Tax Court denies jurisdiction on underlying tax liability.

In Behling, 118 TC No. 36 (2002), the Tax Court ruled that even though an Appeals Officer considered a taxpayer's underlying tax liability in a collection-due-process hearing, the taxpayer was barred from raising the issue in Tax Court, because he had received a deficiency notice. Behling is one of several recent Tax Court decisions interpreting Secs. 6320 and 6330, which Congress enacted in 1998 to provide due-process protections to taxpayers from IRS lien and levy actions.

Background

Sec. 6321 imposes a lien on all of a taxpayer's property and rights to property when demand for payment has been made and the taxpayer has not paid the taxes due. Under Sec. 6322, a lien arises when an assessment is made. For the lien to be valid against other parties, a lien notice must be filed as specified in Sec. 6323. Sec. 6320(a) requires the Service to provide the taxpayer with written notice of the lien within five business days of filing. The notice must include the taxpayer's right to request, within 30 days, an administrative hearing conducted by the Office of Appeals (Appeals). Sec. 6320(c) specifies that the hearing be conducted and judicial review be allowed by applying the procedures in Sec. 6330(c), (d) and (e). (Sec. 6330(a) and (b) provide for notice and right to a hearing before levy)

Under Sec. 6330(c) (2) (A), a taxpayer may raise any relevant collection issues at the hearing, including spousal defenses, the appropriateness of the intended collection action and possible alternatives (including substitution of assets, an installment agreement or an offer-in-compromise). However, under Sec. 6330(c)(2)(B), the taxpayer could only raise challenges to the underlying tax liability at the hearing if he or she did not receive a deficiency notice or otherwise have an opportunity to dispute the liability The hearing is not intended to provide the taxpayer with a second chance to do this. Under Sec. 6330(d), a taxpayer has 30 days to appeal the Appeals Officer's hearing determination to the Tax Court or a district court, as appropriate. Sec. 6330 does not otherwise specify the Tax Court's scope or standard of review.

In Behling, the Service sent a deficiency notice to Harold Behling in March 1997, for $5,179, disallowing an S corporation flowthrough loss due to insufficient stock basis. The taxpayer requested a further explanation of the deficiency and indicated he wanted to file an amended return. In May 1997, the IRS replied that an amended return would not change the deficiency determination, and the deadline for filing a Tax Court petition would expire on June 17, 1997. Behling did not file a Tax Court petition.

In August 1997, the Service assessed the deficiency plus statutory interest. In August 2000, it filed a lien notice and sent the taxpayer a copy, along with information about his right to a hearing. The taxpayer requested a hearing within the 30-day limit; it was held in January 2001. In spite of Sec. 6330(c)(2)(B), the Appeals Officer allowed the taxpayer to present information on the underlying tax' liability. The officer recommended that the assessment be abated, but his supervisor rejected this recommendation. The determination notice on the hearing stated that the lien notice would not be withdrawn, because the taxpayer failed to prove that he had sufficient basis in his S stock. The taxpayer appealed to the Tax Court, limiting his arguments to the underlying tax liability issue.

The Tax Court ruled that under Sec. 6330(c)(2)(B), it did not have jurisdiction to consider the, underlying tax liability, because the taxpayer had received a deficiency notice. The Appeals Officer's consideration of the taxpayer's underlying tax liability did not result in the IRS's waiving the Sec. 6330(c)(2)(B) restriction. The court cited Regs. Sec. 301.6320-1(e)(3), Q&A-Ell, which states that if an Appeals Officer at a hearing, in exercising his or her discretion, considers issues that should not be considered under Sec. 6330(c)(2)(B), such issues will not be treated as part of a determination notice and will not be subject to judicial review. The court ruled that this regulation is a valid interpretation of the statute. If, however, the Service had abated the taxpayer's tax liability in the determination notice, presumably, the abatement would have had legal effect.

If a taxpayer does not make a timely request for a Sec. 6320 or 6330 collection-due-process hearing, the taxpayer could request an administrative hearing with Appeals (i.e., an "equivalent hearing"). Appeals will consider the same issues it would have considered in a collection-due-process hearing; see Regs. Sec. 301.6320-1(i). This hearing results in a decision letter, which does not invoke Tax Court or district court jurisdiction under Sec. 6330(d). Granting an equivalent hearing does not create a waiver by the IRS of the 30-day requirement to request a collection-due-process hearing; see Kennedy, 116 TC 255 (2001).

Conclusion

To properly use a taxpayer's appeal rights, practitioners must know which issues can be raised at the various administrative and judicial proceedings and the deadlines for filing these appeals. If the Service does more for the taxpayer than the statute requires (as the Appeals Officer did in Behling), this action will not expand the taxpayer's appeal rights.

FROM PETER C. BARTON, MBA, CPA, J.D., PROFESSOR OF ACCOUNTING, UNIVERSITY OF WISCONSIN-WHITEWATER, WHITEWATER, WI