Opinion
12220-21 12223-21 17350-21 30612-21 30613-21 30615-21
08-31-2023
MICHAEL J. WATSON & TRACEY L. WATSON, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Christian N. Weiler Judge
These consolidated cases are before the Court on petitioners' Motions to Dismiss for Lack of Jurisdiction. Respondent has filed objections to the Motions. By statutory notices of deficiency, respondent determined a deficiency in petitioners' federal income tax, accuracy-related penalties under section 6662(a) , and additions to tax under section 6651(a)(1) and (a)(2). Petitioners timely petitioned this Court challenging the notices of deficiency.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (Code), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.
Background
The following facts are derived from the parties' pleadings and motion papers, including the Declarations and Exhibits attached thereto. See Rule 121(c). These facts are stated solely for the purpose of deciding the Motions before us and not as findings of fact in this case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
Respondent issued a notice of deficiency to petitioners, Michael J. Watson and Tracey L. Watson, on March 25, 2021, in Docket No. 12220-21. The final date to petition the Court for redetermination of the deficiency was June 23, 2021. Petitioners timely filed the Petition in this case on June 23, 2021. Respondent determined tax deficiencies and penalties for Michael J. Watson and Tracey L. Watson, as follows:
Tax Years Deficiencies Penalties I.R.C. § 6662(a) Additions to Tax I.R.C. § 6651(a)(1) 2015 $1,119,747 $223,949 - 2016 986,451 197,290 $48,025 2017 387,714 77,543
Respondent issued a notice of deficiency to petitioner, Watson Family Insurance Company, Ltd., on March 25, 2021, in Docket No. 12223-21. The final date to petition the Court for redetermination of the deficiency was June 23, 2021. Petitioner timely filed the Petition in this case on June 23, 2021. Respondent determined tax deficiencies and penalties for Watson Family Insurance Company, Ltd., as follows:
Additions to Tax Tax Years Deficiencies Penalties I.R.C. § 6662(a) I.R.C. § 6651(a)(1), (a)(2) I.R.C. § 6655 2015 $73,826 $14,765 - - 2016 155,373 - $34,533 $52 2017 162,130 32,426 -
Respondent issued a notice of deficiency to petitioner, Watson Insurance Company, Ltd., on May 6, 2021, in Docket No. 17350-21. The final date to petition the Court for redetermination of the deficiency was August 4, 2021. Petitioners timely filed the Petition in this case on August 4, 2021. Respondent determined tax deficiencies and penalties for Watson Insurance Company, Ltd., as follows:
Tax Years
Deficiencies
Penalties I.R.C. § 6662(a)
2015
$254,967
$50,993
2016
153,199
30,640
2017
163,991
32,798
Respondent issued a notice of deficiency to petitioner, Watson Insurance Company, Ltd., on August 17, 2021, in Docket No. 30612-21. The final date to petition the Court for redetermination of the deficiency was November 15, 2021. Petitioner timely filed the Petition in this case on November 15, 2021. Respondent determined tax deficiencies and penalties for Watson Insurance Company Ltd., as follows:
Tax Years
Deficiency
Penalty I.R.C. § 6662(a)
2018
$17,918
$3,584
Respondent issued a notice of deficiency to petitioner, Watson Family Insurance Company, Ltd., on August 17, 2021, in Docket No. 30613-21. The final date to petition the Court for redetermination of the deficiency was November 15, 2021. Petitioner timely filed the Petition in this case on November 15, 2021. Respondent determined tax deficiencies and penalties for Watson Family Insurance Company, Ltd., as follows:
Tax Year
Deficiency
Penalty I.R.C. § 6662(a)
2018
$18,245
$3,649
Respondent issued a notice of deficiency to petitioners, Michael J. Watson and Tracey L. Watson, on August 17, 2021, in Docket No. 30615-21. The final date to petition the Court for redetermination of the deficiency was November 15, 2021. Petitioners timely filed the Petition in this case on November 15, 2021. Respondent determined tax deficiencies and penalties for Michael J. Watson and Tracey L. Watson, as follows:
Tax Year
Deficiency
Penalty I.R.C. § 6662(a)
2018
$5,518
$1,104
On July 6, 2023, petitioners filed Motions to Dismiss for Lack of Jurisdiction and three Declarations in support thereof. Respondent filed Responses to Motions to
Dismiss for Lack of Jurisdiction on August 4, 2023. On August 9, 2023, petitioners filed a Reply to Response to Motion to Dismiss for Lack of Jurisdiction. Pursuant to an Order from this Court, these cases were consolidated for trial, briefing, and opinion on August 4, 2023.
Discussion
Summary of Arguments
Petitioners seek dismissal on the ground that the notices of deficiency were "deficient," arguing that respondent failed to make a determination under section 6212(a); thus, no jurisdiction was conferred upon the Court. Petitioners ask the Court to look behind the notices of deficiency and consider the actions of the Revenue Agent (RA) during the examination. Petitioners assert that "fundamental" rights under the Taxpayer Bill of Rights have been denied. Petitioners argue that the RA violated the Internal Revenue Manual's "basic written audit techniques" by failing to interview relevant parties, misquoting relevant law, citing to interview facts of a wholly separate taxpayer, and engaging in inappropriate interview techniques.
Respondent argues that dismissal is inappropriate since looking behind the notice of deficiency to determine its validity is in contravention of the Court's longstanding policy not to examine the Commissioner's administrative procedures. Respondent further argues that the Taxpayer Bill of Rights did not create any substantive rights or remedies for taxpayers.
Jurisdiction
The Tax Court is a Court of limited jurisdiction and may exercise that jurisdiction only to the extent authorized by Congress. Naftel v. Commissioner, 85 T.C. 527, 529 (1985); Breman v. Commissioner, 66 T.C. 61, 66 (1976). The Court has jurisdiction to redetermine a taxpayer's federal tax liability in a deficiency proceeding if the Commissioner has issued a valid notice of deficiency and the taxpayer has timely filed a petition. Rule 13; I.R.C. §§ 6212, 6213, 6214. If a valid notice of deficiency has not been issued, then a case commenced under section 6213(a) must be dismissed for lack of jurisdiction on that ground. See Monge v. Commissioner, 93 T.C. 22, 27 (1989); e.g., Keeton v. Commissioner, 74 T.C. 377, 379 (1980).
The Notices of Deficiency
Review of a Deficiency Proceeding
Congress has granted the Court broad discretion in ascertaining the correct liability of a taxpayer for a taxable year. A proceeding before this Court to redetermine a deficiency is a proceeding de novo, and we generally will not look behind a notice of deficiency to examine the Commissioner's procedures in making the determination. See, e.g., Riland v. Commissioner, 79 T.C. 185, 201 (1982); Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). Our decisions are based on the merits of the record before us, and not on the record developed at the administrative level. Greenberg's Express, Inc., 62 T.C. at 328.
Accordingly, our review of petitioners' tax liabilities is not limited to the administrative record, nor will it be based on the RA's examination. On the facts before us, we decline to look behind the notices of deficiency to consider the actions of the Commissioner and his RA.
Validity of a Notice of Deficiency
Section 6212(a) authorizes the Commissioner to send a notice of deficiency when he determines a deficiency in a taxpayer's tax. Although the Code authorizes the sending of a notice of deficiency, the Code does not specify the form of the notice. See I.R.C. § 6212; Jarvis v. Commissioner, 78 T.C. 646, 655 (1982). "The essential purpose of a deficiency notice is to provide a formal notification that a deficiency in taxes has been determined." Pietz v. Commissioner, 59 T.C. 207, 213-14 (1972).
Section 7522(a) provides that the notice must "describe the basis for, and identify the amounts (if any) of, the tax due, interest, additional amounts, additions to tax, and assessable penalties included in such notice." However, an inadequate description does not invalidate a notice, and the Commissioner need not explain how the deficiencies were determined. Dees v. Commissioner, 148 T.C. 1, 4 (2017); Campbell v. Commissioner, 90 T.C. 110, 115 (1988). All that is required is that the notice advise a taxpayer that the Commissioner has in fact determined a deficiency. Foster v. Commissioner, 80 T.C. 34, 229-30 (1983), aff'd in part, vacated in part, 756 F.2d 1430 (9th Cir. 1985). "Thus, all a notice of deficiency need do is identify the taxpayer, show that a deficiency was determined, state the taxable year involved, and set forth the amount of the deficiency." Pasternak v. Commissioner, 990 F.2d 893, 897 (6th Cir. 1993), aff'g T.C. Memo. 1991-181.
A defect in the fulfillment of section 6212 may result in this Court being deprived of jurisdiction to hear a deficiency case. See, e.g., Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), rev'g 81 T.C. 855 (1983). The U.S. Court of Appeals for the Ninth Circuit determined that a statutory notice that did not determine a deficiency with respect to the taxpayers for the year at issue does not meet the requirements of section 6212(a) and accordingly was deemed invalid. Id. at 1370.
Subsequently to Scar, this Court denied a taxpayers' motion to dismiss for lack of jurisdiction on the ground that the notice was invalid where the first two pages included the petitioning taxpayers' names and set forth a deficiency in tax and additions to tax for a specific year, but the following seven pages of the notice contained adjustments to income and explanations of the adjustments for a taxpayer with a different name. Campbell, 90 T.C. 110. This Court held that the first two pages of the notice were sufficient to "clearly indicate . . . the taxpayers against whom the deficiency was determined" and that the nine pages were insufficient to demonstrate that "the Commissioner failed to make a determination." Campbell, 90 T.C. at 113. The Court distinguished Scar and found that a "presumption arises that there was a deficiency [determination]" where the notice of deficiency "does not reveal on its face that the Commissioner failed to make a determination." Id. at 113.
Most recently, this Court created a two-step approach to decide whether the Commissioner issued a valid notice of deficiency sufficient to confer jurisdiction on this Court. Dees, 148 T.C. 1. The first step asks, "whether the notice objectively put a reasonable taxpayer on notice that the Commissioner determined a deficiency in tax for a particular year and amount." Id. at 6. If the notice passes the first test, the inquiry ends, we decline to look behind the notice, and the notice is valid. Id. If the notice of deficiency is ambiguous, then the party seeking to establish our jurisdiction bears the burden of proving that the Commissioner has determined a deficiency and that "the taxpayer was not misled by the ambiguous notice." Id. In Dees, this Court found that the notice issued by the Commissioner was ambiguous as it asserted a zero-dollar deficiency, but the taxpayer's timely filing of a petition showed that he was not misled by the ambiguity. Id. at 9.
In this case, petitioners appear to be seeking dismissal on the grounds of invalid notices of deficiency. Petitioners argue that the notices of deficiency are invalid as the Commissioner failed to "determine" there is a deficiency due. Petitioners assert that the "inquiry is whether a simple cryptic letter purported to be in the form of a NOD, asserting that a deficiency was determined, and whether the letter and its attachments which on their face indicate a determination was made, satisfies the statutory mandate."
Applying the approaches above, we find that petitioners were issued valid notices of deficiency, respondent determined deficiencies in accordance with relevant law, and this Court has jurisdiction over these cases. Petitioners rely heavily on Scar but fail to acknowledge the subsequent developments concerning the question of whether a notice of deficiency is valid. Compare Scar, 814 F.2d 1919, with Campbell, 90 T.C. 110, and Dees, 148 T.C. 1. The notices of deficiency issued to petitioners in this case were not ambiguous and clearly set forth the deficiencies in tax, the additions to tax, and the associated penalties. The notices of deficiency would have objectively put a taxpayer on notice that respondent had determined a deficiency in tax for a particular year and for an amount. See Dees, 148 T.C. at 6. It is clear that petitioners were aware that respondent had determined a deficiency, as in all six cases; petitioners timely filed Petitions with this Court seeking a redetermination of the deficiencies.
Taxpayer Bill of Rights
In 2015, Congress amended section 7803(a)(3) to statutorily enshrine the Taxpayer Bill of Rights. Protecting Americans from Tax Hikes Act of 2015, Pub. L. No. 114-113, § 401(a), 129 Stat. 3117. Section 7803(a)(3) imposes a duty on the Commissioner to "ensure that the employees of the Internal Revenue Service are familiar with and act in accord with taxpayer rights as afforded by other provisions of this title." The section specifically lists ten rights that are afforded to taxpayers in dealings with the Commissioner as derived from other sections of the Code. I.R.C. § 7803(a)(3).
This Court has previously held that the Commissioner's adoption of a Taxpayer Bill of Rights did not confer "any rights or remedies" onto taxpayers not previously held. Moya v. Commissioner, 152 T.C. 182 (2019). Subsequently, this Court held that section 7803(a)(3) did not confer any new rights on taxpayers, and it did not "independently establish a basis for jurisdiction" in the Tax Court in a collection due process proceeding. See Atl. Pac. Mgmt. Grp., LLC v. Commissioner, 152 T.C. 330, 336 (2019) (citing Protecting Americans from Tax Hikes Act of 2015, Pub. L. No. 114-113, sec. 401(a), 129 Stat. at 3117).
Although it is entirely unclear from the Motions currently before us, we interpret petitioners' Motions as arguing that the invalid notices of deficiency are a "blatant denial of a taxpayer's fundamental taxation rights" found under section 7803. This type of argument appears to be a due process claim based on the actions of the Commissioner in audit. As discussed above, our decision in this case will be based on the record before us, and not the prior administrative level proceeding. See Greenberg's Express, Inc. 62 T.C. at 328. Further, petitioners' filing of Petitions in this Court seeking redeterminations of the deficiencies grants petitioners the due process sought.
In any event, the language of section 7803(a)(3) does not support petitioners' claim, nor does it support petitioners' contention that this Court does not have jurisdiction over this proceeding. Any action, or administrative action, which was potentially violative of section 7803(a)(3) does not alter these proceedings.
Conclusion
Respondent issued valid notices of deficiency in these consolidated cases, and this Court has jurisdiction over these cases. Accordingly, we will deny petitioners' Motions to Dismiss for Lack of Jurisdiction.
We have considered all the arguments that the parties made, and to the extent they are not addressed herein, we find the arguments to be moot, irrelevant, or without merit.
Upon due consideration of the foregoing, it is
ORDERED that petitioners' Motion to Dismiss for Lack of Jurisdiction, filed July 6, 2023, in each of these consolidated cases, are denied.