Government Drops Appeal in Rand Case

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Today, the taxpayers and the Department of Justice filed under Fed. R. App. P. 42(b) a Stipulation to Dismiss, with prejudice, the government’s appeal to the Seventh Circuit of the Rand case (141 T.C. No. 12).  The Seventh Circuit has considered the Stipulation to Dismiss, ordered that the case is dismissed, and issued its Mandate.  This ends the case for the taxpayers, and leaves in intact the Tax Court’s November 18, 2013 fully-reviewed opinion.  

In Rand, the taxpayers mistakenly claimed the earned income credit, the additional child tax credit, and the recovery rebate credit based on erroneous advice from an accountant.  Once the case was docketed, the taxpayers conceded that they were not entitled to these credits.  The government conceded several other adjustments contained in the Notice of Deficiency, leaving only the issue of whether the section 6662 penalty applied.  For two of the three years at issue, the government froze the taxpayers’ claimed refund (it paid the claimed amount for the third year).  

Shortly after briefing was finished, the government issued private guidance clarifying that the penalty did not apply in situations where the refund was frozen, but decided to litigate the issue where the refund is actually paid.  Despite having what they believed were strong arguments regarding reasonable cause and reliance on a tax professional, the taxpayers decided against proceeding to trial and instead decided to submit the case fully stipulated on the statutory and regulatory interpretation grounds on the meaning of the phrase “the amount shown as the tax” on the taxpayers’ tax return.  The taxpayers’ primary argument was that this amount is limited to the amount actually reported on the return, without any adjustment for disallowed refundable credits.  The secondary position was that, if refundable credits were taken into account, such disallowed credits could only reduce the amount shown to zero but could not result in a negative tax amount shown on the return.  Frequent Guest Blogger Carl Smith, then with the Cardozo Law Clinic, filed an amicus brief advocating the secondary position. 


The Tax Court majority, in a fully-reviewed opinion, adopted the secondary argument held that the amount shown as tax on the return is reduced by disallowed refundable credits but not below zero.  Three judges concurred, but argued that the taxpayers’ primary argument was correct.  Two judges dissenting, agreeing with the government’s position.  The taxpayers in Rand actually reported $144 of self-employment income, so the result was a nominal penalty of $29 instead of the $1,494 amount proposed by the government.  The opinion itself has some significant discussions on statutory and regulatory interpretation that may be helpful in future cases.  Additionally, the majority adopted the taxpayers’ argument that the rule of lenity applies to statutes imposing tax penalties. In a Guest Blog Post, Andy Roberson, who litigated Rand, wrote about the rule of lenity.   The Tax Court also rejected the government’s claim for Auer deference to its own regulations. 

As detailed in prior posts (3-24, 11-19, 1-15, 1-14), this issue affects many taxpayers and has resulted in several Orders applying Rand as a computational matter to halt the government from applying penalties under similar circumstances.  The Department of Justice has let at least one other case with the Rand issue go past the appeal date without filing an appeal. Assuming the government does not pursue an appeal in any of the other Rand-type cases, this is a significant victory for low-income taxpayers because the issue of refundable credits comes up most frequently in their cases; however, the issue can impact any taxpayer who incorrectly claims a refundable credit including the adoption credit or the no longer available first time homebuyers credit.  

It remains possible that the government will attempt to overrule the decision by issuing prospective regulations on the subject adopting its unsuccessful litigation position in the Tax Court.  If that occurs, there will likely be future litigation addressing whether the government has this regulatory authority under existing case law such as Brand X, Mayo, Home Concrete and Loving. 

Another possibility is that the government will pursue a legislative change or it will decide to impose penalties under 6676 which Congress created for erroneous refund claims. Many unanswered questions remain, but the government’s decision not to pursue the appeal in Rand signals a good start for those who believe that 6662 penalties should not apply to refundable credits. 

Another issue lurking here that will depend on the still unknown basis for the government’s decision as well as the government’s willingness to undo the damage caused by the imposition of the 6662 penalties in this situation concerns the thousands or tens of thousands of individuals against whom these penalties are “on the books.” The IRS has assessed 6662 penalties against refundable credits for some time. Most taxpayers did not contest the imposition of the penalty. Will the government make an effort to identify and abate these penalties, most of which exist with respect to the least tax savvy part of our population, or will it continue to collect this penalty going forward? 

This issue has been closely followed by the low-income taxpayer community, in this blog and at ABA meetings.  We will continue to follow further developments because of the continuing issues involving those cases still in the collection stream and the possibility of the continued imposition of this penalty pending knowledge of the reason for the government’s decision not to appeal. 

Hearty congratulations to Andy Roberson and Roger Jones of McDermott Will & Emery and Patty Liu of Latham & Watkins who represented the taxpayers in the Tax Court, and Andy represented the taxpayers in the appeal to the Seventh Circuit.  Congratulations also to the Carl Smith and the Cardozo Tax Clinic which filed an amicus brief in the Tax Court.  Last but not least, congratulations to the taxpayers in Rand and all related cases which the government does not appeal – who must be are very happy to have this litigation behind them. 


  1. Carl Smith says

    Thanks, Keith, for the congratulations, and I wan t o say that Andy Roberson and his crew deserve by far the most credit for having the idea to bring the Rand challenge. I just wrote a brief detailing and supporting the alternative theory that most of the Tax Court accepted — which likely only increased the vote total against the IRS position.

    In the opinion, the Tax Court noted that for almost all improperly-claimed credits that generated refund claims, there was a different 20% penalty at section 6676 that the IRS could assert by notice and demand. Section 6676, though, does not apply to EITC refund claims. For the EITC, the Tax Court noted that section 32(k) provides a penalty the IRS can impose denying the credit for the following 2 or 10 years (depending on how egregious the claim was).

    The IRS clearly has already floated a draft of a legislative overruling of Rand on the Hill because language to do so appeared some months ago in Dave Camp’s discussion draft of tax reform at section 6306 of the discussion draft of the Tax Reform Act of 2014. The proposed section reads:


    (a) APPLICATION OF UNDERPAYMENT PENALTIES.— Section 6664(a) is amended by adding at the end the following: ‘‘A rule similar to the rule of section 6211(b)(4) shall apply for purposes of this subsection.’’.

    (b) PENALTY FOR ERRONEOUS CLAIM OF CREDIT MADE APPLICABLE TO EARNED INCOME CREDIT.—Section 6676(a) is amended by striking ‘‘(other than a claim for a refund or credit relating to the earned income credit under section 32)’’.


    (1) UNDERPAYMENT PENALTIES.—The amendment made by subsection (a) shall apply to—
    (A) returns filed after February 26, 2014,
    (B) returns filed on or before such date if the period specified in section 6501 of the Internal Revenue Code of 1986 for assessment of the taxes with respect to which such return relates has not expired as of such date.

    (2) PENALTY FOR ERRONEOUS CLAIM OF CREDIT.—The amendment made by subsection (b) shall apply to claims filed after February 26, 2014.

    Rand would be overruled by the amendment to section 6664(a)’s definition of “underpayment” to cross-reference the provision in 6211 that defines “deficiency” to add in as negative amounts of tax disallowed excess refundable credits generating refunds. The amendment to the section 6676 20% improper refund claim penalty would allow that penalty to apply to EITC disallowances — though this provision will almost never come into effect, since the IRS will now be able usually to get the 6662 penalty on the full EITC disallowance, and there is no 6676 penalty to the extent that a 6662 penalty was imposed on an improper refund claim.

    While in early 2013, I published an article in Tax Notes actually endorsing, as a policy matter, the legislative overruling of the result the Tax Court later reached in Rand, I think the portion of the effective date provision making that provision retroactive to open years is flatly unconstitutional. The Due Process Clause has been held by the Supreme Court to allow a fair amount of retroactive tax legislation relating to tax computation. But, I can’t imagine that a penalty can be expanded retroactively to cover items it never covered before.

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