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

Posted on July 29, 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.



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