Yesterday, the Tax Court issued a full Tax Court Opinion, with concurring and dissenting opinions, finding that an IRS letter was sufficient to confer jurisdiction upon the Tax Court. SECC Corporation v. Commissioner, 142 T.C. No. 12. The controversy arose from an IRS examination of the corporation's Forms 941 (Employer's Quarterly Federal Tax Return) for each of the tax periods from 2005 through 2007. The corporation had classified its workers as both employees and independent contractors in that it reported hourly wages on Forms W-2, but it also paid the workers lease payments for rental of tools and vehicles, reporting the lease payments on Forms 1099-MISC.
The IRS recharacterized the lease payments as wages, and proposed an increase of approximately $1.2 million in tax for additional FICA and withholding, plus penalties and interest. After the corporation filed a protest, the IRS Appeals Office issued a letter sustaining the employment tax liabilities. However, the IRS failed to send the letter by certified or registered mail, and it did not issue a Notice of Determination of Worker Classification. The corporation responded by filing a petition in Tax Court.
Both the IRS and the corporation filed motions to dismiss the case. The IRS believed that the dismissal would deprive the Court of jurisdiction and allow the IRS to pursue collection. The corporation took the position that the dismissal would invalidate the assessment and prohibit the IRS from collecting the liabilities until it issued a formal Notice of Determination of Worker Classification.
The Court rejected both of these positions, instead finding that the IRS letter was a "determination" for purposes of I.R.C. section 7436, which is the relevant code section that confers jurisdiction upon the Tax Court to determine the proper amount of employment tax. The Court also held that the Tax Court petition was timely even though the corporation filed it more than 90 days after it received the IRS letter, which is the normal timeframe during which a petition may be filed. The problem with the IRS letter was that the IRS did not send it by certified or registered mail, which rendered the normal 90-day limitation inapplicable. After ruling on this jurisdictional issue, barring another procedural dismissal or ruling, the Tax Court will now either accept a stipulated settlement from the parties or make its own determination on the merits of the case.