Tax Procedure Book Errata - Notice of Deficiency Determination (2/11/17)

  

Book Outline Section	Nature of Update	Location for current editions
Ch. 11 Notice of Deficiency I.   The Notice of Deficiency and its Role in the System (A Reprise).      A.  General.      B.   What is a Notice of Deficiency?             1.  A Deficiency.              2.  The Notice of Deficiency.                      a.   The Notice, Determination and Explanation.                             (1)    The Determination Requirement.	Discussion of a recent case, Dees v. Commissioner, 148 T.C. ___, No. 1 (2017) (reviewed opinion), here, holding that a notice of deficiency stating $0.00 deficiency but with attachments indicating that a claimed tax benefit had been denied was a valid notice of deficiency	Student Ed. P. 358 (after the 2d full paragraph) Practitioner Ed. p.  504 (after the carryover paragraph at the top)

               The tolerance for some level of imperfection in notices of deficiency is understandable given the ability to resolve or moot the problems by filing a Tax Court petition for redetermination.  But, what about a document in the regular form of a notice of deficiency that states the amount of the deficiency as $0.00?  A taxpayer receiving such a document would know that it is described as a notice of deficiency and that he may file a petition for redetermination is he does not agree.  But the deficiency is stated to the $0.00, and he may agree with that number.  In a 2017 reviewed opinion of the Tax Court (with strong concurring and dissenting opinions), the Court held that the standard form letter for a notice of deficiency that stated that the deficiency amount was $0.00 but included attachments clearly indicating that a deficiency had been determined because a claimed credit was disallowed met the requirements for a notice of deficiency.  n1635a The majority formulated the questions presented as:

   n1635a   Dees v. Commissioner, 148 T.C. ___, No. 1 (2017) (reviewed opinion).

• “Whether the notice objectively put a reasonable taxpayer on notice that the Commissioner determined a deficiency in tax for a particular year and amount.  If the notice, viewed objectively, sets forth this information, then it is a valid notice”
• If, however, that inquiry does not provide an answer (i.e., the notice is ambiguous as to the requirements for a deficiency, then, for the notice to be valid, the evidence “establish that the Commissioner made a determination and that the taxpayer was not misled by the ambiguous notice.”  The majority elsewhere in the opinion frames the latter inquiry as to whether the “taxpayer was prejudiced by an ambiguous notice.”  On the latter point, the majority concluded as follows:

The notice on its face is ambiguous, but the Commissioner has established that he made a determination and that Mr. Dees was not misled by the notice. Mr. Dees timely filed a petition to challenge the notice, and that petition makes clear that Mr. Dees understood that the Commissioner had disallowed his refundable credit: He stated in his petition both that the Commissioner had erred in denying his premium tax credit and that he had documents to substantiate his entitlement to the credit. This establishes that Mr. Dees was not misled by the notice.

 The tests thus enunciated may be described as an objective test and a subjective test. n1635b

   n1635b Judge Ashford’s concurring opinon says that “The opinion of the Court delineates a two-prong approach (with both objective and subjective elements) to determining our deficiency jurisdiction * * * *.”

               As with the last known address requirement for notices, a taxpayer desiring to present this issue should consider the statute of limitations on assessment.  If the taxpayer brings the issue to the IRS’s attention while the statute is still open (either in some administrative process or by petition to the Tax Court, the IRS may solve the problem by issuing a new notice.  If the taxpayer files a petition in the Tax Court while the statute is still open, the mere filing of the petition will suspend the statute of limitations until the Tax Court decision is final even if the notice is ultimately determined by the Tax Court to be invalid. n1635c

   n1653c  §§ 6213(a) (prohibition on assessment which Tax Court petition for redetermination is pending; and 6503(a)(1) (suspension during period of prohibition).  See Shockley v. Commissioner, 686 F.3d 1228 (11th Cir. 2012) (holding that the filing of a Tax Court petition invoked the suspension even if the notice of deficiency was invalid or the filing was not by the proper person; per § 6503(a)(1), the suspension occurs “if a proceeding in respect of the deficiency is placed on the docket of the Tax Court”).

Addendum:  Links to statutes cited:

• § 6213(a), here.
• § 6503(a)(1), here.

The Effect of Violation of the Statutory Requirements for a Notice of Deficiency (8/15/13)

Leslie Book has a good blog entry titled What Happens When The IRS Violates a Statutory Requirement Relating to Notices of Deficiency? (Procedurally Taxing 8/13/13), here.  His general topic is when courts will treat a failure to meet the statutory requirements for a notice of deficiency as invalidating the purported notice of deficiency.  The statutory requirements for the notice are:

1. The date to file a petition for redetermination in the U.S. Tax Court.
2. Notice of Taxpayer Advocate's Contact Information.
3. Notice sent to Taxpayer's Last Known Address.
4. Explanation of Basis for Deficiency.

I encourage readers to read Professor Book's blog entry for more detail than I offer here (except as to item 4).  The unifying theme is whether the taxpayer has been prejudiced by some IRS footfault in meeting these statutory requirements.  Professor Book discusses that prejudice issue in the context of requirements 1 and 2.  It is also present in #3, for the cases hold that, if, despite not being sent to the last known address, the taxpayer actually receives the notice of deficiency in time to file a petition for redetermination, the notice of deficiency will not be invalidated (so that it will operate to suspend the statute of limitations and support the ultimate assessment if the taxpayer did not petition the Tax Court or even if he did petition the Tax Court and loses the last known address issue).

I would like to address briefly the Scar case (Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987)) which Professor Book discusses briefly.  I offer the following from  my book (footnotes omitted):

As noted above, the deficiency notices must describe the basis for the deficiency but failure to do so will not invalidate the deficiency.  Thus, the taxpayer appears to have a statutory right to the information in the notice of deficiency, but no statutory remedy if he does not receive it in the notice of deficiency.  As we shall note, however, there may be some remedies short of invalidity of the notice for failure to meet this requirement of § 7522(a). 

Usually, there will be some explanation.  It may be summary or even cryptic because the determination usually follows an audit in which the taxpayer participated and was aware of the issues the IRS was raising.  Indeed, in such cases, usually the taxpayer will have been provided some type of report (often referred to as a Revenue Agent's Report (“RAR”)) that explains the proposed adjustments.  But again, although the Code provides that the taxpayer be notified of the basis for the deficiency, there is no Code remedy if one is not provided.

Tax Court Rejects Scar Attack on Validity of Notice of Deficiency (12/14/12)

In Cross v. Commissioner, T.C. Memo. 2012-344, here, the Tax Court rejected a Scar claim that a notice of deficiency was invalid.  The holding is consistent with the trend to limit the application of the Scar analysis to invalidate notices of deficiency.  Students of tax procedure should know the background of Scar which is covered ably in the Cross opinion.  I offer here my shorter summary from the Federal Tax Procedure Book (footnotes omitted):

Where the IRS satisfies the Code requirement of an explanation, there are some practical pressures to force the IRS to make it a reasonably good explanation.  As noted above, the statute does require that the IRS determine a deficiency.  One court has held that where the notice of deficiency explains the deficiency based on facts that patently do not exist, then the IRS has not met the requirement that it make a deficiency determination.  In that case, Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), the notice of deficiency said that it was disallowing a deduction for certain tax shelter partnership items with respect to a named partnership.  The taxpayer was not a partner in the named partnership.  The taxpayer was a partner in a tax shelter partnership with another name, and it is likely that the IRS just plugged in the wrong name on the notice of deficiency.  Moreover, the notice of deficiency indicated that the IRS had not actually examined the taxpayer’s return but just calculated the tax proposed in the notice at the highest marginal rate rather than the progressive income tax rates.  The Ninth Circuit held that, on these facts on the face of the notice of deficiency, the IRS had made no determination as required by § 6212.  The result was that the notice of deficiency was invalid.  The invalidity of the notice of deficiency meant that the statute of limitations on assessment was not suspended under § 6503 and, by the time the IRS realized the error (i.e., when the Court of Appeals pronounced the notice invalid), the statute of limitations on assessments had likely expired.  Cases since Scar have read the holding narrowly; a notice of deficiency will be not honored “only where the notice of deficiency reveals on its face that the Commissioner failed to make a determination.”  As a result, Scar is an outlier, with its analysis and holding rarely invalidating a notice of deficiency.

The foregoing paragraph is a revision of the one currently appearing the 2012 versions as follows:  footnoted version at pp. 450-451; and nonfootnoted version pp. 332-333.