Does Failure to Assert Graev 6751(b) Issue in Claim for Refund Foreclose Asserting in Refund Suit? (9/13/19)

For some reasons, although I had this case in my database, I had not reported on it.  Ginsburg v. United States, 123 A.F.T.R.2d 2019-553 (M.D. Fla. 3/11/2019), here, on appeal to the Eleventh Circuit (No. 19-11836-J).  The Procedurally Taxing Blog has a good write up, so I won't re-do the ground covered there.  See Keith Fogg, Variance Doctrine Trumps IRS Failure to Obtain Administrative Approval of Penalty (Procedurally Taxing Blog 5/6/19).  I do, however, offer some musings.

The issue relates to the requirement that the IRS meet a production burden under § 7491(c) with respect to the written manager approval under § 6751(b).  The issue is sometimes referred to as the Graev issue because of the cases that first prominently raised the issue is a very public way in the first opinion in Graev v. Commissioner, 147 T.C. 460 (2016).  Although the issue was rejected in that opinion, it was later reversed in Graev . Commissioner, 149 T.C. 485 (2017) (reviewed opinion), based on Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017). There has been a lot of litigation about the Graev issue, usually in the Tax Court.  Sometimes, where the IRS can show the proper written approval but had not, consistent with prior Tax Court precedent, introduced the evidence at trial, the Tax Court will permit the IRS to open the record to introduce the approval, and that ends that.  Sometimes the Tax Court will not open the record and, because the IRS had the production burden it did not meet, that ends that as well.

The setting here for the issue is a refund claim.  We all know the general rule that the taxpayer must state the grounds for entitlement to a refund in the refund claim and failure to do so precludes the taxpayer from asserting the grounds in an ensuing refund suit.  Ginsburg did not include the Graev issue in his claim for refund.  The timing of the claim for refund with respect to the Graev issue timeline is not clear from the district court opinion, but I infer that the claim for refund was made and denied before the Chai decision which started the taxpayer wins on the Graev issue.  It might be helpful to look at the time line:

11/30/16	Graev v. Commissioner, 147 T.C. 460 (2016) (holding that the relevant § 6751(b) date is the assessment date not the assertion of the penalties in the notice of deficiency or some predicate act)
1/20/17	IRS denies Ginsburg claim for refund which did not raise the Graev issue.
3/20/17	Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017) (holding that the Tax Court was wrong in Graev and that the written approval must exist prior to the notice of deficiency or even some predicate action)
12/20/17	Graev . Commissioner, 149 T.C. 485 (2017) (Supplemental Opinion, reviewed, adopting Chai).

The fact is, however, that the issue had already surfaced, albeit without success, by the time the claim for refund was denied (whenever the claim was filed, it could have been amended up until it was denied and I doubt that that type of amendment would have been foreclosed as a new argument if there were a statute of limitations issue).  Equally important, however, the issue was being vigorously asserted by good lawyers (Frank Agostino and his team of good lawyers, here, handled Graev and Chai, who asserted the issue early, often and everywhere they could).  So, it is not clear why the issue was not explored or included in the claim for refund, given the amount of tax dollars at stake in Ginsburg. 

And it is certainly not clear that the failure to assert the claim timely is grounds for relief.  In Blau v. Commissioner, 924 F.3d 1261, 1272 (D.C. Cir. 2019), the Court rejected a similar claim (albeit in a deficiency proceeding where the taxpayer did not time raise the argument):

RERI asks us to excuse its failure to raise this argument before the Tax Court on the ground that prior to Chai it did not clearly have a claim the IRS violated § 6751(b)(1). Fiddlesticks. The fact is that when RERI was before the Tax Court, it “was free to raise the same, straightforward statutory interpretation argument the taxpayer in Chai made” there. Mellow Partners v. Comm’r, 890 F.3d 1070, 1082 (D.C. Cir. 2018); accord Kaufman v. Comm’r, 784 F.3d 56, 71 (1st Cir. 2015). We therefore see no reason to excuse RERI’s failure to preserve its claim. 

Notwithstanding this, I am discomfited by the Ginsburg holding because the burden of production requirement should mean something even at the summary judgment stage.  Let's say that the Ginsburg had been able to avoid summary judgment on the issue of reliance on counsel.  That might be a heavy lift because the tax shelter involved was so obviously not valid ("too good to be true"), but still assume for a moment that the Ginsburg could have trotted out some tax professional unrelated to the promoters to whom he gave all the facts and a not facially false nontax motivation and did not pay a fraud insurance fee premium so that reliance on counsel could really be in play to get past summary judgment.  Under that assumption, at the trial, the IRS would have to meet a production burden with respect to the penalty even though the taxpayer had not raised it in the claim for refund, a burden that the IRS apparently could not meet.  In order to have § 7491(c) have meaning, I would think that the IRS would, on the motion for summary judgment, have to meet the production burden since it is a predicate to a valid imposition of a penalty.  This is the genre of argument that Ginsburg makes on the pending appeal in the case.  Ginsburg's appellate brief is here; as of this writing, the Government has not filed its Appellee brief.  The CourtListener docket entries for the appeal are here.

Notwithstanding my discomfit, an arguably analogous situation was presented in Finnegan v. Commissioner, 926 F.3d 1261, 1269-1273 (11th Cir. 2019), a deficiency proceeding.  The background for the issue on appeal in Finnegan is the Tax Court's prior holding in Allen v. Commissioner, 128 T.C. 37 (2007) that fraud on the return, even if the preparer's fraud and not the taxpayer's, was sufficient to invoke the unlimited statute of limitations in § 6501(c)(1).  The Allen holding was controversial among practitioners and criticized by many good attorneys.  After Allen, the Tax Court dealt with that issue only sporadically, but continued to treat it as controlling precedent.  The first (and still the only) precedent adverse to Allen then came in BASR Partnership v. United States, 113 Fed. Cl. 181 (2013), aff'd 795 F.3d 1338 (2015), with both the trial and appellate decisions receiving considerable buzz in the tax community.  So, in this sense, the continuing viability of Allen was in the public discussion.  Nevertheless, the taxpayer's lawyer conceded that the taxpayer was not contesting Allen.  That was probably because the lawyer thought he was going to prevail on the issue of whether the preparer committed fraud on the taxpayer's return.  That concession may have come before the Court of Claims opinion in BASR.  But both the trial and appellate opinions in BASR were rendered well before the Tax Court decided, without the taxpayer requesting to have the Tax Court reconsider Allen. Finnegan.  Finnegan v. Commissioner, T.C. Memo 2016-118.  In its opinion, the Tax Court said (Slip Op. 17-18):

   We begin with an analysis of the limitations period for assessment of income tax. The Commissioner generally must assess any income tax within the three-year period after a taxpayer files his or her return. Sec. 6501(a). In the case of a false or fraudulent return with the intent to evade tax, however, tax determined to be due may be assessed at any time. Sec. 6501(c)(1). In Allen v. Commissioner, 128 T.C. at 42, we held that section 6501(c)(1) applies even if it is the preparer of the return, and not the taxpayer, who falsely or fraudulently prepared the return with the intent to evade tax. But see BASR P'ship v. United States, 113 Fed. Cl. 181 (2013), aff'd, 795 F.3d 1338 Fed. Cir. (2015). n6   n6 We see no reason to revisit Allen v. Commissioner, 128 T.C. 37 (2007), on account of BASR P'ship v. United States, 113 Fed. Cl. 181 (2013), aff'd, 795 F.3d 1338 (Fed. Cir. 2015). In the Court of Appeals for the Federal Circuit's opinion, a persuasive dissent was filed, as well as a concurring opinion that relied on sec. 6229, a provision inapplicable in the instant case. Accordingly, even in cases appealable in the Federal Circuit, it is unclear whether, in the absence of the application of sec. 6229, which interpretation of sec. 6501(c)(1) would prevail. Moreover, there is no jurisdiction for appeal of any decision of the Tax Court to the Court of Appeals for the Federal Circuit. Sec. 7482(a)(1). Additionally, the parties have not cited BASR P'ship and do not contend we should revisit Allen. Thus, Allen is controlling precedent in the instant case, and we do not revisit the analysis and conclusion in that Opinion.

Bottom-line, Finnegan's lawyer properly treated Allen as binding precedent but did not request reconsideration of Allen in light of BASR.  On appeal, with new lawyers, Finnegan vigorously asserted that the Eleventh Circuit Court of Appeals, not bound by Allen as was the Tax Court (at least unless the Tax Court reconsidered Allen), should apply the holding in BASR.  The Eleventh Circuit rejected the argument on the basis that Finnegan (through his lawyer) had waived the argument in the Tax Court.  (The Eleventh Circuit brushed off the taxpayer's argument that any waiver of the argument was irrelevant because the Tax Court in Finnegan had actually considered whether Allen should be reconsidered in light of BASR; that brush-off was a bit facile, in my opinion, but nonetheless represents the view of that panel of the Eleventh Circuit.)

Finnegan is thus somewhat analogous to the circumstance in Ginsburg.  In Ginsburg, the taxpayer did not expressly assert that he was not raising the Graev issue in the claim for refund but the taxpayer also did not raise it and present it for the IRS to consider in acting on the claim for refund.  Just as arguments not raised at the trial level may constitute waiver on appeal, so arguments not raised in the claim for refund may be precluded under settled law that the taxpayer is limited in the refund suit to the grounds stated in the claim for refund.  And, if that analogy is correct, it is important to note that the Finnegan was in the Eleventh Circuit, where the Ginsburg appeal is proceeding.

Of course, one question would be how exactly someone would assert the issue in a claim for refund.  Is it proper to make an assertion that the written approval requirement was not met if the taxpayer has no knowledge where it was met?  Of course, the taxpayer could have filed a FOIA request and flushed out the underlying evidence or lack of evidence, so as to assert it in the claim or an amended claim.  (Note also that a taxpayer should be able to pursue the written approval issue in an appeals office conference on the denial under § 7803(e)(7), added by Taxpayer First Act of 2019, § 1001(a),  P.L. 116-25, 133 Stat 981 (July 1, 2019), which parallels FOIA in giving the taxpayer access to the IRS case file for the disputed issue.)  But, even without proof that the written approval did not exist, a taxpayer could state in a claim that the taxpayer has not been provided proof of the written approval and is therefore asserting the issue protectively in the event the IRS cannot meet the production burden Congress imposed under § 7491(c).  As Keith says in the Procedurally Taxing Blog, "This case reminds those individuals to make sure that their claim for refund includes a Graev argument."

A final issue which comes to mind is the Court's conclusions about the "too good to be true" aspect of this case.  Although this was decided on motion for summary judgment, the implication is clear (Slip Op. 14-15) that the deal was too good to be true (objectively that is a fact) and that Ginsburg knew it was too good to be true (I think that is objectively true as well on Ginsburg's experience and facts in the case).  So, if the deal was too good to be true, then Ginsburg certainly knew that it was not true (at least, at a minimum, he willfully blinded himself to the truth).  Since that is a restatement of fraud (voluntary, intentional violation of a known legal duty, including willful blindness as to the known legal duty), did he commit tax fraud/evasion?  If so, at a minimum, he could be subject to the civil fraud penalty in § 6663 and the unlimited statute of limitations in § 6501(c)(1).  If that is right, then the issue is whether the IRS could now assert the civil fraud penalty against Ginsburg and those others similarly (including where courts have similarly found or could find the taxpayer knew the deal was too good to be true)?  More on that later.