Tax Court Finds CDP Jurisdiction to Hear Challenge to Underlying Liability
Amanda Iris Gluck Irrevocable Trust v. Comm’r, T.C. Memo. 154 T.C. No. 11 | May 26, 2020 | Lauber, J. | Dkt. No. 5760-19L
Short Summary: The case involved a collection due process (CDP) proceeding under which the taxpayer sought review pursuant to section 6330(d)(1) of a determination by the Internal Revenue Service (IRS or respondent) to sustain collection action for tax years 2013, 2014, and 2015.
The taxpayer was a direct and indirect partner in partnerships subject to the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982. See I.R.C. secs. 6221-6234 (as in effect for years before 2018). In 2012 one of the partnerships in which the taxpayer held an indirect interest sold property and realized a large capital gain. The taxpayer allegedly failed to report its entire distributive share of that gain.
For 2012, the taxpayer filed a return on Form 1041, U.S. Income Tax Return for Estates and Trusts. On this return it allegedly failed to report its distributive share of the gain that had been allocated to a partnership holding.
The IRS adjusted the taxpayer’s 2012-2015 returns via “computational adjustments.” See I.R.C. sec. 6231(a)(6). These adjustments eliminated the net operating loss (NOL) it had claimed for 2012 and disallowed the NOL carryforward deductions the taxpayer had claimed for 2013-2015, creating balances due for those years. The IRS immediately assessed the resulting tax. See I.R.C. secs. 6222(c), 6230(a)(1).
On June 15, 2017, the IRS sent the taxpayer two Letters 4735, Notice of Computational Adjustment. In the first letter the IRS adjusted upward, by $6,543,748, the taxpayer’s distributive share of the partnership’s capital gain for 2012, eliminating the NOL that the taxpayer had reported for that year. In the second letter the IRS disallowed the NOL carryforwards from 2012 that the taxpayer had claimed as deductions for 2013, 2014, and 2015, creating a balance due for each year. Each Letter 4735 explained that “[t]he adjustment is due to your inconsistent treatment of a partnership item related to the section 1231 gain reported by a partnership in which you have an indirect ownership.”
Subsequently, the IRS mailed a levy notice in an effort to collect the taxpayers 2013-2015 tax, and the taxpayer timely requested a collection due process (CDP) hearing. The settlement officer sustained the levy notice. The taxpayer timely petitioned for review, seeking to challenge its underlying liabilities for 2012-2015. The IRS moved to dismiss as to 2012 and 2013, noting that the 2012 tax year was never before the Court and that the taxpayer’s 2013 liability had been fully satisfied by application of credits from other years. The IRS moved for summary judgment as to 2014 and 2015.
The IRS thereafter assessed petitioner’s liabilities for 2013-2015. When the taxpayer did not pay these liabilities upon notice and demand, the IRS issued, on January 11, 2018, a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice). As of the date of the levy notice, the taxpayer’s outstanding liabilities for 2013-2015 exceeded $180,000.
Key Issue: Whether the Tax Court had jurisdiction to review the taxpayer’s tax liability through a CDP challenge.
- The Court lacks jurisdiction with respect to the taxpayer’s 2012 tax year.
- The taxpayer properly invoked the Court’s jurisdiction under I.R.C. sec. 6330(d)(1) to review its tax liabilities for 2013- 2015. Although the Court generally lacks jurisdiction in a deficiency case to review computational adjustments, see I.R.C. sec. 6230(a)(1), its jurisdiction in a CDP case is not so limited.
- The taxpayer’s 2013 liability has been paid in full, so the taxpayer’s challenge to the collection action for that year is moot.
- The Tax Court may, in a CDP case, review underlying liabilities arising from adjustments to partnership items of TEFRA partnerships, even though such items would not have been subject to review in a deficiency setting.
- The taxpayer is permitted to challenge its underlying liabilities for 2014 and 2015 because it had had no prior opportunity to do so. See I.R.C. sec. 6330(c)(2)(B). The taxpayer properly raised an underlying liability challenge during the CDP hearing by contending that the IRS had improperly disallowed its NOL carryforward deductions for 2014 and 2015. Because genuine disputes of material fact exist as to the taxpayer’s correct tax liabilities for those years, the IRS’s motion for summary judgment will be denied.
Key Points of Law:
- Section 6330(a) requires the IRS, before making a levy, to send a written notice to the taxpayer notifying him of his right to a CDP hearing. The Tax Court has jurisdiction to review a notice of determination issued to a taxpayer following completion of that hearing if a timely petition is filed. Sec. 6330(d).
- Section 6330(d)(1) does not prescribe the standard of review that the Court should apply in reviewing an IRS administrative determination in a CDP case. But its case law provides that where the taxpayer’s underlying tax liability is properly before the court, it reviews the SO’s determination de novo. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). In other respects, the court reviews the IRS action for abuse of discretion. Abuse of discretion exists when a determination is “arbitrary, capricious, or without sound basis in fact or law.”
- A taxpayer may challenge the existence or amount of its underlying liability in a CDP proceeding only if it “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.” Sec. 6330(c)(2)(B).
- In CDP cases involving assessable penalties (viz., penalties not subject to deficiency procedures), the court has jurisdiction to review a taxpayer’s underlying liability for the penalty provided that he raised during the CDP hearing a proper challenge thereto.
- A taxpayer entitled to dispute its underlying liability must nevertheless present a proper challenge before the SO in order to preserve that challenge for judicial review.
- The Court may determine the correct amount of net operating loss for a year not in issue as a preliminary step in determining the correct amount of a net operating loss carryover to a taxable year in issue.
- In determining the allowability of an NOL carryforward or carryback deduction, the Court may consider facts from the original loss year even though the period of limitations for that year is closed.
Insight: Where deficiencies result from a partnership proceeding or adjustment, an affected taxpayer needs to carefully vet their procedural avenues where that partnership is subject to the TEFRA statutory regime. A taxpayer should also take precautions to preserve challenges to substantive tax liabilities in CDP hearings in order to utilize a more favorable standard of review on petition to the Tax Court.
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