“Fatally Inconsistent:” Notice of Deficiency Invalid Due to Ambiguity

Eli Noff, Esq., Partner
Mary F. Lundstedt, Esq., Associate

On October 28, 2019, in U.S. Auto Sales, Inc. v. Commissioner,1 the Tax Court dismissed a case, holding that the Notice of Deficiency (NOD), issued by the Internal Revenue Service (IRS), was ambiguous on its face because it identified two different taxpayers as potentially liable for the deficiencies. The decision should motivate taxpayers and tax professionals to carefully review NODs for ambiguity such as this-and where multiple parties are identified in an ambiguous document, then all parties should petition!

Facts

Two related entities, AF and AS, share a mailing address and counsel; however, they filed separate income tax returns for taxable years ending (TYE) June 30, 2003, June 30, 2007, and June 30, 2008.

On May 15, 2012, the IRS issued what it believed to be a NOD. The document was comprised of: (1) a cover letter, addressed to AS (Petitioner) and attributing deficiencies to AS for TYE June 30, 2003 and 2007; (2) a Form 4089, Notice of Deficiency - Waiver, addressed to AS and referencing the same deficiencies (amounting to approximately $55,000); (3) a Form 5278, Statement - Income Tax Changes, which indicated AF (not AS) as the taxpayer liable for the same deficiencies; and (4) Form 886-A, Explanation of Adjustments, which showed AF (not AS) as the taxpayer and purported to explain the corresponding adjustments.

On August 2, 2012, the IRS issued to AS yet another purported NOD pertaining to TYE June 30, 2007 and 2008. The tax deficiencies in the August notice totaled approximately $6.3 million, and accuracy penalties totaled approximately $1.3 million. Later that same month, the IRS issue AF a notice which was nearly identical to the initial May document-without referencing AS this time.

AS timely filed its petition on the initial May notice. AS alleged that the May notice was "erroneous, arbitrary and capricious, and that respondent should bear the burden of proof as to all items."2 Additionally, in the petition, AS admitted that the proposed deficiencies were applicable to AF. Later, AS also filed a petition on the August notice.

Claiming lack of jurisdiction, the IRS sought the dismissal of the petition for the May notice. The IRS argued that the notice failed to make a determination as to AS, and, as such, the notice was invalid.

AS, opposing dismissal, claimed the May notice was valid to confer Tax Court jurisdiction.

Background

Per Internal Revenue Code (IRC) §6212 a NOD may be issued to the taxpayer when the IRS determines a deficiency. Although, there is no standard or required format for a NOD, it must at least provide: (1) the tax year; (2) the tax; and (3) inform the taxpayer that it is their tax for that tax year.

Dees v. Commissioner3 provides the standard applied by the Tax Court to when deciding the validity of an ambiguous NOD. Specifically, it established a two-part test, applied as follows:

  • First, is the notice objectively clear such that it informs a reasonable taxpayer that the IRS determined a deficiency as to that taxpayer. If not, then apply the second part of the test.
  • Second, if the notice is ambiguous, the party seeking Tax Court jurisdiction must show both: (1) the IRS made a determination regarding the taxpayer, and (2) the ambiguous notice did not mislead the taxpayer.

Analysis

The court applied the two-part test, and the majority agreed that the notice was ambiguous on its face. Simply put, the court found it nearly impossible to determine which taxpayer was the subject of the May document. Indeed, the court stated:

Though the May notice is consistent throughout as to the amounts of the deficiencies and the years at issue, it is fatally inconsistent as to the identity of the taxpayer against whom the deficiencies are determined.

Accordingly, the court moved to the second part of the Dees test. The court noted that Petitioner (again, AS) was the party seeking Tax Court jurisdiction; thus, AS carried the burden of proof. The Tax Court determined that AS could not and did not prove the May notice reflected a determination as to AS. The court emphasized that AS admitted that the proposed deficiencies in the May notice were applicable to AF. Furthermore, the court was convinced that AS's tax returns were unambiguous and confirmed that the May notice did not reflect a determination with respect to AS.

Ultimately, the Tax Court determined that it lacked jurisdiction over the invalid May notice. For AS, then, the purported notice was so ambiguous that it didn't even qualify as a NOD.

Note, though, that it is entirely possible that the document was a valid NOD as to AF. The document was, after all, sent to its last known address, so the two-part test may have ended differently if applied for AF.

Taxpayers and tax practitioners should always carefully review a purported NOD for ambiguity. In a similar situation, where the document is ambiguous and related entities are both name in the NOD, all named entities would do well to petition.

If you have questions or concerns regarding tax matters, contact Frost & Associates, LLC today at 410-497-5947.


1 153 T. C. No. 5 (Oct. 28, 2019).

2 Id. at 5.

3 148 T.C. 1 (2017). Interestingly, this decision was issued after the AS petitions were filed.

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