Faced with the prospect of potential tax liability after an unsuccessful audit, taxpayers are faced with the options of filing a petition in the US Tax Court (Tax Court) prior to paying the liability or paying the liability, making a claim for refund, and (if denied or more than six months have passed) suing the government for a refund in local district court or the Court of Federal Claims. For taxpayers that select the Tax Court route, sometimes a question later arises as to whether they can seek to dismiss their case in order to refile in a different forum. The problem that arises is that Internal Revenue Code (Code) Section 7459(d) provides that if a Tax Court petition in a deficiency proceeding is dismissed (other than for lack of jurisdiction), the dismissal is considered as a decision that the deficiency is the amount determined by the Internal Revenue Service (IRS).
Taxpayers have attempted to avoid this rule in the past, presumably so that they could refile a lawsuit in another forum either because they believe that forum would be more favorable or because they desire a jury trial (Tax Court cases are bench trial; no juries are allowed). More than 40 years ago, the Tax Court rejected this tactic in Estate of Ming v. Commissioner, 62 TC 519 (1974), holding that under Code Section 7459(d), a taxpayer who petitions the court for a redetermination of a deficiency may not withdraw a petition to avoid the entry of decision. Specifically, the court held: “It is now a settled principle that a taxpayer may not unilaterally oust the Tax Court from jurisdiction which, once invoked, remains unimpaired until it decides the controversy.” Since Ming, the Tax Court has distinguished its holding in collection due process cases which involve the review of the IRS’s collection action, not the redetermination of a tax deficiency. See Wagner v. Commissioner, 118 TC 330 (2002). The Tax Court has further extended Wagner to non-deficiency cases involving whistleblower claims under Code Section 7623(b)(4) and stand-alone innocent spouse cases under Code Section 6015(e)(1). See Jacobson v. Commissioner, 148 TC No. 4 (Feb. 8, 2017); Davidson v. Commissioner, 144 TC 273 (2015).
In Schussel v. Commissioner, 149 TC No. 16 (Oct. 5, 2017), the taxpayer attempted to distinguish Estate of Ming and fit within the holding in Wagner and the other cases in the transferee liability context involving Code Section 6091. This statute is a procedural statute authorizing the assessment of transferee liability in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the transferee liability was incurred. It does not create or define a substantive liability; rather, it merely provides the IRS with a remedy for enforcing and collecting from the transferee of the property the transferor’s existing liability. The taxpayer in Schussel argued that, because the parties had reached a settlement as to the claims before the court, he was not seeking a redetermination of a deficiency, Code Section 7459(d) did not apply, and the IRS would not suffer from dismissal of the case.
The Tax Court rejected the taxpayer’s argument. It reasoned that the relevant statutory and regulatory provisions make clear that transferee liability cases are not akin to collection actions but rather are similar to deficiency cases and should be treated procedurally by the Court in the same manner. The court found the fact that the taxpayer was seeking dismissal with prejudice to be unconvincing because, under the applicable rules, any dismissal would effectively be with prejudice. Accordingly, the court held that Estate of Ming applies to transferee liability cases and cannot be dismissed, with or without prejudice, without entry of a decision as to the amount of the liability.
Practice Point: Taxpayers faced with the prospect of litigation need to carefully consider in which forum they will litigate their case. Once that decision is made, it may not be possible to dismiss the case and seek to refile in a more favorable forum. For a more detail discussion of tax litigation forums, see here.