The Tax Court recently issued decisions in Kearse v. Commissioner1and Commission v. Romano-Murphy (“Romano-Murphy II“).2 Both cases involved review of administrative determinations made by IRS appeals officers in collections due process (“CDP”) proceedings. Section 6330(c)(1)3 requires appeals officers conducting CDP hearings to verify that the requirements of any applicable law or administrative procedure related to the assessment and collection of the taxes at issue in the hearing have been met. In Kearse and Romano-Murphy II, the Court found that IRS failed (in the case of Romano-Murphy II) or potentially failed (in the case of Kearse) to follow statutorily mandated procedures for assessing the taxes it was attempting to collect and that such failures would (in the case of Romano-Murphy II) or could (in the case of Kearse) invalidate the assessments. In light of those actual or potential failures, the Court held in both cases that the appeals officers abused their discretion in sustaining the IRS’s collection actions because the verification requirement of section 6330(c)(1) was not met.
Kearse v. Commissioner
Kearse involved Jevon Kearse, a former all-pro defensive end for the Tennessee Titans. In 2010, Kearse claimed a $1,359,000 deduction for a business bad debt on his 2010 return.4 IRS examined the return and disallowed the deduction.5 IRS claimed to have sent Kearse a notice of deficiency dated May 11, 2012 to his last known address, but Kearse claimed that it was never received.6
On November 5, 2012, IRS assessed the additional tax due pursuant to a notice of deficiency, and on December 5, 2012, IRS filed a notice of federal tax lien (“NFTL”) and sent Kearse a letter advising him of the filing and his rights to appeal. In response, Kearse timely filed a request for Collection Due Process (“CDP”) hearing.7 As part of the CDP request, Kearse submitted an offer-in-compromise (“OIC”) based on doubt as to liability, citing as the basis for the offer lack of proper mailing and receipt of the notice of deficiency.8 Following a hearing with Kearse’s authorized representative, the IRS appeals officer assigned to Kearse’s case issued a notice of determination rejecting the request for an OIC and affirming the filing of the NFTL.9 Notwithstanding Kearse’s protestations otherwise, the notice of determination concluded that “the requirements of any applicable law, regulation or administrative procedure with respect to the NFTL filing were met.”10
Kearse timely petitioned the Tax Court for review of the notice of determination.11 The case turned on whether the appeals officer satisfied the requirement of section 6330(c)(1) to “obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met.” Kearse argued that the verification requirement was not satisfied because the appeals officer did not verify that IRS properly mailed the notice of deficiency, and that Kearse received a copy of the notice of deficiency.12 The notice of determination did not indicate what documents were relied upon to verify the notice of deficiency was properly mailed, and the record before the Court did not contain the U.S. Postal Service (“USPS”) Form 387713 or equivalent IRS certified mailing list (“CML”) bearing a date stamp or initials of a USPS employee.14
At some point in the proceedings, the parties stipulated that IRS could not produce USPS Form 3877 or the certified mailing list to show proof of mailing or to otherwise establish that the notice of deficiency was delivered to Kearse.15 Later, in response to an order requiring IRS to respond and address whether the appeals officer properly verified that the notice of deficiency was mailed, IRS presented a declaration of the appeals officer and the appeals officer’s case activity record, indicating the appeals officer was unable to locate the USPS Form 3877 to verify proof of mailing. The declaration indicated that the appeals officer indicated that the only action she took to verify mailing was an examination of records stored in IRS’s Integrated Data Retrieval System (“IDRS”). Sis did not request a copy of the statutory notice of deficiency. After trial, IRS located the relevant USPS Form 3877 showing that the notice of deficiency had been properly mailed and subsequently proffered it to the Court.16
The Court concluded that the IRS appeals officer abused her discretion by failing to verify the notice of deficiency was properly mailed to Kearse.17 The Court’s decision was based largely on the stipulation that IRS could not produce USPS Form 3877. The Court stated that it treats a stipulation “as a conclusive admission by the parties, and the Court will not permit a party to change or contradict a stipulation, except in extraordinary circumstances.”18 Although the USPS Form 3877 was subsequently located and proffered to the Court, the Court refused to disregard the stipulation.
The Court also rejected the argument that the appeals officer’s reliance on the IDRS was sufficient to satisfy the verification requirement.19 The Court acknowledged that the Internal Revenue Manual (“IRM”), as a general rule, permits appeals officers to rely on IDRS data to verify the validity of an assessment from a notice of deficiency.20 The Court noted, however, that when a taxpayer alleges an irregularity, such as failure to properly mail or receive the notice of deficiency, the IRM requires appeals officers to do more than rely solely on IDRS.21 These additional steps include reviewing a copy of the notice of deficiency, and the USPS Form 3877, or equivalent IRS certified mail list bearing a USPS date stamp or the initials of a postal employee. The Court noted that these steps were not taken in Mr. Kearse’s case.22
Because the Court held that the IRS appeals officer abused her discretion in failing to verify the notice of deficiency was timely mailed and received, the Court concluded that it did not address the merits of the assessment or the appeals officer’s decision to reject the offer-in-compromise. The Court likely did this because it realized the limited effect of its ruling. The filing of the request for a CDP suspends the statute of limitations on collection from running during the administrative proceedings and the Tax Court proceeding.23 Nothing in the Court’s ruling prevents IRS from pursuing additional collections actions with respect to the taxes and periods at issue in the case. IRS undoubtedly will refile the NTFL, and since they have located the USPS Form 3877, the verification requirement should not be an obstacle on the second time around. Given this result some have questioned the value of the litigation, noting that all the taxpayer gained was a long delay. While that’s true, delay can be a very valuable tool in collection cases. If Mr. Kearse used the time that he bought through the administrative appeals and subsequent litigation to get his finances in order and paydown the tax debt without the fear of enforced collection action looming over him, then the litigation may be justifiable.
Romano-Murphy v. Commission
Romano-Murphy II is the final chapter of a case that has lasted over ten years and produced three published opinions, two by the Tax Court, and one by the United States Court of Appeals for the Eleventh Circuit. The case began when IRS attempted to assess the taxpayer, the Chief Operating Officer of a nurse staffing company, with trust fund recovery penalties under section 6672 for unpaid federal employment taxes for the second quarter of 2005.24 In July 2006, IRS sent the taxpayer Letter 1153 notifying her of the proposed assessment and informing her of her right to contest the proposed assessment. The taxpayer timely filed a protest, but for an unexplained reason, her protest was not forwarded to the IRS Appeals Office.25 Appeals thus never considered the taxpayer’s protest, and she was not given a pre-assessment conference or a final administrative determination.26 On October 15, 2007, IRS made an assessment against the taxpayer.27That following August, IRS served the taxpayer with notice of intent to levy, and in September 2008,28 the taxpayer filed a timely request for a CDP hearing, wherein she contested the merits of the assessment.29
A CDP hearing was held in February 2009, during which the taxpayer contested her liability for the assessment under section 6672.30 The appeals officer noted that, although the taxpayer timely requested a pre-assessment hearing, IRS never gave her the opportunity to dispute her liability prior to making the assessment.31 The appeals officer therefore conducted a post-assessment review of the taxpayer’s challenges to the assessment. The appeals officer concluded that she was liable for the trust fund penalty and sustained the assessment. The taxpayer then sought review of the appeals officer’s determination in Tax Court.32
In Romano-Murphy v Commissioner (“Romano-Murphy I“), T.C. Memo 2012-330, vacated and remanded, 816 F.3d 707 (11th Cir. 2016), the Tax Court sustained the assessment of the trust fund penalty, holding that the taxpayer had no right to a hearing prior to assessment under section 6672(a), even if a protest was timely filed, and IRS was not required to issue final administrative determination prior to making the assessment.33 Unsatisfied the with the Tax Court’s decision, the taxpayer appealed to the Eleventh Circuit. The Eleventh Circuit sided with the taxpayer and held that a hearing is required prior to assessment under section 6672, if a hearing is timely requested.34 The Eleventh Circuit also held that if a hearing is timely requested, a final administrative determination is required to be provided prior to the assessment.35 The Eleventh Circuit remanded the case to the Tax Court to determine whether IRS’s failure to hold a pre-assessment hearing was harmless error.36
On remand, the Tax Court held that IRS was required under section 6672 to hold a pre-assessment hearing and to make a final administrative determination prior to assessment.37 The Court also held that the requirement of a pre-assessment hearing and final administrative determination prior to assessment was a requirement of applicable law, compliance with which must be verified by the appeals officer under section 6330(c)(1) in order to sustain the proposed collection action. The Court noted that a pre-assessment hearing, if timely requested, and issuance of a final administrative determination were conditions to making a proper assessment under section 6672, as interpreted by the Eleventh Circuit. Because the taxpayer was not afforded a pre-assessment hearing or final administrative determination prior to making the assessment, the Court concluded the assessment was invalid.38 Therefore, the appeals officer abused his discretion in sustaining the assessment.
The Court’s ruling invalidates the trust fund penalty assessment, but, like Kearse, the Court’s ruling in Romano-Murphy II does not prevent IRS from attempting to re-assess trust fund penalties against the taxpayer for the same periods that were at issue in the case. The reason is that section 6672(b)(3)(B) provides that, if a notice of proposed assessment of trust fund recovery penalties is mailed or delivered before the expiration of the statute of limitation on assessment and there is a timely protest of the assessment, the statute of limitations held open until 30 days after IRS makes a final administrative determination with respect to the protest. In Romano-Murphy II, it was undisputed that the notice of proposed assessment was mailed to the taxpayer prior to the expiration of the statute of limitations on assessment, and that the taxpayer filed a timely protest of the proposed assessment. The Court’s ruling means only that appeals must grant the taxpayer a hearing on her protest prior to assessment; it does not mean that IRS must start from scratch and issue another proposed assessment. That being so, the statute of limitations on assessment was likely tolled, and IRS can still make the assessment.
Observations and Take-Aways from Kearse and Romano-Murphy II
As an initial matter, it should be noted that some commentators have questioned the prudence of the litigation in Kearse and Romano-Murphy II because all the taxpayers stood to gain was a long delay based on the facts of their case.39 Delay solely for purposes of delay is never appropriate. To that extent, the criticism is warranted. Often, however, delay can be a valuable tool against enforced collections and is an appropriate means to an end. If Mr. Kearse and Ms. Romano-Murphy used the time they were afforded to get their finances in order and to paydown the tax debt without the fear of enforced collection action looming over them, then the litigation may have been justified. In the end, the decision depends on a number of factors, including, among others, the amount of tax at issue, the time remaining on the statute of limitations, the cost of the litigation, and the prospect of obtaining collection alternatives. The bottom line, however, delay can be an appropriate means to an end. That may or may not have been the case with Mr. Kearse or Ms. Murphy.
Criticisms aside, there are many lessons that can be learned from Kearse and Romano-Murphy II. Kearse and Romano-Murphy II show that process matters. Section 6330(c)(1) requires appeals officers to verify that all requirements of applicable law and procedure were met prior to sustaining a proposed collection action because Congress realized that IRS is not infallible. Kearse and Romano-Murphy II show that the Tax Court will not hesitate to overturn a determination if it can be shown that proper verification did not occur, or that an appeals officer failed to consult available sources of information after being put on notice of an irregularity.
Second, Kearse and Romano-Murphy II illustrate the importance of the administrative record. In Kearse and Romano-Murphy II, the taxpayers were able to prevail, in part, because the Court had a clear understanding of what transpired at the administrative level. To ensure an adequate record, taxpayers and their representatives should request the appeals officer to specify the sources of information and evidence that were reviewed in verifying that the applicable requirements of law were met. More often than not, the notice of determination will contain a perfunctory statement to the effect that the appeals officer verified that all requirements of applicable law and administrative procedure were met. If that happens, the taxpayer or their representative should ask the appeals officer for a supplemental determination.
Third, Kearse and Romano-Murphy II illustrate the value of good lawyering, even when the advocate is not a lawyer, as was the case in Romano-Murphy II. The taxpayer in Romano-Murphy II made a brilliant legal argument based on the structure of section 6672(b). She was ultimately able to persuade the Eleventh Circuit to read into the statute a requirement that, by its terms, did not exist. In Kearse, IRS lost because of the stipulation that it could not produce the USPS Form 3877 to show proof of mailing. However, because the stipulation was carefully word to address only IRS’s ability to produce USPS Form 3877, it left open the possibility that such evidence might exist, as it turns out was the case, IRS likely prevented the court from finding that the notice of deficiency was not mailed. That finding would have been fatal to IRS’s ability to collect from Mr. Kearse because the statute of limitations on assessment would not have been suspended during the litigation and would have expired.
Finally, Kearse illustrates the importance of stipulations. Stipulations are a defining characteristic of Tax Court proceedings. Rule 91(a) of the Tax Court Rules of Practice and Procedure mandates that parties stipulate “to the fullest extent to which complete or qualified agreement can or fairly should be reached . . . all evidence which fairly should not be in dispute.” If a party does not stipulate to certain evidence, the other party can file a motion to compel that party to show cause as to why matters covered by the motions should not be deemed admitted40, and in egregious situations, the Tax Court can dismiss the case.41 As noted above, the Tax Court regards “as a conclusive admission by the parties, and the Court will not permit a party to change or contradict a stipulation, except in extraordinary circumstances.”42 Kearse shows the Court’s fidelity to this rule.
- T.C. Memo. 2019-53.
- 152 T.C. No. 16 (2019).
- All sections references are references to sections of the Internal Revenue Code of 1986, as amended.
- T.C. Memo. 2019-52 at *2.
- Id. at *3, 13.
- Id. at *3.
- Id. at *4
- Id. at *5-6.
- Id.at *6.
- Id. at *7.
- A USPS Form 3877 (See also What is a Firm Mailing Book) is used to keep record of the mailing of a notice of deficiency. See IRM 126.96.36.199.3, Records of Mailing (July 9, 2013). If a taxpayer claims a notice of deficiency was not sent, IRS can establish the notice was timely mailed by producing USPS Form 3877. Once IRS produces USPS Form 3877, a presumption of official regularity arises, and the burden of proof then shifts to the taxpayer to show that the IRS did not issue a valid notice with clear and convincing evidence. See United States v. Ahrens, 530 F.2d 781, 785 (8th Cir. 1976) (applying the presumption of validity where Form 3877 was properly completed and taxpayers’ attorney corroborated existence of notice).
- Id. at. *12.
- Id. at *13.
- Id. at *14.
- Id. at *16.
- Id. at *16 (quoting Shackelford v. Commissioner, T.C. Memo. 1995-484, slip. op. at *15).
- Id. at *13-14.
- Id. at *14 (citing IRM pt. 188.8.131.52.2.1.1(2) (Nov. 8, 2013)).
- Id. at *14 (citing IRM pt. 184.108.40.206.2.1.1(5) (Nov. 8, 2013)).
- Id. at *14 (citing IRM pt. 220.127.116.11.2.1.1(6) (Nov. 8, 2013)).
- See IRC § 6330(e)(1).
- Romano-Murphy v. Commissioner, 152 T.C. No. 16, at *6.
- Id. at *6-7.
- Id. at *8.
- Id. at *9.
- Id. at *10.
- Romano-Murphy v. Commissioner (“Romano I“), T.C. Memo. 2012-330, vacated and remanded, 816 F.3d 707 (11th Cir. 2016).
- Romano-Murphy v. Commissioner, 816 F.3d 707 (11th Cir. 2016).
- Id.; see also Romano-Murphy II, 152 T.C. No. 16, at *13.
- See Romano-Murphy II, 152 T.C. No. 16, at *16.
- Id. at *48.
- Id. at *59.
- See Byan Camp, Lesson From the Tax Court: Another Pyrrhic CDP Win (June 3, 2019) (available at https://taxprof.typepad.com/taxprof_blog/2019/06/lesson-from-the-tax-court-another-pyrrhic-cdp-win.html); Bryan Cam, Lesson From the Tax Court: CDP Win is Not Always a Vicotry (May 28, 2019) (available at https://taxprof.typepad.com//taxprof_blog/2019/05/lesson-from-the-tax-court-cdp-win-is-not-always-a-victory.html).
- Tax Ct. R. 91(f).
- See Williams v. Commissioner, 13 F.3d 1095 (9th Cir. 1993).
- Kearse v. Commissioner, T.C. Memo. 2019-53 at *15 (quoting Shackelford v. Commissioner, T.C. Memo. 1995-484, slip. op. at *15).