On May 26, 2020, the Tax Court issued its opinion in Amanda Iris Gluck Irrevocable Trust v. Commissioner, 154 T.C. No. 11. The main issue in Gluck was whether the Tax Court could consider a challenge to the petitioner’s underlying tax liabilities which were computed by “computational adjustment.” A secondary issue was whether the Tax Court possessed the jurisdiction to hear a challenge for a year not subject to the CDP proceeding, but affected by the adjustment (due to the disallowance of a net operating loss (NOL)).
Background to Tax Court Proceeding
The IRS made a large “computational adjustment” to petitioner’s 2012 return and assessed the resulting deficiency. See IRC §§ 6230(a)(1) and 6231(a)(6). That adjustment eliminated petitioner’s net operating loss (NOL) for 2012 and its NOL carryforwards to 2013-2015, creating the tax liabilities that are the subject of the collection action before the Tax Court. Petitioner timely petitioned the Tax Court, urging that it should not sustain the collection action and should, instead, determine that no additional taxes are owed by the petitioner for the 2012, 2013, 2014 and 2015 calendar years. Respondent contends that the Tax Court lacks jurisdiction with respect to 2012 because there was no collection action for 2012.
For 2012 petitioner filed a return on Form 1041, U.S. Income Tax Return for Estates and Trusts. On this return it allegedly failed to report its distributive share of the gain that had been allocated to partnership directly. Because petitioner did not notify the IRS of this apparent inconsistency, the IRS was permitted to adjust petitioner’s return by computational adjustment, without issuing a notice permitting a pre-assessment challenge. See IRC §§ 6222(c), 6230(a)(1), and 6231(a)(6). The IRS sent petitioner two Letters 4735, Notice of Computational Adjustment. Each Letter 4735 explained that the adjustment was due to the petitioner’s inconsistent treatment of a partnership item related to the IRC § 1231 (gain reported by a partnership) in which the petitioner had an indirect ownership. The IRS thereafter assessed petitioner’s liabilities for 2013-2015.
Bright Line Rule – Tax Court’s Jurisdiction to Consider Challenge Notice of Determination for a Year no Notice of Determination was Issued
The Tax Court is a court of limited jurisdiction, Naftel v. Commissioner, 85 T.C. 527, 529 (1985), and it may exercise jurisdiction only to the extent expressly authorized by statute. Breman v. Commissioner, 66 T.C. 61, 66 (1976). As the party invoking the Court’s jurisdiction, petitioner bears the burden of establishing that jurisdiction exists. See David Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268, 270 (2000), aff’d, 22 F. App’x 837 (9th Cir. 2001). IRC § 6330(a) requires the IRS, before making a levy, to send a written notice to the taxpayer notifying him of his right to a CDP hearing. The Tax Court has jurisdiction to review a notice of determination issued to a taxpayer following completion of that hearing if a timely petition is filed. IRC § 6330(d). The IRS had not issued petitioner, at the time it filed its petition, a notice of determination regarding any collection action with respect to its 2012 tax year. Therefore, the Tax Court lacked jurisdiction in this case to consider any challenge to collection action for 2012. See Gallagher v. Commissioner, T.C. Memo. 2018-77 (citing Pietanza v. Commissioner, 92 T.C. 729, 735 (1989), aff’d, 935 F.2d 1282 (3d Cir. 1991), Pyo v. Commissioner, 83 T.C. 626, 632 (1984); Anson v. Commissioner, T.C. Memo. 2010-119).
Standard of Review Under IRC § 6330(d)(1) (Tax Court proceedings after CDP hearing).
IRC § 6330(d)(1) does not prescribe the standard of review that the Tax Court should apply in reviewing an IRS administrative determination in a CDP case. The Tax Court’s prior decisions, however, are instructive. Where the taxpayer’s underlying tax liability is properly before the Tax Court, it reviews the IRS’s determination de novo. See Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). In other respects, the Tax Court reviews the IRS action for abuse of discretion. Id. at 182. Abuse of discretion exists when a determination is “arbitrary, capricious, or without sound basis in fact or law.” Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006); Holloway v. Commissioner, T.C. Memo. 2007-175, aff’d, 332 F. App’x 421 (6th Cir. 2008).
Challenge to Underlying Tax Liabilities Available when no Notice of Deficiency is Issued Because IRS Assessed Liabilities under IRC §§ 6222(c) and 6231(a)(6) (Computational Adjustments)
A taxpayer may challenge the existence or amount of its underlying liability in a CDP proceeding only if it did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability. IRC § 6330(c)(2)(B). The Tax Court observed that when IRC § 6330(c)(2)(B) refers to a prior opportunity to dispute such tax liability, it means an opportunity to dispute the liability in a prepayment posture. See Credit-Guard of Am., Inc. v. Commissioner, 149 T.C. 370, 375 (2017); Sugarloaf Fund LLC v. Commissioner, 141 T.C. 214, 217 n.2 (2013); Greene-Thapedi v. Commissioner, 126 T.C. 1, 20 (2006). Because the petitioner did not have a prior opportunity to dispute its assessed liabilities in a prepayment posture, the CDP route was available to it.
Bright Line Rule – Tax Court has Jurisdiction to Review Computational Adjustments in CDP Proceedings (but not Deficiency Proceedings)
Although the Tax Court generally lacks jurisdiction to review computational adjustments in deficiency proceedings, pursuant to IRC § 6230(a)(1), the Tax Court’s review in CDP cases is not so limited. In CDP cases involving assessable penalties (i.e., penalties not subject to deficiency procedures), the Tax Court has jurisdiction to review a taxpayer’s underlying liability for the penalty provided that he raised during the CDP hearing a proper challenge thereto. See Yari v. Commissioner, 143 T.C. 157, 162 (2014) (ruling that IRC § 6330(d)(1) expanded the Court’s review of collection actions where the underlying tax liability consists of penalties not reviewable in a deficiency action), aff’d, 669 F. App’x 489 (9th Cir. 2016); Callahan v. Commissioner, 130 T.C. 44, 49 (2008). Applying the same reasoning, the Tax Court may review underlying liabilities arising from adjustments to partnership items of TEFRA partnerships in a CDP case, even though such items would not have been subject to the Tax Court’s review in a deficiency setting. See McNeill v. Commissioner, 148 T.C. 481, 489 (2017).
Caveat – Taxpayer Must Challenge Computationally Adjusted Underlying Liability in CDP Hearing
A taxpayer entitled to dispute its underlying liability based on computational adjustments must nevertheless present a proper challenge in CDP Hearing in order to preserve that challenge for judicial review. See Thompson v. Commissioner, 140 T.C. 173, 178 (2013); Giamelli v. Commissioner, 129 T.C. 107, 113-114 (2007) (same); Treas. Reg. § 301.6330-1(f)(2), Q&A-F3.
Credit Available from Another Tax Year not before Tax Court may be Applied to the Taxpayer’s Liability for the Year Before the Tax Court
The Tax Court may consider facts and issues from other tax years to the extent they are relevant in evaluating a claim that an unpaid tax has been paid. Freije v. Commissioner, 125 T.C. 14, 27 (2005). In determining whether the tax for a CDP year has been paid, rendering collection action for that year inapt, the Tax Court may consider whether a credit available from another tax year should be applied to the taxpayer’s liability for the year before the Court. Del-Co W. v. Commissioner, T.C. Memo. 2015-142.
The Tax Court analogized the NOL scenario in Gluck to a situation in which the IRS has disallowed (say) business expense deductions for the CDP year. In both scenarios the taxpayer is challenging his underlying tax liability for the CDP year by disputing the disallowance of deductions he had claimed for that year. The fact that the source of the deductions the petitioner claimed for the later years was an NOL that allegedly arose in a prior year does not change the analysis.
In any case where a taxpayer claims an NOL carryforward or carryback deduction, the Tax Court has jurisdiction to consider such facts related to years not in issue as may be necessary for redetermination of tax liability for the period before the Court. Keith v. Commissioner, 115 T.C. 605, 621 (2000). Indeed, in an earlier opinion the Tax Court noted that it may determine the correct amount of a NOL for a year not in issue as a preliminary step in determining the correct amount of a net operating loss carryover to a taxable year in issue. Lone Manor Farms, Inc. v. Commissioner, 61 T.C. 436, 440 (1974), aff’d, 510 F.2d 970 (3d Cir. 1975); compare IRC § 6214(b) (Tax Court jurisdiction over other years and quarters).
This reasoning applies with equal force in a CDP case where the Tax Court is seeking to determine the taxpayer’s underlying liability. See, e.g., Gaunt v. Commissioner, T.C. Memo. 2018-78, at *22-*23 (analyzing in a CDP case a taxpayer’s entitlement to an NOL carryforward deduction for the CDP year). In determining the allowability of an NOL carryforward or carryback deduction, the Tax Court may consider facts from the original loss year even though the period of limitations for that year is closed. See Calumet Industries, Inc. v. Commissioner, 95 T.C. 257, 274 (1990). Therefore, the petitioner in Gluck properly challenged its underlying tax liabilities for 2014 and 2015 by reference to its 2012 NOL during the CDP hearing.Add to favorites