The Muddle of Seeking to Litigate the Merits of a Tax Liability in Collection Due Process Cases

0 Flares Filament.io 0 Flares ×

A recent proposed opinion in the Tax Court signals a trap for the unwary for those seeking to litigate the merits of the tax liability stemming from a notice of deficiency in a collection due process (CDP) case.

We have not written much about proposed opinions in the Tax Court. We wrote about the proposed opinion in the Guralnik case. Proposed opinions occur when a case is assigned to a Special Trial Judge who writes the opinion but the opinion waits for a presidentially appointed judge to adopt it as the opinion of the court. The most famous proposed opinion was written in by STJ Couvillion in the Ballard case. The taxpayer in Ballard sought to see the proposed opinion because Judge Dawson, the presidentially appointed Tax Court judge who “adopted” the opinion described the opinion as he wrote as one written by STJ Couvillion. The fight went up to the Supreme Court with the taxpayer ultimately able to show that the opinion of the Tax Court was not the original proposed opinion.

In the case of Lander v. Commissioner, Docket No. 25751-15L, STJ Guy wrote a proposed opinion on July 8, 2019, in which he determines that the Landers cannot litigate the merits of their tax liability in Tax Court in a CDP case because, even though they did not receive the statutory notice of deficiency in time to petition the Tax Court, they made an audit reconsideration request to the IRS after the default assessment of the liability and after the Examination Division of the IRS denied their audit reconsideration request, the Landers appealed the denial to the Appeals Office where they received partial relief. Judge Guy determines that their trip to Appeals as part of the audit reconsideration process provided them with a prior opportunity to have the merits of their case heard even though the audit reconsideration process does not lead to an opportunity to go to Tax Court to contest the determination by the IRS.

read more...

IRC 6330(c)(2)(B) sets out the ability to litigate the merits of the underlying liability in a CDP case. It says:

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)

Treasury Regulation 301.6330-1(e)(3), Q&A-E2, provides that “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” (emphasis added).

The regulation can be read so broadly that it would basically preclude anyone from litigating the merits of the liability since it’s possible to posit the opportunity to get to Appeals in almost all cases including the Landers’ case. The IRS regularly takes the position that an opportunity to go to Appeals prevents the Tax Court from hearing the merits. However, Judge Guy seems to find it important that the Landers availed themselves of the opportunity to go to Appeals. If that’s where his decision rests, and not upon the opportunity to go to Appeals which exists for everyone assessed in their position, then the case serves as a reminder of the trap a taxpayer can fall into if the taxpayer actually goes to Appeals during the audit reconsideration process.

Despite the broad language of the statute and regulation, the Tax Court has sometimes considered whether a taxpayer actually received Appeals review. A couple of earlier cases brought under the small Tax Court procedure did not deny the taxpayer the opportunity to litigate the merits of the liability during a CDP case following audit reconsideration. In Canaday v. Commissioner, T.C. Summary Opinion 2015-57 and Crouch v. Commissioner, T.C. Summary Opinion 2009-143, the IRS appears to have made a similar argument to the one in Landers. The taxpayers were audited and then requested audit reconsideration, which was disallowed, before later requesting a CDP hearing in response to a levy notice. In Canaday, Judge Gerber rejects the IRS argument of preclusion, because taxpayer’s previous contesting on the merits was not before Appeals. And in Crouch, Chief Special Trial Judge Panuthos relies on the audit reconsideration process being contained within the centralized reconsideration unit in Examinations and thus not being an independent review of the merits by Appeals. However, both taxpayers had an opportunity to go to Appeals following their audit reconsideration denial.

The Canday and Crouch cases are instructive because they deal with audit reconsideration, but I do not mean to suggest that the Tax Court ignores the prior opportunity language. In multiple other cases, the Court has quoted the stature or regulation and foreclosed merits review due to a prior opportunity for Appeals review.

Although the proposed opinion recounts the actual trip that the Landers made to the Appeals Office, it’s not an actual trip that always matters in prior opportunity cases. What matters, according to the IRS and numerous prior opinions, is the opportunity to go to Appeals to dispute the liability. The IRS could read the Landers’ case as signaling the end of merits litigation in deficiency cases since every taxpayer who does not actually receive the statutory notice of deficiency sent by the IRS and who, as a result of the failure to receive the notice fails to petition the Tax Court, will have an assessment made against them and will have the post assessment remedy of audit reconsideration including the right to visit Appeals. Since every taxpayer had a prior opportunity to go to Appeals, they do not, according to the broader view of the proposed opinion in Landers, have the opportunity to litigate the merits of their liability in a CDP case.

The broader view of the result here brings the taxpayer’s rights back to the same rights they had regarding the post assessment, pre-payment litigation of the merits of their liability to the time prior to July 21, 1998, when the Restructuring and Reform Act of 1998 added IRC 6320 and 6330. Could this be what Congress intended? The more narrow view brands the taxpayer as someone who made a bad mistake by pursuing an administrative remedy instead of waiting for CDP. The better place to land would be to allow taxpayers who did not have a prior opportunity to contest the merits of their liability in court to come on into Tax Court and contest it there. Getting to the better place would require revisiting earlier Tax Court precedent and challenging the regulation.

The IRS has written the CDP regulations and the Tax Court and some Circuit Courts have interpreted those regulations to restrict the taxpayer’s right to litigate the merits of the underlying liability that the taxpayer never had a right to litigate prior to assessment to the point that the right is almost gone if not gone. In 1998 Congress seemed concerned that a taxpayer could find themselves in a situation in which they owed tax yet never had an opportunity to contest the tax in court. We have now evolved to the situation where the taxpayer’s only right to contest the tax in many cases is to do so in an administrative hearing. Taxpayers had that right prior to the change in 1998. Why would Congress have gone to the trouble of putting in a provision giving taxpayer rights to contest the merits of a liability they never previously had the ability to contest in court if Congress intended us 20 years later to end up back in precisely the situation that existed prior to the legislation?

We have blogged before about Lavar Taylor’s attempts to fight this result in the penalty area. He lost. We have blogged about other cases in which taxpayers were denied the right to contest the merits when they previously had no opportunity to go to court prior to the assessment.

In IRM 5.20.8.8.4, in a provision regarding assessable penalties made under IRC 6700, 6701 and 6702, the IRS has even gone so far as to say that the taxpayer has no right to litigate the underlying merits of those penalties in a CDP case because the taxpayer could pay 15% and litigate the penalty. While some taxpayers would need to pay only a small amount, others with the fraud tag could have to pay large amounts making this result similar to the I rule which stands as a bar to litigation – the bar Congress seemed to want to get around with CDP.

The proposed opinion in the Lander case not only stops the Landers from litigating the merits of the liability assessed against them in which they did not have the opportunity to go to Tax Court prior to the assessment, it paves the way for the IRS and the Tax Court to stop any taxpayer from litigating the merits since they have the opportunity for an administrative appeal. Even if the Tax Court in Landers seeks to make a distinction between taxpayers who visited Appeals with no right to litigate an adverse determination there from those who chose not to visit Appeals, the language of the regulation still seeks to answer the question with opportunity and not action. It could be that only cases not involving a statutory notice of deficiency, such as the case of Hampton Software, and in which audit reconsideration does not apply will be the small subset of cases in which merits litigation in CDP case will continue to exist. Maybe the opinion signals that if a taxpayer does not go the audit reconsideration route and end up in an administrative hearing in Appeals, the taxpayer may still seek to litigate the merits in the Tax Court but that’s not the way the regulation reads nor, I suspect, the way the IRS will interpret and litigate the issue. Let’s strike down the regulation and interpret the language of the statute which says “did not otherwise have an opportunity to dispute such tax liability” to mean did not have a chance to dispute the liability in court. Once you carefully look at the administrative scheme following most assessments, the opportunity to dispute the liability in Appeals exists in most situations including the situation in Landers which seems to be exactly the situation that concerned Congress in the first place. If the Tax Court is interpreting the statute to mean those who availed themselves of the opportunity to go to Appeals, it is already narrowing the plain language of the statute. Why not go all the way. The middle ground is a trap for the unwary and a place that makes neither taxpayers nor the IRS happy. If the IRS and the courts do not change the current status, a legislative change would be appropriate.

Comments

  1. Norman Diamond says

    “The IRS could read the Landers’ case as signaling the end of merits litigation in deficiency cases since every taxpayer who does not actually receive the statutory notice of deficiency sent by the IRS and who, as a result of the failure to receive the notice fails to petition the Tax Court, will have an assessment made against them and will have the post assessment remedy of audit reconsideration including the right to visit Appeals.”

    I think you mean the right to visit Appeals would be for a CDP hearing. How would that give them a right to post assessment audit reconsideration? What happens when the CDP Hearing’s Settlement Officer refuses to hear discussion of the underlying liability?

    “Since every taxpayer had a prior opportunity to go to Appeals”

    No, not every taxpayer. The IRS publishes a list of appealable notices. A notice of lien or intent to levy does not have to be preceded by other appealable notices.

    “In 1998 Congress seemed concerned that a taxpayer could find themselves in a situation in which they owed tax yet never had an opportunity to contest the tax in court.”

    I wish Congress would be more concerned about taxpayers in a situation where they DON’T owe tax but are alleged to owe it and never had an opportunity to contest the tax in court (and sometimes not in a CDP hearing either).

    Consider taxpayers who get socked with the fraud tag, can’t guess why, and the IRS refuses to say why even in court.

  2. V. F. Liptak, CFP (retired w/o grievance) says

    The author calls it a “trap” employed by IRS and admits confusion over whether taxpayers may even dispute “merits”, not on any substance [like accuracy] but on a maze of traps that are confusing [at best (and intentionally so by any fair standard]. Doesn’t this bother you? Is this just a sad game because it’s not your money? Why are SCOTUS opinions that historically prohibit IRS from taking any excess [as if it were a true tax], ignored by you defenders of our rights? What about fiduciary duty of IRS to affirmatively make accurate assessments and collect only what is legally due, regardless of pre or post taking form?

    • Norman Diamond says

      “What about fiduciary duty of IRS to affirmatively make accurate assessments and collect only what is legally due, regardless of pre or post taking form?”

      It was overturned by corrupt actors in the IRS, DOJ, and US courts — not by the owners of this blog. My personal feeling (which the owners of this blog don’t have to say whether they agree or not) is that your complaints are mostly on topic but you are blaming the wrong people. Please don’t blame the messengers.

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.

Leave a Reply to V. F. Liptak, CFP (retired w/o grievance) Cancel reply

*