November 9, 2016
from the United States Tax Court. No. 7688-14 L - Lewis R.
Carluzzo, Special Trial Judge.
Bauer and Kanne, Circuit Judges, and Feinerman, District
case presents an issue of first impression in our circuit-one
that requires us to delve into the abstruse world of
federal-tax procedure. In this appeal, we address whether Our
Country Home Enterprises, Inc. may challenge its liability
for a tax penalty in a Collection Due Process
("CDP") hearing after having unsuccessfully
challenged its liability for that penalty in an
administrative hearing before the IRS Office of Appeals. The
tax court determined that the earlier liability challenge
precluded the later one. Our Country Home appealed. We
appeal concerns the matters a taxpayer can raise in a CDP
hearing. For the reader's benefit, we provide a brief
overview of what CDP hearings are, why they exist, and how
they fit within the enigmatic mishmash that is the Internal
Revenue Code. We then address the issues before us.
Overview of the CDP Process
has given the Secretary of Treasury the power "to
determine, assess, and collect federal taxes."
Gyorgy v. Comm'r, 779 F.3d 466, 472 (7th Cir.
2015) (citing I.R.C. §§ 6201(a), 6301). The
Secretary, in turn, has delegated that power to the
Commissioner of Internal Revenue, who has further delegated
that power to local IRS officials. Hughes v. United
States, 953 F.2d 531, 536 (9th Cir. 1992). IRS officials
review taxpayers' tax returns. BASR P'ship v.
United States, 795 F.3d 1338, 1339 (Fed. Cir. 2015). In
these returns, taxpayers must report the income they earn
each year. Lain v. Comm'r, 103 T.C.M. (CCH)
1546, *2 (2012).
taxpayer understates his income and additional tax is due,
the IRS may propose a deficiency. Michael I. Saltzman &
Leslie Book, IRS Prac. & Proc. ¶ 10.03 (2016). A
deficiency "is the amount of tax imposed less any amount
that may have been reported by the taxpayer on his
return." Laing v. United States, 423 U.S. 161,
173 (1976) (citing I.R.C. § 6211(a)). A deficiency does
not have the force of a judgment; rather, it constitutes the
IRS's provisional determination of how much additional
tax a taxpayer owes. IRS Prac. & Proc. ¶ 10.01 .
Before the IRS can collect a deficiency, it must issue a
notice to the taxpayer. Murray v. Comm'r, 24
F.3d 901, 903 (7th Cir. 1994). This notice gives the taxpayer
the right to challenge the deficiency in tax court.
Tax Court is an Article I court created by Congress with
limited jurisdiction to rule on deficiencies assessed by the
government on taxpayers." Crawford v.
Comm'r, 266 F.3d 1120, 1121-22 (9th Cir. 2001).
Congress created the tax court as an avenue for prepayment
judicial review of tax deficiencies. Flora v. United
States, 362 U.S. 145, 158 (1960). Without this forum,
the only way a taxpayer could challenge a deficiency
judicially would be to pay the tax and sue for a refund in
federal court. Bartman v. Comm'r, 446 F.3d 785,
787 (8th Cir. 2006); I.R.C. § 7422(a). In some cases,
however, a deficiency might be so costly that a taxpayer
cannot pay it. Under these circumstances, the taxpayer would
not be able to initiate a refund suit, and the IRS would be
insulated from judicial review. Flora, 362 U.S. at
158-59. To alleviate this problem, Congress enacted
§§ 6212 and 6213. These sections prohibit the IRS
from assessing a deficiency in income, estate, gift, and
certain excise taxes until the IRS issues a notice of
deficiency, giving the taxpayer access to tax court.
Murray, 24 F.3d at 903.
taxpayer has 90 days (or 150 days if he lives outside the
United States) to petition for review in tax court. I.R.C.
§ 6213(a). So long as the taxpayer makes a timely
petition, the court can review the deficiency and decide
whether to modify or reject it. IRS Prac. & Proc. ¶
taxpayer does not timely file a petition, the IRS can assess
the deficiency. Id. at ¶ 10.01  [b]. An
assessment is the formal recording of a taxpayer's tax
liability. See I.R.C. § 6203. "The
assessment is given the force of a judgment/' authorizing
the IRS to collect the tax. Bull v. United States,
295 U.S. 247, 260 (1935); see Matter of Carlson, 580
F.2d 1365, 1368 (10th Cir. 1978).
taxes are not considered deficiencies under the Internal
Revenue Code. For instance, penalties for failing to file a
tax return or for outright failing to pay taxes due are not
deficiencies. See I.R.C. § 6651(a)(1)-(2);
Internal Revenue Manual at 188.8.131.52.1. Nor are
reporting penalties imposed for failing to report
participation in various tax-shelter transactions.
See I.R.C. § 6707A; Smith v.
Comm'r, 133 T.C. 424, 428-29 (2009). For these
nondeficiency taxes-which are not subject to deficiency
procedures like prepayment judicial review in tax court-the
IRS can make an immediate assessment. See Smith, 133
T.C. at 428-29; Internal Revenue Manual at 184.108.40.206.1;
60 days of an assessment, the IRS must notify the taxpayer of
the amount due and demand payment. I.R.C. § 6303(a). If
the taxpayer fails to pay what is due on time, the IRS can
file a notice of federal tax lien, which places a lien on all
of the taxpayer's property. I.R.C. § 6321. The IRS
then can collect delinquent taxes through either judicial or
administrative means. For instance, the IRS can file a civil
action in federal district court to foreclose on a tax lien.
I.R.C. § 7403. Alternatively, the IRS can take
administrative action by levying on a taxpayer's
property. I.R.C. § 6331. To collect through an
administrative levy, the IRS must give the taxpayer 30
days' prior notice. I.R.C. § 6331(d)(1)-(2).
1998, "the IRS could reach a delinquent taxpayer's
assets by lien or levy without providing any sort of
pre-attachment process." Dalton v. Comm'r,
682 F.3d 149, 154 (1st Cir. 2012). Moreover, IRS officers
could take these actions without any judicial oversight.
See James K. Wilkens and Thomas A. Matthews, A
Survey of Federal Tax Collection Procedure: Rights and
Remedies of Taxpayers and Internal Revenue Service, 3
Alaska L. Rev. 269, 269-70 (1986). Congress determined that
the IRS had gone too far in its collection activities. So
Congress enacted the Internal Revenue Service Restructuring
and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 685,
designed to provide taxpayers with additional procedural
safeguards to oppose IRS collection efforts. Kindred v.
Comm'r, 454 F.3d 688, 695 (7th Cir. 2006).
Specifically, Congress enacted §§ 6320 and 6330,
which grant a taxpayer the right to a CDP hearing after the
IRS issues a notice of federal tax lien (§ 6320) or
before the IRS levies on the taxpayer's property (§
in the IRS Office of Appeals conduct these CDP hearings.
Gyorgy, 779 F.3d at 472; I.R.C. § 6320(b)(1).
The Appeals Office is an independent bureau of the IRS
charged with impartially resolving disputes between the
government and taxpayers. See Gyorgy, 779 F.3d at
472. Although the appeals officer reviewing the case
represents the IRS, he must have had no prior involvement
with the taxpayer regarding the tax at issue. Tucker v.
Comm'r, 676 F.3d 1129, 1131 (D.C. Cir. 2012). The
officer also must verify that the IRS has satisfied all legal
and administrative requirements with respect to the tax.
I.R.C. § 6330(c)(1).
hearing, a taxpayer may raise "any relevant issue
relating to the unpaid tax or the proposed levy, "
including collection alternatives and challenges to the
proposed collection action. I.R.C. § 6330(c)(2)(A). He
may not, however, raise an issue if "the issue was
raised and considered at a ... previous administrative or
judicial proceeding" and he "participated
meaningfully" in that proceeding. I.R.C. §
a taxpayer may contest his liability for the tax, but only if
he "did not receive any statutory notice of deficiency
for such tax liability or did not otherwise have an
opportunity to dispute such tax liability." I.R.C.
§ 6330(c)(2)(B). The Treasury Regulations note that
"[a]n opportunity to dispute the underlying liability
includes a prior opportunity for a conference with [the]
Appeals [Office] that was offered either before or after the
assessment of the liability." Treas. Reg. §
301.6330-l(e)(3) Q&A-E2. The regulations further note,
however, that "[a]n opportunity for a conference with
[the] Appeals [Office] prior to the assessment of a tax
subject to deficiency procedures is not a prior opportunity
for this purpose." Id.
CDP hearings provide taxpayers with additional procedural
safeguards, calling the proceeding a "hearing" is
somewhat misleading in that "there is no obligation to
conduct a face-to-face hearing, no formal discovery, no
requirement for either testimony or cross-examination, and no
transcript." Dalton, 682 F.3d at 155. Moreover,
a taxpayer has no right to subpoena documents or witnesses.
Konkel v. Comm'r, No. 6:99-CV-1026-ORL-31C, 2000
WL 1819417, at *4 (M.D. Fla. Nov. 6, 2000). And a CDP hearing
need not include every party in interest. Dalton,
682 F.3d at 155. Indeed, far from constituting a formal
hearing, a CDP hearing provides a taxpayer with nothing more
than an opportunity for an informal oral or written
conversation with the IRS before he must pay a tax.
these procedural shortcomings, one of the better aspects of
the CDP process is the opportunity for prepayment judicial
review in tax court following the administrative hearing in
the Appeals Office. Under § 6330(d)(1), a taxpayer who
disagrees with the Appeals Office's decision can appeal
that decision to the tax court. See Gyorgy, 779 F.3d
at 472. And when the issue involves liability for the
penalty, the tax court reviews the Appeals Office's
determination de novo. Id. That said, the tax
court's review is limited to the issues raised in the CDP
hearing. Goza v. Comm'r, 114 T.C. 176, 182-83
(2000). This means that, because a taxpayer cannot raise
liability challenges precluded by § 6330(c)(2)(B) and
issues precluded by § 6330(c)(4)(A) in a CDP hearing,
the taxpayer cannot present them to the tax court in its
review of the Appeals Office's decision. Keller Tank
Sews. II, Inc. v. Comm'r, No. 16-9001, 2017 WL
1424973, at *7 (10th Cir. Apr. 20, 2017).
the tax court usually affirms the Appeals Office's
decisions. See IRS Prac. & Proc. ¶
14B.09 (noting that there is a "high rate of
sustention of the Appeals employee's determination when
the case is heard in Tax Court"). So a taxpayer's
best chance for success lies with the appeals officer
conducting the CDP hearing, not with the tax court.
this background in hand, we turn to the issues before us.
2003 through 2007, Our Country Home participated in an
employee-benefit plan called the Sterling Plan. Thomas Blake
was the only Our Country Home employee enrolled in this plan.
Although the company took deductions on its tax returns for
its payments into the plan, Blake claimed no income from the
plan on his returns.
proposed a § 6707A reporting penalty for Our Country
Home's failure to report its participation in this plan
on its 2007 tax returns. The IRS also proposed deficiency
penalties against Our Country Home, claiming that the
company's deductions for its payments into the plan were
improper; these penalties included a § 6662(a) penalty
(which is assessed when a taxpayer makes a substantial
understatement and acts with negligence or disregard of the
rules or regulations) and a § 6662A penalty (which is
assessed when a taxpayer makes an understatement related to a
reportable transaction that was disclosed inadequately). Two
contemporaneous proceedings followed, one concerning the
reporting penalty and the other concerning the deficiency
penalties. This appeal concerns the reporting-penalty
proceeding and Our Country Home's attempts to challenge
its liability for the § 6707A penalty.
incur § 6707A penalties by failing to report
participation in certain abusive tax-shelter transactions.
Smith, 133 T.C. at 427. Because these are reporting
penalties, they do not depend on a tax deficiency; indeed,
the IRS will impose these penalties even in cases involving
an overpayment of tax. Id. at 429.
6707A covers two different kinds of transactions:
"reportable" transactions, which are those
"having a potential for tax avoidance or evasion";
and "listed" transactions, which are reportable
transactions that are the same as or substantially similar to
those that the Secretary of Treasury has specifically
identified as tax-avoidance transactions. I.R.C. §
6707A(c)(1)-(2). The IRS determined that participation in the
Sterling Plan constituted a listed transaction because it is
substantially similar to one of the listed transactions that
the Secretary delineated in Notice 2007-83, 2007-1 C.B. 960.
Thus, according to the IRS, Our Country Home should have
filed a Form 8886 with its tax returns, disclosing its
participation in the plan. Treas. Reg. § 1.6011-4(d).
Because Our Country Home did not file this form, the IRS
imposed a $200, 000 penalty-the statutory maximum for listed
transactions. I.R.C. § 6707A(b)(2)(A).
offered Our Country Home an opportunity for a preassessment
administrative hearing before the Appeals Office.
See Internal Revenue Manual at 220.127.116.11. Our Country
Home accepted the invitation and challenged its liability for
the penalty, arguing that the IRS erred in computing the
penalty amount and improperly classified participation in the
Sterling Plan as a listed transaction. An appeals officer
reviewed the relevant documents and discussed the issues with
a technical specialist. On July 26, 2012, she held a
conference with Our Country Home's counsel. Thereafter,
she issued a memorandum explaining that the IRS correctly
computed the penalty and properly treated participation in
the Sterling Plan as a listed transaction under Notice
2007-83. She thus sustained the penalty in full and closed
February 18, 2013, the IRS assessed the penalty. A month
later, the IRS issued a final notice of intent to levy under
§ 6330 and informed ...