Tax Court in Brief | Schwartz v. Comm’r | Collection Due Process; Credit Election Overpayment; Quintessential Tax Procedure

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The Tax Court in Brief – December 19th – December 23rd, 2022

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Tax Litigation:  The Week of December 19th, 2022, through December 23rd, 2022

Schwartz v. Comm’r, T.C. Memo. 2022-125| December 21, 2022 | Vasquez, J. | Dkt. No. 17291-14L

Short Summary:  Eric Schwartz (“Schwartz”) and his spouse divorced.  Pursuant to those divorce proceedings, the state court required Schwartz and his spouse to make an estimated tax payment of $150,000 to the IRS to help cover their estimated tax liabilities for 2005.  Although Schwartz made the payment and filed an extension of time to file his 2005 tax return, he did not timely file his 2005 return because he believed that he could not do so by state court order.

At various times, Schwartz contacted the IRS to address the unfiled 2005 tax return.  On or about March 28, 2008, he mailed the IRS a form and correspondence indicating that he wanted to apply any overpayment of his 2005 taxes to his 2006 and 2007 tax years.  The IRS responded to the letter on May 7, 2008, noting that it would need additional time to review his claim and that he need not take any further action.  He did not receive any further correspondence from the IRS regarding the 2005 overpayment.

When the state court divorce matter concluded, Schwartz filed his 2005 tax return in October 2011.  On his 2005 return, he reported total tax of $45,282 and an estimated tax payment of $29,718.  On Line 74 of the 2005 return, he indicated that he wanted to apply the entire amount of the claimed refund against his 2006 estimated tax.  The IRS accepted the 2005 tax return but did not transfer the overpayment to 2006.  Rather, the IRS concluded that the credit overpayment request for 2006 was not timely.  Schwartz also filed later year tax returns claiming the credit overpayment flow through on those years.

The IRS issued final notices of intent to levy against Schwartz with respect to his 2006, 2007, 2010, 2011, and 2012 tax years.  Schwartz timely requested CDP hearings and asked Appeals to apply his 2005 overpayment against his liabilities for the years at issue.  Appeals concluded that Schwartz’s March 28, 2008, correspondence did not constitute an informal refund claim.  Appeals issued its Notice of Determination, sustaining the proposed levies, and Schwartz filed a timely petition with the Tax Court.

Key Issues

  • Whether the Tax Court has jurisdiction to review a determination by Appeals as to whether a credit elect overpayment from 2005 should be applied against the tax liabilities at issue (2006, 2007, 2010, 2011, and 2012) in the CDP hearing.
  • If the Tax Court does have jurisdiction to review the credit elect overpayment issue, whether Schwartz’s communications with the IRS related to his 2005 overpayment constituted an informal claim for refund.

Primary Holdings:

  • The Tax Court does not have jurisdiction to address the application of credit elects against Schwartz’s 2010, 2011, and 2012 tax liabilities. The IRS may continue with levy action with respect to these tax years.
  • The Tax Court does have jurisdiction to address the application of credit elects against his 2006 and 2007 tax years.
  • Schwartz’s communication constituted an informal refund claim because: (1) the IRS received the writing within 2 years of his payment; (2) Schwartz explained the divorce proceeding and stated that he expected his payment to satisfy his liability for 2005 with any remainder to his 2006 through 2008 tax years; and (3) the IRS acted upon the claim.  When Schwartz later filed his 2005 tax return, he perfected his claim.  His informal claim eliminates the tax liabilities for 2006 and 2007 in that the overpayment from 2005 offsets those tax liabilities.

Key Points of Law:

  • If the validity of a taxpayer’s underlying liability is properly at issue, the Tax Court reviews Appeals’ determination of the issue in a CDP case de novo. Sego v. Comm’r, 114 T.C. 604, 610 (2000).  Where there is no dispute as to the taxpayer’s underlying liability, we review the administrative determination for an abuse of discretion.  Cropper v. Comm’r, 826 F.3d 1280, 1284 (10th Cir. 2016); Goza v. Comm’r, 114 T.C. 176, 182 (2000).  Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law.  See Murphy v. Comm’r, 125 T.C. 301, 320 (2005).
  • There is some uncertainty in Tax Court precedents as to whether a de novo or an abuse-of-discretion standard of review applies in a situation such as that present in this case. In Landry v. Comm’r, 116 T.C. 60 (2001), the Tax Court applied a de novo standard of review where the taxpayer challenged the IRS’s failure to apply an overpayment credit from another year.  On the other hand, the Tax Court has applied an abuse-of-discretion standard when considering challenges to the IRS’s application of a tax payment.  See Melasky v. Comm’r, 151 T.C. 89, 92 (2018).  However, the Tax Court will not address the proper standard when they would hold under both standards in favor of the IRS or the taxpayer.  See Dixon v. Comm’r, 141 T.C. 173, 184 (2013); Estate of Adell v. Comm’r, T.C. Memo. 2014-89.
  • Generally, the Tax Court does not have jurisdiction in a CDP case to consider matters regarding nondetermination years—e., tax years that are not the subject of the collection action. See Swanberg v. Comm’r, T.C. Memo. 2020-123.  However, the Tax Court may consider facts and issues from other years to the extent that they “are relevant in evaluating a claim that an unpaid tax has been paid.”  Freije v. Comm’r, 125 T.C. 14, 27 (2005).  An available credit from another year is a fact that may affect the amount of the taxpayer’s unpaid tax for the year before the Court.  Weber v. Comm’r, 138 T.C. 348, 371-72 (2012).
  • The regulations provide that if a taxpayer indicates on its return (or amended return) that all or part of an overpayment shown by its return (or amended return) is to be applied to an estimated income tax for the succeeding tax year, such indication shall constitute an election to so apply such overpayment. Reg. § 301.6402-3(a)(5).  This election is known as a “credit-elect overpayment” or simply a “credit elect.”  Weber, 138 T.C. at 357.  In Weber, the Tax Court concluded that it has jurisdiction to consider a non-determination-year credit elect claimed on a return for the determination year.
  • Although the Tax Court may consider “whether a credit available from another tax year should be applied to the taxpayer’s liability for the year before the Court,” the Tax Court may do so only if that other credit “indisputably exists.” Del-Co W. v. Comm’r, T.C. Memo. 2015-142.  A mere claim for a credit “is not an available credit” and such a claim “need not be resolved before the IRS can proceed with collection of the liability at issue.”  Weber, 138 T.C. at 371-72.
  • Section 6402 provides that in the case of any overpayment, the IRS may, within the applicable period of limitations, credit the amount of an overpayment, including any interest allowed thereon, against any tax liability and, if none exists, must (subject to some exceptions) refund any balance to the taxpayer. Under section 6402(a), the application of overpayments of a taxpayer from other years to a particular year of the taxpayer is subject to the applicable refund period of limitations.  Crum v. Comm’r, T.C. Memo. 2008-216.
  • Section 6511(a) provides that a taxpayer must file his or her claim for credit or refund of overpayments with the IRS within the later of three years from the date the return was filed or two years from the date the tax was paid. If the taxpayer did not file a return, then the claim must be made within two years from the time the tax was paid.  R.C. § 6511(a).  If the three-year period applies, the refund is limited to the tax paid during the three years, plus any extension of time for filing the return, immediately preceding the filing of the refund claim (the three-year lookback period).  I.R.C. § 6511(b)(2)(A).  If the two-year period applies, the refund is limited to the tax paid during the two years immediately preceding the filing of the refund claim.  I.R.C. § 6511(b)(2)(B).
  • The regulations provide that a properly prepared claim for credit or refund of income tax “shall be made on the appropriate income tax return.” Reg. § 301.6402-3(a)(1).
  • It has long been recognized that a writing which does not qualify as a formal refund claim nevertheless may toll the period of limitations for refunds if (1) the writing is delivered to the IRS before the expiration of the applicable period of limitations; (2) the writing in conjunction with its surrounding circumstances adequately notifies the IRS that the taxpayer is claiming a refund and the basis thereof; and (3) either the IRS waives the defect by considering the refund claim on its merits or the taxpayer subsequently perfects the informal refund claim by filing a formal refund claim before the IRS rejects the informal refund claim. S. v. Kales, 314 U.S. 186, 194 (1941); George Moore Ice Cream Co. v. Rose, 289 U.S. 373 (1933); Bemis Bros. Bag Co. v. U.S., 289 U.S. 28, 32 (1933).  There are no bright-line rules as to what constitutes an informal claim.  Turco v. Comm’r, T.C. Memo. 1997-564.  Rather, each case must be decided on its own particular facts.  Id.  The relevant question is whether the IRS knew or should have known that a refund claim was being made.  Id.
  • In reviewing an informal refund claim, the IRS must also look at all of the surrounding circumstances and not merely the writing of the taxpayer. See Gustin v. U.S. IRS, 876 F.2d 485, 489 (5th 1989) (“[T]he writing should not be given a crabbed or literal reading, ignoring all the surrounding circumstances which give it body and content.  The focus is on the claim as a whole, not merely the written component.”).

Insight: The Schwartz case is the quintessential tax procedure case.  It addresses the Tax Court’s jurisdiction in CDP situations and the complexities inherent in trying to satisfy the refund statute of limitations when filing an informal refund claim.  The Schwartz case also represents a big win for taxpayers in that it affirms taxpayers may properly utilize a credit elect from prior non-determination years to satisfy tax liabilities at issue in their CDP case.

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