Access to Judicial Review in Nondeficiency Tax Cases

I. Introduction

In Flora v. United States, the Supreme Court held that section 1346(a), the statute conferring jurisdiction on district courts to review tax assessments, requires the taxpayer to fully pay any asserted tax deficiency prior to bringing suit (the Flora rule). The interpretation of section 1346(a) by the Supreme Court in Flora has survived almost six decades with only minor revision. Every tax lawyer with any knowledge of tax procedure knows the Flora rule requiring full payment before suing for a refund. Government attorneys utter the phrase “Flora rule” as though it had the powers of a sacred mantra. It has an enduring power not often questioned. One surprising aspect of recent cases directly attacking the Flora rule is that the attack has taken this long to arise. The delay serves as a testament to the power of the Flora rule even though it rests on a relatively weak foundation.

In a series of cases decided in the past few years, certain taxpayers have encountered significant problems in obtaining judicial review of action by the Service as a result of the Flora rule, bringing the decision in Flora back into focus almost 60 years after the Court heard and reheard the case. These cases attack the structure of the current tax procedure statutes and regulations governing access to judicial review. Because the current position of the government and the courts blocks taxpayers from obtaining any judicial review of certain decisions and actions by the Service, these cases raise serious questions about fundamental rights concerning liabilities imposed under the Code that do not fall within the Code’s deficiency procedures. In a country that traces its roots to the problem of taxation without representation, the inability of taxpayers to obtain judicial review of tax determinations made by the Service should raise concerns.

This Article discusses how we arrived at this situation, including flip-flops in the position taken by the government, and will suggest that every taxpayer have a chance for judicial review prior to, or at the time of, the initiation of collection procedures of levy and filing of a federal tax lien. The current Collection Due Process (CDP) provisions allow for most taxpayers to obtain judicial review of the underlying assessment if no prior opportunity for judicial review existed. The tax system should make use of these provisions as a procedural safeguard against the collection of tax liabilities without the opportunity for judicial oversight regarding the correctness of the assessment.

The circumstances of Larson v. United States provide the context for understanding this point. The Service assessed against Mr. Larson a penalty of $160,232,026 under section 6707 for failure to file two tax shelter registration forms. Section 6707, as applicable at the time of his transaction, imposed a penalty equal to the greater of one percent of the “aggregate amount invested” in the shelter or $500 if the person(s) responsible to do so failed to timely register the shelter with the Service. Over the past few decades, Congress has created approximately 50 assessable penalties similar to section 6707, which allow the Service to make an assessment once it determines the taxpayer meets the criteria for application of the penalty. These assessable penalties do not offer the taxpayer the opportunity for a pre-assessment judicial review before the Tax Court. Nevertheless, Mr. Larson sought judicial review of the liability assessed against him.

Unfortunately for Mr. Larson, the district court ultimately concluded that the Flora rule applied and that, to obtain judicial review of this liability, he had to fully pay the amount of the assessment before he could sue for a refund. Needless to say, few individuals, including Mr. Larson, can afford a payment of $160 million to obtain judicial review. So, while Mr. Larson had (and still has) the theoretical ability to obtain judicial review of the penalty assessment made against him, he had no realistic opportunity for judicial review.

Although not the subject of this Article, the underlying legal issues presented in Larson are significant and would benefit from judicial interpretation. For example, Mr. Larson challenged the Service’s interpretation of the statutory term “aggregate amount invested” under section 6707. The Service includes in this amount loans and loan premiums never actually paid by participants in the tax shelter transaction. Mr. Larson’s interpretation of the statute would have reduced his liability from the assessed amount of $160 million to $7 million. In addition, this issue is not one on which he could realistically expect to receive administrative relief. Yet, the practical effect of the district court’s interpretation of the procedural rules governing review of tax controversies prevented Mr. Larson, and would prevent others in similar situations, from obtaining such review.

The Second Circuit affirmed the decision of the district court dismissing Larson’s suit for lack of jurisdiction. Before the Second Circuit, Mr. Larson argued that the Flora rule applies only in deficiency cases and does not apply to assessable penalties. The court rejected this argument stating that:

The basis of the Flora decisions is that when Congress enacted § 1346(a)(1) it understood the statute to require full-payment to maintain “the harmony of our carefully structured twentieth century system of tax litigation,” not that the full-payment rule only applies when Tax Court review is available.

The court concluded that section 1346(a) “has long been interpreted to require the full payment of the contested tax as a jurisdictional prerequisite to a tax refund action.” Moreover, it stated that “Tax Court availability was not essential to the Supreme Court’s conclusion in either opinion” in Flora. In addition, it concluded that the plain language of section 6707 did not provide for suit after only partial payment of the assessment because of the divisibility of some assessable penalties but not that under section 6707. It stated that Congress would not have made some penalties divisible if it intended that all penalties should be treated as though they had a divisible feature. Finally, the Second Circuit held that no hardship exception to the Flora rule exists and that creating one would endanger the public purse.

The situation with assessable penalties not only prevents unsympathetic individuals and entities who promote tax shelters from obtaining judicial review; it can also serve to bar low-income taxpayers from the opportunity for such review. Another assessable penalty is the penalty imposed under section 6702 for taking a frivolous position. The Service occasionally assesses this penalty against low-income taxpayers. Although the penalty may be as low as $5,000, even that amount can prevent someone with no assets and no disposable income from obtaining judicial review. As in Mr. Larson’s case, these individuals may have defenses to the imposition of the penalty that they would prefer to assert before a judicial rather than an administrative officer. Under the current procedural rules, they cannot contest the liability in court unless they fully pay the $5,000 penalty. For taxpayers with no financial resources, $5,000 may as well be $160 million. In addition, if they fail to contest the penalty, they may lose refundable credits intended to provide a social safety net because the Service will offset any future credits on their account to satisfy the liability.

As previously noted, the Flora rule established the requirement that taxpayers must fully pay an assessed tax liability before suing for a refund to obtain judicial review of the Service’s assessment decision. Part II of this Article discusses the law leading up to the Flora decisions and the decisions themselves. Almost six decades after the Flora decisions, it has become easy to think of them as a simple rule regarding full payment to obtain jurisdiction in a tax refund suit, but the cases involved a number of policy decisions at the time and may well be decided differently in the current landscape of federal tax liabilities.

Although the Flora rule has weathered its six-decade existence with little change, there have been some cases that have defined and refined the principles set out in Flora. Part III discusses these cases and the law controlling jurisdiction for tax litigation post-Flora. Specifically, Part III addresses the application of the Flora rule with respect to divisibility, termination, and penalties and interest. Part IV then considers the due process issues present as a result of denying taxpayers the opportunity for judicial review. Part V briefly addresses the rise of assessable penalties, their general features, and some of the scholarship regarding these penalties. Importantly, these penalties are largely a post-Flora invention of Congress, and they represent the primary form of tax liability for which the Flora rule, in many instances, prevents a meaningful pathway to judicial review.

The CDP procedures, enacted by Congress as part of the Internal Revenue Service Restructuring and Reform Act of 1998, offer a pathway to address the practical absence of judicial review caused by the application of the Flora rule to assessable penalties. Part VI discusses the current state of merits litigation in CDP cases and shows how the current regulations and recent cases operate to prevent the CDP provisions from providing a means to litigate on the merits of the underlying tax liability and, thus, address the problems created by the Flora rule. Part VII discusses the role of the Taxpayer Bill of Rights in the formation of a rule allowing taxpayers the opportunity for judicial review regardless of the type of tax or penalty they seek to contest. Part VIII then proposes a solution that adopts the CDP provisions as a model to provide all taxpayers with an opportunity to obtain judicial review to contest the merits of a tax liability without the payment of the underlying assessment. The conclusion in Section IX provides a reminder of the importance of providing access to judicial review.

II. The Creation of the Flora Rule

Although this Article will cover the applicable tax procedure rules in greater detail below, a basic description of the current statutory scheme to obtain judicial review of asserted tax liabilities and assessments will assist the reader in working through the subsequent sections of this Article and in understanding the dilemma facing Mr. Larson and low-income taxpayers.

Income taxes, certain other taxes such as estate taxes, and numerous penalties, cannot be assessed by the Service without the taxpayer first either consenting to the tax or having the opportunity for judicial review to contest the assessment. The process of giving the taxpayer the opportunity to contest a proposed tax liability in court prior to assessment is known as the deficiency process. In this process, the Service must first send the taxpayer a notice of the proposed additional liability, known as a notice of deficiency. At this point, the taxpayer may elect to agree with the proposal and consent to the assessment, do nothing and by default consent to the assessment, or file a petition for review before the Tax Court. If a taxpayer fails to file a petition before the Tax Court or if a tax liability or assessment does not fall under the deficiency procedure, the taxpayer must generally pay the tax in full, file a claim with the Service, wait either for six months or until the Service disallows the claim, and then file a petition in federal district court or the Court of Federal Claims. Certain taxes and penalties not covered by the deficiency rules permit the taxpayer to pay only a divisible portion of the liability rather than the full amount of the assessed liability and then file a petition in federal district court or the Court of Federal Claims. Many assessable penalties do not have a divisibility feature. For those penalties, such as the penalties imposed by section 6702 or section 6707, the taxpayer must fully pay the penalty to obtain judicial review.

One may have thought that the question decided by the Supreme Court in Flora would have been addressed much earlier in the formation of the tax system. Congress had passed the “modern” tax code in 1954, four years before the Supreme Court decided Flora I in 1958. At that time, the predecessor of the United States Tax Court was approaching its 35th birthday. Many decisions that still direct the structure of tax litigation had by then been well settled and, yet, a significant question mark remained regarding the jurisdictional predicate to nondeficiency tax litigation in the federal district courts. The Supreme Court required two opinions, Flora I in 1958 and Flora II in 1960, to resolve the matter.

Before reviewing the Supreme Court’s analysis in its two Flora opinions, the stage should be set with a discussion of the prior relevant decisions. The decision in Cheatham v. United States, noted by both the district and appellate courts in Flora, is the earliest Supreme Court case requiring full payment of any tax liability prior to bringing suit for a refund. Cheatham involved the collection of income taxes imposed during the Civil War. The Supreme Court in Cheatham spoke in terms of full payment of the outstanding assessment by the taxpayer in order for the district court to have jurisdiction over a refund suit. It stated “[w]hile a free course of remonstrance and appeal is allowed within the departments before the money is finally exacted, the general government has wisely made the payment of the tax claimed, whether of customs or internal revenue, a condition precedent to a resort to the courts by the party against whom the tax is assessed.” Despite this statement, the Court found that the taxpayer did not bring his cause of action in time. Thus, the primary issue in the case was one of the timeliness of the taxpayer’s pursuit of his judicial remedy and not whether he fully paid the asserted liability. Because the outcome of the decision in Cheatham turned on timeliness, the language concerning full payment was dictum.

Importantly, Mr. Flora was not the first person to pay a portion of his tax liability, file a claim for refund, and sue in district court for a determination that he did not owe the tax following Cheatham. In Bushmiaer v. United States, the executors of an estate brought suit to recover $5,000 paid in partial satisfaction of assessments of $94,485.63 for 1942 and $43,503.65 for 1943. The Service moved to dismiss the complaint for failure to state a claim because of the plaintiff’s failure to fully pay the taxes. The district court granted the motion to dismiss. The Eighth Circuit closely analyzed section 1346(a) and determined that it said nothing about full payment of the tax. According to the court, the statute speaks of filing a claim for a refund before bringing suit but does not explicitly require full payment before seeking the refund or initiating suit. The court found that the taxpayer’s claim for a refund claimed only the return of the money already paid. While the Service relied on the Cheatham case to support its position, the Eighth Circuit pointed out that the taxpayer in that case fully paid his taxes and that any discussion of the requirement for full payment was simply dictum.

The Eighth Circuit then noted the prior decision of the Second Circuit in Coates v. United States, which had also held that full payment of a tax liability was not necessary. In its opinion, the Second Circuit had stated: “The defendant urges that the district court did not have jurisdiction of the suit because the plaintiff, it is said, had not paid the entire tax for 1932 when he brought suit. The point did not impress the district judge and does not impress us. . . . The proposition has neither reason nor authority in its favor. We reject the jurisdictional point and pass on to the merits.” In addition to the decisions in Coates and Bushmiaer, the Third Circuit had also held that suit after partial payment satisfied the jurisdictional requirement of the statute in Sirian Lamp Company v. Manning. In Sirian Lamp, the court reject many of the same arguments present in Flora and held that partial payment of the assessed tax did not prevent the Service from collecting the balance during the pendency of the suit.

Nevertheless, the dissent in Bushmiaer foreshadowed the Supreme Court’s opinion in Flora, pointing out that the Board of Tax Appeals (BTA) had been created in 1924 “in order to temper the harshness of that situation [the requirement of full payment of the tax in order to bring a tax refund suit in district court] and to provide such taxpayer an expeditious means of contesting taxes found against him in advance of paying principal or interest.” Additionally, the dissent pointed to the Anti-Injunction Act and the dissonance between allowing a refund suit for full payment and the statute prohibiting injunctions against collection.

Against this brief background of the rules of tax procedure and relevant case law, we can now analyze the decisions in Flora and its subsequent history. As previously noted, the Flora decisions interpret 28 U.S.C. section 1346(a). Section 1346(a) confers jurisdiction on federal district courts to hear suits against the government to obtain a tax refund. That section specifically provides that:

[t]he district courts shall have original jurisdiction over:

(1) Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assess or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws . . . .

 

The Flora decisions sought to interpret section 1346 in the context of a payment by the taxpayer of an amount less than the full amount of the tax assessed.

With respect to the facts in Flora, Mr. Flora claimed that he lost money on the sale of commodities and commodities futures on his tax return for 1950. He claimed that the losses were ordinary losses. The Service audited his return and determined that the losses did not qualify for treatment as ordinary losses but were capital in nature. This adjustment increased Mr. Flora’s tax liability for 1950 by $28,908.60. The Service sent him a statutory notice of deficiency, and he failed to file a petition before the Tax Court. The Service assessed the tax determined in the notice and eventually sought to collect the liability. He paid a total of $5,058.54 on the liability prior to filing a claim for a refund. After the Service denied Mr. Flora’s claim, he brought suit in federal district court in Wyoming.

Before the district court, the taxpayer argued that he did not have the funds to pay the full deficiency and that his time to file suit was running out. The Service filed a motion to dismiss because the taxpayer did not fully pay the assessed amount, arguing that section 1346(a) required full payment to confer jurisdiction of the court in a refund suit. The district court held that it lacked subject matter jurisdiction, citing the Supreme Court’s early decision in Cheatham v. United States and noting “the established policy of our tax system for the taxpayer to pay first and litigate afterwards.” Nevertheless, the court expressed concern regarding the issue of jurisdiction due in large part to the recent decision in Bushmiaer. Because the district court expected that the losing party would appeal, it preemptively decided the substantive issue concerning the disallowance of Mr. Flora’s loss and ruled in favor of the Service. On appeal, the Tenth Circuit remanded the case to the district court with instructions to dismiss the case for lack of subject matter jurisdiction and to vacate its decision regarding the underlying issue. Based on the split in the circuits under Flora and Bushmiaer, the Supreme Court granted certiorari.

In his brief to the Supreme Court, Mr. Flora framed the issue as “[w]hether the United States District Court has jurisdiction of a tax refund suit when the taxpayer has not paid his entire income tax for the year involved as assessed by the Commissioner of Internal Revenue.” The brief relied heavily on the plain language of section 1346(a), which contains no requirement for full payment and instead uses the term “any internal-revenue tax alleged to have been erroneously or illegally assess or collected . . . .” Because the decision of the Tenth Circuit relied on the earlier Supreme Court decision in Cheatham and on the creation of the BTA, the brief explained why the Court’s prior decision and the tangentially related legislation should not control the outcome of the case. The 14-page brief succinctly put forward the basis for Mr. Flora’s case primarily founded on the language of the jurisdictional statute.

The government’s reply brief relied heavily on the creation of the Tax Court, which it described as creating a dual system of tax procedures with prepayment jurisdiction in Tax Court and refund jurisdiction, following full payment, in the district courts. The brief summed up this argument with the statement: “To permit a taxpayer to invoke the jurisdiction of the District Court simply by paying a part of the deficiency would not only invite a multiplicity of suits with respect to the same tax deficiency but for all practical purposes would obliterate the jurisdictional line drawn by Congress between the Tax Court and the District Court.” In a statement that would come back to haunt it, the government stated that “[t]he only decision in point which lends any support to the taxpayer’s argument, and upon which he chiefly relies, is Bushmiaer v. United States . . . .”

In his reply brief, Mr. Flora stated that “[t]he Government’s entire argument is grounded upon unsupportable assumptions that maintenance of the present suit in some way restrains collection of the balance of the assessment.” The argument about collection permeates not only the reply brief but the subsequent oral arguments and those in Flora II. Mr. Flora’s argument was simple—that allowing him to bring suit after partial payment in no way hindered the ability of the government to pursue collection of the liability and that this part of the government’s argument was a red herring that was inconsistent with the language of section 1346(a).

Like his two briefs, Mr. Flora’s oral argument focused on the language of section 1346(a), the existence of several prior cases permitting refund suits after partial payment, and the ability of the Service to pursue collection against the taxpayer during the existence of the refund suit. Considerable portions of the oral argument consisted of a dialogue between Mr. Flora’s counsel, Randolph Thrower, and Justice Frankfurter with the final questions focusing on Mr. Flora’s ability to pay the balance of the tax. The government’s oral argument relied heavily on the existence of the Tax Court, highlighting not only the legislative history suggesting that the creation of the Tax Court was intended to alleviate the problem of full payment before the filing of a refund suit but also to address the hardship created by the circumstance of full payment.

On June 16, 1958, the Court ruled for the government in Flora I, an 8–1 opinion with Judge Whittaker dissenting. Writing for the majority, Chief Justice Warren quickly found that the language of section 1346(a) was ambiguous. Because of the ambiguity and because of the need for strict construction of waivers of sovereign immunity, he determined that the case required a thorough review of section 1346(a)’s legislative history. He traced the history of the statute back to 1866 and found that the statement in dictum by the Supreme Court in Cheatham provided important guidance on the meaning and application of the language. He further found that the carefully constructed dictum in Cheatham “appears to have prevailed for the succeeding fifty or sixty years.” Building on that statement, he opined that “there does not appear to be a single case before 1940 in which a taxpayer attempted a suit for refund of income taxes without paying the full amount the Government alleged to be due.” This statement did not correctly state the situation as Mr. Flora subsequently pointed out in his motion for reconsideration.

After considering the background of section 1346(a), Chief Justice Warren turned to the government’s argument concerning the creation of the BTA. In this section of the opinion, he found that the court’s creation demonstrated a clear congressional understanding that refund suits could only be maintained by full payment of the tax alleged to be due and quoted from the report of the House Committee that considered the legislation:

Although a taxpayer may, after payment of his tax, bring suit for the recovery thereof and thus secure a judicial determination of the questions involved, he cannot, in view of [the statutory predecessor to section 1346(a)], which prohibits suits to enjoin the collection of taxes, secure such a determination prior to the payment of the tax.

Chief Justice Warren then addressed two of the remaining arguments made by Mr. Flora. First, he found that Mr. Flora’s argument that the BTA was created not to stop a refund suit after partial payment but to allow suit before payment without the threat of collection action during the proceeding was an incorrect interpretation of the legislation. Then, he found that Mr. Flora’s concerns about the hardship created by the Court’s decision did not apply because “such an individual [who was too poor to fully pay the tax] is free to litigate in the Tax Court without any advance payment.” This view, which carried over in the Court’s subsequent opinion in Flora II, obviously reflects a view of the tax world prior to the prevalence of assessable penalties.

Because of the inaccuracy of the Court’s statement concerning the lack of any prior cases involving suits for a refund after only partial payment and, of course, because he lost, Mr. Flora filed a request for rehearing. The Supreme Court granted his request by order dated June 22, 1959, setting up round two.

The Brief for Petitioner on Rehearing presented powerful arguments that past practice did not mandate the result that a taxpayer must fully pay prior to bringing a refund suit. The brief pointed out that, during the early history of refund suits for taxes, taxpayers brought suit against individual collectors and that these suits could be brought without full payment. The early statute introduced the claim for refund not to require full payment but to ensure the exhaustion of administrative remedies prior to the initiation of a suit. The brief then argued for an interpretation of the plain meaning of the statute. It maintained that any reliance on legislative history not only created the wrong impression but was also unnecessary. With respect to the argument regarding the creation of the BTA, the brief reiterated that the Board was not created to relieve the hardship of having to fully pay prior to bringing a refund suit, but rather to protect BTA petitioners from the heavy hand of collection while disputing the tax.

The Reply Brief for the United States on Reargument took the position that Mr. Flora’s arguments on rehearing simply rehashed his arguments in the first hearing. The government did not analyze the language of section 1346(a) but focused instead on what it viewed as the overall statutory scheme for tax litigation created by Congress. Going back to the collection theme and arguing that partial payment would cripple collection, the brief stated that “[p]rimary, of course, in the area of taxation are the needs of the fisc.” In addition to a discussion of the problems partial payment would create in the collection of taxes, the brief included six pages in its final section arguing that the petitioner’s claim of financial hardship was without basis. The brief stated:

far from subjecting taxpayers to hardship, the system devised by Congress for enabling a taxpayer to litigate the correctness of an asserted deficiency affords him ample opportunity to select the Tax Court instead of the District Court as the litigation forum, and, moreover, to do so without paying any part of the deficiency in advance.

Obviously, this argument does nothing to advance the view that the Flora rule should apply in cases involving assessable penalties in which the taxpayer has had no opportunity to select the Tax Court and avoid full payment in order to obtain judicial review.

Mr. Flora’s Reply Brief for Petitioner on Rehearing made a couple of points regarding an individual’s ability to pay and the government’s ability to collect. Quoting the government’s brief, the reply brief asserted that “[t]he Government’s only answer for a financially distressed taxpayer is that ‘there should usually be no problem . . . if the tax is paid as promptly as required . . . .’” It pointed out that this was not an answer for a taxpayer without the ability to pay. With respect to the issue of collection, the brief stated “[t]he Government’s real position is that while this suit does not legally restrain collection, nevertheless, as a practical matter, it interferes in some way with the ‘right to prompt payment of taxes.’ The Government’s briefs, however, do not even provide a shred of evidence to support such a position.”

In the oral argument on rehearing, Mr. Thrower provided only a brief opening argument, reserving the balance of his time for rebuttal, an approach more similar to that of a party who won below rather than the party seeking reversal. Mr. Thrower did argue that the government’s position put taxpayers unable to pay the full amount in the position of never recovering amounts of money wrongfully collected. He further argued that the research provided to the Court demonstrated that the history of refund litigation did not support the conclusion that, before the Coates opinion in 1940, taxpayers were unable to bring a refund suit without full payment. The government then argued, as it had in its brief, that section 1346(a) had to be read in conjunction with the overall statutory scheme for tax litigation and that the scheme was established to stop taxpayers from impeding collection by paying only a fraction of their liability and suing for a refund.

Chief Justice Warren again wrote the majority opinion in Flora II just as he had in Flora I; however, this time he was joined by only four other justices instead of seven. This time he wrote more carefully and took much greater care with the words of section 1346(a). Fending off Mr. Flora’s argument that the phrase “any sum” in the provision had meaning that permits partial payment, the Court sought to find meaning in this phrase as something other than a tax or penalty and settled on reading it as interest, stating “but, as we recognized in the prior opinion, the statutory language is not absolutely controlling, and consequently resort must be had to whatever other materials might be relevant.” The Court found that “the legislative history [of this statute] . . . is barren of any clue to congressional intent.” This time the Court adopted an understanding of the legislative history following the direction of Mr. Flora’s arguments; however, the Court pointed out that this presents “a vexing situation—statutory language which is inconclusive and legislative history which is irrelevant.”

Mr. Flora argued that a basis for allowing partial payment refund suits could be found in the historical acceptance of this practice in suits against collectors. The Court rejected this approach under section 1346(a), going back to the Cheatham case for authority that the 1866 statute had changed the common law basis for suits against collectors. The Court acknowledged that if the history allowing partial payment suits against collectors and the statement of the Supreme Court in Cheatham were the only information available, the case would be inordinately difficult to decide, it but found a way out of this problem by viewing the problem not from the perspective of a “single sentence in an isolated statute, but rather with a jurisdictional provision which is a keystone in a carefully articulated and quite complicated structure of tax laws.” Looking at congressional action since 1921, the Court found that “it is apparent that Congress has several times acted upon the assumption that 1346(a)(1) requires full payment before suit.” It then proceeded to examine the legislative history surrounding the creation of the BTA, concluding that “petitioner’s argument falls under the weight of this [the Congressional Record regarding the BTA] evidence.”

The Court did not end its discussion of the complexity of the statutory scheme based solely on the relationship between the BTA and the district courts. It proceeded to consider the Declaratory Judgment Act enacted in 1934 and amended in 1935 to expressly exclude actions with respect to federal taxes. Quoting from the Senate report describing the basis of the 1935 amendment, the Court pointed out that the adoption of Mr. Flora’s position could potentially undermine the practical effect of the amendment even if it did not legally do so. It then raised the concern that partial payment could allow taxpayers to split their claims between the BTA and district court, citing section 7422(e)’s stay of proceedings. The Court found that this provision, coupled with the creation of the prepayment forum of the BTA and the 1935 amendment of the Declaratory Judgment Act created the complex statutory scheme that supported its conclusion, even when the plain language of the statute and the legislative history behind the statute did not.

Although it could have stopped at this point, the Court addressed two additional issues, one of which is critical to the purpose of this Article. First, the Court addressed the mistaken factual assertion in Flora I that no partial payment refund cases existed prior to the Second Circuit’s decision in Coates in 1940. It accepted the government’s assertion that of the large number of refund cases in the preceding decades, over 40,000, when compared with the “inconsequential” number of decisions allowing partial payment “reinforces the conclusion of the prior opinion with respect to the uniformity of the pre-1940 belief that full payment had to precede suit.” The majority opinion ended by addressing the hardship issue in requiring full payment. The Court stated that “this contention seems to ignore entirely the right of the taxpayer to appeal the deficiency to the Tax Court without paying a cent. If he permits his time for filing such an appeal to expire, he can hardly complain that he has been unjustly treated.”

The view that a taxpayer’s ability to petition the Tax Court for review alleviates the hardship of full payment not only loses force in a system that now creates a panoply of liabilities that do not permit Tax Court review, but also sacrifices “the harmony of our carefully structured twentieth century system of tax litigation.” Because tax liabilities that do not offer the opportunity for review before the Tax Court (or the district court with a small divisible payment) undermine the harmony of the tax litigation system upon which the Flora II decision rests, some adjustment in the system must occur in order to restore that harmony.

The Flora decision involved a taxpayer who decided not to pursue his remedy before the Tax Court or missed the deadline for whatever reason. The reasons Mr. Flora failed to petition the Tax Court for review remain unknown, but they had an important impact on the outcome of the case. The decision in Flora II can be read broadly to require that every taxpayer who seeks to bring a suit under section 1346(a) must fully pay the liability before doing so, and, as discussed above, this is the interpretation that the government now asserts. But the opinion can also be read more narrowly as holding only that, in the complex interplay of federal tax litigation options, a taxpayer who has the opportunity to litigate in Tax Court prior to assessment may not later contest a tax liability in district court without full payment. This second interpretation, which the government accepted at its highest levels at least through 1975, better preserves the harmony of the complex interplay of the statutory framework that serves as the foundation for the Supreme Court’s adoption of the Flora rule.

III. Post-Flora Application of the Full-Payment Rule to Taxes

The harsh rule of full payment espoused in Flora need not prevent taxpayers from obtaining judicial review in district court if exceptions exist that mitigate the requirement to first pay all of the money due. Flora I recognized that certain liabilities had a divisibility feature and that this feature served as an exception to the requirement of full payment of the assessment. This Part explores three exceptions: divisibility, termination, and interest. Of the three, only the divisibility exception would assist someone in the position of Mr. Flora or Mr. Larson (or a low-income taxpayer) because their cases would not involve a termination assessment and because, in each situation, the tax or penalty assessment itself was too high for the taxpayer to pay, with the result that an exception for the payment of interest simply would not matter. If Congress made all nondeficiency assessment cases divisible, it could accomplish through legislation what Mr. Flora failed to achieve through litigation. Congress has partially provided relief through divisibility for some assessable penalties, but for many of the assessable penalties, it has failed to do so for reasons that have not clearly been articulated.

A. Divisibility

Some taxpayers whose tax liabilities fall outside the deficiency process allowing litigation prior to assessment may still obtain judicial review following a nominal, or relatively nominal, payment. A large subset of nondeficiency procedure liabilities fall into the category of divisible taxes or penalties. If divisibility applies, a liability does not require full payment to satisfy the Flora rule. The divisibility exception to the full-payment rule traces its roots to Steele v. United States, decided shortly after Flora. In Steele, each officer paid $50.00 representing a portion of the section 6672 (trust fund) penalty and sued for a refund. The government moved to dismiss the case for lack of jurisdiction, citing the recently decided Flora case calling for full payment. The district court dismissed the case citing Flora, but on appeal, the government conceded error, stating “that the withholdings involved constituted separate taxes as to the individual employees of the corporation; and that the penalties imposed similarly would be entitled to be regarded as divisible assessments made in relation to the individual withholdings.” The court accepted the concessions as a correct legal result. The government has never sought to alter this result for employment taxes.

Perhaps the most common applications of the divisibility exception involves the trust fund recovery penalty (“TFRP”) of section 6672—one of the four assessable penalties that existed at the time of the Flora decision—that was at issue in Steele. TFRP arises when a person willfully fails to collect and pay over a tax liability collected on behalf of the United States by a third party—usually a business handling goods subject to a federal excise tax or obligated to withhold employment taxes. The most typical situation involves employment taxes. The employer will collect taxes for the United States from its employees by withholding income, Social Security, and Medicare taxes from their paychecks. The employer holds these withheld funds in trust for the United States. If the employer fails to pay the withheld amounts, the employer becomes liable for the unpaid withholding taxes and, at essentially the same time, the persons in addition to the employer responsible for the failure to pay the withheld taxes become personally liable. They do not have the normal protection that a corporate structure provides.

The Service can assess the TFRP without giving the responsible person the right to contest the assessment before the Tax Court. Depending on the case, the assessment could involve a large liability. For example, assume that Acme, Inc. fails to pay to the Service the $100,000 of taxes it withheld from employees over a period of time. The Service might assess Mr. Smith, a person the Service deems responsible for the failure of Acme, Inc. to pay the taxes, $100,000 in unpaid employment taxes. A liability of this size could bar Mr. Smith as a practical matter from contesting the Service determination that he shared responsibility for paying the employment taxes. Nevertheless, because the TFRP liability is treated as divisible, Mr. Smith can pay the amount of tax withheld from one employee for one quarter (a tax period for employment taxes), file a claim for refund, and sue for a refund in district court if the Service does not grant the claim administratively. The amount Mr. Smith may need to pay to obtain a review of the liability could be as little as $50 or $100. Because of the small amount of the divisible portion of liability in Mr. Smith’s case and in almost every case of divisible taxes, the harshness of the full-payment rule that concerned Mr. Flora and the Supreme Court does not exist. Almost everyone can raise the relatively minor amount of divisible tax usually needed to proceed to a point allowing for judicial review.

While divisibility mitigates the full-payment rule when it applies, it raises the question when a liability satisfies the divisibility test, as well as how to apply the rule. In Larson, the Service argued, and the court found, that the section 6707 tax assessed against him did not meet the divisibility requirement. This meant he had to pay the full amount of the liability to obtain judicial review. The decision in Larson followed the decisions in two other recent cases. In those cases, the courts found that they should narrowly construe the divisible tax exception in favor of the full-payment rule. Yet, Congress has not provided any rational scheme for when the divisibility provisions apply and when they do not. The current situation appears totally arbitrary. Further, and as discussed earlier, the divisibility provisions themselves vary, with some providing taxpayers a very brief window for seeking judicial review after a partial payment and others requiring more substantial partial payments.

B. Termination and Laing v. United States

In Laing v. United States, the Supreme Court returned, at least tangentially, to the Flora rule of full payment. Laing involved a pair of cases in which the Service had made termination assessments. Section 6851 authorizes the Service to terminate a taxpayer’s tax year and to take the taxpayer’s property immediately. Mr. Laing, a citizen of New Zealand, was “caught” by border patrol agents as he attempted to leave the United States with a suitcase in the engine compartment of his car containing over $300,000 of cash. The discovery of the cash led the Service to terminate his tax year and to seize the cash. Similarly, Mrs. Hall, a resident of Kentucky, had her home searched after her husband was arrested in Texas for drug possession. The search turned up a small amount of illegal drugs. The Service then terminated her tax year, creating an assessment for which, unlike Mr. Laing, she did not have ready cash to pay the assessment. Mr. Laing and Mrs. Hall each separately filed suit in the district courts in Vermont and Kentucky, respectively. Both argued that the Service had to issue a notice of deficiency before it could assess and collect from them. On appeal, the Second Circuit, following prior precedent in Irving v. Gray, found that the Service need not issue a notice of deficiency, while the Sixth Circuit found that it should.

The full-payment rule created in Flora played a role in the resolution of these cases because the remedies available to taxpayers against whom the Service had asserted a termination assessment was unclear. The government took the position that the statute did not permit the Service to issue a notice of deficiency. Moreover, at oral argument before the Supreme Court, both in the first instance and on rehearing, the representative of the Solicitor General’s office arguing on behalf of the government made the representation that the taxpayers had the ability to petition the district court and seek a refund without first making full payment because the Flora decision applied only in those cases in which the taxpayer otherwise had the opportunity for review before the Tax Court.

The Solicitor General’s office is very careful about the representations it makes to the Supreme Court. That office not only provided the government’s position concerning Flora in the first Laing argument, but it repeated the argument during the rehearing of the Laing case ten months later. The failure to retract the significant concession concerning the government’s view of the Flora rule and the restatement of that position provides additional support for the view that this represented the unmistakable position of the government regarding the meaning of the Supreme Court’s decision in Flora. This view of the Flora rule was not presented as part of a casual argument raised in the heat of a presentation before the Court. The view was presented in an attempt to win the case before the Supreme Court, as it provided a path for the Court to take in finding that the termination provisions did not violate due process and did offer the taxpayer a meaningful opportunity for judicial review.

While the position of the Solicitor General does not control the courts, it does reflect the position of the government on an issue. The government must speak with one voice before the Supreme Court, and the Solicitor General serves as that voice. If the Solicitor General takes a position on behalf of the United States before the Supreme Court, neither the Department of Justice nor agencies of the United States can reverse that position without permission of the Solicitor General’s office. It is not clear when and how the Service and the Department of Justice obtained permission from the Solicitor General’s office to reverse the position of the United States concerning the Flora rule that it now routinely asserts in assessable penalty cases.

The Supreme Court in Laing determined that the Service must issue a notice of deficiency in termination cases just as it does in jeopardy cases. Because of this decision, the Court did not need to address the Flora rule. Because it did not address the Flora rule and the arguments made by the Solicitor General in its majority opinion, the Laing decision stands to the side of the current Flora debate despite the strong position taken by the Solicitor General’s office, which supports the position of taxpayers like Mr. Larson. Although Mr. Larson pointed out to the Second Circuit the position taken by the Solicitor General in Laing and the United States did not refute what the Solicitor General said to the Supreme Court or point to a change of position by the Solicitor General’s office, the Second Circuit did not address this inconsistency on the part of the government in its opinion.

C. Post-Flora Application of the Full-Payment Rule to Penalties and Interest

Immediately after Flora, no clear answer existed with respect to the meaning of full payment. Did it include interest? Did it include penalties? Did it include both? Flora only addressed the issue of the need to pay the tax in full and did not resolve whether the district court’s jurisdiction in a refund suit also requires the taxpayer to pay the interest and penalties related to the tax in full. In the same footnote in Flora II acknowledging that divisible taxes might have a different rule, the Supreme Court stated that the payment of the tax alone, without the interest, might be sufficient. In the intervening 60 years, the Supreme Court has never reentered the picture to settle this question. Section 1346(a) remains essentially the same as it did at the time of the Flora decision.

Nevertheless, two of the Circuit Courts of Appeals have addressed this question. In Magnone v. United States, the taxpayers paid the tax deficiency and some of the interest and then argued that the Service had overcharged them interest under either section 6601(c) or 6404(e). The Second Circuit concluded that the Flora rule required full payment of all tax, penalties, and interest. Similarly, in Shore v. United States, the Federal Circuit concluded that the Flora rule required full payment of all tax, penalties, and interest but stated that

[o]nly if the taxpayers assert a claim over assessed interest or penalties on grounds not fully determined by the claim for recovery of principal must they prepay such interest and penalties as well as the assessed tax principal.

Curiously, the Federal Circuit in Shore did not mention the earlier Second Circuit’s opinion in Magnone. Although the Second Circuit’s holding could be viewed as in conflict with that in Magnone, one can harmonize the two holdings, since Magnone involved taxpayers who argued that the Service had not correctly calculated the interest amount and their argument on that point would not have been resolved by the litigation regarding the tax deficiency.

To the extent that a trend exists regarding the payment of interest and penalties related to the underlying tax, the trend appears to favor including them as part of the necessary payment if the refund claim specifically places them at issue. The Service appears to agree with the decision in Shore.

IV. Due Process

The Due Process Clause of the Fifth Amendment prohibits the government from depriving persons of “life, liberty or property without due process of law.” Does the practical impossibility of judicial review of a penalty assessment violate due process? Is judicial review the only mechanism for providing due process? The Third Circuit has held that the Fifth Amendment provides a taxpayer, against whom the Service has made a penalty assessment, “the opportunity to be heard at a meaningful time and in a meaningful manner.” What does the right to a meaningful hearing grant to a taxpayer? The Third Circuit further stated that “the concept [of the hearing] is flexible, calling for procedural protection as dictated by the particular circumstance.”

Taxpayers with extremely high, nondivisible assessments still have the theoretical right to pay and then sue in district court. No taxpayer is without a de jure judicial remedy. This right to a hearing has kept courts from finding a due process violation in the full-payment rule. The existence of a bare legal right has trumped the impossibility of exercising that right.

In Philips v. United States, the Supreme Court concluded that a rule requiring a taxpayer who disputes a tax liability to pay that liability before seeking judicial review did not violate the Due Process Clause. When the Supreme Court decided Phillips in 1931, the two judicial forums potentially available to taxpayers were the Tax Court (then the BTA) and the district courts (or the Claims Court). In Philips, the Supreme Court expressly stated that “[t]he procedure provided in [the Code] satisfies the requirements of due process because two alternative methods of eventual judicial review are available to the [taxpayer].” The same two judicial forums existed in 1958 and 1960 when the Supreme Court decided Flora I & II, and the same judicial options exist today. Nevertheless, one significant difference is that taxpayers subject to certain penalty assessments have only one option—the district court—and since the decision in Flora, Congress has expanded the penalty provisions to include assessed amounts so large that almost no one could pay the liability. The prospect of a penalty assessment so large that almost no one could satisfy it did not exist at the time of the Philips or Flora decisions. This situation raises issues similar to those addressed in Flora, but with a constitutional grounding. Nevertheless, no court that has considered the impossibility of practical payment has found that the full-payment rule violates due process.

The issue of due process came before the Supreme Court in Laing. Because the Supreme Court determined that the taxpayers had the right to receive a notice of deficiency upon the termination of a tax year, the decision removed the concern regarding access to judicial review. This, in turn, removed any due process concerns. The Court noted further that failure of the Service to send the notice of deficiency in situations in which the statute requires the Service to issue a notice of deficiency allows the taxpayers to stop collection without the normal procedural bar of the Anti-Injunction Act. In his concurring opinion, Justice Brennan devoted his comments entirely to due process. He focused his concerns on the lengthy amount of time it takes to obtain a judicial determination in a tax case after the taking of a taxpayer’s property. Justice Blackmun in dissent opined that the taxpayer’s opportunity to go to district court eliminates any due process concerns and also concluded the taxpayer can obtain judicial review in Tax Court by filing tax returns.

Most courts rely on the theoretical ability of the taxpayer to obtain a judicial remedy, but some have also pointed to the existence of the ability of the taxpayer to have an administrative hearing. The availability of the administrative hearing with the Service Appeals Office was cited in both strands of recent cases as justification for denying relief to taxpayers facing the practical impossibility of making full payment. These courts described the Service Appeals Office as an “independent” decision maker. These courts accord the Appeals Office independent status even though it is bound by Service rulings that guide, and at times control, the decision it must make.

The due process argument seeks to find traction through the Supreme Court’s decision in Goldberg v. Kelly. In Goldberg, the Supreme Court held that tenants receiving Aid to Families with Dependent Children (AFDC) must receive a hearing prior to the termination of this federal aid program. The Court rejected the government’s argument that the post-termination hearing coupled with the informal pre-termination review was sufficient. Mr. Larson tried to channel the Supreme Court’s thinking in the Goldberg case by citing to an early Supreme Court decision discussing taxes and due process—Phillips. As previously noted, the Court in Phillips held that the twin judicial opportunities before the Tax Court and the district courts satisfied due process concerns about judicial review. Mr. Larson argued that he had no Tax Court option, but the Second Circuit held that the Court in Phillips “did not conclude due process required both.” The Second Circuit quoted Phillips and stated that “[w]here . . . adequate opportunity is afforded for a later judicial determination of legal rights” the government’s collection activities prior to judicial proceedings “have been consistently sustained.” The Second Circuit explicitly told Mr. Larson that the fact that Congress had not offered him a prepayment forum for judicial review and that the amount of the penalty happens to be beyond his financial reach “is not a due process defect.”

Nevertheless, with respect to his due process argument, the Second Circuit did address the three-factor framework adopted by the Supreme Court in Matthews v. Eldridge, albeit as further support for its conclusion that no due process violation occurred. In Matthews, the Supreme Court considered the due process requirements surrounding the termination of social security benefits and concluded that “resolution of the issue whether the administrative procedures provided here are constitutionally sufficient requires analysis of the governmental and private interests that are affected.” To make this determination, the Court identified three factors: (1) “the private interest that will be affected by the judicial action”; (2) “the risk of an erroneous deprivation of such interest through the procedure used and the probable value, if any, of additional or substitute procedural safeguards”; and (3) “the Government’s interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.”

Applying this three-factor framework in Larson, the Second Circuit acknowledged Mr. Larson’s inability to pay, but found that the administrative opportunity to have his case heard by the Appeals Office adequately balanced his concerns with those of the government. The Second Circuit also cited the government’s substantial interest in protecting the public purse. The decision placed almost no weight on Mr. Larson’s practical inability to pay $60 million to bring a traditional refund suit. This failure follows other courts engaging in the same analysis and demonstrates the difficulty taxpayers face on this issue.

Obtaining relief from the lack of judicial review on a constitutional basis is a heavy lift. This approach is not included in the suggested list of solutions provided later in this Article because of the difficulty of overcoming the existing judicial reaction to due process claims. A court that is persuaded of the severity of the current situation seems much more likely to find an exception to the Flora rule or to invalidate a regulation before going to the constitution as the basis for resolving the problem.

V. History of Assessable Penalties

Congress has created many assessable penalties since the decisions in Flora I and II. It has also shown that it knows how to make these penalties divisible. The courts have interpreted the existence of a divisibility feature for some assessments as evidence of a congressional intent that not all assessments should be treated as divisible. Nevertheless, the creation of a divisibility feature for some assessable penalties should not result in the creation of a monolithic class of liabilities that impose significant barriers effectively preventing judicial review. Undoubtedly, Congress has not approached the creation of these penalties with a strategy for divisibility; but a sufficient number of assessable penalties with a divisibility feature exist today to cast doubt on the view that Congress simply did not consider the full-payment rule as it created this new class of liabilities.

Prior to the Flora decisions, only four assessable penalties existed. Of the four penalties, only the TFRP was regularly imposed. Because the TFRP was (and still is) divisible, the assessable feature of the penalty did not create a significant barrier to litigation. In contrast, since the Flora II decision, Congress has created many new assessable penalties some of which have a divisibility feature, including the penalty against return preparers for understating a liability, the penalty for aiding and abetting the understatement of tax liability, and certain tax shelter promoter penalties. As discussed above, the divisibility features of these penalties may impose significant time restrictions on taxpayers seeking to litigate without full payment.

The problem with assessable penalties and divisibility stems from the lack of consistency in providing a divisibility feature coupled with the lack of any explanation why some penalties are divisible and others are not. Assessable penalties seem to arrive in an ad hoc fashion with divisibility features likewise appearing randomly. Congress has not engaged in a serious review of assessable penalties or announced any justification when enacting penalties without providing a pre-assessment opportunity for litigation.

VI. Merits Litigation in CDP Cases

In 1998, Congress created CDP to provide taxpayers with an opportunity to talk with the Service before it levied on property and after it filed a notice of federal tax lien. Although the focus of CDP is on collection action, Congress included in the legislation a provision allowing taxpayers to litigate the merits of their tax liabilities if they had not previously had such an opportunity. Congress did not, however, provide an unlimited opportunity to contest the merits of a liability included in a CDP. The opportunity rests on two separate requirements joined by an “or.” Section 6330(c)(2)(B) allows the Tax Court to make a merits determination when the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”

The first basis for contesting the merits of a tax liability in the CDP context arises if the taxpayer did not actually receive the statutory notice of deficiency. In the hearings leading up to the 1998 legislation, Congress heard from many taxpayers who said that they never received a statutory notice of deficiency and that the first time they learned that they owed the Service occurred when the Service began collection action against them. Taxpayers who do not receive a statutory notice of deficiency, due to some mistake in the mailing or delivery of the notice, have an opportunity to contest the liability in a judicial forum if they timely file a CDP request. The statutory notice of deficiency would only have legal effect if it had been sent to the taxpayer’s last known address. Consequently, whatever may have prevented these taxpayers from receiving a notice of deficiency, they have an additional opportunity to seek review in the Tax Court through the CDP process.

The language of the statute permits these taxpayers to petition the Tax Court to litigate their liability as long as they can prove non-receipt of the notice of deficiency. Proof usually consists of their testimony that they never received the notice. Assuming that the taxpayer meets the burden of proving non-receipt, the statute places no limitations on the taxpayer’s ability to contest the merits of the taxpayer’s claims.

In contrast to those CDP cases in which the taxpayer can contest the taxes reflected on a notice of deficiency, the statute creates a second, less well-defined group of taxpayers who can contest the merits of a tax liability in CDP. This group of taxpayers are ones “who did not otherwise have an opportunity to dispute such liability.” This language leaves room for interpretation with respect to the statutory phrase “opportunity to dispute.” The Service adopted a regulatory definition providing that an “opportunity to dispute” includes “a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability.”

The interpretation adopted by the regulation has the effect of eliminating the opportunity for judicial review of the liability if the taxpayer had a conference with Appeals to discuss the imposition of the liability or had an opportunity to have such a conference. What are the types of cases in which the taxpayer will likely have had a prior opportunity to dispute such a liability? They include assessable taxes and penalties and, in particular, the assessable taxes and penalties that do not have a divisibility feature. Consequently, taxpayers, such as Mr. Larson or the low-income taxpayer described above, who do not have a realistic opportunity for judicial review to dispute their liabilities as discussed in detail previously, may well be the taxpayers who most want to avail themselves of the relief available through merits litigation in CDP. But standing in their way is the language of the regulation which appears to deny them the very opportunity to litigate the merits of their claims if they met with or had the chance to meet with Appeals.

In Lewis v. Commissioner, the first case in which the Tax Court issued a precedential opinion on this issue, the Tax Court upheld the validity of the regulation. The Tax Court found that a prior opportunity to dispute the underlying tax liability includes a prior post-assessment conference conducted with Appeals, even when the taxpayer has no right to judicial review of the determination. The decision of the Tax Court in Lewis essentially stood uncontested for almost a decade, until the filing of three cases in the Tax Court in 2014 contesting the limitation of the regulation and the validity of the regulation itself: Iames, Keller Tank Services II, Inc., and Our Country Home. In each case, the Tax Court followed Lewis and sustained the validity of the regulation. The taxpayers subsequently brought appeals to the Fourth, Seventh, and Tenth Circuits and lost in each one.

The Fourth Circuit in Iames rendered the first circuit court opinion on this issue and concluded that the primary thrust of CDP concerns the collection, and not the fixing, of the underlying liability, stating that “Congress envisioned only limited CDP review of the taxpayer’s underlying liability.” Importantly, the Fourth Circuit concluded that section 6330(c)(2)(B) does not proscribe whether the taxpayer’s opportunity to dispute the liability is an administrative or judicial opportunity. It characterized the taxpayer’s argument that the statute precludes “CDP review only where the taxpayer had a chance to contest his liability in court” as an attempt to read something into the statute that does not exist. In justifying its decision regarding the reasonableness of the regulation, the Fourth Circuit first found that in the administrative hearing before Appeals “taxpayers . . . have a genuine chance to explain why” they are not liable for the amount assessed by the Service. Then, in describing the administrative opportunity to contest the liability, the court described the Appeals Office of the Service as “an independent decisionmaker.” The Fourth Circuit found the regulation to be not only a reasonable, but the correct, interpretation of the statute.

In a reversal of its position regarding the appropriate interpretation of the statute, the Service asserted a second basis for denying judicial review. It argued that section 6330(c)(4)(A) also prohibits a challenge to the liability during the CDP hearing. Subsection (c)(4)(A) provides that “[a]n issue may not be raised at the [CDP] hearing if … the issue was raised and considered at a previous hearing under section 6320 or in any other previous administrative or judicial proceeding; and . . . the person seeking to raise the issue participated meaningfully in such hearing or proceeding.” The Fourth Circuit agreed with the Service that “[s]ection 6330(c)(4) bars Iames from challenging his liability in the CDP context.” Mr. Iames argued that subsection (c)(4)(A) only applies to collection issues and not to challenges to the merits of the liability which are exclusively addressed by section 6330(c)(2)(B), but the court rejected this argument based on the broad “preclusive scope” of subsection (c)(4).

The Tenth Circuit issued the second opinion in this trilogy of opinions concerning merits litigation in CDP in Keller Tank Services II, Inc. The Tenth Circuit applied the Chevron analysis with respect to the regulation and concluded that section 6330(c)(2)(B) was ambiguous in step one and that the interpretation of the statute in the regulation was a reasonable interpretation in step two. Like the Tax Court and the Fourth Circuit, the Tenth Circuit found that nothing on the face of the statute precluded an interpretation of the phrase “opportunity to dispute” as meaning an administrative or judicial hearing. The court found it unnecessary to consider subsection (c)(4)(A) because subsection (c)(2)(B) resolved the issue. The Tenth Circuit also expressed agreement with the Tax Court’s interpretation of this issue in Lewis, specifically quoting the language on the meaningful opportunity offered by a conference with Appeals.

In addressing the taxpayer’s concern that without the chance to have a merits hearing in the CDP process it would have no judicial remedy, the Tenth Circuit fell back on the old saw of refund litigation stating that Regulation section 301.6330-1 “has no impact on the taxpayer’s ability to file a refund suit in federal district court. The jurisdiction of federal courts remains available for a taxpayer to contest its liability.” The court made no mention of the problem a taxpayer would confront in making full payment of a nondivisible, assessable penalty.

Lastly, in Our Country Home, the Seventh Circuit had the benefit of the two recent circuit court opinions on the issue. While making the same core decision upholding the validity of the regulation, the Seventh Circuit did so based on slightly different reasons than those of the Fourth and Tenth Circuits. The Seventh Circuit was the first of the three circuits to clearly appreciate the importance of the opportunity for judicial review in CDP for taxpayers who do not have the chance to litigate in Tax Court. The court acknowledged the importance of an administrative hearing before Appeals on the merits of the liability in the CDP case:

the CDP hearing amounts to much more than a second bite at the apple. Indeed, insofar as a taxpayer uses the CDP process to challenge its liability, the administrative portion of the hearing is largely irrelevant. That’s because taxpayers have the right to seek judicial review of the Appeals Office’s decision in tax court. . . . And the tax court reviews the Appeals Office’s determinations on the liability de novo. . . . Thus, when liability is at issue, the administrative leg of a CDP hearing is better understood as a gateway to prepayment, de novo judicial review.

Unlike either of the prior circuits addressing the issue, the Seventh Circuit exhibited an understanding of what is really at issue. Indeed, precisely because Appeals is not truly independent, taxpayers in the position of Keller Tank and others with assessable penalties will have only a small expectation of success in Appeals but should then have the opportunity to obtain review before a judicial body. The Seventh Circuit acknowledged that only if it agreed with the taxpayer’s interpretation of the statute—that a prior “opportunity to dispute” refers to a judicial hearing—would Our Country Home be able to obtain judicial review without first paying $200,000. Nonetheless, the court stated “[w]e acknowledge that the government’s interpretation effectively closes the door to prepayment judicial relief for taxpayers in Our Country Home’s position. Nevertheless, we uphold the government’s interpretation under Chevron.”

Our Country Home was the first decision to acknowledge the manner in which the regulation interpreting section 6330(c)(2)(B) interrelates with Service practice and its implications for taxpayers. The taxpayer argued that, by including a prior administrative hearing as an “opportunity to dispute,” the regulation essentially eliminated any opportunity for judicial review since a taxpayer will always have an opportunity for an administrative hearing with Appeals at the time of the assessment. The regulation’s inclusion of an administrative hearing means that in no case will a taxpayer be able to contest the merits of the liability before the Tax Court because in every case the taxpayer will have had such an opportunity prior to the CDP hearing.

Despite its acknowledgment of the problem, the Seventh Circuit rejected the taxpayer’s argument. The court also pointed to a concession by the taxpayer that the Service only “sometimes” offers the opportunity for a hearing before the Appeals Office prior to an assessment. The court failed to note, however, that the Internal Revenue Manual directs Service employees to offer the opportunity for an Appeals hearing in essentially all cases of assessable penalties. Because the Service does not always follow its procedures and may only offer taxpayers a post-assessment opportunity for a hearing in Appeals, some taxpayers will have the “opportunity” to contest the merits of an assessable penalty in Appeals in a CDP case but only if the Service slips up and fails to offer the “opportunity” for a hearing prior to making the penalty assessment. But because the decision to offer only a post-assessment hearing is up to the Service and not mandated by statute, the Seventh Circuit concluded that taxpayers are not foreclosed from raising the merits in “all” cases. Thus, the ability to have a merits hearing in CDP turns on the whim or competence of the Service rather than Congressional mandate. It is difficult to believe Congress intended this result.

The Seventh Circuit’s Chevron analysis mirrored the analysis of the other circuits—the statute is ambiguous and the regulation is a reasonable interpretation. Here, the court used subsection (c)(4) in a slightly different and quite logical way. It cited subsection (c)(4) to demonstrate that Congress knew how to distinguish prior judicial opportunities for review from prior administrative ones. The lack of the same specificity in subsection (c)(2)(B) renders that subsection ambiguous in addition to showing that Congress could easily have fixed the problem that concerned the taxpayer. The court also used subsection (c)(4) to make the point that if it held that the phrase “opportunity to dispute” in subsection (c)(2)(B) includes only judicial actions, then taxpayers like Our Country Home would avoid the opportunity for an administrative hearing with Appeals at the time of the assessment for fear that subsection (c)(4) would preclude later raising the issue. The court clearly rejected the taxpayer’s argument that subsection (c)(4) only applies to the collection issues in the case. Unlike the other circuits, the Seventh Circuit acknowledged the existence of some lack of harmony between subsection (c)(2)(B) and subsection (c)(4), but it resolved any potential problems by concluding that subsection (c)(4) only applies if a taxpayer requests a hearing with Appeals before the CDP case.

Through slightly different but primarily similar paths, each of the three circuits reached the same conclusion. Taxpayers with assessable penalties will not have CDP as a door to enter the Tax Court and litigate the merits of a penalty assessment.

VII. The Role of the Taxpayer Bill of Rights in Providing an Independent Review of Service Decisions and Creating a Fair and Just Tax System

Congress enacted reform legislation impacting tax procedure in 1988, 1996, and 1998. The bills passed in these three years carried the informal, if not formal, title of Taxpayer Bill of Rights I, Taxpayer Bill of Rights II, and Taxpayer Bill of Rights III, respectively. These pieces of legislation codified procedures the Service had adopted administratively that benefited taxpayers, such as installment agreements, and created new taxpayer favorable procedural provisions such as financial disability, CDP, and others. The specific additions to the Code created in these three pieces of legislation did not, however, address basic taxpayer rights despite the names given to the legislation.

National Taxpayer Advocate (NTA) Nina Olson made adoption of a true Taxpayer Bill of Rights (TBOR), reflecting the fundamental rights that taxpayers should expect when interacting with the federal tax system, a focal point of her tenure. She recommended congressional enactment of a statutory provision including such taxpayer rights as the right to be informed, the right to be assisted, the right to be heard, and the right of appeal. One of the biggest concerns of the NTA in proposing TBOR was that a tax system that did not make the rights of taxpayers explicit could undermine voluntary compliance. Voluntary compliance plays a vital role in the success of our tax system, and ensuring its continued vitality is essential for compliance.

In 2014, the Service adopted a TBOR administratively as a statement of principles for Service employees to follow. Then, in December of 2015, Congress enacted section 7803(a)(3) codifying TBOR. TBOR does not explicitly grant new rights to taxpayers, and its provisions focus on Service employees and their behavior toward taxpayers; however, the language speaks of rights that have meaning in the context of a taxpayer’s need for an independent review of the decisions of the Service and of fairness. The language and the spirit of TBOR support the notion that taxpayers should have a judicial forum in which to raise concerns about an assessment. Two of the ten items in TBOR have particular applicability to the right for judicial review.

Section 7803(a)(3)(E) of TBOR provides for “the right to appeal a decision of the Internal Revenue Service in an independent forum.” If that right has meaning, the issue of what constitutes an independent forum takes on special importance. While the Appeals Division of the Service has some aspects of independence and presents itself as independent, it has only a limited amount of independence, and that independence could have severe limitations in a case such as Mr. Larson’s or in cases involving alleged frivolous positions. Although the Appeals Division seeks to provide an independent review of a case, on some issues its ability to maneuver becomes restrained by litigating positions adopted by the Service. For example, taxpayers may argue the invalidity of a regulation and persuade a court to overturn that regulation. Appeals will not overturn a regulation and adopt the position asserted by the taxpayer. Moreover, because Appeals operates within the Service and under rules governing Service employees, its independence from the Service has limitations. A taxpayer seeking to challenge certain determinations made by the Service cannot find relief in Appeals because it has no authority to grant relief. In certain matters the agency ties the hands of Appeals, preventing it from granting an independent review. Even in matters in which overriding agency rules do not tie the hands of Appeals on a specific case or matter, its independence does not reach the level of that of the judiciary.

Section 7803(a)(3)(J) of TBOR provides for “the right to a fair and just tax system.” If Congress meant what it said in codifying this right, it must have intended that taxpayers have the right to a judicial review of tax assessments. The current application of the Flora rule and the CDP provision which denies certain taxpayers the right to obtain judicial review of Service action is inconsistent with a fair and just system. The passage of the CDP provisions represented a congressional recognition of the importance of providing taxpayers with an opportunity to have their concerns heard. The inclusion of the right to litigate the merits of a tax liability under certain circumstances was an important part of allowing taxpayers to appropriately raise concerns. The current combination of authorities interpreting Flora and the CDP regulations, however, frustrates the right to a fair and just tax system. Although the codification of this right may not carry with it specific remedies that directly translate into a change in the structure for legal review, the recognition and codification of this right provides a strong justification to remedy the problems caused by the current interpretation of the Supreme Court’s opinion in Flora, which predated both the adoption of refundable credits and Treasury regulations interpreting the right to litigate the merits of a liability in the CDP context.

The answer to the problem of a lack of a judicial review for certain types of tax obligations cannot be directly found in the codification of TBOR; however, the provisions discussed here do provide a framework and an impetus to change the current system. The concept that taxpayers have a right to an independent review of a decision by the Service and the right to a fair and just tax system leads directly to a right to have an opportunity for judicial review of Service decisions.

VIII. Finding a Solution for Taxpayers Currently Prevented from Obtaining Judicial Review of a Tax Liability

The plaintiff in Larson argued, inter alia, for recalibrating the Flora rule as a solution to the current problem. The plaintiffs in Pfaff v. United States and Diversified Group, Inc. v. United States argued for recognition of the divisibility of assessable penalties as the solution to their problems. The plaintiffs in Iames, Keller Tank, and Our Country Home Enterprises argued for striking the CDP regulation that restricts merit litigation in CDP cases in which the taxpayer has not previously had the opportunity for judicial review. The NTA provided a tiered set of recommendations to fix the problem created by Flora starting with clarifying that the full-payment rule does not apply unless the liability is subject to review before the Tax Court. Her second suggestion sought to recalibrate the meaning of full payment. Her third recommendation would expand the Tax Court’s jurisdiction to allow it to hear nondeficiency cases. Her fourth and final recommendation sought to fix the problem by expanding the Tax Court’s CDP jurisdiction. This change would require retooling CDP in several ways and perhaps relying on the intent of Congress in passing the CDP statute. To create a system that allows all taxpayers to litigate the merits of a tax liability, the solution needs to fit a broad category of cases. This Part will discuss the possibility of fixing the problem through each of these approaches.

A. Fixing Flora by Making Clear It Only Applies to Deficiency Cases

As discussed above, the Supreme Court’s decision in Flora II was closely divided, and the majority seemed persuaded that taxpayers who could not pay had the opportunity to petition the Tax Court to resolve their dispute before paying. As demonstrated in the section on assessable penalties, a long list of penalties now exists that leave many taxpayers without an opportunity to petition the Tax Court to contest their liability. Additionally, most of the assessable penalties do not allow the taxpayer to pay a divisible portion of the liability and sue for a refund.

To provide such taxpayers with an opportunity to obtain judicial review, one option would be to adopt the interpretation of Flora expressed by the Solicitor General in Laing—the opportunity to go to district court without full payment of the assessment if recourse to the Tax Court does not exist. This option would allow those taxpayers who cannot file a petition in the Tax Court or for whom the assessment is not divisible an opportunity to pay some portion of the tax, file a claim for a refund, and bring suit if the Service denies the claim or fails to act within six months.

This approach would not overrule Flora. In Flora, the Supreme Court had before it a taxpayer who had received a notice of deficiency and had failed to petition the Tax Court for review. A taxpayer who receives a notice of deficiency should not have the opportunity to pay some portion of the tax and file a claim in district court because of the prior opportunity to petition the Tax Court. This approach would acknowledge that the Supreme Court in Flora did not address the situation involving a taxpayer who does not have the opportunity for relief before the Tax Court or who does not have a divisible tax. Instead, this approach would leave intact the Supreme Court’s decision but acknowledge that the Flora rule was never intended to apply in cases in which the assessment of the liability did not make use of the deficiency process or involve a divisible tax or penalty. Moreover, this approach would recognize that a new breed of cases has arisen since the Flora decision, and that the taxpayers in these new cases need and deserve an opportunity for judicial review other than through full payment. This approach also avoids the arguments in Flora II concerning the 1935 amendment to the Declaratory Judgment Act and section 7422(e). Although the Flora II decision considered the provisions of the Declaratory Judgment Act and the Anti-Injunction Act to support its decision based on the complex statutory scheme applicable to tax litigation, the lack of Tax Court jurisdiction for taxpayers confronting assessable penalties does not directly impact the weight of the Court’s determination with respect to these issues.

An exception to the Flora rule in connection with assessments that do not provide for review before the Tax Court or that are not divisible would provide these taxpayers with review before the district court. As argued by Mr. Flora, it would not prevent the Service from continuing its collection efforts during the period of the litigation. In addition, the opportunity to bring a refund case after payment of only a small portion of the assessed liability would provide the Service with the opportunity to assert a counterclaim for the balance of the liability; the Service could thus obtain a judgment against the taxpayer in those cases in which it prevails. Moreover, a judgment against the taxpayer would create an unlimited period of time within which the Service could collect the liability instead of the typical 10-year statute of limitations on collection. Of course, the additional cost of litigation in district court and the potential creation of a judgment that could be collected for an unlimited period of time may provide reasons for not using this approach to fix the problems of the Flora rule, at least from the perspective of some of the affected taxpayers.

This approach to address the Flora rule could be achieved through litigation if another taxpayer makes the same frontal assault on Flora that the taxpayer pursued in Larson and succeeds in persuading the court to open its doors. Such a straightforward Flora fix could be the cheapest and quickest approach; however, a legislative solution amending section 1346 to confer jurisdiction on the district courts and the Court of Federal Claims to hear cases after only a nominal payment of the underlying tax and the filing of a timely claim would be a more direct means of effectuating this change.

B. Expanding Divisibility to Include Every Penalty

As discussed above, the issue of divisibility has arisen fairly recently. For some time, it appeared that divisibility answered some of the Flora concerns. Taxpayers against whom the Service has imposed an assessable penalty can almost always satisfy the low-dollar barrier needed to obtain judicial review when the penalty is divisible. Depending on the tax or the penalty, this result could potentially occur through an acknowledgment by the Service of divisibility, through judicial decisions determining that all assessable penalties are divisible, or through corrective legislation. This approach to fixing the problem, however, suffers from some of the same concerns that favor a fix through CDP over a fix through the Flora rule. Most significantly, making the penalties divisible will direct litigation into the more expensive and cumbersome district courts rather than the Tax Court.

In addition to concerns regarding litigation in the district courts, the possibility exists that divisibility would not address the problem for every type of assessment not covered by the deficiency procedures. The termination assessment at issue in Laing represents such an assessment. The Supreme Court concluded that the termination assessment process required a deficiency notice, but other types of assessments may exist or be enacted with similar problems. Consequently, changes to ensure that all nondivisible taxes and penalties not subject to the deficiency procedures are eligible for merit litigation in a CDP hearing before the Tax Court would better resolve the problems that currently exist and those that may arise in the future. A remedy that would finally allow taxpayers to obtain judicial review before the Tax Court seems to be the most preferable approach.

C. Reforming CDP to Allow Judicial Review in All Instances When None Currently Exists

One of the concerns expressed in Flora was that the carefully crafted scheme established for tax litigation before the Tax Court, the district courts, and the Court of Federal Claims would be altered if taxpayers were permitted to sue for a refund without making full payment. Consequently, the solution that best fits this carefully crafted scheme today seems to lie in more widely opening the court doors to merits litigation in CDP cases. Arguably, Congress intended to do this in 1998. The regulations adopted by the Service subsequent to the passage of the legislation creating CDP and the decisional law supporting the regulations have now closed the door to broad use of CDP as a place to resolve merits issues in court. Opening that door wider would not undermine the original purpose of CDP or the carefully crafted scheme established for tax litigation. Because CDP litigation occurs in Tax Court which is the least expensive forum in which to litigate a tax case and which knows well how to work with pro se taxpayers, expanding the opportunity for judicial review of the merits of an assessment in CDP cases would be the simplest solution for taxpayers. If CDP is chosen as the means to address the problems of the current system, the CDP process would require some reforms to ensure that it function appropriately in this setting.

In response to many expressions of taxpayer concern regarding the lack of an opportunity for judicial review to contest the merits of a tax liability before the Service initiates collection action, Congress created in CDP an opportunity for taxpayers to challenge the merits of the underlying liability if they had not previously received a statutory notice of deficiency or had not otherwise had a chance to contest that liability, as well as the opportunity to raise issues concerning collection. Nevertheless, the three circuit court decisions upholding the regulations under section 6330(c)(2)(B) and the addition of section 6330(c)(4)(A) raise concerns that may limit the ability of taxpayers to litigate the merits of their claims. These concerns strongly suggest that Congress should amend section 6330 to make it clear that a taxpayer who has not had a prior opportunity for a judicial hearing on the merits of a liability will have that opportunity as a part of CDP.

Any legislation must address both sections 6330(c)(2)(B) and (c)(4)(A) to ensure that a taxpayer does not get tripped up because of a request for an administrative hearing. Legislation should encourage taxpayers who did not have the prior opportunity for a hearing to make an administrative request prior to or after the assessment. Every effort should be made to continue to encourage taxpayers to resolve their disputes with the Service at the administrative stage without resort to the courts. A revision to the statute should eliminate the concern raised in Our Country Home that the correct interpretation of subsection (c)(4) could cause taxpayers to forego an administrative appeal to preserve a judicial appeal. Encouraging taxpayers to pursue an administrative appeal while not forfeiting their right to a judicial hearing, if needed, provides the best practice of seeking administrative resolution, giving every taxpayer the opportunity for a judicial hearing to contest the merits of the liability at a point in the process before substantial collection activity occurs.

CDP generally takes place before the Service enforces collection from the taxpayer. CDP places a hold on administrative collection while the Tax Court has the opportunity to review the case. Using CDP allows taxpayers to petition the Tax Court regarding the merits of their liability which generally provides taxpayers with a less expensive forum for judicial resolution. For low-income taxpayers who might need to use CDP for merits litigation, the option to appear before the Tax Court allows them not only a cheaper judicial forum but also one accustomed to dealing with pro se petitioners.

There are, nevertheless, downsides to using CDP as the means to provide taxpayers with a forum for judicial review. First, the time for requesting a CDP hearing is only 30 days. Second, the time for filing a Tax Court petition after receipt of an unfavorable determination from Appeals is only 30 days. Third, if the taxpayer is out of the country or otherwise does not receive the CDP notice or the CDP determination, nothing in the statute extends the time period for filing a Tax Court petition in a manner similar to that applicable when contesting a notice of deficiency. Fourth, the CDP notice and the CDP determination do not list the last day for the taxpayer to perform the act of filing the request or the petition, in a similar fashion to the notice of deficiency. Fifth, the CDP provisions must change to allow taxpayers to seek a refund. Sixth, the CDP provisions might be amended to allow taxpayers who are in a “currently not collectible” status to raise a merit contest, thereby addressing the concerns raised in Professor Smith’s article.

These procedural issues detract from CDP as the perfect vehicle to provide taxpayers with a judicial forum to review the merits of any tax liability. Nonetheless, revised CDP procedures may well offer a cheaper, more satisfactory means to do so than any of the available alternatives. Moreover, if CDP is amended to address the current problems, it could serve as a means to allow taxpayers to obtain a hearing on the merits in a manner that best harmonizes with the current system for tax litigation.

IX. Conclusion

Perhaps counsel for Mr. Laing provided the best summary in his closing statement to the Supreme Court in the first hearing: “Give me a fellow in a black robe who has no interest, who merely wants to see justice done in the abstract, and I think we’ve got [sic] what this country is all about.”

The recent unsuccessful litigation by taxpayers seeking to obtain the opportunity for judicial review of tax assessments highlights a problem in our system of tax administration. All taxpayers should have a realistic, and not just a theoretical, opportunity to obtain judicial review of the taxes (and penalties) imposed on them. As is frequently stated: “There is a strong presumption favoring judicial review of administrative action.” The Supreme Court has said that judicial review of final agency action is not denied unless “there is persuasive reason to believe that such was the purpose of Congress.” Absent express statutory prohibition, agencies “bear the heavy burden of overcoming the strong presumption that Congress did not mean to prohibit all judicial review of [an agency’s] decision.” The presumption in favor of judicial review applies in tax refund cases as well as cases brought under the Administrative Procedure Act.

To accomplish the goal of providing all taxpayers with a realistic opportunity to obtain judicial review of a decision by the Service to impose a tax or a penalty, we need a change in the way we approach jurisdiction with respect to assessable penalties. Too often, these penalties create a liability so large that taxpayers are unable to satisfy the full-payment requirement of the Flora rule and, thus, serve as a practical bar to judicial review. Of course, the Flora rule disadvantages taxpayers in addition to those with assessable penalties. As the NTA documented with examples and statistics, the Flora rule disadvantages low-income taxpayers who often lack the ability to pay their tax liabilities in full and may subject them to piecemeal collection over many years through offset or levy. If a legislative approach is adopted to remedy the problems created by the Flora rule, that legislation should address the difficulties that the Flora rule creates for low-income taxpayers and resolve those difficulties so that those without financial resources are not denied a realistic opportunity for judicial review.

On the other side of the equation, care must be taken to preserve a system of judicial review that does not overwhelm the ability of the judicial branch to review these requests. Any additional litigation resulting from changes to the Flora rule should not overwhelm the system. At this time, however, very few refund suits are filed in district courts. Because the number of refund suits and the number of CDP cases filed in the Tax Court are similarly low, it appears that room exists for some additional litigation.

The government’s flip regarding the application of the full-payment rule of Flora and the inability of taxpayers to use CDP to contest tax liabilities and assessments on the merits have worsened the situation. These actions undermine taxpayer confidence in the tax system by suggesting the government affirmatively seeks to avoid having its decisions reviewed by the judiciary. Adopting a narrow interpretation of the Flora rule and limiting its application to only those cases in which the affected taxpayer has the opportunity to petition the Tax Court would correct the current problems involving the post-Flora enactment of assessable penalties. Adopting an interpretation of the Flora rule to permit judicial review in the district courts when review is not otherwise available in the Tax Court or interpreting the divisibility rules to apply to all penalties, however, presents some practical limitations that make them inferior remedies. The more preferable remedy would be to amend the CDP provisions to ensure that all taxpayers subject to collection procedures have the opportunity to challenge the merits of any liability in a CDP proceeding if they did not previously have the opportunity to challenge the merits in a judicial proceeding.

Appendix

^{* Repealed, Tax Technical Corrections Act of 2018, Pub. L. No. 115-141, § 401(d)(7)(B), Div. U.}

The author thanks his wonderful research assistants Simona Altshuler, Rocky Li, Michael Rochford, and Michael Waalkes for their invaluable assistance on this Article. He also thanks two amazing volunteers at LSC, Carl Smith and Dale Kensinger. Carl Smith always improves articles when he reviews them. Dale Kensinger also provided valuable comments on this Article. Dale and the author began working together in 1977 when the author joined the Refund Litigation Division of Chief Counsel, IRS. The process of writing this Article has reminded the author of his colleagues and the cases at that very specialized division.