The National Taxpayer Advocate’s 2018 annual report to Congress seeks legislation to address two refund suit issues that have been extensively discussed on PT: (1) legislation clarifying that a tax refund suit in district court or the Court of Federal Claims may consider innocent spouse relief under § 6015, and (2) legislation repealing or substantially modifying the refund suit full payment rule established by Flora v. United States, 362 U.S. 145 (1960).
Section 6015 as a Defense in Collection Suits
Since 2007, the NTA has been alerting Congress to numerous district court holdings that the Tax Court has exclusive jurisdiction to make rulings concerning § 6015 relief, such that § 6015 relief may not be considered by the district courts as a defense in government-brought suits for collection under § 7402 or § 7403. NTA 2007 Annual Report to Congress, Vol. I, p. 631; NTA 2008 Annual Report to Congress, Vol. I, p. 525; NTA 2009 Annual Report to Congress, Vol. I , pp. 494-495; NTA 2010 Annual Report to Congress, Vol. I, pp. 504-505; NTA 2012 Annual Report to Congress, Vol. I., pp. 648, 652; NTA 2015 Annual Report to Congress, Vol. I, pp. 532-536. For a partial listing of many such district court rulings, see Keith’s post here, which links to a 2015 opinion in United States v. Stein. Footnote 1 in Stein cites most cases so holding decided up to 2015. Keith also did a post on this issue in 2018, when another district court held to the same effect. The 2018 post can be found here. Interestingly, no appellate court has been forced to face this issue, so the issue is still one of first impression there. Keith and I have been looking for a test case to bring, but the two district court cases that we have considered to date were not good candidates (for reasons I won’t get into here).
In her 2013 report, the NTA wrote:
As the National Taxpayer Advocate has pointed out, these district court decisions are inconsistent with the statutory language of IRC § 6015, which does not give the Tax Court exclusive jurisdiction to determine innocent spouse claims, but rather confers Tax Court jurisdiction “in addition to any other remedy provided by law.” Nothing in IRC § 6015 prevents a district court from determining, in a collection suit, whether innocent spouse relief is available. . . . Moreover, the refusal to allow a taxpayer to raise IRC § 6015 as a defense in a collection suit may create hardship because a taxpayer may be left without a forum in which to raise IRC § 6015 as a defense before losing her home to foreclosure by the IRS.
NTA 2013 Annual Report to Congress, Vol. I, pp. 416-417.
The NTA has also repeatedly asked that, if the courts do not correct their rulings, Congress adopt legislation that would make it even more clear that § 6015 relief is available as a defense in a district court collection suit. NTA 2007 Annual Report to Congress, Vol. I, pp. 549-550; NTA 2009 Annual Report to Congress, Vol. I, pp. 378-380; NTA 2010 Annual Report to Congress, Vol. I, p. 378-382; NTA 2017 Annual Report to Congress, Purple Book, p. 53.
The NTA collected her most important legislative recommendations (both those from the current year and those from prior years) into a Purple Book that accompanied her 2017 annual report to Congress. In the Purple Book accompanying her 2018 report, she repeats this legislative recommendation here as number 53 of her 58 collected legislative proposals.
Section 6015 Relief Consideration in Refund Suits
But, she also discusses, in the main body of her 2018 report, 10 new legislative proposals, one of which is to clarify that district courts and the Court of Federal Claims also have jurisdiction to consider § 6015 relief in tax refund suits. This clarification is necessary, since the DOJ has been arguing, in two recent refund suits, that the district courts lacked jurisdiction to rule on § 6015 relief because only the Tax Court has jurisdiction to rule on § 6015 relief – citing the DOJ victories in the collection suits.
Keith had blogged here when a district court last year in Chandler v. United States had held that it lacked jurisdiction to consider § 6015 relief in a refund suit. The NTA cites Chandler as the reason provoking her recommendation here.
What the NTA does not mention is that the same issue is currently presented in a district court case, Hockin v. United States, on which I recently blogged here. In my post on Hockin, I noted that the tax clinic at Harvard had submitted an amicus memorandum. My post also had links to the original DOJ motion to dismiss for lack of jurisdiction, the Harvard clinic’s amicus memorandum, and the taxpayer’s response to the motion. On February 26, the taxpayer submitted a supplementary response, which can be found here. One of the major reasons for this supplementary response was that the taxpayer wanted to show the court that the IRS had issued a Chief Counsel Notice in 2000 in which the IRS wrote: “The Service now agrees that the Tax Court, the United States district courts (including the bankruptcy courts) and the Court of Federal Claims have jurisdiction to consider whether the Service abused its discretion in denying equitable relief under I.R.C. § 6015(f).” This Notice had not been mentioned in prior filings in the Hockin case. (Of course, the DOJ Tax Division Trial Section is not bound by the IRS’ view, but this tends further to undermine the Trial Section’s argument in Hockin because the DOJ Tax Division Appellate Section has also recently agreed with the IRS.)
On March 12, the DOJ in the Hockin case will file its reply to the amicus memorandum and the taxpayer’s original and supplemental responses. On April 25, 2019, John MacMorris-Adix, a student in the Low-Income Taxpayer Clinic at Lewis & Clark Law School in Portland, Oregon, will argue the Hockin motion on behalf of the taxpayer before a magistrate in the United States District Court for the District of Oregon..
Chandler was never appealed, but a loss on the same issue in Hockin is likely to be appealed by the taxpayer to the Ninth Circuit.
Repealing or Modifying the Flora Refund Suit Full Payment Rule
The Supreme Court in Flora held that in order for district courts and the Court of Federal Claims to have jurisdiction in a tax refund suit, the taxpayer must have paid the disputed tax in full. In Flora, the IRS had sent a notice of deficiency proposing an increase in income taxes. Rather than petitioning the Tax Court, the taxpayer paid part of the deficiency, filed a refund claim, and later brought a refund suit on that claim in the district court. Part of the rationale of the Supreme Court in so holding in Flora was that the taxpayer could have fought the deficiency, prepayment, in the Tax Court, so should not be heard to complain about the full payment rule. And, in a later Supreme Court case, the Solicitor General told the Court that the DOJ’s position was that the Flora full payment rule only applied when the taxpayer forwent filing a permissible Tax Court deficiency suit.
Les and I did a two-part post last year here and here on the Second Circuit’s Larson opinion from last April. In Larson, a tax shelter promoter had been assessed (jointly with other promoters) a penalty under § 6707 of about $160 million. The other promoters paid about $100 million of the penalty, and Larson paid $1 million and contended that he could not pay the balance. Larson brought a refund suit, and the court held that, even in the case of this assessable penalty, where no Tax Court prepayment suit was ever possible, Flora applies to require full payment before a refund suit may be maintained.
Keith is currently working on a law review article on the unfairness of the full-payment rule. The Harvard clinic had also submitted an amicus brief in Larson that argued the full payment rule should not apply to refund suits involving assessable penalties. Long ago, I had published an article, “Let the Poor Sue for Refund Without Full Payment”, 125 Tax Notes 131 (Oct. 5, 2009), in which I proposed that the full payment rule not apply where the taxpayer had already paid a part of the disputed liability and the taxpayer was current on an installment agreement to pay the rest or was in currently not collectible status. In April 2018, the Harvard clinic also submitted comments to Congress on the “Taxpayer First Act.” A link to the complete comments can be found within a blog post that Keith did on the proposed act here. One of the comments proposed that the Tax Court be given jurisdiction to review assessable penalties prepayment.
Acknowledging that her proposals were inspired, in part, by Larson and analogous to those made by Keith, the Harvard tax clinic, and me, in her 2018 report to Congress here, the NTA summarizes her legislative proposals regarding the full payment rule as follows (footnotes omitted):
A simple solution would be to repeal the full payment rule. If Congress prefers a more tailored approach to improve access to judicial review, the National Taxpayer Advocate recommends Congress:
- Amend 28 U.S.C. § 1346(a)(1) to clarify that full payment of a disputed amount is only a prerequisite for jurisdiction by district courts and the U.S. Court of Federal Claims if the taxpayer has received a notice of deficiency. If enacted, taxpayers who are subject to assessable penalties would not need to pay them in full before filing suit in a district court or the Court of Federal Claims.
- Amend 28 U.S.C. § 1346(a)(1) to clarify that a taxpayer is treated as having fully paid a disputed amount for purposes of the full payment rule at the earlier of when the taxpayer has paid some of it (including by offset) and either (a) the IRS has classified the account as currently not collectible due to economic hardship, or (b) the taxpayer has entered into an agreement to pay the liability in installments. If enacted, taxpayers who cannot afford to pay would have the same access to judicial review as those who can (e., the option to file suit in a district court or the U.S. Court of Federal Claims).
Amend IRC § 6214 to authorize the U.S. Tax Court to review liabilities where the taxpayer has not received a notice of deficiency (g., assessable penalties) in a manner that parallels the deficiency process. In addition, allow the IRS to assess and collect liabilities only after any such review is complete or the period for filing a Tax Court petition has expired. Alternatively, Congress could expand the Tax Court’s jurisdiction to review liabilities in connection with CDP appeals when the taxpayer has not received a notice of deficiency. These changes would authorize review of assessable penalties by the Tax Court even if the taxpayer had an opportunity for an administrative appeal.