We have written often on CDP over the two years or so in the blog. Creeping up on twenty years into CDP I am somewhat surprised that there are still some fundamental questions that have yet to be resolved conclusively. One of those issues arose last week in an order that the Tax Court issued in the case of Cosner v Commissoner. (tip of the hat to Lew Taishoff and his excellent blog for flagging the order in a post earlier this week)
In Cosner, the Tax Court wrestled with whether a CDP case was moot after the taxpayer fully paid his liability as a result of an IRS levy served during the time the IRS was enjoined from collecting the tax due to the taxpayer’s having previously filed a valid Tax Court petition in response to a CDP notice of determination.
The facts are somewhat complex, and I will simplify them below (I encourage readers to go to the order itself for the full procedural history). Despite the muddied and perhaps unique set of facts, however, the order is important because it addresses the fundamental powers of the Tax Court in CDP cases and strongly suggests that in certain situations the Tax Court can order a return of proceeds IRS has collected in a CDP proceeding.
read more...The Facts and Legal Background
IRS issued a determination letter sustaining a proposed levy for Cosner’s unpaid 2009 income tax in early March 2012. On March 30, 2012 Cosner “timely mailed to the Court a document that the Court later filed as his petition (petition). The Court received the petition on April 5, 2012. However, the petition was not docketed as such by the Court.”
Generally, IRS is precluded from serving a levy if the taxpayer files a valid petition in a CDP case. As a result of the court not docketing the document as a petition, however, IRS probably did not know about the document Cosner lodged and in December of 2013 served a levy on Cosner’s employer to collect the unpaid liability. In January 2014, Cosner filed a motion under Tax Court Rule 55 asking for injunctive relief and asking for a refund of the amounts IRS collected from its levy. By early July of 2014, Cosner’s 2009 liability was fully paid.
On July 22, 2014 Tax Court issued an order that treated Cosner’s March 2012 petition as having been filed timely nunc pro tunc (more on that below) but denied without prejudice Cosner’s request to return the proceeds that had been collected pursuant to the levy.
After the July 22 Tax Court order, IRS released the levy and refunded to Cosner amounts that were in excess of the 2009 liability. That was not enough for Cosner though, as he filed a motion to reconsider the Rule 55 request that had requested that IRS return to him all amounts that were collected pursuant to the levy. After all, IRS should not have been allowed to levy at all once Cosner validly petitioned the Tax Court.
IRS opposed the motion as moot and requested that the case be dismissed under Rule 53, in part undoubtedly because of the 2006 Tax Court case Greene-Thapedi v Commissioner. That case held that the Tax Court did not have jurisdiction in a CDP case when the IRS had fully satisfied the taxpayer’s liability under its Section 6402 offset powers (despite CDP’s requirement for IRS to freeze enforced collection IRS has continued offset powers even in the face of a timely CDP request).
The Cosner order sets up its analysis by framing the IRS levy on the employer as prohibited, which contextualizes Cosner’s argument in a way that differs from situations where IRS has acted (as in Greene-Thapedi) pursuant to its authority:
Petitioner’s argument has much force. “A nunc pro tunc order retroactively corrects an original record which is erroneous through inadvertence or mistake.” Turkoglu v. Commissioner, 36 T.C. 552, 554 (1961). The Court’s July 22, 2014, Order found that petitioner had timely filed a petition with respect to the March 2, 2012, notice of determination and ordered that the petition be filed nunc pro tunc as of April 5, 2 012. Accordingly, although he did not then know it, respondent was prohibited from serving the [levy on his employer]. See sec. 6330(e)(1). Pursuant to section 6330(e)(1), the Court may enjoin an unlawful levy notwithstanding the general prohibition on such injunctions under section 7421.
The order then directly distinguishes Greene-Thapedi, noting that unlike here an offset is not a levy and that in Greene-Thapedi the IRS offset meant that it “no longer planned to execute the proposed levy.” Moreover, according to the order, Greene-Thapedi did not involve a premature levy, [and] does not appear to preclude the Court from taking appropriate corrective action following a premature levy….”
The order takes the distinction to its conclusion, stating that
[t] he reasoning of Greene-Thapedi implies that the Court may order respondent to return the proceeds of an unlawful levy action even if the unlawful levy fully satisfied the taxpayer’s theretofore unpaid tax liability. Indeed, in Greene-Thapedi the Court expressly observed that it had previously “exercised its inherent equitable powers to order the Commissioner to return to the taxpayer property that was improperly levied upon.” [citations omitted] Moreover, any other conclusion would allow the Commissioner to moot any case brought under section 6330(e) by unlawfully executing a premature levy…
Some Parting Thoughts
Despite the writing on the wall, the order left open the question as to whether the Tax Court had the authority to order the return of the proceeds, either under its inherent powers or Section 6330(e)(1); the case is set for trial next week in Montana.
A few years ago, Carl Smith wrote an excellent Tax Notes piece exploring the reaches of the Tax Court’s equitable powers in CDP cases. The article tackles some interesting issues, including whether the Tax Court should be able to exercise its equitable powers to compel the IRS to enter into a collection alternative.
It also discusses the Zapara case. Zapara involved a CDP case where the Tax Court fashioned an equitable remedy when despite a request, the IRS failed to timely sell the stock it had seized pursuant to a jeopardy levy. Zapara v Comm’r, 652 F.3d 1042 (9th Cir. 2011), aff’g 126 T.C. 215, denying reconsideration 124 T.C. 223 (2005).
In Zapara, the Tax Court held that the IRS violated section 6335(f) when it did not sell the stock within 60 days of he taxpayer’s request (alternatively IRS could have but did not make a determination that it was not within its best interests to sell the property). The Tax Court remanded the case back to Appeals and ordered Appeals to credit the taxpayers an amount against their liabilities as if they had sold their stock on the 60th day. On appeal the Ninth Circuit affirmed the Tax Court.
IRS issued an AOD disagreeing with the Ninth Circuit and Tax Court’s view on the court’s power in a CDP case:
The Service, however, disagrees that the Tax Court has authority to order a credit to the taxpayer for the Service’s failure to comply with section 6335(f). Section 7433 is the exclusive remedy for recovering damages resulting from the reckless, intentional or negligent disregard of any provision or regulation in connection with the collection of tax, including any violation of section 6335(f). An action for damages under section 7433 must be brought in a district court. The relief ordered by the Tax Court was a substitute remedy to compensate the taxpayers for the monetary damages sustained as a result of the Service having failed to sell the stock or otherwise respond to their request to sell. Section 6335(f) only requires that the Service sell the property or provide notice to the taxpayer and does not provide for any entitlement to monetary relief.
Zapara and Cosner both explore issues relating to the Tax Court’s jurisdictional power to fix mistakes. In some ways, Cosner is a less sympathetic case than Zapara because it appears that it was not the IRS’s fault that it served the levy on his employer. It is also possible (though not clear from the order) that the taxpayer may have even contributed in Cosner to the confusion by perhaps not styling his original petition in the way that facilitated the court’s treating it as such. Nonetheless, even if that is the case, I think in cases such as this where the IRS acts outside its authority, even if it did not know it was so acting, the court should be free to fashion a remedy to bring the taxpayer back to his position prior to the unauthorized actions. Absent that authority, the taxpayer has no efficient practical remedy, and Congress’ wish to allow the Tax Court to review the IRS’s proposed collection actions and possible collection alternatives is illusory.
About Leslie Book
If the Tax Court does not order the return of the funds, I doubt that a section 7433 suit will be an alternative here, since, to recover under section 7433, an IRS employee must have “recklessly or intentionally, or by reason of negligence, disregard[ed] any provision of this title” or regs. I can see a district court holding that, in light of the nunc pro tunc order, even if the IRS acted improperly in light of the retroactive order, at the time it acted, its actions were not reckless, intentional, or negligent, as it had no notice of the Tax Court filing.
I agree with Les that Zapara is the key to the Tax Court’s ability to order an “equitable remedy”. Tough case: In light of what I assume was not a well-crafted petition, does the taxpayer here have clean enough hands for an equitable assist?
Cosner is indeed a tough case to decide because both parties are at fault.
The taxpayer never followed up with the Tax Court when he did not hear anything about his “imperfect” petition. That is strange because he had the same problem with another petition just the year before, which the Tax Court ultimately dismissed for lack of jurisdiction.
The IRS initiated an unlawful levy action. Yet it had no knowledge that Cosner had filed a timely, albeit imperfect, petition. But its subsequent motion to dismiss the case as “moot” is chutzpah. The IRS cannot both violate the law and benefit from that violation.
The Tax Court could deem Mr. Cosner’s levy proceeds as a “deposit” on his tax liability. Because a deposit is not a tax payment, the tax will be unpaid. Because the tax will be unpaid, the case cannot be moot. Because the case cannot be moot, the Tax Court can review the Notice of Determination.
Mr. Cosner’s litigation history indicates he is a tax defier. The Tax Court therefore will certainly sustain the proposed levy action. The IRS can then treat Mr. Cosner’s deemed deposit as a tax payment.
And the unlawful levy/return of levy proceeds issue must await another day…and a better case.
Where do you find the problem petition from the year before? According to the docket in 001480-14, the petition was filed and the fee paid on April 5, 2012. (How often does the Tax Court collect a fee, then do nothing?) That petition was filed from Wyoming, and indeed there is a Marvel H. Cosner who lives there. Then in February 2013, a Marvel Cosner filed a petition with no fee, from New York. That case (003800-13) was dismissed in June 2013 after the petitioner failed to comply with an order to file an amended petition, and pay the filing fee. (Apparently it is not uncommon, for the Tax Court to assign a case number without collecting a fee.)
Maybe it’s the same Marvel Cosner, or maybe Marvel H. Cosner uses the middle initial to distinguish himself from a relative. In either event, I don’t see much evidence of a “tax defier.”
Sometimes, to ascertain the facts, one must “read between the lines.” To determine that Mr. Cosner was likely a tax defier, I did just that–and I read some lines too.
Cosner initially involved two separate CDP levy determinations. One Notice of Determination, which the Tax Court reviewed in the order Les linked us to, involved tax year 2009. The other Notice of Determination involved the tax years 2007 and 2008. The IRS mailed the two notices to Mr. Cosner 10 months apart from one another.
Mr. Cosner admitted to receiving both Notices of Determination. As he did for tax year 2009, Mr. Cosner contended that he had also filed a timely petition for the tax years 2007 and 2008 NOD. He had a point. The Tax Court had received a timely, albeit an imperfect, petition from him. As the Tax Court often does, it had issued Mr. Cosner an order that directed him to file a proper amended petition and to pay the required filing fee. But the Tax Court did not receive either petition or fee. It therefore dismissed the case for (apparent) lack of jurisdiction. In due course, that decision became final.
The 2007 & 2008 NOD returned to the Tax Court on Mr. Cosner’s “second” petition. The Commissioner, as he did for the 2009 NOD, moved to dismiss that petition for lack of jurisdiction. Mr. Cosner argued that the Tax Court was at fault: it had sent its amended petition/filing fee order to a New York address. According to him, he never lived in or used a New York address, so the Tax Court must have mixed him up with another petitioner.
Lo and behold, however, unlike in his 2009 case, the Tax Court still retained the 2007 and 2008 imperfect petition and its covering envelope. And, what do you know, there was the New York address right on both items. Better, when Mr. Cosner moved to restrain collection, he attached a document that contained the same New York address. Even better, when Mr. Cosner objected to the Commissioner’s dismissal motion, he included a document that also bore the identical New York address.
The Tax Court therefore dismissed Mr. Cosner’s second 2007 & 2008 petition for for lack of jurisdiction. You can read the above lines in the Tax Court’s order dated July 22, 2014.
When I read between the lines of that same order, I surmised that Mr. Cosner is likely a tax defier.
First, Mr. Cosner’s disclaimed any knowledge of the New York address that appeared on his own Tax Court correspondence and envelope. His botched disclaimer tells me that someone in New York was likely “helping” Mr. Cosner “file” in the Tax Court.
Second, Mr. Cosner received his 2007 and 2008 NOD in 2013, nearly one year AFTER he had supposedly petitioned the Tax Court over the 2009 NOD. Because he again prepared to petition the Tax Court from a notice that said the IRS could levy his property, one would think Mr. Cosner would ensure that he either (a) filed a proper petition, (b) paid the filing fee, or (c) inquired of the Tax Court why he hadn’t heard from it about his prior year’s petition. Yet he did neither. His curious lack of diligence is outweighed only his his deplorable lack of curiosity.
Third, in the same year that Mr. Cosner could not determine how to file a proper petition, the IRS levied his wages. The very next month, the pro se Mr. Cosner suddenly became an expert on Tax Court practice and procedure; he correctly files amended petitions, pays his filing fees, and even files motions to retrain the IRS’s levy.
To me, the above facts say Mr. Cosner attempted to game the tax system.
An old tax defier trick is to send the Tax Court a confusingly worded letter whenever one of them receives a notice of deficiency or a notice of determination. The Tax Court will then take one of two actions:
(1) send a letter to the petitioner stating that it appears he may have wanted to file a petition, which letter will enclose forms and rules that will allow him to properly do so; or,
(2) docket the letter as an “imperfect petition,” then docket an order for a proper amended petition and filing fee by a date certain.
The tax defier hopes the Tax Court will exercise option (1). That option allows the tax defier not to be subject to court order. Should the IRS take no collection action against him, he need not do anything. Should the IRS take collection against him, he can run to the Tax Court and cry, “But I timely petitioned you and here is the proof.” (He will have retained his certified mail receipt). He can then move to restrain assessment or collection.
Mr. Cosner went one for two. Unfortunately, whoever in New York was “advising” him as to the 2013 notice neglected to do as good a job as he (or someone else) had done with the 2012 notice.
But look what has happened. Mr. Cosner now has a true federal case that has captured the attention of tax professionals throughout the country. I suggest we all watch what Mr. Cosner will do in Montana on Monday. I predict “a really big show.”