The case of Sexton v. Hawkins, US DC Nevada, Case No. 2:13-cv-00893 asked the question of whether the IRS Office of Professional Responsibility had jurisdiction over a disbarred attorney who was suspended from practice before the IRS for actions related to return preparation and writing a tax memorandum that took place during his suspension period. The disbarment and suspension took place after Mr. Sexton plead guilty to four counts of mail fraud and one count of money laundering.
Despite being disbarred and suspended, the plaintiff in the case continued to offer tax services. In particular, he offered services to a Ms. Kern for whom he assisted in preparing her 2010 and 2011 income tax returns and whom he offered to send a written memorandum analyzing her tax options.
Ms. Kern became aware of Mr. Sexton’s disbarment before she accepted the offer and was not pleased. She fired Mr. Sexton via email and filed a complaint with the IRS Office of Professional Responsibility regarding Mr. Sexton. The OPR investigated the complaint, eventually sending a request for information from Mr. Sexton.
Mr. Sexton argued that the OPR has no right to demand disclosures from him, since he is no longer in practice as that term is used in 31 USC §330. The regulations implementing 31 USC §330 are what we generally refer to as Circular 230, thus the case looks at the applicability of Circular 230 to such a suspended practitioner who, following losing his membership in the South Carolina bar, would no longer qualify as a Circular 230 practitioner, as well as the broader question of just what actions are covered by Circular 230 in any event.
Mr. Sexton asked the Nevada District Court to accept the decision of D.C. Circuit Court of Appeals in the case of Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014) that “practice before the IRS” does not include return preparation.
The opinion summarized the Loving holding as follows:
In Loving v. I.R.S., the D.C. Circuit analyzed, 31 U.S.C. § 330 the statute that Defendants in this case rely on for authority to investigate and regulate Sexton. Id. “Section 330 of Title 31 authorizes the Secretary of the Treasury—and by extension, the IRS, a subordinate agency within the Treasury Department—to ‘regulate the practice of representatives of persons before the Department of the Treasury.’ 31 U.S.C. § 330(a)(1).” Id. The Circuit Court addressed the question of “whether the IRS’s authority to ‘regulate the practice of representatives of persons before the Department of the Treasury’ encompasses authority to regulate tax-return preparers like Sexton. 31 U.S.C. § 330(a)(1).” Id. at 1016. The Circuit Court answered in the negative.
In so doing, the D.C. Circuit found that tax preparers are not representatives under Section 330: “[i]n light of the way the Code treats tax preparation, it would be quite wrong to say that a tax-return preparer ‘represents’ the taxpayer in any meaningful legal sense. In short, the statute’s use of the term ‘representative’ excludes tax-return preparers.” Id. at 1016-17. The D.C. Circuit further found that preparing and signing tax returns are not considered as practice before the Department: “[a]lthough the exact scope of ‘practice before’ a court or agency varies depending on the context, to ‘practice before’ a court or agency ordinarily refers to practice during an investigation, adversarial hearing, or other adjudicative proceeding.” Id. at 1018 (emphasis added).
The opinion goes on to note that this Court agrees with and adopts the legal analysis in Loving in handling this case.
The Court begins by rejecting the IRS’s contention that suspended practitioners are still under the jurisdiction of the OPR if their rights have been suspended but not terminated, even though Mr. Sexton is no longer an attorney. The Court did not find that the IRS could produce authority for this position.
The Court also rejects the OPR’s claim that is has “inherent authority” over those who lack the credentials to practice before the agency or have been suspended, finding again the agency did not cite any authority for that position.
The Court then specifically moves on to note that while Circular 230 §10.51(a)(8) prohibits unauthorized individuals from practice before the IRS. Agreeing that Mr. Loving was such an unauthorized individual, the Court, citing Loving, found that his tax return preparation activities did not constitute practice before the IRS.
So, at least for the return preparation work that Mr. Sexton performed, the Court found that the OPR had no authority to demand information from Mr. Sexton.
In a separate issue, the IRS also argued that there is specific statutory authority to allow the agency to deal with Mr. Sexton’s rendering of advice, citing 31 USC §330(e) which provides:
(e) Nothing in this section or in any other provision of law shall be construed to limit the authority of the Secretary of the Treasury to impose standards applicable to the rendering of written advice with respect to any entity, transaction plan or arrangement, or other plan or arrangement, which is of a type which the Secretary determines as having a potential for tax avoidance or evasion.
The IRS argues that this portion of the statute was not analyzed by the Loving court, noting:
Specifically, Defendant argues that “[t]he Loving plaintiffs were in the business of preparing tax returns. They were not traditional Circular 230 practitioners, and they were not in the business of authoring written tax opinions for corporate clients or high net-worth individuals.”
However, the Court rejected this view of Loving, arguing instead for a very narrow reading of the statute.
But the Court goes on to consider that even if Loving did not impact 31 USC §330(e), that section would still not apply in this case in the way the IRS views it. The IRS, while conceding that Mr. Sexton can prepare returns, argues that if he provides any written advice (presumably even on routine matters) that he would come under the agency’s jurisdiction.
The Court notes that the statute itself only allows the agency to impose standards on such advice, but has no mechanism to sanction such advice or, as in this case, the offering of such advice (remember, Mr. Sexton never actually wrote the memorandum, since the client discovered his disbarment and fired him before accepting his offer to write the memorandum).
As well, the Court found that the IRS had not produced any authority to support its view that written advice need not be given when there was an actual proceeding or investigation before the IRS taking place.
As the Court concludes:
In short, the Court finds that in this case, Section 330(e) does not extend to Sexton, a tax preparer and disbarred attorney, who offered to write a written memorandum to a taxpayer about the manner in which she may want to file her taxes.
The case is significant because it represents the first Court outside the DC Circuit to explicitly accept the Loving analysis and it also specifically deals with the written advice provisions of 31 USC §330 that the Loving case did not specifically address.