Tax Court Rejects Constitutional Challenges to Appeals Office CDP Participation (1/30/25)

In Tooke v. Commissioner, 164 T.C. ___, No. 2 (1/29/25), here * and GS here**, the Court, in a CDP case, rejected taxpayer arguments that (i) Appeals Office participants violated the Appointments Clause of the Constitution and (ii) Appeals Office violated the Separation of Powers requirement of the Constitution. I just provided a nonnuanced summary of the arguments rejected. This blog entry will serve primarily as notice to practitioners and students of the holding, an important one; I copy and paste the Tax Court syllabus which, I think, fairly summarizes the full opinion:

           P filed federal income tax returns for taxable years 2012 through 2017 but did not pay the tax. The Internal Revenue Service (IRS) assessed the tax and separately issued P a Notice of Federal Tax Lien Filing and a Final Notice of Intent to Levy. P timely requested a collection due process (CDP) hearing with the IRS Independent Office of Appeals (Appeals). During the CDP hearing, P raised constitutional arguments that Appeals, and the employees who work therein, serve in violation of the constitutional separation of powers, particularly the Appointments Clause; these arguments were rejected. The Appeals Officer prepared a draft Notice of Determination, which was subsequently reviewed and approved by the Appeals Team Manager.

          Pursuant to I.R.C. § 6330(d)(1), P timely filed a Petition with the Tax Court. During this proceeding, P filed two Motions concerning the constitutional separation of powers and the CDP hearing before Appeals: (1) an Appointments Clause Motion, asserting that the Appeals Officers who conducted the CDP hearing, the Appeals Team Manager who reviewed and approved the Notice of Determination, and the Chief of Appeals (Chief), who the statutory scheme tasks with the “supervision and direction” of Appeals, see I.R.C. § 7803(e)(2)(A), but did not  [*2] participate in the CDP hearing, each serve in violation of the Appointments Clause, see U.S. Const. art. II, § 2, cl. 2; and (2) a Separation of Powers Motion (Removal Power Motion), asserting that Appeals, codified by the Taxpayer First Act, Pub. L. No. 116-25, § 1001(a), 133 Stat. 981, 983 (2019) (codified at I.R.C. § 7803(e)(1)), is a de facto independent agency whose head, the Chief, a position also codified by the Taxpayer First Act § 1001(a), 133 Stat. at 983 (codified at I.R.C. § 7803(e)(2)(a)), is subject to an unlawful removal restriction.

          Held: We reject P’s “root-to-branch” theory of causation. P has not made the necessary showing that the Chief’s tenure affected his hearing and prejudiced him in some way. See, e.g., United States v. Smith, 962 F.3d 755 (4th Cir. 2020); United States v. Castillo, 772 F. App’x 11 (3d Cir. 2019).

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.

Flora Full Payment Rule and the Rough Edges (9/17/15)

In the class we discuss the rule -- called the Flora rule -- that, in order to maintain a tax refund suit, the taxpayer generally must fully pay the amount of the assessment.  See Flora v. United States, 362 U.S. 145 (1960), here.  There are some key nuances to that rule.  I discuss those nuances in the Student edition pp. 382-384 and in the practitioner edition pp.  545-549.

One of the key nuances is that, if the assessment in question is a "divisible tax," the taxpayer may pay only the divisible amount.  Flora v. United States, p. 175 n.38 (some taxes "may be divisible into a tax on each transaction or event, so that the full-payment rule would probably require no more than payment of a small amount.”)   For example, for trust fund recovery penalty ("TFRP") based on all employees for a particular quarter or quarters, because the underlying trust fund taxes are divisible, the taxpayer contesting assessment of the TFRP, need only pay for one taxpayer for one quarter.

The divisible tax rule mitigates the full bore application of Flora, and usually makes a refund remedy within the reach of a taxpayer subject to a divisible tax assessment.  The problem comes if the tax (or penalty treated as a tax for this purpose) is so large that paying the full assessment is beyond the reach of the taxpayer.

In Diversified Group Inc. v. United States, 123 Fed. Cl. 442, 2015 U.S. Claims LEXIS 1276 (2015), here [see note below at *], appeal docketed, No. 16-1014 (Fed. Cir. October 6, 2015), the promoter of an abusive shelter and his corporation involved with the promotion of the shelter was assessed a penalty under § 6707, here, for failing to register the shelter.   The penalty was over $24 million.  The promoter paid a small amount and sued for refund, hoping to fit within the divisible penalty exception to full payment.  The Court held that the penalty was not divisible, hence requiring the promoter to pay the full penalty before pursuing a refund suit.

I do not know the financial ability of the promoter or his corporation, but for most ordinary people, paying that amount would difficult, probably impossible.

So the question is when a taxpayer is financially unable to meet the Flora full payment rule and must do so for a refund suit remedy, does he have an alternative to obtain a judicial remedy?  Of course, for the types of tax that require a predicate notice of deficiency, the taxpayer can obtain a Tax Court remedy.  But sometimes the taxpayer may not have received the notice of deficiency (the last known address issue) or the type of tax or penalty does not require a notice of deficiency (§ 6707 is one).

In a case like that, the taxpayer or the person assessed a penalty may be able to get a CDP remedy that could lead to a Tax Court review of the liability.  Keith Fogg a contributor on the Procedurally Taxing Blog discusses this issue in Another Flora Decision – Bad News for Tax Shelter Promoters Highlights Possible CDP Jurisdictional Issue (Procedurally Taxing Blog 9/15/15), here.   Keith concludes:  "It appears that they can litigate the merits of this penalty using the CDP process though the path to that answer may not be as clear as one might like and the answer appears to turn on whether the taxpayer has administratively requested penalty abatement after the assessment."  Keith does a great job of discussing his reasoning and nuance, so I strongly encourage readers to read the blog.

CDP review is discussed in the text - student edition, pp. 457-463 and practitioner edition pp. 657-667.

* This blog entry was prepared on the basis of the original opinion.  The court subsequently reissued the opinion on 9/2/15.  I have changed the citation reference and the link.  Although I have not compared to see what might have changed in the reissued opinion, I don't believe anything was changed relevant to the discussion in this blog entry.

Contesting Liability -- CDP, Audit Reconsideration and OICs for Doubt as to Liability (10/19/13)

Last week in my Tax Procedure Class, we covered Collections generally.  Subsets of collections that were covered were (i) audit reconsideration, (ii) offers in compromise and (iii) Collection Due Process (CDP) hearings.  Today, I write on a Tax Court order in Seifert v. Commissioner (T.C. No. 24735-12) Order dated 10/18/13, here, that in a short order covers key concepts for these three topics.

The taxpayers were assessed taxes in amounts that they claimed they did not owe.  Essentially, the IRS based its assessment on Form 1099 information of gross sales without reducing the gain for basis.   The taxpayers failed to contest the amounts after receiving a notice of deficiency.  So, the assessment on the allegedly excessive amounts was made.  When the IRS tried to collect, the taxpayers invoked the CDP procedures.  The Court rejected the taxpayers attempt to contest the merits of the amounts as follows:

Mr. Seifert asserts that "the sole subject" of this case is his contention that he does not actually owe the tax that the IRS is attempting to collect from him for 2007. That is, he challenges the asserted liability. We observe that it is a very plausible challenge, since gain on a sale must take into account the seller's cost. 

When Mr. Seifert received the notice of deficiency, he had an opportunity to challenge that liability in Tax Court. He could have presented evidence of his cost basis in the securities and, depending on his proof, could have seen his liability reduced or eliminated. But he did not do so. Consequently, the IRS's determination went unchallenged, and the IRS therefore had the right and the responsibility to assess and collect the tax it had determined. When the IRS undertook to collect the tax, then Mr. Seifert attempted for the first time to challenge that liability -- in the CDP hearing. 

However, under section 6330(c)(2)(B), Mr. Seifert may raise a challenge to the underlying liability as part of the CDP hearing only if he "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." But Mr. Seifert does not dispute that he did receive a notice of deficiency with respect to his 2007 liability. As a result, he is not permitted in the agency-level CDP hearing (nor in this judicial review of it) to challenge that liability.

But, as the IRS conceded and the Tax Court specifically observed, all is not lost to these taxpayers to achieve a fair result.  The Tax Court specifically said (emphasis supplied by JAT)

ORDERED that the Commissioner's motion for summary judgment is granted. However, Mr. Seifert is strongly encouraged to consider accepting the invitation of the Commissioner (made at pages 2-7 of his reply filed September 30, 2013) either to request audit reconsideration or to submit an Offer in Compromise based on Doubt as to Liability, outside of the CDP context.

Scope of Tax Court Authority in CDP Hearings (12/7/12)

If the taxpayer is not satisfied with the Appeals Office determination in a CDP Hearing, the taxpayer may file a petition to contest the determination in the Tax Court.  Section 6330(d), here.  In  a recent case, the Tax Court addressed the scope of the Tax Court's authority to remand to the Appeals Office and the IRS's disagreement with some of the Tax Court authority.  Van Camp v. Commissioner, T.C. Memo. 2012-336, here.  The key parts are:

Remand of a CDP case to the Appeals Office may be appropriate in limited circumstances where there occurred some omission or error in the original hearing or in the record of the hearing. [Case citations omitted] 

* * * * 

With regard to respondent's legal argument, we note generally that our jurisdiction in CDP cases is limited to a review of the Commissioner's CDP "determinations". Sec. 6330(d)(1). Once the CDP hearing is concluded, the statutory scheme provides a separate venue for review of a new collection alternative or to address a material change in a taxpayer's financial circumstance—namely, an appeal to the Appeals Office under its retained jurisdiction provided in section 6330(d)(2). The exercise of retained jurisdiction by the Appeals Office does not constitute a continuation of the original CDP proceeding, and the limitations periods that are suspended during CDP hearings are not suspended during review under section 6330(d)(2). The Commissioner's decisions made under section 6330(d)(2) cannot be appealed to this Court. See sec. 301.6320-1(h)(2), Q&A-H2, Proced. & Admin. Regs.; sec. 301.6330-1(h)(2), Q&A-H2, Proced. & Admin. Regs. Consideration and hearings under section 6330(d)(2) are subsequent to and separate from the original CDP hearing and are solely administrative. 

Respondent disagrees with petitioners and with a suggestion made in a number of our opinions that we have the authority to remand CDP cases to the Appeals Office merely where a remand may be regarded as "helpful", "necessary", "productive", and/or due to "changed circumstances." See e.g., Kelby v. Commissioner, 130 T.C. 79, 86 n.4 (2008); Lunsford v. Commissioner, 117 T.C. 183; Kuretski v. Commissioner, T.C. Memo. 2012-262, at *11; Churchill v. Commissioner, T.C. Memo. 2011-182. Respondent contends that, absent the exercise of an abuse of discretion by the settlement officer or a defective or incomplete administrative record, this Court lacks any remand authority in CDP cases. 

In light of our factual resolution of the issue before us in these cases, we do not address that legal question.

Contesting Liability in a CDP Hearing (11/23/12)

Judge Halpern has an interesting opinion in JAG Brokerage, Inc. v. Commissioner, T.C. Memo. 2012-315, here.  The case apparently involves John Gotti, reported to be an American mobster (Wikipedia, here),  who appears in the case along with Kim Gotti for the petitioner corporation.  Mr. Gotti was an officer of the petitioner and appears to have been incarcerated in solitary confinement when the notice of deficiency was issued to the corporate taxpayer, an artificial entity.  The notice of deficiency was copied to Mr. and Ms. Gotti (in her case under a different last name).  No Tax Court case was filed in response to the notice of deficiency.  The tax was assessed.  The IRS instituted collection procedures.  The corporate taxpayer sought to contest liability in a Collection Due Process process (CDP), in which the corporation was represented by Mr. and Ms. Gotti.  In a CDP hearing, the Appeals Office Employee (Appeals Officer or Settlement Officer) will not consider any issue previously disposed of in a CDP hearing or in a prior administrative or judicial proceeding in which the taxpayer could have contested liability and participated meaningfully.  As to the underlying liability, the taxpayer can only contest in the CDP hearing if he “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”  § 6330(c)(2)(B).  So the question was a nuanced one over whether the IRS's proof of mailing the notice of deficiency was adequate to establish that this receipt requirement was met, so as to preclude the taxpayer from contesting the liability.

Judge Halpern rejects the IRS's motion for summary judgment based on its mailing the notice to the petitioner at its last known address and to the two Gottis.  Judge Halpern reasons:

Review of CDP Appeals Procedures (10/30/12)

In Tucker v. Commissioner, 676 F.3d 1120 (D.C. Cir. 2012), here, the D.C. Circuit rejected the taxpayer's Appointments Clause arguments that IRS Appeals personnel who hear CDP appeals are "inferior Officers" within  the meaning of the Appointments Clause.  The Apppointments Clause issue is an important, but arcane area of constitutional law, at least in the context of tax cases.  So, I will not address that issue in this blog.  The taxpayer filed a petition for certiorari on the issue.  I have just reviewed the United States' Brief in Opposition, here, to the granting of certiorari and offer excerpts here to remind students of the background for CDP Appeals which is an important area of the tax practice.

STATEMENT 

1. After making an assessment of taxes, the Secretary of the Treasury, acting through the Internal Revenue Service (IRS), must notify the taxpayer of the assessment and demand payment. 26 U.S.C. 6303. If the taxpayer then neglects or refuses to pay such a tax, the (1) amount due becomes a "lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." 26 U.S.C. 6321. That lien, however, is not self-executing. The IRS may file a notice of lien under 26 U.S.C. 6323 or seek to collect the tax by levy under 26 U.S.C. 6331(a). 

In 1998, Congress enacted 26 U.S.C. 6320 and 6330, which generally give a taxpayer the right to a hearing that reviews the propriety of collection activity after a notice of federal tax lien is filed or a notice of intent to levy is issued. See Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 3401, 112 Stat. 746. Such a hearing -- known as a "collection due process" or "CDP" hearing -- is "held by the Internal Revenue Service Office of Appeals" (Appeals Office), 26 U.S.C. 6320(b)(1), 6330(b)(1), and is "conducted by an officer or employee who has had no prior involvement with respect to the unpaid tax" at issue. 26 U.S.C. 6320(b)(3), 6330(b)(3). If the only issue raised relates to collection, the person conducting the hearing will generally be a "Settlement Officer"; if the underlying tax liability is also disputed, that person will be an "Appeals Officer." See Pet. App. 61a; Internal Revenue Manual (I.R.M.) 8.22.4.5.1, 8.22.4.5.2 (Mar. 29, 2012).