Sixth Circuit Holds that Courts Cannot Enjoin IRS From Receiving or Using Alleged Confidential Info from Former Attorney (11/13/19)

Note:  I posted this earlier on the Federal Tax Crimes Blog here, but since it overlaps with Federal Tax Procedure, I post it here.

In Gaetano v. United States, 2019 U.S. App. LEXIS 33164 (6th Cir. 2019), here, the Gaetanos (husband and wife) sued the United States to enjoin the IRS from receiving and using attorney-client confidential information that their former attorney, Goodman, did or might share with the IRS.  The Court opens with this good succinct introduction of the factual background and holding.

Richard and Kimberly Gaetano trusted Gregory Goodman as their legal advisor and business partner in running a cannabis operation. That trust was spurned.  The Gaetanos ended the relationship after ethics violations undid Goodman's license to practice law. He retaliated by assisting the Internal Revenue Service in a tax audit against them. Concerned about what Goodman might reveal, the Gaetanos sued the government to prevent it from discussing attorney-client confidences with him. The Anti-Injunction Act bars the lawsuit, and the Williams Packing exception does not apply. See 26 U.S.C. § 7421(a); Enochs v. Williams Packing & Navig. Co., 370 U.S. 1, 82 S. Ct. 1125, 8 L. Ed. 2d 292 (1962).

The district court dismissed the complaint.  On appeal, the Sixth Circuit held that dismissal was proper on jurisdictional grounds because of the Anti-Injunction Act, § 7421(a).  In summary, the Court held:

1.  The claim of violation of the Sixth Amendment right to counsel was improper because that is a right that attaches when prosecution is commenced.  There was no prosecution (at least not yet).

2.  The claim of violation of due process was improper.  The Court reasoned (cleaned up):

The Gaetanos next seek refuge in the Due Process Clause of the Fifth Amendment. As a creation of the common law, not the Constitution, the attorney-client privilege cannot by itself provide the basis for a due process claim. Support for the Gaetanos' position thus must come from somewhere else, in this instance from cases holding that deliberate preindictment intrusions into the attorney-client relationship may prove so pervasive and prejudicial as to imperil the fairness of subsequent proceedings.  

Vanishingly few decisions have found a due process violation for government intrusion into the attorney client relationship. The few cases generally involved nefarious government conduct,  such as infiltrating a defense lawyer's office. And in the lion's share of cases, courts treat these due process claims with suspicion. For our part, we have never found a Fifth Amendment violation on this ground. And we recently expressed our skepticism about the continued vitality of the "outrageous government conduct" defense, of which these claims are thought to be a subspecies. 

Even if this deliberate-intrusion concept could form the basis of a due process claim, the Gaetanos still would not prevail. Such claims require an ongoing, personal attorney-client relationship. That's not something the Gaetanos and Goodman have. Such claims also require a deliberate intrusion. But that's not what happened. The government never requested privileged information from Goodman. Such claims also require actual and substantial prejudice. But the Gaetanos seek relief outside the context of any enforcement proceeding, and they offer no explanation why the ordinary remedy—suppressing privileged evidence—would fail to protect them. No Fifth Amendment danger lurks.

3.  The Court rejected a claim under § 7525, noting that the privilege could be raised only to prevent compelled production of privileged information, but cannot be used to stop extrajudicial communications unrelated to  proceedings before a court.

Altera Corp. Petition for Rehearing Denied (11/12/19)

I have written before about the cause célèbre that is the Altera case.  Altera Corp. v. Commissioner, 145 T.C. 91 (2015), here, rev'd 926 F.3d 1061 (2019), here.  Today, the Ninth Circuit denied the petition for rehearing en banc.  See here.

The denial of the petition for rehearing is cursory, as usually the case with denials of petitions for rehearing en banc.

My prediction is that Altera will seek certiorari.  There is no direct conflict.  Altera will urge, I presume, the importance of the issue and conflict in principle with Supreme Court authority regarding interpretation and application of the arbitrary and capricious/State Farm (Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) standard).

There is a significant dissent by Judge Milan Smith (see Wikipedia, here), joined by Judges Callahan and Bade.  Judge Smith does not offer much new there that had not been said by the Tax Court and the Ninth Circuit panel (panel opinion and dissenting opinion).  Basically, Judge Smith claims that the Treasury Regulations failed procedural regularity under the § 706(2)(A) arbitrary and capricious standard, also called the State Farm standard.  The key for Judge Smith is that, in his view, the IRS justified the regulations on the arm's length standard alone rather than the commensurate with income standard and failed to adequately consider the comments in making the final decisions.

I have dealt with this genre of argument in discussing the panel opinions, so I just point to those discussions:  Ninth Circuit Reverses Unanimous Tax Court in Altera (Federal Tax Procedure Blog 6/7/19; 6/20/19; 7/2/19), here.

The Notice of Deficiency (11/8/19)

Tax Procedure fans should follow Bryan Camp's weekly offerings on the Tax Prof Blog, here (the link is to the cover page for the blog).  Bryan's offering this week is titled Lesson From The Tax Court: No Jurisdiction Over Ambiguous NOD, here.  In the blog, Bryan reviews a recent case,  U.S. Auto Sales, Inc. v. Commissioner, 153 T.C. ___, No. 5 (review opinion), here.  In that case, the Tax Court judges get all worked up over a confusing notice of deficiency where the cover letter (that many of us think of as the actual notice of deficiency) is not consistent with the enclosures or attachments intended to explain the deficiency amounts asserted in the letter.

Before reading Bryan's offering, I had just completed a submission draft of an article in which I addressed in a footnote exactly what a notice of deficiency was and referred to the U.S. Auto Sales case.  For those wanting a detailed and thoughtful analysis, please go to Bryan's blog linked above.  But, for a less detailed analysis dealing with just a high level overview of what a notice of deficiency is, I offer the following:

In the article, I discuss the use of ranges in valuation and the interplay with the burden of persuasion.  One topic I address is the common Helvering v. Taylor, 293 U.S. 507 (1935), here, issue of what happens when a notice of deficiency is shown to be arbitrary and excessive.  In addressing that issue, I needed to establish exactly what the notice of deficiency is.  This is what I say in a footnote in the final draft I submitted:

When I use the term notice of deficiency, I mean the (i) cover letter itself which states the amount of deficiencies and tax years and (ii) the enclosures with the cover letter that provide the explanations.  § 7522(a); e.g., IRM 8.17.4.8.13 (09-27-2013), Including Enclosures in the Notice of Deficiency; IRM 8.17.4.10 (09-27-2013), Parts of the Notice of Deficiency Statement.  For an example, see U.S. Auto Sales, Inc. v. Commissioner, 153 T.C. ___, No. 5 (2019), Slip Op. at 2-3, 9 (saying that the “notice encompasses” the “ cover” letter which states the deficiency and years, and the enclosures:  Form 4089, Notice of Deficiency Waiver (permitting a taxpayer to waive the restrictions on assessment), Form 5278 Statement of Income Tax Changes; and Form 886-A Explanation of Adjustments).

Cert Petition Filed in Baldwin re Timely-Mailing, Timely Filing Regulations and Chevron (10/30/19)

Some conservative/libertarians who claim loudly to fear the administrative state are now worked up over a tax case.  In Baldwin v. United States, 921 F.3d 836, 840 (9th Cir. 2019), here, which I discuss in my Federal Tax Procedure 2019 Practitioner edition (p. 188 n. 832).  Baldwin applied the dreaded Chevron and Brand X, feared as tools of the dreaded administrative state.

The background is the timely mailing timely filing rule of Section 7502.  Baldwin held that, because of changes in the regulations (through the filters of Chevron and Brand X), the requirements of 7502 pre-empt the field of timely mailing-timely filing.  Here is the discussion in the text and footnote of the practitioner edition.

2. Common Law Mailbox Rules.
    a. General. 

The Supreme Court has summarized the common-law mailbox rule:  

The rule is well settled that if a letter properly directed is proved to have been either put into the post office or delivered to the postman, it is presumed, from the known course of business in the post office department, that it reached its destination at the regular time, and was received by the person to whom it was addressed.  

This rule may apply in tax cases, although the decisions are varied as to how and if it applies (i.e. some courts hold that § 7502 pre-empts the field, particularly in light of changes to the underlying regulations n832 ).
   n832 Baldwin v. United States, 921 F.3d 836 (9th Cir. 2019). Regs. § 301.7502-1(e)(2) provides that, if there is no actual delivery (which would set the latest date), proof of proper use of the USPS methods or the designated PDS methods “are the exclusive means to establish prima facie evidence of delivery.” DOJ (and thus the IRS’s) position, accepted by the Court in Baldwin, is currently arguing that these regulations to limit mailing as delivery to the prescribed method are exclusive under the authority of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) on the basis that the statute itself is ambiguous as to the application of the mailbox rule. As such, not only is the regulation valid, it pre-empts earlier judicial authority to the contrary under Nat’l Cable & Telecomms.  ss’n v. Brand X Internet Servs., 545 U.S. 967 (2005) (which hold that Chevron qualified interpretive regulations can pre-empt judicial authority except where the judicial authority precludes the interpretation).

The Cato Institute, NFIB and some scholars have filed an amicus brief on the Baldwin petition for cert. See William Yeatman, Baldwin v. United States Is Ideal Vehicle to Revisit Reflexive Deference, 36 Yale J. on Reg.: Notice & Comment (10/29/19), here.  I recommend the article, although it uses APA-speak which may not be familiar to many tax procedure types who spend their time wallowing around in the IRC.  The linked article has further links to the amicus brief.  A key excerpt from the article:

Giants in Tax Law: Roger John Traynor (10/26/19)

I am spending more time than perhaps I should reading some old law review articles by giants in the tax law.  I will do a series of posts introducing these giants to younger lawyers whose knowledge of them may be hazy or nonexistent and offering some of the nuggets I have found in my reading.

I start with Roger John Traynor.  Traynor's Wikipiedia entry is here.  Wikipedia reports that Traynor "is widely considered to be one of the most creative and influential judges as well as legal scholars of his time."  Some other items from Wikipedia:

• At Boalt Hall of UC Berkeley, Traynor wrote groundbreaking articles on taxation, while serving as editor-in-chief of the California Law Review, and became a full-time professor in 1936.
• Traynor took leave from Boalt Hall "in 1937 to help the Treasury Department draft the Revenue Act of 1938."

From their work on the 1938 act, and the mitigation provisions specifically, Traynor and two of his colleagues wrote what, in my mind, is one of the finest article ever written on a Code subject, specifically the mitigation provisions (now in §§ 1311-1314 of the 1986 Code).  John M. Maguire, Stanley S. Surrey and Roger John Traynor, Section 820 of the Revenue Act of 1938, 48 Yale L. J. 509 (Part 1), here, and 719 (Part 2), here (1939). Fans of tax history should recognize the co-authors -- Maguire and Surrey, but perhaps more on them later.  If you want a good introduction to the mitigation provisions of the Code, I highly recommend the article.  For grins, I provide at the bottom of this blog entry an anecdote from my personal experience with the mitigation provisions involving yet another giant in the tax law, Harvard Law Dean Erwin Griswold, then Solicitor General of the United States.

Traynor wrote another law review article from his work on the 1938 Revenue Act:  Roger John Traynor, Administrative and Judicial Procedure for Federal Income, Estate, and Gift Taxes-A Criticism and a Proposal, 38 Colum. L. Rev. 1393 (1938).  Unfortunately, I do not have a link to the article.  I obtained a copy from HeinOnLine, here.  But retrieving the article requires subscriptions.  I obtained my copy from the UVA Law Library, but I don't think I am authorized to post it, so I just have to leave readers to their own resources to obtain a copy if they are interested.

Traynor surveys some big issues with tax administration and tax procedure, many of which are still with us today.  I will discuss and quote some of this article:

1.  Traynor laments the process of self-assessment, examination, notice of deficiency, litigation (Board of Tax Appeals (now Tax Court) and district and Claims Court and Courts of Appeals) and how inefficient it is when the taxpayer starts off with all of the relevant facts (certainly as compared with the IRS) which, if the IRS is to protect the revenue, the IRS must learn afresh and may not learn at all.  Traynor is armed with a lot of statistics to back up his arguments.  He proposes a procedure that would force the taxpayer to divulge facts earlier in the process (and be limited to the facts so divulged) so that the IRS can make decisions on the basis of those facts (unless the IRS contests them) and the taxpayer then limited to the record presented to the IRS rather than having de novo review.  (Of course, that happens in the refund suit via the required claim for refund and variance doctrine, but Tax Court litigation in deficiency cases is de novo.)

Some History on the Innocent Spouse Provisions (10/24/19)

I thought I would point readers to Bryan Camp's recent post Bryan Camp, 100th Lesson From The Tax Court: The Role Of Innocence In § 6015 Spousal Relief (Tax Prof Blog 10/21/19), here.

I offer the following bit of history regarding the original enactment in 1971.  This is from a footnote in my Federal Tax Procedure book:

A bit of history not essential for understanding the innocent spouse provisions.  The innocent spouse provisions were enacted in the early 1971.  Before that enactment, I was working at DOJ Tax Appellate Section and handled one of the more egregious cases in the context, involving separate property liability (Ramos v. Commissioner, T.C. Memo. 1969-157 (held spouse held liable, although “harsh”), rev’d 429 F.2d 487 (5th Cir. 1970)) and was aware of other cases in the office involving joint return liability in harsh contexts (e.g., Scudder v. Commissioner, 48 T.C. 36 (1967) (held spouse liable under joint liability provision), rev'd on other grounds, 405 F.2d 222 (6th Cir. 1968)).  From that work, I drafted proposed legislation that, if enacted, would grant innocent spouse relief.  The Assistant Attorney General for the Tax Division sent the proposal to the IRS with a recommendation that the IRS work on it and make a formal proposal to Congress.  The IRS resisted.  The AAG finally advised the IRS that, if the IRS would not make a proposal to Congress, DOJ Tax would.  At the point, the IRS worked on and made the proposal resulting in the initial innocent spouse provisions (§§ 6013(e) and 66).  The IRS proposal and resulting statute were much stricter than my proposal sent to the IRS by the AAG, but as the AAG said half a loaf is better than no loaf.  And, later, in 1998, the innocent spouse provisions were substantially liberalized.

I offer here a bit more that only real tax procedure geeks could possibly care about.

1.  When first assigned the Ramos case in DOJ Tax Appellate, I tried to get the IRS to give up the case.  There was almost no revenue involved.  But the IRS felt strongly about maintaining the integrity of the community property split even to "innocent spouses."  (Actually, in my mind, the Ramos case should have been prevented by the exercise of discretion at an earlier audit stage; by the time I was assigned the case, Tax Court Judge Featherston (a DOJ Tax alumnus) had already upheld its application to this hapless taxpayer and the IRS wanted to fiercely defend his holding; so I just had to defend the case on appeal.)

FTPB Update 04 - District Court Litigation Types (10/22/19)

I am doing the Updates differently, principally because I have learned how to do footnote links in the blog entry itself.  Accordingly, I have determined that printing the Updates as blog entries rather than separate pdfs will make it more useful to most readers.  I have created a page (to the right), titled FTPB Cumulative Update List with Links, here, that collects all updates in the context of the Table of Contents.

Caveat:  (i) Students using the Student Edition should ignore the footnotes here (just as I do not provide footnotes in the Student Edition; and (ii) the footnote number begin with 1 here rather than the footnote numbers in the text being revised.

Section Affected	Edition page numbers
Ch. 12.  Litigation    II.  Choices of Courts       B.  District Courts  2. Types of Tax Litigation In District Courts Replace the entire section (I highlight in red the revised wording)	Practitioner Ed. pp. 621-622 Student Ed. pp. 429-430

                        2.         Types of Tax Litigation In District Courts.

            District courts are courts of limited jurisdiction, meaning they can only hear cases authorized by the United States Constitution or federal statutes.  District courts have original jurisdiction for any case arising under federal statutes, the Constitution, or treaties,¹ and are specifically conferred jurisdiction for tax refund suits against the United States.  28 U.S.C. § 1346(a)(1) and § 7422(a).  Historical note: Prior to 1966, refund suits could also be brought against the Collector based on illegal exactions without invoking § 1346(a)(1) which was subject to some limitations in earlier periods;² hence a number of leading tax cases from the pre-1966 period are refund suits brought against the Collector. E.g., Lewis v. Reynolds, 284 U.S. 281 (1932).³

            I also note prominently the collection suit.⁴  The Government may bring a collection suit in the district court to reduce an assessment to judgment and to obtain judicial remedies with respect to the tax liability.  If the taxpayer has not by that time judicially contested the underlying tax liability, he or she can do so in that collection suit. ⁵ Sometimes a collection suit is combined with a refund suit.  The classic case is the so-called divisible tax case–best exemplified by the fairly common trust fund recovery penalty under § 6672.  As I  note elsewhere (pp.  ff.), this penalty is usually litigated by a refund suit.  The putative responsible person will pay a small amount to meet the jurisdictional prerequisite that there be a payment which could be refunded.  In the resulting refund suit, the Government will typically file a counterclaim for the balance of the amount that has been assessed.  That counterclaim is a collection suit that could have otherwise been brought independently by the Government to obtain a judgment for the unpaid tax.  The Government will pursue the matter as a counterclaim in order to get the putative responsible person's liability for all quarters concluded in one litigation.

            In addition, the district courts have a potpourri of other jurisdiction, examples of which include jurisdiction to quash an IRS formal document request (“FDR”),⁶ to order more disclosure of a written determination,⁷ to consider petitions for readjustment of partnership adjustments,⁸ jurisdiction to approve a levy on a principal residence,⁹ general jurisdiction to enter orders and judgments necessary or appropriate for the internal revenue laws,¹⁰ jurisdiction over summons enforcement proceedings,¹¹ actions to enforce a lien and declare a sale,¹² certain injunctions against persons abusing the tax system,¹³ wrongful levy suits where a third party claims his or her property was levied upon to pay another taxpayer’s taxes,¹⁴ declaratory judgments for § 501(c)(3) organizations,¹⁵ review of jeopardy assessments and levies,¹⁶ and so on and on.¹⁷  I discuss some of these in other sections of this book.

            For purposes of this course in this section, please focus your attention on the refund suit jurisdiction and its collection suit counterpart.