Mottahedeh v. U.S.: 2d Circuit Declines to Decide Whether Time to File Wrongful Levy Suit Is Subject to Equitable Tolling

We welcome back frequent guest blogger Carl Smith for a discussion of a recent Second Circuit decision concerning equitable tolling.  Keith

I have blogged more than once this year; see, e.g., here; on this year’s Ninth Circuit opinion in Volpicelli v. United States, 777 F.3d 1042 (9th Cir. Jan. 30, 2015), which held that the 9-month period in § 6532(c) in which to file a wrongful levy suit is not jurisdictional and is subject to equitable tolling on the appropriate facts.  I also noted at this post – when the DOJ unsuccessfully sought en banc reconsideration of Volpicelli by the Ninth Circuit – that Volpicelli conflicted with several older (probably outdated) opinions of other Circuits holding that either the 9-month period is jurisdictional (which means it can never be tolled) or that, even if the period is not jurisdictional, the Irwin v. Dept. of Veterans Affairs, 498 U.S. 89 (1990), presumption in favor of equitable tolling of statutes of limitations involving the United States is rebutted with respect to the wrongful levy period.

I had noted that one of the Circuit opinions holding that the wrongful levy period was both jurisdictional and not subject to equitable tolling was Williams v. United States, 947 F.2d 37 (2d Cir. 1991) – an opinion that I said I felt was questionable when issued.  In an opinion issued by the Second Circuit on July 28, 2015, Mottahedeh v. United States, the Circuit affirmed a district court’s dismissal of a late-filed wrongful levy suit for lack of jurisdiction, but it did so without citing any recent case law from the Supreme Court on what time periods are jurisdictional, and without citing Williams.  Further, without citing Irwin or any of the other Circuit opinions concerning whether the wrongful levy time period can be equitably tolled, the Second Circuit declined to state whether that time period could theoretically be equitably tolled, since the court felt that the facts presented in Mottahedeh could in no way justify tolling.  The lack of citation to Williams suggests that the Second Circuit, in a factually-appropriate case, might now be open to an argument that the wrongful levy time period is subject to equitable tolling.


Facts of Mottahedeh

In Mottahedeh, the plaintiff was the trustee of a trust set up by the trustee’s father for her benefit and the benefit of two brothers.  In 1990, the father acquired 19 shares of stock in Old Cedar Development Corp. (the Cedar stock).  In the mid-1990s, the Tax Court – in a case involving the 1978 year and a separate case involving the 1979 and 1980 years – found that the father owed tax deficiencies for those years.  In 1998, the father assigned the Cedar stock to the trust.

On February 11, 2009, the IRS served a levy on the trust for the Cedar stock.  The levy sought to pay only the father’s 1978 liability.  In response, the trustee (the plaintiff in the current suit) filed a timely district court wrongful levy suit, but she voluntarily dismissed the suit on September 16, 2009.

On October 15, 2009, the IRS served another levy on the trust for the Cedar stock – this time to pay the father’s liabilities for 1979 and 1980.  Soon thereafter, the IRS seized the stock.  The plaintiff did not, at first, bring a wrongful levy suit following this second levy.  Rather, on July 28, 2010, she paid off, from the trust’s other assets, her father’s entire tax liability for all three years (over $2 million).  Thereafter, the IRS returned the Cedar stock to the trust.  And on July 23, 2012 – just shy of two years after the payment and close to three years after the second levy – she filed a wrongful levy suit.

District Court Holdings

The DOJ moved to dismiss the suit for lack of jurisdiction.  In the district court, the plaintiff made four arguments:

First, she argued that the first wrongful levy suit put the IRS on notice that the trust owned the Cedar stock and contested any sale of the stock.  The district court rejected this argument, noting that she had dismissed the first suit voluntarily.  Mottahedeh v. United States, 33 F. Supp. 3d 210, 212 (E.D.N.Y. 2014).

Second, she argued that because the IRS never sold the stock, the 9-month period to bring a wrongful levy suit never started to run.  The court rejected this argument, citing case law holding that the 9-month period runs from the date the third party is served with the levy, regardless of when or whether the property is sold. Id. at 213.

Third, she cited United States v. Williams, 514 U.S. 527 (1995), where the Supreme Court held that in the then (but since remedied) absence of a way to contest a situation where a third party pays off a lien, the third party could file a refund lawsuit under 28 U.S.C. § 1346(a)(1).  She asked that she be allowed to amend her complaint to allege jurisdiction as a tax refund lawsuit.  Unfortunately, in EC Term of Years Trust v. United States, 550 U.S. 429 (2007), the Supreme Court distinguished Williams and held that where a levy was served which the third party paid off, the third party only had the right to a wrongful levy suit and the 9-month wrongful levy time period applied to bringing such suit.

Finally, she argued that the court should equitably toll the 9-month period because of the confusing and seemingly conflicting amounts set forth in the levy notices and in an IRS notice proposing to sell the Cedar stock.  The entire discussion of the district court on this last issue is as follows:

The pivotal question the Court must answer is whether § 6532(c) authorizes equitable tolling. See United States v. Brockamp, 519 U.S. 347, 348-49 (1977) (holding that equitable reason would permit tolling “if, but only if, § 6511 contains an implied ‘equitable tolling’ exception” and that § 6511 contains no such implied exception).4/ Plaintiff does not cite any authority demonstrating that § 6532(c) contains an implied equitable tolling provision, nor is the Court aware of any case in this circuit where the court equitably tolled the nine month statute of limitations applicable to§ 7426 claims. Furthermore, as noted in EC Term of Years, the nine month statute of limitations is applied strictly for good reason. 550 U.S. at 431-32 (“the demand for greater haste when a third party contests a levy is no accident . . ., ‘[s]ince after seizure of property for nonpayment of taxes [an IRS] district director is likely to suspend further collection activities against the taxpayer, it is essential that he be advised promptly if he has seized property which does not belong  [11] to the taxpayer’”) (internal citation and quotation marks omitted). As a result, the Court denies plaintiff’s request that the statute of limitations be equitably tolled.


4. Brockamp, cited by the defendant, relies on the general proposition that “[t]ax law, after all, is not normally characterized by case-specific exceptions reflecting individualized equities.” 519 U.S.347 at 352.

[33 F. Supp. 3d at 214-215]

It is odd that the district court did not here mention Williams v. United States, 947 F.2d 37 (2d Cir. 1991) – not to be confused with the Supreme Court’s later Williams case described above.

Second Circuit Williams Opinion 

In the Second Circuit Williams case, the IRS had levied on property, and the plaintiff filed an administrative claim for wrongful levy far more than 9 months later.  Under § 6532(c), there is an exception to the usual 9-month period to file a wrongful levy suit where an administrative claim is filed.  The exception allows suit to be brought up to one year after the claim is filed or 6 months from when the claim is disallowed, whichever period is shorter.  When the IRS sent a notice of disallowance of the claim, it erroneously sent a letter used for disallowing tax refund claims – i.e., a letter telling the taxpayer that he or she has 2 years to bring suit.  The plaintiff brought suit more than a year after the claim was filed and more than 6 months after it was disallowed, but within the incorrect 2-year period mentioned in the letter.  The district court dismissed the suit for lack of jurisdiction.

In Williams, the Second Circuit affirmed the district court, writing:

When an action is brought against the United States government, compliance with the conditions under which the government has agreed to waive sovereign immunity is necessary for subject matter jurisdiction to exist. Accordingly, the statute of limitations may operate in suits against the United States not only as an affirmative defense, see Fed. R. Civ. P. 8(c), but also may deprive a court of subject matter jurisdiction over an action that is not timely filed. [5] . . .

Williams argues that, by issuing to him a Notice of Disallowance which provided that a taxpayer has two years to file a civil suit challenging the disallowance of a refund, the IRS “deceived an unwary taxpayer.” However, the mistaken  [9]  advisement by the IRS does not require that Williams’ action be allowed to proceed, since subject matter jurisdiction may not be created by estoppel or consent of the parties. [940 F.2d at 39-40 (citations omitted)]

Oddly, the court did not cite to the Supreme Court’s opinion in Irwin, which, only a year earlier, had held that statutes of limitations running against the United States were subject to an unstated exception from the normal strict rules concerning waving sovereign immunity – which exception consisted of a rebuttable presumption in favor of equitable tolling in factually-appropriate cases. For lack of a discussion of Irwin alone, therefore, Williams was questionable when issued.

Interestingly, the district court in Mottahedeh, while not citing Williams in its equitable tolling discussion, did cite Williams (indirectly through another citation) as grounds for dismissing the case for lack of jurisdiction, rather than failure to state a claim on which relief could be granted.  The district court wrote:

Although defendant asserts that both 12(b)(1) and 12(b)(6) are grounds for dismissal, the appropriate ground is 12(b)(1), for “[w]hen a plaintiff who sues the United States fails to comply with the relevant statute of limitations, the court is deprived of subject matter jurisdiction.” Meminger v. United States Internal Revenue Service, 1993 U.S. Dist. LEXIS 458 (S.D.N.Y. Jan 21, 1993) (citing Williams v. United States, 947 F.2d 37, 39 (2d Cir. 1991).  [33 F. Supp. 3d at 211 n.1.]

Second Circuit Mottahedeh Opinion 

DOJ attorney Joan Oppenheimer, who did the Volpicelli oral argument and co-wrote the briefs in both Volpicelli and Mottahedeh submitted a brief to the Second Circuit that largely tracked the Volpicelli brief in that, relying on recent Supreme Court case law, it argued that the time period in § 6532(c) is jurisdictional, and that, even if that time period is not jurisdictional, the Irwin presumption in favor of equitable tolling is rebutted as to that time period.  She cited Brockamp for the proposition that tax periods of limitations are not tollable.  She pointed to the Second Circuit’s Williams opinion and opinions of several other Circuits (all opinions, except a 2000 Third Circuit opinion, predating Brockamp) holding the § 6532(c) period jurisdictional and, in the Third Circuit opinion, also not subject to equitable tolling.  She also noted the contrary opinion of the Ninth Circuit in Volpicelli that had been issued a couple of weeks before the DOJ filed its brief in this case. Volpicelli had rejected all of the DOJ arguments by a thorough analysis of recent Supreme Court opinions and a rejection of the argument that Brockamp prohibited the tolling of all Internal Revenue Code time periods.

The plaintiff in Mottahedeh did not file a reply brief, so there was no brief rebutting the DOJ arguments or explaining why the Ninth Circuit had rejected the various DOJ arguments in Volpicelli.  But, I suspect that the Second Circuit panel spent some time reading its Williams opinion, Volpicelli, and recent Supreme Court case law and concluded that Williams was probably no longer good law and that any discussion of recent Supreme Court case law on jurisdiction and equitable tolling would be problematic.  Perhaps the panel worried that to overrule Williams, it would have to write an opinion for en banc consideration – i.e., that the panel could not merely state that Supreme Court  case law since Williams so sapped it of its vitality that no en banc reconsideration was necessary.

In any event, without exampling why § 6532(c) was jurisdictional under current Supreme Court case law, and without citing Williams or any other of the many Circuit court opinions on that time period cited in the DOJ brief, the Second Circuit affirmed the dismissal for lack of jurisdiction because of an untimely-filed suit.

In its opinion, the Second Circuit also rejected the first three arguments made by the plaintiff – for reasons identical to those stated by the district court and discussed above in this post.

But, when it came time to discuss equitable tolling, the Second Circuit departed from the district court’s holding that § 6532(c)’s time period may never be tolled.  Instead, the court – again neither citing Williams, recent Supreme Court case law, or other Circuit opinions addressing the issue of the tollability of § 6532(c)’s time period – simply declined to decide that issue, as unnecessary.  The Second Circuit held that, even if the time period could be tolled, the plaintiff’s arguments that she was confused by amounts in IRS notices was not a sufficient factual ground for equitable tolling.  The court said it was clear that the first levy notice sought 1978 taxes, while the second sought 1979 and 1980 taxes.  “Appellant has neither alleged that anything prevented her from commencing a timely suit in response to the October 2009 Notice of Levy, nor that she pursued her remedies diligently.” Slip op. at 11.

Final Observation

The government decided not to seek certiorari in Volpicelli to resolve the Circuit split.  I assume that the government abandoned the idea of seeking Supreme Court review because it concluded that, after the recent Supreme Court opinion in United States v. Wong, 135 S. Ct. 1625(Apr. 22, 2015), discussed at my post here, the government would lose in the Supreme Court.

I don’t think the Mottahedeh case would make a good vehicle for resolving that Circuit split for two reasons:  The Second Circuit there expressed no opinion either way on the Circuit split.  And the court found no factual basis for equitable tolling.  I don’t think that, even if the plaintiff filed a petition for certiorari in Mottahedeh, such petition would be granted.

But, I do think that a plaintiff with better facts for equitable tolling in a wrongful levy case now stands a good chance in the Second Circuit for winning such a suit.  I don’t think it was an accident that the panel in Mottahedeh both ran away from deciding whether tolling the wrongful levy time period is ever possible and refused to cite the existing Circuit precedent holding against tolling in Williams.

District Court Punishes IRS For Failing to Justify or Explain Itself in FBAR Case

In April and May of this year I blogged Moore v US, in District Court Opinion Raises Important Administrative and Constitutional Law Issues and Procedural Due Process and FBAR. As I discussed back then, Moore involves the IRS’ assessment of a $40,000 nonwillful FBAR penalty. The case is an important case for lots of reasons, including how it emphasizes that the IRS has a legal obligation to explain the underlying reasons for its actions when it proposes and assesses FBAR penalties. Taxpayers, even those who may have stashed cash overseas, have fundamental rights that the IRS should respect. If the IRS fails to respect those rights, cases like Moore provide an important precedent for checking what may be systemic abuses of power but which at a minimum raise troubling fairness concerns for the affected party.

In my prior posts, I discussed how the district court held that Moore violated the law by not filing FBARs and did not have reasonable cause for the nonfiling but that the record before it was inadequate for it to determine whether the amount of the penalties was appropriate.

The district court ordered briefing on that unresolved issue, and now this week in Moore v US the Western District of Washington has ruled that the amount of the penalties was appropriate, but that the IRS abused its discretion in its conduct leading to the assessment and in its failure to explain why it assessed a $40,000 penalty. The decision is brief but noteworthy in its candor in criticizing the IRS’s conduct.

For more background, readers can go back to my posts or also to Jack Townsend’s Criminal Tax Blog, who also covers the current development and past cases in Moore II – District Court Approves Penalty But Admonishes the IRS and Imposes a Cost for Misleading Taxpayer.

The key to the case is its finding that the IRS treated Moore unfairly, and that IRS should have to pay a price for its misconduct. Here’s how it got there.


In the first Moore opinion, the judge was troubled by the IRS’s failing to explain why it penalized Moore:

The court can only guess, however, as to whether the IRS considered relevant factors or made a clear error of judgment. The record before the court contains no administrative explanation of the IRS’s decision to impose penalties.

Moreover, the court was deeply troubled that one of its agents promised Moore that it would not assess the penalty pending an appeal of a proposed assessment but then the IRS assessed Moore anyway:

The Government may also choose to supplement the record to provide contemporaneous explanation of its decision to assess the 2005 penalty without providing the “appeal” it promised Mr. Moore. On the record before the court, that decision is baffling. The only reason the Government offered, its concern that the statute of limitations would expire, is nonsensical on the record before the court.

After briefly discussing that the US demonstrated that it was not an abuse of discretion to penalize Moore $10,000 for the years 2005-08, the district court this week then went on to state that the IRS’s conduct in assessing the penalties “by contrast, was in several respects arbitrary and capricious. In particular, the IRS disclosed no adequate basis for its decision to assess the penalties until this litigation forced its hand. Even after this litigation began, the IRS refused to disclose the evidence on which it now relies to demonstrate the basis for its decision to impose those penalties. With respect to the 2005 penalty, the IRS broke its own promise not to impose a penalty until Mr. Moore had an opportunity to respond to its “proposed” assessment.”

In light of the arbitrary actions of the IRS, the court found that Moore, though responsible for the penalty, “was not responsible for any interest, late fee, or other supplemental assessment that the IRS or another agency of the United States has attempted to tack on to Mr. Moore’s FBAR penalties.” To effectuate that result, the court stated that the US was to treat the FBAR penalties as if they were assessed as of the date of this week’s order.

Upon review of the case memorandum (that the IRS previously had refused to provide to Moore), the court said that the IRS’s penalty determination made sense, or at least was not arbitrary.

The opinion though hits hard when discussing the IRS’s failure to explain itself to Moore:

The IRS’s refusal to disclose anything about the basis for its decision until this litigation, and in particular its decision to withhold Agent Batman’s memorandum until after the court ordered it produced, was arbitrary and capricious. The IRS did not simply fail to disclose Agent Batman’s memorandum, it opposed Mr. Moore’s motion to compel its disclosure. Once the Government determined that it could point to no other evidence justifying its decision to impose the maximum penalties, the Government produced the memorandum. The IRS has offered no explanation for its apparent policy not to explain the assessment of FBAR penalties to citizens, and in particular for its apparent policy not to put that explanation in writing. It has also offered no explanation for its steadfast refusal to disclose Agent Batman’s memo in this litigation until it was left with no other options. No citizen should have to sue his own Government to find out why he is being fined, or to find out why he is being fined $ 40,000 as opposed to a smaller amount. And once a citizen has sued, he should not have to fight over the most basic disclosures.

(emphasis added).

The opinion then walks through the two apparent harms arising from it calls the “arbitrary and capricious conduct in imposing that penalty.” The first harm was that Moore had to face the “unappealing choice to either accept the IRS’s unexplained imposition of a $ 40,000 penalty or to file suit. The court assumes that Mr. Moore’s choice to sue cost him a substantial sum. Second, the IRS has assessed interest and other penalties on top of the FBAR penalties. “

Suggesting perhaps that there was some other remedy for the first harm, the court says it “expresses no opinion at this time on whether the first harm can be remedied. The court remedies the second harm by preventing the IRS from profiting by imposing penalties without explaining them. The court voids the IRS’s assessment of interest and other charges on top of its previously unexplained penalties.”

Broadening the Discussion: Fairness Matters

I applaud the district court’s approach in imposing some costs on the IRS for its misconduct. One benefit that hopefully comes from decisions like Moore is that in addition to its impact on the party to the litigation, one hopes that the scathing court review has some impact on how the IRS goes about its business of administering the FBAR penalty regime.

About a year or so ago the IRS adopted a Taxpayer Bill of Rights. At the time, Commissioner Koskinen announced that the rights amounted to “core concepts about which taxpayers should be aware” and that “respecting taxpayer rights continues to be a top priority for IRS employees.” First on the list of those rights is the right to be informed. Underlying that right is an understanding that taxpayers have a fundamental interest in knowing what the IRS is doing and why it is acting a certain way.

In a sense, the Altera decision earlier this week that Pat Smith discussed on PT in his guest post is a manifestation of that principle when it comes to rulemaking, one of the two fundamental functions that the IRS (as other federal agencies) does. Altera and other cases Pat describes are bringing the IRS in line with other agencies when it comes to imposing an affirmative duty on the IRS to explain and take into account comments when announcing rules in the form of regulations.

Apart from rulemaking, the other fundamental agency function in administrative law is adjudication. With the IRS that often involves making individualized determinations with respect to a liability issue. There is longstanding law that generally provides that when taxpayers challenge a deficiency determination, the courts do not look behind the notice of deficiency. Moreover, as I have also discussed in a prior post, the IRS gets a great deal of leeway when it comes to drafting notices of deficiency, and the Tax Court has in a number of orders now stated that the APA does not independently provide an independent basis for requiring explanation of agency action in its stat notices (see my post Tax Court Order Rejects APA Claim that IRS Precluded from Asserting Penalty in Answer) and an order from this week, Weschler and Wasserman v Commissioner (hat tip on the order to Carl).

De novo review is in many ways a powerful check on agency abuses; after all, a taxpayer can take a deficiency case to Tax Court (or refund cases in district court or the Court of Federal Claims) and get the court to think anew about the issue. The flip side of de novo review for taxpayers is that while a court takes a fresh crack at the issue, it more or less ignores what the IRS did in it coming to its determination that there is a deficiency or in rejecting a refund claim (yes, this is a simplification but generally true). In a sense, courts can whitewash sloppy agency practice, as the court’s main role in liability cases is getting to the right result.

As the IRS gets knee deep in determinations that move away from its traditional deficiency cases, especially when the review is on an abuse of discretion basis, courts are starting to take a more careful look at agency practices. A good example of this is in the FBAR area, where IRS administers the potentially draconian Title 31 penalty regime (See IRM  (07-01-2008) (discussing the delegation to IRS and how the Code does not apply to the FBAR regime).

I have always felt and previously written in discussing CDP and court review of collection actions that the real power of abuse of discretion review is that it opens up agency conduct to the sanitizing influence of an unhappy judge. Moore reminds us that sometimes so-called limited court review can be the most searching when it comes to considering how the agency does its job. A key part of the IRS’s job is explaining why it acts a certain way. The Taxpayer Bill of Rights stands to remind IRS employees alike of the importance of informing taxpayers. Absent a remedy in court, however, sometimes those rights are illusory (or require parties to sue or pursue FOIA to find out what the IRS has done). So the best chance for taxpayers and practitioners wishing to benefit from some of these rights and perhaps change IRS culture may come in cases like Moore where unhappy judges hold up IRS misconduct to the bright and sanitizing light of judicial review.


Summary Opinions for the second half of May

Here is part two of the items from May we didn’t otherwise cover.  We’ll have the June items shortly, and then July.  Hopefully, I’ll get back on track for weekly summaries in the near future.

  • The Sixth Circuit in Ednacot v. Mesa Medical Group, PLLC affirmed the lower court tossing a physician assistant’s claim that an employer wrongfully withheld employment taxes.  The Court determined this was tantamount to a refund suit, which required the taxpayer to first file an administrative claim for refund with the IRS prior to bringing suit.  There seems to be a lengthy past between the parties in this case.  The petitioner brought up a valid seeming point that she did not know if the withholdings were paid to the IRS, and therefore wasn’t sure if the refund was appropriate, but the Court held that Section 7422 was designed to funnel these issues through the administrative process.
  • Couple interesting privilege cases recently, including the Pacific Management Group decision blogged by Joni Larson for us.  In a case that may have a somewhat chilling effect on making reasonable cause claims, the Tax Court has held that claiming reasonable cause to the substantial valuation misstatement penalty waived attorney client privilege and the work product doctrine for certain communications between the taxpayer and its lawyer and accountant.  See Eaton Corp. and Sub. v. Comm’r.  This holding was the affirming of a motion for reconsideration.  The Court found that although there was an objective determination under Section 6662(e)(3), whether relying on the advice on Section 482 was based on the facts and circumstances, including the advice of the lawyer.  By claiming reasonable cause, the privileges were waived for that issue.
  • Taxpayer was successful arguing against the substantial understatement penalty in Johnston v. Comm’r, but it was because the taxpayer didn’t actually owe the tax.  The IRS had argued that a debt between the taxpayer (an executive of a telcom company) and his company was discharged by his employer when he moved to a related entity.  There was credible evidence that it was not discharged and payment continued.  There was the pesky issue that the loan wasn’t paid until the IRS audited the individual, but the Court found that the audit prompted the company to do something with the loan and it hadn’t been tax avoidance…must have been persuasive testimony.
  • LAFA issued guidance on the effect on the limitations period on assessment for payroll tax when the wrong form is filed. (LAFA 20152101F).  Employers are generally required to file quarterly returns on Form 941 for employment taxes when they are paid in that period.  A different form, Form 944 is used for certain employers with little  employment tax liability, and that is required annually.  The statute generally runs from the date of the deemed filing of employment tax returns, which is April 15 the following year.  See Section 6501(a)&(b).  The LAFA reviews the following three situations:
  1. Employer is required to file Form 944, but instead timely files four quarterly Forms 941.

  2. Employer is required to file Form 944, but timely files Form 941 for the first and second quarters of the year instead, and files nothing for the third or fourth quarters of the year.

  3. Employer is required to file quarterly Forms 941, but timely files annual Form 944 instead.


The quick conclusions were:

  1.  Assuming the Forms 941 purport to be returns, are an honest and reasonable attempt to satisfy the filing requirements, are signed under penalty of perjury, and can be used to determine Employer’s annual FICA and income tax withholding tax liability, the Forms 941 meet the Beard formulation and should be treated as valid returns for purposes of starting the period of limitations on assessment.

  2.  An argument can be made that the Forms 941 for the first and second quarters of the tax year constitute valid returns under the Beard formulation since they purport to be returns and are signed under penalty of perjury. However, given that Employer’s FICA and income tax withholding tax liability for the third and fourth quarters will not necessarily be equal to that reported for the first two quarters, the Forms 941 arguably are not sufficient for purposes of the determining Employer’s annual FICA and income tax withholding tax liability and may not be honest and reasonable attempts to satisfy the tax law.

  3.  Assuming the Form 944 purports to be a return, is an honest and reasonable attempt to satisfy the filing requirements, can be used to determine Employer’s annual FICA and income tax withholding tax liability, and is signed under penalty of perjury, Employer’s Form 944 meets the Beard formulation and should be treated as a valid return for purposes of the period of limitations on assessment.

  • A taxpayer in a chapter 11 case, Francisco Rodriquez (not the current Brewers closer who pitched for the Mets before choking out his relative in the clubhouse) was successful in avoiding a lien under 11 USC 506 on property held by the taxpayer that was already underwater with three prior liens.  In re Rodriguez, 115 AFTR2d 2015-1750 (Bktcy D MD 2015).  Section 506 allows liens to be stripped if the property lacks equity, which was what the taxpayer was attempting.  SCOTUS in Dewsnup v. Timm held that  a chapter 7 debtor cannot “strip down” an allowed secured claim (clearly, I was not the debtor, otherwise SCOTUS would have tossed on some Its Raining Men, and granted my right to strip down—I only did it to pay for college, I swear—and yet, still so many student loans).  Various other cases have held that Dewnsup does not extend to other chapters in bankruptcy, and the District Court held that lien stripping was appropriate in chapter 11 under the taxpayer’s circumstances.
  • The Tenth Circuit continues its clear prejudice and hatred towards Canadians (I completely made that up and that link is NSFW) in Mabbett v. Comm’r, where it found the Tax Court properly tossed a petition as being untimely that was filed by a resident of the US, who was a Canadian citizen.  The Court found the Service had properly sent the stat notice to the taxpayer at her last known address (and even if that was not the case, her representative had forwarded her a copy well before the due date of the petition).  The taxpayer also claimed that she was entitled to the 150 day period to file her petition to the court under Section 6213(a) because she was a Canadian citizen.  The Court stated, however, that the statute was clear that the 150 day rule only applies when “the notice is addressed to a person outside the United States.”  The taxpayer had been traveling, and was Canadian, but failed to show she was outside of the United States at the time the notice was sent.
  • In case you haven’t seen, the Service has started a cybercrimes unit to combat stolen ID tax fraud.  In my mind, this is sort of like the IRS and Tron having a lovechild, which I would assume to look like this.  Jack Townsend has real coverage on his Federal Tax Crimes Blog.
  • Jack also has coverage of the new IRS FBAR penalty guidance, which can be found here


A Massive Loss and a Huge Rebuke for the IRS from the Tax Court in Altera Decision

We welcome back guest blogger, Patrick J. Smith of Ivins, Phillips & Barker.  Pat’s practice and writing have a strong focus on the intersection of tax and the Administrative Procedure Act.  Yesterday’s block buster Tax Court decision in this area receives careful analysis from him and a discussion of the potentially far reaching impact of the decision.  Keith

Ordinarily, when the Tax Court issues a decision that is reviewed by the full court, especially in a case involving a challenge to the validity of regulations, there are multiple opinions: a majority opinion, dissents, concurrences, sometimes even a lead opinion that is not the opinion that received the most votes. See, e.g., Lantz v. Commissioner,132 T.C. 131 (2009), rev’d, 607 F.3d 479 (7th Cir. 2010); Intermountain Insurance Service of Vail, LLC v. Commissioner, 134 T.C. 211 (2010), rev’d, 650 F.3d 691 (D.C. Cir. 2011), rem’d, 132 S. Ct. 2120 (2012); Carpenter Family Investments, LLC v. Commissioner, 136 T.C. 373 (2011).  It is extremely rare, if not unprecedented, for the Tax Court to speak with complete unanimity in such a case.  However, the Tax Court was totally unanimous in its holding on Monday of this week in

Altera Corp. v. Commissioner that a provision of the regulations under section 482 dealing with cost-sharing agreements for the development of intangibles was invalid (please note that while my law firm does work for Altera, none of the lawyers in my law firm is among the group of lawyers representing Altera in this case.)  This unanimity surely was meant by the Tax Court to send a very strong message to the IRS and Treasury that business as the IRS and Treasury have usually conducted it in issuing regulations just won’t work any more.


The specific issue in the case was the validity of a provision in the current cost-sharing regulations requiring that the cost of stock-based compensation must be included among the costs that are shared under such arrangements. See Treas. Reg. §1.482-7(d)(2). This is clearly a very important issue in and of itself.  However, the significance of the Altera decision clearly goes far beyond that specific issue and encompasses the entire approach that the IRS and Treasury have traditionally taken in issuing regulations.

The taxpayer in Altera argued that, for a number of reasons, this provision in the cost-sharing regulations was invalid under the “arbitrary and capricious” standard in the Administrative Procedure Act.  Under the Supreme Court’s landmark 1983 State Farmdecision, in order for agency action to satisfy the arbitrary and capricious standard, the agency action must be the product of “reasoned decision-making,” and the agency must, at the time it takes the action being reviewed, provide a reasoned explanation for why it made the particular decision it did.

Although challenges to agency regulations and other agency action outside the tax context almost always include a challenge based on an asserted violation of the arbitrary and capricious standard, usually based on the failure of the agency to provide a satisfactory explanation of the reasons for its action, the invocation of this standard in challenges to tax regulations has traditionally been very rare.  The first case in which a court applied the arbitrary and capricious standard to invalidate a tax regulation was the 2012 decision of the Federal Circuit in Dominion Resources, a case in which two of my partners and I represented the taxpayer.

I have discussed the potential application of the arbitrary and capricious standard to challenge tax regulations and other IRS action in a number of articles (links can be found here, here, here, here, and here.)  As I have pointed out in those articles, many tax regulations are vulnerable to challenge under the arbitrary and capricious standard because the IRS and Treasury often do not provide the type of reasoned explanation for the decisions made in issuing regulations that State Farm requires.  As I have pointed out in those articles, and as the Tax Court opinion in Altera noted in a parenthetical quotation, until very recently, the provisions of the Internal Revenue Manual regarding the drafting of preambles to regulations explicitly stated that “[i]t is not necessary to justify the rules that are being proposed or adopted or alternatives that were considered,” assertions that are clearly inconsistent with the requirements of the arbitrary and capricious standard as interpreted in State Farm.

Before addressing the merits of the taxpayer’s challenge in Altera, the Tax Court addressed some extremely significant preliminary issues.  The first of these issues was whether the regulation that was being challenged was subject to the notice-and-comment requirements for rulemaking in section 553 of the APA.  These requirements apply to “substantive” regulations (the term the APA itself uses), which are often referred to as “legislative” regulations, the term the Tax Court used in Altera.  However, the notice-and-comment requirements do not apply to “interpretative” regulations.

The distinction between these two categories of regulations is not always clear, but one point that is clear is that legislative regulations have the force of law, while interpretative regulations do not.  The IRS has traditionally claimed that regulations issued under the general authority of section 7805(a) are interpretative regulations and as such are exempt from the APA’s notice-and-comment requirements.  However, the IRS also claims that these regulations have the force of law and are therefore entitled to Chevron deference, and this latter position was upheld by the Supreme Court in Mayo.  The Tax Court concluded that because the IRS and Treasury intended the regulation being challenged in Altera to have the force of law, the regulation was subject to the APA notice-and-comment requirements.  While this seems like an easy conclusion, it is very welcome to have it stated so forcefully by the Tax Court, repudiating one of the IRS’s many attempted departures from normal administrative law principles.

The second significant preliminary issue addressed by the Tax Court in Altera was whether State Farm was applicable to the challenge.  The IRS contended that the challenge was governed by Chevron and not by State Farm.  This was another completely untenable position, since numerous decisions by the D.C. Circuit make clear that both standards are applicable to challenges to the validity of agency regulations that involve the interpretation of statutory provisions, and the Tax Court resoundingly repudiated this position as well.  I have noted in my articles that the Supreme Court’s decision in Judulang v. Holder makes clear that State Farm and Chevron step two are essentially equivalent, and the Tax Court in Altera reached the same conclusion.  The Tax Court concluded that because of this equivalence, it was not necessary to decide between applying State Farm and Chevron.  However, the court phrased its reasoning in deciding the merits in terms of the State Farm requirements.

After deciding these preliminary issues, the Tax Court reached the merits of the taxpayer’s challenge.  Section 482 permits the IRS to allocate income, deductions, and other items between related commonly controlled parties where such an allocation is necessary to clearly reflect the income of the parties.  Section 482 does not itself refer to the arm’s length standard, but the long-standing regulations, much case law, and many treaties take the position that allocations under section 482 are appropriate only when those allocation are consistent with the results that would be reached between unrelated parties bargaining at arm’s length.  As the Tax Court phrased the ultimate issue, the validity of the provision in the cost-sharing regulations requiring that the cost of stock-based compensation must be included in the costs that are shared turns on whether the IRS and Treasury reasonably concluded that this position was consistent with the arm’s length standard.

The taxpayer contended that the regulation violated the reasoned decision-making standard because the IRS and Treasury had no evidence that unrelated parties would include the cost of stock-based compensation in the costs that are shared under a cost-sharing agreement and were provided with considerable evidence by the parties who submitted comments that unrelated parties would not in fact agree to share this type of cost.  The Tax Court agreed.  The Tax Court concluded that the issue of whether unrelated parties would share this type of cost was inherently an empirical issue and that it was unreasonable for the IRS and Treasury to rely on their unsupported belief that this type of cost would be shared by unrelated parties.  The Tax Court also agreed with the taxpayer’s argument that the IRS and Treasury acted unreasonably and improperly in failing to adequately respond to the comments that presented evidence that unrelated parties would not share the costs of stock-based compensation.

While Altera is not the first case in which a court has invalidated a tax regulation under the arbitrary and capricious standard, nevertheless, Altera represents a far more significant loss for the IRS than the first such case, Dominion Resources, not only because the particular provision of the regulations that was at issue in Altera had a much broader application than the provision at issue in Dominion Resources, but also because of the breadth of the IRS’s failings in Altera as compared to Dominion Resources.  The holding in Dominion Resources was based on the failure of the IRS and Treasury to provide an explanation of the reasons behind the rule at issue in the preamble to the regulations.  In contrast, the holding in Altera was based on the fact that the reasoning that was disclosed in the preamble was, in the Tax Court’s view, fundamentally flawed.

In the context of most challenges to actions by agencies other than the IRS that are based on the arbitrary and capricious standard, the challenge is, like the one in Dominion Resources, based on a claimed failure by the agency to provide an adequate explanation of the reasons for its action.  In contrast, when the preamble to a regulation discloses the nature of the reasoning process used by the agency in reaching its decision, and the reviewing court concludes that this reasoning process was defective, this represents a much more serious and fundamental flaw in the agency’s actions than a mere failure to explain its reasoning.  There is absolutely no doubt that the Tax Court’s holding in Altera will prompt other challenges to other tax regulations in contexts having nothing to do with section 482.  Hopefully, it will also prompt some rethinking by the IRS of its processes for issuing regulations.

DOJ and Davis Polk Take off the Gloves in Recent Discovery Dispute Involving GE’s $660 Million Tax Refund Suit

A recent district court order highlights a discovery dispute between DOJ litigators and GE counsel Davis Polk. The underlying case involves GE’s $660 million dollar refund suit that “stems from a series of complex corporate restructuring/sale transactions that occurred more than ten years ago.” The litigation has gotten quite testy. The government alleged that GE’s counsel engaged in abusive and obstructive discovery tactics. In the order, however, the judge disagreed with the DOJ’s description and instead said that counsel’s conduct “bespeaks good lawyering.”

The court discussed the precise issue in the order as having not been addressed in any published decision.

What is the issue?

The government served subpoenas on two non-parties, Westport Insurance, a former subsidiary of GE, and on law firm Cahill Gordon & Reindel, which advised GE on some of the transactions relevant to the merits dispute back in 2002 and 2003.

Complying with the subpoenas is no small task, as one might expect with what I am sure is a mind-numbingly complex series of transactions that led to the dispute [Full disclosure: I started my legal career at Davis Polk (well before the dispute at issue in this case)].

The nonparties Westport and Cahill wanted to outsource screening the documents requested in the subpoena to Davis Polk. The district court frames the issue as follows:

The issue here supposes a lawsuit between Party A and Party B and that Party A issues a subpoena to a non-party seeking documents that may be subject to a claim of privilege by opposing Party B. It further supposes the right of Party B to conduct a privilege review of the subpoenaed documents before they are produced by the non-party to Party A to ensure that the document production does not include documents subject to a claim of attorney-client privilege.


The order goes on to narrow the question:

The question, then, is whether Party B (or, more precisely, its counsel) may also—at the non-party’s request—conduct a responsiveness review of the documents before they are produced to Party A. In short, is it proper for a non-party recipient of a document subpoena from Party A to delegate or outsource a portion of its compliance obligations to the opposing Party B and its counsel in the litigation?

(bold emphasis added, as is the case with the rest of the post).

Why did Cahill and Westport wish to outsource the screening? The order gives us some context that the nonparties may not have been up to the task, understandably given that there were tens of thousands of pages (electronic and paper), some of which likely was relevant or privileged but others which were not relevant to the request. Simply put, the non-parties felt that “due to the passage of time and their lack of familiarity with this litigation…they have stated that Davis Polk would be better positioned to conduct this review.”

What was the government’s beef with this? DOJ argued that it was improper for GE’s counsel to be the arbiter of responsiveness and privilege:

According to the United States, this involvement amounts to no less than “obstruct[ion],” “interference” and “abusive discovery tactics.”. And it further contends that “[e]ven assuming it is proper to outsource responsiveness review to an entity not authorized to provide legal representation, and without first-hand knowledge of the subject of the request—it is certainly improper to outsource those responsibilities to the opposing party in the litigation.”

Underlying the government’s beef was its belief that it was ethically improper for Davis Polk, as opposing counsel, to conduct the review. No doubt the litigation has been heated, because it seems to me (and the district court judge) that the DOJ’s perspective is tainted by its narrow view of the Davis Polk attorneys’ ethical obligations:

The Government contends that it would be ethically improper for Davis Polk attorneys to conduct a responsiveness review of documents of a non-party who is not their own client. That is incorrect. GE is the law firm’s client, and a lawyer may generally pursue any lawful activities that serve the interest of his or her client. As the commentary to the ABA’s rules of professional conduct make clear, “[a] lawyer should pursue a matter on behalf of a client despite opposition, obstruction or personal inconvenience to the lawyer, and take whatever lawful and ethical measures are required to vindicate a client’s cause or endeavor,” and “[a] lawyer must also act with commitment and dedication to the interests of the client and with zeal in advocacy upon the client’s behalf.” ABA Model Rules of Prof. Conduct, Rule 1.3 cmt. 1. Nothing in the ethical rules bars a lawyer from reviewing documents that do not belong to his or her client. If it serves the interest of a law firm’s client for the law firm to review the documents of a non-party to the litigation (and who in turn is willing to have the law firm conduct this review), then this review bespeaks good lawyering rather than a cause for complaint to the Court.

The order explains that the judge was not “persuaded by the Government’s myopic view of the scope of the ethical rules that otherwise govern Davis Polk’s conduct.”

In language that will warm the heart of Professional Responsibilities professors, the court reminds the DOJ what those other obligations entail:

The ethical obligations of counsel do not run solely to a client. Quite to the contrary, counsel have multiple ethical obligations to third parties and to the Court that foreclose them from lying, from concealing or altering evidence, or from otherwise engaging in conduct inimical to the due administration of justice. [footnote omitted, but here the order cites a laundry list of ABA Model rules to prove the point]. I decline to conclude that Davis Polk attorneys are free from ethical constraints with respect to their review of Westport and Cahill documents or to presume that Davis Polk attorneys will fail to disclose non-privileged, responsive documents in breach of their ethical obligations.

Beyond the ethics lesson, there is not much law in the order, save the court’s distinguishing a case that the government relied on where there was improper coaching of the non-party subpoena recipients.

The order discusses as well that DOJ apparently felt that Davis Polk was perhaps not being as complete in turning over documents, based I guess on DOJ expectations:

Here, apart from the Government’s complaints about the role of GE and its counsel, the Government argues that there has been an inadequate response to the Westport subpoena.

The judge felt that the government failed to make its case:

I am not (yet) convinced. GE represents that it received about 84,000 electronic documents from Westport, that its search-term queries yielded approximately 40,000 potentially responsive documents, and that each of these 40,000 documents were reviewed “by eye” by Davis Polk counsel. GE also received and reviewed approximately 12,000 documents in paper form. The parties estimate that between 9,000 to 10,000 of the combined total of these electronic and paper documents have been produced as responsive. Standing alone, the low but sizeable percentage of documents that have been determined to be responsive does not convince me that GE or its counsel has likely or necessarily failed to produce responsive documents.

In the order the judge suggests, however, if there were something other than a numbers issue the court might have been willing to give the DOJ attorneys a chance to take a peak at some of the not-provided documents:

The Government does not identify any type or class of document that it has not received and that it would reasonably expect to have been produced from Westport’s files. It does not make any other showing of inadequacy except for its reliance on numerical disparity. For lack of a sufficient showing that responsive documents have not been produced, I decline to consider the Government’s requests for GE to disclose its electronic search terms or to allow the Government a “quick peek” of allegedly non-responsive documents.


The order is a telling rebuke to the DOJ’s blanket assertion that opposing counsel could not screen the documents. It suggests that, absent some plausible reason, when there are sophisticated non-parties and reputable counsel in the case, a court should have reason to accept that parties will behave according to their ethical obligations. The order reminds us sometimes that even in the rarified world of tax litigation, and in the even rarer air of white-shoe law firms and Fortune 500 clients, the gloves sometimes come off and litigation gets heated, even before one gets to the merits. I suspect that that there will be many more chapters in this high-stakes litigation.


A Pro Se King Royally Wins Interest Abatement on Employment Taxes


Carlton Smith recently emailed us regarding King v. Commissioner, a Tax Court case dealing with interest abatement on employment taxes- a fairly infrequent occurrence. The taxpayer in King successfully obtaining the interest abatement was interesting (bad pun not intended) by itself, but the case also touched on the Court’s jurisdiction to review an abatement action arising from the CDP context where the tax had been paid, and reinforced the Tax Court’s view on what is excessive interest (which is contrary to the IRS’s position and perhaps the most important aspect of the case).

Although Mr. King was pro se, he was a lawyer (50 years of experience) and his tax practice is what gave rise to the employment tax liability.  He was a solo lawyer, but employed at least one person in most quarters from 2002 to 2008.  Apparently, not all employment taxes were paid, and the IRS assessed taxes and penalties of just under $50k.  Most of Mr. King’s assets were real estate or his law practice, which would have been difficult or costly to liquidate.  Mr. King requested an installment agreement, which became a long, drawn out fiasco, resulting in Mr. King being passed around to various agents, TAS, and others in collections.  The IA was eventually denied due to the equity Mr. King had in various assets, and he requested a CDP hearing related to filed lien, which the IRS declined to withdraw.  In October of 2011, Mr. King was finally able to contact Arthur Fonzarelli (come on Henry, you are better than that) and obtain a reverse mortgage to pay the taxes.  Following the payment of the tax, Mr. King petitioned the Tax Court to review the denial of the installment agreement, and the IRS denial of penalty and interest abatement on the employment taxes.

The Court had to grapple with whether or not it could take jurisdiction over a CDP case where the tax had been paid (usually, no), whether interest abatement applied to employment taxes (usually, no), and if the Service’s increasing usual game of pass off and wait could result in excessive interest (usually, no).  As discussed below, the Tax Court for Mr. King (not to be confused with the Court of the King before the King Himself) was persuaded by the regal arguments, and held for the taxpayer on all three issues.



As many of our readers know, in general if a taxpayer pays the assessment that gave rise to the CDP hearing, the Tax Court is divested of jurisdiction over the matter, and a taxpayer is forced to request a refund in a district court or the Court of Federal Claims.  See Sections 6320 and 6330; Green-Thapedi v. Comm’r, 126 TC 1 (2006) (though in the SaltzBook upcoming chapter on CDP we also discuss some cracks in the no refund in a CDP case, an issue Les touched on in in June in the post Recent Order Explores Scope of Tax Court powers in CDP Cases).  In the CDP hearing for Mr. King, however, Appeals considered the collection actions and alternatives, but also reviewed the interest abatement request.  Recent case law has made it clear that the Tax Court views the CDP decision as a final determination regarding the abatement of interest.  Although it is related to the CDP determination on the other matters, the abatement is independent and can provide jurisdiction on its own.  In 2012 and 2013, the Tax Court in Gray v. Comm’r, 138 TC 298,  declined to follow the IRS position that it lacked jurisdiction because the interest had been paid.  It held that it retained its jurisdiction under Section 6404(h); Section 6404(h)(2)(B) provides in interest abatement claims that the Tax Court had overpayment jurisdiction.  The Court, in foot note 12, gave the taxpayer a hand, by laying out how this was a claim for overpayment of interest due to failure to abate, as the petition did not specifically state an overpayment.

Section 6404(e) – (e) is not for “employment taxes”

Mr. King apparently argued that Section 6404(e) should have been a valid provision to rely upon for abatement of the interest related to his employment tax liability.  Section 6404(e) allows for the abatement of interest on any deficiency attributable to the IRS’s unreasonable error or delay, and is frequently relied upon for income tax interest abatement.  Unfortunately for the taxpayer here, there is pesky qualifying language relating to (e)(1)(B) that states the Service can only abate tax described in Section 6212, which restricts abatement to taxes imposed by subtitle A or B or chapter 41, 42, 43, or 44.  This generally includes income, gift, estate, gst and various excise taxes on nonprofits or retirement plans – not employment taxes.  King does not discuss (e)(1)(A), which allows for abatement of “any deficiency attributable in whole or in part to any unreasonable error or delay by [the IRS] in performing a ministerial or managerial act”, which does not contain the same reference to Section 6212.  As (e)(1)(B) speaks of payment of the tax and (e)(1)(A) the assessment of the deficiency, my assumption is the timing on the assessment was not an issue, only the prolonged process of the taxpayer being able to pay.  The Service position on (A) may be that the qualifying language applies to it also, but that may be susceptible to attack – I haven’t really researched the matter, but it seems like the key aspect is reliance on regulations that state the position, which seems outside the scope of the statutory language.

Section 6404(a) and when the IRS causes “excessive” interest

So when is the assessment of interest excess?  Probably not as often as taxpayers believe, but more often than the IRS would like.  Section 6404(e) did not provide relief, but Section 6404(a) provides for the abatement of the portion of an assessment, including interest, which “(1) is excessive in amount…or (3) is erroneously or illegally assessed.”  There is no restriction on the type of tax.

Mr. King claimed that the interest was excessive because of the various delays created by the IRS.  The Service position on this matter is that “excessive” is essentially a restatement of the third option of “erroneously or illegally assessed.”  The Service has lost on this matter before in the Tax Court in H&H Trim & Upholstry v. Commr, TC Memo 2003-9, and Law offices of Michael BL Hepps v. Comm’r, TC Memo 2005-138, so this is not breaking new ground, but good reinforcement of a taxpayer friendly ruling.  The Tax Court in the previous cases had interpreted “excessive” to “include the concept of unfairness under all of the facts and circumstances.”  A bit broader than simply erroneously or illegally assessed.   In H&H Trim, the taxpayer was able to show the interest would not have accrued “but for” the Services dilly-dallying.  In King, the Service argued that the prior case law was incorrect, but also argued that the taxpayer could have made a voluntary payment to stop the interest and was requesting an installment agreement, which would have incurred interest.  The Court essentially held that the taxpayer showed he would have perfected the installment agreement and paid it the underlying amount more quickly but for the IRS taking its sweet time and failing to follow its own IRM procedures in responding to the taxpayer’s IA request (albeit imperfect), and abatement was therefore appropriate.  As to the voluntary payment, the Tax Court stated that Section 6404(a) has no language barring abatement when a portion of the error or delay could have been attributable to the taxpayer (Section 6404(e) has that language).  Even if the taxpayer could have made the payment, the failure to do so did not alleviate the IRS’s requirement to abate.

Overall, a very instructive case on making employment tax and interest abatement claims.  Also helpful for those seeking abatement under Section 6404(a) who are arguing the tax is excessive, if the taxpayer can show that but for the IRS’s actions in inappropriately slowing the process the interest would have been less.

Chief Counsel Rejects Byers v. Comm’r D.C. Circuit Collection Due Process Appellate Venue Ruling

We welcome back frequent guest blogger Carl Smith to discuss the recently announced IRS position on the appellate venue of Tax Court cases.  Keith

Last year, I did a post on Byers v. Commissioner, 740 F.3d 668(D.C. Cir. 2014).  In that case, the D.C. Circuit held that appeals of Tax Court Collection Due Process (CDP) proceedings that did not involve challenges to the underlying tax liability only have proper venue in the D.C. Circuit.  Prior to Byers, the IRS and almost all taxpayers had brought such appeals in the Circuit in which the taxpayer resided when the taxpayer filed the Tax Court petition – i.e., in the “regional” Circuits of residence.  Since Byers was decided, the Tax Court has studiously avoided discussing whether it agrees with the D.C. Circuit’s contrary ruling – an issue that is of relevance to the Tax Court in applying its Golsen rule.  The IRS, as well, has been silent as to whether or not it will accept the D.C. Circuit’s interpretation of the venue statute.  As Keith discussed in a previous post, section 103 of S. 903 (which was passed by the Senate Finance Committee earlier this year) would prospectively overrule Byers and clearly require that appeals of CDP and section 6015(e) stand-alone innocent spouse cases go from the Tax Court to the regional Circuits of residence. This post is to report that, finally, on June 30, 2015, Chief Counsel issued Notice CC-2015-006, in which the office takes the position that it thinks Byers was wrongly decided.  Below, I will point out the highlights of the Notice – including both what it covered and what it did not.


As the Notice points out, unless the parties stipulate to a different Circuit under section 7482(b)(2), venue on appeal from Tax Court cases under section 7482(b)(1) is to the D.C. Circuit, unless one of six subparagraphs applies.  Subparagraph (A) provides that a non-corporate petitioner should appeal to the Circuit where he or she lived when he or she filed a Tax Court petition seeking “redetermination of tax liability”.  Deficiency cases and transferee cases were the only two types of cases that were heard by the Tax Court in 1966, when the current version of section 7482(b)(1) was enacted.  Clearly, subparagraph (A) was drafted to cover deficiency and transferee liability cases.  Subparagraph (B) generally provides a principal place of business Circuit for corporate petitioners in cases of petitions seeking “redetermination of tax liability” (also, clearly including deficiency and transferee liability cases).

After 1966, Congress gave the Tax Court over a dozen new jurisdictions, but only added references to those new jurisdictions in 4 more subparagraphs (from (C) to (F)).  The following jurisdictions are not mentioned by Code section in section 7482(b)(1): (1) section 6330(d)(1)

CDP cases , (2) section 6015(e) stand-alone innocent spouse cases, (3) section 6110 disclosure cases, (4) section 7623(b)(4) whistleblower award cases, (5) section 6404(h) interest abatement cases, (6) section 7436 proceedings for determination of employment status, (7) section 7430(f) proceedings to review the IRS’ grant or denial of an award for reasonable administrative costs where there was no underlying Tax Court proceeding, and (8) section 7479 Tax Court declaratory judgment actions relating to eligibility of estates to make installment payments of estate taxes under section 6166.  For these 8 jurisdictions, the IRS and most taxpayers have tried to shoehorn as many as possible into the language of subparagraph (A), so that the cases can be appealed to the Circuits of residence.

In Byers, the D.C. Circuit held that CDP cases that do not involve challenges to underlying tax liability are not described in the plain language of subparagraph (A), so are appealable only to the D.C. Circuit under the flush language at the end of section 7482(b)(1).

The Chief Counsel Notice addresses some of these 8 unnamed jurisdictions.

Whistleblower Award and Disclosure Cases

For two jurisdictions, the Notice concedes that appeals only go to the D.C. Circuit, since these jurisdictions cannot possibly be described as involving “redetermination of tax liability” under subparagraph (A) and (B).  These two jurisdictions are section 7623(b)(4) whistleblower award cases and section 6110 disclosure cases.

The Tax Court has already stated, in dicta, that whistleblower award cases are only appealable to the D.C. Circuit.  See Whistleblower 14106-10W v. Commissioner, 137 T.C. 183, 193 n. 12 (2011) (“Any appeal of this case would likely lie with the Court of Appeals for the D.C. Circuit.  See sec. 7482(b)(1) (flush language).” ).

And the legislative history of the disclosure provisions makes it clear that Congress was counting on subparagraph (A) not applying to appeals of these cases. In two places in each of the House Ways and Means Committee Report and the Senate Finance Committee Report, one can find the sentence:  “A decision of the Tax Court in such a [section 6110 disclosure] case could be appealed only to the United States Court of Appeals for the District of Columbia Circuit unless the Secretary agrees with the person involved to review by another court of appeals (sec. 7482(b)).”  H.R. Rep. 94-658 at 324-325, 1976-3 (Vol. 2) C.B. 697, 1016-1017 (emphasis added); S. Rep. 94-938 at 313-314, 1976-3 (Vol. 3) C.B. 49, 351-352 (emphasis added).

CDP, Innocent Spouse, and Interest Abatement Cases

The Notice takes the position that CDP, innocent spouse, and interest abatement cases fit within subparagraphs (A) or (B), even though the Notice concedes: “Innocent spouse and interest abatement cases involve relief from liability and so arguably should not be categorized as redeterminations of liability.”  However, the Notice states:

[I]t has been the longstanding practice of taxpayers and the government to appeal CDP, innocent spouse, and interest abatement cases to the circuit of the petitioner’s legal residence, principal place of business, or principal office or agency. The government has taken the position that Congress intended the same venue rules that apply to deficiency and transferee cases to apply to these newer categories of cases. Additionally, these cases generally involve the taxpayer’s obligation to pay the underlying tax liability.

The Notice also points out that the Tax Court has also historically followed this approach for purposes of applying its Golsen rule.  (By the way, contrary to what the IRS says, there is nothing in any legislative history to support the IRS’ statement of what Congress intended — either way — as to venue on appeal for any of these 3 jurisdictions.)

Accordingly, the IRS gives the following operative guidance to Chief Counsel attorneys:

The D.C. Circuit is the only court of appeals to have held that the proper venue for an appeal of a non-liability CDP case that is not enumerated in section 7482(b) is the D.C. Circuit. In litigating Tax Court cases, Chief Counsel attorneys should continue to assert the Office’s longstanding position that, for purposes of the Golsen rule, venue generally lies in the circuit of the taxpayer’s legal residence, principal place of business, or principal office or agency, regardless of whether the issues in the case involve liability.2/ In CDP cases in which liability is at issue, Chief Counsel attorneys should also argue, in the alternative, that under the rationale of Byers, venue lies in the regional circuit.

When evaluating appellate venue after a taxpayer files a notice of appeal, if the taxpayer appeals a non-liability case to the D.C. Circuit, and the case is not enumerated in section 7482(b), Chief Counsel attorneys should not recommend objecting to venue since Byers is controlling in the D.C. Circuit. If a taxpayer appeals a non-liability case to the proper regional circuit, Chief Counsel attorneys should likewise not object to venue as the taxpayer’s choice of venue is consistent with our position.


  1. Note that our Office’s position is that issues raised in a CDP case concerning the validity of an assessment, the assessment or collection statutes of limitation, or other procedural requirements for administrative collection do not involve liability. See CC-2014-002, Proper Standard of Review for Collection Due Process Determinations (2014).


Final Observations

The Notice does not address all of the jurisdictions that are not specifically cited in the subparagraphs under section 7482(b)(1).  Apparently, the IRS, for now, only wanted to address 5 of the 8 such jurisdictions.

Finally, the Notice effectively allows a taxpayer who wants to appeal a CDP case loss – where the case did not involve a challenge to the underlying liability – to either the Circuit of residence or the D.C. Circuit.  Thus, to the extent that there are differences in precedent between the two Circuits, taxpayers are afforded a chance to do some forum shopping.








Former NFL Offensive Lineman George Starke Wins Again, This Time in Tax Court

Professional athletes sometimes become the subject of interesting (to me anyway) tax cases. For example, I teach the basic federal income tax class here at Villanova both in the law school and graduate tax program. In those classes, I often discuss Dennis Rodman and his kicking a cameraman, which spawned the case Amos v Commissioner, involving the issue of whether the settlement payments the ex-diplomat and NBA star gave to the kickee-photographer were excluded under Section 104(a)(2). Another involves NFL Hall of Famer Paul Hornung, Hornung v Commissioner. The part of the Hornung case I teach involves the doctrine of constructive receipt, and in particular whether the value of a Corvette that Hornung won as MVP of the NFL championship played on December 31, 1961 had to be included in gross income in 1961, or in 1962, when he picked up the car. It’s a neat case and while most of my students have no idea who Hornung is (and increasingly Rodman), it allows me to inject popular culture into my class.

Earlier this month the Tax Court decided a case involving ex-Redskin star George Starke. This allows me to take the opportunity to connect some sports and NFL references to tax procedure.


Last year, in updating the Saltzman Book chapter on civil penalties, we weaved in the case of Bill Romanowski (another NFLer who had some troubles, including fights with teammates and problems controlling his saliva on the field). Romanowski’s case involves a successful reliance defense to accuracy-related penalties in a horse-breeding “investment.”

Reliance cases are notoriously fact-specific, but the Romanowski opinion is a helpful case for practitioners wanting a successful case even where tax advisors have a financial interest in the investment. It shows how with the right facts (maybe needing a football player juiced up on steroids who took many hits to the head), a taxpayer can still hide behind the advisor to shield penalties.

Just this month, in Starke v Commissioner, the Tax Court decided another case involving a former NFL player, George Starke. After starring at Columbia (both in hoops and football) Starke in the 70’s and 80’s was a member of the Super Bowl winning Redskins’ offensive line, known as the Hogs.

After retiring Starke started a nonprofit training institute in DC called Excel that provided “a two-year program that taught basic reading, writing, and arithmetic in addition to providing job counseling and technical training. The program was available free of charge to any persons who wanted to participate so long as they committed to the attendance requirements.”

The tax problems arose because of sloppy financial management at Excel. Starke took a salary and had a housing allowance; he also had access to a credit card “for both personal and Excel- related expenses, but he did not consistently provide receipts to Excel showing his expenses.”

Like many small organizations the bookkeeping was not precise and there was little in the way of control over the use of the card. One of the accountants testified that if an “employee made a purchase on one of Excel’s credit cards and the employee could not show that it was an expense benefiting Excel, Excel would treat the expense as an advance or prepaid expense on the employee’s behalf.”

Starke left Excel in 2010. The ledger reflected a number of Starke’s credit card purchases in the years 2003-2006; Starke paid back some of the amounts reflected on his card between the years 2007 and 2010. When he left Excel, Starke received a 2010 1098 MISC for over $83,000; presumably for the advances and prepaid expenses that he failed to repay.

Starke failed to include the amounts from the 1098 MISC on his 2010 return, and IRS issued a stat notice, which Starke timely appealed by filing a petition to Tax Court.

So what’s the issue? As in sports, timing can be everything. Here, the proper year for inclusion according to the Tax Court was not 2010, but the years Starke made the charges on the card. Here’s how it gets there.

The Tax Court opinion briefly discusses the impact of the issuance of the information return on burden of production and burden of proof (issues we discussed in the context of information returns last year here; I also discussed both federal and state law causes of action for erroneous information returns here):

For example, in an unreported income case such as this, the Commissioner generally must make some minimal evidentiary showing (which he has done) for the presumption of correctness to attach. And where there is a reasonable dispute with respect to an item reported on an information return, the Commissioner has the burden of producing reasonable and probative information (which he has done).

(footnotes omitted).

After laying that out (and noting that Starke did not argue for a burden shift under Section 7491(a)) the Tax Court indicated it did not matter anyway because Starke was going to be successful based on the preponderance of the evidence.

That evidence, in the way of testimony and the written records, reflects that Starke did not have cancellation of indebtedness income in 2010, but that the payments he received in earlier years may have been income in those years. Tax year 2010 (the year at issue) would have been proper if the IRS could have established that the payments Starke received in earlier years were loans:

In the case of a loan, which is not included in income at the time the funds are disbursed, the parties agree that the amount will be repaid and the debtor-creditor relationship is established at the outset. However, an advance that is considered compensation for services, albeit services to be rendered in the future, constitutes taxable income in the year it is received. We determine whether a bona fide debtor-creditor relationship exists by examining all of the pertinent facts and “[a]n essential element is whether there exists a good-faith intent on the part of the recipient of the funds to make repayment and a good-faith intent on the part of the person advancing the funds to enforce repayment.

The Tax Court discussed how the parties did not intend to treat the personal payments Starke made on the Excel credit card as loans to Starke. For example, there was no loan document, no other written evidence memorializing a loan agreement, and there was an accountant letter from 2005 characterizing the payments as advances and not loans.

Given that there was no loan and the other years were not before the Tax Court, Starke won:

Because we agree that the payments were not loans, we would ordinarily look to whether the payments are considered advances; however, whether the payments are advances is irrelevant in this case because all of the items recorded by Excel as advances or prepaid expenses were recorded for years that are not before the Court. According to Excel’s general ledgers, all of the payments were made before 2010. Because advances are taxable for the year in which they are paid, any advance would have been taxable for years that are not before us.

So, unless those earlier years are still open under Section 6501, Mr. Starke may have one more victory on his resume.