Tax Court Jurisdiction When Taxpayer Late Files the Request for a Collection Due Process Hearing

In Ramey v Commissioner, 156 T.C. No. 1 (2021) the Tax Court determined in a precedential opinion that when the IRS issues a notice of decision rather than a notice of determination and the taxpayer has filed the collection due process (CDP) request late, the Court lacks jurisdiction to hear the case.  The taxpayer, a lawyer, represented himself and pegged his arguments to last known address rather than jurisdiction.  Nonetheless, the decision expands the Court’s narrow view of jurisdiction to another setting without addressing the Supreme Court precedent on jurisdiction and its impact on the timing of the filing of documents.

I think the Court gets it wrong without ever getting into a real discussion of the jurisdiction issue and am surprised after the prior litigation on this issue that it so casually determines that it lacks jurisdiction.  Having said that, the result may have been the same had it not addressed the issue from the perspective of jurisdiction for the reasons discussed below.

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Mr. Ramey apparently has a law office in a location that carries the same address as several other businesses.  The IRS addressed the letter to that location which is the taxpayer’s last known address.  The post office timely delivered the letter, but it was received by someone working for another of the businesses at the location and did not make its way to Mr. Ramey until a short period before the 30-day window to request a CDP hearing.  The Court spends some time on the issue of the address and the delivery of the notice.  Mr. Ramey spends almost all of his energy on this issue, but I have no problem with the CDP notice.  The IRS sent it to his last known address.  You can read the opinion for the details on what went wrong causing him to receive it late.  Had he framed the facts as giving rise to a basis for equitable tolling, the issue would have some interest but simply framing it as a last known address issue gets him nowhere. 

He delayed mailing the request for a hearing until a few days after the 30-day period but seeks to receive a CDP hearing, arguing that, because of the snafu regarding the delivery of the mail and its delayed receipt by him, the otherwise late request for a CDP hearing should be considered as a timely request.

The Court frames the issue as follow:

In this collection due process (“CDP”) case, we are asked to consider what appears to be a question of first impression for our Court: whether a notice of intent to levy that is sent to a taxpayer’s actual (and last known) address by United States Postal Service (“USPS”) certified mail, return receipt requested, starts the running of the 30-day period for requesting a hearing under section 6330, even though the taxpayer does not personally receive the notice because the taxpayer’s address is shared by multiple businesses and the USPS letter carrier leaves the notice at that address with someone who neither works for the taxpayer nor is authorized to receive mail on the taxpayer’s behalf.

Framed in this way, I have no problem with the Court’s decision that the notice did start the 30-day period.  As the opinion progresses, it becomes clear, however, that the Court does much more than answer this question and takes on the issue of its jurisdiction.

Due to the late submission of the CDP request, Appeals gave Mr. Ramey an equivalent hearing rather than a CDP hearing.  It did not reach a resolution with him on whether an alternative to levy existed regarding his $247,033 liability.  This resulted in Appeals sending him a notice of decision from which he filed a Tax Court petition.

The Court acknowledged that it had previously accepted a notice of decision as appropriately invoking its jurisdiction but held that it only did so in situations in which Appeals inappropriately calculated whether the taxpayer submitted the CDP request on time.  It stated that if the IRS inappropriately calculated the timing of the submission and sent a notice of decision as a result, the taxpayer could successfully petition the Tax Court in that situation.  Regarding this issue, the Court states:

A decision letter issued after an equivalent hearing generally is not considered a determination under section 6330 and is therefore insufficient to invoke our jurisdiction. See, e.g., Moorhous v. Commissioner, 116 T.C. at 269-270; Kennedy v. Commissioner, 116 T.C. at 262-263. But we have recognized that a decision letter issued after a timely request for a hearing under section 6330 “is a ‘determination’ for purposes of section 6330(d)(1),” regardless of the label IRS Appeals places on the document. Craig v. Commissioner, 119 T.C. 252, 259 (2002); see also Andre v. Commissioner, 127 T.C. at 70. Put differently, if, in reviewing a CDP case, we determine that IRS Appeals erred in concluding that a taxpayer’s request for a section 6330 hearing was untimely, we have jurisdiction to correct the error and review IRS Appeals’ decision as a determination.

Interestingly, in starting its discussion of jurisdiction, which was preceded by a significant discussion of the IRS regulations that would seem to have little bearing on the issue of jurisdiction, the Court begins the discussion by citing to a whistleblower case in support of the statement that it is a court of limited jurisdiction.  It does not cite to the whistleblower case of Myers v. Commissioner, 928 F.3d 1025 (D.C. Cir. 2019),  in which the D.C. Circuit, the circuit to which all whistleblower cases are appealed, overturned the Tax Court in interpreting a statute essentially identical to the CDP statute on the issue of jurisdiction.  Carl Smith discussed the Myers case here and here.

The IRS position on timely submission of the CDP request has evolved over the past few years and it now treats as timely CDP requests sent to the “wrong” IRS office within 30 days.  We have discussed that issue in a series of posts you can access here.  Linked in that post is an article I wrote in Tax Notes on the issue, which not only discusses the mailing of a request to the right place in the IRS, but the underlying issue of Tax Court jurisdiction based on the timing of the CDP request.  I borrow from that article in some of the following discussion.

The Tax Court first addressed the issue of the impact of the Supreme Court jurisprudence on jurisdiction as applied to IRC 6330 in the case of Guralnik v. Commissioner, 146 T.C. 230 (2016) (en banc), where the tax clinic at Harvard filed an amicus brief arguing that the issue of the timing of the filing of the petition was claims processing issue rather than a jurisdictional one.  The Tax Court rejected that argument 16-0 in its precedential opinion in that case.  Two circuit courts have interpreted IRC 6330 the same as the Tax Court regarding the timing of the filing of the petition after a determination letter – Duggan and Boechler.  Duggan was unrepresented.  The Eighth Circuit split on the Boechler case both in the opinion and the decision on rehearing en banc.  I believe a petition for cert will soon be filed in the Boechler case arguing that the case was wrongly decided and that there is a conflict between the circuits since the language of the whistleblower statute interpreted by the D.C. Circuit in Myers is identical.

The litigation regarding the Tax Court’s jurisdiction when the taxpayer files a late petition differs from the litigation regarding the Tax Court’s jurisdiction when a CDP request arrives late at the IRS.  A different part of the statute controls.  Even if the Tax Court correctly decided Guralnik, and Duggan and Boechler, those decisions would not control the issue of jurisdiction regarding the timing of the submission of a CDP request to the IRS. 

The Conference Committee report on IRC 6330 provides some guidance but does not get mentioned by the parties or the Court.  It reads:

If a return receipt is not returned, the Secretary may proceed to levy on the taxpayer’s property or rights to property 30 days after the Notice of Intent to Levy was mailed.  The Secretary must provide a hearing equivalent to the pre-levy hearing if later requested by the taxpayer.  However, the Secretary is not required to suspend the levy process pending the completion of a hearing that is not requested within 30 days of the mailing of the Notice.  If the taxpayer did not receive the required notice and requests a hearing after collection activity has begun, then collection shall be suspended and a hearing provided to the taxpayer.

H.R. Rep. (Conf.) 105-599 at 265-266 (Emphasis added).

For purposes of looking at the timeliness of making the CDP request, the applicable statute is IRC 6330(b)(1).  It provides that “If the person requests a hearing in writing under subsection (a)(3)(B) and states the grounds for the requested hearing, such hearing shall be held by the Internal Revenue Service Office of Appeals.”   This statue says nothing about the jurisdictional nature of the provision and neither does 6330 (a)(3)(b) which provides “the right of the person to request a hearing during the 30-day period under paragraph (2).”  IRC 6330(a)(2)(C) in applicable part provides “not less than 30 days before the day of the first levy with respect to the amount of the unpaid tax for the taxable period.”

So, reading the section that creates the hearing and the two subsections that mention the 30-day time period, there is no suggestion that Congress intended the period to be jurisdictional.  If the statute does not make the 30-day period for filing the CDP request jurisdictional, then the taxpayer should have the opportunity to have that period tolled by actions showing that the taxpayer had reasonable cause for missing the time period.  The IRS does not acknowledge this in its regulations and neither does the Court in its opinion.

The Tax Court denies jurisdiction here based on an administrative practice of the IRS.  The IRS administrative practice is at odds with the administrative practice of other agencies on similar issues. The Social Security Administration (SSA) and the Veterans Benefits Administration (VBA), agencies that touch millions of customers, provide useful instruction regarding the filing of similar appeal requests.

SSA allows claimants to appeal decisions administratively regarding their Social Security payments by mailing a form to any Social Security office, regardless of which office issued the notice being appealed. SSA Program Operations Manual System (“POMS,” the SSA equivalent to the IRS’s IRM) provides that the deadline for mailing this form may be extended in situations where the claimant can show good cause for late filing.The examples listed in the manual include illness, misleading information provided by an SSA employee, and failure to receive notice, to name a few. In this way, we can see similarities with the “equitable tolling” doctrine discussed in Manella v. Commissioner.

The VBA approach is customer friendly in a different way. That agency maintains one national intake center for all correspondence related to compensation claims. The VA’s manual for the regional offices provides that, “A claimant may request, cancel or reschedule a hearing in writing, by e-mail, by fax, by telephone, or in person.”  Neither the SSA nor the VBA take the hard-line view that the IRS takes with respect to these administrative submissions.  Both SSA and VBA go out of their way to assist the persons working with their agencies in getting the requests to the right places.  Their procedures not only recognize the non-jurisdictional nature of the request but adopt an approach that would closely fit with the approach the Commissioner of the IRS must take pursuant to the Taxpayer Bill of Rights.

Several veteran’s cases have allowed for equitable tolling at the administrative stage.  Bailey v. Principi, 351 F.3d 1381, 1382 (Fed. Cir. 2003) (“We hold that the filing with the regional office of a document that expresses the veteran’s intention to appeal to the Veterans Court equitably tolls the running of the 120–day notice of appeal period, and we therefore reverse and remand.”); Santana-Venegas v. Principi, 314 F.3d 1293, 1298 (Fed. Cir. 2002) (“We hold as a matter of law that a veteran who misfiles his or her notice of appeal at the same VARO from which the claim originated within the 120–day judicial appeal period of 38 U.S.C. § 7266, thereby actively pursues his or her judicial remedies, despite the defective filing, so as to toll the statute of limitations.”); Jaquay v. Principi, 304 F.3d 1276, 1288 (Fed. Cir. 2002), overruled by Henderson v. Shinseki, 589 F.3d 1201 (Fed. Cir. 2009) (“The filing of the misdirected paper itself satisfies the diligence requirement as a matter of law.” (citing Goldlawr, Inc. v. Heiman, 369 U.S. 463, 467 (1962)).  Additionally, one circuit case allowed the late filing where the misfiling was between a court and an arbitration proceeding. Doherty v. Teamsters Pension Trust Fund of Philadelphia & Vicinity, 16 F.3d 1386, 1393 (3d Cir. 1994), as amended on reh’g (Mar. 17, 1994) (finding that equitable tolling could be allowed for when the plaintiff mistakenly filed in federal court rather than the appropriate arbitration forum). 

Why must the IRS and the Tax Court take such a hard line here?  It is not driven by the statute.  It is not driven by good customer service or Taxpayer Rights.  It is not that the IRS has so many more CDP request than the Social Security or Veteran’s Administration has claims.  It seems to be because of the perpetuation of a wrong view about jurisdiction, as well as about how to treat people in the various circumstances that life throws at them.  Other agencies and courts have come to an understanding of this.  Why must the IRS and the Tax Court persist in trying to keep people out of court, and why doesn’t the Tax Court acknowledge the Supreme Court jurisprudence in deciding this case, even if it then sets out to distinguish it?

Maybe Mr. Ramey is not the best petitioner to make this argument, because of his small opportunity to react and file his CDP request and, because he did not set up the jurisdictional argument at the Tax Court level he is not the best person to make this argument on appeal, but this issue will not end with the opinion in this case.

Recent Collection Due Process Decisions

Recently, we were in the process of updating “IRS Practice and Procedure,” which caused me to read some Collection Due Process decisions I failed to catch as they came off the wire.  While the four opinions discussed here do not represent major shifts in the way the Tax Court approaches CDP, they are worth mention for addressing discrete corners of the law.  This issues I discuss here are only a portion of the issues addressed in these cases.  It’s clear that CDP litigation continues at a high level within the Tax Court.

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Galloway v Commissioner, TC Memo 2021-24

This case holds that a taxpayer cannot use the CDP process to rehash a prior rejected offer in compromise (OIC).  Mr. Galloway actually submitted two OICs that the IRS rejected.  As an aside, from the description of the OICs in the Court’s opinion, the rejections seemed appropriate strictly from an asset perspective, since he did not want to include the value of a car he owned but allowed his daughter to use.  He is not the first person I have encountered who seems to feel that providing their property for the use by their children should preclude the IRS from using it as a source of collection.  This view will fail every time.

After rejection of his second OIC, he appealed the decision.  Appeals sustained rejection, which led not too long thereafter to his opportunity for a CDP hearing, which he used to complain about the decision to reject his offer.  The Appeals office hearing the CDP case declined to review the rejection of the OIC, finding that section 6330(c)(4) precluded Mr. Galloway from raising this argument.  The Tax Court agreed with the determination of Appeals, finding that the statute did not allow him to raise the merits of the administrative determination rejecting the offer during the CDP case.  The court cited to the trio of circuit court decisions decided a few years ago holding that the inability of the taxpayer to appeal administrative determination to court did not change the outcome based on the language of the statute.  See our prior discussions on those cases here.

The Court did not speculate on what Mr. Galloway might have done instead of arguing that the prior determination of Appeals was wrong.  I think he could have resubmitted an OIC during the CDP process that either took into account the changes in his circumstances since the prior OIC submission or that offered more than the previously rejected amount, based on his better understanding of the offer criteria.  Had he submitted an offer that was not identical to the one  previously rejected, I think Appeals would have considered it as part of the CDP process.  The rejection of the prior offer did not foreclose his further use of the offer process but did foreclose further argument about the rejected offer.

Friendship Creative Printers v. Commissioner, TC Memo 2021-19  

This case holds that the taxpayer could raise the merits of delinquency penalties by the backhanded method of challenging the application of payments.  Taxpayer failed to pay employment taxes over an extended period of time and failed to file the necessary returns but at some point made payments on the earliest periods.  In the CDP hearing taxpayer argued satisfaction of the earliest periods and eventually provided an analysis showing payments equal to the tax paid.

The Court treated this as a challenge to the merits of the delinquency penalties imposed.  Unfortunately, taxpayer did not designate its payments, which meant that the payments it made were not applied in the manner it expected and it argued in the CDP hearing.  Taxpayer also looked at the transcripts without appreciating the impact of accruals not reflected in the assessed portion of the transcript but accruing nonetheless.

Reynolds v. Commissioner, TC Memo 2021-10

This case holds that the IRS can collect on restitution based assessments even when the taxpayer has an agreement with the Department of Justice to make payments on the restitution award.  Taxpayer engaged in significant criminal tax activity for which he was successfully prosecuted.  The prosecution resulted in a significant restitution order. Like the majority of taxpayers who go through the criminal tax process and spend time in jail, taxpayer’s assets and ability to earn income significantly diminished as a result.  He agreed to pay DOJ $100 a month or 10% of his income.  At the time of the CDP case he was not working and did not appear to have many prospects for future employment.

He argued that the IRS did not have the right to file a notice of federal tax lien or to levy upon him because DOJ was collecting on the liability.  Citing Carpenter v. Commissioner, 152 T.C. 202 (2019), the Tax Court said that the IRS did have the right to pursue collection from him.  Obviously that right, at least with respect to levy, is tempered by the requirement in IRC 6343 not to levy when it would place someone in financial hardship, but no blanket prohibition existed to stop the IRS from collecting and therefore to stop it from making a CDP determination in support of lien or levy.

Although losing the case on the issue of the IRS basic authority to collect, the taxpayer did manage to remove penalties and interest through the CDP process.  The case is a good one to read for anyone dealing with a restitution based assessment to show the interplay between DOJ and IRS in the collection of this type of assessment, as well as to show the limitations of restitution based assessments compared to “regular” assessments.

BM Construction v. Commissioner, TC Memo 2021-13

This case involves, inter alia, a business owned by a single individual and the mailing of the CDP notice to the business owner rather than the business.  The Tax Court finds that sending the CDP notice to the individual rather than the business does not create a problem here, since the sole owner of the business would receive the notice were it addressed to the business rather than to him personally.

Sixth Circuit Upholds Tax Court Decision Denying Merits Litigation in Collection Due Process Case

In Patrick’s Payroll Services, In., v. Commissioner, No. 20-1772 (6th Cir. 2021) the Sixth Circuit held the decision of the Tax Court denying the taxpayer the opportunity to litigate the merits of the underlying tax because of a prior opportunity to discuss settlement with Appeals.  Guest blogger Chaim Gordon wrote about this case after the Tax Court’s decision and while the case was pending before the Sixth Circuit.  Chaim pointed out some of the novel arguments the taxpayer was making.  Unfortunately for the taxpayer, the Sixth Circuit was not buying what it was selling.

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Patrick’s Payroll was an employee leasing companies.  Anyone familiar with that type of business knows that sometimes companies in this business have tax issues regarding the failure to pay over required amounts.  In 2010 and 2011 Patrick’s Payroll paid employee wages and issued W-2s to the employees but it did not pay over the employment taxes to the IRS or file the employment tax returns it was required to file.  Part of the problem here for Patrick’s Payroll concerns timing.  It claims it did not commence operations until September of 2010 and the IRS should not hold it responsible for taxes before it began operating.  It makes a wholly reasonable argument that might succeed if accurate and if timely raised.   

When I am explaining employment taxes to students, I usually ask them what happens to employees whose taxes are withheld but never paid over to the IRS.  Perhaps this is a cruel exercise because a concerned look comes across some of their faces as they begin to wonder if their recent employer has paid over the taxes taken from their wages and whether they will need to cough up the taxes if their employer failed to do so.  Thankfully for employees, they receive credit once the employer withholds the money.  In essence the statute makes the employer the agent of the IRS, not the taxpayer, for collecting the withheld taxes.  This leaves the fight as one between the IRS and the employer (and the responsible officer(s) of the employer.)

The IRS determined that Patrick’s Payroll owed about $1 million in back payroll taxes, issued a 30-day letter and offer the chance to visit the Independent Office of Appeals to discuss the issue.  Patrick’s Payroll did not take the IRS up on the offer to visit Appeals.  The IRS assessed the tax and commenced collection, leading to the issuance of a Collection Due Process (CDP) notice of intent to levy.  This time Patrick’s Payroll did choose to go to Appeals and it wanted to discuss with Appeals the correctness of the assessed liability.  Appeals said you had that chance before at the stage of the 30-day letter and now it’s too late.  After receiving its notice of determination stating that the IRS could move forward to levy on its property, Patrick’s Payroll petitioned the Tax Court and requested that the Tax Court allow it to argue about the correctness of the assessment.

Patrick’s Payroll made two arguments.  First, it argued that because it had not previously had met with Appeals and had it gone to Appeals following receipt of the 30-day letter, such a visit would not have afforded it the right to go to court.  While I have written posts stating my belief that CDP intended to give taxpayers something more than an administrative hearing, which they already had when Congress passed IRC 6330, the Tax Court unmistakably disagrees with my view.  You can read prior posts on this subject here (allowing a merits contest where taxpayer did not receive notice) and here (refusing to allow merits contest where taxpayer previously requested audit reconsideration.)  The Tax Court granted summary judgment to the IRS, agreeing with the IRS that Patrick’s Payroll could not raise the merits in the CDP case, since it had passed on its prior opportunity to go to Appeals even though that prior opportunity did not involve a chance to go to court.

Patrick’s Payroll, however, made a second argument regarding the interpretation of IRC 6330(c)(2)(B).  It argued that this provision must be read disjunctively and allows taxpayers to raise the merits in a CDP case either if they had not had a prior opportunity or if they had not received a notice of deficiency.  At the Tax Court level, Patrick’s Payroll raised this argument in its motion to reconsider and not in its argument in chief.  The Tax Court denied the motion to reconsider but Patrick’s Payroll came to the circuit court ready to make this argument from the outset.

Unfortunately, the Sixth Circuit said that because Patrick’s Payroll first raised the argument in its motion to reconsider, it did not need to consider this argument on appeal.  Then, however, the Sixth Circuit went on to explain why it would have ruled against Patrick’s Payroll on this issue even if it had timely raised the argument.  Since this is an issue of first impression, obtaining the court’s view provides valuable insight, although for those of us wanting taxpayers to have the opportunity to litigate the merits of the underlying liability in CDP cases, the insight here offers little comfort.

The court notes that the word “or” sometimes creates a set of independent conditions but finds that:

Here the word “or” does not create disjunctive qualifications. Instead, the phrase “or does not otherwise” identifies a single operative criterion: not having a prior opportunity to dispute. And the statute provides one of the most common examples of such an opportunity: receiving a notice of deficiency. An example easily illustrates the plain meaning and ordinary usage of the phrase “or did not otherwise.” See Oyer v. Commissioner, T.C. Memo 2003-178, 2003 WL 21384834, at *6 n.8. Imagine a child is told that she may have dessert “if she did not eat a cookie on the schoolbus or did not otherwise have sweets after school.” Id. The clever child admits to eating sweets after school but claims that she is entitled to dessert because she did not eat a cookie on the bus. Eating sweets after school clearly violates the terms of the agreement and no parent would allow the child dessert. If the child were raised by lawyers, she might protest that her parents had unfairly made disjunctive criteria conjunctive: unreasonably requiring that she not eat a cookie on the bus and not eat any sweets after school. Her parents might explain that there never were two criteria, only one: to not eat sweets after school, not eating a cookie on the bus being a good example of the key directive.

Interpreting the statute in line with its plain meaning is also supported by Treasury regulations, the Tax Court’s interpretation, and this court’s previous explanations of Section 6330. See 26 C.F.R. § 301.6330-1(e)(4) (explaining that after receiving an opportunity to dispute but no notice of deficiency, “[t]he taxpayer is precluded from challenging the existence or amount of the tax liability in a subsequent CDP hearing”); Oyer, 2003 WL 21384834, at *6 (“[T]he person seeking to challenge the underlying tax liability in a collection proceeding must not have had another opportunity to raise the challenge.”); Agility Network Servs., Inc. v. United States, 848 F.3d 790, 794 (6th Cir. 2017) (“[I]f a taxpayer has not already had the opportunity to challenge his underlying tax liability, he may do so at the [collection] hearing.”). We therefore reject the taxpayer’s proposed interpretation of Section 6330.

Citing to the IRS interpretation in the regulation in support of its determination that the “or” in 6330 does not create a disjunctive clause seems a funny way to reach a conclusion on a challenge to the regulation.  Maybe the meaning of the statute is plain from its wording, but the regulation should not offer support for the reason for not overturning it.

So, the next taxpayer to raise this argument needs to do so before the motion to reconsider stage and needs to do so in a circuit other than the Sixth Circuit.  We do not need to wait to know what the Tax Court will do with the argument.  The question is whether someone can persuade a circuit court that the “or” creates two separate paths to a merits hearing.

Collection Due Process Request Tolls Statute and Prevents Bankruptcy Discharge

Job Announcement: The Temple University Beasley School of Law was recently notified that it will receive funding from the IRS to open and operate a Low Income Taxpayer Clinic (LITC) on its Main Campus in North Philadelphia which will also serve taxpayers in northeastern Pennsylvania. It is therefore soliciting applications for the position of Visiting Practice Professor of Law and Director of the LITC, which is expected to operate on a part-time basis during 2021. The position will begin on January 15, 2021 or as soon thereafter as practicable, and will run through the end of the calendar year. The Clinic Director will be expected to establish and operate the LITC, including developing a panel of pro bono attorneys and performing community outreach, and to take a leadership role in applying to the IRS for a multi-year grant, which will likely need to be submitted in June, 2021. In addition, the Clinic Director will be expected to develop and teach a course through which students can enroll to participate in the LITC for academic credit in 2021.

It is anticipated that this part-time, visiting position will be enhanced and converted into a clinical faculty position upon receipt of a multi-year grant from the IRS. A national search for an individual to fill the clinical faculty position will be conducted if the multi-year grant is received; the individual selected to fill the part-time visiting position will be eligible for consideration for the clinical faculty position. 

Minimum Qualifications: Candidates must have an excellent academic record and a J.D. degree, as well as experience working in an LITC or equivalent organization, either as a student or practicing lawyer, or other tax practice experience. Candidates must have sufficient tax law expertise to perform and oversee the substantive and procedural aspects of client representation, and be either admitted to practice before the U.S. Tax Court or eligible for such admission.

Temple University values diversity and is committed to equal opportunity for all persons regardless of age, color, disability, ethnicity, marital status, national origin, race, religion, sex, sexual orientation, gender identity, veteran status, or any other status protected by law; it is an equal opportunity/affirmative action employer, and  strongly encourages veterans, women, minorities, individuals with disabilities, LGBTQI individuals, and members of other groups that traditionally have been underrepresented in law teaching to apply.

To Apply: Potential candidates are encouraged to contact the selection committee’s Chair, Professor Alice Abreu, at lawfsc@temple.edu with the following: 1) cover letter and/or statement of interest; 2) resume or CV; 3) the names, affiliations, and contact information for at least three individuals who can serve as professional references; and 4) any other material that demonstrates the candidate’s ability to succeed in the position, such as a publication, brief, or similar document.

Applications should be submitted as soon as possible; interviews, which will be conducted online, could begin as early as January 4, 2021. The position will remain open until filled. Keith.

I have written on more than one occasion about the importance of timing when filing a bankruptcy in order to discharge taxes.  The debtor, or her lawyer, in today’s case, In re Alexander, Dk. No. 19-05033, Adv. Pro No. 19-5033 (D. Conn. 2020) appears to have considered the timing of the filing of the bankruptcy and may have filed bankruptcy primarily for the purpose of discharging the taxes.  Unfortunately for the debtor, a request for a Collection Due Process (CDP) hearing filed before bankruptcy extended the period during which an income tax liability could receive priority status under BC 507(a)(8)(A)(i) and that knocks one of the periods out of alignment with the discharge provisions.  The general rules regarding priority status have a few exceptions designed to protect the IRS and this is one.  Since cases addressing this exception rarely arise, it’s worth a look at how the exception works and why Ms. Alexander continues to owe taxes for 2015.

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Ms. Alexander owed taxes for 2011, 2012, 2013, 2014 and 2015.  She timely filed her returns for these years.  For the last of these years, 2015, she timely filed her return on October 17, 2016 based on an extension and the weekend rule. 

At the time Ms. Alexander filed her bankruptcy petition she was represented; however, her attorney passed away during the adversary proceeding and she did not replace her attorney nor did she really participate after that point.  The bankruptcy petition was filed on October 31, 2019.  Absent the exception for CDP hearings, the timing of the filing of the bankruptcy could not have been more perfect.  It comes slightly more than three years after the due date of the return, as extended, for the most recent tax year.  Under the provisions of BC 507(a)(8)(A) all five of the years at issue would have failed the tests to become priority claims.  Having failed that test and having become general unsecured claims, the taxes for these periods would not fit the discharge exception in BC 523(a)(1) and the IRS would write them off once the bankruptcy court granted the discharge.

One reason I believe that taxes motivated the filing of this bankruptcy provision results from the fact that Ms. Alexander filed an adversary proceeding on December 15, 2019, only six weeks after filing the bankruptcy petition.  I pause here to note that Ms. Alexander’s chapter 7 case was a no asset case which is common.  The IRS and other creditors would have received instructions from the bankruptcy court not to bother submitting a proof of claim because it would have been a waste of time and effort.  She would receive a discharge very quickly and go on her way with many of her debts removed without any payment.

Ms. Alexander did not need to file an adversary proceeding to obtain a declaration regarding the discharge of her taxes.  After the granting of a discharge the IRS abates any taxes discharged by a debtor’s case without the need for the debtor to affirmatively bring such a proceeding.  At that point if the IRS fails to discharge a debt the debtor believes the IRS should have discharged, then the debtor could bring an adversary proceeding seeking a determination regarding the discharge.  Her affirmative effort to do so even before the IRS would make its own determination shows that getting rid of the taxes may have served as a primary motivator for the filing of the bankruptcy case.  In a case such as this the filing of the adversary proceeding may have disadvantaged Ms. Alexander.  If she had waited to see what the IRS did the possibility, arguably remote, exists that the IRS would have written off all of the periods.  By bringing the adversary proceeding she insured that her taxes would be scrutinized by the bankruptcy unit, the IRS attorneys and the Department of Justice attorneys.

Whether the IRS might have mistakenly written off 2015 we will never know.  In response to the adversary proceeding, the IRS filed a motion to dismiss the first four years agreeing that they were dischargeable and removing the need to argue about them in the adversary proceeding.  With respect to 2015, however, the IRS filed a motion for summary judgment setting forth why the taxes for that year achieved priority status and because of that status were excepted from discharge by BC 523(a)(1)(A).  This post will focus on the issues raised in the motion for summary judgment.

As discussed above, she filed her 2015 return on October 17, 2016 and her bankruptcy on October 31, 2019.  Because she timely filed her return and because the bankruptcy filing is more than three years after the due date, under the general rule of 508(a)(8)(A)(i) the tax for 2015 fails the test.  However, the priority rules have exceptions.  One of the exceptions, added in the bankruptcy code changes of 2005 after the adoption of CDP in 1998, suspends or tolls the time period in BC 508(a)(8)(A)(i) for the time during which a CDP case is pending.  The language of the statutory exception appears at the end of the three rules for priority claims set out in 507(a)(8)(A) and provides:

An otherwise applicable time period specified in this paragraph shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days.

The exception exists to give the IRS the full three-year period.  Without this rule a taxpayer could sit in a CDP case for a long time (a real possibility, especially if the taxpayer goes to Tax Court) running out the three-year period while the IRS has no opportunity to engage in enforced collection.  The exception preserves for the IRS the full period of time for a year to receive priority status in bankruptcy, which not only increases its chances of receiving payout in the bankruptcy case but also protects it from discharge under BC 523(a)(1)(A).

Ms. Alexander requested a CDP hearing on February 10, 2017 and remained in CDP status until October 28, 2017.  This period plus the additional 90-day period must be added to the three year period after the due date of filing the return that would normally apply to the determination of priority status in this situation.  When these additional days get added into the picture, the filing of the bankruptcy case occurred too soon to allow the 2015 year to avoid the priority designation.  The bankruptcy court does the math:

At first glance, the Plaintiff’s 2015 tax return date of October 16, 2016 falls outside of the three-year look-back period; given the October 31, 2019 petition date, three years prior would be October 31, 2016. However, the time period the Plaintiff was in Collection Due Process must be extracted from the three years pursuant to section 507(a)(8). The Plaintiff was in Collection Due Process from February 10, 2017 to October 28, 2017. Accordingly, the three-year look-back period did not run consecutively from October 31, 2016 to October 31, 2019, but rather was tolled by the Collection Due Process.

There are 1095 days in the three-year period. The number of days from October 31, 2019 (the petition date) to October 28, 2017 (the end of the Collection Due Process period) is 733 days. 362 days remain of the three-year look-back period (1,095 days minus 733 days equals 362 days). The remaining 362 days, by virtue of the Collection Due Process tolling period, is counted back from February 10, 2017 (the start of the Collection Due Process period), which results in February 14, 2016 as being the end of the three-year look-back period. The Plaintiff’s tax return due date of October 16, 2016, therefore, fell within the three-year look-back period, making her 2015 tax liability a priority claim under section 507(a)(8)(A)(i) that is an exception to discharge under section 523(a)(1)(A).

The case does not break new ground or present an especially difficult legal issue.  It does demonstrate the care that must be taken when choosing the moment for filing bankruptcy if taxes drive that moment.  Here, it appears they did.  So, this is a sad outcome for Ms. Alexander who apparently went into bankruptcy thinking that it would take care of her back taxes.  The good news for her is that bankruptcy did discharge four of the five years for which she owed.

IRS erred in CDP hearing, but taxpayers have no chance to recover administrative costs… absent help from Congress

We welcome first-time guest blogger Maria Dooner to Procedurally Taxing. Maria is the Director of Tax Controversy Services at TaxFirm.com. She chairs the Board of Directors of Community Tax Aid in Washington D.C. and she is a co-author of the chapter, “Recovering Fees and Costs When a Taxpayer Prevails” in the forthcoming edition of Effectively Representing Your Client Before the IRS. Today Maria examines a recent Tax Court opinion denying costs to taxpayers who successfully appealed their CDP determination. Bryan Camp also wrote an excellent post on the case which you can find here. Christine

An award of reasonable administrative and litigation costs under section 7430 was designed to promote effective tax administration by preventing abusive actions and overreaching by the Internal Revenue Service (IRS). But to be effective, a taxpayer must actually recover costs when the government’s position was not substantially justified. A recent Tax Court decision not only continues to expose the challenges faced by taxpayers in recovering reasonable administrative and litigation costs from the IRS, but it also spotlights the need for potential Congressional action.

In Tung Dang and Hieu Pham Dang v. Commissioner, T.C. Memo. 2020-150 (Nov. 9, 2020), the Tax Court held that 1) the petitioners did not incur any reasonable administrative costs as defined by section 7430, and 2) the petitioners were not entitled to an award of reasonable litigation costs since the United States’ litigation position was substantially justified. The court focused almost exclusively on timing — it evaluated when the government’s position was or was not substantially justified and when costs were incurred. Previous PT blog posts have highlighted the difficulties in proving that the government’s position was not substantially justified (see here and here). This post primarily focuses on the challenges with recovering administrative costs due to the timeframe in which they are incurred.

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Facts of Dang

Dang involved a tax collection case where a Revenue Officer denied the taxpayers’ request to levy their individual retirement account (IRA) to pay their outstanding tax liability – a request that would avoid the additional tax on early distributions and the potential sale of other assets. When declining the request, the Revenue Officer stated that the taxpayers had access to alternative sources of funds and she subsequently issued a notice of federal tax lien and notice of intent to levy. In response, the Dangs filed a request for a Collection Due Process (CDP) hearing, but the Settlement Officer sustained the IRS collection actions, stating that a levy is not a collection alternative considered by Appeals. (As an aside, the irony of this case cannot be overlooked – while the taxpayer is contesting the notice of intent to levy, the Appeals Office says “no” to the taxpayer’s specific levy request.)

After receiving an unfavorable notice of determination, the Dangs filed a petition to Tax Court where IRS Counsel conceded the issue in his answer, stating that a substitution of assets (via a levy) is a valid collection alternative, and the Appeals Office abused its discretion. Against the desires of the Dangs who wanted an order to levy their IRA, Special Trial Judge Armen remanded the case back to the Appeals Office to promptly hold another administrative hearing, correct its flawed reasoning and reconsider the taxpayers’ request to levy the IRA. Keith blogged about the remand order on PT here (the taxpayers unsuccessfully argued a remand was unnecessary).

After the Appeals Office concluded that the levy on the IRA was appropriate, and settlement was reached in Tax Court, the taxpayers filed a motion for approximately $13,000 in reasonable administrative costs and approximately $70,000 in litigation costs. The administrative costs claimed by the Dangs included the time spent preparing and participating in the CDP hearing. The litigation costs claimed by the Dangs included all the work that was performed after receiving the Notice of Determination from the Appeals Office. This included time spent preparing the Tax Court petition and work performed while the taxpayers were in Tax Court, including the time spent on the case during the supplemental CDP hearing when it was remanded back to the Appeals Office.

Was the government’s position substantially justified, and when were costs incurred?

To successfully recover costs, the taxpayer must have exhausted administrative remedies with the IRS, have not unreasonably protracted the proceedings, have claimed reasonable costs, and have ultimately prevailed (as well as have satisfied a net worth requirement). Under section 7430(c)(4)(B)(i), a taxpayer cannot be a prevailing party if the United States was substantially justified in their position. When determining whether the government was substantially justified in its position in Dang, Judge Marvel applied a bifurcated analysis.  This involved determining whether the government’s position was substantially justified in 1) its notice of determination in the administrative proceeding, and 2) its answer in the judicial proceeding.  However, before the first question was evaluated, Judge Marvel questioned whether any permissible costs were in fact incurred during the administrative proceeding.

Pursuant to section 7430(c)(2), administrative costs are those incurred by the taxpayer on or after the earliest of: (1) the date of the receipt by the taxpayer of the notice of decision by the IRS Independent Office of Appeals, (2) the date of the notice of deficiency, or (3) the date of the first letter of proposed deficiency that allows the taxpayer to appeal to the IRS Independent Office of Appeals. Because Dang involved a CDP hearing, the only relevant date was the date the taxpayers received the Notice of Determination, which is essentially the notice of decision referenced in the law. So, on or after the notice of determination, the taxpayers could recover any costs incurred from that point forward within an administrative proceeding.

Unfortunately, the notice of determination is probably the worst date to start accruing administrative costs as it concludes a collection case at the administrative level. (The ideal date from a taxpayer’s perspective would be the date the Dangs received a right to a CDP hearing.) But upon receipt of the notice of determination, the Dangs have no move to make in which they could possibly recover any administrative costs. Their only task at hand is to prepare for litigation by reviewing the notice of determination and filing a petition to the Tax Court — time that the Dangs appropriately classified as litigation costs.

Since there were no “administrative costs” (within the scope of the statute) to be awarded, the Tax Court solely evaluated whether the government’s position was substantially justified in the litigation proceeding, relying on Huffman v. Commissioner, 978 F.2d 1148 (1992). Because the IRS promptly conceded its error and moved to remand the case back to the Appeals Office, Judge Marvel found that the IRS’s position was substantially justified. Therefore, no litigation costs could be awarded to the Dangs.

Did the decision to remand create additional administrative costs that could be awarded?

While this case is exceptional in more ways than one, additional costs associated with a supplemental CDP hearing (via a remand) add another twist. Bryan Camp suggests in his post that these costs were incurred after the notice of determination and as part of an administrative proceeding, so there could be an argument that there are administrative costs to be awarded.

This is an interesting point that was not addressed by the Tax Court, which was likely due to the fact these costs were classified as litigation costs by the Dangs. In the Dang case, the supplemental CDP Hearing was held at the direction of the Tax Court, and the hearing was very much connected to the court proceeding, which ultimately concluded the case. (In his order to remand the case back to the Appeals Office, Special Trial Judge Armen still retained jurisdiction over the case.) Thus, it appears that the time spent preparing, traveling, and participating in the remanded appeals hearing was appropriately classified as litigation costs under section 7430(c)(1)(b)(iii).

Why does the definition of “administrative costs” in section 7430 fail to encompass most costs incurred within administrative collection due process proceedings?

Judge Marvel did not analyze whether the government’s position was or was not substantially justified in the administrative proceeding, but we can assume that the position was not substantially justified. (The IRS went against published guidance (i.e. Treas. Reg. 301.6330-1(e)(3)), and this was recognized by IRS Counsel who immediately conceded the issue as well as Special Trial Judge Armen who remanded the case back to the Appeals Office for a do-over.)The question then becomes: why should the Dangs be unable to recover costs for time spent preparing and participating in the original CDP Hearing, which clearly went wrong and did not serve its intended purpose?

As explained above, Judge Marvel’s decision hinges on the definition of “administrative costs” in section 7430(c)(2), which incorporates a timing rule that effectively excludes CDP hearings from consideration. But Regulation § 301.7430-3(a)(4)  appears to go even further, providing that a CDP hearing is not an administrative proceeding for which reasonable administrative costs can be recovered. In their brief, the Dangs argued that this regulation should be disregarded as inconsistent with the statute. The Dangs note, “there is simply no statutory authority for eliminating CDP hearings from the cost recovery regimen.” In their brief, the Dangs emphasize the very first sentence of section 7430, which states that the prevailing party may be awarded reasonable administrative costs in any administrative proceeding in connection with the collection of any tax. They also explain how Regulation § 301.7430-3(a)(4), which precludes most collection actions, particularly a CDP hearing (“the quintessential collection administrative hearing”), from the definition of an administrative proceeding for purposes of section 7430, does not align with the first sentence of section 7430. But despite this being true, it does not change the outcome of the case. Unfortunately, it is the dates that triggered these costs, listed in section 7430(c)(2), that preclude and will continue to preclude the award of administrative costs in most CDP hearings. The dispute over the regulation is a red herring.

Why then did Congress enact a seemingly contradictory statute? An interesting explanation for these dates lies within a small footnote in the Tax Court opinion, indicating that it was Congressional intent to preclude an award for administrative costs arising from a collection action:

In 1988, when Congress amended sec. 7430 to include recovery for administrative costs in addition to litigation costs, the legislative history of the amendment acknowledged that the dates triggering costs precluded an award for administrative costs arising from a collection action. See H.R. Conf. Rept. No. 100-1104, at 226 (1988), 1988-3 C.B. 473, 716 (“Thus, with respect to a collection action, only reasonable litigation costs are recoverable under * * * [sec. 7430].”).

Ironically, a deeper dive into the Technical and Miscellaneous Revenue Act of 1988 shows that its amendment to section 7430 did not even facilitate the recovery of administrative costs for most taxpayers in deficiency proceedings. As passed, this law classified administrative costs as those incurred on or after the earlier of the date of receipt of the notice of the decision of the Appeals Office or the date of the notice of deficiency. Though the Senate bill included a third date, the date of notice of proposed deficiency (often known as the “30-day letter” into the Appeals Office), this was not incorporated into the 1988 Act. Therefore, the 1988 Act added the words “administrative costs” to section 7430, but it failed to provide meaningful impact to taxpayers pursuing administrative costs in deficiency proceedings. By not providing for the effective recovery of administrative costs in proceedings involving both the assessment and collection of tax, the inclusion of “administrative costs” was in many ways meaningless. 

It was not until the passage of the Internal Revenue Service Restructuring and Reform Act of 1998 that Congress approved the award of administrative costs incurred on or after the date of a notice of proposed deficiency. After that, taxpayers were able to recover administrative costs from the moment they received the notice of proposed deficiency and onward. Simultaneously, the 1998 Act created taxpayers’ rights to a CDP hearing — an independent review of a notice of intent to levy and notice of federal tax lien, culminating in a notice of determination and the right to judicial review.

Although we do not know the exact intent of Congress regarding the award of administrative costs in CDP hearings, the legislative history suggests that Congress either lacked an understanding of when these costs were incurred or was not fully committed to awarding them. For example, the fact that Congress did not facilitate the recovery of administrative costs associated with a collection proceeding in the 1998 law could have been an oversight when they were simultaneously creating a collection hearing that did not yet exist. Or maybe more likely, Congress did not understand the dates that triggered these costs. Remember, it took them approximately 10 years, after the law was amended to award administrative costs, to finally incorporate a provision that facilitated the recovery of these costs in deficiency proceedings.

This leads to what may be the main significance of Dang… a successful recovery of administrative costs by taxpayers requires a better understanding of when these costs are actually incurred and a more serious commitment to award them by Congress. The resources exerted in the Dang case where volunteer attorneys spent hours providing financial information, preparing for a CDP hearing, filing motions and briefs, preparing for a second CDP hearing, etc. (all to get back to an answer originally granted by the first Revenue Officer who approved the levy but was replaced by a second Revenue Officer who did not) show the importance of passing a law that allows for the effective recovery of costs and fees when the administrative process goes wrong. 

As a start, Congress could incorporate “costs incurred on or after the date of receipt by the taxpayer of a right to a CDP hearing” into section 7430(c)(2) for the sake of theDangs and thousands of taxpayers in collection cases. By making section 7430 more meaningful, Congress will make it more important for the IRS to follow published guidance in administrative collection due process hearings and will help the IRS achieve its mission in providing top quality service. Ultimately, the purpose of these awards is not to penalize but rather enhance effective tax administration, and to do this, more taxpayers must actually recover costs when the IRS errs.

Day 2 of Collection Due Process Summit Initiative

Yesterday, we reported on the discussions of the the communication and administrative process issues related to Collection Due Process (CDP) that occurred in the 2019 CDP Summit.  Today, we continue the series with a report on the litigation issues presented by CDP as discussed in that summit.

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Breakout: Exploring CDP Rights and Procedures within Judicial Proceedings

Panelists: Keith Fogg, Christine Speidel

Focused on improving effectiveness and efficiency for all participants in Tax Court matters, this session will analyze common petitioner and respondent approaches to litigating CDP in Tax Court. The session will explore opportunities to increase the number of taxpayers who exit litigation with a sustainable plan to collect the correct amount of tax due. Participants will discuss the Tax Court’s authority and limits to achieving a result satisfactorily resolving the issues between the parties; typically, a collection solution for taxpayers litigating in good faith.

Jurisdiction

Filing the CDP Request.

  • LITCs encountered the problem of the IRS offering an equivalent hearing where the taxpayer timely filed a CDP request with the IRS but sent it to the wrong address. In both cases, the jurisdictional issue was not litigated because the taxpayer’s OIC was accepted.
  • In Webber v. Commissioner, the IRS conceded that the taxpayer who accidentally used the wrong IRS address was entitled to a CDP hearing.
    • IRS Chief Counsel reported that they are working on an administrative solution within the IRS. They are working on two fronts: (a) changing the CDP notice to be more clear; and (b) granting CDP hearings if the taxpayer sends the request timely to any IRS office.
  • Question raised, could IRS accept CDP requests by e-file?
    • Clinicians should continue to litigate the issue presented in Webber, and also look out for good equitable tolling cases, where the CDP request was made late but for a very good reason.
      • E.g., reliance on bad advice from the IRS. The merits of the underlying case must also be good in order for it to make a compelling equitable tolling case.

Filing the Tax Court petition

  • Clinicians should continue to litigate equitable tolling in the circuit courts (only the 9th Circuit has conclusively ruled against equitable tolling here). The case must have compelling equitable circumstances and good merits.

Timing; Motions for Summary Judgment

IRS may expedite currently not collectible cases where a CDP hearing is requested.

  • Attendees mentioned instances in which an IRS employee (not from Appeals) responds to CDP requests by offering currently not collectible status if the taxpayer withdrew their request for a hearing. However, taxpayers do not always understand what they’re giving up (i.e., CDP hearing, Tax Court review).
    • Some attendees believe this practice continues, others thought it had stopped.
    • The working group should investigate whether this still happens and whether it violates taxpayer rights.

The group considered whether there should be an expedited track for certain CDP cases in Tax Court.

  • May be based on economic harm, including taxpayers expecting refunds and IRS concerns about pyramiding.
  • The group considered proposing criteria in the context of the Tax Court’s docket, which includes other cases that might merit expedition, like passport cases.
    • If there were a Tax Court rule allowing either party to request expedited review on economic harm grounds, could that include passport cases?
    • Is this a legislative issue rather than a Tax Court rules issue?

Could the Office of Chief Counsel review CDP petitions earlier and would that expedite these cases?

  • Some Counsel offices do review the case thoroughly as they prepare the Answer, and they do reach out to taxpayers to suggest a remand where appropriate. It would be good to ensure that is nationally uniform practice.
  • Although some in the Office of Chief Counsel are proactive at the Answer stage, in many cases the IRS does not file a motion for summary judgment until shortly before the deadline (60 days prior to the calendar call). The Tax Court could amend its rule to move up the motion for summary judgment filing deadline in CDP cases. The Office of Chief Counsel could also make a policy change to encourage earlier filling of motions for summary judgment.

Could petitioners’ counsel file early motions for summary judgment? What would need to happen for this to be possible?

  • The parties would need to agree on the administrative record and identify if there are any disputes about what evidence the Court can consider.
  • Something to keep in mind regarding an early motion for summary judgment is how the Tax Court works its cases. When a case is not on a trial calendar yet, the case is not assigned to a trial judge. The Special Trial Judges take turns reviewing motions that come in on those cases. If it appears that a hearing is needed, they need to ask permission from the judge presiding over the next calendar in the petitioner’s city whether they can add the case to their calendar.

Could expedited CDP cases be heard by video conference?

  • Some Tax Court judges may prefer in-person hearing/testimony.
  • Though no one in the group could recall seeing video conferences used, petitioners might prefer a virtual method that was expedited over waiting for trial.

The group briefly discussed the use of FOIA versus requesting the administrative file from Counsel.

  • Several clinicians use both tools and get different results from each.
  • Counsel does not like taxpayer representatives using FOIA while a case is pending, but if they want to stop the practice they need to address the problems that exist with getting the full administrative file from them.
  • Concerns about obtaining the administrative file by members of the group include inappropriate redaction by Counsel of the record produced; difficulty in obtaining the administration file from Counsel’s office; failure by Counsel’s office to provide a complete administrative record to settlement officers; and Counsel’s office including hearsay in the administrative record, such as in the settlement officer’s declaration.

How could the administrative record be established early in CDP cases?

  • Petitioners’ counsel could send a Branerton letter soon after the pleadings close, requesting the administrative record and a conference to reach agreement on the contents of the record.
  • Tax Court judges could individually implement a standing order requiring the parties to agree on the administrative record and jointly certify it to the court by X date, or otherwise file their proposals/objections.
    • Judge Leyden has a standing order that she uses to efficiently handle 6751(b) issues in deficiency cases that include a 6662 penalty: 60 days prior to trial, she asks the IRS to let her know if they have proof of supervisory approval and, if not, to explain why it’s not needed. This clears out many issues prior to calendar call. A standing order akin to Judge Leyden’s in the context of administrative records would also streamline the trial process. 
  • The Tax Court could adopt a rule requiring Respondent to propose the administrative record within 30 days of filing the answer and giving a period of time for Petitioner to respond.
    • This could parallel or draw from the procedures that US district courts have implemented to manage litigation.
    • This process would set up either party to make a motion for summary judgment as the next step in the case.

Verification vs Merits

  • Petitioner’s counsel should ensure they raise any potential verification issues in the petition.
    • The group did not see the verification issues in petitions very often.
    • Include manager approval of penalties.
    • Include the Marlow issue – IRS cannot rely solely on its computer system when taxpayer raises a credible dispute to the information contained in the system (e.g., that Statutory Notice of Deficiency was correctly mailed).

Remands

Keith brought up the Brown v. Commissioner case, in which there were 3 remands to a settlement officer to consider a merits issue that the settlement officer did not understand how to handle.

  • Why couldn’t the Office of Chief Counsel simply resolve the merits of the liability?
    • There was a general consensus among attendees that Chief Counsel’s office could settle the underlying liability in CDP as they do in deficiency cases, as detailed within the Chief Counsel Directives Manual.

In addition to settling the merits when they are properly at issue, many attendees thought it would be helpful if the Office of Chief Counsel were empowered to settle CDP collection alternative cases.

  • The IRS is not currently set up to do this and it would take quite a lot of effort to accomplish. However, the Department of Justice is a model that the Office of Chief Counsel could use. The Department of Justice consults with the IRS but it makes the settlement decision/offer.
  • There is some limited authority for Counsel to facilitate a collection solution, but they seem reluctant to use it.

A potential suggestion for change was that the IRS develop a 1-page flyer explaining what a remand means, which Counsel could send to pro se taxpayers alongside the motion to remand. The IRS did a great job with this in the deficiency Answer context.

  • It was suggested that the Court develop an FAQ on remands as well.

Breakouts: Other Issues Raised

  • Increased funding is necessary for IT services at the IRS;
  • Creating secure portals and QR codes which will provide a web link in the notice explaining in the Taxpayer Roadmap where the taxpayer is in process with the IRS;
  • Adding confirmation language to the CDP withdrawal form that the taxpayer is in currently not collectible status;
  • Adjust account transcripts to reflect the CDP notice and hearing activity (also, general transcripts information could be improved).

Updates

  • Previously, the IRS position was to treat timely requested CDP hearings as those mailed only to the proper address as listed in the CDP notice.  The problem was that there may be two or more addresses listed on the CDP notice mailed to the taxpayer.  It was IRS policy that if there was a delay in routing a request mailed to the wrong address, that request would likely be treated as not timely filed.  Some of these issues came to a head in the Webber v. Commissioner case as Judge Gustafson criticized this IRS practice in a designated order as discussed here.  Later in the year, Keith wrote about changes to IRS policy regarding the request of a CDP hearing here.  Now, A CDP hearing request mailed to any address on the CDP notice with a postmark by the 30th day after the notice will be treated as timely filed.  This change comes from Chief Counsel technical advice memorandum PMTA-2020-02, dated December 12, 2019.  The memo SBSE-05-0720-0049, dated July 6, 2020, provides that IRM 5.1.9.3.2 will be updated within 2 years from the date of the memo to reflect that change.  I credit Procedurally Taxing and the CDP Summit Initiative for bringing attention to this issue and helping to foster this IRS solution for taxpayers.
  • One of the breakout issues raised regarding QR codes has partially been implemented by the IRS.  IR 2020-233 (October 9, 2020) gives details about how taxpayers can use the QR codes on CP14 notices to find information on the IRS website.  Starting in 2021, the taxpayers will be able to access their account, set up a payment plan or contact the Taxpayer Advocate Service.

We appreciate those of you interested in CDP reform and those of you who have taken the time to read these reports.  For those of you interested in taking part in a CDP committee, please contact my email address, schmidtw at klsinc.org.

Breakout Session Reports From the Collection Due Process Summit Initiative

Last year, Procedurally Taxing reported on the Collection Due Process Summit Initiative here.  The Initiative grew out of the American Bar Association Section of Taxation 2019 May Meeting and continued for an in-person meeting in Washington, D.C. for the Section of Taxation’s Low Income Taxpayer Representation Workshop.

At the Workshop, we gathered individuals in IRS Chief Counsel, LITC personnel, Taxpayer Advocate Service representatives, private practitioners, law school professors and others interested in discussing CDP reform.  The Workshop included breakout sessions where the group solicited feedback and asked if individuals were willing to volunteer for committees that would discuss CDP issues and bring potential solutions to the IRS for evaluation.  You can still sign up – send me an email:  schmidtw at klsinc.org.

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This year, there were some setbacks from the COVID-19 pandemic and shifts in the leadership of the CDP Summit Initiative.  While the larger discussion in the tax arena during this year has been on various pandemic issues regarding the distribution of Economic Impact Payments and interruptions of IRS services, we do believe that problems in CDP areas will be another tax concern resulting from the pandemic.  As taxpayers face difficult economic times based on unemployment or other financial situations, that will ultimately result in tax issues dealt with in the CDP process. 

Most recently, there has been a small group working to continue the focus on CDP issues and advance goals from the Summit Initiative.  We are working to build out our committees and regularly seek for people to contact us if they would like to take part.  An additional goal has been to organize and submit the findings from the breakout sessions for you to read.  For those efforts, I would like to thank Matthew James, Low Income Taxpayer Clinic Director at North Carolina Central University School of Law and Nikki McCain, in private practice and former Low Income Taxpayer Clinic Director at the University of South Dakota School of Law.  They are helping to drive CDP Summit Initiative efforts and edited these session reports.

As we provide you with the reports from the breakout sessions, we also included the introductory notes from the session descriptions to give you context and acknowledge the session leaders.  Thank you also to Erin Stearns and Christine Speidel for providing the notes for their sessions that made up these reports.

Today’s post will provide the reports of the breakout groups discussing notices and the administrative process.  Tomorrow’s post will discuss the report of the litigation breakout group.

Breakout: Improving IRS CDP Notices and Communications

Panelists: William Schmidt, Jeff Wilson, Beverly Winstead

This session will educate participants about IRS communication approaches as they pertain to CDP rights and procedures and known issues with the communications. The session leaders will facilitate an exchange of ideas for more effective messaging to increase taxpayer participation in CDP and more effective engagement with Collections at the earliest possible stage.

Prompts provided by the steering committee.

  1. IRS Publications and Website:
    1. Improve communication effectiveness of CDP publications and IRS website’s CDP content to educate taxpayers to make informed procedure choices;
    1. Emphasize to taxpayers and practitioners the importance, at the earliest possible stage, of creating a comprehensive record supporting a fair and sustainable collection alternative.
  2. IRS Notices (Section 6320 –lien and 6330 –levy). Improve CDP notices to look less like a bill for tax, with CDP hearing rights offered later in the notice without highlight or comment about the value of exercising CDP rights. For example, among other strategies and tactics, pursue the rights-based notice test developed by TAS that was suspended.
  3. IRS Form 12153: Revise CDP hearing request Form 12153, without losing its ease of completion, to make it more functional for the taxpayer. Potential changes include content clarifying lien vs. levy circumstances and explaining collection alternatives.

During this session, the group brainstormed revisions to the CDP Notices, which included:

  • Work towards simpler, layman’s notification letter available in various languages (as required by IRM 22.31.1.1.5.1, but also noting issues with determining taxpayers’ primary language), including term definitions such as garnishment;
  • Notice should clearly explain information to taxpayers and representatives and provide the expectations at and from a CDP hearing. Such information may include:
    • What can be achieved through a CDP hearing; 
      • E.g., collection alternatives available, methods of addressing liens (discharge, subordination, withdrawal, and explanations), ability to address issue of liability.
    • What documents IRS will require and why they need them;
    • What else taxpayers need to do to prepare for their CDP hearings.
      • Note: this information is not readily available on the IRS website. Pub 1660 addresses CDP hearings but could more plainly and thoroughly explain the process and options involved, e.g., Pub. 1660 does not mention Currently Not Collectible status at all.
  • Adjust the appearance of the notice informing the taxpayer of the right to request a CDP hearing (e.g., emphasize the difference/importance of the notice so the taxpayer does not disregard this notice as they would other notices);
  • Add a cover letter to the notice that explains taxpayer rights, collection alternatives (written in bold), availability of LITCs, and references important information listed elsewhere;
  • Appeals should be more consistent in acknowledging when it receives CDP cases;
    • E.g., standardize the letter that indicates the CDP hearing is in progress.
  • Develop a mechanism for taxpayers and representatives to track case status similar to the “Where’s My Refund” tool on the IRS website;
    • Alternatively, a call-in line to track CDP hearing status based on an assigned CDP hearing number.
  • Include contact information for LITCs that serve the taxpayer’s geographic area as part of the notices giving the taxpayer a right to a CDP hearing (LT 11 or Letter 1058).
    • Appeals could send out the current IRS Pub. 4134, which lists all LITCs by state but does not indicate each LITC’s geographic coverage area. Some attendees expressed concerns that Pub. 4134 is too long to send with CDP notices. As something of an aside, someone suggested it would be helpful to modify Pub. 4134 to better indicate each LITC’s geographic coverage area.

The group then discussed potential modifications to Form 12153, Request for a Collection Due Process or Equivalent Hearing:

  • Changing the “I can’t pay” answers to add a Comment box rather than an “other” box in order to better explain the situation;
  • Possibility of adding a collection information statement (e.g., 433-F) with Form 12153.

The group also developed questions for the Service:

  • Are there ways to get clients to respond to notices sooner or convince them to open letters faster?
    • Perhaps there is a way to emphasize taxpayer rights, such as printing on the outside of the envelope or putting in a different stuffer notice.

Breakout: Improving CDP Administrative Proceedings

Panelists: Soree Finley, Susan Morgenstern, Erin Stearns

Participants will learn about opportunities for more effective engagement with IRS Appeals, including when a taxpayer may challenge the accuracy of an assessed liability, the critical role of a record in establishing a sustainable collection alternative to immediate full payment, and procedural traps for the unwary. Participants will collaborate to identify improvements yielding more efficient and effective application of CDP through constructive interaction between taxpayers (or their representatives) and Appeals.

This breakout session was very well attended with approximately 35 attendees (standing room only). The discussion was built around the three priorities identified by the Steering Committee, then transformed into the following questions:

  1. What if IRS expanded telephone outreach efforts and contacted taxpayers in CDP to request a completed Form 433-F or -A?
    1. IRS could proactively assist taxpayers early on with a sustainable collection alternative. If no collection alternative results, then IRS could assign a settlement officer for a CDP hearing.
  2. How could the IRS better promote availability of LITC assistance earlier in the CDP process?
  3. What could be done to educate taxpayers and representatives on how to challenge liability through CDP?

The discussion focused most on the first question. The group spent some time discussing pre-CDP hearing screening measures but primarily discussed work with Appeals generally and improvements to the Appeals process. On this question, the group offered the following suggestions:

  • Remedy some of the staffing challenges by hiring more Settlement Officers;
    • Noted effects of staffing challenges included instances where settlement officers missed CDP hearings without advanced warning and delays in processing hearings and receiving communications scheduling hearings.
  • IRS should consistently apply pre-CDP hearing screening by geographic region;
    • Attendees from all over the U.S. in the breakout session and many indicated they had never been contacted by an IRS employee screening the case prior to sending it to a Settlement Officer for a full-blown hearing, and overall the group expressed interest in having the IRS do this.
    • One concern expressed by a participant was that taxpayers (and perhaps representatives) might feel railroaded by the screening person into agreeing to a collection alternative that might not be the best long-term option. However, most of the group welcomed the idea of being able to resolve cases without a full-blown CDP hearing.
  • Allow representatives (even if just at LITCs) to engage in email dialogue with IRS;
    • This could enable an LITC representative to receive emails from either Collections or Appeals – verifying that the CDP hearing was timely requested, identifying what needs to be submitted, and allowing representatives to submit documents via email.
    • Alternatively, develop an online portal system, like medical providers, which allows taxpayers and representatives to engage with the IRS in a secure setting, and to upload documents, receive messages, schedule phone calls or in person appointments at a Taxpayer Assistance Center, etc. CDP hearings could be handled through such a portal more efficiently than they are handled now and with required privacy protections.
    • Briefly discussed that not all taxpayers are connected and online and there would still need to be opportunities for less connected taxpayers to engage that do not require online interaction.
  • Appeals should provide more face-to-face hearing opportunities (in-person or virtual), which several attendees indicated, were useful for taxpayers facing anxiety;
  • Improve interpreter services available to taxpayers with language barriers.
    • Taxpayers should not have to provide their own interpreters for CDP hearings.

The next question addressed how the IRS could better promote availability of LITC assistance earlier in the CDP process. The group provided the following suggestions:

  • Better inform Appeals offices of LITCs, the location of local LITCs, and the work performed by LITCs;
    • Attendees discussed that the Taxpayer First Act now permits all IRS employees, including those within Appeals, to inform taxpayers of not just the presence of LITCs, but to tell them about LITCs local to them who might be able to help them.
  • Discussed whether more involvement with taxpayers in CDP would be undesirable on any level, e.g., increasing workload in an undesirable way, but attendees did not see this as a problem and indicated they would like to be involved in CDP cases earlier so they could provide more assistance.

Sixth Circuit to (Maybe) Decide Whether Taxpayers Who Don’t Receive a Notice of Deficiency Can Contest an Underlying Liability in a CDP Hearing

We welcome first-time guest blogger Chaim Gordon, a solo tax controversy attorney. In his practice, Chaim represents individuals and small businesses in civil tax audit and litigation matters nationwide. Chaim regularly blogs about tax procedure matters on his Tax Cases & Controversies blog. Keith.

In a case currently pending before the Sixth Circuit, the taxpayer makes the novel argument that a taxpayer can contest an underlying liability in a CDP hearing even if the taxpayer had a prior opportunity to contest the liability before the IRS Appeals Office. The case is Patrick’s Payroll Services, Inc. v. Commissioner, No. 20-1772 (6th Cir.), and the parties have filed their opening briefs. This post discusses the arguments advanced by the parties in their respective briefs and offers some critiques. This is a case to watch with potentially significant ramifications for how certain tax cases are resolved, both administratively and judicially.

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Background:

Generally, the IRS is required to issue a notice of deficiency to taxpayers before assessing additional tax on a taxpayer. See IRC §§ 6212, 6213. The notice of deficiency is the taxpayer’s ticket to the Tax Court. Without it, a taxpayer must generally fully pay the assessed tax before suing for a refund. See Flora v. United States, 362 U.S. 145 (1960). In some situations, however, the IRS may assess tax on a taxpayer without using the deficiency procedures. One such situation that commonly arises is where the IRS assesses a trust fund recovery penalty under section 6672 on a responsible person. Typically, the IRS gives taxpayers facing the assessment of a trust fund recovery penalty an opportunity to contest the penalty in the IRS Appeals Office.

Taxpayers facing such assessments understandably would like to contest such assessments in a prepayment, judicial forum. Specifically, such taxpayers would like to contest such assessments in a collection due process (“CDP”) hearing, which is subject to judicial review. See IRC § 6330. Unfortunately for such taxpayers, the Tax Court, in Lewis v. Commissioner, 128 T.C. 48 (2007), held that a taxpayer is not permitted to challenge an assessed tax in a CDP hearing if the taxpayer had a prior opportunity to contest the assessed tax before the IRS Appeals Office. In doing so, the Tax Court upheld the validity of Treas. Reg. § 301.6320-1(e)(3), Q&A-E2, which provides that the “opportunity to dispute” referred to in section 6330(c)(2)(B) includes an opportunity to dispute the underlying liability administratively. The holding in Lewis was later affirmed by three circuit courts of appeal. See Our Country Home Enterprises Inc. v. Comm’r, 855 F.3d 773 (7th Cir. 2017); Keller Tank Services II Inc. v. Comm’r, 854 F.3d 1178 (10th Cir. 2017); and Iames v. Comm’r, 850 F.3d 160 (4th Cir. 2017).

In a 2018 Tax Notes article, I argued that the Tax Court and the circuit courts misread section 6330(c)(2)(B) by ignoring its first disjunctive test. In describing the issues that may be raised in a CDP hearing, section 6330(c)(2)(B) provides that:

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

I argued that section 6330(c)(2)(B) imposes a disjunctive test. That is, section 6330(c)(2)(B) allows a taxpayer to contest the underlying liability if either (1) the taxpayer did not receive a notice of deficiency, or (2) the taxpayer received a notice of deficiency but did not have an opportunity to contest the underlying liability for some other reason. Read this way, a taxpayer who has not received a notice of deficiency may contest an underlying liability in a CDP hearing even if the taxpayer had a prior opportunity to contest the underlying liability before the IRS Appeals Office. Surprisingly, the Tax Court and the three circuit courts of appeal never explained why section 6330(c)(2)(B) did not impose a disjunctive test.

In my article, I concluded as follows:

Lewis and the circuit court cases entirely fail to address why the taxpayers in each case did not satisfy the first disjunctive test for challenging the tax or penalty in a CDP hearing under section 6330(c)(2)(B). Responsible persons everywhere deserve to know why they are being deprived of the opportunity to obtain prepayment judicial review in contravention of what appears to be an express statutory provision granting them that opportunity.

Presumably, the courts failed to address this argument in those cases because the taxpayers failed to argue it. But a new case pending before the Sixth Circuit may force the courts to finally address the plain meaning of section 6330(c)(2)(B).

New case in the Sixth Circuit:

A corporate taxpayer in the Sixth Circuit that did not receive a notice of deficiency but had an opportunity to contest the underlying liability in the IRS Appeals Office recently argued that it should be allowed to contest its underlying liability in a CDP hearing because section 6330(c)(2)(B) imposes a disjunctive test. The taxpayer’s and the government’s opening briefs have both been filed, and it is time to evaluate the strength of the arguments put forth by the parties. The case has not yet been set for oral argument, but argument was requested by the parties.

Procedural background:

In Patrick’s Payroll Services, the taxpayer attempted to contest its underlying liability for unpaid payroll and unemployment taxes and associated penalties in a CDP hearing, but the IRS Appeals Office determined that it could not do because the taxpayer had a prior opportunity to contest the underlying liability before the IRS Appeals Office. The Taxpayer petitioned the Tax Court and again argued that the IRS Appeals Office should have allowed it to contest the underlying liability in a CDP hearing.

The IRS filed a motion for summary judgment, arguing that, under Lewis, the taxpayer could not contest the underlying liability because the taxpayer had a prior opportunity to contest the underlying liability before the IRS Appeals Office. In response, the taxpayer argued that the prior “opportunity to dispute” the tax liability described in section 6330(c)(2)(B) “must mean judicial review, not review by the Internal Revenue Service itself.” Although acknowledging that Treas. Reg. § 301.6330-(e)(3), Q&A-E2, as well as applicable Tax Court precedent, provide otherwise, the taxpayer noted that the Sixth Circuit has not yet opined on the validity of Treas. Reg. § 301.6330-(e)(3).

The Tax Court entered a memorandum opinion granting the IRS’s summary judgment motion. See Patrick’s Payroll Services, T.C. Memo. 2020-47. The court stated that it has “consistently rejected” the argument an opportunity to contest an underlying liability before the IRS Appeals Office is not a prior “opportunity to dispute” a tax liability within the meaning of section 6330(c)(2)(B).

Taxpayer filed a timely motion for reconsideration of the Tax Court’s opinion. See Tax Ct. R. 161. In the motion, the taxpayer argued that it did not matter whether it had a prior “opportunity to dispute” the tax liability underlying the IRS’s collection action because section 6330(c)(2)(B) must be read disjunctively and it had not received a notice of deficiency. The Tax Court denied the taxpayer’s motion for reconsideration, and the taxpayer appealed to the Sixth Circuit.

The taxpayer’s opening brief:

The taxpayer’s opening brief argued that section 6330(c)(2)(B) should be read as imposing a disjunctive test for two reasons:

First, courts generally read the word “or” as “and” only when the reading the “or” as a disjunctive would lead to absurd results. See, e.g., OfficeMax v. United States, 428 F.3d 583, 590 (6th Cir. 2005). For example, in United States v. Woods, 571 U.S. 31, 45, (2013) (quoting Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979)), the Supreme Court stated as follows:

Moreover, the operative terms are connected by the conjunction “or.” While that can sometimes introduce an appositive—a word or phrase that is synonymous with what precedes it (“Vienna or Wien,” “Batman or the Caped Crusader”—its ordinary use is almost always disjunctive, that is, the words it connects are to “be given separate meanings.”

Second, reading the word “or” in section 6330(c)(2)(B) as imposing a conjunctive test would render the first part of such test—i.e., the phrase “did not receive a notice of deficiency”—superfluous because any taxpayer who received a notice of deficiency had a prior opportunity to contest the underlying liability by filing a petition with the U.S. Tax Court.

The government’s brief:

The government’s brief argued that the court should affirm the Tax Court for two reasons: (1) the taxpayer forfeited its argument by failing to timely raise it below, and (2) section 6330(c)(2)(B) is properly read as imposing a conjunctive test.

The taxpayer forfeited its argument by not timely raising it below.

The government’s first argument in opposition of the taxpayer’s appeal in this case is that the taxpayer forfeited its “novel statutory argument” by failing to timely raising it before the Tax Court and only raised it in a motion for reconsideration. See Evanston Ins. Co. v. Cogswell Properties, LLC, 683 F.3d 684, 692 (6th Cir. 2012). The government noted that, although the rule an argument cannot be raised for the first time in a motion for reconsideration is prudential rather than jurisdictional, this is not an exceptional case.

The government further noted that the Sixth Circuit held that the Tax Court did not abuse its discretion by entertaining the IRS’s motion for reconsideration in Law Office of John H. Eggertsen P.C. v. Commissioner, 800 F.3d 758, 765–66 (6th Cir. 2015), because that motion was to correct “errors of law.” But the government argued that a court is not required to, and should generally not, entertain such motions. The government’s brief does not explain why, however, there should be one rule for motions for reconsideration by the IRS and another rule for motions for reconsideration by taxpayers. If the IRS can file a motion for reconsideration for errors of law of its own making, then taxpayers should be offered the same courtesy.

Section 6330(c)(2)(B) does not impose a disjunctive test.

The government’s second argument is that—even if the court considers the taxpayer’s argument—the court should reject it because section 6330(c)(2)(B) is properly read as imposing a conjunctive test. Specifically, the government argued as follows:

“[T]he word ‘or’ is often used as a careless substitute for the word ‘and’; that is, it is often used in phrases where ‘and’ would express the thought with greater clarity.” De Sylva v. Ballentine, 351 U.S. 570, 573 (1956). Where, as here, “the statute requires proof of a negative,” the word “or” is often read conjunctively. Valadez-Lara v. Barr, 963 F.3d 560, 567 (6th Cir. 2020). For instance, if someone says, “I don’t like apples or oranges,” no one would reasonably interpret this to mean that they find one of either apples or oranges distasteful. They mean that they dislike apples and they dislike oranges.

The government, however, ignores a crucial distinction between “I don’t like apples or oranges” and “I don’t like apples or don’t like oranges.” In the former case, De Morgan’s theorem applies. In the latter case, De Morgan’s theorem is inapplicable. Section 6330(c)(2)(B) is written like the latter case, not the former case. Thus, the government’s apples and oranges example is, pardon the pun, comparing apples to oranges.

(For those wondering, De Morgan’s theorem states that the negation of a disjunction is the conjunction of the negations and the negation of a conjunction is the disjunction of the negations. See O’Donnabhain v. Comm’r, 134 T.C. 34, 81 (2010) (Halpern, J., concurring) (“In formal logic, there is a set of rules, De Morgan’s laws, relating the logical operators ‘and’ and ‘or’ in terms of each other via negation. . . . . The rules are: [1.] not (p or q) = (not p) and (not q) [and 2.] not (p and q) = (not p) or (not q)”); Antonin Scalia and Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 119 (2012) (“The principle that ‘not A, B, or C’ means ‘not A, not B, and not C’ is part of what is called DeMorgan’s theorem.”).)

The government alternatively argues that the inclusion of the word “otherwise” indicates that Congress only intended to provide an example of not having an opportunity to contest a liability. The government offers the following example: Suppose a person offers “I will pick you up if you don’t have a car or if you don’t otherwise have some way of getting here.” In this case, the government argues that someone who had a truck would clearly not be included in the offer simply because that person lacked a car. The reference to having a car is just included as an example of a common means of having some way to get there.

The government’s brief cites a 2003 Tax Court opinion that adopts this reading of section 6330(c)(2)(B). (I unfortunately missed this opinion when I was drafting my article and therefore failed to address the reading it suggests there.) In that opinion, the Tax Court stated as follows:

Section 6330(c)(2)(B) plainly sets forth a single operative criterion, in the form of a stricture: the person seeking to challenge the underlying tax liability in a collection proceeding must not have had another opportunity to raise the challenge. Presumably for the sake of clarity and emphasis, the statute refers particularly to persons who have not received notices of deficiency while referring more generally to persons who “otherwise” lacked opportunities to dispute their tax liabilities. Contrary to petitioners’ argument, however, these references do not denote separate criteria; they merely circumscribe the two categories of persons that, taken together, make up the complete class of persons who satisfy the single operative criterion.

Oyer v. Comm’r, T.C. Memo 2003-178.

Even if this is a possible reading of the phrase “or did not otherwise,” there is no reason to assume that this is how the phrase is commonly understood. Indeed, a quick Google search of the phrase “or did not otherwise” did not turn up any examples where that phrase cannot be read disjunctively. See, e.g., here and here. And many Tax Court cases—including some that cite to Oyer—simply express section 6330(c)(2)(B) in the conjunctive and do not suggest that there is only one criteria—i.e., not having an opportunity to contest the underlying liability. See, e.g., Streiffert v. Comm’r, T.C. Memo. 2014-62 (“Section 6330(c)(2)(B) provides that the taxpayer may contest the existence and amount of the underlying tax liability, but only if the taxpayer did not receive a notice of deficiency and ‘did not otherwise have an opportunity to dispute such tax liability.’” (citing Baltic v. Comm’r, 129 T.C. 178 (2007), and Oyer v. Comm’r, T.C. Memo. 2003-178)).

Moreover, if the government is correct that the phrase “did not receive any statutory notice of deficiency for such tax liability” is merely an example of someone who “did not otherwise have an opportunity to dispute such tax liability,” then it should follow that the opportunity to dispute a liability referred to is—like a notice of deficiency—an opportunity to judicially contest the underlying liability. In a universe that contains opportunities to dispute a liability that give you a ticket to the Tax Court and opportunities to dispute a liability that do not give you a ticket to the Tax Court, it is curious that Congress chose to give as its sole example an opportunity that provides a ticket to the Tax Court. The logical takeaway would seem to be that the opportunity to contest the underlying liability being referred to in the statute is one that, like a notice of deficiency, provides the taxpayer with an opportunity to judicially contest the liability. This would, of course, contradict the regulation upheld by the Tax Court in Lewis and three circuit courts of appeal that provides that an opportunity to contest an underlying liability before the IRS Appeals Office constitutes a prior opportunity under section 6330(c)(2)(B). See Treas. Reg. § 301.6330-(e)(3), Q&A-E2.

By contrast, in the government’s illustration, “I will pick you up if you don’t have a car or if you don’t otherwise have some way of getting here,” cars and trucks are functionally identical. In that case, having a car is a valid example for a set that also includes having a truck. But it would not be a valid example for a set that included having a car, a truck, and feet. Clearly, the offeror intended to offer the ride even if the offeree could theoretically walk to his or her destination.

Finally, the government argued that the taxpayer’s interpretation of section 6330(c)(2)(B) would mean that those who simply received a deficiency notice would not be precluded from challenging their liability in a CDP case unless they also were given a second opportunity to dispute the liability. This appears to be an incorrect result. See Treas. Reg. § 6330-1(e)(4), Example 1 (“The IRS sends a statutory notice of deficiency to the taxpayer at his last known address asserting a deficiency for the tax year 1995. The taxpayer receives the notice of deficiency in time to petition the Tax Court for a redetermination of the asserted deficiency. The taxpayer does not timely file a petition with the Tax Court. The taxpayer is precluded from challenging the existence or amount of the tax liability in a subsequent CDP hearing.”).

But I think that this argument shows that the government continues to misapprehend the plain meaning of section 6330(c)(2)(B). Under the plain meaning of section 6330(c)(2)(B) that I suggested in my article, a taxpayer can contest an underlying liability if (1) the taxpayer did not receive a notice of deficiency, or (2) the taxpayer received a notice of deficiency but—for some other reason—did not have an opportunity to contest the underlying liability. The latter case can refer to a situation where a taxpayer could not file a timely Tax Court petition for medical reasons (e.g., the taxpayer was in a coma for the 90 days following receipt of a notice of deficiency) or did not receive the notice of deficiency before the deadline for filing a timely petition with the Tax Court. See Treas. Reg. § 6330-1(e)(4), Example 2 (“Same facts as in Example 1, except the taxpayer does not receive the notice of deficiency in time to petition the Tax Court and did not have another prior opportunity to dispute the tax liability. The taxpayer is not precluded from challenging the existence or amount of the tax liability in a subsequent CDP hearing.”). Thus, in the ordinary case, a taxpayer who timely receives a notice of deficiency cannot contest the underlying liability in a subsequent CDP hearing.

Concluding thoughts:

We do not know whether the Sixth Circuit will take this opportunity to decide whether a taxpayer can contest an underlying liability if the taxpayer did not receive a notice of deficiency but had an opportunity to contest the underlying liability before the IRS Appeals Office. But even the government’s brief indicates that the court could decide the issue if it chooses to do so. In any event, similarly situated taxpayers would be well advised to argue that section 6330(c)(2)(B) imposes a disjunctive test in their merits briefs before the Tax Court.

But if the Sixth Circuit agrees to decide this issue in this case, the ramifications may be significant with respect to how certain tax cases are resolved, both administratively and judicially. In my view, the court should only adopt the government’s “contextualized” reading of section 6330(c)(2)(B) if the court cannot accept an alternative reading that gives meaning to both prongs of section 6330(c)(2)(B). Because I believe that the taxpayer has advanced such an alternative reading, the court should conclude that a taxpayer who has not received a notice of deficiency can contest the underlying liability in a CDP hearing even if the taxpayer had a prior opportunity to contest the liability before the IRS Appeals Office.