Timely Filing a Tax Court Petition from Prison

Today, we welcome back frequent guest blogger, Carl Smith.  The title does not do the post justice because of the many issues raised by the “untimely” petition filed from prison.  Carl discusses a range of issues raised by this case including the prison mailing rule, equitable tolling, appellate venue and the Golsen rule.  All of these issues come together in this case in which the taxpayer misses his opportunity to obtain a Collection Due Process (CDP) hearing in the Tax Court in part because of bad advice he received from the Appeals Division.  While this post does not offer any great answers to taxpayers receiving bad advice from the IRS on a critical issue such as the timely filing of a Tax Court petition, Carl’s discussion of equitable tolling shows the path to overcoming the inequity of bad advice.  Allowing equitable tolling in a situation such as this would not hurt the IRS in any material way and would make all taxpayers, not just those with the peculiar problems of prisoners, feel better about the system we have for resolution of tax disputes.  In this post, Carl cites to some of the articles he has written on this subject.  I have also written on this subject.  When Taxpayer Bill of Rights 4 gets passed, this issue should be front and center.  Keith 

On April 11, Judge Gustafson, in a long unpublished order, ”reluctantly” dismissed a CDP case because the petitioner filed his petition late.  See Harsh Sharma v. Commissioner, Tax Court Docket No. 5163-11L. To me, the ruling is subject to question on two grounds on which I have written or I have litigated in the past — i.e., (1) what is the correct venue on appeal in CDP cases and (2) can the 30-day period under section 6330(d)(1) in which to file a CDP petition be equitably tolled?  But, even if Mr. Sharma prevailed on appeal — such that the appeals court held that Judge Gustafson was wrong on both the grounds that I question — the taxpayer’s petition still would end up being dismissed.  So, I wouldn’t recommend he file an appeal. 

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The first thing about this case (a thing that is amazing) is that it took the IRS until November 2013 to move to dismiss for lack of jurisdiction — more than 2 1/2 years after the petition was filed and after the Tax Court had granted 4 IRS motions to continue scheduled trials (and this case deals with a jeopardy levy!).  

The second thing about this case (a thing that is annoying) is that the IRS sent notices of determination sustaining both the jeopardy levy and upholding the filing of a notice of tax lien on January 11, 2011, thus statutorily requiring the taxpayer to file a petition in 30 days (i.e., February 10, 2011).  However, the taxpayer wrote to Appeals before February 1, 2011, asking for more time to file a petition.  In a February 1, 2011 letter, Appeals wrote back to the taxpayer and warned him that the filing period could not be extended, but incorrectly stated that the petition had to be filed in the Tax Court “within 30 days of this letter” (i.e., March 3, 2011).  This error really bothered Judge Gustafson, since the Tax Court received an imperfect petition on March 2, 2011.  It had been mailed from the Georgia prison in which the taxpayer was housed, and the envelope in which it came bore a prison stamp of February 24, 2011.  The taxpayer testified that he handed the imperfect petition to the prison authorities to mail on February 1, 2011 (apparently not waiting to hear back from Appeals about the extension), but the judge found this testimony uncorroborated and, sadly, irrelevant.  Why? 

In 1988, the Supreme Court ruled that a prison inmate’s notice of appeal in a habeas corpus case was deemed filed at the time he delivered it to prison authorities for mailing to the court. Houston v. Lack, 487 U.S. 266, 270, 276 (1988).  The prison mailbox rule was subsequently extended and codified in Rules 4(c)(1) and 25(a)(2)(C) of the Federal Rules of Appellate Procedure.  In Crook v. Commissioner, 173 Fed. Appx. 653, 655 (10th Cir. 2006), the Tenth Circuit held that this prison mailbox rule, however, did not extend to filings in the Tax Court.  Rather, the section 7502 rule that timely mailing is timely filing applied, and, under it, the postmark on the envelope is treated as the date of filing.  Long before either opinion, in Rich v. Commissioner, 250 F.2d 170 (5th Cir. 1957), the Fifth Circuit had a deficiency case where there was evidence that a taxpayer delivered a Tax Court petition to prison officials for mailing a full 12 days before it was due to be mailed, but then the prison accidentally failed to mail it until contacted by the taxpayer’s lawyer sometime after the 90-day period lapsed.  In Rich, the Fifth Circuit, though angry with the government and finding the equities all on the taxpayers’ side, held that the petition was untimely and the case must be dismissed for lack of jurisdiction.  As noted by Judge Gustafson, this holding in Rich has never again been cited by the Fifth Circuit.  But, as Judge Gustafson also noted, under Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981), the Eleventh Circuit (which encompasses where Mr. Sharma was living) is required to follow the precedent of the Fifth Circuit from before the time the Eleventh Circuit was formed.  Judge Gustafson held that, since Mr. Sharma’s case was appealable to the Eleventh Circuit, under the Tax Court’s Golsen doctrine (Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. on other issues 445 F.2d 985 (10th Cir. 1971)), the Tax Court was obligated to follow Rich and dismiss the petition because it was deemed mailed on the prison-stamped date of February 24, 2011 — two weeks after it was due to be mailed.  (Parenthetically, at least the Fourth Circuit has criticized and declined to follow Rich in the case of an incarcerated Tax Court deficiency-jurisdiction petitioner and has held that delivery to the prison authorities for mailing is the timely filing date — either under section 7502 or principles of equitable tolling. Curry v. Commissioner, 571 F.2d 1306 (4th Cir. 1978)).

In making this ruling applying the Golsen rule, Judge Gustafson mysteriously did not cite or discuss the recent case of Byers v. Commissioner, 740 F.3d 668 (D.C. Cir. 2014), in which the D.C. Circuit held that appeals of CDP cases from the Tax Court — where the case does not include a challenge to the underlying liability — are only properly appealable to the D.C. Circuit, not the Circuit of residence.  Although the D.C. Circuit has not had a case involving the prison mailbox rule and filings in the Tax Court, the D.C. Circuit has ruled (citing the Supreme Court’s opinion in Houston v. Lack) that an F.R.C.P. 59(e) motion to alter or amend a judgment — one filed in a district court by a prisoner in a 42 U.S.C. section 1983 case — is deemed filed in the district court at the time the motion is handed to prison authorities for mailing.  Anyanwutaku v. Moore, 151 F.3d 1053 (D.C. Cir. 1998). Thus, there is a good chance that, if Mr. Sharma appeals the dismissal to the D.C. Circuit, it would extend this prison mailbox rule to Tax Court petitions.  One difficulty in Mr. Sharma’s appeal may be what is in his amended petition.  Judge Gustafson’s order does not mention whether Mr. Sharma raised a challenge to the underlying liability therein; if he did so, the D.C. Circuit would transfer any appeal to it to the Eleventh Circuit. 

Unfortunately, as I see it, even if Mr. Sharma could convince either the D.C. Circuit or the Eleventh Circuit to apply the prison mailbox rule, he would not win his case.  Judge Gustafson found no corroborating evidence from the prison that would support Mr. Shamra’s testimony that he gave the imperfect petition to the prison for mailing on February 1, 2011 (which would have been a timely mailing date).  Thus, Mr. Sharma will lose this issue either on a legal or factual basis.

Two pages of Judge Gustafson’s order are also addressed to the issue of the letter from Appeals that gave Mr. Sharma incorrect information about when he must file.  It was clear that Mr. Sharma’s imperfect petition was filed a day before the due date set out in that letter.  A frequent reason for applying the doctrine of equitable tolling is the defendant’s misleading the plaintiff as to the correct filing date.  This letter was clearly misleading.  Citing Tax Court case law involving deficiency, CDP, and whistleblower jurisdiction cases, however, Judge Gustafson held that the 30-day period in which to file a Tax Court petition under section 6330(d)(1) was jurisdictional.  A jurisdictional time period cannot be equitably tolled.  I was disappointed to see, however, that Judge Gustafson did not reconsider the CDP authority in light of recent case law from the Supreme Court that has severely limited the “jurisdictional” label generally to subject matter and personal jurisdiction — not “claims processing rules” like time periods in which to file.  (For an example of a recent opinion holding a filing period in an administrative agency not to be jurisdictional, see Sebelius v. Auburn Regional Medical Center, 133 S. Ct. 817 (2013).)  I have previously written articles in Tax Notes Today making the argument that under this recent Supreme Court case law, the periods in which to file a Tax Court petition under its innocent spouse (section 6015(e)(1)), CDP (section 6330(d)(1)), and whistleblower jurisdictions (section 7623(b)(4)) are not jurisdictional and are subject to equitable tolling.  See “Equitable Tolling Innocent Spouse and Collection Due Process Periods”, 2010 TNT 41-8 (March 3, 2010), and Friedland:  Did the Tax Court Blow Its Whistleblower Jurisdiction?”, 2011 TNT 100-10 (May 24, 2011) (Friedland, which I specifically criticized in this article, was one of the opinions that Judge Gustafson relied on in his order).  While Judge Gustafson ruled that the CDP-filing time period was jurisdictional — so could not be extended by the equities — he also wrote: 

An error of this sort is most unfortunate. An agency charged with broad nation-wide responsibility and necessarily staffed by fallible humans can never avoid such errors entirely; but the discovery of such an error should incline the IRS to take action within its discretion to compensate for the error and to provide reasonable remedies for a taxpayer who has been disadvantaged by the agency error. 

I am not sure what remedy the IRS could give Mr. Sharma for this error, since he has already been before Appeals, and the IRS cannot recompense him by offering him Tax Court review.  Now, I have an argument that subsequent Appeals CDP retained jurisdiction hearing notices under section 6330(d)(2) are appealable to the Tax Court, notwithstanding a contrary IRS regulation at section 301.6330-1(h)(2)(A-H2), but I am not sure that such an argument will win, even if the IRS were to give Mr. Sharma another hearing at Appeals.  Note, though, the recent opinion in SECC Corp. v. Commissioner, 142 T.C. No. 12 (Apr. 3, 2014), in which the Tax Court held that it need not give any deference to an IRS Revenue Procedure that appeared to limit the Tax Court’s jurisdiction to hear employee/independent contractor disputes under its jurisdiction at section 7436 (“We owe no deference to what an administrative agency says about our jurisdictional bounds.  See Fox Television Stations, Inc. v. FCC, 280 F.3d 1027, 1038-1039 (D.C. Cir. 2002)”; slip op. at p. 16 n. 5). 

Nevertheless, even if Mr. Sharma were to be able to convince an appeals court that the period at section 6330(d)(1) to file a Tax Court petition was not jurisdictional and could be equitably tolled, I don’t think Mr. Sharma could get equitable tolling.  It was Mr. Sharma’s testimony that he gave the imperfect petition to the prison on February 1. Thus, he could not have detrimentally relied on the Appeals letter giving him an incorrect later date that was only mailed to him on that same date. 

In sum, it is sad that Mr. Sharma has lost his Tax Court case, and disappointing that Judge Gustasfon did not discuss (1) whether Byers affected his Golsen holding or (2) whether Tax Court case law on what is “jurisdictional” is still good after recent Supreme Court case law on the subject, but Mr. Sharma would apparently lose an appeal no matter which way Judge Gustafson ruled on these issues.  Now that I am retired, though, I urge other practitioners to make these arguments to the Tax Court for it to consider in appropriate future cases. 

 

IRS Regulation of Return Preparers: April 15 Edition

April 15 is an appropriate day to flag the issue of regulating return preparers. Last week the Senate Finance Committee held a hearing entitled Protecting Taxpayers from Incompetent and Unethical Return Preparers. Witnesses included Commissioner Koskinen, National Taxpayer Advocate Olson, a practitioner from Oregon (one of four states to regulate unlicensed preparers), Block CEO Bill Cobb, consumer rights advocate Chi Chi Wu and others. A link to video of the testimony and all of the witnesses’ written statements can be found here.

There are some good articles summarizing the hearing and the witnesses’ statements. (see for example last week’s article in Accounting Today). There is also robust public debate on this topic; for example the excellent op-ed by a law student from NYU who succinctly summarized some of the main points that advocates of additional regulation have made. That piece is entitled Rein in Shady Preparers(registration required). A good representation of the opposition to regulation is last week’s written testimony of Dan Alban (the lead attorney who successfully argued the Loving case), who is an articulate advocate. I have discussed my views on the importance of regulating preparers in prior posts.

The arguments regarding preparer regulation include the following: the proposals are anti-competitive and will drive up taxpayer costs, IRS already has enough tools to tackle the problem of incompetent or unscrupulous preparers, the process leading up to the IRS’s decision to impose the requirements was corrupted by corporate interests that would benefit from additional barriers to entry, and the real focus should be on cleaning up and simplifying the tax system.

I will not address all of these objections (and others) but make a few points below.

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The rallying cry is tax simplification. It would likely drive down errors and reduce the need to use commercial preparers. Such a drastic streamlining of the code is unlikely. Thus we continue to see public policy choices represented in the code through credits, deductions, and other preferential treatment of economic decisions.

Refundable credits bring to the fore many views on tax simplification and the role of the tax code in developing social policy. The biggest refundable credit and the one that gets the most attention when it comes to errors is the earned income tax credit (EITC). Yet as I discussed in a post last month and as IRS research reveals, the largest dollar source of errors in EITC claims, commercial or self-prepared, relates to the residence of children. Yes there are some challenging and complex issues on that point (e.g., temporary absences) but legal complexity is not usually a characteristic of the residence issue.   Likewise the underreporting of Schedule C income is not fundamentally an issue of complexity. The largest components of individual tax gap stem from the limited information the government has about the source of the errors and the high costs that the IRS faces in detecting those errors through traditional tools of enforcement. It is those areas where nontraditional measures that increase visibility and accountability of preparers and taxpayers are vital tools necessary to maintain the confidence in the fairness of our tax system.

I do not mean to suggest that structural reform would not have an impact on the tax gap. Splitting the EITC up to account for its work and child characteristics may drive down the opportunity and incentives for taxpayers to misstate facts, as would potentially increasing the amount and availability of the childless EITC even without wholesale credit reform. Why might increasing the childless credit influence overclaim rates on the EITC overall? If a noncustodial parent with earned income was entitled to receive some meaningful EITC even without the presence of children, his or her incentive to improperly claim a child as a qualifying child decreases. The current EITC penalizes working non-custodial parents who may support families or spend significant time with children. Under the current EITC those adults are entitled to little or no benefits in many situations, although they may be able to claim the dependency exemption and child tax credit, thus highlighting the role of the preparer in developing the taxpayer’s facts and understanding the appropriate tax treatment.

Likewise, the individual underreporting tax gap is based on a series of differing problems that varies by taxpayer and by issues with respect to the same taxpayer.  Like the “family credits,” understanding and accurately reporting self-employment income are areas which would benefit from accuracy in paid preparer fact development and understanding.

Preparer testing and education are meant to be part of the IRS’s tool-kit, but that alone should not be the sole determinant of a wholly accurate return. A tax system will always need the ability to detect and sanction those who cross the line; testing and education are insufficient.

The IRS has many tools to influence compliance, and there are other measures that may be less costly that may also increase visibility and accountability of preparers and taxpayers. In particular, as Dan Alban has emphasized, the IRS’s uniform preparer registration requirements (undisturbed by Loving) provide an opportunity for IRS to understand preparers and communicate with preparers who may be taking aggressive positions. It is shocking how little the IRS even knew about preparers before this simple but key reform proposal was implemented a few years ago. Likewise, enhanced due diligence is really just getting started for EITC preparers, and recent tax reform proposals have called for expanding due diligence for other credits.  In his written testimony last week Block CEO Bill Cobb proposed juicing up taxpayer self-disclosure requirements for issues where preparers have heightened disclosure requirements (such as the EITC). This may reduce the incentive for taxpayers to rely on ghost preparers who are completely invisible to the system and encourage taxpayers who self-prepare to honestly report on their returns.

The additional costs associated with testing and education are a red herring and deflect the societal need to ensure accurate, honest tax returns.  The costs that are borne by the preparers and passed on to taxpayers have to be compared to the overall costs borne by the public at large when such a high percentage of commercially-prepared returns has errors. That is especially important given IRS research that suggests there are higher error rates among unlicensed return preparers as compared to other preparers. Further, to the extent that small preparers are less able to benefit from economies of scale and would likely be more directly impacted by testing and education costs, any program could provide waivers or differing fees depending on preparer size or complexity of the returns the preparer may be authorized to prepare for example. However it is important not to confuse complexity with the number of schedules.  A low-income taxpayer’s return may include several schedules to support a large refund, including Schedule EIC, and schedules necessary to claim other credits, such as other family status credits and education credits. Charging by the form should not dictate a higher cost which may be borne disproportionately by lower income taxpayers. The discussion surrounding complexity and costs I think can benefit from a more nuanced appreciation of the differences between legal and factual complexity.  I will pick this topic up in a future post.

On the cost side of the ledger few advocates point to the taxpayer costs associated after the fact compliance efforts. Those costs include the challenges of responding to an audit and/or dealing with collection following the audit of an improper return—easy for many readers of this blog but a potentially major obstacle for others. Responding to an EITC audit where the paid preparer did not complete the preparer due diligence form accurately, or honestly, is rich with costs to the taxpayer – missed work, retaining an attorney, requesting assistance from others to document the audit response, just to name a few. For those who owe money to the IRS due to the receipt of an improper refund, the stress of collection notices and the fear of the bills can lead to other problems with tax administration. The growth in retail establishments peddling offers in compromise and other help with the IRS, while good for the infomercial industry, creates another opportunity for exploiting unsophisticated taxpayers.

As a parting thought, the policy issues surrounding the IRS and the Administration’s request for Congress to pass legislation authorizing the IRS to impose testing and education requirements present an opportunity for informed and reasoned discussion on tax administration. It is easy to rail against the tax gap and high overclaim rates but the IRS’s task of reducing errors on any issue that is not characterized by information reporting and withholding is difficult. IRS in its judgment believes that it could do a better job administering the tax laws and working with preparers if Congress gave it the power that the DC Court said it did not have absent explicit legislative authority. Congress should give the IRS the tools it needs to do its job.  If it does give IRS those tools, the burden should be on the IRS to report on the costs and benefits of its additional powers. That would allow for further monitoring and evaluation based on facts.

 

IRS Offers Small Glimpse of Its Thoughts on Aspects of First Time Abate Program

In the fall of 2012, TIGTA released a somewhat scathing report on the IRS administration of the first time abate program (FTA).  For readers who are unfamiliar, FTA allows taxpayers to abated various delinquency penalties on late returns if certain requirements are met.  The provisions are very taxpayer friendly, and, as highlighted in the TIGTA report, underutilized.  The reason for FTA being underutilized is that most taxpayers are unaware of the program and the IRS never offers it up as a potential solution; taxpayers must request the abatement.

Last year, I drafted a post about the program, which provides greater details on the requirements and availing yourself to FTA, which can be found here.

Last week, the IRS released an email memorandum providing internal guidance on the administration of FTA.  The email is not lengthy, but it does provide some insight, and is interesting because it is one of the few items of guidance on FTA outside of the IRM provisions dealing with the program.  The IRM provision is found at IRM 20.1.1.3.

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After finding the taxpayer did not qualify for the statutory reasonable cause exception, the Service stated that FTA did apply to the failure to deposit penalties.  This is stated in the IRM as one of the three penalties that can be abated, along with the failure to file and failure to pay penalties.  The taxpayer being discussed did not qualify for FTA, and it appeared the examining agent had requested a review for FTA, not the taxpayer.  The memorandum gave the impression that this should not be considered until raised by the taxpayer.

After that finding, the advice provided answers to some general questions.  First, the memorandum stated that FTA would be appropriate for penalty relief during exam and prior to the penalty being assessed.  The memo states that since FTA is not a statutory mandate, the rationale is based on IRS policy and in the drafter’s opinion, assessing the tax would be a waste of Service resources if FTA was appropriate.  This provides important taxpayer and practitioner guidance that FTA can and should be brought up during exam, and the agent should be directed to this email if he or she resists.  I think many practitioners assumed this to be true, but I do not believe the IRM stated as much.

The second question was whether FTA could be applied to any year (highest penalty amount), or if it had to be applied to the earliest tax year.  The memo stated that it had to go towards the earliest tax period, as directed under the IRM.  Although not stated in the memorandum, the basis for this appears to be IRM 20.1.1.3.6.1(2).  My initial thought was that taxpayers should pay the penalties for prior years before requesting FTA for the highest year; however, FTA is generally only available if penalties have not been imposed for the prior three years, so that would not work for most taxpayers.

Somewhat related, when I drafted the earlier post, I had multiple clients going through the FTA program.  One taxpayer had a substantial ($150k plus) penalty, but appeared to qualify.  Given the dollar amount, I was concerned that the Service would take a harder look.  The FTA request was provided in August, and I spoke with Collections at that time, which indicated collection activity would cease until the FTA determination was made.  In December, the Service had not responded to the FTA request, but collection activity resumed.  Thankfully, a somewhat panicked call to the IRS was met with a response that the collection letter was a mistake, and we would have a response on FTA within two weeks.  About a month later, the IRS responded by letter indicating that our request was granted, but the Service retained the right to reverse upon examination.  A very positive result, and handled in the same manner as my smaller FTA cases and generally within the same time frame.

Appeals and Impartiality: Tax Court Finds Appeals’ Procedures Inadequate But Punts on Other Issues

Last week I discussed how courts are wrestling with when a prior Appeals employee’s involvement will trigger a finding that the Appeals’ employee is not impartial in a subsequent collection due process (CDP) case.  In Cox v Commissioner, the Tax Court took a narrow view of what is necessary to ensure that Appeals meets the impartiality requirement. In reversing the Tax Court, the Tenth Circuit took a more expansive view of CDP, and situated its procedural protections as part of a broader due process framework.

Last week the Tax  Court had a chance to revisit the impartiality of Appeals’ employees in the case of Moosally v Commissioner.  In Moosally, the Tax Court held that an Appeals employee who had earlier considered a taxpayer’s appeal of a denied offer in compromise could not preside over a later CDP hearing that involved the same issue and years. The case is easier than Cox because under either a narrow or expansive view of impartiality, what Appeals did in that case was improper. In this post, I will discuss Moosally, and why in that case the Tax Court found Appeals’ procedures inadequate even under the standards the Tax Court applied in Cox.

I will also discuss what Moosally fails to do.  Moosally sidesteps the Tenth Circuit’s finding in Cox that part of the CDP regulations are invalid. In addition, Moosally does not directly address a recent DC Circuit Court of Appeals decision which upends the venue of CDP cases on appeal.  As I describe below, Moosally is likely more significant for what it fails to do than its actual holding on impartiality, as it kicks these issues down the road for future litigants.

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Summary of Facts

Moosally had run up about $40,000 in liabilities relating mostly to two quarters of unpaid trust fund taxes from 2000 and a small amount of income tax from 2008. In June of 2010, Moosally submitted an offer to compromise the two quarters of trust fund liabilities for $200 based on doubt as to collectability(it was not clear why she left off the small income tax liability from the original offer).  In late May 2011, IRS’s centralized offer unit rejected the offer because it determined Moosally’s collection potential to be slightly under $35,000.

In late June 2011, Moosally appealed the rejection of the offer, and in the appeal, she requested Appeals consideration of both the trust fund liabilities and small individual tax liability in its offer review.  She also provided additional documents and explained that her circumstances had changed for the worse  as she had lost her job.  Appeals confirmed receipt of the offer appeal and told Moosally that it assigned a settlement officer to the case, settlement officer Smeck (SO 1).

Here is where things start to get messy. In July of 2011, while the offer was being appealed, as a result of the unpaid liabilities that were the subject of the prior offer, the IRS issued a notice of federal tax lien (NFTL). The NFTL gave Moosally the right to a CDP hearing. She timely filed a request for a CDP hearing; in the CDP request she asked IRS to compromise the liabilities that were part of her appeal before the first settlement officer, SO 1. Appeals assigned the CDP case to a new settlement officer, SO 2.

In late August, the CDP case began to move forward. At around the same time, the first settlement officer, SO 1, and Moosally exchanged letters relating to the appeal of the offer, and Moosally provided the SO1 with updated financial information.  A few days after Moosally sent SO 1 updated financial information, SO 2 sent Moosally a letter saying that the CDP case was being reassigned to the first settlement officer because that settlement officer already had Moosally’s offer under Appeals consideration.

From Appeals’ perspective, taking the CDP case away from SO 2 and giving it to SO 1 made sense because SO 1 was familiar with Moosally and was reviewing her updated financial information.

SO 1 eventually issued a CDP determination sustaining the IRS’s rejection of the offer. Moosally petitioned the Tax Court on the basis that SO 1 was not impartial due to her prior involvement with the tax and periods that were at issue in the CDP determination.  She asked that the Tax Court remand the case back to Appeals with an order that an Appeals employee other than SO 1 preside over the CDP hearing

The Tax Court Finds That There was Prior Involvement

Moosally essentially argued that when the first settlement officer considered the denied offer as part of her appeal outside the CDP proceedings, she had prior involvement with the case and was no longer impartial.  The IRS argued that the first settlement officer did not have prior involvement because she had not made a determination with respect to the original appeal when Appeals transferred the CDP case to her.

The statute provides that an impartial officer or employee is one who has had “no prior involvement with respect to the unpaid tax…before the first [CDP]hearing.” The statute does not define “prior involvement” but the regulations state the following:

Prior involvement by an Appeals officer or employee includes participation or involvement in a matter (other than a CDP hearing held under either section 6320 or section 6330) that the taxpayer may have had with respect to the tax and tax period shown on the CDP Notice.

The case confronts the legacy of Cox, where as I described in my post last week What is a Fair Hearing  the Tenth Circuit in a divided opinion reversed the Tax Court and found that in a CDP hearing involving review of an offer in compromise, an Appeals Officer’s consideration of future years’ delinquent returns constituted prior involvement when those later years came before the same Appeals Officer in a new CDP case involving a new offer in compromise.   Cox reflects two differing approaches to impartiality. The Tax Court found no violation of the impartiality requirement principally because it viewed the Appeals’ Officer’s initial consideration of the delinquent returns as peripheral to the later CDP case. In contrast, the Tenth Circuit  “found that the no prior-involvement requirement was a broad restriction that should not be limited to involvement in a prior hearing or administrative matter” but should include any “substantive and material involvement with a taxpayer’s liability, regardless of whether the liability is the liability currently under official review by the Appeals Officer.” In so finding, the Tenth Circuit opined that the regulatory requirement tethering prior involvement to a particular matter was inconsistent with the statutory language and invalid.

Moosally thus presented the Tax Court with a chance to address the merits of the Tenth Circuit’s approach and consider its view of the regulations defining prior involvement.   The Tax Court declined to do so, however.  As the case was not appealable to the Tenth Circuit, the Tax Court stated that it was not bound to follow the appellate court’s approach to the issue. Instead, it found for Moosally even under the regulations and under the Tax Court’s approach to “prior involvement” as reflected in its Cox opinion.

I will tease out the Tax Court’s analysis, summarizing some of the arguments. I leave out some of the arguments that the IRS made; the opinion is complicated and I suggest for readers wanting more to read the opinion, but here is the nutshell.

As Moosally describes, the Tax Court in Cox found no violation of the impartiality requirement based on two differing rationales:

[T]he Tax Court in Cox determined that there was no violation of the impartial officer requirement because (1) the officer’s prior involvement was only peripheral to, and not the subject of or directly in dispute in, a proceeding before the Court, and (2) there was no greater or different harm where both the officer’s prior involvement and current consideration were in the context of a CDP hearing.

As to the first rationale after distinguishing the facts from Cox, Moosally then lays out why the Tax Court approach in Cox warrants a finding that there was impermissible prior involvement in this case:

Smeck [SO 1] reviewed petitioner’s appeal of her rejected OIC for the periods in issue for nearly three months before petitioner’s CDP hearing for the same periods in issue was also transferred to her. During those three months, Ms. Smeck requested from petitioner and evaluated various documents, forms, and other financial information to calculate petitioner’s reasonable collection potential and evaluate petitioner’s rejected OIC. Accordingly, through her review of petitioner’s rejected OIC, Ms. Smeck had prior involvement with petitioner’s unpaid tax liabilities for the periods in issue before she was assigned to handle petitioner’s CDP hearing for the same taxes and periods in issue. Consequently, we hold that, pursuant to section 301.6320- 1(d)(2), Proced. & Admin. Regs., Ms. Smeck is not an impartial officer pursuant to section 6320(b)(3) and petitioner is entitled to a new CDP hearing before an impartial officer.

In an effort to find the first settlement officer’s involvement as permissible, IRS attempted to distinguish current involvement from prior involvement:

Respondent contends that Ms. Smeck was an impartial officer because she had not yet issued a determination regarding petitioner’s rejected OIC and that  there is “current” involvement, but no “prior” involvement, when an officer has not made any determination regarding a rejected OIC. We disagree. The regulations plainly prohibit “prior involvement” and do not specify that the involvement must culminate in the issuance of a determination of any sort (emphasis added).

The opinion also addressed the second rationale that the Tax Court relied on in Cox, namely that the regulations and legislative history contemplate separate CDP proceedings before the same Appeals’ employee. It did acknowledge that it looked at the same legislative history in finding for the IRS in Cox. It notes, however, that the legislative history does not contemplate  “the combination of CDP hearings with non-CDP matters, such as the OIC rejection appeal involved in the instant case. Ms. Smeck [SO 1] began handling petitioner’s non- CDP appeal of her rejected OIC before she was later assigned petitioner’s CDP hearing.”

In note 9 it goes into further detail, indicating that it is not using Moosally as an opportunity to revisit whether the legislative history supports a more permissive standard when the differing matters are CDP cases, as it offered for support of its holding in Cox:

[in Cox] we referred to this same legislative history for the proposition that “both the statutory and the regulatory language suggest a relatively permissive standard under which participation in earlier collection proceedings would not constitute disqualifying prior involvement for purposes of section 6320 or 6330.” We do not opine on whether the legislative history supports a permissive standard or whether we will continue to apply a permissive standard to situations similar to Cox that involve two CDP matters. However, we conclude that the flexibility contemplated by Congress and provided in sec. 301.6320-1(d)(1), Proced. & Admin. Regs., as plainly stated in the regulation, applies only to situations involving two or more CDP matters.

Keeping its options open, the Tax Court in Moosally stated that given it was deciding the case based on its Cox rationale, it was not taking any position on the merits of the Tenth Circuit’s approach to impartiality:

For clarity, we note that we have not decided whether we will apply the Tenth Circuit Court of Appeals’ analysis to facts similar to those in Cox arising in cases appealable in circuits other than the Tenth Circuit or instead continue to follow the standard and rationale set forth in our Opinion in that case. We find no need to confront that issue in the instant case because we would reach the same conclusion whether we apply our rationale set forth in our Opinion in Cox or the “broad restriction” standard set forth in the Court of Appeals’ opinion in Cox. Accordingly, our conclusions in the instant case do not conflict with the rationale and conclusion set forth in our Opinion in Cox.

Some Parting Thoughts

Moosally does help define what will constitute prior involvement.  Absent a taxpayer’s waiver an Appeals employee who is considering  matters in a non-CDP appeal will not be permitted to be involved in a later CDP case involving the same years and tax. It does not address how much Appeals’ involvement is necessary when there is not a formal matter in Appeals’ jurisdiction.  It does not address the Tenth Circuit’s statement that in its view the CDP regulations are invalid insofar they provide that prior involvement “exists only when the taxpayer, the tax and the tax period at issue in the CDP hearing also were at issue in the prior non-CDP matter.”  See Cox Tenth Circuit opinion at note 10, referring to Treas. Reg. § 301.6330-1(d)(2). Moreover, it does not address the limits of the Tax Court’s second rationale in Cox, that is, whether prior Appeals’ involvement if it arises in a separate CDP case should be less worrisome than prior non-CDP Appeals’ involvement.  I would not be surprised that given the still divergent views of the Tax Court and Tenth Circuit, and that Appeals’ docket is increasingly crowded with both CDP and non-CDP collection matters, that the Tax Court will at some point have to confront these issues again and will not be able to avoid addressing the Tenth Circuit’s approach.

By pointing to the open questions still after Moosally, I do not mean to criticize either the case’s outcome or the Court’s approach in the case at hand. The Tax Court’s approach in Moosally resolves a dispute in the narrowest way possible. What is somewhat hard to square, however, is part of the Tax Court’s rationale for avoiding having to address the Tenth Circuit’s view of impartiality.  The opinion states that Moosally is appealable to the Sixth Circuit under the Golsen rule. As discussed in a prior post, the DC Circuit Court of Appeals in Byers v Commissioner held that in CDP cases where there is no challenge to the underlying liability, venue for an appeal is the DC Circuit Court of Appeals, unless the parties stipulate otherwise.  As there is no DC Circuit court precedent in the issue, the venue statement in Moosally has no practical effect in the case, though it leaves unanswered how the Tax Court views venue in CDP cases.  I would expect that the Tax Court would confront the venue issue in other CDP cases, especially when venue may have a major impact on the case’s outcome, given how many circuit courts of appeal disagree with the Tax Court on the appropriate scope of review in CDP cases, as guest blogger Carlton Smith discussed extensively in Tax Court Dodges CDP Record Rule Ruling.

Byers thus may loom large in these disputes. If Byers stands for the proposition that appeals of CDP cases not involving liability should go to the DC Circuit, then under the Golsen rule, the Tenth Circuit’s view in Cox will not likely control the outcome of a particular case. While absent adverse authority the Tax Court can continue to apply its approach in disputes about the reach of impartiality, taxpayers would be well-advised in the appropriate case to ask the Tax Court to reconsider in light of what I believe to be a well-reasoned and persuasive appellate Tenth Circuit opinion.

Summary Opinions for 4/4/2014

Heavy on the case law this week.  Important holdings regarding closing agreements and the mitigation provisions, Tax Court jurisdiction in worker classification cases, lien priority, and fraudulent information returns.  Also, an interesting marketing concept for tax prep folks — drugs.   To the roundup:

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  • Jack Townsend’s Federal Tax Procedure Blog has a great write up of an interesting case, El Paso CGP company, LLC v. US, which involves the mitigation Sections of the Code allowing the Service to open closed tax years and closing agreements.  Grossly oversimplified,  the taxpayer entered into a closing agreement with the Service for multiple years.  One year, the taxpayer was entitled to a refund, and in others it owed tax.  Following a closing agreement, the Service has one year to assess and collect, or refund the amount due under the mitigation provisions.  Section 1314(b).  The Service reduced the refund by the amount owed in other years, and refunded the rest.  The taxpayer argued that each year had to be either assessed or refunded separately.  The Court found that the mitigation provisions allowed the Service to offset the debts without following the normal assessment procedures because collection was not necessary.  I was slightly surprised at the holding, and it will be interesting to see if a similar matters goes before other courts.
  • The Tax Court in SECC Corp v. Comm’r found an IRS letter classifying workers was a sufficient determination to provide it with jurisdiction to review the classification under Section 7436, and a formal Letter 3523, Notice of Determination of Worker Classification, was not required.  I would highlight J. Halpern’s concurrence, where he mentions Notice 2002-5, which evidenced the Service’s position that only the formal letter provided jurisdiction.  J. Halpern emphasized that the Court owed no deference to the Service in determining its judicial bounds, and said it would be inappropriate to let the Service decide when a taxpayer could have access to the Court.    We will hopefully have a guest post from A. Lavar Taylor, one of the lawyers involved in this matter, later in the week or early next week.  Mr. Taylor should provide additional context, and also analysis of the result.
  • SCOTUS declined to review the 7th Circuit determination in Acute Care Specialist v. US that the statute of limitations which was extended by the TMP with the Service was a partnership item, and the other partners were therefore barred from questioning it under Section 7422.
  • Apparently, 420  Multi Services , a Bronx based tax preparation service, has expanded its business services to something more profitable…you guessed it, weed.  I wonder if they do refund loans to be used on the other offerings.  Probably more than one accountant out there this week who is considering this type of profession change.
  • The District Court for Massachusetts appears to have bailed out an attorney in Deutsche Bank National Trust Company v. United States, where the attorney failed to record the proper mortgage documents for a refinanced mortgage, and the Service subsequently filed tax liens.  The Court approved the Magistrate Judge’s recommendation that the Court find the bank had met the five equitable subrogation factors under Mass. law, and that the bank had the priority of the original mortgagor and priority over the Service.
  • Hell hath no fury like an accounting partner scorned!  The Southern District of Ohio presided over a portion (apparently there were various lawsuits, as the parties were “going to war” with one and other) of the breakup of Waldman, Pitcher and Co, an accounting firm. As part of the dissolution, the remaining partner was to pay portions of the AR to a new firm created by the departing partners.  Some funds were paid over to the new company, and at the end of the year the remaining partner issued personal 1099s to the leaving partners for the full amount due as non-employee compensation; however, the full amounts were not actually collected or paid over, and the payments were not to the individuals.  The Court found that the remaining partner did this intentionally to create tax problems for the leaving partners, and to give his firm a nice deduction.  The departing partners did not include the income on their personal returns, and contacted OPR claiming he was trying to “exact a revenge that he couldn’t otherwise exact during negotiations.”  There was then a handful of additional suits and IRS proceedings regarding the transaction, including defamation, breach of contract, excessive fees, a whistleblower claim, a restraining order, a criminal complaint, breach of confidentiality, and the claim in this case for willfully filing fraudulent information returns under Section 7434.  The case here hinged on whether the remaining partner “willfully” filed the fraudulent returns.  The Court found that based on the accountant’s education, experience, and the use of post-it notes on the 1099s saying the departing partners were “going to hell”, the remaining partner had willfully filed fraudulent returns.

 

Nominee Liens – the lis pendis of tax lien practice

Several earlier post have discussed the scope of the federal tax lien and the priority of the federal tax lien vis a vis other lien claimants.  One recent post talked about the lien foreclosure suit and the distinction between that suit and a levy.  This post addresses another corner of the federal tax lien that comes into play when the taxpayer seeks to keep assets outside the reach of the federal tax lien – the nominee lien.

The term nominee lien does not appear in the Internal Revenue Code.  As a consequence no regulations explain how to file such a lien, when such a lien is perfected, when it is improperly filed, what it reaches, etc.  The nominee lien generally calls upon common law principles.  It should be used by the IRS as a placeholder to prevent further transfer or encumbrance of property alleged to be subject to the federal tax lien and should not, in my view, be used in a similar fashion to the federal tax lien as a waiting tool.  By this I mean, that the filing of the nominee lien should be followed almost immediately by the filing of a suit to foreclose the federal tax lien.  The same is not true of the filing of the “regular” notice of federal tax lien.  The nominee lien puts the name of someone other than the taxpayer out there as someone who owes or has some obligation to the IRS.  This should not occur without an almost immediate plan of action. 

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 The nominee lien differs from the regular notice of federal tax lien in that it encumbers specific property.  While many people inaccurately describe the notice of federal tax lien as a lien against someone’s house or real property, it is simply the making public of a general lien that attaches to all of a taxpayer’s property and rights to property.  The federal tax lien attaches to everything a taxpayer owns and not simply their real property. 

In contrast a nominee lien attaches to specific property allegedly being held for the taxpayer by a third party.  A correctly filed nominee lien should specifically state the property to which it attaches. It frequently is a lien on someone’s house or a specific piece of real property although it could be a lien on almost anything.  When the IRS files a nominee lien it uses the same form it uses to file a regular notice of federal tax lien but it types onto that form not only the name of the third party allegedly holding a taxpayer’s property but also a description of the specific property that is the subject of the nominee lien and the fact that the notice is a notice of nominee lien.

The IRS should file a nominee lien if it determines that the taxpayer has transferred property to someone else who is holding it as the nominal owner while the taxpayer continues to enjoy the property.  The IRS should not file a nominee lien if the transfer to the nominal owner occurred after the assessment of the tax because the federal tax lien will continue to attach to the property in the hands of the nominee since the nominee did not take the property as a purchaser under 6323(h)(6).  In the situation of a transfer after the federal tax lien arises the IRS may want to record something to alert persons dealing with the nominee that the federal tax lien extends to the property but a nominee lien is not needed since the IRS could file the notice of federal tax lien against the taxpayer showing the assessment date or bring a lien foreclosure suit at any time. 

If the transfer of the property to the nominee occurs prior to the assessment of the tax, the federal tax lien arguably does not extend to the property.  In that situation a nominee lien alerts the world that the IRS believes the federal tax lien does extend to the property but should make clear to the world that the individual named in the nominee lien does not have a general obligation to the IRS but only has a contest with the IRS regarding the specific property mentioned in the nominee lien.  Still, that distinction can be lost on credit reporting agencies and a nominee lien can do serious harm to someone’s credit rating and general ability to borrow.  For that reason, it should be followed shortly by a suit to foreclose the lien so that the matter can be relatively quickly resolved.

Two recent cases provide guidance on how the IRS will pursue its interest after filing a nominee lien.  The Powell case demonstrates a very straightforward application of the nominee lien and the Sabby case shows its messier side. 

Mr. Powell was a tax protestor who apparently did not believe his own tax protestor arguments or who perhaps had a wife who did not believe them.  He managed to accumulate over $500,000 in tax liabilities for the years 1999-2003.  During those years he did not file returns but he did incorporate Texore Investment Club, Inc. in Nevada on April 15, 2002 (interesting date of incorporation under the circumstances.)  The sole shareholder of the corporation was his wife and it held their home in Senatobia, Mississippi.  Naturally, they continued to live in the house and to pay the bills on the house.  To all appearances, the house was owned by them as a couple until several years later when they moved out of state and began renting the house.  The IRS eventually made assessments against Mr. Powell and later filed notices of federal tax lien against both him and Texore.  The lien filed against Texore names it as the nominee/alter ego/transferee of Mr. Powell.  This blog will only focus on the nominee aspect of that lien. 

The IRS filed a motion for summary judgment.  The Court looked at prior cases on nominee lien and stated the applicable factors:  “(a)[n]o consideration or inadequate consideration paid by the nominee; (b) [p]roperty placed in the name of the nominee in anticipation of a suit or occurrence of liabilities while the transferor continues to exercise control over the property; (c) [c]lose relationship between transferor and the nominee, (d) [f]ailure to record conveyance; (e) [r]etention of possession by the transferor; and (f) [c]ontinued enjoyment by the transferor of benefits of the transferred property.”  With very little effort, the court found that Texore was the nominee of the taxpayer allowing the IRS to foreclose its lien on the property and sell it free and clear.  This case represents a very normal, plain vanilla type of nominee case where the taxpayer seeks to place property beyond the reach of the federal tax lien but does so in a manner that invites challenge.  

It does cost the IRS and the Department of Justice a fair amount of time and trouble to mount the legal challenge to such a transfer.  For that reason, such a tactic might work if very few dollars were involved but will never work if challenged.  Use of this tactic coupled with the failure to file returns, opens the individual to significantly greater criminal exposure than exists by the simple failure to file a return and provides a relatively clear demonstration that the tax protest activities were not done in good faith.  It is an all-around bad idea by the taxpayer but does slow down IRS collection efforts because of the need to clean up the title prior to selling it.  I suspect, with nothing specific to point to for this opinion, that a tactic like this also makes it much more likely that the IRS would seize and sell a personal residence that might otherwise go untouched after the changes to the law in 1998.  A tactic like this will also make it more difficult for the individual to obtain an offer in compromise since it puts the IRS on high alert for hidden assets. 

The Sabby case presents a more sophisticated nominee situation although at the end of the day the court also allows the IRS to foreclose its lien and sell the property free and clear.  Mr. Sabby owed the IRS even more than Mr. Powell – over $700,000.  Another thing about nominee cases is the amount owed.  The more you owe, generally speaking, the more attention and resources the IRS will put to the case.  Of course, the more you owe the more you may need to hide your interest in assets because of the greater attention.  Mr. Sabby purchased property with someone who appears to have been his girlfriend.  Only she was listed on the mortgage and the title from the outset apparently because he was engaged in illegal activity and he knew he did not want his name on the title so he could avoid forfeiture and other attachments.  He contributed to the purchase and to the upkeep and apparently lived in the property. 

Mr. Sabby was caught and convicted for federal crimes associated with gambling and sent to prison for 30 months.  His girlfriend went to prison for five months.  They took out a mortgage on the property during the criminal proceedings to get money to pay certain debts.  At some point after release they split up and her name remained on the property but she moved out and he stayed.  He testified that she “did not transfer the property to him because of his tax liability with the IRS.”  A friend loaned him over $200,000 which he used to pay off the first mortgage and the interest of his former girlfriend in the property. 

Eventually, the IRS filed a notice of federal tax lien against Mr. Sabby.  With a liability of this size, I would expect the notice to be filed almost immediately after assessment.  The assessment date is not disclosed in the case but the case leaves the impression the notice of federal tax lien was not filed on the heels of the assessment.  Then the IRS did something that makes me scratch my head.  It contacted the former girlfriend and told her it would file a nominee lien if she did not quitclaim the deed to Mr. Sabby.  Instead of quitclaiming the deed to Mr. Sabby, she quitclaimed it to a corporation owned by the individual who loaned money to Mr. Sabby.  

While it was nice of the IRS to give Mr. Sabby’s girlfriend a chance to clean up the title, the friendly gesture opened the door to further cloud the title.  The point of the nominee lien should be to tie up the property to avoid further clouds.  I would not have been so nice.  The next five pages of the opinion are spent unwinding the interests in the property before ending up with the conclusion that Mr. Sabby really owned the property at the time of the transfer to the corporation before concluding that the IRS could foreclose its lien.  The result was predictable even if the path here became much messier than the rather straightforward path in the Powell case.

These cases demonstrate the use of the nominee lien to encumber property while the underlying lien interests get sorted out in court and continue to demonstrate the power of the federal tax lien.  I was a bit surprised by the tipping of the hand in the Sabby case because lien cases often require speed over strength and the action here gave the parties time to potentially encumber the property in a manner that could have damaged the interest of the IRS had they chosen to mortgage the property rather than to transfer it to someone not putting up new money. 

 

 

 

Reliance on Counsel to Avoid Tax Liability

We regularly see taxpayers asserting reliance on advice of counsel as a basis for removal of penalties.  Not too many cases involve an argument that the tax liability itself should be removed due to reliance on counsel.  A recent unsuccessful case, US v. Shriner, making that argument caught my eye as did the name of the judge deciding the case, Marvin Garbis.

Tax practitioners like to describe district court judges as generalist to distinguish them from the tax specialists who populate the Tax Court.  Occasionally, a tax specialist slips onto the district court just as occasionally a lawyer with a more general practice slips onto the Tax Court.  Judge Garbis on the district court in Maryland is a tax practitioner with a capital T.  When he writes a tax opinion, it deserves notice although this one did not “tax” his abilities.  Prior to becoming a district court judge he practiced tax law in Baltimore for more than two decades and was well known for his knowledge of tax procedure.  He wrote “Cases and Material on Tax Procedure” published by West which may have been the first case book on tax procedure as the topic gained prominence and he wrote “Federal Tax Litigation” published by Warren Gorham and Lamont.  He practiced with Tax Court Judge Paige Marvel and with former Deputy Assistant Attorney General and Acting Assistant Attorney General of the Tax Division of the Department of Justice Paula Junghans in the Baltimore firm of Garbis, Marvel and Junghans.  I was always glad I worked for the Chief Counsel office in Richmond rather than Baltimore so I did not have to regularly face the heavy hitting tax litigation lineup presented by that firm.

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So, into Judge Garbis’ court comes a pro se litigant who wants to argue that his lawyer messed up and he, the executor and beneficiary of an estate in which the decedent had significant tax liabilities still owing at death, did not need to pay the estate taxes of the decedent because he received bad advice from his lawyer.  The facts were clear that the decedent had assets of about $470,000 and federal tax liabilities of about $231,000.  The IRS had told the estate’s lawyer who had a proper filed power of attorney the existence and the amount of the liabilities.  Yet, the estate’s assets were distributed without paying the taxes.  The litigant here was one of two executors of the estate who became personally liable for the unpaid taxes as a result of the distribution by virtue of 31 USC 3713.

Section 3713(b) provides that “[a] representative of a person or an estate … paying any part of a debt of the person or Estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.”  This statute not only applies to tax debts but to all debts owed to the federal government.  It is not found in title 26.  It traces its lineage back to the earliest of statutes passed in the United States and back past that to English common law and the maxim that “The King’s debtor dying the King comes first.”  Although Section 3713 imposes this personal liability and is often enough to allow the IRS to collect in these circumstances, it is not the only mechanism for collection of the federal tax debt where pre death liabilities of the decedent go unpaid while estate assets get distributed.  The federal tax lien imposed under title 26 will continue to attach to the property distributed and the transferee liability provisions of 6901 could come into play as well.

Most executors come to the IRS with a request to find out if the decedent had federal taxes before making a distribution of estate assets in order to avoid these problems.  Pursuant to IRC 6905 the IRS can discharge the executors from personal liability for the unpaid taxes of the decedent – of course, that requires paying the taxes with available assets from the estate.  Somehow the person holding the power of attorney for Estate of Carol Shriner did not seek the discharge of personal liability before the distribution of the estate’s assets were made.  The IRS sought to hold the executors personally liable and the executors, or at least one of the two, sought to remove the proposed liability based upon reliance on counsel.

The IRS filed a motion for summary judgment.  The judge granted it.  The case is not remarkable in its outcome but it provides an opportunity to think again about the limits of blame that can be shifted to counsel.  We have blogged before about this issue.  Individuals serving as executors have an especially high duty to “get it right.”  That duty applies to the timely filing of the return as the Supreme Court made clear in Boyle and to the payment of liabilities of the estate as the 5th Circuit recently made clear in Renda.  If the representative has actual knowledge of a federal claim that knowledge is sufficient to trigger the liability of the executor even where the representative gives erroneous advice on how to address the federal claim.  Executors should seek the safe haven of IRC 6905 by obtaining a statement of any tax liabilities, satisfying them and requesting a discharge.  Finding and obtaining a discharge of other federal liabilities may not come as easy as tax liabilities.  The IRS is set up to meet these requests and the opportunity for this relief should not be missed.

The executor made one final argument that Judge Garbis rejected.  He argued that the Tax Court case of Little v. Commissioner provided relief.  In that case, the decedent’s representative was absolved of personal liability under 31 U.S.C. §3713(b) for the estate’s unpaid income tax liabilities.  The court found that while the representative had been placed on inquiry notice after receiving Forms W-2 and 1099 for the estate’s liabilities, he acted in a prudent and reasonable manner by bringing the forms to the attention of the estate’s attorney and relying on the attorney’s mistaken advice that, because of the estate’s size, it owed no income taxes.  Judge Garbis found that the Little case differed because the estate’s counsel had told the executor no tax liabilities existed.  Here, the undisputed facts showed that the representative, and thus the estate, knew that some income tax liability existed.

The outcome here did not turn on the tax procedure expertise of Judge Garbis but his knowledge of tax procedure no doubt made the outcome more certain and more straightforward.