As I finished my clean up of 2010 and posted items that I found more timely, 2011 material was accumulating. I will rarely post something that is more than two months old and I hate to cast away the rough diamonds that I don't have time to polish, so here are some more fairly random items of interest.
Two of them about mail, so I thought I'd recommend the novel Mail. Ms. Medwed is married to a distinguished tax attorney and some tax humor creeps into her work from time to time. I think its terrible that it appears that you can have the book for the price of the shipping and handling, but you would be foolish not to buy it. It's really great. I, myself, have a copy autographed by the author.
Jeffrey L. Rayden, et ux. v. Commissioner, TC Memo 2011-1
This was a about business use of a home. Taxpayer was claiming 70% and IRS was willing to allow 43%. Tax Court went with the IRS. They had a pretty big house :
Petitioners' two-story residence consists of 12 rooms. There is additional space in the area of the vestibule, hall, and staircase. There is also an attached three-car garage. Petitioner's family put the master bedroom and master bathroom to personal use. Petitioners' daughter used the room designated on Exhibit 15-P as bedroom 2, including the sitting area, bathroom, and closet, for personal purposes. Petitioners asserted at the trial that 10 percent of the use of bedroom 2 was for business. The room designated as the guest room consists of 283 square feet and was used by petitioner wife in connection with her travel agency business.
The problem the taxpayer has is that a portion of a house must be used exclusively for business in order to qualify:
Exclusive use of a portion of a taxpayer's dwelling unit means that the taxpayer must use a specific part of a dwelling unit solely for the purpose of carrying on his trade or business. The use of a portion of a dwelling unit for both personal purposes and for the carrying on of a trade or business does not meet the exclusive use test.
Respondent conceded that petitioner used the library and the garage exclusively for business. We also find that petitioner used the living room exclusively for business. Although petitioner's own exhibit claimed that the business used the living room only 95 percent of the time, at trial he credibly explained that “The only reason I put down 95 percent is that somebody who would be visiting could have possibly walked in [or through] that area and walked out.”
This Court has previously held that the mere nonbusiness passage from one room to the next can be classified as a de minimis personal use of the room and will not disqualify the room from the exclusivity requirement of section 280A(c)(1).
Although petitioner first explained that he did not eat in the breakfast room, in response to a question by the Court he conceded that on occasion he or his family may have eaten in the breakfast area. Petitioner also did not use the den, vestibule, and adjoining bar exclusively for business. Petitioner explained that “maybe one or two times a year, [the area] was used sometimes by family that were visiting”. We do not regard as de minimis this personal use of the room by visiting family.
Petitioner also did not use the dining room exclusively for business when his family was visiting. Petitioner testified that “one or two nights a year” when his sons were in town they would have a family dinner in the dining room. Petitioner is not entitled to a deduction for items of expense apportionable to these rooms.
I once read that the most expensive meal that a family has is when they eat in their dining room. In order to get to that result you have to apportion the extra cost that the dining room creates over the number of meals that the family eats there. I wonder if Mr. Rayden will be taking his sons out to restaurants in the future.
CCA 201052003
This was about an amended return that was mailed on the day the statute of limitations expired for the relevant tax year. The ruling, which has some other twists and turns to it, holds that the "timely mailed, timely filed rule" does not apply to an amended return. The reason is that an amended return is not a return "required to be filed". So if you have been waiting to file an amended return that might yield a refund, don't let yourself get too close to the due date. I noted this ruling in my recent post on DOMA. Couples who might benefit from DOMA being declared unconstitutional should be getting their 2007 refund claims in shortly not rushing to the post office with them the Monday after Emancipation Day.
John A. Boultbee v. Commissioner, TC Memo 2011-11
This is the other mail ruling. It is also about the "timely mailed, timely filed rule". Mr. Boultbee mailed a Tax Court petition five days before it was due. It arrived three days after the due date. The twist was that he had mailed it from a foreign country. Now being in a foreign country gave him 150 days instead of 90 days to file the petition, so maybe he doesn't really have a beef. The "timely mailed, timely filed rule" applies to the US mail. Mr. Boultbee was able to prevail, though. He used a registered mail service that is available in the obscure foreign country where he was located. Because of their tracking and that of the US Post Office Service he was able to demonstrate that the petition hit the US mails in time to be "timely mailed".
Petitioner mailed his petition from Victoria, British Columbia, Canada, using the registered mail service of Canada Post on June 9, 2010, the 145th day after the notice of deficiency was sent to petitioner in Victoria. A Canada Post postmark of June 9, 2010, is stamped on the front of the envelope. The Canada Post system, which allows for tracking of documents using a unique identifier on the sticker affixed to the envelope, indicates that the envelope in which the petition was mailed left Canada at 1:51 p.m. on June 10, 2010.
Although no U.S. Postal Service postmark is stamped on the envelope, the U.S. Postal Service Track and Confirm service allows for tracking of inbound registered mail using the same unique identifier used for the Canada Post registered mail. The U.S. Postal Service Track and Confirm service indicates that the envelope in which the petition was mailed was received by the U.S. Postal Service International Service Center in Los Angeles, California, at 10:21 a.m. on June 11, 2010. The envelope was then dispatched to Washington, D.C., where it was received on June 17, 2010, at 10:24 a.m., and then delivered to the Court that same day at 11:34 a.m.
I was going to throw in something about Sergeant Preston and King, his sled dog, but that's the Yukon, which is north of British Columbia.
Beverly B. Bang v. Commissioner, TC Summary Opinion 2011-1
It's really not nice to make fun of somebody's name so it is a good thing that I never will do a full length post on this case with the title "Botta Boom Botta". Besides the title I had even come up with an introductory quote. Further research indicated that maybe Albert Einstein didn't really say that compound interest is the most powerful force in the universe. Nonetheless, Ms. Bang may feel that way.
Ms. Bang was involved in a tax shelter back in the good old days of the Internal Revenue Code of 1954. It wasn't really that big a deal:
The Contra Costa Partnership Bang was a partner in a partnership called Contra Costa Jojoba Research Partners. This partnership, which we shall refer to as the Contra Costa partnership, filed a partnership tax return for its 1983 tax year on which it deducted $437,500 in research and experimental expenditures under section 174. On her own 1983 tax return, Bang reported a deduction of $12,500 for her share of the $437,500 deduction that the partnership had claimed. The 1983 tax return was due on April 15, 1984.
The IRS didn't like the partnership's deductions which led to some litigation. It took a while. Finally Ms. Bang got a notice that she owed an additional $2,636 in tax for the year 1983. She paid it. She also paid a negligence penalty of $131.80 So what's the big deal ? The big deal is that she didn't think she should have to pay $21,553.52 in interest (That was figured at 120% of the regular rate) and a 50% of interest penalty bringing the total tab to $32,343.46. She didn't think it was her fault that the IRS had taken over 20 years to settle this case and finally bill her.
This was an appeal from a collection due process hearing so there were a lot of procedural issues. Ultimately, though she didn't get any relief.
Martin Barajas, et ux. v. Commissioner, TC Summary Opinion 2011-2
This was a pretty ordinary substantiation case. It is interesting in that the Tax Court held to a significant extent for the the taxpayer.
Respondent's continuing disallowance of car and truck expenses relating to petitioner's business mileage to and from Los Angeles stems from petitioner's ability to provide supporting documentation for only 37 (or 77 percent) of his 48 trips. Respondent's insistence on 100 percent corroboration of the mileage log, however, contradicts the Secretary's own regulation. A taxpayer may substantiate his consistent pattern of business use of listed property for the entire year if he can establish by corroborative evidence that the periods for which he has adequate records are representative of the whole year. Sec. 1.274-5T(c)(3)(ii)(A), Temporary Income Tax Regs., 50 Fed. Reg. 46021 (Nov. 6, 1985) .
The taxpayer lost out on some overnight expenses because of failure to keep receipts, but because the amounts were reasonable and the taxpayer had used a competent preparer the Court did not allow the IRS to assess negligence penalties.
Private Letter Ruling 201101029
This was a denial of exempt classification. They were seeking exemption under 501(c)(15) (small insurance company.) The mutual insurance company was composed of 6 taxicab companies. Although each was operated independently there were familial relationships amond the shareholders of the various companies. The IRS wasn't buying it.
There is an insufficient number of insureds to provide for an adequate premium-pooling base. In addition, your risk is too heavily concentrated in two insureds. As a result, your business lacks one of the principal elements of insurance, risk distribution. Thus, because you do not qualify as an insurance company, you do not meet the statutory requirement for exemption under section 501(c)(15) of the Code.
Well that will do for one post. There's plenty more where that came from.
Showing posts sorted by relevance for query timely mailed. Sort by date Show all posts
Showing posts sorted by relevance for query timely mailed. Sort by date Show all posts
Wednesday, March 2, 2011
Tuesday, December 13, 2011
Refund claim
In the Matter of the Petition of CHARLES AND SUSAN VAN NESS for Redetermination of a Deficiency or for Refund of New York State Personal Income Tax under Article 22 of the Tax Law for the Year 2005.
Case Information:
Docket/Court: 823316, New York Division of Tax Appeals, Administrative Law Judge Determination
Date Issued: 11/23/2011
Tax Type(s): Personal Income Tax
OPINION
DETERMINATION
Petitioners, Charles and Susan Van Ness, filed a petition for redetermination of a deficiency or for refund of New York State personal income tax under Article 22 of the Tax Law for the year 2005.
On February 8, 2011 and February 24, 2011, respectively, petitioners, appearing by Buck, Danaher, Ryan and McGlenn (John J. Ryan, Jr., Esq., of counsel), and the Division of Taxation by Mark F. Volk, Esq. (David Gannon, Esq., of counsel), waived a hearing and agreed to submit the matter for determination based upon documents and briefs to be submitted by July 8, 2011, which date commenced the six-month period for issuance of this determination (Tax Law § 2010[3]). After due consideration of the evidence and arguments submitted, Catherine M. Bennett, Administrative Law Judge, renders the following determination.
ISSUE
Whether the Division of Taxation properly denied petitioners' claim for credit or refund for the 2005 tax year on the basis that the claim was filed after the applicable statute of limitations for credit or refund had expired.
FINDINGS OF FACT
1. During 2005, Charles and Susan Van Ness (petitioners), sold real property located in California that resulted in a capital gain of $425,330.00, while they were New York residents. Petitioners reported the sale of the property on their federal income tax return for 2005.
2. In April 2006, petitioners timely filed their 2005 New York State Resident Income Tax Return and included the capital gain from the sale of the California property thereon and paid the tax due of $32,191.00.
3. In 2008, petitioners were notified by the California Department of Taxation that California income tax was due for tax year 2005 attributable to the sale of the same real property.
4. A California nonresident income tax return for 2005 was prepared for petitioners by Sy Marks, petitioners' tax consultant, on or about December 31, 2008, which calculated California tax due in the amount of $34,620.00, plus interest and penalties of $8,732.00, for a total of $43,352.00. Petitioners paid this amount to California.
5. Along with the California nonresident return, Mr. Marks prepared an amended New York State resident income tax return, Form IT-201-X, for 2005, claiming a refund of $28,739.00, representing the computed New York resident credit on the tax paid to California. The amended return was signed by petitioners and Mr. Marks on December 31, 2008, and was mailed to the Division of Taxation (Division) by Susan Van Ness by U.S. Postal Service first class mail during January 2009. Petitioners did not submit written proof of mailing.
6. A separate issue also arose concerning petitioners' 2005 New York State income tax return, which petitioners were addressing with the Division between February 2009 and October 2009. The matter in dispute was represented by assessment L-031318435, dated February 17, 2009, and was based on information furnished to the Division by the Internal Revenue Service (IRS) asserting that petitioners' adjusted gross income was underreported by $7,000.00. Updated information later provided to the Division ultimately led to the conclusion that assessment L-031318435 should be cancelled. In October 2009, petitioners executed a withdrawal of protest showing the tax due as zero.
7. Petitioners received a Correspondence Acknowledgment Notice from the Division dated February 23, 2009, indicating that correspondence had been received from petitioners or their representative regarding assessment L-031318435, concerning the tax period ending December 31, 2005. It stated that petitioners would be notified of the resolution and that no further correspondence was necessary unless petitioners were going to submit additional information or respond to an inquiry from the Division.
8. Mrs. Van Ness construed the February 23, 2009 correspondence as pertaining to the amended 2005 tax return she had mailed in January 2009.
9. Petitioners received a preprinted form entitled Request for Conciliation Conference, dated February 17, 2009, bearing assessment no. L-031318435. Their tax consultant, using the form provided, filed a request for conference bearing the following information:
Amended return filed for 2005 indicating an overpayment of refund of $28,739-plus interest please adjust your assesment [sic] accordingly
According to the date stamp borne by the document, this request for a conciliation conference was received by the Bureau of Conciliation and Mediation Services (BCMS) on April 2, 2009.
10. By correspondence dated June 15, 2009, the Division acknowledged receipt of petitioners' request for a conciliation conference, including petitioners' statement that an amended return for tax year 2005 had been filed and that petitioners were requesting a refund in the amount of $28,739.00. The correspondence also indicated that the Division had no record of an amended tax return having been filed for tax year 2005.
11. Mr. Marks mailed a copy of the amended return that he had prepared for petitioners to the Division with correspondence dated September 8, 2009. According to the Division's records, the return and correspondence were received on September 14, 2009, and this was the date that the Division deemed the return first filed.
12. By Notice of Disallowance dated October 9, 2009, the Division disallowed petitioners' claim for refund in full, explaining that the deadline for filing the amended return had expired on April 15, 2009, and since the return had not been received by the Division until September 14, 2009, the refund must be denied.
SUMMARY OF THE PARTIES' POSITIONS
13. Petitioners assert that as early as February 2009, and again in April 2009, there was activity regarding petitioners' 2005 tax return. Petitioners particularly point to the request by Mr. Marks to adjust the assessment for 2005, referencing petitioners' filing of the amended return for 2005 and an overpayment of $28,739.00 plus interest, and petitioners' request for conciliation conference. Further, petitioners argue, there is no rationale to support a finding that petitioners waited over nine months from its preparation to file a return requesting a sizable refund, having already paid tax on the property transaction to both New York and California.
14. The Division maintains that petitioners' claim for refund for the 2005 tax year was not made within three years of the date the tax was paid and was filed after the statute of limitations for a refund claim had expired. The Division argues that the reference to the pending refund claim on petitioners' request for a conciliation conference, without the inclusion of supporting documentation, is insufficient.
CONCLUSIONS OF LAW
A. As relevant to this proceeding, Tax Law § 687, entitled “Limitations on credit or refund,” provides as follows:
(a) General. —
Claim for credit or refund of an overpayment of income tax shall be filed by the taxpayer within (i) three years from the time the return was filed, (ii) two years from the time the tax was paid ... whichever of such periods expires the latest, or if no return was filed, within two years from the time the tax was paid. If the claim is filed within the three year period, the amount of the credit or refund shall not exceed the portion of the tax paid within the three years immediately preceding the filing of the claim plus the period of any extension of time for filing the return .... If the claim is not filed within the three year period, but is filed within the two year period, the amount of the credit or refund shall not exceed the portion of the tax paid during the two years immediately preceding the filing of the claim....
B. Petitioners assert that their claim for refund was mailed in January 2009, in a timely fashion, and request that, in part, this be viewed with the common sense approach that a person would not likely delay filing for a near $29,000.00 refund. However, petitioners provided no written proof of such filing, having mailed the claim by U.S. Postal Service first class mail. In cases of this kind, the taxpayer bears the burden of proving that the claim for refund was timely filed (Tax Law § 689[e]). It has been well established by the Tax Appeals Tribunal that where a taxpayer uses ordinary mail, the taxpayer bears the risk that a postmark may not be timely fixed by the Postal Service or that the document may not be delivered at all (Matter of Messinger, Tax Appeals Tribunal, March 16, 1989 ; Matter of Sipam Corporation, Tax Appeals Tribunal, March 10, 1988 ). Accordingly, petitioners have not met their burden of proving that the amended return was mailed to the Division in January 2009 on the basis of Mrs. Van Ness's mere statement as to when she mailed the claim for refund.
C. Petitioners further maintain that the Division had actual notice of petitioners' claim for refund by virtue of the statement made on petitioners' April 2, 2009 request for a conciliation conference, which indicated an amended return had been filed for 2005 and that an overpayment in the amount of $28,739.00 plus interest was being sought by them. The Division counters with the argument that the mere reference to a pending refund claim absent the inclusion of supporting documentation is insufficient to be deemed timely. The issue of whether a valid claim for refund has been filed requires that this matter be viewed in conjunction with a body of federal case law that generally holds that there are circumstances under which a taxpayer's informal claim for refund may be sufficient to meet the jurisdictional prerequisite for a timely-filed claim for refund.
The leading case on this topic is United States v. Kales ( 314 US 186 [1941] ). In Kales, the taxpayer, prior to the deadline for filing a formal refund claim, wrote a letter to the Commissioner advising him that if the Internal Revenue Service revised the valuation of certain stock she would insist on a higher valuation and would claim the right to a refund. The letter did not comply with the IRS's regulations because it was not filed on the correct form. The taxpayer subsequently filed an untimely amended return that complied with the regulations for a formal claim for refund. The Court held that the letter to the Commissioner constituted a valid, although informal, claim for refund. The Court stated:
a notice fairly advising the Commissioner of the nature of the taxpayer's claims, which the Commissioner could reject because too general or because it does not comply with the formal requirements of the statute and regulations, will nevertheless be treated as a claim where formal defects and lack of specificity have been remedied by amendment filed after the lapse of the statutory period (citations omitted) (id. at 194).
A second frequently cited case holding that an informal claim for refund may, under some circumstances, stop the running of the statute of limitations on refund claims is American Radiator & Standard Sanitary Corp. v. United States ( 318 F2d 915 [1963]) . On the subject of informal claims, the American Radiator Court stated:
Informal refund claims have long been held valid [citing Kales and cases cited therein]. But they must have a written component, and should adequately apprise the Internal Revenue Service that a refund is sought and for certain years.... In addition to the writing and some form of request for a refund, the only essential is that there be made available sufficient information as to the tax and the year to enable the Internal Revenue Service to commence, if it wishes, an examination into the claim (id. at 920; citations omitted).
The United States Court of Federal Claims, in a more recent case, New England Electric System v. United States (32 Fed Cl 636 [1995]) , more succinctly sets forth the three components to an informal claim, acknowledging the longstanding principles of Kales and American Radiator, as follows:
First, an informal claim must provide the Commissioner of the IRS with notice that the taxpayer is asserting a right to a refund. Second, the claim must describe the legal and factual basis for the refund. Finally, an informal claim must have some written component (American Radiator, supra at 113-114 ). An informal claim, however, requires a court to go beyond the written component and examine the facts and circumstances which are presented in every case (id at 641 [citation omitted]).
The court concluded that although in a perfect world the informal claim would contain all the elements, it will not necessarily fail to be valid in their absence, since the written component alone need not provide the entire framework for the informal refund claim (citing American Radiator, at 114 ). Instead, the elements of the informal claim may be provided through oral communications and other writings (see New England Electric System at 644 ).
Since the request for conference, i.e., the informal claim for refund, contained references to an amended return for tax year 2005 seeking a refund in the amount of $28,739.00, by a writer who clearly believed the return had already been properly filed, the amended return and its attachments amount to writings that may be referenced in order to satisfy the elements of the informal claim. Once the amended return was provided to the Division, for what petitioners believed was the second time, any defects in the informal claim were remedied.
D. The Tax Appeals Tribunal has also long recognized the same principles relying on federal case law, that an informal claim for refund may be recognized if the claim has a written component that adequately apprises the taxing authority that a refund is requested and the tax year in question. It must contain enough information to enable the taxing authority to begin an investigation of the matter if it so chooses and be filed within the statutory period for filing such a claim (Matter of Battaglia, April 18, 2002 ; Matter of Rand, May 10, 1990 ). Based on the foregoing, the statements contained on the request for conciliation conference satisfied the elements for a timely informal refund claim that was perfected with the mailing of another copy of the amended return after the statute had expired. The Division's argument that the original statement failed as a claim for refund since it was lacking supporting documentation at the time, is rejected as ignoring the principles that allow for a timely informal claim to be made, placing the Division on notice of the claim, and thereafter perfected. Accordingly, the refund claim is deemed timely.
E. The petition of Charles and Susan Van Ness is granted, the Division's Notice of Disallowance dated October 9, 2009 is canceled, and petitioners' refund in the amount of $28,739.00 plus interest shall be remitted to them.
DATED: Troy, New York, November 23, 2011
/s/ Catherine M. Bennett
ADMINISTRATIVE LAW JUDGE
Case Information:
Docket/Court: 823316, New York Division of Tax Appeals, Administrative Law Judge Determination
Date Issued: 11/23/2011
Tax Type(s): Personal Income Tax
OPINION
DETERMINATION
Petitioners, Charles and Susan Van Ness, filed a petition for redetermination of a deficiency or for refund of New York State personal income tax under Article 22 of the Tax Law for the year 2005.
On February 8, 2011 and February 24, 2011, respectively, petitioners, appearing by Buck, Danaher, Ryan and McGlenn (John J. Ryan, Jr., Esq., of counsel), and the Division of Taxation by Mark F. Volk, Esq. (David Gannon, Esq., of counsel), waived a hearing and agreed to submit the matter for determination based upon documents and briefs to be submitted by July 8, 2011, which date commenced the six-month period for issuance of this determination (Tax Law § 2010[3]). After due consideration of the evidence and arguments submitted, Catherine M. Bennett, Administrative Law Judge, renders the following determination.
ISSUE
Whether the Division of Taxation properly denied petitioners' claim for credit or refund for the 2005 tax year on the basis that the claim was filed after the applicable statute of limitations for credit or refund had expired.
FINDINGS OF FACT
1. During 2005, Charles and Susan Van Ness (petitioners), sold real property located in California that resulted in a capital gain of $425,330.00, while they were New York residents. Petitioners reported the sale of the property on their federal income tax return for 2005.
2. In April 2006, petitioners timely filed their 2005 New York State Resident Income Tax Return and included the capital gain from the sale of the California property thereon and paid the tax due of $32,191.00.
3. In 2008, petitioners were notified by the California Department of Taxation that California income tax was due for tax year 2005 attributable to the sale of the same real property.
4. A California nonresident income tax return for 2005 was prepared for petitioners by Sy Marks, petitioners' tax consultant, on or about December 31, 2008, which calculated California tax due in the amount of $34,620.00, plus interest and penalties of $8,732.00, for a total of $43,352.00. Petitioners paid this amount to California.
5. Along with the California nonresident return, Mr. Marks prepared an amended New York State resident income tax return, Form IT-201-X, for 2005, claiming a refund of $28,739.00, representing the computed New York resident credit on the tax paid to California. The amended return was signed by petitioners and Mr. Marks on December 31, 2008, and was mailed to the Division of Taxation (Division) by Susan Van Ness by U.S. Postal Service first class mail during January 2009. Petitioners did not submit written proof of mailing.
6. A separate issue also arose concerning petitioners' 2005 New York State income tax return, which petitioners were addressing with the Division between February 2009 and October 2009. The matter in dispute was represented by assessment L-031318435, dated February 17, 2009, and was based on information furnished to the Division by the Internal Revenue Service (IRS) asserting that petitioners' adjusted gross income was underreported by $7,000.00. Updated information later provided to the Division ultimately led to the conclusion that assessment L-031318435 should be cancelled. In October 2009, petitioners executed a withdrawal of protest showing the tax due as zero.
7. Petitioners received a Correspondence Acknowledgment Notice from the Division dated February 23, 2009, indicating that correspondence had been received from petitioners or their representative regarding assessment L-031318435, concerning the tax period ending December 31, 2005. It stated that petitioners would be notified of the resolution and that no further correspondence was necessary unless petitioners were going to submit additional information or respond to an inquiry from the Division.
8. Mrs. Van Ness construed the February 23, 2009 correspondence as pertaining to the amended 2005 tax return she had mailed in January 2009.
9. Petitioners received a preprinted form entitled Request for Conciliation Conference, dated February 17, 2009, bearing assessment no. L-031318435. Their tax consultant, using the form provided, filed a request for conference bearing the following information:
Amended return filed for 2005 indicating an overpayment of refund of $28,739-plus interest please adjust your assesment [sic] accordingly
According to the date stamp borne by the document, this request for a conciliation conference was received by the Bureau of Conciliation and Mediation Services (BCMS) on April 2, 2009.
10. By correspondence dated June 15, 2009, the Division acknowledged receipt of petitioners' request for a conciliation conference, including petitioners' statement that an amended return for tax year 2005 had been filed and that petitioners were requesting a refund in the amount of $28,739.00. The correspondence also indicated that the Division had no record of an amended tax return having been filed for tax year 2005.
11. Mr. Marks mailed a copy of the amended return that he had prepared for petitioners to the Division with correspondence dated September 8, 2009. According to the Division's records, the return and correspondence were received on September 14, 2009, and this was the date that the Division deemed the return first filed.
12. By Notice of Disallowance dated October 9, 2009, the Division disallowed petitioners' claim for refund in full, explaining that the deadline for filing the amended return had expired on April 15, 2009, and since the return had not been received by the Division until September 14, 2009, the refund must be denied.
SUMMARY OF THE PARTIES' POSITIONS
13. Petitioners assert that as early as February 2009, and again in April 2009, there was activity regarding petitioners' 2005 tax return. Petitioners particularly point to the request by Mr. Marks to adjust the assessment for 2005, referencing petitioners' filing of the amended return for 2005 and an overpayment of $28,739.00 plus interest, and petitioners' request for conciliation conference. Further, petitioners argue, there is no rationale to support a finding that petitioners waited over nine months from its preparation to file a return requesting a sizable refund, having already paid tax on the property transaction to both New York and California.
14. The Division maintains that petitioners' claim for refund for the 2005 tax year was not made within three years of the date the tax was paid and was filed after the statute of limitations for a refund claim had expired. The Division argues that the reference to the pending refund claim on petitioners' request for a conciliation conference, without the inclusion of supporting documentation, is insufficient.
CONCLUSIONS OF LAW
A. As relevant to this proceeding, Tax Law § 687, entitled “Limitations on credit or refund,” provides as follows:
(a) General. —
Claim for credit or refund of an overpayment of income tax shall be filed by the taxpayer within (i) three years from the time the return was filed, (ii) two years from the time the tax was paid ... whichever of such periods expires the latest, or if no return was filed, within two years from the time the tax was paid. If the claim is filed within the three year period, the amount of the credit or refund shall not exceed the portion of the tax paid within the three years immediately preceding the filing of the claim plus the period of any extension of time for filing the return .... If the claim is not filed within the three year period, but is filed within the two year period, the amount of the credit or refund shall not exceed the portion of the tax paid during the two years immediately preceding the filing of the claim....
B. Petitioners assert that their claim for refund was mailed in January 2009, in a timely fashion, and request that, in part, this be viewed with the common sense approach that a person would not likely delay filing for a near $29,000.00 refund. However, petitioners provided no written proof of such filing, having mailed the claim by U.S. Postal Service first class mail. In cases of this kind, the taxpayer bears the burden of proving that the claim for refund was timely filed (Tax Law § 689[e]). It has been well established by the Tax Appeals Tribunal that where a taxpayer uses ordinary mail, the taxpayer bears the risk that a postmark may not be timely fixed by the Postal Service or that the document may not be delivered at all (Matter of Messinger, Tax Appeals Tribunal, March 16, 1989 ; Matter of Sipam Corporation, Tax Appeals Tribunal, March 10, 1988 ). Accordingly, petitioners have not met their burden of proving that the amended return was mailed to the Division in January 2009 on the basis of Mrs. Van Ness's mere statement as to when she mailed the claim for refund.
C. Petitioners further maintain that the Division had actual notice of petitioners' claim for refund by virtue of the statement made on petitioners' April 2, 2009 request for a conciliation conference, which indicated an amended return had been filed for 2005 and that an overpayment in the amount of $28,739.00 plus interest was being sought by them. The Division counters with the argument that the mere reference to a pending refund claim absent the inclusion of supporting documentation is insufficient to be deemed timely. The issue of whether a valid claim for refund has been filed requires that this matter be viewed in conjunction with a body of federal case law that generally holds that there are circumstances under which a taxpayer's informal claim for refund may be sufficient to meet the jurisdictional prerequisite for a timely-filed claim for refund.
The leading case on this topic is United States v. Kales ( 314 US 186 [1941] ). In Kales, the taxpayer, prior to the deadline for filing a formal refund claim, wrote a letter to the Commissioner advising him that if the Internal Revenue Service revised the valuation of certain stock she would insist on a higher valuation and would claim the right to a refund. The letter did not comply with the IRS's regulations because it was not filed on the correct form. The taxpayer subsequently filed an untimely amended return that complied with the regulations for a formal claim for refund. The Court held that the letter to the Commissioner constituted a valid, although informal, claim for refund. The Court stated:
a notice fairly advising the Commissioner of the nature of the taxpayer's claims, which the Commissioner could reject because too general or because it does not comply with the formal requirements of the statute and regulations, will nevertheless be treated as a claim where formal defects and lack of specificity have been remedied by amendment filed after the lapse of the statutory period (citations omitted) (id. at 194).
A second frequently cited case holding that an informal claim for refund may, under some circumstances, stop the running of the statute of limitations on refund claims is American Radiator & Standard Sanitary Corp. v. United States ( 318 F2d 915 [1963]) . On the subject of informal claims, the American Radiator Court stated:
Informal refund claims have long been held valid [citing Kales and cases cited therein]. But they must have a written component, and should adequately apprise the Internal Revenue Service that a refund is sought and for certain years.... In addition to the writing and some form of request for a refund, the only essential is that there be made available sufficient information as to the tax and the year to enable the Internal Revenue Service to commence, if it wishes, an examination into the claim (id. at 920; citations omitted).
The United States Court of Federal Claims, in a more recent case, New England Electric System v. United States (32 Fed Cl 636 [1995]) , more succinctly sets forth the three components to an informal claim, acknowledging the longstanding principles of Kales and American Radiator, as follows:
First, an informal claim must provide the Commissioner of the IRS with notice that the taxpayer is asserting a right to a refund. Second, the claim must describe the legal and factual basis for the refund. Finally, an informal claim must have some written component (American Radiator, supra at 113-114 ). An informal claim, however, requires a court to go beyond the written component and examine the facts and circumstances which are presented in every case (id at 641 [citation omitted]).
The court concluded that although in a perfect world the informal claim would contain all the elements, it will not necessarily fail to be valid in their absence, since the written component alone need not provide the entire framework for the informal refund claim (citing American Radiator, at 114 ). Instead, the elements of the informal claim may be provided through oral communications and other writings (see New England Electric System at 644 ).
Since the request for conference, i.e., the informal claim for refund, contained references to an amended return for tax year 2005 seeking a refund in the amount of $28,739.00, by a writer who clearly believed the return had already been properly filed, the amended return and its attachments amount to writings that may be referenced in order to satisfy the elements of the informal claim. Once the amended return was provided to the Division, for what petitioners believed was the second time, any defects in the informal claim were remedied.
D. The Tax Appeals Tribunal has also long recognized the same principles relying on federal case law, that an informal claim for refund may be recognized if the claim has a written component that adequately apprises the taxing authority that a refund is requested and the tax year in question. It must contain enough information to enable the taxing authority to begin an investigation of the matter if it so chooses and be filed within the statutory period for filing such a claim (Matter of Battaglia, April 18, 2002 ; Matter of Rand, May 10, 1990 ). Based on the foregoing, the statements contained on the request for conciliation conference satisfied the elements for a timely informal refund claim that was perfected with the mailing of another copy of the amended return after the statute had expired. The Division's argument that the original statement failed as a claim for refund since it was lacking supporting documentation at the time, is rejected as ignoring the principles that allow for a timely informal claim to be made, placing the Division on notice of the claim, and thereafter perfected. Accordingly, the refund claim is deemed timely.
E. The petition of Charles and Susan Van Ness is granted, the Division's Notice of Disallowance dated October 9, 2009 is canceled, and petitioners' refund in the amount of $28,739.00 plus interest shall be remitted to them.
DATED: Troy, New York, November 23, 2011
/s/ Catherine M. Bennett
ADMINISTRATIVE LAW JUDGE
Late Refund claim
Abdelrahman, Rabie v. Commissioner, TC Summary Opinion 2011-137
ABDELRAHMAN RABIE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information: Code Sec(s):
Docket: Docket No. 2390-10S.
Date Issued: 12/12/2011
Judge: Opinion by DEAN
Reference(s): Code Sec. 6511 ; Code Sec. 6512 ; Code Sec. 6513
Syllabus
Official Tax Court Syllabus
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
Counsel
Abdelrahman Rabie, pro se.
Timothy B. Heavner, for respondent.
Opinion by DEAN
This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year at issue, and Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in petitioner's Federal income tax of $11,987 for 2005. Respondent also determined for 2005 an addition to tax for failure to file timely under section 6651(a)(1) of $395.77 and an addition to tax for failure to pay timely under section 6651(a)(2) of $351.80.
The parties agree that petitioner has overpaid his Federal income tax for 2005. After other concessions by the parties, the only issue for decision is whether petitioner is entitled to a refund or credit of Federal income tax for 2005.
Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits received in evidence are incorporated herein by reference. Petitioner resided in Virginia when the petition was filed.
Background
Petitioner requested on an undated Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, and was granted an extension of time to file his 2005 Federal income tax return until October 15, 2006. On Form 4868 he estimated his total tax liability for 2005 to be $8,320 and his total 2005 payments as $10,229. The “Balance due” to the Internal Revenue Service (IRS), shown on line 6 of the Form 4868, should be obtained by subtracting total payments from the total estimated tax liability. Petitioner wrote "$1,909” on line 6.
Petitioner sent the IRS a letter dated September 23, 2008, in which he apologized for the “delay” in filing his Federal income tax returns for 2005 and 2006. He requested in the letter a further extension of time, until December 31, 2008, to file his returns and stated that “I had [sic] always received refunds and I know that it will be the same for the [sic] 2005 and 2006.”
Respondent mailed petitioner the notice of deficiency in this case on October 26, 2009.
The parties agree that before October 15, 2009, petitioner made no formal claim for refund on a Form 1040, U.S. Individual Income Tax Return, or a Form 1040X, Amended U.S. Individual Income Tax Return, for taxable year 2005. IRS records indicate that on February 1, 2010, a return for 2005 was filed for petitioner. On September 20, 2010, petitioner mailed the IRS a “corrected” return for 2005. The parties agree that with the “corrected” return petitioner has now filed an accurate Form 1040 for 2005.
Discussion
Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer has the burden of proving that those determinations are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933). In some cases the burden of proof with respect to relevant factual issues may shift to the Commissioner under section 7491(a). As there is no dispute as to a factual issue in this case, section 7491(a) is not applicable.
A taxpayer seeking a refund of overpaid taxes ordinarily must file a timely claim for a refund with the IRS that meets the requirements of section 6511. That section contains two separate provisions for determining the timeliness of a refund claim: The taxpayer must file a claim for a refund “within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.” Sec. 6511(a)(1).
Section 6511 also defines two “lookback” periods: if the claim is filed “within 3 years from the time the return was filed”, then the taxpayer is entitled to a refund of the portion of the tax paid within the 3 years immediately preceding the filing of the claim plus the period of any extension of time for filing the return. Sec. 6511(b)(2)(A). If the claim is not filed within that 3-year period, then the taxpayer is entitled to a refund of only that “portion of the tax paid during the 2 years immediately preceding the filing of the claim.” Sec. 6511(b)(2)(B). If no claim has been filed the refund cannot exceed the amount that would be allowable under section 6511(b)(2)(A) or (B) if a claim was filed on the date the refund is allowed. Sec. 6511(b)(2)(C).
Petitioner argues that either his undated Form 4868 or his previously described September 23, 2008, letter to respondent was an informal claim for refund within the prescribed time limits of section 6511.
The purpose of a claim for refund is to put the Commissioner on notice that the taxpayer is asserting a right with respect to Newton v. United States, 143 Ct. Cl. 293 [2 AFTR 2d 5272], an overpayment of tax. 163 F. Supp. 614, 618 [2 AFTR 2d 5272] (1958). The Supreme Court has held that a taxpayer's notice to the IRS that fairly advises it of the nature of the taxpayer's claim which the IRS could reject because it is too general or because it does not comply with the formal requirements of the statute and regulations issued thereunder will still be treated as a claim where the defects and lack of specificity have been remedied by amendment filed after the lapse of the statutory period. United States v. Kales, 314 U.S. 186, 194 [27 AFTR 309] (1941) (and cases cited thereat).
Each case must be decided on its own facts and circumstances in determining whether the IRS should have focused attention on the merits of the “particular dispute” raised by the informal claim. Angelus Milling Co. v. Commissioner, 325 U.S. 293, 297 [33 AFTR 837] (1945). It is not enough, however, that the facts supporting the claim reach the IRS in some “roundabout” fashion. Id. “The evidence should be clear that the Commissioner understood the specific claim that was made even though there was a departure from form in its submission.” Id. at 297-298.
In Kaffenberger v. United States, 314 F.3d 944, 955-956 [91 AFTR 2d 2003-374] (8th Cir. 2003), under the peculiar facts of that case, the court held a Form 4868 satisfied the “written component” requirement of an According to the court in Kaffenberger, the Form informal claim. 4868, along with the other communications between the taxpayer and the IRS, provided the Commissioner sufficient notice that the taxpayer was claiming a credit to be applied to a subsequent year's tax liability.
In Khinda v. Commissioner, T.C. Memo. 1994-617 [1994 RIA TC Memo ¶94,617], this Court stated that Form 4868 is based on the information available to the taxpayer when he sends it in, so that he may obtain an automatic extension of time in which to file an individual income tax return. The Form 4868 does not purport to be a claim for refund, the Court said. And unlike a Form 1040, the Form 4868 does not contain a line on which to enter an amount to be refunded, only a line on which to indicate the balance due.
The Court finds that, under the facts and circumstances of this case, the IRS could not have been expected to determine an overpayment of tax based only on the estimate of petitioner's income tax liability provided by him on the Form 4868.
In United States v. Kales, supra at 194, the taxpayer wrote to the IRS within the time allowed for filing a claim objecting to action by the IRS with respect to its determination of an overvaluation of stock in a previously filed return. She stated in her letter that if the IRS took the threatened action, she would show that the stock had been undervalued and she would claim a right to a refund. When the IRS nevertheless took the action complained of, the taxpayer filed a formal claim stated to be an “amendment” of the claim in her letter. The Court found that the IRS could not have been in doubt “that she was setting forth her right to a refund in the event” it took the action Id. at 195. Her letter was about which she complained. considered an informal claim for refund.
In contrast, in Martin v. United States, 833 F.2d 655 [60 AFTR 2d 87-6037] (7th Cir. 1987), the IRS proposed to determine a deficiency with respect to a previously filed estate tax return. The estate's representative sent the IRS a 37-page protest letter, on the last page of which there was a demand for a refund of tax. The court stated that to be considered an adequate informal claim, the writing must be “sufficient to apprise the IRS that a refund is sought and to focus attention on the merits of the dispute so that an examination of the claim may be commenced if the IRS wishes.” Id. at 660. The court found that the letter did not qualify as an informal claim because the taxpayer failed to specify why a refund was due, the demand was made before the issue of refund seemed ripe, and it failed to put the IRS on notice to conduct an administrative review.
Petitioner's letter of September 23, 2008, asks for additional time to file his 2005 and 2006 returns and states that he always receives refunds and he “knows that it will be the same” for the 2005 and 2006 tax years.
Petitioner's letter of September 23, 2008, was premature and unspecific. There was no “dispute” to which the attention of the IRS could have been drawn. Petitioner himself had not yet computed his tax liability. In addition, the Court finds that petitioner's letter "[failed] to satisfy the most basic requirement of a claim—advising the Commissioner that a refund See Hollie v. Commissioner, 73 T.C. 1198, [was] being sought.” 1214 (1980) (and cases cited thereat). The letter stated that petitioner “had always received refunds” and expresses the opinion that “it will be the same” for 2005; but a refund was not requested. The IRS is not required to use circumstantial evidence or to conduct an independent investigation to determine whether a taxpayer is asking for a refund. 1 Id. at 1215; see also Kuehn v. United States, 202 Ct. Cl. 473, 480 [32 AFTR 2d 73-5376] F.2d 1319, 1322 (1973).
A taxpayer seeking a refund in this Court, however, does not need to actually file a claim for refund with the IRS. He need only show that the tax to be refunded was paid during the applicable lookback period. Sec. 6512(b). In this case, the applicable lookback period is set forth in section 6512(b)(3)(B), which provides that this Court cannot award a refund of any overpaid taxes unless it first determines that the taxes were paid “within the period which would be applicable under section 6511(b)(2) *** if on the date of the mailing of the notice of deficiency a claim had been filed (whether or not filed) stating the grounds upon which the Tax Court finds that there is an overpayment”.
Section 6512(b)(3)(B) treats delinquent filers of income tax returns less favorably than those who have filed timely. Whereas timely filers are most likely to have the opportunity to seek a refund in the event they are drawn into Tax Court litigation, a delinquent filer's entitlement to a refund in Tax Court depends on the date of the mailing of the notice of deficiency. Commissioner v. Lundy, 516 U.S. 235, 245 [77 AFTR 2d 96-406] (1996). Section 6512(b)(3)(B) directs the Tax Court to measure the lookback period from the date on which the notice of deficiency is mailed and not the date on which the taxpayer actually files a claim for refund. Id. In the case of delinquent filers, section 6512(b)(3)(B) establishes only a 2-year lookback period, so the delinquent filer is not assured the opportunity to seek a refund in this Court. Id. If the notice of deficiency is mailed more than 2 years after the taxes were paid, the Court lacks jurisdiction to award the taxpayer a refund. Id.
Neither the amendment of section 6512(b)(3), effective for tax years that ended after August 5, 1997, nor its legislative history permits the Court to deviate in this case from the holding in Commissioner v. Lundy, supra at 245. See Taxpayer Relief Act of 1997, Pub. L. 105-34, sec. 1282(a) and (b), 111 Stat. 1037-1038; see also, e.g., H. Conf. Rept. 105-220, at 577- 578 (1997), 1997-4 C.B. 1457, 2047-2048. Because the notice of deficiency was not mailed to petitioner during the third year after the due date for filing the return, with extension, and no return was filed before the notice was sent, petitioner is not entitled to a 3-year lookback period.
Petitioner's 2005 withheld taxes are deemed to have been paid on April 15, 2006. See sec. 6513(b)(1). Because the notice of deficiency was mailed on October 26, 2009, more than 3 years after deemed payment of the withheld taxes, even the 3-year lookback period, were it available, would not help petitioner. 2
The Court sustains respondent's position that petitioner is not entitled to a refund of tax paid for 2005. See Commissioner v. Lundy, supra at 245.
To reflect the foregoing, Decision will be entered under Rule 155.
1
Petitioner's Form 4868 contains no information that would transform the Sept. 23, 2008, letter into an acceptable informal claim for refund.
2
Petitioner's 2005 tax return filed on Feb. 1, 2010, is a claim for refund but was clearly not filed within 2 years from the time the tax was paid. See secs. 6511(b)(2)(B), 6513(b)(1).
ABDELRAHMAN RABIE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information: Code Sec(s):
Docket: Docket No. 2390-10S.
Date Issued: 12/12/2011
Judge: Opinion by DEAN
Reference(s): Code Sec. 6511 ; Code Sec. 6512 ; Code Sec. 6513
Syllabus
Official Tax Court Syllabus
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
Counsel
Abdelrahman Rabie, pro se.
Timothy B. Heavner, for respondent.
Opinion by DEAN
This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year at issue, and Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in petitioner's Federal income tax of $11,987 for 2005. Respondent also determined for 2005 an addition to tax for failure to file timely under section 6651(a)(1) of $395.77 and an addition to tax for failure to pay timely under section 6651(a)(2) of $351.80.
The parties agree that petitioner has overpaid his Federal income tax for 2005. After other concessions by the parties, the only issue for decision is whether petitioner is entitled to a refund or credit of Federal income tax for 2005.
Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits received in evidence are incorporated herein by reference. Petitioner resided in Virginia when the petition was filed.
Background
Petitioner requested on an undated Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, and was granted an extension of time to file his 2005 Federal income tax return until October 15, 2006. On Form 4868 he estimated his total tax liability for 2005 to be $8,320 and his total 2005 payments as $10,229. The “Balance due” to the Internal Revenue Service (IRS), shown on line 6 of the Form 4868, should be obtained by subtracting total payments from the total estimated tax liability. Petitioner wrote "$1,909” on line 6.
Petitioner sent the IRS a letter dated September 23, 2008, in which he apologized for the “delay” in filing his Federal income tax returns for 2005 and 2006. He requested in the letter a further extension of time, until December 31, 2008, to file his returns and stated that “I had [sic] always received refunds and I know that it will be the same for the [sic] 2005 and 2006.”
Respondent mailed petitioner the notice of deficiency in this case on October 26, 2009.
The parties agree that before October 15, 2009, petitioner made no formal claim for refund on a Form 1040, U.S. Individual Income Tax Return, or a Form 1040X, Amended U.S. Individual Income Tax Return, for taxable year 2005. IRS records indicate that on February 1, 2010, a return for 2005 was filed for petitioner. On September 20, 2010, petitioner mailed the IRS a “corrected” return for 2005. The parties agree that with the “corrected” return petitioner has now filed an accurate Form 1040 for 2005.
Discussion
Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer has the burden of proving that those determinations are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933). In some cases the burden of proof with respect to relevant factual issues may shift to the Commissioner under section 7491(a). As there is no dispute as to a factual issue in this case, section 7491(a) is not applicable.
A taxpayer seeking a refund of overpaid taxes ordinarily must file a timely claim for a refund with the IRS that meets the requirements of section 6511. That section contains two separate provisions for determining the timeliness of a refund claim: The taxpayer must file a claim for a refund “within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.” Sec. 6511(a)(1).
Section 6511 also defines two “lookback” periods: if the claim is filed “within 3 years from the time the return was filed”, then the taxpayer is entitled to a refund of the portion of the tax paid within the 3 years immediately preceding the filing of the claim plus the period of any extension of time for filing the return. Sec. 6511(b)(2)(A). If the claim is not filed within that 3-year period, then the taxpayer is entitled to a refund of only that “portion of the tax paid during the 2 years immediately preceding the filing of the claim.” Sec. 6511(b)(2)(B). If no claim has been filed the refund cannot exceed the amount that would be allowable under section 6511(b)(2)(A) or (B) if a claim was filed on the date the refund is allowed. Sec. 6511(b)(2)(C).
Petitioner argues that either his undated Form 4868 or his previously described September 23, 2008, letter to respondent was an informal claim for refund within the prescribed time limits of section 6511.
The purpose of a claim for refund is to put the Commissioner on notice that the taxpayer is asserting a right with respect to Newton v. United States, 143 Ct. Cl. 293 [2 AFTR 2d 5272], an overpayment of tax. 163 F. Supp. 614, 618 [2 AFTR 2d 5272] (1958). The Supreme Court has held that a taxpayer's notice to the IRS that fairly advises it of the nature of the taxpayer's claim which the IRS could reject because it is too general or because it does not comply with the formal requirements of the statute and regulations issued thereunder will still be treated as a claim where the defects and lack of specificity have been remedied by amendment filed after the lapse of the statutory period. United States v. Kales, 314 U.S. 186, 194 [27 AFTR 309] (1941) (and cases cited thereat).
Each case must be decided on its own facts and circumstances in determining whether the IRS should have focused attention on the merits of the “particular dispute” raised by the informal claim. Angelus Milling Co. v. Commissioner, 325 U.S. 293, 297 [33 AFTR 837] (1945). It is not enough, however, that the facts supporting the claim reach the IRS in some “roundabout” fashion. Id. “The evidence should be clear that the Commissioner understood the specific claim that was made even though there was a departure from form in its submission.” Id. at 297-298.
In Kaffenberger v. United States, 314 F.3d 944, 955-956 [91 AFTR 2d 2003-374] (8th Cir. 2003), under the peculiar facts of that case, the court held a Form 4868 satisfied the “written component” requirement of an According to the court in Kaffenberger, the Form informal claim. 4868, along with the other communications between the taxpayer and the IRS, provided the Commissioner sufficient notice that the taxpayer was claiming a credit to be applied to a subsequent year's tax liability.
In Khinda v. Commissioner, T.C. Memo. 1994-617 [1994 RIA TC Memo ¶94,617], this Court stated that Form 4868 is based on the information available to the taxpayer when he sends it in, so that he may obtain an automatic extension of time in which to file an individual income tax return. The Form 4868 does not purport to be a claim for refund, the Court said. And unlike a Form 1040, the Form 4868 does not contain a line on which to enter an amount to be refunded, only a line on which to indicate the balance due.
The Court finds that, under the facts and circumstances of this case, the IRS could not have been expected to determine an overpayment of tax based only on the estimate of petitioner's income tax liability provided by him on the Form 4868.
In United States v. Kales, supra at 194, the taxpayer wrote to the IRS within the time allowed for filing a claim objecting to action by the IRS with respect to its determination of an overvaluation of stock in a previously filed return. She stated in her letter that if the IRS took the threatened action, she would show that the stock had been undervalued and she would claim a right to a refund. When the IRS nevertheless took the action complained of, the taxpayer filed a formal claim stated to be an “amendment” of the claim in her letter. The Court found that the IRS could not have been in doubt “that she was setting forth her right to a refund in the event” it took the action Id. at 195. Her letter was about which she complained. considered an informal claim for refund.
In contrast, in Martin v. United States, 833 F.2d 655 [60 AFTR 2d 87-6037] (7th Cir. 1987), the IRS proposed to determine a deficiency with respect to a previously filed estate tax return. The estate's representative sent the IRS a 37-page protest letter, on the last page of which there was a demand for a refund of tax. The court stated that to be considered an adequate informal claim, the writing must be “sufficient to apprise the IRS that a refund is sought and to focus attention on the merits of the dispute so that an examination of the claim may be commenced if the IRS wishes.” Id. at 660. The court found that the letter did not qualify as an informal claim because the taxpayer failed to specify why a refund was due, the demand was made before the issue of refund seemed ripe, and it failed to put the IRS on notice to conduct an administrative review.
Petitioner's letter of September 23, 2008, asks for additional time to file his 2005 and 2006 returns and states that he always receives refunds and he “knows that it will be the same” for the 2005 and 2006 tax years.
Petitioner's letter of September 23, 2008, was premature and unspecific. There was no “dispute” to which the attention of the IRS could have been drawn. Petitioner himself had not yet computed his tax liability. In addition, the Court finds that petitioner's letter "[failed] to satisfy the most basic requirement of a claim—advising the Commissioner that a refund See Hollie v. Commissioner, 73 T.C. 1198, [was] being sought.” 1214 (1980) (and cases cited thereat). The letter stated that petitioner “had always received refunds” and expresses the opinion that “it will be the same” for 2005; but a refund was not requested. The IRS is not required to use circumstantial evidence or to conduct an independent investigation to determine whether a taxpayer is asking for a refund. 1 Id. at 1215; see also Kuehn v. United States, 202 Ct. Cl. 473, 480 [32 AFTR 2d 73-5376] F.2d 1319, 1322 (1973).
A taxpayer seeking a refund in this Court, however, does not need to actually file a claim for refund with the IRS. He need only show that the tax to be refunded was paid during the applicable lookback period. Sec. 6512(b). In this case, the applicable lookback period is set forth in section 6512(b)(3)(B), which provides that this Court cannot award a refund of any overpaid taxes unless it first determines that the taxes were paid “within the period which would be applicable under section 6511(b)(2) *** if on the date of the mailing of the notice of deficiency a claim had been filed (whether or not filed) stating the grounds upon which the Tax Court finds that there is an overpayment”.
Section 6512(b)(3)(B) treats delinquent filers of income tax returns less favorably than those who have filed timely. Whereas timely filers are most likely to have the opportunity to seek a refund in the event they are drawn into Tax Court litigation, a delinquent filer's entitlement to a refund in Tax Court depends on the date of the mailing of the notice of deficiency. Commissioner v. Lundy, 516 U.S. 235, 245 [77 AFTR 2d 96-406] (1996). Section 6512(b)(3)(B) directs the Tax Court to measure the lookback period from the date on which the notice of deficiency is mailed and not the date on which the taxpayer actually files a claim for refund. Id. In the case of delinquent filers, section 6512(b)(3)(B) establishes only a 2-year lookback period, so the delinquent filer is not assured the opportunity to seek a refund in this Court. Id. If the notice of deficiency is mailed more than 2 years after the taxes were paid, the Court lacks jurisdiction to award the taxpayer a refund. Id.
Neither the amendment of section 6512(b)(3), effective for tax years that ended after August 5, 1997, nor its legislative history permits the Court to deviate in this case from the holding in Commissioner v. Lundy, supra at 245. See Taxpayer Relief Act of 1997, Pub. L. 105-34, sec. 1282(a) and (b), 111 Stat. 1037-1038; see also, e.g., H. Conf. Rept. 105-220, at 577- 578 (1997), 1997-4 C.B. 1457, 2047-2048. Because the notice of deficiency was not mailed to petitioner during the third year after the due date for filing the return, with extension, and no return was filed before the notice was sent, petitioner is not entitled to a 3-year lookback period.
Petitioner's 2005 withheld taxes are deemed to have been paid on April 15, 2006. See sec. 6513(b)(1). Because the notice of deficiency was mailed on October 26, 2009, more than 3 years after deemed payment of the withheld taxes, even the 3-year lookback period, were it available, would not help petitioner. 2
The Court sustains respondent's position that petitioner is not entitled to a refund of tax paid for 2005. See Commissioner v. Lundy, supra at 245.
To reflect the foregoing, Decision will be entered under Rule 155.
1
Petitioner's Form 4868 contains no information that would transform the Sept. 23, 2008, letter into an acceptable informal claim for refund.
2
Petitioner's 2005 tax return filed on Feb. 1, 2010, is a claim for refund but was clearly not filed within 2 years from the time the tax was paid. See secs. 6511(b)(2)(B), 6513(b)(1).
Tuesday, August 9, 2011
Hand deliver hearing request
PMTA 2011-014
FULL TEXT:
CC:PA:B03:EKMezheritsky
POSTN-155264-07
Via Facsimile, Regular Mail
date:
March 12, 2008
to:
DIRECTOR, TAX POLICY & PROCEDURE, COLLECTION & PROCESSING, APPEALS DIRECTOR, COLLECTION POLICY, SBSE
from:
Mitchel S. Hyman, Senior Technician Reviewer
(Procedure & Administration)
subject:
Timeliness of Collection Due Process Hearing Requests Hand Delivered to Taxpayer Assistance Centers
The purpose of this memorandum is to clarify how the IRS should treat Collection Due Process (CDP) hearing requests where the taxpayer, rather than sending the request to the address listed on the CDP Notice, hand carries the request to an IRS employee in a local Taxpayer Assistance Center (TAC). The issue recently arose in a Tax Court case in which we decided to concede that a CDP hearing request that was hand delivered to a local TAC within the 30-day filing period was a timely hearing request. In light of that case, we are informing you of our position that so long as the taxpayer hand carries the request to an IRS employee in a local TAC no later than 30 days from the date of the CDP notice with respect to hearing requests regarding levies, and no later than 30 days after the expiration of five business days after the date the Notice of Federal Tax Lien (NFTL) is filed with respect to a hearing request regarding an NFTL, the hearing request should be considered timely.
A hearing request regarding a NFTL must be submitted within the 30-day period that commences the day after the end of the five-business-day period following the filing of the NFTL. I.R.C. § 6320(a)(2). Hearing requests regarding levies must be submitted within the 30-day period commencing the day after the date of the CDP levy notice, provided the notice was mailed on or before that date. I.R.C. § 6330(a)(2).
Any written request for a CDP hearing “must be sent or hand delivered (if permitted) to the IRS office and address as directed on the CDP Notice.” Treas. Reg. §§ 301.6320-1(c)(2) Q&A-C6; 301.6330-1(c)(2) Q&A-C6. If this address (or other address authorized in the regulations) is used and the written request is postmarked within the applicable30-day response period (depending on whether the CDP hearing request is regarding a lien or a levy), then in accordance with section 7502, the request will be considered timely filed even if it is not received by the IRS office that issued the CDP Notice until after the 30-day period. Treas. Reg. §§ 301.6320-1(c)(2) Q&A-C4, 301.6330-1(c)(2) Q&A-C4. The address listed on the CDP Notice is typically the location of the IRS campus location closest to the taxpayer's residence or place of business.
Sections 6320 and 6330, and the regulations promulgated pursuant to those statutes, would appear to require timely mailing to the office indicated on the CDP Notice. The regulations under section 6091, however, permit more flexibility with respect to hand carried hearing requests. Section 6091 sets forth the places for filing returns and other documents. The regulations under section 6091 provide a special rule for hand carried documents other than returns. Under §§ 301.6091-1(b)(1) and (2), if a document other than a return is hand carried, and if the document is otherwise required to be filed with a service center, such document may be filed with any person assigned the responsibility to receive hand carried returns in the local IRS office that serves either the legal residence or principal place of business of such person, or the principal place of business or principal office or agency of the corporation. Further, under § 301.6091-1(c), a document will be considered hand carried if it is brought to any person assigned the responsibility to receive hand carried returns in the local IRS office by either the taxpayer or the taxpayer's agent, such as a member of the taxpayer's family, an employee of the taxpayer, the taxpayer's attorney, accountant, or tax advisor, or messengers employed by the taxpayer. Finally, under § 301.6091-1(c), a return or document will not be considered to be hand carried if it is sent to the IRS through the U.S. Mail.
We conclude that the term “service center” under §§ 301.6091-1(b)(1) and (2) should be interpreted as referring to the campuses where the CDP hearing requests are currently sent. Although technically the CDP hearing request is not sent to a traditional “service center,” and instead is sent to a “campus,” a narrow interpretation of the term only serves to hinder the objective of the regulation. The term service center should be broadly interpreted to include regional or centralized offices such as those that receive and process returns, refund claims, hearing requests, etc. A “campus” may be characterized as a service center for purposes of these regulations.
TAC employees have even been authorized to receive tax returns that have been hand delivered. IRM 21.3.4.8(1). Therefore, when a CDP hearing request is required to be filed at a campus, but is instead hand carried to a local TAC employee, the request should be deemed timely so long as the date of delivery is not after the applicable 30-day filing period, even though the hearing request is not actually filed with the campus as directed on the CDP Notice. Upon receiving a hand carried request, the TAC employee should date stamp and initial the hearing request, and then forward the hearing request, preferably by fax, to the proper filing location. All CDP hearing requests received by the local IRS TAC should be promptly forwarded to the campus in order to ensure that unauthorized collection action is not taken. 1
Any questions regarding this memorandum should be directed to Procedure and Administration Attorney Elizabeth Mezheritsky who can be reached at (202) 622- 3600.
cc: Division Counsel
(Small Business/Self-Employed)
National Taxpayer Advocate Counsel
1
Note, however, that a CDP hearing request is not properly filed if mailed to the local IRS TAC office. If the request is received by mail by the TAC, the request is not filed until received by the proper campus. As with hand-carried requests, TAC should promptly forward all requests received by mail to the proper filing location, preferably by fax.
FULL TEXT:
CC:PA:B03:EKMezheritsky
POSTN-155264-07
Via Facsimile, Regular Mail
date:
March 12, 2008
to:
DIRECTOR, TAX POLICY & PROCEDURE, COLLECTION & PROCESSING, APPEALS DIRECTOR, COLLECTION POLICY, SBSE
from:
Mitchel S. Hyman, Senior Technician Reviewer
(Procedure & Administration)
subject:
Timeliness of Collection Due Process Hearing Requests Hand Delivered to Taxpayer Assistance Centers
The purpose of this memorandum is to clarify how the IRS should treat Collection Due Process (CDP) hearing requests where the taxpayer, rather than sending the request to the address listed on the CDP Notice, hand carries the request to an IRS employee in a local Taxpayer Assistance Center (TAC). The issue recently arose in a Tax Court case in which we decided to concede that a CDP hearing request that was hand delivered to a local TAC within the 30-day filing period was a timely hearing request. In light of that case, we are informing you of our position that so long as the taxpayer hand carries the request to an IRS employee in a local TAC no later than 30 days from the date of the CDP notice with respect to hearing requests regarding levies, and no later than 30 days after the expiration of five business days after the date the Notice of Federal Tax Lien (NFTL) is filed with respect to a hearing request regarding an NFTL, the hearing request should be considered timely.
A hearing request regarding a NFTL must be submitted within the 30-day period that commences the day after the end of the five-business-day period following the filing of the NFTL. I.R.C. § 6320(a)(2). Hearing requests regarding levies must be submitted within the 30-day period commencing the day after the date of the CDP levy notice, provided the notice was mailed on or before that date. I.R.C. § 6330(a)(2).
Any written request for a CDP hearing “must be sent or hand delivered (if permitted) to the IRS office and address as directed on the CDP Notice.” Treas. Reg. §§ 301.6320-1(c)(2) Q&A-C6; 301.6330-1(c)(2) Q&A-C6. If this address (or other address authorized in the regulations) is used and the written request is postmarked within the applicable30-day response period (depending on whether the CDP hearing request is regarding a lien or a levy), then in accordance with section 7502, the request will be considered timely filed even if it is not received by the IRS office that issued the CDP Notice until after the 30-day period. Treas. Reg. §§ 301.6320-1(c)(2) Q&A-C4, 301.6330-1(c)(2) Q&A-C4. The address listed on the CDP Notice is typically the location of the IRS campus location closest to the taxpayer's residence or place of business.
Sections 6320 and 6330, and the regulations promulgated pursuant to those statutes, would appear to require timely mailing to the office indicated on the CDP Notice. The regulations under section 6091, however, permit more flexibility with respect to hand carried hearing requests. Section 6091 sets forth the places for filing returns and other documents. The regulations under section 6091 provide a special rule for hand carried documents other than returns. Under §§ 301.6091-1(b)(1) and (2), if a document other than a return is hand carried, and if the document is otherwise required to be filed with a service center, such document may be filed with any person assigned the responsibility to receive hand carried returns in the local IRS office that serves either the legal residence or principal place of business of such person, or the principal place of business or principal office or agency of the corporation. Further, under § 301.6091-1(c), a document will be considered hand carried if it is brought to any person assigned the responsibility to receive hand carried returns in the local IRS office by either the taxpayer or the taxpayer's agent, such as a member of the taxpayer's family, an employee of the taxpayer, the taxpayer's attorney, accountant, or tax advisor, or messengers employed by the taxpayer. Finally, under § 301.6091-1(c), a return or document will not be considered to be hand carried if it is sent to the IRS through the U.S. Mail.
We conclude that the term “service center” under §§ 301.6091-1(b)(1) and (2) should be interpreted as referring to the campuses where the CDP hearing requests are currently sent. Although technically the CDP hearing request is not sent to a traditional “service center,” and instead is sent to a “campus,” a narrow interpretation of the term only serves to hinder the objective of the regulation. The term service center should be broadly interpreted to include regional or centralized offices such as those that receive and process returns, refund claims, hearing requests, etc. A “campus” may be characterized as a service center for purposes of these regulations.
TAC employees have even been authorized to receive tax returns that have been hand delivered. IRM 21.3.4.8(1). Therefore, when a CDP hearing request is required to be filed at a campus, but is instead hand carried to a local TAC employee, the request should be deemed timely so long as the date of delivery is not after the applicable 30-day filing period, even though the hearing request is not actually filed with the campus as directed on the CDP Notice. Upon receiving a hand carried request, the TAC employee should date stamp and initial the hearing request, and then forward the hearing request, preferably by fax, to the proper filing location. All CDP hearing requests received by the local IRS TAC should be promptly forwarded to the campus in order to ensure that unauthorized collection action is not taken. 1
Any questions regarding this memorandum should be directed to Procedure and Administration Attorney Elizabeth Mezheritsky who can be reached at (202) 622- 3600.
cc: Division Counsel
(Small Business/Self-Employed)
National Taxpayer Advocate Counsel
1
Note, however, that a CDP hearing request is not properly filed if mailed to the local IRS TAC office. If the request is received by mail by the TAC, the request is not filed until received by the proper campus. As with hand-carried requests, TAC should promptly forward all requests received by mail to the proper filing location, preferably by fax.
Friday, April 1, 2011
Deadline Looms for Same Sex Couples 2007 Amended Returns
There have been major developments in the tax law affecting same sex couples in the last year. The attitude that I have as a tax advisor is "It is what it is. Deal with it." Whether its fair or makes sense is an interesting question, but not a practical one. When I look at the developments my thought is "What should Robin and Terry do ?" Robin and Terry are a couple of indeterminate gender and relationship status whose role in life is to help me avoid awkward pronoun problems. It's been a big year for Robin and Terry. I've decided that for this post I need to introduce some of their friends. One couple is Alex and Marty. The other is Blynn and Ashley. They are going to be busy this week because despite my advice they put off looking at their 2007 returns to see if they should amend.
Robin and Terry, at least for now, are of the same gender and were married in Massachusetts in 2007. Alex and Marty are of the same gender and are California registered domestic partners. Blynn and Ashley, who know how to act quickly when opportunity arises, are a California same sex married couple. They were married in San Francisco in 2004. Same sex marriage in California has a fairly convoluted legal history. It's arguable that in 2007, there were no same sex married couples in California, but thanks to litigation decided in 2008, now there were.
The development that affects Robin and Terry is the decision in Gill v OPM, which declared that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional. DOMA provides that for all purposes of federal law same sex marriages are not recognized. The Obama administration has announced that it will no longer defend DOMA in court, although it will still be enforced pending appeals. In order to benefit from the ultimate ruling, however, a claim must be filed while the statute of limitations is still open.
For 2007, Robin and Terry filed their returns as single. It may be that they would have paid less tax if they had been able to do a married filing joint return. I discussed the question of whether a joint return is better in a recent post, which was republished in Bay Windows. The short answer is that there are enough potential complications that you really need to do the return in order to tell. Now, Robin and Terry were required to file a joint Massachusetts return so it may be that somebody already prepared a pro-forma federal joint return for them. That's how we would have done it anyway. So one way or another Robin and Terry should compute a joint return and see if it would save them money. It's not a sure bet that Gill v OPM will ultimately be upheld, but there is quite a good chance. Unless there is a timely claim for refund, though, it won't do them any good for their 2007 return.
Alex and Marty have a situation that is more complicated, but not as uncertain. CCA 201021050 holds that the IRS will recognize California community property law as it relates to registered domestic partners. So Alex and Marty will still file as single (or head of household), but each will report half of the "community income", which includes wages. This holding is mandatory for 2010 returns and is causing a lot of heartburn. IRS has reissued a Publication 555 to help explain it. One of the subtleties in this is that not all income is community income and it is only community income that is split. The CCA made filing amended returns for open years optional.
There are a host of phase-outs and thresholds and offsets such that it is really impossible to say with certainty what will happen when you start moving income from one return to another. You have to look at each return. Let's say however that Alex and Marty don't have much other than their jobs and that Alex gets paid a ton of money by Microsoft as an independent contractor and Marty works at Starbucks. Most likely if they prepare amended returns for 2007 Alex will get a big refund and Marty will owe a lot of money. They will, however, net positive, at least on tax, if not on interest.
I did come up with a nasty idea. I've only found one other commentator that has made a similar observation:
Observation: The CCA doesn't say that if one partner amends his or her return, the other must do so as well. So, feasibly the higher income partner could amend his or her return to claim only 50% of his or her earnings while the lower income partner does nothing (i.e., doesn't file an amended return to pick up his or her 50% share). However, as withholding must also be split 50/50, it may be necessary to file both returns to get the full benefit of any savings. Also, the IRS may well require both partners to amend under these circumstances.
That comes from William Bischoff from a National Tax Advisory (NTA-743) (I can't track down a free link to it. I got it from my RIA Checkpoint subscription). I have not found anything to indicate that the IRS has done something to prevent being whipsawed on this issue. So if Alex hurries out and amends for 2007, maybe kind of forgetting to mention it to Marty, it may well be that Marty will be protected by the statute of limitations. I doubt that there is a SWAT team sitting in the service centers ready to issue timely notices of deficiency to the registered domestic partners of people filing refund claims under CCA 201021050, but I never, ever, give advice even to hypothetical clients based on the audit lottery. This particular observation is why I titled my first post on this topic Windfall for "Unmarried" Taxpayers. Other commentators that I have noted are good doobies on this issue. I guess I would say that if Alex amends, maybe Marty should too, but that maybe Marty doesn't have to be in such a rush about it. Also I should note that if Marty had income low enough to not have filed a 2007 return (or didn't file one anyway), there is no statute of limitations protecting Marty.
I won't spend much time on Blynn and Ashley. They do not represent a very large group of people. San Francisco issued same sex couples marriage licences for a brief period in 2004. That was shut down, but the law that declared it illegal was declared unconstitutional in 2008 opening a state wide window, which was closed in November 2008 by Proposition 8. So of the approximately 18,000 legally married same sex couples in California only a small number would have been arguably married in 2007 (at least in retrospect). What is interesting about them is they can either filed an amended joint 2007 return like Robin and Terry or amended 2007 community returns like Alex and Marty. The Alex and Marty option will probably work out better, but I find their situation particularly interesting so I thought I would mention it.
There is another point, which I cannot emphasize enough. If you might benefit from amending your 2007 return and you did not put it on extension,get the amended return done NOW. In CCA 201052003, it was noted that the "timely mailed, timely filed" rule only applies to returns that are "required to be filed". So an amended return to be timely must be received by the IRS before the statute expires. I'm not going to get into whether that is April 15th or April 18th. Don't take chances. Get it done this week and send it return receipt.
P.S.
Patricia Cain of the Santa Clara Same Sex Tax Blog has set me straight on one issue. The 18,000 figure that I picked up from that unimpeachable source, Wikipedia is the number of California same sex marriages in 2008. She indicates that there were over 4,000 licenses issued to same sex couples in San Francisco in 2004, but none of those marriages were valid. So it may well be that not only do Blynn and Ashley not exist, there may actually not be anybody like them. The principle would apply for 2008 amended returns, but there is no rush to get those done and it is probably better to wait for more guidance.
Ms. Cain does not like the idea of the high income partners amending and the other partner letting it slide. It's not my all time favorite idea either, I just haven't figured out why it doesn't work. You really need to go to the Santa Clara blog for a thorough treatment of same sex tax issues. They are very focused on the issue and don't get distracted by mercenaries and celebrity underwear.
Another point that I also picked up from Ms. Cain that I should have thought of myself is that the lower earning partner might be subject to a six year statute of limitations if his or her share of community income would be 25% greater than the income he or she reported..
Thursday, February 24, 2011
DOMA Unconstitutional - Practical Tips
In a quick bonus post yesterday I noted that the Obama administration has decided to no longer defend the Defense of Marriage Act against constitutional challenges. As it turns out that was a bit of an overstatement. I usually don't write on things that "everybody else" is writing about, but the tax issues surrounding same sex couples have been one of my themes. Also I offer a somewhat different perspective. My general attitude toward tax law is "It is what it is. Deal with it."
So here are some practical observations. If you are intensely interested in the nuts and bolts of same sex tax issues, I recommend you follow Santa Clara Law - Same Sex Tax. That blog may be a little West Coast focused, but I recommend it regardless. In Massachusetts the exciting decision in 2010, was Gill v OPM. The case which had several plaintiffs was managed by Gay and Lesbian Advocates and Defenders. Although GLAD's statement on the administration's decision is positive, it is less than celebratory, because the decision isn't quite as sweeping as some media reports make it out to be. There are two caveats. The first is that the administration only said it will not defend DOMA in the Second Circuit where it would be subject to "strict scrutiny". It is still possible that they may continue to defend in the First Circuit which covers Gill v OPM where the standard is "rational basis". The holding in Gill was that the law did not have a "rational basis" (In other words, it doesn't even make good nonsense). That question may be still up for grabs. The other caveat is that the executive branch will continue to enforce DOMA until it is either repealed or declared definitively unconstitutional. That means, I would think, that there will be no helpful guidance from the IRS.
The Mass Family Institute, which did not take a positive view of the administration's decision, did not focus on those nuances in its statement. It did point out that either house of Congress could appoint counsel to defend DOMA and that the Institute, itself, will seek standing to defend it in Gill v OPM. As noted by GLAD, though, the administration has not thrown in the towel on Gill, at least not yet.
The best overall coverage I have seen on the story has been from the Keen New Service.
So what should Robin and Terry do ? (Robin and Terry are a couple of indeterminate gender and marital status who were invented to help me deal with awkward pronoun problems) In today's manifestation they are of the same gender and married in Massachusetts in 2007. In 2007, they each filed returns as single. Robin is on Terry's health insurance and Terry's employer included the related costs as part of Terry's wages. If Robin and Terry were my clients, I'd be looking at their 2007 returns right now and what they could do is wait for my call. I would rough out two pro-forma amended returns. One would be a joint return of Robin and Terry. The other would be Terry, married filing separately, with income reduced by the denied medical insurance exclusion. The chance that the latter would produce a meaningful refund strikes me as improbable, but it would be pretty easy to do. I would tell them that they should extend their 2010 returns. This won't be sorted out by September (Yes I know the extended due date is in October, but I don't like being a "Last Minute Louie", as my mother used to say), but we might know more by then.
If an amended 2007 return would produce a significant refund, they should consider filing it. Let me emphasize - Consider filing it. Despite the bad advice of a legion of divorce attorneys, the decision to file a joint return is not a simple numbers exercise. Filing jointly, as I have pointed out, involves the acceptance of joint and several liability. If Robin thinks that Terry may have omitted to report substantial income then Robin should not join in an amended return.
Assuming that an amended return is a good idea, the other practical tip is to not delay too long. Here is why. For returns that are required to be filed there is a "timely mailed, timely filed" rule. The Service noted however in CCA 201052003 that an amended return is not a return that is "required" so the 2007 amended return needs to be received by the IRS before the statute expires for 2007. Please don't get into an argument about how Emancipation Day and Patriots Day might play into that determination. Get it to them sometime in March.
For later years, the thing to do is to wait and see.
POSTSCRIPT
The government followed up with a withdrawal in Gill v OPM, but the release on it from GLAD indicates some ambiguity in the statement. This in no way affects my advice on getting amended returns in to preserve rights.
So here are some practical observations. If you are intensely interested in the nuts and bolts of same sex tax issues, I recommend you follow Santa Clara Law - Same Sex Tax. That blog may be a little West Coast focused, but I recommend it regardless. In Massachusetts the exciting decision in 2010, was Gill v OPM. The case which had several plaintiffs was managed by Gay and Lesbian Advocates and Defenders. Although GLAD's statement on the administration's decision is positive, it is less than celebratory, because the decision isn't quite as sweeping as some media reports make it out to be. There are two caveats. The first is that the administration only said it will not defend DOMA in the Second Circuit where it would be subject to "strict scrutiny". It is still possible that they may continue to defend in the First Circuit which covers Gill v OPM where the standard is "rational basis". The holding in Gill was that the law did not have a "rational basis" (In other words, it doesn't even make good nonsense). That question may be still up for grabs. The other caveat is that the executive branch will continue to enforce DOMA until it is either repealed or declared definitively unconstitutional. That means, I would think, that there will be no helpful guidance from the IRS.
The Mass Family Institute, which did not take a positive view of the administration's decision, did not focus on those nuances in its statement. It did point out that either house of Congress could appoint counsel to defend DOMA and that the Institute, itself, will seek standing to defend it in Gill v OPM. As noted by GLAD, though, the administration has not thrown in the towel on Gill, at least not yet.
The best overall coverage I have seen on the story has been from the Keen New Service.
So what should Robin and Terry do ? (Robin and Terry are a couple of indeterminate gender and marital status who were invented to help me deal with awkward pronoun problems) In today's manifestation they are of the same gender and married in Massachusetts in 2007. In 2007, they each filed returns as single. Robin is on Terry's health insurance and Terry's employer included the related costs as part of Terry's wages. If Robin and Terry were my clients, I'd be looking at their 2007 returns right now and what they could do is wait for my call. I would rough out two pro-forma amended returns. One would be a joint return of Robin and Terry. The other would be Terry, married filing separately, with income reduced by the denied medical insurance exclusion. The chance that the latter would produce a meaningful refund strikes me as improbable, but it would be pretty easy to do. I would tell them that they should extend their 2010 returns. This won't be sorted out by September (Yes I know the extended due date is in October, but I don't like being a "Last Minute Louie", as my mother used to say), but we might know more by then.
If an amended 2007 return would produce a significant refund, they should consider filing it. Let me emphasize - Consider filing it. Despite the bad advice of a legion of divorce attorneys, the decision to file a joint return is not a simple numbers exercise. Filing jointly, as I have pointed out, involves the acceptance of joint and several liability. If Robin thinks that Terry may have omitted to report substantial income then Robin should not join in an amended return.
Assuming that an amended return is a good idea, the other practical tip is to not delay too long. Here is why. For returns that are required to be filed there is a "timely mailed, timely filed" rule. The Service noted however in CCA 201052003 that an amended return is not a return that is "required" so the 2007 amended return needs to be received by the IRS before the statute expires for 2007. Please don't get into an argument about how Emancipation Day and Patriots Day might play into that determination. Get it to them sometime in March.
For later years, the thing to do is to wait and see.
POSTSCRIPT
The government followed up with a withdrawal in Gill v OPM, but the release on it from GLAD indicates some ambiguity in the statement. This in no way affects my advice on getting amended returns in to preserve rights.
Sunday, February 27, 2011
Amended Returns Due to DOMA Case - What Needs to be Done
This blog is my blog so I make the rules and get to decide when I'm going to break them. One of the rules is that I don't talk about what the tax laws should or should not be. The motto is "It is what it is. Deal with it." So I observe, find humor, matter for reflection or practical implications. When an ordained trumpet player gets a $195,000 "parsonage exclusion" on his second home, I might break the rule and express an opinion. DOMA has enough people expressing opinions, so I'm sticking with the practical implications. If you would like some passionately informed opinion check out Gay and Lesbian Advocates and Defenders and the Massachusetts Family Institute. GLAD was managing the plaintiff side of Gill v OPM. MFI says it will be seeking to pick up the defense ball that the Administration has abandoned. Both organizations agree that the case is important. Other than that they appear to differ.
What I'm thinking about is what Robin and Terry should do. Robin and Terry are a couple of indeterminate gender and marital status who were invented to help me deal with awkward pronoun problems. For now they are of the same gender, live in Massachusetts and were legally married in Massachusetts in 2007. If I was writing a novel, this is the church, where they were married, but that level of detail is really not necessary. The administration's decision doesn't really change my opinion on what needs to be done. It just increases the urgency a bit, since it makes it somewhat more likely that part of DOMA will be definitively declared unconstitutional.
Robin and Terry have been filing their federal returns as single, because they are law abiding. I'm going to assume that they have foregone all the clever ideas I described in my post on the tax advantages of not being married for federal income tax purposes. So there is a chance that if they were allowed to file a joint federal return their aggregate tax liability would be lower. So can they just wait for the DOMA drama to resolve itself and then file amended returns? Not exactly. Any refund claim they make has to be filed before the statute of limitations expires for that year. Putting aside extensions that means that 2007 is looming. I'm not going to get into a fine tuned discussion of Emancipation Day and Patriots Day. The statute expires in the middle of April and the IRS has to receive the claim before the statute expires (No timely mailed, timely filed rule for amended returns). So get this taken care of soon.
How can you tell if Robin and Terry will save money by filing a joint return ? There is really only one way. You have to do the return. Someone might tell you that the wider their discrepancy in income, the more likely they are to benefit from a joint filing and conversely if their incomes are close DOMA is probably saving them income tax. Computing federal income tax, however, involves a host of thresholds, percentage computation and special limitations. To take a simple example. Robin and Terry each make $200,000 per year in salary. Robin is a brilliant stock picker. Terry is, well, an idiot when it comes to investing. Robin has $300,000 in capital gains. Terry has a $500,000 capital loss carryover that promises to last out the new millennium if Terry should live so long. On the separate returns there is a positive $300,000 on one return and a negative $3,000 on the other. On a joint return there is just the negative $3,000.
Another example. Robin makes $250,000 and Terry makes $75,000. Terry has $40,000 in medical expenses while Robin has none. Terry's medical deduction is $34,375. That would be reduced to $15,625 on a joint return because of the higher 7.5% threshold.
One more example. Robin makes $75,000 per year and Terry makes $300,000. Robin owns some rental properties that amazingly lose money. Robin actively participates in running the properties and deducts $25,000 of the losses, the other $10,000 being suspended. On a joint return with Terry they would all be suspended unless, of course, Terry owned a real estate brokerage business. Then they could all be currently deducted.
Then there is the alternative minimum tax. Don't even get me started.
This particular problem does not require the conceptual thinking of a tax attorney or an algorithm designed by a software engineer. It requires a seasoned tax preparer, preferably one with good software.
I don't think it is at all likely that DOMA being declared unconstitutional will affect the returns of people who filed as single, whose tax would be higher if they had been considered married. CCA 201021050 ruled that registered domestic partners in community property states should each report half of their own and their partners income. The ruling made amending returns for open years optional. Presumably it would be the same for a DOMA change. The optional money saving amended returns will only be available for open years, though. Only those who file claims before the statute expires on each year will be able to benefit from those years.
The other consideration in filing joint returns, which I mentioned in last week's post on this issue is joint and several liability. If Robin thinks that Terry may have omitted significant income, then Robin should not join in an amended return regardless of the apparent savings.
So that's it for the practical aspect, which I must say seems to be largely neglected in the rest of the blogosphere. I do have two reflections on the issue. The first is that I think it is fascinating that someone with a very conservative view of the Constitution should really likely the Gill decision. It is a states rights case. It has always been up to the states to say who is or is not married and DOMA is a violation of that principle. I'm still searching for the honest person that doesn't have the same opinion on Gill v OPM and Perry vs. Schwarzenegger, because of their strong belief in either states rights or federal supremacy. I think that the Constitution is generally used by activists as a drunk uses a lamppost, more for support than illumination.
The other observation, which may seem slightly mawkish, though I assure it is quite sincere, is that I feel very blessed that I live in a country where GLAD and MFI are fighting this battle with briefs and news releases. As I noted they both seem to agree that what the court has to say is very important. I don't think we are always as grateful for that type of agreement, as we should be.
Post Script
The Santa Clara Law Same Sex Tax Law Blog has posted something on the practical points of filing for a refund based on the DOMA decisions.
What I'm thinking about is what Robin and Terry should do. Robin and Terry are a couple of indeterminate gender and marital status who were invented to help me deal with awkward pronoun problems. For now they are of the same gender, live in Massachusetts and were legally married in Massachusetts in 2007. If I was writing a novel, this is the church, where they were married, but that level of detail is really not necessary. The administration's decision doesn't really change my opinion on what needs to be done. It just increases the urgency a bit, since it makes it somewhat more likely that part of DOMA will be definitively declared unconstitutional.
Robin and Terry have been filing their federal returns as single, because they are law abiding. I'm going to assume that they have foregone all the clever ideas I described in my post on the tax advantages of not being married for federal income tax purposes. So there is a chance that if they were allowed to file a joint federal return their aggregate tax liability would be lower. So can they just wait for the DOMA drama to resolve itself and then file amended returns? Not exactly. Any refund claim they make has to be filed before the statute of limitations expires for that year. Putting aside extensions that means that 2007 is looming. I'm not going to get into a fine tuned discussion of Emancipation Day and Patriots Day. The statute expires in the middle of April and the IRS has to receive the claim before the statute expires (No timely mailed, timely filed rule for amended returns). So get this taken care of soon.
How can you tell if Robin and Terry will save money by filing a joint return ? There is really only one way. You have to do the return. Someone might tell you that the wider their discrepancy in income, the more likely they are to benefit from a joint filing and conversely if their incomes are close DOMA is probably saving them income tax. Computing federal income tax, however, involves a host of thresholds, percentage computation and special limitations. To take a simple example. Robin and Terry each make $200,000 per year in salary. Robin is a brilliant stock picker. Terry is, well, an idiot when it comes to investing. Robin has $300,000 in capital gains. Terry has a $500,000 capital loss carryover that promises to last out the new millennium if Terry should live so long. On the separate returns there is a positive $300,000 on one return and a negative $3,000 on the other. On a joint return there is just the negative $3,000.
Another example. Robin makes $250,000 and Terry makes $75,000. Terry has $40,000 in medical expenses while Robin has none. Terry's medical deduction is $34,375. That would be reduced to $15,625 on a joint return because of the higher 7.5% threshold.
One more example. Robin makes $75,000 per year and Terry makes $300,000. Robin owns some rental properties that amazingly lose money. Robin actively participates in running the properties and deducts $25,000 of the losses, the other $10,000 being suspended. On a joint return with Terry they would all be suspended unless, of course, Terry owned a real estate brokerage business. Then they could all be currently deducted.
Then there is the alternative minimum tax. Don't even get me started.
This particular problem does not require the conceptual thinking of a tax attorney or an algorithm designed by a software engineer. It requires a seasoned tax preparer, preferably one with good software.
I don't think it is at all likely that DOMA being declared unconstitutional will affect the returns of people who filed as single, whose tax would be higher if they had been considered married. CCA 201021050 ruled that registered domestic partners in community property states should each report half of their own and their partners income. The ruling made amending returns for open years optional. Presumably it would be the same for a DOMA change. The optional money saving amended returns will only be available for open years, though. Only those who file claims before the statute expires on each year will be able to benefit from those years.
The other consideration in filing joint returns, which I mentioned in last week's post on this issue is joint and several liability. If Robin thinks that Terry may have omitted significant income, then Robin should not join in an amended return regardless of the apparent savings.
So that's it for the practical aspect, which I must say seems to be largely neglected in the rest of the blogosphere. I do have two reflections on the issue. The first is that I think it is fascinating that someone with a very conservative view of the Constitution should really likely the Gill decision. It is a states rights case. It has always been up to the states to say who is or is not married and DOMA is a violation of that principle. I'm still searching for the honest person that doesn't have the same opinion on Gill v OPM and Perry vs. Schwarzenegger, because of their strong belief in either states rights or federal supremacy. I think that the Constitution is generally used by activists as a drunk uses a lamppost, more for support than illumination.
The other observation, which may seem slightly mawkish, though I assure it is quite sincere, is that I feel very blessed that I live in a country where GLAD and MFI are fighting this battle with briefs and news releases. As I noted they both seem to agree that what the court has to say is very important. I don't think we are always as grateful for that type of agreement, as we should be.
Post Script
The Santa Clara Law Same Sex Tax Law Blog has posted something on the practical points of filing for a refund based on the DOMA decisions.
Monday, April 18, 2011
Deadline Passes For Some But Not All Same Sex Couples for 2007
Happy Patriots Day. Patriots Day is a legal holiday in Massachusetts. "Twas the 18th of April in seventy-five, hardly a man is now alive that remembers that famous day in year." Great poem. He left the part about the coin toss that Bill Cosby filled in later:
Suppose way back in history if you had a referee before every war, and the guy called the toss. Let’s go to the Revolutionary War."
[Referee speaking] "British call heads. It’s tails. What do you do, settlers? . . . Settlers say that during the war they will wear any color clothes that they want to, shoot from behind the rocks and trees and everywhere. Says your team has to wear red and walk in a straight line.
If you are ever in the area be sure to visit Minuteman National Park. I couldn't find a statue of the referee when I was there, but it is a big park. When the due date used to fall on Patriots Day that would extend the deadline for people who filed in Andover. Apparently nobody is filing in Andover any more. I haven't really studied the issue, but this is the end of tax season for everybody this year.
It is also the end of the line for many people being able to amend their 2007 returns. If you have an amended 2007 return that you are planning to drop in the mail today, you might want to consider seeing if there is an IRS office that will accept it within driving range. "Timely mailed is timely filed" rule does not apply to amended returns. I have been talking about amended return opportunities for same sex couples since a post in August. I went into some detail on different scenarios in a post titled Deadline Looms For Same Sex Couples Amended Returns for 2007. There are two independent events to consider. One is the IRS decision that community property laws should be considered in computing the tax of registered domestic partners. The other is the decision in Gill v OPM that declared Section 3 of the Defense of Marriage Act unconstitutional. I won't rehash the whole thing here.
The important point is that the statute of limitations has not expired for people who extended their 2007 returns. There are also other possible scenarios. If you were audited for 2007 and made a payment in the last two years, the statute might be partially open. Here is a useful link that discusses the issue. There are two important points I will emphasize. If you extended your 2007 return you don't necessarily have until October of 2011 to file an amended return. If you do not extend the three year clock does not start ticking until April 15 regardless of when you file. If you extend, however, the clock started when you actually filed, not the extended due date.
The second point is a cautionary tale that I got from Patricia Cain. I think her blog on same sex tax issues is great. This caution relates to California Registered Domestic partners. I'll use Robin and Terry. In 2006 Robin made $200,000 and Terry made $25,000. They each extended their returns, which they filed in September. In October of 2010, they amended their returns to take into account the community property laws. Robin gets a refund and Terry owes money, but the net is positive (i.e. Robin's refund is greater than Terry's deficiency). They blew the deadline which in their case was September. Oh well. Only it's a lot worse. Robin's amended return was late, but Terry is claiming an increase in gross income greater than 25%, which is a six year statute. Ouch.
My observation on this when I first noted CCA 201021050 was that the IRS had indicated that although the ruling would be mandatory for 2010, amending was optional. So why not just have Robin amend ? Ms. Cain believes that only amending for the refund return is a strategy that does not pass the smell test. I have to agree that I wouldn't plan on using it as an air freshener, but I still haven't found that it doesn't work.
I'd let things develop a little further before doing any 2008 amended returns. The people with the most interesting issues there are the 18,000 same sex California married couples. They can not amend or amend to conform to community property law like registered domestic partners. They also have the additional option, less certain but pretty good, of amending to joint returns based on the decision in Gill v OPM. On a pure bracket analysis the community property option is probably better, but there is a lot more to joint returns. If one of them has large capital gains and the other large capital losses, a joint return could be a huge benefit.
I've got a pretty big pile of other developments to work through now that things are quieting down a little at the day job. If you are following same sex tax issues be sure to keep an eye on the Santa Clara blog, it is very focused.
Friday, May 11, 2012
Estimated tax dot com bubble
Farid Farhoumand, et ux. v. Commissioner, TC Memo 2012-131 , Code Sec(s) 1211; 6330; 6654; 7491.
FARID FARHOUMAND AND SONYA S. FARHOUMAND, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information: Code Sec(s): 1211; 6330; 6654; 7491
Docket: Docket No. 12540-08L.
Date Issued: 05/8/2012
HEADNOTE
XX.
Reference(s): Code Sec. 1211; Code Sec. 6330; Code Sec. 6654; Code Sec. 7491
Syllabus
Official Tax Court Syllabus
Counsel
Arthur H. Boelter, for petitioners.
Melissa L. Hilty, for respondent.
MEMORANDUM OPINION
MARVEL, Judge: Pursuant to section 6330(d), petitioners seek review of respondent's determination to proceed with the collection of their 2000 Federal income tax liability. 1 This matter was submitted fully stipulated under Rule 122 on
January 31, 2011. Subsequently, on January 19, 2012, respondent filed a motion to dismiss for lack of jurisdiction which remains before the Court and which, if granted, could eliminate the need for any further ruling on the merits pursuant to the Rule 122 submission. The issues for decision are: (1) whether the Court has jurisdiction to consider petitioners' challenge to the section 6654(a) addition to tax for failure to pay estimated tax for 2000 (section 6654(a) addition to tax); (2) whether petitioners are entitled to a waiver of the section 6654(a) addition to tax for 2000; and (3) whether respondent abused his discretion when he sustained the proposed levy.
Background
As noted above, the parties submitted this case fully stipulated under Rule 122. We incorporate the stipulated facts herein by this reference. Petitioners resided in Indiana when they filed their petition.
Farid Farhoumand is a stockbroker and investment consultant. His wife, Sonya S. Farhoumand, does not work outside the home.
At various times throughout 2000 Mr. Farhoumand purchased and sold stocks. His stock transactions generated a net loss of approximately $3 million. When Mr. Farhoumand met with a tax adviser to have petitioners' 2000 return prepared, he discovered that they could deduct only $3,000 of the capital losses against ordinary income because of the limitations on claiming capital losses.See sec. 1211(b).
On November 2, 2001, petitioners filed their joint Form 1040, U.S. Individual Income Tax Return, for 2000, reporting income of $1,487,577 and tax due of $589,211. Petitioners' total estimated income tax for 2000 was $502,604, to be paid in quarterly installments of $125,651 each on April 15, June 15, and September 15, 2000, and January 15, 2001. Petitioners failed to make any of those payments.
The Form 4340, Certificate of Assessments, Payments and Other Specified Matters, for petitioners' tax account for 2000 shows the following assessments and payments or credits, as of December 4, 2006:
Date Explanation Assessments
Payments/Credits
11/2/01 Prompt assessment $559,026.00 ---
11/2/01 Sec. 6651(a)(1) addition to tax 125,780.85 ---
11/2/01 Sec. 6654(a) addition to tax 30,066.88 ---
11/2/01 Interest 28,393.83 ---
4/15/03 Overpaid credit applied ---
$35,877.55
10/17/03 Overpaid credit applied ---
75,027.00
12/22/03 Overpaid credit applied ---
34,860.42
6/22/06 Payment ---
559,815.00
10/19/06 Overpayment applied ---
5,474.23
2006 Sec. 6651(a)(1) addition to tax
abated (125,780.85) ---
12/4/06 Sec. 6651(a)(2) addition to tax 93,567.49 ---
Total 711,054.20
711,054.20
Although petitioners' tax account appears fully paid as of December 4, 2006, we infer from the record that respondent's assessment of the addition to tax under section 6651(a)(2) for failure to pay the amount shown as tax on the return (section 6651(a)(2) addition to tax) for 2000 was only a partial assessment of the section 6651(a)(2) addition to tax due from petitioners. On June 18, 2007, respondent assessed an additional section 6651(a)(2) addition to tax for 2000 of $44,574.52. Respondent did not send petitioners a notice of deficiency.
On August 22, 2007, petitioners mailed respondent a letter requesting that respondent waive the section 6654(a) addition to tax of $30,036 (plus interest) under section 6654(e)(3). In the attached memorandum petitioners explained that they had failed to pay the required installments of estimated tax because the losses from Mr. Farhoumand's stock trades were attributable to “one of the most extraordinary collapses in the history of the stock market”, that the losses continued throughout the year, and that they believed that because of these losses they could not possibly owe any income tax for 2000. Petitioners also explained that they had no money to pay installments of estimated tax.
On September 3, 2007, respondent mailed to petitioners a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, for 2000 (final notice). The final notice showed that respondent had assessed the section 6651(a)(2) addition to tax of $44,574.52 and interest and that the total amount due was $195,719.13. 2 Petitioners timely submitted a Form 12153, Request for a Collection Due Process or Equivalent Hearing. In their request petitioners acknowledged that they owed income taxes for 2000 but explained that they had requested a waiver of the section 6654(a) addition to tax, which, if accepted, would have reduced the tax due to approximately $150,000. They also requested additional time to borrow money to pay their overdue taxes.
On January 9, 2008, Settlement Officer Joyce A. Daniels mailed petitioners a letter scheduling a telephone hearing for January 31, 2008. She requested that petitioners provide a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses. Petitioners' attorney, Arthur H. Boelter, who resides and practices in Seattle, Washington, requested that the case be transferred to the Appeals Office in Seattle for a face-to-face hearing, which he wanted to attend on their behalf.
Having determined that a face-to-face hearing could take place only at the Appeals Office closest to petitioners' place of residence, the Internal Revenue Service (IRS) transferred the case file to Indiana. On March 5, 2008, Settlement Officer Mark L. Grzesiowski mailed petitioners a letter scheduling a telephone hearing for April 2, 2008, which was subsequently rescheduled to April 9, 2008. Settlement Officer Grzesiowski requested that petitioners provide a completed Form 433-A or Form 433-B and proof of estimated tax payments for 2007. On March 11 and 19, 2008, Mr. Boelter faxed letters to Settlement Officer Grzesiowski reiterating the request for a face-to-face hearing in Seattle. Petitioners did not submit the requested financial information before the hearing, explaining to Settlement Officer Grzesiowski that they were prepared to pay the remaining liability once the IRS waived the section 6654(a) addition to tax. On March 24, 2008, Settlement Officer Grzesiowski informed Mr. Boelter that a face-to-face hearing could be held only at an Appeals Office in Indiana, where petitioners resided.
On April 9, 2008, a telephone conference was held between Mr. Boelter and Settlement Officer Grzesiowski. During the hearing Mr. Boelter raised only the issue of the waiver of the section 6654(a) addition to tax.
On April 29, 2008, respondent sent petitioners a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 for 2000. In the notice of determination the Appeals Office determined that petitioners did not qualify for the waiver of the section 6654(a) addition to tax and that it was appropriate to collect the unpaid tax liability by levy.
Petitioners timely petitioned this Court. Petitioners then filed a motion for partial summary judgment, which we denied. After the Court held a conference call with the parties, respondent filed a motion to dismiss for lack of jurisdiction. See infra pp. 10-11.
At any relevant time petitioners had not attained age 62 or become disabled. Petitioners paid an addition to tax of $12,058 for failing to pay estimated tax for 1999.
Discussion
I. Section 6330
Section 6330(a) provides that no levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of the right to a hearing before the levy is made. If the person requests a hearing, a hearing shall be held before an impartial officer or employee of the IRS Appeals Office. Sec. 6330(b)(1), (3). At the hearing a taxpayer may raise any relevant issue, including appropriate spousal defenses, challenges to the appropriateness of the collection action, and collection alternatives. Sec. 6330(c)(2)(A). A taxpayer may contest the existence or amount of the underlying tax liability at the hearing if the taxpayer did not receive a notice of deficiency for the tax liability or did not otherwise have an earlier opportunity to dispute the tax liability. Sec. 6330(c)(2)(B); see also Sego v. Commissioner, 114 T.C. 604, 609 (2000).
Following a hearing, the Appeals Office must determine whether the proposed levy action may proceed. The Appeals Office is required to take into consideration: (1) verification presented by the Secretary 3 that the requirements of applicable law and administrative procedure have been met, (2) relevant issues raised by the taxpayer, and (3) whether the proposed levy action appropriately balances the need for efficient collection of taxes with a taxpayer's concerns regarding the intrusiveness of the proposed levy action. Sec. 6330(c)(3).
Section 6330(d)(1) grants this Court jurisdiction to review the determination made by the Appeals Office in connection with the section 6330 hearing. Where the validity of the underlying tax liability is properly at issue, the Court will review the matter on a de novo basis. Sego v. Commissioner, 114 T.C. at 610; Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). Where the underlying tax liability is not in dispute, the Court will review the determination of the Appeals Office for abuse of discretion. Sego v. Commissioner, 114 T.C. at 610; Goza v. Commissioner, 114 T.C. at 182. An abuse of discretion occurs if the Appeals Office exercises its discretion “arbitrarily, capriciously, or without sound basis in fact or law.” Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
Before reviewing the notice of determination, we shall consider respondent's motion. 4
II. Respondent's Motion To Dismiss for Lack of Jurisdiction
A. The Parties' Arguments
In his motion to dismiss respondent contends that this Court lacks jurisdiction to review the notice of determination with respect to the section 6654(a) addition to tax because he issued the final notice only with respect to the section 6651(a)(2) addition to tax. In respondent's view, because the only liability that he can collect and with respect to which he issued the final notice was the section 6651(a)(2) addition to tax, the only relevant issue in the section 6330 proceeding and in this Court is the collection of the section 6651(a)(2) addition to tax. Respondent believes that for this reason the waiver of the section 6654(a) addition to tax was not validly raised during the section 6330 hearing and therefore the Court has no jurisdiction to consider any issues regarding the waiver. Respondent also contends that (1) as of the date of the final notice, petitioners had paid the section 6654(a) addition to tax and owed no taxes for 2000, rendering any potential collection of the section 6654(a) addition to tax moot, and (2) under Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), the Court has no jurisdiction to consider the section 6654(a) addition to tax on the ground of mootness. Respondent requests the Court to uphold the notice of determination and allow respondent to proceed with the levy. 5
Petitioners contend that the entire liability for the taxable year is the subject of the collection proceeding rather than what the final notice shows. They also contend that it is irrelevant that a component of the total liability for the taxable year has been paid because a waiver of the section 6654(a) addition to tax is a method of paying the liability shown in the final notice. Petitioners distinguish Greene-Thapedi on the ground that a portion of the liability for the tax year remains unpaid.
B. Analysis
The Tax Court is a court of limited jurisdiction, and we may exercise jurisdiction only to the extent expressly authorized by Congress. See sec. 7442; Greene-Thapedi v. Commissioner, 126 T.C. at 6. Our jurisdiction under section 6330(d)(1) depends upon the issuance of a valid notice of determination and the filing of a timely petition for review. See Orum v. Commissioner, 123 T.C. 1, 8 (2004), aff'd, 412 F.3d 819 [95 AFTR 2d 2005-2931] (7th Cir. 2005); Sarrell v. Commissioner, 117 T.C. 122, 125 (2001). Respondent issued a notice of determination, and petitioners timely filed a petition. Accordingly, we have jurisdiction to review the notice of determination.
Under Greene-Thapedi, we may dismiss a case when the proposed levy for the taxpayer's tax liability is moot. InGreene-Thapedi v. Commissioner, 126 T.C. at 7, the proposed levy was moot because the Commissioner acknowledged that there was no unpaid liability for the determination year upon which a levy could be based and that he was no longer pursuing the levy. Respondent contends that this case is similar to Greene-Thapedi because petitioners paid the section 6654(a) addition to tax and respondent is not pursuing collection of that liability. We disagree. The proposed levy is not moot because respondent assessed the section 6651(a)(2) addition to tax, issued a final notice and a notice of determination (which addressed the section 6654(a) addition to tax waiver), and intends to proceed with the levy. Petitioners are raising an issue which, if we address it, could result in a determination that the levy may not proceed. Because the collection of the tax liability for 2000 remains unresolved, we shall not dismiss the case as moot.
Although respondent styled his motion a motion to dismiss for lack of jurisdiction, the core of his position is that (1) we may not consider a challenge to the section 6654(a) addition to tax because it is not the liability that respondent assessed and is attempting to collect by levy, and (2) petitioners raise no argument that we may properly consider. We disagree for several reasons.
First, petitioners raise an issue that is relevant to the unpaid tax and the proposed levy. Section 6330(c)(2) allows the taxpayer to raise any relevant issue relating to the unpaid tax or the proposed levy during the section 6330 hearing. 6 In
Freije v. Commissioner, 125 T.C. 14, 26 (2005), we stated that Congress intended a broad construction of what issues a taxpayer was entitled to raise in a section 6330 hearing. Petitioners' argument that they are not liable for an addition to tax that respondent had assessed and they had paid, even if different from the one shown in the final notice, is a relevant issue because it affects the amount of tax that respondent is entitled to collect for the determination year. Cf. id. at 26-27.
Second, we view petitioners' request for a waiver of the section 6654(a) addition to tax as a challenge to the underlying tax liability, which we may review de novo because they did not receive a notice of deficiency for 2000. See Sego v. Commissioner, 114 T.C. at 610. Although section 6330 and regulations thereunder do not define the phrase “underlying tax liability”, inMontgomery v. Commissioner , 122 T.C. 1, 7 (2004), we interpreted it “as a reference to the amounts that the Commissioner assessed for a particular tax period.” 7 Because the “underlying tax liability” refers to any amounts assessed for the relevant tax period, the liability not shown in the final notice is a component of the underlying tax liability and can be properly challenged in a section 6330 proceeding. Id. Accordingly, we conclude that petitioners may raise an argument regarding the liability not shown in the final notice. As follows from the foregoing, we shall deny respondent's motion to dismiss for lack of jurisdiction.
III. Review of the Notice of Determination We now address petitioners' argument that they are not liable for the section 6654(a) addition to tax. The parties agree that petitioners did not receive a notice of deficiency for 2000. Accordingly, we review respondent's determination de novo. See Sego v. Commissioner, 114 T.C. at 610. ,
Generally, section 7491(c) provides that the Commissioner bears the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount. To satisfy the burden of production, the Commissioner must produce evidence that imposing the relevant penalty or addition to tax is appropriate. See Swain v. Commissioner, 118 T.C. 358, 363 (2002). Respondent introduced evidence establishing that petitioners were required to pay estimated tax but failed to do so. 8 This satisfies respondent's burden of production under section 7491(c). Accordingly, petitioners bear the burden of introducing evidence establishing that the imposition of the addition to tax is not appropriate. See Higbee v. Commissioner, 116 T.C. 438, 447 (2001).
Section 6654(a) imposes an addition to tax for underpayment of a required installment of estimated tax. Each required installment of estimated tax is equal to 25% of the “required annual payment”, which in turn is equal to the lesser of (1) 90% of the tax shown on the taxpayer's return for that year (or, if no return is filed, 90%of his or her tax for such year), or (2) if the taxpayer filed a return for the immediately preceding taxable year, 100% of the tax shown on that return. Sec. 6654(d)(1)(A) and (B). The addition to tax is imposed regardless of whether there was reasonable cause for the underpayment. Sec. 1.6654-1(a)(1), Income Tax Regs. The addition to tax under section 6654(a) may be waived if “the Secretary determines that by reason of casualty, disaster, or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience.” Sec. 6654(e)(3)(A).
Petitioners contend that they qualify for a waiver under section 6654(e)(3). 9 They claim that they had negative cashflow every quarter and had no money to pay estimated tax. They claim that “the bursting of the Dot-Com bubble in 2000”, which was one of the “most momentous” collapses in stock market history, qualifies as an unusual circumstance within the meaning of section 6654(e)(3). Petitioners state that although they had taxable income, "[o]n a profit and loss basis *** [their] losses exceeded their income by $2,000,000.” Because they had continuous losses, they assumed that they had no income and would not owe any income tax for 2000. However, during the return preparation process petitioners found out that they were permitted to deduct only $3,000 of their capital loss. 10
Petitioners also contend that the imposition of the addition to tax would be against equity and good conscience. Although petitioners recognize that section 6654(a) contains no reasonable cause exception, they contend that several cases acknowledge that an honest mistake as to tax liability qualifies as reasonable cause for the section 6651(a)(1) addition to tax and the section 6662(a) penalty, and therefore the imposition of the section 6654(a) addition to tax would be against equity and good conscience.
We disagree. Even if petitioners did not know about the limitations on deductibility of capital losses under section 1211(b), as of the time when each payment of estimated tax was due they did not know whether they would have income or a loss for the full year. They had no way of predicting whether they would be able to recoup their losses by yearend, and Mr. Farhoumand continued his investment activity, presumably with the hope of a market turnaround.
We also reject petitioners' argument that they had no money to pay estimated tax because they used money to pay for stock losses. Petitioners did not pay for stock losses, as they claim. They incurred losses upon selling shares they owned. Yet they continued to purchase other stocks, instead of using the sale proceeds to pay estimated tax. 11 In addition, petitioners' estimate that they owe no tax for the taxable year is irrelevant because the Code does not provide for the reasonable cause defense for the section 6654(a) addition to tax, see, e.g., Wolfgram v. Commissioner, T.C. Memo. 2010-69 [TC Memo 2010-69], nor would the imposition of the section 6654(a) addition to tax be against equity and good conscience under the circumstances of this case. Lastly, we disagree that the stock market volatility is an unusual circumstance. Accordingly, we conclude that petitioners do not qualify for a waiver under section 6654(e)(3).
During the hearing petitioners did not offer collection alternatives, and in this proceeding they have not pursued any argument or presented any evidence that would allow us to conclude that the determination to sustain the levy was arbitrary, capricious, without foundation in fact or law, or otherwise an abuse of discretion. The Appeals Office verified that all requirements of applicable law or administrative procedure were met. The Appeals Office concluded that the levy balanced the need for efficient collection of taxes with petitioners' concerns that the collection action be no more intrusive than necessary. Accordingly, we conclude that respondent did not abuse his discretion in sustaining the levy.
We have considered all of the arguments raised by either party, and to the extent not discussed above, we find them to be irrelevant, moot, or without merit.
To reflect the foregoing,
An appropriate order denying respondent's motion to dismiss for lack of jurisdiction will be issued, and decision will be entered for respondent.
1
Unless otherwise indicated, section references are to the Internal Revenue Code (Code) for the relevant period, and Rule references are to the Tax Court Rules of Practice and Procedure.
2
The final notice shows the assessed balance of $44,574.52, accrued interest of $164,284.90, and a credit with respect to the sec. 6651(a)(2) addition to tax of $13,140.29, for the total amount of $195,719.13. We infer from the record that as of March 26, 2009, the date of the Form 4340, additional interest of $164,284.90 had accrued but had not yet been assessed.
3
The term “Secretary” means the Secretary of the Treasury or his delegate. .Sec. 7701(a)(11)(B).
4
The parties addressed the issue described herein upon the Court's invitation to do so.
5
Respondent's request to uphold the notice of determination is inconsistent with his motion to dismiss for lack of jurisdiction. We construe respondent's request to uphold the notice of determination as an alternative position.
6
Sec. 6330(c)(2) provides several examples of such relevant issues, such as appropriate spousal defenses, challenges to the appropriateness of the collection actions, offers of collection alternatives, and, under certain circumstances, challenges to the existence or amount of the underlying liability.
7
Although in Montgomery v. Commissioner 122 T.C. 1 (2004), the precise issue was different from the issue in this case, the facts relevant to the issue at hand are similar. In Montgomery, the taxpayers not only challenged the $222,315.34 amount specified in the final notice, but they also contended that they had overpaid their taxes by $519,087. See id. at 11 n.1 (Wells, J., concurring). Accordingly, both in Montgomery and in the case at hand, the challenged liability concerns an amount not specified in the final notice.
8
The parties stipulated that petitioners had an $855,353 Federal income tax liability for 1999.
9
The parties stipulated that petitioners do not qualify for any of the other exceptions to the estimated tax addition to tax under sec. 6654(e).
10
Sec. 1211(b) provides that losses from sales or exchanges of capital assets are allowed only to the extent of the gains from such sales or exchanges, plus the lower of $3,000 or the excess of such losses over the gains.
11
Petitioners' select stock purchases show that they had sufficient funds to continue to buy stocks. On April 10, 2000, the week that petitioners' first installment of estimated tax of $125,651 was due, they purchased several blocs of shares of Cisco Systems, Inc., and shares of Rydex Series Trust. The cost of one bloc of shares of Cisco Systems, Inc., was $367,574 (later sold at a loss for $261,517). On June 5, 2000, around the time when the second installment of $125,651 was due, petitioners purchased two blocks of stock of Profunds Ultraotc Invs. for $298,752 and $479,880 (sold later in 2000 for $333,598 and $472,253, respectively). On September 29, 2000, around the time the third installment of $125,651 was due, petitioners bought stock of Rambus, Inc., for $399,818 (later sold at a loss for $265,254).
FARID FARHOUMAND AND SONYA S. FARHOUMAND, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information: Code Sec(s): 1211; 6330; 6654; 7491
Docket: Docket No. 12540-08L.
Date Issued: 05/8/2012
HEADNOTE
XX.
Reference(s): Code Sec. 1211; Code Sec. 6330; Code Sec. 6654; Code Sec. 7491
Syllabus
Official Tax Court Syllabus
Counsel
Arthur H. Boelter, for petitioners.
Melissa L. Hilty, for respondent.
MEMORANDUM OPINION
MARVEL, Judge: Pursuant to section 6330(d), petitioners seek review of respondent's determination to proceed with the collection of their 2000 Federal income tax liability. 1 This matter was submitted fully stipulated under Rule 122 on
January 31, 2011. Subsequently, on January 19, 2012, respondent filed a motion to dismiss for lack of jurisdiction which remains before the Court and which, if granted, could eliminate the need for any further ruling on the merits pursuant to the Rule 122 submission. The issues for decision are: (1) whether the Court has jurisdiction to consider petitioners' challenge to the section 6654(a) addition to tax for failure to pay estimated tax for 2000 (section 6654(a) addition to tax); (2) whether petitioners are entitled to a waiver of the section 6654(a) addition to tax for 2000; and (3) whether respondent abused his discretion when he sustained the proposed levy.
Background
As noted above, the parties submitted this case fully stipulated under Rule 122. We incorporate the stipulated facts herein by this reference. Petitioners resided in Indiana when they filed their petition.
Farid Farhoumand is a stockbroker and investment consultant. His wife, Sonya S. Farhoumand, does not work outside the home.
At various times throughout 2000 Mr. Farhoumand purchased and sold stocks. His stock transactions generated a net loss of approximately $3 million. When Mr. Farhoumand met with a tax adviser to have petitioners' 2000 return prepared, he discovered that they could deduct only $3,000 of the capital losses against ordinary income because of the limitations on claiming capital losses.See sec. 1211(b).
On November 2, 2001, petitioners filed their joint Form 1040, U.S. Individual Income Tax Return, for 2000, reporting income of $1,487,577 and tax due of $589,211. Petitioners' total estimated income tax for 2000 was $502,604, to be paid in quarterly installments of $125,651 each on April 15, June 15, and September 15, 2000, and January 15, 2001. Petitioners failed to make any of those payments.
The Form 4340, Certificate of Assessments, Payments and Other Specified Matters, for petitioners' tax account for 2000 shows the following assessments and payments or credits, as of December 4, 2006:
Date Explanation Assessments
Payments/Credits
11/2/01 Prompt assessment $559,026.00 ---
11/2/01 Sec. 6651(a)(1) addition to tax 125,780.85 ---
11/2/01 Sec. 6654(a) addition to tax 30,066.88 ---
11/2/01 Interest 28,393.83 ---
4/15/03 Overpaid credit applied ---
$35,877.55
10/17/03 Overpaid credit applied ---
75,027.00
12/22/03 Overpaid credit applied ---
34,860.42
6/22/06 Payment ---
559,815.00
10/19/06 Overpayment applied ---
5,474.23
2006 Sec. 6651(a)(1) addition to tax
abated (125,780.85) ---
12/4/06 Sec. 6651(a)(2) addition to tax 93,567.49 ---
Total 711,054.20
711,054.20
Although petitioners' tax account appears fully paid as of December 4, 2006, we infer from the record that respondent's assessment of the addition to tax under section 6651(a)(2) for failure to pay the amount shown as tax on the return (section 6651(a)(2) addition to tax) for 2000 was only a partial assessment of the section 6651(a)(2) addition to tax due from petitioners. On June 18, 2007, respondent assessed an additional section 6651(a)(2) addition to tax for 2000 of $44,574.52. Respondent did not send petitioners a notice of deficiency.
On August 22, 2007, petitioners mailed respondent a letter requesting that respondent waive the section 6654(a) addition to tax of $30,036 (plus interest) under section 6654(e)(3). In the attached memorandum petitioners explained that they had failed to pay the required installments of estimated tax because the losses from Mr. Farhoumand's stock trades were attributable to “one of the most extraordinary collapses in the history of the stock market”, that the losses continued throughout the year, and that they believed that because of these losses they could not possibly owe any income tax for 2000. Petitioners also explained that they had no money to pay installments of estimated tax.
On September 3, 2007, respondent mailed to petitioners a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, for 2000 (final notice). The final notice showed that respondent had assessed the section 6651(a)(2) addition to tax of $44,574.52 and interest and that the total amount due was $195,719.13. 2 Petitioners timely submitted a Form 12153, Request for a Collection Due Process or Equivalent Hearing. In their request petitioners acknowledged that they owed income taxes for 2000 but explained that they had requested a waiver of the section 6654(a) addition to tax, which, if accepted, would have reduced the tax due to approximately $150,000. They also requested additional time to borrow money to pay their overdue taxes.
On January 9, 2008, Settlement Officer Joyce A. Daniels mailed petitioners a letter scheduling a telephone hearing for January 31, 2008. She requested that petitioners provide a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses. Petitioners' attorney, Arthur H. Boelter, who resides and practices in Seattle, Washington, requested that the case be transferred to the Appeals Office in Seattle for a face-to-face hearing, which he wanted to attend on their behalf.
Having determined that a face-to-face hearing could take place only at the Appeals Office closest to petitioners' place of residence, the Internal Revenue Service (IRS) transferred the case file to Indiana. On March 5, 2008, Settlement Officer Mark L. Grzesiowski mailed petitioners a letter scheduling a telephone hearing for April 2, 2008, which was subsequently rescheduled to April 9, 2008. Settlement Officer Grzesiowski requested that petitioners provide a completed Form 433-A or Form 433-B and proof of estimated tax payments for 2007. On March 11 and 19, 2008, Mr. Boelter faxed letters to Settlement Officer Grzesiowski reiterating the request for a face-to-face hearing in Seattle. Petitioners did not submit the requested financial information before the hearing, explaining to Settlement Officer Grzesiowski that they were prepared to pay the remaining liability once the IRS waived the section 6654(a) addition to tax. On March 24, 2008, Settlement Officer Grzesiowski informed Mr. Boelter that a face-to-face hearing could be held only at an Appeals Office in Indiana, where petitioners resided.
On April 9, 2008, a telephone conference was held between Mr. Boelter and Settlement Officer Grzesiowski. During the hearing Mr. Boelter raised only the issue of the waiver of the section 6654(a) addition to tax.
On April 29, 2008, respondent sent petitioners a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 for 2000. In the notice of determination the Appeals Office determined that petitioners did not qualify for the waiver of the section 6654(a) addition to tax and that it was appropriate to collect the unpaid tax liability by levy.
Petitioners timely petitioned this Court. Petitioners then filed a motion for partial summary judgment, which we denied. After the Court held a conference call with the parties, respondent filed a motion to dismiss for lack of jurisdiction. See infra pp. 10-11.
At any relevant time petitioners had not attained age 62 or become disabled. Petitioners paid an addition to tax of $12,058 for failing to pay estimated tax for 1999.
Discussion
I. Section 6330
Section 6330(a) provides that no levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of the right to a hearing before the levy is made. If the person requests a hearing, a hearing shall be held before an impartial officer or employee of the IRS Appeals Office. Sec. 6330(b)(1), (3). At the hearing a taxpayer may raise any relevant issue, including appropriate spousal defenses, challenges to the appropriateness of the collection action, and collection alternatives. Sec. 6330(c)(2)(A). A taxpayer may contest the existence or amount of the underlying tax liability at the hearing if the taxpayer did not receive a notice of deficiency for the tax liability or did not otherwise have an earlier opportunity to dispute the tax liability. Sec. 6330(c)(2)(B); see also Sego v. Commissioner, 114 T.C. 604, 609 (2000).
Following a hearing, the Appeals Office must determine whether the proposed levy action may proceed. The Appeals Office is required to take into consideration: (1) verification presented by the Secretary 3 that the requirements of applicable law and administrative procedure have been met, (2) relevant issues raised by the taxpayer, and (3) whether the proposed levy action appropriately balances the need for efficient collection of taxes with a taxpayer's concerns regarding the intrusiveness of the proposed levy action. Sec. 6330(c)(3).
Section 6330(d)(1) grants this Court jurisdiction to review the determination made by the Appeals Office in connection with the section 6330 hearing. Where the validity of the underlying tax liability is properly at issue, the Court will review the matter on a de novo basis. Sego v. Commissioner, 114 T.C. at 610; Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). Where the underlying tax liability is not in dispute, the Court will review the determination of the Appeals Office for abuse of discretion. Sego v. Commissioner, 114 T.C. at 610; Goza v. Commissioner, 114 T.C. at 182. An abuse of discretion occurs if the Appeals Office exercises its discretion “arbitrarily, capriciously, or without sound basis in fact or law.” Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
Before reviewing the notice of determination, we shall consider respondent's motion. 4
II. Respondent's Motion To Dismiss for Lack of Jurisdiction
A. The Parties' Arguments
In his motion to dismiss respondent contends that this Court lacks jurisdiction to review the notice of determination with respect to the section 6654(a) addition to tax because he issued the final notice only with respect to the section 6651(a)(2) addition to tax. In respondent's view, because the only liability that he can collect and with respect to which he issued the final notice was the section 6651(a)(2) addition to tax, the only relevant issue in the section 6330 proceeding and in this Court is the collection of the section 6651(a)(2) addition to tax. Respondent believes that for this reason the waiver of the section 6654(a) addition to tax was not validly raised during the section 6330 hearing and therefore the Court has no jurisdiction to consider any issues regarding the waiver. Respondent also contends that (1) as of the date of the final notice, petitioners had paid the section 6654(a) addition to tax and owed no taxes for 2000, rendering any potential collection of the section 6654(a) addition to tax moot, and (2) under Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), the Court has no jurisdiction to consider the section 6654(a) addition to tax on the ground of mootness. Respondent requests the Court to uphold the notice of determination and allow respondent to proceed with the levy. 5
Petitioners contend that the entire liability for the taxable year is the subject of the collection proceeding rather than what the final notice shows. They also contend that it is irrelevant that a component of the total liability for the taxable year has been paid because a waiver of the section 6654(a) addition to tax is a method of paying the liability shown in the final notice. Petitioners distinguish Greene-Thapedi on the ground that a portion of the liability for the tax year remains unpaid.
B. Analysis
The Tax Court is a court of limited jurisdiction, and we may exercise jurisdiction only to the extent expressly authorized by Congress. See sec. 7442; Greene-Thapedi v. Commissioner, 126 T.C. at 6. Our jurisdiction under section 6330(d)(1) depends upon the issuance of a valid notice of determination and the filing of a timely petition for review. See Orum v. Commissioner, 123 T.C. 1, 8 (2004), aff'd, 412 F.3d 819 [95 AFTR 2d 2005-2931] (7th Cir. 2005); Sarrell v. Commissioner, 117 T.C. 122, 125 (2001). Respondent issued a notice of determination, and petitioners timely filed a petition. Accordingly, we have jurisdiction to review the notice of determination.
Under Greene-Thapedi, we may dismiss a case when the proposed levy for the taxpayer's tax liability is moot. InGreene-Thapedi v. Commissioner, 126 T.C. at 7, the proposed levy was moot because the Commissioner acknowledged that there was no unpaid liability for the determination year upon which a levy could be based and that he was no longer pursuing the levy. Respondent contends that this case is similar to Greene-Thapedi because petitioners paid the section 6654(a) addition to tax and respondent is not pursuing collection of that liability. We disagree. The proposed levy is not moot because respondent assessed the section 6651(a)(2) addition to tax, issued a final notice and a notice of determination (which addressed the section 6654(a) addition to tax waiver), and intends to proceed with the levy. Petitioners are raising an issue which, if we address it, could result in a determination that the levy may not proceed. Because the collection of the tax liability for 2000 remains unresolved, we shall not dismiss the case as moot.
Although respondent styled his motion a motion to dismiss for lack of jurisdiction, the core of his position is that (1) we may not consider a challenge to the section 6654(a) addition to tax because it is not the liability that respondent assessed and is attempting to collect by levy, and (2) petitioners raise no argument that we may properly consider. We disagree for several reasons.
First, petitioners raise an issue that is relevant to the unpaid tax and the proposed levy. Section 6330(c)(2) allows the taxpayer to raise any relevant issue relating to the unpaid tax or the proposed levy during the section 6330 hearing. 6 In
Freije v. Commissioner, 125 T.C. 14, 26 (2005), we stated that Congress intended a broad construction of what issues a taxpayer was entitled to raise in a section 6330 hearing. Petitioners' argument that they are not liable for an addition to tax that respondent had assessed and they had paid, even if different from the one shown in the final notice, is a relevant issue because it affects the amount of tax that respondent is entitled to collect for the determination year. Cf. id. at 26-27.
Second, we view petitioners' request for a waiver of the section 6654(a) addition to tax as a challenge to the underlying tax liability, which we may review de novo because they did not receive a notice of deficiency for 2000. See Sego v. Commissioner, 114 T.C. at 610. Although section 6330 and regulations thereunder do not define the phrase “underlying tax liability”, inMontgomery v. Commissioner , 122 T.C. 1, 7 (2004), we interpreted it “as a reference to the amounts that the Commissioner assessed for a particular tax period.” 7 Because the “underlying tax liability” refers to any amounts assessed for the relevant tax period, the liability not shown in the final notice is a component of the underlying tax liability and can be properly challenged in a section 6330 proceeding. Id. Accordingly, we conclude that petitioners may raise an argument regarding the liability not shown in the final notice. As follows from the foregoing, we shall deny respondent's motion to dismiss for lack of jurisdiction.
III. Review of the Notice of Determination We now address petitioners' argument that they are not liable for the section 6654(a) addition to tax. The parties agree that petitioners did not receive a notice of deficiency for 2000. Accordingly, we review respondent's determination de novo. See Sego v. Commissioner, 114 T.C. at 610. ,
Generally, section 7491(c) provides that the Commissioner bears the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount. To satisfy the burden of production, the Commissioner must produce evidence that imposing the relevant penalty or addition to tax is appropriate. See Swain v. Commissioner, 118 T.C. 358, 363 (2002). Respondent introduced evidence establishing that petitioners were required to pay estimated tax but failed to do so. 8 This satisfies respondent's burden of production under section 7491(c). Accordingly, petitioners bear the burden of introducing evidence establishing that the imposition of the addition to tax is not appropriate. See Higbee v. Commissioner, 116 T.C. 438, 447 (2001).
Section 6654(a) imposes an addition to tax for underpayment of a required installment of estimated tax. Each required installment of estimated tax is equal to 25% of the “required annual payment”, which in turn is equal to the lesser of (1) 90% of the tax shown on the taxpayer's return for that year (or, if no return is filed, 90%of his or her tax for such year), or (2) if the taxpayer filed a return for the immediately preceding taxable year, 100% of the tax shown on that return. Sec. 6654(d)(1)(A) and (B). The addition to tax is imposed regardless of whether there was reasonable cause for the underpayment. Sec. 1.6654-1(a)(1), Income Tax Regs. The addition to tax under section 6654(a) may be waived if “the Secretary determines that by reason of casualty, disaster, or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience.” Sec. 6654(e)(3)(A).
Petitioners contend that they qualify for a waiver under section 6654(e)(3). 9 They claim that they had negative cashflow every quarter and had no money to pay estimated tax. They claim that “the bursting of the Dot-Com bubble in 2000”, which was one of the “most momentous” collapses in stock market history, qualifies as an unusual circumstance within the meaning of section 6654(e)(3). Petitioners state that although they had taxable income, "[o]n a profit and loss basis *** [their] losses exceeded their income by $2,000,000.” Because they had continuous losses, they assumed that they had no income and would not owe any income tax for 2000. However, during the return preparation process petitioners found out that they were permitted to deduct only $3,000 of their capital loss. 10
Petitioners also contend that the imposition of the addition to tax would be against equity and good conscience. Although petitioners recognize that section 6654(a) contains no reasonable cause exception, they contend that several cases acknowledge that an honest mistake as to tax liability qualifies as reasonable cause for the section 6651(a)(1) addition to tax and the section 6662(a) penalty, and therefore the imposition of the section 6654(a) addition to tax would be against equity and good conscience.
We disagree. Even if petitioners did not know about the limitations on deductibility of capital losses under section 1211(b), as of the time when each payment of estimated tax was due they did not know whether they would have income or a loss for the full year. They had no way of predicting whether they would be able to recoup their losses by yearend, and Mr. Farhoumand continued his investment activity, presumably with the hope of a market turnaround.
We also reject petitioners' argument that they had no money to pay estimated tax because they used money to pay for stock losses. Petitioners did not pay for stock losses, as they claim. They incurred losses upon selling shares they owned. Yet they continued to purchase other stocks, instead of using the sale proceeds to pay estimated tax. 11 In addition, petitioners' estimate that they owe no tax for the taxable year is irrelevant because the Code does not provide for the reasonable cause defense for the section 6654(a) addition to tax, see, e.g., Wolfgram v. Commissioner, T.C. Memo. 2010-69 [TC Memo 2010-69], nor would the imposition of the section 6654(a) addition to tax be against equity and good conscience under the circumstances of this case. Lastly, we disagree that the stock market volatility is an unusual circumstance. Accordingly, we conclude that petitioners do not qualify for a waiver under section 6654(e)(3).
During the hearing petitioners did not offer collection alternatives, and in this proceeding they have not pursued any argument or presented any evidence that would allow us to conclude that the determination to sustain the levy was arbitrary, capricious, without foundation in fact or law, or otherwise an abuse of discretion. The Appeals Office verified that all requirements of applicable law or administrative procedure were met. The Appeals Office concluded that the levy balanced the need for efficient collection of taxes with petitioners' concerns that the collection action be no more intrusive than necessary. Accordingly, we conclude that respondent did not abuse his discretion in sustaining the levy.
We have considered all of the arguments raised by either party, and to the extent not discussed above, we find them to be irrelevant, moot, or without merit.
To reflect the foregoing,
An appropriate order denying respondent's motion to dismiss for lack of jurisdiction will be issued, and decision will be entered for respondent.
1
Unless otherwise indicated, section references are to the Internal Revenue Code (Code) for the relevant period, and Rule references are to the Tax Court Rules of Practice and Procedure.
2
The final notice shows the assessed balance of $44,574.52, accrued interest of $164,284.90, and a credit with respect to the sec. 6651(a)(2) addition to tax of $13,140.29, for the total amount of $195,719.13. We infer from the record that as of March 26, 2009, the date of the Form 4340, additional interest of $164,284.90 had accrued but had not yet been assessed.
3
The term “Secretary” means the Secretary of the Treasury or his delegate. .Sec. 7701(a)(11)(B).
4
The parties addressed the issue described herein upon the Court's invitation to do so.
5
Respondent's request to uphold the notice of determination is inconsistent with his motion to dismiss for lack of jurisdiction. We construe respondent's request to uphold the notice of determination as an alternative position.
6
Sec. 6330(c)(2) provides several examples of such relevant issues, such as appropriate spousal defenses, challenges to the appropriateness of the collection actions, offers of collection alternatives, and, under certain circumstances, challenges to the existence or amount of the underlying liability.
7
Although in Montgomery v. Commissioner 122 T.C. 1 (2004), the precise issue was different from the issue in this case, the facts relevant to the issue at hand are similar. In Montgomery, the taxpayers not only challenged the $222,315.34 amount specified in the final notice, but they also contended that they had overpaid their taxes by $519,087. See id. at 11 n.1 (Wells, J., concurring). Accordingly, both in Montgomery and in the case at hand, the challenged liability concerns an amount not specified in the final notice.
8
The parties stipulated that petitioners had an $855,353 Federal income tax liability for 1999.
9
The parties stipulated that petitioners do not qualify for any of the other exceptions to the estimated tax addition to tax under sec. 6654(e).
10
Sec. 1211(b) provides that losses from sales or exchanges of capital assets are allowed only to the extent of the gains from such sales or exchanges, plus the lower of $3,000 or the excess of such losses over the gains.
11
Petitioners' select stock purchases show that they had sufficient funds to continue to buy stocks. On April 10, 2000, the week that petitioners' first installment of estimated tax of $125,651 was due, they purchased several blocs of shares of Cisco Systems, Inc., and shares of Rydex Series Trust. The cost of one bloc of shares of Cisco Systems, Inc., was $367,574 (later sold at a loss for $261,517). On June 5, 2000, around the time when the second installment of $125,651 was due, petitioners purchased two blocks of stock of Profunds Ultraotc Invs. for $298,752 and $479,880 (sold later in 2000 for $333,598 and $472,253, respectively). On September 29, 2000, around the time the third installment of $125,651 was due, petitioners bought stock of Rambus, Inc., for $399,818 (later sold at a loss for $265,254).
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