In Patrick’s Payroll Services, In., v. Commissioner, No. 20-1772 (6th Cir. 2021) the Sixth Circuit held the decision of the Tax Court denying the taxpayer the opportunity to litigate the merits of the underlying tax because of a prior opportunity to discuss settlement with Appeals. Guest blogger Chaim Gordon wrote about this case after the Tax Court’s decision and while the case was pending before the Sixth Circuit. Chaim pointed out some of the novel arguments the taxpayer was making. Unfortunately for the taxpayer, the Sixth Circuit was not buying what it was selling.
Patrick’s Payroll was an employee leasing companies. Anyone familiar with that type of business knows that sometimes companies in this business have tax issues regarding the failure to pay over required amounts. In 2010 and 2011 Patrick’s Payroll paid employee wages and issued W-2s to the employees but it did not pay over the employment taxes to the IRS or file the employment tax returns it was required to file. Part of the problem here for Patrick’s Payroll concerns timing. It claims it did not commence operations until September of 2010 and the IRS should not hold it responsible for taxes before it began operating. It makes a wholly reasonable argument that might succeed if accurate and if timely raised.
When I am explaining employment taxes to students, I usually ask them what happens to employees whose taxes are withheld but never paid over to the IRS. Perhaps this is a cruel exercise because a concerned look comes across some of their faces as they begin to wonder if their recent employer has paid over the taxes taken from their wages and whether they will need to cough up the taxes if their employer failed to do so. Thankfully for employees, they receive credit once the employer withholds the money. In essence the statute makes the employer the agent of the IRS, not the taxpayer, for collecting the withheld taxes. This leaves the fight as one between the IRS and the employer (and the responsible officer(s) of the employer.)
The IRS determined that Patrick’s Payroll owed about $1 million in back payroll taxes, issued a 30-day letter and offer the chance to visit the Independent Office of Appeals to discuss the issue. Patrick’s Payroll did not take the IRS up on the offer to visit Appeals. The IRS assessed the tax and commenced collection, leading to the issuance of a Collection Due Process (CDP) notice of intent to levy. This time Patrick’s Payroll did choose to go to Appeals and it wanted to discuss with Appeals the correctness of the assessed liability. Appeals said you had that chance before at the stage of the 30-day letter and now it’s too late. After receiving its notice of determination stating that the IRS could move forward to levy on its property, Patrick’s Payroll petitioned the Tax Court and requested that the Tax Court allow it to argue about the correctness of the assessment.
Patrick’s Payroll made two arguments. First, it argued that because it had not previously had met with Appeals and had it gone to Appeals following receipt of the 30-day letter, such a visit would not have afforded it the right to go to court. While I have written posts stating my belief that CDP intended to give taxpayers something more than an administrative hearing, which they already had when Congress passed IRC 6330, the Tax Court unmistakably disagrees with my view. You can read prior posts on this subject here (allowing a merits contest where taxpayer did not receive notice) and here (refusing to allow merits contest where taxpayer previously requested audit reconsideration.) The Tax Court granted summary judgment to the IRS, agreeing with the IRS that Patrick’s Payroll could not raise the merits in the CDP case, since it had passed on its prior opportunity to go to Appeals even though that prior opportunity did not involve a chance to go to court.
Patrick’s Payroll, however, made a second argument regarding the interpretation of IRC 6330(c)(2)(B). It argued that this provision must be read disjunctively and allows taxpayers to raise the merits in a CDP case either if they had not had a prior opportunity or if they had not received a notice of deficiency. At the Tax Court level, Patrick’s Payroll raised this argument in its motion to reconsider and not in its argument in chief. The Tax Court denied the motion to reconsider but Patrick’s Payroll came to the circuit court ready to make this argument from the outset.
Unfortunately, the Sixth Circuit said that because Patrick’s Payroll first raised the argument in its motion to reconsider, it did not need to consider this argument on appeal. Then, however, the Sixth Circuit went on to explain why it would have ruled against Patrick’s Payroll on this issue even if it had timely raised the argument. Since this is an issue of first impression, obtaining the court’s view provides valuable insight, although for those of us wanting taxpayers to have the opportunity to litigate the merits of the underlying liability in CDP cases, the insight here offers little comfort.
The court notes that the word “or” sometimes creates a set of independent conditions but finds that:
Here the word “or” does not create disjunctive qualifications. Instead, the phrase “or does not otherwise” identifies a single operative criterion: not having a prior opportunity to dispute. And the statute provides one of the most common examples of such an opportunity: receiving a notice of deficiency. An example easily illustrates the plain meaning and ordinary usage of the phrase “or did not otherwise.” See Oyer v. Commissioner, T.C. Memo 2003-178, 2003 WL 21384834, at *6 n.8. Imagine a child is told that she may have dessert “if she did not eat a cookie on the schoolbus or did not otherwise have sweets after school.” Id. The clever child admits to eating sweets after school but claims that she is entitled to dessert because she did not eat a cookie on the bus. Eating sweets after school clearly violates the terms of the agreement and no parent would allow the child dessert. If the child were raised by lawyers, she might protest that her parents had unfairly made disjunctive criteria conjunctive: unreasonably requiring that she not eat a cookie on the bus and not eat any sweets after school. Her parents might explain that there never were two criteria, only one: to not eat sweets after school, not eating a cookie on the bus being a good example of the key directive.
Interpreting the statute in line with its plain meaning is also supported by Treasury regulations, the Tax Court’s interpretation, and this court’s previous explanations of Section 6330. See 26 C.F.R. § 301.6330-1(e)(4) (explaining that after receiving an opportunity to dispute but no notice of deficiency, “[t]he taxpayer is precluded from challenging the existence or amount of the tax liability in a subsequent CDP hearing”); Oyer, 2003 WL 21384834, at *6 (“[T]he person seeking to challenge the underlying tax liability in a collection proceeding must not have had another opportunity to raise the challenge.”); Agility Network Servs., Inc. v. United States, 848 F.3d 790, 794 (6th Cir. 2017) (“[I]f a taxpayer has not already had the opportunity to challenge his underlying tax liability, he may do so at the [collection] hearing.”). We therefore reject the taxpayer’s proposed interpretation of Section 6330.
Citing to the IRS interpretation in the regulation in support of its determination that the “or” in 6330 does not create a disjunctive clause seems a funny way to reach a conclusion on a challenge to the regulation. Maybe the meaning of the statute is plain from its wording, but the regulation should not offer support for the reason for not overturning it.
So, the next taxpayer to raise this argument needs to do so before the motion to reconsider stage and needs to do so in a circuit other than the Sixth Circuit. We do not need to wait to know what the Tax Court will do with the argument. The question is whether someone can persuade a circuit court that the “or” creates two separate paths to a merits hearing.