In Dodd v. Commissioner, T.C. Memo 2021-118, the Tax Court decides the merits of petitioner’s case, having twice remanded the case previously. In the end, Ms. Dodd lost the merits of her case and owes a large tax liability. The case shows what happens when the IRS fails to properly conduct the Collection Due Process (CDP) hearing and then what happens when it does. Ms. Dodd, although an administrative assistant at a law firm, went through CDP process for over four years pro se. We discussed this case during its previous trip from Appeals to the Tax Court here.
Starting in 2013, Ms. Dodd became an investor in Cadillac Investment Partners, LLC (Cadillac). She was the managing member of this real estate partnership with a 35.5% share of its profit, loss, and capital account. In 2013 Cadillac sold some property generating a large IRC 1231 gain. She received a K-1 from the partnership and reported on her return $1,073,312 in 1231 gain, $1,909 in ordinary business income, ($100,739) net real estate income and $201,601 in distributions. She reported all of these items from her K-1 on her 2013 return which showed a liability of $169,882, that she did not pay with her return. This self-reported liability leads to the CDP hearing. Because the amount at issue stems from a liability reported on her return, the CDP provision, as interpreted by the Tax Court, allows her to contest the correctness of her own return reporting.
While she was not a model CDP citizen, Appeals also had trouble dealing with her case. As discussed in the previous post, it twice assigned the same settlement officer who did not seem well equipped to resolve the proper reporting of a partnership distribution. On the third trip, referred to by the Tax Court as the second supplemental hearing, Appeals assigned a new settlement officer and paired the SO with an appeals officer who had experience dealing with partnership issues. This team determined that Ms. Dodd correctly reported the liability on her return. That determination ending remand number three brought the case back to the Tax Court where this time the court has the tools to make a decision.
In the Tax Court the parties agreed to the necessary facts and submitted the case fully stipulated. Looking at the facts, the court concludes that she correctly reported the liability on her return. Thus, no merits relief in CDP. This merits decision occurred after a de novo review of the facts.
Next, the Tax Court looks at whether Appeals abused its discretion in denying her collection relief from the proposed levy. It concludes that Appeals did not abuse its discretion based on the information Ms. Dodd provided – which was very sparse. So, four years and three remands after she began her case, she ends up back where she started. She now has a determination that her return correctly reported the partnership income and expenses. The IRS has permission to levy upon her and she may need some relief from levy, but she failed to request that relief in a meaningful way during the CDP process.
Appeals correctly dealt with her merits issue on the third try. I cannot guess what went wrong the first two times. As discussed in the prior post, the SO initially assigned to the case moved it quickly both times but seemed incapable of addressing the correctness of the reporting of the partnership items. That an SO would have difficulty determining the correctness of partnership items comes as no surprise, but the failure on the first two tries to line up someone to help with that aspect of these case seems like a failure of the system. Perhaps the correct handling of the case on the third try signals a better understanding of the way to handle a merits claim or perhaps it just means that in this case Appeals’ eyes finally opened to the problem presented.