Hinck, John, et ux. v. U.S. (05/21/2007)

Question presented: Did the grant of selective, limited jurisdiction in the 1996 amendments to 26 USC sec. 6404(e)(1) give the Tax Court exclusive jurisdiction over all such claims, deny all relief for many taxpayers, and repeal by implication the existing 28 USC sec. 1346(a)(1)and 1491(a)(1) refund jurisdiction of the district courts and the Court of Federal Claims?

BY JENNIFER KOONS, MEDILL NEWS SERVICE

The Internal Revenue Service is not known for its kindness and understanding when it comes to unpaid taxes. Those who fail to pay on time are charged an interest on the past due amount.

But there is a tiny catch. Under Title 26, §6404(e) of the U.S. Tax Code, the IRS may abate interest (or “forgive it, partially or Din whole”) if some unreasonable error or delay occurs, which prevents the agency from informing the taxpayer.

In 1986, John and Pamela Hinck filed joint federal income taxes and received tax returns based in part on lost investments in a limited partnership with California-based Agri-Cal Venture Associates.

In 1996 the IRS opened an investigation into the Hincks’ 1986 returns, and assessed $16,000 in additional taxes and roughly $22,000 in interest for failure to pay.

After paying the assessment, the Hincks filed a claim with the IRS, requesting an interest abatement. Under the 1986 version of the statute, the IRS could only grant such a waiver if the taxpayers’ delinquent payment resulted from error or delay by an IRS employee.

But in 1996, lawmakers modified the statute to add “unreasonable” before “errors and delays” and “managerial acts,” a new type of act that could be the basis for the abatement. Also in the 1996 Amendments, Congress added a provision to §6404 that gives the Tax Court the jurisdiction to hear taxpayer claims that the IRS abused its discretion in not waiving the interest payments.

Upon the IRS’ denial of their abatement request, the Hincks filed a claim seeking review in the U.S. Court of Federal Claims. But the court dismissed the claim for lack of subject matter jurisdiction. According to the court, the IRS determination of abatement was discretionary and therefore not traditionally reviewable by the judiciary. The 1996 amendment that gave jurisdiction to the Tax Court did not give jurisdiction to the Court of Federal Claims by implication.

On appeal, the Federal Circuit Court of Appeals agreed, and went even further, holding that the 1996 amendment gave the Tax Court exclusive jurisdiction to review interest abatement claims.

This set up a conflict with the 5th Circuit Court of Appeals’ decision in Beall v. U.S., which held that district courts had concurrent jurisdiction to review §6404(e)(1) decisions.

“The right to review of a denial of a request under 6404(e)(1) for abuse of discretion was previously unavailable,” said Capital University Law School Professor Danshera Cords. “Without the adoption of Code sections 6404(e)(1) and 6404(h), taxpayers would have no right to judicial review of a request for abatement of interest. Congress in this case, as in many others, has provided taxpayers with protections and rights beyond the minimum required to create a fairer tax system.”

On Jan. 12, 2007, the Supreme Court granted certiorari to determine whether the 1996 amendments conferred exclusive jurisdiction on the Tax Court.

And on May 21, 2007, a unanimous Court upheld the Federal Circuit’s decision, ruling that the Tax Court did in fact have sole power to review IRS refusals to reduce interest payments on people who underpay their taxes.

“Judicial review of decisions not to abate requires an evaluation of the internal processes of the IRS, not the underlying tax liability of the taxpayer,” Chief Justice John Roberts wrote for the Court. “We find nothing tellingly awkward about channeling such discrete and specialized questions of administrative operations to one particular court, even if in some respects it ‘may not appear to be efficient’ as a policy matter to separate refund and interest abatement claims.”

Florida attorney James P. Dawson of Fox Rothschild LLP expressed little surprise at the outcome of the case, noting: “After the Court’s decision in EC Term of Years Trust v. U.S., the suspense was over.”

In EC Term of Years Trust, which the Court decided April 30, 2007, the justices upheld a 5th Circuit decision affirming the dismissal of a third-party wrongful levy action brought by a trust to challenge the IRS’ imposition of a levy on a bank account owed by the trust because the agency presumed the trust’s owners had deposited funds in the account to evade taxes.

“As in EC Term of Years Trust v. United States, the Supreme Court held that the governing statute was clear on its face,” Dawson said. “That is, the statute was in effect when the taxpayers brought their challenge. The Supreme Court was not going to facilitate forum shopping and allow the remedy prescribed by Congress to be passed over and, if the taxpayers did not qualify under §6404, then so be it because that is what the statute…provided.”