Out-of-Time Deficiency Case Declaring NOD Invalid but with ASED Statute Still Open (4/17/24)

In my Federal Tax Procedure book, I note that there may be some procedural foot-fault in the IRS issuance of a notice of deficiency (“NOD”), such as failure to send to the last known address. If the NOD is invalid, any resulting assessment is invalid. I note that a traditional way to challenge the NOD for failure to send to the last known address is by filing an out-of-time petition for redetermination with the Tax Court. If the Tax Court then dismisses for lack of jurisdiction of an untimely petition it may base the decision on the invalidity of the NOD which invalidates the assessment requiring a valid NOD; that will invalidate the assessment. I caution that this gambit might be a pyrrhic victory if the IRS can still issue a new deficiency for which the statute of limitations is still open when the Tax Court dismisses.  (See the Federal Tax Procedure book 2023.2 Practitioner Edition pp. 515-516.)

Phillips v. Commissioner, T.C. Memo 2024-44, TA here & GS here, is such a case. In Phillips which the Court says is a deficiency case (see p. 1; for more explanation see my note # 1 below explaining how a CDP case morphed into a separate deficiency case), the petition for redetermination of the deficiency was out of time. The Court found the NOD and resulting assessment to have been invalid for failing the last known address requirement. In getting to the holding of invalidity, the Court offers good discussion of the application of the Regulations on last known address including the IRS access to USPS change of address information as a licensee, the IRS’s processes for insuring last known address, and the IRS’s failure to meet the Regulations’ requirements in this case. I will not further address the merits of the Tax Court’s last known address resolution.

I focus instead on the Phillips opinion’s closing shot (p. 15 n. 10):

Nothing in this Opinion should be construed as limiting respondent’s ability to issue petitioner a new notice of deficiency for 2014 that is properly mailed to petitioner’s last known address.

Readers will recall that in the first paragraph of this blog I explain why an open ASED statute of limitations may permit the IRS to recover from its mistake by issuing a new NOD. In Phillips, since the NOD was generated by a § 6020(b) substitute for return determination (slip op. 3) , the ASED statute appears to be open for the exception that no return was filed. See § 6051(b)(3) and (c)(3), here. The victory is pyrrhic (assuming the IRS follows through).

I have revised my working draft for the 2024 editions (scheduled for early August) and provide a link to the section in the Practitioner Edition where I discuss last known address to avoid the tax liability altogether if the ASED statute is closed. I link that revision draft here; in the linked document the additions are red-lined and the page numbers and footnote numbers do not correspond to the 2023.2 edition or the final edition in August.

JAT Notes:

1. There is a backstory story about how Phillips became an out-of-time deficiency case. It started out as a CDP case after a § 6920(b) SFR generated the NOD. In the CDP proceeding, the taxpayer claimed that he had never received the NOD which the Tax Court read as including a claim that the NOD had not met the last known address requirement. The Tax Court noted that the IRS must prove the NOD was sent to the last known address. The Tax Court then split the CDP proceeding, creating an out of time deficiency proceeding with a separate docket number based on the taxpayer’s claims in the CDP proceeding. Readers might work their way through the docket entries for Tax Court Case 37955-21, here, focusing particularly on # 3, dated 4/14/23, an order which steps through the process of creating the deficiency proceeding from the CDP proceeding. As an out-of-time deficiency proceeding, the Court could then easily reach the issues of its jurisdiction and the last known address requirement.

2. I recommend to students the Court's analysis of the burdens the parties bear on the last known address issue. (See Slip op. 9-10, under the heading III. Allocation of Burden of Proof). Really a good discussion that taxpayers might find helpful in other settings where equity may not favor the general rule allocating the burden of proof to the taxpayer. 

3. I think this case and variations on this case could present good potential questions for teaching tax procedure. I will think about it and either post a follow-up blog or include in the 2024 editions my book.

4. Interestingly, in a footnote (p. 7 n. 7), the Court makes passing mention of Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 982 (2005) which is an extension of Chevron. The Court does not provide the full citation of Chevron, which is Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), sometimes styled Chevron v. NRDC. I am not sure these cases have much effect on the outcome, particularly in light of the pending cases in the Supreme Court questioning Chevron deference.