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

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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!

Carlton Smith About Carlton Smith

Carlton M. Smith worked (as an associate and partner) at Roberts & Holland LLP in Manhattan from 1983-1999. From 2003 to 2013, he was the Director of the Cardozo School of Law tax clinic. In his retirement, he volunteers with the tax clinic at Harvard, where he was Acting Director from January to June 2019.

Comments

  1. I think the judge overreacted. A mistake was made. Mistakes happen all the time. Correct them and move on. But such attacks on counsel does not speak well, in my mind, to the judge who could have expressed his displeasure in a much more temperate fashion.

  2. IRS always wins. That’s the rule. This case is the exception that proves the rule. IRS always wins unless you find a lawyer in rural Wisconsin (LaCrosse County, population about 120,000) who was in practice 15 years before the Justice Department lawyer was born. The lawyer must be willing to tilt windmills occasionally, to take on IRS over a $7,500 refund, and he should hope for unexpected help from an expert on statutes of limitation.

    Ethics? Judge Conley doesn’t realize how much wool has been pulled over his eyes. Look at two of the cases cited by the government in its pleadings, and cited by the judge in his first, erroneous decision and order.

    First case: Manka v. United States, 105 F. Supp. 2d 490, 492 (E.D. Va. 2000)

    Key dates: Original 1993 return extended to October 15, 1994. Return mailed October 15, 1997 and received October 20, 1997.

    Taxpayer was represented. Judge Ellis (yes, THAT Judge Ellis) ruled against him on July 20, 2000. That’s the District Court opinion cited now, nearly 20 years later. But wait, there’s more. Eight days later, the Second Circuit decided the Weisbart case, with which the taxpayer wins. So Manka appealed to the Fourth Circuit on September 28, 2000. In July 2001 he moved the Appeals court to vacate the judgment and remand the case to the District Court, which it did. In November 2001, a stipulation and consent order was lodged and the case was dismissed with prejudice.

    Today the documents related to the Manka case are not available online, but if they aren’t in the Justice Department Tax Division files – they should be – they are just across the Potomac at the Alexandria courthouse. Knowing that history, would you cite Judge Ellis’s opinion in a Virginia district court, to Judge Conley in Wisconsin? Would it be ethical if you tried?

    Second case: Khafra, 2018 WL 5809704 (memorandum opinion by Judge Xinis)

    Key dates: 2011 return due Tuesday, April 17, 2012 (after Sunday and DC holiday). Return was mailed April 16, 2015 (a Thursday) and received April 20, 2015 (a Monday).

    Taxpayers filed pro per. They cited no cases but did mention Internal Revenue Manual 25.6.1.8.5, which has not been changed. Notably, it instructs IRS employees:

    “The postmark date will be treated as the filing date of any payment or document mailed and delivered in an envelope bearing a postmark date after January 11, 2001. See Treas. Reg. Section 301.7502–1(g)(1). . . .Check the postmark date for a possible timely filed claim for refund. Allow a postmark date and edit this date as the return received date if: The return claims an overpayment.”

    Unlike most other cases with this issue, they did not request an extension before the original due date. When the return is due April 17, is that considered an extension so that the claim for refund will be allowed three years later on April 16? The court ruled for IRS, relying on a later case that Mr. Weisbart, of 2000 Second Circuit victory fame, did not win. Apparently a chronic last-day filer, he had mailed his 1992 return on August 16, 1996 because he thought he was covered by his extension to August 16, 1993 (a Monday). He lost. The facts sure look a lot like the case he won, though:

    “Weisbart I” key dates: Original 1991 return extended to August 17, 1992 (a Monday). Return mailed August 17, 1995 (a Thursday) and received August 21, 1995. He wins.

    “Weisbart II” key dates: Original 1992 return extended to August 16, 1993 (a Monday). Return mailed August 16, 1996 (a Friday; IRS says August 17, but lost the envelope) and received August 20, 1996 (a Monday). He loses.

    Is it possible IRS settled this case, also, and just made sure that result didn’t get into the case record? It is still an interesting issue, but irrelevant here. Why is IRS dragging it across the path of the Wisconsin case, like some civet pheromone?

    Judge Conley’s order should be circulated among his colleagues on the bench, as a reminder to take IRS citations with a grain of salt. The Harrison facts should also be added as an example to the IRM, so that the people who reject claims that never make it to court can be exposed to it. A National Taxpayer Advocate could make sure the case result is added to TA training and perhaps a statutes specialist position is created. None of this will happen, though. IRS always wins.

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