In Vento, et al, v. Commissioner, 152 T.C. No. 1 (2019) the Tax Court determined that petitioners could not raise a new substantive issue during the computational phase of the case. During the trial of the Tax Court case the court concluded that petitioners, three sisters who resided in the United States during the year at issue, could not get credit for foreign taxes paid when they attempted unsuccessfully to receive tax treatment as residents of the Virgin Islands. At the conclusion of the Tax Court case and the issuance of the opinion, the court ordered the parties to calculate the tax resulting from its opinion based on the provisions of Tax Court Rule 155.
The parties complied with the court order to calculate the taxes resulting from the opinion; however, they did not agree on the amount of taxes due. When this happens, the Tax Court usually schedules a hearing so that the parties can argue (explain) the basis for their computations. The purpose of the hearing is to determine which of the parties, if either, has properly calculated the tax so that the court can enter a decision upon which the IRS can base an assessment of additional taxes due. In some cases the court can decide the correct computation based on the explanations submitted with the conflicting computations.
In their Rule 155 computation petitioners determined liabilities about 60% less than the liability determined by the IRS. Petitioners’ computation acknowledged that they could not obtain a foreign taxes paid reduction of their taxes under IRC 901 as determined by the court’s opinion but argued instead that they were entitled to a reduction for state and local taxes paid. Petitioners argued that the court could consider the reduction of their taxes on this basis because the parties tried this issue by mutual consent even though petitioners did not place it into their pleadings, citing Tax Court Rule 41(b)(1). This rule allows a party to conform the pleadings to the proof essentially allowing the consideration of an argument not raised in the pleadings if the information came out during trial without an objection.
Petitioners subsequently amended their Rule 155 argument to add a request for a deduction under IRC 31. The court noted that it had not mentioned this section at any point in the litigation prior to the Rule 155 computation phase. The IRS responded to petitioners’ request to make either of these two new arguments with an objection, saying that it had not consented to the arguments during the trial and did not consent at this point. The court denied petitioners’ motion to raise either of these new arguments noting, among other reasons, that raising these arguments would be futile and would not result in the relief requested.
The Tax Court issued a fully reviewed opinion meaning that essentially all of the presidentially appointed active judges sat in the court’s conference room, discussed the case, and worked out how they should decide it. This type of opinion usually happens 5 or 6 times a year. We have written about this type of opinion before and particularly in a guest post by Kandyce Korotky. After the discussion the Chief Judge would have appointed someone in the majority to write the opinion and usually that would be the judge who handled the case prior to the conference. Here, the judge who had the case prior to the court conference, Judge Halpern, did not end up in the majority and could not write the majority opinion. The case has a majority opinion, a concurrence and a concurrence in result only. Judge Halpern writes the concurrence in result only.
The majority opinion, written by Judge Lauber and joined by 9 of the 12 judges who participated in decision in the case approaches the case in the matter of fact, “it’s too late” fashion that I expected. (The opinion says that Judge Gustafson did not participate. Although the Tax Court is missing some judges who have not cleared the appointment process to reach its statutory maximum level of 19, I might have expected a couple of other judges who I thought were still on the court to be mentioned either as joining in one of the opinions or as not participating. It does not matter but the numbers here do not quite add up for me.)
Writing in a separate concurrence and joined by 5 judges, Judge Thornton opened my eyes to why this case is precedential because he spends the majority of his concurrence explaining why the separate concurring opinion in result only of Judge Halpern is incorrect. Judge Halpern was joined by one other judge in his concurrence in result only.
The majority opinion cites a litany of cases holding that parties cannot raise new issues during the Rule 155 phase of a case. This issue is so well settled I struggled to determine why the court issued a precedential opinion in this case. Many prior parties have tried to make new arguments at this phase of the case and a relatively full body of case precedent exists on the subject. Petitioners’ position was even more difficult because the parties submitted the case under Rule 122 – a process for submitting Tax Court cases on the written stipulations of the parties. In such a situation neither party has much room to argue that an issue arose tangentially since they stipulate the issues the court will decide as well as all of the facts. While facts not covered by a stipulation and not raised in the pleadings regularly come out during a trial, the Rule 122 process usually keeps the parties focused on the issues raised in the pleadings. Finding extra arguments in the stipulation of a Rule 122 case presents significant challenges unless the IRS attorney handling the case paid no attention to the issues raised in the pleadings. The majority opinion covers all of the points I would have expected in a case with this issue.
Judge Halpern does not join in the majority because he believes that petitioners have the right to raise overpayment claims citing to the court’s decision in Hulett v. Commissioner, 150 T.C. _ (2018). He explains why petitioners will lose their arguments for a different outcome than the one computed by the IRS in its Rule 155 computation, but he gets to the end result through a different analytical process than the one employed by the majority. He states:
Thus, the majority appears to announce a new dictum: “Thou shalt not, ever, under any circumstances raise a new issue during a Rule 155 proceeding.” That dictum, however, is untenable; It contravenes the plain text of the relevant provisions of our Rules and cannot be reconciled with our prior case law – including that on which the majority purports to rely.
He is particularly concerned about the interplay of Rule 155 with Rule 41. It seems from the concurring opinion written by Judge Thornton that the other members of the court came to an understanding of Judge Halpern’s concern but simply disagreed with it. One of the biggest concerns expressed by Judge Halpern is that the majority’s opinion will prevent consideration of potentially important facts or law that impacts the computation of an opinion because it will prevent the party from raising it. The concurring opinion by Judge Thornton disagrees with this conclusion. Note that even though the petitioners seek to raise something new in this case, the possibility exists that in another case it might be the IRS trying to do so.
Generally, raising a new issue at the Rule 155 stage of a case will prove very difficult. This case provides an internal look at the court’s thinking on when it might occur. For someone seeking to use factors not contained in the court’s opinion ordering the computation, reading and understanding the discussion here could be very useful.