Tax Court Enters Decision in Long-Running Deficiency Cases

Dollarhide Enterprises Inc.,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

United States Tax Court
Washington, DC 20217

ORDER AND DECISION

This was one of three consolidated cases arising from notices of deficiency that the IRS sent the Dollarhides for their 2006 and 2007 tax years, and for a corporation that Mr. Dollarhide owned for its 2006 tax year. The parties have filed motions for entry of decision in all three cases, which we will grant.

But we write at greater length because of the unusual circumstances that have caused the oldest of these cases to enter its second decade of litigation without there ever having been a trial. Along the way, these cases have brought to light potentially important circuit splits on a couple questions of great significance to those who follow tax procedure: (1) under what conditions can parties to a Tax Court proceeding make a binding settlement of the issues in the case without agreeing on the computations needed to enter a final determination and (2) what it means to file a return.

The parties in these cases — especially the Dollarhides — have suffered enough from this prolonged litigation, so despite the importance of the issues raised we discuss them in a nonprecedential order that outlines these problems, doesn't definitively answer them, but will bring these cases to a close.

Background

The Dollarhides filed three timely petitions to get these cases started:

• Docket No. 23113-12 — challenging a notice of deficiency issued to the Dollarhides for their individual tax liability for 2006;

• Docket No. 23139-12 — challenging a notice of deficiency issued to Dollarhide Enterprises Inc., a corporation which Mr. Dollarhide owned, for its tax year ending in September 2006; and

• Docket No. 21366-14 — challenging a notice of deficiency issued to the Dollarhides for their individual tax liability for 2007.

None of these petitions stood out for their complexity. Each raised issues of the alleged underreporting of income and failure to substantiate deductions that are routine in this Court. The Dollarhides challenged not only the individual adjustments, but also attacked the Commissioner's work. Each petition included at the end a prayer for relief similar to this one in the Dollarhides' 2006 case:

WHEREFORE, THE PETITIONER PRAYS THAT THIS COURT hears the proceeding and determines that the service did not have jurisdiction to issue the NOD at all on June 15, 2012, and/or it had no jurisdiction to do so and therefore issued in error, not in accordance with Regulations and or, the usual and customary procedure and/or, the Notice Of Deficiency itself is Deficient, and/or VOID, Deficient on it's Face not providing adequate notice, and therefore should be stricken, or in the alternative, should the matter proceed to be heard on the merits before this tribunal, there are no deficiencies in, and/or Income Tax Due from the Petitioners for the taxable year 2006, that the Petitioners are entitled to a determination of “No Income Tax.” for the years in question in accordance with the 1040 and 1120 Returns prepared and filed, that no penalties pursuant to the aforementioned sections are proper, that no proposed Tax be allowed and no penalties attached, and that the Court Grant such other and further relief as to the Court shall seem fitting and proper.

The first of the cases were calendared for trial back in 2014, but we shunted them to a status-report track at the parties' request to enable them to work on all three at the same time and try to reach a settlement.

In May 2016 the parties reported that they had settled. Their settlement did not take the form of an agreed decision for each of the three cases, but instead a “stipulation of settled issues.” This is an exceptionally common way for parties to wind down litigation in the Court. Because tax returns and notices of deficiency can include so many disputed items, settlements often consist of lists of issues in which the parties make mutual concessions or compromises. A taxpayer's final bill — the amount he has to write a check for — is usually harder to figure out. The calculation often includes a computation of interest, arithmetic adjustments to other items (e.g. limits on deductibility computed by reference to a percentage of adjusted gross income), and a summing of penalties and additions to tax computed as a percentage of the resulting deficiency, reduced by any allowable credits.¹

In these cases, the Commissioner agreed to concede all the various penalties and additions to tax. In addition, both the Commissioner and the Dollarhides agreed to accept the “income, deductions, exemptions, and credits” on returns that the Dollarhides submitted in 2011 during the course of their audit for their 2006 and 2007 tax years. The Commission also conceded that Dollarhide Enterprises had no tax deficiency at all.

Trouble arose when the Commissioner did the computations using the “income, deductions, exemptions, and credits” that he'd agreed to use. The key problem was in the Dollarhides' 2006 year, because the credit they reported was mostly in the form of withholding from the Dollarhides' pay back in 2006, plus a substantial amount of excess Social Security tax. These credits, however, were all generated in calendar year 2006.

To the Commissioner, these credits may have been entirely legitimate, but having been reported by the Dollarhides only in 2011, they were not credits that he could allow in computing the final, bottom-line amount the Dollarhides owed. The Dollarhides disagreed.

The Commissioner finally moved in December 2017 for entry of decision. This is, again, an extremely common motion in our Court that parties use to set up for decision disputes about the computation of a final deficiency once they've agreed on settlement of all the individual issues.

This dispute about the use of the Dollarhides' withholding credits went through a few rounds of briefing. In March 2018 we ruled on this dispute:

[T]he Dollarhides want credit for payments — payments so much larger than their liability that they should get a big refund. But there's a problem: The payments were mostly in the form of withholding from the Dollarhides' pay back in 2006, plus a substantial amount of excess Social Security tax. The Internal Revenue Code says that money that is withheld from taxpayers' pay and excess Social Security tax does count toward their income-tax debt, and is treated as being paid all at once on the due date of the return, see I.R.C. § 6513(b). This means that the Dollarhides are treated as having paid more than $47,000 in April 2007, when they should have filed their return. But the Dollarhides didn't file their 2006 return until February 3, 2011, and it was only on that return that they reported the big withholding and excess Social Security credits.

In tax law, filing a return that shows credits that are larger than the tax owed means the return is also a claim for a refund of that excess amount. The problem here is that the Dollarhides were claiming a refund more than three years after the Code says they are treated as having been paid. (February 3, 2011 is almost four years after April 2007.) Section 6511(b)(2) of the Code says that they have only three years to claim this refund. They don't have to pay the actual tax they owe twice, but this Court cannot legally require the IRS to refund the excess amount that they paid because of this three-year time limit.

The Dollarhides were understandably disappointed with this ruling. They moved to revise or vacate it, and more briefing ensued. They complained that they would never have agreed to the stipulation of settled issues if they knew that the Commissioner was going to argue that their withholding credits wouldn't generate a big refund. And they argued that they would have filed their return within three years of the due date but for what they claimed was a demand by the revenue agent conducting the audit that they submit their late returns to her, rather than mailing them in.

We finally entered decisions in these cases in May 2018, explaining why the law required us to rule in the Commissioner's favor:

The Dollarhides claim, however, that they never would have agreed to the stipulation of settled issues if they knew they weren't going to get that refund. Is that enough?

In ruling on Rule 162 motions, we look to Federal Rule of Civil Procedure 60. See, e.g., Etter v. Commissioner, 61 TCM 1772, 1773 (1991). FRCP Rule 60(b) is the rule that's applicable here, and the Dollarhides point us to FRCP 60(b)(3) which requires a showing of “fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party.” The fraud or other misconduct that the Dollarhides argue the Commissioner engaged in is not telling them about the legal requirement that they had only three years from the due date of their 2006 tax return to file a claim for refund of any overpayment.

. . . .

Not telling someone something they would like to know is generally not fraud, misrepresentation, or misconduct, particularly where that thing could be discovered with a little bit of due diligence. See Casey v. Albertson's Inc., 362 F.3d 1254, 1260 (9th Cir. 2004) (FRCP Rule 60(b)(3) requires “that fraud . . . not be discoverable by due diligence before or during the proceedings” (quoting Pac. & Arctic Ry. & Navigation Co. v. United Transp. Union, 952 F.2d 1144, 1148 (9th Cir. 1991))). The statute of limitations on refunds is a legal issue, and one that the Dollarhides could have easily discovered by cracking open the Code.

The Dollarhides do also complain that the only reason that they didn't file their 2006 tax return within three years of its due date is that the revenue agent examining that year insisted that they submit it to her. The records that they attach to their motion, however, do not show that there was even an ongoing audit of this year for themselves as individuals (in contrast to their corporation, Dollarhide Enterprises, Inc.) within three years of that return's due date.

The Dollarhides then filed notices of appeal in all three cases, even in their 2007 case in which there was no issue about the availability of withholding credits and the corporate case in which the final decision was zero deficiency.

The Ninth Circuit decided that appeal in September of last year. It seems to have made no ruling on the appeals from the decisions for the Dollarhides' 2007 year or the corporation's case. That court also did not examine our discussion of the legal question of whether any overpayment was refundable after applying the Code's three-year limit on claims for a refund. Instead it held that there was no settlement agreement to enforce, because the Commissioner and the Dollarhides had definitely not agreed on the question of the refundability of the withholding credits for their 2006 year. Indeed, it held that we had abused our discretion “because there was no settlement to enforce.” The Ninth Circuit also concluded that we had abused our discretion to “enter a judgment enforcing the parties' purported settlement” of the issue of that refundability when there was no settlement “between the parties with respect to this disputed issue.”

The bottom line was that the Ninth Circuit vacated “the Tax Court's judgment with respect to the Dollarhides' 2006 tax year and remand for further proceedings.” There was no mention of the decision determining that the Dollarhides had a deficiency of about $13,000 for their 2007 tax year or the decision in the corporation's case (which was, after all, a complete concession by the Commissioner in favor of the corporation).

The parties spoke with each other and agreed to entry of decisions showing no deficiencies or penalties in any of these cases, but no refund to the Dollarhides either.

For the corporate case, there is little doubt this is fine. We entered decision in that case for zero deficiency. That decision was either affirmed on appeal or sub silentio vacated for further proceedings consistent with the Ninth Circuit's opinion. In either reading, there's no reason not to find some way of getting a final decision of zero deficiency.

For the Dollarhide's 2006 year, there initially seemed little reason not to grant the parties' motion. The Ninth Circuit had clearly vacated our decision and remanded that case to us for further proceedings. Accepting the parties' compromise is one way of bringing those further proceedings to a close.

But there was a striking problem for the Dollarhides' 2007 case — we'd entered a decision finding a deficiency in that case and there was no mention of it on appeal. It is extremely unclear whether this means we have the power to change the decision — if this decision was affirmed sub silentio by the Ninth Circuit's failure to mention it in any way, it seemed like far too much time has passed to entertain a motion to vacate our decision and enter a new one. We spoke with the parties throughout late last year and the early part of this year and suggested that perhaps respondent might administratively abate that deficiency and reach the result the parties wanted that way.

He has not been able to do so.

Analysis

Enforcement of Partial Settlements

It is certainly true here that the parties did not agree to a disposition about the crediting of the Dollarhide's overpayment. That's why we invited the parties to brief the problem not once but twice, and explained the result of our analysis in response to both rounds.

The first problem that these cases present then is whether our Court can continue to maintain its longstanding custom of enforcing partial settlements, disposing of any remaining disputes about computations with Rule 155 submissions, and then entering final decisions.

Is a stipulation of settled issues in the absence of a stipulation of decision enforceable?

We ourselves have held for many years that it is. Our leading case on the subject is from 1988, Stamm International Corp. v. Commissioner, 90 T.C. 315. In that case, as in the Dollarhides' cases, the parties settled on an issue-by-issue basis. When they couldn't agree on the final, bottom-line amount, the Commissioner tried to get out of the settlement on the ground that he thought the bottom-line amount should be much higher and when agreeing to the offer, neither he, nor the IRS's lawyer had contemplated a Code section that the taxpayer established, would result in a much lower settlement. Stamm Int'l, 90 T.C. at 319.

We concluded

Nothwithstanding repeated inquiry from the Court, respondent has cited no authority that supports his claim that he is entitled to be relieved of the agreement because of his unilateral miscalculation of the amount that would be owing by petitioner under the agreement.

 . . . .

Here, at most, we have a misleading silence by petitioner's counsel; but respondent does not argue that petitioner's counsel has an obligation to advise respondent's counsel of the provisions of the Internal Revenue Code.

Stamm Int'l, 90 T.C. at 11-12.

And this is where things have stood ever since. In Applestein v. Commissioner, 56 T.C.M. (CCH) 1169, 1170 (1989), we again had parties who settled individual issues but didn't agree on a single figure: “[t]here is no injustice, however, in enforcing the terms of a settlement agreement between the parties even though one party miscalculated the amount of taxes that would be owed thereunder.” We summarized the law more recently in McMullen v. Commissioner, 110 T.C.M. (CCH) 458, 459: “In the Tax Court, concessions, compromises, and settlements can be memorialized in various ways, including (as here) by the parties' execution of a stipulation of settled issues. . . . The fact that the parties have not yet agreed upon the ultimate tax consequences does not render such concessions or stipulations any less binding.” See, e.g., Korangy v. Comm'r, 56 T.C.M. (CCH) 989, 992-93 (1989) (unilateral mistake by one party about consequences of stipulation of settled issues no reason to rescind it); McGivney v. Comm'r, 80 T.C.M. (CCH) 94, 94-95 (2000) (same).

In the earliest case we've found in the circuit courts that analyzed the issue, the Fourth Circuit endorsed this practice and rejected an argument by a taxpayer who'd made a mistake in compiling a list of stipulated adjustments and wanted out when presented with a final number. It held that “under federal law a party may rescind a contract because of unilateral mistake if enforcement of the contract would be 'unconscionable' or 'oppressive' and if rescission would not impose a substantial hardship on the other party.” Korangyi v. Comm'r, 893 F.2d 69, 72 (4th Cir. 1990).

The first crack in this consensus came only in 2015. In a per curiam opinion from the Seventh Circuit, that court held that it was error for us to grant the Commissioner's motion for entry of decision when the parties had settled all the individual issues but disagreed about the bottom-line number: “The Stipulation of Settled Issues . . . says nothing about the key issue in the case: the deficiency amounts for the tax years in question. Indeed, the Stipulation of Settled Issues does not even specify a method for determining the deficiency amounts.” Shah v. Comm'r, 790 F.3d 767, 770 (7th Cir. 2015).

The Seventh Circuit in Shah did not mention the Fourth Circuit's opinion in Korangyi or the numerous reiterations of its holding since then in our Court. This may mean that this circuit-court split was unintentional. It may mean that partial settlements that don't include a final deficiency amount are now unenforceable in the Seventh and Ninth Circuits despite the usual maxims of contract law that suggest they are. Or it may just be that, under those general rules of contract law, stipulations of settled issues that don't include a deficiency amount may be unenforceable against unrepresented parties as inherently “unjust” or “oppressive”. We ourselves gamely tried to distinguish Shah as based on the serious illness of the taxpayer in that case or perhaps as a misapprehension of our precedents that treat a stipulation of settled issues as itself a settlement and thus a binding contract. McMullen v. Comm'r, 110 T.C.M. (CCH) 458, 460 n.2 (2015).

But those interested in tax procedure should be aware of this startling development.

What's a Filing?

A second problem that these cases present is the now equally unsettled question of what constitutes the “filing” of a tax return. Remember that on appeal the Dollarhides argued that they could still turn their withholding credit into a refund of an overpayment because they had submitted their missing 2006 return to the examining agent during audit. This may seem unlikely for an audit that began more than three years after the due date of the return, but IRS records do show a return filed less than three years before their audit.²

Here, too, the law used to be settled: A return was “filed” only if it was delivered to the specific individuals identified by the Code or regulations. Allnutt v. Comm'r, 523 F.3d 406, 412-13 (4th Cir. 2008); see e.g. Coffey v. Comm'r, 987 F.3d 808, 812 (8th Cir. 2021) (quoting Comm'r v. Estate of Sanders, 834 F.3d 1269, 1274 (11th Cir. 2016)) (holding that for a return to be filled, it must be delivered to the individual specified in the Code or Regulations); Heard v. Comm'r, 269 F.2d 911, 913 (3d Cir. 1959) (holding that filing only occurs when the paper is received by the proper official). Thus, a taxpayer who sent his return to the wrong IRS service center would not have “filed” his return until it showed up at the right service center. Winnett v. Comm'r, 96 T.C. 802, 808 (1991).

The Ninth Circuit has again found a new way to interpret this concept, at least for those whose returns, like the Dollarhides' were filed late. In Seaview Trading, LLC v. Commissioner, 34 F.4th 666, 673 (9th Cir. 2022), rev'g and remanding T.C. Memo 2019-122, the court held that “based on the ordinary meaning of 'filing,' we hold that a delinquent partnership return is 'filed' under § 6229(a) when an IRS official authorized to obtain and process a delinquent return asks a partnership for such a return, the partnership delivers the return to the IRS official in the manner requested, and the IRS official receives the return.” Id.

Seaview Trading is a very recent decision that came out while we were still waiting the motions for entry of decision from the parties in these cases. We note for the record that we asked Mr. Dollarhide very specifically if he wished to reopen at least his 2006 case for retrial on this issue and that he very specifically declined.

But we again note, for tax proceduralists, that there appears to be no distinction in the Code or regs between partnerships and individuals and other entities with obligations to “file” returns. Seaview Trading may thus also be a fruitful source of litigation in the near future.

Ambiguous Mandates

The third, and final, problem these cases present is what to do with the 2007 individual case. Remember that it found a deficiency that no one contested. The Dollarhides appealed our final decision redetermining that deficiency just as the parties asked for. The Ninth Circuit did not discuss it at all, and it is not at all clear just what their mandate to us about that decision is. In the absence of an administrative abatement — in our opinion a cleaner way to solve the problem — we have to figure out whether we can vacate such an old decision and enter a no-deficiency decision as the parties now wish.

There is no statute, regulation, or useful precedent that either the parties or we can find. It is, however, the general rule that “an inferior court has no power or authority to deviate from the mandate issued by an appellate court.” Briggs v. Pa. R. Co., 334 U.S. 304, 306 (1948). We will therefore assume that we do have the power to vacate a prior decision and enter a new one in accord with the parties' agreement in this situation. To do so doesn't deviate from the mandate in these cases. And it will, one hopes, bring these cases to an end. Or at least allow the entry of decisions that neither party will have standing to appeal.

It is therefore

ORDERED that the Proposed Stipulated Decision filed on November 18, 2021 shall be stricken from the Court's record. It is also

ORDERED that the Court's Order and Decision entered on March 19, 2018 is vacated. It is also

ORDERED that Motion for Entry of Decision filed December 5, 2017 is denied as moot. It is also

ORDERED that the parties' September 6, 2022 joint motion for entry of decision is granted. It is also

ORDERED and DECIDED; that there is no deficiency in income tax due from, nor overpayment due to, petitioner for the tax year ended September 30, 2006;

that there is no addition to tax due from petitioner for the tax year ended September 20, 2006, under the provisions of I.R.C. § 6651(a)(1); and

that there is no penalty due from petitioner for the tax year ended September 30, 2006, under the provisions of I.R.C. § 6662(a).

Mark V. Holmes
Judge