On June 1, 2022, Judge Kathleen Kerrigan began her two-year term as Chief Judge of the US Tax Court. Her election as Chief Judge was announced earlier this year and covered on the blog here. Chief Judge Kerrigan replaces Judge Maurice B. Foley, who served as Chief Judge from June 1, 2018, through May 31, 2022.
We frequently write about developments at the US Tax Court, including noteworthy cases, administrative matters, and the status of presidentially appointed Judges and court-appointed Special Trial Judges. One item we have not discussed in the past is the Tax Court’s “Reports & Statistics,” which is available here.
The Reports & Statistics page currently contains two items: (1) Congressional Budget Justification Reports and (2) Appellate Reports. The former contains reports for FY 2021, FY 2022 and FY 2023, and the latter contains, by months, cases commenced in the US Courts of Appeals from July 2020 through March 2022.
The Congressional Budget Justification Reports are submitted to the Committee on Appropriations, Subcommittees on Financial Services and General Government in the US House of Representative and US Senate. The FY 2023 Congressional Budget Justification Report (FY23 Report), submitted February 28, 2022, includes detailed information regarding the operations of the Tax Court and breakdown of its expenses (both prior and anticipated future expenses).
The FY23 Report contains details on the Tax Court’s response to the COVID-19 pandemic and the substantial increase in petitions filed in FY 2021 (35,297 petitions, up from the historical average of between 23,000 and 26,000 petitions). The report also discusses the court’s use of in-person and remote proceedings over the past two years, noting that the success of remote proceedings and the move to institutionalize remote proceedings post-pandemic.
For FY 2023, the Tax Court requested a budget of $57,300,000. This constitutes a 1.6% decrease from the FY 2022 requested budget. The following charts reflect prior and current requests and staffing levels.
A few other points are worth mentioning. The FY23 Report indicates that the Tax Court does not plan on holding a Judicial Conference in 2023 due to ongoing uncertainties relating to the COVID-19 pandemic (the last Judicial Conference was held in FY 2018). The FY23 Report also discusses the status of the Limited Entry of Appearance procedures that started in September 2019 and mentions certain legislative proposals submitted to Congress for fee proposals (e.g., raising the fee for filing a petition from $60 to $100). Finally, the FY23 Report notes that there are two vacancies for judicially appointed Judges (we note that currently no individuals have been nominated for these vacancies).
Practice Point: The FY23 Report contains detailed information about the Tax Court. It is worth a quick read for those who practice in the Tax Court or are interested in learning more about the Court’s operations.
In a unanimous decision in Boechler, P.C. v. Commissioner issued on April 21, 2022, the Supreme Court of the United States reversed the US Court of Appeals for the Eighth Circuit’s ruling (which affirmed the US Tax Court) and held that the 30-day time limit to file a petition with the Tax Court in a collection due process (CDP) case is a non-jurisdictional deadline subject to equitable tolling. The Supreme Court remanded the case to determine whether the taxpayer is entitled to equitable tolling.
The one-day-late showdown started in 2015, when the Internal Revenue Service (IRS) notified Boechler, P.C. (Boechler), a North Dakota law firm, of a tax discrepancy. Boechler did not respond, which triggered the assessment of an “intentional disregard” penalty along with a notice that the IRS intended to seize Boechler’s property to satisfy the penalty. Boechler requested a CDP hearing before the IRS Independent Office of Appeals (IRS Appeals), arguing that: (1) there was no discrepancy in its tax filings and (2) the penalty was excessive. IRS Appeals rejected these arguments and sustained the proposed levy. Boechler then had 30 days to file its Tax Court petition but missed the deadline by one day. The Tax Court dismissed the petition for lack of jurisdiction, holding that the 30-day filing deadline is jurisdictional and cannot be equitably tolled. The Eighth Circuit affirmed.
The Supreme Court granted certiorari. The US government argued that the deadline was jurisdictional and the Tax Court lacks the power to accept a tardy filing by applying the doctrine of equitable tolling. Boechler argued that equitable tolling applied, and the Tax Court had jurisdiction over its case. The Supreme Court, continuing a trend of distinguishing between claim processing rules and jurisdictional rules, agreed with Boechler.
Internal Revenue Code (Code) Section 6330(d)(1) states, “[t]he person may, within 30 days of a determination under this section, petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter).” The Supreme Court explained that a procedural requirement is treated as jurisdictional “only if Congress ‘clearly states’ that it is” Arbaugh v. Y & H Corp., 546 U. S. 500, 515 (2006), although US Congress need not “incant magic words.” Sebelius v. Auburn Regional Medical Center, 568 U. S. 145, 153 (2013).
The Supreme Court clarified that the question was whether the statutory language limits the Tax Court’s jurisdiction to petitions filed within that timeframe. That answer turned on the meaning of the phrase “such matters.” The first independent clause explains what a taxpayer may do, (“The person may, within 30 days of a determination under this section, petition the Tax Court for review of such determination.”) However, the phrase “such matters” does not clearly mandate the jurisdictional reading and lacks clear antecedent. In addition, the Supreme Court also explained that Code Section 6330(d)(1) lacked in comparable clarity as to other tax provisions enacted around the same time. Finally, the Supreme [...]
On April 1, 2022, the US Tax Court announced that Special Trial Judge (STJ) Daniel A. Guy has retired, effective March 31, 2022. STJ Guy served the Tax Court in various roles for more than 30 years, the last 10 in the capacity of STJ. He was recently honored with the J. Edgar Murdock Award for his distinguished service to the Tax Court. McDermott wishes STJ Guy the best in his post-Tax Court endeavors.
On March 23, 2022, the US Tax Court announced new proposed rules for practicing before it. The Court proposed three new rules, amendments to existing rules and changes to conform the existing rules to various forms. The proposed changes also reflect the Court’s move toward conformity with the Federal Rules of Civil Procedure.
OVERVIEW OF THE NEW PROPOSED RULES
The new rules include Rule 63, Rule 92 and Rule 152. Rule 63 provides rules to parties seeking to intervene in a Court proceeding who have an unconditional right and a conditional right to intervene by a federal statute.
Rule 92 provides rules to identify and certify an administrative record in certain actions. The explanation to the proposed rule states that proposed Rule 92 is meant,
[T]o fill a gap in the Court’s Rules of Practice and Procedure. Although the Court has longstanding Rules governing the submission of the administrative record in declaratory judgment cases, see Title XXI of the Court’s Rules, the Court has not adopted a rule of procedure or a uniform process governing the submission of the administrative record to the Court in other actions where judicial review is normally limited to the administrative record or where judicial review requires an examination of the administrative record and other relevant evidence, as appropriate.
Rule 152 provides a uniform rule for the Court to accept briefs filed by amicus curiae. The explanation to the rule states that proposed Rule 152 is a corollary to Rule 29 of the Federal Rules of Appellate Procedure and Rule 7(o) of the local rules for the US District Court for the District of Columbia. We previously discussed amicus briefs in the Court, and this change is a welcome development to provide specific procedures in the area.
NOTABLE REVISIONS TO EXISTING RULES
Proposed Rule 21, Service of Papers, makes service of pleadings through the Court’s electronic system the default method for serving papers upon the Court and opposing parties.
Proposed Rule 23, Form and Style of Papers, omits all prefixes (e.g., Mr., Ms.) from pleadings. The amendment would also permit the use of a typed written name on a pleading that is filed electronically with the Court to constitute that person’s signature.
Proposed Rule 70, Scope of Discovery, would add the following rule:
Discovery must be proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.
Additionally, the amendment proposes that any information withheld under a claim of privilege must be expressly made and describe the nature of the documents, communications, etc., not produced to enable the other party the ability to assess the privilege claim. The rule also adds provisions for the return of privileged documents that were inadvertently disclosed to the opposing [...]
Tax penalties are always a hot topic here. The Internal Revenue Service (IRS) has a large arsenal when it comes to grounds for asserting penalties on income tax deficiencies, ranging from the common 20% penalty under Internal Revenue Code (Code) Section 6662(a) to higher penalties ranging from 40% (gross valuation or basis misstatements and economic substance) to 75% (fraud).
However, before the IRS can assert most penalties against taxpayers, it must comply with the procedural requirement in Code Section 6751(b): That the “initial determination” to assert the penalty be “personally approved (in writing) by the immediate supervisor of the individual making such determination.” As the US Court of Appeals for the Second Circuit explained in Chai v. Commissioner, US Congress imposed this requirement because it “believes that penalties should only be imposed where appropriate and not as a bargaining chip” and “[t]he statute was meant to prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.”
Over the past several years, there has been substantial litigation over the proper interpretation and application of Code Section 6751(b). The US Tax Court’s recent opinion in Oxbow Bend, LLC v. Commissioner is the latest development. In Oxbow Bend, the Tax Court rejected the taxpayer’s position that the “initial determination” was made on the date that the examining agent prepared a penalty lead sheet reflecting her recommendation to assert penalties and stated in a telephone conference with the taxpayer’s representative on that same day that penalties were being considered. Approximately three months later, the examining agent’s supervisor approved the penalty lead sheet, and the IRS issued a Notice of Final Partnership Administrative Adjustment asserting the penalties. The Tax Court, relying on its prior precedent, held that the word “determination”:
- “has an established meaning in the tax context and denotes a communication with a high degree of concreteness and formality”
- “signifies a consequential moment of IRS action”
- is not a “mere suggestion, proposal, or initial informal mention of penalties”
- “will be embodied in a formal written communication that notifies the taxpayer of the decision to assert penalties.”
Thus, under the Tax Court’s analysis, an “initial determination” can only be made in a “written” document that is provided to the taxpayer.
Oxbow Bend is a memorandum opinion of the Tax Court and, therefore, is limited to its facts and technically not precedential, as we have discussed in the past. However, memorandum opinions are often cited by litigants, and the Tax Court does not disregard these types of opinions lightly. One has to wonder whether, under different facts where an examining agent makes an explicit oral statement to a taxpayer that penalties “will” be asserted, courts might reach a different result given Congress’s express intent that examining agents should not threaten penalties and use them as a bargaining chip for settlement purposes. Further, Code Section 6751(b) expressly requires that the supervisory approval be “in writing” but contains a written requirement for purposes of the [...]
The fallout from taxpayer challenges to the Internal Revenue Service’s (IRS) “reportable transaction” regime continues. On March 21, 2022, the district court in CIC Servs., LLC v. IRS ruled in favor of the taxpayer, vacating Notice 2016-66 and ordering the IRS to return all documents and information produced pursuant to Notice 2016-66 to taxpayers and material advisors.
We previously posted about the Supreme Court of the United States’ decision in CIC Servs., LLC v. IRS, which allowed a pre-enforcement challenge to the IRS’s reportable transaction regime. On remand, the parties filed cross-motions for summary judgment. The district court, relying on Mann Construction, Inc. v. United States, explained that the “Sixth Circuit’s analysis in Mann Construction is binding on this Court and applies equally to the arguments advanced by the IRS regarding Notice 2016-66 in this case.” The court dealt the IRS another blow, holding that Notice 2016-66 had to also be set aside as an agency action that was arbitrary and capricious: “[s]imply including cases in the administrative record that suggest certain tax structures could be abusively employed is not synonymous with examining relevant facts and data in connection with issuing the Notice.” In determining the appropriate relief, the court rejected the IRS’s request to limit vacatur of the Notice to CIC, explaining that “vacating the Notice in its entirety is appropriate” and citing the US Court of Appeals for the Sixth Circuit’s prior statement that the IRS “do[es] not have a great history of complying with APA procedures, having claimed for several decades that their rules and regulations are exempt from those requirements” (See CIC Servs., LLC v. IRS, 925 F.3d 247, 258 (6th Cir. 2019) quoting Kristin E. Hickman & Gerald Kersa, Restoring the Lost Anti-Injunction Act, 103 Va. L. Rev. 1683, 1712-13 (2017)).
Practice Point: The assault on the IRS’s reportable transaction regime is far from over. We recently posted about the Sixth Circuit’s opinion in Mann Construction in which it held that Notice 2007-83, which required disclosure of listed transactions relating to certain employee benefit plans, violated the Administrative Procedure Act (APA). APA challenges continue to expand to other IRS notices that bypassed the notice-and-comment requirement, including Notice 2017-10, which identifies certain syndicated conservation easement transactions as listed transactions subject to disclosure to the IRS. These developments will certainly have a significant impact on taxpayers and material advisors’ responsibilities as we move into the tax filing season.
Prior to his appointment to the Tax Court, Judge Gerber spent several years working for the Internal Revenue Service (IRS) in several cities around the country, including as Acting Chief Counsel. He was then appointed to the Tax Court in 1984, serving as Chief Judge from June 1, 2004, to May 31, 2006. Both before and after his appointment, Judge Gerber was a frequent participant in tax seminars and professional programs, including as a lecturer of law at Vanderbilt School of Law and the University of Miami School of Law Graduate Program.
We both knew Judge Gerber well during our time clerking at the Tax Court. He was always engaging and enjoyed talking about many things outside of tax. As the Tax Court’s announcement states: “Judge Gerber had a zest for life and was a humble, humorous, and unabashedly compassionate man who endeared himself to colleagues, employees, and all those fortunate enough to cross his path.”
On February 25, 2022, the US Tax Court announced that Judge Kathleen Kerrigan has been elected the new Chief Judge and will serve a two-year term beginning June 1, 2022. Judge Kerrigan will replace Chief Judge Maurice B. Foley, who has served in the role since June 1, 2018.
Judge Kerrigan was sworn into the Tax Court on May 4, 2012, for a term ending May 3, 2027. She earned her BS from Boston College in 1985 and her JD from the University of Notre Dame Law School in 1990. After law school, Judge Kerrigan served as Legislative Director for Congressman Richard E. Neal (D-MA) and then worked at Baker & Hostetler LLP in Washington, DC, from 1998 to 2005. From 2005 until her appointment to the Tax Court, she served as Tax Counsel for Senator John F. Kerry (D-MA).
The Tax Court is comprised of 19 presidentially appointed members, senior judges serving on recall and special trial judges. The judges travel nationwide to conduct trials in various designated places.
We are deeply saddened to report that retired US Tax Court Judge Robert P. Ruwe passed away on February 12, 2022. The Tax Court’s press release aptly stated: “Judge Ruwe was known for his extraordinary memory and grasp of tax law, and for the valuable experience that he brought to his work.”
We both clerked for Judge Ruwe in the early 2000s and will never forget his mentorship, dedication to service and love of tax. Judge Ruwe was fond of going for walks with his clerks, whether to talk about pending cases, sports, politics or family life. He also enjoyed giving history lessons during those walks, pointing out lesser-known monuments or memorials and sharing the background of various government buildings. Most walks also ended with the purchase of roses from street vendors to give to his wife MaryKay that evening. Judge Ruwe will be sorely missed.
Below are links with further information about Judge Ruwe and his legacy:
- The End of An Era—Senior Judge Robert P. Ruwe Retires from US Tax Court
- 3 Key Opinions by Retired Tax Court Judge Robert Ruwe
- Alumni Profiles – Roger Bacon High School
- US Tax Court Press Release on J. Edgar Murdock Award
- Presentation of the J. Edgar Murdock Award to The Honorable Robert P. Ruwe, United States Tax Court
- United States Senate Committee on Finance Hearing on Nomination Laurence J. Whalen and Robert P. Ruwe to be Judges on the United States Tax Court (Nov. 3, 1987)