SCOTUS Reports

Tag: Internal Revenue Code Section 6330

  • Do S. Wong v. Commissioner, T.C. Memo. 2020-32: Collection Due Process and Abuse of Discretion in Tax Law

    Do S. Wong v. Commissioner, T. C. Memo. 2020-32 (U. S. Tax Court 2020)

    In Do S. Wong v. Commissioner, the U. S. Tax Court upheld the IRS’s filing of a federal tax lien against Wong, affirming the agency’s collection action as not constituting an abuse of discretion. Wong, who failed to substantiate his 2013 tax deductions and did not respond to IRS requests for financial information during the collection due process (CDP) hearing, challenged the lien. The court’s decision emphasizes the IRS’s discretion in collection actions and the importance of taxpayer cooperation in CDP proceedings, impacting future tax collection cases.

    Parties

    Do S. Wong, the petitioner, represented himself pro se. The respondent was the Commissioner of Internal Revenue, represented by Halvor R. Melom.

    Facts

    Do S. Wong, a California resident, filed a timely federal income tax return for 2013, reporting a tax liability of $10,395. He claimed an overpayment, which he elected to apply to his 2014 tax liability. The IRS examined his 2013 return and disallowed several hundred thousand dollars in business expense deductions due to lack of substantiation. The IRS proposed a deficiency of $156,326 and an accuracy-related penalty of $31,265. Wong did not respond to the 30-day letter or the subsequent notice of deficiency sent on June 28, 2016. The IRS assessed the deficiency and penalty on February 13, 2017, after Wong failed to file a petition within the 90-day period. To collect the unpaid liability, the IRS filed a notice of federal tax lien (NFTL) on February 27, 2018, and sent Wong a notice of the lien filing and his right to a hearing.

    Wong requested a CDP hearing, asserting he did not owe any tax for 2013. The settlement officer (SO) scheduled a telephone hearing for June 13, 2018, and outlined the required documentation for considering collection alternatives, including a Form 433-A and copies of unfiled tax returns for 2014-2017. Wong did not attend the hearing, submit the required documents, or communicate with the SO until after missing the hearing, when he requested additional time to provide documentation for his 2013 expenses and to complete his 2014-2017 returns. The SO denied the extension, advised Wong to pursue audit reconsideration, and closed the case on July 31, 2018. The IRS issued a notice of determination sustaining the NFTL filing on August 2, 2018.

    Procedural History

    Wong timely filed a petition with the U. S. Tax Court challenging the IRS’s determination. The Commissioner moved for summary judgment twice, first on July 11, 2019, and again on October 18, 2019, after supplementing the record with evidence of supervisory approval for the accuracy-related penalty. Wong did not respond to either motion. The court initially denied the first motion without prejudice due to uncertainty about the penalty’s supervisory approval but granted the second motion, finding no genuine dispute as to any material fact and ruling as a matter of law that the IRS did not abuse its discretion in sustaining the NFTL filing.

    Issue(s)

    Whether the IRS abused its discretion in sustaining the filing of a notice of federal tax lien against Wong, given his failure to substantiate his 2013 tax deductions and to cooperate in the CDP hearing process?

    Rule(s) of Law

    In a CDP case, the Tax Court reviews the IRS’s determination for abuse of discretion if the taxpayer’s underlying liability is not at issue. Abuse of discretion occurs when a determination is arbitrary, capricious, or without sound basis in fact or law. The IRS must verify that the requirements of applicable law or administrative procedure have been met, consider any relevant issues raised by the taxpayer, and balance the need for efficient tax collection with the taxpayer’s concerns about the intrusiveness of the collection action.

    Holding

    The U. S. Tax Court held that the IRS did not abuse its discretion in sustaining the filing of the NFTL against Wong. The court found that the IRS properly verified compliance with legal and administrative requirements, considered Wong’s concerns, and appropriately balanced collection needs with the taxpayer’s interests.

    Reasoning

    The court reasoned that Wong’s underlying tax liability for 2013 was not at issue because he received a valid notice of deficiency and did not petition the Tax Court within the statutory period. Thus, the court reviewed the IRS’s determination for abuse of discretion. The court found that the SO verified that the notice of deficiency was sent to Wong’s last known address, the tax liability was properly assessed, and supervisory approval was secured for the accuracy-related penalty, as required by section 6751(b)(1). The court noted that the SO provided Wong with instructions on how to pursue audit reconsideration, a discretionary process outside the CDP framework. Wong’s failure to attend the scheduled hearing, submit required financial information, or seek audit reconsideration justified the SO’s decision not to grant further extensions. The court concluded 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 summary judgment in favor of the Commissioner and sustained the IRS’s collection action by upholding the filing of the NFTL.

    Significance/Impact

    Do S. Wong v. Commissioner reinforces the discretion afforded to the IRS in collection actions and the importance of taxpayer cooperation in CDP proceedings. The decision highlights that taxpayers must substantiate their claims and comply with IRS requests for information to challenge collection actions effectively. It also clarifies the IRS’s authority to proceed with collection actions when taxpayers fail to engage in the CDP process, potentially affecting future cases where taxpayers seek to challenge collection actions without providing necessary documentation or pursuing alternative remedies such as audit reconsideration. The case underscores the procedural requirements and the limited scope of judicial review in CDP cases, emphasizing the need for taxpayers to address their underlying liabilities through appropriate channels before challenging collection actions.

  • C. Lynn Moses v. Commissioner of Internal Revenue, T.C. Memo 2014-220: Collection Due Process and Tax Liability Determination

    C. Lynn Moses v. Commissioner of Internal Revenue, T. C. Memo 2014-220 (U. S. Tax Court 2014)

    In a ruling on a collection due process (CDP) hearing, the U. S. Tax Court upheld the IRS’s determination to proceed with a levy against C. Lynn Moses for unpaid taxes from 1999-2002. The court found that Moses failed to provide evidence to challenge the tax liabilities determined by the IRS through bank deposit analysis, and upheld the tax deficiencies and associated penalties. Additionally, the court ruled that the IRS did not abuse its discretion in conducting the CDP hearing via telephone rather than in person, given Moses’s lack of cooperation and failure to provide requested financial documentation.

    Parties

    C. Lynn Moses was the petitioner, appearing pro se. The respondent was the Commissioner of Internal Revenue, represented by Kimberly L. Clark. The case originated in the U. S. Tax Court, docket number 1710-12L.

    Facts

    C. Lynn Moses did not file federal income tax returns for the years 1999 through 2002. The IRS, after conducting a bank deposit analysis of Moses’s Key Bank account, determined that Moses was engaged in a real estate trade or business and had unreported income for those years. Additionally, Moses was found to have failed to report his share of his wife’s community income. The IRS sent notices of deficiency to Moses’s last known addresses, which were returned unclaimed. The IRS subsequently assessed Moses’s tax liabilities and penalties for these years. Moses did not pay the assessed amounts, leading the IRS to issue a final notice of intent to levy and a notice of his right to a CDP hearing.

    Procedural History

    Moses requested a CDP hearing, expressing a desire for a face-to-face meeting and the intent to challenge the tax liabilities, verify IRS procedures, and discuss collection alternatives. The IRS’s Office of Appeals assigned Settlement Officer Eric D. Edwards to Moses’s case, who scheduled a telephone hearing. Moses failed to submit requested financial documentation and did not participate in the scheduled telephone hearings. Settlement Officer Edwards issued a notice of determination sustaining the proposed levy, which Moses challenged in the U. S. Tax Court. The court reviewed the IRS’s determination under an abuse of discretion standard.

    Issue(s)

    Whether C. Lynn Moses failed to report gross income for the years 1999-2002, making him liable for the assessed tax deficiencies and additions to tax under sections 6651(a)(1) and (2) and 6654(a)?

    Whether the IRS abused its discretion in sustaining the proposed levy action against Moses?

    Rule(s) of Law

    Section 6331(a) authorizes the IRS to levy upon a taxpayer’s property if the tax remains unpaid after notice and demand. Section 6330(a) mandates that no levy may occur without the taxpayer being notified of their right to a hearing. Section 6330(c)(2)(B) precludes a taxpayer from contesting the underlying tax liability in a CDP hearing if they had a prior opportunity to dispute such liability. The IRS’s determination of a deficiency is presumed correct, and the taxpayer bears the burden of proving it incorrect (Rule 142(a); Welch v. Helvering, 290 U. S. 111 (1933)).

    Holding

    The court held that Moses failed to rebut the presumption of correctness regarding the IRS’s deficiency determinations for the years 1999-2002, thus sustaining the tax liabilities as determined by the IRS, except for the conceded amounts. Moses was also found liable for additions to tax under sections 6651(a)(1) and (2) for all years at issue, and under section 6654(a) for the years 2000-2002. The court further held that the IRS did not abuse its discretion in sustaining the proposed levy action against Moses.

    Reasoning

    The court’s reasoning was based on the IRS’s use of the bank deposit method to reconstruct Moses’s income, a method long sanctioned by courts (Estate of Mason v. Commissioner, 64 T. C. 651 (1975)). The IRS established a minimal evidentiary foundation linking Moses to an income-producing activity, shifting the burden to Moses to prove the deficiency determinations were erroneous, which he failed to do. The court also considered the IRS’s compliance with section 7491(c), which places the burden of production on the IRS for additions to tax, but found the IRS met this burden by introducing evidence of Moses’s failure to file and pay taxes, and the preparation of substitute for returns (SFRs). The court rejected Moses’s argument for a face-to-face hearing, citing precedent that such a hearing is not required under section 6330 and that Moses’s failure to cooperate and provide financial documentation justified the IRS’s decision to proceed via telephone.

    Disposition

    The U. S. Tax Court upheld the IRS’s determination to proceed with the levy action against Moses for the unpaid taxes from 1999-2002, including the assessed deficiencies and additions to tax, except for the amounts conceded by the IRS.

    Significance/Impact

    This case reinforces the IRS’s authority to use the bank deposit method for reconstructing income and the legal presumption of correctness for IRS deficiency determinations. It also underscores the importance of taxpayer cooperation in CDP hearings and the IRS’s discretion in determining the format of such hearings. The decision highlights the procedural and evidentiary requirements for challenging tax liabilities and the consequences of non-compliance with IRS requests for documentation.

  • Drake v. Commissioner, 123 T.C. 320 (2004): Ex Parte Communications and Abuse of Discretion in IRS Appeals

    Drake v. Commissioner, 123 T. C. 320 (U. S. Tax Court 2004)

    In Drake v. Commissioner, the U. S. Tax Court ruled that ex parte communications between IRS Appeals officers and other IRS employees, which compromised the independence of the Appeals function, constituted an abuse of discretion. The court remanded the case for a new hearing, emphasizing the importance of an independent and impartial review process in IRS collection due process hearings. This decision underscores the need for procedural integrity in administrative tax proceedings.

    Parties

    Petitioner: Gregory Drake, residing in South Yarmouth, Massachusetts. Respondent: Commissioner of Internal Revenue, represented by the IRS.

    Facts

    Gregory Drake and Barbara Drake filed a joint bankruptcy petition under Chapter 13 in 1997, during which they sold three properties subject to federal tax liens. The proceeds were distributed to them upon dismissal of the bankruptcy case. Subsequently, the IRS sent a notice of intent to levy on their tax liabilities for several years. The Drakes requested a Collection Due Process (CDP) hearing under section 6330 of the Internal Revenue Code. During the administrative review, an ex parte communication occurred between Settlement Officer O’Shea and Advisor Gordon, where Advisor Gordon questioned the credibility of the Drakes’ bankruptcy counsel. This communication was not disclosed to the Drakes. The Appeals Officer Kaplan later closed the case without receiving requested documentation from the Drakes.

    Procedural History

    The IRS Appeals Office determined that the proposed levy should be sustained against Gregory Drake. Drake timely filed a petition for review of the determination in the U. S. Tax Court, which reviewed the determination for abuse of discretion. The court considered the ex parte communication and its impact on the independence of the Appeals function.

    Issue(s)

    Whether the ex parte communication between the IRS Appeals officer and another IRS employee, which questioned the credibility of the taxpayer’s representative, constituted an abuse of discretion under section 6330 of the Internal Revenue Code?

    Rule(s) of Law

    Section 6330 of the Internal Revenue Code requires the IRS to provide taxpayers with a notice of intent to levy and the opportunity for a hearing before the IRS Office of Appeals. The Appeals officer must conduct the hearing independently and impartially, as mandated by the Internal Revenue Service Restructuring and Reform Act of 1998. Revenue Procedure 2000-43 prohibits ex parte communications between Appeals officers and other IRS employees to the extent that such communications appear to compromise the independence of the Appeals function.

    Holding

    The U. S. Tax Court held that the ex parte communication between Settlement Officer O’Shea and Advisor Gordon, which questioned the credibility of the taxpayer’s representative, constituted an abuse of discretion. The court remanded the case to the IRS Appeals Office for a new section 6330 hearing before an independent Appeals officer.

    Reasoning

    The court’s reasoning focused on the necessity of an independent and impartial Appeals function, as required by the Internal Revenue Service Restructuring and Reform Act of 1998. The court noted that the ex parte communication between Settlement Officer O’Shea and Advisor Gordon, which involved questioning the credibility of the taxpayer’s representative, was not ministerial, administrative, or procedural in nature. This communication violated Revenue Procedure 2000-43, which prohibits such ex parte communications to ensure the independence of the Appeals function. The court emphasized that the taxpayer was not given an opportunity to participate in this communication, which may have damaged the taxpayer’s credibility in the administrative proceedings. The court’s decision to remand the case for a new hearing was based on the need to ensure that the Appeals officer could conduct an impartial review without being influenced by prior communications questioning the taxpayer’s credibility.

    Disposition

    The U. S. Tax Court remanded the case to the IRS Appeals Office for a new section 6330 hearing before an independent Appeals officer who has received no communication relating to the credibility of the petitioner or petitioner’s representative.

    Significance/Impact

    The Drake v. Commissioner decision underscores the importance of procedural integrity in IRS collection due process hearings. It reinforces the prohibition on ex parte communications between Appeals officers and other IRS employees, emphasizing the need for an independent and impartial review process. This ruling has significant implications for the administration of tax collection procedures, ensuring that taxpayers receive fair treatment and the opportunity to present their case without bias. Subsequent cases have cited Drake to support the principle that the independence of the Appeals function is crucial to the fairness of IRS proceedings.