When a taxpayer goes into bankruptcy, a new forum for tax litigation opens up, or potentially opens up, based on section 505 of the Bankruptcy Code. This section provides in pertinent part that “the [bankruptcy] court may determine the amount or legality of any tax, any fine or any penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, ….“ The recent case of Snyder v. Commissioner provides insight into the impact of a bankruptcy decision on the merits of a tax liability on a Tax Court case. It also demonstrates the res judicata effect of the Bankruptcy Court’s decision on the tax matters decided in the case.
The Snyders appear comfortable in bringing court actions. Here, we see the result that court proceedings can have on the statute of limitations. The recently decided Tax Court case in a collection due process (CDP) case concerns the tax years 1988 and 1989. Because of years of litigation and a late start to the assessment of the liabilities for those years, the statute of limitations on collection remains open and still has years to run.
While it is not clear from the recent Tax Court opinion what caused the mailing of the notice of deficiency for 1988 and 1989 on September 25, 1997, the mailing of that notice appears timely based on the absence of a challenge. The Snyders timely filed a Tax Court petition based on the notice of deficiency and proceeded toward trial in Washington DC on a trial calendar scheduled to start on March 15 (the Ides of March), 1999. On that fateful day the Snyders filed a chapter 13 petition in the bankruptcy court for the District of Maryland. Filing the bankruptcy petition invoked Bankruptcy Code section 368(a)(8) of the automatic stay and stopped the Tax Court case in its tracks. Although the opinion does not state why the Snyders chose this day to file their bankruptcy petition, I suspect it had much to do with pending Tax Court trial and little to do with the anniversary of the death of Julius Ceasar.
Having filed the bankruptcy proceeding, the Snyders decided to avail themselves of the new forum in which to litigate their tax matter; however, it took over four years, until April 18, 2003, before the bankruptcy court issued an order concerning their liability. The Snyders appealed the order of the bankruptcy court, the District Court remanded the case for further consideration and over three years later on October 30, 2006, the bankruptcy court issued an order on remand determining that the notice of deficiency was proper and the Snyders owed about $150,000 for the two years combined. They appealed again and this time went even to the Fourth Circuit which upheld the bankruptcy court’s determination on May 11, 2007.
All this time the Tax Court case remained open and suspended. While the bankruptcy court took over the litigation of the merits of the Snyders’ liabilities for 1988 and 1989 and while the automatic stay suspended the Tax Court proceeding, the end of the merits litigation on the bankruptcy side of the case did not terminate the Tax Court case. In these circumstances, the Tax Court enters a decision once the stay lifts. The decision document entered in the Tax Court case mirrors the decision of the bankruptcy court and serves as the action that allows the Tax Court to close its case. Usually, the Tax Court orders the parties to provide status reports on the progress of the bankruptcy case during the period of the automatic stay. Without looking at the docket sheet in the case, I imagine that the attorney for the IRS in this case filed numerous status reports over the eight year period the case worked its way to resolution in the bankruptcy court process.
So, the IRS finally won a victory allowing it to assess a tax liability for tax years that ended approximately 20 years earlier. In the recently decided CDP case the Snyders argued that the IRS jumped the gun in making this assessment. It is this argument and its resolution that provides the most interesting aspect of the case for me because very few cases illustrate the interplay of the bankruptcy and Tax Court decisions as they impact the timing of the assessment. Before we get to the discussion of the resolution of the timing of the assessment, it is necessary to set the scene by talking about the collection due process case.
On May 11, 2007, the Tax Court entered its order determining the amount of the deficiencies for 1988 and 1989 in the Tax Court case filed almost ten years earlier in December 1997. I can only imagine that someone in the Tax Court clerk’s office was glad to get that case off of their desk. The IRS assessed the taxes for those years on July 23, 1997 – 73 days later. Upon making this assessment the IRS should have sent notice and demand letters to the taxpayers within 60 days. Because the Snyders put this at issue in the CDP hearing the Tax Court determined, based on certified transcripts provided by the IRS, that notice and demand went to the Snyders on July 23 and August 27, 2007. The timing of the notices falls well within the 60 day period required by IRC 6303.
Having sent notice and demand, one can only imagine without seeing the entire file of the IRS that the IRS sent other notices to the Snyders and they did not pay. Because this case bears the Docket Number 8740-13L, I conclude that the IRS eventually sent the taxpayers a notice of intent to levy or filed a notice of federal tax lien, or both, and that the collection action caused the Snyders to timely request a CDP hearing. The Tax Court case does not mention when the CDP notice issued so determining how long the case sat in Appeals is not possible based on the opinion. Unless it sat in Appeals a long time, it took the IRS several years after making the assessment to get to the point of issuing the CDP notice that gave rise to the most recent Tax Court case. Given the amount of the liability, I would have expected the IRS to quickly file the notice of federal tax lien which would have triggered an opportunity for a CDP hearing; however, this timing issue does not come out in the opinion just as the length of time the case spent in Appeals does not come out. No matter the timing of the collection actions or the Appeals consideration of those actions, Appeals eventually issued a determination letter upholding the collection action and taxpayers petitioned the Tax Court on April 22, 2013.
The four page electronic Tax Court docket sheet on the CDP case shows that the Snyders take litigation seriously. They filed a series of motions and discovery requests from the outset of the case. The IRS filed a motion for summary judgment on November 7, 2014, over 18 months after the filing of the petition. The Tax Court decision accepts the IRS motion for summary judgment and does so because almost all of the issues raised by the Snyders in the proceeding such as the validity of the original notice of deficiency, the amount of their deficiency and the innocent spouse status of Marion Snyder were previously decided by the bankruptcy court and cannot be relitigated in CDP proceeding based on the principle of res judicata. This portion of the opinion provides a routine application of res judicata in the various issues raised again by the Snyders.
As mentioned above the interesting aspect of the case comes in the discussion of their attack on the timing of the assessment. The assessment occurred 73 days after the entry of the Tax Court’s decision. The Snyders argued that IRC 6213(a) prohibited the IRS from assessing the tax until 90 days after the entry of the Tax Court decision due to section 7481(a)(1). Because of the prior determination of the bankruptcy court, section 6213 does not control the assessment date in this case as it does with most Tax Court litigation. Instead, section 6871(a) controls. Rather than creating a 90 day waiting period, section 6871(a) “provides, in part that any deficiency with respect to income tax determined by the Secretary may be assessed immediately, despite the restrictions imposed by section 6213(a) on assessments, if the liability for the tax has become res judicata pursuant to a determination in a bankruptcy case under title 11 of the United States Code. See Freytag v. Commissioner . Thus, when a tax liability is determined by the bankruptcy court, the restrictions imposed on assessment by section 6213(a) do not apply, including the restriction that the Commissioner wait until the 90-day period expires before making an assessment.”
Because the bankruptcy court had previously determined that taxpayers owed a deficiency for the taxes, the decision of that court on the liability was res judicata at the time of the entry of the Tax Court decision even through an appeal of the bankruptcy court’s finding were on appeal to the Fourth Circuit. The Tax Court also rejected the arguments of petitioners that the IRS did not follow its own manual procedures regarding the assessments saying that the manual does not control the legality of the assessments and that the assessment was legal pursuant to section 6871(b). While this outcome does not set precedent, it provides insight into the processing of a case where the taxpayer invokes the right to litigate in bankruptcy after initially petitioning the Tax Court to decide the proposed deficiency.