Summary Opinions for May, part 1

May got away from me, and so has much of June.  I’ll post the Summary Opinions for May in two parts, and handle June in the same manner.  Below are some of the tax procedure items in May that we didn’t otherwise cover:

  • The Middle District of Louisiana, after the Fifth Circuit vacated and remanded the case, reversed its prior decision and, under Woods, held that the Section 6662(e) valuation misstatement penalty could be imposed when the underlying transaction had been determined to lack economic substance. Chemtech Royalty Associates, LP v. US.   This case was the result of some crazy tax planning by Dow Chemicals to goose its basis in a chemical plant.  Here is Jack Townsend’s prior coverage of the case.
  • Sticking with substantial valuation misstatement penalty, the Tax Court in Hughes v. Comm’r upheld the penalty against a KPMG partner who claimed a step up in basis in stock when he transferred the shares to his non-resident spouse.  This was based on some informal tax research, and conversations with some co-workers that were also informal.  The Court essentially felt Mr. Hughes should have known better, and tagged him with a big penalty (probably didn’t help he was transferring the shares to try and ensure his ex-wife couldn’t make a claim for the increase in value).
  • IRS has released Chief Counsel Advice regarding abatement of paid tax liabilities.  In taxpayer friendly advice, CCA 201520010 states the language of Section 6404(a) is “permissive” and does not require the liability to be outstanding.  That Section states the “IRS is authorized to abate the unpaid portions of the assessment of any tax or any liability in respect thereor…”  The reference to “unpaid”, according to the CCA, is not binding on the Service.
  • The Service has released CCA 201519029, which provides advice on when preparer penalties can apply in situations where the prepared didn’t sign the return or didn’t file the return, and when a refund claim was made after the statute had expired.  For the third situation, the Service stated that “understatement of liability” does not include claims barred by the statute.  The full conclusions in the CCA are:

Issue 1: Yes. If the return is not filed, a penalty under I.R.C. § 6694(b) may be assessed if the return preparer signed the return and the return preparer’s conduct was willful or reckless.

Issue 2: Yes. Under the language of I.R.C. § 6694(b)(1), the return preparer penalty may be assessed if the tax return preparer prepares any return or claim for refund with respect to which any part of an understatement of liability is due to willful or reckless conduct. There is no requirement that the Service allow the amounts claimed on an amended return before the I.R.C. § 6695(b) penalty may be assessed.

Issue 3. The penalties under I.R.C. §§ 6694(a), 6694(b) or 6701 should not be assessed merely because the return preparer made and filed a claim for refund after the period of limitations for refunds had expired, because an “understatement of liability” does not include claims that are barred by the period of limitations. In addition, there may be extenuating circumstances that weigh against asserting the penalty. The amended return, for example, may be perfecting an earlier timely informal claim for refund.

  • The Service has announced it will be refunding the registered tax return preparer test fees.  There will be a second refund procedure where you can request your time back…but it will be ignored.
  • Professor Andy Grewal in early May had an excellent blog post on Yale’s administrative law blog, Notice and Comment, which highlights more potential penalties on employers attempting to follow the ACA requirements.
  • Another CCA (CCA 201520005) , where the IRS has held that the deficiency procedures apply to the assessment of the penalty under Section 6676 to erroneous refund claims based on Section 25A(i) American Opportunity Credit, since the penalty can only apply to a refund claim based on the credit if that claimed credit is part of a deficiency.  Carlton Smith previously had a blog post touching on this issue, found here, where he persuasively criticized  this position.  You should check out the entire post, but I’ve recreated a portion below:

A third issue discussed by the PMTA is how the section 6676 penalty is to be assessed.  Frankly, I read the Code as providing that the assessment is done like a section 6672 responsible person trust fund penalty — straight to assessment, without the deficiency procedures applying.  That seems to be what section 6671 provides.  But, the PMTA takes the position that only for underlying issues on which the section 6676 penalty applies where there is no jurisdiction in the Tax Court under the deficiency procedures, such as for excessive refund claims regarding employment taxes or the section 6707A reportable transaction penalty, the section 6676 penalty is done by straight assessment, without prior notice to taxpayers.  However, for section 6676 penalties on what would constitute a “deficiency” — and excessive refundable credit claims are clearly part of a deficiency under section 6211(b)(4)‘s special rules — the PMTA concludes that the section 6676 penalty should be asserted in a notice of deficiency.  The PMTA reasons that Tax Court cases have in the past held that a penalty which is computed as a function of a deficiency (which I would point out includes extra late-filing and late-payment penalties on the tax deficiency) are also treated under the deficiency procedures.  This reasoning is all mixed up.  The Tax Court applies the deficiency procedures to penalties like the late-filing and late-payment penalties of section 6651(a) that are imposed on the tax deficiency only because of special language in section 6665(b) that directs the Tax Court to do so.  There is no similar language in section 6671 directing deficiency procedures to apply to any penalties imposed in the following sections.

  • And another CCA (201517005), this one dealing with the statute of limitations for refunds based on foreign taxes deducted.  Specifically, whether a refund claim more than ten years (yr 13) after the tax year in question (yr 2) was timely when it resulted from an NOL (yr 4) where the taxpayer elected to deduct foreign taxes paid instead of taking foreign tax credit.  The IRS concluded that no, Section 6511(d)(2) applied to the NOL and required the claim to be made three years after the NOL year.  Section 6511(d)(3), which allows for a ten year statute for refunds pertaining to foreign tax credits, was not applicable.
  • Apparently, some states are starting to scale back the amount of tax credits available for movie productions.  Two years ago, The Suspect was filed in my building, staring Mekhi Phifer and no one else you have ever heard of.  I think it was “catered” by a fast food joint, and they may have been using our coffee pots to make coffee.  I can’t imagine Pennsylvania dropped the big bucks to land that film.
  • Emancipation day is throwing off filings again next year.  I always assumed that had something to do with the date of the Emancipation Proclamation, but I was wrong. The Emancipation Proclamation went into effect January 1st, 1863.  On April 16th, 1862, President Lincoln signed the Compensated Emancipation Act, freeing the enslaved living in the District of Columbia.  The linked Rev. Ruling explains what those in Massachusetts who are celebrating Boston Marathon Day (Patriots Day-celebrating the shot heard round the world) should do also.
  • Initially when writing this, I was watching the US women’s national team take it to Colombia, and recalling what a jackass Sepp Blatter has been.  Hoping this article is in reference to the shoe dropping on him next.  Even if he didn’t evade taxes, he should have to pay someone money for suggesting he would boost viewership of the women’s game with hot pants.  Or for not knowing who Alex Morgan is…or for making the women play on turf.

Deciding Whether to Pursue a Liability – The Differing Standard between Trust Fund Recovery Penalty Cases and Examination Cases


As we have mentioned before, Les, Steve and I are engaged in updating IRS Practice and Procedure by Saltzman and Book.  Last year I wrote a number of posts on Collection Due Process as I prepared to update that part of the book.  I have now created an entire chapter on CDP cases which will come out with the 3rd Edition of the book.  Now, I am beginning to update Chapter 17 which covers both transferee liability and the trust fund recovery penalty (TFRP).  So, look for more posts on those topics.  In this post I will examine a unique facet of the TFRP with respect to the when the IRS makes a decision to assess that liability.

In TFRP cases the IRS has decided that it has the ability to look at a taxpayer’s collection potential in deciding whether to set up a tax liability in the first place.  This post will examine the policy behind the decision that the IRS can use collection as a basis for not pursing a liability in TFRP cases yet it pays no attention to collection in ordinary examination cases particularly the cases involving low income taxpayers with little or no collection potential.


The determination to purse TFRP is made under IRM, which is made as soon as possible after the initial contact (IRM with the taxpayer and within 120 days of being assigned to a revenue officer.  IRM lists the factors to consider when determining the amount of the TFRP.  After the initial contact, collectability will be determined.  IRM gives the IRS the option of non-assertion based on collectability.  To assert non collectability the IRS will look to the factors listed in IRM  Those factors include:

  • Current financial condition
  • Involvement in a bankruptcy proceeding
  • Income history and future income potential
  • Asset potential (likelihood of increase in equity in assets and taxpayer’s potential to acquire assets in the future

More guidelines on the impact of collectability in making the TFRP assessment follow in IRM and (3), which includes:

If responsible person financial analysis shows. . . Then. . .
Any present or future ability to pay Assess the penalty and take the appropriate collection action based on an analysis of the taxpayer’s financial condition.
No present, but future ability to pay Assess the TFRP based on future income potential and possible refund offset. Prepare a pre-assessed Form 53 and file lien if appropriate.
The responsible person cannot be located or contacted but internal research identifies assets or income sources Assess the TFRP since there is a good possibility of some collection from the assets/income sources that were located.
No present or future income potential exists over the collection statute period Do not assess the TFRP since the financial analysis shows there is little prospect that the taxpayer will receive any increase in income or acquire assets that will enable the Service to collect any of the penalty.


The TFRP will normally not be assessed when:

  • There is no present or future collection potential.
  • Neither the responsible person nor their assets/income sources can be located

IRM discusses whether to pursue the TFRP in Installment Agreement or Bankruptcy Situations, while IRM analyzes TFRP in offer in compromise situations.

The focus on collectability before making the assessment in the TFRP situation stands in stark contrast the approach of the IRS in making an assessment in other situations.  The use of collection in the TFRP situation creates difficulties in reconciling the policy here regarding assessment with the Congressional policy on this type of liability expressed in the bankruptcy code.  The TFRP stands as the only tax liability incapable of getting discharged no matter how old the period for which the taxpayer owes the tax or how long ago the assessment took place.  Bad actions such as filing a fraudulent return, late return or no return can also result in a liability excepted from discharge but in those situations it is the action of the taxpayer with respect to the tax rather than the tax itself.

Given that the taxpayer cannot discharge the TFRP and the IRS has a guaranteed 10 years to collect the liability if it wants to have that period, why would the IRS choose this debt among all others to exercise a collectability determination as part of deciding whether to assess.  Why would it not save this type of determination for low income taxpayers and dependency exemption cases like the taxpayer Les wrote about on Mother’s Day?

I think that the IRS makes a distinction for TFRP taxes because this is the one tax that gets assessed by the collection division.  Employees of the collection division approach assessment with a pragmatism employees of the examination division do not.  While the IRS does not evaluate employees based on metrics (see Restructuring and Reform Act of 1998 Sec. 1204) such as how many dollars they have assessed or collected, exam employees generally measure their worth by the number and amount of assessment with little care for whether the assessment will ever be collected.  Collection officers, however, hate the thought of going through the assessment process for nothing.  As a consequence, they built into the portion of the assessment process they control a look at collection.  Nothing stops the IRS from applying this same logic to all assessments it makes.  If it did, probably a decent percentage of the assessments against low income taxpayers would go unmade.  That might be good for a system in which the IRS has limited resources.

It seems especially unsatisfactory that the one tax Congress chose to single out for the worst treatment in bankruptcy, the one tax based on the taxpayer’s breaching the trust to hold public funds for payment to the IRS, the one tax where the taxpayer responsible for non-payment nevertheless receives full credit for the unpaid withheld taxes on their individual income tax return and on the calculation of their social security benefits would be the tax that the IRS gives a break to deciding to make an assessment by looking first to its ability to collect the tax after assessment.  To limit this pragmatic approach to individuals engaged in behavior we otherwise view as reprehensible seems not to make sense.  Perhaps, the IRS should take another look at why it adopted the policy and why it only applies this beneficial approach to responsible officers who owe the TFRP.


Trust Fund Recovery Penalty Collection Not Stopped by Installment Agreement of Corporation

In Kirkpatrick v. Commission the Tax Court addressed the case of an individual responsible officer.  His corporation, Accurate, failed to pay over employment taxes for several quarters.  It had a liability of almost a half million dollars.  Despite the size of the liability, the business negotiated an installment agreement (IA) with the IRS and, by negative implication in the description of the facts of the case, remained current on the IA throughout the period of the Tax Court case.  Mr. Kirkpatrick had a small liability for individual income taxes for 2010 and had also negotiated an IA on which, by negative implication, he also seemed current.  After the establishment of both IAs, the IRS assessed the trust fund recovery penalty (TFRP) against Mr. Kirkpatrick.  That assessment caused the IRS to declare his IA in default.  That led to the issuance of a notice of intent to levy which, in turn, led to a collection due process hearing in Appeals followed by a Tax Court petition when the determination letter upheld the proposed levy action.

The case presents the common situation of how to handle a responsible officer penalty liability while the corporation attempts to pay off the trust fund (and non-trust fund) employment tax debt.  A similar case, involving bankruptcy rather than IAs, made it to the Supreme Court almost a quarter century ago.  The underlying situations remain the same, although the IRS has changed its procedures regarding the assessment of the TFRP in the interim.  The Tax Court discusses the assessment aspect and offers the greatest potential for relief although not to Mr. Kirkpatrick on the facts presented by this case.


Mr. Kirkpatrick wants two things from the IAs.  He wants his original IA back because the assessment of the TFRP did not result from bad tax behavior after the creation of his IA but merely the assessment of a liability from long ago actions.  I thought he had a good point but the settlement officer and, ultimately, the Court did not.  Second, he wanted the IRS to hold off collecting against him as long as Accurate remained in compliance with its IA.  This argument comes up repeatedly in responsible officer cases.  I think this argument also makes good sense; however, I understand how the IRS would not want to hold off collecting just because a corporation with a significant history of delinquency says it will make it all good.

On the second issue, the Supreme Court addressed a similar issue in the context of a Chapter 11 plan in the 1990 case of Energy Resources.  In that case the corporation sought plan language designating that the Chapter 11 payments would first apply to the trust fund portion of the outstanding employment tax liability.  The IRS objected arguing that the payment did not meet the criteria of voluntary payment necessary to allow a taxpayer to designate.  The Supreme Court, following the lead of the First Circuit, recast the argument as one focused on the power of the bankruptcy court and held that the bankruptcy court had the power to allow designation and approved the plan language.  This issue led to adoption of a position by the IRS that if the taxpayer did not seek to designate the payments in the bankruptcy plan the IRS would hold off on collecting from the individual responsible officer(s) as long as the corporation remained current on its plan obligations as well as its ongoing tax obligations. See IRM (Aug. 1, 2010) (addressing designation of payments in Chapter 11 plans); IRM (June, 9, 2003) (discussing application of payments in determining TFRP assessments and stating, “Absent statute considerations, assertion recommendations normally will be withheld in cases of approved and adhered to business installment agreements and bankruptcy payment plans.  To the extent necessary, information will be gathered to support a possible assessment in the event the agreement is defaulted.”).

Mr. Kirkpatrick sought the same type of deal in an IA and, in the end, did not get it.  I cannot say why the IRS will not give the same deal when the corporation pays through an IA rather than a Chapter 11 plan.  Here the IRS successfully argued that it did not need to forebear under the law or under the IRM.  Mr. Kirkpatrick may not have cited to the bankruptcy provisions of the IRM or the IRS, and the Court, may not have felt they were applicable.  Apparently, no similar provisions exist for IAs.  Perhaps they do not because the IRS has more control over the IA situation, although as discussed previously, not total control.

What Mr. Kirkpatrick did argue goes to the best strategy in these situations or at least one strategy that might have succeeded in his case.  He cited to IRM provisions that allow the IRS collection employee to forebear on assessment of the TFRP if the corporation is paying back the underlying taxes.  These provisions provide the path to keeping the IRS from collecting while the corporation pays but did not help Mr. Kirkpatrick because the IRS had already assessed the TFRP in his case.  To qualify for the postponement of assessment, the responsible officer must extend the statute of limitations on collection and the corporation must remain current.  Had he used these IRM provisions prior to the assessment, he not only could have avoided having the IRS seek to collect the TFRP from him but the IRS would not have terminated his IA for individual income taxes as it did.

Given that the IRS seems willing to forego making the assessment but not forego collection once it has assessed, the winning strategy in these cases seems clear.  Of course, not every corporation will have the resources to pay back the taxes it failed to pay originally.  In my experience, only a small number or corporations may have these resources.  Still, if you have such a corporation, follow the IRM provisions to hold off assessment.  If that does not work, keep in mind that bankruptcy might provide an alternate path to the desired result.


Summary Opinions for 12/14/2014

Merry Christmas, Happy (last day of) Hanaukka, Joyous Holidays and a wonderful Festivus for the restofus.

A quick note on posting; we probably will not have regular substantive content up over the next few days, and perhaps not until January 5th – although we do have one guest post we may put up before then because it is somewhat time sensitive.

1314snowI am a little behind on SumOp again after spending a few days in the Upper Peninsula of Michigan last week for my brother-in-laws graduation from his Ph.D. program (he still has to defend, so I don’t have to call him doctor yet).  It was in the mid to high-20s, sunny, and there was no snow.  Apparently, that is not the norm for the UP in the winter.
Michigan is a huge state, and, interestingly, it is further to drive from Houghton, Michigan (where I was- and in that band that got over 341 inches of snow last year — can that be correct?!) to Detroit than it is from Detroit to Washington DC.  Thankfully, we flew.

To the procedure.

  • In response to SECC Corp v. Comm’r, which we discussed before in SumOp here,  Chief Counsel has issued a notice to its lawyers as to when to advise the Service to issue a Notice of Determination of Worker Classification under Section 7436, and how to handle docketed Tax Court cases where employment taxes are at issue with similar facts as SECC.  In SECC, the Court found that an informal letter from the Service indicating worker classification was a sufficient determination to confer jurisdiction, and a Formal Letter 3523, Notice of Determination of Worker Classification was not required.   Notice CC-2014-011 can be found here.  Chief Counsel urged its lawyers to distinguish SECC where possible, and otherwise acknowledge SECC Corp. v. Comm’r, but indicate the IRS does not agree and argue that only a Notice of Determination of Worker Classification is sufficient to confer jurisdiction.  It will be interesting to see how the Circuit Courts shake out on this.
  • Frank Agostino of Agostino & Associates has published his December newsletter.  Unfortunately, no hot tubbing, but, as always, the content is great, and like mini-law review articles.  A fitting follow to the first item above, one of the two articles in the newsletter is a comprehensive review of employment misclassification issues.
  • The Eastern District of Michigan, in Field v. US (13-cv-12605), has held that a deed severing tenants by entireties property was not intended to go into effect until the death of the first spouse, which worked to extinguish the tax lien filed against the first spouse to die.  Both spouses signed the deed, but it was given to their lawyer to hold in escrow until one of them died.  At that point, it was transferred to a revocable trust.  The Court found that the issue was whether or not the deed was “delivered.”  Looking to Michigan law, the Court found that a deed takes effect from the time of delivery, and not the date of execution.  Sorry no free link.
  • The District Court for Idaho held that a largely uninvolved investor was a responsible person for employment tax purposes.  Shore v. United States seems like an unfortunate case, but the result is not surprising.  Shore funded a company, and hired a gentleman named Lewis to run the company.  Although Shore was named as President, and owned all the shares, Lewis was completely in charge and both Shore and Lewis assumed he would purchase the company.  Lewis also held himself out as the owner.  When Shore was informed by the IRS that employment taxes had not been paid over, he realized that Lewis had been embezzling substantially from the company (amazing how often this fact pattern occurs).  Shortly thereafter, Shore paid creditors other than the IRS.  The company then didn’t pay all the taxes.   The Court found that Shore was clearly a responsible person under Section 6672.  Shore attempted to argue that the Slodov v. US, 436 US 238, applied, which limits the imposition under Section 6672 in limited circumstances when new management takes over and pays creditors (allows new management to attempt to salvage a company without fear of personal liability for TFRP).  The Court, citing to the 9th Circuit, declined to extend  the exception to situations where the “new management” was the existing president. Joe Kristan’s RothCPA blog has coverage.
  • I wasn’t familiar with the name Jon Edelman, but a quick Google search showed that he really screwed over the government.  The Feds caught on, and assessed a whole bunch of tax, and then Mr. Edelman got to spend some time doin time in Texarkana.  The IRS is still trying to collect some of the hundreds of millions of dollars, and Mr. Edelman is apparently trying to minimize that.  The Tenth Circuit affirmed the district court, finding that Mr. Edelman moved funds from one trust (presumably reachable by the IRS) to another trust (presumably less reachable).  The district court applied a constructive trust on the current and future assets of the second trust.  The trustee of the trust and Mr. Edelman raised on appeal that the funds could not be traced.  The Circuit Court held it would normally apply the plain error standard, but this was not urged by Mr. Edelman.  It further held that this was not raised at the lower court, and was therefore not properly reviewable by the Appeals Court.
  • The IRS is expanding its pilot post appeals mediation program for OIC and TFRP cases that Appeals could not settle, which will now be available throughout the U.S.  The new rules can be found here.  An Appeals officer trained as a mediator will serve as mediator, and the taxpayer can elect to hire a second outside mediator.  Certain topics cannot be mediated, a list of which is found here, along with a summary of the program.  Although I haven’t seen numbers lately, my understanding is that mediation is fairly successful, but probably underutilized by taxpayers.  From a quick review of the Rev. Proc., it doesn’t appear like anything has drastically changed, except for the nationwide rollout.

Litigating the Merits of a Trust Fund Recovery Penalty Case in CDP When the Taxpayer Fails to Receive the Notice

In Mason v. Commissioner the Tax Court issued a regular opinion as it decided for the first time the impact of taxpayer’s failure to receive her notice of the trust fund recovery penalty (TFRP) assessment.  The case provides a logical extension to the provisions allowing taxpayers to litigate the merits of an income tax liability following a failure to receive the notice of deficiency.  In addition to the extension of protection to TFRP assessment situations in which the taxpayer did not have a pre-CDP opportunity to contest the correctness of the TFRP assessment, this case merits discussion because it also raises the issue of the ability of the Tax Court to hear a TFRP case based on the date of the assessment and the treatment of the IRC 6320 notice as the notice required by IRC 6672.


The Court spends a good deal of time with the procedural issues in this case, which makes sense because on the merits the taxpayer had little to offer.  She founded the business and ran the day to day operations.  After spending several pages getting to the merits of the case, the Court very quickly dispensed with her claim that the 6672 liability did not apply to her.  I will spend no time discussing her merits issue and will focus on her right to raise it even if she had a very weak case.

The issue causing the Tax Court to report this case as a regular opinion arises from the failure of Ms. Mason to receive Letter 1153 giving her a chance to go to Appeals to discuss the imposition of the 6672 liability. The IRS mailed the letter to her address of record on September 2, 2005.

Although a certified mail label and return receipt were affixed to the envelope, postage was placed thereon with a private postage meter and the letter was posted without being presented to a U.S. Postal Service (USPS) employee. As a result, no USPS postmark was date-stamped on the envelope, nor was the item number on the certified label entered in to USPS certified mail tracking system. . . .  The unopened envelope, return receipt still attached, was received by the IRS on September 29, 2005, Petitioner did not receive the Letter 1153 or notification of its attempted delivery.

These facts give Ms. Mason just about the best position possible to argue that in a CDP hearing she did not have the chance to previously contest the liability, except that Congress did not explicitly contemplate this situation as it wrote the statute. Section 6330(c)(2)(B) provides that “[t]he 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.”  While Congress clearly signals that someone who fails to receive a notice of deficiency may raise the merits of the underlying liability in a CDP case, it did not talk specifically about liability situations outside deficiency proceedings.  It spoke vaguely about otherwise having an opportunity to dispute the liability.  What does that mean?

The 6672 liability does not use deficiency procedures as a predicate to assessment.  Since 1996, however, it does have very specific procedures the IRS must follow concerning notice provided in section 6672(b)(1) which states, “No penalty shall be imposed under subsection (a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212(b) or in person that the taxpayer shall be subject to an assessment of such penalty.”  While this provision closely mirrors the notice of deficiency language, it clearly differs from the notice of deficiency procedures.

Assuming the mailing was proper and given the fact that she did not receive the notice giving her a right to contest the assessment in Appeals, should she have the right to contest the assessment during a CDP hearing? The settlement officer (SO) working her CDP case told her she could not raise the merits of the TFRP assessment.  In the determination letter sustaining the IRS proposed levy, the SO reiterated the position that she could not raise the merits of the underlying TFRP assessment, citing to the attempted delivery of the Letter 1153 and Appeals consideration of her appeal of an offer in compromise.

The Tax Court showed great sympathy for her plight in trying to address the unpaid TFRP liability. I did not detail all of her efforts, which you can read in the opinion, but the Court characterized the process as follows:

One major reason for petitioner’s difficulty was that she had to deal with a different person for each type of procedure concerning the employment tax liability. At one point in the process she was dealing with as many as five of respondent’s representatives regarding different aspects of the same underlying tax liability: i.e., offers, installment payments, claim for refund, etc.  Respondent’s balkanized approach to collection procedures was also detrimental to respondent, because important dates and events were not being internally coordinated.  For petitioner, it presented Kafkaesque circumstances and confusion.

Not having read the brief filed by Chief Counsel, I cannot say if he argues that the TFRP situation bears fundamental differences from deficiency cases; he thinks that she deliberated failed to pick up the mail, triggering a different set of precedent discussed in the blog recently; he argues that the simultaneous CDP and refund hearing satisfied the prior hearing requirement or some other argument.  I would expect Chief Counsel’s office to agree with this opinion but it bears watching if he accepts this decision.

The Court did not buy whichever argument Chief Counsel sought to sell. Instead, it applied the same standard to this situation that applies when a taxpayer does not receive a properly addressed notice of deficiency.  In that situation the assessment, although valid, leaves the taxpayer with the opportunity to challenge because of the lack of receipt.

The Court noted that nothing in this record indicated that Ms. Mason chose not to pick up this mailing and, in fact, everything in the record supported the conclusion that she diligently pursued every opportunity given to her. The Court’s decision that she had the right to contest the merits of the TFRP liability in this CDP proceeding seems logical under both the language and the intent of the statute.  The IRS may not have contested this legal conclusion but only its application on these facts where it felt Ms. Mason had the opportunity to contest the liability previously.

In addition to the major holding of the case it contains two other holdings worth mentioning. The first concerns a minor matter of the Tax Court’s jurisdiction to hear a TFRP case and other non-deficiency procedure cases in the CDP context.  When Congress created CDP in 1998 it contemplated that CDP hearings would occur in the Tax Court for taxes assessed through the deficiency procedures and in District Court for taxes assessed though non-deficiency procedures such as employment taxes.  That bifurcation created unnecessary confusion and Congress amended the CDP provisions in 2006 to place all CDP cases under the jurisdiction of the Tax Court.  In making the change, it gave the Tax Court jurisdiction for determinations made after October 16, 2006.  Here the determination occurred on February 2, 2007 a few months after the effective date of the change in the law.  The change took place sufficiently long ago that few cases continue to require close scrutiny of the effective date but this one did.

The second issue worth noting concerns the phrase “otherwise have an opportunity to dispute” a tax liability. The phrase comes from IRC 6330(c)(2)(B), but the Code does not define the phrase.  The regulations define it by stating that it “includes a prior opportunity for a conference with Appeals.”  The definition in the regulations leaves open whether something else might also constitute an opportunity to dispute the tax liability.  In Lewis v. Commissioner, the Tax Court agreed with the regulation that the phrase included a prior opportunity to raise the issue at Appeals.  In Ms. Mason’s case she met with the SO on the CDP hearing and the appeal of a claim for refund at the same time.  For a more detailed discussion of the Lewis case and its interpretation of a “prior opportunity” to dispute the result of a previous administrative hearing, see When Can Taxpayers Challenge the Merits of the Underlying Liability in CDP Appeals: Why the Tax Court Was Wrong in Lewis v. Commissioner and its Progeny (Feb. 26, 2014).

The IRS argued at times that the simultaneous hearing gave her a prior opportunity cutting off her ability to petition the Tax Court on the merits of her liability.  The Court said that IRC 6330(c)(2)(B) contemplated a prior Appeals hearing and not a simultaneous one.  Therefore, the fact that Appeals considered the merits of the TFRP in the appeal of her claim for refund at the same time it considered her CDP request did not preclude her from raising the merits of the underlying assessment in the appeal to the Tax Court of the CDP determination.  While simultaneous hearings do not commonly occur, they do occur occasionally.  This decision will help those taxpayer should the IRS argue again that a simultaneous hearing on the merits cuts off rights in an appeal of the CDP determination.