I learned something this past week I should have known. It is possible to extract yourself from a Tax Court case without a decision. I grew up in a world of deficiency proceedings. When I first started litigating in the 1970s, the IRS still did a fair percentage of examinations of returns, they did them face to face and they examined a fair number of small businesses. I did most of my early litigation with small businesses that would never be audited today but which presented interesting factual issues.
Due to significant cuts in the past 35 years, the IRS audits a minuscule number of returns, about 75% of the time it audits by correspondence and, for the most part, it does not bother with small businesses where the bulk of the tax gap lies. I think the safest place for a taxpayer to go might be a small business in a TEFRA partnership since the IRS does not have the time to spend to go through records of small businesses and does not understand TEFRA but that’s just a view from the outside that has nothing to do with this post.
In deficiency cases if the taxpayer goes to Tax Court there is only one door out of the proceeding and that door involves a decision (See Estate of Ming v. Comm’r, 62 T.C. 519 (1974)). Once a taxpayer files a Tax Court petition based on a notice of deficiency, the taxpayer cannot decide that they no longer want to be in Tax Court and simply nolle pros the case as might happen in other civil litigation. The Tax Court keeps the case to the end and the taxpayer cannot escape once in the door. (A small exception to this exists for taxpayers who do not pay the filing fee at the outset. They have a short period of time to pay up or be kicked out as though they never arrived. I am not suggesting that a taxpayer on the fence about whether to file a Tax Court petition file the petition and not pay the fee in order to buy an additional 30 days or so after the end of the 90 day period in the notice of deficiency but the effect of the Court’s practice with respect to the fees leaves open this possibility.)
Once in Tax Court the taxpayer must either agree to a deficiency, convince the IRS to concede that no deficiency exists (or that a refund exists), have a deficiency imposed by a decision on the merits or enforcing a stated but not followed through upon settlement (See Dorchester Indus., Inc. v. Comm’r, 108 T.C. 320 (1997); see also T. Keith Fogg, Go West: How the IRS Should Foster Innovation in its Agents, 57 Vill. L. Rev. 441 (2012)) or have the Tax Court case dismissed which, contrary to the belief of many of my clients, means the IRS has permission to assess the full amount of the proposed deficiency as if the taxpayer did not petition the Tax Court in the first place (See Dorl v. Comm’r, 57 T.C. 720 (1972) (citing 26 U.S.C.A. § 6512(a)); Fiorentino v. United States, 226 F.2d 619 (C.A. 3, 1955)).
Despite the rules I knew in the deficiency cases before the Tax Court, I did not previously realize that things differ when the taxpayer arrives in Tax Court through a determination. The clinic represents a taxpayer in a collection due process case (CDP) and the Chief Counsel attorney wanted the taxpayer to concede that the relief sought in the proceeding was not available. After reviewing the case, we agreed that the client would not obtain relief through the CDP case in Tax Court, discussed with the client how the case might be resolved through another process and informed the Chief Counsel attorney we were in agreement.
I thought that the Chief Counsel attorney would draft a decision document, we would sign it, present it to the Court, the Court would sign it and then the case would come to an end. Instead, the Chief Counsel attorney wanted the taxpayer to file a motion to dismiss the case. This did not make sense in my deficiency oriented Tax Court world. Taxpayers, at least ones who know what they are doing, do not file a motion to dismiss their Tax Court case because that is not an option. So, I asked my students to research the matter and to get a sample motion from the Chief Counsel attorney. I got nothing. My students did not understand what I was asking, could not find a sample and could not obtain a sample from the Chief Counsel attorney.
At this point I could have actually researched the issue myself since I knew what concerned me and wondered if the deficiency process on this issue carried over to determination cases but instead of actually doing the work I phoned a friend and former colleague who still works at Chief Counsel’s office and who I thought would know the answer immediately and I was right because she did know the answer immediately (actually I emailed rather than phoned.) It turns out that the Tax Court decided this issue over a dozen years ago but I had not taken notice. In Wagner v. Commissioner, 118 T.C. 330 (2002), the Tax Court held that a CDP case may be dismissed without prejudice upon motion by the taxpayer, distinguishing CDP cases from cases holding that taxpayers may not withdraw a petition under section 6213 to redetermine a deficiency. See also Settles v. Commissioner, 138 T.C. 372 (2012).
The result makes perfect sense but was not a situation I had previously confronted. Like most dinosaurs, I just assumed things always worked as they had in the past. I write this post in case there are any other dinosaurs out there so I can help you to avoid being as uninformed as me on this issue. Dinosaurs are not extinct. They morphed into old attorneys who do not keep up and who are too lazy to hit the books (or the bits and bites) to do the work necessary to find the right answers.