Tax Court Judge Gustafson Enters Order Permitting IRS to Concede Without Merits Decision (11/6/21)

In an order in Puglisi v. Commissioner (T.C. Dkt Nos. 4796-20, 4799-20, 4826-20, 13487-20, 13488-20, 13489-20 Order served 10/29/21), here, the Tax Court (Judge Gustafson) permitted the IRS to concede the deficiency adjustments related to the taxpayers' microcaptive insurance and thus move to decision in the case.  Readers know that the IRS believes – strongly believes—that many forms of microcaptive insurance are abusive.  Many microcaptive deficiency cases are pending, and, of course, the Supreme Court recently held in CIC Svcs., LLC v. IRS, 593 U.S. ___, 141 S.Ct. 1582 (2021) that the material advisor reporting requirement imposed by IRS Notice for abusive microcaptives could be subject to pre-enforcement review.  As to CIC, see Supreme Court Holds in CIC Services that IRS Micro-Captive Notice May Be Contested Pre-Enforcement (5/17/21; 5/18/21), here.

In the Puglisi Order, the IRS conceded all of the adjustments related to the microcaptive insurance. Typically, if the IRS concedes, the taxpayer may be more than willing to accept the concession and move on, perhaps trying to recover attorney fees and costs under §7430.  In this case, the taxpayers apparently are unable to recover under § 7430 "' because of the technical limitations of I.R.C. section 7430.'”  (Slip Op. 6.) Here, the taxpayers do not want to move on but want to litigate the merits of the issues the IRS conceded. What is going on that requires an order of 17 pages?

The taxpayer speculates, as recounted in the Order, that (Slip Op 8-9):

Respondent has now concluded that he wants to abandon the tax deficiencies asserted in his notices of deficiency, apparently because he recognizes that Petitioners' cases are not the litigation vehicles that he wants to use to present his theories to this Court. But while Respondent is willing to abandon the asserted deficiencies, he is not willing to concede the inaccuracy of his determinations underlying the adjustments * * *. [The motions for entry of decision make a] strategic attempt to “concede” the overall amounts at issue, in order to avoid an adverse ruling on the specific determinations in the notices of deficiency * * *.

Judge Gustafson addressed the IRS’s litigating strategy later (Slip Op. 16-17):

            If it were true that the Commissioner's concessions in these cases are merely tactical and simply reflect that “Petitioners' cases are not the litigation vehicles that he wants to use to present his theories to this Court” (Doc. 21 at 4), then our exercising discretion to accept the concessions in these cases is, of course, without prejudice to our exercising discretion in the management of future “Series A” cases. However, if petitioners are among “hundreds of other companies * * * [that] purchased insurance from Series A of Oxford Insurance Company LLC” (Doc. 21 at 2; Doc. 24 at 4-5 & n.4), then we could not criticize petitioners, the “other companies”, or Series A if they had coordinated their efforts and pursued the instant petitions because they were more promising than others as “litigation vehicles” for the taxpayers' position; nor can we criticize the Commissioner for conceding cases in which his position is weaker in order to devote his resources to litigating cases that are more promising for his position.

The taxpayers claimed (Slip Op. 9, see particularly n. 4) that the issue being conceded could be a recurring issue for these particular taxpayers for later years because the IRS had not abandoned its underlying substantive position that the microcaptives were abusive and that the underlying reporting positions were wrong.  In response, the IRS offered to enter a closing agreement for the later-filed open years (2019 and 2020) that stipulates that the IRS will not challenge the deductibility of the payments. (Slip Op. 9-10.)

So, again, what are these taxpayers fighting about?  It is an issue involving many other taxpayers. Accepting these taxpayers’ claims, the IRS did not think these particular cases offered an appropriate litigating vehicle and would forego any tax liability from these taxpayer to avoid having to litigate. I presume that, if indeed, these cases were bad litigating vehicles for the IRS, they were good litigating vehicles for many of the other taxpayers subject to the IRS’s position on microcaptives.  So, I assume (and this is an assumption rather than a fact I know), the other taxpayers who may have worse cases than these taxpayers wanted these cases to be litigated to a determination on the merits that, they hoped, would sustain the deductions.  (Perhaps those taxpayers are helping fund the litigation of the best vehicle from their perspectives.)

In resolving the issue of whether the IRS can concede the deficiency without conceding the merits of the taxpayers’ position, Judge Gustafson has a marvelous discussion (Slip Op. pp. 10-of some basic Tax Court law.  I highly recommend the discussion to students and practitioners.  I will not analyze that discussion in detail because it is not that long and hangs together from my perspective. However, I will note certain points, some of which are obvious to many students and practitioners.

 Judge Gustafson starts with a discussion in “1.A. A decision in a deficiency case” (Slip Op. 10-11.), discussing the nature of a deficiency, the nature of a deficiency case, and the nature of a Tax Court decision.  All of that is basic law but still worth a read.

Judge Gustafson then turns to his analysis which proceeds first to establish jurisdiction and then says (Slip Op. 12 & 13):

We next note that the question is not whether petitioners are entitled to decisions in their favor. They are.

 * * * *

The Commissioner is not attempting in this case to avoid the entry of decisions against himself. On the contrary, he has moved for entry of decisions. Once entered, those decisions will become final under section 7481, and res judicata will attach. See Commissioner v. Sunnen, 333 U.S. 591, 598 (1948) (“if a claim of liability or non-liability relating to a particular tax year is litigated, a judgment on the merits is res judicata as to any subsequent proceeding involving the same claim and the same tax year”). Whether a Tax Court litigant is entitled to a  decision (it is entitled) is a question different from whether the litigant is entitled to an opinion (it may or may not be entitled, as we now discuss).

 Judge Gustafson then proceeds to show (Slip Op. 13-15) that, in these cases, the taxpayers are not entitled to an opinion on issues that have been conceded (conceded as noted for reasons other than the merits of the concessions).  Further, reasons Judge Gustafson (Slip Op 15-17), while the Tax Court may have discretion to reject the concession and force a decision on the merits, it is not required to do so.  In addressing this issue, Judge Gustafson noted (p. 16 n. 6):

  n6 If we have such discretion, then presumably our exercise thereof would, on appeal, be reviewed for abuse of that discretion. However, it is not obvious how such review would proceed. It is not the opinion but the “decision” of the Tax Court that may be appealed to the Court of Appeals. See secs. 7481-7483; Jennings v. Stephens, 574 U.S. 271, 277 (2015) (citing Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842 (1984)) (“federal appellate courts, do[] not review lower courts’ opinions, but their judgments”). If an appeal addresses an abuse of discretion that may have affected the amount of the district court judgment or of a Tax Court decision (such as an abuse of discretion in an order granting or denying a motion to amend a pleading or granting or denying a motion for a continuance), then one can imagine a reversal and remand to correct the error, possibly yielding a different judgment or decision; but if the appellant does not seek a decision different from what the Tax Court entered but rather seeks an opinion that would yield the very same decision, then it is difficult to conceive of the remand order that the appellate court would issue.

Judge Gustafson's analysis is a good law and worth careful review by students and practitioners.  Just saying that, though, I wonder why the result was published as an Order rather than a T.C. Memo. or even T.C. opinion.