Source: https://procedurallytaxing.com/tag/bryan-camp/
Timestamp: 2019-04-21 08:38:38+00:00

Document:
It is unconscionable to enforce against taxpayers a statutory time limitation when Congress itself denied taxpayers the ability to protect their rights during all or part of that time period by forcing the closure of the IRS and the Tax Court. That is, Congress failed to fund either the Tax Court or the IRS, causing both to shut down for between 31 (Tax Court) and 35 (IRS) days. This failure caused both the agency and the Court to be closed to taxpayer’s attempts to resolve disputes about either the determination or collection of tax. This failure is an act of Congress just as much as the statutory limitations periods are acts of Congress. And Congress should not be able to demand that a taxpayer act within a certain time period while at the same time denying the taxpayer any ability to act during all or part of that time period. Equity should, and I believe can, prevent that result.
The above proposition is the basis for this, my last Post in the “After the Shutdown” series. Part I discussed how a reopened Tax Court might apply the Guralnik case to ostensibly late-filed petitions. Part II explained the new thinking about how jurisdictional time periods differ from non-jurisdictional. Part III explained why the time period to petition the Tax Court in §6213 should no longer be viewed as a jurisdictional limitation. I invite those readers interested in how the new thinking would apply to the time periods in §6330(d) and §6015(e) to look at my paper posted on SSRN, which I am trying to get published in a Law Review. Legal academics must publish or perish and, apparently, blogging does not count.
Today’s post explores why the Tax Court should be able to apply equitable principles to evaluate the timeliness of taxpayer petitions filed after the shutdown, regardless of whether any of the applicable limitations periods are jurisdictional or not.
Before diving in to equity, I wanted to point out that Congress itself could actually save a lot of litigation here by passing a very simple off-Code statute that says something like: “For purposes of computing time limitations imposed in Title 26 on taxpayers to petition the Tax Court, the days between December 22, 2018 and January 28, 2019 shall be disregarded.” Congress could do that. Congress should do that (for the reasons I explain below). But you can bet you sweet bippy that Congress won’t do that. It made this mess. But it is unlikely to clean it up. So it will fall to the Tax Court to sort through cases. When it does so, I believe the circumstances of the shutdown strongly support the extraordinary remedy of equitable tolling.
The Tax Court is truly a unique court. It is neither fish nor fowl, as Prof. Brant Hellwig so nicely explains in his article “The Constitutional Nature of the U.S. Tax Court,” 35 Va. Tax Rev. 269 (2015). That is, all efforts to type the Tax Court as part of the Legislative Branch, Judicial Branch, or Executive Branch of the federal government are flawed, both as a matter of theory and as a matter of practice. Channeling Felix Cohen and other Legal Realists, Brant sensibly concludes that we don’t really need to worry about “where” the Tax Court belongs in the Constitutional structure. It’s indeterminate position poses no threat to the structural integrity of the federal government, and its useful work in resolving taxpayer disputes with the IRS does not depend on its precise location in any branch.
But there is no doubt that the Tax Court exercises the “judicial power” of the United States. The Supreme Court said so in Freytag v. Commissioner, 501 U.S. 868 (1991). And part of that “judicial power” is the power to apply equitable principles and doctrines to the disputes that are properly brought before the Court for resolution. Prof. Leandra Lederman has a lovely article on this subject: “Equity and the Article I Court: Is the Tax Court’s. Exercise of Equitable Powers Constitutional?” 5 Fla. Tax Rev. 357 (2001).
It is important to remember that equitable doctrines are not simply free-floating grants of power. Equitable doctrines are linked to, and bounded by, a set of principles. But what distinguishes equitable principles from legal rules is that the application of equity is highly contingent on the facts before the court. The great legal historian F. W. Maitland put it this way in his 1910 Lectures On Equity: “I do not think that any one has expounded or ever will expound equity as a single, consistent system, an articulate body of law. It is a collection of appendixes between which there is no very close connection.” (p. 19) And in this 1913 law review article, Professor Wesley Newcomb Hohfeld discussed the difficulty of teaching equity as a system of rules separate from legal rules. I think it this way: equity fixes problems that legal rules cannot fix.
One equitable doctrine that might apply here is equitable tolling. When litigants show that, despite diligent efforts, some extraordinary circumstance prevented them from protecting their rights by timely filing within a period of limitations, a court will equitably toll the limitation period. See e.g. Holland v. Florida, 560 U.S. 631 (2010). The idea of “tolling” means that the limitations period is suspended for the tolling period. That is, it stops running and then starts running again when the tolling period ends, picking up where it left off. Artis v. District of Columbia, 138 S.Ct. 594 (2018).
Remember, this is equity, not a hard and fast legal rule or doctrine. So how much diligence a litigant must show varies with circumstances. Similarly, how extraordinary the barrier had to be also varies with circumstance. If the Tax Court applies that doctrine, it could decide—consistent with the logic of my very first paragraph—that the days in which Congress’s failure to fund the Court forced it to shut its doors should stop the running of any applicable limitation period. The Court may decline to apply equitable tolling, however, for two reasons.
First, the Tax Court has repeatedly said it cannot equitably toll jurisdictional time periods and it believes that the relevant time periods in the Tax Code are jurisdictional. I believe the Tax Court is simply wrong that the deficiency and CDP time periods are jurisdictional. That’s what I explained in the prior blog posts and in my SSRN paper.
Even if the time periods are jurisdictional, however, I believe there is good authority to toll them nonetheless. The authority is from the Supreme Court. In Honda v. Clark, 386 U.S. 484 (1967), 4,100 plaintiffs of Japanese descent whose assets had been seized by the U.S. during World War II sued for recovery years after the applicable limitation period had ended. The district court dismissed the cases “on the ground that the court lacked jurisdiction over the subject matter of the actions because they were not commenced within the time set forth in section 34(f) of the Trading with the Enemy Act.” 356 F.2d 351, 355 (D.C. Cir. 1966). Both the district court and the D.C. Circuit dismissed their suit for the standard reason: equitable principles did not apply to when limitation periods were a waiver of sovereign immunity. The D.C. Circuit gave the standard analysis: “All conditions of the sovereign’s consent to be sued must be complied with, and the failure to satisfy any such condition is fatal to the court’s jurisdiction.” 356 F.2d at 356.
The Supreme Court disagreed. While noting the general rule, it characterized the rule as a presumption and said that one needed to look at the particular statutory scheme at issue to discern purpose. Whether or not the time period was jurisdictional was totally absent from the Court’s approach to applying equitable tolling. The Court concluded it was “much more consistent with the overall congressional purpose to apply a traditional equitable tolling principle, aptly suited to the particular facts of this case and nowhere eschewed by Congress, to preserve petitioners’ cause of action.” 386 U.S. at 501.
The Supreme Court’s focus in Honda (and later in other cases, as I explain in my paper) was on the relationship between Congress and the limitation period. When you approach the limitation periods in §6213 and §6330(d) in that way, I believe the approach used by the Supreme Court in Honda strongly support application of equitable tolling, in two ways.
First, as I have argued here, the Tax Court itself has relied upon the great remedial purposes of §6213 and §6330 to in fact enlarge what it believes are jurisdictional time periods under certain circumstances. A careful reading of its cases shows that what animates its decisions is the remedial purpose of the statutory scheme that allows taxpayers a day in court before either (1) being forced face a tax assessment and its consequences or (2) being forced to pay an assessed tax. To count the shutdown days as part of a limitations period would run counter to that remedial purpose.
Second, I again restate the idea of my first paragraph. This is not a situation where a taxpayer would seek equitable tolling because of some individual government employee’s bad behavior. This is Congressional bad behavior. Another way to think of the relationship is this: if the time periods are part of Congress’s waiver of Sovereign Immunity, and if only Congress can waive Sovereign Immunity, then one can reasonably find that Congress itself has here waived its immunity by ceasing to fund the government.
The second reason that the Tax Court might look askance at applying equitable tolling here is that the doctrine usually applies in a fact pattern where the party seeking tolling has done all it can. Here, there may be instances where that is not true. For example, a taxpayer may not have even attempted to file a petition when the last day ran during the shutdown period. Or the taxpayer may not have even been prepared to file during the shutdown period and only prepares and files once the shutdown period ends. Most importantly, a taxpayer’s period might have been disrupted by the shutdown period but may not have ended during the shutdown period. How is the Tax Court supposed to measure a taxpayer’s diligence in that situation, when no one knew until Friday that the government would reopen on Monday?
I do not know the answer to these questions because equity is a case-by-case determination. The Tax Court can help avoid the time and effort of applying equitable tolling by applying a uniform counting rule that simply disregards the shutdown days, based on the idea underlying FRCP 6, as I will argue in an article I hope to publish in Tax Notes soon. Even there, however, there will be cases that are not covered even by a broad reading of FRCP 6. That will be the cases where the last day of the period came after the shutdown ended. Yet there may be such cases that command the sympathy of the Tax Court. I think the Court has the power to act and to apply equitable tolling in the cases where the circumstances support it.
Part I discussed how a reopened Tax Court might apply the Guralnik case to ostensibly late-filed petitions. The Tax Court is likely to apply Guralnik narrowly which means petitions not filed on the first day the Court reopens will be outside their Statutes of Limitation, putting the SOL in SOL. Equitable tolling could help cure that problem but the Tax Court takes the position that it cannot apply equitable doctrines to the time periods for taxpayers to petition the Tax Court because, in its view, those time periods are jurisdictional restrictions on its powers.
Today’s post applies the rules to the 90/150 day period in §6213. The most reasonable conclusion under the new thinking is that §6213 is not a jurisdictional time period. That means that the Tax Court can apply equitable principles to decide whether an ostensibly late-filed petition is timely or not. And when the Tax Court is closed for more than 33 days in a row, that is a big start to an equitable tolling analysis for those cases that cannot fit within a narrow or even a broad application of Guralnik.
Four of the five factors point to treating §6213 as a claims processing rule. Again, this is basically a summary of what I have written in this paper posted on SSRN. As usual, please comment on any errors or omissions that you spot.
Notice there is no mandatory language. Nothing in that sentence tells the reader what happens if the taxpayer misses the 90/150 day deadline. And nothing in that sentence gives the Tax Court the power to hear or decide matters raised in the petition.
The word “jurisdiction” does not appear in the first sentence. One finds the jurisdictional grant to the Tax Court over in §6214, which provides that the Tax Court has “jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency…and to determine whether any additional amount, or any addition to the tax should be assessed, if claim therefor is asserted by the Secretary at or before the hearing or a rehearing.” The §6214 power to redetermine a deficiency is simply not hooked into the §6213 timing rule.
The fourth sentence of §6213 does contain the magic word “jurisdiction.” But, as I explain in much greater detail in my paper on SSRN, while the word “jurisdiction” does appear in the fourth sentence, it is not there tied to the Court’s power to redetermine a deficiency. It was added to the Tax Court much, much, later than first sentence and later than the §6214 jurisdictional language.
As I explain in my SSRN paper, Congress first gave the Tax Court jurisdiction to redetermine a proposed deficiency in 1924. It did that in a statute separate from the 90/150 day limitation period. The codifiers also put that jurisdictional grant in a separate section of the Tax Code, both in the 1939 Code and the 1954 Code.
Much later, in 1954, Congress added to the Tax Court’s jurisdiction the power to enjoin the IRS from assessing or collecting a tax liability when the taxpayer had filed a timely petition. The codifiers put that injunctive power in the same statute as the 90/150 limitation period and conditioned that power on a timely petition being filed. But the Tax Court’s jurisdiction to redetermine a deficiency is still in a separate statute.
As applied to the shutdown, that distinction possibly makes a difference. The IRS computers will automatically set up an assessment if no IRS employee inputs the Transaction Code (TC) indicating that a petition has been filed in the Tax Court. To account for notification delays, the computers are programmed to wait 110 days after the NOD date before setting up the assessment. Readers should understand that assessments are made in bulk. Each week, all the assessments that are ready to be made are aggregated into a single document that is signed, either physically or electronically, by a designated official and, hey presto, all of the taxpayers who were set up for that week are now assessed.
This is the only factor that supports reading §6213 as jurisdictional. But it’s not especially strong because it consists only of lower court precedent that relies on other lower court precedent. As I explained in Part II, the Supreme Court has not hesitated to scrub even long-standing lower court precedent when it believes the new thinking requires a different result. The only judicial context that counts for the Supremes is their own former opinions!
In cases too numerous to mention, dating back to 1924, we have held that the statutorily-prescribed filing period in deficiency cases is jurisdictional. See, e.g., Satovsky v. Commissioner, 1 B.T.A. 22, 24 (1924); Block v. Commissioner, 2 T.C. 761, 762 (1943). Even if the “equitable tolling” argument advanced by petitioner and amicus curiae were otherwise persuasive, which it is not, we would decline to adopt that argument solely on grounds of stare decisis.
The error here is in relying on old thinking. As I explained in Part II and also in my paper, the Supreme Court keeps emphasizing that courts should not rely solely on precedent developed under the old thinking. In particular, my paper looks at both the cases cited by Guralnik here and not only shows how neither is particularly useful but also discovers that the Tax Court itself no longer follows Block’s rationale on how to count jurisdictional time periods!
The most recent Circuit Court opinion of note is Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017). There, Judge Easterbrook gave two reasons for holding that §6213 was jurisdictional. First, he swooned over the magic word “jurisdiction” in §6213 and totally ignored how it related, or did not relate, to the 90/150 time period. Second, he relied on—wait for it—wait for it—Guralnik!
For many decades the Tax Court and multiple courts of appeals have deemed § 6213(a) as a whole to be a jurisdictional limit on the Tax Court’s adjudicatory competence. [String cite omitted]. We think that it would be imprudent to reject that body of precedent, which places the Tax Court and the Court of Federal Claims, two Article I tribunals, on an equal footing. So we accept Guralnik’s conclusion and treat the statutory filing deadline as a jurisdictional one.
What is especially sad here is that the string cite that I omitted from the quote does not contain a single case after 1995. Nor could it. There is not a single court case—much less one from the Supreme Court—that actually analyzes §6213 under the Supreme Court’s new thinking and applies all the factors.
The legislative context of §6213(a) also supports reading the provision as a claims-processing rule and not as a jurisdictional requirement. The legislative context is very similar to that which the Supreme Court found so important in Henderson v. Shinseki, 562 U.S. 428 (2011) discussed in Part II. In brief, Congress created the original Board of Tax Appeals to give taxpayers a theretofore unavailable judicial remedy. The legislation creating the BTA was manifestly remedial.
The Tax Court itself has used the remedial nature of deficiency proceedings to soften the effect of its continued holding that §6213 is jurisdictional. In effect, the Tax Court “cheats” on applying §6213 by choosing from among multiple starting dates to help taxpayers meet the 90 day requirement. It does so because it recognizes the legislative context of the deadline. I explain this in my article Equitable Principles and Jurisdictional Time Periods, Part II, 159 Tax Notes 1581 (free download here).
It would be no stretch at all for the Tax Court to apply that precedent to an analysis of whether §6213 is jurisdictional in the first place.
Under the new thinking, then, four of the five factors point towards reading §6213 as a claims processing rule and not a jurisdictional rule.
Part I discussed how a reopened Tax Court might apply the Guralnik case to ostensibly late-filed petitions. I explained how it might apply the case narrowly or broadly. This post moves beyond Guralnikand starts exploring the correctness of the Court’s underlying assumption: that time limits in the Tax Code for taxpayers to petition the Tax Court to hear their disputes with the IRS are jurisdictional. A possible silver lining to the shutdown may be that it gives the Court an opportunity to revisit that assumption.
Guralnik is essentially a work-around to equitable tolling. The Tax Court says it cannot apply equitable principles to most statutes of limitation in the Tax Code because those statutes are, in its view, part and parcel of the Congressional grant of subject matter jurisdiction to the Tax Court. I believe that view is based on an outdated understanding of the law. I have posted a paper on SSRN that goes into great detail on what the current law is and how it should apply to three limitation periods in the Code: §6213, §6330(d), and §6015(e). Today’s post is a summary of what I call the “new thinking” about jurisdictional time periods that the Supreme Court has been wrestling with for the past 10-15 years. For fuller treatment, please see my paper on SSRN. For the Cliff Notes version, read on.
Starting in Kondrick v. Ryan, 540 U.S. 443 (2004), the Supreme Court became obsessed with distinguishing between jurisdictional time periods and “mere” claims processing rules. At that time, courts routinely presumed that all time limits were jurisdictional in nature. By 2013, however, the Court had totally flipped the traditional presumption. The new thinking is that time limits are presumed non-jurisdictional unless Congress had done something special to indicate otherwise. Here is how the Court summed it up in Sebelius v. Auburn Regional Medical Center, 568 U.S. 145 (2013). Be sure to empty your mouth of liquid before you read on.
To ward off profligate use of the term jurisdiction, we have adopted a readily administrable bright line for determining whether to classify a statutory limitation as jurisdictional. We inquire whether Congress has clearly stated that the rule is jurisdictional; absent such a clear statement, we have cautioned, courts should treat the restriction as nonjurisdictional in character. This is not to say that Congress must incant magic words in order to speak clearly. We consider context, including this Court’s interpretations of similar provisions in many years past, as probative of whether Congress intended a particular provision to rank as jurisdictional. 568 U.S. at 153.
The spit-take is on the phrase “readily administrable bright line.” It makes you wonder what planet the Justices had just visited. Folks, there is no bright line. There are, by my count, five indeterminate factors that the Court instructs lower courts to consider. But fear not! The task is not hopeless; it is merely very difficult.
Please note that all my case cites are to Supreme Court cases after 2000. I’ve read what I think are all the relevant ones in order to synthesize these factors. Note further that you simply cannot trust any court case before then. And you cannot really trust many lower court cases before the Supreme Court’s “we-really-mean-it” decisions in 2013 (Auburn Regional) and 2015 (Kwai Fun Wong). If someone cites a case to you, go look at the date to see if it is even attempting to reflect the Supreme Court’s new thinking. Here is my summary of that thinking, divided into five factors.
The first factor any court will consider is the text of the relevant statute. If the text expressly refers to subject-matter jurisdiction or speaks in jurisdictional terms, then that will generally be the end of the analysis. Under the old presumption, a statute that used mandatory language was presumed jurisdictional and mandatory language made it difficult to overcome the presumption. Under the new thinking, however, while mandatory language is still one factor to consider, it is no longer very important. Words like “shall” or “must” just don’t cut it anymore. The Supreme Court has repeatedly rejected the idea that mandatory language alone—even really emphatic language—makes a time period jurisdictional. Musacchio v. United States, 136 S.Ct. 709 (2016)(defendant in criminal prosecution not allowed to raise statute of limitations for first time on appeal because the limitation period was not jurisdictional despite its mandatory language); United States v. Kwai Fun Wong, 135 S.Ct. 1625 (2015)(limitations period which said a claim brought after the deadline date “shall be forever barred” was not jurisdictional).
A second factor is the presence or absence of the term “jurisdiction.” It turns out that while the word “jurisdiction” is important, it is not determinative. The Supreme Court has found a statute jurisdictional even without the word “jurisdiction” in it. Miller-El v. Cockrell, 537 U.S. 322 (2003)(finding that the statutory context of 28 U.S.C. §2253 made it jurisdictional even though it did not contain the magic word “jurisdiction”). And on the flip side, the Court has also found a statute of limitations to be non-jurisdictional even though the statute contained the word “jurisdiction” in it! SeeReed Elsevier v. Muchnick, 559 U.S. 154 (2010)(overruling widespread agreement among Circuit Courts to hold that the term “jurisdiction” in 17 U.S.C. §441(a) was not a clear enough statement because it just described a court’s ability to hear a particular issue in a larger copyright infringement suit and not the courts ability to hear the rest of the suit).
A third important factor to consider is the relationship of the limitation period to the surrounding statutory scheme. That is statutory context. The Supreme Court has focused on this factor to explain its reluctance to label a limitation period as “jurisdictional” when the limitation period is present in the same statutory section as a concededly jurisdictional grant. SeeGonzalez v. Thaler, 565 U.S. 134 (2012)(even though 28 U.S.C. §2253(c)(1) was a jurisdictional provision, the neighboring limitation in §2253(c)(3) was not);Sebelius v. Auburn Regional Medical Center, 568 U.S. 145 (2013)(rejecting argument that proximity of 42 U.S.C. §1395oo(a)(3) to concededly jurisdictional requirements in §1395oo(a)(1) and §1395oo(a)(2) made the (a)(3) time requirements also jurisdictional).
This is just another word for “precedent.” The Court has not been reluctant to reverse long-standing precedent…when the precedent is from lower courts. See e.g.Reed Elsevier v. Muchnick, 559 U.S. 154 (2010). But it’s a different story when the long-standing precedent is of the Supreme Court’s own making. SeeBowles v. Russell, 551 U.S. 205 (2007)(deciding that the time limits in 28 U.S.C. §2107 were jurisdictional simply because of “our longstanding treatment of statutory time limits for taking an appeal”); J.R. Sand and Gravel v. United States, 552 U.S. 130 (2008)(holding that time limits in 28 U.S.C. § 2501 were jurisdictional because of four prior Supreme Court cases said so and “petitioner can succeed only by convincing us that this Court has overturned, or that it should now overturn, its earlier precedent.”).
The final type of context that the Supreme Court has factored into its jurisdictional analysis is what I call the legislative context. Others might call it legislative purpose. Whatever you call it, the Court has sometimes looked to see whether finding a limitation period jurisdictional would further or hinder the policy goals of the underlying statutory scheme. I would not put a whole lotta faith in this factor right now because the current composition of the Supreme Court seems to me (and to this USA Today article) to tilt towards textualists. And textualists don’t seem to like looking to purpose unless they get really desperate.
But there is hope. I think the clearest example of where the Court found legislative context to be the deciding factor is Henderson v. Shinseki, 562 U.S. 428 (2011). And that opinion was authored by Justice Alito. There the Court held that the limitation period in 38 U.S.C. §7266(a) for a veteran to obtain court review from an adverse Veterans Administration agency decision was not jurisdictional. After first finding that neither the factors of text nor precedent pointed clearly in one direction or another, Justice Alito turned to the legislative context. “While the terms and placement of §7266 provide some indication of Congress’ intent, what is most telling here are the singular characteristics of the review scheme that Congress created for the adjudication of veterans’ benefits.” Focusing then on the Congressional intent, Justice Alito found that Congress meant for the entire statutory scheme for veterans benefits to be highly remedial.
The reason I go into some detail on the Henderson case is because I think it is pretty relevant to how a court might approach interpreting the limitation provisions in the Tax Code. After all, the whole point of the U.S. Tax Court’s existence is to give taxpayers a pre-payment remedy. It’s a big-time remedial scheme. That is, I think, particularly important when considering the limitation periods in §6213, §6330(d), and §6015(e). More on that in Part III, coming soon.
The Tax Court officially closed its doors on December 28, 2018. During one of the panels at the ABA Tax Section Pro Bono and Tax Clinics Committee meeting this past weekend in New Orleans, the question arose of how the shutdown affected the various administrative and judicial time periods for taxpayers to take various actions. For example, if the 90 day period in § 6213 for filing a petition expired during the shutdown, would the taxpayer still be able to file a timely petition on the day the Tax Court reopens?
Like Winter, litigation is coming. The point of this series of posts is to help readers prepare.
The Tax Court may actually have already given us one answer to the question of how the shutdown affects various time periods. In Guralnik v. Commissioner, 146 T.C. 230 (2016), the Court held that a day the Tax Court was physically closed would not count as part of the §6330(d) time period to protest a CDP Notice of Determination.
Keith Fogg and I have slightly different takes on how Guralnik might apply and he kindly invited me to post my thoughts on the matter. Today’s post will explain why I believe that Guralnik is strong support for the proposition that none of the shutdown days are days that count for jurisdictional time periods.
In future posts I will explain how taxpayers and the Tax Court might actually make some lemonade from this lemon of a shutdown. The Tax Court currently holds that the following time periods are jurisdictional: the 90/150 day period in §6213; the 30 day period in §6330(d); and the 90 day period in §6015(e). That means that the IRS Office of Chief Counsel cannot simply stipulate away the problem. The looming litigation gives the Tax Court a wonderful opportunity to revisit its thinking about the jurisdictional nature of these statutes. So in the next series of posts I will summarize a paper I posted on SSRN that explains: (1) the current Supreme Court doctrine for evaluating whether a statutory time period is truly a limitation on a court’s subject matter jurisdiction; and (2) how that doctrine applies to the time periods in §6213, §6330 and §6015(f).
In Guralnik, the taxpayer (TP) was trying to file a collection due process (CDP) petition. On the day before the 30thday, the TP sent his petition using Fed Ex “First Overnight” service. Fed Ex was unable to physically deliver the petition the next day (the last day of the 30 days) because the Tax Court was officially closed that day due to a snowstorm. Fed Ex successfully delivered the petition the next day, one day late. The question was whether the petition was timely.
The TP next argued for the §7502 statutory mailbox rule. The Tax Court rejected that argument because the particular Fed Ex service used (“First Overnight”) was not listed as an approved private delivery service. If the TP had just used “Standard Overnight” that would have been fine. But the “First Overnight” was a new service and the IRS had not updated the list of approved private delivery services to include it. And you wonder why people hate lawyers.
Unless the court orders otherwise, if the clerk’s office is inaccessible…on the last day for filing…then the time for filing is extended to the first accessible day that is not a Saturday, Sunday, or legal holiday.
procedural rules for computing time are fully applicable where the time period in question embodies a jurisdictional requirement. Rather than expanding a court’s jurisdiction, Civil Rule 6 simply supplies the tools for counting days to determine the precise due date. (Internal quotes and cites omitted).
We conclude that Civil Rule 6(a)(3) is “suitably adaptable” to specify the principle for computing time when our Clerk’s Office is inaccessible because of inclement weather, government closings, or other reasons. Civil Rule 6(a)(3) provides that the time for filing is then “extended to the first accessible day that is not a Saturday, Sunday, or legal holiday.” Because the petition was filed on February 18, 2015, the first accessible day after the Court reopened for business, the petition was timely filed and we have jurisdiction to hear this case.
Application of Guralnik to Shutdown Cases: The Good, the Bad, and the Different.
One could read Guralnik as a supersized mailbox rule. It would apply to taxpayers faced with a time period that expired during the shutdown. Such taxpayers could still successfully file a timely petition so long as they did so on “the first accessible day after the Court reopen[s] for business.” I think this is how Keith and most folks read the case and I admit it’s the most solid reading. Let’s call it the narrow reading.
The narrow reading of Guralnik has the advantage of letting the Court avoid messy equitable inquiries. It’s a bright-line counting rule and could really help process a bunch of cases into the system and get them to a quicker resolution on the merits. That’s good. And it will probably give relief to a large number of taxpayers who are actually able to quick-like-a-bunny file on the day the Tax Court reopens. It will also give relief to taxpayers who have attempted to file but whose petitions were undeliverable because of the shutdown and are being held for re-delivery by their chosen delivery service. That’s also good.
The first downside of the narrow reading is that it would only help those taxpayers whose deadline hit during the shutdown. While that is likely the largest group of affected taxpayers, there may be some who received their Ticket to the Tax Court (be it a Notice of Determination or Notice of Deficiency or other ticket) at some point during the shutdown but at a time where their deadline comes after the shutdown ends.
For example, let’s say a taxpayer received an NOD 40 days ago, when the shutdown had not begun. There are still 30 days left to petition the Tax Court, but the shutdown has prevented the taxpayer from dealing with the NOD, either by filing a petition or by going to Appeals. Or perhaps a taxpayer receives an AUR NOD during the shutdown. I have heard of taxpayers still receiving automated notices of intent to levy during the shutdown (and having no one to call), but I welcome comments on whether some IRS automated processes are still spitting out NODs.
For these types of taxpayers, the narrow reading of Guralnik means they must ignore the shutdown and plan on the Tax Court reopening in time for them to make a timely filing without having the usual opportunity to resolve the matter with Appeals or other IRS office.
The second downside to the narrow reading is that it requires taxpayers to assiduously monitor the shutdown situation and the Tax Court’s status. They cannot plan. They, or their representative must carefully monitor the Tax Court’s status because the shutdown has essentially reduced their limitations period to one day. Especially if the Tax Court reopens with no warning, very few taxpayers would be able to meet the “the first accessible day after the Court reopen[s] for business.” So the cautious use of Guralnik would help only those taxpayers who filed their petition on the FIRST day the Court reopens (hereinafter “the Magic Day”).
One way the Court could ameliorate this second downside is to delay its reopening after the Shutdown Ends. For example, the Court could post an order that says it will remain closed for the first 10 business days after the President signs an appropriation bill funding the Court. That would not only allow taxpayers time to get their acts (and petitions) together to file on the Magic Day, it will also allow Tax Court personnel to clear the decks of accumulated work, re-calendar cases, and prepare for the Magic Day snowstorm of filings. This idea was floated at the ABA Tax Section Meeting last week. I think Keith came up with it, but cannot recall for sure.
A Different Understanding of Guralnik?
The narrow reading of Guralnik limits its application to only those situations where the last day of the applicable deadline falls on an inaccessible day. But the Court could also apply Guralnik more broadly, in a way that would ameliorate both downsides. I take this idea from Judge Lauber’s reasoning: “Rather than expanding a court’s jurisdiction, Civil Rule 6 simply supplies the tools for counting days to determine the precise due date.” The idea here is to read FRCP 6 as a tolling provision and not just as a bulked-up mailbox rule.
Both Judge Lauber’s reasoning and the D.C. Circuit’s reasoning allow for a more generous reading of Guralnik. If the principle underlying FRCP 6(a)(3) is truly that we do not count inaccessible days that arise because of unpredictable or extraordinary circumstances—whether they be snowstorms or shutdowns—then such days should not count, period. No logic limits the counting rule to only the situations where the last day of the deadline falls on an inaccessible day.
This broader reading of Guralnik would not be decision that forces the Court to apply equitable principles to each case. It would be a decision simply about whether the days when the Court is inaccessible were predictable or not. Saturdays and Sundays and federal holidays are predictable. They are on the calendar. But snowstorms and shutdowns are not predictable. So those days should not “count” for limitation periods.
One obvious barrier to this broader reading of Guralnik is that the text of FRCP 6 talks only about situations where the last day falls on an inaccessible day. But, again, just as the D.C. Circuit applied FRCP 6 to a situation that was not covered by its plain language, so can the Tax Court here apply the idea of FRCP 6—the purpose of FRCP 6—to the shutdown situation. Again, in the words of the D.C. Circuit: “Statutory provisions laying down time periods for taking appeals, like any other enactments, must be interpreted and applied by courts; in so doing, we use the federal rules as guides. Surely, the jurisdiction of the federal courts to construe the jurisdictional provisions of a statute cannot be a matter of serious dispute.” (citations and internal quotes omitted).
The insight of the D.C. Circuit, adopted by the Tax Court in Guralnik is that taxpayers should not be held accountable for situations which they cannot neither predict or control. The unpredictability of the shutdown mirrors the unpredictability of snowstorms. Nay, it magnifies that unpredictability. No one can predict precisely when the shutdown will end. This inability makes it impossible for taxpayers and their representatives to plan their filings. They simply cannot determine the precise due date. Every day the shutdown continues is another day that some deadlines have run and is another penultimate day for other deadlines. Will the shutdown continue the next day? Will the shutdown continue for three more days? Who the heck knows! Similarly, taxpayers subject to a 90 day deadline who received their Tax Court ticket before the shutdown will have unexpectedly lost all the days of the shutdown to resolve their case in the Office of Appeals.
Remember, the FRCP is just a standardized rule of procedure, promulgated by the Supreme Court. The courts can, and do, regularly interpret the FRCPs using a common law case-by-case approach. Recent opinions on the meaning and application of FRCP 8(a)(2) are good examples. So if the D.C. Circuit can apply FRCP 6 to an agency deadline by using the idea that it was “inconceivable” that Congress intended the limitation period to include inaccessible days, the Tax Court can do the same here and for the same reason: it is inconceivable that Congress intended the 30 and 90 day periods within which to petition the Tax Court for relief to be swallowed up by a government shutdown that is now over 30 days in length. Those shutdown days simply should not count towards the applicable limitation period.
An alternative approach to applying this broader reading of Guralnik to the shutdown situation would also treat FRCP 6 more as a tolling provision, but in a more limited way than allowing any and all inaccessible days to not count towards the applicable limitation period. Again, keep in mind we are not talking about equitable tolling. The question is about finding an administrable bright-line counting rule to deal with the cases filed after the shutdown ends, both those cases filed on the Magic Day, and those cases that miss the Magic Day but are still filed timely….if you don’t count the shutdown days.
The alternative approach would recognize that a single inaccessible day in the middle of a 90 day period or 2 year period would be little more than a Saturday or Sunday or holiday in terms of impact. It would not interfere with planning nor with the ability of the taxpayer to determine the precise due date for the Tax Court petition the way that this interminable shutdown does. But when, as here, the inaccessible days keep piling up and their end point is unknowable, the FRCP 6(a)(3) could be applied to acknowledge that difference. One bright line interpretation would stop counting inaccessible days when they reach some percentage of the applicable limitations period, perhaps over a third. Another bright line would be to say inaccessible days do not count when they are in excess of four in a row (longer than any three day weekend).
The Court could also take an equitable tolling approach by apply FRCP 6 to the Magic Day filings but then evaluating all other filings on a case by case basis. That would require the Court to depart from its long-standing view that sections 6213, 6330(d) and 6015(e) are jurisdictional statutes. I think there is a very good case to be made why the first two are not jurisdictional and a very weak case for the third. That is the subject of future posts in this series.
Today Professor Bryan Camp shares with us some of his views on the government’s loss in Chamber of Commerce v IRS, the challenge to Treasury’s anti-inversion regs that I discussed here.The case has been generating significant comment. For example, Professor Andy Grewal on the Notice & Comment blog nicely summarized the outcome and gave some additional context.
I know everyone is chomping at the bit to get to the cool APA stuff, but I think the Anti-Injunction Act is the big issue here. Or at least should be. If I read the decision correctly (a big if), this appears to be a suit by an Association and they get standing only because one of their members believed that the regulation under attack would deny them a tax benefit they believed they would get absent this section 7874 regulation on inversion.
That statement reflects a poor understanding of tax administration. You could say that about ANY substantive tax reg. Is the court really saying that ANY tax regulation can be attacked by any taxpayer whose taxes are potentially affected by the regulation??? That cuts against loads of precedent going at least as far back at Fleet Equipment Co. v. Simon, 76-2 U.S. Tax Cas. (CCH) P16,231 (D.D.C. 2976). This is exactly the kind of suit that the Anti-Injunction Act is supposed to stop.
In contrast to substantive regs the courts have allowed suits to restrain implementation of regulations that go to tax administration, such as return preparer regulations or information reporting regulations. Those cannot be attacked in a refund suit and they do not affect the self-reporting taxpayers of the taxpayers subject to them. But the time and place to attack a substantive tax regulation is in a refund suit. Gosh and golly.
If the TP here wanted to attack the regulation, it could do so in a refund suit if it takes a different position, gets audited, and wants to fight. Sure, the regulation would be in place, but the TP would argue that the regulation gets zero deference because it was (allegedly) invalidly promulgated. Without the regulation, the IRS would still take the same position on the return item but the court would be faced with the TP’s position and the IRS position, unsupported by the authority of a valid regulation. Just like an assessment is not valid when not properly done.
We welcome back Professor Bryan Camp who has blogged with us on several prior occasions. Bryan and I worked together in Chief Counsel’s office in the General Litigation Division many years ago before he became a professor and everyone had the chance to learn what a great writer he is. He writes today about a case that first surfaced earlier this summer when a Tax Court order to show cause signaled trouble. I note that the case has a 2012 docket number and that it is not the only case involving petitioner husband on the Tax Court’s current and past docket. The age of the docket itself provides a cautionary tale for anyone picking up a case at calendar call.
Last week the Tax Court issued an opinion in Clark Gebman and Rebecca Gebman v. CIR, T.C. Memo 2017-184. It teaches a lesson about the pitfalls of representing a married couple and the very technical approach that a Court might use to apply conflict of interest rules to such representation.
The Gebmans had petitioned the Tax Court pro-se after receiving an NOD. One of the major issues was the taxability of distributions Mr. G. took from his IRAs.
At a January 30, 2017 calendar call in NYC they were still unrepresented. Now, the Tax Court, in conjunction with the ABA Tax Section, has implemented a calendar call program whereby attorneys show up at calendar call and volunteer their services to taxpayers. This is a most excellent program. Keith blogged about its history this past Spring and Judge Peter Panuthos also gives a great history of the program in 68 Tax Lawyer 439 (Spring 2015).
So up steps Frank Agostino at calendar call to help the Gebmans, pro bono. Trouble ensues. See below the fold for details.
Folks, we have all been there. Whether it is representing a closely held corporation, a family business, or joint filers, we have all been in situations where what is best for the group overall is not equally good for every individual in that group. When I was in practice we called this being a lawyer for “the situation” and it always, always, always raised conflict of interest flags that we needed to be sure were addressed.
In the Gebman’s case it appears that Frank concluded that Mr. Gebman simply had no non-frivolous argument to contest the NOD and that the best course of action for the couple would be to obtain spousal relief for Mrs. G. because Mr. G—who had been unemployed since 2007 (hence the apparent need to withdraw the IRA money)—was a turnip. It looks to me like Frank’s idea was to solve Mrs. G.’s problem at the liability stage (via spousal relief), thus shifting the payment burden to the Mr. G., The Turnip. Then Frank could solve Mr. G.’s collection problem in collection by showing Mr. G.’s turniptitude and obtaining a CNC or perhaps a DATC OIC.
Frank proceeded to implement this very reasonable strategy. At the January 30th calendar call, Mr. G. stands up and tells Judge Halpern “I’m going to do what’s best for my family, your Honor. And I’ve been counseled that I’ve made a mistake, and I need to be accountable to the Government.” At the same time Frank asked for leave to amend the Petition to put in an Innocent Spouse claim for Mrs. G.
Frank’s plan was a reasonable one. He was a being a great lawyer for the situation. But even the best plans fall prey to the winds of fortune. After the calendar call, recognizing that married couples always have an appearance of conflicting interests, Frank attempted to get both Mr. and Mrs. G to sign waivers and informed consent. Mr. G. refused. Moreover, Mr. G. “fired” Frank and eventually filed with the Tax Court two pro-se documents totally 50 pages of what the Court describes as containing “much rambling, extraneous matter…to show the injustice Mr. Gebman is claiming to be fighting.” Still, the documents were enough to trigger the Court’s concern that Frank might be disabled from representing Mrs. G. without Mr. G.’s continued consent.
Sure enough, Judge Halpern decided that in order to obtain the liability relief sought under the spousal relief provisions of either §6015(b) or (f), Mrs. G. would have to take a position about the facts surrounding the IRA distributions that would be materially adverse to Mr. G.’s interest. Specifically she would need to show that either the IRA distributions were solely an income item attributable solely to Mr. G. and that she did not benefit from the distributions, or she would have to show that he fraudulently (as to her) converted the IRA proceeds to his own use.
Given this conflict of interests concerning the nature of the IRA distributions, Judge Halpern concluded that Frank could not continue to represent Mrs. G. without a waiver from Mr. G. After all, Frank went into the Calendar Call and met with both spouses, gave advice to both spouses, and thereby established an attorney-client relationship with both spouses. By doing so Frank was now in a position to be advocating adverse to his former client. Moreover, although not specifically mentioned by the Court, Frank potentially received from Mr. G. information that he could use against Mr. G. in advocating for Mrs. G.’s spousal relief. This all creates the potential to breach Frank’s duty to Mr. G. under Model Rule of Professional Conduct 1.9, unless Frank gets a waiver from Mr. G. But Mr. G. has refused to sign a waiver. So Mrs. G. will have to find a new attorney or else proceed on her own.
To me, the take-away lesson here is the Tax Court’s narrow approach to determining a materially adverse interest. It takes a very technical approach and looks only at the taxpayer’s theoretical interests in avoiding liability. But Mr. G. had no practical interest in avoiding liability and, further, has no non-frivolous argument for doing so. Mr. G. is a turnip. He has no assets. If you have nothing to lose you don’t fear the reaper. The Tax Court refuses to consider the practical aspect of this case. It says “Mr. Agostino does not address the fact that during the normal 10-year collection period…Mr. Gebman’s fortunes may change.” True enough in theory, but doubtful in reality.
Bottom line is that although you may come up with a reasonable strategy while acting as a lawyer for the situation, beware of the technical conflicts that may exist and deal with them appropriately.
This post originally appeared on the Forbes PT site on February 21, 2017.
We welcome guest bloggers Bryan Camp and Victor Thuronyi. Professor Camp has been our guest before and posted, inter alia, a very popular three part series on Eight Tax Myths – Lessons for Tax Week. Post 1 can be found here, Post II can be found here and Post III can be found here. Professor Camp is the George H. Mahon Professor of Law at Texas Tech. Mr. Thuronyi writes for PT for the first time. Mr. Thuronyi practiced tax law, served in the U.S. Treasury Department, and taught tax law before joining the International Monetary Fund in 1991 where he worked until retirement in 2014 as lead counsel (taxation). He has worked on tax reform in many countries and is the author of Comparative Tax Law (2003) and other writings on tax law.
Whether you want to see President Trump’s returns or not, the controversy points out to me a couple of things we have gotten right that we ought to celebrate. After abuses of information at the IRS by President Nixon in an attempt by him to make life difficult for his enemies, Congress significantly tightened the disclosure laws in 1976. That legislation has worked. The legislation has worked in part because of the laws enacted but also in part because of the culture it has created at the IRS regarding taxpayer information. Despite a lot of curiosity about President Trump’s returns starting months before his election, the returns have not surfaced. He had no legal duty to disclose them even though precedent of many recent presidential candidates created a cultural expectation of disclosure. I celebrate the success of Congress and the IRS in protecting the returns.
Lots of folks want to see Donald Trump’s tax returns. Conventional wisdom is that the returns cannot be disclosed unless he consents. That conventional wisdom is based on the general rule contained in 26 U.S.C. §6103(a). The general rule forbids IRS employees (and some folks who receive information from IRS employees) from disclosing “return information.” That is a term of art that means more than just tax returns but basically means anything in the IRS files.
Section 6103 is a really complex statute, mostly because of the exceptions to the general rule. The exceptions are found in subsections (c) through (o). These exceptions balance a taxpayer’s privacy with the needs of government officers and employees to do their jobs. So the exceptions to the general rule can get quite gnarly.
Several commentators have begun to explore some of the lesser known exceptions to the general rule of nondisclosure. George Yin has a nice op-ed piece that explains one exception to the general rule in §6103: Congress can ask for Trump’s returns. Andy Grewal also explores this idea in a well done post over at the Yale regulation blog. Both posts are worth reading.
Both George and Andy focus on the power of certain Congressional committees and staff to ask for tax returns as part of their oversight function. That power is found in §6103(f)(1) through (f)(4). Democrats have acted on the ideas in George and Andy’s blogs. Stephen Ohlemacher from the AP reports that Democrats on the House Ways and Means Committee tried to get the Committee to ask for Trump’s returns, but were outvoted by Committee Republicans.
But what if the returns were dumped on the Committee’s lap by an IRS employee without the Committee having made a request? That could happen under the very last paragraph in subsection (f).
The statute does not say whose misconduct or whose maladministration the returns must relate to. An employee’s concern could be that Trump’s extensive business holdings and his well-documented refusal to divest himself of business relationships will create (or has already created) misconduct and maladministration on his part. For example, all of the profits from Trump’s businesses still accrue to his benefit. That means when the federal government leases an entire floor of Trump Tower for $1.5 million, Trump is directly benefitting from that decision. Or, for example, Trump might sign an executive order barring immigration from certain countries but he might exclude from that order immigration from countries where he or his businesses own property and businesses.
However, while §6103(f)(5) is a possible avenue for an IRS employee to blow the whistle on Trump, two obstacles make it a tricky one. First, despite the statute’s broad language, the history of its enactment suggests that the language may refer only to the misconduct or maladministration by the IRS or its employees. Second, only an IRS employee who has proper access to return information is permitted to disclose.
Congress enacted §6103(f)(5) in 1998 as part of the IRS Restructuring and Reform Act of 1998 (“RRA”). RRA originated in the House as H.R. 2676 but the provision now codified in §6103(f)(5) was not in the House version. It came from the Senate Finance Committee’s version. You can find all the documents and history of the bill here.
The Senate Finance Committee Report explains that “it is appropriate to have the opportunity to receive tax return information directly from whistleblowers.” (p. 105).
The Conference Committee expanded the limiting language to the language that became the law. Under the expanded language, disclosure is authorized if the IRS employee making the disclosure believes that the return is related to “possible misconduct, maladministration, or taxpayer abuse.” The expansion, however, seems to stop short of expanding the idea of whose improper conduct is at issue. Under the Senate version, the improper conduct was explicitly linked to IRS employee misconduct or taxpayer abuse. The revised language expanded the kind of improper conduct to include “maladministration.” But whether the revised language expanded the idea to misconduct or maladministration by a government employee other than an IRS employee is unclear. Arguably, however, if the misconduct is relevant to misconduct of the sort that a Congressional committee might investigate, then the broad language of the statute could cover it.
Even if one reads §6103(f)(5) as authorizing an IRS employee to blow the whistle on a non-IRS government employee, one large obstacle remains. Section 6103(f)(5) only applies when the IRS employee making the disclosure has authorized “access” to the return. This would mean that only the relatively narrow group of IRS employees who are authorized to view the returns for audit or other purposes would be eligible whistleblowers. That brings us back to Trump’s claim that he is under audit. If he is telling the truth about that, then there are certainly some IRS employees who have legitimate access to at least the returns being audited.
In addition, any other person, such as an employee of a state taxing agency, who has properly received the returns from the IRS pursuant to the exceptions listed in §6103(a)(3) would also have proper access. We do not explore the legal position for this group, however, since it would involve delving into potential state law prohibitions on their action.
Congress has enacted a number of statutes that make willful violation of the disclosure rules a crime. First up is §7213 which imposes a fine up to $5,000, and up to five years imprisonment for any willful violation of §6103. See e.g. United States v. Richey, 924 F.2d 857 (9th Cir. 1991). In the criminal context, however, the Supreme Court has instructed that a good-faith misunderstanding of the law or a good-faith belief that one is not violating the law negates willfulness, whether or not the claimed belief or misunderstanding is objectively reasonable. Cheek v. U.S. 498 U.S. 192 (1991).
Second, 18 U.S.C. § 1030(a)(2) makes the unauthorized access of government computers a felony. This provision includes the unauthorized access of returns or return information in government computer files.
Third, in the RRA, Congress created 26 U.S.C. §7213A to specifically make the unauthorized inspection of returns or return information, whether in paper or computer files, a misdemeanor. See Pub. L. No. 105-206, 112 Stat. 711 (1998).
We have never before had a President so vulnerable to conflicts of interest and, at the same time, so callous about his governing duties and so careless of the law. This potent combination requires checks, it requires balances. Checks and balances are what have enabled this country to thrive for over 200 years. A review of Trump’s tax returns is but a small part of what is necessary to check on his behavior. If the Congress does not have the political will to use its powers, there remains a possibility that a whistleblower from the IRS or a State agency could force the issue.
Keith emailed me last week and asked if I would care to blog about a recent 4th Cir. opinion affirming a Tax Court decision that upheld a proposed deficiency in the taxes of QinetiQ US Holdings (Q). (for previous PT posts on QinetiQ see here, here and here).It seems that Q took a big §83(h) deduction. On audit, the Service disallowed the deduction and sent Q a Notice of Deficiency (NOD). In court, Q argued that the NOD violated the Administrative Procedure Act (APA) because the NOD gave no explanation for the disallowance and, oh, by the way, the §83 deduction was proper. The Tax Court rejected both arguments. The 4th Cir. affirmed.
Maybe the §83 issue is interesting. If so, I’m sure the Surly Subgroup will blog it. To me, however, what makes this 4th Cir. opinion worthy of a shout out is its discussion about the relationship of the Administrative Procedure Act (APA) to tax procedure. Ever since the Supremes decided Mayo Foundation in 2011, it seems everybody and their little dogs have been declaring that something called “tax exceptionalism” is dead. The Fourth Circuit’s opinion gives a more nuanced take, one that is worth blogging about for three reasons. First, it represents a new front on the “tax exceptionalism” debate. Second, the Circuit’s opinion makes a critically important point about the relationship of the APA to tax procedure. Third the opinion could affect court review of other types of IRS determinations, such as CDP determinations.
I will consider each of these points in turn.
Professor Steve Johnson at Florida State has written extensively and lucidly about the tax exceptionalism debate. In this short Florida Bar Review article from 2014 he encouraged tax practitioners to consider challenging NOD’s under an APA standard. Apparently the lawyers for Q read his article!
The APA is found at 5 U.S.C. Subchapter II. Section 706 says that courts should review agency adjudications to be sure they were not made arbitrarily. To do that, the court needs to see what the agency’s rationale was for its decision. So over time the Supreme Court has developed the requirement that “an agency provide reasoned explanation for its action.” FCC v. Fox Television, 556 U.S. 502, 515 (2009).
In QinectiQ, the taxpayer argued that the NOD failed the APA §706 standard. The NOD said only that Q had additional taxable income of “$177,777,501” because Q had “not established that [it was] entitled” to a deduction “under the provisions of [26 U.S.C. §83].” The NOD gave zero explanation for why the Service was disallowing the deduction. The failure to articulate a rational explanation for its disallowance decision meant that a review court had no way to police the NOD for arbitrariness.
In a short unpublished order, the Tax Court refused to apply the APA standard and held that the NOD was instead subject to the standard provided for in §7522(a). The taxpayer’s argument to the Fourth Circuit was essentially that §7522 and the APA standards were cumulative, not exclusive.
The Fourth Circuit affirmed the Tax Court. It believed the taxpayer’s attempt to apply the APA standard “fails to consider the unique system of judicial review provided by the Internal Revenue Code for adjudication of the merits of a Notice of Deficiency.” (p. 9 of slip opinion).
The Fourth Circuit thought two features of tax administration made the APA standard inapplicable. First, “because the Code’s provisions for de novo review in the tax court permit consideration of new evidence and new issues not presented at the agency level, those provisions are incompatible with the limited judicial review of final agency actions allowed under the APA.” (p. 10-11 of slip opinion). Second, the Tax Code’s provisions for judicial review of NOD’s pre-dated the APA. “Congress did not intend for the APA ‘to duplicate the previously established special statutory procedures relating to specific agencies.’” (p. 12 of slip opinion, quoting Bowen v. Massachusetts, 487 U.S. 879, 903 (1988)).
The Fourth Circuit’s consideration of these two features of tax administration is the more nuanced understanding that I think is worth commenting on.
The APA was enacted on the basis of a massive, massive, study of federal agencies and their operations undertaken by the Attorney General’s Committee on Administrative Law (“the Committee”). The Committee’s Final Report is generally believed to be the most important influence on the text and application of the APA.
The Final Report grew out of a detailed study of then-existing agencies, a study contained in 27 Monographs written by staff, each running hundreds of pages. (Monograph 22 focused on the tax administration). At its inception, the Committee “had initially hoped to be able to suggest uniform rules for agency practice” (quote from Grisinger Law in Action: The Attorney General’s Committee on Administrative Procedure, 20 J. of Policy History 379 (2008)). In light of the information produced in the 27 monographs, however, the Final Report backed away considerably from that aspiration and instead prescribed a general framework for balancing the goals of agency efficiency and autonomy with the goals of agency transparency and protection of individuals from arbitrary agency actions. That is why the resulting APA was widely understood as standing for the proposition that “procedural uniformity was not well suited to the administrative process.” (Grisinger at 402; one sees the same theme in almost all the contemporary commentaries and reviews of the Final Report). That is, the APA provided generalized standards for controlling administrative actions rather than detailed prescriptions. This conventional view is elegantly summed up by Professors Hickman and Pierce: “the Administrative Procedure Act is to administrative law what the Constitution is to constitutional law.” Kristin E. Hickman, Richard J. Pierce, Jr., Federal Administrative Law: Cases and Materials, (Foundation Press, 2010) at 19.
What this means is that while the APA does apply to all agencies, including the IRS, it does not apply in the exact same way to all agencies. Every agency is “exceptional” in that every agency faces a different set of operational demands and requirements and organic statutory provisions. All of those variables must be reconciled to the general language of the APA and it should not surprise anyone that different reconciliations lead to different applications of the APA principles to different agencies. That is why the Supreme Court, in Bowen, said “When Congress enacted the APA to provide a general authorization for review of agency action in the district courts, it did not intend that general grant of jurisdiction to duplicate the previously established special statutory procedures relating to specific agencies.” 847 U.S. 879 at 903.
Put another way, the debate is not “whether” the APA applies, it’s “how” the APA applies. It is not so much whether the NOD review procedure “comply with” the APA as it is whether the procedures are “consistent with” the APA. Does the APA displace or otherwise affect otherwise applicable rules that govern what goes into the NOD and how the Tax Court reviews it?
That is what the Fourth Circuit recognizes in QinetiQ. The Tax Code’s specific statutory review structure makes the APA review standard inapplicable, for both historical and operational reasons. The historical reason is what I said above: the specific statutory structure for court review of NOD’s pre-dates the APA and the APA was not written to displace prior law. The operational reason is that taxpayers have the burden to prove entitlement for deductions and have every opportunity to do so in a de novo Tax Court review. That de novo nature of review is what makes the current practice acceptable. For example, if the IRS rejects a claimed deduction, tax law does not put the burden on the IRS to prove up the rejection. The burden remains on the taxpayer to prove up the entitlement, only now in front of the Tax Court (or district court if the taxpayer chooses to pay the deficiency and then go for a refund). It is the Tax Court’s job to determine or re-determine the taxpayer’s proper tax liability. That’s why it can either increase the proposed deficiency (§6214(a)) or actually order a refund (§6512(b)).
The Tax Court has recognized these points as well. It has a nice discussion of this kind of “tax exceptionalism” in Ax v. CIR, 146 T.C. No. 10 (2016) (which Les has previously blogged here and which Professors Stephanie Hoffer and Chris Walker give some very thoughtful comments here). In Ax, the taxpayer objected to the Service raising a new issue before the Tax Court, even though the Service acknowledged it bore the burden of proof. Like the taxpayer in QinetiQ, the taxpayer in Ax argued that because “the Supreme Court rejected the concept of ‘tax exceptionalism,’ the Administrative Procedure Act and [case law] bar Respondent from raising new grounds to support his final agency action beyond those grounds originally stated in the notice of final agency action” (e.g. the NOD). The Tax Court’s rejection of that position is worth reading.
Have you ever noticed how you need an NOD to get Tax Court review? I don’t just mean the “Notice of Deficiency.” I also mean the “Notice of Determination” from a CDP hearing. That’s a ticket to the Tax Court, too. But, sorry, a “Determination Letter” is not a ticket. Likewise, if a taxpayer petitions for “stand alone” spousal relief per §6105(f), the eventual “Notice of Determination” issued by IRS or Appeals is the ticket for Tax Court review (of course, §6105(e) also permits a taxpayer to seek judicial review in cases where the Service has not acted within 6 months of the initial request for spousal relief).
The point is that the Tax Court reviews agency decisions other than deficiency determinations. QinectiQ deals with only ONE kind of IRS determination (although by far the most frequent). The inimitable Steve Johnson gives an excellent and in-depth treatment of the variety of ways that the APA §706 might be applicable to a variety of IRS determinations in his Duke L. Rev. article “Reasoned Explanation and IRS Adjudication,” 63 Duke L. J. 1771.
The Fourth Circuit’s rationale for not applying the ABA §706 standard of review in QinectiQ actually suggests the ABA standard may be applicable to court review of some of these other IRS determinations. One sees this in the opinion’s discussion of Fisher v. Commissioner, 45 F.3d 396 (10th Cir. 1995). In Fisher, the 10th Circuit held an NOD invalid because the NOD implicitly denied, without explanation, a taxpayer’s request for penalty abatement. Since the Service has the discretion to grant or deny such requests, the 10th Circuit thought that the failure to explain why the Service was exercising its discretion to deny the relief violated “an elementary principal of administrative law that an administrative agency must provide reasons for its decisions.” 45 F.3d at 397. Unexplained exercise of discretion is per se arbitrary, says Fisher.
The Fourth Circuit could have just disagreed with Fisher. The IRS issued a well-reasoned AOD that explained why Fisher was wrong. AOD-1996-08, 1996 WL 390087. But the Fourth Circuit instead chose to distinguish Fisher, saying in footnote 6: “we do not read Fisher…as requiring a reasoned explanation in all Notices of Deficiency.” Hmmmm. Does that suggest that in situations where the Service is exercising discretion—like refusing to grant a request for spousal relief, or refusing to accept a collection alternative offered in a CDP hearing—that one of those decisions would be subject to the APA §706 standard, even when the Tax Code has very detailed special statutory procedures? After all, both the CDP provisions and spousal relief provisions were added by Congress after the APA.
the standard of review employed by the Tax Court is abuse of discretion, except with respect to the existence or amount of the underlying tax liability, for which the standard of review is de novo. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). The evidentiary scope of review employed by the Tax Court is de novo. Robinette v. Commissioner, 123 T.C. 85, 101 (2004), rev’d, 439 F.3d 455, 459-462 (8th Cir. 2006). That means that the Court’s review is not confined to evidence in the administrative record. See Speltz v. Commissioner, 124 T.C. 165, 177 (2005) (citing Robinette v. Commissioner, 123 T.C. at 94-104), aff’d, 454 F.3d 782 (8th Cir. 2006). If the Court remands a case to the Appeals Office, the further hearing is a supplement to the original hearing, not a new hearing, Kelby v. Commissioner, 130 T.C. 79, 86 (2008), but the position of the Appeals Office that the Court reviews is the position taken in the supplemental determination, id.
The Tax Court’s practice of allowing new information is IMHO a perfectly reasonable procedure and it reflects the ongoing nature of both CDP and 6015(f) determinations. Each of those determinations can be affected by facts that change at any time. But it is arguably NOT the procedure contemplated by the APA. Notably, the APA contemplates that the record, once made, is unalterable. And the danger of allowing an open record is that the Tax Court becomes mired “with tax enforcement details that Congress intended to leave with the IRS.” Robinette v. Commissioner, 439 F.3d 455, 459 (8th Cir. 2006) aff’ing in part 123 TC 85.
Both the CDP and the spousal relief review provisions were added by Congress long after the APA’s enactment. Perhaps the flip side of pre-existing administrative schemes not being displaced by the APA is that post-APA statutory provisions do not exclude application of APA §706 but incorporate that standard (unless of course Congress says the provisions are to be exclusive). Of course, the operational reasons for concluding that the §706 standard has been trumped by the specific CDP provisions may remain.
Those of us who study this stuff are not in agreement. For Les’ take, see here; for Stephanie Hoffer and Chris Walker’s take, see here. As Keith points out, the CDP procedures have astonishingly large gaps in them. But IMHO the APA does not mandate a uniform set of rules for the Tax Court to deal with those gaps. Like the U.S. Constitution, the APA simply provides the touchstone by which to measure any rules or procedures that the Tax Court or IRS come up with in implementing CDP. Claiming that a procedure violates §706 is like claiming one process or another violates “due process.” You first have to figure out what process is “due” before you can find a violation.
In sum, I believe the Fourth Circuit’s opinion in QinetiQ leaves open the door to argue that for non-deficiency determinations, APA §706 has greater applicability than for standard Tax Court review of deficiency notices. Personally, I think that (1) the specificity of the both the CDP and innocent spouse provisions, and (2) the specific relationship that the Tax Court has in supervising so many aspects of tax administration still trump the general provisions in the APA. But those two reasons for treating current procedure as may not be as applicable to other types of determinations, such as §6672 decisions, or penalty abatement decisions, or other “discretionary” decisions that are not clearly covered by specific Tax Code provisions.

References: §6213
 §6330
 §6015
 v. 
 v. 
 v. 
 v. 
 §6213
 §6330
 §6213
 §6330
 §6213
 §6213
 §6213
 §6214
 §6214
 §6213
 §6213
 §6214
 §6213
 v. 
 v. 
 v. 
 §6213
 §6213
 § 6213
 §6213
 §6213
 v. 
 §6213
 §6213
 §6213
 §6213
 §6213
 §6330
 §6015
 v. 
 v. 
 v. 
 v. 
 v. 
 §2253
 v. 
 §441
 v. 
 §2253
 §2253
 v. 
 §1395
 §1395
 §1395
 v. 
 v. 
 §2107
 v. 
 § 2501
 v. 
 §7266
 §7266
 §6213
 §6330
 §6015
 § 6213
 v. 
 §6330
 §6213
 §6330
 §6015
 §6213
 §6330
 §6015
 §7502
 v. 
 v. 
 §6015
 §6103
 §6103
 §6103
 §6103
 §6103
 §6103
 §6103
 §6103
 §7213
 §6103
 v. 
 v. 
 § 1030
 §7213
 §83
 §83
 §83
 v. 
 §706
 §83
 §7522
 §7522
 v. 
 v. 
 §6105
 §6105
 §706
 §706
 v. 
 §706
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 §706
 §706
 §706
 §706
 §6672