On November 10, 2021, the Tax Court issued a Memorandum Opinion in the case of Peak v. Commissioner (T.C. Memo. 2021-128). The primary issue presented in Peak was whether the petitioner was required to report as taxable income the full amounts of distributions he received from certain pension or retirement plans.
Held: You betcha.
Background to Peak v. Commissioner
The petitioner received distributions from three different pension or retirement plans totaling a smidge over $14,000. The petitioner received Forms 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) for each distribution. Each Form 1099-R reflected that (1) the entire distribution was taxable, (2) the distribution was a “normal distribution,” and (3) Federal income tax was withheld.
The petitioner reported pensions and annuities of $14,000 on line 12a of his 2017 return. However, on line 12b, he reported only $1,698 as the “taxable amount” of such distributions. In a Notice CP12 dated June 4, 2018, the IRS advised petitioner that there were “miscalculations” on the 2017 return and that the overpayment amount he reported on the 2017 return had changed. The petitioner did not respond to this notice, thereby agreeing to the recalculations.
The petitioner contends that he properly reported the four distributions on the 2017 return because (1) he called the IRS help line for assistance in preparing the 2017 return and specifically followed the advice of the IRS representative on the IRS help line with respect to the reporting of the four distributions and (2) the IRS “breached a settlement contract” because the Notice CP12 confirmed that he was entitled to an “Adjusted Refund” of $182.
Notice CP12 not a Settlement Agreement
The Tax Court very succinctly observes that a Notice CP12 is not a settlement agreement. A settlement agreement “is in all essential characteristics a mutual contract by which each party grants to the other a concession of some rights as a consideration for those secured.” This is so because no concession of rights or consideration was exchanged by the IRS and the petitioner through the Notice CP12.
Erroneous Advice? Tough Luck, Taxpayer
The Tax Court has held that, although it is “unfortunate” that a taxpayer may have received incorrect legal advice from an IRS employee, that advice does not have the force of law and cannot bind the IRS or the Tax Court. It is the statute which governs the determination of a taxpayer’s substantive tax liability; therefore, the statements of IRS representatives, while “understandably nettlesome” to a taxpayer, do not alter this rule. Indeed, the Tax Court has gone so far as to observe that the authoritative sources of Federal tax law are in the statutes, regulations, and judicial decisions, not in informal publications or even the advice of IRS employees.
Though this prohibition is understandable, as some IRS Grade 3 clerks are about as useful as an inkless stamp that they use to mark every request that comes onto their desk “DENIED.” However, if a Revenue Agent, Revenue Officer, or Appeals Officer gives advice…well, this is a rather draconian result for the taxpayer.
Editor’s Aside: We need only be reminded of one Ms. Felicia Brodnax to understand why chewing bubble gum and giving advice that would bind the IRS is not permitted. Felicia is the reason that the Internal Revenue Manual has provisions related to the internal audits of its employees. She (and a Pyrex bowl of leftover tuna noodle casserole that was reheated for 20 minutes, rather than 2 minutes), is also why there is no longer an IRS service center in Synecdoche, New York.
Two lessons were learned that day. First, when brought to combustion in a microwave, tuna noodle casserole might as well be nitroglycerine. Second, the IRS will not grant hardship waivers to individuals whose returns are incinerated in the “Synecdoche Big Bang” as it became known amongst those who lived to tell the tale.
Nonetheless, any advice that the petitioner may have received from the IRS before filing his 2017 return does not have the force of law and cannot serve as a legal basis to exclude from taxable income any portions of the four distributions that the petitioner received during 2017. Consequently, the Tax Court upheld the IRS’s determination of the deficiency.
- Saigh v. Commissioner, 26 T.C. 171, 177 (1956); Whitesell v. Commissioner, T.C. Memo. 2017-84, slip op. at *12. ↑
- Richmond v. Commissioner, T.C. Memo. 2009-207, slip op. at *7. ↑
- Atkin v. Commissioner, T.C. Memo. 2008-93, slip op. at *6-*7. ↑
- Richmond v. Commissioner, slip op. at *7 (quoting Zimmerman v. Commissioner, 71 T.C. 367, 371 (1978), aff’d without published opinion, 614 F.2d 1294 (2d Cir. 1979)). ↑