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Friday, April 29, 2011

Fahey: Is the Tax Court Exempt From the APA?

Diane L. Fahey (New York Law School) has published Is the United States Tax Court Exempt From Administrative Law Jurisprudence When Acting as a Reviewing Court?, 58 Clev. St. L. Rev. 603 (2010). Here is part of the abstract:

The Tax Court is an Article I court created by Congress to provide taxpayers with a forum to protest some tax deficiencies prior to their payment. The Tax Court is not comfortable with its new appellate role and has tried to create a judicial review process by analogizing collection due process appeals to the Tax Court’s deficiency procedures. However, when the Tax Court hears deficiency cases it acts as a trial court and hears the matter de novo. When the Tax Court hears collection due process appeals it acts as an appellate court reviewing agency action to determine its propriety, a different role and process from deficiency cases.

Commentators have urged the Tax Court to fill in the gaps in its statutory authority by turning to traditional administrative law jurisprudence, including the Administrative Procedure Act. In the absence of legislation specifying how a court is to review agency action, these bodies of law step into the breach and provide structure for the court’s review process. As a result, participants in the process are assured of consistency and predictability regarding the review process, thus rendering the process fairer. However, the Tax Court insists that it has never been subject to administrative law jurisprudence or the APA, nor could it be. The Tax Court thwarts participants’ legitimate expectations when it creates its own rules of procedure and evidence when acting as a reviewing court. An exploration of both the Tax Court’s and the Administrative Procedures Act’s history reveals that, in fact, the Tax Court is not exempt from traditional administrative law jurisprudence.

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The Tax Court's jurisprudence stems from the fact that the very first opinions assumed that CDP = deficieny jurisdiction and that many of the taxpayers were tax protestors. One case even says that an Appeals hearing in CDP is just like a Appeals hearing in a deficiency case. Another limits witness testimony because that is not normal in IRS deficiency Appeals hearings.

Thus, getting off on what may have turned out to be the wrong foot has led to an number of quirks and problems for the court. The most prudent action would be for the court to review its earliest caselaw in light of a decade of experience with CDP cases. Much of that early case law should be overruled and with the benefit of hindsight corrected to make sense of the CDP process and the court's (and the IRS's) role in the CDP process.

When it gets to the point where a taxpayer sends his lawyer to the CDP hearing and then the taxpayer cannot testify on his/her own behalf because he/she was not present at the hearing something is wrong and what is broken needs to be fixed. Most of the first cases were "dogs with fleas" as the IRS was scared as all get out in the wake of RRA 98 and likely approved any CDP offer that was remotely reasonable. When Congress got off the IRS'd back, the IRS got more and more aggressive/assertive in CDP cases circa mid 2000-10. The 10 deadly sins were gone and IRS employees no longer feared their job was in danger for not approving a TP's CDP case. By this point, the jurisprudence no longer fit the taxpayers who came to court: they were no longer protestors and deadbeats. And the court had to much case law to reconsider.

It is time for the court to reconsider what it did in the beginning. That way the jurisprudence that follows may make better sense of the CDP process. Requiring the IRS to make a full record -- transcripts of hearings, allowing witnesses, requiring more formal proceedings by the IRS -- will help the court, and the IRS. It is hard to decide a case when there isn't much of a record to review.

Posted by: tax guy | May 1, 2011 5:24:52 AM