Tax Blog/Blawg

The undersigned has been practicing in the United States Tax Court since May 1971, and has seen many changes, such as the evolution of the very simple Tax Court Rules of Practice during 1973 into the Tax Court Rules of Practice and Procedure when the Court added provisions with regard to summary judgment as well as discovery.  The Tax Court, and its predecessor – the Bureau of Tax Appeals, were originally created to give taxpayers the opportunity to challenge determinations of deficiencies in taxes, and occasionally secure overpayments when in fact they were appropriate.  Over time, Congress has come to the Tax Court as an ideal place to put jurisdiction for resolution of a variety of problems. 

Over the years, the kinds of actions the Court has been empowered to consider have been expanded to include abatement of interest, attorneys’ fees, innocent spouse, collection due process, declaratory judgments, whistleblower claims, § 6751(b) disputes and, most recently, actions brought under the purview of § 7345 concerning revocation or denial of a passport in case of certain tax delinquencies.  It is noteworthy the Court had not requested this additional jurisdiction, and the subject of this article has to do with its continued resistance to that expansion of its jurisdiction.

The Tax Court has taken two approaches to situations where a jurisdiction was thrust upon it.  In the First Taxpayers’ Bill of Rights, which most Practitioners came to view as a “bill of goods,” I.R.C. § 6404(e) was enacted to allow taxpayers to file claims for abatement of interest.  Not surprisingly, the IRS rarely granted those claims, and while the need for judicial review was apparent, but the law was silent. 

The Tax Court, like every other Court to which a taxpayer brought the denial of a claim, refused to accept jurisdiction.  In 1998, as part of the IRS Restructuring and Reform Act, the Tax Court was given specific jurisdiction over denied claims.  The result?  The writer published an article in the January 2002 edition of the Journal of Taxation, entitled “Broken Promise:  Interest Abatement,” which highlighted the ways the Tax Court had bent over backwards to find reasons for denying claims for abatement of interest.  The situation has not improved since then. 

The practitioners whose claims for attorneys’ fees have been submitted have faced a similar approach.  That is to say, to the extent the Court cannot find an outright prohibition in the Treasury Regulations, the already paltry amount allowed by statute will be nickel and dimed and whittled down to a point where it's hardly even worth making the claim.  Those seeking rewards as whistleblowers have likewise been disappointed by their reception.  Fortunately, the Court's approach to innocent spouse cases and collection due process challenges have been far more evenhanded. 

However, there are situations where the Court has taken the position that it simply does not have jurisdiction.  A prime example is related to § 7436 proceedings for determination of employment status.  In Henry Randolph Consulting v. Commissioner, 112 T.C. 1 (1999), the undersigned represented a company that had received a letter determining that several of its workers were not independent contractors, but the determination letter identified neither the workers themselves nor the amounts each allegedly received which were going to be reclassified as compensation.  As such, allegations of error were included in the petition with respect to these failures. 

The Commissioner filed a motion to strike those allegations, which the Tax Court was more than happy to grant.  In Henry Randolph Consulting v. Commissioner, 113 T.C. 250 (1999), a follow-up case, the same lawyer and taxpayer combination attempted to have the IRS’ Answer stricken for failure to allege those facts.  Once again, the Court refused to consider the issue.  Fortunately, Congress took note of this, and in the Community Renewal Tax Relief Act of 2000, P.L. 106-554, § 314(f) was included to specifically add the jurisdiction over the identity of the workers and the proper amount of employment tax for each in these proceedings, which gutted the Tax Court’s rationale in its prior holdings.  

The ultimate reason for dodging jurisdiction is hard to understand, because in the course of an actual trial, those facts would have definitely come out.  Since then, the Tax Court has dealt with those issues in such cases in an evenhanded way.  Notably, after those two opinions were issued, IRS Counsel conceded that the workers were not employees.

More recently, the Tax Court was faced with the challenge of interpreting I.R.C. § 6751(b), that largely overlooked provision of the 1998 Restructuring and Reform Act, which may be the epitome of poor drafting on the part of the Congress.  That provision provides as follows:

            (b)       Approval of assessment

           In General – No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.

This writer recognizes that the reference to the “before assessment is made” leaves a great deal open to interpretation.  A number of taxpayer’s counsel attempted to have the Tax Court apply this provision, and in Graev v Commissioner, 147 T.C. No. 16 (2016), a reviewed opinion with a number of dissents, the Tax Court opined that it did not have jurisdiction to consider this issue in a deficiency case.  That interpretation survived briefly until Chai v. Commissioner, 851 Fd.3d 190 (2d Cir. 2017) was issued, in which the Second Circuit Court of Appeals informed the Tax Court that it did indeed have jurisdiction over the application of that provision.  The Tax Court relented and stated that it would apply the rule of the Second Circuit to other cases.  The crux of the issue of course has to do with whether a written approval of the application of a penalty is made before the “initial determination,” and a considerable amount of litigation has ensued in which the Tax Court has interpreted this provision appropriately.  Nonetheless, the initial approach was to the effect that it did not have jurisdiction, much as it seemed to be saying in the Henry Randolph Consulting cases.

Most recently, the Tax Court has decided two cases involving the revocation or denial of passports, Reusch v. Commissioner, 154 T.C. 289 (2020), and Shitrit v. Commissioner, T.C. Memo. 2021-63.  In each case, the taxpayer had brought a challenge to a determination of owing seriously delinquent tax debt where the Commissioner had transmitted a Certification of that to the Secretary of State for a denial or revocation of a passport.  In each case, the taxpayer sought to have the Tax Court “review” the determination including the determined amount of liability – income tax in the Shitrit case, and a penalty in the Reusch case.  In both cases, the Court stated it does not have jurisdiction to do so.  The Court concluded that § 7345(b) limits the Court’s jurisdiction to determining only whether the Commissioner erred in certifying (or failing to reverse its certification) that a taxpayer owes a “seriously delinquent tax debt” as defined by § 7345(b).

Ironically, in each case, actions by the IRS outside of that proceeding had rendered the ultimate determination of liability moot.  However, there will clearly be cases down the line where the liability will be present, the jurisdiction cannot be so easily sidestepped, and the Court is going to have to deal with the question of how much the liability actually is. 

It would be all too easy for a practitioner or a taxpayer to misinterpret the Tax Court’s reticence in this area as an effort to discourage the filing of future actions of the sorts which have been the subject of opinions which limit the exercise of its jurisdiction.  The reality is that Congress did not consult with the Tax Court before it dumped jurisdiction of these matters on a Court that was established for totally different purposes.  Moreover, to the extent Congress is tempted to continue this practice, it could avoid the difficulties discussed in connection with §§ 6751(b), 7345(b) and 6404(e) if it consulted with the day-to-day practitioners about the reality of what goes on in their dealings with the Internal Revenue Service which lead up to these proceedings in the Court and its proceedings.