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.

Bad Dates Followed by Bad Inserts

One of the excuses the IRS put forward in conjunction with the relatively quiet announcement that it would send out a high volume of notices with bad dates involved the stuffers that it would put in each envelope. As I wrote yesterday, these stuffers explained that the taxpayer should not pay attention to the date on the letter (and in the IRS case management database) but rather rely on the stuffer for guidance on which the taxpayer must perform the statutorily mandated action related to the notice. The stuffers themselves raised some questions discussed in yesterday’s post.

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Subsequent to the sending of the letters with bad dates on July 14, 2020, the IRS announced that “whoops”, it failed to put the stuffer notice into certain of the Collection Due Process (CDP) notices it sent.  Of course, the CDP notice creates a very short window for the taxpayer to take action in order to preserve their rights.  After failing to put the stuffer notice into these statutorily mandated letters with dates that might have been two or three months before the mailing (or longer), the IRS sought to correct that mistake by sending out a subsequent letter informing these taxpayers that they had more time.  Unfortunately, this correcting letter had the wrong date for the last date to perform the statutorily mandated act.  I will let the IRS letter do the talking:

To correct this issue with the CP90, CP90C and CP297 notices, a supplemental Letter 544-C was generated on August 6, 2020 and mailed on August 7, 2020, advising taxpayers that they have until September 8, 2020 to request a CDP hearing. In some cases, the Letter 544-C advised taxpayers they had until September 7, 2020. September 7 is Labor Day and pursuant to IRC section 7503 the due date for the hearing is the next business day, which is September 8. Issuance of the Letter 544-C is posted on IDRS command code ENMOD with the literal 0544CLTR for the date generated. Refer to IRM 5.19.9.3.3, FPLP Systemic Processes and Indicators, and IRM 5.19.9.2.4, SITLP Notices, for information regarding TC 971 action codes associated with SITLP and FPLP notices.

The Memorandum for Director, Campus Collection and Director, Field Collection from the Acting Director of Collection Policy detailing the snafu is dated September 3, 2020 and is linked here.  The Memorandum does contain a copy of the supplement letter.  It is not at all clear that the envelope containing the supplemental letter included a copy of the original backdated CDP notice.  Let’s look at what these taxpayers will have received.

On July 14, 2020, the IRS mailed CDP notices to taxpayers that had queued up in its computer system for months during the period of time the IRS employees stayed home due to the pandemic.  The CDP notices could have been dated as early as March.  That CDP notice would have told the taxpayer they had until 30 days after the date of the notice to request a CDP hearing.  So, for example, a letter dated March 30 and arriving sometime in mid-July to late July would have told the taxpayer to request a hearing by April 29.  Since there was no stuffer notice in the envelope the taxpayer, who probably doesn’t subscribe to PT or the National Taxpayer Advocate’s blog or other sources of news about the millions of letters sent out with wrong dates, would possibly give up assuming it was a missed opportunity.

Then, three or four weeks later the taxpayer would receive another letter of some type stating that they had until September 7 or September 8 to file a CDP request.  (The IRS sent the “new” CDP letters on August, 7 and that’s why it calculated the last date as September 7, a Monday since 30 days from August 7 would have fallen on Sunday, September 6.  Unfortunately, the creator of the stuffer notices did not fully appreciate the calendar.  Because September 7 was Labor day, the last day to request a CDP hearing would fall on the next working day, per IRC 7503, which would be September 8, 2020.) This could have created significant confusion among the taxpayers I represent.  This is just one of the many problems created by mass mailing notices with the wrong dates.  On top of this problem the IRS is out potentially collecting on these individuals because they did not request a CDP hearing by April 29.  (Tomorrow’s post will talk about a postponement of collection for some that might have benefited these taxpayers.)

The pandemic put the IRS in a bad spot, but it is making things much worse for itself and others by sending out bad notices and by sending out its collectors before it finishes going through the backlog of mail.  It would be nice to see them push the reset button and figure out how to protect taxpayer rights during a pandemic.  By failing to include the stuffer in all of the notices and by failing to calculate the proper date on the notices the IRS compounded the mistake created by its decision to send out notices with bad dates. 

The confusion surrounding the dates on the notices and the dates on the stuffers may provide a basis for requesting a CDP hearing beyond the date on the notices.  In partial recognition of the confusion, a September 3, 2020 memo by SBSE stated that all CDP requests filed on or Before September 8, 2020 where the IRS issued letters CP90, CP 90C, or CP297 dated in the period April 3, 2020 to July 13, 2020 would be deemed timely.  The SBSE memo shows that the IRS has the ability, without even invoking IRC 7508A, to extend the time for a taxpayer to receive a CDP hearing.  The IRS should be generous in its determination of CDP requests and err on the side of accepting such requests during this period rather than reverting to its practice of denying such requests if a day late.  Similarly, taxpayers should push back if denied a CDP hearing given the confusion that has occurred because of the pandemic.

An Update on the Post Reporting on the sending of Notices with Bad Dates

On June 30, 2020, I wrote a post discussing the IRS’s decision to send out millions of notices with bad dates.  I believe this was a bad idea for the reasons articulated in the post; however, new information suggests that the problem did not extend as far as I reported in the June post.  Last week, I was on a panel at the ABA Tax Section meeting regarding these notices.  One of my co-panelist, Julie Payne, who serves as the Tax Litigation deputy to the head of the SBSE division of Chief Counsel, had updated information on the notices I wrote about in the earlier post.  In that post I relied for my information on a post by the National Taxpayer Advocate.  Based on Julie’s information, the IRS did not send out as many notices with bad dates as was first thought.  In this post I will explain what happened in the sending of the notices with bad dates in greater detail based on the information now available to me.

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The initial reporting of this issue placed the number of notices with bad dates as exceeding 20 million.  The IRS term for these notices is backlogged.  Some have described them as backdated.  The IRS computers generated these notices during the period of the IRS shut down.  When IRS employees began returning to work, they found that the computer system had queued the notices waiting for the employees to print and mail them.  The computer had not caused the printing of the notices and the IRS had to decide whether to print them or not but, if printed, they would bear the date the computer generated the notice and not the date the IRS printed them for mailing.  The IRS decided not to print the vast majority of the notices but to regenerate those notices at a future time with a date coextensive with their mailing.

Apparently, the IRS decided to print certain statutorily mandated notices.  I imagine the IRS obtained a legal opinion concerning the printing of these notices with dates as much as three and one half months before the time of mailing.  I have not seen the legal advice rendered.  The IRS mailed most, and maybe all, of the notices with the bad dates on July 14, 2020.  These statutorily mandated notices came in three types: 1) notice and demand – letters CP14 (individuals) and CP16 (businesses); 2) math error/notice and demand combination letters; and 3) CDP levy notices – letters CP90; 90C; 297; 297-A and 297-C.  Instead of printing 20 million notices with wrong dates, it printed and mailed about 1.5 million notices from these three types.  The vast majority of the notices the IRS printed and mailed were notice and demand letters.  That makes sense because the statute requires the sending of that notice with every assessment where an outstanding balance exists.

Notice and Demand

Knowing it was sending out notices with bad dates, the IRS created an insert, or stuffer, to go in each envelope.  Each type of letter had a different insert.  The notice and demand letter had Notice 1052-A inserted into the envelope.  This notice tells the recipient that for certain liabilities, including 2019 income taxes, the IRS will not charge interest and penalties if the taxpayers pay the liability prior to July 15, 2020.  For assessments based on older liabilities or certain types of taxes, such as employment taxes, the taxpayer needed to pay by July 10 to avoid penalties.  Of course, taxpayers would receive the letter after these dates have passed if the letters, together with the inserts, were mailed on July 14.  So, the insert to the notice and demand letter would alert taxpayers that interest and penalties would not run from the date on the letter, but the insert would not have given the taxpayer the opportunity to pay prior to the time interest and penalties would begin to run.  The timing of interest and penalties here is governed by the invocation of IRC 7508A as we discussed here in Notices 2020-18 and 2020-20.  To change that timing the IRS would have had to issue another notice like Notice 2020-18 giving taxpayers more time to pay and it did not do that.

Math Error Notices

In the envelope containing the Math Error notices, the IRS inserted Notice 1052-B.  Like the notice inserted into the Notice and Demand letter envelope, this notice explains that the pandemic has caused the IRS to mail the Math Error notice later than the date on the letter and notes that the 60 days from the letter may have already run.  The insert gives the taxpayers until August 21 to respond to the Math Error notice instead of the date 60 days from the date on the Math Error notice itself.  IRC 6213(b)(2) gives a taxpayer 60 days to request an abatement of a math error assessment:

(2) Abatement of assessment of mathematical or clerical errors

(A) Request for abatement

Notwithstanding section 6404(b), a taxpayer may file with the Secretary within 60 days after notice is sent under paragraph (1) a request for an abatement of any assessment specified in such notice, and upon receipt of such request, the Secretary shall abate the assessment. Any reassessment of the tax with respect to which an abatement is made under this subparagraph shall be subject to the deficiency procedures prescribed by this subchapter.

I am concerned about this if I understand the timing of the mailing correctly. Consider an example: if the IRS computer generated a Math Error notice with a date of April 10 giving the taxpayer 60 days to respond, and thus triggering the sending of a statutory notice of deficiency, is instead sent on July 14 ((i.e., until the August 21 date I mention above). I do not understand why the recipient would not have 60 days from July 14 instead of 38 days.  I am unsure if I misunderstood the date of mailing of these Math Error notices with bad dates or if the IRS chose to give taxpayers less than the statutorily mandated time to respond to the Math Error notice or if some other explanation exists.  I do not see how the IRS could cut short the time within which the taxpayer could object to the Math Error notice no matter what date appears on the notice itself.

CDP Notices

In the envelope containing the CDP notices the IRS inserted Notice 1052-C.  This insert also explains to the taxpayer that the taxpayer should not be concerned by the date on the CDP notice itself and gives the taxpayer until August 13, 2020, to file a CDP request that will result in a hearing that will allow the taxpayer to go to Tax Court if the taxpayer does not agree with the result.  In other words, the taxpayer has until August 13 to request a CDP hearing rather than an equivalent hearing.  Here the date the IRS provides in the stuffer for timely requesting a CDP hearing perfectly matches with the timing of mailing of the CDP notice on July 14.  This provides support for the timing of the mailing of the documents on that date.

As we have discussed before, the date to request a CDP hearing is not a date that creates a jurisdictional time frame.  Taxpayers might miss this date for good reason and still request a CDP hearing.  Tomorrow, I will discuss how the IRS made mistakes in the mailing of the CDP notices and how it corrected the mistakes giving taxpayers more time to make the CDP request.  Keep in mind that even that additional time might have the possibility of extension under the right circumstances based on the arguments in the post linked above.

Trust Fund Recovery Penalty Case Wins a Remand in Prior Opportunity CDP case

In the case of Barnhill v. Commissioner, 155 T.C. 1 (2020) the Tax Court determined that the taxpayer never received the letter from the IRS scheduling the conference to dispute the Trust Fund Recovery Penalty (TFRP).  Because the taxpayer did not receive that letter, the taxpayer did not have a prior opportunity to dispute the merits of the TFRP.  Because the Settlement Officer in the Collection Due Process case refused to hear the merits of the TFRP based on the position that the taxpayer had a prior opportunity to dispute the TFRP in Appeals, the Tax Court remanded the case to Appeals to give the taxpayer an opportunity to contest the merits.  Bryan Camp wrote an excellent post on this case which you may want to read instead of this one, but I will try to cover slightly different ground.

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The Barnhill case arose in Richmond, Virginia.  I had lunch with Mr. Barnhill’s attorney not long after the opinion was issued.  He indicated that after the opinion, the parties reached a basis for settlement and described the settlement to me.  The Tax Court docket sheet does not yet reflect a settlement but sometimes the settlement of a case can move slowly and particularly now.  The settlement shows the benefit of CDP in a way that we do not talk about often and the prior opportunity aspect of this case stands in contrast to another TFRP case involving prior opportunity now pending before the 4th Circuit.

Mr. Barnhill requested a hearing with Appeals to talk about the imposition of the TFRP against him.  He felt and his ultimate settlement suggests that the TFRP proposed against him was too high.  For reasons unknown he did not receive the invitation to the hearing offered by Appeals.  Because he did not respond to the offer of the hearing, Appeals quite rightly recommended the assessment move forward, which led to the filing of the notice of federal tax lien which led to his request for a CDP hearing. 

Because this is a TFRP case with a divisible tax at issue, Mr. Barnhill had a way to get into court to contest the liability without having to full pay the liability.  He did not face the same mountain of full payment faced by Lavar Taylor’s clients who tried without success to use CDP to resolve the merits of their tax liability as we discussed here, here and here.  Even without the full payment barrier, however, litigation in district court costs much more than litigation in Tax Court in almost every case and certainly more than an administrative hearing.  CDP offered him the chance to have his administrative hearing that he missed.  Once he missed the pre-assessment administrative hearing with Appeals, CDP provided, by far, the cheapest way for him to resolve his dispute over the liability.  It also provided the cheapest way for the IRS to resolve the dispute.

Not every taxpayer has a meritorious argument that the assessed amount overstates the correct liability.  I understand the desire to limit the use of Appeals resources and Counsel resources if a high percentage of cases seeking a merits review lack any merit.  I have no empirical evidence but do not believe that the majority of cases seeking a merits adjustment lack a basis for such an adjustment.  The IRS does taxpayers, and in many cases itself, a disservice by imposing regulations that limit the opportunity to come into Appeals in the CDP context and limit the opportunity to litigate in Tax Court.  Viewed through the lens of taxpayer rights, it has regulations that do not provide taxpayers with their full rights.  This is particularly true in cases with high dollar assessable, non-divisible penalties, but also applies in situations where a simple administrative visit could resolve a matter that otherwise requires expensive district court litigation.

Assuming the information provided to me that the Barnhill case has settled for an amount substantially lower than the assessed amount is correct, the case stands as an example of the benefit of CDP merits opportunities.  Instead of working hard to limit those opportunities, the IRS should reexamine its regulations, perhaps armed with empirical evidence I do not have, and create a better system than exists today.

This leads to the contrast between what has happened in Barnhill and what happened in a CDP case stemming from an Automated Underreporter assessessment, the Zhang case.  Zhang was decided by designated order rather than precedential opinion and was blogged by Caleb Smith here.  Like Mr. Barnhill, Mr. Zhang did not have a pre-assessment hearing with Appeals and sought to raise the merits of his assessment in a CDP case.  The facts in the Zhang case, however, differed slightly and that difference caused the Tax Court to deny him the opportunity to go back to Appeals to work out the issue.  As a result, he decided to take his case into the 4th Circuit (docket no. 20-01453) rather than to start over through the refund route (a route still theoretically open to him should he lose on appeal.)

Among other things, the Zhang case reinforces the importance of the Tax Court’s orders.  While the Barnhill case ends up as a precedential opinion, the Zhang case flies under the radar as an order, albeit a designated one.  In Mr. Zhang’s case he alleges that he did not receive the statutory notice of deficiency.  In most cases, but see the discussion on Landers here, that would afford Mr. Zhang the opportunity to have a hearing with Appeals regarding the merits of the assessment.  Mr. Zhang made a timely CDP request after receiving a notice of intent to levy and asked to discuss the merits of the assessment; however, the individual in Appeals handling his case for some reason did not consider the merits.  The Tax Court seemed to acknowledge that the Appeals mishandled this CDP hearing; however, Mr. Zhang did not petition the Tax Court after receiving the determination letter in this case.

He later received a notice of federal tax lien which caused him to file another CDP request.  He again sought to raise the merits of the assessment.  Here, he gets caught in a Catch-22 situation.  Appeals says maybe we should have listened to you last time, but that time serves as a prior opportunity and it’s too late to raise the merits now.  The Tax Court agreed with Appeals on this point.  The 4th Circuit will have an opportunity to rule on the outcome.

IRS – is this what you want?  Your mistake led the pro se Mr. Zhang to the wrong place and now you are arguing that because the pro se Mr. Zhang did not appeal your mistake he is out of luck on having a prepayment forum to fix his liability.  Yes, he could try audit reconsideration but why make him do that?  His case is an AUR case.  It should be relatively easy to determine if you agree.  Here is the maddening part of prior opportunity, and the game the IRS wants to play with it.  Let’s figure out a way to resolve these cases at the administrative level and not force people into court unnecessarily, particularly when the mistake started with the agency and not the individual.

Mr. Barnhill’s result shows the redeeming feature of CDP.  Mr. Zhang’s case shows the maddening aspect of how it is administered in some cases.  We can make it better.

Timely Requesting a CDP Hearing

Today we celebrate the 7th anniversary of procedurally taxing.  As we have mentioned before, the idea of the blog was the brainchild of Les Book.  Les, Steve and I were, and are, working on the treatise “IRS Practice and Procedure” that Les edits.  From the work we did keeping that treatise updated we decided to put up occasional posts on the new blog site.  From rather modest expectations the blog has grown well beyond our vision of the blog in 2013.  Thank you for joining us in talking, writing and thinking about tax procedure and trying to improve the way we navigate the tax system.  The blog is approaching 3000 subscribers.  Because of tax procedure issues raised by the pandemic, the blog has had many more visits in 2020 than any previous year.

In SBSE-05-0720-0049 the IRS announces changes to IRM 5.1.9.3.2 regarding the receipt of a request for a CDP hearing.  The changes result from Chief Counsel technical advice memorandum PMTA-2020-02, dated December 12, 2019.  The changes in the IRM take a narrow view of the timeliness of request for a CDP hearing and leave out broader issues of jurisdiction as well as of best practices.

We have discussed this issue previously here, here, here and here.  I wrote an article about this issue in Tax Notes in November of 2018 available here

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At one point the IRS took the position that in order to timely request a CDP hearing, the taxpayer had to mail the request to the proper address for requesting a CDP hearing as listed in the CDP notice.  One of the problems with this position stemmed from the CDP notice, which generally contained two or more addresses.  Because the CDP notice serves as much or more as a collection notice demanding payment as it does as a notice of legal rights to a hearing, the notice featured an address where the recipient could mail their payment.  Taxpayers regularly mailed their CDP request to the office listed for mailing payment instead of the office listed for sending the request as discussed here.  Although IRS employees were instructed to quickly resend the request to the appropriate office, this did not always happen.  When the notice reached the correct office after the 30-day period, the IRS argued that the taxpayer should receive only an equivalent hearing.

The PMTA and the changes to the IRM reflect a relaxation of the rule regarding receipt and allow as a timely request the mailing to any address on the CDP notice with a postmark by the 30th day after the notice.  This IRM provision, however, adheres to the narrowest interpretation of the PMTA.  It’s a good first step, but many taxpayers will send their requests to some other address or send it after the 30 days while having a good excuse.  The IRM also allows as timely CDP requests those requests that taxpayers timely fax to a fax number when the CDP request form provides such a number.

Taxpayers should make every effort to mail or fax their CDP request to the proper address or fax number on the CDP notice; however, if the CDP request did not get sent to an address or fax number on the CDP notice by the 30th day, the taxpayer should still consider arguing a timely mailed or faxed notice to the IRS should trigger a CDP hearing rather than an equivalent hearing.  Because the timely CDP request provides one step in the path to jurisdiction of the Tax Court in a CDP petition, the taxpayer should consider making equitable tolling arguments in appropriate circumstances.

The new IRM provisions will allow taxpayers who timely mail their CDP request to an address on the CDP notice; however, we know that many additional permutations exist that could cause late receipt of a CDP request by the IRS.  Because the making of a late CDP request to the IRS should not create a jurisdictional basis for barring a CDP hearing, taxpayers with a good excuse for lateness should seek to preserve their right to a CDP hearing by explaining to the IRS the reason for the late submission of the CDP request.  If the IRS persists in denying a CDP hearing and issues a decision letter rather than a determination letter, the taxpayer should file a petition with the Tax Court within 30 days of the decision letter seeking a determination from the Tax Court regarding the timeliness of the CDP request.  Assuming that the Tax Court agrees with the basis for the late CDP request, the Tax Court can determine that the taxpayer has met the criteria for making a CDP request and remand the case to Appeals for a CDP hearing.

The recent change to the IRS offers a good first step toward improvement of the process of obtaining a CDP hearing.  Taxpayers should continue pushing to make the process even better.

A Webber Update, Possible Pandemic Changes, and Conservation Easements: Designated Orders 5/11/20 to 5/15/20 and 6/8/20 to 6/12/20

There were 7 designated orders during the week I monitored in May and 1 designated order for the week I monitored in June (Mark Alan Staples order), covering a variety of topics.  We start with an order updating the Webber case and its Collection Due Process issues.  Next, is there a change in the Tax Court treatment of motions to dismiss during the COVID-19 pandemic?  Following that, there are conservation easement, innocent spouse and other cases to review.

A Webber Update

Docket No. 14307-18 L, Scott Allan Webber v. C.I.R., Order available here.

Previously in Procedurally Taxing, the Webber case prompted discussion and change regarding Collection Due Process (CDP) and jurisdiction in Tax Court.  I wrote here regarding the case and Judge Gustafson’s taking issue with a prior IRS motion to dismiss.  The motion to dismiss was based on an IRS notice concerning CDP rights that had 2 addresses listed, one to request a CDP hearing and the other to make payment to the IRS on the listed amount due.  Mr. Webber had attempted to submit his CDP hearing request, but wound up mailing it to the payment address by mistake.  Based on the request’s movement through the IRS bureaucracy, it arrived at the correct location but late enough to only allow Mr. Webber an equivalent hearing (limiting his access to Tax Court review).  After Judge Gustafson took the IRS to task on the motion to dismiss as being a harsh result for such a simple taxpayer mistake, the IRS withdrew their motion to dismiss.  Things were not done regarding CDP, though, as there was a CDP Summit Initiative Workshop where these types of issues with CDP notices were discussed (also here).  Keith wrote here that a result of this discussion led to a program manager technical assistant (PMTA) memo setting new IRS policy to determine timeliness of a CDP hearing request.  The new policy is based on the type of situation above – receipt of a CDP hearing request at an incorrect office when it was mailed to the incorrect office because of being an office listed on the notice. 

I would like to also announce that the IRS is making a revision to the Internal Revenue Manual at IRM 8.22.5.3 to reflect that PMTA memo.  The revision will be effective beginning July 6 and will be incorporated into the IRM within 2 years of the date of this memorandum, reflected here (this links to a Tax Notes article available only to subscribers). 

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Got that?  Because the current designated order has a change of topic.  This designated order’s topic is shift from jurisdiction to the topic of credit elects.

In fact, Mr. Webber is dealing with a credit elect dating back to 2003 (when it was $71,012).  Over the years, that credit elect was applied to each tax year until we are dealing with the tax year at issue and the question of whether a credit elect of $77,782 from 2012 applies to his 2013 tax return.  If so, it reduces his 2013 total tax of $5,690 so that there is a credit elect of $72,092 that would carry to the 2014 tax return.

The problem is that Mr. Webber has received conflicting messages from the IRS regarding allowance of the credit elect over the years.  Certainly, removing an earlier link in the chain of credit elects would affect the 2013 tax year.  Part of the problem is that the review by Appeals during his CDP hearing was not honoring a prior IRS letter allowing the credit elect for tax years 2004 and 2005.

This order deals with both an IRS motion for summary judgment and Mr. Webber’s response, which contains a motion to dismiss and a motion to remand.

Mr. Webber presents the issue raised, the availability of the credit elect for tax year 2013, as a challenge to the existence of an underlying liability.  He contends that no valid CDP hearing was conducted asking to dismiss for lack of jurisdiction, but also asking for a remand back to Appeals for them to take appropriate action.  The judge finds dismissal for lack of jurisdiction to be unwarranted.  Regarding remand, Judge Gustafson says it may or may not be necessary based on the IRS argument concerning the credit elect issue in the CDP hearing so no remand at this time.  Both motions are denied (the motion to remand denied without prejudice).

While the Court is not adjudicating Mr. Webber’s entitlement to the overpayment underlying the credit elect in 2013, the Court does have the responsibility to determine if the IRS allowed the overpayment but failed to credit it.  The Court states that is a genuine dispute of material fact since Appeals gave a statement in 2012 that they are allowing the full amount of the claimed credit elect for 2004 and 2005.  Appeals stated in the more recent CDP hearing that the question needed to be resolved outside Appeals so the Court reviews possible reasoning (statute of limitations, non-determination years, or refunds received).  None of that is conclusive so there is a genuine dispute of fact, leading to denial of the motion for summary judgment.  The parties are currently filing joint status reports to the Court.

Bob Kamman wanted to let us know about some coincidences – there is a citation in this order to a published Tax Court opinion from 2012 that also involves a credit-elect dispute in a CDP context.  The taxpayer is named Hershal Weber and the opinion was written by Judge Gustafson.  The more things change, the more they stay the same?

Stance on Motions to Dismiss During Pandemic?

Docket No. 10386-19S, Salvador Vazquez, v. C.I.R., Order available here.

This order is rather short, but notable.  The order begins by stating this case was scheduled for the Los Angeles trial session beginning June 1 before COVID-19 disrupted the Tax Court calendars.  The IRS filed a motion to dismiss for failure to properly prosecute on May 6, stating that the petitioner failed to respond to numerous attempts by the IRS to make contact.

Judge Carluzzo states:  “Under the circumstances and at this stage of the proceedings, we are reluctant to impose the harsh sanction that respondent requests. Our reluctance, however, to impose the sanction at this time in this case should not in any way be taken as a suggestion that a party’s behavior, as petitioner’s behavior is described in respondent’s motion, could not support such a sanction under appropriate circumstances.”

It is too soon to tell if this is any type of new position for the Tax Court regarding motions to dismiss during these pandemic times.  Since then, the judge ordered the parties to, separately or together, submit reports by August 24.

Conservation Easements

In recent years, the IRS has been taking a harder stance against several organizations that have claimed deductions for the donations of conservation easements.  For those looking to learn more about the issues, I recommend listening to two of the June 2020 podcast episodes from Tax Notes Talk.  A problem I have noticed is that both the bad apples and the good ones have been swept up in the IRS enforcement efforts.  For example, a request I have seen from the good apples is that they would like to get sample language from the IRS on how to draft documents relating to the conservation easement donation that will be satisfactory to the IRS.

One current development regarding conservation easement cases is that the IRS announced in IR-2020-130 that certain taxpayers with syndicated conservation easement issues will receive letters regarding time-limited settlement offers in docketed Tax Court cases.  Perhaps that will help reduce the conservation easement cases on Tax Court dockets.

  • Docket No. 5444-13, Oakbrook Land Holdings, LLC, William Duane Horton, Tax Matters Partner v. C.I.R., Order available here.

Oakbrook Land Holdings would like to reopen the record to add four deeds from the Nature Conservancy that have language to support the argument that Oakbrook’s deed doesn’t violate the regulation regarding their conservation easement donation.  The Court ruled the evidence is merely cumulative.  Also, the Conservancy’s comments, not practices, are what is discussed so the proffered deeds won’t change the outcome of the case.  The motion to supplement the record is denied.

  • Docket No. 10896-17, Highpoint Holdings, LLC, High Point Land Manager, LLC, Tax Matters Partner, v. C.I.R., Order available here.

This case required a look to state law in Tennessee regarding interpretation of the deed at issue and that does not help Highpoint Holdings.  The IRS motion for partial summary judgment is granted and the parties are to submit their status reports on how to proceed in the case.

Innocent Spouse

Docket No. 4899-18, Doris Ann Whitaker v. C.I.R., Order available here.

This is an innocent spouse case that came to Tax Court as Ms. Whitaker is seeking relief from joint liability for 2005 income tax, pursuant to IRC 6015(f).  Ms. Whitaker has not completed high school and is employed as a nurse’s aide.  When filing the 2005 tax return, income attributable to her then-disabled and drug-addicted husband was not reported on the return.  Ms. Whitaker did not report his income as she incorrectly understood “married filing jointly” to mean “married filing separately”.  Basically, she thought filing the joint return took care of her obligations and her husband was required to file his own separate return.

The IRS filed their motion for summary judgment, arguing “there remains no genuine issue of material fact for trial”.  The Court, when reviewing the facts and circumstances, takes Ms. Whitaker’s education and resources into account and finds this factor is sufficient to prompt a holding that there is a genuine issue of material fact to prompt denial of the motion without prejudice.

However, what to make of the recent amendment to IRC 6015(e)(7)?  The amendment requires the Tax Court to review applicable innocent spouse cases based on (A) the administrative record established at the time of the determination, and (B) any additional newly discovered or previously unavailable evidence.  What should be done with motions for summary judgment in conjunction with these evidentiary requirements?  In this case, only the IRS motion is on hand.  The Court has the discretion to construe an opposition to a summary judgment motion as a cross-motion for summary judgment but only where the parties have adequate notice and adequate opportunity to respond.  There was no such notice to treat Ms. Whitaker’s opposition as a cross-motion.  The Court orders the parties to communicate toward settlement.  The next order is for the IRS to file a certified administrative record and motion for summary judgment based on that record.  Ms. Whitaker is ordered to file any objections she would have about the administrative record, a response to the motion and a cross-motion for summary judgment.  The Clerk of the Court is also ordered to serve on Ms. Whitaker a copy of the information letter regarding the local Low Income Taxpayer Clinics potentially providing assistance to her (this case is being worked by Winston-Salem IRS Counsel so presumably this would be the 2 North Carolina clinics).

There have been subsequent orders filed in this case.  The first order relays that in a telephone conference between the parties that the IRS is conceding the IRC 6015 issue in the case so the parties are ordered to file a proposed stipulated decision or joint status report no later than July 17.  The second order relays that the IRS filed a motion for entry of decision on June 24, proposing a zero deficiency and no penalty due for the 2005 tax year, after applying IRC section 6015(b), and there is no overpayment in income tax due to petitioner for the 2005 tax year.  However, the motion states that the petitioner objects so Ms. Whitaker is to file no later than July 24 a response to the motion explaining why it should not be granted and a decision should be entered in this case.

Unless there is a procedural issue in her case I am overlooking, I find this to be a win for Ms. Whitaker and think she should not file a response to the motion.

Short Takes on Issues

  • Docket No. 6946-19SL, Soccer Garage, Inc., v. C.I.R., Order available here.

This case concerns Collection Due Process regarding a levy and penalties for failure to file.  The IRS argues there was an intentional disregard of the filing requirement.  There are not enough facts provided regarding the petitioner’s intent so the Court denied the IRS motion for summary judgment.

  • Docket No. 10662-19W, Wade H. Horsey v. C.I.R., Order available here.

Mr. Hosey requested the reconsideration of the determination of a whistleblower claim and his motion was denied.

  • Docket No. 6560-18, Mark Alan Staples v. C.I.R., Order and Decision available here.

Mr. Staples filed a motion for new trial that the Court had to recharacterize as a motion for reconsideration of findings or opinion.  Mr. Staples made arguments about the characterization of his retirement benefits, Constitutional arguments, and generally argued about his computation regarding tax year 2015.  The Court denied the motion as the IRS computations were in line with the Court’s memorandum findings of fact and opinion.  On this case, I am generally confused by the petitioner’s actions – was he a tax protestor or just ignorant of tax procedure?  Either way, his motion was filed in vain.