Background:

Generally, the IRS is required to issue a notice of deficiency to taxpayers before assessing additional tax on a taxpayer. See IRC §§ 6212, 6213. The notice of deficiency is the taxpayer’s ticket to the Tax Court. Without it, a taxpayer must generally fully pay the assessed tax before suing for a refund. See Flora v. United States, 362 U.S. 145 (1960). In some situations, however, the IRS may assess tax on a taxpayer without using the deficiency procedures. One such situation that commonly arises is where the IRS assesses a trust fund recovery penalty under section 6672 on a responsible person. Typically, the IRS gives taxpayers facing the assessment of a trust fund recovery penalty an opportunity to contest the penalty in the IRS Appeals Office.

Taxpayers facing such assessments understandably would like to contest such assessments in a prepayment, judicial forum. Specifically, such taxpayers would like to contest such assessments in a collection due process (“CDP”) hearing, which is subject to judicial review. See IRC § 6330. Unfortunately for such taxpayers, the Tax Court, in Lewis v. Commissioner, 128 T.C. 48 (2007), held that a taxpayer is not permitted to challenge an assessed tax in a CDP hearing if the taxpayer had a prior opportunity to contest the assessed tax before the IRS Appeals Office. In doing so, the Tax Court upheld the validity of Treas. Reg. § 301.6320-1(e)(3), Q&A-E2, which provides that the “opportunity to dispute” referred to in section 6330(c)(2)(B) includes an opportunity to dispute the underlying liability administratively. The holding in Lewis was later affirmed by three circuit courts of appeal. See Our Country Home Enterprises Inc. v. Comm’r, 855 F.3d 773 (7th Cir. 2017); Keller Tank Services II Inc. v. Comm’r, 854 F.3d 1178 (10th Cir. 2017); and Iames v. Comm’r, 850 F.3d 160 (4th Cir. 2017).

In a 2018 Tax Notes article, I argued that the Tax Court and the circuit courts misread section 6330(c)(2)(B) by ignoring its first disjunctive test. In describing the issues that may be raised in a CDP hearing, section 6330(c)(2)(B) provides that:

The 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. [Emphasis added.]

I argued that section 6330(c)(2)(B) imposes a disjunctive test. That is, section 6330(c)(2)(B) allows a taxpayer to contest the underlying liability if either (1) the taxpayer did not receive a notice of deficiency, or (2) the taxpayer received a notice of deficiency but did not have an opportunity to contest the underlying liability for some other reason. Read this way, a taxpayer who has not received a notice of deficiency may contest an underlying liability in a CDP hearing even if the taxpayer had a prior opportunity to contest the underlying liability before the IRS Appeals Office. Surprisingly, the Tax Court and the three circuit courts of appeal never explained why section 6330(c)(2)(B) did not impose a disjunctive test.

In my article, I concluded as follows:

Lewis and the circuit court cases entirely fail to address why the taxpayers in each case did not satisfy the first disjunctive test for challenging the tax or penalty in a CDP hearing under section 6330(c)(2)(B). Responsible persons everywhere deserve to know why they are being deprived of the opportunity to obtain prepayment judicial review in contravention of what appears to be an express statutory provision granting them that opportunity.

Presumably, the courts failed to address this argument in those cases because the taxpayers failed to argue it. But a new case pending before the Sixth Circuit may force the courts to finally address the plain meaning of section 6330(c)(2)(B).

New case in the Sixth Circuit:

A corporate taxpayer in the Sixth Circuit that did not receive a notice of deficiency but had an opportunity to contest the underlying liability in the IRS Appeals Office recently argued that it should be allowed to contest its underlying liability in a CDP hearing because section 6330(c)(2)(B) imposes a disjunctive test. The taxpayer’s and the government’s opening briefs have both been filed, and it is time to evaluate the strength of the arguments put forth by the parties. The case has not yet been set for oral argument, but argument was requested by the parties.

Procedural background:

In Patrick’s Payroll Services, the taxpayer attempted to contest its underlying liability for unpaid payroll and unemployment taxes and associated penalties in a CDP hearing, but the IRS Appeals Office determined that it could not do because the taxpayer had a prior opportunity to contest the underlying liability before the IRS Appeals Office. The Taxpayer petitioned the Tax Court and again argued that the IRS Appeals Office should have allowed it to contest the underlying liability in a CDP hearing.

The IRS filed a motion for summary judgment, arguing that, under Lewis, the taxpayer could not contest the underlying liability because the taxpayer had a prior opportunity to contest the underlying liability before the IRS Appeals Office. In response, the taxpayer argued that the prior “opportunity to dispute” the tax liability described in section 6330(c)(2)(B) “must mean judicial review, not review by the Internal Revenue Service itself.” Although acknowledging that Treas. Reg. § 301.6330-(e)(3), Q&A-E2, as well as applicable Tax Court precedent, provide otherwise, the taxpayer noted that the Sixth Circuit has not yet opined on the validity of Treas. Reg. § 301.6330-(e)(3).

The Tax Court entered a memorandum opinion granting the IRS’s summary judgment motion. See Patrick’s Payroll Services, T.C. Memo. 2020-47. The court stated that it has “consistently rejected” the argument an opportunity to contest an underlying liability before the IRS Appeals Office is not a prior “opportunity to dispute” a tax liability within the meaning of section 6330(c)(2)(B).

Taxpayer filed a timely motion for reconsideration of the Tax Court’s opinion. See Tax Ct. R. 161. In the motion, the taxpayer argued that it did not matter whether it had a prior “opportunity to dispute” the tax liability underlying the IRS’s collection action because section 6330(c)(2)(B) must be read disjunctively and it had not received a notice of deficiency. The Tax Court denied the taxpayer’s motion for reconsideration, and the taxpayer appealed to the Sixth Circuit.

The taxpayer’s opening brief:

The taxpayer’s opening brief argued that section 6330(c)(2)(B) should be read as imposing a disjunctive test for two reasons:

First, courts generally read the word “or” as “and” only when the reading the “or” as a disjunctive would lead to absurd results. See, e.g., OfficeMax v. United States, 428 F.3d 583, 590 (6th Cir. 2005). For example, in United States v. Woods, 571 U.S. 31, 45, (2013) (quoting Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979)), the Supreme Court stated as follows:

Moreover, the operative terms are connected by the conjunction “or.” While that can sometimes introduce an appositive—a word or phrase that is synonymous with what precedes it (“Vienna or Wien,” “Batman or the Caped Crusader”—its ordinary use is almost always disjunctive, that is, the words it connects are to “be given separate meanings.”

Second, reading the word “or” in section 6330(c)(2)(B) as imposing a conjunctive test would render the first part of such test—i.e., the phrase “did not receive a notice of deficiency”—superfluous because any taxpayer who received a notice of deficiency had a prior opportunity to contest the underlying liability by filing a petition with the U.S. Tax Court.

The government’s brief:

The government’s brief argued that the court should affirm the Tax Court for two reasons: (1) the taxpayer forfeited its argument by failing to timely raise it below, and (2) section 6330(c)(2)(B) is properly read as imposing a conjunctive test.

The taxpayer forfeited its argument by not timely raising it below.

The government’s first argument in opposition of the taxpayer’s appeal in this case is that the taxpayer forfeited its “novel statutory argument” by failing to timely raising it before the Tax Court and only raised it in a motion for reconsideration. See Evanston Ins. Co. v. Cogswell Properties, LLC, 683 F.3d 684, 692 (6th Cir. 2012). The government noted that, although the rule an argument cannot be raised for the first time in a motion for reconsideration is prudential rather than jurisdictional, this is not an exceptional case.

The government further noted that the Sixth Circuit held that the Tax Court did not abuse its discretion by entertaining the IRS’s motion for reconsideration in Law Office of John H. Eggertsen P.C. v. Commissioner, 800 F.3d 758, 765–66 (6th Cir. 2015), because that motion was to correct “errors of law.” But the government argued that a court is not required to, and should generally not, entertain such motions. The government’s brief does not explain why, however, there should be one rule for motions for reconsideration by the IRS and another rule for motions for reconsideration by taxpayers. If the IRS can file a motion for reconsideration for errors of law of its own making, then taxpayers should be offered the same courtesy.

Section 6330(c)(2)(B) does not impose a disjunctive test.

The government’s second argument is that—even if the court considers the taxpayer’s argument—the court should reject it because section 6330(c)(2)(B) is properly read as imposing a conjunctive test. Specifically, the government argued as follows:

“[T]he word ‘or’ is often used as a careless substitute for the word ‘and’; that is, it is often used in phrases where ‘and’ would express the thought with greater clarity.” De Sylva v. Ballentine, 351 U.S. 570, 573 (1956). Where, as here, “the statute requires proof of a negative,” the word “or” is often read conjunctively. Valadez-Lara v. Barr, 963 F.3d 560, 567 (6th Cir. 2020). For instance, if someone says, “I don’t like apples or oranges,” no one would reasonably interpret this to mean that they find one of either apples or oranges distasteful. They mean that they dislike apples and they dislike oranges.

The government, however, ignores a crucial distinction between “I don’t like apples or oranges” and “I don’t like apples or don’t like oranges.” In the former case, De Morgan’s theorem applies. In the latter case, De Morgan’s theorem is inapplicable. Section 6330(c)(2)(B) is written like the latter case, not the former case. Thus, the government’s apples and oranges example is, pardon the pun, comparing apples to oranges.

(For those wondering, De Morgan’s theorem states that the negation of a disjunction is the conjunction of the negations and the negation of a conjunction is the disjunction of the negations. See O’Donnabhain v. Comm’r, 134 T.C. 34, 81 (2010) (Halpern, J., concurring) (“In formal logic, there is a set of rules, De Morgan’s laws, relating the logical operators ‘and’ and ‘or’ in terms of each other via negation. . . . . The rules are: [1.] not (p or q) = (not p) and (not q) [and 2.] not (p and q) = (not p) or (not q)”); Antonin Scalia and Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 119 (2012) (“The principle that ‘not A, B, or C’ means ‘not A, not B, and not C’ is part of what is called DeMorgan’s theorem.”).)

The government alternatively argues that the inclusion of the word “otherwise” indicates that Congress only intended to provide an example of not having an opportunity to contest a liability. The government offers the following example: Suppose a person offers “I will pick you up if you don’t have a car or if you don’t otherwise have some way of getting here.” In this case, the government argues that someone who had a truck would clearly not be included in the offer simply because that person lacked a car. The reference to having a car is just included as an example of a common means of having some way to get there.

The government’s brief cites a 2003 Tax Court opinion that adopts this reading of section 6330(c)(2)(B). (I unfortunately missed this opinion when I was drafting my article and therefore failed to address the reading it suggests there.) In that opinion, the Tax Court stated as follows:

Section 6330(c)(2)(B) plainly sets forth a single operative criterion, in the form of a stricture: the person seeking to challenge the underlying tax liability in a collection proceeding must not have had another opportunity to raise the challenge. Presumably for the sake of clarity and emphasis, the statute refers particularly to persons who have not received notices of deficiency while referring more generally to persons who “otherwise” lacked opportunities to dispute their tax liabilities. Contrary to petitioners’ argument, however, these references do not denote separate criteria; they merely circumscribe the two categories of persons that, taken together, make up the complete class of persons who satisfy the single operative criterion.

Oyer v. Comm’r, T.C. Memo 2003-178.

Even if this is a possible reading of the phrase “or did not otherwise,” there is no reason to assume that this is how the phrase is commonly understood. Indeed, a quick Google search of the phrase “or did not otherwise” did not turn up any examples where that phrase cannot be read disjunctively. See, e.g., here and here. And many Tax Court cases—including some that cite to Oyer—simply express section 6330(c)(2)(B) in the conjunctive and do not suggest that there is only one criteria—i.e., not having an opportunity to contest the underlying liability. See, e.g., Streiffert v. Comm’r, T.C. Memo. 2014-62 (“Section 6330(c)(2)(B) provides that the taxpayer may contest the existence and amount of the underlying tax liability, but only if the taxpayer did not receive a notice of deficiency and ‘did not otherwise have an opportunity to dispute such tax liability.’” (citing Baltic v. Comm’r, 129 T.C. 178 (2007), and Oyer v. Comm’r, T.C. Memo. 2003-178)).

Moreover, if the government is correct that the phrase “did not receive any statutory notice of deficiency for such tax liability” is merely an example of someone who “did not otherwise have an opportunity to dispute such tax liability,” then it should follow that the opportunity to dispute a liability referred to is—like a notice of deficiency—an opportunity to judicially contest the underlying liability. In a universe that contains opportunities to dispute a liability that give you a ticket to the Tax Court and opportunities to dispute a liability that do not give you a ticket to the Tax Court, it is curious that Congress chose to give as its sole example an opportunity that provides a ticket to the Tax Court. The logical takeaway would seem to be that the opportunity to contest the underlying liability being referred to in the statute is one that, like a notice of deficiency, provides the taxpayer with an opportunity to judicially contest the liability. This would, of course, contradict the regulation upheld by the Tax Court in Lewis and three circuit courts of appeal that provides that an opportunity to contest an underlying liability before the IRS Appeals Office constitutes a prior opportunity under section 6330(c)(2)(B). See Treas. Reg. § 301.6330-(e)(3), Q&A-E2.

By contrast, in the government’s illustration, “I will pick you up if you don’t have a car or if you don’t otherwise have some way of getting here,” cars and trucks are functionally identical. In that case, having a car is a valid example for a set that also includes having a truck. But it would not be a valid example for a set that included having a car, a truck, and feet. Clearly, the offeror intended to offer the ride even if the offeree could theoretically walk to his or her destination.

Finally, the government argued that the taxpayer’s interpretation of section 6330(c)(2)(B) would mean that those who simply received a deficiency notice would not be precluded from challenging their liability in a CDP case unless they also were given a second opportunity to dispute the liability. This appears to be an incorrect result. See Treas. Reg. § 6330-1(e)(4), Example 1 (“The IRS sends a statutory notice of deficiency to the taxpayer at his last known address asserting a deficiency for the tax year 1995. The taxpayer receives the notice of deficiency in time to petition the Tax Court for a redetermination of the asserted deficiency. The taxpayer does not timely file a petition with the Tax Court. The taxpayer is precluded from challenging the existence or amount of the tax liability in a subsequent CDP hearing.”).

But I think that this argument shows that the government continues to misapprehend the plain meaning of section 6330(c)(2)(B). Under the plain meaning of section 6330(c)(2)(B) that I suggested in my article, a taxpayer can contest an underlying liability if (1) the taxpayer did not receive a notice of deficiency, or (2) the taxpayer received a notice of deficiency but—for some other reason—did not have an opportunity to contest the underlying liability. The latter case can refer to a situation where a taxpayer could not file a timely Tax Court petition for medical reasons (e.g., the taxpayer was in a coma for the 90 days following receipt of a notice of deficiency) or did not receive the notice of deficiency before the deadline for filing a timely petition with the Tax Court. See Treas. Reg. § 6330-1(e)(4), Example 2 (“Same facts as in Example 1, except the taxpayer does not receive the notice of deficiency in time to petition the Tax Court and did not have another prior opportunity to dispute the tax liability. The taxpayer is not precluded from challenging the existence or amount of the tax liability in a subsequent CDP hearing.”). Thus, in the ordinary case, a taxpayer who timely receives a notice of deficiency cannot contest the underlying liability in a subsequent CDP hearing.

Concluding thoughts:

We do not know whether the Sixth Circuit will take this opportunity to decide whether a taxpayer can contest an underlying liability if the taxpayer did not receive a notice of deficiency but had an opportunity to contest the underlying liability before the IRS Appeals Office. But even the government’s brief indicates that the court could decide the issue if it chooses to do so. In any event, similarly situated taxpayers would be well advised to argue that section 6330(c)(2)(B) imposes a disjunctive test in their merits briefs before the Tax Court.

But if the Sixth Circuit agrees to decide this issue in this case, the ramifications may be significant with respect to how certain tax cases are resolved, both administratively and judicially. In my view, the court should only adopt the government’s “contextualized” reading of section 6330(c)(2)(B) if the court cannot accept an alternative reading that gives meaning to both prongs of section 6330(c)(2)(B). Because I believe that the taxpayer has advanced such an alternative reading, the court should conclude that a taxpayer who has not received a notice of deficiency can contest the underlying liability in a CDP hearing even if the taxpayer had a prior opportunity to contest the liability before the IRS Appeals Office.