An Update on the Lawsuit Against Bank of America for Failing to Issue Accurate Interest Information Statements

One of the most viewed posts last year was one that discussed a lawsuit alleging that Bank of America intentionally and systematically understated millions of dollars in homeowners’ mortgage interest payments following loan modifications. Today is the first of a two- part post by the lead lawyer on the case, David Vendler, a partner at Morris Polich & Purdy LLP. In this post, David updates us on developments in the case and related cases. In tomorrow’s post, David walks through in detail his legal arguments that underlie the claim that the bank has underreported interest.

David is an accomplished attorney who has been lead counsel in a number of high profile class action lawsuits. The charges in the Bank of America case relate to fundamental issues of tax administration, including whether consumers can rely on information returns that financial institutions issue. This post and tomorrow’s post show us that perhaps consumers and preparers may need to think twice about whether they can rely on those statements. In addition, there may be a need for millions of consumers to amend prior years’ returns when the returns include interest deductions when banks have modified loans. As David describes, the district court case that I originally discussed last year was dismissed, and now is on appeal. Related cases though are percolating, and it is likely as David describes the IRS and courts may be weighing in soon. Les

We are writing to update your blog on the status of our case against Bank of America, N.A. involving its failing to include on Forms 1098 customer payments of deferred interest in the loan modification context. As your readers will recall, the question at the heart of the case is whether 26 U.S.C. 6050H requires banks and mortgage servicing companies to report on Forms 1098 borrower repayments of interest that were owed at the time of a loan modification and which have been are “wrapped into” the “new principal” of the loan post-modification.


An example was given in the earlier blog post that well illustrates the issue. Assume a homeowner facing financial distress has a $600,000 principal balance on a 15-year mortgage. At the time of the modification, the homeowner also owes $60,000 in delinquent interest. Post modification, the homeowner ends up with a 30-year mortgage and owes $660,000. That amount consists of the original principal plus the $60,000 in back interest. Our view is that the entirety of the borrowers’ post-modification payments should be applied first to retiring the $60,000 of pre-modification interest, and that those amounts should be reported on Form 1098. Bank of America and many other banks have taken the position that they are not going to report the repayment of this interest at all.

Our position is that pre-loan-modification interest retains its character as interest post-modification and that therefore 26 U.S.C. Section 6050H requires that the borrowers’ post-loan modification payment of that interest must be reported on Form 1098. We further take the position that under the “interest before principal” payment allocation provisions that exist in all standard mortgage agreements, the borrowers’ post-loan-modification payments should be first applied to retire any pre-modification interest. Only then, should payments be allocated to retiring interest accrued post-modification and principal. See Prabel v. Commissioner, 91 T.C. 1101, 1113 (1988), affd. 882 F.2d 820 (3d Cir.1989) (courts generally have “deferred to the loan agreements between debtors and creditors where the agreements make specific provision for the accrual or allocation of loan payments between principal and interest.”)

Last year, our case against Bank of America got thrown out by the district court (that dismissal is  here). The ground for the district Court’s opinion was that the IRS supposedly has “exclusive enforcement” jurisdiction over 26 U.S.C. Section 6050H. We have appealed that ruling and briefing on that appeal will be complete next month. Argument will likely take place sometime in 2017. In the months since our case against Bank of America was thrown out, two other district courts in similar cases have explicitly refused to follow the Bank of America decision and have found these other Form 1098 cases “cognizable” in court; those opinions are found here and here. In our view, these subsequent decisions by two different federal judges bode well for our chances before the 9th Circuit. But there are also other movements afoot that will have ramifications on this issue (and our appeal) within this year.

Although the IRS refused all of our entreaties to become involved with this issue (made through the Office of the Taxpayer Advocate), two banking industry submissions – made pursuant to Rev. Proc. 2003-36 on September 15, 2015 and October 15, 2015 by the Mortgage Bankers Association (“MBA”) (MBA letter here) and American Bankers Association (“ABA”) (ABA letter here) – have apparently gotten the IRS to finally take notice. Specifically, on January 7, 2016, the IRS as part the IRS’ Industry Issue Resolution Program issued a curt statement stating it had agreed to accept two issues for consideration: (1) whether Section 6050H requires reporting of pre-loan-modification interest and (2) whether deferred interest in the negative amortization loan context should be reported.

Not surprisingly, neither the AMA’s and MBA’s letters claim that such interest should not be reported, but instead seek that the IRS issue a prospective-only rule that would (at least potentially) eliminate their members’ liability for having failed to report such interest in past years. We responded with our own submissions here in which we urged that the there is no need for “guidance” since there is a mountain of legal authority that already exists pointing inexorably to the conclusions: (1) that the payment of previously deferred mortgage interest must be reported on Form 1098 by the recipient of that interest in the year of actual payment and (2) that an intervening loan modification does nothing to change this.

We also pointed out that the only reason the ABA and MBA were seeking “guidance” is that some of its members are seeking to have the IRS help them avoid exposure in litigations like ours for their having improperly reported the mortgage interest payments of millions of Americans. Specifically, we stated that they are hoping to be able to create their own precedent so they can argue in Court that the IRS’s issuance of some sort of “prospective” “guidance” proves that an ambiguity existed in the law such that their under-reporting of interest was “reasonable.” However, we argued that the mere fact that some banks are reporting interest in a manner that is contrary to well-established law does not mean that there is an ambiguity in the reporting requirements. It just means that those banks are doing it wrong.

The real truth is that some ABA member banks (like Bank of America) chose expediency over compliance because tracking deferred interest is costly. But accuracy lies at the core of section 6050H. Clearly, any rule that promotes a schism between the amount of interest that a borrower pays to a lender from the amount of interest that lender reports on Form 1098 crosses purposes with the intent of section 6050H (this is not to say that the amount of interest deducted by the taxpayer will always match the amount of interest reported on Form 1098. For instance, a borrower might pay less than $600 in interest and thus not receive a Form 1098, but that borrower could still deduct the interest that he or she did pay). Because taxpayers, their tax preparers, and the IRS all routinely rely on the amounts contained on the lender-issued Form 1098, if pre-existing interest is not reported on Form 1098, most borrowers (and their tax preparers) would never even know: (1) there is a pre-existing interest balance that can be deducted, or (2) how to allocate their mortgage payments to determine in which tax-year they have repaid the prior interest balance. While this may be “good” for the treasury, it is inconsistent with the principle that everyone pays only the amount of tax they are required to pay under the tax code.

These problems all completely disappear if banks simply report the “aggregate” amount of interest (both current and pre-existing) that they actually receive as is mandated by the unambiguous language of § 6050H (recipients of “interest” on “any mortgage” are required to report on Form 1098 (to the IRS and to the payer) the “aggregate” amount of “interest” “received” during the calendar year if that amount “aggregates” to over $600). If that happens, then the taxpayer will deduct the proper amounts and the Form 1098 will have served its raison d’être by helping the IRS to verify that the amounts deducted are proper.

In tomorrow’s post we will discuss the legal issues underlying how banks are supposed to report interest.

The Limits of the “One Inspection” of Taxpayers’ Books and Records Rule

We have discussed parties’ challenges to IRS administrative summons on a few occasions. Courts give IRS wide latitude in seeking documents and evidence in the exam process. One limitation on IRS powers is the Code itself, as Section 7605(b) provides that “only one inspection of a taxpayer’s books of account shall be made for each taxable year unless ․ the [Treasury] Secretary ․ notifies the taxpayer in writing that an additional inspection is necessary.” A recent case out of the Seventh Circuit, US v Titan Industries, illustrates that despite the one bite at the apple rule, the IRS gets another bite when a subsequent request for records that IRS previously may have requested relates to a differing year’s tax liability.

Here are the facts and the basic issue before the court.


Titan received an IRS summons issued in connection with an audit of its 2010 tax year. The summons ordered Titan to turn over records relating to 2009, including its general ledger and travel records. Titan had previously turned over those records in connection with the IRS’s audit of its 2009 year. The 2010 audit concerned a loss carry-forward from 2009.

Titan refused to comply with the summons. It argued before the district court and on appeal that Section 7605(b) prevents the IRS from inspecting the 2009 records it had already provided unless the IRS “makes a finding of necessity and notifies the taxpayer in writing of that finding.”

Titan argued that the prohibition in Section 7605(b) that IRS gets “only one inspection of a taxpayer’s books of account shall be made for each taxable year…” means that absent a finding of necessity and notice, the IRS cannot request information relating to the same year even if IRS needed the documents in another year’s examination:

Titan argues that the statute limits the IRS to a single inspection of a “taxpayer’s books of account” created for a particular taxable year, unless the Secretary finds a second inspection “necessary” and sends written notice to that effect. In other words, Titan reads “for each taxable year” as modifying “taxpayer’s books of account.” On this interpretation, Titan’s 2009 records—already inspected during the audit of its return for tax year 2009—cannot be inspected again in connection with the audit of its 2010 tax return (or any subsequent tax-year audit, for that matter) unless the Secretary first sends written notice of necessity.

The Seventh Circuit rejected that interpretation on two main grounds: a plain reading of the statute and applying a couple of cases that illustrate the statute’s limits.

On the matter of statutory interpretation, the court felt that Titan’s argument was strained:

Titan’s interpretation is disjointed and curiously omits some of the language of the statute. The key statutory phrase is this: “[O]nly one inspection of a taxpayer’s books of account shall be made for each taxable year.” The more natural reading of this language limits the IRS to one inspection of a taxpayer’s books per audit of a given year’s tax return (subject, of course, to notice and a finding by the Secretary that a second inspection is necessary). Read in this more natural way, § 7605(b) does not bar the summons of Titan’s 2009 records for the purpose of auditing its 2010 tax return.

The Seventh Circuit’s discussed two main cases, one decided in favor of the taxpayers and the other in the IRS favor. The taxpayer-friendly case was Reineman v. United States, 301 F.2d 267 (7th Cir.1962). In that case, the taxpayer purchased horses for a breeding business and deducted costs on its 1954 tax return. IRS requested records in an audit of the taxpayer’s 1954 tax return. IRS made adjustments to the 1954 return. IRS then audited the 1955 tax return, but in so doing took another look at the 1954 adjustments. IRS “reopened the 1954 audit (without written notice from the Secretary) and again adjusted the [1954] deduction for the six horses.” The Seventh Circuit said that ran afoul of Section 7605(b):

The 1954 records inspected by the IRS to adjust the deduction for the second time were wholly irrelevant to the 1955 audit. We concluded that the second inspection of those records violated § 7605(b) because it was an “additional inspection” of the taxpayers’ books for the purpose of reopening the 1954 tax return.

The second relevant case is Digby v. Commissioner, 103 T.C. 441 (1994). In that case IRS audited a 1987 tax return and during the examination looked at records pertaining to a couple’s S Corp stock basis to determine whether the couple could claim losses. The couple was able to demonstrate that it had basis to support a deduction. The IRS later also examined the 1988 individual tax return, which also had reflected losses from the S Corp. In the second audit, the IRS found that the couple did not have sufficient basis and disallowed the losses for both 1987 and 1988. The couple argued that the second request ran afoul of Section 7605(b). The Tax Court disagreed, and in so doing gave a detailed walk through the statute and its legislative history and its relation to the Supreme Court Powell decision. “[In Powell] the Supreme Court held, with respect to section 7605 (b) that, generally, “no severe restriction was intended”, and regarding unnecessary examinations, courts are not required “to oversee the Commissioner’s determinations to investigate.” As the Seventh Circuit explained:

The tax court concluded that the second inspection of the records was not a violation of § 7605(b) because that inspection was undertaken for the purpose of examining the 1988 tax return, and—unlike Reineman—those records were necessary to complete that audit. The court ruled that an additional adjustment of the tax return for an earlier taxable year is not a violation of § 7605(b) so long as it was not coupled with an additional inspection of the taxpayer’s books for the purpose of adjusting that year’s tax liability.

Naturally, Titan argued that its case was like Reineman. The Seventh Circuit disagreed:

This case is more like Digby than Reineman. The IRS first inspected Titan’s 2009 records to verify its net operating loss in connection with an audit of its 2009 tax return. The IRS now seeks to inspect those same records for the purpose of auditing Titan’s 2010 tax return in order to determine the validity of its 2010 net-operating-loss carryforward. Much like the pass-through loss at issue in Digby (and unlike the deduction at issue in Reineman), the net-operating-loss carryforward on the 2010 tax return cannot be verified unless the IRS inspects the 2009 records.


In our past discussion of summons litigation (e.g., the Clarke case still percolating post Supreme Court and on appeal following the district court order I discussed last year, IRS efforts to get records for offshore accounts, and in the IRS’s examination of Microsoft that Keith discussed here), the courts tend to give IRS wide powers to get access to relevant documents. As Titan shows, IRS can make a second request for documents it received in an earlier year’s audit if those documents relate to another year’s potential tax liability. As the discussion of Digby illustrates, so long as the IRS in seeking enforcement of a summons can connect the requested documents to a later year’s potential tax consequences, IRS not only gets a second look at the documents but also gets a chance to reopen that earlier audit.

Discharging Late Filed Returns – A Novel but Unsuccessful Approach

I have discussed the issue of late filed returns and bankruptcy discharge too much. See the most recent post, capturing all prior posts, here.  Despite many discussions of this issue, the debtor in Nilsen v. Massachusetts Dept of Revenue, a recent bankruptcy in Massachusetts, a state in the 1st Circuit where controlling circuit law requires the strict interpretation that any late return is excepted from discharge, made a novel argument worthy of a brief post.


The debtor failed to timely file returns for almost every year between 2000 and 2010. In August of 2010 he late-filed for all of the years except 2010 and he submitted that return in March of 2012.  He then waited until March of 2015 to file a chapter 7 petition.  At the time of filing the bankruptcy petition, he owed the IRS over $200,000 and the state about $28,000.  His chapter 7 case was a no asset case and he received a discharge in about three months.

He then filed a complaint to determine dischargeability knowing that taxing authorities would treat his debts as excepted from discharge due to the late filing and the controlling circuit law. Both government entities filed motions for judgment on the pleadings.  With respect to the IRS it bears noting that it does not agree with the 1st Circuit but follows the law of the circuit rather than its own more lenient position on the issue when it is litigating in one of the three strict interpretation circuits.

The debtor objected to the motions filed by the government entities. The court allowed the debtor to place the returns into the record and treated the motions as motions for summary judgment because it admitted the factual material.  The debtor did not argue that the late Forms M1 (the state tax return form) and Forms 1040 he filed were returns but rather than but rather that they were “equivalent reports” as that term is used in bankruptcy code section 523(a)(1)(B).

Section 523(a)(1)(B) provides that “(a) A discharge under section 727, 1141 1228(a), or 1328(a) of this title does not discharge an individual debtor from any debt – (1) for a tax or customs duty – (A) with respect to which a return, or equivalent report or notice, if required – (i) was not filed or given: or (ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition.”

By recasting the title given to the tax return forms debtor hoped to avoid the application of the controlling circuit precedent. A footnote in the controlling 1st Circuit case noted that the debtors in that case had initially made an argument similar to the one Mr. Nilsen makes here but they abandoned it so this argument was not considered by the 1st Circuit in its opinion on the application of the discharge provision.  Essentially, his argument is that “A document which is not a return within the meaning of section 523(a)(*) solely due to its tardiness, constitutes an equivalent report where it satisfies the non-bankruptcy definition of return in all other respects, is treated as a return for non-bankruptcy purposes and serves the same function as a timely filed return.”

The IRS argued that some states use the term equivalent report but that no such term exists with respect to federal taxes. Federal law only requires the filing of “returns.”  The IRS also argued that “the plain language of section 523(a)(1)(B) and (a)(*) indicate that a late filed Form 1040 is not an equivalent report or notice…. Accordingly, it concludes that whether a document constitutes an equivalent report or notice for purposes of 523(a)such a document must be equivalent to a return as defined by section 523(a).”

Both the IRS and Massachusetts argued that In re Ciotti made clear that the language in 523(a) adding “or equivalent report or notice” expanded the prerequisites for obtaining a discharge and did not diminish them.  The court found the reasoning in Ciotti compelling as well as the reasoning in the controlling 1st Circuit opinion.  In addition, the court found that even if it simply applied the Beard test as the debtor seemed to want the debtor would still lose based on the pre-2005 law that had developed on this issue.  I doubt the debtor was shocked at this outcome and I expect that the debtor was advised before filing bankruptcy that the taxes were likely to survive the bankruptcy because of the circuit in which he resided.  The case shows the creativity that can come into play in the face of very long odds.

Verification of Bankruptcy Action in a Collection Due Process Case

In a recent bench opinion in the case of Brown v. Commissioner, Judge Gustafson granted partial summary judgement to the IRS on the issue of the taxpayer’s ability to contest the merits of the tax liability in the Collection Due Process (CDP) case but remanded the case to Appeals for verification that the IRS properly abated liabilities at the conclusion of a bankruptcy case.  Neither aspect of the case is surprising or remarkable but the case itself provides some insight into the failure of the IRS to follow an earlier court ruling and the failure of Appeals to even check on it.  Several years ago in a case that opened my eyes to the benefits of CDP to correct errors in the collection of taxes, the IRS and Appeals made similar mistakes following a bankruptcy case.  Because Appeals employees often have very little knowledge of bankruptcy, this case points out the need to pay careful attention in CDP cases that follow bankruptcy actions and challenge verifications where the Appeals employee fails to acknowledge the impact of the bankruptcy case.


Judge Gustafson’s bench opinion in this case is very detailed. Given that Tax Court judges must deliver bench opinions on the road during a trial calendar before it concludes, he delivers an oral opinion that takes up 17 pages of transcript involving an array of factual details that is surprising in its depth in this context.  Because it is a bench opinion, it has no precedential value as we have discussed here and here.

The petitioner, Dr. Brown, has a long history with the IRS including conviction for tax evasion for 1994 and 1995 and a subsequent bankruptcy case in which the IRS filed a proof of claim for over $3.5 million. The trustee in the bankruptcy case contested the IRS claim and ultimately the IRS and the trustee reached a settlement concerning the amount and character of the claim.  Although the IRS received significant payments from the bankruptcy estate, Dr. Brown still owed a fair amount of money.  The opinion does not discuss every aspect of the bankruptcy case but I believe all or almost all of the unpaid taxes must have been excepted from the bankruptcy discharge because of fraud or unfiled returns.  During the bankruptcy proceeding, Dr. Brown contested the liability determined by the IRS for the two years of the criminal conviction but did not contest the liability for the remaining years.  Because he had the opportunity to contest the liability for all years in bankruptcy, Judge Gustafson granted summary judgment in the CDP case with respect to his attempt to challenge the correctness of the taxes for the non-criminal years in the CDP proceeding.  He based his only challenge in the CDP case on the merits of the liability.  Since he had the prior opportunity and since Appeals had nothing else to consider, the granting of summary judgement on this issue required little discussion.

Even though Dr. Brown raised an issue in the CDP case that could not provide a basis for relief, the statute still requires the Appeals employee reviewing the case to verify that the IRS had taken the proper procedural steps with respect to the liability it sought to collect. The Appeals employee, perhaps blinded by the incorrect attempt to contest the merits of the underlying liability, appears to have completely missed this obligation; however, prior to the proceeding the attorney in Chief Counsel’s office determined that the bankruptcy unit in the IRS never abated the taxes in response to the settlement the IRS entered into in the bankruptcy case with the trustee.  As a result of that settlement, the IRS had an obligation to abate about $1 million.  Mr. Brown, representing himself, did not notice this failure and did not raise it as part of his case but Appeals should have verified the correctness of the liability and did not.  At the request of Chief Counsel’s office, the opinion remands the case to Appeals to properly verify the liability and notes that the administrative correction within the bankruptcy unit was apparently underway.

The CDP case I worked several years ago involving a bankruptcy issue was one I picked up at calendar call. The pro se taxpayers were convinced the IRS had mishandled the discharge of the taxes in the prior bankruptcy case of the husband but did not articulate the problem in a way that convinced me initially that the IRS had made a mistake.  When one spouse files bankruptcy, interest and penalties continue to run on the spouse not in bankruptcy, and I thought the taxpayers failed to appreciate that fact.  As I got into the case, however, I found that the IRS had misapplied the funds in the bankruptcy case, not mishandled the discharge, creating a huge remaining liability for the non-bankrupt spouse that should not have existed.  Fortunately, the Court continued the case to allow the clinic time to review the case.  It would not have been possible to determine the mistake within the short time frame of a calendar call.  Once I pointed out the issue to the Chief Counsel attorney, he immediately took steps to correct the problem.  Neither he, nor the Appeals employee had seen the problem previously even though the taxpayers were complaining about, albeit unartfully, the application of the bankruptcy process to their situation.

Sometimes verification of the correctness of the debt gets complex. You cannot rely on the IRS to get it right every time.  If a prior bankruptcy case exists and you do not have comfort with the application of the bankruptcy laws to the taxes, you might consider consulting with someone who can assist you in reviewing the impact of the bankruptcy matter on the liabilities.  Dr. Brown was fortunate that the Chief Counsel attorney did that for him here.  Not everyone will have that fortune.

Procedure Grab Bag

Or an interesting limitations case and a limiting interest TAM.

The last SumOp got a little lengthy, so I pulled out two items to trim it down.  The first I also thought deserved slightly more explanation, as the facts were complicated and the IRS somewhat reversed course on a position.  The second case deals with an untimely refund in a quirky situation.

  • The first tax procedure item is TAM 201548019, which highlights one way that  overpayment and underpayment interest can be complicated.  The issues and conclusion were as follows:


I. Under Section 6611, does interest accrue on a general adjustment overassessment when the Service has simultaneously determined that there is an increase in tax due to adjustments to carrybacks from subsequent years, where the net effect of these increases and decreases is an overassessment?

II. If interest is allowed pursuant to Section 6611 on the general adjustment overassessment, to what date does such interest accrual run?


I & II. Yes. Overpayment interest is allowable on the portion of the overpayment used to satisfy the underpayment from the date of said overpayment to the due date of the loss year return.

The applicable facts are that taxpayer filed a return for tax year 1, and timely paid the tax due.  In a subsequent year the taxpayer filed a tentative refund based on a net operating loss carry back from a future year 2.  The Service issued a refund based on the claim.  Later, on audit, the NOL was largely disallowed from year 2, causing a potentially increased assessment for year 1, which was less than the original refund amount.  The IRS also adjusted the original return for tax year 1 for other reasons, resulting in an original net overassessment and refund even after the reduced NOL.


The taxpayer took the position that interest was due on the full overpayment amount until the tentative refund was issued based on the NOL (no interest was paid when the refund was generated by the NOL).  The IRS rejected this position somewhat.  It was willing to pay interest on the full amount, but not until the erroneous refund date.  The TAM states the IRS position is that interest on the total overpayment amount from year 1 runs until the due date of the loss year return, when the incorrect credit was generated and deemed applied.  The TAM states this is because Section 6611(b) only allows interest on an overpayment when there is a refund or an amount is credited.   Here, the Service determined the amount of refund in question was not “refunded” following the audit, and was instead applied against an outstanding underpayment from the erroneous refund generated by the incorrect NOL carryback.  The date the NOL was generated, the credit date, is the date used by the Service, instead of the actual refund date arising from the incorrect NOL carryback.  The TAM points out that neither refund nor credit are defined in the statute, and walks through the Service’s analysis of why the payment here is a credit.  The Service also stated that its prior similar TAM (201123029) was not binding and that the analysis was incorrect; specifically that an overpayment that was not in fact refunded could be considered refunded.   It will be interesting to see if something percolates through the courts with this fact pattern.

  • The second item is a tax procedure case out of the Middle District of Florida.  US v. Bates is as interesting as crippled valet, John Bates, but with tax procedure and not scheming servants. The taxpayer was a pilot who worked for an airline that went bankrupt.  Pursuant to the bankruptcy, the airline ceased paying retirement payments.  Prior to the order ceasing the retirement payments, the airline had prepaid FICA taxes on a portion of the amount that was going to be paid to the taxpayer, but the underlying income was never paid.    The taxpayer sought a refund of the withheld taxes, which was granted by Appeals.  The Service later sought to recoup what it deemed an erroneous refund, as it believed the refund request was outside the statute of limitations.

The payment was made in January of 2004.  Mr. Bates filed his refund claim on January 28, 2008.  He was denied, and went to Appeals.  While that was occurring, in May of 2009, another pilot filed suit in the Federal Claims Court seeking a refund of the FICA taxes, and claiming to represent himself and other pilots, including Bates (he was not a lawyer).  The Court tossed the claim for all plaintiffs except Kooperman, because he couldn’t represent others before the court.  In April of 2010, Appeals ok’d the entire refund to Bates.  In May of 2010, the Court order was vacated, and all claims were stayed to allow the non-Kooperman plaintiffs to get a lawyer instead of a pilot.  Bates, having a refund, did not pursue the claim.   In January 2011, the Service requested the refund back, stating the refund was erroneous because it was untimely, but also because Bates was a plaintiff at the time in the Kooperman case.  The United States in June of 2012 then sought to remove Bates from the Kooperman case because he had already received the refund.  Sticking it to him on both ends. That motion was opposed by Bates and is still pending.

Both parties agreed the refund was made, and the erroneous refund claim was timely, so the only question was whether the refund was erroneous.  Bates (having lawyered up) argued the request was timely, he was not a plaintiff, and even if he was, the government can’t recoup a refund issued by Appeals in settlement of an issue.  On the last issue, the Court relied on Johnson v. United States, 54 Fed. Cl. 187 (Fed. Cl. 2002), which held Appeals cannot issue refunds on untimely claims.

As to the timing, both parties agreed that the original refund request was outside of the stated time period in Section 6511(a).  Bates argued, however, that there was no basis for a refund until after the bankruptcy court held that Bates would not receive retirement payments under the plan.  Apparently, Bates did not have sufficient statutory grounds for this position, as the court stated it was essentially an argument for equitable tolling.   I really should have pulled the briefs, as I would assume there would be some Code or Bankruptcy Code argument to be made that the statute was suspended until all facts were available (even if it was a losing one).

The Court apparently has not been following Carl Smith’s various strong posts on equitable tolling.  The Court held that the results were unusual for Bates and harsh, but that it lacked authority to apply equitable tolling and cited to Vintilla v. United States, 931 F.2d 1444 (11th Cir. 1991).  The Court also noted it lacked the authority to grant interest abatement on the erroneous refund, as the taxpayer requested, even though Appeals had mistakenly issued the refund, and that authority was vested with the Department of Treasury, which can only be reviewed by the Tax Court. See Section 6404(h).




How Late Can a Taxpayer Request an Equivalent Hearing?

Today we welcome guest blogger, Charles R. Markham, EA, USTCP.  I referred to Charles in an earlier post.  He has assisted me as I settled into the Harvard clinic this year both as a valued member of our pro bono panel and with issues involving the state of Massachusetts taxes.  He has passed the difficult test to become a non-attorney Tax Court practitioner and regularly represents clients in Tax Court as well as during the administrative process.  In this post he brings attention to an apparent inconsistency in the Collection Due Process (CDP) regulations concerning equivalent hearings.  Because equivalent hearings do not cause an extension of the statute of limitations on assessment and because so few CDP cases in Tax Court result in a reversal of the Appeals employees determination, I sometimes purposefully counsel clients to choose this option and, with those clients who do not appear within 30 days, I am often left with only this option.  Charles points out that perhaps there is a greater opportunity for the equivalent hearing than just the one year window.  Keith 

How much does it matter when the IRS commits an oversight when they amend a regulation?  Can the IRS just overlook the plain language of the resulting regulations because they think they know that’s really not what they meant?  Well, in the case of the regulations governing equivalent hearing that appears to be what’s happening.

The equivalent hearing is not a creature of statute but purely a creature of regulation, and most practitioners will tell you that while not appealable to Tax Court they still serve a valuable safety value that can be used to get a “fresh set of eyes” and hopefully a “cooling off period” (or maybe just a “time out”) when attempting to resolve a taxpayer’s collection matter.


Administrative History

In Craig v. Commissioner the Tax Court provides an overview of equivalent hearings and their legislative history:

“Whereas the rules for [Collection Due Process] hearings are provided explicitly in the statute, the rules for an equivalent hearing have their genesis in the statute’s legislative history and the regulations implementing Congressional intent as gleaned from that history. See H. Conf. Rept. 105-599, at 266 (1998); 1998-3 C.B. 1020 (in the event that a taxpayer does not timely request a Hearing, “The Secretary must provide a hearing equivalent to the hearing if later requested by the taxpayer”); cf. Johnson v. Commissioner, 86 AFTR 2d 2000-5225, 2000-2 USTC par. 50,591 (D. Or. 2000) (“‘equivalent hearing’ is provided for only by regulation and is not mandated by Section 6330 itself”). The scheme of the regulations as they apply to equivalent hearings generally follows the statutory scheme for Hearings.  Under the regulations, any taxpayer who fails to timely request a Hearing may receive an equivalent hearing. Sec. 301.6330-1(i)(1), Proced. & Admin. Regs. The equivalent hearing (like the Hearing) is held with Appeals, and the Appeals officer considers the same issues which he or she would have considered had the equivalent hearing been a Hearing. Id. The Appeals officer also generally follows the same procedures at an equivalent hearing which he or she would have followed had the equivalent hearing.”

When the first equivalent hearing regulations were published on January 18, 2002, (T.D. 8980, 2002-1 C.B. 477) in the Federal Register (67 FR 2549) along with the 2002 final regulations under section 6320they contained no time limit for requesting an equivalent hearing.  Such a hearing could be requested anytime after the 30 day window for requesting a Collection Due Process (“CDP”) hearing had expired.  This could occur years after the CDP notice was issued.   In 2006, the IRS amended the 6330 regulations and one of the primary changes was to introduce a strict one year time frame for requesting an equivalent hearing.

2006 Regulations   

Under the new regulations, an equivalent hearing could only be requested during the eleven months after the 30 day window for the CDP request period has expired.

This timeframe is stated at §§ 301.6320-1(i)(2)A-I7 and 301.6330-1(i)(2)A-I7:

 Q-I7. When must a taxpayer request an equivalent hearing with respect to a CDP Notice issued under section 6330? 

 A-I7. A taxpayer must submit a written request for an equivalent hearing within the one-year period commencing the day after the date of the CDP Notice issued under section 6330. This period is slightly different from the period for submitting a written request for an equivalent hearing with respect to a CDP Notice issued under section 6320. For a CDP Notice issued under section 6320, a taxpayer must submit a written request for an equivalent hearing within the one-year period commencing the day after the end of the five- business-day period following the filing of the NFTL.

However, when the regulations were amended in 2006, it seems that another passage of the CDP regulations was overlooked and went unchanged.  This passage leaves an alternative window to request equivalent hearings.  The sentence is in the following section (author’s emphasis at end):

§301.6330-1(b)(2) speaks to this in Q&A B2.

 Q-B2. Is the taxpayer entitled to a CDP hearing when the IRS, more than 30 days after issuance of a CDP Notice under section 6330 with respect to the unpaid tax and periods, provides subsequent notice to that taxpayer that the IRS intends to levy on property or rights to property of the taxpayer for the same tax and tax periods shown on the CDP Notice? A-B2. No. Under section 6330, only the first pre-levy or post-levy CDP Notice with respect to the unpaid tax and tax periods entitles the taxpayer to request a CDP hearing. If the taxpayer does not timely request a CDP hearing with Appeals following that first notification, the taxpayer foregoes the right to a CDP hearing with Appeals and judicial review of Appeals’ determination with respect to levies relating to that tax and tax period. The IRS generally provides additional notices or reminders (reminder notifications) to the taxpayer of its intent to levy when no collection action has occurred within 180 days of a proposed levy. Under such circumstances, a taxpayer may request an equivalent hearing as described in paragraph (i) of this section.

This sentence survived the 2006 amendments and remains in the regulations today.  Overlooked, it remains there like a vestigial organ.  But the author argues that this phrasing still has meaning and does not contradict the rest of the regulations and perhaps is not that vestigial after all.  In fact, is could be read to create a whole new class of equivalent hearings–which this article will term as “B-2″ hearings, triggered by the 180 day notices that the IRS frequently issues pursuant to IRM (2)  .

When these B-2 sentences are read in the context of the original regulations (written when there was no deadline on requesting equivalent hearings), their original purpose seems to be simply advisory.  Many times a taxpayer is confronted when the IRS has issued a CDP notice on an account years in the past so the taxpayer’s appeal rights have long lapsed.  Perhaps years ago the situation was actually resolved in the taxpayer’s favor.  Maybe the IRS placed the account in currently non collectible status.  Now circumstances have changed and the IRS is back at the door step, but now the taxpayer no longer has their “once in a lifetime” CDP rights.  The first step in the sequence is for the IRS to issue a 180 day reminder notice.   The purpose of this regulatory passage was simply to note that (at the time) the taxpayer could avail themselves of their equivalent hearing rights since there weren’t any time limits.    In fact in the case of a resolved balance due where the IRS had placed the taxpayer in non-collectible status, the author would argue the taxpayer really isn’t appealing the original CDP notice at all (the balance due had been previously resolved at the time) so much as the taxpayer is appealing the renewed efforts of the IRS to collect on them.

If we now read the regulations as they stand, is there an inherent conflict between this B-2 passage and the section of the regulations that describe an equivalent hearing?  Moreover, is the conflict so great that the 2006 regulations and the deadline stated in I-7 override the lack of a deadline in B-2?  The author would argue these two that these passages can live in harmony.  Unanticipated harmony, perhaps, but harmony nonetheless.

Two Types of Equivalent Hearing

For the two passages to live in peace there must be conceptually two different equivalent hearings.  The equivalent hearings all practitioners are heretofore familiar with for the purposes of this discussion would be “I-7 hearings”, the classic (or regular) hearing (and the hearing the IRS will routinely give you).  Section (i) of the 6330 regulations describes the conduct of all equivalent hearings.  What is different is the triggering event.  An “I-7 hearing” is an “equivalent hearing with respect to a CDP Notice issued under section 6330″.   Thus, there is a direct nexus between the classic “I-7″ hearing and the CDP Notice.  Since by definition, there has only been less than a year of time, it is practically impossible for the situation to become “stale” and enter into a “B-2″ situation.  However, the language of B-2 is much broader.  While recognizing that a CDP Notice has been issued at some point (and it could have been issued years before), the trigger event is a more recent IRS notice.  Just to review and more carefully read the language of B-2.

If the taxpayer does not timely request a CDP hearing with Appeals following that first notification, the taxpayer foregoes the right to a CDP hearing with Appeals and judicial review of Appeals’ determination with respect to levies relating to that tax and tax period. The IRS generally provides additional notices or reminders (reminder notifications) to the taxpayer of its intent to levy when no collection action has occurred within 180 days of a proposed levy. Under such circumstances, a taxpayer may request an equivalent hearing as described in paragraph (i) of this section.     

Let’s revisit my earlier non-collectible example now with just a few more details.  This is very typical fact pattern that could arise under a “B-2″ type scenario, a scenario many practitioners might be familiar with.   The balance due at this point is now perhaps eight years old.  The original CDP notice was issued over five years ago.  In fact the balance due has been classified as currently not collectible by the IRS.  But this status can always be changed.  In fact it recently was, as a recently filed tax return did show an unusually higher level of income than usual but this was actually due to a one time forgiveness of indebtedness.  This “increase” in income is arguably illusory and caused the account to be removed from uncollectible status and the 180 day “reminder notice” to be issued.   The author would argue that the purpose of the equivalent hearing would not be to argue the original CDP Notice from five years ago but really to argue the recent IRS determination to remove the account from non-collectible status.  The purpose of the hearing is “why is the IRS cancelling my non-collectible status?” Other B-2 type hearing issues might be “Why does the IRS now want to levy my social security?” or “I thought this bill has been paid” or “Hasn’t the collection statute expired?”

As we see, for the two passages to live together without I-7′s deadline trumping a B-2 hearing request, a B-2 hearing must be seen as not “in respect of the original CDP levy notice” but the later six month reminder notice.  And if the original levy notice was more than several years prior, is this really a problem?  It’s really the current threat (and why it has occurred) that the taxpayer is concerned about.

In drafting the B-2 Question and Answer, it seems the authors were keenly aware of this context, and in fact, the more one considers this, the more it begins to seem that there is a place for the “B-2″ equivalent hearings along side the “I-7″ (regular) equivalent hearings and perhaps there wasn’t any oversight in leaving this section of the regulations alone in 2006.

Several sidebar observations

This entire logic would only apply to notices that are advising of the potential for levy not a lien.  So this really has no counterpart in 6320.   Also, the section the regulations that speaks to “no collection action within 180 days” would appear to be critical as well as receipt of the notice.  The regulations state, “in these circumstances”, (note use of the plural) thus the circumstances seem to be both (a) receipt of the appropriate notice and (b) no collection action in the prior 180 days.   Finally, when a Revenue Officer commences a case, they will frequently issue CDP notices on all the relevant periods and six month reminder notices on everything else.  Being able to invoke this will allow everything to be considered by the same settlement officer versus having some periods before a Revenue Officer and some periods before a Settlement Officer in a CDP appeal.

Raising the issue with the IRS

The correct way to raise this issue would be to request an equivalent hearing and to specifically request a “Separate Timeliness Determination” because the equivalent hearing will be inevitably determined to be outside the one year jurisdiction upon initial review.  Occasionally, the author has been occasionally successful in getting someone in the Separate Timeliness Determination unit to actually rule in his client’s favor on the basis of this argument, but generally the argument falls on deaf ears.    (One is never granted an actual hearing with the Separately Timeline Determination unit.  This is all done behind the scenes and the practitioner simply learns of the result.)  The author’s batting average is only about 15% of the time successful.

Nevertheless, it doesn’t appear at this time that many in the IRS are particularly aware of the B-2 equivalent hearing regulation or will adhere to them when advised of them.  After all, what is written doesn’t matter, because that’s really not what we meant! 

Migraine Caused by Improper IRS Collection Action During Bankruptcy Stay Triggers Damages for Emotional Distress

In re Hunsaker No. 12-64782-fra13 (free link not available), a case out of the bankruptcy court in Oregon, caught my attention. It involved Jonathan Hunsaker, a retired Oregon state trooper and his wife Cheryl Hunsaker. The Hunsakers ran into financial problems, leading to a bankruptcy filing. Following the filing, IRS violated the Bankruptcy Code’s stay on collection, leading to a suit where the Hunskakers sought $5,000 in damages. The court held that the Hunsakers were entitled to damages from that the emotional distress that the improper IRS collection efforts caused, and awarded the Hunsakers $4,000.

I describe how it got there below.


The Hunsaker’s financial problems stemmed from when their “homestead was discovered to be subject to disputed claims by secured creditors, in turn complicated by claims of Marion County, Oregon, that the purchase of the homestead created an unlawful partition.” As a result, in September 2012 the Hunsakers filed a reorganization under Chapter 13 of the Bankruptcy Code. Shortly thereafter, the IRS received notice of the filing, and filed a proof of claim, in the amount of $ 9,301. At the moment of the Chapter 13 filing, the automatic stay under the Bankruptcy Code came into place. In a Chapter 13 case it continues throughout the life of the case which usually means it lasts for three to five years until completion of the plan or dismissal of the case. The Chapter 13 plan was confirmed in the fall of 2014 long after the filing of the petitioner; however, the timing of the confirmation does not impact the existence of the automatic stay if the case remains open.

Sometimes the IRS does things it is not supposed to do and that’s what happened here. Despite the stay, IRS sought collection on the assessed liability on four separate occasions over a one-year period:

  1. December 12, 2013: A notice of intent to levy, and a demand for payment of $ 9,685.65;
  2. February 10, 2014: A notice of levy on Social Security benefits, and a demand for payment of $ 9,814.28;( as a side note, one of the benefits of a Chapter 13 plan is that interest does not run on the claim and if the claim is paid the liability is satisfied. So, the increasing amounts you see on these later notices are amounts the debtor will likely never pay).
  3. September 1, 2014: A notice of intent to seize (“levy”) debtors’ state tax refund “or other property,” demanding $ 10,158.69; and
  4. December 8, 2014: A levy on Social Security benefits, and a demand for payment of $ 10,234.25.

The Hunsakers told their attorney each time; he assured them that the IRS actions were “unlawful.” In addition, in December of 2013 and February of 2014 (around the time of the first two collection actions) the attorney contacted the IRS advising it of the bankruptcy filing and that any collection actions were illegal

The opinion states that the Hunsakers were “adversely affected” by the IRS actions:

The stresses naturally inherent to a complex bankruptcy case were exacerbated by the perceived threat of additional collection actions by the Internal Revenue Service. Mrs. Hunsaker, in particular, testified to the onset of migraine headaches within hours of receipt of each of the notices. Each spouse noted signs of tension and anxiety in the other, which in turn added to his or her own stress. The Plaintiffs were especially concerned with the threat to levy on Mr. Hunsaker’s Social Security income, because loss of a substantial portion of their income would render their plan of reorganization unfeasible. Although their attorney assured them that the automatic stay prevented the actions threatened by the notices, the effect of the attorney’s assurances began to wear thin as the notices continued to come.

Statutes in Effect

The relevant statutes are as follows. Bankruptcy Code section 362(a)(6) prohibits “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.”

Bankruptcy Code section 362(k) [previously found in 362(h)] provides that an individual injured by a willful violation of the stay shall recover actual damages, including costs and attorney’s fees, as well as punitive damages in appropriate circumstances.

The issue in the case was whether the emotional distress the Hunsakers suffered gave rise actual damages under 362(k). The government argued, as you would expect, no, primarily on the basis that the Hunsakers did not suffer any actual damages even though the IRS foot-faulted with its collection action. The Court found to the contrary based on a 2004 case, In re Dawson, 390 F 3d 1139 (9th Cir. 2004). In that case, on reconsideration, the Ninth Circuit held that emotional distress stemming from violations of the stay can give rise to actual damages under Section 362(k) even if there are no pecuniary losses.

I was a bit surprised by that holding, and Dawson itself makes for interesting reading to get to the conclusion that you can suffer “actual damages” under the statute even without pecuniary loss associated with emotional distress, including a look at “contextual clues” of the damage provision (“by limiting damages to individuals Congress emphasized harms that are unique to human beings, [such as] emotional distress, which can be suffered by individuals but not by organizations”) and the stay’s legislative history where Congress discussed both financial and nonfinancial harms that may befall debtors when creditors violate the stay.

Dawson sets out then that pecuniary loss is “not required in order to claim emotional distress damages, [though] not every willful violation merits compensation for emotional distress.” To limit frivolous claims and guide courts, Dawson sets out the following questions as factors that courts weigh to determine if damages are appropriate:

  1. Did the debtor suffer significant harm?
  2. Did the debtor clearly establish the significant harm? and
  3. Did the debtor “demonstrate a causal connection between that significant harm and the violation of the automatic stay (as distinct, for instance, from the anxiety and pressures inherent in the bankruptcy process)”?

Back to Hunsaker

Using Dawson as a guide, the court found that this emotional distress was serious enough to warrant damages, noting that “[t]he injuries described by the Plaintiffs at trial, particularly Mrs. Hunsaker’s migraine headaches, were clearly established as neither trivial nor insubstantial, and are compensable under the Dawson standards.” In addition to Dawson, the Hunsaker court also looked to a 1995 bankruptcy case out of Georgia, In re Flynn, where the court awarded $ 5,000 award of emotional distress damages stemming from IRS stay violations “based on plaintiff’s uncorroborated testimony that she was forced to cancel a child’s birthday party because her checking account had been frozen.”

The main part of the court’s analysis is where the court isolates the effect of the IRS misconduct from the general stress of bankruptcy and a “demonstration of circumstances which may make it obvious that a reasonable person would suffer significant emotional harm.” Here the court looked to the IRS sending four separate notices even though the attorney told the IRS to stop when it improperly sent the first two letters:

In the instant case, the Plaintiffs received four notices from the Internal Revenue Service, each of which indicated that the Service intended to take steps which would, once carried out, likely defeat their efforts to reorganize their finances through Chapter 13. The notices continued notwithstanding their attorney’s efforts to stop them, and it is not unreasonable that they were concerned that the Government might take the action threatened notwithstanding their attorney’s assurances.

The Court of Appeals points out that the harm sustained because of the stay violation must be distinct from the “anxiety and pressures inherent in the bankruptcy process.” This requirement may be satisfied by a showing that the stay violation increased or aggravated the stress and anxiety inherent in the underlying proceedings. It is not, however, necessary that plaintiffs provide corroborating evidence, or establish that the violation was egregious.

From the judge’s perspective, the wife’s testimony was enough to show that the IRS, and not the general stress of the bankruptcy, caused her migraines.

The evidence here sufficiently demonstrates that the “inherent” tension and stress of the Plaintiffs’ bankruptcy was exacerbated by the stay violation. The case was progressing well, and a plan was finally confirmed shortly before the fourth notice was sent. Mrs. Hunsaker testified that she suffered from migraines attributable to the notices.

After establishing that the debtors satisfied the Dawson test (using a clear and convincing standard, and based on their testimony alone), the court turned to damages:

The Plaintiffs seek a modest award of $ 5,000 for the two of them. This circumspect demand is appropriate: while the Court finds that the Plaintiffs have satisfied their burden of establishing that their claim is significant — that is, not trivial or insubstantial — their damages are, compared to many, not overwhelming. Nor is there any reason to find that the Government’s actions were egregious: there was, in fact, no evidence as to why the violations took place, and the events are more likely the result of error and oversight than malice. The evidence established that each of the Plaintiffs, suffered harm, and that, of the two, Mrs. Hunsaker’s was more intense. Considering all the circumstances, Mrs. Hunsaker should be awarded damages of $ 3,000, and Mr. Hunsaker $ 1,000, for a total of $ 4,000.

Brief Analysis

As a longtime migraine sufferer, I sympathize with Mrs. Hunsaker. I understand the court’s inclination to punish the IRS. For many people, collection letters from the IRS cause particular stress. In addition, the Hunsakers promptly told their attorney about the IRS collection efforts, and the attorney told the IRS (in writing) to stop, which the IRS ignored. A number of cases have found that the burden is on the IRS to show that its procedures take into account the stay, and that IRS must establish procedures to avoid violations. Absent imposing some sanction on the IRS, it seems unfair (though certainly not unprecedented) if there is no consequence when IRS violates a clear statute. The stay on collection is a fundamental debtor protection. Perhaps a slap on the wrist for causing a headache is the right result.

In any event, the Hunsaker’s $4,000 damages is likely gross income, given that damages on account of emotional distress, even when accompanied by physical symptoms such as headaches or stomach disorders, do not fit within the definition of damages on account of a physical injury.  That inquiry leads us to a stroll down IRC Section 104(a)(2), legislative history accompanying the 1996 changes to that statute, and a number of cases that parse the difference between a physical symptom of emotional distress and an actual physical injury, though that discussion perhaps waits for another day and another dispute.





Matuszak v. Comm’r: A Tax Court Innocent Spouse Equitable Tolling Test Case

Frequent guest blogger Carl Smith writes today about a case in which he and I seek to argue that equitable tolling applies to the time frame for filing innocent spouse cases in Tax Court.  If you happen to have an innocent spouse or Collection Due Process case dismissed recently for lack of jurisdiction where the taxpayer had good reason for missing the time frame within which to file, please let us know.  Keith

I know that some of you think I only care about equitable tolling in the Tax Code.  I don’t.  But, it is one of the few areas of tax procedure where the courts created the problem and so are the ones who should fix it.  In United States v. Brockamp, the Supreme Court held that the section 6511 periods in which to file tax refund claims are not subject to the judicial doctrine of equitable tolling.  Through enactment of section 6511(h) (tolling the statute of limitations in cases of financial disability), Congress overruled Brockamp for the limited circumstances involved therein.

Since then, the government has consistently argued that Brockamp requires that there be no equitable tolling anywhere in the Tax Code.

As to time periods in which to file certain recent-jurisdiction Tax Court petitions (but not the original section 6213(a) deficiency jurisdiction time period), Keith and I would like to ask the Tax Court to reconsider and overrule its precedents on jurisdiction and equitable tolling.  This is to inform you that Keith and I have just done so — as new pro bono counsel of record — in a stand-alone innocent spouse case brought in Tax Court under section 6015(e), Matuszak v. Commissioner, Docket No. 471-15.  A copy of the December 29, 2015 order of dismissal entered by Judge Marvel in the case is here.  A link to our January 22, 2016 memorandum of law in support of a motion to vacate that order is found in two parts here and here.  Keith and I argue that the 90-day period at section 6015(e)(1)(A) in which to file a stand-alone innocent spouse petition is not jurisdictional and is subject to equitable tolling.  And we ask the Tax Court to reconsider and overrule its contrary precedent as to this particular time period in Pollock v. Commissioner because the reasoning of Pollock has been undermined by five subsequent Supreme Court opinions: Holland v. Florida; Henderson v. Shinseki; Gonzalez v. Thaler: Sebelius v. Auburn Regional Med. Cntr.; and United States v. Wong. (Another opinion issued on January 25, 2016, by the Supreme Court, Musacchio v. United States,also undermines Pollock.)


Last year, as an amicus, I helped obtain a ruling from the Ninth Circuit in the case of Volpicelli v. United States that, under current Supreme Court case law, the 9-month period in section 6532(c) in which to file a wrongful levy suit in district court is not jurisdictional and is subject to equitable tolling.  The government vigorously disagrees with that opinion, but decided not to ask the Supreme Court to review it (despite a split with older opinions from other Circuits). See posts on Volpicelli here and here.

In recent posts here and here, PT made you aware that in November, Keith and I, on behalf of the Harvard Federal Tax Clinic, filed an amicus memorandum of law in the Tax Court case of Guralnik v. Commissioner,  in which we make the argument that the 30-day period in section 6330(d)(1) in which to file a Collection Due Process (CDP) petition in the Tax Court is not jurisdictional and is subject to equitable tolling.  For those interested, as an update, here is a link to the IRS’ January 6, 2016 response to our memorandum.  Suffice it to say that the IRS argues that we grossly exaggerate the impact of the recent non-tax Supreme Court opinions on these topics.  But, that’s what the government unsuccessfully argued in Volpicelli, too.

I have been using the Tax Court’s order search function to read all recent orders of the Tax Court citing either section 6015 or 6330.  From doing that reading, and ordering copies of documents from the Tax Court in cases suggesting that the taxpayers might have had an equitable tolling argument for a late filing, I have located a small number of cases that might be used as test cases.  When the order issued in Matuszak on December 29, 2015, this seemed like a promising test case.

Matuszak Facts 

Craig Matuszak had a successful career going in the telecommunications business.  But, things went off the rails when his employer accused him and other employees of theft.  The theft was accomplished by making the employer pay third-party invoices for work never done and pocketing the money sent to pay those invoices.  The alleged conduct happened in 2007 and 2008, years in which Craig and his wife Linda filed joint returns that, of course, did not report any money that Craig stole as income.

On August 8, 2012, Craig was charged in federal district court both with wire fraud and filing a false 2007 income tax return in violation of section 7602(2).  The date the information was filed, Craig pled guilty, since he and his criminal lawyer had negotiated the exact amount of the tax deficiencies for 2007 and 2008 with the federal government in advance.  Under the plea deal, Craig and Linda forfeited the primary residence that they had been building in 2007 and 2008 (and completed in 2009) and two automobiles.  The primary residence was their only house and major asset.  Since January 2014, Craig has been incarcerated, and he is not expected to be released until 2017 at the earliest.  If you have access to PACER you can find out more about his case at United States v. Craig Matuszak, N.D.N.Y., Docket No. 1:12-cr-359.

On August 28, 2012, Craig brought a Form 4549 for 2007 and 2008 to Linda, and told her that she needed to sign the form for his plea deal to go through and that she would not be liable for the tax deficiencies shown thereon ($333,964 for 2007 and $105,055 for 2008) beyond the forfeited assets.  Late in 2009, Craig had told Linda that he was under criminal investigation for something he did at work, but he minimized the investigation and did not even let Linda go to his plea entry hearing.  So, in August 2012, she was rather shocked to hear that, essentially, the Matuszaks would lose all their assets because of the plea and owe additional unpaid taxes.  She was not aware at that date that Craig had ever received any unreported income.  Even today, she doesn’t know what happened with the money Craig now concedes that he took from his employer.  But, taking her husband’s assurances that she would not be liable for anything more, Linda signed the Form 4549, and the IRS assessed the taxes shown thereon and sent both spouses bills seeking payment.

After Craig was incarcerated and Linda was reduced to renting a place to live in, she filed a Form 8857 covering the 2007 and 2008 liabilities.  With no fuss, CCISO granted Linda complete section 6015 relief for 2008.  (Since 2001, Linda has been disabled, and her sole source of income has been Social Security disability.)  But, there was a problem with 2007.

Prior Deficiency Case

In 2010, the IRS had begun a routine audit of some unreimbursed employee business expense deductions claimed by Craig on the Schedule A of the 2007 joint return.  In September 2010, the IRS sent a notice of deficiency disallowing most of the deductions and asserting a deficiency of $9,260.  Linda had asked Craig if this IRS audit had anything to do with the criminal investigation that was going on.  Craig (probably correctly) said, “no”.

Acting pro se, Craig and Linda jointly prepared and filed a Tax Court petition contesting the notice.  At this point, Craig was still employed (by a different employer) and the Matuszaks were fairly well off, so Linda had no reason to think that, even if the deductions were wrong, the couple couldn’t afford to pay them.  As a result, the petition (given Docket No. 27407-10) did not include a request for section 6015 relief.

When the IRS attorney who was about to prepare the answer in the case searched a database, she discovered a criminal investigation regarding Craig that included the year 2007.  So, rather than file an answer, she successfully moved the Tax Court to stay all proceedings in the deficiency case pending resolution of the criminal proceedings.  Nothing happened in the deficiency case – other than periodic reports filed by the IRS attorney – until the IRS attorney prepared and sent to the Matuszaks a stipulated decision that showed the $333,964 deficiency for 2007 that appeared in the Form 4549 that both spouses had already signed.  Linda co-signed the stipulated decision, again on Craig’s assurances that she wouldn’t owe the tax shown thereon.

During the entire deficiency case, Linda never spoke to the IRS attorney – even failing to respond to voicemail messages from the attorney asking Linda’s position on IRS motions and the status reports prepared by the IRS attorney.  Linda was afraid of messing up Craig’s criminal case if she said something wrong to the IRS attorney in the deficiency case.

Current Innocent Spouse Case

CCISO denied Linda’s request for section 6015 relief for 2007 simply on the grounds of res judicata – that Linda could have, but did not, raise section 6015 relief in the deficiency case.  CCISO ruled that Linda was not entitled to the statutory exception to res judicata found at section 6015(g)(2) because, it said, Linda had “participated meaningfully” in the deficiency case.

Linda took her disallowance to Appeals, which upheld the CCISO ruling and issued a notice of determination denying relief on October 7, 2014.  Linda was concerned that she timely file a Tax Court petition, so she spoke twice to the Appeals Officer (AO) about the final date by which the petition needed to be mailed to the Tax Court.  Linda has contemporaneous notes in three places regarding the two phone conversations she had with the AO that seem to corroborate Linda’s story that the AO told Linda the final date to file was January 7, 2015.  In fact, the final date was January 5, 2015.  Linda thought she mailed her petition a day early when she mailed it out on January 6, 2015.  But, in fact, she mailed her petition a day late.

You may be wondering why Linda did not go to a tax clinic to get help with filing, since, of course, at that point, she could not afford to hire an attorney.  Well, Linda lives far upstate in New York, not near any New York City clinic.  And the closest clinic, in Albany, could not help her, since its intake procedures prohibited taking cases involving more than $50,000 of tax.  Linda went to her local library to research her case.  Linda’s research and frequent migraine headaches were among the reasons why she took so long to file the petition.

After Linda filed the section 6015(e) petition, the IRS attorney filed an answer and then went out on maternity leave.  A second IRS attorney who was assigned the case after it was noticed for trial before Judge Marvel (on February 1, 2016 in New York City) noticed the late filing issue.  Because jurisdictional issues can be raised at any time (unlike statute of limitation issues, which should be raised in the answer), the second IRS attorney then moved to dismiss the case for lack of jurisdiction.

On December 29, 2015, Judge Marvel dismissed the petition, pointing out that Tax Court precedent is that its filing dates in that court cannot be extended.  While sympathetic, Judge Marvel said there was nothing that she could do if Linda was misled by the AO into filing a day late.

Keith and I read the order and decided to contact Linda and offer our services, pro bono, to try to get the Tax Court to overturn its precedent that the section 6015(e)(1)(A) 90-day period in which to file a Tax Court innocent spouse petition is jurisdictional and not subject to equitable tolling.  We have asked the court to rule that the time period is not jurisdictional, but is merely a period of limitations subject to equitable tolling in the right circumstances.  We have also asked the court to take back jurisdiction in the case and then invite the IRS, if it chooses, to file a motion for leave to amend its answer to plead non-compliance with the period of limitations.  Under Rule 39, both the statute of limitations and estoppel are special issues that must be set forth in a party’s pleadings.  If the IRS does plead the statute of limitations, Linda, in turn, will plead estoppel as a result of the AO’s statements as to the filing date – estoppel being one of the usual grounds giving rise to equitable tolling.

Frankly, an example in the proposed section 6015 regulations seems to exactly cover Linda’s case on the res judicata issue, so that if the Tax Court takes back jurisdiction and the IRS does not raise (or raises, but loses) the statute of limitations issue, I would expect the IRS to concede the case on the merits.  Example 5 of Proposed Reg. 1.6015-1(e)(4) (proposed on November 20, 2015) states:

“In March 2014, the IRS issued a notice of deficiency to H and W determining a deficiency on H and W’s joint income tax return for tax year 2011. H and W timely filed a pro se petition in the United States Tax Court for redetermination of the deficiency. W signed the petition, but otherwise, H handled the entire litigation, from discussing the case with the IRS Chief Counsel attorney to agreeing to a settlement of the case. Relief under section 6015 was never raised. W signed the decision document that H had agreed to with the IRS Chief Counsel attorney. If W were to later file a claim requesting relief under section 6015, W’s claim would not be barred by res judicata. Considering these facts and circumstances, W’s involvement in the prior court proceeding regarding the deficiency did not rise to the level of meaningful participation.  [REG-134219-08, 2015-49 I.R.B. 842, 851]“

If this proposed regulation had been on the books when CCISO reviewed Linda’s Form 8857, I don’t believe that CCISO would have even asserted that Linda’s limited participation in the deficiency case caused res judicata to apply to her request for innocent spouse relief.

In a future post in March, Keith and I will report on another CDP case (i.e., beyond Guralnik) in which we will hopefully be arguing as amicus – this time in a pending pro se Ninth Circuit appeal – that the 30-day period in section 6330(d)(1) in which to file a CDP petition in the Tax Court is not jurisdictional and is subject to equitable tolling.  Stay tuned.