US Tax Court: A Ruling & Rules

On April 12, 2007, the United States Tax Court issued an Opinion in Estate of Edward P. Roski, Sr., deceased v. Commissioner of Internal Revenue Service (30 pages, PDF), 128 T.C. No. 10, on a somewhat obscure section of the Internal Revenue Code that, in a broader sense, signals a more responsive approach by that Court to taxpayers, and increased responsibilities of the Internal Revenue Service in disputes before the Tax Court.

An introduction to this federal court of distinctive jurisdiction & powers is set forth on the website of the United States Tax Court:

The U.S. Tax Court is a Federal court of record established by Congress under Article I of the Constitution of the United States. Congress created the Tax Court to provide a judicial forum in which affected persons could dispute tax deficiencies determined by the Commissioner of Internal Revenue prior to payment of the disputed amounts. The jurisdiction of the Tax Court includes the authority to hear tax disputes concerning notices of deficiency, notices of transferee liability, certain types of declaratory judgment, readjustment and adjustment of partnership items, review of the failure to abate interest, administrative costs, worker classification, relief from joint and several liability on a joint return, and review of certain collection actions.

The Tax Court is composed of 19 presidentially appointed members. Trial sessions are conducted and other work of the Court is performed by those judges, by senior judges serving on recall, and by special trial judges. All of the judges have expertise in the tax laws and apply that expertise in a manner to ensure that taxpayers are assessed only what they owe, and no more. Although the Court is physically located in Washington, D.C., the judges travel nationwide to conduct trials in various designated cities.

For further information, you can read the Taxpayer Information Section recently-posted on that website. Or you can view a PowerPoint presentation entitled "Tax Court in the United States: Background & Sources of Judicial Opinions" (26 slides), posted by the Library of the Yale Law School.

The U.S. Tax Court is altering its procedures to become more responsive in "small tax cases".

A Press Release, dated September 12, 2006, reported that Chief Judge John O. Colvin, for the Court, proposed amendment to Rule 173(b) of the Tax Court Rules of Practice and Procedure, that would require the filing of answers by the Commissioner of Internal Revenue in all small tax cases.

Small tax cases now comprise about half the Court’s docket. Petitioners in small tax cases are increasingly represented by low income taxpayer clinics, which in recent years have proliferated, partly because of funding provided by legislation. The parties as well as the Court would benefit from improved pretrial communication between the parties in small tax cases.

Because current rules generally do not require the Commissioner to file answers in small tax cases, petitioners and low income taxpayer clinics have sometimes had difficulty in identifying and contacting, until shortly before trial, the IRS attorney responsible for a case. Requiring the Commissioner to file answers in all small tax cases will provide petitioners or their counsel the name, address, and telephone number of the IRS attorney responsible for the case well before trial.

This information should facilitate essential pretrial communication between the parties, encourage earlier consideration of small tax cases by the appropriate IRS attorney, and reduce instances in which the parties and the Court are surprised by 11th-hour procedural and jurisdictional motions.In addition, small tax cases move through the administrative system relatively quickly and may present novel issues resulting from changes in the tax law. The filing of answers may promote earlier identification of such issues and assist the Court in making informed and timely decisions as to whether it might be appropriate to discontinue small tax case proceedings in particular instances, pursuant to section 7463(d). It is not anticipated that the proposed amendment will result in any significant delay in the calendaring of small tax cases for trial.

Then, in a Press Release, dated November 28, 2006, the Court reported extension of the previously-scheduled implementation of the new rule amendments, pending evaluation of written comments received. The comments, derived from four sources (including the Department of the Treasury and the American Bar Association's Tax Section), were attached to the press release.

Then, in a Press Release, dated January 12, 2007, the Court announced adoption of the final amendments to its court rules. The amendments became effective for small tax cases in which the petitions were filed after March 13, 2007.

Against this backdrop, the Roski case stands out, even though the substantive litigation related to a little-used tax election claimed by an estate.

That case related to an estate's election for treatment under I.R.C. Sec. 6166(a), which allows an estate an election to pay Federal estate tax due in installments over a 10-year period after a 5-year deferral. Otherwise, Federal estate tax is due within 9 months of a decedent’s death under I.R.C. Sec. 6075(a).

The issue before the Tax Court was the IRS requirement that the Estate post adequate long-term surety in order to make the election under the statutory provision.

A summary of the issues and holdings was set forth in the Tax Court's Opinion (Note: "R" is the Internal Revenue Service, as Respondent; emphasis is added):

The estate filed a petition with this Court requesting relief under sec. 7479, I.R.C. The estate alleged that R abused his discretion in denying the election on the basis of the estate’s failure to provide a bond.

R moved for summary judgment on the grounds that this Court does not have jurisdiction to review R’s determination because the requirement of a bond or a special lien is not within the scope of the jurisdiction granted by sec. 7479, I.R.C. The estate objected to R’s motion and filed a cross-motion for summary judgment, asking this Court to find that R has no authority to impose a bright-line security requirement and that if R had exercised his discretion properly, he would not have found a bond or a special lien to be necessary in this case.

Held: We have jurisdiction under sec. 7479, I.R.C., to review R’s determination. Nothing in the statute or its legislative history restricts our review of R’s denial of the election. R has failed to rebut the strong presumption that an action of an administrative agency is subject to judicial review.

Held, further, R has no authority to require a bond or a special lien in every case. By doing so, R is making the furnishing of security a substantive requirement of sec. 6166, I.R.C., which Congress did not intend. Further, R’s adoption of a standard that precludes the exercise of discretion is grounds to set aside R’s determination.

The Tax Court issued its ruling as an "opinion", rather than as a "memorandum", decision, which adds weight to its holdings.

The Tax Court noted that "The Commissioner has changed his position regarding whether a bond is required for a section 6166 election four times over the last 15 years". The Opinion reviewed those changing, published IRS positions, which were adopted in 1987, 1993, 1997, & 2000, and then noted: "Ultimately, the Commissioner did not adhere to the position he took in 2000." The Opinion noted "Although the published guidance discussed earlier cannot be cited as precedent under section 6110(k)(3), it highlights the Commissioner’s confusion about the proper interpretation of the bond requirement."

The Tax Court rejected the IRS arguments that, should the Tax Court ignore IRS administrative interpretations, the legislative purpose behind both sections 6166 and 7479 would be frustrated. The Court countered, citing a supportive legislative report:

Congress enacted section 7479 because “[it] believed that taxpayers should have access to the courts to resolve disputes over an estate’s eligibility for the section 6166 election, without requiring potential liquidation of the assets that the installment provisions of section 6166 are designed to protect.”

On the issue of an adequate "exercise of discretion", the Tax Court found insufficiency on the part of the IRS:

[S]ection 6165 gives the Commissioner discretion to require a bond for extension of time to pay tax, but it does not make it mandatory. Implicit in this grant of discretion is a statutory obligation to exercise discretion. Respondent, however, has not exercised discretion in spite of the fact that he concedes in his memorandum that requiring a bond under section 6165 is “unquestionably a discretionary act that could only be subject to an abuse of discretion review.”

The failure of the IRS to exercise "discretion" in this particular case, when requested by the election, frustrated both legislative and judicial concepts:

By adopting a bright-line rule in every case, the Commissioner has shirked his administrative duty to state findings of fact and reasons to support his decisions that are sufficient to reflect a considered response to the evidence and contentions of the losing party and to allow for thoughtful judicial review.

But, the case is still not over, as indicated by the concluding paragraph of the Opinion:

We have found that respondent has arbitrarily failed to exercise his discretion and may not impose a bright-line bond requirement. Therefore, for the above reasons, we will deny respondent’s motion for summary judgment. However, we will not adjudicate the merits of the dispute at this juncture as the estate requests in its cross-motion for summary judgment. The record does not contain sufficient facts for us to decide the merits of the estate’s assertion that furnishing security is not necessary in this case. The uncontested facts do not allow us to resolve the matter in favor of the estate. Therefore, we shall also deny the estate’s cross-motion for summary judgment to the extent that it seeks a final disposition of the matter.

The very broad point that can be read from both the rule amendments and the Roski case is that the IRS should be responsive to taxpayers' good faith concerns & actions when applying federal tax laws.