Offer of Appeals conference is opportunity to dispute underlying liability

The Tax Court held that taxpayers who refused to meet with IRS Appeals after being offered a conference had been given the opportunity to dispute Sec. 6707 penalties assessed against them by the IRS. Therefore, the taxpayers could not challenge the penalty liabilities in a Collection Due Process (CDP) hearing or in the Tax Court because they had a prior opportunity to dispute the underlying liabilities.

Background

Between 1999 and 2002, the Diversified Group Inc. and its founder and president, James Haber, marketed and sold certain tax–avoidance strategies to clients. The strategies were substantially similar to “son–of–boss” tax shelter transactions described in Notice 2000–44 and, according to Haber and Diversified, were “designed to result in noneconomic tax losses for clients and others.” Haber and Diversified did not register the transactions as tax shelters under Sec. 6111.

The IRS notified Haber in 2002 that it was investigating Diversified’s tax shelter activities. After an 11–year examination, in 2013, the IRS issued two notices of proposed adjustment (one to Haber and one to Diversified), proposing penalties of approximately $41.2 million under Sec. 6707 for failing to register the transactions.

Haber and Diversified disputed the penalties in an unorthodox way. In August 2013, they sent a letter purporting to waive their IRS Appeals rights in connection with the proposed Sec. 6707 penalties, including any right to receive a so–called 30–day letter, other than rights to a CDP hearing. They claimed that “IRS Appeals consideration is not a meaningful option and might arguably foreclose any judicial review.”

In the ensuing conflict over IRS Appeals’ consideration of their cases, Haber and Diversified repeatedly disavowed any right to meet with Appeals. Internally, IRS staff sought to provide them a pre–CDP right to Appeals consideration of the Sec. 6707 penalties.

On Dec. 16, 2013, the IRS sent Haber and Diversified letters notifying them of penalties under Sec. 6707 of $24,920,904 (the amount of the originally proposed penalties less the amounts paid by co–promoters of the transactions at issue). In the letters, the Appeals Office informed Haber and Diversified that they could request a post–assessment conference with the office. Subsequently, on Feb. 11, 2014, Appeals sent letters to both Haber and Diversified, notifying them of the Sec. 6707 penalties, in which it stated that if they thought they had reasonable cause why the penalties should not be collected or that they were not otherwise liable for the penalties, they could “request consideration by [the] Appeals Office.”

Haber and Diversified did not take up the offer in either of the letters. In March 2014, the IRS assessed Sec. 6707 penalties related to the tax shelter transactions with respect to both of them.

On May 6, 2014, the IRS mailed Haber and Diversified Letters 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320. Haber and Diversified each sent back a Form 12153, Request for a Collection Due Process or Equivalent Hearing. The IRS sent Haber and Diversified each a Notice of Intent to Levy and Notice of Your Right to a Hearing, dated May 3, 2017. The Appeals settlement officer (SO) handling the case also sent a letter on May 3, 2017, stating that one CDP hearing would cover the 2014 lien notices and the 2017 levy notices.

Over the next 14 months, Haber and Diversified, the SO, and other IRS staff members traded emails, letters, and memoranda regarding whether Haber and Diversified were entitled to dispute their penalty liabilities in the CDP hearing and whether the liens and levies at issue should be sustained. On July 31, 2018, and Aug. 7, 2018, the SO issued notices of determination to Haber and Diversified that sustained the notices of federal tax lien filing, proposed levy actions, and determined that Haber and Diversified were barred from challenging their underlying liabilities by Sec. 6330(c)(2)(B).

Haber and Diversified timely petitioned the Tax Court, and their cases were consolidated. The IRS moved for summary judgment that Haber and Diversified were precluded from challenging their Sec. 6707 penalty liabilities during their respective CDP hearings.

The Tax Court’s decision

On summary judgment, the Tax Court held that the IRS’s offer to Haber and Diversified of a conference with the Appeals Office was an opportunity for them to dispute their Sec. 6707 penalty liabilities within the meaning of Sec. 6330(c)(2)(B). Thus, because Haber and Diversified were given that opportunity, they were precluded under Sec. 6330(c)(2)(B) from challenging their liabilities in their CDP hearings and in Tax Court.

Sec 6330(c)(2)(B) provides that a taxpayer can raise challenges to a tax liability that the IRS seeks to collect by lien or levy if the taxpayer did not receive any statutory notice of deficiency for the tax liability or did not otherwise have an opportunity to dispute the tax liability. These two conditions are necessary but independent. Thus, if either is present, the taxpayer is precluded from challenging the underlying liability in a CDP hearing.

Regs. Sec. 301.6330–1(e)(3), Q&A–E2, provides that “[a]n opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability.” The Tax Court upheld the regulation in Lewis, 128 T.C. 48, 61 (2007).

While the Tax Court did not state in Lewis whether an offer of a conference with Appeals is sufficient to preclude subsequent collection review consideration, it has held in multiple cases that a taxpayer who declines an offer to meet with Appeals cannot challenge the underlying liability in a CDP hearing (e.g., Goddard, T.C. Memo. 2022–96; Bletsas, T.C. Memo. 2018–128; and Thompson, T.C. Memo. 2012–87). Appeals courts have interpreted the statute in the same way (e.g., Our Country Home Enterprises, Inc., 855 F.3d 773 (7th Cir. 2017), and Keller Tank Services II, Inc.,854 F.3d 1178 (10th Cir. 2017)).

The Tax Court determined that in light of its prior decisions interpreting Sec. 6330(c)(2)(B), Haber and Diversified “otherwise had an opportunity to dispute” their Sec. 6707 penalty liabilities when they received the Dec. 16, 2013, and Feb. 11, 2014, letters from the IRS, which both authorized them to request consideration of their penalty liabilities by Appeals. In Goddard, Bletsas, and Thompson, the court had held that such authorization presents an “opportunity to dispute.” The court found that there was “no relevant distinction between Mr. Haber’s and Diversified’s circumstances and those in past cases.”

The Tax Court observed that the Dec. 16, 2013, and Feb. 11, 2014, letters informed Haber and Diversified of their appeal rights and provided instructions about how to appeal — namely, by filing a protest. Thus, according to the court, had they followed the letters’ instructions, they could have challenged their liabilities before IRS Appeals. “That,” the court stated, “is the essence of an ‘opportunity to dispute’ within the meaning of section 6330(c)(2)(B).”

In summary, the Tax Court stated that although Haber and Diversified may not have desired an opportunity to dispute their penalty liabilities before proceeding to a CDP hearing, the letters the IRS sent to them on Dec. 16, 2013, and Feb. 11, 2014, clearly offered them a chance to meet with IRS Appeals and contest their liabilities. Under the text of Sec. 6330(c)(2)(B) and the court’s decisions interpreting it, letters such as those received by Haber and Diversified count as opportunities to dispute their liabilities. Thus, the court held that Haber and Diversified were precluded from challenging their liabilities in their CDP hearings and in the Tax Court.

Haber’s and Diversified’s counterarguments

Opportunity to dispute: Haber and Diversified argued in Tax Court that an “opportunity to dispute” under Sec. 6330(c)(2)(B) must be “meaningful.” They claimed that the opportunity presented by the IRS’s letters was not meaningful, or, at a minimum, there was a material question of fact as to whether any conference in which they would have participated would have been meaningful.

Haber and Diversified contended that for several reasons, any conference they would have attended would have produced a “precooked result,” rendering their opportunity to contest the penalties meaningless. In Haber’s and Diversified’s views, the IRS examination team was afraid that its interpretation of Sec. 6707 would not be sustained if reviewed by a court or the IRS’s National Office. Therefore, they claimed, the examination team “schemed to ensure that such review would never occur.”

While the Tax Court was skeptical of these claims made by Haber and Diversified, it found that even if it were not, their argument faced a more fundamental problem. Specifically, because Haber and Diversified were offered, but did not avail themselves of, an opportunity to contest their liabilities for the Sec. 6707 penalties, they could not now demand a trial on how meaningful the opportunity to do so would have been.

Moreover, by refusing to have a conference with Appeals, the Tax Court reasoned, Haber and Diversified had made it impossible for the court “to undertake the very analysis they request.” As Haber and Diversified acknowledged, whether an Appeals conference is meaningful depends on what happens at it. Since no Appeals conference had happened (on account of Haber’s and Diversified’s actions) before the CDP hearing, the court was unable to decide how meaningful it would have been.

Whether letters offered a “conference with Appeals“: Haber and Diversified also asserted that the offers of “a post–assessment conference” and “consideration by Appeals” in the Dec. 16, 2013, and Feb. 11, 2014, letters, respectively, were not offers of a “conference with Appeals” under Regs. Sec. 301.6330–1(e)(3), Q&A–E2. According to Haber and Diversified, a conference for these purposes required a formal meeting between an Appeals officer and a taxpayer, formally scheduled, with a submission of information. The Tax Court found that these arguments “border on frivolous” and that an Appeals conference does not have to be a formal meeting.

The Tax Court also found that even if a formal meeting was required under the regulations, Haber and Diversified “made no effort to demonstrate” that they would not have received a formal meeting had they followed the instructions in the Dec. 16, 2013, and Feb. 11, 2014, letters. The court stated that “having declined an actual meeting, Mr. Haber and Diversified cannot invoke the imagined characteristics of a hypothetical meeting to avoid summary judgment.”

Administrative Procedure Act and timeliness of IRS letters: Haber and Diversified claimed that the Feb. 11, 2014, letters could not have conferred an “opportunity to dispute” the Sec. 6707 penalties because they were created in violation of the Administrative Procedure Act (APA) or were untimely under Sec. 6303. With regard to the APA claim, the Tax Court found that the Feb. 11, 2014, letters reflected proposed reasoning and potential future action, not “final action” taken by the IRS. Therefore, the court concluded that the APA was inapplicable to the letters.

With regard to the timeliness claim, Sec. 6303(a) instructs the IRS to give notice “as soon as practicable, and within 60 days, after the making of an assessment of a tax pursuant to section 6203” to each person liable for the tax. Haber and Diversified maintained that because the Feb. 11, 2014, letter was sent before assessment, it was untimely under Sec. 6303 and thus could not have provided an “opportunity to dispute” their liabilities with Appeals.

The Tax Court found, though, that whether the letters were timely under Sec. 6303(a) was irrelevant to their effect under Sec. 6330(c)(2)(B). Regs. Sec. 301.6330–1(e)(3), Q&A–E2, provides that “[a]n opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability” (emphasis added). Thus, regardless of whether they were timely, the letters provided a way for Haber and Diversified to contest their liabilities with Appeals.

Validity of Regs. Sec. 301.6330-1(e)(3), Q&A-E2, and Loper Bright: Haber and Diversified further argued that, following the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), the result in Lewis and other cases upholding Regs. Sec. 301.6330–1(e)(3), Q&A–E2, has effectively been overturned and that the Tax Court was required to reconsider the regulation’s validity. The Tax Court disagreed, noting that Loper Bright states:

By [overruling Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)], … we do not call into question prior cases that relied on the Chevron framework. The holdings of those cases that specific agency actions are lawful … are still subject to statutory stare decisis despite our change in interpretive methodology.

Thus, the Tax Court concluded that the holdings in Lewis, its own prior cases, and the related decisions by the courts of appeals remain in force after Loper Bright. Moreover, the court found that Lewis and the related cases strongly suggested that the courts viewed Regs. Sec. 301.6330–1(e)(3), Q&A–E2, as the best reading of Sec. 6330(c)(2)(B) (rather than simply a permissible one) and thus that the IRS would have prevailed regardless of Chevron. Accordingly, the court held that Loper Bright did not require it to reach a different result.

Reflections

The IRS also moved for summary judgment on whether the SO assigned to Haber’s and Diversified’s cases was properly appointed under the Appointments Clause in Article II of the U.S. Constitution. Haber and Diversified speculated that even if they had taken the IRS up on its offer for them to meet with Appeals, their hypothetical conference would not have constituted an “opportunity to dispute” their liabilities because the officer with whom they would have met would have been improperly appointed.

While the court questioned whether Haber and Diversified could challenge the appointments of hypothetical Appeals officers before whom they never appeared, it held that, based on its decisions in Tucker, 135 T.C. 114 (2010), and Tooke, 164 T.C. 16 (2025), IRS Appeals officers are not “officers of the United States” subject to the Appointments Clause, including when they are presiding over CDP hearings. “Accordingly,” the court stated, “Mr. Haber’s and Diversified’s imagined officers’ appointments would not have invalidated their hypothetical conference with IRS Appeals.”

The Diversified Group Inc., 166 T.C. No. 2 (2026)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.