Lippolis v. Commissioner: Tax Court Holds $2 Million Whistleblower Amount Limitation an IRS Affirmative Defense

In today’s guest post we welcome back Carlton Smith, who writes on yesterday’s important Tax Court Lippolis decision discussing the nature of the $2 million threshold amount limitation in whistleblower matters. Les

For the past decade, the Supreme Court — in a series of non-tax opinions — has been trying to cut back on the overuse (including its own overuse) of the term “jurisdictional”.  With one significant exception (which I will note below), the Tax Court has largely ignored these new Supreme Court restrictions on what is “jurisdictional”.  Pointedly, the Tax Court has not reexamined whether, in light of the recent Supreme Court case law, any of its prior holdings that time periods or other mandatory rules are jurisdictional need modification.  In the recent case of Lippolis v. Commissioner, 143 T.C. No. 20 (11/20/14), the Tax Court has finally applied this non-tax Supreme Court case law and found that a $2 million threshold amount limitation in a whistleblower case is not one that, if missed, results in the dismissal of the case for lack of jurisdiction.  Rather, the court holds that the threshold is non-jurisdictional and one that the IRS must plead as an affirmative defense on which the IRS will have the burden of proof.  Could Lippolis be the trigger for reexamination of the Tax Court’s other, older “jurisdictional” holdings under its non-whistleblower jurisdictions?



First, why does it matter whether a requirement is jurisdictional or merely a fact to prove to win a case?   As the Supreme Court sees it:

This question is not merely semantic but one of considerable practical importance for judges and litigants. Branding a rule as going to a court’s subject-matter jurisdiction alters the normal operation of our adversarial system. Under that system, Courts are generally limited to addressing the claims and arguments advanced by the parties. Courts do not usually raise claims or arguments on their own. But federal courts have an independent obligation to ensure that they do not exceed the scope of their jurisdiction, and therefore they must raise and decide jurisdictional questions that the parties either overlook or elect not to press.

Jurisdictional rules may also result in the waste of judicial resources and may unfairly prejudice litigants. For purposes of efficiency and fairness, our legal system is replete with rules requiring that certain matters be raised at particular times. Objections to subject-matter jurisdiction, however, may be raised at any time. Thus, a party, after losing at trial, may move to dismiss the case because the trial court lacked subject-matter jurisdiction. Indeed, a party may raise such an objection even if the party had previously acknowledged the trial court’s jurisdiction. And if the trial court lacked jurisdiction, many months of work on the part of the attorneys and the court may be wasted.

Because the consequences that attach to the jurisdictional label may be so drastic, we have tried in recent cases to bring some discipline to the use of this term. We have urged that a rule should not be referred to as jurisdictional unless it governs a court’s adjudicatory capacity, that is, its subject-matter or personal jurisdiction. Other rules, even if important and mandatory, we have said, should not be given the jurisdictional brand.

Henderson v. Shinseki, 131 S. Ct. 1197, 1202 (2011) (holding a 120-day time period to file in the Article I Court of Appeals for Veterans Claims non-jurisdictional; citations omitted).

In Arbaugh v. Y & H Corp., 546 U.S. 500 (2006), the Supreme Court had before it a Title VII employment discrimination suit.  The case had been tried before a magistrate, and the plaintiff had won a judgment.  Only later did the defendant move to dismiss the case on the ground of lack of jurisdiction.  The basis for the motion was that, to be covered by the Title VII rules, an employer must have 15 employees, and the defendant, for the first time now, argued that it did not have 15 employees.  After investigating the status of certain workers, the district court reluctantly agreed that the employer did not have 15 workers and, since the Circuit court had called the 15-employee limitation “jurisdictional”, the suit had to be dismissed at this late date.  The Supreme Court reversed, finding that the 15-employee limitation was not jurisdictional.  Setting up a rule that it called a “readily administrable bright line”, the Court wrote:  “If the Legislature clearly states that a threshold limitation on a statute’s scope shall count as jurisdictional, then courts and litigants will be duly instructed and will not be left to wrestle with the issue. But when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character.”  Id. at 515-516 (citations omitted).  In effect, the Court created a presumption that statutory requirements are not jurisdictional, which presumption can be rebutted by Congressional language or structure.  Among the reasons that the Court found the 15-employee rule not jurisdictional was that Congress placed the rule in a different section of the law than the jurisdictional grant to the courts.

Whistleblower Award Rules

With this background in mind, let’s turn to the whistleblower award rules.  There has long been a provision in the IRC — currently at section 7623(a) — for the IRS to grant discretionary awards to whistleblowers.  In 2006, Congress supplemented this provision by adding a subsection (b) creating mandatory awards in certain cases.  Under paragraph (b)(1), mandatory awards may range from 15 to 30 percent of what the IRS collected (tax, interest, and penalties).  Under paragraph (b)(2), the award percentage can be no more than 10 percent if the information was all derived from public sources (e.g., court records or news media).  Paragraph (b)(3) authorizes the IRS to reduce the award for any whistleblower who planned and initiated the action leading to the underpayment and to completely eliminate the award if the whistleblower was criminally convicted concerning the underpayment.

Sections 7623(b)(4) and (5) provide:

(4)  Appeal of award determination. Any determination regarding an award under paragraph (1), (2), or (3) may, within 30 days of such determination, be appealed to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).

(5)  Application of this subsection. This subsection shall apply with respect to any action– (A) against any taxpayer, but in the case of any individual, only if such individual’s gross income exceeds $ 200,000 for any taxable year subject to such action, and (B)  if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $ 2,000,000.

The Lippolis Case

In the Lippolis case, the whistleblower provided information that resulted, the IRS said, in collection of $844,746.  The IRS sent Mr. Lippolis a letter saying that he was not entitled to an award under subsection (b), but the IRS was granting him a discretionary award of 15 percent under subsection (a).  Mr. Lippolis filed a petition in the Tax Court within 30 days of the letter.  In it, he argued that the IRS, in fact, collected more than $844,746, and he was due an award of greater than 15 percent under subsection (b).  The IRS moved to dismiss the case for lack of jurisdiction, asserting that only $844,746 was collected, so the paragraph (5) requirement in subsection (b) that the amount in dispute exceed $2 million was not met.

Citing the post-2005 non-tax Supreme Court opinions Henderson v. Shinseki; Arbaugh v. Y & H Corp.; Gonzalez v. Thaler, 132 S. Ct. 641 (2012); and Reed Elsevier, Inc. v. Muchnick, 559 U.S. 154 (2010), Tax Court Judge Colvin easily resolved the issue of whether the $2 million limitation was jurisdictional.  The court noted that paragraph (5) did not speak in jurisdictional terms.  About the only question was whether the proximity of the paragraph (5) limitation to the paragraph (4) jurisdictional grant suggested a different result.  As noted above, the Supreme Court in Arbaugh (as it has in other cases) has pointed out that by placing a requirement in a separate section of the U.S. Code from the jurisdictional grant, Congress indicates that it does not want the requirement to be treated as jurisdictional.  But, as the Tax Court noted, in Gonzalez, the Supreme Court has also said that “[m]ere proximity will not turn a rule that speaks in nonjurisdictional terms into a jurisdictional hurdle”.  132 S. Ct. at 651.  Accord Sebelius v. Auburn Regional Medical Center, 133 S. Ct. 817, 825 (2013) (“A requirement we would otherwise classify as nonjurisdictional . . . does not become jurisdictional simply because it is placed in a section of a statute that also contains jurisdictional provisions.”).

After finding the $2 million limitation not jurisdictional, the Tax Court moved on to how it would require the parties to litigate the limitation amount issue.  First, the Tax Court held that the amount requirement, like pleading the statute of limitations, was an affirmative defense, which the IRS must plead in its answer under Rule 39.  This conclusion was based on practicalities and fairness, since the IRS might be the only party in possession of all the relevant facts.  Second, the court held that the IRS would have the burden of proof on the issue of whether $2 million or less had been collected.  Why?  Well, the party pleading an affirmative defense usually has the burden of proving it. But, also, “[I]t would be unduly burdensome to require the whistleblower to provide or perhaps even know of the existence of” what may be confidential taxpayer information or records.  Sip op. at 12.

After denying the IRS’ motion to dismiss, the Tax Court gave the IRS 60 days to amend its answer to plead the affirmative defense and “to include allegations of fact supporting the amendment to the answer”.  Slip op. at 14.


Some observations:

The Tax Court has a number of jurisdictions — many of which were only granted in the last 20 years.  In only one other opinion that I know of has the Tax Court discussed any of the recent Supreme Court non-tax case law on what is jurisdictional.  That opinion is Pollock v. Commissioner, 132 T.C. 21 (2009), where Judge Holmes faced the issue of whether the 90-day period in which to file a stand-alone innocent spouse case under section 6015(e)(1) was subject to equitable tolling (as a district court judge had held with respect to the taxpayer in a related case).  In Irwin v. Department of Veterans Affairs, 498 U.S. 89 (1990), the Supreme Court held that there is a rebuttable presumption that non-jurisdictional time periods (a/k/a statutes of limitations) in the U.S. Code are subject to equitable tolling.  But was section 6015(e)(1) jurisdictional?  Section 6015(e)(1) provides:

(1)  In general. In the case of an individual against whom a deficiency has been asserted and who elects to have subsection (b) or (c) apply, or in the case of an individual who requests equitable relief under subsection (f)–

(A)  In general. In addition to any other remedy provided by law, the individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section if such petition is filed–

(i)  at any time after the earlier of–

    (I)  the date the Secretary mails, by certified or registered mail to the taxpayer’s last known address, notice of the Secretary’s final determination of relief available to the individual, or

    (II)  the date which is 6 months after the date such election is filed or request is made with the Secretary, and

(ii)  not later than the close of the 90th day after the date described in clause (i)(I).


Judge Holmes held that section 6015(e)(1) spoke in jurisdictional terms, and so, citing a few Supreme Court opinions (some recent and some not), he held the time limit to file to be jurisdictional.  “The most important point to notice is that the Code here actually uses the word ‘jurisdiction’ — giving us ‘jurisdiction’ if someone files her petition within the 90-day time limit.  Statutes granting a court ‘jurisdiction’ if a case is filed by a stated deadline look more like jurisdictional time limits.”  132 T.C. at 30.  Judge Holmes also noted that the language of section 6015(e)(1) was similar to the Tax Court’s CDP appeal jurisdiction language at section 6330(d)(1), which provides: “The person may, within 30 days of a determination under this section, appeal such determination to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).”  He noted that the Tax Court in Boyd v. Commissioner, 124 T.C. 296, 303 (2005), affd. 451 F.3d 8 (1st Cir. 2006), and Jones v. Commissioner, T.C. Memo. 2003-29, had held that section 6330(d)(1)’s time limit is jurisdictional and is not subject to tolling.  Both provisions similarly include a parenthetical jurisdictional grant within a sentence that otherwise merely sets a time limit in which a person “may” file a Tax Court petition.  He thought a similar holding, therefore, was required for both sections 6015(e)(1) and 6330(d)(1) time limits.

Unfortunately for Judge Holmes’ ruling in Pollock, he did not have the benefit of even more recent Supreme Court case law such as Henderson, in which the Supreme Court stated: “Among the types of rules that should not be described as jurisdictional are what we have called ‘claim processing rules’.  These are rules that seek to promote the orderly progress of litigation by requiring that the parties take certain procedural steps at certain specified times.  Filing deadlines, such as the 120-day filing deadline at issue here, are quintessential claim-processing rules.”  131 S.Ct. at 1203.  The Supreme Court has, essentially, recently created a rebuttable presumption that time limits are not jurisdictional.  It may still be that the parenthetical grants of jurisdictions within section 6015(e)(1) and 6330(d)(1) are considered Congress’ instruction to treat the time limits as jurisdictional (i.e., rebutting the presumption), but there is now some doubt as to this proposition, since, as noted above (and relied upon by Judge Colvin in Lippolis), the Supreme Court has more recently stated: “Mere proximity will not turn a rule that speaks in nonjurisdictional terms into a jurisdictional hurdle”.  Gonzalez, 132 S. Ct. at 651.  The Supreme Court has not yet had a case where a jurisdictional grant was inserted parenthetically in a time period in which to file.  The issue of whether the time limits of 6015(e)(1) and 6330(d)(1) are themselves jurisdictional is now a much closer question than it was when Pollock was decided.

Pollock‘s reliance on Boyd and Jones is also likely misplaced, as both those opinions did not discuss any recent Supreme Court case law and simply imported what the Tax Court had before said about the 90-day period in which to file a petition in a deficiency action.  Statements about what was “jurisdictional” in the old days were often made casually (i.e., if it was mandatory, it must be jurisdictional) and based on a now-outmoded view of construing, in a limited fashion, waivers of sovereign immunity where procedural issues are at stake.  I am not here arguing that the 90-day period in section 6213(a) is not jurisdictional.  I believe it still is jurisdictional, but only because Congress did not want late petitions to preclude paying and suing for a refund in district court, not because the language of the time limit is mandatory.

The Tax Court has also held that the 30-day time limit in section 7623(b)(4) is jurisdictional and not subject to equitable tolling.  It did so in Friedland v. Commissioner, T.C. Memo. 2011-90.  But Friedland did not cite or discuss any of the recent Supreme Court non-tax case law on jurisdiction.  It simply cited old Tax Court deficiency jurisdiction opinions and the Boyd CDP opinion for holding that the 30-day period is jurisdictional.  Since the jurisdictional grant of the whistleblower jurisdiction is also simply a parenthetical within a time limit, I am not so sure that Friedland is right, either.

Courts of Appeals have been faster than the Tax Court in relying on this recent non-tax Supreme Court case law to decide the jurisdictional nature of requirement in tax statutes.  For example, the D.C. Circuit (the Circuit to which all whistleblower cases are appealable under the flush language of section 7482(b)(1)) has held that, in light of Henderson, the two-year period in section 7433 in which to file a district court suit for damages for unauthorized collection actions is not jurisdictional.  Keohane v. United States, 669 F.3d 325, 330  (D.C. Cir. 2011).  Section 7433(a) grants jurisdiction for the suit, but section 7433(d)(3) states:  “Notwithstanding any other provision of law, an action to enforce liability created under this section may be brought . . . only within 2 years after the date the right of action accrues.”  Citing and discussing Henderson and other non-tax cases, the Fifth Circuit, by contrast, has held that the 150-day time period for partners to bring TEFRA partnership suits in Tax Court under section 6226 is jurisdictional.  A.I.M. Controls v. Commissioner, 672 F.3d 390, 393-395 (5th Cir. 2012).

 Final Observations on Jurisdiction and Tax

Some final observations on “jurisdiction” and tax cases:  I have blogged before on the case of Volpicelli v. United States, currently pending in the 9th Circuit. The issue in that case is whether the 9-month period in section 6532(c) to file a wrongful levy suit is jurisdictional or otherwise a non-jurisdictional statute of limitation subject to equitable tolling under the presumption in Irwin. In the briefs, the parties all rely on the non-tax Supreme Court case law in arguing their respective positions.  The oral argument happened on October 7.  While, from the statements of the judges at oral argument, I now expect that the 9th Circuit will hold the time period both not jurisdictional and subject to tolling, it is likely that the court will first, before ruling, await the opinions in the most recent Supreme Court cases to face the jurisdictional and equitable tolling issues. I have also blogged before on those Supreme Court cases, Wong and June, which will have their Supreme Court oral arguments on December 10.  In those cases, the issue is whether two different time periods in the Federal Tort Claims Act (i.e., the 2-year period in which to file an administrative claim and the 6-month period after claim disallowance to bring a district court lawsuit) are jurisdictional or subject to equitable tolling.  A ruling that the 6-month period is tollable would likely lead a court of appeals in a later case to hold that the 2-year period at section 6532(a) to file a tax refund lawsuit is also not jurisdictional and is subject to tolling — a complete reversal of all case law so far on this time limit (though that case law almost all pre-dates 2000).

So, there is much currently happening on the issue of what is jurisdictional.  It is great that the Tax Court in Lippolis has started catching up on non-tax developments.  Now there may be more developments to come in the tax area holding mandatory requirements (time periods or otherwise) not to be jurisdictional.  I’m happy to see that the Tax Court has finally caught the wave.

International Collection Efforts by the IRS – Expanding the Number of Treaties in which We Have Collection Language    


The United States has treaty language that allows us to work with the taxing authorities in other countries to collect U.S. taxes owed from U.S. Citizens or their property located in those countries and to allow those countries to have IRS collect from their citizens or property located in the U.S.  (For an example of the treaty language used to effectuate bilateral assistance and support in collecting tax, see U.S.-France Income Tax Treaty, Article 28).  In the countries where this treaty language exists, U.S. collection officials initiate the contact with the treaty partners though the competent authority to request that the collection officials in the treaty country take action to collect the unpaid taxes from the assets available in their country.  Currently, the U.S. has this treaty language allowing collection with only five countries – Canada, France, Holland, Denmark and Sweden.  The treaties containing this language were written long ago and the U.S. has not sought to insert this language into treaties in the recent past (For a brief discussion of the history of this treaty language, see Brenda Mallinak, , 16 Duke J. Comp. & Int’l L. 79, 94 (2006)).

As I was writing this post, I received a Treasury Inspector General for Tax Administration (TIGTA) report, Reference Number: 2014-30-054 dated September 12, 2014.  I want to talk about that report and how I think it highlights the problems in international collection while missing the mark because it fails to address the gaping hole in our treaty language as a major source of improving international collection.


The TIGTA report looks at the international collection efforts of the IRS and finds them lacking.  I agree with the conclusion but find that blaming the IRS collectors badly misplaces the blame for the failures in this area.  Congress makes a lot of noise about offshore issues and has implemented some reasonably good legislation to seek to improve matters on the liability side while doing almost nothing to assist IRS collectors in their efforts to put money into our coffers that has moved overseas.  Similarly, Treasury makes a lot of noise about offshore liability issues but has not aided the problem because it has not moved to put collection language into treaties leaving IRS collectors with meager remedies to seek to collect from persons keeping themselves and their assets offshore.  The TIGTA report does not to address the structural problems with the offshore collection system.  Without structural changes the IRS collectors will continue to experience frustration and obtain victories on the margins while losing the battle to those parking themselves and their assets out of the reach of the IRS given the current legal situation.

As the world has gotten smaller and as the movement of people and assets offshore has become routine, the IRS finds itself in a situation not unlike creditors seeking to collect when the Articles of Confederation rather than the Constitution existed.  One of the big reasons for ditching the Articles and moving to the Constitution stemmed from the inability of creditors to collect from persons moving from one state to another.  We now face that situation on a more global level.  We have recognized it over the past fifteen years in the area of finding the money parked offshore in tax havens but we have not yet addressed it in the collection area.

The TIGTA report spends most of its energy talking about failures of vision and implementation in the IRS collection division with respect to its international collection efforts.  I will return to that but want to point out that despite the failures discussed in the report, the 40 or 41 International Revenue Officers collected over $53 million in both fiscal years.  Without knowledge of how the amounts reported were calculated, this seems like a great return on investment for the very small number of people working these cases and a much higher return than normal for dollars invested with the IRS.  Without more context, however, it is impossible to know if this $53 million collected in the past two years is a significant, or I suspect, insignificant amount of the total dollars that might have been collected from citizens and assets parked offshore.

TIGTA criticizes the IRS for a lack of management oversight, the lack of a legitimate strategy and poor procedures and policies for the revenue officers attempting to collect.  While these criticisms undoubtedly have some merit, TIGTA offers little guidance on how the revenue officers might better perform the task of collecting where the money and the taxpayer sit offshore.  Better policies and better training can only do so much when the structure of the system stymies the IRS collection efforts at every turn.

In domestic collection the IRS can file the notice of federal tax lien against the delinquent taxpayer and cripple the person’s credit rating.  It can levy on assets it identifies and obtain property without having to work through a court or through another agency.  Those types of collection efficiencies do not exist for the international collection efforts and may never exist but if international collection has a chance of becoming more efficient, it needs a structure that keeps people from avoiding collection simply by moving themselves and their assets offshore.  If the Government has serious intentions of collecting delinquent taxes from persons moving themselves and their money around the globe, it needs to look to multilateral efforts to solve the problem and not try to go it alone squeezing marginal gains out of an understaffed group of revenue officers.

The TIGTA report mentions the one “easy” collection tool available for collecting taxes from individuals who have parked their money and their assets overseas – the “Customs Hold.”   The report explains this devise as follows:

 International revenue officers can request that a Customs Hold be input into the Treasury Enforcement Communication System (TECS) for delinquent taxpayers.  Once the taxpayer is on the TECS, the U.S. Department of Homeland Security (DHS) notifies the IRS whenever the taxpayer travels into the United States.

The TECS is a database maintained by the DHS and is used extensively by the law enforcement community.  Taxpayers are informed with a Letter 4106, Letter Advising Taxpayer of Department of Homeland Security Notification, that an international revenue officer has taken action to advise the DHS that the taxpayer has outstanding tax liabilities and that this may result in an interview by a Customs and Border Protection Officer if the taxpayer attempts to enter the United States.  There is a Memorandum of Understanding [create link to memo] between the IRS and the DHS that allows Customs and Border Protection Officers to stop delinquent taxpayers identified on the TECS to collect their contact information of where they will be staying while in the United States.

According to the TECS Coordinator, the international revenue officer must submit a completed Form 6668, TECS Entry Request, to have a Customs Hold placed on a taxpayer.  The form is sent to the group manager for a signature and e-mailed to the TECS Coordinator.  The TECS Coordinator maintains a spreadsheet to document taxpayer added to or deleted from the TECS.  According to the Spreadsheet there are approximately 1,700 taxpayers on the TECS with approximately $1.6 billion in delinquent tax assessments.  This includes assessments of approximately $1.1 billion solely owed by international taxpayers.

In an earlier post I wrote about the writ ne exeat.  This is a labor intensive option available to the IRS to seek to stop a taxpayer from leaving the country with their money.  The taxpayer discussed in that case was stopped at the border undoubtedly because of a “Customs Hold” as he sought to return to the United States while taxes remained unpaid.  That example demonstrates part of the power of the “Customs Hold” but does not tell the whole story.  Just because someone gets stopped as they seek to reenter the U.S. and sent to a little room off in the corner of an airport does not mean that they will pay the tax or that they will be held in the little room for a long period of time.  Holding individuals as they seek to return to the U.S. no doubt raises revenue but it only works if the individual seeks to return and only when the hold itself proves effective as a means for convincing them to pay.

It is time to expand the list of countries with whom we have collection treaties, to make it a regular part of our bilateral treaties or to begin an effort to make cross border collection of taxes a part of a multilateral effort.  The international revenue officers have only labor intensive tools that rely on the taxpayer living in one of five countries or returning to the U.S.  Their arsenal of weapons no longer matches the ability of individuals to move themselves and their money.  The TIGTA report may have found problems in the operation of the current program but misses the overall problem.  If we want to collect globally we need to ban together with other countries the way we have done with FATCA.  Trying to catch these individuals one by one as they return to the country does not solve the problem.



Successfully Bringing a Bivens Case is Not Easy

In Bivens, the Supreme Court created a small window by which an individual harmed by the action of a federal agent could personally sue the agent and get past a motion to dismiss based upon the immunities which protect government agents. Only a small number of Bivens cases get filed against IRS employees.  A much smaller number make it to trial.  On October 29, 2014, the District Court for the Southern District of West Virginia, in Brodnik v. Lanham struck down an attempt to hold an IRS special agent personally liable under the basic theory that the agent had wrongfully pursued prosecution of Mr. Brodnik.

The case caught my eye because the background facts stated that the criminal investigation of Mr. Brodnik went on for six years. Criminal cases move slowly but six years stretched those time frames well beyond the norm.  That time period stretches the investigation beyond the statute of limitations for prosecution normally applicable.  The opinion does not provide an answer to that riddle but does make clear that Mr. Brodnik was acquitted on all counts.  After the acquittal, Mr. Brodnik’s dissatisfaction with the IRS turned into this suit against the special agent and the IRS.  While the now dismissed Bivens count will receive attention here, the case lives on as a wrongful disclosure case.


Mr. Brodnik alleged that the special agent testified at trial that “it was debatable that Brodnik had broken the law.” Wow.  I never worked with a special agent who had much doubt that the taxpayer under investigation broke the law.  I have not seen the transcript but wonder if that quote is similar to the quotes on all of the campaign ads on TV one must endure if trying to watch a TV in the weeks before an election.

In addition Mr. Brodnik alleged that the special agent sent in a third party to illegally access Brodnik’s electronic mail and give it to him. Mr. Brodnik alleged that Ms. Beck illegally accessed Mr. Brodnik’s email and sent print outs of the messages to Mr. Lanham.

Mr. Lanham discussed one such email in his conversation with Mr. Brodnik’s wife, where he told her “that a letter was found in the search warrant records where a client of [Mr. Brodnik’s business partner] had stated he got into the employee leasing program to save taxes through loans. [Mr. Lanham] said the client wrote in the letter that there would be no record of the letter on his computer or in his files.  The client also wrote that he was mailing the letter to avoid any electronic trail of it.  [Mr. Lanham] explained that an e-mail from the Blenheim Group outlined how the AEL loans worked.  [Mr. Lanham] told [Mrs. Brodnik] that the e-mail started out that they usually did not discuss this, but went on in detail using the names of a trust and the name of a client to explain how it was done.”

At issue in the opinion is whether these allegations allow Mr. Brodnik to personally sue a government employee despite the shield of absolute or qualified immunity that exits for such employees. When I worked for Chief Counsel, IRS, I was personally sued a few times.  When the plaintiff included federal district court judges as co-defendants with me, I felt especially comfortable with the likely outcome.  The plaintiffs in my cases were always individuals who would have been called tax protestors by the IRS prior to 1998.

Special Agent Lanham, however, was not sued by a tax protestor but by an angry defendant who had specific allegations of Mr. Lanham’s wrongdoings. Before getting to the issue of whether these alleged wrongdoings actually occurred, Mr. Brodnik first has to survive a motion to dismiss for failure to state a claim.  Because of the immunities given to federal employees, Mr. Brodnik faced a very difficult task.

The District Court states that “a Bivens action is a judicially created damages remedy which is designed to vindicate violations of constitutional rights by federal actors.” The person seeking to recover in a Bivens case must show the “violation of a valid constitutional right by a person acting under color of federal law.”  In Saucier v. Katz the Supreme Court mandated a two-step sequence for resolving the qualified immunity claim in these cases.  First, do the plaintiff’s claims make out the violation of a constitution right and second, was the right alleged “clearly established” at time of misconduct.  The federal official must have violated a clearly established constitutional right.

The Supreme Court looked at the issue again in 2009 in the case of Pearson v. Callahan in which it stated that lower courts have discretion to decide which of the two Saucier prongs to address first.  The plaintiff must show that the unlawfulness of the conduct was apparent “in light of preexisting law.”  The plaintiff must also show that an objective reasonable federal official in circumstances similar to those facing the defendant in a Bivens case would have known that the conduct violated the law.  This knowledge must exist with respect to the specific conduct alleged and not in some abstract way.  The District Court found that the actions Brodnik alleged that the special agent committed could have violated several different constitutional rights and it listed several possibilities; however, it determined that Brodnik did not nail down the specific right violated.

The Court declined to speculate on the right Brodnik felt the special agent violated and without knowing that right it could not apply the specific conduct alleged to a right to determine if a Bivens action existed. Still, in dismissing the claim, it gave Brodnik the opportunity to amend the claim.  If Brodnik does not take the court up on that opportunity, it will surprise me.  Nonetheless, he has a difficult road to success.

IRS agents regularly make mistakes in carrying out their duties as do employees at other federal agencies and in private industry. When an IRS special agent has an individual under investigation for six years, if that allegation proves correct, it would put a serious strain on the individual under investigation.  During that period the agent will generally make contact with numerous third parties and will leave the impression that the individual has done something wrong just by virtue of the questions asked.  These impressions not only create personal stress but can also have a very negative impact on the individual’s business or employment.  In the First Amended Complaint, Mr. Brodnik sets forth the names of at least twenty-three individuals, including Mr. Brodnik’s family, friends, and professional associates, all of whom Mr. Lanham contacted and disclosed that Mr. Brodnik was under investigation.  Mr. Brodnik asserted that he suffered a foreclosure of his primary residence, loss of personal income, attorney fees, failure of his enterprise Mountain Haven Skin Center, additional cost for malpractice insurance, consultation fees, and other financial losses.

While Mr. Brodnik was the one who alleged injury from the IRS criminal investigation, Mrs. Brodnik also appears to have suffered from the lengthy investigation. During the investigation, it seems that Mr. and Mrs. Brodnik’s marriage fell apart and Mr. Brodnik requested a divorce.  Mrs. Brodnik was also wrapped up in the investigation, although from her conversation with Mr. Lanham, it appears that she had very little, if any, working knowledge of what her husband was doing.  Mr. Lanham’s report stated that “[s]he believes now that things may have intentionally been kept from her because of her husband wanting a divorce now.”  Mrs. Brodnik repeated several times during her conversation with Mr. Lanham that “her sister’s death had been very hard on her” and she was emotionally overwhelmed after the IRS searched her home.  Additionally, after the search, she noticed a pair of diamond and sapphire earrings were missing and she filed a report with the Bluefield Police Department, but she was afraid to contact anyone involved with the investigations because of her fear of retribution.  Mrs. Brodnik referred to the situation as “being up to your ass in alligators so you don’t worry about draining the swamp.”

Allegations of loss of business, dissolution of marriage, destruction of business reputation are common themes of those investigated by special agents.  Those types of allegations will not form the basis of a successful Bivens action since nothing sounds in constitutional deprivation.  I have included more details here than you may want or need to show the types of allegations made and the difficulty an individual will have in holding an IRS official personally liable even where the severe consequences of an investigation resulting in a not guilty determination gravely impact a person’s life.  The law must protect agents who make a wrong judgment on the legal consequences of a taxpayer’s actions as long as the agent’s actions do not cross the boundaries of appropriate investigative actions.

Here the special agent, or perhaps the agency, may have a ways to go to get out of the woods. The disclosure violation alleged to have occurred during the investigation appears headed to trial and could result in monetary relief for Mr. Brodnik.  This case demonstrates the difficulty in getting past the door with a Bivens case.  Getting past the door needs to be difficult.  At the same time, if the agent has made mistakes that cry for a remedy, a pathway for relief must exist.  This case does not raise significant issues but the outcome of the alleged disclosure violation may bear watching.




Living With Your Decisions: Delinquent Mortgage Debt

While not so much a procedure case, last month’s case of Copeland v Commissioner caught my interest, and does bring up a procedural issue in a way. It involves the deductibility of qualified residence interest. In Villanova’s graduate tax program and in law school, I have struggled (along with my students) with some of the cases that have disallowed deductions when individual taxpayers have borrowed additional money to pay back interest on a delinquent loan.  Courts and IRS put the kibosh on deductions when the new loan comes from the same lender as the old delinquent loan; the theory in those cases is that the taxpayer has not really gone out of pocket and that there is just a shuffling of papers.

On the other hand, if a taxpayer gets a new loan from an unrelated party, and uses those borrowed funds, the courts and the IRS have generally allowed the deduction. Economically, there is not much difference (after all the borrower may just as well not pay back the new lender), but form matters, at least some of the time. That takes us to the Copelands, and how sometimes the form chosen may produce an unfortunate tax outcome.


First, some facts:

Petitioners are cash basis taxpayers. In 1991 they purchased a residential property in Yucaipa, California, for $334,000. They financed this purchase with a $300,000 mortgage loan secured by the property. Petitioners have occupied this property as their home since 1991. In 2007 petitioners refinanced the Yucaipa property with a $600,000 loan from Gateway Funding Diversified Mortgage Services (GFDMS). This loan was likewise secured by a mortgage on the property. Bank of America subsequently acquired the GFDMS mortgage loan.

Like many other taxpayers in the great recession the Copelands had a hard time making ends meet and were behind with their creditors, including Bank of America. In 2010, they sought a modification from Bank of America:

This [modification] application was granted, and the terms of petitioners’ mortgage loan were permanently modified. The modifications included a reduction of the interest rate, a change in the payment terms, and an increase in the loan balance. Immediately before the modifications, the outstanding loan balance was $579,275; after the modifications, the new balance was $623,953. The difference (equal to $44,678) resulted from adding the following amounts to the loan balance: past due interest of $30,273, servicing expense of $180, and charges for taxes and insurance of $14,225.

In 2010, the Copelands sought to deduct the delinquent interest of $30,273 that became part of their new balance following the modification. IRS disallowed the deduction, and Copelands petitioned the case to Tax Court.

As Copeland discusses, cash basis taxpayers are generally not allowed a deduction, whether it is for interest or other items, when they make a mere promise to pay an obligation. Deductibility generally comes in the form of a cash transfer or a transfer of a cash equivalent.  When it comes to delinquent interest, (mostly post-86 Tax Reform Act in the form of qualified residence interest as other consumer interest is generally not deductible), a taxpayer facing back due mortgage interest cannot get a deduction when he executes a new note to the lender adding to the balance that is owed by the delinquent interest. The reason, as Copeland discusses, is that “the note may never be paid, and if it is not paid, the taxpayer has parted with nothing more than his promise to pay.”  (internal citations omitted)

Here, facing a modification of an existing debt, the Copeland court agreed with the IRS’s disallowance essentially due to the rationale discussed above:

Through the loan modification agreement, the $30,273 in past-due interest on petitioners’ mortgage loan was added to the principal. No money changed hands; petitioners simply promised to pay the past-due interest, along with the rest of the principal, at a later date. Because petitioners did not pay this interest during 2010 in cash or its equivalent, they cannot claim a deduction for it for 2010. They will be entitled to a deduction if and when they actually discharge this portion of their loan obligation in a future year.

All this takes us to the procedural issue the taxpayer raised. Essentially, the taxpayers argued that they could have borrowed money from a new lender, and if they in fact used newly borrowed funds to pay delinquent interest, they would have been allowed the deduction.

[P]etitioners ask us to recharacterize their loan modification transaction. Instead of having modified the terms of their existing loan, petitioners say they should be treated as if they had obtained a new loan from a different lender and used the proceeds of that loan to pay both the principal of the Bank of America loan and the past-due interest.

The court did not accept the taxpayers’ argument. In addition to noting that its actual transaction was not the same as a new loan (and taking issue with whether they “could have obtained a $623,952 loan from a different lender, given the economic environment prevailing in 2010”), the killer for the Copelands was that they made their bed and had to lie in it:

In any event, it is well established that taxpayers must accept the tax consequences of the transaction in which they actually engaged, even if alternative arrangements might have provided more desirable tax results.

To that end, Copeland cites a 1977 Supreme Court case, Williams v Commissioner, which (citing to older Supreme Court cases) emphasized that a “taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not . . . and may not enjoy the benefit of some other route he might have chosen to follow, but did not.”


Copeland reminds us that once a taxpayer chooses a transaction, it is likely not going to succeed by showing how an economically equivalent transaction may result in a more favorable tax outcome. By choosing the wrong process the taxpayers got a result they did not want substantively.  Similar results can come when you choose the wrong procedure and argue that you should get a benefit that would have been available had you chosen another procedure.  Voluntary payment comes to mind.  If a taxpayer makes a payment and does not designate then the IRS will put the money where it wants even though had the taxpayer chosen to use the procedure of designation, he would have been able to put the money on another tax debt. Somewhat similarly though with much bigger numbers at stake, I discussed last month’s Ford decision where Ford made the choice of not designating a remittance as a payment and thus lost on its suit for additional overpayment interest.





TIGTA Report on ACS Details the Impact of Shrinking Budget on Tax Collection Efforts


On September 18, 2014, the Treasury Inspector General for Tax Administration (TIGTA) issued a report about ACS.  The title gives a good preview of the article, “Declining Resources Have Contributed to Unfavorable Trends in Several Key Automated Collection System (ACS) Business Results.”  The fact that ACS cannot perform as well when it loses a significant percentage of its staff does not rise to the level of shocking news but the report itself provides an interesting insight in the impact of the dwindling resources and how the IRS goes about shuffling the deck chairs in what appears at the moment a losing effort at keeping up with its workload.  The report does not suggest that a tipping point is near when the lack of resources will cause a major shift in voluntary compliance.


The report does a good job of describing ACS and how it fits into the collection system the IRS has developed. It occupies the second chair in a three part process:  1) the notice stream; 2) ACS; and 3) field collection.  The report talks about how the breakdown in ACS has, and will, continue to impact field collection and it makes some suggestions on how to lessen that impact if no resources appear on the horizon.  The descriptions and the statistics show the tough choices the IRS must make as it tries to meet workload demand in a time of significantly less resources.  Because of the reduction in staff, ACS no longer calls out to taxpayers seeking their compliance; it  has evolved into an organization that responds to calls from taxpayers receiving correspondence from the notice stream.  This description of the change in the work of ACS shows how the original goal of ACS – as a quick point of contact with delinquent taxpayers – no longer exists.  Its mission is to answer as many of the calls as it can but it cannot even cope with that mission.

The report contains several excellent charts displaying statistics on the actions of ACS. It has lost 24% of its workforce in the past three years (see Figure 2 below).  Because of issues with identity theft, the IRS has redeployed its smaller workforce to address that problem instead of using this workforce to cover as many collection cases as possible.  This, in turn, is driving some of the collection decision.  ACS issues less levies (see Figure 10 below) because it knows that when it issues levies the taxpayers will call.  I always thought that the reason for the levy was to get taxpayers to call who did not seem motivated to do so through correspondence.  The problem with having them call is that ACS then becomes overwhelmed.  The report states, “ACS management sometimes scales back issuing levies at a controlled rate in an effort to limit incoming calls to a manageable level.”

The report also details that more cases go into the Queue (see Figure 12 below). The Queue exists to warehouse collection cases no one can work.  Sending a case to the Queue does not mean that the IRS has given up on collecting the liability but just that it cannot pay attention to that case at the moment.  If the taxpayer files a refund return, the IRS will still offset the refund but absent having money fall into its lap or the taxpayer suddenly having a desire to pay the taxes about which many notices were previously sent, the taxpayer will simply not hear from anyone at the IRS while the case sits in the Queue.  A case could sit in the Queue for 10 years and then go away because of the statute of limitations on collection.  The report states that “ACS sent 12 percent more cases to the Queue during F& 2013 than during FY 2012.”

The problems in ACS and its inability to work cases impact field cases adversely simply because cases now take longer to reach the field (see Figure 7 below). I have read studies before finding that once a tax debt goes unpaid for two years the likelihood of the IRS collecting the debt dwindles to about 15%.  Now, cases do not get out of ACS to the filed until they have already aged past that point.

On average, a case is in the notice stream for nearly five months prior to entering ACS inventory. Cases that are not resolved by ACS can remain in ACS inventory for more than two years before being systemically routed to either the CFf (field collection aka revenue officers) or the Queue.  TDAs (tax delinquent accounts) that are routed to the Queue will have aged on average more than three years before being assigned to a revenue officer.  If and when these cases are eventually assigned to the CFf, they have aged and their collection potential has significantly decreased.

If revenue officers do not get cases until three years after assessment, they have a steep hill to climb to obtain payment. The original plan in creating ACS was to have speedy contact with taxpayers because quick collection means a much higher chance of success with collection.  Instead of the original plan, ACS now stands as a bar to quick collection and perhaps a bar to collection at all.  If staffing levels have fallen so far that ACS cannot do what it was designed to do and now serves as a drag on collection rather than a turbo charge, the time has come for redesign.

The report notes that the reduction in the filing of notices of federal tax liens as a result of changes a couple of years ago when the Freshstart initiate took place, may have really helped ACS (see Figure 11). After reading that ACS curtailed levy action to assist ACS responders, I almost got the feeling that those of us who thought we had done a successful job of lobbying for a better notice of lien filing policy only won because the IRS could not keep up with servicing the notices of federal tax lien filed at the lower level.

The report concludes with some dire remarks about the future of collection at the IRS. “[I]nventory continues to be routed to the ACS even when inventory cannot be worked.  When inventory is not worked or not worked timely, case dispositions may be adversely affected.  This may also have a substantial impact on the amount of Federal taxes that remain uncollected.”  The report urges IRS collection officials to align inventory routing with capabilities.  What will this mean?  If a case is headed to the Queue, routing it through ACS does not make too much difference to the action that will occur on that case.  It does not matter much if a case sits in the inventory of ACS or in the Queue if no one seeks to take affirmative action to collect.  From the taxpayer’s perspective, the location of the account between an inactive ACS and the Queue does not matter.

So, the IRS could shoot cases at Queue dollar levels straight to the Queue and not bother to load up the inventory of ACS. Because Queue dollar levels may stand at high levels, this could mean that accounts with less than $50,000 or $75,000 simply go straight to the Queue without sitting in ACS while ACS concentrates on quickly moving the higher dollar cases destined for revenue offices if ACS fails to collect.  To accomplish the direct move into the Queue, the IRS may have to raise to even higher levels the point at which it files the notice of federal tax lien or takes levy action.  Good news if you have a mid-level tax debt amount and bad news if you would like others to pay their fair share.

TIGTA reports often trouble me because they exhort the IRS to work better, faster, smarter and do not look at the system within which the IRS function works to see if better design could solve the problem more effectively. This report seems to acknowledge that the problem does not stem from the ACS not working efficiently and suggests a “better” system by suggesting a system that will move work out of ACS that cannot handle the volume in its current depleted state.  In the roughly 30 years of its existence, ACS has drawn much criticism.  If the IRS continues to shrink, ACS may simply cease to exist because it just gets in the way of collection and no longer has the ability to seek payment of tax from delinquent taxpayers.

















Reinhart Part II – Extending the Statute of Limitations on Collection by Virtue of Being Out of Country

In the first post on this case I discussed the CDP and lien issues presented.  Many of those issues seemed unusual or wrong in some way.  The meat of this case, however, lies in the application of the facts to the statutory suspension available where a taxpayer removes themselves from the country for six months.  This statute extension provision presents legal issues and Ms. Reinhart’s counsel challenged the regulation interpreting what it means to remove oneself from the country.  The case also presents factual issues.  In the end the Court decided the case on the facts without resorting to an analysis of the correctness of the regulation.  In this post I will examine the law, the facts, and the burden of proof.


The burden of proof issue adds a wrinkle to the case because of the procedural setting. The question raised by Reinhart concerns how, if at all, the burden of proof on a statute of limitations issue changes when a statute of limitations issue presents itself in the CDP context.  The IRS argued that the determination letter issued by Appeals in response to Reinhart’s CDP request was subject to an abuse of discretion review.  If correct, that would change the burden of production for the statute of limitations argument.  Reinhart argued that the burden of proof/burden of production issue, like an issue where petitioner contests the underlying tax, would have a de novo review.  The Tax Court agreed with Reinhart.

CCA 2014-002 states that “Counsel attorneys should argue in Tax Court CDP cases that a determination by Appeals about the validity of an assessment, the expiration of the assessment or collection statute of limitation, or other procedural requirements for administrative collection are determinations under sections 6320(c) and 6330(c)(1) reviewable for abuse of discretion.”  The notice acknowledges that some Tax Court opinions have decided that the phrase “existence or amount of the underlying tax liability” in the CDP provisions includes arguments regarding the statute of limitations and cites to five cases.  Then the Notice lists another five cases reaching the opposite conclusion.  Because Appeals must verify the statute of limitations has not yet expired as part of statutory charge, Counsel views the statute of limitations issue as one falling under the abuse of discretion standard.

In Reinhart, the IRS could hardly have chosen a worse case to test the position taken in the notice. The normal statute of limitation had long expired before the IRS decided to reopen this case.  The statute of limitations issue presented here is not only rare but particularly fact driven.  For the Tax Court to decide that the IRS could get past a difficult statute of limitation issue because the case came to it through the CDP door seems a stretch.  In some ways the IRS position here reminds me of the position it battled in bankruptcy court for two decades.  In bankruptcy cases, debtors argued that instead of the normal burden of proof in a tax case where the taxpayer has the burden that if a tax merits argument came up in a bankruptcy case the appropriate burden applicable was not the one used for tax merits litigation but rather the one used for objections to bankruptcy claims.  The Supreme Court rejected that argument in Raleigh v. Illinois Department of Revenue, 530 U.S. 15 (2000), holding that the nature of the issue before the court, rather than the particular forum, dictated the burden of proof.

Just as in Raleigh, the important issue in Reinhart is the nature of the issue before the court.  It should not matter that the statute of limitations issue has come to the court through the lense of a CDP case.  It should not matter that an IRS Appeals employee, in addition to the IRS employee in collection, decided that the statute of limitations on collection had not expired.  What matters is that the statute of limitations issue requires the party asserting an exception to the statute of limitations must prove the exception applies to the circumstances of the case.  Letting the IRS avoid the need to prove that simply because a second IRS employee, the Settlement Officer in Appeals, agreed with the first should not control this issue.

The Tax Court laid it out in simple, direct terms. The party raising the statute of limitations has an affirmative defense but must establish a prima facie case the collection period has expired.  Once the party, here the taxpayer, establishes a prima facie case, the burden of production then “shifts to the Commissioner to prove that an exception to the period of limitations applies.”  The IRS must prove that exception and not hide behind a determination of one of its employees.  The Tax Court held that a statute of limitations argument challenges the underlying liability and therefore give a de novo rather than abuse of discretion review to this issue.

After resolving the burden issue, the Court moved on to the real issue – did petitioner extend the statute of limitations by her actions? Section 6503(c) provides that “[t]he running of the period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period during which the taxpayer is outside the United States if such period of absence is for a continuous period of at least 6 months.”  Treasury regulation 301.6503(c)-1(b) explains what the statute means by providing, “The taxpayer will be deemed to be absent from the United States for purposes of this section if he is generally and substantially absent from the United States, even though he makes casual temporary visits during the period.”

“Generally and substantially absent” does not seem quite the same as continuously absent – at least not to Ms. Reinhart. She argued that the statute was not ambiguous and should be applied based on its plain meaning which is always out of the country for a period of six straight months.  The IRS argued that “continuous” does not necessarily mean “uninterrupted.”  Both positions leave open the question of when the suspension stops.  If Ms. Reinhart did spend six straight months out of the United States after the assessment and before the running of 10 years, when would the suspension stop?   How much U.S. presence would trigger an end to the suspension?  That would have been an interesting question on the facts of this case but the Court did not get there because it interpreted that she did not meet the initial test to create a suspension.

The opinion contains seven pages (at least in my printed version) displaying Ms. Reinhart’s arrival and departure records maintained by the Department of Homeland Security. That’s a lot of trips.  The records start on January 16, 2001.  From that point until they stop on July 10, 2010, she was constantly going in and out of the country.  The IRS could have collected the liability just from the cost of the airplane tickets.  The amount of travel displayed in the opinion is impressive.  So, the issue of continuously versus generally and substantially is clearly presented by the facts of this case.

Aside from the airplane records which create significant doubt about the continuous nature of her absence overseas, the IRS had two rather significant pieces of evidence in its favor. First, Ms. Reinhart’s 2001 through 2004 joint tax returns listed a Bahamian mailing address.  Second, on August 6, 2006, “petitioner signed a declaration submitted to the U.S. District Court for the Southern District of Florida stating that petitioner and her husband lived in Nassau, Bahamas, and that the Vero Beach, Florida, residence never was intended to be their residence.”  These two pieces of evidence impressed me but did not create the same impression on the Court.

Petitioner testified that she lived in Florida throughout, reciting a fairly long list of different addresses in Florida. She said that her husband rented a furnished one-bedroom apartment in Nassau, Bahamas from September 2002 until February 2012 but she always considered herself to reside in the U.S. (except perhaps when she signed the declaration).  She explained away the use of the Nassau address as resulting from a misunderstanding of the question and that she did live in Nassau when she was with her husband and she was not asked whether she lived continuously in the Bahamas or whether she had other residences.  The Court found her testimony credible even if I am having trouble with some of it.  It found that she lived in the U.S. and her husband lived in the Bahamas.

The burden of proof aspect of the case is legally the most significant; however, the lengthy litany of facts about her obvious constant movement back and forth between the Bahamas and the U.S. makes it a difficult case from a factual perspective. As a long time government lawyer, I am troubled when people explain away statements they make under penalties of perjury when the answer does not have significance.  I understand why the Court wanted to get to a factual rather than legal result here but I find her testimony too convenient for my liking.  Had the Court gotten to the merits of the statutory language, I think she was not continuously out of the United States.  By deciding the case on a factual basis, it gets to what seems to be the right result in a way that does not require it to strike down a regulation and cause an automatic appeal.

I take away from the case that a taxpayer traveling back and forth all the time as Ms. Reinhart did will have a decent case to keep the statute of limitations from getting suspended. Even if the Court had made its decision based on her residence moving to the Bahamas and applying the language of the regulation, it might still have found that she was not generally and substantially absent.  This is a hard case to know who to root for.  The IRS appears to have done nothing for a decade with respect to a taxpayer who it knew was not a good taxpayer.  Then it makes very technical argument based on a regulation that appears suspect.  On the other hand neither Ms. Reinhart’s tax activities nor her testimony left me with a favorable impression.  Losing this liability may mean nothing if it gets a subsequent liability against her and the new liability exceeds her ability to pay or the IRS’s ability to pursue collection.  If nothing else, the case highlights a little used provision of the code for extending the statute of limitations and tees up an attack on the regulation for the next taxpayer to come along.


IRS Power To Regulate Tax Practitioners Slipping Away

This post is by Christopher S. Rizek and was originally published by PT on Forbes. Chris is a member of Caplin & Drysdale, Chtd. in Washington, D.C. Chris was formerly an Attorney-Advisor and Associate Tax Legislative Counsel with the U.S. Treasury Department, Office of Tax Legislative Counsel, as well as a trial attorney with the US Department of Justice. He is a nationally known tax controversy practitioner who frequently speaks and writes about major issues in tax procedure and tax administration. In today’s post, Chris discusses last week’s district court order in Sexton v. Hawkins, another case testing the limits of OPR’s authority.

The power of the IRS’s Office of Professional Responsibility seems to be draining away in the aftermath of Loving v. IRS, 742 F.3d 1013 (D.C. Cir. Feb. 11, 2014), and Ridgely v. Lew, 2014 WL 3506888 (D.D.C. July 16, 2014).  What appears to be the latest drop comes in Sexton v. Hawkins, No. 2:13-cv-00893-RFB-VCF (D. Nev. Oct. 30, 2014).

James Sexton used to be a practitioner representing taxpayers before the IRS.  I say “used to be” for two reasons.  (Some of these facts are drawn from the complaint (and exhibits) in the case, not just the opinion, so at this point they are just allegations, but like the court I am assuming for now that they’re correct.)  One, Mr. Sexton apparently at one time represented taxpayers before the IRS, since he is a lawyer licensed in South Carolina who also has an LL.M. in Taxation.  But in 2005 he pled guilty in federal court to four counts of mail fraud and one count of money laundering.  As a result, in 2008 OPR suspended him from practice before the IRS for an indefinite period.  Since then he has made a living providing tax advice and return preparation services to taxpayers in Las Vegas.

Two, according to Loving, a person who does not actively represent taxpayers in proceedings with the IRS but merely prepares returns is not engaged in “practice before the IRS” as that term is used in the applicable statute, 31 U.S.C. § 330(a).  Since his suspension by OPR, therefore, Mr. Sexton contends that he has not been a “practitioner” before the IRS; and the rationale of Loving supports that claim.  He acknowledges that he prepares returns for clients, but again he relies on Loving to contend that he is not thereby subject to regulation under section 330.

Here’s where it gets interesting.  OPR had apparently received a complaint that Mr. Sexton was engaged in practice before the IRS, and in February, 2013 it sent him an inquiry letter.  It asked a number of questions about his practice, and requested many documents related to his clients, such as copies of returns he had prepared, any documents he used or relied upon in preparing returns, and any explanations of the tax law he had provided to clients.  OPR specifically relied on provisions of Circular 230 in its request letter, citing section 10.20 as authority for its request and for his purported obligation to comply, and sections 10.50 and 10.52 for sanctions that might apply.  In May, 2013 Mr. Sexton sued under the Administrative Procedure Act, seeking declaratory relief that he was not subject to OPR regulation and asking the court to enjoin the OPR request for information.  The Justice Department moved to dismiss.


Before reviewing the opinion, let’s pause a moment to reflect on some of the seeming paradoxes in this dispute.  First, Mr. Sexton (and perhaps the court) might consider it strange that OPR is threatening sanctions against someone whom it has already sanctioned once with an open-ended, indefinite suspension.  Perhaps the only thing left that OPR could seek to do to Mr. Sexton now would be to disbar him permanently or impose some kind of monetary penalty on him.  See Cir. 230 § 10.50.  And at the same time it is arguing that he is not authorized to practice before the IRS, OPR is relying on provisions of Circular 230 that, well, apply only to practitioners before the IRS.  Under the Loving rationale, return preparation is not practice, so perhaps OPR is investigating to see if Mr. Sexton is engaged in other activities that might constitute practice.  But what is its authority to ask a return preparer (who post-Loving is by definition a non-practitioner) about that?

On the other hand, OPR would presumably contend that it is merely investigating to see if Mr. Sexton is in compliance with his previous sanction; or it might argue that Mr. Sexton is still at least potentially an authorized practitioner by virtue of being a lawyer, that he was merely suspended not disbarred, and that its present inquiry is necessary to see if an additional sanction is necessary.  Either of these contentions would be consistent with OPR’s position, which OPR personnel repeat in various forms at every opportunity (and which I’m paraphrasing), that “once you’re in the system you’re in for all purposes” and OPR has continuing jurisdiction over you.  (I have argued elsewhere that the authority for that ongoing jurisdiction over practitioners derives from section 330(b), not section 330(a), but that discussion is for another day.)

These are all intriguing questions, and they may eventually be resolved by the Sexton court.  But they’re not in the opinion just issued, which is interesting in its own right for other reasons.  First, over the Government’s motion to dismiss, the court held that it had jurisdiction under section 702 of the APA, because the OPR investigation constitutes a “final agency action for which there is no other adequate remedy in a court.”  It may seem strange (and I’m sure OPR feels this way) to characterize a mere inquiry letter as a final agency action.  But to that, the court essentially responds that OPR is hoist by its own petard.  It finds that OPR’s assertion of jurisdiction over Mr. Sexton and his business is itself a final agency action that has consequences, among which would be application of the very provisions OPR cites, i.e. the obligation under section 10.20 to respond to its inquiry and the possibility of additional sanctions under 10.50.  Other consequences might also ensue: Mr. Sexton claims that OPR has threatened to withdraw his ability to e-file returns if he fails to respond to the inquiry letter, and the opinion points out that the letter would require him immediately to turn over otherwise confidential client records and returns.  OPR’s position, the court states, “elides the important distinction between a mere investigation, which is likely not final, and the instant demand for documents under color of law and threat of consequences, which is.”  And the court finds that there is no adequate remedy to prevent the harm that could flow from that, pointedly noting the Justice Department’s concession at oral argument that there was “no possible administrative remedy or process for contesting the production of the material.”

In a second holding, and largely for the same reasons, the court finds that Mr. Sexton has adequately asserted a claim for relief.  The issues it describes include whether Mr. Sexton is a “practitioner,” whether OPR jurisdiction extends to a “former practitioner” and his business, and most interestingly “whether the giving of tax advice is beyond the scope of the regulatory authority” of OPR.  That the court even appears intent on deciding that third issue, which has been the subject of much speculation since Loving, should give the government some pause.

Third and finally, the court enters a preliminary injunction, again based mainly on the lack of any other adequate remedy.  It notes that once the  requested documents are produced they cannot be “unproduced” (its word), and it specifically finds that the production itself could constitute irreparable injury, whereas on the other hand there is no hardship to the IRS or adverse impact on the public from waiting.  The court thus specifically enjoins the production of documents – but not the entire investigation – and prohibits the IRS from suspending Mr. Sexton’s ability to e-file because he has failed to produce those documents.

There are many other thought-provoking asides and comments in the opinion, which I urge readers to review carefully.  And while I don’t want to speculate how this case will eventually turn out, it does seem, as I said at the start, to be at the very least another temporary setback for OPR.  The government has now suffered three consecutive losses in its effort to reach return preparation activities, whether conducted by non-practitioners (Loving),former practitioners (Sexton), or even current CPAs (Ridgely).  Given the court’s comments and holdings in this initial opinion, a final loss in Sexton could further seriously undercut OPR’s authority.

On the other hand, the court’s conclusion that there is no potential harm to the public from letting a convicted felon and suspended practitioner continue to prepare returns seems questionable.  It is certainly inconsistent with the findings of the IRS’s return preparation study, the regulations overturned in Loving, and the views of the organized tax bar and accounting profession.  Many of us believe additional legislative authority is required and urge a thorough re-writing of section 330, although it is hard to believe a Republican-controlled Congress will be inclined to give the IRS new and expansive regulatory powers.

So the most likely result may just be continued fights over – and possibly further erosion of – OPR’s authority.

Summary Opinions for 10/31/14

The first week of November had two great guest posts.  The first post, which can be read here, was by attorney Michelle Feit, who discussed the extended statute of limitations found under Section 6501(c)(8).  The second, found here, was by Robert Everett Johnson, an attorney with the Institute for Justice, who discussed two recent cases where the IRS was found to have improperly seized assets using the Anti-Structuring Laws. I would suggest our readers review the comments to that post, found here, which were very strong. I would also commend to our readers the comments to Keith’s post on the suspension of the statute of limitations due to continuous absence from the US.  Lots of good information.

To the other procedure:


  • The Fifth Circuit, in Hoeffner v. Comm’r, reviewed a collection case, and found no reasonable cause for failure to file and pay, although the taxpayer did have obstacles in obtaining information to file.  Mr. Hoeffner was a prominent attorney in Houston.  In 2007, he was indicted on fraud, conspiracy, and money laundering, where he allegedly bribed adjusters at The Hartford Financial Services group with luxury cars, trips, night life and cash.  It seemed as though this counselor was headed to be a jailhouse lawyer, but the case resulted in a mistrial. He later paid costs related other criminal charges, which were then dropped.   Mr. Hoeffner then sued the Hartford and its general counsel (who was then the US Deputy Treasury Secretary) for negligently causing the bribery charges to be brought against him, and for a related cover-up for what he claimed was the extortion of him for the “bribes” to have cases settled.  Much of this summary is taken from a Bloomberg article found here.  In 2012, that case was settled.  Here is an article, including an interview with Mr. Hoeffner, from after the settlement.  So, Mr. Hoeffner lost his law license for a few years, and a couple million bucks, but somewhat cleared his name.

The tax case revolves around whether or not Mr. Hoeffner had reasonable cause for failing to timely file his 2008 tax return and timely paying his tax liability.  Mr. Hoeffner argued that a pre-trial order in his criminal case barred him from contacting his accountant, who had his tax records.  The Court held that neither unavailability of records, nor involvement in litigation, was reasonable cause, and he could not rely on his criminal defense lawyer’s advice to not file the incomplete or incorrect return.   The accountant did testify, and said it would have been impossible for another preparer to figure out the returns without his papers, but the Court still imposed the penalties.  Peter Reilly has additional coverage over at Forbes.

  • The Feds have removed and withdrawn regulations relating to the qualified payment card agent program.  The Service indicated that the program is now obsolete because of the reporting obligations found under Section 6050W.
  • As mentioned in the intro, we were fortunate to have Mr. Johnson from the Institute for Justice posting this week on the government seizing assets using the Anti-Structuring Laws.  Jack Townsend shared his initial thoughts on the NYT article last week, which can be found here.  Like all of Jack’s content, this is well worth your time.
  • Taxpayer who prevailed on about ¼ of Section 7431 wrongful disclosure case that was settled in part and dismissed in part was not entitled to attorney’s fees under Section 7430, as it did not “substantially prevail” in the amount or the most significant issue.  In The National Organization for Marriage (NOM) v. US, NOM and the Service disagreed on the amounts in question, and the Court held for the government.  I can say with certainty NOM will not be on my giving Tuesday list, but I am not sure how I feel about this holding.  I think it is correct, but have concern about how the holding could be expanded…but perhaps unfounded concern.  My concerns pertain to the Court’s determination of the amount in question, and as to what the “most significant issue” was in the case.

As to the most significant issue, the Court highlighted that the IRS conceded the wrongful disclosure claim in the answer to the complaint.  The complaint apparently had a bunch of other trumped up First Amendment/government conspiracy claims by NOM that the disclosure was related to.  These were dismissed, leaving only the amount of the damages to be determined.  The Court found that the other B.S. claims were the real reason for the suit, which was evidenced by the suit moving forward even though the government admitted to the disclosure.  The Court also noted that the government was substantially justified, which also precluded the award, which I did not take issue with.  The parties settled for $50k on the improper disclosure.  I suspect NOM did protract litigation on potentially bogus claims, but the underlying, primary claim was wrongful disclosure, which the IRS did.

I also was slightly uncomfortable with the “amount in question” conclusion.  NOM’s position was that the amount in question was either $60, 500 or $58,586, which were the specified damages in the complaint.  The government said that amount should have been $117,586, plus the pled (or pleaded) unspecified punitive damages.  The Service’s $117k number was based on the fact that NOM amended its claims, withdrawing a portion of around $50k, and then adding back in a similar amount for a different claim.  The Service added both together.   The Court accepted the $117k base number, and then went through a rational and lengthy discussion about including punitive damages.  The Court eventually concluded it needed to calculate a number and add it to the other damages, which it did, ending with a substantially higher number.  Had the Court accepted the government’s stated number, the recovery would have been a little under 50%.  Whereas with the punitive damages it is around 25% recovered.  Only recovering 45% is not sufficient, but in a different circumstance, the punitive damages number could have been the difference.

This is something to think about when throwing in “plus punitive damages”, and when including ancillary arguments in your complaint beyond your primary issue.

  • In US v. Briggs (couldn’t find a free link, sorry), the US District Court for the Eastern District of North Carolina denied a trustee’s motion to dismiss the government’s claim to foreclose a lien against the trust’s interest in an LLC.  The Court indicated state law stated the interest in the LLC was a property right, which then in turn allowed the government to lien the property under Section 7403, and levy the same.  I do not know N.C. law on this matter, but I wonder if it restricts collection against LLC interests to charging orders.  I also wonder how those laws interact with the government’s collection powers.
  • The Information Reporting Program Advisory Committee issued its annual report.  The report suggests an increased use of TIN matching to increase accuracy and compliance, a minimum threshold for 1099 corrections, and various other suggestions to increase compliance while making said compliance easier for taxpayers and information reporters.
  • Tax Court dismissed a petition for failure to timely file the same when the taxpayer attempted to use  The postmark was clearly on the last permitted filing day, and there was evidence that the 3rd party who mailed the petition did so at the post office on the last day for filing; however, the envelope also contained a postmark from the USPS the following day.  See Sanchez v. Comm’r, TC Memo 2014-223.  Another unfortunate result due to using the wrong mailing service.
  • SCOTUS granted certiorari in King v. Burwell, one of the ACA cases dealing with whether the tax credits are available for insurance purchased on a non-state exchange.  We have prior coverage here.