Last week the Seventh Circuit reversed the Tax Court in King v Commissioner, holding that the Tax Court was incorrect in concluding that the Service abused its discretion in not abating the late Mr. King’s interest that accrued on employment tax liabilities. We have discussed the case before, most recently with Carl reviewing the oral argument in Interest Abatement Based on “Unfair” Assessment and Stephen discussing the Tax Court opinion in A Pro Se King Royally Wins Interest Abatement on Employment Taxes
I will excerpt heavily from our prior posts and the Seventh Circuit opinion and offer a few observations.
The Issue and Tax Court Resolution
As Carl and Stephen discussed, this was an odd interest abatement case, arising through CDP and applying Section 6404(a) rather than the explicit interest abatement provision found in Section 6404(e). The dispute centered on interest that the IRS charged that was attributable to unpaid employment taxes and in part erroneous information that the IRS had given King. An IRS employee told King it would grant him an installment agreement; it later decided that King’s collection potential was too high to warrant an installment agreement. King paid the tax but argued that he should not have paid the interest that ran from the date of the erroneous information about the installment agreement until his later payment as he would have paid earlier had he known he was not going to be given an installment agreement.
Carl discussed how the employment tax context took this case out of the explicit interest abatement regime in Section 6404(e) and how it came to Tax Court via CDP:
King is an employment tax Collection Due Process (CDP) case based on a notice of federal tax lien (NFTL). The only issue left in the case on appeal is interest abatement under IRC § 6404(a). That’s not a typo for § 6404(e). § 6404(e) allows abatement of interest with respect to taxes that are deficiencies (income, estate, and gift), not employment taxes, where there have been unreasonable IRS errors or delays. By contrast, § 6404(a) provides: “The Secretary is authorized to abate the unpaid portion of the assessment of any tax or any liability in respect thereof, which–(1) is excessive in amount, or (2) is assessed after the expiration of the period of limitation properly applicable thereto, or (3) is erroneously or illegally assessed.” While § 6404(a) abatement clearly authorizes abating tax, the IRS agrees that “any liability in respect” of the tax includes interest.
Stephen set out King’s argument and the Tax Court’s resolution of the case:
Mr. King claimed that the interest was excessive because of the various delays created by the IRS. The Service position on this matter is that “excessive” is essentially a restatement of the third option of “erroneously or illegally assessed.” The Service has lost on this matter before in the Tax Court in H&H Trim & Upholstry v. Commr, TC Memo 2003-9, and Law offices of Michael BL Hepps v. Comm’r, TC Memo 2005-138, so this is not breaking new ground, but good reinforcement of a taxpayer friendly ruling. The Tax Court in the previous cases had interpreted “excessive” to “include the concept of unfairness under all of the facts and circumstances.” A bit broader than simply erroneously or illegally assessed. In H&H Trim, the taxpayer was able to show the interest would not have accrued “but for” the Services dilly-dallying. In King, the Service argued that the prior case law was incorrect, but also argued that the taxpayer could have made a voluntary payment to stop the interest and was requesting an installment agreement, which would have incurred interest. The Court essentially held that the taxpayer showed he would have perfected the installment agreement and paid it the underlying amount more quickly but for the IRS taking its sweet time and failing to follow its own IRM procedures in responding to the taxpayer’s IA request (albeit imperfect), and abatement was therefore appropriate. As to the voluntary payment, the Tax Court stated that Section 6404(a) has no language barring abatement when a portion of the error or delay could have been attributable to the taxpayer (Section 6404(e) has that language). Even if the taxpayer could have made the payment, the failure to do so did not alleviate the IRS’s requirement to abate
Seventh Circuit Reverses
In a relatively brief opinion, after getting over a mootness hurdle (King died shortly after the appeal was lodged) the Seventh Circuit reversed the Tax Court, giving three reasons:
The first is the vagueness of “unfairness” as a criterion for abatement; the word is an invitation to arbitrary, protracted, and inconclusive litigation.
Second, extending as it does an invitation to taxpayers to delay paying taxes, the nebulous standard of “unfairness” could result in a significant loss of tax revenues.
And third, we’ll see that the Tax Court’s approach is inconsistent with a valid regulation promulgated by the Treasury Department.
Judge Posner, no fan of vague standards or multiple factors, was explicit in his dislike of using unfairness as a standard and Tax Court precedent that so allowed:
Elaborating the first point briefly, we note the embroidery that the Tax Court, quoting from its earlier opinion in H & H Trim & Upholstery Co. v. Commissioner, T.C. Memo. 2003‐9, at *2, wove into its opinion in the present case on the basis of its touchstone of “unfairness under all of the facts and circumstances”—its belief that the “word ‘excessive’ takes into account the concept of what is fair, or more appropriate here, unfair,” and its approving references to a dictionary’s definition of “excessive” as “whatever notably exceeds the reasonable, usual, proper, necessary, just, or endurable” (what on earth is “endurable” doing in this list?) and to “just” as meaning “equitable” and “equitable” as meaning “fair.” This terminological potpourri can provide no guidance to taxpayers, their advisers, IRS agents, or the Tax Court. It’s a monkey wrench tossed into the machinery of tax collection.
The opinion also has a nod to Chevron and agency deference, as Judge Posner explains in discussing the third reason why the Seventh Circuit thought the Tax Court was wrong:
The Supreme Court has said that “filling gaps in the Internal Revenue Code plainly requires the Treasury Department to make interpretive choices for statutory implementation at least as complex as the ones other agencies must make in administering their statutes.” Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44, 56 (2011). The interpretive choice in this case is found in the regulation defining the statutory term “excessive in amount” to mean “in excess of the correct tax liability.” 26 C.F.R. § 301.6404–1(a), Treas. Reg. § 301.6404–1(a). As there is no indication that the IRS is misinterpreting its regulation, there is no need for us to consider the possible inroads that recent Supreme Court decisions have made into “Auer deference” (judicial deference to agencies’ interpretations of their own regulations), inroads discussed for example in Michael P. Healy, “The Past, Present and Future of Auer Deference: Mead, Form and Function in Judicial Review of Agency Interpretations of Regulations,” 62 Kansas Law Review 633 (2014).
Some Brief Thoughts
This was a case that mattered a lot to IRS for the broader precedent, as the amount of interest at issue was minimal. As Carl discussed, this case went up to the Seventh Circuit without the benefit of a taxpayer brief or oral argument. Some background on the interest abatement provisions makes this perhaps not as clear as Judge Posner concludes. In 1986, where Congress enacted the first interest abatement provision, Congress wrote then that it intended the provision at subsection (e) to be used in situations where an error or delay in performing a ministerial act resulted in the imposition of interest, and the failure to abate interest “would be widely perceived as grossly unfair”. S. Rep. 99-313, 1986-3 (Vol. 3) C.B. 1, 208. Later in 1998, Congress inserted the word “unreasonable” before “error or delay” to provide a judicial review standard, but did not say that the prior legislative history language about unfairness was now obsolete. Indeed, in King, Judge Posner quoted from H & H Trim, which quoted a dictionary definition of “excessive” as including “whatever notably exceeds the reasonable” (i.e., is unreasonable).
If interpreting “excessive” in 6404(a) as “unfair” would be unworkable, it seems odd that “unfair” is exactly what Congress thought the courts should be looking to as a standard for review of interest abatement cases under Section 6404(e). If he is correct that “the vagueness of ‘unfairness’ as a criterion for abatement; [is that] the word is an invitation to arbitrary, protracted, and inconclusive litigation”, then perhaps the opinion should discuss how such a criteria has operated for 30 years without a problem to tax administration in Section 6404(e).
It is possible that this is not the last of time we will see this issue. I am aware that practitioners have used an H&H Trim unfairness argument successfully at times with counsel to generate abatements, even on case involving income taxes. We will see whether the Tax Court will stick to its guns on this issue. The Service appeal and victory in this case is a pretty good indicator that the Service is now focused on and opposed to such arguments.