We welcome back frequent guest blogger, Carl Smith. Carl writes on the first circuit court opinion to address the issue of obtaining a refund in a CDP case. Keith
Regular Tax Court practitioners are aware that in a case brought in the Tax Court in response to a notice of deficiency, the Tax Court has jurisdiction not just to find no deficiency, but to find an overpayment and, if necessary, to order the IRS to pay the overpayment as a refund. The Tax Court’s refund jurisdiction, and that jurisdiction’s various limitations, can be found at section 6512(b).
Tax Court Collection Due Process (CDP) cases start with Appeals Office hearings in response to a notice of intention to levy (NOIL) or a notice of federal tax lien (NFTL) in which multiple other issues can be raised beyond merely the propriety of the NOIL or NFTL. Section 6330(d)(1) gives jurisdiction to the Tax Court the hear appeals of notices of determination issued at the end of the Appeals Office CDP hearings. What if, during the Tax Court appeal, the IRS takes an overpayment from a later tax year and offsets it against the year involved in the NOIL or NFTL such that the tax is now fully paid and the IRS is no longer seeking to collect it? What happens in such a case if the offset more than fully pays the assessment, such that the taxpayer now wants a refund? Can the Tax Court order a refund as part of its CDP jurisdiction?
In Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), the Tax Court held that once the IRS notifies the court that, since the liability has been fully paid, the IRS is no longer seeking to collect the liability set out in the NOIL or NFTL, the case is moot and should be dismissed — even if the taxpayer is now arguing that she overpaid the tax assessment. The Tax Court held that it had no overpayment jurisdiction in its CDP appeal jurisdiction.
Surprisingly, in the nearly 10 years since the Greene-Thapedi opinion was issued, the question of whether the Tax Court lacks refund jurisdiction in its CDP proceedings has never been considered by a Court of Appeals. But, the D.C. Circuit, in its recent opinion in Willson v. Commissioner, 2015 U.S. App. LEXIS 19389 (Nov. 6, 2015), has finally considered the issue and agreed with the Tax Court that the Tax Court lacks refund jurisdiction in its CDP appeals proceedings.
read more...Byers Prequel
I am not greatly surprised by the Willson holding, as part of it was foreshadowed in the opinion in Byers v. Commissioner, 740 F.3d 668 (D.C. Cir. 2014). Although ProcedurallyTaxing has done a number of blog posts on Byers, see here and here, the posts have all focused on the Byers’ case’s CDP venue on appeal issue. One of the non-venue issues in Byers, however, concerned an assessment that the IRS abated during the Tax Court CDP appeal. The Byers Tax Court appeal involved a notice of determination that upheld an NOIL covering five taxable years. During the course of the Tax Court proceeding, at the taxpayer’s request, the IRS lawyers went searching for the notice of deficiency that supposed underlay the assessment for the last taxable year, but the lawyers found no such notice. Accordingly, the IRS abated the assessment for that year and moved in the Tax Court to dismiss this one year from the suit as moot. Byers objected to the dismissal, noting that the year that was abated represent over 30% of the total unpaid liability set forth in the NOIL, and it was the large total liability for all five years together that may have motivated the Settlement Officer (SO) to have upheld the levy; had the liability been smaller, the SO might have, say, worked with him to give him an installment agreement. Despite this argument, both the Tax Court and D.C. Circuit held that the Tax Court should dismiss from its CDP proceeding any tax year as to which the IRS was no longer seeking collection. Id. at 679. In Byers, however, the taxpayer had paid nothing towards this abated assessment, so there was no request from the taxpayer for the Tax Court to find an overpayment and order a refund.
Willson Holding
In Willson, the taxpayer filed his 2006 income tax return showing an overpayment of over $13,000, but he elected to carry that amount forward to his 2007 taxes. After the carryforward, on his 2007 taxes, he still showed a large overpayment, and he asked that $10,000 of such overpayment be sent to him as a refund while the rest should be carried forward again to 2008. The IRS not only sent him the $10,000 for 2007, but it issued a check to him for 2006 in the amount of the $13,000 overpayment credit. Realizing its error, the IRS — more than 2 years after sending the check for 2006 — improperly assessed the taxpayer’s 2006 year for $13,000 and began collection actions. It was improper of the IRS to try to recover its erroneous refund by assessment. Instead, the IRS should have filed a suit for erroneous refund under section 7405 within 2 years of the refund, though it never did, so it could not now. The taxpayer, understanding the IRS’ error, sent a check to the IRS for $5,000, suggesting that he be allowed to pay back the rest of the 2006 overpayment in installments. Another roughly $2,000 was taken from an overpayment for the taxpayer’s 2009 year and applied to the 2006 assessment by offset. An NOIL was then issued for the 2006 assessment, and the taxpayer had a CDP hearing. The notice of determination upheld the NOIL.
In the course of the Tax Court proceeding, the IRS lawyers recognized that the assessment for 2006 was improper and had it reversed. This left a credit balance in the 2006 account of over $7,000, but the IRS did not send a check for that amount to Mr. Willson. Rather, the IRS sent Mr. Willson a check to cover the 2009 offset that was taken (less $100 that Wilson had apparently sent as an estimated tax payment for 2009 in March 2010), and the IRS lawyers moved for the Tax Court to dismiss the 2006 year case as moot. But, the taxpayer argued that the year was not moot, since he wanted to get his $5,100 overpayment credit refunded to him and he was now alleging various other damages. Apparently, the IRS kept the $5,100 because it was voluntarily paid within 2 years of the erroneous refund check. In a one-page unpublished order, the Tax Court granted the IRS’ motion and dismissed the case as moot.
The D.C. Circuit opinion cites both its prior opinion in Byers and the Tax Court’s opinion in Greene-Thapedi for its holding that the Tax Court properly dismissed the case as moot and that the Tax Court lacks refund jurisdiction in a CDP proceeding. In the opinion’s final full paragraph, the D.C. Circuit wrote:
No unpaid tax liability remains on Willson’s 2006 tax account. The IRS no longer seeks to levy on his property. This is, in fact, the very relief Willson ostensibly sought when he requested a CDP hearing to challenge the proposed levy in the first place. Willson has received all the relief that section 6330 authorizes the tax court to grant him; if he is entitled to any other relief—with regard to the disputed $5,100 or otherwise—he must seek it in district court or in the Court of Federal Claims. See 28 U.S.C. § 1346(a)(1) (granting federal district court and Court of Federal Claims original jurisdiction over actions for “recovery of any internal-revenue tax”); 26 U.S.C. § 7422 (setting out procedure for taxpayer refund suits); id. § 7433(a)-(b) (granting right to bring suit against government for damages if IRS collection action is unlawful). “With no levy being placed upon [Willson’s] property[,] . . . there was no actual case in controversy regarding [his] appeal of such a levy action.” See Byers, 740 F.3d at 679. Accordingly, “[t]here was no appropriate course of action for the Tax Court to take but to dismiss as moot” Willson’s case. See id.
In a footnote to this paragraph, the D.C. Circuit wrote:
The same is true of Willson’s claims that the IRS violated his constitutional rights, the Ex Post Facto Clause and the constitutional principle of separation of powers in pursuing a levy against him; because the tax court has granted him all the relief to which he is entitled under section 6330, those claims likewise belong in district court or in the Court of Federal Claims.
Willson also contends that the case is not moot because he has a claim for costs and attorney’s fees, but a plaintiff’s attorney’s fees claim cannot of its own accord keep alive any merits claim that would otherwise be moot. See Lewis v. Continental Bank Corp., 494 U.S. 472, 480 (1990); accord Johansen v. United States, 506 F.3d 65, 70 (1st Cir. 2007).
I’m not too sanguine that Mr. Willson will ever get back his $5,100. It likely is too late for him to bring a section 7433 suit for damages for wrongful collection, as the time in which to bring such a suit is 2 years from the date that he became aware of the wrongful collection action. And I doubt he will get that money back through a district court tax refund suit, since earlier in the opinion, the D.C. Circuit also wrote:
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. See, e.g., O’Bryant v. United States, 49 F.3d 340, 347 (7th Cir. 1995) (“[E]rroneous refunds and tax liabilities are simply not of the same ilk.”); Pac. Gas & Elec. Co. v. United States, 417 F.3d 1375, 1383 (Fed. Cir. 2005) (refunds sent due to clerical error “are owed to the government by reason of unjust enrichment” instead of “statutory obligation under the tax code to pay the government”).
Observations
For some reason, the D.C. Circuit’s opinion in Willson never mentioned the Tax Court’s jurisdiction at section 6512(b) to find overpayments. I know that Frank Agostino has represented several people in the Tax Court where Frank has argued that section 6512(b) is not limited to deficiency cases, but applies, as well, to CDP cases. Frank tells me he raises this issue challenging the holding in Greene-Thapedi often in the Tax Court, but the cases all have so far all settled out (and the one case he has pending is likely to settle), so he is not yet in a position to take any appeal to a Circuit court so as to create, if possible, a Circuit split with the D.C. Circuit. As I noted in the post on Byers from July 22, 2015, the IRS and DOJ are not objecting to taxpayers taking appeals of their CDP cases from the Tax Court to the Circuits of residence. So, a person with a Tax Court CDP case is free to avoid the D.C. Circuit holding in Willson, even though the D.C. Circuit might have held in Byers that the person’s type of CDP case (i.e., one not involving a challenge to the underlying liability) can only properly be appealed to the D.C. Circuit.
Mr. Willson, according to the Tax Court website, lives in Washington state. (I hope this is not a mistake for his being a resident of D.C.) If this is true, then Mr. Willson is another one of a number of taxpayers who have, since the Byers opinion, deliberately chosen to take their appeals from the Tax Court in CDP cases to the D.C. Circuit under the flush language at the end of section 7482(b)(1), rather than to their Circuit of residence. Mr. Onyango of Onyango v. Commissioner, 142 T.C. 425 (2014), who lives in Illinois, also has brought his CDP appeal from the Tax Court in the D.C. Circuit, where it is pending (mid-briefing) at docket number 14-1280. You can find Keith’s post on the Onyango Tax Court opinion here.
About Carlton Smith
The Tax Court possesses only the jurisdiction that Congress grants to it.
The Tax Court has refund jurisdiction in deficiency cases. See I.R.C. § 6512(b). It also has refund jurisdiction in spousal relief cases. See I.R.C. § 6015(g). In contrast to those two laws, neither I.R.C. § 6320 nor I.R.C. § 6330 mentions anything about refunds.
It follows that Congress did not grant the Tax Court refund jurisdiction in CDP cases.
As for Byers, I’m unclear how that case is precedent for Willson. Carl tells us Byers did not involve a refund claim. If the Byers connection to Willson is mootness, then on that ground it fails too.
Willson’s case was moot. He received all the relief the Tax Court had jurisdiction to grant him for the sole tax year he placed in issue.
In contrast, Byers’s case involved a live controversy for five tax years–including the tax year for which the IRS attorneys could not locate a notice of deficiency. “[A] claim is moot when the issues presented are no longer `live’ or the parties lack a
legally cognizable interest in the outcome.” Powell v. McCormack, 395 US 486, 496 (1969). Although the IRS could not collect on Byers’s one tax year, that tax year played a significant part in Appeals’ determination to sustain the planned levy action.
If the IRS followed its normal procedure, then Appeals had under review only one I.R.C. 6330 notice, not five of them. Appeals obviously got one of Byers’s five tax years wrong in a determination that reviewed only one CDP notice. How, then, can a court ignore Appeals’ harmful error, and “review” Appeals’ (remaining) determination, without it running afoul of the long-standing Chenery doctrine?
Byers made that very Chenery argument to the D.C. Circuit, which rejected it for two reasons: First, attached to the IRS motion for summary judgment was an affirmation by the SO that she would have reached the same result without the 2003 year being involved, and Byers had failed to object at the time to introduction of this extra-record affirmation, so the Tax Court could review that as the final administrative decision. Second, Byers failed to mention Chenery until his D.C. Cir. briefs. So, the D.C. Circuit said that it was not considering the Chenery issue. But, as you and Mr. Byers have articulated the Chenery argument, if it had been timely raised and if he had objected to the affirmation, the Chenery argument seems pretty persuasive to me.
My feeling is that the Tax Court lacks refund jurisdiction in CDP. But, I wanted to alert readers to the fact that Frank Agostino makes a decent case for the other position and continues to litigate the issue. Having read Frank’s papers before in cases that settled, I don’t think the issue is so clearly open and shut.
I had only thought of Byers in the CDP appellate venue context. Carl’s comment caused me to again review Byers’s merits. In short, the D.C. Circuit wrongly decided the merits.
To me, the Settlement Officer’s declaration (which I have not read) tips the balance toward Mr. Byers. First off, the Settlement Officer did not submit a declaration in which she swore that she “would have reached the same result without the 2003 year being involved.” Had she done so, her statement would hardly be evidence; it would be a post-hoc rationalization.
Instead, the D.C. Circuit said:
“The IRS’s motion for summary judgment also included a declaration from the Settlement Officer stating that “[t]he reasons for, and the facts underlying [her] determination are found in the Notice of Determination, dated November 24, 2009” and that those reasons were applicable “with respect to petitioner’s unpaid income tax liabilities for tax years 1999, 2000, 2001, and 2002.” Am. Decl. of Lupe Silva at 1, Byers v. Comm’r, No. 3032-10L (T.C. May 25, 2011).” Byers v. CIR, 740 F. 3d 668, 680.
That declaration part, though, declares nothing. The Tax Court had “ORDERED that any references to [Byers’s] tax year 2003 are hereby stricken from the record in this case.” (January 18, 2011 Order). Because the Tax Court had stricken the tax year 2003 from the record, it’s not surprising that the Settlement Officer’s declaration did not mention tax year 2003.
The D.C. Circuit thus read more into the Settlement Officer’ declaration than what she said there. And the court recognized it was doing so.
The D.C. Circuit said, “In other words, the final Amended Declaration of the Settlement Officer did not rely on the 2003 tax year.” Given the Tax Court’s strike order, for the court to say the Settlement Officer’s declaration did not rely on the 2003 tax year is quite different from it saying the Settlement Officer “would have reached the same result without the 2003 year being involved.”
The D.C. Circuit blew the Chenery doctrine too. Did Byers really have to pursue Chenery with the Tax Court? Byers at 681. Or did Chenery apply regardless of who did, or did not, raise that judicial review doctrine? To ask those questions is to answer them.
Byers should not have lost on the merits. Both the Tax Court and D.C. Circuit apparently forgot that his case came before them on a motion for summary judgment. Given the many disputed issues involved, Byers at least should have survived summary judgment.
All that said, I remain unpersuaded that Byers is precedent for Willson.