Tax Court in Brief | Goddard v. Comm’r | Collection Due Process, Penalties for Failure to Register a Tax Shelter

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The Tax Court in Brief – September 19th – September 22nd, 2022

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation:  The Week of September 19th, 2022, through September 22nd, 2022

Goddard v. Comm’r; Lee, Goddard, & Duffy, LLP v. Comm’r, T.C. Memo 2022-96| September 19, 2022 | Copeland, Judge | Dkt. No. 22334-17L, 23743-18L

Summary: This 32-page opinion, at its core, regards IRS Collection Process. Factually, the case regards tax liabilities accruing for years 1999 and 2000 and that pre-dated the American Jobs Creation Act of 2004 (AJCA). The tax liabilities in issue revolve around the since-repealed penalty provisions of section 6707 of the Internal Revenue Code. Thus, the opinion’s future relevance in regard to the repealed section 6707 is questionable, but the opinion’s long factual summary is telling as to the application of IRS Collection Due Process.

A factual summary that triggered the underlying tax liability is as follows: In 2004 the IRS began investigating Lee, Goddard, & Duffy, LLP (LGD) and William Goddard for promoter penalties under pre-AJCA sections 6707 and 6708 arising from abusive “short option strategy” (SOS) tax shelters and Custom Adjustable Rate Debt Strategy (CARDS) tax shelters. The IRS linked investors to these petitioners, as a person and an entity, involved in preparing those tax shelters. The IRS concluded that petitioners had worked with KPMG to promote SOS tax shelters first offered for sale in 1999 and CARDS tax shelters first offered for sale in 2000. KPMG was deemed the principal organizer under Temporary Treasury Regulation § 301.6111-1T, and KPMG failed to register the tax shelters. Because Goddard and LGD assisted in the implementation, they were also required to register those alleged tax shelters under pre-AJCA section 6111, but they did not. See Form 8264, Application for Registration of a Tax Shelter.

After completion of a summons enforcement action, the IRS, in about May 2014, developed a pre-AJCA section 6707 penalty case against Goddard and LGD. The initiation of the case involved Form 5701, Notice of Proposed Adjustment; Form 886-A, Explanation of Items; a penalty computation; Publication 5 – Your Appeal Rights and How to Prepare a Protest if You Don’t Agree. The case proceeded into 2016 when IRS Appeals Officer sustained the pre-AJCA section 6707 penalties for tax years 2009 and 2000. To collect those penalties, the IRS provided Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320. In 2017, Goddard submitted Form 12153, Request for a Collection Due Process or Equivalent Hearing (CDP hearing request), claiming that he had no opportunity to dispute the underlying tax liability during the Appeals Office process. (Goddard claimed he did not receive Appeals Office’s closing letter, but, in the CDP process, Goddard produced the closing letter to the Settlement Officer.) Later in 2017, the IRS mailed LGD Letter 1058, Final Notice – Notice of Intent to Levy and Notice of Your Rights to Hearing (levy notice), with respect to the pre-AJCA section 6707 penalties for tax years 1999 and 2000. LGD timely submitted a CDP hearing request. LGD did not check any boxes on the CDP hearing request indicating a reason for disagreeing with the proposed levy. Ultimately, the Settlement Officer affirmed that the levy notice and amounts due were properly assessed. LGD contested the determination.

Key Issues and Short Answers:

(1) Whether the settlement officers (SO) erred by refusing to consider petitioners’ underlying liabilities;


(2) Whether written supervisory approval under section 6751 was obtained before the IRS assessed pre-AJCA section 6707 penalties against petitioners;


(3) Whether the assessments of the pre-AJCA section 6707 penalties were barred by the three-year period of limitations for returns under section 6501 or the five-year period of limitations under 28 U.S.C. § 2462; and

No, no applicable limitations period barred the penalties in issue. Under section 6501(c)(3), the IRS can make an assessment beyond the three-year period of limitations when nothing is filed. Registration of a tax shelter bears no relationship to filing a tax return. The registration is not a return, and the penalties imposed by pre-AJCA section 6707 bear no relationship to filing a return. Accordingly, return-based limitations in section 6501 impose no limitation on assessment of these types of penalties. And, pre-AJCA section 6707 penalties are not an “action, suit, or proceeding” governed by 28 U.S.C. § 2462.

(4) Whether the AJCA retroactively repealed the pre-AJCA section 6707 penalties.


Key Points of Law:

Collection Due Process. Section 6321 provides that if any person liable to pay any tax neglects or refuses to pay the same after demand, the unpaid amount— any interest, addition to tax, or assessable penalty—shall be a lien in favor of the United States. The IRS shall notify a taxpayer in writing when a notice of lien is filed under section 6323 and inform the taxpayer of the right to request any administrative hearing with Appeals. See 26 U.S.C. §§ 6320(a) and (b), 6330(b). If a taxpayer fails to pay any federal tax liability after notice and demand under section 6303, section 6331(a) authorizes the IRS to collect the tax by levy on the taxpayer’s property.

Levy Notice. The IRS must first issue a levy notice and notify the taxpayer of the right to an administrative hearing before Appeals at least 30 days before any levy is made. Id. at § 6330(a) and (b)(1). After receiving a levy notice, the taxpayer may request an administrative hearing before Appeals. Id. at § 6330(a)(3)(B), (b)(1). A taxpayer receiving notice of filing a tax lien has hearing rights similar to the hearing rights accorded to a taxpayer receiving a levy notice. See id. at § 6320(c). The provisions of section 6330(c), (d), and (e) also govern the conduct of a CDP hearing requested under section 6320, and CDP hearings held under sections 6320 and 6330 may be heard together. Jordan v. Commissioner, 134 T.C. 1, 5 (2010).

Standard of Review and Disputing Tax Liability. When taxpayers make an abuse of discretion claim under section 6330(c), the Tax Court considers and decides whether the IRS settlement officer: (1) properly verified that the requirements of applicable law and administrative procedure have been met, (2) considered any relevant issues the taxpayers raised, and (3) considered “whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” 26 U.S.C. § 6330(c)(3); see Golditch v. Commissioner, T.C. Memo. 2022-26, at *6; Ludlam v. Commissioner, T.C. Memo. 2019-21, at *9–10, aff’d per curiam, 810 F. App’x 845 (11th Cir. 2020). A taxpayer may raise a CDP challenge to the underlying tax liability only if he “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.” § 6330(c)(2)(B).

Section 6330(c)(1) Verification Issues. Taxpayers must plead section 6330(c)(1) issues for the Tax Court to review them. Under section 6330(c)(1), “[t]he appeals officer shall at the [CDP] hearing obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met.” The Tax Court “review[s] the Appeals officer’s verification under section 6330(c)(1) without regard to whether the taxpayers raised it at the Appeals hearing” if the taxpayers adequately raised the issue in their petition filed in this Court. Hoyle v. Commissioner, 131 T.C. 197, 202– 03 (2008), supplemented by 136 T.C. 463 (2011); see Rule 331(b)(4). But the taxpayers must put on a prima facie case and meet their burden of proof showing the Appeals officer failed to obtain the necessary verification from the Secretary under section 6330(c)(1). Dinino v. Commissioner, T.C. Memo. 2009-284, 98 T.C.M (CCH) 559, 564; see also Rule 331(b)(4).

Proper Supervisory Approval for Penalties. Compliance with section 6751 is an issue of “verification” under section 6330(c)(1), which may be raised in a CDP case before the Tax Court. Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 154 T.C. 68, 75 n.8 (2020), rev’d and remanded on other grounds, 29 F.4th 1066 (9th Cir. 2022). Section 6751(b)(1) requires the initial determination of certain penalties to be “personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” Section 6751 requires written supervisory approval before the assessment of the penalty or, if earlier, before the relevant supervisor loses discretion whether to approve the penalty assessment. Laidlaw’s Harley Davidson Sales, Inc., 29 F.4th at 1074.

Statute of Limitations. “Raising the issue of whether the limitations period has expired constitutes a challenge to the underlying tax liability.” Hoffman v. Commissioner, 119 T.C. 140, 145 (2002). If a taxpayer is barred from contesting their underlying tax liabilities before the Tax Court because the taxpayer had a prior opportunity to contest the tax liability, the taxpayer cannot back-door contest the liability by asserting the affirmative defense of limitations. A period of limitations generally “runs against the United States only when they assent and upon the conditions prescribed.” Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249 (1930). “Statutes of limitation sought to be applied to bar rights of the Government, must receive a strict construction in favor of the Government.” Badaracco v. Commissioner, 464 U.S. 386, 391 (1984).

Registration of Tax Shelter. Neither Mr. Goddard nor LGD filed a Form 8264, Application for Registration of a Tax Shelter. Under section 6501(c)(3), the IRS can make an assessment beyond the three-year period of limitations when nothing is filed. A tax must generally be assessed “within 3 years after the return was filed” or (if the tax is payable by stamp) within three years after the tax was paid. IRC § 6501(a). Registration of a tax shelter bears no relationship to filing a tax return. The registration does not purport to be a return or even provide information sufficient to calculate a tax liability, and the penalties imposed by pre-AJCA section 6707 bear no relationship to filing a return. See Beard v. Commissioner, 82 T.C. 766, 777 (1984) (establishing a four-part test for what constitutes a return), aff’d per curiam, 793 F.2d 139 (6th Cir. 1986). Rather, penalties for failure to register tax shelters are imposed on persons who were required to do so but failed. Accordingly, return-based limitations in section 6501 impose no limitation on assessment of these types of penalties.

Insights: Abusive tax shelters are a key focus of the IRS. Tax practitioners who participate in the implementation of certain tax shelters, even if the practitioners did not create the shelter, may be penalized for failing to register the shelter. See Form 8264, Application for Registration of a Tax Shelter.