According to the American Film Institute, Casablanca has the most memorable quotes of any film in the 20th Century. Among the ones I can remember are: “Here’s looking at you, kid,” “We’ll always have Paris,” and, of course, “Play it again, Sam.”
Except, as many people know, no one in Casablanca actually says, “Play it again, Sam.” One of the film’s more famous and repeated quotes is, in fact, not one of the film’s quotes. It’s catchy and it’s close to what the characters actually say, but it’s not quite accurate.
Nonetheless, it has been essentially incorporated into Casablanca’s lore, and is part of its enduring appeal. I think that something very similar happens in the law sometimes. A court repeats a (close, but inaccurate) statement enough that it just becomes accepted. Only unlike apocryphal film quotes, which carry little consequence and can be fairly easily corrected, getting a court to revisit an “accepted” truth is a very tall order.
read more...As you’ve possibly guessed, I’m talking about the Tax Court’s (mis)understanding of TIPRA payments. But it surely matters in many more contexts. When one case sets bad precedent or one court mischaracterizes the legislative history, undoing the damage gets successively harder each time the original error is repeated. At some point it may just become implacable.
As quick background, in 2006 Congress amended the Offer in Compromise statute (IRC § 7122) to require that a partial payment be included with most Offers. These partial payments are commonly referred to as “TIPRA” payments after the law (Tax Increase Prevention and Reconciliation Act) that created them.
In a series of posts, I laid out why I thought there was a good argument to be made that TIPRA payments were refundable deposits. Those arguments included (1) the ambiguous statutory language, (2) the equally ambiguous legislative history, and (3) the plain language of the Treasury Regulations. So imagine my surprise when, after having spent all that time, I come to learn that:
“The law is clear that a TIPRA payments are not refundable deposits but rather are non-refundable payments of tax.” So says the 9th Circuit in Brown v. Commissioner, 58 F.4th 1064, 1066 (9th Cir., 2023)).
But you don’t have to just take the 9th Circuit judges’ word for it. In fact, they cite to (1) a precedential case, (2) the statute, and (3) the legislative Conference Report on point, all saying that the TIPRA payments are non-refundable payments of tax. You don’t get clearer than that!
Until, that is, you actually look at each of the sources. Let’s start with the Conference Report.
Actually… let’s not start with the Conference Report, because Brown doesn’t quote the Conference Report, but rather to a case that cited to the Conference Report. So let’s start by looking at that case, Isley v. Commissioner, 141 T.C. 349 (2013) and its analysis.
In Isley, the Tax Court directly addresses whether the taxpayer (famous musician Ron Isley) is entitled to a refund of his TIPRA payment on a rejected Offer. The Tax Court found that Mr. Isley was not entitled to a refund of the TIPRA payment because it was a payment towards the underlying tax liability, rather than a deposit. To reach this conclusion, the Tax Court draws on the TIPRA Conference Report, and goes on to say:
“The report’s explanation of the new provision refers to the 20% payment as a ‘partial payment’ or ‘down payment’ of the taxpayer’s liability.”
Case closed, as they say on TV. Except…
What the Conference Report Actually Says
The good news is that the words the Tax Court put in quotes (“partial payment” and “down payment”) are, in fact, words used in the Senate Amendment. The bad news is that the Conference Report doesn’t refer to those as being “applied to the taxpayer’s liability.” Which of course is exactly what the Tax Court is using the Conference Report to argue for.
Maybe a less selective quote from the Conference Report would be helpful:
Senate Amendment:
“The provision requires a taxpayer to make partial payments to the IRS while the taxpayer’s offer is being considered by the IRS. For lump-sum offers, taxpayers must make a down payment of 20 percent of the amount of the offer with any application. […] The provision eliminates the user fee requirement for offers submitted with the appropriate partial payment.” [Emphasis added]
Conference Agreement:
“The conference agreement includes the Senate amendment provision, with the following modifications. Under the conference agreement, any user fee imposed by the IRS for participation in the offer-in-compromise program must be submitted with the appropriate partial payment. The user fee is applied to the taxpayer’s outstanding tax liability.” [Emphasis added.]
It is important to note that a “user fee” is undeniably separate from the partial (i.e. “TIPRA”) payment. The Senate Amendment originally proposed getting rid of the user fee so long as there was a TIPRA payment. The Conference Agreement said, “no, let’s keep the user fee in addition to the TIPRA payment.” Treating the user fee and TIPRA payment distinct is also how the statute operates.
So the Conference Report only makes clear that the user fee must be applied to the outstanding tax. But the Conference Report says absolutely nothing about whether the TIPRA payment must be applied to the outstanding tax. (Somewhat perversely, the IRS has since decided that it will refund the user fee but not the TIPRA payment if the Offer isn’t processed: see Offer terms of Form 656 Section 7 provision (c).)
What about the “down-payment” language that the Tax Court quotes? To me, understood in its proper context, describing TIPRA payments as a “down-payment” makes much more sense if it is thought of as a “down-payment” on the Offer and not on the underlying tax (as Isley claims the report requires). You don’t make “down payments” on tax that is already assessed and owed for prior years. You make a “down payment” on the proposed Offer settling that underlying tax for a lower amount. If I was making a “down payment” on the underlying liability, I would not be making an Offer at all: I’d be fully paying the tax.
But wait, there’s more. Let’s take a look at how the Conference Report characterizes the “Present Law” (i.e. the law prior to TIPRA):
Present Law:
“Taxpayers are permitted (but not required) to make a deposit with their offer; if the offer is rejected, the deposit is generally returned to the taxpayer.” [Emphasis added]
What TIPRA changed from the present law was that it required a partial payment rather than just “permitting” one. That’s it. It did not say a word about changing the character of that partial payment from a refundable deposit to a non-refundable payment of tax. Indeed, since the law prior to TIPRA was “optional deposit” and the only explicit change was to remove the word “optional,” I’d argue that the Conference Report supports a reading that it remains a deposit. Note also IRC § 7809(b), reinforcing the general understanding that Offer payments are deposits.
Of course, the 9th Circuit in Brown also says the statutory language is clear, and courts focus on the text of the statute rather than a Conference Report. So just how clear is the statute?
Apparently clear enough that the Court doesn’t need to analyze it. Brown doesn’t quote the language of the statute, but parenthetically describes IRC § 7122(c)(2)(A – C) as “establishing that any TIPRA payment goes to the taxpayers liabilities.”
We’ll see if that is a fair characterization in a moment. But note that the same lack of statutory analysis is apparent in Isley. Further, in a twist of fate, petitioner’s counsel in Isley is the same as petitioner’s counsel in Brown, and never appears to have raised the issue of the ambiguous statutory language in either case. Per Isley:
“Thus, it is clear that, in the normal circumstances of a taxpayer’s submission of an OIC to the IRS, the section 7122(c) payment constitutes a nonrefundable, partial payment of the taxpayer’s liability, and petitioner does not argue to the contrary.” 141 T.C. 349, 372. [Emphasis added.]
What the Statute Actually Says
We are told in Brown that IRC § 7122(c)(2)(A – C) establishes “that any TIPRA payment goes to the taxpayers liabilities.” Maybe. But just for fun, let’s look at what the statutory language actually says:
(A) Use of payment
The application of any payment made under this subsection to the assessed tax or other amounts imposed under this title with respect to such tax may be specified by the taxpayer.
(B) Application of user fee
In the case of any assessed tax or other amounts imposed under this title with respect to such tax which is the subject of an offer-in-compromise to which this subsection applies, such tax or other amounts shall be reduced by any user fee imposed under this title with respect to such offer-in-compromise.
(For present purposes, Subparagraph (C) is mostly irrelevant and gives the Treasury the authority to waive the TIPRA payment requirement via regulation. Why that might matter in a different context will be discussed in my next post, which deals with admin law.)
The statute breaks down two different types of payments: (1) Subparagraph A pertaining to TIPRA payments and (2) Subparagraph B pertaining to user fees. They are distinct, and clearly lay out different standards: (A) sets out flexibility for taxpayers on TIPRA payments, whereas (B) gives no flexibility. Subsection (A) never says a word about TIPRA payments being nonrefundable, or otherwise required to be applied to taxpayer liabilities.
So while the statute (like the Conference Report) is clear on user fees, it is decidedly ambiguous on TIPRA payments. All it really says is that the taxpayer can specify how TIPRA payments are applied if they want to.
If I wanted to go further down the statutory interpretation rabbit-hole, I’d note that the Supreme Court has said that when “Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.” Russello v. United States, 464 U.S. 16, 23 (1983). The Tax Court has frequently quoted this language approvingly in precedential decisions. See, e.g., Whistleblower 21276-13W v. Commissioner, 147 T.C. 111 (2016); Grajales v. Commissioner, 156 T.C. 55 (2021); and most recently, Thomas v. Commissioner, 160 T.C. No. 4 (2023). Applied here, one might argue that Congress specifically said underlying tax is reduced by user fees but did then omits that language with regards to TIPRA payments.
Interesting…
Play It Again, Sam
So the statute doesn’t clearly say, “TIPRA is non-refundable payment towards the liability.” Nor does the Conference Report. And yet here we are, told again and again that both the statute and Conference Report make “clear” that TIPRA is non-refundable. Play it again, Sam: if we just say it enough, it becomes part of the lore.
But for posterity’s sake, let’s be clear: the law is not clear that TIPRA payments are non-refundable payments of tax. And the 9th Circuit and Tax Court are, I think, clearly wrong about that. Changing that understanding, however, will not come easy.
About Caleb Smith
Like button hit twice. There are many examples of this failure. By lawyers and judges.
In United States v. Boyle, 469 U.S. 241, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985), Footnote 9 reads:
“Courts have differed over whether a taxpayer demonstrates “reasonable cause” when, in reliance on the advice of his accountant or attorney, the taxpayer files a return after the actual due date but within the time the adviser erroneously told him was available. Compare Sanderling, Inc. v. Commissioner, 571 F.2d 174, 178-179 (CA3 1978) (finding “reasonable cause” in such a situation); Estate of Rapelje v. Commissioner, 73 T.C. 82, 90, n. 9 (1979) (same); Estate of DiPalma v. Commissioner, 71 T.C. 324, 327 (1978) (same), acq., 1979-1 Cum.Bull. 1; Estate of Bradley v. Commissioner, 33 TCM 70, 72-73 (1974) (same), aff’d, 511 F.2d 527 (CA6 1975), with Estate of Kerber v. United States, 717 F.2d 454, 454-455, and n. 1 (CA8 1983) (per curiam ) (no “reasonable cause”), cert. pending, No. 83-1038; Smith v. United States, 702 F.2d 741, 742 (CA8 1983) (same); Sarto v. United States, 563 F.Supp. 476, 478 (ND Cal.1983) (same). We need not and do not address ourselves to this issue.”
Turns out that the Rapelje case actually found that there was no reasonable cause demonstrated for a tardy filing.
Raising issues like these almost daily in this Blog is where the sterling scholarship of the authors in general and here, by Prof. Smith, allows readers to fortify their representation of our clients. As for the nature of TIPRA payment, IRC § 7122(c)(2)(A) seems clear in the discretion it appears to afford the taxpayer to decide the “application” of any payment made with the OIC. Further, it would seem, only if the taxpayer never takes a position on the application of any payment can the IRS then decide how to allocate it. If the taxpayer states in the OIC or on the face of a TIPRA payment check something like “unless OIC is accepted, this payment shall be refunded,” then the taxpayer has exercised his discretion under (c)(2)(A) about how the payment must be applied. Assuming there is no technical definition of “the application of any payment” (which I haven’t researched), limiting the taxpayer’s discretion to apply the TIPRA payment only to tax due in specific years—rather than including the discretion to direct the payment to be refunded (and not apply to any tax due) if the offer is rejected—then it seems the taxpayer’s election to refund the payment should prevail. Of course, the taxpayer has to provide some direction at some point to preserve the issue. Otherwise, I suppose, the right to exercise discretion, it could be argued, may be forfeited. In any event, excellent reading.