Paul L. Caron

Monday, March 15, 2021

Lesson From The Tax Court: The Presumption Of Regularity For NODs

Tax protestors are the cowbirds of the tax ecosystem, forcing the employment of resources that could be put to more productive use.  Nonetheless, tax protestors sometimes provide a service: they help us revisit basic lessons about tax and tax administration.  Today’s lesson is one such basic lesson: about the presumption of regularity.

The presumption of regularity is a broad doctrine that courts use when faced with disputes about the legitimacy of federal agency actions. In Brian E. Harriss v. Commissioner, T.C. Memo. 2021-31 (Mar. 11, 2021) (Judge Thornton), the taxpayer argued that a Notice of Deficiency (NOD) issued to him was invalid because the IRS employee who signed it was not authorized to sign it.  In rejecting the argument, Judge Thornton teaches a useful basic lesson in how the presumption of regularity applies to NODs.  Details below the fold.

Law: The Importance of “Notice” In “Notice of Deficiency”
Leandra Lederman’s fine article, 'Civil'Izing Tax Procedure: Applying General Federal Learning to Statutory Notices of Deficiency, 30 UC Davis L. Rev. 183 (1996), explains that one can see NODs as serving two purposes: a functional notice purpose and a formal pleading purpose.  Here, I want to just focus on the notice purpose.

Congress set up the deficiency procedures in §273 et. seq. of the Revenue Act of 1924, 43 Stat. 253, 296 (June 2, 1924).  The point was to give taxpayers a pre-assessment review of any IRS determination to assess more tax than the taxpayer had reported.  To that end, §274(a) provided that “If, in the case of any taxpayer, the Commissioner determines that there is a deficiency in respect of the tax imposed by this title, the taxpayer, except as provided in subdivision (d), shall be notified of such deficiency by registered mail, but such deficiency shall be assessed only as hereinafter provided.”

Courts routinely explained that the purpose of the statute was to give adequate notice and permit access to the pre-payment forum.  Form was unimportant. The eminent jurist Learned Hand put it this way: “the notice is only to advise the person who is to pay the deficiency that the commissioner means to assess him; anything that does this unequivocally is good enough.” Olsen v. Helvering, 88 F.2d 650, 651 (2d Cir.1937) (collecting cases).

What started out in §274 in 1924 is now found codified in §6212(a).  It reads: “If the Secretary determines that there is a deficiency in respect of any tax imposed by subtitles A or B or chapter 41, 42, 43, or 44 he is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail.”

While the language has changed, the law about NODs has not: courts still routinely explain that substance is what matters, not form.  See e.gTavano v. Commissioner, 986 F.2d 1389, 1390 (11th Cir. 1993) (unsigned NOD sent to taxpayer was valid even because it “adequately advised him that the Commissioner intended to assess him.”); Selgas v. Commissioner, 475 F.3d 697, 700 (5th Cir. 2007) (collecting cases and holding that “a notice of deficiency is valid as long as it informs a taxpayer that the IRS has determined that a deficiency exists and specifies the amount of the deficiency. The existence of a signature or the identity of any IRS official who provides one, is superfluous.”).

This emphasis on substance over form sometimes helps taxpayers.  For example, in Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987) the Ninth Circuit reiterated the rule that “no particular form is required for a valid notice of deficiency...and the Commissioner need not explain how the deficiencies were determined.” Id. at 1367.  In that particular case, however, the court gave careful attention to the substance of the NOD, concluding it did not give sufficient notice because the attachments to the NOD “make it patently obvious that no determination has in fact been made.” Id. at 1367.

Alert readers will see that, in contrast to the original statute, which directed “the Commissioner” to issue the NODs, the current codification now directs “the Secretary” to do that.  As a practical matter, however, that makes no difference because neither individual is capable of performing the duty imposed by statute.  Both must rely upon delegations of authority.  Indeed, all statutory duties and powers, whether directed at the Secretary or the Commissioner, are delegated to various IRS employees in a long series of Delegation Orders (DOs) collected in the IRM Part 1.  The DO to issue NODs in IRM (12-07-2020) (Delegation Order 4-8 (Rev. 2) (“Authority to Issue Notices of Deficiency or Execute Agreements to Rescind Notices of Deficiency”).

Alert readers will wonder about IRS reorganizations.  After all, the IRS is no different than any bureaucracy: it is constantly reshuffling and relabeling various functions.  IRM deals with that.  Titled “Effect of Personnel and Organizational Changes on Delegation Orders,” it provides that “When organizational or personnel changes are made which alter title/designation, without substantive alteration in function or duty, existing delegation orders remain in effect until updated by the appropriate organization.”

Law: The Presumption of Regularity
The presumption of regularity is a general collection of doctrines, all of which operate to protect the validity of government actions by requiring those who claim that a governmental action resulting from improper procedure or improper motives bear the burden of producing actual evidence of the claimed procedural or motivational misconduct. See generally, Note, The Presumption of Regularity in Judicial Review of the Executive Branch, 131 Harv. L. Rev. 2431 (2018).  The article explores how litigation over various actions by the Trump administration has given courts rich opportunities to explore the application and limits of the doctrine.

Tax practitioners usually encounter a version of the presumption in the form of the presumption of correctness that courts give to the substance of NODs.  I wrote about this in Lesson From The Tax Court: NOD Reprints Are Not Copies, But May Still Trigger Presumption Of Correctness, TaxProf Blog (Nov. 26, 2018).  Jack Townsend also notes this linkage in his very useful article Burden of Proof in Tax Cases: Valuation and Ranges — An Update, 73 Tax Law. 389, 405-406 (2020) (“The presumption of correctness attaching to the notice of deficiency is a subset of the general presumption of regularity attaching to government actions.”).  The presumption of correctness refuses to look behind the face of an NOD at the alleged motives of IRS employees involved in the process.

The presumption of correctness goes to the contents of an NOD, it substance.  Beyond that, however, the presumption of regularity applies to the issuance of an NOD.  Courts will presume that the IRS followed the proper process to produce the NOD sent to the taxpayer.  The taxpayer bears the burden of producing contrary evidence and persuading the court otherwise.

Today’s lesson comes from a tax protestor who noticed that the title of the IRS employee who signed the NOD was not one of the various titles contained in the IRM Delegation Order.

Let’s take a look.

Mr. Harriss, an engineer, worked for CH2M Hill Alaska, Inc. in 2012, 2013, and 2014.  The company sent him a W-2 showing wages of about $150,000 each year.  He also received another W-2 from another employer in 2014.  And in 2013 he also took an early distribution of some $37,000 from his Fidelity IRA.  Fidelity issued a 1099-R.

Mr. Harriss filed returns for each of those years.  He invited IRS attention by reporting zero income, claiming an overpayment of all withheld taxes, including Medicare and Social Security, and attaching various tax protestor nonsense to the returns such as this statement: “My activities...involved entirely private arrangements and did not involve the exercise of any federal privilege or the receipt of any federally-connected gain or benefit.” Op. at 2.

The IRS accepted the invitation, audited, and sent out NODs for all the years in issue.  Mr. Harriss timely petitioned the Tax Court.  It turns out the 2012 NOD was untimely and so the IRS conceded that year, which thus allowed Mr. Harriss to escape one proposed deficiency of about $32,000.

This was not Mr. Harriss’ first trip to the Tax Court.  He was a serial hobbyist, who had raised and lost his substantive tax protestor arguments in litigation over his 2010 and 2011 tax years in Harriss v. Commissioner, T.C. Memo. 2017-5.

This time, he tried a procedural set of tax protestor arguments.  He had noticed that each of his NODs had been signed by an IRS employee with the title “Program Manager, Return Integrity and Compliance Services, Integrity and Verification Operation.”  He then noticed that none of the Delegation Orders in the IRM delegate authority to issue an NOD to such a position.  Ah ha!

Lesson: The Presumption of Regularity Applies to NOD Signatures
Judge Thornton first explains how the presumption of regularity applies to facts.  He states it this way: “Whenever an official has acted, it is presumed that whatever is required to give validity to the official's act in fact exists.”  (Op. at 10, internal quotes and citations omitted).  He then goes on to explain that “Petitioner has offered no evidence that [the IRS employee] lacked delegated authority to issue the notices of deficiency. Rather, he relies primarily on the fact that the notices show [her] position as “Program Manager, Return Integrity and Compliance Services, Integrity and Verification Operation” — a position not expressly listed among those to which Delegation Order 4-8 delegates authority to sign and issue notices of deficiency.

Judge Thornton then explains that offering a negative (her position was not listed) does not prove a positive (she had no authority).  That is because the burden is not on the IRS to prove authority but on the taxpayer to prove lack of authority.  Here, the positions expressly listed in the Delegation Order were reshuffled as part of an IRS reorganization in 2014 such that the IRS employee was exercising the same function as the listed positions.  Unless Mr. Harriss could provide evidence to the contrary, the presumption of regularity meant that the Court would presume the reshuffling did not affect the delegations, exactly as explained in IRM (“Effect of Personnel and Organizational Changes on Delegation Orders.”).

Bonus Lesson: NODs Don’t Need No Stinkin’ Signature
As a backup, Judge Thornton noted the well-settled rule that I explain above: so long as the NOD serves its function to put the taxpayer on sufficient notice, then it need not meet any particular formal requirements, including the requirement of a signature.  In fact, Judge Thornton might as well have pointed out that the canard that an NOD must be signed by an authorized IRS employee is tax protestor nonsense.  It has been so widely and roundly rejected by courts that the IRS helpfully lists it on its Frivolous Arguments webpage—not that tax protestors really care.

Coda: No §6673 Penalty?
Despite Mr. Harriss' best efforts to waste IRS and Tax Court resources simply to nurture his fantasies about tax law, Judge Thornton declined to impose §6673 sanctions.  I am guessing that is because Mr. Harriss here advanced a different set of frivolous arguments from those he had advanced in his prior litigation.

Or perhaps Judge Thornton recognized that this cowbird tax protestor was really doing all taxpayers an unintended service by giving the Court the opportunity to teach us all a good lesson about the presumption of regularity.

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites readers to return each Monday to TaxProf Blog for another scintillating Lesson From The Tax Court.

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@Jack. Regarding the presumption I was confused at first on why it even mattered. If the NOD does not even need to be signed, then who cares about the signature title?? However, I think the difference is between the requirement that it be signed (a purely internal unenforceable requirement) and the requirement that it be ISSUED (a statutory requirement). The delegation orders go to the question of issuance. I do not believe the IRS has the burden of persuasion on NODs. But I am not sure. I think it is the taxpayer who has both the burden of producing evidence and the burden of persuading the court that the issuance was illegal. That will take a lot more than differences in title. Again, however, you may know this stuff better than I do!

Posted by: bryan | Mar 15, 2021 9:01:33 AM

Bryan and others,

Some points of varying length and perhaps clarity.

1. Bryan, Thanks for the good discussion of the case and background.

2. Thanks also for the kind reference to my article.

3. Does the presumption operate like a burden of persuasion—like a tie breaker in state of equipoise as to the fact on which the burden is on a party requiring that the fact not be found?. The Harriss court suggests that function on p. 14 (“[c]hoice between two doubts should be made in such a way as to favor the presumption of official regularity.” I infer that implicit in that statement is that only reasonable doubts are considered. And it seems to me that if one doubt is stronger than the other (rather than a state of equipoise between the doubts), the stronger doubt should control the outcome. Thus, in Harriss, if the taxpayer exegesis of the delegation authority had created substantial and persuasive doubt (even if not certainty) that the authority was not properly delegated, the taxpayer should prevail. At least as to factual presumptions, it is said that proof sufficient to avoid summary judgment or directed verdict is sufficient to avoid the presumption and then the most authority evidence controls the outcome with any equipoise resolved against the party with the burden of persuasion.

4. Implicit in the foregoing is that the IRS should have to prove proper delegation rather than relying on a presumption. That may not be the law, but it seems to me that imposing that burden on the IRS is the right answer. Burdens are often imposed on parties who have the best access to the evidence. The IRS has best access to the evidence of proper delegation and should have to bear that burden.

5. Could the Court’s analysis be that the IRS did prove proper authority? See its discussion of the IRM discussion for internal reorganizations, requiring you reference to the function rather than the title. See IRM Note (04-09-2020), Servicewide Delegation Order Content (“If, during a reorganization, position titles change, without substantive change in responsibility, a delegation order is still effective for the new position title until the delegation order is revised.”)

Posted by: Jack Townsend | Mar 15, 2021 8:51:37 AM