Several years ago I wrote a post focused on the choice petitioners have when filing a Tax Court petition and how that choice could impact the outcome of their case. I wrote the post because the Tax Court had entered a precedential decision in the case of Rand v. Commissioner, 141 T.C. 12 (2014), determining that the IRS could not impose the IRC 6662 penalty for understatement on taxpayers who overclaimed the earned income tax credit since the overstatement of the credit was not an understatement of tax. The IRS disagreed with the decision initially and indicated a desire to continue litigating the issue. A similar situation had occurred earlier when the Tax Court issued a precedential opinion in Lantz v. Commissioner, 132 T.C. 131 (2009), striking down the innocent spouse regulations interpreting IRC 6015(f) to impose a two-year time limit after the initial collection action on requesting innocent spouse relief.
read more...In these situations, my suggestion in the post was to elect the small tax case procedure, if it was available, and the Tax Court would follow its precedent, resulting in an automatic victory for the petitioner. To go this route, you must not only qualify for small tax case procedure but also be in a circuit that does not have adverse precedent on the issue, since the Tax Court inexplicably follows the Golsen rule in deciding small tax cases as discussed in an article by Carl Smith “Does the Tax Court’s Use of its Golsen Rule in Unappealable Small Tax Cases Hurt the Poor?” Carl pointed out in his article that the Golsen rule by which the Tax Court adopted the rule of following the precedent of the circuit to which a Tax Court case would be appealed does not logically follow when a case cannot be appealed to the circuit court. By their very nature, small tax cases are cases entirely within the jurisdiction of the Tax Court. The Tax Court reversed its prior precedent in adopting Golsen in order to keep petitioners who lost at the Tax Court from simply appealing and obtaining a reversal in circuits where the Tax Court and the circuit court disagreed. If a case cannot be appealed to the circuit court, no need exists for following circuit precedent, yet the Tax Court applies Golsen anyway.
Given the Tax Court’s application of the Golsen rule, choosing the small tax case route does not make sense if the taxpayer lives in a circuit where adverse precedent exists. If no circuit precedent exists in the circuit where the taxpayer resides at the time of filing the Tax Court petition, then the Tax Court follows its own precedent. If it has a precedential opinion on its books, you know the outcome of the case, which makes choosing the small tax case route the logical choice for qualifying taxpayers.
This brings me back to the discussion at the end of the post on Friday, March 19. The discussion focused on the Tax Court’s decision in Sutherland v. Comm’r, 155 T.C. No. 6 (2020) and the apparent disagreement of the IRS with the Tax Court’s decision regarding the administrative record in innocent spouse cases. The situation in Sutherland presents another example of the value of electing small tax case status once the Tax Court has issued a precedential opinion on an issue. A high percentage of innocent spouse cases will qualify for small tax case status. Going that route gives you certainty if you fit within the facts of Sutherland.
Even if you do not elect small case status at the outset of the case as about 50% of petitioners do, you can make the election later in the case with leave of court. Pursuant to Tax Court Rule 171 you must make the election prior to the start of trial. You can expect to face some opposition from the IRS if you are making the election in a situation which will result in automatic loss for the IRS, but the IRS does not have many good arguments for opposing your request.
I have heard some practitioners say they always elect regular case status. Doing so ignores the what can be a winning strategy in situations like Rand, Lantz and Sutherland. The IRS has the right to keep litigating in Tax Court after obtaining a losing opinion on an issue, because it can set the issue up for a fight in the circuit courts where it might overturn the precedential decision of the Tax Court, as it did in Lantz. Conversely, taxpayers have the right to choose a Tax Court “forum” that prevents the IRS from getting to circuit court. Pay attention to the situations when this strategy could create an easy victory for your client.
Following the Golsen rule, even in a small case, makes sense because whether this case is or is not appealable, the outcome should not vary depending on which procedure was used in the Tax Court or which court one was in in a particular geographic area. (Yes, I know that that is untrue if you are in the Claims Court, and not always true in District Court depending on the likelihood of an appeal.) If the Supreme Court had ruled one way, would the Tax Court be justified in holding another way in a small case because there is no appeal? Surely not. Although I have been a tax lawyer for over forty years, I tend to give greater credence to the need for uniformity “within a Circuit” (even if there is a Circuit split that has not been resolved by the Supreme Court) than “within the Tax Court but only for small cases.”
Another area in which a practitioner might consider small case status is the situation where the IRS has asserted failure to file penalties, and the taxpayer has a reasonably good pitch that he thought his accountant had handled electronic filing on a timely basis. The courts – including the Tax Court – have generally not been receptive to this argument, hewing to (arguably) outdated precedent (Boyle) that makes the taxpayer responsible for the defalcations of his agent. However, in the right case, if no appeal is possible, a Tax Court judge may very well issue a decision in favor of the taxpayer on the applicability of the penalty. This happened for an associate in our office who tried such a case as a pro bono volunteer.
Just to underscore Keith’s advice, I point to a case decided by STJ Panuthos that presented the Lantz issue, where the Tax Court had held the 2-year reg. invalid, Iljazi v. Commissioner, T.C. Summary Op. 2010-59. Mr. Iljazi came to me when I was the Director of the tax clinic at Cardozo School of Law. The only reason that the IRS objected to relief was that Mr. Iljazi had requested relief too late under the reg. under 6015(f). Mr. Iljazi lived in the Second Circuit. The Lantz case was then on appeal (to the Seventh Circuit), so there was no appellate authority on the issue. Here’s footnote 1 of the Iljazi opinion: “‘Respondent sought to have the small tax case designation removed from this case in an attempt to be able to appeal any adverse decision for the purpose of overturning our holding in Lantz v . Commissioner , 132 T .C . 131 (2009). Petitioner objected to the removal. Under sec. 7463(a), the small tax case designation is made ‘at the option of the taxpayer concurred in by the Tax Court’. The Court denied respondent’s motion .” George Willis (the director of Chapman U.’s tax clinic) told me that Judge Panuthos had denied a similar IRS motion at an L.A. calendar a few weeks before. After I objected to the IRS’ motion to removing the S in Iljazi, I then submitted the case fully stipulated, and Judge Panuthos gave the taxpayer the benefit of the Tax Court’s opinion in Lantz. He did so, even though there was pending in the Second Circuit a challenge to the Lantz opinion involving a woman, Ms. Coulter, who was in the same fact pattern as Lantz (although the IRS shockingly failed to mention that existing appellate case to the judge when it argued that it needed the Iljazi case to create a test case for the Second Circuit). When I later learned of the Coulter case, Christine and I contacted Ms. Coulter (who was pro se in the IRS appeal of her case) and then represented her before the Second Circuit. Her case was conceded by the DOJ after oral argument, but before opinion, when, a month after the oral argument, the IRS abandoned the reg.