Paul L. Caron

Monday, January 31, 2022

Lesson From The Tax Court: The Presumption Of Regularity

Camp (2021)No, today’s lesson has nothing to do with your gastrointestinal system.  But it does relate to what comes out of the bureaucratic process.  The presumption of regularity affects a broad range of IRS work product, such as Notices of Deficiencies, Certificates of Assessments and, in today’s case, Penalty Approval forms.

In Long Branch Land LLC v. Commissioner, T.C. Memo. 2022-2 (Jan. 13, 2022) (Judge Lauber), the taxpayer attempted to take a very large charitable deduction for donation of a conservation easement.  In its Notice of Deficiency, the IRS not only disallowed the deductions but also proposed to assess penalties under §6662 and §6662A.  In Tax Court the IRS moved for partial summary judgment on the issue of whether it complied with the supervisory approval requirements of §6751(b)(1).

The taxpayer argued that the IRS failed to comply with the penalty approval requirements because the IRS employee who approved the penalty was not the “immediate supervisor” of the IRS employee who proposed the penalty.  Judge Lauber rejected the argument, invoking the presumption of regularity.  His use of the doctrine, however, demonstrates it chameleon-like quality: it is both a rule of law and a rule of evidence.  Details below the fold.

Law: The Presumption of Regularity: Rule of Law or Rule of Evidence?
The presumption of regularity is often expressed as a rule of law.  For example, Judge Lauber cites to Lewis v. United States, 279 U.S. 63, 73 (1929) for the proposition that “it is the settled general rule that all necessary prerequisites to the validity of official action are presumed to have been complied with.”  Op. at 5.  He also cites to Mecom v. Commissioner, 101 T.C. 374 (1993) for the proposition that “IRS officials are presumed to have properly discharged their official duties.”  Id.  Other courts often quote a slightly different formulation from United States v. Chemical Foundation, Inc., 272 U.S. 1 (1926): “The presumption of regularity supports the official acts of public officers, and, in the absence of clear evidence to the contrary, courts presume that they have properly discharged their official duties.”  Id. at 14-15.

Boy, all of those statements sure look like the presumption is a rule of law: an official act is presumed valid, period.  It’s totally up to the party objecting to produce evidence to show the invalidity.  Notice, however, that all of these cases involve acts of public officials.  Mecom was about acts of IRS employees.  Lewis involved the acts of a federal judge.  Chemical Foundation involved the acts of a special receiver appointed by the President of the United States.

But dig a little further and the rule starts to look like a rule of evidence.  Here’s how the Supreme Court framed the rule in 1893: “It is a rule of very general application, that where an act is done which can be done legally only after the performance of some prior act, proof of the later carries with it a presumption of the due performance of the prior act."  Knox County v. Ninth National Bank, 147 U.S. 91, 97 (1893).

Perhaps the reason for this weirdness is that the presumption, as applied to public officials, derives from an older presumption that applied to all private individuals.  And that presumption was an evidentiary rule.

As best I can tell, the Supreme Court first applied the presumption of regularity to acts of public officials in 1827 in Bank of the United States v. Dandridge, 25 U.S. 64 (1827), where the Court expanded this long-standing common-law rule of evidence.  Justice Story explained:

“By the general rules of evidence, presumptions are continually made in cases of private persons of acts even of the most solemn nature, when those acts are the natural result or necessary accompaniment of other circumstances. In aid of this salutary principle, the law itself, for the purpose of strengthening the infirmity of evidence, and upholding transactions intimately connected with the public peace and the security of private property indulges its own presumptions.  It presumes that every man, in his private and official character, does his duty until the contrary is proved.” 25 U.S. at 69 (emphasis supplied).

The controversy in Dandridge was whether a cashier was acting on behalf of the Bank when formal proof of the cashier’s appointment was not available.  While the presumption of regularity had long been applied to the acts of private individuals, no one had apparently considered whether it could be applied to the acts of a public official, here the cashier for the Bank.  Judge Story said the presumption should indeed apply to public officials and that it should be presumed the cashier was acting lawfully without forcing the Bank to produce records to prove the validity of the appointment.  But read Justice Story’s reasoning carefully: was he creating a rule of law or of evidence or both?

“The same presumptions are, we think, applicable to corporations. Persons acting publicly as officers of the corporation are to be presumed rightfully in office; acts done by the corporation which presuppose the existence of other acts to make them legally operative are presumptive proofs of the latter. *** If officers of the corporation openly exercise a power which presupposes a delegated authority for the purpose, and other corporate acts show that the corporation must have contemplated the legal existence of such authority, the acts of such officers will be deemed rightful, and the delegated authority will be presumed. *** In short, we think that the acts of artificial persons afford the same presumptions as the acts of natural persons. Each affords presumptions from acts done of what must have preceded them as matters of right or matters of duty.”

There is no consensus by courts on whether the presumption of regularity is a rule of law, a rule of evidence, or what.  Compare the majority and dissenting opinions in Government of Guam v. Guerrero, 11 F.4th 1052 (2021) (disagreeing about whether Guam's taxing authority was entitled to presumption of regularity when agency introduced documents similar to IRS Form 4340 Certificates of Assessments).

Law: Why It Matters
Whether the presumption is a rule of law or rule of evidence matters for two reasons: (1) it affects the predicate for the presumption; and (2) it affects the standard of review an appellate court will use.  Let’s look at both.

(1) Predicate for the Presumption
In Romero v. Tran, 33 Vet. App. 252 (2021) Judge Michael Allen (who before his appointment was a long-time law professor at Stetson) writes a very thoughtful opinion about the duality of the presumption of regularity.  He explains that the presumption-as-rule-of-law may be “premised upon independent legal authority rather than on evidentiary findings.” Id. (string-citing various cases).  Thus, if the “law imposes a relevant, official duty on an official, we presume that the official has properly performed that duty, unless there is evidence to the contrary.”  Id.  But the presumption-as-evidentiary-rule is triggered by predicate evidence.  For example, “acts done by a public officer which presuppose the existence of other acts to make them legally operative, are presumptive proofs of the latter.” Id. at 259 (internal quotes and cites omitted).  See also Guam v. Guerrero, supra (Bennet, dissenting) (explaining times when Circuit requires predicate evidence to establish presumption and times it does not).

It seems to me that a good way to think about this distinction is that it depends on what issue or argument is being addressed.  For example, consider the presumption of regularity that attaches to the issuance of a Notice of Deficiency (NOD).  It might be either the evidentiary rule or the legal rule, depending on the taxpayer’s objection to the NOD.

Thus, one the one hand, if the taxpayer argues that IRS employees issued the NOD just to harass the taxpayer or for some other improper purpose, the Court would apply the legal rule: IRS employees are presumed to carry out their official duties properly, period.  The taxpayer would need to bring forward evidence to show the improper purpose.  Cf. United States v. Clarke, 573 U.S. 248 (2014) (IRS summons entitled to presumption of regularity as a matter of law as against taxpayer’s contention that the summons was issued for an improper purpose).

On the other hand, if taxpayer denies ever receiving an NOD and raises the question of whether the IRS properly mailed the NOD, the IRS does not get a presumption of regularity unless it first produces some predicate evidence to show (1) an NOD actually existed and (2) the NOD was mailed to the taxpayer’s last known address.  See Bryan Camp, Lesson From The Tax Court: NOD Reprints Are Not Copies, But May Still Trigger Presumption Of Correctness, TaxProf Blog (November 25, 2018) (collecting cases).  Judge Halpern has a good discussion in Garrett v. Commissioner, T.C. Memo. 2015-228.

(2) Standard of Appellate Review
When a trial court, such as the Tax Court, decides a question of fact, appellate court review is deferential: the appellate court does not simply step in the shoes of the trial court by asking whether the decision was erroneous or whether the appellate judge would have made the same decision.  Instead it asks whether the decision was clearly erroneous, or against the weight of evidence in the record taken as a whole.  Anderson v. Bessemer City, 470 U.S. 564 (1985) (if trial court’s decision is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though the court of appeals would have weighed the evidence differently).

In contrast, an appellate court review a question of law de novo: it does indeed step into the shoes of the trial court and substitutes its own judgment for that of the trial court.  See generally, Kelly Kunsch, Standard of Review (State and Federal): A Primer, 18 Seattle L. Rev. 11 (1994).

So when the presumption of regularity is treated as an evidence rule, then a trial court’s decision to apply the presumption will likely be given a light appellate touch.  But when the decision is viewed as a legal rule, an appellate court may well substitute its judgement.

Facts And Lesson
Section 6751(b)(1) is still on the books and still requires that “No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.”

Long Branch Land LLC’s 2014 return for was selected for audit.  The IRS employee assigned to audit the return was the Revenue Agent (RA) Lorient.  In July 2018 he decided the IRS should assert various penalties against the taxpayer.  Mr. Lorient filled out two Civil Penalty Approval Forms and got them signed well before the office sent out the Notice of Final Partnership Administrative Adjustment (FPAA) to tell the taxpayer the bad news (disallowance of a $10 million deduction) and the worse news (some hefty penalties).  The IRS offered these two Penalty Approval Forms to show it had complied with §6751(b)(1).

The taxpayer argued the Forms were improperly signed.  To understand why, we need to look at the management structure here.

Mr. Lorient was a member of Team 1711 in the IRS Large Business & International (LBI) operating division.  The LBI division is divided into various directorates, some of which are subject matter based and some of which are territorial.  Here's the organization chart.  It appears Mr. Lorient worked in one of the territorial units.  He was supervised by another RA, Ms. Moore.  She had been appointed as Acting Manager for Team 1711 by another official, Ms. Baldwin, who was the Acting Territory Manager.  Since the taxpayer was formed in Georgia, I assume Ms. Baldwin reported to the Director for Field Operations South East, who is also currently listed in the current LBI organization chart as....Acting!

You can see from all these repeated “Acting” in titles that IRS staffing is in flux.  And sometimes wires get crossed.  In this case, Ms. Moore was initially appointed to be Acting only until July 7, 2018.  However, the person who appointed her, the Acting Territory Manager Ms. Baldwin, told Team 1711 on Friday June 22 that Ms. Moore would continue to be their Acting Team Manager until the end of the fiscal year, September 30th.

Ms. Baldwin, however, failed to fill out the internal IRS form to extend Ms. Moore’s appointment.  And then she ceased being the Acting Territory Manager on Saturday June 23.  The new Acting Territory Manager, Mr. Daniel, started on Monday June 25.  But it took him some time to notice that Ms. Baldwin had not filled out the form.  He filled out the proper form on August 7th.

The problem with all this was that Mr. Lorient had Ms. Moore sign the Penalty Approval Form on July 31st.  That was when her initial appointment as Acting Team Manager—at least as evidenced in the original form appointing her—had expired and there was no new form to give evidence of her appointment extension.  Apparently that is why Mr. Lorient actually gave Mr. Moore two Penalty Approval Forms to sign that day.  The first she signed as “Acting Team Leader” and the other she signed as “Examiner’s Immediate Supervisor.”

In Tax Court the taxpayer argued that Mr. Moore had no authority to sign either of the Penalty Approval Forms on July 31st because she had no authority to be the Acting Team Leader on that day.  The taxpayer argued that Mr. Daniel’s July 7th appointment could not cure “unauthorized action by Government employees through retroactive delegations of authority.”  Op. at 5.

Judge Lauber was not impressed for three reasons.

First, he notes that “there is no evidence to suggest that Ms. Moore lacked supervisory authority on July 31, 2108” Op. at 5.  By that he means that the IRS submitted evidence (through affidavits) that everyone treated her as having supervisory authority because of the oral communication by Ms. Baldwin.  Writes Judge Lauber: “at no point did RA Lorient or any other team member question Ms. Moore’s supervisory authority.”  He points out that if the lack of an internal form was dispositive, then “all members of Team 1711 (on petitioner’s theory) would have been compelled to assert penalties on their own...or cease work indefinitely.” Op. at 6.

Second, he raises the presumption of regularity and finds that “Petitioner has offered no ‘clear evidence’ to overcome this presumption.” Op. at 6.  Again, the only evidence is a later-filled internal form .  But Judge Lauber says the form just “memorialized” the delegation and did not make the delegation.

Third, he points out that the supervisory approval requirement is only that the “immediate supervisor” of the IRS employee sign off on the penalty and that the Tax Court has defined that term functionally, not formally, as the person who actually supervises the employee’s work on an examination.  So even if Ms. Moore was not formally the “Acting Team Leader” when she signed the form, she was certainly Mr. Lorient’s immediate supervisor for the purposes of the statute.

Comment: Rule of Law or Rule of Evidence?
It is not clear what triggered Judge Lauber’s use of the presumption of regularity.  It might be that he is using it as a rule of law.  That seems to be the case because all three of the quotes he selects run in that direction and he does not explicitly say that any of the evidence submitted by the IRS created the presumption.  And this would be using the presumption very much in the same way the Supreme Court did way back in 1827 in the Bank of United States v. Dandridge case.  There, as here, the dispute was about whether a government employee had the proper authority to take an action.  In Dandridge the government could not produce evidence of the cashier’s proper appointment and the Court said basically “we don’t care: it’s on the other side to produce evidence that there was no appointment.”  It was enough for the Supreme Court that everyone had accepted the cashier as duly appointed and treated the cashier that way.  Similarly, it was not incumbent on the IRS to show the paperwork proving Ms. Moore’s appointment.  It was enough that everyone treated her as having been duly appointed.  So the law itself creates the presumption.  And the lack of a form did not overcome that presumption of law.

But it might also be that Judge Lauber believes the presumption is proper because the IRS introduced an evidentiary predicate to create the presumption.  Before enactment of §6751(b)(1) the presumption of regularity would attach to the penalties proposed in an NOD or an FPAA.  Congress modified that presumption by requiring the IRS to now introduce evidence that the immediate supervisor of an IRS employee who first proposes penalties has approved the proposal.  Thus, now, only once it offers a facially valid Penalty Approval Form does the presumption of regularity kick in.  This would make the presumption operate for penalty approvals similarly to how it operates for the validity of assessments, where the IRS typically sets the predicate by submitting Forms 4340.  Huff v. US, 10 F. 3d 1440 (9th Cir. 1993) (Forms 4340 created presumption as to validity of assessment but not as to validity of notice).

And, regardless of the trigger, evidence that Ms. Moore’s paperwork trailed the oral extension of her appointment by some five weeks did not suffice to overcome the presumption that actions she took during those five weeks were valid.

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  Readers can presume the regularity of his Lessons From the Tax Court appearing on TaxProf Blog every Monday

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First, I would eliminate the conservation easement as the deduction has caused valuation law suits to proliferate as the possibility of the absurdly large deduction reminds one of the old tax shelter days. Frankly I prefer cash contributions or only in kind contributions that are indisputably genuine such as a Tintoretto portrait.

Evidence is introduced to support the determination of facts. It is essentially a rule of procedure. The rule of law that is proved is a substantive determination.

Rule of law – de novo appellate standard, that is, question of law is subject to full appellate review. A question of fact may become a question of law if the evidentiary record is so sparsely populated with supporting evidence that no reasonable trier of fact could ever have made the factual determination supporting the verdict.

Posted by: Jonathan S. Ingber | Feb 3, 2022 12:45:03 PM

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