Tax Court Had Jurisdiction to Review Computational Adjustments in CDP Case

(Parker Tax Publishing June 2020)

The Tax Court held that, where the IRS made a computational adjustment to the return of a taxpayer who is a partner in several TEFRA partnerships, the taxpayer was permitted to challenge the underlying tax liabilities because it did not have a prior opportunity to do so. The court found that although it generally lacks jurisdiction in a deficiency case to review computational adjustments, its jurisdiction in a collection due process case is not so limited. Gluck Irrevocable Trust v. Comm'r, T.C. 154 T.C. No. 11 (2020).

Background

In 2012, the Amanda Iris Gluck Irrevocable Trust (Trust) was a partner in a partnership called Stellar GT Promote, LLC (Promote). Promote was a partner in two other partnerships, Stellar GT, LLC (GT), and Stellar Member, LLC (Member). Member was also a partner in GT. All three partnerships were subject to the unified audit and litigation procedures that applied under the Tax Equity and Fiscal Responsibility Act (TEFRA) before its repeal in 2018.

GT recognized a capital gain of over $88 million in 2012. Promote's distributive share of approximately $79 million consisted both of the gain from the interest in GT it held directly and from its indirect interest which it held through Member. Promote reported its full distributive share of the gain on a Form 4797, Sales of Business Property, which it filed with its 2012 tax return. However, on Schedule K, it reported only the gain allocated to it indirectly and omitted the gain allocated directly. Promote issued Schedules K-1 to its partners, including the Trust, that likewise reported only Promote's indirectly-allocated gain. Neither Promote nor any of its partners filed a Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR).

On Trust's 2012 tax return, it did not report its distributive share of the gain that had been allocated to Promote directly. Because Trust did not notify the IRS of this apparent inconsistency, the IRS was permitted to adjust Trust's return by computational adjustment, without issuing a notice permitting a pre-assessment challenge under Code Secs. 6222(c), 6230(a)(1), and 6231(a)(6). The IRS made an upward adjustment to the Trust's distributive share of Promote's capital gain for 2012, eliminating a net operating loss (NOL) that Trust had reported for that year. The IRS also disallowed the NOL carryforwards from 2012 that Trust had claimed as deductions for 2013, 2014, and 2015, creating a balance due for each year. The IRS sent Trust a notice informing it that, if it wished to dispute the computational adjustments, it would need to pay the resulting liabilities and file a claim for refund.

The IRS assessed Trust's liabilities for 2013-2015. When Trust did not pay, the IRS issued a notice of levy, to which Trust responded with a request for a collections due process (CDP) hearing. Trust's CDP request listed the tax years at issue as 2012-2015, although the levy notice concerned only 2013-2015. An IRS settlement officer (SO) confirmed that the tax liabilities for 2013-2015 had been properly assessed, that proper notice and demand for payment was mailed to Trust's last known address, and that all other requirements of applicable law and administrative procedure had been met. The SO noted that Trust had an outstanding liability for 2012 but that its 2012 liability was not a subject of the levy notice. In a CDP conference, Trust's representative challenged the liability for 2012, arguing that it did not have a prior opportunity to dispute that liability, and asserted that it had no liability for 2013, 2014, or 2015.

The SO determined that he lacked jurisdiction over Trust's 2012 tax year and thus could not consider an underlying liability challenge for that year. The SO did not address Trust's underlying liability challenge for 2013-2015 which was predicated on the disallowance of NOL carryforward deductions for those years. In a notice of determination, the IRS sustained the proposed levy for 2013-2015. The notice explained that Trust's liabilities were based on the computational adjustments and that Trust could dispute these adjustments by paying the tax and filing a claim for refund. Concluding that Trust had thus had, but neglected to take advantage of, a prior opportunity to dispute its 2013-2015 tax liabilities, the SO determined that Trust could not challenge them during the CDP hearing.

Trust took its case to the Tax Court. The IRS moved to dismiss as to 2012 and 2013, noting that the 2012 tax year was never before the court and that Trust's 2013 liability had been fully satisfied by application of credits from other years. The IRS also moved for summary judgment with respect to 2014 and 2015. The IRS conceded that the SO erred in declining to consider Trust's underlying liability challenge because under Code Sec. 6330(c)(2)(B), a prior opportunity to dispute a tax liability means a prepayment opportunity, which Trust did not have. However, the IRS argued that Trust was actually disputing its liability only for 2012 in order to create a putative overpayment for that year and then offset that overpayment against its liabilities for 2014 and 2015. The IRS contended that under Freije v. Comm'r, 125 T.C. 14 (2015), in determining whether the tax for a CDP year has been paid, the Tax Court may consider whether a credit available from another year should be applied, but only if that other credit indisputably exists. Because Trust did not have such a credit from 2012, the IRS asserted that the SO's conclusion, if not his reasoning, was correct.

Tax Court's Analysis

The Tax Court held that it did not have jurisdiction to consider any challenge to the IRS's collection action for 2012 because the IRS had not issued Trust, at the time it filed its petition, a notice of determination regarding any collection actions with respect to that year.

However, for 2013, 2014 and 2015, the Tax Court held that it had jurisdiction to review Trust's tax liabilities. For 2013, the court found that there no longer existed an unpaid tax liability upon which collection action could be based as a result of the application of credits from other tax years to satisfy in full Trust's liability for 2013. For 2014 and 2015, the Tax Court followed its ruling in McNeill v. Comm'r, 148 T.C. No. 23 (2017), in which it held that the Tax Court can review underlying liabilities arising from adjustments to partnership items of TEFRA partnerships, even though such items would not have been subject to the court's review in a deficiency setting. The court found that because Trust's underlying liabilities for 2014 and 2015 arose from computational adjustments made to conform its return to partnership items of TEFRA partnerships, Trust did not have a prior opportunity to challenge the liabilities and therefore could challenge them before the SO even though they were assessed on the basis of items over which the Tax Court would lack jurisdiction in a deficiency case.

The court found that Trust properly challenged its tax liabilities for 2014 and 2015 because, during the CDP hearing, it contended that the IRS had erroneously determined its liabilities for those years by disallowing its NOL carryforward deductions. The Tax Court rejected the IRS's argument that Trust was actually disputing its tax liability only for 2012 in order to create an overpayment to apply to 2014 and 2015. In the court's view, this situation was no different from one in which the IRS has disallowed, for example, business expense deductions for the CDP year. In both scenarios, the taxpayer is challenging its underlying tax liability for the CDP year by disputing the disallowance of deductions it had claimed for that year. The court further noted that, in cases where a taxpayer claims an NOL carryforward or carryback deduction, the Tax Court has jurisdiction to consider facts related to years not at issue as necessary to redetermine the tax liability for the period before the court. The court found that this reasoning applied with equal force in a CDP case where the court is seeking to determine the taxpayer's underlying liability.

The Trust advanced several arguments with respect to its entitlement to NOL carryforward deductions for 2014 and 2015. It claimed that for 2012, Promote was allocable both a gain and a loss in connection with its investment in GT, that this gain and loss were not reported separately but were netted on its 2012 tax return, and that the Schedule K-1 reflected this netted amount. The court said that, if these allegations were correct, the IRS's computational adjustments may have been erroneous. The court found that the SO did not address these factual questions, and the IRS had not yet addressed them either. Thus, the court concluded that genuine disputes of material fact existed that precluded summary judgment.

For a discussion of TEFRA audit procedures, see Parker Tax ¶28,505. For a discussion of NOL deductions, see Parker Tax ¶53,115. For a discussion of CDP procedures, see Parker Tax ¶260,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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