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Friday, June 3, 2005

Crane & Johnson Elaborate on Check-the-Box Decision

Our post Tuesday on Littriello v. United States, No. 3:04CV-143-H (W.D. KY, May 18, 2005), which upheld the Check-the-Box Regs, sparked a spirited discussion on the TaxProf Discussion Group.  Two of the participants have graciously agreed to share their observations here with the broader tax community:

CranechCharlotte Crane, Professor of Law, Northwestern:

The case is a payroll tax case; surely the district court is wrong (or at least misleading) that if the check-the-box regs are invalid, "the company alone is liable for the taxes at issue"? Or did Congress repeal the responsible party/100% penalty approach to enforcing payroll taxes and I missed it? Apparently not, because the plaintiff argues that the government should have pursued this approach, not the disregarded entity approach.

How did the case ever get started in the way the court now reports it without any alternative theories of liability remaining in the case? We do not have enough facts to know if the plaintiff in this case would be the most obvious "responsible person," or anything about how hard it would have been to collect the tax that way. But it still seems strange that the government doesn't seem to be pursuing other courses of action as well. Why aren't these other possible theories of liability being pursued in this same litigation--is it because of some peculiar aspects of the levy procedure used or the provisions of the TBR?

My real question is, I guess, aren't the steps the government usually takes in a case like this sufficiently well established that some one in the government had to have wanted to tee up this case as a challenge to the check-the-box regs? Was anyone in Washington watching?

JohnsonSteve Johnson, E.L. Wiegand Professor of Law, William S. Boyd School of Law, University of Nevada, Las Vegas:

Charlotte asks whether the government had adequate alternative theories and, if it did, whether there was a failure of strategic vision on the government's part in allowing this case to proceed as a vehicle testing the validity of the Regs. We don't have enough info to be sure, but my speculations are below.

1.  Would sec. 6672 have been an adequate remedy? Sec. 6672 was discussed in the penultimate paragraph of the case, but there's more that could be said. Sec. 6672 applies only to the trust fund portion of the taxes, not to the employer's portion. It is not clear from the first paragraph of the case whether both trust fund and non-trust fund portions were at issue and, if so, in what, amounts. It also is unclear whether there would have been a statute of limitations problem as to sec. 6672 for any of the taxes. It also is possible that L was not a responsible person (although it's pretty likely that the sole member of an LLC was a responsible person) or that willfullness wasn't present. I suspect that sec. 6672 would have been available as to at least part of the liabilities, but it's possible that sec. 6672 might not have reached all of the liabilities.

2.  Would the gov't have had other remedies outside the check-the-box Regs? Transferee and fiduciary liability wouldn't have been available under sec. 6901(a). Depending on unknown facts (including whether L received distributions from the LLC), the gov't might have proceeded under the old Trust Fund Doctrine or under a fraudulent conveyance statute. However, those alternatives are cumbersome.

3.  Let's assume that there were adequate alternative remedies. If so, was there a failure of strategic vision in Washington? (Such things, I think, are not unheard of.)

Unburdened by knowledge, I nonetheless reveal my suspicion that Charlotte's right. There are plenty of cases in which IRS, IRS Counsel, and DOJ display tunnel vision. This was a CDP case and probably involved less than enormous sums. It may well have been treated as routine, with no one seriously considering that this case could lead to the overthrow of the check-the-box Regs.

But perhaps I'm wrong. Maybe the large stakes were seen in the small case and the gov't decided to go forward on this basis anyway. If one believes that the Regs are invalid, one thinks "of course the gov't will do all it can to avoid a properly framed judicial challenge to those Regs." I'm not sure, though, that that's the generally held belief inside IRS and Treasury. Those agencies may well believe that the Regs are legal (not just expedient), so do not fear exposing them to challenge.

It will be interesting to see the next steps in the controversy. L may choose (because of cost or other reasons) not to appeal. I hope there is appeal, and i certainly would recommend appeal were I the attorney for L. Regardless of what one thinks of the ultimate issue, there should be widespread agreement that the District Court's opinion is weak. As several have noted, the opinion seems to rest more on pragmatism than on law. In its Chevron analysis, the District Court virtually ignored that the statute had been interpreted by the Supreme Court. The powerful arguments in Gregg's were not addressed by the District Court (perhaps had not been presented to that court). Appeal would lie with the Sixth Circuit, which is not a notoriously pro-IRS court.

If L appeals, what would the gov't do? An appeal -- coupled with the enormous publicity that this case will recieve -- would get the attention of high levels in Washington. It's hard to walk away from a victory, of course. Still, an intriguing possibility would be settling or even conceding the case. At the price of probably small dollars, that would remove the threat to the Regs. (Indeed, the only judicial authority extant would be the District Court's decision upholding the Regs.) Then, in future collection cases, the gov't could just rely on whatever alternative theories were available. The gov't was frying other fish when it promulgated these Regs. Not asserting them in collection cases would be a small price to pay.

The downside of the above strategy would be "blood in the water". If the gov't did not defend its L victory on appeal, the world would know that even IRS and DOJ doubt the legal validity of the Regs. Opponents of the Regs would be emboldened.

I await with great interest the next steps in this controversy.

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