Whistleblower Week – Designated Orders, March 2 – 6, 2020

This week was apparently Whistleblower Week at the Tax Court, featuring three separate whistleblower orders from Judges Copeland, Jones, and Kerrigan. We’ll also discuss a short order on limited entries of appearance (which has less importance after the Court’s recent administrative order regarding limited entries of appearance in the time of COVID-19), as well as an order to dismiss a deficiency case for lack of jurisdiction.

Other orders included:

  • An excellent refresher from Judge Urda on motions to vacate under Tax Court Rule 162 and Federal Rule of Civil Procedure 60(b).
  • An order from Judge Toro granting a motion to dismiss from Petitioner in a standalone innocent spouse case.
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The Whistleblower Orders

There were three orders granting summary judgment to Respondent in whistleblower cases. (There were technically four, but the orders in the unconsolidated Keane cases are essentially identical).

  • Docket No. 10662-19W, Horsey v. C.I.R. (Order Here)
  • Docket Nos. 22897-18W, 23240-18W, Keane v. C.I.R. (Orders Here & Here)
  • Docket No. 22395-18W, Lambert v. C.I.R. (Order Here)

These cases follow the Tax Court’s decision from last fall in Lacey v. Commissioner, 153 T.C. No. 8 (2019), which held that the Court has jurisdiction under I.R.C. § 7623(b)(4) to review decisions of the Whistleblower Office to reject a claim for failing to meet threshold requirements in the regulations applicable to whistleblower claims. See Reg § 301.7623-1(c)(1), (4). The Court has long held that it has no jurisdiction to force the IRS to audit or collect proceeds from target taxpayers and that if the IRS fails to audit and collects no proceeds from the target, the Court likewise has no jurisdiction to review the decision not to audit or collect proceeds. Cohen v. Commissioner, 139 T.C. 299, 302 (2012).

In Lacey, it was undisputed that the IRS did not audit the taxpayer and collected no proceeds. However, the Court determined that an initial rejection of the whistleblower complaint without a referral to the IRS operating division could be reviewed for abuse of discretion. The Court noted that permissible reasons for rejection at this level included those threshold regulatory requirements: that the whistleblower’s complaint provides specific and credible information that the whistleblower believes will lead to collected tax proceeds; reports a failure to comply with the internal revenue laws; identifies the persons believed to have failed to comply; provides substantive information, including all available documents; and does not provide speculative information. Under the regulations, the Whistleblower Office should first determine whether the claim is deficient in this regard, and if not, forward the case to an IRS operating division (e.g., LB&I for large business taxpayers, etc.).

At that point, a “classifier” in the operating division takes over, and determines whether to proceed with an audit. However, they too could determine that the claim was deficient for any of the reasons the initial classifier could. In Lacey, the Court denied summary judgment to Respondent because the administrative record was not sufficiently clear to discern whether the Whistleblower Office considered the whistleblower’s claim at all; thus it was likewise impossible to determine why the claim was rejected.

In these three cases, however, the Court has no trouble of the kind that tripped up the IRS in Lacey. In all of the cases, the IRS neither audited nor collected proceeds from the target taxpayers. And the Whistleblower Office, in each case, did refer the case to a “classifier” in the relevant operating division. That employee, in turn, determined that the initial claim was speculative and recommended that the IRS not proceed with further investigation of the target taxpayers. Unlike Lacey, all of this information was apparently included in the administrative record, and so the Court could grant summary judgment more easily.

In Keane, Judge Jones noted that the IRS may continue to run into problems where it rejects claims using “and/or” language in the determination letter. Here, the classifier rejected the claim because “the information provided was speculative and/or did not provide specific or credible information regarding tax underpayment or violations of internal revenue laws.” This is important, because under the Chenery doctrine, the Court may only review the IRS determination for the reasons that the IRS actually relied on in making its determination. See Lacey, 153 T.C. at *14 (citing Kasper v. Commissioner, 150 T.C. 8, 23-24 (2018)). Using “and/or” language makes the grounds for the IRS determination unclear. While Judge Jones notes that the record support both reasons here, other cases might be closer.

Judge Jones cites a memorandum opinion from Judge Gustafson, who raised a similar concern earlier this year. See Alber v. Commissioner, T.C. Memo. 2020-20. This aligns with his analogous view of the IRS’s practice in issuing Notices of Determination in CDP cases, where the IRS typically writes that “There was a balance due when the Notice of Intent to Levy was issued or when the NFTL filing was requested.” In a previous order (covered here), Judge Gustafson wondered whether someone at Appeals actually did verify that a balance due existed, given the lack of clarity in the notice.

What to distill from Lacey and these orders? First, the Tax Court can review an initial rejection from the Whistleblower Office—even if no proceeds are collected. Second, if an employee of the IRS operating division decides not to pursue collection after referral from the Whistleblower Office, that will generally be sufficient to resolve the case in favor of the IRS—though one might reasonably suspect a different result could lie if that classifier failed to meaningfully review the case, as potentially occurred in Lacey with the Whistleblower Office. Finally, if the administrative record provides multiple reasons for rejecting the claim in an “and/or” formulation, this could prove problematic for the IRS under Chenery if at least one reason isn’t supported in the administrative record.

Docket No. 722-19L, Jenkins v. C.I.R. (Order Here)

This short order from Judge Gale deals with a defective limited entry of appearance. Counsel attempted to file a motion to dismiss for Petitioners based on an electronically filed “limited” entry of appearance. However, the Tax Court’s previous administrative order authorizing limited entries of appearance only allowed her to do so on paper, and then only at the trial session itself. So, the Court struck the motion. Counsel found an easy remedy here, however, and simply entered an appearance normally, filed the motion to dismiss; the Court granted it days later.  

On May 29, the Court issued a new administrative order that authorizes the filing of a limited entry of appearance electronically, at any time during the pendency of a Tax Court case. It offers much more flexibility for practitioners to limit their representation to a prescribed proceeding. This includes the trial session itself, as did the previous order, but can also include motion hearings, pre-trial conferences, and other matters at anytime between the issuance of the Notice Setting Case for Trial until the adjournment of the trial session. Because the end of representation isn’t necessarily as clear-cut under this new order, the attorney must file a Notice of Completion at the end of the limited appearance; the Court is not required to approve the end of the representation.

Docket No. 18705-18S, Patten v. C.I.R. (Order Here)

This is the order that keeps a tax attorney up at night. It explains, in minute detail, the process by which an attorney missed the 90-day jurisdictional deadline to file a Tax Court petition in a deficiency case.

The Notice of Deficiency was dated June 22, 2018; the Petition was filed with the Tax Court on September 21, 2018: the 91st day after June 22. Apparently, Respondent’s counsel didn’t notice this in filing the Answer, but Judge Leyden’s chambers did. She issued an order to show cause, directing Respondent to provide the “postmarked U.S. Postal Service Form 3877 or other proof of mailing” regarding the notice of deficiency. After all, it’s not the date listed on the Notice of Deficiency that controls under the statute; it’s the date of mailing of the Notice of Deficiency. See I.R.C. § 6213(a).

Chief Counsel responded to the order and attached Form 3877 showing that the Notice was indeed mailed to Petitioner’s last known address by certified mail (along with two other addresses). The Notice sent to the last known address was returned, as was one of the other notices. But it looks like one notice was successfully delivered. (Of course, that’s irrelevant to the validity of the Notice itself, as Respondent established that the Notice was sent to the taxpayer’s last known address by certified mail. See I.R.C. § 6212.)

Respondent also showed that Petitioner, through his attorney, mailed the petition to the Court on September 19, 2018. As we know, the Court received it on September 21, 2018—one day late. Ordinarily, documents are “filed” when they are received—either by the IRS or the Tax Court.

So, can’t the mailbox rule under I.R.C. § 7502 save the taxpayer’s petition? Not here. Petitioner’s attorney, in his response to the order, acknowledged that the petition was mistakenly sent via FedEx Express, rather than FedEx Overnight due to an “office slipup”. While section 7502(f) allows taxpayers to use private delivery services, such as FedEx, UPS, or DHL, instead of the USPS, practitioners and petitioners alike must ensure that they are using a “designated delivery service.”

What’s a designated delivery service? Section 7502(f)(2) defines the type of services that the Secretary may designate, and Reg. § 301.7502-1(e)(2)(ii) describes the process of designating the service (i.e., publishing it in the Internal Revenue Bulletin). And in practice, the Secretary does so periodically—most recently in Notice 2016-30. The list also appears more accessibly on the IRS website.

So, does FedEx Express appear on this list of designated delivery services? No. Therefore, it can’t trigger the mailbox rule under section 7502. The petition is filed late, and the Tax Court has no jurisdiction to decide the case. Judge Leyden therefore dismisses the case—which involves liabilities for four separate tax years—for lack of jurisdiction.

The lesson for practitioners? Mail the petition so the Court receives it before the deadline. Otherwise, mail the petition via USPS certified mail. Train your office staff to only mail petitions to the Tax Court via USPS certified mail. Is there a good reason to ever use a private delivery service when mailing a Tax Court petition? I don’t see one, given the very real risks involved that bear out here. 

Exercise Caution When Using Extended Tax Court Due Date

In an earlier post I provided proposed time frames for filing Tax Court petitions based on different due dates.  Circling back to that issue, I wanted to point out the downside of the extension created by the decision in Guralnik v. Commissioner, 146 T.C. 230 (2016)(en banc).  At this point we do not know if the time to file a petition for those with a due date between March 19 and July 15, 2020, will be governed by a combination of Guralnik and Notice 2020-23, just Notice 2020-23 or just Guralnik.  The answer to that question depends, in part, on when the Tax Court clerk’s office reopens.  The previous post presumed that the Tax Court clerk’s office would reopen on June 30 but if it reopens after July 15, 2020, and if the time period for filing a Tax Court petition in Notice 2020-23 is not further extended, then Guralnik will both pre-date and post-date the extension in Notice 2020-23, making the extension in the Notice irrelevant for purposes of Tax Court filing.

Guralnik created a logical rule for a snow storm that is a limited time event but does not work as well with an extended closure, such as the one caused by COVID-19 or the government shutdown of 2018-2019.  The problem with a long shut-down and its impact on the time to timely file a Tax Court petition results from Guralnik’s requirement that the petition be filed when the Tax Court reopens.  Some petitioners will not know the precise date the Tax Court will reopen.  Based on what happened during the 2018-2019 government shutdown, petitioners using private delivery services seemed to have the petitions returned after some failed attempts.  What happens when a private delivery service returns the petition after a failure and the petitioner fails to mail the document to the Court before the reopening date?  The Tax Court has issued conflicting rulings which exacerbates the already difficult situation.

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In the case of McClain v. Commissioner, Dk. No. 2699-19S, a deficiency case involving a pro se petitioner, the Tax Court issued an order that dismissed a petitioner who filed a petition late because of the government shut down in 2018-2019.  Mr. McClain’s petition was filed by the Tax Court on February 4, 2019.  The IRS sent the notice of deficiency on October 9, 2018.  The time for filing a petition would ordinarily have run on Monday, January 7, 2019.  Between December 28, 2018 and January 28, 2019, the Tax Court closed including closure of the clerk’s office triggering the application of Guralnik.

The Tax Court closure triggered the extended time to file in Guralnik but the extended time did not help Mr. McClain.  The cautionary tale here stems from the way Mr. McClain was treated by the Tax Court even though he made an effort to file during the shut-down.  The decision here could have implications for taxpayers have a petition come due during the time the Tax Court is closed due to the pandemic.

Although the petition was filed almost a month after the statutory due date, the due date fell at a time when the court was closed.  Attached to the petition were two FedEx envelopes one of which was shipped on January 8, 2019 and the other on January 15, 2019.  The Tax Court determined that it lacked jurisdiction over Mr. McClain’s case, despite the fact that the taxpayer attempted to mail the petition to the court twice during the period extended by the Guralnik case.  The Tax Court found that despite the two attempts to file while it was closed, the taxpayer was obliged to send a petition to it on January 28, 2019, the date it reopened.  Because the postmark on his petition was February 1, 2019, the Tax Court determined that it lacked jurisdiction. Bryan Camp also recently analyzed this case over on TaxProf Blog, which you can find here.

In McNamee v. Commissioner, T.C. Memo 2020-37, a CDP case in which the petitioner was represented, the Court cited to an announcement on its website that was not mentioned in the order entered in the McClain case.  The Court wrote in the facts:

On December 28, 2018 [a few days before the last date to file], petitioner sent a petition to this Court seeking review of the notice of determination. The petition was sent to the Court via FedEx Priority Overnight service. Because of a lapse in Government funding the Court was closed from December 28, 2018, to January 25, 2019. As a result, the envelope containing the petition was returned to petitioner as undeliverable. The Court’s website at the time instructed taxpayers that, “[i]f a document mailed or sent * * * to the Court has been returned, the party that mailed or sent the document should remail or resend it to the Court with a copy of the envelope or container in which it was first mailed or sent.” Following those instructions, petitioner on January 31, 2019, redelivered to the Court–again by FedEx Priority Overnight service–the petition and the envelope in which it had originally been delivered. The petition was received by the Court and filed on February 1, 2019.

In the discussion section of the opinion, the Court found the petition timely filed, writing:

Petitioner first mailed his petition to the Court via FedEx Priority Overnight service on December 28, 2018, three days before the deadline for filing his petition. Because his petition was timely mailed, it is deemed timely filed, and we thus have jurisdiction over this case.

Both McClain and McNamee sent their petitions to the Tax Court by an approved private delivery service while the court’s Clerk’s Office was closed.  Their petitions were returned.  They resent the petitions a few days after the Clerk’s Office reopened.  About the only difference between the two cases is that McClain first sent his petition one day after the 90-days had expired (not considering Guranik) while McNamee first sent his petition within the 30-day period for filing a CDP petition.  But, still, McClain first sent the petition while the Clerk’s Office was closed, so arguably that should be enough under Guranik and the website instructions.

I find it impossible to reconcile the results of the two cases in which the order and the opinion came out within days of each other.  I believe that the McNamee opinion interprets Guralnik in the manner most consistent with that opinion; however, McClain raises real concerns for anyone trying to provide advice on how to interpret Guralnik.  The Court advises prospective petitioners to watch its site to learn when the Court will reopen.  The Court should give petitioners plenty of warning before it reopens and should clarify its instructions.  While the instructions cited in the McNamee case say to retain a copy of petitions sent during the closure and to provide the returned mail with the petition filed after the Tax Court reopens, the instructions should alert prospective petitioners when mailing a petition during closure will not work.  Mr. McClain at least deserves an explanation why following what appeared to be the Court’s instructions and the intent of the Guralnik case still resulted in dismissal.  His dismissal was especially unfortunate because he was pro se and may not have had the tools to adequately argue his case in the way that Mr. McNamee did. 

How the Death of a President Impacts Tax Court Jurisdiction

The ever alert commenter-in-chief and occasional guest blogger, Bob Kamman, brought to my attention a Tax Court order issued on February 21, 2019, as a result of the death of President George H. W. Bush in 2018.  It seems that the petitioner in the case, Ms. Makowski, went to the post office on December 5, 2018, the 90th day to mail her petition to the Tax Court.  When she arrived at the post office, it was closed because President Trump had ordered December 5, 2018 to be a day of national mourning for President Bush.  So, Ms. Makowski had to come back to the post office the next day to mail her petition.  When her petition arrived at the Tax Court, the IRS noticed that it was mailed one day late and filed a motion to dismiss for lack of jurisdiction.

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Ms. Makowski responded to the motion by sending the court a letter explaining the problem she had in trying to mail the letter on the 90th day.  The court then issued the following order:

On February 21, 2019, respondent filed in the above-docketed case a Motion To Dismiss for Lack of Jurisdiction, on the ground that the petition herein was not filed within the time prescribed by section 6213(a) or 7502 of the Internal Revenue Code. Respondent attached to the motion copies of a notice of deficiency and corresponding certified mail list, as evidence of the fact that such notice for the taxable years 2015 and 2016 was sent to petitioner by certified mail on September 6, 2018. On March 26, 2019, the Court received from petitioner a document, initially filed as a letter, that is in the nature of an objection to the motion to dismiss. Therein, petitioner explained, and attached documentation supporting, that she had been unable to mail the petition on the December 5, 2018, due date because of the closure of post offices concomitant with the declaration by President Donald Trump of a National Day of Mourning in honor of former President George H.W. Bush. 

Upon due consideration, it is ORDERED that petitioner’s submission filed March 26, 2018, [sic] as a letter shall be recharacterized as an objection to the pending motion to dismiss. 

It is further ORDERED that, on or before April 18, 2019, respondent shall file a response to petitioner’s just-referenced objection, addressing the impact of the National Day of Mourning declaration for purposes of filing deadlines. 

The IRS withdrew its motion because of the Tax Court’s decision in Guralnik.  The case moved forward to decision where the IRS conceded that she had no deficiency for the two years at issue.  Happy ending.

The case demonstrates another way that the shutdown of the overall federal government (think budget impasse as discussed here) or the Tax Court (think snow as discussed here) can impact a taxpayer’s ability to obtain Tax Court jurisdiction or at least to have a petition deemed timely filed, so that the petitioner need not get into the arguments about whether timely filing creates a jurisdictional issue.

It’s a fairly simple lesson at this point, but the issue of government shutdown resulting from the death of a President reminded me of a problem caused by the death of President Nixon in April of 1994.  This remembrance has absolutely nothing to do with tax procedure so stop reading if you are looking for any meaning here.

At the time of President Nixon’s death, I was the District Counsel for the IRS in Richmond, Virginia which meant I was in charge of the group of attorneys representing the IRS in Virginia.  One of the attorneys in the office was going to a training program in Boulder, Colorado.  As I remember, the program ran from Tuesday morning through Thursday afternoon with Monday and Friday as travel days.  The attorney liked to ski and decided to go to Colorado early in order to get in some skiing over the weekend.  The flight cost to the government was the same, and he picked up his expenses for the time before the training program began. 

After he left Richmond and before the training program began, the government announced that Wednesday of the week of the training program would be a day of national mourning for President Nixon.  That caused the office to cancel the training program since it could not be held on Wednesday and that created a big hole in the programming.  By the time of the decision, the attorney was already on the slopes.  This was an era before cell phones and other forms of instant communication, so I called the ski resort and asked it to leave a message on its message board for the attorney to call me.  That failed.  I called the hotel in Boulder where he was going to stay and did connect with him once he arrived there.  He returned to Richmond after receiving the message at the hotel, and we began the process of putting in a travel voucher for a trip to a training program that was cancelled.

Many memos and phone calls later, the government did cover the cost of his airfare and one night’s lodging, but the exercise forever burned in my memory the fact that the government shuts down when a President dies, even though the consequences of the shutdown can be unexpected.  As bad as it seemed when I was writing and calling on behalf of the employee to obtain his reimbursement, I remember that my counterpart in Chicago had an employee who had a fear of flying and took the train from Chicago to Colorado to attend the training.  So, I was not the only one with this headache. 

Shutting down the government creates many ripples.  If you have a Tax Court matter with a due date on the shutdown, keep Guralnik in mind.  This is yet another situation where it can come in handy.

District Court Reverses Its Section 6511(b)(2)(A) Ruling and Excoriates IRS and DOJ for Not Citing Relevant Authority

People ask me what I do in my retirement to keep my mind active.  In addition to a lot of pleasure reading, I keep up with the tax law, blog here, and engage in impact litigation with the Harvard tax clinic, usually in the appellate courts.  Getting an appellate court to overturn a lower court ruling is almost a mug’s game.  Gil Rothenberg of the DOJ reported last fall that of taxpayer appeals in the fiscal year ended September 30, 2019, the DOJ won 94% of the time.  I usually get involved in hard cases, seeking to overturn settled law.  But, my winning percentage is far better than 6% – though still well below 50%, as any appellant would expect.  I tell people that I am a sort of Don Quixote, often falling off my Rosinante or mistaking a barber’s basin for the Golden Helmet of Mambrino.  But, sometimes, I do save a damsel in distress.  I just did.

Indeed, I just got a district court reversal even without entering an appearance in the case, even as an amicus.  And I got a scathing opinion from the judge against the government, to boot.  (I was not looking for the scathing tone, but the judge is right.)

You may recall my recent post involving a case named Harrison v. United States, W.D. Wisconsin Docket No. 19-cv-194.  In the case, the taxpayers mailed a late 2012 original return containing a refund claim for withheld taxes just before the end of a period of 3 years after the return’s due date plus the length of an extension they had obtained to file the return (but had not used).  The return arrived at the IRS a few days after the period expired.  The court correctly ruled that the claim was timely filed under section 6511(a) because it was filed within 3 years after the return was filed – indeed, both were filed the same day.  But, the court then misapplied the lookback rule of section 6511(b)(2)(A) to hold that the claim was limited to taxes deemed paid in a period looking back 3 years plus the extension period from the date the IRS received the claim.  No tax was deemed paid in that period, so the over-$7,000 refund was limited to $0, said the court.  The taxpayers had correctly argued that section 7502’s timely mailing rules apply such that the lookback period should begin from the date the return was mailed (not received), so the entire refund should be allowed.  Apparently, the IRS’ only objection to paying the refund was the amount limitation. 

Unfortunately, neither party cited to the district court the most relevant case law, Weisbart v. United States, 222 F.3d 93 (2d Cir. 2000), or pertinent regulations that had been adopted in 2001 to embody the holding of Weisbart.  And you would not expect a district court judge to be an expert on tax procedure.

I contacted the taxpayers’ attorney on January 13 to point out the correct authority and suggested that he move for reconsideration.  He did so here on January 15.  On January 24, the DOJ filed a notice that it did not object to the motion for reconsideration because the DOJ had the law wrong.  In part, the DOJ Tax Division blamed the IRS lawyers for not telling the DOJ the correct law.  On January 29, the district court entered a revised order, granting the motion for reconsideration and also amended the judgment to find the government owes the taxpayers the tax refund they sought, plus interest from April 15, 2013.

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The district court ruled for the taxpayers not just relying on Weisbart and the 2001 regulations that I discussed in my post, but the earlier, less clear regulations that Weisbart interpreted as providing for this result. This could have been a two-page order.  But, it wasn’t.  The judge was boiling mad at the government.  He ordered that his revised opinion be sent to every IRS and DOJ Tax Division attorney for reading for ethical training.  Because you don’t see this too often, I quote here what the judge wrote about the government lawyers (omitting footnotes; emphasis added):

Regrettably, not only did plaintiff fail to bring this case and the regulations to the court’s attention in their previous briefing on defendant’s motion to dismiss or for summary judgment, but the IRS and the U.S. Department of Justice, whose respective jobs include promulgating and enforcing the applicable regulation, also did not. Still, presented with the regulations, defendant concedes it has no basis to oppose the motion for reconsideration, and the IRS has confirmed that it is prepared to issue a refund in the amount sought in plaintiffs complaint, plus statutory interest. (Def.’s Resp. (dkt. #25) ¶ 18.) While there is no question that this is the appropriate response and course of action, the court remains troubled by defendant’s failure to alert the court to the Weisbart case and even more the regulations. In its submission, defendant represents that the IRS did not identify the Weisbart case, the Chief Counsel’s Notice or the regulations, but acknowledges that counsel for defendant did identify the Weisbart case in their own research, and chose not to disclose it in their briefing because it is not “controlling” in the Seventh Circuit. (Id. ¶¶ 13-14.) This might be a viable defense if: (1) the failure to cite Weisbart were the only failure and; (2) the U.S. Department of Justice’s and IRS’s aspirations only were not to fall below the bare minimum ethical threshold. See Am. Bar Assoc. Rule 3.3 (“A lawyer should not knowingly . . . fail to disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel.”). 

More critically, however, the Weisbart court relied on a Treasury Regulation, which is controlling authority on both the IRS and this court. Defendant explains that the Chief Counsel’s Notice announcing a change in its litigation position and the amendment to 26 C.F.R. § 301.7502-1(f) occurred after the Weisbart opinion, but the language in 26 C.F.R. § 301.6402-3(a)(5), on which the Second Circuit in part relied, remains in place today, and defendant failed to alert the court of this regulation. Thus, the conduct of defendant’s counsel here falls below even a bare minimum ethical standard, something counsel would have discovered by reading Weisbart and the current versions of the regulations cited in that case closely, rather than dismissing it as an inconvenient contrary authority that they were not ethically required to cite to the court. Even if this were not so, defendant cited a number of cases from other circuits that were also not controlling in this court in support of its erroneous argument that the administrative complaint was filed on the date it was received by the IRS.

These egregious missteps in defendant’s response were enough to prompt this court to consider whether an award of attorney’s fees incurred in responding to the motion for summary judgment and in bringing their motion for reconsideration would be appropriate under 28 U.S.C. § 1927. However, this would require a finding of actual bad faith to shift fees to plaintiff. See Boyer v. BNSF Ry. Co., 824 F.3d 694, 708 (7th Cir.), opinion modified on reh’g, 832 F.3d 699 (7th Cir. 2016) (“If a lawyer pursues a path that a reasonably careful attorney would have known, after appropriate inquiry, to be unsound, the conduct is objectively unreasonable and vexatious. To put this a little differently, a lawyer engages in bad faith by acting recklessly or with indifference to the law, as well as by acting in the teeth of what he knows to be the law[.]” (internal citation omitted). Instead, defendant’s counsel’s representations show negligence, which is not sufficient to invoke fees under § 1927. Id. Plus, counsel at least confessed error when plaintiff finally discovered the controlling regulation and brought it to defendant’s and the court’s attention. 

Nevertheless the court will require defendant to circulate this opinion and order, along with the Chief Counsel’s Notice and 26 C.F.R. §§ 301.7502-1(f) and § 301.6402- 3(a)(5) to all attorneys in the IRS Office of Chief Counsel and to the Tax Division of the U.S. Department of Justice in hopes that these actions will prevent future opposition to meritorious claims for refunds, as well as any instinct to ignore the duty of candor to the court by burying precedent no matter how well reasoned, helpful or directly on point it may be simply because one is not ethically bound to disclose it. In their prayer for relief in their complaint, plaintiffs requested attorney’s fees, but cited no support for this request. (Compl. (dkt. #1) 3.) In their motion for reconsideration, plaintiffs simply request $7,386.48 and statutory interest. (Pls.’ Mot. (dkt. #24) 4.)

Observation

I am glad the court corrected this injustice.  However, I would point out that district courts still need guidance on issues like interest.  It is usually the case that overpayment interest is payable to a taxpayer from the date the tax was overpaid.  But, in 1982, Congress specifically added new paragraph (3) to section 6611(b) providing that in the case of late returns, interest is payable from the date the return is filed.  Thus, the amended judgment has the wrong interest accrual date.  I refuse to do the research necessary to figure out if the interest accrual date (i.e., the date the return is “filed”) is the date the return was mailed or the date the IRS received the return.  Basta!

Mail At Your Peril: Taxpayer Dodges A Bullet (For Now)

We have discussed many times the issues that practitioners and taxpayers face when trying to prove they have filed a tax return or other document with the IRS or Tax Court.  A recent case in Tax Court, Seely v Commissioner, involves a taxpayer’s attorney who mailed a petition to Tax Court via old fashioned first class postage and not via certified mail, registered mail or an authorized private delivery service. In Seely, the Tax Court received the petition, but not until 111 days after the date of the 90-day letter. Seely claimed that his lawyer mailed the petition four days before the 90-day period ended to file a petition timely and properly and fully secure the Tax Court’s jurisdiction to hear the case. Unfortunately for Seely (or so it seemed) the envelope containing the petition had no discernible postmark. The IRS argued that the taxpayer failed to petition the Tax Court within the 90-day period and moved to dismiss the petition for lack of jurisdiction.

Our faithful readers know where this may be heading. Section 7502 provides, in general, that if a document is delivered to the IRS by the United States mail after the due date, then the date of the United States postmark on the envelope is deemed to be the date of delivery (i.e., filing). The statute also provides that for registered mail, the registration is prima facie evidence that the document was delivered, and that the date of registration is deemed to be the postmark date. For good measure, the statute says that Treasury can issue rules to flesh out how the statutory rules for registered mail filing can apply to mailing via certified mail or through an authorized private delivery service. IRS has issued regulations and other guidance that fills out the details on certified mail and the use of private carriers.

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Back to Seely. The regulations under Section 7502 do not directly address envelopes with no postmarks (they do addresses postmarks that are “not legible” and provide that the taxpayer has the burden of proving the postmark date when the postmark is not legible). As his lawyer did not send the petition by certified mail, registered mail or through an authorized private delivery service, and as there was no postmark at all, the rules generally default to the filing date equaling the date that the document was received (in this case by the Tax Court). Yet the opinion in Seely notes that there is precedent in Tax Court to allow taxpayers to prove the mailing date through extrinsic evidence, like testimony, the amount of time the document allegedly took to arrive as compared to the time that the document should take to arrive, and whether the document or envelope has the markings that indicate that they may have been misplaced or lost along the way. When relying on extrinsic evidence, the standard the taxpayer has to satisfy to prove the mailing date is proof by convincing evidence.

Seely opposed the motion to dismiss, and Seely had as part of the record a sworn statement by the attorney claiming that they deposited the petition in the US mail four days before the last date for filing the petition. The IRS submitted proof that it normally takes 8 – 15 business days for documents to be delivered to a government agency or office in DC (while this seems like an excessive amount of time, the opinion drops a footnote discussing how mail to Tax Court goes through an irradiation process adding an extra 5 to 10 days).  The government helpfully noted that Seely’s petition allegedly arrived 16 business days after his attorney claimed that he mailed it from Washington State. 

In light of the amount of time the document took to arrive, the IRS asked the court to consider the lawyer’s statement to fail to meet the standard that the taxpayer had convincing evidence that the petition was timely filed.

The Tax Court, in an opinion by Judge Vasquez, disagreed:

First, we note that the petition arrived at the Court only one business day late. We also note that the Fourth of July holiday. In prior cases holiday conditions at the post office (e.g., holiday closures, unusually large volumes of mail, or inefficiencies attributable to temporary staff) have been found to be a possible explanation for short delays in delivery. We are thus unpersuaded by respondent’s argument that Mr. Boyce’s declaration is not reliable because the petition’s alleged mailing date does not square with its actual delivery date. (citations and footnote omitted).

When one crunches the numbers, to get to the 21 actual days he allowed after the due date and to mesh with the lawyer’s sworn statement that he mailed the petition three days before the due date, Judge Vasquez effectively allows 24 days for the mailing, which includes eight weekend days and a holiday on top of the 15 business days to get to the needed 24 days.

At the end of the day, the sworn statement by the attorney, the 4th of July holiday and actual delivery close in time to the far end of estimated number of business days it takes for mail to get to DC were enough, and the Tax Court denied the government’s motion to dismiss.

Seely lives to fight the proposed deficiency on the merits.

Observations

This is the place where it makes sense to remind practitioners to fork over the extra few bucks to mail documents via registered mail, certified mail or through an authorized private delivery service. 

Readers may also recall US v Baldwin, a  9th circuit case that Carl Smith has written about (the circuit that would likely have venue in an appeal of Seely). In that case, the 9th Circuit held that 

  • regulations [the excerpt I quote below] that the IRS finalized in 2011 essentially supplanted the common law mailbox rule, 
  • the regulations were valid under the familiar two-step Chevron test, and 
  • under the Brand X doctrine the regulations essentially trumped prior 9th Circuit precedent that held that Section 7502 did not supplant the common law mailbox rule because the prior case law did not reflect the 9th circuit’s conclusion that the outcome it chose was based on an unambiguous reading of the statute .  

Those regulations provide as follows:

Other than direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a duly designated [private delivery service] . . . are the exclusive means to establish prima facie evidence of delivery of a document to the agency, officer, or office with which the document is required to be filed. No other evidence of a postmark or of mailing will be prima facie evidence of delivery or raise a presumption that the document was delivered.

I had read the regulations as applying in cases where the document was never delivered (as in Baldwin, involving a refund claim), as well as in cases where the document eventually made its way to the IRS or in Tax Court (as in Seely, where the Tax Court eventually did receive the petition). Yet Seely notes and distinguishes Baldwin because in Seely the document was actually delivered. That opened the door for the Tax Court, consistent with its approach in other cases, to consider the extrinsic evidence to prove when the petition was placed in the mail.

What about the reach of and validity of the 2011 regulations? As readers may be aware, the taxpayers have filed a cert petition in Baldwin (last month the government filed its opposition, here and the taxpayer filed their reply). The case is an interesting vehicle for possibly overruling the Brand X doctrine, which holds that a “prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.” There is significant hostility to Brand X among some (see the numerous amici) and the doctrine raises interesting questions as to which branch should be responsible for the final say on a statute that on its face at least allows for competing reasonable interpretations.

While I am not sure that the Supreme Court will take the bait on Baldwin to consider overturning Brand X, I do expect that there will be plenty of additional litigation concerning the reach and validity of the 7502 regulations. After all, despite the relative low cost of avoiding these kinds of disputes by mailing in a way that guarantees evidence of mailing, and the increasing use of electronic filing (which has its own 7502 issues), there are enough taxpayers and practitioners who seem willing to roll the dice and courts (and practitioners) have been struggling with 7502 for decades.

District Court Gets Timely Mailing Is Timely Filing Rule of Section 7502 Wrong as Applied to Refund Claim Lookback Period of Section 6511(b)(2)(A)

I remember when I was a young associate at Roberts & Holland LLP in 1983 and marveled at how Sidney Roberts could remember developments in the tax law from as much as 40 years earlier.  Well, now I am approaching 40 years of doing tax procedure, and I marvel at long-ago fights that I still remember.  One of those fights just came up in a district court case in the Western District of Wisconsin, Harrison v. United States, No. 19-cv-00194 (W.D. Wis. Jan. 9, 2020), and, sadly, the court got the upshot wrong.  The exact issue in the case was definitively resolved the other way in regulations adopted in 2001 that followed a once-controversial Second Circuit opinion.  Neither the DOJ nor the district court in Harrison seems to be aware of the Second Circuit opinion or the relevant regulation.  Sad.

The issue is how the refund claim limitations at section 6511(a) and (b) and the timely mailing is timely filing rules of section 7502(a) interact when a late original return was filed seeking a refund, and the return was mailed out only a few days before the expiration of the period that is 3 years plus the amount of any extension to file after the return’s original due date, where the return/claim is received by the IRS and filed after that period.  The DOJ and the district court correctly recognized that the refund claim is timely under section 6511(a) because it was filed on the same date the return was filed – i.e., that a late return is still a return for purposes of section 6511(a).  See Rev. Rul. 76-511, 1976-2 C.B. 428 (itself trying to resolve a Circuit split on this issue that still continued for almost 30 years after its issuance).  But, then the DOJ argued (and the district court agreed) that the 3 year plus extension lookback period of section 6511(b)(2)(A) looks back from the date of IRS receipt, and since the taxes were deemed paid on the original due date of the return, the refund claim is limited to $0 because no taxes were paid or deemed paid in that lookback period.  It is this second holding that is manifestly incorrect.

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Harrison Facts

The Harrison facts are quite simple and typical:  All of the 2012 taxes at issue were withheld from wages or other income.  Thus, section 6513(b)(1) deems them paid as of April 15, 2013.  The taxpayers obtained a 6-month extension to file their return, but then did not mail an original return under that extension.  Rather, they filed a very late return in 2016.  It showed an overpayment of $7,386.48, which they asked to be refunded.  The return was sent by certified mail on October 11, 2016, and was received by the IRS on October 17, 2016.

The taxpayers argued that, under the timely mailing is timely filing rules of section 7502(a), the 3 years plus 6 month lookback period for taxes paid begins from the October 11, 2016 date of mailing (making the refund amount limit $7,386.48), while the DOJ argued that the 3 years plus 6 month lookback period for taxes paid begins from October 17, 2016 because section 7502(a) has no application in this case (making the refund amount $0).  The DOJ moved (1) to dismiss the case for failure to state a claim on which relief could be granted (i.e., under FRCP 12(b)(6)) – a merits dismissal – or (2), in the alternative, for summary judgment that the claim was limited to $0 (also a merits ruling).

Harrison Ruling

The district court correctly noted that there is no Seventh Circuit authority directly answering the question of the date from which the lookback is determined on these facts.  The district court then reasoned that October 15 or 17, 2016, was not the due date for the return – October 15, 2013 was (taking into account the 6-month extension).  The court concluded that section 7502(a) had no application here.  That statute only provides that if a return or claim is delivered to the IRS after the due date, then the date of the United States postmark is deemed the date of delivery.  However, this rule only applies if the postmark falls on or before the due date of the return or claim.  (For certified mail, used herein, the date on the certified mail receipt, not the postmark, is used.  Section 7502(c).)

What does the district court cite in support of its holding under section 6511(b)(2)(A)?  It cites (1) Pitre v. IRS, 938 F. Supp. 95 (D.N.H. 1996), an on point opinion decided before the Second Circuit’s opinion in Weisbart v. United States Dept. of Treasury, 222 F.3d 93 (2d Cir. 2000) (discussed below) and (2) two opinions reaching the right result (i.e., no refund) – Washington v. United States, 123 AFTR 2d 2019-1585 (S.D.N.Y. 2019), and Doyle v. United States, 88 Fed. Cl. 314 (2009) – but where the mailing date was after the 3 years plus any extension period, so the courts’ statements therein that the even-later received date governed under section 6511(b)(2)(A) were correct because section 7502(a)’s extension does not apply if the mailing is after such date. 

Weisbart and the Regulation

The district court in Harrison neither discussed the Weisbart opinion nor the regulations under section 7502.  Had the district court done so, I expect that it would have reached a different result. 

Weisbart is on all fours with Harrison as to its facts.  In Weisbart, to quote the court:

Emanuel Weisbart’s 1991 income tax return was due on April 15, 1992, but he obtained an automatic extension until August 17, 1992. Despite the extension, Weisbart did not file his return by the August 1992 deadline. Tarrying three years, he mailed his 1991 return to the IRS on August 17, 1995. The tax return was submitted on the customary Form 1040 and included a refund claim for $4,867 from the $12,477 in taxes that had been previously withheld from Weisbart’s 1991 wages. The IRS received the return on August 21, 1995.

222 F.3d at 94.

The Weisbart court, relying on regulations that have since been clarified and expanded, reasoned that the rules of section 7502 apply in this case to make the amount paid on the due date within the period provided by section 6511(b)(2)(A) – i.e. that the lookback date is the date of mailing, not the date the IRS received the refund claim.  The court wrote:

The Service argues, and the district court held, that the “prescribed” period applicable to Weisbart’s tax return should also apply to the refund claim. Applying this construction, Weisbart’s refund claim would not enjoy the benefit of the mailbox rule, and would therefore be barred. . . .

Taken together, these two Treasury Regulations provide that the applicability of the mailbox rule to the refund claim should be analyzed independently of the timeliness of the tax return itself, regardless of whether they are in the same document. As such, even though Weisbart’s tax return was untimely filed, his refund claim enjoys the benefit of the mailbox rule, and is deemed filed on August 17, 1995. Because that date is within 3 years of the date when Weisbart is deemed to have paid his withheld employment taxes, he may recover any overpayment included in those taxes under the look back provisions of section 6511(b)(2)(A).

222 F.3d at 97 (citation omitted).

The Treasury decided to accept the Weisbart holding, and so, in 2001, promulgated T.D. 8932, 66 FR 2257.  The Treasury decision stated:

[T]he IRS and the Treasury Department have determined that, in certain situations, a claim for credit or refund made on a late filed original income tax return should be treated under section 7502 as timely filed on the postmark date for purposes of section 6511(b)(2)(A). This is consistent with the opinion of the United States Court of Appeals for the Second Circuit in Weisbart v. United States Department of Treasury and Internal Revenue Service, 222 F.3d 93 (2d Cir. 2000), rev’g 99-1 USTC (CCH) P50,549 (E.D.N.Y. 1999), AOD-CC-2000-09 (Nov. 13, 2000).

66 FR at 2258.  The Treasury Decision added a new subsection (f) to Reg. section 301.7502-1.  I won’t quote the technical language of the regulation, but I will quote the one on point example at subsection (f)(3). It reads:

(i) Taxpayer A, an individual, mailed his 2001 Form 1040, “U.S. Individual Income Tax Return,” on April 15, 2005, claiming a refund of amounts paid through withholding during 2001. The date of the postmark on the envelope containing the return and claim for refund is April 15, 2005. The return and claim for refund are received by the Internal Revenue Service (IRS) on April 18, 2005. Amounts withheld in 2001 exceeded A’s tax liability for 2001 and are treated as paid on April 15, 2002, pursuant to section 6513.


(ii) Even though the date of the postmark on the envelope is after the due date of the return, the claim for refund and the late filed return are treated as filed on the postmark date for purposes of this paragraph (f). Accordingly, the return will be treated as filed on April 15, 2005. In addition, the claim for refund will be treated as timely filed on April 15, 2005. Further, the entire amount of the refund attributable to withholding is allowable as a refund under section 6511(b)(2)(A).

Emphasis added.

Observations

Before berating the district judge, who is no doubt not a tax procedure specialist, I would point out that the parties’ briefing on the motion did not mention either the Second Circuit’s opinion in Weisbart or the regulation under section 7502.  The brief accompanying the motion is here, the taxpayers’ brief is here, and the government’s reply brief is here.  I am quite dismayed, though, that the DOJ Trial Section attorney did not know of the relevant authority.  I have sent an e-mail to the Harrisons’ counsel suggesting a motion for reconsideration or an appeal to the Seventh Circuit.

The district court in Harrison did do something else right, though:  It did not treat compliance with the tax paid amounts rules of section 6511(b) as jurisdictional.  Rather, both the DOJ and the court (unlike many other courts) treated compliance with these rules as a merits issue.  The court granted the DOJ’s motion on the ground of summary judgment, not FRCP 12(b)(1) (lack of jurisdiction) or 12(b)(6) (failure to state a claim).  In not treating the rules of section 6511(b) as jurisdictional, the Harrison court followed Seventh Circuit precedent, stating:

In reviewing the caselaw, requiring administrative exhaustion of a refund claim may be a jurisdictional requirement. See Gillespie v. United States, 670 Fed. App’x 393 (7th Cir. 2016) (acknowledging that recent Supreme Court developments “may cast doubt on the line of cases suggesting that § 7422(a) is jurisdiction”). However, the Seventh Circuit has treated whether there are any tax payments within the “look back period” as an element of the claim. See Gessert v. United States, 703 F.3d 1028, 1036-37 (7th Cir. 2013) (holding that the claims do “not meet the [timing] requirements of the statute,” despite headnotes that describe it as a jurisdictional defect); Curry v. United States, 774 F.2d 852, 855 (7th Cir. 1985) (holding court lacks jurisdiction because plaintiffs failed to exhaust their claims, but even if they had exhausted, they would be barred from obtaining a refund because of the time requirements under § 6511). As such, the merits of plaintiffs’ claim appear to be properly before the court.

Footnote 2 (emphasis in original).

The Federal Circuit took a similar position (i.e., that compliance with the section 6511(b) tax payment rules is not jurisdictional) in Boeri v. United States, 724 F.3d 1367, 1369 (Fed. Cir. 2013), a case on which Stephen blogged here.  For a discussion of the Gillespie case cited by the Harrison court, see my prior post here.

Does Judge Toro Misunderstand Guralnik?

There’s a pro se deficiency case set for trial in San Francisco before Judge Toro in the week beginning February 3, 2020, Gebreyesus v. Commissioner, Docket No. 1883-19.  Although the IRS had not moved to dismiss the petition for lack of jurisdiction, Judge Toro, has essentially issued an order to show cause why he shouldn’t dismiss the case for lack of jurisdiction because of an untimely petition.  The Judge thinks the petition would be untimely if the notice of deficiency had been mailed to the taxpayer on the date shown on the notice of deficiency – October 22, 2018 – so the judge asks that proof of mailing be submitted to him by January 21, 2020.

This case gets into a particular issue of how the government shutdown interacts with (1) Guralnik v. Commissioner, 146 T.C. 230 (2016) (en banc), and (2) section 7502.  I think it pretty clear that the judge, who seems vaguely aware of Guralnik (but doesn’t cite the opinion), has the analysis wrong, and that there is no way this petition is untimely.  I hope the IRS lawyers in the case explain it to the judge, but just in case they don’t, I hope the judge gets to read this post before he rules.  No pro se taxpayer is likely to be able to explain about how Guralnik should work in this case.  Keith has blogged here, here, and here on the interaction of Guralnik and the recent government shutdown, but not on the facts of Gebreyesus.

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Gebreyesus Facts

Let’s assume that the IRS has documentary proof that it mailed the notice of deficiency on the date shown on the notice – October 22, 2018.  You would probably think the taxpayer has until January 20, 2019 (90 days) to file the petition in person, place it in the mails, or place it with a designated private delivery service.  But, January 20, 2019 was a Sunday, and the 21st was Martin Luther King Jr.’s Birthday – both of which under section 7503 can’t be the last date to file.  Interestingly, the notice of deficiency correctly stated that the last date to file was Tuesday, January 22, 2019.

But, then, the government (including the Tax Court) shut down in late December.  As a result, the Tax Court’s Clerk’s Office was not open again until Monday, January 28, 2019.

Judge Toro just noticed that on January 23, 2019, the petition was placed with a FedEx service that is a qualifying private delivery service under section 7502(f).  Had the government not shut down, the petition no doubt would have been delivered to the court overnight on Wednesday, January 24, 2019.  But, the petition arrived at the Tax Court instead on Monday, January 28, 2019 – the date the Clerk’s Office reopened – and was filed on that date.

Judge Toro’s Analysis

In his order, Judge Toro writes:

If the notice of deficiency was mailed on October 22, 2018 (that is, on the date shown on the notice of deficiency), then the 90-day period under section 6213(a) would have expired on January 22, 2019 (taking into account that January 20, 2019, was a Sunday and January 21, 2019, was a holiday in the District of Columbia).  Because the ship date reflected on the FedEx envelope – January 23, 2019 -is one day after January 22, 2019, the petition would be untimely under section 6213(a) and the rules of section 7502(a) and (f).
 
If, however, the notice was mailed after October 22, 2018, the 90-day period would have expired no earlier than January 23, 2019, and, since the petition was given to FedEx by January 23, 2019, under section 7502(a) and (f) the petition would be treated as having been timely filed. [footnote omitted]

What’s Wrong With This Analysis?

Section 7502 has no application unless the petition arrives after the last date to file.  But, that did not occur in this case.  Under Guralnik, if the Clerk’s Office is not open on what would ordinarily be the last date to file, then the last date to file becomes the date the Clerk’s office reopens – i.e., January 28, 2019 in this case. But, that’s the date the Tax Court physically received and filed the petition.  So, the petition did not arrive after the due date, taking into consideration Guralnik.  It arrived on the (revised) due date.  Effectively, the taxpayer here should be treated as if he personally walked into the Clerk’s Office on January 28, 2019 and handed in the petition for filing.  Clearly, that would be OK under Guralnik.  FedEx merely acted as the taxpayer’s agent in walking the petition in on that last date to file.

This result may strike some as odd – that the taxpayer could mail out the petition the day after the last date to file shown on the notice of deficiency, yet still get the benefit of filing a timely petition.  But, I don’t see how a court could rule any other way.

Review of 2019 (Part 1)

In the last two weeks of 2019 we are running material which we have primarily covered during the year but which discusses the important developments during this year.  As we reflect on what has transpired during the year, let’s also think about how we can improve the tax procedure process going forward.  We welcome your comments on the most important developments in 2019 related to tax procedure.

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Important IRS Announcements

CC Notice 2020-002Contacting IRS attorney by email

This recently-issued Chief Counsel notice announces a process for email communications between practitioners and Chief Counsel attorneys. Formerly, communication with Chief Counsel attorneys was difficult, due to internal restrictions on emailing taxpayer information. Under the new notice, Chief Counsel employees can now exchange email with taxpayers and practitioners using encrypted email methods. This new policy will likely prove helpful for practitioners, who can now make quicker progress in working with Chief Counsel to resolve Tax Court litigation or to prepare for trial.

CC Notice 2019-006Deference

This notice is a policy statement, warning Treasury and the IRS about the current judicial state of play on deference to agency regulations. It states that Chief Counsel attorneys will no longer argue that courts should apply Chevron or Auer deference to sub-regulatory guidance, such as revenue rulings, revenue procedures, or other notices. This guidance should be read in conjunction with the Supreme Court’s decision last term in Kisor v. Wilkie, in which the Court scaled back the applicability of Auer deference and indicated a willingness to rethink the scope of agency deference.  As tax lawyers it’s easy to overlook important administrative law decisions such as Kisor, but we all need to recognize the importance of such decisions on how to practice before the IRS. 

See Keith Fogg, Notices on Communicating with IRS, Chief Counsel’s Office and Deference, Procedurally Taxing (Oct. 28, 2019), https://procedurallytaxing.com/notices-on-communicating-with-irs-chief-counsels-office-and-deference/#comments

Altera, Good Fortune, & Baldwin – Deference to regulations

The 9th Circuit recently reversed the Tax Court’s decision that the transfer pricing regulations at issue in Altera Corp. v. Commissioner, 926 F.3d 1061 (9th Cir. 2019), rev’g 145 T.C. 91 (2015) were invalid because they lacked a “reasonable explanation” as required by the Supreme Court in State Farm.  A majority of the Ninth Circuit concluded that Treasury made “clear enough” its decision by including “citations to legislative history” that the dissent said were “cryptic.” The 9th Circuit recently denied Altera’s petition rehearing en banc over a vigorous dissent from three judges, making the case a possible vehicle for certiorari and the latest Supreme Court reexamining of administrative deference.

In contrast, a decision by the D.C. Circuit in Good Fortune Shipping v. Commissioner, 897 F.3d 256 (D.C. Cir. 2018), rev’g 148 T.C. 262 (2017), held invalid regulations that narrowed an excise tax exemption for corporations owned by shareholders in certain countries.  The regulations said ownership of bearer shares could not be used to qualify for the exemption.  The preamble to the regulations suggested the rule was needed because of the difficulty of reliably tracking the location of the owners of bearer shares, but the court observed that other regulations issued by the agency suggested that the location of the owners of bearer shares were becoming easier to track over time.

On the other hand, in Baldwin v. United States, 921 F.3d 836 (9th Cir. 2019), reh’g denied, 2019 U.S. App. LEXIS 18968 (9th Cir. June 25, 2019), petition for cert. filed, 2019 WL 4673331 (U.S. Sept. 23, 2019) (No. 19-402), the Ninth Circuit held that a claim for refund was late because the common law mailbox rule was supplanted by Treas. Reg. § 301.7502-1(e)(2)(i).  Because the Ninth Circuit had previously held the statutory rule (IRC § 7502) provided a safe-harbor that supplements the common-law rule, the district court held the regulations invalid.  Under the Supreme Court’s holding in Brand X, “[a] court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.”  In this case, the regulations trumped the Ninth Circuit’s prior interpretation of IRC § 7502 because it said its earlier decision was filling a statutory gap.  Litigators have indicated this case may be the perfect vehicle for the Supreme Court to consider overruling Chevron or Brand X. 

See Andrew Velarde, Can the Humble Mailbox Rule Bring Monumental Changes to Chevron? 94 Tax Notes Int’l 412 (Apr. 29, 2019) (noting that Justices Thomas, Gorsuch, Kavanaugh, Alito, Breyer, and Chief Justice John Roberts have arguably expressed reservations about an overly broad reading of Chevron).

Taxpayer First Act (“TFA”)

Innocent Spouse changes/Effect of 6015 (e)(7)

The TFA made perhaps unintentional but significant changes regarding the Tax Court’s review of appeals of adverse innocent spouse determinations.  The change is codified at 6015(e)(7) Such appeals will be reviewed de novo (codifying previous Tax Court precedent). This part of the new law regarding the standard for review is uncontroversial and will not result in changes for those seeking innocent spouse relief; however, the legislation changes the scope of review.  Previously, the innocent spouse proceeding went forward with no restrictions on the information the taxpayer could present in the Tax Court.  Now, the scope of review is limited to the administrative record plus the Tax Court can consider “newly discovered or previously unavailable” evidence. While these provisions may seem innocuous, they also may lead to significant new disadvantages for taxpayers. For one, innocent spouse cases present uniquely burdensome evidentiary issues for taxpayers. Presenting evidence of spousal abuse, for example, may be difficult, especially if police or medical reports do not exist in the administrative record. Meanwhile, the one exception to the administrative record, “newly discovered or previously unavailable” evidence, remains ill-defined in the statute and may prove to be a source of confusion for taxpayers and practitioners. Important evidence that a taxpayer may already possess – thus not making it “newly discovered or previously unavailable” – but didn’t include in the administrative record could potentially be excluded. For pro se taxpayers in particular, who may not be aware of the relevance of certain documents when making their case, this is a particular challenge.

The first few Tax Court cases implicating 6015(e)(7) have begun to emerge and may provide more clarity. One potential judicial solution to the issue would be for the Tax Court to remand cases with under-developed records back to the IRS.

Carlton Smith, Should the Tax Court Allow Remands in Light of the Taxpayer First Act Innocent Spouse Provisions?, Procedurally Taxing (Oct. 17, 2019), https://procedurallytaxing.com/should-the-tax-court-allow-remands-in-light-of-the-taxpayer-first-act-innocent-spouse-provisions/

Keith Fogg, First Tax Court Opinions Mentioning Section 6015(e)(7), Procedurally Taxing (Oct. 16, 2019), https://procedurallytaxing.com/first-tax-court-opinions-mentioning-section-6015e7/

Christine Speidel, Taxpayer First Act Update: Innocent Spouse Tangles Begin, Procedurally Taxing (Oct. 10, 2019), https://procedurallytaxing.com/taxpayer-first-act-update-innocent-spouse-tangles-begin/

Steve Milgrom, Innocent Spouse Relief and the Administrative Record, Procedurally Taxing (July 9, 2019), https://procedurallytaxing.com/innocent-spouse-relief-and-the-administrative-record/

Carlton Smith, Congress Set to Enact Only Now-Unneeded Innocent Spouse Fixes, Part 2, Procedurally Taxing (Apr. 4, 2019), https://procedurallytaxing.com/congress-set-to-enact-only-now-unneeded-innocent-spouse-fixes-part-2/

Carlton Smith, Congress Set to Enact Only Now-Unneeded Innocent Spouse Fixes, Part 1, Procedurally Taxing (Apr. 3, 2019), https://procedurallytaxing.com/congress-set-to-enact-only-now-unneeded-innocent-spouse-fixes-part-1/

Ex parte in TFA and CDP

The TFA does not specifically address ex parte communications between appeals and examinations or collections personnel. However, it does codify appeals’ status as an independent office, which may further strengthen arguments against ex parte communication. The currently applicable ex parte restrictions are found in Rev. Proc. 2012-18, which sets forth extensive guidance on permissible and impermissible forms of ex parte communications.

 In CDP proceedings, ex parte communications can potentially occur between appeals officers and revenue officers via the transmission of the administrative file to Appeals. Rev. Proc. 2012-18 prohibits the inclusion of material that “would be prohibited if . . . communicated to Appeals separate and apart from the administrative file.” But as demonstrated by a recent case, Stewart v. Commissioner, this may be a high bar for taxpayers to clear in challenging such communications. In Stewart, the revenue officer included contemporaneous notes in the file that indicated the taxpayer’s representation was somewhat uncooperative during a field meeting. The Tax Court declined to accept the taxpayer’s argument that the notes were prejudicial and ruled in favor of the Commissioner. 

See Keith Fogg, Application of Ex Parte Provisions in Collection Due Process Hearing, Procedurally Taxing (Sep. 19, 2019), https://procedurallytaxing.com/application-of-ex-parte-provisions-in-collection-due-process-hearing/

Taxpayer protection program

Identify fraud has been a consistent and significant problem for the IRS. But the Service’s new procedures for protecting taxpayer information may be unduly burdensome, particularly for taxpayers who need representation with time-sensitive matters. For those representing taxpayers whose returns are flagged as potential victims of identity theft, the process of authenticating identity is difficult and requires knowledge of taxpayer personal information that may not be readily available, such as place of birth or parent’s middle name. The burden is such that it may even implicate the Taxpayer Bill of Rights (TBOR)’s “right to retain representation”. By de facto requiring that the taxpayer actively participate in the identity verification process, the taxpayer is effectively deprived of their right to have their representative act for them in dealings with the IRS.

See Barbara Heggie, Taxpayer Representation Program Sidesteps Right to Representation, Procedurally Taxing (Oct. 3, 2019), https://procedurallytaxing.com/taxpayer-protection-program-sidesteps-right-to-representation/

VITA referrals to LITCs

Especially relevant for our purposes, the TFA “encourages” VITA programs to advise participating taxpayers about the availability of LITCs and refer them to clinics. This is a helpful step, which strengthens the connection between VITA and LITCs and may help inform eligible taxpayers of the existence of their local LITC.