August 25, 2019

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What Happens At Exam, Stays At Exam!

A recent case decided by the US Tax Court reminds us that when you litigate a case in Tax Court, what happened during the Internal Revenue Service (IRS) examination and Appeals bears very little relevance (if any) once you get to court. Generally, Tax Court’s proceedings are de novo, and the court looks solely to the IRS’s position in the Notice of Deficiency (Notice). The Revenue Agent’s Report and other statements made by the IRS before the issuance of the Notice are typically ignored.

In Moya v. Commissioner, 152 TC No. 11 (Apr. 17, 2019), the IRS determined deficiencies related to the disallowance of certain business expense deductions. The taxpayer did not assign error to the disallowance, but instead argued that the Notice was invalid because the IRS had violated her right to be informed and her right to be heard under an IRS news release and an IRS publication outlining various rights of taxpayers. Specifically, the taxpayer asserted that she had requested that her examination proceedings be transferred to California after she had moved from Las Vegas to Santa Cruz, and that the IRS had violated the her rights by providing vague and inconsistent responses to, and by ultimately denying, her request.

The IRS responded by citing Greenberg’s Express, Inc. v. Commissioner, 62 TC 324 (1974), which provides that because a Tax Court proceeding to redetermine a deficiency is a de novo proceeding, the court considers the deficiency on its merits and, in particular, does not “look behind” the Notice to assess the IRS’s conduct in issuing the Notice. Because the taxpayer did not contest the deficiency on its merits, the IRS argued that the deficiencies should be valid notwithstanding any violations of taxpayer rights during examination.

The Tax Court ruled in favor of the IRS. The court acknowledged that it had, in past cases, deviated from Greenberg’s Express to consider constitutional violations made by the IRS during examination and that in those cases it had shifted the burden of production from the taxpayer to the IRS. However, the Tax Court noted that, even in those cases involving constitutional violations, the remedy had not been to invalidate the Notice altogether. The court then held that any violation of the rights asserted by the taxpayer was not a constitutional violation but was, at most, a violation of a statutory right or of an administrative procedure. The Tax Court refused to invalidate the Notice or to shift the burden of production to the IRS in such a case, instead adhering to Greenberg’s Express and determining the deficiency de novo. Because the taxpayer had not addressed the deficiencies on the merits despite being requested by the court to do so, the court sustained the deficiencies in the Notice.

The Tax Court also noted that the taxpayer made no reference to Internal Revenue Code (Code) section 7803(a)(3), which now requires that the IRS ensure that its employees are familiar with and act in accord with the taxpayer rights afforded in the Code, including the rights set forth in the IRS News Release and Publication referred to by the taxpayer. Code section 7803(a)(3) was not in effect at the time the Notice was issued and, therefore, was not applicable. The court did note that it was inevitable that it would have to address Code section 7803(a)(3) and the duties imposed on the IRS. For our prior coverage of Code section 7803(a)(3) and taxpayer rights, see here.

Practice Point: This case reinforces the rule that what happens during the examination typically is not relevant to a court proceeding. Strategically, it is best to look at the examination as a “trial run.” It is also important to remember to allege substantive errors in a Tax Court petition to avoid being treated as conceding the IRS’s adjustments. Regarding Code section 7803(a)(3), the court specifically declined to rule on the merits on this issue but the opinion does provide a useful roadmap regarding statutory taxpayer rights.

© 2019 McDermott Will & Emery


About this Author


Le Chen focuses his practice on US and international tax matters.

While in law school, Le served as executive notes development editor for The Tax Lawyer and was a semifinalist in the 2016 Thomas Tang National Moot Competition. In addition to participating in the Georgetown Law Appellate Courts Immersion Clinic, he interned at the US Department of Justice, Tax Division, and served as a pro bono law clerk for the AARP Legal Counsel for the Elderly.

From 2014 to 2015, Le was a research scientist at the New Jersey Department of the Treasury, Office of the...

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Andrew R. Roberson tax attorney McDermott Will. Andy handles tax cases in Federal court, United States Tax Court

Andrew R. Roberson is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  Andy specializes in tax controversy and litigation matters, and has been involved in over 30 matters at all levels of the Federal court system, including the United States Tax Court, several US Courts of Appeal and the Supreme Court. 

Andy also represents clients, including participants in the CAP program, before the Internal Revenue Service Examination Division and Appeals Office, and has been successful in settling tax disputes through the administrative appeals and Fast Track processes.  He has extensive experience in Tax Court practice and procedure, corporate reorganizations, TEFRA, tax accounting and substance/form issues.  Andy is a frequent speaker on tax topics and has authored several articles on tax matters. 

Andy is active in the pro bono community, providing services to low-income individuals in Federal and state tax disputes on issues such as substantiation, deductions and credits, innocent spouse relief and collection matters.  He was recently named 2012 Volunteer of the Year by the Center for Economic Progress.

Kevin Spencer, McDermott Will & Emery LLP , Tax Litigation Attorney

Kevin Spencer is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Washington, D.C., office.  He focuses his practice on tax controversy and litigation issues. 

Kevin represents clients in complicated tax disputes in court and before the Internal Revenue Service (IRS) at the IRS Appeals and Examination divisions.

In addition to his tax controversy practice, Kevin has broad experience advising clients on various tax issues, including tax accounting, employment and...