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Three Circuits to Consider the CDP Issue of a Prior Opportunity to Contest Underlying Tax

Posted on Feb. 24, 2016

Today we welcome back frequent guest blogger Carl Smith writing about a CDP issue that has drawn our attention previously, here, here and especially here.  The issue concerns the ability of a taxpayer in a CDP case to raise the merits of the underlying tax liability when the taxpayer has had the opportunity to discuss the issue with Appeals prior to the CDP hearing but the opportunity did not offer the prospect of anything more than an administrative hearing, i.e., no judicial review.  In this context, denying the taxpayer the opportunity to raise the merits of the liability in the CDP hearing before the Tax Court seems wrong.  Yet, so far the Tax Court has agreed with the IRS that a taxpayer cannot raise the merits if the taxpayer had the prior hearing opportunity with Appeals even though that opportunity did not offer the chance for judicial review.

A couple of months ago after my most recent post on this issue, I received an interesting message from Chaim Gordon, a PT reader and former Tax Court clerk who now practices with the Washington office of Venable, LLP.  Chaim comments:

Lewis, and the commentary on it, have focused on the issue of whether the opportunity referred to in I.R.C. § 6330(c)(2)(B) includes an opportunity to dispute the underlying liability administratively.  In my view, this issue is beside the point because Lewis is wrong for a more fundamental reason:  it misreads I.R.C. § 6330(c)(2)(B).

The relevant language of I.R.C. § 6330(c)(2)(B) (emphasis added) is as follows:  “The 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.”  For some reason, the Tax Court has been reading the word “or” as an “and”, but it has never explained why it has done so.  The statute as written makes sense and contemplates relief in one of two scenarios:  (1) If a taxpayer does not receive a notice of deficiency, the taxpayer can raise the underlying liability in a subsequent CDP hearing.  (2) If the taxpayer received a notice of deficiency but could not then contest the liability (however that concept is understood) for other reasons (e.g., a medical emergency precludes the taxpayer from filing a petition with the Tax Court), then the taxpayer also has the right to raise the underlying liability in a subsequent proceeding.  From what I have seen, the error here can be traced to the preamble of the relevant regulations, but the regulations themselves do not require this result.

In our back and forth concerning this post and Chaim’s comment, Carl agreed that Chaim raises a valid concern about this issue but commented further that:

There is Supreme Court case law for the proposition that “or” may be interpreted as “and.”  The problem may also be an APA one:  In its preamble to the regs., the IRS did not explain why it was reading “or” as “and”.

A more fundamental problem with the reg. is any deference to its validity.  In Lavar’s post, he pointed out that the Tax Court should not be deferring to a reg. that purports to limit its possible jurisdiction.  Lavar cites non-tax cases for this exception to the deference rule.  But, there is now a more on point cite.  Note that just last week, the Tax Court explicitly said in footnote 2 to Bongam v. Commissioner that the 6330 reg. — to the extent that it purports to limit Tax Court jurisdiction — is not entitled to deference.  The footnote reads:

The Treasury Regulations appear to specify notice by certified or registered mail as the preferred form of notice. See sec. 301.6330-1(e)(3), Q&A-E8, Proced. & Admin. Regs. (“Taxpayers will be sent a dated Notice of Determination by certified or registered mail.”). Respondent does not argue that these regulations limit our jurisdiction. See Harris v. Commissioner, 32 T.C. 1216, 1217 (1959) (“[O]ne litigant cannot write into the law limitations on the jurisdiction of the Court as to the other party by his own regulations.”).

This is a long lead in to Carl’s excellent post bringing us up to date on this issue as it heads into the Circuit Courts for further testing.  Keith

In June 2015, Judge Carluzzo issued orders in three related Tax Court Collection Due Process (CDP) cases brought by the same lawyer.  The cases are Our Country Home Enterprises, Inc., Docket No. 7688-14L, Christofer Iames, 10306-14L, and Keller Tank Services II, Inc., 11611-14L.  In each case, the Judge issued an order and decision granting summary judgment to the IRS and later denied a motion to vacate that order.  Each case has been appealed to a different Circuit: respectively, the 7th, 4th, and 10th.  Each case involves a notice of determination allowing the IRS to levy to collect section 6707A penalties assessed for failing to identify listed transactions in which each taxpayer had invested.

Under Smith v. Commissioner, 133 T.C. 24 (2009), the Tax Court has no deficiency jurisdiction to consider section 6707A penalties, but such penalties can be considered by it in CDP.  However, section 6330(c)(2)(B) provides that a CDP hearing cannot involve challenges to the underlying liability where the taxpayer either did not receive a notice of deficiency (the situation here) or otherwise have a prior opportunity to contest the underlying liability (the issue in dispute).  It appears that each case will involve a contest to the implementing regulation that says that a prior conference at Appeals (other than a conference prior to the issuance of a deficiency notice) prohibits a challenge to the underlying liability in either a CDP Appeals hearing or a Tax Court CDP case.  In each of the three cases, the taxpayer had a conference with Appeals over section 6707A penalties before notices of intention to levy were issued.  Therefore, relying on the statute and its interpreting regulation, the Tax Court precluded the taxpayers from raising any challenge to the underlying liability in a CDP appeal before the court.

In my view, these were strange holdings, since even if the implementing regulation was valid in the normal case, here, in each case, the taxpayers made constitutional challenges to section 6707A.  How can an Appeals conference deal with a constitutional challenge to the facial validity of the statute?

The outcome of these appeals could also affect CDP cases involving the section 6672 penalty — a penalty similarly assessed without a notice of deficiency and as to which Appeals Office conferences are offered around the time of assessment.

Here is a quote from the heart of each June order in the three cases:

[A]ccording to petitioner, the underlying liability should be abated because ‘the assessment is based upon, including but not limited to, an unexplained determination that the related transaction is a listed transaction and a provision of the Internal Revenue Code that is unconstitutional as a deprivation of due process.’

According to respondent’s motion, petitioner is precluded from challenging the existence or the amount of the underlying liability in this proceeding because he had a prior opportunity to do so. See sec. 6330(c)(2)(B). The underlying liability was assessed on July 2, 2012, following a conference with respondent’s Appeals Office (Appeals). Relying upon section 6330(c)(2)(B), section 301.6320-1(e)(3), Q&A-E2, Proced. & Admin. Regs., and Lewis v. Commissioner, 128 T.C. 48 (2007), which upheld the validity of that regulation, respondent argues that because Appeals had considered the underlying liability prior to petitioner’s request for section 6330 review, petitioner may not in this proceeding challenge the existence or the amount of that liability.

According to petitioner, Lewis is not controlling because: (1) the case was superseded, if not overturned, by Yari v. Commissioner, 143 T.C. 7 (Sept. 15, 2014); and (2) the version of section 301.6320-1(e)(3), Q&A-E2, Proced. & Admin. Regs. considered in Lewis has since been amended, and the version in effect here is invalid. For the following reasons, we disagree with petitioner on both points. Unlike the situation before us, Yari did not address the taxpayer’s entitlement to challenge the existence or the amount of the taxpayer’s section 6707A liability. Focusing on an amendment to section 6707A, in Yari the Court established the proper method for computing penalties under that section. Because of the timing of the amendment that changed the manner in which liabilities under that section are computed, and consistent with the agreement of the parties, the Court noted that Appeals consideration of the taxpayer’s liability independent of the then ongoing section 6330 administrative hearing was not a prior opportunity to challenge that liability within the meaning of section 6330(c)(2)(B).

Here, there was no intervening change to the statute giving rise to the underlying liability. That liability was considered by Appeals prior to the section 6330 proceedings, and therefore, consistent with section 301.6320-1(e)(3), Q&AE2, Proced. & Admin. Regs., as construed in Lewis, petitioner has had a prior opportunity to challenge the existence or the amount of the underlying liability and he may not do so here.

Furthermore, the Court’s reasoning in Lewis with respect to the validity of the version of section 301.6320-1(e)(3), Q&A-E2, Proced. & Admin. Regs., there under consideration has equal application to the amended version that is applicable here. The amendment, which seems to be an acknowledgment of existing practice, expands, rather than limits, taxpayer rights under section 6330. We find it curious that petitioner would now argue for the invalidity of the regulation upon that ground. Petitioner’s argument that Lewis has no application here is rejected. It follows that petitioner may not, in this proceeding, challenge the existence or the amount of the underlying liability.


Last year, Lavar Taylor did a guest post, linked above, presenting his argument for why Lewis and the regulation are wrong and the Tax Court should be able to consider the underlying tax in a CDP hearing unless the taxpayer had a prior judicial opportunity to contest the liability (not merely an Appeals conference).  The three cases in the Circuit Courts may lead to some guidance on this subject.

Also in the wings is a pending appeal in the D.C. Circuit in Onyango v. Commissioner, 142 T.C. 425 (2014), where a taxpayer who usually did not pick up any of his mail at one of his addresses was held to have received a notice of deficiency sent to that address and thereby lost his chance of contesting the underlying liability in a CDP case.  Keith previously posted on Onyango.  Onyango has been fully briefed as to whether such behavior precludes the Tax Court from considering the underlying liability in a CDP case. (In the appeal, Onyango has also raised some medical reason why he did not pick up his IRS mail, but that portion of the appeal is sealed.)  Oral argument in the Onyango case has not yet been scheduled.  The opinion in Onyango will doubtless provide appellate guidance as to some of the circumstances under which a taxpayer is precluded from contesting underlying liability in a CDP case.

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