Tax Litigation Update: D.C. Circuit Holds Tax Court Required to Articulate Basis for Dismissal Based on Lack of Jurisdiction

On June 19, 2015, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) vacated and remanded the decision of the United States Tax Court in Edwards v. Commissioner after the Tax Court failed to “articulate the basis for its jurisdictional dismissal.” In Edwards, available here, the D.C. Circuit determined that while it was in the Tax Court’s powers to dismiss the case before it, the Tax Court was required to explain its grounds for dismissal. Because the Tax Court failed to do so, the D.C. Circuit vacated and remanded the case.

The Tax Court is an Article I court which exercises the judicial power of the United States. SeeFraytag v. Commissioner, 501 U.S. 868 (1991). The Tax Court is a court of limited jurisdiction, meaning it can only hear and decide certain issues. One of the issues the Tax Court can decide is the issuance of notices of deficiency and the filing of a petition against the deficiency. The Internal Revenue Service (“IRS”) has the authority to issue a notice of deficiency, informing the taxpayer of his tax deficiency, and if the deficiency goes unchallenged the IRS will assesses and collect the taxpayer’s unpaid debt through an income tax deficiency.

When the IRS issues a notice of deficiency to a taxpayer, the IRS must inform the taxpayer by “send[ing] a notice of deficiency to a taxpayer prior to initiating proceedings to assess a deficiency.” Edwards at 3. After a notice is sent, “a taxpayer typically has ninety days to . . . challenge the deficiency.” Id. So long as the IRS issues the notice, or the taxpayer responds to the notice within the allocated ninety days, the Tax Court has jurisdiction over the matter. However, if the IRS fails to issue a notice of deficiency, or the ninety days has elapsed, “the tax court does not have jurisdiction . . . .” Id. at 4.  In Edwards, the D.C. Circuit was faced with the interesting situation where both parties agreed that the Tax Court lacked jurisdiction, however the issue before the court was why. The taxpayers claimed that no notice of deficiency was ever sent, while the IRS contended the taxpayers missed the ninety day deadline.

Background

At issue in Edwards were two taxpayers whom the IRS claimed had tax deficiencies, and after allegedly sending a notice of deficiency with no challenge from the taxpayers, the “IRS retained several of their tax refunds and applies those funds to their outstanding tax liabilities.” Id. However, the taxpayers filed a petition in the Tax Court “allege[ing] that the IRS violated due process of law by failing to issue notices of deficiency before assessing tax liabilities against the taxpayers and by failing to issue final notices of intent to levy before levying the taxpayers’ assets.” Id.

At a hearing before the Tax Court, the IRS was unable to provide confirmation that the notices of deficiency were actually sent. Therefore, the Tax Court “issued an order in June 2013, granting the taxpayer’s motion and dismissing the case for lack of jurisdiction on ‘the ground that there has been no showing that a notice of deficiency ha[d] been issued to either taxpayer . . . .’” Id.

The taxpayers timely submitted a “claim for litigation and administrative costs.” Id. at 5. However, “[t]he presiding tax court judge insisted that he could not consider the claim for costs unless he reopened the case and vacated his dismissal order.” Id. After the taxpayers allowed for the proceedings to go forward, the Tax Court had to revisit its jurisdictional ruling. In the Tax Court’s second order, the Tax Court “den[ied] the taxpayers’ motion for costs and once against dismiss[ed] the petition for lack of jurisdiction.” Id. at 5-6. However, contrary to the first order, the second order “did not resolve whether the notices had in fact been issued, but merely that is was ‘clear in this matter . . . that the Court has no jurisdiction over [the taxpayers’ petition].’” Id. at 6. Both parties appealed.

D.C. Circuit’s Ruling

While both parties agreed that the Tax Court lacked jurisdiction, they did not agree regarding why. The taxpayers argued that the Tax Court lacked jurisdiction because the IRS never sent the notices of deficiency, while the IRS countered and claimed that jurisdiction was not warranted because the taxpayers exceeded the ninety day limit to file a petition.

The D.C. Circuit recognized that the taxpayers’ and the IRS’ explanation for lack of jurisdiction are “factually mutually exclusive, and, while either leads to jurisdiction-based dismissal, the consequences of dismissal differ depending on the court’s reasoning.” Id. at 7. While the D.C. Circuit agreed with the Tax Court that it was proper for the Tax Judge to resolve this issue, the D.C. Circuit said “[judges] should first decide whether a notice of deficiency was properly issued before turning to whether the petition was timely filed.” Id.

The D.C. Circuit found that this initial determination was critical because the basis of dismissal for lack of jurisdiction “may affect a taxpayer’s rights or the IRS’s ability to collect taxes owed.” Id.Therefore, “it is essential that the tax court clearly state the grounds for its dismissal.” Id. Yet, here the Tax Court failed in its second order to “articulate the basis for its order to inform the parties of the rights and obligations it establishes.” Id.

In holding that the Tax Court must articulate a basis for its dismissal for lack of jurisdiction, the D.C. Circuit rejected the IRS’s interpretation of the Tax Court’s second order in which the IRS argued that “the tax court’s [second] order found as a matter of fact that notices of deficiency were issued and concluded that it lacked jurisdiction because the petition was not timely filed.” Id. at 9. However, the D.C. Circuit “decline[d] to consider the taxpayers’ argument” either in which the taxpayers agued the “tax court was bound by the jurisdictional holding of the [first] order. Id.

The D.C. Circuit’s holding reinforces the premise that the “fact-intensive inquiry” of “whether notices [were] ever issued” is “dependent on evidence of various circumstances” and “[t]he tax court has routine fact-finding capabilities, and expertise and experience in evaluating just such evidence.” Id. at 9-10. Therefore, the Tax Court is in the best position “to determine in the first instance the adequacy of any proof that the notices were in fact issued.” Id. at 10. Accordingly, the D.C. Circuit “vacate[d] the tax court’s decision and remand[ed] for further proceedings consistent with [] opinion.” Id. at 12.

The D.C. Circuit’s message to the Tax Court is simple. If the Tax Court lacks jurisdiction over a particular case, it must explain why it lacks jurisdiction, instead of just issuing an order declaring it does not have jurisdiction.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of tax and tax litigation. They will continue to monitor developments in this area of the law. Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions regarding this article or any other issues on which we might provide legal assistance.