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Goldberg v. Commissioner (T.C. Memo. 2020-38)

On April 2, 2020, the Tax Court issued a 163-page Memorandum Opinion in the case of Goldberg v. Commissioner (T.C. Memo. 2020-38). The issues properly before the court in Goldberg were whether Form 4549 (Income Tax Examination Changes) is a binding contract and whether the interest under IRC § 6404(e)(1) should be abated. A number of other issues including collateral and equitable estoppel were raised, but the Tax Court found that they were not properly before the Tax Court.

Background

The IRS issued a notice of federal tax lien (NFTL) in November 2012. The petitioner timely requested a CDP hearing, which was held, and a notice of deficiency was issued. The petitioner timely filed a petition with the Tax Court, which remanded the case to Appeals to review the petitioner’s claims for interest abatement. After a supplemental hearing, Appeals issued a supplemental determination rejecting the petitioner’s claims for interest abatement. The Court then held a trial. In the post-trial brief, the IRS conceded the interest abatement, but only for a limited period in 2011.

Importantly for the Tax Court’s analysis (though not for its ultimate decision), in April 2011, the IRS prepared a Form 4549 (Income Tax Examination Changes), which the petitioner and his wife signed in May 2011. One of the primary issues presented was whether this Form 4549 was binding on the IRS, therefore determining whether the petitioner owed interest in 2004 (which the Form 4549 did not assert).

The Basic Principles of Collection: Assessment Then Collection

The IRS cannot collect a tax until it has made an assessment of the tax. IRC § 6502(a) (assessment is precondition for imposing levy); IRC § 6322 (assessment results in lien); Jordan v. Commissioner, 134 T.C. 1, 12 (2010), suppl’d by T.C. Memo. 2011-243. The authority of the IRS to assess is subject to statutory restrictions designed to protect taxpayers. Under IRC § 6501(a), the IRS cannot assess tax more than three years after the return was filed.

Under IRC § 6213(a), the IRS cannot assess a deficiency–generally the amount of unreported tax–unless the IRS first mails the taxpayer a notice of deficiency. See IRC § 6211(a). The notice of deficiency gives the taxpayer the right to file a Tax Court petition to redetermine the amount of the deficiency. IRC § 6213(a); IRC § 6214(a).

The Basic Principles of Collection: Automatic Lien and Notice of Federal Tax Lien (NFTL)

Assessment of tax by the IRS automatically creates a (silent) lien on the taxpayer’s property in favor of the United States. IRC § 6322. To establish the priority of the tax lien against certain other types of creditors, the IRS may file a notice of lien. IRC § 6323(a); IRC § 6323(f). After filing a notice of lien, the IRS is required to give notice to the taxpayer (a notice of federal tax lien (NFTL)) giving the taxpayer the right to a collection due process (CDP) hearing with Appeals. IRC § 6320(a)(1); IRC § 6320(a)(3).

The Basic Principles of Collection: Notice of Levy

The IRS can collect an assessed tax by levy. IRC § 6502(a); IRC § 6331(a). Before it makes the levy, the IRS must give the taxpayer notice of the proposed levy. IRC § 6330(a)(1); IRC § 6330(b)(1). This notice gives the taxpayer the right to request a CDP hearing. Id. A CDP hearing, whether held in conjunction with a levy or the filing of a notice of lien, is governed by IRC § 6330(c); IRC § 6320(c).

The Basic Principles of Collection: Matters to be Considered at CDP Hearing

IRC § 6330(c) sets forth the matters to be considered at the CDP hearing, and IRC § 6330(c)(2)(B) more specifically provides that the taxpayer may raise at the hearing challenges to the existence or amount of the underlying tax liability the IRS is seeking to collect if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute such tax liability.

The Basic Principles of Collection: The Notice of Determination and Petition Rights

After a CDP hearing, or, if one is not requested or held, the Office of Appeals issues a letter to the taxpayer setting out the terms of the determination. See IRC § 6330(c)(3). The taxpayer person may thereafter file a Tax Court petition for redetermination within 30 days of the notice of determination, which gives the Tax Court jurisdiction to review the determination. IRC § 6330(d)(1).

The Basic Principles of Collection: Remand to Appeals After Petition Filed

In some circumstances, the Tax Court may remand a CDP case to Appeals to make a supplemental determination. The Tax Court also has jurisdiction to review the determination as supplemented. See LG Kendrick, LLC v. Commissioner, 146 T.C. 17, 36 (2016), aff’d, 684 F. App’x 744 (10th Cir. 2017); Kelby v. Commissioner, 130 T.C. 79, 87-88 (2008).

The Basic Principles of Collection: Accrual of Interest

Interest accrues on any underpayment of tax and will begin to accrue on the date that payment was due. IRC § 6601(a). Interest “may be assessed and collected at any time during the period within which the tax to which such interest relates may be collected.” IRC § 6601(g). Under IRC § 6502(a)(1), the period of limitations on the collection of tax begins on the date the IRS assesses the tax.

The Basic Principles of Collection: Assessment of Interest

Taken together, IRC § 6502(a)(1) and IRC § 6601(g) stand for the proposition that the assessment of interest may occur only after the assessment of the tax to which such interest relates. See Field v. United States, 381 F.3d 109, 113 (2d Cir. 2004); see also IRS PLR 201319017. By executing a Form 4549, a taxpayer consents to the immediate assessment and collection of the tax and the interest to which the tax relates Aguirre v. Commissioner, 117 T.C. 324, 327 (2001).

The Basic Principles of Collection: Abatement of Interest

The IRS may abate assessed interest under certain conditions. IRC § 6404(e)(1), (e)(2). The Tax Court has jurisdiction over any action brought by a taxpayer to determine whether the IRS’s failure to abate interest under IRC § 6404(e) was an abuse of discretion. IRC § 6404(h)(1).

There are two prerequisites for Tax Court jurisdiction regarding abatement of interest: the taxpayer’s net worth may not exceed the relevant ceiling, and the action must be brought within 180 days after the date that the IRS mails final determination not to abate the interest (note, it begins at mailing not at the taxpayer’s receipt). IRC § 6404(h)(1).

The Basic Principles of Collection: Challenge to Underlying Liability at CDP Hearing Necessary to Challenge in Tax Court

As noted, in a CDP hearing, a taxpayer is permitted to bring a challenge to the existence and amount of the underlying tax liability the IRS is seeking to collect through the levy (or the lien-notice filing) that triggered the CDP hearing. IRC § 6330(c)(2)(B). If the IRS is seeking to collect interest, then the taxpayer in a CDP hearing can challenge the liability for interest. Urbano v. Commissioner, 122 T.C. 384, 390 (2004); Montgomery v. Commissioner, 122 T.C. 1, 8 (2004). A challenge to liability for interest can be premised on the interest-abatement provisions of IRC § 6404(e)(1). See Urbano, 122 T.C. at 390; Katz v. Commissioner, 115 T.C. 329, 339 (2000).

The regulations interpreting IRC § 6330 provide that a taxpayer can only ask the court to consider an issue, including a challenge to the underlying tax liability, that was properly raised in the taxpayer’s CDP hearing. Treas. Reg. § 301.6330-1(f)(2), Q&A-F3. This includes liability for a penalty and interest. An issue is properly raised if the taxpayer requests raises the issue with Appeals and presents evidence with respect to that issue after being given a reasonable opportunity to present such evidence. Id.; see also Giamelli v. Commissioner, 129 T.C. 107, 114-115 (2007).

The Basic Principles of Collection: Challenge to Underlying Liability when Liability Challenged is Liability for Interest

The underlying tax liability is the liability the IRS is seeking to collect through the collection action that triggered the taxpayer’s right to request a CDP hearing. Klein v. Commissioner, 149 T.C. 341, 348-349 (2017). Thus, if the IRS is seeking to collect interest, then interest is the underlying liability. A taxpayer’s challenge to its underlying tax liability is generally reviewed de novo. Urbano, 122 T.C. at 393.

The exception to this general standard of review arises when the taxpayer’s challenge to interest liability is premised on the interest-abatement provisions of IRC § 6404(e)(1). In such an instance, the Tax Court will likely review the Appeals determination for abuse of discretion. See Downing, 118 T.C. at 30; Krehnbrink v. Commissioner, T.C. Memo. 2019-56, *17; Estate of La Sala v. Commissioner, T.C. Memo. 2016-42, *16-*17.

Meanwhile, Back to Goldberg – The Nature of Form 4549

At the close of an IRS examination, the revenue agent (RA) prepared a Form 4549, a report of the examination’s findings. The Form 4549 explains the proposed adjustments to taxes, penalties, and interest determined as a result of the IRS examination. If the taxpayer signs the form, the taxpayer agrees to the immediate assessment and collection of the adjusted items as shown, plus any statutory interest.

By signing the Form 4549, a taxpayer waives the IRC § 6213(a) prohibition on the IRS’s assessing a tax deficiency without the mailing of a notice of deficiency. See IRC § 6213(d). A taxpayer signing the Form 4549 also waives appeal rights as well as the right to contest in the United States Tax Court the findings in this report. See Aguirre, 117 T.C. at 327. In Goldberg, the Form 4549 showed an interest amount of zero. Thus, the petitioner argued that the Form 4549 was a contract, under the terms of which the IRS agreed not to assess interest against him.

The Form-4549-as-a-Contract Argument

The petitioner claimed that the “zero interest entry” on Form 4549 constituted a term in a binding contract relieving the petitioner of interest on his 2004 income-tax balance. The petitioner raised this argument at his CDP hearing, at his supplemental CDP hearing, and in his briefs. His contract argument is an argument that he is not liable for interest on his 2004 underpayment of tax. Because this interest is the liability the IRS seeks to collect, the petitioner’s contract argument is a “challenge to the underlying tax liability” pursuant to IRC § 6330(c)(2)(B). Urbano, 122 T.C. at 393.

Unfortunately, the Tax Court was not buying what the petitioner was peddling. The Tax Court held that the only thing the execution of Form 4549 accomplished was to ink the petitioner’s consent to the immediate assessment and collection of the deficiency and all additional interest “as provided by law.” If the petitioners had desired to permanently fix their interest liability at zero, they could have entered into a closing agreement, which is subject to the requirements of IRC § 7121. See Urbano, 122 T.C. at 393-94. Only a closing agreement is a binding contract between the taxpayer and the IRS that fixes liability. Hudock v. Commissioner, 65 T.C. 351, 362 (1975); Treas. Reg. § 301.7121-1(a); Treas. Reg. § 301.7121-1(d)(1).

Assessment of Interest

To summarize the summary of the collection process so usefully included in the Tax Court opinion, the IRS must assess a tax before it attempts to collect. IRC § 6502(a). To assess a deficiency, the taxpayer must receive a notice of deficiency and timely file a petition with the Tax Court. IRC § 6212(a). The IRS must wait until the decision of the Tax Court becomes final to begin collection. IRC § 6213(a).

Underpayment interest, provided for by IRC § 6601, is assessed, collected, and paid in the same manner as taxes. IRC § 6601(e)(1). Therefore, collection of interest can only follow assessment of interest. IRC § 6502(a); IRC § 6601(g). The IRS may assess interest at any time the tax which the interest relates to may be collected. IRC § 6601(g).

As such, it follows that the assessment of interest may only occur after the assessment of the related tax. IRC § 6502(a)(1); IRC § 6601(g); see also Field, 381 F.3d at 113. Taxpayers are liable for interest on underpayments of tax that are not paid on or before the last date prescribed for payment. IRC § 6601(a).

Original opinion: (T.C. Memo. 2020-38) Goldberg v. Commissioner

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