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Court of Federal Claims Rejects Taxpayer Bill of Rights Argument

Posted on Dec. 4, 2020

In October my grandchildren, John, Lily and Sam came to the farm for pictures before the soybeans turned brown. In this photo they left a spot for their sibling who had not yet arrived. Last night about 7:00 ET Rosemary Lucia DuMont aka “Rose”, pictured here with mom, arrived.  Rose brings a happy ending to an otherwise challenging and memorable year. Keith.

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In the recent case of Shnier v. United States, No. 18-1257 (Ct. Fed. Cls. 2020) the Court of Federal Claims addressed arguments by pro se taxpayers that the proposed outcome in their case violated the Taxpayer Bill of Rights (TBOR). Following another recent case decided by the Court of Federal Claims, the court rejected the TBOR argument as well as the substantive arguments put forward by the Shniers. The case does not cover much new procedural ground but does add another court to the list of courts unwilling to create substantive remedies for violations of TBOR. Here, the alleged violations were quite a stretch. So, the court faced neither a situation in which the facts might have created a compelling argument nor advocacy by someone skilled in that art.

The Shniers moved to the US from Canada.  Mr. Shnier’s family in Canada owned a business and he inherited an interest in the business. One aspect of the business structure established in Canada involved an entity essentially established as a holding company. Mr. Shnier received money from the holding company and did not report it. Eventually, the IRS determined that the income was taxable in the U.S. and that it was subject to the PFIC rules. The Shniers argue that the PFIC rules should not apply in this situation because the intention of the rules was to tax individuals seeking to avoid US tax by establishing an account overseas. Since Mr. Shnier’s ownership of the business arose from the fact of inheriting an interest in a Canadian, his motives fell outside of the PFIC rules according to him.

The court goes fairly deeply into the jurisprudential background of statutory interpretation in situations in which the role of the statute and the language of the statute do not precisely align. It quotes from a law review article written by my dean, John Manning, and from an article written by recently seated Supreme Court Justice Barrett in holding that the goal of the legislature is to write the laws. It declines to recast the language of the laws to find in them a meaning that suits the needs and interpretation of the Shniers.

In addition to arguing about the correct interpretation of the statutory language, the Shniers argue that they should receive the relief they request, a refund of the taxes paid, because of TBOR. The court notes that

Another judge on this court recently held “[i]t is plaintiff’s burden to establish jurisdiction for his claims founded on the Taxpayer Bill of Rights, but he has not shown that the ten rights listed at I.R.C. § 7803(a)(3) are money-mandating so as support this court’s jurisdiction under the Tucker Act.” Yates v. United States, No. 20-169T, 2020 WL 5587366, at *6 (Fed. Cl. Sept. 18, 2020) (Sweeney, J.)

It cites to the case of Facebook, Inc. v. IRS, No. 17-CV-06490, 2018 WL 2215743, at *13 (N.D. Cal. May 14, 2018) holding that the TBOR created no new rights and then quotes from the Tax Court’s decision in Moya v. Commissioner stating:

TBOR exists “not[to] . . . create new rights or remedies, only to group existing rights into categories that are easier for taxpayers and IRS employees to understand and remember. Thus, a TBOR does not create new rights, but provides organizing principles—a framework—for statutory rights.” 152T.C. 182,196 (2019) (emphasis in original) … the Commissioner had no power to legislate any new rights,” leading it to “conclude that, in adopting its TBOR in 2014, the IRS did not create for taxpayers any rights or remedies that they did not theretofore enjoy.” Id. at 197

While Moya considered the IRS’s administrative adoption of TBOR prior to Congress’ adoption of TBOR (and thus is arguably dicta in its consideration of the legal effect of TBOR’s codification), its reasoning reflects the judicial perspective to date on TBOR’s legal impact in cases arising in deficiency context.

Moya concerned the impact of supposed mistreatment in an examination that led to a deficiency case in Tax Court, In Shnier, which arises in a refund suit in the context of the meaning of the technical PFIC rules, the taxpayers made the following specific arguments regarding TBOR:

  1. their “right to be informed” was violated because they did not know about the PFIC laws until an accounting firm alerted them;
  2. their “right for quality service” was violated because “[t]here is no specialized telephone help line” for compliance questions;
  3. applying the PFIC laws to “pre-existing non-willful foreign passive assets that have not been funded directly or indirectly by US sourced monies” violates their “right not to be discriminated against” because had they “been American [s investing in]…an American company…the taxation rules would have been less harsh, non-punitive, and easier to comply” with; and
  4. their “right to a fair and just tax system” was violated because “it [is] extremely unfair and unjust that the punitive, complex, and expensive to comply [with] PFIC tax laws which were created for an entirely different target and purpose, would be applied” to them.

The court rejected all of their arguments. After discussing each of the arguments in turn, it stated:

The Court finds the reasoning from the courts in Yates, Facebook, Inc., and Moya persuasive; even plaintiff agrees the TBOR does not override the text of the tax code. OA Tr. at 49:13–17; see Yates, 2020 WL 5587366, at *6; Facebook, 2018 WL 2215743, at *13; Moya v. Comm’r, 152 T.C. at 196. Despite the forcefulness of the equitable concerns plaintiffs raise, the Court holds it does not have the power to interpret or apply §1291 contrary to the plain text of the statute as established

The decision here is not surprising. As I mentioned in an article published last year, taxpayers will have a very difficult time persuading a court to use TBOR to change the outcome of a substantive tax provision. The limiting language of TBOR makes it almost impossible for an argument based on TBOR to go face to face with a substantive provision of law and impact the substantive result stemming from statutory language. Here, the TBOR argument served essentially as an extension of the equitable argument the taxpayers sought to make regarding the application of the PFIC rules to the facts in their case. Despite the fact that Congress may not have intended those rules to curb ownership of a family business in a foreign country, the language explicitly taxed the situation in which taxpayers found themselves. Other situations exist in which TBOR might provide some assistance. Seeking to use it in a frontal assault on a substantive provision proves once again that TBOR does not exist to serve this purpose. Put a tick mark on the wall for another court that has reached this conclusion.

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