On March 15, 2022, the Tax Court issued a Memorandum Opinion in the case of Hamilton v. Commissioner (T.C. Memo. 2022-21). The primary issues presented in Hamilton v. Commissioner were (1) whether the Tax Court would consider taxpayers’ testimony and documentary evidence; (2) whether the notices of determination contained plain errors; (3) whether the omission of documents from administrative record called into question completeness of record (and, if so, whether settlement officer’s determination to sustain notice would have been same had she been aware of documents); and (4) whether taxpayers presented officer with substantial reason to grant extension of time to submit financial information.
Held: Yes, on all counts. Remanded.
Background to Hamilton v. Commissioner
During 2016 and 2017, Mr. Hamilton worked as an attorney (first as a solo practitioner and then in a partnership), while Mrs. Hamilton worked as a chaplain. The Hamiltons reported on their 2016 Form 1040 taxable income of $223,000 and a total tax of $72,000. They did not pay in full the tax that they reported.
The IRS subsequently assessed the reported tax as well as an addition to tax for failure to timely pay tax under IRC § 6651(a)(2), an addition to tax for failure to pay estimated tax under IRC § 6654, and statutory interest. As of December 17, 2019, the Hamiltons’ unpaid tax liability for 2016 totaled $70,500 (not a typo, they had paid some tax).
Notice and CDP Hearing Request
The IRS filed a Notice of Federal Tax Lien (NFTL) as part of its efforts to collect the outstanding liability and informed the Hamiltons of their right to a CDP hearing. The Hamiltons timely requested a hearing, indicating their interest in an installment agreement and asserting that the “income and expenses for 2014-16 were not properly calculated.”
A settlement officer in Appeals later sent to the Hamiltons two letters dated October 3, 2018, scheduling their CDP hearing for November 15, 2018. In each letter the settlement officer explained that, during the hearing, she would consider “[a]ny relevant issues you wish to discuss.” The settlement officer emphasized, however, that the Hamiltons needed to be current with their 2018 estimated tax payments and filing obligations and to provide certain documents for her to consider any collection alternative.
The settlement officer asked for a significant amount of documentation.
Like, a lot.
The Hamiltons did not supply any documents by October 24, 2018. In a letter to the settlement officer dated October 31, 2018, Mrs. Hamilton addressed the status of the requested documents.
She explained that the Hamiltons previously had retained a bookkeeper to prepare their tax returns, maintain personal and professional accounts, advise them as to necessary filings, and submit such filings. Mrs. Hamilton reported that the Hamiltons had discovered (after receiving the settlement officer’s October 3 letters) that the bookkeeper had failed in those various duties.
Specifically, Mrs. Hamilton wrote that “[p]ersonal account records seem never to have been kept, and professional account records are spotty at best.” She further explained that the bookkeeper had destroyed the underlying financial documents that the Hamiltons had supplied her.
Mrs. Hamilton stated that she and her husband had retained a certified public accountant, who would represent them in the CDP hearing, to “reconstruct and verify necessary information.” Mrs. Hamilton finally noted that she had reordered online records such as bank account statements, emphasizing that she would “forward your requested documentation as quickly as I can reconstruct it, anticipated to be within days.”
Mrs. Hamilton stressed that the Hamiltons sought to arrange for installment payments on the delinquency. She sounded a note of uncertainty, however, as to whether the CDP hearing was the correct forum to do so. Between November 2 and November 15, 2018, the Hamiltons sent the settlement officer five faxes containing hundreds of pages of documentation.
The day before the CDP hearing, the Hamiltons submitted additional documents. Specifically, they sent the settlement officer Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses. They also sent a fax message to the settlement officer stating “2017 returns filed,” which was followed by a fax of a copy of the filed returns (and a fax from the CPA stating that the returns had been e-filed and accepted) on the day of the hearing itself.
In her correspondence, Mrs. Hamilton asked the settlement officer to contact her if she had “any questions or concerns.” The settlement officer did not do so. Nor did she do any work on the case between October 1, 2018, when she spent an hour and a half reviewing the file and drafting the initial letters, and November 15, 2018, when she spent an hour preparing for the hearing scheduled for that day.
The telephone CDP hearing was held on November 15, 2018, with the Hamiltons and Ms. Tokar Canton in attendance. The settlement officer pointed out various problems with the Hamiltons’ tax reporting, documentation, and payments.
Specifically, she asserted that the Hamiltons had failed to file Form 941 for the third and fourth quarters of 2016 as well as their 2017 tax return. The settlement officer also stated that the Hamiltons had failed to supply financial documentation, including proof of monthly expenses. Finally, she observed that the Hamiltons were not in compliance with their estimated tax payments.
Judge Urda drops a little footnote here to explain that
The Form 941 for the third quarter of 2016 was filed on December 12, 2018, and Form 941 for the fourth quarter was filed on November 19, 2018. Although Mr. Hamilton had not previously filed Forms 941 for either quarter, IRS transcripts reflect that his tax deposits were sufficient to cover the amounts reflected on the return for each quarter.
Is this Karen the Asshat making another appears so quickly after Shaddix v. Commissioner (T.C. Memo. 2022-11)?
The CPA reasonably responded to several of these points. With respect to the supporting financial information, she noted that the Hamiltons had faxed bank statements and documentation establishing monthly expenses, other than for health and auto insurance and out-of-pocket healthcare costs.
The CPA further noted that the Hamiltons had filed their 2017 return before the CDP hearing and had faxed a copy to the settlement officer. In response to questions regarding the Hamiltons’ plan for becoming compliant with their estimated tax payments, the CPA stated that they could be current as soon as December.
The SO then stated that she would recommend sustaining the NFTL filing. She informed the Hamiltons that they were not eligible for a collection alternative because of the issues previously outlined. Mr. Hamilton asked about the possibility of rescheduling the hearing to supply the missing information, but the settlement officer demurred, explaining that the Hamiltons could petition for review or work with the IRS’s compliance office.
Yep, definitely Karen the Asshat.
The Notice of Determination
On December 4, 2018, the Office of Appeals issued identical notices of determination to Mr. and Mrs. Hamilton sustaining the filing of the NFTL for 2016 and rejecting the Hamiltons’ request for an installment agreement. The notices stated that the Hamiltons were ineligible for a collection alternative on largely the same grounds as discussed at the hearing:
- they had failed to file their 2017 income tax return;
- they had failed to file Mr. Hamilton’s Form 941 for the third and fourth quarters of 2016;
- they had not provided certain financial documentation; and
- they were not in compliance with their 2018 estimated tax payments.
Standard of Review
Where, as here, the underlying tax liabilities are not at issue, we review the determination of the Office of Appeals for abuse of discretion.
In reviewing for abuse of discretion, we must uphold the Office of Appeals’ determination unless it is arbitrary, capricious, or without sound basis in fact or law. We do not substitute our judgment for that of the Office of Appeals but consider “whether, in the course of making its determination, the Appeals Office complied with the legal requirements of an administrative hearing.”
CDP Hearing Requirements
When making the determination whether to sustain a collection action, a settlement officer must (1) verify that the requirements of any applicable law or administrative procedure have been met, (2) consider any relevant issues the taxpayers raised, including offers of collection alternatives, and (3) consider whether “any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the [taxpayers] that any collection action be no more intrusive than necessary.”
This case focuses on the second requirement, viz., whether the settlement officer gave proper and fair consideration to issues that the Hamiltons raised. “CDP hearings are designed to be a forum for considering taxpayers’ legitimate disagreement with collection actions.” “It is therefore important to question whether a taxpayer’s concerns have been properly addressed in the CDP hearing.”
The settlement officer premised her determination to sustain the NFTL filing on four grounds:
- the Hamiltons’ failure to file their 2017 federal income tax return;
- the Hamiltons’ failure to file Forms 941 for the third and fourth quarters of 2016;
- the Hamiltons’ failure to supply requested financial documentation; and
- the Hamiltons’ noncompliance with their estimated tax obligations.
Although any of these grounds might justify sustaining a collection action, the settlement officer here failed to give proper consideration to points the Hamiltons raised during the hearing, which undermined each of the grounds she relied upon.
In yet another footnote, Judge Urda notes
The notices of determination (one sent to Mr. Hamilton, the other to Mrs. Hamilton) also state that the Hamiltons had not filed their 2018 Form 1040. But the 2018 Form 1040 was not due until April 15, 2019, about four months after the issuance of the notices.
Problems Undercutting the Determination – Plain Errors
As an initial matter, the notices featured plain errors directly related to the reasons the settlement officer gave for her determination. Specifically, the notices relied upon the Hamiltons’ purported failure to file their 2017 federal income tax return in sustaining the collection action. The Hamiltons, however, had filed this tax return the day before the CDP hearing and faxed the settlement officer a copy of the return that had been filed.
They also explicitly informed her of this filing at the hearing. The settlement officer nonetheless maintained in the notices that this return had not been filed, which was plainly wrong.
Another significant error related to Mr. Hamilton’s Form 941 for the fourth quarter of 2016. Although the notices gave the failure to file this Form 941 as another reason for sustaining the collection action, IRS records reflect that the Form 941 had been filed on November 19, 2018, the day before the settlement officer submitted her case-closing documents and two weeks before the notices were issued.
The Tax Court previously observed that “[i]t is the policy of the Office of Appeals to consider financial information…up to the time of the issuance of the notice of determination.” The Office of Appeals did not do so in this case and instead issued notices contradicted by the IRS’s own information.
Problems Undercutting the Determination – Omission in the Administrative Record
The Tax Court also had “significant concerns” about the administrative record. The record compiled by the settlement officer includes a fax cover sheet dated November 9, 2018, from the Hamiltons to the settlement officer reflecting that they had faxed her 11 pages. The record further contains an internal IRS email to the settlement officer reflecting that 11 pages had been received from the Hamiltons’ fax number on that date. The administrative record, however, does not include any of the documents besides the cover sheet.
At trial the Hamiltons introduced a fax transmission log from November 9, 2018, reflecting that they faxed 11 pages to the IRS (at a time consistent with the IRS reception email). They also included the pages purportedly missing from the administrative record, which included the Form 941 for the fourth quarter of 2016.
Based on the documents before the Tax Court, it appeared that the Hamiltons faxed and the Office of Appeals received material bearing directly on the grounds for sustaining the NFTL filing, which the settlement officer did not consider. The failure of the administrative record to capture some documents makes us question the completeness of the administrative record that the settlement officer considered and that we are reviewing.
The Tax Court was further concerned about its ability to assess whether the settlement officer’s determination would have been the same had she been aware of this Form 941, and, critically, whether such a determination would have been an abuse of discretion.
Problems Undercutting the Determination – Denial of Additional Time
“An Appeals officer’s unreasonable denial of a request for more time to submit financial information or other evidence may be an abuse of discretion.” “The reasonableness of a request for more time, and the reasonableness of a denial of such a request, will depend on the particular facts of the case.” In making this decision, the settlement officer often considers the taxpayers’ “prior conduct.” The context of this case shows that the settlement officer’s denial of a brief extension was arbitrary and capricious.
As an initial matter, the Hamiltons made efforts to keep the settlement officer informed as to issues affecting their information-gathering process. They alerted the settlement officer to difficulties in producing the many documents that had been requested, giving a plausible explanation (their bookkeeper’s failures and destruction of their documents) as to the source of their problems.
The Hamiltons later asked the settlement officer to apprise them of any questions or concerns that they could answer before the hearing. She did not take them up on that offer; her doing so would have allowed the Hamiltons to address any issues before the November 15, 2018, hearing. Finally, Mr. Hamilton requested rescheduling the hearing so that they could rectify the gaps identified by the settlement officer.
The Hamiltons demonstrated a similar willingness to fix the problems identified with their estimated tax payments. After being informed that they owed estimated tax for 2018, the settlement officer asked the Hamiltons about their plan for meeting their obligations. The Hamiltons responded that they could make the requisite payments within a few weeks.
The Hamiltons’ prehearing conduct also showed a commitment to cooperating with the settlement officer so that they could qualify for an installment agreement. Between November 2, 2018, and the hearing on November 15, they sent the settlement officer at least five fax messages, four of which included financial records and copies of completed tax forms. They sent hundreds of pages of financial and tax documentation, including monthly bills and bank statements, Forms 433-A and 433-B, and numerous personal and business tax returns.
In summary, the Hamiltons had demonstrated through word and deed a sincere commitment to meeting their obligations in order to be eligible for a collection alternative. The Hamiltons’ case is far from “the run-of-the-rejection-mill case where a taxpayer submits no information.” Nor had the Hamiltons previously requested an extension, choosing instead to keep the settlement officer abreast of developments while attempting to satisfy her requests.
The settlement officer thus had every reason to expect that, if she granted the Hamiltons an extension or rescheduled the hearing, they would work quickly to do whatever was needed to qualify them for an installment agreement.
It further seems apparent that if the settlement officer had taken the time to discuss with the Hamiltons their outstanding obligations, that conversation would not have fallen on deaf ears. We accordingly conclude the Hamiltons had presented the settlement officer with a “substantial reason to grant an extension.”
A settlement officer generally does not abuse her discretion by sustaining a determination where taxpayers fail to submit requested financial information or comply with their tax obligations during the CDP proceeding. In this case, however, the settlement officer’s plain errors, the uncertain state of the administrative record, and the arbitrary denial of an extension convince us that the notices of determination lacked a sound basis in fact and law.
The record before the Tax Court “fundamentally” suggested that the settlement officer made up her mind after a cursory one-hour review of the Hamiltons’ materials and failed to give proper consideration to the issues they raised, as required by IRC § 6330(c)(3)(B).
Classic Karen the Asshat.
In this case, Karen was both wrong and an asshole.The cumulative effect of the settlement officer’s conduct in this case was to deprive the Hamiltons of fair consideration of their issues and concerns. The Hamiltons’ conduct was by no means perfect, but it reflected consistent cooperation and good-faith effort throughout the CDP process. “Although [the Tax Court] cannot substitute [its] judgment for that of the [settlement officer], [the Tax Court’s] review of the overall record leaves us with a firm sense that [the Hamiltons have] not been treated in a fair and rational manner.”
- Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000). ↑
- See, e.g., Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006); Taylor v. Commissioner, T.C. Memo. 2009-27, *9. ↑
- Charnas v. Commissioner, T.C. Memo. 2015-153, *7. ↑
- IRC § 6330(c)(3); see Chiarelli v. Commissioner, T.C. Memo. 2017-91, *6; Shanley v. Commissioner, T.C. Memo. 2009-17, *3. ↑
- Charnas, T.C. Memo. 2015-153, at *12; see also IRC § 6330(c)(2) (providing that taxpayer may raise “any relevant issue”). ↑
- Charnas, T.C. Memo. 2015-153, at *12; see also Blosser v. Commissioner, T.C. Memo. 2007-323, *4 (observing that “[i]f IRC § 6330(b) [providing a taxpayer’s right to a fair hearing before a levy is made] is to be given any force, the Appeals Office must make its determination … after giving adequate consideration to all meritorious issues the taxpayer has raised during the hearing.”); IRC § 6320(b). ↑
- Dinino v. Commissioner, T.C. Memo. 2009-284, *10; accord Ludlam v. Commissioner, T.C. Memo. 2019-21, at *15-16, aff’d per curiam, 810 F. App’x 845 (11th Cir. 2020). ↑
- See McNair Eye Ctr., Inc. v. Commissioner, T.C. Memo. 2010-81, *3; Meeh v. Commissioner, T.C. Memo. 2009-180, *4. ↑
- Rosenthal v. Commissioner, T.C. Memo. 2014-252, *12. ↑
- Dinino at *9; see also Szekely v. Commissioner, T.C. Memo. 2013-227, at *10 (observing that “a settlement officer should take into consideration the entire context of the case”). ↑
- Dinino at *9; see also Judge v. Commissioner, T.C. Memo. 2009-135, *3. ↑
- Cf. Shanley, *6 (noting that “reasons related to the information-gathering process” might bear on a settlement officer’s exercise of discretion). ↑
- Leslie v. Commissioner, T.C. Memo. 2016-171, *29, aff’d, 725 F. App’x 597 (9th Cir. 2018). ↑
- See Judge, T.C. Memo. 2009-135, at *3. ↑
- See id. (observing that the taxpayer’s “past cooperation with the Appeals Office persuades us that he would have timely submitted the revised financial information if granted an extension”). ↑
- See Szekely, T.C. Memo. 2013-227, at *10 (observing that the Tax Court “would hope that the IRS would reach out to a taxpayer in these circumstances and assist him in his tax compliance efforts, rather than proceed to close his case”). ↑
- Shanley, T.C. Memo. 2015-153, at *6. ↑
- See, e.g., Giamelli v. Commissioner, 129 T.C. 107, 111-12 (2007) (observing that “[r]eliance on a failure to pay current taxes in rejecting a collection alternative does not constitute an abuse of discretion”); Rockafellor v. Commissioner, T.C. Memo. 2019-160, at *13. ↑
- Blosser, T.C. Memo. 2007-323, at *4 (observing that “[i]f IRC § 6330(b) is to be given any force, the Appeals Office must make its determination after the taxpayer has had the opportunity to be heard at a fair hearing and after giving adequate consideration to all meritorious issues the taxpayer has raised during the hearing”); see also Charnas, T.C. Memo. 2015-153, at *12 (holding that “[i]t is therefore important to question whether a taxpayer’s concerns have been properly addressed in the CDP hearing”); cf. Glossop v. Commissioner, T.C. Memo. 2013-208, at *16 (“The statute requires … that a taxpayer be given a reasonable chance to be heard before the issuance of a notice of determination.”). ↑
- Szekely, T.C. Memo. 2013-227, at *11-12. ↑