On April 19, 2022, the Tax Court issued a precedential opinion in Treece Financial Services Group v. Commissioner, 158 T.C. No. 6. Since the issuance of the opinion, I intended to write a post about the case but now an additional reason for doing so exists. On May 19, 2022, the IRS filed a motion for reconsideration. This is a rare occurrence as I discussed in a post several years ago on this type of motion in which I not only discuss such motions generally but provide some detail regarding my own ill-fated motion for reconsideration several decades ago.
Filing a motion for reconsideration is a rare thing at Chief Counsel. The Chief Counsel’s Directive Manual at 35.9.1.2.4 describes the filing of such a motion:
(1) In rare instances, it may be necessary to file a motion requesting reconsideration of findings or opinion. These motions must be recommended by the Division Counsel, reviewed in the appropriate Associate Chief Counsel’s office and approved by the Chief Counsel. See T.C. Rule 161
(2) Motions for reconsideration of finding or opinion should only be filed in cases of substantial error or where exceptional or compelling circumstances exist.
The fact that Chief Counsel’s office succeeded in getting the Acting Chief Counsel to sign off on this motion within one month after the issuance of the opinion provides a statement of the significance of the motion. Chief Counsel could have decided to seek an appeal of the decision. Had it done so it would have had to convince the Department of Justice and potentially had a conference in the Room of Lies, but it would not have needed the approval at Chief Counsel level to initiate the appeal. If nothing else the decision to file a motion for reconsideration of a precedential opinion decided by the Judge who has just become the Chief Judge signals the depth of the disagreement with the decision. Now, let’s talk about the opinion itself and see what has riled up Chief Counsel’s office.
The Treece case concerns another aspect of an issue we have discussed frequently on the blog – the jurisdiction of the Tax Court. The IRS moved to partially dismiss the case for lack of jurisdiction although it styled its motion as one for summary judgment. Petitioner filed a response. Meanwhile the taxpayer moved for summary judgment to which the IRS filed a response. The Court sets up the issue this way:
Respondent contends that this Court lacks jurisdiction in this employment tax case to review respondent’s determination that the Voluntary Classification Settlement Program (VCSP) does not apply to the computation of petitioner’s employment tax liabilities. Petitioner contends that it met all the requirements of the VCSP and respondent does not have the discretion to deny its participation in the VCSP.
In 2019, the IRS notified Treece Financial Services Group (the petitioner) of the reclassification of Dock D. Treece (the taxpayer) from independent contractor to employee for three previous tax years (2015, 2016, 2017). Mr. Treece is the sole corporate officer of the business. The company agreed to his treatment as an employee. The case concerns possible reductions in certain taxes resulting from his reclassification as an employee. The company sought the reductions through VCSP.
I.R.S. Announcement 2012-45, 2012-51 I.R.B. 724, 724. To be eligible for the VCSP, a taxpayer must: (1) have consistently treated the workers as nonemployees; (2) have filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years; and (3) not currently be under employment tax audit by the Internal Revenue Service (IRS).
The IRS denied Treece the ability to participate in VCSP because at the time it applied it was under an employment tax examination.
The Court first addresses the motion to partially dismiss filed by the IRS. In doing so it provides a general statement of its jurisdiction in a case like this:
Generally, we have jurisdiction under section 7436(a) to determine: (1) whether an individual providing services to a person is that person’s employee for purposes of subtitle C; (2) whether the person, if an employer, is entitled to relief under section 530 of the Revenue Act of 1978; and (3) the proper amounts of employment taxes which relate to the Commissioner’s determination concerning worker classification.
The Court then moves to a discussion of providing review of a decision made by the IRS:
There is a strong presumption that an act of administrative discretion is subject to judicial review. Trimmer, 148 T.C. at 346; Corbalis v. Commissioner, 142 T.C. 46, 56 (2014) (holding that denials of interest suspension under section 6404(h) are subject to judicial review)…. In 2000 section 7436(a) was amended to provide the Tax Court jurisdiction to “determine whether such a determination by the Secretary is correct and the proper amount of employment tax under such determination.”… The U.S. Court of Appeals for the Ninth Circuit held that the amendment in 2000 “indicates that Congress did not intend to limit the Tax Court’s jurisdiction under section 7436 to determining only whether an individual was an employee.” Charlotte’s Office Boutique, Inc. v. Commissioner, 425 F.3d at 1208.
Don’t you love it when the Court says that Congress did not intend to limit its jurisdiction. Carl Smith and I have sought to have the Tax Court look at time periods for filing petitions that way for several years. Looking for more decisions that adopt the Treece view of jurisdiction soon.
Here, the Court finds that because the VCSP eligibility determination directly impacts the amount of tax the company will owe “the procedures that Congress has established for judicial review of the Commissioner’s determinations logically contemplate review of such a denial as one element of the determination.”
After denying the IRS motion to partially dismiss, the Court turned to the motion for summary judgment filed by Treece. It quickly determines that a material dispute exists concerning the facts.
Motion for Reconsideration
As mentioned above, the IRS did not like the decision in this case and filed an extraordinary motion for reconsideration. It lists several reasons why the Tax Court got it wrong:
(a) Respondent’s denial of petitioner’s VCSP application does not constitute a “determination” under section 7436(a)1 in connection with an “examination”;
(b) The VCSP is not a determination of the “correct and the proper amount of employment tax.” Treece at 5. Rather, it is a settlement program that allows for taxpayers to voluntarily reclassify their own workers and treat them as employees prospectively in exchange for a settlement payment in an amount that is a significant departure from the employment tax rates imposed by the Code. More specifically, the VCSP results in the parties entering into a closing agreement pursuant to section 7121 that: 1) requires the taxpayer to treat the class(es) of workers as employees beginning on a date chosen by the taxpayer; 2) provides retroactive audit relief for a taxpayer in that the IRS agrees not to disturb the taxpayer’s prior classification of the worker(s) as nonemployees for prior tax periods; and 3) the IRS collects a minimal payment amount equal to only 10 percent of the amount of employment taxes that would have been due on compensation paid to the workers being reclassified for just the most recent tax year prior to the filing of the VCSP application, calculated under reduced rates; and
(c) The VCSP does not reflect an administrative “examination” or “determination” of employment due pursuant to section 7436(a)
The motion for reconsideration explains for the remaining 15 pages why the Tax Court made a mistake when it asserted jurisdiction of the decision of VCSP not to consider this case. I am not sure that the motion raises any new arguments the IRS did not make prior to the decision but it does signal the depth of the IRS disagreement with the decision.
One concern that a party has in filing a motion such as this signaling significant disagreement is that it alerts the Court an appeal is coming and allows the Court to shore up its arguments essentially writing its own brief to the appellate court. We will see if the IRS motion moves the Tax Court. Very few of these type motions change the mind of the deciding court. I expect we will be seeing more about this case for some time to come.