In a fully reviewed case, the Tax Court holds, in a very fractured vote, that an IRS Notice of Deficiency stating the taxpayer owes $.00 is a valid notice of deficiency conferring jurisdiction on the Court. The decision in Dees v. Commissioner, 148 T.C. 1 (2017) finds the judges engaged in a debate about just how bad a Notice of Deficiency can be and still meet the standard of a Notice of Deficiency. In upholding the notice as valid, the split vote came out seven judges in favor of the notice in an opinion by Judge Buch, two judges in favor of the notice in a concurring opinion by Chief Judge Marvel, one judge in favor of the notice in a lengthy concurring opinion by Judge Ashford (for a total of 10) versus seven judges in a dissent by Judge Foley and six of those same judges signing onto a separate dissent written by Judge Gustafson. The result almost reminds you of a presidential election and makes me feel better that the Harvard tax clinic was able to unify the Court in a jurisdictional case last year, Guralnik discussed here, in which it voted 16 to 0 against a position espoused by the clinic.read more...
One of the interesting aspects of the opinion is the opportunity it gave the Court to recount the many ways in which it has held over the years that bad Notices of Deficiency still conferred jurisdiction. Judge Buch cites to a host of cases in which the IRS screwed up the Notice of Deficiency in one way or the other and yet the Court still found a valid notice existed. Those cases included notices which determined taxes on a calendar year basis even though the taxpayer used a fiscal year (Miles Prod. Co. v. Commissioner, 96 T.C. 595 (1991)); even though the IRS attached pages concerning another taxpayer (Campbell v. Commissioner, 90 T.C. 110 (1988)); and even though the notice attached pages related to a different year from the notice (Erickson v. Commissioner, TCM 1991-97)(citing older Tax Court opinions with the same issue.)
When the IRS makes a mistake in the Notice of Deficiency and the Tax Court nonetheless holds that the notice meets the minimum standard to satisfy the statutory definition of a Notice of Deficiency, the IRS still faces some hurdles in most cases because the burden of proof often shifts to it to prove the basis for the poorly described adjustment. In the Dees case, the various opinions supporting the notice discussed the burden shifting aspect of the Court’s jurisprudence with respect to poorly drafted notices. The judges in the dissent noted the many ways a bad notice can still constitute a valid notice but reached a tipping point with a notice that on its face said that the taxpayer had a $.00 deficiency. I cannot do a great job of distilling all of the arguments presented in the five separate opinions in a blog post but I will try to briefly describe the points made by each opinion.
Judge Buch’s opinion follows a long line of Tax Court opinions holding that various problems with the Notice of Deficiency do not invalidate the notice. In this regard, the opinion here represents just another small step in a 90-year march to save notices whenever possible while imposing other consequences on the IRS for the failures in its notice. In order to save this notice, Judge Buch looks at the notice as a whole and does not stop on the first page of the notice where the notice states quite clearly that it finds no deficiency. Judge Buch, as the Court has done in many prior opinions, goes into the back pages of the notice to figure out that the IRS really did find something wrong with the taxpayer’s return and that what it found wrong really did result in a deficiency in the taxes reported on the return. This opinion finds that in making the determination to validate a notice a Court looks at both objective and subjective facts. The objective facts include the “package” of the notice as a whole. When read together what does the IRS really say? Here, it found, as is common in the opinions reviewing the validity of notices, that when considered as a whole, the notice made sufficiently clear that the IRS did find the taxpayer had claimed a refundable credit he should not have claimed, the IRS intended to disallow that claim, and that in disallowing that claim the tax result created a liability that meets the definition of deficiency. Judge Buch’s opinion goes on to look at the subjective effect of the notice in order to determine its validity. Here, he found that not only did the notice as a whole evince a deficiency determination but the taxpayer realized what the IRS intended to say even though the IRS drafted an inartful notice. Because this notice met both prongs of the test for a valid notice, Judge Buch and six other judges determined that this notice conferred jurisdiction on the Tax Court.
Chief Judge Marvel agrees with Judge Buch’s opinion to the extent that it discusses the objective test to determine the validity of the notice including the use of material outside the notice itself, but she balks at the second prong. She finds the subjective intent of the taxpayer regarding the notice inappropriate. Those references draw on dicta in earlier opinions and the Court should not elevate “those references into a test that has no place in resolving the real jurisdictional issue – whether the Commissioner in the notice of deficiency made a determination with respect to the taxpayer that confers jurisdiction on this Court.”
Judge Ashford writes alone but also writes the longest of the opinions. At the risk of distilling her argument too far, she seems to say that the title of the document is what really matters. If the IRS sends a letter entitled Notice of Deficiency, the IRS has sent a Notice of Deficiency and the rest of the discussion concerns other issues. She looks hard at the relevant statutes more than prior law. She too disagrees with Judge Buch’s opinion concerning the importance of the taxpayer’s subjective intent. On this point she writes that “we will never find that we lack jurisdiction under it, because we will never be faced with a case in which a taxpayer has not filed a petition.” While it is true that the Tax Court will never be faced with a case in which the taxpayer has not filed a petition, it may be faced with a case in which the taxpayer files a petition long after the 90 days passes and after the statute of limitations on assessment passes in which the taxpayers argues that a timely petition was not filed because the taxpayer did not believe that the document entitled Notice of Deficiency that said the taxpayer owed $.00 was really a Notice of Deficiency. In such a case, the Tax Court would face the intent issue under the view of the Buch opinion.
Judge Foley and the other six judges joining in the dissent choke on the notion that a Notice of Deficiency can exist where the notice says $.00 on its face because the notice “does not fairly advise the taxpayer that the Commissioner has, in fact, determined a deficiency and … specify the year and amount.” His opinion points out that the existence of a deficiency represents the most fundamental requirement of a Notice of Deficiency. His opinion finds that “only taxpayers with counsel at the ready and pro se taxpayers with extrasensory perception will be able to divine the meaning of these misleading missives.” Because the Notice of Deficiency is designed to satisfy certain fundamental rights and because a notice that on its face says that the taxpayer owes nothing seems not to satisfy those rights, it is hard to argue with the concerns expressed by the dissent. The dissent is short and does not spend much time with prior precedent because it seems to view that the line crossed here is not one that can be patched up by flipping through the back pages of the notice or relying on the taxpayer understanding the true meaning of what the IRS intended. I interpret the bottom line of this opinion as saying that even though the Tax Court has a long history of precedent looking at the back pages of the Notice of Deficiency to ascertain what it really means or looking at other documents, as Chief Judge Marvel points out, that precedent does not support crossing the line to uphold a notice which on its face says the taxpayer owes $.00. Once the notice says that, it does not warrant further inquiry but simply fails to satisfy a necessary condition.
Judge Gustafson writes a separate dissent in which all of the judges joining in Judge Foley’s dissent also join except for Judge Gale. Judge Gustafson further articulates the importance of putting the $.00 amount on the face of the Notice of Deficiency. He points out that the notice twice states that the deficiency is $.00. “A notice that reports such a zero is not a notice of a deficiency; it is a notice of no deficiency.” (emphasis in original) He looks to the requirement that the IRS mail a Notice of Deficiency. Here it mailed a notice of disallowance and of no deficiency. This meant that the notice lacked a statutory predicate and the Court should dismiss the case.
The Tax Court bends over backwards to determine it has jurisdiction when a taxpayer files something within the time frame set out by the relevant statute – usually 90 days. It treats many types of documents filed by petitioners as petitions, or imperfect petitions, allowing taxpayers to perfect their filing as long as the original document arrives at the Court on time. As pointed out by all of the prior opinions cited in Judge Buch’s opinion, the Court has similarly bent over backwards as it determines jurisdiction when a taxpayer timely files a petition in response to a Notice of Deficiency containing defects by allowing the IRS to repair the damage caused by the inadequacy of its notice.
The Dees case presents a factual situation the Court had not previously faced – a notice that literally says no deficiency exists but which when you dig deeper shows that the IRS really did mean to say a deficiency did exist. The majority views the poorly drafted notice as just one more example of a notice that requires peeking behind the first page and they have plenty of case support for that view. The dissent says there must be some line over which the IRS cannot cross and still have a valid notice and that this notice crosses that line. Because I do not have to vote, I will stop there except to say that to the extent the majority is correct, I think the concurring opinion of Chief Judge Marvel places a reasonable limit on the inquiry to which the Court should go in making its determination. It seems tough enough to determine what the IRS means with the written notice without having to try to figure out what the taxpayer thought the IRS meant and how that matters for purposes of granting the Court jurisdiction.