(Today we welcome back Guest Blogger Carl Smith to bring us up to date on the Rand litigation. We will continue to track this issue in future posts.)
On January 15, Keith did an Update blog post on all of the cases in the Tax Court that have come to light since November 18, 2013 that present the same issue decided that day in Rand v. Commissioner, 141 T.C. No. 12. In Rand, the Tax Court held that disallowed refundable tax credits can generate “underpayments” under section 6664(a) on which a 20% section 6662(a) penalty can be imposed only to the extent the credits were used by the taxpayer to bring his or her tax liability down to zero — but not to the extent that the credits generated refunds. Even though it is only three weeks since Keith’s update, I think it is time for another update, since seven more Tax Court dockets have come to light with the issue just since Keith’s last post.
But, first, the key issue right now is whether the IRS will seek to appeal Rand to the 7th Circuit (where the Rands live). In addition to appeal, there are three other alternatives that the IRS is likely considering: (1) The IRS may decide just to live with Rand. (2) It may try to adopt a regulation under section 6664(a) overruling Rand (which would likely have prospective effect — and which the Tax Court said in Rand might or might not be invalid). (3) The IRS may seek corrective legislation to overrule Rand (probably the slowest route to a fix).
As of today, the IRS has not decided what to do about Rand. The “decision” document in the Rand Tax Court case was entered on Jan. 15, so the IRS only has until Apr. 15 (90 days) to file a notice of appeal.
On page 187 of her Dec. 31, 2013 annual report to Congress, Nina Olson urged: “[T]he IRS should direct attorneys handling refundable credit cases involving IRC § 6662 penalties to notify the court and opposing counsel (or pro se petitioner) if the IRS is pursuing a larger penalty than would apply under the Tax Court’s recent analysis in Rand.” From what I have seen, it appears that the IRS attorneys are currently doing this. But, it also appears that judges are reviewing dockets themselves to locate Rand-type cases.
In this update, I wanted to review all such Rand-type cases that have come up since Nov. 18. The way I located the dockets is through opinions (there were two) or through orders issued by Tax Court judges specifically mentioning the Rand case’s effects on the docket. I found these orders using the Tax Court’s order search function by searching for the word “Rand”. So as not to make the reader go back to Keith’s earlier blog, I am going to combine the seven more recent dockets with those discussed in Keith’s blog. And I will group the dockets by category.
Cases in the Courts of Appeals Already
Before the Rand case was decided, I noticed that the issue was present, but undiscussed, in an opinion decided by Judge Kroupa in Dec. 2012, Morales v. Commissioner, T.C. Memo. 2012-341, Tax Court Docket Nos. 4225-12 and 5316-12. In the opinion, she held that the taxpayers improperly claimed first time homebuyer credits and should pay section 6662(a) penalties on the disallowed credits because they were negligent. I then entered an appearance for the taxpayers and moved for reconsideration only of the imposition of the penalties. I argued that the judge should have imposed on the IRS the burden under 7491(c) of showing there was an “underpayment”, even though the taxpayers — like every pro se taxpayer — would never have thought to specifically have raised the lack of “underpayment” issue. In Aug. 2013 (also before the Rand opinion was issued), Judge Kroupa denied the motion for reconsideration — saying that I was improperly raising a newly-minted issue. See Morales v. Commissioner, T.C. Memo. 2013-192. In Dec. 2013, I appealed the Morales cases to the 9th Cir., where my opening brief is due on Mar. 3. The 9th Cir. Docket Nos. are 13-74283 and 13-74284. Whether or not the DOJ will file the appellee’s brief in the case will likely depend on the IRS decision about appealing Rand. If the IRS appeals Rand, the DOJ in Morlaes will both argue that Rand was wrong and argue that I raised the Rand issue too late to be considered.
Regular Tax Court Cases That May Be Appealed
In addition to Rand and Morales, there are now four other Tax Court dockets in regular cases in which the Tax Court or IRS has identified a Rand issue. If the IRS decides to appeal Rand, it will likely want to appeal the Tax Court’s actions in removing penalties in each of these four other cases. Three of the dockets involve taxpayers living overseas, so the appeals by the IRS would go to the D.C. Circuit under the default rule of section 7482(b)(1) where the taxpayer does not reside in any Circuit. Faecher, Docket No. 16049-12, Aumann, Docket No. 23021-10, and Bukshpan, Docket No. 24533-10. One docket involves a taxpayer who lives in the Seventh Circuit, Bertram, Docket No. 24697-12. In all four cases, the Tax Court judge issued an order to show cause mentioning Rand, but in no case has the decision been entered, so the time to appeal has not started. In an IRS report filed in Faecher, on Jan. 2, the IRS conceded that the Tax Court, if following its own Rand precedent, should enter a decision without any penalties. But, in the report, the IRS started that it reserved the right to appeal the decision. Even though over a month has passed since this report, the Tax Court has not yet entered the Faecher decision.
Thus, currently, if all appeals go forward in all these six cases, the Rand issue may be considered by the Seventh, Ninth, and D.C. Circuits. And, of course, if there is any Circuit split, a Supreme Court opinion might be needed to resolve that split.
S Cases That May Not Be Appealed
Keith has pointed out the current advantage of being an S status case under section 7463 if there is a Rand issue in the case. The Tax Court will follow its own precedent in Rand, removing or lowering the penalty, and the IRS can’t appeal. Thus, taxpayers should fight any efforts by the IRS to remove S status from Rand-type cases already filed and should file any new Rand-type cases seeking S status. I am not aware that the IRS is yet moving to remove the S status in Rand-type cases, but that is what the IRS did in 2009-2011 when it decided to appeal Lantz v. Commissioner, 132 T.C. 131 (2009), and all Lantz-type cases involving the validity of the 2-year period to request section 6015(f) equitable innocent spouse relief imposed by an IRS regulation (since abandoned). As far as I am aware, no judges ever granted the IRS motions to remove S status in the Lantz-type cases. So, the odds are that the judges won’t remove S status in Rand-type cases, either.
There have already been two published opinion in S cases following the Rand holding with respect to the penalties: Li v. Commissioner, T.C. Summary Op. 2013-97, and Richardson v. Commissioner, T.C. Summary Op. 2014-9.
In another case, Weisinger, Docket No. 15555-11S, the Tax Court dismissed a petition for failure to properly prosecute, but in doing so, removed a proposed section 6662(a) penalty — citing Rand.
In three other S cases, the Rand issue has been identified, but the IRS is being given until April 14 (the day before Rand must be appealed if it is going to be) to decide what to do about the issue. All three of these cases appeared on Judge Lauber’s Nov. 18, 2013 New York calendar, and the parties had reported a basis of settlement that included the penalties that would now be improper under the Tax Court’s view in Rand. Schutz, Docket No. 30420-12S, Zyslin, Docket No. 30026-12S, and Braitman, Docket No. 21779-12S. It is unclear to me why Judge Lauber is allowing more time for either the entry of a decision or an IRS status report, since, unless the IRS asks to be relieved of the settlement or to remove the S status, nothing prevents the Judge from insisting the filed settlement immediately be incorporated into decisions, but without (or reducing) the penalties, consistent with Rand.
I may periodically do further updates on Rand-type cases between now and the time that the IRS decides whether to appeal Rand. In the 2009-2011 period, I appointed myself to keep track of the Lantz-type cases in all of the Circuits (and eventually to litigate one in the Second Circuit — one that, ironically, never got decided). Keeping track was a useful project because once the IRS decided to litigate the Lantz issue in all possible Circuits, I could contact all the taxpayers or their counsel to make sure that everyone on the taxpayers’ side knew what was being argued in all Circuits and had representation. This put taxpayers on the same footing as the IRS and DOJ in coordinating a response (though taxpayers could not force other taxpayers to make any particular arguments). I hope that we are not headed to a similar multi-Circuit litigation here on the Rand issue, but you never know. Other than in Rand and Morales, all the other taxpayers mentioned above are currently pro se. If the IRS decides to appeal their cases (or to try to appeal by fist moving to remove S status), I may use this list as a list for obtaining volunteer pro bono counsel for these people.
Stay tuned . . . .