The U.S. Supreme Court has ruled 8-1 in favor of the Internal Revenue Service commissioner, and against a taxpayer, in a case that may limit how much the U.S. Tax Court can help taxpayers.
The court issued the ruling in Commissioner of Internal Revenue v. Jennifer Zuch, a case involving a dispute over the personal income taxes that Jennifer Zuch owed in 2010. Zuch later filed a petition for help from the Tax Court.
The IRS used some of the federal tax it withheld from Zuch's 2018 earnings to offset what Zuch owed for 2010. The IRS said that eliminating Zuch's tax liability for 2010 made Zuch's Tax Court petition moot and ended the Tax Court's jurisdiction over the case.
Zuch appealed, saying that she wanted her 2010 tax obligations to be resolved in another way and that she wanted her case to stay in Tax Court, because resolving a Tax Court case is usually faster and simpler than resolving a U.S. district court case.
The Supreme Court majority overturned a 3rd U.S. Circuit Court of Appeals ruling in Zuch's favor. The court majority agreed with the IRS that Zuch's original petition was moot and that Zuch would have to file any challenge to IRS actions in a U.S. district court.
What it means: Justice Neil Gorsuch, the justice who voted against the ruling, said the ruling is unfair to taxpayers because it gives the IRS the ability to choose where to put a case.
The IRS "may pursue a levy and argue its case to the Tax Court," Gorsuch wrote in his dissenting opinion. "Then, if the Tax Court seems likely to side with the taxpayer, the IRS can drop the levy and avoid an unfavorable ruling on the taxpayer's underlying tax liability."
If, for example, a client filed a Tax Court petition involving the impact of life insurance and inherited annuities in one year, the IRS might be able to push the case into U.S. district court by using a client's withheld taxes for a later year to zero out the levy it was seeking from the client for the earlier year, even if zeroing out the levy made the client's overall financial situation worse than if the client had won the Tax Court case.
From the perspective of the Supreme Court majority, however, the ruling simply confirms that the IRS has the ability it already believed it had to end Tax Court cases by zeroing out the tax bills involved.
The tax liability: Zuch is a resident of Tenafly, New Jersey. In 2010, she was married to Patrick Gennardo.
In September 2012, she filed a 2010 federal income tax return with the status of married filing separately. The return showed that she had gross income of $74,493, let the IRS withhold $8,036 in federal taxes from her earnings and owed $7,736 in taxes.
Gennardo filed a separate return showing $383,354 in taxes due and $10,000 in estimated tax payments.
In November 2012, Zuch filed an amended return showing that she had $145,393 in 2010 income, because she had received $71,000 in distributions from a retirement account that she forgot to include in the original 2010 return. She also reported $50,000 in estimated tax payments for 2010. Gennardo provided a statement saying the $50,000 in estimated payments should be allocated to Zuch.
Zuch and Gennardo then agreed that Gennardo would make a 2011 estimated tax payment that would apply solely to Zuch's tax liability.
The IRS applied the estimated tax payments to Gennardo's tax liability.
Since then, Zuch has been trying to have the IRS apply the estimated tax payments to her 2010 tax liability rather than to Gennardo's.
Zuch and Gennardo divorced in 2014.
The early legal proceedings: Zuch filed her Tax Court petition in 2014.
In 2022, after the IRS used Zuch's 2018 withholding payments to eliminate her 2010 tax obligations, a Tax Court judge ruled in favor of the IRS and found Zuch's petition to be moot.
Zuch filed an appeal with the 3rd Circuit. A three-judge panel at the 3rd Circuit overturned the Tax Court ruling.
The Supreme Court case: The IRS commissioner appealed to the Supreme Court in 2014.
The National Taxpayers Union Foundation and the U.S. Chamber of Commerce filed briefs supporting Zuch.
The U.S. Chamber argued that Zuch's actual tax liability was a relevant issue that the Tax Court could resolve.
"The fact that the IRS found a different pot of money to satisfy the contested balance does not moot Ms. Zuch's dispute over the application of the estimated payment and does not deprive the Tax Court of jurisdiction," the chamber told the court.
A Supreme Court ruling in favor of the IRS "would likely translate to years of additional and unnecessary litigation and expenses for taxpayers," the chamber said.
The IRS said the history of the laws governing the Tax Court shows that a proceeding becomes moot once the IRS is no longer asking a taxpayer to make a payment.
The Supreme Court ruling: The Tax Court has authority over the IRS only when a taxpayer owes the IRS unpaid taxes, and the only relief the Tax Court can provide is to render conclusions about whether or not a taxpayer must pay an IRS levy, Justice Amy Coney Barrett wrote in an opinion for the Supreme Court majority.
When there is no levy, "the Tax Court has no authority to render such conclusions," Barrett wrote. "Given these statutory constraints, the Tax Court properly dismissed Zuch's appeal."
Zuch could still sue in a U.S. district court to get her money back from the IRS, and she did file a "postdeprivation suit" for a refund, Barrett added.
Credit: Diego M. Radzinschi/ALM
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