TIGTA Report Reminds That IRS Regularly Misclassifies CDP Requests Impacting Taxpayer’s Ability to Obtain a CDP Hearing and the Statute of Limitations

When Congress passed the Restructuring and Reform Act in 1998, it demonstrated significant concern about the performance of the IRS in the collection area.  The law made significant changes to the way the IRS collects as well as to oversight of the IRS collection activity.  The principal oversight imposed involves annual reviews by the Treasury Inspector General for Tax Administration (TIGTA) of several aspects of IRS collection actions.  We have written about these reports many times because they can contain rich sources of information about what is happening inside of the IRS.

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TIGTA usually produces the bulk of these annual reports in September.  On September 6, 2019, TIGTA produced its annual report regarding Collection Due Process (CDP), and it points to continued problems two decades after creation of the CDP program.  Since TIGTA’s job involves identifying problems, the fact that it found some problems does not come as a surprise.  The problems that it identified fit nicely with some of the initiatives of the ongoing CDP summit as well as some of the problems we have discussed before.  I will focus on the two main problems identified by TIGTA.

Misclassifying CDP Requests

Here’s what TIGTA found:

We found that the IRS misclassified nine of the 140 CDP and Equivalent Hearing cases we reviewed. As a result, these taxpayers did not receive the hearings to which they were entitled or incorrectly received a hearing when they should not have. By comparison, we identified eight misclassified CDP and Equivalent Hearing cases in our prior year review. Based on our sample results, we estimate that 1,402 of 35,850 taxpayer cases closed in FY 2018 were misclassified by Appeals and, as a result, taxpayers did not receive the type of hearing to which they were entitled.

The results suggest a relatively significant error rate in classifying CDP requests.  When the IRS misclassifies the request of a pro se taxpayer, many will not have the tools to contest that misclassification and will accept the equivalent hearing instead of the CDP request to which they were entitled.  One of the suggestions made to the IRS regarding the making of the request for a CDP hearing is to make it simpler.  The IRS could create one fax number or one snail mail address to which all CDP requests could be sent.  Instead it has a confusing fabric of places to which a CDP request may need to be sent in order for the IRS to consider it mailed to the right place.  It also uses the CDP notice as a collection tool rather than just as a tool to notify taxpayers of their right to a CDP hearing.  By using the notice primarily as a collection tool, the hearing opportunity not only gets lost in translation but so does the address.  The TIGTA report identifies cases in which the IRS timely receives a CDP request but receives it at the wrong location.  Many other taxpayers might make a timely request if the CDP notice provided more notice and less collection information.

The TIGTA report notes that misclassification of the CDP request impacts the hearing the taxpayer receives and the notice following that hear but it does not address the jurisdictional arguments the IRS makes if the taxpayer petitions the Tax Court.  For a more extensive discussion of the issues raised by misclassification, see prior discussions here and here (this links to a Tax Notes article available only to subscribers.)

Statute of Limitations

With respect to the statute of limitations on collection, TIGTA found a significant number of errors here as well:

We found that eight of the 140 cases reviewed had an incorrect CSED. In comparison, we identified nine cases with CSED errors in our prior year review. We identified:

  • Five CDP cases for which the CSED was incorrectly extended. As a result, the IRS had more time to collect delinquent taxes than it was authorized. Based on our sample results, we estimate that the IRS may have incorrectly extended the CSED in 2,183 of 35,850 CDP and Equivalent Hearing cases closed in FY 2018.
  • Three CDP and Equivalent Hearing cases for which the CSED was incorrectly shortened. As a result, the IRS had less time to collect any outstanding balance from the taxpayer than it was authorized. Based on our sample results, we estimate that the IRS incorrectly reduced the CSED in 588 of 35,850 CDP and Equivalent Hearing cases closed in FY 2018.
  • The suspension of the CSED is systemically controlled by transaction codes on the Integrated Data Retrieval System. One code is entered to start the suspension, and another code is entered to stop the suspension and restart the statute period. Generally, the code to suspend the collection statute, along with the date the suspension should begin, is input by the Collection function. However, in certain instances, Appeals personnel are responsible for inputting the suspension code and start date. Upon completion of the CDP hearing, Appeals is responsible for entering the code to remove the suspension of the statute period along with the hearing completion date. The Integrated Data Retrieval System will systemically recalculate the CSED based on the dates entered for the two codes (which generally reflect the length of the Appeals hearing or the exhaustion of any rights to appeal following judicial review). We found that Collection function and Appeals personnel did not enter the correct date to start the suspension of the collection statute. In addition, Appeals personnel did not enter the correct date to end the suspension of the collection statute. Appeals management agreed with all but *1* of the errors we identified.

The fact that the IRS improperly extended the statute of limitations on collection in over 2,000 cases in one year should give any practitioner pause to rely on the statute of limitations calculated by the IRS.  Calculating the statute of limitations on collection has become very complicated.  See our prior discussion here.  Relying on the IRS to properly compute the statute of limitations seems risky given the over 5% error rate suggested by this report. 

The IRS does not bring many suits to reduce an assessment to judgment, but when these suits occur, the Department of Justice seems to file them right at the statute of limitations deadline.  This TIGTA report provides strong support for the practice of carefully reviewing the statute of limitations determination by the IRS.

The Collection Due Process Summit Initiative – 2019 Low Income Taxpayer Representation Workshop

I am here to provide an update of the Collection Due Process (CDP) Summit Initiative, which Carolyn Lee first wrote about in this post. Some of you may be aware that the American Bar Association holds a Low Income Taxpayer Representation Workshop each December in Washington, D.C. For 2019, the focus is on the Collection Due Process Summit Initiative. Anyone interested in Collection Due Process is welcome to attend. Registration is only $20 for ABA members, and $30 for nonmembers.

The meeting will be held December 3 from 8:30 to noon at Morgan, Lewis & Bockius LLP. More details are below.

The Collection Due Process Summit Initiative

The origin for the Collection Due Process Summit Initiative came about when preparing for a panel presentation for the 2019 May Tax Meeting for the American Bar Association Section of Taxation meeting in Washington, D.C. The panelists were Keith Fogg, Judge Gustafson, Mitch Hyman, Carolyn Lee, Erin Stearns and myself. Within the panel, we made a point of discussing issues with CDP to avoid complaining and with the goal of brainstorming creative ways for positive change. We also wanted to look at several areas related to CDP – the CDP notices mailed out by the IRS, the meetings with Appeals, the Tax Court process, and whether a creative solution like mediation would apply.

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Following the panel, several members of the group kept in touch. We worked to develop a core group of people to steer the Summit Initiative. With that steering committee, we discussed a set of roughly 30 issues with CDP. We took that input and people’s votes for what would be popular. We also wanted input from within the IRS of what sounded realistic. If something would not work, why not? We took the input on those 30 issues, divided into stages, and selected the top 3 to 4 for each.

It must be noted that the steering committee includes private practitioners, educators, IRS Chief Counsel, the Taxpayer Advocate Service, and LITC directors. We also have people within IRS Appeals, IRS Collections, and the Tax Court that we stay in communication with and use as sounding boards regarding their stages of CDP.

Members of the steering committee also wanted to provide further education on the CDP process. At the 2019 Fall Tax Meeting for the American Bar Association Section of Taxation meeting in San Francisco, there were 3 panels developed by the CDP Summit Initiative connected to the CDP process. The first panel, for the Young Lawyers Forum and Diversity committees, was part of the Tax Bridge on the Road, titled “What is Collection Due Process? A Practical Introduction to the Stages of CDP.” The second, for the Individual & Family Taxation committee, was called “Collection Due Process Notices: Much Needed Works in Progress.” The third panel, for the Pro Bono & Tax Clinics committee, was called “Prior Opportunities to Dispute Liability in Collection Due Process: An Oversized Reaction to Insufficient Action.”

The Workshop

While it is a goal of the CDP to promote education regarding CDP, we also want to bring discussion for change. The day will start out with some history of CDP and the Summit Initiative. From there, we turn to a panel on how to approach change with the IRS to achieve the best results. Next, we turn to breakout sessions regarding the top opportunities cited at the various stages of the CDP process. We will bring the group together to share what each group learned before turning to Keith Fogg for closing comments. We will be using the results to guide working groups next year to tackle those top opportunities at each stage.

All who are interested in CDP improvement are invited – from the private bar, Enrolled Agents, CPAs, and those attending the LITC conference that week. As you can see, Keith and others from the Procedurally Taxing website are involved with the CDP Summit Initiative. The cost is low so should not keep any of you in the area from attending – especially as it will include 2 MCLE credits and a box lunch!

2019 Low Income Taxpayer Representative Symposium
Collection Due Process Summit Initiative Workshop

December 3, 2019
8:30 a.m. – Noon

Improving Procedures for Taxpayers to Arrange
Sustainable Plans to Collect the Correct Amount of Tax Owed.

Who should attend?  Everyone interested in the efficient, effective collection of tax, via procedures that are humane for taxpayers, including the IRS (Collection, Appeals, Counsel), taxpayer representatives and the Tax Court
Date: Tuesday, December 3, 2019
Time: 8:30 a.m. – Noon (box lunches to grab and go)
Location: Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue, NW
Washington, DC 20004
Registration Fee:  $30 General Registration
$20 ABA Member
$20 Full-time LITC Employee
Free Full-time J.D., LL.M., or M.T. Candidates (No CLE Credit)
[Law Student registrants who are current nonmembers will also receive complimentary Membership in the ABA and the Section of Taxation]

AGENDA

8:30 a.m.

Opportunities for CDP Improvement: Efforts Underway by the Collection Due Process Summit Initiative.
Collection Due Process (CDP) is a bundle of IRS collection procedural protections governed by IRC section 6320 and 6330, that affect taxpayers, their representatives, the IRS, and the Tax Court. CDP provides a structured path to achieving sustainable tax collection alternatives of procedural value to taxpayers and IRS Collection professionals. However, over time, CDP as applied lapsed into policies and procedures that often inhibit a broad range of individual and business taxpayers from establishing collection alternatives to full payment of the correct tax owed, which taxpayers can maintain. In addition, CDP procedures as applied frequently create frustration for IRS Collection professionals and IRS Counsel attorneys. These developments are contrary to the express beneficial intent of the Section 6320/6330 legislation and imperil efforts to efficiently arrange sustainable methods for taxpayers to pay the correct amount of tax owed.

Change for the better is in the air, in the form of the CDP Summit Initiative established in May 2019 to support CDP and improve how it works. Summiteers include representatives of all stakeholders, as direct participants or advisory resources. Following a methodical, consensus-driven process, the Summit Steering Committee identified priority opportunities with high potential to increase the beneficial impact of CDP in application. Summit Working groups formed around the priority opportunities are in the early stages of determining objectives, strategies and tactics to result in change.

This session will update LITR participants about Summit-designated opportunities to improve CDP, why the opportunities were selected for further exploration and action, and how all stakeholders interested in the effective and efficient arrangement of reasonable collection alternatives will benefit from the Summit’s collaborative work.

The CDP Summit’s work has the support of several ABA Tax Section committees including the Pro Bono & Tax Clinic Committee and the Individual Tax and Family Committee. ABA tax meetings have provided an important platform to discuss CDP issues and solutions while educating conference participants about functioning effectively within CDP boundaries.
Moderator: Sarah Lora, Low Income Tax Clinic, Lewis & Clark Law School, Portland, OR
Panelists: Mitchel Hyman, IRS Office of Chief Counsel, Washington, D.C.; William Schmidt, Kansas Legal Services, Kansas City, KS; Erin Stearns, Low Income Taxpayer Clinic, University of Denver, Denver, CO

9:15 a.m.

Approaching Change With the IRS
This panel will identify and explain constructive ways for practitioners to work with the IRS to create positive change benefiting both the IRS and taxpayers in the area of CDP and beyond. Panelists will explore various levels of rulemaking, the scope and authority of those rules, and ways to influence those rules. The panel also will discuss tools practitioners may use to explore and understand the underpinnings of regulatory actions, such as the Freedom of Information Act, as well as effective opportunities for proposing regulatory reform. The panel will also discuss the role of the Taxpayer Advocate Service’s Systemic Advocacy Management System (SAMS) in identifying the need for systemic changes and implementing those changes.
Moderator: Matthew James, Low Income Tax Clinic, North Carolina Central University, Durham, NC
Panelists: Mary Gillum, Legal Aid Society of Middle Tennessee & the Cumberlands, Oak Ridge, TN; John B. Snyder, III, Low-Income Taxpayer Clinic, University of Baltimore, Baltimore, MD; James P. Leith, Local Taxpayer Advocate, Baltimore, MD

10:00 a.m. Break

10:15 a.m. Exploring CDP Challenges and Practical Solutions – Working Breakout Sessions
Session participants will actively explore CDP policy and procedures focusing on CDP Summit priority opportunities and potential feasible solutions. Output will further the work of Summit Working Groups to effect change and increase efficient, fair tax collection.

Workshop participants choose to attend one of three concurrent sessions:

(1) Improving IRS CDP Notices and Communications. This program will educate participants about IRS communication approaches as they pertain to CDP rights and procedures and known issues with the communications. The session leaders will facilitate an exchange of ideas for more effective messaging to increase taxpayer participation in CDP and more effective engagement with Collections at the earliest possible stage.
Facilitators: William Schmidt, Kansas Legal Services, Kansas City, KS; Jeff Wilson, Taxpayer Advocate Service, Indianapolis, IN; Beverly Winstead, Low Income Taxpayer Clinic, University of Maryland, Baltimore, MD

(2) Improving CDP Administrative Proceedings. Participants will learn about opportunities for more effective engagement with IRS Appeals, including when a taxpayer may challenge the accuracy of an assessed liability, the critical role of a record in establishing a sustainable collection alternative to immediate full payment, and procedural traps for the unwary. Participants will collaborate to identify improvements yielding more efficient and effective application of CDP through constructive interaction between taxpayers (or their representatives) and Appeals.
Facilitators: Soreé Finley, Charlotte Center for Legal Advocacy, Charlotte, NC; Susan Morgenstern, Local Taxpayer Advocate, Cleveland, OH; Erin Stearns, Low Income Taxpayer Clinic, University of Denver Sturm College of Law, Denver, CO

(3) Exploring CDP rights and procedures within judicial proceedings. Focused on improving effectiveness and efficiency for all participants in Tax Court matters, this session will analyze common petitioner and respondent approaches to litigating CDP in Tax Court. The session will explore opportunities to increase the number of taxpayers who exit litigation with a sustainable plan to collect the correct amount of tax due. Participants will discuss the Court’s authority and limits to achieving a result satisfactorily resolving the issues between the parties; typically, a collection solution for taxpayers litigating in good faith.
Facilitators: Keith Fogg, Federal Tax Clinic, Harvard Law School, Jamaica Plain, MA; Christine Speidel, Villanova University Charles Widger School of Law, Villanova, PA

11:15 a.m. Discussion of Breakout Session Results and Identification of Next Steps
Breakout session leaders will report on results of the group discussions, focusing on pragmatic elements for IRS procedural change, practitioner performance improvement and taxpayer orderly, effective interaction with CDP. Essentially a collaborative CLE, educating the participants on best practices in applying CDP, the output will inform the strategic and educational work for the Collection Due Process Summit Initiative during 2020. Proposals will address, among other topics, an analysis of IRS CDP correspondence, taxpayer rights in Appeals, and the role of judicial review in guiding sustainable collection alternatives. This session will emphasize sharing taxpayer representative practice tips and easy-to-implement internal IRS process improvements.
Facilitators: Susan Morgenstern, Local Taxpayer Advocate, Cleveland, OH; William Schmidt, Kansas Legal Services, Kansas City, KS; Christine Speidel, Villanova University Charles Widger School of Law, Villanova, PA; Erin Stearns, University of Denver Sturm College of Law, Denver, CO

11:55 a.m. Closing remarks. Addressing the importance of critical analysis of CDP as applied and vigilant efforts to support the proper application of CDP, in order to achieve the beneficial intent of IRC Sections 6320 and 6330.
Presenter: Keith Fogg, Federal Tax Clinic, Harvard Law School, Jamaica Plain, MA

Noon Workshop adjourns. Box lunches to grab and go.

Love, Legal Fees, and the Origin of the Claim: Designated Orders September 23 – September 27, 2019

Despite a relatively small number of orders designated during the week of September 23, they were diverse and interesting. I discuss three below, but the orders not discussed addressed: IRS’s motion for summary judgment in a case where petitioner cited the book, “Cracking the Code” to support his position (here); and a motion to stay (here) and a motion to dismiss for lack of jurisdiction (here) from petitioners in a consolidated docket case involving converted partnership items.

Docket No. 15277-17, Maria G. Leslie v. C.I.R. (order here)

This first order piqued my interest because it covers a topic that comes up in the individual income tax class that I teach every year. The order addresses the IRS’s motion for summary judgment and the case involves alimony and the deduction for legal fees under section 212. The Tax Cuts and Jobs Act separately impacted both of these issues by eliminating the income inclusion (and corresponding deduction) of alimony for divorces decreed post-2019, and by suspending miscellaneous itemized deductions (so below-the-line attorney’s fees cannot currently be deducted). The analysis in this order is still helpful and relevant to past, and perhaps, future years.

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A deduction for legal fees is allowed when the fees are incurred to produce or collect income. Since alimony is considered income by virtue of section 71(c) legal fees related to alimony could be deducted, prior to the TCJA changes. Legal fees related to other costs of divorce are not deductible, so it is important that taxpayers (or more importantly, their divorce attorneys) distinguish between the fees paid for each cause of action.

To determine whether the fees are deductible, the Court must look to the origin of the claim and not the taxpayer’s purpose or desired outcome in the case.

In this specific case, there is a lot at stake for the petitioner. Her ex-husband worked with the firm that handled the class action lawsuit against Enron and for which he received a $50 million fee after the marriage ended.

Originally, a marital settlement agreement (“MSA”) was reached which entitled petitioner to 10% of her ex-husband’s earnings. The amount received under the MSA was determined to be alimony income to the petitioner in an earlier Tax Court case.

Later, petitioner had second thoughts about the MSA and incurred legal fees in three separate proceedings: 1) to set aside the MSA for lack of legal capacity, 2) for an order to show cause as to why she should receive the percentage of earnings as dictated by the MSA nevertheless (her ex-husband deposited her percentage into a trust account for her benefit, but she was barred from accessing it), and 3) for damages for breach of fiduciary duty to her with respect to the MSA negotiations under California Family Code which allows a suit for damages if a breach by her ex-husband results in impairment to her undivided one-half interest in the community estate.

The Court looked to origin of the claim for each proceeding and determined that petitioner was only entitled to deduct legal fees for the second proceeding, because it related to the alimony income in the trust account and her ability to collect it. The IRS’s motion for summary judgment was denied with respect to this part.

The other proceedings were not entitled to a legal fee deduction because the origin of the claim in the first proceeding was related to a flaw in the MSA, and in the third proceeding arose from a duty that her ex-husband had to her as a result of their marriage. In other words, the origin of the first and third claims did not involve the production or collection of income. The IRS’s motion for summary judgement was granted with respect to these parts.

The parties were ordered to submit settlement documents or a status report by the end of November.

Docket No. 6446-19L, Wendell C. Robinson & May T. Jung-Robinson (order here)

In this order the petitioners have filed a motion for summary judgment because they believe they have already paid their 2012 liability of $88,000 with a combination of withholding and a check sent with their return. They argue that as a result of the liability being paid in full, and since the assessment statute is closed, the IRS’s proposed levy cannot be sustained.

In response, the IRS explains that the petitioners’ return contained mathematical errors, so they owed $13,267.20 more than what their return originally reflected. The IRS used its math error authority to correct the returns, so no notice of deficiency was issued. There has been considerable coverage by PT on various math error authority issues (for example: here and here) and it was an “Area of Focus” in former NTA, Nina Olson’s Fiscal Year 2019 Objectives Report to Congress.

The Court has an issue with the IRS’s use of math error authority in this case – mainly that Appeals’ notice of determination makes no mention of the mathematical corrections permitted by section 6213(b)(1), nor of whether the petitioners were notified of the corrections, as required, to give them an opportunity to request abatement. Abatement can be requested under section 6213(b)(2)(A) and doing so entitles the taxpayer to deficiency procedures.

The Court would like more evidence on this issue, so it denies petitioner’s motion.

Docket No. 17799-18L, Michael Balice v. C.I.R. (order here)

This case involves an interesting scenario in the CDP world that I have not encountered – it is one where a taxpayer timely requests a CDP hearing but is not provided with one. Keith covered the topic in 2015 (here), and in 2016 (here) after the IRS provided guidance on how its attorneys should handle the issue in Chief Counsel Notice (“CC”) 2016-008. The issue has also come up in at least one other designated order post (here).

In this order, it appears that Counsel may not have adhered its own guidance and the IRS has moved to dismiss the case alleging that the petitioner took only frivolous positions in his CDP requests for a levy and lien.

The IRS argues that the Court should grant summary judgment in their favor because they did not violate petitioner’s due process rights by denying him a CDP hearing. In the IRS’s view, petitioner had an opportunity to raise issues regarding his liability and the validity of the lien in other courts (because the DOJ had the case for a period of time) and petitioner’s request was properly disregarded because it only raised frivolous issues. IRS also argues that there is no benefit to remanding the case to Appeals, which the Court may be permitted to do, because of petitioner’s frivolous arguments and because Appeals lacks the authority to compromise petitioner’s liability due to the DOJ’s involvement.

The Court isn’t convinced by the IRS’s arguments and reviews the history of the case. Earlier on, as a result of the Office of Appeals’ view that the petitioner’s request was frivolous, it did not communicate with the petitioner in any of the usual ways. The petitioner did not receive an explanation of the process and Appeals did not request any financial information.

The only correspondence Appeals sent to petitioner was a notice of determination sustaining the NFTL (petitioner’s request related to his proposed levy was not timely). This denial of a CDP hearing is permitted under section 6330(g), but Thornberrypermits the Tax Court to review the “non-hearing” for an abuse of discretion.

That opportunity for review is potentially helpful for petitioner in this case. The Court reviews the form letter that petitioner submitted with his CDP request and nothing seems frivolous about it.  If only some portions of petitioner’s request are frivolous, then Appeals may have abused its discretion in denying the CDP hearing. The Court also identifies a section 6751 supervisory approval issue and the IRS has not demonstrated it has met its burden. As a result, rather than grant the IRS’s motion, the Court sets the motion for argument during the upcoming trial session.

A Journey Through Rule 81(i) – Designated Orders: August 19 – 23, 2019

There were only four orders this week. The first and most interesting order explores Rule 81, which governs the taking and use of depositions in the Tax Court. Two CDP orders and a tax protester in a deficiency case round out this week’s orders.

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Docket  Nos. 16634-17L, 15789-17, Raley v. C.I.R. (Order Here)

This short order from Judge Buch strikes from the record Respondent’s lodging of a document entitled “Respondent’s Designation of Deposition Testimony To Be Used At Trial.” Judge Buch characterizes Respondent’s filing as “an attempt to put into the evidentiary record of this case a deposition of a non-party taken pursuant to a stipulation under Rule 81(d) . . . .” For those practitioners who don’t often take depositions in cases before the Tax Court (myself included), a brief review of Rule 81 is called for.

Rule 81 provides that a party may take depositions only where (1) the parties agree to do so under Rule 81(d), or (2) the party seeking the deposition applies for permission from the Court under Rule 81(b). Compared to Rule 30 of the Federal Rules of Civil Procedure, which requires an application only in limited circumstances, the Tax Court has much more discretion under its Rules to allow an unconsented deposition. But here, the parties stipulated, and so didn’t need Court permission to take the deposition.

Now we have a deposition. But what can we do with it? Rule 81(i) governs use of the deposition in the Court. Rule 81(i) is analogous, but not identical, to FRCP 32.

At the trial . . . any part or all of a deposition, so far as admissible under the rules of evidence applied as though the witness were then present and testifying, may be used against any party who was present or represented at the taking of the deposition or who had reasonable notice thereof, in accordance with the following provisions:

1. The deposition may be used by a party for the purpose of contradicting or impeaching the testimony of the deponent as a witness;

2. The deposition of a party may be used by an adverse party for any purpose;

3. The deposition may be used for any purpose if the Court finds: (A) That the witness is dead; (B) that the witness is at such a distance from the place of trial that it is not practicable for the witness to attend, unless it appears that the absence of the witness was procured by the party seeking to use the deposition; (C) that the witness is unable to attend or testify because of age, illness, infirmity, or imprisonment; (D) that the party offering the deposition has been unable to obtain attendance of the witness at trial, as to make it desirable in the interests of justice, to allow the deposition to be used; or (E) that such exceptional circumstances exist, in regard to the absence of the witness at the trial, as to make it desirable in the interests of justice, to allow the deposition to be used.

So, to summarize, the deposition may be used in three circumstances: (1) impeaching the deponent as a witness at trial; (2) for any purpose, if the deponent is a party; and (3) purposes related to the unavailability of a witness at trial, including death, distance, inability to attend or compel attendance, or other exceptional circumstances.

Here, Respondent, according to Judge Buch, simply attempted to put the entire deposition into the record. That won’t work, because Respondent didn’t even identify how Respondent intended to use the deposition. Without at least this, the Court has no basis to determine whether the deposition will be permissibly used under Rule 81(i).

Respondent’s counsel didn’t take this lying down. A week later, Judge Buch issued a subsequent order in this case. The parties held a conference call with Judge Buch, and explained that the deponent would be unavailable for trial—one of the reasons a deposition can be used, for any reason, under Rule 81(i)(3). Judge Buch accordingly vacated the August 21 order, retitled Respondent’s filing of the deposition as a “Motion Under Rule 81(i),” and ordered the parties to stipulate to the admissibility of so much of the deposition as possible. That stipulation was filed on September 6, and the Court accordingly granted Respondent’s motion under Rule 81(i) on September 18.

Docket  Nos. 5227-18L, 4986-18L, Koham v. C.I.R. (Order Here)

This CDP case from Judge Buch involves petitioners who don’t appear sympathetic. The liability arose from the taxpayer’s self-assessment of income tax liabilities on returns they filed for 2013 and 2014. The taxpayers filed an OIC, but listed “patently excessive” expenses (e.g., $9,500 for housing expenses). In the interim, the Service filed a NFTL, and so Petitioners elected to pursue the OIC through the CDP procedures.

The settlement officer calculated a monthly net income for the taxpayers of $987, after reducing their monthly expenses to the IRS collection standards amounts. The SO found a reasonable collection potential of $312,361—far greater than the corresponding tax liability of $35,117 and dwarfing petitioners’ offer of $2,500.

The SO offered a streamlined installment agreement of $332 per month (i.e., the total liability divided by 72 months). But Petitioner didn’t accept it and the SO issued a Notice of Determination that sustained the NFTL. Petitioners proceeded to the Tax Court, arguing in their response to Respondent’s eventual motion for summary judgment that the SO made a “blanket rejection” of the OIC.

There was simply nothing here for the Court—or frankly, the IRS—to work with. Petitioners provided no evidence of an IRS error with the expense calculation to lower the “reasonable collection potential”; no purported special circumstances that would justify acceptance of an offer for less than the reasonable collection potential; and no further allegations (e.g., that the SO failed to verify all applicable statutory and procedural requirements). They complained of the SO’s “blanket rejection” of the OIC; instead it seems the SO considered the circumstances and rejected the OIC for a fair reason. Pro se CDP litigants should take note: your reasons for seeking reversal must be well-grounded in the facts and law.

Docket  No. 24599-17L, Marra v. C.I.R. (Order Here)

Another CDP case, this time from Chief Special Trial Judge Carluzzo. Respondent filed a motion for summary judgment, while Petitioner moved to remand the case to IRS Appeals. The primary issue is whether Petitioner may challenge the underlying liability pursuant to IRC § 6330(c)(2)(B). Respondent objects because they believe Petitioner did not raise the underlying liability during the CDP hearing itself, and is therefore precluded from raising that issue before the Tax Court. See Giamelli v. Commissioner, 129 T.C. 107, 112-13 (2007). Petitioner responded that, in fact, he raised the issue in a Form 1127, Application for Extension of Time for Payment of Tax Due to Hardship, which he allegedly submitted during the CDP hearing.Judge Carluzzo notes a further disagreement to whether Petitioner had reasonable cause for failure to pay the underlying liability, in addition to the liability itself.

Because Judge Carluzzo finds there to be a continuing dispute regarding the underlying liability, he denies Respondent’s motion for summary judgment, because genuine issues of material fact remain in dispute (though the order does not detail precisely what facts are material or in dispute).

Further, Judge Carluzzo denies Petitioner’s motion to remand—likely because the issue centers on the underlying liability. If the Court finds that Petitioner did raise the underlying liability at the hearing, then the Court may consider it de novo without need for remand. See Sego v. Commissioner, 114 T.C. 604, 610 (2000). If not, then it’s a moot point anyway. In any case, remand doesn’t make sense here.

Docket No. 322-19, Barfield v. C.I.R. (Order Here)

Finally, Judge Guy defeats a classic tax protester tactic. In an earlier proceeding, Petitioner alleged an issue regarding tax year 2015. But at that time, the Service hadn’t issued a notice of deficiency for 2015. So, Respondent moved to dismiss for lack of jurisdiction as to 2015, which the court granted.

Later, the Service did issue a notice of deficiency for 2015. Petitioner asked the Tax Court for review, and filed a motion for summary judgment, arguing that the earlier proceeding had dismissed the 2015 tax year, and thus, was res judicata as to this new proceeding. Respondent filed a motion for judgment on the pleadings in response. 

Judge Guy parries this tax protester’s attempt to nullify the Service’s notice of deficiency and grants Respondent’s motion for judgment on the pleadings. Because Petitioner didn’t allege any errors or facts with respect to Respondent’s notice—aside from the baseless res judicata argument—Judge Guy found that “the petition . . . fails to raise any justiciable issue.” Judge Guy also warns petitioner about the section 6673 penalty, but does not impose one. A review of the case’s docket suggests that Petitioner heeded Judge Guy’s warning, as there have been no further filings in this docket. 

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.