We have written on several occasions about the ability of a taxpayer to litigate the merits of the underlying liability in a Collection Due Process (CDP) case [See posts here and here]. Section 6330(c)(2)(B) provides that a taxpayer may challenge the underlying liability in a CDP hearing if the taxpayer did not receive a statutory notice of deficiency or did not otherwise have an opportunity to dispute the liability. The Summary Opinion in Canaday v. Commissioner provides a new fact pattern in a long line of cases in which the IRS seeks to prevent the taxpayer from raising the merits of the liability in a CDP case. Judge Gerber determines that the petitioner in this case could raise the merits. I think the decision stretches the reasoning of the applicable regulation even though an argument exists that the language of the regulation does not cover this specific situation or that the regulation goes beyond the intent of the statute. Since the petitioner here elected the small tax case procedure, the Summary Opinion is the last word in this case and no further review of the opinion will occur.read more...
Judge Gerber focuses on whether the petitioner had the prior opportunity to discuss the merits of his tax liability before Appeals. I tend to agree with the IRS view that the petitioner had that opportunity as I read the statute but applying the applicable regulation the question is not free from doubt. For almost a year I have been writing and working with Les to create a new chapter exclusively on CDP for Saltzman and Book treatise, IRS Practice and Procedure. Oddly enough, the issue of when a taxpayer can get to the merits of the underlying liability in a CDP case presents one of the most convoluted areas of CDP practice. In discussing the issue in this case Judge Gerber only cites to one case, Lewis v. Commissioner. That case is a large source of the confusion in this area. For the reasons set forth in great detail in a post by guest blogger Lavar Taylor, Lewis, and perhaps the regulation to the extent that Lewis correctly interprets the regulation, reaches the wrong conclusion. I will circle back to Lewis but the incorrect decision in Lewis does not necessarily lead to the wrong decision in this case except to the extent that the Tax Court has failed to issue an opinion clearly laying out the rules in this area for others to follow. The confusion in the case law finds its source in an unclear statute, interpreted by a very IRS friendly regulation further exacerbated by an aggressive litigation position on the issue presented in Lewis.
Mrs. Canaday timely filed her 2008 return claiming on the return the first time homebuyer credit. That credit had a short life following the recession that started in 2007 as Congress sought to give a boost to the real estate market through a huge refundable credit. The size of the credit attracted people seeking to obtain easy money from the IRS with incorrect claims. The IRS poured significant resources into examining returns claiming this credit because of the many incorrect claims filed. The IRS audited Mrs. Canaday’s 2008 return as a part of this effort. During the examination, Mrs. Canaday had a change of heart concerning the correctness of her claim on the original return of the homebuyer credit. So, she filed an amended return in which she removed the homebuyer credit. This gave the IRS permission to assess and ended the audit. It should have also ended her opportunity to raise the merits of the liability in a CDP case.
If Mrs. Canaday had not claimed the homebuyer credit on her original return, failed to remit all of the tax reported on the return and raised the right to claim the homebuyer credit as a part of her CDP hearing, she would have had the right to do so because of the decision in Montgomery v. Commissioner. That decision turns on the fact that someone seeking to contest the correctness of the liability reported on a return has not previously had the opportunity to contest that liability. Instead, she presents the reverse situation. She claimed the credit, got audited and, through the filing of the amended return, agreed that she should not have claimed the credit. Filing the amended return served the same purpose as signing a Form 870 or Form 4549. By doing so she waived her right to have a hearing before Appeals. If she had not waived this right during the audit process, she had the right to go to Appeals and her case was on that track. She similarly waived the right to go to Tax Court to contest this liability in a pre-assessment forum. The IRS interpreted the meaning of opportunity in section 301.6330 – 1(e)(1) which says “The taxpayer also may raise challenges to the existence or amount of the underlying liability, including a liability reported on a self-filed return, for any tax period specified on the CDP Notice if the taxpayer did not receive a statutory notice of deficiency for that tax liability or did not otherwise have an opportunity to dispute the tax liability.” This interpretation basically parrots the statute but it went further in its examples.
The example in this regulation at Q&A E-2 states “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.” While Mrs. Canaday never received a notice of deficiency for this liability and has never been offered a conference with Appeals because she conceded her case during audit before availing herself of the right to the Appeals conference, the IRS position is that she did otherwise have an opportunity to dispute the liability and she waived it by filing the amended return reporting the liability she now seeks to contest during the audit of her return. The decision to waive it at that point should have precluded her from raising the merits in the CDP case based on the regulation. While the opinion does not go into great detail, I assume that just as the Court decided in Montgomery that the taxpayer there qualified for a merits determination to contest his tax return because he did not receive a notice of deficiency and was not “offered” an Appeals conference, Ms. Canaday, through her more convoluted path, got to the same place.
The case gets even more confusing because after filing the amended return consenting to assessment of a tax liability for 2008 that did not include the first time home buyer credit, she reversed her position again. The opinion does not discuss why she decided to originally claim the credit, then decided to give up on the credit by filing the amended return and then decided to seek the credit again by filing for audit reconsideration but she was obviously having second and third thoughts about the credit. The audit reconsideration process exists for taxpayers who uncover new evidence after the conclusion of an audit and assessment of the tax. She does not fit the mold for audit reconsideration and the IRS may have denied her claim for audit reconsideration for that reason. It is unclear why audit reconsideration did not work in her case but I suspect the IRS simply returned the request saying that the request failed to comply with the purpose of audit reconsideration. If that assumption is correct, she was not “offered” a post-assessment Appeals conference as a part of the audit reconsideration either. If my guess regarding audit reconsideration is wrong then this case may reach a different conclusion than Lewis even if it cites Lewis for authority. Since going to Appeals in an audit reconsideration context cannot lead to Tax Court, I do not think that opportunity to go to Appeals should matter but the Lewis case and the IRS interpretation of the applicable regulation do not turn on the ability of the taxpayer to seek Court review. I will discuss the importance of Court review below.
Because the audit reconsideration did not bring her the requested relief, e.g., the refundable homebuyer credit, Mrs. Canaday sought to raise the ability to claim the first time home buyer credit again in her CDP case. Appeals denied her that right. It told her she had already had the opportunity to have her case heard before Appeals and, therefore, could not receive it again as part of the CDP process. She sought Court review of that decision. The Court determined that Appeals abused its discretion in refusing to allow her to contest the merits of the liability stating “Although petitioner did contest the merits of the underlying liability before the collection hearing, she was not allowed a prior opportunity to contest the liability before Appeals.” The Court follows this with a statement that she “has not had a prior opportunity to challenge her underlying liability within the meaning of section 6330(c)(2)(B)….” These statements must result from the absence of a notice of deficiency or an “offer” of an Appeals conference.
She could have gone to Appeals as a part of the audit of her 2008 return. The reason she did not go to Appeals resulted solely from her agreeing to the assessment of the liability she now seeks to contest. She consented to the assessment by filing the amended return. Because she not only could have gone to Appeals at the conclusion of her audit but she could have failed to sign a consent to assessment, received a statutory notice of deficiency gone to the Tax Court, the path to the decision here seems to lie in interpreting opportunity to equal a formal offer of an Appeals conference rather than the opportunity for an Appeals conference that the taxpayer foregoes. The example in the regulation indicates that opportunity includes a formal offer to meet with Appeals but it does not preclude other opportunities. I agree with the IRS that she had an opportunity to go to Appeals but I wish for more clarity in this area. I do not find that clarity in this summary opinion.
It seems that the decision here really acts as an extension of the Montgomery decision rather than an application of the Lewis case. Read as an extension of Montgomery and an application of the specific language of the regulation rather than the language of opportunity in the statute, the opinion makes sense even if it extends the Montgomery reasoning in a manner with which I have trouble agreeing. The Court should throw out the Lewis case, reexamine the regulation and create a simple formula for what constitutes a prior opportunity to dispute the liability. A prior opportunity to dispute the liability should only be an opportunity in which the taxpayer not only has a chance to discuss the liability with Appeals but also has a chance for judicial review of the liability. Where the taxpayer has had the chance to talk to Appeals and to go to the Tax Court, I would interpret the statute to preclude the taxpayer from having the opportunity to litigate the merits of the liability in the CDP context. If the taxpayer has not had that opportunity, the Court should allow a merits contest in the CDP case. Lewis introduces complexity and unfairness into the equation. Court review provides a critical linchpin in this analysis. Some would argue that the statute should be interpreted to only preclude merits review in situations where the taxpayer previously went to Court on the merits of the liability. The language of the statute could support that interpretation but getting to that result now would require finding that the regulation was invalid. The current state of the law creates too much confusion and too little opportunity for taxpayers who seek to address the underlying merits. The decision here expands the opportunity for judicial review when the taxpayer does not literally have an offer to go to Appeals. The case, however, points to the continued confusion in this area. The taxpayer, in choosing small case status, made the correct forum choice in this case.