9th Circuit Affirms Tax Court’s Ruling in Kollsman Disregarding the Report of Taxpayer’s Appraiser

We welcome back guest blogger Cindy Charleston-Rosenberg. Cindy is a past president and a certified member of the International Society of Appraisers. She and I both posted on the Tax Court’s earlier decision in the Kollsman case. Now, the 9th Circuit, in an unpublished opinion, has affirmed the Tax Court’s opinion. I am somewhat surprised that the taxpayer appealed this case because the burden to overturn the Tax Court’s decision was high. The 9th Circuit seemed to have little trouble finding that the Tax Court correctly relied on the appraiser used by the IRS and dismissing the taxpayer’s appraiser who came burdened with conflict problems and a desire not to use comparables in setting a value. The 9th Circuit stated “The Tax Court did not err in rejecting Wachter’s (the petitioner’s appraiser) opinion in part because he did not support his valuations with comparable sales data.” The 9th Circuit did not directly address the conflict of the taxpayer’s appraiser that greatly influenced the Tax Court to ignore or deeply discount his opinion but instead continued to focus on the deficiencies of his opinion stating “the Tax Court did not err in finding that Wachter failed to explain the nearly fivefold increase in value between his valuation and the sale price.” As Cindy explains and as we discussed in the prior posts, getting the right appraiser makes a huge difference in getting the “right” outcome. Trying to fix a problem with an appraisal through an appeal will generally not end well. Keith

On July 26, 2019, The Appraisal Foundation released a press statement urging legal advisors and wealth managers, in light of the recent affirmation of Kollsman v Commissioner, (T.C. Memo. 2017-40) to recognize the primacy of the personal property appraisal profession. The Appraisal Foundation is the nation’s foremost authority on valuation services, authorized by Congress as the source of appraisal standards and appraiser qualification criteria.

The 9th Circuit affirmation of Kollsman establishes that attorneys and other allied professionals should, as a minimum standard of care, recognize appraising as a professional discipline distinct from other types of art market expertise. From the Foundation’s release: 

with this ruling, the competency and professionalism of personal property appraisers has been confirmed for the second time by the judicial system in the United States … wealth managers and estate attorneys now have a greater fiduciary duty to their clients to fully understand appraiser qualification criteria and appraisal standards when vetting personal property appraisal experts.

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The Tax Court decision in Kollsman essentially disregarded an appraisal submitted by a high ranking executive of a premiere auction house as lacking basic qualification, credibility, support and objectivity. The decision relied almost exclusively on the opinion of the IRS expert, who was a relevantly credentialed, professional appraiser. The 9th Circuit opinion found the Tax Court did not err in rejecting the auction house expert’s opinion, in part because it was not supported by comparable sales data and failed to consider relevant past sales. In disregard to established caselaw and standard professional appraisal practice, the auctioneer testified that when he arrived at his valuations, he was “not interested” in comparables, and had only reviewed comparables after the IRS challenged his methodology. In finding the auction house appraisal to be “unreliable and unpersuasive” the Tax Court opinion deemed the omission of comparables supporting the valuations to be “remarkable”, stating; “we have repeatedly found sale prices for comparable works quite important to determining the value of art”. In contrast, the court found the credentialed appraiser engaged by the IRS explained his methodology, relied on comparables, and conducted research as to the impact of the subject property’s condition to an expected level of professional performance and objectivity. 

To help ensure a trustworthy level of professional competency, The Appraisal Foundation’s sponsoring professional personal property organizations, the International Society of Appraisers, the Appraisers Association of America, and the American Society of Appraisers, have embraced and are bound to implement the Personal Property Appraiser Minimum Qualification Criteria in issuing credentials to members. Each organization maintains a public registry where the appraiser’s level of credentialing, areas of specialization, education and experience may be accessed and confirmed. Members of these associations earn their credentials through a stringent admissions, training and testing process. They are required to comply with IRS guidelines and the Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice (USPAP), are bound to continuing education requirements and to submit to the oversight of their professional organization’s ethics committee. 

As a member of the Appraisal Foundation’s Board of Trustees, I welcome the opportunity to collaborate with the legal and wealth management professions on best practices in identifying and engaging qualified appraisers, particularly for IRS use appraisals. As we see here, every appraisal report submitted to the IRS has the potential to become the subject of litigation. Procedurally Taxing readers are invited to review my earlier post for an in-depth analysis of the implications of the original ruling, and Keith Fogg’s earlier coverage of this case highlighting the avoidable perception of bias when engaging an expert seeking any involvement in the sale of purchase of the subject of an appraisal. 

Last September the American College of Trust and Estate Counsel (ACTEC) Regional Meeting in Baltimore hosted a panel addressing this issue. The feedback from the considerable post-presentation engagement from attendees was that the qualification criteria for real property appraisers are well understood by the legal profession. However, qualification criteria and practice standards for personal property and business valuation experts, sourced by the same authority, are clearly less so, often with devastating outcomes for consumers.

In the wake of the Kollsman affirmation,particularly as the ruling applies to the benefits of engaging relevantly credentialed experts for IRS valuations, and critically, the Appraisal Foundation’s now public stance on this issue, it will be increasingly difficult for tax and legal advisors to defend engagement of less than fully qualified valuation experts. 

Jurisdiction Cannot Be Manufactured: Designated Orders 6/3/19 – 6/7/19

The most exciting designated order during the week of June 3, 2019, by far, was in Docket No. 14307-18, Scott Allan Webber v. CIR. It was so exciting that it was worthy of its own post, which is here (and I’m thankful to William Schmidt for giving it the attention it deserves).

Docket No. 15445-18, Stephen E. Haney v. CIR (order here), Docket No. 15435-18, Ricardo C. Lacey & Cynthia V. Lacey v. CIR (order here), and Docket No. 15315-18, Steven E. Ayers & Donna J. Ayers v. CIR (order here)

Typically, when I come across three designated orders with nearly identical language it is because the same order was issued in a consolidated docket. But that was not the case during the week of June 3; rather there were three separate cases involving the same bad actor. What he did was bad, but not bad enough to rise to the level of the Court making a Department of Justice referral – which is a little surprising.

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Detailed facts about each petitioner’s specific case were not included in the orders, but each one is before the Court on a motion to dismiss for lack of jurisdiction, and the same oddity happened in all three cases. A petition was filed with the Court, which included a copy of a notice of deficiency, but the date on the petitioner’s notice of deficiency didn’t match the date on the version the IRS had. The IRS produced its version as well as a certified mailing list reflecting the date that matched the IRS’s version.

The Court conducted an evidentiary hearing to develop a record that would explain why there was a discrepancy between the dates on the notices.

The Court noted other similarities in the cases: all three petitions originated from the same tax preparation company (according to the return address labels), and appear to have been signed by the same person, but there are no markings or disclosures to indicate that a third party signed on behalf of the petitioners.

In an effort to gather information, the IRS subpoenaed the accountant associated with the tax preparation company (the “accountant”) on the return address labels. They directed him to appear and testify at the evidentiary hearing, but he did not.

Instead, a taxpayer unrelated to any of the three cases came to testify for the IRS about his experience with the accountant. In his testimony, the taxpayer explained that he invested in a company and later took substantial losses related to the investment on his federal income tax return. The IRS proposed to disallow the losses and on the advice of his tax preparer, the taxpayer met with the accountant (who was the tax preparer for the company the taxpayer invested in). The accountant assured him that the IRS was incorrect, and he would take care of the matter and the taxpayer signed a power of attorney allowing the accountant to represent him.

Then, the taxpayer received a notice of deficiency and forwarded it to the accountant, who he believed was still his representative at the time. The taxpayer reached out to the accountant several times to inquire about whether a petition had been filed with the Court and did not receive a response from the accountant but did receive a bill from the IRS.

Sometime later, the taxpayer received notice from the Court that it had received a petition on the taxpayer’s behalf. The IRS filed a motion to dismiss in the case alleging that the petition was not timely filed. The IRS alleged that the notice of deficiency had been altered to make it appear timely filed. The taxpayer hired an attorney to help him respond to the motion, and in his response claimed that he believed his former representative, the accountant, had altered the dates.

Based on the taxpayer’s testimony and IRS records, the Court finds that the accountant was responsible for altering the dates in all three designated order cases. The Court also warns the accountant against misleading the Court, harming taxpayers and wasting the Court’s and IRS’s resources in the future.

It is unclear from the orders (and from some additional research) whether the accountant actually has the authority to represent individuals before the IRS and Tax Court. In all three cases petitioners are designated as pro se, and presumably, the petitioners would have needed to ratify their petitions if they did not authorize the initial petition’s filing.

One last oddity is that motions for continuance were filed by petitioners in all three cases on the exact same day, a week after the orders were issued and the cases had been dismissed, which may suggest an attempt at continued involvement by the accountant.

Docket No. 19502-17, Cross Refined Coal, LLC, USA Refined Coal, LLC, Tax Matters Partner v. CIR (order here)

This next order addresses discovery motions; more specifically, both parties’ motion to compel the production of documents. The parties have decided to utilize a “quick peek” review and the Court approves. Procedurally Taxing covered this uncommon procedure back in 2016 in a post by Les, here. Since it has been a few years (and I assume educating the public on this option was the reason the Court designated the order), here is a quick refresher:

The procedure originates from Federal Rule of Evidence 502, which states, “A federal court may order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court.”  As a result, the procedure can speed up the discovery process by allowing parties to review substantial amounts of information without the risk of waiving any privilege.

In the remaining designated orders, the Court calculates the value of a donated building façade in a case involving a disputed charitable contribution deduction after the parties couldn’t reach an agreement (order here), and the Court grants a summary judgment motion in a CDP special circumstances offer in compromise case (order here).

A Message from the National Taxpayer Advocate

Friends and Colleagues,

I have been thinking what I can say to everyone who has been writing “reflections” throughout this month, and I have been having a hard time finding words.  Let me just say I am overwhelmed.  It has been my privilege to be part of a journey along which I have met so many fine people, who have dedicated their lives and made sacrifices to protect taxpayer rights, who care about access to justice and the fundamental fairness of the tax system.

 It is to you all that I owe thanks and appreciation.  That I have in some way been able to influence peoples’ lives and choices was never anything I set out to do, and I am just humbled and a bit astonished to read folks’ reflections.  I look forward to working with you all going forward, in my next step, through the Center for Taxpayer Rights.  You can reach me at neo@taxpayer-rights.org.

Nina

Reflections on the Impact of Nina Olson by Armando Gomez

We welcome Armando Gomez to provide this reflection on Nina on her final work day as National Taxpayer Advocate.  Armando is a partner with Skadden Arps and a former chair of the ABA Tax Section.  He was instrumental in Nina’s appointment to the position of National Taxpayer Advocate and so provides a perfect capstone to the reflections this month.    Keith

I first met Nina Olson some twenty-three years ago when, as a young lawyer for the National Commission on Restructuring the Internal Revenue Service, I was introduced to her by Janet Spragens. Just a few years out of law school, I had much to learn, and Nina and Janet were happy to educate me on what needed to be done to provide fairness and due process for taxpayers who could not afford to engage counsel to help them navigate the labyrinth that is the tax controversy process. The recommendations that they made to the Commission lead to important provisions of the 1998 Restructuring Act. More importantly, when it came time for the Secretary of the Treasury to appoint a National Taxpayer Advocate, Nina’s name quickly made it to the top of the list.

The Restructuring Commission’s mandate from Congress was to make recommendations for modernizing the IRS and improving its efficiency and taxpayer services. One of the lawyers working with me on the Commission’s staff had studied under Professor Spragens at American University’s Washington College of Law, and he invited her to meet with me to explain how tax clinics were starting to help fill a huge void in the tax system for unrepresented taxpayers. Janet introduced me to Nina, who wowed us all with her energy, determination and imagination. Through their advocacy, the Commission recommended that Congress enact various enhancements to the Taxpayer Bill of Rights, and to establish a matching grant program to support the development and expansion of low income taxpayer clinics. These recommendations, which were enacted as part of the 1998 Restructuring Act, were among the most meaningful and lasting changes that resulted from the Commission’s work.

Not long thereafter, when the IRS needed a new National Taxpayer Advocate, I received a call from former Deputy Commissioner Mike Murphy, who was helping to identify potential candidates for that role. It was obvious to me that Nina was already one of the nation’s leading taxpayer advocates, and Mike encouraged me to explore with her the possibility of putting her name in the hat for this appointment. Happily for all of us who care about the tax system, Nina eagerly accepted the challenge, and the rest is history. Nina tells this story a little differently, but what matters is not how she was appointed as the NTA, but that she received the appointment and made the most of it, building a lasting legacy that will benefit generations of taxpayers.

As reflected in the many tributes that have appeared on this blog, and as has been heard throughout the nation over the past months since Nina announced her retirement, Nina Olson has worked tirelessly as the National Taxpayer Advocate, working inside and outside of the IRS to bring attention to and address systemic problems. Although her predecessor did much to help establish the Taxpayer Advocate Service, Nina has forged TAS with her vision of how the organization can work proactively to ensure that all taxpayers get a fair shake, and to shine a bright light on problems requiring legislative solutions.

When the House Ways & Committee’s Oversight Subcommittee held a hearing on July 24, 1997 to consider the recommendations of the Restructuring Commission, then Senator Bob Kerrey, one of the two co-chairs of the Commission, testified that “there are twice as many people who pay taxes as vote” and that “Citizens’ faith that their government can be fair and efficient is dependent on a well-functioning IRS.” (Hearing before the Subcommittee on Oversight of the Committee on Ways & Means, House of Representatives, July 24, 1997 at 4.) Now more than ever, our Nation’s faith in government is being tested regularly. Fortunately, Nina Olson has helped to build important safeguards into the tax system to protect the rights of all taxpayers. She, more than anyone else, has helped to implement the “vision for a new IRS” contemplated in the 1997 report of the Restructuring Commission, and for that Nina will have the lasting thanks and gratitude of all of us who care about the tax system.

Reflections on the Impact of Nina Olson as National Taxpayer Advocate by Jack Manhire

Jack Manhire is currently the Assistant Vice President for Entrepreneurship and Economic Development, and the Assistant Dean and Chief of Staff of the School of Innovation at Texas A&M University. He has held previous and courtesy positions at Texas A&M’s School of Law and the Bush School of Government & Public Service, along with faculty fellowships at the Colleges of Medicine and Architecture. He has also held positions at the IRS and the U.S. Department of the Treasury.

Nina Olson: Tax Administration Innovator

There have been so many great reflections on the impact of Nina Olson as National Taxpayer Advocate on this blog, I wanted to add one from someone who worked directly for her at the Taxpayer Advocate Service. I had the honor for working for Nina first as one of her Attorney-Advisors, and then as the Director of Technical Analysis and Guidance for TAS.

For some, Nina can come across as an intimidating boss; one who demands perfection and is personally involved in almost every aspect of TAS operations. But this is not a criticism. In fact, Nina’s leadership style mirrors many of our country’s greatest innovators (e.g., Steve Jobs, Thomas Edison, etc.).

Working for her, I soon learned that what one might see as “demanding perfection” is actually a relentless dedication to the mission of TAS; a mission that she created singe-handedly. Her “hands on” involvement reflects her tenacious perseverance to the mission, and reflects her demand that the flames of that mission not merely stay lit, but rise and spread through the inspired dedication of her employees.

These are necessary attributes of a successful innovator, and also those of an entrepreneurial builder. Recall that the very first Annual Report to Congress (what we called the “ARC”), was every word written by Nina herself. This is because she wanted to ensure that she set the tone and example for future ARCs. She had the foresight to treat the annual report requirement as not a statutory chore, but an opportunity to innovate from within the IRS for the taxpayers to whom she has dedicated so much of her life.

And that entrepreneurial spirit never left. While future ARCs benefitted from a robust research and legal staff, every single theme, opinion, and suggestion was from first to last Nina’s project. I know this sounds amazing given that many of the annual reports were pushing 1,000 pages, but it is true and further testifies to Nina’s immense intellectual capacity.

And so, from my current chair, I see Nina as one of the great American innovators. Her vision and tireless effort produced innovations within the IRS, within the tax code, and within our public understanding of taxpayer rights that will inform future policy. There was a great deal to learn from Nina, and my own career ambitions at the time stunted some of those opportunities. But Nina was always there, not only to drive the message, mission, and vision personally, but also to care for her people and give them every opportunity to develop and succeed.

It is unlikely we will see another public policy and tax administration innovator such as Nina Olson any time soon. Her legacy is just too great to duplicate; and much of that legacy has only recently taken root. The next 10 to 20 years will reveal the far-reaching impact of her vision and tireless work.

Stay purple!

Interest and Penalties on Restitution-Based Assessments

On June 27, 2019, the Office of Chief Counsel, IRS published Notice CC-2019-004 to update a notice it issued eight years ago shortly after the IRS was given permission by Congress to make assessments based on restitution orders. We have written about assessments based on restitution orders before here, here and here. The idea to allow the IRS to make assessments based on these orders improved the process for handling the civil side of criminal cases. Before the change in the law, the IRS had to go through the entire deficiency process before it could begin the collection process. Many taxpayers who go through the criminal process already have a significantly diminished ability to satisfy any subsequent assessment of the tax relating to the crime. For those taxpayers who did have the post criminal process ability to pay the tax, the sometimes multiyear process needed by the IRS to achieve an assessment further winnowed the group with an ability to pay.

So, in general, the innovation of restitution-based assessments greatly improved the process; however, these assessments have limitations and almost 10 years after these types of assessments were approved, the limitations are still being refined. This notice addresses limitations on restitution-based assessments when it comes to interest and penalties. Keep in mind that although Congress granted the IRS the ability to make an assessment of tax after the imposition of a restitution order it did not prevent the IRS from continuing to use its traditional bases for making an assessment and those traditional bases could fill the gaps left by restitution based assessments in those situations in which pursuing the additional steps to assessment would make good sense.

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In its original notice regarding restitution based assessments, Notice CC-2011-018, the IRS took the position that underpayment interest under IRC 6601 would accrue on the restitution assessment. In Klein v. Commissioner, 149 T.C. No. 15 (2017), blogged here, the Tax Court disagreed. The new notice states:

Consistent with Klein, if a taxpayer challenges in litigation the accrual of interest on an amount of restitution assessed under section 6201(a)(4)(A), the interest should be abated.

Does this mean that taxpayers who do not challenge the imposition of this interest in litigation must still pay it? Is this an example of Sludge where the IRS knows that it shouldn’t do something but refuses to establish the administrative process for fixing the problem, forcing taxpayers and the courts to do that work for them? I do not understand why the IRS would only eliminate the accrual of this interest in litigation and not just do it or at least do it upon an administrative request by the taxpayer. Perhaps readers will comment on why the IRS has adopted this position which will only benefit taxpayers who bring an action against the IRS in court.

In the following sentence the IRS limits the situations in which it will abate the accrued interest to those situations in which the restitution order does not include interest. I do not know the percentage of restitution orders that mention interest. Obviously, this is something that the IRS would want to work with the U.S. Attorneys around the country to insure is included in restitution orders. Usually, taxpayers would have a very limited ability to keep this language out of the restitution order. So, I see it as a matter of educating the prosecutors to make sure the language appears in the restitution order. If prosecutors become sufficiently educated on the subject, the IRS may have a means of circumventing the adverse decision in Klein or at least setting up for additional litigation over whether 6201(a)(4)(A) allows the assessment of accrued interest.

The new notice does refer back to the original notice on the issue of interest accruing under 18 USC 3612(f) and continues to take the position that even though the United States can seek interest on the restitution ordered amount the IRS cannot assess interest under that provision. The Department of Justice could, however, go after the person to obtain this interest.

The Notice next turns to the failure to pay penalty. For taxpayers assessed in the traditional IRS ways, the making of the assessment will trigger the penalty which runs at .5% per month up to a total of no more than 25% if the assessed amount remains unpaid for 50 months. In Klein the Tax Court also held that the IRS lacks authority to assess and collect this penalty based on a restitution assessment. The penalty applies to the failure to pay the tax required to be shown on a return; however, the restitution assessment is not an assessment of tax. So, the Notice provides that “the failure to pay penalty does not apply to an amount of restitution assessed under section 6201(a)(4)(A).”

Again, the Notice provides that if the restitution order makes this penalty a component of the restitution order “the taxpayer is liable for the failure to pay penalty included in the order.” The Notice notes that these situations will be rare.

Without data regarding how much the IRS collects on restitution orders, it’s hard to say how much the limitation on the collection of interest and penalties based on restitution orders impacts the overall collection of tax liabilities. Because my experience trying to collect from people who have gone through the criminal tax process suggests that collection from these individuals often results in low yields, I think that the limitation on the ability of the IRS to collect certain interest and penalties based on the restitution order does not negatively impact the Service in any significant way. For those individuals for whom it identifies a continued ability to pay it can go through the traditional means of making an assessment while pursuing collection of the tax it has assessed as a result of the restitution order.

The new notice brings the guidance of the Service into line with the decision of the Tax Court. The Tax Court’s decision makes sense. For those individuals assessed between 2010 and the timing of this notice, I expect that it will be difficult to get the Service to abate the interest and penalties it now acknowledges it should not have made. Some of these individuals may be entitled to a refund. Others will want the assessments abated in order to reduce the amount the IRS collects from them. Some will be so judgment proof that this may not matter.

Reflections on the Impact of Nina Olson by Sheri Dillon

Today we welcome Sheri Dillon as our guest blogger to provide her reflection on the tenure of Nina Olson as National Taxpayer Advocate. Sheri is a partner with the Washington, D.C. office of Morgan Lewis where she specializes in tax controversy and has some significant clients. Sheri is also a person committed to pro bono work. She, and her partner Jennifer Breen, started a tax clinic to assist low income taxpayers in the DC area. She is the incoming vice chair of the ABA Tax Section in charge of pro bono matters for the Section. Keith

When I think of Nina, and the profound impact she has had on justice and fair tax administration for all, I come back to the same question. How did she do it? In reviewing the posts this past month on Procedurally Taxing, from my perspective, the answer can be summed up in one word: grit. Grit is passion, perseverance, courage, conscientiousness, and resilience. Simply stated, grit is refusing to take no for an answer.

I can’t think of anyone who embodies grit more than Nina. I am hoping to learn from Nina’s example, borrow some of her grit and make it my own. Like many private practitioners, it’s hard to find the time to take on the pro bono matters that I would like to. And when I am able to take them on, it’s frustrating to often find that I don’t have the tax knowledge or skills base to help them. Thanks to Nina, there exists a community of low-income taxpayer clinicians, as well as the Taxpayer Advocate Service, standing by ready and willing to help.

Also thanks to Nina, we can see that real change can be brought to a bureaucracy and tax administration agency as large and unwieldy as the Internal Revenue Service. And, as Nina demonstrated, some of that change can come from the outside – from tax practitioners, taxpayers, lawmakers, and the courts. I am hoping to work this next year to see what change I can help effect that will further the objective of equal access to justice and representation in matters before the Service.

Nina’s life work, coupled with her grit, created a system that provides representation for many of our low-income taxpayers – defined by Congress as those whose incomes do not exceed 250% of the poverty guidelines. While this has tremendously helped our most vulnerable taxpayers, it still leaves many taxpayers without representation and forced to pay more tax than they should under the tax law. Which raises the question – how can we ensure that taxpayers whose income exceeds 250% of the poverty guidelines but nonetheless can’t afford representation, are nonetheless represented? I don’t have the answer to this question, but am hoping to gather my grit, and work – along with the tax bar – to find the answer.

Seventh Circuit to Hear First Case about Applying Latest Innocent Spouse Equitable Rev. Proc.

Last summer, the Tax Court decided what seemed to be a fairly routine innocent spouse case involving three tax years, Jacobsen v. Commissioner, T.C. Memo. 2018-115. Mr. Jacobsen’s former wife had embezzled about $500,000 from her employer, and he was seeking to be relieved of taxes on the embezzlement income that had been omitted from their joint returns. The Tax Court dismissed the 2009 year from the case because the taxes had already been discharged in Mr. Jacobsen’s unfortunate ensuing bankruptcy. For the 2010 year, the court relieved him under section 6015(b) because he did not even have reason to know of the embezzlement (his ex-wife having hidden the money in small deposits in their joint business account and then gambled it all away), and four other equitable factors favored relief, while none disfavored relief. For the 2011 year, though, the court denied him relief under section 6015(b), (c), and (f), holding that, because he helped a return preparer prepare the 2011 return after his wife had already gone to jail, he had actual knowledge by then of the omitted income.

Of course, actual knowledge precludes relief under subsections (b) and (c), but it doesn’t preclude relief under subsection (f), equitable relief. Rev. Proc. 2013-34, 2013-2 C.B. 397, applicable to the case, provides factors to consider for equitable relief. Prior Rev. Proc. 2003-61, 2003-2 C.B. 296, had provided that actual knowledge was an especially strong factor weighing against relief, though it could be overcome. A major liberalization of relief in the 2013 Rev. Proc. is that actual knowledge is now weighed no more heavily against a taxpayer than reason to know. But then, Judge Paris, purporting to apply the 2013 Rev. Proc., but with no comparison of the factors for 2011, held that because Mr. Jacobsen had actual knowledge and helped prepare the 2011 return, he could not get equitable relief.

Mr. Jacobsen had been pro se. Keith and I were perplexed by the 2011 ruling. There were four positive factors for relief – marital status (divorced), no significant benefit, compliance with later tax filing requirements, and adverse health issues (Mr. Jacobsen is a vet with PTSD). How could they be outweighed by merely one negative factor, actual knowledge, which is no longer held extra-strong weight? (Helping prepare a return does not seem to be a separate factor, but simply part of the knowledge factor.) So, the Harvard Federal Tax Clinic volunteered to represent Mr. Jacobsen in an appeal of the 2011 part of the case to the Seventh Circuit. The DOJ did not cross-appeal the IRS loss on the 2010 year.

We think this is an important case to vindicate the liberalization of the actual knowledge factor in Rev. Proc. 2013-34. While there have been many court of appeals opinions under the prior Rev. Procs. under subsection (f), this will apparently be the first appellate case applying Rev. Proc. 2013-34. We know that the Tax Court has held that it isn’t bound to follow the Rev. Proc., but Judge Paris purported to follow the Rev. Proc. when discussing the equity factor for relief under subsection (b) for 2010. Even if the Rev. Proc. is only advisory, can a court purporting to apply it let one negative factor outweigh four positive factors? And isn’t the judge making actual knowledge, in effect, a per se disqualifier from relief under subsection (f), which contains no provision concerning knowledge?

A law student helped the IRS try the case in the Tax Court. Three law students at Harvard helped Keith and me draft our appellate brief. Here is the appellee’s brief. No reply brief was filed. A Harvard clinic student will do the oral argument for Mr. Jacobsen in the Seventh Circuit on September 13 – which we hope will be a lucky day, despite its being a Friday. This must be either the first case or one of the first cases where law students have helped both taxpayers and the IRS in litigating a case.