The Tenth Circuit held that a taxpayer was not entitled to challenge the imposition of a penalty in a Collection Due Process (CDP) hearing because it had already disputed the penalty in an administrative proceeding at the IRS Appeals office.
Background
Keller Tank Services II Inc. participated in an employee benefit plan called the Sterling Benefit Plan. Keller did not report its participation in the plan on its tax return for 2007. The IRS determined that the plan was a reportable listed transaction that Keller was required to report on its return under Regs. Sec. 1.6011-4. The Service assessed a penalty of $57,782 under Sec. 6707A for Keller's failure to report its participation in the plan on its 2007 return.
Keller filed a protest with the IRS Appeals Office to seek rescission of the penalty under Sec. 6707A(d). Appeals held a telephone conference with Keller, during which the Appeals officer heard Keller's liability arguments. The Appeals officer concluded Keller's participation in the plan was a "listed transaction" and decided to sustain the penalty.
Subsequently, the IRS sent Keller a final notice of its intent to levy and of Keller's right to a CDP hearing under Sec. 6330. Keller requested a CDP hearing, arguing the IRS assessed the penalty without Keller's having the opportunity to protest the IRS's determination that the underlying transaction was a listed transaction. The IRS granted Keller a CDP hearing, but the CDP officer assigned to Keller's case informed the company in a letter that, under Sec. 6330(c)(2)(B), it could not dispute its liability for the penalty (the liability) because it had a prior opportunity to do so at its Appeals hearing for the 2007 tax period.
At the CDP hearing, Keller nonetheless attempted to contest its liability and did not raise any other issues. The CDP officer again informed Keller that it could not contest the liability at the hearing because it had had a prior opportunity to do so at its Appeals hearing. Thus, the CDP officer upheld the penalty determination.
Keller then filed a petition with the Tax Court to challenge the liability. The IRS filed a motion for summary judgment, arguing that, based on Sec. 6330(c)(2)(B) and Regs. Sec. 301.6320-1, the company could not contest the liability in its CDP hearing because of its previous opportunity to challenge liability at the Appeals Office hearing. The Tax Court granted the IRS summary judgment, holding that Sec. 6330(c)(2)(B) precluded Keller from contesting the liability and further holding that Regs. Sec. 301.6320-1 is a reasonable interpretation of the statute and applied to Keller based on the court's decision in Lewis, 128 T.C. 48 (2007). Because Keller did not raise any nonliability challenges, the court sustained the IRS's levy against the company.
Keller appealed the Tax Court's decision to the Tenth Circuit. In addition to its previous arguments, the IRS argued that Keller's appeal was moot because Keller was collaterally estopped from challenging its liability. Keller argued that Regs. Sec. 301.6320-1 unreasonably interprets Sec. 6330(c)(2)(B) to preclude liability challenges at the CDP hearing—and ultimately before the Tax Court—when a taxpayer had a prior opportunity to dispute its liability before the IRS Appeals office.
The Tenth Circuit's decision
The Tenth Circuit affirmed the Tax Court's decision that Keller was not entitled to challenge the liability for the Sec. 6707A(d) penalty at the CDP hearing because it previously had the opportunity to dispute the liability in its Appeals hearing. While the court disagreed with the IRS's mootness argument, it also disagreed with Keller's arguments regarding the scope of a CDP hearing. Applying the two-step regulatory analysis endorsed by the Supreme Court in Chevron, U.S.A., Inc. v. National Res. Def. Council, Inc., 467 U.S. 837 (1984), the Tenth Circuit found that the IRS's interpretation of Sec. 6330(c)(2)(B) in Regs. Sec. 301.6330-1, making the statute applicable to administrative review proceedings, was reasonable.
Mootness: The IRS's mootness argument stemmed from Keller's stipulation to be bound in its deficiency proceeding by the Tax Court's decision in a related case called Our Country Home Enterprises Inc., 145 T.C. 1 (2015). In Our Country Home, the Tax Court addressed another taxpayer's participation in the same Sterling Benefit Plan and determined that participation in the plan was a listed transaction. Based on Keller's stipulation, the IRS contended that the Tax Court's decision in Our Country Home, in which it found that the plan was a listed transaction, resolved all of Keller's issues in its appeal and therefore Keller was collaterally estopped from challenging its liability for the Sec. 6707A penalty, mooting the case.
The Tenth Circuit concluded that the case was not moot because (1) the IRS's collateral estoppel argument concerns the merits of Keller's arguments, not the court's jurisdiction; (2) Keller's stipulation was binding only in Keller's deficiency proceeding, not the Sec. 6707A penalty proceeding at issue in the appeal; and (3) even if Keller's participation in the plan is a listed transaction, Keller contested other issues related to the appeal.
Reasonableness of the regulation: Regarding whether Regs. Sec. 301.6330-1 was a reasonable interpretation of Sec. 6330(c)(2)(B), the Tenth Circuit performed the two-step Chevron analysis. In Chevron, the Supreme Court held that a court must defer to an administrative agency's regulation that reasonably interprets an ambiguous statute.
In the first step of the Chevron analysis, the court analyzes the statute that is the basis of the regulation, using the traditional tools of statutory construction, to determine whether the intent of Congress is clear from the statutory text and whether Congress has spoken to the precise question at issue. If the statute meets both these requirements, the court must give effect to the express intent of Congress. If the statute is silent or ambiguous, the court must apply the second step and analyze the agency's interpretation of the regulation to determine if it is a permissible one (i.e., it is a permissible construction of the statute). If the court finds that the interpretation is permissible, it must defer to the agency's interpretation.
In step one of the analysis, the Tenth Circuit determined that Sec. 6330(c)(2)(B) is ambiguous. The court found that the statute did not define the phrase "opportunity to dispute," and an opportunity could be interpreted to mean judicial review, administrative review, or both. Further, the court found that the text of nearby Sec. 6330(c)(4)(A) contributes to the ambiguity because, unlike Sec. 6330(c)(2)(B), it expressly precludes consideration of issues at a CDP hearing that were raised and considered at any other "administrative or judicial proceeding."
In step two of the analysis, the court determined that the IRS's interpretation of the statute was reasonable for three reasons. First, the court observed that nothing in the text of the statute excluded an administrative review from being an "opportunity to dispute" a tax penalty and nothing suggested that reading the text to include an administrative proceeding is unreasonable. Second, Sec. 6330(c)(4)(A) bars taxpayers from raising an issue at a CDP hearing that was raised and considered in a judicial or administrative forum; thus, the court found it reasonable to conclude that Congress regarded an administrative hearing as adequate to preclude CDP hearing consideration under Sec. 6330(c)(2)(B).
Finally, as the Tax Court had in Lewis, the Tenth Circuit found that if Congress had intended to limit Sec. 6330(c)(2)(B) to judicial review, it could have simply used the language "opportunity to seek judicial review" in the statute. Moreover, interpreting it as limited to a judicial review would encourage a taxpayer to wait until a collection action begins before disputing a nondeficiency liability to obtain judicial, rather than administrative, review. This, the court stated, would minimize the role of the Appeals office and contradict the purpose of the 1998 Internal Revenue Service Restructuring and Reform Act, P.L. 105-206, through which Congress intended to provide taxpayers a means to seek review of a liability informally in an Appeals conference so a taxpayer could resolve tax disputes without litigation.
Reflections
Presumably, Keller did not seriously believe that it would get a different result from a CDP hearing review of the penalty than it got from Appeals. Rather, the company wanted the CDP hearing review so that it could challenge the penalty in Tax Court without paying it first. The position taken by the Tenth Circuit does not prevent a taxpayer from litigating the penalty issue after an Appeals hearing. However, to do so, the taxpayer must pay the penalty and file a refund suit in federal district court.
Keller Tank Services II, Inc., No. 16-9001 (10th Cir. 2017)
