Are Alleged Alter Egos, Successors in Interest and/or Transferees Entitled to Their Own Collection Due Process Rights Under Sections 6320 And 6330? Part 5

Lavar Taylor brings us the fifth installment of his series on Collection Due Process and third parties. Today he addresses strategies in litigating the issues. Lavar promises one more post on the topic after this one. When complete his work on this topic will be the equivalent of a law review article but with a very practical bent. For practitioners with clients who have derivative liabilities, Lavar provides significant insight into the law and the practice of representing parties operating in the dark shadows of the code and administrative practice. Although Lavar does not discuss the issue, it is interesting how the Taxpayer Bill of Rights promises of the right to challenge the IRS position and be heard and the right to appeal an IRS decision in an independent forum intersect with the way that these third parties are treated by the IRS. Keith

In Part 4 of this series, I discussed the questions of 1) how a putative alter ego/successor in interest/transferee of a taxpayer might pursue litigation in the Tax Court to raise the questions of whether they are entitled to Collection Due Process (“CDP”) rights under sections 6330 and 6320 of the Code, independent of the rights of the original taxpayer who incurred the liability, 2) whether the government can take administrative collection action against a putative alter ego/successor in interest/transferee without first obtaining a District Court judgment or making a separate assessment, and 3) whether the Tax Court has the ability to address issues 1 and 2 above, given that no notice of determination is ever issued by the IRS in these situations.

This post addresses the question of how a putative alter ego/successor in interest/transferee of a taxpayer might pursue litigation in the District Court to raise the questions of 1) whether they are entitled to Collection Due Process (“CDP”) rights under sections 6330 and 6320 of the Code, independent of the rights of the original taxpayer who incurred the liability, and 2) whether the government is prohibited from taking collection action against a putative alter ego/successor in interest/transferee of the taxpayer without first obtaining a District Court judgment against the putative alter ego/successor in interest/transferee, based on the arguments set forth in Part 3 of this series.

This post also discusses the factors affecting the decision of whether to litigate these issues in Tax Court or District Court. In addition, this post discusses why assertions of “nominee” status by the IRS are treated differently under the CDP rules.

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1. Litigating in District Court

An alleged alter ego/successor in interest/transferee has always had a remedy in District Court to challenge levy action against them in the form of a wrongful levy action brought under §7426. See, e.g., Towe Antique Ford Found. v. IRS, 999 F.2d 1387 (9th Cir. 1993). These lawsuits, however, have focused on whether the alleged alter ego/successor in interest/transferee was substantively liable for the tax liability under state law.

To the best of my knowledge, there are no reported decisions where the alleged alter ego/successor in interest/transferee has argued that the IRS levy action was improper because the IRS failed to send the alleged alter ego/successor in interest/transferee a separate §6330 Notice of Intent to Levy before taking levy action against them. Nor am I aware of any reported cases where the alleged alter ego/successor in interest/transferee brought a wrongful levy action claiming that the IRS cannot take any administrative collection action against a purported alter ego/successor in interest/transferee prior to the government obtaining a District Court judgment they are liable for the taxpayer’s taxes as an alter ego, successor in interest, or transferee of the taxpayer, based on the theory articulated in Part 3 of this series.

Frequently, the previously unannounced levy action against the alleged alter ego/successor in interest/transferee financially destroys them and deprives them of the resources needed to challenge the IRS’s assertion of liability. Under the law as interpreted by the IRS, the playing field is decidedly tilted in favor of the IRS. While there are undoubtedly many meritorious assertions of liability by the IRS, I am aware of a number cases in which the issue of liability as an alter ego/successor in interest/transferee was at best questionable or debatable. In our now-settled Tax Court case, for example, there was a state Supreme Court decision which made clear that, based on the undisputed facts in our case, it was not possible for our client to be an alter ego of the taxpayer. Yet the IRS, without properly investigating the facts, pursued levy action against our client, with the blessing of Area Counsel’s Office, based on the unsound premise that our client was an “alter ego” of the taxpayer.

Even where a third party is conceding that they are liable as an alter ego, successor in interest, or transferee of the taxpayer under state law, they can bring a wrongful levy action to challenge the procedural validity of the levy action, based on the failure of the IRS to issue a §6330 Notice of Intent to Levy to the third party prior to taking levy action against the third party.  The mere opportunity to seek administrative collection alternatives, such as an installment agreement, or even an offer in compromise based on doubt as to liability, without having to deal with unannounced levy action may often be the difference between financial life and death for an alleged alter ego/successor in interest/transferee.

For these reasons, any alleged alter ego/successor in interest/transferee, even if they agree that they are liable for the taxes assessed against the taxpayer can bring suit, either in District Court or in Tax Court to challenge the failure of the IRS to issue a separate §6330 Notice of Intent to Levy to them prior to taking levy action.   In such a suit they can also challenge the underlying ability of the government to ever take administrative collection action against an alleged alter ego/successor in interest/transferee prior to obtaining a District Court judgment in favor of the government (or prior to making a separate assessment), based on the theory articulated in Part 3 of this series.

Similar options exist to challenge the validity of an alter ego/successor in interest/transferee notice of federal tax lien. A petition can be filed with the Tax Court, although care should be taken to file the petition promptly after the filing of the lien notice, to minimize the risk that such a petition might be deemed untimely by the Court. Such a petition will be subject to the same jurisdictional challenges as a levy petition.

Alleged alter egos/successors in interest/transferees likewise have always had the opportunity to file a quiet title action in District Court, pursuant to 28 U.S.C. §2410 in order to challenge the validity of the tax lien. See Spotts v. United States, 429 F.3d 248 (6th Cir. 2005). There is no reason why an alleged alter ego/successor in interest/transferee could not file a quiet title action in District Court based on the grounds that 1) the IRS failed to give them their own lien CDP rights as required by section 6320 after the filing of the notice of federal tax lien, and 2) the government is not permitted to take collection action against them in the absence of a separate assessment against them or a District Court judgment imposing liability as an alter ego, successor in interest, or transferee of the taxpayer, for reasons outlined in Part 3 of this series.

2. Tax Court or District Court: Making a Choice

If an alleged alter ego/successor in interest/transferee wishes to pursue litigation to challenge the ability of the IRS to levy without first issuing a separate §6330 Notice of Intent to Levy to challenge the ability of the IRS to take administrative collection action against a purported alter ego/successor in interest/transferee, choosing between Tax Court and District Court as a litigation forum can be difficult. District Court offers a forum where the court clearly has jurisdiction to rule on the issues at hand. District Court also is much quicker than Tax Court. Indeed, in our now-settled case, at the time of the settlement, the IRS’s motion to dismiss the petition for lack of jurisdiction had been pending with the Tax Court for over 12 months without any opinion being issued.

District Court Judges, however, often lack even basic familiarity with tax laws in general and with CDP laws in particular. Tax Court Judges have significant expertise in tax law and regularly deal with CDP procedures in their cases. They certainly have more expertise in determining the extent of their own jurisdiction than do District Court Judges. Page limitations on filings in District Court may hamper the ability of an alleged alter ego/successor in interest to fully brief all of the issues, which are complex and arcane, even to the most dedicated tax procedure junkies.

In addition, once the Department of Justice acquires jurisdiction over a case, settling that case can become much more difficult. There can be a dramatic difference in the levels of approval needed to settle a case with the Office of Chief Counsel and the levels of approval needed to settle a case with the Department of Justice.   See the Department of Justice Tax Division Settlement Reference Manual. Furthermore, the differences between the rules governing discovery in Tax Court and the rules governing discovery in the District Court generally make it far more expensive to litigate in District Court than in Tax Court.

An alleged alter ego/successor in interest/transferee who ventures into District Court in a wrongful levy action or a quiet title action also faces the possibility that the Department of Justice will seek an affirmative judgment against them, including a judgment for the foreclosure of real property owned by the alleged alter ego/successor in interest/transferee which the government contends can be reached in an effort to satisfy the taxes owed by the taxpayer. No such counterclaims can be filed by the government in Tax Court litigation; IRS must refer the matter to the Department of Justice for a separate lawsuit.

Yet, until the Tax Court has issued an opinion in this area, anyone who chooses Tax Court as their litigation forum currently faces the possibility that the Tax Court will eventually dismiss their petition for lack of jurisdiction in a way that fails to resolve the underlying question of whether alleged alter egos/successors in interest/transferees are entitled to their own independent CDP rights or whether the IRS may ever pursue administrative collection action against an alleged alter ego/successor in interest/transferee without first obtaining a District Court judgment. And however the Tax Court rules on this issue, the Tax Court’s ruling can be appealed to the relevant Court of Appeals.

The specific facts in each case will also be an important factor, as will the proclivities of the local District Court Judges. The rulings of the District Courts can also be appealed to the relevant Court of Appeals, but there will never be any appeal on the issue of whether the District Court lacks jurisdiction over such a suit, as long as the suit is brought within the applicable statute of limitations for wrongful levy actions and quiet title actions. (The statute of limitations for wrongful levy actions is now two years. 26 U.S.C. §6532(c). The statute of limitations on quiet title actions is six years. See Nesovic v. United States, 71 F.3d 776 (9th Cir. 1995). )

3. The Long, Hard Road Ahead

Given the circumstances described in this series of posts, it is likely to be quite some time before there is a definitive answer to the questions of whether alleged alter egos/successors in interest/transferees are entitled to their own independent CDP lien and levy rights and whether the IRS may ever take administrative collection action against a putative alter ego/successor in interest/transferee without first obtaining a District Court judgment or making a separate assessment. The speed at which the case law develops will depend in large part on how the Tax Court rules in its first published opinion on these issues. If the Tax Court rules that it has jurisdiction, that holding will drive litigation of these issues to the Tax Court. The IRS will then likely appeal the Tax Court’s holding(s) to multiple Courts of Appeal, possibly leading to a split in the Circuits and Supreme Court review of the issue(s) that split the Circuits.

If the Tax Court holds that it lacks jurisdiction but refuses to follow Adolphson and holds adversely to the government on the procedural issues in dismissing the petition for lack of jurisdiction, this holding will also drive litigation to the Tax Court. This will likely be followed by government appeals to multiple Courts of Appeal and possibly an eventual Supreme Court ruling in this area.

If the Tax Court holds that it lacks jurisdiction and follows Adolphson, a few brave hardy souls may continue to litigate in Tax Court, with the idea of taking their cases to the relevant Courts of Appeal But most litigation involving these issues will be driven to the District Courts, many of which may be reluctant to second guess the Tax Court’s holding on the jurisdictional issue. But the District Courts will still be able to rule on the substantive CDP issue, as well as on the issue of whether the government is required to obtain a District Court judgment (or make a separate assessment) against purported alter egos/successors in interest before the government can take collection action against them.

One or more of these issues are likely to end up being argued before the Supreme Court, absent any future legislative action by Congress. But it is likely to be a number of years before that happens.

4. “Nominee” Liens and Levies- Why The CDP Rules Are Different

In writing this series of posts, I have purposefully avoided including “nominee” liens and levies within the scope of my discussion of the extent to which the CDP provisions may be invoked by third party non-taxpayers against whom the IRS is pursuing collection action to collect taxes owed by the original taxpayer. Putative “nominees” are different from putative alter egos/successors in interest/transferees in that “nominees” are not themselves personally liable for the tax liability. Rather, a true nominee holds “property or rights to property” of a taxpayer as the agent of the taxpayer.   They are not personally liable for the tax. This distinction is critical for purposes of determining the rights of putative “nominees” under the CDP procedures.

In Part 1 of this series I noted that there are important differences between §§6320 and 6330, and their counterparts, §§ 6321 and 6331. Section 6321 imposes a lien against all “property and rights to property” of a person who is “liable for the tax.” Thus, there must be a personal liability for a tax obligation before a lien can arise against a person’s “property or rights to property” under §6321.

The language of §6320 makes clear that a lien CDP notice is only required to be sent to the “the person described in section 6321,” i.e., a person who is personally liable for the tax. Thus, a putative nominee of the taxpayer is not entitled to notice under §6320 and cannot invoke the lien CDP procedures if the IRS files a “nominee” notice of federal tax lien. Note, however, that a true “nominee” notice of federal tax lien should make clear that the IRS lien only attaches to the specific property, real or personal, which the putative nominee is supposedly holding as an agent of the taxpayer. As I will discuss in Part 6 of this series, virtually all “nominee” notices of federal tax lien flunk this test.

Section 6331, on the other hand, authorizes the IRS to levy on all “property and rights to property” of a person who is personally liable for a tax and to levy on all property on which there is a tax lien. Thus, it is possible that the IRS could levy on property that is possessed or owned by a third party which the IRS claims is encumbered by a tax lien, even though the person who possesses or owns that property is not personally liable for the tax.

Section 6330 provides that “[n]o levy may be made on any property or right to property of any person” unless notice is given to “such person” under §6330. Importantly, §6330 uses the phrase “any person,” not the phrase “person liable for the tax.” Section 6330 also does not refer specifically to the “person” described in §6331(a). I personally believe that this a distinction with a difference, and that Congress intended for any person who has a facially recognizable possessory or ownership interest in property under state law upon which the IRS intends to levy is entitled to notice under section 6330 and thus is entitled to invoke the collection due process procedures.

But the IRS thinks otherwise, and issued regulations which define the term “person” in §6330 as the “person liable for the tax.” Treasury Regulation §301.6330-1(a)(3), Question and Answer 1. If this regulation is valid, only persons who are personally liable for the tax are entitled to notice under §6330 and may invoke the CDP levy procedures. No true “nominees” can invoke CDP levy procedures under the IRS’s interpretation of the law.

If the cited Treasury Regulation is struck down as being inconsistent with the statute, however, true nominees would be entitled to notice under §6330 and would be entitled to avail themselves of the CDP levy appeal process. I believe this regulation is inconsistent with the statute. The phrase “any person” is about as broad as you can get, and the contrasting language of §6320 supports the conclusion that Congress’ use of the phrase “any person” in section 6330 was deliberate. Limiting the availability of the levy CDP appeal procedures to persons who are personally liable for the tax is contrary to the language of the statute.

I leave a more detailed analysis of why I believe that this regulation is not valid for another day. Suffice to say that anyone who is the subject of true nominee collection action, where the IRS merely claims that the property held by or ostensibly belonging to a third party on which the IRS has levied is being held by the third party putative nominee for the benefit of the taxpayer and is not asserting that the third party is personally liable for the taxes owed by the taxpayer, will have to convince the Court that this regulation is invalid should they bring an action in Tax Court or District Court to challenge the IRS “nominee” levy action on the grounds that the IRS failed to issue a §6330 Notice of Intent to Levy to the third party prior to levying on property owned or held by the third party.

Because alleged “nominees” are in a more perilous legal position than alleged alter egos/successors in interest/transferees when it comes to invoking the CDP procedures, It may be that the IRS will, in the future, show a greater interest in pursuing “nominee” collection activity as opposed to pursuing “alter ego/successor in interest/transferee” collection activity.   I have seen some evidence of this here in southern California, after the IRS read our pleadings in our now-settled case.

My experience is that many people in the IRS throw around the terms “alter ego,” “transferee,” and “nominee” like these terms are interchangeable body parts. Of course, nothing could be further from the truth. Alter egos and transferees are personally liable for the taxpayer’s taxes, based on applicable state law. Under California law, for example, the legal test for holding a third party liable as an alter ego is different from holding a third party liable as a transferee. The legal test for holding a third party liable as a successor in interest is likewise distinct from the tests for imposing liability as an alter ego or transferee. Nominees are not personally liable for the taxpayer’s tax liability.

Private practitioners should be prepared to call out the IRS if it attempts to sidestep efforts to hold the IRS accountable under the CDP provisions by improperly labeling all third party collection action as “nominee” collection action.

I have one more post to add to this series of posts. In Part 6, I will explain why virtually all IRS “nominee” notices of federal tax lien are improper in a way which can cause legal detriment to the alleged nominees. I have also seen a “transferee” notice of federal tax lien with this same impropriety. In addition to explaining the impropriety, I will offer a suggestion to the IRS on how it can cure this impropriety.

 

Are Alleged Alter Egos, Successors in Interest and/or Transferees Entitled to Their Own Collection Due Process Rights Under Sections 6320 and 6330? Part 4

Guest blogger Lavar Taylor continues his series on Collection Due Process and third parties. The series provides a deep dive into the jurisprudence of CDP cases and the rights of third parties to have an outlet to challenge the liens and levies made against these non-taxpayer parties held liable for the taxpayer’s obligations. Keith

This post looks at the question of how a putative alter ego, successor in interest or transferee of a taxpayer might pursue litigation in the Tax Court to raise the question of whether they are entitled to Collection Due Process (“CDP”) rights under §§6330 and 6320 of the Code, independent of the rights of the original taxpayer who incurred the liability. This discussion assumes, of course, that the IRS has the legal ability to pursue administrative collection action against a putative alter ego or successor in interest of the taxpayer, without first obtaining a judgment in District Court or without first making a separate assessment against the third party under section 6901.   As is explained in Part 3 of this series, such an assumption may not be correct.

This post also discusses how a putative alter ego/successor in interest/transferee might pursue litigation in the Tax Court to raise the issue discussed in Part 3, namely, whether the government can ever take administrative collection action against the putative alter ego/successor in interest/transferee in the absence of a District Court judgment holding that the putative alter ego/successor in interest/transferee is liable for some or all of the taxpayer’s tax liability.

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  1. Existing Tax Court Jurisprudence Regarding Tax Court Jurisdiction

The Tax Court has stated on numerous occasions that a notice of determination under the CDP provisions is a taxpayer’s “ticket” to the Tax Court in CDP cases, see Weber v. Commissioner, 122 T.C. 258, 263 (2004), and that a failure to file a timely petition in response to a notice of determination requires the Court to dismiss the petition for lack of jurisdiction. Id. The Tax Court has also held that, in a situation where the IRS issued a notice of intent to levy under §6330 and the taxpayer failed to request a CDP hearing, the Court lacked jurisdiction because no CDP hearing had been requested and no notice of determination had been issued by the IRS. Offiler v. Commissioner, 114 T.C. 492 (2000).

Thus, in situations where the IRS takes levy action, whether against a taxpayer or against a putative alter ego/successor in interest/transferee, without first issuing a CDP notice of intent to levy under §6330, and the party against which levy action files a petition with the Tax Court to challenge the validity of the levy action as having been taken in violation of §6330, the IRS will likely argue that the Tax Court lacks jurisdiction over the petition. Indeed, that is exactly what the IRS did in the case in which we filed petition with the Tax Court on behalf of our client, an alleged alter ego/successor in interest, after the IRS levied on our client’s bank accounts without providing any notice or other advanced warning whatsoever to our client.

The IRS can take this position even if the failure to issue a §6330 notice of intent to levy is in clear violation of the law. Of course, even if the IRS were to “concede” that the Tax Court has jurisdiction over a petition in this situation, such a “concession” would not be binding on the Tax Court. The Court has an independent duty to determine whether it has jurisdiction over a petition, regardless of the positions taken by the parties. SECC Corp. v. Commissioner, 142 T.C. 225 (2014).

The Tax Court has never held that it lacks jurisdiction over a petition in this precise situation, however. In one case where the Tax Court concluded that the IRS improperly levied on a taxpayer’s bank account without first issuing a Notice of Intent to Levy, the Court held that it had jurisdiction over the case because the IRS made a de facto “determination” for purposes of section 6330 in response to which a petition was filed and thus formed the basis of the Court’s jurisdiction. See Chocallo v. Commissioner, T.C. Memo 2004-152, 87 T.C.M. (CCH) 1432 (2004). In Chocallo, the Court also held that it had the ability to order the IRS to refund to the Petitioner all funds which Respondent had improperly seized or levied from the taxpayer.

[Curiously, it is not possible to access the docket sheet in the Chocallo case electronically. The Tax Court’s website indicates that the case is filed under seal. This seems to me to be very strange.   I have a distinct memory, from a number of years ago, of reading another Memorandum Decision, the name of which I cannot recall, which seemingly was issued either in the Chocallo case or in another case involving facts that were very similar to the facts in Chocallo, prior to the date of 2004 Chocallo opinon. Since I have not able to locate any other Memorandum Decision with similar facts, it would be nice if the seal in Chocallo were somehow lifted. I would then be able to figure out whether my memory is correct about the existence of the other Memorandum Decision or instead be able to confirm that my memory has been completely corrupted from lead poisoning. (Most of my ill-spent youth was spent growing up on the site of a defunct lead-smelting plant in southern Illinois. I blame all of my mistakes on this fact.)]

The aspect of the Chocallo opinion dealing with the ability of the Tax Court to exercise jurisdiction in this situation has been discussed by the Tax Court in TC opinions, see Greene-Thapedi v. Commissioner, 126 T.C. 1, 9 n.13 (2006), and Bussell v. Commissioner, 130 T.C. 222, 245 (2008), but it has never been disavowed by the Court. Thus, it is an open question as to how the Tax Court would rule in a Reviewed Opinion or a TC Opinion by one Division of the Court on the issue of whether the Tax Court can acquire jurisdiction in the fact pattern that was faced by our clients. If the Tax Court does acquire jurisdiction, however, it would appear that it can exercise equitable powers to restore the status quo ante and order the IRS to undo the effects of an illegal levy. See Zapara v. Commissioner, 652 F.3d 1042 (9th Cir.2011), affirming 124 T.C. 223 (2005).

Notwithstanding this uncertainty, there is one step which practitioners can take to increase the chances that the Tax Court will hold that it has acquired jurisdiction in a case where the IRS has taken levy action against an alleged alter ego/successor in interest/transferee of the taxpayer without sending a separate notice of intent to levy to the alleged alter ego/successor in interest/transferee. That step is well illustrated by the opinion in Grover v. Commissioner, T.C. Memo 2007-176, 94 T.C.M. 28 (2007). In Grover, the taxpayer filed a petition asserting that the IRS had issued levies without first sending the taxpayer a §6330 Notice of Intent to Levy.   The IRS moved to dismiss for lack of jurisdiction, based on the grounds that no Notice of Determination had ever been issued to the taxpayer. The IRS also noted that it had previously issued a §6330 Notice of Intent to Levy to the taxpayer well before the taxpayer filed a Tax Court petition.

In dismissing the petition for lack of jurisdiction, the Tax Court stated as follows:

The parties agree that respondent issued no notice of determination. Petitioner does not contend that respondent otherwise made any section 6330 determination. Cf. Chocallo v. Comm’r, T.C. Memo 2004-152 (describing an order denying a motion to dismiss for lack of jurisdiction predicated on the nonissuance of any notice of determination, where the Court had found that the taxpayer had received a “‘determination’ within the contemplation of section 6330” on the basis of “various discrepancies” in the transcripts of account). But as suggested in Boyd v. Comm’r, supra at 303, even if we were to conclude that the notice of levy was “evidence of a concurrent section 6330 determination”, we would be required to dismiss this case for lack of jurisdiction because petitioner did not file his petition until November 17, 2006, which was more than 30 days after the October 9, 2006, notice of levy.

This quote makes clear that, if an alleged alter ego/successor in interest/transferee of a taxpayer wants to have a fighting chance to convince the Tax Court to take jurisdiction over a petition filed in a case where the IRS took levy action against an alleged alter ego/successor in interest/transferee of the taxpayer without first sending a separate §6330 Notice of Intent to Levy to the alleged alter ego/successor in interest/transferee, the alleged alter ego/successor in interest must file the petition within 30 days of the date of the initial IRS levy. In our now-settled Tax Court case, we made sure to file a petition within this 30 day period.

It is possible to argue that a petition filed under these circumstances is timely if filed within 30 days of the date on which the alleged alter ego/successor in interest/transferee receives notice of the levy action. But the prudent course of action is to file a petition within 30 days of the date of the initial levy action if possible.

Even then, it is possible that the Tax Court will end up holding that it lacks jurisdiction in this situation. In our case, we argued in the alternative that, even if the Tax Court lacks jurisdiction in this situation because there was no “determination,” the Tax Court can dismiss the petition for lack of jurisdiction in a way that makes clear that the IRS’s levy action was illegal. I now turn to those alternative arguments.

  1. Alternative Arguments- Getting the Case Dismissed for Lack of Jurisdiction for the Right Reasons

The Tax Court has issued opinions in a number of cases in which taxpayers filed petitions claiming that the IRS had failed to send a §6330 Notice of Intent to Levy to the taxpayer’s last known address before taking levy action. In these situations, the Tax Court has dismissed the petition based on lack of jurisdiction due to the failure of the IRS to send a valid notice of intent to levy prior to taking levy action. See, e.g., Buffano v. Commissioner, T.C. Memo 2007-32, 93 T.C.M. (CCH) 901 (2007). This approach is consistent with the Tax Court’s jurisprudence involving the failure of the IRS to issue a notice of deficiency to a taxpayer’s last known address. See King v. Commissioner, 88 T.C. 1042 (1987), aff’d,  857 F.2d 676 (9th Cir. 1988).

The Ninth Circuit has held that a failure of the Tax Court to explain the reasons for dismissing a petition for lack of jurisdiction where a taxpayer has alleged that the IRS failed to send a notice of deficiency to the taxpayer’s last known address is legal error. See Rosewood Hotel, Inc. v. Commissioner, 275 F.2d 786 (9th Cir. 1960).

In our now-settled case, we argued in the alternative that, if the Tax Court lacked jurisdiction over our petition, it should dismiss the petition for lack of jurisdiction on the grounds that the IRS was required to issue a separate §6330 Notice of Intent to Levy to our client prior to taking levy action and had failed to do so.   We cited to Rosewood and other case law involving for the proposition that the Court could not simply dismiss the petition for lack of jurisdiction without explanation in the face of an argument that the IRS had violated the law by levying on our client’s property without first issuing our client a separate §6330 Notice of Intent to Levy

We also argued in the alternative that the Tax Court should dismiss the petition for lack of jurisdiction on the grounds that the IRS could not pursue levy action at all against our client, because the Code does not permit collection action against an alleged alter ego/successor in interest/transferee in the absence of a judgment (or separate assessment) against the alleged alter ego/successor in interest/transferee. In essence, we raised the argument discussed in Part 3 of this series of blog posts, based on the fact that the IRS could not take administrative collection action against alleged transferees of a taxpayer prior to the enactment of the predecessor to what is now section 6901 of the Code, as another alternative argument.

In raising these arguments, however, we had to deal with the case of Adolphson v. Commissioner, 842 F. 3d 478 (7th Cir. 2016). Adolphson held that the Tax Court erred in cases such as Buffano v. Commissioner, supra, when the Court dismissed the petition for lack of jurisdiction while explaining that Respondent had failed to issue the Notice of Determination to the petitioner’s last known address. The Seventh Circuit held that this latter topic should not have been addressed at all when the Court dismissed the petition for lack of jurisdiction. Instead, per the Seventh Circuit, the Tax Court should have just dismissed the petition for lack of jurisdiction, without further comment.

Ironically, the Seventh Circuit, in reaching its conclusion, violated the very rule which it pronounced in its own opinion. The Seventh Circuit discussed the IRS’s failure to send the Notice of Determination to the petitioner’s “last known address” at length. Aside from the Seventh Circuit’s failure to adhere to its own holding in its opinion, my biggest concern about the Seventh Circuit’s holding is that it permits the IRS to unilaterally deprive taxpayers, along with putative alter egos/successors in interest, of the ability to challenge levy action in the Tax Court. This ruling forces parties to vindicate their CDP rights in District Court, a forum that, since 2006, has no familiarity whatsoever with these rights. The notion that only District Courts, and not the Tax Court, can decide the scope of the Tax Court’s jurisdiction in CDP cases where the IRS refuses or fails to issue a §6330 Notice of Intent to Levy seems to me to be utterly absurd and contrary to Congressional intent.

When we settled our case, we deprived the Tax Court of the opportunity to rule on whether it will continue to follow its prior holding in Buffano in cases which are not appealable to the Seventh Circuit. The Tax Court will face that issue in the not too distant future, and the Tax Court’s holding in that case will impact the ability of alleged alter egos/successors in interest to obtain a dismissal of a petition based on lack of jurisdiction with a discussion and analysis by the Tax Court of the IRS’s alleged procedural irregularities.

If the Tax Court holds that it lacks jurisdiction in these types of cases and, in doing so, follows the holding of the Seventh Circuit in Adolphson, alleged alter egos/successors in interest will be forced to litigate in District Court the question of whether they are entitled to their own independent CDP rights.

This concludes Part 4 of this series. Part 5 of this series will address how these issues can be raised in District Court litigation. Part 5 will also discuss why assertions by the IRS of “nominee” status require a different analysis regarding the potential applicability of the CDP procedures than assertions by the IRS of “alter ego,” “successor in interest” or “transferee” status.   I will also explain why virtually all “nominee” notices of federal tax lien that have been filed by the IRS, along with some “transferee” notices of federal tax lien filed by the IRS, are likely improper in one important respect, to the legal detriment of most, if not all of the persons/entities against whom/which these lien notices have been filed.

 

ARE ALLEGED ALTER EGOS, SUCCESSORS IN INTEREST AND/OR TRANSFEREES ENTITLED TO THEIR OWN COLLECTION DUE PROCESS RIGHTS UNDER SECTIONS 6320 AND 6330? PART 3

We welcome back guest blogger A. Lavar Taylor who brings us his third article in a series on the rights of third parties to obtain a Collection Due Process hearing. As he usually does, Lavar goes back to basics and breaks down why the current rulings may have missed the mark as he broadens our understanding of the process and how the parts fit together. Keith

At the end of Part 2 of this series, I raised the question of whether In re Pitts, 515 B.R. 317 (C.D. Cal. 2014), aff’d, 688 F. App’x 774 (9th Cir. 2016) was decided correctly. The Pitts court held that the IRS may take administrative collection action against a general partner of a general partnership to collect employment taxes incurred by the partnership, without making a separate assessment against the general partner. The court held that the general partner is a “person liable for the tax” for purposes of section 6321 because the general partner is liable for the partnership’s employment taxes under California law. Notably, California law, like the laws of all other states, provides that a general partner of a general partnership is personally liable for all partnership debts.

The court in Pitts did not directly address the question of whether the general partner was entitled to their own independent Collection Due Process (“CDP”) rights under sections 6320 and 6330 of the Internal Revenue Code. Nevertheless, it follows from the holding in Pitts that a general partner is entitled to their own independent CDP rights under sections 6320 and 6330. As is discussed in Part 2, the Internal Revenue Manual (“IRM”) acknowledges that general partners in this situation are entitled to their own independent CDP rights.

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Previously, I discussed why I believe that the IRS is talking out of both sides of their mouth in refusing to extend independent CDP rights under sections 6320 and 6330 to putative alter egos and successors in interest of taxpayers, while these rights are extended to partners of general partnerships. My argument is straightforward: if a partner who is personally liable under state law for a partnership’s unpaid tax liability is a “person liable for the tax” under sections 6320 and 6330, and thus is entitled to their own independent CDP rights, then an alter ego or successor in interest who is personally liable under state law for a third party’s unpaid tax liability is likewise a “person liable for the tax,” and thus, is entitled to their own independent CDP rights.

This post examines the question of whether Pitts, and cases such as the Ninth Circuit’s opinion in Wolfe v. United States, 798 F.2d 1241 (9th Cir. 1986), were decided correctly.  If Pitts and Wolfe were decided incorrectly, the rules governing the collection of unpaid taxes from third parties would be significantly different than they are today. Any time the IRS wanted to collect taxes from a putative alter ego of the taxpayer, a putative successor in interest of a taxpayer, or a partner of a taxpayer which is a general partnership, the IRS would have to refer the matter to the Department of Justice Tax Division to bring suit. Administrative collection action by the IRS against putative alter egos and successors in interest of the taxpayer (and against general partners of a partnership for taxes owed by the partnership) would be prohibited.

Before you summarily dismiss my suggestion that the IRS may be legally precluded from taking administrative collection action against putative alter egos and successors in interest as the product of a senile, stark raving mad tax controversy attorney who, after 37 years of practicing law in this area, has finally gone off of the deep end, read the rest of this post carefully. And as you carefully read through the rest of this post, consider the answer to following question:

Why was the predecessor to section 6901 of the Code enacted?

It is the answer to this question which supports the conclusion that the IRS may not take administrative collection action against putative alter egos or successors in interest of the original taxpayer in the absence of a separate assessment against the third party.

Why are the circumstances of the enactment of the predecessor to section 6901 so important to this analysis? The answer is quite simple. Before the enactment of the predecessor to section 6901, the government could not administratively pursue collection action against putative “transferees” of the persons who incurred the original tax liability, i.e., the “person liable for the tax.” Instead, the government was required to bring suit in federal or state court to prove that these third parties were personally liable as transferees.

This history is laid out in the Supreme Court’s opinion in Commissioner v. Stern, 357 U.S. 39 (1958), which construed section 311 of the Internal Revenue Code of 1939, the predecessor to section 6901. The Court stated at pages 42-43 as follows:

The courts have repeatedly recognized that § 311 neither creates nor defines a substantive liability, but provides merely a new procedure by which the Government may collect taxes. Phillips v. Commissioner, supra [referring to Phillips v. Commissioner, 283 U.S. 589 (1931]; Hatch v. Morosco Holding Co., 50 F.2d 138; Liquidators of Exchange National Bank v. United States, 65 F.2d 316; Harwood v. Eaton, 68 F.2d 12; Weil v. Commissioner, 91 F.2d 944; Tooley v. Commissioner, 121 F.2d 350. Prior to the enactment of §280 of the Revenue Act of 1926, 44 Stat. 9, 61, the predecessor of § 311, the rights of the Government as creditor, enforceable only by bringing a bill in equity or an action at law, depended upon state statutes or legal theories developed by the courts for the protection of private creditors, as in cases where the debtor had transferred his property to another. Phillips v. Commissioner, supra, at 283 U. S. 592, note 2; cf. Pierce v. United States, 255 U. S. 398; Hospes v. Northwestern Mfg. & Car Co., 48 Minn. 174, 50 N.W. 1117. This procedure proved unduly cumbersome, however, in comparison with the summary administrative remedy allowed against the taxpayer himself, Rev.Stat. § 3187, as amended by the Revenue Act of 1924, 43 Stat. 343. The predecessor section of § 311 was designed “to provide for the enforcement of such liability to the Government by the procedure provided in the act for the enforcement of tax deficiencies. S.Rep. No. 52, 69th Cong., 1st Sess. 30.

In Stern, the Court went on to hold that courts are required to look to state law for purposes of determining whether a party is a “transferee” who is liable for the tax incurred by the original “person liable for the tax.”

The purpose of section 6901, and of its predecessor first enacted in 1926, is clear: namely, to permit the IRS to impose personal liability on third party “transferees” and treat them as “persons liable for the tax” against whom the IRS may pursue administrative collection action, provided that the IRS follows the procedures set forth in section 6901. To comply with these procedures, the IRS must make a separate assessment against the transferee after issuing a section 6901 notice of deficiency to the alleged transferee, thereby allowing the alleged transferee to challenge the assertion of liability in Tax Court.

Thus, the predecessor of section 6901 first enacted in 1926 established a mechanism that resulted in third party transferees becoming “persons liable for the tax” against whom administrative collection action could be pursued. It would seem to follow from this analysis that, prior to the enactment of the initial predecessor of section 6901 in 1926, third party transferees were not “persons liable for the tax.” This conclusion is bolstered by looking at the predecessor to section 6303(a) of the Internal Revenue Code, which requires the IRS to send notice and demand for payment to “each person liable for the unpaid” tax within 60 days of the date on which the tax is assessed by the IRS.

The predecessor to IRC section 6303(a) that was in effect in 1926 when section 6901’s predecessor was enacted in 1926, Revised Statutes section 3184, provided in relevant part as follows:

Where it is not otherwise provided, the collector shall in person or by deputy, within ten days after receiving any list of taxes from the Commissioner of Internal Revenue, give notice to each person liable to pay any taxes stated therein, to be left at his dwelling or usual place of business, or to be sent by mail, stating the amount of such taxes and demanding payment thereof.

This language is remarkably similar to present-day section 6303(a), except that the current 60-day deadline to give notice and demand for payment was only 10 days. As is indicated in the legislative history of the predecessor to section 6901 cited above, at the time the predecessor to section 6901 was enacted, the IRS was not permitted to take administrative collection action against putative third-party transferees. Rather, the IRS was required to bring suit against putative third-party transferees in court. The fact that the IRS was not able to administratively pursue third party transferees under the predecessor to section 6303(a) at the time of the enactment of the predecessor to section 6901, a predecessor that reads remarkably like section 6303(a), supports the conclusion that the language in what is now section 6303(a) was never intended to authorize the issuance notice and demand for payment to any person other than the “taxpayer” who incurred the tax liability and against who an assessment has been made. It also supports the conclusion that putative transferees, alter egos and successors in interest were never intended to be within the scope of persons against which administrative collection action could be taken to collect the tax incurred by the “person liable for the tax.”

But what about cases such as Wolfe, discussed previously? Wolfe seemingly holds that the IRS may take administrative collection action against a shareholder of a corporation taxpayer based on the theory that, under state law, the shareholder is the alter ego of the corporation, without making a separate assessment against the shareholder and without sending the shareholder a separate section 6303(a) notice and demand for payment.

The short answer Is that the holding of Wolfe, which was decided before the enactment of the CDP procedures, not only misstates the law, but also has been undercut by the Supreme Court’s decision in United States v. Galletti, 541 U.S. 114 (2004). The relevant language from Wolfe is as follows:

Wolfe challenges the levy served upon him as illegal because no assessment was made against him as a taxpayer. He argues that levies to collect taxes can be served only upon taxpayers against whom assessments have been made. This argument is without merit.

Section 6331 of the Internal Revenue Code empowers the Government to collect overdue taxes by levying upon the taxpayer’s property. The regulations to this section provide that a levy can be served upon any person in possession of property subject to levy, by serving a notice of levy. 26 C.F.R. § 301.6331-1(a)(1) (1985). Thus, levies can be effected against any person in possession of the taxpayer’s property, not just against the taxpayer.

Wolfe misconstrues section 6331 by arguing that a notice of levy and a levy are distinct, and that a notice of levy, but not a levy, can be served on persons against whom assessments have not been made. Regulation 301.6331-1 makes clear that a notice of levy is simply a means of effecting a levy against persons in possession of taxpayer property.

Moreover, under alter ego theory, the assessment against the corporation was effective against Wolfe as well. See Harris, 764 F.2d at 1129 (under alter ego theory, assessment issued against corporation was effective as against both shareholder and corporation); see also Valley Finance, 629 F.2d at 169 (alter ego of corporation not entitled to separate notice of deficiency).

798 F.2d at 1245. The quote above omits footnote 5, which appears at the end of the quoted language. The contents of that footnote are critical to the Ninth Circuit’s holding and thus are quoted here in their entirety:

Wolfe’s reliance on United States v. Coson, 286 F.2d 453 (9th Cir. 1961), in support of his argument that the Government’s failure to file an assessment against him invalidated the levy is misplaced. Coson involved partnership tax liability, and since partners and partnerships, unlike corporations and shareholders, are not separate taxable entities, the case is distinguishable on that ground. The Coson court invalidated a levy against a partner because no assessment, notice or demand had been filed against him as a taxpayer. Here, on the other hand, the Government issued the required assessment, notice, and demand against the taxpayer corporation. Coson does not mandate that assessments be made against third parties in possession of taxpayer property before levies can be effected.

From this discussion, it is apparent that the Ninth Circuit did not understand that partnerships and their partners are distinct entities for purposes of tax administration. The fact that income from tax partnerships “flows through” to partners does not change the fact that a partnership is distinct from its partners for purposes of tax administration and does not mean that partners and partnerships “are not separate taxable entities.” Similarly, subchapter S corporations are distinct from its shareholders for purposes of tax administration, even though the income of a Subchapter S corporation flows through to its shareholders. Partnerships can incur their own tax liabilities, such as penalties for failure to file a partnership tax return, employment taxes and other excise taxes. In addition, the enactment of the new BBA partnership audit rules, which have now taken effect, make it very clear that partnerships and their partners are very distinct from one another for purposes of tax administration.

It appears that the Ninth Circuit in Wolfe refused to apply the rationale of Coson to the fact pattern in Wolfe because the Court believed that partnerships and their partners are the same entities for tax purposes in a collection context. Whatever logical force that this reasoning has (which is little or none), it appears that this reasoning was rejected by the Supreme Court when it decided in United Galletti that a partner of general partnership is not a “taxpayer” for purposes of assessing and collecting employment taxes incurred by the partnership.

The last sentence of footnote 5 in Wolfe is also problematical for those who seek to apply the holding in Wolfe to a situation where the government is attempting to impose personal liability against a third party as a putative alter ego of the “person liable for the tax.” That sentence suggests that the Court in Wolfe was dealing only with a situation where the IRS was merely seeking to levy on corporate property that was in the hands of the shareholder. If that was the situation, there would have be no need for the Ninth Circuit in Wolfe to discuss why the corporate shareholder was personally liable for the corporate taxes based on an alter ego theory.

Thus, there are a number of reasons why trial courts from which an appeal would lie to the Ninth Circuit are arguably free to disregard the Ninth Circuit’s holding in Wolfe and conclude that the IRS may not take administrative collection action against a putative alter ego of a or against a putative successor in interest of the person that incurred the tax liability.

Most of the cases in which our office has encountered an “alter ego” determination or a “successor in interest” determination by the IRS have involved employment taxes. The procedures set forth in section 6901 generally do not apply to employment taxes. They apply to the following types of taxes: (a) income taxes imposes by subtitle A; (b) estate taxes imposed by chapter 11; (c) gift taxes imposed by chapter 12; and (d) fiduciary liability under 31 USC 3713. See § 6901(a)(1).   Section 6901 procedures only apply to other types of taxes (such as employment taxes) only if the taxes in question “[arise] on the liquidation of a partnership or corporation, or on a reorganization with the meaning of section 368(a).” See § 6901(a)(2). This language effectively precludes the application of section 6901 to unpaid employment taxes.

While I have not searched for any authorities which discuss this point, there may have been historical reasons for Congress’ failure to include employment taxes within the scope of what is now section 6901. In 1926, the world was a different place. Income tax withholding from wages did not become universal until 1943. Social Security laws were not enacted until 1935, and a major expansion of those laws was not enacted until 1939, effective in 1940. Thus, in 1926, when the predecessor to section 6901 was first enacted, employment taxes and universal income tax withholding were not even in existence. In 1939, when the 1939 Code was enacted, employment taxes were very new, and there was no universal income tax withholding.

If, as the IRS contends, the IRS is free today to unilaterally assert personal liability under state law against third parties by taking administrative collection action against those third parties, without a separate assessment against the third parties and without bringing suit against the third parties in court, then it would appear that the enactment of the original predecessor to section 6901 back in 1926 was unnecessary. The same rationale which arguably permits the IRS to unilaterally pursue administrative collection action against putative alter egos and putative successors in interest today, without a separate assessment and without first going to court, arguably would have permitted the IRS to pursue administrative collection action against putative transferees back in 1926, without a separate assessment and without going to court, when the first predecessor to section 6901 was enacted.

Yet, back in 1926, it was clear that the IRS could not unilaterally pursue administrative collection action against putative transferees. The IRS was required to file suit in court. The question, then, is why should putative alter egos and putative successors in interest be in a worse position today from a standpoint of tax procedure and administration than putative transferees were in back in 1926? Other than the taxpayer friendly addition of the CDP provisions, the basic laws have not changed that much. Most, if not all, changes in the law have been “taxpayer friendly.”

The extent to which courts will have the intestinal fortitude to address in published opinions the question of why today’s putative alter egos and successors in interest should not be in any worse a position that the putative transferees were in 1926 prior to enactment of the predecessor to section 6901 remains to be seen. In Pitts, our office raised this issue in an amicus brief filed with the Ninth Circuit. The Ninth Circuit panel, cowards that they were, issued an unpublished opinion in which the Court did not address this issue.

Still, this issue is worth raising in any case in which a putative alter ego or putative successor in interest is also arguing that they are entitled to their own CDP rights. Court that are reluctant to declare that case law such as Wolfe is no longer good law may be more receptive to the argument that, to the extent the IRS is seeking to hold third parties personally liable for taxes incurred by another person, the IRS is required to give those third parties their own independent CDP rights.

In Part 4, I will address, among other issues, the issue of how putative alter egos and putative successors in interest might go about getting the Tax Court to rule on the issues discussed in Parts 1 through 3. There are a number of potential roadblocks to having these types of cases heard in the Tax Court, and care needs to be taken to avoid creating more potential obstacles than the ones that already exist. Getting into District Court is relatively easy. Part 4 will discuss both options and will discuss why putative alter egos and successors in interest might want to litigate these issues in the Tax Court, as opposed to the District Court.

 

ARE ALLEGED ALTER EGOS, SUCCESSORS IN INTEREST AND/OR TRANSFEREES ENTITLED TO THEIR OWN COLLECTION DUE PROCESS RIGHTS UNDER SECTIONS 6320 AND 6330? PART 2

Today, guest blogger Lavar Taylor continues his discussion of the interplay of the laws regarding third parties liable for a tax debt and the ability of those third parties to obtain CDP rights. If you have not had the chance to read his initial post on this topic, you might want to take time to read that one before digging into this one. These posts not only explore the ability of these third parties to obtain CDP rights but help anyone not familiar with the various ways that the IRS can seek payment of a taxpayer’s liability to gain a better understanding of the collection process. Keith

In Part 1 of this series of blog posts, I explained how the relevant statutes and regulations, together with the rationale of the Court deciding Pitts v. United States in favor of the IRS, support the conclusion that persons/entities who are alleged by the IRS to be the alter ego, successor in interest, and/or transferee of the party who incurred the tax liability (“original taxpayer”) are entitled to their own independent Collection Due Process (“CDP”) rights under §§ 6320 and 6330 of the Code. In the present blog post, I explain why I believe that the IRS is speaking out of both sides of its mouth when it denies alleged alter egos, successors in interest, and transferees their own independent CDP rights under §§ 6320 and 6330.

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The IRS, in the current version of the Internal Revenue Manual (“IRM”), instructs revenue officers to treat partners in a general partnership which incurred unpaid federal taxes as “persons liable for the tax” for purposes of administratively enforcing the partnership’s unpaid tax liability. Per the IRM, these general partners are to be given CDP Lien and Levy notices under sections 6320 and 6330, in addition to the CDP Lien and Levy notices provided to the taxpayer partnership. Thus, IRM section 5.19.8.4.2(5)(08-05-2016), titled CDP Hearing Requests, provides in section (5) as follows:

If the tax liability involves a partnership, a request for a CDP hearing under IRC 6330 would cover all partners in the partnership. Under IRC 6320, the partnership and partners listed on the NFTL receive the CDP hearing notice. A partner with authority to represent the partnership could request a hearing for the partnership or a partner listed on the NFTL could request a CDP hearing as an individual partner.

Similarly, IRM 8.22.5.3.1.4(4) (03-29-2012), titled Determining Timeliness-Levy, provides that “[f]or partnerships, Collection may issue separate notices to individual partners as well as the partnership entity.” IRM Section 8.22.6.5 (03-29-2012), titled Partnership Liability, states as follows:

1. Under state law, general partners in partnerships are liable for taxes assessed against the partnership. In United States v. Galletti, 541 U.S. 114 (2004), the Supreme Court held the Service’s assessment against a partnership serves to make the general partner liable for the tax. While the Supreme Court did not address administrative collection, Galletti is consistent with the Service’s long-standing legal position that it can enforce a tax lien and take administrative levy action against a general partner based on the assessment and notice and demand directed to the partnership. See Chief Counsel Notice 2005-003 at http://www.irs.gov/pub/irs-ccdm/cc-2005-003.pdf .

2. A partner’s individual CDP hearing request:

— DOES NOT affect Collection’s ability to collect from the partnership or other individual partners’ assets

— DOES affect Collection’s ability to collect from that partner’s individual assets.

Chief Counsel Notice 2005-003 explains in detail the rationale for the IRS’s position that the IRS may pursue administrative collection action against general partners personally for taxes incurred by and assessed against the partnership itself. Essentially, the IRS takes the position that it may take advantage of state law to pursue collection of a tax liability against someone other the person who incurred the tax liability. That concept is not a new one – it is the bedrock of the Supreme Court’s decision in Commissioner v. Stern, 357 U.S. 39 (1958), which deals with the assertion of transferee liability under what is now section 6901 of the Code. In the case of a general partner of a general partnership, the IRS is using the relevant state’s version of the Uniform Partnership Act, which provides that general partners are personally liable for partnership debts.

Why is the IRS speaking out of both sides of its mouth when it grants partners in general partnerships their own CDP rights under §§ 6320 and 6330 with respect to taxes incurred by the partnership but denies those same CDP rights to alleged alter egos, successors in interest and transferees of the original taxpayer? Simply put, the IRS, in seeking to hold third parties liable as the alleged alter ego, successor in interest, and/or transferee of the original taxpayer, is invoking state law to hold a third party liable for the taxes of the original taxpayer.

Conceptually, there is no difference between the IRS invoking state law to hold a general partner of a general partnership liable for the partnership’s tax liability and the IRS invoking state law in an effort to hold someone other than the original taxpayer liable for that tax liability as an alleged alter ego, successor in interest, and/or transferee of the original taxpayer. While determining whether a person or entity is a partner of a general partnership is normally a simpler task than determining whether a person or entity is an alter ego, successor in interest, or transferee of the original taxpayer, both types of determinations involve the application of state law to a given set of facts to determine whether a third party can be held liable for taxes owed by the original taxpayer.

It is clear that state law governs the question of whether a third party can be held liable as an alter ego, successor in interest, and/or transferee of the original taxpayer for taxes assessed against the original taxpayer. See, e.g., Commissioner v. Stern, 357 U.S. 39 (1958) (transferee), Wolfe v. United States, 798 F.2d 1241, (9th Cir. 1986) (alter ego), TFT Galveston Portfolio, Ltd. v. Comm’r, 144 T.C. 96 (2015) (successor in interest), see also Fourth Inv. LP v. United States, 720 F.3d 1058 (9th Cir. 2013) (nominee). It seems to me that, if the IRS’s assertion of liability under state law to enforce a general partnership’s tax liability against a general partner of that partnership is sufficient to trigger CDP rights for the general partner, the IRS’s assertion of liability under state law to enforce a taxpayer’s tax liability against a third party as an alleged alter ego, successor in interest, or transferee should also be sufficient to trigger CDP rights for the alleged alter ego, successor in interest, or transferee.

In the Tax Court cases which we recently settled, the IRS argued that it was not being inconsistent in denying our client (which was an alleged alter ego/successor in interest of the original taxpayer) its own independent CDP rights while allowing those same rights to partners of general partnerships that incur tax liabilities. The IRS argued as follows:

The alter ego doctrine is used in federal tax cases to collect the liability of a taxpayer from a separate corporate entity that is operating to impair the government’s ability to satisfy the taxpayer’s legitimate tax liability. See Oxford Capital Corp. v. United States, 211 F.3d 280, 284 (5th Cir. 2000); Valley Fin. V. United States, 629 F.2d 162, 172 (D.C. Cir. 1980). Once respondent has determined that an entity is an alter ego, that entity’s assets may be levied upon for the debtor of the taxpayer because the law does not recognize the taxpayer and the alter ego entity as each having independent existence for purposes of debt collection. See Oxford Capital Corp., 211 F.3d at 284; see also United States v. Scherping, 187 F.3d 796, 801-02 (8th Cir, 1999).

There are two significant problems with the IRS’s argument (aside from the fact that the IRS’s argument fails to address successor in interest liability). First, there is both federal and California case law which makes clear that an entity is considered a valid, separate entity even when that entity is liable for a third party’s debt under the alter ego doctrine. In Wolfe v. United States, 798 F.2d 1241 (9th Cir. 1986), the Ninth Circuit upheld the application of the alter ego doctrine under Montana law against the shareholder of a corporate taxpayer. In doing so, the Ninth Circuit stated as follows:

Indeed, despite Wolfe’s contentions, it is not necessarily inconsistent to view a corporation as viable for the purpose of assessing a corporation tax, while disregarding it for the purpose of satisfying that assessment. Only those corporations that were established with no valid purpose are considered sham corporations, and thus not entitled to separate taxable status. See Moline Properties v. Commissioner, 319 U.S. 436, 439, 87 L. Ed. 1499, 63 S. Ct. 1132 (1943). A corporation could have a valid business purpose (giving it separate tax status), and at the same time be so dominated by its owner that it could be disregarded under the alter ego doctrine. Cf. National Carbide Corp. v. Commissioner, 336 U.S. 422, 431-434 & n. 13, 93 L. Ed. 779, 69 S. Ct. 726 (1949) (finding insignificant, for the purpose of determining whether a subsidiary corporation is entitled to separate taxable status, the fact that the owner retains direction of the subsidiary’s affairs, provides all of its assets, taxes all its profits, and exercises complete domination and control over its business). This view has been adopted by the Fifth Circuit. See Harris v. United States, 764 F.2d 1126, 1128 (5th Cir. 1985) whether or not [the corporation] was a separate taxable entity is not the same question as whether it was an alter ego for the purpose of piercing the corporate veil”).

Thus, Wolfe, and the cases cited in the Wolfe opinion, make clear that a corporation can be a valid, separate entity from the original taxpayer for purposes of the CDP procedures, even if the IRS is seeking to hold a corporation liable under the alter ego doctrine for the taxes owed by the original taxpayer.

Similarly, California law, upon which the IRS was relying in the now-settled cases we were handling in Tax Court, makes clear that a third party entity which is held liable as the “alter ego” of the original obligor remains a valid, independent entity for purposes of California law. In Mesler v. Bragg Management Co., 39 Cal. 3d 290 (1985), the California Supreme Court made this point very clear while holding that a parent corporation could be sued as the alleged alter ego of its subsidiary, even though the plaintiff had previously reached a settlement agreement with the subsidiary. The Court stated in relevant part as follows:

[W]hen a court disregards the corporate entity, it does not dissolve the corporation. “It is often said that the court will disregard the ‘fiction’ of the corporate entity, or will ‘pierce the corporate veil.’ Some writers have criticized this statement, contending that the corporate entity is not a fiction, and that the doctrine merely limits the exercise of the corporate privilege to prevent its abuse.” (6 Witkin, op. cit. supra, §5, at p. 4317; see, e.g., Comment, supra, 13 Cal. L.Rev. at p. 237.)

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The essence of the alter ego doctrine is that justice be done. “What the formula comes down to, once shorn of verbiage about control, instrumentality, agency, and corporate entity, is that liability is imposed to reach an equitable result.” (Latty, Subsidiaries and Affiliated Corporations (1936) p. 191.) Thus the corporate form will be disregarded only in narrowly defined circumstances and only when the ends of justice so require.

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It is not that a corporation will be held liable for the acts of another corporation because there is really only one corporation. Rather, it is that under certain circumstances a hole will be drilled in the wall of limited liability erected by the corporate form; for all purposes other than that for which the hole was drilled, the wall still stands. 39 Cal. 3d at 300-301.

To the extent that state law is relevant in this context, California law supports the conclusion that an alleged alter ego is a separate entity which is entitled to its own independent CPD rights. (For taxpayers located outside of California, and outside of the Ninth Circuit, the relevant case law will obviously be different.)

The second problem with the IRS’s argument is that the two cases which it cited both pre-date the CDP procedures, which took effect in January of 1999, following the enactment of RRA 1998 in July, 1998. The resolution of the question of whether an alleged alter ego, successor in interest, or transferee of the original taxpayer is entitled their own independent CDP rights will likely depend on the statutory interpretation of the CDP provisions, §§ 6320 and 6330. There are no cases which address this issue. And as is explained in Part 1 of this series of blog posts, the question of how to interpret §§ 6320 and 6330 is likely to be influenced by looking to §§ 6321 and 6331.

Notably, § 6331 refers to the need to provide a “notice and demand” before levy action may be pursued. This is a reference to “notice and demand” as set forth in IRC § 6303(a), which requires the IRS to provide “notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof.” This notice must be sent to the person’s “last known address” within 60 days of the date on which the tax is assessed. Id. Failure to give a valid notice and demand renders void any levy action by the IRS and requires the IRS to refund all monies collected by levy. See Martinez v. United States, 669 F.2d 568 (9th Cir. 1981) (IRS was required to return all funds received by levy where IRS failed to give taxpayer a valid notice and demand under § 6303(a) prior to issuing levies). Failure to give a proper notice and demand also prevents the IRS from taking future administrative enforcement actions such as filing lien notices and issuing levies. See United States v. Coson, 286 F.2d 453 (9th Cir. 1963) (failure to send proper notice and demand to putative partner of a general partnership rendered tax lien void), United States v. Chila, 871 F.2d 1015 (11th Cir. 1989), cert. denied, 493 U.S. 975 (1989) (failure of the IRS to send a valid notice and demand to the taxpayer precludes the IRS from taking administrative collection action with respect to the unpaid taxes but does not prevent a suit to reduce the assessment to judgment), Blackston v. United States, 778 F.Supp. 244 (D. Md. 1991) (Marvin Garbis, J.).

There is a further requirement that the IRS send a notice of intent to levy under IRC § 6331(d) at least 30 days before the IRS levies “upon the salary or wages or property of any person with respect to any unpaid tax.” This requirement, largely forgotten since the enactment of section 6330, has never been repealed. Its primary significance now is that the sending of this notice triggers an increase in the accrual rate of the failure to pay penalty under IRC §§ 6651(a)(2) and (a) (3). See IRC § 6651(d)(1).

The language of §§ 6303(a) and 6331(d) is similar to the language used in §§ 6320 and 6330. Yet we know that the IRS does not send a “notice and demand” for payment under § 6303(a) within 60 days of the date of assessment to alleged alter egos, successors in interest, or transferees who have not been separately assessed that tax liability. Similarly, we know that the IRS does not send § 6331(d) notices to alleged alter egos, successors in interest, or transferees prior to issuing levies against the property of alleged alter egos, successors in interest, or transferees. How is it that the IRS is able to take administrative collection action against alleged alter egos, successors in interest, and/or transferees without complying with §§ 6303(a) and 6331(d)?

The answer to that apparent conundrum may surprise you. While it is possible to argue that the IRS may take administrative collection action against alleged alter egos, successors in interest, and/or transferees who have not been separately assessed a tax liability without complying with the requirements of §§ 6303(a) and 6331(d), it is far from clear that this argument carries the day. There are other arguments, some of which, in my view, have not been properly articulated in recent years. Perhaps Pitts was incorrectly decided, and the IRS is not entitled to take administrative collection action against alleged alter egos, successors in interest, or transferees at all. That topic will be explored in greater detail in Part 3 of this series.

 

 

 

Are Alleged Alter Egos, Successors In Interest and/or Transferees Entitled to their Own CDP Rights?

Today, we welcome back guest blogger A. Lavar Taylor for what is the first in a series of posts.  Lavar’s practice is based in Southern California; however, he handles tax cases across the country.  His latest challenge involves representing individuals in CDP cases who are not the taxpayer. If successful, his latest venture will open up CDP to a group of individuals currently barred from using that procedure. Keith

Introduction

This blog post is the first in a short series of blog posts addressing the question of whether the IRS has been violating the Collection Due Process (“CDP”) procedures since they became effective in January of 1999 by refusing to extend CPD rights to alleged alter egos, successors in interest and/or transferees of the person/entity who/which incurred the tax, i.e., the original “taxpayer,” where no separate assessment has been made against the alleged alter ego, successor in interest and/or transferee.   The IRS would have the public, including tax professionals, believe that the answer to this question is “no,” that these persons are not entitled to their own CDP rights independent of the CDP rights of the original “taxpayer.” This blog post, along with several succeeding blog posts, will explain why the IRS may be wrong on this point.  These posts will also examine the potential procedural obstacles to the Tax Court rendering an opinion on the question of whether alleged alter egos, successors in interest and transferees are entitled to their own independent CDP rights.

These posts will also examine the argument that the IRS is not permitted to take administrative collection action against any of these “secondarily liable” persons at all, absent a separate assessment against them. This argument seems radical, even “protester-like,” on the surface. But if it turns out that these “secondarily liable” persons are not entitled to their own independent CDP rights, this argument is not at all far-fetched.

Why do I have an interest in these topics? Our office recently settled several cases pending in the Tax Court in which we had raised these issues. The Tax Court would have had the opportunity to address the question of whether an alleged alter ego/successor in interest is entitled to its own separate CDP rights under §§ 6320 and 6330, plus various related jurisdictional issues, had these cases not recently settled. Because those cases are now settled, the Tax Court cases are moot.

Because the question of whether alleged alter egos, successors in interest and transferees are entitled to their own independent CDP rights is an important, recurring issue, I am sharing with the tax procedure community the arguments that we made in our now-resolved cases, so that this issue can be raised by other taxpayers and can hopefully resolved by the Tax Court in another case. I use the term “hopefully” purposely. As this series of blog posts will demonstrate, it is an open question whether the Tax Court can acquire jurisdiction to decide the question of whether alleged alter egos, successors in interest and/or transferees are entitled to their own independent CDP rights.

The questions of a) whether the Tax Court can acquire jurisdiction to decide this issue and b) how alleged alter egos, successors in interest and/or transferees can maximize the chances of the Tax Court acquiring jurisdiction will be addressed in future blog posts.   In this blog post, I discuss the relevant statutes and regulations, along with a key case, which the government won, which strongly supports the conclusion that alleged alter egos, successors in interest and/or transferees are entitled to their own independent CDP rights.

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The Statutes

Section 6320 states that any “person described in section 6321” of the Code is entitled to CDP rights under §6320. Section 6320(a)(1). The “person” who is described in §6321 is “any person liable to pay any tax”. Thus, §6320 should apply if there is a “person, ” a tax is owed, and the “person” is “liable” for that tax. Section 7701(a)(1) defines the term “person” very broadly.

The language of §6330 appears to be broader than the language of §6320 in its application. It seemingly requires the IRS to follow the levy CDP procedures not just where the IRS intends to levy on property owned by the person who is liable for the unpaid taxes in question but also where the IRS wants to levy on property that is owned by a person other than the person who is liable for the unpaid taxes in question on which the IRS has a valid lien. Section 6330(a)(1) states that “[n]o levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made.”

Section 6331(a) of the Code permits the IRS to levy on “all [non-exempt] property and rights to property” of the “person liable to pay any tax” and on any property on which the IRS has a lien under Chapter 64 (which consists of §§6301 through 6344 of the Code). The ability of the IRS under§ 6331(a) to levy on property on which it has a tax lien, even if the property is not owned by the person who is liable for the unpaid tax liability, seemingly reinforces the notion that §6330 gives CDP rights to all “persons” who own property on which there is a tax lien, even if those persons are not personally liable for the unpaid taxes.

The Regulations

Ah, but what the Code seemingly gives, the regulations clearly tax away. Treasury Regulation §301.6330-1(a) provides in relevant part:

(3)Questions and answers. The questions and answers illustrate the provisions of this paragraph (a) as follows:

Q-A1. Who is the person to be notified under section 6330?

A-A1. Under section 6330(a)(1), a pre-levy or post-levy CDP Notice is required to be given only to the person whose property or right to property is intended to be levied upon, or, in the case of a levy made on a state tax refund or a jeopardy levy, the person whose property or right to property was levied upon. The person described in section 6330(a)(1) is the same person described in section 6331(a) – i.e., the person liable to pay the tax due after notice and demand who refuses or neglects to pay (referred to here as the taxpayer). A pre-levy or post-levy CDP Notice therefore will be given only to the taxpayer.

Q-A2. Will the IRS give notification to a known nominee of, a person holding property of, or a person who holds property subject to a lien with respect to, the taxpayer of the IRS’ intention to issue a levy?

A-A2. No. Such a person is not the person described in section 6331(a)(1), but such persons have other remedies. See A-B5 of paragraph (b)(2) of this section.

What the IRS has done in its regulations is to say that the term “any person” does not really mean any person, but instead means “any person liable for the tax under §6331(a).” While it seems to me that the language of the regulation is inconsistent with the statute on this point,  I will leave that discussion and that fight for another day.   It is not necessary for courts to strike down this regulation to reach the conclusion that alleged alter egos, successors in interest and/or transferees are entitled to their own independent CDP rights under §6330, although striking down this regulation would make it much simpler to reach that conclusion. Striking down the regulation, however, would have no effect on the question of whether alleged alter egos, successors in interest and/or transferees have CDP rights under §6320.

What do the regulations under section 6320 have to say? Here is the relevant portion of Treasury Regulation § 301.6320-1:

(a)Notification –

* * *

Q-A1. Who is the person entitled to notice under section 6320?

A-A1. Under section 6320(a)(1), notification of the filing of a NFTL on or after January 19, 1999, is required to be given only to the person described in section 6321 who is named on the NFTL that is filed. The person described in section 6321 is the person liable to pay the tax due after notice and demand who refuses or neglects to pay the tax due (hereinafter, referred to as the taxpayer). * * *

(b) Entitlement to a CDP Hearing

(2) * * *

Q-B5. Is a nominee of, or a person holding property of, the taxpayer entitled to a CDP hearing or an equivalent hearing?

A-B5. No. Such person is not the person described in section 6321 and is, therefore, not entitled to a CDP hearing or an equivalent hearing (as discussed in paragraph (i) of this section). * * *

These regulations track the language of § 6320, more so than the regulations issued under § 6330 track the actual language of that section.

So what lessons are to be drawn from the regulations as to what “persons” are entitled to CDP rights under §§6320 and 6330? The most important lesson is that, per the regulations, in order for a person to be entitled to CDP rights, they must be a “person liable for the tax” under § 6320 or a “person liable to pay any tax” under § 6331(a).

The Case of Pitts v. United States

With that lesson in mind, I now discuss the important case of Pitts v. United States, 515 B.R. 317 (C.D. Cal. 2014), aff’d, 668 Fed. Appx. 774, 2016 U.S. App. LEXIS 16287, 118 A.F.T.R.2d (RIA) 5644, 2016-2 U.S. Tax Cas. (CCH) P503992016 (9th Cir. 2016)(unpublished opinion), a case which Keith blogged about here.

Importantly, Pitts was a government victory.   The unfortunate fact that the Ninth Circuit buried its conclusion in an unpublished opinion does not lessen the importance of the case. (Note: I filed an amicus curiae brief with the Ninth Circuit in Pitts. My argument in that amicus brief will be discussed in detail in one of the later blog posts on this topic.)

In Pitts, a general partnership incurred unpaid employment taxes. Pitts was a general partner in the partnership. The IRS filed a notice of federal tax lien against Pitts, in her capacity as a general partner, without making a separate assessment against Pitts. Pitts later filed a chapter 7 bankruptcy petition. After obtaining a discharge, Pitts filed an adversary proceeding against the IRS, seeking, inter alia, to invalidate the tax liens evidenced by the notices of federal tax lien filed against her for the taxes incurred by the partnership.  The Bankruptcy Court upheld the validity of the liens, and Pitts appealed to the District Court.

The District Court, in a published opinion, affirmed the holding of the Bankruptcy Court. The District Court acknowledged that the case presented the question of whether the IRS could pursue administrative action against a general partner of a general partnership to collect taxes incurred by the partnership, a question left open by the Supreme Court in United States v. Galletti, 541 U.S. 114 (2004). (Note: I am very familiar with Galletti, because I was co-counsel for Galletti in the Supreme Court and authored almost all of the merits brief filed by Galletti.)

Pitts argued, unsuccessfully, that the IRS could not pursue administrative collection action against her to collect the employment taxes owed by the partnership without making a separate assessment against her under section 6672. She cited to the Supreme Court’s holding in Galletti that a general partner of a general partnership that incurs unpaid employment taxes is not the “employer” who incurs the tax and thus is not “primarily liable” for the partnership’s tax liability, even though the Supreme Court also held that Galletti was “secondarily liable” for those taxes by operation of state (California) law, which allowed the IRS to file a claim against Galletti in bankruptcy.

The District Court, in ruling for the government, characterized the government’s arguments as follows:

But the Government argues that contrary to Pitts’s argument, once the IRS assesses a tax against a general partnership, it need not separately assess the general partners in order to make them liable. The Government contends that since Pitts is liable for DIR’s debts under California law, the tax assessment against DIR for its unpaid employment-tax withholdings suffices to create a tax debt owed by Pitts to the IRS. The IRS further asserts that it did not have to proceed against Pitts under § 6672 but rather could separately pursue her under state law.

The District Court then went on to address the question of whether the IRS can pursue administrative enforcement remedies to collect against Pitts. The Court stated as follows:

But for the IRS to properly record a tax lien as provided under § 6321, Pitts must only be “any person liable to pay any tax”—not necessarily the primarily liable “taxpayer” as Congress has defined that term in § 7701(a)(14) (defining “taxpayer” as “any person subject to any internal revenue tax”). The determination whether Pitts is a “taxpayer” does not establish the IRS’s ability to record a statutory lien under § 6321. Rather, the existence of her federal tax liability for “any tax”—regardless of how that liability arises—is the defining criterion of the tax lien’s validity. As the Court established above, Pitts is in fact liable under federal law for DIR’s unpaid employment-tax withholdings.

This District Court thus held that Pitts was a “person liable to pay any tax” for purposes of section 6321, even though Pitts’ liability for the tax was grounded on state law (California’s version of the Uniform Partnership Act), not based on federal law, such as section 6672.

The Ninth Circuit affirmed the holding of the District Court, albeit in a cowardly manner, via an unpublished opinion. The Court stated:

First, pursuant to the plain language of 26 U.S.C. § 6321, Pitts is a “person liable to pay any tax,” and a lien in favor of the government arises by operation of federal law. See In re Crockett, 150 F.Supp. 352, 354 (N.D. Cal. 1957) (California partner was liable for debts of partnership under state law; accordingly, partner was liable for entire amount of partnership’s employment taxes, and was “person liable to pay” under § 6321’s identically worded predecessor); see also Bresson v. C.I.R., 213 F.3d 1173, 1178 (9th Cir. 2000) (where the IRS relied on state law to establish an individual’s liability, “the government’s underlying right to collect money in this case clearly derives from the operation of federal law (i.e., the Internal Revenue Code)”).

Second, the United States may utilize administrative enforcement procedures to collect the debt from Pitts, because she is secondarily liable for DIR’s assessed debt. See United States v. Galletti, 541 U.S. 114, 122, 124 S. Ct. 1548, 158 L. Ed. 2d 279 (2004) (“After the amount of liability has been established and recorded, the IRS can employ administrative enforcement methods to collect the tax”). The United States is not obligated to make a second assessment against Pitts individually, because the consequences of its assessment attach to the assessed debt “without reference to the special circumstances of the secondarily liable parties.” Id. at 123.

So there you have it. A person who is “secondarily liable” for a tax liability under state law is a “person liable to pay any tax” under §6321. Presumably that person is also “any person liable to pay any tax” for purposes of § 6331.

It would seem to follow that, if a person who is “secondarily liable” for a tax liability under state law is subject to administrative collection action under §§6321 and 6331, such person is also entitled to the protections of the CDP procedures. That topic will be explored in greater detail in the next blog post.

 

What is a Prior Opportunity to Contest the Liability for Purposes of Collection Due Process?

Today, we welcome back guest blogger A. Lavar Taylor.  Lavar’s practice is based in Southern California; however, he handles tax cases across the country.  His latest challenge involves representing taxpayers seeking the opportunity to litigate the merits of their liability in the Tax Court in the context of Collection Due Process (CDP) cases.  The Tax Court has followed the IRS’s lead in its interpretation of prior opportunity to dispute a tax liability.  Both the Tax Court and the IRS deny taxpayers the opportunity to litigate the merits of the underlying liability in many circumstances in which the taxpayer had the opportunity for an administrative hearing even though that administrative hearing with Appeals could not lead to a court hearing.  Because of Lavar, three Circuit Courts of Appeal will soon hear oral argument on the question of what is a prior opportunity to dispute a tax liability which bars a taxpayer from challenging the merits of the underlying tax liability in a collect due process tax case under IRC 6330(c)(2)(B).  Last year when I wrote a new chapter on CDP for the Saltzman and Book treatise, IRS Practice and Procedure, I was struck by the number of unresolved CDP issues that still remain.  I consider this issue the most vexatious of the unresolved issues and the one where the regulations deviate to the greatest extent from the intent of the statute.  We will closely follow Lavar’s efforts and we have written on this before here and here.  If he can succeed in pushing back on the current interpretation of prior opportunity, he will open up for many taxpayers the chance to litigate large liabilities without the need to pay to litigate.  Keith

Back in February of this year, Carl Smith noted in a guest post  that three Circuit Courts of Appeal would be considering the question of the circumstances under which a taxpayer is barred from challenging the merits of the underlying tax liability in a Collection Due Process case under section 6330(c)(2)(B) because of a “prior opportunity” to contest the underlying liability.  Our firm was retained to handle these appeals.  Briefing in all three cases is now complete.  Oral argument in the 7th Circuit case is set for November 9.  Oral argument in the 10th Circuit case is set for November 14.  Oral argument in the 4th Circuit case is set for the last week of January.

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This issue is an important one.  For taxpayers who lack the resources to pay the disputed liability in full and pursue a suit for refund in District Court or the Court of Claims, particularly those taxpayers against whom the IRS may assess (or has already assessed) taxes and/or penalties without resorting to the deficiency procedures, resolution of this issue could determine whether they will ever be able to challenge in court the merits of those taxes or penalties. (The prior statement ignores the fact that taxpayers theoretically can file bankruptcy and commence an objection to the IRS’s proof of claim or an adversary proceeding under section 505 of the Bankruptcy Code.  Bankruptcy is not a feasible option for many taxpayers, however.)

For those taxpayers who have the means to both pay the disputed liability in full and litigate the merits of the liability in a refund suit in District Court or the Court of Claims, resolution of this issue will decide whether they can ever challenge the disputed liability in the Tax Court, which is procedurally more “taxpayer friendly” than District Court or the Court of Claims and is far less expensive in which to litigate than either of these other two fora.

The parties’ briefs are lengthy, although none of the attorneys involved on either side were paid by the word. The briefs are lengthy because resolving this issue in a proper manner requires a detailed knowledge of tax procedure that most appellate Judges lack.  I’m not going to summarize the briefs here, but copies of our opening brief, the government’s responding brief, and our reply brief in the 7th Circuit case can be found here, here, and here.

If you have the time, I strongly recommend reading the briefs.  They contain a number of surprises.  Of particular interest is the fact that the government is arguing that the taxpayers in these three cases are also barred by section 6330(c)(4) from challenging the merits of the liabilities.   This is a new development.  Section 6330(c)(4) has previously been interpreted by the IRS Office of Chief Counsel as only applying to collection-related issues, not to liability-related issues.  IRS Chief Counsel’s prior position, however, has not prevented the Department of Justice from arguing that section 6330(c)(4) prohibits the taxpayers-appellants in these three cases from challenging  the merits of the underlying liabilities.   There are other surprises in the briefs as well, but I leave it to the readers of this blog post to discover them on their own.

The fact that three Courts of Appeal will be considering these issues simultaneously creates the possibility of a Circuit split.   Indeed, the “split” could even be a “fracture,” with the possibility of each Circuit going its own direction.  Of course, we hope for a unanimous reversal of the Tax Court by all three Circuits.

The last interesting point is that I will get to spend Election Day in Chicago.  Having grown up in downstate Illinois, I’m familiar with the unofficial state slogan of Illinois, which is “Vote Early, Vote Often.”  I jokingly suggested to one of my colleagues that, having voted early here in California, my trip to Chicago might afford me the chance to vote more than once.  He responded that I should check to see whether the records show that I have continuously voted in Illinois since leaving the state almost 40 years ago.  He has a point.  When I’m not busy preparing for oral argument, I will check that out.

 

SECC Corporation v. Commissioner: How It Started, How It Ended, and What Might Happen Going Forward

Today is the last installment of Lavar Taylor’s three-part post on the SECC v Commissioner case, a case that is now a foundational case in understanding the Tax Court’s jurisdiction to hear employment tax disputes. The first two parts of this three-part post can be found here and here. In this post, Lavar explains the aftereffects of the opinion, including the IRS’s about-face on the issue, the likely reasons and consequences of the IRS position and the very successful ultimate resolution of the SECC case. Les 

Government Reaction to Tax Court Opinion

Speaking of appeals, I turn now to the government’s reaction to the Tax Court’s opinion in SECC. I’m certain that the IRS was just as surprised as I was at the outcome. I am also certain that they liked the outcome far less than I did. After all, I now had a chance to prove that the IRS should lose on the merits, without having to foray into District Court. (I’ve litigated a worker classification dispute in District Court before. See Vendor Surveillance Corp. v. United States, 97-2 U.S.T.C. ¶50,527 (9th Cir. 1997)(unpublished decision reversing award of attorney’s fees under section 7430 after taxpayer prevailed in a jury trial in a worker classification case). Trying this type of case in District Court is extremely expensive.) If SECC lost at trial, SECC could still appeal the decision on jurisdictional grounds.

The IRS, however, initially was not content to let the matter go to trial and then deal with the jurisdictional issue in a post-trial appeal. Rather, they told me, and the Tax Court, that they were considering seeking leave to file an interlocutory appeal of the jurisdictional issue to the Ninth Circuit. As seasoned tax controversy attorneys know, however, the IRS does not get to decide whether they will ask the Tax Court for leave to file an interlocutory appeal. Only the Solicitor General, after consulting with the Department of Justice Tax Division’s Appellate Section, gets to authorize the pursuit of an interlocutory appeal.

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Having worked in the General Litigation Division of the IRS National Office in the early 1980’s, where I carried the bags of the IRS attorneys who met with the attorneys from the Appellate Section of DOJ Tax Division, and having observed strenuous disagreements between these IRS and DOJ attorneys about whether to appeal an adverse ruling, I was quite familiar with the procedure that had to be followed in order to authorize an interlocutory appeal. I knew that lots of government attorneys would be involved and that there would be lots of meetings. Keith Fogg accurately described this process in parts 1 and 2 of The Room of Lies. I sat in the Room of Lies on many occasions, albeit as a lowly bag carrier. Based on my experience, I thought the process might take a few months, six months at most.

Time passed without any decision. In December of 2014, the IRS issued Chief Counsel Notices CC-2014-11 and CC-2015-1, in which IRS Chief Counsel’s Office formally announced to the world that they disagreed with the Tax Court’s holding in the SECC opinion. I waited some more. It was not until March of 2015 that the IRS formally advised the Tax Court that the decision had been made to not pursue an interlocutory appeal of the jurisdictional issue.

What happened? Apparently DOJ and the Solicitor General’s Office disagreed with the IRS. While no one has told me the story, I’m certain I could come up with a fairly accurate script of the conversations that took place. The attorneys in the IRS who were involved in drafting Notice 2002-5, supra, no doubt pushed hard for the SG to pursue an interlocutory appeal. They were vested in their “creation” (the Notice) and pushed hard for what they thought was a righteous cause.

The DOJ Appellate attorneys no doubt had significant reservations about pursuing an interlocutory appeal. The DOJ attorneys were likely concerned about the possibility that SECC might prevail on the jurisdictional issue in the Ninth Circuit. They were also likely concerned about the fact that the Ninth Circuit’s opinion in Charlotte’s Office Boutique, Inc. v. Commissioner, 425 F.3d 1203 (9th Cir. 2005), was, to say the least, somewhat in tension with the position argued by the Commissioner on the jurisdictional issue in the Tax Court. They may have also been concerned about the fact that the Ninth Circuit has not always been particularly kind to the IRS in section 530 cases. Regardless of why the government did not pursue an interlocutory appeal, I was now looking at a Tax Court trial, or, if the Tax Gods were with me, a settlement that my client could live with.

After learning that the IRS would not be pursuing an interlocutory appeal, I learned that the IRS was auditing the income tax returns of cable splicers in southern California. The IRS undoubtedly learned what I had previously learned, namely, that during the quarters at issue in the SECC case, the entire cable splicing industry in southern California treated the cable splicers as “dual status” workers, the same as SECC had done. Thus, the IRS was now aware that I could make a strong “industry practice” showing in support of my section 530 argument, in addition to showing that the IRS advised my client to do business the way that it did, and showing that my client consistently followed all information reporting requirements. The IRS may have also learned that the argument that the cable splicers were in fact independent contractors for all purposes had some merit.

The Government’s Change in Views: The Agreement with the SECC Holding

Near the end of 2015, the IRS issued Chief Counsel Notice CC-2016-002. In this Notice, the IRS announced to the world that it was now in agreement with the Tax Court’s holding in the SECC case! About this time, I had a telephone conversation with the IRS attorney handling the case. As the result of this telephone conversation, I submitted a formal settlement offer to the IRS. The amount of the offer? A total of $25,000 in taxes, spread out over all of the quarters in question. In return, my client would concede that the workers in question were employees for all purposes of Subtitle C during the quarters at issue. (Such a result would have been metaphysically impossible had the case gone to trial. That is why settlements were invented.) Not too long thereafter, the offer was accepted. A similar story played out in the one other case handled by our office that had not previously settled. The SECC case was over.

So what happened? Why the change in position by the IRS on the jurisdictional issue? While no one from the IRS has even hinted to me why this happened, I don’t think it is too hard to surmise why the change in position took place. With the change in position, it is very unlikely that the IRS will ever “blow” a statute of limitations in an employment tax case, and it is unlikely that the Tax Court’s holding in SECC will be reversed by a Court of Appeals any time soon.

It appears from the Tax Court’s opinion in SECC that, once a “determination” is made by the IRS under section 7436(a), the statute of limitations on assessment is suspended. While there may be some practical problems in determining when that suspension begins and ends, the IRS can avoid having to deal with those kinds of issues by requiring taxpayers to sign written extensions of the statute of limitations prior to the earliest possible expiration of the statute of limitations on assessment or, if no written extensions are forthcoming, by issuing a notice of determination to the taxpayer under section 7436(b) prior to the earliest possible expiration of the statute of limitations on assessment. Most taxpayers will sign the statute extensions, in the hope that the case will eventually settle.

The number of Tax Court petitions that will be filed prior to the issuance of a Notice of Determination under section 7436(b) will be small. Most taxpayers will want to try to settle with the Office of Appeals before going to court, and most cases handled by the Office of Appeals will settle. It is very unlikely that rational taxpayers will file a Tax Court petition prior to the issuance of a Notice of Determination under section 7436(b) with the idea that they will thereafter challenge the jurisdiction of the Tax Court on the grounds that no Notice of Determination was issued. Such a taxpayer, after losing on the jurisdictional issue in Tax Court, would then have to appeal the Tax Court’s ruling to a Court of Appeals after going to trial or settling the case. It is unlikely that any appeal would be filed after a settlement has been reached.

Compare that situation with the situation that would have resulted if the IRS had not acquiesced in the Tax Court’s ruling in SECC and had instead continue to argue that no Notice of Determination was required to be issued in cases such as SECC. The Ninth Circuit would have eventually ruled on the jurisdictional issue. If they had ruled in favor of SECC, the employment tax world would again have been thrown into a state of chaos. Statutes of limitations would have been “blown.” Uncertainty regarding the Tax Court’s jurisdiction would have continued, pending an eventual ruling by the Supreme Court in SECC or in some future case. The Supreme Court’s ruling might not have come until after a Circuit split developed. Uncertainty when it comes to the jurisdiction of the Tax Court is not a good thing.

Uncertainty would still have lingered even if the Ninth Circuit had sustained the Tax Court, because the IRS would have continued to challenge the Tax Court’s ruling in SECC. That uncertainty would not have been a good thing.

It is certainly possible that, at some point in the future, a Court of Appeals will have occasion to rule on the jurisdictional issue decided in the SECC case. In any appeal from a decision in a 7436 case where the Tax Court petition was filed without the issuance of a Notice of Determination under section 7436, the Court of Appeals will have an independent duty to determine whether the Tax Court had jurisdiction below. It is possible that the situation will play out in a manner similar to how the case law played out after the IRS acquiesced in the Tax Court’s holding in Fernandez v. Commissioner, 114 T.C. 324 (2000), that it had jurisdiction to review determinations under section 6015(f), only to see the Ninth Circuit later hold that the Tax Court lacked jurisdiction to review such determinations in Commissioner v. Ewing, 439 F.3d 1009 (9th Cir. 2006). But even if that were to happen, the IRS’s recent acquiescence in the Tax Court’s holding in SECC will create much less chaos and uncertainty in the near future than if the IRS had not acquiesced in that holding.

The Resolution of the SECC Case

The IRS’s acquiescence in the Tax Court’s holding in SECC, however, came with a price for the government. In order to avoid having SECC possibly upset the apple cart by appealing the jurisdictional issue to the Ninth Circuit, the IRS had to settle the SECC case (and the related case) on terms that would ensure that SECC would not appeal the jurisdictional issue. To its credit, the IRS did just that. Regardless of the IRS’s motivation for settling on the terms that it did, my own view is that the result in the case was a fair one given the unusual facts of the case, even though the taxpayer had to wait a long time for that result.

Note, however, that future litigants with issues similar to the issues raised in the SECC case will face obstacles not faced by SECC. The IRS, in Chief Counsel Notice CC-2016-002, supra, has indicated that it intends to challenge arguments by taxpayers that they are entitled to section 530 relief or are entitled to section 3509(a) rates in cases with fact patterns similar to the fact pattern in SECC. While I think that Chief Counsel is taking a position that is wrong both legally and from a standpoint of fairness to taxpayers who face situations similar to the situation faced by SECC, that topic is for another day.

Looking Ahead to Future Disputes and a Nod to the Professionalism of the Government Counsel

Perhaps the most interesting cases going forward will focus on when a “determination” has taken place or, more likely, will focus on when the suspension of the statute of limitations on assessment begins and ends. In cases where the IRS has used the “belt and suspenders” approach of obtaining written extensions of the statute of limitations, statute of limitations issues are not likely to arise. But in cases where the IRS relies solely on the Tax Court’s interpretation of section 7436 in SECC to keep the assessment statute of limitations on assessment open, statute of limitations issues could arise. Notably, these issues could arise either in Tax Court litigation or in District Court refund litigation. Thus, it is possible that District Courts will be issuing rulings on statute of limitations issues in situations in which the resolution of the statute of limitations issue will turn on whether the Tax Court decided the jurisdictional issue correctly in SECC.

In closing, I would like to tip my cap to the government counsel with whom I worked in the SECC case and related cases. Their professionalism was greatly appreciated, even when we vehemently disagreed with each other’s legal positions. I would also like to tip my cap to Robert Horwitz and Barry Furman. Robert, who has moved on from our firm after growing tired of driving from Santa Monica to Orange County and back every day for almost 20 years, worked by my side as we crafted our arguments in the SECC case. Barry, who was co-counsel with me, and lead trial counsel, some 22 years ago in the Vendor Surveillance case mentioned earlier, served as a sounding board for our case strategy. Both of these fine attorneys were of great help to me in handling this matter.

SECC Corporation v. Commissioner: How It Started, How It Ended, and What Might Happen Going Forward

In yesterday’s post guest poster Lavar Taylor set the table for the dispute before the Tax Court in SECC v Commissioner, a case that considers the Tax Court’s jurisdiction to hear employment tax disputes under Section 7436. Today Lavar walks us through the Tax Court’s surprising resolution of the dispute. Les

If you read Part 1 of this post, you now understand what I meant when I said that the SECC case was a tax procedure nerd’s dream and a client’s nightmare. The tax procedure issues in the case were ubiquitous. Things were about to get even more interesting.

On April 3, 2014, the Court issued a reviewed opinion in SECC Corporation v. Commissioner, 142 T.C. 225 (2014)(“SECC”). At the time the Court released its opinion, I was meeting with an IRS Appeals Officer in another case. Someone from the IRS interrupted that meeting to tell me that I had “won” the SECC case, without explaining the contents of the Court’s opinion. Of course, regardless of how the Court ruled, the case would not be over. Given the IRS’s vigorous advocacy of its position, I anticipated they would appeal if the Court granted our motion to dismiss for lack of jurisdiction. I returned to my office, eager to find out exactly how I had “won” the case.

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The Majority Opinion

The Tax Court issued a reviewed opinion in the SECC case, with the majority opinion (authored by Judge Colvin and joined by 14 other judges) denying both parties’ motions to dismiss and holding that the Court had jurisdiction to determine the merits of the disputed employment tax liabilities. The majority opinion properly noted that it has an independent duty to determine whether it has jurisdiction, even where both parties argue that the Court lacks jurisdiction, and that the Court owes no deference whatsoever to the IRS’s view, whether expressed through regulations or otherwise, as was the case in SECC, see Notice 2002-5, 2002-1 C.B. 320, that the Court lacks jurisdiction over the case.

The majority opinion then held that the Tax Court had jurisdiction to determine the merits of the disputed employment tax audit deficiencies even though the IRS had never issued a Notice of Determination under section 7436(b). The majority opinion pointed out that section 7436(a) gives the Tax Court jurisdiction if there is a “determination” made as the result of an audit and there is an actual controversy regarding whether workers are employees for purposes of Subtitle C or whether the taxpayer is entitled to relief under section 530. That subsection says nothing at all about a “notice of determination.”

Per the majority opinion, the legislative history of section 7436 makes clear that a mere “failure to agree” regarding the result of an employment tax audit could constitute a “determination” under section 7436(a) which would trigger a taxpayer’s right to file a Tax Court petition. Once there has been a “determination,” the taxpayer’s right to file a petition with the Tax Court to challenge the results of the employment tax audit is limited only when the IRS issues a Notice of Determination by certified or registered mail under section 7436. When that happens, the taxpayer must file a petition within 90 days after the date of that notice in order to invoke the Tax Court’s jurisdiction. Thus, per the majority opinion, section 7436 is similar to the statutory scheme governing refund claims. Under that scheme, the taxpayer has the right to go to court at any time after a refund claim has been filed and six months have passed since the filing of the claim, but the taxpayer’s right to go to Court has a two year time limitation once the IRS issues a formal denial of the claim for refund.

The majority opinion also noted that Congress, in section 7436(d), failed to make the principles of section 6212 applicable to determinations under section 7436(a). Rather, Congress incorporated only “the principles of subsections (a), (b), (c), (d), and (f) of section 6213, section 6214(a), section 6215, section 6503(a), section 6512, and section 7481” as applying to proceedings brought under section 7436. The majority opinion also noted that the principles of these sections were to apply in the same manner as if the Secretary’s determination described in subsection (a) were a Notice of Deficiency (emphasis added).

Thus, per the majority opinion, it is a “determination” under subsection (a) of 7436, and not the Notice of Determination under section (b), that triggers, among other things, the taxpayer’s right to file a Tax Court petition and the related restrictions on assessment and collection of the employment taxes which are the subject of the dispute between the IRS and the taxpayer who is being audited. It would appear that the “determination” under subsection (a) also starts the suspension of the statute of limitations on assessment. More on how that might work later.

As for applying these principles to SECC’s case, the majority opinion held that SECC’s petition was timely because the IRS had never sent SECC a Notice of Determination by certified or registered mail as required by subsection 7436(b). There had previously been a “determination” under section 7436(a) in connection with an audit and there was an actual controversy when Appeals issued their letter dated April 15, 2011, and SECC was entitled to file a Tax Court petition at any time thereafter until the 90th day after a notice was sent to SECC by certified or registered mail.

The Concurring Opinion

A concurring opinion, authored by Judge Halpern and joined by eleven other Judges, joined the majority opinion “without reservation” and noted that the majority reached the correct conclusion as a matter of tax policy. Judge Halpern noted that sustaining the IRS’s position would “improperly permit the Commissioner to determine, in his sole discretion, whether a taxpayer shall have access to this Court in order to resolve [a worker classification dispute such as the dispute between SECC and the Commissioner].” Judge Halpern went on to say:

Were we to adopt respondent’s position, the Commissioner, by refusing to issue a notice of determination, would be able to deny the taxpayer access to this Court, which he may be tempted to do whenever he feels his chance of success on a worker classification or RA ’78 sec. 530 issue is better in either the District Court or the Court of Federal Claims than this Court. There is no basis in section 7436 or as a matter of policy for granting the Commissioner this “forum shopping” discretion, and it would thwart the obvious congressional intent embodied in that provision to permit taxpayers, in their discretion, to litigate, in this Court, worker classification and RA ’78 sec. 530 issues that the Commissioner has raised on audit.

The Dissenting Opinion

Judges Goeke and Kerrigan dissented. They stated that the structure of section 7436 indicates that the Court should treat a worker classification determination as if it were a deficiency determination in an income tax case. They expressed concerns that the majority’s approach will result in administrative problems. They posed a number of questions which they thought did not have appropriate answers under the approach taken by the majority, such as whether the IRS would be able to assess a disputed employment tax deficiency after the IRS made a “determination” (without sending a Notice of Determination under section 7436(b)) but the taxpayer failed to file a Tax Court petition within 90 days of the date of the determination. Thus, in their view, the Tax Court should not have jurisdiction over a worker classification case unless the IRS has issued a notice of determination under section 7436(b). Since the parties agreed that no such notice had been issued to SECC, the dissenters would have dismissed the petition for lack of jurisdiction.

As for whether the IRS should have issued a Notice of Determination, the dissenters stated that the Court should not have “delved” into the administrative record to determine whether the IRS had made a “determination” under section 7436(a). Rather, they would have permitted the IRS to decide unilaterally when its examination warrants the issuance of a Notice of Determination, leaving the IRS to bear the consequences associated with making an invalid assessment if it turned out that the IRS was in fact required to issue a Notice of Determination before assessment of the employment tax deficiencies.

The dissenters left little doubt about how they viewed the merits of the dispute. They viewed the case as a pure accountable plan case and believed that the majority’s approach set a “dangerous precedent” which would allow any taxpayer in an accountable plan case to make the arguments that SECC made and transform its case into a worker classification dispute. The dissenters stated that “[t]he IRS could have reasonably concluded that the worker classification arguments were frivolous and did not justify a determination.”

Wait a minute. Stop the presses. Did the dissenters call my arguments frivolous? FRIVOLOUS? My arguments have been called many things over the past 35 years: “creative,” “clever,” “aggressive,” “too cute by half,” even that dreaded five letter word – “wrong.” But my arguments had never before been called “frivolous.” Perhaps the only thing worse would have been if Justice Scalia had called my arguments “legalistic argle-bargle.” See Windsor v. United States, 570 U.S. ___, 133 S.Ct. 2675, 2709 (Scalia dissenting). (Fortunately I escaped that fate. Justice Scalia, like all the other Justices, ignored the amicus brief I filed in the Windsor case.)

I can’t let that characterization of my arguments by the dissenting Judges go unchallenged. Was it “frivolous” to argue that the cable splicers were true independent contractors when the Fifth Circuit had previously held that similarly situated cable splicers were independent contractors? I don’t think it was. Was it “frivolous” to argue that, in the alternative, my client was entitled to section 530 relief when, among other things, a) the entire cable splicing industry in southern California treated the cable splicers the way SECC treated them during the periods in question, b) SECC had always complied with the rules regarding the issuance of information returns such as Forms 1099, c) the IRS had previously told SECC to treat the cable splicers the way they did, and d) there was absolutely no case law which addressed the question of whether SECC was entitled to section 530 relief where it had treated the workers as “dual status” workers for tax reporting purposes? I don’t think it was. Was it “frivolous” to argue in the alternative that the taxes owed by SECC should have been computed based on section 3509(a) rates when SECC believed (based on advice given by the IRS itself) that it had been doing things properly? I don’t think it was. Was it “frivolous” to argue in the alternative that the taxes owed by SECC should have been reduced under section 3402(d)? I don’t think it was.

I really don’t think that the dissenters thought that statement through before they wrote it. And I certainly hope that if any of their friends or neighbors ever run a business and receive a bill from the IRS for $1.5 million in taxes as the result of doing business in the manner in which they were told to do business by the IRS, the dissenters would urge their friends or neighbors to use all arguments at their disposal to fight that bill, just as SECC did. Frivolous? Bah, humbug! I’ll fight that characterization to my dying breath. (Now Keith and Les understand why I did not want to write this post until the case was over.)

Now that I have vented my spleen, I have a more important point to make about the dissent. The dissenters’ suggestion that the IRS can ignore the rules just because the IRS (or a Tax Court Judge) believes that a taxpayer’s argument is frivolous is an extremely dangerous idea that, if adopted by the IRS and the Courts, could seriously damage our voluntary compliance system. The fact that the government must follow proper procedures, and can be held accountable if it fails to do so, is as much a bedrock of our voluntary compliance system as is the willingness of taxpayers to voluntarily file their tax returns and (usually) file an income tax return that consists of non-fiction instead of fiction.

The government doesn’t convict criminal tax defendants and throw them in jail without a trial just because the IRS or a Judge thinks that their arguments are “frivolous.” Instead, the government gives them a trial, along with an opportunity to appeal the result at the trial if they don’t like the outcome of the trial. Nor do we allow the IRS to assess income tax deficiencies without issuing a Notice of Deficiency just because the IRS or a Judge believes that the taxpayer’s arguments are “frivolous.” Rather, the IRS must first issue the taxpayer a Notice of Deficiency, and the taxpayer can file a petition and seek a trial in the Tax Court. If the taxpayer does not like the result there, they can appeal to the Courts of Appeal. And sometimes it turns out that an argument that the lower court thought was “frivolous” turns out to have been a winning argument.

Even where taxpayers lose, and lose badly, however, the taxpayer can say that they had their day in court, and third-party observers can take comfort in the fact that, should they ever end up in a wrestling match with the IRS, the IRS (and the courts) will give them a fair shake by following the rules, instead of bending the rules whenever they don’t think much of the taxpayer’s arguments. When taxpayers are convinced that the IRS does not follow the rules and/or the Courts don’t follow the rules, they are less likely to comply with the law.

In the third and final part, I will discuss the aftermath of the SECC opinion, including the reasons and consequences of the IRS position and the ultimate resolution of the case.