When Can Taxpayers Challenge the Merits of the Underlying Liability in CDP Appeals: Why the Tax Court Was Wrong in Lewis v. Commissioner and Its Progeny

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Introduction: Today’s guest post is provided by A. Lavar Taylor. Lavar is the founding partner in the firm of  A. Lavar Taylor and Associates. Lavar has extensive experience in both the private and public sector as his firm bio highlghts. He is a thoughtful commentator and creative advocate, and  I have learned much from his prior writing, especially in the collection area. This post considers a fundamental question in the CDP statute, namely, when should the Tax Court be entitled to consider the merits of a tax liability in CDP cases. It may seem odd that some fifteen years into the statute we still have some fundamental ambiguous issues. As this post points out, that is largely attributable to an unclear statute and at times earlier court opinions that stemmed from pro se taxpayers who may not have made their cases in the best possible way. In this post Lavar makes a forceful argument that the Tax Court should reconsider earlier precedent on the issue.  Les

Shortly after the passage of RRA98 I had the privilege of taking a step away from my position as District Counsel for Virginia/West Virginia and coming into Washington to temporarily head the division of Chief Counsel’s office in charge of collection issues – then known as the General Litigation Division.  Many of the changes to the code in RRA98 fell under the jurisdiction of the General Litigation Division and we set about to write the regulations on those new code sections.  At the top of the list was collection due process.  I met daily with the attorney who was drafting the regulation and regularly with the Associate Chief Counsel and the Chief Counsel on the progress and shape of the CDP regulations.   I do not remember considering the particular issue that Lavar writes about when we were writing the initial CDP regulations.  We had a lot of things to cover in those regs and we were trying to get them out (and did) before CDP went into effect six months after enactment of the statute.  I agree with Lavar’s position and think that if we had thought about it and discussed it at the time that we might have addressed it. Keith

If taxes are the life blood of the government, then tax procedure necessarily defines the process by which the government extracts that life blood from taxpayers. Ideally, the extraction process should not involve any gratuitous pain or discomfort and should not land the taxpayer in the poorhouse. But sometimes, whether due to a lack of cooperation by taxpayers or due to a poor job done by the government in extracting  life blood from  taxpayers, the extraction process can create discomfort, hardship, and financial difficulty.  This leads to the topic of this blog post, namely, the Collection Due Process (“CDP”) procedures and when they allow a taxpayer to challenge the merits of the underlying tax liability under section 6330(c)(2)(B).

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In 1998 Congress revolutionized the collection process by enacting sections 6230 and 6330 of the Internal Revenue Code.   Since these provisions took effect in early 1999, taxpayers have had the opportunity to challenge (either prospectively or retrospectively) collection action by the IRS, both administratively and in court.  Taxpayers have also had the opportunity to challenge the merits of the underlying tax liability under certain circumstances, thus creating a new “prepayment” forum in which taxpayers may litigate a tax liability.

Section 6330(c)(2)(B) states that a taxpayer “may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”

This provision, like many of the provisions in section 6320 and 6330, has  spawned litigation regarding  the meaning of the statute.  In Lewis v. Commissioner, 128 T.C. 48 (2007), the Tax Court upheld the validity of Treas. Reg. §301-6330-1(e)(3), Q&A-E2, which purports to interpret section 6330(c)(2)(B) of the Code.  That regulation provides in relevant part:

Q-E2.             When is a taxpayer entitled to challenge the existence or amount of the tax liability specified in the CDP Notice?

A-E2. A taxpayer is entitled to challenge the existence or amount of the underlying liability for any tax period specified on the CDP Notice if the taxpayer did not receive a statutory notice of deficiency for such liability or did not otherwise have an opportunity to dispute such liability. Receipt of a statutory notice of deficiency for this purpose means receipt in time to petition the Tax Court for a redetermination of the deficiency determined in the notice of deficiency. An opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability. An opportunity for a conference with Appeals prior to the assessment of a tax subject to deficiency procedures is not a prior opportunity for this purpose.

In Lewis, the taxpayer, a plumber, filed his 2002 Form 2010 late.  He paid the tax shown due with the return at the time he filed the return. The IRS assessed late filing and late payment penalties.    Lewis then submitted a request for abatement of these penalties. Ultimately, the Office of Appeals denied the request for abatement.

The IRS then issued a section 6630 Notice of Intent to Levy. Lewis timely requested a hearing with the Office of Appeals and in that appeal sought to challenge the late filing and late payment penalties.  Appeals refused to address the merits of the penalties, claiming  that Lewis had received a “prior opportunity” to challenge the penalties as the result of the prior administrative hearing before the Office of Appeals.  Lewis challenged that refusal in a petition to the Tax Court and sought to litigate the merits of these penalties in the Tax Court case.

Judge Goeke held that Lewis could not challenge the merits of the late filing and late payment penalties in the CDP administrative proceeding or in the Tax Court case because Lewis had a “prior opportunity” to dispute these penalties in the prior administrative hearing with the Office of Appeals.  Judge Goeke believed that the language of section 6330(c)(2)(B) was susceptible to more than one interpretation, stating as follows:

On the one hand, it can be read to mean an opportunity to challenge the underlying liability in a forum ultimately subject to judicial review. On the other hand, it can be read to include challenges subject to judicial review as well as challenges heard by respondent’s Appeals Office in circumstances where no subsequent prepayment judicial review of the determination is available.

With all due respect to Judge Goeke, I would rephrase the choice faced by the Court in that case. And I submit that the choice is not a difficult one at all once a more complete analysis is performed. Simply put, the Court reached the wrong conclusion in Lewis.

The type of “opportunity” specifically referred to by Congress which, if not pursued by the taxpayer, precludes the taxpayer from challenging the merits of the liability in a Collection Due Process proceeding is a judicial opportunity (the opportunity to seek Tax Court review of a notice of deficiency), not an administrative opportunity. Thus, in interpreting the statute, the proper inquiry is whether Congress intended to limit the ability of taxpayers to challenge the merits of the underlying liability in CDP cases only where they previously had a judicialopportunity to challenge the underlying liability,  or instead intended to also limit the ability of taxpayers to challenge to challenge the merits of the underlying liability in CDP cases where taxpayers have had  a prior non-judicial, or merely an administrative , opportunity to challenge the merits of the underlying liability, even where there was no judicial opportunity to challenge an adverse administrative ruling by the IRS.

A challenge to a tax liability heard by the IRS’s Office of Appeals is merely one form of administrative challenge available to taxpayers. Taxpayers have multiple administrative opportunities to challenge a tax liability, including (but not limited to) the following:  1) offer in compromise based on doubt as to liability at the Examination level, 2) offer in compromise based on doubt as to liability at the Office of Appeals level, 3) audit reconsideration at the Examination level, 4)  audit reconsideration at the Office of Appeals level, 5) penalty abatement request at the Examination level, 6) penalty abatement request at the Office of Appeals level, 7) amended return at the Examination level, and 8) amended return at the Appeals level.  Each of these is a distinct administrative “opportunity” available to taxpayers whose tax liability has not previously been adjudicated by a court and whose liability is not currently being litigated. But they are all administrative opportunities, as opposed to judicial opportunities, and none of these administrative opportunities carry with them a right of the taxpayer to seek judicial review of an adverse administrative ruling.

Thus, the dichotomy set up by the Court in Lewis (administrative opportunities where there is a right of judicial review  versus  administrative opportunity  where there is no right of judicial review) was not proper. The proper dichotomy is whether Congress intended the concept of a “prior opportunity” in section 6330(c)(2)(B) to include both a “judicial opportunity” and a purely  “administrative opportunity” (i.e., an administrative without a right of judicial review) to challenge the underlying tax liability or intended to only include a  “judicial opportunity” to challenge the underlying tax liability.

Under the principle of ejusdem generis, the “ prior opportunity” referred to by section 6330(c)(2)(b) would necessarily be a judicial opportunity. See, e.g., Canton Police Benevolent Association of Canton, Ohio v. United States, 844 F.2d 1231 (6th Cir. 1988), Host Marriott Corp. v. United States, 133 F.Supp.2d 790, 793 (D.Md. 2000). That principle derives from the Latin term which means of the same kind, which when it comes to statutory interpretation generally provides the principle that when a statute lists something specific and then refers to the general, the general must refer to the same kind of things previously listed.

It seems to me that the application of ejusdem generis appropriate in this situation.  If the concept of  “prior opportunity” includes a purely  administrative opportunity to challenge the liability where there is no right of judicial review of an adverse administrative ruling, then there could never be any circumstances under which a taxpayer could  challenge the merits of an assessment under section 6332(c)(2)(B).  Such a result  would render meaningless the statutory right under section 6330(c)(2)(B) to challenge the merits of the liability in a CDP case and would violate the rule of statutory construction that says that statutes should not be interpreted in a way that renders them ineffective or futile. Matut v. Commissioner, 86 T.C. 686, 690 (1986).

Virtually every taxpayer who has received a bill from the IRS for unpaid taxes has an  “opportunity” to challenge the liability administratively, provided that the liability has not been previously adjudicated by a court and is not the subject of pending litigation.  Depending on the circumstances which preceded the assessment, the challenge to the liability can be done by submitting an offer in compromise based on doubt as to liability, a request for audit reconsideration, a request for penalty abatement and/or an amended returns, none of which carry with them the right of judicial review of an adverse ruling.

For example, taxpayers who for some reason do not actually receive a valid notice of deficiency have the ability to seek administrative audit reconsideration of the assessed deficiency.  See Baltic v. Commissioner, 129 T.C. 178 (2007), Internal Revenue Manual §4.13.3.   Because virtually every taxpayer who owes assessed taxes which have not been previously adjudicated by a court has an administrative opportunity to dispute the liability, it makes sense to construe the “opportunity” in section 6330(c)(2)(B) only as a judicial opportunity, not an administrative opportunity where there is no right of judicial review of an adverse administrative ruling. Otherwise the right to challenge the underlying liability in CDP proceedings is meaningless.

The statutory language refers only to the existence of an “opportunity,” not to an effort to take advantage of that “opportunity.”  Logically, under section 6330(c)(2)(B), that “opportunity” must necessarily  refer to an opportunity not taken advantage of.  Indeed, the fact that a failure to file a Tax Court petition in response to the issuance of a notice of deficiency precludes a taxpayer from challenging the merits of the liability shown on the notice of deficiency during a CDP appeal indicates that “opportunities” not taken advantage of are the opportunities which matter for purposes of section 6330.

The statute likewise does not limit the definition of an “opportunity” to an “opportunity” to take a matter to the Office of Appeals.  The statute on its face applies to all “opportunities.”  This is another reason why it makes sense to limit the definition of “opportunities” to judicial opportunities.

Thus, the distinction drawn by Treas. Reg. §301-6330-1(e)(3), Q&A-E2 between cases where there has been a prior hearing with the Office of Appeals and cases where there has been no prior hearing with the Office of Appeals has no support in the statutory language.  If the “opportunity” referred to in section 6330(c)(2)(B) includes all administrative opportunities, it should not matter whether or not the taxpayer has taken advantage of the administrative opportunity to go to the Office of Appeals. The mere existence of the administrative “opportunity” would theoretically prohibit the taxpayer from challenging the merits of the tax liability during a CDP appeal.

While it is possible to construe the term “opportunity” to include only those administrative opportunities (with no right of judicial review of an adverse administrative ruling)  which the taxpayer actually invokes, such a result makes no sense from a standpoint of tax administration. Such a rule would discourage knowledgeable taxpayers from attempting to resolve liability disputes as early as possible. Instead, knowledgeable taxpayers would sit back and wait for the IRS to issue a notice of intent to levy under section 6330, or to file a notice of federal tax lien, before they challenged the liability. And taxpayers who are not knowledgeable and who attempt to resolve liability disputes early in the collection process will be unknowingly penalized if they are unsuccessful in their initial administrative challenge and then seek to challenge the liability later in the context of a CDP hearing.

The regulation’s “carve out” for pre-assessment hearings with the Office of Appeals in cases subject to the deficiency procedures from the rule that prohibits raising the merits of the liability where there has been a prior hearing with the Office of Appeals  is nonsensical. For example, if a taxpayer had a hearing with the Office of Appeals following an income tax examination but prior to the issuance of the notice of deficiency to the taxpayer’s last known address, and the taxpayer did not actually receive the notice of deficiency, the taxpayer would currently be able to raise the merits of the tax liability in a CDP appeal. See, e.g.,  Kuykendall v. Commissioner, 129 T.C.  77 (2007), and cases cited therein.   Yet taxpayers who have pre-assessment hearings with the Office of Appeals regarding proposed Trust Fund Recovery Penalties are not able to raise the merits of the tax liability in a CDP appeal. See, e.g., Mason v. Commissioner, 132 T.C.  301 (2009).

Because interpreting the phrase “opportunity to dispute such tax liability” to include pure administrative opportunities would render nugatory the language in section 6330(c)(2)(B) which allows the taxpayer to challenge the underlying tax liability in a CDP appeal under certain circumstances, the Court’s holding in Lewis is not consistent with the statutory language of section 6330.

In addition, the Court in Lewis erred in deferring   to the Secretary’s interpretation of section 6330(c)(2)(B).   Section 6330(c)(2)(B) defines the scope of the Tax Court’s jurisdiction to review the merits of the tax liability which is subject of the collection action being reviewed by the Court pursuant to Section 6330.  In deferring to the Secretary’s interpretation of section 6330(c)(2)(B) as set forth in the Treasury Regulations, the Court effectively deferred to the Executive Branch in defining the scope of the Tax Court’s jurisdiction.

Courts have repeatedly stated that the courts, not the Executive Branch,  define the scope of their own jurisdiction.   See, e.g.,  Marbury v. Madison, 5 U.S. (1 Cranch) 137 (1803).    Courts have also repeatedly held that agency regulations which purport to define the scope of the jurisdiction of the courts are not entitled to any judicial deference. See, e.g.,  Schweika v. Department of Homeland Security,  723 F.3d 710 (6th Cir. 2013). Thus, the Court in Lewis should not have deferred to the interpretation of section 6330(c)(2)(B) set forth in the Treasury Regulations.

Because the taxpayer in Lewis was unrepresented, the concepts and arguments discussed in the blog post were not presented to, or considered by, the Court. That is most unfortunate, because we are now stuck with a result in Lewis that is in my view incorrect, barring a change of heart by the Tax Court, with or without a prompting by a Circuit Court of Appeals.

Comments

  1. A J Decaria EA says:

    The article was very informative. Thanks for posting it. I am interested in recourse under the current circumstances, and arguments to present to the IRS at any administrative level. I am also interested in arguments that will cause the IRS to open an avenue to court.
    I deal with IRS Appeals Settlement Officers frequently, and they will not always consider the accuracy of the liability. If they come out of examination, I can accept it, as my clients would have received a stat notice either from exam or from Appeals. I have more problems with the TFRP, as it is assessed without appeal rights or the right to go to court. Some ASOs will consider whether my client is really a person with the capacity to act willfully. Some won’t. The underlying IRS procedures for TFRP assessment need to be more like the ones that exist with respect to audit issues. The potential for a stat notice should be part of the process.

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