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Liu v. Commissioner (T.C. Memo. 2020-31)

On March 5, 2020, the Tax Court issued a Memorandum Opinion in the case of Liu v. Commissioner (T.C. Memo. 2020-31). The single issue presented in Liu was whether the Tax Court had jurisdiction to determine whether petitioners were liable for interest on the deficiencies determined by the IRS because the IRS filed an erroneous notice of Federal tax lien (NFTL).

Background

Petitioners each owned a 50% interest in an S corporation. The petitioners reported receiving qualified dividends from the S corporation rather than ordinary income. The IRS examined the returns and determined that the petitioners received ordinary income rather than qualified dividends.

The IRS issued notices of deficiency in which it determined that the petitioners overstated their qualified dividend income, and, as a consequence, the IRS increased the petitioners’ ordinary income received by an S corporation on the petitioners’ Schedule E (Supplemental Income and Loss).

The IRS erroneously filed a notice of Federal tax lien (NFTL) in September of 2016 for unpaid assessments. In December 2018, the IRS filed a certificate of release of the Federal tax lien. In July 2019, the IRS filed a subsequent certificate of release of Federal tax lien pursuant to IRC § 6326 to clarify that the NFTL had been filed erroneously.

Taxation of S Corporation

Generally, an S corporation is not subject to Federal income tax at the entity level. IRC § 1363(a); see also Taproot Admin. Servs., Inc. v. Commissioner, 133 T.C. 202, 204 (2009), aff’d, 679 F.3d 1109 (9th Cir. 2012). S corporation items of income, gain, loss, deduction, and credit flow through to the S corporation shareholders who report their pro rata shares of such items on their respective returns. See IRC § 1366(a).

The character of an S corporation item allocated to a shareholder is determined as if the item were realized directly by the shareholder. IRC § 1366(b). Qualified dividend income includes dividends received from a domestic C corporation and is taxed as net capital gain. IRC § 1(h)(11)(B)(i)(I).

Payment of Liability and Jurisdiction to Hear Challenge to Payment of Interest

The petitioners paid the total deficiency amounts that the IRS determined. However, the petitioners contend that they should not have to pay interest on the deficiency amounts because the IRS erroneously filed an NFTL.

The Tax Court is a court of limited jurisdiction, and it may exercise its jurisdiction only to the extent authorized by Congress. See IRC § 7442; Naftel v. Commissioner, 85 T.C. 527, 529 (1985). The Tax Court’s jurisdiction under IRC § 6320 and IRC § 6330 depends upon the issuance of a valid notice of determination and the filing of a timely petition for review of the notice of determination. IRC § 6320(c); IRC § 6330(d)(1); see also Orum v. Commissioner, 123 T.C. 1, 8 (2004), aff’d, 412 F.3d 819 (7th Cir. 2005); Sarrell v. Commissioner, 117 T.C. 122, 125 (2001).

In the absence of a notice of determination and a timely filed petition, the Tax Court lacks jurisdiction over issues arising under IRC § 6320 and IRC § 6330. Offiler v. Commissioner, 114 T.C. 492, 498 (2000). Critically, in the present case, the IRS fell on its sword (albeit taking its sweet time to do so) and filed a certificate of release of Federal tax lien.

In deficiency proceedings, such as this case, the Tax Court’s jurisdiction does not extend to interest imposed by IRC § 6601. Lincir v. Commissioner, 115 T.C. 293, 298 (2000), aff’d, 32 F. App’x 278 (9th Cir. 2002). In limited circumstances, however, the Tax Court does have jurisdiction to redetermine interest. Pursuant to IRC § 7481(c)(1), (c)(2), the Tax Court will have jurisdiction to redetermine an overpayment of interest when certain requirements are met, including an assessment made by the IRS under IRC § 6215, which “assessment” includes interest. Critically, however, interest had not yet been assessed against the petitioners. As such, the Tax Court did not have jurisdiction to redetermine interest that had not yet been determined or assessed pursuant to IRC § 7481(c).

Original opinion: (T.C. Memo. 2020-31) Liu v. Commissioner

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