Tax Court Preserves Taxpayer Protections against Arbitrary and Capricious Appeals Rulings

us_tax_courtIn Buczek v. Commissioner, 143 T.C. 16 (2014), the Tax Court granted the IRS’s motion to dismiss for lack of jurisdiction under IRC § 6330(g) where the taxpayers offered only frivolous arguments as the basis for a Collection Due Process (“CDP”) hearing.  Of note, however, is the Court’s refusal to overturn the Tax Court’s decision in Thornberry v. Commissioner, 136 T.C. 356 (2011), which also involved a IRC § 6330(g) determination.

In November 2013, the IRS sent the taxpayers a final notice of intent to levy to collect unpaid Federal income tax and interest assessed for 2009.  The taxpayers timely filed Form 12153, Request for a Collection Due Process or Equivalent Hearing, in response.  The taxpayers did not check any boxes on the Form 12153 but wrote “common law hearing” on the form where they could state another grounds for requesting a CDP hearing.  The taxpayers submitted seven additional pages with the Form 12153, including a copy of the notice of intent to levy stamped with common tax protestor arguments, “Pursuant to UCC 3-501”, “Refused from the cause”, “Consent not given”, and “Permission DENIED”.

The IRS sent the taxpayers a letter in January 2014 requesting that the taxpayers amend their CDP hearing request to provide a legitimate reason for the hearing or to withdraw the request.  The taxpayers did not timely respond to this letter.  In March 2014, the IRS sent the taxpayers a letter informing the taxpayer that the IRS was disregarding the taxpayers’ CDP request under the authority of IRC § 6330(g).

The taxpayers attached the notice of disregard letter to their Tax Court petition in response to a notice of deficiency for a different tax year.  The Court dismissed the case for lack of jurisdiction and ordered the notice of disregard letter be filed as an imperfect petition for the taxpayers’ 2009 tax liability.  The taxpayers filed an amended petition in May 2014 pursuant to an order by the Court.  The taxpayers’ petition and subsequent pleadings complained about the conduct of an IRS agent, not the appeals officer that sent the notice of disregard letter, and did not raise any “justiciable issue with regard to the Appeals Office’s disregard of his hearing request or its determination to proceed with the collection of his unpaid income tax liability for 2009.”

In June 2014, the IRS filed a motion to dismiss for lack of jurisdiction asserting that the Court does not have jurisdiction when a disregard letter is issued under IRC § 6330(g).  The motion to dismiss was contrary to the Court’s decision in Thornberrywhich held that while IRC § 6330(g) denies further administrative or judicial review of the portions of a CDP request that the Appeals office deem frivolous, the statute does not deny judicial review of that determination.

Judge Dawson, writing for the court, denied the IRS’s request to overturn Thornberry, distinguishing this case on its facts.  Unlike the taxpayers in Thornberry, who presented four valid grounds for a CDP hearing under IRC § 6330(c)(2), here the taxpayers’ CDP request did not make any assertions that would raise a legitimate issue under IRC § 6330(c)(2).  The taxpayers did not challenge the appropriateness of the collection action, request collection alternatives, or properly contest the underlying tax liability.  Also, unlike Thornberry, where the taxpayers’ CDP request and petition properly raised issues under IRC § 6330(c)(2)(A) and (B), here the taxpayers did not raise any valid issues that could be considered in a CDP hearing.

Judge Dawson granted the IRS’s motion to dismiss for lack of jurisdiction based upon his determination the the taxpayers did not make a proper request for a CDP hearing and thus the CDP request was properly treated as if it was not submitted.  However, Judge Dawson clearly states that the Court’s review of IRS determinations under IRC § 6330(g) are important in protecting taxpayers from determinations that are “arbitrary and capricious” and did not overturn Thornberry.

Read the full opinion here: Buczek v. Commissioner, 143 T.C. No. 16 (2014)

Tax Court: Challenge to Underlying Liability Does Not Extend Period for CDP Appeal

In a rare division opinion supplementing a previous division opinion, the Tax Court offers a primer on the definition of “deficiency” and its meaning for jurisdictional purposes. This opinion is not for the meek of heart nor for those not ready to tackle the nuance of Tax Court jurisdiction.

In response to a motion to certify an interlocutory appeal, Judge Joseph Gale lays out the statutory requirements for the court’s jurisdiction over deficiencies as well as collection actions. He also discusses the statutory grounds for variances in the 30-day response required for collection due process review (e.g., innocent spouse relief, interest abatement) and other non-deficiency actions (e.g., employment taxes, frivolous return penalties) in U.S. Tax Court.

The court did not certify the interlocutory appeal and affirmed the proposition that a challenge to the “underlying tax liability” in a collection due process hearing does not extend the period in which to file a petition for review with the Tax Court.

Read the entire opinion here:
Gray v. Commissioner (Gray II), 140 T.C. No. 9 (2013)

Tax Court Collection Due Process Standard of Review Upended by the First Circuit

In an decision that could dramatically change collection due process, the First Circuit Court of Appeals held that the standard of review applied to collection due process cases by the Tax Court for more than a decade is incorrect. In Dalton v. Commissioner, No. 11-2217P-01A (1st Cir. June 20, 2012), the First Circuit Court of Appeals reviewed a division opinion of the Tax Court which found that the IRS Office of Appeals abused its discretion when it sustained a collection action based on an incorrect application of the law. The First Circuit reversed the Tax Court on the basis that it applied an “improper standard of review” with respect to the Office of Appeals determination. The First Circuit held that the Tax Court’s review is limited to whether the Office of Appeals’ determination was “reasonable,” not necessarily whether or not it was correct.

In Dalton v. Commissioner, 135 T.C. 393 (2010), the Tax Court reviewed a collection due process determination applying the standard of review established in Sego v. Commissioner, 114 T.C. 604 (2000). Sego requires that

where the validity of the underlying tax liability is
properly at issue, the Court will review the matter on a de
basis. However, where the validity of the underlying
tax liability is not properly at issue, the Court will
review the Commissioner’s administrative determination for
abuse of discretion. Sego, at 610.

The Tax Court applied the second prong of Sego finding an abuse of discretion in the Appeals Officer’s incorrect application of the law. The underlying legal question was whether or not petitioners owned property held in a trust and which body of law, state, federal or both, should be applied to answer that question.

The Court of Appeals did not address Sego in its opinion. The appellate court, however, did hold that the role of the Tax Court in reviewing collection due process determinations was

to decide whether the IRS’s subsidiary factual and legal determinations are
reasonable and whether the ultimate outcome of the CDP proceeding
constitutes an abuse of the IRS’s wide discretion.

The First Circuit, by Senior Judge Seyla, explained that a more deferential standard of review was “consistent with the nature and purpose of the CDP process” and that the question for the reviewing court was not the correctness, or not, of the determination but rather whether the determination “falls within the universe of reasonable outcomes.” The Court further explained that regardless of whether the Appeals determination was based on a factual finding, a legal question, or a mixed question of law and fact, the reviewing Court’s role was only to evaluate the reasonableness of the determination.

The First Circuit’s opinion is the fourth milepost in petitioners’ legal saga since their first encounter with the IRS Office of Appeals. In 2006, petitioners requested review of their collection due process determination when the Appeals Officer rejected their offer in compromise. Respondent moved for summary judgment. Petitioners’ responded maintaining that their offer in compromise should have been accepted because there was doubt as to the collectibility of tax and the appeals officer erred by attributing assets to petitioners that they did not own. The Tax Court denied respondent’s motion in a memorandum decision and remanded the case to Appeals for a redetermination on the applicable law. Dalton v. Commissioner, T.C. Memo. 2008-165. Following the second review by the Appeals Officer, the case returned to the Tax Court on petitioners’ motion for summary judgment. The IRS filed a response to petitioner’s motion for summary judgment and lodged a second motion for summary judgment. In the reviewed opinion noted above, the Tax Court found that the Office of Appeals’ decision to continue with the collection action was an abuse of discretion because the Appeals Officer rejected petitioners’ offer in compromise on erroneous legal grounds. Dalton v. Commissioner, 135 T.C. 393 (2010). The Dalton’s final encounter in the Tax Court resulted in a memorandum opinion awarding them legal fees. Dalton v. Commissioner, T.C. Memo. 2011-136. All three decisions in favor of the Dalton’s were reversed by the First Circuit.

Read the First Circuit’s opinion here:
Dalton v. Commissioner, No. 11-2217P-01A (1st Cir. June 20, 2012)

Tax Court: Untimely CDP Petition Confers Jurisdiction for Interest Abatement Claim

In an opinion that may be instructive to tax practitioners reluctant to advance alternative theories for relief, the Tax Court held that it had jurisdiction to review the denial of a request for interest abatement that arose out of an untimely petition for review of a collection due process hearing.

The pro se petitioner had a collection due process hearing. In the hearing, petitioner challenged the underlying tax liability, renewed a claim for innocent spouse relief and requested abatement of interest. The Appeals Officer upheld the collection action against the petitioner in a written determination which also included a final determination as to petitioners request for interest abatement. Petitioner petitioned the Tax Court for review of the collection determination but failed to file the petition within the 30 day statute of limitations under Section 6330(d). Respondent filed a motion to dismiss for lack of jurisdiction. Petitioner appeared at the trial session to challenge respondent’s motion and raised the same claims in a hearing before the court that she raised in the appeals hearing. The Court heard petitioners claims and gave the parties an opportunity to brief the issue. On brief, petitioner once again raised all three claims that she made at the Office of Appeals.

Upon review of the parties’ arguments and the Appeals Officer’s case activity file, the Court found that it did not have jurisdiction to review the merits of the collection action and granted respondent’s motion to dismiss on that claim. However, the Court found that the final determination on the collection action also constituted a final determination as to petitioner’s request for interest abatement under Section 6404. The statute of limitations for review of a request for interest abatement is 180 days. The Court held that even though the petition was not timely to grant jurisdiction under Section 6330 it was timely as a request for review of an interest abatement and conferred jurisdiction upon the Court independent of the collection due process proceedings. The Court ordered further proceedings to determine whether respondent’s determination on the interest abatement claim was an abuse of discretion.

Read the opinion here:
Gray v. Commissioner, 138 T.C. No. 13 (2012)

Tax Court: Collection Due Process “Disregard” Letter is Sufficient for Jurisdiction

The Tax Court, in a reviewed opinion authored by the indefatigable Judge Dawson, holds that a decision letter from the Office of Appeals disregarding the frivolous arguments of a taxpayer, along with other legitimate arguments, is a determination under Section 6330(d)(1) for jurisdictional purposes.

Read the opinion here:
Thornberry v. Commissioner, 136 T.C. No. 16 (2011)