Graev and the Trust Fund Recovery Penalty

The Tax Court is marching through the penalty provisions to address how Graev impacts each one.  It had the opportunity to address the trust fund recovery penalty (TFRP) previously but passed on the chance.  In Chadwick v. Commissioner, 154 T.C. No. 5 (2020) the Tax Court decides that IRC 6751(b) does apply to TFRP and that the supervisor must approve the penalty prior to sending Letter 1153.  Having spoiled the ending to the story, I will describe how the court reached this result. See this post by Bryan Camp for the facts of the case and further analysis.

This is another decided case with a pro se petitioner, in which the petitioner essentially dropped out and offered the court very little, if any, assistance.  The number of precedential cases decided with no assistance from the petitioner continues to bother me.  I do not suggest that the Tax Court does a bad job in deciding the case or seeks to disadvantage the taxpayer, but, without thoughtful advocacy in so many cases that the court decides on important issues, all taxpayers are disadvantaged — and not just the taxpayer before the court.  Clinics and pro bono lawyers have greatly increased the number of represented petitioners in the Tax Court over the past two decades, but many petitioners remain unrepresented. These unrepresented petitioners, by and large, do not know how to evaluate their cases and how to represent themselves, which causes the court to write opinions in a fair number of pro se cases relying on the brief of the IRS and the research of the judge’s clerk in creating a precedential opinion.  Should there be a way to find an amicus brief when the court has an issue of first impression, so that subsequent litigants do not suffer because the first party to the issue went forward unrepresented?

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The real question here is whether the TFRP is a tax or a penalty.  The IRS argues that IRC 6751(b) does not apply to the TFRP because it is a tax.  We know it’s a tax because the Supreme Court has told us so in Sotelo v. United States, 436 U.S. 268, 279 n.12 (1978).  In Sotelo the Supreme Court sought to characterize the TFRP for purposes of bankruptcy.  In bankruptcy getting characterized as a penalty has very negative consequences with respect to priority classification, discharge and even chapter 7 priority of secured claims.  We have written about several code sections that bankruptcy courts have characterized from tax to penalty or vice versa based on the Supreme Court’s analysis in Sotelo.  You can find a couple of those posts here, and here

So, if TFRP acts as a tax for purposes of bankruptcy, should it, could it act as a penalty for purposes of 6751(b)?  While the Tax Court had skirted the issue previously, the Southern District of New York had decided it head on in United States v. Rozbruch, 28 F. Supp. 3d 256 (2014), aff’d on other grounds, 621 F. App’x 77 (2nd Cir. 2015).  In Rozbruch the court held the TFRP a tax that did not require penalty approval under IRC 6751(b).

The TFRP does not seem like the kind of penalty Congress intended when it worried about using penalties as a bargain chip.  The TFRP is the chip.  It imposes on the responsible person or persons the unpaid tax liability of the taxpayer charged with collecting taxes on behalf of the United States, who failed to fulfill that responsibility.  Good reasons exist not to apply IRC 6751(b) in the TFRP context.  The reasons could have made for another contentious Tax Court conference in the Graev Conference Room, but no one at the court seemed up for the fight.

Instead, the Tax Court settles for a straightforward determination that Congress put the TFRP in the penalty sections of the code, Congress called the TFRP a penalty, and it has some features of a penalty to support its label as a penalty.  While acknowledging that the Supreme Court has held that for bankruptcy purposes TFRP will act as a tax, the Tax Court says that does not mean it isn’t a penalty, citing the wilfullness element necessary to impose the TFRP.  It also finds that the assessable feature of the TFRP supports the penalty label.  So, without a decent fight between Tax Court judges, we get the result that the Tax Court finds the TFRP to be a penalty.  This fight may not be over if the IRS wants to bring it up again.  Unlike lots of liabilities that primarily if not exclusively get decided in Tax Court, matters involving the TFRP primarily get decided in district courts.  Only in the CDP context will the Tax Court see a TFRP case.  So, this may not be the end of road for this issue.

Having decided that the TFRP is a penalty, the Tax Court then decided when the “initial determination” occurred.  Relying on its recent opinion in Belair Woods LLC v. Commissioner, 154 T.C. 1 (2020), the Tax Court decided that the initial determination of the penalty assessment was the letter sent by the IRS to formally notify the taxpayer that it had completed its work.  In the TFRP context this is Letter 1153.  Here the IRS had obtained the right approval prior to the sending of this letter and the court upheld the TFRP.

The Court reaches a taxpayer-friendly conclusion that the IRS must obtain supervisory approval prior to the application of this unusual provision and perhaps did not find any judges putting up a fight against that result because it was taxpayer-friendly.  As with most 6751 decisions, it’s hard to say what Congress really wanted in this situations.  The result here does not bother me.  Certainly, the result has logical support, but the opposite result would have logical support as well.  It will be interesting to see if the IRS wants to fight about this further in the district courts or if it will just acquiesce.  At the least the IRS will want to cover its bases by timely giving the approval, even if it thinks the approval is unnecessary.  The first time a large TFRP penalty gets challenged and the approval was not timely given, the IRS will have to swallow hard before giving up the argument entirely.

Graev and the Reportable Transaction Penalty

In Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 154 T.C. No. 4 (2020) the Tax Court addresses the need for supervisory approval and the necessary timing of supervisory approval when the IRS imposes the reportable transaction penalty under IRC 6707A.  We will discuss the mechanics of the penalty below, but this is a really harsh penalty and setting the scene deserves some attention.  When I say harsh, I do not mean to imply that the penalty should not exist or that the IRS improperly imposed it here or elsewhere.  The harshness of this penalty derives from the amount of the possible penalty.  We discussed this penalty in the context of the Flora rule in the case of Larson v. United States where the IRS assessed a penalty of about $163 million against Mr. Larson and others for failing to disclose a reportable transaction.  See the discussion of Larson here and here.  So, the ability of 6751(b) to provide a basis for removing this penalty if the IRS failed to follow the proper procedures for supervisory approval could make a huge dollar difference to certain taxpayers.

The Laidlaw case also deserves attention for the procedural posture of the case at the time the Court makes its decision here.  Note that petitioner filed this case in the Tax Court in 2014 and that the tax year at issue is fiscal year 2008.  Remember that in 2008 no one paid attention to IRC 6751(b).  The issue comes up here in the context of Collection Due Process (CDP) many years after the IRS made the assessment.  The IRS must verify the correctness of its assessment in the CDP process.  Here, the CDP process offers the taxpayer the opportunity to raise an issue and obtain court review it otherwise would not have.  How many other penalties assessed long ago before anyone paid attention to IRC 6751(b) might CDP prove as the place where penalties go to die?  Since Graev brought 6751 to everyone’s attention, the number of times the IRS will fail to get the appropriate supervisory approval will be quite low; however, many penalties exist on the books of the IRS from 10 years ago that were imposed at a time when the IRS did not pay careful attention to the supervisory approval rule or have court guidance on when the approval must occur.  Taxpayers with old penalties who might pay those penalties should make certain to raise the supervisory approval issue through CDP, audit reconsideration or whatever procedural avenues remain open.

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Laidlaw participated in a listed transaction and did not disclose that participation on its tax return.  Subsequent to filing its return for fiscal year 2008, Laidlaw did send to the IRS Form 8886 amending its return and reporting the participation.  A revenue agent examined Laidlaw’s 2008 return and concluded that because it did not include the reportable transaction on the original return, the 6707A penalty applied.  The revenue agent made the initial determination as that phrase is used in 6751 by sending a 30-day letter.  This letter did not contain the approval of the revenue agent’s supervisor.  A month after sending the 30-day letter the revenue agent’s supervisor did approve the assertion of the 6707A penalty.

Laidlaw appealed the assertion of the penalty.  After only two years, Appeals sustained the decision to impose the penalty leading to an assessment of the penalty in 2013.  The penalty was assessed in mid-September, and the notice of intent to levy was sent in mid-November.  The short period of time between the assessment and the notice of intent to levy shows the difference in the way the IRS treats assessments against entities compared to individuals, where the time period between assessment and the notice of intent to levy would have been two or three months longer, because the notice stream for individuals is four letters instead of two. 

Upon receiving the notice of intent to levy, the IRC 6330 notice, Laidlaw timely requested a CDP hearing.  In the CDP hearing the Appeals employee notified Laidlaw that it could not challenge the merits of the 6707A penalty because it had an opportunity to do so administratively by going to Appeals before the assessment of the penalty.  (Read the Larson case above or the discussion of CDP cases tried by Lavar Taylor if you want to know more about the inability to litigate the large penalties imposed under 6707A.)  The Appeals employee did not verify that the supervisor had properly approved the penalty.  Of course, at the time of the verification process in this case, the timing of the supervisory approval did not enter the minds of many people inside or outside of Appeals.  What’s important here is that, even though the right to a merits review of the 6707A did not exist, that right exists separately from the obligation under IRC 6330(c)(1) of the Appeals employee to verify the correctness of the assessment.  The verification requirement serves here as a powerful remedy for the taxpayer.

The IRS argued in this case that the supervisory approval did not need to come before the issuance of the 30-day notice but only before the making of the assessment.  No need to go into the tortured language of 6751 and why the IRS or anyone might question the timing of the assessment for those who regularly read this blog.  For anyone wondering why the IRS would not immediately concede the issue, put Graev into the search box of the blog and read the myriad opinions on 6751 trying to parse its meaning.

While the IRS argument might have merit, the Laidlaw case follows the decisions in Clay and in Belair (see discussion of that case here) in which the Tax Court seeks to finally create a bright line for when approval must occur.  Laidlaw seeks to apply that same bright line test to 6707A.  In applying that bright line, Laidlaw looks to the first formal pronunciation by the IRS of the desire to impose the penalty.  That bright line occurs with the sending of the 30-day letter.  At the time the IRS sent that letter it lacked the approval of the revenue agent’s immediate supervisor.  Therefore, the penalty here fails.

Ringing in the New Year with Another Graev Case

On January 7, 2020, the Tax Court issued a TC opinion in Frost v. Commissioner, 154 T.C. No. 2 (2020).  This case presents another permutation of the issues raised in Graev and is another case decided on this issue in which petitioner handled the case pro se, although Mr. Frost has been an enrolled agent for 25 years.  The opinion says that before he became an enrolled agent he performed collections work as an IRS revenue agent.  He would have been a most unusual revenue agent if he performed collection work, so I assume that he was a revenue officer.  Whether he was a revenue officer or revenue agent, working five years or more for the IRS in either position can chart a path to receiving the enrolled agent designation without taking the difficult test to become an enrolled agent. This background indicates that he was not the usual pro se taxpayer though he may have lacked experience in the Tax Court.  His knowledge of the tax system comes back to haunt him in the end.

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The underlying issues in the case concern business expenses and a loss reported on an LLC in which he had a controlling interest.  Though we do not care about his underlying tax issues, the court obviously must and it goes through the case and statutory law governing the proper deduction of business expenses, before arriving at the conclusion that, despite his extensive and long-standing experience preparing tax returns, petitioner failed to present any evidence in support of his expenses and failed to comply with the strict substantiation requirements of IRC 274(d).  He sounds very much like many clients of the tax clinic. 

Similarly, with respect to the loss claimed from his LLC, his failure to establish his adjusted basis torpedoed his chances of winning this issue.  It’s hard to know with proof issues whether his failure was one of lack of understanding the necessary information he needed to place before the court (or the IRS during the administrative phase) or simply the claiming of tax benefits he was never entitled to in the first place.

He made arguments about the notice of deficiency and why he was selected for audit.  I imagine he pointed out there were many taxpayers more deserving of being audited than him, etc., etc.  The court disposed of this argument citing Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324 (1974) and a few of the other from thousands of cases it could have chosen to knock down this cry for help based on perceived fairness issues.

Now, the court gets to the meat of the case for our purposes and looks at the penalties imposed upon him.  It points out that the IRS bears the burden of production with respect to the penalties, which requires the IRS to come forward with sufficient evidence showing the appropriateness of imposing the penalties.  This includes showing that IRC 6751(b) compliance occurred.  The court walks through the various burdens on the IRS when taxpayer challenges penalties the IRS proposes to impose and discusses the requirements of IRC 7491(c).  It then turns to 6751(b) and notes that here the IRS “produced no evidence of written supervisory approval of the initial determination of section 6662(a) accuracy-related penalties for 2010 and 2011.”  I am a bit confused why the IRS did not concede this issue if it had nothing to show approval of the penalties for these two years.

It’s a different story for 2012.  The IRS does have a signed penalty approval form signed by the revenue agent’s immediate supervisor over a year before the issuance of the notice of deficiency.  The court finds that the introduction by the IRS of the approval form signed before the notice of deficiency satisfies the burden of production on the IRS.  The burden then shifts to petitioner to show evidence suggesting that the approval was untimely.  The court notes in footnote 6 that in Graev it reserved “the issue of whether the Commissioner bears the burden of proof in addition to the burden of production.  We reserve that issue here as well because placement of the burden of proof here… would not change the outcome.  Here, Mr. Frost came forward with no evidence to contradict the supervisory approval for 2012.

Mr. Frost did not claim or put on any evidence that the formal notice of the imposition of the penalty preceded the approval of the penalty.  So, the court turned to the balance of the burden on the IRS as established in Higbee v. Commissioner, 116 T.C. 438 (2001).  This burden requires showing that the penalty should apply in this situation.  Here the IRS showed that the understatement of tax by Mr. Frost exceeded $5,000 and that the IRS correctly calculated the penalty based on the understatement.  It was then up to Mr. Frost to show that he had reasonable cause for the underpayment.  Mr. Frost put on evidence of his brother-in-law’s health issues during the year at issue, but he has the problem that he has lots of tax experience.  The court expects more from him than it would expect from someone who had not been working in the tax system for 40 years and finds his excuses inadequate to meet his burden of showing reasonable cause and good faith.

Frost does not break as much new ground as some of the other recent TC opinions on 6751 but it does do a nice job of laying out what the court expects of each party when they engage in penalty litigation.  I don’t know why the IRS was holding on to 2010 and 2011 as penalty years if it lacked the managerial approval.  Surely, by this time it knew that it must have the approval or fail.  The docket number is from 2015 so perhaps at the time this case was submitted a few years ago, the Graev case had not become clear.  That’s my guess.  When it takes close to five years between the time a case starts until it reaches opinion, intervening legal opinions can change what the IRS might have argued when the case started.

Belair Woods – The Ghouls Continue

In the recent case of Belair Woods, LLC v. Commissioner , 154 T.C. No. 1 (2020) the Tax Court once again goes into its court conference room to have a discussion about the fallout from the Graev opinion and IRC 6751(b).  Because Congress is really slow and has been sitting on his reappointment for a long time, neither the court nor we as consumers of the court’s opinions have the benefit of Judge Holmes’s views on the most recent iteration of a procedural statute written by someone with no background in tax procedure.  This post is dedicated to him and his coining of the term ‘Chai Ghouls’ to describe the many situations the Tax Court would face in trying to provide meaning to this statute.  So, the court is once again tasked with making sense out of nonsense. 

The court deeply fractures, again, over what to do with this statute, and this time it is deciding when the IRS must obtain supervisory approval of the decision to impose the penalty.  The taxpayer argues that the approval must come at the first whiff of the imposition of the penalty, because even at the earliest stages, mention of the imposition of a penalty can cause the penalty to be used as a bargaining chip and that’s what Congress seemed to be wanting to prevent.  This is a logical argument and persuades almost half of the voting judges.  Judge Lauber, writing for a plurality, picks a later time period – the issuance of a formal notification and finds that the IRS had obtained the appropriate approval by that point (for most of the penalties in contention.)

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The case involves a TEFRA partnership.  Normally, in a TEFRA partnership, the IRS issues a 60-day letter (much like the 30-day letter outside TEFRA) and finally an FPAA (the ticket to the Tax Court that is the basis of this case).  Here, the IRS got managerial approval of the penalty before the 60-day letter, which showed a penalty.  Problem is that about two years earlier, the agents had sent a calculation of the potential 60-day letter income adjustments (including showing the penalty) to the partners and suggested a conference to discuss what was effectively this proposed 60-day letter.  But, the agents did not obtain penalty approval before sending this pre-60-day letter. 

Judge Lauber plus seven judges hold that it is time to create as bright a line as possible, citing United States v. Boyle, 469 U.S. 241, 248 (1985) (bright-line rule for late-filing penalty in the case of filing agents), and that the required approval moment should be when a penalty “is embodied in the document by which the Examination Division formally notifies the taxpayer, in writing, that it has completed its work and made an unequivocal decision to assert penalties.”  In this case, the pre-60-day letter was just a proposal.  It was not the critical moment.  Judge Lauber cites the opinion in Kestin v. Commissioner, 153 T.C. No. 2, at slip op. pp. 26-27 (2019), for the similar proposition that a letter suggesting section 6702 penalties might be applied if the taxpayer does not correct a frivolous return is also not a critical moment for managerial approval under section 6751(b).

In a separate concurring opinion, Judge Morrison writes:

 “On the facts of this case, I agree with the opinion of the Court that the 60-day letter was the initial determination to impose the penalties. However, I do not agree with any suggestion in the opinion of the Court that the initial determination to impose the penalties may only be ‘a formal written communication to the taxpayer, notifying him that the Examination Division has completed its work and has made a definite decision to assert penalties.’”

Judge Gustafson and six dissenters agreed with the taxpayer that the pre-60-day-letter was the critical moment for managerial approval of the penalty on these facts. Thus, only 8 of the 16 judges voted for the proposition that the initial determination to impose the penalties may only be ‘a formal written communication to the taxpayer, notifying him that the Examination Division has completed its work and has made a definite decision to assert penalties’”. It appears that there is still no bright line — at least one than can be cited outside the TEFRA partnership context of Belair Wood.

Bryan Camp has written an excellent post on this case which can be found here.  I agree with Bryan’s analysis and will not rehash why it’s a good analysis, but anyone interested in this issue should read his post.  Bryan concludes that Judge Lauber’s reasoning makes the most sense.  Because Bryan does such a good job of explaining the case and the various reasons behind the decisions made by judges on this issue, I want to focus on another issue.  Why doesn’t Congress understand what assessment means, and why doesn’t it fix an obvious mistake, instead leaving Tax Court judges to scratch their heads and spend inordinate amounts of time bonding in a conference room?

When I teach assessment, I almost always poll my students by asking how many of them have ever had taxes assessed against them.  Almost no students raise their hands admitting to such a terrible tax gaffe.  They think, like most people and certainly like most members of Congress, that an assessment is a bad thing.  In reality, assessment is a neutral act of recording a liability on the books and in most instances is a good and important act, because it is a necessary predicate to obtaining a refund of federal taxes.

The Congressional misunderstanding of assessment comes through loud and clear in IRC 6751(b).  I will circle back to IRC 6751(b), but before doing so, I want to spend a little time with an even greater screw-up by Congress in misusing the term ‘assessment’.  The greater example I want to offer is found in Bankruptcy Code 362(a)(6) passed in 1978 as part of the new bankruptcy code adopted that year.  This code replaced the bankruptcy code of 1898 which had been substantially updated in 1938.  The adoption of the new bankruptcy code in 1978 followed almost a decade of debate and discussion.

One of the primary features of the bankruptcy code is the automatic stay.  The stay protects the debtor and creditors from aggressive creditors who might seek self-help and reduce the property available to all creditors or property available to the debtor through the exemption provisions.  The stay is a good thing.  Congress placed the stay in BC 362 and in paragraph (a) enumerated 8 different things impacted by the stay.  Because the stay does not stop everything, Congress inserted in paragraph (b) a list of (now) 28 actions not stopped by the stay.  So, what went wrong?

Bankruptcy code 362(a)(6) provides:

Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, …, operates as a stay, applicable to all entities, of—

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;

If BC 362(a)(6) stays any act to assess that arose before the commencement of the case, then it stops the IRS from assessing the liability reflected on a return for a year that ended before the filing of the bankruptcy case.  We have had years since 1978 when over 1.5 million new bankruptcy cases were filed.  The vast majority of those cases were filed by individuals.  A decent percentage of those cases were filed during the first 3 and ½ months of the year and most of those returns sought refunds.  So, how could the IRS send to these individuals in distress their tax refund when it could not assess the liability?  Keep in mind also that in 1978 we were still in an era of paper filing.  So, the IRS would need to set these returns to the side to be processed once the stay lifted, and they would sit in rooms in the Service Centers around the country waiting for the stay to lift, so the IRS could perform the simple act of assessment and then send out the tax refund.

You can imagine that debtors in this situation did not really want to hear about the problem Congress created with the language of 362(a)(6) prohibiting assessment as though making the assessment was a bad thing.  The IRS faced a choice of what to do to avoid potentially tens of thousands of stay lift motions that would really be unnecessary if the statute were worded properly to reach its intended result.  Sixteen years later, in 1994, the IRS finally convinced Congress to amend BC 362(b)(9) to permit assessment in this circumstance.  The statutory language creating the stay on assessment still exists in 362(a)(6) as a lasting testament to Congressional misunderstanding of assessment, but finally the IRS did not have to stack returns in rooms in the Service Centers in order to move cases along.

Because it took over 15 years for problems in IRC 6751(b) to come to everyone’s attention, perhaps under the timeline of BC 362(a)(6) we still have another decade or more before Congress will get around to fixing its mistaken understanding of assessment in 6751.  The Congressional sentiment of stopping the IRS from using penalties as a bargaining chip makes sense and is probably bipartisan.  With help from the tax community, Congress could make amendments that would allow courts and the IRS to properly administer the statute. We could wish, however, that it will recognize the problem more quickly this time.  In the meantime, the court conference room at the Tax Court will continue to get plenty of use as the court tries to make sense of nonsense.

Imposing the Frivolous Return Penalty

At the end of last summer, the Tax Court issued a TC opinion on the issue of imposing the frivolous return penalty of IRC 6702.  In that opinion it also discussed, inevitably, the impact of Graev on this particular penalty.  We should have covered this case closer to the time it came out.  Several subsequent opinions have cited to it.  This post seeks to correct the omission and make you all aware of Kestin v. Commissioner, 153 T.C. No. 2 (2019).

This case provides yet another example of how friendly the Tax Court is to petitioners.  Of course, statistically, the Tax Court rules most of the time for the IRS; however, it generally gives the taxpayers ample opportunities to make their case.  Mrs. Kestin did not appear for the trial of her case but that did not stop the court allowing her to participate in post-trial briefing and for holding, in part, in her favor despite the position she took on her amended return.

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Mrs. Kestin got off to a good start, from a tax perspective, in 2014.  She timely filed a joint return with her husband reporting her wages of over $155,000 from which she was withheld.  Something happened there after that caused her to lose faith with the tax system.  In September 2015 she submitted an amended return which the Tax Court describes as frivolous and which the IRS identified as frivolous for purpose of imposing the IRC 6702 penalty.  The amended return reported a zero liability accompanied by a narrative that I would describe as tax protestor language, together with a request for a refund of all of the money withheld from her in 2014.

The IRS sent her correspondence pointing out that her amended return could result in the imposition of the IRC 6702 penalty and giving her a chance to avoid the penalty by correcting the frivolous filing.  Unfortunately, she doubled down on her newfound position by sending a letter pointing out the IRS was wrong and attaching a copy of the original amended return.  She did not stop there but sent five more letters to the IRS explaining her position, each one attaching a copy of the amended return.  The IRS imposed a new penalty assessment each time it received one of her missives.

To assist in collecting the sizable liability resulting from the imposition of all of these $5,000 penalties, the IRS filed a notice of federal tax lien and that provided her with the opportunity to request a Collection Due Process (CDP) hearing which she did.  In the CDP hearing she sought, inter alia, to contest the imposition of the penalty on the merits.  Faithful readers know it is hard to raise merits issues regarding assessable penalties because taxpayers have typically had a prior opportunity to go to Appeals before the imposition of the assessable penalty at issue; however, Appeals will not hear frivolous arguments, so she got to raise the merits in her CDP case.

The court imposed the 6702 penalty on the original filing of the amended return and says that Mrs. Kestin agrees with that penalty except for some procedural differences.  The focus then turns to the six times she mailed a copy of the frivolous return to the IRS and it imposed additional penalties.  In a 6702 case, the issue is not what is a return – as the court has discussed many times going back to the Beard case – but what purports to be a return.  When she mailed in the additional six documents she marked them as copies.  The court found that because these documents were marked as copies they did not purport to be returns.  The court points out that the statute does not address whether copies might trigger the penalty and neither do the regulations or prior case law.  On the facts here, it holds that the six copies she sent in her follow up correspondence did not purport to be returns and cannot form the basis for imposition of the penalty.  While the decision is important, and certainly important for Mrs. Kestin, the fact pattern here may be a narrow one although a couple of subsequent opinions discussed below may suggest otherwise.

Having removed all but one of the penalties based on the lack of the filing of documents purporting to be a return, the court then moved to the now inevitable inquiry concerning supervisory approval.  The IRS conceded that the penalty here was not calculated by electronic means and required supervisory approval.  Next, the court turned to Letter 3176C sent by the IRS to Mrs. Kestin warning her that if she did not correct the amended return asserting the frivolous position, the IRS intended to impose the 6702 penalty.  Was this letter the “initial determination” of the penalty that required supervisory approval prior to mailing?  The court finds that the sending of this letter did not mark an initial determination because at the time of sending this letter it remained to be seen whether the penalty would apply.

After acknowledging the strange language of the statute that does not fit the situation, the court found this letter served to warn the taxpayer rather than to determine the penalty liability.  Because it gave the taxpayer the opportunity to avoid the penalty by correcting the submission, the initial determination could not occur until after the proffered period of retraction.  The actions of the IRS did not seek to use the letter as a bargaining chip but rather as an opportunity to avoid imposition.  Kestin is one of several cases decided in the past few months on the issue of initial determination including the severely split decision in Belair Woods, LLC v. Commissioner, 154 T.C. No. 1 (2020) (though Judge Gustafson dissents in Belair Woods after penning Kestin because he perceives a distinction between the situations.)  The decision here appears generally consistent with the other decisions and in some respects foreshadows their outcome.

In the short time since the Kestin opinion the Tax Court has had several additional opportunities to address the issue of frivolous penalties and taxpayer submissions.  In Smith, the taxpayer sent an objectionable original return.  She sent at least one copy of that return with later correspondence (can’t tell yet how many).  Her case was tried (without her showing up) and post-trial briefs were filed. Then, both Graev III and Kestin came down.  In an order from August 30, 2019, Judge Halpern invited additional briefing from the parties by mid-September concerning the application of both opinions.  Only the pro se taxpayer filed a supplemental brief.  The case is awaiting decision, which may be further held up pending the Kestin appeal (see discussion below.)  In Luniw, a bench opinion from Judge Carluzzo served Nov. 20, 2019, the taxpayer was hit with three 6702 penalties.  One was for his original return.  Then the IRS wrote back proposed changes to the return causing the taxpayer to generate essentially the same return and sent it again to the IRS.  Later the taxpayer sent a second copy of the return to the IRS.  Judge Carluzzo applies Kestin and holds that only the last document is not subject to a penalty. Finally, in Jaxtheimer, the taxpayer filed his 2013 return three separate times, reporting zero wages and zero tax owed. Upon each instance, the IRS assessed 6702 penalties. Judge Pugh upheld only the first instance of the penalty assessment, citing Kestin and finding that there was insufficient evidence to determine that the two later-filed returns were not copies.

Mrs. Kestin raised a few other issues which the court brushed away with relatively little fanfare.  The most important of these lesser issues concerns the adequacy of the notice of determination.  She argues that the notice fails because it describes two occasions of frivolous action when the IRS sought to impose seven penalties.  Citing to its earlier opinion in First Rock Baptist Church Child Dev. Ctr. v. Commissioner, 148 T.C. 380, 387 (2017), blogged here, the court holds that if the notice contains enough information to allow the taxpayer to understand the matter at issue and does not mislead it satisfies the statutory requirement.

We blogged about the Kestin case prior to its decision here, here, and here.  This may not be the last time we blog about it.  The IRS filed a notice of appeal in the 4th Circuit on Wednesday, January 8.  I am mildly surprised that it is appealing this case because the circumstances seem pretty narrow; however, the three subsequent opinions citing to Kestin suggest my view of the universe of frivolous cases may just be too limited.  From the perspective of the IRS, the amount of effort to handle a copy of a frivolous document probably closely equals the amount of time it takes to handle a document that purports to be a return.  So, it may want to argue that the decision does not follow the intent of the statute.  It seems like it could get where it wants to go with a regulation, but I do not know what drives this decision.  To my knowledge Mrs. Kestin continues to pursue this matter pro se.  If anyone has a significant interest in the issue and feels the Tax Court got it right, perhaps an amicus brief would be of assistance to her.

District Court Reverses Its Section 6511(b)(2)(A) Ruling and Excoriates IRS and DOJ for Not Citing Relevant Authority

People ask me what I do in my retirement to keep my mind active.  In addition to a lot of pleasure reading, I keep up with the tax law, blog here, and engage in impact litigation with the Harvard tax clinic, usually in the appellate courts.  Getting an appellate court to overturn a lower court ruling is almost a mug’s game.  Gil Rothenberg of the DOJ reported last fall that of taxpayer appeals in the fiscal year ended September 30, 2019, the DOJ won 94% of the time.  I usually get involved in hard cases, seeking to overturn settled law.  But, my winning percentage is far better than 6% – though still well below 50%, as any appellant would expect.  I tell people that I am a sort of Don Quixote, often falling off my Rosinante or mistaking a barber’s basin for the Golden Helmet of Mambrino.  But, sometimes, I do save a damsel in distress.  I just did.

Indeed, I just got a district court reversal even without entering an appearance in the case, even as an amicus.  And I got a scathing opinion from the judge against the government, to boot.  (I was not looking for the scathing tone, but the judge is right.)

You may recall my recent post involving a case named Harrison v. United States, W.D. Wisconsin Docket No. 19-cv-194.  In the case, the taxpayers mailed a late 2012 original return containing a refund claim for withheld taxes just before the end of a period of 3 years after the return’s due date plus the length of an extension they had obtained to file the return (but had not used).  The return arrived at the IRS a few days after the period expired.  The court correctly ruled that the claim was timely filed under section 6511(a) because it was filed within 3 years after the return was filed – indeed, both were filed the same day.  But, the court then misapplied the lookback rule of section 6511(b)(2)(A) to hold that the claim was limited to taxes deemed paid in a period looking back 3 years plus the extension period from the date the IRS received the claim.  No tax was deemed paid in that period, so the over-$7,000 refund was limited to $0, said the court.  The taxpayers had correctly argued that section 7502’s timely mailing rules apply such that the lookback period should begin from the date the return was mailed (not received), so the entire refund should be allowed.  Apparently, the IRS’ only objection to paying the refund was the amount limitation. 

Unfortunately, neither party cited to the district court the most relevant case law, Weisbart v. United States, 222 F.3d 93 (2d Cir. 2000), or pertinent regulations that had been adopted in 2001 to embody the holding of Weisbart.  And you would not expect a district court judge to be an expert on tax procedure.

I contacted the taxpayers’ attorney on January 13 to point out the correct authority and suggested that he move for reconsideration.  He did so here on January 15.  On January 24, the DOJ filed a notice that it did not object to the motion for reconsideration because the DOJ had the law wrong.  In part, the DOJ Tax Division blamed the IRS lawyers for not telling the DOJ the correct law.  On January 29, the district court entered a revised order, granting the motion for reconsideration and also amended the judgment to find the government owes the taxpayers the tax refund they sought, plus interest from April 15, 2013.

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The district court ruled for the taxpayers not just relying on Weisbart and the 2001 regulations that I discussed in my post, but the earlier, less clear regulations that Weisbart interpreted as providing for this result. This could have been a two-page order.  But, it wasn’t.  The judge was boiling mad at the government.  He ordered that his revised opinion be sent to every IRS and DOJ Tax Division attorney for reading for ethical training.  Because you don’t see this too often, I quote here what the judge wrote about the government lawyers (omitting footnotes; emphasis added):

Regrettably, not only did plaintiff fail to bring this case and the regulations to the court’s attention in their previous briefing on defendant’s motion to dismiss or for summary judgment, but the IRS and the U.S. Department of Justice, whose respective jobs include promulgating and enforcing the applicable regulation, also did not. Still, presented with the regulations, defendant concedes it has no basis to oppose the motion for reconsideration, and the IRS has confirmed that it is prepared to issue a refund in the amount sought in plaintiffs complaint, plus statutory interest. (Def.’s Resp. (dkt. #25) ¶ 18.) While there is no question that this is the appropriate response and course of action, the court remains troubled by defendant’s failure to alert the court to the Weisbart case and even more the regulations. In its submission, defendant represents that the IRS did not identify the Weisbart case, the Chief Counsel’s Notice or the regulations, but acknowledges that counsel for defendant did identify the Weisbart case in their own research, and chose not to disclose it in their briefing because it is not “controlling” in the Seventh Circuit. (Id. ¶¶ 13-14.) This might be a viable defense if: (1) the failure to cite Weisbart were the only failure and; (2) the U.S. Department of Justice’s and IRS’s aspirations only were not to fall below the bare minimum ethical threshold. See Am. Bar Assoc. Rule 3.3 (“A lawyer should not knowingly . . . fail to disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel.”). 

More critically, however, the Weisbart court relied on a Treasury Regulation, which is controlling authority on both the IRS and this court. Defendant explains that the Chief Counsel’s Notice announcing a change in its litigation position and the amendment to 26 C.F.R. § 301.7502-1(f) occurred after the Weisbart opinion, but the language in 26 C.F.R. § 301.6402-3(a)(5), on which the Second Circuit in part relied, remains in place today, and defendant failed to alert the court of this regulation. Thus, the conduct of defendant’s counsel here falls below even a bare minimum ethical standard, something counsel would have discovered by reading Weisbart and the current versions of the regulations cited in that case closely, rather than dismissing it as an inconvenient contrary authority that they were not ethically required to cite to the court. Even if this were not so, defendant cited a number of cases from other circuits that were also not controlling in this court in support of its erroneous argument that the administrative complaint was filed on the date it was received by the IRS.

These egregious missteps in defendant’s response were enough to prompt this court to consider whether an award of attorney’s fees incurred in responding to the motion for summary judgment and in bringing their motion for reconsideration would be appropriate under 28 U.S.C. § 1927. However, this would require a finding of actual bad faith to shift fees to plaintiff. See Boyer v. BNSF Ry. Co., 824 F.3d 694, 708 (7th Cir.), opinion modified on reh’g, 832 F.3d 699 (7th Cir. 2016) (“If a lawyer pursues a path that a reasonably careful attorney would have known, after appropriate inquiry, to be unsound, the conduct is objectively unreasonable and vexatious. To put this a little differently, a lawyer engages in bad faith by acting recklessly or with indifference to the law, as well as by acting in the teeth of what he knows to be the law[.]” (internal citation omitted). Instead, defendant’s counsel’s representations show negligence, which is not sufficient to invoke fees under § 1927. Id. Plus, counsel at least confessed error when plaintiff finally discovered the controlling regulation and brought it to defendant’s and the court’s attention. 

Nevertheless the court will require defendant to circulate this opinion and order, along with the Chief Counsel’s Notice and 26 C.F.R. §§ 301.7502-1(f) and § 301.6402- 3(a)(5) to all attorneys in the IRS Office of Chief Counsel and to the Tax Division of the U.S. Department of Justice in hopes that these actions will prevent future opposition to meritorious claims for refunds, as well as any instinct to ignore the duty of candor to the court by burying precedent no matter how well reasoned, helpful or directly on point it may be simply because one is not ethically bound to disclose it. In their prayer for relief in their complaint, plaintiffs requested attorney’s fees, but cited no support for this request. (Compl. (dkt. #1) 3.) In their motion for reconsideration, plaintiffs simply request $7,386.48 and statutory interest. (Pls.’ Mot. (dkt. #24) 4.)

Observation

I am glad the court corrected this injustice.  However, I would point out that district courts still need guidance on issues like interest.  It is usually the case that overpayment interest is payable to a taxpayer from the date the tax was overpaid.  But, in 1982, Congress specifically added new paragraph (3) to section 6611(b) providing that in the case of late returns, interest is payable from the date the return is filed.  Thus, the amended judgment has the wrong interest accrual date.  I refuse to do the research necessary to figure out if the interest accrual date (i.e., the date the return is “filed”) is the date the return was mailed or the date the IRS received the return.  Basta!

Mail At Your Peril: Taxpayer Dodges A Bullet (For Now)

We have discussed many times the issues that practitioners and taxpayers face when trying to prove they have filed a tax return or other document with the IRS or Tax Court.  A recent case in Tax Court, Seely v Commissioner, involves a taxpayer’s attorney who mailed a petition to Tax Court via old fashioned first class postage and not via certified mail, registered mail or an authorized private delivery service. In Seely, the Tax Court received the petition, but not until 111 days after the date of the 90-day letter. Seely claimed that his lawyer mailed the petition four days before the 90-day period ended to file a petition timely and properly and fully secure the Tax Court’s jurisdiction to hear the case. Unfortunately for Seely (or so it seemed) the envelope containing the petition had no discernible postmark. The IRS argued that the taxpayer failed to petition the Tax Court within the 90-day period and moved to dismiss the petition for lack of jurisdiction.

Our faithful readers know where this may be heading. Section 7502 provides, in general, that if a document is delivered to the IRS by the United States mail after the due date, then the date of the United States postmark on the envelope is deemed to be the date of delivery (i.e., filing). The statute also provides that for registered mail, the registration is prima facie evidence that the document was delivered, and that the date of registration is deemed to be the postmark date. For good measure, the statute says that Treasury can issue rules to flesh out how the statutory rules for registered mail filing can apply to mailing via certified mail or through an authorized private delivery service. IRS has issued regulations and other guidance that fills out the details on certified mail and the use of private carriers.

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Back to Seely. The regulations under Section 7502 do not directly address envelopes with no postmarks (they do addresses postmarks that are “not legible” and provide that the taxpayer has the burden of proving the postmark date when the postmark is not legible). As his lawyer did not send the petition by certified mail, registered mail or through an authorized private delivery service, and as there was no postmark at all, the rules generally default to the filing date equaling the date that the document was received (in this case by the Tax Court). Yet the opinion in Seely notes that there is precedent in Tax Court to allow taxpayers to prove the mailing date through extrinsic evidence, like testimony, the amount of time the document allegedly took to arrive as compared to the time that the document should take to arrive, and whether the document or envelope has the markings that indicate that they may have been misplaced or lost along the way. When relying on extrinsic evidence, the standard the taxpayer has to satisfy to prove the mailing date is proof by convincing evidence.

Seely opposed the motion to dismiss, and Seely had as part of the record a sworn statement by the attorney claiming that they deposited the petition in the US mail four days before the last date for filing the petition. The IRS submitted proof that it normally takes 8 – 15 business days for documents to be delivered to a government agency or office in DC (while this seems like an excessive amount of time, the opinion drops a footnote discussing how mail to Tax Court goes through an irradiation process adding an extra 5 to 10 days).  The government helpfully noted that Seely’s petition allegedly arrived 16 business days after his attorney claimed that he mailed it from Washington State. 

In light of the amount of time the document took to arrive, the IRS asked the court to consider the lawyer’s statement to fail to meet the standard that the taxpayer had convincing evidence that the petition was timely filed.

The Tax Court, in an opinion by Judge Vasquez, disagreed:

First, we note that the petition arrived at the Court only one business day late. We also note that the Fourth of July holiday. In prior cases holiday conditions at the post office (e.g., holiday closures, unusually large volumes of mail, or inefficiencies attributable to temporary staff) have been found to be a possible explanation for short delays in delivery. We are thus unpersuaded by respondent’s argument that Mr. Boyce’s declaration is not reliable because the petition’s alleged mailing date does not square with its actual delivery date. (citations and footnote omitted).

When one crunches the numbers, to get to the 21 actual days he allowed after the due date and to mesh with the lawyer’s sworn statement that he mailed the petition three days before the due date, Judge Vasquez effectively allows 24 days for the mailing, which includes eight weekend days and a holiday on top of the 15 business days to get to the needed 24 days.

At the end of the day, the sworn statement by the attorney, the 4th of July holiday and actual delivery close in time to the far end of estimated number of business days it takes for mail to get to DC were enough, and the Tax Court denied the government’s motion to dismiss.

Seely lives to fight the proposed deficiency on the merits.

Observations

This is the place where it makes sense to remind practitioners to fork over the extra few bucks to mail documents via registered mail, certified mail or through an authorized private delivery service. 

Readers may also recall US v Baldwin, a  9th circuit case that Carl Smith has written about (the circuit that would likely have venue in an appeal of Seely). In that case, the 9th Circuit held that 

  • regulations [the excerpt I quote below] that the IRS finalized in 2011 essentially supplanted the common law mailbox rule, 
  • the regulations were valid under the familiar two-step Chevron test, and 
  • under the Brand X doctrine the regulations essentially trumped prior 9th Circuit precedent that held that Section 7502 did not supplant the common law mailbox rule because the prior case law did not reflect the 9th circuit’s conclusion that the outcome it chose was based on an unambiguous reading of the statute .  

Those regulations provide as follows:

Other than direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a duly designated [private delivery service] . . . are the exclusive means to establish prima facie evidence of delivery of a document to the agency, officer, or office with which the document is required to be filed. No other evidence of a postmark or of mailing will be prima facie evidence of delivery or raise a presumption that the document was delivered.

I had read the regulations as applying in cases where the document was never delivered (as in Baldwin, involving a refund claim), as well as in cases where the document eventually made its way to the IRS or in Tax Court (as in Seely, where the Tax Court eventually did receive the petition). Yet Seely notes and distinguishes Baldwin because in Seely the document was actually delivered. That opened the door for the Tax Court, consistent with its approach in other cases, to consider the extrinsic evidence to prove when the petition was placed in the mail.

What about the reach of and validity of the 2011 regulations? As readers may be aware, the taxpayers have filed a cert petition in Baldwin (last month the government filed its opposition, here and the taxpayer filed their reply). The case is an interesting vehicle for possibly overruling the Brand X doctrine, which holds that a “prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.” There is significant hostility to Brand X among some (see the numerous amici) and the doctrine raises interesting questions as to which branch should be responsible for the final say on a statute that on its face at least allows for competing reasonable interpretations.

While I am not sure that the Supreme Court will take the bait on Baldwin to consider overturning Brand X, I do expect that there will be plenty of additional litigation concerning the reach and validity of the 7502 regulations. After all, despite the relative low cost of avoiding these kinds of disputes by mailing in a way that guarantees evidence of mailing, and the increasing use of electronic filing (which has its own 7502 issues), there are enough taxpayers and practitioners who seem willing to roll the dice and courts (and practitioners) have been struggling with 7502 for decades.

How to Accelerate Collection in CDP: Designated Orders, December 30 – January 3

It was an interesting week for designated orders on collection due process (CDP) cases, with orders that really demonstrate the upsides and downsides to CDP protections. Professor Bryan Camp has sometimes referred to CDP as “Collection Delay Process” (as he notes here). Two of this week’s orders are illustrative of how the IRS might accelerate getting to collection where the petitioner appears to just be delaying for the sake of delaying, whereas one order reaffirms the purpose and value of judicial review when there may be a genuine issue of the proper collection actions. We’ll start with the IRS tactics for getting to collection when the taxpayer appears to be delaying just for delay’s sake.

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Tactic One: Motion to Levy While the CDP Case is Pending. Squire v. C.I.R., Dkt. # 13308-19L: (order here)

This was one of those rare orders that is covered (albeit briefly) by Tax Notes Today (found here, paid subscription required). So what is going on in this case that makes it TNT worthy? At first blush, not much: it looks like so many other CDP cases we have covered on these hallowed pages: the taxpayer didn’t provide any financials or collection alternatives during the hearing, the IRS doesn’t believe the underlying liability is properly at issue, and so the case should be resolved. Usually we would see that in a summary judgment motion. But that is where this case separates itself from the pack: the IRS isn’t moving for summary judgment, but actually wants to move forward with levy while the CDP case is pending (i.e. docketed). (Also perhaps setting this case apart is that the petitioner is apparently a well-known attorney…)

Generally, levy (for any taxable year at issue) is prohibited while a CDP hearing (or appeal therefrom) is pending. See IRC 6330(e)(1). However, the prohibition on levy does not apply if (1) the underlying tax is not at issue, and (2) the IRS shows good cause why levy should go forward. IRC 6330(e)(2). Thus, in a “Motion to Permit Levy” the IRS will need to show those two things: the issue isn’t the underlying tax and there is a good reason to allow the levy to proceed right now, rather than after the Court (presumably) upholds the IRS Appeals determination that a levy is warranted.

We’ve seen the IRS struggle a bit through summary judgment motions in the past. How do they do on the Motion to Permit Levy?

Not too well.

First off, petitioner claims (apparently without any support) that the underlying taxes were put at issue in the Collection Due Process hearing. But Judge Leyden doesn’t even need to consider that issue, because even if the IRS did meet that element they’d fail on “good cause.” Judge Leyden acknowledges that “good cause” is a slippery term, but cites to Burke v. C.I.R., 124 T.C. 189 (2005) for some examples of where good cause to allow a levy may be found: essentially, where the taxpayer uses CDP to bring up frivolous arguments or needlessly delay collection.

The IRS thinks that the petitioner is very much in the game of needlessly delaying collection. And this is because this taxpayer seems to always end up in Tax Court -having filed four CDP petitions (including the instant case) in the last eight years. This pesky petitioner just keeps insisting on CDP and losing (or at least losing two of the four times: one is still pending, i.e. the order at issue, and the Court does not explicitly reference the outcome in the fourth).

But is constantly insisting on your rights the same as needlessly delaying collection? That is a bridge too far for Judge Leyden, especially given the paltry record for the docketed case. It is not yet clear that, in this present case, the petitioner has no leg to stand on and evidence would show that it is all a delay tactic. The record shows that the petitioner self-reported the tax due, and participated in the CDP hearing. The record does not show (or at least the IRS hasn’t put forth evidence) that frivolous arguments have been made, so the argument seems to boil down to “this person keeps losing. And they should know better (subtext: the petitioner in this case is an attorney, apparently at one point quite well known, who has run into some ethical issues in the past), so it is a delay tactic.”

I’m sympathetic to the IRS’s concern in this case, since it appears that petitioner keeps losing for the same uncorrected issue: failing to pay estimated taxes (compliance being a prerequisite for essentially every collection option). But I’m not sympathetic to the way the argument was presented. Where the IRS wants to accelerate collection by levying during a CDP case, they need to do better by: (1) properly showing the underlying tax isn’t at issue (in this case, the only exhibit to the motion was IRS certificates of assessment, which just don’t go far enough to prove the underlying tax isn’t/couldn’t be at issue); and (2) putting the administrative record before the Court so they can actually see the arguments that were raised in the CDP hearing, and then have some idea if they are frivolous. I think the IRS particularly failed with the latter, since (arguably) the administrative record could also show that the underlying tax wasn’t raised in the hearing and thus would not be properly at issue. The administrative record is (increasingly) critical in non-deficiency cases, which can hurt the IRS just as easily as it can hurt the taxpayer if it is not properly developed.

Tactic Two: Summary Judgment Done Right. Peele v. C.I.R., Dkt. # 5447-19L (order here)

In Peele we have another serial CDP user (more accurately, “abuser”) but a different outcome -this time a success for the IRS on the more traditional motion for summary judgment. From Judge Gustafson’s stern rebuke to the petitioner (warning of potential IRC 6673 penalties in the future) this may have actually been a better vehicle for the motion to permit levy than the previously discussed Squire case. So how did we get here?

Ms. Peele appears to be one of those individuals that loves filing complaints/petitions, but not taking essentially any other action to address the problem. Her failure to act begins by failing to file a tax return for the year at issue (2012), resulting in an SFR. She later filed a CDP hearing request for the resulting Notice of Federal Tax Lien but it was upheld by Appeals. Undeterred, Ms. Peele filed a Tax Court petition… and then did not show up in court or respond to a summary judgment motion. Astoundingly, the Tax Court granted the IRS summary judgment motion.

But Ms. Peele was not going to let these losses get her down. So she appealed the Tax Court decision to the 4th Circuit Court of Appeals. Where her case was dismissed for… any guesses? That’s right: failure to prosecute.

All this time, effort, and wasted judicial resources on the 2012 taxes she never filed… and it isn’t over. Remember, the chronology I just walked through was from a Notice of Federal Tax Lien (docketed here). The designated order for the week still involves the 2012 taxes, but from a Notice of Intent to Levy.

So has Ms. Peele changed in the intervening years? Is the threat of a levy enough to prompt her to action beyond just filing in court? For those debating human nature, this one can be chalked up as a win in the “people don’t change” column.

Again, Ms. Peele makes every timely request necessary for Court jurisdiction, but does nothing thereafter: a timely CDP request that she fails to follow through on (i.e. skips the hearing) and a timely petition to Court that she fails to follow through on (i.e. fails to respond to the IRS motion for summary judgment).

So a petitioner that was very likely only using CDP to delay can delay no longer: summary judgment is granted. It is not immediately clear to me that a motion to permit levy in this case would have gotten to quicker collection for the IRS but my bet is it would have had a greater chance of success than Squire because no reasons exist for the court to review (she didn’t participate in the hearing) and that, coupled with her history, strongly suggests a “delay” purpose.

But Wait! CDP CAN Be a Valuable Check on the IRS. Lecour v. C.I.R., Dkt. # 22905-18L (order here)

So we’ve had two previous cases where the IRS seemed to reasonably believe the petitioner was just trying to delay collection through CDP. Is that all CDP is? One intricate delay tactic? Maybe not… This final order stands for the value of CDP as a check against IRS collection personnel.

The Lecour’s (husband and wife) are represented by counsel, and appear to have been fairly well engaged with the IRS throughout the CDP process. Namely, they submitted financials and specifically proposed a payment alternative (in this case, an installment agreement) for their rather sizeable 2013 and 2014 balances (totaling approximately $96,000).

Paying down a $96,000 bill, even over the course of many years, can be a difficult task for many. Here, the petitioners sought to alleviate this difficulty by proposing an installment agreement that began with lower monthly payments in the first year ($500/month), and then ramped up after that ($1,500/month). The reasoning behind this proposed structure was to give the petitioners time to restructure their living expenses so that they could afford to pay more in the second year and onwards. 

Of course, we wouldn’t be here unless the IRS had a problem with this proposal. And the IRS problem is one we’ve seen before: namely, that they believed the monthly amounts could be higher because their reported income should be higher and some of their necessary expenses should be lower.

Although some installment agreements for relatively low balances must be accepted as a matter of law (see IRC 6159(c)) the general rule (applicable in this case) is that the IRS has fairly broad discretion to enter into an agreement (see IRC 6159(a), noting the permissive language). Still, it is not boundless discretion, and installment agreements like these are exactly the sorts of cases where I appreciate the ability to get Court review rather than have the entirety of the decision rest in the IRS’s hands.

Of course, even with judicial review on proposed collection alternatives, taxpayers are often in a tough spot. As Judge Panuthos notes, review of collection alternatives involve an abuse of discretion standard and the Tax Court will not “substitute our judgment for that of the IRS, recalculate a taxpayer’s ability to pay, or independently determine what would have been an acceptable collection alternative.” That would appear to signal an uphill battle for the petitioner in this case. But perhaps there is hope… in the Internal Revenue Manual (IRM).

From the beginning it bears noting that the IRM does not create taxpayer rights and is not binding on the IRS (or the Tax Court). See, e.g. Thompson v. C.I.R., 140 T.C. No. 4 (2013) at footnote 16 for a list of cases on that point. In other words, it is not law.

However, the IRM does provide guidelines as to what the IRS’s policy is on the sort of financial analysis at play in nearly all collection cases. In other words, it provides some sort of yardstick for the Tax Court to consider how the IRS decided to exercise its discretion in collection: if the IRS completely ignores its own policy (reflected in the IRM) and doesn’t provide a reason why, that is a pretty good sign of “abuse of discretion.”

A couple things that the IRM provides in cases like this are (1) the permissive ability of the IRS to have provide the one-year “reorganization” period requested by petitioner (see IRM 5.14.1.4.1(2)) and (2) guidelines on allowable expenses (especially national and local standard expenses) in determining income that could be put towards the tax liability. If you deviate from those IRM provisions, you’d better clearly explain why.

And therein lies the problem for the IRS’s summary judgment motion. It just isn’t clear enough from the Notice of Determination (or record thus far) the exact reasoning for the number the IRS arrived at. If the numbers were clearly linked to the IRM positions (again, not binding) just saying so may well be reason enough. But where they aren’t following the IRM (or it isn’t clear that they are) you have an open question of whether the IRS employee was properly exercising discretion, or just doing their own thing -something CDP is likely intended to prevent.

And, thanks to Court review not operating as a rubber stamp on the IRS’s determination, you have protection before collection can take place. In the instant case, the IRS’s summary judgment motion is denied (effectively slowing down the collection action IRS hopes to accelerate) while the facts can be better determined, preventing potentially unaffordable or catastrophic levy. In other words, sometimes the process works.

Final Orders of the Week

For posterity’s sake, there were two other (essentially identical) designated orders from December 30 – January 3 in Giambrone v. C.I.R. They dealt with a motion for a protective order from a non-party to the suit and can be found here and here.