December 9, 2013
In a somewhat unusual move, the Ninth Circuit issued an order last week suggesting that the parties pursue mediation in the Bergmann case. The order came two days after the court heard oral argument. The order states that “the court believes this case may be appropriate for mediation” and therefore it is being referred to the Ninth Circuit’s Mediation Office. A mediator will then contact the parties to determine their interest, but the parties are not required to elect mediation. The Circuit Mediator is directed to report back to the panel by January 4. In the meantime, the court will not act on the appeal.
The oral argument in this case was held on December 3 before Ninth Circuit Judges Gould, Paez, and District Court Judge Marilyn Huff, sitting by designation. As we have previously reported, the issue in this case is whether the taxpayer was insulated from penalties for participating in a tax shelter because he filed a qualified amended return. The outcome turns on the applicability of Treasury regulations that delineate when it is, in effect, too late for a taxpayer to save himself by filing an amended return because it is understood that he is doing so only because IRS actions have tipped him off that the shelter is being audited. As the parties framed the issue at oral argument, the dispute boils down to whether the current Treasury regulation (which describes what IRS actions are to be understood as tipping off the taxpayer) was merely a clarification of the previous regulation that was in effect at the time that the taxpayer filed his amended return. The taxpayer’s counsel conceded that applying the terms of the current regulation would have terminated the right to avoid penalties by filing an amended return; government counsel conceded that it is the older regulation, not the current one, that applies.
A couple of questions were asked at oral argument of each side, but nothing unexpected arose that obviously should have prompted the panel to suggest mediation. Towards the end of the argument, however, after the panel had established that few, if any, taxpayers remain governed by the terms of the older regulation, District Judge Huff asked government counsel whether the parties had considered mediation (noting that she did not even know if the Ninth Circuit had a mediation program). Not surprisingly, both government counsel and later taxpayer counsel said that they would not rule anything out and would be willing to entertain mediation.
The Ninth Circuit, of course, has an established mediation program — to which this case is now being referred — but that program ordinarily kicks in at the outset of the appeal, not after briefing and oral argument. In fact, in this case the parties participated in the first stage of that process, a telephone settlement assessment conference, back in March 2012. Thereafter, on March 15, 2012, the Court issued an order stating that the case was not selected for the mediation program, and it then proceeded to briefing.
The panel is now suggesting that the parties take a fresh look and decide whether they can reach a middle ground. There is no middle ground if the appeal proceeds to a decision: either the qualified amended return was timely and effective to protect against penalties or the taxpayer’s ability to achieve that protection was terminated before he filed the amended return. The panel perhaps decided that a fairer result lies somewhere in the middle — given that the text of the older regulation appears to lean towards the taxpayer but resolving the case on that basis might be regarded as allowing the taxpayer to benefit from a poorly drafted regulation when it should have been too late, as a policy matter, to avoid penalties by filing an amended return. Whatever the court was thinking, the oral argument and this order have given each side reason for concern that it might lose if the appeal proceeds to judgment. On the one hand, the judges did not question the government’s assertions that its interpretation of the regulation was entitled to deference and that it would be a bad policy result to allow the taxpayer to escape penalties here. On the other hand, the court — particularly Judge Gould who questioned government counsel on this point — did not appear entirely convinced that the current regulation can be viewed as a “clarification” because the text of the older regulation is not easily read to support the government’s position. It is entirely possible that both sides will seize this opportunity to split the baby and will reach a settlement through the mediation process.