Ambiguous IRS Notice Sinks Taxpayer's Tax Court Petition

(Parker Tax Publishing November 2019)

The Tax Court held that it did not have jurisdiction over a notice of deficiency that identified two related but separate companies as potentially liable for the deficiencies. Applying Dees v. Comm'r, 148 T.C. No. 1 (2017), the Tax Court found that (1) the notice was ambiguous because it identified two related but separate entities as the taxpayer, and thus it was impossible to ascertain from the notice which entity would owe the determined deficiencies; and (2) the taxpayer could not prove that the notice reflected determinations with respect to it because the taxpayer's returns showed that any determination reflected in the notice could not relate to the taxpayer. U.S. Auto Sales, Inc. v. Comm'r, 153 T.C. No. 5 (2019).

Background

U.S. Auto Sales, Inc. (Sales) and U.S. Auto Finance, Inc. (Finance) are related corporations which share the same mailing address and are represented by the same counsel. Sales and Finance filed separate tax returns for tax years 2003, 2007, and 2008.

In May 2012, the IRS issued a set of documents purporting to be a notice of deficiency (i.e., the May notice). The notice included (1) a cover letter, addressed to Sales, stating that the IRS determined deficiencies of $24,480 for 2003 and $30,668 for 2007; (2) a Form 4089, Notice of Deficiency - Waiver, also addressed to Sales, listing deficiencies identical to those in the cover letter, and no deficiency for tax year 2008; (3) a Form 5278, Statement - Income Tax Changes, showing Finance, not Sales, as the taxpayer and stating the same deficiencies for 2003 and 2007 and no deficiency for 2008; and (4) a Form 886-A, Explanation of Adjustments, showing Finance as the taxpayer. The Form 886-A stated that the IRS disallowed part of Finance's claimed rent expense deductions for tax years 2007 and 2008.

On August 2, 2012, the IRS issued to Sales a second purported notice of deficiency (i.e., the August notice). The August notice determined deficiencies of over $3.3 million for 2007 and $2.9 million for 2008. Eight days later, on August 10, Sales filed a Tax Court petition with respect to the May notice. In that petition, Sales admitted that the proposed deficiencies applied to Finance, a separate and distinct corporation. On September 13, 2012, Sales filed a petition with respect to the August notice.

In a deficiency case, the Tax Court's jurisdiction requires a valid notice of deficiency and a timely petition. Code Sec. 6212(a) authorizes the IRS to issue a notice of deficiency "to the taxpayer" when it determines a deficiency as to that taxpayer, and no particular form is required. In Dees v. Comm'r, 148 T.C. No. 1 (2017), the Tax Court set forth a two-part test for determining the validity of an ambiguous notice of deficiency. First, the Tax Court must determine whether a purported notice would inform a reasonable taxpayer that the IRS has determined a deficiency as to that taxpayer. If it would, then the notice is valid. If it would not, the Tax Court applies the second step and looks outside the four corners of the purported notice to determine whether the IRS made a taxpayer-specific determination. In Campbell v. Comm'r, 90 T.C. 110 (1988), the Tax Court held that the IRS is presumed to have made a taxpayer-specific determination, but the presumption can be rebutted with extrinsic evidence, including tax returns.

The IRS argued that the Tax Court did not have jurisdiction over the May notice because the May notice did not make a determination as to Sales. The IRS contended that Sales' tax returns showed that any determination reflected in the May notice could not relate to Sales. Sales responded that the May notice was valid because it identified Sales in its opening pages and set forth deficiencies for two tax years. Sales contended that it was entitled to the Campbell presumption that the IRS made a determination specific to it and reasoned that the IRS must have made a determination as to it because the August notice came so quickly after the May notice that the determination must have been made before that in the May notice. Sales further argued that under Benzvi v. Comm'r, 787 F.2d 1541 (11th Cir. 1986), a valid notice does not have to identify the taxpayer correctly, but need only determine a deficiency and identify the amount of the deficiency and the tax year at issue. According to Sales, a notice need not be error-free, and any errors could be addressed by the IRS in its pleadings.

Analysis

The Tax Court sided with the IRS in holding that the May notice was invalid and the court therefore did not have jurisdiction over it. Applying the first step of the Dees analysis, the court found that the May notice was ambiguous because, although it was consistent as to the amounts of the deficiencies and the years at issue, it was fatally inconsistent as to the identity of the taxpayer against whom the deficiencies were determined. The court pointed out that the cover letter and Form 4089 identified Sales, while the Form 5278 and Form 886-A identified Finance, a related but separate entity, as the taxpayer. In the court's view, it was not possible to ascertain from the documents which entity would owe the deficiencies.

Under the second step of the Dees test, the Tax Court found that Sales failed to prove that the May notice was a determination with respect to it. The court found that even if Sales were entitled to the Campbell presumption that the notice was a determination specific to it, Sales' tax returns rebutted the presumption. The Tax Court was unconvinced by Sales' temporal argument and found that the timing of the August notice had no bearing on the validity of the May notice. Finally, the court found that the Benzvi decision did not support Sales' argument because the Eleventh Circuit held that a valid notice must identify the taxpayer unambiguously. The Tax Court explained that identification of the taxpayer is essential because a deficiency determination is necessarily taxpayer-specific and requires a calculation based on that taxpayer's information.

Observation: In a dissenting opinion, two judges contended that the Tax Court's decision in Scar v. Comm'r, 81 T.C. 855 (1983) (Scar I), rev'd, Scar v. Comm'r, 814 F.2d 1363 (9th Cir. 1987) (Scar II), was the controlling precedent. In Scar I, the Tax Court held that it had jurisdiction over a deficiency notice because the notice set forth the amount of the deficiency and the tax year involved. The dissenting judges noted that even though Scar I was reversed by the Ninth Circuit, it continued to be controlling precedent, except in the Ninth Circuit. One judge responded to the dissenters in a concurring opinion by arguing that Dees was controlling because it dealt with an ambiguous notice of deficiency while Scar I did not. The concurring opinion also noted that the parties in this case based their arguments solely on Scar II and did not acknowledge that Scar I had any continuing validity as a precedent.

For a discussion of the content of a notice of deficiency, see Parker Tax ¶263,135. For a discussion of the rules for filing a petition with the Tax Court, see Parker Tax ¶263,510.

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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