Things That Happen to Your Tax Court Case When You File Bankruptcy or Your Judge Retires: Designated Orders, June 17 – 21

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There were six designated orders for the week of June 17 – 21, of which three are worth going into detail on. The remaining three orders can be found here, here, and here. The orders that will be addressed raise some interesting issues with the interplay of bankruptcy and collection due process cases, as well as what happens when the judge that heard your case retires before rendering a decision.

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Does Dismissing a Collection Due Process Case Violate the Automatic Stay of Bankruptcy? Betters v. C.I.R., Docket # 8386-17L (here)

One of the most powerful provisions in the bankruptcy code is the automatic stay at 11 U.S.C. 362. Violating the stay can lead to claims (whether successful or not) of damages and attorney’s fees against the IRS (as Keith blogged here). The automatic stay essentially gives whomever files bankruptcy some “breathing room” from creditors while sorting things out by pausing (or preventing) most collection actions (see Keith’s post on the effect of the automatic stay and a notice of federal tax lien, here). One specific thing that the automatic stay touches is “the commencement or continuation of a proceeding before the United States Tax Court […] concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order of relief” through the bankruptcy court. See 11 U.S.C. 362(a)(8). 

In the order above, the taxpayer filed his Tax Court petition in response to a Collection Due Process determination (that presumably would have upheld a levy action). People who have unpaid taxes frequently have other unpaid debts, and a few years later while the case was still pending in Tax Court the taxpayer filed a petition with the U.S. Bankruptcy Court. Now the taxpayer wants to get out of Tax Court and just deal with the whole thing in Bankruptcy Court. And the IRS has no objection to going that route.

The question is whether the Tax Court can dismiss the case without violating the stay, even if both parties want that result. The answer, according to Chief Special Trial Judge Carluzzo, hinges on the application of Settles v. C.I.R., 138 T.C. 372 (2012). Both the IRS and the petitioner say that Settles applies, such that the case can be dismissed. Judge Carluzzo, however, disagrees.

In Settles, the taxpayer had a collection case he wanted dismissed, while he had a bankruptcy case with a stay still in effect. The Tax Court allowed the voluntary dismissal of the case. The one (big) difference: in Settles the bankruptcy court had already adjudicated the merits of the tax liabilities, and all that was left were non-tax creditors. And that difference is enough for Judge Carluzzo to say that no voluntary dismissal is presently allowed: if you want to dismiss the case, take it up with the bankruptcy court to have them modify the stay.  

So even though the parties want it dismissed, Judge Carluzzo’s hands are tied. I’d note in passing that if the case were a deficiency proceeding, and not a collection action, the option of voluntary dismissal would be more obviously unavailing: once you invoke the Tax Court’s jurisdiction in a deficiency case there is no way out absent a determination by the Tax Court. Compare Estate of Ming v. Commissioner, 62 T.C. 519 (1974) with Wagner v. Commissioner, 118 T.C. 330 (2012).

The other order that involved bankruptcy (Wilson v. C.I.R., dkt. # 25218-18SL (order here)) deserves much less explication, but serves as a warning for taxpayers that think bankruptcy is a cure-all for tax debts. It is another collection action where the petitioners filed bankruptcy involving the tax years at issue, but in this instance the bankruptcy case was over well before the Tax Court order was issued. However, because the tax debts at issue were for returns that were due within three years of the bankruptcy petition they were non-dischargeable in Chapter 7 (see 11 USC 523(a)(1)(A) and 11 USC 507(a)(8)). The Bankruptcy court puts things in plain English for the taxpayer in their “Explanation of Discharge,” which included the sentence “Examples of debts that are not discharged are […] debts for most taxes.” Because one of the two arguments the petitioners want to make is that the debts were discharged in bankruptcy, and because the other argument has already been fixed by the IRS (applying a payment to the correct year) there is nothing left at issue. Summary judgment ensues.

What Happens When the Tax Court Judge Hearing Your Case Retires? Zajac III v. C.I.R., dkt. # 1886-15. (order here)

Judge Chiechi retired effective October 19, 2018 (see press release here). As indicated by the docket number, however, this case has been going on since 2015. The trial took place in early February, 2018 and briefs were submitted in May, 2018. One might ask how much is left to be done in this case (which has a somewhat unusual +100 filings with a pro se party). But the petitioner wants a second-go at the trial. And since the case involves witness credibility determinations the standard it to allow a new trial unless the parties either agree they don’t want to, or (sometimes) if the petitioner fails to ask.

How far will that new trial get the petitioner? If I had to bet, I’d say it is only delaying the inevitable. Why may it be of limited use? Consider the following: 

First, Judge Gale is quick to remind the parties of the “law of the case doctrine.” That doctrine is often raised when a case is on appeal, and stands for the proposition that “when a court decides on a rule of law, that decision should continue to govern the same issues in subsequent stages of the same case.” Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 816 (1988). As Judge Gale explains, in this context it means that “a successor judge generally should not, in the absence of exceptional circumstances, overrule a ruling or decision of the initial judge.” In other words, whatever Judge Chiechi or other judges in the case have already ruled on, Judge Gale isn’t likely to overturn. And at this point, as I alluded to earlier with the +100 filings on the docket, there have been quite a few rulings. 

Second, one of the legal arguments that the petitioner wants to make (and use a new trial to establish) pretty clearly has no traction. Perhaps unsurprisingly, it is a penalty issue that raises the specter of Graev. The petitioner wants to put the IRS supervisor that approved the penalty on the witness stand. One may wonder why the supervisor’s testimony is necessary, when all that is required is written approval under IRC § 6751(b)(1). Indeed, there has already been some case development on this point: see Raifman v. C.I.R., T.C. Memo. 2018-101, Ray v. C.I.R., T.C. Memo. 2019-36, and Alterman v. C.I.R., T.C. Memo. 2018-83, all of which provide some detail to the general rule that the Tax Court isn’t going to “look behind” a document to the reasoning or motives of the penalty approval by the supervisor. The petitioner in this case apparently wants to show that the IRS agent had a conflict of interest and, consequently, the manager shouldn’t have given supervisory approval. That is a lot like looking at the reasoning and motives of the supervisory approval, and I doubt it would succeed regardless of what the questioning elicits. In truth, if the IRC 6662(a) penalty is so ill-conceived, the taxpayer should have some other pretty obvious defenses apart from procedural infirmities… like reasonable cause or simply not having a substantial understatement (or not acting negligently) in the first place. 

But the petitioner isn’t just casually throwing the “conflict of interest” argument around: he has gone so far as to sue the IRS agent in Federal District Court under a Bivens action. That case was dismissed with prejudice. If I were a government employee that was sued by an individual taxpayer I’d probably be pretty upset too… only it appears that the suits were filed after the penalties were already proposed.

The final reason why I’m not so sure the new trial will get to a different outcome than whatever was already coming: this is a case almost entirely about determining the proper amount of self-employed income and expenses. While testimony (particularly credibility) definitely matters in such cases, the most important evidence is usually documentary. There have already been five submissions of stipulated facts and roughly 80+ exhibits. Those are in the record and aren’t going to be changed. Documents don’t always tell the whole story, and credibility determinations matter when those documents are being explained. But at this point most of the work in this 4 year-old case is, thankfully for Judge Gale, likely done.

Caleb Smith About Caleb Smith

Caleb Smith is Visiting Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today.

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