In McLane v. Commissioner, TC Memo 2018-149, the Tax Court followed its prior precedent in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006) holding that it lacked jurisdiction in a Collection Due Process (CDP) case to grant petitioner a refund. Carl Smith blogged about the issue here when the McLane case was pending and he earlier blogged about the issue here when the DC Circuit affirmed the outcome in Greene-Thapedi in its holding in Willson v. Commissioner, 2015 U.S. App. LEXIS 19389 (Nov. 6, 2015). We have discussed other cases with this issue such as VK&S Industries v. Commissioner; ASG Services, LLC v. Commissioner; and Allied Adjustment Services v Commissioner (see post here) in which the court issued a designated order rather than an opinion. These cases serve as another reminder of the importance of orders, and particularly designated orders as a source of substantive rulings from the Tax Court even if these orders do not have precedential value.
Carl assisted the University of the District of Columbia Tax Clinic in filing an amicus brief in the McLane case. A link to the amicus brief, substantially written by Jacqueline Lainez’s student at UDC Roxy Araghi is here. A copy of the taxpayer’s brief and the IRS brief are here and here, respectively. The outcome is disappointing but not surprising given the prior precedent. In the opinion Judge Halpern provides a detailed explanation regarding why the Tax Court should not exercise jurisdiction to grant refunds in CDP cases but does not change the reasoning or outcome of Greene-Thapedi which is no doubt why the Tax Court marked this as a memorandum opinion.
On October 19, 2009, Mr. McLane timely filed his 2008 income tax return pursuant to a 6-month extension to file and the mailing rules of section 7502. The return showed a balance due, and so he paid $957 toward that balance between December 2009 and October 2010 and another $800 between October 2010 and October 2012. In August 2012, the IRS mailed a notice of deficiency to Mr. McLane disallowing various Schedule C deductions and seeking a deficiency with respect to his 2008 taxes. But, he never got the notice of deficiency. Some of the $800 had been paid after the IRS mailed the notice of deficiency. The IRS later filed a notice of federal tax lien (NFTL) against him, and he sought a CDP hearing in which he contended that the assessment was invalid because no notice of deficiency had been mailed. He also argued in the hearing that he could prove sufficient deductions, but he did not ask for a refund of any amount that he had paid.
Mr. McLane did not get satisfaction at Appeals, so he petitioned the Tax Court. The Tax Court concluded that a notice of deficiency had been properly mailed, but he simply had not received it. After a remand to Appeals, a trial was had in the Tax Court in September 2016, and post-trial briefs were later filed. The failure to receive the notice of deficiency allowed the Tax Court to decide de novo his challenge to the underlying tax liability set out therein. Neither in his pretrial nor post-trial briefs did Mr. McLane seek a refund. Before the Tax Court’s ruling on the merits, the IRS later conceded that, for the 2008 tax year, Mr. McLane had proved enough business expenses at trial to not only fully eliminate any deficiency and abate the NFTL, but to also produce an overpayment. In a conference call among the parties and Judge Halpern in February 2018, Mr. McLane first asked for a refund of the overpayment that the IRS now conceded had occurred.
In an order issued on March 13, 2018 — one that did not mention Greene-Thapedi — Judge Halpern asked for memoranda of law from the parties on whether he had jurisdiction to find an overpayment under these facts. UDC filed an amicus memorandum, as well.
In Greene-Thapedi the Tax Court reviewed a CDP case where the IRS had been trying to collect a deficiency arising from a stipulated decision of the Tax Court in an earlier deficiency case involving 1992 income taxes. The dispute in the CDP hearing was only over the amount of interest charged on the stipulated deficiency. But, the IRS offset an overpayment of taxpayer’s 1999 liability to fully pay the 1992 liability pending before the court in the CDP matter. The taxpayer in that CDP case then sought a refund of interest accrued before the notice of intent to levy. The court found that the dispute over the interest was a challenge to the underlying liability, but once the levy became moot by virtue of the offset of the 1999 liability the opportunity to challenge the liability vanished together with any claim for refund. The court also noted in the case that IRC 6330 does not expressly give the Tax Court jurisdiction to determine overpayments and to order refunds. The case contains no discussion of whether the refund claim was timely filed under section 6512(b)(3), which gives the Tax Court the power to find an overpayment under its deficiency jurisdiction under several scenarios.
In the Greene-Thapedi opinion at footnote 19 the Tax Court mentioned the possibility that although not present in that case the determination of an overpayment might be “necessary for a correct and complete determination of whether the proposed collection action should proceed.” Thus, the court gave Mr. McLane some hope that his case might fit within the exception mentioned by the court as a possibility. Both Mr. McLane and the amicus also argued that the Greene-Thapedi case was legally distinguishable, since it involved a dispute over interest on a deficiency that had already been stipulated, whereas the McLane CDP case was the first time the merits of the deficiency were being litigated. Both memoranda argued that a taxpayer who had not received a notice of deficiency should be put in the same position in a CDP challenge to that liability in Tax Court as he would have been had he received the notice of deficiency. The amicus pointed out that one could still apply the Tax Court’s overpayment jurisdiction rules of section 6512(b)(3) by limiting the amount of the refund to both (1) the amount paid in the 3-year (plus extension) period before the notice of deficiency was mailed (a deemed paid claim) and (2) the amount paid after the notice of deficiency. The $957 and $800 payments would fall within those descriptions. Another factor giving Mr. McLane some hope was the dissenting opinion of Judge Vasquez in Greene-Thapedi which invoked the need to broadly construe the court’s jurisdiction because of the remedial nature of CDP. Judge Vasquez also pointed out that the decision created a trap for the unwary:
Taxpayers who choose to litigate their section 6015 [innocent spouse] and section 6404 claims as part of a section 6330 proceeding cannot obtain decisions of an overpayment or refund in Tax Court. If those same taxpayers had made claims for section 6015 relief or interest abatement in a non-section 6330 proceeding, we could enter a decision for an overpayment and could order a refund.
In McLane the court acknowledges that it must revisit Greene-Thapedi to determine if it has overpayment jurisdiction on the facts presented here; however, it concludes that it has no reason to depart from the earlier precedent.
In response to the narrow argument that Mr. McLane and UDC made that the Tax Court has overpayment jurisdiction in a Tax Court case only where the underlying tax liability is at issue because of “the non-receipt of a mailed notice of deficiency,” the court states that:
We see no reason why the issuance of a notice of deficiency that petitioner never received should allow him to pursue a claim for refund that would otherwise have become time barred long before he manifested any awareness of it.
The court reasons that he had plenty of time to notice that he had more expenses than he originally claimed on his 2008 return and he did not act to raise a refund claim until a conference call with the parties in the CDP litigation in February of 2018. By 2018, the normal statute of limitations to file a claim for refund had long since passed. The court expresses concern that providing refund jurisdiction in this context would allow a taxpayer to make an end run around the refund time frames established in the Code. It is unclear how much this late request for a refund may have impacted the outcome of the case. The court does not directly address the argument made by UDC that section 6512(b)(3)’s overpayment jurisdiction filing deadlines (which cover payments made in periods both before and after the notice of deficiency was mailed) could be treated as obviating the need for any amended return in order to seek a refund in the Tax Court CDP case.
The court provides an extensive discussion regarding the arguments of the amicus brief which follow closely the arguments made by Judge Vasquez in his dissent in Greene-Thapedi and the court pushes back on each one of those arguments. I will not repeat them here but I came away with the impression that the length of the opinion may have been influenced by the desire to take this opportunity to refute Judge Vasquez’s dissent in more detail than was done in the majority opinion in Greene-Thapedi and perhaps was done with an eye toward the possible appeal of the McLane case. Of the appellate courts, only the D.C. Circuit (in Willson, a case also with unusual facts not involving a challenge to the underlying liability) has ever discussed or followed Greene-Thapedi. McLane could appeal his case to the Fourth Circuit. In any event several pages of the opinion explain in detail why none of the issues raised by Judge Vasquez provide a basis for Tax Court jurisdiction.
For anyone interested in fighting this issue, the opinion provides a detailed roadmap of what the court thinks of the arguments made to this point. While it appeared that Greene-Thapedi may have left a crack in the door for a taxpayer to come in with different facts and succeed in obtaining a refund in a CDP case, the McLane decision signals that the crack is closed. Any success on this issue must come from persuading a circuit court to interpret the statute differently or for Congress to make clear that its jurisdictional grant goes further than it currently appears to do.