The Independence of Appeals: How long?

This past week Tax Notes Today ran a story entitled: “Appeals Needs to Be 'On Same Page' as Rest of IRS, Brown Says" by Dustin Stamper, 2007 TNT 54-2. Yet another article by the people at TNT.

In summary your IRS Deputy Commissioner of Services and Enforcement Kevin Brown is suggesting that the Appeals Division is not interpreting the law as they should. Yet in the same breath he tells private practitioners that they need not be concerned as to Appeals’ independence. Right and Attention passengers of the Titanic we have found ice for our drinks so don’t be concerned with that little hole on the side.
IRS Deputy Commissioner Kevin Brown should know better to make such public statements as Appeals. Succinctly stated - IRS Appeals must remain independent.

As was previously mentioned in this blog and was commented in the TNT article one cannot ignore that the IRS has a new policy regarding shelters – sending the case back for further submission. Now Kevin Brown’s position as to Appeals should be viewed for what it is – yet another broadside directed towards Appeals – “get with it or else”. So what does the or else mean? Well to be honest if I were still in the Office of Chief Counsel it would mean I better be prepared for an up tick in litigation.

Why do I say that? Well unless things have changed since I left in 2003, the Appeals division of the IRS was composed of lawyers, CPA’s, former revenue agent who genuinely strived to independently evaluate the facts, the Revenue Agent’s factual development of the case, and the law. If the case was not properly developed and the statute was still open the Appeals Officer would, at times, send the case back to the revenue agent to develop. As to legal issues, the Appeals officer would conduct his/her research, consult with the National Office and follow IRS’s positions on these matters. If there was a question of legal interpretation, then the concept of hazards of litigation would come into play. Last time I looked what makes our profession so enjoyable is that, more times than not, there is no black and white answer. I should expect that such a statement Mr. Brown would take umbrage with.

With that last statement in mind, Mr. Brown cannot be referring to the typical case that is handled by Appeals. So what is Mr. Brown referring to? It must be large case related and there are rumors that as to certain tax shelters and the penalties phase of these cases, deals can still be made based on hazards of litigation. If I am right Mr. Brown is demanding that the Appeals Officers be ostriches in the sand and focus solely on Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006); Long Term Capital Holdings, Ltd. v. United States, 330 F.Supp.2d 122 (D.Conn.2004) and ignore Klamath Strategic Investment Fund, LLC v. United States, --- F.Supp.2d ----, 2007 WL 283790, (E.D.Tex.. 2007); United Parcel Service of America v. Commissioner, 254 F. 3d 1014 (11th Cir. 2001); Compaq Computer Corp. v. Comm'r, 277 F .3d 778, 781-82 (5th Cir.2001).

So what does this mean for us tax practitioners? We need to educate our clients that extensions of time may not be the best option. To the contrary, forget the extensions, let’s all play on the same track – let the IRS to issue the Notice of deficiency. If you are in the Fifth, and I believe to a lesser extent the Eleventh, Klamath bodes well for your client. As for taxpayers residing in other circuits I would keep an eye on Jade Trading. I would be shocked if the taxpayer prevailed in that case but if penalties were raised by the IRS and they were not upheld by the Court, well that would be interesting. Even if Jade Trading were to go to entirely the government’s way, there are still the facts of each individual case. Thus, there would be a trial for each of these cases in the Tax Court, District Court, or Court of Claims. Talk about a tidal wave of litigation which neither the Courts nor the government’s litigators could handle. Since I only worked at the Office of Chief Counsel, I can only speak as to those individuals. The majority of those offices are understaffed and the individuals are overworked and underpaid. If you are relying on your STA’s then I say ditto.

Accordingly, Mr. Brown I would reconsider your views as to Appeals. If Appeals starts agreeing with your position as to the law you will have more litigation than your litigators can handle. As mama used to stay “Be careful what you ask for you may get it”.
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