Offset is the most likely collection damage to occur in the premature assessment situation.

We have not focused our discussion on the taxpayers filing Collection Due Process petitions in response to a notice of intent to levy under IRC 6330.  For these taxpayers the threat of immediate enforced collection action is very real based on the failure of the IRS to input freeze codes resulting from the filing of the Tax Court petition.  CDP levy cases represent less than 5% of the petitions filed, but for taxpayers in these cases, the prospect of significant negative consequences as a result of the late transmittal of information to the IRS is the most urgent.

Stand-alone innocent spouse cases represent another vulnerable group of taxpayers.  Many of these taxpayers have gone through the collection notice stream prior to filing the innocent spouse petition.  The filing of the innocent spouse request puts a hold on collection action, but that hold ends if the IRS rejects their innocent spouse claim and they do not petition the Tax Court.  These cases could go immediately back into the collection stream, resulting in enforced collection prior to the fix of the notification of the petition.

CDP lien cases do not present the same type of urgency.  In CDP lien cases it is the taxpayer who hopes the Court will act quickly to grant relief.  The IRS, by filing the notice of federal tax lien, has already placed itself in the position it needs in order to protect its interest.  So, late notification of the filing of a CDP lien petition is unlikely to have direct adverse consequences on the taxpayer.  It simply delays the date on which the taxpayer might receive some form of relief from the lien filing.

In the stakeholder meetings, which Christine and Caleb attended, the Tax Court indicated that it is processing petitions based on a FIFO system. It is unclear whether the Court will be able to provide pre-service information to the IRS for petitions that were in its backlog at the time the Court’s petition acceptance procedures changed. As the Court works through the petition backlog, it might consider triaging cases to identify the CDP levy cases and stand-alone innocent spouse cases in which taxpayers are most vulnerable.  These CDP levy and innocent spouse petitioners could benefit the most from getting the information about their petitions over to the IRS in time to stop enforced collection.

As the IRS returned to more normal operation last fall, it produced a surge of notices that caused the significant uptick in Tax Court filings in the first half of 2021.  If we are past that surge, and I cannot say if we are with certainty, the balance of the year should return to a more normal filing pattern for the Tax Court and allow the Tax Court clerk’s office to catch up and catch its breath.  If you are filing a petition, lots of reasons exist for filing the petition electronically, but one of those reasons is that it will make it easier for the clerk’s office to process the petition, which should help to more quickly reduce and eliminate the premature assessment problem.  Consider filing your petitions electronically if you haven’t done so previously.