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Two Circuits Sustain Tax Court’s Inability to Grant Requested Relief

Posted on Feb. 15, 2022

Within the span of a few days the 2nd Circuit and the 4th Circuit each sustained a decision of the Tax Court that it lacked jurisdiction to grant the taxpayer the requested relief. The cases arise out of different sources of the Court’s jurisdiction and deal with different requests yet provide a common theme regarding the limits of the Tax Court’s authority. In McLane v. Commissioner, No. 20-1074 (4th Cir. 2022) the 4th Circuit sustains the Tax Court’s decision that it lacks the ability to order an overpayment refund in a Collection Due Process (CDP) case in which the IRS withdrew its notice of federal tax lien. We blogged the McLane case here following the Tax Court memorandum opinion. In Ruesch v. Commissioner, Dk. No. 20-3493 (2nd Cir. 2022), the 2nd Circuit sustains the Tax Court’s decision that it lacks the ability to determine the underlying tax liability in a passport revocation case. We blogged the Ruesch case here following the Tax Court precedential decision.

Neither opinion provides a lot of reasoning and both opinions appear to leave open the question of whether the Tax Court could still decide the issues if the IRS had not withdrawn the lien or reversed the certification. To the extent the decisions left the door open a crack, that’s the silver lining in cases otherwise disappointing to the taxpayers.

In McLane, the petitioner proceeded pro se in the Tax Court and into the Circuit Court before Daniel Lader of Diruzzo & Company signed on for pro bono representation. Amicus briefs were filed in support of the petitioner by the American College of Tax Counsel and the Tax Freedoms Institute, signaling an issue of some importance to the practitioner community. The issue here was first decided by the Tax Court in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), a case in which the taxpayer also proceeded pro se. The 4th Circuit said the case presented a single issue:

whether, after the Commissioner of Internal Revenue conceded that a taxpayer owed $0 and was entitled to the removal of any lien or levy, the United States Tax Court had jurisdiction to determine that the taxpayer overpaid and order a refund.

Although the IRS sent Mr. McLane a notice of deficiency to his last known address, all parties agreed that he never received it. This fact allows him to contest the liability in a CDP hearing, which he did. He presented enough information to support the losses claimed on his return and the IRS conceded that he owed no taxes for the year at issue. He claimed that he had overpaid, and the IRS argued the Tax Court lacked jurisdiction to hear whether he had overpaid. The Tax Court agreed with the IRS. The 4th Circuit said it would review this decision de novo. After reciting the facts, it states:

When as here, the Commissioner has already conceded that a taxpayer has no tax liability and the lien should be removed, any appeal to the Tax Court of the Appeals Office’s determination as to the collection action is moot.

The Court stated that it could not interpret the phrase “underlying tax liability’ in isolation but must read it in “the specific context in which that language is used.” It then concluded the phrase “does not provide the Tax Court jurisdiction over independent overpayment claims when the collection action no longer exists.”

The glimmer of hope on the issue for future taxpayers seeking a refund in a CDP case is found in a footnote designated with a *. The court says:

Here, we believe it is unnecessary to decide the “[m]ore fundamental[]” question of whether § 6330 ever grants the Tax Court jurisdiction to determine an overpayment or to order a refund given that § 6330 so clearly cannot confer such jurisdiction when no active collection action persists.

Not a lot of reasoning in this opinion with which to work.

In Ruesch, the 2nd Circuit issues a per curiam opinion. Frank Agostino argues the case for the petitioner/appellant. The taxpayer’s underling problems stem from penalties under IRC 6038 for failure to file information returns concerning controlling interests in foreign businesses. She received a CDP notice and timely requested a hearing, but the IRS misplaced her request. Because it thought it had not heard from her, it certified her debt as seriously delinquent tax debt. She filed a Tax Court petition in response to this determination. While her Tax Court case was pending, the IRS discovered her CDP request and reversed her certification to the State Department since its policy was not to certify debt while a CDP matter was pending.

Having reversed the certification, the IRS moved to dismiss her Tax Court petition for lack of jurisdiction and for mootness. The Tax Court granted the IRS motions, determining that IRC 7435 did not authorize it to rule on the merits of the underlying liability and that the case was moot since the IRS had withdrawn certification. She appealed, arguing that the Tax Court should make a determination on the merits of her liability. She argued that the voluntary cessation doctrine should apply to keep her passport claim alive.

The voluntary cessation doctrine provides an exception to mootness if a party can prove that the defendant voluntarily ceases the offending conduct in order to evade judicial review “by temporarily altering questionable behavior.” Connecticut Citizens Def. League, Inc. v. Lamont, 6 F.4th 439, 446 (2d Cir. 2021). The court explains that the doctrine is not absolute. It’s still possible for a case to be moot even if the defendant concedes if the defendant can demonstrate (1) “interim relief or events have completely and irrevocably eradicated the effects of the alleged violation” and (2) “there is no reasonable expectation that the alleged violation will recur.” Here, the Second Circuit agrees with the Tax Court that both conditions are satisfied and affirms the dismissal of the challenge to the certification to revoke the passport as moot. The court indicates that if the IRS, after the conclusion of the CDP hearing, again tries to certify the debt to the State Department for passport revocation, the taxpayer at that time can bring a new Tax Court suit under IRC 7435.

Then, the Second Circuit takes up the issue of the challenge to the underlying liability. It finds that at the time of dismissal she had already received the only relief available, making her claims on this point moot, but in footnote 3 notes that she

may yet have the chance to challenge her underlying liability in court. That liability is currently the subject of an IRS appeals process that has still to run its course. See 26 U.S.C. § 6320. After receiving a final determination through that process, Ruesch will be able, if necessary, to “petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter).” Id. § 6330(d)(1); see id. § 6320(c). If Ruesch continues to object to the IRS’s position regarding her underlying liability, she will eventually have her day in court. For now, however, there is nothing further for our Court or the Tax Court to do.

I am not convinced she will have the opportunity to litigate the merits of her liability in a CDP case. That’s for another day, however. The lesson from this case is that the Tax Court is not the place to go to litigate the merits of the underlying liability if you get into Tax Court because your passport was certified to the State Department.

I don’t expect either of these cases to go beyond the circuit stage at this point. No conflict exists. The cases do not have high administrative importance, which is not to say they are unimportant. However, the issue decided in McLane is headed to the Third and Ninth Circuits, which have never ruled on the issue, in Ahmed, T.C. Memo 2021-142, appeal pending (3rd Cir.) and Brown, T.C. Memo 2021-112, appeal pending (9th Cir.). It will not surprise me to see a few more tries at the appellate level on that issue.

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