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Pazden v. Commissioner (T.C. Memo. 2021-108)

On September 2, 2021, the Tax Court issued a Memorandum Opinion in the case of Pazden v. Commissioner (T.C. Memo. 2021-108). The primary issues presented in Pazden were (1) whether Ms. Pazden is entitled to challenge her underlying tax liability for 2010, and (2) whether Appeals abused its discretion in sustaining the proposed levy in this case.

Held: Nope and Nope.

Background

Ms. Pazden failed to timely file her 2010 Federal income tax return. The IRS thereafter sent Ms. Pazden a notice of deficiency dated June 3, 2013, based upon a substitute for return that the IRS had prepared under the authority conferred by IRC § 6020(b). The notice determined a deficiency of $449,934, as well as additions to tax under IRC § 6651(a)(1) for failure to file her tax return, IRC § 6651(a)(2) for failure to pay tax, and IRC § 6654 for failure to pay estimated tax, and statutory interest.

On August 30, 2013, Ms. Pazden sent a letter to this Court in which she specifically referenced in the subject line the “Notice of Deficiency dated June 3, 2013,” and began the text of the letter by noting that “[r]eference is made to the IRS notice dated June 3, 2013 which I received for the tax year 2010.” The Tax Court docketed Ms. Pazden’s letter as the petition in docket No. 21012-13, later dismissing the case for failure to pay the required filing fee.

During the pendency of that case, Ms. Pazden received a letter from Appeals dated December 11, 2013, which offered her an informal settlement conference. The letter requested that Ms. Pazden provide a 2010 tax return and supporting documentation by January 6, 2013. On April 19, 2014, Ms. Pazden sent a letter to the IRS enclosing Form 1040, U.S. Individual Income Tax Return, for her 2010 tax year, reporting negative $1,500 in adjusted gross income and no tax due for that year.

The CDP Proceedings and Audit Reconsideration

As part of its attempt to collect the outstanding 2010 liability, the IRS sent Ms. Pazden a notice of intent to levy and notice of her right to a hearing, dated December 5, 2017. Ms. Pazden timely requested a CDP hearing in a letter dated January 1, 2018. In that letter Ms. Pazden challenged her underlying tax liability and urged the IRS to consider the Form 1040 she had filed in 2014. She also indicated that she would pursue audit reconsideration.

Pazden v. CommissionerMs. Pazden formally requested audit reconsideration on February 6, 2018. In October 2018 the IRS determined that Ms. Pazden’s request should be characterized as a claim adjustment, which required an examination. The IRS subsequently assigned the case to a revenue agent. As part of the examination the revenue agent gave Ms. Pazden an opportunity to discuss the case and to provide information substantiating her position.

The examination concluded in September 2019 with the IRS explaining in a letter that the information provided did not justify any change to its previous adjustments. The IRS subsequently issued another letter on November 1, 2019, formally stating that Ms. Pazden’s audit reconsideration did not result in any change.

The CDP proceeding traveled down a separate track. On April 3, 2018, a settlement officer sent Ms. Pazden a letter scheduling a CDP hearing. The settlement officer explained that Ms. Pazden was precluded from raising the issue of her underlying liability as “the issue was raised and considered at a previous administrative proceeding.” The letter concluded by asking for certain information necessary to consider a collection alternative.

The settlement officer conducted a telephone CDP hearing with Ms. Pazden and her brother on May 8, 2018. During that hearing Ms. Pazden confirmed that she was exclusively challenging her 2010 liability and was not interested in pursuing a collection alternative. The settlement officer asserted that Ms. Pazden had had a previous opportunity to challenge the liability both in this Court and before Appeals and was precluded from doing so in the CDP hearing.

The settlement officer, however, stated that she would give time to allow the audit reconsideration process to play out. Appeals thereafter sent Ms. Pazden a notice of determination, dated August 7, 2019, upholding the proposed levy. The notice indicated that Ms. Pazden had failed to appear for a call with Appeals and stated that she was precluded from challenging her liability given her previous opportunities to do so and that she had raised no other issues.

Underlying Liability

A taxpayer may raise a CDP challenge to the existence or amount of her underlying tax liability only if she did not receive a statutory notice of deficiency for the tax year at issue or otherwise have an opportunity to dispute it. See IRC § 6330(c)(2)(B). Although Appeals concluded that Ms. Pazden both received a notice of deficiency and had a separate opportunity to dispute this before the Office of Appeals in 2013, the Tax Court needed to go no further than the first point.

Ms. Pazden plainly received the 2010 notice of deficiency, as evidenced by her August 30, 2013, letter to the Tax Court referencing the “Notice of Deficiency dated June 3, 2013.” Accordingly, she was precluded from contesting her 2010 liability before Appeals during her CDP hearing and before the Tax Court. See IRC § 6330(c)(2)(B); Goza v. Commissioner, 114 T.C. 176, 182-83 (2000).

An Interesting Procedural Issue—Audit Reconsideration and a Second Notice of Deficiency

Pazden Second ChanceMs. Pazden nonetheless argues that her audit reconsideration request and the subsequent examination should have triggered a second notice of deficiency for tax year 2010, giving her another opportunity to challenge the underlying liability. The IRS’ authority to issue a notice of deficiency, however, is predicated on the Secretary’s determining a deficiency in the taxpayer’s income tax. See IRC § 6212(a). The IRS here did not determine any additional tax deficiency in the wake of the audit reconsideration examination, and a second notice was not required.

Although the Tax Court does not go any further, it is interesting to note that had a second notice of deficiency been issued, then the taxpayer would have been entitled to challenge the underlying liability. That’s a sneaky little approach to get your day in court on the merits of the underlying liability.

(T.C. Memo. 2021-108) Pazden v. Commissioner

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