The Tax Court held that a purported notice of deficiency issued to a taxpayer, which consisted of four documents, two of which identified the taxpayer and two of which identified another related taxpayer, was not a valid notice of deficiency. Thus, the Tax Court did not have jurisdiction over the taxpayer's case filed in response to the notice.
Background
U.S. Auto Sales Inc. is a corporation with a principal place of business in Georgia. U.S. Auto Finance is a related entity that has the same mailing address and is represented by the same counsel. The two companies filed separate income tax returns for the fiscal years ending June 30, 2003, 2007, and 2008.
On May 15, 2012, the IRS issued a set of documents that it contended was a notice of deficiency (May notice). The May notice included:
- A cover letter dated May 15, 2012, addressed to U.S. Auto Sales and stating that the IRS determined tax deficiencies for fiscal years 2003 and 2007, respectively;
- A Form 4089, Notice of Deficiency — Waiver, also addressed to U.S. Auto Sales, listing identical deficiencies for fiscal years 2003 and 2007 and no deficiency for fiscal year 2008;
- A Form 5278, Statement — Income Tax Changes, showing U.S. Auto Finance, not U.S. Auto Sales, as the taxpayer and stating the same deficiencies for fiscal years 2003 and 2007 and no deficiency for fiscal year 2008; and
- A Form 886-A, Explanation of Adjustments, showing U.S. Auto Finance as the taxpayer and purporting to explain the adjustments shown on the Form 5278.
The Form 886-A within the May notice stated that the IRS disallowed part of U.S. Auto Finance's claimed deductions for rent expense for fiscal years 2007 and 2008, respectively.
On Aug. 2, 2012, the IRS mailed U.S. Auto Sales a second purported notice of deficiency (August notice). The August notice included a deficiency amount for fiscal year 2007 different from the amount of the deficiency in the May notice and, unlike the May notice, a deficiency for 2008. On Aug. 10, 2012, U.S. Auto Sales filed a petition in Tax Court based on the May notice, claiming that the proposed deficiencies were applicable to U.S. Auto Finance. The company alleged that the May notice was erroneous, arbitrary, and capricious and that the IRS should bear the burden of proof for all items. On Sept. 13, 2012, U.S. Auto Sales filed a petition based on the August notice.
The IRS moved to dismiss the first case for lack of jurisdiction, arguing that the May notice was invalid because it had failed to make a determination with respect to U.S. Auto Sales. U.S. Auto Sales countered that the May notice was valid because it identified U.S. Auto Sales in its opening pages and set forth deficiencies for two tax years. At a hearing on the motion to dismiss, U.S. Auto Sales presented evidence establishing that the IRS's determination in the May notice did not relate to the company.
On Feb. 2, 2017, the Tax Court decided Dees, 148 T.C. 1 (2017), in which it clarified the standard the court applies when determining whether an ambiguous notice of deficiency is valid. As a result of the Dees decision, the Tax Court ordered U.S. Auto Sales and the IRS to file memoranda of law discussing its impact on the IRS's pending motion to dismiss U.S. Auto Sales's case for lack of jurisdiction.
The Tax Court's decision
The Tax Court held that the May notice was invalid because it did not reflect a deficiency determination as to U.S. Auto Sales and granted the IRS's motion to dismiss the case. The court found that the May notice did not meet either of the tests used to evaluate a notice of deficiency set out by the Tax Court inDees.
For the Tax Court to have jurisdiction over a case, the taxpayer petitioning the court must have received a valid notice of deficiency and must have filed a timely petition with the court. Because there was no question that U.S. Auto Sales had filed a timely petition, the Tax Court only considered whether the May notice was a valid notice that conferred jurisdiction on the court.
Sec. 6212(a) authorizes the IRS to issue a notice of deficiency to a taxpayer when it determines a deficiency with respect to that taxpayer. The notice is not required to be in any particular form, and the Tax Court considers the set of documents making up the notice as a whole. To evaluate whether an ambiguous notice of determination is invalid, the court uses the analytical framework from Dees, which consists of a two-part test.
Under the first test, the Tax Court determines whether, on an objective basis, a purported notice would inform a reasonable taxpayer that the IRS had determined a deficiency as to that taxpayer. If the notice does so unequivocally, the notice is valid and the court does not move to the second test.
If the Tax Court finds the notice is ambiguous, in the second test it considers whether the party seeking to invoke jurisdiction has established that (1) the IRS made a determination as to the taxpayer and (2) the taxpayer was not misled by the ambiguous notice. If these two facts are established, the notice is valid despite being ambiguous. Ordinarily, the court presumes that the IRS made a taxpayer-specific determination if there is no indication in the notice that the IRS failed to consider information that related to the taxpayer (called a Campbell presumption after Campbell, 90 T.C. 110 (1988)). The party invoking jurisdiction must establish that the IRS made a taxpayer-specific determination, and the court may consider evidence from outside the four corners of the purported notice in evaluating whether the taxpayer has done so.
First test: The Tax Court stated that in order to be unambiguous under the first test, the notice must, on its face, advise the person who is to pay the deficiency that the IRS means to assess that person. The court found that the notice was ambiguous, stating that it was "fatally inconsistent as to the identity of the taxpayer against whom the deficiencies are determined," because the cover letter and the Form 4089 identified U.S. Auto Sales, and the Form 5278 and the Form 886-A identified U.S. Auto Finance. Thus, although the documents in the May notice showed that a determination had been made, it was not possible to ascertain from them which entity would owe the deficiencies, so the notice did not advise the person who is to pay the deficiency that the IRS meant to assess the deficiency.
Second test: U.S. Auto sales made two inferential factual arguments and one legal argument to establish that the May notice reflected a determination by the IRS. First, the company argued that it was entitled to the Campbell presumption because its case was factually analogous to Campbell, and therefore it had established that the IRS determined a deficiency against it. The company's second argument was that the IRS must have determined a deficiency against it because the August notice came so soon after the May notice that the determination must have been made before that in the May notice. Finally, the company argued that the May notice was valid even if it did not reflect a determination as to U.S. Auto Sales, because, under Benzvi, 787 F.2d 1541 (11th Cir. 1986), a valid notice does not have to identify the taxpayer correctly. The notice, instead, need only determine a deficiency and identify the amount of the deficiency and the tax year at issue and need not be error-free.
The IRS argued that a review of the returns entered into evidence showed that any determination reflected in the May notice did not relate to U.S. Auto Sales. The Tax Court agreed that the notice did not relate to the company, asserting that it could not ignore the evidence in the record, particularly the tax returns, that the notice was not a determination for U.S. Auto Sales. The court also pointed out that U.S. Auto Sales had admitted that the May notice reflected determinations for U.S. Auto Finance and that it was clear that U.S. Auto Sales had not been prejudiced by the erroneous May notice.
Regarding U.S. Auto Sales's Campbell presumption argument, the Tax Court found Campbell to be distinguishable on the facts, but it noted that even if U.S. Auto Sales were entitled to the presumption, it was only a presumption and could be rebutted by other evidence. In the company's case, the court determined its tax returns rebutted any jurisdictional inference the Campbell presumption may have granted.
The Tax Court determined that U.S. Auto Sales's second argument based on the timing of the August notice was "similarly unconvincing." The court found that there was no support in its case law or the record for the inference the company wanted the court to draw, and that the timing of the August notice simply had no bearing on the validity of the May notice.
Finally, the Tax Court found that the company's legal argument relied on a distorted reading of the Benzvi case. While the court in that case had held that a notice must indicate that the IRS has determined that a deficiency exists for a particular year and specify the amount of the deficiency, it had also held that the notice must unambiguously identify the taxpayer.
Reflections
A dissenting opinion in the case claimed that the majority opinion "ignores precedent, endorses a jury-rigged analytical construct, and puts the onus on taxpayers to divine the meaning of the IRS's slapdash gobbledygook" and "bends over backward to clean up the IRS's mess." The dissenters reproach the court for creating an "amorphous new standard that leaves taxpayers, the IRS, and this Court at sea."
The dissenters believed that the controlling precedent in the case should be the Tax Court's opinion in Scar, 81 T.C. 855 (1983), rev'd, 814 F.2d 1363 (9th Cir. 1987), and not the Tax Court's opinion in Dees. Scar involved a notice of deficiency that contained errors but that the Tax Court held to be valid because it put the taxpayers on notice, stated the amount of the deficiency, and specified the tax years involved (the Ninth Circuit later reversed the Tax Court).
Two concurring opinions, however, explained why the majority opinion did not follow Scar. The concurring opinions stated that Scar was factually distinguishable because the taxpayers in that case, unlike U.S. Auto Sales, did not receive an ambiguous notice of deficiency. Thus, the majority had properly applied Dees rather thanScar.
U.S. Auto Sales, Inc., 153 T.C. No. 5 (2019)
