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What is a Prior Opportunity to Contest the Liability for Purposes of Collection Due Process?

Posted on Nov. 3, 2016

Today, we welcome back guest blogger A. Lavar Taylor.  Lavar’s practice is based in Southern California; however, he handles tax cases across the country.  His latest challenge involves representing taxpayers seeking the opportunity to litigate the merits of their liability in the Tax Court in the context of Collection Due Process (CDP) cases.  The Tax Court has followed the IRS’s lead in its interpretation of prior opportunity to dispute a tax liability.  Both the Tax Court and the IRS deny taxpayers the opportunity to litigate the merits of the underlying liability in many circumstances in which the taxpayer had the opportunity for an administrative hearing even though that administrative hearing with Appeals could not lead to a court hearing.  Because of Lavar, three Circuit Courts of Appeal will soon hear oral argument on the question of what is a prior opportunity to dispute a tax liability which bars a taxpayer from challenging the merits of the underlying tax liability in a collect due process tax case under IRC 6330(c)(2)(B).  Last year when I wrote a new chapter on CDP for the Saltzman and Book treatise, IRS Practice and Procedure, I was struck by the number of unresolved CDP issues that still remain.  I consider this issue the most vexatious of the unresolved issues and the one where the regulations deviate to the greatest extent from the intent of the statute.  We will closely follow Lavar’s efforts and we have written on this before here and here.  If he can succeed in pushing back on the current interpretation of prior opportunity, he will open up for many taxpayers the chance to litigate large liabilities without the need to pay to litigate.  Keith

Back in February of this year, Carl Smith noted in a guest post  that three Circuit Courts of Appeal would be considering the question of the circumstances under which a taxpayer is barred from challenging the merits of the underlying tax liability in a Collection Due Process case under section 6330(c)(2)(B) because of a “prior opportunity” to contest the underlying liability.  Our firm was retained to handle these appeals.  Briefing in all three cases is now complete.  Oral argument in the 7th Circuit case is set for November 9.  Oral argument in the 10th Circuit case is set for November 14.  Oral argument in the 4th Circuit case is set for the last week of January.

This issue is an important one.  For taxpayers who lack the resources to pay the disputed liability in full and pursue a suit for refund in District Court or the Court of Claims, particularly those taxpayers against whom the IRS may assess (or has already assessed) taxes and/or penalties without resorting to the deficiency procedures, resolution of this issue could determine whether they will ever be able to challenge in court the merits of those taxes or penalties. (The prior statement ignores the fact that taxpayers theoretically can file bankruptcy and commence an objection to the IRS’s proof of claim or an adversary proceeding under section 505 of the Bankruptcy Code.  Bankruptcy is not a feasible option for many taxpayers, however.)

For those taxpayers who have the means to both pay the disputed liability in full and litigate the merits of the liability in a refund suit in District Court or the Court of Claims, resolution of this issue will decide whether they can ever challenge the disputed liability in the Tax Court, which is procedurally more “taxpayer friendly” than District Court or the Court of Claims and is far less expensive in which to litigate than either of these other two fora.

The parties’ briefs are lengthy, although none of the attorneys involved on either side were paid by the word. The briefs are lengthy because resolving this issue in a proper manner requires a detailed knowledge of tax procedure that most appellate Judges lack.  I’m not going to summarize the briefs here, but copies of our opening brief, the government’s responding brief, and our reply brief in the 7th Circuit case can be found here, here, and here.

If you have the time, I strongly recommend reading the briefs.  They contain a number of surprises.  Of particular interest is the fact that the government is arguing that the taxpayers in these three cases are also barred by section 6330(c)(4) from challenging the merits of the liabilities.   This is a new development.  Section 6330(c)(4) has previously been interpreted by the IRS Office of Chief Counsel as only applying to collection-related issues, not to liability-related issues.  IRS Chief Counsel’s prior position, however, has not prevented the Department of Justice from arguing that section 6330(c)(4) prohibits the taxpayers-appellants in these three cases from challenging  the merits of the underlying liabilities.   There are other surprises in the briefs as well, but I leave it to the readers of this blog post to discover them on their own.

The fact that three Courts of Appeal will be considering these issues simultaneously creates the possibility of a Circuit split.   Indeed, the “split” could even be a “fracture,” with the possibility of each Circuit going its own direction.  Of course, we hope for a unanimous reversal of the Tax Court by all three Circuits.

The last interesting point is that I will get to spend Election Day in Chicago.  Having grown up in downstate Illinois, I’m familiar with the unofficial state slogan of Illinois, which is “Vote Early, Vote Often.”  I jokingly suggested to one of my colleagues that, having voted early here in California, my trip to Chicago might afford me the chance to vote more than once.  He responded that I should check to see whether the records show that I have continuously voted in Illinois since leaving the state almost 40 years ago.  He has a point.  When I’m not busy preparing for oral argument, I will check that out.

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