Phillips v. Commissioner of Revenue (ATB 2015-113 published on March 20, 2015) highlights three traps for the unwary that can hurt Massachusetts taxpayers. For example, it may be a trap to follow the appeals procedures set forth in Massachusetts Department of Revenue (“MDOR”) letters to taxpayers. In Phillips, taxpayers followed these procedures. The Massachusetts Appellate Tax Board (“ATB”) nonetheless dismissed the taxpayers’ appeal for lack of jurisdiction. The ATB decision in Phillips is summarized and discussed below. The full text is available for download on the ATB website.
The taxpayers did not timely file their 2007 state income tax return. The Massachusetts Department of Revenue (“MDOR”) mailed a Notice of Failure to File on September 2, 2009—more than one year after the filing due date. The taxpayers did not respond. On December 28, 2009, the Department of Revenue mailed a Notice of Assessment of personal income tax in the amount of $299,081.08. The taxpayers filed a tax return (Massachusetts Form 1) on July 6, 2010—more than six months after they received the Notice of Assessment. The taxpayers requested a refund of $3,325 by virtue of tax-deductible business losses claimed on Schedule C.
On October 27, 2010, the MDOR sent an information request to audit the 2007 tax return. The letter “request[ed] further information, including proof of any final determination by the Internal Revenue Service (“IRS”) and substantiation of the business expenses claimed as deductions on Schedule C” (page ATB 2015-114). The taxpayers responded on December 22, 2010 with an Application for Abatement (Form CA-6). They included a one-page document from the IRS showing a refund on their federal income tax return (Form 1040), but they did not provide any supporting documentation to substantiate the business expenses they had claimed on Schedule C.
On March 27, 2012, the MDOR issued a Notice of Abatement Determination denying the taxpayers’ application for abatement. The MDOR’s letter to the taxpayers notified them that they could appeal the MDOR’s adverse decision in one of two ways:
- File an appeal to the ATB within the next sixty (60) days; or
- File a second Form CA-6 to the MDOR and include the requested supporting information within three years after the return was filed, pursuant to Massachusetts General Laws Chapter 62C, section 37. (The statute provides that a CA-6 may be filed either three years after the return has been filed, or two years after the tax has been assessed, or one year after the tax was paid, whichever is later.)
The taxpayers chose to file a second CA-6 and did so on November 2, 2012. The second CA-6, however, also did not include financial records to substantiate the business losses claimed on Schedule C. The MDOR again denied the abatement application in a Notice of Abatement Determination dated May 29, 2013. The taxpayers filed an appeal with the ATB on July 26, 2013, just before the end of the sixty-day period following the second Notice of Abatement Determination.
The ATB Decision in Phillips
The ATB dismissed the Phillips appeal for lack of jurisdiction because the taxpayers filed their appeal too late. The ATB unanimously held that the taxpayers should have filed their appeal only during the 60-day period immediately after the first Notice of Abatement Determination. This 60-day period began on March 27, 2012 and ended on May 26, 2012. Despite the MDOR’s invitation to file a second CA-6, the taxpayers were not allowed appeal the denial of the second appeal to the ATB. The ATB reasoned that as a general rule, each Form CA-6 is treated as a separate request. A taxpayer is not permitted to request abatement of the same tax twice unless one of the following four exceptions applies:
- There are newly discovered facts;
- The first CA-6 application is a return which shows an overpayment;
- There is a second assessment; or
- There is a subsequent change in decisional law. (Page ATB 2015-119, citing cases.)
In the Phillips case, these exceptions did not apply. In particular, there were no “newly discovered facts.” Also, the new CA-6 did not provide any additional information. Therefore, the MDOR’s denial of the second CA-6 did not open a second 60-day “window” for the taxpayers to appeal. There was only one 60-day “window” to appeal. This appeal “window” ended in 2012, more than a year before the taxpayers filed their appeal in 2013.
Three Traps for the Unwary
The procedural law governing Massachusetts tax appeals is littered with traps for the unwary. In this case the taxpayers fell into three such traps.
- The taxpayers incorrectly assumed that if the IRS allows a deduction, then Massachusetts must also allow the deduction. This is not correct. The Massachusetts Department of Revenue (“MDOR”) is a separate bureaucracy with its own rules and procedures. The MDOR is interested in what IRS thinks, but it makes up its own mind based on the evidence presented to it. Thus, the taxpayers’ first mistake was to simply send the MDOR evidence that IRS had allowed the deductions in question without also submitting the supporting documentation.
- The taxpayers blundered into a second trap for the unwary by following the MDOR’s invitation to file a second administrative appeal instead of filing a case with the Massachusetts Appellate Tax Board. The taxpayers did not realize that normally the 60-day appeals “window” begins from the first abatement denial.
- The taxpayers were justified in believing that they were following the MDOR’s procedures as outlined in the MDOR’s letter to them. Nonetheless, the ATB takes the position that it cannot take equitable considerations into account when applying the 60 day jurisdictional rule.
There is no doubt that the 60-day appeals “window” is intentionally designed to minimize appeals and thereby maximize the revenues of the Commonwealth of Massachusetts. The ATB does what it can to mitigate the harsh 60 day rule.
- The ATB will “bend” the jurisdictional rules slightly when taxpayers submit a timely appeal to the Appellate Tax Board but erroneously file it with the MDOR. In such cases, the ATB presumably considers the MDOR as its agent to receive and promptly turn over the erroneously filed appeal.
- The ATB explicitly considered the fairness question in a footnote (page ATB 2015-121). It noted that the MDOR might take two years or more to address a second abatement request. By that time the 60 day “window” to file a case with the ATB will have long passed. In future cases, the ATB promised to “review de novo the sufficiency of the substantiation of the second application” (Form CA-6) to determine whether the exception for “newly discovered facts” (quoted above) would open a second 60-day “window” for the taxpayers.
It is troubling that the MDOR letter did not explicitly warn taxpayers that they might lose their ATB appeal rights if they followed the MDOR suggestion to file a second appeal. Correct information was available to the taxpayers in MDOR regulations and the ATB relied extensively on these regulations in reaching its decision. Nonetheless, one wonders if a business, in similar circumstances, could avoid liability for triple damages under c. 93A, the Massachusetts consumer protection statute that penalizes unfair trade practices. Would the courts hold that a customer trying to resolve a business dispute cannot rely on a company’s letter to its customers explaining how to resolve a business dispute? Would the court hold that despite c. 93A, the correct rule is caveat emptor (“let the buyer beware”) and that customers can only blame themselves if they fail to follow the company’s fine print on how to resolve business disputes?
Taxpayers should not assume that they know how to preserve their ATB appeal rights. Rather, as soon as they receive a denial notice from the MDOR, they should seek professional advice from a law firm that understands Massachusetts tax appeals procedures.
 The Massachusetts Appellate Tax Board is the Massachusetts cognate (equivalent) of the United States Tax Court.
 http://www.mass.gov/anf/hearings-and-appeals/decisions/tax-appeal-decisions/findings-promulgated-during-2015/jan-2015-to-june-2015/ (last visited May 7, 2015). Click on William H. Phillips Jr. Michele D. Phillips v. Commissioner of Revenue (March 20, 2015).