Issues in Motions to Dismiss for Lack of Jurisdiction: Designated Orders 9/30/19 to 10/4/19

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For the work week of September 30 through October 4, there were 4 designated orders.  Three have substantive issues (and all have motions to dismiss for lack of jurisdiction), discussed below.  The first order is a tangled series of notices and petitions that Judge Copeland sorts through.  For the last two orders, Judge Guy deals with two very different cases that both have motions to dismiss for lack of jurisdiction.  In contrasting the two, one involves the definition of a deficiency and the other deals with the classification of a remittance as either a payment or a deposit.

For the fourth order, available here, I wanted to take a brief moment to acknowledge that the Tax Court referred the petitioner to contact local Low Income Taxpayer Clinics to see if they could help.  The clinics are those covering the Tampa, Florida, Tax Court docket (Bay Area Legal Services, Gulfcoast Legal Services, and Florida Rural Legal Services).

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3 Notices and 3 Petitions

Docket No. 4460-17, Tramy T. Van v. C.I.R., Order available here.

To provide some clarity, it will be necessary to include some tables regarding the notices sent by the IRS and petitions filed by Ms. Van (sometimes referred to specifically as Petitioner) and her ex-husband, Denny Chan.

In 2010, Tramy Van and Denny Chan were married.  They filed a joint tax return in 2010 that included a $192,763.00 net operating loss carryforward.  They divorced after 2010 so none of the other tax returns involved are joint returns.

On 11/23/16, the IRS mailed three notices of deficiency.  The first notice was for tax years 2011, 2012, and 2013 (Notice # 1).  That notice was sent only to Petitioner at her last known address and she received it.  It proposed several adjustments, including an adjustment to the carryforward from 2010 to 2011.

Notice # 1 addressed to Petitioner only:

Year Deficiency Section 6663 Penalty Section 6651(a)(1) Addition to Tax
2011 $350,669.00 $263,001.75 $87,167.00
2012 $444,335.00 $333,251.25 None
2013 $550,174.00 $412,630.50 None

The second notice was for tax year 2010 only, sent to both parties at Mr. Chan’s last known address (Notice # 2).  The third notice was also for 2010 and was sent to Petitioner’s last known address, but she did not timely receive it.

Notices # 2 and 3 addressed to Petitioner and Mr. Chan:

Year Deficiency Section 6663 Penalty
2010 $441,539.00 $331,154.25

Petitions Filed by Tramy Van and Denny Chan:

Docket Number Petitioner Notice Attached Filed
2435-17 Denny Chan Notice 2 1/24/17
4460-17 Tramy Van Notice 1 2/21/17
15694-18 Tramy Van Notice 2 8/9/18

As noted above, Denny Chan petitioned the Tax Court, which has led to questions about consolidation of cases.

What we are concerned with, though, is the petition by Tramy Van filed in docket number 4460-17, concerning Notice # 1.  In paragraph five and, importantly, in the attachment to the petition, she explicitly contested “all the IRS’s changes to the tax returns examined for the applicable tax years ending 2010 through 2013 for the following taxpayers:  Tramy T. Van, Tramy Beauty School [Partnership], Tramy Beauty School, Inc. [S Corp].”  She explained that she had not received a notice for 2010, but expected to receive one.

The IRS filed an answer to that petition, alleging no notice was sent to Tramy Van for tax year 2010 (basically denying sending Notice # 2 and # 3).

The next year, Tramy Van filed another petition (15694-18) based solely on tax year 2010, attaching Notice # 2, which was received from Denny Chan’s counsel.

In the 4460-17 case, the IRS filed a Motion for Leave to File Amended Answer, admitting sending the 2010 Notice to Petitioner, with an attachment of Notice # 3, arguing the Court has jurisdiction over 2010.  That same day, they filed a Motion to Consolidate Mr. Chan’s case with the 4460-17 case.  The next day, both motions were granted.

In the 15694-18 case, the IRS filed a Motion to Close on Ground of Duplication, which was later denied.  The IRS later filed a Motion to Dismiss for Lack of Jurisdiction on 1/31/19.  They attached a certified mailing list, showing Notice # 3 was mailed 11/23/16 (this document came nearly two years after the 4460-17 petition).  Since the 15694-18 petition was filed 8/9/18, the IRS motion to dismiss was granted because the petition was untimely, filed eighteen months after the 90-day period for filing the petition expired.

Turning to the analysis in this case, the 2010 notice was deemed received by Petitioner in the 15694-18 case when sent to her last known address on 11/23/16, treating Notice # 3 as a valid notice of deficiency.

Next, since Notice # 3 was sent by certified mail on 11/23/16, a petition would be timely if postmarked on or before 2/21/17.  The 4460-17 petition was filed 2/21/17, within the statutory 90-day period, making it a timely filed petition.

Is there an objective indication Tramy Van contested the 2010 determination?  In order to do so, a taxpayer must give an objective indication of contesting a deficiency determined by the IRS against the taxpayer.  The petition must be ascertainable about the issues presented and give the parties and the Court fair notice of the matters in controversy and the basis for their respective positions.

The petition states that Tramy Van contests all changes to her 2010 return concerning her as an individual and regarding her two businesses.  She states she was not in actual receipt of the notice, which is why it was not attached.  She was in receipt of Notice # 1, which has a connection from 2011 to the disallowed net operating loss carryforward disallowed from 2010.  By stating she contested the changes for years 2010 through 2013, she gave notice to the Court and the IRS that 2010 would be a matter in controversy within the petition.

The Court denied the IRS motion to dismiss for lack of jurisdiction for Tramy Van as to tax year 2010.  All other arguments raised by the parties were deemed either moot or without merit.

Takeaway:  The multiple notices and petitions have led to a good amount of confusion that needed sorting out.  It is fortunate for Tramy Van that she listed the year 2010 on her petition, plus mailed the petition in a timely fashion, or it likely would have been dismissed before the Tax Court.

What Is a Deficiency?

Docket No. 5307-19S, Rajan R. Kamath v. C.I.R., Order of Dismissal for Lack of Jurisdiction available here.

Mr. Kamath did not timely file his federal tax returns for tax years 2011, 2012, 2013 and 2015.  The IRS audited him and prepared substitute tax returns under section 6020(b) and mailed 30-day letters regarding the income tax deficiencies for the years at issue.  Mr. Kamath filed delinquent tax returns for those years, leading the IRS to process the tax returns, resulting in tax liabilities and additions to tax under sections 6201(a)(1) and 6651(a)(2).

The IRS issued a notice of deficiency for the four tax years.  There were no deficiencies in federal income tax listed, but they determined Mr. Kamath to be liable for the following additions to tax based on his delinquent tax returns:  section 6651(a)(1) [late filing] for all four tax years, section 6651(a)(2) [late payment] for tax years 2013 and 2015, section 6654 [failure to pay estimated tax] for tax years 2012, 2013, and 2015.  Mr. Kamath timely filed a petition for redetermination challenging the notice of deficiency.

In the analysis, section 6212(a) authorizes the IRS to send notices of deficiency to taxpayers.  The question is – did the IRS determine a “deficiency” within the meaning of the Code?  Section 6211(a) defines a “deficiency” as the amount by which the tax imposed by subtitle A and B, or chapters 41 to 44 of the Code, exceeds the excess of the sum of the amount shown as the tax by a taxpayer on the taxpayer’s return plus the amounts previously assessed as a deficiency, over the amount of rebates made.  Section 6665(a) states the general rule that additions to tax are treated as “tax” for purposes of assessment and collection.  Section 6665(b) provides an exception to the general rule, however, that subsection (a) shall not apply to additions of tax under sections 6651, 6654, or 6655, except for applications of 6651 additions, to the extent such addition is attributable to a deficiency in tax under section 6211, or additions described in section 6654 or 6655, if no return is filed for the taxable year.

Mr. Kamath filed delinquent federal income tax returns for the four years that the IRS assessed under 6201(a)(1).  In the Court’s review, the tax liabilities reported do not constitute income tax deficiencies under 6211(a).  Also under 6665(b), the additions to tax are not “tax” subject to the Court’s jurisdiction.  The additions to tax under 6654 are also not subject to the deficiency procedures because Mr. Kamath filed delinquent tax returns for the years in issue.  It followed that the notice of deficiency is invalid and the Tax Court is obliged to grant the IRS motion to dismiss.

The Court has some sympathy to the petitioner’s argument that it is inequitable to deny him the opportunity to petition the Tax Court.  As they have said previously, “We recognize the difficult position in which petitioners are placed by not being able to come to the Tax Court to test the validity of the respondent’s action in asserting the penalty.  Nevertheless, that is the law and we must take it as we find it.”

The Court ordered that the IRS motion to dismiss for lack of jurisdiction is granted and dismissed the case for lack of jurisdiction on the ground that the notice of deficiency is invalid.

Takeaway:  Mr. Kamath’s delinquent filing of his tax returns led to greater issues with the IRS than if he had timely filed his tax returns.  If he had not filed those tax returns late, all of the penalties would have been on the statutory notice of deficiency the IRS would have been required to send in order to assess the taxes and he could have contested them in Tax Court.  By filing the late returns, Mr. Kamath cut off his ability to contest the penalties in a pre-payment forum.  The lesson here is that a taxpayer who doesn’t file his return and now wants to contest the late filing and late payment penalties that will necessarily follow should not agree with the IRS when it proposes an IRC 6020(b) return but should instead wait for the notice of deficiency which will give him the opportunity to put on information about the tax itself and probably settle it at the same place he would have been had he filed the late returns while preserving his pre-payment right to go to Tax Court to contest the penalties.  Unless he has very unusual facts the preservation of the pre-payment right to contest the penalties may not be of much value.

Is It a Payment or a Deposit?

Docket No. 25757-18S, Albert Carnesale & Robin Carnesale v. C.I.R., Order available here.

Before we dig into the issue of deposits versus payments, I am going to provide some citations where you can read more on the subject.  One prior post in Procedurally Taxing is available here.  You can also turn to the Saltzman and Book text in ¶6.06 Advance Remittances: Deposits vs. Payments.

Originally, the IRS mailed to the petitioners a CP2000 notice, stating that they owed additional tax of $23,171 for tax year 2016, an accuracy-related penalty under IRC section 6662(a) of $4,220, and interest of $1,120, offset by a credit of $2,070.  In response, the accountant for the Carnesales sent a letter to the IRS with a check for the tax liability.  The letter stated that they agreed with the changes in tax liabilities, but requested a waiver of the tax penalty.

The IRS followed up with a notice of deficiency with the same amounts for the tax liability and accuracy-related penalty.  The Carnesales filed their petition with the Tax Court, stating that they do not contest the underlying liability but do contest the penalty.  The IRS filed a motion to dismiss for lack of jurisdiction on the ground the notice of deficiency is invalid because the Carnesales paid the tax liability before the notice of deficiency was issued to them.

The IRS argues that the remittance should be treated as a payment of tax instead of a deposit because the Carnesales failed to follow the procedures in Rev. Proc. 2005-18, 2005-1 C.B. 798, to properly designate the remittance as a deposit.

In the transcript for 2016 submitted by the IRS, the remittance is recorded as “Advance payment of tax owed”.  No assessments were entered for the tax, penalty, or interest proposed in the CP2000, leaving a credit balance in the account for the Carnesales.

Contrary to the procedures established in Rev. Proc. 2005-18, the remittance was not offset by a corresponding assessment of tax to which the “payment” relates.  The Court concludes that the IRS treated the remittances as a deposit, not a payment, and did not assess additional tax equal to the amount of the remittance before issuing the notice of deficiency.

The Court dismissed the motion to dismiss for lack of jurisdiction.  Trial is currently scheduled for January 13 in Los Angeles.

Takeaway:  While there are procedures for designating a remittance as a deposit in Rev. Proc. 20015-18, it looks like the petitioners were fortunate in how the IRS treated the remittance so the case was not dismissed for lack of jurisdiction and they can be heard at their day in court.

William Schmidt About William Schmidt

William Schmidt joined Kansas Legal Services in 2016 to manage cases for the Kansas Low Income Taxpayer Clinic and became Clinic Director January 2017. Previously, he worked on pro bono tax cases for the Kansas City Tax Clinic, the Legal Aid of Western Missouri Low Income Taxpayer Clinic and the Kansas Low Income Taxpayer Clinic. He records and edits a tax podcast called Tax Justice Warriors.

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