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Litigating the Merits of a Trust Fund Recovery Penalty Case in CDP When the Taxpayer Fails to Receive the Notice

Posted on Dec. 4, 2014

In Mason v. Commissioner the Tax Court issued a regular opinion as it decided for the first time the impact of taxpayer’s failure to receive her notice of the trust fund recovery penalty (TFRP) assessment.  The case provides a logical extension to the provisions allowing taxpayers to litigate the merits of an income tax liability following a failure to receive the notice of deficiency.  In addition to the extension of protection to TFRP assessment situations in which the taxpayer did not have a pre-CDP opportunity to contest the correctness of the TFRP assessment, this case merits discussion because it also raises the issue of the ability of the Tax Court to hear a TFRP case based on the date of the assessment and the treatment of the IRC 6320 notice as the notice required by IRC 6672.

The Court spends a good deal of time with the procedural issues in this case, which makes sense because on the merits the taxpayer had little to offer.  She founded the business and ran the day to day operations.  After spending several pages getting to the merits of the case, the Court very quickly dispensed with her claim that the 6672 liability did not apply to her.  I will spend no time discussing her merits issue and will focus on her right to raise it even if she had a very weak case.

The issue causing the Tax Court to report this case as a regular opinion arises from the failure of Ms. Mason to receive Letter 1153 giving her a chance to go to Appeals to discuss the imposition of the 6672 liability. The IRS mailed the letter to her address of record on September 2, 2005.

Although a certified mail label and return receipt were affixed to the envelope, postage was placed thereon with a private postage meter and the letter was posted without being presented to a U.S. Postal Service (USPS) employee. As a result, no USPS postmark was date-stamped on the envelope, nor was the item number on the certified label entered in to USPS certified mail tracking system. . . .  The unopened envelope, return receipt still attached, was received by the IRS on September 29, 2005, Petitioner did not receive the Letter 1153 or notification of its attempted delivery.

These facts give Ms. Mason just about the best position possible to argue that in a CDP hearing she did not have the chance to previously contest the liability, except that Congress did not explicitly contemplate this situation as it wrote the statute. Section 6330(c)(2)(B) provides that “[t]he 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.”  While Congress clearly signals that someone who fails to receive a notice of deficiency may raise the merits of the underlying liability in a CDP case, it did not talk specifically about liability situations outside deficiency proceedings.  It spoke vaguely about otherwise having an opportunity to dispute the liability.  What does that mean?

The 6672 liability does not use deficiency procedures as a predicate to assessment.  Since 1996, however, it does have very specific procedures the IRS must follow concerning notice provided in section 6672(b)(1) which states, “No penalty shall be imposed under subsection (a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212(b) or in person that the taxpayer shall be subject to an assessment of such penalty.”  While this provision closely mirrors the notice of deficiency language, it clearly differs from the notice of deficiency procedures.

Assuming the mailing was proper and given the fact that she did not receive the notice giving her a right to contest the assessment in Appeals, should she have the right to contest the assessment during a CDP hearing? The settlement officer (SO) working her CDP case told her she could not raise the merits of the TFRP assessment.  In the determination letter sustaining the IRS proposed levy, the SO reiterated the position that she could not raise the merits of the underlying TFRP assessment, citing to the attempted delivery of the Letter 1153 and Appeals consideration of her appeal of an offer in compromise.

The Tax Court showed great sympathy for her plight in trying to address the unpaid TFRP liability. I did not detail all of her efforts, which you can read in the opinion, but the Court characterized the process as follows:

One major reason for petitioner’s difficulty was that she had to deal with a different person for each type of procedure concerning the employment tax liability. At one point in the process she was dealing with as many as five of respondent’s representatives regarding different aspects of the same underlying tax liability: i.e., offers, installment payments, claim for refund, etc.  Respondent’s balkanized approach to collection procedures was also detrimental to respondent, because important dates and events were not being internally coordinated.  For petitioner, it presented Kafkaesque circumstances and confusion.

Not having read the brief filed by Chief Counsel, I cannot say if he argues that the TFRP situation bears fundamental differences from deficiency cases; he thinks that she deliberated failed to pick up the mail, triggering a different set of precedent discussed in the blog recently; he argues that the simultaneous CDP and refund hearing satisfied the prior hearing requirement or some other argument.  I would expect Chief Counsel’s office to agree with this opinion but it bears watching if he accepts this decision.

The Court did not buy whichever argument Chief Counsel sought to sell. Instead, it applied the same standard to this situation that applies when a taxpayer does not receive a properly addressed notice of deficiency.  In that situation the assessment, although valid, leaves the taxpayer with the opportunity to challenge because of the lack of receipt.

The Court noted that nothing in this record indicated that Ms. Mason chose not to pick up this mailing and, in fact, everything in the record supported the conclusion that she diligently pursued every opportunity given to her. The Court’s decision that she had the right to contest the merits of the TFRP liability in this CDP proceeding seems logical under both the language and the intent of the statute.  The IRS may not have contested this legal conclusion but only its application on these facts where it felt Ms. Mason had the opportunity to contest the liability previously.

In addition to the major holding of the case it contains two other holdings worth mentioning. The first concerns a minor matter of the Tax Court’s jurisdiction to hear a TFRP case and other non-deficiency procedure cases in the CDP context.  When Congress created CDP in 1998 it contemplated that CDP hearings would occur in the Tax Court for taxes assessed through the deficiency procedures and in District Court for taxes assessed though non-deficiency procedures such as employment taxes.  That bifurcation created unnecessary confusion and Congress amended the CDP provisions in 2006 to place all CDP cases under the jurisdiction of the Tax Court.  In making the change, it gave the Tax Court jurisdiction for determinations made after October 16, 2006.  Here the determination occurred on February 2, 2007 a few months after the effective date of the change in the law.  The change took place sufficiently long ago that few cases continue to require close scrutiny of the effective date but this one did.

The second issue worth noting concerns the phrase “otherwise have an opportunity to dispute” a tax liability. The phrase comes from IRC 6330(c)(2)(B), but the Code does not define the phrase.  The regulations define it by stating that it “includes a prior opportunity for a conference with Appeals.”  The definition in the regulations leaves open whether something else might also constitute an opportunity to dispute the tax liability.  In Lewis v. Commissioner, the Tax Court agreed with the regulation that the phrase included a prior opportunity to raise the issue at Appeals.  In Ms. Mason’s case she met with the SO on the CDP hearing and the appeal of a claim for refund at the same time.  For a more detailed discussion of the Lewis case and its interpretation of a “prior opportunity” to dispute the result of a previous administrative hearing, see When Can Taxpayers Challenge the Merits of the Underlying Liability in CDP Appeals: Why the Tax Court Was Wrong in Lewis v. Commissioner and its Progeny (Feb. 26, 2014).

The IRS argued at times that the simultaneous hearing gave her a prior opportunity cutting off her ability to petition the Tax Court on the merits of her liability.  The Court said that IRC 6330(c)(2)(B) contemplated a prior Appeals hearing and not a simultaneous one.  Therefore, the fact that Appeals considered the merits of the TFRP in the appeal of her claim for refund at the same time it considered her CDP request did not preclude her from raising the merits of the underlying assessment in the appeal to the Tax Court of the CDP determination.  While simultaneous hearings do not commonly occur, they do occur occasionally.  This decision will help those taxpayer should the IRS argue again that a simultaneous hearing on the merits cuts off rights in an appeal of the CDP determination.

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