The End of the Line for the Pareskys?

Guest blogger Bob Probasco returns today with perhaps his final update on the Paresky case. Christine

I’ve blogged about the Paresky case before (here, here,  here, and here).  The latest development, and probably the end of the line, came on Friday when the Eleventh Circuit issued its opinion.  The circuit court agreed with the district court, as well as the Second Circuit in Pfizer Inc. v. United States, 939 F.3d 173 (2d Cir. 2019), and the Federal Circuit in Bank of America Corp. v. United States, 964 F.3d 1099 (Fed. Cir. 2020).  District court jurisdiction for “tax refund suits” does not apply to stand-alone suits for additional overpayment interest.

Nothing about the decision was really surprising.  The contrary decision in E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005) was always a strained interpretation of the jurisdictional statutes, and the trend has been moving away from that interpretation over the past few years.  The Eleventh Circuit evidently thought it was an easy case as well; Carl Smith pointed out to me that the decision came only 35 days after oral argument, compared to 17 months for the Pfizer decision.  That’s fast!  But I thought I would offer a few comments as we perhaps close this chapter.

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What was this dispute all about, again?? There are two provisions that might offer district court jurisdiction for a stand-alone case seeking additional interest from the government on tax overpayments.  28 U.S.C. § 1346(a)(1) covers claims for recovery of taxes, that is, tax refund suits.  28 U.S.C. § 1346(a)(2)—the “little” Tucker Act—covers claims against the government under the Constitution, Acts of Congress, regulations, contracts with the government, or non-tort damages.  The little Tucker Act is limited to claims of $10,000 or less, whereas the courts can hear tax refund suits for any amount.  Under 28 U.S.C. § 1491(a)(1), however, the Court of Federal Claims can hear Tucker Act claims for any amount.

Court also have, with very rare exceptions, concluded that a tax refund suit—even if that includes stand-along cases for additional overpayment interest—is subject to the 2-year statute of limitations (from the IRS denial of the administrative claim) in section 6532.  Tucker Act claims, however, fall under the general 6-year statute of limitations (from the date the cause of action accrued, generally when the overpayment was scheduled): 28 U.S.C. § 2401 for district courts or 28 U.S.C. § 2501 for the CFC.

In these cases—Scripps, Pfizer, Bank of America, and Paresky—the taxpayers were arguing that their cases fit under “refund suit” jurisdiction.  And the government was arguing strenuously that their claims only qualified for jurisdiction under the Tucker Act.  Thus, when the amount at issue was over $10,000, the CFC would be the only available forum.

If taxpayers can always go the Court of Federal Claims, why is this important to them??

I think it’s primarily a matter of forum-shopping.  Pfizer’s case involved an issue—interest payable when a refund check is lost and has to be re-issued—for which there was a favorable Second Circuit precedent: Doolin v. United States, 918 F.2d 15, 18 (2d Cir. 1990).  Bank of America’s case, on the other hand, appears to have been filed in Western District of North Carolina to avoid an unfavorable Federal Circuit precedent, specifically, Wells Fargo & Co. v. United States, 827 F.3d 1026 (Fed. Cir. 2016).  (I’m guessing here, but it seems very likely from looking at the pleadings that Wells Fargo would have been a huge incentive to avoid the Federal Circuit.)

For Pfizer and Bank of America, the courts’ decision were not fatal.  Pfizer could still hope for the same result in the CFC; at least, I’m not aware of any negative precedent there.  Bank of America may have lost a significant portion, but not all, of its claim by winding up in the CFC.

The Pareskys, though, were not forum shopping.  In fact, they initially filed suit in the Court of Federal Claims.  But they faced a statute of limitations problem.  By the time they filed suit, the 6-year statute of limitations for Tucker Act claims had expired.  So the CFC dismissed their case for lack of jurisdiction but transferred it to the Southern District of Florida at their request.  A refund suit, for which the statute of limitations had not yet expired, was their only hope.  (The Eleventh Circuit pointed out in a footnote that the Tucker Act statute of limitations had not expired yet when the IRS denied their refund claim, so they still had time to file in the CFC.  And, of course, they could have filed suit even while the refund claim was pending.  Alas, they did not.)

Does this result make sense from a policy perspective?

Debatable.  There are two conflicting policies involved here.  On the one hand, Congress wanted most—and all large—Tucker Act claims to go to the CFC, because claims against the federal government are their area of expertise.  Thus, the $10,000 limit on Tucker Act claims in district court; provide easier access to local courts, but only for smaller cases where the difficulty and expense of litigating in a far-off forum would be relatively harsher.

On the other hand, Congress wanted taxpayers to be able to bring all federal tax refund suits in their local forum.  That may have reflected a judgement that: (a) the relative expertise of the CFC is less of an issue; and (b) there may be a lot more tax refund suits than Tucker Act claims, so it’s better to spread those out. Which of those policies should rule when the suit at issue is for additional interest on federal tax overpayments?  Hard to say.  There are fewer of these cases than tax refund suits, and it may be beneficial to establish precedents that will apply uniformly to all taxpayers.  But the same rationales for district court jurisdiction without a dollar limitation for refund suits might apply to these suits as well.  I doubt if Congress collectively gave it much thought.  If they had, perhaps they would have been comfortable with district courts hearing these cases, just as Pfizer, Bank of America, and the Pareskys wanted.  But we now have three circuit courts that have decided that’s not what Congress enacted.

So, is this really the end of the line for the Pareskys?

They’re really very sympathetic plaintiffs.  The dispute arose out of their losing a lot of money in the Bernie Madoff Ponzi scheme and filing refund claims to recoup taxes because of the loss.  (Rather ironic that Mr. Madoff passed away between oral arguments and the decision, isn’t it?)  This decision is pouring salt on the wound.  But, alas, I don’t see much hope at all for them.  They might ask for an en banc review or file a cert petition with the Supreme Court.  But I think both would likely be rejected.  (DOJ Tax Division might like to see this case go to the Supreme Court, to overturn Scripps, but I seriously doubt if they could convince the Solicitor General to support granting cert.)  And even if an en banc review by the Eleventh Circuit or cert by the Supreme Court were granted, I would certainly expect them to reach the same decision.

As far as the issue in general, without a Supreme Court decision, we may still see some of these cases crop up occasionally in other circuits.  The score is still only 3–1 and if the money involved is enough and precedents dictate that a district court would be a more favorable forum, taxpayers may take a shot at it.  But if the issue comes before any of the nine circuits remaining that still haven’t addressed it, I expect they would wind up agreeing with the Second, Eleventh, and Federal Circuits.

TEFRA + LCU = Confusion, Part 3

In today’s post Bob Probasco concludes his three-part series on General Mills and the intersection of TEFRA and “hot interest.” Part One can be found here. Part Two, here. Christine

In Part 1, I described the decision by the Court of the Appeals for the Federal Circuit in General Mills, Inc. v. United States, 957 F.3d 1275 (Fed. Cir. 2020), aff’g 123 Fed. Cl. 576. (2015).  The taxpayer’s refund suit sought recovery of $6 million of excessive underpayment interest, but the court dismissed the case based on a jurisdiction issue from a special TEFRA provision.  I thought that the court made a crucial assumption, never clearly stated, as to the conceptual framework for adjustments resulting from a TEFRA proceeding.  Part 2 explained why an alternative framework, which would have supported the taxpayer’s position instead of the government’s, is not only possible but perhaps the best way to think about these issues.  Because the court dismissed the case for lack of jurisdiction, based on the TEFRA provision, we didn’t get a decision regarding the merits issue, concerning whether the IRS has assessed too much interest.  It’s an issue that I had never dealt with before and I think the IRS’s position may be wrong.  That’s what today’s post, Part 3, is about.

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Background

The case involved two sets of tax returns and audits: those for the General Mills (“GMI”) corporate tax returns and those for partnership tax returns for General Mills Cereals, LLC (“Cereals”).  Various members of the GMI consolidated group were partners in Cereals, so the partnership tax returns – and any audit adjustments – for Cereals flowed through to GMI.  The IRS audited the 2002-2003 tax returns (both corporate and partnership) and later the 2004-2006 tax returns (same).  Although there are some slight differences between the audits for those two periods, for simplicity I will focus on the 2002-2003 tax returns.

Audits began for both GMI and Cereals in 2005 for these years.  The IRS issued a 30-day letter for the GMI audit on June 15, 2007, asserting proposed deficiencies of more than $143 million for 2002 and almost $83 million for 2003.  The partners in Cereals entered into settlement agreements in July 2010.  On August 27, 2010, the IRS issued a document described as a “notice of computational adjustment” to GMI, identifying additional underpayments, resulting from the Cereals audit, of about $16 million for 2002 and more than $33 million for 2003.

The IRS assessed additional taxes, penalties, and interest resulting from the Cereals audit in September 2010.  GMI paid all outstanding balances for these years, including interest, on April 11, 2011.  The IRS sent GMI detailed interest computation schedules for these years, apparently for the first time, on April 18, 2011 and April 20, 2011.  The schedules reflected that the IRS began charging a higher underpayment interest on July 15, 2007.  GMI filed refund claims on March 28, 2013, arguing that the interest IRS accrued and assessed was almost $6 million too high.  GMI then filed this refund suit on January 30, 2014.

The Basis for GMI’s Refund Claim – LCU Interest The interest rate for large corporate underpayments (LCU) is governed by section 6621(c), as supplemented by Treas. Reg. § 301.6621-3, which increases the normal underpayment interest rate by 2% for a corporate taxpayer’s underpayments that exceed $100,000.  It was enacted in 1990, as part of the Omnibus Budget Reconciliation Act, and has typically been referred to by practitioners ever since as “hot interest.”  There are two key concepts in determining whether, and when, to apply hot interest: the “threshold underpayment” and the “applicable date.”

Threshold Underpayment

Whether hot interest applies is not, oddly enough, determined by comparing the underpayment balance to $100,000.  The regulation establishes a “threshold underpayment,” a term of art that appears only here.  Hot interest applies if that amount, rather than the underpayment balance, exceeds the $100,000 statutory requirement.  The threshold underpayment is defined as the correct amount of tax (excluding penalties and accumulated interest) less all payments made by the last date prescribed for payment.  Thus, it appears to be a cumulative amount rather than the result of a particular transaction such as an audit.  (But see below regarding “applicable date.”)  Once hot interest is triggered, the higher interest rate would apply to the entire underpayment balance going forward, including interest and penalties and any amounts subsequently assessed.  Under the IRS interpretation, hot interest would apply even if the actual underpayment balance declines below the $100,000 threshold as a result of payments.

The existence of a threshold underpayment is determined only when there is an assessment, not merely because of a proposed deficiency.  (Contrast the determination of the “applicable date” discussed below.)  If the taxpayer receives a 30-day letter or a notice of deficiency for $110,000 but the amount is reduced to $90,000 prior to assessment, the threshold underpayment is only $90,000 and hot interest does not apply.  But even if an amount greater than $100,000 is originally assessed, the regulation states that hot interest will not apply if a subsequent judicial determination reduces the tax liability (and therefore the threshold underpayment) below $100,000.

The regulation doesn’t specifically address whether a subsequent administrative determination reducing the tax liability (e.g., an abatement resulting from a refund claim) would reduce the threshold underpayment, potentially below $100,000.  Based on the definition of the threshold underpayment in the Code, it should – but I haven’t run across a ruling on this specific question.  The IRS has challenged whether an abatement reduces the threshold underpayment but to my knowledge only in the specific context of an NOL carryback.  The IRS lost, in Med James, Inc. v. Commissioner, 121 T.C. 147 (2003), but in that case the reduction from an NOL carryback was asserted as a counterclaim in a deficiency proceeding.  If the abatement had been granted in an administrative determination, the taxpayer might have had to pay and file a refund claim/suit to address the hot interest issue.

Determining the amount of the threshold underpayment is complicated enough that the IRS can easily make mistakes.  But if you look at the amounts above, it’s clear that GMI met the threshold underpayment requirement.  That is only one part of the answer, though.  To determine whether/when hot interest applies, the IRS also must determine the applicable date. 

Applicable Date

Interest on underpayments generally runs from “last date prescribed for payment,” typically the unextended return due date.  The higher rate for hot interest only applies “for periods after the applicable date.”  For assessments subject to deficiency proceedings, the applicable date is 30 days after the earlier of a “letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals” (i.e., a 30-day letter) or the notice of deficiency.  That’s section 6621(c)(2)(A).

Section 6621(c)(2)(B)(i) is a special rule that applies to tax assessments not subject to the deficiency procedures; for such underpayments, the applicable date is 30 days after a letter or notice of the assessment or proposed assessment.  This would apply to certain taxes other than income tax.  This category also would include two common situations involving income tax: amounts shown on the original return but not paid on or before the last date prescribed for payment, and summary assessments for “mathematical or clerical errors.”

Although not explicitly addressed in the Code, the regulation includes within the scope of section 6621(c)(2)(B)(i) “underpayments attributable, in whole or in part, to a partnership item.”  For those, the applicable date would be the 30th day after the first letter or notice that notifies the taxpayer of an assessment of the tax.

The Code also identifies three exceptions under which a letter or notice that otherwise qualifies would not establish an applicable date and start hot interest running:

  • A 30-day letter or notice of deficiency that is withdrawn.
  • A 30-day letter or notice of deficiency for which the taxpayer pays the amount in full within 30 days after the letter or notice is sent.
  • Any letter or notice involving “small amounts,” that is, an amount that is not greater than $100,000 (as with threshold underpayment, excluding penalties and interest). 

As with threshold underpayments, the proper determination of the applicable date may be complicated and subject to error.  GMI believed that the IRS applied the law incorrectly and charged hot interest when it should not have.

IRS application and GMI’s argument

Interest at the normal underpayment interest rates generally (with some common caveats) begins as of the filing due date, without regard to extensions, rather than when the IRS made the assessments.  But the increased interest rate for hot interest starts only on the applicable date. What does that mean when there are multiple assessments, including adjustments flowing through from TEFRA audits?

The IRS position apparently is that hot interest starts, for the entire underpayment balance, as of the first applicable date for any component of that underpayment balance.  As noted above, GMI’s corporate audit resulted in a 30-day letter issued on June 15, 2007.  So the IRS interest calculations increased the interest rate starting on July 15, 2007, one month later, for the entire underpayment balance, including that attributable to the computational adjustments from the TEFRA audit.

GMI, on the other hand, read sections 6621(c)(2)(A) and (B)(i) as bifurcating the underpayments for these tax periods.  The portion of the underpayment attributable to the corporate audit and the portion of the underpayment attributable to the TEFRA audit would have separate applicable dates.  Hot interest for the portion of the underpayment attributable to the corporate audit might start as of July 15, 2007.  But the first letter or notice that notified GMI of an assessment of tax from the TEFRA audit was issued on August 27, 2010.  So hot interest for that portion of the underpayment shouldn’t start until September 26, 2010, more than three years later than the applicable date the IRS used. 

I think GMI’s position is certainly a reasonable interpretation.  The Code is, as almost always, ambiguous and the drafters may not even have considered this situation.  GMI’s particular situation, an assessment resulting from a corporate audit followed by an assessment resulting from a TEFRA audit, is not explicitly addressed anywhere in the 4-1/2 pages of regulations either.  There are six examples in the regulations, but none involve this situation.  Indeed, none of the examples even involve a partnership adjustment.

GMI pointed out that section 6621(c)(2)(A) already uses a “the earlier of” comparison between a 30-day letter and a notice of deficiency for which no 30-day letter was issued.  If Congress didn’t want to bifurcate the underpayments in a situation like GMI’s, why not simply include the provision regarding non-deficiency proceedings as 6621(c)(2)(A)(iii) instead of 6621(c)(B)(i)?  

I think it would be possible to carry the argument even further, arguing that hot interest applies only at the level of individual components of the underpayment balance, rather than the entire balance.  Other interest provisions apparently work that way, e.g., the “restricted interest” provisions in sections 6601(c) and 6611(e).  The references in section 6621(c) to letters or notices arising from specific adjustments, rather than to the entire underpayment balance, are very similar to the restricted interest provisions.  That arguably suggests the same approach of applying the special rule to components rather than the entire balance.

That interpretation could also be inferred from the exception in section 6621(c)(B)(iii), under which a letter or notice for a deficiency or assessment less than $100,000 does not start hot interest running.  Before that provision was added in 1997, hot interest would be triggered when the threshold underpayment from two or three separate transactions exceeded $100,000.  That’s reflected in Treas. Reg. § 301.6621-3(d), Example 2, which has not been revised to be consistent with the Code provision as amended in 1997.  What’s the purpose of section 6621(c)(B)(iii)?  Maybe it reflects a determination that hot interest should be applied only to individual transactions over $100,000, rather than a cumulative balance.  And maybe that implies that the applicable date should be determined separately for each of those transactions.

Further support is available from the exception in section 6621(c)(B)(ii), under which a letter or notice for which the taxpayer pays the amount in full within 30 days does not start hot interest running.  That looks very much like an incentive for quick payment, doesn’t it?  But if hot interest applies at the level of the entire underpayment balance rather than individual transactions, the incentive starts looking strange.  There is an extra incentive to pay quickly for the first deficiency/assessment that triggers hot interest, but that extra incentive goes away for the second, third, etc. deficiency/assessment.  Why would that be the case? I don’t recall ever seeing this issue before the Federal Circuit’s decision came out.  The case was filed in the Court of Federal Claims in 2014, and that court ruled in 2015, but I missed those at the time.  To my knowledge, this issue has not been addressed in any other cases.  (If anyone has seen it elsewhere, please let me know!)  So I was eager to see the court’s analysis.  Alas, there was none.  The case was dismissed for lack of jurisdiction, so we’re still waiting for the courts to rule on this issue.

TEFRA + LCU = Confusion, Part 2

In Part Two of this three-part series, Bob Probasco examines the dissenting view in the recent General Mills case out of the Federal Circuit. Part One can be found here. Christine

In Part 1, I described the decision by the Court of the Appeals for the Federal Circuit in General Mills, Inc. v. United States, 957 F.3d 1275 (Fed. Cir. 2020), aff’g 123 Fed. Cl. 576 (2015). The parties’ briefs on appeal can be read here: Opening Brief, Answer, and Appellant’s Reply. The taxpayer’s refund suit sought recovery of $6 million of excessive underpayment interest, but the court dismissed the case based on a jurisdiction issue from a special TEFRA provision.  I thought that the court made a crucial assumption, never clearly stated, as to the conceptual framework for adjustments resulting from a TEFRA proceeding. 

Part 2 explains why an alternative framework, that would have supported the taxpayer’s position instead of the government’s, is not only possible but perhaps the best way to think about these issues.  This case involved the intersection of TEFRA and the complex interest provisions of the Code.  The combination is messy. 

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Brief Recap of the Facts and the Majority’s Position The case involved partnership audits and adjustments for partnership tax returns for General Mills Cereals, LLC (“Cereals”).  Different members of the General Mills (GMI) consolidated group were partners in Cereals, so the tax returns—and any audit adjustments—for Cereals flowed through to GMI.  The IRS audited the 2002-2003 tax returns (both corporate and partnership) and later the 2004-2006 tax returns (same).  Although there are some slight differences between the audits for those two periods, for simplicity I will focus on the 2002-2003 tax returns.

Audits began for Cereals in 2005 for these years.  The partners in Cereals entered into settlement agreements in July 2010.  On August 27, 2010, the IRS issued a “notice of computational adjustment” to GMI, identifying additional underpayments resulting from the Cereals audit, of about $16 million for 2002 and more than $33 million for 2003. 

The IRS assessed additional taxes, penalties, and interest resulting from the Cereals audit in September 2010.  GMI paid all outstanding balances for these years, including interest, on April 11, 2011.  The IRS sent GMI detailed interest computation schedules for these years, apparently for the first time, on April 18, 2011 and April 20, 2011.  The schedules reflected that the IRS began charging a higher underpayment interest rate (“hot interest”) on July 15, 2007.  GMI filed refund claims on March 28, 2013, arguing that the higher interest rate should not have started until September 26, 2010.  It then filed this refund suit on January 30, 2014.

The government argued, and the majority agreed, that the relevant statute of limitations for such refund claims was the six-month period specified in section 6230(c)(2) for challenging erroneous computational adjustments rather than the two-year limitation period of section 6511.  As a result, the refund claims were filed untimely, and the case was dismissed for lack of jurisdiction.

The Dissent

The Federal Circuit’s decision was 2-1.  Judge Newman dissented and would have reversed the dismissal for lack of jurisdiction.  She thought section 6511, rather than 6230(c), applied to these refund claims.  Section 6231(a)(6) defines a computational adjustment as “the change in the tax liability of a partner which properly reflects the treatment under this subchapter of a partnership item.”  She concluded that the “payment of interest is not a ‘tax liability.’”  Further, “partnership item” should not be construed so “‘broadly as to cover claims that depend on the unique circumstances of an individual partner.’” (quoting Prochorenko v. United States, 243 F.3d 1359 (Fed. Cir. 2001)).  Thus, the refund claims were not correcting errors in computational adjustments of a partnership item; they were for refund of an overpayment of interest, to which the two-year limitation period in section 6511 apply.

Judge Newman found no hint in the TEFRA legislative history of any Congressional intent to truncate the two-year limitations period in section 6511.  She also quoted a 2001 Supreme Court case:  “[I]n cases such as this one, in which the complex statutory and regulatory scheme lends itself to any number of interpretations, we should be inclined to rely on the traditional canon that construes revenue-raising laws against their drafter.”

Possible Confusion Regarding the Conceptual Framework?

As I read the majority opinion and the applicable Code sections, it occurred to me that the analysis—as well as the regulation that defined resulting interest as a computational adjustment—rested in part on an assumption about the governing framework.  Specifically, the IRS, DOJ, and Court seem to think of adjustments to the partners’ returns as falling into two categories only:

  • Computational adjustments for which deficiency proceedings are required.  This encompasses (a) those for which partner-level determination are not necessary as well as (b) those for penalties, additions to tax, and additional amounts. 
  • Computational adjustments for which deficiency proceedings are not required.  This encompasses those for which partner-level determinations are not necessary. 

That seems consistent with the structure of former section 6230.  Section 6230(a)(2)(A) provides circumstances under which deficiency procedures apply and section 6230(a)(1) effectively is “everything else.”

The government puts interest in the second category, even though partner-level determinations are necessary.  (They certainly were in this case because the interest computations depended on information that was not part of the TEFRA proceedings.  The notice, and therefore applicable date used by the IRS, were part of the corporate audit.)  The decision to put interest into the second category perhaps was because interest doesn’t fit into the first category, which “shall apply to any deficiency attributable to . . ..”  Interest is not a tax liability and therefore is not included in the definition of deficiency and therefore does not fall within section 6230(a)(2)(A).  Where else can it be?  Only section 6230(a)(1).

But that is only the case if assessments of additional interest are computational adjustments.  The dissent concluded that interest assessments don’t fit within the definition of a computational adjustment.  An alternative framework would be that adjustments to partners’ returns, resulting from a partnership-level proceeding, fall into three categories:

  • Computational adjustments for which deficiency proceedings are required.  This encompasses (a) those for which partner-level determination are not necessary as well as (b) those for penalties, additions to tax, and additional amounts. 
  • Computational adjustments for which deficiency proceedings are required.  This encompasses (a) those for which partner-level determination are not necessary as well as (b) those for penalties, additions to tax, and additional amounts. 
  • Computational adjustments for which deficiency proceedings are required.  This encompasses (a) those for which partner-level determination are not necessary as well as (b) those for penalties, additions to tax, and additional amounts. 

In that case, the six-month period in section 6230(c)(2) only applies to the first two categories.  The third falls under the two-year period of section 6511 for normal refund claims.

This certainly seems as though it could have been what Congress intended.  Before TEFRA, we just had deficiency procedures and interest was not subject to those; it was just assessed after tax was assessed.  Did Congress intend partnership proceedings and computational adjustments to only address the same types of adjustments that deficiency proceedings covered—underlying tax, penalties, additions to tax, and additional amounts?  And then rely on the existing process for assessing interest, which is to simply assess it and require the taxpayer to pay and file a refund claim?  I haven’t done a deep dive into the legislative history, but that seems very plausible to me.  It’s also arguably the best interpretation under the definition of a computational adjustment quoted above in the discussion of the dissent.

There is a technical argument to the contrary that could support the majority’s position. 

  • Section 6601(e)(1) says that references to “tax” shall be deemed also to refer to interest, except for such references in subchapter B of chapter 63 (sections 6211-6216). 
  • So “tax” in section 6230(a)(2)(A) would include interest, but that section doesn’t mention “tax,” it refers to “deficiency”. 
  • And the reference to “tax” in section 6211(a), defining “deficiency,” doesn’t include interest.  Therefore, interest is not part of a deficiency. 

Thus, interest is included in the definition of a computational adjustment in section 6231(a)(6), which has a direct reference to “tax.”  But section 6230(a)(2)(A) has only an indirect reference (through section 6211) to tax, so interest is not included to the category of computational adjustments for which a deficiency proceeding is appropriate. 

But that’s highly technical and formal.  Common sense would say that—for purposes of the TEFRA provisions—if interest is not included in a deficiency for purposes of section 6230(a)(2)(A), it shouldn’t be included in a change to tax liability for the definition of computational adjustment in section 6231(a)(6).

The Court of Federal Claims opinion addressed this question, whether interest is incorporated in the definition of a computational adjustment, in more detail than the Federal Circuit’s decision.  The CFC didn’t rely entirely on the regulation and in fact suggested that would be insufficient by itself.  It cited several cases, some of which addressed a former version of section 6621(c), which increased the interest rate for “tax-motivated transactions” (TMT); the CFC, along with other courts, considered TMT interest analogous to hot interest.  But those cases never addressed the definition of computational adjustment, other than in the regulation.

For example, in N.C.F. Energy Partners v. Commissioner, 89 T.C. 741 (1987), the partnership sought to challenge penalties and TMT interest in its proceeding, although they were not asserted in the final notice of partnership administrative adjustment.  The IRS moved to dismiss those portions of the case for lack of jurisdiction.  The court concluded that additional findings of fact with respect to individual partners would be required, so those issues should not be addressed in the partnership proceeding.  The court did not directly interpret the definition of a computational adjustment, although it seemed to suggest that TMT interest would be addressed in a deficiency proceeding.

In White v. Commissioner, 95 T.C. 209 (1990), the IRS issued a notice of deficiency including TMT interest after the conclusion of the partnership proceeding.  The IRS moved to dismiss the interest determination from the deficiency proceeding.  The court agreed, 13-2 in a reviewed opinion.  That case, however, turned on the question of whether interest was included in a “deficiency.”  The court did not address how a later assessment of interest should be handled, as a computational adjustment or just a normal assessment of interest.

In Pen Coal Corp. v. Commissioner, 107 T.C. 249 (1996), the notices of deficiency had included tax, penalties, additions to tax, and additional amounts and had also determined that hot interest applied, without determining the amount.  The IRS sought to strike the interest determinations from the deficiency proceeding.  The court agreed, following White, but again did not interpret section 6231(a)(6).

Finally, in Olson v. United States, 172 F.3d 1311 (Fed. Cir. 1999), the taxpayers filed refund suits in the Court of Federal Claim.  They argued that various assessments (including TMT interest) resulting from a settlement of a partnership proceeding were invalid because they had received no notices of deficiency.  The CFC granted the government’s motion for summary judgement, concluding that notices of deficiency were not required and noting that no other basis for the refund was asserted.  The Federal Circuit agreed.  There was a brief reference to interest being included in the definition of a computational adjustment, but that mentioned only the regulation with no interpretation of the applicable Code section. 

Practical Considerations

The regulation stating that interest is included in a computational adjustment may have been influenced by an assumption—possibly shared by the DOJ and court—that interest computations are generally straight-forward and easy to verify.  If so, it might seem simplest to include interest in a computational adjustment not subject to deficiency procedures.  As with the allocation of the previously determined change in the underlying tax, errors would be rare but easily detected.  A computational adjustment, even with the abbreviated period within which to file a refund claim, would be a reasonable compromise.

However, while interest calculations for most taxpayers are indeed straight-forward and easy to verify, that is often not the case with large businesses who may have multiple changes to tax liability implicating several different issues of interest calculation.  Sometimes the law is not clear; other times the law is clear, but errors occur frequently.  Specialist firms provide taxpayers with reviews of interest computations to identify potential problems.  That process, however, can take a long time.

This also means that an abbreviated period within which to file refund claims relating to interest is not a good idea from a policy perspective.  The description in the Federal Circuit’s decision suggests that by the time GMI received the April 2011 interest computation schedules it had all the necessary information to identify the basis for a refund claim based on when hot interest rates should apply.  But that was more than six months after the August 2010 notice that the CFC considered the initial notice of computational adjustment.  It was even more than six months after the assessment of interest in September 2010.  I defy anyone to look at a lump sum assessment of interest for a large corporate taxpayer and be able to determine how that amount was calculated.

Even if the Federal Circuit decided that the April 2011 schedules were the initial notice of computational adjustment with respect to interest, six months is still not a lot of time within which to file a comprehensive refund claim covering all interest errors that might have been contained in those computations.  Rushing to file a refund claim based only on the issue concerning hot interest might have risked forfeiting claims based on other issues.

Thus, even if the correct legal determination were that the six-month period to file refund claims applied to computational adjustments relating to interest, it seems like a bad policy choice.

Conclusion  

Between the dissent, the alternative framework for classifying adjustments arising from a TEFRA proceeding, and the practical considerations, there seems to be at least a reasonable argument that interest should not be included in the definition of computational adjustments and not subject to the accelerated refund claim provisions of section 6230(c).  But that’s now what the regulation the IRS wrote say—and challenging the validity of the regulation would be difficult—and that’s not what the Federal Circuit decided.

This concludes the discussion of the TEFRA jurisdictional issue.  Part 3 addresses the substantive issue: exactly when the higher hot interest rate should have started.  It’s a complicated issue in these specific circumstances and, to my knowledge, has not yet been ruled on by any court.

TEFRA + LCU = Confusion, Part 1

We welcome back guest blogger Bob Probasco for a three-part series inspired by the Federal Circuit’s recent 2-1 decision tossing General Mills’ refund claim as untimely under TEFRA, although the claim would have been timely under the standard timeframes of section 6511. Part 1 sets the stage and examines the majority’s reasoning. Christine

On April 23, 2020, the Court of the Appeals for the Federal Circuit issued its decision in General Mills, Inc. v. United States, 957 F.3d 1275 (Fed. Cir. 2020), aff’g 123 Fed. Cl. 576 (2015).  The taxpayer’s refund suit sought recovery of $6 million of excessive underpayment interest it had paid to the IRS.  The court ruled for the government and dismissed the case.  It’s an unusual case, with aspects I had never dealt with before, so I thought Procedurally Taxing readers might enjoy it.  Fair warning, though: the TEFRA partnership audit procedures are complicated, as are the “large corporate underpayment” (LCU interest, or “hot interest”) provisions of the Code.  When they intersect, turbulence is likely.

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The Facts

The case involved two sets of tax returns and audits: those for the General Mills (“GMI”) corporate tax returns and those for partnership tax returns for General Mills Cereals, LLC (“Cereals”).  Different members of the GMI consolidated group were partners in Cereals, so the tax returns—and any audit adjustments—for Cereals flowed through to GMI.  The IRS audited the 2002-2003 tax returns (both corporate and partnership) and later the 2004-2006 tax returns (same).  Although there are some slight differences between the audits for those two periods, for simplicity I will focus on the 2002-2003 tax returns.

Audits began for both GMI and Cereals in 2005 for these years.  The IRS issued a 30-day letter for the GMI audit on June 15, 2007, asserting proposed deficiencies of more than $143 million for 2002 and almost $83 million for 2003.  The partners in Cereals entered into settlement agreements in July 2010.  On August 27, 2010, the IRS issued a “notice of computational adjustment” to GMI, identifying additional underpayments, resulting from the Cereals audit, of about $16 million for 2002 and more than $33 million for 2003. 

The IRS assessed additional taxes, penalties, and interest resulting from the Cereals audit in September 2010.  GMI paid all outstanding balances for these years, including interest, on April 11, 2011.  The IRS sent GMI detailed interest computation schedules for these years, apparently for the first time, on April 18, 2011 and April 20, 2011.  The schedules reflected that the IRS began charging a higher underpayment interest rate (“hot interest”) on July 15, 2007.  GMI filed refund claims on March 28, 2013, arguing that the higher interest rate should not have begun until September 26, 2010.  As a result, the IRS had accrued almost $6 million too much interest.  GMI then filed this refund suit on January 30, 2014.

The “hot interest” issue underlying the claim is intriguing and I was looking forward to reading the court’s analysis of it.  But the opinion focuses instead on the jurisdictional TEFRA provision that formed the basis of the government’s motion to dismiss.  I’ll have more discussion of the hot interest issue in Part 3.  But because the taxpayer lost on the jurisdictional issue, we will have to wait for another day for a court decision on the merits issue.

The Jurisdictional Question—TEFRA Computational Adjustments

Framework

A preliminary reminder:  the TEFRA provisions—Subtitle F, Chapter 63, Subchapter C—were stricken and replaced with a new regime for partnership audits, by the Bipartisan Budget Act of 2015.  References herein to specific Code sections are to the TEFRA versions, not the BBA versions.

As we all remember, TEFRA established unified partnership audit proceedings, with special rules for assessments of partners based on any resulting adjustments to the partnership tax return.  The changes to the partners’ tax liabilities to reflect the partnership adjustments are called “computational adjustments,” section 6231(a)(6).  Computational adjustments were initially understood as falling into two categories, depending on whether a partner-level determination was required.  If no such partner-level determination was required, the IRS simply assessed any additional amounts due.  (Mechanical applications, such as recalculating an itemized deduction for medical expenses, were not considered “determinations.”)  If a partner-level determination was necessary, the IRS had to issue a notice of deficiency, providing an opportunity for judicial review. 

The two categories became three with the Taxpayer Relief Act of 1997.  Penalties had been identified as a problem.  There might be necessary partner-level determinations to address penalty defenses.  Litigating those defenses (including defenses by indirect partners) in a partnership-level proceeding was not considered feasible but removing all penalties to deficiency proceedings was not an ideal approach either.  Thus, whether a penalty generally applied would be resolved in a partnership-level proceeding.  The IRS could then proceed to assessment without a deficiency proceeding, requiring partners to raise partner-level defenses in a refund claim/suit.  So the categories were:

  • Adjustments for which a partner-level determination was not required (immediate assessment allowed).
  • Adjustments for which a partner-level determination was required, other than penalties, additions to tax, and additional amounts (deficiency proceeding required).
  • Adjustments for penalties, additions to tax, and additional amounts (immediate assessment allowed).

Those were specified in section 6230(a).  Although that section didn’t address interest, the IRS did, by regulation.  Treas. Reg. § 301.6231(a)(6)-1(b) provides that a “computational adjustment includes any interest due with respect to any underpayment or overpayment of tax attributable to adjustments to reflect properly the treatment of partnership items.”  The IRS treats such adjustments of interest as computational adjustments that can be assessed immediately.

Claims Arising Out of Erroneous Computations

For computational adjustments that are assessed directly and cannot be challenged in a deficiency proceeding in Tax Court, section 6230(c) provides an opportunity for challenge.  The taxpayer may file a refund claim for erroneous computations that:

  • Are necessary to apply the results of a settlement, final partnership administrative adjustment (if not challenged in Tax Court), or a Tax Court decision challenging the FPAA. 
  • Impose any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item.

These refund claims “shall be filed within 6 months after the day on which the Secretary mails the notice of computational adjustment to the partner.”  Thereafter, a refund suit can be brought within the period specified in section 6532(b) for refund suits.  And section 6511(g) provides that section 6230(c) applies, rather than section 6511, with respect to tax attributable to partnership items.

I’ve actually never dealt with a section 6230(c) refund claim before and perhaps others haven’t either.  This case was a good reminder of the different limitation period.  But it’s particularly fascinating because of a quirk introducing when dealing with interest resulting from a TEFRA proceeding.

Application in GMI’s Case

The Notices GMI Received

Let’s start with the communications at the conclusion of the Cereals (partnership) audit, as those were relevant to the basis for the motion to dismiss.  The IRS and GMI executed a settlement agreement on July 27, 2010.  It addressed “any deficiency attributable to partnership items, penalties, additions to tax, and additional amounts that relate to adjustments to partnership items, as set forth in the attached Schedule of Adjustments (plus any interest provided by law.)”  The same “any interest provided by law” language also appeared elsewhere in the settlement agreement, but there was no reference to hot interest or even the amount of interest that would result.

On August 27, 2010, the IRS sent a cover letter with Form 5278, Statement—Income Tax Changes.”  That form included a line for “Balance due or (Overpayment) excluding interest and penalties” with a corresponding dollar amount.  No amount was shown for interest, but the cover letter stated that the IRS “will adjust your account and figure the interest.”  Still no reference to hot interest.  The IRS assessed the tax deficiencies plus interest (including hot interest) on September 3, 2010, but no schedule showing how the amount of interest had been computed was sent to GMI at this time. 

On April 18, 2011, the IRS sent GMI an interest computation schedule for each of the four years, showing that hot interest began running on June 15, 2007—the date of the notice of proposed deficiency for the corporate audit.  The IRS sent another interest computation schedule for one of the years on April 20, 2011.

GMI paid the additional taxes and interest (including hot interest) on April 11, 2011.  It then filed refund claims on March 28, 2013, within the traditional two-year period after the payment in section 6511, and then this refund suit.  The government filed a motion to dismiss, arguing that the six-month period of section 6230(c) applied and therefore the refund claims were filed too late.

The Majority Opinion

GMI’s attorneys did a very professional, thorough job of identifying arguments that the refund claims were timely.  The majority opinion in the Federal Circuit shot them all down.

The notices received did not qualify as “computational adjustments.”  The majority’s response: Treas. Reg. § 301.6231(a)(6)-1(b) specifically included interest in the scope of computational adjustments and GMI did not challenge the validity of the regulation.  The Court of Federal Claims also cited several cases, including the Tax Court and other Circuit Courts, that it concluded supported the conclusion that interest is a computational adjustment.

However, I think (and the dissent may have agreed) the validity of the regulation is not clear.  And I don’t find the cases cited by the Court of Federal Claims very persuasive either.  Stay tuned for further discussion in Part 2.

Refund claims for “computational adjustments” only cover computation errors, not the legal error that GMI alleged.  The majority relied on the fact that section 6230(b) addressed “mathematical and clerical errors appearing on partnership returns,” implying that section 6230(c) must refer to a different class of errors.  It also cited a Seventh Circuit that reached the same conclusion, for the same reason. 

This isn’t entirely persuasive either.  An alternative, and to my mind more persuasive, distinction would be that section 6230(b) concerns mathematical or clerical errors on the partnership return while section 6230(c) concerns errors in a computational adjustment to make the partner’s return consistent with a substantive adjustment to the partnership return in a TEFRA proceeding.  Two entirely different things, aren’t they?  And most direct assessments (other than interest) without deficiency proceedings can only be challenged based on: (a) mathematical errors in allocating the change in tax liability; or (b) partner-specific penalty defenses.

The section 6230(c) refund claim provision applies only to adjustments necessary to apply the settlement, but the partnership audit and settlement did not address how hot interest should be computed.  GMI pointed out that (a) the partnership settlement agreements did not cover any aspect of how interest would be computed and (b) a global settlement agreement had explicitly carved out any implication that GMI had agreed to interest computations.  The court’s response focused on the boilerplate language “any interest provided by law.” 

I don’t consider this persuasive either.  Can you imagine a settlement agreement concerning the underlying tax liability that, instead of identifying the specific adjustments, said “any adjustments to income or expenses provided by law”?   Of course not.  That’s not a “settlement” in any normal sense of the word.  Similar boilerplate language about interest abounds in tax controversy but I’ve always considered that as intended simply to avoid any implication, by omission, that the parties had agreed that interest would not apply.  I don’t think boilerplate language like that has ever been interpreted to mean that the parties had settled on the resulting computation.  The fact that interest was “clearly contemplated” doesn’t mean that it was settled.

Section 6511 also applies and is an alternative available to taxpayers.  Here, the court relied on the general principle that a narrower, specifically drawn statute pre-empts a broader provision.  That’s generally true, although it may not always apply. 

For policy reasons, the section 6230(c) refund claim provision should not apply to claims that are entirely due to a partner’s unique factual circumstances.  This seems one of GMI’s less persuasive arguments, and the court simply pointed out there was no authority to support this position.

Section 6230(c) only applies to refund claims that are attributable to partnership items and the “applicable date” that GMI was disputing is not a partnership item.  As with the preceding item, this was a difficult argument and the court disagreed that a “partnership item” was a general requirement for all these refund claims.  Although the court did not go into detail, there is a structural argument.  The only reference to “partnership item” in that provision is in section 6230(c)(1)(A)(i), which relates to a computational adjustment to make the partner’s return consistent with the partnership return.  That sounds very much like making the partner’s return consistent with the partnership return as filed.  By comparison, section 6230(c)(1)(A)(ii) addresses computational adjustments relating from a TEFRA audit—settlement, FPAA, or court decision.  Section 6230(c)(1)(A)(i) would cover GMI’s situation, and it does not mention “partnership item.”  Neither does section 6230(c)(2), which governs the refund claims, mention “partnership item.” 

The notices received by GMI did not provide adequate notification of the determination.  The Court of Federal Claims seemed to consider even the initial notice on July 27, 2010, to have provided adequate notification.  It relied on GMI’s acknowledgement that “interest is generally the type of item that is ‘implicit in a computation of tax with respect to settled items so that it need not be expressly computed or even identified in the notice of computational adjustment that applies to the settlement.’”  Interest may be straight-forward in other contexts but certainly was not here. 

However, the Federal Circuit relied instead on the interest computation schedules received in April 2011 as providing adequate notice.  From the court’s description, it appears those did make it clear that hot interest would be applied and what applicable date would apply.  GMI argued those were still insufficient because they didn’t mention the six-month limitation period in section 6230(c) or even that a jurisdictional period was being triggered.  In addition, the schedules didn’t mention the TEFRA proceeding or segregate interest arising from the corporate audit for that arising from the Cereals audit.  The court simply rejected those as not required elements of a notice of computational adjustment.

And so, the majority dismissed the case for lack of jurisdiction.  Unless/until the issue comes up in another circuit, that decision will stand.  But it’s not necessarily the correct decision.  In Part 2, I’ll briefly summarize the dissent and then add some further thoughts on how the framework applied by the majority is arguably not the best way to think about these types of adjustments.  A different conceptual framework could lead to a decision in the taxpayer’s favor.

Complications With Rolling Credit Elect Transfers – Part 2

Bob Probasco returns with Part Two of his examination of rolling credit elect transfers and their treatment for interest purposes. Christine

In Part 1, I discussed the result in Goldring v. United States, 2020 U.S. Dist. LEXIS 177797, 2020 WL 5761119 (E.D. La. Sept. Sep. 28, 2020) and started laying the framework for a critique of the decision.  That included the treatment of credit elect transfers (CETs), which is now pretty much settled law.  Now we’ll take a look at previous cases with the specific scenario at issue in Goldring – rolling CETs – for which the results have been mixed.

Treatment of rolling CETs for interest purposes

FleetBoston Fin. Corp v. United States, 483 F.3d 1345 (Fed. Cir. 2007) is the only Circuit Court decision clearly on point, for now.  (Rolling CETs were also involved in Marsh & McLennan Cos. v. United States, 302 F.3d 1369 (Fed. Cir. 2002), but the taxpayer agreed with the government’s position later adopted in FleetBoston and the case addressed a different statutory provision, so the court did not have to decide this issue.)  It concluded that interest computation should take into account only the first CET, from the year at issue, and ignore subsequent (rolling) CETs.  Under that approach, the underpayment interest assessed against the Goldrings would be entirely valid.

In re Vendell Healthcare, 222 B.R. 564 (Bankr. M.D. Tenn. 1998), Otis Spunkmeyer, Inc. v. United States, 2004 WL 5542870 (N.D. Cal. 2004), and the dissent in FleetBoston follow the use of money principle from Avon Products and progeny.  The balance in the year at issue doesn’t become “due and unpaid” until the CET amount actually provides the taxpayer with a benefit in a subsequent year – either applied to an estimated tax installment to avoid the addition to tax or included in an overpayment that is refunded instead of transferred to the next year.  Under that approach, the Goldrings would be entitled to a full refund of the underpayment interest.

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FleetBoston disagreed with Vendell and Spunkmeyer, concluding that they

disregard both the account-specific meaning of the term “paid” in the Internal Revenue Code and the regulatory scheme under which a credit elect overpayment will be deemed to reside in the tax account for the succeeding year, even if it is not needed to pay estimated tax in that year. 

In other words, the use of money principle is a tool of statutory construction but cannot override the specific terms of the statutes enacted by Congress. 

Who’s right?

The FleetBoston interpretation may be correct, but I don’t think either the Code or the regulatory scheme are as clear as the Federal Circuit thought they are.  FleetBoston distinguished Vendell and Spunkmeyer in part because of “the account-specific meaning of the term ‘paid’ in the Internal Revenue Code.”  But the issue in these cases is when underpayment interest under section 6601(a) begins running, the “last date prescribed for payment,” not when it stops, “the date paid.”  As discussed in Part 1, Avon Products, Inc. v. United States, 588 F.2d 342 (2nd Cir. 1978) concluded that the beginning date was not clearly addressed by the statute and effectively re-wrote it; the IRS acquiesced in not only the holding but also the reasoning.  That suggests it would be feasible and permissible to re-write it again to address rolling CETs.

The relevant part of the regulatory language, which is the same in both § 301.6402-3(a)(5) and § 301.6611-1(h)(2)(vii), says only that “such amount shall be applied as a payment on account of the estimated income tax for such [succeeding] year or the installments thereof.”  The regulations were enacted back in 1957 and didn’t address when underpayment interest on a subsequently determined deficiency would run.  (I found nothing helpful in the Federal Register when the proposed and final regulations were issued; I doubt if the IRS thought about issues with subsequently determined deficiencies at that time.)  That was worked out through cases and revenue rulings, not regulations.  Even Revenue Ruling 99-40 doesn’t specifically address situations where the CET is not needed at all for estimated tax installments and is rolled to the next year rather than refunded. 

The parties in Goldring argued a lot about the interpretations of cases and rulings, and whether they should apply here.  The disagreement seems to flow from fundamentally different frameworks for thinking about CETs, both in general and with rolling CETs, in this context.

Government perspective – it’s a matter of accounting 

From the perspective of the government (and the FleetBoston court), the focus is on the fact that money has been transferred from one year to another year – the particular year to which the overpayment was first transferred.  The statute and regulations are clear.  The subsequent CETs and the other years are irrelevant.  This has intuitive appeal.  Generally, interest is computed on each tax year independently.  Independence of each tax year is a foundational principle for many purposes in our system and the language in the regulations for CETs is consistent with that perspective.  The initial CET is irrevocable and anything that happens thereafter (a subsequent CET) is not related to the original CET.  If a deficiency arises in the original year of the overpayment, you figure out the effective date of the transfer to the succeeding year, using the approach developed in the cases and summarized in Revenue Ruling 99-40.  If the election on the original year’s return is made before the due date of the return for the succeeding year, which it almost always is, the transfer (a “payment” in the succeeding year) would be effective no later than the due date of that return.

That amount of money is sitting in only one tax year at any point in time.  This is generally how the IRS would record it on account transcripts.  Under this interpretation, in the Goldring case, the amount at issue would be:

  • Included in the account for the 2010 tax year from April 15, 2011, until transferred out on April 15, 2012
  • Transferred into the account for the 2011 tax year on April 15, 2012, and remaining there until transferred out on April 15, 2013
  • Transferred into the account for the 2012 tax year on April 15, 2013, and remaining there until transferred out on April 15, 2014
  • Etc.

In other words, the Code doesn’t offset the 2010 deficiency against the overpayment in 2011 (or subsequent years) as a result of the CET.  The Avon Products decision was not a broad interest netting solution; it just addressed when the transfer between years is considered to take place.

Taxpayer’s perspective – prevent inequitable results

From the perspective of the taxpayer (as well as Vendell, Spunkmeyer, and the FleetBoston dissent), the language is ambiguous enough to allow a construction to meet the policy objectives of Congress.  Avon Products and its progeny, combined with other Code provisions such as sections 6601(f) and 6611(b)(1) and the global interest netting regime of section 6621(d), evidence a strong desire by Congress to avoid “interest arbitrage” results that might be unfair to taxpayers when there are both overpayments and underpayments outstanding.  Global interest netting protects taxpayers from paying underpayment interest at a higher rate than received for overpayment interest on equivalent balances outstanding at the same time.  The same principle should protect all taxpayers from paying underpayment interest during periods when there was an equivalent overpayment balance outstanding for which the taxpayer doesn’t receive interest at all.

Section 6621(d) only allows, by its terms, netting of overpayments on which interest is allowable and underpayments on which interest is payable.  If not for the fact that overpayments that the taxpayer elects to CET to the following year do not earn overpayment interest, that section would give the Goldrings the result they ask for.  But excluding CETs from the reach of section 6621(d) was not necessarily Congress’s intention.  I haven’t done a comprehensive review of the legislative history, but I suspect that limiting section 6621(d) to overpayments on which interest is allowable and underpayments on which interest is payable was only intended to maintain certain restricted interest provisions that give the government an incentive to act quickly. 

For that matter, was the regulation providing that an overpayment transferred by CET does not earn overpayment interest the best decision?  Section 6402(b) is a broad specific grant of authority to issue regulations.  But this was also an exception to the general rule of section 6611(a).  The provision makes some sense, given the solution in Avon Products and progeny, if the taxpayer does not continue to roll over CETs.  The IRS could have written the regulation to address rolling CETs in a way that would conform to the Congressional purpose of disallowing government interest arbitrage.

Avon Products and its progeny have an effect very similar to netting.  Prior to those decisions, the IRS treated the original overpayment in those situations (on which interest was not allowable because it was used for a CET) and the subsequently determined deficiency as separate and independent transactions.  Thus, until the CET was effective, there was – for the same year – an overpayment transaction that didn’t earn interest at all and an underpayment transaction for which the IRS charged interest.  Avon Products combined the two transactions into a single balance before computing interest, what I term “annual interest netting.” 

Notably, the final result of this line of cases and rulings did not treat the CET as effective based on an artificial date, such as the date the return was filed for the overpayment year or the unextended filing due date of the overpayment year.  Instead, the CET was effective only when the taxpayer got a benefit from having the money in the succeeding year.  The current IRS practice limits the effective date of the CET to no later than the unextended filing due date for the succeeding year.  Why should it be limited that way, if the taxpayer receives no benefit in the first succeeding year and instead rolls the amount over to the next year? 

Even if the government’s accounting perspective is respected, is the application of it necessarily immutable?  The CET from Year 1 to Year 2 creates a “negative payment” in Year 1 and a payment in Year 2.  The CET from Year 2 to Year 3 creates a “negative payment” in Year 2 and a payment in Year 3.  Can we consider the payment in Year 2 (from Year 1’s CET) and the “negative payment” in Year 2 (from Year 2’s CET) to have simply offset to eliminate both?  Perhaps.

Where do we go from here?

The government’s position prevailed in FleetBoston, the only Circuit Court decision on the issue of rolling CETs to date.  Vendell, Spunkmeyer, and the FleetBoston dissent held for taxpayers on this issue.  The Goldring decision ruled for the government in a fairly cursory manner and it has now been appealed.

I’m not sure which of the opposing position will prevail in the Fifth Circuit.  I suspect the interpretation in FleetBoston will prevail.  But there are certainly arguments for the taxpayers’ position.  We have an example, over the past couple of years, of a single Circuit Court decision on an issue that might have seemed durable – but wasn’t, once other Circuit Courts eventually considered the issue.  We’ll see whether that happens here.

Complications With Rolling Credit Elect Transfers – Part 1

We welcome back guest blogger Bob Probasco. In Part One of this two part post, Bob dives into the history of “credit elect transfers” and their treatment for interest purposes. Part Two will analyze the Goldring case in more detail and discuss the arguments that are likely to be made on both sides as the case goes before the Fifth Circuit. Christine

A brief order was issued in September, concerning an issue related to interest on federal tax overpayments and underpayments.  In Goldring v. United States, 2020 U.S. Dist. LEXIS 177797, 2020 WL 5761119 (E.D. La. Sept. Sep. 28, 2020), the court granted the government’s motion for summary judgement, concluding that the IRS properly assessed $603,335 of underpayment interest.  The court rejected the taxpayers’ arguments concerning the proper treatment of interest in situations with rolling credit elect transfers.

We’re all familiar with “credit transfers,” the terminology for IRS authority under Code section 6402(a) to apply an overpayment for one year against an outstanding tax liability for another year.  IRS records show tax balances from the government perspective, of course, under which an overpayment by the taxpayer is a liability or, in accounting terminology, a credit.  (These transfers show up on transcripts with transaction codes 826/706, labeled “credit transferred out”/“credit transferred in”.)

A “credit elect transfer” (CET) is one the taxpayer requests, on their tax return; I frequently make such an election and some of you may as well.  The election, made on line 36 of the Form 1040 for 2020, is to apply part or all of the overpayment shown on the return to your estimated tax obligations for the next year.  The overpayment that the taxpayer elects to transfer does not earn overpayment interest for the period before the transfer, even if the return is filed well after the due date of that return.  This is not a statutory restriction; section 6402(b) just authorizes Treasury to prescribe regulations governing such CETs.  It did, including § 301.6402-3(a)(5) and § 301.6611-1(h)(2)(vii).

As for “rolling credit elect transfers,” those may be most easily illustrated by the facts of this case.   

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Facts

I’m going to dispense with most of the details and just focus on the key facts regarding the specific issue at hand.

  • Mr. and Mrs. Goldring’s 2010 tax return showed an overpayment of $6,782,794, which was applied to their 2011 tax return at their request.
  • Their 2011 tax return showed an overpayment of $6,521,775, which was applied to their 2012 tax return at their request.
  • Their 2012 tax return showed an overpayment of $5,869,478, which was applied to their 2013 tax return at their request.
  • Etc., etc., etc.

Thus, “rolling” CETs – the Goldrings kept rolling over their overpayments to the next year instead of receiving refunds. 

I’ve used CETs often, occasionally even rolling CETs, although the numbers were much smaller than for the Goldrings.  I intended to use the CET against the estimated tax installment obligation due at the same time as my tax return.  It was easier to make that portion of the obligation by CET rather than making a separate payment for year 2 and getting a refund (without interest) for year 1 several weeks later.

Mr. and Mrs. Goldring had something else in mind.  They anticipated a possible audit deficiency for their 2010 tax return.  Their accountants had suggested the rolling CETs as a way to keep funds with the IRS sufficient to cover the potential deficiency, thereby avoiding underpayment interest.  Remitting a separate deposit in the nature of a cash bond would have been an option as well.  Perhaps rolling CETs were seen as a low key way to accomplish the same thing, without waving a red flag to alert the IRS of the potential deficiency?  If there had never been a deficiency for 2010, the rolling CETs wouldn’t have been an issue.  Eventually the Goldrings would have asked for a refund instead of rolling the overpayments over.  No interest would be allowed on the refund and that would have been an end of it.

But, as they feared, there was a deficiency for 2010.  The IRS began an audit on April 15, 2013 and issued a 30-day letter on August 11, 2015.  Appeals agreed with the audit determination and issued a notice of deficiency for $5,250,549 on March 30, 2017.  On June 20, 2017, rather than go to Tax Court, the taxpayers consented to immediate assessment.  The audit deficiency was eventually paid from overpayment balances for later returns, specifically, Mrs. Goldring’s 2014 separate tax return and Mr. Goldring’s 2016 separate tax return. A refund claim and this refund suit followed.

The validity of the 2010 deficiency itself had been resolved in this same case, by an order issued on April 13, 2020.  That left the question of interest that had been assessed on the deficiency.  The IRS assessed underpayment interest on the 2010 deficiency for the period from April 15, 2012, the due date for the 2011 tax return, until paid.  The Goldrings argued that, because the IRS always had money in its possession sufficient to cover the audit deficiency, no underpayment interest should be accrued.        

The District Court’s Opinion

The court decided this issue in favor of the government.  Section 6601(a) provides for underpayment interest as follows:

If any amount of tax imposed by this title . . . is not paid on or before the last date prescribed for payment, interest on such amount . . . shall be paid for the period from such last date to the date paid.

The regulations sections cited above provide that the portion of an overpayment designation as a CET “shall be applied as a payment on account of the estimated tax for [the succeeding] year or the installments thereof.”  The 2010 CET was irrevocable and resulted in transferring $6,782,794 from the account for the taxpayers’ 2010 tax year to the account for their 2011 tax year.  That transfer from 2010 to 2011 was effective as of April 15, 2012, the due date of the 2011 tax return.  The original overpayment in 2010, transferred to 2011, would not earn overpayment interest.  But it could shield the taxpayers from underpayment interest from a subsequently determined deficiency, until the funds were deemed transferred to 2011.  Underpayment interest began accruing on April 15, 2012, the last date prescribed for payment for the year to which the overpayment was transferred, and continued until April 15, 2015 and April 15, 2017, when the deficiency was paid by section 6401(a) transfers from subsequent tax returns.  The plaintiffs were not entitled to a refund of underpayment interest and the government was entitled to summary judgement.

This sounds like a very straightforward application of clear law, doesn’t it?  Particularly since the printed order was just barely over 4 pages and the “law and analysis” portion is only 2 pages, double-spaced.  But I’m not sure that answer is necessarily the best interpretation of the law.  Here’s why.

Treatment of CETs for interest purposes

Today, in most instances when you elect to apply some or all of an overpayment to estimated taxes for next year, interest issues don’t come up at all.  You’re not entitled to interest on the overpayment, by regulation.  When an interest issue does come up, it’s because the IRS audits the year with the overpayment and determines a deficiency.  With most CETs, the method of calculating underpayment interest on that subsequently determined deficiency is no longer contested. 

But there was a great deal of uncertainty before the decision in Avon Products, Inc. v. United States, 588 F.2d 342 (2nd Cir. 1978).  By the last date prescribed for payments of its 1967 taxes, the unextended filing due date, the taxpayer had paid in $44,500,086.58.  When it finally filed its tax return on September 15, 1968, it reported its tax liability as $44,384,460.26, resulting in an overpayment of $115,626.32, which it elected to apply to 1968’s tax liability.  A subsequent audit determined that its correct liability was $44,483,062.42, resulting in a deficiency of $98,602.17.

Section 6601(a), by its literal terms, only charges interest on underpayments if the correct tax liability was not paid on or before the last date prescribed for payment.  But the amount paid as of the last date prescribed for payment was $44,500,086.58, which was more than the adjusted tax liability of $44,483,062.42.  Under the literal terms of the statute, the IRS could not assess any underpayment interest at all for that deficiency.

The interpretation didn’t seem right either, but the Second Circuit found an elegant solution.  It interpreted “last date prescribed for payment” in these situations to mean the moment at which the tax first became “due but unpaid.”  It was fully paid by March 15, 1968, the last date prescribed for payment.  But a CET was effectively a “negative payment,” just as a refund would have been.  It reduced the net amount paid by Avon from $44,500,086.58 (as of the date prescribed for payment) to $44,384,460.26 (after the CET).  At that point, the tax liability became “due but unpaid” and underpayment interest would begin accruing.

When the “negative payment” is a refund, we know when that happened and therefore when underpayment interest on a subsequently determined deficiency begins.  But what is the effective date of a “negative payment” by CET?  That wasn’t clear.  The IRS argued for the due date of the return without regard to extensions, or March 15, 1968.  Avon argued for September 15, 1968, the date of both (a) filing the 1967 return and making the election to apply the CET to 1968’s tax liability and (b) the due date of an estimated tax installment for Avon’s 1968’s tax liability.  The Second Circuit agreed with Avon.

Avon Products, several subsequent cases – May Dep’t Stores Co. v. United States, 36 Fed. Cl. 680 (C.F.C. 1996); Kimberly-Clark Tissue Co. v. United States, 1997 U.S. Dist. LEXIS 3100 (E.D. Pa. 1997); Sequa Corp. v. United States, 1996 U.S. Dist. LEXIS 5288 (S.D.N.Y. Apr. 22, 1996); Sequa Corp. v. United States, 1998 U.S. Dist. LEXIS 8556 (S.D.N.Y. June 8, 1998) – and a series of revenue rulings eventually developed what is now the standard treatment for CETs.  “When a taxpayer elects to apply an overpayment to the succeeding year’s estimated taxes, the overpayment is applied to unpaid installments of estimated tax due on or after the date(s) the overpayment arose, in the order in which they are required to be paid to avoid an addition to tax for failure to pay estimated income tax under §§ 6654 or 6655 with respect to such year.”  Revenue Ruling 99-40.

The logic behind this solution was to avoid a double benefit, to either the taxpayer or the government.  The CET amount would provide a potential benefit to the taxpayer in the year of the overpayment (1967 in the Avon Products case) for periods before the effective date of the transfer.  Overpayment interest was not allowable, but the CET amount would reduce the subsequently determined deficiency that would be subject to underpayment interest.  The CET amount would benefit the taxpayer in the succeeding year (1968 in the Avon Products case) for periods after the effective date of the transfer.  It would either (a) avoid the addition to tax for failure to pay estimated taxes or (b) be refunded to the taxpayer for its use.  There would be no period during which the taxpayer received a potential benefit for neither year or received a potential benefit for both years. 

None of the cases or revenue rulings specifically dealt with situations in which the CET is not needed for an estimated tax installment.  IRS practice has been to apply any remaining portion as of the due date of payment for the succeeding year’s tax liability.  That makes perfect sense if there is no rolling CET, as the taxpayer will either need that amount to pay the liability or receive a refund.  It makes less sense in situations with rolling CETs, as in the Goldring case.  That had to wait for a new series of cases, and the results are mixed.  I’ll turn to that in Part 2.

Pfizer Again – On to the Substantive Issue

We welcome back guest blogger Bob Probasco with an update on the Pfizer case and its, seemingly, never ending quest for interest on a large refund.  Pfizer has moved past the procedural hurdles and onto the merits of its claim for interest.  As Bob describes below, we have not yet seen the end of the case and our continuing lessons on the payment of interest.  Keith

I’ve discussed a particular jurisdictional issue in the Pfizer case, and others, several times on Procedurally Taxing over the last two years.  That issue was whether taxpayers can file standalone suits for additional overpayment interest, in excess of $10,000, in the Court of Federal Claims as well as District Court.  (If you’re interested in this issue, the PT posts are here, here, here, here, here, here, here, and here.)  Over that period, Pfizer has moved from the Southern District of New York to the Second Circuit to the Court of Federal Claims.  The jurisdictional issue was resolved long ago, at least for this case, and the parties can proceed to the substantive issue. 

When we last visited the status, Pfizer had filed a motion for summary judgment; the government opposed that motion and sought additional discovery.  The CFC issued an opinion and order on September 14, 2020. 

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The substantive issue – overpayment interest when a refund check is re-issued

The case resolves around a refund of $499,528,449.05, resulting from an overpayment on Pfizer’s tax return for 2008, which was timely filed on September 11, 2009.  The government contends that it processed six separate checks – five for $99 million each and the sixth for $4,528,449.05 – and mailed them on October 20, 2009, by first-class mail.  Pfizer contends that its tax department in New York never received the checks.  The government then cancelled the checks and executed an electronic funds transfer for the entire $499,528,449.05 on March 18, 2010, which was deposited into Pfizer’s account on the following day.

The government did not pay overpayment interest on the refund; Pfizer contends it should have. During that period, the overpayment interest rate on large balances (so-called “GATT interest”) was 1.5%.  Even at that low rate, interest on half a billion dollars would have added up; Pfizer’s complaint asked for more than $8 million, “plus statutory interest” which continues to compound. 

The legal dispute comes down to two words, italicized below.  Section 6611(b), which defines the period for which overpayment interest is paid, states in relevant part:

(b) Period  Such interest shall be allowed and paid as follows: . . .

(2) Refunds

In the case of a refund, from the date of the overpayment to a date (to be determined by the Secretary) preceding the date of the refund check by not more than 30 days, whether or not such refund check is accepted by the taxpayer after tender of such check to the taxpayer. The acceptance of such check shall be without prejudice to any right of the taxpayer to claim any additional overpayment and interest thereon.

Meanwhile, Section 6611(e)(1), which is an exception under which overpayment interest will not be paid, states:

Refunds within 45 days after return is filed

If any overpayment of tax imposed by this title is refunded within 45 days after the last day prescribed for filing the return of such tax (determined without regard to any extension of time for filing the return) or, in the case of a return filed after such last date, is refunded within 45 days after the date the return is filed, no interest shall be allowed under subsection (a) on such overpayment.

The conference report for the 1993 amendment to Section 6611(e) describes the provision as:

No interest is paid by the Government on a refund arising from an original income tax return if the return is issued by the 45th day after the later of the due date of the return . . . or the date the return is filed.

The government focuses on the word “issued” in the legislative history for Section 6611(e) and concludes that mailing the refund within 45 days avoids interest, regardless of whether the refund is delivered to the taxpayer.  Pfizer focuses on the word “tender” in Section 6611(b)(2) and concludes that it requires “that a taxpayer has some knowledge of [the refund check] and an opportunity to accept, or decline to accept, the check.”  That quote is from Doolin v. United States, 918 F.2d 15, 18 (2d Cir. 1990).  The Seventh Circuit adopted that analysis in Godfrey v. United States, 997 F.2d 335, 337 (7th Cir. 1993).  The Doolin precedent is why Pfizer originally brought the case in the Southern District of New York instead of the Court of Federal Claims.

This issue appears to have been litigated infrequently, with Pfizer only the third case to address it.  Although he didn’t seem very impressed with the government’s proffered legislative history, Judge Lettow didn’t decide the legal issue.  Material disputes of fact remained.

The Fact Issues

The government offered evidence of the Treasury’s processing and mailing procedures and that Pfizer’s checks were processed accordingly.  But an email from an IRS employee stated that “the checks weren’t sent & stopped the request.”  Further, problems with the Post Office or Pfizer’s mail handling practices might have resulted in one or two missing checks, but there were six missing checks.  That raised questions about whether Treasury’s procedures were really followed.  Pfizer also argued that the usual presumption of delivery should not apply when there is evidence that the mail was not received.

On the other side, the government wanted additional discovery concerning Pfizer’s mail practices, to challenge Pfizer’s assertion that the checks were never delivered.  A third-party contractor picked up all of Pfizer’s mail from the Post Office and took it to Pfizer’s central mailroom, to be sorted and delivered to various offices and departments.  Pfizer’s Tax Department didn’t receive the refund checks but that didn’t necessarily mean Pfizer hadn’t.  During an earlier deposition, an Operations Manager for Pfizer testified that he wasn’t aware of any complaints regarding lost, non-received, or misplaced mail.  But he hadn’t inquired into incidents of lost mail in preparation for the deposition.  The government had asked to examine a Pfizer witness concerning “all incidents in which Pfizer lost or allegedly failed to receive mail addressed to Pfizer” at that address and considered the deposition testimony insufficient.

Conclusion

The judge declined to resolve the statutory interpretation issue on a motion for summary judgment because neither party would have been entitled to summary judgment at this point.  The government could not win because there were genuine disputes of act concerning whether Treasury issued and mailed the checks.  Pfizer could not win because there were genuine disputes of fact concerning whether the checks were appropriately delivered to Pfizer.

As a result, the judge denied Pfizer’s motion for summary judgment and granted the government’s motion to reopen discovery.  The judge ordered the parties to file a proposed schedule for discovery and further proceedings by the end of September.  It may be a while longer before we get a ruling on the legal issue.

Inside a Virtual Settlement Day

Today guest blogger Bob Probasco returns with a detailed account of his recent Virtual Settlement Day experiences in Texas. Bob also offers some advice for those participating in future VSD events. Christine

Virtual Settlement Days are the new craze, as IRS Counsel and the Tax Court press for making progress on cases even under our current difficult circumstances.  Several of you likely have already participated in one or more VSD; many others at least have heard about them from others who have participated.  Counsel put a team together to establish a general process and issued a “Best Practices” guide.  But the VSDs are organized by local offices, and likely there is some degree of variety from place to place.  So I thought there might be some benefit to PT readers from additional sharing of experiences by those of us who have already been through this.  I hope to hear more from others.

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The Pre-COVID History

Some of my comments may make more sense if I start out with a brief overview of what Texas was doing, for both calendar calls and settlement days, before the coronavirus.  The environment within which we operated influenced how VSDs were organized and operated and may have resulted in some differences (good and bad?) from VSDs elsewhere.

Texas has five different cities where the Tax Court holds trial sessions – Dallas, El Paso, Houston, Lubbock, and San Antonio.  The IRS Counsel office in Dallas handles Dallas and Lubbock trials; their office in Austin handles San Antonio and El Paso trials; their office in Houston handles Houston trials.  Texas has eight LITCs and our state bar Tax Section has a long-established calendar call program, created by Elizabeth Copeland back in 2008.  The state bar program has coordinators for Dallas, Houston, and San Antonio; the coordinators generally have a small group of volunteers they rely on regularly. 

Texas’s experience with in-person settlement days dates to 2014, with the first one in San Antonio.  Rachael Rubenstein, when she directed the LITC at St. Mary’s University School of Law, brought the idea back to Texas from an LITC conference and helped organize it with Counsel.  It was a successful trial, although only one IRS attorney came down from Austin.  (The need to travel is usually a complication for the IRS.)  Dallas started its settlement days in 2016, normally on a Saturday morning at one of the local clinics.  They’ve been very successful.  Houston and San Antonio started more recently.

Enter the VSDs

Texas was not the first location to have a VSD, but Counsel quickly scheduled three this summer.  The first, organized by Counsel’s Dallas office, for cases in Dallas and Lubbock, was scheduled over three days, Thursday 6/25 through Saturday 6/27.  Counsel sent out 96 invitation letters; 26 petitioners replied to make an appointment.  We were ultimately only able to hold meetings with 18 of them, as we ran low on volunteers.  More about that later.  I took four appointments, the SMU clinic took three, we had eight state bar volunteers who took nine appointments, and two petitioners had other representation and didn’t ask to meet with a pro bono volunteer.  Three petitioners cancelled or no-showed and one settled in advance of the appointment.  All told, nine cases settled and another five moved toward settlement.  This was a very successful event, with better turnout than we usually had in Dallas for in-person settlement days.

The Houston and Austin offices of Counsel scheduled their VSDs for the week of July 20th.  Houston had about twelve appointments; Austin had five.  I haven’t heard yet as much about how those events went, other than one appointment I had, but my impression was that those also were very successful.

That’s the high-level summary; what follows are my specific experiences.

Thursday, June 25:  Dallas Counsel sent out the invitation letters and scheduled appointments as petitioners contacted them.  Counsel then emailed a link to the WebEx meeting to petitioners with confirmed appointments a couple of days in advance of the meeting.  The email asked the petitioners whether they wanted to talk with the pro bono volunteer in advance.  My first appointment was an EITC substantiation case and talking in advance and sharing documents might have been very helpful.  But the petitioner didn’t ask to talk with me in advance and I met her only at the beginning of the virtual session.  My understanding of WebEx is that the host can allow any participant to share their screen.  Depending on how tech-savvy the petitioner was, she might have been able to share her documentation with us during the meeting and we might have been able to settle.

But we ran into a snag.  Two WebEx servers crashed that morning and the meeting had to be rescheduled as an IRS telephone conference call.  The petitioner had documents but couldn’t share them over the phone.  The IRS attorney had virtually nothing; the petitioner had submitted documents to Appeals last fall, but they hadn’t been uploaded and the physical administrative file was of course not available to Counsel.  In a situation like that, you can discuss generalities, but you may not be able to settle until later.  My clinic later took on the petitioner as a client and I’m hopeful we’ll settle soon.

Friday, June 26:  This petitioner, whose case was for Lubbock, did send me a lot of documents in advance.  My schedule precluded a telephone or Zoom meeting before the appointment, but I was able to evaluate his situation and we communicated by email.  The actual WebEx meeting ran into another snag.  There were still some potential problems with the WebEx servers, I think related to capacity, so Counsel came up with a workaround.  We used WebEx for video only and a telephone conference call for audio. 

I had already provided him with substantial advice by email Wednesday and Thursday nights, but we talked through the issues more.  I had concluded earlier that this CDP case would likely not settle; it seemed to be almost entirely based on strongly held but very different interpretations of tax law, rather than factual disputes.  When I’ve encountered such cases in the past, they never seem to settle.  Sure enough, on Friday there was some discussion but no settlement.  However, we did clarify some of the petitioner’s arguments and gained additional information.  I also communicated with the petitioner by email Friday night to answer some additional questions he had and clarify some aspects of court procedure.  It’s unfortunate when you’re unable to progress toward settlement in a Virtual Settlement Day, but perhaps the meeting at least contributed to resolution of the case.

I had a second appointment on Friday, but that petitioner did not show up.

Saturday, June 27:  This petitioner’s case was also for Lubbock, and he also sent me quite a few documents in advance.  And again, my schedule was busy so it wasn’t until late Friday night that I had an opportunity to review everything and email him with my preliminary evaluation.  The meeting proceeded similarly to the one the day before.  And this appeared also to be an instance of strongly held but very different interpretations of tax law. 

Although I understand that WebEx does have “breakout room” functionality, the original plan was for the IRS attorney to make the pro bono volunteer a co-host, and then leave the WebEx meeting to allow a private conversation.  But once again we were using WebEx for video only and an IRS conference call for audio.  There was no way for the IRS attorney to leave the conference call without terminating it.  So instead, the petitioner and I left the WebEx meeting and the IRS conference call; then I called the petitioner for a private conversation.  After that, we returned to WebEx and the conference call.

Although we weren’t able to reach a settlement, I was able to provide information to the petitioner about the strength of his case and answer some questions about court procedure.  Since there apparently was no dispute concerning the material facts, I suggested a submission without trial under Rule 122 would be appropriate and more convenient than appearing for trial.  I think both petitioner and the IRS attorney were satisfied with that approach and will cooperate in stipulating the facts, so this case seems headed toward resolution.

That was it for the Dallas event.  We had enough state bar volunteers, along with the clinics, for the Houston and Austin event, after some balancing between the two.  But the Austin event got a last-minute email from a petitioner on Wednesday asking for an appointment on Thursday, so I volunteered to take that one.

Thursday, July 23:  Another CDP case.  For the Dallas VSD, Counsel copied the applicable volunteer when emailing a petitioner with a link for the WebEx meeting.  I didn’t know who the petitioner was on this case until the virtual meeting began.  I’m not sure if that was a conscious decision by Austin Counsel to delay the communication of the petitioner’s name as long as possible or just a result of this being a last-minute appointment.  I don’t know if he was offered an opportunity to talk with me in advance, but if he was, he didn’t pursue it.

We were able to use WebEx for both video and audio this time, and I had an opportunity to experience sharing documents within WebEx.  The IRS Attorney showed us the Notice of Determination.  It’s a little bit awkward when someone else is at the controls (I’m gaining sympathy for what my students in a virtual class go through) and I didn’t capture in my notes all of the important information for reference later when we had a private conversation.  But the process works.

We ran into problems when transitioning to a private meeting between me and the petitioner.  The IRS attorney left the WebEx meeting, as planned, but that unexpectedly kicked all of us out the meeting and the IRS attorney had to schedule a new WebEx meeting and invite us.  None of us were absolutely sure if that would happen again, so the petitioner and I decided to have our private conversation outside of WebEx.  The IRS attorney kept the WebEx meeting going, the petitioner and I exited, and then he and I had a Zoom meeting.  (You’re probably wondering why I didn’t use Zoom for private conversations with petitioners during the Dallas VSDs.  So am I.  IRS Counsel only uses WebEx for videoconferencing but that restriction wouldn’t apply to a meeting that IRS Counsel does not attend.  It should have occurred to me earlier as it would have been easier than a cellphone call.)

After we returned to the WebEx meeting to discuss the case with the IRS attorney, there were a couple of times that the petitioner wanted to speak with me privately again.  The discussions were likely to be brief, so we came up with a workaround rather than returning to Zoom.  The IRS attorney left the WebEx meeting going but left his office so he couldn’t hear us, then came back in five minutes.  A little inconvenient for him but, unlike my other VSD cases, we were able to reach a settlement.  Hurray!

Takeaways

Compared to the in-person settlement days, there were some noticeable differences – some better, some worse.  Overall, I thought the VSDs went well.  Counsel is to be commended for their efforts in trying to make progress on the cases even under today’s difficult circumstances.  In reflecting over it, there were also some things to consider the next time around.

Choice of cases to invite.  Our Dallas in-person settlement days usually invited petitioners whose cases were scheduled for trial in the next 2-3 months, and sometimes Counsel limited the invitations to cases they considered good candidates for settlement.  For the VSDs, it seems as though the invitation list was crafted more broadly.  Of the four cases I assisted with, three were in the very early stages and had not yet been set for trial.  (The fourth had been set for trial in May, before the Tax Court cancelled those trial sessions.)  I was somewhat surprised by that, as often at that stage Appeals has jurisdiction.  But if we can settle cases earlier, bring them on.  It seemed to work well overall.

I think there’s an argument for only inviting cases for which Counsel thinks progress is likely.  I’ve heard in the past about in-person settlement days where that approach was taken but here it seems Counsel may have not focused as much on that.  Progress seemed unlikely for two of my four appointments.  I understand that Counsel may have difficulties with a case and hope that a volunteer will persuade a petitioner that a proposed resolution is reasonable.  And that happens sometimes even if the proposed settlement is a full concession by the petitioner; the petitioner may believe a volunteer who tells her that she should concede, but not trust Counsel who says the same thing.  Even though the petitioner isn’t any better off, the judicial process is.  The Court and Counsel both appreciate any intervention that results in resolution before trial. 

On the other hand, there are some cases for which it seems extremely unlikely from the very beginning that a volunteer will change either party’s point of view.  Is it worthwhile to invite those petitioners to a settlement day, whether in-person or virtual?  I didn’t think it would be in those two cases I assisted with, and I was surprised that they wound up at the VSD.  But in retrospect there was some movement (very slight) toward resolution, even if the cases would not settle.  And the petitioners hopefully got some useful information from me, even if not what they may have hoped for.  I wonder whether the petitioners and Counsel thought the VSD was beneficial for those cases.

Time:  Our Dallas settlement days were always held on Saturday mornings.  Several IRS attorneys and several pro bono volunteers would show up for the entire morning.  We could get through 10 – 15 meetings easily and typically no one was committed for more than four hours.  The VSDs were mostly held during the week and spread over several days.  That is probably more convenient for Counsel and LITCs, as this is part of their day job and most meetings were during our normal work hours.  The total time set aside was much more than the four hours for our Dallas in-person settlement days, but IRS attorneys and pro bono volunteers alike only had to be there for their meetings, rather than the whole time, so the total time commitment may have been similar.  It also seemed to be better for petitioners, at least if there was a Saturday option.  And no one had travel time to get there.

There is a possible downside for state bar pro bono volunteers, as most of the meetings were during the work week when they often have other commitments, rather than on the weekend.  Perhaps as a result, the volunteers may have been more likely to volunteer for only one or two appointments instead of handling four at an in-person settlement day.  Part of that may also be a result of more time set aside for VSD appointments and in-person, as the process can be a little bit slower. 

This is a balancing act and the plan for our VSDs may be the right one for VSDs going forward, but it’s something to think about.  Most importantly, the organizers for the pro bono volunteers may need to consider that more than the normal number of volunteers may be needed when moving from in-person to virtual.

Location:  This was a huge advantage of the VSDs.  The obvious advantage is eliminating travel time for everyone but there are two other aspects.  First, VSDs allowed Counsel to combine cases from more than one trial location.  We had done in-person settlement days for Dallas trial sessions.  But Dallas Counsel also handles Lubbock trial sessions.  Even if they organized an in-person Lubbock settlement day, travel costs for the Dallas IRS attorneys would have limited participation.  With a VSD, however, it was easy to invite petitioners with cases for both cities.  The second advantage of a VSD is that it facilitates getting pro bono volunteers.

Soliciting volunteers:  We had started to cast our net wider for the state bar volunteers even before COVID.  Last year, the Texas Tax Section started sending out blast emails to the entire membership inviting them to sign up as volunteers for calendar calls or settlement days or Adopt-a-Base training sessions.  (Rachael Rubenstein implemented this initiative for soliciting volunteers for us.)  It’s part of a balancing act between asking our “regulars” to stay involved and diversifying our volunteer base (expanding base, involving younger attorneys, etc.). 

When we switched from in-person settlement days to VSDs, though, that had an even greater reach.  Our Dallas VSD had eight state bar pro bono volunteers, of whom three were from Houston.  Our Houston and Austin VSDs in turn drew volunteers from Dallas.  We even got an out-of-state volunteer from D.C., who happened to be a member of the Texas bar.  (Thank you!)

We turned out to have more petitioners wanting to participant in the Dallas event than the volunteers could cover, and some never made it off the waitlist.  But that was primarily because we got a later start than for the Houston and Austin events.  The next time we do this, I think we’ll be able to get more volunteers.

It takes effort to solicit intrastate volunteers but the ability to serve more petitioners is worth it.  The program that Rachael started in Texas gave us a head start in that, although she also had to put in a lot of effort connecting the volunteers to the petitioners.  The time slots the volunteers asked for didn’t match exactly with the petitioner appointments.  I doubt if we would have had as many volunteers without that program already in place.  Other state bars may want to investigate something similar if they’re not doing it already. 

This advantage of a VSD in attracting volunteers who do not live in the area will also apply to calendar calls as the Tax Court starts its remote trial sessions.  We tend to need fewer volunteers at calendar calls then at settlement days, but the potential for interstate assistance can greatly help locations that do not have clinics or an established state bar program.  It will be more difficult to coordinate than intrastate volunteers, but Meg Newman at the ABA Tax Section is already doing some of this.  The Texas bar will be helping with a VSD, and possibly a calendar call, for Las Vegas later this year.

Technology:  We had some issues with WebEx during the Dallas VSD, although most of that may have been just temporary glitches rather than recurring problems.  However, I suspect many of the pro bono volunteers mostly use Zoom and are unfamiliar with WebEx; I know I was.  Even some of the individual IRS attorneys may not have been familiar with the full range of functionality used in a VSD – sharing documents, selecting a co-host, etc.  For that matter, petitioners might also struggle with sharing documents if they were unfamiliar with the technology.

We did get an instruction guide for signing in and a video tutorial in advance of the VSD.  That was helpful.  In retrospect, it might have been beneficial to have a live run-through to acclimate to the software.  But it’s hard to find time for this in everyone’s busy schedule.  This will get better over time, though, as everyone gains more familiarity.

Sharing information.  This is a disadvantage of VSDs, compared to in-person.  At the in-person events, petitioners and Counsel both often bring documents to the event and it’s easy to give them to the volunteers to look at those throughout the meeting with petitioners.  That’s harder to do through videoconferencing.  Petitioners may not have the documents in electronic format, for screen sharing, and holding a document up to the camera may not work well.  It can be awkward for the volunteer to refer back to documents during the discussion if petitioner or Counsel are sharing them through the screen.  And after Counsel leaves the meeting, any documents shared by them are – I assume – not available during the private conversation between volunteer and petitioner.

For the Dallas event, the invitation letter invited petitioners to send documents to Counsel in advance; a couple of days before the meeting, Counsel offered to put petitioner and volunteer in touch to discuss the case before the meeting.  I think there was little, if any, information shared ahead of time, though.  Maybe a more assertive approach, earlier in the process, would change that.  Perhaps when the petitioners respond to the invitation letter to schedule an appointment Counsel could: (a) explain the benefits of talking with the volunteer in advance; (b) strongly suggest that it would be beneficial to send documents to Counsel in advance and ask whether those could be shared with the volunteer; and (c) ask the petitioner if documents already filed with the court (e.g., petition/notice of deficiency, any pending motions, etc.) could be shared with the volunteer in advance.

At some VSDs, cases were “recalled” for later in the week or a subsequent week.  That can be a good solution for this issue and would likely work well for Counsel and clinic volunteers.  But it might be harder for state bar volunteers to squeeze a second meeting into an already busy schedule.  For clinic volunteers, there is also the option of entering an appearance in the case and continuing through resolution; state bar volunteers do that less rarely.  Of my three VSD cases that did not settle, I did that for one but chose not to for the other two.

This is certainly not a big issue.  We can get documents and information from the petitioner and Counsel during the virtual meeting, which is essentially what typically happens at an in-person settlement day or a calendar call.  But virtual seems slower than in-person and anything that helps speed up the process might help.

Parting thought

VSDs will take some getting used to, and they have some obvious challenges.  But they also offer significant advantages.  My experiences were definitely positive.  If you’ve been hesitant about participating in one, don’t be.  I think it would also make sense to continue offering at least some VSDs or virtual trial sessions even after COVID is long behind us.  Just like so many other things, the result of the pandemic may be a permanent and substantial change in how we work.