Tax Court Rejects Constitutional Challenges to Appeals Office CDP Participation (1/30/25)

In Tooke v. Commissioner, 164 T.C. ___, No. 2 (1/29/25), here * and GS here** [to come], the Court, in a CDP case, rejected taxpayer arguments that (i) Appeals Office participants violated the Appointments Clause of the Constitution and (ii) Appeals Office violated the Separation of Powers requirement of the Constitution. I just provided a nonnuanced summary of the arguments rejected. This blog entry will serve primarily as notice to practitioners and students of the holding, an important one; I copy and paste the Tax Court syllabus which, I think, fairly summarizes the full opinion:

           P filed federal income tax returns for taxable years 2012 through 2017 but did not pay the tax. The Internal Revenue Service (IRS) assessed the tax and separately issued P a Notice of Federal Tax Lien Filing and a Final Notice of Intent to Levy. P timely requested a collection due process (CDP) hearing with the IRS Independent Office of Appeals (Appeals). During the CDP hearing, P raised constitutional arguments that Appeals, and the employees who work therein, serve in violation of the constitutional separation of powers, particularly the Appointments Clause; these arguments were rejected. The Appeals Officer prepared a draft Notice of Determination, which was subsequently reviewed and approved by the Appeals Team Manager.

          Pursuant to I.R.C. § 6330(d)(1), P timely filed a Petition with the Tax Court. During this proceeding, P filed two Motions concerning the constitutional separation of powers and the CDP hearing before Appeals: (1) an Appointments Clause Motion, asserting that the Appeals Officers who conducted the CDP hearing, the Appeals Team Manager who reviewed and approved the Notice of Determination, and the Chief of Appeals (Chief), who the statutory scheme tasks with the “supervision and direction” of Appeals, see I.R.C. § 7803(e)(2)(A), but did not  [*2] participate in the CDP hearing, each serve in violation of the Appointments Clause, see U.S. Const. art. II, § 2, cl. 2; and (2) a Separation of Powers Motion (Removal Power Motion), asserting that Appeals, codified by the Taxpayer First Act, Pub. L. No. 116-25, § 1001(a), 133 Stat. 981, 983 (2019) (codified at I.R.C. § 7803(e)(1)), is a de facto independent agency whose head, the Chief, a position also codified by the Taxpayer First Act § 1001(a), 133 Stat. at 983 (codified at I.R.C. § 7803(e)(2)(a)), is subject to an unlawful removal restriction.

          Held: We reject P’s “root-to-branch” theory of causation. P has not made the necessary showing that the Chief’s tenure affected his hearing and prejudiced him in some way. See, e.g., United States v. Smith, 962 F.3d 755 (4th Cir. 2020); United States v. Castillo, 772 F. App’x 11 (3d Cir. 2019).

Schwarzbaum Redux – 11th Circuit Issues New Opinion to Correct Statement of FBAR Willfulness Civil Penalty Standard (1/23/25)

 In United States v. Schwarzbaum, ___ F.4th ___ (11th Cir. 1/23/25), CA11 here and GS here [to come], the 11^th Circuit revisited the long-running Schwarzbaum FBAR civil penalty litigation. I discussed the immediately preceding visitation/opinion in 11th Circuit on Third Consideration Seals FBAR Willful Penalty Except for Relatively Small Amount Held Excessive Fine under 8th Amendment (Federal Tax Procedure Blog 9/4/24) here. In this new opinion, issued yesterday, the Court starts:

Appellee’s [United States’] petition for panel rehearing is GRANTED. We VACATE our prior opinion in this case and substitute the following in its place:

The Slip Opinion for the prior opinion was 53 pages; the Slip Opinion for this new opinion is 55 pages. For purposes of Federal Tax Crimes and Federal Tax Procedure Blogs, the material changes * only correct misstatements in the original opinion that the FBAR willfulness civil penalty standard is the same as the FBAR willfulness criminal penalty standard (the Cheek/Ratzlaf standard). (See new footnotes on p. 40 n. 7 and p. 46 n. 10.) As all readers of this blog surely know, the civil penalty standard includes recklessness but the criminal penalty standard requires the stricter specific intent requirement in Cheek and Ratzlaf. I don’t think that those corrections affect the bottom-line holdings, so I just copy and paste the succinct summary I provided in the original blog entry.

(1)  (a) held the FBAR civil willful penalties are “fines” within the meaning of the Eighth Amendment; (b) held the minimum $100,000 penalties applying to Schwarzbaum’s accounts with small amounts (those $16,000 or less) are disproportional and excessive; (c) held the penalties on the accounts with significantly larger amounts are not disproportional and thus not excessive; and (d) remanded to the district court to determine the effect of the $300,000 reduction required by the (1)(b) holding.

(2)   (a) rejected Schwarzbaum’s attack that, in a prior appeal, the court held the assessment was “arbitrary and capricious” and thus rendered the assessments invalid from inception; instead holding that the prior holding was that the assessment was “not in accordance with law,” a different standard under APA § 706(2)(A), requiring a remand to the IRS to fix the calculation mistake rather than wipe out the assessments; (b) rejected a related statute of limitations argument that the remand required a new out of time assessment, holding the issue had been decided against Schwarzbaum in an earlier appeal; (c) sustained a lower assessment rather than the correct assessment which would have been higher; and (d) held the district court properly remanded the case to the IRS and retained jurisdiction of the case to consider after the IRS recalculated the penalties.

Supreme Court Stays District Court Injunction Against Filing Requirements of Corporate Transparency Act (1/24/25; 1/26/25)

Corporate Transparency Act Case Overview

The first Corporate Transparency Act ("CTA") case to reach the Supreme Court involved a preliminary skirmish over a district court’s universal injunction. This injunction prevented the Treasury and the IRS from enforcing the filing requirements of the Corporate Transparency Act (“CTA”). For more details, see Texas District Court Enjoins the Corporate Transparency Act Nationwide (Federal Tax Procedure Blog (12/5/24; 1/6/25), here, as well as the articles linked below.

Legal Proceedings

The district court action consisting of holding the CTA unconstitutional and enjoining the CTA spawned the following:

1.   Appeal on the Merits: The appeal on the merits to the Fifth Circuit is currently pending expedited consideration.

2.   Requests to Lift the Injunction: Requests to lift the injunction filed (i) in the Fifth Circuit, which ultimately denied the request, and then (ii) in the Supreme Court where it was docketed as No. 24A653, here.

Supreme Court Order

On January 23, 2025, the Supreme Court entered an order on the docket (No. 24A653), here:

Application (24A653) for stay presented to Justice Alito and by him referred to the Court is granted. The December 5, 2024 amended order of the United States District Court for the Eastern District of Texas, case No. 4:24–cv–478, is stayed pending the disposition of the appeal in the United States Court of Appeals for the Fifth Circuit and disposition of a petition for a writ of certiorari, if such a writ is timely sought. Should certiorari be denied, this stay shall terminate automatically. In the event certiorari is granted, the stay shall terminate upon the sending down of the judgment of this Court. Justice Gorsuch concurring in the grant of stay. (Detached Opinion). Justice Jackson dissenting in the grant of stay. (Detached Opinion)

Media Coverage

Use of AI, Including Large Language Models (LLMs), in Tax Court Brief Writing (And Really Other Legal Analysis) (1/22/25; 1/23/25)

 AI (artificial intelligence) is ubiquitous now; or at least the discussion of AI is ubiquitous. See generally Artificial intelligence. (2025, January 22), Wikipedia, here.  I asked ChatGPT about use of AI by lawyers and received the response linked here. I write today on some instances recently called to my attention of misuse of AI in briefing in Tax Court cases, but I understand that similar misuse has been identified in briefing in other courts.

Use of AI in legal briefing has received considerable attention, from general discussion of the strengths and weaknesses to specific instances where lawyers have been called out when they used AI that failed. E.g., Is AI a Good Tool for Legal Brief Writing? (Spellbook 10/22/24), here (general discussion, but noting in part for today’s blog that “AI tools can sometimes "hallucinate" information and generate fake citations that human lawyers must carefully check.”); What Are the Best AI Tools for Writing Legal Briefs? (Bloomberg Law 6/10/24), here (nothing that AI in large language models (“LLM”) can produce “false information” via what are called “hallucinations;” and that, as a result, “21 federal trial judges have issued standing orders regarding AI, and attorneys are often required to disclose all uses of AI.”) Suffice it to say that my understanding is that AI generated content must be carefully checked and appropriate revisions made before submitting that content in a brief submitted to the court. (This is confirmed by my limited use of AI as discussed at the end of this blog.)

The Tax Court has no formal rule addressing the use of AI. However, a reader recently advised me of two Tax Court Orders by Judge Buch addressing the issue. Thomas v. Commissioner (T.C. Dkt 10795-22 at #36 Order dtd 10/23/24), here; and Westlake Housing, L.P. v. Commissioner (T.C. Dkt. No. 478-24L at # 32 Order dated 1/13/25), here. (I have posted both orders to my Google Docs to permit a permalink that readers can directly access without having to go through the DAWSON docket sheet which does not offer a permalink for direct access to the orders.)

Thomas is a short order (5 pages); Westlake is even shorter (2 pages). I discuss Thomas in some detail. The Court (Judge Buch) sets the issue up in its opening paragraph:

          This case was tried on September 17, 2024, in Atlanta, Georgia. In preparing for trial, the Court noticed that some of the authorities cited in petitioner’s Pretrial Memorandum did not exist, evidencing possible AI hallucinations. To inquire into these authorities, the Court held a hearing to provide petitioner’s counsel an opportunity to clarify the Pretrial Memorandum. During that hearing, petitioner’s counsel explained that someone else had prepared the Pretrial Memorandum, and she did not review the work that was provided to her. Rule 33 instructs that, in signing a pleading, counsel is certifying that he or she has read the pleading, that it is well grounded in fact; and that it is warranted by existing law. Because the Pretrial Memorandum violates this standard, we will deem it to be stricken. We will also take this occasion to address the use of AI as a tool to assist petitioners and practitioners. As discussed below, however, striking the Pretrial Memorandum will not affect the ultimate outcome in this case.

After then summarizing nicely the role of the Pretrial Memorandum (pp. 1 & 2), the Court noted:

Supreme Court Accepts Cert in Zuch as to Mootness in CDP where IRS Collected by Offset the Tax Subject to Levy (1/13/25)

On Friday, January 10, 2024, the Supreme Court granted the Solicitor General’s petition for writ of certiorari in Commissioner v. Zuch (S.Ct. No. 24-416), here. The order granting the petition is here; the Supreme Court’s docket sheet is here; the Third Circuit opinion is Zuch v. Commissioner, 97 F.4th 81 (3rd Cir. 2024), here. My blog on the 3^rd Circuit panel opinion in Zuch is 3rd Circuit Holds Tax Court Has Jurisdiction to Determine Overpayments in CDP Proceedings (3/29/24; 3/30/24), here. (Although I cite my prior blog, I recommend those new to the issue, spend their time on the briefing on the petition for writ of certiorari and the 3rd Circuit panel opinion.)

The Question Presented from the petition, filed by Solicitor General Prelogar but naming attorneys from the Solicitor General’s office and the Tax Division, is:

Whether a proceeding under 26 U.S.C. 6330 for a pre-deprivation determination about a levy proposed by the Internal Revenue Service to collect unpaid taxes becomes moot when there is no longer a live dispute over the proposed levy that gave rise to the proceeding.

The Question Presented from the Brief in Opposition. here, filed by a formidable Skadden Arps team led by Shay Dvoretzky, here, and joined by the ubiquitous Frank Agostino, here,

          The Internal Revenue Code authorizes the IRS to levy—that is, seize—a taxpayer’s property to collect unpaid taxes, but only after providing the taxpayer with notice and an opportunity for an administrative hearing before the IRS Independent Office of Appeals. (Appeals Office). See I.R.C. § 6330. At the hearing, the taxpayer may raise “any relevant issue relating to the unpaid tax or the proposed levy.” I.R.C. § 6330(c)(2)(A). The taxpayer may also challenge her underlying tax liability if she did not previously have an opportunity to do so. I.R.C. § 6330(c)(2)(B). After the Appeals Office renders its decision, the taxpayer may “petition the Tax Court for review of such determination,” “and the Tax Court shall have jurisdiction with respect to such matter.” I.R.C. § 6330(d)(1).

          The question presented is whether the Tax Court retains jurisdiction under I.R.C. § 6330 to review and issue declaratory relief as to the Appeals Office’s determination of the taxpayer’s underlying liability when, despite the parties’ live dispute about that liability, the IRS stops pursuing the levy.

JAT Comments:

Updates on Developments in IRS Penalty Administration and Voluntary Disclosure (1/11/25; 1/15/25)

 I post here links to earlier posts on my Federal Tax Procedure Blog about the IRS’s Voluntary Disclosure Practice (“VDP”). ABA Tax Section Comments on VDP Disclosure Form 14457, Voluntary Disclosure Practice Preclearance and Application (1/5/25), here; and IRS Voluntary Disclosure Practice (VDP) Requires Taxpayer Admit Criminal Willfulness (11/29/24; 1/5/25), here.

Also, I have just recently learned that, in the National Taxpayer Advocate’s Annual Report to Congress 2024, here, the NTA discusses two of 10 Most Serious Problems Encountered by Taxpayers that relate to tax administration of the type addressed in this blog (Federal Tax Crimes) and the companion blog (Federal Tax Procedure). Items 9 and 10 are, respectively:

9. Civil Penalty Administration (pdf 16 pages), here; and

10. Criminal Voluntary Disclosure (pdf 17 pages), here.

The most relevant to the initial item in this blog is the Criminal Voluntary Disclosure which I generally refer to as the IRS Voluntary Disclosure Practice (“VDP”). From the discussion of both items, I gather that the practitioner community has major concerns with IRS administration, that the NTA has listened to those concerns (calling the community “external stakeholders”), and that, in large part, the NTA has adopted those concerns.

Added 1/15/25 8:15pm: On the IRS Voluntary Disclosure Practice, see Dan Price, Is the IRS Trying to Terminate the Voluntary Disclosure Practice? 185 Tax Notes Federal 1573 (11/25/24), here, echoing some of the themes in the NTA's Item 10 above. Dan's article is offered with permission of Tax Analysts.

Although it probably does not matter what I believe, I will state my belief anyway:

On Remand from Supreme Court on Chevron's Demise, D.C. Circuit Holds that Agency Interpretation is Best Interpretation (1/11/25; 1/12/25)

Yesterday, the D.C. Circuit decided Lissack v. Commissioner, ___ F.4^th ___ (D.C. Cir. 1/10/25), D.C. Cir. here and GS here [to come]. The Supreme Court had remanded Lissack to re-consider its previous opinion in Lissack v. Commissioner, 68 F.4th 1312 (D.C. Cir. 2023), here in light of the demise of deference in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), here.

I first describe the current Lissack decision in a straightforward manner. After that, I will discuss Lissack as an example of the type of case where, during the Chevron regime, courts , determined that the agency interpretation was the best interpretation and cited Chevron because best interpretations are necessarily reasonable; in effect, where that phenomenon occurs the courts have not deferred to the agency interpretation even though they may cite and discuss Chevron. But let’s first turn to the current Lissack decision.

Bottom-line, the Lissack panel determines that the agency interpretation is the best interpretation and therefore denies Lissack relief for that reason. Added 1/12/25 1:00pm: The Lissack panel opinion cites (Slip Op. 23-24) Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) because it found the IRS interpretation had "persuasive value," saying that it "makes good sense." Finding the IRS interpretation persuasive is not deference.

The context, highly summarized, is: Lissack filed a whistleblower claim regarding a condominium group’s treatment of membership deposits. The IRS decided to audit as a result of Lissack’s claim; otherwise, the IRS would not have audited at all. During the audit, the IRS made two key decisions: (i) that the taxpayer correctly reported the membership deposits, thus collecting no proceeds based on the whistleblower's claims; and (ii) that the taxpayer impermissibly claimed a deduction for an intercompany debt, thus collecting proceeds. The interpretive regulation required that, for a whistleblower award, the adjustment and related collected proceeds, the base for the award, must arise from the whistleblower’s claims. In other words, adjustments and collected proceeds unrelated to the whistleblower’s claims do not give rise to an award. The D.C. Circuit panel thus held that the IRS regulation treating separate adjustments as separate administrative actions was the best reading of the statute. (See Slip Op. 17-26.)

The whistleblower argued for a “but for” test that asked whether the IRS discovered the adjustments because of the whistleblower’s claims which was the case here because the IRS started the audit that it would not have otherwise started because of the whistleblower’s claims. The D.C. Circuit panel rejected that argument.

The D.C. Circuit panel also rejected other whistleblower arguments about discovery and trial de novo but I discuss here only the Chevron issue, the basis for the remand from the Supreme Court.

 Agency Interpretation is Best Reading of Statute

ABA Tax Section Comments on VDP Disclosure Form 14457, Voluntary Disclosure Practice Preclearance and Application (1/5/25)

I previously expressed concerns about the IRS VDP Practice reflected in Form 14457, Voluntary Disclosure Practice Preclearance and Application (November 2024) I was concerned with the requirement that the taxpayer admit criminal willfulness in order to complete parts of the application. IRS Voluntary Disclosure Practice (VDP) Requires Taxpayer Admit Criminal Willfulness (11/29/24; 1/5/25), here.

The purpose of this post is to alert practitioners of the ABA Tax Section’s Comments on the Form 14457. See 12/20/24 Abreu Cover Letter to Werfel, Commissioner, with Comments on VDP and Streamlined Filing, TN here.

I do not offer further comments principally for lack of time and energy (I came down with a significant serious flue-type affliction shortly after Christmas, and have not regained full energy but should later next week (in which I case I might offer comments by expanding this blog entry)). In addition, I am not yet sure that my comments could add anything material to the ABA Tax Section comments. See the list of persons contributing to the comments.

I also alert readers that I have significantly revised (or re-revised) the VDP discussion in my Federal Tax Procedure Book. The revisions are here. See also Federal Tax Procedure Book 2024 Editions Updates (7/26/24; 1/5/25), here.