Tax Court in Brief | Mattson v. Comm’r | Passport Revocation Notice for “Seriously Delinquent Tax Debt”; Limitations on Tax Liens

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The Tax Court in Brief – December 5th – December 9th, 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 December 5th, 2022, through December 9th, 2022

Mattson v. Comm’r, T.C. Memo. 2022-118 | December 6, 2022 |Copeland, J. |Docket No. 16982-18P 

Summary: Eric Mattson did not file income tax returns for tax years 2001, 2002, and 2005 through 2008. The IRS prepared substitutes for returns using third-party information return documents. In six separate notices of deficiency, the IRS determined various deficiencies and additions to tax for each year in issue. Mattson contested none of them. So, the IRS assessed the deficiencies, additions to tax, and applicable interest. To collect Mr. Mattson’s outstanding tax liabilities for the years in issue, the IRS mailed Mr. Mattson a Notice CP508C, Notice of certification of your seriously delinquent federal tax debt to the State Department (certification notice) that (1) notified Mr. Mattson that his tax debt was $61,933.71 and (2) certified to the State Department that his tax debt is seriously delinquent such that the State Department was prohibited from issuing or renewing a passport to Mr. Mattson. Mr. Mattson filed a Petition with the Tax Court pursuant to section 7345(e)(1), and both the IRS and Mr. Mattson moved for summary judgment on the certification notice issue.

Key Issues:

Whether the IRS proved, as a matter of law, that the certification notice was proper?

Whether the IRS’s liens were unenforceable due to passage of time?

Whether the Tax Court was required to obtain supervisory approval to assess a penalty for Mr. Mattson’s frivolous actions in the Tax Court?

Key Holdings: The IRS proved its right to judgment by showing no material fact issue with respect to the elements for a certification notice, being: Mr. Mattson’s federal tax liability was a seriously delinquent tax debt because it: (1) had been assessed; (2) exceeded $51,000; (3) was unpaid and legally enforceable; and (4) was the subject of a filed lien notice or a completed levy.

The IRS’s right to collection was not barred by limitations.

The Tax Court was not required to obtain supervisory approval for court-ordered penalty under section 6673(a)(1).

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; (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.

First Requirement: Assessment. “Assessment” is defined in section 6203 and is the process by which the amount of tax owed to the IRS is fixed by recording the liability of the taxpayer in the Office of the Secretary of the Treasury. See San Gabriel Energy v. Commissioner, T.C. Memo. 1994-150, 1994 WL 122102, at *6; see also 26 U.S.C. §§ 6211–6215. The IRS must show that it followed the deficiency procedures, primarily: (1) the IRS first determined deficiencies and issued notices of deficiency; (2) the IRS waited until the time period for filing a petition with the Tax Court for redetermination of a deficiency had passed, see 26 U.S.C. § 6213(a); and (3) the IRS appropriately assessed the liabilities determined in those notices of deficiency.

Second Requirement: $51,000 Threshold. The Tax Court must find that the monetary threshold requirement imposed by section 7345(b)(1)(B), as modified by section 7345(f), was met. Generally, “any reference in this title to ‘tax’ imposed by this title shall be deemed also to refer to the additions to tax, additional amounts, and penalties provided by this chapter.” 26 U.S.C. § 6665(a)(2). “[T]his chapter” refers to chapter 68, which contains section 6673 (being a penalty-assessment statute).

Third Requirement: Unpaid and Legally Enforceable. The tax debts for the years in issue, including the Court-ordered section 6673(a)(1) penalty, must be legally enforceable as of the time of the certification. 26 U.S.C. § 7345(b)(1) (flush text).

Fourth Requirement: Collection Actions Already Taken. For the certification to stand, the record must show that when the IRS certified the taxpayer to the State Department, the IRS had already engaged in collection actions, such as issuance of lien and levy notices for the tax years in issue. See 26 U.S.C. § 7345(b)(1)(C); Ezekwo v. Commissioner, T.C. Memo. 2022-54, at *5 (clarifying that either a notice of lien filed pursuant to section 6323 or a levy made pursuant to section 6331 “is sufficient to render a tax debt ‘seriously delinquent’”).

Period of Limitations on Collection After Assessment. Under section 6502(a)(1), the IRS has ten years to collect tax by levy or judicial proceeding. That ten-year period of limitations is suspended when a taxpayer requests a collection due process hearing pursuant to sections 6320 and 6330. See 26 U.S.C. §§ 6320(c), 6330(e)(1); Boyd v. Commissioner, 117 T.C. 127, 130 (2001). The suspension remains in effect throughout the CDP hearing and any subsequent appeals. 26 U.S.C. § 6330(e)(1). It ends on the 90th day after the day the final appeal determination is made. See id.; Treas. Reg. § 301.6330-1(g).

Expiration of Filed Tax Liens. When a taxpayer fails to pay an assessed tax liability after receiving notice and demand for payment, a lien automatically arises by operation of law and continues until the liability is satisfied or becomes unenforceable by lapse of time. 26 U.S.C. §§ 6321, 6322. That lien, however, is generally not valid against third parties unless the IRS records the lien, i.e., files a notice of federal tax lien. See 26 U.S.C. § 6323(a); Thompson v. Commissioner, T.C. Memo. 2013-260, at *7–8; Treas. Reg. §§ 301.6323(a)-1(a), 301.6323(f)-1(d). The IRS need not record the lien in order to enforce it against the taxpayer. If the underlying liability becomes unenforceable by lapse of time, the IRS is required to release the lien no later than 30 days after the day on which the lien became unenforceable. 26 U.S.C. § 6325(a)(1). A decision by the IRS to not refile a notice of federal tax lien that has expired affects only its priority against third parties, not the liabilities themselves. See Treas. Reg. § 301.6323(a)-1(a). And, Section 7345 of the Code does not require the IRS to refile a notice of federal tax lien in order for a tax debt to be considered seriously delinquent. See 26 U.S.C. § 7345(b)(1)(C).

Written Supervisory Approval for the Court-Ordered Section 6673(a)(1) Penalty. A penalty assessed by the Tax Court pursuant to section 6673(a)(1) does not require supervisory approval pursuant to section 6751(b)(1). Williams v. Commissioner, 151 T.C. 1, 5–10 (2018). Section 6673(a)(1) empowers the Tax Court to assess a penalty against a taxpayer who wastes the time and resources of the Tax Court and is mutually exclusive from any penalty that must be approved pursuant to section 6751(b)(1).

Insights: A “seriously delinquent tax debt” could result in a scenario where the State Department is prohibited from issuing or renewing a passport to the taxpayer. Depending on the taxpayer, the consequence affecting the taxpayer’s passport could be extremely personal and not just financial. The four requirements for the IRS to establish a right to issue a certification notice pursuant to section 7345(a) are straightforward and well-defined by the Tax Court such that, when the taxpayer fits into those 4-factor requirements, a certification may be leveraged against the taxpayer and without much room for the taxpayer to escape.