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Corbalis v Commissioner: Tax Court Holds it Has Jurisdiction to Review Interest Suspension Decisions

Posted on Jan. 28, 2014

The Tax Court decided a case of first impression, Corbalis v Comm’r, 142 TC No. 2. The main issue decided on summary judgment was whether the court review provisions of section 6404(h) apply to denials of interest suspension under section 6404(g). IRS had taken the position that the court review provisions of 6404(h) applied only to final determinations relating to 6404(e), dealing with abatement claims running from IRS ministerial or managerial mistakes. The Tax Court held that it does have jurisdiction to review an IRS determination that the suspension period does not apply. The case is also interesting procedurally because it makes the important point that IRS revenue procedures, especially when unaccompanied by persuasive reasoning, are entitled to no judicial deference.

I will provide some background for the dispute and summarize the main points.

It is difficult to get IRS to abate interest. Section 6404(e) and (g) provide two avenues for taxpayers to argue interest should not apply. Section 6404(e) relates to delays stemming from ministerial or managerial acts. There are regulations applying Section 6404(e) and a number of Tax Court cases considering whether delays constitute managerial or ministerial acts.

Section 6404(g) is a less well-known provision. Part of RRA 98, it generally provides that interest does not run if the Service fails to contact the taxpayer within the close of the 36-month period beginning on the later of (i) the date on which the return is filed; or (ii) the due date of the return without regard to extensions. Originally, the provision had more bite because Congress provided for an 18-month period, but it is still on the books.

The Tax Court has exclusive jurisdiction under Section 6404(h) to review a claim that “failure to abate interest under this section was an abuse of discretion, and may order an abatement, if such action is brought within 180 days after the date of the mailing of the Secretary’s final determination not to abate such interest.”(emphasis added)

The case provides the background on Section 6404(h):

When enacted in 1996 as part of the Taxpayer Bill of Rights 2 (TBOR 2), Pub. L. No. 104-168, sec. 302(a), 110 Stat. at 1457-1458 (1996) (as amended by TBOR 2 sec. 701(a) and (c)(3), 110 Stat. at 1463, 1464), then section 6404(g), now section 6404(h), for the first time gave this Court jurisdiction to review requests for abatement of interest in the case of proceedings commenced after July 30, 1996. Before the enactment of that provision, the Court generally lacked jurisdiction over issues involving interest.

IRS issued Rev. Proc. 2005-38. It provides generally that IRS views Tax Court review of interest determinations as limited to Section 6404(e) abatement claims, and not claims that interest should be suspended under Section 6404(g).

Though taxpayers made an argument that the procedure could be read differently to contemplate court review of suspension determinations, the court gave no deference to the procedure:

There is no reasoning in support of the conclusion stated in the revenue procedure, and we discern none for distinguishing between section 6404(e) requests and section 6404(g) requests. Thus, the revenue procedure is not entitled to deference. See Exxon Mobil Corp. v. Commissioner, 689 F.3d 191, 200 (2d Cir. 2012), aff’g 136 T.C. 99, 117 (2011). A procedural pronouncement cannot restrict or revise section 6404(h). See Commissioner v. Schleier, 515 U.S. 323, 336 n.8 (1995); Estate of Kunze v. Commissioner, 233 F.3d 948, 952 (7th Cir. 2000), aff’g T.C. Memo. 1999-344. The wording and context of the statute, supplemented by more general legal principles, control.

The court turned to the statute and its main reason for holding that the court had jurisdiction follows:

First, we agree with petitioners that all of section 6404 deals with abatement, of which suspension is a category. A claim that interest should have been suspended for a period is the logical equivalent of a claim for abatement of interest that has been assessed for that period.

The court goes on to draw on general administrative law principles—increasingly important in tax cases—that provide that there is “a strong presumption that the actions of an administrative agency are subject to judicial review.” It noted that “the use of “shall” in a statute (as in 6404(g)) suggests agency actions are susceptible to court review. Citing to general administrative law doctrine, it notes that “[h]istorically, clear indications of congressional intent to subject discretionary administrative action to judicial review have been required. See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 410 (1971) (interpreting 5 U.S.C. sec. 701(a)(2), which exempts discretionary administrative action from judicial review).”

A final procedural point worth noting. IRS argued in the alternative that the administrative procedures were ongoing and that the letters it issued to the taxpayer were not a final determination. The opinion dismissed that argument, noting and referring to other authority that emphasizes the label of a document is not conclusive. The key is whether the letter embodies a determination in substance.

Parting Thoughts

I suspect that we will not see many cases involving suspension periods. The court in Corbalis itself reserved judgment on whether the suspension period provisions apply, noting that the record was incomplete on whether the suspension period is implicated in the circumstance in this case (loss carrybacks). The case is of broader significance. First, the Tax Court rightly gave the IRS revenue procedure purporting to define its jurisdiction no deference, especially when the procedure lacked a reasoned explanation. Second, advocates are well served to draw on general administrative law principles and caselaw, especially in cases that are not deficiency determinations.  In the last few decades Congress has increasingly expanded the Tax Court’s jurisdiction to matters beyond deficiency cases. This past decade has seen significant developments clarifying the importance of those administrative law doctrines. Just how far some of the general administrative law principles will disrupt established tax practice is an open and very current question.

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