Lisa Edwards v. Commissioner of IRS , 791 F.3d 1 ( 2015 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 19, 2015 Decided June 19, 2015
No. 14-1004
LISA A. EDWARDS AND JOSEPH P. THOMAS,
APPELLANTS
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLEE
On Appeal from the Order of
the United States Tax Court
Bruce E. Gardner argued the cause and filed the briefs
for appellants.
Janet A. Bradley, Attorney, U.S. Department of Justice,
argued the cause for appellee. With her on the brief were
Tamara W. Ashford, Acting Assistant Attorney General at the
time the brief was filed, Bruce R. Ellisen, Attorney. Bridget
M. Rowan, Attorney, entered an appearance.
Before: GARLAND, Chief Judge, and ROGERS and
PILLARD, Circuit Judges.
Opinion for the Court filed by Circuit Judge PILLARD.
2
PILLARD, Circuit Judge: Both parties to this appeal agree
that the tax court lacked jurisdiction to consider the petition
filed by taxpayers Lisa Edwards and Joseph Thomas
challenging the seizure of their funds by the Internal Revenue
Service. What they disagree about is why, and the reason
turns out to make a great deal of difference. According to the
taxpayers, the tax court lacked jurisdiction because the IRS
never sent them notices of deficiency, which are the
documents the Service is required to send before it initiates
proceedings to assess a tax deficiency, and which serve as
taxpayers’ “tickets” to tax court. Prevailing on that ground
could mean the taxpayers do not owe the taxes the IRS
claims, and could entitle them to recover the costs they
incurred to challenge the IRS’s seizure of their property. The
IRS counters that it sent the taxpayers the notices of
deficiency, and the tax court lacked jurisdiction because the
taxpayers waited too long to file their petition. Prevailing on
that ground would leave the tax assessment undisturbed. The
IRS sought in the tax court to dispute the taxpayers’ allegation
that notices were never successfully sent to the taxpayers in
the first place. The IRS asserts that it could not provide the
best evidence of that mailing because, when it sought to
retrieve its own copies of the notices from storage, the
package containing the notices was lost or misplaced.
Without that evidence, the tax court initially agreed with the
taxpayers and dismissed their petition for lack of jurisdiction
for want of notices of deficiency. When the prevailing
taxpayers moved for costs, however, the tax court vacated its
decision and, in a second order, dismissed the case for lack of
jurisdiction and denied costs. Unlike the initial order,
however, the second order did not state its grounds. Because
the tax court was required to articulate the basis for its
jurisdictional dismissal, we vacate the tax court’s order and
remand for the court to do so.
3
I.
In 2009, the IRS selected the taxpayers’ recent returns for
examination and concluded that the taxpayers had a tax
deficiency of more than $9,000 for tax year 2007 and that
Thomas individually had a deficiency of more than $15,000
for 2008. 1 The IRS contends that on March 11, 2010, it
mailed both of the taxpayers a notice of deficiency for 2007
and Thomas a notice of deficiency for 2008. The taxpayers
contend, however, that they never received notices of
deficiency for either year.
The Internal Revenue Code requires the IRS to follow
specific procedures before it assesses and collects an income
tax deficiency. The IRS must “send a notice of deficiency to
a taxpayer prior to initiating proceedings to assess [a]
deficiency.” Gardner v. United States, 211 F.3d 1305, 1311
(D.C. Cir. 2000); see also I.R.C. §§ 6212(a), 6213(a). 2 The
Code provides that the IRS may satisfy its obligation by
mailing a notice to the taxpayer’s last known address via
certified or registered mail; there is no requirement that the
IRS prove that the taxpayer actually received the notice.
I.R.C. § 6212(a)-(b); see also Keado v. United States, 853
F.2d 1209, 1211-12 (5th Cir. 1988). After the IRS issues a
notice of deficiency, a taxpayer typically has ninety days to
file a Section 6213 petition in tax court challenging the
deficiency. See I.R.C. § 6213(a); Gardner, 211 F.3d at 1311.
The IRS cannot assess a tax deficiency or bring a collection
1
Taxpayers Edwards and Thomas were married and filed a joint
return for tax year 2007. They filed their federal taxes in 2008 as
“married filing separately.” Edwards’s 2008 return is not at issue
here.
2
Unless otherwise specified, all statutory citations are to the
Internal Revenue Code of 1986, as amended, codified in Title 26 of
the U.S. Code.
4
action against the taxpayer unless it has sent a notice of
deficiency to the taxpayer and either the ninety-day period for
filing a tax court petition has run or, if the taxpayer has filed a
petition, the tax court has rendered a final decision. 3 Keado,
853 F.2d at 1212; see also I.R.C. § 6213(a). The tax court
does not have jurisdiction to consider a taxpayer’s Section
6213 petition unless the IRS has first issued the taxpayer a
notice of deficiency. See, e.g., Shepherd v. Commissioner,
147 F.3d 633, 634 (7th Cir. 1998). The tax court also lacks
jurisdiction if the taxpayer’s petition is not timely filed. See,
e.g., Correia v. Commissioner, 58 F.3d 468, 469 (9th Cir.
1995); Zigmont v. Commissioner, 97 T.C.M. (CCH) 1202(2009), 2009 WL 564949, at *4-5. A taxpayer who fails to
file a timely petition in tax court is not without legal recourse.
The taxpayer can pay the tax, file a claim for refund with the
IRS, and, if the claim is denied, file a refund suit in federal
district court or the court of claims. See I.R.C. § 7422.
The taxpayers filed a petition in the tax court in 2012,
after the IRS retained several of their tax refunds and applied
those funds to their outstanding tax liabilities. The petition
alleged 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. The IRS
3
A deficiency is the difference between the amount of tax imposed
by the tax code and the amount of tax shown on the taxpayer’s
return. I.R.C. § 6211(a); Keado, 853 F.2d at 1210 n.1. An
assessment of a deficiency is a bookkeeping notation made when
the IRS in its records establishes an account against the taxpayer.
Laing v. United States, 423 U.S. 161, 170 n.13 (1976); see also
I.R.C. § 6203. If the IRS fails properly to assess the tax, the
taxpayer is not obligated to pay the tax. Welch v. United States,
678 F.3d 1371, 1376 (Fed. Cir. 2012); see also I.R.C. §§ 6213(a),
6401(a).
5
moved to dismiss the petition for lack of jurisdiction because
it was filed more than ninety days after the Service sent the
taxpayers notices of deficiency. The IRS, however, was
unable to produce copies of the notices of deficiency that it
claims to have sent because, it says, the administrative files
containing copies of the notices were lost in the mail when the
IRS attempted to retrieve them from storage. Instead, the
Service produced a declaration from an IRS employee and a
postal service mail log form as evidence that it had created
and sent the notices to the taxpayers’ last known addresses.
The mail log did not indicate, however, what was mailed.
The taxpayers opposed the IRS’s motion and cross-moved for
dismissal on the ground that the tax court lacked jurisdiction
because the IRS never issued notices of deficiency. After a
hearing, the tax court issued an order in June 2013, granting
the taxpayers’ motion and dismissing the case for lack of
jurisdiction on “the ground that there has been no showing
that a notice of deficiency has been issued to either [taxpayer]
for any of the years placed in dispute in the petition.” J.A.
171-72.
The case was then administratively closed before the
taxpayers timely submitted their claim for litigation and
administrative costs. The presiding tax court judge insisted
that he could not consider the claim for costs unless he
reopened the case and vacated his dismissal order. The
taxpayers accordingly moved to vacate the tax court’s order to
obtain consideration of their motion for costs. The tax court
held a hearing on the motion to vacate at which the judge
made sure the taxpayers were aware that, if the order were
vacated, the IRS might in the meantime locate the lost notices
of deficiency and ask the court to revisit its jurisdictional
ruling before the court could reinstate it together with a ruling
on costs. The judge said he might well grant such a request,
but added that he would not revisit his earlier ruling in the
6
absence of new evidence. The tax court then issued an order
granting the motion to vacate, held in abeyance the renewed
cross-motions to dismiss for lack of jurisdiction, and
permitted the Service to oppose the motion for costs. The IRS
conceded that the taxpayers were the prevailing party, but
argued that the taxpayers were not entitled to some of the
costs they claimed, and that the amounts they requested were,
in any event, not reasonable. The IRS did not locate the lost
files after the motion to vacate was granted.
In December 2013, the tax court issued an order denying
the taxpayers’ motion for costs and once again dismissing the
petition for lack of jurisdiction. The tax court’s December
order of dismissal, however, was not as clear as its June order.
The new order recounted the IRS’s argument that the Service
had issued and mailed the taxpayers notices of deficiency, and
described the evidence the Service presented in support of
that contention. The court then observed that the taxpayers
disputed that the notices were issued. Unlike the first order,
however, the December order did not resolve whether the
notices had in fact been issued, but merely stated that it was
“clear in this matter . . . that the Court has no jurisdiction over
[the taxpayers’ petition].” J.A. 251. The court went on to
address the litigation costs question, denying the taxpayers’
motion because the IRS’s position was substantially justified.
The court concluded that it was dismissing the case sua
sponte for lack of jurisdiction, thereby mooting both parties’
motions to dismiss. This appeal followed.
II.
We “review the decisions of the Tax Court . . . in the
same manner and to the same extent as decisions of the
district courts in civil actions tried without a jury.” I.R.C.
§ 7482(a)(1). We thus review the tax court’s conclusions of
7
law de novo and its findings of fact for clear error. Gaughf
Props., L.P. v. Commissioner, 738 F.3d 415, 420 (D.C. Cir.
2013). The taxpayers’ primary contention on appeal is a legal
question: whether the tax court erred by failing to explain in
its December order why it lacked jurisdiction to hear the
taxpayers’ petition. We agree with the taxpayers that the tax
court was under an obligation to state the basis of its dismissal
and erred here by failing to do so.
The tax court is a court of limited jurisdiction,
Commissioner v. McCoy, 484 U.S. 3, 7 (1987), and its
jurisdiction is predicated on both the issuance of a notice of
deficiency and the filing of a timely petition, see I.R.C.
§ 6213(a). The parties have identified two reasons the court
might have lacked jurisdiction in this case: either, as the
taxpayers contend, the IRS never mailed them notices of
deficiency, or, as the Service argues, it issued such notices,
but the taxpayers did not timely file their petition in the tax
court. The two reasons are, however, factually mutually
exclusive, and, while either leads to jurisdiction-based
dismissal, the consequences of dismissal differ depending on
the court’s reasoning. See D’Andrea v. Commissioner, 263
F.2d 904, 906-07 (D.C. Cir. 1959). When faced with such a
choice, as tax court precedent recognizes, that court is
required to state whether it lacks “jurisdiction because no
statutory notice of deficiency has been issued or because a
valid notice was issued but the petition was not timely filed.”
Pietanza v. Commissioner, 92 T.C. 729, 735 (1989); see also
Pyo v. Commissioner, 83 T.C. 626, 632, 639-40 (1984);
Shelton v. Commissioner, 63 T.C. 193, 196-98 (1974). The
tax court has also held that judges should resolve those issues
in a particular order—they should first decide whether a
notice of deficiency was properly issued before turning to
whether the petition was timely filed. Shelton, 63 T.C. at 198.
8
Because the basis of dismissal may affect a taxpayer’s
rights or the IRS’s ability to collect taxes owed, it is essential
that the tax court clearly state the grounds for its dismissal. If
the tax court determines that a notice of deficiency was not
properly issued, then the IRS may not assess the deficiency or
seek to collect it from the taxpayers. See, e.g., Keado, 853
F.2d at 1212; United States v. Zolla, 724 F.2d 808, 810 (9th
Cir. 1984); Shelton, 63 T.C. at 195; see also I.R.C. § 6213(a).
If the statute of limitations has already run, the IRS cannot
simply correct its error by issuing a new notice of deficiency.
In that event, the taxpayer’s liability becomes unenforceable.
Alternatively, if the court dismisses the case because the
taxpayer did not file a timely petition, the Service is free to
assess and collect the tax. Pietanza, 92 T.C. at 735; Shelton,
63 T.C. at 194, 197. Accordingly, the tax court must
articulate the basis for its order to inform the parties of the
rights and obligations it establishes.
The opacity of the tax court’s December order is apparent
when it is contrasted with the June order. The court’s first
dismissal order expressly denied the IRS’s motion and
granted the taxpayers’ motion, specifying that the court
lacked jurisdiction on “the ground that there has been no
showing that a notice of deficiency has been issued to either
[taxpayer] for any of the years placed in dispute in the
petition.” J.A. 171-72. The December order, by contrast,
stated merely that it was “clear” that the court lacked
jurisdiction, whether or not the notices of deficiency had been
issued by the IRS. J.A. 251. The court’s December denial of
both parties’ motions and its terse order undercut any
contention that it resolved precisely why jurisdiction was
lacking in this case. We therefore vacate the December order
and remand this case to the tax court to give that court an
opportunity to state its reasons for dismissing the petition.
9
The Service urges us to conclude that the tax court’s
December order found as a matter of fact that the notices of
deficiency were issued and concluded that it lacked
jurisdiction because the petition was not timely filed. But the
portion of the order discussing the jurisdictional question only
observed that the parties disputed whether the notices were
issued, without announcing any resolution of the question.
The IRS’s interpretation of the December order takes out of
context the court’s statement that the evidence presented by
the IRS “strongly suggest[ed]” that notices of deficiency were
issued to the taxpayers, “even though the existence of those
notices of deficiency cannot be supported by a review of a
copy of them.” See J.A. 252. The court made that statement
when evaluating the motion for costs, which required the
court to determine whether the IRS’s position was
substantially justified. In acknowledging the IRS’s position
as arguable, however, the court did not adopt it. That
language does not support the Service’s interpretation of the
order.
The taxpayers, for their part, do not contend that the tax
court ruled in their favor in its second order, but that it lacked
the authority to rule against them. Their motion to vacate the
June order was filed, they argue, for the “limited purpose” of
seeking litigation costs, a collateral issue distinct from the
underlying jurisdictional question. See J.A. 173. Without any
reason to revisit its jurisdictional holding, the taxpayers assert
that the tax court was bound by the jurisdictional holding of
the June order. Because the basis for the court’s December
order is unclear, we cannot discern whether the tax court
changed its mind between the two orders. Accordingly, we
decline to consider the taxpayers’ argument before the tax
court has had an opportunity to explain clearly the grounds
upon which its decision rests. When the copies of the notices
themselves have been lost, determining whether notices ever
10
issued is a fact-intensive inquiry dependent on evidence of
various circumstances, such as the IRS’s regular practices for
creating and mailing notices. See, e.g., Welch v. United
States, 678 F.3d 1371, 1379-82 (Fed. Cir. 2012); United
States v. Aherns, 530 F.2d 781, 784-85 (8th Cir. 1976);
Pietanza, 92 T.C. at 731-42; Webb v. Commissioner, 72
T.C.M. (CCH) 826 (1996), 1996 WL 558320, at *5-6. The
tax court has routine factfinding capabilities, and expertise
and experience in evaluating just such evidence, so we leave
it to the tax court to determine in the first instance the
adequacy of any proof that the notices were in fact issued.
III.
The taxpayers raise three other arguments on appeal that
warrant only brief discussion. First, the taxpayers ask us to
reverse the tax court’s denial of their motion for costs. A
prevailing party is not entitled to recover costs from the IRS if
the Service’s litigation position was “substantially justified.”
I.R.C. § 7430(c)(4)(B)(i). Evaluation of which party
prevailed and, if the taxpayers prevailed, whether the IRS’s
position was justified, depends in large part on the adequacy
of the evidence that the notices were issued. Because the
costs claim will be affected by the grounds of the tax court’s
jurisdictional ruling, we vacate the tax court’s denial of the
taxpayers’ motion for costs and leave it to the tax court to
decide the taxpayers’ motion anew, in light of the
jurisdictional rationale it adopts.
The taxpayers also contend that the tax court overlooked
the second argument raised in their petition. They assert that
the IRS failed to mail them a final notice of levy for the 2007
and 2008 tax years before seizing their assets, in violation of
the Internal Revenue Code and the Due Process Clause. See
I.R.C. § 6330(a)(1). A final notice of levy permits a taxpayer
11
to request a collection due process hearing before the IRS’s
Appeals Office. See id. After such a hearing, the IRS issues
the taxpayer a notice of determination, which permits the
taxpayer to seek tax court review of the IRS’s proposed
levies. See id. § 6330(d)(1); Boyd v. Commissioner, 451 F.3d
8, 10-11 (1st Cir. 2006). Before the tax court, the parties
agreed that no notice of determination had been issued, but
did not explore the legal consequences of that fact. The tax
court’s December order did not address the taxpayers’
alternative ground for jurisdiction. On remand, therefore, the
tax court must first determine whether the parties have
preserved their arguments concerning this issue. If so, it
should explain whether it has jurisdiction over the taxpayers’
claim that the IRS impermissibly failed to issue a final notice
of intent to levy before levying the taxpayers’ assets, and spell
out the reasons for its jurisdictional holding. Compare Boyd,
451 F.3d at 10-11 (affirming the jurisdiction-based denial of a
petition contending the IRS improperly denied taxpayers the
process that would have led to a notice of determination), with
Kennedy v. Commissioner, 116 T.C. 255, 261 (2011)
(dismissing petition on jurisdictional grounds because the IRS
failed to mail the required notice to taxpayer before filing a
lien).
Finally, we lack jurisdiction to consider a new argument
the taxpayers attempt to raise for the first time on appeal. The
taxpayers state that taxpayer Thomas requested the IRS
conduct a collection due process hearing concerning his 2008
tax liability after the taxpayers filed their petition in the tax
court. According to the taxpayers, the IRS’s Appeals Office
conducted the hearing but impermissibly withheld a notice of
determination following the hearing, which precludes Thomas
from seeking tax court review of the IRS’s decision. The
taxpayers’ counsel admitted at oral argument that he never
asked the tax court to rule on this particular issue. Oral Arg.
12
Recording at 7:54-8:51. Consequently there is nothing for us
to review. See McCoy, 484 U.S. at 6; see also Oral Arg.
Recording at 8:43-8:51 (counsel conceding as much).
* * *
For the foregoing reasons, we vacate the tax court’s
decision and remand for further proceedings consistent with
this opinion.
So ordered.