As we have reported before, here, occasional guest blogger Lavar Taylor brought three appeals into the circuit courts. Two circuit courts have ruled thus far and both sustained the decision of the Tax Court upholding the regulation promulgated by the IRS which prevents a taxpayer from bring a merits dispute in a collection due process (CDP) case if the taxpayer had the opportunity for a conference with Appeals prior to bringing the CDP case even if the opportunity to go to Appeals did not include an opportunity to contest the matter in court. We are still waiting on the third circuit court in which Lavar made his arguments to decide the case that came before it in order to determine if a split in the circuits on this issue might lead to Supreme Court review. Meanwhile, the Keller Tank decision decided by the 10th Circuit has had further developments and the Tax Court continues to decide cases on this issue. Both the new developments in Keller Tank and the recent activity in the Tax Court deserve mention.
On March 31, 2017, the IRS filed a request with the 10th Circuit in the Keller Tank case entitled “APPELLEE’S MOTION TO AMEND OPINION TO CLARIFY AUTHORITY OF IRS OFFICE OF APPEALS OVER RESCISSION OF I.R.C. § 6707A PENALTIES.” In the motion, the IRS requests that the 10th Circuit amend the opinion in the case, which was entirely favorable to the IRS, to remove language suggesting that the Appeals Office could rescind the 6707A penalty. The motion states that the Commissioner has not delegated that authority to Appeals and that the opinion could mislead others. You do not often see the winning party asking the court to rewrite its opinion but the reason for the request makes perfect sense for an agency trying to administer a statute and wanting to make sure that parties follow the correct procedure when requesting remedies.
Following on the heels of the motion by the IRS, on April 7, 2017, the taxpayer filed a PETITION FOR REHEARING AND REQUEST FOR REHEARING EN BANC. In this petition, the taxpayer essentially asks the court to reconsider its decision and sets out the reasons why it should do so. We will continue to follow the developments in this case as well look for the final circuit court opinion.
Meanwhile, back in the Tax Court a couple of decisions on this topic deserve brief mention and discussion. The first was an order and decision issued by Judge Holmes on January 3, 2017 in White v. Commissioner, Dk. No. 9967-15L. Mr. White filed his 2008 return in 2013. The IRS not only assessed the taxes reflected on the return but also assessed penalties for late filing and late payment. In his CDP case Mr. White wanted to contest the penalties. Judge Holmes set out the timeline regarding the penalties and Mr. White’s efforts to contest them in the order:
-October 4, 2013 — Mr. White writes to IRS Appeals to ask for relief from the penalties;
– January 24, 2014 — IRS Appeals denies his request;
-April 9, 2014 — Mr. White files an administrative appeal of the denial;
-May 20, 2014 — while this administrative appeal is pending, the IRS sends Mr. White a notice of federal tax lien;
-June 6, 2014 — Mr. White files his request for a CDP hearing and states that he only wants to challenge the penalties;
-October 28, 2014 — The administrative appeal leads to a partial abatement of the penalties;
-December 24, 2014 — the Appeals settlement officer conducting the CDP hearing writes to Mr. White to schedule the hearing but warns him that his filing of a request with IRS Appeals and pursuit of an administrative appeal constituted his one chance to challenge his liability;
-March 17, 2015 — The Appeals settlement officer issues the notice of determination in which he rules that Mr. White may not challenge the penalties in a CDP hearing because he had challenged them administratively.
Mr. White pressed for consideration of the penalty assessment amount in the CDP hearing. The IRS filed a motion for summary judgement. Because he never received a notice of deficiency regarding the underlying taxes, since they are taxes on his return filed without remittance, Montgomery v. Commissioner would allow him to contest the taxes in the CDP hearing but what about the penalties which he contested prior to the CDP hearing in appeals in the penalty abatement context.
The relevant regulation is 26 CFR § 301.6320-1(e)(3), A-E2 and it provides:
“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.”
The Court notes that the second sentence of the regulation does not apply because his opportunity for a conference with Appeals came after and not before the assessment of the tax. In its brief in support of the summary judgment motion, the IRS cited to two trust fund recovery penalty cases in which the taxpayer received a hearing with Appeals but TFRP cases have their own special regime for obtaining Appeals conferences. Even though the IRS apparently did not cite to Lewis v. Commissioner, 128 T.C. 48 (2007), Judge Holmes looks at it and finds the facts essentially identical. On the basis of Lewis, he upholds the determination of Appeals and grants the motion for summary judgment.
The decision in White raises the question of what would have happened to Mr. White’s request to have the penalties reviewed by the Tax Court in the CDP case if he had not first sought to have Appeals look at them. I think that he may have gotten his review. If I am right, perhaps taxpayers should not engage in the penalty abatement process immediately after filing a late return but wait until the CDP process begins. That is not the most efficient result but taxpayers who want the ability to challenge the denial of penalty abatement in court must wait for CDP or fully pay and sue for refund.
On March 29, 2017, Judge Lauber issued an opinion in Bitter v. Commissioner, T.C. Memo 2017-46. The Bitter case is another 6707A case. The Court picks up on the two recent circuit court decisions and cites them in the decision. The case shows what taxpayers should expect if they seek to litigate the merits in a CDP case of this type of penalty. The door is firmly shut and will only open if a circuit court agrees with the argument that the regulation goes too far by preventing taxpayers who can only obtain review from Appeals from raising the merits of the underlying liability in a CDP case. Judge Lauber goes through all of the recent decisions if you want a thorough update on the state of the law in this area.