People ask me what I do in my retirement to keep my mind active. In addition to a lot of pleasure reading, I keep up with the tax law, blog here, and engage in impact litigation with the Harvard tax clinic, usually in the appellate courts. Getting an appellate court to overturn a lower court ruling is almost a mug’s game. Gil Rothenberg of the DOJ reported last fall that of taxpayer appeals in the fiscal year ended September 30, 2019, the DOJ won 94% of the time. I usually get involved in hard cases, seeking to overturn settled law. But, my winning percentage is far better than 6% – though still well below 50%, as any appellant would expect. I tell people that I am a sort of Don Quixote, often falling off my Rosinante or mistaking a barber’s basin for the Golden Helmet of Mambrino. But, sometimes, I do save a damsel in distress. I just did.
Indeed, I just got a district court reversal even without entering an appearance in the case, even as an amicus. And I got a scathing opinion from the judge against the government, to boot. (I was not looking for the scathing tone, but the judge is right.)
You may recall my recent post involving a case named Harrison v. United States, W.D. Wisconsin Docket No. 19-cv-194. In the case, the taxpayers mailed a late 2012 original return containing a refund claim for withheld taxes just before the end of a period of 3 years after the return’s due date plus the length of an extension they had obtained to file the return (but had not used). The return arrived at the IRS a few days after the period expired. The court correctly ruled that the claim was timely filed under section 6511(a) because it was filed within 3 years after the return was filed – indeed, both were filed the same day. But, the court then misapplied the lookback rule of section 6511(b)(2)(A) to hold that the claim was limited to taxes deemed paid in a period looking back 3 years plus the extension period from the date the IRS received the claim. No tax was deemed paid in that period, so the over-$7,000 refund was limited to $0, said the court. The taxpayers had correctly argued that section 7502’s timely mailing rules apply such that the lookback period should begin from the date the return was mailed (not received), so the entire refund should be allowed. Apparently, the IRS’ only objection to paying the refund was the amount limitation.
Unfortunately, neither party cited to the district court the most relevant case law, Weisbart v. United States, 222 F.3d 93 (2d Cir. 2000), or pertinent regulations that had been adopted in 2001 to embody the holding of Weisbart. And you would not expect a district court judge to be an expert on tax procedure.
I contacted the taxpayers’ attorney on January 13 to point out the correct authority and suggested that he move for reconsideration. He did so here on January 15. On January 24, the DOJ filed a notice that it did not object to the motion for reconsideration because the DOJ had the law wrong. In part, the DOJ Tax Division blamed the IRS lawyers for not telling the DOJ the correct law. On January 29, the district court entered a revised order, granting the motion for reconsideration and also amended the judgment to find the government owes the taxpayers the tax refund they sought, plus interest from April 15, 2013.
The district court ruled for the taxpayers not just relying on Weisbart and the 2001 regulations that I discussed in my post, but the earlier, less clear regulations that Weisbart interpreted as providing for this result. This could have been a two-page order. But, it wasn’t. The judge was boiling mad at the government. He ordered that his revised opinion be sent to every IRS and DOJ Tax Division attorney for reading for ethical training. Because you don’t see this too often, I quote here what the judge wrote about the government lawyers (omitting footnotes; emphasis added):
Regrettably, not only did plaintiff fail to bring this case and the regulations to the court’s attention in their previous briefing on defendant’s motion to dismiss or for summary judgment, but the IRS and the U.S. Department of Justice, whose respective jobs include promulgating and enforcing the applicable regulation, also did not. Still, presented with the regulations, defendant concedes it has no basis to oppose the motion for reconsideration, and the IRS has confirmed that it is prepared to issue a refund in the amount sought in plaintiffs complaint, plus statutory interest. (Def.’s Resp. (dkt. #25) ¶ 18.) While there is no question that this is the appropriate response and course of action, the court remains troubled by defendant’s failure to alert the court to the Weisbart case and even more the regulations. In its submission, defendant represents that the IRS did not identify the Weisbart case, the Chief Counsel’s Notice or the regulations, but acknowledges that counsel for defendant did identify the Weisbart case in their own research, and chose not to disclose it in their briefing because it is not “controlling” in the Seventh Circuit. (Id. ¶¶ 13-14.) This might be a viable defense if: (1) the failure to cite Weisbart were the only failure and; (2) the U.S. Department of Justice’s and IRS’s aspirations only were not to fall below the bare minimum ethical threshold. See Am. Bar Assoc. Rule 3.3 (“A lawyer should not knowingly . . . fail to disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel.”).
More critically, however, the Weisbart court relied on a Treasury Regulation, which is controlling authority on both the IRS and this court. Defendant explains that the Chief Counsel’s Notice announcing a change in its litigation position and the amendment to 26 C.F.R. § 301.7502-1(f) occurred after the Weisbart opinion, but the language in 26 C.F.R. § 301.6402-3(a)(5), on which the Second Circuit in part relied, remains in place today, and defendant failed to alert the court of this regulation. Thus, the conduct of defendant’s counsel here falls below even a bare minimum ethical standard, something counsel would have discovered by reading Weisbart and the current versions of the regulations cited in that case closely, rather than dismissing it as an inconvenient contrary authority that they were not ethically required to cite to the court. Even if this were not so, defendant cited a number of cases from other circuits that were also not controlling in this court in support of its erroneous argument that the administrative complaint was filed on the date it was received by the IRS.
These egregious missteps in defendant’s response were enough to prompt this court to consider whether an award of attorney’s fees incurred in responding to the motion for summary judgment and in bringing their motion for reconsideration would be appropriate under 28 U.S.C. § 1927. However, this would require a finding of actual bad faith to shift fees to plaintiff. See Boyer v. BNSF Ry. Co., 824 F.3d 694, 708 (7th Cir.), opinion modified on reh’g, 832 F.3d 699 (7th Cir. 2016) (“If a lawyer pursues a path that a reasonably careful attorney would have known, after appropriate inquiry, to be unsound, the conduct is objectively unreasonable and vexatious. To put this a little differently, a lawyer engages in bad faith by acting recklessly or with indifference to the law, as well as by acting in the teeth of what he knows to be the law[.]” (internal citation omitted). Instead, defendant’s counsel’s representations show negligence, which is not sufficient to invoke fees under § 1927. Id. Plus, counsel at least confessed error when plaintiff finally discovered the controlling regulation and brought it to defendant’s and the court’s attention.
Nevertheless the court will require defendant to circulate this opinion and order, along with the Chief Counsel’s Notice and 26 C.F.R. §§ 301.7502-1(f) and § 301.6402- 3(a)(5) to all attorneys in the IRS Office of Chief Counsel and to the Tax Division of the U.S. Department of Justice in hopes that these actions will prevent future opposition to meritorious claims for refunds, as well as any instinct to ignore the duty of candor to the court by burying precedent no matter how well reasoned, helpful or directly on point it may be simply because one is not ethically bound to disclose it. In their prayer for relief in their complaint, plaintiffs requested attorney’s fees, but cited no support for this request. (Compl. (dkt. #1) 3.) In their motion for reconsideration, plaintiffs simply request $7,386.48 and statutory interest. (Pls.’ Mot. (dkt. #24) 4.)
I am glad the court corrected this injustice. However, I would point out that district courts still need guidance on issues like interest. It is usually the case that overpayment interest is payable to a taxpayer from the date the tax was overpaid. But, in 1982, Congress specifically added new paragraph (3) to section 6611(b) providing that in the case of late returns, interest is payable from the date the return is filed. Thus, the amended judgment has the wrong interest accrual date. I refuse to do the research necessary to figure out if the interest accrual date (i.e., the date the return is “filed”) is the date the return was mailed or the date the IRS received the return. Basta!