Liberty Global Court Holds that Government May Proceed by Collection Suit without a Notice of Deficiency (8/13/23)

I earlier wrote on an unresolved issue in United States v Liberty Global (D. Colo. Civil Dkt.22-cv-02622-RBJ), CL here. The issue was whether, as in this case, the Government could bring a tax collection suit without first issuing a notice of deficiency. See Further Commotion in Liberty Global Collection Suit Over Whether a Notice of Deficiency Is Required Before Collection Suit (1/16/23; 1/19/23), here.

The district court resolved the issue in United States v. Liberty Global, Inc. (D. Colo. Opinion dated June 1, 2023), CL here. The Court summarizes its holding (Slip Op.. 5-6):

          LGI’s proposition that § 6213(a) was intended to convert the administrative route to a plenary scheme for income tax collection is inconsistent with the weight of authority among courts who have addressed this issue. Moreover, the analysis required to reach that conclusion does not comport with canonical approaches to statutory interpretation, which charge courts to refrain from adopting interpretations that would displace longstanding common-law rights or disrupt established distributions of power among governmental bodies in the absence of clear language demonstrating Congress’s intent to do so. See FBI v. Fazaga, 142 S. Ct. 1051, 1060-1061 (2022). Because there is no indication that § 6213(a) was intended to supplant the existing common-law avenue for the government to recover unpaid taxes, the Court will not infer that intent here.

          Therefore, this analysis adopts the proposition that there exist two avenues for the government to collect unpaid taxes: the administrative route (assessment and collection) and the common-law route (filing suit on the debt). Defendant alleges a defect in the government’s compliance with the requirements to proceed via the administrative route. However, compliance with those requirements is irrelevant here because the government does not seek to proceed via the administrative route (and in fact was foreclosed from doing so by defendant’s own maneuvers), and because defendant has not shown that the notice requirements in the administrative process have been or should be read onto the alternative common-law process.

 JAT Notes:

Tax Court Holds that IRS Has No Authority to Assess § 6038(b) Penalties for Form 5471 Delinquencies (4/3/23; 4/23/23)

In Farhy v. Commissioner, 160 T.C. 399 (2023), TN here and GS here, the Tax Court held in a CDP case that collection efforts for the § 6038(b) penalties for initial and continuation failure to file Forms 5471 were not authorized because there was no assessment authority for § 6038(b) penalties. Section 6038(b) is here. Assessments are required for IRS collection actions such as liens and levies, thus the collection action failed.

My comments:

1. I find the Farhy holding odd; indeed, I think it is wrong. The statute is clear that Congress intended the § 6038(b) penalties to apply. The penalty for the initial failure seems to be automatically imposed by the statute's literal terms without any action by the IRS. § 6038(b) (“If any person fails to furnish, within the time prescribed under paragraph (2) of subsection (a), [the Form 5471] such person shall pay a penalty of $10,000 for each annual accounting period with respect to which such failure exists.”) There is no authority—and the Tax Court in Farhy cites none—for the proposition that Congress intended to exclude the § 6038(b) penalty from usual IRS collection tools. Instead, at best, the Tax Court finds a footfault in the interlocking statutory provisions.

2. The Code treats penalties as taxes, and 6201(a), here, authorizes “assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title.”  (Emphasis supplied by JAT.) “Including” at least suggests that, so long as the tax (penalty) is imposed by Title 26, assessment authority can include more than the types of liabilities specifically listed. More importantly, it would not facially exclude the § 6038(b) penalties and should be capacious enough to cover the § 6038(b) penalties, particularly because there is no reason to think that Congress intended otherwise.

3. An assessment is simply a recording on the IRS books that a taxpayer owes a liability. In Hibbs v. Winn, 542 U.S. 88, 100 (2004), here, the Supreme Court described assessments (cleaned up):

          As used in the Internal Revenue Code (IRC), the term “assessment” involves a recording of the amount the taxpayer owes the Government. 26 U.S.C. §6203. The “assessment” is essentially a bookkeeping notation. Section 6201(a) authorizes the Secretary of the Treasury “to make . . . assessments of all taxes . . . imposed by this title.” An assessment is made “by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary.” §6203. n2 See also M. Saltzman, IRS Practice and Procedure ¶10.02, pp. 10-4 to 10-7 (2d ed. 1991) (when Internal Revenue Service signs “summary list” of assessment to record amount of tax liability, “the official act of assessment has occurred for purposes of the Code”).
   n. 2 Section 301.6203-1 of the Treasury Regulations states that an assessment is accomplished by the “assessment officer signing the summary record of assessment,” which, “through supporting records,” provides “identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment.” 26 C.F.R. §301.6203-1 (2003).

If the statute says a delinquent filer is subject to the penalty, it makes no sense that the IRS can’t record the liability on its books—easily meeting the definition of an assessment. And, what logic is it that the IRS cannot record on its books a clear liability such as § 6038(b)?

Further Commotion in Liberty Global Collection Suit Over Whether a Notice of Deficiency Is Required Before Collection Suit (1/16/23; 1/19/23)

Updated 1/19/23 with Court docket entry stating that the claim Liberty Global wanted to assert should not be filed.  See Comment #2 below.

I recently wrote on the Government’s Collection Suit against Liberty Global. Government Files Collection Suit in Liberty Global Raising Procedural Issues (Federal Tax Procedure Blog 10/8/22; 10/12/22), here. In their respective positions in pre-filing letters to the court, the parties address Liberty Global’s claim that a collection suit cannot be commenced without assessment of the tax and the assessment must be preceded by a notice of deficiency which did not occur here. Liberty Global’s letter of 12/20/22 at Docket Entry 15 is here; the Government’s response letter of 1/11/23 at Docket Entry 19 is here. (I noted in paragraph 9 of my initial blog that the complaint did not allege assessment of the tax liability.)  The docket entries in the case are here.

The letters are short and recommended reading. The gravamen of the competing claims are

• Liberty Global’s Claim. Timely notice of deficiency and assessment are required to precede a collection suit, citing § 6213(a), here (“no levy or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer”).
• The Government’s Claim. The Government claims that neither notice of deficiency nor assessment is required before filing a tax collection suit within the assessment period, citing § 6501(a), here (“no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such [three-year] period”)

Basically, on the face of the claims, § 6213(a) and § 6501(a) seem to conflict. Which is it?

We’ll see.

JAT Comments:

District Court Teaches Confusing Summary Judgment Lesson (2/19/20)

In United States v. Feldman, 2020 U.S. Dist. LEXIS 24162 (E.D. Mich 2/12/20), CL here (and docket entries here) in a collection suit, the Court denied the United States’ motion for summary judgment, starting the exegesis as follows (Slip Op. 1-2):

And the IRS says that every reasonable jury would agree with it and [*2]  so this Court should grant it summary judgment. But the Court believes that there is a genuine dispute over how much income Feldman received in 2001 and 2002, and thus a genuine dispute over whether the IRS has reasonably determined the amount of tax owed. Accordingly, as explained below, the Court will deny the IRS' motion for summary judgment.

The Court wanders around a bit in its discussion, and in the course of starting the wandering with the following comment (Slip Op.):

“Unfortunately, the parties in this case have put little effort into figuring out the proper summary-judgment burdens.”

So the Court sets about to instruct the parties.  Unfortunately, at least as I see it, the Court gets the analysis for the most significant issue wrong, in part because it does not understand the facts and the law of how stock transactions are reported in brokerage accounts.

I will try to summarize the key facts for purposes of this blog’s discussion. I note that I have not studied in detail the underlying submissions by the parties, but I spot checked a couple of the documents and incorporate them as background in this discussion.

I think the relevant facts are:

(i) Feldman did not file returns for 2001 and 2002;

(ii) the IRS assessed tax for those years based, according to the court, on a list of “seven payments from brokerage firms to Feldman;” The brokerage firms issued Forms 1099-B for stock transactions in Feldman’s account(s).  On Forms 1099-B a brokerage (or other financial) firm lists sales proceeds for stock (or other financial assets) sold in the client’s account(s).  Apparently, the list referred to was the IRS computer generated list of the amounts the brokerage firm reported as sales proceeds on the Forms 1099-B issued to Feldman for transactions in his account. Basically, the transactions would have been sales of stock (or other financial assets) where the sales proceeds were deposited into the taxpayer’s account with the brokerage firm.

(iii) the brokerage firm did not distribute to Feldman all of the proceeds it received and reported on Forms 1099-B.  Rather, because Feldman had written bad checks to the brokerage firm, the brokerage firm reduced any amounts ultimately paid to the taxpayer by the amount of its claim for bad check amounts.  There may have been some other offsets as well.  So, in sum, the amounts reported on the Forms 1099-B would have exceeded the amounts the brokerage firm actually distributed to the Feldman.

The relevant facts may be illustrated in a simple example: (i) brokerage firm sells stock from taxpayer’s account for $1,000 and receives that amount into the taxpayer’s account with the brokerage firm; (ii) brokerage firm collects from that $1,000 an amount of $200 for a bad check (or any other amount the taxpayer owes the brokerage firm); (iii) brokerage firm pays the taxpayer the net of $800.  In these facts, the Form 1099-B reports $1,000 proceeds (payments received by the brokerage firm on sale) and does not report the actual cash payment to the taxpayer of $800.  On his tax return, the taxpayer’s gain should be reported as follows: (i) amount realized $1,000 proceeds; (ii) less the taxpayer’s basis in the stock sold (the example does not quantify the basis and, in the years involved, basis was not a reporting item on Form 1099-B); and (iii) producing the taxable gain on the sale of the stock.