Summary Opinions for 7/18/14

A quick thank you to Christine Speidel for her guest post last week on the unanswered questions regarding ACA and tax procedure.  If you have not yet reviewed, please take a look and check out the interesting comment from one of our readers.  Here are a few other items from last week that caught our eye:


  • Good news for employers.  Y’all can’t be held responsible for the satanic requirement of requesting a Social Security Number from your prospective employees.  Congress and/or the IRS is the devil that makes you do that, and that evil likely won’t be excised any time soon.  See Yeager v. Firstenergy Generation Corp., where the district court tossed a religious discrimination suit brought by a prospective employee who was denied an internship because of he would not supply an SSN; he believed identification by any number, including an SSN, was the “mark of the beast”.   That’s got to be tough in the deli line.
  • The First Circuit has held that interest owed by a transferee under Section 6901 is not calculated under the Code, as it would be for the transferor, and instead is calculated under the applicable state law.  See Schussel v. Werfel.  I was surprised by the holding, and I have not fully digested it yet, as it is very long.  I won’t delve too deep into the analysis, but the Court relied on the 1958 Supreme Court case, Commissioner v. Stern, which held that “where…state fraudulent transfer law supplied the substantive rule, state law controlled the existence and extent of the [transferee] liability.”  The current statute still looks to state law to determine if there has been a transfer, so the 1st Circuit determined it must also dictate the actual amount owed, including the interest calculation.  This issue is covered in ¶ 17.05 of Saltzman and Book, including the related issues as to when interest actually starts to run, and other potential conflicts between state and federal law on related procedural matters.  All very interesting.
  • On July 2, 2014, a new AJAC memo was issued regarding the second phase of the implementation.  The memo, which is very long, can be found here.  We previously covered this about a year ago here.  We continue to applaud this effort, and look forward to the implementation.  We may also have some additional coverage regarding this memo in the future (once I find time to read all 62 pages).
  • A taxpayer was booted from court on her wrongful collection claim under Section 7433 in Antioco v. US because the Court found the inappropriate actions occurred during assessment and not collections.  I only looked at the holding, and the Appeals officer seemed rude and overzealous (but I have heard of worse).  What struck me was the characterization of this matter as assessment, and not collections.  Taxpayer received a notice of intent to levy for taxes she owed from two and three years before.  She requested a CDP hearing and asked for an installment agreement.  She had the CDP hearing, the IA was denied, and the levy sustained.  Tax Court sent it back to reconsider the IA.  This is when CDP hearing is terrible, and IA is rejected.  Goes back to Court, wins again, back to Appeals, and gets an IA.  The Court highlighted the various cases that indicated Section 7433 should be construed narrowly to only collection actions, and then stated:

 All of [taxpayer’s] alleged wrongdoing took pace prior, or in relation to, platinff’s CDP hearing.  They were, therefore, actions taken during the determination or assessment of plaintiff’s taxes, not during their collection….indeed, the government never collected taxes pursuant to [taxpayer’s] assessment; instead, plaintiff sought , and was granted, a second appeal which ultimately resulted in her successful application for an installment plan.

Hmmm. I’m not certain the Court was wrong in its holding, but the opinion does not clearly convince me that levy actions, liens, CDP hearings, and installment agreements (all of which would have been after assessment of the tax) are not collection actions, and are instead assessment actions.  This is especially true, because there was no mention in the opinion of the taxpayer questioning the underlying assessment of tax.  She was simply seeking collection alternatives.

Why the District Court Found No Jeopardy in Former Senator Fumo’s Case, How the Statute Could Work Better and How Bankruptcy Might Impact These Liabilities

Yesterday, I started to explain the basis for the determination that jeopardy did not exist in former Senator Fumo’s case.  I primarily discussed the aspect of the case court found troubling.   and used that discussion to raise a systemic problem with IRS examinations, revenue agents pay no attention to what a taxpayer does with assets while they audit returns.  The troubling aspect of the case for the court and for me was the four year period of the audit – a remarkable pace.

The case involved more than simply a snail’s pace audit during which the IRS paid no attention to the transfer of almost all of the taxpayer’s assets.  In addition to transferring his cash assets and fully or partially transferring his real property assets, former Senator Fumo also made statements to his ex-wife that he intended to make himself judgment proof while still retaining control of his assets.  These statements generally do not lead to a good outcome for someone trying to fend off a jeopardy assessment.  However, they were not enough to carry the day for the IRS. .  So, how did the court find that the jeopardy assessment should be abated considering there was a transfer of a significant amount of assets coupled with damaging statements that seemed to cry out for a determination of jeopardy?

Certainly, the evidence presented played a critical role in the outcome.  As I will discuss below, two other issues present themselves here.  The first, and less important, concerns the Court’s possible misunderstanding of the case.  It made a couple of statements that left me thinking it did not quite understand enough about tax procedure to understand the result of its opinion.  It is also possible that I read more into those statements than I should.  The second issue concerns the structure of the jeopardy assessment statute and the problems that structure creates for the IRS in a case where the taxpayer has/had significant real property assets.


The Asset Transfers

The court looked closely at each of the transfers and at the statements in determining whether former Senator Fumo’s actions warranted a determination of jeopardy.  Just as the revenue agent did not move quickly to complete the audit of the income tax returns, the court did not race to its conclusions.  It wrote a lengthy opinion working carefully through the applicable regulations and the facts in the case.  The transferred assets fell broadly into two categories – cash and real property.  Former Senator Fumo transferred a significant amount of money to his son right about the time the prison sentence began.  Despite the fact that much of the money transferred from Senator Fumo’s bank accounts ended up in bank accounts owned solely in the name of the son, the court found that the money transfers were reasonable because the son took on the obligation of paying the bills while he father served time in prison.  The son showed a fair amount of the money was going to pay for the father’s bills.  I could not tell from the opinion that all of the money went for the father’s bills or that the son had returned the money now that the father could handle his own financial affairs again.  Perhaps my concerns about that aspect of the story seek a level of proof beyond the required showing of general use of the funds for the father’s affairs.  This part of the proof distinguished this case from others where courts upheld the jeopardy determination.

The court found the explanations about the real estate transfers reasonable as well.  The general explanation here involved estate planning.  The “Bush tax credits” were set to expire on December 31, 2011, former Senator Fumo’s accountant advised him to make gifts before they expired in order to do some estate planning.  The transfers, except for one, kept the property partially in the name of former Senator Fumo because he transferred his property from himself to himself and his son or himself and his girlfriend as joint tenants with rights of survivorship.  Steve may write a follow up post on whether the alleged estate planning aspect of these transfers had meaning.  I found myself much less convinced by the story about the transfer of the property in comparison to giving his son control of the bank account.  Making property transfers like this while an audit is underway, even a slow moving audit and even transfers with retention of a partial interest, seems inappropriate.  I think the court did not have the right statutory tools to deal with this behavior and I would change the statute as discussed below.

The Damaging Statements

After working through the transfers the court addressed the damning statements written to his former wife in which he states he wants to put his assets in someone else’s name while retaining control  and put the assets beyond the reach of the government.  The court found they “were written in the context of seeking her input and assistance regarding what he believed was a necessary renegotiation of the loan he had with a family trust account and more generally how to handle their daughter’s trust.”  Former Senator Fumo testified that the correspondence was not “about IRS concerns” but rather renegotiation of a loan with a family partnership.  The court found the explanations were convincing and found that the IRS did not find the existence of the correspondence until several months after the jeopardy assessment and therefore could not rely on the correspondence to show jeopardy.  I found the language about putting property beyond the government’s reach hard to reconcile with a family trust dispute but I did not read the transcript and perhaps a link exists that has passed me by.  I think the court simply did not find the words overcame the acts and the acts did not rise to the level of a jeopardy assessment.  The actions do matter much more.  Words like these can support a court’s decision or be brushed away when not supportive.  I do not fault the court for brushing them aside given its conclusion on the actions.

The Court’s Apparent Misunderstanding of Assessment and Federal Tax Liens

The court made two statements that make me think it does not quite understand what it has done.  First, it said “when Plaintiff was assessed with additional income taxes of approximately $2 million in October, 2012, the IRS did not believe a jeopardy assessment was necessary.”  This statement shows that the court does not understand the word assessment even though assessment is what the proceeding is all about.  The IRS did not make an assessment in October 2012 because it could not.  At that point it issued a notice of deficiency.  Had the IRS thought that jeopardy existed at that point, it would have made a jeopardy assessment.  The demonstrated lack of understanding of assessment leads to a lack of understanding of the lien which leads to a worry that the court may not understand what it has done here.

The second statement occurs later in the opinion.  In talking about the problem of the transferred properties the court says this is not a problem because the IRS knows the identities of the parties receiving the transferred interests – the son and the fiancée.  Knowing their identities is not the real problem.  Stopping them from further transferring or tying up the property is the problem and without an assessment the IRS cannot do anything about that, but sadly, the court seems to think that it can.  The court says “Defendant has already filed a nominee lien against Plaintiff’s fiancée.”  That statement suggests the court thinks the nominee lien will continue to exist after this opinion.  The opinion results in the abatement of the underlying assessment and will cause the IRS to release all of the liens it as filed including the nominee liens

The court’s misunderstanding of assessment and apparent misunderstanding of liens leaves me wondering if it thinks that the IRS is somehow protected from further transfer of the property.  It received an expert opinion report from a prominent local tax practitioner addressing  things the IRS can do to recover the property.  I found the conclusion of this report, that the IRS may be better off because of the transfers since it has the ability to sue more people to recover the proposed deficiencies, rather remarkable.  Sure, it can pursue claims against them but that does not guarantee recovery.  The better course is to tie up the property with nominee and “regular” tax liens. The IRS cannot do that now until the end of the Tax Court case which could be years away.  The IRS unsuccessfully objected to admission of the report.  I did not read the trial transcript.  The report seemed like a great opportunity to examine the expert and bring out all of the possibilities.

A Better Way

I would like the court to have upheld the jeopardy assessment for the purpose of allowing the IRS to file liens but not to levy.  Because of the amount and value of real property in this case, the filing of liens could serve to protect the interests of the IRS without creating a major cash flow problem for former Senator Fumo while he contests the correctness of the IRS determination of his liability.  While Congress has recognized the distinction between lien and levy in the Collection Due Process (CDP) context in a similar setting, it did not make a distinction between lien and levy in the jeopardy context.  The district court either had to give a thumb’s up or down on the assessment and the lien and levy rode together in that determination.  Other jeopardy cases exist like this one where what the IRS really needs to do is tie up property to keep it from dissipating during the sometimes lengthy path to normal assessment.  It should have a mechanism for doing so.  The jeopardy statute should allow the court to make a two part determination with respect to assessment and allow the IRS to make an assessment establishing the lien with a lesser showing while only allowing it to make a levy when a heavier showing is made.

The transfer of the cash and its use to pay bills during the period of incarceration rang true enough in the case to make the need for levy action a weak need in this setting.  The success on that story colored the court’s view of the need for jeopardy particularly if it held an erroneous view of the assessment and lien provisions.

Consequences of the Loss of the Lien if Bankruptcy Ensues

The loss of the lien also matters if former Senator Fumo decides to visit the bankruptcy court.  By chance, most of the liabilities the IRS says he owes are currently dischargeable.  The lien, or the absence of the lien or of the filed notice of federal tax lien, could play a big role if bankruptcy is in his future.   The IRS says he owes three types of taxes and sent him three notices of deficiency giving rise to three Tax Court cases.  Each of these liabilities has its own discharge rules although two overlap here.  First, the IRS says he owes income taxes.  The tax years of the income tax liabilities extend back for more than a decade.  These old taxes do not get priority treatment in the bankruptcy code because only the fraud penalty is keeping open the statute of limitations.  If the IRS can prove fraud, the income taxes are excepted from discharge (meaning he still will owe them after bankruptcy) by BC 523(a)(1)(C); however the fraud penalty equal to 75% of the tax liability would not survive bankruptcy because of the age of the tax years and the limitation of BC 523(a)(7) to penalties accruing within three years of the bankruptcy petition.  The only way the IRS would recover anything on the fraud penalty would be if it had a filed federal tax lien or if the estate had enough money to pay general unsecured claims.

The gift tax is an excise tax.  Excise taxes only retain their priority for three years from the due date of the return on the gift.  The IRS alleges that the gift took place in 2009 which is more than three years ago.  The IRS will have a general unsecured claim on the gift tax which would be discharged in bankruptcy the same way the fraud penalty would be discharged.  Without a lien, the IRS might recover little.  The third liability is an excise tax for wrongfully dealing with an exempt organization.  The wrongful acts occurred more than three years ago making this a general unsecured claim, it might also be an unsecured claim because the code section giving rise to the liability is treated as a penalty provision for bankruptcy purposes.  Either way, this debt gets discharged in bankruptcy similar to the gift tax and the fraud penalty.  Bankruptcy may not occur because former Senator Fumo has too many assets to make it worthwhile or he has concerns that fraudulent transfer actions against his son and fiancée might create too much trouble but depending on his finances moving forward, it remains a potentially attractive option for eliminating almost all of the liabilities in the absence of the lien.


This was a close case.  Former Senator Fumo’s counsel did an excellent job addressing the important issues and convincing the court that the actions supporting jeopardy really resulted from other issues.  The prompt payment of the sizeable restitution and fines no doubt also played a role in the decision.  If former Senator Fumo still has significant assets when the Tax Court case reaches its conclusion, this decision matters little to the IRS.  The jeopardy assessment seeks to protect it from financial loss.  It will lose nothing if it succeeds in establishing the liability and he promptly pays up.  Of course, if he wins in Tax Court, it also suffers no financial loss.  I am concerned about the property transfers and would like to have a system that prevents further transfers during the slow process of determining the liability.  Until Congress becomes concerned about this, my private concerns do not matter.

Halbig & King: “SCOTUS, it’s ACA, Please Take us Back”

As was well documented today, the DC Circuit in Halbig v. Burwell and the Fourth Circuit in King v. Burwell issued conflicting opinions this morning on the IRS regulations authorizing tax credits in federal exchanges under section 36B of the ACA.   The DC Circuit held the regulations were invalid and only state exchanges could receive the credits, while the Fourth Circuit said the Service had a reasonable interpretation of the ambiguous statute and subsidies were available for folks who signed up through the federal exchange.

Les covered both of these case before, when each was in the lower court.  The Halbig write up can be found here, and the King write up can be found here.  We will have some in depth coverage and thoughts on the holdings later this week.  Stay tuned!

Although I indicate in my title, this is heading to the Supreme Court, it is possible that en banc review will be requested, putting off what I suspect is the inevitable hard look from John Roberts and Co.

Jeopardy Assessment Abated in Former Senator Fumo’s Case

Last fall I wrote about former Senator Fumo here, here, and here as a way to introduce jeopardy assessment and jeopardy levy.  I noted at the time that the IRS took an amazingly long time to make a jeopardy assessment against him.  I stopped writing about the case in part because the slowness of the IRS in making the jeopardy assessment was matched by the slow movement of the jeopardy case in district court.  Watching a jeopardy case unfold in slow motion differs from the norm in these cases but perhaps brings its own lessons to situation.  The district court in Philadelphia has now decided that the IRS did not meet its burden with respect to jeopardy.  This means that the assessment the IRS has made in the case, the levies, the “regular” and nominee liens will all disappear with the possibility that at the end of the Tax Court case they will spring back.

The district court correctly criticized the IRS for the pace of the jeopardy case.  It also found that the explanation given by former Senator Fumo regarding the transfer of money from his bank accounts as well as the transfer of real property made business sense or made enough business sense to provide a basis for abating the jeopardy assessment.  I found myself agreeing with the court as to the cash but not agreeing as to the real estate and occasionally the court made statements that left me wondering if it understood what was going to happen as a result of this decision or what might happen.  In the end, the court seemed convinced that former Senator Fumo or his son or his fiancée still had enough assets to pay the taxes should the Tax Court permit assessment of the proposed deficiencies and that his prompt payment of the significant restitution amounts suggested he would promptly pay any tax liability the Tax Court might determine he owes.

In this post I primarily focus on the impact of the slow decision by the IRS to pursue jeopardy and how that timing seemed to impact the Court’s decision.  This is part of a two part post in which the second post will address the decision itself and how the statute might have led to this decision by failing to distinguish between the current need for a lien as opposed to a levy.


To reset the scene on this case, the IRS has proposed assessments against him for three different types of tax liabilities:  income tax for the years 2001-2005; excise taxes related to self dealing with an exempt organization he controlled for the years 2002-2004 and gift taxes for transfers in 2009.  On March 16, 2009, a jury found him guilty of 137 counts of conspiracy, fraud, obstruction of justice and aiding and abetting the filing of false tax returns of a tax-exempt organization.  His received a prison sentence of 61 months has paid over $4 million in fines, penalties and restitution in connection with the conviction.  The timing and length of the prison sentence matter with respect to the defense to the jeopardy and the timely payment of the fines, penalties and restitution also seemed to favorably influence the court.

As normally happens in criminal cases involving taxes, the IRS did nothing on the civil liabilities stemming from former Senator Fumo’s behavior until the conclusion of the criminal case.  Here, that decision may not have been routine since the tax charge played such a small role in the overall criminal case.  Nonetheless, shortly after the conviction the IRS assigned a revenue agent to examine former Senator Fumo’s income taxes.  The agent began his investigation in 2009 and concluded it in 2012.  I have been involved with or observed a lot of post conviction examinations but cannot remember one that went this long.  The agent explained in his affidavit that his examination was slowed by serious family issues.  This means that his manager decided that the case did not require expeditious handling and could wait for the agent’s return.  The manager may have had few options but that did not come out.  The fact that the statute of limitations on assessment had long since passed and fraud must keep it open took off some of the normal time pressure in an exam.  The court noted that the IRS could have reassigned the examination if it had significant concerns about its ability to collect the taxes.  Not only did the examination take four years but it resulted in a “regular” statutory notice of deficiency because no one at the IRS was paying any attention to the property transfers former Senator Fumo was making during this period.

I pause here to say this this demonstrates a serious flaw in the way the IRS does business.  It assigns cases to revenue agents who pay no attention to what the taxpayer does with assets during the months or years they engage in examination of the taxpayer.  Even where it has a taxpayer convicted of fraud, even where the proposed liability totals millions of dollars, and even when the case takes forever to come to completion, the IRS goes around with its head in the sand making no effort to determine if it should worry about collection.  Most of the transfers here took place in 2009.  Had former Senator Fumo wanted to hide assets, the IRS gave him three or four years, while it slowly examined him, to do so.  This business practice coupled with the amazing length of the examination convinced the district court that it should abate the jeopardy assessment even in a situation where doing so put the IRS collection at risk.  The IRS should consider assigning revenue officers to monitor taxpayers in high dollar, high risk, high profile cases so that it does not end up embarrassed like this.

Revenue agent’s jobs do not involve caring about collection.  So they do not.  They had so little concern they let the case languish in audit for four years while paying no attention to what former Senator Fumo did with his assets.  Only when the hometown newspaper ran a series of articles gathering information from public records did someone at the IRS, after the issuance of the statutory notice of deficiency, wake up to the fact that collection of the liability the IRS had invested many hours in developing may be at risk.  This business model, which pre-dates the changes to the IRS in 2000 deserves attention.  Slow moving audits producing high dollar deficiencies should not have only revenue agents who have no systemic reason to care about collection assigned to them.

The IRS spends a lot of potentially wasted resources on such audits because it does not keep its eyes on the assets.  Had it paid attention to the asset transfers and made the jeopardy assessment in 2009, I think this case has a different outcome but this is not the only high dollar case where no attention gets paid to the taxpayer’s assets until the slow moving revenue agents and potentially the slow moving Appeals Division and slow moving Tax Court finish their work.  The IRS does not have enough resources to have a revenue officer watch every case it audits, but it should have enough resources to have them watch cases like this one.  The business model needs tweaking and this case should serve as a wake-up call.

The relatively new restitution based assessment provisions may change this equation in cases in which the court orders restitution based on tax violations.  In those cases the IRS will have the opportunity to immediately assess following the restitution order and immediately begin collection.  Even in those cases, the IRS should consider assigning a revenue officer no later than the time at which the conviction occurs so that the revenue officer can begin gather information about the assets.  Cases involving criminal convictions where the taxpayer has significant assets deserve significant attention.  The IRS needs to devise a better strategy that includes collection at an early point.

I have swerved from discussing the court’s analysis to rant about slow audits and non-existent collection concerns.  In the next post concerning former Senator Fumo I will explain why I think the district court mostly got it right in deciding to abate the jeopardy assessment but seemed to fail to understand what abating the assessment will do to the protections the IRS has put in place following its wake call in this case.  Because the abatement of the assessment leaves the IRS with no protections from property transfers except to bring actions after the property sales and potentially after the dissipation of the proceeds of those sales, I have more concerns about the future collection of any liabilities determined assessable than the district court seemed to have.

Loving, Ridgely, City of Arlington, and the Current Approach to Chevron

Florida State University College of Law Professor Steve Johnson, one of the most thoughtful and prolific tax procedure scholars (his SSRN author page is here if you want to sample some of his 86 articles), offers thoughts on the context of the Loving and Ridgely cases. In this post, Professor Johnson’s deep knowledge of the intersection of administrative law and tax procedure provides a longer-range view and places the cases in perspective.  Les

There sometimes is a tendency to focus on events in isolation.  Yet to understand events more deeply, and to better predict their consequences, requires considering history and context.  The assassination of an Austrian archduke and his wife in Sarajevo might, taken by itself, have seemed too small a cause to lead to the deaths of 9 million soldiers and countless civilians – until one understand the tinder (the networks of alliances, the conflicting economic, territorial, colonial, and dynastic aspirations) to which the assassination was the match.  This posting explores the wider context of Loving and Ridgely, two recent cases invalidating Treasury regulations.


1. The Two Cases 

The Loving and Ridgely cases  invalidated portions of Circular 230, the Treasury regulations governing practice before the IRS.   Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014), aff’g  917 F. Supp. 2d 67 (D.D.C. 2013)(invalidating regs under 31 C.F.R. secs. 10.3  to 10.6 as to return preparer regulation); Ridgely v. Lew, 2014 WL 3506888 (D.D.C. July 16, 2014)(invalidating regs under 31 C.F.R. sec. 10.27 restricting contingency fees).  The cases concluded that the regs exceeded the authority Congress had delegated to the Treasury under 31 U.S.C. sec. 330.

The obvious, immediate question arising from Loving/Ridgely is “what other portions of Circular 230 might also be at risk under the cases’ construction of sec. 330?”  This question is of great practical importance, and we will  grapple with it for years to come in the additional litigation that no doubt will follow in the wake of these decisions.

For now, though, I’d like to consider the wider context.  Loving and Ridgely did not spring up suddenly and seemingly from nowhere.  Along with the Supreme Court, the D.D.C. and the D.C. Cir. are at the heart  of administrative law, the most frequent plains on which the great battles of administrative law are fought.  Loving and Ridgely are Chevron Step 1 cases, and they were decided as they were because of – and reflecting shifts into –  the judicial approach to Chevron currently dominant in general administrative law.

2. Changed Judicial  Approach to Chevron

It once was thought that Chevron was a “super-deferential approach,” and indeed that may once have been so.  E.g., William Popkin, Materials on Legislation 611 (5th ed. 2009).  But fashion, the prevalence of 3-D movies, and judicial approaches to interpretation change over time.  In recent years, there has been a turn in administrative law back towards congressional primacy.  Judicial deference to agencies has weakened as a result.  E.g., Jack M. Beerman, The Turn Toward Congress in Administrative Law, 89 B.U.L. Rev. 727 (2009); Steve R. Johnson, Loving and Legitimacy: IRS Regulation of Tax Return Preparation, 59 Villanova L. Rev. 113-14 (2014).

A subtle but important shift has occurred as to how some judges frame the question, a shift from “I’ll uphold the agency action unless Congress prohibited the agency from wielding this power” to “I’ll uphold the agency action only if Congress  gave the agency this power.”  As a practical matter, a judge laboring under the former approach is pre-disposed to rule for the agency. Less so is the judge operating under the latter approach.

Chevron spoke not just of explicit congressional conferrals of power on agencies.  It also ventured that statutory gaps can constitute implicit delegations.  467 U.S. 837, 843 (1984); see also Morton v. Ruiz, 415 U.S. 199, 231 (1974).  Such a formulation is favorable ground for the agency.  “Implicit delegation,” however,  was deemphasized in later cases, such as  United States v. Mead Corp., 533 U.S. 218, 226-27 (2001)(“We hold that administrative implementation of a particular statutory provision qualifies for Chevron deference when it appears that Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority.”).

This approach has prevailed.  A 2008 article stated: “For most of the past decade, the Supreme Court seemed to be gradually eroding the deference accorded to administrative agencies.”  Stephen M. Johnson, Bringing Deference Back (But for How Long?), 57 Cath. L. Rev. 1, 1 (2007).  The  article saw several 2006 decisions as deviating from that course, but any such change had short tenure.  Subsequent cases, including recent Supreme Court tax decisions, continue to define delegation as a key aspect of Chevron, and their main focus is  explicit, not implicit,  delegation. E.g., United States v. Home Concrete & Supply, LLC, 132 S. Ct. 1836, 1843-44 (2012); Mayo Foundation for Med. Educ. & Research v. United States, 131 S. Ct. 704, 713-14 (2011).

 3. City of Arlington

A key case in the current, delegation-oriented approach to Chevron is City of Arlington v. FCC, 133 S. Ct. 1863 (2013).  The agency prevailed in the case, with the majority holding that Chevron applies to an agency’s determination of the scope of its jurisdiction.  This might seem pro-agency.  It’s not.  The majority, in an opinion written by Justice Scalia, stressed that  this Chevron review – in jurisdiction cases as in all cases – is to be exacting, not indulgent.  Near the start, the majority opinion stated:  “No matter how it is framed, the question a court faces when confronted with an agency’s interpretation of a statute it administers is always, simply, whether the agency has stayed within the bounds of its statutory authority.”  Id. at 1868 (emphasis in original).

At the end of its opinion, the majority reemphasized:  “The fox-in-the-henhouse syndrome is to be avoided … by taking seriously, and applying rigorously, in all cases, statutory limits on agencies’ authority.  Where Congress has established a clear line, the agency cannot go beyond it; and where Congress has established an ambiguous line, the agency can go no further than the ambiguity will fairly allow.”  Id. at 1874.  None of the nine justices – whether in the majority, concurring, or in dissent – disputed the proposition that Chevron Step 1 review should be rigorous.

 4. The Two Cases and the Current Approach

The Supreme Court handed down City of Arlington between the district court and the circuit court Loving opinions.  Despite preceding City of Arlington, the district court opinion plainly applied a rigorous, not deferential, style of analysis at Chevron Step 1.  See Johnson, Villanova, supra, at 113-20.

The circuit court’s Loving opinion  was unmistakably influenced by City of Arlington.  The opinion quotes City of Arlington in both the first paragraph and the last paragraph of its analytical portion.  742 F.3d at 1016 & 1022.  Unsurprisingly,  Ridgely also quotes City of Arlington early in its analysis.  2014 WL 3506888, at *4.

 5. The Future  

The time at which a case is decided can be outcome determinative.  A case of first impression could be decided by the courts differently if it arose in Year 1 or in Year 20, if different styles of interpretation were in vogue in the two years.  Loving and Ridgely might have been decided in favor of the government had they reached the courts when Chevron was super-deferential.  But they reached the courts now, when a rigorous, non-deferential approach generally prevails in applying Chevron Step 1.  Thus, the government lost.

Loving and Ridgely have great local significance as to the viability of Circular 230 rules.  Their general significance as to Chevron Step 1 analysis depends on how long the current exacting mode remains in vogue.  The swing of a pendulum carries the virtual guarantee of a swing back at some point.

Summary Opinions for the weeks of July 4th and July 11th

Special double feature this week.  Summary Opinions will cover items we did not otherwise cover in the previous two weeks.


  • IRS has announced that ITINs will now only expire if not used on tax returns for five consecutive years.  They used to expire after five years.
  • From Accounting Today, a story on the TIGTA Report regarding the Service’s poor handling of amended tax returns.   TIGTA found about 20% of the amended returns had erroneous refunds issued.  On the bright side, four out of five didn’t .  That would have landed you a solid B- in college; enough to return the following semester and continue drinking.
  • From Jack Townsend’s Federal Tax Crimes Blog, a write up of US v. McBride, where a lawyer was indicted for tax obstruction, and the prosecution requested the indictment be sealed.  Jack uses the word skullduggery, which is pretty awesome, but the post generally covers when indictments should be sealed and the reasons that, in general, they should not.
  • In v. US, the Northern District of California has dismissed the Government’s motion to dismiss the FOIA request of for all types of nonprofits’ Form 990s in machine readable format.  The Feds claimed that FOIA is trumped by the Code sections dealing with the release of Forms 990.  The Yes We Scan organization is able to fight another day as the Court found that there was no basis for the Service’s position, and the position would undermine FOIA.
  • The Frank Sawyer Trust of May 1992, which we very briefly mentioned in SumOp before, requested the Tax Court reconsider its prior holding that it was liable as a transferee for tax debts of entities it had held.  The two items in dispute were whether the IRS should apply equitable recoupment for estate tax overpayments in the settlor’s wife’s estate, and if the trust should be responsible for the penalties imposed on the entities.  Terribly oversimplified, the same income tax issue giving rise to the tax debt also caused the trust to be able to sell the entities at higher prices.  Those entities were in the spouse’s estate, and the resulting tax inflated the entities value and arguably a refund of estate tax due on that amount.  The Court stated the test for recoupment as:


[t]o apply equitable recoupment, the taxpayer must prove the following elements: (1) the overpayment or deficiency for which recoupment is sought by way of offset is barred by an expired period of limitation, (2) the time-barred overpayment or deficiency arose out of the same transaction, item, or taxable event as the overpayment or deficiency before the Court, (3) the transaction, item, or taxable event has been inconsistently subjected to two taxes, and (4) if the transaction, item, or taxable event involves two or more taxpayers, there is sufficient identity of interest between the taxpayers subject to the two taxes that the taxpayers should be treated as one.


Only points two and three were in dispute.  The Court found that income and estate tax can be imposed on the same item and that the Service was inconsistently treating the two taxes arising from that same item.  As to the penalties, the actions giving rise to the penalties occurred months after the sale by the trust.  The Court found the Service failed to evidence the connection between the trust and the inappropriate acts, and declined to impose the penalties on the taxpayer.  An interesting case, and one that I suspect will be appealed – again (it has already gone up to the First Circuit at least once).

  • In Heckman v. Comm’r, the Tax Court has held that the extended six year statute of limitations applies for assessment on a taxpayer when the taxpayer receives a distribution from a disqualified ESOP in an amount exceeding 25% of his gross income for the year.  Section 6501(a) imposes the general three year statute, but that can be extended under Section 6501(e)(1)(A) to six years when a taxpayer makes an omission on his return in an amount that is greater than 25% of the amount of gross income stated on the filed return (As I’m sure you will all remember, this provision has received a lot attention over the last few years regarding inflated basis transactions).  If you adequately disclose the transaction or item, the normal three year statute still applies.  The disclosure must be legit though, and can just be you yelling it at an IRS building as you drive by.  The Court found the possible verbal disclosure some years later, and the return of a related entity that had some clues as to the ESOP termination were insufficient disclosure, and allowed the six year statute.  This situation was fairly egregious, and the same individual controlled all aspects of the entities, ESOP and his personal returns.  But what about the situation where the individual did not know his ESOP distribution was not properly tax deferred, or perhaps were an IRA rollover is not valid for reasons outside the taxpayer’s control?  Probably the same result, as the statute speaks only to “omits from gross income”, and has no language regarding knowledge or intent.  See Benson v. Commissioner.  I would still research the issue, and try to come up with a good argument, especially if there was no reason your client should have known about the omission.
  • Big Mo Vaughn has struck out with the Tax Court (much like all his plate appearances with the Mets at the end of his career – horrible acquisition by then GM Steve Phillips, almost as bad as Mr. Phillips decision to have an affair with a twenty-something-year-old intern at ESPN). The Court found he did not show reasonable cause for failure to file his tax return and failure to pay his taxes where there was not evidence if he even asked his accountant or financial advisor if it had been done.  Unfortunately, Mo’s financial advisor apparently stole close to $3MM from him during this same time period.  In a clever argument, Mo argued this caused him to be “disabled”, which was in line with a bankruptcy case, Am. Biomaterials Corp, 954 F2d 919, out of the Third Circuit.  Unfortunately, the Tax Court sided with Valen Mfg. Co. v. US, 90 F3d 1190, out of the Sixth Circuit, which held  in Am. Bio the CEO and CFO were the bad actors, making it impossible for the corporation to comply.  Whereas in Valen, the bookkeeper failed to file, but the executives remained able to review the bookkeepers actions.  The Tax Court said Mo was more like the executives in Valen, who could have questioned his crook of a financial planner.

DC District Court Following LovingTakes Down Part of Circular 230 Contingent Fee Rules

The implications of Loving are starting to be felt beyond the question of the IRS’s ability to regulate unlicensed preparers. Earlier this week the DC District Court in Ridgely v Lew relied on Loving to invalidate Treasury Circular 230 10.27 insofar as it prevents the charging of contingent fees for refund claims practitioners charge for preparing and filing refund claims after an original filing and before the Service has commenced an audit. In the case, CPA Ridgely sued under the APA and Declaratory Judgment Act seeking injunctive and declaratory relief. He claimed that the 2007 10.27 Circular 230 rules led to a “loss of clients and significant revenue.”


In Ridgely, the District Court held that the preparing and filing of refund claims prior to any IRS examination or other matter for which a representative would have submitted a power of attorney is not practice within the meaning of Title 31 Section 330(a)(1), the same statutory authority that was at issue in Loving. According to the Ridgely Court:

At Chevron step one, then, this case boils down to the following question: does Section 330 unambiguously foreclose the IRS’s interpretation that CPAs act as “representatives” who “practice” before the IRS when they prepare and file Ordinary Refund Claims?

Plain Text Analysis

The Court drew from Loving in its analysis that the plain text analysis of Section 330(a) precluded the Service’s ability to restrict contingent fees in what it called “ordinary refund claims”:

This Court, however, is not the first to venture down this particular rabbit hole. Earlier this year, in Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014), the D.C. Circuit grappled with the question of “whether the IRS’s authority to ‘regulate the practice of representatives of persons before the Department of the Treasury’ encompasses authority to regulate tax-return preparers,” Loving, 742 F.3d at 1016 (emphasis added), whom the Court in turn defined as persons who “‘prepare[] for compensation, or who employ[] one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code,’” id. (quoting 26 C.F.R. § 301.7701-15(a)). The Court held that the text, history, structure, and context of Section 330 “foreclose[d] and render[ed] unreasonable” the IRS’s interpretation of Section 330. Id. at 1022. In other words, the IRS’s interpretation failed at both Chevron step 1 and Chevron step 2. Id. …

The plain text of Section 330(a) limits the regulatory authority of the Secretary of the Treasury to “the practice of representatives of persons before the Department of the Treasury.” 31 U.S.C. 330(a)(1). As the Loving court explained, two terms in this provision are key: “representative” and “practice.” To fall under Section 330’s purview, the regulated conduct must be “practice” and must be undertaken by a “representative.”

As to the meaning of the term “representative,” Loving is clear: a “representative” is traditionally one “with authority to bind others.” 742 F.3d at 1016. Tax-return preparers neither “possess legal authority to act on the taxpayer’s behalf” nor can they “legally bind the taxpayer by acting on the taxpayer’s behalf.” Id. at 1017. They are, as a result, “not agents.” Id. As mentioned earlier, the Loving court defined “tax return preparers” to expressly include those preparing refund claims, but even if the court’s holding fails to directly cover CPAs preparing and filing Ordinary Refund Claims, the court’s reasoning applies straightforwardly. CPAs preparing and filing such claims before possessing any power of attorney possesses no “legal authority to act on behalf of taxpayers.” Id. at 1017. In Loving’s words, these individuals merely “assist[]” the taxpayer. Id. Thus, Section 330’s use of the term “representative” excludes refund claim preparers, just as it did tax-return preparers in Loving.

History, Context and Dismissal of the IRS Argument

Beyond the plain text analysis, in pages 10-11 Ridgely mirrored the lower court’s Loving opinion  and also looked to the context and history of Section 330 to find that the statute did not cover “mere preparation and filing of refund claims.”

Starting on page 12, it also discounted the IRS’s argument:

The IRS offers only one non-conclusory argument in response to the Court’s statutory interpretation as guided by Loving: that because Ridgely is a CPA, he “is a representative who practices before the Department and is therefore subject to the terms of Circular 230.” IRS Mot. [Dkt. No. 35-1] at 25. In other words, according to the IRS, it has authority to regulate all actions of CPAs who—at some point—“practice” before it, regardless of “whether they’re acting in a representational or non representational capacity.” Hearing Tr. at 26. This argument, however, poses three problems. First, it is inconsistent with the use of the word “practice” in Section 330. The statute does not regulate “practitioners” generally; it regulates a specific kind of activity they may undertake: “practice . . . before the [IRS].” 31 U.S.C. § 330(a)(1). Second, the IRS’s position would read the word “representative” out of Section 330. As Loving made clear, Section 330 only applies to individuals when they represent taxpayers. Third, adhering to the IRS’s position would lead to absurd results. According to the IRS, it could broadly regulate the actions of CPAs no matter what they were doing—even if their conduct was nowhere close to “practicing” before IRS—simply because, say, the CPAs “practiced” before the IRS once a year. Meanwhile, the IRS would impose no contingent fee restrictions on the preparation and filing of Ordinary Refund Claims by non-CPAs and those who never “practice” before the IRS. Nothing in the statutory text (or, for that matter, the context and history of Section 330) gives the IRS this kind of authority over CPAs specifically. Further, nothing in Section 10.27 indicates that the IRS was concerned with CPA conduct in particular instead of with the ethics of fee arrangements for preparation and filing generally. The Court therefore disagrees with the IRS that simply because CPAs may at times practice before the IRS, the IRS has authority to regulate their conduct without limit.

The IRS also argued that it had “inherent authority” to regulate those who, like Ridgely as a CPA, practice before it in other capacities. The Court rejected that as foreclosed by Loving.

Result and Initial Reaction

After finding that the IRS overstepped its bounds, the Court granted Ridgely a declaratory judgment that the IRS lacked statutory authority to promulgate contingent fee restrictions on those preparing and filing ordinary refund claims. It also agreed to permanently enjoin the IRS from enforcing the regulation (pages 14-15).

This is a blow to the IRS and suggests that we are just beginning to see the fallout from Loving. Following the decision, some IRS officials were suggesting Loving should be narrowly construed. Ridgely suggests courts may not agree with that. The notion that practice begins at a certain time in all tax matters potentially has broader implications for the validity of other parts of Circular 230.  Commentators have already questioned the effect on IRS’s ability to control aggressive tax shelter advice. Ridgely also brings into question, for example, the part of the voluntary certification proposal for unlicensed preparers which asks preparers to opt in to part of Circular 230 in connection with preparing tax returns. In the weeks and months ahead, with the AICPA suit challenging the voluntary preparer regulation proposal (and no doubt other cases too) there will be an emphasis on just how far Loving and its rationale reach in terms of providing limits on the IRS and potentially upsetting the Circular 230 landscape. It does not seem, at least in the short term, Congress will help the IRS out with legislation and we can expect the courts defining the limits of Loving and its rationale.

As to broader questions of administrative law, many tax practitioners feared that, after Mayo Foundation’s adoption of the deferential Chevron test for regulatory review, we would rarely see courts invalidating Treasury regulations.  Both Loving and Ridgely are proof that Chevron has teeth.


Professor Steve Johnson, one of the most thoughtful commentators on tax procedure and Loving in particular has an excellent reaction piece in Tax Prof

Prior PT Posts on Loving

We extensively covered the Loving case in the past year. Two of the more recent posts are below:

Recent Developments in the Regulation of Return Preparers (Larry Gibbs)

Loving Victory is Final and Why That’s a Good Result For Taxpayers and Preparers (Dan Alban)

NTA Objectives Report Issued; Teleforum on Kuretski Today

As reported by many, the NTA issued the FY 2015 annual objectives report to Congress. While I have not read the entire report, some things jump out at me, including a change in format from past reports, and how many focus areas in Volume 1 were focus areas in our blog in the past year. Below is a brief discussion of the change in format as well as areas of focus in the report, with individualized links.

Before heading to the report, I note that the Federalist Society is sponsoring a teleforum on the Kuretski case TODAY at 1 PM eastern time. No registration is needed and interested participants can dial in at  888-752-3232; Professor Kristin Hickman (Minnesota Law School ) and my Villanova Law colleague Tuan Samahon will be the participants.


Kuretski Event Today

From the Federalist Society promotional materials, here is the description:

At bottom, in Kuretski v. Commissioner, presidential power is at stake. Judges of the U.S. Tax Court (26 USC 7443(f)), were arguably characterized by the U.S. Supreme Court, in Freytag v. Commissioner, as exercising a portion of the judicial power of the United States. Recently, however, the D.C. Circuit Court of Appeals disagreed when it found that the Tax Court exercises only executive power. What are the implications of the D.C. Circuit Court’s opinion on the president’s removal power? Has the D.C. Circuit misread Freytag, or faithfully applied it.

TAS Objectives Report

Volume 1 lists specific focus areas, individually linked below. Volume 2 departs from past practices and includes the IRS’s responses to the previously-issued 25 Most Serious Problems Encountered by Taxpayers. In past annual reports (issued close to the calendar year end), the IRS responded directly to the Most Serious Problems in the annual report itself. The IRS responses are now in the mid-year objectives report released yesterday. The preface to Volume 2 by the NTA describes the change:

Unlike previous Annual Reports, the 2013 document did not include IRS comments on the Most Serious Problem analyses and the National Taxpayer Advocate’s response to those comments . In part, this change was necessary so we could issue the report as close as possible to the December 31 statutory deadline, given the 16-day government shutdown last fall, which hit at a particularly crucial time in the editing and review schedule.

Volume 2 in the Objectives Report now has the IRS’s response and TAS’s reply. The preface details the statutory authority for the change, as well as describing how the Commissioner asked the NTA to “identify for his consideration select recommendations from the report that she believed could have a significant positive impact on tax administration and could be undertaken or at least explored with minimal resources.” The NTA added that the IRS has made substantial progress on five of those issues.

Areas of Focus in Objectives Report

The Objectives Report identifies the objectives of the Office of the Taxpayer Advocate “for the fiscal year beginning in that calendar year.” Here are the objectives, with links:

  1. TAS Will Work Closely with the IRS on Implementing the Taxpayer Bill of Rights and Integrating it into IRS Operations
  2. Return Preparer Fraud: A Sad Story
  3. Despite Improvements, TAS Remains Concerned About IRS Treatment of Taxpayers Applying for Exempt Status
  4. IRS Steps to Create a Voluntary Program for Tax Return Preparer Standards in Light of the Loving Decision Are Well Intentioned, but the Absence of a Meaningful Competency Examination Limits the Program’s Value and Could Mislead Taxpayers
  5. The IRS’s Decision Not to Except Any TAS Employees During the Government Shutdown Resulted in Violations of Taxpayer Rights and Undermined TAS’s Statutory Authority to Assist Taxpayers Suffering or About to Suffer Significant Hardship
  6. IRS Funding Gap Creates Severe Risk to the Delivery of the Taxpayer Advocate Service Integrated System (TASIS)
  7. Providing Current and Accurate Instructions and Guidelines for IRS Employees and Taxpayers
  8. TAS Prepares for Implementation of Filing Season 2015 Affordable Care Act Provisions
  9. The IRS Has Improved at Detecting Identity Theft and Assisting Victims, but Victims with Multiple Tax Issues Still Lack One IRS Contact Person to Oversee All Aspects of Their Cases
  10. Collection: The IRS Does Not Adequately Protect Low Income Taxpayers from the Harmful Effects of Levies 
  11. TAS is Working with the IRS to Resolve Certain Taxpayer Accounts with Extensions of Time for Collection that Exceed Current Policy Limits
  12. The IRS Needs to Improve Service and Access to Payment Options for Taxpayers with Collection Problems
  13. The Earned Income Tax Credit is an Effective Anti-Poverty Tool That Requires a Non-Traditional Compliance Approach by the IRS
  14. TAS Continues to Monitor the IRS’s Implementation of the Supreme Court Decision in Windsor and Processing of Same-Sex Marriage Returns and Related Claims

Many of the areas the NTA lists as focus areas were the subject of posts in Procedurally Taxing. I have not had the time to go through the report but a couple of items in particular are of interest, including the discussion of the 32(k) ban and the discussion of ACA implementation, topics we discussed at PT in the past week.