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Tax Litigation: The Week of December 26, 2021 – January 1, 2022

Ahmed v. Comm’r, T.C. Memo. 2021-142 |December 28, 2021 | Thornton, J. | Dkt. No. 12876-18L

Opinion

Short Summary. The IRS filed a notice of federal tax lien against Mr. Ahmed with respect to his 2013, 2014, 2015, and 2016 Forms 1040 tax years and certain trust fund recovery penalties assessed against him under section 6672 of the Code (TFRPs). Mr. Ahmed later paid the 2013, 2014, 2015, and 2016 Forms 1040 taxes—and the Tax Court granted the IRS’s motion to dismiss these years as moot, leaving only the TFRPs. After Mr. Ahmed received a supplemental Appeals hearing, he sent a check to the IRS in the amount of $625,000 with a letter that stated that the $625,000 was a “cash bond deposit” under Rev. Proc. 2005-18. The IRS received the payment and applied it against the outstanding TFRPs. The IRS then moved to dismiss the remainder of the case in Tax Court on grounds of mootness.

Key Issues: Whether a taxpayer’s CDP case becomes moot when the taxpayer submits a “cash bond deposit” for TFRPs while the case is pending in the Tax Court.

Primary Holdings: A taxpayer’s case becomes moot when a taxpayer makes full payment of the liabilities at issue while the case is pending in Tax Court. In this case, because the taxpayer concedes that it was not a deposit under section 6603, the payment to the IRS constituted full payment and resolved the outstanding liabilities.

Key Points of Law:

• Section 6321 imposes a lien in favor of the United States on all property and property rights of a person who is liable for and fails to pay tax after demand for payment has been made. The lien arises when assessment is made and continues until the assessed liability is paid. 6322.
• For the lien to be valid against certain third parties, the Secretary must file a notice of Federal tax lien; within 5 business days thereafter, the Secretary must provide written notice to the taxpayer. 6320(a), 6323(a).
• Within 30 days commencing after the end of the 5 busines days, the taxpayer may request an administrative hearing before an Appeals officer. 6320(b)(1); Treas. Reg. § 301.6320-1(c)(1). If an administrative hearing is requested, the hearing is conducted by Appeals. At the hearing, the settlement officer must verify that the requirements of any applicable law or administrative procedure have been met. Sec. 6320(c), 6330(c)(1). The taxpayer may raise any relevant issue relating to the collection of the unpaid tax. Sec. 6330(c)(2)(A).
• Section 6330(d)(1) provides that this Court has jurisdiction to review an Appeals determination. However, the Tax Court is a court of limited jurisdiction, sec. 7422, and we may exercise jurisdiction only to the extent expressly authorized by Congress. Naftel v. Comm’r, 85 T.C. 527, 529 (1985). In general, the Court’s jurisdiction under section 6330(d)(1) is limited to reviewing whether the Commissioner’s proposed collection activity is appropriate. Greene-Thapedi v. Comm’r, 126 T.C. 1, 7 (2006). Ordinarily, once the Commissioner concedes that there is no unpaid liability for a disputed year upon which a collection action could be based, a proceeding filed in this Court pursuant to section 6330 is moot. Section 6330 does not give the Court jurisdiction to determine an overpayment or order a refund or credit of taxes paid. Willson v. Comm’r, 805 F.3d 316 (D.C. Cir. 2015).
• Section 6603 provides that a taxpayer may make a cash deposit with respect to “any tax imposed under subtitle A or B or chapter 41, 42, 43, or 44 which has not been assessed at the time of the deposit.” TFRPs are imposed under section 6672, which is in chapter 68 in subtitle F of the Code, rather than in any of the subtitles or chapters listed in section 6603(a).
• In Greene-Thapedi, the Tax Court held it lacked jurisdiction to review a taxpayer’s refund claim in a section 6330 collection proceeding.

Insight: The Ahmed case shows how super technical the relevant statutory provisions are in a CDP case. If a taxpayer wants to ensure that the Tax Court continues to have jurisdiction over the CDP claims, the taxpayer should ensure that full payment of the tax liabilities at issue has not been made.

Brian K. Bunton and Karen A. Bunton, v. Comm’r, T.C. Memorandum 2021-141| December 28, 2021 | Weiler, J. | Dkt. No. 20438-19L.

Short Summary: The main issue in this case is whether the IRS abused its discretion when sustaining a notice of levy issued to the taxpayers.

Brian K. Bunton and Karen A. Bunton (the taxpayers), filed an income tax return for 2016 attaching two Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc., jointly with a letter stating tax protestor arguments concluding that the “payments made to us by these private sector companies did not result from any taxable activity and do not constitute any taxable income under relevant law”.

The IRS began an examination on the return and determined that the taxpayers had unreported income in the amount of the missing W-2s. The IRS also submitted an “Address Information Request” to the U.S. Postal Service to confirm the taxpayers’ address. The IRS sent a statutory notice of deficiency to the taxpayers. The taxpayers did not challenge such notice in the Tax Court.

After 1 year, the IRS sent a levy notice to the taxpayers informing on their right to request a CDP hearing, which was requested timely. Taxpayers did not include their telephone number and on Form 12153, they requested a face-to-face hearing. A settlement officer (SO) was assigned to the case, who reached out to the taxpayers and requested financial information to be considered for a collection alternative. Taxpayers responded by requesting abatement of taxes because violated “certain Internal Revenue Code” claiming that the notice of deficiency was void as a matter of law because it did not contain a written declaration under penalty of perjury. The taxpayers did not attend their CDP and Appeals issued a Notice of Determination Concerning Collection Actions for tax years 2016 (notice of determination) sustaining the levy notice. The taxpayers filed suit in Tax Court to challenge such notice and to contest the tax liability. The Court ruled against the taxpayers.

Key Issues: Whether the IRS abused its discretion when sustaining the levy notice issued to the taxpayers.

Primary Holdings: The IRS did not abuse its discretion when sustaining the levy notice.

Key Points of Law:

The Tax Court has jurisdiction to review the determination of Appeals in a CDP case. I.R.C. 6330(d)(1). In a CDP case, a taxpayer generally challenges the determinations made by Appeals. the taxpayer can challenge the underlying tax liability only if he did not receive a notice of deficiency or had a prior opportunity to contest the liability. I.R.C. 6330(c)(2)(B); see Sego v. Commissioner, 114 T.C. 604 , 609 (2000). If the underlying tax liability is properly at issue, the Court reviews de novo. Goza v. Commissioner, 114 T.C. 176 , 181-182 (2000). For any other determination made by Appeals, the Court reviews only for abuse of discretion. Craig v. Commissioner, 119 T.C. 252 , 260 (2002).

Abuse of discretion exists if the determination was arbitrary, capricious, or without sound basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301 , 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).

Here, the taxpayers challenged both the tax liability and the determination sustaining the levy:

• As for the tax liability, the Tax Court determined that it was not at issue because the taxpayers received a notice of deficiency. To determine whether the taxpayer receives such notice, depends on the preponderance of the evidence. Sego v. Commissioner, 114 T.C. at 611. If the notice of deficiency is mailed to the taxpayer’s last known address, actual receipt of the notice is immaterial, and the notice is valid. United States v. Zolla, 724 F.2d 808 , 810 (9th Cir. 1984).

Here, the IRS mailed a notice to the taxpayers last known address and to the POA on file. Moreover, the IRS did verify the address of the taxpayers with the U.S. Postal Service. Accordingly, the Court determined that the IRS exercised reasonable diligence in determining that the copies of the notice of deficiency were properly sent to the petitioner’s last known address.

• As for the other determinations, the Court concluded that the IRS did not abuse its discretion. The Court does not substitute its judgment for that of Appeals but considers whether Appeals, in the course of making its determination: (1) verified that the requirements of applicable law and administrative procedure have been met; (2) considered all relevant issues raised by the taxpayer, including offers of collection alternatives such as an offer-in-compromise; and (3) determined whether any proposed or actual collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary. Sec. 6330(c)(3).

In this regard, the levy was sustained because the levy of the State tax refund was proper under I.R.C. 6330(f)(2). In this case, the levy was imposed on the State tax refund, falling squarely under this provision.

As for the remaining determination concerning the IRS failure to contact the taxpayers before the date of their scheduled CDP hearing, the Court determined that the correspondence between the IRS to the taxpayers, requiring the filing of tax returns, requesting information, among others, constituted their CDP hearing. See Kipp v. Commissioner, T.C. Memo. 2015-7.

As for the balance need for efficient collection with the concern of the taxpayer that the collection action is not more intrusive than necessary, the Court determined that the IRS’ actions were proper considering the fact that the petitioners never submitted the requisite financial information or outstanding tax returns. Thus the analysis was properly made on the available information to the IRS.

Insight: This case only adds to the long list of tax protestor cases. Taxpayers should be aware of “information” available on the web, that favors not filing of a tax return or not reporting income. This case only shows that such arguments would not be fruitful in Court and moreover, will put the taxpayers in situations that can be avoided by a correct filing and proper tax advice.

Whistleblower 15977-18W v. Comm’r, T.C. Memo. 2021-143 | December 29, 2021 | Guy, J. | Dkt. No. 15977-18W

Opinion

Short Summary: The whistleblower submitted a Form 211, Application for Award for Original Information, to the IRS. In the Form 211, the whistleblower identified a target, which according to the whistleblower, was a dual citizen of the United States and Country X and was subject to, but failed to pay, substantial amounts of various Federal taxes. The IRS Whistleblower Office (WBO) reviewed the information and denied an award under section 7623(a). The whistleblower filed a petition with the United States Tax Court, and the IRS sought summary judgment on the claim. The whistleblower filed an opposition to the summary judgment motion and also a separate motion to remand to perfect the claim.

Key Issues: Whether the WBO followed the correct procedure in reaching its determination to reject the Whistleblower’s request for an award.

Primary Holdings: The court granted the Commissioner’s summary judgment motion because the WBO’s determination was adequately supported, and the whistleblower failed to provide specific and credible information to support the award. The court denied the whistleblower’s motion to remand. While the whistleblower is free to perfect the claim and resubmit it, the WBO is not required to permit a whistleblower to do so within the context of this action.

Key Points of Law:

• In accordance with section 7623, the WBO performs an initial evaluation of a whistleblower’s submission to determine whether the claim, on its face, meets certain minimum standards. Section 301.7623-1(c)(4), Proced. & Admin. Regs., provides in relevant part that, if the whistleblower does not provide specific and credible information, the WBO has the discretion to reject the claim. The administrative record showed that the WBO followed proper procedures in this case. The WBO forwarded petitioner’s information to Small Business/Self Employed Operating Division (SB/SE) for review; SB/SE evaluated the information and recommended that the WBO reject the claim because, among other reasons, petitioner did not provide specific and credible information. The WBO then accepted that recommendation and issued a final decision rejecting petitioner’s claim. While the documentary record underlying the WBO determination was relatively sparse, it was sufficient to show that the WBO did not abuse its discretion in concluding that petitioner’s claim, and the information offered in support of that claim, was not specific or credible.
• The court’s review of a WBO determination is generally limited to the administrative record, leaving the WBO administrative determination undisturbed unless the determination is found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. The court does not substitute its judgment for that of the WBO, but instead simply ensures that the determination remains within the bounds of reasoned decision making. Id. at *4 (citations omitted).
• Section 301.7623-1(c)(4), Proced. & Admin. Regs., provides in relevant part that, if the whistleblower does not provide specific and credible information, the WBO has the discretion to reject the claim or inform the whistleblower of any deficiencies and provide the whistleblower an opportunity to perfect the claim for award. The regulation goes on to state that, if the WBO rejects the whistleblower’s claim for lack of specific and credible information, as was the case here, the whistleblower may perfect and resubmit the claim. Under the circumstances, petitioner may elect to perfect and resubmit the claim to the WBO, but the WBO is not obliged to permit petitioner to do so within the context of this action. Id. (citations omitted).
• The Whistleblower provided information derived from mainly publicly available sources and that information did not begin to support the claimed award. The Whistleblower provided evidence the target was born in and briefly resided in the United States as an infant, the target’s parents were citizens of Country X, and the target later rose to a position of substantial prominence and influence in Country X. Petitioner could find no public record that the target ever exercised any of the fundamental rights or privileges of a U.S. citizen, including obtaining a Social Security number or a passport. At the same time, petitioner was unable to find any record that the target ever renounced U.S. citizenship. In sum, petitioner did not provide specific and credible information sufficient to establish that the target was a citizen of the U.S. at birth. Moreover, as petitioner seems to have recognized in the materials submitted to the WBO, even assuming for the sake of argument that the target was a citizen of the United States at birth, the fact that the target rose to a position of prominence and influence in Country X casts serious doubt on the proposition that the target retained U.S. citizenship status into adulthood.

Insight: While this Whistleblower has the opportunity to perfect his claim and resubmit it to the Whistleblower Office, he will he need specific, credible evidence to support his claim for an award.

Starcher v. Comm’r, T.C. Mom 2021-144 | December 30, 2021 | Lauber, J. | Dkt. No. 12356-20L

Opinion

Short Summary: This is a collection due process (“CDP”) hearing in which the taxpayer contests an IRS determination upholding the filing of a Notice of Intent to Levy (the “Levy Notice”) as to the taxpayer’s 2014 tax year. Ultimately, the Tax Court finds that the taxpayer was not eligible to contest her tax liability in the CDP hearing and that the IRS did not abuse its discretion in upholding the levy notice

Key Issues:

• Whether the taxpayer could dispute her underlying tax liability at the CDP hearing; and
• Whether the settlement officer (“SO”) abused his discretion in upholding the Levy Notice

Facts and Primary Holdings:

• The taxpayer failed to file a tax return for 2014, so the IRS prepared a substitute for return (“SFR”) on her behalf pursuant to I.R.C. § 6020(b).
• On the basis of the SFR, the IRS send the taxpayer a notice of deficiency, which determined a 2014 tax liability in the amount of $24,329, plus additions to tax totaling $5,596.
• The taxpayer did not timely petition the Tax Court for redetermination within the 90-day period per I.R.C. § 6213(a), and therefore the IRS subsequently assessed these amounts.
• In an effort to collect these liabilities, on July 29, 2019, the IRS sent the taxpayer a levy notice. She timely requested a CDP hearing.
• At the scheduled CDP hearing, on July 14, 2020, the taxpayer appeared by phone and requested that she be allowed to submit a delinquent return for 2014 that would replace the SFR and reduce her tax liability. She also expressed interest in a collection alternative. The SO explained that the taxpayer could not then dispute her tax liability because she failed to petition the Tax Court in response to the notice of deficiency—which she acknowledged receiving. The SO nevertheless indicated that he would look at a proposed 2014 tax return if submitted to him by August 7, 2020. The SO further requested that the taxpayer submit financial information in support of any collection alternative by the same date. The taxpayer failed to submit anything prior to this deadline.
• On August 19, 2020, the SO closed the case, and on September 15, 2020, the IRS issued her a notice of determination sustaining the levy notice. In the meantime, although the taxpayer never submitted financial information with respect to a collection alternative, she did in fact submit a proposed delinquent 2014 tax return, which the SO forwarded to a different IRS office.
• The taxpayer timely petitioned the Tax Court for review, contending that the SO should have accepted her delinquent 2014 return and reduced her tax liability accordingly.

Key Points of Law:

• The taxpayer’s underlying tax liability was not properly at issue before the SO. A taxpayer may challenge her underlying liability at a CDP hearing only if she “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute” it. Sec. 6330(c)(2)(B). Since the taxpayer did not deny receiving the notice of deficiency, she had the requisite opportunity to dispute the tax, but failed to timely do so.
• The fact that the SO agreed to review a proposed delinquent 2014 tax return does not change the analysis. The Code does not permit an SO or this Court to consider an underlying liability challenge if the taxpayer previously received a notice of deficiency for the same year. See R.C. § 6330(c)(2)(B)
• Where de novo review is not applicable, as here, the scope of review in CDP cases is confined to the administrative record. See Keller v. Comm’r, 568 F.3d 710, 718 (9^th 2009), aff’g in part T.C. Memo 2006-166.
• Accordingly, in a case such as this, the Tax Court’s review was limited to deciding whether the IRS action is supported by the administrative record and is not “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Belair v. Comm’r, 157 T.C. 10, 17 (2021) (quoting Van Bemmelen v. Comm’r, 155 T.C. 64, 79 (2020)).
• In determining whether the SO abused its discretion, the Tax Court considers three things:
  • Whether the SO properly verified that the requirements of any applicable law or administrative procedure had been met;
  • Whether the SO considered any relevant issues raised by the taxpayer; and
  • Whether the SO determined whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary. See R.C. § 6330(c)(3) .
• After reviewing the record, the Court determined that the SO properly discharged all of his responsibilities under §6330(c). The taxpayer was not entitled to challenge her underlying liability at the CDP hearing, so the SO’s unwillingness to accept a delinquent 2014 return for filing was not an abuse of discretion. Moreover, although the taxpayer initially expressed interest in a collection alternative, she never made a specific proposal and did not submit any of the requisite financial information. It is not an abuse of discretion for an SO to sustain a collection action where the taxpayer has proposed no alternative. See McLaine v. Comm’, 138 T.C. 228 , 243 (2012).

Insight: The rules regarding challenging an underlying tax liability at a CDP hearing are fairly strict. If a taxpayer had the opportunity prior to the CDP hearing to contest that liability – an opportunity that is usually presented by a notice of deficiency (as it was here) – then they will not be able to challenge that tax liability at the CDP hearing. It is imperative that a taxpayer timely respond to a notice of deficiency in order to preserve their rights to have the Tax Court consider their case.

Pfetzer v. Comm’r, TC Memo. 2021-145| December 30, 2021 | Pugh, J. | Dkt. No. 10346-18L

Opinion

Short Summary: Mr. Pfetzer (“Petitioner”) did not file federal income tax returns for 2004 through 2012. The Internal Revenue Service (“IRS”) prepared substitutes for returns and assessed tax for each of these years. Petitioner did not pay the assessed tax liabilities.

In June 2016, the IRS sent Petitioner a Notice of Federal Tax Lien Filing (“NFTL”) covering the unpaid tax liabilities. In response, Petitioner timely submitted a request for collection due process (“CDP”) hearing, arguing in part that he did not owe the asserted tax for 2010 and 2011 and that he wanted verification that the IRS had complied with all legally required procedures.

In September 2016, a settlement officer (“SO”) contacted Petitioner and requested that he submit tax returns for 2010 and 2011 as well as additional information and returns if he wanted to be considered for collection alternatives. Petitioner responded by challenging the tax assessments for 2004 through 2012. Petitioner questioned whether the IRS had properly issued notices of deficiency for these years and asserted that he had never received any such notices.

On April 23, 2018, the IRS issued a notice of determination sustaining the NFTL filing. In reaching this conclusion, the SO looked at computerized transcripts that showed that notices of deficiency were sent to Petitioner’s last known address.

Petitioner filed a petition with the Tax Court challenging the notice of determination and arguing in part that the SO failed to verify that all legal and administrative requirements were followed.

The IRS filed a motion for summary judgment, which the Court denied, remanding the case to IRS Appeals. The Court noted that there remained questions regarding what was in the administrative record and what the SO relied upon to verify that all legal and administrative requirements were met. Specifically, the Court pointed out precedent stating that when a taxpayer alleges that the notice of deficiency was not mailed, it is insufficient for the IRS merely to consult transcripts to verify the proper mailing of the notice of deficiency. Instead, the IRS must look to “underlying documents in addition to the tax transcripts, such as the taxpayer’s return, a copy of the notice of deficiency, and the certified mailing list.”

On remand, Petitioner continued to assert that he had not received notices of deficiency for any of the years at issue. The SO argued that Petitioner could not challenge the underlying tax liabilities. Ultimately, IRS appeals sustained the NFTL filing. In a supplemental notice of determination, the SO stated that she had relied on transcripts to verify that the notices of deficiency had been sent to Petitioner.

Petitioner and the IRS filed a joint motion to submit the case under Tax Court Rule 122, Submission Without Trial, along with a joint stipulation of facts with accompanying exhibits. The stipulated record did not include the IRS’s complete administrative record, any notice of deficiency, or proofs of mailing to Petitioner’s last known address.

Key Issues

• Did IRS Appeals abuse its discretion in sustaining the NFTL filing?

Primary Holdings

• Yes, IRS Appeals abused its discretion in sustaining the NFTL filing. The SO did not properly verify that valid notices of deficiency were issued or mailed to Petitioners’ last known address for any of the years at issue by reviewing underlying documentation, despite being told by the Court to do so.

Key Points of Law

• Where the taxpayer’s underlying tax liability is at issue, the Tax Court reviews the Commissioner’s determination de novo. Sego v. Comm’r, 114 T.C. 604, 610 (2000); Goza v. Comm’r, 114 T.C. 176, 181-182 (2000).
• The Court reviews IRS Appeals determinations regarding nonliability issues for abuse of discretion. Sego, 114 T.C. at 610; Goza, 114 T.C. at 182.
• Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. See Murphy v. Comm’r, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006). It is the taxpayer’s burden is to prove that the SO abused her discretion. Tax Court Rules 142(a), 122(b); see Woodral v. Comm’r, 112 T.C. 19, 23 (1999).
• The IRS must give any person liable to pay tax a written notice of an NFTL filing upon that taxpayer’s property. I.R.C. § 6320(a)(1). The notice must inform the taxpayer of the right to request a hearing at IRS Appeals. Id. § 6320(a)(3)(B), (b)(1).
• During the administrative hearing process, the SO must verify that all legal and administrative requirements have been met. Id. § 6330(c)(1).
• With limited exceptions, a deficiency may not be assessed until after a notice of deficiency has been mailed to the taxpayer. Id. § 6213(a). If assessment of a deficiency is not preceded by a notice of deficiency, then the assessment, as well as any lien that is based on the assessment, is invalid. Hoyle v. Comm’r, 131 T.C. 197, 205 (2008).
• Therefore, in verifying that all legal and administrative requirements have been met, an SO must verify that a valid notice of deficiency was issued to the taxpayer. Jordan v. Comm’r, 134 T.C. 1, 12 (2010), supplemented by T.C. Memo. 2011-243.
• Moreover, when a taxpayer alleges that he did not receive a notice of deficiency, an SO may not rely solely on transcripts to verify that a notice was issued and mailed to the taxpayer’s last known address. Hoyle, 131 T.C. at 205 n.7. Instead, the SO must examine “underlying documents in addition to the tax transcripts, such as the taxpayer’s return, a copy of the notice of deficiency, and the certified mailing list.” Id.
• Requiring verification of compliance with all legal and administrative procedures is not a challenge to the underlying liability; it is a standalone requirement. Id. at 200-203.

Insights: Pfetzer demonstrates the importance of taxpayers’ demanding that the IRS prove that it has complied with all legal and administrative requirements that are necessary for the IRS to be able to take the action in question.

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