Middleton v. Commissioner
T.C. Memo. 2022-28

On April 4, 2022, the Tax Court issued a Memorandum Opinion in the case of Middleton v. Commissioner (T.C. Memo. 2022-28). The primary issues presented in Middleton v. Commissioner were (i) whether the taxpayer could challenge the Trust Fund Recovery Penalty at his CDP hearing; and (ii) whether the taxpayer established that he was not “responsible person” for collecting, accounting for, and paying over employees’ income and employment taxes.

Background to Middleton v. Commissioner

In March 2007, Lineation Marketing Co. (Lineation) was organized and registered with the California secretary of state. Lineation provided roadway striping and signage. The petitioner was the responsible managing officer for Lineation during the relevant tax periods. Bank records show that the petitioner opened a checking account for Lineation in December 2012, and a savings account in September 2013. He was the only signer on the bank accounts.

In November 2015, a revenue officer interviewed the petitioner regarding his responsibilities with Lineation and recorded his responses on Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes. The petitioner signed the Form 4180.

Middleton v. CommissionerIn June 2016, the IRS mailed Letter 1153 and Form 2751 to the petition proposing a TFRP against him for 2013. The petitioner did not dispute receipt of the Letters 1153 and did not request a hearing with Appeals. The TFRPs attributable to Lineation were assessed against the petitioner in July and September 2016.

Just prior to and just after the assessment, the petitioner submitted multiple Forms 656-L, Offer in Compromise (Doubt as to Liability), arguing that he was an employee and not an owner of Lineation. The IRS rejected the petitioner’s offers-in-compromise. The IRS gave the petitioner 30 days to request a reconsideration. He did so by completing a Form 13711, Request for Appeal of Offer in Compromise. However, Appeals ultimately sustained the IRS’s rejection of the petitioner’s offers-in-compromise.

The IRS sent a Notice of Intent to Levy to the petitioner in June 2018. He timely submitted a request for a CDP or equivalent hearing, and on the request, he indicated that he could not pay and was not liable for the TFRPs. The assigned settlement officer scheduled a CDP hearing for January 2019. She requested the following documents: (1) a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals; (2) signed tax returns for 2017; and (3) supporting documentation for any expenses reported.

Despite the SO’s best efforts, the CDP hearing never happened, and the IRS issued a notice of determination. The petitioner then filed his Petition.

After the IRS’s motion for remand was granted, a second settlement officer who had no prior involvement with the case reviewed all the documents associated with this case and called the petitioner to schedule a hearing. Unable to reach the petitioner, the second settlement officer left a message scheduling a hearing for October 20, 2020. He followed up with a letter sent September 24, 2020, confirming the hearing and requesting tax returns, a completed Form 433-A, bank statements, and proof of expenses.

The second settlement officer advised the petitioner that he had determined that the petitioner was liable for the TFRPs and that the information he had requested in his letter was needed if a collection alternative, such as an installment agreement, was to be considered. The petitioner requested an installment agreement and agreed to send the requested information by December 4, 2020.

Much back and forth ensued, phone tag was played, but ultimately, the petition failed to provide all requested information; thus, the petition’s installment agreement was ultimately denied. Appeals issued a supplemental notice of determination sustaining the proposed levy action with respect to the assessed TFRPs for taxable periods ending June 30, 2012, through March 31, 2014.

The Trust Fund Recovery Penalty

IRC § 6672(a) imposes a penalty—commonly referred to as the TFRP—for willfully failing to collect, account for, and pay over income and employment taxes of employees. These penalties are assessed and collected in the same manner as taxes against a person who is “an officer or employee of a corporation…who as such officer, [or] employee…is under a duty to perform,” in this case, the duties to which IRC § 6672 refers. IRC § 6671(a) and (b). Such persons are referred to as “responsible persons,” a term which may be broadly applied.[1]

Prior Opportunity to Challenge Underlying Liabilities

Under certain circumstances a taxpayer may raise challenges in a CDP proceeding to the IRS’s determination of his or her underlying tax liabilities.[2] A taxpayer’s challenge to his or her status as a responsible person constitutes a dispute of the taxpayer’s liability.[3] A taxpayer may challenge in a CDP proceeding the amount of the tax assessed by the IRS if he or she did not receive a statutory notice of deficiency or did not otherwise have a prior opportunity to dispute the tax liability.[4]

Where the assessments against the taxpayer are TFRPs, the IRS does not issue or mail a notice of deficiency.[5] Instead, in general, the IRS must provide the taxpayer with a notice of the TFRPs before assessment.[6] A Letter 1153 provides a taxpayer the opportunity to dispute his or her liability for a TFRP by filing an appeal with the IRS.[7]

Pazden Second Chance
Or, in Mr. Middleton’s case, eight or nine…

However, if a taxpayer receives a Letter 1153 and takes the resulting opportunity to dispute the underlying TFRP liability at the Appeals conference, the taxpayer is precluded by IRC § 6330(c)(2)(B) from challenging the underlying tax liability in a subsequent CDP hearing.[8] The same is true of a taxpayer who receives a Letter 1153 but forgoes the opportunity to dispute liability by failing to timely request an Appeals conference.[9]

Documentary evidence of mailing may suffice as proof that a notice of deficiency was properly mailed to a taxpayer.[10] When a Letter 1153 is mailed, the IRS must follow the same mailing procedures that are provided for notices of deficiency in IRC § 6212(b).[11] Likewise, the same evidence that establishes that the IRS mailed a notice of deficiency to a taxpayer’s last known address is sufficient to establish that the IRS properly sent a Letter 1153.[12]

The petitioner was properly sent the Letters 1153 but did not request a conference before Appeals to challenge his TFRP liabilities. He thus had a prior opportunity to challenge the underlying liabilities and therefore was precluded from challenging them during his CDP hearing.[13]

Raising Underlying Liabilities in a CDP Hearing

The Tax Court will consider an underlying tax liability on review only if the taxpayer properly raised the issue during the CDP hearing.[14] For the first time at trial, petitioner testified that he did not recall receiving the Letters 1153. The petitioner did not raise this issue during his CDP hearing and is precluded from challenging his underlying liabilities here.[15] However, the opinion goes on to observe, even if the petitioner could challenge his underlying liabilities before the Tax Court, his claims would fail.

The petitioner does not dispute that he worked for Lineation and was responsible for its bank accounts. He testified that he was the responsible managing officer during the relevant tax periods. During trial, the petitioner raised the issue that he was coerced by the revenue officer into admitting that he was the responsible person for Lineation on the Form 4180. Even if his claim of coercion was true, it would not affect his status as the responsible person.[16]

Abuse of Discretion

Because the petitioner’s underlying liabilities are not at issue, the Tax Court’s review of the notice of determination is for abuse of discretion.[17] An abuse of discretion occurs if Appeals exercises its discretion “arbitrarily, capriciously, or without sound basis in fact or law.”[18]

IRC § 6330(c)(3) requires the settlement officer to consider the following during a CDP hearing:

  1. whether the requirements of any applicable law or administrative procedure have been met;
  2. any issues appropriately raised by the taxpayer; and
  3. whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary.[19]

The Tax Court noted that the second settlement officer properly based his determination on the factors specified by IRC § 6330(c)(3).

The Tax Court has authority to review satisfaction of the verification requirement of IRC § 6330(c)(1) regardless of whether the taxpayer raised that issue at the CDP hearing.[20] IRC § 6330(c)(1) requires the Appeals officer, as part of his or her review of a proposed action to collect TFRPs, to verify that a Letter 1153 was issued to the taxpayer.[21]

On remand, the second settlement officer verified that the written approval requirement under IRC § 6751(b) had been met.[22] He also verified that the petitioner had been mailed the Letters 1153 before the assessment of the TFRPs. As such, IRC § 6330(c)(1) was satisfied.

Middleton v. Commissioner
Just give me something

IRC § 6330 does not require that the Appeals officer rely upon any particular document in order to verify that all applicable laws and administrative procedures were followed.[23] Where a taxpayer specifically alleges that he or she never received a Letter 1153, an Appeals officer cannot rely solely on tax transcripts to verify that a Letter 1153 has been sent.[24]

Instead, the Appeals officer must examine “underlying documents in addition to the tax transcripts, such as the taxpayer’s return, a copy of the notice of deficiency, and the certified mailing list.”[25] At the end of the day, however, when a settlement officer gives a taxpayer an adequate timeframe to submit requested items, it is not an abuse of discretion to move ahead if the taxpayer fails to submit the items within that timeframe.[26]

Middleton v. Commissioner

Footnotes for Middleton v. Commissioner
  1. Mason v. Commissioner, 132 T.C. 301, 321 (2009).
  2. See IRC § 6330(c)(2)(B).
  3. Anderson v. Commissioner, T.C. Memo. 2016-219, *11; Morgan v. Commissioner, T.C. Memo. 2011-290, slip op. at *8.
  4. IRC § 6330(c)(2)(B); see also Montgomery v. Commissioner, 122 T.C. 1, 7 (2004).
  5. See IRC § 6212(a).
  6. IRC § 6672(b)(1).
  7. See Mason, 132 T.C. at 317-18.
  8. See, e.g., Mason, 132 T.C. at 317.
  9. See Bletsas v. Commissioner, T.C. Memo. 2018-128, at *8-9, aff’d, 784 F. App’x 835 (2d Cir. 2019).
  10. Coleman v. Commissioner, 94 T.C. 82, 90 (1990).
  11. IRC § 6672(b)(1).
  12. See Mason, 132 T.C. at 318.
  13. See IRC § 6330(c)(2)(B).
  14. Giamelli v. Commissioner, 129 T.C. 107, 112-16 (2007).
  15. See id.; Treas. Reg. § 301.6330-1(f)(2), Q&A-F3.
  16. See IRC § 6672(a); Mason, 132 T.C. at 321.
  17. See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 181-82 (2000).
  18. Woodral v. Commissioner, 112 T.C. 19, 23 (1999); see also Keller v. Commissioner, 568 F.3d 710, 716 (9th Cir. 2009), aff’g in part T.C. Memo. 2006-166.
  19. See also Lunsford v. Commissioner, 117 T.C. 183, 184 (2001).
  20. Hoyle v. Commissioner, 131 T.C. 197, 202-03 (2008), supplemented by 136 T.C. 463 (2011).
  21. See Lee v. Commissioner, 144 T.C. 40, 49-50 (2015).
  22. See Chadwick v. Commissioner, 154 T.C. 84 (2020) (holding that TFRPs are penalties subject to the written supervisory approval requirement for assessment).
  23. Craig v. Commissioner, 119 T.C. 252, 262 (2002).
  24. See Hoyle, 131 T.C. at 205 n.7.
  25. Id. (quoting Chief Counsel Notice CC-2006-019 (Aug. 18, 2006)).
  26. Pough v. Commissioner, 135 T.C. 344, 352 (2010).


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