Commencement of a Deficiency Proceeding and Pretrial Practice

Commencement of a Deficiency Proceeding and Pretrial Practice Michael J. Desmond is a certified as a Tax Law Specialist by the State Bar of California, Board of Legal Specialization. Mike began his career in tax controversy as a Trial Attorney with the Attorney General s Honors Program at the Tax Division of the U.S. Department of Justice. After the Justice Department, Mike worked at a boutique tax firm in Washington, D.C., where he was elected partner in 2004. In this capacity he represented clients ranging from Fortune 100 companies to partnerships and individuals. Mike returned to government in 2005, serving as Tax Legislative Counsel in the U.S. Department of Treasury through 2008. As Tax Legislative Counsel, Mike was the Department s senior legal advisor on domestic tax issues, testifying before Congress and working with senior IRS officials including the IRS Commissioner and Chief Counsel on a broad range of tax policy, legislative and regulatory matters. Following his tenure at the Treasury Department, Mike spent several more years as a partner in a global law firm before starting his own practice in January 2012. Kathleen Pakenham is co-chair of Cooley LLP s Tax practice group and is a member of the Litigation department. She also serves on the firm s Management Committee. Ms. Pakenham joined the Firm in 2010 and is resident in the New York office. Ms. Pakenham is a seasoned litigator in matters involving complex questions of federal tax law and procedure. Michael J. Desmond and Kathleen Pakenham I. PRE-FILING CONSIDERATIONS A. Choice of Forum Considerations 1. The principal distinction between litigating a tax dispute in the Tax Court and litigating in a refund forum is that the Tax Court provides a prepayment forum, whereas the refund courts generally require full payment of the disputed tax as a jurisdictional prerequisite. See Flora v. United States, 362 U.S. 145 (1960). The U.S. bankruptcy courts can, in some cases, also be an appropriate forum for the resolution of tax disputes. See, e.g., 11 U.S.C. 505(a) (providing bankruptcy courts with jurisdiction to resolve disputed tax items). A complete analysis of the various forum considerations is beyond the scope of this outline, but they include: a. Precedent Considerations. The Tax Court will follow its own division opinions unless precedent exists in the appellate court that would hear an appeal in the case (determined by the taxpayer s legal residence or principal place of business, I.R.C. 7482(b)(1)). Golsen v. Commissioner, 54 T.C. 742 (1970), aff d, 445 F.2d 985 (10th Cir. 1971), cert. denied, 404 U.S. 940 (1971). District courts, on the other hand, are not bound by decisions rendered by other courts in the same district, nor are judges on the Court of Federal Claims bound by decisions issued by other judges on that Court. The Practical Tax Lawyer 21

22 The Practical Tax Lawyer Winter 2015 b. Procedural Considerations. Jurisdiction in the Tax Court is triggered by issuance of a notice of deficiency. Except in unusual circumstances, a timely filed petition is generally not subject to jurisdictional challenge. Jurisdictional challenges in refund cases are more common and can be based on failure to comply with the full-payment rule, an identified variance between an administrative refund claim and a position advanced in litigation, and other arguments. c. Interest. Although the Tax Court offers a pre-payment forum, absent a deposit (see Rev. Proc. 2005-18, 2005-1 C.B. 798), filing a petition does not stop the running of underpayment interest if the IRS s position is ultimately sustained. If a disputed tax is paid in full and subject to a refund claim, the taxpayer is generally entitled to overpayment interest. d. Right to a Jury Trial. Taxpayers have the right to a jury trial in refund actions brought in the district courts (but not the Court of Federal Claims); the United States can also demand a jury trial in a district court refund action, even if the taxpayer does not. e. Government Counsel. Refund suits are typically handled by trial attorneys from the Tax Division of the U.S. Department of Justice based in Washington, D.C. The Tax Division lawyers will usually have had no prior connection with the matter. Tax Court cases are typically handled by area IRS Chief Counsel attorneys who may have had some involvement in the administrative development of the case. f. Discovery. Historically, discovery has been more limited in the Tax Court than in refund forums, although recent changes to the Tax Court s rules have made pre-trial discovery more widely available. See U.S. Tax Court Press Release (Sept. 18, 2009) (announcing adoption of changes to the Tax Court s rules designed to make them conform more closely to the Federal Rules of Civil Procedure), available at http://www.ustaxcourt.gov/press/091809.pdf. In the Tax Court, it is generally presumed that the IRS has developed its case in the administrative audit process and that, as a developed case, extensive discovery should not be necessary. This is particularly true in cases where the taxpayer carries the burden of proof. g. New Issues. Because the filing of a timely petition in Tax Court tolls the assessment limitations period, the IRS can raise new issues at any time prior to decision in the case, although doing so will generally shift the burden of proof to the IRS. Abatti v. Commissioner, 644 F.2d 1385 (9 th Cir. 1981). In raising new issues, the IRS can also seek a greater amount than that set forth in the notice of deficiency. See Raskob v. Commissioner, 37 B.T.A. 1283 (1938) (taxpayer petitioned a $16,000 deficiency notice but ended up with a $1,025,000 deficiency determination), aff d sub nom. DuPont v. Commissioner, 118 F.2d 544 (3d Cir. 1941), cert. denied, 314 U.S. 623 (1941). In a refund forum, once the assessment limitations period has expired, the IRS is limited to its offset rights in raising new issues, which may reduce the amount of a refund that would otherwise be paid but cannot result in an increased deficiency. Lewis v. Reynolds, 284 U.S. 281 (1932).

Deficiency Proceedings 23 B. Tax Court s Deficiency Jurisdiction 1. Tax Court is a court of limited jurisdiction and cannot exercise power other than that expressly conferred by Congress. Knapp v. Commissioner, 90 T.C. 430 (1988), aff d, 867 F.2d 749 (2d Cir. 1989), reh g denied, 870 F.2d 93 (2d Cir. 1989). 2. The Tax Court is without jurisdiction to determine a claimed overpayment for a tax year that is not the subject of a timely petition to contest a statutory notice of deficiency. I.R.C. 6512(b)(1). See Kazi v. Commissioner, T.C. Memo 1991-37, aff d sub nom. Gardner v. Commissioner, 954 F.2d 836 (2d Cir. 1992), cert. denied, sub. nom., Falk v. Commissioner, 504 U.S. 910 (1992); see also Savage v. Commissioner, 112 T.C. 46 (1999) (holding that Tax Court lacks jurisdiction to review IRS s application of overpayment for tax year at issue to deficiencies that allegedly arose during tax years not before the court). 3. For adjustments to a joint return, the IRS will issue a notice of deficiency to both spouses and both spouses typically join in the petition filed with the Tax Court. If only one spouse becomes a party to the Tax Court proceeding, the IRS may proceed with assessment and collection against the non-petitioning spouse. 4. Once invoked, the Tax Court s jurisdiction is exclusive. The taxpayer cannot thereafter bring suit in a U.S. district court or the U.S. Court of Federal Claims for a refund relating to the same tax for the same period. I.R.C. 6512(a); First National Bank v. United States, 792 F.2d 954 (9th Cir. 1986), cert. denied, 479 U.S. 1064 (1987). 5. After the Tax Court acquires jurisdiction, the taxpayer cannot withdraw or dismiss a petition without prejudice. Frisbie v. Commissioner, T.C. Memo 1987-423, aff d, 878 F.2d 385 (9th Cir. 1989); Estate of Ming v. Commissioner, 62 T.C. 519 (1974). Nor can the taxpayer have a case removed from the Tax Court to a refund forum. Estate of Bailly v. Commissioner, 81 T.C. 949, 955-58 (1983), modifying, 81 T.C. 246 (1983); Dorl v. Commissioner, 57 T.C. 720 (1972). 6. If the IRS issues a notice of deficiency to the taxpayer while refund litigation is pending for the same tax for the same period, the taxpayer may petition the Tax Court for review and thereby divest the refund court of jurisdiction over the matter. I.R.C. 7422(e); Finley v. United States, 612 F.2d 166 (5th Cir. 1980); Statland v. United States, 178 F.3d 465 (7th Cir. 1999), cert. denied, 528 U.S. 1155 (2000) (district court lost jurisdiction when the taxpayers filed a petition with the Tax Court for the same tax year); Kuhn v. Commissioner, T.C. Memo 1981-207. The issues raised by the notice of deficiency can also be joined in the refund action, either by the taxpayer following the normal refund procedures (e.g., full payment and filing an administrative claim for refund) and filing an amended complaint or by the government filing a counter-claim. 7. The Tax Court is bound by its own reviewed decisions, Supreme Court decisions, and decisions of the court to which an appeal would lie in a particular case. See Golsen v. Commissioner, 54 T.C. 742

24 The Practical Tax Lawyer Winter 2015 (1970), aff d on other grounds, 445 F.2d 985 (10th Cir. 1971), cert. denied, 404 U.S. 940 (1971); see also Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67, 75 (2012) ( [T]he Golsen rule applies only where the clearly established position of a Court of Appeals signals inevitable reversal upon appeal. ); Lardas v. Commissioner, 99 T.C. 490, 495 (1992). 8. Payment of a contested tax prior to issuance of a notice of deficiency will deprive the Tax Court of jurisdiction because the payment will eliminate the deficiency. I.R.C. 6213(b)(4). In this situation, the taxpayer must file a timely administrative refund claim and pursue refund litigation. A taxpayer may, however, make a cash deposit of the asserted deficiency to stop the running of interest without depriving the Tax Court of jurisdiction. I.R.C. 6603(a); Rev. Proc. 2005-18, 2005-1 C.B. 798. Interest is paid on a deposit only to the extent the deposit is attributable to a disputable tax, as that term is defined in Code sections 6603(d)(2) and (3). 9. Payment of the asserted deficiency after the issuance of a notice of deficiency, does not deprive the Tax Court of jurisdiction. I.R.C. 6213(b)(4) (second sentence). C. Tax Court Jurisdiction in Non-Deficiency Cases 1. The Tax Court has jurisdiction over a variety of non-deficiency types of cases that are generally outside the scope of this Outline. These include: a. Partnership Proceedings. Within 90 days after mailing of a notice of final partnership administrative adjustment ( FPAA ) issued pursuant to Code section 6223(a)(2) in the audit of a partnership, the tax matters partner ( TMP ) of the partnership can file a petition with the Tax Court challenging the FPAA determinations. I.R.C. 6226(a)(1). If no petition is filed by the TMP, other partners can file a petition within the following 60 days. I.R.C. 6226(b); Tax Ct. R. 240 to 251. See also I.R.C. 6228 (providing the Tax Court with jurisdiction over petitions challenging the IRS s failure to act on a partner s administrative adjustment request). i. If no partner files a petition challenging an FPAA, the adjustments set forth in the FPAA become final. Unlike deficiency cases, in the context of a defaulted FPAA there is no ability to pay the tax and bring a suit for refund. b. Collection Due Process. Taxpayers seeking to challenge IRS collection actions under the collection due process procedures in Code sections 6330 (applicable to levies) and 6320 (applicable to notices of federal tax lien) may, within 30 days of the IRS Appeals Office denying relief, file a petition for review with the Tax Court. I.R.C. 6330(d)(1), 6320(c). The Tax Court is the exclusive jurisdiction available to taxpayers seeking to challenge a collection due process determination. See also Tax Ct. R. 330 to 334. c. Relief from Joint and Several Liability. When the IRS denies a taxpayer innocent spouse relief under Code section 6015, a petition can be filed with the Tax Court challenging that

Deficiency Proceedings 25 determination. I.R.C. 6015(e); Tax Ct. R. 320 to 325. When innocent spouse relief is granted, the non-petitioning spouse has no right to challenge the IRS determination in Tax Court. Maier v. Commissioner, 360 F.3d 361(2d Cir. 2004). d. Interest Abatement. In certain cases, the IRS has discretion to abate underpayment interest accrued pursuant to Code section 6601. I.R.C. 6404(e). Under Code section 6404(h), the Tax Court has limited jurisdiction over challenges to the IRS s denial of an interest abatement request. See also Tax Ct. R. 280 to 284. e. Worker Classification Determinations. The Tax Court has jurisdiction under Code section 7436(a) over cases challenging certain determinations made by the IRS with respect to the classification of workers as employees. See also Tax Ct. R. 290 to 294. f. Declaratory Judgment Actions. The Tax Court has jurisdiction over petitions seeking declaratory judgments with respect to the qualification of certain retirement plans, I.R.C. 7476, with respect to the valuation of certain gifts, I.R.C. 7477, with respect to the tax-exempt status of payments made on certain governmental obligations under Code section 103, I.R.C. 7478, and with respect to the eligibility of an estate for installment payments under Code section 6166, I.R.C. 7479. See Tax Ct. R. 210 to 218 (procedures in declaratory judgment actions). g. Whistleblower Actions. In 2006 Congress amended and expanded the informant reward or whistleblower program under the Code to include, among other changes, a grant of jurisdiction to the Tax Court to review an administrative reward determination. I.R.C. 7623(b)(4); Tax Ct. R. 340 to 345. This jurisdiction extends only to whistleblower challenges to an award determination and does allow a whistleblower to challenge in court the IRS s refusal to initiate an investigation. Cohen v. Commissioner, 139 T.C. 299 (2012), aff d per curiam, 550 Fed. Appx. 10 (D.C. Cir 2014), cert denied, 134 S. Ct. 2890 (2014); Whistleblower 14106-10W v. Commissioner, 137 T.C. 183 (2011). h. Disclosure Actions. Disputes between taxpayers and the IRS regarding the nature and extent of public disclosure of written determinations under Code section 6110 can also be litigated in the Tax Court. I.R.C. 6110(f)(3); Tax Ct. R. 220-229A. D. Admission to Practice Before the Tax Court 1. An attorney may practice before the Tax Court upon filing with the Court s Admissions Clerk a completed application accompanied by a fee established by the Court and a current certificate from the clerk of the appropriate court, showing that the applicant has been admitted to practice and is a member in good standing of the Bar of the Supreme Court of the United States, or of the highest court of any state or of the District of Columbia, or any commonwealth, territory, or possession of the United States. Tax Ct. R. 200(a)(2) and Appendix 2.