SETTLING TAX COURT CASES:
THE ROLES
OF
IRS APPEALS DIVISION,
IRS DISTRICT COUNSEL,
AND THE
UNITED STATES TAX COURT
by
Gary D. Borek
Attorney at law
Buffalo, New York
I. BACKGROUND INFORMATION AND TERMINOLOGY
A. The Significance of, and the Limitations on, Assessments of Taxes
1. An understanding of the assessment and collection process is essential to any discussion about administrative or judicial tax proceedings.
2. The Internal Revenue Service must assess a tax before it can proceed to collect the tax. See Internal Revenue Code ("IRC") §§6303(a), 6231, 6331, and 6401(a).
3. Assessment of a tax is a physical act. A tax is assessed when the appropriate IRS official signs a form 23-C containing the necessary information about the taxpayer and the tax. See IRC §6203 and Treasury Regulation ("Reg.") §301.6203-1. The date of assessment is often referred to as the "23C Date" by the IRS.
4. With a few exceptions, the IRS cannot assess an income, estate, or gift tax deficiency until after sending a statutory notice of deficiency. See IRC §§6212 and 6213(a). The exceptions include:
a. Tax Shown on Return - The tax shown on a return (and any tax paid) may be assessed by the IRS without prior notice to the taxpayer. See IRC §§6201(a) and 6213(b)(4). Such assessments are known as summary assessments. They are also referred to by the misnomer of "self-assessment."
b. Mathematical Errors - Additional income taxes arising from mathematical errors can also be summarily assessed. Assessments based on mathematical errors, however, cannot be collected until after the IRS has given the taxpayer notice of the assessment. The taxpayer then has sixty days to request an abatement of the assessment. The IRS must abate the assessment if a timely request is made by the taxpayer. After an abatement, the additional taxes attributable to the mathematical error will be subject to the statutory notice of deficiency procedures. See IRC §§6213(b)(1) and (2). Mathematical errors include mistakes in arithmetic, incorrect use of an IRS table, inconsistent entries on a return, omissions of information required to substantiate an item on the return, and a claim that exceeds a limitation imposed by statute or regulation. See IRC 6213(g).
c. Termination and Jeopardy Assessments - Termination assessments (IRC §6851) and jeopardy assessments (IRC §6861) can be made by the IRS without prior notice to the taxpayer. They can be made only if the IRS determines that collection of a proposed additional tax will be prejudiced or jeopardized by further delay. Termination assessments are used to assess proposed tax deficiencies before the close of the taxpayer's current taxable year or before the taxpayer's tax return is due for a preceding taxable year. Jeopardy assessments can be used for any taxable year but only if the taxable year has ended. A taxpayer may seek expedited administrative and judicial review of termination and jeopardy assessments. See IRC §7429(a).
5. The statutory notice of deficiency, (a/k/a a "90-day letter") gives the taxpayer ninety days to file a petition in the United States Tax Court challenging the proposed deficiency. See IRC §6213(a).
6. The IRS cannot assess a proposed deficiency until after the ninety day period. If the taxpayer files a petition with the Tax Court, then the IRS cannot assess the proposed deficiency until after the Tax Court's decision becomes final. See IRC §6213(a).
7. If the taxpayer does not timely file a petition in the Tax Court, then the deficiency will be assessed and the IRS will proceed with collection. See IRC 6213(c). The taxpayer, however, can still pursue an administrative claim for refund after paying the assessed tax deficiency. If the refund claim is denied, or if the IRS fails to act on the claim within 6 months, then an action for refund can be commenced in a federal district court or the United States Court of Claims. See IRC §7422.
B. An Overview of IRS Administrative Procedure
1. Before proposing a deficiency, the IRS usually conducts an audit. If the IRS auditor determines that an additional tax is due, a 30-day letter will be issued. The 30-day letter informs the taxpayer of the amount and basis of the proposed deficiency. The taxpayer has 30 days from the date of the letter to request a conference with an appeals officer of the IRS Appeals Division. See Reg. §601.106(b).
2. If an appeals conference is not requested and the taxpayer does not agree to the assessment of the proposed deficiency, then the 90-day letter will be issued by either the service center or district director.
3. If an appeals conference is requested and the taxpayer fails to agree to a proposed deficiency determined by the appeals officer, then the Appeals Division will issue the 90-day letter.
4. The above procedures are not mandatory, except for the 90-day letter which is prescribed by statute. The IRS can simply determine a deficiency and send a 90-day letter without first sending a 30-day letter or offering a conference with appeals. See, e.g., Ballard v. Commissioner, T.C. Memo 1987-471.
5. The IRS may rescind a notice of deficiency at the request of the taxpayer. See IRC §6212(a). One reason for such a recision can be the taxpayer's request for a conference with Appeals to settle a case despite the failure to make such a request before the issuance of the statutory notice of deficiency. For the procedures for requesting a recession of a statutory notice of deficiency see Rev. Proc. 88-17, 1988-1 C.B. 400, attached as Appendix A) and IRS form 8626.
C. Requesting an Administrative Appeals Conference - Practical Considerations
1. The Appeals Division may add to, as well as subtract from, the proposed deficiency. Generally, appeals officers are more highly trained, and have much more experience, than the IRS auditors. They may spot and raise issues which the auditor missed, resulting in a statutory notice of deficiency well in excess of that proposed in the 30-day letter. Thus, requesting an administrative Appeals conference exposes the taxpayer to possible additions to the deficiency proposed at the examination level.
2. Generally, the taxpayer has the burden of proof on any items set forth in the statutory notice of deficiency. See Tax Court Rule 142. This includes any additions added to the deficiency proposed by the Appeals Division. The IRS, however, will have the burden of proof for any new matters raised after the filing of a petition in the Tax Court. See Tax Court Rule 142(a). The burden of proof is very difficult for the IRS to carry because the taxpayer is in control of the evidence. Thus, refusing a conference with Appeals may serve as a practical barrier to the addition of items to those in the 30-day letter.
3. The issuance of a notice deficiency and a petition to the Tax Court also cut off the use of an administrative summons by the IRS for the tax year or years involved. Universal Manufacturing Co. v. Commissioner, 93 T.C. 589 (1989) and Westreco, Inc. v. Commissioner, TCM 1990-501. This will have the practical effect of reducing the information readily available to the IRS, making the use of the government's limited resources and time a factor to be considered in settlement negotiations.
4. Statements made to an appeals officer during an administrative settlement conference may not be protected from use at trial under Rule 408 of the Federal Rules of Evidence.
5. In contrast to the above disadvantages, an appeals conference may be the only method of settling some issues. The authority of the examiner is much more restricted than that of the appeals officers. Novel or complex issues may not receive adequate consideration at the examination level. Appeals officers, however, are willing to give consideration to such matters.
II. THE APPEALS DIVISION OF THE IRS
A. Organization and Jurisdiction.
1. The Appeals Division of the Internal Revenue Service operates under the Office of Chief Counsel, IRS. The Appeals Division is divided into regional and local offices, all of which are overseen by a national office. The North Atlantic Region of the Appeals Division has a local office in Buffalo (at Suite 400, 28 Church Street), and satellite offices in Rochester and Syracuse, New York.
2. The Appeals Division has authority to determine tax liabilities and associated penalties for income, estate, and gift taxes, and several other taxes, including those that are and are not subject to the statutory notice of deficiency procedures. See Reg. §1.610.106(a)(1)(ii).
3. The major function of the Appeals Division is to determine whether there is a basis for settlement of a tax dispute.
4. A tax dispute can reach the Appeals Division as either an administrative appeal (a "non-docketed case") or for settlement of a petition in the Tax Court (a "docketed case"). The jurisdiction of the Appeals Division is set forth in Reg. §601.106(a) and Rev. Proc. 87-14, 1987-1 C.B. 720, a copy of which is attached as Appendix B.
5. The taxpayer must initiate the request for an appeals conference in a non-docketed case. See Reg. §§601.106(a)(1)(iii) and 601.106(b). A docketed case will be transferred to the Appeals Division for settlement consideration by the IRS District counsel after the initial pleadings are completed.
B. Practice Pointers
1. Every practitioner contemplating an appearance before the Appeals Division should read the practice rules set forth in Reg. §601.106(f)(1) through (9), some of which are highlighted below. These rules are in addition to, but not a modification of, the practice rules contained in Circular 230 (31 CFR 10).
2. The appeals officer cannot settle a case based on nuisance value. The expenses of litigation are generally irrelevant to the IRS. Potential adverse publicity is also seldom a factor in the appeals officer's consideration of a matter.
3. The Appeals Division settles cases on an issue by issue basis rather than by compromising the total dollar figure.
4. An appeals officer can settle issues on the "hazards of litigation." This means that the appeals office can "settle a tax controversy on a basis which fairly reflects the hazards which would exist if the case were litigated." See Reg. §601.106(f)(2) (emphasis added). Note the references to "litigation." The practitioner must convince the appeals office that there are significant "hazards of litigation". Thus, the effective representation of a client before the Appeals Division in both docketed and non-docketed cases requires a mastery of:
a. The facts of the matter at issues.
b. The likelihood of proving those facts at trial, including an understanding of the evidentiary problems for both the taxpayer and the IRS.
c. The relative strengths and weakness of the legal arguments for both sides.
d. The applicable procedural rules and the realities of pursuing resolution of issues through litigation.
5. Legal issues can sometimes be resolved through the use of a request for national office technical advice. The procedural rules for such requests are set forth in Reg. §601.106(f)(9).
III. DISTRICT COUNSEL
A. District Counsel is the local office of the Chief Counsel's Office. In essence, the District Counsel and his or her staff of attorneys are the in-house counsel to the IRS. Technically, however, the district counsel attorneys are not employees of the IRS.
B. The local District Counsel Office is at Suite 500, 28 Church Street, Buffalo, N.Y. It services the entire IRS Buffalo District.
C. The district counsel attorneys have been trained as litigators. They are adept at evaluating the outcome at trial based on the evidence expected to be submitted and the legal arguments to be made.
D. Cases are settled at the district counsel level for the following reasons:
1. The parties have fully prepared their case for trial and are well aware of the "hazards of litigation", thereby making rational settlement decisions possible.
2. One or both parties are not ready for trial and the quickly approaching trial calendar brings about settlement to avoid the hazard of litigating with inadequate preparation.
3. One of the parties has decided that the time and effort of litigation of the particular case is not worth the expected results, even though the only settlement possibility is something less than the expected results.
E. As at the Appeals Division, cases are seldom settled on nuisance value, or for raw dollar amounts, or to avoid potential adverse publicity. Instead, cases are settled on the expected trial outcome of factual issues. The government's position on legal issues is usually determine by the national office rather than the trial attorney.
IV. THE UNITED STATES TAX COURT
A. The Tax Court does not have a structured settlement procedure, such as mandatory pre-trial settlement conferences with a judge.
B. The Tax Court, however, could not possibly hold trials for most of the docketed cases. Thus, the Court relies heavily on the ability of the parties to settle most cases.
C. The Tax Court Rules contain many procedures which can facilitate settlement or help remove barriers to settlement. These include resolution of legal issues by motions for full or partial summary judgment (Rule 121) and resolution of factual issues by submissions to arbitration (Rule 124).
D. Most helpful towards settlement of a tax court case is the mandatory process of stipulation. See Rule 91. The petitioner should not expect to settle a case with district counsel without engaging in the stipulation process, which begins with participation in informal discovery. See Branerton corp. v. Commissioner, 61 T.C. 691 (1974). The petitioner should not expect much aid from the Court if the stipulation process has been ignored. See, International Air Conditioning Corp. v. Commissioner, 67 T.C. 89 (1976).
APPENDIX A
REV. PROC. 88-17
SECTION 1. PURPOSE
This revenue procedure provides taxpayers with instructions for entering into an agreement under section 6212(d) of the Internal Revenue Code to rescind a notice- of deficiency. Section 6212(d) of the Code provides that the Secretary may, with the consent of the taxpayer, rescind any notice of deficiency mailed to the taxpayer. Section 6212(d) was added to the Code by the Tax Reform Act of 1986, section 1562(a), 1986-3 (Vol. I) C.B. 678.
SEC. 2. BACKGROUND
.01 Section 6212(a) of the Code provides that if the Secretary determines that there is a deficiency in respect of any tax imposed by subtitle A of title 26 (relating to income taxes), subtitle B (relating to estate, gift, and generation-skipping taxes), or chapters 41, 42, 43, 44, or 45 (relating to certain excise taxes), the Secretary is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail
.02 Section 6212(c)(1) of the Code provides, in general, that if the Secretary has mailed to the taxpayer a notice of deficiency as provided in section 6212(a), and the taxpayer files a petition with the Tax Court within the time prescribed in section 6213(a), the Secretary shall have no right to determine any additional deficiency, except in the case of fraud, and except as provided in section 6214(a) (relating to assertion of greater deficiencies before the Tax Court), in section 6213(b)(1) (relating to mathematical or clerical errors), in section 6851 (relating to termination assessments), or in section 6861(c) (relating to the making of jeopardy assessments).
.03 Section 6213(a) of the Code states that within 90 days, or 150 days if the notice is addressed to a person outside the United States, after the notice of deficiency authorized in section 6212 is mailed, the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. Except as provided in section 6851 or 6861, no assessment of a deficiency and no levy or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such 90-day or 150-day restriction period, as the case may be, nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final.
.04 Section 6212(d) of the Code provides that the Secretary may, with the consent of the taxpayer, rescind any notice of deficiency mailed to the taxpayer. Any notice so rescinded shall not be treated as a notice of deficiency for purposes of section 6212(c)(1) (relating to further deficiency letters restricted), section 6213(a) (relating to restrictions applicable to deficiencies and petition to Tax Court), and section 6512(a) (relating to limitations in case of petition to Tax Court), and the taxpayer shall have no right to file a petition with the Tax Court based on such notice.
SEC. 3. SCOPE AND OBJECTIVE
.01 This revenue procedure applies to agreements to rescind a notice of deficiency mailed to a taxpayer pursuant to section 621 2(a) of the Code. This procedure does not apply to a Notice of Final Partnership Administrative Adjustment (FPAA) or to a Notice of Final S Corporation Administrative Adjustment (FSAA).
.02 Whether a notice of deficiency will be rescinded is discretionary on the part of the Secretary. A notice of deficiency may only be rescinded with the consent of the taxpayer.
.03 If a notice of deficiency is rescinded, it is treated as if it never existed. Limitations regarding credits, refunds, and assessments relating to the rescinded notice are void and the rights and obligations of the parties that existed prior to the issuance of the notice of deficiency are reinstated. The Commissioner or his or her delegate may issue a later notice of deficiency in an amount that exceeds, is the same as, or is less than the amount in the rescinded notice of deficiency. The taxpayer may exercise all administrative and statutory appeal rights from a reissued notice of deficiency, but cannot petition the Tax Court from a rescinded notice of deficiency .
.04 A notice of deficiency may be rescinded for the following reasons:
(1) If the notice was issued as a result of an administrative error; for example, the notice was issued (i) to the wrong taxpayer, (ii) for the wrong tax period, or (iii) without considering a properly executed Form 872, Consent to Extend the Time to Assess Tax.
(2) If the taxpayer submits information establishing the actual tax due to be less than the amount shown in the notice.
(3) If a taxpayer specifically requests a conference with the Appeals Division for the purpose of entering into settlement negotiations. However, the notice may be rescinded only if the Appeals Division first decides that the case is susceptible to agreement.
.05 Notwithstanding section 3.04, the Internal Revenue Service will not rescind a notice of deficiency if:
(1) On the date of the rescission, 90 days or less would remain before the expiration date of the period of limitation on assessment (determined, for this purpose, without regard to the issuance of the notice of deficiency). A notice of deficiency may be rescinded in these circumstances, however, if before that expiration date the taxpayer and the Service execute a consent to extend the limitation period on Form 872. In no case will the Service rescind a notice if, on the date of the rescission, the period of limitation on assessment would have expired but for the issuance of the notice of deficiency;
(2) The 90-day or 150-day restriction period under section 6213(a) of the Code has expired without the taxpayer filing a petition with the Tax Court;
(3) The taxpayer has filed a petition with (or mailed a petition to) the Tax Court; or
(4) The taxpayer and the Service, prior to the issuance of the notice of deficiency, have executed a Form 872-A, Special Consent to Extend the Time to Assess Tax, covering any of the tax years in the notice of deficiency.
SEC. 4. PROCEDURE
.01 In all events taxpayers who wish to have a notice of deficiency rescinded should contact the person/ office listed on the notice and request Form 8626, Agreement to Rescind Notice of Deficiency. Taxpayers who wish an Appeals conference (see section 3.04(3) above) should contact the person/office listed on the notice in order to find out how to contact the appropriate Appeals Office.
.02 A request to rescind a notice of deficiency should be made by the taxpayer as soon as possible after receipt of the notice because a notice will not be rescinded after the 90-day or 150-day restriction period under section 6213(a) of the Code has expired.
.03 If the Service agrees with the taxpayer that the notice of deficiency should be rescinded, Form 8626 will be sent to the taxpayer requesting the taxpayer's written consent to rescind. If appropriate, Form 872 will also be sent for the taxpayer's signature. If the taxpayer agrees to the rescission of the notice of deficiency, the signed Form 8626 (and Form 872 if appropriate) must be returned to the office that sent the Form 8626 as soon as possible prior to the expiration of the 90-day or 150-day restriction period as described in section 2.03 of this revenue procedure. After the Form 8626 is returned by the taxpayer and signed on behalf of the Commissioner, a copy will be furnished to the taxpayer (and/or his or her authorized representative(s)) by mail or in person. The effective date of the rescission agreement is the date on which the Commissioner's delegate signs Form 8626.
.04 If the notice of deficiency .was issued to a husband and wife jointly, Form 8626 and, if included, Form 872, must be signed by both the husband and wife, or their authorized representative(s). If Form 8626 and/ or Form 872 is signed by a representative, and a power of attorney has not previously been filed, the power of attorney must be included with Form 8626.
.05 If the Service does not agree that the notice of deficiency should be rescinded, the taxpayer will be notified in writing and the-notice of deficiency will remain in effect.
.06 Form 8626 must cover the same tax period(s) as the notice of deficiency to which it relates and must reflect the same tax deficiency and penalties as the notice of deficiency.
SEC. 5. EFFECTIVE DATE
This revenue procedure is effective with respect to notices of deficiency issued on or after January 1, 1986.
DRAFTING INFORMATION
The principal author of this revenue procedure is John McGreevy of the Individual Tax Division. For further information regarding this revenue procedure contact Mr. McGreevy on (202) 566-4942 (not a toll-free call).
APPENDIX B
REV. PROC. 87-24
SECTION 1. PURPOSE
The purpose of this revenue procedure is to facilitate effective utilization of the administrative appeals process and achieve earlier development and disposition of Tax Court cases either by settlement or by trial.
SEC. 2. PROCEDURES
Cases docketed in the United States Tax Court will be processed under the following procedures:
.01 Docketed cases will be referred by District Counsel (hereinafter "Counsel") to the Appeals Division (hereinafter "Appeals") for consideration of settlement unless the statutory notice of deficiency was issued by Appeals. Cases in which Appeals issued the statutory notice of deficiency may be referred to Appeals unless Counsel determines that there is little likelihood that a settlement of all or a part of the case can be achieved in a reasonable period of time.
.02 Cases involving deficiencies (defined to include tax and penalties per taxable period) of more than $10,000 will be promptly returned to Counsel when no progress toward settlement of all or a part of a case is made, or when a case appears on a trial calendar, unless Counsel agrees to extend the period of Appeals' consideration of the case.
.03 Except as provided in section 2.01, cases involving deficiencies of $10,000 or less, including "S" cases, will be referred to Appeals for a period of six months or until one month before the trial calendar call in regular cases or 15 days before the trial calendar call in "S" cases, if earlier. At the end of the period described in the foregoing sentence or at such time as Appeals determines the case is not susceptible of settlement in whole or in part, the case will be returned to Counsel. Where appropriate, Counsel and Appeals may agree to extend the period of Appeals' consideration, or return the case to Appeals, if there is a likelihood of settlement.
.04 Appeals will have sole settlement authority over docketed cases referred to Appeals pursuant to these procedures until the case is returned to Counsel. Upon request, a case will be returned to Counsel to allow adequate trial preparation. Whenever a docketed case is returned to Counsel, sole authority to dispose of the case by trial or settlement will revert to Counsel, unless Counsel and Appeals agree that settlement authority over some or all issues will be retained by Appeals. Thus, in some situations Counsel will prepare a case for trial while Appeals simultaneously conducts settlement negotiations.
.05 By agreement between Counsel and Appeals, any docketed case may be transferred from Counsel to Appeals or from Appeals to Counsel, as appropriate, notwithstanding the fact that the case was previously considered by the receiving function. This authority will be utilized when such transfer will promote more efficient disposition of the case.
.06 In appropriate cases, such as those involving significant issues or large deficiencies, Counsel and Appeals may, as soon as the case is at issue, commence working together. During such a period of joint consultation Appeals will retain jurisdiction over settlement while Counsel acts in an advisory capacity, including attending settlement conferences. Joint consultation may continue until the case is settled or settlement appears unlikely.
.07 At the request of Counsel and with the agreement of Appeals, when Counsel has jurisdiction over a case Appeals may assist Counsel with settlement negotiations, with trial preparation, or at the trial of the case.
.08 The Director of the Tax Litigation Division (or the Deputy Associate Chief Counsel (International) with respect to international issues) may, after consulting with the Director of the Appeals Division and the appropriate Regional Counsel, determine that a case, or an issue or issues in a case, should not be considered by Appeals. In such a situation Appeals will forego settlement authority over such case or issues.
.09 The petitioner and/or representative will be contacted promptly by the Counsel or Appeals Office receiving the case. This notification will state that the receiving office has acquired sole authority to dispose of the case, through settlement or trial, as appropriate. Prompt notification will also be sent in the event it is determined that trial preparation will be commenced under section 2.04 or that a case, or an issue or issues in a case, should not be considered by Appeals under section 2.08.
SEC. 3. EXCLUSIONS
Section 2 shall not apply to cases in which the notice of deficiency, liability, or other determination was issued by Appeals, by the Employee Plans/Exempt Organizations function or by a District Director based on a National Office ruling or technical advice in that case involving qualification of an employee plan or tax exemption and/or foundation status of an organization (but only to the extent the case involves such issue). Section 2 shall also not apply to cases docketed under sections 6110, 7428, 7476, 7477, or 7478 of the Internal Revenue Code.
SEC. 4. EFFECTIVE DATE
This procedure is applicable to all docketed Tax Court cases pending on or after June 1, 1987.
SEC. 5. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 82-42, 1982-2 C.B. 761, is superseded. Legislation and Regulations Division, Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224, (Attention: CC:LR:T LR-74-86). Telephone 202-566-3297 (not a toll-free call).
DRAFTING INFORMATION
The principal author of these proposed regulations is Stuart G. Wessler of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing these regulations both on matters of substance and style.
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