Tax Court Finds CDP Jurisdiction to Hear Challenge to Underlying Liability

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

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.

Primary Holdings

Key Points of Law:

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.

Tax Litigation Attorneys

Need assistance in managing the Tax Compliance process? With our unique substantive and procedural knowledge, we can provide a comprehensive approach to the tax dispute resolution process, often collaborating with clients’ existing tax professionals to formulate creative solutions to the most complex tax problems. Freeman Law offers value-driven legal services and provides practical solutions to complex tax issues.  Schedule a consultation now or call (214) 984-3410 to discuss your tax concerns and questions? 

 

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