Corporation Challenges Collection of Tax Shelter Penalties

THE DIVERSIFIED GROUP INCORPORATED,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITION FOR LIEN AND LEVY ACTIONS
UNDER CODE SECTIONS 6320(c) AND 6330(d)

The petitioner, The Diversified Group Incorporated (“Petitioner”), hereby petitions for review of a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 of the Internal Revenue Code (the “Determination”). As the basis for its case, Petitioner alleges as follows:

1. Petitioner is a Delaware corporation, with its principal office and mailing address at 950 Third Ave., 22nd Floor, New York, New York 10022-2705 (Address Used By Court).

2. The Determination (a copy of which is attached and marked Exhibit A) is dated July 31, 2018 and was issued by the Office of the Internal Revenue Service Appeals Office (“Appeals”) in Westbury, New York.

3. The amounts and type of underlying tax liability and the years to which the Determination relates are as follows:

Taxable Years Ended	Type	Underlying Liability
December 31, 1999, 2000, 2001 and 2002	§ 6707 penalty	$24,905,404.00
	“additional penalty”	5,416,854.00
	Interest through 8/06/18	4,315,741.47
	Collection costs	160.00
	Total	$34,638,159.47

3.a. Background.

3.a.(i) This case concerns penalties assessed by the Respondent, Commissioner of Internal Revenue (the “Commissioner”), against Petitioner and its president, James Haber (“Mr. Haber”), pursuant to section 6707¹ as in effect before 2004 (the “penalty”) for their failure to register certain transactions (the “transactions”) as “tax shelters” pursuant to section 6111, also as in effect before 2004.

3.a.(ii) During 1999, 2000, 2001 and 2002, Petitioner helped arrange tax-advantaged transactions, which typically involved a customer's acquiring and trading digital options according to a tax strategy furnished to the customer.

3.a.(iii) In certain cases, the transactions were engaged in not by a customer but by an affiliate of Petitioner.

3.a.(iv) In relevant part, section 6111(a) requires a “tax shelter organizer” to register a “tax shelter”.

3.a.(v) A “tax shelter” is defined in material part as an “investment” whose “tax shelter ratio” exceeds 2 to 1. The “tax shelter ratio” is defined as the ratio of (A) the aggregate deductions and 350% of the tax credits represented as being available to an investor to (B) the “investment base”, which is in turn defined as the amount of money and adjusted basis of property (net of any liability encumbering the property) contributed by the investor.

3.a.(vi) Petitioner asserts that the transactions are, in whole or in part, not “tax shelters” within the meaning of section 6111, and thus not required to be registered.

3.a.(vii) Section 6707(a) imposes a penalty on anyone required to register a tax shelter who fails to do so without reasonable cause, in an amount equal to the greater of $500 or 1% of the “aggregate amount invested in such tax shelter”. By reference to Treas. Reg. § 301.6111-IT, A-21, Treas. Reg. § 301.6707-1T, A-1 provides that the quoted language means, in material part, “the aggregate amount to be received from the sale of interests in the investment and includes all cash [and] the fair market value of all property contributed [to the tax shelter investment].”

3.a.(viii) Petitioner asserts, inter alia, that if the transactions were required to be registered, Petitioner had reasonable cause for failing to register them, the Commissioner erred in computing the penalty, the Commissioner's arbitrary computation and assertion of the penalty violates the principle of substantive due process and the Eighth Amendment of the United States Constitution, and that in any event collection of the penalty is barred by a statute of limitations or laches.

3.a.(ix) Pursuant to Treas. Reg. § 301.6707-1T, A-9, all persons required to register a tax shelter who fail to do so are jointly and severally liable for the penalty.

3.a.(x) Petitioner asserts that the Commissioner may not have credited it properly with payments towards the penalty made by others liable for it.

3.a.(xi) When, as here, the Commissioner proposes a levy, section 6330 bars the Commissioner from collecting a tax through the levy without first offering the taxpayer a “collection due process” (CDP) hearing with Appeals. Section 6330 provides that at the hearing the taxpayer may raise any relevant issue relating to the unpaid tax or the proposed levy (other than the underlying liability), and may also challenge the underlying liability if the taxpayer did not receive a statutory notice of deficiency or did not previously have “an opportunity to dispute such tax liability.” According to Treas. Reg. § 301.6330-1(e)(3), A-E2, “[a]n 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.” Section 6330(c)(1) requires the officer conducting a CDP hearing to obtain verification from the Secretary that all legal and administrative requirements have been met.

3.a.(xii) Similarly, by reference to section 6330, section 6320 requires the Commissioner to offer the taxpayer a CDP hearing when, as here, the Commissioner files a notice of federal tax lien. According to Treas. Reg. § 301.6320-1(e)(3), A-E2, “[a]n 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.”

3.a.(xiii) In brief, section 6751(b) bars the Commissioner from assessing a penalty “unless the initial determination of such assessment is personally approved (in writing)” by the immediate supervisor of the person making the “determination” or “such higher level official as the Secretary may designate”.

3.a.(xiv) Section 6303(a) requires the Commissioner to give “notice” of an unpaid tax “demanding payment thereof” within 60 days after the tax is assessed.

4. The Commissioner has committed the following errors in the Determination:

4.a. The Commissioner erred in refusing to consider Petitioner's challenges to the existence or amount of the underlying tax liability (the “liability”), including those set forth in paragraph 3.a above.

4.b. The Commissioner erred in determining that Petitioner may not dispute the liability in the CDP proceeding.

4.b.(i) The Commissioner erred in determining that Petitioner may not dispute the liability because Petitioner had a prior opportunity to do so, even though (inter alia):

(A) Petitioner did not either receive a statutory notice of deficiency or actually litigate the liability in court;

(B) Petitioner was not given the opportunity to litigate the liability in court;

(C) Petitioner had not previously disputed the liability at Appeals;

(D) No correspondence was sent to Petitioner constituting an “offer” of an opportunity to dispute the liability; at most, Petitioner was offered an opportunity to request such an opportunity;

(E) A taxpayer should not be deemed to have been offered an opportunity to dispute the liability where, as here, any such opportunity was explicitly waived in advance; and the taxpayer explicitly rejected any such offer;

(F) The IRS had no authority to make such an offer;

(G) The principal issue was a “coordinated issue,” so the Appeals officer would have no power to render a decision in favor of Petitioner, rendering any such opportunity illusory, not “meaningful”;

(H) The Appeals hearing would have violated the Due Process clause of the Fifth Amendment of the United States Constitution;

(I) If the Appeals officer (or some other Appeals official who would have ultimately determined such a coordinated issue) would not have been constrained by IRS Chief Counsel's well-established and non-negotiable position (as in fact he would have been), then the hearing would not have been effective because the Appeals officer or other official would not have been appointed under Article II, Section 2, Clause 2 of the United States Constitution (“the Appointments Clause”);

(J) While a taxpayer has only one opportunity to dispute a liability, either in court or at Appeals, that is at the taxpayer's option;

(K) Prior consideration by Appeals, or an offer of consideration by Appeals, could only bar CDP consideration of the liability as to factual issues, not legal issues; and

(L) Any purported offer to Petitioner of an opportunity to dispute the liability was not effective because it was issued in bad faith, with the intent of preventing Petitioner from obtaining judicial review of the assertion of the liability.

4.b.(ii) The Commissioner erred in determining that the letter issued to Petitioner on February 11, 2014 (the “2/11/14 Notice”) constituted a prior opportunity to dispute the liability.

4.b.(iii) The Commissioner erred in determining that the 2/11/14 Notice precluded Petitioner from disputing the liability in the CDP proceeding.

4.b.(iv) The Commissioner erred in determining that the 2/11/14 Notice provided Petitioner with the opportunity to dispute the liability.

4.b.(v) The Commissioner erred in determining that Treas. Reg. § 301.6320-1(e)(3), A-E2 is valid and in failing to determine that this regulation and Treas, Reg. § 301.6330-1(e)(3), A-E2 are invalid.

4.b.(vi) The Commissioner erred in determining that Petitioner need not have pursued an opportunity to dispute a tax liability in order to be barred from disputing it in a CDP proceeding.

4.b.(vii) The Commissioner erred in failing to determine that the Commissioner's assertion of the additional penalty in the Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing issued to Petitioner on May 3, 2017 without any prior notice or even a purported opportunity to engage in an Appeals conference permitted Petitioner to dispute the liability in the CDP proceeding.

4.b.(viii) The Commissioner waived the right to claim that Petitioner may not dispute the liability in the CDP proceeding.

4.c. The Commissioner erred in verifying that the requirements of any applicable law or administrative procedure were met.

4.c.(i) The Commissioner erred in determining that the requirements of section 6303(a) were met.

(A) The Commissioner erred in determining that the 2/11/14 Notice and the letter issued to Petitioner on April 26, 2017 (the “2017 Notice”) each constituted a notice and demand.

(B) The Commissioner erred in determining that that the federal tax lien is not invalid even though no notice and demand was issued within 60 days after the assessment of the penalty.

(C) The Commissioner erred in determining that the 2017 Notice was issued timely and was valid.

4.c.(ii) The Commissioner erred in failing to verify whether the requirements of section 6751(b) were met. In the alternative, the Commissioner erred in determining that the requirements of section 6751(b) were met.

(A) The Commissioner erred in determining that he does not have the burden of establishing that the requirements of section 6751(b)(1) were met.

(B) The Commissioner erred in determining that Ms. Alla Reyfman approved the penalty assessment on Form 8278.

(C) The Commissioner erred in determining that the signatures on Form 8278 are not illegible when the Form 8278 is viewed on a computer in its PDF format or the signatures are copied and the font size is increased.

(D) The Commissioner erred in determining that the Form 8278 was in fact signed.

(E) The Commissioner erred in determining that the irregularities in the Form 8278 did not invalidate it.

(F) The Commissioner erred in determining that a memorandum dated December 5, 2013 and/or a letter dated January 16, 2014 were sufficient to establish that the penalty was properly authorized.

(G) The Commissioner erred in determining that the requirements of section 6751(b) were met, even though the purported written approval of the penalty by the immediate supervisor of the individual making the determination occurred after the penalty had already been determined.

4.c.(iii) The Commissioner erred in determining that the CDP proceeding and the Determination are not nullities though even though the settlement officer was not appointed as provided in the Appointments Clause.

4.d. The Commissioner erred in asserting that what he calls “tax shelters” were required to be registered under section 6111.

4.e. The Commissioner erred in determining that no statute of limitations applies to the penalty.

4.f. The Commissioner erred in determining that no response was necessary to the letter Petitioner's counsel sent to the settlement officer on July 5, 2018.

4.g. The Commissioner erred in determining that the penalty is for the 199905 tax period.

4.h. The Commissioner erred in sustaining the notice of federal tax lien and the proposed levy action.

4.i. The determinations in the Determination and all or a portion of the Commissioner's conduct in reaching them constitute one or more abuses of discretion.

5. Petitioner relies, as the basis of its case, on the following facts:

5.a. Audit

5.a.(i) On or about March 14, 2002, the IRS notified Petitioner that it was commencing an audit for the penalty.

5.a.(ii) On or about March 4, 2004, the IRS notified Mr. Haber that it was expanding the penalty audit to include him.

5.a.(iii) On May 9, 2013, the IRS transmitted to Petitioner and Mr. Haber substantially identical Notices of Proposed Adjustment (“NOPAs”) for the penalty, each asserting a penalty in the total amount of approximately $42 million.

5.a.(iv) Attached to each NOPA were two schedules (the “NOPA schedules”) setting out the transactions on which the penalty was allegedly based, the year (1999, 2000, 2001, or 2002) when the transactions allegedly occurred, and the computation of the penalty for each of the transactions.

5.a.(v) According to the NOPAs, all of these transactions were based on two tax strategies, OPS and FDIS, and all or substantially all of these transactions were of the type the Commissioner calls “Son of BOSS”.

5.a.(vi) In a so-called Son of BOSS transaction, a participant, directly or through a single-member limited liability company, acquires an option spread consisting of a purchased or “long” option and a largely-offsetting issued or “short” option in exchange for payment of the net premium, and contributes that option spread to a partnership in exchange for a partnership interest. The participant takes the position that his outside basis equals the gross stated premium for the long option, without regard to the gross stated premium for the short option. After further steps depending on the precise form of the transaction, the participant claims a tax loss approximately equal to the gross stated premium. The “shelter” results from the tax loss's substantially exceeding the participant's economic cost, including transaction fees.

5.a.(vii) In the NOPAs, to compute the “investment base”, and therefore the tax shelter ratio and whether the transactions were required to be registered, the Commissioner netted the premiums paid for the long and short options; but to compute the “aggregate amount invested”, on which the penalty is based, the Commissioner did not net the options, but instead used the gross premium paid for the long option without regard to the long option. The NOPAs set out no theory for this discrepancy.

5.b. Petitioner and Mr. Haber engage in discussions with Exam and waive an Appeals Conference.

5.b.(i) On May 20, 2013, counsel for Petitioner and Mr, Haber (“Petitioner's counsel”) engaged in a conference call with representatives of the Commissioner. On the call for the Commissioner were Revenue Agent Juan Marulanda, his Team Manager Alla Reyfman, Tax Shelter Specialist William McCracken, Michael Halpert, who was the program manager for tax shelters, Special Trial Attorney Dan Rosen, and IRS attorney Gail Campbell.

5.b.(ii) Petitioner's counsel asked if the Commissioner had any authority for netting the options for purposes of calculating the tax shelter ratio but using only the long option for calculating the penalty. Mr. Halpert replied that there was no published guidance, that the Commissioner had informal advice that was about ten years old that provided a “strong rationale” for not netting the options, but that he would not discuss the informal advice with Petitioner's counsel.

5.b.(iii) Petitioner's counsel asked what levels of reconsideration there would be if it turned out that Petitioner, Mr. Haber and the Commissioner could not “work something out”. Mr. Halpert replied that if the parties were unsuccessful in working things out with the Commissioner's Examination Division (“Exam”), the taxpayer could be heard at Appeals. He added that Exam had a high success rate of working things out, that only a few cases involving the § 6707 penalty had gone to Appeals, and that Exam had a 100% sustention rate at Appeals for these cases. Petitioner's counsel asked if all the § 6707 cases were going to a particular Appeals office. Mr. Halpert replied that Petitioner's and Mr. Haber's cases would be sent to an Appeals office of their request, but that this issue is a coordinated issue. He added that the Appeals officer does not have authority to settle without concurrence of the Technical Guidance Coordinator, Len Getz in Philadelphia.

5.b.(iv) The Internal Revenue Manual provides that penalties under § 6707 are Appeals coordinated issues.

5.b.(v) On or about July 12, 2013, Petitioner and Mr. Haber sent the Commissioner responses to the NOPAs.

5.b.(vi) On July 30, 2013, Petitioner's counsel engaged in a conference call with representatives of the Commissioner. On the call for the Commissioner were Messrs. Marulanda, Reyfman, McCracken, Halpert, and Rosen, along with mentee Ruth Levine. Petitioner's counsel asked for the legal basis of the Commissioner's netting the options for purposes of calculating the tax shelter ratio and not netting them for purposes of calculating the penalty. Mr. Halpert offered to address this issue in revised NOPAs, but indicated that the Commissioner had taken a consistent position on that issue for 12 years and would not be wavering now. After the parties had discussed Petitioner's and Mr. Haber's responses to the NOPAs, Petitioner's counsel proposed that the cases be entered in the Fast Track mediation program. Mr. Halpert stated that in this program, the Commissioner would have latitude to negotiate based only on the Petitioner's and Mr. Haber's inability to pay, not on legal issues. He also said that the Commissioner would entertain issuing a 30-day letter to “get the time clock running”. Petitioner's counsel responded that he could not think of a good reason for the Commissioner to do so unless counsel went “radio silent”, which he was not going to do.

5.b.(vii) In anticipation of a planned August 23, 2013 meeting to discuss the NOPAs, Petitioner's counsel circulated a proposed agenda. Item III on that agenda was “Exchange of Views on Hazards of Litigation for Issues in Dispute” including “Whether the penalty should be computed only on the net amount invested”. In an August 22, 2013 email to Petitioner's counsel, Mr. McCracken stated this would not be on the agenda because “we cannot take such matters, if any, into account in making examination adjustments or seeking an administrative resolution at the examination level”.

5.b.(viii) On August 23, 2013, Petitioner's counsel met with representatives of the Commissioner at the Commissioner's New York office to discuss the NOPAs. Attending for the Commissioner were Acting Team Manager Stephanie McMahon and Messrs. Halpert, Marulanda, McCracken, Rosen, and Campbell.

5.b.(ix) The meeting began with a discussion of whether the hazards of litigation would be addressed. Mr. Halpert indicated that he did not recall prior discussion of this question, but only whether a 30-day letter would have to be issued at some point to start “running of clock”. In any event, he stated that Exam had no jurisdiction to address the hazards of litigation or the merits of a legal position, but only to determine factual issues.

5.b.(x) Discussion then turned to whether the Fast Track mediation process could be used for this purpose. Mr. Halpert indicated that ordinarily it could, but in the context of so-called Son of BOSS transactions and associated penalties, Exam would not permit this process to be used for anything other than determining the taxpayer's ability to pay.

5.b.(xi) Discussion then turned to addressing this issue with Appeals. Mr. Halpert stated that while Appeals had authority as an institution to consider hazards of litigation and evaluate the merits of legal positions as it relates to so-called Son of BOSS transactions and related matters, they are Appeals coordinated issues and there are no Appeals settlement guidelines. Mr. Halpert continued that individual appeals officers do not have the ability to consider the merits in hearings involving these transactions, including penalties. Instead, the Appeals coordinator for the issue, Len Getz, would control the matter. Mr. Halpert further stated that Appeals had sustained Exam 100% of the time with respect to so-called Son of BOSS matters, including penalties. Mr. Rosen, apparently concerned about where Mr. Halpert's statement would lead, then interjected that the 100% sustention rate “is statistically speaking only.”

5.b.(xii) After the parties had discussed other matters, Mr. Halpert summarized the meeting by saying that “We, the IRS exam team, are 100% firm in the legal conclusions. To the extent that they are not appropriately articulated in the NOPA, we will fix that.” Mr. Halpert added that areas of opportunity to discuss the penalty computation were minimal and reiterated that prior IRS experience had shown that where a taxpayer had gone to Appeals concerning the penalty, Appeals had sustained Exam's determination, Mr. Halpert professed not to fully understand how the merits of the penalty could be litigated but assumed that it would be in a refund action only.

5.b.(xiii) IRS personnel also agreed to reduce the asserted penalty to reflect the Commissioner's computation of penalties actually paid and to be paid by others with respect to the transactions. However, IRS personnel declined to set out how the Commissioner intended to account for these third-party payments.

5.b.(xiv) On August 29, 2013, Petitioner's counsel wrote to Ms. McMahon to waive any right Petitioner and Mr. Haber might have to a hearing with Appeals (other than a CDP hearing), and asked that if the matter could not be resolved at the Exam level, that Petitioner and Mr. Haber be directly issued a notice entitling them to a CDP hearing. Petitioner's counsel's letter stated:

From our meeting, it is painfully clear that IRS Appeals consideration is not a meaningful option and might arguably foreclose any judicial review. Your team confirmed that normal Appeals consideration is not available in this matter and that the penalties proposed are an Appeals “coordinated” issue, with only the designated IRS Appeals coordinator having jurisdiction to consider our arguments. Further, even that limited consideration appears meaningless as your team confirmed that there is no “coordinated” Appeals settlement guideline and Appeals has previously sustained IRS penalty determinations in every case. Accordingly, the Taxpayers hereby waive all IRS Appeals rights they may have in connection with NOPAs relating to the proposed section 6707 penalties, including any right to receive a so-called 30-day letter, other than rights to a collection due process (“CDP”) hearing. The Taxpayers respectfully request that if this matter cannot be resolved at the Examination level, the IRS instead assess the penalties and proceed in due course to issue a CDP notice without offering the Taxpayers a prior opportunity for a conference with Appeals.

5.b.(xv) By separate letter, on the same day Petitioner's counsel requested technical advice on various legal issues, including computation of the penalty.

5.b.(xvi) By letter dated September 16, 2013, Ms. McMahon responded to Petitioner's counsel that if resolution could not be reached at the audit level, “30-day letters will be issued.” Ms. McMahon admitted that to date the Commissioner had “achieved sustention of promoter penalty assessments considered by Appeals” but asserted that that fact did not foreclose the taxpayer's right to request Appeals consideration or relieve “Appeals of its obligation to attempt to reach settlements with . . . taxpayers in accordance with its mission statement”. Ms. McMahon declined to treat Petitioner's counsel's August 29, 2013 letter as a waiver of future Appeals consideration and also, without providing any reason, denied the request for technical advice.

5.b.(xvii) By letter dated September 18, 2013, Petitioner's counsel replied to Ms. McMahon that he had not misunderstood the settlement authority of Appeals, and that his statement that “normal Appeals consideration is not available” reflects what her team had told him: this is an Appeals coordinated issue, all penalty assessments had been sustained, there are no Appeals settlement guidelines in place, and that Petitioner and Mr. Haber would “do no better at Appeals than whatever can be agreed to with your Examination team.” Petitioner's counsel also noted that Exam had no authority under the Internal Revenue Manual to issue a 30-day letter in such a case; that while a taxpayer had a right to request Appeals consideration post-assessment, that right did not come with issuance of a 30-day letter; that Petitioner and Mr. Haber had waived any right to Appeals consideration and that the Commissioner's declining to recognize it was a “legal nullity”; and that in light of this waiver, “any issuance of a 30-day letter . . . in my view would be done solely to deny [Petitioner and Mr. Haber] judicial review”.

5.b.(xviii) By letter dated October 14, 2013, Petitioner's counsel appealed the denial of Petitioner's and Mr. Haber's request for technical advice. By letter dated October 22, 2013, Norma I. Lowry, Territory Manager, denied the appeal without providing the reasons.

5.b.(xix) By letter dated December 13, 2013, Petitioner's counsel wrote to Ms. Reyfman reiterating the points in his August 29, 2013 and September 18, 2013 letters to Ms. McMahon. By letter dated December 17, 2013, Ms. Reyfman restated Ms. McMahon's response, and added that “30-day letters have been issued”.

5.c. The Commissioner nonetheless issues a purported 30-day letter and a notice; refund litigation ensues and is ultimately dismissed; Petitioner and Mr. Haber each receive an NFTL and file for a CDP hearing, which is suspended while the refund litigation proceeds.

5.c.(i) Disregarding Petitioner's and Mr. Haber's explicit waiver of rights to an Appeals hearing and request that the Commissioner simply proceed in due course to issue a notice that would enable each of them to challenge the proposed penalty in a CDP proceeding, by letters dated December 16, 2013 the Commissioner informed Petitioner and Mr. Haber that the total penalty asserted was $24,920,904 and that if they did not agree to the penalty, they “can request” a post-assessment conference with Appeals. Mr. Marulanda was listed on the letter as the “contact person”.

5.c.(ii) Attached to the letters were revised NOPAs together with two NOPA schedules, again reflecting approximately $42 million in asserted penalty. For the first time, the Commissioner purported to explain the penalty base as including the cash contributed by the participant (including fees paid by him) plus the premium for the short option, which was included “because it is used by the [participant] to purchase the long option, which is an amount received to obtain an interest in the tax shelter.”

5.c.(iii) By letter dated January 14, 2014, Petitioner's counsel responded to Mr. Marulanda, reiterating that Petitioner and Mr. Haber had previously waived any right to an Appeals hearing and that therefore the purported offer of an opportunity to request an Appeals hearing was a legal nullity.

5.c.(iv) By letter dated January 16, 2014, Ms. Reyfman notifed Petitioner's counsel that a net unpaid penalty of $24,920,904 reflected payments by others subject to the penalty on the same transactions. This letter contained no underlying data.

5.c.(v) By identical letters dated February 11, 2014, the Commissioner notified Petitioner and Mr. Haber of a § 6707 penalty in the amount of $24,920,904 (the “2/11/14 Notices”). The 2/11/14 Notices also stated that if Petitioner and Mr. Haber believed the penalty should not be imposed or that they were not liable for it, they “may request” consideration by Appeals.

5.c.(vi) Assuming (erroneously) that the 2/11/14 Notices meant that the penalty had been assessed, on or about February 28, 2014 Petitioner and Mr. Haber each paid a divisible portion of the penalty and concurrently filed a refund claim, requesting that it be denied expeditiously. Petitioner and Mr. Haber subsequently received notice that their refund claims had been denied.

5.c.(vii) By letters dated March 12, 2014, Petitioner's counsel responded to the 2/11/14 Notices, reiterating to B. Roskelley, identified as the “contact person”, that having previously waived any right to Appeals consideration, Petitioner and Mr. Haber had no such a right. Petitioner's counsel added that Petitioner and Mr. Haber questioned whether any authority existed for the Commissioner to offer Appeals consideration, but that in any event Petitioner and Mr. Haber were respectfully declining the offer to request it.

5.c.(viii) By letters dated May 6, 2014, the Commissioner issued to Petitioner and Mr. Haber Notices of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (“NFTLs”) with respect to a section 6707 penalty, in the amount of $24,905,404 for Petitioner and in the amount of $24,902,534 for Mr. Haber.

5.c.(ix) Petitioner's penalty was assessed on March 3, 2014 and Mr. Haber's was assessed on March 10, 2014.

5.c.(x) Neither Petitioner nor Mr. Haber received a statutory notice of deficiency for the liability or any part thereof, the Commissioner has never contended that one was issued or required to be issued, and the Determination asserts that the section 6501 three-year statute of limitation for assessment on return-based penalties does not apply to the penalty.

5.c.(xi) On or about June 2, 2014, Petitioner and Mr. Haber filed requests for a CDP hearing. In those requests, each of them challenged the penalty on the merits, asserting multiple grounds.

5.c.(xii) Petitioner's counsel subsequently engaged in correspondence and telephonic discussions with Eric Feinman, who had been assigned to the CDP cases as settlement officer. Mr. Feinman indicated that, without considering arguments or evidence presented by Petitioner and Mr. Haber, he had reached a preliminary determination that they would not be permitted to dispute the penalty in the CDP proceeding because they had had a prior opportunity for Appeals consideration.

5.c.(xiii) By letters dated July 18, 2014, Petitioner's counsel indicated his disappointment in Mr. Feinman's preliminary determination because it was contrary to Appeals' mission and the CDP hearing requirement that determinations be made after consideration of the issues raised by the taxpayer. Petitioner's counsel further set out grounds why Petitioner and Mr. Haber believed that the merits of the penalty could be raised at the CDP hearing.

5.c.(xiv) On or about July 18, 2014, Petitioner and Mr. Haber filed suit in the United States Court of Federal Claims demanding a refund and abatement of the unpaid portion of the penalty.

5.c.(xv) On July 31, 2014, Mr. Feinman left Petitioner's counsel a voicemail message indicating that he would request a legal opinion from the Commissioner's “local associate area counsel” as to whether Petitioner and Mr. Haber could dispute the liability at the CDP hearing.

5.c.(xvi) On October 22, 2014, Petitioner's counsel was informed by S. Starling Marshall, the Government's attorney in the refund action, that pursuant to an executive order the CDP proceedings had been suspended until the refund litigation ended.

5.c.(xvii) The refund litigation ended in early 2017 when the United States Court of Appeals for the Federal Circuit affirmed the Court of Federal Claims' dismissal of the lawsuit for lack of jurisdiction, without reaching the merits, and Petitioner and Mr. Haber did not seek review of the decision by the United States Supreme Court.

5.c.(xviii) The Federal Circuit held that to sue for a refund Petitioner and Mr. Haber were required to pay the entire assessment because the penalty was not divisible. The court reasoned that if registration was required, the OPS and FDIS strategies themselves, not the individual transactions, would have been required to be registered.

5.d. The CDP proceedings resume.

5.d.(i) By memorandum dated April 26, 2017 (the “Char Memorandum”), IRS attorney Sze Wan Florence Char informed Mr. Feinman that the refund litigation was over and that he should remove Petitioner's and Mr. Haber's CDP cases from suspense. Ms. Char also informed Mr. Feinman that the penalty had in fact not been assessed against Petitioner until March 3, 2014 and against Mr. Haber until March 10, 2014, that no other letters or notices were sent to them within 60 days after the March assessment, and therefore that since what Ms. Char described as the “notice and demand”, i.e. the 2/11/14 Notices, preceded the assessments, there was a “litigation hazard” which, IRS counsel believed, did not undermine the validity of the lien.

5.d.(ii) On or about April 27, 2017, Petitioner and Mr. Haber received identical notices (the “2017 Notices”), which were identical to the 2/11/14 Notices except for the date, April 26, 2017.

5.d.(iii) On May 6, 2017 Mr. Haber received a Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing (“NITL”), dated May 3, 2017, addressed to him. Two days later, Petitioner's counsel received a copy of that document and also an NITL dated May 3, 2017 addressed to Petitioner.

5.d.(iv) Petitioner's and Mr. Haber's NITLs asserted total amounts owed of, respectively, $33,820,497 and $33,777,297, including an unexplained “additional penalty” of, respectively, $5,416,854 and $5,410,491.

5.d.(v) On or about May 16, 2017 Petitioner and Mr. Haber requested CDP hearings for the NITLs, again contesting the penalty on multiple grounds.

5.d.(vi) By letter dated June 27, 2017, Mr. Feinman wrote to Petitioner's counsel that he had been assigned the Petitioner's and Mr. Haber's CDP cases with respect to the NITLs, which had been consolidated with the CDP cases relating to the NFTLs, that all of the CDP cases were suspended while he awaited advice from IRS Chief Counsel as to whether the liability may be disputed in the CDP hearings, and that he would contact Petitioner's counsel to schedule a conference once the cases were reactivated.

5.d.(vii) On or about April 16, 2018, Petitioner and Mr. Haber each received an identical letter from Mr. Feinman dated April 11, 2018. Mr. Feinman acknowledged receipt of Petitioner's timely filed requests for a CDP hearing for both the lien and levy actions and sought to schedule a conference.

5.d.(viii) Each of Mr. Feinman's April 16, 2018 letters letter enclosed a Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, which, he asserted, reflected managerial approval for the § 6707 penalty and satisfied the approval requirements of § 6751(b). The form itself states that “Manager's signature is required in block 11a to meet the provisions” of section 6751. On the each copy that Mr. Feinman enclosed, block 11a contains only the words “Manager signature”, underneath it the typed name “Alla Reyfman-Melamed”, and what appears to be printed matter that is illegible. The area above this printed matter is blank. No signature, actual or specimen, appears in block 11a. Box 11b contains the words “Date signed” and typed “2/5/14”. Box 9 lists the penalty as being for “Failure to furnish information on reportable transactions”, which is the section 6707 penalty for post-2003 transactions only. Each Form 8278 contains other irregularities as well, including stating in Box 5 that the “year” is “199905” for Petitioner (and “199912” for Mr. Haber) even though the penalty is asserted for multiple years — 1999, 2000, 2001 and 2002.

5.d.(ix) By letters dated May 3, 2018, Mr., Feinman, replying to letters from Petitioner's counsel dated April 27, 2018, wrote that his prior letters covered all of Petitioner's and Mr. Haber's outstanding CDP requests; that the “additional penalty” referenced in each of the May 3, 2017 NITLs was the result of an error and that there was in fact no additional penalty; that (in Petitioner's case) the current liability for the penalty consists of the original assessment, plus fees and collection costs of $160, plus accrued interest, and less a $15,500 payment (in fact, the amount paid to begin the refund proceeding); that he was unable to provide another copy of the Form 8278 (Petitioner's counsel had requested one that would allow him to read the illegible print in box 11a, and had also requested documentation that the Form 8278 had in fact been digitally signed by the purported signatory); and that he was unable to provide a copy of a Lead Sheet 300-Penalty Approval Form (or equivalent) that Petitioner's counsel had requested.

5.d.(x) Mr. Feinman and Petitioner's counsel participated in a telephone conference call on May 17, 2018. Mr. Feinman explained the “additional penalty” was, he thought, an erroneous assertion by a collection revenue officer of a failure-to-pay penalty, to which a section 6707 penalty assessment is not subject. Petitioner's counsel addressed multiple problems with the Forms 8278.

5.d.(xi) On May 25, 2018, Petitioner's counsel sent a follow-up letter to Mr. Feinman to reiterate Petitioner's and Mr. Haber's concerns regarding the Forms 8278, which caused the Forms 8278 to fail to meet the requirements of section 6751(b).

5.d.(xii) Petitioner's counsel also requested a copy of a memorandum dated December 5, 2013 (the “December 5 Memorandum”), which Mr. Feinman had said in the telephone conference call that the IRS might rely upon to prove that it complied with the requirements of section 6751(b).

5.d.(xiii) By letter dated June 27, 2018, Mr. Feinman forwarded a copy of the December 5 Memorandum to Petitioner's counsel. In relevant part, this memorandum, from Alla Reyfman-Melamed to Norma Lowry and Barbara Harris, stated that the IRS was ready to proceed with the unagreed closing of the penalty examination and to assess a penalty in the amount of approximately $24.9 million, and noted that “the tax shelter ratio and penalty determination are well-established positions and are non-negotiable” and had concurrence from Chief Counsel attorneys. The memorandum purports to have been digitally signed by Ms. Lowry (but not dated), was mechanically signed by Ms. Harris, and does not even purport to have been signed by Ms. Reyfman-Melamed.

5.d.(xiv) By letter dated July 5, 2018, Petitioner and Mr. Haber presented additional arguments to Mr. Feinman. Mr. Feinman determined it was not necessary to respond to this letter.

5.e. At the time that Treas. Reg. § 301.6320-1(e)(3), A-E2 and Treas. Reg. § 301.6330-1(e)(3), A-E2 were promulgated, the Commissioner did not explain why he took the position that “[a]n opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals”, rather than only a judicial hearing.

5.f. The Determination asserts an amount due, including interest through August 6, 2018, of $29,221,305.465 [sic] and asserts that it is for the 199905 tax period.

5.g. The Determination, in material part, sustains the notice of federal tax lien and the proposed levy action, asserts that Petitioner may not dispute the liability because it had a prior opportunity to do so, asserts that no statute of limitations applies to the penalty, denies that the Commissioner has the burden of establishing that the requirements of section 6751(b) were met, and concedes that Petitioner is not liable for the “additional penalty”.

5.h. The hearing officer did not obtain verification that the requirements of section 6751(b) were met.

5.i. Ultimate factual allegations.

5.i.(i) Petitioner was never offered an opportunity for a conference with Appeals regarding the underlying liability.

5.i.(ii) Petitioner never had an opportunity for a conference with Appeals regarding the underlying liability.

5.i.(iii) Petitioner never engaged in a conference with Appeals regarding the underlying liability.

5.i.(iv) Had Petitioner engaged in a conference with Appeals regarding the underlying liability, the result — Appeals' sustaining the penalty on the merits — would have been pre-determined.

5.i.(v) The Commissioner did not, within 60 days after the assessment of the penalty, give notice to Petitioner for the penalty demanding payment thereof.

5.i.(vi) The initial determination of the penalty assessment against Petitioner was not personally approved (in writing) by the immediate supervisor of the person making such determination or by a higher level official properly designated by the Secretary.

WHEREFORE, Petitioner prays that the Court:

1. Determine that the Commissioner erred as alleged in paragraph 4;

2. Order and decide that the Commissioner's determinations, including the sustaining of the notice of federal tax lien and the proposed levy action, are not sustained or, alternatively, remand this case to Appeals for the purpose of conducting a hearing to supplement the record with matters not considered by Appeals at the first CDP hearing including challenges to the existence or amount of the underlying tax liability; and

3. Grant Petitioner such other and further relief as may be just and proper.

Dated August 29, 2018.

Jasper G. Taylor III
Richard L. Hunn

Norton Rose Fulbright US LLP
1301 McKinney, Suite 5100
Houston, Texas 77010-3095
Telephone: 713/651-5670

Counsel for Petitioner

ADMITTED

Jasper G. Taylor III
T.C. Bar No. TJ0421

ADMITTED

Richard L. Hunn
T.C. Bar No. HR0899