Tax Court in Brief | Shaddix v. Commissioner | Collection Due Process Hearings and Liability

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The Tax Court in Brief – February 28th  – March 4th, 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 February 28, 2022, through March 4, 2022

Shaddix v. Comm’r | TC Memo. 2022-11 | February 28, 2022 | Lauber, J. | Dkt No. 12683-20L

Issue: Upon Respondent’s Motion for Summary Judgment, the Tax Court analyzed whether, at a Collections Due Process (CDP) hearing, IRS Appeals abused its discretion in denying the Petitioner’s request to challenge the liability underlying a Notice of Federal Tax Lien (NFTL) and upholding the collection action.

Short Summary: The IRS sent the Petitioner a NFTL for an unpaid liability of about $40,000 for 2013-2016. At the CDP hearing, a settlement officer stated that Petitioner could not challenge the liability based on the mistaken belief that the IRS had audited the returns. Petitioner then made an offer in compromise (OIC). A specialist recommended accepting the OIC of $4,400, considering Petitioner’s net operation loss (NOL) of over $700,000 in 2017, only if Petitioner agreed the NOL would apply against future tax only after repayment of the unpaid NFTL liability (plus statutory additions). After Petitioner declined the counteroffer, a second officer upheld the NFTL, stating flatly that Petitioner could not challenge the liability. Petitioner requested review, arguing that rejection of the OIC was wrongful as the IRS’s conditions required payment of incorrect penalties and interest.

Primary Holdings

Petitioner appeared to have the right to challenge the NFTL at the CDP stage given that the liability amounts stated in the NFTL were self-reported and there was no evidence in the record of Petitioner having received a notice of deficiency or of an examination.

Because the IRS’s determination regarding Petitioner’s right to challenge the liability was not supported by the record, the Tax Court deemed the decision an arbitrary and capricious abuse of discretion and remanded to Appeals for a supplemental CDP hearing.

The Tax Court ordered Appeals to review its refusal of Petitioner’s attempt to challenge the liability and either (1) explain the factual and legal basis for concluding it cannot be challenged, or (2) offer the Petitioner an opportunity to offer evidence concerning the liability; the Tax Court declined to reach the question of whether Appeals abused its discretion in denying the OIC.

As the IRS had not issued notices of determination for tax years 2012 and 2017, the Tax Court dismissed Petitioner’s appeal in connection with those years.

Key Points of Law

When a taxpayer’s underlying liability is not in dispute, the Tax Court reviews the IRS’s decision for abuse of discretion only. Otherwise, the review would be de novo.

In the 9th Circuit, when de novo review is not applicable, the scope of review in CDP cases is confined to the administrative record.

A taxpayer may challenge an underlying liability in a CDP case if the taxpayer did not receive a statutory notice of deficiency for the liability or did not otherwise have an opportunity to dispute a liability self-reported by the taxpayer on a return or reported by the IRS in a substitute for a return.

In connection with collection actions, the Tax Court’s jurisdiction is limited to tax liabilities for which the IRS issued a valid notice of determination. See 26 U.S.C. § 6330(d)(1).

Tax Court Litigation Attorneys

Need assistance litigating in the U.S. Tax Court? Freeman Law’s tax attorneys are experienced litigators with trial-tested litigation skills and in-depth substantive tax knowledge, having collectively litigated hundreds of cases before the U.S. Tax Court. Our tax controversy lawyers have extensive experience in Tax Court matters involving partnership audits and litigation under both the TEFRA and BBA regimes, international tax penalties, foreign trusts, valuation, reasonable compensation disputes, unreported income, fraud penalties, other tax penalties, and many other matters. We draw on our experience and wealth of tax knowledge to advise and guide clients through the entire tax controversy process, building the right strategy to resolve tax controversies from day one. Schedule a consultation or call (214) 984-3000 to discuss your Tax Court concerns or questions.