By: Leandra Lederman
In QinetiQ v. Commissioner, the Court of Appeals for the Fourth Circuit refused to invalidate a Notice of Deficiency that simply stated “that QinetiQ ‘ha[d] not established that [it was] entitled’ to a deduction ‘under the provisions of [26 U.S.C.] § 83.’” The taxpayer had argued that the Notice “failed to provide a reasoned explanation for the agency’s final decision, as required by the Administrative Procedure Act (APA), 5 U.S.C. §§ 701-06.” The court’s analysis of this issue focuses on the distinction between court review that is subject to the APA and court review that is not. The QinetiQ court found that review of IRS deficiency actions, which predates the APA, falls into the latter category.
The QinetiQ case can readily be grouped with Mayo Foundation and the post-Mayo cases focused on the intersection of administrative law with federal tax law. In a recent post on the Procedurally Taxing blog, Bryan Camp does a nice job of analyzing the case in that context. But another perspective on the case is that the APA argument in QinetiQ is the latest packaging of some taxpayers’ complaints about uninformative Notices of Deficiency. In fact, QinetiQ also argued that the Notice violated Code section 7522, which requires various IRS notices, including Notices of Deficiency, to “describe the basis for, and identify the amounts (if any) of, the tax due, interest, additional amounts, additions to the tax, and assessable penalties included in such notice.”
As I wrote over two decades ago, in one of my first articles, “‘Civil’izing Tax Procedure: Applying General Federal Learning to Statutory Notices of Deficiency,” 30 U.C. Davis L. Rev. 183 (1996), the conflicts and confusion over the validity of Notices of Deficiency stem from two issues. The first is that courts often focus on only one of the Notice’s functions in isolation, such as its jurisdictional role as the “ticket to Tax Court” in deficiency cases. My 1996 article argued that the Notice of Deficiency not only plays that role, it also provides notice to the taxpayer (like civil process) and acts as an inchoate complaint, helping to frame the issues if a Tax Court case ensues. As I explain there, less content should be required for jurisdictional purposes than to frame the content of the litigation. Code section 7522 arguably reflects this idea, as I’ll explain further below.
The second contributor to these conflicts over Notices of Deficiency is what is at stake when a taxpayer challenges the validity of a Notice. If the Tax Court finds the notice invalid, it must dismiss the case for lack of jurisdiction. An invalid notice generally is insufficient to toll the statute of limitations under Code section 6503(a). By the time the Tax Court finds the notice invalid, the statute of limitations on assessment likely will have expired. (If, instead, the IRS wins on the validity issue, the taxpayer generally can litigate the case in Tax Court, or, if the taxpayer filed the petition late, may pay the amount in the notice and follow the procedures to get the case heard in refund court.)
Code section 7522 acknowledges the difficulties uninformative IRS notices pose for taxpayers by requiring a description, as quoted above. But section 7522 also acknowledges the difficulty that invalidating a notice imposes on the IRS (generally, inability to assess the deficiency), stating, “An inadequate description under the preceding sentence shall not invalidate such notice.” The statute thus precludes that particular remedy for violations of its requirements. That is consistent with my argument that not all failures in the Notice of Deficiency implicate Tax Court subject matter jurisdiction. Note that section 7522 does not preclude other remedies, such as shifting the burden of proof to the IRS. See Shea v. Commissioner, 112 T.C. 183, 196-97 (1999), nonacq. 2000-44 I.R.B. 429.
The QinetiQ court did not reach the remedy question because it did not find a violation of section 7522. However, the Fourth Circuit’s analysis of the section 7522 issue suggests that it may have fallen into the trap of focusing purely on the validity or invalidity of the Notice, rather than on whether the Notice had inadequacies that could be remedied in some other way. That is, the court framed this issue as follows:
We next consider whether the Notice of Deficiency in this case was insufficient to satisfy the requirement of Section 7522(a) of the Code that the IRS “describe [in the Notice] the basis for, and identify the amounts (if any) of, the tax due, interest, additional amounts, additions to the tax, and assessable penalties.” 26 U.S.C. § 7522(a). The statute further provides that “an inadequate description under the preceding sentence shall not invalidate such notice.” Id. However, the statute is silent regarding the circumstances, if any, that will cause a Notice of Deficiency to be invalidated. Id.
QinetiQ US Holdings, Inc. & Subs. v. Comm’r, 2017 U.S. App. LEXIS 272, *13 (4th Cir. 2017) (emphasis added).
Note that, in the italicized language, the Court of Appeals did not state something like “the statute is silent regarding the remedy for a violation of Code section 7522.” The court did not address that issue; instead, the next paragraph discusses case law on the validity issue, and the final paragraph in that section finds that “the Notice of Deficiency issued to QinetiQ satisfied the basic requirements of the Internal Revenue Code.” Id. at *14. Thus, the QinetiQ court found that the Notice of Deficiency met the minimal elements necessary to be valid and thus sufficient for Tax Court subject matter jurisdiction purposes. The court did not analyze the question of whether, despite being valid, the notice lacked a sufficiently detailed explanation such that the taxpayer was entitled to some other remedy.
Courts’ failure to distinguish among the various functions of the Notice of Deficiency is unfortunate, not least because it may make courts reluctant to find uninformative Notices of Deficiency inadequate. If the only remedy for an inadequate notice is dismissal of the case, some courts may be inclined to put a thumb on the scale in the IRS’s favor. But a notice can be inadequate without being invalid. The Notice in QinetiQ may have contained sufficient information, but in the next case in which the taxpayer challenges the Notice on procedural grounds, I hope the court hearing that challenge will consider the question of whether the remedy sought is the correct one for any violation the court may find.