On remand, the Tax Court held that, despite an ambiguous mandate from the Ninth Circuit, it had the power to vacate a prior decision in a case and enter a new decision based on an agreement between the taxpayer and the IRS.
Background
The IRS issued two notices of deficiency to Frank Dollarhide, one for 2006 and one for 2007, and another for the tax year ending in September 2006 to Dollarhide Enterprises Inc., a corporation Dollarhide owned. Dollarhide filed petitions with the Tax Court challenging each of the IRS’s determinations. The three cases were consolidated in Tax Court.
In 2016, Dollarhide and the IRS reported to the court that they had reached a settlement in the cases. The IRS agreed to concede all the various penalties and additions to tax. In addition, both the parties agreed to accept the “income, deductions, exemptions, and credits” on returns that Dollarhide submitted in 2011 during the course of the audit for the 2006 and 2007 tax years. Further, the IRS conceded that Dollarhide Enterprises did not have a tax deficiency.
Based on this agreement, Dollarhide was expecting a refund of taxes, based on credits for withholding taxes and excess Social Security tax that he generated in 2006. These credits were reported to the IRS on a return submitted to the IRS in February 2011 during the audit of his 2006 tax year.
The IRS took the position that although the credits were legitimate, they could not be taken into account in determining the amount owed to or from Dollarhide under the settlement. The IRS reasoned that the withholding and the excess Social Security tax should be treated, under Sec. 6513(b), as having been paid on the due date of Dollarhide’s 2006 return in April 2007. Consequently, because Dollarhide did not report the credits until he submitted his return in February 2011, four years after they were treated as being paid, he had failed to claim a refund for the credits within the three-year time limit in Sec. 6511(b)(2).
Dollarhide claimed he never would have agreed to the settlement if he had known the IRS was going to deny the refund he was expecting based on the credits. Dollarhide also claimed the returns would have been filed on time except that the revenue agent conducting Dollarhide’s audit demanded that he submit the returns to her instead of mailing them to the IRS. Therefore, Dollarhide refused to sign off on a final determination of the amount of the deficiency under the settlement.
In 2017, the IRS moved for an entry of decision in Tax Court. As the Tax Court explained, “this is … an extremely common motion in our Court that parties use to set up for decision disputes about the computation of a final deficiency once they’ve agreed on settlement of all the individual issues.” The Tax Court, agreeing with the IRS, held that Dollarhide was not entitled to a refund of the credits for withholding and excess Social Security tax from 2006. In addition, the court held that Dollarhide had a $13,000 deficiency for 2007 and that Dollarhide Enterprises, as the IRS had conceded, had no deficiency.
Dollarhide appealed all three cases to the Ninth Circuit. The Ninth Circuit, observing that the settlement between Dollarhide and the IRS did not mention anything about the statute-oflimitation issue, found that there was no settlement agreement to enforce because Dollarhide and the IRS had not agreed on the question of the refundability of the withholding credits for their 2006 tax year. Thus, the Ninth Circuit held that the Tax Court had abused its discretion in entering a judgment on the purported settlement of the issue (Dollarhide, 855 Fed. Appx. 402 (9th Cir. 2021)). It vacated the Tax Court’s decision regarding the 2006 tax year and remanded the case for further proceedings. However, the Ninth Circuit’s opinion did not address the Tax Court’s decisions regarding Dollarhide’s deficiency for 2007 or Dollarhide Enterprises’ deficiency.
After the Ninth Circuit issued its decision, the IRS and Dollarhide conferred and agreed to the Tax Court’s making entry of decisions showing no deficiencies or penalties in the three cases, but there would be no refund to Dollarhide as well. The Tax Court concluded that there was no problem with doing so for the Dollarhide Enterprises case and Dollarhide’s 2006 individual case, finding that this would be consistent with the Ninth Circuit’s ruling.
However, the Tax Court was less sure about Dollarhide’s 2007 case because it had entered a decision finding a deficiency in that case and there was no mention of it in the Ninth Circuit’s opinion. Therefore, the court found that it was “extremely unclear” whether this meant it had the power to change its prior decision because it was not certain whether the decision was affirmed sub silentio by the Ninth Circuit’s failure to mention it. In addition, it seemed to the court that far too much time had passed for it to entertain a motion to vacate its decision and enter a new one.
In order to solve this problem, the Tax Court asked the IRS if there was a way that it could administratively abate the 2007 deficiency to reach the result desired by the parties. The IRS was unable to do so, so the court was forced to decide, in the face of an ambiguous mandate from the Ninth Circuit, whether it could vacate its old decision and enter a new no-deficiency decision as the IRS and Dollarhide wished.
The Tax Court’s decision
The Tax Court held that it did have the power to vacate its prior decision in the 2007 case and enter a new decision in accord with the parties’ agreement. It found that there is no statute, regulation, or useful precedent that covered this situation. However, the court, while finding no clear answer to the problem of the Ninth Circuit’s ambiguous mandate in the case, concluded that entering a new decision would not deviate from the Ninth Circuit’s mandate and that, as a general rule, the Supreme Court has held that an inferior court has no power or authority to deviate from the appellate court’s mandate.
In its order, the Tax Court also addressed two unsettled issues pertinent to Dollarhide’s case that it described as being of interest to those interested in tax procedure. First, it discussed whether it could continue its “longstanding custom” of enforcing partial settlements and whether a stipulation of settled issues in the absence of a stipulation of decision is enforceable. In past cases (e.g., Stamm International Corp., 90 T.C. 315 (1988)) the court had held that the answers to these questions was yes, finding that, as in Dollarhide’s case, where the IRS and the taxpayer had settled a case on an issue-by-issue basis, a settlement was binding, even if the parties could not agree on the bottom-line amount due as a result of the settlement.
This position was endorsed by the Fourth Circuit in Korangy, 893 F.2d 69 (4th Cir. 1990). However, in 2015, the Seventh Circuit went in the other direction, holding in Shah, 790 F.3d 767 (7th Cir. 2015), that the Tax Court erred in granting the IRS’s motion for entry of decision when the parties had settled all the individual issues but disagreed about the bottom-line number for the deficiency amount.
The Tax Court noted that the Seventh Circuit in Shah did not mention the Fourth Circuit’s opinion in Korangy or the numerous decisions of the Tax Court in accord with that opinion. According to the court, the import of Shah was not clear, and the decision might mean that the circuit court split was unintentional, that partial settlements that do not include a final deficiency amount are now unenforceable in the Seventh and Ninth Circuits, or that, under the general rules of contract law, stipulations of settled issues that do not include a deficiency amount may be unenforceable against unrepresented parties as inherently “unjust” or “oppressive.” The Tax Court after Shah again followed its practice of enforcing partial settlements in McMullen, T.C. Memo. 2015-219, distinguishing the cases on factual differences and noting that perhaps the Seventh Circuit had misapprehended the Tax Court’s precedents that treat a stipulation of settled issues as itself a settlement and thus a binding contract.
The second unsettled issue addressed by the Tax Court was the question of what constitutes the “filing” of a tax return. It brought the issue up because Dollarhide had argued that his refund request for the 2006 credits (his 2006 return) would have been filed on time if he had mailed the return to the IRS instead of sending it to the revenue agent who was conducting the audit.
The Tax Court explained that the law in this area until recently had been settled, with a return being treated as “filed” only if it was delivered to the specific individuals identified by the Code or regulations. Consequently, a taxpayer who sent his or her return to the wrong IRS service center would not have “filed” the return until it showed up at the correct service center.
However, the Ninth Circuit in a recent case held that, based on the ordinary meaning of the term “filing,” a late-filed partnership return is “filed” for purposes of Sec. 6229(a) “when an IRS official authorized to obtain and process a delinquent return asks a partnership for such a return, the partnership delivers the return to the IRS official in the manner requested, and the IRS official receives the return” (Seaview Trading, LLC, 34 F.4th 666, 673 (9th Cir. 2022), rev’g T.C. Memo. 2019-122) (see Tax Trends, “Meaning of ‘Filed’ Defined for Purposes of Delinquent Partnership Returns,” 53-8 The Tax Adviser 50 (August 2022)).
The Seaview Trading decision came out in May 2022 while the Tax Court was still waiting for motions for entry of decision from the IRS and Dollarhide. The court noted for the record that it “very specifically” asked Dollarhide if he wanted to reopen his 2006 case for retrial on this issue and that Dollarhide “very specifically declined” the court’s offer. Nonetheless, the court found that there appeared to be no distinction in the Code or regulations between partnerships, individuals, and other entities that have obligations to “file” returns; therefore, it speculated that the Seaview Trading decision may be a “fruitful source of litigation in the near future.” In the end, the court vacated its prior decision and decided that there was no deficiency of income tax due from nor overpayment due to Dollarhide and no penalties to impose for the 2006 tax year.
Reflections
In the opening of its order, the Tax Court stated that the parties, particularly Dollarhide, had suffered enough from the prolonged litigation, which has been going on since 2012. Therefore, despite the importance of the issues regarding the enforcement of partial settlements and the filing of returns, the court stated that it discussed them “in a nonprecedential order that outlines these problems, doesn’t definitively answer them, but will bring these cases to a close.”
Dollarhide Enterprises, Inc., No. 23139-12 (Tax Ct. 9/28/22)
Contributor
James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.
