Patrick Thomas brings us the designated order posts this week. He is writing separately on the Krug whistleblower case and we will publish his write up with the designated orders for a later week. The Webert case, discussed here, provides a good lesson on different types of assessments and covers material we have not previously addressed. Keith
Memorial Day week is, apparently, a fairly inactive one at the Tax Court. Only three orders were designated this week, though all have something interesting. We’ll cover Judge Halpern’s order in a whistleblower case in an upcoming post that looks at a later designated order in that case.
Summary vs. Deficiency Assessments in Section 6213(a)
Docket No. 15981-17, Webert v. C.I.R. (Order Here)
This order from Judge Panuthos very nicely distinguishes a summary assessment from a deficiency assessment—and the resulting ability of the Service to collect on the former, though not the latter, while a Tax Court proceeding is pending.
The Service sent these joint taxpayers Notices of Deficiency for 2010 through 2015 proposing over $300,000 in tax and penalties, as the taxpayers hadn’t yet filed returns for those years. Two days later, the Service received tax returns for all of these years and filed them. These returns reported substantially less tax for each year and claimed a refund for a number of years. For 2010 through 2013, they’d owe about $11,000; for 2014 and 2015, they claimed a refund, which they elected to apply to the subsequent tax year.
They then filed a 2016 return, which claimed a $10,000 refund (owing largely to their election with respect to the 2015 tax year). In turn, they wanted this refund applied to 2017.
That didn’t happen. Instead, the Service first issued a math error notice for 2016, removing the $7,000 overpayment from 2015, leaving a $2,875 refund. Then, after processing the old returns, the Service took that refund and applied it to the 2010 and 2011 debts.
In the meantime, the Service sent a notice for 2010 through 2015, reducing the proposed assessments in the Notice of Deficiency (though the Court doesn’t say by how much). Presumably, these reductions exceeded the Weberts’ own calculations, as the examining agent “did not accept the figures on the returns as substantially correct.”
The Weberts filed a Tax Court petition, and before the Respondent answered, Mr. Webert filed a motion to restrain assessment or collection last September. This motion argued that the 2016 to 2010/2011 refund offset violated section 6213(a), which prohibits collection of a deficiency until after a Tax Court decision becomes final. The Court has since issued four substantive orders asking for additional detail from Respondent, ultimately resulting in this order denying Mr. Webert’s motion. (Mrs. Webert apparently retained counsel and clarified that she did not join in his motion).
Judge Panuthos denied the motion, principally because he found that the petitioners did not challenge the portion of the deficiency representing the taxes listed on their filed tax returns. He explained that, under Meyer v. Commissioner, 97 T.C. 555 (1991), the Service is authorized to assess and collect tax reported on original or amended tax returns, along with any additions to tax such as the failure to file penalty. Further, he notes that under section 6213(a) itself, the Court has jurisdiction to enjoin collection as to part of a deficiency only if the Tax Court petition disputes that part of the deficiency.
However, Judge Panthuos needs to distinguish the Powerstein case—a case he himself wrote more than 25 years ago! There, the petitioners filed amended returns for multiple years during a Tax Court proceeding that, under the logic of Meyers, would constitute summary assessments and were otherwise collectible by the Service during a Tax Court case. But Judge Panuthos held in Powerstein that these returns did not authorize the Service to assess or collect the tax they reported.
What’s the difference? In Powerstein, petitioners filed their return after their petition was filed, specifically referencing the ongoing Tax Court proceeding. Indeed, the returns were filed after Respondent’s answer proposing additional deficiencies and after petitioner’s reply thereto. The returns were also submitted at once—some claiming a large refund, others reporting tax, in what Judge Panuthos characterized as a “misguided attempt to generate a net refund for the years at issue.”
While Powerstein doesn’t explicitly state this principle, the core inquiry seems to be whether, based on all facts and circumstances, it was clear that the Powersteins were still disputing a portion of the deficiency the Service was seeking to assess or collect. That squares with the text of section 6213(a), which deprives the Court of jurisdiction otherwise. In other words, it doesn’t necessarily matter when the returns were filed, but that timing can be relevant to the inquiry.
So, I suspect that a return filed even during a Tax Court proceeding itself could still allow the Service, under Judge Panuthos’ logic in Powerstein and Webert, to assess and collect that debt where there’s no other indication that the taxpayer still dispute that portion of the liability. Conversely, any tax reported on a return filed before the Service issues a Notice of Deficiency would be summarily assessed and collectible.
The Weberts fall into a grayer area, given that the Service determined a deficiency, but they had not yet filed a Tax Court petition. Ultimately, however, they did not show either through the returns themselves, their petition, or through the many rounds of previous orders and responses any intent to challenge that portion of the purported deficiency. That being so, the assessment was properly made under section 6201(a) and the Tax Court lacks jurisdiction to enjoin collection under section 6213(a).
A Cautionary Tale of Stipulations, Admissions, and Delay
Docket No. 17507-14, Trilogy, Inc. & Subsidiaries v. C.I.R. (Order Here)
To conclude, a foray into relief from stipulations by Judge Gustafson. Before getting to this order—which grants Respondent’s motion to strike under Rule 91(e)—some context is necessary.
At issue is whether Petitioner can deduct legal fees for 2009 through 2011. An apparently key analysis underlying this claim is why Trilogy sought to increase its stock ownership percentage in another company, Selectica. The Supreme Court of Delaware affirmed a ruling that concluded Trilogy did so to “intentionally impair corporate assets, or else coerce Selectica into meeting certain business demands under the threat of such impairment,” rather than to conduct a hostile takeover. Versata Enterprises, Inc. v. Selectica, Inc., 5 A.3d 586 (Del. 2010).
In the Tax Court, Trilogy filed requests for admissions in November 2017 that asked Respondent to admit matters that were contrary to that 2010 holding. Nevertheless, Respondent admitted them in January 2018. The Court previously relieved Respondent of those admissions in an order on April 12.
In the meantime, Respondent and Petitioner signed a stipulation of facts on March 19, 2018, and filed it on March 26. This stipulation also contained the offending provisions and so Respondent filed its motion to strike under Rule 91(e)—on April 20, 2018. Anyone see a problem yet?
Judge Gustafson granted Respondent’s present motion, as under the standards for evaluating such a motion, Trilogy could not show unfair prejudice, given it knew about Respondent’s dispute as to this issue when the motion to withdraw the admissions was filed on March 20—and indeed, of the larger factual controversy since 2010.
Judge Gustafson, however, is not indulging IRS counsel’s delay and unnecessary motion practice. Looking at the dates above, IRS counsel clearly knew about this factual dispute when the motion to withdraw the admission was filed on March 20—and likely for some time before. Yet counsel signed the stipulation containing similar language one day prior (and filed it a few days after that). Worse still, counsel took a whole month to file a motion to correct the stipulations.
I certainly respect that both petitioner’s and respondent’s counsel bear significant time pressures in Tax Court litigation. In this case, however, the Court itself had to expend additional time and resources on this motion, which if the issue had been caught before the stipulations were filed, could have been avoided. Not wanting to deal with this again in this litigation, Judge Gustafson concludes: “we do not condone the Commissioner’s inefficient handling of this issue. Absent truly extraordinary circumstances, we do not expect to allow the Commissioner to make any further correction of his admissions or stipulations in this case.” Consider yourself warned.