Frequent contributor Carl Smith discusses a case implicating the Tax Court’s ability to determine and order the credit or refund of an overpayment in a CDP case. Les
In 2006, in a court-reviewed opinion, the Tax Court in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), held that the Tax Court lacked jurisdiction to determine an overpayment in a Collection Due Process (“CDP”) case. Although section 6512(b) gives the Tax Court overpayment jurisdiction, the court held that section 6512(b) was limited in application to deficiency cases and interest abatement cases, where it is specifically referenced in section 6404(h)(2)(B). The Tax Court has never reexamined its Greene-Thapedi holding, and the holding was adopted only in a D.C. Circuit opinion, Willson v. Commissioner, 805 F.3d 316 (D.C. Cir. 2015), presenting a highly unusual fact pattern. A case named McLane v. Commissioner, Docket No. 20317-13L, currently pending before Judge Halpern may lead to consideration of Greene-Thapedi’s holding in the Fourth Circuit in a case with a more typical fact pattern than that presented in either Greene-Thapedi or Willson.
read more...The McLane case is not new to readers of PT. A March designated order in the case was discussed by Samantha Galvin in her post on April 5. But, that post did not discuss Greene-Thapedi, so I think another post expanding on McLane is called for.
In Greene-Thapdei, a taxpayer complained during a CDP hearing of alleged excess interest and late-payment penalty that she had been charged after she settled a Tax Court deficiency case. The IRS had assessed the agreed tax, as well as interest and late-payment penalty thereon. During the Tax Court CDP case, the balance charged was fully paid by a credit that the IRS took from a later taxable year, so the Tax Court dismissed the case as moot, concluding that it had no overpayment jurisdiction in CDP. But, a curious footnote (19) in the majority opinion may have tried to leave open the issue of overpayment jurisdiction in cases where the taxpayer did not receive a notice of deficiency and so could challenge the underlying liability in CDP. However, the footnote is far from clear. The footnote reads:
We do not mean to suggest that this Court is foreclosed from considering whether the taxpayer has paid more than was owed, where such a determination is necessary for a correct and complete determination of whether the proposed collection action should proceed. Conceivably, there could be a collection action review proceeding where (unlike the instant case) the proposed collection action is not moot and where pursuant to sec. 6330(c)(2)(B), the taxpayer is entitled to challenge “the existence or amount of the underlying tax liability”. In such a case, the validity of the proposed collection action might depend upon whether the taxpayer has any unpaid balance, which might implicate the question of whether the taxpayer has paid more than was owed.
Judge Halpern joined nearly every other judge in the majority opinion. Judge Vasquez filed a dissent arguing that the Tax Court implicitly had jurisdiction to determine an overpayment in CDP.
In McLane, the IRS says it issued a notice of deficiency to McLane’s last known address, but, when he never filed a Tax Court petition, it assessed the income tax deficiency. It later sent him a notice of intention to levy. In the CDP case in Tax Court, the IRS conceded that he did not receive the notice of deficiency so could challenge the underlying liability. After a trial, the IRS conceded that McLane proved not only the disputed deductions in the notice of deficiency, but also that he had more deductions than were reported on his return and so overpaid his taxes by about $2,500. After the post-trial briefs were in (but before any opinion was issued), the parties held a conference call with Judge Halpern about what to do. The IRS took the position that the Tax Court had no jurisdiction to find an overpayment and any claim filed today would be time barred. After the conference call, the Judge in March issued an order asking for the parties to file memoranda addressing whether the court had overpayment jurisdiction. The 6-page order did not mention Greene-Thapedi, but stated:
Because the question of our jurisdiction in a collection due process (CDP) case to determine and order the credit or refund of an overpayment appears to be a novel one, we will require the parties to submit supplemental briefs addressing the issue before we resolve it.
Judge Halpern doesn’t usually forget about relevant opinions, so I suspect that he may be thinking that Greene-Thapedi is distinguishable (maybe under footnote 19?). In the order, the judge also suggested that the pro se taxpayer consult a tax clinic in the Baltimore or D.C. area before submitting his memorandum.
Although the taxpayer spoke to the tax clinic at the University of the District of Columbia, he decided not to retain that clinic and stayed pro se.
In response to the judge’s order, three memoranda were eventually filed with the Tax Court: (1) an IRS’ memorandum, (2) the taxpayer’s memorandum, and (3) an amicus memorandum that the judge allowed the UDC clinic to submit. Full disclosure: Although the amicus memorandum was written primarily by UDC law student Roxy Araghi and her clinic director, Jacqueline Lainez, since I assisted them significantly, I am also listed as of counsel on the memorandum.
Essentially, the IRS simply points to Greene-Thapedi as controlling and argues that the Tax Court lacks overpayment jurisdiction in CDP for the reasons stated by the majority in that opinion.
The IRS also cites and relies on Willson. In Willson, the IRS erroneously sent the taxpayer refund checks for two taxable years, when it should have sent only one refund check. Later realizing its mistake, the IRS assessed in the earlier year the erroneous payment amount. The taxpayer eventually realized that one of the two refunds checks was erroneous, and he voluntarily sent the IRS some money for the year for which the IRS had set up the assessment. When the IRS did not get back the rest of the assessment from the taxpayer, it issued a notice of intention to levy for the balance. During the Tax Court CDP case, the Tax Court held that assessment was not a proper way of collecting back the erroneous refund. And appropriate methods (such as a suit for erroneous refund) were now time-barred. So, the IRS abated the assessment. Then, the IRS argued that the case was moot. But, at that point, the taxpayer contended that he had overpaid his tax (the voluntary payments), and he asked the Tax Court to so hold, citing the Tax Court’s authority under section 6330(c)(2)(B) to consider challenges to the underlying liability. The Tax Court dismissed the CDP case as moot, without finding an overpayment.
The D.C. Circuit in Willson agreed with the Tax Court, but stated: “The IRS retained the $5,100 not to satisfy a tax liability but to recover an erroneous refund sent as a result of a clerical error. The debt created by such an erroneous refund is not a tax liability.” 805 F.3d at 320 (emphasis in original).
Since Willson does not involve a deficiency in tax and may not even involve underlying tax liability at all, it may not be controlling in McLane.
And, no other Court of Appeals has considered Greene-Thapedi’s Tax Court jurisdictional issue.
The McLane taxpayer and UDC amicus memoranda argue that Greene-Thapedi is distinguishable from McLane on the facts or was, simply, wrongly decided. The taxpayer’s memorandum also distinguishes Willson factually in a footnote. Both memoranda make many of the arguments that Judge Vasquez included in his dissents in Greene-Thapedi for why the Tax Court has inherent overpayment jurisdiction in a CDP case – especially one where a taxpayer is litigating a deficiency because he did not receive a notice of deficiency.
As I see it, either way Judge Halpern rules, there is a good chance that the losing party will take this issue up to the Fourth Circuit on appeal, where we might finally get a ruling on whether the Greene-Thapedi opinion is right or not after all.
About Carlton Smith
“But, a curious footnote (19) in the majority opinion may have tried to leave open the issue of overpayment jurisdiction in cases where the taxpayer did not receive a notice of deficiency and so could challenge the underlying liability in CDP.”
The relevant statute is clear in that it only applies to deficiency cases. In a case where the IRS has no record of having issued a Notice of Deficiency[*], other courts have to be used, and it’s pretty hard to obtain jurisdiction in other courts too.
[* It seems that there is no exception even when the IRS formerly had a record of having issued a Notice of Deficiency but no longer has such a record.]
Some kinds of innocent spouse cases acquire refund jurisdiction by a different statute.
Anyway, the footnote doesn’t really leave open the possibility of refund jurisdiction, only overpayment jurisdiction for matters such as abuse of discretion, when an assessment could have been collected by power of offset from an overpayment made during the very same tax year, so the lien was not justified, though the balance of the overpayment requires a refund suit in a different court.
The order is quoted: “Because the question of our jurisdiction in a collection due process (CDP) case to determine and order the credit or refund of an overpayment appears to be a novel one, we will require the parties to submit supplemental briefs addressing the issue before we resolve it.”
The question is not novel; in 2011 the IRS persuaded Tax Court to ignore footnote (19) when using Greene-Thapedi to prevent overpayment jurisdiction. Only perhaps one fact pattern is novel: this time the IRS has a record of having issued a Notice of Deficiency.
The majority opinion in Greene-Thapedi reached an incorrect conclusion. If the merits of the underlying liability is properly at issue in a CDP case, the full payment of the previously unpaid tax liability does not render the entire case “moot”. Notwithstanding the full payment of the previously unpaid liability, there is still a dispute regarding the amount of the tax liability. That dispute cannot possibly be described as “moot.” Yet that is what the Tax Court concluded. That conclusion is logically flawed.
The question of whether the Tax Court can order a refund be paid in the context of a CDP case is a different question. If the conclusion is that the Tax Court cannot order a refund be paid in the context of a CDP case, that inability is not a bar to the Court deciding the merits of the disputed liability, even after the disputed liability has been paid in full during the course of the CDP proceeding.
I suppose that, if a tax liability was paid in full during the course of a CDP proceeding and the two year period within which to file a refund claim expired during the course of the CDP proceeding, the dispute regarding the amount of the liability could become moot. Such a scenario seems improbable, however. Even in the absence of the filing of a formal refund claim, I would expect that the continuing (post-payment) challenge to the underlying liability would, at a minimum, constitute a timely informal claim which could be perfected at a later date.
The reality is that it will rarely make sense for a taxpayer who has their dispute regarding the amount of a tax liability tossed from the Tax Court based on Greene-Thapedi to appeal the Tax Court’s order dismissing the CDP case as “moot.” It will normally be more efficient to resolve the disputed liability through the refund process than to pursue an appeal to the Court of Appeals and then, only if you get the Appeals Court to reverse Greene-Thapedi, go back to the Tax Court to litigate.
This issue is one of the “peeves” that I keep in the kennel with all of my other pet peeves. I am always looking for an opportunity to assist in overturning the Tax Court’s opinion in Greene-Thapedi. It is bad law.