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:
- TaxA: The tax imposed by subtitle A—i.e., what the tax actually should be, under the Internal Revenue Code;
- TaxR: The amount shown as the tax by the taxpayer upon his return;
- A: Amounts previously assessed as a deficiency;
- C: Amounts collected without assessment—the critical issue in this order; and
- 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.
About Patrick Thomas
This odd result that the Tax Court lacks jurisdiction in a deficiency case where the taxes were previously paid has always struck me as wrong. Many cases say that the actual non-existence of a deficiency does not deprive the Tax Court of jurisdiction. Otherwise, every time the Tax Court concluded there was no deficiency, the Court would have to dismiss for lack of jurisdiction, not enter a decision of no deficiency.
And in the CDP area, the court has held that where the taxpayer was rightly given an equivalent hearing, but the IRS mistakenly issued a notice of determination, the court has jurisdiction, but summary judgment is granted to the IRS because the request for a CDP hearing was untimely. See Kim v. Commissioner, T.C. Memo. 2005-96.
However, it is the case that the courts have long held that payment of the tax before the notice of deficiency is issued renders the notice setting out a deficiency insufficient to create Tax Court jurisdiction. In addition to the case cited in the post, here is a passage from Paccon, Inc. v. Commissioner, 45 T.C. 392, 396-397 (1966):
It is the existence of a deficiency at the date of the sending of the notice of deficiency that confers jurisdiction upon this Court. In Stanley A. Anderson, 11 T.C. 841 (1948), we held that where, on the date of the mailing of the letter purporting to be a notice of deficiency, it appeared that the tax had already been paid, the letter was not a valid notice of deficiency and therefore did not confer jurisdiction upon this Court. In McConkey v. Commissioner, 199 F. 2d 892 (C.A. 4, 1952), affirming an order of dismissal of this Court, the court pointed out that a taxpayer “cannot pay the tax, then, upon an erroneous determination of a deficiency by the Commissioner, when there is in fact no deficiency since the tax has been paid, seek a review by the Tax Court.” In these situations, if the only items considered had been the tax shown on the return as compared to the tax liability determined by the Commissioner, there would have existed a deficiency. In the McConkey case a revenue agent had tentatively proposed a deficiency in tax against the taxpayer, the taxpayer had paid the amount of such tentative deficiency, and the payment had been accepted. In that case the question was the nature of the payment which had been placed by the collector in a suspense account without assessment. Concluding that the payment had been collected as a deficiency prior to the issuance of the notice, the court determined that no deficiency existed at the time the notice was issued and therefore the notice was not a notice of deficiency conferring jurisdiction upon this Court. The situation here is not different for jurisdictional purposes from one in which respondent determined an increase in income tax liability but an overassessment in income tax as a result of the allowance of a net operating loss carryback without any additions to tax being involved. If we would conclude that such a notice was not a notice of deficiency conferring jurisdiction upon this Court, under Charles E. Myers, Sr., supra, we must reach the same conclusion here. Since we consider it to be necessary to our jurisdiction that a deficiency exists when the notice is issued, we conclude that we are without jurisdiction in this case as to the fiscal year ended June 30, 1955.
“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.”
The IRS thought that too. The IRS tells non-resident aliens that they can only sue in Court of Federal Claims, but everyone else can choose either a District Court or Court of Federal Claims. However, the DOJ and 9th Circuit observed that Congress revoked the power it had been given by Cook v. Tait. Congress legislated that the only District Court that can be used is the one whose district the taxpayer resides in. US citizens who live in American Samoa or countries outside of the US do not get the complete benefit of citizenship, they do not get jury trials, they can only sue in Court of Federal Claims, the same as non-resident aliens. 26 USC section 7701 definition 39 does not help them. (US non-citizen nationals, such as many residents of American Samoa, are treated as non-resident aliens by title 26 USC, but it is also possible for a US citizen to reside in American Samoa. Other US citizens reside in Canada, Japan, etc.)
Procedural complexity is not the only problem for pro se taxpayers. The Federal Circuit, in an intra-judge split (one judge being on both panels) overturned the IRS’s acceptance of a tax return for one year because the DOJ disagreed with the IRS’s position that it’s OK to report the non-resident alien spouse’s SSN as applied for, spouse’s ITIN applications rejected by the IRS, and spouse’s reliance on US v. Sullivan and Garner v. US; but the same court upheld the IRS’s acceptance of a tax return for a different year because the DOJ didn’t dispute the IRS’s position that the exact same facts apply in both years. Whatever it is that makes courts refuse to credit a taxpayer for payments made, procedural complexity is not it.
“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?”
The IRS has indeed reneged on promises that it made to Tax Court such as this one. As far as I can tell, Tax Court can choose at random too. Tax Court can decide that the court was defrauded by the IRS and vacate its order, or Tax Court can decide that the court lost jursdiction 90 days after the dispositive order.
However, there’s a problem with this wording. The IRS only issued a Notice of Deficiency not an assessment, so if the IRS proceeds to make an assessment it will not be a duplicate assessment. The taxpayer has to wait for a notice of lien or levy, whereupon the taxpayer will be unable to argue the underlying liability because the taxpayer already had an opportunity to dispute the underlying liability with IRS Appeals. So the taxpayer will have to comply with Flora, but District Court and Court of Federal Claims will find reasons to dismiss for lack of jurisdiction. The IRS will use offset power to confiscate every future refund that should ever accrue to the taxpayer.
If Low Income Tax Clinics were allowed to help victims sue in District Court and Court of Federal Claims, maybe things would improve? Dream on.
Regarding:
“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”
It seems one of two things must have happened. Either: (a) the IRS applied the payment to the account but did not assess at the time; or (b) the IRS prepared the Notice of Deficiency incorrectly. If the IRS had assessed, then the Form 4549 for the Notice of Deficiency should reflect that previous assessment on line 12, thus a deficiency of $0.
But even if the IRS didn’t assess at the time, the Notice of Deficiency would *still* be wrong. A collection without assessment should also be reflected on line 12, thus resulting in a deficiency of $0 and a decision not to issue the Notice of Deficiency at all.
In an ideal world, the IRS would assess when a payment is received under the authority in section 6213(b)(4). Form 4549 seems to assume that will happen. As you point out, the definition in section 6211(a) would result in a $0 deficiency here, but line 12 on Form 4549 is described as “Total Tax Shown on Return or as Previously Adjusted” without any mention of “collected without assessment.” Further, section 6213(b)(4) states that:
“In any case where such amount is paid after the mailing of a notice of deficiency under section 6212, such payment shall not deprive the Tax Court of jurisdiction over such deficiency determined under section 6211 without regard to such assessment.”
Why is this limited to amounts paid *after* the Notice of Deficiency? It seems to be an assumption that amounts paid *before* the Notice of Deficiency would have been assessed. Or else that the Notice of Deficiency would reflect that payment; in this case, resulting in a $0 deficiency.
I’d prefer that the court make a determination rather than dismiss for lack of jurisdiction. But it would be even better to avoid the problem in the first place. The IRS should have appropriate procedures to review transcripts and properly determine the amount of the deficiency to reflect amounts collected without assessment as well as prior assessments.