3rd Circuit Holds Tax Court Has Jurisdiction to Determine Overpayments in CDP Proceedings (3/29/24; 3/30/24)

In Zuch v. Commissioner,97 F.4th 81 (3rd Cir. 3/22/24), CA3 here and GS here, the Court starts the opinion of the Court as follows:

When Congress grants taxpayers the right to challenge what the Internal Revenue Service says is owed to the government, Congress's will prevails. The IRS cannot say that such a right exists only under the circumstances it prescribes. That ought to go without saying, but this case requires us to say it.

This signals that the rest of the opinion is not favorable to the IRS.

I infer from Judge Jordan’s Wikipedia page here and even this opinion with some hyperbole that Judge Jordan is not an IRS skeptic like some other judges; Judge Jordan’s appointment to the Court of Appeals was unanimous (91 for, 0 against, and 9 not voting (including then Senator Biden). See Senate Vote Summary, here.

So what is Judge Jordan’s disaffection with the IRS? The Court summarizes in the next two paragraphs:

The IRS sent Jennifer Zuch a notice informing her that it intended to levy on her property to collect unpaid tax. She challenged the levy, arguing that she had prepaid the tax. The IRS Independent Office of Appeals (the "IRS Office of Appeals") sustained the levy, and Zuch petitioned the United States Tax Court for review of that decision. While the issue was being litigated in that Court over several years, the IRS withheld tax refunds owed to Zuch and applied them to what it said was her unpaid balance, satisfying it in full. When, according to the IRS's accounting, there was no more tax to be paid, the IRS filed a motion to dismiss the Tax Court proceeding for mootness, and the Court granted the motion.

Because Zuch's claim is not moot, we will vacate the dismissal and remand this matter to the Tax Court to determine whether Zuch's petition is meritorious.

Judge Jordan starts with an overview of basic tax procedure of how taxpayers may litigate their tax liabilities in the Tax Court deficiency proceedings and CDP proceedings to challenge an assessment. (Slip Op. 4-7.) Judge Jordan says that the CDP proceeding, which he calls a “scheme,” “makes good sense in light of potential due process concerns.” Those concerns, he says are to give the taxpayer an opportunity for challenge before property is seized.

I should note that his reference to “scheme” could suggest something underhanded but that does not appear to be his use here. See e.g., Why you shouldn’t mix up your schemes (Columbia Journalism Review 6/13/16), here (illustrating the confusions about “scheme” with the “scheme” involved in the Panama Papers, a much discussed tax topic and noting that “Scheme” is a “Janus word,” or a “contranym” or “contradictanym,” with two opposite meanings;” but usually  determined by the hearer in the context.). Judge Jordan’s context here for “scheme” is merely to show the methods of contesting liability, without any suggesting of disaffection of the, shall we say, “scheme.”

Immediately after stating these two different judicial processes, Judge Jordan than holds forth on “Unpaid Tax Versus Tax Liability.” (Slip Op. 7-9, footnote omitted)

           Section 6330(c)(2)(B) of the Internal Revenue Code raises an important question: What is the difference between unpaid tax and tax liability? There must be some distinction, or else the language in §6330(c)(2)(B) allowing a challenge to liability would be superfluous. Congress confined the right to raise a liability challenge to taxpayers who did not have a previous opportunity to do so, while at the same time granting all taxpayers in a CDP hearing the ability to raise issues relating to the unpaid tax or proposed levy. Hence, it is evident [*8] that Congress intended to grant to qualifying taxpayers some right in addition to the rights given to all taxpayers in a CDP hearing. See infra section II.C.3. On that basis, “unpaid tax” cannot be synonymous with “tax liability.” See also United States v. Yung, 37 F.4th 70, 79 (3d Cir. 2022) (“Normally, where Congress uses different words, we read those words to have different meanings.”).

Citing West’s Law Dictionary to explain further, Judge Jordan then illustrates in an example (Slip Op. 8):

Tax liability is therefore the net amount owed to the IRS: If you owe $20 to the IRS and have prepaid that $20, your tax liability — at least on these simple facts — is $0. Understanding “tax liability” in this way accords with the plain meaning of “liability.” To say, “I have no liability” is to say, in effect, “I owe nothing.” A “challenge” to liability under §6330(c)(2)(B) means the taxpayer disputes what the IRS says he owes.

With his construct, Judge Jordan then describes “unpaid tax” for purposes of the statutes in issue. (Slip Op. 8.)

Strictly speaking, then, unpaid tax means something different than tax liability. For example, assuming that the IRS has assessed $20 in taxes, your unpaid tax is just that: the $20 the IRS says you owe. But further proceedings can change that number. If a deficiency proceeding or a challenge under §6330(c)(2)(B) in a CDP hearing establishes that the IRS should have credited $5 toward the $20 balance, your liability is $15, and, once fixed by those further proceedings, that sum also becomes your unpaid tax.

I made a note to myself in the margin that these paragraphs do not sound right. The note was to draw my attention back after reading and considering the entire opinion. After reading and considering the entire opinion, I still do not think it sounds right. (See e.g., 2024 Form 1040 p. 2 line 16 describing “Tax” and line 24 describing “Total Tax” after some adjustments such as the childcare tax credit. From that, lines 15-32 describe payments toward the tax liability, including the income tax withheld or paid as estimated tax (which is the $20 in Judge Jordan’s simple example). The tax liability in that example should be $20 in my view.

So, I am not sure of the point that Judge Jordan is making. I don’t think readers or even I would be further enlightened by digging any deeper into the distinction Judge Jordan is trying to make (and, I confess, he may have made and I just didn’t appreciate his point).

Judge Jordan then moves to the facts which, in relevant summary include

• Estimated tax payments aggregating $50,000 (aggregate) for their joint liabilities for the years 2010 and 2011
• The IRS applied the $50,000 to Zuch’s husband’s liability from a late-filed married filing separate return; apparently the husband did not claim the $50,000 as a credit on his late filed returns, suggesting that he may have recognized that Zuch was entitled to the estimated tax payment.
• The IRS and the husband enter an offer in compromise (OIC) with the husband. The treatment of the $50,000 estimated tax payments in reaching the OIC is unclear, but it does appear that the IRS treated the $50,000 as the husband’s payments in reaching its decision to approve the OIC. In other words, the husband benefited from the estimated tax payments.
• The net of that is that the IRS correspondingly denied Zuch the benefit of the $50,000 estimated tax payments, so that her account showed a tax due for which some collection action was noticed, thus giving her a right to a CDP proceeding administratively and then in the Tax Court.
• Zuch filed a CDP proceeding with the IRS and then in the Tax Court contesting whether the IRS had improperly not credited her with the benefit of the $50,000 aggregate payment.
• Then, while during the long period Zuch was contesting the alleged improper application to her husband of the $50,000 estimated tax payment, the IRS credited unrelated refunds otherwise due Zuch to eliminate her tax liability for 2010 and 2011 and then moved to dismiss as moot the CDP proceeding involving whether Zuch should have been credited with the $50,000 estimated tax payments. The IRS claimed that, because of the credit of Zuch’s refunds to the unpaid assessments, there was no unpaid liability to which collection action (lien or levy) could apply. (In fact, if Zuch were entitled to credit for the $50,000 estimated tax payments, she would have had a $50,000 overpayment which the IRS could (perhaps should) have refunded, but the IRS took the position that the estimated tax payments were credited to the husband’s separate tax liability.)
• The Tax Court dismissed the CDP proceeding as moot because the full payment of the unpaid assessments with Zuch’s unrelated refunds meant that the IRS could not take collection activity. Taxpayer appealed arguing that the Tax Court could still consider whether the $50,000 had been improperly credited to her husband which, if so, would mean that she is entitled to the resulting overpayments as refunds based upon the crediting of the unrelated refunds. This raised the issue of whether, in a CDP proceeding, the Tax Court can do anything other than determine the propriety of the action being contested (lien or levy); i.e., can it determine an overpayment and take some action requiring the IRS to refund the overpayment.

From these facts, Judge Jordan then says (Slip Op. 16):

           The dispute comes down to this: whether, in the midst of litigation over a contested tax liability, the IRS is free to deprive the Tax Court of jurisdiction by the expedient of taking the taxpayer's tax refunds and applying them to that liability. The answer is no. The IRS's arrogation to itself of the power to eliminate pre-deprivation judicial review of liability by seizing a taxpayer's money to cover a disputed debt is not supported by relevant statute, common law (incorporated into statute), or mootness principles.

Setting aside the polemics about the equities, the issue is more subtle than that because the ultimate issue is one of jurisdiction which generally must be clearly conferred. Thus, within that jurisdictional issue are the following sub issues, some overlapping:

• Can the Tax Court in a CDP proceeding do anything for the taxpayer more than determine that the collection activity is inappropriate? 
• what more can it do than order the IRS to cease collection activity?
• Can the Tax Court determine that, based on the proper allocation of the $50,000 estimated tax payment, Zuch had overpaid her tax liability thus entitling her to a refund? and 
• would the latter be, to the extent of the overpayment determined, an advisory opinion without remedy except in its moral suasion to get the IRS to act?

The balance of the opinion works through the brush of legal issues raised by those questions. Suffice it to say, accepting Judge Jordan’s framing of the facts as creating strong equities for Zuch, it is not surprising how he frames the law to give her the opportunity for relief. Basically, Judge Jordan says that the Tax Court had the authority in a CDP proceeding to consider her claims that (i) the $50,000 estimated payments should be credited to her and (ii) the Tax Court can give her some relief, at a minimum by pronouncing that she overpaid her tax liability which would put moral pressure on the IRS to refund the determined overpayment.

Judge Jordan seems to operate on the factual assumption that Zuch was entitled to be credited the $50,000 aggregate estimated tax payments. In Zuch’s CDP proceeding at the administrative level, the IRS determined that Zuch was not entitled to be credited with those estimated tax payments. The Tax Court never made a factual determination that Zuch was entitled to be credited  the estimated tax payments because, it concluded, even if Zuch were so entitled, the Tax Court could not determine or order a refund in a CDP proceeding. But, as I read Judge Jordan’s opinion, he determines that mixed question of fact or law in Zuch’s favor. See e.g., Judge Jordan’s claim (Slip Op. 29)s:

In short, because the IRS's setoffs were invalid and without legal effect, Zuch's claims are not moot, although Zuch's money is, at least for the time being, in the government's pocket.”

If the bold-face claim were true as he states it, there would be no need for a remand other than to direct the Tax Court to determine the overpayment that Judge Jordan for the Court has determined and, directly or indirectly, take action that results in the IRS ordering a refund of the improperly withheld unrelated refunds.

All of which is to say that, God bless him, Judge Jordan speaking for the panel has his (or the panel’s) heart(s) in the right place on the facts as he lays them out. I am just not sure that his discussion logically follows from the law as I understand it. So, even though I agree that Judge Jordan gets the bottom line right in an equity sense, I am not sure that the case should be read as pronouncing general authority in in a CDP proceeding for the Tax Court to determine overpayments and take action that will require or motivate the IRS to refund the overpayments thus determined.

Perhaps a legislative fix could work. Alternatively, the IRS could I suppose issue regulations adopting that interpretation, but I am not sure that even with expansive application of Chevron an interpretation affecting the Tax Court's jurisdiction would be authoritative.

Added 3/30/24 @ 1pm:

I have revised the working draft of the Federal Tax Procedure Book 2024 editions (to be published in August 2024) as follows:

1. I deleted the following paragraph on p. 746 (top of page) of the 2023.2 Practitioner (deletion indicated by strikeout):

Finally, the jurisdiction in CDP cases is only with respect to the collection action in issue. The taxpayer may not raise in the CDP case an argument that, not only does he not owe the tax, but he is entitled to a refund.3302
   n3302 See Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006); and McLane v. Commissioner, 24 F. 4th 316 (4th Cir. 2022).

I have substituted the following (substitution indicated in red font):

Finally, there is a conflict among the Circuits on the issue of whether 
(i) the Tax Court’s CDP jurisdiction making determinations that affect the collection action (lien or levy) in issue; fn1 or 
(ii) in cases where the Tax Court considers and determines the underlying tax liability in the CDP proceeding, the Tax Court may determine an overpayment and thus determine (a) the taxpayer’s entitlement to a refund and (b) even order the refund thus determined. fn2
   n1 See Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006); and McLane v. Commissioner, 24 F. 4th 316 (4th Cir. 2022).
   n2 Zuch v. Commissioner, ___ F.4th ___, ___, 2024 U.S. App. LEXIS 6827, 2024 WL 1224410 (3rd Cir. 2024) (“Greene-Thapedi‘s holding that a taxpayer may only challenge her underlying tax liability if there remains an unpaid tax or a proposed levy is erroneous.”). Zuch quotes Michael I. Saltzman & Leslie Book, IRS Practice & Procedure ¶ 14B.16[4][a] (West 2023) for the proposition that the Tax Court has authority to determine the correct tax liability which is separate from whether the Court may order a refund.

Added 3/20/24 2:00pm:

If Congress were to add specific authority to determine overpayments and order refunds, should it also order jurisdiction to determine deficiencies (amount of tax owed less amount(s) previously assessed) that can then be assessed?

* Google Scholar posts Court of Appeals opinions with a temporary URL; later, after the Federal Reporter citations (e,g., now F.4th) are determined, GS posts a permanent URL with the permanent GS link. I sometimes (but not always) update to the permanent link. The Circuit Court slip opinions are usually permanent links.