Are Appeals Officers Equipped and Trained to Assess Accurately the Litigating Hazards of a Case? (9/25/15)

Appeals' standard for settlement is to reflect the litigating hazards of the case.  See IRM 8.6.4.1  (10-26-2007), Fair and Impartial Settlements per Appeals Mission, here ("A fair and impartial resolution is one which reflects on an issue-by-issue basis the probable result in event of litigation"). One of the concerns expressed with that standard is that Appeals Officers are not litigators nor are most of them even lawyers.  How then do they assess the litigating hazards of a case?

Keith Fogg of Procedurally Taxing has this blog on the subject where he expresses concern:  Judging Litigation Hazards without Seeing or Following Litigation (Procedurally Taxing Blog 7/6/15), here.  Keith is a law professor now but formerly was with Chief Counsel and had considerable opportunity to observe Appeals Officers' application of the standard.  He expresses concern that Appeals may be paying less attention to insuring that Appeals Officers at least observe litigation to sharpen their skills at determining the litigation hazards.  And, of course, the Appeals Officers have difficulty assessing evidentiary and procedural problems and how they may affect the outcome of the case if it proceeds to trial.  Among the problems is credibility of witnesses.  Many cases (including the anecdote I present at the end of this blog entry) really turn on credibility, and the Appeals Officer has no way of factoring credibility into a settlement.  It is true that many revenue agents may view the witnesses as not credible, often without even interviewing them and the Appeals Officer will usually be aware of the revenue agent's assessment of credibility.  But, the Appeals Officer has no way of assessing the revenue agent's determination of credibility or, more directly,  making an independent determination of credibility to properly assess the litigating hazards.

Sheldon ("Shelly") Kay, currently with a law firm but previously with district counsel and thereafter with Appeals where he served as National Director of Appeals, does not agree with Keith.  He has written his views in a blog on Procedurally Taxing:  “Judging Litigating Hazards – Another View” (Procedurally Taxing 9/24/15), here.  Shelly makes a strong rebuttal.

I encourage tax procedure fans and particularly students in my class to read these blogs.  They are relatively short and discuss a core function of Appeals.  We will cover Appeals on October 1, and I have provided a link to this blog (with the links to the Procedurally Taxing Blogs).

On this subject (particularly credibility assessments), I offer the following from my practice.  Where I have one or two key witnesses as to key issues who I believe to be very credible, I have on occasion offered to have those witnesses come to an Appeals Conference to allow the Appeals Officer to factor credibility into the Appeals Officer's assessment of litigating hazards.  For example, in one of my offshore cases, the IRS proposed a multiple year 50% FBAR penalty against my client.  The issue is credibility -- what did the client know and when did the client know it; or phrased in terms of willful blindness (if that even applies), what did the client avoid knowing and when did the client avoid knowing it.  I assessed my client to have exceptionally strong credibility (one of the best and most credible witnesses I have had in my career) in a case that really turns on credibility.  The Appeals Officer declined but what got him quickly to a settlement was my request, because of my client's health, to take a protective deposition in advance of the litigation.  I reminded him in making that request that, in my view, the IRS has no case on the litigating hazards given her credibility and a deposition would establish that.  Merely requesting the deposition moved the case to a settlement.  In fairness to that Appeals Officer, the case was being controlled by unseen and unknown administrators of the IRS's offshore program.  (Those unknown and unseen administrators also had no ability to assess the witness.)

I will offer another anecdote.  I had a case where the agent went off the deep end and determined that the client owed a very large amount of money and was subject to the civil fraud penalty.  Let's say for illustrative purposes the tax was $1,000,000 (it was just under, but want to use a round number).  The civil fraud penalty was then 50%.  In fact, the tax was not due and, even if there were a tax due, fraud was not involved.  My client was a lawyer and very credible, so I had him come to the Appeals Conference.  The Appeals Officer who was just recently brought to Appeals from examination was very antagonistic.  We offered 25% of the tax but no penalty (a $250,000 settlement) just to conclude the matter, although we believed no tax was even due.  The Appeals Officer refused, so I literally begged him to get a then district counsel involved because, as I told the Appeals Officer, no district counsel would, in my judgment, defend the case.  He refused.  We did not reach settlement.  The Appeals Officer cause a notice of deficiency to issue.  We filed a petition in the Tax Court.  Before even filing an answer, the district counsel attorney called me to advise that, although they would file a perfunctory general denial (well almost general denial), he would be sending me a stipulated decision document giving up the IRS's position entirely.  The district counsel made that decision based solely on our submissions to Appeals and the petition (which was nothing more than a notice petition simply summarizing our submissions to Appeals).  Obviously, that Appeals Officers had not a clue as to litigating hazards, and moreover had not a clue as to the legal merits on the underlying issue which was simply whether a note to a bank was a recourse note.

I have other stories, but will forego them now.  Perhaps in class.