Barnhill v. Commissioner (155 T.C. No. 1)

On July 21, 2020, the Tax Court issued its opinion in Barnhill v. Commissioner (155 T.C. No. 1). The issue presented in Barnhill v. Commissioner is whether a taxpayer, who receives a Letter 1153 (Trust Fund Recovery Penalty (TFRP) Letter), and who timely appeals the TFRP, but who does not receive a meaningful opportunity to challenge his liability for the TFRP (because the taxpayer, for instance and as here, did not receive subsequent correspondence scheduling a meeting to challenge the liability) may thereafter challenge the underlying liability for the TFRP in a CDP proceeding.

Background to Barnhill v. Commissioner

Petitioner was the director of a Chesterfield, Virginia corporation, Iron Cross, Inc, who failed to collect or pay over employment taxes for ten – yes, ten – quarters from June 2010 through September 2012.  Although it is unclear from the Tax Court opinion the exact nature of Iron Cross (and they have ZERO presence on the internet), I have to assume that they are a well-meaning motorcycle club.

The IRS assessed employment taxes against Iron Cross for the ten quarters at issue and proposed a Trust Fund Recovery Penalty (TFRP) against the petitioner under IRC § 6672 in the same amount.  The IRS sent (by certified mail) Mr. Barnhill a Letter 1153 (Trust Fund Recovery Penalty Letter), on November 2016.  The Petitioner took umbrage with the impugnation of his honor, and he timely mailed a protest to Appeals. Next, the IRS sent (by regular mail) a Letter 5157 to the petitioner’s last known address.  Nothing is known about the fate of the letter carrier, but the letter itself never made it to the petitioner, so assume what you will about the poor postman’s whereabouts and wellbeing.

Only two days after the scheduled telephone conference, Appeals sent a Letter 1536 (Closing Letter for Unagreed Employment Tax and Trust Fund Recovery Penalty), assessed the TFRP, made notice and demand, and receive no payment.  The IRS sent the petitioner a Letter 3172, and the petitioner exercised his right to a CDP hearing, in which he argued that he had not been given a meaningful opportunity to challenge the assessment.  Appeals sustained the assessment and NFTL filing, and the petitioner timely filed a petition with the Tax Court.

Summary Judgment Principles

Summary judgment is critical to this case, because the Tax Court must assume facts and inferences in the light most favorable to the nonmoving party (here, the Petitioner). Espinoza v. Commissioner, 78 T.C. 412, 416 (1982); Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985); cf. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986) (same standard under Fed. R. Civ. P. 56 (summary judgment) as Tax Court Rule 121 (same)). The petitioner declared under penalty of perjury that he had not receive the Letter 5157, and it was the IRS’s motion, and so the court had to assume that the petitioner had not, in fact, receive the letter.

What Passes for a Burn in a Tax Court Opinion

The Motion for Summary Judgment filed by the IRS states that although “the petitioner claims that he did not receive” the Letter 5157, that letter was sent to the same address as the Letter 1153, which petitioner received. In the IRS’s reply to the petitioners Tax Court petition, the IRS doubles down, stating again that the petitioner “claims he did not receive the Letter 5157.” Judge Gustafson, not one to let emotion get the best of him, nevertheless zings the IRS by noting that if the IRS wanted to raised doubt against the assertion that the petitioner did not receive the Letter 5157, “the forum for that effort would be a trial, not a [summary judgment motion] that asserts we need no trial.”  But Gustafson wasn’t finished.  The library was still open.  When noting that the IRS had to assume that the petitioner did not receive the Letter 5157, “We do not cross our fingers behind our back as we state this assumed fact, though the IRS’s papers seem to suggest that we should.”  Boom.  Mic Drop.  Gustafson out.

Prior “Opportunity” under IRC § 6330(c)(2)(B)

The Tax Court accurately observes that a petitioner cannot challenge his underlying liability for the TFRPs if he had a prior “opportunity to dispute such tax liability” under IRC § 6330(c)(2)(B), which provides that a taxpayer may raise a challenge to his underlying tax liability at the CDP hearing only if (1) the taxpayer did not receive a statutory notice of deficiency (SNOD), or (2) the taxpayer did not otherwise have an opportunity to dispute such tax liability.

A prior conference with Appeals, before or after assessment, is an opportunity to dispute the liability.  Treas. Reg. § 301.6320-1(e)(3), Q&A-E2; Iames v. Commissioner, 850 F.3d 160, 165-167 (4th Cir. 2017) (pre-assessment Appeals hearing); Lander v. Commissioner, 154 T.C. No. 7, *31-*32) (Mar. 12, 2020) (post-assessment Appeals audit reconsideration process); Lewis v. Commissioner, 128 T.C. 48, 61, n.9 (2007) (agency-level hearing).  However, if a taxpayer receives notice of his opportunity to dispute his liability with Appeals (e.g., a Letter 1153) but forgoes the opportunity to dispute liability by failing to timely request the Appeals conference, the taxpayer is precluded by IRC § 6330(c)(2)(B) from challenging the underlying tax liability in a subsequent CDP hearing. See Bletsas v. Commissioner, T.C. Memo. 2018-128, *8-*9 (taxpayer received Letter 1153 but took no further action), aff’d, 784 F. App’x 835 (2d Cir. 2019); Smith v. Commissioner, T.C. Memo. 2015-60, *24 (taxpayer failed to timely respond to Letter 1153 because representative failed to send response); Thompson v. Commissioner, T.C. Memo. 2012-87, *7 (taxpayer received Letter 1153 but failed dispute liability).

Neither can a taxpayer deliberately refuse to accept the delivery of a Letter 1153 and then argue that it did not receive opportunity to dispute the underlying liability. See Giaquinto v. Commissioner, T.C. Memo. 2013-150, at *14-*15 (taxpayer who deliberately refused to accept delivery of Letter 1153 had prior opportunity to dispute liability); but see Mason v. Commissioner, 132 T.C. 301, 317-318 (2009) (merely mailing Letter 1153 to last known address not sufficient to provide opportunity to dispute liability if taxpayer does not actually receive, and does not intentionally avoid receipt, of Letter 1153).

If the taxpayer receives the letter but foregoes the opportunity to challenge, or challenges and loses, all CDP rights are not lost, only the right to challenge the underlying liability.  In such circumstances the primary remaining purpose of the CDP hearing would be for the taxpayer and the settlement officer to discuss collection alternatives.

Receipt of Letter 1153 Does Not Constitute “Opportunity” to Dispute Liability

The Tax Court issues a strong mea culpa with this section of the opinion.  In the IRS’s Motion for Summary Judgment, the IRS asserts that the Tax Court “has held that the receipt of a Letter 1153 constitutes an opportunity to dispute the taxpayer’s liability.”  For support, the IRS cites three tax court cases – Morgan v. Commissioner, T.C. Memo. 2011-290; McClure v. Commissioner, T. C. Memo. 2008-136; and Solucorp Ltd. v. Commissioner, T.C. Memo. 2013-118.  The Tax Court, backed into a bit of a corner by the verbiage of their own opinions, notes that, fine, we have said that the receipt of Letter 1153 “constitutes an opportunity,” but we did not actually mean it.  It was “shorthand.”

The Tax Court then invites the IRS to read between the lines, and in doing so issues a black letter rule: “the Letter 1153 itself does not constitute the opportunity” to dispute liability.  Rather, the Letter 1153 gives rise to and provides the means for the opportunity.  The opportunity, instead, “plainly takes place in the appeals hearing.”  It is, therefore, the hearing that constitutes the opportunity provided for in IRC § 6330(c)(2)(B).  This is a big deal, because prior to the Barnhill opinion, there had been – understandably – confusion, as the IRS demonstrated in its blanket statement that letter equals opportunitySee Solucorp, T.C. Memo. 2013-118, *9 (receipt of letter constitutes opportunity); but see Id. at *8 (letter provides taxpayer with the means of protesting liability).

Mea culpa. Mea maxima culpa.

The Tax Court notes that only infrequently will liability be properly raised at a CDP hearing, because a CDP hearing is just that a Collection Due Process hearing.  Within the “collection-focused” framework of CDP appeals, liability plays “no more than a minor part.”  See also Iames v. Commissioner, 850 F.3d at 167 (same). Why then even provide an opportunity to challenge liability at a CDP hearing?  The Tax Court observes that IRC § 6330(c)(2)(B) catches taxpayers who would otherwise “fall through the cracks.”  See, Id. at 166.  To that end, when a taxpayer timely requests and, through no fault of his own, but is denied the opportunity to participate in a hearing before Appeals, the taxpayer has fallen through the proverbial “cracks,” and he should be given an opportunity to dispute the underlying liability in the CDP appeal.

Prior “Opportunity” when an Appeals Conference is Thwarted

Recovering from its mea culpa moment, the Tax Court observes that it has consistently held that a thwarted taxpayer is a protected taxpayer.  Where a taxpayer has taken all of the proper steps to avail himself of the opportunity to dispute his liability under IRC § 6330(c)(2)(B), the taxpayer must, in fact, realize that opportunity.  See Perkins v. Commissioner, 129 T.C. 58, 66-67 (2007); Mason, 132 T.C. at 318-321; Romano-Murphy v. Commissioner, 152 T.C. 278, 305-313 (2019).

Before the Tax Court closes, it takes one last swipe at the IRS.  The Tax Court notes that in the CDP context, if Appeals sends a letter to the taxpayer but receives no response, it is common (and good) practice to send a “last chance” letter to permit the taxpayer to complete the process.  See Wong v. Commissioner, T.C. Memo. 2020-32, at *5.  In Barnhill, however, when the IRS did not receive a response (by way of participating in the telephone conference offered by Letter 5157, the IRS closed the case “a mere two days later.”

“There may be a good and sufficient reason for this brisk efficiency,” the Tax Court notes, but such ruthless “efficiency” did not provide the petitioner with an adequate opportunity to dispute his liability. Speed, it appears, does not impress the Tax Court, especially when that speed “thwarts” a taxpayer’s statutory rights.  It may not have been a “deliberate, arbitrary refusal” by Appeals, but the Tax Court concludes, a taxpayer who was deliberately refused “could hardly be said to have received any less of an opportunity” as the petitioner. The Tax Court in essence said, “The court is far too dignified to say that the IRS arbitrarily, capriciously, deliberately, and unrepentantly deprived the petitioner of his rights. So the court will not say it.”*

*Author’s Note: The rhetorical device of preterition (also known as paralipsis, cataphasis, antihrasis, and parasiopesis) is a personal favorite of mine, and it is displayed in the Tax Court’s rather passive aggressive language here.  “If I weren’t more of a gentleman, I would call you a lying, two-faced, wolf-whelped, son-of-a-whore, but I won’t, because, as I said, I am a gentleman.”  That’s right, dear readers, there are fancy Latin and Greek words for being passive aggressive.

Learn them.

Use them.

Enjoy them.

Bright Line Rule

To determine whether a TFRP liability may be challenged in a CDP case, the Tax Court must determine (1) whether the taxpayer received the Letter 1153, and if he did, (2) whether the taxpayer had an opportunity to dispute the TFRP proposed in the Letter 1153.

A Procedural Aside: Tax Court Endorses Token Payment / Refund End-Around the Denial of Relief at the Letter 1153 Hearing

If a taxpayer receives a Letter 1153, disputes the underlying TFRP liability at the Appeals conference, and loses the dispute, the taxpayer is precluded by IRC § 6330(c)(2)(B) from challenging the underlying tax liability in a subsequent CDP hearing or in Tax Court.  What recourse, then, does a taxpayer have to judicially challenge the Letter 1153 hearing determination?

The IRS has a very interesting procedural footnote on page 23 of the Slip Opinion.  In footnote 7, the court explains why the lack of opportunity of review by the Tax Court after the opportunity for the Letter 1153 Appeals conference is not severely prejudicial. The court noted that, because the IRC § 6672 penalty is divisible, a taxpayer may litigate the penalty (albeit in refund litigation) after having paid an amount corresponding to the tax withheld from a single employee.  See Weber v. Commissioner, 138 T.C. 348, 363 n.12 (2012); Davis v. United States, 961 F.2d 867, 870, n.2 (9th Cir. 1992); Bland v. Commissioner, T.C. Memo. 2012-84, *22, n.13. Thus, the taxpayer whose liability is upheld in a Letter 1153 proceeding before Appeals can make a small “token” payment towards the IRC § 6672 penalty, file a refund claim with the IRS and, if the refund claim is denied, file a refund suit in a Federal District Court or the Court of Federal Claims challenging the liability.

(155 T.C. No. 1) Barnhill v. Commissioner

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