Supreme Court Reaffirms that Agencies Are Not Entitled to Chevron Deference on Their Interpretations of Judicial Review Issues

There have been occasions over the years where I have seen Collection Due Process or innocent spouse regulations place indirect limits on what the Tax Court may do.  For example, under section 6015(g)(3), refunds can be awarded as part of relief under subsections (b) and (f), but not (c).  Regulation § 1.6015-4 further provides that subsection (f) (which applies when relief is not available under subsections (b) or (c)) may not be used to circumvent the limitation of subsection (g)(3) of no refunds under (c):  “Therefore, relief is not available under [subsection (f)] to obtain a refund of liabilities paid for which the requesting spouse would otherwise qualify for relief under [subsection (c)].”  These are indirect limits on the Tax Court’s power, since they initially only limit what the IRS may do by way of awarding a refund under subsection (f).  But, I have wondered about whether such regulations deserve Chevron deference because they also impinge on the Tax Court’s powers.  In an amicus brief that Keith and I filed in a case challenging this particular regulation (but where the Court ultimately ruled so that it did not have to reach the regulation validity issue), we argued that Chevron deference should not be given to it – pointing to Supreme Court authority saying that deference is not owed to agency views as to judicial review matters.

I am still not sure that I am right as to no Chevron deference to such indirect limitations, but the Supreme Court recently decided a case, Smith v. Berryhill, 587 U. S. __ (2019) (May 28, 2019), where it repeated the rule that agencies are not entitled to Chevron deference as to their views on judicial review.  Because many are not familiar with this exception to Chevron deference, I thought it would be useful to quote what the Court said in this recent case.  

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The issue in the case was whether certain Social Security disability benefits rulings are subject to judicial review.  The rulings were those of an internal Appeals Council, holding that benefits applicant Mr. Smith’s appeal to that Council was untimely.  The Council rulings were made after a full hearing on the merits before an administrative law judge. Mr. Smith then sued for judicial review, and lost at both the district court and the court of appeals. 

In the Supreme Court, the government reversed its prior position and agreed that claimant Smith was entitled to judicial review of the Appeals Council’s determination regarding the timeliness of his administrative appeal. The Court appointed an amicus to argue the government’s prior position – that the rulings were not “final” under the Social Security Act, and therefore not subject to judicial review. In its argument, the amicus contended that the Court should give Chevron deference to the position of the agency (prior to its switch in the case) that these rulings were not “final” agency decisions.  Rejecting Chevron deference to this prior regulatory interpretation, the Court wrote:

Chevron deference “‘is premised on the theory that a statute’s ambiguity constitutes an implicit delegation from Congress to the agency to fill in the statutory gaps.’” King v. Burwell, 576 U. S. ___, ___ (2015) (slip op., at 8). The scope of judicial review, meanwhile, is hardly the kind of question that the Court presumes that Congress implicitly delegated to an agency.

Indeed, roughly six years after Chevron was decided, the Court declined to give Chevron deference to the Secretary of Labor’s interpretation of a federal statute that would have foreclosed private rights of action under certain circumstances. See Adams Fruit Co. v. Barrett, 494 U. S. 638, 649–650 (1990). As the Court explained, Congress’ having created “a role for the Department of Labor in administering the statute” did “not empower the Secretary to regulate the scope of the judicial power vested by the statute.” Id., at 650. Rather, “[a]lthough agency determinations within the scope of delegated authority are entitled to deference, it is fundamental ‘that an agency may not bootstrap itself into an area in which it has no jurisdiction.’” Ibid. Here, too, while Congress has empowered the SSA to create a scheme of administrative exhaustion, see Sims, 530 U. S., at 106, Congress did not delegate to the SSA the power to determine “the scope of the judicial power vested by” §405(g) or to determine conclusively when its dictates are satisfied. Adams Fruit Co., 494 U. S., at 650. Consequently, having concluded that Smith and the Government have the better reading of §405(g), we need go no further.


Slip op. at 14.

Of course, some justices on the Supreme Court currently think that Chevron deference should be abandoned entirely.  But, until it is (if ever), tax practitioners may consider whether to raise this exception to Chevron when litigating the validity of regulations that directly or indirectly impinge on the Tax Court’s powers.

Capacity to File a Tax Court Petition

At issue in Timbron Holdings Corporation and Timbron International Corporation v. Commissioner, T.C. Memo 2019-31, is whether a corporation can file a Tax Court petition when its corporate charter has lapsed. The Tax Court holds that it cannot and that reviving the charter after the filing of the petition does not save the Tax Court case. The non-precedential opinion reminds us of the importance of corporate formalities when seeking to litigate regarding corporate tax liabilities.

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On March 2, 2009, and August 1, 2013, respectively, the California Franchise Tax Board suspended Timbron International’s and Timbron Holdings’ powers, rights, and privileges for failure to pay State taxes. Petitioners’ powers, rights, and privileges remained suspended as of July 6, 2017. The suspension of corporate powers provides another example of the types of state benefits that taxpayers can lose by not paying state taxes. I had not previously seen this exercise of power by a state but I do not represent corporations. The suspension must happen routinely in California with potentially far sweeping results including those at issue here. This means that corporations that fall behind in paying their state taxes will have difficulty in many contexts. It also could have significant consequences for the responsible persons of the corporations. This post will not discuss the broader issues.

The court notes that as of July 6, 2017, the powers remained suspended. The suspension of the corporate powers, of course, does not stop the IRS from auditing the corporation and from issuing a notice of deficiency. The IRS did issue the notice on July 14, 2016. The corporations responded by filing Tax Court petitions on October 11, 2016 which respondent answered the following month. In the answer the IRS did not raise the jurisdictional issue but such issues can be raised at any time. Several months later the IRS must have noticed the suspended powers and the fact the suspension existed at the time of the filing of the petitions and it filed motions to dismiss for lack of jurisdiction due to the lapse of corporate existence at the time of the filing of the petitions. In response the corporations did not argue with the fact of the suspension but argued that at the time of the filing of the petition “that they had obtained certificates of reviver and were considered ‘active’ as of September 27, 2017 (approximately 11 months after the end of the applicable period).”

The court set up the issue with the following statement:

Whether we have jurisdiction to decide a matter is an issue that a party, or this or an appellate court sua sponte, may raise at any time. David Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268, 269 (2000), aff’d, 22 F. App’x 837 (9th Cir. 2001). Jurisdiction must be shown affirmatively, and petitioners bear the burden of proving all facts necessary to establish jurisdiction in this Court. Id. at 270. Petitioners must establish that: (1) respondent issued them valid notices of deficiency and (2) they, or someone authorized to act on their behalf, filed timely petitions with the Court. See Rule 13(a), (c); Monge v. Commissioner, 93 T.C. 22, 27 (1989); see also secs. 6212 and 6213.

The court noted that corporate petitioners must have capacity to file a petition in order to for the court to have jurisdiction. (For a good discussion of the Timbron case commenting on Tax Court Rule 60(a), see Bryan Camp’s blog post here.) It then looks to California law to determine what it means to have the corporate powers suspended. The IRS relied on the case of David Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268, 269 (2000), aff’d, 22 F.App. 837 (9th Cir. 2001). In that case the Tax Court interpreted California law in a very similar situation and determined that “[i]n reaching our holding we cited Cal. Rev. & Tax. Code secs. 23301 and 23302 (West 1992 & Supp. 1999), noting that the Supreme Court of California has construed those sections to mean that a corporation may not prosecute or defend an action during the period in which it is suspended.”

Petitioners argued that even though the state suspended its powers it still retained some rights and that those residual rights gave it capacity to file the Tax Court petition. They pointed to cases in California courts brought by suspended corporations which were allowed to proceed after the lifting of the suspension. The Tax Court rejected this argument pointing to its long history on this issue and discussing the fact that a post-petition restoration of rights did not revive a petition filed at the time corporate powers were suspended, for a court with limited jurisdiction. In this way it differentiated itself from the courts of general jurisdiction in California to which petitioners had cited.

Petitioners also argued that the 90-day period for filing a petition after the issuance of a notice of deficiency was not a jurisdictional time period. Since that period for filing a petition is not jurisdictional, petitions argued that the period could remain open until the restoration of corporate powers. The court dismissed this argument in a footnote citing to the Guralnik case in which the Tax Court, in a 16-0 reviewed opinion, rejected similar arguments concerning its jurisdiction raised by the tax clinic at Harvard. This is an issue we have discussed repeatedly in the blog though not in the context of lapsed corporate powers and not with an 11-month time frame to equitably toll.

The outcome here comes as no surprise. A host of cases have reached similar results including the almost identical case of David Dung Le. States regularly suspend corporations for failure to pay the annual registration fees. As states find more ways to suspend corporate powers, corporations must pay careful attention to their status at the time of filing the Tax Court petition. Chief Counsel, IRS will pay attention to this issue since it presents an easy way to dispose of a case. Then a corporation already in financial trouble will only have the opportunity to contest the IRS determination if it can come up with full payment of the liability in order to meet the Flora rule.

Breland, Jr. v. Commissioner: Another Bankruptcy-Tax Trap for the Unwary Practitioner

Today we welcome first-time guest blogger Brad D. Jones. With editorial assistance from returning guest Ken Weil, in this post Brad evaluates the implications for bankruptcy debtors and practitioners of the Tax Court’s recent Breland decision. For a bankruptcy primer written for tax practitioners, see the bankruptcy chapter of Effectively Representing Your Client Before the IRS. Ken and Brad will be updating this chapter for the 8th edition of the book, expected to be published in December 2020. Several of Keith’s past PT posts also address the intersection of tax procedure and bankruptcy. Christine

If a tax is non-dischargeable, an understated IRS claim for that tax can have a devastating impact on an individual debtor’s financial well-being post-bankruptcy. This is because 11 U.S.C. § 523(a)(1)(A) of the Bankruptcy Code provides that non-dischargeable IRS claims can be collected by the IRS post-petition “whether or not a claim for such tax was filed or allowed.” If the IRS’s claim is understated, a person’s unpaid tax liabilities will generally be collectible by the IRS even if all of the individual’s available assets were used in the bankruptcy to pay other, lower-priority debts. As a result, an unfiled or undervalued IRS claim can lead the IRS to continue to pursue an individual for unpaid tax debt post-bankruptcy, even if the IRS did not pursue its claims in the bankruptcy case or allowed funds that should have gone to its claims to be paid to other creditors. The issue of how to fix a debtor’s tax liability and what needs to occur in the bankruptcy court to do so was at issue in Breland, Jr. v. Commissioner, 152 T.C. No. 9 (2019).

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Bankruptcy debtors generally have two main avenues to fix the amount of their tax liability for a given year: (1) file a motion for the bankruptcy court to determine the amount of their tax debt pursuant to 11 U.S.C. § 505; or (2) object to the IRS’s proof of claim. See Internal Revenue Service v. Taylor, (In re Taylor), 132 F.3d 256, 262 (5th Cir. 1998). In Breland,the Tax Court considered the effect of a resolved proof-of-claim objection on the ability of the IRS to pursue post-petition claims “regardless of whether a claim for the tax was filed or allowed,” as contemplated in § 523(a)(1)(A).

Breland involved a commercial-real-estate investor who allegedly owed a substantial sum to the IRS post-bankruptcy. The issue was whether the IRS could agree in the bankruptcy to a consent order setting the amount of its priority claim, allowing the debtor to pay a substantial sum to creditors subordinate to the IRS, and then later issue a notice of deficiency seeking up to $45 million more for the same tax years that it had compromised. The Tax Court held that it could, narrowly interpreting the bankruptcy court’s order as not addressing the total amount of the debtor’s federal tax liability. The Tax Court reached that result even though its interpretation conflicted with the interpretation of the bankruptcy court that entered the order. The Tax Court’s holding is surprising given that proof of claim objections are generally res judicata on the IRS and final orders resolving contested matters in bankruptcy are typically given broad preclusive effect. The Breland ruling forces bankruptcy practitioners to be particularly vigilant in addressing tax issues in the bankruptcy context.

Breland undercuts the ability of individual debtors to rely on proof of claim objections to fix the amount of their tax liabilities. In Breland, the debtor filed a Chapter 11 bankruptcy case and the IRS filed a proof of claim stating it was owed over $2 million in income tax for the years 2004 to 2008. The debtor filed an objection, stating in its entirety, that the “Debtor objects to the penalties assessed against him on the grounds that the Debtor had reasonable cause for not paying the taxes on time.” The parties entered into a consent order in which the IRS agreed to settle the debtor’s objection by agreeing to specific amounts for its priority tax debts with both sides agreeing that the disputed penalty portion was a general unsecured claim to be resolved after bankruptcy plan confirmation. After conducting discovery related to the disputed penalty portion, the IRS filed an amended proof of claim and asserted additional tax was due. The debtor objected on the grounds that the consent order fixed the debtor’s tax obligation. The bankruptcy court granted the objection and the IRS appealed. The district court remanded to the bankruptcy court for clarification as to the preclusive effect of the consent order. In response to the remand from the district court, the bankruptcy court ruled:

[T]he Court finds that the Consent Order . . . is the controlling document as to the extent of the Debtor’s tax obligation to the IRS. The Consent Order contains a clear statement of the total IRS claim amount and divides that amount into priority and general unsecured values. . . Moreover, by its terms, the Consent Order appears binding and complete. No specific limitation on the Consent Order’s effect is indicated in its terms. The IRS did not reserve the right to assert additional claims. Indeed, the Consent Order did not reserve any rights to the IRS, only to the Debtor. The purpose of the Consent Order is unclear if it was not meant to bind the IRS to its terms.

The IRS appealed, losing in the district court and stipulating to dismissal of its appeal to the 11th Circuit. In the midst of the proceedings in the bankruptcy and district courts, the IRS issued its notice of deficiency, triggering the filing of the debtor’s petition before the Tax Court.

Outside of bankruptcy, a consent order would normally be res judicata on the IRS’s attempt to collect additional amounts for the tax years set forth in the consent order. See United States v. Int’l Bldg. Co., 345 U.S. 502, 506 (1953) (consent order not binding on the United States for tax years subsequent to those years covered in the consent order). The consent order would also be binding if the tax in question were dischargeable. And Breland agreed that the consent order would be res judicata on the IRS if the “order had fixed petitioner’s total Federal tax liability for the subject tax years.”

Even though on remand the bankruptcy court had directly addressed the issue before the Tax Court and found its own order to be “the controlling document as to the extent of the Debtor’s tax obligation to the IRS,” the Tax Court interpreted the consent order narrowly. In the Tax Court’s view, the bankruptcy court’s order did not control for two reasons: First, the Tax Court believed res judicata did not apply because it believed that the consent order establishing the amount of the IRS’s claim and resolving an objection to plan confirmation is an inherently different proceeding than a proceeding to determine whether a particular liability is owed. The Tax Court noted that debtor’s proof of claim objection only challenged the penalties assessed, which the Court found undercut his argument that the consent order determined the total pre-petition tax liability. Second, in the Tax Court’s view, reading the consent order as a final determination of the debtor’s tax liabilities would have the effect of discharging otherwise non-dischargeable debts and contradict § 523(a)(1)(A). The Tax Court did not think res judicata applied because in its view the consent order was not “a final judgment on the merits of [the debtor’s] entire Federal tax debt for any given year.”

The Tax Court’s statement that a determination of an individual’s tax debt in bankruptcy is not the same cause of action as determining the tax debt generally is puzzling. The Court did not cite to any cases in its res judicata analysis that arose in the context of a settled or litigated proof of claim objection. The Tax Court’s view that the consent order was a different cause of action than a determination of tax liability is a more restrictive interpretation than is typically applied in a res judicata analysis. Generally, causes of action are the same for res judicata purposes if they arise “out of the same nucleus of operative fact.” In re Piper Aircraft Corp., 244 F.3d 1289 (11th Cir. 2001). In the context of a contested proof of claim, it is difficult to see how a dispute over the amount of the same tax, for the same years, and involving the same individual, can possibly not arise out of a common factual nucleus, which is precisely the reason that proof of claim objections generally are res judicata. See Hambrick v. Commissioner, 118 T.C. 348, 353 (2002) (recognizing that unlike proof of claim objections or a tax liability determination by the bankruptcy court, the mere confirmation of a Chapter 11 plan generally does not require a determination of the amount of a debtor’s non-dischargeable tax liability).

Similarly, the Tax Court’s consideration of the non-dischargeable nature of the debt also does not make much sense in the context of interpreting the scope of the bankruptcy court’s order regarding a proof of claim settlement. While unpaid non-dischargeable debts will generally survive whether the plan is confirmed or not, the purpose of a proof of claim objection is different. A claim objection is generally filed to determine the total amount owed, which does not turn on dischargeability (though a claim objection often establishes the facts from which dischargeability can easily be determined). In this case, the debtor conceded the non-dischargeability of the tax at issue. So in compromising the amount of the priority claim under the consent order, the IRS knew it was establishing the amount of the non-dischargeable portion of its claim. The bankruptcy court clearly understood this difference, which is why it interpreted its order as controlling for the amount of tax at issue.

Moreover, the Tax Court did not give any consideration to the way proofs of claims fit within the bankruptcy scheme as a whole. A basic underpinning of bankruptcy law is the absolute priority rule: the concept that higher priority claims (such as priority tax claims) must be paid in full before estate assets are used to pay lower priority claims. See Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 983 (2017) (recognizing that the “priority system has long been considered fundamental to the Bankruptcy Code’s operation”). Establishing the amount of priority tax claims and paying those claims before funds are lost paying lower priority debts is central to both the bankruptcy priority scheme and claims filing process – so much so that the Bankruptcy Code permits debtors to file a proof of claim on behalf of the IRS when doing so is necessary to determine the amount of the tax debt. 11 U.S.C. § 501(c); Taylor, 132 F.2d at 262 (suggesting the option of filing a claim for the IRS to fix the amount of the tax debt). The Tax Court’s decision to apply a restrictive reading of the consent order, at odds with the bankruptcy court’s own interpretation, frustrates these objectives of the Bankruptcy Code. It is also incompatible with the deference courts typically exercise in favor of orders entered by another court. See Colonial Auto Center v. Tomlin (In re Tomlin), 105 F.3d 933, 941 (4th Cir. 1997) (recognizing that the bankruptcy court is in the best position to interpret its own order and its interpretation warrants customary deference).

On May 7, 2019, the debtor filed a Motion to certify the Tax Court’s order to permit an immediate appeal and the Tax Court issued an order requiring the IRS to respond by June 10, 2019. Regardless of the outcome of any appeal, Breland is instructive for practitioners with bankruptcy clients facing tax debts. The Tax Court made much of the fact that neither the plan nor the consent order referenced the bankruptcy court’s authority under 11 U.S.C. § 505 to determine the amount of a debtor’s tax liability. It would be advisable for practitioners to seek to include language either in the Chapter 11, 12, or 13 plan or in orders resolving the IRS claims that specifically reference Bankruptcy Code § 505 and state that the plan or the order constitutes a determination of the amount of the total tax due for the years at issue. Similarly, the Tax Court in Breland also appeared troubled that the debtor’s proof of claim objection only stated that the objection was to the amount of the penalties. If a debtor is going to file an objection to the IRS’s proof of claim anyway, it may be helpful to include an objection to any amounts in excess of those asserted in the IRS proof of claim with a reference to 11 U.S.C. § 505.

Update: coincidentally, on the date this post was published the Tax Court issued a memorandum opinion holding that the Brelands had overstated their long-term capital loss by nearly a million dollars. Christine

Fallout from the Shutdown – The Odyssey of a Tax Court Petition

I think we all expected that the length of the shutdown would create some interesting procedural issues. At the recent ABA Tax Section meeting Rich Goldman from Procedure & Administration in Chief Counsel’s office reported on an interesting case that arose because of the shutdown. In the end the taxpayers will get their day in court but their visit to the Tax Court got off to a rocky start.

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The case is Hackash v. Commissioner, Dk. No. 2406-19S. Mr. and Mrs. Hackash received a statutory notice of deficiency (SNOD) on October 22, 2018. They sent a petition to the Tax Court on January 16, 2019 via FedEx using one of the FedEx services designated by the IRS. At the time they sent their petition to the Tax Court, it was closed. FedEx attempted delivery several times (January 17, 18 and 22); I guess the delivery person was not reading the news about the shutdown. Each time the delivery person showed up there was no answer at the Tax Court.

The story told by Rich at the ABA diverges a bit from the Court’s order determining that it had jurisdiction. The order says that after the last failed attempt FedEx attempted to return the petition to petitioners. Rich said that FedEx took the petition to a location in Mississippi. Meanwhile, the Court resumed operations on January 28, 2019 at the end of the shutdown. According to Rich, someone in Mississippi noticed that they had a package destined for the Tax Court and shipped the package back up to D.C. where it was delivered to the Court on February 1, 2019. In shipping the package from Mississippi to D.C., FedEx used one of its lowest delivery services which has not made it onto the IRS list of approved services.

When the package arrived at the Court on February 1, more than 90 days had run since the sending of the SNOD. Because the package arrived at the Court via an unapproved delivery service and because it arrived well after the 90th day, the Court issued an order to show cause why the case should not be dismissed as untimely.

Petitioners were able to show the Court that they did timely mail the petition and show the various attempts by FedEx to deliver the package during the shutdown. Rich noted that they had kept their receipt from the original mailing. Based on the timely mailing of the petition in the first instance and the mailing by an authorized third party, the Court determined that it did have jurisdiction, stating:

I.R.C. section 7502(f) governs the treatment of private delivery services under section 7502. It provides that the sending of a petition by a designated private delivery service may be treated as timely mailed. In Notice 2016-30, 2016- 18 I.R.B. 676,2 the Commissioner includes FedEx Standard Overnight among designated private delivery services. See I.R.C. sec. 7502(f)(2); sec. 301.7502-1(c)(3), Proced. & Admin. Regs. As respondent further notes, Notice 2016-30 further provides that, under section 7502(f)(1), the date recorded by FedEx to its electronic data base or the date marked by FedEx on the cover of the item is treated as the postmark for purposes of section 7502. Accordingly, the Court concludes and agrees with the parties that the petition in this case was timely mailed/timely filed with the Court.

So, the taxpayers have a happy ending and we get a story from one of the problems created by the shutdown. I am sure this is not the only problem. Here, the taxpayers were diligent in responding to the Court’s order, they had used an authorized delivery service to initiate the mailing to the Court, and they had kept proof of mailing. I hope that they have an outcome on the merits equal to their outcome on the jurisdictional issue. I also wonder how many private delivery servers stood at the Tax Court’s doors during the shutdown waiting for someone to answer.

AJAC and the APA, Designated Orders 4/8/2019 – 4/12/19

Did the Appeals’ Judicial Approach and Culture (AJAC) Project turn conversations with Appeals into adjudications governed by the Administrative Procedure Act (APA) and subject to judicial review by the Tax Court? A petitioner in a designated order during the week of April 8, 2019 (Docket No. 18021-13, EZ Lube v. CIR (order here)) thinks so and Tax Court finds itself addressing its relationship with the APA yet again.

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I spent time reviewing the history of the APA’s relationship with the IRS as well as the somewhat recent Tax Court cases that have addressed it (including Ax and Altera). The argument put forth by petitioner in this designated order appears to be novel – but ultimately the Tax Court’s response is similar to its holding in Ax, with perhaps even more insistence on the Tax Court’s jurisdictional limitations.  

Most recently, the Ninth Circuit withdrew its decision in the appeal of Altera, and we wait to see if it decides again to overturn the Tax Court’s decision which held that the IRS violated the APA when issuing regulations under section 482. For the most recent PT update on the case, see Stu Bassin’s post here.

The case in which this order was designated is also appealable to the Ninth Circuit. Is petitioner teeing up another APA argument before the Ninth Circuit depending on what happens in Altera? That’s a stretch – since petitioner is asking the Court to treat a phone call with Appeals as a adjudication – but it is possible that something more is going on than what is conveyed in the order.

First, let me provide some background: Petitioner is an LLC taxed as TEFRA partnership; it filed bankruptcy in 2008 but then reorganized. Part of the reorganization involved the conversion of debt that Goldman Sachs (or entities controlled by it) had in the old partnership into a controlling equity interest in the new partnership.  After the reorganization, the partnership filed tax returns taking the position that the partnership was terminated on the date of the reorganization because more than 50% of the partnership interests had been ousted through what was in substance a foreclosure of the old partners’ interests. Accordingly, the old partners treated the reorganization as a deemed sale of their property and reported $22 million in gain.

Then, in 2011, reorganized EZ Lube filed an Administrative Adjustment Request (AAR) taking a position contrary to the former partners’ previously filed returns. The position taken in the AAR was that the partnership was not technically terminated, and instead the exchange of debt for equity created $80 million in cancelled debt income.

The IRS agreed with the AAR and issued a final partnership administrative adjustment (FPAA) reflecting that the partners’ originally filed returns were wrong. But one of the former partners liked the old characterization so in response to the FPAA, he petitioned the Tax Court.

In due course the case was assigned to Appeals and this is where things start to get messy. The Appeals officer stated, over the phone, that she agreed with the former partner. In other words, that the FPAA should be conceded. The Appeals Officer’s manager concurred but explained that they would need to consult with Appeals National Office before the agreement could be conveyed in a TEFRA settlement.  Appeals National Office did not agree with the Appeals Officer’s position, so the case did not settle.

Petitioner argues that the phone conversation with the Appeals Officer was a determination and should end the case. The basis for petitioner’s argument is that the IRS’s Appeals Judicial Approach and Culture initiative transformed Appeals to a quasi-judicial part of the IRS which listens to each side and then issues a decision (like a court) instead of negotiating settlements to end litigation.

The IRS does not dispute that the phone call occurred, nor does it dispute the substance of what the Appeals Officer said, but it does dispute that the phone call was a determination. The IRS acknowledges that AJAC may have changed how Appeals processes cases, but maintains it did not set up a system of informal agency adjudication followed by judicial review as those terms are commonly used in administrative law.  

The Court tasks itself to answer the only question it sees fit for summary judgment, which is: what is the proper characterization of what the Appeals officer said?

The Court can decide, as it has in other cases, whether the parties actually reached a settlement by applying contract law and by making any subsidiary findings of fact. But petitioner argues that the call was not a settlement, it was a determination and the Court has jurisdiction to review such determinations.

This is where the Court insists on its jurisdictional limitations and goes on to review all the different code sections that grant it jurisdiction. It does not find anything in the Code that allows it to review determinations by Appeals in TEFRA, or deficiency, cases.

The petitioner agrees that nothing in the Code provides the Court with jurisdiction to review Appeals determinations in deficiency cases. Instead petitioner argues that the default rules of the APA give the Court jurisdiction, because the Appeals Officer was the presiding agency employee and she had the authority to make a recommended or initial decision as prescribed by 5 U.S.C. 554 and 557, and the Appeals Officer’s decision is subject to judicial review under 5 U.S.C. 702.

This is where the Tax Court revisits some of the arguments made in Ax – that the Internal Revenue Code assigns Tax Court jurisdiction. This arrangement is permissible under what the APA calls “special statutory review proceedings” under 5 U.S.C. 703. See Les’s post here and Stephanie Hoffer and Christopher J. Walker’s post here for more information.

If petitioner seeks review under default rules of the APA, the Court’s scope of review would be limited to the administrative record with an abuse of discretion standard. This creates two different standards for TEFRA cases, and the Court finds this impossible to reconcile.

The reality is that when a petitioner is unhappy with a decision made by Appeals in a docketed case, they can bring the case before the Court. It seems as though petitioner in this case is trying to treat a decision made by the Appeals Officer assigned to the case as something different than a decision made by Appeals National Office – but a decision has not been rendered until a decision document is issued and executed by both parties. The Court points out that phone calls can be a relevant fact in determining whether the parties have reached a settlement, but it doesn’t mean the Court has the jurisdiction to review phone calls. Petitioner says phone call itself is of jurisdictional importance, but if that’s the case, it is the District Court, not the Tax Court, that is the appropriate venue to review it.

Is this a situation where petitioner is unhappy because there was a glimmer of hope that the case would go his way which was ultimately destroyed by the National office? Or is something more going on here?  AJAC is called a project and caused changes to the IRM. It’s not a regulation or even guidance provided to taxpayers – rather it is a policy for IRS employees to follow and seems to be a permissible process and within the agency’s discretion to use. But it’s not even AJAC itself that petitioner seems to have a problem with, instead petitioner’s problem lies with the difference between the appeals officer’s position and the National Office’s position on the case.

The Court denies petitioner’s summary judgment motion and orders the parties to file a status report to identify any remaining issues and explain whether a trial will be necessary.

Other Orders Designated

There were no designated orders during the week of April 1, which is why there is no April post from Patrick. The Court seemingly got caught up during the following week and there were nine other orders designated during my week. In my opinion, they were less notable, but I’ve briefly summarized them here:

  • Docket No. 20237-16, Leon Max v. CIR (order here): the Court reviews the sufficiency of petitioner’s answers and objections on certain requests for admissions in a qualified research expenditure case.
  • Docket No. 24493-18, James H. Figueroa v. CIR (order here): the Court grants respondent’s motion to dismiss a pro se petitioner for failure to state a claim upon which relief can be granted.
  • Docket No. 5956-18, Rhonda Howard v. CIR (order here): the Court grants a motion to dismiss for failure to prosecute in a case with a nonresponsive petitioner.
  • Docket No. 12097-16, Trilogy, Inc & Subsidiaries v. CIR (order here): the Court grants petitioner’s motion in part to review the sufficiency of IRS’s responses to eight requests for admissions.
  • Docket No. 1092-18S, Pedro Manzueta v. CIR (order here): this is a bench opinion disallowing overstated schedule C deductions, dependency exemptions, the earned income credit, and the child tax credit.
  • Docket No. 13275-18S, Anthony S. Ventura & Suzanne M. Ventura v. CIR (order here): the Court grants a motion to dismiss for lack of jurisdiction due to a petition filed after 90 days.
  • Docket No. 14213-18L, Mohamed A. Hadid v. CIR (order here): a bench opinion finding no abuse of discretion and sustaining a levy in a case where the taxpayer proposed $30K/month installment agreement on condition that an NFTL not be filed, but the financial forms did not demonstrate that petitioner had the ability to pay that amount each month.
  • Docket No. 5323-18L, Percy Young v. CIR (order here): the Court grants respondent’s motion to dismiss in a CDP case where petitioner did not provide any information.
  • Docket No. 5323-18L, Ruben T. Varela v. CIR (order here): the Court denies petitioner’s motion for leave to file second amended petition.

Undesignated Orders: All in a Day’s Work for a Tax Court Judge

Today frequent guest blogger Bob Kamman takes us through a day in the life of a Tax Court judge, as viewed through the non-designated orders that occupy much of the Court’s day-to-day time. Christine

Much can be learned from the Designated Orders selected by Tax Court judges as noteworthy among the hundreds of orders issued each day. But sometimes we may learn just as much from those that are not designated. For examples, let’s shadow Judge David Gustafson for one day, as he works through his in-box to move cases along.

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These are all lessons from May 2, 2019. They include:

  1. A taxpayer (Augustine) hopes to get help from a Low-Income Taxpayer Clinic.
  2. A taxpayer (Pendse) wants a trial later this month because she will be out of the country for more than a year.
  3. Taxpayers (Emanouil) whose co-counsel wants to withdraw, but forgets to sign the motion.
  4. A taxpayer (Miruru) whose case was dismissed with tax deficiency upheld after failure to appear at trial and to respond to an IRS motion.
  5. A taxpayer (Baba) gets a second chance from IRS Appeals but has not confirmed he wants it.
  6. Taxpayers (Reuter and Stovall) have not returned proposed decision documents to IRS after a settlement seems to have been reached.
  7. A partnership (Cross Refined Coal) in whose case IRS has filed a motion to compel.
  8. A taxpayer (Insinga) in a 2013 whistleblower case, whose latest filing needs to be sealed without redactions.
  9. Taxpayers (Houchin) whose 2013 case will be continued again, as they and IRS requested, but not on Judge Gustafson’s calendar. (The docket shows a bankruptcy filing.)
  10. Taxpayers in two cases (Lugo, and Abdu-Shahid) in which IRS Counsel misfiled documents.

Darline Augustine, Docket 12248-18

Pro Se, New York

The Commissioner filed a motion for summary judgment (Doc. 7) in this “collection due process” (“CDP”) case. We ordered petitioner Darline Augustine to file a response by March 1, 2019, and we did our best to explain the nature of the IRS’s motion and what she should state in a response. (See Doc. 9.)

Ms. Augustine requested more time to submit her response (see Doc. 13), so we gave her until April 15, 2019 (see Doc. 14). On that date she filed a one sentence letter (Doc. 15) that did not respond substantively to the motion. By order of April 22, 2019 (Doc. 17), we allowed her to file a supplemental response by no later than May 6, 2019. On April 29, 2019, we received from Ms. Augustine another letter (Doc. 18), which informed us that she is getting the help of a Low Income Tax Clinic, and which states: “With regard to the reply to the summary judgment, I will have to get assistance from a low income legal service. I am not an attorney and legal language is quite opaque to me.” No attorney from an LITC has filed an entry of appearance in this case.

Ms. Augustine’s letters have asserted that she wants to appear before the Tax Court. Trials are conducted, however, to resolve disputes of fact. If there are no material facts that are disputed, then there is no need for a trial. The Commissioner’s motion purports to show that no trial is needed in this case because (the motion says) the undisputed facts show that the IRS is entitled to prevail. To preserve her opportunity for a trial, Ms. Augustine must show why we should not grant the Commissioner’s motion. We will give her one more opportunity to do so. It is

ORDERED that, no later than June 3, 2019, Ms. Augustine shall file any supplemental response to the Commissioner’s motion that she wishes to file. If she intends to obtain the assistance of an LITC, then she will need to obtain it in time to meet that deadline. In the absence of the entry of an appearance by an attorney representing Ms. Augustine, we would not expect to grant her any further extension of this deadline. It is further

ORDERED that, no later than June 24, 2019, the Commissioner shall file a reply to Ms. Augustine’s supplemental response, if she files one; or, if she does not file a supplemental response, then the Commissioner shall file a status report so stating.

Shona Pendse, Docket 25665-17

(Pro Se, Boston before taxpayer relocated)

Now before the Court is petitioner’s motion to calendar this case for trial this month. We will deny the motion.

This case was scheduled to be tried at a Boston session of this Court on April 1, 2019, but at the joint request of the parties, it was continued. The place of trial was changed to Washington, D.C., and the case was thereafter scheduled to be tried at a trial session beginning September 16, 2019. Petitioner wants a more prompt trial, and she says that she must be out of the country from June 2019 through August 2020. She therefore requested that the case be set for trial at a special trial session in Washington beginning May 21, 2019, at which the undersigned judge will coincidentally be presiding. Respondent objects. Counsel states that he received information from petitioner in April that prompted an inquiry by which he learned of a related refund case that is pending in U.S. district court, that involves a different taxpayer, and that is being handled by the U.S. Department of Justice. Counsel states that it is necessary to coordinate the two cases and that he cannot be ready for trial in this case in May 2019. Petitioner does not dispute the relatedness of the cases but maintains that respondent should have known about the related case already and should now be ready to proceed.

Even if we were otherwise inclined to grant petitioner’s motion, it might not be practical to try to fit this case into the special trial session beginning May 21, 2019. A special trial session is set based upon the anticipated situation and needs of the case being scheduled, and in this instance the other case set for that session is likely to use all of the available time in that session. Moreover, respondent’s counsel’s expressed need to coordinate this case with the refund case is plausible, and while perfect coordination of information between Chief Counsel and the various units of the IRS–and between Chief Counsel and the Department of Justice–might bring efficiencies, it would do so at a sometimes great cost, so we do not fault Chief Counsel nor his client agency for counsel’s unawareness of the related case before petitioner disclosed it to him.

Because we will deny the motion to calendar, this case remains on the calendar for the regular trial session in Washington, D.C., beginning September 16, 2019. However, we do not overlook petitioner’s scheduling difficulty with that trial session, and this order is without prejudice to any motion petitioner might make to continue this case from that trial session. We would consider any such motion on its merits. It is

ORDERED that petitioner’s motion to calendar is denied.

Peter C. & Pascale Emanouil, Docket 5089-17

(2-Day Trial in Boston, October 2018)

On April 25, 2019, an unopposed motion to withdraw as counsel of record was filed on behalf of Nicholas F. Casolaro. The motion states that co-counsel Richard M. Stone and Peter D. Anderson will continue as counsel for petitioners in this case. That motion, however, was not signed by Mr. Casolaro in compliance with Tax Court Rule 24(c), which requires that counsel seeking to withdraw his appearance must file a motion with the Court requesting leave to do so. It is therefore

ORDERED that, no later than May 7, 2019, counsel for petitioners shall file an amendment to the unopposed motion to withdraw bearing the signature of Mr. Casolaro in compliance with Rule 24(c).

Mbugua J. Miruru, Docket 25168-17

(New Hampshire, Pro Se)

When this case was called from the calendar for the Court’s March 11, 2019, Boston, Massachusetts, trial session, there was no appearance by or on behalf of petitioner Mbugua J. Miruru. Counsel for the Commissioner appeared and filed a motion to dismiss for lack of prosecution. In that motion, the Commissioner moves the Court to enter a decision with respect to Mr. Miruru in the amount for the tax year 2015 set forth therein. By order dated March 11, 2019 (served March 18, 2019), the Court directed Mr. Miruru to file a response to the Commissioner’s motion to dismiss on or before April 10, 2019. As of this date, the Court has received no response from Mr. Miruru. It is therefore

ORDERED that in addition to regular service, the Clerk of the Court shall serve a copy of this Order of Dismissal and Decision on Mr. Miruru at the additional address (in Bristol, New Hampshire) that appears on the certificate of service attached to the Commissioner’s motion. It is further

ORDERED that the Commissioner’s motion to dismiss for lack of prosecution is granted, and this case is dismissed for lack of prosecution. It is further

ORDERED AND DECIDED that there is a deficiency in income tax due from petitioner Mbugua J. Miruru for the tax year 2015 in the amount of $4,538.

Abu Baba, Docket 13186-18

(Virginia, Pro Se)

On April 26, 2019, the Commissioner filed two motions: (1) a motion for continuance [i.e., for a postponement] of the trial of this case, and (2) a motion for remand, in which it asks the Court to remand the case to the IRS’s Office of Appeals for further consideration. A continuance and remand would be welcome to many petitioners in a case such as this one, but the motions state that the Commissioner does not know whether petitioner Abu Baba objects to the motions. It is therefore

ORDERED that, no later than May 14, 2019, Mr. Baba shall file with the Court and serve on the Commissioner a response to the Commissioner’s two motions filed April 26, 2019.

Janet Ann Reuter & David Stovall, Docket 15641-17

(New York, Pro Se)

On May 1, 2019, the Commissioner filed a motion for entry of decision. The motion alleges that the parties have reached a basis of settlement and that counsel for the Commissioner sent to petitioners a proposed decision document effectuating that settlement, but indicates that petitioners have failed to return the decision document to counsel for the Commissioner. It is therefore

ORDERED that, if petitioners objects to the Commissioner’s motion for entry of decision, then on or before May 15, 2019, petitioners shall file with the Court and serve on the Commissioner a response to the motion, explaining why that motion should not be granted and a decision entered in this case.

Cross Refined Coal, LLC, Docket 19502-17

(Counsel for Both Parties in Chicago; Boston Trial Request)

On April 26, 2019, respondent filed a motion to compel (Doc. 50). It is

ORDERED that petitioner shall file a response by May 10, 2019, and that respondent shall file a reply by May 23, 2019.

Robert J. & Linda C. Houchin, Docket 27654-13

(Nevada; Counsel for Both Parties and Trial in Los Angeles)

In accordance with the parties’ joint recommendation in their status report filed April 29, 2019, it is

ORDERED that the undersigned judge no longer retains jurisdiction over this case and that this case is continued generally.

Joseph A. Insinga, Docket. 9011-13W

(New Jersey; Washington DC Trial)

(Petitioner Counsel in Memphis; IRS Counsel in Detroit)

 On April 26, 2019, petitioner filed a first amended reference list of redacted information (Doc. # 258). It is therefore

ORDERED petitioner’s first amended reference list of redacted information (Doc. 258), is sealed. It is further

ORDERED that the Clerk of the Court shall remove from the Court’s public record the first amended reference list of redacted information (Doc. 258), and that these documents shall be retained by the Court in a sealed file which shall not be inspected by any person or entity except by an Order of the Court.

Wanda M. Lugo, Docket 15028-18

(New York; Pro Se)

On May 1, 2019, the Commissioner mis-filed in this case a motion for extension of time (Doc. 10) that was obviously intended to be filed in another case. It is therefore

ORDERED that the Commissioner’s motion filed May 1, 2019 (Doc. 10), is stricken from the Court’s record in this case and shall not be viewable as part of this case.

Abdu-Shahid May, Docket 11654-18

(New York; Pro Se)

On May 1, 2019, the Commissioner mis-filed in this case a motion for extension of time (Doc. 12) that was obviously intended to be filed in another case. It is therefore

ORDERED that the Commissioner’s motion filed May 1, 2019 (Doc. 12), is stricken from the Court’s record in this case and shall not be viewable as part of this case.

What sort of day was it? “A day like all days, filled with those events that alter and illuminate our times… all things are as they were then, and you were there.” (If you were not a television viewer before 1972, you may not recognize that quotation from Walter Cronkite.) As this review demonstrates, a Tax Court judge in just one day may make a wide range of decisions –- for individuals and businesses disputing large amounts of tax and small ones; in collection due process matters; and even in whistleblower cases. Most of this work will not be found in published opinions and designated orders. What all of the cases have in common, though, is that each is the most important one before the Court, for the petitioner (and counsel, if any) involved.

Tenth Circuit Agrees with Graev II – IRS Attorney Can Impose Penalties

The case of Roth v. Commissioner raises again the issue of whether the IRS can raise a penalty once the case arrives in Tax Court. In certain cases the IRS attorney assigned to a case once the taxpayer files a Tax Court petition sees a penalty issue that the examination division did not. In the Roth case, the IRS attorney raised an additional penalty in answering the petition. Because the answer will always receive a review from the docket attorney’s supervisor, the raising of the penalty in the answer does receive supervisory approval in the Office of Chief Counsel. At issue is whether IRC 6751 permits the raising of the penalty at that stage of the case.

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The Roths donated land to a conservation easement and valued the contribution at almost $1 million. The Tenth Circuit characterized their case as follows:

The Roths’ case is one of the so-called “gravel-pit cases” in which Colorado taxpayers claimed large deductions based on the appraisal and donation of conservation easements prohibiting the mining of gravel on what had historically been farmland. The IRS later determined these easements to be effectively worthless (or worth drastically less than the taxpayers claimed) because the subject farmland was more valuable as farmland than it would be if mined for gravel. Esgar Corp. v.Comm’r, 744 F.3d 648, 658 (10th Cir. 2014).

The revenue agent who audited the case disallowed the easement deduction almost in its entirety and imposed the 40% gross overvaluation penalty after obtaining the appropriate managerial approval. The Roths went to Appeals where the appeals officer made what the IRS characterized as a clerical error by reducing the penalty from 40% to 20%. The manager in the Appeals Office approved the report of the appeals officer and the notice of deficiency contained the 20% penalty. The Roths then filed a Tax Court petition. In answering the petition, the IRS attorney, and her supervisor, responded by asserting the 40% penalty. While appeals officers almost never raise new issues in a case, Chief Counsel attorneys regularly raise new issues that they spot when working a case. The ability and the willingness of Chief Counsel attorneys to raise new issues should cause taxpayers to think about potential issues in their cases before filing a Tax Court petition in knee jerk fashion. As happened here, filing the petition can result in more taxes than the IRS asserted in the notice of deficiency.

The Tax Court sustained the penalty, noting that the IRS had obtained the appropriate approvals at every step and that the IRS can change the penalty at the Tax Court stage if it acts appropriately in obtaining the penalty approval.

On appeal, the Roths acknowledged that the IRS obtained supervisory approval at every step but argued that the notice of deficiency contains the initial determination of the penalty locking the IRS into the amount of penalty in the notice. While the Tax Court and the Second Circuit had approved the initial raising of a penalty by a Chief Counsel attorney at the Tax Court stage, the issue was one of first impression in the Tenth Circuit and only the second time this issue has reached a circuit court. The Roths also framed the issue in a slightly different way than prior cases. The Tenth Circuit described the issue before it as follows:

In short, the Roths raise a narrow question of statutory construction: whether the statutory notice of deficiency constitutes the IRS’s § 6751(b) initial determination. To answer this question, after stating the standard for our review, we consider the meaning of § 6751(b) generally before applying that meaning to the facts before us.

The Tenth Circuit noted that the Roths raised a legal question which required it to give a de novo review. So, like other courts before it the Tenth Circuit began to try to interpret the puzzling language of IRC 6751 in order to determine if the word “initial” in the statute had the meaning offered in the taxpayer’s arguments. Because of prior cases seeking to make this same determination, the Tenth Circuit did not operate without the guidance of the prior judges who had struggled to fit the language of the statute into the norms of tax procedure. It stated:

Given these accepted definitions, § 6751(b)’s phrase “the initial determination of such assessment” poses an obstacle to plain-language interpretation. The Code does not require, or even contemplate, that “assessments” will be “determined.” See Chai, 851 F.3d at 218–19 (“[O]ne can determine a deficiency, and whether to make an assessment, but one cannot ‘determine’ an ‘assessment.’” (quoting Graev v. Commissioner (Graev II), 147 T.C. 16, No. 30638-08, 2016 WL 6996650 (2016) at *31 (Gustafson, J., dissenting) (internal citations omitted))). Indeed, the IRS has seemingly little discretion to make any determination with respect to the assessment of a liability.

The Tenth Circuit agreed with the Second Circuit that the language of IRC 6751 is ambiguous. So, it began to look at legislative history in order to find an answer to the meaning of the language. It found that the purpose of IRC 6751 was to prevent “rogue” IRS agents from proposing penalties in order to get taxpayers to agree to their adjustments. Having determined why Congress enacted the provision, the Tenth Circuit then set off to determine how it should apply the language of the statute given the facts in the Roths’ case.

According to the Tenth Circuit, nothing in the statute requires that the IRS include its initial determination in the notice of deficiency. It finds that the determination of the revenue agent could be viewed as the initial determination but also that the determination of the IRS attorney could be viewed as the initial determination as well. The court noted that the statutory scheme for the Tax Court clearly contemplates that the IRS can add additional liabilities and that adopting the position of the Roths would undermine that statutory context in which this question arose.

As its final reason for rejecting the argument of the Roths, the Tenth Circuit mentions that to accept their argument would upset Tax Court jurisprudence and it does not want to lightly do that. It cites to the Supreme Court case of Dobson v. Commissioner, 320 U.S. 489, 502 (1943). In the Dobson case the Supreme Court briefly flirted with the notion that Tax Court decisions should be given special deference because of the expertise of the Tax Court. Justice Jackson, a former Chief Counsel, IRS, argued for such a result but I had thought the case had very little viability at this point.

The decision here follows the decisions in the Second Circuit and the Tax Court. It adds little to the jurisprudence other than adding another circuit to those interpreting IRC 6751 to allow Chief Counsel attorneys to add penalties. Since the statute makes little internal sense, the court’s decision to pursue legislative history in trying to find an answer makes sense and fits with the approach of earlier courts that have wrestled with the provision. Still, it’s possible that other taxpayers will continue to attack this position in hopes that a court will back another interpretation of a confusing statute.

CFC Holds that Math Error Notices Reducing Refund Claims Are Not Notices of Claim Disallowance for Purposes of SOL to Bring Suit

In a case brought by a pro se taxpayer in the Court of Federal Claims (CFC), Hale v. United States, 2019 U.S. Claims LEXIS 502 (May 14, 2019), the CFC held, among other interesting things, that math error notices that reduced refunds sought on original tax returns were not formal notices of claim disallowance as to the reductions for purposes of the 2-year statute of limitations for bringing refund suits at section 6532(a). The suit was thus timely for years for which such math error notices were sent, though was dismissed for failure to state a claim under CFC Rule 12(b)(6) because the taxpayer didn’t articulate a reason for why the math error notices were wrong.

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In a nutshell, the court describes the case as follows:

In this tax refund case, pro se Plaintiff Annice Hale claims that she is entitled to a refund of taxes for the tax years 2012 through 2017 because the government improperly adjusted downward the refunds claimed in her returns for each of those tax years. Ms. Hale’s complaint, liberally construed, also alleges civil rights and tort claims against the government in connection with these tax-related government actions. The government has moved to dismiss Ms. Hale’s complaint under Rules 12(b)(1) and 12(b)(6) of the Rules of the Court of Federal Claims (“RCFC”).

As discussed below, the Court lacks subject-matter jurisdiction over Ms. Hale’s civil rights and tort claims, part of her 2012 tax refund claim, and her 2014 refund claim. Moreover, Ms. Hale has failed to state a claim with respect to tax years 2013, 2015, 2016, and 2017, as well as the portion of her claim for tax year 2012 over which the Court has jurisdiction. As to these remaining claims Ms. Hale’s allegations, taken as true, do not establish any claim upon which relief can be granted.

I will discuss the years separately, for the most part. It appears that all of the claims were made on original tax returns that were timely filed.

2014

The 2014 year was perhaps the easiest year for the court. In that year, the IRS sent a notification of claim disallowance as to part of the claim on September, 9, 2015. Under section 6532(a), a notification of claim disallowance triggers a 2-year period in which a taxpayer must bring suit on the refund claim. Ms. Hale, however, waited over 3 years to bring suit. Thus her case was untimely. Following other CFC case law, which relies on Federal Circuit precedent, the court held that it lacked jurisdiction under CFC Rule 12(b)(1) because the deadline in section 6532(a) is jurisdictional.

I agree with the court that the case as regards 2014 should be dismissed for untimely filing, but under CFC Rule 12(b)(6) (failure to state a claim on which relief could be granted), not 12(b)(1) (lack of jurisdiction). In a comment to a Bob Probasco post on the refund case of Pfizer v. United States, 2d Cir. Docket No. 17-2307 (which has still not yet been decided by the Second Circuit, despite oral argument having happened on February 13, 2018), I pointed out that Keith and I have filed an amicus brief on behalf of the Harvard clinic arguing that the section 6532(a) deadline is not jurisdictional and is subject to estoppel under recent Supreme Court case law making most filing deadlines now nonjurisdictional. Our amicus brief criticizes the Federal Circuit authority, which was decided before the recent Supreme Court case law making filing deadlines only rarely now jurisdictional.

2012

Ms. Hale was a low-income taxpayer who had no income tax liability in 2012, but who reported self-employment tax of $1,192. On her original 2012 return, she sought a refund of $2,977 based on subtracting that tax liability from an earned income tax credit (EITC) of $3,169 and an American Opportunity Credit of $1,000. The IRS, apparently, did not send her a math error notice, but in processing the return, it reduced the EITC by $100 because, presumably, Ms. Hale simply misread the EITC table. That left a potential refund of $2,877, but the IRS had been informed by FEMA that the taxpayer owed FEMA $2,119. The IRS sent that amount to FEMA and issued a refund check for the balance, $758. The court does not explain it, but apparently, Ms. Hale also sent several more amended returns seeking from the IRS the balance of the original refund amount that had not previously been paid to her. The last of those amended returns was filed on June 15, 2015, and the court mysteriously treats it as the refund claim underlying the suit for purposes of timely bringing suit.

The CFC first noted that section 6402(d)(1)(A) authorizes offsets to other government agencies like FEMA, and section 6402(g) also provides that “[n]o court of the United States shall have jurisdiction to hear any action, whether legal or equitable, brought to restrain or review a reduction authorized by subsection (c), (d), (e), or (f).” Thus, it lacked jurisdiction to consider the reduction. However, the CFC also noted that it has broad jurisdiction under the Tucker Act, 28 U.S.C. section 1491(a)(1), which permits the CFC to hear “any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.” While a claim against FEMA might be heard by the CFC as an illegal exaction case, the CFC held that, since Ms. Hale’s pleadings did not even mention FEMA, the CFC had no jurisdiction to consider a suit against FEMA. Besides, documents in the record of the refund suit indicated that Ms. Hale later got the funds back from FEMA through a separate, internal FEMA proceeding.

The court then entered into a controversial discussion that it need not have done, since it is clear that, as to the 2012 claim (and all other claims), suit was brought within 6 years and 6 months after the claim was filed.

Some district courts have held that, in addition to the statute of limitation of section 6532(a), suits for refund must also satisfy the statute of limitation set out as a catchall at 28 U.S.C. section 2401(a). Section 2401(a) requires suits to be brought within 6 years of the time that they first could have been brought. Since a refund suit can be brought as soon as 6 months after the claim is filed if there has not earlier been a notification of claim disallowance, those courts held that a taxpayer has only 6 years and 6 months from the date of the refund claim to bring a refund suit where the IRS has never sent out a notification of claim disallowance. There is a parallel 6-year catchall statute of limitations under 28 U.S.C. section 2501 that applies to the CFC. In footnote 5 of its opinion in Hale, the CFC wrote:

The Court observes that in United States v. Clintwood Elkhorn Min. Co., 553 U.S. 1 (2008), the Supreme Court suggested—but did not hold—that in the absence of another, more specific limitations period, tax refund cases are subject to the federal “outside limit” six-year statute of limitations provided in 28 U.S.C. §2401(a). Id. at 8. (quoting United States v. A.S. Kreider Co., 313 U.S. 443, 447 (1941). The Supreme Court thus implied that the Court of Claims was incorrect in its 1955 holding that the six-year general statute of limitations never applies in tax refund cases. See Detroit Trust Co. v. United States, 130 F. Supp. 815, 131Ct. Cl. 223, 226-28 (1955) (finding that six-year statute of limitations did not bar action based in part on refund claim filed in 1917 and disallowed in 1951, where suit was filed within two years of 1951 disallowance); Wagenet v. United States, No. 08-142, 2009 U.S. Dist. LEXIS 115547, 2009 WL 4895363, at *2 (C.D. Cal. Sept. 14, 2009) (applying the six-year statute of limitations set forth in 28 U.S.C. §2401(a) because where “no notice of disallowance was mailed . . . Section 6532(a)(1) does not apply”). Ms. Hale filed suit within six years of her claims for refund. With respect to her $100 EIC claim for tax year 2012, Ms. Hale’s complaint is timely because her last amended return (in other words, her claim for refund) for 2012 was filed on June 15, 2015 and her complaint was filed on October 11, 2018.

However, as Bob Probasco has noted in another prior post, the IRS takes the position that Detroit Trust was correctly decided. Chief Counsel Notice 2012-012. I am surprised to see the CFC needlessly disregarding precedent of the Court of Claims (the forerunner to the Federal Circuit, which would have to follow Detroit Trust or formally overrule it). For an excellent law review article that has convinced me that Detroit Trust is wrong, see Adam R.F. Gustafson (the son of Tax Court Judge Gustafson), “An ‘Outside Limit’ for Refund Suits: The Case Against the Tax Exception to the Six-Year Bar on Claims Against the Government”, 90 Or. L. Rev. 191 (2011).

As to the extra $100 of the refund sought that had not been sent to FEMA, the CFC in Hale ruled that Ms. Hale’s pleadings made no mention of why the IRS was wrong on the EITC adjustment, so she had failed to state a claim on which relief could be granted.

2013, 2015, 2016, and 2017

The court next inquired whether the refund claims and refund suit were timely as to the claims for the years 2013, 2015, 2016, and 2017. It noted that the refund claims were timely made, since they appeared on the original returns – i.e., within 3 years after the returns were filed under section 6511(a). Under section 6532(a), Ms. Hale was thus entitled to bring suit on the reduced claims any time after 6 months, unless the IRS sent her a notification of claim disallowance. In the latter case, the Ms. Hale would have had to bring suit within 2 years thereafter. The court found that the IRS had “sent Ms. Hale ‘math error notices’ using form letter 474C for tax years 2013 and 2017, a 288C letter requesting more information for tax year 2015, and a 12C letter requesting more information for tax year 2016.” Citing no case law as authority, the CFC held that none of these notices or letters constituted a notification of claim disallowance for purposes of section 6532(a), writing:

Internal guidance from the IRS suggests that—among other criteria—a notice of disallowance must inform the taxpayer of her “right to file suit” and of the “period in which suit may be filed.” Chief Counsel Advisory, IRS CCA 200203002 (Jan. 18, 2002). Notices informing taxpayers that the IRS needs more information to process a claim, along with math error notices or similar correspondence, typically fail to adequately notify taxpayers of a final adverse action or of their right to file suit within two years. Id.Form of Notice of Disallowance of a Refund Claim—Refund Suits, Fed. Tax Coordinator ¶ T-9022 (2d ed. 2019) (discussing “dual purposes” of informing taxpayer of final disallowance and of the right to sue along with applicable statute of limitations).

Here, none of the correspondence in the record pertaining to tax years 2013, 2015, 2016, and 2017 meets these criteria for effective notices of disallowance. They do not inform Ms. Hale of her right to sue or of the applicable two-year limitations period.

After concluding that it had jurisdiction, the CFC then dismissed the suit for each of these years for failure to state a claim: For 2013, Ms. Hale had apparently already been sent two refund checks exceeding her original claim. For the other years, the IRS had either reduced credits that she claimed or subtracted from her claimed refunds the self-employment tax that would apply based on the Schedules C or C-EZ that she filed with the returns. She made no allegations showing the IRS was wrong to make these adjustments.

Civil Rights and Tort Claims

Finally, the CFC also discussed certain civil rights and tort claims contained in Ms. Hale’s complaint, finding that the Tucker Act did not authorize it to consider such claims. Interestingly, although the CFC (on PACER.gov) will not allow me to see her complaint or response to the DOJ motion, it appears Ms. Hale’s claims, in part, relied on the Taxpayer Bill of Rights (not sure if the IRS version or the statutory version). I am not sure that the CFC was aware of this, since it made no mention of the Taxpayer Bill of Rights in its opinion – an opportunity wasted, but perhaps better, since I would think that a pro se person could not make a serious argument for the application of the Taxpayer Bill of Rights in court. The CFC wrote:

As noted, the government has construed Ms. Hale’s assertions concerning violations of certain alleged rights as civil rights and tortious damages claims. The Court concurs with this interpretation of Ms. Hale’s references to alleged violations of her “Right to a Fair and Just Tax System,” “Right to Quality Tax Service,” “Right to Pay no more than the Correct Amount of Tax,” “Right to be Informed,” and “Right to Finality,” as well as her allegations that the government’s actions have damaged her credit history and caused her “financial disparity.” Compl. at 4; see also Pl. Resp. Mem. (“Pl.’s Resp.”) at 99, Docket No. 13.

The Court finds that it lacks subject-matter jurisdiction over these claims. The Tucker Act serves as a waiver of sovereign immunity and a jurisdictional grant, but it does not create a substantive cause of action.

(citations omitted).

Here’s a link to Keith’s recent PT post on the Tax Court’s opinion in Moya v. Commissioner, 152 T.C. No. 11 (Apr. 17, 2019), in which it held that the IRS version of the Taxpayer Bill of Rights does not give a taxpayer any additional procedural rights in the Tax Court.