Appeal from the United States Court of Federal Claims, in case no. 09-CV-890, Senior Judge Robert H. Hodges, Jr.
The opinion of the court was delivered by: O'malley, Circuit Judge.
Before BRYSON, CLEVENGER, and O'MALLEY, Circuit Judges.
Appellants Joshua Welch and Alejandra de Losada appeal from a judgment of the Court of Federal Claims, finding that they are not entitled to refunds of $142,277.55 and $725,205.28 paid to the IRS for tax deficiencies in tax year 1992 and tax year 1995, respectively. The Internal Revenue Service ("IRS") must assess any tax deficiency within the applicable limitations period, or the taxpayer is relieved of the obligation to pay the deficiency. The parties dispute whether the IRS properly mailed the two notices of deficiency at issue here prior to December 31, 2000, thereby tolling the pertinent statute of limitations and making the 1992 and 1995 assessments timely. Use of the form prescribed in the Internal Revenue Manual for establishing compliance with the notice of deficiency mailing requirement-PS Form 3877-is not a prerequisite to the government demonstrating mailing of a notice of deficiency, but some corroborating evidence of both the existence and timely mailing of the notice of deficiency is required. Because the IRS presented such corroborating evidence for the 1992 notice of deficiency but not as to the 1995 notice, we affirm in part and reverse in part. We affirm the judgment of the Court of Federal Claims with respect to the 1992 assessment, and reverse with respect to the 1995 assessment.
In 1993, appellant Joshua Welch, who was then employed as a financial analyst, filed an individual tax return for tax year 1992 and paid income taxes in the amount of $97,964. Welch and appellant Alejandra de Losada were married in the same year. Appellants filed a joint tax return in 1996 for tax year 1995 and reported ordinary losses in excess of $1.3 million. Appellants also requested a carryback of a portion of these losses to Welch's 1992 tax year. The IRS granted the carryback, issuing a refund in the amount of $76,570 for his 1992 tax year. The IRS subsequently audited the appellants' 1995 tax return. During the audit, appellants agreed to extend the statute of limitations with respect to any necessary assessment for the 1992 and 1995 tax years to December 31, 2000.
In connection with the audit, the IRS mailed a letter dated November 10, 1998, ("Letter 950") jointly to Welch and de Losada informing them that it was denying the $1,329,070 ordinary loss claimed in their 1995 return. The IRS concluded that Welch could not support his claim that he was either a trader/dealer or professional gambler and therefore entitled to treat his trading losses as ordinary losses. This denial resulted in a tax deficiency of $223,500 for 1995. The IRS also proposed a twenty percent negligence penalty in the amount of $44,700 for that tax year. On the same day, the IRS mailed a letter to Welch individually ("Letter 569") proposing a full disallowance of Welch's refund of $76,570 for tax year 1992, which was based on a carryback of the ordinary loss claimed in tax year 1995.
Both Letters 569 and 950 were mailed to appellants' Central Park West address. Although appellants have no recollection of receiving either letter, they do not dispute the mailing or receipt of these letters. At his deposition Welch testified that, upon receiving any correspondence from the IRS, it was his standard practice to forward such correspondence to their then-accountant, Eric Roseman. Mr. Roseman, in fact, represented Welch in an appeal- that was ultimately denied-to the IRS regarding the adjustment proposed in Letter 569 and represented both Welch and de Losada in connection with a similarly unsuccessful appeal relating to Letter 950. In an Appeals Case Memorandum ("ACM") dated June 7, 2000, IRS personnel made a request to IRS counsel for approval to issue a notice of deficiency to Welch for tax year 1992 and to both appellants for tax year 1995. The ACM sets forth a tax deficiency for 1992 of $43,032, reduced from $76,570, and a deficiency of $223,500 and a penalty of $44,700 for 1995. A supplemental ACM indicating that "statutory notice has been approved by district counsel" is dated August 31, 2000. Both the initial and supplemental ACM identify a statute of limitations date of December 31, 2000. Tax assessments for the 1992 and 1995 tax years were subsequently recorded on February 15, 2001.
A tax lien for the 1992 tax year was filed against Welch on December 14, 2001. In September 2007, the IRS issued a "Final Notice of Intent to Levy" for the 1992 and 1995 tax years.*fn1 Appellant, represented by the accounting firm Press Schonig, requested a Collection Due Process Hearing with the IRS to protest the filing of the Final Notice of Intent to Levy. The IRS denied the petition for relief. A tax lien for the 1995 tax year was filed against both appellants in June 2008.
On July 11, 2008, appellants filed a petition in the Tax Court seeking removal of the assessments and cessation of all collection activities. In order to complete an apartment sale while their petition was pending, appellants paid $142,277.55 with respect to the 1992 lien and $725,205.28 with respect to the 1995 lien, for a total of $867,482.83, in October 2008. On March 31, 2009, the Tax Court summarily dismissed the appellants' petition as moot since payment on the assessment had been made.
On May 7, 2009, appellants filed two Form 1040X's with the IRS, seeking a refund of the $867,482.83 in tax deficiencies paid for tax years 1992 and 1995. After more than six months elapsed from filing the Forms 1040X, on December 28, 2009, appellants filed suit in the Court of Federal Claims seeking a refund of the full $867,482.83, alleging overpayment under I.R.C. § 6401(a) on grounds that the deficiencies were both assessed after the expiration of the governing statute of limitations. The Court of Federal Claims had jurisdiction under 28 U.S.C. § 1346(a)(1) and § 1491(a)(1).
After the close of discovery, the parties filed cross-motions for summary judgment on whether the IRS properly mailed statutory notices of deficiency for the tax years 1992 and 1995 before December 31, 2000. The parties argued that this issue would be determinative of appellants' claims because, if notices of deficiency were mailed before the running of the statute of limitations, those mailings would thereby extend the statute of limitations for assessing appellants' income tax. The parties agreed that the assessments were timely even if the statutory notices were never received, as long as they were timely sent.
On May 3, 2011, the Court of Federal Claims granted summary judgment to the government and denied summary judgment to appellants, finding that "[the IRS] has demonstrated as a matter of law that it mailed the notices of deficiency for the 1992 and 1995 tax years." Specifically, the Court of Federal Claims determined the IRS procedure in Manhattan to consist of the following: (1) an appeals officer decides to issue a statutory notice of deficiency and personally delivers the case to the Appeals Processing Section; (2) the appeals officer enters the preparation of the notice into his or her case activity record; (3) the tax examiner then issues the statutory notice of deficiency, date stamping the notice and noting the ninety-day default date by which the taxpayer must petition the Tax Court; (4) the notice is then sent to the address listed in taxpayer's file. The Court of Federal Claims concluded that the existence of the ACM indicated compliance with procedural steps (1) and (2). With regard to steps (3) and (4), the court noted that appellants' file at the IRS contains a date-stamped notice of deficiency for 1992 with the correct address and date of default. Additional documentation, in the form of mail return-receipt cards and a computer-generated control card with tax amounts matching that listed on the Certificates of Assessments and Payment, were also cited by the Court of Federal Claims as additional supporting documentation.*fn2
The Court of Federal Claims found that this evidence collectively raised a presumption that the IRS had acted with official regularity and that the appellants did not contradict that presumption.
On these grounds, the Court of Federal Claims found the statute of limitations tolled and collection of deficiencies for both tax years valid. Citing United States v. Zolla, 724 F.2d 808, 810 (9th Cir. 1984), the court noted that "[t]he IRS is entitled to a presumption of official regularity if it can produce a Form 3877 and a date-stamped copy of the notice of deficiency." Welch v. United States, 98 Fed. Cl. 655, 659 (2011). The court went on to find that, even "[w]here the IRS is unable to produce these two documents it can raise the same presumption by establishing that it followed a set procedure with respect to the taxpayers and providing corroborating documentation." Id.(citing United States v. Ahrens, 530 F.2d 781, 785 (8th Cir. 1976)). Finding that the Manhattan IRS office both established its own procedure and provided corroborating ...