SCOTUS Reports

Tag: IRS audits

  • Burlage v. Commissioner, T.C. Memo. 1993-448: When IRS Can Reexamine Tax Years Without Notice

    Burlage v. Commissioner, T. C. Memo. 1993-448

    The IRS may reexamine a tax year without providing notice under section 7605(b) if the reexamination arises from an examination of a different tax year using the same records.

    Summary

    In Burlage v. Commissioner, the IRS reexamined the petitioners’ 1987 tax year after examining their 1988 amended return, using the same records related to a subchapter S corporation’s losses. The court held that this reexamination did not violate section 7605(b) as it was not an “unnecessary examination” and did not constitute a “second inspection” of the 1987 records. The decision emphasized that the IRS may reexamine a year without notice if the same records are examined in connection with a different tax year, and highlighted the annual nature of tax assessments, allowing for independent examinations of each year.

    Facts

    Petitioners resided in Englewood, Colorado. Revenue Agent Burlage examined petitioners’ 1987 tax year, allowing a loss from Digby Leasing based on a draft Schedule K-1 and a memorandum provided by petitioners’ representative. Later, Agent Chase examined petitioners’ 1988 amended return, which included a similar loss from Digby Leasing. Upon reviewing the 1988 records, Agent Chase determined that petitioners lacked sufficient basis for the claimed losses in both 1987 and 1988. He then reexamined the 1987 tax year, leading to a notice of deficiency for 1987 without providing written notice to petitioners.

    Procedural History

    The IRS issued notices of deficiency for petitioners’ 1987, 1988, and 1989 tax years, which were consolidated for trial. The parties resolved all substantive issues except whether Agent Chase’s reexamination of the 1987 tax year violated section 7605(b) by being an unnecessary examination or a second inspection without notice.

    Issue(s)

    1. Whether Agent Chase’s reexamination of petitioners’ 1987 tax year constituted an “unnecessary examination” under section 7605(b).
    2. Whether Agent Chase conducted a “second inspection” of petitioners’ 1987 records without providing written notice as required by section 7605(b).

    Holding

    1. No, because the reexamination was necessary as it was based on information obtained from the 1988 examination and was not barred by the prior examination or agreement.
    2. No, because the reexamination of the 1987 tax year using the same records as the 1988 examination did not constitute a second inspection under section 7605(b).

    Court’s Reasoning

    The court applied section 7605(b), which aims to limit unnecessary examinations and second inspections without notice. It found that Agent Chase’s reexamination of the 1987 tax year was not unnecessary because it was based on new information from the 1988 examination, and the statute does not limit the number of examinations for the same year. The court also determined that there was no second inspection of the 1987 records since the same records were examined in connection with the 1988 tax year, and each tax year is treated as a separate matter. The court cited cases like United States v. Powell and Curtis v. Commissioner to support its interpretation of section 7605(b). The court noted that the purpose of section 7605(b) is to curb the investigating powers of low-echelon revenue agents, but it does not restrict the IRS from examining subsequent years using the same records.

    Practical Implications

    This decision allows the IRS greater flexibility to reexamine tax years without providing notice if the same records are relevant to an examination of a different year. Practitioners should be aware that signing a Form 870 does not preclude further examination of the same year. The ruling reaffirms the principle that each tax year is a separate liability, which may affect how taxpayers and their representatives handle ongoing audits and amended returns. Future cases may reference Burlage when addressing the scope of section 7605(b) and the IRS’s ability to reexamine tax years based on information from subsequent years.

  • Penn-Field Industries, Inc. v. Commissioner, 75 T.C. 728 (1980): Limits on Discovery in Allegations of Selective Enforcement

    Penn-Field Industries, Inc. v. Commissioner, 75 T. C. 728 (1980)

    Discovery requests must be relevant and not unduly burdensome, especially in claims of selective enforcement by the IRS.

    Summary

    In Penn-Field Industries, Inc. v. Commissioner, the petitioner sought extensive discovery from the IRS to support its claim of selective enforcement regarding the deductibility of compensation paid to shareholder-employees. The Tax Court denied the request, finding it irrelevant and unduly burdensome. The court reasoned that the IRS’s selection of taxpayers for audit is not unconstitutional unless based on impermissible criteria. This decision highlights the court’s discretion in managing discovery and the high burden on taxpayers alleging selective enforcement.

    Facts

    Penn-Field Industries, Inc. , a corporation based in Pennsylvania, sought a redetermination of its income tax deficiencies for fiscal years ending March 31, 1974, and March 31, 1975. The petitioner alleged that the IRS practiced invidious discrimination in its audits and litigation concerning the deductibility of reasonable compensation paid to shareholder-employees of closely held corporations. To support this claim, Penn-Field served the IRS with 248 interrogatories seeking detailed statistical data on corporate audits from 1968 to 1977. The IRS objected, stating that gathering such information would be unduly burdensome and irrelevant to the case at hand.

    Procedural History

    Penn-Field filed a motion under Tax Court Rule 71 to compel the IRS to answer its interrogatories. The IRS responded with a motion for a protective order under Rule 103. A hearing was held on April 28, 1980, in Philadelphia, where both parties presented oral arguments. The petitioner also submitted a brief addressing the IRS’s objections.

    Issue(s)

    1. Whether the petitioner’s interrogatories seeking statistical data on IRS audits are relevant to its claim of selective enforcement.
    2. Whether the interrogatories impose an undue burden on the IRS.

    Holding

    1. No, because the interrogatories do not establish a colorable claim of selective enforcement based on impermissible criteria.
    2. Yes, because gathering the requested information would be unduly burdensome in terms of time, money, and personnel.

    Court’s Reasoning

    The Tax Court emphasized that discovery in tax cases should be focused on facts directly relevant to the issues at hand. The court cited Estate of Woodard v. Commissioner, stating that the purpose of discovery is to ascertain facts bearing directly on the case’s issues. The court accepted the IRS’s argument that it does not maintain the detailed statistical data requested by the petitioner. Complying with the interrogatories would require examining millions of corporate tax returns, which would be astronomically burdensome. The court also found the petitioner’s allegations of constitutional violations irrelevant, as the petitioner failed to show that the IRS’s audit selection was based on impermissible criteria like race or religion. The court relied on Oyler v. Boles, which held that selective enforcement is not unconstitutional unless based on an unjustifiable standard. The petitioner needed to demonstrate both that it was singled out for audit while others were not, and that this selection was based on impermissible grounds. The court concluded that the petitioner’s failure to meet these requirements rendered its discovery request irrelevant and burdensome.

    Practical Implications

    This decision sets a high bar for taxpayers seeking discovery in allegations of selective enforcement by the IRS. It underscores the court’s discretion in managing discovery and the need for taxpayers to establish a colorable claim before pursuing extensive discovery. Practitioners should be aware that broad discovery requests may be denied if they are unduly burdensome or not directly relevant to the case’s issues. The ruling also reinforces the IRS’s discretion in selecting taxpayers for audit, as long as this selection is not based on impermissible criteria. Future cases alleging selective enforcement will need to provide strong evidence of both discriminatory selection and impermissible criteria to justify extensive discovery. This case may influence how courts in other jurisdictions handle similar discovery disputes in tax litigation.