IRC 7459(d) and the Impact of Dismissal

On May 20, 2021, the Court of Federal Claims decided the case of Jolly v. United States, Dk. No. 20-412.  Ms. Jolly pursued the case pro se.  The court lists the opinion as not for publication. The case involves a refund suit covering four tax years.  The court decided not to dismiss her complaint rejecting the government’s motion.  Carl Smith noticed this decision and in his email forwarding the opinion he provided much of the substance of this post. 

In amicus briefs filed by the tax clinic at Harvard in the cases of Organic Cannabis and Northern California, the clinic argued that the court should not be concerned about turning late filing of a deficiency petition into a merits issue, rather than a jurisdictional one.  The counter-argument (which the 9th Cir. accepted in Organic Cannabis) was that, if a deficiency petition is dismissed for late filing and that is a merits dismissal, then it upholds the deficiency under 7459(d), and so the Tax Court decision could present a res judicata bar to a person seeking to litigate the deficiency later by paying and suing for a refund.  In our cert. amicus brief in Northern California, we acknowledged that that was a theoretical possibility.  We noted in our brief that neither Carl Smith nor I could recall any case where a person who was dismissed from the Tax Court for late filing later full-paid the deficiency and sued for refund.  We acknowledged that it is possible such rare cases existed, but said they must be a very few since it could arise in the traditional refund context or when there is no balance due but a disallowed refundable credit and a late filed petition. 

Because of the possibility, Nina Olson, when she was the National Taxpayer Advocate made a legislative proposal to fix the jurisdiction issue, and it contains a modification to 7459(d) that would except untimely filed petition dismissals from the rule upholding the deficiency. 

The Jolly case presents the fact pattern we said we did not recall ever seeing. 

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In Jolly, for the 2016 year, the IRS issued a notice of deficiency.  Jolly, pro se, late-filed a Tax Court petition, which was dismissed for lack of jurisdiction.  The IRS applied overpayments from 2018 and 2019 that were shown on the returns to the 2017 deficiency, still leaving a partial balance due for 2017.  The IRS did not apply any of the overpayments to 2016.  This is unusual because normal procedure at the IRS applies payments to the earliest period to tax, then penalty and then interest.  It is unclear why the payments were posted in this manner in the Jolly case. 

Jolly, again pro se, then filed suit in the Court of Federal Claims seeking a refund for each of the years 2016 through 2019.  The DOJ moved to dismiss all four years, though on different grounds.  It wanted the court to dismiss 2016 and 2017 for failure to full pay and wait 6 months after a refund claim to bring suit – i.e., lack of jurisdiction.  It wanted the court to dismiss 2018 and 2019 because the overpayments from those years had been applied to 2017 – i.e., failure to state a claim since she received the refund she requested on her returns for those years.  Pro se taxpayers commonly misunderstand what it means when the IRS offsets a liability.  Clinic clients regular arrive at the door complaining of one year when the IRS has granted the requested refund for the year identified by the taxpayer but taken the refund to an earlier year where the problem exists.  In somewhat confusing rulings, the court denied  the government’s motions for all years.

For 2016 and 2017, the court thinks it is important to decide whether notices of deficiency were issued for each year.  It’s not clear why it feels this way.  The court finds that a notice of deficiency was issued for 2016, but not 2017.  The court notes the IRS has lost the 2017 administrative file, and the court won’t accept at this time only circumstantial evidence of mailing.  The court says that the credits from 2018 and 2019 might have full-paid the 2016 liability and part-paid the 2017 alleged liability based on the evidence in the record at this time.  This approach seems confused.  It is implicit in the court’s ruling that if a notice of deficiency was not sent for 2017, the Flora rule doesn’t apply to the erroneous assessment of the deficiency and the credits from 2018 and 2019 can be moved from the 2017 year to the 2016 year to meet Flora.  I would have thought Flora requires full payment of an assessment, even if the assessment was not made correctly procedurally, though I have never researched case law on that issue, if any. 

In addition to this argument, what about the government argument that the taxpayer had to file a refund claim and wait six months?  Clearly, a 2019 overpayment used to finish paying the 2016 year could only have been applied as a credit in 2020, and suit here was brought in 2020.  It is very unlikely that the taxpayer filed a refund claim for 2017 between the time that the 2019 credit was posted to 2017 and then waited six months to bring suit.  In denying the motion, the court doesn’t discuss this issue.  Here’s the last paragraph of the opinion as relates to the motion for 2016 and 2017:

If Ms. Jolly’s 2017 deficiency of $6,371.76 does not exist, the math follows: applying Ms. Jolly’s 2018 and 2019 tax refund ($1,947.00 and $1,255.00, respectively) to only her 2016 assessment of $2184.81 results in a residual amount of around $1017.19.2 As there is a factual dispute underlying the jurisdictional allegation in the government’s Rule 12(b)(1) motion, the Court “weigh[s] evidence” and “find[s] facts” while “constru[ing] all factual disputes in favor of [Ms. Jolly].” Knight, 65 Fed. Appx. at 289; see also Cedars-Sinai Medical Center, 11 F.3d at 1583–84, James, 887 F.3d at 1373. Accordingly, based on the record before the Court, specifically the government’s failure to locate Ms. Jolly’s 2017 IRS administrative file, the Court finds Ms. Jolly may have paid her full tax liability before filing this lawsuit, and thus the Court has subject matter jurisdiction over her 2016 and 2017 tax refund claims. See Flora, 362 U.S. at 150.

It is also unclear why the court did not dismiss the 2018 and 2019 years for failure to state a claim.  The government argued that the claims (shown on original returns) had been paid by application of the overpayments to 2017.  A taxpayer should not be able to bring a refund suit for the year in which overpayments occurred that were used as credits against earlier-year balances due.  Such a suit could only be brought for the earlier years to which the credits had been applied.  The court seems to think that because it determines that the 2017 assessment was improper, the IRS must be deemed not to have made the credits of the refund claims shown on the 2018 and 2019 returns.  But, even if so, why didn’t the court say that the 2018 overpayment should be deemed to partly pay the 2016 deficiency, so at least there can be no overpayment suit relating to 2018?  Here’s the entire discussion of why the court denies the DOJ 21(b)(6) motion for 2018 and 2019:

The government further contends Ms. Jolly is not entitled to any recovery for 2018 and 2019 since Ms. Jolly received her 2018 and 2019 refunds as payments towards her 2017 balance. Gov’t MTD at 9–10. As discussed supra, the absence of a notice of deficiency bars the IRS from assessing a tax deficiency against Ms. Jolly in 2017, thus, the record before the Court compels a finding that the IRS possibly owes Ms. Jolly a residual amount after applying her 2018 and 2019 tax credit towards her 2016 balance. Accordingly, “accept[ing] well-pleaded factual allegations as true and . . . draw[ing] all reasonable inferences in favor of [Ms. Jolly],” the Court finds Ms. Jolly alleges “enough facts to state a claim to relief [regarding her tax refund of 2018 and 2019] that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Athey v. U.S., 908 F.3d 696, 705 (Fed. Cir. 2018) (quoting Call Henry, Inc. v. U.S., 855 F.3d 1348, 1354 (Fed. Cir. 2017)) (When deciding a Rule 12(b)(6) motion to dismiss, the Court “must accept well-pleaded factual allegations as true and must draw all reasonable inferences in favor of the claimant.”).

Jolly will struggle to win this case, but perhaps the court’s ruling will allow her to prove to the Tax Division attorney handling the case that she should not have been assessed in 2016 and that she is entitled to a refund, even if she is not entitled to bring a refund suit for four years.  Since much confusion seems to surround the 2017 year and how the assessment came to exist for that year and why the IRS offset the later refunds to 2017 instead of 2016 perhaps this pause will allow time for clearing up that issue as well. The judge seems to misunderstand the basis for refund litigation but that will no doubt be worked out over time.  The case is most notable because it represents an example of someone who missed their chance to go to Tax Court but followed through in seeking a return of the tax through the filing of a refund suit.  Although Carl and I said we did not know of a case with those facts, perhaps we should have remembered the case of Flora which had those very facts and raised the question of what happens when you miss your chance to go to Tax Court.  In the Flora case we know that the Supreme Court held, in the fact of an unclear statute and contradictory prior case law, that the taxpayer can only bring the refund suit by first fully paying the tax, making a timely refund claim, waiting for the claim disallowance letter (or the passage of six months) and then coming to court.  If you want to read more about Flora and the parallels with the Jolly case, here is an article I wrote about Flora.

Incapacitation, Death and the End of an Era, Designated Orders November 16 – 21, 2020, Part II

The week of November 16, 2020 was the week preceding Thanksgiving and the Tax Court’s transition to Dawson was looming, which meant orders would no longer be “designated” on a daily basis. The judges knew it may be one of their last opportunities to alert the public (and Procedurally Taxing) to an order. Many lengthy, novel and diverse orders were designated. As a result, my week in November warranted two parts, and this second part is my last post on designated orders ever. I’ve learned a lot over the last three and a half years, and I hope you all have too.

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Answering Interrogatories while Incapacitated

In consolidated Docket No. 26812-12, 29644-12, 26052-13, 27243-15, 5314-16, 5315-16, 5136-16, 5318-16, Deerco, Inc., et al. v. CIR, the case involves the acquisition of a corporation and the subsequent removal of substantial plan assets (over $24 million) from the acquired corporation’s pension plan in 2008.

The petitioner who is the focus of this order was the President of the acquiring corporation and the trustee for the pension plan of the acquired corporation in control of the disposition of assets, so naturally, the IRS is very interested in what he has to say. Unfortunately, he is incapacitated. His counsel answered some of the IRS’s interrogatories on behalf of all the petitioners (individuals and entities) in this consolidated case by stating that they lack information or knowledge.

The IRS and Court find petitioners’ counsel’s answers to be insufficient for a couple reasons:

1) Rule 71(b) requires the answering party to make reasonable inquiry and ascertain readily available information. A party cannot simply state they lack the information without explaining the efforts they have made to obtain the information. Even though the petitioner is incapable of responding, the Court thinks he should have documents or records that would enable his counsel to answer the substance of the interrogatories. Petitioner also had an attorney and accountant assisting him during the transaction at issue, and those individuals may have useful information, documents, or records.

2) The Court also finds the answers are procedurally defective. The procedures, found in Rule 71(c), differ depending on whether an individual or an entity is providing the answer. In this case, petitioners’ counsel has signed under oath the answers on behalf of all petitioners. Counsel is permitted to answer and sign under oath for entities, but not for individuals. Individuals must sign and swear under oath themselves. The petitioner in this case can’t do that, but his wife has been appointed as his guardian, so she can.

There are other issues raised (such attorney-client privilege concerns), but the prevailing message is that the Court thinks petitioner’s counsel can do better and outlines the ways in which they can provide more adequate answers.

We Cannot See A Transferee

In consolidated Docket No. 19035-13, 19036-13, 19037-13, 19038-13, 19058-13, 19171-13, 19232-13, 19237-13,  Liao, Transferees, et al. v. CIR, the IRS tries several avenues to prove that petitioners, who consist of the estate and heirs of a taxpayer who owned a holding company, called Carnes Oil, should be liable as transferees when an acquisition company ultimately sold the company’s assets and tried to use a tax shelter to offset the capital gains.

In this case, initially, a company called MidCoast offered to buy Carnes Oil’s shares. MidCoast has a history of facilitating a tax shelter known as an “intermediary transaction.” In another post for PT (here), Marilyn Ames covers a Sixth Circuit decision in Hawk, which involved MidCoast, intermediary transactions, and some implications under section 6901. In Hawk, the Court affirmed the Tax Court’s decision and held that petitioners’ lack of intent or knowledge cannot shield them from transferee liability when the substance of the transaction supports such a finding.

In this case, petitioners have moved for summary judgment, and their lack of knowledge is one of the factors the Court uses to ultimately determine petitioners should not be held liable as transferees. Petitioners’ case is distinguishable from Hawk, because the Court determines, in substance, the transaction was a real sale.  

Petitioners didn’t accept MidCoast’s offer, but instead accepted an offer from another company called ASI. More details are fleshed out below, but long story short- the IRS argues an “intermediary transaction” occurred. In support of this the IRS insists that the economic substance doctrine (a question of law) and substance over form analysis (a question of fact) show that what looked like a sale of stock for money was really the sale of Carnes Oil’s assets followed by a liquidating distribution directly from the company to petitioners. The IRS seeks to reclassify the estate and heirs from sellers to transferees to hold them liable.

Even viewing the facts in a light most favorable to the IRS, the Court disagrees under both analyses. The heirs reside in different states, so the appellate jurisdiction varies. The Court acknowledges that they may have to contend with subtle conflicts among the jurisdictions, but regardless of the jurisdiction, whether a transaction has economic substance requires a close examination of the facts.

The facts show that when petitioners sold their stock the company still had non-cash assets, and those assets weren’t liquidated until after ASI controlled it. Petitioners also weren’t shareholders of the dissolved corporation, because it continued to exist for over a year after they sold it.

The facts are not clear as to where ASI got the money to pay petitioners, but after tracing the funds from relevant bank accounts, the Court determined it did not come from Carnes Oil, or a loan secured by their shares.

Neither the petitioners nor their advisers had actual knowledge of what ASI was planning to do. The IRS says there were red flags and petitioners should have known, but the Court finds Carnes Oil was a family company using local lawyers in a small town, and the shareholders reasonably accepted the highest bid.

It was a real sale. The company got an asset-rich corporation and petitioners got cash. The Court grants petitioners’ motion for summary judgment – a win for petitioners in an increasingly pro-IRS realm.

Gone and Abandoned

In Docket No. 23676-18, Miller v. CIR, the Court dismisses a deceased petitioner’s case for lack of prosecution despite his wife being appointed as his personal representative. Petitioner died less than a month after petitioning the Tax Court in 2018 and after some digging the IRS found information about petitioner’s wife.

The Court reached out to her and warned that if she failed to respond the case was at risk of being dismissed with a decision entered in respondent’s favor. The Court did not receive a response.

Rule 63(a) governs when a petitioner dies and allows the Court to order a substitution of the proper parties. Local law determines who can be a substitute. The Court’s jurisdiction continues when someone is deceased, but someone must be lawfully authorized to act on behalf of the estate. If no one steps up the prosecution of the case is deemed to be abandoned.

The Court finds petitioner is liable for the deficiency amount, but it’s not a total loss for the estate, because IRS can’t prove they complied with section 6751(b) so the proposed accuracy-related penalty is not sustained.

All’s Fair in Love and SNOD

In consolidated Docket No. 7671-17 and 10878-16, Roman et. al. v. CIR, a pro se married couple with separate, but consolidated Tax Court matters moves the Court to reconsider its decision to deny petitioners’ earlier motions to dismiss for lack of jurisdiction. The motions were disposed of by bench opinion.

The Court reviews the record and determines that petitioner made objections that have yet to be ruled on.

First, however, it explains that there are two procedural reasons for why petitioner motions could be denied. Petitioners filed the present motion under Rule 183, but that rule only applies to cases tried before a Special Trial Judge. Petitioners in this case have not yet had a trial, the bench opinion only exists to dispose of petitioners’ motions to dismiss, so Rule 183 is not applicable. Additionally, the motions for reconsideration were filed more than 30 days after the petitioners received the transcripts in their case, so they were not timely under rule 161.

Even though the motions could be denied for those reasons, the Court goes on to consider the merits of petitioners’ arguments.

Petitioners’ argue that the Court lacks jurisdiction because their notices of deficiency were invalid because they were not issued under Secretary’s authority as required by section 6212(a).   

Petitioner wife argues her notice of deficiency is invalid because it originated from an Automated Underreported (AUR) department and was issued by a computer system, which is not a under a permissible delegation of the Secretary’s authority.  

Petitioner husband’s notice of deficiency was issued by a Revenue Agent Reviewers about a year later. He argues that his notice is invalid because the person who signed the notice was not named on the notice and she did not have delegated authority to issue the notice. The IRS was not sure who issued the notice, but there were three possibilities. Petitioner husband says not knowing who specifically issued the notice constitutes fraud.

After reviewing the code, regulations, extensive case law, and the Internal Revenue Manual the Court concludes both notices were issued under permissible delegations of the Secretary’s authority and the case can proceed to trial.

Orders not discussed:

  • In Docket No. 25660-17, Belmont Interests, Inc. v. CIR, the Court needs more information from the IRS about how it plans to use the exhibits which petitioner wants deemed inadmissible. According to IRS, the exhibits support the duty of consistency related to representations made by petitioner. Petitioner states the exhibits include representations made in negotiations directed toward the resolution of prior cases involving the same or very similar issues and the F.R.E. 408(a) bars their admission.  
  • Docket No. 10204-19, Spagnoletti v. CIR (order here) petitioner moves to vacate or revise the decision in his CDP case based on arguments made in the original opinion which the Court found were not raised during in the CDP hearing nor supported by the record, so the Court denies the motion.
  • Docket No. 11183-19, Bright v. CIR and Docket No. 18783-19, Williams v. CIR, two bench opinions in which petitioners were denied work-related deductions primarily due to lack of proper proof.  

When the “Routine” Morphs into a “Ticket to Tax Court”

We welcome guest blogger Steve Jager.  Steve is a regular reader of PT with a commercial and a pro bono tax practice.  He devotes a lot of time to the LITC at California State University Northridge [known as the Bookstein LITC], serving as one of their “Tax Court Advisors”  and regularly working with clinic staff/students and clients in resolving issues. He is also a partner in private practice with the firm of Fineman West & Company, LLP.  Although licensed as a CPA, he has passed the test to practice before the Tax Court which a small percentage of practitioners pass each time the Court offers the test.

Steve brings us the story of one of his clients driven to Tax Court by the pandemic and the inability of the IRS to process its mail.  Steve’s case probably represents one of many in this situation where taxpayers receive a notice of deficiency (or notice of determination) not through any fault of their own or of the IRS but because the significant delays in processing mail cause the IRS system to move the case into the deficiency procedure process rather than allowing resolution at the administrative stage.  This by-product of the pandemic certainly occurred in pre-pandemic times but not to the extent of the current level of cases caused by the failure to match correspondence which could resolve the case with the taxpayer’s file.  This causes extra work for the practitioner which is not compensated in the current attorney fee structure, extra anxiety for the taxpayer (and costs) and extra work for Chief Counsel attorneys forced to work on cases that would have been resolved at a lower level.  Taking the case to Tax Court does buy a taxpayer the personal service of an attorney or paralegal rather than the impenetrable correspondence unit of a Service Center but at a high price for all.  Hopefully, the cost here will obtain for Steve’s client the desired result.  Because the client paid the tax prior to the mailing of the notice of deficiency, I expect the IRS will file a motion to dismiss.  Keith

I feared it could happen, but prayed it would not.  I knew the cogs in the IRS machinery were still churning out Notices, and I also knew that the IRS was not keeping up with all the correspondence it was creating with these Notices and I wondered what would happen IF an IRS failure to quickly process a reply to Notice CP2000 occurred…   And then it did. 

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Most of us are probably already familiar with the CP2000 Notice – that Notice that the IRS uses when a “routine matching” of the W2’s and 1099’s are matched up against the tax returns that are filed, and when there is a “mismatch,” the letter that is sent out to the Taxpayer is the CP2000, which assumes that the “mismatch” is unreported income (or an incorrectly deducted interest expense amount), and the IRS gives the taxpayer the opportunity to either pay the calculated tax or otherwise offer explanations as to why the “mismatches” are already reported or not taxable or correctly deducted, as the case may be.  So the possible responses from the Taxpayer (or his/her practitioner) would be either: (i) concession of the amount requested, with or without payment of the additional tax; or (ii) partial concession with a full explanation as to why the concession was only partial – i.e., agreeing with one or more, but not all of the adjustments proposed by the IRS; or (iii) no concession due to a full explanation as to why the proposed adjustments are not correct.    Under “normal” conditions [read that as prior to the pandemic], any of those responses made within 30 days would be considered and at least acknowledged by the IRS.  This, of course, would mean that someone at the Service Center has opened the mail, read the response and within those 30 days, has generated a reply letter back to the Taxpayer.  

But what happens now when the IRS is behind in opening mail, reading the correspondence and writing replies?

Well, it would appear that under the current conditions the CP2000 “machinery” is assuming there has been no response and “pulling the trigger” by issuing the Statutory Notice of Deficiency!  Yikes!  Once the IRS has issued a Statutory Notice of Deficiency, it is really hard to convince the IRS to rescind the Notice (made especially hard, once again, by the fact that the IRS is not running at full capacity), so the Taxpayer has little choice except to file a petition with the United States Tax Court.  Let me relate my own clients’ story.  

Let’s call these clients, Mr. and Mrs. Taxpayer.  When I prepared their 2018 income tax return, I was unaware that Mr. Taxpayer had begun receiving social security income during that tax year, and he did not give me the 1099 from the Social Security Administration, and I certainly did not know to ask him for it.  Therefore, that income was omitted from the tax return.  The IRS computer, however, when matching the social security administration payments against the tax returns, realized a “mismatch,” and a CP2000 was issued last October.  My client received the Notice and contacted me, whereupon we quickly figured out that the income should have been reported, but was not, so I instructed my client to write a check for the tax and the interest as calculated by the IRS.  My client wrote that check IMMEDIATELY, and mailed it with the correct payment stub to the address, as instructed by the IRS.    The IRS cashed the check within 7 days of its receipt, so we know they are still opening the mail quickly, but then things obviously break down.  Notwithstanding the fact that I have had to elevate this to the Tax Court (more on that in a moment), the truly insidious part of this now all-too-common saga, is that the IRS had apparently not credited the payment to the account for Mr. and Mrs. Taxpayer, which resulted in the Statutory Notice being issued!  Once the check was noted as received, I must ask why the IRS machinery wasn’t stopped?

Regardless of why this has happened despite Mr. and Mrs. Taxpayer’s compliance, the reality is that I have had to file a Petition in the Tax Court.  This was certainly not my first petition filed with the Court, but it is my first which was filed electronically, pursuant to the new DAWSON system which the Tax Court has been so excited to roll out.  Preparing the petition was exactly the same as before – that is to say that the Petitioner or practitioner still drafts the Petition as before, and merely uploads the petition as a pdf file, which is a fairly simple process.  Paying the $60 filing fee, which in the past would have been paid by writing a check out of my Client Trust Account, was fairly easy to do by establishing an account with Pay.gov.

Now that the Petition is filed and the IRS is “served,” relatively expensive IRS resources are going to be needed.  Since I have asked for the Trial to be conducted in Los Angeles, I believe that at least a paralegal will need to be conscripted into drafting the Answer to the Petition.   Once that has happened and the Commissioner and my clients are “at issue,” only then will I be able to offer the copy of Mr. and Mrs. Taxpayer’s canceled check to prove that they timely paid the tax that they conceded as soon as they were notified, plus interest.

In this case, my clients, Mr. and Mrs. Taxpayer, are fortunate.  They are being represented and I expect to resolve this case easily.   But how many other folks are there who are compliant, law-abiding taxpaying citizens who will also need to go through a similar ordeal on their own…  unless, of course, they find their way (and are eligible for services) by one of the many LITC clinics.  And for those who do not qualify for LITC Service?   How much will those folks need to pay a professional lawyer or qualified Tax Court practitioner if they wish to be represented?

Rescinding the NOD; Prior Opportunities; and Non-Requesting Spouses Behaving Badly – Designated Orders: November 11 – 15, 2019

Three orders from three judges this week. Of note, I discuss the Service’s authority under section 6212(d) to rescind a Notice of Deficiency (and its futility), along with the Court’s contempt authority under section 7456(c) (and its disuse). Let’s jump right in.

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Docket No. 12248-18 L, Augustine v. C.I.R. (Order Here)

Judge Gustafson grants Respondent’s motion for summary judgment in this CDP case—though only in part, as Respondent conceded noncompliance with section 6751. While the result is fairly straightforward, Petitioner’s history in interfacing with the IRS and TAS—but not the Tax Court—suggests that the importance of seeking Tax Court review wasn’t apparent.

The IRS assessed additional tax liabilities from an audit of 2013 and 2014, which disallowed various Schedule C deductions. The IRS issued a Notice of Deficiency on January 19, 2016; instead of filing a petition, the taxpayer continued corresponding with the IRS. The IRS reaffirmed its decision in a letter dated April 13, 2016—five days before the deadline to file a Tax Court petition.

I’ve seen numerous taxpayers who, desiring not to go to court and believing they can still prevail upon the IRS, continue corresponding with the IRS. In so doing, they often give up their right to go to Tax Court and to obtain meaningful review of the IRS’s underlying decision.  In fact, I’ve seen tax preparers and even CPAs make the same choice. In my view, there is almost never a reason to avoid the Tax Court once the IRS issues a Notice of Deficiency.

Nonetheless, Petitioner did not petition the Tax Court in response to the Notice of Deficiency. Instead, it seems she sought help from TAS, which requested that the IRS “rescind” the Notice of Deficiency.

The IRS does have authority under section 6212(d) to rescind a Notice of Deficiency. If the rescission occurs, the Notice no longer functions as a valid Notice of Deficiency (though does still toll the assessment statute of limitations between the Notice’s issuance and its rescission). Faced with a rescinded Notice, the IRS could not assess additional tax, and the taxpayer could not petition the Tax Court for review.

Unsurprisingly, the IRS does not like to rescind Notices of Deficiency, and so refused TAS’s request to do so here. The criteria for rescinding a Notice of Deficiency are found in IRM 4.8.9.28.1, and include situations where (1) the notice was issued for an incorrect tax amount; (2) the notice was issued to the wrong taxpayer or for the wrong tax period; (3) the notice was issued without considering a properly filed consent to extend the assessment statute of limitation; (4) the taxpayer submits information establishing the actual tax due is less than the amount shown in the notice; or (5) the taxpayer requests a conference with the appropriate Appeals office, but only if Appeals decides that the case is susceptible to agreement. While TAS agreed that the notice should be rescinded—and presumably that one or more of these criteria were met—the IRS apparently did not. Moreover, if TAS’s decision came after the expiration of the 90 day period, the IRM explicitly provides that the IRS should not rescind the Notice. And of course, at that time, the taxpayer has no right to petition the Tax Court.

I’m not sure how long the IRS takes to process requests for rescission, and I’m not sure how long that occurred in this case. But it’s far safer and more productive, in my book, to request review in the Tax Court, ensure oneself of review from IRS Appeals, and resolve the case in this forum.

In this case, TAS did eventually prevail on the IRS to allow Petitioner to have a hearing with IRS Appeals. Still, Appeals made no changes to those in the Notice of Deficiency.

Accordingly, Petitioner was barred from raising the underlying liability under section 6330(c)(2)(B), because Petitioner (1) did receive a notice of deficiency, and (2) had a prior opportunity to dispute the tax before IRS Appeals. While the latter point has been subject to (largely unsuccessful) litigation regarding whether a “prior opportunity” should be limited to a prior judicial opportunity (see our coverage here and here), petitioner clearly loses on the former point.

The remainder of the order is unremarkable. The Settlement Officer offered a payment plan of $490 per month, even though Petitioner never submitted a Form 433-A or filed a delinquent tax return. Unsurprisingly, Judge Gustafson found that Respondent’s decision to sustain the levy notice was not an abuse of discretion. 

Docket No. 20945-17 L, Simon v. C.I.R. (Order Here)

We have another CDP case, this time from Judge Halpern who grants Respondent’s motion for summary judgment to sustain both a levy and a notice of federal tax lien as to trust fund recovery penalties. There are a couple wrinkles that bear mentioning in this case: (1) the definition of a “prior opportunity” under section 6330(c)(2)(B); and (2) designation of payments.

Prior Opportunity

After the TFRP was assessed, Petitioner requested review from IRS Appeals. That appeals “hearing” proceeded as many Appeals hearings do: through exchanges of correspondence and telephone calls. Petitioner never had the opportunity to present his case face-to-face with IRS Appeals. And thus, he argued in the Tax Court that he did not have a true “prior opportunity” under section 6330(c)(2)(B) to dispute the underlying liability, and so wished to do so in the CDP context. (Unlike in the order above, TFRP assessments are not subject to deficiency procedures, so Petitioner accordingly never received a Notice of Deficiency).

Judge Halpern disagreed. In a previous case, Estate of Sblendorio v. Commissioner, T.C. Memo. 2007-94, the Court held on similar facts that “correspondence and telephone conversations between [petitioner] and the Appeals officer are sufficient to constitute a conference with Appeals,” which would constitute a “prior opportunity” to dispute the underlying liability. It’s unclear whether the Tax Court has held similarly in a precedential case; the Court has, however, held that face-to-face hearings are not absolutely required in the CDP context. See Katz v. Commissioner, 115 T.C. 329, 335 (2000). But see Charnas v. Commissioner, T.C. Memo 2015-153 (finding an abuse of discretion based upon the cumulative effect of the SO’s conduct—including failure, upon request, to offer a face-to-face hearing in light of complicated facts).

Of course, the administrative record shows that the petitioner in Simon failed to request a face-to-face hearing during the underlying administrative appeal of the TFRP. The cases cited above uniformly suggest that requesting such a hearing is a pre-requisite to finding an abuse of discretion in the context of a valid CDP hearing. So too, one might suggest, in the context of a prior opportunity. The lesson here: if you believe a face-to-face hearing is important to resolving the underlying liability, request one at the earliest opportunity.

Designation of Payments

The underlying business filed for bankruptcy under chapter 7. During the bankruptcy case, the bankruptcy trustee sent a check for $91,850 to the IRS, which referenced the bankruptcy case number and the company’s name. Neither the check nor the letter accompanying it designated to which tax periods or tax types the payment should be applied.

The IRS applied the payments to the earliest tax period (June 30, 2010), and applied the payments first to the non-trust fund portion of the liability. Petitioner did receive a large credit for the trust fund portion of this liability in the amount of $67,261. Petitioner argued in his Form 12153 and at the CDP hearing that the full amount of the trustee’s payment should have been credited towards the liability, not just the $67,261.

If a taxpayer designates a payment to a particular tax period or particular type of liability (i.e., the trust fund portion of employment taxes vs. the non-trust fund portion), the IRS must honor that designation. Rev. Proc. 2002-26, § 3.01. However, if the payment is not so designated, the IRS will apply the payment “in the best interests of the government.” See id. § 3.02.That usually means applying the payment to (1) the tax period on which the collection statute of limitation will most quickly run, and (2) tax periods and types that have only one potential collection source. Here, the IRS could collect the non-trust fund portion of employment tax liability only from the underlying company; responsible officer of the company never bear personal liability for this type of employment tax debt. In contrast, because the IRS had assessed the TFRP against Petitioner, it could collect the trust fund portion of the company’s employment tax liability both from the company and from petitioner.

So, it makes sense—and indeed, is enshrined in the IRM as policy—that the IRS will apply undesignated payments first to the non-trust fund portion of a liability, absent a designation from the taxpayer. Thus, Judge Halpern finds no abuse of discretion with Respondent’s application of the bankruptcy trustee payment here.

Judge Halpern’s language, however, does raise an interesting question to me. He notes “neither the check nor the letter designates the tax period to which the payment is to be applied, or whether the payment is to be applied towards the trust fund taxes or non-trust fund taxes.”

What if it did? Is there a plausible situation in which a bankruptcy trustee would, in practice, designate a payment on behalf of the debtor? If so, would that designation on behalf of the taxpayer be effective? The language of Rev. Proc. 2002-26 requires that the “taxpayer [provide] specific written directions as to the application of the payment.” § 3.01. I leave it to my colleagues and readers who are better versed in bankruptcy to opine.

Docket No. 17455-16, Hefley v. C.I.R. (Order Here)

Finally, a short jaunt into the difficulties of an innocent spouse defense in a jointly filed petition. The joint petition in this case responded to two IRS notices: a Notice of Deficiency for tax years 2011, 2012, and 2013; and a Notice of Determination regarding an administrative innocent spouse request for the same tax years.

Earlier this year, the non-requesting spouse, Mr. Hefley, filed a Motion for Leave to File Amended Petition to withdraw any dispute regarding the Notice of Determination. Judge Gale notes that he “purported to do so as ‘Counsel for Petitioner’”, and included a signature page apparently bearing the signatures of both spouses. The Court granted this motion shortly thereafter.

In the intervening time, the Court became aware of these facts: specifically, that Mr. Hefley had purported to act on behalf of his spouse as “Counsel”, though lacked authority to do so, given that he was not a member of the Tax Court bar. Further, any such representation would be ethically problematic, given that his interests with regard to the Notice of Determination are diametrically opposed Mrs. Hefley’s interests. Even more problematically, Mrs. Hefley stated in a conference call that she did not sign the Amended Petition, and that it appears to contain a fraudulent signature.

So, Judge Gale decided to void the Amended Petition and deny the motion for leave to file the Amended Petition. Problematically, the case was already set for trial on November 18 and discovery was conducted on the premise that no innocent spouse claim would be raised at trial. The trial would therefore be bifurcated: all issues related to the underlying deficiency would be tried on November 18, and all issues related to the innocent spouse claim would be tried, if at all, at a later date. 

A final note: while the Court’s actions are certainly warranted, I believe that Mr. Hefley should face more serious consequences. He, in essence, tried to pull the wool over the eyes of the Court, opposing counsel, and his own spouse. The facts indicate he likely produced a fraudulent signature on the Amended Petition. That’s serious misconduct.

The Court’s tools in sanctioning this conduct, however, seem somewhat limited. Section 6673 does not seem to provide a remedy; his actions do not constitute (1) proceedings instituted merely for purposes of delay; (2) a frivolous or groundless position; or (3) an unreasonable failure to pursue administrative remedies. The Court has rules for sanctions in the discovery context, see T.C. Rule 104, but that likewise seems inapposite to the misconduct at hand.

The Tax Court’s contempt powers authorized under section 7456(c) might provide an avenue for sanctioning such misconduct. It provides that “the Tax Court . . . shall have power to punish by fine or imprisonment, at its discretion, such contempt of its authority, and none other, as (1) misbehavior of any person in its presence or so near thereto as to obstruct the administration of justice . . . .” In a prior case, Williams v. Commissioner, 119 T.C. 276 (2002), the Court found the petitioner in criminal contempt of the Court; it imposed no term of imprisonment, but rather assessed a $5,000 fine. The taxpayer there fraudulently informed the Court that he had filed a bankruptcy petition, which would have invoked the automatic stay and thus delayed the case in Tax Court.  (I’d be curious to understand how the Court collects such a fine, as unlike the section 6673 penalty, it is not subject to the Service’s normal assessment and collection procedures).

It appears, however, that the Tax Court doesn’t make much use of its contempt authority (at least, not in published opinions or in its orders). The Court has only cited its authority in 7456(c) in orders five times since June 2011; no order actually found a taxpayer or third party in contempt. Other than Williams, only one recent opinion, Moore v. Commissioner, T.C. Memo. 2007-200, substantively discusses the Court’s contempt power under 7456(c)—though ultimately the Court declines to sanction the petitioner in Moore.

I’d suggest that the Court ought to rediscover its authority under section 7456(c) for situations where, as here, the petitioner has engaged in fraudulent conduct, yet the section 6673 penalty is unavailable.

Second Circuit Reverses Tax Court in Borenstein

This post got lost and so comes onto the site about six months after I wrote it, but it still might be of interest to some.  Thanks to Jack Townsend for asking about it.  I wrote it just before I took off on my cross country bicycling trip and failed to keep a good track on it as it went to my research assistant.  Keith

The Tax Court held in Borenstein v. Commissioner, 149 T.C. 263 (2017) that a taxpayer who filed her return late and after the IRS had issued a notice of deficiency could not obtain a refund given the specific timing of her late return and the notice of deficiency.  We discussed the case here.  The interpretation of the IRS and the Tax Court in the case created an odd “donut-hole” in the statute during which the taxpayer could not file a late return and obtain a refund if during the applicable time the IRS had sent a notice of deficiency.

The Tax Court reached the decision in the case by interpreting the plain language of the statute and applying an interpretive maxim.  The Second Circuit did not find the language as plain or the maxim as applicable and reversed the decision of the Tax Court allowing Ms. Borenstein to receive a refund of almost $40,000 plus interest.  The tax clinic at the Legal Services Center of Harvard partnered with the tax clinic at Georgia State to file an amicus brief in support of Ms. Borenstein because we thought his issue likely to impact low income taxpayers.

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Ms. Borenstein filed a request to extend the time to file her 2012 individual income tax return from April 15, 2013 to October 15, 2013.  Even though she timely and properly filed the request for an extension of time to file her return, she failed to file the return by the extended due date.  She had a lot of stock sales.  The IRS assigned a zero basis to the stock and eventually sent her a notice of deficiency stating that she owed over $1 million in taxes largely resulting from the sale of stock.  The IRS sent the notice of deficiency on June 19, 2015.  Ms. Borenstein filed her return, showing an almost $40,000 refund because her stock did not have a zero basis, on August 29, 2015.

Because of the timing of the notice of deficiency and of the late filed return, the IRS took the position that IRC 6213(b)(3) prohibited her from obtaining a refund.  The facts in the case were not in dispute.  The only issue was the interpretation of the statute and whether it created an unusual donut-hole time period during which a taxpayer could not file their return and obtain a refund, as the IRS argued, or whether the taxpayer had a continuous time period within which to file the return and still obtain a refund. 

Because this is the first and only case seeking an interpretation of the statute on this issue and because the administrative importance is low as signaled by the lack of litigation over the 20-year span since the statutory provision at issue came into existence, it seems extremely unlikely that the IRS will seek certiorari in this case.  Whether it will make the same argument if the issue arises in another circuit remains to be seen.  I hope that the opinion will cause it to rethink its position.

Congress took a look at IRC 6213 and the refund provision in it after the Supreme Court decided the case of Commissioner v. Lundy, 516 U.S. 235 (1996).  Lundy involved the look back period for refund claims and produced a surprising result causing the changes to the statute.  The Second Circuit described the Congressional intent in changing the statute as follows:

A taxpayer who files a tax return, and within three years after that filing is mailed a notice of deficiency from the Commissioner, is entitled to a look‐back period of at least three years. However, prior to Congress’s amendment of the governing statute, a taxpayer who had not filed a return before the mailing of a notice of deficiency‐‐like Borenstein‐‐was entitled only to a default two‐year look‐back period. Accordingly, Congress, seeking to extend the look‐back period available to such non‐filing taxpayers, provided that if a notice of deficiency is mailed “during the third year after the due date (with extensions) for filing the return,” and if no return was filed before the notice of deficiency was mailed, the applicable look‐back period is three years. This is called the “flush
language” of 26 U.S.C. § 6512(b)(3).

Ms. Borenstein filed her return during the third year after the original due date of the return and after the notice of deficiency.  If Congress had not changed the statute, the Lundy case would have prevented her from obtaining a refund because she filed the return more than two years after the original due date and after the issuance of the statutory notice.  She argued that the change in the statute opened the door for her to obtain the refund, but the IRS said if you carefully looked at the statute it did not work that way for someone who had requested an extension of time to file the return and then filed late.  Looking at the language of the statute quoted above, the IRS argued and the Tax Court accepted that:

“(with extensions)” has the effect of delaying by six
months the beginning of the “third year after the due date, ….”

Under this interpretation, the Tax Court could only look back two years. She had no payments within the two-year period as her payments were deemed made on the original due date of the return.

Borenstein looked at the statute and found different meaning:

Borenstein argues that “(with extensions)” has the effect of extending by six months the “third year after the due date,” and therefore that the notice of deficiency, mailed 26 months after the due date, was mailed during the third year. That would mean that the Tax Court has jurisdiction to look back three years, which would reach the due date and allow Borenstein to recover her overpayment.

The Second Circuit sided with Borenstein but examined the Tax Court decision and explained why it disagreed with that decision.  It described the Tax Court’s basis for the decision as follows:

[T]he Tax Court determined that the meaning of the flush language of 26 U.S.C. § 6512(b)(3) is unambiguous, relying heavily on the canon of statutory construction known as the “rule of the last antecedent” to find that “(with extensions)” modifies only “due date.” However, that canon “is not an absolute and can assuredly be overcome by other indicia of meaning.” Barnhart v. Thomas, 540 U.S. 20, 26 (2003). Here, it does not yield a clear answer.

What the Tax Court found clear, the Second Circuit did not:

While the Tax Court determined that “(with extensions)” modifies the noun “due date,” it is at least as plausible that “(with extensions)” modifies the phrase “third year after the due date,” thereby extending the third year. Accordingly, because the flush language of 26 U.S.C. § 6512(b)(3) supports more than one interpretation, we “consult legislative history and other tools of statutory construction to discern Congress’s meaning.” 

Once it determined it could look at legislative history, the Second Circuit determined that in amending IRC 6213(b)(3) after Lundy, Congress was trying to create a path for taxpayers to have a three-year lookback period in Tax Court in order to obtain their refund.  Congress did not like the fact that a taxpayer had been cut off from obtaining a refund just because the IRS had sent a notice of deficiency prior to the end of three years from the original due date.  Cutting off taxpayers who received a notice of deficiency created disparate treatment among taxpayers who were similarly situated.  Given the Congressional goal in amending the statute, it makes the most sense to read the statute in the way proposed by Ms. Borenstein.  Of course, the Second Circuit needed to throw in a maxim that supported its conclusion and in doing so gave some good language to taxpayers for future cases:

Our conclusion is supported by “the longstanding canon of construction that where ‘the words [of a tax statute] are doubtful, the doubt must be resolved against the government and in favor of the taxpayer,’” a principle of which “we are particularly mindful.” Exxon Mobil Corp. & Affiliated Cos. v. Comm’r of Internal Revenue, 689 F.3d 191, 199‐200 (2d Cir. 2012) (quoting United States v. Merriam, 263 U.S. 179, 188 (1923)). As Borenstein notes, the Tax Court’s interpretation creates a six‐month “black hole” into which her refund disappears, a result that unreasonably harms the taxpayer and is not required by the statutory language.
 
Moreover, the interpretation we adopt is consistent with the language of 26 U.S.C. § 6511(b)(2)(A), which provides for a look‐back period “equal to 3 years plus the period of any extension of time for filing the return.” 26 U.S.C. § 6511(b)(2)(A) (emphasis added). In view of our obligation to resolve doubtful language in tax statutes against the government and in favor of the taxpayer, we conclude that “(with extensions)” has the same effect as does the similar language that existed in § 6511(b)(2)(A) at the time of § 6512(b)(3)’s amendment‐‐that is, the language expand.

The Second Circuit opinion makes sense to me.  I think it achieves the intent of Congress in “fixing” the statute after Lundy.  It also avoids what seems like an absurd result the IRS interpretation achieves by avoiding the six month black hole or donut hole.  Taxpayers should file their returns on time.  If they do not file on time, they can suffer significant consequences including the total loss of their refund if they wait too long.  Taxpayers, however, should receive three years within which to file their late returns and still receive a refund whether or not the IRS issues a notice of deficiency. 

Losing Jurisdiction through Excessive Payments – Designated Orders: May 27 – 31, 2019

Another week with only two designated orders (likely caused by the Memorial Day holiday). The first comes from Judge Carluzzo, but is a fairly unremarkable order that grants a petitioner’s motion to dismiss his own CDP case. There was a motion for summary judgment pending from Respondent; perhaps Petitioner agreed to a collection alternative or otherwise came to a realization that defending against summary judgment would be futile. We don’t know, as there remains no electronic access to documents on the Tax Court’s docket other than orders and opinions.

The other order from Judge Leyden likewise dismisses a case, but for a different reason: the petitioners in this deficiency case had paid the Service’s proposed tax before it issued a notice of deficiency. Nevertheless, the Service ended up issuing a Notice of Deficiency, from which the Petitioners timely petitioned the Tax Court.

Ordinarily, when dealing with jurisdictional motions in the deficiency context, we see two failures of jurisdiction: (1) the Petitioner hasn’t timely filed their petition, or (2) the Service issued an invalid notice of deficiency—most often because the Service failed to mail the notice to the Petitioner’s last known address.

Here, Respondent filed a motion to dismiss for lack of jurisdiction. Judge Leyden finds the Notice of Deficiency is invalid, but not because it was inappropriately mailed. Rather, the Notice is invalid because, the Court concludes, no deficiency exists.

Conceptually, this feels a bit like putting the cart before the horse. Isn’t the question of whether a deficiency exists a determination to be made on the merits? Why is the Court deprived of jurisdiction? Payment of a deficiency and the deficiency itself seem to be independent concepts. Why is the Tax Court not empowered, as a statutory matter, to determine the propriety of a deficiency—even if it’s been paid before the Notice of Deficiency is issued?

The Court doesn’t cite to any caselaw in the order, but a number of Courts of Appeals agree with Judge Leyden’s analysis. For example, in Conklin v. Commissioner,  897 F.2d 1027 (10th Cir. 1990), a Notice of Deficiency was issued for a joint liability. However, prior to the Notice of Deficiency, the wife paid the entire proposed joint liability in full. The husband sought to challenge the liability in Tax Court. The Tax Court determined the merits of the issue, but the 10th Circuit reversed, holding that the no deficiency existed under I.R.C. § 6211, because it had been fully paid prior to the husband’s Notice of Deficiency. Therefore, the Tax Court had no jurisdiction to hear the case and determine the merits.

What’s the statutory underpinning of this decision? It begins and ends with IRC § 6211, which defines a deficiency. I teach this section each year to my Tax Clinic class, which results in some mild bewilderment. Let’s look at the statute:

For purposes of this title in the case of income . . . taxes imposed by subtitles A… the term “deficiency” means the amount by which the tax imposed by subtitle A …exceeds the excess of—

  • The sum of  
  •  The amount shown as the tax by the taxpayer upon his return . . . plus
  • The amounts previously assessed (or collected without assessment) as a deficiency, over—
  • The amount of rebates, as defined in subsection (b)(2), made.

Clear as mud. I try to frame this as a mathematical equation in class. As elements in the equation, we have:

  1. TaxA: The tax imposed by subtitle A—i.e., what the tax actually should be, under the Internal Revenue Code;
  2. TaxR: The amount shown as the tax by the taxpayer upon his return;
  3. A: Amounts previously assessed as a deficiency;
  4. C: Amounts collected without assessment—the critical issue in this order; and
  5. R: The amount of rebates.

As much as I try to tell students wanting to enroll in Tax Clinic that there’s minimal math involved, it’s time to express this as a proper equation.

Deficiency = TaxA  – ((TaxR  + A + C) – R)  

And, remembering with much appreciation my high school algebra classes, we can simply the equation as follows:

Deficiency = TaxA  – TaxR  – A – C + R  

(My wife—who majored in mathematics—tells me that this is an example of the “distributive property”.)

For simple cases, this makes some conceptual sense. A deficiency primarily equals the tax under subtitle A, less the tax that the taxpayer reported on the tax return.

Let’s add some complexity. If there were previous deficiency assessments made, then those amounts should be reduced from the new deficiency. If there were rebates made (as would occur if, for example, a previous audit resulted in an additional refund to the taxpayer), those amounts should be added to the new deficiency.

That brings us to the issue in this case—“amounts previously . . . collected without assessment.” Those too must be reduced from the definition of a deficiency under section 6211. And if the Notice of Deficiency is issued after the “amounts collected without assessment” exceed the amount of any proposed deficiency, then no deficiency existed when the Notice was issued—or at least, no deficiency that the Commissioner is asserting.  In effect, the Notice is asserting something that cannot exist under section 6211, and it’s therefore invalid. In contrast, if payment occurs after the Notice is issued, the Notice itself remains valid as a deficiency existed at the time of the Notice.

Ultimately, taxpayers in this situation still have an option to dispute the merits of an IRS audit determination: they may file a refund claim with the Service and (upon denial) sue for a refund in District Court or the Court of Federal Claims. This isn’t the most helpful result for pro se taxpayers, given the relative procedural complexity in those courts. Yet, it remains the sole option for these taxpayers.

There are some practical problems with this approach, however. In Judge Leyden’s order, the Petitioners didn’t object to Respondent’s motion. Presumably they agreed that they owed a deficiency, had paid it, and wanted to simply finalize the matter with the IRS.

But there’s still a potential problem. The Service issued a Notice of Deficiency several months after the Petitioners fully paid the proposed deficiency. It seems likely that when they made the payment the Petitioners would have signed Form 4549, Income Tax Examination Changes, which waives the restrictions in section 6213 on assessment and collection. If they did, and the IRS made an assessment pursuant to the Form 4549 at that time, then there is potentially a risk that the Service could assess the same tax again subsequent to the Notice of Deficiency. Stranger things have happened; indeed, Judge Leyden references this possibility in the order itself, and notes that the Service has assured the Court it will take care not to make a duplicate assessment.

What happens if the Service does make that mistake? Can the Petitioner return to Tax Court to enforce the Service’s promise reflected in the order? Maybe, as a practical matter. Perhaps the Court would exercise such jurisdiction as in similar cases involving improper mailings that invalidate the Notice of Deficiency.

At present, this case represents a cautionary tale to taxpayers and their representatives wishing to dispute a tax deficiency in the U.S. Tax Court, yet also wish to prevent the running of penalties and interest. Either (1) they should designate their payment as a “deposit” or (2) they should wait until after issuance of the Notice of Deficiency to make payment. Otherwise, any dispute is heading to District Court or the Court of Federal Claims.


Tax Court Holds Power of Attorney Form Inadequate to Change a Taxpayer’s Address

In a precedential opinion in the case of Gregory v. Commissioner, 152 T.C. No. 7 (2019), the Tax Court has held that sending a power of attorney (POA) form to the IRS with a new address for the taxpayer does not put the IRS on notice with respect to the change of address such that it must use that address in corresponding with the taxpayer in a notice required to be sent to the taxpayer’s last known address. Bryan Camp has a nice write up of the case on the Tax Prof blog if you want an expanded take on the case and you have an interest in knowing how Bryan met his wife.

Before going into an explanation of the basis for the Court’s opinion and why it issued a precedential opinion on this issue, I found it worth noting what was not discussed in this case. Since it was not discussed, I do not know why and would welcome comments from any reader who might know. Because the issue in the case is whether the POA form can change a taxpayer’s address, I would guess that a valid POA existed at the time the notice of deficiency at issue in this case was mailed. If a valid POA existed at the time of the issuance of the notice, why didn’t the POA receive the notice in time to file the Tax Court petition?

The IRS position is that its failure to send a copy of the notice of deficiency to the POA does not invalidate the notice and does not save the taxpayer who files late. See IRM 4.8.9.11.4 (providing that notice may be invalid if not mailed to last known address of taxpayer or if not mailed by certified or registered mail) and IRM 4.8.9.11.2 (providing that copies of the notice are sent to the POA via regular mail). Here, it is not clear if there was a valid POA at the time of the notice, if the POA was timely notified or if the IRS failed to send a copy to the POA. If a POA existed and the IRS timely sent a copy to the POA, maybe this was really a case seeking to protect the POA from exposure. If a POA existed and the IRS did not send a timely notice to the POA, I am surprised that the taxpayer did not at least make an argument regarding that failure. If the notice were a notice of determination in a CDP case, IRC 6304 might come into play if the IRS failed to timely notice the POA. See IRC 6304(a)(2); but cf. Bletsas v. Commissioner, T.C. Memo 2018-128 (2018) (rejecting taxpayer’s argument that IRC 6304 required the IRS to mail a notice of lien to her POA).

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The Gregorys filed their return for 2014 after they moved from Jersey City, New Jersey to Rutherford, New Jersey in 2015; however, on the 2014 return they put their Jersey City address. The opinion did not provide an explanation for why they did this but right off the bat they have created a problem for themselves. During the course of the examination, the Gregorys submitted two POAs to the IRS and each POA listed their new address in Rutherford. During the examination, they also filed a request for extension of time to file their 2015 return and that request also listed their Rutherford address. When the IRS issued the notice of deficiency on October 13, 2016, it had not yet received their 2015 return and it had not received a formal change of address notification from the Gregorys.

The IRS sent the SNOD to Jersey City. The Gregorys did not receive it until after 90 days had run. They filed their Tax Court petition immediately upon receipt of the SNOD. The IRS moved to dismiss the petition as untimely. Both parties agreed it was untimely and that the Tax Court case became one that would decide whether the notice was sent to their last known address and not one which would determine the merits.

The Court here relies on the statute, the regulations under the statute and the Rev. Proc. promulgated in furtherance of the regulations. Bryan Camp’s post does an excellent job walking through those provisions and I will not duplicate it here. The result of the application of the statute, the reg and the Rev. Proc., as well as the language on the POA form and the application for extension form, is that these forms are not returns. Putting a new address on these forms does not provide the type of notice requiring the IRS to adjust its records. Because the POA form and the application for extension form do not require the IRS to adjust its record of a taxpayer’s address, the sending of the SNOD to the Jersey City address met the statutory requirement of sending the notice to the taxpayer’s last known address. Since it met that requirement, the SNOD provided a valid basis for the IRS to assess the liability shown thereon. The taxpayers can still litigate about the underlying liability. They must fully pay first and file a refund claim in order to litigate the issue through the refund process. Alternatively, since they did not receive the SNOD, they can litigate the merits in a Collection Due Process case once the IRS sends notice of intent to levy or files a notice of federal tax lien. Depending on whether a copy of the SNOD was timely sent to a representative, they may find their representative anxious to assist them in obtaining an opportunity to litigate the merits.

The decision here suggests to practitioners that they should take the opportunity of sending in a POA to review the client’s last known address and the practitioner should consider including with the POA a formal notice of the change of address where appropriate.

The case does not address the situation of conversations with the IRS. When I speak with someone at the IRS and I am confirming my ability to represent the taxpayer, I frequently get quizzed about the POA. One part of the quiz is the taxpayer information. If the POA does not contain the taxpayer’s phone number, I get quizzed about their phone number and sometimes about their address. If a representative talks to a human at the IRS about the taxpayer’s address on a POA, I wonder if that might change the outcome here. The issue of last known address has many permutations. In the book Effectively Representing Your Client before the IRS an entire chapter is devoted to this topic. No one wants to be relying on a last known address argument but this issue comes up with frequency.

 

Tax Court Order Highlights Faulty Stat Notice Issued to Married Taxpayers

What happens when IRS wishes to issue stat notice to taxpayers who filed joint returns? Section 6212(b)(2) provides that the notice may be a single joint notice, except if the IRS has been notified that the spouses live separately. IRS Restructuring Act of 1998 in an off-Code provision states that IRS is required, “whenever practicable,” to send “any notice” relating to a joint return separately to each spouse.  When taxpayers file joint returns, and IRS issues a stat notice, IRS policy is to send duplicate notices to each spouse even if they live at the same address.

Parson v Commissioner is a recent undesignated Tax Court order that highlights the risks to the IRS when it does not strictly follow its procedures for issuing separate notices.

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Here are the facts. Parson involved married taxpayers who lived at the same address. In 2014, the husband filed a MFS return and the wife did not file a return; in 2015 they filed a joint return. IRS examined the husband’s 2014 MFS return and the 2015 joint return. IRS issued and sent a single stat notice that covered the husband’s 2014 MFS return and the joint return. The letter portion of the stat notice was addressed only to the husband. The waiver allowing immediate assessment only listed the husband as the sole taxpayer. Accompanying the letter were two separate Forms 4549 A, Income Tax Examination Changes, one for 2014 in the husband’s name and the other for 2015 that referred to both husband and wife.

The Parsons together filed and signed a single petition; the petition swept in both years. For 2014, IRS moved to dismiss the case for the wife, which the Tax Court granted, given that in 2014 the examination pertained to the husband’s MFS return.

Special Trial Judge Armen on his own raised the issue of a jurisdiction for the wife for 2015 given that the stat notice letter only listed the husband’s name. IRS claimed that the Tax Court had jurisdiction over the wife for 2015 because the Income Tax Examination Change Form 4549 A for 2015 also had her name on it and that she was not misled or confused—after all she did file a petition the Tax Court.

Judge Armen disagreed:

However, the Court views the matter differently. First and foremost, it is clear that the . . . notice of deficiency was addressed solely to [husband]. See I.R.C. sec. 6212(a) and (b). Second, the Commissioner is obliged, “wherever practicable, [to] send any notice relating to a joint return under section 6013 of the Internal Revenue Code of 1986 separately to each individual filing the joint return.” Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, sec. 3201(d), 112 Stat. at 740. This was not done in the present case.

The order thus dismissed the wife’s case for lack of jurisdiction; the order goes on to state that of course IRS could issue a separate stat notice to the wife and that if she wishes to challenge that in Tax Court she will have to timely file a new petition.

Observations and Conclusion

RRA 98’s off Code provision requiring “wherever practicable” that IRS issue separate notices related to a joint return is an important protection from abusive or controlling spouses that may not share correspondence (IRS by the way interprets “any notice” relating to a joint return as only notices required by statute). The separate notice requirement is not an absolute directive and Section 6212 allows a single joint notice when IRS does not know that spouses live separately. The order in Parson highlights the risk to IRS when its stat notice itself fails to explicitly list both spouses’ names, and IRS fails to send separate letters. Parson also is a reminder to practitioners to review carefully IRS correspondence to make sure that IRS complied with its notice requirements. Query how Judge Armen would have ruled if the IRS had sent a duplicate copy of the stat notice addressed to the wife that failed to include her name on the letter portion of the notice.

Hat tip to Lew Taishoff who flagged this order on his blog.