Paul L. Caron

Monday, August 5, 2019

Lesson From The Tax Court: Appeals Is Still Part Of The IRS, Really!

I find it useful to think of tax administration as comprising two overarching functions: (1) determining tax liabilities and (2) collecting tax liabilities.  The IRS Office of Appeals (“Appeals”) supports both functions by mediating disputes between taxpayers and either the IRS exam function or collection function.  In Aldo Fonticiella v. Commissioner, T.C. Memo. 2019-74 (June 13, 2019), Judge Gerber teaches us that even though Appeals has a different (and wider) set of powers that often allow it to settle disputes without litigation, it still functions as an integral part of the IRS, no matter how many times Congress puts “Independent” in its title.

Taxpayers unhappy with Appeals look for creative ways to avoid its decisions.  In 2011, one such taxpayer argued that all Appeals work product violated the U.S. Constitution.  His theory was that Appeals Officers were “Officers of The United States” within the meaning of the U.S. Constitution.  That meant they had to be appointed by the President with the consent of the Senate.  Because they were not, they could not wield any power over taxpayers.  That made all their work illegal and without effect.  In Tucker v. Commissioner both the Tax Court (135 T.C. 114, 2010) and the D.C. Circuit (676 F.3d 1129, 2012) rejected the argument.  Not a single judge agreed with the taxpayer.

Creativity begets creativity.  In Fonticiella, Judge Gerber considers and rejects a companion argument, that Appeals is a “de facto independent agency” whose very existence is an affront to the U.S. Constitution.  While that is a loser argument today, it may become a winner eventually as Congress keeps trying to transform Appeals into a mini-me Tax Court.  The recently enacted Taxpayer First Act, P.L. 116-25, moves in that direction, although not far enough, IMHO, to affect the rationale for Judge Gerber’s decision.  You can read more about it below the fold.

The IRS Office of Appeals

Appeals is staffed by experienced IRS employees.  Hugh Bickford’s summary in his 1967 “Successful Tax Practice” (4th Ed.) is as true today as it was then: 

“The conferees of the Appellate Division are career [employees], most of whom have had from ten to twenty or more years in the Service, reaching their position by promotion....  They are tax law specialists and are among the best [employees] in the Service.  Many of them are members of the bar and have passed Civil Service examinations in accounting when originally appointed.” 

Before 1998, Appeals was involved in reviewing only disputes about tax determination.  So Appeals Officers (AOs) were, basically, former Revenue Agents (RAs). 

In 1998 Congress expanded Appeals’ scope of review to include disputes about tax collection in the IRS Restructuring and Reform Act of 1998, P.L. 105-206 (RRA 98).  That was awkward because RAs know little about collection.  So Appeals started hiring former Revenue Officers (ROs) to work the new Collection Due Process (CDP) reviews.  These new Appeals employees got a new title, Settlement Officers (SOs), ostensibly to help distinguish their role in resolving collection disputes from the Appeals Officer’s role in resolving liability determinations.  But...I was in Chief Counsel at that time and I recall that another reason for the different name involved some professional jealousy as well.  Historically, RAs and ROs have not had much to do with each other and the existing AOs apparently wanted to keep it that way.  That, at least, is my memory of it, but at my age memory is not always the truest friend.  Anyone with more information is welcome to share in the comments.

The additional work Congress gave Appeals in 1998 did not change its purpose, however.  Appeals has always been charged with providing an internal review mechanism before “the IRS” makes its institutional determination of a tax liability or, after 1998, before it makes its institutional decision about using its lien and levy powers to enforce collection.  The current Appeals Mission Statement reflects this historical purpose: "to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service."

That has always been Appeals' mission: to be independent-minded.  One can see this from a brief history written in 1987 by the then Chief of Appeals Division.  Howard T. Martin, “IRS Appeals Division – 60 Years Old,” 39 The Tax Executive 341 (Summer 1987) (sorry but the only link I could find is on HeinOnline, which has a paywall).  He writes: “Today Appeals provides the same service to taxpayers as it did in 1927.  It holds conferences at over 500 locations in the country to resolve tax disputes on a fair and impartial basis to both the taxpayer and the government.”

Appeals is far from the only internal review mechanism that resolves tax disputes by bringing in an independent-minded review.  Traditionally, internal oversight has been performed through managerial review.  For example, before Congress involved Appeals in collection process in 1998, ROs generally got to decide what assets to go after.  But some assets---such as nursing homes or a taxpayer’s primary residence---were off limits unless ROs got approval from four layers of internal sign-offs:  the group manager, then the Collection Branch Chief, then District Counsel, and finally the person then called the District Director.  Within each layer there might also be multiple reviewers, because the Branch Chief and District Director each had deputies who would generally participate in a decision of that magnitude and the review process in the District Counsel's office often involved at least two attorneys reviewing the file, the docket attorney and that attorney's line manager. 

Appeals is simply another type of internal review on top of all that.  It is different in that the taxpayer is invited to participate.  But the reviewed decisions are still internal to the IRS.  They are still institutional decisions, only made by a different set of employees who have a different scope of authority from the examination or collection functions. 

Nor is Appeals a unique type of internal review.  For example, in situations where the taxpayer receives an NOD and files a petition in Tax Court and then asks for a meeting with Appeals, Appeals has settlement authority under Delegation Order 8-8, IRM 1.2.47.  Appeals will exercise that authority according to its mandate and its wider set of powers.  It’s decision is the decision of “the IRS.”

But if a taxpayer chooses to forgo Appeals, or else Appeals cannot resolve the case, the settlement authority goes over to Office of Chief Counsel.  See IRM 35.5.2.  At that point, Chief Counsel and not Appeals speaks for “the IRS.”  Taxpayers most certainly participate in that process as they do in the Appeals process.  I tell my students that Chief Counsel attorneys will exercise a judgment about settling a case that is quite independent of both the IRS examination or collection functions and independent of Appeals.  It’s another set of internal decision-makers for a taxpayer to negotiate with.  Keith Fogg wrote this nice post on this split of authority (and DOJ settlement authority) over on Procedurally Taxing

Aside from expanding Appeal’s review into collection decisions, RRA 98 contained one provision which significantly changed the relationship of Appeals with the rest of the Service.  An off-Code provision created a requirement that the IRS must "ensure an independent appeals function...including the prohibition...of ex parte communications between appeals officers and other Internal Revenue Service employees to the extent that such communications appear to compromise the independence of the appeals officers." RRA 98, §1001.

Since 1998 IRS management has endeavored to fulfill the command to “ensure an independent appeals function” by altering Appeals procedures.  The alterations not only police Appeals communications with other IRS functions to ensure maximum transparency to taxpayers, but the changes also create more distance between Appeals and the employees working the case.  For example, prior to RRA 98 the assigned AO would review the taxpayer’s protest and would often review the Revenue Agent’s Report with its author.  The AO would decide what additional information he or she needed, if any, and from whom.  The Appeals Officer would often meet independently with the Revenue Agent and separately with the taxpayer.  No more.  Now when the AO needs more information or needs something reworked, the AO sends it back to the examination function.  Now when the AO wants to chew out the examination function for stupid errors, the AO must wait until the case is formally out of Appeals’ jurisdiction.  See IRM (Post-Settlement Conferences). 

What remains, however, is that Appeals’ scope of authority is defined and limited by the IRM, just as it always has been.  Appeals speaks for the IRS, not in addition to the IRS.  For example, when a taxpayer invokes the Appeals process before being issued an NOD, Appeals has the authority to issue the NOD.  See IRM  Similarly, when a taxpayer invokes the Appeals process to contest an NFTL or proposed levy, Appeals issues a Notice of Determination to either proceed with collection or not.  Either way, it’s the IRS speaking.  Appeals tells taxpayers the final IRS decision about tax liability or the final IRS decision about collection.

The recently enacted Taxpayer First Act (TFA) formalizes the Office of Appeals in the Tax Code, adding §7803(e).  Before this year, Appeals was purely a creation of internal management.  Sure, some statutes referenced the office---notably §6320 and §6330---but nothing in the Tax Code created the office. The TFA changed that.  It now formally creates an Office of Appeals.  Excuse me, I should say it creates the “Internal Revenue Service Independent Office of Appeals.” You can find the details in §7803(e).  Weirdly, Congress has still kept the ex-parte prohibition off-Code (unless I just overlooked it). 


Article II, §2, clause 2 of the U.S. Constitution is commonly called the Appointments Clause.  As interpreted by the Supreme Court, it provides that when Congress writes a statute creating a important enough position, the holder is called an “Officer of the United States,” and may only be appointed by the President with the consent of the Senate.  When Congress creates other, less important, positions, the holders may be just “inferior Officers.”  Congress may constitutionally permit those positions to be filled by the President alone or even by a lower level Officer, such as a Department head.  See generally, Freytag v. Commissioner, 501 U.S. 868 (1991) for a good background.  For a good law review article on the subject, go read John T. Plecnik, "Officers under the Appointments Clause," 11 Pit. Tax Rev. 201 (2014).

Everyone else (about 2 million federal employees) gets hired pursuant to the Civil Service Reform Act of 1978, or one of about 100 other hiring authorities.  Or at least that’s how I understand it.  This 2016 GAO Report gives a nice breakdown of the 105 most commonly used hiring authorities and how often they get used.  All the hiring authorities are based on the idea that government employment should be primarily a function of merit, not political patronage.  Even the hiring authorities that remove competitive hiring do so for limited purposes, recognizing that non-competitive hiring is a small exception to an historically strong normative rule.  Hiring based on merit has been the central idea that has driven government hiring since the 1883 Pendleton Act was signed into law by President Chester A. Arthur, arguably the greatest accomplishment of that accidental President, who himself had benefited from the patronage system as the Collector for Port of New York.

The Supreme Court is pretty coy about distinguishing between “Officers,” “inferior officers,” or just plain ole “employees.”  Basically, the Court looks to how much discretion and authority the employee has.  The closest example for AO’s is Freytag.  There the Supremes held that Tax Court Special Trial Judges (STJs) were “inferior Officers” of the United States because of their wide scope of authority to decide cases and their significant discretion to conduct a full adversarial hearing.  Importantly, the Court noted that the STJ’s authority included the powers to administer oaths, to take testimony, to rule on motions and the admissibility of evidence, and the STJ’s discretion included the ability to punish all “[c]ontemptuous conduct,” including violations of orders.  More recently, in Lucia v. SEC,  138 S.Ct. 2044 (2018), the Court held that SEC ALJ’s are “Officers” because their discretion and authority rival that of a U.S. federal district court judge.

In the Tucker case, the D.C. Circuit applied the Freytag learning to AO’s and SO’s.  There, in a quite lucid opinion, the D.C. Circuit repeatedly went beyond labels to examine function.  For example, even though the Office of Appeals was not, at that time, created by statute, the Circuit Court said it would take the office as “established” because it would be “anomalous if the Appointments Clause were inapplicable to positions extant in the bureaucratic hierarchy, and to which Congress assigned "significant authority," merely because neither Congress nor the executive branch had formally created the positions.”

Historically, the folks who work as Appeals Officers or Settlement Officers have never been appointed by the President or by a head of department such as the Secretary of Treasury, or even by the Commissioner of the IRS.  They have always been career IRS employees, hired under the authority of §7804 and the Civil Service Reform Act.  The TFA changes that only with respect to the Chief of Appeals.  Section 7803(e)(2)(b) gives the IRS Commissioner authority to hire the Chief of Appeals and excepts the appointment from the Civil Service Reform Act restrictions over in title 5.  The rest of the staff are still hired as usual.  In sum, §7803(e) basically codifies the current structure of Appeals as an office with its own separate chain of command, like the Office of Chief Counsel in §7803(b) and the office of the Taxpayer Advocate in §7803(c).

Lesson: Appeals is Part of IRS

This is a CDP appeal.  Dr. Fonticiella is a cardiologist against whom the IRS is apparently seeking to collect five years of unpaid taxes.  After Appeals green-lighted collection, Dr. Fonticiella petitioned the Tax Court for review.  His lawyers, from the DiRuzzo & Co. law firm, moved for Summary Judgment on the grounds that the Office of Appeals exercises its powers unconstitutionally. 

Basically, the taxpayer’s argument is that Appeals is a separate agency from the IRS because its duties “transcend purely executive functions” and, hey!, Congress keeps using that word “independent”!! 

Judge Gerber follows the Tucker focus on function.  Judge Gerber points out that calling Appeals “independent” is meaningless unless you answer the question “independent from what”?  He relies heavily on the reasoning of the Tax Court and the D.C. Circuit in Tucker to explain that Appeals is only “independent” of the exam and collection functions within the IRS.  It is not independent of the IRS itself.  As Judge Gerber writes: “the use of the “independent” to describe Appeals’ function does not automatically make Appeals an independent agency.”  Judge Gerber points out that the taxpayer “has not cited to any majority opinions or existing precedents that are contradictory to the reasoning in Tucker.” 

Comment: Impact of Taxpayer First Act

I do not think either Judge Gerber’s opinion or the Tucker opinion are affected by the changes made in the Taxpayer First Act.  Those changes formalize the Office of Appeals, require the Chief of Appeals to be appointed by the Commissioner (and not by the Secretary), and put into a statutory form what has always been Appeals’ historic mission.  Seriously.  The mission statement is basically cut and pasted into §7803(e)(3). 

The Taxpayer First Act is all about labels.  But the Tucker analysis does not turn on labels.  It turns on function.  And the Taxpayer First Act makes no changes to the function of Appeals.   It does not alter Appeals’ role in CDP or deficiency cases.  It arguably expands Appeals’ role in deficiency review by giving taxpayers a vague “right” to review.  That word is the title of §7803(e)(4), but the text of the provision just says “The resolution process described in paragraph (3) shall be generally available to all taxpayers.” And then paragraph (5) hedges even that provision with further qualifications, qualifications which just spell trouble for the IRS, but money for tax practitioners like Mr. DiRuzzo when they have well-heeled clients like Dr. Fonticiella. 

In short, the Taxpayer First Act leave the function of Appeals untouched.  It is still an office within the IRS that is independent from other IRS offices (and processes), those that make the initial liability determination or collection determination.  I use the word “processes” because no human actually decides to pursue collection.  It’s automatic.   Tax administration, particularly collection, is all about automated processes, as I explained in Bryan Camp, "Theory and Practice In Tax Administration" 29 Va. Tax Rev. 227 (2009).   Appeals brings an independent viewpoint but that does not make it a completely separate "Independent Agency."

Appeals is very similar to the Office of Chief Counsel and the Office of the Taxpayer Advocate.  Both of those Offices can and do exercise as wide authority and discretion as does Appeals, but just in different procedural contexts.  For example, Chief Counsel has the same ability to settle a case as does Appeals, but that authority kicks in at a later stage.  IRM 35.5.2.

Indeed, both Chief Counsel and TAS are arguably more “independent” than Appeals.  First, each of those positions requires appointment by the President with Senate consent.  Not so the Chief of Appeals.  Second, the head of TAS, the National Taxpayer Advocate (NTA), has the authority to hit on Congress directly, without any need for the Commissioner’s permission.  That unique power is much greater than any power given Appeals or Chief Counsel.  Third, the Chief Counsel does not simply report to the Commissioner, but also reports to the General Counsel of Treasury, which gives the Chief Counsel a degree of independence significantly greater than the Chief of Appeals.

In sum, nothing about Appeals currently makes it different from other “independent” parts of the IRS, except for the modified ex-parte rules.  If every AO and SO had to be appointed by the President, then so must every docket attorney and every local Taxpayer Advocate. 

But if Congress keeps messing around with function, such as making Appeals function more like an adjudicatory body overseeing an adversarial hearing, then Congress may indeed need to change how AOs and SOs are hired and fired.

Bryan Camp is the George H. Mahon Professor of Law, independent but still part of Texas Tech University School of Law

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