Seven Tax Court Judges Depart From the Court’s Penalty Pleading Precedents

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Today, we welcome back our most frequent guest blogger, Carl Smith.  Carl identifies an area of inconsistency in Tax Court rulings related to penalties.  This issue carries particular importance for the many pro se petitioners who go to Tax Court because they frequently fail to specifically mention penalties when assigning error in their pleadings.  Last month, I had the opportunity to participate in the Duke Law Journal’s Annual Symposium on Administrative Law.  Most of the papers submitted focused on how tax law was special, or not special, with respect to the rules that apply across the board in administrative law.  I had the pleasure of serving as the discussant of a paper by Professor Leandra Lederman on the Dobson case decided by the Supreme Court over 60 years ago, in which it held that the Tax Court was special and its opinions required special deference on appeal.  While Congress reversed that opinion a few years later, we need to consider how special the Tax Court is in many ways among federal courts.  Its high level of pro se petitioners causes it to adopt rules that must work for the most sophisticated of litigants and the least sophisticated and to seek to apply those rules in a fair and consistent manner.  The inconsistency that Carl has identified points to the difficulty the Court has in creating and implementing precedent that applies across the spectrum of cases it receives.  The inconsistency noted here demonstrates the continued concern the Court shows for the pro se litigants coming to its door.  Keith 

Stare decisis is a method for assuring litigants that they will be treated the same way that others have been treated.  It also helps ensure Equal Protection to litigants.  As you know from prior blog posts (the last in mid-February), I have been keeping up with the issue decided in Rand v. Commissioner, 141 T.C. No. 12 (Nov. 18, 2013).  See previous posts on Rand here, here, and hereRand held that improperly claimed refundable credits factor into the “underpayment” under section 6664(a) on which the accuracy-related penalty is imposed, but only to they extent that the credits reduced the tax shown on the return to zero — not below zero.  I have been looking into subsequent cases in the Tax Court that have presented the Rand issue, and I have come to a surprising finding:  Tax Court Judges are often completely ignoring the Tax Court’s current precedents on the requirements to plead penalty issue — mostly ruling in more taxpayer-favorable ways. This violation of stare decisis is troublesome.  I can only conclude that some judges don’t like the precedent.  But, if that is the case, the precedent should be overruled, not randomly ignored.  Indeed, as I will explain below, I think the Tax Court precedent on pleading penalty issues is not in accord with Congress’ enactment of section 7491(c) in 1998.  I would like the Tax Court to change its penalty pleading precedent to conform with what many Tax Court judges are currently doing with their Rand-type cases. 



 Rand was the first precedential Tax Court opinion on this “underpayment” issue, though, actually, it was the fourth case in which the Court ruled on the issue. The three prior occasions (coming essentially to the same result) were in non-precedential S case opinions. Since Rand, a search of Tax Court opinions and unpublished orders reveals 11 more cases in which the “underpayment” issue has been presented.  

Then, in addition, there are the Morales cases, T.C. Memo. 2012-341, supplemented by T.C. Memo. 2013-192, where I am counsel of record in 9th Circuit appeals.  The Moraleses had filed pro se petitions in the Tax Court.  Judge Kroupa found that they had improperly claimed first-time homebuyer credits and were liable for accuracy-related penalties on the deficiencies because of negligence.  After this first opinion was issued, I entered pro bono appearances for the Moraleses and timely moved to reconsider the opinion.  I argued that section 7491(c) imposed on the IRS the burden of production on penalties and that burden included showing there was an “underpayment.”  Making the same arguments being made in Rand, I argued there were no underpayments from the disallowed credits because the improper credits did not reduce the Moraleses’ tax liabilities; the credits only generated refunds.  In her second opinion in the case, Judge Kroupa denied the motion for reconsideration — even though she was aware that the Rand case was then pending and might rule in favor of those taxpayer on the very underpayment issue I raised.  Judge Kroupa cited to two Tax Court opinions in support of her ruling:  Swain v. Commissioner 118 T.C. 358 (2002), and Funk v. Commissioner, 123 T.C. 213 (2004).  In those cases, the Tax Court was faced with interpreting how its pleading rules interacted with the new section 7491(c). 

Under Tax Court Rule 34(b)(4), any issue not pleaded is deemed conceded.  Therefore, prior to the enactment of section 7491(c), where a notice of deficiency included proposed penalties, but the Tax Court petition (or later briefing) did not mention the penalties, the Tax Court would hold that the penalties had been conceded.  

Section 7491(c) provides:  “Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.”   

In Swain, a taxpayer filed a petition that, among other things, did not identify any particular errors in the proposed penalties included in the notice of deficiency.  The IRS moved to strike various parts of the petition and sought summary judgment on several other issues, including its entitlement to the penalties.  The IRS argued that, despite the enactment of section 7491(c), if a taxpayer does not assign errors to the penalties, then the IRS has no burden to introduce any evidence (such as of late-filing or negligence) to be awarded the penalties.  Judge Halpern agreed, stating: “The Commissioner’s burden of production under section 7491(c) is to produce evidence that it is appropriate to impose the relevant penalty, addition to tax, or additional amount (without distinction, penalty). See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Unless the taxpayer puts the penalty into play, however (by assigning error to the Commissioner’s penalty determination), the Commissioner need not produce evidence that the penalty is appropriate, since the taxpayer is deemed to have conceded the penalty in the decision.” 118 T.C. at 363. Funk involved essentially the same issue, but the motion involved was one to dismiss for failure to state a claim upon which relief could be granted.  In Funk, Judges Dawson and Panuthos held that the tax protesting taxpayer’s failure to raise any particular issues about the penalties in the petition relieved the IRS of having to introduce any evidence in support of the penalties.

But, a few years later, it appears that the Tax Court had second thoughts about Swain and Funk.  In Wheeler v. Commissioner, 127 T.C. 200 (2006), affd. 521 F.3d 1289 (10th Cir. 2008), another tax protestor raised largely frivolous arguments in his petition, but his petition also stated:  “‘The Petitioner is not liable for any determination of penalties and/or interest in the notice of deficiency” and that ‘The Petitioner is not liable for a penalty at 26 U.S.C. section 6654.'”  Wheeler, 127 T.C., at 203.  Judge Marvel wrote: 

In the petition, petitioner contested his liability for the additions to tax.  Although the petition is unclear in many respects and does not follow the format that Rule 34(b) requires for a properly prepared petition, petitioner nevertheless asserted in the petition that he was not liable for the additions to tax, and respondent was put on notice that petitioner’s liability for the additions to tax was an issue.  We conclude, therefore, that petitioner assigned error to the additions to tax, see Swain v. Comm’r, supra, at 364-365, and respondent had the burden of production under section 7491(c) to come forward with evidence that it is appropriate to hold petitioner liable for the additions to tax.  Therefore, we must review the record with respect to each addition to tax to ascertain whether respondent met his burden of production. Id. at 207.  

Judge Marvel went on to find that neither the section 6651(a)(2) nor 6654 penalties could be imposed.  The former could not be imposed because the IRS had failed to prove that it had prepared a substitute for return for the year that could form the basis of the late payment penalty — which is imposed on the tax shown on the return.  The latter estimated tax penalty could not be imposed because the IRS had not introduced any evidence going to the previous year’s taxes — a figure that can impact the required quarterly installment amount that goes into calculating the penalty.  Thus, under Wheeler, it appears that if the IRS is put on notice that penalties are contested generally, then the Tax Court enforces all penalty sub-issues against the IRS, even though the taxpayer has never pleaded those sub-issues. 

In the 9th Circuit, I will point out that, under the Wheeler pleading rule, the Moraleses should be able to have the Tax Court judge make the IRS prove an “underpayment,” since in the Moraleses’ petitions, they each complained about IRS delays in sending the notices of deficiency that resulted in needless accumulation of “penalties and interest” — and both the judge and the IRS proceeded at trial as if the penalties were at issue.  In other words, the petitions put the IRS on notice that penalties were contested generally, so it is the judge who must enforce against the IRS the presentation of proof on all sub-issues (whether or not they are also pleaded), including that there were underpayments.  That’s how I read Wheeler

However, I don’t think Wheeler is the right rule, and I suspect many Tax Court judges don’t either, since my research indicates that many Tax Court judges — when faced with petitions presenting the “underpayment” issue faced in Rand — completely ignore Wheeler, Swain, and Funk.  In my view, section 7491(c) should be read to overrule, in the case of penalties, Tax Court Rule 34(b)(4)’s direction that any issue not pleaded is conceded.  In my view — also apparently shared by a number of Tax Court judges — in the case of pro se individual petitions, there is no need for the taxpayer even to mention penalties for the IRS to have to shoulder the burden of proving its entitlement to penalties.  In court proceedings involving notices of deficiency proposing penalties on individuals, Congress’ goal in placing the burden on the IRS was to make sure the IRS had good reasons for the penalties, and for the court to test those reasons.  Congress must have known how few pro se petitioners ever mention penalties in their petitions.  Thus, it would not have wanted a rule that only placed the burden of production on the IRS for those wealthy individuals who could hire lawyers who could draft pleadings specifically contesting penalties.  Apparently, no one made this argument to the Tax Court in Swain, Funk, or Wheeler, where the tax protestor taxpayers proceeded pro se.  So, I can’t blame the Tax Court too much for agreeing with the unopposed IRS interpretation of the interaction of 7491(c) and Rule 34(b)(4).

In connection with representing the Moraleses, except as to the earliest two petitions from over 12 years ago that have been destroyed, I have managed to obtain from the Tax Court Reproduction Office copies of petitions and amended petitions in all 12 cases (other than Rand) where a judge has to date raised the Rand issue.  One of those cases was decided before Rand.  Seven of those cases were decided after Rand.  And four of those cases are still pending, but the judge has asked the IRS to demonstrate that there is an underpayment in light of the Rand opinion. All 12 of the cases were filed pro se.  In not a single petition has the taxpayer raised the “underpayment” issue.  Indeed, only a single petition mentions penalties at all — by requesting the Tax Court to “remove the fines.”  In none of the cases did the taxpayers ever file pre-trial or post-trial memoranda or briefs in which they might have raised contests to the penalties.  Yet, the judges, clearly sua sponte, have made the IRS prove that there was an underpayment, even though, except in one case, the taxpayers never even generally raised the penalties.  Thus, for 11 of the 12 cases, the judges violated the precedents Swain, Funk, and Wheeler, since those opinions would say that a taxpayer who has not even ever mentioned penalties has conceded them. 

Because I am not sure that Tax Court judges realize how generally they and other judges ignore Swain, Funk, and Wheeler, and because they may wish to reconsider those precedents, below, I name names.  I do this not to embarrass anyone, but to make judges aware of what is going on in largely unpublished orders or summary opinions that effectively, by omission, hide the issue. 

In the following three published opinions, even though the taxpayers never mentioned penalties in their petitions, judges both imposed the burden of production on the underpayment issue on the IRS, but held that the IRS had not met that burden and reduced or eliminated the penalties sua sponteSolomon v. Commissioner, T.C. Summary Op. 2008-95 (Panuthos, CSTJ.); Richardson v. Commissioner, T.C. Summary Op. 2014-9 (Dean, STJ.); Li v. Commissioner, T.C. Summary Op. 2013-97 (Haines, J.). None of these opinions mention what was said about penalties in the petitions.  I checked.  Nothing was. 

In the following five cases, even though the taxpayers only in one case (Weisinger) even mentioned penalties (requesting the elimination of the “fines”), judges both imposed the burden of production on the underpayment issue on the IRS, but held, in unpublished orders, that the IRS had not met that burden and reduced or eliminated the penalties sua sponteWeisinger v. Commissioner, Docket No. 15555-11S (order of dismissal and decision, dated Nov. 22, 2013) (Morrison, J.); Arnold v. Commissioner, Docket No. 8369-13S (order of dismissal and decision, dated Feb. 27, 2014) (Carluzzo, STJ.); Bey v. Commissioner, Docket No. 3469-13 (order of dismissal and decision, dated Mar. 11, 2014) (Carluzzo, STJ.); Bukshpan v. Commisioner, Docket No. 24533-10 (order and decision modifying submitted stipulated decision, dated Mar. 13, 2014) (Morrison, J.); Aumann v. Commissioner, Docket No. 23021-10 (order and decision modifying submitted stipulated decision, dated Mar. 12, 2014) (Morrison, J.).  The orders in Bukshpan and Aumann are particularly interesting, since there, in IRS filings made in late February before Judge Morrison ruled against the IRS on the Rand issue, the IRS actually objected that the petitions did not mention penalties, so, under Swain and Funk, the taxpayers were deemed to have conceded the correctness of the penalties.  In his orders in March, Judge Morrison did not explain why Swain and Funk did not apply or even mention those opinions.  He simply reduced the penalties consistent with the Rand opinion, leaving the IRS to appeal, if it wants to, to the D.C. Circuit both on the Rand issue and his failure to follow the Swain and Funk pleading holdings.  The IRS can appeal the Bey order to the 4th Circuit.  Rand is appealable to the 7th Circuit. 

Finally, in four unresolved cases, even though the taxpayers’ petitions did not mention penalties at all, either the judge or the IRS has raised the “underpayment” issue and the noncompliance of proposed settlements of the cases with Rand.  In Braitman v. Commissioner, Docket No. 21779-12S, Zyslin v. Commissioner, Docket No. 30026-12S, and Schutz v. Commissioner, Docket No. 30420-12S, on the day that the Rand opinion was issued, the taxpayers and the IRS reached bases of settlement that apparently imposed penalties on disallowed refundable credits in conflict with Rand. The cases are being held in limbo by Judge Lauber until the IRS reports to him, by April 14, about what its position is with respect to the Rand opinion and the proposed settlements. In Faecher v. Commissioner, Docket No. 16049-12, on October 21, 2013, the parties submitted a proposed decision to Judge Gale, but he declined to enter it.  Rather, on January 30, 2014, he issued an order in the case, sua sponte, noting that the amounts of the accuracy-related penalties were computed inconsistently with Rand and directing the IRS to “show cause why [it] has satisfied [its] burden of production under section 7491(c) that the imposition of section 6662(a) penalties in this case is appropriate.”  In its responsive filing, the IRS did not point out that the petition did not even mention penalties, and so it should not have the burden of production on penalties.  Rather, the IRS argued merely that Rand was wrongly decided. 

In summary, seven Tax Court judges — Judges Panuthos, Dean, Haines, Carluzzo, Morrison, Lauber, and Gale – have, sua sponte, raised the Rand penalty issue in cases where the taxpayers did not plead it (or, in nearly every case, did not even mention penalties in their petitions or otherwise in their cases).  Thus, those judges ignored the Tax Court precedents in Swain, Funk, and Wheeler.  The pleading holdings in Swain and Funk have merely been applied by Judge Kroupa to the Moraleses.  It seems to me that if seven judges don’t want to follow the pleading precedents, it is time to reexamine them.  And I think the seven judges have it right:  Pro se individual taxpayers should not be required to plead anything about penalties in their petitions to get the benefit of Congress’ placement of the 7491(c) burden of production on all penalty issues on the IRS.



Carlton Smith About Carlton Smith

Carlton M. Smith worked (as an associate and partner) at Roberts & Holland LLP in Manhattan from 1983-1999. From 2003 to 2013, he was the Director of the Cardozo School of Law tax clinic. In his retirement, he volunteers with the tax clinic at Harvard, where he was Acting Director from January to June 2019.


  1. Charles Barrett says

    In the case United States v Barrett’s they have paid in $253000 the amount if the refund demanded back by the plaintiff was $217,000.

    The amounting still being demanded by IRS is mostly penalty and interest. In march 2013 they submitted accounting to the court and added $190,000 in penalty and interest . They neglected to inform the court they were adding interest monthly and subtracting that from the Barrett’s $5000 payment.

    Is this in line with your discussion in this Blog ?

    Thank you

    • Carl Smith says

      I’m sorry, Mr. Barrett for not responding to you before. The Supreme Court has held that one must first pay the tax in full before bringing a tax refund suit. See Flora v. U.S., 362 U.S. 145 (1960). This raised a question, though, about whether a taxpayer has also to pay all of the penalty and interest before bringing a refund suit. That question was answered in a Federal Circuit opinion in a rather odd way. In Shore v. U.S, 9 F.3d 1524 (1993), the court held that, generally, a taxpayer in a refund suit only has to pay the tax before brining the suit. However, it wrote: “Only if the taxpayers assert a claim over assessed interest or penalties on grounds not fully determined by the claim for recovery of principal must they prepay such interest and penalties as well as the assessed tax principal.” An example of what the court was thinking of for penalties to have to be paid first is where the taxpayer wants to argue something specific about the penalties — e.g., that they should not apply to him because he had a defense of reasonable cause. An example for the interest to have to be paid first is where the taxpayer argues that the IRS has miscomputed the interest — e.g., starting from a wrong date. I don’t know what your case is about, so I can’t say how the Shore rule would apply in your case.

      The government has adopted the Shore rule as correct, so it won’t object if you follow it. However, how much needs to be paid is a jurisdictional question that a court is free to raise on its own. There may be some district courts who, on their own, may decide this jurisdictional issue differently.

  2. Charles Barrett says

    Please excuse my typos. I am using a phone and my fingers are to large.

    I should have proof read it before sending.

  3. Carl Smith says

    If the Tax Court does want to reconsider its holdings in Swain, Funk, and Wheeler, it might consider this argument:

    Congress enacted sec. 7491(c), which provides: “Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.” Although Tax Court rules of pleadings are not directly provisions of Title 26, their sole existence is authorized by sec. 7453. Thus, indirectly, 7491(c) overrides Tax Court Rule 34(b)(4) to the extent it requires individual petitioners to plead the inaccuracy of penalties or have the penalties conceded.

  4. Eric Rasmusen says

    “(4) Clear and concise assignments of each and every
    error which the petitioner alleges to have been committed
    by the Commissioner in the determination of the deficiency
    or liability. The assignments of error shall include issues
    in respect of which the burden of proof is on the Commissioner. Any issue not raised in the assignments of error
    shall be deemed to be conceded. Each assignment of error
    shall be separately lettered.”

    Reading hastily, I don’t know if I understood the general issue. Here are a couple of possibilities:
    1. If the taxpayer pleads that he filed and paid on time and wins but didn’t plead that he shouldn’t have to pay penalties and interest, he still has to pay the penalties and interest.
    2. If the taxpayer pleads that he filed and paid on time and wins but didn’t plead that he shouldn’t have to pay penalties and interest, he still has to pay the interest, but not the penalties.
    3. If the taxpayer pleads that he filed and paid on time and loses, but he actually did pay on time because of withholding, then he still has to pay the interest the IRS wrongly asked for.

  5. Eric Rasmusen says

    There’s another angle here, of jurisprudence generally. If the plaintiff fails to plead X, the rules may say that he loses his right to X. But does that mean it is forbidden for the judge give it back to him sua sponte? When courts allow amended pleadings—- which I guess are usually a matter of grace rather than right— this is little different. The rule then just says that if the judge decides *not* to allow consideration of X, the plaintiff is not allowed to appeal X.
    If this interpretation is valid, the 7 judges haven’t broken with precedent.

    But I don’t know how the general legal principle works out. If attorney X fails to object to a question asked of a witness by attorney Y, can the judge raise an objection to it sua sponte?

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