T.C. Mem o. 2 01 6- 24

UNITED STAT ES TAX COURT

CHARLES R. MANGUM AND ESTATE O F MARI LYN MANGUM, DECEASED, CHARLES R. MANGUM, EXECUTO R, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 12 88 -1 2L. Fi le d F eb ru ary 16 , 20 16
.
Sal li e W. Gladne y , forpe ti ti on ers . Tho m as Lee Fen ne r an d P au l Co op erm anFei nb erg , forres po nd en t.

MEMORANDUM OPINION BUCH, Ju dg e: Thi s ca se co m es be fo re u s o n ape ti ti on forrev ie w of a
co ll ect io n d et erm in at io n re la ti ng to a li ab il ity forform er s ect io n 6 62 1( c) t ax -- 2 -

[* 2] m ot iv at edtra ns act io n i nt eres t re pe al edforreturns du e aft er 1 98 9. In 1
co ll ect io n re vi ew cas es , sec ti on 63 30 (c)( 2) (B) p ro vi de s tha t t ax pa y ers can no t ch al le ng e th ei r un de rlyin g t ax li ab il ity if the y rece iv eda st atut ory

no ti ce o f de fic ie nc y

or h ada pr io r op po rtu ni ty to ch al le ng e th ei r un de rlyin g l iabi li ty. Purs ua ntto sec ti on 63 30 (d ), th e Mang um s see k re vi ew of th e In te rn al Rev enue 2 Serv ic e’s (IRS ) de te rm in at io n t ha t s us ta in edth e fi li ng of ano ti ce o f Fed eral tax li enwith re sp ectto th ei r 19 83 tax y ear, an d the y rai se va rio us arg um en ts di sp ut in g th e und erl y in g t ax li ab il ity att rib ut ab le to sec ti on 66 21 (c) i nt eres t. Reg ard le ss of 3 th e m eri ts of t he ir arg um en ts ab ou t the un de rlyin g l iabi li ty, th e Mang um s re cei ve d pr io r co ns id erat io n i n Ap pe al s b efo re the ir c ol le ct io n h eari ng reque st s. Acco rd in gl y , th ey

are s ta tu to ril y

ba rredfro m

ch al le ng in g the ir u nd erl y in g l iabi li ty,
an d t he IRS d idno t ab us e it s d is cret io n b y su st ai ni ng th e li en .
Om ni bu s B ud ge t Re co nc il iati on Act o f 19 89 (OBRA), Pub. L. No. 1 01
- 1 23 9, s ec. 7 72 1( b) , 10 3 S ta t. at23 95 -2 39 9. Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al Rev enue Co de (Co de ) in effe ctforth e rel ev an t t im es , andall Ru le refe ren ces are to th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. Mrs . Man gu m

di eddu rin g t hi s d is pu te with t he IRS. Inth is cas e, he r es ta te 2 ap pe ars th ro ug h h er h us ba ndas e xe cu to r. Forco nv en ie nc e, we wil l re fer t o M r. Man gu m an d h is lat e wif

e o r he r es ta te co ll ect iv el y as “ th e Mang um s”
. See s ec. 6 32 0( c). 3- 3 -

[* 3] Bac kg ro un d Thi s ca se was s ub m it te d wi th ou t tria l u nd er Ru le 12 2. Ch arl es R. Man gu m

was ali m it edpa rtn er i n Di ll on Oil Tech no lo gy Part ne rs . The Di ll on Oil pa rtn ers hi p was crea te d o st en si bl y to in ve stinen ha nc ed oi l re co ve ry

tec hn ol og y

us edto reco ve r oi l an d n atur al ga s. Dil lo n Oi l was 4
subjec t t o the pa rtn ers hi p aud itan d l it ig at io n p ro cedur es fou ndat s ect io ns 62 21 th ro ug h 6 23 3, co m

m on ly referre d t o a s TEFRA. Dil lo n Oi l was on e o f th e m an y 5 Elek tra/Hem is ph ere t ax sh el te r in ve st m en t p artne rs hi ps who se partn ers hi p i te m s were ex te ns iv el y

li ti ga te d i n Tax Co urt. Elektraan d Hem is ph ere r eferto th e 6
na m es of the en ti ti es th atpu rp orte dl y li cen se d e nh an cedoi l re co ve ry tec hn ol og y to in ve st m en t p artne rs hi ps , in cl ud in g Di ll on Oil
. There were o ve r 2,0 00 rel at ed 7

See Kraus e v . Comm is si on er, 9 9 T.C. 1 32 , 13 3- 13 4 (1 99 2) , aff’d s ub no m . 4 Hil de br an d v . Commis si on er, 2 8 F .3d10 24 (10 th Cir . 19 94 ). TEFRA is sh ort fo r th e Tax Equ ity an d F is cal Res po ns ib il ity Act o f 19 82 , 5 Pub. L. No. 9 7- 24 8, s ec. 4 02 (a), 9 6 S ta t. at64 8. See Kraus e v . Comm is si on er, 9 9 T.C. at13 3. 6 See Kraus e v . Comm is si on er, 9 9 T.C. at14 0, 1 50 , 15 2 (i n t hi s ca se th e 7 no n- TEFRA partn ers hi ps lea se d e nh an cedoi l re co ve ry tec hn ol og y

fro m Elektra Ene rg y Co rp ., andth e TEFRA pa rtn ers hi ps lea se d e nh an cedoi l re co ve ry te ch no lo gy from

Hem is ph ere Li cen si ng Co rp ., th e su cces so r co rp or at io n t o Elek tra ).- 4 -

[* 4] Elektra/Hem is ph ere p re-TEFRA andTEFRA partn ers hi p c as es with a ll eg ed to ta l t ax de fic ie nc ie s i n e xc es s o f $2 bi ll io n. 8 Mr. Ma ng um ’s flo wth ro ug h l os s fr om Dil lo n Oi l was $9 8,8 58 for19 83 . He
an d h is wife , Mari lyn, fil eda joi ntFo rm 10 40 , U.S. Ind iv idua l In co m e Tax Return, an d re po rte d t ha t l os s o n t he ir S ch edul e E, Sup pl em en ta l In co m e an d Los s. I. Dil lo n Oi l FP AA andTax C ou rt P ro ceed in g The li ab il ity

th e Mang um s ar e ch al le ng in g was de te rm in edas ares ul t o f a pr oc eed in g i nv ol vi ng Dil lo n Oi l. The IRS ex am in edDil lo n Oi l’s 1 98 3 re turnan d is su eda no ti ce o f fi na l p artne rs hi p a dm in is tra ti ve ad jus tm en t fo r th e 1 98 3 pa rtn ers hi p t ax ab le y ear. Th e IRS pri nc ip al ly dis al lo wedov er $ 17 m il li on of Dil lo n Oi l’s d educ ti on s. A pe ti ti on was fi le d wi th res pe ctto Dil lo n Oi l an d
se ve ral ot he r si m il arl y

si tu at edpa rtn ers hi ps , andth e cas e was cap ti on edVul can Oil Tech . Partne rs v. Co m m is si on er, 1 10 T.C. 15 3 (1 99 8) , nam edforth e le ad
en ti ty. Becaus e o f th e la rg e num be r of Elektra/Hem is ph ere c as es be fo re the Tax Co urt, we co ns ol id at edtwo cas es , Krau se v. Co m mis si on er an d Hi ld eb ran d v
.

Krau se v. Co m

mis si on er, 9 9 T.C. at13 3. 8- 5 -

[* 5] Co m m is si on er, an d t rie d t he m as ates t ca se forth e o th er Ele ktra/ Hem is ph ere 9
cas es . W e d eci de d t ho se cas es in19 92 , andth e Co urt o f App eal s fo r th e Ten th Ci rcu itaffi rm edin19 94 . In 1 99 8 we i ss ue d a n i nt erl oc ut ory Opi ni oninth e Dil lo n Oil pro ceed in g h ol di ng th atKrau se v. Co m mis si on er co ntro ll edan d t ha t s ect io n 66 21 (c) t ax -m ot iv at edtra ns act io n i nt eres t ap pl ie d. 1 0 Co ng res s en act edtax -m ot iv at edtra ns act io n i nt eres t u nd er s ect io n 6 62 1( c) in to law i n 1 98 4 bu t l at er re pe al editforreturns du e aft er 1 98 9. Tax-m ot iv at ed 1 1 1 2 tra ns act io n i nt eres t p ro vi de d fo r in te res t at12 0% o f th e n orm al rat e an d app li edto un de rp aym en ts of t ax gre at er tha n $ 1,0 00 th atwere at tri bu tabl e to a ta x- m ot iv at ed tra ns act io n. 1 3

Krau se v. Co m

mis si on er, 9 9 T.C. 1 32
. 9 Vul canOil Tech . Partne rs v. Co m mis si on er, 1 10 T.C. 15 3, 1 54 -1 55 (19 98 ) 1 0 (in te rlo cu to ry

Opi ni on inDil lo n Oi l p ro ceed in g) , aff’d s ub no m . Tuce k v
. Co m m is si on er, 1 98 F.3d25 9 (1 0t h C ir. 1 99 9) , andaff’d s ub no m . Drak e Oil Tech
. Part ne rs v. Co m

m is si on er, 2 11 F.3d12 77 (10 th Cir . 20 00 ). Defi ci t Re du ct io n Actof 1 98 4, Pub. L. No. 9 8- 36 9, s ec. 1 44 , 98 Sta t. at 1 1 68 2 (i ni ti al ly cod ifi edas s ect io n 6 62 1( d) bu t l at er ch an ge d t o s ect io n 6 62 1( c) b y th e Tax Refo rm

Act o f 19 86 , Pub . L. No. 99 -5 14 , sec . 15 11 (c)( 1) (A), 10 0 S ta t. at 27 44 ). OBRA s ec. 7 72 1( b)
.

1 2 Sec. 6 62 1( c) (re pe al ed19 89 ). 1 3- 6 -

[* 6] W e ev en tu al ly dis m is se d Di ll on Oil ’s cas e fo r la ckof p ro se cu ti on . The de ci si on en te redon June 13 , 20 02 , ho wev er, i s s il en t o n wh ethe r se ct io n 6 62 1( c) in te res t ap pl ie s. II. IRS’ Dete rm in at io n Th atth e Mang um s Owe Ad di ti on al Tax B ecau se of t he Dil lo n Oi l Dec is io n By let te r da te d F eb ru ary 7, 2 00 3, the IRS n ot ifi edth e Mang um s tha t the y owe d a dd it io na l t ax an d i nt eres t fo r 19 83 be cau se of t he Dil lo n Oi l p artne rs hi ple ve l d eci si on . The IR S in cl ud edwith t hi s l et te r a Fo rm 45 49 A-CG, In co m e Tax Exa min at io n C ha ng es , whi chex pl ai ne d tha t the Man gu m s’ in co m e wou ldbe ad jus te d b y $9 8,8 58 be cau se of t he Dil lo n Oi l d eci si on . This ad jus tm en t re su lt ed in a ta x i nc reas e o f $4 7,5 54 . The t ot al am ou ntdu e fo r 19 83 was $ 36 4,8 70 .99 , co ns is ti ng of $ 47 ,55 4 o f ta x, $ 21 5,6 66 .93 inst atut ory in te res t p ur su an t t o s ect io n 66 01 , and$1 01 ,65 0.0 6 i n t ax -m ot iv at edtra ns act io n i nt eres t p ur su an t t o s ect io n 66 21 (c). On M ay 26 , 20 03 , th e IRS ass es se d a ndbi ll edth e Mang um s $ 35 8,2 97 .60 fo r ta x year 19 83 be cau se of t he Dil lo n Oi l p ro ceed in g, wh ic h i nc lu de d $ 47 ,55 4 i n ta x, $ 31 0,7 55 .01 inin te res t, an d a n $ 11 .41 cred itto ad jus t a p rev io us ly im

po se d la te paym en t p en al ty. Thi s n ot ic e st at eda lo wer b al an ce due th anth e Feb ru ary 7 le tt er, an d t hi s l owe r am ou ntis co ns is te ntwith t he IRS’ ass es sm en t l is te d o n F orm- 7 -

[* 7] 43 40 , Cert ifi cat e o f Ass es sm en ts , Paym en ts , andOth er Sp eci fie d M at te rs , for ta x year 19 83
. A. Reject io n o f th e Mang um s’ Offer-i n- Co m pr om is e On No ve m

be r 25 , 20 03 , th e Mang um s s ub m it te d an o ffer -in -co m pr om is e ch al le ng in g t he ir l iabi li ty for the sec ti on 66 21 (c) t ax -m ot iv at edtrans act io n in te res t. The y

off eredto pa y

$2 63 ,86 3.6 7 fo r ta x year 19 83 an d i nc lu de d ach eck fo r th atam ou nt . They arg ue d tha t the Co urt o f App eal s fo r th e Fi fthCir cu itin Co pe landv. Co m

m is si on er ha d h el d t ha t the Krau se an d Hi ld eb ran d a na lysis of

1 4
se ct io n 1 83 “ was wron g a s a m at te r of law an d El ektra/Hem is ph ere p artne rs who are b ou ndby the ou tc om e inth os e cas es are n otsubjec t t o [s ect io n] 66 21 (c) pe na lty in te res t.” The IRS re

jecte d the Man gu m s’ off er-i n- co m pr om is e inOcto be r 20 04 be cau se th e Co urt i n Kraus e v . Comm is si on er “ m ad e num ero us fin di ng s o f fac t 1 5
co nc lu si ve ly establ is hi ng th atth e Ele kt ra/ Hem is ph ere t ran sa ct io ns lac ke d
eco no m ic subs tanc e.” The IRS ex pl ai ne d t hi s was a su ffi ci en t b as is to co nc lu de th atth e tr an sa ct io ns were t ax m ot iv at edbe cau se a ta x- m ot iv at edtra ns act io n
29 0 F .3d32 6 (5 thCir . 20 02 ), aff’g i n p art , rev ’g inpa rt a ndrem an di ng 1 4 T.C. Mem o. 2 00 0- 18 1. Krau se v. Co m

m is si on er, 9 9 T.C. 1 32
. 1 5- 8 -

[* 8] in cl ud es an y

tra ns act io n t ha t i s a s ha m purs ua ntto sec ti on 66 21 (c)( 3) (A)(v ),
an d c ourts ha ve he ldth atsh am tra ns act io ns in cl ud e th os e d et erm in edto ha ve no eco no m ic subs tanc e. Furth er, the IRS s tate d t ha t co urts “ caneit he r in qu ire in to whe th er the re were an y

no n- ta x e co no m ic effe ct s o r us e th e an al y si s u nd er [s ect io n] 18 3. Th e an al y si s i s the same whethe r th e te rm in ol og y us edis th atof ‘econ om ic subs tanc e,’ ‘ sh am ,’ or s ect io n 1 83 .” The IR S co nc lu de d t ha t the Man gu m s wer e li ab le for sec ti on66 21 (c) t ax -m ot iv at edtra ns act io n i nt eres t. B. App eal s’ Reject io n o f th e Mang um s’ Offer-i n- Co m pr om is e On No ve m

be r 24 , 20 04 , th e Mang um s ap pe al edth e IRS ’ de ci si onto reject th ei r of fer- in -co m

pr om is e. The a ss ig ne d Ap pe al s o ffi cer n ot ifi edth e Mang um s’ at to rn ey th atsh e was wait in g fo r th e IRS Offic e o f Ch ie f Co un se l t o a dv is e h er o n th e se ct io n 6 62 1( c) d et erm in at io n. Ult im at el y , th e App eal s o ffi cer s us ta in edth e reject io n o f th e Mang um s’ of fer- in -co m

pr om is e. The Ap pe al s o ffi cer l efta m es sa ge with t he Man gu m s’ at to rn ey th atsh e wou ldbe su st ai ni ng th e reject io n o f th e Mang um s’ off er. The App eal s o ffi cer the n s po ke with t he Man gu m s’ att orne y by pho ne on Feb ru ary 28 , 20 07 , exp la in in g t ha t s he wou ldsu st ai n the reject io n o f th e Mang um s’ off er. Tha t sa m e d ay , th e Mang um s’ att orne y fax edth e App eal s o ffi cer aco py of a n ot ic e o f in te ntto lev y

is su edfor19 83 th atth e Mang um s h adrece nt ly recei ve d, s ta ti ng th at- 9 -

[* 9] he r “ he lp to ge t thi s s tay edun ti l the off er i s o ffi ci al ly rejectedwou ldbe gr eat ly app reci at ed .” The Ap pe al s o ffi cer u lt im at el y su st ai ne d t he reject io n o f th e of fer. Late r in 20 07 Mrs . Man gu m pa ss edaway , andMr. Ma ng um was app oi nt ed
ex ecu to r of

he r es ta te . III. IRS No ti ce o f In te ntTo Lev y to th e Mang um s The IRS s en t the Man gu m s a F in al Not ic e o f In te ntto Levy andNot ic e o f You r Ri gh t t o aHeari ng da te d J anua ry 14 , 20 10 . This no ti ce was fortax y ear 19 83 an d s ho weda $9 0,9 13 .17 ba la nc e due , as wel l as a la te pa ym en t p en al ty of $2 ,68 9.3 3. The Man gu m s s ub m it te d aFo rm 12 15 3, Re qu es t fo r a Co ll ect io n Du e Pro ces s o r Equ iv al en t Hea rin g, m ark in g “ Offer i n C om pr om is e” as a co ll ect io n al te rn at iv e, whi chth e IRS rece iv edon Feb ru ary 8, 2 01 0. Initth ey arg ue d t ha t

“ [n ]um ero us co urts ha ve he ldth atIRS i m po si ti on of t he [se ct io n] 66 21 (c) p en al ty in te res t ra te ba se d o n t he Vul canOil Tax C ou rt d eci si onis im pr op er as a m at te r of law” an d “ th e IRS erre d i n re jecti ng * * * [t he ir] of

fer- in -co m

pr om is e.” By let te r da te d M ay

24 , 20 10 , th e IRS reject edth e Mang um s’ col le ct io n due pr oc es s o r equi va le nthe ari ng reque st . The IR S ex pl ai ne d t ha t the Man gu m s’ reque stwas n otti m el y

be cau se th ei r Fo rm

12 15 3 was rece iv edm or e th anon e y ear- 10 -

[* 10 ] aft er the IRS s en t a n ot ic e o f in te ntto lev y to th e Mang um s o n Oct ob er 8 , 20 03 . Howev er, the IRS’ adm in is tra ti ve fil e fo r th e Mang um s d oe s n otco nt ai n a ny in fo rm at io n fr om

cert ifi edm ai l l is ts foran y m ai li ng s b etweenMay 200 2 a nd Octo be r 20 07
. The IRS s en t M r. Man gu m a Fo rm 85 19 , Taxp ay er’s Co py of No ti ce o f Lev y , th atwas d at edJu ly 1, 20 10 , andex pl ai ne d t ha t the IRS h adlev ie d o n h is W el ls Farg o b an k a cco un t. The Man gu m s re qu es te d ast ay on act iv ity

be cau se th e IRS h as no t i ss ue d aform al no ti ce o f de te rm in at io n. Nei th er thi s n ot ic e n oran y th atth e IRS is su edto th e Mang um s as of J ul y 1, 2 01 0, ar e b efo re the Co urt. IV. IRS No ti ce o f Fed eral Tax Li ento th e Mang um s The IRS s en t the Man gu m s a Let te r 31 72 , Not ic e o f Fed eral Tax Li enFil in g an d Yo urRig htto a Heari ng Und er IR C 6 32 0, o n Oct ob er 1 2, 2 01 0. Th e le tt er was for tax y ear 1 98 3 fo r a $ 90 ,91 3.1 7 l ie n a ndst at edth e as se ss m en t d at e was Mar ch16 , 19 87
. On No ve m

be r 3, 2 01 0, the Man gu m s s ub m it te d ane w Form 12 15 3, m ark in g

“ Offer i n C om

pr om is e” as a co ll ect io n a lt ern at iv e. The M an gu m s ag ai n ch al le ng edth e se ct io n 6 62 1( c), t ax -m ot iv at edtra ns act io n i nt eres t. A set tl em en t o ffi cer wh o h adha d n o p rio r in vo lv em en t wi th th e unp ai d li ab il ity at i ss ue was a ss ig ne d the cas e. He de te rm in edth atth e Mang um s co ul d- 11 -

[* 11 ] no t ch al le ng e th e und erl y in g l iabi li ty attr ib ut ab le to th e se ct io n 6 62 1( c) in te res t b ecau se th ey

ha d b eengi ve n apri orop po rtu ni ty to ch al le ng e it . He
ex pl ai ne d t hi s i n alet te r he sen t J un e 1 0, 2 01 1, an d h e sc he du le d aco ll ect io n due pr oc es s h eari ng forJu ly 12, 2 01 1. Th e se tt le m en t o ffi cer m etwith t he Man gu m s’ at to rn ey on Ju ly 12, 2 01 1, an d h e rei te rat edth atth e Mang um s co ul d n otch al le ng e th e und erl y in g l iabi li ty becau se th e App eal s o ffi cer h adsu st ai ne d t he reject io n o f th e Mang um s’ off

er-i n- co m pr om is e b as edondo ub t as to li ab il ity . The Ma ng um s’ at to rn ey to ldth e se tt le m en t o ffi cer t ha t the Man gu m s n ev er re cei ve d aclo si ng le tt er fro m

App eal s an d wi sh edto fil e an ot he r of fer- in -co m

pr om is e. The Man gu m s s ub m it te d an o ffer -in -co m pr om is e b as edon do ub t as to li ab il ity for 19 83 off eri ng $1 00 , whi chth e IRS rece iv edon Nov em be r 1, 2 01 1. On Dec em

be r 15 , 20 11 , th e IRS sen t the Man gu m s a n ot ic e o f de te rm in at io n su st ai ni ng th e li enfortax y ear 1 98 3. Th e IRS ex pl ai ne d i n t hi s d et erm in at io n le tt er tha t the Man gu m s co ul d n otch al le ng e th e se ct io n 6 62 1( c) i nt eres t b ecau se th ey ha d h ada pr io r op po rtu ni ty to ch al le ng e itwhen th e App eal s o ffi cer co ns id eredth ei r of

fer- in -co m

pr om is e. The IR S fu rth er ex pl ai ne d tha t i t wo ul d fi le
anam en de d n ot ic e o f Fed eral tax li ento co rrec t the ass es sm en t d at e o n the
or ig in al fil in g, wh ic h i t d idon Decem be r 22 , 20 11 . Mr. Man gu m , whi le res id in g- 12 -

[* 12 ] inTexa s, t im el y

pe ti ti on edinres po ns e to th is no ti ce o f de te rm in at io n, wh ic h
su st ai ne d t he li enforhi m an d fo r hi s wi fe’s es ta te . The pa rti es m ov edto subm itth e cas e fu ll y st ip ul at edun de r Ru le 12 2 a nd fil eda st ip ul at io n o f fac ts with e xh ib it s. Th e Co urt g ran te d t he ir r eque st . Dis cu ss io n Thi s ca se co m es be fo re u s o n ape ti ti onforrev ie w of the IRS’ det erm in at io n su st ai ni ng th e li enforth e 1 98 3 t ax y ear. Th e Mang um s as se rt tha t the un de rlyin g li ab il ity attrib ut ab le to th e se ct io n 6 62 1( c) t ax -m ot iv at edtra ns act io n i nt eres t i s i n erro r. The IR S arg ue s tha t the Man gu m s ar e b arre d fr om ch al le ng in g t he
un de rlyin g l iabi li ty in thi s p ro ceed in g b ecau se of t he ir p rio r op po rtu ni ty to ch al le ng e th e und erl y in g l iabi li ty w ith Ap pe al s. 1 6 I. Fo rm er Se ct io n 6 62 1( c) Tax -Mo ti va te d Tra ns act io n In te res t The IRS as se ss edsec ti on 66 21 (c) t ax -m ot iv at edtra ns act io n i nt eres t o n t he Man gu m s’ 19 83 un de rp aym en t, wh ic h s te m m edfro m th e Dil lo n Oi l p artne rs hi p pr oc eed in g. Fo rm er s ect io n 6 62 1( c) ap pl ie d t o s ub st an ti al un de rp aym en ts
The IRS al so arg ue s tha t the Man gu m s ar e b arre d fr om ch al le ng in g t he 1 6 un de rlyin g l iabi li ty becau se th ey ha d apri orop po rtu ni ty to p art ic ip at e in th e pa rtn ers hi p- le ve l p ro ceed in g u nd er s ect io n 6 22 6( c). Bec au se we fin d t ha t the Man gu m s h ada pr io r op po rtu ni ty to ch al le ng e th ei r un de rlyin g l iabi li ty w ith App eal s, we d o n otne edto ad dr es s thi s ad di ti on al pa rtn ers hi p- le ve l p art ic ip at io n arg um en t.- 13 -

[* 13 ] att rib ut ab le to tax -m ot iv at edtra ns act io ns an d i nc reas edth e rat e o f in te res t
on th os e und erp aym en ts to 12 0% o f th e st an da rdun de rp aym en t i nt eres t ra te fou nd in sec ti on 66 21 (a)( 2)
. Forth is sec ti on , th e Co de de fin eda subs ta nt ia l 1 7
un de rp aym en t as anun de rp aym en t g reat er tha n $ 1,0 00
. Tax-m ot iv at ed 1 8 tra ns act io ns in cl ud edam on g o th er thi ng s “ any sh am or f rau du le nttra ns act io n.” 1 9 Furth er, Co ng res s ex pr es sl y pro vi de d t ha t the Secr et ary co ul d p ro m ul ga te reg ul at io ns to sp eci fy

whi chtra ns act io ns wou ldbe co ns id eredtax m ot iv at ed
. 2 0 II. Co ll ect io n Du e Pro ces s Ov erv ie w andOur R ev ie w of IR S’ Determ in at io n The Secr et ary m

us t n ot ify tax pa y ers inwrit in g o f th ei r ri gh t t o re qu es t a he ari ng up on th e fi li ng of ano ti ce o f li en . Thes e h eari ng s ar e o fte n c al le d 2 1
co ll ect io n due pro ces s, o r CDP, h eari ng s. In aCDP h eari ng tax pa y ers m ay rai se 2 2
an y is su e th atis rel ev an t t o a n u np ai d t ax or aco ll ect io n a ct io n, i nc lu di ng

Sec. 6 62 1( c)(1 ) (rep eal ed19 89 ). 1 7 Sec. 6 62 1( c)(2 ) (rep eal ed19 89 ). 1 8 Sec. 6 62 1( c)(3 )(A)(v ) (rep eal ed19 89 ). 1 9 Sec. 6 62 1( c)(3 )(B) (rep eal ed19 89 ). 2 0 Sec. 6 32 0( a). 2 1 Sec. 6 32 0( b) an d (c ). 2 2- 14 -

[* 14 ] ap pr op ria te sp ou sa l d efen se s, ch al le ng es to th e ap pr op ria te ne ss of c ol le ct io n act io ns , andoff

ers of c ol le ct io n a lt ern at iv es . 2 3 A. Und erl y in g Li ab il ity Ch al le ng es Tax pa y ers m ay

ch al le ng e th e ex is te nc e o r am ou ntof the un de rlyin g t ax li ab il ity inth ei r CDP h eari ng if the y di d n otrece iv e a s ta tu to ry no ti ce o f de fic ie nc y

or d idno t o th erwi se ha ve th e o pp ortu ni ty to d is pu te th e li ab il ity . 2 4 Whi le th e te rm

“un de rlyin g l iabi li ty” is n otde fin edinsec ti on 63 20 or 6 33 0, we ha ve in te rp ret edth is term “ to in cl ud e an y

am ou nt s o wedby a tax pa y er p ur su an t t o th e ta x l aws .” Furth er, we h av e p rev io us ly uph el d re gu la ti on s p ro m ul ga te d b y 2 5 th e Sec ret ary th atde fin e a p rio r op po rtu ni ty to d is pu te th e und erl y in g l iabi li ty to

Sec. 6 33 0( c)(2 )(A). 2 3 Sec. 6 33 0( c)(2 )(B)
. 2 4 Katz v. Co m

m is si on er, 1 15 T.C. 32 9, 3 39 (20 00 ). 2 5- 15 -

[* 15 ] in cl ud e a p rio r “ op po rtu ni ty for a co nf eren ce wi th App eal s”
. Sect io n 2 6 30 1.6 32 0- 1( e)(3 ), Q&A-E2 , Pro ced . & Adm in . Reg s., p ro vi de s:

Q-E2. Whenis a ta xp ay er en ti tl edto ch al le ng e th e ex is te nc e o r am ou ntof t he tax li ab il ity sp eci fie d i n t he CDP Not ic e? A-E2. A ta xp ay er i s en ti tl edto ch al le ng e th e ex is te nc e o r am ou ntof t he un de rlyin g l iabi li ty for an y tax pe rio d s pe ci fie d o n the CDP No ti ce i f th e ta xp ay er d idno t re cei ve a st atut ory no ti ce o f de fic ie nc y

forsu chli ab il ity

or d idno t o th erwi se ha ve anop po rtu ni ty to di sp ut e su chli ab il ity . Recei ptof ast atut ory no ti ce o f de fic ie nc y fo r th is pu rp os e m ean s re cei ptinti m e to pe ti ti on th e Tax Co urt fo r a red et erm in at io n o f th e d efi ci en cy de te rm in edinth e n ot ic e o f de fic ie nc y . An o pp ortu ni ty to d is pu te th e und erl y in g l iabi li ty in cl ud es a pr io r op po rtu ni ty for a co nf eren ce wi th App eal s tha t was of fere d e ithe r be fo re o r aft er the ass es sm en t o f th e li ab il ity . An op po rtu ni ty for a co nf

eren ce wi th App eal s p rio r to th e as se ss m en t o f a ta x s ub ject t o d efi ci en cy

pro cedur es is no t a p rio r op po rtu ni ty for th is pu rp os e. Altho ug h p et it io ne rs arg ue th atLewis v. Co m m is si on er, 1 28 T.C. 48 (20 07 ), was in co rrec tl y

de ci de d, we ar e b ou ndby ourCo urt’s p rece de nt . 2 7 Lewis v. Co m

m is si on er, 1 28 T.C. 48 , 61 (20 07 ) (h ol di ng th atbe cau se 2 6 “ Co ng res s al so in te nd edto pre cl ud e ta xp ay ers who were p rev io us ly affor de d a co nf eren ce wi th th e App eal s Off ic e fro m rai si ng th e und erl y in g l iabi li ti es ag ai n i n a co ll ect io n re vi ew he ari ng an d b efo re thi s C ou rt” , sec . 30 1.6 33 0- 1( e)(3 ), Q&AE2, Pro ced . & Adm in . Reg s., i s v al idas areas on ab le in te rp ret at io n o f se ct io n 63 30 (c)( 2) (B)) ; s ee al so Hass el Fam il y Ch iro pr act ic , DC, PC v. C omm is si on er, 36 8 F . App ’x 69 5 (8 th Cir . 20 10 ), aff’g T.C. Me m o. 2 00 9- 12 7; Tot te n v . Uni te d St at es , 29 8 F . App ’x 57 9 (9 th Cir . 20 08 ); M as on v. Co m m is si on er, 1 32 T.C. 30 1, 31 9 (2 00 9) ; Pe rk in s v . Comm is si on er, 1 29 T.C. 58 , 63 (20 07 ). See S ec. St at e Ban k v . Commis si on er, 1 11 T.C. 21 0, 2 13 (19 98 ) (“ The 2 7 (co nt in ue d...)- 16 -

[* 16 ] The reco rdinth is cas e is cle ar tha t the Man gu m s h ada pr io r op po rtu ni ty to ch al le ng e th ei r un de rlyin g l iabi li ty. No o ne di sp ut es th atth e Mang um s h adpri or co ns id erat io n o f th ei r arg um en ts rel at edto th ei r un de rlyin g t ax li ab il ity inApp eal s be fo re the ir C DP he ari ng reque st s. As a res ul t, we ar e p recl ud edfro m co ns id eri ng th e is su es th ey

rai se . Bec au se th e Mang um s h ada pr io r op po rtu ni ty w ith Ap pe al s t o c ha ll en ge th ei r un de rlyin g l iabi li ty, th ey are s tatu to ril y

ba rredfro m

ch al le ng in g t he ex is te nc e oram ou ntof t ha t l iabi li ty in thi s p ro ceed in g. Curren tl y th e Mang um s’ on ly 2 8 fo ru m to ch al le ng e th ei r ta x wo ul d b e to pa y th e und erl y in g l iabi li ty andsu e fo r a refu nd
. 2 9

(...co nt in ue d) 2 7 do ctrin e o f st are d eci si s g en eral ly requ ire s tha t we fo ll ow the ho ld in g o f a pr ev io us ly deci de d c as e, ab se ntsp eci al jus ti fic at io n.” ), aff’d, 2 14 F.3d12 54 (10 th Ci r. 20 00 ). Sec. 6 33 0( c)(2 )(B) , (d) ; Be hl in g v . Comm is si on er, 1 18 T.C. 57 2, 5 79 2 8 (2 00 2)
. See s ecs . 74 22 , 65 11 (a).

2 9- 17 -

[* 17 ] B. Abu se of Di sc ret io n R ev ie w of IR S’ Determ in at io n Bec au se th e v al id ity

of the un de rlyin g l iabi li ty is n otpro pe rly at is su e, we rev ie w th e IRS ’ de te rm in at io n fo r ab us e o f di sc ret io n. An ab us e o f di sc ret io n 3 0 wil l b e fo un d wh ere t he de te rm in at io n was “ arb itrary, capri ci ou s, o r witho utso un d ba si s i n fa ctor l aw.” 3 1 The IRS m

us t t ak e in to co ns id erat io n: (1) th e v eri fic at io n t ha t the requi rem en ts of a ny app li cab le law o r admin is tra ti ve pro cedur e h av e b eenm et ; (2 ) is su es rai se d b y

th e ta xp ay er; an d (3 ) whe th er an y pro po se d c ol le ct io n a ct io n ba lanc es th e n eedforeffi ci en t co ll ect io n wi th th e le gi ti m at e co nc ernof t he ta xp ay er tha t an y

co ll ect io n a ct io n b e n o m or e in tru si ve th anne ces sa ry . The 3 2
se tt le m en t o ffi cer p ro pe rly bas edhi s d et erm in at io n o n t he se fact or s. Fi rs t, the set tl em en t o ffi cer v eri fie d t ha t the requi rem en ts of app li cab le law
an d a dm in is tra ti ve pro cedur e were m et . The Fe de ral Gov ern m en t o bt ai ns a li en ag ai ns t “ al l p ro pe rty andrig ht s t o p ro pe rty, whethe r rea l o r pe rs on al ” o f an y

See S eg o v . Comm is si on er, 1 14 T.C. 60 4, 6 10 (20 00 ); Go za v . 3 0 Co m m is si on er, 1 14 T.C. 17 6, 1 82 (20 00 ). Giam el li v. Co m

m is si on er, 1 29 T.C. 10 7, 1 11 (20 07 ). 3 1 Sec. 6 33 0( c). 3 2- 18 -

[* 18 ] pe rs on li ab le for

Fed eral tax es up on de m an d fo r pa ym en t an d fa il ur e to pa y . The Se cret ary ha s the di sc ret io n t o wi th dr aw th e n ot ic e o f li enif c ert ai n 3 3 ci rcu m st an ces are p res en t, s uc h a s the fil in g o f th e n ot ic e was pre m atur e, th e ta xp ay er en te redin to anag reem en t t o s at is fy th e li ab il ity , withdrawal wou ld faci li ta te co ll ect io n, o r with t he co ns en t o f th e Nat io na l Tax pa y er Advo cat e, withd rawal wou ldbe inth e b es t i nt eres ts of t he tax pa y er. The s et tl em en t o ffi cer 3 4 de te rm in edth atno ne of t he pe rm is si ve cir cu m st an ces forli enno ti ce wi th dr awal were p res en t. He fu rth er d et erm in edth atth e IRS ha d s en t the Man gu m s a b il l fo r th e 1 98 3 t ax th atha d n otbe enful ly pai d. Fi na ll y , alt ho ug h h e d et erm in edth atth e as se ss m en t d at e li st edon th e n ot ic e o f Fed eral tax li enwas i nc orrect , he e xp la in ed th atth is was a“no n- fat al pro cedur al erro r th at* * * [wo ul d] be co rrec te d wi th th e fil in g o f anam en de d t ax li en .” The IR S fi le d a n a m en de d t ax li enno ti ce an d
no ti fie d M r. Man gu m . Furth er, the ori gi na l n ot ic e o f Fed eral tax li en , alb ei t wi th 3 5

Sec. 6 32 1. 3 3 Sec. 6 32 3(

j). 3 4 See C ym anv. Co m

m is si on er, T.C. Mem o. 2 00 9- 14 4, 2 00 9 WL 17 48 86 3, 3 5 at*2 , n.5 (“ The no ti ce o f li enst at es in co rrec t as se ss m en t d at es , bu t tha t erro r do es no t i nv al id at e th e n ot ic e o f Fed eral tax li en .”).- 19 -

[* 19 ] anin co rrec t as se ss m en t d at e, was su ffi ci en t t o g iv e th e Mang um s n ot ic e as requi redun de r se ct io n 6 32 0. 3 6 Seco nd , th e se tt le m en t o ffi cer c on si de redth e o nl y is su e rai se d b y

th e Man gu m s. Th e Mang um s s ub m it te d an o ffer -in -co m pr om is e as a co ll ect io n al te rn at iv e, arg ui ng th atth e p orti on of t he ir l iabi li ty attr ib ut ab le to th e se ct io n 66 21 (c) t ax -m ot iv at edtra ns act io n i nt eres t was inerro r. The s et tl em en t o ffi cer in ve st ig at edIRS’ reco rd s fo r th e Mang um s. He d et erm in edth e Mang um s wer e pr ecl ud edfro m

ch al le ng in g t he ir u nd erl y in g l iabi li ty becau se th ey ha d apri or op po rtu ni ty to ra is e th is is su e with Ap pe al s, wh ic h h adsu st ai ne d t he reject io n o f th ei r of fer- in -co m

pr om is e. Thi rd , th e se tt le m en t o ffi cer d et erm in edth atup ho ld in g t he li enba lanc edth e Gov ern m en t’s n eedforeffi ci en t co ll ect io n o f ta x wi th th e Mang um s’ con cern s tha t th e co ll ect io n a ct io n b e n o m or e in tru si ve th anne ces sa ry .

Sag e v . Uni te d S ta te s, 9 08 F.2d18 , 22 (5t h C ir. 1 99 0) (ho ld in g t ha t a 3 6 no ti ce o f as se ss m en t tha t co nt ai ne d atec hn ic al erro r is st il l “ va li d wh ere t he ta xp ay er h as no t b eenm is le d b y th e erro r” an d h adactua l n ot ic e o f th e co nduc t th atwas a t i ss ue ); c f. San de rli ng , Inc . v. Co m m is si on er, 5 71 F.2d17 4, 1 76 (3d Ci r. 19 78 ) (“ A no ti ce o f a d efi ci en cy , eve n i f itco nt ai ns erro r, m ay no ne th el es s b e va li d wh ere t he tax pa y er h as no t b eenm is le d a s t o the pro pe r y ear i nv ol ve d o r th e am ount s i n c on tro ve rs y .”), aff’g i n p art66 T.C. 74 3 (1 97 6) an d 6 7 T.C. 1 76 (1 97 6)
.- 20 -

[* 20 ] Acco rd in gl y , th e se tt le m en t o ffi cer d idno t ab us e h is di sc ret io n wh enhe
su st ai ne d t he li en . III. Co nc lu si on The Man gu m s h ada pr io r op po rtu ni ty to ch al le ng e th e und erl y in g l iabi li ty at tri bu tabl e to th e se ct io n 6 62 1( c) t ax -m ot iv at edtra ns act io n i nt eres t, an d t he y can no t fu rth er ch al le ng e th ei r un de rlyin g l iabi li ty here. Acco rd in gl y , ou r rev ie w of th e IRS ’ de te rm in at io n i s l im it ed , andwe fin d t ha t the IRS d idno t ab us e it s di sc ret io n i n s us ta in in g t he li en . To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor
res po nd en t.