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Snow Case Highlights Limits on Tax Court’s Jurisdiction to Vacate

Posted on June 30, 2014

Today’s guest poster is Sean Akins. Sean Akins is a senior associate at Latham & Watkins, LLP whose practice includes tax controversy matters for corporations, partnerships, and individuals. Sean is a co-author of Kafka, Cavanagh & Akins: Litigation of Federal Civil Tax Controversies and a co-author of Effectively Representing Your Client Before the IRS, Chapter 7, Litigation in the Tax Court. Sean is an Associate Member of the J. Edgar Murdock American Inns of Court (U.S. Tax Court), and a Nolan Fellow (2014-2015) of the Section of Taxation of the American Bar Association. Sean is also an avid (albeit amateur) physics buff, for which he begs the readers’ indulgence.Les

In quantum physics (bear with me) a physical system is in a state of quantum superposition when it exists in all of its theoretical states at a single moment, but when measured or observed, coalesces to a single identifiable state. A rudimentary example of this is the nature of a photon in quantum superposition as both a particle and a wave until the photon is measured, whereupon it behaves as a particle. Although superposition is a concept limited to the quantum world, one procedural aspect of the Tax Court bears a striking resemblance – the Tax Court’s subject matter jurisdiction (more on this later).

The Tax Court’s recent division opinion in Snow v. Commissioner 142 T.C. No. 23 (2014) implicates the Court’s subject matter jurisdiction, as well as several other procedural issues including: (i) the Tax Court’s two-tiered procedure for deciding a case under Tax Court Rule 183, and (ii) the Tax Court’s limited ability to vacate a final decision. In Snow, the Court denied Petitioners’ motion to vacate. As described below, this result appears, at least initially, inconsistent with authorities addressing the Tax Court’s ability to vacate a final decision. These inconsistencies, however, can be resolved through the application of an old common law doctrine known as the “bootstrap doctrine.”

Background and Rule 183 Procedures

The initial decision in Snow, issued in 1996, involved classic jurisdictional questions of whether the Service properly issued a notice of deficiency to the taxpayers’ last known address, and whether the taxpayers timely petitioned the Tax Court with respect to that notice. Pursuant to Rule 180, the Chief Judge assigned a Special Trial Judge to hear the case. Because the amount at issue exceeded the then-applicable $10,000 threshold, however, Section 7443A and Rule 183 required a Regular Judge to issue the decision of the Court after the Special Trial Judge had heard the case.

At the time Snow was decided in 1996, the Tax Court employed a collaborative two-step process for deciding cases subject to Rule 183. First, the Special Trial Judge heard the case and issued a draft report to the Regular Judge. This report was never provided to the parties. Second, the Regular Judge and Special Trial Judge engaged in a back-and-forth revision process, leading to the Regular Judge’s agreement with and adoption of the rewritten report.

In Snow, the first step of this process produced a draft report that recommended granting the Petitioners’ motion to dismiss for lack of jurisdiction because the notice had not been sent to the taxpayers’ last known address. Subsequently, though, the Regular Judge rejected this finding and reached the opposite conclusion, granting Respondent’s motion to dismiss for lack of jurisdiction on account of the Petitioner filing the petition in an untimely manner. The two judges revised the draft report using the collaborative process and issued it as the formal decision.

Nine years after the Snow decision was entered the Supreme Court, in Ballard v. Commissioner 44 U.S. 40 (2005), rejected the Tax Court’s collaborative Rule 183 approach (which had been in place since 1983). The Ballard Court held the collaborative process contradicted Rule 183, which required the Regular Judge to adopt, modify or reject the Special Trial Judge’s report, not engage in a cooperative re-drafting process. Additionally, the Ballard Court ruled that the Tax Court was required to provide a copy of the Special Trial Judge’s initial report to the parties for purposes of any Appeal.

Following Ballard, the Tax Court issued copies of initial reports drafted by Special Trial Judges that were issued in connection with Rule 183 cases, including those in old cases where the initial report could be located. The Tax Court provided such a report to the Snow Petitioners in 2005 who, for the first time, learned of the Special Trial Judge’s initial conclusion that the jurisdictional question should have been decided in Petitioners’ favor.

Motion to Vacate

Eight years after receiving the initial Special Trial Judge report, its discovery lead the Snow Petitioners to file a motion to vacate the 1996 decision. In denying the Snow Petitioners’ motion, the Tax Court held that it was without jurisdiction to vacate a final decision (in this case nearly 18 years final) except in limited situations. Those situations include where there has been a fraud upon the court, mutual mistake, and where the Court had never acquired jurisdiction in the first place (the “lack of jurisdiction exception”). The Tax Court rationalized the lack of jurisdiction exception, stating that “it would ‘border on absurdity’ to prevent the tax court on jurisdictional grounds from vacating a decision it lacked jurisdiction to enter in the first place.”

The Tax Court rejected this exception, though, stating that “because petitioners filed petitions, we had jurisdiction to decide our jurisdiction” and therefore to “grant Respondent’s original motions to dismiss for lack of jurisdiction.” In other words, because the Court had limited jurisdiction to grant Respondent’s motion to dismiss, that decision could no longer be vacated using the lack of jurisdiction exception.

The reasoning behind the Tax Court’s refusal to grant the Snow Petitioners’ motion to vacate on the grounds that it never had jurisdiction appears, at least initially, inconsistent with the authorities describing the Tax Court’s ability to vacate a final decision under this exception. This is because the lack of jurisdiction exception has been applied in other cases where taxpayers filed Petitions and decisions became final. See, e.g., Abeles v. Commissioner 90 T.C. 103 (1988); Billingsley v. Commissioner 868 F.2d 1081, 1084-1085 (9th Cir. 1989); Brannon’s of Shawnee, Inc. v. Commissioner 9 T.C. 999, 1002 (1978). Similarly, cases applying the lack of jurisdiction exception, and other cases addressing the Tax Court’s jurisdiction to determine its jurisdiction, have recognized, for example, that “[t]he defense of lack of subject matter jurisdiction cannot be waived, and the court is under a continuing duty to dismiss an action whenever it appears that the court lacks jurisdiction.” Billingsley v Commissioner, at 1085.

If the foregoing is indeed the case, then the Tax Court may review its jurisdiction at any time – at the initiation of the case, during the litigation, after the decision is entered, and after the decision is final. Similarly, the foregoing cases do not foreclose the Court from revisiting the jurisdictional question at any point in the future. How then does this comport with the Snow opinion, where the Court held it lacked jurisdiction to vacate and revisit its earlier jurisdictional ruling issued in 1996?

Although not addressed explicitly by the Court, one answer is an old common law doctrine known as the “bootstrap doctrine.” That doctrine recognizes that courts are inherently imbued with the jurisdiction to determine their own subject matter jurisdiction. But courts are not infallible, and they may incorrectly determine whether they have jurisdiction. Irrespective of whether such determination is correct or incorrect, the bootstrap doctrine provides that once the jurisdiction determination is made, it is thereafter valid, and further dispute is precluded once the decision becomes final. For additional background on the bootstrap doctrine, see here 51 Minn. L. Rev. 491 at 494-99 (1967) (HeinOnline) and here 53 Harv. L. Rev. 652 (1940) (HeinOnline).

This doctrine makes sense – if the Tax Court could always revisit its earlier jurisdictional rulings, then the lack of jurisdiction exception would be available in perpetuity. Taxpayers and Respondent would have unlimited ability to challenge prior jurisdictional determinations and true finality would be an impossibility.

And so here we return to the concept of superposition and the Tax Court’s subject matter jurisdiction. Before it is measured, a photon exists in a state of quantum superposition as both a wave and a particle, but once observed this duality coalesces into a single identifiable state. The Tax Court’s subject matter jurisdiction is similar. Before it is measured, the Court’s subject matter jurisdiction may exist or it may not. This state of ‘superposition’ permits the Court to vacate a decision, even after that decision has become final, using the lack of jurisdiction exception. But this exception is available only insofar as a state of superposition exists. Once the Tax Court measures its jurisdiction, as the Snow Court did in 1996, the bootstrap doctrine permanently fixes that measured state so that it can no longer be attacked or revisited.

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