More on Delegations of Authority, Notices of Deficiency and Consents to Extend (3/18/21)

Yesterday, I posted on a case, Harriss v. Commissioner, T.C. Memo. 2021-31, that led me into a discussion of delegated authority to make deficiency determinations from the Secretary of the Treasury down to employees (by function) in the IRS and related issues, including consents to extend the statute of limitations.  Burden of Persuasion As to Proper Delegated Authority for Statutorily Required IRS Action (Here Notice of Deficiency) (Federal Tax Procedure Blog 3/17/21), here.  A colleague engaged me on a couple of issues from the blog.  I thought I would present the issues here and my cut on the issues.  I have reformulated the issues to better present them here:

Issue 1:  The courts treat the Forms 872 (Consent to Extend the Time to Assess Tax) and its various iterations, such as Form 872-A (Special Consent to Extend the Time to Assess Tax) used for the statute extension authorized by than § 6501(c)(4)(A), here, as unilateral waivers rather than as contracts.

JAT Response to Issue 1:  I again direct readers to the article:  John A. Townsend & Lawrence R. Jones, Jr., Interpreting Consents to Extend the Statute of Limitations, 78 Tax Notes 459 (1998), here.  But the shorter answer is in the statute itself, § 6501(c)(4)(A) (bold-face supplied by JAT):

Where, before the expiration of the time prescribed for the assessment of any tax imposed by this title, except the estate tax provided in chapter 11, both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.

 The emphasized language requires:

1.        Both the IRS and the taxpayer must sign a consent to reflect the agreement.

2.        Both must sign be before the expiration of the period of limitation (even the aborted writing was after the period of limitation in Stearns, so that the facts of would give the victory to the IRS under the statute as written now)..

3.        The consent is an agreement (see “so agreed” in the statute) which certainly connotes something bilateral rather than just a unilateral waiver.  In the law of waiver, waiver is a unilateral not requiring any agreement by the other party.  (Of course, if the other party asserts waiver as a defense, the party may be said to be agreeing with the waiver but agreement is not thought of as an agreement in the way § 6501(c)(4)(A) written.)  In other words, a waiver is truly unilateral and  in the law of waiver there is no requirement that the other party sign or otherwise agree to a waiver for the waiver  to be effective.  All that is required is that the party waiving do the act necessary to constitute a waiver.

Issue 2: How can a Form 872 be a contract when the benefits flow only one-way – i.e., the IRS gets the benefit but the taxpayer gets nothing of benefit? 

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.

Ninth Circuit Substantially Affirms Adjustments for Bullshit Tax Shelter (1/18/14)

In Candyce Martin 1999 Irrevocable Trust v. United States, 739 F.3d 1204 (9th Cir. 2014), here, the Ninth Circuit largely affirmed the IRS's partnership adjustments denying the benefits of a bullshit tax shelter.  For an earlier blog on another aspect of this case at the trial level, see The Role of the Taxpayer's Independent Lawyer in Tax Shelter Promotions with Promoter Opinions (10/8/11), here.

In the appeal case just decided, the Court (Judge Thomas) opens with

In this appeal, we examine some of the tax consequences arising from the sale of the Chronicle Publishing Company and, specifically, whether the Internal Revenue Service's proposed adjustment of certain partnership tax items was time barred. Although the ultimate issue is relatively straightforward, both the back story and the legal framework are somewhat complex, requiring us to delve deep in the heart of taxes.

I won't try to deleve deep in the heart of taxes, but will just state that the case, involving multi-tiered partnerships, ultimately turned on an interpretation of a restrictive consent to extend the statute of limitations.  The consent involved was the Form 872-I executed by the Martin Family Trusts, the ultimate partner.  The Form 872-I is titled:  Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership. An unrestricted version of that form is here.  The restriction in the Form in the case was:

The amount of any deficiency assessment is to be limited to that resulting from any adjustment directly or indirectly (through one or more intermediate entities) attributable to partnership flow-through items of First Ship LLC, and/or to any adjustment attributable to costs incurred with respect to any transaction engaged in by First Ship LLC, any penalties and additions to tax attributable to any such adjustments, any affected items, and any consequential changes to other items based on any such adjustments.

Essentially, the Court held that, because of the wording of the restrictions, the consent applied to the bulk of the adjustments (some $318 million) in issue but did not apply to others (some $4 million).  So, it appears to be a substantial win for the Government.

See also Reminder on Sweep of Form 872-I, Partner Level Consent to Extend Statute of Limitations (Federal Tax Procedure Blog 11/23/12), here.

Reminder on Sweep of Form 872-I, Partner Level Consent to Extend Statute of Limitations (11/23/12)

The Tax Court recently issued a decision reminding taxpayers and practitioners how sweeping the scope of the Form 872-I is.  WHO515 Investment Partners v. Commissioner, T.C. Memo. 2012-316, here.  The Form 872-I, here, is titled titled Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership.  The Form is executed by the partner in the partnership and thus, by extending the Section 6501, here, limitations periods with special reference to partnership adjustments, in effect, pre-empts the special minimum partnership limitation provisions in the TEFRA rules.  The Form 872-I thus specifically says:

Without otherwise limiting the applicability of this agreement, this agreement also extends the period of limitations for assessing any tax (including additions to tax and interest) attributable to any partnership items (see section 6231 (a)(3)), affected items (see section 6231 (a)(5)), computational adjustments (see section 6231(a)(6)), and partnership items converted to nonpartnership items (see section 6231 (b)). 

I have modified my Federal Tax Procedure book as follows (with the context indicating the new materials in bold):

Consents to Extend the Statute of Limitations Must Be Properly Executed During Open Period (9/12/12)

My partner, Larry Jones, called this IRS memorandum to my attention.  ILM 201235009, here, published also at 2012 TNT 171-27.   The bottom line is that, while the statute of limitations of limitations was still open a Form 872-I, Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership, here, had been signed by the Revenue Agent who did not have authority to sign a consent.  A person authorized to sign the consent subsequently signed the consent over two years later, after the statute of limitations had expired.  Held, the consent was invalid because an authorized signature for the IRS had not occurred during the period of the statute of limitations.

The memo summarizes the requirements for a valid consent as follows:

To be valid, an agreement by the taxpayer to extend the statute of limitations on assessment must be (1) in writing; (2) entered into before the expiration of the original collection period or a previously agreed upon extension; and (3) executed by the taxpayer and an authorized delegate of the Commissioner. I.R.C. § 6502(a); Treas. Reg. § 301.6502-1(a)(2)(i). In an Action on Decision regarding Rohde v. United States, 415 F.2d 695 (9th Cir. 1969), the Service acceded that, under applicable Treasury Regulations, the Commissioner (or his delegate) must counter-sign a waiver form prior to the expiration of the period of limitations for the waiver to be effective. AOD-1973-442, 1973 WL 35098 (IRS AOD). Although Rohde only addressed the validity of a waiver of the six-year period of limitations on collection after assessment, the AOD states that the signature requirement also applies to extensions of time for the assessment of income tax (i.e. Form 872). Id.

This requirement of valid signatures by the taxpayer and the IRS within the open period of limitations applies to the types of consents tax controversy practitioners usually deal with - such as most prominently the regular Form 872, here.  We recommend that taxpayers check their consents to make sure that they are signed by a person with proper authority.