TC Decides Sec. 6330's Jurisdiction

In Downing, 118 TC No. 2 (2002), the Tax Court held that it had jurisdiction to review a Sec. 6651(a)(2) addition to tax under Sec. 6330(d)(1)(A), even though the IRS did not determine or issue a deficiency notice. Sec. 6330(d)(1) provides taxpayers with judicial review when not previously available.

Sec. 6213(a) gives the Tax Court jurisdiction over taxpayers' petitions to redetermine deficiencies in income, estate, gift and generation-skipping transfer (GST) taxes issued by the Service under Secs. 6211(a) and 6212(a). Under Sec. 6214(a), the Tax Court has jurisdiction over additions to the tax asserted by the IRS. Sec. 6651(a)(2) provides for an 0.5% addition to tax per month (not to exceed 25%) for late payment of the tax due on any income, estate or gift (and GST) return, unless the taxpayer shows reasonable cause. Under Sec. 6665(a), deficiency procedures that apply to taxes also apply to additions to tax. However, under Sec. 6665(b)(1), Sec. 6665(a) does not apply to Sec. 6651 additions to tax unless the Service issues a deficiency notice. In Estate of Forgey, 115 TC 142 (2000), the Tax Court ruled that it did not have jurisdiction over a Sec. 6651(a)(1) addition to tax, because it was not attributable to a tax deficiency.

Sec. 6330, enacted in 1998 and effective for collection actions initiated after Jan. 18, 1999, expands taxpayers' lien and levy rights, including notice before levy, the right to a fair hearing and judicial review. Under Sec. 6330(a), the IRS Appeals Office has to conduct a hearing before making a levy on any property. According to Sec. 6330(c), the taxpayer may raise any relevant issue as to the proposed levy at the hearing, but could only raise challenges to the underlying tax liability if he did not receive a deficiency notice or otherwise have an opportunity to dispute the tax liability. Under Sec. 6330(d)(1)(A), the taxpayer has 30 days to appeal the hearing's determination of income, estate, gift and GST taxes to the Tax Court. Sec. 6330 does not otherwise specify any details about the Tax Court's scope or standard of review.

In Downing, the taxpayers timely filed their 1995 return, indicating $32,561 in tax due. They enclosed $5,000 with an offer-in-compromise as full payment (even though they had net assets of about $44,000). After misplacing the offer for one year and erroneously applying the $5,000 to reduce the Downings' tax liability, the Service returned the $5,000 to them with interest; it did not issue a deficiency notice. In 1996–1997, the Downings submitted five more offers-in-compromise, each for less than $8,000, which the IRS rejected as too low.

In 1998, the Service informed the Downings it would accept $22,837 (payable at $951.55 per month for 24 months, excluding interest) to settle their 1995 tax liability. The Downings refused and the IRS withdrew the offer. It then issued a Notice of Intent to Levy and Right to a Hearing. The amount due included an addition to tax for failure to pay under Sec. 6651(a)(2). The Downings argued that they had reasonable cause for not paying. The Service prevailed at the hearing and the Downings appealed to the Tax Court.

The Tax Court first held that it had jurisdiction over lien and levy determinations for income, estate, gift and GST taxes under Sec. 6330, whether or not the IRS had issued a deficiency notice. The court then concluded that, "for purposes of section 6330(d)(1), we generally have jurisdiction over the addition to tax under section 6651(a)(2)." What the Tax Court apparently meant is that, if the Service did not issue a deficiency notice, the court would still have jurisdiction under Sec. 6330 to review the underlying tax liability (including additions to tax) in its review of the levy hearing. However, when the IRS issues a deficiency notice, the court only has jurisdiction to review the underlying tax liability (including additions to tax) under Secs. 6213(a) and 6214(a). This latter review precedes (and is unrelated to) any proposed levy by the Service or the levy hearing.

The rationale for this decision is to give the taxpayer only one opportunity to contest the underlying tax liability. If the IRS issues a deficiency notice and the taxpayer does not appeal it under Sec. 6213(a), Sec. 6330 does not provide a second chance for the Tax Court to review the underlying tax liability. Other recent cases supporting this interpretation include Goza, 114 TC 176 (2000); Landry, 116 TC 60 (2001); Inman, TC Memo 2001-107; and Nestor, 118 TC No. 10 (2002).

The legislative history of Sec. 6330 states:

Where the validity of the tax liability was properly at issue in the hearing, and where the determination with regard to the tax liability is a part of the appeal, no levy may take place during the pendency of the appeal. The amount of the tax liability will in such cases be reviewed by the appropriate court on a de novo basis. Where the validity of the tax liability is not properly part of the appeal, the taxpayer may challenge the determination of the appeals officer for abuse of discretion. In such cases, the appeals officer's determination as to the appropriateness of collection activity will be reviewed using an abuse of discretion standard of review.

Accordingly, the Tax Court reviewed de novo whether the Downings were liable for the Sec. 6651(a)(2) addition to tax. Turning to the Downings' failure to pay their taxes, the court held that they did not have reasonable cause, because they had sufficient assets to pay the taxes when they submitted their offers-in-compromise. Alternatively, they could have accepted the Service's monthly payment schedule. Therefore, the court sustained the Sec. 6651(a)(2) addition to tax.

Before Congress enacted Sec. 6330, the Tax Court did not have jurisdiction to hear an appeal of a Sec. 6651 addition to tax when the IRS did not issue a deficiency notice. The Service now has jurisdiction when the taxpayer requests a hearing after receiving a notice of levy and appeals the result. However, when the IRS has issued a deficiency notice, Sec. 6330 only gives the Tax Court jurisdiction over lien and levy determinations made at the hearing. Sec. 6330 thus expands (but does not duplicate) the Tax Court's jurisdiction.

From Peter C. Barton, MBA, CPA, J.D., Professor of Accounting, and Clayton R. Sager, Ph.D, Associate Professor of Accounting, University of Wisconsin-Whitewater, White-water, WI (neither associated with BDO Seidman, LLP)