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:

More on Delegations of Authority, Notices of Deficiency and Consents to Extend (3/18/21)

Yesterday, I posted on a case, Harriss v. Commissioner, T.C. Memo. 2021-31, that led me into a discussion of delegated authority to make deficiency determinations from the Secretary of the Treasury down to employees (by function) in the IRS and related issues, including consents to extend the statute of limitations.  Burden of Persuasion As to Proper Delegated Authority for Statutorily Required IRS Action (Here Notice of Deficiency) (Federal Tax Procedure Blog 3/17/21), here.  A colleague engaged me on a couple of issues from the blog.  I thought I would present the issues here and my cut on the issues.  I have reformulated the issues to better present them here:

Issue 1:  The courts treat the Forms 872 (Consent to Extend the Time to Assess Tax) and its various iterations, such as Form 872-A (Special Consent to Extend the Time to Assess Tax) used for the statute extension authorized by than § 6501(c)(4)(A), here, as unilateral waivers rather than as contracts.

JAT Response to Issue 1:  I again direct readers to the article:  John A. Townsend & Lawrence R. Jones, Jr., Interpreting Consents to Extend the Statute of Limitations, 78 Tax Notes 459 (1998), here.  But the shorter answer is in the statute itself, § 6501(c)(4)(A) (bold-face supplied by JAT):

Where, before the expiration of the time prescribed for the assessment of any tax imposed by this title, except the estate tax provided in chapter 11, both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.

 The emphasized language requires:

1.        Both the IRS and the taxpayer must sign a consent to reflect the agreement.

2.        Both must sign be before the expiration of the period of limitation (even the aborted writing was after the period of limitation in Stearns, so that the facts of would give the victory to the IRS under the statute as written now)..

3.        The consent is an agreement (see “so agreed” in the statute) which certainly connotes something bilateral rather than just a unilateral waiver.  In the law of waiver, waiver is a unilateral not requiring any agreement by the other party.  (Of course, if the other party asserts waiver as a defense, the party may be said to be agreeing with the waiver but agreement is not thought of as an agreement in the way § 6501(c)(4)(A) written.)  In other words, a waiver is truly unilateral and  in the law of waiver there is no requirement that the other party sign or otherwise agree to a waiver for the waiver  to be effective.  All that is required is that the party waiving do the act necessary to constitute a waiver.

Issue 2: How can a Form 872 be a contract when the benefits flow only one-way – i.e., the IRS gets the benefit but the taxpayer gets nothing of benefit? 

The Notice of Deficiency (11/8/19)

Tax Procedure fans should follow Bryan Camp's weekly offerings on the Tax Prof Blog, here (the link is to the cover page for the blog).  Bryan's offering this week is titled Lesson From The Tax Court: No Jurisdiction Over Ambiguous NOD, here.  In the blog, Bryan reviews a recent case,  U.S. Auto Sales, Inc. v. Commissioner, 153 T.C. ___, No. 5 (review opinion), here.  In that case, the Tax Court judges get all worked up over a confusing notice of deficiency where the cover letter (that many of us think of as the actual notice of deficiency) is not consistent with the enclosures or attachments intended to explain the deficiency amounts asserted in the letter.

Before reading Bryan's offering, I had just completed a submission draft of an article in which I addressed in a footnote exactly what a notice of deficiency was and referred to the U.S. Auto Sales case.  For those wanting a detailed and thoughtful analysis, please go to Bryan's blog linked above.  But, for a less detailed analysis dealing with just a high level overview of what a notice of deficiency is, I offer the following:

In the article, I discuss the use of ranges in valuation and the interplay with the burden of persuasion.  One topic I address is the common Helvering v. Taylor, 293 U.S. 507 (1935), here, issue of what happens when a notice of deficiency is shown to be arbitrary and excessive.  In addressing that issue, I needed to establish exactly what the notice of deficiency is.  This is what I say in a footnote in the final draft I submitted:

When I use the term notice of deficiency, I mean the (i) cover letter itself which states the amount of deficiencies and tax years and (ii) the enclosures with the cover letter that provide the explanations.  § 7522(a); e.g., IRM 8.17.4.8.13 (09-27-2013), Including Enclosures in the Notice of Deficiency; IRM 8.17.4.10 (09-27-2013), Parts of the Notice of Deficiency Statement.  For an example, see U.S. Auto Sales, Inc. v. Commissioner, 153 T.C. ___, No. 5 (2019), Slip Op. at 2-3, 9 (saying that the “notice encompasses” the “ cover” letter which states the deficiency and years, and the enclosures:  Form 4089, Notice of Deficiency Waiver (permitting a taxpayer to waive the restrictions on assessment), Form 5278 Statement of Income Tax Changes; and Form 886-A Explanation of Adjustments).

Attorney Fraud Resulting in Tax Court Decision; Can It Be Corrected? How? (10/16/18; 10/17/18)

This article caught my attention today:  Bruce Vielmetti, Former Foley & Lardner partner suspended for falsifying documents in IRS audit of Carmex family (Journal Sentinel 10/16/18), here.  The opening paragraph says:

A former Foley & Lardner partner was suspended two years Tuesday by the state Supreme Court for lying to the IRS during an audit of two wealthy estates connected to a major area business.  

So, I went to the Wisconsin Supreme Court opinion which is here.  I offer the the pertinent portions relevant to the issue I address here as to whether and how the IRS can correct a tax under-assessed because of a Tax Court decision induced by fraud.

¶6 While working at the Foley firm, Attorney Wiensch provided estate planning services to a husband and wife who were owners of a privately owned business corporation. Attorney Wiensch prepared a trust under the terms of which the husband and wife were the trust donors and their children were the trustees and beneficiaries. Attorney Wiensch drafted an  Installment Sale Agreement, pursuant to which the husband sold most of his stock in the company to the trust in exchange for a promissory note in an amount in excess of $50 million based on the appraised value of the stock sold. The purpose of the stock sale was to transfer wealth to the clients' children, via the trust, free of gift and estate taxes and to ensure that any future appreciation of the stock held by the trust would not become part of the husband's estate. 

¶7 Transactions structured like the stock sale are reviewed by the Internal Revenue Service (IRS) to determine if the promissory note is a bona fide debt, or if the transaction should be treated as a taxable gift, or if transferred assets should be included in the seller's gross estate for purposes of determining the estate tax liability. Strategies used by estate planning professionals to minimize the risk of an IRS challenge to transactions such as the stock sale have included the use of personal guarantees by trust beneficiaries of a certain percentage of the sale price, often ten percent, or of a defined value formula clause that automatically adjusts valuation of the transferred assets based on a final determination by the IRS or a court. 

¶8 The husband died first, and pursuant to his estate plan, ownership of his remaining shares in the company passed to his wife as the surviving spouse. Attorney Wiensch was retained to represent the husband's estate. Attorney Wiensch prepared the estate tax return for the husband's estate and filed it with the IRS. The IRS audited the husband's estate tax return, as well as other gift tax returns filed on behalf of the clients for years prior to the husband's death.  

¶9 An IRS estate tax attorney served as the examiner for the IRS in conducting the audit. The IRS attorney corresponded with Attorney Wiensch in an effort to obtain information material to the audit. In September 2012, in response to requests from the IRS attorney, Attorney Wiensch sent the IRS copies of an Installment Sale Agreement, a Collateral Pledge Agreement, and a Guaranty of Specific Transaction. Attorney Wiensch represented to the IRS that the Installment Sale Agreement memorialized the terms of the stock sale and that the Collateral Pledge and Guaranty related to the stock sale. The copy of the Installment Sale Agreement Attorney Wiensch sent to the IRS in September 2012 contained a defined value formula clause. Attorney Wiensch altered and misdated the Installment Sale Agreement he sent to the IRS in September 2012. He did not prepare this document contemporaneously with the stock sale. The Installment Sale Agreement the husband actually executed on an earlier date did not contain the defined value formula clause.

Good Review of Points Previously Covered in Class (9/28/15)

Lua v. United States, 2015 U.S. Claims LEXIS 1235 (9/25/15), here, offers a good review of concepts we have studied in this case.

In Lua, upon completion of the audit, the unsophisticated taxpayers who did not have a representative signed a Form 4549 Income Tax Examination Changes.  This form has language "waiving their right to a notice of deficiency."  Section 6213(a), here, prohibits the IRS from assessing prior to issuing a notice of deficiency in income tax cases.  Section 6213(d) provides that a taxpayer may waive the right to receive a notice of deficiency, thus allowing an assessment without the notice of deficiency.  This waiver is often done on the Form 870, Waiver of Restrictions on Assessment, but also from the language quoted above, may be done on the Form 4549.  See Student Edition pp. 145-146 & 334-335.

Shortly after signing the waiver, the taxpayers engaged a tax professional.  The tax professional requested audit reconsideration in a telephone call to the agent and a day later confirmed the request in a letter to the group manager.

On November 26, 2007, the IRS assessed the deficiencies, but granted the request for audit reconsideration.  As a result of the audit reconsideration, the IRS ultimately reduced the amount of the deficiencies, but by that time the taxpayers had filed amended returns and, apparently protectively, payments substantially in excess of the amounts ultimately determined to be due.  It is a little fuzzy to me precisely what happened after the assessment, but it may not be critical for the points discussed below.  What appears to be in issue in this refund litigation is the amount paid up to the amount that was not abated in audit reconsideration -- in other words the amount determined due after audit reconsideration

1. Did the taxpayers waive the right to a notice of deficiency.

Yes.  The taxpayers did sign the Form 4549 which waives the notice of deficiency in clear language.  In this regard, the Court indicated in footnote 12 that the waiver had not been improperly induced.

2.  Did the taxpayers withdraw the waiver of the notice of deficiency.

No.  The taxpayers asked for audit reconsideration which is a separate procedure.  Audit reconsideration is addressed in the text.  See Student edition p. 452.

Seventh Circuit Opinion on Role of Notice of Deficiency and Last Known Address Requirement (3/7/15)

In Gyorgy v. Commissioner, ___ F.3d ___, 2015 U.S. App. LEXIS 3100 (7th Cir. Feb. 27, 2015), here, the Court addressed certain key aspects of tax procedure relating to the key role of the notice of deficiency.  For practitioners (other than novice practitioners), this is perhaps redundant to information they already know.  In some way, it is probably redundant for students also.  Still it is a pretty good summary of the process, so I offer it here.  In most cases, I will eliminate most case or other citations, except when I think they are important:  I include the Code sections because the Code is important.  The excerpts are:

We begin with an overview of the CDP process and the taxpayer's right to appeal. The Internal Revenue Code (the "Code") directs the Treasury Secretary—acting through the IRS—to determine, assess, and collect federal taxes. See I.R.C. §§ 6201(a), 6301. It also requires taxpayers to file returns as prescribed by the IRS. See id. § 6011(a). If the IRS finds that a person has unpaid taxes for a given year, it must notify him of the deficiency before it can collect the debt. See id. §§ 6212(a), 6213(a). Once the IRS mails notice, the taxpayer may petition the tax court to redetermine the correct amount of the deficiency. Id. §§ 6213(a), 6214(a). If he does not file a timely petition (normally within ninety days), then the deficiency "shall be assessed, and shall be paid upon notice and demand." Id. § 6213(c). 

If the taxpayer does not pay, then his tax liabilities become a lien on his real and personal property. Id. § 6321. To protect the government's rights against other secured creditors with respect to the encumbered property, the IRS must generally file a notice of the tax lien with the appropriate state authority. See id. § 6323(a), (f). It must then inform the taxpayer that it filed the lien notice. Id. § 6320(a). 

The taxpayer is entitled to challenge the lien in a CDP hearing before the Appeals Office, which is an independent bureau within the IRS. Id. § 6320(b). The "hearing" is informal and may consist of correspondence, telephone conversations, or in-person meetings. Treas. Reg. § 301.6330-1(d)(2), . In general, the taxpayer may raise any relevant issue. I.R.C. § 6330(c)(2)(A). That includes a challenge to his underlying tax liability if he did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability. Id. § 6330(c)(2)(B). The appeals officer must consider the issues raised by the taxpayer and verify that the IRS followed proper procedures. § 6330(c)(3). 

After the hearing, the Appeals Office issues a notice of determination containing its findings and conclusions. Treas. Reg. § 301.6330-1(e), Q&A-E8. If the taxpayer is dissatisfied, he can appeal the determination to the tax court. I.R.C. § 6330(d)(1). If his underlying tax liability was properly at issue in the CDP hearing, the tax court reviews that issue de novo. It reviews the Appeals Office's other determinations for abuse of discretion. Jones v. Comm'r, 338 F.3d 463, 466 (5th Cir. 2003) ("In a collection due process case in which the underlying tax liability is properly at issue, the Tax Court ... reviews the underlying liability de novo and reviews the other administrative determinations for an abuse of discretion." (citing Craig v. Comm'r, 119 T.C. 252, 260 (2002))). 

The tax court's decision is in turn subject to review in the appropriate court of appeals. I.R.C. § 7482(a)(1). We review tax court decisions "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." Id. 

With this background in hand, we turn to the two issues on appeal. 

Principal Life -- A Masterpiece of Tax Procedure (11/29/13)

In my last Tax Procedure Class, we spent most of the class discussing Principal Life Ins. Co. v. United States, 95 Fed. Cl. 786 (Fed. Cl. 2010).  The Court's slip opinion is here; students can link to a nonofficial version (Harvard Caselaw Access Project) but with local page citations, here.  I do ask, however, that students download the actual case with the local page citations. 

The reasons I think the case is important are: (i) it is a tax procedure case; (ii) it is a tour de force tax procedure case; and (iii) it covers a lot of ground that we covered earlier in the class.  I promised the students that I would post a blog on the case in order to help them learn Tax Procedure and, even, study for the examination.  THIS POSTING IS NOT INTENDED AND SHOULD NOT BE USED AS A SUBSTITUTE FOR ACTUALLY READING AND STUDYING THE CASE.

Judge Allegra (Wikipedia here) introduces the case as follows:

"The procedural aspects of the tax laws are of overriding importance in many controversies," one commentator has noted, "eclipsing or making moot substantive issues such as the allowance of deductions or credits, recognition or deferral of income, and methods of accounting." Theodore D. Peyser, 627-3rd Tax Management Portfolio, "Limitations Periods, Interest on Underpayments and Overpayments, and Mitigation" at 1 (2010). At times, the questions spawned by these procedures take on an almost "metaphysical" cast, Baral v. United States, 528 U.S. 431, 436, 120 S. Ct. 1006, 145 L. Ed. 2d 949 (2000), like "when is taxable income taxed?" The ontology needed to solve such abstruse inquiries comes not from philosophical tomes, but from Chapters 63 through 66 of the Internal Revenue Code of 1986, which supply interfused rules mapping the contours of commonly-used, but frequently-misunderstood, tax concepts such as "assessment," "deposit," and "overpayment." 

Though the background provided by these rules can be numbing in its intricacy, the dispute presented by the cross-motions for summary judgment pending before the court can be stated simply: Plaintiff, Principal Life Insurance Company and Subsidiaries (plaintiff or Principal) argues that it is entitled to certain overpayments because its taxes were not timely assessed by the Internal Revenue Service (IRS). Defendant responds that the taxes in question were timely assessed and that even if they were not, they are not recoverable as an overpayment. Plaintiff is wrong; defendant is right. It remains to explain why.

KEY FACTS:

Practitioner Warns of IRS Letters and Notices to Not Ignore (8/17/13)

Edward M. Robbins, Jr., a prominent tax litigator (see bio page here), has posted a good series of articles on six IRS Letters and Notices You Must Not Ignore.  The articles present a good summary of the problems encountered in ignoring these letters and notices; or, to state it differently, the reasons you should pay attention to these letters and notices.  This articles are on a blog sponsored by the law firm of Hochman, Salkin, Rettig, Toscher & Perez, P.C, here, which has a strong team in tax controversy matters. Readers might also want to review that firm's publications web site, here.

Ed's list is:

1. Statutory Notice of Deficiency (Ninety Day Letter).
2. Final Partnership Administrative Adjustment (FPAA) under TEFRA.
3. The IRS Summons (including an IRS caused Grand Jury Subpoena).
4. The Final Notice Before Levy.
5. Statutory Notice of Denial of a Claim for Refund.
6. Notice of Computational Adjustment under TEFRA.

The series of articles is:

1. Six IRS Letters and Notices You Must Not Ignore (Tax Controversy (Civil & Criminal) Report 7/7/13), here, addressing items 1 and 2 on his list.
2. Part II – Six IRS Letters and Notices You Must Not Ignore (Tax Controversy (Civil & Criminal) Report 8/5/13), here, addressing items 3 and 4 on his list.
3. I will post the link to the final article when he posts it.