Assessment Statute of Limitations When Contesting an Allegedly Invalid Notice of Deficiency (8/16/12)

In the text, I noted (Footnoted version pp. 187-188; Nonfootnoted version p. 133):

Parsing the text of the statute, § 6503(a)(1) suspends the period of limitation on assessments until 60 days beyond whichever of the following dates applied (depending upon whether the taxpayer petitions the Tax Court): (1) if the taxpayer does not petition the Tax Court, the end of the 90-day period during which the IRS was prohibited from making the assessment (the same 90 period during which the taxpayer could have petitioned the Tax Court but did not), and (2) if “a proceeding in respect of the deficiency is placed on the docket of the Tax Court,” the date the Tax Court decision becomes final. n647 

 n647 Recognizing the text’s substantial meaning, see Shockley v. Commissioner, 686 F.3d 1228 (11th Cir. 2012).

Section 6503(a) is here.  The Shockley opinion is here.

I ask you now to focus on the quote establishing second suspension period indicated in the quote - "if a proceeeding * * * is placed on the docket of the Tax Court" and the accompanying footnote.  In a recent article, practitioners have critiqued the Shockley holding for its potential consequences beyond the limited confines of the case.  Andy R. Roberson and Kevin Spencer, 11th Circuit Allows Invalid Notice to Suspend Asssessment Period, 136 Tax Notes 709 (Aug. 6, 2012) (criticizing Shockley for the scope of its potential application in other cases).  The article is here.

One problem the authors note is that perhaps the most commonly used method for contesting an an invalid notice of deficiency creates a potential trap for the unwary.  If an invalid notice of deficiency is issued, the taxpayer has the following options for contesting any assessment based on the invalid notice (Footnoted version pp. 462; Nonfootnoted version 333-334):

• The taxpayer can pursue two avenues for Tax Court review.  The avenue traditionally pursued is for the taxpayer to file a petition in the Tax Court after the 90 day period has expired.  There is no statutory authority for this and, of course, the normal 90-day period to file a Tax Court petition has expired.  The Tax Court filing procedure then has the following procedural steps: (i) the taxpayer moves to dismiss the petition for lack of jurisdiction because the notice of deficiency was not valid; (ii) the IRS moves to dismiss because the petition was not timely filed; and (iii) the court dismisses and, if it bases the dismissal on the invalidity of the notice of deficiency, the IRS must issue a new notice of deficiency if the deficiency statute of limitations is still open.  The taxpayer can alternatively await a collection action that invokes the Collection Due Process (“CDP”) procedure that offers an administrative appeals-type review and, failing satisfaction administratively, permits Tax Court review. 

• Alternatively, the taxpayer may file an injunction suit in the district court because both (i) § 6213(a) so provides and (ii) the general anti-injunction statute, § 7421(a) expressly excepts § 6213(a) from its scope.  Either way, the taxpayer if successful obtains a judicial determination that the notice of deficiency was not valid, thus invalidating the assessment predicated on a valid notice of deficiency.

If the Taxpayer pursues the first option of filing a petitioner for redetermination of the deficiency followed by a motion to dismiss, the filing of the petition will further suspend the statute of limitations (already suspended by the issuance of a notice of deficiency).  The authors of the article note:

Under that rationale, the IRS could issue a defective or invalid notice of deficiency -- for example, a notice issued before the completion of a related partnership proceeding, a notice not mailed to the taxpayer's last known address, a notice that does not correctly identify the taxpayer or the amount of the deficiency -- and after the taxpayer goes through the time and expense of filing a petition and moving to dismiss the case for lack of jurisdiction, the IRS could come back within 60 days with a new notice that cures the defect in the invalid notice and possibly raises new issues or theories. Giving the IRS multiple bites of the proverbial apple defeats the entire purpose of the statutory framework related to the period of limitations on assessment -- finality. 

The Eleventh Circuit's exaggerated concerns about depriving the IRS of its chance to assess tax seem misplaced because taxpayers, not the IRS, face the real Hobson's choice. It is in the best interests of a taxpayer to file a petition with the Tax Court challenging the invalidity of a notice of deficiency and seek its dismissal. Failure to contest the notice will force the taxpayer to fight an uphill battle when the IRS seeks to collect on its erroneously assessed deficiency. Under the Eleventh Circuit's holding, however, by petitioning an invalid notice of deficiency, the taxpayer will suspend the limitations period on assessment and give the IRS an opportunity to cure its invalid notice with no consequence.

I have amended footnote 647 to include the article in the footnote along with Shockley.

Note that the issue is also relevant to the text discussion of the procedure to file the petition and motion to dismiss.  The text says after discussing the available procedures to contest an invalid notice (Footnoted version pp. 452; nonfootnoted version p. 334:

Merely having an invalid notice will not necessarily carry the day for the taxpayer.  In order to win, the statute of limitations on assessment must have expired by the time the IRS becomes aware of the problem.  If the statute is still open when the IRS learns of the problem, the IRS can simply issue a new notice of deficiency. n1366a

I do not change the text but have added footnote n1366a at the end of the paragraph as follows:

   n1366a For a cautionary discussion about using the alternative to file a Tax Court petition and move to dismiss, see Andy R. Roberson and Kevin Spencer, 11th Circuit Allows Invalid Notice to Suspend Asssessment Period, 136 Tax Notes 709 (Aug. 6, 2012) where the statute of limitations is still open on the date the Tax Court petition is filed.  In the case there discussed, Shockley v. Commissioner, ___ F.3d ___, 2012 U.S. App. LEXIS 14200 (11th Cir. 2012), the Eleventh Circuit held that a Tax Court petition filed in response to an invalid notice of deficiency will have the effect of suspending the statute of limitations as of the date the petition is filed.  Thus, before filing the petition, the taxpayer will want to make sure the statute has closed.

I will give a couple of examples to illustrate the issue.

Assume a normal 3 year statute of limitations.  Tax year is 01.  The return was filed 4/15/02.  The IRS sends a notice of deficiency on 2/1/05.  The notice of deficiency is invalid ( not sent to last known address and taxpayer does not actually receive it in time to file a petition).  Taxpayer receives a copy of the notice on 8/1/05.  The taxpayer can file a petition and motion to dismiss.  The statute of limitations expired on 4/15/05 because the notice was not valid.  The filing of the petition on 8/1/05 cannot suspend a statute that has already lapsed.

Now for the variations:

#1.  The taxpayer receives a copy of the notice on 5//10/05 and files the petition on 5/15/05.  Same result.

#2.  The taxpayer receives a copy of the notice on 4/28/05 and the petition on 5/02/05.  Same result, even though within the 90 period. Normally, the sending of the notice suspends the statute for 90 + 60 days.  But the notice is invalid, so the suspension does not occur.  But, the taxpayer did actually receive the notice in time to file the petition on the last date of 5/1/05.  This raises the issue discussed on in the text book regarding receipt in time to file a notice of deficiency.  (See Footnoted version, pp. 448-450; FonFootnoted version pp. 330-332.)  I won't address that issue here except to say that an argument can be made that the taxpayer did not receive the notice time, therefore the original notice is invalid, therefore the Section 6503(a)(1) extension did not apply, and therefore the statute of limitations ran on 4/15/05.

#3.  The taxpayer receives the notice of deficiency and files the petition on 3/15/05.  Both suspension periods apply -- i.e., the issuance of the notice deficiency is actually received by the taxpayer in time to file thus validating the otherwise invalid notice of deficienty and the placing of a proceeding regarding the notice on the docket of the Tax Court.