Precedential Opinion Regarding Deemed Offer Acceptance

In Brown v. Commissioner, 158 T. C. No. 9 (2022) the Tax Court addressed an argument by petitioner’s counsel that returning an offer in compromise did not stop the two year period within which the IRS must accept or reject an offer because of the existence of a Collection Due Process (CDP) hearing.  Mr. Brown argued that the IRS caused the deemed acceptance of his offer by failing to issue a notice of determination in the CDP case within 24 months after submission of the offer.  The Tax Court rejected this interpretation of the return of the offer and ruled that the 24 month period giving rise to a deemed offer acceptance ended when the offer unit returned the offer and not when the Settlement Officer sent the notice of determination.

We previously discussed the Brown case here after the Tax Court issued T.C. Memo 2019-121.  As we discussed in the prior post, Mr. Brown owed about $50 million to the IRS and the offer unit returned the offer because an enforcement collection group had the case.  The issues in the prior case play out in the recently issued opinion discussed below but with a twist because of the argument regarding the impact of the determination letter.

We have discussed the issue of deemed acceptance of offers here , in a case in which the taxpayer brought suit unsuccessfully in district court trying to enforce a deemed offer; here, where we first discussed the concept of deemed acceptance and here, where we discussed the possibility that the COVID shutdowns at the IRS could cause offers to sit for a sufficiently long period to meet the deemed acceptance period.  Although we have written about this topic several times before, we know of no one who has obtained a deemed accepted offer.  If any readers have had an offer deemed accepted, we would love to hear your story.  So far, the discussion has been too academic and ended only in losing stories.

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Judge Lauber wrote the opinion in the original Brown case and writes this opinion as well.  The only way to get an offer in compromise case into the Tax Court is through CDP.  This case is a CDP case.  The Settlement Officer (SO) hearing the case concluded that the OIC unit was right to send to the specialized collection unit as directed by the Internal Revenue Manual.  According to the SO, once the OIC unit identified the case as one in the inventory of the specialized collection unit, it could not process the offer and had to return it.  Petitioner argues that the return of the offer to the specialized collection unit did not equate to a rejection of the offer under the statute in a CDP case and the rejection did not occur until 27 months after submission when the SO issued the determination letter in the CDP case.

While I linked above to one of the earlier decisions of the Tax Court regarding Mr. Brown which I blogged, the Court notes that:

This is the third CDP case petitioner has prosecuted in this Court. See Brown v. Commissioner (Brown IV), T.C. Memo. 2021-112, supplementing Brown v. Commissioner (Brown II), T.C. Memo. 2019-121, aff’d in part, vacated in part, and remanded, Brown v. Commissioner (Brown III), 826 F. App’x 673 (9th Cir. 2020); Brown v. Commissioner (Brown I), T.C. Memo. 2016-82, aff’d, 697 F. App’x 1 (D.C. Cir. 2017). At issue in the previous cases were collection actions relating to petitioner’s 2001– 2007 and 2014 tax years. This case concerns collection action for petitioner’s 2009 and 2010 tax years.

Mr. Brown had submitted an OIC in Brown II and argued there that no formal rejection occurred.  In that case the Court ruled the return ended the OIC consideration and stopped the 24 month period keeping it from meeting the deemed acceptance provision.  The Ninth Circuit affirmed the decision that the return ended the 24 month period.  While the prior litigation was pending, Mr. Brown submitted the OIC at issue here to the SO in a new CDP case.  The Court describes the offer as substantially similar to the one in the earlier litigation.  The SO forwarded the offer to the OIC unit.  About seven months after receipt, the OIC unit:

issued petitioner a letter informing him that the IRS had “closed [the] file” and was “returning your Form 656, Offer in Compromise” because “[o]ther investigations are pending that may affect the liability sought to be compromised or the grounds upon which it was submitted.” The Laguna Group explained: “As of the date of this letter, we are considering your offer closed.

Petitioner argued to the SO that the reason for returning the offer was bogus.  The SO kept the CDP case open during the pendency of the “other investigations” referred to as the reason for returning the offer.  By the time the SO issued the determination letter on this CDP case more than 24 months had passed since the submission of the OIC.  After filing the petition in Tax Court, Mr. Brown filed a motion for summary judgment arguing for deemed acceptance. 

Because the language of IRC 7122(f) uses the term rejected and the language of the IRS here did not use the term rejected but rather the term “returned”, the issue for decision in the prior Brown cases turned on whether a return fits the definition of a rejection.  The earlier decisions decided that returning the offer stopped the 24 month period.

Because the IRS returns many offers as non-processable, the regulations under IRC 7122 address the issue of the effect of a return:

The regulations provide that “[a]n offer to compromise becomes pending when it is accepted for processing.” Treas. Reg. § 301.7122-1(d)(2). If the IRS accepts an offer for processing but subsequently determines that it was (or has become) nonprocessable, or that the offer is nonreviewable for other reasons, the offer may be returned to the taxpayer. Ibid. “An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer.” Ibid.

The Court finds that the return of the offer results in the same outcome as the rejection of the offer.  Here, the offer was accepted for processing and returned within six months.  Because that six month period is less than the 24 month period necessary for a deemed acceptance, the IRS argues that the offer fails the criteria for deemed acceptance.

Petitioner accepts the earlier decisions regarding return vs. rejection but argues that this result only covers “ordinary” offers and not offers made in a case pending under CDP.  For an offer submitted as part of a CDP hearing, only the notice of determination issued by Appeals can serve as the terminating event.  The Court notes that Mr. Brown “floated a similar theory” in the earlier cases but both the Tax Court and the Ninth Circuit demurred and did not address the argument head on in part because Appeals issued the determination letter in those cases within the two year period keeping the focus squarely on return versus reject and not on any special status of reject in a CDP case.

Here, the Court rejects the argument that the offer remained open holding that petitioner conflates the offer period with the CDP resolution and providing other reasons for its decision some of which I copy here:

petitioner’s argument is meritless because it confuses two kinds of finality: the administrative return of an OIC, which terminates the 24-month period under section 7122(f), and the notice of determination, which terminates the CDP proceeding under section 6330….

In essence petitioner contends that section 6330 overrides sub silentio the outcome dictated by section 7122(f), asserting that the notice of determination is the “critical event” under section 7122(f) and that “there is no real authority that suggests a contrary result.” This assertion ignores Treasury Regulation § 301.7122-1, Brown II, Brown III, Notice 2006-68, and the IRM provisions discussed previously. These authorities confirm that the IRS’s initial decision to return an OIC is the event that terminates the 24-month “deemed acceptance” period. Petitioner has cited no authority for the proposition that section 7122(f) has a different meaning when the offer is made in a CDP context….

Acceptance of petitioner’s argument — that Appeals must issue the notice of determination within 24 months after an OIC is submitted — could place the SO in a dilemma. If the SO by that deadline has not resolved every issue raised by the taxpayer, the SO could be motivated to issue a notice of determination prematurely, lest the OIC be “deemed accepted.” But doing so would risk reversal and remand for failure to address all “relevant issue[s] relating to the unpaid tax or the proposed [collection action].” § 6330(c)(2)(A). That would prolong the case even further, defying logic and undermining Congress’ intent.

The Court’s decision keeps the deemed acceptance provision within the offer unit and does not allow interplay between offers and CDP to impact the time frame.  The decision seems right, but I appreciate the effort of petitioner’s counsel to push on this issue where very little precedent exists.  Taxpayers seeking to marry the 24 month period to the CDP notice of determination will need to take it up with circuit courts.  Perhaps Mr. Brown will once again visit the Ninth Circuit and create precedent there.

Update on Litigation Over Whether the Deficiency Petition Filing Deadline is Still Jurisdictional

We welcome back Carl Smith who keeps us updated on the progress of the jurisdiction motions now in litigation regarding deficiency proceedings in the Tax Court. Some might view the IRS response in Hallmark as one that places the Golsen rule regarding circuit court decisions above a Supreme Court decision but we have a link to the IRS response and you can decide for yourself. Keith

On May 3, 2022, and May 17, 2022, we did a couple of posts on the post-Boechler litigation over whether the deficiency petition filing deadline under IRC 6213(a) is still jurisdictional and not subject to equitable tolling.  In Hallmark Research Collective v. Commissioner, Tax Court Docker No. 21284-21, the taxpayer timely moved to vacate an April 1, 2022, order dismissing the case for lack of jurisdiction on account of late filing.  A link to the taxpayer’s memorandum of law in support of that motion was attached to the May 3, 2022, post.  This post is both to provide you with a link to the IRS’ June 22, 2022, response, and to give a little update on where Hallmark and other test cases stand as well as the Tax Court’s actions in similar cases.

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I have few comments on the IRS Hallmark response, since you can read it for yourself.  It is only 18 pages in length and does not address in detail many of the points raised in the taxpayer’s 50-page memorandum of law.  The main thing to note is that there had been speculation (based on comments by the IRS at the May ABA Tax Section meeting) that the IRS was rethinking its position on various non-CDP Tax Court filing deadlines.  Whatever the IRS may be thinking as to other filing deadlines, its reconsideration of the deficiency filing deadline has led it to reaffirm the Tax Court’s long-standing position that the deficiency filing deadline is still jurisdictional after Boechler.

There are two more things in the IRS response to note:

Frist, in the taxpayer’s memorandum in Hallmark, the taxpayer argued that the source of the Tax Court’s deficiency jurisdiction is IRC 6214(a), not IRC 6213(a).  That is a respectable position because a number of current Tax Court judges have said as much in opinions.  The IRS response ignores the mention of IRC 6214(a) and talks only about whether IRC 6213(a), which the IRS believes contains the jurisdictional grant, also contains a jurisdictional filing deadline.

Second, the IRS raises new arguments about how IRC 6213(c) and 6215 are incompatible with a ruling that the deficiency filing deadline is not jurisdictional.  I don’t agree, but you can read the IRS argument for yourself.

Judge Gustafson has directed the taxpayer to file a reply to the IRS response by July 22, 2022.  We will provide a link to the reply after it is filed.

In my May 17, 2022, post, I noted that, since May 6, 2022, the Tax Court had stopped issuing dismissal orders in response to either (1) IRS motions to dismiss late-filed deficiency petitions for lack of jurisdiction or (2) Tax Court orders to show cause why a late-filed deficiency petition should not be dismissed for lack of jurisdiction.  On average, before the Hallmark motion was filed, the Tax Court had dismissed 2 to 3 deficiency petitions a day for lack of jurisdiction for late filing.  This halt on dismissals has continued, except for one case (probably an accident) in Saltmarsh v. Commissioner, Tax Court Docket No. 5779-21, where, on June 14, 2022, Judge Urda dismissed a late-filed deficiency case for lack of jurisdiction.

In my May 17, 2022, post, it was only my speculation that this halt was due to the pendency of the Hallmark motion.  But, now my speculation has some concrete support. On May 12, 2022, the IRS filed a motion to dismiss a late-filed deficiency case for lack of jurisdiction in Spears v. Commissioner, Tax Court Docket No. 6232-21.  On May 18, 2022, Judge Copeland issued an order in Spears striking the case from a trial calendar and wrote: “Before taking further action in this case, we will await the ruling of this Court on the Hallmark motion to vacate.”

If the Tax Court ultimately agrees with Hallmark that the filing deadline is not jurisdictional, then one consequence (probably affecting the largest number of taxpayers) is that the Tax Court will have to stop issuing orders to show cause why a late-filed deficiency case should not be dismissed for lack of jurisdiction.  The court will then have no business issuing an order pointing out to one party a non-jurisdictional defense that the party (here, the IRS) had not thought to make.  An odd thing is that it appears that a minority of Tax Court judges are continuing to issue orders to show cause why late-filed deficiency cases should not be dismissed for lack of jurisdiction – though the number of orders to show cause has fallen off by well over 50%.  Here are two examples of cases in which the Tax Court recently issued such orders to show cause:  Madrid v. Commissioner, Tax Court Docket No. 3731-21 (order of Judge Morrison dated June 3, 2022); Murtaza v. Commissioner, Tax Court Docket No. 23342-21S (order of Judge Landy dated June 15, 2022).  I think the issuance of such orders while the Hallmark motion is pending does a disservice to taxpayers if Hallmark ends up ruling that the filing deadline is not jurisdictional.  In effect, such orders alert the IRS to a possible late filing, which the IRS can later raise as a defense in an amendment to its answer.

Other than Hallmark, there is one case where other taxpayers are currently litigating the issue of whether the deficiency petition filing deadline is jurisdictional post-Boechler.  As noted in my May 17, 2022, post, in Culp v. Commissioner, Third Circuit Docket No. 22-1789, the IRS sent a notice of deficiency to the taxpayers, but the taxpayers say they never received the notice of deficiency or a later notice of intention to levy, but only became aware of a notice of deficiency’s possible issuance when the IRS started levying.  The Culps had contacted TAS about the mysterious levies, but before TAS had done anything, the IRS satisfied the balance of the deficiency by offset of an overpayment from a later tax year.  This put the Culps in a refund posture.  TAS did not get them a refund, so the Culps belatedly filed a Tax Court deficiency petition seeking a refund under the court’s IRC 6512(b) overpayment jurisdiction.  The Culps also argued that the IRS had never sent a notice of deficiency to their last known address.  In response, the IRS produced a copy of the notice and proof of mailing to their last known address.  The Tax Court found the proof of mailing sufficient and dismissed the petition for lack of jurisdiction for late filing.  On appeal, the Culps argue (1) that no notice of deficiency was sent (which, if true, will actually hurt them because the Tax Court will then lose any overpayment jurisdiction) and (2) if the notice was sent, then the Tax Court has deficiency and overpayment jurisdiction because the filing deadline should be equitably tolled.

In my May 17, 2022, post, I noted that the Tax Clinic of the Legal Services Center of Harvard Law School, acting on behalf of The Center for Taxpayer Rights, planned to file an amicus brief in the Culp case in support of the argument that, since Boechler, the deficiency petition filing deadline is not jurisdictional and is subject to equitable tolling.  After showing the DOJ lawyers in Culp a copy of a nearly-6,500-word amicus brief and getting the DOJ’s and the Culps’ consent to file it, the Center filed the amicus brief.  The DOJ then moved to strike the brief.  Why?  A few days before the amicus brief was filed, the DOJ had moved for summary affirmance in the appeal, arguing that there was no significant legal issue for an appeal.  The DOJ motion for summary affirmance did not mention Boechler, but merely cited an existing Third Circuit opinion holding that the filing deadline in the Tax Court is jurisdictional.  The DOJ objects to the filing of the amicus brief both before the Third Circuit has ruled on the motion for summary affirmance and before the Culps file their opening brief for appellant.  The DOJ also argues that an amicus brief at the current stage of the case should be no more than 2,600 words.

The Center for Taxpayer Rights believes that it has done nothing wrong in filing a brief of almost 6,500 words at this stage of the case.  Comments to the rules say that the briefing schedule is not suspended when a motion for summary affirmance is filed.  The Center’s response to DOJ’s motion to strike its amicus brief also noted that the brief does not specifically address the motion for summary affirmance. A link to the affidavit mentioned in the response can be found here.

The Culps have filed a response to the motion for summary affirmance. The DOJ has filed a reply to the Culps’ response. In it, the DOJ criticizes several of the Culps’ arguments, including alleging that the Culps are making new arguments not presented below. But, crucially, the DOJ also argues (at pp. 10-12) that “neither Boechler nor the doctrine of equitable tolling affects the outcome here”. The DOJ says that Boechler is limited to CDP cases, and there is long-standing Circuit court precedent (including in the Third Circuit) that the IRC 6213(a) filing deadline is jurisdictional. In addition, the DOJ argues that, even if equitable tolling were allowed, the Culps only argue for equitable tolling because of IRS misconduct in 2019, long after the filing deadline in mid-2018 had passed. The DOJ says there is no excuse for the Culps to have waited until 2021 to file a Tax Court petition. (Note: The Culps should also have argued that non-receipt of the notice of deficiency in 2018 was sufficient for equitable tolling purposes, since the Culps never received even a copy of the notice of deficiency until after they filed the Tax Court petition. We recognize that other Tax Court and some appellate precedent would also have to be overruled to make this argument that in the case of mere non-receipt of a notice of deficiency, a late petition may be filed under equitable tolling.)

The Third Circuit has referred both motions to a motions panel for ruling, and it has only now suspended the filing schedule for merits briefs.  We will keep you posted on whether the case survives the motion for summary affirmance.  If summary affirmance is denied, at worst, if the motion to strike the amicus brief at this time is granted, a similar amicus brief will be filed after the Culps file their first merits brief.

Finally, there is at least one new Tax Court deficiency case, filed on May 31, 2022, where the taxpayer filed late and is seeking equitable tolling, Gruis v. Commissioner, Tax Court Docket No. 11951-22.  The petition was filed by a lawyer for an LITC, who is aware of the Boechler case.  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.

COVID and DAWSON

We have written on more than one occasion about the pre-mature assessment and pre-mature collection problems caused by the delays at the Tax Court in processing cases. The failure to timely notify the IRS of a petition sends the IRS off to assess (and then collect) in deficiency cases or off to collect in CDP levy cases. In this post I will discuss another situation in which not knowing whether a petition was filed created a potentially unnecessary second filing and a proposal for enhancing notification of parties similar to the practice of district courts and some state courts.

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Timely Notification and Support for Petitioners Filing Electronic Petitions

An order entered in Foster Drive LLC v. Commissioner, Dk. No. 4094-21 (June 6, 2022) puts on display another potential problem caused when the Tax Court does not timely process petitions. Here, the problem comes up in the context of a TEFRA proceeding.

The Tax Matters Partner (TMP) filed an IRC 6226 proceeding. Because of the delays in processing the petition and assigning a docket number to the case, the partnership could not be certain that the TMP’s petition arrived at the Court on time. This caused a notice partner to file a second petition during the additional time allowed for a notice partner to do so. Almost exactly a year after filing the second petition and after the cases were placed on the Birmingham calendar, the Court noticed the second filing was the filing in the same case in which the TMP had previously filed to contest the determination. This led to an order to show cause why the petition filed by the notice partner should not be dismissed.

In this situation only one case can go forward. It will be the case of the TMP. The notice partner’s case will be dismissed for lack of jurisdiction. When I read the order I thought it provided another example of the extra work triggered when one part of the tax system gets out of whack similar to the problem of pre-mature assessments. In corresponding with it turns out the problem may have resulted from DAWSON more than from COVID.

When electronically filing a petition, something DAWSON allows and a significantly beneficial improvement, individual petitioners must create a separate document for the filing of the social security number but bundle the remainder of the petition package into one PDF document. When filing a partnership petition, all documents should be bundled into one PDF. The instructions do not provide significant detail on this point and it is not covered in the rules. In this case the petition filed by the TMP split the petition and the FPAA. Because the TMP could not confirm with the Court that the failure to remit the documents in a single PDF was “harmless error” it felt it necessary to file the second petition.

Prompt service would have confirmed the acceptance of the petition. In this period when filing petitions electronically remains a novelty and the Court wants to promote filing electronically, perhaps it would be good to have a line into the Clerk’s office to confirm receipt of an electronically filed petition and to confirm it correctness so that petitioners do not need to worry if their petition met the criteria for a properly filed petition. Petitioners long accustomed to filing paper petitions may be more comfortable continuing to file paper petitions without a means of confirming success in filing. The Tax Court does not want to create the same type of problems that the IRS creates by making its rules for electronic filing more difficult than paper filing while purporting to encourage electronic filing. See our discussion here on some of the issues existing in electronically filing a return and how it differs from paper filing.

Allowing a Second Email Address for Service from Court

On a related but separate matter, Jack Townsend forwarded a suggestion from one of his readers that could also enhance the DAWSON system.  Many federal district courts and state courts allow parties to provide two email addresses for notices to counsel.  This allows counsel to have a second notice come into the office to a legal assistant or to an email address the office uses for all service.  If DAWSON allowed counsel to list two email addresses it could avoid some headaches from missed notifications and improve response times.

In Florida, the rule is Fla. R. Jud. Admin. 2.516 (b)(1)(A): “Upon appearing in a proceeding, an attorney must designate a primary e-mail address and may designate no more than two secondary e-mail addresses and is responsible for the accuracy of and changes to that attorney’s own e-mail addresses maintained by the Portal or other e-Service system. Thereafter, service must be directed to all designated e-mail addresses in that proceeding. Every document filed or served by an attorney thereafter must include the primary e-mail address of that attorney and any secondary email addresses. If an attorney does not designate any e-mail address for service, documents may be served on that attorney at the e-mail address on record with The Florida Bar.”

This brief blog post from the Florida Bar discusses the problem when there are too many email addresses allowed.  Should the Tax Court adopt a rule allowing two email address, however, it would seem to avoid the problem created in Florida when it allowed an unlimited number.

Section 1 (f) of the U.S. District Court for the Southern District of California’s electronic filing manual states that “Registration constitutes consent to electronic service of documents by e-mail, as provided by the Federal Rules of Civil, Criminal and Appellate Procedure. An attorney may register up to two (2) additional e-mail addresses.” This appears to be standard in federal district courts, however, it is also apparent that some Courts have been lenient in the past and have allowed more than two emails. The U.S. District Court for the District of Arizona sent a notice to attorneys that “Effective March 1, 2018, the Court intends to enforce the additional 2 e-mail address restriction” which indicates that previously attorneys could list more than two email addresses.

I just filed an amicus brief in the Third Circuit.  The entry of appearance form for that Circuit provides the opportunity for the original email address and three additional email addresses.  A copy of the Third Circuit’s form is attached here.

As the Court continues to improve DAWSON looking for ways to make practitioners, and pro se petitioners, more comfortable with the filing of electronic petitions would benefit everyone.  Separately, allowing parties to designate more than one email address could improve communication at little or no cost.

Tax Court Inconsistent on Economic Hardship

Before I embark on a discussion of this innocent spouse case, I want to pause for a brief commercial interlude.  My fellow blogger, Christine Speidel, and my colleague at Harvard, Audrey Patten, have just published, through the ABA Tax Section, the third edition of “A Practitioner’s Guide to Innocent Spouse Relief.”  I read the book and it is excellent.  Here is a link to the ABA announcement about the book which contains a link you could use to purchase it if desired.  Keith

The case of Pocock v. Commissioner, T.C. Memo 2022-55 holds that payment of the tax liability at issue would create an economic hardship for Ms. Pocock.  I agree with the decision in the Pocock case but find it at odds with an earlier TC Memo decision, Sleeth v. Commissioner, my clinic appealed to the 11th Circuit where the Tax Court found in similar circumstances that equity in property precluded a determination of economic hardship. For a discussion of the Sleeth case look here

The situation in Pocock and Sleeth arises when a spouse with limited income owns property in which equity exists.  This fact pattern arises with some regularity and a consistent position from the Court would assist in resolving these cases at the administrative stage.  In the typical case, the requesting spouse could sell the property with equity, their home, and satisfy a portion of the outstanding liability; however, selling the house would generally create hardship for the requesting spouse who would then need to move, probably to a rental unit of lesser quality with little or no future prospect of purchasing a home.  The requesting spouse in these cases generally has no ability to extract the equity through borrowing because of low income stream to support loan repayment.  Is it economic hardship to require sale of the home to partially satisfy the outstanding joint liability or should the requesting spouse eliminate their equity in assets before basing their economic hardship request on available income?

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Fascinating Facts

The facts in Pocock interest me and should greatly concern the IRS and the public in general.  Mr. Pocock tried his hand at several income producing activities without success until he settled on an annual scheme of obtaining a six figure income by grossly inflating his withholding credits.  The Court describes in some detail his efforts to produce income the honest way before embarking on a “money brokering business.”  For reasons described in the opinion, the requesting spouse could not get her husband to discuss his business ventures without fear of physical and verbal reprisal.  She learned to avoid the topic.  He also controlled the mailbox cutting off another avenue of information that might have been available to her.

Here’s the Court’s description of his money brokering scheme:

For taxable years 1995 through 2005, Mr. Pocock fraudulently claimed large refunds on his and petitioner’s joint returns by overstating his income and federal income tax withholdings. Because the IRS did not examine or otherwise correct those returns, respondent’s account transcripts for those years show balances of zero.


On the joint returns for 1995 through 2005, Mr. Pocock reported federal income tax and withholding as follows:

Tax year        Filing date    Total tax       Withholding  Overpayment
1995              9/4/1997      $26,593        $80,674        $54,081
1996              9/8/1997      58,768           98,523           39,755
1997              2/3/1999     61,475           172,406         110,931
1998              12/10/1999 56,158           169,968         113,810
1999              5/4/2001      58,745           174,898         116,153
2000              8/29/2002    51,244           194,170         142,926
2001              12/30/2002 55,060           208,836         153,776
2002              1/11/2005    52,803           219,628         166,825
2003              1/14/2005    47,488           184,828         137,340
2004              10/21/2005 35,253           193,627         158,104
2005              1/17/2008    53,435           149,012         95,577


After receiving the above-described joint returns, the IRS issued Mr. Pocock and petitioner the following refund checks comprising the reported overpayments and, for some years, interest:


Tax year        Issue date     Amount
1997              4/30/1999    $112,621
1998              2/13/2000    115,137
2000              9/27/2002    142,926
2001              3/21/2003    153,776
2002              4/8/2005      168,594
2003              4/1/2005      138,243
2004              7/14/2006    166,077
2005              2/15/2008    95,577


Petitioner, who believed that Mr. Pocock was earning periodic commissions from his “money brokering” business, endorsed the refund checks for 1997 and 2004. Occasionally she asked about the status of their tax filings, but he never gave her a clear answer. When he showed petitioner the 2004 refund check, Mr. Pocock explained that it was part of his compensation for the closing of a deal.

I would like to believe that the fraud filters at the IRS work better than Mr. Pocock’s case suggests.  His scheme succeeded for a long time.  Eventually, the IRS caught on but not for three more years.  He essentially got the same amounts of refunds based on overclaiming withholding for 2006 and 2007 before his 2008 return finally caused the IRS computer or someone at the IRS to wake up.

Mr. Pocock then had the chutzpah to file a CDP request regarding the liability triggered as the IRS refused to give him credit for his bogus overpayment claim.  Only 16 years after his scheme started, criminal investigators appeared on his doorstep.  They eventually recommended prosecution of Mr. Pocock but not of petitioner.  The U.S. Attorney’s office declined to prosecute.  A footnote in the opinion suggests the declination resulted from concerns about the statute of limitations.  I wonder if extreme embarrassment over the IRS’s inability to detect the scheme also played a part in the decision.

I apologize for taking you on a long journey through facts that really have nothing to do with the issue causing me to write this post, but I was so fascinated that Mr. Pocock could use a scheme of overclaiming withholding credits for over a decade that I could not help myself from writing about it.  If you have my same voyeuristic tendencies, I recommend reading the 27 page opinion.

Innocent Spouse Claim

Not that it especially matters but it is worth noting that petitioner filed her innocent spouse request almost a decade ago in January of 2013.  By that point the IRS had established liabilities against the couple of almost $500,000 and it could have been higher.  She petitioned the Tax Court in November of 2016 so it only had her case for five and one half years before rendering an opinion.

At the time of the trial, petitioner was 68 years old.  She had total assets of slightly over $190K almost all of which came from equity in her home.  Her monthly income totaled, $1,855 resulting from social security, wages and rental income from Mr. Pocock, her ex-husband, whom she rented space to in the house.  His presence in the house did continue to cause difficulty as discussed below.

She sought relief under IRC 6015(f) and the Court cited the requirements set out in Rev. Proc. 2013-34.  The Court looked to see if she met the threshold requirements for streamlined relief.  The IRS raised concerns about three elements of the bases for relief.  First, it expressed concern about the transfer of assets from Mr. Pocock to petitioner.  After he stole from the estate of his mother, he transferred his interest in their Florida home to petitioner and her mother (a joint owner of the home.)  The Court finds that the transfer did not occur as part of a fraudulent transfer but rather as compensation for damages resulting from his mishandling of the estate case.

Next the IRS raised an objection concerning her knowledge of the scheme.  The Court found her testimony credible that she did not know what he did each year.  The returns looked proper on their face and he had told her the money resulted from his money brokering business.  The Court was also impressed with the testimony regarding why petitioner would not question him about finances.  As a result, the Court finds she had no knowledge of the overstated withholding and no reason to know the returns were incorrect.

Lastly, the Court found the liabilities resulted from Mr. Pocock’s actions and not hers meaning that the liabilities all met the test of resulting from items attributable to the non-requesting spouse.

The Court then turned its attention to the elements of a streamlined determination.

The requesting spouse is eligible for a streamlined determination by the Commissioner only in cases in which the requesting spouse establishes that she (1) is no longer married to the nonrequesting spouse (marital status requirement), (2) would suffer economic hardship if not granted relief (economic hardship requirement), and (3) did not know or have reason to know that the nonrequesting spouse would not or could not pay the underpayment of tax reported on the joint income tax return, or did not know or have reason to know that there was an understatement or deficiency on the joint income tax return (lack of knowledge requirement). The requesting spouse must establish that she satisfies each of the three elements to receive a streamlined determination granting relief. 

The IRS challenged the marital status element because they still lived in the same house; however, the Court determined that they had become roommates.  The Court did not find that the divorce served as a ruse.

The IRS challenged the economic hardship element because she had substantial equity in the house.  The Court finds:

we doubt petitioner could access the equity in the property without selling it. The record includes a statement of credit denial from a credit union, and petitioner credibly testified that her work prospects were diminishing on account of physical ailments. Given these circumstances, we do not believe petitioner could liquidate her assets to make even a partial payment of the liabilities and still meet her reasonable basic living expenses. She therefore satisfies the second prong of the economic hardship test.

Almost identical facts to Sleeth and the opposite result.  Ms. Sleeth had even less income and no real work history.  She was also in her 60s.  Maybe the Court in Pocock was influenced by a concession by the IRS and maybe the inconsistency is in the approach of the IRS and not the Court.  In footnote 20 the Court states:

Respondent does not contend that petitioner could sell the home and still meet her reasonable basic living expenses. To the contrary, respondent states on brief: “Respondent is not arguing that petitioner should have to sell the home in order to pay the tax liability.”

She did put on evidence that should could not borrow on the equity in the house because she did not have the income to support repayment of any loan.

Finally, the Court looks again at knowledge and determines that she did not have knowledge of the scheme.  It states that Mr. Pocock had proved to petitioner that he was untrustworthy putting her on constructive notice warranting an inquiry by her.  Because he became violent when questioned about finances, her failure to question him in this situation is excused based on the totality of the circumstances.

Conclusion

As a result, the Court determines she qualifies for streamlined relief.  As I mentioned at the outset, I agree with the opinion but find the result here with respect to economic hardship difficult to square with at least one prior opinion from the Court.  Because of the importance of that issue in innocent spouse cases, it deserves more attention at the IRS and the Court.

IRS Files Motion for Reconsideration in Precedential Tax Court Case

On April 19, 2022, the Tax Court issued a precedential opinion in Treece Financial Services Group v. Commissioner, 158 T.C. No. 6.  Since the issuance of the opinion, I intended to write a post about the case but now an additional reason for doing so exists.  On May 19, 2022, the IRS filed a motion for reconsideration.  This is a rare occurrence as I discussed in a post several years ago on this type of motion in which I not only discuss such motions generally but provide some detail regarding my own ill-fated motion for reconsideration several decades ago.

Filing a motion for reconsideration is a rare thing at Chief Counsel.  The Chief Counsel’s Directive Manual at 35.9.1.2.4 describes the filing of such a motion:

(1) In rare instances, it may be necessary to file a motion requesting reconsideration of findings or opinion.  These motions must be recommended by the Division Counsel, reviewed in the appropriate Associate Chief Counsel’s office and approved by the Chief Counsel.  See T.C. Rule 161

(2) Motions for reconsideration of finding or opinion should only be filed in cases of substantial error or where exceptional or compelling circumstances exist.

The fact that Chief Counsel’s office succeeded in getting the Acting Chief Counsel to sign off on this motion within one month after the issuance of the opinion provides a statement of the significance of the motion.  Chief Counsel could have decided to seek an appeal of the decision.  Had it done so it would have had to convince the Department of Justice and potentially had a conference in the Room of Lies, but it would not have needed the approval at Chief Counsel level to initiate the appeal.  If nothing else the decision to file a motion for reconsideration of a precedential opinion decided by the Judge who has just become the Chief Judge signals the depth of the disagreement with the decision.  Now, let’s talk about the opinion itself and see what has riled up Chief Counsel’s office.

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The Treece case concerns another aspect of an issue we have discussed frequently on the blog – the jurisdiction of the Tax Court.  The IRS moved to partially dismiss the case for lack of jurisdiction although it styled its motion as one for summary judgment.  Petitioner filed a response. Meanwhile the taxpayer moved for summary judgment to which the IRS filed a response.  The Court sets up the issue this way:

Respondent contends that this Court lacks jurisdiction in this employment tax case to review respondent’s determination that the Voluntary Classification Settlement Program (VCSP) does not apply to the computation of petitioner’s employment tax liabilities. Petitioner contends that it met all the requirements of the VCSP and respondent does not have the discretion to deny its participation in the VCSP.

In 2019, the IRS notified Treece Financial Services Group (the petitioner) of the reclassification of Dock D. Treece (the taxpayer) from independent contractor to employee for three previous tax years (2015, 2016, 2017).  Mr. Treece is the sole corporate officer of the business.  The company agreed to his treatment as an employee.  The case concerns possible reductions in certain taxes resulting from his reclassification as an employee.  The company sought the reductions through VCSP.

I.R.S. Announcement 2012-45, 2012-51 I.R.B. 724, 724. To be eligible for the VCSP, a taxpayer must: (1) have consistently treated the workers as nonemployees; (2) have filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years; and (3) not currently be under employment tax audit by the Internal Revenue Service (IRS).

The IRS denied Treece the ability to participate in VCSP because at the time it applied it was under an employment tax examination.

The Court first addresses the motion to partially dismiss filed by the IRS.  In doing so it provides a general statement of its jurisdiction in a case like this:

Generally, we have jurisdiction under section 7436(a) to determine: (1) whether an individual providing services to a person is that person’s employee for purposes of subtitle C; (2) whether the person, if an employer, is entitled to relief under section 530 of the Revenue Act of 1978; and (3) the proper amounts of employment taxes which relate to the Commissioner’s determination concerning worker classification.

The Court then moves to a discussion of providing review of a decision made by the IRS:

There is a strong presumption that an act of administrative discretion is subject to judicial review. Trimmer, 148 T.C. at 346; Corbalis v. Commissioner, 142 T.C. 46, 56 (2014) (holding that denials of interest suspension under section 6404(h) are subject to judicial review)….  In 2000 section 7436(a) was amended to provide the Tax Court jurisdiction to “determine whether such a determination by the Secretary is correct and the proper amount of employment tax under such determination.”… The U.S. Court of Appeals for the Ninth Circuit held that the amendment in 2000 “indicates that Congress did not intend to limit the Tax Court’s jurisdiction under section 7436 to determining only whether an individual was an employee.” Charlotte’s Office Boutique, Inc. v. Commissioner, 425 F.3d at 1208.

Don’t you love it when the Court says that Congress did not intend to limit its jurisdiction.  Carl Smith and I have sought to have the Tax Court look at time periods for filing petitions that way for several years.  Looking for more decisions that adopt the Treece view of jurisdiction soon.

Here, the Court finds that because the VCSP eligibility determination directly impacts the amount of tax the company will owe “the procedures that Congress has established for judicial review of the Commissioner’s determinations logically contemplate review of such a denial as one element of the determination.”

After denying the IRS motion to partially dismiss, the Court turned to the motion for summary judgment filed by Treece.  It quickly determines that a material dispute exists concerning the facts.

Motion for Reconsideration

As mentioned above, the IRS did not like the decision in this case and filed an extraordinary motion for reconsideration.  It lists several reasons why the Tax Court got it wrong:

(a) Respondent’s denial of petitioner’s VCSP application does not constitute a “determination” under section 7436(a)1 in connection with an “examination”;

(b) The VCSP is not a determination of the “correct and the proper amount of employment tax.” Treece at 5. Rather, it is a settlement program that allows for taxpayers to voluntarily reclassify their own workers and treat them as employees prospectively in exchange for a settlement payment in an amount that is a significant departure from the employment tax rates imposed by the Code. More specifically, the VCSP results in the parties entering into a closing agreement pursuant to section 7121 that: 1) requires the taxpayer to treat the class(es) of workers as employees beginning on a date chosen by the taxpayer; 2) provides retroactive audit relief for a taxpayer in that the IRS agrees not to disturb the taxpayer’s prior classification of the worker(s) as nonemployees for prior tax periods; and 3) the IRS collects a minimal payment amount equal to only 10 percent of the amount of employment taxes that would have been due on compensation paid to the workers being reclassified for just the most recent tax year prior to the filing of the VCSP application, calculated under reduced rates; and

(c) The VCSP does not reflect an administrative “examination” or “determination” of employment due pursuant to section 7436(a)

The motion for reconsideration explains for the remaining 15 pages why the Tax Court made a mistake when it asserted jurisdiction of the decision of VCSP not to consider this case.  I am not sure that the motion raises any new arguments the IRS did not make prior to the decision but it does signal the depth of the IRS disagreement with the decision. 

One concern that a party has in filing a motion such as this signaling significant disagreement is that it alerts the Court an appeal is coming and allows the Court to shore up its arguments essentially writing its own brief to the appellate court.  We will see if the IRS motion moves the Tax Court.  Very few of these type motions change the mind of the deciding court.  I expect we will be seeing more about this case for some time to come.

Speeding Up Settlement: Some ABA Conference Inspired Thoughts

An infant with black hair, dark eyes, and pink skin lies swaddled on his back in a crib, gazing into the distance.

Welcome, baby Henrick! While the arrival of Henrick Bruce Smith prevented Caleb’s in-person attendance at the ABA Tax Section’s May Meeting, thanks to the hybrid meeting format Caleb was able to participate remotely and today he offers a blog post spurred by the discussion. Those who registered for the meeting can watch recordings of the sessions for 90 days on the Cvent platform. Related to today’s post, the Pro Bono & Tax Clinics session also included a panel discussing pleadings and possibilities for earlier settlement of cases.

For the first time in two years, the ABA Tax Section had its annual May meeting in-person. Nonetheless, as my son was approximately two days old at the start of the conference, I opted to attend virtually.

In the Pro Bono & Tax Clinics panel, “Tax Court Updates: The View from the Bench,” I recall hearing a comment about how the Tax Court doesn’t know when “settlement days” are occurring, and that there isn’t really much of an opportunity for the Tax Court to play a larger role in that process. It is entirely possible that in the throes of sleep deprivation I misconstrued something that was said: feel free to fact-check me with the recordings of the panels as they are made available. In any event, dreamt or not, the comment got me thinking: are there ways the Tax Court could get more involved with facilitating settlement?

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Let’s begin with a statement of the issue. The issue isn’t that Tax Court cases don’t often settle. The issue is that Tax Court cases don’t often settle as quickly as they could or should. Quick and efficient settlement is key to tamping down the rather large number of docketed cases the Tax Court is presently wrestling with.

As detailed in Keith’s post and the NTA statistics, it is possible that IRS Appeals shares some blame for cases that should have been settled much earlier but linger on the docket. It is also likely that the parties, absent the Tax Court’s prodding, could do more to speed up resolution of the cases. But since people (myself included) are generally loathe to take on extra work, Tax Court prodding may just be what’s needed. How might the Tax Court prod parties into engaging in settlement talks at an earlier stage?

In thinking over this issue, I thought about my experience with other courts.

I have been tax-focused pretty much from day one of my legal career (it’s why I went to law school). However, one day in my 2L year I was pulled from my tax clinic work and asked to step in on an eviction case. I had made the mistake of showing up to clinic despite approximately two inches of snow being on the ground which, being from Minnesota, I failed to recognize is an extinction-level event in Oregon.

Since no other students were around, I had to show up in housing court on a case I knew essentially nothing about. I was about as helpful as you may expect a law student to be in that circumstance. And yet… the case settled favorably for the client.

How did this happen?

I can assure you it wasn’t through any of my efforts, but rather because of the judge. After the parties announced themselves, the very first thing the judge did was to order the parties to talk things over in the hallway and try to settle, if possible. And when all you’ve seen of the other party is a name on a sheet of paper, it is amazing what a little face-time can do. Opposing counsel was (somewhat) sympathetic to the plight of our retired client, and an agreement was reached.

It is clear that the Tax Court is operating from different parameters than state courts are, especially in terms of frequency of court dates and potential remedies (eviction cases being largely issues between private parties). But to me this gets at the power of the judge simply saying, “go talk things over.” Infantilizing though it may be, I really do think that the parties often need that directive before they’ll actually do it.

Again, however, the Tax Court is not in the same position as state courts are. There needs to be a different window for the Tax Court to say “go talk it over” apart from physically being in the court, since Tax Court rides circuit and infrequently visits most locations in the country. Where might we find that window? I can think of two options.

Option One: Pretrial Conferences

I’ve only been a party to about five or six federal district court cases, and all have settled fairly quickly. The most striking difference between federal district court and tax court, in my opinion, is the formality: more formal scheduling, more formal discovery, more formal everything.

Another difference is in pre-trial conference procedures. FRCP 26(f) generally requires that the parties confer about the case (and the possibilities for settling) prior to the court’s scheduling order or conference. The Tax Court has no such requirement under the rules, as there are no required “initial disclosures,” and formal discovery is generally the last resort rather than a given.

Both the US Tax Court Rules and the Federal Rules of Civil Procedure also have specific rules covering pre-trial conferences. See FRCP 16(a) and Tax Court Rule 110. Both rules provide that pre-trial conferences are discretionary, but in my (albeit limited) district court experience they tend to come up as a matter of course: discussions of settlement being raised by the judge during what is technically a “scheduling conference.” Again, it is amazing what can happen when a judge simply tells the parties to talk with each other for a bit.

I see this occasionally in Tax Court as well, though it appears to be largely a matter of the individual judge’s tastes. Judge Holmes, for example, seems to take a more hands-on approach to his docket. It generally isn’t (and doesn’t need to be) a particularly formal conference: I’ve seen that oftentimes just the “threat” of a call with the judge ends up moving the case forwards, especially when it was mostly languishing due to administrative inertia.

There is, however, a pretty big impediment to the Tax Court using pre-trial conferences as a way to resolve cases (or encourage settlement) earlier in the process. Namely, that in many locations Tax Court cases remain on the “general docket” and don’t have a judge assigned to them until late in the game. In Minnesota, for example, there is no trial session set on either the fall or spring 2022 calendars. So if I filed a petition today I could be pretty confident that it would not be calendared until 2023… and even then, likely not until March or April (the Tax Court for some reason tends to avoid Minnesota in January and February).

So maybe pretrial conferences aren’t always a way for the Tax Court to initiate settlement at an earlier stage. But they could still be a way for practitioners to get the ball moving. Rule 110(c) provides that parties can move for pretrial conferences even when they are not calendared, with the pretrial conference taking place anywhere “convenient.” Since there are now virtual trials, and weeks set off for virtual trial dates, they may well make for convenient pretrial conference “locations.”

Option Two: Status Reports 

There are a few advantages that the Tax Court may have over federal district court in encouraging early settlement, despite its later (and less formal) involvement in most cases. And these advantages spring largely from the different infrastructure of Tax Court controversies, for both respondent and petitioners. Whereas the federal district court deals with a range of parties, the Tax Court always deals with the IRS. Tax Court judges are generally very familiar with IRS procedures.

But there is also the infrastructure that has been built up (in no small part due to the efforts of numerous PT editors and contributors, and the ABA) for petitioners. While there are certainly pro bono referral programs with federal district courts, I don’t believe any are as formalized or robust as those in the Tax Court. There has been buy-in from all parties, resulting in the Tax Court calendar call program and the IRS push for settlement days from on-high. And while the nationwide LITC program isn’t limited to Tax Court disputes, it is clear that Tax Court is the preferred venue of LITC practitioners (see LITC program report at page 24).

All of this is to say that perhaps this infrastructure can be better exploited for early settlement in Tax Court. My pitch would be to put certain cases on “status report track” before trial dates are even set. I imagine these to be generic orders asking the parties to file a status report say, four months after the petition is filed, where the parties address (1) whether any effort to work toward settlement has taken place, and (2) whether Appeals has contacted the Petitioner. For pro se petitioners, it could also include a question about whether they have reached out to LITCs for assistance.

In jurisdictions where the Tax Court infrequently holds trial, I think this approach could work where others fail. A few thoughts on why:

First, status reports are fairly informal and not particularly time consuming. A lot of the joint status reports I’ve filed with IRS counsel are two or three paragraphs. Nonetheless, they serve a purpose: in the passive-aggressive parlance of the Midwest, they are a “gentle reminder” to parties to get things done. I have found that many cases that have been languishing on purely administrative grounds suddenly get resolved when a status report is on the horizon.

Second, you don’t really need to have the Tax Court judge acting on status reports, the way you do with motions. In fact, you’re not supposed to ask the Tax Court to “do” anything in a status report. That’s the role of a motion (see designated order post on point here). Because of this, it is much less of a problem to require status reports where the case remains on the general docket: incoming Chief Judge Kerrigan presumably wouldn’t be overwhelmed with additional work.

Third, Tax Court litigation already utilizes informal processes that this could potentially tie into. The Branerton process is one that comes to mind, suggested to me by Les and written about a bit in a “PT Classic” guest-post from Prof. Scott Schumacher in 2015. Sad to say, I have seen numerous cases where the Branerton process never really occurs, and as trial looms the parties struggle to contact each other and do what they can to stipulate. Note that petitioners can also initiate Branerton, so there is equal blame to share when this occurs.

Lastly, when a trial date is set and the case is assigned to a specific judge, they can look over the record and see if the parties have communicated. At calendar calls there are invariably multiple motions to dismiss for lack of prosecution that the Tax Court judge must reach a determination on. Some of the inefficiencies in Tax Court cases resolving quickly surely falls on petitioners: this practice may help the Tax Court in reaching their decision on where the blame should fall.

Tax Court Building Reopens

While it may not matter to most practitioners, the Tax Court building reopened to the public on Monday, June 6.  Here is the announcement the Court released on June 3 regarding the reopening:

UNITED STATES TAX COURT
Washington, D.C. 20217

June 3, 2022

PRESS RELEASE

Beginning June 6, 2022, the Tax Court’s Washington, D.C. courthouse will be open to the public, and its Records Office will be accessible during the Court’s regular business hours, 8:00 AM to 4:30 PM, Monday through Friday. Questions should be directed to the Public Affairs Office at (202) 521-3355.

The reopening of the Tax Court building, which has been closed for most of the period since March 2020 when most of the United States shut down in response to COVID, means that persons interested in the public records of Tax Court cases who can get themselves to the Judiciary Square area of Washington, D.C., can now view the records at no cost by going to the Records Office.  The Records Office contains a small space where, unless things have changed, two computer terminals provide access to case information at no cost to the person sitting at the terminal.  It also means that a person who can get to the Records Office can make an in  person request for documents in Tax Court cases and obtain them immediately without having to wait to call the office and go through the procedure to order documents.

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As we discussed previously, the Tax Court announced proposed rule changes in March.  The Tax Clinic at Harvard commented on those rules as did other parties including the ABA Tax Section, the Center for Taxpayer Rights and the IRS.  The Tax Court posts comments made to it on its web site; however, as of the time of writing this blog post, it had not posted the comments on the rule changes proposed in March of 2022.  So, I cannot link to the IRS comments because I do not have them, and I do not know if there were comments made by others.  The four groups that regularly comment on rules in recent years are the ABA Tax Section, the IRS, the Texas State Bar and the Harvard Tax Clinic; however, individuals also occasionally comment as well.  The comment process provides an excellent opportunity to provide the Court with your views.  I am somewhat surprised that the Court does not receive more comments.

Of course, the Court does not need to accept the views expressed, and it need not explain why it does or does not accept the views expressed in comments.  The Administrative Procedure Act does not govern the Court’s rulemaking process.  While a judge may occasionally make a statement at an ABA Tax Section meeting or some other setting about the Court’s consideration of rules, the process of considering comments remains, by and large, veiled in secrecy.  Even though I do not have a great track record on having my views adopted, I feel that the Court considers them and appreciate the opportunity to formally express them. 

Speaking of expressing my views, I will tie the Tax Clinic at Harvard’s most recent comment on access to records into the reopening of the Court.  While the reopening of the Court offers an alternative to some to reach the public records at the Court, for most persons seeking those records a trip to the Records Office may prove too expensive in time or money.  In the most recent comments, the Harvard Clinic suggested an improvement on the current remote access to records provision which requires a phone call to the Records Office.  I have written before about the process.

Sometimes a person at the Records Office answers the phone when you call seeking records.  If no one answers, you leave a message and someone calls you back in a few hours or a few days.  If someone answers, they take your request and tell you they will get back to you in several business days.  The process regularly involves phone tag at the beginning or the end or both.  The suggestion of the Harvard Clinic was to eliminate the phone tag part of the process by creating a fax number into which your records order could be faxed (together with a form for the request) or a dedicated email account into which you could email your request.  Allowing the requester to fax or email the request would eliminate the phone tag that occurs now when requesting records and allow members of the office staff to avoid the sometimes lengthy conversations regarding requests for documents from multiple cases.

Now that the Court and the Records Office have reopened, a lucky few can more easily access the public records available at the Tax Court but closely guarded.  A good small step to reopening after the pandemic closure.

2021 Tax Court Exam for Nonattorneys

Today we welcome first time guest blogger Sherrill L Trovato to provide detailed information about the examination the Tax Court administers to non-attorneys who practice before it.  If you go back almost 100 years now to the beginning of the Board of Tax Appeals both attorneys and CPAs could practice before the Board.  That changed in 1942 with other changes at the time it changed its name to Tax Court of the United States. The Tax Court sought to become more court like and CPAs were a casualty of that effort.  Now, non-lawyers must take a test to earn the right to practice before the Tax Court.  The story can be found in Part IV of Dubroff and Hellwig’s book on the history of the Court.  An earlier post I wrote several years ago on this exam has proved to be one of our most popular posts of all time.  Today we have a real expert on the subject to provide information.

Sherrill passed the Tax Court exam over two decades ago and in 2002 set up a program to teach others how to pass the exam.  She also offers other skills classes to Tax Court practitioners.  She received her Bachelor of Arts (Business Administration, Accounting), Master of Business Administration (Finance), and Master of Science (Taxation) degrees, all from California State University (Fullerton) between 1988 and 1993. She passed the SEE on her first attempt in 1991 and became an enrolled agent in 1992. She is a Fellow of NTPI (National Tax Practice Institute).  In addition to providing education for tax professionals, her Southern California firm offers tax compliance and controversy services through the Tax Court.  Keith

Late afternoon on May 6, 2022 the U.S. Tax Court emailed results of the November 17, 2021 nonattorney written admission exam to those candidates who sat for the first ever remote exam after the pandemic postponed the November 2020 exam.

Prior to the November 2021 exam, the Tax Court exam was a biannual 4-hour, handwritten exam, offered only in Washington, DC.  In 2016 the exam site was moved from the Tax Court building to the Ronald Reagan Building and International Trade Center. 

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The exam is difficult for many reasons, including the breadth of information tested.  Since 1996 the exam has consisted of 4 parts, each of which must be passed in one sitting with a score of 70% or better:

  • 25% (60 minutes) Tax Court Rules of Practice and Procedure
  • 25% (60 minutes) Federal Rules of Evidence
  • 40% (96 minutes) Federal Taxation
  • 10% (24 minutes) Legal Ethics (based on the Model Rules of Professional Conduct of the American Bar Association)

There is no opportunity to hold any passing score to a subsequent exam year and the requirement to pass the entire exam is one reason the exam is so challenging. 

For the handwritten exam, scratch paper was provided and non-programmable calculators could be used for calculations.  Answers were recorded manually on what was essentially a bluebook (small bound bundles of paper), although in recent years the cover was color-coded by exam part. 

For the handwritten exam, the court provided resources that could be accessed including a printed copy of the Tax Court Rules, the Model Rules, and the two volume CCH Internal Revenue Code.  The Federal Rules of Evidence were not available.  There is not sufficient time to research answers during the exam, so the partial “open book” nature is not very useful.

Prior to 2020, the fee to take the handwritten exam was $75 to the Tax Court. With the anticipated 2020 exam, the exam fee payable to the Tax Court increased to $150.  When the exam was offered on a remote basis, each examinee also paid an additional fee of $100 to ExamSoft, the provider of the exam.  The ExamSoft platform has been used to administer bar exams, and offers security to maintain integrity of the answer files, plus auditing information for the exam provider. 

The 2021 exam started at 12:10 Eastern Time, and was given in 2 sessions of 110 minutes each, with a 15-minute comfort break in between the sessions.  Session One covered Federal Taxation and Legal Ethics and Session Two covered Practice and Procedure and Evidence.  Once a session ended, it was closed and could not be accessed again. 

For the remote exam the Court provided a PDF version of selected provisions from the Internal Revenue Code, Tax Court Rules of Practice and Procedure, and the ABA Model Rules of Professional conduct.  The Federal Rules of Evidence were not available.

There were additional technical requirements with the remote exam which required a laptop or desktop computer with an installed or external webcam and an internet connection.  Two mandatory mock examinations had to be completed to be eligible to take the nonattorney exam.  The mock exam had to be taken on a specific version of the ExamSoft software, but depending upon the date the software was downloaded, many students found themselves with the wrong software version, which created additional confusion and consternation in the days before the exam.

During the exam, examinees had to remain within view of the web camera, and a video file accompanied the exam answers.  No scratch paper or external resources could be accessed.

Those who were not successful can obtain a copy of their scores and answers by written request no later than 60 days from the date of the notification.  The Tax Court will not reconsider the examination results unless the unsuccessful examinee can demonstrate there is a clerical error in the scoring of the exam; those requests must be received within 90 days of the date of the email.  All examination answers are deleted from the Court’s records 120 days after the email, unless there is a reconsideration challenge pending, in which case the answers will be deleted 60 days after the Court takes final action on the request, but not earlier than 120 days after the date of the email. 

Successful examinees cannot obtain their answers and scores, and there are no official answers published by the Tax Court, which is another reason this exam is so difficult.

On May 16, 2022 the Tax Court began disseminating exam answers and scores sheets to those who requested them.  The score sheets indicate that the 2021 remote exam was still a traditional 4-hour exam, 240 minutes long, yet examinees were only given 220 minutes to complete it (two blocks of 110 minutes each).  As in prior exams, in the 2021 exam Substantive Tax was allocated 96 minutes, Legal Ethics was allocated 24 minutes, and both Practice and Evidence were allocated 60 minutes each.

Of the roughly 30 exams I’ve seen to date, it is apparent examinees struggled to achieve passing scores on the Substantive Tax and Legal Ethics (Session One) sections more than Practice and Evidence (Session Two).  Many of my students indicated that they ran out of time during Session One and had extra time during Session Two.  During the in-person exam an examinee could choose what order to take the exam in, and could move between the parts as needed based on the four hours available; this was not possible during the remote exam.

I know that 15 of my students passed, but as of this writing (5/28/22) the Tax Court has not yet released the total number who passed the 2021 exam. 

The pass rate between 2000-2018 ranges from a low of 5.56% in 2004 (4 of 72 examinees) to a high of 18.25% in 2014 (23 out of 126).  I took the exam and passed it on my first attempt in 2000, one of 17 who passed that year out of 102 examinees.  The Tax Court provides these statistics for 2000-2018 on their website:  https://ustaxcourt.gov/resources/practitioner/NonAttorney_Exam_Statistics.pdf.

Under Tax Court Rule 200(c), those who pass must be sponsored by at least two persons admitted to practice before the Court by a sponsor who can state, according to the email sent to successful examinees, “fully and frankly the extent of the sponsor’s acquaintance with you, the sponsor’s opinion of your moral character ad repute, and the sponsor’s opinion of your qualifications to practice before this Court.”  The successful examinee must also execute the Practitioner’s Oath before a Notary Public, which can be emailed to the Tax Court Admissions Office, and pay the $50 original admission fee simultaneously with the oath. 

In 2013, 2017 and 2019, Tax Court judges personally swore in nonattorneys who were successful on this difficult exam.  When I spoke with her May 12, 2022 about the possibility of also recognizing those who passed the 2021 exam, Jennifer Siegel of the Tax Court Public Affairs office said, “Although the Court is holding in-person trial sessions, the main courthouse building is not open for outside visitors, and a group swearing-in ceremony may not be possible.  Anyone who passed the 2021 exam who is interested in being sworn in by a Tax Court judge at a local trial calendar can contact Jennifer Siegel, Public Affairs, at 202.521.3355 (or PublicAffairs@ustaxcourt.gov), to discuss that opportunity.”

It is not yet known whether the next exam will be given remotely or return to an in-person model.  This should be specified in the press release required under Tax Court Rule 200(a)(3) when the Tax Court announces the date and time of the exam, approximately six months before the exam is held.