In response to the filing of a Notice of Federal Tax Lien or proposed levy, CDP cases provide an opportunity to challenge IRS application of payments in assessed liabilities. In Allied Adjustment Services v Commissioner the taxpayer did just that; it brought a CDP case challenging the IRS’s application of payments relating to corporate income tax and employment tax liabilities, arguing that the IRS’s application was improper. After filing the petition in response to the IRS’s enforced collection, to hedge its bets and limit interest exposure, Allied Adjustments fully paid the liabilities. IRS responded by filing a motion to dismiss the CDP case as moot. In a designated order, the Tax Court agreed with the IRS, leaving the taxpayer only with the option to take its case to district court or the Court of Federal Claims.
I will explain why below.
In deficiency cases, petitioners can stop the accrual of interest by paying a liability after filing a petition. The Tax Court, while thought of more as a forum to contest a proposed assessment and thus get pre-payment review, has under Section 6512(b) the statutory power to find that there is an overpayment and order a refund in deficiency cases.
We have previously discussed that the Tax Court has held in the 2006 case Greene-Thapedi v Commissioner that it does not generally have the power to order a refund in CDP cases. See for example Willson v. Comm’r: D.C. Cir. Holds Tax Court Lacks Refund Jurisdiction in Collection Due Process Cases where Carl discussed how the DC Circuit was the first circuit to expressly agree with the Tax Court that the Tax Court lacks refund jurisdiction in CDP cases.
As I mentioned above, in Allied Adjustment the taxpayer sought to stop the accrual of interest after IRS began enforced collection and the taxpayer lodged an appeal with Tax Court of an adverse CDP determination. IRS, in response to the full payment filed its motion to dismiss based on mootness, claiming that the “applicable proposed levies are no longer necessary and the applicable notices of federal tax lien have been released.”
In response, the taxpayer emphasized that it paid “only to halt the accrual of interest” and that rather than being moot “the basis for her petitions in this Court — i.e., that respondent’s alleged failure to address the improper application of prior tax payments and the cascading penalties resulting therefrom – has not been resolved.”
This prompted the Tax Court to explain why the limitations in its CDP jurisdiction meant that while the taxpayer still had a beef it had to take that beef to another forum. In so doing, it plainly describes what those limits mean in CDP cases:
Given the limitations on our jurisdiction in lien and levy actions under section 6230(c) and 6330(d), the relief that we can provide to a petitioner in adjudicating such actions is limited, amounting to giving a “thumbs-up or thumbs- down” on whether respondent may proceed with the collection action in question. If we find that the existence and amount of the underlying tax liability is correct and Appeals’ determination did not constitute an abuse of discretion, we may uphold the determination and sustain the collection action. If we find that the existence and amount of the underlying tax liability is incorrect or that Appeals’ determination constituted an abuse of discretion because of Appeals’ failure to consider relevant information or for some other reason, we may, as the Court did earlier in Docket No. 12037-13L, remand the case for further consideration by Appeals, or reject Appeals’ determination and overrule the collection action.
The above discussion suggests that if the taxpayer had not fully paid, if the Tax Court agreed with the taxpayer on the allocation issue, the IRS’s power to remand or reject a collection action provides an incomplete though possible indirect way to get a refund in CDP proceedings. The killer in Allied Adjustnment was the taxpayer’s voluntary full payment:
Because petitioner does not dispute that it has paid in full the outstanding liabilities for the taxable years and quarterly periods at issue in these cases and respondent has released the liens for the applicable years and periods and no longer needs, nor intends, to levy to collect petitioner’s liabilities for the applicable taxable years and quarterly periods, there is no longer any basis for us to exercise jurisdiction over these cases and we must dismiss them.
The order notes that all is not lost, as the taxpayer could take the case to another court:
Despite the fair amount of time that both petitioner and respondent, as well as this Court, have spent in dealing with these cases up to this point, we now lack the power to grant petitioner the relief that it still seeks. Its remedy lies elsewhere, first in filing a refund claim with respondent (see sec.7422)and, if that is unsuccessful, instituting a tax refund suit in traditional refund fora — the district courts of the United States (see 28 U.S.C. sec. 1346(a)(1)) or the United States Court of Federal Claims (see 28 U.S.C. sec. 1491(a)(1)).
I do note that there are some cracks in the Greene-Thapedi restriction on refunds in CDP cases, and to say that Tax Court has no refund power in CDP cases is a bit imprecise. For example I wrote about one of those cracks in Recent Order Explores Scope of Tax Court Powers in CDP Cases where in Cosner v Commissioner the Tax Court wrestled with whether a CDP case was moot after the taxpayer fully paid his liability as a result of an IRS levy served during the time the IRS was enjoined from collecting the tax due to the taxpayer’s having previously filed a valid Tax Court petition in response to a CDP notice of determination. In that order, the Tax Court found against the IRS on the mootness issue, and it explained and distinguished Greene-Thapedi, noting that the case did not mean in all instances the Tax Court could not use its equitable powers to order a refund.
Here, while the taxpayer claimed the IRS improperly acted, those improper actions did not trigger the full payment, so Cosner’s reasoning was of no direct help. The outcome presents a trap for the unwary. That the taxpayer needs to bring another lawsuit to get to the merits, especially when the merits pertain to issues of payment allocation (which seem to be issues in a specialized court’s wheelhouse), is wasteful.