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IRS Abandons Motion in Which It Asked the Tax Court to Elevate its Pleading Standard

Posted on Aug. 28, 2017

We welcome back frequent guest blogger Carl Smith who is following up on his post from June about what must be said in a Tax Court pleading to get into the door of the Court.  Special thanks to Tax Notes for granting us permission to link to its article about the Spencer case.  We know that many of our readers do not have the ability to easily access Tax Notes and appreciate the willingness of Tax Notes to allow us to bring you its article on this topic.  Almost everything I write about starts by reading a case or link on Tax Notes.  It is an invaluable resource for me.

I encourage you again to look at the comments.  Frequent commenter, Bob Kamman, suggested that we adopt a weekly IRS Funny Papers post to complement our weekly designated orders post.  I responded to Bob when he suggested it that I was unsure if we would find enough material to make a weekly post.  He will soon show that my estimation of the number of goofs that qualify as funny paper material equals or exceeds enough for a weekly report.  The name for the column comes from the language used at the IRS in the 1970s, and beyond, to describe an action an employee might take with the regular injunction from the supervisor being “don’t do something that will get us in the funny papers.” Bob has posted, in the comments section of the blog, an interesting, if not amazing, piece of work at the IRS that definitely qualifies as funny paper material.  If you have seen or heard of funny paper material, please follow Bob’s lead.  We may add this as a weekly post. Keith

On August 24, in Spencer v. Commissioner, Tax Court Docket No. 8760-17W, the IRS, without explanation, asked the Tax Court to deny its own motion in a whistleblower case to dismiss the petition for failure to state a claim on which relief could be granted.  Spencer presents an interesting pleading quandary for whistleblowers – i.e., what to plead if one does not know if the IRS conducted an audit of the taxpayer based on the information the whistleblower supplied.  The motion to dismiss also asked the Tax Court to apply to the petition the higher pleading standard that has been adopted recently in the Supreme Court for suits brought in district court.  The motion did not acknowledge the potentially major shift in Tax Court pleading that it was, in effect, requesting. On August 25, acting on the IRS’ more recent request, the Tax Court denied the IRS’ motion to dismiss without issuing any order explaining its action.

In a recent post, I explained how the Tax Court has long applied the “notice pleading” rules of Conley v. Gibson, 335 U.S. 41 (1957).  Those rules allow a complaint (or, in the Tax Court’s case, a petition) to survive a motion to dismiss for failure to state a claim on which relief can be granted if the complaint contains a short and plain statement of the claim that will give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”. Id., at 45-47.  In my post, I pointed out that in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the Supreme Court abandoned notice pleading for district court suits in favor of “plausibility pleading” – i.e., requiring the plaintiff to not merely plead legal conclusions, but to plead some plausible facts that might support the legal claim pleaded.  I also noted that the Tax Court has never issued any opinions citing Twombly or Iqbal, and that all but a handful of unpublished orders searchable on the court’s website seem to continue to apply notice pleading rules.  Only Judge Carluzzo has issued less than a handful of orders in which he has cited Twombly in deciding a motion to dismiss for failure to state a claim.  However, it is not clear from the citations that the judge was intending to change the pleading rules.  Rather, he seems to have cited Twombly merely for propositions that are compatible with Conley.  In my post, I also described what has been my seemingly one-man campaign to get the Tax Court to clearly state that it will not adopt the Twombly/Iqbal plausibility pleading rules – explaining both in an article and a letter to the Tax Court the many reasons for staying with notice pleading rules.

Spencer involves fairly simple facts:  A whistleblower supplied the IRS with information concerning unpaid tax and penalties totaling $7.3 million and sought a reward.  After two years, the IRS issued a letter to him saying that he was not entitled to an award because the IRS had taken no action based on the information provided.  Spencer then requested from the IRS certain information concerning his claim, including the ability to review his claim’s administrative file, but the IRS made no response.  Spencer then filed a Tax Court petition seeking review of the IRS denial, but he faced a quandary:  He had no idea whether or not the IRS had taken action against the taxpayer.

Tax Court Rule 33(b) provides that the signature of counsel or a party on pleadings constitutes a certification that, to the best of the signer’s knowledge, information, and belief, the pleading is well grounded in fact.  Spencer felt that he could not, in comporting with the rules, allege that the IRS took action against the taxpayer, so he pleaded a lack of knowledge on this issue, as follows:

Although the Commissioner’s denial letter states that the IRS took no action based on the information that Petitioner provided, Petitioner lacks sufficient information to confirm or disprove the accuracy of that assertion, and such information is in the exclusive possession of the Commissioner. . . .

Unless Petitioner is permitted to obtain discovery from the Commissioner, Petitioner has no means to obtain (within the time period when he may petition the Tax Court) information to confirm or disprove the IRS’ assertion that no action was taken based on Petitioner’s information.

Instead of filing an answer in the case, the IRS filed a motion to dismiss for failure to state a claim on which relief could be granted.  In the motion, the IRS argued that, without any allegation that it had taken administrative action against the taxpayer, the petition failed to state a claim.  The IRS also wrote:

In order to withstand a motion to dismiss for failure to state a claim, Petitioner must plead factual allegations sufficient to raise a right to relief above the speculative level. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (abrogating the Court’s plaintiff-deferential standard in Conley v. Gibson, 355 U.S. 41 (1957)). However, the Supreme Court has cautioned, it is not enough to make “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements…” Ashcroft v. Iqbal, 556 U.S. 662, 678 (citing Twombly at 555).

It is well settled that the elements of a whistleblower award under section 7623(b) require proof that respondent (1) initiated an administrative or judicial action against a taxpayer based on petitioner’s information and (2) collected tax proceeds from the target of that action based on such information. See Cooper v. Commissioner, 136 T.C. 597, 600 (2011) (Cooper II).

In a 25-page opposition to the motion, Spencer noted that the Tax Court had not yet adopted Twombly/Iqbal and cited both to my article on this subject and my letter to the Tax Court on this subject that I sent as a comment on the most recent proposed Tax Court rules changes.  Spencer made many of the arguments I had for the Tax Court’s not adopting Twombly/Iqbal.  (Spencer found these items of mine on his own.  I had no hand in drafting his response.)

More directly applicable to his case, Spencer noted the Tax Court’s opinion in Lippolis v. Commissioner, 143 T.C. 393 (2014), in which it held that the $2 million taxpayer amount in dispute limitation at section 7623(b)(5) was not a jurisdictional question, but an affirmative defense to be raised by the IRS, with the burden of proof being placed on the IRS, since it had the information, not the whistleblower.  Spencer wrote:  “Following the logic of Lippolis, the Court should determine that lack of IRS action and collected proceeds are affirmative defenses.  As such, Petitioner is not required to plead IRS action or collected proceeds in the Petition.”

Spencer also wrote:

Petitioner should not be required to rely on the IRS’ conclusory assertion that it, “took no action based on the information that you provided.” This assertion may simply be mistaken as to the facts. See Gonzalez v.  Comm’r, T.C. Memo. 2017-105, at 5 n.5 (“Contrary to the statement in the final determination, the record reflects that the IRS collected tax proceeds from taxpayer 1 as a result of the information that petitioner provided to the Whistleblower Office”).

Spencer asked for time to do a little discovery of the IRS on the administrative action issue.  Then, he would either concede the case, or, if (1) the IRS still maintained there was no administrative action, (2) Spencer disagreed, and (3) the IRS wanted to dispense with the case before a trial, then the IRS could move for summary judgment.

In filing short papers replying to Spencer’s opposition, the IRS chose not to argue any legal points.  It merely wrote:

5. Subsequent to the filing of the motion to dismiss and petitioner’s response, respondent has determined that petitioner has stated a justiciable claim consistent with the requirements of Tax Court Rule 341(b).

6. Accordingly, without conceding the correctness of the claim, petitioner has stated a claim upon which relief can be granted.


It appears that a whistleblower case may be the most likely one in which the Tax Court will wade into the issue of the proper pleading standard for a motion to dismiss for failure to state a claim – unless the Tax Court places on the IRS the burden of pleading and proving a number of requirements of section 7623(b).  It is too bad that Spencer will not be the test case for this issue.

For more observations on whistleblower cases (including, specifically, Spencer) and the pleading issue, you can read here Andrew Velarde’s excellent article “Tax Court Pleading Standard Suffers From Lack of Clarity”, Tax Notes, July 10, 2017, pp. 156-160, to which Tax Analysts, Inc. has graciously authorized PT to link.  Mr. Velarde makes many original observations besides quoting both me and Prof. Steve Johnson.

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