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Statement of
Daniel J. Wiles
Deputy Associate Chief Counsel
(Domestic Field Service)
Office of Chief Counsel
Internal Revenue Service
Before the
Committee on the Judiciary
Subcommittee on Commercial and Administrative Law
May 22, 1997
Introduction
Good morning, Mr. Chairman and members of the committee. My name is Daniel J. Wiles and I am the Deputy Associate Chief Counsel (Domestic Field Service), Office of Chief Counsel, Internal Revenue Service. In this capacity, I oversee the Service's litigation efforts and practice in the area of Domestic taxation. This includes supervisory oversight of the Counsel's appellate litigation practices and its Action on Decision program. I appreciate the opportunity to be here today to discuss H.R. 1544, the Federal Agency Compliance Act.
This bill would amend the Administrative Procedures Act by (1) requiring an agency to adhere to the court of appeals' precedent in cases appealable to that circuit and (2) limiting an agency's discretion to relitigate legal issues in federal courts.
While H.R. 1544 reflects an approach that is, in large part, consistent with the Internal Revenue Service's current policy with respect to litigation, we do not think it would be desirable to enact this bill into law for a number of reasons.
In brief, we are concerned that the legislation would limit administrative judgment and flexibility and could create more -- rather than less -- litigation and uncertainty.
I would like first to provide an overview of the role of litigation within the context of tax
administration and how the Office of Chief Counsel approaches that litigation. I will then
discuss our concerns with H.R. 1544.
Role of Litigation in Tax Administration
To understand the role of litigation in tax administration, it is important first to understand the mission of the Internal Revenue Service. The mission of the IRS states that:
The purpose of the Internal Revenue Service is to collect the proper amount of tax revenue at the least cost; serve the public by continually improving the quality of our products and services; and perform in a manner warranting the highest degree of public confidence in our integrity, efficiency, and fairness.
This mission is further reflected in our Statement of Principles of Internal Revenue Tax Administration, which is as follows:
The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax
policy for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to carry out that policy by correctly applying the
laws enacted by Congress; to determine the reasonable meaning of various Code provisions in
light of the congressional purpose in enacting them; and to perform this work in a fair and
impartial manner, with neither a government nor a taxpayer point of view.
At the heart of administration is interpretation of the Code. It is the responsibility of each person
in the Service, charged with the duty of interpreting the law, to try to find the true meaning of the
statutory provision and not to adopt a strained construction in the belief that he or she is
"protecting the revenue."
The revenue is properly protected only when we ascertain and apply the true meaning of the
statute.
The Service also has the responsibility of applying and administering the law in a reasonable,
practical manner. Issues should only be raised by examining officers when they have merit,
never arbitrarily or for trading purposes. At the same time, the examining officer should never
hesitate to raise a meritorious issue. It is also important that care be exercised not to raise an
issue or to ask a court to adopt a position inconsistent with an established Service position.
Administration should be both reasonable and vigorous. It should be conducted with as little delay as possible and with great courtesy and considerateness. It should never try to overreach, and should be reasonable within the bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it should be relentless in its attack on unreal tax devices and fraud.
This philosophy -- of collecting the proper amount of tax revenue by correctly interpreting the Code -- is as important in litigation as in other tax administration activities. Over 30 years ago, the Office of Chief Counsel provided the following guidelines for litigation:
A detailed tax code does not provide all the answers. Many questions arise for the first time in
litigation. The position taken must represent the interpretation the Service wants because it is the
best and most reasonable, the interpretation that makes the maximum contribution to a sound,
wise tax system, not only immediately but over the long run. Our responsibility to adopt the
proper position in litigation cannot be shifted to the courts.
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In addition to insuring that litigation positions conform with ruling policy, it is important that legal positions urged in litigation reflect the same "largeness of attitude" that the Commissioner and Chief Counsel have stated should be used in performing the ruling or interpretative function . . . . It is natural for the lawyer responsible for litigating a case or supervising its litigation to want to urge whatever arguments will support the Government. However, because a case is in litigation does not justify taking a position which would not be taken had the question been presented for a ruling.
Chief Counsel Order 1964-7. We continue to follow this philosophy today.
It is also important to put into context both the amount of litigation in the system and the way we handle that litigation. Litigation is never our first choice in resolving a dispute. We recognize that it is an expensive and uncertain process and should be used only when absolutely necessary.
To put the amount of litigation in perspective, over 200 million tax returns are filed each year. In fiscal year 1995, approximately 2.1 million examinations were conducted and all but about 68,000 of these cases were resolved at the examination stage. The vast majority of these remaining 68,000 cases were settled without litigation. On average, only about 29,000 Tax Courts petitions and about 800 refund suits are filed each year.(1) The Tax Court tries and decides only about 1,200 to 1,500 cases each year; the district courts and Claims Court write about 160 opinions a year in tax cases. Even while pending in court, the vast majority of these disputes are settled. Taxpayers and the government choose to appeal only about 250-275 Tax Court and
refund cases each year while the government appeals only about 50 of these cases a year.
Any decision to appeal a case is made only after considerable review. Within the Office of Chief Counsel, the recommendation to appeal or not to appeal is made by one of the three Associate Chief Counsel (the one with subject matter jurisdiction over the issue) in consultation with the Treasury General Counsel. This recommendation is initially reviewed by the Assistant Attorney General for the Tax Division of the Department of Justice who makes an independent recommendation to the Solicitor General. The final decision to appeal is made by the Office of the Solicitor General, after taking into account these recommendations. This process is designed to ensure that the decision to appeal is reviewed by senior level officials at the IRS and the Department of Justice who are not involved in the case at the trial level.
IRS' Action on Decision Program
The foregoing statistics, which have remained relatively constant in recent years, show that the government initiates only a limited number of appeals. Nevertheless, in some cases where the decision is made not to pursue further appeals (including appeals to the Supreme Court), the issue may be significant to tax administration and indirectly affect numerous other taxpayers. In these instances, it is important that the Service communicate its planned future actions with respect to these issues. The Service may do this by issuing what we call an "Action on Decision" (AOD). An AOD lets Internal Revenue Service agents, Chief Counsel lawyers, and taxpayers know whether the IRS will litigate the issue again in that court or another court.
The Action on Decision program was created in the 1920's and has been only slightly modified over the intervening 70 years. Under our current guidelines (a copy of which has been provided to the Committee) in significant cases, the Chief Counsel's office issues an Action on Decision which states whether the IRS position on the court decision is one of acquiescence, acquiescence in result only, or nonacquiescence.
Acquiescence means that the Service accepts the holding of the court in a case and will follow it nationwide in disposing of cases with the same controlling facts. It does not indicate approval or disapproval of the reasons assigned by the court for its conclusions.
Acquiescence in result only means that the Service accepts the holding of the court in a case and that the Service will follow it nationwide in disposing of cases with the same controlling facts. However, it indicates disagreement or concern with some or all of the reasons assigned by the court for its conclusions.
Nonacquiescence signifies that, although the decision was not appealed or was not reviewed by the Supreme Court, the Service does not agree with the holding of the court and will not follow it nationwide in disposing of other taxpayers' cases. If a nonacquiescence AOD is issued with respect to an opinion of a circuit court, the AOD will state whether or not the Service will follow the holding of the court on that issue in cases that are appealable to the court that issued the adverse decision.
The decision whether to issue an AOD is made at the same senior IRS level as the decision to recommend appeal; that is, by the Associate Chief Counsel with jurisdiction over the subject matter. While considering the issuance of an AOD, the Associate Chief Counsel must also consider whether changes are needed in IRS rulings and regulations because of the court decision or whether the issue may be resolved by administrative changes rather than further litigation. A decision to issue an AOD is frequently made only after coordination with the Treasury Department, Office of Tax Policy and the Department of Justice.
Intracircuit Relitigation
It is the longstanding general policy of the Office of Chief Counsel to follow the decisions of the courts of appeals. Even where it is determined that an opinion of a court of appeals will not be followed nationwide, the stated nonacquiescence policy of the Office of Chief Counsel is that "as a general rule, with respect to opinions of an appellate court, the Service will follow the holding of the circuit court in case[s] appealable to that circuit due to the binding nature of that opinion in lower courts." Chief Counsel Directives Manual (35)(12)11.(4).
In the time available to prepare this testimony, I asked my staff to quickly survey the AODs issued in the last 10 years. A preliminary count indicated that the Service issued a total of 200 AODs covering 247 issues during this period. In the majority of these AODs, the Service accepted the decision of the court and indicated that it would follow that decision in disposing of other cases nationwide. Even where we did not do that, we generally decided to follow that opinion in that circuit.
One example of this policy is the AOD the Service issued with respect to Security Bank of Minnesota v. Commissioner, 994 F.2d 432 (8th Cir. 1993), AOD
1995-14. In this AOD, the Service disagreed with the opinion of the court and announced that it would litigate the issue presented by the case again, but only in circuits other than the Eighth Circuit. A number of banks which could appeal cases to the Eighth Circuit wished to follow the decision in Security Bank and change their methods of accounting. To allow taxpayers in the Eighth Circuit to avail themselves of the method of accounting permitted by Security Bank, the Service issued Notice 95-57, 1995-2 C.B. 337, which allowed the taxpayers to automatically change their methods of accounting to that desired.
In limited situations however, the Service will issue an AOD indicating that it will relitigate an issue in the same circuit which had issued the adverse opinion. Over the last 10 years, our quick survey found only six cases(2) in which this exception to our general practice was implicated.
In three of the six cases, the Service believed that litigation could proceed even in the deciding circuit because the precedent could be distinguished on, or limited to, its facts.(3)
In two of the six cases, the procedures required by these decisions would have been administratively difficult and burdensome.(4) Moreover, if the Service's position was ultimately upheld, any contrary treatment for taxpayers in those circuits would have resulted in dramatically inconsistent treatment of similarly-situated taxpayers in different areas of the country.(5) We were convinced that other courts would not agree with those initial decisions, and the Service position was ultimately upheld by the Supreme Court. Bufferd v. Commissioner, 113 S. Ct. 927 (1993).
The remaining case also involves an issue in which we anticipate review by the Supreme
Court, but such review has not yet occurred.(6)
We believe that the decisions to continue litigation in these exceptional instances were appropriate to promote sound tax administration.
Intercircuit Relitigation
The IRS carefully reviews all court of appeals opinions adverse to the government and considers whether the opinion reflects a persuasive view of the law that should be adopted as the Service position. If we believe that the opinion is not correct, we may determine to litigate the issue in other circuits. As explained above, although Service nonacquiescence is generally not intended to direct relitigation in the same court of appeals, it is intended to direct relitigation in other circuits.
Given the decision of Congress to have 13 separate courts of appeals, intercircuit conflict is probably inevitable and, in some ways, beneficial. Relitigation in other courts may present a fresh, independent look at the issue which may result in an opinion more consistent with the correct interpretation of the statute. The Internal Revenue Service is charged with administering the tax laws uniformly for taxpayers across the country. In those rare situations where the Service believes that a Supreme Court decision is required to provide final resolution of an issue, intercircuit relitigation is often necessary to obtain Supreme Court review. The inherent structure of the 13 judicial circuits and the IRS's responsibility to ensure federal tax uniformity require IRS litigation decisions to balance these competing factors.
An alternative to the current judicial structure that might ensure greater tax uniformity with less relitigation has been proposed on a number of occasions in the past. This alternative has focussed upon the possibility of having a single national court of appeals for tax cases. However, while this proposal has often been discussed, it has never obtained significant support and has never been enacted. The consensus has been that there are significant advantages to multi-circuit litigation of tax cases. Commenting on this proposal and summarizing a number of independent analyses of multi-circuit litigation, the American Bar Association, Section on Taxation, Report of the Task Force on the Civil Litigation Process concluded:
Part of the genius of our system of circuit appellate reports is the opportunity for reconsideration of an issue already decided in one circuit by another appellate court free of the constraints of the doctrine of stare decisis. This opportunity for an issue to be ventilated in more than one circuit may be especially important in tax cases. The first appellate review of a tax issue may be shortsighted, distorted by a particular record or omission of an argument, or simply mistaken. . . . Only after the initial decision may the importance of the matter become apparent -- along with different circumstances or other new material indicating that the initial decision did not take into account all relevant considerations.
(Nov. 1, 1989, at 18-19). We agree with this statement.
It has been suggested by some that there is a "two circuit rule" or a "three circuit rule" before the Service will accept or concede a position (i.e., that the Service will concede a position only after it loses in two or three circuits). The Service has no such rule. We look at each situation individually and consider the best course of action for each. On some issues, the Service concedes after a loss in a single court; on other issues, the Service will concede only after the Supreme Court has addressed the issue. Reasons We Do Not Support H.R. 1544
As we noted at the outset, the design and the intent of H.R. 1544 is substantially consistent with the litigation philosophy of the Office of Chief Counsel and the Internal Revenue Service as reflected in our published guidelines and longstanding practice. However, the Service does not support H.R. 1544 because we believe that in order to further sound tax administration we need the flexibility to exercise judgment in determining the most appropriate litigation strategy for each individual case. This legislation would replace our ability to exercise this judgment with a set of prescribed rules.
This bill also does not address taxpayer appeals which are the greatest cause of repetitive litigation; the proposal would not limit taxpayer appeals regardless of the number of court of appeals decisions favorable to the government position. Neither would the proposal ensure the uniform interpretation of legislation. For example, it would require government concession of issues even where three or more circuits supported the government view, if three circuits did not support that view.
Also, a particular statutory provision or complementary provisions may affect parties to the same transaction in different ways. This proposal, especially with regard to multi-circuit relitigation, assumes that a decision of a court is either completely in favor of, or adverse to, the interests of taxpayers at large. However, in the Internal Revenue Code there are numerous reciprocal provisions that affect different taxpayers in opposite ways. In a given transaction, the application of the law may be tax-beneficial to one taxpayer (e.g., a deduction) and correspondingly tax-detrimental to another (e.g., taxable income). Further, the controlling circuits for these taxpayers are often different. Thus, for a given transaction, it is possible for both taxpayers to prevail at appellate levels notwithstanding the theoretical impossibility that both opinions could be correct. The "three circuit rule" of the proposed legislation could mean that the government would be forced to honor both contrary decisions if each garnered support of three circuits.
Another concern with the proposal is that it does not take into account the fact that appeals in tax cases, unlike appeals in other civil cases, may frequently arise simultaneously in different circuits. This may happen, for example, when the Tax Court consolidates cases with a common issue that are appealable to different circuits. Other times, new cases enter the appellate stream before decisions are rendered by appellate courts in earlier appeals. It is uncertain whether the "three circuit" rule will be applied based upon the coincidence of which circuits decide their cases first, and thus, the "three circuit" rule would likely cause confusion and be difficult to administer.
More generally, we note also that the bill implicitly allows for judicial review of an agency's decision to continue intracircuit litigation. Thus, we believe that this proposal would likely create more litigation than it prevents as the opposing parties offer differing meanings of the terms of the bill as well as the scope of the precedent itself. For example, proposed section 707(b) would allow intracircuit litigation when it is "not certain whether [the matter] will be subject to review by the court of appeals that established the precedent . . . ." However, appellate venue in tax cases is never absolutely determinable until the taxpayer files a petition or complaint in a particular federal court.(7) Of course, as noted above, venue is possible in the Court of Appeals for the Federal Circuit regardless of residence or place of business. If the bill is enacted, there will be litigation as to whether the venue was nevertheless "certain" before the filing of the petition or complaint.
Likewise, the scope of existing precedent is frequently the central argument on the merits of subsequent cases on similar issues. The proposed legislation will shift the focus away from the substantive issues in a particular case and to the issue of whether there is existing precedent in the circuit that precludes relitigation. The other exceptions are also likely to increase (rather than decrease) controversy. Finally, it is probably not possible to state exceptions in objective terms that will encompass all the legitimate rationales that exist, or may in the future exist, to justify intracircuit litigation or litigation in more than those circuits. Nor will these objective exceptions meaningfully substitute for the judgment that is applied by the Office of Chief Counsel, the Tax Division of the Department of Justice and the Office of the Solicitor General today in deciding whether individual cases should be appealed.
We believe, there are already adequate managerial controls in place to ensure that the government's decisions to appeal in tax cases further the goals of sound tax administration. The Service's decision to nonacquiesce in a court of appeals decision is made only after extensive coordination. Also, the Solicitor General's office must approve all appeals; it is our experience that recommendations for further appeals after an adverse decision are subject to very careful scrutiny. The justification would typically be based on the importance of the legal issue and chances of success of continued appeals. The existence of favorable precedents of other courts or split decisions may also be significant. These factors, however, are not specifically recognized as relevant in the proposed legislation.
Finally, the Internal Revenue Code already contains a sanction designed to prevent unjustifiable litigation on the part of the Internal Revenue Service. IRC section 7430, Awarding of Costs and Certain Fees, provides that the prevailing party in an administrative or court proceeding against the United States may be awarded administrative and litigation costs. This would apply when the taxpayer is the prevailing party and the position of the United States was deemed "not substantially justified." In initially approving this legislation, Congress noted that it was generally justifiable to relitigate in order to seek a circuit conflict. Nevertheless, it would not be justifiable to continue litigation where it is not justifiable in both fact and law. Under the Taxpayer Bill of Rights 2, it is the Service's burden to show that its position is justifiable.
The specific remedy of IRC section 7430, in combination with the overall structure for review
and control of decisions to appeal, ensures that litigation is pursued only in meritorious cases.
H.R. 1544 will add little to this process but may well result in additional litigation over
compliance with the bill itself. This ancillary litigation will do nothing to resolve the merits of
the Service's position or determine whether that position was substantially justified.
Conclusion
Before the Service decides to relitigate an adverse decision, it considers the significance of the decision to taxpayers across the country, its impact on tax administration, the benefits of uniformity and costs of relitigation, the importance of the issue, and the relative merits of both sides of the issue. Thus, the Service's litigation decisions reflect a carefully balanced judgment taking into account relevant factors and competing interests. We do not believe H.R. 1544 is an appropriate substitute for the conscientious exercise of informed judgment based on the circumstances of each particular situation.
Mr. Chairman, that concludes my remarks. I would be happy to answer any questions.
1. These numbers do not include collection, disclosure, criminal, or other non-tax civil litigation.
2. In one additional case, Sealy Power, Ltd. v. Commissioner, 46 F.3d 382 (5th Cir. 1995), AOD 1995-10, the IRS indicated that it would not follow the decision of the Fifth Circuit only if another court of appeals reached a contrary result. Thus, until and unless that occurs, the IRS will follow that opinion in that circuit.
3. Placid Oil Co. v. IRS, 988 F.2d 554 (5th Cir. 1993), reh'g denied, AOD 1995-04; Gaw v. Commissioner, 45 F.3d 461 (D.C. Cir. 1995), AOD 1996-04; and Hurt v. United States, 70 F.3d 1261 (4th Cir. 1995), AOD 1997-05.
4. Kelley v. Commissioner, 877 F.2d 756 (9th Cir. 1989), AOD 1991-08, and Fendell v. Commissioner, 906 F.2d 362 (8th Cir. 1990), AOD 1991-01. These cases both involved the issue of whether consents to extend the limitations period for assessments must be obtained at the individual taxpayer level or at a flow-through entity level (partnership, "S" Corporation, or complex trust). The courts of appeals determined that those consents must be obtained at the entity level. Longstanding Service practice had been only to obtain consents from individuals, not from flow-through entities.
5. Because the individual shareholders frequently resided in different districts (and circuits), it would be possible under these decisions for different limitations periods to apply to shareholders of the same "S" Corporation.
6. Powell v. Commissioner, 958 F.2d 53 (4th Cir. 1992), cert denied, 61 U.S.L.W. 3332 (1992), AOD 1993-04. Note, however, that the Fourth Circuit itself has distinguished and limited the application of this opinion in later cases. See Balkisson v. Commissioner, 995 F.2d 525 (4th Cir. 1993).
7. I.R.C. section 7482(b) provides that venue for appellate review is generally determined where the taxpayer resides or has a principal place of business at the time of the filing of the petition or complaint..