Articles and Publications
Nov 07, 2019
Tax Court overlooks IRS mistake
Usually the IRS argues that its notice of deficiency (NOD) is valid and that the Tax Court has jurisdiction over a case. This is so because it’s the method for the IRS to assess and then collect tax. However, the recent case of U.S. Auto Sales, Inc. v. Commissioner 1 is an exception to this rule; the IRS argued its NOD was not valid.
In U.S. Auto, the IRS issued a NOD for years 2003 and 2007, determining deficiencies of $24,480 and $30,668, respectively (the “First NOD”). Three months later, the IRS issued a second NOD determining deficiencies of $3,371,690 and $2,995,911 for years 2007 and 2008, respectively (the “Second NOD”). U.S. Auto argued that the First NOD was valid and the Tax Court had jurisdiction. If the First NOD was valid, then the IRS could not assert the $3,371,690 liability for 2007 in the Second NOD.
In the First NOD, the cover letter and the Form 4089 notice of deficiency waiver correctly identified U.S. Auto as the taxpayer, but the Form 5278 statement of changes and the Form 886-A explanation of changes identified a related, but separate, entity as the taxpayer.
U.S. Auto argued the First NOD was sufficient because the statute2 merely requires that a NOD advise the taxpayer that the IRS determined a deficiency for a specific year and for a particular amount. U.S. Auto also argued that in a 1983 case3 the Tax Court ruled a NOD was valid, where the front page of the NOD identified that the taxpayer owed a specific amount for a specific year, even though the explanatory attachments related to a different person.
Here, a divided Tax Court ruled in favor of the IRS, stating that the First NOD was not valid. The Court relied on a 2017 case4 that ruled a NOD is not valid where it is ambiguous on its face and where the taxpayer cannot prove that the NOD relates to the taxpayer. Specifically, the IRS produced the tax returns of U.S. Auto which showed that the adjustments in the First NOD were not related to U.S. Auto. Additionally, the Court pointed to the Tax Court petition filed in response to the First NOD, where U.S. Auto alleged that the proposed deficiencies “on their face” were applicable to a different entity, as evidence that the First NOD was ambiguous.
In this case, the Court went out of its way to overlook an IRS mistake. Winning against the IRS is difficult.
Business owners and taxpayers seeking to achieve victory in Tax Court are encouraged to contact a Chuhak & Tecson tax attorney.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.
Client alert authored by: David B. Shiner, Principal
1 153 T.C. No. 5 (Oct. 2019)
2 IRC §6212
3 Scar v. Commissioner, 81 T.C. 855 (1983)
4 Dees v. Commissioner, 148 T.C. 1 (2017)