Source: https://procedurallytaxing.com/tag/a-lavar-taylor/
Timestamp: 2019-04-20 18:41:38+00:00

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In Part 4 of this series, I discussed the questions of 1) how a putative alter ego/successor in interest/transferee of a taxpayer might pursue litigation in the Tax Court to raise the questions of whether they are entitled to Collection Due Process (“CDP”) rights under sections 6330 and 6320 of the Code, independent of the rights of the original taxpayer who incurred the liability, 2) whether the government can take administrative collection action against a putative alter ego/successor in interest/transferee without first obtaining a District Court judgment or making a separate assessment, and 3) whether the Tax Court has the ability to address issues 1 and 2 above, given that no notice of determination is ever issued by the IRS in these situations.
This post addresses the question of how a putative alter ego/successor in interest/transferee of a taxpayer might pursue litigation in the District Court to raise the questions of 1) whether they are entitled to Collection Due Process (“CDP”) rights under sections 6330 and 6320 of the Code, independent of the rights of the original taxpayer who incurred the liability, and 2) whether the government is prohibited from taking collection action against a putative alter ego/successor in interest/transferee of the taxpayer without first obtaining a District Court judgment against the putative alter ego/successor in interest/transferee, based on the arguments set forth in Part 3 of this series.
This post also discusses the factors affecting the decision of whether to litigate these issues in Tax Court or District Court. In addition, this post discusses why assertions of “nominee” status by the IRS are treated differently under the CDP rules.
An alleged alter ego/successor in interest/transferee has always had a remedy in District Court to challenge levy action against them in the form of a wrongful levy action brought under §7426. See, e.g., Towe Antique Ford Found. v. IRS, 999 F.2d 1387 (9th Cir. 1993). These lawsuits, however, have focused on whether the alleged alter ego/successor in interest/transferee was substantively liable for the tax liability under state law.
To the best of my knowledge, there are no reported decisions where the alleged alter ego/successor in interest/transferee has argued that the IRS levy action was improper because the IRS failed to send the alleged alter ego/successor in interest/transferee a separate §6330 Notice of Intent to Levy before taking levy action against them. Nor am I aware of any reported cases where the alleged alter ego/successor in interest/transferee brought a wrongful levy action claiming that the IRS cannot take any administrative collection action against a purported alter ego/successor in interest/transferee prior to the government obtaining a District Court judgment they are liable for the taxpayer’s taxes as an alter ego, successor in interest, or transferee of the taxpayer, based on the theory articulated in Part 3 of this series.
Frequently, the previously unannounced levy action against the alleged alter ego/successor in interest/transferee financially destroys them and deprives them of the resources needed to challenge the IRS’s assertion of liability. Under the law as interpreted by the IRS, the playing field is decidedly tilted in favor of the IRS. While there are undoubtedly many meritorious assertions of liability by the IRS, I am aware of a number cases in which the issue of liability as an alter ego/successor in interest/transferee was at best questionable or debatable. In our now-settled Tax Court case, for example, there was a state Supreme Court decision which made clear that, based on the undisputed facts in our case, it was not possible for our client to be an alter ego of the taxpayer. Yet the IRS, without properly investigating the facts, pursued levy action against our client, with the blessing of Area Counsel’s Office, based on the unsound premise that our client was an “alter ego” of the taxpayer.
Even where a third party is conceding that they are liable as an alter ego, successor in interest, or transferee of the taxpayer under state law, they can bring a wrongful levy action to challenge the procedural validity of the levy action, based on the failure of the IRS to issue a §6330 Notice of Intent to Levy to the third party prior to taking levy action against the third party. The mere opportunity to seek administrative collection alternatives, such as an installment agreement, or even an offer in compromise based on doubt as to liability, without having to deal with unannounced levy action may often be the difference between financial life and death for an alleged alter ego/successor in interest/transferee.
For these reasons, any alleged alter ego/successor in interest/transferee, even if they agree that they are liable for the taxes assessed against the taxpayer can bring suit, either in District Court or in Tax Court to challenge the failure of the IRS to issue a separate §6330 Notice of Intent to Levy to them prior to taking levy action. In such a suit they can also challenge the underlying ability of the government to ever take administrative collection action against an alleged alter ego/successor in interest/transferee prior to obtaining a District Court judgment in favor of the government (or prior to making a separate assessment), based on the theory articulated in Part 3 of this series.
Similar options exist to challenge the validity of an alter ego/successor in interest/transferee notice of federal tax lien. A petition can be filed with the Tax Court, although care should be taken to file the petition promptly after the filing of the lien notice, to minimize the risk that such a petition might be deemed untimely by the Court. Such a petition will be subject to the same jurisdictional challenges as a levy petition.
Alleged alter egos/successors in interest/transferees likewise have always had the opportunity to file a quiet title action in District Court, pursuant to 28 U.S.C. §2410 in order to challenge the validity of the tax lien. See Spotts v. United States, 429 F.3d 248 (6th Cir. 2005). There is no reason why an alleged alter ego/successor in interest/transferee could not file a quiet title action in District Court based on the grounds that 1) the IRS failed to give them their own lien CDP rights as required by section 6320 after the filing of the notice of federal tax lien, and 2) the government is not permitted to take collection action against them in the absence of a separate assessment against them or a District Court judgment imposing liability as an alter ego, successor in interest, or transferee of the taxpayer, for reasons outlined in Part 3 of this series.
If an alleged alter ego/successor in interest/transferee wishes to pursue litigation to challenge the ability of the IRS to levy without first issuing a separate §6330 Notice of Intent to Levy to challenge the ability of the IRS to take administrative collection action against a purported alter ego/successor in interest/transferee, choosing between Tax Court and District Court as a litigation forum can be difficult. District Court offers a forum where the court clearly has jurisdiction to rule on the issues at hand. District Court also is much quicker than Tax Court. Indeed, in our now-settled case, at the time of the settlement, the IRS’s motion to dismiss the petition for lack of jurisdiction had been pending with the Tax Court for over 12 months without any opinion being issued.
District Court Judges, however, often lack even basic familiarity with tax laws in general and with CDP laws in particular. Tax Court Judges have significant expertise in tax law and regularly deal with CDP procedures in their cases. They certainly have more expertise in determining the extent of their own jurisdiction than do District Court Judges. Page limitations on filings in District Court may hamper the ability of an alleged alter ego/successor in interest to fully brief all of the issues, which are complex and arcane, even to the most dedicated tax procedure junkies.
In addition, once the Department of Justice acquires jurisdiction over a case, settling that case can become much more difficult. There can be a dramatic difference in the levels of approval needed to settle a case with the Office of Chief Counsel and the levels of approval needed to settle a case with the Department of Justice. See the Department of Justice Tax Division Settlement Reference Manual. Furthermore, the differences between the rules governing discovery in Tax Court and the rules governing discovery in the District Court generally make it far more expensive to litigate in District Court than in Tax Court.
An alleged alter ego/successor in interest/transferee who ventures into District Court in a wrongful levy action or a quiet title action also faces the possibility that the Department of Justice will seek an affirmative judgment against them, including a judgment for the foreclosure of real property owned by the alleged alter ego/successor in interest/transferee which the government contends can be reached in an effort to satisfy the taxes owed by the taxpayer. No such counterclaims can be filed by the government in Tax Court litigation; IRS must refer the matter to the Department of Justice for a separate lawsuit.
Yet, until the Tax Court has issued an opinion in this area, anyone who chooses Tax Court as their litigation forum currently faces the possibility that the Tax Court will eventually dismiss their petition for lack of jurisdiction in a way that fails to resolve the underlying question of whether alleged alter egos/successors in interest/transferees are entitled to their own independent CDP rights or whether the IRS may ever pursue administrative collection action against an alleged alter ego/successor in interest/transferee without first obtaining a District Court judgment. And however the Tax Court rules on this issue, the Tax Court’s ruling can be appealed to the relevant Court of Appeals.
Given the circumstances described in this series of posts, it is likely to be quite some time before there is a definitive answer to the questions of whether alleged alter egos/successors in interest/transferees are entitled to their own independent CDP lien and levy rights and whether the IRS may ever take administrative collection action against a putative alter ego/successor in interest/transferee without first obtaining a District Court judgment or making a separate assessment. The speed at which the case law develops will depend in large part on how the Tax Court rules in its first published opinion on these issues. If the Tax Court rules that it has jurisdiction, that holding will drive litigation of these issues to the Tax Court. The IRS will then likely appeal the Tax Court’s holding(s) to multiple Courts of Appeal, possibly leading to a split in the Circuits and Supreme Court review of the issue(s) that split the Circuits.
If the Tax Court holds that it lacks jurisdiction but refuses to follow Adolphson and holds adversely to the government on the procedural issues in dismissing the petition for lack of jurisdiction, this holding will also drive litigation to the Tax Court. This will likely be followed by government appeals to multiple Courts of Appeal and possibly an eventual Supreme Court ruling in this area.
If the Tax Court holds that it lacks jurisdiction and follows Adolphson, a few brave hardy souls may continue to litigate in Tax Court, with the idea of taking their cases to the relevant Courts of Appeal But most litigation involving these issues will be driven to the District Courts, many of which may be reluctant to second guess the Tax Court’s holding on the jurisdictional issue. But the District Courts will still be able to rule on the substantive CDP issue, as well as on the issue of whether the government is required to obtain a District Court judgment (or make a separate assessment) against purported alter egos/successors in interest before the government can take collection action against them.
One or more of these issues are likely to end up being argued before the Supreme Court, absent any future legislative action by Congress. But it is likely to be a number of years before that happens.
In writing this series of posts, I have purposefully avoided including “nominee” liens and levies within the scope of my discussion of the extent to which the CDP provisions may be invoked by third party non-taxpayers against whom the IRS is pursuing collection action to collect taxes owed by the original taxpayer. Putative “nominees” are different from putative alter egos/successors in interest/transferees in that “nominees” are not themselves personally liable for the tax liability. Rather, a true nominee holds “property or rights to property” of a taxpayer as the agent of the taxpayer. They are not personally liable for the tax. This distinction is critical for purposes of determining the rights of putative “nominees” under the CDP procedures.
In Part 1 of this series I noted that there are important differences between §§6320 and 6330, and their counterparts, §§ 6321 and 6331. Section 6321 imposes a lien against all “property and rights to property” of a person who is “liable for the tax.” Thus, there must be a personal liability for a tax obligation before a lien can arise against a person’s “property or rights to property” under §6321.
The language of §6320 makes clear that a lien CDP notice is only required to be sent to the “the person described in section 6321,” i.e., a person who is personally liable for the tax. Thus, a putative nominee of the taxpayer is not entitled to notice under §6320 and cannot invoke the lien CDP procedures if the IRS files a “nominee” notice of federal tax lien. Note, however, that a true “nominee” notice of federal tax lien should make clear that the IRS lien only attaches to the specific property, real or personal, which the putative nominee is supposedly holding as an agent of the taxpayer. As I will discuss in Part 6 of this series, virtually all “nominee” notices of federal tax lien flunk this test.
Section 6331, on the other hand, authorizes the IRS to levy on all “property and rights to property” of a person who is personally liable for a tax and to levy on all property on which there is a tax lien. Thus, it is possible that the IRS could levy on property that is possessed or owned by a third party which the IRS claims is encumbered by a tax lien, even though the person who possesses or owns that property is not personally liable for the tax.
Section 6330 provides that “[n]o levy may be made on any property or right to property of any person” unless notice is given to “such person” under §6330. Importantly, §6330 uses the phrase “any person,” not the phrase “person liable for the tax.” Section 6330 also does not refer specifically to the “person” described in §6331(a). I personally believe that this a distinction with a difference, and that Congress intended for any person who has a facially recognizable possessory or ownership interest in property under state law upon which the IRS intends to levy is entitled to notice under section 6330 and thus is entitled to invoke the collection due process procedures.
But the IRS thinks otherwise, and issued regulations which define the term “person” in §6330 as the “person liable for the tax.” Treasury Regulation §301.6330-1(a)(3), Question and Answer 1. If this regulation is valid, only persons who are personally liable for the tax are entitled to notice under §6330 and may invoke the CDP levy procedures. No true “nominees” can invoke CDP levy procedures under the IRS’s interpretation of the law.
If the cited Treasury Regulation is struck down as being inconsistent with the statute, however, true nominees would be entitled to notice under §6330 and would be entitled to avail themselves of the CDP levy appeal process. I believe this regulation is inconsistent with the statute. The phrase “any person” is about as broad as you can get, and the contrasting language of §6320 supports the conclusion that Congress’ use of the phrase “any person” in section 6330 was deliberate. Limiting the availability of the levy CDP appeal procedures to persons who are personally liable for the tax is contrary to the language of the statute.
I leave a more detailed analysis of why I believe that this regulation is not valid for another day. Suffice to say that anyone who is the subject of true nominee collection action, where the IRS merely claims that the property held by or ostensibly belonging to a third party on which the IRS has levied is being held by the third party putative nominee for the benefit of the taxpayer and is not asserting that the third party is personally liable for the taxes owed by the taxpayer, will have to convince the Court that this regulation is invalid should they bring an action in Tax Court or District Court to challenge the IRS “nominee” levy action on the grounds that the IRS failed to issue a §6330 Notice of Intent to Levy to the third party prior to levying on property owned or held by the third party.
Because alleged “nominees” are in a more perilous legal position than alleged alter egos/successors in interest/transferees when it comes to invoking the CDP procedures, It may be that the IRS will, in the future, show a greater interest in pursuing “nominee” collection activity as opposed to pursuing “alter ego/successor in interest/transferee” collection activity. I have seen some evidence of this here in southern California, after the IRS read our pleadings in our now-settled case.
My experience is that many people in the IRS throw around the terms “alter ego,” “transferee,” and “nominee” like these terms are interchangeable body parts. Of course, nothing could be further from the truth. Alter egos and transferees are personally liable for the taxpayer’s taxes, based on applicable state law. Under California law, for example, the legal test for holding a third party liable as an alter ego is different from holding a third party liable as a transferee. The legal test for holding a third party liable as a successor in interest is likewise distinct from the tests for imposing liability as an alter ego or transferee. Nominees are not personally liable for the taxpayer’s tax liability.
Private practitioners should be prepared to call out the IRS if it attempts to sidestep efforts to hold the IRS accountable under the CDP provisions by improperly labeling all third party collection action as “nominee” collection action.
I have one more post to add to this series of posts. In Part 6, I will explain why virtually all IRS “nominee” notices of federal tax lien are improper in a way which can cause legal detriment to the alleged nominees. I have also seen a “transferee” notice of federal tax lien with this same impropriety. In addition to explaining the impropriety, I will offer a suggestion to the IRS on how it can cure this impropriety.
At the end of Part 2 of this series, I raised the question of whether In re Pitts, 515 B.R. 317 (C.D. Cal. 2014), aff’d, 688 F. App’x 774 (9th Cir. 2016) was decided correctly. The Pitts court held that the IRS may take administrative collection action against a general partner of a general partnership to collect employment taxes incurred by the partnership, without making a separate assessment against the general partner. The court held that the general partner is a “person liable for the tax” for purposes of section 6321 because the general partner is liable for the partnership’s employment taxes under California law. Notably, California law, like the laws of all other states, provides that a general partner of a general partnership is personally liable for all partnership debts.
The court in Pitts did not directly address the question of whether the general partner was entitled to their own independent Collection Due Process (“CDP”) rights under sections 6320 and 6330 of the Internal Revenue Code. Nevertheless, it follows from the holding in Pitts that a general partner is entitled to their own independent CDP rights under sections 6320 and 6330. As is discussed in Part 2, the Internal Revenue Manual (“IRM”) acknowledges that general partners in this situation are entitled to their own independent CDP rights.
Previously, I discussed why I believe that the IRS is talking out of both sides of their mouth in refusing to extend independent CDP rights under sections 6320 and 6330 to putative alter egos and successors in interest of taxpayers, while these rights are extended to partners of general partnerships. My argument is straightforward: if a partner who is personally liable under state law for a partnership’s unpaid tax liability is a “person liable for the tax” under sections 6320 and 6330, and thus is entitled to their own independent CDP rights, then an alter ego or successor in interest who is personally liable under state law for a third party’s unpaid tax liability is likewise a “person liable for the tax,” and thus, is entitled to their own independent CDP rights.
This post examines the question of whether Pitts, and cases such as the Ninth Circuit’s opinion in Wolfe v. United States, 798 F.2d 1241 (9th Cir. 1986), were decided correctly. If Pitts and Wolfe were decided incorrectly, the rules governing the collection of unpaid taxes from third parties would be significantly different than they are today. Any time the IRS wanted to collect taxes from a putative alter ego of the taxpayer, a putative successor in interest of a taxpayer, or a partner of a taxpayer which is a general partnership, the IRS would have to refer the matter to the Department of Justice Tax Division to bring suit. Administrative collection action by the IRS against putative alter egos and successors in interest of the taxpayer (and against general partners of a partnership for taxes owed by the partnership) would be prohibited.
Why was the predecessor to section 6901 of the Code enacted?
It is the answer to this question which supports the conclusion that the IRS may not take administrative collection action against putative alter egos or successors in interest of the original taxpayer in the absence of a separate assessment against the third party.
Why are the circumstances of the enactment of the predecessor to section 6901 so important to this analysis? The answer is quite simple. Before the enactment of the predecessor to section 6901, the government could not administratively pursue collection action against putative “transferees” of the persons who incurred the original tax liability, i.e., the “person liable for the tax.” Instead, the government was required to bring suit in federal or state court to prove that these third parties were personally liable as transferees.
The courts have repeatedly recognized that § 311 neither creates nor defines a substantive liability, but provides merely a new procedure by which the Government may collect taxes. Phillips v. Commissioner, supra [referring to Phillips v. Commissioner, 283 U.S. 589 (1931]; Hatch v. Morosco Holding Co., 50 F.2d 138; Liquidators of Exchange National Bank v. United States, 65 F.2d 316; Harwood v. Eaton, 68 F.2d 12; Weil v. Commissioner, 91 F.2d 944; Tooley v. Commissioner, 121 F.2d 350. Prior to the enactment of §280 of the Revenue Act of 1926, 44 Stat. 9, 61, the predecessor of § 311, the rights of the Government as creditor, enforceable only by bringing a bill in equity or an action at law, depended upon state statutes or legal theories developed by the courts for the protection of private creditors, as in cases where the debtor had transferred his property to another. Phillips v. Commissioner, supra, at 283 U. S. 592, note 2; cf. Pierce v. United States, 255 U. S. 398; Hospes v. Northwestern Mfg. & Car Co., 48 Minn. 174, 50 N.W. 1117. This procedure proved unduly cumbersome, however, in comparison with the summary administrative remedy allowed against the taxpayer himself, Rev.Stat. § 3187, as amended by the Revenue Act of 1924, 43 Stat. 343. The predecessor section of § 311 was designed “to provide for the enforcement of such liability to the Government by the procedure provided in the act for the enforcement of tax deficiencies. S.Rep. No. 52, 69th Cong., 1st Sess. 30.
The purpose of section 6901, and of its predecessor first enacted in 1926, is clear: namely, to permit the IRS to impose personal liability on third party “transferees” and treat them as “persons liable for the tax” against whom the IRS may pursue administrative collection action, provided that the IRS follows the procedures set forth in section 6901. To comply with these procedures, the IRS must make a separate assessment against the transferee after issuing a section 6901 notice of deficiency to the alleged transferee, thereby allowing the alleged transferee to challenge the assertion of liability in Tax Court.
Thus, the predecessor of section 6901 first enacted in 1926 established a mechanism that resulted in third party transferees becoming “persons liable for the tax” against whom administrative collection action could be pursued. It would seem to follow from this analysis that, prior to the enactment of the initial predecessor of section 6901 in 1926, third party transferees were not “persons liable for the tax.” This conclusion is bolstered by looking at the predecessor to section 6303(a) of the Internal Revenue Code, which requires the IRS to send notice and demand for payment to “each person liable for the unpaid” tax within 60 days of the date on which the tax is assessed by the IRS.
Where it is not otherwise provided, the collector shall in person or by deputy, within ten days after receiving any list of taxes from the Commissioner of Internal Revenue, give notice to each person liable to pay any taxes stated therein, to be left at his dwelling or usual place of business, or to be sent by mail, stating the amount of such taxes and demanding payment thereof.
But what about cases such as Wolfe, discussed previously? Wolfe seemingly holds that the IRS may take administrative collection action against a shareholder of a corporation taxpayer based on the theory that, under state law, the shareholder is the alter ego of the corporation, without making a separate assessment against the shareholder and without sending the shareholder a separate section 6303(a) notice and demand for payment.
Wolfe challenges the levy served upon him as illegal because no assessment was made against him as a taxpayer. He argues that levies to collect taxes can be served only upon taxpayers against whom assessments have been made. This argument is without merit.
Section 6331 of the Internal Revenue Code empowers the Government to collect overdue taxes by levying upon the taxpayer’s property. The regulations to this section provide that a levy can be served upon any person in possession of property subject to levy, by serving a notice of levy. 26 C.F.R. § 301.6331-1(a)(1) (1985). Thus, levies can be effected against any person in possession of the taxpayer’s property, not just against the taxpayer.
Wolfe misconstrues section 6331 by arguing that a notice of levy and a levy are distinct, and that a notice of levy, but not a levy, can be served on persons against whom assessments have not been made. Regulation 301.6331-1 makes clear that a notice of levy is simply a means of effecting a levy against persons in possession of taxpayer property.
Moreover, under alter ego theory, the assessment against the corporation was effective against Wolfe as well. See Harris, 764 F.2d at 1129 (under alter ego theory, assessment issued against corporation was effective as against both shareholder and corporation); see also Valley Finance, 629 F.2d at 169 (alter ego of corporation not entitled to separate notice of deficiency).
Wolfe’s reliance on United States v. Coson, 286 F.2d 453 (9th Cir. 1961), in support of his argument that the Government’s failure to file an assessment against him invalidated the levy is misplaced. Coson involved partnership tax liability, and since partners and partnerships, unlike corporations and shareholders, are not separate taxable entities, the case is distinguishable on that ground. The Coson court invalidated a levy against a partner because no assessment, notice or demand had been filed against him as a taxpayer. Here, on the other hand, the Government issued the required assessment, notice, and demand against the taxpayer corporation. Coson does not mandate that assessments be made against third parties in possession of taxpayer property before levies can be effected.
From this discussion, it is apparent that the Ninth Circuit did not understand that partnerships and their partners are distinct entities for purposes of tax administration. The fact that income from tax partnerships “flows through” to partners does not change the fact that a partnership is distinct from its partners for purposes of tax administration and does not mean that partners and partnerships “are not separate taxable entities.” Similarly, subchapter S corporations are distinct from its shareholders for purposes of tax administration, even though the income of a Subchapter S corporation flows through to its shareholders. Partnerships can incur their own tax liabilities, such as penalties for failure to file a partnership tax return, employment taxes and other excise taxes. In addition, the enactment of the new BBA partnership audit rules, which have now taken effect, make it very clear that partnerships and their partners are very distinct from one another for purposes of tax administration.
It appears that the Ninth Circuit in Wolfe refused to apply the rationale of Coson to the fact pattern in Wolfe because the Court believed that partnerships and their partners are the same entities for tax purposes in a collection context. Whatever logical force that this reasoning has (which is little or none), it appears that this reasoning was rejected by the Supreme Court when it decided in United Galletti that a partner of general partnership is not a “taxpayer” for purposes of assessing and collecting employment taxes incurred by the partnership.
The last sentence of footnote 5 in Wolfe is also problematical for those who seek to apply the holding in Wolfe to a situation where the government is attempting to impose personal liability against a third party as a putative alter ego of the “person liable for the tax.” That sentence suggests that the Court in Wolfe was dealing only with a situation where the IRS was merely seeking to levy on corporate property that was in the hands of the shareholder. If that was the situation, there would have be no need for the Ninth Circuit in Wolfe to discuss why the corporate shareholder was personally liable for the corporate taxes based on an alter ego theory.
Thus, there are a number of reasons why trial courts from which an appeal would lie to the Ninth Circuit are arguably free to disregard the Ninth Circuit’s holding in Wolfe and conclude that the IRS may not take administrative collection action against a putative alter ego of a or against a putative successor in interest of the person that incurred the tax liability.
Most of the cases in which our office has encountered an “alter ego” determination or a “successor in interest” determination by the IRS have involved employment taxes. The procedures set forth in section 6901 generally do not apply to employment taxes. They apply to the following types of taxes: (a) income taxes imposes by subtitle A; (b) estate taxes imposed by chapter 11; (c) gift taxes imposed by chapter 12; and (d) fiduciary liability under 31 USC 3713. See § 6901(a)(1). Section 6901 procedures only apply to other types of taxes (such as employment taxes) only if the taxes in question “[arise] on the liquidation of a partnership or corporation, or on a reorganization with the meaning of section 368(a).” See § 6901(a)(2). This language effectively precludes the application of section 6901 to unpaid employment taxes.
While I have not searched for any authorities which discuss this point, there may have been historical reasons for Congress’ failure to include employment taxes within the scope of what is now section 6901. In 1926, the world was a different place. Income tax withholding from wages did not become universal until 1943. Social Security laws were not enacted until 1935, and a major expansion of those laws was not enacted until 1939, effective in 1940. Thus, in 1926, when the predecessor to section 6901 was first enacted, employment taxes and universal income tax withholding were not even in existence. In 1939, when the 1939 Code was enacted, employment taxes were very new, and there was no universal income tax withholding.
If, as the IRS contends, the IRS is free today to unilaterally assert personal liability under state law against third parties by taking administrative collection action against those third parties, without a separate assessment against the third parties and without bringing suit against the third parties in court, then it would appear that the enactment of the original predecessor to section 6901 back in 1926 was unnecessary. The same rationale which arguably permits the IRS to unilaterally pursue administrative collection action against putative alter egos and putative successors in interest today, without a separate assessment and without first going to court, arguably would have permitted the IRS to pursue administrative collection action against putative transferees back in 1926, without a separate assessment and without going to court, when the first predecessor to section 6901 was enacted.
The extent to which courts will have the intestinal fortitude to address in published opinions the question of why today’s putative alter egos and successors in interest should not be in any worse a position that the putative transferees were in 1926 prior to enactment of the predecessor to section 6901 remains to be seen. In Pitts, our office raised this issue in an amicus brief filed with the Ninth Circuit. The Ninth Circuit panel, cowards that they were, issued an unpublished opinion in which the Court did not address this issue.
Still, this issue is worth raising in any case in which a putative alter ego or putative successor in interest is also arguing that they are entitled to their own CDP rights. Court that are reluctant to declare that case law such as Wolfe is no longer good law may be more receptive to the argument that, to the extent the IRS is seeking to hold third parties personally liable for taxes incurred by another person, the IRS is required to give those third parties their own independent CDP rights.
In Part 4, I will address, among other issues, the issue of how putative alter egos and putative successors in interest might go about getting the Tax Court to rule on the issues discussed in Parts 1 through 3. There are a number of potential roadblocks to having these types of cases heard in the Tax Court, and care needs to be taken to avoid creating more potential obstacles than the ones that already exist. Getting into District Court is relatively easy. Part 4 will discuss both options and will discuss why putative alter egos and successors in interest might want to litigate these issues in the Tax Court, as opposed to the District Court.
Are Alleged Alter Egos, Successors In Interest and/or Transferees Entitled to their Own CDP Rights?
This blog post is the first in a short series of blog posts addressing the question of whether the IRS has been violating the Collection Due Process (“CDP”) procedures since they became effective in January of 1999 by refusing to extend CPD rights to alleged alter egos, successors in interest and/or transferees of the person/entity who/which incurred the tax, i.e., the original “taxpayer,” where no separate assessment has been made against the alleged alter ego, successor in interest and/or transferee. The IRS would have the public, including tax professionals, believe that the answer to this question is “no,” that these persons are not entitled to their own CDP rights independent of the CDP rights of the original “taxpayer.” This blog post, along with several succeeding blog posts, will explain why the IRS may be wrong on this point. These posts will also examine the potential procedural obstacles to the Tax Court rendering an opinion on the question of whether alleged alter egos, successors in interest and transferees are entitled to their own independent CDP rights.
These posts will also examine the argument that the IRS is not permitted to take administrative collection action against any of these “secondarily liable” persons at all, absent a separate assessment against them. This argument seems radical, even “protester-like,” on the surface. But if it turns out that these “secondarily liable” persons are not entitled to their own independent CDP rights, this argument is not at all far-fetched.
Why do I have an interest in these topics? Our office recently settled several cases pending in the Tax Court in which we had raised these issues. The Tax Court would have had the opportunity to address the question of whether an alleged alter ego/successor in interest is entitled to its own separate CDP rights under §§ 6320 and 6330, plus various related jurisdictional issues, had these cases not recently settled. Because those cases are now settled, the Tax Court cases are moot.
Because the question of whether alleged alter egos, successors in interest and transferees are entitled to their own independent CDP rights is an important, recurring issue, I am sharing with the tax procedure community the arguments that we made in our now-resolved cases, so that this issue can be raised by other taxpayers and can hopefully resolved by the Tax Court in another case. I use the term “hopefully” purposely. As this series of blog posts will demonstrate, it is an open question whether the Tax Court can acquire jurisdiction to decide the question of whether alleged alter egos, successors in interest and/or transferees are entitled to their own independent CDP rights.
The questions of a) whether the Tax Court can acquire jurisdiction to decide this issue and b) how alleged alter egos, successors in interest and/or transferees can maximize the chances of the Tax Court acquiring jurisdiction will be addressed in future blog posts. In this blog post, I discuss the relevant statutes and regulations, along with a key case, which the government won, which strongly supports the conclusion that alleged alter egos, successors in interest and/or transferees are entitled to their own independent CDP rights.
Section 6320 states that any “person described in section 6321” of the Code is entitled to CDP rights under §6320. Section 6320(a)(1). The “person” who is described in §6321 is “any person liable to pay any tax”. Thus, §6320 should apply if there is a “person, ” a tax is owed, and the “person” is “liable” for that tax. Section 7701(a)(1) defines the term “person” very broadly.
Section 6331(a) of the Code permits the IRS to levy on “all [non-exempt] property and rights to property” of the “person liable to pay any tax” and on any property on which the IRS has a lien under Chapter 64 (which consists of §§6301 through 6344 of the Code). The ability of the IRS under§ 6331(a) to levy on property on which it has a tax lien, even if the property is not owned by the person who is liable for the unpaid tax liability, seemingly reinforces the notion that §6330 gives CDP rights to all “persons” who own property on which there is a tax lien, even if those persons are not personally liable for the unpaid taxes.
Q-A1. Who is the person to be notified under section 6330?
A-A1. Under section 6330(a)(1), a pre-levy or post-levy CDP Notice is required to be given only to the person whose property or right to property is intended to be levied upon, or, in the case of a levy made on a state tax refund or a jeopardy levy, the person whose property or right to property was levied upon. The person described in section 6330(a)(1) is the same person described in section 6331(a) – i.e., the person liable to pay the tax due after notice and demand who refuses or neglects to pay (referred to here as the taxpayer). A pre-levy or post-levy CDP Notice therefore will be given only to the taxpayer.
Q-A2. Will the IRS give notification to a known nominee of, a person holding property of, or a person who holds property subject to a lien with respect to, the taxpayer of the IRS’ intention to issue a levy?
A-A2. No. Such a person is not the person described in section 6331(a)(1), but such persons have other remedies. See A-B5 of paragraph (b)(2) of this section.
What the IRS has done in its regulations is to say that the term “any person” does not really mean any person, but instead means “any person liable for the tax under §6331(a).” While it seems to me that the language of the regulation is inconsistent with the statute on this point, I will leave that discussion and that fight for another day. It is not necessary for courts to strike down this regulation to reach the conclusion that alleged alter egos, successors in interest and/or transferees are entitled to their own independent CDP rights under §6330, although striking down this regulation would make it much simpler to reach that conclusion. Striking down the regulation, however, would have no effect on the question of whether alleged alter egos, successors in interest and/or transferees have CDP rights under §6320.
Q-A1. Who is the person entitled to notice under section 6320?
Q-B5. Is a nominee of, or a person holding property of, the taxpayer entitled to a CDP hearing or an equivalent hearing?
These regulations track the language of § 6320, more so than the regulations issued under § 6330 track the actual language of that section.
So what lessons are to be drawn from the regulations as to what “persons” are entitled to CDP rights under §§6320 and 6330? The most important lesson is that, per the regulations, in order for a person to be entitled to CDP rights, they must be a “person liable for the tax” under § 6320 or a “person liable to pay any tax” under § 6331(a).
With that lesson in mind, I now discuss the important case of Pitts v. United States, 515 B.R. 317 (C.D. Cal. 2014), aff’d, 668 Fed. Appx. 774, 2016 U.S. App. LEXIS 16287, 118 A.F.T.R.2d (RIA) 5644, 2016-2 U.S. Tax Cas. (CCH) P503992016 (9th Cir. 2016)(unpublished opinion), a case which Keith blogged about here.
In Pitts, a general partnership incurred unpaid employment taxes. Pitts was a general partner in the partnership. The IRS filed a notice of federal tax lien against Pitts, in her capacity as a general partner, without making a separate assessment against Pitts. Pitts later filed a chapter 7 bankruptcy petition. After obtaining a discharge, Pitts filed an adversary proceeding against the IRS, seeking, inter alia, to invalidate the tax liens evidenced by the notices of federal tax lien filed against her for the taxes incurred by the partnership. The Bankruptcy Court upheld the validity of the liens, and Pitts appealed to the District Court.
Pitts argued, unsuccessfully, that the IRS could not pursue administrative collection action against her to collect the employment taxes owed by the partnership without making a separate assessment against her under section 6672. She cited to the Supreme Court’s holding in Galletti that a general partner of a general partnership that incurs unpaid employment taxes is not the “employer” who incurs the tax and thus is not “primarily liable” for the partnership’s tax liability, even though the Supreme Court also held that Galletti was “secondarily liable” for those taxes by operation of state (California) law, which allowed the IRS to file a claim against Galletti in bankruptcy.
But the Government argues that contrary to Pitts’s argument, once the IRS assesses a tax against a general partnership, it need not separately assess the general partners in order to make them liable. The Government contends that since Pitts is liable for DIR’s debts under California law, the tax assessment against DIR for its unpaid employment-tax withholdings suffices to create a tax debt owed by Pitts to the IRS. The IRS further asserts that it did not have to proceed against Pitts under § 6672 but rather could separately pursue her under state law.
But for the IRS to properly record a tax lien as provided under § 6321, Pitts must only be “any person liable to pay any tax”—not necessarily the primarily liable “taxpayer” as Congress has defined that term in § 7701(a)(14) (defining “taxpayer” as “any person subject to any internal revenue tax”). The determination whether Pitts is a “taxpayer” does not establish the IRS’s ability to record a statutory lien under § 6321. Rather, the existence of her federal tax liability for “any tax”—regardless of how that liability arises—is the defining criterion of the tax lien’s validity. As the Court established above, Pitts is in fact liable under federal law for DIR’s unpaid employment-tax withholdings.
This District Court thus held that Pitts was a “person liable to pay any tax” for purposes of section 6321, even though Pitts’ liability for the tax was grounded on state law (California’s version of the Uniform Partnership Act), not based on federal law, such as section 6672.
First, pursuant to the plain language of 26 U.S.C. § 6321, Pitts is a “person liable to pay any tax,” and a lien in favor of the government arises by operation of federal law. See In re Crockett, 150 F.Supp. 352, 354 (N.D. Cal. 1957) (California partner was liable for debts of partnership under state law; accordingly, partner was liable for entire amount of partnership’s employment taxes, and was “person liable to pay” under § 6321’s identically worded predecessor); see also Bresson v. C.I.R., 213 F.3d 1173, 1178 (9th Cir. 2000) (where the IRS relied on state law to establish an individual’s liability, “the government’s underlying right to collect money in this case clearly derives from the operation of federal law (i.e., the Internal Revenue Code)”).
Second, the United States may utilize administrative enforcement procedures to collect the debt from Pitts, because she is secondarily liable for DIR’s assessed debt. See United States v. Galletti, 541 U.S. 114, 122, 124 S. Ct. 1548, 158 L. Ed. 2d 279 (2004) (“After the amount of liability has been established and recorded, the IRS can employ administrative enforcement methods to collect the tax”). The United States is not obligated to make a second assessment against Pitts individually, because the consequences of its assessment attach to the assessed debt “without reference to the special circumstances of the secondarily liable parties.” Id. at 123.
So there you have it. A person who is “secondarily liable” for a tax liability under state law is a “person liable to pay any tax” under §6321. Presumably that person is also “any person liable to pay any tax” for purposes of § 6331.
It would seem to follow that, if a person who is “secondarily liable” for a tax liability under state law is subject to administrative collection action under §§6321 and 6331, such person is also entitled to the protections of the CDP procedures. That topic will be explored in greater detail in the next blog post.
What is a Prior Opportunity to Contest the Liability for Purposes of Collection Due Process?
Back in February of this year, Carl Smith noted in a guest post that three Circuit Courts of Appeal would be considering the question of the circumstances under which a taxpayer is barred from challenging the merits of the underlying tax liability in a Collection Due Process case under section 6330(c)(2)(B) because of a “prior opportunity” to contest the underlying liability. Our firm was retained to handle these appeals. Briefing in all three cases is now complete. Oral argument in the 7th Circuit case is set for November 9. Oral argument in the 10th Circuit case is set for November 14. Oral argument in the 4th Circuit case is set for the last week of January.
For those taxpayers who have the means to both pay the disputed liability in full and litigate the merits of the liability in a refund suit in District Court or the Court of Claims, resolution of this issue will decide whether they can ever challenge the disputed liability in the Tax Court, which is procedurally more “taxpayer friendly” than District Court or the Court of Claims and is far less expensive in which to litigate than either of these other two fora.
The parties’ briefs are lengthy, although none of the attorneys involved on either side were paid by the word. The briefs are lengthy because resolving this issue in a proper manner requires a detailed knowledge of tax procedure that most appellate Judges lack. I’m not going to summarize the briefs here, but copies of our opening brief, the government’s responding brief, and our reply brief in the 7th Circuit case can be found here, here, and here.
If you have the time, I strongly recommend reading the briefs. They contain a number of surprises. Of particular interest is the fact that the government is arguing that the taxpayers in these three cases are also barred by section 6330(c)(4) from challenging the merits of the liabilities. This is a new development. Section 6330(c)(4) has previously been interpreted by the IRS Office of Chief Counsel as only applying to collection-related issues, not to liability-related issues. IRS Chief Counsel’s prior position, however, has not prevented the Department of Justice from arguing that section 6330(c)(4) prohibits the taxpayers-appellants in these three cases from challenging the merits of the underlying liabilities. There are other surprises in the briefs as well, but I leave it to the readers of this blog post to discover them on their own.
The fact that three Courts of Appeal will be considering these issues simultaneously creates the possibility of a Circuit split. Indeed, the “split” could even be a “fracture,” with the possibility of each Circuit going its own direction. Of course, we hope for a unanimous reversal of the Tax Court by all three Circuits.
The last interesting point is that I will get to spend Election Day in Chicago. Having grown up in downstate Illinois, I’m familiar with the unofficial state slogan of Illinois, which is “Vote Early, Vote Often.” I jokingly suggested to one of my colleagues that, having voted early here in California, my trip to Chicago might afford me the chance to vote more than once. He responded that I should check to see whether the records show that I have continuously voted in Illinois since leaving the state almost 40 years ago. He has a point. When I’m not busy preparing for oral argument, I will check that out.
Speaking of appeals, I turn now to the government’s reaction to the Tax Court’s opinion in SECC. I’m certain that the IRS was just as surprised as I was at the outcome. I am also certain that they liked the outcome far less than I did. After all, I now had a chance to prove that the IRS should lose on the merits, without having to foray into District Court. (I’ve litigated a worker classification dispute in District Court before. See Vendor Surveillance Corp. v. United States, 97-2 U.S.T.C. ¶50,527 (9th Cir. 1997)(unpublished decision reversing award of attorney’s fees under section 7430 after taxpayer prevailed in a jury trial in a worker classification case). Trying this type of case in District Court is extremely expensive.) If SECC lost at trial, SECC could still appeal the decision on jurisdictional grounds.
The IRS, however, initially was not content to let the matter go to trial and then deal with the jurisdictional issue in a post-trial appeal. Rather, they told me, and the Tax Court, that they were considering seeking leave to file an interlocutory appeal of the jurisdictional issue to the Ninth Circuit. As seasoned tax controversy attorneys know, however, the IRS does not get to decide whether they will ask the Tax Court for leave to file an interlocutory appeal. Only the Solicitor General, after consulting with the Department of Justice Tax Division’s Appellate Section, gets to authorize the pursuit of an interlocutory appeal.
Having worked in the General Litigation Division of the IRS National Office in the early 1980’s, where I carried the bags of the IRS attorneys who met with the attorneys from the Appellate Section of DOJ Tax Division, and having observed strenuous disagreements between these IRS and DOJ attorneys about whether to appeal an adverse ruling, I was quite familiar with the procedure that had to be followed in order to authorize an interlocutory appeal. I knew that lots of government attorneys would be involved and that there would be lots of meetings. Keith Fogg accurately described this process in parts 1 and 2 of The Room of Lies. I sat in the Room of Lies on many occasions, albeit as a lowly bag carrier. Based on my experience, I thought the process might take a few months, six months at most.
Time passed without any decision. In December of 2014, the IRS issued Chief Counsel Notices CC-2014-11 and CC-2015-1, in which IRS Chief Counsel’s Office formally announced to the world that they disagreed with the Tax Court’s holding in the SECC opinion. I waited some more. It was not until March of 2015 that the IRS formally advised the Tax Court that the decision had been made to not pursue an interlocutory appeal of the jurisdictional issue.
What happened? Apparently DOJ and the Solicitor General’s Office disagreed with the IRS. While no one has told me the story, I’m certain I could come up with a fairly accurate script of the conversations that took place. The attorneys in the IRS who were involved in drafting Notice 2002-5, supra, no doubt pushed hard for the SG to pursue an interlocutory appeal. They were vested in their “creation” (the Notice) and pushed hard for what they thought was a righteous cause.
The DOJ Appellate attorneys no doubt had significant reservations about pursuing an interlocutory appeal. The DOJ attorneys were likely concerned about the possibility that SECC might prevail on the jurisdictional issue in the Ninth Circuit. They were also likely concerned about the fact that the Ninth Circuit’s opinion in Charlotte’s Office Boutique, Inc. v. Commissioner, 425 F.3d 1203 (9th Cir. 2005), was, to say the least, somewhat in tension with the position argued by the Commissioner on the jurisdictional issue in the Tax Court. They may have also been concerned about the fact that the Ninth Circuit has not always been particularly kind to the IRS in section 530 cases. Regardless of why the government did not pursue an interlocutory appeal, I was now looking at a Tax Court trial, or, if the Tax Gods were with me, a settlement that my client could live with.
After learning that the IRS would not be pursuing an interlocutory appeal, I learned that the IRS was auditing the income tax returns of cable splicers in southern California. The IRS undoubtedly learned what I had previously learned, namely, that during the quarters at issue in the SECC case, the entire cable splicing industry in southern California treated the cable splicers as “dual status” workers, the same as SECC had done. Thus, the IRS was now aware that I could make a strong “industry practice” showing in support of my section 530 argument, in addition to showing that the IRS advised my client to do business the way that it did, and showing that my client consistently followed all information reporting requirements. The IRS may have also learned that the argument that the cable splicers were in fact independent contractors for all purposes had some merit.
Near the end of 2015, the IRS issued Chief Counsel Notice CC-2016-002. In this Notice, the IRS announced to the world that it was now in agreement with the Tax Court’s holding in the SECC case! About this time, I had a telephone conversation with the IRS attorney handling the case. As the result of this telephone conversation, I submitted a formal settlement offer to the IRS. The amount of the offer? A total of $25,000 in taxes, spread out over all of the quarters in question. In return, my client would concede that the workers in question were employees for all purposes of Subtitle C during the quarters at issue. (Such a result would have been metaphysically impossible had the case gone to trial. That is why settlements were invented.) Not too long thereafter, the offer was accepted. A similar story played out in the one other case handled by our office that had not previously settled. The SECC case was over.
So what happened? Why the change in position by the IRS on the jurisdictional issue? While no one from the IRS has even hinted to me why this happened, I don’t think it is too hard to surmise why the change in position took place. With the change in position, it is very unlikely that the IRS will ever “blow” a statute of limitations in an employment tax case, and it is unlikely that the Tax Court’s holding in SECC will be reversed by a Court of Appeals any time soon.
It appears from the Tax Court’s opinion in SECC that, once a “determination” is made by the IRS under section 7436(a), the statute of limitations on assessment is suspended. While there may be some practical problems in determining when that suspension begins and ends, the IRS can avoid having to deal with those kinds of issues by requiring taxpayers to sign written extensions of the statute of limitations prior to the earliest possible expiration of the statute of limitations on assessment or, if no written extensions are forthcoming, by issuing a notice of determination to the taxpayer under section 7436(b) prior to the earliest possible expiration of the statute of limitations on assessment. Most taxpayers will sign the statute extensions, in the hope that the case will eventually settle.
The number of Tax Court petitions that will be filed prior to the issuance of a Notice of Determination under section 7436(b) will be small. Most taxpayers will want to try to settle with the Office of Appeals before going to court, and most cases handled by the Office of Appeals will settle. It is very unlikely that rational taxpayers will file a Tax Court petition prior to the issuance of a Notice of Determination under section 7436(b) with the idea that they will thereafter challenge the jurisdiction of the Tax Court on the grounds that no Notice of Determination was issued. Such a taxpayer, after losing on the jurisdictional issue in Tax Court, would then have to appeal the Tax Court’s ruling to a Court of Appeals after going to trial or settling the case. It is unlikely that any appeal would be filed after a settlement has been reached.
Compare that situation with the situation that would have resulted if the IRS had not acquiesced in the Tax Court’s ruling in SECC and had instead continue to argue that no Notice of Determination was required to be issued in cases such as SECC. The Ninth Circuit would have eventually ruled on the jurisdictional issue. If they had ruled in favor of SECC, the employment tax world would again have been thrown into a state of chaos. Statutes of limitations would have been “blown.” Uncertainty regarding the Tax Court’s jurisdiction would have continued, pending an eventual ruling by the Supreme Court in SECC or in some future case. The Supreme Court’s ruling might not have come until after a Circuit split developed. Uncertainty when it comes to the jurisdiction of the Tax Court is not a good thing.
Uncertainty would still have lingered even if the Ninth Circuit had sustained the Tax Court, because the IRS would have continued to challenge the Tax Court’s ruling in SECC. That uncertainty would not have been a good thing.
It is certainly possible that, at some point in the future, a Court of Appeals will have occasion to rule on the jurisdictional issue decided in the SECC case. In any appeal from a decision in a 7436 case where the Tax Court petition was filed without the issuance of a Notice of Determination under section 7436, the Court of Appeals will have an independent duty to determine whether the Tax Court had jurisdiction below. It is possible that the situation will play out in a manner similar to how the case law played out after the IRS acquiesced in the Tax Court’s holding in Fernandez v. Commissioner, 114 T.C. 324 (2000), that it had jurisdiction to review determinations under section 6015(f), only to see the Ninth Circuit later hold that the Tax Court lacked jurisdiction to review such determinations in Commissioner v. Ewing, 439 F.3d 1009 (9th Cir. 2006). But even if that were to happen, the IRS’s recent acquiescence in the Tax Court’s holding in SECC will create much less chaos and uncertainty in the near future than if the IRS had not acquiesced in that holding.
The IRS’s acquiescence in the Tax Court’s holding in SECC, however, came with a price for the government. In order to avoid having SECC possibly upset the apple cart by appealing the jurisdictional issue to the Ninth Circuit, the IRS had to settle the SECC case (and the related case) on terms that would ensure that SECC would not appeal the jurisdictional issue. To its credit, the IRS did just that. Regardless of the IRS’s motivation for settling on the terms that it did, my own view is that the result in the case was a fair one given the unusual facts of the case, even though the taxpayer had to wait a long time for that result.
Note, however, that future litigants with issues similar to the issues raised in the SECC case will face obstacles not faced by SECC. The IRS, in Chief Counsel Notice CC-2016-002, supra, has indicated that it intends to challenge arguments by taxpayers that they are entitled to section 530 relief or are entitled to section 3509(a) rates in cases with fact patterns similar to the fact pattern in SECC. While I think that Chief Counsel is taking a position that is wrong both legally and from a standpoint of fairness to taxpayers who face situations similar to the situation faced by SECC, that topic is for another day.
Perhaps the most interesting cases going forward will focus on when a “determination” has taken place or, more likely, will focus on when the suspension of the statute of limitations on assessment begins and ends. In cases where the IRS has used the “belt and suspenders” approach of obtaining written extensions of the statute of limitations, statute of limitations issues are not likely to arise. But in cases where the IRS relies solely on the Tax Court’s interpretation of section 7436 in SECC to keep the assessment statute of limitations on assessment open, statute of limitations issues could arise. Notably, these issues could arise either in Tax Court litigation or in District Court refund litigation. Thus, it is possible that District Courts will be issuing rulings on statute of limitations issues in situations in which the resolution of the statute of limitations issue will turn on whether the Tax Court decided the jurisdictional issue correctly in SECC.
In closing, I would like to tip my cap to the government counsel with whom I worked in the SECC case and related cases. Their professionalism was greatly appreciated, even when we vehemently disagreed with each other’s legal positions. I would also like to tip my cap to Robert Horwitz and Barry Furman. Robert, who has moved on from our firm after growing tired of driving from Santa Monica to Orange County and back every day for almost 20 years, worked by my side as we crafted our arguments in the SECC case. Barry, who was co-counsel with me, and lead trial counsel, some 22 years ago in the Vendor Surveillance case mentioned earlier, served as a sounding board for our case strategy. Both of these fine attorneys were of great help to me in handling this matter.
If you read Part 1 of this post, you now understand what I meant when I said that the SECC case was a tax procedure nerd’s dream and a client’s nightmare. The tax procedure issues in the case were ubiquitous. Things were about to get even more interesting.
On April 3, 2014, the Court issued a reviewed opinion in SECC Corporation v. Commissioner, 142 T.C. 225 (2014)(“SECC”). At the time the Court released its opinion, I was meeting with an IRS Appeals Officer in another case. Someone from the IRS interrupted that meeting to tell me that I had “won” the SECC case, without explaining the contents of the Court’s opinion. Of course, regardless of how the Court ruled, the case would not be over. Given the IRS’s vigorous advocacy of its position, I anticipated they would appeal if the Court granted our motion to dismiss for lack of jurisdiction. I returned to my office, eager to find out exactly how I had “won” the case.
The Tax Court issued a reviewed opinion in the SECC case, with the majority opinion (authored by Judge Colvin and joined by 14 other judges) denying both parties’ motions to dismiss and holding that the Court had jurisdiction to determine the merits of the disputed employment tax liabilities. The majority opinion properly noted that it has an independent duty to determine whether it has jurisdiction, even where both parties argue that the Court lacks jurisdiction, and that the Court owes no deference whatsoever to the IRS’s view, whether expressed through regulations or otherwise, as was the case in SECC, see Notice 2002-5, 2002-1 C.B. 320, that the Court lacks jurisdiction over the case.
Per the majority opinion, the legislative history of section 7436 makes clear that a mere “failure to agree” regarding the result of an employment tax audit could constitute a “determination” under section 7436(a) which would trigger a taxpayer’s right to file a Tax Court petition. Once there has been a “determination,” the taxpayer’s right to file a petition with the Tax Court to challenge the results of the employment tax audit is limited only when the IRS issues a Notice of Determination by certified or registered mail under section 7436. When that happens, the taxpayer must file a petition within 90 days after the date of that notice in order to invoke the Tax Court’s jurisdiction. Thus, per the majority opinion, section 7436 is similar to the statutory scheme governing refund claims. Under that scheme, the taxpayer has the right to go to court at any time after a refund claim has been filed and six months have passed since the filing of the claim, but the taxpayer’s right to go to Court has a two year time limitation once the IRS issues a formal denial of the claim for refund.
The majority opinion also noted that Congress, in section 7436(d), failed to make the principles of section 6212 applicable to determinations under section 7436(a). Rather, Congress incorporated only “the principles of subsections (a), (b), (c), (d), and (f) of section 6213, section 6214(a), section 6215, section 6503(a), section 6512, and section 7481” as applying to proceedings brought under section 7436. The majority opinion also noted that the principles of these sections were to apply in the same manner as if the Secretary’s determination described in subsection (a) were a Notice of Deficiency (emphasis added).
Thus, per the majority opinion, it is a “determination” under subsection (a) of 7436, and not the Notice of Determination under section (b), that triggers, among other things, the taxpayer’s right to file a Tax Court petition and the related restrictions on assessment and collection of the employment taxes which are the subject of the dispute between the IRS and the taxpayer who is being audited. It would appear that the “determination” under subsection (a) also starts the suspension of the statute of limitations on assessment. More on how that might work later.
As for applying these principles to SECC’s case, the majority opinion held that SECC’s petition was timely because the IRS had never sent SECC a Notice of Determination by certified or registered mail as required by subsection 7436(b). There had previously been a “determination” under section 7436(a) in connection with an audit and there was an actual controversy when Appeals issued their letter dated April 15, 2011, and SECC was entitled to file a Tax Court petition at any time thereafter until the 90th day after a notice was sent to SECC by certified or registered mail.
Were we to adopt respondent’s position, the Commissioner, by refusing to issue a notice of determination, would be able to deny the taxpayer access to this Court, which he may be tempted to do whenever he feels his chance of success on a worker classification or RA ’78 sec. 530 issue is better in either the District Court or the Court of Federal Claims than this Court. There is no basis in section 7436 or as a matter of policy for granting the Commissioner this “forum shopping” discretion, and it would thwart the obvious congressional intent embodied in that provision to permit taxpayers, in their discretion, to litigate, in this Court, worker classification and RA ’78 sec. 530 issues that the Commissioner has raised on audit.
Judges Goeke and Kerrigan dissented. They stated that the structure of section 7436 indicates that the Court should treat a worker classification determination as if it were a deficiency determination in an income tax case. They expressed concerns that the majority’s approach will result in administrative problems. They posed a number of questions which they thought did not have appropriate answers under the approach taken by the majority, such as whether the IRS would be able to assess a disputed employment tax deficiency after the IRS made a “determination” (without sending a Notice of Determination under section 7436(b)) but the taxpayer failed to file a Tax Court petition within 90 days of the date of the determination. Thus, in their view, the Tax Court should not have jurisdiction over a worker classification case unless the IRS has issued a notice of determination under section 7436(b). Since the parties agreed that no such notice had been issued to SECC, the dissenters would have dismissed the petition for lack of jurisdiction.
As for whether the IRS should have issued a Notice of Determination, the dissenters stated that the Court should not have “delved” into the administrative record to determine whether the IRS had made a “determination” under section 7436(a). Rather, they would have permitted the IRS to decide unilaterally when its examination warrants the issuance of a Notice of Determination, leaving the IRS to bear the consequences associated with making an invalid assessment if it turned out that the IRS was in fact required to issue a Notice of Determination before assessment of the employment tax deficiencies.
I can’t let that characterization of my arguments by the dissenting Judges go unchallenged. Was it “frivolous” to argue that the cable splicers were true independent contractors when the Fifth Circuit had previously held that similarly situated cable splicers were independent contractors? I don’t think it was. Was it “frivolous” to argue that, in the alternative, my client was entitled to section 530 relief when, among other things, a) the entire cable splicing industry in southern California treated the cable splicers the way SECC treated them during the periods in question, b) SECC had always complied with the rules regarding the issuance of information returns such as Forms 1099, c) the IRS had previously told SECC to treat the cable splicers the way they did, and d) there was absolutely no case law which addressed the question of whether SECC was entitled to section 530 relief where it had treated the workers as “dual status” workers for tax reporting purposes? I don’t think it was. Was it “frivolous” to argue in the alternative that the taxes owed by SECC should have been computed based on section 3509(a) rates when SECC believed (based on advice given by the IRS itself) that it had been doing things properly? I don’t think it was. Was it “frivolous” to argue in the alternative that the taxes owed by SECC should have been reduced under section 3402(d)? I don’t think it was.
Now that I have vented my spleen, I have a more important point to make about the dissent. The dissenters’ suggestion that the IRS can ignore the rules just because the IRS (or a Tax Court Judge) believes that a taxpayer’s argument is frivolous is an extremely dangerous idea that, if adopted by the IRS and the Courts, could seriously damage our voluntary compliance system. The fact that the government must follow proper procedures, and can be held accountable if it fails to do so, is as much a bedrock of our voluntary compliance system as is the willingness of taxpayers to voluntarily file their tax returns and (usually) file an income tax return that consists of non-fiction instead of fiction.
The government doesn’t convict criminal tax defendants and throw them in jail without a trial just because the IRS or a Judge thinks that their arguments are “frivolous.” Instead, the government gives them a trial, along with an opportunity to appeal the result at the trial if they don’t like the outcome of the trial. Nor do we allow the IRS to assess income tax deficiencies without issuing a Notice of Deficiency just because the IRS or a Judge believes that the taxpayer’s arguments are “frivolous.” Rather, the IRS must first issue the taxpayer a Notice of Deficiency, and the taxpayer can file a petition and seek a trial in the Tax Court. If the taxpayer does not like the result there, they can appeal to the Courts of Appeal. And sometimes it turns out that an argument that the lower court thought was “frivolous” turns out to have been a winning argument.
Even where taxpayers lose, and lose badly, however, the taxpayer can say that they had their day in court, and third-party observers can take comfort in the fact that, should they ever end up in a wrestling match with the IRS, the IRS (and the courts) will give them a fair shake by following the rules, instead of bending the rules whenever they don’t think much of the taxpayer’s arguments. When taxpayers are convinced that the IRS does not follow the rules and/or the Courts don’t follow the rules, they are less likely to comply with the law.
In the third and final part, I will discuss the aftermath of the SECC opinion, including the reasons and consequences of the IRS position and the ultimate resolution of the case.

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 v. 
 v. 
 § 3187
 § 311
 § 301
 v. 
 § 6901
 § 6901
 §6320
 §6321
 §6320
 §6330
 §6331
 §6330
 §6320
 § 6320
 § 6330
 § 6320
 § 6331
 v. 
 § 6672
 § 6321
 § 7701
 § 6321
 § 6321
 § 6321
 v. 
 v. 
 §6321
 § 6331
 v. 
 v. 
 v. 
 v. 
 v.