Today we welcome to the guest blogging ranks Peter Lowy, who is a member of Caplin & Drysdale. A nationally known tax litigator, Pete has also dedicated a significant amount of time on pro bono matters, for which he won the ABA Tax Section Pro Bono Award (now the Spragens Award) in 2003. In today’s post, Pete discusses the Seventh Circuit’s Gyorgy v Commissioner opinion. Gyorgy touches on a number of important procedural issues, including the record rule in CDP cases and last known address. Gyorgy has already been cited by the Tax Court in Adolphson v Comm’r for the proposition that a serial non-filer has a burden to show what address the IRS should have sent certain notices to at his or her last known address. Les
On February 27, 2015, the US Court of Appeals for the 7th Circuit decided a collection due process case, Gyorgy v. Commissioner, which tees up at least three important procedural issues. In this post, I will discuss those issues after summarizing the facts.
read more...The Facts
A thumbnail and streamlined sketch of the facts is as follows. The taxpayer, Gyorgy, had failed to file tax returns for years including 2002 and 2003, the years at issue on appeal. The IRS made substitute returns for 2002 and 2003, and mailed notices of deficiencies to the address in its records, even though the IRS knew the address was incorrect since it had received returned undelivered mail as well as third-party information returns with one or more different addresses for the taxpayer. After no petitions were filed in the Tax Court in response to the undelivered notices of deficiency, the IRS assessed.
Two years later, the IRS commenced collection proceedings, and mailed lien notices to the taxpayer—at his correct address. In response, the taxpayer filed timely requests for due process hearings before the IRS. In its request, Gyorgy challenged the underlying deficiency and whether the IRS had followed its necessary procedures. During the CDP process, Gyorgy provided no material information to the CDP officer, and the Appeals Office issued an adverse determination. Gyorgy timely petitioned the Tax Court, where the Tax Court conducted a de novo review. Gyorgy appears to have provided very little relevant evidence, and the Tax Court sustained the lien notices for tax years 2002 and 2003. Gyorgy appealed to the 7th Circuit.
The Issues
First, is judicial review in a CDP case limited to the administrative record? Prior to Gyorgy, several circuits had decided the issue but the 7th Circuit had not. Consequently, the Tax Court, under its rule of Golsen, had applied its own rule in the absence of controlling precedent from the court to which the case was appealable. On appeal, the 7th Circuit in Gyorgy had the opportunity to clarify the record rule for taxpayers in its geographic jurisdiction. But the court punted instead, as it was not required to reach the issue on the record in Gyorgy’s particular case (it appears the taxpayer was afforded a full opportunity but failed to provide additional evidence or credible testimony to supplement the administrative record. Whether review was limited to the administrative record or not should be academic). Nevertheless, in its discretion, the 7th Circuit could have clarified the application of the record rule, which may have assisted the IRS and taxpayers confused about the extent of judicial review, and, thus, the level of due process to which they are entitled in a CDP appeal.
The lack of clarity that remains surfaces at least two policy questions for the record rule. One: whether there should be a uniform application of the record rule across circuits. Without uniformity of application, different taxpayers will have different opportunities to challenge adverse IRS determinations and thus different levels of due process, depending upon where they reside. Uniformity, however, may require legislative action unless the Supreme Court steps in. Two: if a uniform law is adopted, should it limit or not limit review to the administrative record. The main downside of limiting review to the administrative record is that it may lead to a more litigation-oriented and less resolution-oriented process because it would encourage taxpayers to load up the administrative record with all potentially relevant evidence in the event the matter is submitted for judicial review. In practice, the resolution-mindedness of the process and parties involved has been a key quality to its success.
Second, on the last known address issues, what is a court’s standard of review in a CDP case in the context of a challenge to the assessment of the underlying liability on the grounds that the IRS failed to mail a notice of deficiency to the taxpayer’s last known address? The general rule is that when the underlying tax liability is properly at issue in a CDP hearing, the Tax Court reviews the underlying liability issue de novo, but reviews the Appeals Office’s other determinations for abuse of discretion. Should the last known address issue, when raised as invalidating the underlying liability assessment, be viewed as part of the underlying liability determination, and accordingly subject to the de novo standard of review? Not according to the 7th Circuit in Gyorgy. In its opinion, the 7th Circuit cited two cases to support applying an abuse of discretion standard: Goza, a 2000 Tax Court decision, and Jones, a 2003 5th Circuit decision. In Jones, the taxpayer failed to pay the tax shown due on its return, so a notice of deficiency was not a prerequisite to assessment. In Goza, the taxpayer received notices of deficiency so could not contest the underlying liability or associated assessment in the CDP proceeding before the court.
At a minimum, there is a legitimate policy debate to be had on the proper standard of review. The rationale for de novo review of the underlying liability is that taxpayers that had not received a prior opportunity to petition the Tax Court should receive the same rights of review to which taxpayer’s would be entitled outside of the CDP context (but that the review should be conducted within the CDP process so that adjudication of the underlying liability does not materially delay the IRS’s collection action). In a sense, the CDP process is a conceptually bifurcated but consolidated proceeding in which the taxpayer may challenge, in the first place, the assessment of the underlying liability. Secondarily, the taxpayer may also challenge the proposed actions to collect the assessed liability if they are determined to be owed. De novo review of all issues associated with adjudicating all matters related to the underlying assessment would afford the CDP petitioner the same rights as they would receive through other avenues of review—whether in Tax Court or in District Court where the taxpayer may challenge an assessment on last-known-address grounds and the District Court would review the issue without deference. De novo review would also permit the taxpayer to obtain (and introduce as evidence) information from the IRS that is relevant to a last-known-address determination.
Third, how extensive is the IRS’s due diligence obligation to locate a taxpayer’s correct address when it knows or has reason to know that the taxpayer is not receiving mail at the address in its records? Under the law, taxpayers have a duty to clearly notify the IRS when their address changes, and the IRS has an obligation of “reasonable due diligence” to identify the taxpayer’s correct address when they know the address in their records is wrong. In many last-known address cases, the taxpayer could have done a much better job at clearly notifying the IRS of their address change, and the IRS could have done more to locate the taxpayer’s correct address when it was obvious the address in their files was invalid. In determining whether a notice was mailed to the taxpayer’s “last known address,” courts at times tend (as a practical matter) to balance the respective obligations that both taxpayers and the IRS have; however, different courts place more or less of the onus on one side of the balance or the other.
The 7th Circuit in Gyorgy determined that the IRS had met its “reasonable due diligence” obligation and thus the mailing address it used constituted the taxpayer’s last known address. It may be important that Gyorgy’s facts, as portrayed in the 7th Circuit’s opinion, are unsympathetic. He had failed to file returns for the tax years at issue and at least four subsequent years, had kept the IRS utterly in the dark about his whereabouts, and on the witness stand he even admitted that he moved around so much that his correct address was hard to keep track of. The IRS’s records suggested that the postal service also did not have a more recent address than the address appearing on his last filed tax return—for tax year 2000. The IRS had received returned mail from the address in its records as well as W-2 and 1099 forms for 2002 and 2003 that showed different addresses, but the IRS received no responses to R-U-There letters sent to at least one of those different addresses. Based on these facts, the 7th Circuit did not require the IRS to expand its search for the taxpayer’s address beyond the IRS’s own records.
The 7th Circuit acknowledges in its opinion that it may have required less of the IRS to meet its due diligence obligation than other courts had in other cases. It discussed a leading case out of the 5th Circuit, Terrell v. Commissioner, in which the 5th Circuit required the IRS to expand its investigation to at least certain accessible sources, which may include DMV records, or contacting the taxpayer’s employer or return preparer. These are among the sources the IRS routinely consults when attempting to collect taxes, so why shouldn’t it take these steps when notifying taxpayers of important rights? The facts of Terrell, however, are distinguishable for many reasons including that the taxpayer had filed tax returns and taken reasonable although imperfect steps to allow the IRS to know her correct address. The 7th Circuit expressly declined to decide whether it should categorically reject Terrell or should follow Terrell if presented with a similarly sympathetic set of facts.
A question readers may wish to consider is whether the juxtaposition of Gyorgy and Terrell represents a developing circuit split on whether the definition of “reasonable due diligence” requires investigation into records not currently in the IRS’s possession when the IRS knows the mailing address in its records is wrong; or whether the differences in the cases reflect that the “reasonable due diligence” standard calls for a pragmatic, fact-driven approach that may be influenced at least partly on the reasonableness of the taxpayer’s efforts; or whether it suggests something else entirely.
Conclusion
In summary, the posture of the Gyorgy case placed three procedural issues in the 7th Circuit’s hands. Although the court punted on the record rule, it raised relevant and worthwhile points on all three issues, which readers may wish to weigh in on.
Editor Update
Jack Townsend’s Federal Tax Procedure Blog also has a nice write up of the case, where he raises a practical question as to why a nonfiler would want to raise the last known address issue: “ In the case, Gyorgy filed no tax returns, so, even if he prevailed on the issue of last known address, the IRS still has the ability to assess. (I presume that he did not do the § 6020(a), here, substitute for return which he signed, thus making it a return.)”
Peter, great write-up! Thanks.
On the record issue, wouldn’t any discussion and resolution of the issue in the case have been dicta because it is not necessary to the result?
Which, in any event, invites a discussion into the persuasive effect of dicta — an issue that has been present since the concept was formulated. Your thoughts?
Jack Townsend
Jack, The Gyorgy case on the record rule illustrates a double-standard the IRS pursues: The IRS likes the record rule only when there is nothing the IRS wants to add to the record. Even under the record rule, the IRS still always gets to put the SO on the stand to “expand” on his or her reasoning that was supposedly unclear from the notice of determination and the Case Activity Record (which is admittedly, pretty sparsely completed). But, the IRS usually objects to any testimony of the taxpayer supplementing the record. The courts have held that, even under the record rule, the taxpayer may testify as to something that the taxpayer claims was left out of the record (usually a discussion with the SO of some topic that the SO left out of the Case Activity Record), so IRS objections are not always successful, even under the record rule.
I don’t have all the information (e.g., transcripts of the trial), but I think what happened in Gyorgy (based on my review of the Tax Court’s bench opinion and the Seventh Circuit’s opinion) is that the SO verified that notices of deficiency were sent for three years involved in the CDP hearing merely by looking at IRS transcripts. The SO concluded that the taxpayer had not received those notices, so allowed the taxpayer to challenge the underlying liability (which the taxpayer later failed to do at the CDP hearing in any meaningful way).
When the case got to the Tax Court, and the issue of the notices of deficiency being sent or sent to the last known address went before the court, the IRS panicked — realizing that the record did not contain any proof of mailing, any notices, or appropriate addresses taken from returns of prior years. So, even though the IRS contended in the case (successfully) that the issue of whether a notice of deficiency was properly sent was one decided on an abuse of discretion standard, and normally, the IRS would object to supplementing a record for an issue decided on abuse of discretion, the IRS decided not to raise the record rule, but to introduce testimony from the SO’s Team Manager about proper addresses and introduce copies of the notices of deficiency and proof of mailing — none of which had been part of the administrative record. Since the IRS had the burden of proving proper verification, it was not willing to rely on simply the SO’s reading of transcripts.
By the way, I don’t understand why these factual issues of sending out notices and last known address should be decided on an abuse of discretion standard. I would hold it should be decided on a de novo standard — just as Nina Olson has argued that the CSED should be decided on a de novo standard — where no record rule would apply in any event.
When the IRS looked for the three relevant notices of deficiency, it discovered that the first one was missing, and no proper proof of its mailing existed, so the IRS then conceded that year. When the taxpayer got up to testify about where he lived in the various years and the supposed notices he gave to the Postal Service, that was testimony that would not permissibly come in under the record rule because it was not simply clarifying what was said or done during the CDP hearing. But, the IRS was at that point in no position to object to the taxpayer’s testimony, since it wanted to keep the evidence in the record that it had put in. So, neither the taxpayer nor the IRS in this case raised the record rule to object to the other side’s supplementing the record.
That appears to be why the Seventh Circuit was not in a position to rule on the record rule. The Seventh Circuit was aware of the issue, but could not exclude evidence that the parties did not ask to exclude before the trial court or object to in principle under the record rule in their briefs.
Gyorgy reveals another reason why the record rule makes little sense in CDP. As far as the Tax Court was concerned (though the Seventh Circuit disagreed), the taxpayer there had raised a challenge to his underlying liability, so in the Tax Court ,the taxpayer was free to introduce evidence on the underlying tax issue that did not appear in the administrative record. This is because challenges to underlying liability are decided on a de novo standard (hence a de novo court record). Consider the impracticality of a judge applying the record rule in the middle of a trial where some issues are being decided on the administrative record and some issues are being decided on a de novo record — with the judge having to parse each sentence of testimony to make sure that, if it applied to the abuse of discretion issue and was not clarifying the record, it had to be excluded. I am sure that taxpayers would probably be baffled by the judge’s rulings — and rightly so. Such bifurcated trials have got to be a mess. It would be far simpler and fairer to just completely dispense with the record rule for any CDP issue — ending bifurcated issue trials. And this would also end the IRS practice of selectively raising the record rule for a heads-I-win, tails-you-lose kind of litigation.
Mr. Gyorgy should not have appealed a CDP case to the 7th Circuit–which is notoriously anti-taxpayer. Instead, he should have appealed to the D.C. Circuit under its recent Byers appellate venue decision.
‘Tis true that Byers was a non-liability case. But appealing to the D.C. Circuit would have been smart for three reasons. One, the D.C. Circuit might have extended Byers. Two, Mr Gyorgy never petitioned for a redetermination of a tax liability. And three, Mr. Gyorgy never challenged his tax liabilities.
Rather, when he raised the NOD “last known address” issue, Mr. Gyorgy was disputing the validity of the tax assessment, which is part of the CDP verification process.
For those reasons, Mr. Gyorgy might have successfully taken advantage of Byers. Given his 7th Circuit “alternative,” it would have been well worth his while to make the attempt.
Once in the D.C. Circuit, Mr. Gyorgy would have had a far better chance on the merits. As it once did, the D.C. Circuit could have concluded (a) the NODs are valid to toll any applicable limitations periods, but (b) for last known address “reasonable diligence” reasons, the 90-day petition time is tolled until Mr. Gyorgy actually receives those NODs. See Gaw v. CIR, 45 F.3d 461, 468 (D.C. Cir. 1995). The holding that would follow is the tax assessment is invalid.
Although Gaw predates the CDP laws, its remedy remains valid. A post-assessment CDP liability “challenge” is not identical to a pre-assessment “determination of a tax liability.” The former cannot therefore be well substituted for the latter. Importantly, a Gaw outcome would remove the havoc the record rule could wreak at any “bifurcated” CDP Tax Court trial.
Interestingly, the 7th Circuit cited Gaw (slip opn. *12); predictably, the 7th Circuit ignored its taxpayer-favorable outcome.
Thank you for this interesting post, Mr. Lowry.
I have a couple questions regarding the significance of the issues raised that have been bothering me whenever the standard of review and record rule debates come up. I apologize if these merely display my ignorance on the subjects or if these questions have been answered elsewhere.
1) If the Tax Court’s standard of review with respect to a CDP hearing is “abuse of discretion,” I don’t know if the record rule is relevant. An Appeals Officer cannot abuse his or her discretion by failing to consider documents or other evidence that were never presented. I suppose the evidence could potentially show that the AO abused his discretion by failing to ask or clarify that he was looking for, but I think that could probably be established based on the record.
2) With respect to the standard of review for the taxpayer’s last known address: Shouldn’t this question relate to the validity of the assessment, which should be part of the AO’s verification that the requirements of any applicable law or administrative procedure had been followed (per section 6330(c)(1)). If that is the case, then the question is simply whether the AO performed such verification. If there is no evidence on the record that he did, the case gets remanded back to Appeals because a failure to follow the law gets remanded under any standard. If the AO did verify, did the petitioner object and with what evidence? That seems to fall under normal CDP procedures, and not a dispute over the existence/amount of the liability itself.