Timely Requesting a CDP Hearing

Today we celebrate the 7th anniversary of procedurally taxing.  As we have mentioned before, the idea of the blog was the brainchild of Les Book.  Les, Steve and I were, and are, working on the treatise “IRS Practice and Procedure” that Les edits.  From the work we did keeping that treatise updated we decided to put up occasional posts on the new blog site.  From rather modest expectations the blog has grown well beyond our vision of the blog in 2013.  Thank you for joining us in talking, writing and thinking about tax procedure and trying to improve the way we navigate the tax system.  The blog is approaching 3000 subscribers.  Because of tax procedure issues raised by the pandemic, the blog has had many more visits in 2020 than any previous year.

In SBSE-05-0720-0049 the IRS announces changes to IRM 5.1.9.3.2 regarding the receipt of a request for a CDP hearing.  The changes result from Chief Counsel technical advice memorandum PMTA-2020-02, dated December 12, 2019.  The changes in the IRM take a narrow view of the timeliness of request for a CDP hearing and leave out broader issues of jurisdiction as well as of best practices.

We have discussed this issue previously here, here, here and here.  I wrote an article about this issue in Tax Notes in November of 2018 available here

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At one point the IRS took the position that in order to timely request a CDP hearing, the taxpayer had to mail the request to the proper address for requesting a CDP hearing as listed in the CDP notice.  One of the problems with this position stemmed from the CDP notice, which generally contained two or more addresses.  Because the CDP notice serves as much or more as a collection notice demanding payment as it does as a notice of legal rights to a hearing, the notice featured an address where the recipient could mail their payment.  Taxpayers regularly mailed their CDP request to the office listed for mailing payment instead of the office listed for sending the request as discussed here.  Although IRS employees were instructed to quickly resend the request to the appropriate office, this did not always happen.  When the notice reached the correct office after the 30-day period, the IRS argued that the taxpayer should receive only an equivalent hearing.

The PMTA and the changes to the IRM reflect a relaxation of the rule regarding receipt and allow as a timely request the mailing to any address on the CDP notice with a postmark by the 30th day after the notice.  This IRM provision, however, adheres to the narrowest interpretation of the PMTA.  It’s a good first step, but many taxpayers will send their requests to some other address or send it after the 30 days while having a good excuse.  The IRM also allows as timely CDP requests those requests that taxpayers timely fax to a fax number when the CDP request form provides such a number.

Taxpayers should make every effort to mail or fax their CDP request to the proper address or fax number on the CDP notice; however, if the CDP request did not get sent to an address or fax number on the CDP notice by the 30th day, the taxpayer should still consider arguing a timely mailed or faxed notice to the IRS should trigger a CDP hearing rather than an equivalent hearing.  Because the timely CDP request provides one step in the path to jurisdiction of the Tax Court in a CDP petition, the taxpayer should consider making equitable tolling arguments in appropriate circumstances.

The new IRM provisions will allow taxpayers who timely mail their CDP request to an address on the CDP notice; however, we know that many additional permutations exist that could cause late receipt of a CDP request by the IRS.  Because the making of a late CDP request to the IRS should not create a jurisdictional basis for barring a CDP hearing, taxpayers with a good excuse for lateness should seek to preserve their right to a CDP hearing by explaining to the IRS the reason for the late submission of the CDP request.  If the IRS persists in denying a CDP hearing and issues a decision letter rather than a determination letter, the taxpayer should file a petition with the Tax Court within 30 days of the decision letter seeking a determination from the Tax Court regarding the timeliness of the CDP request.  Assuming that the Tax Court agrees with the basis for the late CDP request, the Tax Court can determine that the taxpayer has met the criteria for making a CDP request and remand the case to Appeals for a CDP hearing.

The recent change to the IRS offers a good first step toward improvement of the process of obtaining a CDP hearing.  Taxpayers should continue pushing to make the process even better.

Imposing the Fraud Penalty after Prosecution While Satisfying IRC 6751(b)

In Minemyer v. Commissioner, T.C. Memo 2020-99 the Tax Court determined that the IRS failed to prove it made a timely approval of the fraud penalty and determined that the IRS could not assess the penalty in this case.  Because Mr. Minemyer had the fraud penalty imposed after a successful prosecution of him for tax evasion under IRC 7201, I found the application of IRC 6751(b) here produced a surprising result, though I cannot say the decision is incorrect and sympathize with any effort to parse through the language of this statute.  The Tax Court seeks to enforce a bright line rule even though the circumstances of this case which follows a criminal conviction present a somewhat different situation than the ordinary imposition of a civil penalty

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In a case like this, IRS policy ties the hands of the revenue agent and the immediate supervisor making the imposition of the fraud penalty against Mr. Minemyer a foregone conclusion.  In some respects, the imposition of the penalty here acts somewhat like the penalties imposed by computer because the IRS imposes the penalty automatically by virtue of its policy and not imposing the penalty requires the agent to obtain approvals.  The apparent legislative goal in passing IRC 6751(b) was to prevent the IRS from using penalties as a bargaining chip.  The goal serves a laudable purpose and a more clearly written statute enforcing that goal would receive support from everyone.  We have written before on many occasions, samples found here and here, about the defects in the statutory language of IRC 6751(b).

Here, the goal of the statute really plays no part in the imposition of the penalty.  If the IRS makes a determination that someone has committed tax evasion and refers the case to the Department of Justice for prosecution, the imposition of the fraud penalty could come as no surprise – and particularly so when the person is actually convicted of tax evasion.  In a case such as this, the imposition of the penalty must occur pursuant to the Internal Revenue Manual 25.1.6.2(9) unless the revenue agent or the supervisor get permission at a high level to not impose the fraud penalty.

The revenue agent apparently visited Mr. Minemyer in prison to secure his signature on Form 4549 consenting to the assessment of the tax and the fraud penalty.  Mr. Minemyer apparently did sign the Form 4549 but later withdrew his consent asserting that he signed it under duress.  At the Tax Court trial, the IRS did not produce the Form 4549.

This case involves the tax years 2000 and 2001.  So, the years come after the passage of IRC 6751(b) in 1998 but well before the IRS focused on compliance with IRC 6751(b).  The conviction here occurred in 2009 before the passage of the statute permitting restitution based assessments discussed here.

Nonetheless, the revenue agent actually obtained the signature of the immediate supervisor before the IRS sent the 30-day letter.  The problem the Court has with the penalty approval here turns again on the language of the poorly crafted statute, which requires the supervisor’s signature before the “initial determination” regarding the imposition of the penalty.  Here, the effort to have Mr. Minemyer sign the Form 4549 occurred prior to the sending of the 30-day letter and may have been the initial determination, which may require the IRS demonstrate supervisory approval at an earlier stage than the 30-day letter.  Here’s what the Court says:

In Frost v. Commissioner, 154 T.C. ___, ___ (slip op. at 21-22) (Jan. 7, 2020), we held that “the Commissioner’s introduction of evidence of written approval of a penalty before a formal communication of the penalty to the taxpayer is sufficient to carry his initial burden of production under section 7491(c) to show that he complied with the procedural requirement of section 6751(b)(1).” As in Frost, respondent here introduced evidence of written approval of the penalty before a formal communication (i.e., the 30-day letter). Also as in Frost, petitioner has not claimed that there was a prior initial penalty determination. Unlike Frost, our record does support the conclusion that respondent may have formally communicated his initial penalty determination to petitioner before the 30-day letter. Cf. Frost v. Commissioner, 154 T.C. at ___ (slip op. at 23) (“[P]etitioner has not claimed, nor does the record support a conclusion, that respondent formally communicated his initial penalty determination to petitioner before the date that the examining agent’s manager signed the Civil Penalty Approval Form.” (Emphasis added.)).

When the revenue agent visited petitioner in prison, he provided petitioner a Form 4549, which petitioner signed. Petitioner contends that he was under duress to sign the Form 4549 and for that reason he withdrew his consent. During respondent’s counsel’s opening statement at trial he contended that petitioner [*8] received a preliminary form before the formal communication in the 30-day letter and that petitioner signed it, agreeing to the fraud penalty for 2001. This statement is an acknowledgment that the Form 4549 communicated an intention to impose a penalty.

Respondent did not offer this Form 4549 into evidence. Therefore, we cannot determine whether the Form 4549 or the 30-day letter was the initial determination for the purpose of section 6751(b). Without the Form 4549 we cannot determine whether that form clearly reflected the revenue agent’s conclusion that petitioner should be subject to a penalty. See Carter v. Commissioner, at *30. If the Form 4549 was the initial determination of the fraud penalty for 2001, there is no evidence of its timely written approval. 

Accordingly, we conclude respondent has not met the burden of production for the determination of the section 6663(a) fraud penalty for 2001. Therefore, petitioner is not liable for the fraud penalty for 2001.

The tossing of the fraud penalty against someone convicted of tax evasion on this technicality seems a bit harsh and out of sync with the purpose of the statute but the Court must deal with a poorly written statute and seeks to establish bright line rules.  Perhaps this situation would not occur going forward because of the heightened emphasis on IRC 6751(b) at the IRS due to all of the litigation.  Maybe Congress did not care when the IRS lost lots of penalties due to the application of IRC 6751(b), since the IRS takes an approach to penalties that many might view as too zealous.  Imposing the fraud penalty against someone convicted of tax evasion can hardly fall into the over-zealous category and failing to impose the penalty on a convicted tax felon for a technicality like this should cause Congress to think about writing this provision in language that fits with the language of the tax code.

As mentioned above, the imposition of the fraud penalty against Mr. Minemyer occurred as automatically as the penalty imposed by computers.  Individuals convicted of violations of IRC 7201 always get the fraud penalty.  The IRS views it as inappropriate to ask the Department of Justice to prosecute someone for tax evasion with a guilt beyond a reasonable doubt standard and not pursue the civil fraud penalty thereafter.  My thinking on this case is no doubt colored by my view that to not impose the fraud penalty here the revenue agent and the immediate supervisor would have needed to move heaven and earth and that everyone knew this.  I realize those penalty administrative norms do not match the language of this poorly worded statute, but Mr. Minemyer’s civil fraud penalty was, in reality, approved the day his case was referred to DOJ for prosecution.  The revenue agent and the immediate supervisor served as no more than window dressing in the imposition of the penalty in a case such as this.

The decision in this case was entered on July 1, 2020, just three months and six days short of the 10-year anniversary of the filing of the petition in this case back in October of 2010.  The IRS must regret that the case did not reach a decision point during the first five years of its existence before the jurisprudence on Graev developed.  This would have been a slam dunk case for the IRS back during that period.

A Webber Update, Possible Pandemic Changes, and Conservation Easements: Designated Orders 5/11/20 to 5/15/20 and 6/8/20 to 6/12/20

There were 7 designated orders during the week I monitored in May and 1 designated order for the week I monitored in June (Mark Alan Staples order), covering a variety of topics.  We start with an order updating the Webber case and its Collection Due Process issues.  Next, is there a change in the Tax Court treatment of motions to dismiss during the COVID-19 pandemic?  Following that, there are conservation easement, innocent spouse and other cases to review.

A Webber Update

Docket No. 14307-18 L, Scott Allan Webber v. C.I.R., Order available here.

Previously in Procedurally Taxing, the Webber case prompted discussion and change regarding Collection Due Process (CDP) and jurisdiction in Tax Court.  I wrote here regarding the case and Judge Gustafson’s taking issue with a prior IRS motion to dismiss.  The motion to dismiss was based on an IRS notice concerning CDP rights that had 2 addresses listed, one to request a CDP hearing and the other to make payment to the IRS on the listed amount due.  Mr. Webber had attempted to submit his CDP hearing request, but wound up mailing it to the payment address by mistake.  Based on the request’s movement through the IRS bureaucracy, it arrived at the correct location but late enough to only allow Mr. Webber an equivalent hearing (limiting his access to Tax Court review).  After Judge Gustafson took the IRS to task on the motion to dismiss as being a harsh result for such a simple taxpayer mistake, the IRS withdrew their motion to dismiss.  Things were not done regarding CDP, though, as there was a CDP Summit Initiative Workshop where these types of issues with CDP notices were discussed (also here).  Keith wrote here that a result of this discussion led to a program manager technical assistant (PMTA) memo setting new IRS policy to determine timeliness of a CDP hearing request.  The new policy is based on the type of situation above – receipt of a CDP hearing request at an incorrect office when it was mailed to the incorrect office because of being an office listed on the notice. 

I would like to also announce that the IRS is making a revision to the Internal Revenue Manual at IRM 8.22.5.3 to reflect that PMTA memo.  The revision will be effective beginning July 6 and will be incorporated into the IRM within 2 years of the date of this memorandum, reflected here (this links to a Tax Notes article available only to subscribers). 

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Got that?  Because the current designated order has a change of topic.  This designated order’s topic is shift from jurisdiction to the topic of credit elects.

In fact, Mr. Webber is dealing with a credit elect dating back to 2003 (when it was $71,012).  Over the years, that credit elect was applied to each tax year until we are dealing with the tax year at issue and the question of whether a credit elect of $77,782 from 2012 applies to his 2013 tax return.  If so, it reduces his 2013 total tax of $5,690 so that there is a credit elect of $72,092 that would carry to the 2014 tax return.

The problem is that Mr. Webber has received conflicting messages from the IRS regarding allowance of the credit elect over the years.  Certainly, removing an earlier link in the chain of credit elects would affect the 2013 tax year.  Part of the problem is that the review by Appeals during his CDP hearing was not honoring a prior IRS letter allowing the credit elect for tax years 2004 and 2005.

This order deals with both an IRS motion for summary judgment and Mr. Webber’s response, which contains a motion to dismiss and a motion to remand.

Mr. Webber presents the issue raised, the availability of the credit elect for tax year 2013, as a challenge to the existence of an underlying liability.  He contends that no valid CDP hearing was conducted asking to dismiss for lack of jurisdiction, but also asking for a remand back to Appeals for them to take appropriate action.  The judge finds dismissal for lack of jurisdiction to be unwarranted.  Regarding remand, Judge Gustafson says it may or may not be necessary based on the IRS argument concerning the credit elect issue in the CDP hearing so no remand at this time.  Both motions are denied (the motion to remand denied without prejudice).

While the Court is not adjudicating Mr. Webber’s entitlement to the overpayment underlying the credit elect in 2013, the Court does have the responsibility to determine if the IRS allowed the overpayment but failed to credit it.  The Court states that is a genuine dispute of material fact since Appeals gave a statement in 2012 that they are allowing the full amount of the claimed credit elect for 2004 and 2005.  Appeals stated in the more recent CDP hearing that the question needed to be resolved outside Appeals so the Court reviews possible reasoning (statute of limitations, non-determination years, or refunds received).  None of that is conclusive so there is a genuine dispute of fact, leading to denial of the motion for summary judgment.  The parties are currently filing joint status reports to the Court.

Bob Kamman wanted to let us know about some coincidences – there is a citation in this order to a published Tax Court opinion from 2012 that also involves a credit-elect dispute in a CDP context.  The taxpayer is named Hershal Weber and the opinion was written by Judge Gustafson.  The more things change, the more they stay the same?

Stance on Motions to Dismiss During Pandemic?

Docket No. 10386-19S, Salvador Vazquez, v. C.I.R., Order available here.

This order is rather short, but notable.  The order begins by stating this case was scheduled for the Los Angeles trial session beginning June 1 before COVID-19 disrupted the Tax Court calendars.  The IRS filed a motion to dismiss for failure to properly prosecute on May 6, stating that the petitioner failed to respond to numerous attempts by the IRS to make contact.

Judge Carluzzo states:  “Under the circumstances and at this stage of the proceedings, we are reluctant to impose the harsh sanction that respondent requests. Our reluctance, however, to impose the sanction at this time in this case should not in any way be taken as a suggestion that a party’s behavior, as petitioner’s behavior is described in respondent’s motion, could not support such a sanction under appropriate circumstances.”

It is too soon to tell if this is any type of new position for the Tax Court regarding motions to dismiss during these pandemic times.  Since then, the judge ordered the parties to, separately or together, submit reports by August 24.

Conservation Easements

In recent years, the IRS has been taking a harder stance against several organizations that have claimed deductions for the donations of conservation easements.  For those looking to learn more about the issues, I recommend listening to two of the June 2020 podcast episodes from Tax Notes Talk.  A problem I have noticed is that both the bad apples and the good ones have been swept up in the IRS enforcement efforts.  For example, a request I have seen from the good apples is that they would like to get sample language from the IRS on how to draft documents relating to the conservation easement donation that will be satisfactory to the IRS.

One current development regarding conservation easement cases is that the IRS announced in IR-2020-130 that certain taxpayers with syndicated conservation easement issues will receive letters regarding time-limited settlement offers in docketed Tax Court cases.  Perhaps that will help reduce the conservation easement cases on Tax Court dockets.

  • Docket No. 5444-13, Oakbrook Land Holdings, LLC, William Duane Horton, Tax Matters Partner v. C.I.R., Order available here.

Oakbrook Land Holdings would like to reopen the record to add four deeds from the Nature Conservancy that have language to support the argument that Oakbrook’s deed doesn’t violate the regulation regarding their conservation easement donation.  The Court ruled the evidence is merely cumulative.  Also, the Conservancy’s comments, not practices, are what is discussed so the proffered deeds won’t change the outcome of the case.  The motion to supplement the record is denied.

  • Docket No. 10896-17, Highpoint Holdings, LLC, High Point Land Manager, LLC, Tax Matters Partner, v. C.I.R., Order available here.

This case required a look to state law in Tennessee regarding interpretation of the deed at issue and that does not help Highpoint Holdings.  The IRS motion for partial summary judgment is granted and the parties are to submit their status reports on how to proceed in the case.

Innocent Spouse

Docket No. 4899-18, Doris Ann Whitaker v. C.I.R., Order available here.

This is an innocent spouse case that came to Tax Court as Ms. Whitaker is seeking relief from joint liability for 2005 income tax, pursuant to IRC 6015(f).  Ms. Whitaker has not completed high school and is employed as a nurse’s aide.  When filing the 2005 tax return, income attributable to her then-disabled and drug-addicted husband was not reported on the return.  Ms. Whitaker did not report his income as she incorrectly understood “married filing jointly” to mean “married filing separately”.  Basically, she thought filing the joint return took care of her obligations and her husband was required to file his own separate return.

The IRS filed their motion for summary judgment, arguing “there remains no genuine issue of material fact for trial”.  The Court, when reviewing the facts and circumstances, takes Ms. Whitaker’s education and resources into account and finds this factor is sufficient to prompt a holding that there is a genuine issue of material fact to prompt denial of the motion without prejudice.

However, what to make of the recent amendment to IRC 6015(e)(7)?  The amendment requires the Tax Court to review applicable innocent spouse cases based on (A) the administrative record established at the time of the determination, and (B) any additional newly discovered or previously unavailable evidence.  What should be done with motions for summary judgment in conjunction with these evidentiary requirements?  In this case, only the IRS motion is on hand.  The Court has the discretion to construe an opposition to a summary judgment motion as a cross-motion for summary judgment but only where the parties have adequate notice and adequate opportunity to respond.  There was no such notice to treat Ms. Whitaker’s opposition as a cross-motion.  The Court orders the parties to communicate toward settlement.  The next order is for the IRS to file a certified administrative record and motion for summary judgment based on that record.  Ms. Whitaker is ordered to file any objections she would have about the administrative record, a response to the motion and a cross-motion for summary judgment.  The Clerk of the Court is also ordered to serve on Ms. Whitaker a copy of the information letter regarding the local Low Income Taxpayer Clinics potentially providing assistance to her (this case is being worked by Winston-Salem IRS Counsel so presumably this would be the 2 North Carolina clinics).

There have been subsequent orders filed in this case.  The first order relays that in a telephone conference between the parties that the IRS is conceding the IRC 6015 issue in the case so the parties are ordered to file a proposed stipulated decision or joint status report no later than July 17.  The second order relays that the IRS filed a motion for entry of decision on June 24, proposing a zero deficiency and no penalty due for the 2005 tax year, after applying IRC section 6015(b), and there is no overpayment in income tax due to petitioner for the 2005 tax year.  However, the motion states that the petitioner objects so Ms. Whitaker is to file no later than July 24 a response to the motion explaining why it should not be granted and a decision should be entered in this case.

Unless there is a procedural issue in her case I am overlooking, I find this to be a win for Ms. Whitaker and think she should not file a response to the motion.

Short Takes on Issues

  • Docket No. 6946-19SL, Soccer Garage, Inc., v. C.I.R., Order available here.

This case concerns Collection Due Process regarding a levy and penalties for failure to file.  The IRS argues there was an intentional disregard of the filing requirement.  There are not enough facts provided regarding the petitioner’s intent so the Court denied the IRS motion for summary judgment.

  • Docket No. 10662-19W, Wade H. Horsey v. C.I.R., Order available here.

Mr. Hosey requested the reconsideration of the determination of a whistleblower claim and his motion was denied.

  • Docket No. 6560-18, Mark Alan Staples v. C.I.R., Order and Decision available here.

Mr. Staples filed a motion for new trial that the Court had to recharacterize as a motion for reconsideration of findings or opinion.  Mr. Staples made arguments about the characterization of his retirement benefits, Constitutional arguments, and generally argued about his computation regarding tax year 2015.  The Court denied the motion as the IRS computations were in line with the Court’s memorandum findings of fact and opinion.  On this case, I am generally confused by the petitioner’s actions – was he a tax protestor or just ignorant of tax procedure?  Either way, his motion was filed in vain.

 

Tax Court Website

The Tax Court has been telling us for some time that it was migrating to a new case management system and making other changes starting in July 2020.  On Friday, July 17 it upgraded its website.  This created a problem for frequent visitors to the Court’s website such as Carl Smith and me.  Because of cookies and other helpful messages embedded in our computers, we found that we could access very little at the Court’s website but it seemed like we were in the right place. 

Because both Carl and I were experiencing the essentially the same problem and because we were talking to each other and not to others who might have helped us, I reached out to the Court and received an immediate response suggesting that I close out my currently open Tax Court page and go back into the Court’s website, making sure that there were no words on the access line after https://www.ustaxcourt.gov/

I followed the Court’s instructions and all of my problems went away.  Perhaps Carl and I are the only dinosaurs who experienced this problem but we decided to write this short post to alert any others with our same handicap to the issue.  If you experience problems as you use the new website, the Tax Court seemed quite interested in hearing about any problems or concerns that you have.

Spies and Tax Court Judges

Bob Kamman, our intrepid commenter in chief and occasional guest blogger, alerted me to the announcement last week of the retirement of Tax Court judge Joel Gerber.  Judge Gerber served on the Tax Court from 1984 until his retirement.  He has earned his retirement having worked in one capacity or another for the federal government for 55 years.  Since 2006 he has served as a senior judge on the Tax Court.  The recent announcement tells us he will no longer serve as a senior judge.  He is the only Tax Court judge who had been my boss.  I never tried a case before him and believe I only met him once at a reception.  Still, he presided over a case that my office tried which evokes special memories.

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Before he became Judge Gerber, he was a chief counsel attorney.  He went straight from college to law school to Chief Counsel’s office, just as I did.  He started his career in Chief Counsel’s office as a trial attorney in Boston.  When he started, Chief Counsel’s office had a rule that prohibited attorneys from working in their home state.  His home state was Illinois. 

He must have excelled at trial work because he transferred to Atlanta as a Senior Trial Attorney for four years, before becoming the District Counsel in Nashville, Tennessee from 1976 to 1980.  As District Counsel, he would have headed up a group of about 6-10 attorneys who handled all of the Tax Court cases in Tennessee and provided all of the advisory work in that state to the IRS.  It is his next job that represents a remarkable leap.  He moved from District Counsel of a relatively small office to Deputy Chief Counsel – the highest non-political office in all of Chief Counsel.  This leap sits pretty far outside of the norm for a move within Chief Counsel’s Office.  He became my boss when the Chief Counsel resigned in 1983 and he became the Acting Chief Counsel for a year before being appointed by President Regan to the Tax Court.  When I refer to him as my boss, I reference his time as Acting Chief Counsel when he headed the office.  As a lowly trial attorney I was many levels below him and never had contact with him.

The case that evokes special memories of Judge Gerber involved the master spy of the latter half of the 20th century, Aldrich Ames.  For those unfamiliar with Mr. Ames, he worked for the CIA and specialized in the Soviet Union.  Although he made a government employee’s salary, Mr. Ames drove expensive cars, lived in a nice house in a tony neighborhood and in other ways lived a lifestyle inconsistent with the earnings of a government employee.  Eventually, the sharp eyes at the CIA noticed the discrepancy between the pay and the lifestyle, did some probing and determined that he moonlighted as a spy giving information about US operatives around the world to the Soviet Union in return for cash.  The Soviets failed to issue him 1099s for these payments and he forgot to report them on his tax returns.  The Tax Court case concerned the tax on the unreported income from his moonlighting enterprise.

Before Mr. Ames filed his Tax Court petition, he had already moved to Allenwood, Pennsylvania where the government provided him with free housing for life.  The government prosecuted him for spying but included a count of conspiracy to defraud the IRS under 18 U.S.C. § 371 in the charges because, like Al Capone, this charge was solid and essentially took the guesswork out of whether he would be convicted.  When he worked at the CIA, Mr. Ames lived in Northern Virginia.  Because the Richmond District Counsel’s Office handled criminal cases for the entire state of Virginia, we were involved in the development of the criminal case against him.  Before the IRS sends a notice of deficiency pursuing additional tax assessments, it lets the criminal case run its course.  In this instance one result of the criminal case was the forfeiture of everything that Mr. Ames owned.  So, the notice of deficiency had little chance of resulting in payment or making any difference to the lifestyle of Mr. Ames.

I think the only reason Mr. Ames filed a Tax Court petition was a hope that it might allow him to leave the prison for the trial of the case.  No one wanted that to happen.  The prison officials did not want to send him outside the prison walls.  I did not get the impression that the Tax Court was excited at the prospect of hosting him in its building.  As a result, a special trial session occurred in Allenwood penitentiary.  Because few Tax Court trials take place in maximum security prisons, the case had a certain specialness for this reason alone. 

Judge Gerber presided over the trial and wrote the opinion linked above.  At the time of trial, I was the District Counsel in Richmond.  I cannot remember why I did not attend the trial but I sent John McDougal to assist the attorney assigned to the case. It did not come as a surprise that the IRS won the case even though the victory may not have brought funds into the government coffers.  Still, you do not want to lose such a case.

I am sure that Judge Gerber must have tried many interesting cases during his lengthy tenure on the Tax Court.  This one has always been special to me.

A Sun Has Set: Reflections on the Honorable John Lewis

Over the next days, weeks, months, and years, there will be many tributes to Congressman John Lewis, who passed away on July 17, 2020.  Historians and advocates will assess his enormous contributions in the fields of human and civil rights.  Here, today, I just want to share how John Lewis affected my life and my work.

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I was seven years old when John Lewis boarded the bus south in the first wave of Freedom Riders, and I have no memories of hearing about them.  But even at that age I was acutely aware of racial prejudice; my mother had been raised in Mississippi and I could sense her fear and anxiety over racial matters.  I had personally experienced scorn and ridicule at school because of my family’s religious beliefs and practices, so I knew some measure of cruelty people could inflict because of perceived differences.  I also knew religious beliefs were a matter of free exercise, whereas skin color was not.  I was not sure what all that meant, but I was aware, from my own home environment, that people of color experienced discrimination in ways I did not.

But nothing prepared me, at the age of eleven, for the events shown on the news the night of March 7, 1965, when I watched peaceful human beings be bludgeoned and set upon by dogs, simply because they wanted to cross a bridge.  More astonishing to me, though, was the courage of those human beings, moving forward even as they knew they would face violence.  The conviction and strength of their beliefs affected me profoundly.  They showed they could speak truth to power and were willing to accept the consequences.  I took that lesson to heart, and it altered the trajectory of my life.

Fast forward several decades to 2011, the 50th anniversary of the Freedom Riders.  By that time, as National Taxpayer Advocate, I had testified before the Ways and Means Committee, and its Subcommittee on Oversight, about ten times, and had testified before Congress about forty times.  For much of that time Congressman Lewis was either chair or ranking member of the Oversight Subcommittee.  I had worked with his staff on numerous occasions on legislative proposals, many incorporating the recommendations in the National Taxpayer Advocate’s Annual Reports to Congress.  One of my most treasured possessions is a copy of the Taxpayer First Act signed by Chairman Neal and inscribed – yes, inscribed – by John Lewis.

Whenever I testified, regardless of which party was in control of the House or Senate, I was a bipartisan witness, asked to testify by both the Chair and the Ranking Member.  But for the hearing on May 25, 2011, for the first and only time in my career, I was a Democratic witness at a hearing on “Improper Payments in the Administration of Refundable Tax Credits”.  I was understandably nervous about the hearing; the subject of improper payments and the Earned Income Tax Credit is very politically charged and I was aware many people wanted more enforcement focus on the EITC. I knew I was going to have to present a persuasive case for a more nuanced approach, and I was going to have to do that even as the members of one party did not want me there.

As fortune would have it, the week before, on May 16, 2011, PBS aired the documentary Freedom Riders, a film by Stanley Nelson, based on Raymond Arsenault’s book, “Freedom Riders: 1961 and the struggle for Racial Justice.”  I had watched that film, curled up in fetal position through most of it.  It was with the memories of that film and those events fresh in my mind that I approached the hearing.  Also during that week, I had listened to radio and television interviews with Congressman Lewis, as he reflected on past and current times.  As I approached the hearing, I kept in my mind’s eye the deliberate courage and peaceful strength of those individuals who created a movement.  I knew, too, the steely determination and strategy it took to survive such events.  What I was facing was child’s play, but they were my role models.

The hearing went very well and respectfully.  After the hearing, Congressman Lewis came over to thank me.  The room was buzzing, with side conversations and people milling about.  Reporters were leaving the room, the court reporter was packing up.  I mumbled some thanks about the invitation, and then told the Congressman that I had seen his interviews and seen the film and that I was just so profoundly grateful for his work.  He took both my hands in his and looked me in the eyes and for the next five minutes or longer just spoke to me, never moving his eyes, talking about those events and the challenges today.  The world just stopped for me.  And apparently it did for others, too, because out of the corner of my eye I could see people stop moving and then slowly edge toward us, to listen in.

The moments ended, the Congressman had to move on, and so did I.  Well, almost.  Anyone who has felt the strength of those hands and of that gaze is not the same.  They impart compassion, yes,  but they urge you on and they do not accept excuses.

Occasionally, as a person in a position of some authority, I could use that authority to accomplish something that might not happen under normal circumstances.  Later in 2011, all of the Local Taxpayer Advocates (LTAs) were going to be in Washington DC for a leadership training meeting.  I had been frustrated how many of the LTAs seemed burned out and were not advocating as vigorously on various issues as I would like them to.  It kept coming to me that they needed more courage.

In the weeks leading up to the showing of the film Freedom Riders in the spring of 2011, there were posters on the Washington DC Metro promoting the film, with a picture of a bombed out bus, and the tagline, “Would you get on the bus?”  That line kept going through my mind all summer; it made it clear that societal and systemic change starts with individual acts of courage and conviction.  That is what the LTAs needed to understand – that despite all the roadblocks put in front of them by their colleagues at the IRS, it was their responsibility to stand fast, and they needed to muster their courage to do that.

Well.  I decided that we would show the Freedom Riders film mid-way through the leadership meeting.  My staff thought I was nuts, but I insisted: we would dedicate an entire afternoon to the film.  We printed up “tickets” that said, Would you get on the bus?  I asked three LTAs, who were African American and were over the TAS offices in the deep south, to be on a panel after the film.  I introduced the film by saying I just wanted people to watch it and think about the courage these people showed, what it took for them to do what they did, and how that would apply to them.  I could tell that everyone thought this was just another crazy NTA thing they had to go along with, and many of the African Americans in the room were suspicious; what was the subtext here?

After the film, there was absolute silence.  And then the three LTAs on the panel started speaking.  They shared their experiences, their families’ experiences, what they experienced to that day, in terms of racism.  They spoke about the quiet courage required every single day of their existence, to assert their humanity and go through life with dignity.  Then others in the audience stood up and spoke; people talked about how the film affected them, how it made them reflect on their own beliefs and actions, and also how it made them look at their work with renewed commitment.  People broke for the day and carried those conversations on at dinner and the next day.

There were no miracles after that – no all-of-a-sudden people showed more courage.  But some did.  It was a small step, and it mattered.

On March 7, 2019, I had my final hearing before Congressman Lewis as chair of the Ways and Means Oversight Subcommittee.  Seven days before, I had announced my pending retirement as National Taxpayer Advocate.  At the end of the hearing, I approached the dais to thank the Chairman.  Again, he took my both my hands, looked in my eyes, and said, “A sun is setting.”  We hugged.  (You can watch the hearing here.)

Hon. John Lewis and Nina Olson embrace following her testimony on March 7, 2019.
Screen shot of Hon. John Lewis and Nina Olson embracing following a Congressional hearing on March 7, 2019.

Over the course of John Lewis’ long life, he saw many a sun set.  But what John Lewis knew, and I learned from him, is after each sun has set, there is a new dawn.  It is up to each and every one of us to determine what the new dawn brings. To mix metaphors, will you get on that bus?

Using Bivens to Attack Flora

In Canada v. United States, 125 AFTR2d 2020-960 (5th Cir. 2020) the taxpayer brought a Bivens suit seeking damages against the revenue agents because the agents caused the IRS to assess against him a tax shelter penalty under IRC 6707 in an amount so high payment of the penalty was a practical impossibility. If this story sounds similar, remember the case of Larson v. United States, 2018 U.S. App. LEXIS 10418   (2nd Cir. 2018) discussed here and here.  Larson is not the only other case to reveal this problem.   Other cases with this same problem include Diversified Group Inc. v. United States, 841 F.3d 975 (Fed. Cir. 2016), which tried unsuccessfully to argue that the penalty was divisible, and the three circuit cases litigated by Lavar Taylor seeking unsuccessfully to get a foot in the door using the merit litigation provisions of Collection Due Process discussed here.  The ability of the IRS to assess a non-divisible penalty under IRC 6707 in a staggering amount puts taxpayers back in the boat they were in prior to the creation of the Tax Court. It also reminds us that 100 years ago Senators pushed for the creation of the Tax Court in order to prevent individuals from seeking bankruptcy as a refuge from taxes they could not contest judicially without full payment.

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In Canada, bankruptcy is exactly where he went so that he could litigate the merits of his tax liability under B.C. 505(a) since he did not have enough money to meet the Flora rule.  The taxpayer won the merits of his case in bankruptcy beating back the incredibly high penalty amount assessed by the IRS. United States v. Canada (In re Canada), 574 B.R. 620, 623 [119 AFTR 2d 2017-1752] (N.D. Tex. 2017).  After succeeding in essentially eliminating the liability through the bankruptcy proceeding, he turned and argued that the agents who caused the assessment of this penalty knew that he had no prepayment forum where he could litigate the liability and knew they were wrongfully forcing him into bankruptcy.  He brought this Bivens suit seeking to recover damages and attorney’s fees from the individuals he blamed for being forced into bankruptcy.  The Fifth Circuit, affirming the lower courts’ dismissal of the case, carefully analyzed the factors necessary for a Bivens action, before pointing out that precedent in recent decades disfavors expansion of the original decision and two cases decided shortly thereafter.  The court also points out that if successful, his suit would provide an end run around the Flora rule of full payment.

Because I think the Flora rule should not apply to non-deficiency cases, I am not too saddened by an end run around Flora.  I also applaud the ingenuity of the argument here; however, the Supreme Court has made it clear in the decades following Bivens that it does not want to expand the grounds for obtaining recovery from government agents.  The result here comes as no particular surprise.  I found heartening the success of Mr. Canada in removing the penalty at the bankruptcy level.

For anyone not familiar with Bivens cases and the IRS we have discussed them previously here and here.  Government agents at all agencies need protection from personal suits brought concerning actions taken in the scope of their employment.  Interpreting that scope broadly makes sense as we don’t want to chill the government employees from doing their job.  At the same time if government employees do something so egregious and outside the scope of their employment, it also makes sense that at some point the immunity that protects them from personal liability goes away.  Bivens brings out facts where the immunity goes away, but the Supreme Court wants and needs to carefully control the circumstances where that exists.  The Fifth Circuit in Canada looks at the history of the case law after Bivens in concluding that the actions of the revenue agents in assessing the 6707 penalty against Mr. Canada did not rise to the level of action that could give rise to a personal liability against them.

Canada argues that the district court below improperly considered the special factors by applying a “sound reason” standard rather than a “convincing reason” one. Canada asserts the latter is what Ziglar requires.

The Fifth Circuit finds that Canada cannot fit himself into one of the narrow paths for application of Bivens.  It points out that if what he seeks is some form of compensation for his efforts to rid himself of the 6707 assessment, he had other paths available:

It is unclear why Canada did not simply file an application for fees in the bankruptcy court or in the initial district court. Canada states the IRS’s appeal to the district court deprived the bankruptcy court of jurisdiction to consider his fee request. Canada also contends that the appeal forecloses the IRS’s untimeliness argument or is a compelling reason to extend the 26 U.S.C. § 7430‘s 30-day period. These arguments make little sense. He could have filed a motion for the recovery of fees at any time during the pendency of the case in the bankruptcy court. Canada also had the option of moving to reopen the bankruptcy case once the initial district court’s ruling on appeal became unappealable. See 11 U.S.C. § 350(b) (“A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.”). Similarly, Canada had the ability to ask the initial district court to award him fees anytime between the start of the appeal and 30-days after the IRS could no longer appeal the district court’s order. There is no convincing reason why Canada could not have filed an application for fees under 26 U.S.C. § 7430 in one of those two courts before August 2017 because of an appeal that ended on May 8, 2017. Nevertheless, assuming arguendo that his proposition is accurate, he still could have filed this lawsuit before the 30-day time period lapsed.

While I am sympathetic with Mr. Canada because the current interpretation of the Flora rule essentially forced him into bankruptcy, the Fifth Circuit’s opinion makes sense to me.  Bivens does not seem like the right place to go for the wrong he has suffered.  Bringing an application for fees seems more appropriate even though I understand this might not adequately compensate him for the trouble he has endured.  The real answer lies in removing the Flora rules as a barrier to litigating the correctness of certain penalty assessments.  Until that problem goes away, others will use their creative energies similar to the way Mr. Canada has done.  The problem is not the agents.  The problem lies with the current interpretation of Flora which prevents, as a practical matter, taxpayers from contesting certain assessable penalties.  It also lies with Congress which has created the assessable penalties leaving taxpayers no alternative but bankruptcy should they seek to contest the liability.  Congress knew better than this a century ago when it created the predecessor to the Tax Court.

Center for Taxpayer Rights Files Amicus Brief in Support of CIC in Supreme Court

Readers are likely familiar with CIC v IRS, which we originally discussed back in 2017 when a federal district court in Tennessee dismissed a suit that a manager of captive insurance companies and its tax advisor had brought that sought to invalidate IRS disclosure obligations on advisors and participants in certain micro captive insurance arrangements. Having made its way through a Sixth Circuit opinion affirming the district court and a colorful and divided denial of a request for an en banc hearing, the Supreme Court granted cert earlier this spring. 

This week the Center for Taxpayer Rights, under the leadership of Nina Olson, filed an amicus brief in support of CIC, with Keith, Carl Smith, and Meagan Horn of Thompson & Knight LLC, on behalf of the Harvard Tax Clinic, and I, all as counsel for the Center.

The issue in the case involves whether the Anti Injunction Act (AIA) shields the IRS’s information gathering requirements issued in IRS Notice 2016-66 from APA scrutiny outside traditional tax enforcement proceedings. The Sixth Circuit reasoned that the presence of a potential penalty for failing to comply with the Notice that would be assessed in the same manner as taxes shielded the IRS from pre-payment APA review. 

The case provides an opportunity to explore the reach of the AIA in light of a number of recent developments, including the 2015 Supreme Court opinion in Direct Marketing Association v Brohl and recent scholarship from Professor Kristin Hickman and Gerald Kerska calling into question whether the AIA should bar pre-enforcement challenges.

Our brief requests that the Supreme Court reverse the decision of the Sixth Circuit because in our view it improperly restricts taxpayers from challenging certain IRS requests for information in situations where the taxpayer is not bringing suit to contest the underlying merits of the tax liability. 

In our brief, consistent with the mission of the Center for Taxpayer Rights, which is dedicated to furthering taxpayers’ awareness of and access to taxpayer rights, we highlight the potential negative effect that the Sixth Circuit’s approach may have for a wide spectrum of taxpayers, including low income taxpayers. To bring that point home we explore past IRS practices requiring information from refundable credit claimants and the possible harm that future information reporting efforts could have on participation and the welfare of low income taxpayers .

As we discuss in the brief, we believe that the Sixth Circuit’s holding is inconsistent with the Court’s holding in Direct Marketing Ass’n v. Brohl:

[Direct Marketing] demonstrates that the AIA’s reach is limited with respect to challenges to requests for information by taxing authorities. The Internal Revenue Service cannot avoid this limitation by threatening taxpayers with a penalty if they do not comply with the rule-making (even if such penalty is “assessed and collected in the same manner as taxes” under the Code). If the Sixth Circuit’s overly broad interpretation stands, low-income taxpayers will be subjected to potentially severe adverse effects. The IRS will hold the unilateral right to shield their rule-making from APA scrutiny by choosing to include the right to impose a potential penalty for noncompliance. The low-income taxpayer will be at the mercy of the IRS in these circumstances with no practical ability to contest the rule-making authority of the IRS without first violating the rule established by the IRS and then paying the full amount of the penalty imposed.

The case is teed up for the fall term, and there will likely be many amicus briefs filed in the coming days.

Update: late yesterday CIC filed its opening brief, emphasizing that challenges to tax reporting requirements that are backstopped by penalties should not implicate the AIA. The brief explores the implications of Direct Marketing, questions whether the presence of an assessable penalty should meaningfully distinguish the case from Direct Marketing, argues that the Sixth Circuit’s holding furthers neither the interest of the APA or the AIA, and considers the practical consequences of an approach that prevents challenges until after a potentially sizable penalty is assessed.

For readers interested in a nuance, I note that CIC’s brief raises an issue that lurks below the main issue, namely whether the AIA is a jurisdictional statute or merely a claim processing rule (see page 23). That issue is teed up because CIC argues that the principle that jurisdictional rules should be clear merits a finding that it should be able to bring the challenge. The brief does not, however, concede on the issue that the AIA is jurisdictional , and in so doing refers to a concurring opinion by now Justice Gorsuch in the 2013 Tenth Circuit Hobby Lobby opinion. I explore the issue of whether the AIA is jurisdictional in the upcoming update to Chapter 1.6 in Saltzman Book IRS Practice and Procedure. The issue of whether the AIA is jurisdictional may be more important if the Supreme Court affirms the Sixth Circuit.