SCOTUS Reports

Tag: Collection Due Process

  • Tooke v. Commissioner, 164 T.C. No. 2 (2025): Appointments Clause and Separation of Powers in Administrative Proceedings

    Tooke v. Commissioner, 164 T. C. No. 2 (2025)

    In Tooke v. Commissioner, the U. S. Tax Court upheld the constitutionality of the IRS Independent Office of Appeals, rejecting arguments that its officers’ appointments violated the Appointments Clause and that the Chief’s removal restrictions infringed on separation of powers. The court found that Appeals Officers and Team Managers are not “Officers of the United States,” and thus do not require formal appointment under the Constitution. This ruling clarifies the status of administrative adjudicators and supports the IRS’s current structure for handling collection due process hearings.

    Parties

    Charlton C. Tooke III (Petitioner) v. Commissioner of Internal Revenue (Respondent). The case was filed in the U. S. Tax Court, Docket No. 398-21L.

    Facts

    Charlton C. Tooke III filed federal income tax returns for the years 2012 through 2017 but did not pay the assessed taxes. The IRS issued a Notice of Federal Tax Lien Filing and a Final Notice of Intent to Levy. Tooke requested a Collection Due Process (CDP) hearing with the IRS Independent Office of Appeals (Appeals). During the hearing, Tooke raised constitutional arguments concerning the separation of powers, specifically the Appointments Clause and removal power of Appeals Officers, Appeals Team Managers, and the Chief of Appeals. The Appeals Officer rejected these arguments, and the Appeals Team Manager issued a Notice of Determination sustaining the tax lien and proposed levy action. Tooke subsequently filed a petition in the U. S. Tax Court challenging the constitutionality of the Appeals process.

    Procedural History

    Tooke timely filed a petition in the U. S. Tax Court challenging the Notice of Determination issued by the IRS Independent Office of Appeals. He filed two motions: an Appointments Clause Motion asserting that the Appeals Officers, Appeals Team Managers, and the Chief of Appeals were unconstitutionally appointed, and a Separation of Powers Motion asserting that the Chief’s removal restrictions violated constitutional principles. The Tax Court considered these motions under the standard of review applicable to summary judgment.

    Issue(s)

    Whether Appeals Officers and Appeals Team Managers are “Officers of the United States” under the Appointments Clause, requiring formal appointment? Whether Tooke has standing to challenge the appointment and removal of the Chief of Appeals?

    Rule(s) of Law

    The Appointments Clause of the U. S. Constitution, Article II, Section 2, Clause 2, requires that all “Officers of the United States” be appointed by the President with the advice and consent of the Senate, or by Congress vesting the appointment of inferior officers in the President alone, the courts of law, or the heads of departments. “Officers of the United States” are those who hold a continuing position, exercise significant authority pursuant to the laws of the United States, and are established by law.

    Holding

    The U. S. Tax Court held that Appeals Officers and Appeals Team Managers are not “Officers of the United States” and thus do not need to be appointed under the mandates of the Appointments Clause. The court also held that Tooke lacked standing to challenge the appointment and removal of the Chief of Appeals.

    Reasoning

    The court reasoned that Appeals Officers and Appeals Team Managers do not wield significant authority as defined by Supreme Court precedents in cases like Buckley v. Valeo, Freytag v. Commissioner, and Lucia v. SEC. Appeals Officers lack the power to take testimony, issue subpoenas, or enforce compliance with discovery orders, powers that are characteristic of officers. Their decisions are subject to review by Appeals Team Managers and the Commissioner, further diminishing their authority. The court also found that the positions of Appeals Officers and Team Managers are not “established by Law” as required by the Appointments Clause, citing the diffuse statutory language in sections 6320 and 6330 of the Internal Revenue Code. Regarding standing, the court determined that Tooke’s injury was not traceable to the Chief of Appeals, who did not participate in Tooke’s CDP hearing, and thus Tooke lacked standing to challenge the Chief’s appointment and removal. The court rejected Tooke’s “root-to-branch” theory of causation, which argued that the Chief’s unconstitutional appointment tainted the entire Appeals process.

    Disposition

    The court denied Tooke’s Appointments Clause Motion as to the Chief of Appeals and his Separation of Powers Motion. The court also denied Tooke’s Appointments Clause Motion as to Appeals Officers and Appeals Team Managers, finding that they are not “Officers of the United States. “

    Significance/Impact

    The decision in Tooke v. Commissioner affirms the constitutionality of the IRS Independent Office of Appeals’ current structure and operations. It clarifies that Appeals Officers and Team Managers do not require formal appointment under the Appointments Clause, upholding the IRS’s authority to conduct CDP hearings without constitutional challenge. The ruling also sets a precedent for standing requirements in challenges to the appointment and removal of high-level administrative officials who do not directly participate in a taxpayer’s case. This case may influence future challenges to the constitutionality of administrative adjudicators and the separation of powers doctrine in tax administration.

  • Jenner v. Commissioner, 163 T.C. No. 7 (2024): FBAR Penalties and Collection Due Process Rights

    Jenner v. Commissioner, 163 T. C. No. 7 (U. S. Tax Court 2024)

    In Jenner v. Commissioner, the U. S. Tax Court ruled that Foreign Bank Account Reporting (FBAR) penalties are not taxes and thus not subject to the collection due process (CDP) hearing requirements of I. R. C. §§ 6320 and 6330. The court dismissed the case for lack of jurisdiction, clarifying that the IRS was not obligated to provide a CDP hearing for FBAR penalties, which are governed by Title 31, not Title 26 of the U. S. Code.

    Parties

    Stephen C. Jenner and Judy A. Jenner, petitioners, v. Commissioner of Internal Revenue, respondent.

    Facts

    Stephen C. Jenner and Judy A. Jenner were assessed FBAR penalties under 31 U. S. C. § 5321 for failing to file foreign bank account reports for the years 2005 through 2009. The Department of the Treasury’s Bureau of the Fiscal Service (BFS) informed the Jenners that funds would be withheld from their monthly Social Security benefits under the Treasury Offset Program (TOP) to satisfy their debts. The Jenners requested collection due process (CDP) hearings, but the IRS denied these requests, asserting that FBAR penalties are not taxes and thus not subject to I. R. C. § 6330 requirements. The Jenners subsequently filed a petition with the U. S. Tax Court, alleging they were deprived of their CDP rights.

    Procedural History

    The Jenners filed their petition with the U. S. Tax Court on June 5, 2023, while residing in Florida. The Commissioner moved to dismiss the case for lack of jurisdiction on July 19, 2023, arguing that the collection of FBAR penalties is not subject to the notice and other requirements of I. R. C. § 6330. The Tax Court, in its opinion dated October 22, 2024, granted the Commissioner’s motion and dismissed the case for lack of jurisdiction.

    Issue(s)

    Whether Foreign Bank Account Reporting (FBAR) penalties are subject to the requirements of I. R. C. §§ 6320 and 6330, which mandate collection due process (CDP) hearings for unpaid taxes?

    Rule(s) of Law

    The Internal Revenue Code, specifically I. R. C. §§ 6320 and 6330, mandates collection due process (CDP) hearings for unpaid taxes. FBAR penalties are authorized and imposed by Title 31 of the U. S. Code, specifically 31 U. S. C. § 5321, and are not considered taxes under the Internal Revenue Code. The U. S. Tax Court has jurisdiction over cases involving unpaid taxes as per I. R. C. § 7442.

    Holding

    FBAR penalties are not taxes imposed by the Internal Revenue Code and thus are not subject to the requirements of I. R. C. §§ 6320 and 6330. The U. S. Tax Court lacks jurisdiction over the Jenners’ petition because FBAR penalties do not fall within the court’s jurisdiction.

    Reasoning

    The court’s reasoning was based on the statutory distinction between Title 26 (Internal Revenue Code) and Title 31 (Money and Finance) of the U. S. Code. FBAR penalties, governed by Title 31, are considered nontax debts to the United States, and their collection is subject to different procedures than those for taxes under Title 26. The court emphasized that the CDP procedures under I. R. C. §§ 6320 and 6330 apply only to unpaid taxes, as evidenced by the language in these sections that consistently refers to “tax. ” The court cited previous decisions, such as Goza v. Commissioner and Williams v. Commissioner, to support its conclusion that FBAR penalties are not subject to the deficiency procedures or CDP requirements. The court also noted that the collection mechanism for FBAR penalties is a civil action, not a lien or levy, further distinguishing them from taxes. The court rejected the Jenners’ arguments that the administrative offsets on their Social Security benefits constituted levies by the Secretary that entitled them to a CDP hearing, stating that such offsets are governed by Title 31, not Title 26.

    Disposition

    The U. S. Tax Court dismissed the case for lack of jurisdiction.

    Significance/Impact

    Jenner v. Commissioner clarifies that FBAR penalties are not subject to the collection due process (CDP) requirements of I. R. C. §§ 6320 and 6330. This decision reinforces the distinction between Title 26 and Title 31 penalties, impacting how taxpayers and the IRS handle FBAR penalty assessments and collections. The ruling may influence future litigation regarding the applicability of tax court jurisdiction to penalties imposed under other titles of the U. S. Code. Practitioners must advise clients that FBAR penalties are not subject to the same procedural protections as tax liabilities, potentially affecting strategies for challenging such penalties.

  • J.E. Ryckman v. Commissioner, 163 T.C. No. 3 (2024): Jurisdiction and Procedural Rights under Tax Treaties

    J. E. Ryckman v. Commissioner, 163 T. C. No. 3 (United States Tax Court 2024)

    In a case of first impression, the U. S. Tax Court ruled it lacks jurisdiction to review the IRS’s denial of a Collection Due Process (CDP) hearing for a taxpayer’s Canadian tax liability under the Canada-U. S. Income Tax Treaty. The court interpreted the Treaty to require the U. S. to treat Canadian claims as U. S. claims with exhausted rights, thus precluding additional U. S. procedural protections. This decision highlights the interplay between treaties and domestic law, affirming that later-enacted statutes do not conflict with treaty obligations if properly harmonized.

    Parties

    J. E. Ryckman, the petitioner, sought to challenge the IRS’s denial of her request for a Collection Due Process (CDP) hearing. The Commissioner of Internal Revenue, the respondent, moved to dismiss her petition for lack of jurisdiction. Throughout the proceedings, Ms. Ryckman was represented by David R. Jojola, Derek W. Kaczmarek, Nicholas Michaud, and Paul J. Vaporean, while the Commissioner was represented by Ping Chang and Derek S. Pratt.

    Facts

    Ms. Ryckman, a resident of Arizona, owed approximately $200,000 in Canadian taxes for the tax years 1993 and 1994. In 2017, the Canada Revenue Agency (CRA) sent a mutual collection assistance request (MCAR) to the IRS under the Canada-U. S. Income Tax Treaty. The MCAR stated that Ms. Ryckman’s tax liabilities were “finally determined” under Canadian law, meaning all administrative and judicial rights to restrain collection had lapsed or been exhausted. The U. S. Competent Authority granted the MCAR, and the IRS subsequently filed a notice of federal tax lien (NFTL) against Ms. Ryckman. Despite being informed that she had no right to a CDP hearing, Ms. Ryckman requested one, which the IRS denied. She then petitioned the Tax Court for review of the denial.

    Procedural History

    The IRS filed a notice of federal tax lien (NFTL) against Ms. Ryckman on December 7, 2020, and notified her on January 25, 2021, that she was not entitled to a CDP hearing. Ms. Ryckman requested a CDP hearing on February 4, 2021, which the IRS denied on February 8, 2021. Ms. Ryckman filed her petition with the Tax Court on February 18, 2021, challenging the IRS’s denial. The Commissioner moved to dismiss the petition for lack of jurisdiction, arguing that the Tax Court did not have authority to review the denial of a CDP hearing related to a Canadian tax liability under the Treaty.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction under I. R. C. § 6330(d)(1) to review the IRS’s denial of a Collection Due Process (CDP) hearing request regarding the collection of Canadian taxes pursuant to a mutual collection assistance request (MCAR) under the Canada-U. S. Income Tax Treaty?

    Rule(s) of Law

    The Tax Court has jurisdiction under I. R. C. § 6330(d)(1) to review a determination only if the IRS was subject to obligations imposed by I. R. C. § 6320 or § 6330 in making that determination. Under the Canada-U. S. Income Tax Treaty, Article XXVI A(2) defines a revenue claim as “finally determined” when all administrative and judicial rights of the taxpayer to restrain collection in the applicant State have lapsed or been exhausted. Article XXVI A(3) requires the requested State to collect the accepted revenue claim “as though such revenue claim were the requested State’s own revenue claim finally determined in accordance with the laws applicable to the collection of the requested State’s own taxes. ” Article XXVI A(5) states that nothing in the article shall be construed as creating or providing any rights of administrative or judicial review of the applicant State’s finally determined revenue claim by the requested State.

    Holding

    The Tax Court held that it lacked jurisdiction under I. R. C. § 6330(d)(1) to review the IRS’s denial of Ms. Ryckman’s request for a CDP hearing because the IRS was not subject to any obligations imposed by I. R. C. § 6320 or § 6330 with respect to her hearing request. The Court interpreted the Canada-U. S. Income Tax Treaty to require the U. S. to treat Ms. Ryckman’s Canadian tax liability as a U. S. tax assessment for which all rights to restrain collection, including CDP rights, had lapsed or been exhausted.

    Reasoning

    The Court’s reasoning was based on a detailed analysis of the Treaty provisions and their interaction with the CDP statutes. The Court noted that the Treaty’s requirement that a Canadian revenue claim be treated as “finally determined” under U. S. law meant that Ms. Ryckman had no additional rights to a CDP hearing in the U. S. The Court emphasized that the Treaty’s language precluded the creation of any new administrative or judicial rights in the U. S. for finally determined Canadian claims. The Court also considered the IRS’s post-ratification conduct, which initially suggested that CDP rights applied to treaty levies but later shifted to offering alternative administrative processes. The Court rejected the dissent’s argument that the Treaty should be read to allow for CDP rights, as this would create a conflict with the later-enacted CDP statutes, which the Court found could be harmonized with the Treaty’s provisions. The Court also addressed policy considerations, noting that allowing additional procedural rights in the U. S. would undermine the Treaty’s purpose of ensuring that collection assistance requests are made only after all remedies in the applicant State are exhausted.

    Disposition

    The Tax Court dismissed Ms. Ryckman’s petition for lack of jurisdiction, as the IRS’s denial of her CDP hearing request was not a determination subject to judicial review under I. R. C. § 6330(d)(1).

    Significance/Impact

    This case is significant for its interpretation of the interaction between tax treaties and domestic law, particularly in the context of procedural rights. It clarifies that the U. S. must treat Canadian revenue claims accepted under the Treaty as U. S. tax assessments with exhausted rights, thereby foreclosing additional U. S. procedural protections. This ruling may impact future cases involving tax treaties and collection assistance requests, emphasizing the importance of harmonizing treaty obligations with domestic statutes. It also underscores the limited jurisdiction of the Tax Court and the need for taxpayers to exhaust all remedies in the applicant State before seeking relief in the U. S. under a treaty.

  • Mukhi v. Commissioner, 162 T.C. No. 8 (2024): IRS Assessment Authority and Civil Tax Penalties under I.R.C. §§ 6038(b) and 6677

    Mukhi v. Commissioner, 162 T. C. No. 8 (2024)

    The U. S. Tax Court ruled that the IRS lacks authority to assess penalties under I. R. C. § 6038(b) for failure to file foreign corporation information returns, thus invalidating collection actions for these penalties. However, the court upheld penalties under I. R. C. § 6677 for failure to report foreign trust transactions, finding they do not violate the Eighth Amendment’s Excessive Fines Clause. This decision clarifies the IRS’s assessment powers and the constitutional limits of civil tax penalties.

    Parties

    Raju J. Mukhi, the petitioner, challenged the Commissioner of Internal Revenue, the respondent, in the United States Tax Court. Mukhi’s challenge was in response to a notice of determination concerning foreign reporting penalties assessed under I. R. C. §§ 6038(b) and 6677. The case proceeded through summary judgment motions filed by both parties.

    Facts

    Raju J. Mukhi created three foreign entities between 2001 and 2005: Sukhmani Partners II Ltd. , Sukhmani Gurkukh Nivas Foundation, and Gurdas International Ltd. Through these entities, Mukhi opened foreign brokerage accounts and conducted transactions amounting to over $9. 7 million transferred to Gurdas International Ltd. and approximately $4. 7 million withdrawn between 2005 and 2008. Following a guilty plea in 2014 for false tax returns and failure to file reports of foreign bank accounts, the IRS assessed penalties totaling over $11 million under I. R. C. §§ 6038(b) and 6677 for Mukhi’s failure to timely file required international information returns. Mukhi protested these assessments and requested a Collection Due Process (CDP) hearing, during which he sought to challenge his underlying liability and proposed collection alternatives.

    Procedural History

    The IRS issued notices of determination to proceed with collection actions, prompting Mukhi to file a petition with the U. S. Tax Court. The case was consolidated with Mukhi’s related deficiency case for trial and briefing. Both parties filed cross-motions for summary judgment, addressing issues of due process, abuse of discretion in rejecting collection alternatives, and the constitutionality of the assessed penalties. The Tax Court reviewed the motions based on the administrative record and legal precedents, considering the validity of the notice of determination, the IRS’s assessment authority, and the application of the Eighth Amendment’s Excessive Fines Clause.

    Issue(s)

    Whether the IRS has the authority to assess penalties under I. R. C. § 6038(b) for failure to file foreign corporation information returns?

    Whether the penalties assessed under I. R. C. § 6677 for failure to report foreign trust transactions violate the Eighth Amendment’s Excessive Fines Clause?

    Whether the settlement officer violated Mukhi’s Fifth Amendment due process rights or abused his discretion in rejecting Mukhi’s proposed collection alternatives?

    Rule(s) of Law

    The court applied the rule that the IRS’s assessment authority is limited to those penalties explicitly provided for in the Internal Revenue Code. I. R. C. § 6038(b) imposes a penalty for failure to file information returns disclosing ownership of a foreign corporation, but does not grant the IRS the authority to assess this penalty. I. R. C. § 6677 imposes penalties for failure to file information returns related to foreign trusts, with the penalty amount determined based on the gross value of the trust assets or transferred property. The Excessive Fines Clause of the Eighth Amendment prohibits the imposition of fines that are grossly disproportionate to the gravity of the offense. The court also considered the due process requirements under the Fifth Amendment and the IRS’s discretion in evaluating collection alternatives under I. R. C. § 7122(a).

    Holding

    The court held that the IRS lacks authority to assess penalties under I. R. C. § 6038(b), thus prohibiting collection actions for these penalties. The court further held that the penalties imposed under I. R. C. § 6677 do not constitute fines and therefore do not violate the Excessive Fines Clause. The settlement officer did not violate Mukhi’s Fifth Amendment due process rights or abuse his discretion in rejecting Mukhi’s proposed collection alternatives, as the offers were significantly below Mukhi’s reasonable collection potential.

    Reasoning

    The court’s reasoning was grounded in statutory interpretation, constitutional analysis, and administrative law principles. For I. R. C. § 6038(b), the court adhered to its precedent in Farhy v. Commissioner, which established that the IRS lacks assessment authority for this penalty. This decision was based on the plain language of the statute, which does not explicitly grant assessment authority to the IRS. Regarding I. R. C. § 6677, the court found that these penalties serve a remedial purpose aimed at protecting revenue and reimbursing the government for investigation expenses, rather than punishing the taxpayer. This purpose aligns with the court’s consistent interpretation of civil tax penalties as non-punitive under the Eighth Amendment. The court’s analysis of the Fifth Amendment and collection alternatives focused on the settlement officer’s independent review of Mukhi’s case and the adequacy of the proposed offers in relation to Mukhi’s financial situation. The court emphasized that the settlement officer’s interactions with the Appeals officer did not compromise his impartiality, and the rejection of the collection alternatives was justified given the significant disparity between the offers and Mukhi’s reasonable collection potential.

    Disposition

    The court granted partial summary judgment in favor of Mukhi on the issue of the IRS’s authority to assess penalties under I. R. C. § 6038(b), prohibiting collection actions for these penalties. The court granted the Commissioner’s motion for partial summary judgment on the issues of the validity of the notice of determination, the non-violation of Mukhi’s Fifth Amendment rights, the non-abuse of discretion in rejecting collection alternatives, and the non-violation of the Excessive Fines Clause by the I. R. C. § 6677 penalties. Mukhi’s motion for summary judgment was denied.

    Significance/Impact

    This case significantly impacts the IRS’s enforcement of foreign reporting penalties, particularly under I. R. C. § 6038(b), by clarifying that the IRS lacks assessment authority for these penalties. This ruling may prompt legislative action to explicitly grant such authority if deemed necessary. The decision also reinforces the distinction between remedial and punitive penalties under the Eighth Amendment, providing guidance on the constitutional limits of civil tax penalties. For legal practitioners, the case underscores the importance of challenging the IRS’s assessment authority and the need for thorough review of collection alternatives in CDP hearings.

  • Organic Cannabis Foundation, LLC v. Commissioner, 161 T.C. No. 4 (2023): Equitable Tolling and Collection Due Process Hearings

    Organic Cannabis Foundation, LLC v. Commissioner, 161 T. C. No. 4 (2023)

    The U. S. Tax Court ruled that the 30-day deadline for requesting a Collection Due Process (CDP) hearing can be equitably tolled, overturning prior precedent. This decision enhances taxpayer rights by allowing late-filed requests for CDP hearings to be considered under certain circumstances, impacting how the IRS handles tax collection disputes.

    Parties

    Organic Cannabis Foundation, LLC, the petitioner, sought review of the IRS’s tax lien filings for the years 2010, 2011, and 2018. The respondent was the Commissioner of Internal Revenue. The case was heard in the U. S. Tax Court under docket numbers 381-22L and 5442-22L.

    Facts

    Organic Cannabis Foundation, LLC, had unpaid income taxes for the years 2010, 2011, and 2018. The IRS issued notices of federal tax lien (NFTL) filings for these years. The petitioner timely requested a CDP hearing for 2010 and 2011 within the 30-day period specified by I. R. C. § 6320(a)(3)(B). However, the request for a 2018 CDP hearing was submitted one day after the deadline. The IRS treated this as untimely and provided an equivalent hearing instead, which does not allow for judicial review. The petitioner challenged the timeliness of the 2018 request and argued for equitable tolling of the 30-day period.

    Procedural History

    The IRS provided a CDP hearing for 2010 and 2011 and an equivalent hearing for 2018, issuing a Notice of Determination for 2010 and 2011, and a Decision Letter for 2018. The petitioner filed a petition seeking review for all three years. The Commissioner moved to dismiss the 2018 claim for lack of jurisdiction, arguing that the hearing request was untimely. The Tax Court overruled its prior precedent in Kennedy v. Commissioner, which had held that the 30-day period for requesting a CDP hearing was a fixed deadline not subject to equitable tolling.

    Issue(s)

    Whether the 30-day period for requesting a CDP hearing under I. R. C. § 6320(a)(3)(B) is subject to equitable tolling?

    Rule(s) of Law

    The Internal Revenue Code, specifically I. R. C. § 6320, provides taxpayers with the right to request a CDP hearing within 30 days of receiving a notice of federal tax lien filing. The Supreme Court’s decision in Boechler, P. C. v. Commissioner established that nonjurisdictional deadlines, such as the 30-day period for filing a petition for judicial review, are subject to equitable tolling. The Tax Court applied this principle to the administrative deadline for requesting a CDP hearing.

    Holding

    The Tax Court held that the 30-day period for requesting a CDP hearing is subject to equitable tolling. The court overruled Kennedy v. Commissioner to the extent that it held the 30-day period was a fixed deadline not amenable to equitable tolling.

    Reasoning

    The Tax Court’s reasoning was grounded in the Supreme Court’s decision in Boechler, which established that nonjurisdictional deadlines are presumptively subject to equitable tolling unless Congress clearly indicates otherwise. The court found no such clear statement in I. R. C. § 6320 that would preclude equitable tolling of the 30-day period. The court also examined the legislative history and Treasury regulations, concluding that they did not categorically preclude equitable tolling. The court noted that the regulations allow for some equitable considerations, such as permitting taxpayers to perfect defective hearing requests after the 30-day period. The court rejected the argument that the IRS’s need for prompt collection justified a strict deadline, emphasizing the remedial nature of the CDP regime designed to protect taxpayers. The court also considered the administrative burden of applying equitable tolling but found it manageable compared to other tax-related deadlines.

    Disposition

    The Tax Court remanded the collection action for 2018 to the IRS Independent Office of Appeals to determine whether the circumstances surrounding the petitioner’s late filing warranted equitable tolling.

    Significance/Impact

    This decision expands taxpayer rights by allowing for the possibility of equitable tolling of the 30-day period for requesting a CDP hearing. It overrules prior Tax Court precedent and aligns with the Supreme Court’s approach to nonjurisdictional deadlines. The ruling may lead to increased requests for CDP hearings and could affect the IRS’s collection procedures. It also highlights the importance of considering equitable principles in administrative processes, potentially influencing future interpretations of similar statutory deadlines.

  • Stanojevich v. Commissioner, 160 T.C. No. 7 (2023): Frivolous Tax Return Penalties Under IRC § 6702(a)

    Stanojevich v. Commissioner, 160 T. C. No. 7 (United States Tax Court 2023)

    In a significant ruling on frivolous tax return penalties, the U. S. Tax Court upheld the IRS’s imposition of penalties under IRC § 6702(a) against a trustee who filed frivolous returns on behalf of a trust. The court clarified that a trustee can be personally liable for such penalties, reinforcing the IRS’s authority to enforce tax compliance and deter frivolous filings.

    Parties

    Srbislav B. Stanojevich, as the petitioner and trustee of the Source Financial Trust (SFT), challenged the Commissioner of Internal Revenue, the respondent, regarding the filing of a Notice of Federal Tax Lien (NFTL) for assessed frivolous return penalties for tax years 2009 through 2012. Stanojevich appeared pro se, while the Commissioner was represented by Alexander N. Martini and John T. Arthur.

    Facts

    Srbislav B. Stanojevich, acting as the trustee of the Source Financial Trust (SFT), filed income tax returns for the trust for the years 2009 through 2012. These returns reported interest income as the sole source of income for SFT, with the interest income matching the amount of withheld federal income tax. The returns claimed that SFT’s total tax was zero and requested refunds equal to the withheld tax amounts. The IRS determined these returns to be frivolous under IRC § 6702(a) due to the obviously false claims of withheld taxes, leading to the assessment of a $5,000 penalty against Stanojevich for each year. Stanojevich contested these penalties, arguing he was not personally liable as they related to the trust’s returns, not his own.

    Procedural History

    The IRS sent Stanojevich a notice of the NFTL filing and his right to a Collection Due Process (CDP) hearing. Following the hearing, the IRS Office of Appeals sustained the NFTL filing. Stanojevich timely petitioned the Tax Court to challenge the notice of determination. The case was remanded to Appeals for clarification on verification requirements, after which Appeals issued a supplemental notice again upholding the NFTL filing. The Tax Court then considered the case under summary adjudication, applying a de novo review for the underlying liability issue and an abuse of discretion standard for other determinations by Appeals.

    Issue(s)

    Whether a trustee can be held personally liable for frivolous return penalties under IRC § 6702(a) when the frivolous returns were filed on behalf of a trust?

    Rule(s) of Law

    IRC § 6702(a) imposes a $5,000 penalty on any person who files a return that does not contain sufficient information for the IRS to judge the substantial correctness of the self-assessment or contains information indicating the self-assessment is substantially incorrect, if the filing is based on a position identified as frivolous by the IRS or reflects a desire to delay or impede federal tax laws. The court interpreted the term “person” under § 7701(a)(1) to include a trustee, and § 6012(b)(4) mandates that a trust’s return be filed by its fiduciary.

    Holding

    The Tax Court held that Stanojevich, as the trustee of SFT, was liable for the penalties assessed under IRC § 6702(a) for filing frivolous returns on behalf of the trust. The court ruled that the plain language of § 6702(a) extends liability to any person who files a frivolous return, including a trustee filing on behalf of a trust.

    Reasoning

    The court’s reasoning centered on the interpretation of IRC § 6702(a) and the definition of “person” under § 7701(a)(1), which includes a trustee. The court emphasized that § 6012(b)(4) assigns the responsibility for filing a trust’s return to its fiduciary, thereby supporting the imposition of § 6702(a) penalties on a trustee for frivolous filings. The court found that Stanojevich’s filings met the criteria for frivolous returns under § 6702(a)(1) and (2), as they contained false information and were based on positions identified as frivolous by the IRS. The court rejected Stanojevich’s argument that he should not be personally liable because the returns were for the trust, asserting that the statute’s language does not condition liability on the type of return filed. Additionally, the court found no abuse of discretion by the IRS Office of Appeals in upholding the NFTL filing, as the settlement officer had properly verified the assessments and followed procedural requirements.

    Disposition

    The Tax Court sustained the IRS’s determination and upheld the NFTL filing, affirming Stanojevich’s liability for the frivolous return penalties.

    Significance/Impact

    This ruling clarifies that trustees can be held personally liable for filing frivolous tax returns on behalf of trusts, reinforcing the IRS’s ability to enforce tax compliance and deter such filings. The decision underscores the broad interpretation of “person” under the tax code, extending liability to fiduciaries and potentially affecting how trustees approach their tax filing responsibilities. The case also affirms the IRS’s procedural integrity in handling CDP hearings and assessments, likely influencing future cases involving similar issues.

  • Brown v. Commissioner, 158 T.C. No. 9 (2022): Deemed Acceptance of Offers-in-Compromise Under I.R.C. § 7122(f)

    Brown v. Commissioner, 158 T. C. No. 9 (2022)

    In Brown v. Commissioner, the U. S. Tax Court ruled that an Offer-in-Compromise (OIC) submitted during a Collection Due Process (CDP) hearing is not automatically accepted if not rejected within 24 months, as per I. R. C. § 7122(f). The court held that the rejection period ends when the IRS returns the OIC, not when Appeals issues a notice of determination. This decision clarifies the application of the “deemed acceptance” rule in the context of CDP proceedings, ensuring that the IRS can promptly address OICs without being pressured by the 24-month deadline during ongoing CDP cases.

    Parties

    Michael D. Brown, as the petitioner, sought review of the Commissioner of Internal Revenue’s decision to reject his OIC. The Commissioner of Internal Revenue served as the respondent in this case, which was heard in the U. S. Tax Court.

    Facts

    Michael D. Brown, with a tax liability exceeding $50 million, received a Notice of Federal Tax Lien Filing and his right to a CDP hearing from the IRS on November 9, 2017. He timely requested the hearing and submitted an OIC on April 19, 2018, offering $320,000 to settle his liabilities for the tax years 2009 and 2010. The OIC was forwarded to the IRS’s Centralized Offer in Compromise Unit (COIC unit), which determined the offer to be processable. Subsequently, the offer was referred to a collection specialist in the Laguna Niguel branch (Laguna Group). On November 5, 2018, the Laguna Group returned the OIC to Brown, closing the file on his offer due to pending investigations that might affect the liability. Despite Brown’s efforts to have the decision overturned during the CDP hearing, the IRS Appeals officer upheld the Laguna Group’s decision and closed the case, issuing a notice of determination on August 12, 2020.

    Procedural History

    Following the IRS’s notice of determination on August 12, 2020, Brown timely petitioned the U. S. Tax Court for review. He filed a Motion for Summary Judgment on July 22, 2021, arguing that his OIC should be deemed accepted under I. R. C. § 7122(f). The court heard oral arguments on March 28, 2022, and issued its opinion on June 23, 2022, denying Brown’s motion. The court’s decision was based on the precedent set in Brown II and Brown III, where similar arguments were rejected.

    Issue(s)

    Whether an OIC submitted during a CDP hearing is deemed accepted under I. R. C. § 7122(f) if the IRS does not issue a notice of determination within 24 months of the offer’s submission.

    Rule(s) of Law

    I. R. C. § 7122(f) states that an OIC “shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. ” Treasury Regulation § 301. 7122-1(d)(2) clarifies that an OIC is deemed pending only between the date it is accepted for processing and the date it is returned to the taxpayer. Notice 2006-68, § 1. 07, further explains that the 24-month period does not include time spent by the IRS Office of Appeals reviewing a rejected OIC.

    Holding

    The U. S. Tax Court held that Brown’s OIC was not deemed accepted under I. R. C. § 7122(f) because it was returned by the Laguna Group within 24 months of submission, specifically in November 2018. The court emphasized that the rejection period terminates upon the return of the OIC, not upon the issuance of the notice of determination by Appeals.

    Reasoning

    The court’s reasoning was grounded in the plain language of I. R. C. § 7122(f) and the applicable regulations and notices. It relied on previous decisions in Brown II and Brown III, which established that the 24-month period ends when the COIC unit returns the OIC. The court rejected Brown’s argument that the notice of determination by Appeals should be the terminating event, noting that such a rule would conflict with the statutory purpose of ensuring prompt IRS action on OICs. The court also addressed policy concerns, stating that requiring Appeals to issue a notice of determination within 24 months could lead to premature closures of CDP cases, potentially resulting in reversals and remands. Additionally, the court considered the practical implications of Brown’s theory, suggesting it could encourage delay tactics by taxpayers.

    Disposition

    The court denied Brown’s Motion for Summary Judgment, upholding the IRS’s decision to return his OIC within the 24-month period specified in I. R. C. § 7122(f).

    Significance/Impact

    The Brown decision clarifies the application of the “deemed acceptance” rule under I. R. C. § 7122(f) in the context of CDP proceedings. It reinforces the IRS’s ability to manage OICs efficiently without being constrained by the 24-month deadline during ongoing CDP cases. This ruling is significant for practitioners and taxpayers, as it sets a clear precedent that the return of an OIC by the IRS, rather than the issuance of a notice of determination by Appeals, is the critical event for determining whether an OIC is deemed accepted. The decision also underscores the importance of the IRS’s administrative procedures in handling OICs and may influence future legislative or regulatory adjustments to the tax collection process.

  • Chavis v. Commissioner, 158 T.C. No. 8 (2022): Trust Fund Recovery Penalties and Collection Due Process Procedures

    Chavis v. Commissioner, 158 T. C. No. 8 (U. S. Tax Ct. 2022)

    In Chavis v. Commissioner, the U. S. Tax Court upheld the IRS’s decision to sustain a tax lien against Angela M. Chavis for trust fund recovery penalties (TFRPs) assessed due to her corporation’s failure to pay payroll taxes. The court ruled that Chavis could not challenge her underlying liability at the collection due process (CDP) hearing because she had a prior opportunity to contest it. Additionally, the court affirmed that ‘innocent spouse’ relief was unavailable for TFRP liabilities, and upheld the IRS’s decision not to place her account in ‘currently not collectible’ status, emphasizing the procedural limitations in CDP hearings and the distinct nature of TFRP liabilities from joint income tax liabilities.

    Parties

    Angela M. Chavis, Petitioner, pro se; Commissioner of Internal Revenue, Respondent, represented by Catherine S. Tyson.

    Facts

    Angela M. Chavis and her then-husband were officers of Oasys Information Systems, Inc. , a corporation that withheld payroll taxes from its employees but failed to pay those taxes to the government during 2011-2014. The IRS issued Chavis a Letter 1153, Notice of Trust Fund Recovery Penalty, proposing to assess TFRPs against her and her husband under I. R. C. § 6672. Chavis received the letter but did not challenge the proposed assessment. Subsequently, the IRS assessed TFRPs totaling $146,682 against Chavis. In an effort to collect this liability, the IRS issued Chavis a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing. Chavis requested a collection due process (CDP) hearing, during which she sought to challenge her underlying liability, requested innocent spouse relief under I. R. C. § 6015, and asked for her account to be placed in ‘currently not collectible’ status and for the lien to be withdrawn. The IRS denied these requests, leading to Chavis’s petition to the U. S. Tax Court.

    Procedural History

    The IRS issued a Letter 1153 to Chavis, which she received but did not challenge. After assessing TFRPs, the IRS issued a Letter 3172, prompting Chavis to request a CDP hearing. The settlement officer (SO) reviewed Chavis’s requests during the CDP hearing and denied them, leading to a notice of determination sustaining the lien filing. Chavis timely petitioned the U. S. Tax Court, which reviewed the case under the summary judgment standard. The court applied an abuse of discretion standard of review to the IRS’s actions since Chavis’s underlying liability was not properly at issue.

    Issue(s)

    Whether Chavis, having received a prior opportunity to challenge her TFRP liability upon receipt of the Letter 1153, was entitled to challenge her underlying tax liability at the CDP hearing or in the U. S. Tax Court?

    Whether Chavis was eligible for ‘innocent spouse’ relief under I. R. C. § 6015 for her TFRP liability?

    Whether the IRS abused its discretion in sustaining the collection action against Chavis?

    Rule(s) of Law

    I. R. C. § 6330(c)(2)(B) states that a taxpayer may challenge the existence or amount of her underlying tax liability in a CDP case 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.

    I. R. C. § 6672(a) provides that any person required to collect, truthfully account for, and pay over payroll taxes, who willfully fails to do so, shall be liable for a penalty equal to the total amount of the tax evaded or not accounted for and paid over.

    I. R. C. § 6015 provides relief from joint and several liability on joint returns, but this relief applies only to liabilities shown on (or should have been shown on) a joint federal income tax return.

    Holding

    The U. S. Tax Court held that Chavis was not entitled to challenge her underlying TFRP liability at the CDP hearing or in the court because she had a prior opportunity to dispute it upon receipt of the Letter 1153. The court also held that Chavis was not eligible for ‘innocent spouse’ relief under I. R. C. § 6015 because her TFRP liability did not arise from any liability shown on a joint federal income tax return. Finally, the court held that the IRS did not abuse its discretion in sustaining the collection action against Chavis.

    Reasoning

    The court’s reasoning was based on the statutory framework governing TFRPs and CDP hearings. The court noted that TFRPs are ‘assessable penalties’ not subject to deficiency procedures, but taxpayers have the opportunity to dispute their liability by appealing a Letter 1153. Since Chavis received the Letter 1153 and did not appeal, she was precluded from challenging her underlying liability at the CDP hearing. Regarding ‘innocent spouse’ relief, the court interpreted I. R. C. § 6015 to apply only to liabilities arising from joint federal income tax returns, not TFRPs. The court upheld the IRS’s decision to deny CNC status and lien withdrawal, finding that the settlement officer properly calculated Chavis’s ability to pay and that Chavis failed to provide evidence supporting her claims. The court emphasized that the IRS’s actions were not arbitrary, capricious, or without sound basis in fact or law, thus not constituting an abuse of discretion.

    Disposition

    The U. S. Tax Court granted the IRS’s motion for summary judgment, sustaining the notice of determination and upholding the tax lien filing against Chavis.

    Significance/Impact

    Chavis v. Commissioner reinforces the procedural limitations on challenging underlying liabilities in CDP hearings when a prior opportunity to dispute existed. It clarifies that ‘innocent spouse’ relief under I. R. C. § 6015 does not extend to TFRP liabilities, which are distinct from joint income tax liabilities. The decision also underscores the IRS’s discretion in determining collection alternatives based on the taxpayer’s financial situation and adherence to administrative procedures. This case is significant for practitioners and taxpayers dealing with TFRPs, as it highlights the importance of timely challenging proposed assessments and understanding the scope of relief available in CDP proceedings.

  • William E. Ruhaak v. Commissioner of Internal Revenue, 157 T.C. No. 9 (2021): Collection Due Process Hearings and Equivalent Hearings

    William E. Ruhaak v. Commissioner of Internal Revenue, 157 T. C. No. 9 (2021)

    In a significant ruling, the U. S. Tax Court clarified the distinction between Collection Due Process (CDP) hearings and equivalent hearings under IRS procedures. William E. Ruhaak sought an equivalent hearing to voice his conscientious objection to tax payments, but the court ruled that his timely request within the 30-day period following the levy notice automatically triggered a CDP hearing. The decision underscores the strict adherence to statutory and regulatory frameworks governing IRS collection actions, impacting taxpayers’ rights to administrative hearings.

    Parties

    William E. Ruhaak, as the Petitioner, sought review of the IRS’s determination to sustain a proposed levy. The Commissioner of Internal Revenue, as the Respondent, defended the IRS’s actions and determination.

    Facts

    On March 10, 2017, the IRS sent William E. Ruhaak a Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice) via certified mail. Ruhaak responded by mailing Form 12153, Request for a Collection Due Process or Equivalent Hearing, on April 7, 2017, which was postmarked on that date and received by the IRS Office of Appeals on April 10, 2017. On this form, Ruhaak checked a box requesting an equivalent hearing if his request for a CDP hearing was untimely. The IRS, however, determined that Ruhaak’s request was timely for a CDP hearing, and thus, he was not entitled to an equivalent hearing. After a CDP hearing, the IRS issued a notice of determination sustaining the proposed levy. Ruhaak argued that he should have been granted an equivalent hearing, as his Form 12153 constituted a written request made within the one-year period for requesting such a hearing.

    Procedural History

    The IRS sent Ruhaak a levy notice on March 10, 2017, and Ruhaak timely filed a Form 12153 within the 30-day period provided for requesting a CDP hearing. The IRS Office of Appeals determined that Ruhaak’s request was timely for a CDP hearing and conducted such a hearing. Following the hearing, the IRS issued a notice of determination on September 15, 2017, sustaining the proposed levy. Ruhaak then filed a timely petition for review with the U. S. Tax Court, which denied respondent’s motion for summary judgment and proceeded to trial. The Tax Court ultimately ruled that Ruhaak’s request, made within the 30-day period, necessitated a CDP hearing, not an equivalent hearing, and upheld the IRS’s determination.

    Issue(s)

    Whether a taxpayer, who submits a hearing request within the 30-day period following the mailing date of a levy notice, may request an equivalent hearing instead of a CDP hearing under IRS regulations?

    Rule(s) of Law

    Section 6330 of the Internal Revenue Code authorizes the IRS to notify taxpayers of their right to a CDP hearing upon receiving a levy notice. A taxpayer must request a CDP hearing within the 30-day period following the mailing date of the levy notice. IRS regulations allow for an equivalent hearing if a taxpayer fails to timely request a CDP hearing, provided the request for an equivalent hearing is made in writing within the one-year period commencing the day after the date of the levy notice. See 26 C. F. R. § 301. 6330-1(i)(1), (2).

    Holding

    The court held that a taxpayer’s request for a hearing made within the 30-day period following the mailing date of the levy notice triggers a CDP hearing and not an equivalent hearing. Consequently, Ruhaak’s timely request necessitated a CDP hearing, and the IRS properly issued a notice of determination following the CDP hearing.

    Reasoning

    The court’s reasoning hinged on the statutory and regulatory frameworks governing CDP and equivalent hearings. The IRS regulations specify that a taxpayer who fails to make a timely request for a CDP hearing may request an equivalent hearing. Since Ruhaak’s request was made within the 30-day period for requesting a CDP hearing, he was not eligible for an equivalent hearing. The court emphasized that the one-year period for requesting an equivalent hearing begins only after the 30-day period for a CDP hearing expires. The court further noted that Ruhaak’s argument was based on a misreading of the regulations in isolation, without considering the full context of the IRS’s administrative procedures. Additionally, the court addressed Ruhaak’s claim that the IRS abused its discretion in not rescheduling a telephone conference, finding that his request for rescheduling was conditioned on an unlawful demand for an equivalent hearing, and his arguments during the CDP hearing were frivolous and precluded under the IRS regulations.

    Disposition

    The court upheld the IRS’s determination to sustain the proposed levy, ruling that Ruhaak was entitled to a CDP hearing, not an equivalent hearing, and that the IRS did not abuse its discretion in the conduct of the CDP hearing or in its determination to sustain the levy.

    Significance/Impact

    This case clarifies the distinction between CDP and equivalent hearings under IRS regulations, emphasizing the importance of the timing of a taxpayer’s request in determining the type of hearing available. It reinforces the IRS’s authority to strictly enforce the 30-day period for requesting a CDP hearing, impacting taxpayers’ ability to select the type of administrative hearing they receive. The decision also underscores the IRS’s ability to summarily dispose of frivolous arguments during CDP hearings, which may extend to equivalent hearings, affecting taxpayers’ rights to raise certain objections during IRS collection proceedings.

  • Mary T. Belair v. Commissioner of Internal Revenue, 157 T.C. No. 2 (2021): Abuse of Discretion in Collection Due Process Hearings

    Mary T. Belair v. Commissioner of Internal Revenue, 157 T. C. No. 2 (2021)

    In Mary T. Belair v. Commissioner, the U. S. Tax Court upheld the IRS’s filing of a tax lien against Belair, ruling that the IRS did not abuse its discretion in denying her an installment agreement due to her failure to file required tax returns. This case underscores the importance of filing compliance in collection due process (CDP) hearings and the limited scope of judicial review in such cases, confined to the administrative record for abuse of discretion.

    Parties

    Mary T. Belair, the petitioner, appeared pro se. The respondent was the Commissioner of Internal Revenue, represented by Joseph E. Conley, Thomas R. Mackinson, and Cameron W. Carr. The case was heard by the United States Tax Court, with appellate venue in the Court of Appeals for the Ninth Circuit.

    Facts

    Mary T. Belair received a notice from the IRS on February 28, 2019, informing her of a Federal tax lien filed against her for unpaid income taxes for the years 2013, 2014, and 2015. Belair requested a collection due process (CDP) hearing and expressed interest in an installment agreement, claiming she expected to receive a large judgment from a lawsuit against a former U. S. Attorney. During the CDP hearing process, the IRS requested Belair to submit her delinquent tax returns for 2016, 2017, and 2018, and a completed Form 433-A. Belair failed to provide the requested documents, leading to the IRS’s determination to uphold the tax lien and deny her request for an installment agreement.

    Procedural History

    Belair timely requested a CDP hearing following the IRS’s notice of a Federal tax lien. After the hearing, the IRS’s Office of Appeals upheld the lien and denied Belair’s request for an installment agreement due to her noncompliance with filing requirements. Belair then petitioned the U. S. Tax Court for review. The Commissioner moved for summary judgment, which was supported by the administrative record. The Tax Court reviewed the case under the abuse of discretion standard, limited to the administrative record, as mandated by the Ninth Circuit’s application of the record rule in CDP cases.

    Issue(s)

    Whether the IRS’s Office of Appeals abused its discretion in upholding the filing of a Federal tax lien and denying Belair’s request for an installment agreement, given her failure to submit required delinquent tax returns?

    Rule(s) of Law

    In reviewing a CDP case where the underlying tax liability is not at issue, the court applies an abuse of discretion standard, limited to the administrative record. The court upholds the administrative determination unless it is arbitrary, capricious, or without sound basis in fact or law. See Keller v. Commissioner, 568 F. 3d 710 (9th Cir. 2009). IRS guidelines require a taxpayer to be in filing and payment compliance to qualify for an installment agreement. See Giamelli v. Commissioner, 129 T. C. 107 (2007).

    Holding

    The Tax Court held that the IRS’s Office of Appeals did not abuse its discretion in upholding the filing of the Federal tax lien and denying Belair’s request for an installment agreement due to her failure to file required tax returns.

    Reasoning

    The court’s reasoning focused on the administrative record and the IRS’s adherence to applicable law and procedures. The IRS verified that all legal and administrative requirements were met in filing the tax lien. Belair’s failure to submit the required delinquent returns and Form 433-A within the specified timeframe justified the IRS’s decision to close the CDP hearing and uphold the lien. The court emphasized that the IRS’s determination was not arbitrary or capricious, as it was based on Belair’s noncompliance with filing requirements, a prerequisite for considering an installment agreement. The court also noted that Belair’s arguments regarding a lawsuit against a former U. S. Attorney were not relevant to the CDP hearing’s scope, which is limited to collection issues. The court concluded that the IRS’s action balanced the need for efficient tax collection with Belair’s concerns, adhering to the statutory requirement under section 6330(c)(3)(C).

    Disposition

    The Tax Court granted the Commissioner’s motion for summary judgment, affirming the IRS’s determination to uphold the Federal tax lien and deny Belair’s request for an installment agreement.

    Significance/Impact

    This case reinforces the importance of filing compliance in CDP hearings and clarifies the scope of judicial review in such cases, limited to the administrative record for abuse of discretion. It underscores the IRS’s authority to deny installment agreements based on noncompliance with filing requirements, impacting taxpayers’ strategies in collection disputes. The ruling also highlights the Ninth Circuit’s application of the record rule, which may influence the approach of taxpayers and the IRS in CDP proceedings within that jurisdiction.