Sixth Circuit Holds Potential Misconduct in CDP Hearing Does Not Give Rise to Wrongful Collection Action

In Agility Network Services v US the Sixth Circuit held that a taxpayer who alleged that Appeals botched its collection due process hearing could not bring a wrongful collection action against the IRS because the hearing did not arise “in connection with any collection of Federal tax.”

In this post I will summarize the court’s reasoning and offer some observations on its approach.

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Agility Network Services involves a CDP case that did not go well. The owner of Agility Network Services (Agility Network) and her husband were employees of the company. Agility Network had overdue employment taxes; after the IRS filed a notice of federal tax lien, it requested a CDP hearing. After seven months (and according to the taxpayer only after it got Taxpayer Advocate involved because the Revenue Officer would not forward the case file), the hearing was scheduled for December 2012. Once the hearing was scheduled and held, the taxpayer did not like the manner in which it was conducted and the outcome:

[The Appeals Officer] refused to investigate the taxpayers’ assertion that they tried to make payments but that the IRS refused to accept them; [the Appeals Officer] misstated the tax code and Internal Revenue Manual while offering excuses for [the Revenue Officer’s] failure to process the taxpayers’ CDP request; Allen refused to discuss the taxpayers’ requested installment plan, reasoning that they did not make enough money to justify one; and Allen denied the taxpayers’ request to abate penalties. Furthermore, [the Appeals Officer] stated at the hearing “that she knew . . . [the Revenue Officer’s] actions were made with the genuine intent to help the taxpayers.” The taxpayers contend that this statement proves [the Appeals Officer] had an impermissible ex parte communication with [the Revenue Officer]. The hearing ended with the taxpayers having discussed only one issue of the many they had planned to raise.

In May of 2013 (about seven months after the first meeting and I think prior to the issue of a determination) Appeals scheduled a follow-up meeting. In July 2013, and pursuant to the taxpayer’s request, a new Appeals Officer met with the taxpayer. At the follow-up meeting, the taxpayer requested that IRS withdraw the NFTL and agree to a proposed installment plan. The new Appeals Officer rejected the request (and a request to record the meeting), though this Appeals Officer based his installment agreement rejection on the grounds that the taxpayer earned too much money rather than too little.

After the unsatisfactory second meeting, the taxpayer began a voluntary $5,000 month payment. It also brought an action in federal district court seeking a restraining order against the IRS to prevent enforced collection and sought damages under Section 7433 alleging that the Appeals conduct in both hearings amounted to wrongful collection action. The district court found that the Anti-Injunction Act prevented the restraining order and that the Appeals Officer’s conduct did not arise in connection with a “collection action.”

On appeal the Sixth Circuit quickly affirmed the lower court’s tossing of the restraining order request on the grounds that the Anti-Injunction Act prevented the request to restrain the government’s collection efforts.

The Sixth Circuit gave the Section 7433 issue some more attention. Section 7433 provides for damages for wrongful collection actions. As Appeals has become more involved with collection matters some taxpayers have unsuccessfully sought to use Section 7433 to recover damages for misconduct that arises in a collection case in Appeals. We have previously discussed this issue; see Keith’s post on the Antioco case Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement, which Stephen also discussed in a Summary Opinions post. In those prior posts, we noted that the district court in Antioco held that in a CDP case the Settlement Officer was not engaged in collection action but was rather reviewing the collection action. That review was not enough to bring Appeals’ alleged misconduct within the scope of a Section 7433 wrongful collection claim.

Agility Network likewise concludes that 7433 is not a remedy for alleged misconduct in a CDP hearing but has a more robust appellate court consideration of the issue. In deciding against the taxpayer, the Sixth Circuit explained that it its view Appeals’ conduct in the hearings relates to affirmative rights that a taxpayer has in the collection process, rather than the government’s collection of taxes:

The relevant question, then, is whether an IRS agent acts “in connection with any collection of Federal tax” when she conducts a CDP hearing. Under the most reasonable interpretation of the phrase, the answer is no. In common parlance, an IRS agent acting in connection with tax collection would be taking an affirmative step to recover money owed to the government. In contrast, a CDP hearing is a right bestowed upon a taxpayer, at the taxpayer’s request, to provide protection from abusive or unduly burdensome tax collection. The hearing does not help the IRS collect on a tax debt, but in fact impedes collection, at least temporarily, to the taxpayer’s benefit

To be sure the Sixth Circuit also acknowledged that it was possible to take a broader reading of the phrase “in connection with any collection of Federal tax” to include CDP proceedings:

Under this reading, any IRS agency action involving a person who owes a tax debt is “in connection with tax collection.” Under this interpretation, an IRS agent acts in connection with tax collection during a CDP hearing because, at that point, the IRS has already initiated the levy or lien process against the taxpayer.

It rejected that broader reading for two reasons: one, such an approach renders the language in the statute limiting the remedy to collection actions superfluous, essentially encompassing “almost everything IRS agents do. The agency exists to collect revenue, after all.”

Second, the Sixth Circuit cited the maxim that courts are to narrowly interpret exceptions to sovereign immunity, leading it to note that between two reasonable interpretations courts should opt for the one that leads to a narrower waiver.

Some Observations

I think this presents a closer case than perhaps the opinion reflects. The rationale the court uses to distinguish a CDP matter from collection action is a bit outdated. While a CDP hearing is certainly a taxpayer right that arises only if a taxpayer properly invokes the proceeding, it is a statutory right that all taxpayers enjoy in the collection process. Once invoked, Appeals has jurisdiction to compel IRS to refrain from collection and also to dictate the manner that the IRS collects an agreed and assessed liability. To argue that CDP is only an impediment to collection misstates the possible benefit that CDP is meant to provide to the government. It is not in the government’s interest to collect a tax when the IRS fails to ensure that it followed its statutory or administrative procedures.

Collection cases are the mainstay of the Appeals docket. Like it or not Appeals is part and parcel of the collection process. There is a functional partnership between Appeals and Collection. This is especially apparent in cases where the taxpayer requests a withdrawal of an NFTL, where it is in the taxpayer’s strong interest to get prompt review of the request.  It is clear in this case that Appeals’ delay in considering and deciding contributed to the taxpayer dissatisfaction.  Under CDP, Appeals is statutorily charged with ensuring that the collection action balances the need for efficient collection action with the taxpayer’s concern that the action be no more intrusive than necessary.  In a CDP hearing, especially in the context of considering the request to withdraw a notice of federal tax lien filing, Appeals’ responsibilities seem to directly relate to the IRS’s collection of taxes.

What Does “Prior Opportunity to Dispute a Liability” Mean?

In Keller Tank Services II, Inc. v. Commissioner, No. 16-9001 (Feb 21, 2017) the 10th Circuit upheld the Tax Court’s determination of “prior opportunity to dispute a liability.”  The Tax Court, in turn, upheld the IRS determination of this phrase in the Collection Due Process (CDP) regulations.  The 10th Circuit went through a Chevron analysis of the statute and the regulation in making its decision to uphold the regulation.  We have discussed this issue previously here, here, here and here.  The last link discusses in detail that Keller Tank is the first of three recent circuit court arguments by Lavar Taylor challenging the regulation.

The result here is disappointing for those of us hoping that the CDP process can provide a pre-payment forum for tax liabilities, usually a penalty, that do not have the benefit of the deficiency process and are not divisible.  For these liabilities, the decision in Keller Tank places the taxpayer in the unenviable position of having an Appeals Officer as the only person standing between them and a sometimes crushing liability for which they will never have the opportunity to litigate because paying several million dollars to satisfy the liability and the Flora rule is not a possibility.

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The IRS asserted a penalty under 6707A against Keller Tank for engaging in and failing to report a listed transaction.  This case does not reach the merits of the penalty assessment and finds that the taxpayer cannot contest the merits in the CDP case.  The 10th Circuit correctly points out that the taxpayer still has an opportunity to contest the merits through a refund suit.  It does not mention that in many cases that opportunity is illusory because of the amount of money the taxpayer would have to pay in order to satisfy the Flora rule.  The amount of the penalty in Keller Tank is not so high that it presents a practical inability to pay; however, I have no idea if the amount, though not astronomically high, still exceeds the taxpayer’s ability to pay.

Section 6330(c)(2) describes the matters that can be heard at a CDP hearing.  Subparagraph (B) under that section provides that

“The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”

Treas. Reg. 301.6320-1(e)(3) addresses matters considered at a CDP hearing.  The regulation is primarily in Q&A format.  Q-E2 asks the question:

“When is a taxpayer entitled to challenge the existence or amount of the tax liability specified in the CDP notice?”

A-E2 answers that question in a long paragraph that includes the following statement:

“An opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability.  An opportunity for a conference with Appeals prior to the assessment of a tax subject to deficiency procedures is not a prior opportunity for this purpose.”

The language of the regulation stating that the conference with Appeals satisfies the requirement of section 6330(c)(2)(B) formed the basis for the appeal.  The taxpayer argues that this language conflicts with the intent of the statute.  The IRS refused to allow the taxpayer to argue the merits of the penalty in the CDP hearing because it had a prior opportunity to address the merits of the penalty during the assessment phase although that opportunity did not include the ability to contest the assessment of the penalty in a pre-assessment judicial forum.  According to the IRS, that opportunity arose after the IRS issued a 30-day letter because the taxpayer submitted a written protest challenging the grounds for issuing the penalty and participated in a telephone conference, which resulted in Appeals sustaining the penalty.  The Tax Court agreed with the determination CDP by Appeals on this point which was the only point raised by the petitioner in the CDP request.  On appeal to the 10th Circuit, Keller Tank argued that the refusal to allow it the opportunity to raise the merits of the penalty assessment in the CDP process violated the goal of the statute and that the regulation impermissibly frustrated that goal.

The regulation creates a clear distinction between taxes governed by the deficiency procedures and those that are not.  A taxpayer with a liability covered by the deficiency procedures can have a pre-assessment conference with Appeals at which Appeals sustains the liability proposed by the Examination Division.  If the taxpayer does not receive the notice of deficiency, the taxpayer can raise the merits of the underlying liability in the Tax Court in the context of a CDP hearing because of the failure of the opportunity to go to Tax Court prior to the assessment due to the non-receipt of the notice of deficiency.  In this situation, the IRS must have mailed the notice of deficiency to the taxpayer’s correct address or the taxpayer could set aside the assessment.  Yet, Congress recognized that sometimes taxpayers did not receive the notice of deficiency and sought to give them an opportunity to have their day in court because of the non-receipt of the notice.

In contrast a taxpayer with a liability not governed by the deficiency procedures offered an opportunity to meet with Appeals prior to or after the assessment of the liability, receives no opportunity to have their day in court through the CDP process even though they previously had no opportunity to go to court to contest the merits of the liability.  For these taxpayers, the right to contest the liability through the refund procedure remains their only path to court.  The regulation acknowledges that taxpayers whose taxes are assessed through the deficiency process are not limited to only using the refund procedure while forcing the refund procedure on those taxpayers whose liabilities did not related to a tax assessed through the deficiency process.  The 10th Circuit and the Tax Court find that regulation reaches a logical result in interpreting an unclear statute despite the distinction it draws between the types of taxes.

To sustain the Tax Court decision, the 10th Circuit engaged in a Chevron analysis of the regulation.  It first looked at the language of the statute to determine if the language of the statute spoke to the precise question at issue and determined that it did not.  The 10th Circuit agreed with the Tax Court that the “otherwise have an opportunity to dispute” language in the statute was ambiguous and was not defined in the 1998 legislation creating the language or elsewhere in the Internal Revenue Code.  That determination allowed the Court to move on to step 2 of the Chevron analysis which looks at the interpretation of the statute by the regulation in question in order to decide if that interpretation is based on a permissible construction of the statute.  The 10th Circuit again agreed with the Tax Court that a reasonable interpretation of “opportunity to dispute” includes “a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability.”  A factor influencing both the Tax Court and the 10th Circuit is the failure of Congress to simply say that a taxpayer who has not had a prior opportunity for judicial review will receive on in the CDP process.  No doubt, this is a strong basis in support of the decision.

The 10th Circuit opinion has a paragraph that attempts to support its determination using logic I cannot follow.  It suggests that accepting the taxpayer’s argument would promote similarly situated taxpayers to skip the conference with Appeals and wait until collection begins so they can go directly to court.  Few taxpayers would want to pass up an opportunity to resolve their problem at the lowest level in the cheapest way simply so they could argue a case before a court.  Taxpayer’s argument in favor of an opportunity to go to court does not minimize the importance of Appeals and does not undercut the importance of the informal conference.  To the extent the 10th Circuit relied on this logic to reach its conclusion, I think its based its decision on flawed reasoning.

After reaching its conclusion, the 10th Circuit doubled back to address arguments presented by the taxpayer.  Keller Tank argued that the regulation impermissibly limits the jurisdiction of the Tax Court through a regulation because the regulation limits the matters the Tax Court may hear.  The 10th Circuit finds that the regulation does not diminish the Tax Court’s jurisdiction but only limits what may be heard in the administrative process before the IRS in a CDP proceeding.  Because the limitation is on the administrative process and not on the Tax Court, even though the Tax Court is limited to addressing matters that may be raised in the administrative hearing, the 10th Circuit finds that the regulation does not directly limit the Tax Court’s jurisdiction.  Not only is this logic unsatisfactory but the opinion goes on to throw in an additional paragraph here noting that taxpayers have the ability to bring a refund suit without discussing the realities of this ability.

Next, the 10th Circuit addresses taxpayer’s argument that the regulation contains internal inconsistencies.  Keller Tank first argued that the regulation “is inconsistent because it precludes liability challenges at a CDP hearing even when the taxpayer failed to exercise its opportunity to dispute liability at the Appeals Office and was therefore not actually heard.”  Because the statute on speaks to “opportunity” and not to an opportunity the taxpayer exercises, the 10th Circuit finds that the regulation is consistent with the statute and it promotes the statutory purpose of encouraging taxpayers to meet with Appeals.  Keller Tank next argued the regulation was inconsistent “because it precludes liability challenges at a CDP hearing for some, but not all, prior administrative opportunities.”  Keller Tank’s argument here goes to the discrepancy between taxes arises under the deficiency process and those outside that process.  The 10th Circuit simply finds that the distinctions are not “unreasonable or arbitrary or that it is inconsistent to treat different administrative proceedings differently.”

One down and two to go

Arguments occurred within a short time in three circuits.  Taxpayers have lost the first but have two more opportunities.  If the arguments do not succeed, perhaps the judicial interpretations of the language in the statute will persuade Congress to fix the inconsistency between deficiency and non-deficiency process taxes and allow all taxpayer to have a day in court before they must pay.  Congress seemed to want that result in 1998 when it passed the CDP provisions.  If the courts cannot be persuaded that Congressional language allows that result, it is time to push for legislative change.  Because many, though certainly not all, of the people assessed penalties through the non-deficiency process are people with whom few legislators will be excited to assist, getting a legislative change may prove difficult.

 

 

Quick Follow Ups on Vigon v. Commissioner and Private Debt Collection

Vigon

I recently wrote about an order in the case of Vigon v. Commissioner in which Judge Gustafson provided instruction to respondent’s counsel because of a failure to lay the proper foundation for a the summary judgment motion.  IRS Counsel took the instruction to heart quickly and requested a continuance for a trial scheduled for February 22, 2017.  The IRS now agrees that petitioner is not liable for the penalties at issue in the case and stated in its motion that it was in the process of abating the penalties.  The IRS further stated that it was in the process of releasing the liens.  This is a great result for a pro se taxpayer who did not initiate the arguments resulting in these concessions.  The Court granted the continuance but had a question for the IRS:

“We understand how collection issues under section 6330(c)(2)(A) become moot if collection activity ceases. It is less clear how a liability challenge under section 6330(c)(2)(B) becomes moot merely upon an announced concession, which would not seem to have any res judicata or collateral estoppel effect. Perhaps a CDP petitioner who makes a liability challenge that the IRS concedes is entitled to decision in his favor on the liability issues.”

So, the Court ordered the IRS to make an appropriate filing by March 24, 2017, and to explain in the filing how it provide adequate relief to the petitioner on the merits side of this case.

Private Debt Collection

I also recently wrote about private debt collection and wanted to provide a quick update.

The IRS recently released sample CP40 notice letter.  The letter alerts the taxpayer that their account has been assigned to a PDC.  The hope is that the letter will prepare the taxpayer for the call(s) from the PDC and keep the taxpayer from having concerns that the PDC is a scam artist.

 

 

Appeals Abuses Discretion in a Collection Due Process Case by Failing to Engage in Financial Analysis

In an order issued on January 24, 2017, in the case of Brown v. Commissioner, Judge Holmes declines to uphold the determination by a Settlement Officer because she did not engage in an analysis of the impact of the taxpayer’s monthly shortfall in income necessary to pay expenses as it related to the assets he had available to satisfy his outstanding tax liability.  The analysis in the case provides an important look at how at least one judge on the Tax Court looks at the duty of Appeals in reviewing a CDP case as well as how he calculates ability to pay in the context of someone with assets but a negative monthly balance sheet.  The decision does not mean that the IRS cannot require the taxpayer use the assets to satisfy the outstanding liability but does mean that in the CDP process Appeals must analyze the need for the asset in order to make ends meet in the future.  We have talked about abuse of discretion previously but the Brown case seems to place a higher, though not inappropriate, burden on the IRS that most other cases we have reviewed.  The approach also follows a similar path to the one taken by Judge Gustafson in in some of his recent holdings discussed here and here  and breaks from some older opinions that did not delve as deeply into a situation the IRS appeared to ignore.

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The IRS determined that Mr. Brown was a responsible officer of Hudson Steel Fabricators & Erectors, Inc.  After going through the appropriate process, it assessed a trust fund recovery penalty against him of almost $200,000.  He engaged in an administrative appeal of the determination of the TFRP and lost.  Eventually, the IRS sent him a CDP notice which caused him to timely request a hearing.  He wanted to bring back up the merits in the CDP concerning his underlying liability for the TFRP but Appeals said he could not and the Court agreed.  Based on the information available in the order, nothing suggests that he had failed to receive a fair hearing on the issue prior to assessment or that he had a clear basis for overturning the assessment, as in a case Les discussed previously.  In addition to trying to seek to have another hearing on the correctness of the TFRP assessment, he also raised the issue that his account should be placed into Currently Not Collectible (CNC) status rather than have the IRS levy upon his assets.  The Court focused on the CNC issue and how Appeals should go about determining when someone qualifies for CNC status.

Though not quick to do so, Mr. Brown submitted to the Settlement Officer not too long after the CDP hearing a Form 433-A, also known as a collection information statement (CIS).  The Settlement Officer reasonably told him that if he wanted her to consider CNC as an option he had to give her the CIS so that she would have a basis for making a decision.  The CIS showed that each month his income was less than his allowable living expenses.  The Settlement Officer seemed to accept that the income and expenses on the CIS correctly stated his living situation; however, the ability to qualify for hardship status, a predicate to CNC designation, also includes the taxpayer’s assets.  A taxpayer could have a negative monthly cash flow but have a savings account with a million dollars.  The IRS would not, in those circumstances, stand back from collection just because of the negative monthly cash flow.

In analyzing Mr. Brown’s assets, the Settlement Officer found that he had equity in a retirement account that totaled nearly $70,000 and a whole life policy worth more than $20,000.  The inquiry does not, or should not, however, stop once the SO finds assets of value.  In order to determine if a hardship situation exists, the SO should consider other factors.  Judge Holmes went to two IRS regulations from which he pulled guidance regarding the situation in which a taxpayer has an asset but also has expenses exceeding current income.  Treas. Reg. 301.6343-1(b)(4)(ii) discussing hardship status provides that the SO could consider a host of factors including: age, employment status, employment history, medical expenses, earning capability, number of individuals the taxpayer supports as well as the necessary reasonable expenses.  Treas. Reg. 301.7122-1(c)(3)(iii) discussing effective tax administration offers in compromise gives examples of hardship even where a taxpayer could fully pay the liability.  The regulation gives an example of someone whose retirement account represented their only asset.  The regulation provides that if “liquidation of the retirement account would leave him without adequate means to provide for basic living expenses, that is hardship.

Judge Holmes says that his role is not to decide whether Mr. Brown’s circumstances satisfied the conditions of hardship but whether the SO abused her discretion in denying him the relief he requested in the CDP case.  He describes his review as constrained by the Supreme Court’s decision in SEC v. Chenery Corp., 332 U.S. 194 (1947).  We have discussed Chenery before here (in a post that links to several other posts discussing Chenery), but it does not get cited in many CDP cases by judges other than Judge Holmes.  Here, the SO’s determination simply stated that Mr. Brown had an ability to pay because of his assets.  The SO made no effort to determine if he would need those assets in order to cover the monthly shortfall of expenses over income.  Judge Holmes cites to the case of Riggs v. Commissioner, TCM 2015-98 in which the Court held in a non-precedential opinion that if a taxpayer makes a request for CNC status a part of the CDP hearing the SO “must determine whether or not there is financial hardship.”  (emphasis in original).  Here, the SO states Mr. Brown has an ability to pay but does not perform the analysis set forth in the Internal Revenue Manual which discusses whether enforced collection “would not cause hardship.”

Because she did not analyze what would happen if the IRS took away all of his assets leaving him with an income shortfall each month, the determination abuses the discretion given to Appeals which means that the Court will not sustain the determination.  Judge Holmes denied the summary judgment request filed by the IRS but stated that it did not know if Mr. Brown would prefer a supplemental hearing on remand or an entry of decision in his favor.  I discussed before the uncertainty of victory in a CDP case and Judge Holmes acknowledges that in the choices he offers to Mr. Brown.  In an order entered in the case of Stark v. Commissioner  Judge Holmes provided a significant discussion of the choices facing a CDP petitioner who succeeds in showing that Appeals abused its discretion in sustained a CDP Notice.  The petitioner must choose whether to allow the court to deny permission to levy in the CDP Notice and “win” the CDP case in Tax Court or have the case remanded to Appeals to try to work out a collection alternative.  Judge Holmes allows victorious petitioners to choose after counseling them on the pluses and minuses of their options.  Winning means that the IRS cannot levy until it issues another CDP notice and, as Judge Holmes points out, it is unclear if the language of IRC 6320(b)(2) “means the taxpayer isn’t entitled to another hearing if the IRS issues a new notice of lien or levy after we don’t sustain the first one…. To date, no court has answered this question, and we don’t do so here either.  We bring it up to highlight the potential risk to the taxpayer.”

The order here is important for anyone arguing a CDP case and seeking CNC status which is a high percentage of persons seeking relief in the CDP process.  The fact pattern presented here is quite common.  Many taxpayers, at least a high percentage of taxpayers coming into my clinic, have allowable expenses that exceed their income.  Many taxpayers with tax liability are at or near the end of their working careers and hoping to rely on their savings to assist them in retirement.  Almost anyone on social security, even those with the highest monthly amounts of social security which my clients rarely receive, can have allowable expenses that exceed their monthly social security payments.  Judge Holmes’ approach would shelter from collection savings set aside to supplement the social security payments to the extent the income from those savings does not cause the taxpayer’s income to exceed allowable expenses.  Practitioners who have not regularly been making this argument should be taking a copy of this order together with the sources cited by Judge Holmes into their CDP hearings but also citing the same material to the ACS employee who the taxpayer will encounter before the collection of the account reaches the point of a CDP hearing.  The order should also cause Appeals to take notice and give direction to its employees about their responsibilities in reaching the determination and it gives Counsel employees another lesson in the primer on summary judgment motions that Judge Gustafson’s recent orders have provided.

 

Judge Gustafson Continues His Primer for Chief Counsel Attorneys on Motions for Summary Judgment

I recently wrote about an order issued by Judge Gustafson in the case of Vigon v. Commissioner in which he explained to a Chief Counsel attorney what the attorney needed to provide in order to succeed in a motion for summary judgment in a case involving a penalty.  In the case of Hill v. Commissioner, Judge Gustafson continued his lessons to Chief Counsel attorneys on this subject.  It appears that the attorney in the Hill case may have missed my prior post since it came out before he submitted his motion and could have been helpful to him in drafting the motion.

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Judge Gustafson has the unusual background for a Tax Court judge of service as a career attorney at the Department of Justice Tax Division.  Few Tax Court judges have a background as career civil servants litigating cases for the government because becoming a Tax Court judge requires a political appointment and such appointments do not usually go to individuals who have spent their careers working for the federal government in the executive branch where opportunities for the kinds of relationships that lead to a political appointment do not come easy.  At the time of his appointment, Judge Gustafson was the chief of the court of claims section of the Tax Division.  That section, not surprisingly, represents the IRS in cases brought before the Court of Federal Claims.  The work in that section differs from the work in the other civil trial sections at the Tax Division because of the limitations of the Court of Federal Claims.  Attorneys in that section do not typically handle bankruptcy cases, do not get involved in collection suits brought by the government, do not have jury trials but do, like the Tax Court, have some unique jurisdictional issues because of the nature of that court and do handle large, high profile refund matters.  Like all civil trial sections at the Tax Division, attorneys in that section do have a substantial practice in motions for summary judgment.

Unlike Tax Division attorneys, Chief Counsel attorneys do not have a long tradition in summary judgment work.  Prior to the passage of the collection due process (CDP) provisions in 1998, summary judgment motions in Tax Court cases were rare.  Even after 1998, it took some time, maybe a decade or so, before Chief Counsel’s office settled upon summary judgment motions as a go to option for resolving CDP cases.  So, many of the managers in Chief Counsel’s office did not cut their teeth on summary judgment motions and may not be in the strongest position to review and guide the attorneys in preparing such motions.  Judge Gustafson, who would have prepared many summary judgment motions as a DOJ trial attorney and reviewed many as a supervisor there, is in a good position to provide guidance on these motions and he does so again in the Hill case.  Now, the question is whether the Chief Counsel attorneys are paying attention to his orders since orders do not get published by the Tax Court in a formal manner but do go up on the Court’s web site each day and can be searched by issue or by judge.  Because IRS attorneys may view summary judgment motions against pro se taxpayers as shooting fish in a barrel, they may not take the time to develop all of the evidence necessary to support such motions.  They are finding in the recent orders issued by Judge Gustafson that even unrepresented taxpayers may present a challenge in successfully obtaining a summary judgment if the Court carefully reviews the motions submitted.

The IRS assessed a frivolous tax submission penalty against Ms. Hill.  The case is set for trial on March 27, 2017.  The IRS filed a motion for summary judgment in the case on January 25, 2017.  The timing of the filing of the motion is not accidental.  For the first several years after the IRS adopted motions for summary judgment as their go to option for CDP cases, they tended to file the motions the week before the trial calendar.  Carl Smith and I wrote about this in an article back in 2011.  The Tax Court changed Rule 121(a) regarding the timing of filing motions for summary judgment in 2011 to require that they be filed at least 60 days before the calendar.  The Tax Court rule drove the timing of the IRS filing of the motion on January 25 for a calendar 61 days later.  Keep in mind that some Chief Counsel attorney had this case in their inventory since shortly after it was filed on March 30, 2016.  CDP cases do not go back to Appeals after the filing of the petition since the notice of determination always issues from Appeals.  Chief Counsel attorneys each handle many cases.  Here the attorney decided to wait to the very last minute to file the motion for summary judgment.  There could be many reasons for the timing of the filing including that the case was only recently assigned to the attorney filing the motion but the timing of the motion was typical of the cases I see.  As with the Vigon case, Judge Gustafson did not wait until the last minute to issue his order in response to the summary judgment motion and did not require a response from the pro se taxpayer.

Judge Gustafson finds that the IRS did not support some of the factual predicates in the motion as required by Tax Court Rule 121(d), sent. 3 and did not address patent legal questions.  The IRS did not attach the allegedly frivolous return to the motion.  So, the Court could not see what made the return frivolous.  The Court describes the Form 12153 submitted by petitioner as containing “handwritten notations, words, and symbols, none of which we can understand” together with a four page handwritten attachment of “similarly indecipherable writing.”  The description raises my curiosity and reminds me of some handwritten law school exams I have had to grade.  The Court goes on to say that the written matter “does not appear to assert typical tax protestor contentions.”  This is important if you remember the types of things that can trigger the frivolous return penalty which we have discussed in a prior post.  The gibberish, if that is the right word, made it past the IRS filters for frivolous CDP requests (also discussed here and here) which differ from the filters for application of the frivolous return penalties.

The notice of determination issued by Appeals interpreted the difficult to read Form 12153 as one in which it could not determine if the petitioner intended to dispute the liability and so it did not seek to determine if the IRS should have asserted the frivolous return penalty.  The Court, however, assumes that it did.  Apparently, Appeals made no mention of a prior opportunity to contest the penalty which might have barred petitioner from raising the penalty in the CDP hearing.  Since Appeals did not consider the merits of the penalty and since Counsel did not attach the allegedly frivolous return to the motion, the motion will fail at least in part but the failure does not stop here.  The Court notes that on the penalty issue the IRS bears at trial the burden of production under IRC 7491(c) and the burden of proof under IRC 6703(a) which it fails to meet.

The liability at issue here is a penalty which raises the issue of appropriate approval which raises the issue of verification by Appeals.  Appeals determination makes no mention of its efforts to verify the IRS gave the necessary approval for assertion of the penalty as required by IRC 6751(b)(1).  The motion for summary judgment does not address this issue.  To show compliance with this issue, which the IRS would have known had it read Judge Gustafson’s order from December in the Vigon case, it “must show (1) the identity of the individual who made the “initial determination”, (2) an approval “in writing”, and (3) the identity of the person giving approval and his or her status as the “immediate supervisor”.”  The IRS failure to address any of these elements in its motion, including attaching the Form 8248 designed for this purpose dooms the motion.

I suspect that the Vigon and Hill motions for summary judgment are not the only ones out there in which the IRS has failed to meet its burden under section 6751.  The IRS routinely files summary judgment motions and often does so in rote, cookie cutter fashion based on the last summary judgment motion it filed.  A high percentage of cases have penalties.  Until it clears out of its system the summary judgment motions that fail to mention the verification process, it may be easy to push back on such motions.  Of course, many of these motions involve pro se taxpayers.  It will be interesting to see if other judges begin to push back as Judge Gustafson has done on this issue.

 

 

 

 

Verifying the Approval of the Immediate Supervisor As Required by IRC 6751

Last month we wrote about the fully reviewed Tax Court opinion in Graev v. Commissioner, 147 T.C. No. 16 (Nov. 30, 2016) in which the majority of a deeply divided Court held that the Court could not decide if the IRS had failed to follow the requirement in 6751 that the IRS obtain managerial approval before assessing a penalty because the assessment had not yet occurred.  The majority suggested that the taxpayer could raise the issue in a Collection Due Process (CDP) case after the assessment but not a deficiency case.  The Graev case was heard by Judge Gustafson though he ended up writing the dissent in the case once it went to Court conference.  Conveniently, a CDP case involving 6751 just happened to be pending in Judge Gustafson’s inventory and unfortunately for the Chief Counsel attorney, who filed a not carefully worded motion for summary judgement, it came up right after the Graev decision was issued.  The Chief Counsel’s attorney’s misfortune was good luck for practitioners following this issue since it allowed Judge Gustafson to highlight the language of the statute he had recently discussed with his colleagues in Court conference and point out what the IRS must do if it wants to prove its 6751 case.  Chief Counsel attorneys filing summary judgment motions in future CDP cases may want to pay attention to this order.

In Vigon v. Commissioner Judge Gustafson issued an order denying the motion for summary judgment filed by the IRS.  He did so for several reasons each of which deserves mention.  The case points out once again the importance of orders in Tax Court decisional matters even though orders have no precedent setting value.  The turnaround time on this order is worth noting.  We have discussed before the length of time it can take for a taxpayer to receive a decision from the Tax Court.  That was no problem here.  The motion for summary judgment was filed on December 21, 2016 and the order was entered on December 23, 2016.  Swifter justice could hardly have occurred.

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Background

The order entered on December 23, 2016, was not the first order entered in this case.  Petitioner requested place of trial in DC.  Petitioner indicated to the Court that he would have difficulty attending the trial because he was in Canada.  Then Chief Judge Thornton issued an order directing the clerk to send to petitioner information about how to resolve his case without trial.  The letter sent by the clerk is not available on the Court’s electronic docket but I presume it talks about settlement.  Settlement here may prove difficult because the issue appears to be the imposition of several frivolous tax submission penalties under IRC 6702(a).  Surprisingly, the IRS does not contest the ability of the taxpayer to raise the merits of his liability for these penalties because it generally takes the position that an administrative opportunity to contest the penalties prevents the taxpayer from raising the merits of standalone penalties in the CDP context.

When the case was scheduled for trial, petitioner’s wife wrote to the Court requesting a continuance because her husband was incarcerated. (As a side note I will mention that if he was incarcerated in Canada at the time he received his CDP notice it is surprising that he was able to timely file a CDP petition.  Being out of the United States imposes a significant barrier on receiving the notice and turning it around into a timely petition without the additional difficulty factor of the mail delays encountered by those who are incarcerated.)  Judge Gustafson granted the request for continuance but provided the following guidance to respondent in the second paragraph of his order:

“ORDERED that, no later than May 25, 2016, respondent shall file a motion for summary judgment or another appropriate motion. Presumably, respondent’s motion will undertake to show that the “verification” by the Office of Appeals pursuant to section 6330(c)(1) included a verification of compliance with section 6751(b)(1). See IRM pt. 25.25.10.8.1 (08-13-2015) (“Pursuant to IRC Section 6751(b), written management approval must be indicated before assessing the IRC Section 6702 penalty. This written managerial approval should be indicated on Form 8278”).”

 

The Chief Counsel attorney assigned to the case must have discovered that Appeals did not bother to verify compliance with 6751 as a part of its CDP verification process (shocking), and he came back to the Court requesting a remand of the case to Appeals to allow it to complete the verification process it missed during its initial consideration.  The Court granted this request.  The case went back to Appeals in late July or August of 2016 and returned to Chief Counsel’s Office in time for it to file the motion for summary judgement that is the subject of this post.  On the second trip through Appeals a verification of the approval required by 6751 occurred although, as discussed below, the verification did not satisfy the Court.

The December 23 Order

The first paragraph of the Order sets the tone for the problems the IRS faces in getting the summary judgement it has requested.  The Court states:

 

“Some of the factual predicate for the Commissioner’s motion is not “supported as provided in this rule”, Rule 121(d), sent. 3; and legal argument needed to address patent questions is not given in the motion. We will therefore not require Mr. Vigon to file a response but will deny the motion and will schedule this case for trial….”

 

The first problem with the motion that the Court addresses is that the IRS argued that the documents mailed to it that caused the imposition of the frivolous submission penalties were not amended returns; however, the Court points out that three of the nine documents in question had the amended return box checked.

Another problem with the motion for summary judgement concerned its description of the documents as returns.  The Court points out that three of the documents were unsigned and could not qualify as returns.

The most relevant problem for purposes of this post, however, comes with the verification of the immediate supervisor as required by IRC 6751.  Before analyzing the legal issue presented the Court makes the following observation about the verification:

 

“The Commissioner’s motion for summary judgment asserts that “before each of the I.R.C. section 6702 penalties was assessed, an immediate supervisor of the individual making the determination to assess the penalty approved that determination in writing”. The Forms 8278 do name an “Originator” on line 10a and a “Reviewer” on line 16. However, not in keeping with the remand memorandum, neither the motion nor any of its attachments (as far as we can tell) identify the person approving the penalty determination as being in fact the immediate supervisor of the individual making the initial determination of the penalty. (Rather, in an email to counsel (Ex. V), the settlement officer observed, “[T]he form 8278 shows a ‘Reviewer’ signature which everyone seems to constitute as a manager signature but it would be better presented in a court situation if the form was changed to notate Manager or Supervisor as the actual person signing the form.”)”

 

Leaving aside the statutory problem the IRS has with IRC 6702 and whether some the documents filed by petitioner meet the requirement of being a return, the Court focuses on the verification requirement under 6751 of approval.  The statute requires the approval of the immediate supervisor of the person making the penalty determination.  Although the statute would also allow approval by mangers higher up in the pecking order it does so by stating that those non-immediate supervisors must be delegated by the Secretary of the Treasury.  To date, the Secretary as not delegated anyone who can make this approval.  This means that the IRS must show, and Appeals must verify in a CDP case, that the immediate supervisor of the person making the penalty determination has approved the assertion of the penalty.

Looking at the description from Appeals described above, the form shows the signature of a reviewer but does not make clear that it is the signature of the immediate supervisor of the person making the determination.  The IRS fails to address this in its motion and instead glosses over it with a reference to the generic term of manager which is a broader term that immediate supervisor.  Because of a mismatch between the terms used by the IRS in its forms and in its arguments with the language of the statute, the Court denies the motion for summary judgment.

Conclusion

Perhaps the settlement letter sent almost two years ago by Chief Judge Thornton will gain increased importance or perhaps the IRS will seek to remand the case again to search to find out if the person signing the penalty approval form was the immediate supervisor of the person making the penalty determination.  The Vigon case points again to the problems the IRS encounters in administering this long forgotten and only recently focused upon requirement of the 1998 legislative changes.  If Mr. Vigon wins, he needs to send Frank Agostino a thank you note for bringing the issue to light and Judge Gustafson a note for requiring that the IRS adhere to the statute.  Because Mr. Vigon is representing himself and has sent in nothing in his defense that I can see on the electronic docket, he would have lost already if the Court were not actively looking out for his interests.  This puts a significant burden on the Court and one that it cannot always meet because the system is not designed for the judge to find all of the arguments that a taxpayer might want or need to make.

 

 

 

Misleading Taxpayers with Collection Letter

This is not the first post on the way the IRS collection letters mislead taxpayers.  This is also not the first post on the notice stream of letters sent in collection cases after assessment of tax.  This may be the first post in which I feel like I am writing about a deliberate attempt by the IRS to mislead taxpayers with a form.  I find the statements the IRS has deliberately chosen to make in Notice CP504 false and can only conclude that it has made these statements after giving thought to what it says in the letter because I know these letters receive much scrutiny before the IRS uses them.

Letters in the collection notice stream satisfy statutory requirements and collection goals.  Section 6303 requires the IRS send a notice and demand letter after it makes assessment when insufficient funds exist on the account to satisfy the liability.  The IRS should send this letter within 60 days of assessment; however, its failure to do so impacts the creation of the federal tax lien and not the validity of the assessment.

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The notice stream fulfills two other statutory requirements – those found in IRC 6331(d) and 6330.  The interplay of these two sections creates the basis for the discussion in this post.  Because the IRS has chosen to misrepresent its authority to levy in Notice CP504, examining the role of these sections must precede the discussion of the misrepresentation itself.

Dating back at least the 1860s, Congress gave the IRS, and its predecessors, authority to levy on the assets of taxpayers who failed to pay their federal taxes.  Levy provides the IRS with a powerful administrative tool which, prior to 1998, involved no judicial check on the IRS before the levy occurred.  Before 1998, however, Congress did require that the IRS send taxpayers a notice of intent to levy 30 days before it could begin administratively taking their property.  The code section requiring this notice is IRS 6331(d).  This section provides:

1.     In general. Levy may be made under subsection (a) upon the salary or wages or other property of any person with respect to any unpaid tax only after the Secretary has notified such person in writing of his intention to make such levy.

2.     30-day requirement. The notice required under paragraph (1) shall be –

  1. Given in person
  2. Left at the dwelling or usual place of business of such person, or
  3. Sent by certified or registered mail to such person’s last known address,

No less than 30 days before the day of the levy.

In 1998 Congress decided that IRC 6331(d) provided inadequate protection to taxpayers before the IRS could levy on their property.  To remedy this failing, Congress did not remove section 6331(d) but added section 6330.  Now, the IRS had two notices it must provide to taxpayers before it could levy.  The new notice created in section 6330 not only gives the taxpayer notice of the IRS intent to levy but also gives the taxpayer the right to contest the levy by filing a Collection Due Process (CDP) request before the levy may occur.  Today, it is easy to forget that the section 6331(d) requirement still exists because it receives almost no attention but the statute still requires the IRS to provide this notice as well and the IRS does so.

In 1998, the IRS decided to make the last letter of its notice stream of collection notices, normally the 4th letter, a letter that combined the taxpayer’s notice rights under both 6331(d) and 6330 into the same letter.  It continued this practice for many years though no legal requirement exists that the same letter provide the notice required by both statutes.  Conversely, no statutory requirement causes the IRS to put the notices into separate letters.

At some point in the recent past, the IRS decided that it would split the notice required by 6331(d) and 6330 into two separate letters.  One of the reasons, a major reason, for combining the two notice requirements into one letter was cost.  Each statutorily required notice came with a requirement that the IRS send the notice by certified mail.  The CDP notice requires not only that the IRS mail it certified, but also that the IRS request return receipt.  Combining the two notices allowed the IRS to meet the costly statutory requirement of certified mail with one rather than two mailings.  Because of the number of notices of intent to levy sent each year and the extra cost of sending two letters by certified mail, the IRS could save several million dollars each year simply by combining the two notices.

The IRS has now decided that it will send the taxpayer, as the third notice in the notice stream, a section 6331(d) notice.Here is the notice sent to one of the clients of the Harvard clinic.  The IRS titles the notice “Notice of Intent to Levy.”  In the body of the notice, the IRS says that if the taxpayer does not pay the tax by the date specified in the letter, the IRS may levy on the taxpayer’s property and rights to property including: 1) wages, real estate commissions, and other income; 2) bank accounts; 3) personal assets (e.g., your car and home) and 4) Social Security benefits.  The problem with this notice and with these statements (some might say threats) arises because, at the time the IRS sends this notice, it has not yet provided the taxpayer with the CDP notice.  Without the CDP notice, the IRS cannot levy upon a taxpayer after 1998 and yet, it says to taxpayers in Notice CP504 that it can.  At best, the letter misleads taxpayers about their rights and viewed at worst, the letter contains false statements known by the IRS employees designing this letter as such.

To test the letter and the statements that the IRS could levy as a result of it, the Harvard clinic sent a Form 12153 to the IRS requesting a CDP hearing for a client who had received Notice CP504.  Even though the letter does not mention section 6330, it describes a procedure the IRS can only take after sending a CDP notice.  So, we thought that by sending a CDP request we would see what would happen.  We expected that the IRS would not provide our client with a CDP hearing, but it seemed better to try and find out.  First, we obtained the permission of our client to file the CDP request after explaining to him our reasons for wanting to do so.  In the first case in which we requested a CDP hearing, we eventually received a letter from the IRS saying that the client could not have a CDP hearing because the IRS had not sent a CDP notice.  Before we could petition the Tax Court from that letter, which might be characterized as a notice of decision from which the Tax Court has in certain circumstances granted jurisdiction, the IRS sent another notice of intent to levy citing to section 6330, and we did not want to impair the taxpayer’s ability to use the CDP process, so we filed another CDP request based on the notice which cited to section 6330 and have our case under consideration for an offer in compromise.

Another client received this notice and we sent another CDP request to the IRS.  In the second case, the IRS has neither responded to our request nor sent a notice citing to section 6330.  We will continue, with client permission, to send in requests for CDP hearings whenever our clients receive a notice of intent to levy stating that the IRS can levy upon their property.  We hope one day to uncover the mystery of how the IRS thinks that it can levy in 2016 based on a 6331(d) notice without sending a 6330 notice.  If anyone out there can help us to solve this mystery, we would appreciate your assistance.  For the moment, I remain of the opinion that Form CP504 seeks to purposely mislead taxpayers.  I find the letter offensive.  I believe it violates taxpayer rights.  I think the IRS should immediately stop sending a letter entitled Notice of Intent to Levy containing instructions in the body of the letter about the taking of a taxpayer’s property when the IRS has no authority to do so.

After the Tax Court Finds It Lacks CDP Jurisdiction, Seventh Circuit Says It Should Keep Quiet About Other Collection Issues

We welcome back frequent guest blogger, Carl Smith, who discusses a recent 7th Circuit case that rejects a line of cases decided by the Tax Court concerning the scope of its authority when dismissing a Collection Due Process case.  Keith

In a precedential opinion issued on November 18 in Adolphson v. Commissioner, the Seventh Circuit affirmed the Tax Court’s dismissal of a Collection Due Process (CDP) petition under section 6330(d)(1) for lack of jurisdiction. The Tax Court dismissed the petition because the IRS had never issued a notice of determination after a CDP hearing – a ticket to the Tax Court.  But, the Seventh Circuit was unhappy that the Tax Court also went on to consider (though, ultimately reject) the taxpayer’s argument that there had been no CDP hearing and no notice of determination (NOD) only because the IRS failed to send a notice of intention to levy (NOIL) to the taxpayer at the taxpayer’s last known address.  In effect, the Seventh Circuit said that where the Tax Court lacks jurisdiction because of the lack of an NOD, the Tax Court should keep quiet about other potential collection issues – such as, in this case, whether the IRS had issued an NOIL to the taxpayer’s last known address before it had started levying.  The Seventh Circuit particularly rejected a line of Tax Court opinions beginning with Buffano v. Commissioner, T.C. Memo. 2007-32 – which, according to the Seventh Circuit, the Tax Court has only intermittently followed – in which the Tax Court has considered as part of its jurisdictional dismissals, issues going to the validity of NOILs.

This post will discuss Buffano, the unpublished order issued by Judge Carluzzo in Adolphson, and the Seventh Circuit opinion in Adolphson.

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Readers are no doubt aware that before the IRS issues a CDP NOD (a ticket to the Tax Court), the IRS Office of Appeals must hold a CDP hearing.  CDP hearings can only be requested after the IRS validly issues an NOIL or NFTL.  One way for the IRS to validly issue an NOIL or NFTL is to send it by certified or registered mail to a taxpayer’s last known address.  Sections 6320(a)(2)(C) and 6330(a)(2)(C).  If certified or registered mail is used for an NOIL, levy is prohibited for the 30-day period in which a taxpayer can request a CDP hearing.  Section 6331(d)(1) and (2).  If a CDP hearing is requested, no levy is allowed and the collection statute of limitations is suspended until the CDP hearing (and any judicial appeals) are over.  Section 6330(e)(1).

Buffano

In Buffano, the first the taxpayer knew about collection was when the IRS sent a levy to his employer.  The taxpayer was upset that he had not, before then, received an NOIL.  The taxpayer sent a Form 12153 requesting a CDP hearing with respect to the taxes being levied, and the IRS decided that, since it had sent an NOIL to what it had thought was the taxpayer’s last known address (even though the NOIL was returned by the USPS undelivered), the IRS had done all it needed to do to commence levy.  Since the request for a CDP hearing was made more than 30 days after the IRS mailed the NOIL, the IRS instead gave the taxpayer an equivalent hearing.  At the end of the equivalent hearing, the taxpayer was unsatisfied with the equivalent letter, and, within 30 days, filed a petition in the Tax Court under section 6330(d)(1).

The IRS moved to dismiss the case for lack of jurisdiction on the ground that no NOD following a CDP hearing had been issued.  Thus, the taxpayer had not received a ticket to the Tax Court.  The taxpayer cross-moved to dismiss for lack of jurisdiction on a different ground:  No NOIL had validly been sent to his last known address.  The court decided that it had to determine the reason for the jurisdictional dismissal that was inevitable in the case.  The Tax Court held that the NOIL had not been sent to the taxpayer’s last known address.  Thus, it was invalid, and the dismissal was predicated on the NOIL’s invalidity.  Presumably, the Tax Court expected that this holding would mean that the IRS had to send a new NOIL to the taxpayer for the same taxes before the IRS could commence any levy.

In subsequent cases presenting the same fact pattern as Buffano, the Tax Court has sometimes (but not always) followed Buffano and issued a ruling on whether or not the NOIL was mailed to the last known address.  If the NOIL was mailed to the last known address, then the Tax Court has dismissed for lack of jurisdiction on the basis of a lack of an NOD.  If the NOIL was not mailed to the last known address, the Tax Court has dismissed for lack of jurisdiction on the basis of a lack of a validly-mailed NOIL.  See, e.g., Anson v. Commissioner, T.C. Memo. 2010-119; Space v. Commissioner, T.C. Memo. 2009-230; Kennedy v. Commissioner, T.C. Memo. 2008-33.

Adolphson Tax Court Order 

Mr. Adolphson’s fact pattern was quite similar to Buffano – i.e., he first learned of collection from an actual levies on third parties who held his funds, but he had never before received an NOIL. Unlike Buffano, he did not thereafter ask for and get an equivalent hearing, but went straight to the Tax Court.  In the Tax Court, Mr. Adolphson first moved to restrain further levies and for the Tax Court to order the IRS to refund what had already been levied – arguing that the IRS had not sent an NOIL to his last-known address and citing Buffano.  Then, the IRS cross-moved to dismiss for lack of jurisdiction because of the absence of an NOD.  The IRS, however, attempted to show it had mailed an NOIL to his last known address.  Since Mr. Adolphson had not filed returns for many years, there was a serious issue as to which address was his last known address.

In an unpublished order at Docket No. 21816-14L, issued on February 3, 2015, Special Trial Judge Carluzzo granted the government’s motion, first stating:

Petitioner agrees that the Court is without jurisdiction in this matter. That being so, his motion to restrain must be denied as our authority to grant the relief he seeks arises only in cases where our jurisdiction under section 6330(d) has properly been invoked. See sec. 6330(e). Petitioner, however, disagrees with respondent’s ground for the dismissal.

Then, the judge distinguished Buffano as follows (footnote omitted):

Petitioner’s reliance upon Buffano is misplaced. The record in Buffano contained information showing the address shown on the taxpayer’s relevant Federal income tax return, the starting point for purposes of establishing a taxpayer’s last known address. See sec. 301.6212-2(a) Proced. & Admin. Regs.; Kennedy v. Commissioner, 116 T.C. 255 (2001); Abeles v. Commissioner, 91 T.C. 1019 (1988). Petitioner has not established what, if any, address was shown on his Federal income tax return(s) most recently filed before the relevant notices of intent to levy were issued.  Furthermore, under the circumstances before us and contrary to petitioner’s suggestion, the address shown on respondent’s November 5, 2012, letter to him is hardly determinative as to his “last known address” for purposes of section 6330.

Because of the paucity of information as to petitioner’s last known address, we decline to make any finding on the point in resolving the jurisdictional motion before us. To the extent that there are any irregularities in the assessment process giving rise to the above-mentioned liabilities, or to the collection of those liabilities, petitioner’s remedies, if any, lie in a different Federal court.

Adolphson Seventh Circuit Opinion 

The Seventh Circuit affirmed the Tax Court, but using a lot of words criticizing both the Tax Court’s rulings and the DOJ lawyers’ briefs and oral argument.  In a 16-page opinion, the panel took apart Judge Carluzzo’s barely 3-page order.

Initially, the panel stated that, if it were going to apply the Buffano line of cases, it disagreed that the IRS had shown that it mailed an NOIL to the taxpayer’s last known address.  In particular, the panel noted that some of the IRS evidence of mailing consisted of improperly-authenticated transcripts that only indicated the issuance of one or more NOILs, but there was no evidence in the record of any mailing or evidence of even the address used.  The panel accused Judge Carluzzo of improperly shifting the burden of proof on mailing to the taxpayer and wrote:  “In other words, had the tax court followed Buffano and required the Commissioner to prove proper mailing, the ‘paucity of information’ should have led to a win for Adolphson.” Slip op. at 10-11.

The panel was also critical of the DOJ lawyers for, among other things, (1) not taking a position on whether the Buffano line of cases was correct, (2) not taking a position on whether Judge Carluzzo correctly distinguished Buffano, (3) making no attempt to justify the IRS collection behavior in the case, and (4) unhelpfully arguing that “Adolphson, proceeding pro se, erred by asking the tax court to enjoin further collection efforts and refund money already collected, rather than asking the court to invalidate the levies.”  Id. at 11.  “Instead, the Commissioner insists that Adolphson is relegated either to an administrative claim before the IRS or a refund suit in district court, while maintaining that ‘whether the IRS mailed a Notice of Intent to Levy to taxpayer’s last known address is not relevant in this case.’” Id.

Turning to the law, the panel wrote:

Notwithstanding this unwillingness to confront the salient issue, the Commissioner is correct that, absent a notice of determination, the tax court lacks jurisdiction under 26 U.S.C. § 6330(d).  A decision invalidating administrative action for not following statutory procedures is a quintessential merits analysis, not a jurisdictional ruling. The Buffano line of cases therefore represents an improper extension of the tax court’s statutorily defined jurisdiction.

Id. at 12 (citations omitted).

The panel blamed the Tax Court’s error in Buffano on its uncritically importing into CDP, from its deficiency jurisdiction case law, the practice of allowing a taxpayer who files a late deficiency petition to ask that the court determine that the notice of deficiency was not sent to the last known address, and, so, the Tax Court lacked deficiency jurisdiction because of an invalid notice.  Calling the deficiency jurisdiction practice “less problematic”, the panel distinguished it from determining whether an NOIL was properly sent to a last known address, since the challenged notice in a deficiency case is the ticket to the Tax Court (the “jurisdictional hook”), whereas an NOIL is not.  In a passage I find confusing, the panel wrote:

Although calling this ground for dismissal [of an improperly-mailed notice of deficiency] “jurisdictional” is a misnomer, the logical underpinning is the same: The tax court is determining whether the IRS has met statutory requirements to proceed with collection, but there isn’t a question of whether or not the jurisdictional hook exists (were there no deficiency, there would be nothing to collect).

Id. at 14.  Earlier in the opinion, the panel had written:

This [Buffano] practice of invalidating collection activity [in a CDP case] where the tax court lacks statutory authority to proceed also violates the Tax Anti‐Injunction Act, 26 U.S.C. § 7421(a), which (with exceptions inapplicable here) provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” This statute deprives courts of jurisdiction to enter pre‐collection injunctions and “protects the Government’s ability to collect a consistent stream of revenue” by ensuring that “taxes can ordinarily be challenged only after they are paid, by suing for a refund” under 28 U.S.C. § 1346(a)(1). By invalidating levies despite the absence of a notice of determination under § 6330—a taxpayer’s jurisdictional hook to enter tax court—decisions such as Buffano stand in direct opposition to the Act.

Id. at 12-13 (citations omitted).

Ultimately, the panel concluded that a taxpayer in Mr. Adolphson’s position is left only the remedy of a refund suit.  I would call that remedy completely useless, since one can only get a court to order a refund in such a suit if one has overpaid one’s taxes.  Lewis v. Reynolds, 284 U.S. 281 (1932).  It is of no relevance in a refund suit whether the IRS improperly forced all or part of the tax payments by a procedurally-improper levy.

The panel regretted that it saw no statutory remedy for Mr. Adolphson’s plight:

The framework used in Buffano to scrutinize the IRS’s compliance with its statutory obligations does have equitable appeal; a taxpayer to whom the IRS fails to mail a Final Notice of Intent to Levy and, through no fault of her own, misses the 30-day window to request a CDP hearing might otherwise be left without an opportunity to petition the tax court prior to seizure of her assets. This is the system devised by Congress, however . . . .  Troubling though this [refund suit] “remedy” may be, given the expense and potential delays inherent in such a suit, there is no lawful basis for expanding the tax court’s jurisdiction to resolve the perceived problem. Absent a notice of determination, the tax court simply has no lawful authority to hear a taxpayer’s claim under § 6330(d).

Adolphson, at 15-16.

Observations

Because Mr. Adolphson was pro se and the DOJ’s briefing was so unhelpful, the panel may have misunderstood certain things about tax procedure when it wrote the opinion.  The opinion conspicuously fails to mention three possible avenues for relief for him.

First, section 6330(e)(1) suspends the collection statute of limitations if a person requests a CDP hearing.  In this case, no CDP hearing was requested because no NOIL was issued to the last known address (probably).  Section 6330(e)(1) goes on to provide:

Notwithstanding the provisions of section 7421(a), the beginning of a levy or a proceeding during the time the suspension under this paragraph is in force may be enjoined by a proceeding in the proper court, including the Tax Court.  The Tax Court shall have no jurisdiction under this paragraph to enjoin any action or proceeding unless a timely appeal has been filed under subsection (d)(1) and then only in respect of the unpaid tax or proposed levy to which the determination being appealed relates.

Since there was no NOD here to which an appeal under subsection (d)(1) could be timely, the Tax Court lacked that injunctive power under subsection (e)(1).  I don’t see the district court having injunctive power under (e)(1), either, since the injunctive power is provided during the period of the suspension.  Since no CDP hearing was requested (probably, since no NOIL was issued to the last known address), no suspension period is in effect.

Second, the Supreme Court acknowledged a judicial, equitable exception to the anti-injunction act in Enochs v. Williams Packing & Navigation Co., 370 U.S. 1 (1962).   To succeed under that exception, a taxpayer must show (1) that under no circumstance could the government prevail, and (2) that there is equity jurisdiction – i.e., that the taxpayer would suffer irreparable harm if the government’s actions were not enjoined.  While I think that an IRS levy made without previously sending a proper NOIL might meet the first requirement, merely being forced to pay money would doubtless not be considered irreparable injury.  However, there might be irreparable injury if, say, the levies would end up forcing the taxpayer’s business into bankruptcy.

Short of injunctive relief, though, Congress has provided in section 7433 a suit for money damages on account of negligent wrongful collection actions.  But, under this section, a taxpayer is limited to actual damages – and I am not sure merely paying taxes prematurely constitutes actual damages.  However, collateral damage – such as the levies ending up causing the taxpayer to lose clients or to go into bankruptcy – would seem to be compensable damages.

I also don’t think the Adolphson court appreciated how the dismissal of a deficiency petition for lack of jurisdiction because of an invalid notice doesn’t amount to an injunction against the IRS.  The Tax Court has jurisdiction to find facts necessary to its jurisdiction. When the Tax Court determines that a notice of deficiency wasn’t valid, that is a jurisdictional fact found by the court that could be used by a taxpayer in later litigation to collaterally estop the IRS from, say, judicially foreclosing on the tax lien that arose from the deficiency.  By contrast, if the Tax Court holds an NOIL was invalid, the court would be deciding an issue not necessary to its CDP jurisdiction, so the discussion would be dicta.  A taxpayer could not use this dicta to collaterally estop the IRS in later litigation from arguing that the NOIL was valid. The result of a ruling in a Buffano-type case that the NOIL wasn’t properly mailed is simply an advisory opinion to the IRS not to pursue collection under that NOIL. The IRS usually follows that advice. But, since the Tax Court shouldn’t be issuing advisory opinions, perhaps that is part of why I agree with the Seventh Circuit that Buffano is incorrect.

Finally, Adolphson may also call into question Craig v. Commissioner, 119 T.C. 252 (2002), where the Tax Court held that it has jurisdiction under section 6330(d)(1) to hear a case where the IRS mistakenly issued an equivalent hearing letter, rather than an NOD.  In Craig, the Tax Court said it would treat the equivalent hearing letter as an NOD.  Adolphson seems to suggest that when no NOD was actually issued, the Tax Court should just keep quiet about any other merits issue, as it lacks jurisdiction under section 6330(d)(1).