United States: Liberty Global Turns The Deficiency Procedures Upside Down

Can the IRS sue a corporation because it believes the company underreported its taxes? You might think the answer is no — the IRS must first propose an adjustment, let the company go to Appeals, and then issue a notice of deficiency.

Afterward, the company can either file suit in the Tax Court or pay the taxes and sue for a refund in federal district court or the Court of Federal Claims. But Liberty Global¹ calls into question whether that process is mandatory because a federal district court determined that the government may sue for allegedly unpaid taxes instead of issuing a notice of deficiency. All corporate taxpayers should be aware of this case.

The federal government took a surprising step in Liberty Global by suing the taxpayer for unpaid federal income taxes. In its motion to dismiss, Liberty Global Inc. argued that the IRC's deficiency provisions prohibit the government from suing a taxpayer without first issuing a notice of deficiency.² Not so, the court said, finding that the government can issue a notice of deficiency or exercise its "common-law right to sue for outstanding debt."³

This common law right is rarely invoked. The few cases in which it has been (aside from Liberty Global) generally involved the government's attempt to collect tax liabilities that had already been established or assessed. Since Congress enacted the deficiency procedures over 100 years ago, it is unclear whether the government has ever initiated a lawsuit to establish a tax deficiency rather than collect a known liability. In Liberty Global, it has attempted to revive this little-known common law right.

I. Legal Background

In the United States, taxpayers must file returns reporting their income and tax liability.⁴

The IRS may examine these returns and determine a deficiency, which is "the amount by which the tax imposed . . . exceeds . . . the amount shown as the tax by the taxpayer."⁵ The deficiency procedures are well established in the code.⁶ Before assessing a deficiency and taking collection action, the IRS must first issue a notice of deficiency.7 The notice of deficiency informs the taxpayer of the alleged tax liability and instructs the taxpayer that it has 90 days to dispute the liability in the Tax Court.⁸ The IRS cannot assess or collect the tax before the taxpayer has had the opportunity to seek Tax Court review.⁹ This was not always true.

A. Brief History

Before Congress established the current deficiency procedures, the United States could generally "employ any common law remedy for the collection of its dues."¹⁰ The government also had statutory authority to initiate "any proper form of action, before any Circuit or District Court of the United States for the district in which the liability for such tax may have been or may be incurred."¹¹ But as the tax system evolved, the administration of the tax system evolved with it.

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Footnotes

1. United States v. Liberty Global Inc., No. 1:22-cv-02622 (D. Colo. June 1, 2023).

2. Liberty Global's motion to dismiss, Liberty Global, No. 1:22-cv-02622 (Jan. 23, 2023).

3. Liberty Global, No. 1:22-cv-02622, at *5.

4. Sections 6011 and 6012.

5. Section 6211(a). The calculation also takes into account "amounts previously assessed" and "rebates" issued to the taxpayer.

6. See generally, Hallmark Research Collective v. Commissioner, 159 T.C. No. 6 (2022).

7. Section 6213(a).

8. Id. Foreign taxpayers, however, have 150 days to petition the Tax Court.

9. Id.; see also section 6851 (termination assessments of income tax), section 6852 (termination assessments involving 501(c)(3) organizations), and section 6861 (jeopardy assessments). These sections provide that the IRS can make immediate assessments in some extraordinary cases but that a notice of deficiency must still be issued later.

10. Dollar Savings Bank v. United States, 86 U.S. 227, 239-240 (1873).

11. Id. at 240.

Originally published by TAX NOTES FEDERAL

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