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)

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