Tax Court jurisdictional hijinks?

[KickahaOta]

I'm very curious to see what the educated legal minds of this forum think about the Tax Court practice illustrated just this week by Sadek v. Commissioner.

To sum up the proceedings in a slightly snarky but completely fair way:

• The taxpayer files a petition for review of a tax deficiency, along with a motion to dismiss that same petition for lack of jurisdiction.
• The IRS files an opposition to the taxpayer's motion to dismiss for lack of jurisdiction, along with a motion to dismiss for lack of jurisdiction.
• The taxpayer opposed the IRS's motion to dismiss for lack of jurisdiction, and insists that the petition should be dismissed for lack of jurisdiction.
• The Tax Court denies the taxpayer's motion to dismiss for lack of jurisdiction, grants the IRS's motion to dismiss for lack of jurisdiction, and dismisses the case for lack of jurisdiction.
• The resulting order determines the rights of the parties.

Now to fill in the reason for all this procedural jockeying: The Tax Court only has jurisdiction over this sort of case if a petition is filed with the court within 90 (or occasionally 150) days after a "valid notice if deficiency" is issued by the IRS. A notice of deficiency is only "valid" if, among other things, it's mailed to the taxpayer's "last known address" as defined by certain rules. So you can get a situation like the one shown in this case:

• The IRS issues a notice of deficiency and mails it to a certain address.
• The taxpayer doesn't challenge within the 90-day window, either because they didn't receive the notice, or because they received it and blew it off.
• The taxpayer then files a petition with the Tax Court, saying "I know this petition is late, but the notice of deficiency was sent to the wrong address, which means that it's not valid. So you should dismiss on the grounds that the notice of deficiency was invalid, which means that you don't have jurisdiction, but which also means that the IRS can't collect until they issue another notice properly."
• The IRS files a response that says "The notice was sent to the right address and so it's valid. The taxpayer's petition is late and you should dismiss on those grounds, which means that you don't have jurisdiction, but which also means that we can go ahead and collect."
• The Tax Court sides with the IRS (or in other cases with the taxpayer), finds that the petition was late (or that the notice was invalid), and dismisses for lack of jurisdiction.

Now, I can certainly see the pragmatic reasons for letting the Tax Court do this. But I also can't help but think that I've seen plenty of cases where appellate courts have said 'If the parties agree that the court doesn't have jurisdiction, and their only disagreement is on why, the court has no business wading into that dispute -- it should just dismiss and tell both sides to go away.'

[LaVidaRoja]

The real issue here was the statute of limitations. IF the notice of deficiency was valid, the IRS could assess the tax and go for collection (which is what they had done). If the notice of deficiency was not valid, the statute of limitations on assessment passed and the IRS would not be able to assess the tax.

[KickahaOta]

True, that's why the petitioner wanted Tax Court review so badly. But "The parties really want this" isn't normally a reason for courts to go beyond their jurisdiction.

Another obviously-true thing that the Tax Court frequently trots out in these cases is "Courts have jurisdiction to determine their own jurisdiction". And that obviously makes sense -- if the defendant in a case says "I don't think you have jurisdiction, and therefore you shouldn't even have the power to decide whether you have jurisdiction", that obviously isn't something that the courts can allow to work. But again, when both parties agree that the court has no jurisdiction -- and the only dispute is why -- it seems really weird to me that the court would go ahead and make that determination.

[jcolvin2]

But again, when both parties agree that the court has no jurisdiction -- and the only dispute is why -- it seems really weird to me that the court would go ahead and make that determination.

If the case were dismissed pursuant to the government's motion, the assessment stands and can be collected against the taxpayer, and the taxpayer has to pay the tax in order to obtain court review (if the IRS denied a refund claim, the taxpayer could sue in the district court or Court of Federal Claims).

If, on the other hand, the case were dismissed pursuant to the taxpayer's motion (which alleged that the IRS had failed to send the SNOD to the taxpayer's last known address), the IRS cannot enforce the assessment (because it failed to meet one of the requirements for having a valid SNOD). In most cases, because of the lapse of time, the IRS will be unable to issue a timely SNOD, and the taxpayer will never have to pay the tax.

[LaVidaRoja]

The WHY was the entire point of the case. If the Court had refused to hear for lack of jurisdiction without explaining that the taxpayer was deficient, there would have been additional litigation regarding the attempts to collect. The Court would have had to decide the same issue at a later date, with additional expense to both parties.

[Dr. Caligari]

Now, I can certainly see the pragmatic reasons for letting the Tax Court do this. But I also can't help but think that I've seen plenty of cases where appellate courts have said 'If the parties agree that the court doesn't have jurisdiction, and their only disagreement is on why, the court has no business wading into that dispute -- it should just dismiss and tell both sides to go away.'

I've seen cases where appellate courts have said things like that; there was one 7th Circuit decision by [former] Judge Posner-- a very smart man, but not when it comes to taxes-- where a taxpayer won in Tax Court on the grounds that the NOD was sent to the wrong address, and it was too late to issue a new one, and Posner wrote that she wasn't entitled to costs because she "filed in the wrong court." That's usually what a dismissal for lack of jurisdiction means, but in these kind of tax cases, the Tax Court is the only court that can can grant you relief without you having to first pay the tax assessment in full, file a claim for refund, and wait up to 6 months before you can sue to get back the money you may not have owed at all.

[Burnaby49]

That's usually what a dismissal for lack of jurisdiction means, but in these kind of tax cases, the Tax Court is the only court that can can grant you relief without you having to first pay the tax assessment in full, file a claim for refund, and wait up to 6 months before you can sue to get back the money you may not have owed at all.

Quite the opposite in Canada. If a taxpayer appeals an assessment collection on the taxes is deferred until the appeal is decided. This can easily take years. First they have to appeal to Tax Court and, if they lose there, a further appeal to the Federal Court of Appeal. I've seen the process take a decade in cases with a lot of money at stake where tax lawyers spend years before the actual hearing engaging in procedural squabbling. Downside for the taxpayer is interest on the outstanding taxes can easily end up more than the taxes themselves. However if they wish they can pay the disputed taxes upfront and if they win get it back with interest.

[Famspear]

That's usually what a dismissal for lack of jurisdiction means, but in these kind of tax cases, the Tax Court is the only court that can can grant you relief without you having to first pay the tax assessment in full, file a claim for refund, and wait up to 6 months before you can sue to get back the money you may not have owed at all.

Quite the opposite in Canada. If a taxpayer appeals an assessment[,] collection on the taxes is deferred until the appeal is decided. This can easily take years. First they have to appeal to Tax Court and, if they lose there, a further appeal to the Federal Court of Appeal. I've seen the process take a decade in cases with a lot of money at stake where tax lawyers spend years before the actual hearing engaging in procedural squabbling. Downside for the taxpayer is interest on the outstanding taxes can easily end up more than the taxes themselves. However if they wish they can pay the disputed taxes upfront and if they win get it back with interest.

But, what exactly is the act of "assessment" under Canadian law? Is it Event A, the computation, by a government tax collector, of the amount of tax alleged? Or, is it Event B, the act of the tax collector officially determining (officially concluding) that the amount computed is the correct amount in the eyes of the tax collector? Or, is it Event C, the act of physically recording the previously computed, previously "determined" amount on the books of the taxing agency?

The term "assessment" as used in the U.S. Internal Revenue Code has a narrow technical meaning: it is essentially Event C.

To over-simplify: For a U.S. Federal income tax not shown on a tax return filed by the taxpayer, the IRS cannot legally do "Event C" until the taxpayer has had the opportunity to litigate the matter in the U.S. Tax Court -- which is sort of like an "appeal" of the IRS "determination". In fact, the Tax Court filing involves a petition for "redetermination" of tax -- a tax that has not yet been assessed and which cannot be legally assessed until the prescribed process is completed.

[Burnaby49]

I had to deal with people like you when I worked. Pick, pick, pick. I guess it goes with the territory. When you're dealing with the most complex legislation in Canada (and maybe the US, I don't have a clue about Obamacare) you expect definition nitpicking. I once sat through a hearing at the Federal Court of Appeal on exactly that issue. When had the CRA actually reassessed the taxpayer? Tax Court screwed it up, decided in favour of the taxpayer, and the FCA had to reverse it. It was filled with paragraphs like this;

[11] In the motions judge’s view, the taxpayer’s burden is to demolish assumptions made by the Minister in assessing and not in confirming the reassessment. He thought it inappropriate to saddle the taxpayer with the onus of disproving assumptions made at the objection stage. He disagreed with the statement of Cattanach J. in Parsons v. M.N.R., [1984] 1 F.C. 804 that the confirmation of an assessment is part of the assessment process, finding that this statement was inconsistent with a more recent pronouncement of Rip J. of the Tax Court which, he believed, was implicitly confirmed by this Court: ibidem, at paragraph 27. Furthermore, the motions judge took the position that placing the onus on the Minister was more procedurally fair, as “The cards are already stacked in favour of the Crown” and there was “no reason for stacking the cards any further”: ibidem, at paragraph 28.

In Canada taxpayers are expected to file their tax returns with the correct taxes calculated by April 30th of the year following the tax year. If they don't have taxes deducted at source they have to file quarterly installments based on the assumed total annual tax bill. Wife and I had a once-in-a-lifetime taxable capital gain last year which actually exceed our otherwise mundane combined pension incomes. So the CRA started badgering me to pay quarterly tax installments which in total would have exceeded my entire gross income for this year.

But, to simplify, let's take me with just pension income. I fill out my 2018 tax return and file it by April 30th, 2019 with a cheque for whatever taxes I calculate are owing. The Canada Revenue Agency reviews it and sends me an assessment notice. The date on the notice is legally the date of my assessment. This might say taxes were correct. If so, done deal. If the assessment revises the taxes owing then I owe the excess I hadn't paid when I filed along with interest on this amount running from April 30th. If I hadn't sent in any payment with my tax return interest on the entire unpaid amount starts running from April 30th. However I can get an assessment notice saying everything is fine and still have problems later if the CRA takes a second look at my 2018 return and finds problems. It will send a reassessment notice and the clock starts ticking yet again from the date of the reassessment.

So your comment;

In fact, the Tax Court filing involves a petition for "redetermination" of tax -- a tax that has not yet been assessed and which cannot be legally assessed until the prescribed process is completed.

Doesn't apply here because the tax was already assessed with the original assessment notice or the later reassessment notice. The appeal, if successful, will require a further reassessment. So if the taxpayer wins the Tax Court orders the CRA to reassess the taxpayer based on the findings in the decision. You wrote;

But, what exactly is the act of "assessment" under Canadian law? Is it Event A, the computation, by a government tax collector, of the amount of tax alleged? Or, is it Event B, the act of the tax collector officially determining (officially concluding) that the amount computed is the correct amount in the eyes of the tax collector? Or, is it Event C, the act of physically recording the previously computed, previously "determined" amount on the books of the taxing agency?

The answer is none of the above since it is the date the assessment notice is mailed by the CRA. The closest is Events A or B since as assessment notice will closely follow either event.

[Famspear]

I had to deal with people like you when I worked. Pick, pick, pick.

Yes, and the proper use of legal terms like "assess" and "assessment" has been important in U.S. case law as well.

As I recall, at least one U.S. tax protester tried to argue that he or she had no legal liability to pay a Federal tax until the tax had been "assessed" by the IRS. A few years ago, I even found a bankruptcy case where an acquaintance of mine -- a bankruptcy lawyer with no tax background -- tried to argue that the IRS could not have a valid claim in a bankruptcy case because the IRS had not "assessed" the tax.

The mistake that all these people are making is to ignore the legal definition, and to instead use the terms "assess" and "assessment" in some sort of hazy, colloquial sense, such as: to "compute," or to "officially determine," or maybe both. (To make it more confusing, the terms "assess" and "assessment" might actually mean those things in the context of local property taxes in some county or another.

Not U.S. Federal tax, though:

The assessment shall be made by recording the liability of the taxpayer in the office of the Secretary [of the Treasury or his delegate] in accordance with rules or regulations prescribed by the Secretary.

--from Internal Revenue Code sec. 6203 (emphasis added).

In the case of a tax related to a required tax return, the legal obligation to pay the U.S. tax arises prior to the assessment and, therefore, without assessment:

Except as otherwise provided in this subchapter, when a return of tax is required under this title or regulations, the person required to make such return shall, without assessment or notice and demand from the Secretary, pay such tax to the internal revenue officer with whom the return is filed, and shall pay such tax at the time and place fixed for filing the return (determined without regard to any extension of time for filing the return).

--from Internal Revenue Code sec. 6151(a) (emphasis added).

The assessment is the act of physically recording an already existing liability on the books of the Treasury. The act of assessment does not "create" the legal liability to pay the tax. Indeed, the legal liability to pay must already exist before the assessment can be validly made. (And, even the amount of tax assessed can later be determined to be legally incorrect, in a proceeding in U.S. District Court.)

In other words, the "pick, pick, pick" is not a matter of merely poring over some insignificant detail.

[Famspear]

Let's suppose that a taxpayer files a U.S. federal income tax return showing his tax to be $10,000 (before considering payments made, etc.). The following sequence may occur.

1. "self-assessment" (not the same as "assessment") of $10,000 -- the filing of the return by the taxpayer, showing the tax to be $10,000 (before subtracting any applicable credits for payments, etc.)

2. IRS examines the return, and concludes that the correct amount of tax should be $12,000 (again, without regard to how much has or has not been paid). The IRS makes an administrative "determination" of a "deficiency" of $2,000.

3. IRS issues a statutory notice of deficiency (90 day letter).

4. Within 90 days, the Taxpayer files a petition for a judicial "redetermination" in the U.S. Tax Court.

5. The Tax Court case drags on almost forever, and ultimately the Tax Court agrees in part with the taxpayer and in part with the IRS. The Court judicially "redetermines" the deficiency to be $1,500. A judgment is entered. The taxpayer does not appeal.

6. Eventually, the IRS "assesses" the deficiency (formally records the liability on its books) of $1,500, under section 6203.

[Famspear]

Even Federal court judges are not immune to the mistaken use of the term "assessment": "There still must be an assessment of the tax by the IRS against the taxpayer, before the tax debt is created." --from Capuano v. United States, 955 F.2d 1427, 1432 (11th Cir. 1992). This appears to be an imprecise use of language by the Court of Appeals, which went on to describe the effect of a Federal tax lien -- not the creation and existence of the underlying tax liability itself.

The argument that no tax is owed unless the tax is first officially "assessed" by the IRS was specifically rejected by the United States Court of Appeals for the Second Circuit, which cited section 6151(a), in United States v. Ellett, 527 F.3d 38, 2008-1 U.S. Tax Cas. (CCH) paragr. 50,362 (2d Cir. 2008) (per curiam), citing United States v. Daniel, 956 F.2d 540, 542 (6th Cir. 1992); United States v. Hogan, 861 F.2d 312, 315-16 (1st Cir. 1988); and United States v. Dack, 747 F.2d 1172, 1174-75 (7th Cir. 1984) (per curiam) (distinguishing and limiting a contrary statement by the Court Appeals for the Seventh Circuit, in United States v. England, 347 F.2d 425 (7th Cir. 1965), to the effect that an assessment was required). See also United States v. Voorhies, 658 F.2d 710 (9th Cir. 1981) and United States v. McLain, 646 F.3d 599 (8th Cir. 2011). See also dicta in United States v. Silkman, 156 F.3d 833 (8th Cir. 1998).

Under section 6501(a) of the Internal Revenue Code, the government may file a lawsuit for collection of a federal tax within three years after the related tax return is filed, even if the tax has not been assessed. See, e.g., United States v. Craddock (In re Craddock), 184 B.R. 974 (D. Colo. 1995) (under section 6501(a) of the Internal Revenue Code, assessment of a federal tax is not a requirement in a lawsuit brought by the government within three years after the related tax return is filed, and assessment is not a requirement for tax liability).

Further: “taxes may be and often are collected without assessment…[and] in such a case, the tax, if legally due, cannot be recovered [by the taxpayer as a tax refund] merely because it had not been formally assessed.” Meyersdale Fuel Co. v. United States, 44 F.2d 437 (Ct. Cl. 1930).

See also Theodore D. Peyser, "Limitations Periods, Interest on Underpayments and Overpayments, and Mitigation," vol. 627 (4th ed. 2012), Bloomberg BNA, under "General Rules of §§ 6501(a) and 6502": " . . . the government cannot begin any court proceeding without assessment for the collection of tax after the expiration of the three-year period, although the IRS rarely institutes a collection suit before making an assessment." In other words, even without assessment, the government can begin such a proceeding if the three year period has not yet expired, but such actions without assessment are rare.

[Famspear]

Note that for some legal purposes, Federal income taxes are deemed to exist as of the close of the tax year, rather than at the time the return is due to be filed. The Court of Appeals for the Ninth Circuit has stated that " tax liabilities, though unassessed, are deemed obligations due and owing at the close of the taxable year." Edelson v. Commissioner, 829 F.2d 828, 834 (9th Cir. 1987).

To the same effect, in another federal criminal tax case:

[The defendant Richard] Kelley further contends that he had no tax liability for the year 1973 because of the failure of the IRS to conduct an administrative assessment of his tax after refusing to accept his incomplete return. See United States v. Radue, 486 F.2d 220, 222 (5th Cir. 1973), cert. denied, 416 U.S. 908, 94 S.Ct. 1615, 40 L.Ed.2d 113 (1974). The IRS is required to follow certain procedures in assessing the liability of a taxpayer before it can bring a civil suit to enforce a collection of the tax due. 26 U.S.C. §§ 6020(b), 6201 et seq.; 26 C.F.R. §§ 301.6020-1, 301.6201-1 et seq. (Supp.1975). There is no requirement, however, that an administrative assessment record be filed before there can be a criminal prosecution for failing to report or pay income tax under 26 U.S.C. §§ 7201-07. Tax liability is imposed by statute independent of any administrative assessment. United States v. Radue, supra, 486 F.2d at 222; Funkhouser v. United States, 260 F.2d 86, 87 (4th Cir. 1958), cert. denied, 358 U.S. 940, 79 S.Ct. 346, 3 L.Ed.2d 348 (1959); 10 J. Mertens, Federal Income Taxation § 55A.05 (1970 1204*1204 rev. ed.); see United States v. Commerford, 64 F.2d 28, 30 (2d Cir.), cert. denied, 289 U.S. 759, 53 S.Ct. 792, 77 L.Ed. 1502 (1933).

--from United States v. Kelley, 539 F.2d 1199 (9th Cir. 1976), cert. denied, 97 S. Ct. 393 (1976) (emphasis added).