Last week in Moosally v Commissioner, the Tax Court remanded a collection due process (CDP) case to Appeals, essentially finding that Appeals failed to give a taxpayer an impartial hearing. In light of the issue’s importance, I write a two-part post. The first post describes an earlier case involving a similar issue, Cox v Commissioner. While six years old, Cox is one of a handful of cases invalidating a regulation and the only circuit court case directly addressing impartiality in this context. The second post will consider the more recent Moosally case. That case highlights the Tax Court’s views on impartiality, and also allows us to consider the thorny issue of appellate venue in CDP cases, an issue we have discussed before.
This and the next post are somewhat technical. They shed light on differing institutional perspectives on what procedural protections are necessary to generate a fair CDP hearing, an issue with broad implications. Not surprisingly, IRS tends to take a more narrow view as to what is necessary to get to an impartial hearing, and taxpayers and some courts are pushing back.
Some context, description and analysis follows.
A Little Context
In creating CDP, Congress was concerned with providing administrative and judicial oversight over IRS collection. Congress tagged Appeals with the role of administrative overseer, and in 2006 Congress gave the Tax Court exclusive trial-court jurisdiction for CDP (the original legislation split court review between district courts and the Tax Court).
Within CDP, Congress took specific steps to ensure that Appeals review was independent, both in reality and in perception. One main guarantor of independence is Section 6320(b), which requires that a CDP hearing be before an “impartial” Appeals employee. To that end, the statute provides that the Appeals employee assigned to the case must have had no prior involvement with respect to the unpaid tax prior to the first CDP hearing for that tax. The statute allows for a taxpayer to waive that prohibition, but there is no further statutory clarification on what is meant by prior involvement.
The regulations provide that “[p]rior involvement by an Appeals officer or employee includes participation or involvement in a matter (other than a CDP hearing held under either section 6320 or section 6330) that the taxpayer may have had with respect to the tax and tax period shown on the CDP Notice.”
In essence, the regulations narrow the statutory prohibition. By adding the term in a matter, the regulations add another condition that the statute does not require. Under the regulations’ approach, an Appeals employee can have had prior exposure to a taxpayer’s tax and tax years in a later CDP case if that exposure was not tied to a particular matter.
The Tenth Circuit Disagrees with the IRS and Tax Court on Impartiality
In 2008, the Tenth Circuit in Cox v Commissioner concluded that the regulatory restriction tethering an Appeals employee’s participation or involvement to a matter was invalid. In Cox, the AO was considering in a CDP case an OIC for the 2000 year. During review of the OIC, the AO noted that the taxpayer did not file for 2001 and 2002, and the AO said he “solicited” the returns and they were filed “through him.” The AO looked into the 2001 and 2002 years and noted that the taxpayer had lots of income and had made only de minimis estimated payments. In sustaining the rejection of the 2000 OIC, the AO wrote to the taxpayers:
The 2002 return had a liability of $146,460 but only a ridiculously low $1,000 paid as an estimated payment. In light of 2002’s unjustified “optimism” that there would be no significant tax liability, and the established fact that significant income has been earned this year, I cannot credit the idea that this year’s decision to make no estimated tax payments is based on a sound financial analysis. . . . You have not paid your taxes for the last four years (1999-2002) and it looks like you are now adding a fifth. . . . Nothing I have been provided removes the big picture of high income taxpayers who did not pay their taxes during the fat years and now facing leaner years you wish to maintain a high standard of living and continue to have the government fund business through unpaid taxes. You already have an involuntary loan from the government of $514,000 and we are unwilling to loan more, in fact, we are going to collect some overdue payments by levy if voluntary payments are not made. I don’t really expect you can come up with $300K in cash to make full payment on 1999 & 2000 (or the $514,000 to pay all liabilities) . . . .
Eventually, the taxpayer filed a separate CDP request for the 2001 and 2002 years, where he also requested a collection alternative for the larger combined liabilities. Appeals assigned the same Appeals Officer to the new CDP hearing. The taxpayer requested that Appeals assign a new Appeals employee to the case. After conferring with his supervisor, the Appeals Officer on the earlier case concluded that he was not required to recuse himself from the later case as there was “no compelling reason to make a reassignment since it was not technically required” and “would do nothing but create delay.”
The same Appeals Officer considered the new request for an OIC and in a new notice of determination rejected the OIC. The taxpayer appealed that determination to the Tax Court and argued that the AO should not have been assigned the 2001 and 2002 matter in light of his prior involvement in the 2000 CDP hearing. The remedy he requested was a remand before a new Appeals employee.
IRS in its brief argued that there was no prior involvement or participation, because “the very notion of ‘involvement’ by an ‘officer or employee’ of the Appeals Office has no meaning if the specified tax and tax period have never previously been the subject of collection activity within the purview of Appeals.” (recall that in the earlier CDP case the later years were only addressed because the Appeals Officer noted that the taxpayer had not filed the later-year returns).
In Cox, the Tax Court essentially accepted the IRS’s approach, finding that prior involvement “does not arise where consideration of later years was peripheral to a proceeding the subject of which was an earlier year or years” and was not the subject of, i.e., was not directly in dispute in, a proceeding before the Commissioner.
On appeal, the Tenth Circuit disagreed with the IRS and the Tax Court:
[I]t is not relevant to our inquiry whether [the Appeals Officer] was biased by his prior involvement with the taxpayers’ 2001 and 2002 liabilities, all that is required for his recusal is that he in fact did have prior involvement with those liabilities. His consideration of those liabilities during the CDP hearing for 2000 was a material factor in his decision and constitutes prior involvement within the meaning of I.R.C. § 6330(b)(3). Thus, the taxpayers are entitled to a collection due process hearing before an impartial appeals officer in accordance with the statute.
The dissent tied a recusal requirement to involvement that led to a determination on the merits. The majority rejected that approach, looking to see if prior involvement was both substantive and material:
The dissent’s insistence that an Appeals Officer is not required to recuse himself pursuant to section 6330(b)(3) unless he has previously made an official determination about whether a liability is accurate or collectible adds a requirement not found in the statute’s language. We think that once an Appeals Officer has substantive and material involvement with a taxpayer’s liability, regardless of whether the liability is the liability currently under official review by the Appeals Officer, he has had prior involvement with respect to that liability within the meaning of section 6330(b)(3). (emphasis added).
Cox is a challenging case on a few levels. It is over six years old. As a pre-Mayo case, it reflects a less deferential approach to agency guidance than in the post-Mayo world. It does not even cite Chevron, but its analysis is a Chevron-type analysis, concluding that the statute’s language is clear and the IRS could not read ambiguity into the statute. Moreover, Cox considered a different version of the CDP regs that did not on their face connect involvement to a matter, though in dicta (footnote 10), it stated that its analysis warranted invalidating the current regulations, as the IRS’s application of older regulations mirrored the current regulation’s approach.
In wrestling with the statutory language, IRS and Tax Court considered the statute’s purpose in a narrow way. As the Tax Court noted in its opinion from 2006(p. 25), it seems that in fashioning the no prior involvement rule, Congress likely was thinking about situations where an Appeals Officer may have heard a pre-assessment appeal involving issues of liability. There is little doubt that the statute would preclude that Appeals Officer from hearing a CDP case involving the same tax and years—a situation that may have been more likely back in 1998 before Appeals introduced Settlement Officers to essentially hear most of the non-liability CDP cases. In RRA 98, Congress also carved out from the no involvement rule an Appeals employee who heard an earlier CDP case involving the same year and tax—reflecting a recognition to expedience that the Tax Court thought significant. From that starting point, in treating the AO’s actions as not constituting impermissible prior involvement, Tax Court and IRS deferred to principles of expedience and efficiency. There is no doubt that requiring a new Appeals employee to get up to speed on the taxpayer’s facts slows down the process.
The Tenth Circuit’s view of the statute’s purpose has a very different starting point. Rather than a narrow view of Congress’ purpose in enacting CDP, it connected the issue to broader principles of fairness and more general concepts of due process that extend beyond the confines of Sections 6320 and 6330:
Our conclusion is further supported by the purpose of section 6330, which is to provide taxpayers with similar due process protection “in dealing with the IRS that . . . they would have in dealing with any other creditor.” S. Rep. No. 105-174, at 67. Central to that purpose is the taxpayer’s fundamental right to an impartial appeals officer, no different than the right to an impartial decisionmaker in any other due process context. See Withrow v. Larkin, 421 U.S. 35, 46-47 (1975) (“[A] fair tribunal is a basic requirement of due process. This applies to administrative agencies which adjudicate as well as to courts. Not only is a biased decisionmaker constitutionally unacceptable but our system of law has always endeavored to prevent even the probability of unfairness.”) (citations and internal quotations omitted). Limiting the definition of “no prior involvement” to Treas. Reg. § 301.6330-1(d)(2) impermissibly narrows that protection.
The Tenth Circuit and Tax Court’s differing perspective is intriguing. In part, I believe the Tax Court’s 2006 Cox decision reflects a general skepticism that the tax bar had of CDP. The Tenth Circuit situates CDP as part of a broader framework of protections, perhaps due to time passing but also probably relating to its generalist approach to tax cases, which allowed it to view CDP in a broader context. As to the former reason, over time, there is increasing recognition that CDP, while imperfect, plays a valuable role in the tax system. Its limited review of collection practices that were largely immune from judicial oversight has given taxpayers a way to seek redress from agency wrongs. A reading of CDP cases where the Tax Court has not sustained collection determinations leads to an appreciation for how the IRS in administering its awesome powers as a creditor can sometimes overlook taxpayer rights. Absent CDP, those taxpayers would be treated even worse and there would be little chance of correcting agency error. I suspect that initially the Tax Court greeted CDP with less than enthusiasm. Perhaps now that differs as judges sees that they can play a valuable institutional role and check for agency abuses.
Given that following RRA, courts now play a crucial role as institutional protector against arbitrary IRS collection action, the Tenth Circuit decision in my view properly situates the issue. The IRS and Tax Court’s efficiency and expediency concerns should in close cases be outweighed by interpretations that hew to broader fairness concerns. I do not mean to suggest that the courts should turn their back on the IRS’s concerns of being allowed to efficiently administer its collection review powers. Cox suggests that some involvement will not trip the impartiality wire. If the involvement is neither substantive nor material, the Appeals employee should not be precluded from the later case.
For example, in Cox, I suspect that if the Appeals Officer had merely acknowledged that the later returns were delinquent, requested that the taxpayer file those returns, and received the filing of the later returns, the court would have held for the IRS. Instead, in Cox, the Appeals Officer subjectively commented in writing on the implications of those later returns (recall the letter cited above where the AO called the later year’s estimated payments “ridiculously low” and the AO criticized the taxpayer’s unfounded financial optimism). That made it difficult for the court to frame the Appeals Officer’s involvement as immaterial and not substantive, and from the taxpayer’s perspective likely contributed to him feeling that the AO had prejudged his case.
When I return in Part 2 of this post, I will look at last week’s Moosally case, which affords us the chance to consider some of the concerns raised in Cox. While Moosally does not turn on Cox, Cox is on the books, standing in contrast to the Tax Court and regulatory view of impartiality. The issue is unlikely to go away. The case raises questions as to validity of the regulations in cases appealable to other circuits, and affords taxpayers an avenue to challenge collection determinations when an Appeals employee has had some involvement with a prior matter.