The Tax Court might not be open for mail, but it is still churning through cases. The designated orders for the week of April 20 – 24, 2020 provide some helpful lessons for practitioners that remain engaged with IRS Counsel. Particularly, they provide some insight on when it is appropriate to ask the IRS to better explain their adverse position. I did not find the March 23 – 27 orders to be as illuminating (there were only two) and they can be found here and here for posterity.
When Does Greenberg Express Leave the Station? Smith v. C.I.R., Dkt. # 13382-17 (here)
There are a lot of instances when it appears that petitioners are concerned about the IRS reasoning or motives in a Notice of Deficiency and try to use discovery in court as a way to get a clearer picture. A lot of these maneuvers are expressly disallowed by Greenberg (for refreshers on Greenberg see posts here and here) and possibly on evidentiary grounds of relevancy. Sometimes, however, the reason behind the discovery presents a bit of a gray zone. This case shows one such gray zone that may prove helpful to practitioners.
The easy cases are where you want to prove that the IRS “picked on you” in exam. Those are not allowed, as the motive behind the audit is pretty much irrelevant in a deficiency proceeding. A step towards the gray-zone is the argument that the notice of deficiency should be invalid on procedural grounds -either of the APA Qinetiq variety (covered here) which are unlikely to succeed, or on Scar grounds which are also difficult.
Smack in the middle of the gray-zone, however, is where you are using discovery to understand the legal reasoning of the IRS’s position -not necessarily saying you were treated unfairly in the moments leading to the issuance of the notice of deficiency, but that it is unclear what the IRS believes the issues to be. In some contexts this isn’t going to work. The above-order, however, shows where discovery may be appropriate: so-called “contention interrogatories.”
In the above order, petitioners want to know why the IRS thinks they aren’t entitled to a credit under IRC § 41. I’m going to go out on a limb and say (1) the SNOD was not particularly detailed on that point, and (2) there were supporting documents that have been submitted purportedly to show entitlement to the credit. Actually, the second point can be surmised from the order: the IRS (and Judge Gale) refer to numerous “Bates numbered documents” submitted by petitioner pertaining to the credit. More on them later.
So petitioners think they’ve provided enough documentation to get the credit, and the IRS thinks otherwise. Why get the court involved to settle that in discovery, instead of waiting for trial where the court will make exactly that determination on the basis of the evidence?
Because, understandably, petitioners want to be completely clear on why the IRS doesn’t think entitlement to the credit has been proven just yet in order to prepare for trial. Is it that the documents don’t say what petitioners think they say? Is it that the IRS doesn’t trust the veracity of the documents? Is it an evidentiary issue at all? Clarification on these points would certainly help in preparation for trial, and ultimately help an orderly trial take place. Thus, petitioners serve 15 interrogatories on the IRS to better clarify their “factual or legal position” as reflected in the notice of deficiency.
The IRS screws up in a few ways in their response. One is easily remedied: they don’t sign and swear to the interrogatory responses, rendering them procedurally defective under Tax Court Rule 71(c). The other screw up is less easily remedied: the court finds that almost half of the responses, as a matter of substance, are insufficient. This was generally for generically referring to witness testimony (without saying who the actual witness would be) or generically referring to submitted documents (without referencing the Bates number of the document) for the IRS’s continued disagreement with petitioners. Ultimately, Judge Gale orders the IRS to fix the procedural issues and file supplemental answers to the interrogatories that actually answer the interrogatories.
Again, I think this gets close to (but avoids) being framed in a way that Greenberg would preclude. When the IRS denies a credit in a notice of deficiency, their reasoning for denying it doesn’t really matter that much: as we all know, “Credits are a matter of legislative grace, INDOPCO, yada yada yada.” So anytime the IRS puts a credit at issue, and for whatever reason, it is on you to show you should get it.
But here petitioners aren’t really saying “we want you to explain why your notice of deficiency is correct” (inappropriately putting the burden of proof on the IRS). They are saying “we want to know what, after everything we’ve submitted, is still in contention” (keeping the burden on petitioner, but giving them the ability to better prepare to meet that burden in litigation).
I’d advise practitioners to consider integrating these sorts of “contention requests” in their general litigation checklists. I’ve never served interrogatories on the IRS. But I have raised the issue of what remains in contention in informal discovery (sometimes Branerton, more often with IRS Appeals).
My clinic frequently has to prove the elements of a qualifying child under IRC § 152(c). Sometimes we have what I would consider pretty compelling documentary evidence for each element. Yet Appeals sits on it or appears not to have looked closely at what we’ve sent, finally asking for still more documents from a given checklist that “proves” an element (usually residency) after weeks of remaining unresponsive. In these instances my clinic often sends a fax to Appeals laying out the evidence we’ve already provided, why we think it is more than sufficient to demonstrate each element of qualifying child status, etc. and conclude with a request of our own: If this isn’t good enough, please kindly tell us why and what exactly is in contention. Not “what else would you like us to provide?” (there will always be something, and we’ve usually gone over that with Appeals by this point). But “Here is our case. We think it stands for itself. Tell us why not.” The three times my clinic has done this in the last two years the next communique from IRS Appeals was a full concession.
When it isn’t clear why the case isn’t being wrapped up, sometimes it can be helpful to bluntly ask. Maybe the IRS has a good reason you haven’t considered and the development of the case is assisted by them telling you. Or maybe they’re cynical and just don’t believe you. With the latter, I’ve found IRS Appeals to be less likely to stick with that if they would need to write it on paper as their reason for failing to settle.
Take (Judicial) Notice: Continuing Life Communities Thousand Oaks LLC v. C.I.R., Dkt. # 4806-15 (here)
This was a very brief order (less than 2 pages) but provides an interesting and widely applicable lesson on the concept of “judicial notice.” In law school evidence classes we learn that you can ask a court to “take judicial notice” of certain facts. We then forget how it works shortly after the final exam, relearn for the bar, and then largely forget again, remaining perhaps dimly aware that asking courts to “take judicial notice” is something we lawyers can do. It sounds nice, but when is it applicable, and what does it actually do?
The Federal Rule of Evidence on point is FRE 201. Among other things, it provides that the court can take judicial notice only of “adjudicative” and not “legislative” facts. What is the difference between the two? One key thing to keep in mind is that adjudicative facts pertain only to the particular case at issue, whereas legislative facts are more directly related to “legal reasoning and the lawmaking process.” The Notes of the Advisory Committee provide a detailed explanation, replete with citations to law review articles and musings from Professor Kenneth Davis, who apparently “coined the terminology.” Apologies to my law school evidence professor if that was covered in class.
One may be forgiven for thinking that, even with the explanations provided by Professor Davis, the difference between adjudicative and legislative facts isn’t always crystal clear. In this case, petitioner’s counsel asked the Tax Court to take judicial notice of the arguments IRS Counsel advanced on brief in a different case, apparently at odds with the argument they were making in the instant case. Is that allowed?
Judge Holmes says “no.” The court can (and does) take judicial notice of facts from court records in certain circumstances -namely in instances involving collateral estoppel. (See my post here for a quick refresher on collateral estoppel.) But in matters of evidence, it is always important to consider the purpose for the evidence being put forth -the same statement could be inadmissible hearsay, or not, depending on what it is being used to show (my thoughts on that in the context of the penalty supervisory approval form can be found here).
In this instance, the purpose for taking judicial notice of the arguments made by IRS counsel in other cases with a different taxpayer is certainly not for establishing collateral estoppel. Rather, it seems to be with the intention of showing that the argument in the instant case is less persuasive because the IRS doesn’t always hold tight to it in other cases with other parties. Judge Holmes isn’t biting, finding that it isn’t properly an adjudicative fact in this context. But one of the bigger reasons may be a matter of practicality: as Judge Holmes cheekily notes, “the Commissioner seems to be involved in a very large percentage of cases tried in our Court […] and cannot reasonably be expected to express the nuances of his positions in each case in ways that are entirely consistent across litigation.”
In short, asking the Tax Court to “notice” that IRS Counsel has argued something different in brief in a different case is probably not going to happen. Note, however, that it is a slightly different matter if it was not something argued on brief, but published guidance that the IRS now appears to be taking an inconsistent approach to (see the end of my article on Feigh discussing Rauenhorst here). Note also that while asking the court to take “judicial notice” of inconsistencies across government litigating positions might not be availing tactic, that doesn’t mean it is inappropriate to bring those inconsistencies to the court’s attention by in brief or even oral argument. Imagine, for example, that the government argued that dismissal of an innocent spouse case in tax court on jurisdictional grounds is not completely unfair because the taxpayer could always full-pay and go to district court. It would perhaps cut against that argument were the government to argue, in district court, that there is fact no refund jurisdiction for innocent spouse cases in district court after all. Now where have I seen that… (posts here and here).
Reverberations from Procedurally Taxing Jurisdictional Victories: 4 Whistleblower Orders from Judge Carluzzo (orders here, here, here, and here)
Lastly, I’d like to conclude on a high-note: the fruits of Keith and Carl’s “Quest Against Jurisdictional Restrictions.” The juiciest fruit from that quest has been from their involvement in Meyers v. C.I.R. See PT coverage here, among others. Because Myers found that the whistleblower statute IRC § 7623(b)(4) is not jurisdictional and could be subject to equitable tolling, Judge Carluzzo issued four nearly-identical designated orders denying the IRS motions to dismiss for lack of jurisdiction and instead ordering that they file an answer. Obviously this doesn’t mean that any of the whistleblowers will succeed on the merits but if they do that would be justice done that would otherwise have been denied (indeed, that their cases will be heard at all could be seen as a win for justice).