Proposed Changes to Tax Court

Interest Abatement – The Tax Court already serves as a venue for interest abatement cases.  Taxpayers have 180 days following a determination by the IRS disallowing a request for interest abatement.  This grants twice the time to file a petition in Tax Court for a deficiency or innocent spouse case and six times the time to file a petition in a CDP case.  The change does not address the extended time period but rather a problem in getting the IRS to make a decision concerning interest abatement.

Under the change, taxpayers who request interest abatement and do not receive relief or a determination letter from the IRS within 180 days of the request will now have the opportunity to file a Tax Court petition based on the failure to receive a determination. This creates for Tax Court jurisdiction a procedure similar to the procedure following a claim for refund where taxpayers can file a complaint in district court or the Court of Federal Claims six months after filing the claim if the IRS has not acted to grant or disallow the claim.

Interest abatement cases compromise only a small portion of the Tax Court’s docket. This proposed change to 6404(h) seeks to help taxpayers trying to get into court when the IRS did not issue a notice of determination.  If the taxpayer seeks interest abatement, this is not necessarily a high priority item for the IRS. So, the request can languish.  At least one Tax Court opinion has held that 6404(h) jurisdiction cannot be invoked, no matter how long it is since the taxpayer requested a determination.

Small Tax Case Procedures for Interest Abatement Cases – The small tax case procedures of Section 7463 do not currently allow taxpayers seeking interest abatement.  This change will allow those seeking interest abatement of $50,000 or less to elect to use the small tax case procedures.  After passing the 1998 act, Congress realized that 6330 and 6015(e) cases were not described in 7463 and it amended the statute adding subsection (f) to give the Court jurisdiction over these cases if less than $50,000 was at issue. When it made that adjusting amendment in 2000 to give additional jurisdiction for small case proceedings to new types of cases it had created in its RRA 98 legislation, Congress forgot to also amend 7463 to deal with 6404(h) proceedings adopted in 1996.  Because of the small number of interest abatement cases, this change will not fill the ranks of small cases.  Small tax cases comprise about half of the docket of the Tax Court each year.

Appellate Venue for Innocent Spouse and CDP cases – This issue has received much attention in our blog and was discussed by Les in his post last week. The legislation would “fix” the problem by sending these cases to the circuit court to which a case would ordinarily go based on the residence of the taxpayer at the time of the petition creating a rule identical to appellate venue for deficiency cases.  When Congress created the stand-alone innocent spouse cases and CDP cases in 1998 it neglected to change the appellate venue statute.  No one seemed to notice the oversight until a law student, James Bamberg, wrote an article about it that won the Tannenwald competition.  Eventually, litigants picked up on the issue and convinced the DC Circuit that it had jurisdiction over these cases.

Appellate venue matters a great deal in these cases at the moment because of the record rule. Three circuits to which CDP cases were perhaps erroneously appealed have determined that taxpayers may not add evidence to the record in a CDP case.  The DC Circuit has not ruled on this.  Under the Golson rule, the Tax Court, which allows evidence, has no binding circuit authority if the DC Circuit controls the setting of binding authority.  This change would reinstate the appellate venue rule most practitioners followed without thinking prior to the article by Mr. Bamberg.  Our frequent guest blogger Carl Smith has written to Congress concerning the record rule aspect of this change and I quote his correspondence here:

I am not writing you about the Kuretski provision in the proposed bill, but another provision in the bill that “clarifies” that appeals from the Tax Court in Collection Due Process and Innocent Spouse cases go to the Circuit where the taxpayer lives rather than the D.C. Circuit, as held in the case of Byers v. Commissioner, 740 F.3d 668 (D.C. Cir. 2014).  I have no objection to the clarification, even though it was an amicus brief drafted by me on behalf of the Kuretskis that convinced the D.C. Circuit in Byers to hold that current language in 7482(b)(1) directs CDP appeals only to the D.C. Circuit (at least where the case does not also involve a challenge to the underlying liability).  But my support for the amendment is conditional on your also fixing an issue that the venue argument was all about (behind the scenes) in Byers.  For by fixing the venue provision to overrule Byers, you will resurrect a split between how the Tax Court and three Circuit Courts view the appropriate record in a Tax Court CDP case.  The split results in taxpayers in the Tax Court who live in the 1st, 8th, and 9th Circuits not being able to supplement in the Tax Court the administrative record they created at their IRS Appeals CDP hearing, while taxpayers living in the rest of the country are free to supplement the record.  That is no way to administer a uniform federal tax law, and I do not anticipate (as detailed below) that this split will ever reach the Supreme Court and be fixed by the courts.  So, it is up to Congress to fix the record rule problem.  And I hope that the fix is one that allows taxpayers to supplement the administrative record.

It has forever been the rule that in Tax Court deficiency cases, although the Tax Court is reviewing IRS action (the issuance of a notice of deficiency), and sometimes even on an abuse of discretion standard (such as under sections 446 and 482), the Tax Court holds a trial de novo as to evidence.  In 2004, the issue of the Tax Court CDP proceeding’s scope came before the Tax Court.  In the 1998 Committee reports on CDP, Congress stated that the Tax Court should review IRS CDP notices of determination on an abuse of discretion standard, except that the Tax Court should review de novo any challenges to underlying tax liability.  This led the IRS to argue to the Tax Court that a Tax Court CDP proceeding — particularly one reviewed only for abuse of discretion — is different from a Tax Court deficiency proceeding, and so a CDP proceeding before the Tax Court generally should allow no additional testimony or documentary evidence to be added to the administrative record created at Appeals.  In an en banc opinion, the Tax Court held that Congress understood how Tax Court litigation was nearly always de novo as to evidence — even where review was sometimes on an abuse of discretion standard — so Congress intended that taxpayers be able to supplement the administrative record in their Tax Court CDP proceedings.  Robinette v. Commissioner,123 T.C. 85 (2004).  This has been the precedential position of the Tax Court ever since 2004.

The IRS was upset with the ruling in Robinette, and so it appealed to the 8th Circuit (under the assumption that venue was correct there).  Indeed, up until the time of the Byers opinion last year, both the IRS and nearly every taxpayer who lived in a regional Circuit appealed any Tax Court CDP loss to the regional Circuit in which the taxpayer lived.

The 8th Circuit reversed the Tax Court in Robinette (at 439 F.3d 455, 459-462 (2006)), holding that the Tax Court, for the most part (i.e., other than taking in evidence to clarify what went on at Appeals) was limited to the administrative record as its only evidence to consider in CDP proceedings.  The 8th Cir. relied on the Administrative Procedure Act and general notions of administrative law that dictate that if the standard of review is abuse of discretion, then the scope of the evidence must be only the evidence reviewed by the administrative agency.  Two other Circuits agreed with the 8th Circuit.  Murphy v. Commissioner, 469 F.3d 27, 31 (1st Cir. 2006), and Keller v. Commissioner, 568 F.3d 710, 718 (9th Cir. 2009).  Since 2009, no other Circuit or the D.C. Circuit has ruled one way or the other on this Tax Court CDP “record rule” issue.

Under its Golsen doctrine (Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. on other issue, 445 F.2d 985 (10th Cir. 1971)), the Tax Court follows its own precedent — except in the case where a court of appeal to which the Tax Court case is appealable has ruled to the contrary.  In the Tax Court’s opinion in Murphy at 125 T.C. 301 (2005), the Tax Court first indicated how its Golsen rule should interact with the holdings of any Circuit Court on the CDP record rule issue. At 125 T.C. at 313 n. 6, the Tax Court indicated that for purposes of Golsen, it would feel compelled to follow a holding by a court of appeals to which the case is appealable that limited the Tax Court to the CDP record created at Appeals.  However, since at that time, the 1st Circuit (where the taxpayer lived) had not issued any opinion on the record rule, and the Tax Curt assumed that an appeal would be proper in the 1st Circiut, the Tax Court said it would follow its own precedent in Robinette and allow in certain additional evidence.  Secondly, though, the Tax Court held that such additional evidence cannot include evidence that the taxpayer deliberately withheld from the Appeals Officer at the CDP hearing.  Id. at 315 (“evidence that petitioner might have presented at the section 6330 hearing (but chose not to) is not admissible in a trial conducted pursuant to  section 6330(d)(1) because it is not relevant to the question of whether the Appeals officer abused her discretion.”).

Let me say that, having represented many taxpayers at CDP hearings, it is often unclear what issue the hearing officer is concerned about.  It is a very rare taxpayer who would deliberately withhold evidence if the taxpayer really wanted to get relief.  In my experience, often a taxpayer receives a notice of determination and is shocked when reading it to find out that the hearing officer misunderstood some fact that could have easily been disproved if only the officer had pointedly asked for information or documentation on the fact.  That is why the Tax Court rule allowing supplementing the record with evidence that was not deliberately withheld gives a fairer chance to taxpayers of getting appropriate relief.  I don’t much care about the niceties of administrative law’s customary record rule.  The Tax Court’s history of de novo evidence in deficiency cases is a far more practical system for CDP cases.  CDP cases at Appeals are generally handled with little or no help from counsel (which the taxpayers cannot afford), and pro se individual taxpayers cannot be expected to create elaborate administrative records as, say, some company would do in challenging an EPA proposed ruling.  Thus, for practical reasons alone, I strongly support the Tax Court’s Robinette holding, with the limitation in Murphy that the taxpayer should not be allowed to introduce evidence that he or she deliberately withheld from the Appeals Officer.

Ever since it decided Robinette, the Tax Court has applied its Golsen rule such that it follows its own precedent (i.e., trial de novo) in CDP proceedings where the taxpayer lives in the D.C. Circuit or the eight other regional Circuits that have not decided the issue and follows the rule limiting its CDP proceedings to the administrative record for taxpayers who reside in the First, Eighth, and Ninth Circuits.  The Tax Court has done so under the undiscussed assumption that venue on appeal from one of its CDP decisions is to the regional Circuit in which the taxpayer lives.  The regional Circuits are where, since 1999, nearly every one of the 600-plus CDP appeals has been taken.  Since Byers was decided, the Tax Court has not revisited how it would apply the Golsen rule in a CDP case before it that, like Byers, only involved a complaint about a collection alternative (not the underlying tax).

The record rule dispute between the Tax Court and the three Circuit courts has not come up in any other Circuit Court opinion since 2009 because, while the issue is ever present during a Tax Court CDP trial, it is rarely an issue over which a taxpayer or the IRS will ground (or even mention in) an appeal.  At best, it is a side issue in appeals whether some evidence should or should not have been included in the Tax Court.  For this reason, this unfortunate split between the Tax Court and three regional Circuit has now been in force for about 6 years now.  It shows no sign of being resolved — probably ever — by the courts.

Although Mr. Byers and the Kuretskis (though not living in D.C.) had their own particular reasons for wanting to go to the D.C. Circuit, the reason I put so much effort into the amicus brief on venue that prevailed in Byers was that I was hoping the D.C. Circuit would rule that the D.C. Circuit alone was the proper venue on appeal for all CDP cases coming out of the Tax Court.  If it so ruled, and the Tax Court agreed, the Tax Court would say that, since the D.C. Circuit is the venue on appeal from its CDP holdings countrywide, and the D.C. Circuit has no precedent (yet) on the record rule issue, the Tax Court under Golsen is free to follow its own precedent in Robinettte and allow taxpayers countrywide to supplement the administrative record in CDP proceedings.  In effect, I wanted to make the three Circuit Court rulings on the record rule moot, since no appeals would ever go to those Circuits.  The DOJ fought Byers so hard not because the result I argued for was inconvenient to taxpayers, but because, if I won the Byers venue argument, it would lose the benefit of its three Circuit Court rulings on the record rule.  Indeed, that is why the DOJ attorney mentioned the record rule at the Byers oral argument, even though Mr. Byers had not tried to supplement his administrative record because he lived in the 8th Circuit.  Thus, Mr. Byers’ case was not a vehicle for litigating the administrative record rule issue, but the DOJ and IRS knew that the record rule was the primary issue (from its perspective) that the government would be concerned about.  (After all, the government regularly appears in all Circuit courts, and the D.C. Circuit is only a few blocks away from where the DOJ appellate lawyers have offices.  The Byers venue ruling is actually more convenient to the DOJ appellate lawyers.)

What I would do is amend section 6330(d)(1) to add the following at the end of the current paragraph:

“The record in the appeal shall consist of the administrative record created before the Internal Revenue Service Office of Appeals and any supplemental evidence that the Tax Court deems relevant, so long as such supplemental evidence was not deliberately withheld by the taxpayer from the Office of Appeals during the hearing.  For all issues in the appeal, the Tax Court’s standard of review shall be abuse of discretion, except that it shall be de novo as to any issue concerning either underlying tax liability under subsection (c)(2)(B) or whether the period in section 6502(a) has expired.”

Suspension of Time to File Tax Court Petition for Innocent Spouse and CDP Cases When Taxpayer Files Bankruptcy – Similar to the last problem described, Congress did not make special provision for innocent spouse and CDP cases upon their creation to create a similar path for them that exists for deficiency cases.  The Tax Court probably had to hold its nose when addressed this issue in Drake v. Commissioner, where it held that a pending bankruptcy precluded the filing of a 6015(e) case.  That opinion where the Tax Court was forced by the statute to reach a bad result drives this change. In the Bankruptcy Tax Act of 1980 Congress passed legislation to sync up the tax code with the then newly passed bankruptcy code.  In BC 362(a)(8) Congress created an automatic stay on commencing or continuing a Tax Court case while the automatic stay was in effect.  The extension of the stay to Tax Court litigation seems odd but the effect prevents taxpayers from petitioning the tax Court while the stay exists.  This change extends the time in which innocent spouse and CDP cases can file Tax Court petitions if the stay creates a bar to filing a Tax Court petition and remedies the problem address in Drake.

Application of Federal Rules of Evidence – This is another Golsen rule issue but not one I have ever seen in action.  The current provision requires the Tax Court to apply the rules of evidence used by the United States District Court for the District of Columbia in cases tried without a jury.  The Tax Court applies those rules even if it is trying a case appealable to a circuit which has interpreted the rules of evidence differently.  This creates a potential problem if the rule of evidence causes the party to lose the case in Tax Court but would have the opposite result applying the rule of the circuit to which appeal would lie.  The change allows the Tax Court to apply the rule of evidence for the circuit to which the appeal lies avoiding a decision that requires an appeal to get to the controlling result.

In casting about to find a case demonstrating this, I consulted with Carl. He pointed me to a case he worked on when he was a clerk for Judge Nims over 30 years ago.  Here is his description of the issue:

In Pacella v. Commissioner, the Tax Court held that held that ink analysis was not a sufficiently recognized to be accepted was not a sufficiently recognized to be accepted by the Tax Court under the D.C. Cir.’s Frye standard, though a number of other Circuits had already rejected the Fyre standard.  Pacella lived in the 2d Cir.  There is no subsequent appellate history, though the IRS lost Pacella on not just the evidentiary issue.  In Pacella, on the evidentiary issue, Nims [with Carl’s assistance] wrote:

In determining questions of evidence, the Tax Court is governed by “the rules of evidence applicable in trials without a jury in the United States District Court of the District of Columbia.” Sec. 7453; Rule 143(a), Tax Court Rules of Practice and Procedure.

The test for ascertaining whether evidence is admissible as scientific was first enunciated by the Court of Appeals for the District of Columbia Circuit in Frye v. United States, 293 F. 1013 (D.C. Cir. 1923): Just when a scientific principle or discovery crosses the line between the experimental and demonstrable stages is difficult to define. Somewhere in this twilight zone the evidential force of the principle must be recognized, and while courts will go a long way in admitting expert testimony deduced from a well-recognized scientific principle or discovery, the thing from which the deduction is made must be sufficiently established to have gained general acceptance in the particular field in which it belongs. [293 F. at 1014; emphasis supplied.] Though this “general acceptance” test has been rejected by a number of circuits (see 3 J. Weinstein &  [19]  M. Berger, Weinstein’s Evidence, par. 702[03], at 702-17 n. 7 (1981), and cases cited therein), it is still applied in the District of Columbia Circuit; see United States v. McDaniel, 538 F.2d 408, 412-414 (D.C. Cir. 1976) (spectrographic voice identification); United States v. Addison, 498 F.2d 741, 743-745 (D.C. Cir. 1974) (spectrographic voice identification); United States v. Skeens, 494 F.2d 1050, 1053 (D.C. Cir. 1974) (polygraph); therefore we apply it here. Id. at 614.

[In Daubert v. Merrell Cow Pharmaceuticals, Inc. 509 U.S. 579 (1993), the Supreme Court resolved the Circuit split and rejected the Frye rule on scientific evidence in favor of a more liberal rule based on relevancy.]

Judicial Conduct and disability procedures – This provision authorizes the Tax Court to create procedures allowing parties to file complaints with respect to the conduct of its judges and to allow the Tax Court to establish procedures for investigating and resolving those complaints.  It brings the Tax Court into alignment with Article III courts in establishing such a procedure.

Administration, Judicial Conference and Fees – Most of the rules governing federal courts reside in Article 28 and do not apply to the Tax Court.  The Tax Court does not come under the Administrative Office of the United States Courts.  Because it sits to the side, many of the enabling legislation concerning courts do not apply to it and hampers some of its operations.  Not being under the Administrative Office keeps the Tax Court out of the PACER system for electronic court records and causes the Tax Court to create its own system and own rules for electronic access.  This legislation fill some of the holes explicitly allowing the Tax Court to hold judicial conferences and charge reasonable fees for attending, to deposit certain fees into a special fund at Treasury to offset appropriated funds for court operation and maintenance and to provide the Tax Court with the same general management, administrative and expenditure authorities available to Article III courts.

Tax Court not an Executive Agency – Recent litigation in the Kuretski case covered here extensively, brought to light the removal clause provision, IRC 7443(f).  The DC Circuit’s decision that the Tax Court is an executive branch court for removal clause purposes even though the Supreme Court seemed to say it was a judicial body for appointments purposes has created uncertainty and concern.  This provision clarifies that the Tax Court is not with the Executive Branch.

The Kuretski case is before the Supreme Court with a cert petition. Whether this legislation will moot the need for Supreme Court review of the issue remains to be seen.  We plan to write further on the issue and note with pride that the Senate document cited to our blog to link readers to the cert petition filed in this case.