Appeals and Impartiality: Tax Court Finds Appeals’ Procedures Inadequate But Punts on Other Issues

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Last week I discussed how courts are wrestling with when a prior Appeals employee’s involvement will trigger a finding that the Appeals’ employee is not impartial in a subsequent collection due process (CDP) case.  In Cox v Commissioner, the Tax Court took a narrow view of what is necessary to ensure that Appeals meets the impartiality requirement. In reversing the Tax Court, the Tenth Circuit took a more expansive view of CDP, and situated its procedural protections as part of a broader due process framework.

Last week the Tax  Court had a chance to revisit the impartiality of Appeals’ employees in the case of Moosally v Commissioner.  In Moosally, the Tax Court held that an Appeals employee who had earlier considered a taxpayer’s appeal of a denied offer in compromise could not preside over a later CDP hearing that involved the same issue and years. The case is easier than Cox because under either a narrow or expansive view of impartiality, what Appeals did in that case was improper. In this post, I will discuss Moosally, and why in that case the Tax Court found Appeals’ procedures inadequate even under the standards the Tax Court applied in Cox.

I will also discuss what Moosally fails to do.  Moosally sidesteps the Tenth Circuit’s finding in Cox that part of the CDP regulations are invalid. In addition, Moosally does not directly address a recent DC Circuit Court of Appeals decision which upends the venue of CDP cases on appeal.  As I describe below, Moosally is likely more significant for what it fails to do than its actual holding on impartiality, as it kicks these issues down the road for future litigants.

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Summary of Facts

Moosally had run up about $40,000 in liabilities relating mostly to two quarters of unpaid trust fund taxes from 2000 and a small amount of income tax from 2008. In June of 2010, Moosally submitted an offer to compromise the two quarters of trust fund liabilities for $200 based on doubt as to collectability(it was not clear why she left off the small income tax liability from the original offer).  In late May 2011, IRS’s centralized offer unit rejected the offer because it determined Moosally’s collection potential to be slightly under $35,000.

In late June 2011, Moosally appealed the rejection of the offer, and in the appeal, she requested Appeals consideration of both the trust fund liabilities and small individual tax liability in its offer review.  She also provided additional documents and explained that her circumstances had changed for the worse  as she had lost her job.  Appeals confirmed receipt of the offer appeal and told Moosally that it assigned a settlement officer to the case, settlement officer Smeck (SO 1).

Here is where things start to get messy. In July of 2011, while the offer was being appealed, as a result of the unpaid liabilities that were the subject of the prior offer, the IRS issued a notice of federal tax lien (NFTL). The NFTL gave Moosally the right to a CDP hearing. She timely filed a request for a CDP hearing; in the CDP request she asked IRS to compromise the liabilities that were part of her appeal before the first settlement officer, SO 1. Appeals assigned the CDP case to a new settlement officer, SO 2.

In late August, the CDP case began to move forward. At around the same time, the first settlement officer, SO 1, and Moosally exchanged letters relating to the appeal of the offer, and Moosally provided the SO1 with updated financial information.  A few days after Moosally sent SO 1 updated financial information, SO 2 sent Moosally a letter saying that the CDP case was being reassigned to the first settlement officer because that settlement officer already had Moosally’s offer under Appeals consideration.

From Appeals’ perspective, taking the CDP case away from SO 2 and giving it to SO 1 made sense because SO 1 was familiar with Moosally and was reviewing her updated financial information.

SO 1 eventually issued a CDP determination sustaining the IRS’s rejection of the offer. Moosally petitioned the Tax Court on the basis that SO 1 was not impartial due to her prior involvement with the tax and periods that were at issue in the CDP determination.  She asked that the Tax Court remand the case back to Appeals with an order that an Appeals employee other than SO 1 preside over the CDP hearing

The Tax Court Finds That There was Prior Involvement

Moosally essentially argued that when the first settlement officer considered the denied offer as part of her appeal outside the CDP proceedings, she had prior involvement with the case and was no longer impartial.  The IRS argued that the first settlement officer did not have prior involvement because she had not made a determination with respect to the original appeal when Appeals transferred the CDP case to her.

The statute provides that an impartial officer or employee is one who has had “no prior involvement with respect to the unpaid tax…before the first [CDP]hearing.” The statute does not define “prior involvement” but the regulations state the following:

Prior involvement by an Appeals officer or employee includes participation or involvement in a matter (other than a CDP hearing held under either section 6320 or section 6330) that the taxpayer may have had with respect to the tax and tax period shown on the CDP Notice.

The case confronts the legacy of Cox, where as I described in my post last week What is a Fair Hearing  the Tenth Circuit in a divided opinion reversed the Tax Court and found that in a CDP hearing involving review of an offer in compromise, an Appeals Officer’s consideration of future years’ delinquent returns constituted prior involvement when those later years came before the same Appeals Officer in a new CDP case involving a new offer in compromise.   Cox reflects two differing approaches to impartiality. The Tax Court found no violation of the impartiality requirement principally because it viewed the Appeals’ Officer’s initial consideration of the delinquent returns as peripheral to the later CDP case. In contrast, the Tenth Circuit  “found that the no prior-involvement requirement was a broad restriction that should not be limited to involvement in a prior hearing or administrative matter” but should include any “substantive and material involvement with a taxpayer’s liability, regardless of whether the liability is the liability currently under official review by the Appeals Officer.” In so finding, the Tenth Circuit opined that the regulatory requirement tethering prior involvement to a particular matter was inconsistent with the statutory language and invalid.

Moosally thus presented the Tax Court with a chance to address the merits of the Tenth Circuit’s approach and consider its view of the regulations defining prior involvement.   The Tax Court declined to do so, however.  As the case was not appealable to the Tenth Circuit, the Tax Court stated that it was not bound to follow the appellate court’s approach to the issue. Instead, it found for Moosally even under the regulations and under the Tax Court’s approach to “prior involvement” as reflected in its Cox opinion.

I will tease out the Tax Court’s analysis, summarizing some of the arguments. I leave out some of the arguments that the IRS made; the opinion is complicated and I suggest for readers wanting more to read the opinion, but here is the nutshell.

As Moosally describes, the Tax Court in Cox found no violation of the impartiality requirement based on two differing rationales:

[T]he Tax Court in Cox determined that there was no violation of the impartial officer requirement because (1) the officer’s prior involvement was only peripheral to, and not the subject of or directly in dispute in, a proceeding before the Court, and (2) there was no greater or different harm where both the officer’s prior involvement and current consideration were in the context of a CDP hearing.

As to the first rationale after distinguishing the facts from Cox, Moosally then lays out why the Tax Court approach in Cox warrants a finding that there was impermissible prior involvement in this case:

Smeck [SO 1] reviewed petitioner’s appeal of her rejected OIC for the periods in issue for nearly three months before petitioner’s CDP hearing for the same periods in issue was also transferred to her. During those three months, Ms. Smeck requested from petitioner and evaluated various documents, forms, and other financial information to calculate petitioner’s reasonable collection potential and evaluate petitioner’s rejected OIC. Accordingly, through her review of petitioner’s rejected OIC, Ms. Smeck had prior involvement with petitioner’s unpaid tax liabilities for the periods in issue before she was assigned to handle petitioner’s CDP hearing for the same taxes and periods in issue. Consequently, we hold that, pursuant to section 301.6320- 1(d)(2), Proced. & Admin. Regs., Ms. Smeck is not an impartial officer pursuant to section 6320(b)(3) and petitioner is entitled to a new CDP hearing before an impartial officer.

In an effort to find the first settlement officer’s involvement as permissible, IRS attempted to distinguish current involvement from prior involvement:

Respondent contends that Ms. Smeck was an impartial officer because she had not yet issued a determination regarding petitioner’s rejected OIC and that  there is “current” involvement, but no “prior” involvement, when an officer has not made any determination regarding a rejected OIC. We disagree. The regulations plainly prohibit “prior involvement” and do not specify that the involvement must culminate in the issuance of a determination of any sort (emphasis added).

The opinion also addressed the second rationale that the Tax Court relied on in Cox, namely that the regulations and legislative history contemplate separate CDP proceedings before the same Appeals’ employee. It did acknowledge that it looked at the same legislative history in finding for the IRS in Cox. It notes, however, that the legislative history does not contemplate  “the combination of CDP hearings with non-CDP matters, such as the OIC rejection appeal involved in the instant case. Ms. Smeck [SO 1] began handling petitioner’s non- CDP appeal of her rejected OIC before she was later assigned petitioner’s CDP hearing.”

In note 9 it goes into further detail, indicating that it is not using Moosally as an opportunity to revisit whether the legislative history supports a more permissive standard when the differing matters are CDP cases, as it offered for support of its holding in Cox:

[in Cox] we referred to this same legislative history for the proposition that “both the statutory and the regulatory language suggest a relatively permissive standard under which participation in earlier collection proceedings would not constitute disqualifying prior involvement for purposes of section 6320 or 6330.” We do not opine on whether the legislative history supports a permissive standard or whether we will continue to apply a permissive standard to situations similar to Cox that involve two CDP matters. However, we conclude that the flexibility contemplated by Congress and provided in sec. 301.6320-1(d)(1), Proced. & Admin. Regs., as plainly stated in the regulation, applies only to situations involving two or more CDP matters.

Keeping its options open, the Tax Court in Moosally stated that given it was deciding the case based on its Cox rationale, it was not taking any position on the merits of the Tenth Circuit’s approach to impartiality:

For clarity, we note that we have not decided whether we will apply the Tenth Circuit Court of Appeals’ analysis to facts similar to those in Cox arising in cases appealable in circuits other than the Tenth Circuit or instead continue to follow the standard and rationale set forth in our Opinion in that case. We find no need to confront that issue in the instant case because we would reach the same conclusion whether we apply our rationale set forth in our Opinion in Cox or the “broad restriction” standard set forth in the Court of Appeals’ opinion in Cox. Accordingly, our conclusions in the instant case do not conflict with the rationale and conclusion set forth in our Opinion in Cox.

Some Parting Thoughts

Moosally does help define what will constitute prior involvement.  Absent a taxpayer’s waiver an Appeals employee who is considering  matters in a non-CDP appeal will not be permitted to be involved in a later CDP case involving the same years and tax. It does not address how much Appeals’ involvement is necessary when there is not a formal matter in Appeals’ jurisdiction.  It does not address the Tenth Circuit’s statement that in its view the CDP regulations are invalid insofar they provide that prior involvement “exists only when the taxpayer, the tax and the tax period at issue in the CDP hearing also were at issue in the prior non-CDP matter.”  See Cox Tenth Circuit opinion at note 10, referring to Treas. Reg. § 301.6330-1(d)(2). Moreover, it does not address the limits of the Tax Court’s second rationale in Cox, that is, whether prior Appeals’ involvement if it arises in a separate CDP case should be less worrisome than prior non-CDP Appeals’ involvement.  I would not be surprised that given the still divergent views of the Tax Court and Tenth Circuit, and that Appeals’ docket is increasingly crowded with both CDP and non-CDP collection matters, that the Tax Court will at some point have to confront these issues again and will not be able to avoid addressing the Tenth Circuit’s approach.

By pointing to the open questions still after Moosally, I do not mean to criticize either the case’s outcome or the Court’s approach in the case at hand. The Tax Court’s approach in Moosally resolves a dispute in the narrowest way possible. What is somewhat hard to square, however, is part of the Tax Court’s rationale for avoiding having to address the Tenth Circuit’s view of impartiality.  The opinion states that Moosally is appealable to the Sixth Circuit under the Golsen rule. As discussed in a prior post, the DC Circuit Court of Appeals in Byers v Commissioner held that in CDP cases where there is no challenge to the underlying liability, venue for an appeal is the DC Circuit Court of Appeals, unless the parties stipulate otherwise.  As there is no DC Circuit court precedent in the issue, the venue statement in Moosally has no practical effect in the case, though it leaves unanswered how the Tax Court views venue in CDP cases.  I would expect that the Tax Court would confront the venue issue in other CDP cases, especially when venue may have a major impact on the case’s outcome, given how many circuit courts of appeal disagree with the Tax Court on the appropriate scope of review in CDP cases, as guest blogger Carlton Smith discussed extensively in Tax Court Dodges CDP Record Rule Ruling.

Byers thus may loom large in these disputes. If Byers stands for the proposition that appeals of CDP cases not involving liability should go to the DC Circuit, then under the Golsen rule, the Tenth Circuit’s view in Cox will not likely control the outcome of a particular case. While absent adverse authority the Tax Court can continue to apply its approach in disputes about the reach of impartiality, taxpayers would be well-advised in the appropriate case to ask the Tax Court to reconsider in light of what I believe to be a well-reasoned and persuasive appellate Tenth Circuit opinion.

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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