Tax Court in Brief | Belton v. Comm’r | “Seriously Delinquent Tax Debt” and IRS Requirement to Comply with Lien Procedure

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Tax Litigation:  The Week of January 23rd, 2022, through January 27th, 2023

Belton v. Comm’r, T.C. Memo. 2023-13| January 24, 2023 |Toro, J. | Dkt. No. 22438-19P

Summary: Petitioners, Willard Belton and Martha-Alexander Belton (Petitioners or Beltons) seeks review pursuant to section 7345(e), challenging the IRS’s certification to the Secretary of State that Petitioners had a “seriously delinquent tax debt” related to the relevant years.

The Beltons did not pay in full their joint federal income tax liabilities for the relevant years. The IRS filed a notice of federal tax lien for some of the taxable years. The IRS also issued to the Beltons notices of federal tax lien filings informing them of their right to collection due process hearings. The Beltons requested collection due process hearings, but they either withdrew those requests or waived their rights to judicial review with respect to any determinations made by the IRS Office of Appeals. And, the time for seeking such hearings lapsed. The IRS issued a notice of intent to levy for each of the relevant years. Later, the IRS notified the Beltons that the IRS had made section 7345 certifications with respect to their unpaid tax liabilities, that the State Department had been notified of the section 7345 certifications, and that the State Department could revoke their passports or refuse to issue them new passports based on the section 7345 certifications.

Key Issues:

  1. Whether the Tax Court has jurisdiction to consider Petitioners’ challenges to the tax liabilities underlying their section 7345 certifications?
  2. Whether section 7345 requires that the IRS show compliance with the levy statute, section 6331, before making a certification of a “serious delinquent tax debt”?

Primary Holdings:

  1. No. The Tax Court lacks jurisdiction to address Petitioners’ challenges to the underlying liabilities. The court followed the same reasoning as described in Adams v. Commissioner, No. 1527-21P, 160 T.C. (Jan. 24, 2023) issued on the same day as this Belton opinion. See Tax Court in Brief blog on Adams for additional information; see also Ruesch v. Commissioner, 25 F.4th 67, 71-72 (2d Cir. 2022), aff’g in part, vacating and remanding in part 154 T.C. 289 (2020).
  2. Yes. When the IRS relies on levies to prove the existence of a “seriously delinquent tax debt,” to prevail on a motion for summary judgment, the IRS must demonstrate how the record shows that the levies on which the IRS relies were made “pursuant to” the statutory lien requirements. For the taxable years 2004-2010, 2012, and 2014 the IRS showed compliance with lien requirements. For taxable year 2015, the IRS did not. Pursuant to section 6331(k), no levy may be made (1) during the period that an offer-in-compromise or an offer for an installment agreement is pending, (2) during the period in which an installment agreement is in effect, or (3) during the 30 days following the rejection of an offer-in-compromise or an offer for an installment agreement. I.R.C. § 6331(k)(1) and (2). The IRS failed to explain the installment agreement or offer for an installment agreement matters reflected in the evidence presented in support of the request for summary judgment.

Key Points of Law:

Serious Delinquent Tax Debt. Section 7345(a) of the Code provides that, if the IRS certifies that a taxpayer has a “seriously delinquent tax debt,” that certification shall be transmitted “to the Secretary of State for action with respect to denial, revocation, or limitation of [the taxpayer’s] passport.” The IRS is required to contemporaneously notify the taxpayer upon making that certification. 26 U.S.C. § 7345(d). A “seriously delinquent tax debt” is generally a federal tax liability that (1) has been assessed; (2) exceeds $50,000 (adjusted for inflation); (3) is unpaid and legally enforceable; and (4) is the subject of a filed lien notice or a completed levy. 26 U.S.C. § 7345(b)(1), (f); Garcia v. Commissioner, 157 T.C. 1, 7 (2021). If a certification “is found to be erroneous or if the debt with respect to such certification is fully satisfied,” the IRS must reverse its certification and notify the Secretary of State and the taxpayer. 26 U.S.C. § 7345(c)(1), (d).

Tax Court Adjudication. Section 7345(e)(1) permits a taxpayer whom the IRS has certified as having a seriously delinquent tax debt to petition the Tax Court to determine “whether the certification was erroneous or whether the [IRS] has failed to reverse the certification.” The Code restricts the relief that the court may grant. If the court determines that a certification is erroneous, the court can grant only one remedy: an order that the IRS “notify the Secretary of State that such certification is erroneous.” 26 U.S.C. § 7345(e)(2).

Requirements. A taxpayer’s federal tax liability is a seriously delinquent tax debt if it: (1) has been assessed; (2) exceeds $51,000 (increased for inflation, as appropriate); (3) is unpaid and legally enforceable; and (4) is the subject of a filed lien notice or a completed levy. See 26 U.S.C. § 7345(b)(1), (f); Rev. Proc. 2017-58, § 3.53. An assessed liability must exist before a seriously delinquent tax debt may be found. See I.R.C. § 7345(b)(1)(A). Section 6201(a)(1) directs the Secretary of the Treasury to “assess all taxes determined by the taxpayer or by the Secretary as to which returns or lists . . . are made.” An assessment is made when the IRS makes an entry in its books that the taxpayer owes tax. I.R.C. § 6203; Hibbs v. Winn, 542 U.S. 88, 100 (2004); Baltic v. Commissioner, 129 T.C. 178, 183 (2007).

Section 7345(b)(1)(C)—Procedural Requirements. Subparagraph (C) provides two different paths for the IRS to meet the remaining definitional requirements of section 7345(b)(1). The IRS must demonstrate that, with respect to the liabilities underlying the section 7345 certification, either “(i) a notice of lien has been filed pursuant to section 6323 and the administrative rights under section 6320 with respect to such filing have been exhausted or have lapsed, or (ii) a levy is made pursuant to section 6331.” I.R.C. § 7345(b)(1)(C). Either of these paths is sufficient to meet the procedural requirements of subparagraph (C) for a particular year at issue. But, the notice of lien must have been filed “pursuant to section 6323.” I.R.C. § 7345(b)(1)(C)(i); see also I.R.C. § 6323(f). Clause (ii) provides that levy must have been “made pursuant to section 6331.” I.R.C. § 7345(b)(1)(C)(ii).

“Pursuant to” Section 6323. The phrase “pursuant to” as used in clauses (i) and (ii) of section 7345(b)(1)(C) means that, to make a section 7345 certification properly, the IRS must have acted in accordance with the terms of sections 6323 and 6331, respectively. The IRS may not properly make a section 7345 certification if, in attempting to meet either the lien or levy requirements of subparagraph (C), the IRS contravened the terms of either section 6323 or section 6331, as applicable.

Compliance with Section 6323 Clause (ii)—Levy Made “Pursuant to” Section 6331. Clause (ii) contains two specific requirements: first, that levy actually was made (that is, the issuance to the taxpayer of a notice of intent to levy would not suffice for this purpose), and, second, that the levy was made properly. As to the actual making of a levy, section 7701(a)(21) provides that “[t]he term ‘levy’ includes the power of distraint and seizure by any means,” but the term “levy” is not otherwise defined in the Code. The Treasury Regulations offer an indication of how a levy is made: “Levy may be made by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights to property subject to levy, including receivables, bank accounts, evidences of debt, securities, and salaries, wages, commissions, or other compensation.” Treas. Reg. § 301.6331-1(a)(1). Such notice may be served by mail. Id. para. (c). As to the proper making of a levy (i.e., for a levy to be “pursuant to section 6331”), it must not contravene the terms of that section. This includes any of the section 6331 rules that protect taxpayers against a levy action. See, e.g., I.R.C. § 6331(k).

Levy Under Section 6331. Section 6331 sets out requirements that a levy must satisfy. For example, section 6331(k) provides that no levy may be made (1) during the period that an offer-in-compromise or an offer for an installment agreement is pending, (2) during the period in which an installment agreement is in effect, or (3) during the 30 days following the rejection of an offer-in-compromise or an offer for an installment agreement. I.R.C. § 6331(k)(1) and (2).

Insights: Belton provides taxpayers with an additional arrow in the quiver to challenge a certification made by the IRS pursuant to section 7345. If the IRS fails to show that it complied with the lien requirements of section 6323 or 6331, the taxpayer may have a window of hope to prevent a certification to the Department of State for revocation or denial of the taxpayer’s passport and ability to travel freely beyond the borders of the U.S.