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Tax Court Cases: The Week of August 30 – September 3, 2021

Karson C. Kaebel v. Comm’r, No. 16171-18P, T.C. Memo 2021-109 | September 9, 2021 | Halpern | Dkt. No. 16171-18P

Tax Dispute Short Summary: 

This case focuses on 26 U.S.C. § 7345, which gives the IRS the authority to recommend to the Secretary of State of the United States that a taxpayer’s passport be denied, revoked, or limited as a result of a seriously delinquent tax debt.  Here, the taxpayer was certified by the IRS pursuant to § 7345 as having such a seriously delinquent tax debt.  The taxpayer argued first that the alleged tax debt was incorrect and second, that § 7345 is unconstitutional.

Tax Litigation Key Issues:

• Did the taxpayer have a “seriously delinquent tax debt,” as that term is defined in 26 U.S.C. § 7345;
• Is I.R.C. § 7345 an unconstitutional limitation on a fundamental right?

Facts and Primary Holdings: 

• The taxpayer failed to file returns for tax years 2005-2010. Based on that failure, the IRS filed substitutes for return in which it determined deficiencies of over $200,000 for those tax years.
• In two prior Tax Court decisions, the taxpayer was found to have received notices of deficiency for all of the six years in question.
• In May, 2013, the IRS filed liens with respect to tax years 2005-2009. In February, 2014, the IRS added tax year 2010 to the lien.  Although given the opportunity to request a Collection Due Process (“CDP”) hearing, the taxpayer failed to do so.
• In response to a subsequent notice of levy, the taxpayer did request a CDP hearing with respect to the levy for tax year 2010. The taxpayer complained that the IRS had failed to comply with all proper procedures.  An appeals officer denied that request and verified that all legal and administrative requirements had been met.
• In August, 2014, the taxpayer filed a petition challenging the IRS’s determination to proceed by levy to collect the 2010 tax liability. He argued that the IRS had failed to issue a Notice of Deficiency.  Following a trial, the Tax Court entered a decision sustaining the determination.
• In January, 2018, the taxpayer filed another petition disputing IRS levies for all of the delinquency years, again arguing that the IRS had failed to properly issue Notices of Deficiency. The Tax Court granted the IRS’s motion to dismiss this petition for lack of jurisdiction based on the fact that the petition was untimely.  The taxpayer appealed that decision to the Fifth Circuit, where the Fifth Circuit upheld the decision.
• In July, 2018, the IRS notified the taxpayer that he had been certified to the Secretary of State as an individual owing a seriously delinquent tax debt of $260,620.
• After reviewing the facts, the Court determined that the IRS did not err in determining that the taxpayer had a “seriously delinquent tax debt,” as defined in I.R.C. § 7345.
• Relying on Rowen v. Comm’s, 156 T.C. _____, ______ (slip op. at 16-17) (March 30, 2021), the Court rejected the taxpayer’s constitutional challenge to § 7345. It held that the actions of the IRS Commissioner, the Secretary of the Treasury, and the Secretary of State were governed by separate and distinct rules, which impose different responsibilities on each and grant them varying degrees of discretion in carrying out those responsibilities.  In Rowan, the Court found meritless that the taxpayer’s claim that “§7345 was unconstitutional . . . because it prohibits international travel[,] . . . a fundamental right enshrined in the Fifth Amendment.”  The Court explained that Section 7345 “simply does not authorize any passport-related decision and therefore does not prohibit international travel.”  They added:  “[A] statutory provision (section 7345) that merely provides for the certification of certain tax-related facts and does not restrict in any manner the right to international travel cannot run afoul of * * * the Fifth Amendment.” Id. at __ (slip op. at 21). The Court offered no opinion on the constitutionality of the authority granted to the Secretary of State by FAST Act[1] section 32101(e). Id. at __ (slip op. at 22).
• The Court specifically declined to address a constitutional challenge to any action by the Secretary of State pursuant to FAST Act § 32101(e).
• Finally, the Court issued a show cause notice ordering the taxpayer to show cause as to why a penalty pursuant to I.R.C. § 6673(a)(1)(B) should not be assessed against him based on arguments made in this, the taxpayer’s third case regarding the liabilities at issue, that had previously been rejected.

Key Points of Tax Law:

• The Tax Court has jurisdiction under § 7345(e) to determine whether an IRS certification under that section was erroneous.
• A “seriously delinquent tax debt” is defined as a Federal tax liability that has been assessed, which exceeds $51,000,[2] which is unpaid and legally enforceable, and against which a lien notice has been filed or a levy has been made. § 7345(b)(1).
• If the Tax Court determines that certification under § 7345 was erroneous, then the court may order the IRS to notify the Secretary of State that such certification was erroneous. 7345(e)(2).  The statute specifies no other form of relief that a Court may grant.  See Ruesch v. Comm’r, 154 T.C. 289, 294 (2020).
• Collateral estoppel prevented the taxpayer from arguing that the IRS had not sent notices of deficiency based on the findings in his previous Tax Court cases.
• Section 6673(a)(1) allows the Tax Court to impose a penalty of up to $25,000 if (1) the taxpayer has instituted or maintained proceedings before the Tax Court primarily for delay or (2) the taxpayer’s position in the proceeding is frivolous or groundless.

Tax Litigation Insight:  Although not directly identified as such, the arguments asserted in this case by the taxpayer generally appear to be tax protester-type arguments, and like most such arguments, they do not fare well in the Tax Court (or any other court).  This case provides yet another reason that taxpayers should respect their obligations under the Internal Revenue Code – because § 7345 described in this case provides authority that could ultimately end in the revocation of a taxpayer’s passport and concomitant ability to travel internationally.

[1] Congress enacted I.R.C. § 7345 in 2015 as part of the Fixing America’s Surface Transportation (FAST) Act, Pub. L. No. 114-94, section 32101, 129 Stat. at 1729.

[2] Sec. 7345(b)(1)(B) requires that the liability be greater than $50,000. That amount is adjusted for inflation beginning in tax years after 2016. Sec. 7345(f). The adjusted amount for tax year 2018 was $51,000. See Rev. Proc. 2017-58, sec. 3.53, 2017-45 I.R.B. 489, 499.

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