More on the Muddle of CDP

On August 6, 2019, I wrote about what I called the muddle that has been created in Collection Due Process (CDP) merits litigation.  Maybe because of the muddle of the litigation or maybe because I too am muddled, I kept thinking about the problem and I feel the need to write more about my concerns with the proposed decision in the Landers case that the prior post addressed.

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The ability to litigate the merits of a tax liability during the collection phase of a case came into the code in 1998 with the advent of CDP.  Among the opportunities provided to taxpayers by a CDP hearing is the opportunity to contest the merits of the liability in certain circumstances.  IRC 6330(c)(2)(B) provides:

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

At least one part of the muddle is the meaning of “or” in this provision, as it separates the clause discussing the failure to receive the notice of deficiency from the clause concerning prior opportunity.  At the ABA Tax Section meeting this fall, a panel on October 5 in the Pro Bono and Tax Clinics Committee will discuss prior opportunity as a part of the CDP summit.  Understanding how to interpret this clause and how the proposed Landers decision fits into the jurisprudence around this clause will take up some of the panel’s time.  It seems that the IRS and the Tax Court do not pay much attention to this “or”.

In 1998, Congress created the CDP to give taxpayers an opportunity to talk to the IRS before it levied on property and after it filed a notice of federal tax lien.  Although the focus of CDP centers on collection action, Congress included in the legislation a provision allowing taxpayers to litigate the merits of their tax liability if they had not previously had such an opportunity.  Congress did not provide an unlimited opportunity to contest the merits of a liability included in a CDP.  The statute rests on two separate requirement that the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”

The first basis for contesting the merits of a tax liability in the CDP context arises if the taxpayer did not actually receive the statutory notice of deficiency. In the hearings leading up to the 1998 legislation, Congress heard from many taxpayers who said that they never received a statutory notice of deficiency and the first time they learned that they owed the IRS occurred when the IRS began collection action against them.  Taxpayers who do not receive a statutory notice of deficiency because of some snafu in the mailing or receipt did have an opportunity to contest the liability in a judicial forum.  The statutory notice of deficiency would only have legal effect if sent to their last known address.  Whatever prevented these taxpayers from filing a timely petition in the Tax Court, they had a valid opportunity to seek review in the Tax Court.

The language of the statute permits these taxpayers to get back to the Tax Court to litigate their liability as long as they can prove non-receipt of the notice of deficiency.  Proof usually consists of their testimony that they never received the notice.  Assuming that the taxpayer meets the burden of proving non-receipt, the statute arguably places no limitations on the taxpayer’s ability to contest the merits the taxpayer failed to contest when the IRS sent the notice of deficiency.

In contrast to those CDP cases in which the taxpayer can contest the taxes reflected on a notice of deficiency, the statute creates a second less well-defined group of taxpayers who can contest the merits of the liability in CDP.  This group of taxpayers are ones “who did not otherwise have an opportunity to dispute such liability.”  This language leaves room for interpretation in looking at the words opportunity and dispute.  The IRS provided definition in its regulations with respect to this statute.  The regulation provides that the term “opportunity to dispute” includes “a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability.”

Landers ignores the “or” and proposes that if the taxpayer actually has a meeting with Appeals, in this case through the audit reconsideration process, then this prior opportunity prevents the taxpayer from having a merits hearing in the Tax Court.  Landers does not talk about whether the failure to receive a notice of deficiency provides a stand-alone basis for a merits hearing as the statute seems to suggest but, without discussion, treats the “or” as an “and”.

This treatment would be the first case to hold that even though the taxpayer did not receive a notice of deficiency the actual meeting with Appeals overrides the language of the statute stating that the failure to receive the notice is the basis for a merits hearing.  It would not be the first Tax Court case to overlook the “or”.

In discussing the case within PT as I tried to work through the muddle, Christine provided the following comments:

I think the IRS view is that both conditions must be satisfied, since they felt the need to clarify in the reg. that an appeals conference offered before the issuance of a SNOD does not count as a prior opportunity, notwithstanding their general position that it does count. If the two grounds for merits review were wholly independent, the opportunity for an appeals administrative hearing would never matter in a case where a SNOD was issued but not received. 


I looked through a few of the income tax opinions on this, and noticed that in Montgomery and Tatum the judge changes the “or” to “and” when rephrasing the rule. The IRS acquiescence to Montgomery quotes the “and” rephrasing. 


That said, Tatum (and Sherer) are all about receipt & the taxpayer’s knowledge of the SNOD, and don’t discuss what opportunities for appeals review may have existed in between the SNOD and the CDP notice.


It’s puzzling to me in Onyango that the discussion is all about receipt of the SNOD, and the court does not talk about the “prior opportunity” language or use that language to find for the IRS. The D.C. Circuit’s affirmance says “Appellant has not shown that the Tax Court clearly erred in … finding that he ″received″ a notice of deficiency as that term is used in 26 U.S.C. § 6330(c)(2)(B).” In contrast, the Sego case does find that the petitioner wife who deliberately refused certified mail had a “prior opportunity” to dispute, in addition to citing caselaw saying that taxpayers can’t defeat actual notice by refusing mail. So the Sego court took care to eliminate both prongs for merits review, while the Onyango court did not. 

It will be interesting to see what happens to the “or” as Landers moves forward.  The Tax Court has not yet fully embraced the regulation, and its expansive view of opportunity has the effect of eliminating most CDP merits hearings.  So far, having an actual Appeals hearing seems important to the Tax Court making the provision a trap for the unwary, as discussed in the previous post.  That interpretation, which traces back to Lewis v. Commissioner, shows a gap between the Tax Court and the regulation, even if the Lewis case otherwise provides little comfort to taxpayers seeking merits relief.  The court now seems poised to accept the IRS interpretation of “or” in deciding that it really means “and”.  (It’s also not clear and not discussed in Landers how, if at all, IRC 6330(c)(4) has a role here if the taxpayer has an actual Appeals hearing.)

Settlement of Docketed Collection Due Process Cases

The IRS just issued new IRM guidance on the settlement of docketed Collection Due Process (CDP) cases. At this point all CDP cases go to the Tax Court for litigation. The IRM provisions set out the difference between trying to settle a Tax Court case involving a notice of deficiency and one involving CDP. It’s worth discussing the difference and thinking about whether there should be a difference and how the difference impacts the ability to settle and the timing of the settlement.

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IRM 35.5.2.19 (08-06-2019) provides:

Settlement of Docketed Collection Due Process Cases

(1) The settlement of liability issues in CDP cases should be done in a manner consistent with the policies applied in deficiency cases. See CCDM 31.1.1.1.3.1, Settlement Policies in Deficiency Proceedings. If Appeals erroneously failed to address liability, the liability should generally be resolved through settlement or trial, as liability is reviewed de novo by the Tax Court. In some instances, though, remand to Appeals for consideration of the underlying liability may be helpful to develop facts or facilitate settlement to avoid further litigation.

(2) For non-liability issues in CDP cases, if the administrative record is complete and Appeals did not err or abuse its discretion, Counsel should generally defend the determination.

(3) Settlement through acceptance of a collection alternative such as a new offer in compromise or installment agreement where there has been no abuse of discretion by Appeals may be appropriate when it is necessary for the fair treatment of a taxpayer or when a lack of settlement could result in unfavorable legal precedent. Otherwise, the determination should be defended and the taxpayer should be encouraged to submit a collection alternative after the litigation is concluded.

(4) Counsel does not have the authority to directly accept collection alternatives from taxpayers on behalf of the Service. If Counsel seeks to settle a docketed CDP case through a collection alternative, Counsel must request the assistance of the Service to evaluate and accept or reject the proposed collection alternative. See IRM 5.8.10.12.2, Docketed Collection Due Process (CDP) Cases, for guidance on requesting consideration of offers in compromise in docketed CDP cases.

(5) In lieu of settlement, Counsel can consider filing a motion to remand in the instances discussed in CCDM 35.3.23.7, Motion to Remand.

The IRM provision in section (1) says that the settlement of liability issues, i.e., litigation in CDP of the merits of the liability, should happen just as it happens in cases in which the petitioner reaches the Tax Court as a result of receiving a statutory notice of deficiency. The examination side of the IRS has essentially delegated to Chief Counsel’s office the ability to settle their cases in Tax Court. When you petition the Tax Court based upon a statutory notice of deficiency, the Chief Counsel attorney has full authority to settle a case without going back to the examination division to ask if it is okay to settle. The Chief Counsel attorney must obtain the consent of their manager but no one contacts the IRS office that generated the case. In the vast majority of cases, the examination side of the IRS really expresses no interest in the case once it is sent to Counsel.

The collection side of the IRS apparently does not trust its attorneys to the same degree that the examination side does. In part (4) of this IRM provision it explains that Counsel does not have the authority to directly accept collection alternatives. This means that even where the taxpayer can convince the Chief Counsel attorney that a proposed collection resolution is appropriate, the Chief Counsel attorney cannot effectuate a settlement to reflect this agreement. Think about what happened in the Dang case blogged here. The revenue officer and the settlement officer told the taxpayer that the IRS would not/could not levy on the taxpayer’s IRA account even though doing so would save the taxpayer the 10% excise tax imposed by IRC 72(t) and, in this case, about $10,000. The Chief Counsel attorney seemed to get it right away that the IRS could levy on the IRA account and that doing so made perfect sense yet the Chief Counsel attorney could not settle this collection matter and had to send the case back to Appeals so it could enter into the settlement agreement. This caused delay, additional interest, unnecessary processing and anguish.

Why is it that Chief Counsel attorneys can settle the underlying tax but cannot settle the collection of the tax? Appeals can settle both. Are Chief Counsel attorneys not trusted by their client? Are they not competent enough in collection matters to make a good decision? I really don’t know why Chief Counsel attorneys must send back collection cases to their client to settle. It seems to me that it would make sense not to create this dichotomy. Department of Justice attorneys can and do settle collection suits all the time. It’s not rocket science. I suggest giving Chief Counsel attorneys the ability to settle collection matters. It would make CDP cases resolve more easily when there is a mistake. It would avoid unnecessary remands. It would recognize that Chief Counsel attorneys understand collection issues and have the ability to resolve them.

Two tickets to Tax Court, by way of § 6015 and Collection Due Process

Today we again welcome guest blogger Carolyn Lee who practices tax controversy and litigation in the San Francisco offices of Morgan Lewis. Carolyn represents individual and business clients, including pro bono and unrepresented taxpayers while volunteering with the low income tax clinic of the Justice & Diversity Center of The Bar Association of San Francisco.

Carolyn asks that we add a reminder about the CDP Summit Initiative she is involved with, to reform and improve the effectiveness and efficiency of collection due process procedures, benefitting everyone who engages with them. Registration is open for the upcoming ABA Tax Section meeting in San Francisco on October 4 and 5, when there will be three CDP Summit programs. In addition, there will be a CDP Summit in Washington, D.C. on the morning of December 3. Contact Summit participants Carolyn (carolyn.lee@morganlewis.com), William Schmidt schmidtw@klsinc.org, or Erin Stearns (erin.stearns@du.edu) if you would like to be involved. Christine

The recent case of Francel v. Commissioner, T.C. Memo. 2019-35, provides a wealth of tax procedure lessons.  In Francel, a denial of § 6015 relief collided with a CDP determination, resulting in two tickets to Tax Court – one more valuable than the other.

Thomas Francel was (and is) a cosmetic surgeon with a solo practice that generated almost $1 million in income to the Francel household during each of the 2003-2006 tax years in issue. Patients paid their fees in three ways: currency, cashier’s checks (together, “cash”) or credit cards. Fees were accepted by the practice receptionist who turned them over to the office manager, Sharon Garlich. Ms. Garlich entered currency payments less than $100 and cashier’s checks in amounts of $10,000 or greater in the practice’s accounting system. Credit card payments also were entered in the practice’s accounting system. Ms. Garlich gave all other cash to Dr. Francel’s wife (nameless to the Court except as “Francel’s wife”) who also was employed at the medical office. These diverted fees ranged between $194,000 and $264,000 for each of the 2003-2006 tax years.

Ms. Garlich recorded by hand in a green ledger the cash payments she gave to Ms. Francel – or to Dr. Francel if Ms. Francel was not available. The medical practice’s CPA had direct access to the practice’s accounting system. No one gave the CPA the green ledger. No one told the CPA about the cash diverted to Ms. Francel (or Dr. Francel). The Francels filed joint income tax returns. The medical practice filed its tax return as an S corporation, with income passing through to the Francels.

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The Opinion does not indicate whether Dr. Francel personally directed the use of any of the diverted fees, though there are hints he was aware some cash was held separate from the practice’s accounts. For example, Ms. Garlich testified she gave diverted fees to Dr. Francel if Ms. Francel was not at the office. Also, when Ms. Garlich discussed the practice’s cash flow problems with Dr. Francel, she testified that his solution, after speaking with Ms. Francel, was “instead of keeping all of the cash for a while they would just go ahead and put half of it into the business.” Nonetheless, Dr. Francel could have known about the unconventional (in the Court’s view) fee handling method and still have believed the income tax reporting was correct.

The facts do tell us that Ms. Francel had a drug habit, which she kept hidden from Dr. Francel. We also learned that the strain of keeping two sets of books wore on Ms. Garlich, who retained legal counsel and reported the scheme to the US Attorney’s Office and the IRS Criminal Investigation Division.

Further into the engaging 48-page Opinion we learn that Ms. Francel (and not Dr. Francel) was indicted by the US Attorney’s Office and charged with a violation of § 7201, for attempting to evade or defeat federal income tax owed. Ms. Francel plead guilty to the federal tax charges, agreeing that the total tax underpayment for the 2003-2006 tax years was $344,121. Ms. Francel was sentenced to one year and one day imprisonment with supervised release. She was ordered to pay restitution to the government in the amount of $344,124 (the opinion acknowledges the $3.00 difference). Ms. Francel paid the restitution in full, using funds from a 401(k) account she owned. The restitution payments were credited to Dr. Francel’s account since a payment by either jointly liable spouse reduces the liability owed by both spouses. As an aside, Ms. Garlich has a whistleblower claim pending related to her role in securing the collected tax.

Many more pages later, recounting the successful civil litigation brought by Dr. Francel’s medical practice against Ms. Francel for embezzlement; a divorce suit and reconciliation between the Francels (still married and working together at Dr. Francel’s practice); and the recurring appearances of the same few lawyers representing the Francels individually and together and the medical practice, as plaintiff or defense, variously, throughout the years leading to the Tax Court trial (not so subtly noted by the Court), we arrive at the procedural history section of the Opinion. It is a delight for persons interested in the finer technical points of collection due process, § 6015 relief jurisdiction and Tax Court standard and scope and standard of review.

Dr. Francel Engages with the IRS and the Tax Court.

Due to interest and other computational quirks, after the restitution was paid the Francels still owed approximately $144,400 for the 2003-2006 years. Dr. Francel submitted a Form 8857 – Request for Innocent Spouse Relief on May 18, 2015 for all four tax years. The Opinion does not include any facts about an administrative review of the 6015 request by the IRS’s Innocent Spouse unit. We only know Dr. Francel’s claim was assigned to Appeals (“§ 6015 Appeals”).

On September 22, 2015, the IRS mailed Dr. Francel a notice of intent to levy to collect the 2003-2006 income tax liabilities, despite statutory prohibitions and Internal Revenue Manual (IRM) instructions to suspend collection when a processable request for § 6015 relief is received. The Opinion provides no indication of collection jeopardy. See § 6015(e)(B)(i); IRM 25.15.2.4.2; and IRM 8.21.5.5.7. Dr. Francel timely requested a collection due process (CDP) hearing with respect to the notice of intent to levy, asserting that he was entitled to § 6015 relief. The Appeals Officer assigned to the CDP hearing request (the “CDP Appeals Officer”) paused the CDP proceedings pending the decision regarding Dr. Francel’s § 6015 request.

Dr. Francel’s request for relief was denied. A report initiated by the § 6015 Appeals Officer, unsigned and undated, was sent to the CDP Appeals Officer who reviewed the report and adopted the decision without change. (We do not know the basis for the administrative denial.) The CDP Appeals Officer had a telephone conference with the attorney representing Dr. Francel for the CDP hearing, and confirmed the § 6015 request was denied.

On February 14, 2017, the IRS mailed Dr. Francel a notice of determination following the CDP hearing, sustaining the levy collection. This notice of determination with respect to the CDP hearing was a ticket to Tax Court for Dr. Francel, to seek review of the determination.

The notice stated that Dr. Francel would receive a separate “Final Appeals Notice” regarding his rejected relief request. Presumably this communication would have been issued as Notice of Determination by § 6015 Appeals. Such a notice would also have been a ticket to Tax Court for Dr. Francel. The notice was not sent, however. Because the IRS did not issue a response to Dr. Francel regarding the Form 8857, his application for relief itself became a ticket to Tax Court. See § 6015(e).

On March 14, 2017, Dr. Francel petitioned the Court to review the February 14, 2017 notice of determination, asserting error in denying him § 6015 relief. The petition was filed within thirty (30) days of the February notice. Ms. Francel intervened to support his request for relief. (The Francels were living together again.) Ms. Francel failed to appear for trial; she was dismissed as a party for failure to prosecute the case.

Dr. Francel had two tickets to Tax Court. The § 6015 rejection, with or without a formal determination denying relief initiated by § 6015 Appeals, entitled Dr. Francel to Tax Court review under § 6015(e). In addition, the CDP determination allowed Dr. Francel into Tax Court under § 6330(d)(1).

Does it matter which ticket Dr. Francel tendered to the Court?

Two Tickets to Tax Court

Consider the § 6015(e) ticket. First, when is a petition from a 6015 ticket timely? The Court explained a petition pursuant to § 6015(e) was timely regardless of whether there was a final determination issued by § 6015 Appeals (i.e., the promised Final Appeals Notice). The clock to petition for Court review of denial of § 6015 relief starts ticking on the date the IRS mails, by certified or registered mail to the taxpayer’s last known address, notice of the Service’s final determination. The taxpayer may petition for relief not later than the 90th day after such date. Here there was no notice from § 6015 Appeals. But taxpayers are not held hostage by slow determinations of § 6015 applications. Instead, they may petition the Court for review of their requests after six (6) months have passed since the request was made to the IRS. § 6015(e)(A)(i)(II). The Court determined Dr. Francel’s petition was timely pursuant to § 6015(e)(A) because it was filed March 14, 2017; that is, significantly longer than six (6) months after May 18, 2015 when the processable Form 8857 was submitted to the IRS.

Second, what standard and scope of review apply to the 6015 ticket? In cases arising under § 6015(e)(1), the Court employs a de novo standard of review and a de novo scope of review. Porter v. Commissioner, 132 T.C. 203, 210 (2009). (As a bonus for readers, the Porter opinion includes an extensive dissent asserting the proper standard of review for § 6015 cases should be abuse of discretion (with a de novo scope of review) – written by Judge Gustafson and joined by Judge Morrison who decided this Francel case.)

The de novo standard of review and scope of review affords taxpayers the benefit of the Court’s fresh consideration of all relevant evidence. IRS determinations are not granted deference. In some instances, particularly when an administrative record is under-developed when the matter reaches the Court, de novo review can make all the difference with respect to a full hearing of the facts and law, and a decision that is correct on the merits rather than based solely on the administrative record. Unfortunately, this summer Congress limited the Court’s scope of review in § 6015(e) cases so it is no longer fully de novo. It remains to be seen how litigants and the Tax Court will interpret the Taxpayer First Act’s changes to § 6015(e). Steve Milgrom and Carl Smith raised several concerns and questions in a recent PT post.

Now turn to the § 6330(d)(1) CDP ticket to Tax Court. The default application of § 6330(d)(1) provides that a petition must be made within thirty (30) days of a CDP determination – significantly shorter than the period to request review of a § 6015 relief rejection. Nonetheless, Dr. Francel met the 30-day deadline. The Court would have had jurisdiction to review the rejection of § 6015 relief by the CDP Appeals Officer based on Dr. Francel’s § 6330(d)(1) ticket.

The advantage of one ticket over the other in this case comes into sharp relief with respect to the standard and scope of review. In contrast to the Court’s full de novo review of § 6015 matters, collection due process review is constrained. The standard of review when the liability is not at issue – which it was not in Francel – is abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 609-610 (2000), quoting the legislative history of § 6330, because the statute itself does not prescribe the standard the Court should apply when reviewing the IRS’s administrative decisions.

Even more material in CDP matters, the standard of review is abuse of discretion. Sego v. Commissioner, supra; Goza v. Commissioner, 114 T.C. 176, 181-182 (2000); Robinette v. Commissioner, 439 F.3d 455, 459 (8th Cir. 2006, rev’g 123 T.C. 85 (2004). (Of course, review is de novo if the underlying liability is properly at issue.) Also, the Court often is bound by the record rule, in that it may only consider evidence contained in the administrative record if the case is appealable to the 1st, 8th, or 9th Circuits. In cases appealable to the other circuits, the Court does not limit the scope of its review to the administrative record, following Robinette. Judge Halperin recently reviewed the messy case law on scope and standard of review in CDP appeals in Hinerfeld v. Comm’r, T.C. Memo. 2019-47. In many cases, particularly those involving self-represented taxpayers, the record rule forecloses a full hearing of relevant facts. Here, however, Dr. Francel did not suffer from lack of representation.

So for a case involving a § 6015 issue and a CDP issue, one ticket is more valuable than the other. The § 6015(e)(1) ticket offers a longer period to petition for Court review and it offers a de novo standard and scope of review. The § 6030(d)(1) ticket requires a 30-day dash to petition and it is burdened by the abuse of discretion standard and scope of review. In the Francel matter, the § 6015(e)(1) ticket would be more valuable.

In fact, the Court took jurisdiction pursuant to § 6015(e)(1) without an explanation for the selection. Perhaps it did so because the rejected request for § 6015 relief preceded the unfavorable CDP determination which sustained the § 6015 denial. Thus, Dr. Francel had the benefit of the Court’s full de novo review. This may have been small comfort, however, because the Court sides with the IRS, deciding that Dr. Francel did not qualify for any relief.

By comparison to the lead in, a fairly uneventful conclusion

From this point, the Opinion accelerates to a close with the § 6015 analysis. Fundamentally, the unreported income was attributable to Dr. Francel. Relief may not be granted under § 6015(b) or (c) for tax arising from a liability attributable to the requesting spouse. Dr. Francel’s S corporation medical practice was required to report all fees as income. As sole shareholder of the practice, Dr. Francel was then required to include the fees in his income. The question of income attribution did not rest on who was responsible for the under-reporting, or embezzlement, or criminal tax evasion.

In addition, the Court decided it would not be inequitable to hold Dr. Francel liable for the deficiencies. (Section 6015(f) permits relief even when the liability is attributable to the requesting spouse, if an analysis of the facts and circumstances establishes equitable relief is justified.) According to the Court, Dr. Francel benefitted from the unreported cash fees because Ms. Francel spent some of the cash on home improvements for the residence Dr. Francel still occupied. He also owned the car restored using the unreported income. Dr. Francel’s accumulated wealth was attributable in part to the unreported cash and the unpaid tax from the 2003-2006 tax years. These facts weighed against a grant of relief. If Dr. Francel had actual knowledge, or reason to know, of the diverted cash and unreported income as the facts imply, this would have weighed against relief as well. Not mentioned but possibly also a factor: Dr. Francel may have failed the economic hardship test because he had the financial resources to pay the liability and still maintain a standard of living well above IRS national, regional and local standards (remember, Dr. Francel continued his cosmetic surgical medical practice).

In close, what a bountiful Opinion this is, presenting facts that would be NCI-episode-worthy if there had been a dead body; a generous tutorial regarding § 6015 relief, collection due process, as well as standard and scope of Court review; and – best of all – an elegant profiling of two tickets to the Tax Court. As a bonus, for readers who teach professional responsibility for tax practitioners, I recommend mining the Opinion for an exam fact pattern regarding an attorney’s duty of loyalty and conflicts of interest, extracting the many representation scenarios the Court helpfully flags. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Procedural Issues

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

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

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

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

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

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

Judge Gustafson’s Analysis

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

1. The addressing of the CDP hearing request

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

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

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

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

2. The timeliness of the CDP hearing request

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

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

Taylor v. C.I.R.

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

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

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

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

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

Fallout

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

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

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

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

Conclusion

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

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

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

Collection Due Process Summit Initiative

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

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

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

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

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

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

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

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

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

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

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

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

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

Taxpayer Barred from Raising TEFRA Adjustments in Collection Due Process Hearing

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

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

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

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

The Court states:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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