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May 2023 Digest

Posted on June 1, 2023

PT covered several important and long-awaited Court decisions in May, including Supreme Court decisions about the notice requirements for third-party summonses and state property tax strict foreclosures, an update in Mann Construction, and DC Circuit decisions about situs of the Tax Court and whistleblower jurisdiction and award limitations.

Important Case Updates

Supreme Court Finds For Government in Polselli Summons Litigation: The Supreme Court held that the IRS need not notify third parties when it issues a summons in the aid of collecting the tax liability of another person. Without notice, there is no clear path for district court review. The Court chose not to follow the 9th Circuit’s decision in Ip which said that notice is not required only when a liable taxpayer has legal interest in the accounts and records. Observations about the opinion, concurrence, and the impact the decision has on other areas are made in this post.

Property Tax Strict Foreclosure – A Final Update: The Supreme Court effectively ends the practice of strict foreclosure for unpaid property tax with its decision in Tyler. The Court determined the taxpayer had standing to bring the case and that the state violated the Fifth Amendment’s Takings Clause by engaging in the strict foreclosure practice.

The D.C. Circuit Strikes Back: The Court Affirms Its 2014 Holding That The Tax Court Is In The Executive Branch: In Crim, the DC Circuit followed its precedent in Kuretski to find that the Tax Court is an independent executive branch agency, but the majority and dissent’s analysis of the separation of powers issues raise new questions.

Latest Round of Litigation in Mann Construction Another Defeat For The Government: In the latest Mann Construction case, the Court denied the government’s motion to stay the Court’s earlier order which required the IRS to set aside the Notice at issue. The effect that a stay on one federal court has on other jurisdictions is a hot issue in this case and in administrative law generally.

DC Circuit Issues Awaited Whistleblower Opinion in Lissack v Commissioner: In Lissak, the DC Circuit clarifies that Whistleblower Office decisions are subject to court review when the IRS actually conducts an examination based on the submission, which distinguishes Lissak from Li. The Court also upholds the regulations’ approach to limiting awards to situations when information substantively connected to the eventual adjustment is provided, even if the IRS would not have otherwise examined the target. The post provides additional information about the case, outstanding issues, and current proposed whistleblower legislation.

DOJ Wins One Case and Loses Motions in Another Where POAs Signed First Refund Claims for Taxpayers, Part I & DOJ Wins One Case and Loses Motions in Another Where POAs Signed First Refund Claims for Taxpayers, Part II: This two-part post discusses cases that involve refund claims that were signed by POAs who didn’t check the box which would have authorized them to sign tax returns. The DOJ’s motion to dismiss was successful in Dixon and unsuccessful in Cooper. The posts analyze how cases with similar fact patterns resulted in different rulings, the role of the “duly filed” requirement, and the still unresolved tension between waiver cases and informal claim cases.

Taxpayer Rights and Insights

A Free Direct E-filing Tax Return System is a Fundamental Taxpayer Right: The Inflation Reduction Act directed the IRS to prepare a report about the costs associated developing and running with a free direct e-filing tax return system with a focus on multi-lingual and mobile-friendly features. In this post, Nina recounts the origins of the Free File Alliance which is the current free option that the IRS provides and makes a strong case for why a direct system is better.

Can a Taxpayer Successfully Sue When IRS Fails to Do What It Should Do: Two recent cases provide insight into whether judicial options are available when the IRS fails to do what it should do. In Kem, after the IRS ignored her math error abatement request, the taxpayer petitioned the Tax Court and made solid arguments about IRS’s obligations and the Court’s jurisdiction. The Court didn’t specifically address her arguments and the IRS didn’t acknowledge that it failed to follow math error procedures, but nonetheless issued her a refund. In Veg Invest Trust, the IRS ignored a CDP hearing request, so the taxpayer is suing for a refund in district court. The case has just begun so it’s one to watch for anyone whose correspondence, or client’s correspondence, has gone unopened, lost, or ignored.

Extension of Time for Payment of Tax Due to Undue Hardship: Part 1 and Extension of Time for Payment of Tax Due to Undue Hardship: Part 2: This two-part post shares a slightly modified version of an article that was originally published in the Journal of Tax Controversy. The article discusses the request for an extension to pay. Unless a deficiency is due to negligence, intent to disregard, or fraud, the IRS can extend the payment of a tax deficiency if the taxpayer would face undue hardship.

In The Room Where It Happens, It Doesn’t Always Happen Exactly Right and Back to the Room Where it Happens: Chris Rizek was in the room where the House and Senate’s competing provisions for innocent spouse reform were reconciled. Reflecting on the process, he finds it surprising that so much time has been devoted to analyzing the jurisdictional parentheticals and recalls that Congress’s overall goal was to expand, not limit, jurisdiction to review the IRS’s actions.

Tax Court Updates

Tax Court Expands Online Availability of Documents: During the ABA Tax Section Meeting, the Court announced that it will expand the online availability of Court documents. Beginning August 1, all newly filed posttrial briefs filed by practitioners admitted to practice before the Court and all newly filed amicus briefs filed pursuant to Rule 151.1 in non-sealed cases will be made available through DAWSON. This post delves into the details related to this and other changes.

Where Have All the Judges Gone (and Other Information from the ABA May Meeting) Part 1: The Court is currently operating with 16 Presidentially appointed judges out of a possible 19, with more vacancies upcoming, due to some judges awaiting reappointment and others being moved to senior status with no one in line to take their place. This post looks at the possible reasons for this, suggests increasing the number of special trial judges to process more cases, and looks at the history of special trial judges.

Serious Warnings for Frivolous Positions : The IRS issues the taxpayer a warning before making a section 6702 assessment even though it is not required by statute to do so. It is a step the IRS has imposed upon itself in the IRM and no cases have address whether failing to warn would provide a basis for setting aside the penalty. Similarly, the Tax Court gives the taxpayer a warning before issuing a section 6673 penalty, but does a taxpayer have a legal right to a that warning? This post explores why this question may become more important as time goes on.

Tax Court Decisions

Tax Court Says “Nutts” to Time Zone Filing Extension: Nutt is a precedential opinion in which the Tax Court (again) expressed its position that eastern time is the time zone which dictates the timeliness of a Tax Court petition. The issue has arisen in other cases, including Sanders where the petitioner who after multiple unsuccessful attempts, successfully filed less than a minute after the deadline. Under current law, the petition deadline cannot be equitably tolled, but Congress could amend section 7502 or allow time zone flexibility for matters where the amount is dispute is $50,000 or less per year.

Old Habits Die Hard: The Tax Court issued an order dismissing a late filed CDP petition for lack of jurisdiction in Floyd. The order was immediately rescinded by another order issued the same day. Boechler made such orders inapplicable since the deadline is no longer jurisdictional. Boechler also allows the Court to ignore CDP petition deadlines unless the IRS raises a concern, but it looks like it will take the Court some time to adjust.

Remand of a CDP Case: Whittaker was remanded back to Appeals after the Court found clear error in the rejection of the taxpayers’ offer in compromise. The taxpayers were close to retirement, so the IRM and Treasury Regulation allow their retirement account to be treated as income rather than an asset. They raised other valid arguments, but the record did not reflect that the arguments were taken into consideration. The case provides a glimpse into how the judicial process can shape the administrative process and demonstrates how important it is to have a judicial check on the IRS’s collection powers.

Trust and Bankruptcy Decisions

Uncertainty Over Bankruptcy Court Jurisdiction in Innocent Spouse Cases Seeking Equitable Relief: The Court in Geary held that bankruptcy courts do not have jurisdiction to determine whether a taxpayer qualifies section 6015(f) innocent spouse relief. Unlike (b) and (c) relief, the Court concludes that Congress unambiguously limited the authority to grant (f) relief to the IRS.

The Perils of Electing to Carry Forward a Tax Refund When Filing Bankruptcy: The taxpayers in Miller v. Wylie elected to apply their sizable 2018 federal and state refunds to their 2019 income tax liabilities five months before filing for bankruptcy. The bankruptcy trustee alleges that the carry forward election was a transfer which concealed property with the intent to hinder, delay, or defraud a creditor with the meaning of BC 727(a)(2)(A). The court disagreed and found that the election is a preference of the IRS over other creditors, which could cause the funds to be clawed back into the estate but would not rise to the level of denying a discharge.

IRS Loses Injunction Case Against Mother After Raising Its Eyebrow: In U.S v. DuBois the Court decided against enjoining a mother from using proceeds from a settlement. She and her tax-owing son were beneficiaries of a trust and sued the trustee for breach of fiduciary duty. While the suit was pending, the IRS brought suit against her son for failing to pay income taxes. The mother and son settled with the trustee and the son immediately assigned his rights to settlement to his mother for no consideration. The son argued that he had agreed to assign his interest earlier before becoming aware of the IRS’s suit. The argument raised some eyebrows but was ultimately successful since the IRS didn’t present evidence to refute it.

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