Tax Court cannot determine overpayment in CDP review case

The Tax Court held that it did not have jurisdiction under Sec. 6330(d)(1) to determine the amount and order the credit or refund of a taxpayer’s overpayment in a Collection Due Process (CDP) hearing review.

Background

Brian McLane filed a 2008 return reporting a tax liability that included a Schedule C, Profit or Loss From Business, for his contracting business. The IRS later audited McLane’s return, disallowing his Schedule C deductions and assessing additional taxes of $23,615 for 2008. The IRS sent McLane a notice of deficiency for the assessment, but he did not receive it.

The IRS sent McLane a Notice of Federal Tax Lien (NFTL) in March 2013, which he did receive. In response, he timely requested a CDP hearing. After the hearing, the IRS sustained the NFTL, and McLane petitioned the Tax Court under Sec. 6330(d)(1) to review the IRS’s determination. In the petition, McLane asserted that the IRS did not issue him a deficiency notice for 2008 and that the IRS had not given him sufficient opportunity to substantiate the deductions it disallowed for 2008.

In 2018, because of additional documentation McLane submitted while his Tax Court case was pending, the IRS conceded that McLane was entitled to more Schedule C deductions than he had included on his return and agreed to abate the assessment and release the lien against him for 2008. Although McLane had not made any claim that he was entitled to a refund in his petition to the Tax Court or the previous proceedings in his case, he requested that the Tax Court determine the amount of his overpayment for 2008 and order the IRS to issue him a refund for it.

The law

Under Sec. 6512(a), the Tax Court has jurisdiction to redetermine the amount of a taxpayer’s deficiency when a taxpayer timely files a petition with the court for redetermination. Under Sec. 6512(b)(1), the court has jurisdiction in a deficiency case to determine the amount of a taxpayer’s overpayment for a tax year before the court. However, the Tax Court’s jurisdiction to order a credit or refund is limited to the part of a tax paid after the mailing of a notice of deficiency (Sec. 6512(b)(3)(A)) or for which a timely claim for refund was pending (or could have been filed) on the date of mailing of the notice of deficiency (Sec. 6512(b)(3)(B)).

Secs. 6320 and 6330 provide a taxpayer the right to an Appeals hearing — the CDP hearing — before the IRS can collect taxes by means of a lien or levy. Sec. 6330(d)(1) allows a taxpayer to petition the Tax Court (and gives the court jurisdiction) to review the IRS’s determination at a CDP hearing.

In Greene-Thapedi, 126 T.C. 1 (2006), the Tax Court addressed whether it had jurisdiction to determine in a CDP review case brought under Sec. 6330(d)(1) whether a taxpayer was entitled to a refund of interest paid. The court concluded that Sec. 6330 does not expressly give it jurisdiction to determine an overpayment or to order a refund or credit of taxes paid, and refused to assume jurisdiction in a CDP case in the absence of explicit statutory authority. According to the court, there was no evidence that Congress intended that Sec. 6330 would provide for the allowance of tax refunds and credits.

The Tax Court’s decision

The Tax Court held that it did not have jurisdiction to determine the amount of McLane’s overpayment for 2008 or order a credit or refund of the overpayment, finding that McLane had provided no reason for it to overrule the precedent it set in Greene-Thapedi.

McLane contended that despite the holding in Greene-Thapedi, the Tax Court did have overpayment and refund jurisdiction under Sec. 6330, but only in very limited circumstances. Under his theory, the Tax Court has jurisdiction in cases in which the taxpayer’s underlying tax liability is at issue because the taxpayer did not receive a deficiency notice that the IRS had mailed.

McLane argued that under Sec. 6512(b)(3)(B), the IRS’s mailing of a deficiency notice preserves an “imputed refund claim” for the taxpayer as of its mailing date, and that this refund claim is activated by the taxpayer’s filing a petition to the Tax Court. Similarly, McLane reasoned, Sec. 6330(c)(2)(B), which allows a taxpayer to challenge the existence of his or her underlying tax liability in a CDP hearing when he or she did not receive a deficiency notice, also allows the taxpayer to raise any refund claim that would have been activated by the filing of a petition for redetermination filed in response to the undelivered deficiency notice.

The Tax Court disagreed, finding no reason why the IRS’s issuance of a deficiency notice that McLane did not receive should allow him to pursue a claim for refund that was time-barred long before he showed he was aware of it. While a taxpayer’s filing of a redetermination petition in response to a deficiency notice effectively tolls the limitation period on any claim for refund for a year covered by the notice because the petition cuts off the taxpayer’s right to seek a refund for the year in any other forum, the issuance of a notice of deficiency, by itself, does not prevent the taxpayer from seeking a refund in other courts.

Accordingly, McLane’s failure to receive a deficiency notice for 2008 did not deprive him of an opportunity to pursue a claim for a refund of any overpayment he made for that year. The limitation period on McLane’s last payment on his 2008 liability expired in 2012, but McLane in no way raised the issue of an overpayment of taxes for 2008 before February 2018, long after the limitation on any refund claim for the year had expired. Thus, the Tax Court stated it could “see no reason to read into section 6330(d) jurisdiction that that section does not explicitly grant us to give those in petitioner’s situation another opportunity to pursue a refund claim in regard to which they took no action during the applicable period of limitations.”

Reflections

An amicus brief filed in McLane’s case contended (as had a dissenter in the Greene-Thapedi case) that allowing the Tax Court to determine a taxpayer’s overpayment was necessary to fulfill Congress’s “remedial” purpose for the CDP review provisions. The Tax Court, based on the legislative history of the statute, concluded that the purpose of the statute was to “ensure due process” when the IRS uses its power to collect taxes through liens and levies, not to protect taxpayers from the results of their failure to timely pursue a refund claim. In McLane’s case, the IRS’s agreement to abate the assessment and release the lien against him ensured that the IRS would not use its collection powers to violate McLane’s rights. Therefore, the court found that the purpose of the CDP review provisions had been satisfied, even though McLane ultimately paid more tax than he owed for 2008.

McLane, T.C. Memo. 2018-149