Hampton Software Gets Collection Due Process Hearing on the Merits

0 Flares Filament.io 0 Flares ×

We have written about the issue of whether a taxpayer can raise the merits of the underlying liability in a CDP case here, here, here and here.  The recent case of Hampton Software v. Commissioner adds another chapter to the growing book on this issue.  Because it got off track in the Lewis v. Commission case back in 2007, the Tax Court has struggled with this issue.  The Hampton case reaches the right result allowing the taxpayer to raise the merits of the underlying liability in the CDP case but struggles a little to get there because of the history on this issue.  As we discussed in Carl Smith’s post two weeks ago, linked above, three circuit courts are now poised to look at this issue and perhaps the problem will get fixed judicially at that level.


The Hampton case involves a worker classification issue rather than a tax liability as the underlying merits issue in the case. The company hired an individual to do maintenance work and treated this individual as an independent contractor.  The IRS audited petitioner’s returns for two years and determined that the maintenance worker should have been classified as an employee.  The IRS issued a 30 day letter offering the petitioner the opportunity to discuss the matter with the Office of Appeals.  Petitioner accepted that offer.  After meeting with the Appeals Officer, petitioner could not resolve the issue.  The IRS issued a Notice of Determination of Worker Classification (NDWC).  The Appeals Officer sent petitioner an NDWC to petitioner’s last known address; however, the notice was returned to the IRS with the notation “Return to Sender” and with the “Unclaimed” box checked.

Petitioner did not petition the Tax Court to contest the determination because petitioner did not receive the notice. The IRS eventually assessed the tax resulting from the change in worker classification and moved the case to the collection division.  Petitioner did not pay in response to the notices sent by the IRS and eventually, the IRS sent a notice of intent to levy.  Petitioner received this notice and timely requested an appeals hearing under the Collection Due Process (CDP) provisions.  Petitioner sought a hearing to discuss the merits of the underlying liability.  Appeals told him he could not discuss the merits because he already had a chance to do that in his prior Appeals conference.  Appeals sent him a notice of determination regarding the CDP request.  He petitioned the Tax Court under the CDP provisions and sought to litigate the merits of the worker classification issue.  The IRS moved for summary judgment because he had already had an appeals conference.

At issue is Section 6330(c)(2)(B) which addresses the issues a taxpayer can raise at a CDP hearing and provides that a taxpayer can challenge the underlying 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.” The Court states that the regulations interpreting this code section, 301.6330-1€(3), Q&A-E2 “make a distinction between taxes that are subject to deficiency procedures and taxes that are not subject to deficiency procedures.”  Where taxes are not subject to deficiency procedures, any prior offer of a conference with appeals prior to the CDP hearing precludes the taxpayer from raising the merits in the CDP case.  This is the holding in Lewis which upheld the validity of the regulation.  In contrast, for taxes subject to the deficiency procedures, an opportunity for a conference with Appeals does not matter because what matters is the notice of deficiency and the opportunity to petition the Tax Court.

The Court frames the question it must decide as one turning on whether the NDWC is subject to deficiency procedures. That is not what the statute says.  The statute says “did not receive a statutory notice of deficiency.”  The Court knows that a SNOD and a NDWC are not the same thing and has different boxes for petitioners to check on its form petition.  That is not what the regulation says which is why the IRS was taking the unreasonable position that it did in a case where the taxpayer clearly would have petitioned the Tax Court to contest the underlying liability had it received the NDWC.  The regulation is bad and the IRS position to deny this taxpayer the opportunity to contest the underlying liability is quite harsh.  So, the Court looked for a way to allow the taxpayer to contest the determination without reversing Lewis and taking on the regulation.

To reach the desired result, the Court looks at principles behind a SNOD and a NDWC and finds them to be essentially the same. It finds that the provisions giving rise to a SNOD and a NDWC come from the same subtitle, chapter and sub-chapter of the Code.  It finds NDWC is “generally” subject to the deficiency procedures and cites examples.  Then it holds that “because an NDWC is generally subject to deficiency procedures, a preassessment conference with IRS Appeals is not a prior opportunity to dispute the underlying liability” and the receipt of the NDWC serves as the relevant prior opportunity for purposes of CDP.  It does this in a non-precedential Memorandum opinion which raises the question of what will happen to the next person with an NDWC in this situation who seeks to have the Court hear the merits of its CDP case.  As we discussed in prior posts, the better result would be to knock down this provision of the regulations and allow persons who did not have a prior opportunity to go to Court to fight against the underlying liability to have that right when they come to the Tax Court in the CDP context.  A straight forward rule of that type would not cause the Tax Court to have to dance around the statutory language as it does here and allow petitioners to the opportunity to use the CDP statute in the way it was intended – as an opportunity to address the merits of the liability in Court when a prior opportunity did not exist.

While the Court finds that no evidence existed in the summary judgment motion that petitioner failed to pick up its NDWC, this issue still looms as a possibility as the matter moves to trial. We have posted before on the Onyango v. Commissioner, 142 T.C. No. 24 (2014)  case concerning the requirement that a taxpayer make an effort to get their mail and the consequence of not doing so.  Depending on the information the IRS can develop at trial, this issue could present another barrier to petitioner’s ability to raise the merits.


  1. Barry Goldwater says

    So if a taxpayer is assessed a TFRP and does not get an appeal, he can file a CDP and contest it in a CDP Hearing and then in Tax Court?

    Would be a good way to get around the “To Infinity and Beyond” issue Keith wrote about on March 1st.

  2. Jason T. says

    There goes Keith again. He again reveals his wish that taxpayers with “pay first, litigate later” tax liabilities could raise a CDP liability challenge with judicial review. With the law as written, though, no one can grant Keith’s wish.

    Although the employment tax liability at issue there is a “pay first, litigate later” liability, the Tax Court’s Hampton Software opinion is sound. Keith faults the Tax Court’s reasoning because, he insists, § 6330(c)(2)(B) says a taxpayer may raise a CDP liability challenge if he ‘did not receive a statutory notice of deficiency.’ Keith is wrong again.

    The key part of § 6330(c)(2)(B) actually says a taxpayer may raise a CDP liability challenge if he did receive ANY statutory notice of deficiency.

    Congress used the statutory word “any,” as distinguished from Keith’s “a,” for good reason. Congress enacted the worker classification determination statute (§ 7436) the year before it enacted the Collection Due Process statutes. So when it enacted the CDP statutes, Congress was aware that § 7436(d)(1) treated a § 7436(a) determination for certain statutory purposes “as if it were a notice of deficiency.” A § 7436(a) determination is therefore neatly encompassed within the phrase “ANY statutory notice of deficiency” in § 6330(c)(2)(B).

    Bottom line: the Tax Court’s opinion was correct…as far as it went. But the Tax Court’s disastrous “you didn’t check your mail regularly” Onyango opinion could still prove to be a dangerous bug within Hampton Software.

  3. Norman Diamond says

    “The key part of § 6330(c)(2)(B) actually says a taxpayer may raise a CDP liability challenge if he did receive ANY statutory notice of deficiency. ”

    So it does. But 26 CFR 301.6330-1 says “A”.

  4. Casual Observer says

    Another jurisdictional power grab by the Court of Exceptionalism at its finest. The Court’s simplistic approach of comparing deficiency procedures for income taxes to the 7436 regime completely misses the boat. The purpose of 7436 is quite clear: it is a regime that authorizes judicial review of the IRS’s determination to reclassify independent contractors as employees. No more, no less. If the IRS wins, the result is that additional employment taxes are due. 7436 simply says the IRS can’t assess and collect those taxes until after the court case is done. Congress can surely differentiate between a “determination” and a “notice of deficiency” as those terms are used in 7436 and elsewhere in the Code. But of course the Tax Court doesn’t think so.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind