Explanation of Provisions

The bill provides that, in connection with the audit of any person, if there is an actual controversy involving a determination by the IRS as part of an examination that (a) one or more individuals performing services for that person are employees of that person or (b) that person is not entitled to relief under section 530 of the Revenue Act of 1978, the Tax Court would have jurisdiction to determine whether the IRS is correct. For example, one way the IRS could make the required determination is through a mechanism similar to the employment tax early referral procedures.[7]

The bill provides for de novo review (rather than review of the administrative record). Assessment and collection of the tax would be suspended while the matter is pending in the Tax Court. Any determination by the Tax Court would have the force and effect of a decision of the Tax Court and would be reviewable as such; accordingly, it would be binding on the parties. Awards of costs and certain fees (pursuant to section 7430) would be available to eligible taxpayers with respect to Tax Court determinations pursuant to the bill. The bill also provides a number of procedural rules to incorporate this new jurisdiction within the existing procedures applicable in the Tax Court.

[H. Rept. 105–148, supra at 639–640.]

The Senate report is essentially the same. S. Rept. 105–33, supra at 304-305.

The last sentence of the explanation states that section 7436 provides several procedural rules to incorporate this new jurisdiction into the existing procedural rules which apply to cases before our Court. H. Rept. 105–148, supra at 640; S. Rept. 105-33, supra at 305; see H. Conf. Rept. 105220, at 734 (1997). The reports do not state that section 7436(c) and (d) provides procedural rules, but it appears that those are the procedural rules referred to in this legislative history.

Petitioner contends that the legislative history for section 7436 shows that we have jurisdiction to decide the amounts of employment tax due for the workers whose status is before the Court. We disagree. The legislative history states that Congress intended that we decide "certain" 8 and not all employment tax disputes and does not state that we should decide any issues other than those specified in section 7436(a).

7 See Announcement 97-52, 1997-2 I.R.B. 22; Announcement 96–13, 1996-12 I.R.B. 33.

8 The House and Senate committee reports stated as reasons for change:

It will be advantageous to taxpayers to have the option of going to the Tax Court to resolve certain disputes regarding employment status. [H. Rept. 105-148, at 639 (1997); S. Rept. 10533, at 304 (1997); emphasis added.]

C. Section 7436 Compared to Declaratory Judgment
Provisions

Petitioner points out that section 7436 differs in several ways from the declaratory judgment provisions (sections 7428, 7476, 7477, 7478, 7479), and contends that this shows that Congress intended to provide jurisdiction to decide the amounts of employment tax due. Petitioner points out that section 7436 and the declaratory judgment provisions differ in that (1) section 7436(a) uses the term "determination”, and the declaratory judgment provisions state "make a declaration"; (2) section 7436 incorporates the principles of several sections that pertain to deficiency procedures, and the declaratory judgment provisions do not; and (3) declaratory judgment proceedings are generally based on the administrative record, Rule 217(a), while a proceeding under section 7436 is de novo, H. Rept. 105-148, supra at 640; S. Rept. 105-33, supra at 304.

Petitioner also points out that we may not know the identities of all taxpayers affected by our decision in a declaratory judgment case. For example, For example, when we decide that an organization does not qualify under section 501(c)(3), many taxpayers who have made contributions to the organization and are affected by the decision are unknown to the Court. Petitioner contends that this shows that cases arising under section 7436 are unlike declaratory judgment cases because we know the identity of the taxpayer in a case brought under section 7436.

In response, respondent points out that section 7436 and the declaratory judgment provisions are similar in that, for example, (1) our jurisdiction in a case brought under section 7436 and in a declaratory judgment case is triggered by respondent's issuance of a notice of determination, see secs. 7428(a)(1), 7476(a)(1), 7477(a), 7478(a)(1), 7479(a); (2) section 7436 and the declaratory judgment provisions have as subsection (a) "Creation of remedy" and as subsection (b) "Limitations"; (3) section 7436 and the declaratory judgment provisions specifically require an actual controversy involving a determination by the Secretary; (4) section 7436 and the declaratory relief provisions include "Petitioner" as subsection (b)(1) and have a subsection which limits the time to file a petition in the Tax Court; and (5) after stating the pre

requisites for the type of determination, section 7436 and the declaratory judgment provisions state: "upon the filing of an appropriate pleading, the Tax Court may" decide a specified issue or issues, without specific reference to the amount of tax liability that results from that decision.

Petitioner is right that section 7436 differs in some ways from the declaratory judgment provisions. However, we agree with respondent that section 7436 is more like the declaratory judgment provisions, which specify a subject matter over which we have jurisdiction but do not state that we may decide the amount of tax due. This contrasts with our deficiency jurisdiction under section 6213, under which we may redetermine the "amount" of tax due. Sec. 6211(a). Thus, a comparison of the declaratory judgment provisions with section 7436 supports our conclusion that section 7436 does not provide jurisdiction to decide amounts of employment tax due.

D. Whether It Would Be Illogical To Give Us Jurisdiction To Decide Worker Classification Status Without Jurisdiction To Decide Amounts of Tax Due

Petitioner contends that it would be illogical to give us jurisdiction to decide worker classification issues without jurisdiction to decide amounts of tax due. Petitioner points out that if we lack jurisdiction to decide amounts of employment tax due, a taxpayer would be required to go to a second judicial forum to dispute those amounts. Petitioner contends that limiting our jurisdiction violates logic and public policy (e.g., the convenience of the parties and judicial economy). We disagree. First, we do not acquire jurisdiction from theories based on public policy, convenience of the parties, or judicial economy. See Trost v. Commissioner, 95 T.C. at 565; Judge v. Commissioner, 88 T.C. at 1180-1181; Axe v. Commissioner, 58 T.C. 256, 259 (1972). Although petitioner contends that a broader grant of jurisdiction might have provided an additional efficiency regarding the resolution of worker classification disputes, we believe section 7436 does not give us that authority.

Second, section 7436 provides a reasonable and helpful alternative to litigating worker classification cases in other courts even if it does not provide jurisdiction to decide the

amounts of employment tax due. Before section 7436 was enacted, the U.S. District Courts and the Court of Federal Claims had refund jurisdiction over employment classification, entitlement to relief under section 530 of the Revenue Act of 1978, and other employment tax issues. Congress found that disputes with the Internal Revenue Service over worker classification and entitlement to relief under section 530 of the Revenue Act of 1978 have been difficult for many taxpayers and decided to provide for judicial review of these issues before this Court on a prepayment basis. See sec. 7436(d); H. Rept. 105-148, supra; S. Rept. 105-33, supra. Once these issues are decided, we believe the parties will be much more likely to reach an agreement about amounts of tax owing, if any. A Tax Court decision on worker classification issues will facilitate a final resolution of the controversy.

E. Whether the Attachment of a Consent To Assess Tax to the Notice of Determination Conflicts With Respondent's

Contention That We Lack Jurisdiction To Decide

the Amount of Employment Tax Due

Petitioner points out that respondent attached a calculation of the amount of tax that petitioner owes to the notice of determination and contends that this is inconsistent with respondent's position that we lack jurisdiction to decide amounts of employment tax due. Respondent contends that the calculation to which petitioner refers is included only to show whether petitioner may elect the small case procedures under section 7436(c). Respondent's explanation is reasonable; a calculation of amounts due is necessary if the small case procedures are to apply for cases in which up to $10,000 ($50,000 after July 22, 1998) is in dispute. The notice of determination and attachments thereto do not create jurisdiction not otherwise provided by statute to decide whether the amount of tax proposed to be assessed is correct.

F. Conclusion

We conclude that we lack jurisdiction under section 7436 to decide the amount of petitioner's employment tax liability for the periods in issue. For the foregoing reasons, we will

grant respondent's motion to dismiss for lack of jurisdiction and to strike.

An appropriate order will be issued.

JOHN J. REICHEL, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 23143-97.

Filed January 7, 1999.

P, a real estate developer, purchased properties intending to develop them. He undertook no development activities on the properties due to adverse economic conditions. R disallowed P's deductions of the properties' real estate taxes, determining the taxes must be capitalized under sec. 263A, I.R.C., as indirect expenses of producing property. Held, P must capitalize the tax payments under sec. 263A, I.R.C.

Timothy W. Tuttle, for petitioner.

Michael H. Salama and Sherri S. Wilder, for respondent.

OPINION

LARO, Judge: This case was submitted to the Court without trial pursuant to Rule 122(a). John J. Reichel petitioned the Court to redetermine a 1993 income tax deficiency of $32,887 and a $6,577 accuracy-related penalty under section 6662(a). Respondent reflected this determination in a notice of deficiency issued to petitioner on September 5, 1997.

Following concessions by the parties, we must decide whether section 263A requires petitioner to capitalize real estate taxes he paid in 1993 on land he purchased for development. We hold it does. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the year in issue, and Rule references are to the Tax Court Rules of Practice and Procedure. Dollar amounts are rounded to the nearest dollar.

Background

All facts have been stipulated and are so found. The stipulation of facts and the exhibits submitted therewith are incorporated herein by this reference. Petitioner lived in Irvine, California, when he petitioned the Court.