Dollarhide v. Comm'r of Internal Revenue

• Decision Date: 27 September 2022
• Docket Number: 23113-12
• Parties: FRANK W. DOLLARHIDE & MICHELLE D. DOLLARHIDE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

FRANK W. DOLLARHIDE & MICHELLE D. DOLLARHIDE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 23113-12

United States Tax Court

September 27, 2022

ORDER AND DECISION

Mark V. Holmes Judge.

This was one of three consolidated cases arising from notices of deficiency that the IRS sent the Dollarhides for their 2006 and 2007 tax years, and for a corporation that Mr. Dollarhide owned for its 2006 tax year. The parties have filed motions for entry of decision in all three cases, which we will grant.

But we write at greater length because of the unusual circumstances that have caused the oldest of these cases to enter its second decade of litigation without there ever having been a trial. Along the way, these cases have brought to light potentially important circuit splits on a couple questions of great significance to those who follow tax procedure: (1) under what conditions can parties to a Tax Court proceeding make a binding settlement of the issues in the case without agreeing on the computations needed to enter a final determination and (2) what it means to file a return.

The parties in these cases -- especially the Dollarhides -- have suffered enough from this prolonged litigation, so despite the importance of the issues raised we discuss them in a nonprecedential order that outlines these problems doesn't definitively answer them, but will bring these cases to a close.

Background

The Dollarhides filed three timely petitions to get these cases started:

• Docket No. 23113-12 -- challenging a notice of deficiency issued to the Dollarhides for their individual tax liability for 2006;

• Docket No. 23139-12 - challenging a notice of deficiency issued to Dollarhide Enterprises Inc., a corporation which Mr. Dollarhide owned, for its tax year ending in September 2006; and • Docket No. 21366-14 -- challenging a notice of deficiency issued to the Dollarhides for their individual tax liability for 2007.

None of these petitions stood out for their complexity. Each raised issues of the alleged underreporting of income and failure to substantiate deductions that are routine in this Court. The Dollarhides challenged not only the individual adjustments but also attacked the Commissioner's work. Each petition included at the end a prayer for relief similar to this one in the Dollarhides' 2006 case:

WHEREFORE, THE PETITIONER PRAYS THAT THIS COURT hears the proceeding and determines that the service did not have jurisdiction to issue the NOD at all on June 15, 2012, and/or it had no jurisdiction to do so and therefore issued in error, not in accordance with Regulations and or the usual and customary procedure and/or, the Notice Of Deficiency itself is Deficient, and/or VOID, Deficient on it's Face not providing adequate notice, and therefore should be stricken, or in the alternative, should the matter proceed to be heard on the merits before this tribunal, there are no deficiencies in, and/or Income Tax Due from the Petitioners for the taxable year 2006, that the Petitioners are entitled to a determination of "No Income Tax." for the years in question in accordance with the 1040 and 1120 Returns prepared and filed that no penalties pursuant to the aforementioned sections are proper, that no proposed Tax be allowed and no penalties attached, and that the Court Grant such other and further relief as to the Court shall seem fitting and proper.

The first of the cases were calendared for trial back in 2014, but we shunted them to a status-report track at the parties' request to enable them to work on all three at the same time and try to reach a settlement.

In May 2016 the parties reported that they had settled. Their settlement did not take the form of an agreed decision for each of the three cases, but instead a "stipulation of settled issues." This is an exceptionally common way for parties to wind down litigation in the Court. Because tax returns and notices of deficiency can include so many disputed items, settlements often consist of lists of issues in which the parties make mutual concessions or compromises. A taxpayer's final bill -- the amount he has to write a check for -- is usually harder to figure out. The calculation often includes a computation of interest, arithmetic adjustments to other items (e.g. limits on deductibility computed by reference to a percentage of adjusted gross income), and a summing of penalties and additions to tax computed as a percentage of the resulting deficiency, reduced by any allowable credits.^[1]

In these cases, the Commissioner agreed to concede all the various penalties and additions to tax. In addition, both the Commissioner and the Dollarhides agreed to accept the "income, deductions, exemptions, and credits" on returns that the Dollarhides submitted in 2011 during the course of their audit for their 2006 and 2007 tax years. The Commission also conceded that Dollarhide Enterprises had no tax deficiency at all.

Trouble arose when the Commissioner did the computations using the "income, deductions, exemptions, and credits" that he'd agreed to use. The key problem was in the Dollarhides' 2006 year, because the credit they reported was mostly in the form of withholding from the Dollarhides' pay back in 2006, plus a substantial amount of excess Social Security tax. These credits, however, were all generated in calendar year 2006.

To the Commissioner, these credits may have been entirely legitimate, but having been reported by the Dollarhides only in 2011, they were not credits that he could allow in computing the final, bottom-line amount the Dollarhides owed. The Dollarhides disagreed.

The Commissioner finally moved in December 2017 for entry of decision. This is, again, an extremely common motion in our Court that parties use to set up for decision disputes about the computation of a final deficiency once they've agreed on settlement of all the individual issues.

This dispute about the use of the Dollarhides' withholding credits went through a few rounds of briefing. In March 2018 we ruled on this dispute:

[T]he Dollarhides want credit for payments -- payments so much larger than their liability that they should get a big refund. But there's a problem: The payments were mostly in the form of withholding from the Dollarhides' pay back in 2006, plus a substantial amount of excess Social Security tax. The Internal Revenue Code says that money that is withheld from taxpayers' pay and excess Social Security tax does count toward their income-tax debt, and is treated as being paid all at once on the due date of the return, see I.R.C. § 6513(b). This means that the Dollarhides are treated as having paid more than $47,000 in April 2007, when they should have filed their return. But the Dollarhides didn't file their 2006 return until February 3, 2011, and it was only on that return that they reported the big withholding and excess Social Security credits.

In tax law, filing a return that shows credits that are larger than the tax owed means the return is also a claim for a refund of that excess amount. The problem here is that the Dollarhides were claiming a refund more than three years after the Code says they are treated as having been paid. (February 3, 2011 is almost four years after April 2007.) Section 6511(b)(2) of the Code says that they have only three years to claim this refund. They don't have to pay the actual tax they owe twice, but this Court cannot legally require the IRS to refund the excess amount that they paid because of this three-year time limit.

The Dollarhides were understandably disappointed with this ruling. They moved to revise or vacate it, and more briefing ensued. They complained that they would never have agreed to the stipulation of settled issues if they knew that the Commissioner was going to argue that their withholding credits wouldn't generate a big refund. And they argued that they would have filed their return within three years of the due date but for what they claimed was a demand by the revenue agent conducting the audit that they submit their late returns to her, rather than mailing them in.

We finally entered decisions in these cases in May 2018, explaining why the law required us to rule in the Commissioner's favor:

The Dollarhides claim, however, that they never would have agreed to the stipulation of settled issues if they knew they weren't going to get that refund. Is that enough?

In ruling on Rule 162 motions, we look to Federal Rule of Civil Procedure 60. See, e.g., Etter v Commissioner, 61 TCM 1772, 1773 (1991). FRCP Rule 60(b) is the rule that's applicable here, and the Dollarhides point us to FRCP 60(b)(3) which requires a showing of "fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party." The fraud or other misconduct that the Dollarhides argue the Commissioner engaged in is not telling them about the legal requirement that they had only three years from the due date of their 2006 tax return to file a claim for refund of any overpayment.

Not telling someone something they would like to know is generally not fraud, misrepresentation, or misconduct, particularly where that thing could be discovered with a little bit of due diligence. See Casey v. Albertson's Inc., 362 F.3d 1254, 1260 (9th Cir. 2004) (FRCP Rule 60(b)(3) requires "that fraud . . . not be discoverable by due diligence before or during the proceedings" (quoting Pac. & Arctic Ry. & Navigation Co. v. United Transp. Union, 952 F.2d 1144, 1148 (9th Cir. 1991))). The statute of limitations on refunds is a legal issue, and one that the Dollarhides could have easily discovered by cracking open the Code.

The Dollarhides do also complain that the only reason that they didn't file their 2006 tax

...