Burden of Persuasion As to Proper Delegated Authority for Statutorily Required IRS Action (Here Notice of Deficiency) (3/17/21; 3/19/21)

In Harriss v. Commissioner, T.C. Memo. 2021-31, TN here and GS here, the Tax Court addressed IRS employee authority and the burden on the taxpayer  to prove that the IRS employee taking the critical action, suggesting that the presumption of regularity applies to the authority to issue notices of deficiency.  Professor Bryan Camp has a good blog on this case and the presumption.   Bryan Camp, Lesson From The Tax Court: The Presumption Of Regularity For NODs (Tax Prof Blog 3/15/21), here.  (Professor Camp and I engage on some of the issues in the comments to his blog.)

I was particularly concerned about imposing upon the taxpayer the burden of proof on the taxpayer.  The Court called the burden the burden of proof without distinguishing between burden of persuasion and burden of production, but it is clear that the court is referring to the burden of persuasion.  The Court then thrashes around and ultimately concludes, in effect, that, while the IRS did not show that its own employee issuing the NOD had the properly delegated authority, the taxpayer did not show that she did not and therefore, as with burdens of persuasion in a state where the fact is not proved, the taxpayer loses.  (See more below as to whether the Tax Court was in equipoise as authority or could find that the employee had the delegated authority.)

It just doesn’t sound right to me that the IRS should not be required to prove its employee’s authority to take statutorily required action.

At p. 10 n. 6, the Tax Court distinguished Muncy v. Commissioner, 637 F. App'x 276 (8th Cir. 2016) which reversed a case where the Tax Court record did not indicate the IRS employee’s authority to issue an NOD and remanded for the Tax Court “to determine whether Miller had authority to issue the NOD that is the subject of this  case, and for further proceedings consistent with that determination.”  The implication, not expressly stated, was that the IRS should lose if the record does not show the authority.  Yet, in Harris, the Court seemed to hold that the taxpayer loses if the record does not show that the employee lacked the authority, distinguishing Muncy on the Golsen dodge.

As a matter of what I think is sound procedural practice in allocating burdens in litigation, it seems to me that the burden should be on the IRS.  The IRS is uniquely situated to show its employees’ authorities to undertake action.  The IRS has that evidence; the taxpayer does not have that evidence without substantial effort and perhaps obligatory discovery against the IRS.  (Practice Note: by way of discovery, I suggest request for admission and related interrogatory to force the IRS to show its hand; alternatively, I suggest that the taxpayer requested a stipulation that the IRS has no evidence to show proper authority.)

Here are some key components of the Court’s exegesis:

1. The general overview of delegations (pp. 8-9):

Section 6212(a) provides: “If the Secretary determines that there is a deficiency in respect of any tax imposed by subtitles A or B or chapter 41, 42, 43, or 44 he is authorized to send notice of such deficiency to the taxpayer by certified [*8] mail or registered mail.” Section 7701(a)(11)(B) defines “Secretary” to mean “the Secretary of the Treasury or his delegate.” In this context “delegate” means “any officer, employee, or agency of the Treasury Department duly authorized by the Secretary of the Treasury directly, or indirectly by one or more redelegations of authority, to perform the function mentioned or described in the context”. Sec. 7701(a)(12)(A)(i).

By regulations the Secretary has extended the authority to determine deficiencies and to issue notices of deficiency to the Commissioner of Internal Revenue and to district directors, directors of service centers, and regional directors of appeals. See secs. 301.6212-1(a), 301.7701-9, Proced. & Admin. Regs. These regulations authorize the Commissioner to redelegate the performance of such functions to other officers or employees under his supervision and control; the Commissioner may also authorize further delegation of such authority by his delegates. See sec. 301.7701-9(c), Proced. & Admin. Regs. As permitted by these regulations, the authority to sign and issue notices of deficiency has been redelegated under Delegation Order 4-8, Internal Revenue Manual (IRM) pt. 1.2.43.9(1), (2), and (3) (Sept. 4, 2012). The list of positions authorized under Delegation Order 4-8 includes “Department Managers, Campus [*9] Compliance Services (Small Business/Self-Employed)” and “Director, Return, Integrity and Compliance Services (Wage & Investment).”Id.

The Court cites IRM 1.2.43.9(1), (2), and (3) (Sept. 4, 2012) which provides redelegations or recognizes redelegations made elsewhere.

2. The Court feints (p. 10) with imposing the burden on the taxpayer because the taxpayer filed the motion for summary judgment.  I think that begs the question of who has or should have the burden of persuasion and thus should bear the burden of failure of proof in the summary judgment record.  Perhaps recognizing the inadequacy of that notion, the Court says (p. 10):  "More fundamentally, however, petitioner bears the burden of proof because of the presumption of official regularity."

3. The Court then discusses its misguided burden of proof notion in that respect.   That's where the Court is forced to duck Muncy under its Golsen rule.  (See above.)

4. The Court then says (p. 11):

Petitioner has offered no evidence that Ms. Davis lacked delegated authority to issue the notices of deficiency. Rather, he relies primarily on the fact that the notices show Ms. Davis' position as “Program Manager, Return Integrity and Compliance Services, Integrity and Verification Operation” — a position not expressly listed among those to which Delegation Order 4-8 delegates authority to sign and issue notices of deficiency.

Of course, the Court also had to duck the redelegations  note in IRM 1.2.43.9 which provides redelegations or recognizes redelegations made elsewhere and does not include the IRS employee (by position) issuing the notice here.  The IRS’s ducking of that problem (p. 13) was that the IRS employee’s function may have changed description in reorganizations and thus falls under a general IRM provision “IRM pt. 1.11.4.6(1)(3) (note) (Oct. 10, 2008), which states: ‘If, during a reorganization, position titles change, without substantive change in responsibility, a delegation order is still effective for the new position title until the delegation order is revised.’”  The Court jumps on that unsupported thread that “The circumstances and context of the 2014 IRS reorganization and this IRM directive lend support to the presumption of official regularity sufficient to sustain the inference that Ms. Davis possessed delegated authority to sign and issue the notices of deficiency.”  Put plainly, the IRS did not show the authority but at best argues that the authority might have existed and then the Court says the fact that the authority might have existed, along with the presumption supports the inference that it did exist at least for purposes of denying this taxpayer justice to which he may have been entitled.  The authority then cited for that leap is (pp. 13-14):

Cf. R.H. Stearns Co. of Bos., Mass., 291 U.S. at 58-64 (holding that a waiver of the limitations period was effective although not signed by the Commissioner until after the limitations period had expired, stating that “the presumption of official regularity was sufficient to sustain the inference that the Commissioner on his side had done whatever was appropriate to give support to his own act” and that “[c]hoice between two doubts should be made in such a way as to favor the presumption of official regularity”); United States v. Ahrens, 530 F.2d 781, 786 n.8 (8th Cir. 1976) (noting that, in accordance with customary principles governing evidentiary presumptions, application of the presumption of official regularity “rests upon probabilities, not certainties”). Petitioner has failed to meet his burden of proof to overcome the presumption of official regularity and show that Ms. Davis lacked such delegated authority.

Note first that the authority is cf authority.  Cf authority is explained at LII, here, as:  "Cf. Authority supports by analogy. "Cf." literally means "compare." The citation will only appear relevant to the reader if it is explained. Consequently, in most cases a parenthetical explanations of the analogy should be included."  So, it is not the strongest authority around but, presumably as  presented, the only authority.

Let’s just address the first of the cf. authority cited, R.H. Stearns Co. of Bos., Mass. v. United States, 291 U.S. 54 (1934), GS here, and quoted in a parenthetical to the cite.  The quotes are (to repeat):

(holding that a waiver of the limitations period was effective although not signed by the Commissioner until after the limitations period had expired, stating that “the presumption of official regularity was sufficient to sustain the inference that the Commissioner on his side had done whatever was appropriate to give support to his own act” and that “[c]hoice between two doubts should be made in such a way as to favor the presumption of official regularity”)

In Stearns, the issue was whether the taxpayer had waived the statute of limitations.  The Court said (pp. 56-57):

In February, 1921, the taxpayer signed and filed a waiver of any statutory period of limitation as to the assessment and collection of the tax for the calendar year 57*57 1917. It did this in order to be assured that the audit by the Commissioner would be deliberate and thorough. In the absence of such a consent the period of limitation would have expired in April, 1923. The extension was approved in writing by the Commissioner in February, 1923. The waiver on its face had no limit in respect of time, but under a regulation adopted in April, 1923, it spent its force on April 1, 1924, unless continued or renewed.

In February, 1923, the taxpayer signed a second waiver applicable to the fiscal years 1917 and 1918, and extending the period for collection until March 1, 1925. This waiver was not signed by the Commissioner within the term of its duration, though it was signed, years afterwards, on April 7, 1930.

So, of course, now it is clear that the Consent to Extend the Statute of limitations (Form 872) is not effective unless signed by the IRS within an open statute of  limitations period.  That did not occur in Strearns.  So, how did the Court get around that? (I am not sure exactly the language of the statute at that time.)  The Court said (p. 59):

There was here more than a waiver, an abandonment of a privilege to insist upon the fulfilment of a condition (Stange v. United States, 282 U.S. 270, 275, 276; Florsheim Bros. Co. v. United States, 280 U.S. 453, 456); there was a positive request, which till revoked upon reasonable notice had the effect of an estoppel.

The taxpayer was estopped?  The Court treated (pp. 62-63) the estoppel as the same as a waiver of the statute of limitations:

The label counts for little. Enough for present purposes that the disability has its roots in a principle more nearly ultimate than either waiver or estoppel, the principle that no one shall be permitted to found any claim upon his own inequity or take advantage of his own wrong. 

So, the taxpayer was wrong to insist that the IRS act within its statutory authority to make the assessment within the period required by statute and show its authority for having done so?  Then focusing on the merits (pp. 62-64), the Court reasons:

The burden was on the petitioner, seeking a refund of its tax, to prove its allegation that the overassessment for 1918 had been illegally credited upon the tax for 1917. At the outset it might have stood upon the fact that the credit had been made after the normal term of limitation, casting the burden on the Government of going forward with evidence in proof of an extension. When its own waiver had been proved, however, the case took on another aspect. At that stage the presumption of official regularity was sufficient to sustain the inference that the Commissioner on his side had done whatever was appropriate to give support to his own act and thus validate the credit. Acts done by a public officer "which presuppose the existence of other acts to make them legally operative, are presumptive proofs of the latter." Bank of the United States v. Dandridge, 12 Wheat. 64, 70; United States v. Royer, 268 U.S. 394, 398; Knox County v. Ninth National Bank, 147 U.S. 91, 97; Mandeville v. Reynolds, 68 N.Y. 528, 534; Demings v. Supreme Lodge Knights of Pythias, 131 N.Y. 522, 527; 30 N.E. 572; Wigmore, Evidence, Vol. 5, § 2524. No doubt the presumption of regularity is subject to be rebutted. It stands until dislodged.

Now, the petitioner has failed to show that the Commissioner did not approve in writing. On the contrary the evidence is persuasive that he did. A certificate of an additional assessment for the fiscal year ending July 31, 1917, was signed, as we have seen, on June 26, 1923; and on the assessment list attached thereto, opposite the entry of the assessment against the petitioner, the following appears: "7/31/17 Fisc. 1753361. O.L. 4/17/23; waiver." The Commissioner did not sign his name below the memorandum, but the memorandum was attached to a certificate which the Commissioner did sign, and his name subscribed to the certificate authenticates also the documents attached to it, if we assume in favor of the petitioner that signing is essential. The Court of Claims was of the opinion that the word "waiver" on this list had relation to the second of the two consents on file with the Commissioner. The context and the circumstances lend support to that conclusion. The fiscal year for the petitioner ended July 31. Probably through inadvertence, the first waiver refers to a tax for the calendar year ending December 31. This might have seemed to exclude the first six months of the year ending July 31, 1917, i. e., the period from July 31, 1916 to January 1 following. We do not say that the courts would uphold so literal a construction. Almost certainly the objection, if made, would be put aside as hypercritical. See 39 Stat., c. 463, p. 770, § 13. Even so, the memorandum may well be allocated to the waiver that fits it precisely in preference to the one that fits it imperfectly. We turn, then, to the documents in order to relate them to one another. If we look only to its letter, the memorandum does not refer to a waiver for the calendar year ending December 31, 1917. It refers, on the contrary, to a waiver for the fiscal year ending July 31, 1917 (7/31/17). The only waiver corresponding to this description in form as well as in substance is the one filed with the Commissioner February 19, 1923, which covers the year ending July 31, 1917, as well as the year after.

The inference, therefore, is legitimate that the second of the two waivers is the one that the Commissioner had in view when he wrote this memorandum indicative of assent. At the very least the effect of the entry is to leave the purpose of the writer doubtful. Choice between two doubts should be made in such a way as to favor the presumption of official regularity.

So, the Court then finds that the Commissioner did adequately sign the waiver (or something like it) in the required open statute of limitations and, in any event, the record was in equipoise for which the presumption carried the day.

5. Let me posit for readers a hypo in today’s world.  The Form 872, Consent to Extend the Time to Assess Tax here, requires the taxpayer and the IRS to sign the consent.  If the IRS does not sign within the required period, does anyone believe that a unilateral signature on some other document in the IRS's bowels (such as an authorization to assess or some such however labeled (or perhaps an email from the manager to the agent saying that the manager agreed to the consent) will meet the requirement? 

One of my first jury trials while with DOJ Tax in the early 1970s was a case exactly in that posture.  All the IRS could produce was a Form 872 signed by the taxpayer but not by the IRS.  Actions were taken in the IRS that could only have been taken if there were an effective Consent to Extend the Statute of Limitations which, of course, required a consent signed by the taxpayer and the IRS.  The Government and the taxpayer agreed that the Government bore the burden to show a timely assessment which required an effective consent.  The taxpayer offered to settle for a 95% refund.  I counter-offered a 75% refund.  The taxpayer refused.  We went to trial.  I produced evidence from which the jury could reasonably infer that there had been a dual-signed original and the IRS’s retention of a copy signed only by the taxpayer was just a mistake (the original with both signatures was returned to the taxpayer who, of course, denied receiving it).  The jury held for the Government.  The taxpayer who could have gotten 75% on settlement walked away with nothing.  But the key point for this blog was that the essential thing I had to prove was that there had existed at one time an actual Form 872 signed by the taxpayer and the IRS within the otherwise open limitations period.  I did that by circumstantial evidence and not by presumptions  of regularity.

Perhaps in retrospect, I should have filed a summary judgment or requested directed verdict based on the presumption of regularity but, even in retrospect, I can’t believe that Judge O’Kelley (Wikipedia here) would have granted either.

6.  Finally, the Stearns court talks of waiver but as my former partner and I have argued, consents to extend the statute of limitations are contracts signed with mutual consideration. See John A. Townsend & Lawrence R. Jones, Jr., Interpreting Consents to Extend the Statute of Limitations, 78 Tax Notes 459 (1998), here.  Contracts generally require mutual consideration.  In Stearns, as the Court noted (p. 56-57) that the taxpayer signed "in order to be assured that the audit by the Commissioner would be deliberate and thorough.”  In other words, taxpayer did not sign out of affection or detached and disinterested generosity for the IRS but thought it would get something from the extension.  (Practice Note:  taxpayers should never agree to an extension of the statute of limitations unless there is something in it for them, and  their advisers should so counsel them.)

Added 3/19/21 9:30am:  I pick up on the delegation issue and the presumption of regularity.  Readers of this blog presumably are familiar with the Tax Court's continued thrashing around on the issue of the proper timing of written supervisor approval in § 6751(b).  Why wouldn't that presumption apply there to relieve the IRS of proving proper and timely written approval?  I suppose that § 7491(c)'s imposition of the burden of production might override any presumption that might otherwise apply.  But, even if § 7491(c) did not apply and only § 6751(b) applied, I doubt that a court would apply a presumption to relieve the IRS of proving proper authority to impose the penalty.  That is just a gut reaction though.  But, if it were a good gut reaction, then I also have a gut reaction that it is improper to impose a burden of persuasion on the taxpayer for proper delegated authority for an NOD.  Perhaps one might impose a burden of production to put the issue in play but the burden of persuasion is different, which is uniquely within the IRS's ability to meet.