The Eleventh Circuit Court of Appeals upheld a deficiency notice of more than $5 million against a taxpayer who reported adjusted gross income of $22,921 and taxable income of $13,221 on his late-filed 2006 return ( Hoang, No. 13-14398 (11th Cir. 5/2/14), aff’g T.C. Memo. 2013-127).
Diep Hoang’s 2006 tax return was due Oct. 15, 2007, but he did not file it until Sept. 2, 2009, and the IRS was suspicious of the low income reported on the return because it had received Forms 1099 from various brokerage firms indicating he received $14,855,797 from securities sales in 2006. In response, the IRS issued a notice of deficiency for 2006 for $5,188,587 in income tax, an addition to tax of $1,297,534 for failure to timely file, and an understatement penalty of $1,037,717. The IRS treated the total amount reported on the 1099s from the sale of the securities as capital gain because it did not have any information about the basis of the stock that was sold.
In response to the IRS’s notice of deficiency, Hoang filed a petition with the Tax Court claiming that the notice was “totally invalid and illegal” because the IRS was not authorized under the Code to issue the notice, the tax increase was fabricated, the IRS did not meet its burden of proving the legality of the notice, and the IRS was issuing the notice to retaliate for Hoang’s earlier claim that it had committed perjury in a prior controversy with Hoang. Hoang also tried to file a counterclaim arguing that the notice was a criminal act disguised as tax collection and asking for $75 million in damages from the IRS.
While preparing for the Tax Court trial, the IRS tried many times to get cost basis information from Hoang but was unsuccessful. With its first request, the IRS provided a listing of each sale and its amount and date; Hoang responded by saying the request was unconstitutional. In response to the second request, Hoang responded that the IRS lacked jurisdiction because the notice was issued on Aug. 3, 2010, which, he claimed, was after the statute of limitation had run on his 2006 return. Hoang also claimed there were no more documents to provide because “all of them were discarded after April 15, 2010.”
During the trial, the IRS again tried to get the cost basis information. In one response, Hoang claimed he provided it when he filed his return, but the IRS threw it away. He also tried to submit a 13-page exhibit that was a compendium of various papers, including a document purportedly from his broker that did not identify the account holder. The Tax Court refused to admit the exhibit into evidence because the documents in it appeared to be incomplete and altered, they had not been authenticated, and they had not been provided before trial.
In 2013, the Tax Court issued a 48-page memorandum detailing all of these facts and upheld the IRS’s notice of deficiency in full. The Eleventh Circuit affirmed the Tax Court’s decision, finding that the statute of limitation had not run on Hoang’s return because he did not file it until 2009, and that the deficiency was correct because Hoang failed to provide any cost basis information despite numerous opportunities to do so. All IRS determinations have a presumption of correctness that taxpayers can rebut, but, in this case, the taxpayer presented no evidence that would rebut that presumption.
Sally P. Schreiber (
) is a JofA senior editor.