Tax Court Denies Sanctions Against IRS, Remands Case to Appeals

ALL-RITE LEASING COMPANY, INC.,
Petitioner
v.
Commissioner of Internal Revenue,
Respondent

UNITED STATES TAX COURT
Washington, DC 20217

ORDER

Pending in this collection due process (CDP) case are petitioner's motion to impose sanctions, filed September 24, 2020, as supplemented on September 26 and November 3, 2020, and respondent's motion to remand, filed November 19, 2020. We conclude that no hearing is necessary to dispose of these motions. For the reasons stated below we shall deny petitioner's motion for sanctions as supplemented and grant respondent's motion to remand.

A. Background

This case was previously calendared for trial at the session of the Court scheduled to commence in Los Angeles, California, on April 27, 2020. By order dated March 19, 2020, this trial session was canceled because of concerns relating to coronavirus (COVID-19). On May 26, 2020, the parties filed a joint motion to remand, requesting that “this case be remanded to the same Office of Appeals Settlement Officer Teresita Paz (ASO Paz), for a Supplemental Collection Due Process hearing to be conducted in-person and audio recorded for creation of an adequate record (as the October 17, 2017, first Collection Due Process hearing was conducted), for a reconsideration of petitioner's offer-in-compromise request, and for the issuance of a Supplemental Collection Due Process Notice of Determination”, subject to various agreed-upon terms as stated in the motion.¹

By order dated May 27, 2020, the Court granted the parties' joint motion to remand. The order stated that this case “is remanded to respondent's Appeals Office for a supplemental collection due process hearing in accordance with the agreed-upon terms as set forth in the parties' joint motion to remand” and that “respondent shall offer petitioner an administrative hearing at respondent's Appeals Office located closest to petitioner's residence (or at such other place as may be mutually agreed upon) at a reasonable and mutually agreed upon date and time, but no later than August 27, 2020.” On August 21, 2020, respondent filed an unopposed motion for extension of time to September 28, 2020, to conduct the supplemental CDP hearing, citing “COVID-19 related restrictions on respondent's staff accessing their offices”. On August 24, 2020, the Court granted respondent's motion for extension of time. On September 25, 2020, Appeals issued petitioner a supplemental notice of determination, sustaining (for the second time) the proposed collection action and denying an offer-in-compromise (OIC).

B. Petitioner's Motion to Impose Sanctions

On September 24, 2020, petitioner filed a motion to impose sanctions, which petitioner supplemented on September 26 and November 3, 2020. In this motion as supplemented petitioner alleges that respondent's Appeals Office (Appeals)² failed to comply with the Court's May 27, 2020, remand order because it refused to conduct an in-person recorded supplemental hearing and because it failed to consider the merits of petitioner's OIC based on financial information that petitioner had previously supplied. Petitioner's motion requests us to impose sanctions under sections 6673 and 7456(c) and also to hold respondent in default under Rule 123.³

In his response filed November 19, 2020, respondent disagrees that sanctions are appropriate. Respondent asserts that Appeals was unable to offer petitioner an in-person audio recorded hearing by September 28, 2020, because of “ongoing coronavirus pandemic and the closure of respondent's offices due to health and safety concerns.” Respondent asserts that Appeals “offered to hold a telephonic or video conferencing hearing with petitioner's counsel but declined to allow him to record the hearing.”⁴ In his response respondent asserts, with respect to petitioner's OIC, that “Appeals reviewed the entire administrative file and determined that the offer was properly returned to petitioner 'pursuant to Collections policy and procedures.'”

1. Section 6673

Petitioner requests the Court to order respondent to “pay Petitioner's IRC §6673(a)(2) excess costs, expenses, and lawyer's fees, all due to Respondent's unreasonable and vexatiously multiplied proceedings in this litigation by Appeals' refusal to comply with the Court's May 7, 2020, order”.

Section 6673(a)(2), which is captioned “Counsel's liability for excessive costs”, provides for sanctions “[w]henever it appears to the Tax Court that any attorney or other person admitted to practice before the Tax Court has “unreasonably or vexatiously multiplied the proceedings.” Section 6673(a)(2) is derived from section 1927 of the Judicial Code, 28 U.S.C. section 1927 (1988); these two statutory provisions contain substantially identical language and serve the same purposes in different forums. Takaba v. Commissioner, 119 T.C. 285, 296-297 (2002); Dixon v. Commissioner, T.C. Memo 2000-116, citing H. Rept. 101-247, at 1399-1400 (1989). Consequently, the two provisions have been historically interpreted consistently. Takaba v. Commissioner, 119 T.C. at 297.

The Court of Appeals for the Ninth Circuit, to which any appeal of this case would presumably lie, see sec. 7482(b)(1)(G), has stated that 28 U.S.C. section 1927 “does not authorize recovery from a party or an employee, but 'only from an attorney or otherwise admitted representative of a party.'” FTC v. Alaska Land Leasing, Inc., 799 F.2d 507, 510 (9th Cir. 1986), quoting 1507 Corp. v. Henderson, 447 F.2d 540, 542 (7th Cir. 1971); see also Kaass Law v. Wells Fargo Bank, N.A., 799 F.3d 1290, 1293 (9th Cir. 2015). Petitioner's motion to impose sanctions, as supplemented, is directed not to any actions by respondent's counsel but rather to alleged actions (or inactions) by Appeals personnel.⁵ Appeals “is a component of the IRS within the Department of the Treasury”; its personnel are employed by the Commissioner pursuant to his authority under section 7804(a). Tucker v. Commissioner, 135 T.C. 114, 134 (2010). Consequently, section 6673(a)(2) is wholly irrelevant in this case.

In any event, nothing in petitioner's allegations suggests bad faith or recklessness on the part of Appeals personnel. We are astonished that petitioner would suggest that Appeals acted in bad faith or recklessly in declining to hold an in-person conference during the COVID-19 pandemic, when respondent's offices were closed because of safety and health concerns.⁶ See Takaba v. Commissioner, 119 T.C. at 297 (discussing the legal standard for imposing sanctions under section 6673). And insofar as petitioner's complaint relates to Appeals' declining to reconsider petitioner's OIC on its merits, we expect any such concern to be addressed on remand of this case as requested by respondent and as addressed below.

2. Section 7456

For similar reasons, we reject as without merit petitioner's request for sanctions pursuant to section 7456(c), which provides in relevant part:

The Tax Court and each division thereof shall have power to punish by fine or imprisonment, at its discretion, such contempt of its authority, and none other, as —

(1) misbehavior of any person in its presence or so near thereto as to obstruct the administration of justice;

(2) misbehavior of any of its officers in their official transactions; or

(3) disobedience or resistance to its lawful writ, process, order, rule, decree, or command.

Petitioner's request for sanctions under section 7456(c), like its request for sanctions under section 6673, is directed toward alleged misconduct by “Appeals” and certain of its personnel — specifically Settlement Officer Lee and “her Appeals' bosses” — rather than any conduct by respondent's counsel. Neither “Appeals”, Settlement Officer Lee, nor her “Appeals' bosses” are parties to this case. In certain circumstances a nonparty may be held in contempt. See, e.g., NLRB v. Sequoia District Council of Carpenters, 568 F.2d 628, 633 (9th Cir.1977) (“[T]o be held liable in contempt, it is necessary that a non-party respondent must either abet the defendant [in violating the court's order] or be legally identified with him” (quotation omitted)). Allegations of misconduct by a party's employees, however, do not justify contempt sanctions where the party is not involved in the contempt. As Judge Learned Hand explained long ago:

[N]o court can make a decree which will bind any one but a party * * * * Thus, the only occasion when a person not a party may be punished, is when he has helped to bring about, not merely what the decree has forbidden, because it may have gone too far, but what it has power to forbid, an act of a party. This means that the respondent must either abet the defendant, or must be legally identified with him. * * *

Thus, if the defendant is not involved in the contempt, the employee cannot be; the decree has not been disobeyed, so far as it is valid.

Alemite Mfg. Corp. v. Staff, 42 F.2d 833 (2d Cir. 1930) (emphasis added), citing inter alia Harvey v. Bettis, 35 F.2d 349 (9th Cir. 1929).

Petitioner has not meaningfully alleged that respondent or his counsel were involved in any contempt of this Court's authority or orders. In any event, for reasons similar to those previously discussed, nothing in petitioner's allegations suggests contemptuous disobedience to this Court's orders by “Appeals”, SO Lee, her “Appeals' bosses”, or anyone else. Indeed, petitioner has suggested no legal basis for holding “Appeals” in contempt and seems implicitly to acknowledge the absence of any such legal basis when it asserts: “Alternatively, if the Court determines that I.R.C. § 7456 sanctions can only apply to an individual, then I.R.C. § 7456(c)(1) allows this court to award the sanction Petitioner requested, as against SO Lee and her bosses as 'misbehavior of any person in its presence, or so near thereto' as obstructing the administration of justice of Respondent's refusal to comply with the Court's May 27, 2020, Order.” This assertion is wholly without merit. None of the alleged misconduct occurred in the Court's presence (there have been no hearings in this case to date) or otherwise constitutes sanctionable misconduct under section 7456(c)(1).

3. Rule 123

Petitioner requests that “Respondent be held in default and the Court enter a decision against defaulting Respondent that Petitioner's CDP OIC is accepted as originally filed to Respondent's Office of Appeals SO Paz” or alternatively that the Court enter a decision or order remanding this case subject to certain specified conditions.

Rule 123(a) provides that the Court may hold a party in default for “failure to plead or otherwise proceed as provided by these Rules or as required by the Court”. Respondent has not failed to plead or otherwise proceed as provided by the Rules or as required by the Court. In any event, insofar as petitioner seeks remand of this case as a sanction, the request is rendered moot by our granting of respondent's motion to remand this case, as discussed immediately below.

C. Respondent's Motion to Remand

On November 19, 2020, respondent filed a motion to remand this case to Appeals for further consideration, to permit reconsideration of petitioner's OIC while preserving petitioner's right to judicial review. Respondent's motion sets forth a number of proposed terms and conditions for the remand hearing. On November 19, 2020, petitioner filed its response to respondent's motion to remand, stating that petitioner concurred that this case should be remanded to Appeals but subject to petitioner's own terms and conditions. On February 22, 2020, respondent filed his reply to petitioner's response. In that reply, respondent represents that the parties now agree about most of the terms and conditions of the remand hearing, including some modifications to address certain of petitioner's concerns, but that the parties continue to disagree about two terms and conditions that petitioner requested in its response, to wit: (1) “Appeals is not allowed to read Appeals' Case Activity Record entries prior to Dec. 31, 2020”; and (2) “Appeals is not allowed to read Collection's Integrated Collection System History Transcript entries of any date” (collectively, the disputed terms).

We agree with respondent that for the Court to include the disputed terms in our remand order would unduly restrict Appeals' ability to review the entire administrative record and would interfere with its ability to conduct a full and regular review of all available information. Insofar as petitioner disagrees with, or has concerns about the veracity or reliability of, information contained in the portions of the administrative record to which the disputed terms relate, petitioner will be able to explain these concerns during the remand hearing.

Accordingly, for the reasons explained above, it is

ORDERED: That petitioner's motion to impose sanctions, filed September 24, 2020, as supplemented on September 26 and November 3, 2020, is denied. It is further

ORDERED: That respondent's motion to remand, filed November 19, 2020, is granted in that this case is remanded to respondent's Independent Office of Appeals for a supplemental collection due process hearing to be held no later than June 11, 2021 and in accordance with these terms:

Michael B. Thornton
Judge