Tax Court Raises Constitutional Issues Concerning a Taxpayer’s Ability to Have the Merits of a Liability in Considered in Appeals as Part of a Collection Due Process Case

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There was an interesting order issued recently by Judge Gustafson in Laidlaw’s Harley Davison Sales, Inc. The case again surfaces the issue of when the taxpayer can raise the merits of the underlying tax liability in a Collection Due Process (CDP) case. See recent discussions of this issue here and here.

The underlying liability in the Laidlaw case concerns a 6707A penalty. Les has blogged on this penalty here and here. As discussed before, that penalty can result in a substantial liability, the taxpayer does not receive a notice of deficiency and the taxpayer cannot pay a divisible portion of the penalty in order to litigate in a refund forum. While the judge rules that, even though the taxpayer did not have a previous opportunity to challenge the underlying liability through a court proceeding, the taxpayer had a chance to discuss the penalty with Appeals prior to the assessment, so 6330(c)(2)(B), as interpreted by 301.6330-1(e) precludes a challenge to the merits of the tax liability in the CDP hearing.

Treas. Reg. 301.6330-1(e)(3)Q-E2. When is a taxpayer entitled to challenge the existence or amount of the tax liability specified in the CDP Notice?

A-E2. A taxpayer is entitled to challenge the existence or amount of the underlying liability for any tax period specified on the CDP Notice if the taxpayer did not receive a statutory notice of deficiency for such liability or did not otherwise have an opportunity to dispute such liability. Receipt of a statutory notice of deficiency for this purpose means receipt in time to petition the Tax Court for a redetermination of the deficiency determined in the notice of deficiency. An opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability. An opportunity for a conference with Appeals prior to the assessment of a tax subject to deficiency procedures is not a prior opportunity for this purpose.

However, Judge Gustafson did not stop with that ruling. He went on to address 6707A(d) concerning the authority of Appeals to rescind this penalty and the duty of Appeals on remand to consider whether it should rescind the penalty. The discussion is interesting as the CDP process hits a new doorway. The fact that this novel issue comes up in an order again points to the difficulty in following Tax Court rulings since these orders, though public and beautifully indexed and freely searchable, do not make their way to the reporting services and carry no precedential value.


Even though Judge Gustafson felt the regulation tied his hands with respect to allowing the CDP hearing in Tax Court to serve as a forum for litigation on the underlying merits of the 6707A penalty, he saw a possible problem with the assessment. Some case law suggests that the statute of limitations may have run in circumstances like the one presented in this case. Appeals did not consider the statute of limitations. So, he remanded the case. Interestingly, CDP case law holds that the issue of the statute of limitations raises merits issues itself. Whether the statute of limitations raises the merits of the liability or presents an issue of verification or some other issue a taxpayer may raise may not matter if the IRS waives the limits of 6330(c)(2)(B) and asks for a remand to consider the statute of limitations issue. Here the IRS agreed to the remand on the statute of limitations issue.

Because 6707A authorizes the IRS to “rescind” the penalties and because the Appeals employee did not address rescinding the penalty in the determination, Judge Gustafson finds that the Appeals employee should have addressed rescinding the penalty as a part of the determination and directs them to do so on remand.  The IRS replied that there can be no judicial review of the decision to rescind.  Judge Gustafson insists that Appeals consider rescinding the penalties during the remand and responds:

Even if Appeals has discretion to rescind penalty or not rescind, it would seem that Appeals does not have discretion simply to ignore the rescinding request and to fail to rule on it. And even if we are barred from reviewing Appeals’ determination as to rescinding penalty (and even if that bar is constitutional), it would seem that in a CDP case we can review a wholesale failure to make any determination whatsoever as to rescinding penalty.

Very few Tax Court cases address the constitutionality of the Internal Revenue Code. While the reference to the constitutionality of the language of the statute barring Court review strikes only a glancing blow at the issue, seeing it raised in a Tax Court order by itself makes this order interesting. I am bothered more by the ban on Court review in the CDP regulation which gives taxpayers in Laidlaw’s situation a right only to a hearing in Appeals with no opportunity to litigate the imposition of the penalty unless they pony up tens of thousands of dollars. As we have discussed before, this regulation and the barrier it creates to merits litigation where no other outlet exists, should be struck.

The case bears following to see what Appeals does on the remand with the issue of rescinding the penalty. Perhaps the statute of limitations issue will cause the case to end in a favorable way for the taxpayer. If it does not, I do not have high hopes that Appeals will exercise its authority to rescind. Maybe the taxpayer will take on the regulation considering the near impossible position it places taxpayers without a huge hoard of cash. As the issue of the ability of taxpayers to raise the merits of the underlying liability continues to arise in cases such as this one with huge penalties no subject to the deficiency procedures, I expect petitioners will push into the Circuit courts the correctness of the regulation limiting their ability to obtain a court review of the penalty without full payment. The twist in this case concerning the overlay of the CDP review process on the authority of Appeals to rescind the penalty adds another interesting feature to the case and another cause for hope for the petitioners faced with a very difficult liability to pay before getting their day in court.




  1. [S. Olsen: This comment has been removed and is being turned into a post that will be put on PT the week of November 2nd]

  2. The regulations under 6330 are issued under authority of 7805 because there is no direction in 6320 or 6330 to the Treasury to issue regulations. Indeed, it should be questioned whether Treasury can by regulation limit procedural rights granted by statute if that statute does not explicitly give Treasury authority to authority to do so. The general grant of authority in 7805(a) goes to “enforcement of this title.” While collection of tax certainly goes to “enforcement,” it would not be seriously considered that Treasury has authority to alter Title 28 or the Fed. R. Civ. P. While there is some current dispute as to the exact nature of the Tax Court and its status in the hierarchy of the Federal judiciary, the Treasury surely does not have authority to tell the Tax Court what it can and cannot decide. Someone should challenge Regulation 301.6330-1 directly.

    • Karma Chameleon says

      At least in Harley DaviDson, you need not worry about the Treasury Regulations telling the Tax Court “what it can and cannot decide.”

      Despite Keith’s implication, the Tax Court in Harley Davidson did not even mention Treasury Regulation 301.6330-1, let alone rely on it. To reach its liability challenge conclusion, the Tax Court relied solely on the law.

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