The Tax Court case of William Trumbly and Vicky Wood v. Commissioner raises a few interesting issues in the context of Collection Due Process (CDP). I will focus on three issues: (1) the creation of duplicate (or near duplicate) administrative records; (2) the impact of the failure of the IRS to turn over the record (including the possible imposition of the 6673 penalty on the IRS); and (3) the effect of bankruptcy on the federal tax lien. I will discuss each issue in turn.
Dueling Case Activity Records
I do not believe I have previously seen a case in which the Appeals Officer maintained two separate administrative records and perhaps describing them in this fashion does not accurately portray them; however, in some sense that happened here. A good reason exists for not maintaining two separate administrative records and this case shows why. Two records were created in taxpayer’s case because of the timing of the appeal of an offer in compromise rejection, the timing of the request for a CDP hearing based on the filing of the notice of federal tax lien and the assignment of both cases to the same Settlement Officer in Appeals. The SO created a case activity record for the OIC and the CDP matters; however, the two matters bled together as she sought to resolve the collection matter. The SO copied and pasted entries from one matter to the other in an effort to keep complete records in both appeals; however, she did not completely succeed in transferring all entries such that the two case activity reports contained different entries in some instances.
Eventually, the taxpayers and the SO did not reach agreement in the CDP case (or the OIC case) and Appeals issued a notice of determination. Taxpayers timely petitioned the Tax Court and the SO executed “a written declaration under penalties of perjury, stating inaccurately that the administrative record consisted of 88 exhibits, all of which she attached to her declaration.” She inadvertently [a finding of the Court] failed to attach the case activity record of the OIC matter to her declaration. The IRS then lost [a finding of the Court] the case activity report of the OIC matter and the Chief Counsel attorney assigned to the case did not provide it to taxpayer’s counsel during the discovery process. One week before trial, the SO found the OIC case activity report and emailed it to the Chief Counsel attorney who faxed it to petitioner’s counsel the next day without realizing [a finding of the Court] that it differed from the case activity record of the CDP matter previously provided in response to discovery.
Because it does happen that a CDP hearing will end up with an Appeals employee who also has an OIC or other matter pending before them, this case suggests that practitioners should be on the alert for the existence of more than one Appeals case activity reports that should go into the administrative record for the Tax Court in the CDP case. The failure to attach the second report may not have made a difference at the end of this case but it could make a difference in another case. Since the taxpayer wants to build as complete an administrative record as possible, knowing that other Appeals records could exist might prove useful.
Imposition of 6673 Penalty against the IRS
When taxpayer’s counsel received the missing case activity report and noticed that the newly discovered report contained material that the “other” report did not contain, taxpayer’s counsel did not appreciate the last minute surprise. He moved “to impose sanctions on respondent pursuant to section 6673(a)(2) for the actions of respondent’s counsel.” The Tax Court generally uses section 6673 to impose sanctions upon tax protestors who waste the Court’s time with tried and tested losing arguments. Subparagraph (a)(2) specifically addresses actions by counsel in the case and allows the Tax Court has the ability to order the attorney to pay the “excess costs, expenses, and attorneys’ fees” created where counsel has “multiplied the proceedings in any case unreasonably and vexatiously.” The statute provides that if government counsel is the counsel that creates the problem the United States will pay the costs in the same manner as attorney’s fees.
Chief Counsel attorneys do not like to have attorney’s fees awarded against the government in cases they try because, like all attorneys, they do not like to lose, but also because it brings unwanted attention to the loss from several bureaucratic levels above. I can only imagine how excited a Chief Counsel attorney would be to cause a 6673(a)(2) award. It would require a lot of memo writing to explain to the higher levels what happened. Fortunately for the Chief Counsel attorney here, the Court found that the conduct did not rise to the level of unreasonable and vexatious conduct. The outcome seems very reasonable under the facts presented although it also seems reasonable that taxpayer’s counsel should receive some compensation for time spent at the last minute before trial trying to unravel the snafu caused by the IRS.
Congress modeled section 6673(a)(2) after 28 U.S.C. 1927 and the few courts that have addressed the issue of penalizing counsel under 6673(a)(2) have looked to the title 28 provision for guidance. Two Tax Court cases that have looked at the issue are Takaba v. Commissioner and Harper v. Commissioner. In the Takaba case petitioner initially made tax protestor arguments by himself but eventually obtained counsel who continued to make essentially the same tax protestor arguments despite many warnings about the consequences. The Tax Court looked at the standards created by the title 28 cases and found that petitioner’s counsel’s actions were unreasonable and vexatious. In Harper the case did not involve a tax protestor but the actions of petitioner’s counsel provide a how to book on what not to do in trying a case. The Tax Court, after recounting the many things that petitioner’s counsel did and did not do found as an ultimate finding of fact that “The course of conduct engaged in by petitioner’s attorney, as described above, was so completely without merit or justification as to require the conclusion that it must have been undertaken for some improper purpose such as delay. On the basis of this course of conduct, we find that Mr. Feinson has acted in bad faith so as to multiply the proceedings in this case unreasonably and vexatiously.”
Most courts looking at the title 28 basis for imposing a penalty against counsel sought a showing of bad faith but a minority have imposed a penalty for reckless behavior. Here Judge Vasquez found that the motion for sanctions lacked merit because respondent’s counsel did not know at the time of calendar call or at any time before the trial that the two case activity reports differed. The Court also found that her failure to provide this document during the discovery phase was not a knowing failure. While the Court suggests that the lack of a more diligent review may have resulted from an error in judgment, nothing in the record suggests that any error in judgment rose to the level of unreasonable or vexatious behavior. The case provides a cautionary tale for those situations in which the client gives you material to pass along in discovery. Careful review of the material can save problems later.
Bankruptcy and the Federal Tax Lien
The final issue concerns the impact of bankruptcy on the federal tax lien. On this issue my comments go beyond the information available in the opinion because I am concerned about the impression the opinion leaves concerning the impact of bankruptcy on the lien. This CDP case arose because the IRS filed a notice of federal tax lien. On the issue before the Tax Court of the appropriateness of filing the notice of federal tax lien the Court found that it did not need to address the issue because after filing the Tax Court petition taxpayers filed a bankruptcy petition and received a discharge of the liabilities at issue. The Court then found “thus, there is no longer any need for the collection action. Accordingly, we hold that the bankruptcy discharge renders this issue moot, and we will dismiss it as such.”
The problem with the Court’s stated reason for dismissing the CDP case as moot is that a bankruptcy discharge does not destroy the federal tax lien or release the notice of the lien. The IRS may decide to release the lien and it may have done so in this case but the opinion does not talk about what the IRS did or did not do. It only talks about the discharge making the CDP case moot. Because a bankruptcy discharge does not eliminate the lien, the language of the opinion leaves the wrong impression even if the IRS decided to write off the liability and release the notice of federal tax lien. I hope for the taxpayer that the case really did become moot but the decision of the IRS in this situation depends on what assets they had to which the lien attached.