The Muddle of Seeking to Litigate the Merits of a Tax Liability in Collection Due Process Cases

A recent proposed opinion in the Tax Court signals a trap for the unwary for those seeking to litigate the merits of the tax liability stemming from a notice of deficiency in a collection due process (CDP) case.

We have not written much about proposed opinions in the Tax Court. We wrote about the proposed opinion in the Guralnik case. Proposed opinions occur when a case is assigned to a Special Trial Judge who writes the opinion but the opinion waits for a presidentially appointed judge to adopt it as the opinion of the court. The most famous proposed opinion was written in by STJ Couvillion in the Ballard case. The taxpayer in Ballard sought to see the proposed opinion because Judge Dawson, the presidentially appointed Tax Court judge who “adopted” the opinion described the opinion as he wrote as one written by STJ Couvillion. The fight went up to the Supreme Court with the taxpayer ultimately able to show that the opinion of the Tax Court was not the original proposed opinion.

In the case of Lander v. Commissioner, Docket No. 25751-15L, STJ Guy wrote a proposed opinion on July 8, 2019, in which he determines that the Landers cannot litigate the merits of their tax liability in Tax Court in a CDP case because, even though they did not receive the statutory notice of deficiency in time to petition the Tax Court, they made an audit reconsideration request to the IRS after the default assessment of the liability and after the Examination Division of the IRS denied their audit reconsideration request, the Landers appealed the denial to the Appeals Office where they received partial relief. Judge Guy determines that their trip to Appeals as part of the audit reconsideration process provided them with a prior opportunity to have the merits of their case heard even though the audit reconsideration process does not lead to an opportunity to go to Tax Court to contest the determination by the IRS.

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IRC 6330(c)(2)(B) sets out the ability to litigate the merits of the underlying liability in a CDP case. It says:

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)

Treasury Regulation 301.6330-1(e)(3), Q&A-E2, provides that “An opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability” (emphasis added).

The regulation can be read so broadly that it would basically preclude anyone from litigating the merits of the liability since it’s possible to posit the opportunity to get to Appeals in almost all cases including the Landers’ case. The IRS regularly takes the position that an opportunity to go to Appeals prevents the Tax Court from hearing the merits. However, Judge Guy seems to find it important that the Landers availed themselves of the opportunity to go to Appeals. If that’s where his decision rests, and not upon the opportunity to go to Appeals which exists for everyone assessed in their position, then the case serves as a reminder of the trap a taxpayer can fall into if the taxpayer actually goes to Appeals during the audit reconsideration process.

Despite the broad language of the statute and regulation, the Tax Court has sometimes considered whether a taxpayer actually received Appeals review. A couple of earlier cases brought under the small Tax Court procedure did not deny the taxpayer the opportunity to litigate the merits of the liability during a CDP case following audit reconsideration. In Canaday v. Commissioner, T.C. Summary Opinion 2015-57 and Crouch v. Commissioner, T.C. Summary Opinion 2009-143, the IRS appears to have made a similar argument to the one in Landers. The taxpayers were audited and then requested audit reconsideration, which was disallowed, before later requesting a CDP hearing in response to a levy notice. In Canaday, Judge Gerber rejects the IRS argument of preclusion, because taxpayer’s previous contesting on the merits was not before Appeals. And in Crouch, Chief Special Trial Judge Panuthos relies on the audit reconsideration process being contained within the centralized reconsideration unit in Examinations and thus not being an independent review of the merits by Appeals. However, both taxpayers had an opportunity to go to Appeals following their audit reconsideration denial.

The Canday and Crouch cases are instructive because they deal with audit reconsideration, but I do not mean to suggest that the Tax Court ignores the prior opportunity language. In multiple other cases, the Court has quoted the stature or regulation and foreclosed merits review due to a prior opportunity for Appeals review.

Although the proposed opinion recounts the actual trip that the Landers made to the Appeals Office, it’s not an actual trip that always matters in prior opportunity cases. What matters, according to the IRS and numerous prior opinions, is the opportunity to go to Appeals to dispute the liability. The IRS could read the Landers’ case as signaling the end of merits litigation in deficiency cases since every taxpayer who does not actually receive the statutory notice of deficiency sent by the IRS and who, as a result of the failure to receive the notice fails to petition the Tax Court, will have an assessment made against them and will have the post assessment remedy of audit reconsideration including the right to visit Appeals. Since every taxpayer had a prior opportunity to go to Appeals, they do not, according to the broader view of the proposed opinion in Landers, have the opportunity to litigate the merits of their liability in a CDP case.

The broader view of the result here brings the taxpayer’s rights back to the same rights they had regarding the post assessment, pre-payment litigation of the merits of their liability to the time prior to July 21, 1998, when the Restructuring and Reform Act of 1998 added IRC 6320 and 6330. Could this be what Congress intended? The more narrow view brands the taxpayer as someone who made a bad mistake by pursuing an administrative remedy instead of waiting for CDP. The better place to land would be to allow taxpayers who did not have a prior opportunity to contest the merits of their liability in court to come on into Tax Court and contest it there. Getting to the better place would require revisiting earlier Tax Court precedent and challenging the regulation.

The IRS has written the CDP regulations and the Tax Court and some Circuit Courts have interpreted those regulations to restrict the taxpayer’s right to litigate the merits of the underlying liability that the taxpayer never had a right to litigate prior to assessment to the point that the right is almost gone if not gone. In 1998 Congress seemed concerned that a taxpayer could find themselves in a situation in which they owed tax yet never had an opportunity to contest the tax in court. We have now evolved to the situation where the taxpayer’s only right to contest the tax in many cases is to do so in an administrative hearing. Taxpayers had that right prior to the change in 1998. Why would Congress have gone to the trouble of putting in a provision giving taxpayer rights to contest the merits of a liability they never previously had the ability to contest in court if Congress intended us 20 years later to end up back in precisely the situation that existed prior to the legislation?

We have blogged before about Lavar Taylor’s attempts to fight this result in the penalty area. He lost. We have blogged about other cases in which taxpayers were denied the right to contest the merits when they previously had no opportunity to go to court prior to the assessment.

In IRM 5.20.8.8.4, in a provision regarding assessable penalties made under IRC 6700, 6701 and 6702, the IRS has even gone so far as to say that the taxpayer has no right to litigate the underlying merits of those penalties in a CDP case because the taxpayer could pay 15% and litigate the penalty. While some taxpayers would need to pay only a small amount, others with the fraud tag could have to pay large amounts making this result similar to the I rule which stands as a bar to litigation – the bar Congress seemed to want to get around with CDP.

The proposed opinion in the Lander case not only stops the Landers from litigating the merits of the liability assessed against them in which they did not have the opportunity to go to Tax Court prior to the assessment, it paves the way for the IRS and the Tax Court to stop any taxpayer from litigating the merits since they have the opportunity for an administrative appeal. Even if the Tax Court in Landers seeks to make a distinction between taxpayers who visited Appeals with no right to litigate an adverse determination there from those who chose not to visit Appeals, the language of the regulation still seeks to answer the question with opportunity and not action. It could be that only cases not involving a statutory notice of deficiency, such as the case of Hampton Software, and in which audit reconsideration does not apply will be the small subset of cases in which merits litigation in CDP case will continue to exist. Maybe the opinion signals that if a taxpayer does not go the audit reconsideration route and end up in an administrative hearing in Appeals, the taxpayer may still seek to litigate the merits in the Tax Court but that’s not the way the regulation reads nor, I suspect, the way the IRS will interpret and litigate the issue. Let’s strike down the regulation and interpret the language of the statute which says “did not otherwise have an opportunity to dispute such tax liability” to mean did not have a chance to dispute the liability in court. Once you carefully look at the administrative scheme following most assessments, the opportunity to dispute the liability in Appeals exists in most situations including the situation in Landers which seems to be exactly the situation that concerned Congress in the first place. If the Tax Court is interpreting the statute to mean those who availed themselves of the opportunity to go to Appeals, it is already narrowing the plain language of the statute. Why not go all the way. The middle ground is a trap for the unwary and a place that makes neither taxpayers nor the IRS happy. If the IRS and the courts do not change the current status, a legislative change would be appropriate.

Collection Due Process and Webber v. C.I.R.

I am part of the Collection Due Process (CDP) Summit Initiative that Carolyn Lee wrote about in a recent post to Procedurally Taxing.  The initiative consists of a group of tax practitioners and others working with the IRS to discuss CDP issues toward the goal of eventual improvements for the IRS and taxpayers.  The genesis of that initiative comes from a panel I was on as part of the American Bar Association May Meeting this year in Washington, D.C.  Among others, that panel included Carolyn, Keith Fogg, and Judge David Gustafson of the U.S. Tax Court.  More information is available here.

Recently, when I read a particular order submitted by Judge Gustafson during a week Samantha Galvin was monitoring Tax Court designated orders, I requested to submit a separate piece focusing on that order. Since I knew Judge Gustafson had an interest in CDP issues and since he spends a good portion of the order’s focus on CDP procedure, I wanted to provide some analysis of its significance.

The designated order in Scott Allan Webber v. C.I.R., here, has facts that on their face can be simply summarized (a CDP request mailed by a taxpayer to the wrong address led to an IRS motion to dismiss in Tax Court), but what makes the order so interesting instead are procedural issues and Judge Gustafson’s analysis.

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Procedural Issues

The procedural history for Mr. Webber begins with his 2013 income tax liability.  After the IRS assessed a liability which he did not pay, the IRS mailed to Mr. Webber a Notice LT11, the CDP Notice.  That notice is a notice of intent to levy and notice of right to a hearing.  Judge Gustafson describes the LT11 as performing double duty, because it also serves as a demand for payment by its conspicuous language and larger type.

At the top of page 1 for Mr. Webber’s LT11, the return address showing where the IRS mailed the notice from was a post office box in Philadelphia, Pennsylvania.  At the bottom of page 1, with payment information, there was listed a post office box for the IRS in Kansas City, Missouri.  The bottom of page 2 also provides the post office box for the Philadelphia address on the reverse side of the Kansas City address.  To summarize:  two addresses for Philadelphia on pages 1 and 2 with an address for Kansas City on page 1, but on the reverse side of the Philadelphia address on the second page.

Mr. Webber filled out Form 12153 to request a CDP hearing.  He filled out his paperwork correctly until it came to how he placed the paperwork in the envelope (with the address showing through the cellophane) on where to mail his form to the IRS.  He placed the Kansas City address facing out in the envelope as though he was making payment rather than requesting a CDP hearing, mailing it to the incorrect address for making a CDP request rather than to the Philadelphia address to which the IRS wanted a CDP request to go.

He mailed his Form 12153 on February 22, 2018, for the CDP hearing which had a request deadline of March 4, 2018.  March 4 was a Sunday so timely arrival would have been on or before Monday, March 5.  The request was received by the IRS in Kansas City on Thursday, March 1.  Five calendar days (three business days) later, the Kansas City location faxed the CDP hearing request to the Philadelphia location on Tuesday, March 6.  Effectively, the CDP hearing request arrived at the correct location one day after the deadline.

IRS Appeals treated the CDP hearing request as untimely so did not grant a CDP hearing, but an equivalent hearing.  The CDP hearing is subject to judicial review by the Tax Court, but an equivalent hearing is not.  A CDP hearing produces a Notice of Determination that supports Tax Court jurisdiction.  Mr. Webber received a Decision Letter dated June 13 based on his Equivalent Hearing.  Mr. Webber timely mailed a Tax Court petition even though he received the equivalent hearing’s form. The case stating the Tax Court can review an equivalent decision letter as if it were a notice of determination is Craig v. Commissioner, 14649-01L, here.

On May 22, 2019, the IRS filed a motion to dismiss for lack of jurisdiction.  In the motion, the IRS stance is that the hearing request was timely mailed, but sent to the wrong address.  Receipt to the correct address a day late means the taxpayer is not entitled to a CDP hearing.

Judge Gustafson’s Analysis

Judge Gustafson’s order requested a supplemental memorandum from the IRS regarding their motion to dismiss regarding two issues:

1. The addressing of the CDP hearing request

Judge Gustafson cites Question and Answer C6 of Treasury Regulation § 301.6630-1(c)(2), which states the written request for a CDP hearing must be sent to the IRS office and address as directed on the CDP notice.  He points out that there were not one, but two addresses on the CDP notice.

From there, Judge Gustafson mentions how he almost mailed a bill payment to an incorrect address in a similar fashion.  “That is to say, we sympathize with a taxpayer who is confused by the design of Notice LT11.”  He also notes that the IRS has to deal with complex paperwork for the nation and “it is entirely reasonable for the IRS to request a given type of document to be submitted to a given location.”

Judge Gustafson summarizes his position regarding the address issues with Notice LT11 best in this paragraph:

However, where the IRS intends to require that a CDP hearing request be sent to a particular address, and where it takes the position that a CDP hearing request sent to a different address is invalid and ineffectual, and where it argues that the use of the wrong address ultimately deprives the Tax Court of jurisdiction over the case–in such a circumstance, we wonder whether an occasion for confusion is predictably and unfairly created by (a) combining the CDP notice with a gratuitous demand for payment, (b) providing multiple address slips back to back with multiple addresses , (c) putting the wrong address slip on the front page of the notice, and (d) failing to label the CDP address slip with any indication that it is the CDP address slip. It would seem reasonable for the IRS either to insist that a CDP hearing request must be sent to a specific address or to decide to make use of its mailing of a CDP notice for the additional purpose of soliciting payments to be mailed to a different address–but probably not both.

2. The timeliness of the CDP hearing request

Looking at Internal Revenue Code §§ 6330 (a)(3)(B) and (a)(2), Judge Gustafson notes that a taxpayer has the right to request a CDP hearing within the period of “30 days before the day of the first levy” while other statutory language cited by the IRS refers to the “30-day period commencing the day after the date of the CDP notice.”

The judge states he would benefit from the IRS filing the supplement to the motion and would also like them to state how they reconcile the statutory language above with the position taken in the motion to dismiss.  Additionally, the judge requested to know when (if ever) the IRS made a “first levy” with respect to Mr. Webber’s liability, and the IRS position whether treating a CDP hearing request as untimely in such a circumstance constitutes an abuse of discretion by Appeals. 

Taylor v. C.I.R.

First of all, I would like to take a detour into another Tax Court order that I found when researching CDP for the panel presentation I mentioned above.  I came across Rodney A. Taylor v. C.I.R., order here, which is an order by Judge Carluzzo.  In the order, we have a similar CDP situation.  Here, the Tax Court petitioner timely mailed the CDP hearing request to the IRS, but sent it to the wrong address.  By inference, it made it to the correct address after the deadline.

The order is two paragraphs long so I could quote it in its entirety, but I will focus on this: 

because respondent has not demonstrated sufficient prejudice resulting from the manner that the request was mailed to insist upon strict compliance with the Treasury Regulations relied upon in support of his motion, we find that petitioner’s request for an administrative hearing was timely made.

The decision letter was treated as an equivalent of a notice of determination to allow for Tax Court jurisdiction.  Judge Carluzzo ordered that the IRS motion to dismiss for lack of jurisdiction is denied.

Judge Carluzzo gets to his result in a direct fashion.  While he lacks Judge Gustafson’s analysis in this order, he makes the point that the IRS should show how they suffered prejudice by receiving a CDP hearing request at the wrong address within the IRS bureaucracy or he will deny their motion to dismiss for lack of jurisdiction.

Fallout

After the entry of the order requesting that the IRS provide responses regarding its motion to dismiss, Keith Fogg, through the Legal Services Center of Harvard Law School, entered his appearance for Scott Allan Webber.  He did not want to comment on current litigation, but shared with me documents filed in the case.

The IRS filed a motion to withdraw the motion to dismiss for lack of jurisdiction.  The body of the motion is 2 pages and cites Judge Gustafson’s order, where he ordered them to supplement the motion to dismiss for lack of jurisdiction “unless [the Commissioner] withdraws his motion to dismiss.”  Basically, the IRS takes door number two and quietly exits the stage.  There is no explanation of IRS reasoning regarding either of the motions.

The Harvard clinic filed a response in support of the IRS motion to withdraw.  Basically, their stance is that the 30-day statutory period to request a CDP hearing is a nonjurisdictional claims-processing rule subject to equitable tolling and waiver, which they claim are present in Mr. Webber’s case.  I am not going to steal the clinic’s thunder regarding its arguments for equitable tolling and waiver as it will take further space to summarize those pages.  I will note that he does disclose adverse legal authority in the Tax Court as Judge Nega granted IRS motions to dismiss in two cases involving the same taxpayer (Nunez v. Commissioner, 2925-17L here and 2946-17L here).  I found the response to be well drafted and note that the response was prepared with assistance by law students Michael Waalkes and Silvia Perdochova.

Judge Gustafson granted the IRS motion to withdraw by a court stamp that states “granted” on the motion.  While it would have been nice if there was an opinion from Judge Gustafson on the jurisdictional issues, it was not to be.  Though the Tax Court has the Webber case scheduled for trial on September 16, the jurisdictional portion is no longer at issue.

Conclusion

It is difficult to draw conclusions from this case regarding positions from the IRS and the Tax Court.  The IRS did not say much and the Tax Court says less.  From the Tax Court, I noted that some past orders look to be taxpayer-friendly while others seem to favor the IRS.  From the IRS in this case, the motion to dismiss took the stance that a day late is not good enough and then backtracked for unstated reasons following Judge Gustafson’s order requesting further explanation.

Overall, my takeaway from the filings in this case are that there are problems with the CDP process affecting everyone involved.  Judge Gustafson pointed out several issues with the LT11.  It is framed like a billing statement, not a notice for informing taxpayers of their rights.  It is confusing for taxpayers on where to mail Form 12153 to request a CDP hearing due to multiple addresses listed on the notice.  Perhaps a centralized address would be better.  If a taxpayer makes a mistake and timely mails the form to the wrong address within the IRS organization, what should be the result?  What should be made of the different 30-day standards Judge Gustafson cites regarding timeliness?  In the clinic’s response, it makes several arguments that the 30-day statutory period is a nonjurisdictional claims-processing rule subject to equitable tolling and waiver.  I do not know that this case brought answers, but it certainly brought several questions regarding CDP.

I am proud to be part of a CDP Summit initiative that is working to bring improvements to the CDP process.  I am glad that we are sparking conversations with various IRS departments, private practitioners, LITC directors, Tax Court judges, and others to develop processes that bring benefit to the tax system and everyone involved.  Hopefully we can learn lessons from Webber to improve the CDP process for taxpayers in the future.

Collection Due Process Summit Initiative

Today we welcome guest blogger Carolyn Lee who practices tax controversy and litigation in the San Francisco offices of Morgan Lewis.  Carolyn represents individual and business clients, including pro bono and unrepresented taxpayers while volunteering with the low income tax clinic of the Justice & Diversity Center of The Bar Association of San Francisco.  She has taken on the task of trying to reform and improve CDP after our first two decades of experience with this statute and created the CDP Summit Initiative.  The CDP Summit Initiative plans to hold sessions at several committee meetings during the upcoming ABA Tax Section meeting in San Francisco on October 4 and 5.  It also plans to hold a CDP summit in Washington, D.C. on the morning of December 3.  If you have an interest in improving CDP, here’s a chance to get involved.  Keith 

Few topics engage the tax controversy and litigation community more than the Sections 6320 and 6330 collection due process (CDP) protections as applied. The CDP community is vast – virtually anyone touched by IRS tax collection efforts including taxpayers, practitioners in firm and clinic practice environments, the IRS Collections division, the Office of Chief Counsel, the Tax Court, and the IRS Taxpayer Advocate Service (TAS). We are unified by the fact that everyone has ideas or plans for CDP’s improvement. Note, however, there is no movement to eliminate CDP. CDP indisputably offers valuable protections and procedures to the community.

Instead, there is a new movement to continue fortifying CDP through a newly launched CDP Summit initiative. The Summit objectives are three-fold: CDP education for all stakeholders to increase effective engagement; policy and procedure improvements; and transparency when change is not feasible, with an explanation. Summiteers are shamelessly piling on the years of work by Keith Fogg and Les Book and this Procedurally Taxing (PT) blog, Nina Olson and TAS, the often unheralded efforts by IRS and Office of Chief Counsel professionals, Tax Court directional Orders and Opinions, and observations by private bar practitioners. Summiteers recognize an infrastructure worthy of renovation instead of tear-down treatment. This posting is a call to join the CDP Summit initiative with input and, potentially, time and talent as a member of a Summit Working Group. More information about becoming a Summiteer closes this post.

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As commemorated by PT and others throughout last year, CDP is in its third decade. CDP’s implementation, through more than 20 million mailed CDP notices, has revealed its creaky aspects and unintentional, unproductive results in some circumstances. The community has had ample experience to identify opportunities for change, to more effectively and efficiently achieve CDP’s beneficial intent: Fairness when collecting tax due. Orderly procedures that result in progress. Sustainable, humane tax collection approaches to address outstanding tax liabilities.

New slipcovers and updated kitchen appliances have been a recurring feature of CDP’s life. Consider the ever-evolving lien and levy notices, beta tests of helpful outreach to taxpayers after a CDP request is submitted and before the case is referred to a Settlement Officer, and court Orders spurring resourceful efforts to craft sustainable collection alternatives instead of sending the taxpayer back to the street, no further along toward a sustainable collection plan than before filing a Court Petition. Generally unacknowledged is the fact that for years the IRS Collection teams and Chief Counsel attorneys have attended to many suggestions for improvement presented by TAS, PT posters and practitioners underwriting CDP impact litigation – in addition to surfacing opportunities for improvement based on their own experience. The IRM, CDP forms and related communications often change accordingly without fanfare. It is safe to say the point of these government efforts is to improve CDP processes, not torment taxpayers and their representatives. No one believes simply moving a file off a desk without progress, or with a determination that only pushes the (possibly redundant) work to someone else’s desk, is considered a successful or satisfying result by IRS Collections and Chief Counsel professionals.

There still is work to be done to realize CDP’s beneficial intent. The CDP Summit initiative is organized to press forward on an all-together-now basis, in earnest support of CDP. The Summit launched with a program of the ABA Tax Section Individual and Family Tax Committee during the 2019 May Meeting. It continues as an initiative with the active involvement of expert members of every CDP community stakeholder group. The May panelists – the Honorable David Gustafson, Judge, United States Tax Court; Mitch Hyman, Office of Chief Counsel and §§ 6320 and 6330 subject matter specialist; Keith Fogg, who needs no introduction here; Erin Stearns and William Schmidt, both Low Income Tax Clinic Directors; and me for the private tax controversy and litigation bar – are the foundation of the CDP Summit Steering Committee. We are joined by additional representatives from the IRS Office of Chief Counsel, IRS Collections and Collections Appeals, IRS SBSE Counsel responsible for Collections programs, TAS, tax academia and the private bar and tax clinics. 

How many CDP opportunities for improvement have already been captured? Almost thirty (30) from every CDP stakeholder constituency. What follows is only a sampling. Many opportunities will look familiar. Here we go: Do more, better, with CDP notices and other communications. (Note that here, the CDP Summiteers plan to join IRS and TAS notice improvement initiatives underway.) Simplify the CDP hearing request process and clarify what, if anything, is jurisdictional about CDP request submission dates. Regarding the CDP request Form 12153, keep the request simple and quick to complete and add tools for the taxpayer to understand and evaluate the value of and eligibility for collection options (link to the financial information Forms 433). For taxpayers ready to act, let them check a box on the Form 12153 seeking expedited attention. Expand the IRS beta program offering helpful support to develop sustainable collection alternatives after the CDP request and before the Appeals hearing.  Explore and test the role of the codified Taxpayer Bill of Rights (TBOR) within CDP. Clarify what is a “prior opportunity” to contest a tax liability. What about expanding the use of fee-free Appeals mediation while in a CDP or Tax Court docketed posture? Explore the use of Motions for Summary Judgment given the unforgiving abuse of discretion standard and scope of review, within the context of achieving CDP’s intended results. Are there more options for the Court to address CDP issues presented within the same standard and scope of review constraints? Should all CDP Motions for Summary Judgment be set for trial session hearings, to allow unrepresented taxpayers the opportunity of pro bono counsel and to facilitate settlement? Speaking of remand (an increasingly lively topic of interest), when might an Order of Remand be most productive? More proactively, let’s be in front of understanding the IRS’s planned uses of technology for collection within the context of TBOR.

Opportunities are being classified as Administrative (bifurcated as to point of entry to CDP and Appeals), Judicial and Remedies, with some blurring between the Judicial and Remedies classifications. Change opportunities will be administrative (for example, the IRM), regulatory (including revenue procedures and revenue rulings) and statutory. There may be proposed revised or new Tax Court Rules of Practice and Procedure. The Summit focus will be on feasible administrative and procedural change.

Because the CDP Summit is committed to impact, feasible change with significant effect is our goal. The Steering Community will prioritize opportunities. Working groups across all stakeholders will form around the priorities to explore and recommend change, or understand why change is not feasible (accompanied by possible beneficial alternatives). Education and communications will flow to the practitioner community and taxpayers including, but not limited to several CDP programs during the ABA 2019 Fall Tax Meeting (San Francisco, October 3-5).

Now to the call to action: PT readers and CDP fans, move beyond complaining in the corners and join us. Send us your ideas to improve CDP, within the boundaries of the current §§ 6320 and 6330 statutes. Opportunities within the administration of CDP, judicial engagement, and remedies leading to sustainable collection alternatives are welcome.

Consider whether you would like to be a Summiteer member of a volunteer working group addressing Administrative, Judicial or Remedies opportunities led by a fellow Summiteer. Collaborate with others across the CDP community, including IRS and Chief Counsel subject matter experts. While working group participation will be accompanied by tax geek glamour, it also will require work and time in several forms: Brainstorming, research and analysis, conference call and listserve discussion, requests to publish and present CLE programs about your efforts. We promise you the satisfaction of constructive and productive collaborative effort and outcomes will be immeasurable.

Sections 6320 & 6330 Collection Due Process Protections: Improve CDP, all together now.  Call for input and working group participation.

We look forward to hearing from you. If you have a suggestion or want to become a Summiteer member please contact Carolyn Lee at carolyn.lee@morganlewis.com; or William Schmidt at schmidtw@klsinc.org; or Erin Stearns at erin.stearns@du.edu.

Taxpayer Barred from Raising TEFRA Adjustments in Collection Due Process Hearing

The case of Davison v. Commissioner, T.C. Memo 2019-26 raises the issue of contesting the merits of adjustments contained in a Final Partnership Administrative Adjustment (FPAA). The Tax Court determines that Mr. Davidson cannot raise the merits of those issues which resulted in computational adjustments to his return. He argued that he never had a chance to raise those issues. Essentially, the court says too bad. He also sought to raise the issue of the penalty imposed on him due to the amount of the adjustments. The court signals that he might have been able to raise that issue had he done so when he made his Collection Due Process (CDP) request but having failed to raise the separate penalty issue when he submitted his request he could not do so during the Tax Court proceeding.

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Mr. Davison was a partner in a partnership that had an interest in two other partnerships. The IRS audited the partnerships he did not directly own and made adjustments. Those adjustments flowed through to his individual return through the partnership interest he did own. Although the IRS sent the FPAA regarding the adjustments to the tax matters partners of the two partnerships, no one petitioned the Tax Court.

Years later as the IRS began to collect from him Mr. Davison requested a CDP hearing and sought in the hearing to raise the issue of his underlying liability. The Settlement Officer in Appeals told him that he could not do so and he ultimately petitioned the Tax Court. In Tax Court he tried to raise the issue of the liability arguing that he had not previously had the opportunity to litigate the merits of the tax assessed against him. As with most things involving TEFRA, things get tricky.

This is not the first case involving this issue which does not surprise me given that two decades have passed since Collection Due Process came into existence; however, I had not noticed this issue before. I thought that perhaps others may not have noticed the issue since it does not arise with great frequency in litigation. The prior decisional law drives the outcome in this case.

The Court states:

In Hudspath v. Commissioner, T.C. Memo. 2005-83, aff’d, 177 F. App’x 326 (4th Cir. 2006), we addressed whether a taxpayer may contest his underlying income tax liability in a CDP case to the extent that this liability was based on computational adjustments resulting from a TEFRA proceeding. The case involved only income tax assessments for the taxpayer’s 1996 and 1997 taxable years that were attributable to computational adjustments resulting from two FPAAs. Those FPAAs had been the subject of a TEFRA proceeding that this Court ultimately dismissed for lack of jurisdiction. We held that pursuant to section 6330(c)(2)(B), the taxpayer was precluded from challenging the existence or amount of his 1996 and 1997 underlying income tax liabilities because he had had the opportunity, in the TEFRA proceeding, to challenge the partnership items that were reflected on the two FPAAs.

The instant case is indistinguishable from Hudspath. Pursuant to section 226(a) and (b), within 90 days of the mailing of an FPAA a tax matters partner may file a petition with this Court or other referenced Federal court for readjustment of the partnership items; and if the tax matters partner fails to file such a petition, any notice partner may file a petition for readjustment within 60 days after the 90-day period has closed. Here, the parties stipulated that on October 4 and 20, 2010, the IRS issued the Cedar Valley FPAA and the TARD Properties FPAA, but no petition was ever filed pursuant to this statutory prescription challenging either FPAA. These defaulted FPAAs then became binding and conclusive upon petitioner, allowing the IRS to make the computational adjustments to income that petitioner desires to place in dispute. See sec. 6230(c)(4); Genesis Oil & Gas, Ltd. v. Commissioner, 93 T.C. 562, 565-566 (1989). It is undisputed that petitioner’s income tax liability for 2005 was attributable solely to the computational adjustments resulting from the defaulted Cedar Valley FPAA and the defaulted TARD Properties FPAA. Accordingly, petitioner’s “earlier opportunity to dispute his liability” for income tax for 2005 was the opportunity to commence a TEFRA proceeding challenging the FPAAs upon their issuance.

Mr. Davison’s problem with this analysis stems from his lack of knowledge of the earlier opportunity to go to Tax Court. He complains that he never received notice of the FPAA and had no voice in whether the partnerships would file a Tax Court petition. He contends that he only learned about the FPAAs after the time to petition the Tax Court had passed. The IRS did not put on any evidence to contest his statement on this point – not that it was obligated to do so. There was also no indication that the IRS knew he was an indirect partner of the entities to which it issued the FPAAs. The court explained why this did not matter with respect to the issue of whether Mr. Davison could raise the underlying merits in the CDP case:

Under section 6223(h)(2), the tax matters partner of Six-D [this is the partnership in which Mr. Davison owned an interest] was required to forward copies of the Cedar Valley FPAA and the TARD Properties FPAA to petitioner. Furthermore, in any event, “[t]he failure of a tax matters partner, a pass-thru partner, the representative of a notice group, or any other representative of a partner to provide any notice or perform any act * * * [such as an appeal to an FPAA] does not affect the applicability of any proceeding or adjustment * * * to such partner.” Sec. 6230(f); Kimball v. Commissioner, T.C. Memo. 2008-78, slip op. at 9. Because petitioner indirectly held interests in Cedar Valley and TARD Properties and section 6223(c)(3) is of no avail here, the IRS was not required to provide him individual notice of the FPAAs.

Therefore, we find that petitioner had a prior opportunity to challenge his liability for income tax attributable to the computational adjustments resulting from the defaulted TARD Properties FPAA (as well as the defaulted Cedar Valley FPAA) and is precluded from challenging this liability in this case.

So, Mr. Davison does not have the opportunity to raise the merits of the partnership adjustments in his CDP case. While harsh, this result is the same result outside of CDP and is a feature of the way TEFRA operates with respect to certain affected items. The case does not discuss what possibilities of success Mr. Davison might have had if the court had allowed him to contest the underlying liabilities. It seems that the tax matters partners would have raised the issue if a meritorious case existed. He was removed from those partnerships and would likely have had a difficult time marshalling the evidence to contest the liabilities even if he had been given the opportunity.

In addition to contesting the underlying liability, Mr. Davison sought to contest the accuracy related penalty imposed upon him for one of the years because of the amount of the liability. The court noted that the partnership should also contest the penalty; however, the TEFRA rules that prevent him from contesting the partnership adjustments would not keep him from contesting the application of the penalty in a refund action after he paid the penalty. Unfortunately, he runs into another barrier.

Mr. Davison raised the penalty issue for the first time in his Tax Court petition having failed to mention it in his CDP request. The court stated:

We find that he did not properly raise this issue below and therefore is precluded from challenging his liability for the penalty in this proceeding.

This result flows directly from the CDP regs and serves as a reminder of the need to anticipate all arguments in submitting the Form 12153 at the beginning of the CDP case. The IRS should receive the opportunity to consider all issues the taxpayer seeks to raise as it considers the case during the administrative phase. The court does not want to see an issue for the first time that the taxpayer has failed to previously mention.

Taxpayer Bill of Rights Does not Confer Tax Court with Jurisdiction in Collection Due Process

In the case of Atlantic Pacific Management Group LLC v. Commissioner, 152 T.C. No. 17 (June 20, 2019) the Tax Court in a precedential opinion determines, inter alia, that the Taxpayer Bill of Rights (TBOR) does not provide a basis for jurisdiction for a taxpayer to come into the court seeking Collection Due Process (CDP) relief. The case involves more than just the TBOR argument, but I think the TBOR aspect of the case may have driven the case to precedential status. The case is one of several in which Frank Agostino has raised TBOR as a basis for relief. I discuss this case and the others in an article on TBOR forthcoming in the Temple Law Review.

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The IRS assessed penalties against the taxpayer under IRC 6698(a) for late partnership information returns and IRC 6038(b) for failing to file information returns with respect to foreign corporations and partnerships. After sending the requisite notice demanding payment and not receiving payment, the IRS eventually filed a notice of federal tax lien and sent a CDP notice to petitioner at its New York address. The court finds that the CDP notice was sent on June 13, 2017, delivered and signed for on June 16, 2017. In a footnote it notes that petitioner disputes delivery and further notes that this fact does not matter. Petitioner’s tax matters partner was not in the United States at the time of delivery and did not sign for the delivery. Petitioner requested a CDP hearing on July 28, 2017 more than 30 days after the mailing of the CDP notice. The address used by petitioner in requesting the CDP hearing matched the address to which the IRS sent the CDP notice.

The IRS responded to the CDP request by notifying petitioner that its request failed to meet the timeliness requirements for a CDP hearing. The IRS offered petitioner an equivalent hearing if it requested one by September 1, 2017. It did this in a letter dated August 28, 2017. Petitioner did not reply to this letter by September 1 and one wonders how it could do so within such a short time frame. This puzzles me as I thought the untimely CDP request submitted within one year of the CDP notice would automatically trigger an equivalent hearing but apparently the taxpayer must make a second request affirming the desire for an equivalent hearing. The IRS automated collection site closed the case without offering an equivalent hearing on September 7, 2017. Because the Tax Court does not have jurisdiction over equivalent hearings, it does not provide a further discussion of this troubling truncation of the equivalent hearing.

Petitioner sent another request for a CDP or equivalent hearing on December 19, 2017, but the court noted that the record contained no indication of a response to this letter from the IRS. Apparently having heard nothing since sending the December letter, petitioner filed its petition on May 2, 2018, requesting review of its case even though it did not have a determination or a decision letter. Petitioner attached to its petition the letter from the IRS dated August 28, 2017.

The Tax Court started its discussion with a general statement of the prerequisite for obtaining jurisdiction to obtain a collection due process review:

Our jurisdiction under section 6330(d)(1) requires a written notice embodying a determination to proceed with the collection of taxes in issue, and a timely petition. Lunsford v. Commissioner, 117 T.C. 159, 164 (2001). The determination does not have to follow any particular format. LG Kendrick, LLC v. Commissioner, 146 T.C. 17, 28 (2016), aff’d, 684 F. App’x 744 (10th Cir. 2017). However, if no written determination is issued, the absence of such a determination is grounds for dismissal of the petition. Id. (citing Offiler v. Commissioner, 114 T.C. 492, 498 (2000)). In deciding whether we have jurisdiction we will not look behind a notice of determination, or lack of notice, to determine whether a hearing was fair or even whether the taxpayer was given an appropriate hearing opportunity. Id. at 31; cf. Lunsford v. Commissioner, 117 T.C. at 164-165.

Since the court decided off the bat it lacked jurisdiction, it next looked to explain why it had no jurisdiction to hear the case. It basically discussed two cases in which it noted the difficulty to reconcile the outcomes in the Tax Court. First, it discussed Buffano v. Commissioner, T.C. Memo. 2007-32. In Buffano, the Tax Court determined that the IRS sent the CDP notice to the wrong address. Because of the error in mailing the CDP notice, the Tax Court invalidated the levy notice as it dismissed the case. Petitioner argued that the court should issue a similar order here. Second, the court discussed Adolphson v. Commissioner, 842 F.3d 478, 484 (7th Cir. 2016) where the Seventh Circuit, in a case with similar facts to Buffano held that “[a] decision invalidating administrative action for not following statutory procedures is a quintessential merits analysis, not a jurisdictional ruling.” The IRS asked the Tax Court to adopt the holding in Adolphson and decline to rule on the administrative action as it dismissed the case. The court declined both invitations and distinguished this case from Buffano because it found that the IRS in this case mailed the CDP notice to the correct last known address.

Since the CDP notice went to petitioner’s last known address and since petitioner failed to make a timely CDP request, the court held that the IRS did not need to issue a notice of determination. Without the notice of determination, the court lacked jurisdiction over petitioner’s collection complaints.

Petitioner did not stop at this point but argued in the alternative that IRC 7803, home to TBOR, offered another path by which the court could obtain jurisdiction. The court declined the invitation to find jurisdiction through TBOR stating:

… section 7803(a)(3) itself does not confer any new rights on taxpayers; it merely lists “taxpayer rights as afforded by other provisions of” the Code. Further, section 7803(a)(3) imposes an obligation on the Commissioner to “ensure that employees of the Internal Revenue Service are familiar with and act in accord with” such rights. It does not independently establish a basis for jurisdiction in this Court.

In a footnote the court cites to the case of Moya v. Commissioner, 152 T.C. __, __ (slip op. at 16-17) (Apr. 17, 2019), where the court held, in the context of a deficiency case, that TBOR provided no new rights and no independent rights on which the taxpayer could rely. We discussed the Moya case here.

The court concludes by noting, as it frequently does, that petitioner still has the remedy of paying the tax and filing a refund claim. No facts were offered on the practicality of this remedy for this taxpayer. I know for the taxpayers I represent, this is not a practical remedy.

The decision here does not come as a surprise to me. Had the court ruled that it had jurisdiction based on TBOR I would have been shocked. The refusal to use TBOR as a basis for jurisdiction does not mean that a violation of taxpayer rights could never play a role in the outcome of a CDP case in Tax Court but conclusively provides, at least at the Tax Court, that TBOR will not open the door of the Tax Court no matter how egregious the violation of taxpayer rights and that the taxpayer must find some other means to obtain jurisdiction.

Here, the taxpayer did not argue that the 30 day period for making a CDP request is not a jurisdictional time period and that its failure to meet the 30 day period resulted from some factor(s) that could form the basis for equitable tolling. The facts do not necessarily support such an argument, but the taxpayer did make some arguments about the absence of the principal of the business at the time of the delivery of the CDP notice. Judge Gustafson recently issued an interesting order raising questions regarding the jurisdiction of the Tax Court based on a failure of the “right” part of the IRS to receive the CDP notice within 30 days. If TBOR does not open the court’s door in the situation presented by Atlantic Management, be sure to look at whether a CDP request submitted to the IRS after the 30 day period might warrant a different type of argument regarding jurisdiction that does not rely on TBOR.

Who Owes the Tax – Blue Lake Rancheria

In the case of Blue Lake Rancheria Economic Development Corp. v. Commissioner, 152 T.C. No. 5 (2019) the Tax Court determined that only one of the two corporations against whom the IRS was pursuing collection owed the tax. I hope that we will one day receive a guest post from petitioner’s counsel, Bob Rubin, who started two weeks before me at Chief Counsel’s office in March of 1977 and occupied the office adjacent to mine, but in the meantime I want to write a short post to provide the facts and outcome on a case featuring the unique legal issues presented by tribal entities.

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The primary issue in this case focused on tribal law and the powers granted to corporations chartered under the federal statutes governing these entities. Blue Lake Rancheria Economic Development Corporation (BLREDC) is the real petitioner in this Collection Due Process (CDP) case and the parent corporation in the structure created by the tribe. The second corporation, Mainstay Business Solutions (MBS), presents as a subsidiary of BLREDC.

MBS ran an employment and temp agency. During and after the recession, it experienced significant business challenges and ultimately closed its doors. Before it closed up, it incurred huge 941 liabilities for failure to pay over employment taxes for numerous quarters. MBS agrees that it owes the money but that does the IRS little good since it has no assets. The IRS seeks to also hold BLREDC liable for the unpaid taxes and BLREDC has assets.

The IRS argues for the application of state law and under state law it would have a relatively easy time tagging BLREDC with the liability. BLREDC argues that state law does not apply. The court recites the relevant statutes and notes that although MBS is structured as a division of BLREDC the form of a division is a creature of federal, and not state law, created as a result of the issuance of a federal charter to the tribe by a federal agency in a dispute over federal taxes. Under the circumstances the court states that it fails to see why state law matters.

Next, the IRS argued that the power to create legally distinct corporate divisions is not an ordinary corporate power and, therefore, it follows that the granting of such a power is outside the scope of the federal statute. As with the first argument, the court disposes of this one noting that the federal statute at issue here grants broad authority. It rejects the narrow interpretation of the scope of authority available under the statute.

Additionally, the court notes that the canons of construction at play in this this situation favor the tribe. It cites to a couple of canons it deems applicable and points out that they call for interpreting statutes in a manor favorable to the interests of the tribe.

The court closes with the following quote:

The plain terms of IRA [the federal statute at issue here] sec. 17 clearly bestow broad discretionary power on DOI to issue Federal charters of incorporation to Indian Tribes. The powers that may be conferred on a tribal corporation under IRA sec. 17 are not limited to those held by State corporations nor are they limited by State law.

As a result the Tax Court determines that BLREDC does not share the employment tax liability with its former division. On the way to this result the court had also determined that BLREDC did not have a prior opportunity to contest the merits of the employment tax liability. The court also distinguished the case of First Rock Baptist Church Child Dev. v. Commissioner, 148 T.C. 380, 387 (2017), discussed in a prior post here, as it went through its analysis concerning its jurisdiction. The court also pointed out that this case involved employment taxes and not income taxes stating that a different analysis applied in the case of employment taxes.

The tribal law that underpins the court’s decision here will not come into play in most of the cases litigated regarding related corporations and their common liabilities for tax. For that reason this taxpayer favorable opinion here will not easily translate to more common situations. Tax practitioners who do represent tribal interests will find the opinion useful not only in the way the court approached its analysis of the statute but also because of the canons it applied. Congratulations to my friend Bob Rubin for winning an unusual case and providing PT with the opportunity to explore the intersection of tribal law and tax procedure.

Getting to Meaningful Court Review in Collection Due Process Cases: Designated Orders, February 25 – March 1, 2019

There were three designated orders for the final week of February 2019, and all of them concerned Collection Due Process (CDP) cases. Two of the orders (Savanrola Editoriale Inc. here and McDonald here feature the time-honored determination that it is not an abuse of discretion for the IRS to sustain a collection action when the taxpayer refuses to provide financial information or otherwise take any part in CDP hearing. The orders are not particularly novel in that regard, but they do provide a good contrast to the third order where the Court actually finds against the IRS and remands to Appeals.

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Since abuse of discretion is a fairly vague standard, even the easy cases can be useful. Savonrola involves a taxpayer that wanted to challenge the underlying tax liability leading to the notice of federal tax lien (NFTL). However, apart from requesting a CDP hearing (blaming a faulty 1099-Misc for the liability) and then petitioning the court after receiving the determination sustaining the NFTL, it does not appear that the taxpayer engaged in the process much at all. The order does not reference any content from the CDP hearing itself, and it is not clear if the taxpayer engaged in the one that was offered. At the very least, the taxpayer does not appear responsive to the Tax Court once the petition was filed -the case was on the verge of being dismissed for failure to respond to an order to show cause. Because the taxpayer made no showing (and raised no argument) that they should be able to argue the underlying liability under IRC 6330(c)(2)(B) the Court had an easy time disposing of the case.

In McDonald the taxpayer did engage a bit more, but still not enough to give themselves a chance of winning on review. Here, the taxpayer apparently wanted to enter an installment agreement but had been unable to (which can happen to the best of us). However, the taxpayer had a back-year tax return that was “rejected” (that is, not-processed) by the IRS which complicated matters. At the CDP hearing, IRS Appeals was understandably unwilling to set up an installment agreement without that return being properly filed. Appeals also requested a Form 433-A for the installment agreement -the reasonableness of that request depending a bit more on the terms of the installment agreement being proposed. In response, the taxpayer sent an unsigned 2015 return and a Form 433-A lacking supporting documentation. When the signature and supporting documents were not forthcoming after multiple requests, Appeals rejected the installment agreement request and issued a determination sustaining the levy. As can be guessed, based on the failure of filing compliance alone, the Court had very little trouble finding there to be no abuse of discretion.

One can read the frequent, easy cases of Savonrola and McDonald to mean simply that the taxpayer will lose if they don’t comply with IRS requests during CDP hearings. But there is a deeper lesson to be learned: the Court needs something to look at to see how IRS discretion was exercised. By failing to comply or otherwise engage with the IRS during the hearing, you are building a record for review that can only ask one question: was it a reasonable exercise of discretion for the IRS to request the information in the first place? Almost (but importantly not always) the Court will find requests for unfiled tax returns or financial statements are not unreasonable and, by consequence, there was no abuse of discretion for the IRS to sustain the collection action when the requests were not complied with.

The important difference is that taxpayers may succeed even without providing requested information if they have readily engaged in the process. By so doing, they create a record for the Court to review and, possibly, come to a determination that discretion, properly exercised, would not require the information. The most famous of these cases is Vinatieri v. C.I.R.. In Vinatieri, the taxpayer provided a Form 433-A and demonstrated serious financial hardship and medical issues during the CDP hearing, but acknowledged that she had unfiled tax returns. The financial hardship was obvious, as was the fact that it would be exacerbated by levy. The IRS policy (that back year returns must be filed before releasing a levy under IRC 6343(a)(1)(D)) was not so obvious, and blindly following it was an abuse of discretion. Ms. Vinatieri was, it should be remembered, a pro se low-income petitioner with serious health issues. She is the prototypical taxpayer that CDP is meant to protect before disastrous levies take place. Nonetheless, it is not clear she would have prevailed (especially not in a “record-rule” jurisdiction) had she not engaged with the IRS at the hearing.

CDP hearings can also help the more affluent (and represented) taxpayers on non-equitable grounds -and again, engaging is key. Sometimes, a taxpayer may not have to comply with an IRS request for information by adequately showing that the information is unnecessary -for instance, where updated financials are cumulative, because the real issue is a matter of law (See the earlier designated order from McCarthy v. C.I.R., here). When you turn the inquiry into a question of law (not always an easy, or possible task with low-income taxpayers) you change the Court’s rubric. And that is exactly what happens in the third and final designated order of the week

Tax Court to IRS: High School Math Rules Apply. Show Your Work or Face Remand. McCarthy v. C.I.R., Dkt. No. 21940-15L (here)

We’ve blogged briefly about Mr. McCarthy before. The case boils down to whether the petitioner or a trust is the real owner of two pieces of property. If petitioner owns it his collection potential should be upwardly adjusted and the IRS rejection of his Offer in Compromise (or partial pay installment plan) likely constitutes a reasonable exercise of discretion. The issue, then, is mostly legal: does the trust own the property, or is the trust merely the petitioner’s “nominee”?

When the issue before the Court is a question of law, the vagueness of “abuse of discretion” goes largely out the window. It is always an abuse of discretion to erroneously interpret the law at issue (See Swanson v. C.I.R., 121 T.C. 111 at 119 (2003)). McCarthy, however, involves a slightly different lesson: it isn’t necessarily that the IRS erroneously interpreted the law (thereby reaching the wrong determination). It is that the IRS didn’t sufficiently back up the determinations it did reach.

The IRS tried to determine whether the petitioner was the true “beneficial owner” of the properties in the trust by analyzing how the petitioner and trust actually treated the property. The first property at issue (the “Stratford” property) was rented out to a corporation (American Boiler) that was apparently controlled by the petitioner. American Boiler made rental payments to the trust for many years, though in apparently inconsistent amounts.

The IRS believed this string of relationships, peculiar circumstances, as well as the fact that there was no written lease agreement between American Boiler and the trust, adds up to nominee. But the Court sees some gaps between those circumstances and the ultimate conclusion. The Court characterized the argument as “inviting us to speculate that petitioner caused the Trust to use in some fashion for its own benefit the rental income it received from American Boiler.” In other words, the IRS hasn’t adequately shown how they get from point A to point B, and their failure to show their work is fatal. The Tax Court “will not indulge in such speculation.”

The IRS fares no better with the second piece of property (the “Charlestown” property). This time, the IRS inferences seem even more threadbare. The trust (with petitioner as trustee) purchased the Charlestown property. The IRS argues that it was “reasonable for [the Settlement Officer] to have inferred that the funds to purchase the Charlestown property must have come from petitioner.” Unfortunately, there are other beneficiaries (apart from petitioner) of the trust that may have led to other contributions to it, even aside from the aforementioned rental income the trust received. Accordingly, the Court finds no basis for the IRS determination that petitioner was the beneficial owner of the Charlestown property as well.

The point isn’t that the IRS was clearly wrong that the trust was not the nominee of the petitioner (it may very well be his nominee: he hasn’t exactly been a “good actor” in other tax matters –the first footnote of the order mentions his involvement in a criminal tax case).  The point is that the IRS did not do its job in showing how they reasonably came to that conclusion apart from general inferences, which was the issue put before the Court. The taxpayer here may well be the polar opposite of Ms. Vinatieri: represented by counsel, likely affluent (at one time or another), and without the cleanest of hands. But like Vinatieri, (and unlike McDonald or Savonrola) they succeeded by engaging in the process and presenting a question (and record) the Court could reasonably rule in their favor on.

Arguments to Raise in Collection Due Process, Naked Assessment Concerns, and the Supremacy Clause: January 28 – February 1 Designated Orders (Part II)

In Part I we focused mostly on summary judgment motions in deficiency cases, and particularly on how important it is to frame the issue as a matter of law rather than fact. The remaining designated orders of that week provide lessons on (1) burden shifting arguments, (2) state privilege and federal rules of evidence conflicts, and (3) arguments to raise (or not raise) in collection due process (CDP) litigation. We begin our recap with the latter.

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CDP Argument One: Did the IRS Engage in a Balancing Analysis? Jackson v. C.I.R., Dkt. # 3661-18L

Judicial review of a CDP hearing may sometimes seem a bit perfunctory -it can be difficult to make legal arguments in abuse of discretion review where the IRS appears to have quite a bit (though not unbounded) of discretion to take their proposed collection action. The statutes governing the usual “collection alternatives” (Offer in Compromise at IRC 7122, Installment Agreements at IRC 6159, and Currently Not Collectible at, more-or-less, IRC 6343) similarly do not provide a robust set of rules that the IRS cannot violate.

But that isn’t to say that judicial review in a CDP hearing provides no benefit. As I’ve written about before, CDP can be an excellent venue for putting the IRS records at issue -not asking the Court to rule on a collection alternative, but to prove that they followed the rules they are supposed to (proper mailing, supervisory approval, etc.). The statutory hook for these issues is the CDP statute itself -specifically, IRC 6330(c)(1) and (c)(3)(A). The orders discussed below rely (with varying success) on different statutory or common-law arguments.

In something of a rarity, all three CDP hearing cases involve parties that are either represented by counsel or, in this instance, are attorneys themselves. The lawyerly imperative to focus on the text of the statute is what drives Mr. Jackson’s argument: in this case the requirement that the IRS “balances the need for efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” IRC 6330(c)(2)(A)

The crux of Mr. Jackson’s argument is that the IRS didn’t balance these interests when they denied his installment request. Judge Gustafson (tantalizingly) mentions that there is a part of the Notice of Determination that specifically talks about the “balancing analysis” the merits of which the Court could review… but that, quite unfortunately, is not how Mr. Jackson frames the issue. Rather, the reference to the balancing test by Mr. Jackson is just a disguised, repackaged argument that the IRS should have accepted the proposed installment agreement.

There is good reason why it fails on that point. Namely, that Mr. Jackson was not filing compliant (he was delinquent on estimated tax payments) and the Tax Court has already held such a rejection not to be an abuse of discretion in Orum v. C.I.R. 123 T.C. 1 (2004). Since the crux of the argument is just “the IRS should accept my installment agreement” made twice (once as an issue raised under IRC 6330(c)(2)(ii) and once under IRC 6330(c)(3)(C)) it is doomed to fail.

I characterized Judge Gustafson’s mention of court review of real “balancing analysis” arguments as tantalizing because (1) I see them so rarely, and (2) they may provide new and fertile ground for court review. In my experience, a Notice of Determination always includes a boilerplate, conclusory paragraph on the “balancing analysis” conducted by Appeals. That appears to be the case here as well, where the “balancing analysis” is a statement that conveniently covers all the issues of IRC 6330(c):

“The filing of the notice of federal tax lien is sustained as there were legitimate balances due when the lien was filed and the taxes remain outstanding. All legal and procedural requirements prior to the filing of the Federal Tax Lien have been met. The decision to file the lien has been sustained. This balances the need for efficient collection of the tax with your concern that the action be no more intrusive than necessary.”

Judge Gustafson refers to this language in the notice of determination when he writes “there was at least a purported balancing, whose merits we might review.” Emphasis in original. The present facts and posture of the case before Judge Gustafson leave much to be desired, but I wouldn’t bet against other cases potentially gaining traction on that line of argument. It is true that, in my quick research, petitioners historically haven’t had much success on “balancing analysis” argument. But many of the taxpayers in such cases were either non-individuals (i.e. corporate) see Western Hills Residential Care, Inc. v. C.I.R., T.C. Memo. 2017-98, non-compliant on filing, or the determination actually demonstrated the IRS did balance the equities, see Estate of Myers v. C.I.R., T.C. Memo. 2017-11. I’d like to see a case where the taxpayer legitimately raises such equity concerns in the hearing and the IRS determination blithely repeats the boilerplate language. I believe under those circumstances you may just have an argument for remand -particularly if the administrative record gives no insight to the Appeal’s reasoning such that abuse of discretion could be properly determined.

CDP Argument Two: Invoking Res Judicata and Challenging Treasury Regulations: Ruesch v. C.I.R., Dkt. # 2177-18L

There is a lot going on in this case but, depending partly on your view of the validity of Treas. Reg. 301.6320-1(d)(2), Q&A-D1, the eventual resolution may seem inevitable. By breaking up the collection into two discrete issues (income tax vs. penalty) one can better trace the contrasting ideas of petitioner and the Court.

2010 Income Tax Liability

The taxpayer had a small balance due and was offered a CDP hearing after the IRS took their state tax refund (one of the few exceptions to a “pre-collection” CDP hearing: see IRC 6330(f)(2)). The taxpayer timely requested the CDP hearing. However, by the time the hearing actually was dealt with by Appeals it was moot because the balance (somewhere around $325 originally) now showed $0. Appeals issued a decision letter (erroneously but in this case harmlessly treating the original CDP request as an equivalent hearing) stating that there was no case because “your account has been resolved.” Nonetheless (and probably anticipating the next point), the taxpayer timely petitioned the court on that determination letter.

2010 IRC 6038(b) Penalty

A little more than a month after receiving that decision letter, the taxpayer gets a new Notice for 2010, this time saying that she had a balance of $10,000. Only it wasn’t for any income tax assessment: it was a penalty under IRC 6038(b) for failure to disclose information to the IRS. The IRS issued a CP504 Notice for this penalty which, though frustratingly similar to a CDP letter (see Keith’s article here) will not ordinarily lead to a CDP hearing. Nonetheless, the taxpayer requested a CDP hearing (as well as a Collection Appeals Request) after receiving the CP504 Notice. Still later, however, the taxpayer did receive a Notice of Federal Tax Lien for the penalty conveying CDP rights, which they also timely requested. Most important, however, is just this: at the time of the trial no determination was reached and no determination letter issued regarding the penalty as a result of a CDP hearing.

If you are treating the matter as two discrete tax issues, the answer seems straightforward: dismiss for mootness. The only tax issue properly before the court (the income tax liability, not the penalty for which no CDP hearing or determination letter has issued) has a $0 balance. From that perspective, there is no real notice of determination or collection action to review.

Having their day in court, however, the taxpayer wishes to argue otherwise. Rather than dismiss for mootness, the Court should exercise jurisdiction by granting a motion to restrain assessment or collection because: (1) the case is not moot (the IRS says the taxpayer still owes a balance (penalty) for that year, after all), (2) the IRS previously said (in the Notice of Determination for the since-paid liability) that there was no balance due for that tax year and should be held to that under res judicata, and (3) there can be no further CDP hearings on this matter because the Treasury Regulation that (seems to) allow more than one hearing for a given tax period (Treas. Reg. 301-6320-1(d)(2), Q&A-D1) is invalid.

The Court basically says “no” to each of these arguments or premises. In reverse order, the Court says (1) it doesn’t need to touch the regulation validity argument because ta prior case that explicitly allows more than one CDP hearing per period (Freije II) doesn’t rely on the Regulation; (2) res judicata is not applicable to IRS determinations that are administrative rather than judicial in nature; and (3) the case is moot because the notice of determination before the court pertains to fully paid tax. The argument the taxpayer wants to make pertains to a penalty which has not yet even had a CDP hearing (or determination).

Collectability As a Matter of Law: McCarthy v. C.I.R., Dkt. # 21940-15L

Lastly, we have the rare case where a taxpayer’s inaction (failure to fill out updated financial statements) is actually quite appropriate. In this instance, the case has been remanded to Appeals already, so court is waiting for parties to work things out. The IRS, as it often does, has since requested updated financial documents. But the taxpayer has not complied for the simple reason that it would be futile to do so: The determination of collectability, it appears, all circles around a legal question of whether a trust is the taxpayer’s nominee. Since the two parties are at loggerheads about that question, it is likely that will be a question for the Court and one of the reasons the judicial review of collection decisions can be important. Though, frustratingly for those of us working with low-income taxpayers, such wins seem to only appear to help those with trusts… See Campbell v. C.I.R., T.C. Memo. 2019-4.

Naked Assessments… In Employment Law? Drill Right Consultants, LLC v. C.I.R., Dkt. # 16986-14

There were two orders issued in the same day for the above case, and only the docket number was listed as “designated” (there was no link to a particular order) so I’m just going to treat both as designated orders, with greater detail on the more substantive of the two.

One of the orders (here) was a fairly quick denial of a summary judgment motion by the petitioner. The case concerns worker classification which, as Judge Holmes remarks, “is a famously multifactor test.” Generally, it is difficult to prevail in summary judgment on multi-factor (and highly fact intensive) tests. Here, the IRS disagrees with some of the “facts” (informal interrogatory responses) provided by petitioner in support of the motion for summary judgment. And that is all that it takes. Motion dismissed.

What is perhaps more interesting, however, is the accompanying order (here) that addresses who (petitioner or the IRS) has the burden of proof moving forward in this case. Those rules are pretty well set in deficiency cases, and the applicable Tax Court Rule 142(a)(1) also seems to make it an easy answer: the burden is on the taxpayer unless a statute or the court says otherwise.

There isn’t a direct statute on point. The most appropriate statute on point does not actually address the underlying type of tax at issue here: IRC 7491 burden shifting rules apply to income, estate and gift taxes but not employment taxes. Arguably, this could be interpreted as an intentional omission by Congress, such that there should be no burden shift with employment taxes. But, lacking a “direct hit” from Congress, might the taxpayer find some room for judge-made exceptions?

Here, the analysis goes to that most well-known of exceptions: the “naked assessment.” Judge Holmes quickly describes what appear to be two strains of naked assessment cases applicable to deficiency cases. The “pure” strain is a complete failure of the Commissioner to engage in a determination related to the taxpayer and completely ruins the validity of the Notice of Deficiency. This strain is derived from the well-known Scar v. C.I.R. case that taxpayers have rarely been able to use. The Scar strain actually won’t help petitioner, because he needs there to be jurisdiction in order to get court review of the employment status leading to the employment taxes (which are not subject to deficiency procedures).

Fortunately for petitioner, there is also a diluted strain of the naked assessment: the Portillo v. C.I.R. strain. The Portillo strain doesn’t ruin the validity of the notice of deficiency (thereby ruining jurisdiction), but simply removes the presumption of correctness. To get the Portillo outcome, you need to argue that there was a determination relating to the taxpayer, but that there was no “ligament of fact” behind that determination, and it should not be afforded a presumption of correctness. This is the judge-made exception the taxpayer wants here, and it certainly makes sense in omitted income cases (where the taxpayer has to prove a negative).

It appears that petitioner tries to get Portillo treatment by relying on a particular worker classification case, SECC Corp. v. C.I.R., 142 T.C. 225 (2014). In SECC Corp., both sides agreed that the Court didn’t have jurisdiction because the IRS didn’t issue its standard “Notice of Determination of Worker Classification” (NDWC) letter. Instead the IRS issued “Letter 4451” which both parties agreed (for different reasons) wasn’t a proper ticket to get into tax court. But the tax court found that they had jurisdiction anyway, because both parties were putting form over substance in contravention of the underlying statute’s (IRC 7436) intent. Essentially, the statute requires a determination by the IRS and the letter reflects the final determination: it doesn’t much matter what the letter is labeled and the legislative history buttressed the reading that a specific letter was not needed.

So why does the jurisdictional “substance over form” SECC Corp. case matter for petitioners here? It matters because they SECC Corp. never answered whether these “informal determinations” should be afforded the same presumption of correctness that a formal determination gets. And presumably, petitioner’s case is dealing with the same informal determination that SECC Corp. did.

Unfortunately, Judge Holmes isn’t buying that the SECC Corp. case created a new Portilla-style burden shift for worker classification issues. Petitioner has to point to something (statute or case law) that says the burden should shift. The only statute on point implies that it doesn’t. The only case(s) on point deal with notices of deficiency (SECC Corp. doesn’t speak one way or another on the issue). And so, with nothing to hang their hats on, they cannot prevail on the burden shift.

Where State and Federal Law Collide: Rules of Evidence and Supremacy: Verde Wellness Center Inc. v. C.I.R., Dkt. # 23785-17

The final designated order addresses who wins in the battle of State privilege vs. federal rules of evidence. Appropriately, it involves a medical marijuana dispensary in Arizona -once more highlighting the potential tensions of state and federal law. The IRS is trying to get more information about the dispensary via subpoena to a state department, and the state department (not the taxpayer) is saying “sorry Uncle Sam: that information is privileged.”

As far as Arizona state law goes, the department is correct on that point. Unfortunately, this is a federal tax case which, under IRC 7453 is governed by the federal rules of evidence, particularly FRE 501 which provides that federal law governs privilege questions in federal cases. And federal law in both the D.C. circuit and 9th Circuit (where the instant case would be appealable) make clear that no “dispensary – state” privilege is recognized.

Since it isn’t privileged under the rules that matter it doesn’t matter that it would be a crime under state law to disclose. That’s the gist of what the Constitution is getting at when it says “This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.” Art. VI, Cl. 2

Or, to parse, in conflict of state and federal law, Uncle Sam is the superior sovereign. Sorry Arizona.