Extracting Yourself from a Tax Court Case

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I learned something this past week I should have known. It is possible to extract yourself from a Tax Court case without a decision. I grew up in a world of deficiency proceedings. When I first started litigating in the 1970s, the IRS still did a fair percentage of examinations of returns, they did them face to face and they examined a fair number of small businesses. I did most of my early litigation with small businesses that would never be audited today but which presented interesting factual issues. 

Due to significant cuts in the past 35 years, the IRS audits a minuscule number of returns, about 75% of the time it audits by correspondence and, for the most part, it does not bother with small businesses where the bulk of the tax gap lies. I think the safest place for a taxpayer to go might be a small business in a TEFRA partnership since the IRS does not have the time to spend to go through records of small businesses and does not understand TEFRA but that’s just a view from the outside that has nothing to do with this post. 

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In deficiency cases if the taxpayer goes to Tax Court there is only one door out of the proceeding and that door involves a decision (See Estate of Ming v. Comm’r, 62 T.C. 519 (1974)). Once a taxpayer files a Tax Court petition based on a notice of deficiency, the taxpayer cannot decide that they no longer want to be in Tax Court and simply nolle pros the case as might happen in other civil litigation. The Tax Court keeps the case to the end and the taxpayer cannot escape once in the door. (A small exception to this exists for taxpayers who do not pay the filing fee at the outset. They have a short period of time to pay up or be kicked out as though they never arrived. I am not suggesting that a taxpayer on the fence about whether to file a Tax Court petition file the petition and not pay the fee in order to buy an additional 30 days or so after the end of the 90 day period in the notice of deficiency but the effect of the Court’s practice with respect to the fees leaves open this possibility.) 

Once in Tax Court the taxpayer must either agree to a deficiency, convince the IRS to concede that no deficiency exists (or that a refund exists), have a deficiency imposed by a decision on the merits or enforcing a stated but not followed through upon settlement (See Dorchester Indus., Inc. v. Comm’r, 108 T.C. 320 (1997); see also T. Keith Fogg, Go West: How the IRS Should Foster Innovation in its Agents, 57 Vill. L. Rev. 441 (2012)) or have the Tax Court case dismissed which, contrary to the belief of many of my clients, means the IRS has permission to assess the full amount of the proposed deficiency as if the taxpayer did not petition the Tax Court in the first place (See Dorl v. Comm’r, 57 T.C. 720 (1972) (citing 26 U.S.C.A. § 6512(a)); Fiorentino v. United States, 226 F.2d 619 (C.A. 3, 1955)). 

Despite the rules I knew in the deficiency cases before the Tax Court, I did not previously realize that things differ when the taxpayer arrives in Tax Court through a determination. The clinic represents a taxpayer in a collection due process case (CDP) and the Chief Counsel attorney wanted the taxpayer to concede that the relief sought in the proceeding was not available. After reviewing the case, we agreed that the client would not obtain relief through the CDP case in Tax Court, discussed with the client how the case might be resolved through another process and informed the Chief Counsel attorney we were in agreement. 

I thought that the Chief Counsel attorney would draft a decision document, we would sign it, present it to the Court, the Court would sign it and then the case would come to an end.   Instead, the Chief Counsel attorney wanted the taxpayer to file a motion to dismiss the case. This did not make sense in my deficiency oriented Tax Court world. Taxpayers, at least ones who know what they are doing, do not file a motion to dismiss their Tax Court case because that is not an option. So, I asked my students to research the matter and to get a sample motion from the Chief Counsel attorney. I got nothing. My students did not understand what I was asking, could not find a sample and could not obtain a sample from the Chief Counsel attorney. 

At this point I could have actually researched the issue myself since I knew what concerned me and wondered if the deficiency process on this issue carried over to determination cases but instead of actually doing the work I phoned a friend and former colleague who still works at Chief Counsel’s office and who I thought would know the answer immediately and I was right because she did know the answer immediately (actually I emailed rather than phoned.) It turns out that the Tax Court decided this issue over a dozen years ago but I had not taken notice. In Wagner v. Commissioner, 118 T.C. 330 (2002), the Tax Court held that a CDP case may be dismissed without prejudice upon motion by the taxpayer, distinguishing CDP cases from cases holding that taxpayers may not withdraw a petition under section 6213 to redetermine a deficiency.  See also Settles v. Commissioner, 138 T.C. 372 (2012)

The result makes perfect sense but was not a situation I had previously confronted. Like most dinosaurs, I just assumed things always worked as they had in the past. I write this post in case there are any other dinosaurs out there so I can help you to avoid being as uninformed as me on this issue. Dinosaurs are not extinct. They morphed into old attorneys who do not keep up and who are too lazy to hit the books (or the bits and bites) to do the work necessary to find the right answers. 

 

 

Comments

  1. Another way for a CDP case to evaporate is if the amount that is the subject of the suit gets paid before the Tax Court case is over. This can happen, since the IRS, even in a case involving a notice of intention to levy (where active collection is barred while the suit is pending), still can passively collect through refund offsets under 6402(a). When this happens, usually, the IRS makes a motion to dismiss the case as now moot. This can be particularly disconcerting to a person who was using the CDP case to challenge the underlying tax liability. The moment full payment is made, the case stops — even without a ruling on the merits. The Tax Court in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), held that it has no refund jurisdiction in CDP. Once the tax is paid, there is nothing more the Tax Court can do. At that point, the taxpayer must file a refund claim and sue for refund in district court of the Ct. of Fed. Cl.

    • Carl Smith’s supposition regarding “full-payment” tax liability challenge CDP cases cannot be right.

      Initially, the Tax Court’s lack of refund jurisdiction in CDP cases is irrelevant. The law itself generally directs the IRS to refund any tax overpayment.

      In short, the CDP statute(s) say the taxpayer may contest his underlying tax liability at his CDP hearing if he has not had a prior opportunity to do so. If he is dissatisfied with Appeals’ determination on that tax liability, the same law provides the taxpayer with the right to petition the Tax Court to review (de novo, no less) the determination. The law does not strip the taxpayer of that right should he (voluntarily or involuntarily) then fully pay the tax. And no rule of law may do so.

      We know generally that tax payment does not conclude tax liability. When a taxpayer is challenging his underlying tax liability under de novo review, how can his case become “moot” by mere tax payment?

      Think of deficiency cases. Yes, one can moot his Tax Court case if he pays the asserted deficiency BEFORE he files his petition. But he may proceed with his Tax Court case (also on de novo review) even if he pays the asserted deficiency after he files his petition. The same must hold true in what is the huge majority of tax liability challenge CDP cases. Otherwise, the law says one paid tax deficiency case may proceed, but another paid tax deficiency case must stop. That is an absurd result.

      As further proof, in deficiency cases the Tax Court can redetermine a deficiency HIGHER than the one the IRS determined. I.R.C. section 6214(a). At least in tax liability challenge CDP cases arising from an unpaid deficiency assessment then, the Tax Court must possess like authority. The taxpayer’s “full payment”, however, satisfies only the deficiency the IRS determined. Because the Tax Court could redetermine a higher deficiency, that payment cannot “stop” the case.

      Finally, Greene-Thapedi did not involve an underlying tax liability challenge; the taxpayer previously litigated a deficiency case. As for a case where the taxpayer properly challenged his underlying tax liability in Tax Court and yet he had his case “stopped” by full payment…I know of none.

      • I disagree with Jason T. and refer him to the text of the opinion. I admit that Greene-Thapedi was not the case of a taxpayer who did not get a notice of deficiency and so was challenging the underlying tax liability in the notice for the first time in the CDP case. But, the language of the court is pretty clear that it covers all CDP case challenges to underlying liability. As the court saw it, Greene-Thapedi involved a challenge to the underlying liability, albeit the challenge there only involved alleged overcharges of interest and penalties. The court states (on page 8):

        In the instant case, unlike in Chocallo v. Commissioner, supra, and Gerakios v. Commissioner, supra, there remains unresolved petitioner’s claims for a refund. In her amended petition, petitioner contends that she is not liable for the 1992 deficiency and associated interest on the ground that respondent failed to assess the deficiency and mail her a timely notice and demand to pay; alternatively, she contends that pursuant to section 6601(c) she is not liable for interest accruals from the period from July 5, 1997 (when she claims respondent was required to make notice and demand for payment of her 1992 deficiency) to July 3, 2000 (when respondent sent her Form CP 504 requesting payment). On brief, petitioner contends that she is entitled to a refund for:

        all compound interest she paid for the period April 15, 1993 to July 18, 2000, all interest she paid for periods during which interest was suspended or [sic] July 5, 1997 to July 3, 2000; and for all sums that she paid for penalties and additions and interest on such, that were disallowed by the June 5, 1997 Tax Court decision.

        Petitioner’s claim for a refund arises, if at all, under section 6330(c)(2), as an outgrowth of her challenge to the existence and amount of her underlying 1992 tax liability. Pursuant to section 6330(c)(2), however, whatever right petitioner may have to challenge the existence and amount of her underlying tax liability in this proceeding arises only in connection with her challenge to the proposed collection action. Inasmuch as the proposed levy is moot, petitioner has no independent basis to challenge the existence or amount of her underlying tax liability in this proceeding.

        More fundamentally, section 6330 does not expressly give this Court jurisdiction to determine an overpayment or to order a refund or credit of taxes paid.

        • For what it is worth I find Judge Vasquez’ dissent in Greene-Thapedi to be persuasive. I also think the case is inconsistent with Montgomery, and in any event much less defensible from a policy standpoint. The idea that a taxpayer can get court review of a self-reported liability but cannot effectively get TC review when through no acton on her own IRS applies an overpayment from another year I find troubling.

        • Before I drafted my previous post I reread Greene-Thapedi. At best, the relevant quotation from it that Carl Smith gives is dictum.

          Because the taxpayer could not challenge her underlying tax liability, Greene-Thapedi’s “no independent basis” comment doesn’t control. In fact, I note that no one has pointed to any case where the taxpayer, properly challenging his underlying tax liability, had his CDP case “stopped” by a tax payment.

          I agree with Leslie’s opinion of Judge Vasquez’s dissent. That dissent should have been the majority opinion in Green-Thapedi. I have no doubt it will be the majority opinion in a future CDP case that pits a proper underlying tax liability challenge against an IRS “mootness” assertion.

          Leslie’s observation about Montgomery nicely comports with my argument. Before Montgomery, the IRS contended that the taxpayer could not challenge his underlying tax liability because the tax assessment arose from his voluntary admission on his own tax return. Now the IRS contends that the taxpayer cannot challenge his underlying tax liability merely because he paid the tax assessed? That makes even less sense than the Montgomery contention given that the taxpayer can supposedly render “full payment” involuntarily.

          Finally, does anyone disagree that the Tax Court would have the authority in a CDP case to determine a liability amount higher than the one the IRS has assessed?

  2. Bob Kamman says:

    IRS and petitioner can file a joint motion to dismiss in a 7428(a) case involving 501(c)(3) determinations. Came across that today in a case involving Carleton Festival (Docket No. 13617-14X).

    “For the reasons set forth in the parties’ joint motion to dismiss, filed August 27, 2014, it is
    “ORDERED that the joint motion is granted, and this I.R.C. §7428(a) case is dismissed as moot. See Wagner v. Commissioner, 118 T.C. 330 (2002).”

    Which of course leaves unanswered the question of whether Carleton Festival is aligned with the Koch brothers, or George Soros.

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