Opinion ID: 1070
Heading Depth: 2
Heading Rank: 3

Heading: new harmless error exception

Text: The majority only reaches the right result because it creates a new harmless error exception. This rule was not advocated by either party in this court or below, even though the government stands to benefit from it. The majority holds that even when a notice of deficiency is required under § 6230, the IRS's failure to issue such a notice will be excused if this failure was not prejudicial. Maj. Op. at 1361-62, 1364. The majority defines prejudicial as an error that could affect the outcome, meaning it results in an incorrect assessment or collection of taxes. Id. at 1364-65. In my view, the majority errs by inventing a harmless error exception for procedural errors by the IRS. Maj. Op. at 1364-65. Though the majority may intend its holding to be limited, I question whether the test can, or will, be limited to the facts of this case. Cf. Maj. Op. at 1365-66. Though the majority does not discuss them, the implications of this new rule are sweeping: So long as the IRS is right that more taxes are owed, it can always bypass the notice of deficiency procedures in I.R.C. §§ 6211-6216. As a practical matter, taxpayers will rarely, if ever, be able to satisfy the majority's test, which requires showing that litigating in Tax Court could have resulted in a different outcome than a refund suit in district court or the Court of Federal Claims. Maj. Op. at 1365. Indeed, by design the primary difference between a Tax Court action and a refund suit is whether the taxpayer has to pay the disputed taxes before litigating. Compare I.R.C. §§ 6213, 6512, with I.R.C. §§ 6227, 7422. This is one of the rare cases where the exception may indeed consume the rule, namely the procedures set out in I.R.C. §§ 6211-6216. [8] More importantly, the majority's exception has no textual basis in the tax code. Though the majority tenuously relies on the general harmless error standard in 28 U.S.C. § 2111, [9] properly applied, § 2111 changes nothing. Maj. Op. at 1363-65. It does not change the result here because I.R.C. §§ 6211-6216 make clear that a taxpayer has an unqualified right to a notice of deficiency. Until the IRS issues the taxpayer such a notice, the IRS cannot assess or collect that deficiency. I.R.C. § 6213(a); see also Frontone, 383 F.3d at 658; Eschweiler v. United States, 946 F.2d 45, 48 (7th Cir.1991) (noting the IRS's statutory obligation to send notice of the deficiency). The majority's mistake is to treat the notice of deficiency as an empty procedural gesture, like using the right size paper or filing enough copies of an appellate brief. See Maj. Op. at 1363-65; see, e.g., Fed. R.App. P. 32; Ninth Cir. R. 32-2. As with most tax laws, here the substantial right at stake is the taxpayer's right to have the IRS follow particular procedures before assessing or collecting taxes. See I.R.C. §§ 6212-6213. The majority incorrectly assumes that the IRS's failure to follow the procedures Congress established only matters if that failure could affect the outcome, the tax assessed. Maj. Op. at 1361-65. Focusing on whether the outcome (tax assessed) is right or wrong ignores the nature of the right at stake. Tax laws are technical laws. They are not subject to the general principles of equity as the majority now holds; instead, they require strict adherence to the explicit procedures they establish. See United States v. Dalm, 494 U.S. 596, 608, 110 S.Ct. 1361, 108 L.Ed.2d 548 (1990); Lewyt Corp. v. Comm'r, 349 U.S. 237, 249, 75 S.Ct. 736, 99 L.Ed. 1029 (1955); Oropallo v. United States, 994 F.2d 25, 28 n. 3 (1st Cir.1993); In re Graham, 981 F.2d 1135, 1138 (10th Cir.1992); Ewing v. United States, 914 F.2d 499, 501 (4th Cir.1990); Richardson v. Smith, 301 F.2d 305, 306 (3d Cir.1962) (noting that taxation is a game which must be played strictly in accordance with the rules). Because the right at issue is partially procedural, much of the harm is deprivation of that procedure. Cf. Hughes v. Rowe, 449 U.S. 5, 13 & n. 2, 101 S.Ct. 173, 66 L.Ed.2d 163 (1980); Carey v. Piphus, 435 U.S. 247, 266, 98 S.Ct. 1042, 55 L.Ed.2d 252 (1978) (holding that deprivation of a party's procedural due process rights is actionable, even without injury). Here, however, the harm is greater than just a loss of procedure because receiving a notice of deficiency is prerequisite to filing in Tax Court. When taxpayers are entitled to a notice of deficiency and receive none, they lose their statutory right to a prepayment, pre-assessment forum (Tax Court) due to the IRS's error, thus depriving them of a substantial right. See I.R.C. § 6213(a). The majority misses the point by framing the issue as whether there were any issues that [the taxpayers] were unable to litigate in the context of the refund suit that they would have been able to litigate in a Tax Court suit. Maj. Op. at 1364-65. The tax code does not make a taxpayer's right to sue in Tax Court depend on whether the outcome could have been different, as the majority suggests. Id. at 1364-65. The majority attempts to support its new harmless error rule through misplaced reliance on Elings v. Commissioner, 324 F.3d 1110 (9th Cir.2003), and Smith v. Commissioner, 275 F.3d 912 (10th Cir. 2001). These cases do not help the majority, because none involve the failure to give the taxpayer notice or follow the tax code's procedures. Maj. Op. at 1364-65. In those cases, unlike here, the IRS followed the required procedure: it issued a notice of deficiency. See Elings, 324 F.3d at 1111; Smith 275 F.3d at 913-14. The only question was whether errors in those notices were harmless. The tax code expressly provides that errors in a notice of deficiency will generally not invalidate that notice. I.R.C. § 7522(a). Because of I.R.C. § 7522(a), Elings and Smith are quite different cases from one where the taxpayer received no notice, as occurred here. Whatever its faults, an error-filled notice still alerts the taxpayer that the IRS thinks he owes more taxes. No court has held, as the majority does here, that the IRS's failure to issue any notice is harmless error. The majority also diverges from Supreme Court precedent by failing to strictly and narrowly construe the tax procedures that parties (including the IRS) must follow. The proper course is to tack as close to the plain language as common sense and precedent permit, not create a new harmless error exception to excuse the IRS's failings. See, e.g., Helvering v. Nw. Steel Rolling Mills, Inc. 311 U.S. 46, 49, 61 S.Ct. 109, 85 L.Ed. 29 (1940); Deputy v. du Pont, 308 U.S. 488, 493, 60 S.Ct. 363, 84 L.Ed. 416 (1940). The provisions at issue are characteristically narrow; they do not create a harmless error exception for when the IRS exceeds its authority and fails to follow the tax code's deficiency procedures. See I.R.C. §§ 6211-6216. As in Botany Worsted Mills v. United States, 278 U.S. 282, 288-89, 49 S.Ct. 129, 73 L.Ed. 379 (1929), here Congress has prescribed the exclusive method by which the IRS can assess and collect deficiencies, I.R.C. §§ 6211-6216. See O'Bryant v. United States, 49 F.3d 340, 346-47 (7th Cir.1995) (Congress gave the IRS specifically delineated collection authority, and the IRS must act within that authority.). Part of this prescription is the degree of formality requiredthe statute requires the IRS to issue a notice of deficiency; it is not enough that the ultimate assessment turns out to be right in the absolute sense. [10] Id.; cf. Botany Worsted, 278 U.S. at 289, 49 S.Ct. 129; Raleigh & Gaston R.R. Co. v. Reid, 13 Wall. 269, 270, 20 L.Ed. 570 (1871) (When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode.). The majority is simply wrong to equate a taxpayer's right to a refund suit or a collection due process hearing (CDP hearing) with a taxpayer's pre-payment, pre-assessment right to challenge the alleged deficiency in Tax Court. Maj. Op. at 1365-66. There are many differences between a CDP hearing and Tax Court, not the least of which is the timing and the existence of an assessment. A taxpayer only has a right to a CDP hearing after taxes have been assessed, the taxpayer has refused to pay, and the IRS has finally sought to collect the unpaid taxes by levying the taxpayer's property. I.R.C. §§ 6330, 6331(a). By then, the taxpayer's credit score has been affected and his property subject to liens. I.R.C. § 6322; see United States v. Nat'l Bank of Commerce, 472 U.S. 713, 719-20, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985); Bronson v. United States, 46 F.3d 1573, 1577 n. 10 (Fed.Cir.1995); In re DeAngelis, 373 F.2d 755, 757 (3d Cir.1967). While it is true that a CDP hearing provides the taxpayer an opportunity to dispute the underlying tax liability if he did not receive any statutory notice of deficiency for such tax liability or otherwise did not have an opportunity to dispute any such tax liability, the legislative history of CDP hearings suggests Congress wanted to provide  greater due process to taxpayers who are trying to comply with our complex tax laws, not a substitute for notices of deficiency. 144 Cong. Rec. S4147, 4182 (1998) (emphasis added). Tellingly, even the Tax Court does not consider CDP hearings a substitute for the IRS following the tax code's deficiency procedures. See Freije v. Comm'r, 125 T.C. 14, 36-37, 2005 WL 1649142 (2005); see also I.R.C. § 6330. This is not surprising, given that CDP hearings are the eleventh-hour option for opposing collection. Similarly, the majority is wrong to equate a taxpayer's right to file a refund suit with the right to file in Tax Court, before paying anything. Maj. Op. at 1364-65, 1366. As the name suggests, refund suits can only be filed after the taxpayer has paid the amount of taxes the IRS says he owes. Not surprisingly, the majority's view also conflicts with the views of other courts. Other courts that have considered the issue do not agree that a CDP hearing or refund suit substitutes for the opportunity to bring a pre-payment suit in Tax Court. See, e.g., Phila. & Reading Corp. v. Beck, 676 F.2d 1159, 1163-64 (7th Cir. 1982); Hoyle, 131 T.C. 13, 2008 WL 5156596, at  ([T]his Court has held that `petitioner's opportunity in a section 6330 proceeding [CDP hearing] to dispute the underlying tax liability does not cure an assessment made in derogation of his right under section 6213(a) to a deficiency proceeding.' (emphasis added)). For these reasons, I cannot agree that the IRS's failure to issue a notice of deficiency, when such a notice is required, is harmless error.