The Implications for Tax Litigation of the Supreme Court’s Decision in Michigan v. EPA

We welcome back Patrick J. Smith of Ivins, Phillips & Barker. Pat discusses Michigan v EPA, a Supreme Court decision from earlier this week. Somewhat lost in the shuffle of the Court’s major decisions on ACA and same-sex marriage, Michigan v EPA is a significant administrative law case that may come into play when there are challenges to the validity of select tax regulations, including the Florida Bankers challenge to regulations requiring the reporting of interest income earned by non-resident aliens. Les

On Monday of this week, the last day on which it issued decisions for the current term, the Supreme Court issued its opinion in Michigan v. EPA. This case involved a challenge to the validity of a regulation issued by the EPA. The statutory provision that was at issue in the case directed the EPA to regulate hazardous air pollutant emissions by fossil-fuel-powered electric generating plants if the agency determined that regulating these emissions was “appropriate and necessary.” As part of its analysis, the agency determined that the annual cost for the generating plants to comply with this type of regulation would be $9.6 billion and that the direct annual health benefits of imposing this type of regulation would be $4 to $6 million. However, the agency also determined that “costs should not be considered” in making the decision as to whether it was “appropriate” to regulate these emissions. The agency determined based on other considerations that regulation of these emissions was “appropriate” and “necessary.”

The regulation was challenged on the basis that the EPA’s refusal to consider costs in making the decision as to whether regulation of these emissions was “appropriate” was improper. The D.C. Circuit rejected this challenge in a split decision, with Judge Kavanaugh dissenting from the conclusion that it was proper for the EPA to exclude costs from its decision-making on whether it was “appropriate” for the agency to regulate the emissions that were at issue in this case.

The Supreme Court, in a 5-4 decision, with the majority opinion written by Justice Scalia, reversed the D.C. Circuit and agreed with Judge Kavanaugh that the EPA was wrong to exclude any consideration of costs from its decision-making on whether regulation of these emissions was “appropriate.” While the challenge to the regulation was based on Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., nevertheless, the opinion also included significant citations to the Supreme Court’s 1983 landmark decision in Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co., in which the Court provided important guidance on the Administrative Procedure Act’s “arbitrary and capricious” standard for courts to use in reviewing agency action.


The Court’s Analysis: Arbitrary and Capricious

In fact, the Court’s analysis began with an invocation of principles applicable under the arbitrary and capricious standard, rather than with Chevron:

Federal administrative agencies are required to engage in “reasoned decisionmaking.” “Not only must an agency’s decreed result be within the scope of its lawful authority, but the process by which it reaches that result must be logical and rational.” It follows that agency action is lawful only if it rests “on a consideration of the relevant factors.” Motor Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut. Automobile Ins. Co., 463 U. S. 29, 43 (1983) (internal quotation marks omitted).

Only after this beginning did the Court turn to Chevron:

Chevron directs courts to accept an agency’s reasonable resolution of an ambiguity in a statute that the agency administers. Even under this deferential standard, however, “agencies must operate within the bounds of reasonable interpretation.” EPA strayed far beyond those bounds when it read §7412(n)(1) to mean that it could ignore cost when deciding whether to regulate power plants.

Thus, although Justice Scalia does not explicitly refer to the two steps of the Chevron test, the foregoing passage suggests that under that framework, this decision fits under step two rather than step one. The Court elaborated on its conclusion as follows, once again invoking State Farm rather than Chevron:

Congress instructed EPA to add power plants to the program if (but only if) the Agency finds regulation “appropriate and necessary.” §7412(n)(1)(A). One does not need to open up a dictionary in order to realize the capaciousness of this phrase. In particular, “appropriate” is “the classic broad and all-encompassing term that naturally and traditionally includes consideration of all the relevant factors.” 748 F. 3d, at 1266 (opinion of Kavanaugh, J.). Although this term leaves agencies with flexibility, an agency may not “entirely fai[l] to consider an important aspect of the problem” when deciding whether regulation is appropriate. State Farm, supra, at 43.

Read naturally in the present context, the phrase “appropriate and necessary” requires at least some attention to cost. One would not say that it is even rational, never mind “appropriate,” to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits….No regulation is “appropriate” if it does significantly more harm than good.

There are undoubtedly settings in which the phrase “appropriate and necessary” does not encompass cost. But this is not one of them. Section 7412(n)(1)(A) directs EPA to determine whether “regulation is appropriate and necessary.” (Emphasis added.) Agencies have long treated cost as a centrally relevant factor when deciding whether to regulate. Consideration of cost reflects the understanding that reasonable regulation ordinarily requires paying attention to the advantages and the disadvantages of agency decisions. It also reflects the reality that “too much wasteful expenditure devoted to one problem may well mean considerably fewer resources available to deal effectively with other (perhaps more serious) problems.” Against the backdrop of this established administrative practice, it is unreasonable to read an instruction to an administrative agency to determine whether “regulation is appropriate and necessary” as an invitation to ignore cost.

The decision in Michigan v. EPA is clearly an extremely important administrative law decision, and its importance is clearly not limited to the context of the particular statute at issue here or to regulations issued by the EPA. The degree to which agencies may or must consider cost in their issuance of regulations has been an important open issue.

While this case dealt most directly with the meaning of the term “appropriate” in a particular provision in a particular environmental statute, nevertheless, by emphasizing that it is not even “rational” for an agency to ignore costs when the costs of an agency action far outweigh the benefits of that action, this decision is broadly applicable to virtually any agency decision-making exercise. It is also significant that the Court distinguished one of its prior decisions which held that in a particular statutory context it was not appropriate for the agency to consider cost:

American Trucking thus establishes the modest principle that where the Clean Air Act expressly directs EPA to regulate on the basis of a factor that on its face does not include cost, the Act normally should not be read as implicitly allowing the Agency to consider cost anyway.

Thus, the fact that a particular statutory provision authorizing or directing agency action does not explicitly refer to cost as one of the relevant considerations does not by itself mean that cost is not relevant, unless the provision does explicitly refer to other factors and omits any mention of cost. However, the Court also explicitly limited its holding in one respect. It emphasized that it was not telling the agency, in this case at least, that a formal cost-benefit analysis was required:

Our reasoning so far establishes that it was unreasona­ble for EPA to read §7412(n)(1)(A) to mean that cost is irrelevant to the initial decision to regulate power plants. The Agency must consider cost—including, most importantly, cost of compliance—before deciding whether regulation is appropriate and necessary. We need not and do not hold that the law unambiguously required the Agency, when making this preliminary estimate, to conduct a formal cost-benefit analysis in which each advantage and disadvantage is assigned a monetary value. It will be up to the Agency to decide (as always, within the limits of reasonable interpretation) how to account for cost.

State Farm and Chevron

Michigan v. EPA is also significant for the way it blends State Farm and Chevron. Another significant administrative law issue that has been the subject of some uncertainty is the relationship between the State Farm analysis and the Chevron analysis. The D.C. Circuit has treated State Farm and Chevron step two as overlapping if not essentially equivalent. Michigan v. EPA clearly confirms the correctness of that approach. In this regard, another passage from Judge Kavanaugh’s dissent in the D.C. Circuit seems particularly relevant:

In this case, whether one calls it an impermissible interpretation of the term “appropriate” at Chevron step one, or an unreasonable interpretation or application of the term “appropriate” at Chevron step two, or an unreasonable exercise of agency discretion under State Farm, the key point is the same: It is entirely unreasonable for EPA to exclude consideration of costs in determining whether it is “appropriate” to regulate electric utilities under the MACT program.

 Justice Thomas and Separation of Powers Issues

Another significant aspect of Michigan v. EPA is Justice Thomas’s concurring opinion. In a prior post, I discussed the Court’s decision in Perez v. Mortgage Bankers Association earlier this year, including the fact that Justice Thomas, in his concurring opinion in that case, for the first time expressed his view that the Auer deference principle, under which an agency is given deference for its interpretations of its own regulations, may be vulnerable to challenge as an unconstitutional violation of separation of powers principles. While his analysis in that concurring opinion by implication extended to Chevron as well as Auer, in his concurring opinion in Michigan v. EPA the application of that argument to Chevron becomes explicit.

Impact on Florida Bankers and Tax Litigation

Finally, there is the question of the potential application of the holding in Michigan v. EPA in tax litigation. While it is probably the case that in many challenges to tax regulations, the cost of compliance with the regulation may not be a realistic basis for challenge, there is no principled reason why in appropriate cases, the cost of compliance with a tax regulation might not form part or all of the basis for challenge.

A case that is currently pending in the D.C. Circuit, Florida Bankers Association, presents an example of a challenge to a tax regulation where the adverse economic impact that the challengers contend flowed from the regulation at issue was the major basis for their substantive challenge to the regulation. This case involved a challenge by bankers associations to regulations issued by the IRS that required banks to report to the IRS information regarding the amount of interest income earned by non-resident aliens on accounts with the banks, even though such individuals are clearly not subject to U.S. tax on that income. The IRS argued that this information reporting was justified on the basis that it was necessary in order for the U.S. to comply with information sharing agreements it has entered into with other countries regarding interest earned in each country by citizens of the other country.

The bankers associations argued that because of fears by non-resident aliens that the information reported to the IRS would be misused by their home countries, such non-resident aliens would respond to the regulation by withdrawing substantial amount of funds from U.S. banks, thus harming the banks and the U.S. economy. The bankers associations claimed that the IRS in issuing this regulation had incorrectly concluded that the magnitude of such withdrawals would be minimal, and that this error violated the arbitrary and capricious standard.

The district court rejected this challenge, and the bankers associations appealed to the D.C. Circuit. Judge Kavanaugh is on the D.C. Circuit panel that heard oral argument on this case in early February. In light of Judge Kavanaugh’s involvement in the D.C. Circuit opinion that was reversed by Michigan v. EPA, it seems likely that the D.C. Circuit decision in Florida Bankers was held waiting the Supreme Court’s decision. If this speculation is correct, then it seems likely that Michigan v. EPA will play a significant role in the D.C. Circuit’s decision in Florida Bankers.

In a recent Tax Notes article and in prior posts here, I discussed the Anti-Injunction Act issue in Florida Bankers, and the fact that it seems likely that the D.C. Circuit opinion in the case will provide insight on whether I am correct that the Supreme Court’s decision in March in Direct Marketing will mean that the Anti-Injunction Act will be read more narrowly in the future than it has been. The Supreme Court’s decision in Michigan v. EPA provides another reason to look forward to the D.C. Circuit decision in Florida Bankers with anticipation.

Summary Opinions for May, part 1

May got away from me, and so has much of June.  I’ll post the Summary Opinions for May in two parts, and handle June in the same manner.  Below are some of the tax procedure items in May that we didn’t otherwise cover:


  • The Middle District of Louisiana, after the Fifth Circuit vacated and remanded the case, reversed its prior decision and, under Woods, held that the Section 6662(e) valuation misstatement penalty could be imposed when the underlying transaction had been determined to lack economic substance. Chemtech Royalty Associates, LP v. US.   This case was the result of some crazy tax planning by Dow Chemicals to goose its basis in a chemical plant.  Here is Jack Townsend’s prior coverage of the case.
  • Sticking with substantial valuation misstatement penalty, the Tax Court in Hughes v. Comm’r upheld the penalty against a KPMG partner who claimed a step up in basis in stock when he transferred the shares to his non-resident spouse.  This was based on some informal tax research, and conversations with some co-workers that were also informal.  The Court essentially felt Mr. Hughes should have known better, and tagged him with a big penalty (probably didn’t help he was transferring the shares to try and ensure his ex-wife couldn’t make a claim for the increase in value).
  • IRS has released Chief Counsel Advice regarding abatement of paid tax liabilities.  In taxpayer friendly advice, CCA 201520010 states the language of Section 6404(a) is “permissive” and does not require the liability to be outstanding.  That Section states the “IRS is authorized to abate the unpaid portions of the assessment of any tax or any liability in respect thereor…”  The reference to “unpaid”, according to the CCA, is not binding on the Service.
  • The Service has released CCA 201519029, which provides advice on when preparer penalties can apply in situations where the prepared didn’t sign the return or didn’t file the return, and when a refund claim was made after the statute had expired.  For the third situation, the Service stated that “understatement of liability” does not include claims barred by the statute.  The full conclusions in the CCA are:

Issue 1: Yes. If the return is not filed, a penalty under I.R.C. § 6694(b) may be assessed if the return preparer signed the return and the return preparer’s conduct was willful or reckless.

Issue 2: Yes. Under the language of I.R.C. § 6694(b)(1), the return preparer penalty may be assessed if the tax return preparer prepares any return or claim for refund with respect to which any part of an understatement of liability is due to willful or reckless conduct. There is no requirement that the Service allow the amounts claimed on an amended return before the I.R.C. § 6695(b) penalty may be assessed.

Issue 3. The penalties under I.R.C. §§ 6694(a), 6694(b) or 6701 should not be assessed merely because the return preparer made and filed a claim for refund after the period of limitations for refunds had expired, because an “understatement of liability” does not include claims that are barred by the period of limitations. In addition, there may be extenuating circumstances that weigh against asserting the penalty. The amended return, for example, may be perfecting an earlier timely informal claim for refund.

  • The Service has announced it will be refunding the registered tax return preparer test fees.  There will be a second refund procedure where you can request your time back…but it will be ignored.
  • Professor Andy Grewal in early May had an excellent blog post on Yale’s administrative law blog, Notice and Comment, which highlights more potential penalties on employers attempting to follow the ACA requirements.
  • Another CCA (CCA 201520005) , where the IRS has held that the deficiency procedures apply to the assessment of the penalty under Section 6676 to erroneous refund claims based on Section 25A(i) American Opportunity Credit, since the penalty can only apply to a refund claim based on the credit if that claimed credit is part of a deficiency.  Carlton Smith previously had a blog post touching on this issue, found here, where he persuasively criticized  this position.  You should check out the entire post, but I’ve recreated a portion below:

A third issue discussed by the PMTA is how the section 6676 penalty is to be assessed.  Frankly, I read the Code as providing that the assessment is done like a section 6672 responsible person trust fund penalty — straight to assessment, without the deficiency procedures applying.  That seems to be what section 6671 provides.  But, the PMTA takes the position that only for underlying issues on which the section 6676 penalty applies where there is no jurisdiction in the Tax Court under the deficiency procedures, such as for excessive refund claims regarding employment taxes or the section 6707A reportable transaction penalty, the section 6676 penalty is done by straight assessment, without prior notice to taxpayers.  However, for section 6676 penalties on what would constitute a “deficiency” — and excessive refundable credit claims are clearly part of a deficiency under section 6211(b)(4)‘s special rules — the PMTA concludes that the section 6676 penalty should be asserted in a notice of deficiency.  The PMTA reasons that Tax Court cases have in the past held that a penalty which is computed as a function of a deficiency (which I would point out includes extra late-filing and late-payment penalties on the tax deficiency) are also treated under the deficiency procedures.  This reasoning is all mixed up.  The Tax Court applies the deficiency procedures to penalties like the late-filing and late-payment penalties of section 6651(a) that are imposed on the tax deficiency only because of special language in section 6665(b) that directs the Tax Court to do so.  There is no similar language in section 6671 directing deficiency procedures to apply to any penalties imposed in the following sections.

  • And another CCA (201517005), this one dealing with the statute of limitations for refunds based on foreign taxes deducted.  Specifically, whether a refund claim more than ten years (yr 13) after the tax year in question (yr 2) was timely when it resulted from an NOL (yr 4) where the taxpayer elected to deduct foreign taxes paid instead of taking foreign tax credit.  The IRS concluded that no, Section 6511(d)(2) applied to the NOL and required the claim to be made three years after the NOL year.  Section 6511(d)(3), which allows for a ten year statute for refunds pertaining to foreign tax credits, was not applicable.
  • Apparently, some states are starting to scale back the amount of tax credits available for movie productions.  Two years ago, The Suspect was filed in my building, staring Mekhi Phifer and no one else you have ever heard of.  I think it was “catered” by a fast food joint, and they may have been using our coffee pots to make coffee.  I can’t imagine Pennsylvania dropped the big bucks to land that film.
  • Emancipation day is throwing off filings again next year.  I always assumed that had something to do with the date of the Emancipation Proclamation, but I was wrong. The Emancipation Proclamation went into effect January 1st, 1863.  On April 16th, 1862, President Lincoln signed the Compensated Emancipation Act, freeing the enslaved living in the District of Columbia.  The linked Rev. Ruling explains what those in Massachusetts who are celebrating Boston Marathon Day (Patriots Day-celebrating the shot heard round the world) should do also.
  • Initially when writing this, I was watching the US women’s national team take it to Colombia, and recalling what a jackass Sepp Blatter has been.  Hoping this article is in reference to the shoe dropping on him next.  Even if he didn’t evade taxes, he should have to pay someone money for suggesting he would boost viewership of the women’s game with hot pants.  Or for not knowing who Alex Morgan is…or for making the women play on turf.

Failing to Prove the Attorney-Client Privilege Applies

Today returning guest blogger, Joni Larson, writes about a recent Tax Court case involving a failure to successfully invoke the attorney-client privilege.  As with her last post, she takes us into the practical world of transforming information into evidence.  Sheis the perfect person to discuss the privilege because she authors the book on evidentiary issues in Tax Court.  She teaches at Western Michigan University – Cooley Law School where she is also the Director of the Graduate Tax Program. Keith

One of the most well-known privileges is the attorney-client privilege.  Rule 501 of the Federal Rules of Evidence allows common law privileges, such as the attorney-client privilege, to be claimed in the Tax Court (see also IRC section 7453).  The privilege protects communications made in confidence by a client to an attorney when the client is seeking legal advice.  It also applies to confidential communications made in the opposite direction, from the attorney to the client, if the communications contain legal advice or reveal confidential information on which the client sought advice.  The purpose of the privilege is to allow for full and frank communications between attorneys and their clients—the client is able to fully inform the lawyer and the lawyer can be frank and honest with his advice to the client. See Upjohn Co. v. United States, 449 U.S. 383, 389-90 (1981).

The privilege is not an absolute privilege that covers every communication between the attorney and the client.  It does not apply to underlying facts, business or other non-legal advice given by the attorney (see Ford v. Commissioner, T.C. Memo. 1991-354), information received from third parties, information given to the attorney that the attorney is expected to disclose to a third party, the identity of a client, or the fact that an individual has become a client.


If a party wants to claim that a communication is covered by the attorney-client privilege, he has the burden of establishing it applies. See Fu Inv. Co. v. Commissioner, 104 T.C. 408, 415 (1995).  “Blanket claims of privilege without any allegations that the production of documents requested would reveal, directly or indirectly, confidential communications between the taxpayer and the attorney, or without any allegations that the particular documents were related to the securing of legal advice, are insufficient. . . .”See Bernardo v. Commissioner, 104 T.C. 677, 682 (1995).

The privilege may be waived.  If the client voluntarily discloses the information or fails to take precautions to preserve the confidentiality of the privileged material, the privilege is waived.  See Moore v. Commissioner, T.C. Memo. 2004-259.  While disclosing the actual communication with the attorney will waive the privilege, disclosing only the subject of the communication will not.  See WFO Corp. v. Commissioner, T.C. Memo. 2004-186.

This tension between, on the one hand, disclosing enough information to satisfy the burden of proving the privilege applies and, on the other, not disclosing so much information that the privilege is considered waived, provides an interesting challenge for those claiming the privilege.  In Pacific Management Group v. Commissioner, T.C. Memo. 2015-97, this tension was the focus of the Tax Court’s decision regarding a motion to compel production of documents.

In 1999 the taxpayers met with an attorney, Mr. Ryder, who pitched to them a program designed to minimize their tax liability; the taxpayers elected to participate.  Several years down the road, the Commissioner contended the program lacked economic substance, the taxpayers disagreed, and the parties ended up in Tax Court.

Over the years, Mr. Dunning, an attorney, had provided legal, corporate, and business advice to the taxpayers.  Prior to trial, counsel for Commissioner served a Subpoena Duces Tecum on Mr. Dunning.  He appeared at trial and produced some of the requested documents but declined to produce all.  He claimed the documents he did not produce (mostly emails), were protected by the attorney-client privilege.  For the 2,000 or so emails he claimed were privileged, he supplied a privilege log that stated who the email was from, name or email address of to whom it was sent, name or email address of who was copied, and the date and time sent.  No other information was provided.

A few days into the trial, the Commissioner filed a Motion to Compel Production of Documents Responsive to a Subpoena Duces Tecum Served on Steven Dunning and the court heard oral arguments on the motion.  Judge Lauber indicated he was inclined to grant the motion because the privilege log was inadequate.

To be adequate, a privilege log must set forth each element of the privilege and be sufficient to establish that the confidence was by a client to an attorney for the purpose of obtaining legal advice or by the attorney to the client where the communication contains legal advice or reveals confidential information about the client’s request for advice.  Mr. Dunning’s log did not contain any information about the subject of the email, describe the contents of the email, or include facts as to why the communication was intended to be confidential.

Mr. Dunning was in the courtroom on the first day of trial to hear counsel for Commissioner state he was going to challenge the log as insufficient, effectively alerting Mr. Dunning to the fact that he needed to prepare a more detailed log.  During the oral arguments, Judge Lauber noted that Mr. Dunning had been put on notice that the Commissioner considered the log inadequate and that Mr. Dunning had been given a second bite at the privilege log apple, but had chosen not to take it.

Because Mr. Dunning was the corporate and general business attorney for the taxpayers and had served as such for a long time, it was possible the email communications contained general business advice or discussed transactional matters.  If they did, because they did not contain legal advice, the communications would not be protected.  The minimal information supplied in the privilege log made it impossible for the Court to determine what the communications were about.  Having failed to meet his burden of proof, Mr. Dunning’s emails were not protected by the attorney-client privilege and the Commissioner’s Motion to Compel was granted.

It could be that Mr. Dunning decided not to provide a more detailed privilege log because, even if he had, the emails would not have been protected.  In its opinion, the court noted that the Commissioner also had argued that the taxpayers had waived the privilege, presumably by disclosing the information to a third party.  No further information about the suggested waiver was provided.

Noteworthy, the privilege also would have been waived by the taxpayers if they affirmatively placed Mr. Dunning’s advice at issue.  The Tax Court uses a three-prong test to determine if the privilege is waived by a taxpayer’s affirmative actions.   First, the taxpayer’s assertion of the privilege must have been the result of some affirmative act, such as the taxpayer filing suit in Tax Court.  Second, through this affirmative act, the taxpayer put the protected information at issue by making it relevant to the case.  Finally, application of the privilege would have denied the Commissioner access to information vital to his defense. See Karme v. Commissioner, 73 T.C. 1163, 1184 (1980), aff’d 673 F.2d 1062 (9th Cir. 1982); Hartz Mountain Industries, Inc. v. Commissioner, 93 T.C. 521, 522–23 (1989).

With few facts about the underlying controversy in Pacific Management disclosed in the opinion, it is not possible to determine if the communications had been disclosed to third parties or if the taxpayers had placed Mr. Dunning’s advice at issue.  Perhaps most curious of all is the fact that Mr. Ryder, presumably the same Mr. Ryder who pitched the tax-savings structure, is representing the taxpayers before the Tax Court.  It will be interesting to see how his role in the case plays out.


Aging Offers in Compromise into Acceptance

I recently attended the Tax Court Judicial Conference where I saw and old friend.  The friend worked in the General Litigation Division of IRS Chief Counsel’s office for several years before entering private practice a few decades ago.  Because the General Litigation Division, which has now merged into Procedure and Administration, had responsibility for answering collection issues for the whole office of Chief Counsel, my friend has a deep knowledge of collection issues gained as a young lawyer working in this division.

When old lawyers get together they like to complain.  At the conference he complained to me about an offer case he had submitted on which he had not received an answer in about 18 months.  My response was that rather than complaining he should hope that the non-responsiveness continues for another six months at which time the statute will deem the offer accepted.  Because he did not remember this addition to IRC 7122 in 2006, it seemed possible to me that others would also not know if it.  I know of at least one case where recently the two year period passed with no response.  Since the IRS has less and less resources with which to handle the work assigned to it, the possibility of obtaining an acceptance in this manner now seems real and not, as I once thought, theoretical.


Public Law 109-222, Section 509(b)(2) amended IRC 7122 to add subsection (f).    Subsection (f) provides that “Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. …”  The legislative history states that the subsection applies to offers submitted to the IRS 60 days after May 17, 2006.

I have never had the good fortune to have an offer pass the 24 month mark before hearing from the IRS with a yea or nay.  A couple of months ago, I received an email from occasional blogger and clinic colleague, Scott Schumacher, the director of the University of Washington low income tax clinic saying that his clinic had a case that the clinic had submitted to the IRS more than 24 months ago.  He said that they had scoured the Internal Revenue Manual and found no mention of what to do when the 24 month period passed.  We talked about how to consummate the offer in these circumstances.  I suggested sending a letter and the offer payment to the offer unit thanking them for accepting the offer and tendering the offer amount.

I also saw Scott at the Tax Court Judicial Conference where he told me that before his clinic had to take the uncertain step of perfecting the offer to which the IRS had not responded in 24 months, the IRS did in fact accept the offer.  That leaves open the question of exactly how to consummate the offer in this circumstance and I welcome comments from anyone who has gone through this or anyone who thinks they know how to complete an offer to which the IRS has not decided in 24 months and for which no guidance exists.  I can understand why the IRS does not want to publish guidance on this topic.  It probably feels awkward about having to write about what to do when it drops the ball; however, some guidance would be appreciated.

One issue present if the offer is deemed accepted by the passage of time is the terms of the offer.  The offer in compromise form, Form 656, in Section 8 imposes a number of terms in subsections (a) through (p) like the one in subparagraph (g) requiring compliance for the next five years with filing and payment.  In subsection (c) it imposes the condition that the IRS will take any refund due to the taxpayer for the year the offer is accepted and all prior years.  Because these terms are on the form the taxpayer signs in submitting the offer it would seem that they apply even if the offer acceptance occurs due to the passage of 24 months since the taxpayer adopted them as part of the offer in signing the Form 656.    One of the terms in Section 8 of Form 656 that may not need to appear there because of the language of the statute concerns the taxpayer’s ability to challenge the liabilities covered by the offer.

Subsection (i) provides that “Once the IRS accepts my offer in writing, I have no right to challenge the tax debt(s) in court or by filing a refund claim or refund suit for any liability or period listed in Section 2, even if I default the terms of the accepted offer .”   Does this mean that where the taxpayer obtains acceptance by virtue of the passage of 24 months the taxpayer may still contest the underlying liabilities?  If the offer gets accepted due to the passage of time, the language of Section (8) could become important in deciding how the offer acceptance by virtue of passage of time differs from offers accepted by the IRS in the normal fashion.   I also solicit comments on this issue from those of you who have offers accepted under this provision.

Another issue not discussed in the statute or in any guidance concerns how long a taxpayer has to pay the offer after the passage of the 24 month period.  Once the statute deems the offer accepted, the logical extension of acceptance would be to expect performance within a reasonable period of time after acceptance.  The taxpayer’s offer promises to pay a certain amount in full or over time upon acceptance.  If the 24 months passes and the taxpayer does nothing, at what point has the taxpayer waived acceptance by not performing on the terms of the offer after acceptance.  I find nothing in Section 8 of Form 656 addressing the time period within which a taxpayer should perform after the passage of the 24 months and acceptance of the offer through that method.  Could the IRS argue at some point that if the taxpayer does not make payment within a reasonable time after a deemed acceptance that the taxpayer’s failure negates acceptance?  I also solicit comments on this aspect if anyone has had a deemed accepted offer rejected for failure to perform.

The deemed acceptance of an offer may become more prevalent as the IRS staffing problems continue to increase.  The issue points to the importance of retaining the letter from the IRS indicating receipt of an offer and calendaring an event two years thereafter in case of failure of the IRS to act.  The possibility of a time passage acceptance also makes me wonder if changing the terms of the offer might become prevalent if the IRS is not going to look at the offer form until after the 24 months expires.  Nothing in the statute requires making the offer terms laid out in Section 8 of Form 656 though I expect the IRS would return an offer with those terms altered where it reviews the offer.

I was impressed that the University of Washington clinic caught the two year time period and wonder if my clinic would have done the same.  Even though I knew of the statutory provision, my clinic has not had a practice of calendaring the two year time period.  My practice on calendaring offers needs to change.  Getting an offer acceptance based on the passage of time is certainly a slow way to learn of acceptance but it might be a very satisfactory way to get what you want and to feel better about the cuts at the IRS which you normally curse while waiting on the phone for a couple of hours.

King v Burwell: Initial Observations

Most readers by now already know that the Supreme Court today decided King v Burwell. We have previously discussed the case and some of the many potential tax procedure issues that the decision might have considered. The most interesting tax procedural aspect of the case from my quick read is its approach to interpretation, that is its reliance on broader legislative purpose and its lack of referring to Chevron deference in its decision. Part of the Court’s rationale is that the decision implicated health care, a subject not in the IRS’s wheelhouse of expertise.

The language from the opinion that pushes away from Chevron is below, with my emphasis in bold:

This approach[Chevron] “is premised on the theory that a statute’s ambiguity constitutes an implicit delegation from Con- gress to the agency to fill in the statutory gaps.” FDA v. Brown & Williamson Tobacco Corp., 529 U. S. 120, 159 (2000). “In extraordinary cases, however, there may be reason to hesitate before concluding that Congress has intended such an implicit delegation.” Ibid.

This is one of those cases. The tax credits are among the Act’s key reforms, involving billions of dollars in spending each year and affecting the price of health insur- ance for millions of people. Whether those credits are available on Federal Exchanges is thus a question of deep “economic and political significance” that is central to this statutory scheme; had Congress wished to assign that question to an agency, it surely would have done so ex- pressly. Utility Air Regulatory Group v. EPA, 573 U. S. ___, ___ (2014) (slip op., at 19) (quoting Brown & William- son, 529 U. S., at 160). It is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort. See Gonzales v. Oregon, 546 U. S. 243, 266–267 (2006). This is not a case for the IRS. 

Professor Rick Hasen at U Cal Irvine in the Election Law Blog has a brief post called King v Burwell: The Return of Purpose in Statutory Interpretation. He highlights the importance of the decision in light of the Court’s approach to resolving the issue:

This means of interpretation is important for a number of reasons. First, it means that a new administration with a new IRS Commissioner cannot reinterpret the law to take away subsidies. Second, it puts more power into the hands of Congress over administrative agencies (and therefore the executive), at least on issues at the core of congressional legislation. Third, and most important as a general principle, it rehabilitates a focus on the law’s purpose as a touchstone to interpretation, over a rigid and formalistic textualism that ignores real-world consequences. If followed through consistently, this principle would greatly improve our statutory interpretation.

In the near future, I suspect there will be a lot of discussion revolving around the Court’s approach in the case and perhaps whether it signifies a move away from Chevron when Congress tasks IRS with its typical  grab bag of non-revenue raising policies.  In the meantime, it looks like ACA is here to stay, leaving us and PT with many other procedural and administrative issues we are sure to discuss in the days ahead.

UPDATE: Chris Walker, former PT guest blogger and administrative law scholar, has a nice discussion of some of the administrative law context and implications over at Notice & Comment

Does Rev. Proc. 99-21 Validly Restrict Proof of Financial Disability, for Purposes of Extending the Refund Claim SOL, to Letters From Doctors of Medicine and Osteopathy? Part 2

Yesterday, frequent guest blogger Carl Smith took us through the statute and Rev. Proc. 99-21 in setting the scene for Judge Gustafson’s March order in the Kurko case and its importance. Today, Carl picks up where he left off and shows how the current revenue procedure misses the mark. Because the IRS has never given the public the opportunity to comment on the procedure and because it does not explain how it decided upon the procedure, the procedure not only needs changing but also appears vulnerable to attack. That attack will have to come in some future case, though, as the IRS recently conceded the issue as presented in Kurko – without first getting a judicial ruling either way on the issue. Keith

Proof of “Disability” for SSDI Purposes

I am no expert in SSDI disability benefits litigation, so I went to one for information.  Prof. Toby Golick of Cardozo has for decades headed a Cardozo clinic that regularly wins SSDI benefits cases before the Social Security Administration.


Toby told me the following:

The language of § 6511(h) derives from the SSDI provisions at 42 U.S.C. § 423(d)(1)(A), which generally defines “disability” as “inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months”. (The same definition is used for SSI benefits, but without the requirement of past FICA contributions for sufficient quarters.)  There are two separate questions, however — (1) whether the individual has a physical or mental impairment and (2) whether the individual’s impairment prevents her from working.  Regulations specify that to establish an impairment, evidence is needed from an “acceptable medical source”, limited to licensed physicians, osteopaths, licensed psychologists, optometrists, podiatrists, and speech pathologists. 20 C.F.R. § 404.1513(a). After the impairment is established, the agency will consider pretty much anything to establish the effect of the impairment on the ability to work.  20 C.F.R. § 404.1513(d) lists the following sources for the second inquiry:

(1)  Medical sources not listed in paragraph (a) of this section (for example, nurse-practitioners, physicians’ assistants, naturopaths, chiropractors, audiologists, and therapists);

(2)  Educational personnel (for example, school teachers, counselors, early intervention team members, developmental center workers, and daycare center workers);

(3)  Public and private social welfare agency personnel; and

(4)  Other non-medical sources (for example, spouses, parents and other caregivers, siblings, other relatives, friends, neighbors, and clergy).

20 C.F.R.  § 404.1527 explains how opinion evidence of disability is weighed, with more, or sometimes controlling, weight being accorded to treating physicians.  Toby says:  “The bottom line is that the Social Security disability determination is (wisely) based on all the relevant evidence, not merely a physician certification.”  Why didn’t the IRS adopt the SSDI procedures for proving disability?

Proof of Disability for Purposes of Early Withdrawal Penalty at § 72(t)

An exception to the 10% penalty for early withdrawals from qualified retirement plans has similar language to § 6511(h).  Section 72(t)’s penalty does not apply to distributions attributable to a taxpayer’s being disabled within the meaning of § 72(m)(7).  § 72(t)(2)(A)(iii).  Section 72(m)(7) describes “disability” largely the same was as § 6511(h) does and states:  “An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such manner as the Secretary may require.”  While the IRS has promulgated a regulation at § 1.72-17A(f) that elaborates on the definition of “disability” for this purpose, there is nothing in the regulation that states how disability must be proved, and no Rev. Proc. fills that gap either.  Case law suggests that the taxpayer’s own testimony in Tax Court, coupled with some testimony from a medical professional (of a type not specified) is helpful to the court’s making a de novo determination of qualification for this exception – as indeed was indicated just this week in Trainito v. Commissioner, T.C. Summary Op. 2015-37, where the court, while accepting into evidence medical records of a diabetic coma, bemoaned the absence of any additional medical records — or testimony from medical professionals — regarding the taxpayer’s diabetes or alleged depression. Why isn’t it good enough for proving disability for purposes of extending the refund claim statute of limitations to just introduce taxpayer testimony and (unspecified) medical personnel testimony at trial, as is done in section 72(t) cases?

Proof of Disability for Purposes of “Reasonable Cause” for Penalties

In setting the § 6511(h) financial disability procedures, the IRS should also have considered the much more lax rules that apply to a very similar situation — when a taxpayer seeks relief from a late-filing penalty (say, at § 6651(a)(1)) on the grounds of “reasonable cause and not willful neglect”.  In United States v. Boyle, 469 U.S. 241 (1985), the Supreme Court observed, in dicta, that “disability alone could well be an acceptable excuse for a late filing.”  Id., at 248 n.6.  For relief on the basis of “reasonable cause”, regulations only state that

a taxpayer who wishes to avoid the addition to the tax for failure to file a tax return or pay tax must make an affirmative showing of all facts alleged as a reasonable cause for his failure to file such return or pay such tax on time in the form of a written statement containing a declaration that it is made under penalties of perjury. Such statement should be filed with the district director or the director of the service center with whom the return is required to be filed . . . . [Treas. Reg. § 301.6651-1(c)(1)]

There is nothing in the regulations requiring that, for proof of reasonable cause on the ground of disability or other ill health, any medical-field worker provide a letter.  However, in practice, I have often had my Cardozo Tax Clinic clients obtain a letter from some third-party medical worker to attach to any submission under the regulation.  In my experience, such letters are fairly easily obtained (in the case of mental health issues) from a therapist who the taxpayer regularly sees, but are hard to get from doctors (such as psychiatrists), who have busy practices, see the patient infrequently, and who are uncomfortable in making any statement beyond the taxpayer’s medical diagnosis.  For examples of letters from physicians that were too waffly to qualify taxpayers for tolling under § 6511(h), see. e.g., Pleconis v. IRS, 2011 U.S. Dist. LEXIS 88471 (D.N.J. 2011); Henry v. United States, 2006 U.S. Dist. LEXIS 93038 (N.D. TX. 2006).

Even the requirement that the taxpayer’s reasonable cause statement for removing penalties must be made under penalties of perjury is permitted to be ignored by IRS employees.  The requirement that such a statement be sworn is not included in IRS Notice 746 (“Information About Your Notice, Penalty and Interest”) (rev. 2011), which states:

Reasonable Cause. The law lets us remove or reduce the penalties we explain in this notice if you have an acceptable reason. If you believe you have an acceptable reason, you may send us a signed statement explaining your reason. We will review it and let you know if we accept your explanation as reasonable cause to remove or reduce your penalty.

And the Internal Revenue Manual indicates that for some, unspecified small penalty amounts (the figure is redacted), IRS employees may find reasonable cause to exist either (1) even where a reasonable cause statement is unsigned or (2) based only on oral conversations with the taxpayer.  See IRM (rev. 8/5/14).

Finally, there is no requirement that the reasonable cause statement be filed with the tax return, although it is recommended that the taxpayer do so in the instructions.  See, e.g., 2014 Form 1040 Instructions at p. 92.

When a reasonable cause statement is not accepted by the IRS (or not received), it is typical in court cases (deficiency or CDP) that the court decides the issue of reasonable cause because of physical or mental health reasons on a de novo record and under a de novo standard.   For examples of where the Tax Court has found reasonable cause for late filing because of health issues, see, e.g., Meyer v. Commissioner, T.C. Memo. 2003-12; Shaffer v. Commissioner, T.C. Memo. 1994-618; Carnahan v. Commissioner, T.C. Memo. 1994-163.

Proof of Physical and Mental Health Issues in Innocent Spouse Cases

When a person files for innocent spouse relief under § 6015, he or she does so on a Form 8857.  Under section 4.03(g) of Rev. Proc. 2013-34, 2013-2 C.B. 397, one of the factors considered by the IRS in the case of “equitable” relief under subsection (f) is the requesting spouse’s mental or physical health.  Of this factor, the IRS wrote in that section as follows:

Whether the requesting spouse was in poor physical or mental health. This factor will weigh in favor of relief if the requesting spouse was in poor mental or physical health at the time the return or returns for which the request for relief relates were filed (or at the time the requesting spouse reasonably believed the return or returns were filed), or at the time the requesting spouse requested relief. The Service will consider the nature, extent, and duration of the condition, including the ongoing economic impact of the illness. If the requesting spouse was in neither poor physical nor poor mental health, this factor is neutral.

Note that there is no requirement that any medical professional submit a letter (with the Form 8857 or at a later time) that discusses the taxpayer’s health issues.

When § 6015(f) cases are litigated in the Tax Court, the Tax Court decides the issue of equity both on a de novo standard and a de novo record. Porter v. Commissioner, 130 T.C. 115, 117 (2008) and 132 T.C. 203, 210 (2009), and “consults”, but is not bound by, the Rev. Proc.’s factors.  Pullins v. Commissioner, 136 T.C. 432, 439 (2011).  When health issues are raised, the Tax Court does not require any medical testimony (though, I am sure it might appreciate some in close cases).  Indeed, in the Pullins case — decided by Judge Gustafson — the judge wrote as follows about the physical or mental health factor:

There is no evidence that Ms. Pullins was ill when she signed the returns in issue or when she requested relief in April of 2008. See id. sec. 4.03(2)(b)(ii). This factor ordinarily would not weigh in favor of or against granting relief in the IRS’s analysis. See id. sec. 4.03(2)(b). However, having observed Ms. Pullins at trial in September 2009, we conclude that she is now disabled and unable to work and earn income and that she may be permanently so. We find that her obviously impaired health at the time of the trial de novo is relevant, and we conclude that this factor weighs in favor of granting relief. [Id. at 454]

So, just the judge eyeballing and listening to the taxpayer at trial is apparently enough evidence to prove health to be a positive factor for innocent spouse relief under subsection (f).

It is frankly baffling why the IRS should have imposed a stricter proof regime in Rev. Proc. 99-21 for § 6511(h) for obtaining financial disability relief from the refund claim statute of limitations than the equally-consequential-to-the-government determinations made concerning whether a taxpayer is entitled to SSDI, had reasonable cause for avoiding a late-filing penalty, or was entitled to innocent spouse relief.  In any redo of the required § 6511(h) procedures, I would urge the IRS to consider three things:  (1) whether it is really necessary to obtain a letter from a medical professional, (2) who that professional might be, and (3) when that letter must be provided to the IRS.  It is this last issue that leads to my final observations.

The Requirement to Attach Proof of Financial Disability to the Return 

One of the odd things about the Kurko case was that neither the IRS nor the judge seems to object to the late receipt of a “physician” letter and statement from the taxpayer.  Under the Rev. Proc. quoted in yesterday’s post, both are required to be attached to the refund claim (in this case, that would be Ms. Kurko’s late original 2008 income tax return, which was filed in mid-2013).  In the supplemental notice of determination, the Settlement Officer did not raise late receipt as a reason for turning down the benefits of § 6511(h) tolling.  Since she did not do so, the doctrine of SEC v. Chenery, Corp., 318 U.S. 80, 93-95 (1943), which prohibits a court from affirming on a ground not articulated by the agency, applies and would have stopped the judge and IRS attorneys from raising the lateness argument. See Salahuddin v. Commissioner, T.C. Memo. 2012-141 at *16 (citing Chenery and stating: “our role under section 6330(d) is to review actions that the IRS took, not the actions that it could have taken”) (Gustafson, J.).

In any redo of Rev. Proc. 99-21 (hopefully through the notice and comment regulation process), I would hope that the IRS reconsiders whether it is really too draconian a sanction to impose this timing requirement on taxpayers — one that is not imposed in the penalty “reasonable cause” or innocent spouse areas.  Remember that these § 6511(h) taxpayers, even if they have somehow managed to file a late return, are (because of their illnesses) likely not good about reading or complying with IRS instructions that would tell them about this proof timing requirement.  These are the last taxpayers on whom I would impose a requirement that everything be perfect on the return when it is filed.

And, remember that the Supreme Court has previously held that informal refund claims are sufficient to stop the refund claim statute of limitations, and that a perfected refund claim later on (after the statute has run) is normally sufficient.  United States v. Kales, 314 U.S. 186, 194 (1941).

Further, if IRS employees don’t want to enforce this timing requirement in some cases (like Kurko), why state the timing requirement as mandatory at all?  Leaving the submission of the physician’s statement as mandatory at the time of the filing of the return when the IRS has shown that it can overlook that mandatory requirement simply allows for IRS employees to impose the requirement at whim, which is a recipe for abuse of discretion.


Congress passed § 6511(h) to assist a very vulnerable population. Most of the persons impacted by the financial disability provisions face mental and not physical impairments preventing them from easily complying with the procedures for filing returns and refund claims. Rather than creating difficult barriers for this group to navigate, the IRS should adopt procedures that impose barriers to the extension of the statute of limitations only for those who cannot demonstrate financial disability, while allowing the former individuals the full opportunity to demonstrate the bases for their claims.

Does Rev. Proc. 99-21 Validly Restrict Proof of Financial Disability, for Purposes of Extending the Refund Claim SOL, to Letters From Doctors of Medicine or Osteopathy? Part 1

Procedurally Taxing has been following a CDP case that raised important issues about the proper application of the financial disability provisions added to the Code in 1998. Both Carl Smith and I have written on this issue and I have blogged on it. As currently written the concept of financial disability applies in the refund context though the discussion here also relates to the equitable tolling discussions we have frequently had on this site and most recently in a post by Carl.

Carl has produced a two part post on a CDP case that was pending before Judge Gustafson in which the judge entered another interesting order in March. Today’s post will set up the case and describe that recent order. Tomorrow’s post will demonstrate the too limited scope of the current procedures governing the determination of financial disability and offer some unsolicited advice to the IRS on how it might make improvements. Keith

In two prior posts — one in Summ. Ops. by Stephen and one by me — PT has reported on a very interesting Collection Due Process (CDP) case that was recently pending in the Tax Court, Kurko v. Commissioner, Docket No. 24040-13L.  The case had continued to present novel issues — most recently in an order issued by Judge Gustafson on March 20, 2015 – namely, whether an amended return’s overpayment may be credited against a CDP-year liability, even though the overpayment return was filed beyond the 3-year period of § 6511(a). In a recent remanded CDP hearing completed prior to the March 20 order, the taxpayer presented the Settlement Officer with a letter from a licensed psychologist stating that the taxpayer had a mental health disability that made her financially disabled for purposes of § 6511(h)’s provision tolling the credit or refund claim period under (a).  In a supplemental notice of determination, the SO denied tolling on the ground that, under Rev. Proc. 99-21,1999-1 C.B. 960, the letter had to come from a “doctor of medicine or osteopathy legally authorized to practice medicine and surgery” – which is a subset of individuals defined as “physicians” at 42 U.S.C. § 1395x(r) (listing various medical professionals, but not clinical psychologists).  In his order of March 20, Judge Gustafson instructed the parties to brief the issue of the validity of the Rev. Proc.’s limitation requiring the letter to come from a doctor of medicine or osteopathy as defined in § 1395x(r)(1).  Although it initially supported the position taken in the supplemental notice of determination, after reading Judge Gustafson’s questions in his March 20 order, the IRS decided to sign a stipulated decision providing that the overpayment was timely claimed, notwithstanding that the letter was not from a “physician” – thereby settling the case and rendering the issue moot for purposes of the Kurko case. However, as this issue may recur, and the issue is an important one, I think it is worth a couple of posts.

Below, I explore Judge Gustafson’s concerns in detail and conclude that the Rev. Proc. is invalid and the IRS should revise it and replace it, after notice and comment, with a suitable regulation.


First, some good news about Ms. Kurko’s case:  Ms. Kurko was proceeding in the case pro se. An issue in the prior posts on this case was the judge’s request that Ms. Kurko get an attorney or next friend to assist her in prosecuting the case. She did eventually get a pro bono attorney, Bruce McElvenney, located in Norwell, MA. I commend Mr. McElvenny in his representation, which began with the CDP remand hearing earlier this year.

Kurko‘s Facts

Ms. Kurko failed to timely file 2008 and 2009 income tax returns, but she filed a late 2011 return showing a small balance due that she did not pay.  The IRS prepared Substitutes for Return for her for 2008 and 2009 showing substantial balances due (over $10,000 due for 2009) and sent her notices of deficiency.  She received the 2009 notice of deficiency, but did not contest it in Tax Court, so was not in a position to challenge the 2009 underlying liability in a CDP hearing.  §6330(c)(2)(B). She did not receive the 2008 notice of deficiency, so she still could raise a challenge to the 2008 underlying liability in a CDP hearing.  The IRS assessed both the 2008 and 2009 deficiencies.  In February 2013, the IRS sent Ms. Kurko a notice of filing of a tax lien for 2008, 2009, and 2011.  She timely requested a CDP hearing.  In her Form 12153, she challenged the amount of the 2008 liability and wrote: “I am in the process of seeking legal assistance and psychiatric assistance.  I told agents unemployed (sic) and am applying for SSDI [Social Security Disability Insurance benefits].

During the course of the ensuing CDP hearing, in June 2013, Ms. Kurko filed an original 2008 income tax return showing an overpayment of $8,560, which she elected to apply to her 2009 taxes.  The IRS processed the 2008 return (eliminating any balance due for 2008), but did not apply the overpayment shown thereon as a credit to the 2009 liability, since the SO determined that the 3-year credit or refund claim statute of limitations at § 6511(a) for the 2008 year had run out on April 15, 2012 — 14 months before the 2008 return was filed.  As of the time the SO issued the notice of determination (September 2013), Ms. Kurko had not been awarded SSDI benefits.  However, based on evidence provided to an ALJ in the Social Security Administration (1) by a licensed psychologist with a PhD degree in clinical psychology and (2) by Ms. Kurko (apparently through her own testimony), at some point after she filed her Tax Court case, she was granted SSDI benefits.

In December 2014, Judge Gustafson issued a bench opinion finding that Ms. Kurko had discussed her mental health issues with the SO, who should have then invited Ms. Kurko to submit evidence that she had been financially disabled within the meaning of § 6511(h).  Since the SO had not done so, the judge ordered the case remanded for a supplemental CDP hearing.

Section 6511(h) and Rev. Proc. 99-21

Section 6511(h), adopted in 1998, provides that “the running of the periods specified in subsections (a), (b), and (c) [of § 6511] shall be suspended during any period of such individual’s life that such individual is financially disabled”.  The statute partially overruled the Supreme Court’s decision in the Brockcamp case, which held that the 3-year period of limitations in subsection (a) was not subject to the judicial doctrine of equitable tolling on any ground (including the ground of disability involved therein). The new statute defined “financially disabled” as “such individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” Congress placed two limitations on this provision:  First, “[a]n individual shall not be considered to have such an impairment unless proof of the existence thereof is furnished in such form and manner as the Secretary may require.”  Second, “[a]n individual shall not be treated as financially disabled during any period that such individual’s spouse or any other person is authorized to act on behalf of such individual in financial matters.”

The Treasury has never adopted any regulations under § 6511(h).  However, in 1999, without any prior public notice or comment or explanation of why it made certain choices, it adopted Rev. Proc. 99-21.  Section 4 thereof states:

Unless otherwise provided in IRS forms and instructions, the following statements are to be submitted with a claim for credit or refund of tax to claim financial disability for purposes of § 6511(h).

(1) a written statement by a physician (as defined in § 1861(r)(1) of the Social Security Act, 42 U.S.C. § 1395x(r)(1)), qualified to make the determination, that sets forth:

(a) the name and a description of the taxpayer’s physical or mental impairment;

(b) the physician’s medical opinion that the physical or mental impairment prevented the taxpayer from managing the taxpayer’s financial affairs;

(c) the physician’s medical opinion that the physical or mental impairment was or can be expected to result in death, or that it has lasted (or can be expected to last) for a continuous period of not less than 12 months;

(d) to the best of the physician’s knowledge, the specific time period during which the taxpayer was prevented by such physical or mental impairment from managing the taxpayer’s financial affairs; and

(e) the following certification, signed by the physician:

I hereby certify that, to the best of my knowledge and belief, the above representations are true, correct, and complete.

(2) A written statement by the person signing the claim for credit or refund that no person, including the taxpayer’s spouse, was authorized to act on behalf of the taxpayer in financial matters during the period described in paragraph (1) (d) of this section. Alternatively, if a person was authorized to act on behalf of the taxpayer in financial matters during any part of the period described in paragraph (1) (d), the beginning and ending dates of the period of time the person was so authorized.

Remand Hearing and Subsequent Order

At the remand hearing in February of this year, Ms. Kurko, assisted by her counsel, submitted a letter from the same licensed psychologist whose evidence was accepted for SSDI purposes.  The letter was in the required format of the Rev. Proc. 99-21 letter.  Ms. Kurko also submitted the written statement required by the Rev. Proc. that no one was authorized to act on her behalf on financial matters during the relevant period.

In a supplemental notice of determination, the SO turned down the psychologist’s letter on the ground that the psychologist was not a “physician”, as defined in the Rev. Proc.  Ms. Kurko then filed a report with the court showing the psychologist’s letter and the supplemental notice of determination.  This triggered a fairly annoyed order from the judge on March 20.  In the order, the judge, after noting that the case was set for a second trial at Boston on June 8, stated

that, if the case does not settle, then in the next memoranda or briefs to be filed, the parties shall explain their positions on two issues:

(a)            What level of deference should be accorded to the “physician” requirement of section 4(1) of Rev. Proc. 99-21, 1991-1 C.B. 960? Section 6511(h) provides that the taxpayer must furnish “proof … in such form and manner as the Secretary may require”. Did the Revenue Procedure go beyond mere form and manner to set up a substantive standard? Does that matter? Does it matter whether the Revenue Procedure was promulgated without notice-and-comment pursuant to Section 4 of the Administrative Procedures Act, 5 U.S.C. § 553?

(b)            For purposes of assessing the validity of the “physician” requirement, what was the agency’s rationale for (a) requiring that the statement be by a “physician” as opposed to another sort of medical professional, and (b) importing the definition of “physician” from a Medicare provision (42 U.S.C. § 1395x(r) (“a doctor of medicine … legally authorized to practice medicine and surgery”))? In regards to Medicare (its native context), the definition has the apparent purpose of restricting Medicare payments to certain persons. It is not immediately obvious why, in setting standards for proving a mental disability, an agency would require a statement by someone who is qualified to receive Medicare payments and is “authorized to practice medicine and surgery”.

Deference to Rev. Procs.

Of course, it is well-settled in the Tax Court that a Revenue Procedure that states no reasoning for a requirement gets no deference — not even Skidmore v. Swift & Co., 323 U.S. 134 (1944), deference.  See Exxon Mobil Corp. v. Commissioner, 136 T.C. 99, 117 (2011) (“Because the pronouncement in Rev. Proc. 99-43, supra, that [for interest netting to apply] both periods of limitation must be open is unaccompanied by any supporting rationale, it is not entitled to [even Skidmore] deference and does not provide a basis for resolving the issues before us.”).

“Physician” in 42 U.S.C. § 1395x(r) includes more individuals than the “doctor of medicine or osteopathy” under its paragraph (1) — who are the only kinds of medical professionals eligible to submit the Rev. Proc. written statement.  The term “physician” at subsection (r) also includes (at later paragraphs thereunder) doctors of dental surgery or dental medicine, doctors of podiatric medicine, doctors of optometry, and licensed chiropractors. None of these other health professionals, although “physicians” for Medicare purposes, may submit the Rev. Proc. written statement. However, even if the Rev. Proc. were expanded to allow written statements from all the other people listed under subsection (r), that subsection’s definition of “physician” currently does not include “clinical psychologists”. Medicare does contain definitions of “clinical social worker” and “clinical psychologist” at 42 U.S.C. § 1395x(hh) and (ii), but those professionals are not treated as “physicians” under Medicare.

Regardless of whether the IRS actually could find a reason for cross-referencing a subset of the definition of “physician” in Medicare, that Rev. Proc. limitation should be rejected, since the IRS has apparently failed to consider why it should reject the less strict procedures to prove disability applied in the SSDI context and other contexts.  The SSDI requirements and requirements in other contexts will be discussed in tomorrow’s post, together with suggestions for improving and replacing the current Rev. Proc. governing financial disability. But, the judge’s March 20 order has at least already resulted in the IRS conceding Ms. Kurko’s right to benefit from § 6511(h), notwithstanding her non-compliance with the Rev. Proc. A stipulated decision in the Kurko case was entered on June 18, 2015. Although the Tax Court lacks jurisdiction in CDP cases to find an overpayment, in a stipulation below the judge’s signature in the decision, the IRS and Ms. Kurko agreed that there was an overpayment for 2008 in the amount sought by Ms. Kurko ($8,560) and that the overpayment was not barred by § 6511.


Contrasting the Compromise Standards between the Chief Counsel, IRS and the Department of Justice in Litigated Cases

We have discussed different aspect of offer in compromise (OIC) policy before in the blog (see posts here, here, and here); however, we have not discussed the difference in policy between the IRS and the Department of Justice Tax Division (DOJ Tax) when it comes to settlement of cases. When the IRS litigates in Tax Court to determine a taxpayer’s correct liability, Chief Counsel, IRS serves as its counsel. When the IRS litigates in other contexts, DOJ Tax serves as its counsel (see previous post about this here). Even though both offices have tax litigators seeking to represent the IRS, the offices take different approaches when it comes to their approach to settling a case.

This discussion has some crossover with the discussion on the IRS policy concerning applicability of collection to the assessment of taxes. Does it make sense to devote resources to trying a case when the taxpayer has little or no ability to pay the tax should the government win the case. In many of the cases coming into the Tax Court the IRS has invested almost no resources in proposing the assessment. It has simply sent the taxpayer a computer generated letter and maybe a relatively low graded correspondence examiner has spoken to the taxpayer or reviewed mail sent by the taxpayer. The relatively high graded attorney and the Appeals Officer face the prospect of spending far more time than the examination division did in creating the case all to produce an assessment that will simply sit in the every growing inventory of the understaffed Collection Division.


Chief Counsel will settle a case based on the merits of the issue(s) presented but will almost never look at the ability of the taxpayer to pay the tax. Even in a situation in which the effort to try the case to determine the liability might require significant resources and the likelihood of ever collecting much, if any, of the liability should assessment occur, Chief Counsel attorneys generally close their eyes to the collection potential of the case because of their office policy.  The manual provision (IRM 35.2.6(1)) giving guidance to Chief Counsel employees provides “It is preferable that all settlements be effectuated by a merits settlement rather than upon the basis of inability to pay. This general guideline is applicable even though there may be a substantial basis for concluding that the petitioner may not be able to pay the agreed deficiency. In this instance, the case should be settled on its merits, and if the petitioner is unable to pay such deficiency, he can later file an offer in compromise based upon doubt as to collectability.” Most Tax Court cases result in a settlement or a trial, during which the IRS assesses the taxpayer; moreover, the taxpayer can file an offer in compromise only after an IRS assessment.

In contrast DOJ Tax attorneys have the ability to settle cases based on the taxpayer’s ability to pay the liability at issue. According to DOJ Settlement Reference Manual, Section V.A.1, “[e]ven though the Government may have a strong case on the merits, absent other considerations, Government lawyers should not expend substantial resources to obtain an uncollectible judgment. Instead, it may be more efficient to negotiate a collectability settlement.”  When the IRS refers a case to DOJ for DOJ to handle, the ability to settle the case also travels to DOJ.  Under  IRC 7122(a), the Attorney General has the authority to settle a refund or other suit at any stage of the proceeding after the suit has been referred to the Department of Justice. “The Attorney General has the inherent power to compromise any litigation in which the Department of Justice represents the United States;”

According to one author, David J. Herzig, writing “Justice for All: Reimagining the Internal Revenue Service,” this broad power “afford[s] the Department of Justice the opportunity to settle a case for reasons of strategy rather than solely on the merits.” The IRS acknowledges that once it has referred a case to DOJ, the referral gives DOJ full authority to settle cases.  IRM  discusses the authority of DOJ to consider settlements based on collectability, regardless of whether the case has been classified as “S.O.P.”

As the IRS refers cases to DOJ, it generally classifies them SOP or Standard.   If classified SOP, Settlement Option Procedure, the IRS essentially says to DOJ no need to consult with us if you want to settle the case.  If the IRS classifies the case Standard, the IRS classification essentially requests DOJ consult with the IRS in settling the case.  The consultation, however, is somewhat one-sided in that DOJ can ignore the wishes of the IRS and settle in whatever manner it deems appropriate because it has sole authority to settle.  This does not mean DOJ ignores the IRS because it does not but it does mean that the views of the IRS on the outcome of a case do not bind DOJ in its decision to settle on whatever basis it deems appropriate.

Why does Chief Counsel adopt the policy of ignoring collectability in pursuing litigation at a time of limited resources while DOJ Tax exercises discretion in pursuing cases where it perceives that doing so would not result in the collection of tax should it succeed? In giving up the bankruptcy SAUSA work, Chief Counsel acknowledged that its resources are stretched very thin. The policy the IRS has adopted in TFRP cases to consider collectability in determining whether to assess could equally apply to settlements reached by Chief Counsel attorneys. It has precedent for changing its approach in the policies of its client and in the policies of its counterparts at DOJ. Yet, in the face of severely dwindling resources, Chief Counsel’s office continues to move cases into litigation without taking into consideration the ability of the IRS to collect the assessments it has spent many hours to create.

Perhaps it is time for Chief Counsel’s office to reconsider its policy to litigate cases in which the prospects of collection appear low or non-existent. In a small number of cases, it will wrap up litigation with an offer in compromise. Guest blogger Erin Stearns will discuss that rarely used process in an upcoming post. If Chief Counsel’s office got its client to work with it in identifying clients with little prospect of collection, it could work settlements similar to DOJ and perhaps achieve a greater number of settlements resolving the collection issue at the same time as the assessment. Given the resource issues it faces, it may be time to rethink its approach to tax merits litigation.