Designated Orders 7/16 – 7/20

Caleb Smith from the University of Minnesota brings us this week’s designated orders. The parade of orders involving Graev continues and Professor Smith explains the evidentiary issues present when the IRS seeks to enter the necessary approval form after reopening the Tax Court record. Professor Smith also provides advice, based on another order entered this week, on how to frame your CDP case. A non-procedural matter that might be of interest to some readers is ABA Resolution 102A passed this week, urging Congress to repeal the repeal of the alimony deduction. For those interested in this issue, the resolution contains much background on the deduction.  Keith

Submitting Evidence of Supervisory Approval Post-Graev III

Last week, William Schmidt covered three designated orders that dealt with motions to reopen the record to submit evidence of supervisory approval under IRC 6751. I keep waiting for this particular strain of post-Graev III clean-up to cease, but to no avail: the week of July 16 two more designated orders on issues of reopening the record were issued. Luckily, there are important lessons that can be gleaned from some of these orders on issues that have nothing to do with reopening the record (something that post-Graev III cases shouldn’t have to worry about). Rather, these cases are helpful on the evidentiary issues of getting supervisory approval forms into the record in the first place.

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Choosing the Right Hearsay “Exception” Fakiris v. C.I.R., dkt. # 18292-12 (here)

In Fakiris, the IRS was once again confronted with the issues of (1) reopening the record to get supervisory approval forms into it, and (2) objections to those forms on hearsay grounds. At the outset (for those paying attention to docket numbers), one may be forgiven for wondering how it is even possible that this case was not decided well before Graev III. The briefing in Fakiris was completed in August, 2014 with no apparent court action until June, 2017. Judge Gale walks us through the procedural milestones in a footnote: although a decision was entered for the IRS about a year ago in T.C. Memo. 2017-126, the IRS filed a motion to vacate or revise (surprisingly, since they appear to have won on all fronts). The decision that the IRS sought to vacate includes a footnote (FN 20) providing that because petitioner did not raise a 6751 issue, it is deemed conceded. At the time, there was some uncertainty about whether the taxpayer had to affirmatively raise the issue, or whether it was a part of the IRS’s burden of production under Higbee. See earlier post from Carl Smith.

In any event, and no matter how old the case may be, it is still before the Court and the record must still be reopened for the IRS to succeed on the IRC 6751 issue. After the usual explanation of why it is proper for the Court to exercise its discretion to reopen the record, we arrive at the evidentiary issue: isn’t a supervisory approval form hearsay? At least so objects petitioner.

Where petitioners object to IRS supervisory approval forms as “hearsay” it appears to be the standard operating procedure of IRS counsel to argue the “business records” exception (see FRE 803(b)). Generally, the IRS prevails on this theory, but this theory creates potentially needless pitfalls. Fakiris demonstrates those pitfalls, noting that under the business record exception the IRS has certain foundational requirements it must meet “either by certification, see 902(11), Fed. R. Evid. [here], or through the testimony of the custodian or another qualified witness, see Rule 803(6)(D), Fed. R. Evid.” Without that foundation, the business records exception cannot hold -and indeed, in Fakiris the IRS lacks this foundation and is left spending more time and resources to go back and build it as their proffered evidence is excluded from the record.

So how does one avoid the time-consuming, perilous path of the “business exception?” Judge Gale drops a rather large hint in footnote 9: “We note that Exhibits A and B [the actual penalty approval forms] might also constitute “verbal acts”, i.e., a category of statements excluded from hearsay because ‘the statement itself affects the legal rights of the parties or is a circumstance bearing on conduct affecting their rights.’” If it is a “verbal act” it is categorically not hearsay (and not an “exception” to the hearsay rule). I have made exactly this argument before, although I referred to verbal act as “independent legal significance.” I am surprised that the IRS does not uniformly advanced this argument. In the instances that the IRS used it, the IRS has prevailed (as covered in the designated orders of the previous week). Judge Gale also refers to the advisory committee’s note to bolster the argument that the supervisory approval form is not hearsay: “If the significance of an offered statement lies solely in the fact that it was made, no issue is raised as to the truth of anything asserted, and the statement is not hearsay.” Advisory Committee Note on FRE 801(c) [here]. To me, that is what appears to be happening here. The IRS is simply trying to prove that a statement was made (i.e. a supervisor said “I approve of this penalty.”) The penalty approval form is that statement. It is absurd to think that the form is being offered for any other purpose (e.g. as evidence that the taxpayer actually was negligent, etc.).

If you don’t believe me (or Judge Gale), perhaps Judge Holmes will change your mind? In a designated order covered last week in Baca v. C.I.R., the IRS prevails on a theory that the supervisory approval form is a verbal act, without relying on the business exception. In reaching that determination, Judge Holmes references not only the FRE advisory committee note on point, but also Gen. Tire of Miami Beach, Inc. v. NLRB, 332 F.2d 58 (5th Cir. 1964) providing that a statement is a nonhearsay verbal act if “inquiry is not the truth of the words said, merely whether they were said.”

If you just aren’t sold on the “verbal acts” argument, Judge Gale’s Footnote 9 has yet more to offer. As a second possible avenue for getting the penalty approval form into evidence, Judge Gale suggests the public records exception of FRE 803(8). This exception to hearsay requires proper certification, but apparently has been successfully used by the IRS in the past with Form 4340 (See U.S. v. Dickert, 635 F. App’x 844 (11th Cir. 2016)).

All of this is to say, I think the IRS has ample grounds for getting the supervisory approval form properly into evidence. For petitioners, though it is likely a losing argument, if there are actual evidentiary concerns you must be sure to properly raise those objections -even if in the stipulation of facts. A second designated order issued the same week as Fakiris (found here) does not even get to the question of whether the forms are hearsay after reopening the record -presumably because the objections were never raised (the docket does not show a response by petitioner to the IRS’s motion to reopen the record).

Setting Yourself Up for Favorable Judicial Review on CDP Cases: Jackson v. C.I.R., dkt. # 16854-17SL (here)

Taxpayers that are unable to reach an agreement with the IRS on collection alternatives at a Collection Due Process (CDP) hearing generally have an uphill battle to get where they want to go. Yes, they can get Tax Court review of the IRS determination, but that review is under a fairly vague “abuse of discretion” standard. Still, there are things that petitioners can do to better situate themselves for that review.

At an ABA Tax Section meeting years ago, a practitioner recommended memorializing almost everything that is discussed in letters to IRS Appeals. Since the jurisdiction I practice in is subject to the Robinette “admin record rule,” it is especially important to get as much as possible into the record. Conversely, one may argue that the record is so undeveloped that it should be remanded because there is nothing for the Court to even review: see e.g. Wadleigh v. C.I.R., 134 T.C. 280 (2010). The order in Jackson provides another lesson: how to frame the issue before the Court.

In Jackson, the taxpayers owed roughly $45,000 for 2012 – 2015 taxes due to underwithholding. After receiving a Notice of Intent to Levy, the Jacksons timely requested a CDP hearing, checking the boxes for “Offer in Compromise,” “I Cannot Pay Balance,” and “Installment Agreement” on their submitted Form 12153. Over the course of the hearing, however, the only real issue that was discussed was an installment agreement -albeit, a “partial pay” installment agreement (PPIA). A PPIA is essentially an installment agreement with terms that will not fully pay the liability before the collection statute expiration date (CSED) occurs.

Obviously, the IRS is less inclined to accept a PPIA than a normal installment agreement, because a PPIA basically agrees to forgive a part of the liability by operation of the CSED. Sensibly, IRS Appeals required a Form 433-A from the Jacksons to determine if a PPIA made sense.

The Form 433-A submitted by the Jacksons appears to have pushed the envelope a bit. Most notably, the Jacksons claimed $740 for monthly phone and TV expenses (the ultra-deluxe HBO package?) and $629 per month in (voluntary) retirement contributions as necessary expenses. The settlement officer downwardly adjusted both of these figures (and possibly others) pursuant to the applicable IRM, and determined that the Jacksons could afford to pay much more than the $300/month they were offering. Going slightly above and beyond, the settlement officer proposed an “expanded” installment agreement (i.e. one that goes beyond the typical 72 months) of $1,100 per month. The Jackson’s rejected this, but appear to have proposed nothing in its stead. Accordingly, the settlement officer determined that the proposed levy should be sustained.

Judge Armen notes that with installment agreements (as with most collection alternatives under an abuse of discretion standard of review), “the Court does not substitute its judgment for that of the Appeals Office[.]” Sulphur Manor, Inc. v. C.I.R., T.C. Memo. 2017-95. If the IRS “followed all statutory and administrative guidelines and provided a reasoned, balanced decision, the Court will not reweigh the equities.” Thompson v. C.I.R., 140 T.C. 173, 179 (2013).

The Thompson and Sulphur Manor, Inc. cases provide, in the negative, what a petitioner must argue for any chance on review. Starting with Sulphur Manor, Inc., the petitioner must strive to present the question as something other than a battle of who has the “better” idea. In other words, don’t frame it as a battle of bad judgment (IRS Appeals) vs. good judgment (petitioner). If it must be a question of judgment, then Thompson gives the next hint on how to frame the issue: not that the IRS exercised “bad” judgment, but that they didn’t provide any reasoning for their decision in the first place (i.e. that they did not “provide a reasoned, balanced decision”). A lack of reasoning is akin to an “arbitrary” decision, which is by definition an abuse of discretion.

Better than framing the determination as lacking any reasoning, however, is where the petitioner can point to “statutory and administrative guidelines” that the IRS did not follow. Of course, this is difficult in collection issues because there are generally fairly few statutory guidelines the IRS must follow in the first place. But administrative guidelines do exist in abundance, at least in the IRM. Of course, this cuts both ways: the IRM can also provide cover for the IRS when it is followed, but appears to get to an unjust outcome.

Returning to the facts of Jackson, the petitioner faced an extremely uphill (ultimately losing) battle. It is basically brought before the Court as a request for relief on the grounds that the taxpayer just doesn’t like what the IRS proposes. As Judge Armen more charitably characterizes the case, by failing to engage in further negotiations with Appeals on a proper amount of monthly installment payments, “petitioners framed the issue for decision by the Court as whether the settlement officer, in declining to accept their offer of a partial payment installment agreement in the monthly amount of $300, abused her discretion by acting without a reasonable basis in fact or law.” This is asking for a pretty heavy lift of the Court, since there is no statute that provides the IRS must accept partial pay agreements, and the facts show the IRM was followed by the IRS. Not surprisingly, the Court declines to find an abuse of discretion.

Odds and Ends: Remaining Designated Orders

End of an Era? Chapman v. C.I.R., Dkt. # 3007-18 (here)

The Chapmans appear to be Tax Court “hobbyists” -individuals that enjoy making arguments in court more than most tax attorneys, and generally with frivolous arguments. The tax years at issue (going back to 1999) have numerous docket numbers assigned to them both in Tax Court and the 11th Circuit, all with the same general take-away: you have no legitimate argument, you owe the tax. But could this most recent action be the secret, silver bullet? Could this newfound argument, that they are not “taxpayers” subject to the Federal income tax when the liability is due to a substitute for return, be their saving grace?

Nope. All that argument does is get them slapped with a $3,000 penalty under IRC 6673(a). One hopes this is the end of the saga.

The Vagaries of Partnership Procedure: Freedman v. C.I.R., dkt. # 23410-14 (here)

Freedman involves an IRS motion to dismiss for lack of jurisdiction the portion of an individual’s case that concerns penalties the IRS argues were already dealt with in a prior partnership-level case. For a fun, late-summer read on the procedures under TEFRA for assessment and collection against a partner, after a partnership-level adjustment, this order is recommended.

 

When Does the Period Begin for Filing a CDP Request?

I previously blogged the case of Weiss v. Commissioner in which the taxpayer argued that the date on the Collection Due Process (CDP) Notice controlled the period for making a CDP request. Les provided an update on the case that included the oral argument and the briefs. The D.C. Circuit issued its opinion, an unpublished per curiam, on May 22, 2018, affirming the decision of the Tax Court but not without some criticism of both parties.

As a reminder about the case and to set up the language of the Circuit decision, the taxpayer owes a substantial amount of tax for many periods. Three bankruptcy cases suspended the statute of limitations on collection. Near the end of the statute of limitations, a revenue officer made a personal visit to the home of Mr. Weiss to deliver the CDP Notice. The RO dated the notice he expected to deliver during the visit; however, the RO did not go up to the door and deliver the notice because a dog of sufficient size and ferocity made him think better of personal delivery. Instead, the RO returned to his office and mailed the notice. He did not get around to mailing the notice until two days after the date on the notice.

Mr. Weiss filed a CDP request within 30 days of the date on which the notice was actually mailed but more than 30 days after the date on the notice. He argued that his request should be treated as a request for an equivalent hearing which does not suspend the statute of limitations on collection and the IRS argued that the actual date of mailing controls which meant that his request for a CDP hearing was timely and suspended the statute of limitations on collection. The consequence of a statute suspension was that a suit brought by the IRS was timely filed. The Tax Court agreed with the IRS that the date of actual mailing controls but had some sharp words for both parties.

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When requesting a CDP hearing or an equivalent hearing, the IRS asks that the taxpayer file a Form 12153. The form contemplates that if filed within 30 days of the CDP notice the taxpayer will receive a CDP hearing with full rights and if filed after that time but within one year of the CDP notice the taxpayer will receive an equivalent hearing. Although the form does not contemplate the option, it seems possible that a taxpayer could make a request for an equivalent hearing during the first 30 days by stating that request. Because of the suspension of the statute of limitations that accompanies a CDP hearing and because of the low likelihood of success in court on those cases, good reason exists to want an equivalent hearing in some circumstances.

Here, the taxpayer argues that he wanted an equivalent hearing and he thought he would get one based on the timing of his request. In my experience the IRS regularly puts dates on its letters, not just CDP notice letters, that do not correspond to the date on which the IRS mails the letter. Weiss tells you not to rely on the date of the letter as the meaningful date. For taxpayers seeking an equivalent hearing in this context, it would seem that a clear statement that an equivalent hearing is sought plus waiting for a couple of weeks after the 30 day period ends from the date on the CDP notice would be the best practice. The D.C. Circuit, while agreeing that the language of the statute dictates using the date of mailing rather than the date on the letter, had some pretty sharp words for the IRS and its practice of putting a date on the letter that was not the actual date of mailing:

Nonetheless, in spite of the unappealing proposition that we must side either with a taxpayer deliberately attempting to manipulate the Code to prevent paying his own taxes or a government agency that seems not to care whether it provides the citizenry with notice of their rights and liabilities, we must decide whether the date on the notice or the date of mailing governs. The taxpayer’s position has the advantage of common sense. But the government’s position has the insurmountable advantage of compliance with the language of the statute. That is to say, what the statute requires is “the notice . . . shall be . . . sent by certified or registered mail, return receipt requested . . . not less than thirty days before the date of the first levy. . . .” (emphasis added). In this case, the undisputed evidence is that the notice was “sent,” that is mailed, no more than thirty days before Weiss’s March 14 mailing. Therefore the statute was tolled.

We note in parting the court’s hope that few taxpayers will be as anxious as Weiss to manipulate the law in order to attempt to extinguish tax liabilities. We further hope that few agencies will be as careless with dates and especially with the rights of the citizens as the IRS in this case. Nonetheless, unattractive as the position of the IRS may be, it does comport with the language of the statute and the apparent meaning of the word “send.” We therefore affirm the decision of the Tax Court.

Congress could fix this problem, and others regarding CDP notices, by requiring the IRS to put a date on the letter by which the taxpayer should file the request and providing that the taxpayer could rely on that date or on the later date of actual mailing. There were enough problems with notices of deficiency that Congress addressed the situation in that context in 1998 at the same time it created the CDP process; however, it failed to give taxpayers seeking CDP relief the same benefit as those seeking relief in the deficiency context.

 

Recent Tax Court Case Highlights CDP Reach and Challenges With Collection Potential (and a little Graev too)

I read with interest Gallagher v Commissioner, a memorandum opinion from earlier this month.  The case does not break new ground, but it highlights some interesting collection issues and also touches on the far-reaching Graev issue.

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First the facts, somewhat simplified.  The taxpayer was the sole shareholder of a corporation whose line of business was home building and residential construction.

The business ran into hard times and was delinquent on six quarters of employment taxes from the years 2010 and 2011. IRS assessed about $800,000 in trust fund recovery penalties under Section 6672 on the sole shareholder after it determined he was a responsible person who willfully failed to pay IRS. IRS issued two notices of intent to levy including rights to a CDP hearing. The taxpayer timely requested a hearing, and the request stated that he sought a collection alternative.

After the taxpayer submitted the request for a CDP hearing the matter was assigned to a settlement officer (SO). There was some back and forth between the SO and the taxpayer, and the taxpayer submitted an offer in compromise based on doubt as to collectability for $56,000 to be paid over 24 months. After he submitted the offer, IRS sent a proposed assessment for additional TFRP for some quarters in the years 2012 and 2014.

The SO referred the offer to an offer specialist. Here is where things get sort of interesting (or at least why I think the case merits a post). The specialist initially determined that the taxpayer’s reasonable collection potential (RCP) was over $847,000. That meant that the specialist proposed to reject the offer, as in most cases an offer based on doubt as to collectability must at least equal a taxpayer’s RCP, a figure which generally reflects a taxpayer’s equity in assets and share of future household income.

Before rejecting the offer, the specialist allowed the taxpayer to respond to its computation of RCP. The taxpayer submitted additional financial information and disputed the specialist’s computation of the taxpayer’s equity in assets that he either owned or co-owned.  That information prompted the offer specialist to revise downward the RCP computation to about $231,000 after the specialist took into account the spouse’s interest in the assets that the taxpayer co-owned and also considered the impact of the spouse on his appropriate share of household income.

Following the specialist’s revised computations, the taxpayer submitted another offer, this time for about $105,000. Because it was still below the RCP (at least as the specialist saw it), she rejected the follow up offer, which led the IRS to issue a notice of determination sustaining the proposed levies and then to the taxpayer timely petitioning the Tax Court claiming that IRS abused it discretion in rejecting his offer and sustaining the proposed levies.

So what is so interesting about this? It is not unusual for taxpayers to run up assessments and to then disagree with offer reviewers on what is an appropriate offer and to differ on RCP. RCP calculations are on the surface pretty straightforward but in many cases, especially with nonliable spouses, illiquid assets and shared household expenses (as here) that calculation can be complex and lead to some differences in views.

In addition, the opinion’s framing of the limited role that Tax Court plays in CDP cases that are premised primarily on challenges to a collection alternative warrants some discussion. The opinion notes that the Tax Court’s function in these cases is not to “independently assess the reasonableness of the taxpayer’s proposed offer”; instead, it looks to see if the “decision to reject his offer was arbitrary, capricious, or without sound basis in fact or law.” That approach does not completely insulate the IRS review of the offer (or other alternative) from court scrutiny, and in these cases it generally means that the court will consider whether the IRS properly applied the IRM to the facts at hand. While that is limited and does not give the court the power to compel acceptance of a collection alternative, it does allow the court to ensure that the IRS’s rejection stems from a proper application of the IRM provisions in light of the facts that are in the record and can result in a remand if the court finds the IRS amiss in its approach (though I note as to whether the taxpayer can supplement the record at trial is an issue that has generated litigation and differing views between the Tax Court and some other circuits).

That led the court to directly address one of the main contentions that the taxpayer made, namely that the specialist grossly overstated his RCP due to what the taxpayer claimed was an error in assigning value to his share of an LLC that owned rental properties.  This triggers consideration of whether it is appropriate to assign a value for RCP purposes to an asset that may in fact also be used to produce income when the future income from that asset is also part of the RCP. The IRM addresses this potential double dipping issue but the Gallagher opinion sidesteps application of those provisions because the rental properties did not in fact produce income, and the offer specialist rejection of the offer, and thus the notice of determination sustaining the proposed levies, was not dependent on any income calculations stemming from the rental properties.

The other collection issue worth noting is a jurisdictional issue. During the time the taxpayer was negotiating with the offer specialist, IRS proposed to assess additional TFRP for quarters from different years that were not part of the notice of intent to levy and subsequent CDP request:

Those liabilities [the TFRP assessments from quarters that were not part of the CDP request] were not properly before the Appeals Office because the IRS had not yet sent petitioner a collection notice advising him of his hearing rights for those periods.  In any event, the IRS had not issued petitioner, at the time he filed his petition, a notice of determination for 2012 or 2014. We thus lack jurisdiction to consider them. [citations omitted]

Yet the taxpayer in amending his offer included those non CDP years in the offer. The Gallagher opinion in footnote 5 discusses the ability of the court to implicitly consider those non CDP years in the proceeding:

We do have jurisdiction to review an SO’s rejection of an OIC that encompasses liabilities for both CDP years and non-CDP years. See, e.g., Sullivan v. Commissioner, T.C. Memo. 2009-4. Indeed, that is precisely the situation here: the SO considered petitioner’s TFRP liabilities for 2012 and 2014, as well as his TFRP liabilities (exceeding $800,000) for the 2010 and 2011 CDP years, in evalu- ating his global OIC of $104,478. We clearly have jurisdiction to consider (and in the text we do consider) whether the SO abused his discretion in rejecting that offer. What we lack jurisdiction to do is to consider any challenge to petitioner’s underlying tax liabilities for the non-CDP years.

This is a subtle point and one that practitioners should note if in fact liabilities arise in periods subsequent to the original collection action that generated a collection notice and a consideration of a collection alternative in a CDP case. Practitioners should sweep in those other periods to the collection alternative within the CDP process; while those periods are not technically part of the Tax Court’s jurisdiction they implicitly creep in, especially in the context of an OIC which could have, if accepted, cleaned the slate.

The final issue worth noting is the opinion’s discussion of Graev and the Section 6751(b) issue. While acknowledging that it is not clear that the TFRP is a penalty for purposes of the Section 6751(b) supervisory approval rule, the opinion notes that in any event the procedures in this case satisfied that requirement, discussing and referring to the Tax Court’s Blackburn opinion that Caleb Smith discussed in his designated orders post earlier this month:

We found no need to decide that question because the record included a Form 4183 reflecting supervisory approval of the TFRPs in question. We determined that the Form 4183 was suffic- ient to enable the SO to verify that the requirements of section 6751(b)(1) had been met with respect to the TFRPs, assuming the IRS had to meet those requirements in the first place.

Here, respondent submitted a declaration that attached a Form 4183 showing that the TFRPs assessed against petitioner had been approved in writing by …. the [revenue officer’s] immediate supervisor…. In Blackburn, we held that an actual signature is not required; the form need only show that the TFRPs were approved by the RO’s supervisor. Accordingly, we find there to be a sufficient record of prior approval of the TFRPs in question.

Eleventh Circuit Says Untimely-Made CDP Arguments “May Deserve Attention from the Bench and Bar”

We welcome back frequent guest blogger Carl Smith. Today, Carl discusses a recent decision on appeal from dismissal by the Tax Court for untimely filing a CDP request. The taxpayer timely filed the request after receipt but not within the applicable time from mailing. The facts make for a compelling case and maybe the next person with this problem now has a basis for winning this argument. We also wish to thank Tax Notes for allowing us to link to an comments to proposed regulations referred to at the bottom of this post. Keith 

Here’s something you don’t see every day: The Eleventh Circuit faced two CDP arguments that it held were raised too late for it to consider on appeal. Yet the court was so bothered by the possible correctness of the arguments that it deliberately wrote a published opinion explaining the arguments. Here’s the penultimate paragraph of the opinion:

We do not reach the due process or legislative history arguments because Mr. Berkun did not properly raise them in the tax court. Given the lack of any substantive ruling on our part, this may seem like an opinion “about nothing.” Cf. Seinfeld: The Pitch (NBC television broadcast Sept. 16, 1992). And maybe it is. But we have chosen to publish it because the issues that Mr. Berkun attempts to raise on appeal may deserve attention from the bench and bar.

Berkun v. Commissioner, 2018 U.S. App. LEXIS 13910 (11th Cir. May 25, 2018) (slip op. at 12). This post will set out the arguments to publicize them – in hopes that practitioners and Tax Court judges dealing with pro se petitioners will consider raising the arguments timely in future Tax Court cases. For the Tax Court to accept one of the arguments, though, it will have to overrule one of its prior T.C. opinions.

In a nutshell, the first argument is that when the IRS puts a person in prison for tax fraud, Due Process requires that any notice of intention to levy (NOIL), if mailed, be mailed to him or her in prison and not merely to the residential address shown on the most recent tax return (where the IRS knows he or she is not currently living).

The second argument is one that has come up a number of times. In the innocent spouse case of Mannella v. Commissioner, 132 T.C. 196, 200 (2009), rev’d and remanded on other issue, 631 F.3d 115 (3d Cir. 2011), the Tax Court wrote:

If the [NOIL] is properly sent to the taxpayer’s last known address or left at the taxpayer’s dwelling or usual place of business, it is sufficient to start the 30-day period within which an Appeals hearing may be requested. Sec. 301.6330-1(a)(3), A-A9, Proced. & Admin. Regs. Actual receipt of the notice of intent to levy is not required for the notice to be valid for purposes of starting the 30-day period. Id. We see no reason the notice of intent to levy, including information about her right to section 6015 relief, mailed to petitioner at her last known address but not received by her should start the 30-day period to request an Appeals hearing but not start the 2-year period to request relief under section 6015(b) or (c).

In Berkun, the second argument was that both the structure of CDP and a sentence from its legislative history (one that was not discussed in the pro se case of Mannella), indicate that, contrary to Mannella, a NOIL mailed to a last known address but not actually received by the taxpayer in the 30-day period in which to request a CDP hearing does not cut off the right of the taxpayer to later request a CDP hearing (i.e., not an equivalent hearing), and the CDP regulation cited in Mannella is either distinguishable or invalid.

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Berkun Facts

Alan Berkun had been convicted in New York of securities and tax fraud. The judge imposed restitution both to his victims and to the IRS. The IRS assessed the restitution under section 6201(a)(4). At the time of his incarceration, Berkun had been living with his girlfriend and their three mutual children in a house he owned in Florida, so he was incarcerated in Florida for a number of years.

While in jail, he wrote the IRS a letter asking that all correspondence concerning his tax issues be sent to him in jail. However, the income tax returns that he filed for the last two years prior to his release showed his address as the Florida house in which his girlfriend and children lived. He expected to move back into that house when he got out of prison, but shortly before release, his girlfriend ended the relationship and refused to let him move back in.

Shortly before Berkun’s release, a Revenue Officer (RO) was assigned to try to collect the restitution assessment. The RO learned that Berkun was in jail, but wanted to issue a NOIL. The RO decided to mail the NOIL to Berkun’s Florida house, without even copying Berkun in jail. Berkun’s girlfriend got the NOIL and threw it in the garbage, not telling Berkun about it.

A few months later, Berkun was released to live in his mother’s house. The RO visited him there and brought a copy of the NOIL, which he gave to Berkun. This was the first Berkun heard of the NOIL. Berkun promptly hired an attorney, who got a Form 12153 requesting a CDP hearing into the IRS’ possession within 30 days after the meeting. Berkun was not seeking to deny the correctness of the restitution assessment, but just to arrange for a collection alternative to immediate full payment through levy. One of the arguments that Berkun made was that his former girlfriend had converted a large amount of his property (including a valuable stamp collection) shortly after she learned of the NOIL, and he wanted the IRS to pursue her for collection of part of the liability.

Appeals held a hearing in which it did not agree to the collection alternative proposed or to pursue the former girlfriend. After the hearing, Appeals issued a decision letter, taking the position that the hearing was an equivalent hearing, not a CDP hearing, since Berkun had not filed his Form 12153 within 30 days of the mailing of the NOIL to his Florida house.

Tax Court Proceedings

Berkun’s lawyer filed a petition with the Tax Court and argued, under Craig v. Commissioner, 119 T.C. 252 (2002), that the decision letter should be treated as a CDP notice of determination giving the right to Tax Court review because Berkun had timely requested a CDP hearing within 30 days of actually receiving the NOIL. Berkun’s lawyer argued that, based on prior cases involving prisoners put in jail by the IRS, the last known address for Berkun on the day that the NOIL was mailed was prison, not the Florida house; thus, the NOIL that was mailed was invalid, and the NOIL that was hand-delivered was the first valid NOIL, as to which a timely Form 12153 had been filed.

In an unpublished order, Judge Carluzzo dismissed the petition for lack of jurisdiction, holding on these facts that the NOIL was mailed to Berkun’s last known address, since it was mailed to the address shown on his most recent tax return.

Keith and I read the unpublished order and realized that Berkun had a second argument for why the Tax Court had jurisdiction that Judge Carluzzo had not discussed (naturally, since Berkun’s then-lawyer did not know about the argument). We contacted Berkun and his lawyer and made them aware of the argument. Berkun’s lawyer moved to vacate the order of dismissal, making this new argument – that, even if the NOIL was mailed to Berkun’s last known address, because he did not actually receive it during the 30-day period, he was entitled to a CDP hearing by requesting one within 30 days after actual receipt. A copy of a 51-page memorandum of law that accompanied the motion to vacate can be found here.

The memorandum was so long because it takes a lot of time to explain this argument. I will not go into the argument in great detail. Instead, the reader may read the memorandum or a more detailed summary of it in a prior post I did on it here in connection with unpublished orders in a case named Godfrey v. Commissioner, Tax Court Docket No. 21507-13L. As noted in the post, Godfrey was a case where the NOIL, although mailed to the taxpayer’s last known address, was not actually received during the 30-day period. The post noted that the same had happened in Mannella and in Roberts v. Commissioner, T.C. Summary Op. 2010-21. In each case, the Tax Court cited the CDP regulation saying that an NOIL that was mailed to the last known address was valid, even if not received. But, the court did not discuss the structure of CDP or the legislative history that suggests that the regulation is distinguishable or invalid as to cutting off the right of a taxpayer in such a case to get a CDP hearing if the taxpayer did not file a hearing request within 30 days of the NOIL’s mailing.

Just to whet the reader’s appetite, here is from the Conference Committee report, where Congress wrote:

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

H.R. Rep. (Conf.) 105-599, 105th Cong., 2nd Sess. (1998) at 266, 1998-3 C.B. at 1020 (emphasis added).

The second and third sentences of the above-quoted language are the origin of the equivalent hearing, discussed in detail at Reg. § 301.6330-1(i). The last sentence, though, appears to be a command to hold a regular CDP hearing when a properly addressed NOIL was not received within the 30-day period. Only in a real CDP hearing must the IRS suspend collection action under section section 6330(e)(1). Thus, while it is true that an NOIL that is not received in the 30-day period is valid for some purposes (e.g., to allow the IRS to start collection), it should not be valid for purposes of cutting off a right to a CDP hearing when one is requested later, after the NOIL is actually received.

Moreover, Congress was clearly concerned that nonreceipt of important IRS notices could deprive a taxpayer of prepayment Tax Court review. For that reason, Congress explicitly provided that, in a CDP hearing, the taxpayer may raise a challenge to the underlying liability if the taxpayer did not actually receive a notice of deficiency. Section 6330(c)(2)(B). It would be inconsistent with the purposes of CDP to allow Tax Court prepayment challenges to happen when a notice of deficiency was not actually received, but not when a NOIL was not actually received.

Judge Carluzzo wanted no part of this argument, so he denied the motion to vacate in a brief paragraph in an unpublished order, as follows:

In the face of seemingly plain statutory language and even plainer regulations”, Andre v. Commissioner, 127 T.C. 68, 71 (2006), petitioner, in his motion to vacate filed May 12, 2016, challenges our order of dismissal for lack of jurisdiction, entered April 15, 2016, that is supported by that plain statutory language, even plainer regulations, and numerous opinions of this Court. In support of his motion petitioner relies upon certain legislative history that his memorandum of authorities, also filed May 12, 2016, shows to raise more questions than it answers. Otherwise if, as in this case, the notice referenced in I.R.C. §6330(a)(1) & (2) is properly mailed to the taxpayer, we are aware of no authority for petitioner’s argument that the period referenced in I.R.C. §6330(a)(3)(B) should take into account the date the notice is received by the taxpayer rather than the date the notice is mailed by the Commissioner. 

Appellate Proceedings 

On appeal to the Eleventh Circuit, Berkun retained Joe DiRuzzo, who was admitted to that Circuit and had extensive appellate experience. Joe made the decision not to argue that the NOIL was not mailed to the last known address, but Joe incorporated into his brief the argument that an NOIL that is not timely received can still give rise to a CDP hearing and a new Due Process argument.

The Due Process argument was based on non-tax case law from forfeiture cases that holds that a notice of forfeiture, to satisfy Due Process, must be sent to an incarcerated person in jail. See, e.g., Dusenbery v. United States, 534 U.S. 161, 164-69 (2002) (Due Process satisfied by mailing a notice of forfeiture to a claimant by certified mail to the prison where he was incarcerated, to the residence where the claimant’s arrest occurred, and to the home where the claimant’s mother lived); United States v. McGlory, 202 F.3d 664, 672, 674 (3d Cir. 2000); Weng v. United States, 137 F.3d 709, 714 (2d Cir. 1998). Joe argued that these Due Process cases should be extended to serving NOILs, as well.

As noted above, the Eleventh Circuit held that both the legislative history and Due Process arguments should have been raised in the Tax Court before Judge Carluzzo’s order of dismissal, and the judge was within his rights not to consider the legislative history argument in a motion for reconsideration (though, query whether the judge actually considered it and rejected it on the merits?). But, the Eleventh Circuit was obviously troubled by the possible merit of these two arguments. So, it wrote it published opinion “about nothing” to make the bench and bar aware of the arguments.

Observation

The legislative history argument is not a new one to the IRS. As noted in my prior Godfrey post, in August 2013, the IRS proposed changes to the innocent spouse regulations under section 6015. See REG-132251-11, 78 F.R. 49242-49248, 2013-37 I.R.B. 191. Among the proposed changes was one to Reg. § 1.6015-5(b)(3)(ii) to “clarify” that the 2-year period of section 6015(b) or (c) starts irrespective of an electing spouse’s actual receipt of the NOIL, if it was sent by certified or registered mail to the electing spouse’s last known address. This proposal was explicitly proposed to align the regulations to the holding in Mannella. On January 30, 2014, a number of low-income taxpayer clinicians (including Keith and I) submitted combined comments on the proposed regulations that, among other things, argued that Mannella was wrongly decided and the CDP regulation about non-receipt of NOILs was inconsistent with the legislative history. We recommended that, if an NOIL is considered a collection activity, the 2-year period start from the date of actual receipt of the NOIL. Our comments were published in Tax Notes Today, where they can be found at 2014 TNT 22-64. The proposed regulations are still outstanding, and the IRS has not responded to our comments.

 

Does the Tax Court Sometimes Have Refund Jurisdiction in CDP Cases?

Frequent contributor Carl Smith discusses a case implicating the Tax Court’s ability to determine and order the credit or refund of an overpayment in a CDP case. Les

In 2006, in a court-reviewed opinion, the Tax Court in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), held that the Tax Court lacked jurisdiction to determine an overpayment in a Collection Due Process (“CDP”) case. Although section 6512(b) gives the Tax Court overpayment jurisdiction, the court held that section 6512(b) was limited in application to deficiency cases and interest abatement cases, where it is specifically referenced in section 6404(h)(2)(B). The Tax Court has never reexamined its Greene-Thapedi holding, and the holding was adopted only in a D.C. Circuit opinion, Willson v. Commissioner, 805 F.3d 316 (D.C. Cir. 2015), presenting a highly unusual fact pattern. A case named McLane v. Commissioner, Docket No. 20317-13L, currently pending before Judge Halpern may lead to consideration of Greene-Thapedi’s holding in the Fourth Circuit in a case with a more typical fact pattern than that presented in either Greene-Thapedi or Willson.

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The McLane case is not new to readers of PT. A March designated order in the case was discussed by Samantha Galvin in her post on April 5. But, that post did not discuss Greene-Thapedi, so I think another post expanding on McLane is called for.

In Greene-Thapdei, a taxpayer complained during a CDP hearing of alleged excess interest and late-payment penalty that she had been charged after she settled a Tax Court deficiency case.  The IRS had assessed the agreed tax, as well as interest and late-payment penalty thereon.  During the Tax Court CDP case, the balance charged was fully paid by a credit that the IRS took from a later taxable year, so the Tax Court dismissed the case as moot, concluding that it had no overpayment jurisdiction in CDP.  But, a curious footnote (19) in the majority opinion may have tried to leave open the issue of overpayment jurisdiction in cases where the taxpayer did not receive a notice of deficiency and so could challenge the underlying liability in CDP. However, the footnote is far from clear.  The footnote reads:

We do not mean to suggest that this Court is foreclosed from considering whether the taxpayer has paid more than was owed, where such a determination is necessary for a correct and complete determination of whether the proposed collection action should proceed. Conceivably, there could be a collection action review proceeding where (unlike the instant case) the proposed collection action is not moot and where pursuant to sec. 6330(c)(2)(B), the taxpayer is entitled to challenge “the existence or amount of the underlying tax liability”. In such a case, the validity of the proposed collection action might depend upon whether the taxpayer has any unpaid balance, which might implicate the question of whether the taxpayer has paid more than was owed.

Judge Halpern joined nearly every other judge in the majority opinion.  Judge Vasquez filed a dissent arguing that the Tax Court implicitly had jurisdiction to determine an overpayment in CDP.

In McLane, the IRS says it issued a notice of deficiency to McLane’s last known address, but, when he never filed a Tax Court petition, it assessed the income tax deficiency.  It later sent him a notice of intention to levy.  In the CDP case in Tax Court, the IRS conceded that he did not receive the notice of deficiency so could challenge the underlying liability.  After a trial, the IRS conceded that McLane proved not only the disputed deductions in the notice of deficiency, but also that he had more deductions than were reported on his return and so overpaid his taxes by about $2,500.  After the post-trial briefs were in (but before any opinion was issued), the parties held a conference call with Judge Halpern about what to do.  The IRS took the position that the Tax Court had no jurisdiction to find an overpayment and any claim filed today would be time barred.  After the conference call, the Judge in March issued an order asking for the parties to file memoranda addressing whether the court had overpayment jurisdiction.  The 6-page order did not mention Greene-Thapedi, but stated:

Because the question of our jurisdiction in a collection due process (CDP) case to determine and order the credit or refund of an overpayment appears to be a novel one, we will require the parties to submit supplemental briefs addressing the issue before we resolve it.

Judge Halpern doesn’t usually forget about relevant opinions, so I suspect that he may be thinking that Greene-Thapedi is distinguishable (maybe under footnote 19?).  In the order, the judge also suggested that the pro se taxpayer consult a tax clinic in the Baltimore or D.C. area before submitting his memorandum.

Although the taxpayer spoke to the tax clinic at the University of the District of Columbia, he decided not to retain that clinic and stayed pro se.

In response to the judge’s order, three memoranda were eventually filed with the Tax Court: (1) an IRS’ memorandum, (2) the taxpayer’s memorandum, and (3) an amicus memorandum that the judge allowed the UDC clinic to submit. Full disclosure: Although the amicus memorandum was written primarily by UDC law student Roxy Araghi and her clinic director, Jacqueline Lainez, since I assisted them significantly, I am also listed as of counsel on the memorandum.

Essentially, the IRS simply points to Greene-Thapedi as controlling and argues that the Tax Court lacks overpayment jurisdiction in CDP for the reasons stated by the majority in that opinion.

The IRS also cites and relies on Willson. In Willson, the IRS erroneously sent the taxpayer refund checks for two taxable years, when it should have sent only one refund check. Later realizing its mistake, the IRS assessed in the earlier year the erroneous payment amount. The taxpayer eventually realized that one of the two refunds checks was erroneous, and he voluntarily sent the IRS some money for the year for which the IRS had set up the assessment. When the IRS did not get back the rest of the assessment from the taxpayer, it issued a notice of intention to levy for the balance. During the Tax Court CDP case, the Tax Court held that assessment was not a proper way of collecting back the erroneous refund. And appropriate methods (such as a suit for erroneous refund) were now time-barred. So, the IRS abated the assessment. Then, the IRS argued that the case was moot. But, at that point, the taxpayer contended that he had overpaid his tax (the voluntary payments), and he asked the Tax Court to so hold, citing the Tax Court’s authority under section 6330(c)(2)(B) to consider challenges to the underlying liability. The Tax Court dismissed the CDP case as moot, without finding an overpayment.

The D.C. Circuit in Willson agreed with the Tax Court, but stated: “The IRS retained the $5,100 not to satisfy a tax liability but to recover an erroneous refund sent as a result of a clerical error. The debt created by such an erroneous refund is not a tax liability.” 805 F.3d at 320 (emphasis in original).

Since Willson does not involve a deficiency in tax and may not even involve underlying tax liability at all, it may not be controlling in McLane.

And, no other Court of Appeals has considered Greene-Thapedi’s Tax Court jurisdictional issue.

The McLane taxpayer and UDC amicus memoranda argue that Greene-Thapedi is distinguishable from McLane on the facts or was, simply, wrongly decided. The taxpayer’s memorandum also distinguishes Willson factually in a footnote. Both memoranda make many of the arguments that Judge Vasquez included in his dissents in Greene-Thapedi for why the Tax Court has inherent overpayment jurisdiction in a CDP case – especially one where a taxpayer is litigating a deficiency because he did not receive a notice of deficiency.

As I see it, either way Judge Halpern rules, there is a good chance that the losing party will take this issue up to the Fourth Circuit on appeal, where we might finally get a ruling on whether the Greene-Thapedi opinion is right or not after all.

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Frivolity, CDP Remands, Proving A Return Filed, and Untimely Refund Claims: Designated Orders 4/30 – 5/4/2018

Professor Patrick Thomas brings us the latest installment as we continue to play catch up on some interesting designated orders. Les

 This week’s orders bring us, yet again, a few taxpayers behaving badly (the interminable Mr. Ryskamp graces the pages of this blog yet again), a bevy of Graev-related orders on motions to reopen from Judge Carluzzo (all granted), three orders from Judge Jacobs, and a few deeper dives.

First, Judge Buch exercises the Tax Court’s ability to remand CDP cases for changed circumstances. Judge Ashford reminds us of the potential power of dismissing a deficiency case for lack of jurisdiction due to an untimely Notice of Deficiency—along with the proof needed to achieve such a result. Finally, Judge Holmes handles a motion to vacate due to petitioner’s inability to obtain a refund from the Tax Court.

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 Special Trial Judges Wield the Section 6673 PenaltyDocket Nos. 12507-17 L, Rader v. C.I.R. (Order Here); Docket No. 3899-18, Ryskamp v. C.I.R. (Order Here)

In Rader, Judge Panuthos granted respondent’s motion to dismiss for failure to state a claim in the CDP context. It’s relatively rare for the Tax Court to hear or grant such motions in CDP cases. When a petition is timely and properly filed, the Court usually decides, at minimum, whether the Settlement Officer “verifi[ed] … that the requirements of any applicable law or administrative procedure have been met”, as is required under section 6330(c)(1)—even where the petitioner doesn’t raise that issue or participate in the administrative hearing or Tax Court proceeding.

In contrast, here Judge Panuthos never reaches the merits (despite a timely filed request for a CDP hearing and timely filed petition) because the petition itself didn’t really say anything of substance.  Indeed, Judge Panuthos characterized it as containing “little more than pseudo-legal verbiage; references to [Code] sections and citations of tax cases, accompanied by petitioner’s questionable interpretations of those Code sections and case holdings; and accusations of fraud on the part of the IRS.”

The petition did try to challenge the underlying tax liability for 2012, noting that the Substitute-For-Return was inappropriate. Judge Panuthos gives a short recitation of why individuals are obligated to pay federal income tax, and why the Service has authority to assess tax via an SFR. (Not that he was required to; petitioner had already challenged his underlying liability, unsuccessfully, in a deficiency case, and so was barred from litigating the issue here). He then grants the motion to dismiss.

Finally, Judge Panuthos assesses, on the Court’s own motion, a $5,000 penalty under section 6673 for asserting “frivolous and meritless arguments”. Apparently, Mr. Rader has been assessed such a penalty in four (four!) separate deficiency dockets, including the one giving rise to this CDP matter. I’m not sure if another penalty will set him on the straight and narrow—but at this juncture, not issuing a penalty simply isn’t an option.

In Judge Guy’s order, Mr. Ryskamp is at it again. As we reported last month, Mr. Ryskamp attempted to acquire CDP jurisdiction by writing “Notice of Determination” on top of a Letter 2802C for 2017, and filed a petition with that letter on January 5, 2018. (The Letter 2802C indicates to a taxpayer that they submitted incorrect information to their employer on Form W-4). Judge Guy dismissed that case for lack of jurisdiction, warning him about the section 6673 penalty in an order dated March 23, 2018. In another post, we notedthat Mr. Ryskamp did the same thing with a LT16 notice (for those keeping score at home, still not a Notice of Determination), which Judge Gustafson quickly dismissed (though without the 6673 warning).

Now, Mr. Ryskamp filed a petition dated February 23, 2018, again attaching a letter related to withholding compliance, which he had requested from the Service. Judge Guy issued an Order to Show Cause why the case shouldn’t be dismissed for lack of jurisdiction; Mr. Ryskamp responded that the Court should regardless answer the following question: “What are a taxpayer’s substantive collection due process rights?”

Bad answer—or, question. Judge Guy dismisses the case for lack of jurisdiction. Additionally, he imposes a $1,000 penalty under section 6673, noting that Mr. Ryskamp was previously warned about the penalty four years earlier, and had been subject to two other case dismissals upon similar grounds. Judge Guy didn’t yet reference his earlier order regarding the Letter 2802C (perhaps because the Order to Show Cause was filed a day beforethe earlier order was issued).

What IRS notice will next reach the Tax Court as Mr. Ryskamp seeks to acquire jurisdiction of his substantive due process arguments? Time—and ever-increasing 6673 penalties—will likely tell. In the meantime, however, the Ninth Circuit will deal next with Mr. Ryskamp; he filed a Notice of Appeal on May 4. Mr. Ryskamp should take a look at section 6673(b)(3), which allows for the Service to assess and collect as a tax any sanctions he receives in a Court of Appeals.

Remanding for Changed Circumstances in a CDP Hearing Docket No. 1801-17 L, Rine v. C.I.R. (Order Here)

Turning the tables, Judge Buch encounters a relatively sympathetic taxpayer in Rine, where the petitioner is mired in the collection of a Trust Fund Recovery Penalty under section 6672. In the CDP hearing, Mr. Rine rejected the Settlement Officer’s proposed $914 per month installment agreement, and upon issuance of a Notice of Determination sustaining the levy, petitioned the Tax Court.

While Mr. Rine actively participated in the CDP hearing—submitting a Form 433-A with expenses well in excess of his income—it seems the Settlement Officer substantially adjusted his figures. Ultimately, she concluded that Mr. Rine had at least $914 per month in disposable income, and that he’d need to sell some assets (stock, life insurance, and his 401(k)) before that could occur. He alleged that these assets had already been fully leveraged to finance his struggling former business.

Meanwhile, this business, which originally incurred the employment taxes at issue, had already entered into a bankruptcy plan to repay the liability (or more likely, some portion of the liability). Throughout this litigation, it paid $10,000 per month (which eventually mooted one of the tax periods before the Court in Pine, as it became paid in full). Mr. Rine argued that the liability was being paid under the bankruptcy plan, and so the IRS shouldn’t collect from him personally.

Respondent filed a motion for summary judgment, arguing that there was no abuse of discretion in sustaining the levy, because Mr. Rine rejected the proposed Installment Agreement. In response, Mr. Rine repeated the arguments above, and noted that his wife had recently suffered from an accident, reducing her income; his own medical conditions had also deteriorated, increasing his expenses. Judge Buch holds that no abuse of discretion occurred, because the SO considered the information petitioner provided, verified applicable legal and administrative requirements, and engaged in the CDP balancing test.

But that was the extent of Judge Buch’s analysis. As such, I’m left with a number of questions: (1) how did the SO arrive at a $914 per month income surplus, where Mr. Rine’s submissions deviate so substantially? (2) Was her calculation valid? (3) What’s the total liability, and how quickly would the liability be paid under the bankruptcy plan alone? While the latter question is not determinative, it’d be helpful to have seen more analysis of whythe SO’s calculation was not arbitrary and capricious. From the facts alone (expenses far exceeding income; fully leveraged assets), a colorable case could be made that the decision was indeed arbitrary and capricious.

Nevertheless, Mr. Pine lives on to fight another day. Because of the changed circumstances for both Mr. and Mrs. Pine, Judge Buch remands the case to Appeals—though he notes that it’s up to Mr. Pine to provide evidence of his new situation.

Conflicting Evidence Finds Jurisdiction Docket Nos. 17507-14, 3156-13, Peabody v. C.I.R. (Order Here)

Our next order comes from Judge Ashford, who denies petitioner’s motion to dismiss for lack of jurisdiction. Petitioners alleged that the Service issued their Notice of Deficiency too late, and therefore, had blown the assessment statute of limitations under section 6501(a).

Interestingly, this motion to dismiss was made pursuant to a timely filed petition; in the ordinary course, petitioners move to dismiss for lack of jurisdiction where the taxpayer never received the Notice of Deficiency. They then allege that the Service failed to send the Notice to their last known address. The Service responds with its own motion to dismiss for lack of jurisdiction, but on the basis that the petition is untimely. Either way, the Tax Court finds a lack of jurisdiction, but the prevailing party obtains a judgment as to whythe Court lacks jurisdiction. If no proper Notice of Deficiency was issued, then the Service must respect that judgment and cannot thereafter proceed to assess or collect the underlying tax.

In contrast, the Peabodys received the Notice and timely filed a petition. Strike one against the success of their jurisdictional motion to dismiss.

The dispute here centers on whenthe Peabodys filed their 2009 income tax return. All agree they received an extension of time to file until October 15, 2010. If they filed the return on that date, then the statute under 6501(a) would have expired on October 15, 2013. A Notice of Deficiency issued on July 10, 2014 would be too late.

But was the return filed on October 15, 2010? The Service introduced a 2009 return that bore a stamped date of October 31, 2011, petitioners’ signatures, and handwritten dates of October 13, 2010.  The date on the paid preparer signature line was October 18, 2011. The envelope, which was sent to the IRS service center in Austin, bore a postmark date of October 28, 2011. Under these facts, a filing date of October 31, 2011 causes the statute to run on October 31, 2014—3 years after filing (note that the filing date for returns received after the deadline is the date of IRS receipt, not when the taxpayer mailed it).

Petitioners’ story is quite different. They argue that this purported “return” was not, in fact, their original 2009 federal income tax return. In their version, the return was prepared, picked up, signed, and mailed to the IRS campus in Fresno all on October 15, 2010. To support these allegations, they included an email, invoice, and filing instructions from their return preparer; a copy of the first two pages of their 2009 tax return; and sworn declarations from both Mr. Peabody and their tax return preparer.

The email seems to show that the return was sent from the preparer to Mr. Peabody on October 15, 2010. The return has a handwritten date of October 15, 2010 next to petitioners’ signatures, though the tax preparer did not sign. Mr. Peabody’s statement avers that he mailed the return the same day using the pre-addressed envelope from his return preparer. It also notes that, as to the Service’s return allegedly received on October 31, 2011, Mr. Peabody mailed a second return in response to a letter from the IRS, which requested a copy of the return; their preparer, according to them, printed it on October 18, 2011, and they sent it on its way. The preparer’s statement noted only that he prepared the return, and that the Peabodys picked it up on October 15, 2010 and mailed it.

This caused the IRS to pile on. Respondent submitted a sworn statement of the Revenue Agent who conducted the audit and a certified copy of Form 4340, Certificate of Assessments, Payments, and Other Specified Matters. The RA began the audit in August 2012, and requested a copy of the return, which was provided in early 2013 (thus, petitioners’ statement that he sent a copy of the return in 2011 seems suspect). At no time, according to the RA, did the Peabodys challenge the timing of the 2009 return filing. The Form 4340 showed an extension of time was filed, but that no return was filed until October 31, 2011.

Finally, Mr. Peabody replied with another sworn statement, noting that he was told during the audit that he was a victim of ID theft, which had caused his 2009, 2011, and 2012 returns to be rejected. He also noted that he believed the SOL had expired, justifying his refusal to extend the assessment statute for 2009.

Judge Ashford finds jurisdiction, and validates the Notice of Deficiency, relying on the self-serving nature of petitioners’ testimony, along with the unexplained discrepancies between the Service’s return (signed on October 13, 2010 and filed October 31, 2011) and the petitioners’ (signed on October 15, 2010 and filed on October 15, 2010). Further, the petitioners alleged in their petition that the return was filed on October 10, 2010. Judge Ashford also notes in a footnote that even if petitioner was an ID theft victim, this hurts his claim; the Service rejects returns that it believes are from an ID thief. (Interestingly, she also chides the IRS for assessing a failure-to-file penalty under section 6651(a) if the Peabodys are indeed ID theft victims). As such, the petitioners fail to carry their burden; weighed against the evidence the Service produced, especially the Form 4340, it appears more likely than not the only valid return is the one the IRS received on October 31, 2011. Indeed, the Form 4340 notes that the Service sent notices on July 25, 2011 and September 19, 2011, strongly suggesting the Service either rejected or didn’t receive the earlier return (and perhaps it’s that second notice to which petitioners responded with the “copy” of the return). This all puts the Service’s Notice of Deficiency well within the assessment statute.

Motion to Vacate for Bygone Refunds Docket Nos. 21366-14, 23139-12, 23113-12, Dollarhide v. C.I.R. (Order Here)

I was really hoping that with a name like “Dollarhide”, this would be a tax evasion case of some variety.

I mean, come on. Dollarhide? It’s just too good.

Alas, the Dollarhides seem like fairly honest taxpayers tripped up by the refund statute of limitations. We briefly covered these dockets in an earlier postfrom March. In that order, Judge Holmes granted the Service’s motion to enter a decision, finding that the refund statute of limitations barred the petitioners’ refund claim. Under section 6513(b), their withholding for 2006 was treated as paid on April 15, 2007; to make matters worse, it seems the Dollarhides paid excess Social Security tax—which likewise is claimable as a credit and treated as paid on April 15, 2007. But they filed their return on February 3, 2011, more than three years thereafter. Accordingly, the payment on April 15, 2007 was not claimable under section 6511(b)(2).

Now, the Dollarhides filed a motion to vacate or revise the decision under Rule 162. They argued that, had they known they couldn’t receive a refund, they would not have agreed to the stipulation of settled issues, upon which the Court based its decision. This document presumably includes a stipulation that the 2006 return was filed on February 3, 2011. The Tax Court rules here track the Federal Rules of Civil Procedure; FRCP 60(b) governs motions for relief from judgment, and the Dollarhides attempt to shoehorn this matter into FRCP 60(b)(3), which allows relief for fraud, misrepresentation, or misconduct by an opposing party.

That argument doesn’t fly with Judge Holmes. He notes that a mere failure to state something is not fraud, misrepresentation, or misconduct, at least where the untold statement could have been discovered with a little diligence. The Dollarhides, according to Judge Holmes, could have indeed discovered a clear legal issue like this.

Secondly, the Dollarhides argue that they didn’t file a 2006 return, because the Revenue Agent handling the corporation’s audit requested their 2006 individual return. From the order, we can’t tell whetherthat return was indeed submitted to the RA. Judge Holmes notes that no individual audit occurred for 2006. If the Dollarhides are telling the truth, and the return was indeed submitted to the RA, I’m not sure it matters that no individual audit was conducted. See above, however, for difficulties in proving whenor howa return was filed.

Finally, the Dollarhides didn’t raise the overpayment in their petition. Because the stipulation of settled issues indeed “resolved all issues in the case” (the refund claim not being an issue), any misrepresentation to the IRS wasn’t material.

But even if the Dollarhides found their way past the barriers to granting a motion to vacate, they’d still have great difficulties on the merits. If the Dollarhides could have proven that the return was somehow filed beforethe IRS alleges (perhaps with the Revenue Agent), they might have had a shot. It doesn’t look like any such evidence was presented, either with the motion or elsewhere in this case. As such, Judge Holmes denies the motion and ends this case.

CDP Requests Timely Filed in Wrong IRS Office – Tax Court Judges Disagree on Jurisdictional Consequences

We welcome back frequent guest blogger Carl Smith who writes about a jurisdictional issue in CDP cases that seems to have split the Tax Court and on which the IRS seeks to control jurisdiction with administrative pronouncements. Keith

A common fact pattern in Tax Court orders dealing with an IRS motion to dismiss for lack of jurisdiction is a taxpayer whose Collection Due Process (CDP) hearing request arrives in the wrong IRS office within the 30-day period, and then that wrong IRS office forwards the request to the right IRS office, where it arrives after the 30-day period has expired. In such cases, the IRS treats the request as untimely, provides an equivalent hearing, and issues a decision letter thereafter. When a taxpayer petitions the Tax Court in response to the decision letter, how do Tax Court judges rule on the inevitable IRS motion to dismiss for lack of jurisdiction? Well, there is no published opinion on this issue, but there are at least three recent orders (which are, of course, non-precedential), and the Tax Court judges therein ruled have inconsistently with each other. Compare Taylor v. Commissioner, Docket No. 3043-17L (order dated Nov. 8, 2017) (holding that the Tax Court has jurisdiction) (Carluzzo, STJ); with Nunez v. Commissioner, Docket No. 2946-17L (order dated May 18, 2018) (holding that the Tax Court lacks jurisdiction in a section 6672 penalty case) (Nega, J.), and Nunez v. Commissioner, Docket No. 2925-17L (order dated May 21, 2018) (holding that the Tax Court lacks jurisdiction) (Nega, J.).

A Tax Court opinion to establish binding precedent on this common fact pattern is needed. In a third recent order, Khanna v. Commissioner, Docket No. 5469-16L (order dated Feb. 13, 2018) (Gale, J.), the judge never had to rule on this issue; however, the order indicates the analysis that the T.C. opinion should use: whether the 30-day period to request a CDP hearing is not jurisdictional and is subject to equitable tolling under recent Supreme Court case law. For under equitable tolling, timely filing in the wrong forum is one of the ways to satisfy a nonjurisdictional time limit.

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This is not an original post: Samantha Galvin published posts on two of the relevant orders within the last year, here and here. Meanwhile, this post discusses the recent inconsistent orders in Nunez.

Background

Both section 6320(a)(3)(B) and (b)(2) and section 6330(a)(3)(B) and (b)(2) provide a 30-day period to request a CDP hearing after the IRS issues a notice of filing of a tax lien (NFTL) or a notice of intention to levy (NOIL). If the taxpayer timely files the request (on a Form 12153), the taxpayer receives a CDP hearing and a notice of determination (NOD) at the end thereof. If the taxpayer misses the 30-day period, he or she may receive an equivalent hearing and a decision letter at the end thereof. A NOD may be reviewed by the Tax Court if the taxpayer files a petition within a different 30-day period provided in section 6330(d)(1).

The courts have held that the section 6330(d)(1) 30-day period is jurisdictional and not subject to equitable tolling. See, e.g., Guralnik v. Commissioner, 146 T.C. 230, 235-238 (2016); Duggan v. Commissioner, 879 F.3d 1029 (9th Cir. 2018).

An equivalent hearing decision letter is not reviewable, unless the Tax Court concludes that the taxpayer had in fact timely requested a CDP hearing; in the latter case, the Tax Court treats the decision letter issued by the IRS as if it were a reviewable NOD. Craig v. Commissioner, 119 T.C. 252, 259 (2002).

While the Tax Court has never called the 30-day periods to request a CDP hearing jurisdictional, and not subject to equitable tolling, it has treated compliance with the 30-day periods as mandatory to its review jurisdiction under section 6330(d)(1). See, e.g., Offiler v. Commissioner, 114 T.C. 492 (2000) (dismissing a petition for lack of jurisdiction when the IRS did not hold a CDP hearing because the taxpayer filed a late request). On the other hand, when the IRS properly held an equivalent hearing (because the request was late), but erroneously thereafter issued a CDP NOD, the Tax Court held that it had jurisdiction on account of the NOD’s issuance, but the Tax Court did not dismiss the case for lack of jurisdiction, but rather granted summary judgment to the IRS (a merits ruling). Kim v. Commissioner, T.C. Memo. 2005-96 (suggesting that compliance with the 30-day request period is not jurisdictional to the Tax Court).

Reg. §§ 301.6320-1(c)(2)(A-C6) and 301.6330-1(c)(2)(A-C6) state:

The written request for a CDP hearing must be sent, or hand delivered (if permitted), to the IRS office and address as directed on the CDP Notice. If the address of that office does not appear on the CDP Notice, the taxpayer should obtain the address of the office to which the written request should be sent or hand delivered by calling, toll-free, 1-800-829-1040 and providing the taxpayer’s identification number (e.g., SSN, ITIN or EIN).

Internal Revenue Manual § 5.19.8.4.2(8) (8-5-16) states:

If the CDP hearing request is not addressed to the correct office as indicated in the CDP notice, the date to determine timeliness is the date the request is received by the IRS office to which the request should have been sent. However, if the address does not appear on the notice, or if it is determined that the taxpayer received erroneous instructions from an IRS employee resulting in the request being sent to the wrong office, use the postmark date to that office to determine timeliness.

Note: 

A request that is hand-carried to a local Taxpayer Assistance Center will be timely if delivered within the 30-day period during which taxpayers may request a hearing. See IRM 5.19.8.4.7.1.2, CDP Hearing Requests Hand Delivered to Taxpayer Assistance Centers (TAC).

Taylor 

Judge Carluzzo’s order in Taylor is so short that I will quote it in its entirety. Essentially, he holds the request timely because the IRS wasn’t much prejudiced by timely receipt in the wrong office. He used a “substantial compliance” analysis. He wrote:

Because petitioner’s request for an administrative hearing was mailed to, and received by the Internal Revenue Service within the period contemplated in section 6320(a)(3) and (b), even though the request was not mailed to the address designated in the relevant collection notice, and 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. That being so, we further find that the decision letter attached to the petition is the equivalent of a notice of determination for purposes of sections 6320(c) and 6330(d). See Craig v. Commissioner, 119 T.C. 252 (2002). Because the petition in this case was filed within the period prescribed in section 6330(d) in response to that document, it is

ORDERED that respondent’s motion to dismiss for lack of jurisdiction, filed March 30, 2017, is denied.

The Taylor case is set for a trial on September 10, 2018.

Nunez

Nunez involved a CDP hearing request mailed to a wrong IRS address, not simply a wrong IRS office. NOILs for section 6672 penalties and income tax deficiencies instructed the taxpayer to mail his request to Internal Revenue Service, P.O. Box 145566, Cincinnati, OH 45250-5566. Although he mailed the request to the correct address, the taxpayer accidentally wrote the city and state as Hartford, CT. It is not clear why the USPS did not follow the P.O. Box and ZIP Code information and send the request to Cincinnati anyway, but the IRS office in Kansas City first received the request on the 30th day. At least nine days later, that office forwarded the request to the Cincinnati office. Eventually, the IRS concluded that the requests were late, provided an equivalent hearing, and issued separate decision letters thereafter. Nunez then filed two separate Tax Court petitions: one for the section 6672 penalties and another for the income tax deficiencies.

In both of his orders, Judge Nega only considered whether the request might be treated as timely filed under section 7502’s timely-mailing-is-timely-filing rules. He wrote in the income tax docket order:

Unfortunately, petitioner cannot rely on the mailbox rule to treat his Form 12153, that was delivered after the 30-day period specified in section 6320 and/or 6330, as timely filed because he did not properly address the envelope. See sec. 301.7502-1(c)(1), Proced. & Admin. Regs. Therefore, the Appeals Office properly issued petitioner a decision letter for tax years 2012 and 2014, and as mentioned above, a decision letter is not a notice of determination sufficient to invoke’s (sic) this Court’s jurisdiction under section 6320 or 6330. Kennedy v. Commissioner, 116 T.C. 255, 262-263 (2001). Accordingly, we are obliged to dismiss this case for lack of jurisdiction.

The section 6672 docket order is virtually verbatim as the order in the income tax docket.

Observations

In my view, both judges failed to do the proper legal analysis with respect to the facts. That analysis, however, was stated by Judge Gale in Khanna v. Commissioner, Docket No. 5469-16L (order dated Feb. 13, 2018). In Khanna, the taxpayers not only mailed their CDP hearing request to the wrong IRS office (where it arrived two days early), but also, after the IRS sent the taxpayers a decision letter, it appeared from the date of that letter that the taxpayers filed their petition late under the 30-day period in section 6330(d)(1). The decision letter had not been mailed by certified mail, though, so the court was unwilling to assume that the date shown on the decision letter was the date of its mailing. In directing the IRS to file a supplement to its motion giving evidence of the decision letter’s mailing date, the court also wrote:

Depending upon the evidence identified concerning the decision letter’s mailing date, we may still need to decide the more difficult issue of the timeliness of petitioners’ CDP hearing request. In that event, we may further direct respondent to address three additional issues bearing upon the timeliness of petitioners’ CDP hearing request: . . . (2) the impact of recent U.S. Supreme Court and Third Circuit Court of Appeals cases concerning equitable tolling upon respondent’s position that the requirement that a CDP hearing request be filed within 30 days of the CDP notice is jurisdictional, see United States v. Kwai Fun Wong, 575 U.S. __, 135 S. Ct. 1625 (2015); Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145 (2013); Gonzalez v. Thaler, 565 U.S. 134, 141 (2012) (cautioning courts not to lightly attach the drastic consequences of labeling a deadline enacted by Congress as “jurisdictional” in an effort to bring some discipline to the term’s use); Kontrick v. Ryan, 540 U.S. 443 (2004); United States v. Brockamp, 519 U.S. 347 (1997); Irwin v. Dept. of Veterans Affairs, 498 U.S. 89 (1990); Rubel v. Commissioner, 856 F.3d 301, 304 (3d Cir. 2017) (cautioning courts to avoid “drive-by jurisdictional rulings” due to the drastic consequences of a “jurisdictional” label) . . . .

Judge Gale will never have to decide this issue, since the parties to Khanna have reached a settlement, and the judge has indicated that he will grant a taxpayers’ motion to dismiss the case (whether or not the case had been properly filed).

In an appeal from a Tax Court innocent spouse case dismissal, the Third Circuit once stated:

There may be equitable tolling “(1) where the defendant has actively misled the plaintiff respecting the plaintiff’s cause of action; (2) where the plaintiff in some extraordinary way has been prevented from asserting his or her rights; or (3) where the plaintiff has timely asserted his or her rights mistakenly in the wrong forum.” Hedges v. United States, 404 F.3d 744, 751 (3d Cir. 2005) (internal quotation marks and citation omitted).

Mannella v. Commissioner, 631 F.3d 115, 125 (3d Cir. 2011).

It appears that, as Judge Gale must have recognized, timely filing a CDP request in the wrong IRS office might meet the third stated common ground for equitable tolling. See, e.g., Bailey v. Principi, 351 F.3d 1381, 1382 (Fed. Cir. 2003) (“We hold that the filing with the regional office of a document that expresses the veteran’s intention to appeal to the Veterans Court equitably tolls the running of the 120–day notice of appeal period, and we therefore reverse and remand.”); Santana-Venegas v. Principi, 314 F.3d 1293, 1298 (Fed. Cir. 2002) (“We hold as a matter of law that a veteran who misfiles his or her notice of appeal at the same VARO from which the claim originated within the 120–day judicial appeal period of 38 U.S.C. § 7266, thereby actively pursues his or her judicial remedies, despite the defective filing, so as to toll the statute of limitations.”); Doherty v. Teamsters Pension Trust Fund of Philadelphia & Vicinity, 16 F.3d 1386, 1393 (3d Cir. 1994) (equitable tolling could be allowed when the plaintiff mistakenly filed in federal court rather than the appropriate arbitration forum).  Note that, in Nunez, the request actually arrived in the incorrect Kansas City office on the 30th day, which made it unnecessary to determine whether section 7502 had any impact on the issue of timely filing if a person is invoking equitable tolling.

If the 30-day periods to request a CDP hearing are jurisdictional, then the IRS may not extend them by regulation or the Manual. Auburn Reg’l Med. Ctr., 568 U.S. at 154 (holding that if the filing deadline is jurisdictional, “[n]ot only could there be no equitable tolling. The Secretary’s regulation providing for a good-cause extension . . . would fall as well.”). And, if the time periods are jurisdictional, then they cannot be subject to equitable exceptions either, such as equitable tolling. Dolan v. United States, 560 U.S. 605, 610 (2010).

But, Wong teaches that “Congress must do something special, beyond setting an exception-free deadline, to tag a statute of limitations as jurisdictional and so prohibit a court from tolling it.” Wong, 135 S. Ct. at 1632.

Congress has done no such thing here. The statutory filing deadlines for requesting CDP hearings do not contain the word “jurisdiction” (unlike the section 6330(d)(1) filing deadline) or otherwise speak in jurisdictional terms, and there is no history of treating the CDP request deadlines as jurisdictional – in contrast to the Tax Court’s long-standing position that filing deadlines in the Tax Court are jurisdictional. Thus, there is no reason for the Tax Court to follow its Guralnik holding is jurisdictional when looking at the 30-day periods to request a CDP hearing.

And it would not be surprising for the Tax Court to hold that the Tax Court CDP filing deadline is not subject to equitable tolling, while the deadlines to request a CDP hearing from the IRS are subject to equitable tolling. In Hall v. Commissioner, 135 T.C. 374 (2010), the Tax Court reaffirmed its holding that the since-abandoned 2-year regulatory filing deadline to request innocent spouse relief under section 6015(f) was invalid. Judge Wells, in a concurrence joined by five other Tax Court judges, stated that, even if the regulation had been valid, the 2-year period should be subject to equitable tolling, unlike the 90-day deadline in section 6015(e)(1)(A) to petition the Tax Court for a determination of entitlement to section 6015 relief, which the Tax Court in Pollock v. Commissioner, 132 T.C. 21 (2009), held was jurisdictional. Hall, 135 T.C. at 387 n.5 (Wells, J., concurring).

Finally, it appears that the IRS, in the Manual, essentially treats the CDP request filing deadlines as nonjurisdictional and subject to equitable tolling.

First, as noted above, the Manual provides that if a CDP request arrives timely at the wrong IRS office, if taxpayer received erroneous instructions from an IRS employee, the filing is treated as timely. That is the first ground in Mannella listed for equitable tolling in which the defendant had actively misled the plaintiff with respect to the plaintiff’s cause of action.

Second, there are provisions in the regulations (Reg. §§ 301.6320-1(c)(2)(A-C7) and 301.6330-1(c)(2)(A-C7) ) and Manual (§ 5.19.8.4.2.2 (8-27-10)) for giving the taxpayers up to an additional 15 days to perfect a timely CDP request that arrived in an unprocessable form. Paragraph (2) of that Manual provision states:

If a request for a CDP hearing is filed timely, but is not processable, contact the taxpayer and allow up to 15 calendar days for the taxpayer to perfect the request so that it is processable. If the taxpayer meets this requirement, the request is timely filed.

Note: 

If the taxpayer demonstrates that the late response was due to extenuating circumstances, such as being in the hospital or out of the country during that period, then treat the request as timely.

Such extenuating circumstances mentioned in the Manual are basically the same as the second ground listed in Mannella for equitable tolling, in which the plaintiff has been prevented from asserting his or her rights in some extraordinary way. Not that the IRS’ interpretation of the CDP request filing deadlines should control the courts, but it was my intention to illustrate that it would not be shocking to the IRS if the filing deadlines were treated as nonjurisdictional and subject to equitable tolling.

If he chooses to do so, Mr. Nunez’s cases are appealable to the Ninth Circuit. We will watch closely.