In Whistleblower Case Tax Court Admonishes IRS For Failing to Follow Its Own Rules

Rogers v Commissioner is a Tax Court opinion that explores the IRS process for whistleblower claims and the impact of administrative law principles when the IRS fails to follow its own guidance. The case involves a series of allegations against nine family members and acquaintances who Rogers claimed had “conspired to commit grand theft through conversion of the assets of Mr. Rogers’ mother.”  As the opinion recounts, Rogers claimed that the nine fraudulently shifted assets away from his mother causing her to be “[divested] of her financial assets and property without her direct knowledge or control.”

The opinion discusses the process the Whistleblower Office (WBO) employs to review claims. That has recently changed, with SBSE operating division classifiers reviewing the claim (it used to be done principally by WBO staff). In this case the classifier recommended that the Service reject the claim because the “allegations are not specific, credible, or are speculative.”

In response, the WBO sent a letter to Rogers stating that it rejected his claim because it “decided not to pursue the information you provided.” The letter did not identify the reason for rejecting as being tied to a credibility determination.

Rogers appealed to the Tax Court seeking review of the WBO’s award determination under Section 7623(b)(4). The IRS filed an answer and then filed a motion for summary judgment. The Tax Court rejected the IRS’s motion, and in so doing issued a precedential opinion that clarified a few prior important principles and also established some new ones. In this post I will highlight some of the major points in the opinion.

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As an initial matter the opinion notes that the monetary thresholds for mandatory awards under 7623(b) are not jurisdictional and are affirmative defenses that the government must plead and prove. There are two thresholds for mandatory awards; a $200,000 income test and $2 million dispute test. A prior opinion established that the $2 million test was not jurisdictional and Rogers extends that reasoning to the $200,000 test. As the government failed to raise that defense in its answer, the opinion proceeded to the merits of the motion.

As I discussed in Tax Court Decides Scope and Standard of Review in Whistleblower Cases WBO appeals are subject to the record rule, meaning that generally the Tax Court is bound to the record below (scope of review). The standard of review is abuse of discretion, meaning that the Tax Court will not sustain a decision when a determination is arbitrary, capricious, or without sound basis in fact or law.  

As part of that abuse standard review, administrative law precedent establishes that an agency that fails to follow its own regs has abused its discretion.  In addition, under the Chenery doctrine the Tax Court “can uphold the WBO’s determination only on the grounds it actually relied on when making its determination….This means that the WBO must clearly set forth the grounds on which it made its determination, so that we don’t have to guess.” 

These points are key in this case, as the opinion discusses how the WBO letter to Rogers purported to reject his claim but in fact was a denial. 

The regulations under 7623 distinguish between WBO office rejections and denials. Under the regulations, “[a] rejection is a determination that relates solely to the whistleblower and the information on the face of the claim that pertains to the whistleblower.” Sec. 301.7623-3(c)(7), Proced. & Admin. Regs.; see also Internal Revenue Manual (“IRM”) pt. 25.2.1.1.3(7) (Apr. 29, 2019).

As the opinion notes a denial “is fundamentally different from a “rejection.” Under the regulations, “[a] denial is a determination that relates to or implicates taxpayer information.” Sec. 301.7623-3(c)(8), Proced. & Admin. Regs.; see also IRM pt. 25.2.1.1.3(3) (“A denial is a determination that is made for reasons beyond the information contained on the Form 211. [sic] (e.g., the Service did not proceed based on the information provided by the whistleblower, the case was surveyed or no changed by the operating division, the issue(s) alleged by the whistleblower were no change issues, the issues alleged by the whistleblower were below threshold, the statute has expired on the issues raised by the whistleblower, there are no collected proceeds).”).

The distinction matters, as there are different process for denials as compared to rejections. And it matters even more for purposes of this case because the Tax Court is going to hold the IRS to the procedures it has established in the regs:

On its face, the Letter states that the WBO is rejecting Mr. Rogers’ claim. But the WBO Letter fails to include any rationale that would support a rejection under the regulations….

Rather than focusing on the whistleblower and explaining what he failed to [do it] switches its focus to the agency itself and what the agency chose to do. Thus, the Letter tells Mr. Rogers that “the IRS decided not to pursue the information you provided.” While this may be a plausible explanation for a denial, it does not explain the basis of a rejection.

The opinion continues with a reference to the late great Yogi Berra:

In short, the regulatory framework gave the WBO two distinct paths for action — rejection or denial. Having come to that “fork in the road,” the WBO Letter followed Yogi Berra’s advice and “took it.” The Yankee great’s suggestion was sound in context, as both prongs of the fork led to his home. But with respect to a whistleblower award, the two prongs of the regulations lead to very different places. By including the “decided not to pursue” rationale as the reason for its purported rejection, the WBO Letter in effect said to Mr. Rogers “we reject your claim because we are denying the claim.” This statement was self-contradictory — and therefore impermissible — under the regulations.

There is more to the opinion and I will highlight some of the main points below.

Under Chenery the Tax Court will look beyond the determination letter to see if there was other material in the record as a “determination letter that is silent or muddled with respect to a supportable rationale may still be sustained if other materials in the record clarify the agency’s reasoning.” 

After performing that inquiry the opinion concluded that the rest of the record contradicted the rationale it gave Rogers in the letter. I found this part of the opinion interesting, as it revealed the likely reason why the WBO used the language it did with Rogers. Rejections generate fewer opportunities to perfect a claim; thus WBO likely did not want to have Rogers resubmit his claim and take additional IRS resources in dealing with additional submissions. 

The opinion did not look favorably at this tactic, emphasizing that the “WBO is not free to take away with double speak rights that the regulations plainly provide.” 

And for good measure the opinion rebukes the WBO for failing to treat Rogers fairly:

As the Supreme Court recently observed: “If men must turn square corners when they deal with the government, it cannot be too much to expect the government to turn square corners when it deals with them.” Niz-Chavez v. Garland, 593 U.S. ___, ___, 141 S. Ct. 1474, 1486 (2021). We cannot countenance intentional obfuscation on the part of the WBO. And neither the WBO Letter alone nor the Letter coupled with the administrative record here provides a coherent account of the WBO’s determination that is consistent with the regulations. That, in turn, represents an abuse of discretion, and accordingly we must deny the Commissioner’s motion

Conclusion

The opinion also explores the implications of the shifting of some WBO functions to SBSE in light of a general reluctance of courts to interfere with agency enforcement decisions. 

But the main takeaway from Rogers is that the opinion explores how even limited abuse of discretion review such as that in WBO determinations can ensure that the IRS treat individuals transparently and in line with its own procedures.

As the opinion notes, “it may well be that Mr. Rogers’ claim is nothing more than a personal dispute that the IRS will decide not to pursue even if Mr. Rogers provides additional information. Nevertheless, the WBO must comply with the regulations, and Mr. Rogers is entitled to transparency and candor as to the reasons for its ultimate determination. We cannot countenance intentional obfuscation by the WBO, nor will we bless attempts to improperly shield cases from judicial review

Whistleblower Case Dismissed – Could All Writs Provision Have Saved It?

In McCrory v. Commissioner, 156 T.C. No. 6 (2021) the Tax Court issued a precedential opinion holding that McCrory came to the Tax Court before she received what the Tax Court felt was the proper ticket.  Ms. McCrory represented herself in the Tax Court case.  As discussed below, she may have had an argument that she did not make.  It’s tough for everyone when the court creates precedent based on a one sided argument.

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Ms. McCrory sent the IRS 21 separate claims for whistleblower awards in 2015.  Her claims were based on public records and alleged that the taxpayers about whom she provided information had underreported awards obtained in a litigation settlement.  She received from the IRS Whistleblower office a letter offering her an award if she agreed to accept the award in full settlement and waive her right to go to court.  The letter also offered a second option by which she would indicate disagreement with the proposed offer.  Instead of accepting the offer or indicating disagreement, she asked for access to the IRS administrative file in order to make a more informed decision.

This seemingly reasonable request pits her need for information against the requirement that the IRS keep taxpayer information confidential – a tension that exists regularly in whistleblower cases.  The IRS told her it could not provide the information she wanted, and she petitioned the Tax Court in response to the IRS letter denying her the right to information.  The letter denying her the right to information did not deny her whistleblower claim.

The IRS moved to dismiss her petition for lack of jurisdiction arguing that she filed the petition prematurely.  Essentially, the IRS argues that the Tax Court lacks jurisdiction to review its determination regarding the information she may see and even if at some point the Tax Court has jurisdiction over the issue of the information she can see, it lacks that jurisdiction prior to the time the IRS makes a formal determination regarding the amount of award she should receive, if any. As the Tax Court frames the case:

The sole issue for decision is whether the letter respondent sent to petitioner recommending a preliminary award under section 7623(a) constitutes a “determination” within the meaning of section 7623(b)(4).

The tricky thing about whistleblower cases is that the statute doesn’t say what action by the IRS constitutes a determination.  Unlike deficiency cases where the statute provides much more guidance regarding the “thing” that gives a taxpayer a ticket to the Tax Court, the whistleblower statute comes up short in this area.  The court notes:

[w]e have held that the name or label of a document does not control whether the document constitutes a determination” and that “our jurisdiction is established when the Commissioner issues a written notice that embodies a determination.” Cooper v. Commissioner, 135 T.C. 70, 75 (2010).

The Tax Court had not previously issued a specific opinion regarding the document the IRS calls a preliminary award recommendation and whether this letter could qualify as a basis for Tax Court jurisdiction.  In the Cooper case the court held that another letter that did not call itself a determination letter did provide a basis for jurisdiction. 

So, Ms. McCrory’s petition in the context of the whistleblower statute deserved a close look.  The court described her argument as follows:

Petitioner contends the preliminary letter embodied a “determination” because the letter: (1) requested that she waive her appeal rights; (2) did not indicate that the preliminary award amount would change; and (3) did not indicate that a subsequent determination would be issued.

In finding that the letter Ms. McCrory received did not serve as a determination of the type to provide it with jurisdiction, the court was not surprisingly influenced by the wording of the letter stating it was a preliminary award determination.  Even though the IRS may not have changed its mind had she checked the box declining the proffered settlement, the court found that another step needed to occur before the IRS had issued the type of determination needed to invoke its jurisdiction.  It noted that the sending of the preliminary award letter complied with the framework of the regulations under section 7623(a).

Ms. McCrory also requested that the court order the IRS to issue a determination so she could move forward and save her time and the court’s time in getting to a determination of the proper amount of her award.  The court declined to do this since it had no jurisdiction over the matter.  It said:

In the event we agree with respondent, as we have, petitioner alternatively asks that the Court either order respondent to issue a final decision or consider the preliminary award recommendation a final decision in the interests of judicial economy. As previously stated, the Court may exercise jurisdiction only to the extent authorized by Congress and is without authority to enlarge upon that statutory grant. Judge v. Commissioner, 88 T.C. at 1180-1181Naftel v. Commissioner, 85 T.C. at 529; see Phillips Petroleum Co. & Affiliated Subs. v. Commissioner, 92 T.C. at 888Section 7623(b)(4) authorizes this Court to exercise jurisdiction when a determination has been made. Kasper v. Commissioner, 137 T.C. at 41. Since we have concluded that respondent has not made a “determination”, we lack authority to enlarge upon that statutory grant by deeming the preliminary award recommendation to be a “determination” for purposes of our review. Likewise, we decline to order respondent to issue a final decision or to intervene in the whistleblower administrative process.

This portion of the opinion drew a comment from former frequent guest blogger Carl Smith.  Carl found it very disappointing to see this last sentence in a precedential T.C. opinion without a discussion of the All Writs Act.  The All Writs Act allows a supervising court to order an agency to act.  In a case years ago named Insinga, Judge Gustafson asked the parties to brief the applicability of the All Writs Act in a similar case.  In a PT post Carl wrote on the Tax Court’s Myers opinion, he discussed and linked to the order in Insinga.  Here’s from the order:

The amicus curiae (National Whistleblower Center) argues in the alternative that where an award determination has been unreasonably delayed, the Tax Court has jurisdiction–in light of § 7623(b)(4) and under § 706(1) of the Administrative Procedures Act (“APA”), 5 U.S.C. § 551 et seq.–to “compel agency action unlawfully withheld or unreasonably delayed”. Respondent counters that the APA itself confers no jurisdiction and that the mandamus statute (28 U.S.C. § 1361) by its terms gives jurisdiction only to “[t]he district courts”. Respondent is correct; but the “All Writs Act” (28 U.S.C. § 1651) applies to “all courts established by Act of Congress” (cf. 26 U.S.C. § 7441, establishing the U.S. Tax Court); and the U.S. Court of Appeals for the D.C. Circuit has held in Telecommunications Research and Action Center v. FCC, 750 F.2d 70, 75 (D.C. Cir. 1984) (“TRAC“), that, in view of the APA and the All Writs Act, “it is clear–and no party disputes this point–that” if a statute (there, 28 U.S.C. § 2342(1)) confers on a court exclusive jurisdiction to review a final agency order, then even before the final order has been issued, the court has “jurisdiction over claims of unreasonable [agency] delay”. (The D.C. Circuit would appear to be the default venue for any appeal in this case; see 26 U.S.C. § 7482(b)(1).)

We have not decided whether the reasoning in TRAC applies to the Tax Court and its jurisdiction under § 7623(b)(4). Nor have we decided whether, if the APA does not directly apply, this case nonetheless presents one of those instances in which the Tax Court, “in appropriate circumstances, borrow[s] principles of judicial review embodied in the APA.” Ewing v. Commissioner, 122 T.C. 32, 54 (2004) (Thornton, J., concurring).

We believe we ought not to reach those questions if we do not need to do so.

The issue in Insinga was rendered moot before Judge Gustafson ruled when the IRS issued a final determination letter. 

Maybe Ms. McCrory will consider doing a motion to reconsider the All Writs Act authority, though it is possible that the judge will still say he declined to issue an order, whether or not he had the power.  This may be an opportunity for someone in the Whistleblower bar to step in and assist a pro se petitioner on a matter that might have broader implications.  The opinion does not state that he lacks the power, though it is clearly implied by the sentences preceding the holding that discuss lack of power in other situations.

Odds and Ends: Designated Orders 10/26/20 to 10/30/20

As the United States Tax Court made their conversion from their prior court filing system to the DAWSON system, we are no longer going to have designated orders selected by the Tax Court. Instead, we can browse the orders of the day and select which orders are worthy of interest. Perhaps the longest orders are the best ones, but I have found that short orders might be ones of interest also.

While Samantha Galvin had substantive orders in the last week of designated orders, my last week of designated orders was earlier and I felt more like they were odds and ends being cleaned out. There were 7 designated orders in the week that I will give brief descriptions for as they were generally 2-4 pages in length and varied in category.

Dismissal for Lack of Jurisdiction

  • Docket No. 5103-19, Joseph C. Ho v. C.I.R., Order of Dismissal for Lack of Jurisdiction 10/28/20 available here.

One of the strict rules for the Tax Court is the deadline for filing a petition within the prescribed time period. For a notice of deficiency, the time period is a 90-day period that is generally provided on the notice mailed out by the IRS.

Mr. Ho was able to meet the deadline for filing his petition. The problem is that he mailed it to the wrong place. He mailed his petition by certified mail to the IRS in Holtsville, New York, where it arrived on his deadline of February 11, 2019. It was forwarded by the IRS on March 8 and the Tax Court received it on March 14 (both dates after the 90-day period expired). The result is that the Court granted the IRS’s motion to dismiss for lack of jurisdiction.

All is not lost for Mr. Ho, however. The motion from the IRS states: “Although the petition was not timely filed in this case, Respondent’s counsel has been working with Petitioner to attempt to administratively resolve this case…Petitioner informed Respondent’s counsel that he has no objection to the granting of this motion.”

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Motion to Dismiss for Lack of Prosecution 1

  • Docket No. 13644-19, Timothy Stevens, Jr., v. C.I.R., Order of Dismissal and Decision 10/28/20 available here.

If you spend time working Tax Court cases, you become familiar with motions to dismiss for lack of prosecution. In person or in a court order, there is an inevitable discussion between the Tax Court judge and IRS Counsel about the lack of responsiveness from the petitioner. Usually, the petitioner files the petition and does nothing else. The IRS Counsel will usually relate about attempts to contact the petitioner like telephone calls and mail that got no response. That is the case here, but I want to commend Judge Gale for the thorough order in this case. The order goes through the case law involved supporting the order of dismissal. If you want to read through textbook analysis of the law supporting a Tax Court judge’s order of dismissal in a case, I would recommend that you look at this order.

Motion to Dismiss for Lack of Prosecution 2

  • Docket No. 2322-19, Jaideep S. Chawla v. C.I.R., Order of Dismissal and Decision available 10/27/20 here.

Once again, we have a routine order of dismissal based on the motion to dismiss for lack of prosecution. In this instance, I wanted to note petitioner’s letter where petitioner stated that “petitioner’s name is now John Adams; multiple lawsuits have been filed by petitioner against the Internal Revenue Service related to the alleged tax bill; and the petitioner will not pay any debt until the Internal Revenue Service releases all federal tax filings of President Barack Obama to petitioner.” Following that letter, the petitioner did not appear for the remote hearing on the case. Understandably, the respondent’s motion to dismiss for lack of prosecution was granted by the Court.

Incompetent Person Needing Next Friend

  • Docket No. 3136-20S, Laura B. Walker v. C.I.R., Order 10/30/20 available here.

The IRS filed a motion to change or correct the caption in this case to name the petitioner’s daughter, Kimberly Walker Fuller, as her next friend. They represent that Laura Walker is currently incapacitated and unable to manage her own financial affairs, plus she previously appointed Ms. Fuller as her agent to handle such matters. Ms. Fuller has no objection to the granting of the motion.

Tax Court Rule 60(a)(1) requires a case seeking redetermination of a deficiency be brought by and in the name of the person that the deficiency was determined against, or by the fiduciary entitled to institute a case on behalf of such a person. Rule 60(d) provides that a representative, such as a guardian, conservator, or like fiduciary, may bring a Tax Court case on behalf of the incompetent person. An incompetent person without a duly appointed legal representative may act by a next friend.

Ms. Fuller has a power of attorney that allows her to act as Ms. Walker’s agent for purposes that include pursuing claims and litigation and pursuing tax matters. The power of attorney is not affected by Ms. Walker’s subsequent disability or incapacity, and is governed by Pennsylvania law.

The Court reviewed Pennsylvania law and the power of attorney form. Finding that the power of attorney form is sufficient, the Court recognized Ms. Fuller to commence and prosecute the case on Ms. Walker’s behalf and recognized her as next friend pursuant to Rule 60(d). The caption was also ordered to be changed.

Whistleblower Denial

  • Docket No. 10452-19W, Bobbi J. Marvel v. C.I.R., Order and Decision (order here).

The Tax Court has jurisdiction under I.R.C. section 7623(b)(4) to review decisions of the Whistleblower Office to reject a claim for failing to meet the threshold requirements applicable to whistleblower claims. In short, a whistleblower needs to prove that there was administrative or judicial action to collect unpaid tax or otherwise enforce the internal revenue laws based on the information provided by the whistleblower.

Here, the whistleblower submitted that the target taxpayer had not filed tax returns for tax years 2013 through 2018. The issue is that the IRS did not pursue any action because the unfiled tax returns fell below the threshold for an audit. Since the IRS did not audit the target taxpayer, they did not take any action based on the whistleblower’s information. In the Tax Court’s review, there was thus no abuse of discretion by the IRS examiner and the Court sustained the final determination denying the whistleblower claim.

CDP – No Hearing in Person

  • Docket No. 14307-18 L, Scott Allan Webber v. C.I.R., Order available 10/30/20 here.

This case has been documented at previous times in Procedurally Taxing because of some groundbreaking issues related to collection due process (here and here).

This time, there is discussion of the Court granting an IRS motion to modify the remand instructions for remanding the case to be reviewed by IRS Appeals. The hearing on the motion to modify the remand instructions was going to be conducted by video conference or telephone unless the parties agreed to meet in person. Mr. Webber filed a motion to reconsider the Court order because he wanted the hearing to be in person. Mr. Webber has 6-8 bankers boxes of records that contain potential relevance to the case.

The Court repeats that it is not going to adjudicate Mr. Webber’s entitlement to an overpayment regarding the credit elect in controversy and that the issue on remand is whether the IRS allowed the overpayment but failed to credit it. That is a question of what the IRS did, not what Mr. Webber did. Those records would likely be in IRS records about Mr. Webber’s case and not Mr. Webber’s records about his transactions. Since Mr. Webber did not explain the relevance of his boxes of documents, the Court denied his motion for reconsideration.

Results for Motion to Compel

  • Docket No. 25934-17, Dean Kalivas v. C.I.R., Order available 10/26/20 here.

In this case, IRS Counsel filed a motion to compel production of documents with regard to 4 requests. Mr. Kalivas did not file a response to the court, but sent it to IRS Counsel. In their status report, the IRS summarized Mr. Kalivas’s response that he had no documents for requests 1, 2, and 4. Also, he provided documents for request 3 during informal discovery and had no further documents to provide. IRS Counsel stated in their status report that requests 3 and 4 were now moot.

Request 1 concerned whether payments made by Richard McKinney to Mr. Kalivas were taxable income or repayments of a loan. Request 2 concerned Mr. Kalivas’s entitlement to Schedule C and E expense deductions.

The Tax Court granted the motion to compel in part so that Mr. Kalivas is precluded from producing at trial documents responsive to those 2 requests that he failed to produce prior to the order. The motion to compel was denied in part, with prejudice, in that they do not take as established the taxability of Mr. McKinney’s payments or how Mr. Kalivas would not be entitled to the Schedule C and E expense deductions.

Not groundbreaking cases this week, but I think there have been some pearls of wisdom to find in my last post on designated orders. Overall, writing about designated orders has been a great experience as it stretched my writing abilities. In addition, I have learned about the Tax Court and areas of tax law outside of the Low Income Taxpayer Clinic realm (whistleblower cases, for example). I am grateful for this opportunity with Procedurally Taxing and look forward to writing on the next tax topics.

The Effect of an Order to Show Cause, Designated Orders August 24-28 and September 21-25, 2020

Docket No. 14410-15, Lampercht v. CIR (order here)

Up until now, I was the only designated orders’ author who had yet to cover this case which has had eight orders designated in it since March of 2018. The case’s recent orders have addressed discovery-related matters, and in this order on petitioner’s motion, the Court reconsiders a previously issued “order to show cause.” It decides to withhold its final ruling in part to allow more time for petitioners to comply, discharge it in part, and make it absolute in part.

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The Tax Court strongly encourages parties to engage in informal discovery, so it is somewhat rare to encounter an order related to discovery.  Tax Court Rule 91(f) allows the Court to issue an “order to show cause” related to stipulations when one of the parties “has refused or failed to confer with an adversary with respect to entering into a stipulation” or “refused or failed to make such a stipulation of any matter.”

The order describes the effect an “order to show cause” has on the parties and the proceedings. The case involves several different types of documents all of which appear to be difficult obtain and some which may not even exist. The first documents addressed by the Court relate to property owned by petitioners in another country. Earlier on, petitioners conveyed that their ability to obtain the documents was symmetrical to the IRS’s ability, so the Court ordered petitioners to execute a waiver which the IRS could use to obtain the documents. Even with the waiver, the IRS was unsuccessful but learned that petitioners could obtain the documents by requesting them from the local authorities where the property is located. As a result, the Court sets a specific date for the petitioners to do this or else the order will be made absolute.

Next, petitioners state that certain business-related records do not exist, and they wish to provide affidavits instead. The IRS challenges the sufficiency of the affidavits, but the Court says the IRS can press his criticisms of petitioners’ explanation at trial and dismisses the “order to show cause” as it relates to these items.

Finally, petitioners contend that they were unable to get necessary records from their bank in order to participate in the IRS’s voluntary offshore disclosure program. The IRS also needs a waiver from petitioners to attempt to obtain the bank records. The petitioners executed a waiver but it was ultimately returned because it was not notarized, and petitioners failed to provide the identity verification requested. The Court makes the “order to show cause” absolute as it relates to this item.

What is the effect of an “order to show cause” being made absolute? In this case, it means that petitioners are precluded from offering any evidence at trial with the respect to the item or the inexistence of the item. In other words, the Court will not allow petitioners to use their alleged inability to the obtain records serve as a reason for their inaction at trial.  

Docket No. 13892-19, Malone v. CIR (order here)

This next order involves the Court’s concern with a petitioner’s capacity to engage in litigation and a conflict that may arise if a certain family member tries to help him.

The tax return at issue in the case is a section 6020(b) substitute for return which didn’t account for any of petitioner’s business expenses. The case was scheduled for trial in June 2020 but was delayed due to Covid-19 and since then parties have kept the Court apprised of their progress in monthly status reports. In the reports, petitioner’s counsel repeatedly states that petitioner has not made much progress with retrieving and organizing documents due to side effects of brain surgery he had in February 2019.

Since the petitioner has not made much progress, the Court is concerned with petitioner’s capacity under rule 60(c). Petitioner’s counsel states that petitioner’s family is helping him gather documents and information but does not identify which family members are assisting him which also raises the potential conflict concern for the Court.

Petitioner may wish to challenge the IRS’s determination of his filing status. This is permitted because a substitute for returns does not constitute “separate” returns for purposes of section 6013(b) (see Millsap v. Commissioner, 91 T.C. 926 (1988)).  The 6020(b) substitute for return used married filing separate status, so the Court speculates that if petitioner challenges his filing status and files a married filing joint tax return, then petitioners’ spouse may have a conflict of interest in helping him gather documents and information, unless his spouse disavows themselves of innocent spouse relief.

Without additional information, the Court isn’t sure that petitioner’s counsel can proceed without the appointment of a representative or if petitioner does not have such a duly appointed representative, a next friend or guardian ad litem.

To resolve their concerns the Court specifically asks whether petitioner was married during the year at issue, and if so, the status of petitioner’s spouse’s tax liability that year, including whether petitioner plans to submit a joint return. The Court also asks whether petitioner’s spouse has a conflict of interest or potential conflict of interest that may prohibit them from acting on petitioner’s behalf.

Docket No. 6341-19W, Sebren A. Pierce (order here)

This order provides the Court with another opportunity to reiterate its record rule and standard of review in whistleblower cases. The Court also cites its Van Bemmelen opinion which Les mentions in his very recent post on the record rule here.

In this designated order, the Court is addressing petitioner’s motion for summary judgement. Petitioner’s case alleged that a certain State had defrauded taxpayers of more than $43 billion in connection with the incarceration of prisoners in that State who were wrongfully prosecuted. The whistleblower office’s final decision rejected the claim “because the information provided was speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws.”

After pleadings were closed, petitioner filed a motion for summary judgment asserting that he is entitled to a whistleblower award of 15% to 30% of the amount and requests an advance payment of $20 million, with any discrepancies in the award amount to be resolved by IRS audit.

The Court goes on to explain that is not how summary judgment works in whistleblower cases. The Court cannot determine that petitioner is entitled to an award and force the IRS to pay up, because it is not a trial on the merits. The Court explains that the de novo standard of review petitioner desires is not possible.

Orders not discussed, include:

  • Docket No. 1781-14, Barrington v. CIR (order here), petitioner’s motion to compel is denied because it is inadequately supported since petitioner cannot yet show that the IRS has failed to respond to formal discovery.
  • Docket No. 18554-19W, Wellman v. CIR (order here) the IRS’s motion for summary judgment in this whistleblower case is granted and petitioner does not object.
  • Docket No. 13134-19L, Smith v. CIR (order here), the IRS’s motion summary judgment is granted in a CDP case where petitioners submitted an offer in compromise but were not current with estimated tax payments.

The Record Rule in Tax Court Whistleblower Proceedings

The Tax Court’s memorandum opinion in Neal v Commissioner highlights some of the unique aspects of whistleblower cases, including whether Tax Court should supplement the administrative record when there is a claim that the record is deficient. 

To set the stage, I include the language from the syllabus to the opinion:

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P [the petitioner] was a consultant who worked for target (“T”) and, at T’s request, assembled information to give to an IRS agent who conducted an audit. P left T in 2012, and in 2014 he submitted to R’s Whistleblower Office (“WBO”) a Form 211, “Application for Award for Original Information”, making allegations of tax issues concerning T. The WBO determined that an audit of T’s returns was already underway and that the same issue that P raised in his Form 211 in 2014 had been raised in another individual’s Form 211 that had been previously submitted in 2010 and had been forwarded to the agent. The WBO did not forward P’s Form 211 to the agent and denied P’s claim for an award on the grounds that “the information you provided did not result in the collection of any proceeds”. R made adjustments to T’s liability and collected tax. P filed a petition in the Tax Court seeking review of the WBO’s denial of an award. 

In other words, the WBO denied the award because it found that someone else had beaten Mr. Neal to the punch. Neal appealed the determination in Tax Court. The IRS moved for summary judgment based on the certified administrative record, as it argued that the earlier whistleblowing meant that with respect to Neal “no administrative or judicial action occurred and no proceeds were collected as a result of information provided in the claim.”

Neal disagreed with the facts and information in the record. He alleged that the record 1) omitted information he had provided to the agent and 2) failed to show that the WBO forwarded his Form 211 to the agent. Neal claimed to have played a prominent role with the examining agent and audit of the target even though the record did not corroborate that.

In deficiency cases, the Tax Court generally takes in evidence on a de novo basis. Not so in whistleblower cases.  As a refresher, in Kasper v Commissioner the Tax Court held that the scope of review in whistleblower cases is subject to the record rule and that the standard of review is abuse of discretion. (For my post on Kasper and more on standard and scope of review see Tax Court Decides Scope and Standard of Review in Whistleblower Cases.)

While the Tax Court is generally bound to the record, that does not mean that the Tax Court is obligated to accept what the IRS provides as the certified record. For example in Van Bemmelen v. Commissioner, the Tax Court noted that in a whistleblower case an administrative record may be “supplemented” in one of two ways:

either by (1) including evidence that should have been properly a part of the administrative record but was excluded by the agency, or (2) adding extrajudicial evidence that was not initially before the agency but the party believes should nonetheless be included in the administrative record. [citations omitted]

In Neal, the focus was on the first way, as Neal claimed that the IRS failed to include in the record relevant information pertaining to the audit and Neal’s role in eventually leading to collected proceeds from the target.  The Neal opinion is important as it highlights that an allegation that the record is inadequate is met with a presumption of administrative regularity. That means that “[a]bsent a substantial showing made with clear evidence to the contrary” [as per the Van Bemmelen case] unsupported allegations will not be enough to warrant supplementing the record.

In Neal, the Tax Court held an evidentiary hearing to resolve the challenge to the sufficiency of the administrative record.  The hearing failed to generate the facts needed for Neal to meet the bar of a “substantial showing” with “clear evidence”. For example, the IRS’s examining agent credibly testified that he did  “not ever see Mr. Neal’s Form 211, that he did not recall ever making any information requests of Mr. Neal, that he did not recall ever receiving any documents from Mr. Neal, and that he did not remember ever seeing Mr. Neal before the day of trial.” 

The Neal opinion is also interesting in that it further applies and refines the summary judgment standard in whistleblower cases, and it discusses the distinction in these cases from typical deficiency cases where the parties and the court are not similarly constrained by the record below:

[I]n a “record rule” whistleblower case there will not be a trial on the merits. In such a case involving review of final agency action under the APA, summary judgment serves as a mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and is not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 

In Neal, the distinction between the rationales for denying the government’s summary judgment motion did not matter:

That distinction (denying the motion where the record shows a dispute of fact versus denying the motion where the record fails to support the conclusion) does not affect the outcome in this case since, as we explain below, the administrative record does not reflect any dispute of fact as to, nor any lack of support for, the WBO’s determination.

Conclusion

In A Legislative History of the Modern Tax Whistleblower Program [$], an article that came out today in Tax Notes, Dean Zerbe argues that the Tax Court’s approach to review in whistleblower cases is wrong as a matter of law. Dean was formerly chief investigative counsel and tax counsel for the Senate Finance Committee. In that capacity he was the lead counsel responsible for drafting section 7623(b), the mandatory whistleblower award provision. He believes that the legislative history supports a finding that the standard of review is de novo (which would allow the Tax Court to conduct a trial and the parties to make their own record in court). In the article Dean states that Chief Counsel and the Tax Court failed to consider that history in Kasper, which, as he notes, involved a pro se taxpayer who failed to fully brief the issue. Keith has suggested that when there are pro se cases that may trigger precedential opinions on issues, the Tax Court should have a process in place to ensure amicus involvement. The issues in those cases deserve full briefing, and there are many important Tax Court opinions involving pro se petitioners.

As the Tax Court hears more whistleblower appeals it will confront many thorny issues surrounding the adequacy of the record.  The record rule, and its exceptions, is a more familiar issue for other courts used to a constrained review of administrative agency actions.  In addition, it is possible that there will be challenges to the standard of review and record rule in circuit courts, as Kasper may not be the last word on that issue. 

A Family Court Spin on Whistleblowing, Supervisory Approval, and Trial Scheduling: Designated Orders 7/6/20 to 7/10/20

Even though there were only three orders for the week I monitored in July, there wound up being enough interesting topics to write about.  The longest order is interesting because it puts a different spin on whistleblower cases before the Tax Court.  The next case focuses on timely written supervisory approval for IRS penalties.  Finally, there is another case dealing with trial scheduling issues due to the COVID-19 pandemic.

A Nevada Whistleblower in Family Court

Docket No. 20287-18W, Monique Epperson v. C.I.R., Order and Decision available here.

Most often we think of whistleblower claims in a certain way.  It might be that the whistleblower was an employee who learned of misdeeds with regard to taxes or it might be that a person finds out through business dealings of foul play concerning tax reporting.  I doubt Family Court would be in the top answers concerning whistleblowing, but that is the topic of today’s case.

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You see, Ms. Epperson is a Nevada resident who was involved in a child custody dispute in her local family law court system in years 2016 and 2017.  Both her and her ex-husband were ordered to retain the services of various attorney, physician and psychology service providers from a list of court-approved outsource service providers.  She independently contracted with those providers and paid by cash, check or credit card during those 2 tax years.

It seems that Ms. Epperson had a bone to pick with how things went in family law court, but she was creative since most people do not think about the IRS when it comes to getting even.  Ms. Epperson is different because she chose to contact the IRS Whistleblower Office.  In December 2017, the IRS Whistleblower Office received five Forms 211, Application for Award for Original Information, from Ms. Epperson – all dated November 28, 2017.  The targets of those Forms were the Family Court and four independent contractors paid by her or her ex-husband during their court proceedings.

Her claim against the Family Court is that it should have issued Forms 1099-MISC to the various service providers because of the IRS requirement that when a business pays an independent contractor $600 or more over the course of a tax year, it should report those payments on a Form 1099-MISC issued to the independent contractor.  Her claim against the contractors is that they underreported income during the tax year, which would be easier to conceal in connection with child custody matters because they are usually sealed and unavailable for public viewing.

When the IRS Whistleblower Office reviewed the claims, they combined all five whistleblower claims into one group and applied a common decision.  The decision was based on the fact that the Family Court did not make payments to the independent contractors and the litigants (such as Ms. Epperson and her ex-husband) made the payments instead.  As none of those individual litigants are a business, they were not required to report payments by Form 1099-MISC.  The conclusion was there was no credible tax issue and the whistleblower claims were denied.

Ms. Epperson next timely filed her Tax Court petition.  Over time, the IRS filed a motion for summary judgment and Ms. Epperson filed her opposition to the motion, each with unsworn declarations under penalty of perjury in support of the motions.

This Tax Court filing comes about because Congress gave whistleblowers the ability to seek judicial review of their award determinations, but that review is limited to award determinations made under IRC section 7623(b), not 7623(a).  As a result, judicial review is only available for claims where the proceeds in dispute exceed $2,000,000 and an individual target taxpayer has gross income of at least $200,000 for the tax year(s) at issue. 

Ms. Epperson’s claim?  Unknown as to amounts paid to the Family Court, and, taken in the light most favorable to her, could have exceeded $2,000,000.  The claim against the contractors was fairly small (the $13,055 paid by her and her ex-husband to the contractors).  The contractors were three individuals and a corporation but nothing in the court pleadings or exhibits provides the gross income of those contractors.  Again, in the light most favorable to her, their gross income could have exceeded $200,000.  However, the proceeds in dispute for the contractors fell below the $2,000,000 threshold of IRC section 7623(b)(5)(B).

That threshold limitation is not jurisdictional, but it is an affirmative defense that must be raised and proven by the IRS.  In this case, the IRS did not raise that defense in their answer, but raised it in their motion for summary judgment.  An affirmative defense cannot be raised for the first time in a motion for summary judgment.  Since that defense was raised in the motion and not the answer, it will not be considered by the Court.  The fact that the contractor claims fell below the $2 million threshold was not fatal to Ms. Epperson’s petition for judicial review.

In reviewing the administrative record, there is explanation as to the determination regarding the Family Court but not explanation regarding the determination for the contractors.  The evidence indicates that there was a determination regarding the Family Court and the claims against the contractors were sent along in conjunction with that determination.  In the Court’s conclusion, there was no abuse of discretion regarding the Whistleblower Office determination regarding the Family Court but the IRS did not satisfy the burden of showing entitlement to summary judgment regarding the contractors.

The IRS motion for summary judgment with respect to the Family Court claim was granted while the motion for summary judgment with respect to the contractor claims was denied without prejudice.  The IRS Whistleblower Office determination with respect to the Family Court claim was sustained.

Supervisory Approval for IRS Penalties

Docket No. 15309-15, Jesus R. Oropeza, v. C.I.R., Order available here.

There are pending cross-motions for partial summary judgment in this case on the issue of whether the IRS secured timely written supervisory approval subject to IRC section 6751(b)(1) for the notice of deficiency.

In January 2015 – the revenue agent assigned to this case sent the petitioner a Letter 5153 and attached a revenue agent report asserting a 20% accuracy-related penalty attributable to one or more of the options under IRC section 6662(b)(1), (2), (3), or (6).  In the report, the agent stated that that the underpayment application is zero where a 40% penalty under 6662(h), (i), or (j) would be applied.  Two weeks later, the revenue agent’s immediate supervisor signed a civil penalty form approving a 20% penalty for substantial understatement [6662(b)(2)].  The penalty form did not cite any of the other three grounds or a 40% penalty.

In May 2015 – the revenue agent and someone who is potentially his immediate supervisor prepared a joint memo for IRS Chief Counsel.  The memo, signed by both, recommends the penalty be increased from 20% to 40% under 6662(i) on the ground that the petitioner engaged in a “nondisclosed noneconomic substance transaction.”  Five days later, the IRS issued a notice of deficiency asserting a 40% penalty for a “nondisclosed noneconomic substance transaction” but said it was a 40% 6662(b)(6) penalty.  In the alternative, the notice determined a 20% penalty attributable to negligence or substantial understatement of income tax.

The Court asks for the parties to submit briefs on the following issues by August 7: Assuming, for the purpose of argument, that the IRS did not secure timely supervisory approval for the penalty or penalties asserted in the revenue agent report –

  • Should the report be regarded as asserting all four types of 20% penalty, including the 20% penalty for engaging in a noneconomic substance transaction under section 6662(b)(6)?, and
  • If the 6662(b)(6) penalty was asserted in the report but not timely approved, can the IRS urge there was secured approval for a “40% section 6662(b)(6) penalty under 6662(i) even though the latter subsection operates only to increase the 6662(b)(6) penalty, which hypothetically was not timely approved?

I would make an argument in this case under the Taxpayer Bill of Rights about right # 10, the right to a fair and just tax system.  It seems to me there is a bit of a whipsaw effect going on here because of the quick movement between a 20% penalty and a 40% penalty.  First, the petitioner learns of a 20% penalty.  Later, the IRS stance is that it is a 40% penalty or, in the alternative, a 20% penalty.  Where is the finality for a taxpayer in those kind of changes?

Trial Scheduling Issues in the Pandemic

Docket No. 14546-15, 28751-15 (consolidated), YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, et al. v. C.I.R., Order available here.

In November 2019, these consolidated cases were set for trial to commence September 14, 2020 in New York, New York.  Because of COVID-19 concerns, an order issued in April 2020 cancelled the Special Trial Session and struck the cases from the calendar.  The parties later agreed to have a Special Trial Session commencing Tuesday, October 13, by remote trial proceeding.  This order gives instructions regarding the trial and amends the pretrial schedule so that the pretrial schedule spans the end of July through the end of September 2020.

I did have a thought that maybe this was not meant to be a designated order.  Usually, all cases that are consolidated are listed in the daily designated orders.  In this case, there was only one of the two consolidated cases that were included in the designated orders.  I am not entirely convinced either way, though this case does lay out the pretrial schedule and addresses other concerns in the COVID-19 trial scheduling era so it may be useful reference.

 

The IRS Loves Ambiguity, Designated Orders May 4-8 and June 1-5, 2020

The orders designated during my weeks in May and June didn’t address anything we haven’t covered before, with the exception of an order (here) referencing the Tax Court’s opinion in Lacey v. Commissioner, 153 T.C. No. 8 (2019). I started digging into the opinion to include it as part of my post, but Patrick Thomas had the same idea and did an excellent job covering it (here).

The Lacey opinion reflects the Court’s displeasure with the IRS’s use of boilerplate, ambiguous correspondence. The IRS’s use of standardized notices in many cases is understandable, however, there are times when the IRS owes a taxpayer more than a vague list of possible reasons for why it is disregarding an issue.

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The Court takes issue with IRS’s use of “and/or” in whistleblower determinations in Lacey and in CDP Notices of Determination in Alber v. Commissioner, T.C. Memo. 2020-20. I have also seen vague boilerplate responses sent in other cases (identity theft and offer in compromise examples come to mind) at a preliminary stage when IRS has decided the matter isn’t worth looking into further.

Not all cases are eligible for Tax Court review, but all taxpayers deserve to know why the IRS is not continuing to work on their case.

The IRS loves the “efficiency” of ambiguous correspondence. This is exemplified in its plan to send out notices with incorrect dates as a result of the Covid-19 shutdown (which Keith covered here). The IRS benefits from the confusion created by ambiguous correspondence because it delays or prevents taxpayers from responding in a timely or appropriate way.

The recent orders and decisions reflecting the Court’s view of ambiguous correspondence could prompt a change in IRS practices. We are at a time when everyone is imagining the ways things could be, looking at new and improved ways to operate, and resetting their expectations. The IRS desperately needs to upgrade its technology in response to Covid-19, and more generally, to finally join the rest of us in today’s world. As part of any upgrades or improvements, the IRS should consider ways that it can communicate more clearly in the responses it sends to taxpayers.

Other orders designated in May:

  • Docket No. 17614-13 and 17603-13 , Vincent J. Fumo v. CIR. Orders (here and here) granting the IRS’s motion in limine to preclude testimony from an Assistant U.S. Attorney and two revenue agents regarding the ‘manner and motives’ behind examination of petitioner’s income and excise tax liabilities.
  • Docket No. 9946-19L, Linnea Hall McManus & John McManus v. CIR. Order and decision (here) granting the IRS’s motion for summary judgement in a CDP case where petitioners did not provide requested information.

Other orders designated in June:

  • Docket No. 16492-18, Vishal Mishra and Ritu Mishra v. CIR. Order (here) granting the IRS’s motion for entry of decision in its favor, because petitioners are disputing already-conceded accuracy related penalties.
  • Docket No. 11152-18 L, Xavier Pittmon v. CIR. Order and decision (here) granting the IRS’s motion to dismiss, because the petitioner cannot contest his liability in his CDP case.  

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.