An interesting recent Tax Court decision seems to indicate that taxpayers have clear autonomy with regards to judicial review as well as retracting judicial review of “seriously delinquent tax debt.”
In Pugh v. Commissioner, the IRS certified Pugh to the Secretary of State under I.R.C. § 7345 as an individual with a “seriously delinquent tax debt.” The State Department accordingly refused to renew the taxpayer’s U.S. passport. Taxpayer petitioned the court for review of the certification pursuant to I.R.C. § 7345(e). The Commissioner then filed two successive Motions for Summary Judgment, one of which was pending when the taxpayer filed a Motion to Dismiss her case. The IRS initially indicated that they would object to dismissal but reversed course and confirmed no objection. The issue of whether the court may grant a taxpayer’s motion to dismiss without prejudice in a case contesting a section 7345 certification was a question of first impression.
The court made three holdings explicit: the court had discretion to grant the taxpayer’s unilateral Motion for the court to dismiss without prejudice her case contesting a certification under I.R.C. § 7345; further, absent evidence of clear legal prejudice to the government, will grant the taxpayer’s Motion to Dismiss; and ultimately, further, denied the government’s Motion for Summary Judgment as moot.
The court emphasized that ruling on Pugh’s Motion did not require any redetermination of tax debt due, and that the Tax Courts defer to the Federal Rules where no tax court rules exist. In particular, FRCP 41(a)(1), which provides rules for the voluntary dismissal of a civil “action” and FRCP 41(a)(2), stating a plaintiff’s motion to dismiss is effective “only by court order, on terms that the court considers proper.” The court concluded that the Commissioner would not suffer clear legal prejudice if dismissal was granted, treating this case as if it had never been commenced.
Perhaps what’s most interesting about this case is that the (pro se) taxpayer filed her Motion to Dismiss based on an assertion that “she, as an alien foreign national, is exempt from taxation and has been all her life.” (Ms. Pugh provided no documentation or other supporting evidence for this claim.) Regardless, the court’s decisions confirm a taxpayer’s right to commence, and now also dismiss without prejudice, a petition and cause under I.R.C. 7345(e).
The case is also important because taxpayers must factor the cost of litigation into their willingness to proceed. The ability to dismiss a lawsuit they filed if it becomes too expensive is important when taxpayers decide whether or not to take a dispute to court. If a counterclaim is filed by the government, such dismissal may not be possible and that must be factored into whether a lawsuit economically makes sense.