The Whittakers owe about $33,000 and offer to pay $1,629 to resolve their liability.

They could hardly ask for a better start to the opinion: “The Whittakers are hardworking people…” Seeking an offer, you worry that the applicants come across as deadbeats or people trying to gain an unfair advantage on the system. Those type applicants certainly exist. When the Court starts off the opinion with this statement, it bodes well for the Whittakers because it means they have crossed an important threshold in making their case. Just because they are hardworking does not mean they deserve the offer in compromise they have requested but this finding definitely moves their case forward in a positive way.

The Whittakers are in their mid-60s. The opinion says that Ms. Whittaker is only one year away from retirement as a family and community-empowerment specialist for a local school district. Mr. Whittaker is a veteran and a self- employed personal trainer. The opinion does not discuss how long he intends to continue working. The length of future employment can be a sticking point. I recently had a client in his mid-70s and the offer examiner projected his income for the next 10 years. President Biden may have moved the bar on expectations of how long someone will/should work but for many individuals working after full Social Security retirement age should not be something that the IRS expects in my opinion.

The CDP case only involves the tax year 2015. So, that is the only year before the Tax Court. The offer, however, covers 2004-2006, 2015 and 2018. While the Court only addresses 2015, the decision regarding the offer necessarily implicates the whole offer and not just one of the years in the offer. So, the taxpayers get the benefit of a decision covering their whole liability even though it nominally relates just to one year.

The Whittakers submitted a doubt as to collectability offer saying, in effect, that they had no ability to fully pay the debt owed to the IRS. The IRS responded that based on its calculation of their assets they had the ability to fully pay the outstanding liabilities. The IRS could still accept the offer even if the Whittakers had the ability to full pay, but the IRS offer examiner and Appeals employee did not want to accept the offer. The value of the house, the ability of the Whittakers to pull money out of the equity in the house, the value of retirement accounts, the need to use the money in those accounts to pay basic living expenses and the change in their circumstances due to the pandemic were the source of the dispute on how to calculate the correct offer amount.

Because the Whittakers live in Minnesota, the Eighth Circuit decision in Robinette v. Commissioner, 439 F.3d at 459 controls the Tax Court’s actions with respect to scope of review. The Robinette case held that the Tax Court must limit what it considers to the administrative record and not take new evidence.

The Court looked at each of the disputed issues in turn. With respect to the retirement account it stated:

The Whittakers argue that, because they are nearing retirement, the money in those accounts should be viewed as generating income over time, not as an asset to be liquidated to pay their tax debt….

They specifically cite IRM 5.8.5.10 (Mar. 23, 2018), which states that a taxpayer within one year of retirement may have his retirement accounts treated as income; and IRM 5.8.5.20(4) (Sept. 30, 2013), which states that taxpayers who are retiring may have their future income and expenses adjusted in calculating their RCP. They think these parts of the IRM should have made the IRS increase their projected income a bit, but taken the value of the accounts entirely off the asset-side of the RCP computation — changes that they also say would make their OIC more reasonable. They also point to an authority higher than the IRM that both the IRS and we have to follow — there’s a Treasury Regulation that says that the IRS may compromise a tax debt if a taxpayer has a retirement account with sufficient funds to fully pay his liability, but who would be unable to pay for basic living expenses afterwards if he did so. Treas. Reg. § 301.7122-1(c)(3)(iii) (example 2)

The IRS counters that neither the IRM nor the regulation requires the IRS to treat the retirement account strictly as a source of income. In a situation in which the taxpayers argue for special circumstances, the IRS should consider additional factors such as age, employment status, medical issues, number and health of dependents and ability to earn a living. The Settlement Officer in Appeals states in her report that the special circumstances were considered but did not provide a basis for accepting the offer since the Whittakers had no long-term illnesses and were not living on a fixed income.

The Court acknowledges that reasoning does not create an erroneous view of the law or facts but also notes a problem for the IRS:

this reasoning [the information in the report] didn’t make it into the notice of determination, no matter that it is reasonably clear in the administrative record as a whole. There is some ambiguity in the law here — we typically say that we confine our review to the reasoning in the notice of determination, but administrative-law cases more generally do let a reviewing court “uphold a decision of less than ideal clarity if the agency’s path may reasonably be discerned.”

The Court then moves on to look at the home equity situation.

The [OIC] Unit adopted the county’s assessed value of the Whittakers’ home in its analysis of the OIC. It figured that the quick sale value¹² of the home was $194,400. The Whittakers had a mortgage for $85,237, and so a net equity of $109,163. This analysis, however, ignored the Whittakers’ contention that the home was worth less than its assessed value due to its condition as well as their contention that they are unable to tap that equity because of the restrictive terms of their mortgage. The settlement officer did not address these arguments, but disregarded them and adopted the Unit’s valuation.

The Whittakers argue that the home was not worth its assessed amount because it was in bad shape. They further argue that they cannot borrow against the home both because they lack the ability to make the loan payments that would result and because the existing loan documents prohibit such a borrowing. The Court takes the IRS to task for not following up on the Whittakers claims regarding their inability to refinance the house:

The IRS does need to take problems with possible refinancing a home seriously. For example, in Antioco, 105 T.C.M. (CCH) at 1236, [see post here and prior posts] the taxpayer submitted proof of her attempts to refinance after the settlement officer asked for such documents to help the officer make her determination. Here, although the Whittakers didn’t submit such proof, [*12] they said that they would and could if the settlement officer had only asked. The Whittakers have a point — there’s nothing in the administrative record that states or even suggests that the examiner at the Unit or the settlement officer during the CDP hearing asked for any information in addition to the appraised value. The settlement officer noted that she “advised [the Whittakers’ lawyer] that the special circumstances were considered; but did not warrant acceptance of the offer” and that she “was not going to remove the equity for the investment because the taxpayers can fully pay with one of the retirement accounts; plus, the taxpayers have over $100,000 in equity in the home.” There’s no evidence in the record of any consideration of the Whittakers’ arguments on this point.

This is where the CDP process provides a very tangible benefit to all taxpayers because it interjects a judicial overview on a process otherwise completely within the control of the IRS, as Les discussed recently in the Pitt Tax Review.  This does not mean the taxpayer will always win, see e.g. this post discussing a loss by the taxpayer, but it does mean that all taxpayers win by getting a window into the thinking about what is appropriate.

The Court finds that the Settlement Officer’s conclusion regarding the equity in the home and the Whittakers ability to tap into that equity was clearly erroneous. Because of that finding the SOs use of that equity in calculating their reasonable collection potential was an abuse of discretion.

The Court then moved on to the impact of the pandemic. The pandemic impacted many taxpayers. Many had offers pending based on one set of projections only to have those projects smashed by the economic disruption caused by the pandemic. Of course, the disruption impacted taxpayers in different ways depending on their circumstances. It’s easy to image that a self-employed person engaged in personal training would have had little or no work for a significant period of time and then would almost need to start the business from scratch. Given his age, this disruption caused Mr. Whittaker to leave the workforce. The pandemic also caused a major downward shift in the amount of work Mrs. Whittaker had. The SO’s response to this significant change in circumstances was not to recalculate the offer but rather to offer a hold on collection.

The SO also miscalculated Mr. Whittaker’s military pension by almost $1,000 a month. The IRS argues the error is harmless because enough equity still existed to satisfy the liability. The IRS attempted to put in the record at trial information not in the administrative file in order to support its conclusion. The Court rejected this attempt stating:

Upholding the rejection of the Whittakers’ offer because Mrs. Whittaker’s mall job may have resumed or Mr. Whittaker might be able to run a training business using potential clients’ possible pandemic purchases is entirely speculative. These post hoc rationalizations are precisely what Chenery bars. See Antioco, 105 T.C.M. (CCH) at 1240.

The Court notes that the Whittakers lost their jobs in the middle of the CDP hearing. This materially changed their circumstances since their income was critical to the calculation regarding their ability to pay. Rather than compel the IRS to accept the offer that the Whitakers made, the Court sends the case back to Appeals to consider their updated information. This limited remedy does not guarantee the Whittakers will receive the offer in compromise they seek but does give them a good chance for a favorable outcome. Unlike most tax cases, CDP cases provide a moving target. Income and expenses are dynamic. This case demonstrates how their dynamic nature can change outcomes and show how the IRS must be flexible during the CDP process to adapt to changes in a taxpayer’s financial circumstances. One wonders whether the absence of judicial review that accompanies IRS consideration of most collection alternatives reinforces a decision-making process that fails to consider taxpayers’ changing financial circumstances and encourages a more generic IRS approach to evaluating a taxpayer’s true ability to pay. CDP, while not without some problems, injects a needed judicial check on the IRS’s still considerable collection powers.

They say bad facts make bad law, and I’d say something similar about “bad taxpayers.” I don’t know who exactly this particular Michael D. Brown is but owing approximately $50 million in back taxes usually doesn’t play well. I can’t help but see that as a backdrop to some of the opinions that have been rendered in his line of cases… but more on that later.

As a brief refresher, Mr. Brown submitted an Offer in Compromise (Offer) to settle his back taxes for a lump-sum payment of $400,000. Because he is over 250% of the Federal Poverty Line, his Offer had to be accompanied with a 20% payment -commonly referred to as a “TIPRA” payment, after the bill that enacted it.

The IRS “rejected” (or “returned,” his Offer… maybe the distinction matters?) but pocketed the 20% TIPRA payment. Now Mr. Brown wants his $80K back. The Tax Court had already found that the return/rejection of the Offer was not an abuse of discretion, and the 9^th Circuit agreed. But there was still an open question as to whether the Tax Court had jurisdiction to order a refund of the TIPRA payment. The 9^th Circuit remanded to the Tax Court on exactly that issue.

Of course, on that question the Tax Court found that it is “a court of limited jurisdiction.” (T.C. Memo. 2021-112.) Hence, no jurisdiction over refunding the TIPRA payment. Everyone can mark that off on their bingo sheet.

As an aside, I’d note that the Tax Court also makes a determination about the character of the TIPRA payment (i.e. “not a deposit”) and whether on the merits it should be refunded. The 9^th Circuit blesses that determination as well, which I take issue with and will go into more detail on in my next post.

For now, let’s focus on how heavily Boechler, a decision explicitly covering jurisdictional statutes issued five months prior to the Tax Court ruling in Brown figured into the equation. How did the Tax Court address this monumental Supreme Court decision explicitly dealing with the Tax Court’s CDP jurisdiction in its opinion regarding the Tax Court’s CDP jurisdiction?

[Alec Trebek Voice]: “Answer: Not at all.”

Well, you might say, maybe the issue wasn’t raised. And indeed it wasn’t. The brief for Brown had already been submitted prior to Boechler. You can’t fault the Tax Court for not considering an issue that wasn’t raised.

But what about with the 9^th Circuit on appeal?

Brown explicitly did raise the Boechler issue in its briefing with the 9^th Circuit via FRAP Rule 28j and also as part of oral arguments. How much did the 9^th Circuit address this monumental Supreme Court decision explicitly dealing with the Tax Court’s CDP jurisdiction in its opinion regarding the Tax Court’s CDP jurisdiction?

[Alec Trebek Voice]: “Answer: Not at all.” Daily double!

Thus, the request for an en banc hearing to revisit the issue. And the rather terse shut-down of that request: a one-page denial noting that of the entire bench “no judge has requested a vote on whether to rehear the matter en banc.”

So we don’t really know how the 9^th Circuit thinks Boechler applies to the question of the Tax Court’s refund jurisdiction. Though I suppose we can infer that the 9^th Circuit simply thinks that Boechler doesn’t apply at all. Is that the correct reading of Boechler?

Read narrowly, Boechler looks at the distinction between claims processing rules and jurisdictional rules. It deals with procedural questions of jurisdiction: when you can get into court, not what powers a court can exercise once you’re there. On this reading, it is fair to say that Boechler is wholly irrelevant to the issues in Brown.

That is my Cliff’s Notes version of Boechler and jurisdiction. It would likely get you a D- on any law school exam. You’d be better off reading the actual opinion (it isn’t that long), or better yet Carl’s multiple posts on the topic.

Counsel for Brown urges a broader reading. Per the motion for rehearing, Brown argues that Boechler “changed the jurisdictional inquiry. The old platitude stated that Tax Court lacked jurisdiction over a matter unless some statute expressly granted it. Boechler establishes the new standard that Tax Court has jurisdiction if a predicate notice has been issued unless some statute eliminates that jurisdiction.”

Maybe. I’m not sure I agree that Boechler goes that far. But I do think that the Tax Court genuinely needs to wrestle with Boechler in ways it does not yet appear ready to. At the very least, I’d ask the Tax Court to look at jurisdictional issues with fresh eyes and retire the opening sentence of so many opinions: “We are a court of limited jurisdiction.” This favorite refrain of the Tax Court has never really done any legwork because, as Judge Posner aptly remarked in Flight Attendants v. Commissioner, 165 F.3d 572, 578 (7th Cir. 1999) “All federal courts are courts of limited jurisdiction.” (Hat tip to Bryan Camp’s article for highlighting that quote.) The inquiry is to the scope of that jurisdiction.

On that note, it genuinely confounds me that that Tax Court continues to interpret the scope of its CDP jurisdiction as if Congress placed it in a straitjacket. CDP was created by Congress precisely as a judicial check against IRS abuse. Thus, it rings a bit hollow when the petitioner demonstrates in a CDP case that the IRS did something abusive (like keep money it shouldn’t) and the Tax Court retorts, “We’re an Article I Court. If only Congress gave us power to remedy such abuses… alas.”

But the Tax Court decision in Brown (upheld by the 9^th Circuit) is even worse than being just one more notch on the Thapedi-Thumper’s belt. As I’ll discuss in my next posts, Brown potentially represents the Tax Court tightening the straitjacket even further.

Imagine that the IRS levied on your state tax refund when it has not properly followed the procedures (that is, the law) prior to doing so. Fortunately, under IRC § 6330(f) you are provided a CDP hearing after the levy. You are pretty upset: indeed, you want the money back for the IRS’s improper levy.

Months ago, I wrote about this exact scenario with the IRS CP504 “Notice of Intent to Levy.” I argued if the IRS does not properly send the CP504 (for example, it isn’t sent to the “last known address”), the IRS should have to return the levied proceeds to the taxpayer. I suggested that this be done at the CDP hearing.

Carl Smith noted in the comments section that you probably wouldn’t be able to get these proceeds returned in CDP because the Tax Court does not (believe itself to) have “refund jurisdiction.” See Greene-Thapedi. And I completely agree with Carl that if you ask the Tax Court to “order” a “refund” in CDP it isn’t going to happen.

But I don’t think that ends the inquiry or addresses the actual hypothetical I laid out. And it is important to understand why.

It is fair to say that the Tax Court has tended to take a rather narrow view of its ability to order refunds in CDP litigation. The posts here and here detail multiple cases where the Tax Court (and affirming appellate courts) say “sorry, but if you’re asking for a refund you’re in the wrong place.”

One could therefore be excused for looking at these decisions and saying “if you’re asking for money back, it isn’t going to happen in CDP.” In a likely ill-advised effort of providing a mnemonic device, I’m going to refer to this approach as being a “Thapedi-Thumper,” since a broad reading of Greene-Thapedi really forms the backbone of this belief.

I see two fundamental problems with the Thaepdi-Thumper approach. The first problem is focusing too much on the need for the Tax Court’s jurisdictional power to order a refund. The second, related problem, is a failure to focus on the actual people and actual processes that resolve the bulk of CDP controversies.

I will cover the second problem in my next post. For now, let’s look at if and when you really need “refund jurisdiction” in CDP to get the remedy you’re asking for.

Overpayments and Refunds – Keep Them Separate

In my previous post I noted the distinction between an “overpayment” and a “refund.” Namely, that an “overpayment” is what happens when you have more credits/payments than tax, and a “refund” is when the IRS actually sends that excess money to you. It is important to keep those notions separate.

Let’s start with the Tax Court and overpayments in CDP. I think it’s clear that the Tax Court is actually less averse to making determinations about the existence or amount of overpayments than Thapedi-Thumpers may believe. Indeed, Greene-Thapedi itself suggests this in the oft-cited and tantalizing “Footnote 19,” which provides:

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

To me, the footnote suggests that the Tax Court may consider overpayments when relevant to a proposed (i.e. not mooted) collection action. The Schwartz case is consistent with this: there was still outstanding tax on multiple years (i.e. no refund would result), but the “validity of the proposed collection action” on the years where there was an overpayment would obviously not be upheld. That’s why Judge Vasquez said it didn’t matter if he looked at the issue from abuse of discretion or de novo: the levy wouldn’t be sustained either way.

The problem is that so many taxpayers (understandably) want to take it a step further: they have an overpayment, so why not also order a refund? That’s what the taxpayer in McLane v. Commissioner (T.C. Memo. 2018-149) wanted, and that’s what the Tax Court resisted. As far as collection went, the “overpayment” tax year at issue (2008) was already fixed by the parties, with the IRS abating the assessment.

So let’s move to when, if ever, you might get a refund in CDP litigation. On that question I’d say that it is clear the Tax Court will not order a refund of an overpayment. But the Tax Court may order a refund of other ill-gotten funds.

What does that mean? It means that if you are saying you “paid more tax” than you have due (i.e. an overpayment) you are out of luck in CDP litigation. But if instead you are saying the IRS took money they shouldn’t have (say, by failing to follow proper procedures), you may just get your money back.

If you want to put a technical spin on it, I’d say that the Tax Court is averse to ordering “rebate refunds,” and perhaps less averse to “non-rebate refunds.” Again, I commend Professor Camp’s article to those who want to learn more about the distinction between the two. For present purposes (and possibly in contravention of what Professor Camp himself would agree to), I’m going to classify any disbursement of money to the taxpayer that doesn’t result from an overpayment as a “non-rebate refund.”

You may say I’m a dreamer, but I’m not the only one: Chocallo v. C.I.R., T.C. Memo. 2004-152.

The Chocallo opinion involves a disgruntled pro se petitioner asking the Tax Court to exercise all sorts of powers it does not have in CDP: namely, criminal prosecution of IRS employees and other monetary compensation. The Tax Court pretty easily determines it doesn’t have jurisdiction to do so. But you might ask why the petitioner was so upset in the first place…

And that’s where things get interesting.

The Tax Court found that the IRS had levied on Chocallo’s bank account (for approx. $23,000) prior to offering her a statutorily required CDP hearing. (The IRS later discovered that the underlying assessment was invalid too… oops.) Because the levy improperly occurred prior to being offered a CDP hearing the Tax Court, in Judge Ruwe’s words, “ordered that the amount collected by levy be returned to petitioner with interest.”

Wow. Ordering money being returned in a CDP hearing… How are we to unpack this?

The Chocallo opinion was issued before Greene-Thapedi, which is important. The Tax Court was aware of Chocallo when it gave its opinion… and in approximately three paragraphs discussing Chocallo, gave no indication that it disagreed with the return of the improperly levied proceeds. Indeed, the court thought it an important distinction that Chocallo dealt with an improper levy rather than offset, as was the case in Greene-Thapedi.

This is all to suggest that Chocallo is in fact consistent with Greene-Thapedi. The Court doesn’t find it necessary to explain why Chocallo is consistent, but I can think of a couple reasons it might have latched on to.

First, one could argue that what the Tax Court did in Chocallo was not to order a “refund” or even to determine an “overpayment.” Instead, it ordered the IRS to “return” certain levy proceeds. Note, importantly, that as I define it, these would be “non-rebate refunds.” The return of money in this case has nothing to do with whether there was an “overpayment” or not: it just has to do with the propriety of the collection action.

(As an aside, note that this is exactly the remedy I’d be asking for in the hypothetical involving an invalid CP504 Notice and levy on state tax refund I posted on, which Carl seemed to disagree with me about. Because I can’t let it go, more on why, regardless of Chocallo, I think I’d have a good chance of getting the levied proceeds back in CDP in my next post.)

Second, one could read Chocallo as merely addressing a procedural wrong (levy prior to CDP hearing), that in a very real sense has nothing to do with the “underlying liability” of the tax, and everything to do with the levy action itself. And what exactly is the Tax Court given jurisdiction over if not a review of the propriety of levy actions?

Indeed, PT has covered something quite similar before in Cosner v. Commissioner. Strangely enough, the Tax Court seems to care when the IRS improperly levies in CDP litigation reviewing the propriety of levy actions…

Reasons to Doubt My Optimism

Yet despite everything I’ve written, one could still be excused for wondering how much a “non-precedential” (reasons for scare quotes in this post) memorandum opinion from 2004 can really open the door to getting money back in CDP. Similarly, is the Tax Court really going to be swayed by arcane (and questionable) distinctions between “rebate” and “non-rebate” refunds?

I think the issue has yet to be determined. The case that actually worries me the most isn’t Greene-Thapedi or any of the other “please give me a refund of overpayment” cases. Rather, it is the much-maligned Brown v. Commissioner saga (as written about here, here and here among other places).

It appears that the litigious Mr. Brown asked the Tax Court to provide a refund of his TIPRA payment on his returned Offer in Compromise… and the Tax Court said it has no such jurisdiction. That would very plainly be a “non-rebate” refund. A big strike against the distinction I’ve attempted to draw, albeit in a non-precedential opinion. I’ve also previously complained about the Brown’s case failure to raise administrative law arguments, and I seriously doubt that it raised the rebate/non-rebate distinction here, so perhaps the argument could still persuade a judge. But the existence of this opinion makes the fight a little more uphill.

Nonetheless, I’d note that Brown had relatively bad facts for the taxpayer. I’d also note that Greene-Thapedi, McLane, and others tend to have extremely convoluted fact patterns. It is possible that when the issue is a bit more clear-cut (IRS didn’t follow proper procedures) the Tax Court may be willing to order appropriate relief, short of a “rebate refund.” The Tax Court does, I believe, want to fix obvious wrongs so long as it has the jurisdictional “power” to do so.

So long as there is an obvious inequity and the remedy doesn’t violate refund jurisdiction, the Tax Court can help. Note that Greene-Thapdedi references (without criticizing) Chocallo’s return of the improperly levied proceeds as an exercise of the “Tax Court’s inherent equitable powers.” The precedential case Zapara v. Commissioner (126 T.C. 215 (2006)) is also a very clear exercise of inherent equitable powers. And again in 2006 (albeit in the non-precedential Sampson-Gray v. Commissioner, T.C. Summ. Op. 2006-19), the Tax Court (1) references its inherent equitable powers, (2) cares about whether there was a procedural defect to be remedied, and (3) “expects” the IRS to do the right thing and credit the taxpayer with the money that is due to them (see footnote 5).

Put together, this means that you may not be out of luck in Tax Court during CDP litigation when you’re asking for money back, so long as you aren’t asking for an “order” of a (rebate) “refund.” But beyond that, as I’ll detail in my next post, even if what you want is undeniably a rebate refund, CDP may still help get you where you want to go.