On February 28, 2022, the Tax Court issued a Memorandum Opinion in the case of Shaddix v. Commissioner (T.C. Memo. 2022-11). The primary issue presented in Shaddix was whether the IRS abused its discretion in upholding the filing of a notice of federal tax lien by denying the petitioner the ability to challenge his underlying liability.
Held: In a rare abuse of discretion victory for a taxpayer, the Tax Court in Shaddix v. Commissioner actually held that the IRS did, in fact, abuse its discretion.
Background to Shaddix v. Commissioner
The petitioner had liabilities of $39,000 for the tax years 2013-2016. Whether he self-reported these liabilities, or the IRS pulled them from a hat is anyone’s guess, but Judge Lauber assumed for purposes of the IRS’s motion for summary judgment that they were self-reported. In support of said motion for summary judgment, the IRS attached account transcripts with entries for each year stating, for what it’s worth, “Return Filed & Tax Assessed.”
Whether the account transcripts in Shaddix v. Commissioner were detailed enough to include the IRS muttering the phrase, “Gotcha, sucker,” is anyone’s guess. Judge Lauber does not expound on this point, which is a rare instance of Lauberian economy.
The transcripts have no indication that the petitioner’s returns were examined or that any additional tax was assessed after the returns were filed. Most importantly, the record includes no evidence that the IRS issued the petitioner a notice of deficiency for any relevant year. Notwithstanding this administrative peccadillo, in March 2018, the IRS sent the petitioner a Notice of Federal Tax Lien Filing and Your Right to a Hearing, and he requested a Collection Due Process (CDP) hearing on a Form 12153, Request for a Collection Due Process or Equivalent Hearing.
The IRS initially viewed his hearing request as untimely, but the petitioner was able to show that his request, sent via certified mail, was delayed due to U.S. Postal Service error. The IRS ultimately agreed to treat his hearing request as timely filed.
And this, my friends, is why you ALWAYS use certified mail, return receipt requested. Carrier pigeons just don’t hold the same authoritative weight in court as a stamped receipt—in large part due to the language barrier between said pigeon’s cooing and the Tax Court’s reporter.
Assignment to Settlement Officer Karen the Asshat and IRS Shenanigans
A CDP appeal was scheduled for Halloween 2018. The petitioner called in as scheduled, and the settlement officer—who was Briefly Taxing’s old friend SO Karen the Asshat—began the conference by stating to the petitioner that she had “reviewed internal IRS records and determined that the assessments for 2013–2016 were valid.” She further informed the petitioner that he was not entitled to challenge his underlying liability for any year at issue.
Karen the Asshat’s determination that he could not challenge his underlying liabilities “seems to have been based on her belief that the petitioner’s tax returns had been audited.” She wrote in her notes:
He admits to participating in the audit but states he has more receipts to be considered. [The petitioner] states he does owe [some tax] but not the amount stated.
Editor’s Note: “Participating” in an audit does not a prior opportunity to challenge your liability make.
The petitioner submitted an offer-in-compromise based on doubt as to collectability using a Form 656, Offer in Compromise, proposing a lump sum offer of $4,400. In support of his OIC, he submitted a Form 433-B, which included information about Sweetwater Holdings, Inc. (Sweetwater), an S corporation wholly owned by the petitioner. It seems that as much as Karen the Asshat sucked at her job, Sweetwater sucked at whatever the hell it did (or didn’t do), as Sweetwater reported a net operating loss in 2017 of nigh $715,000.
Critically, the offer specialist (a close cousin of SO Karen the Asshat on her mother’s side), determined that the amount the petitioner offered—$4,400—was sufficient given his current financial circumstances. But bucking the old adage that you can’t get blood from a turnip, the offer specialist insisted that the petitioner execute a collateral agreement waiving his right to claim NOLs and unused investment credits related to Sweetwater. The agreement recited that it was intended to supply “additional consideration for acceptance of [the petitioner’s] offer in compromise,” which, if you’re keeping score at home, did not require “additional consideration” based on the taxpayer’s financial circumstances.
But here we are.
The proposed collateral agreement specified the amount of NOLs to be waived and the time when this waiver would affect the petitioner’s future tax returns. The NOLs to be waived would be limited to the 2013–2017 liabilities to be compromised, minus the $4,400 paid, plus statutory additions (i.e., interest and additions to tax) that would become due on the 2013–2017 liabilities if there were no compromise. And the waived NOLs would come at the front, rather than at the back, of the line. Judge Lauber explains succinctly the effect of this collateral agreement:
In other words, the petitioner would be required to pay future taxes in an amount corresponding to the waiver amount, and he would then be permitted to use the balance of his NOL carryforwards on subsequent tax returns.
Needless to say, the petitioner declined to acquiesce to the IRS’s request that he sign the collateral agreement.
The case was sent back to appeals and was assigned to a second settlement officer, who we’ll call Reggie the Dunderhead. Ol’ Reggie determined that all was copacetic with the rejection, and he sent the petitioner a letter setting up a telephone conference. To really hit the point home, the letter actually stated that the petitioner “may not dispute the liability in your CDP hearing because ___________.”
Then, in the space where one would have expected [Reggie the Dunderhead] to explain why the petitioner could not dispute his liability, the following typographical error or unfinished phrase appears: “[en.”
Nonetheless, the petitioner (with the patience of a saint) attended the telephone conference. He stated that he did not object to the waiver of NOLs in an amount equal to the liabilities being compromised (minus $4,400). However, he did object to having the waiver extend to “statutory additions that would become due in the absence of the compromise.”
Because you know, he was compromising the liability…so there would not be any statutory additions…because…compromise…
Further, the petitioner urged that the NOLs being waived should go to the back, rather than the front, of the line. In other words, he contended (appropriately) that he should be allowed to use his reduced NOL balance to begin offsetting his future tax liabilities immediately.
Much to Karen the Asshat’s delight, Reggie the Dunderhead rejected the OIC as “not in the best interest of the Government.” The notice of determination that the IRS sent to the petitioner recited Appeals’ conclusion that the petitioner’s offer “was acceptable with the collateral agreement.” However, the notice went further, to really drive the idiocy point home:
Appeals asked you to review the agreement, especially item 5 which stated the amount of tax paid as a result of the waiver would not exceed an amount of the liability compromised along with statutory additions. You still refused to sign the agreement.
Further, even despite SO Karen the Asshat’s notes recounting the petitioner’s assertions that (1) he owed some tax “but not the amount stated” and (2) he “ha[d] more receipts to be considered,” the notice of determination asserted:
You did not dispute your liability.
At this point, we credit the petitioner for not going completely postal. Your fearless editors cannot guarantee that we would have kept our collective cool at this juncture. As Yogi Berra once said, “When you come to a fork in the road, take it.” Had Yogi been faced with Karen the Asshat and Reggie the Dunderhead, he would *likely* have taken said fork and repeatedly jabbed it menacingly in the direction of the settlement officers (aiming for the tender bits).
The Petition in Shaddix v. Commissioner
The petitioner timely petitioned the Tax Court for review. He disputed the rejection of his OIC, contending that Reggie the Dunderhead should have limited the NOL waiver to the liabilities being compromised (less $4,400) and should have permitted him to begin claiming NOL carryforward deductions (as thus reduced) immediately. He urged that the collateral agreement, upon which Reggie the Dunderhead insisted, was fundamentally unfair, asserting that it “puts me in a worse position than I would be without it” by “requiring me to immediately begin to pay additional [penalties and interest] that I would not otherwise owe.” Indeed, it would…
You’ve Got a Lot of Damn Gall, IRS
The IRS argued that the petitioner’s underlying tax liabilities are not at issue because he failed to challenge those liabilities during the CDP hearing.
That right there is chutzpah…the same chutzpah that you might find in a young psychopath, who murdered his family with a hatchet and then sought clemency on the basis that he was an orphan.
Dispatching the Prior Opportunity Argument
A taxpayer may challenge his underlying liability in a CDP case if he “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute” it. If these conditions are met, a taxpayer may challenge a liability EVEN IF HE REPORTED IT ON HIS OWN DAMN RETURN.
Judge Lauber was quite diplomatic at this stage:
Evidently believing that the petitioner had participated in a prior IRS audit, [Karen the Asshat] referred him instead to audit reconsideration. But in opposing summary judgment, the petitioner avers that he never “discussed anything about ‘participating in the audit.’”
There is no indication in the petitioner’s account transcripts or elsewhere in the record (apart from the assertion in [Karen the Asshat’s] notes) that the IRS [actually] examined his 2013–2016 returns. There is likewise no evidence that the petitioner received a notice of deficiency for 2013–2016 or that he had any other opportunity (e.g., at a prior Appeals conference) to dispute those liabilities. In short, [Karen the Asshat] appears to have given the petitioner incorrect information, and [Reggie the Dunderhead] appears to have perpetuated that error by reiterating [Karen the Asshat’s] conclusion and leaving unfinished the portion of his letter explaining why an underlying liability challenge was not possible.
Error in Refusing to Consider Liability = Liability Properly at Issue in CDP Hearing
The Tax Court observed that “when an Appeals officer errs in refusing to consider a taxpayer’s underlying liability challenge, that matter was ‘properly at issue’ in the CDP hearing.” Thus, “[w]here a taxpayer is incorrectly advised at a CDP hearing that [it] had a prior opportunity to contest [its] underlying liability,” the Tax Court can and will consider the taxpayer’s underlying liability.
Because the administrative record did not support Karen the Asshat’s assertion that the petitioner was not entitled to challenge his underlying tax liabilities or the assertion in the notice of determination that the petitioner “did not dispute [his] liability,” the Tax Court remanded the case to Appeals for a supplemental CDP hearing.
(T.C. Memo. 2022-11) Shaddix v. Commissioner
- Dear Judge Lauber is not well known around these parts for his brevity… ↑
- IRC § 6330(c)(2)(B). ↑
- See Montgomery v. Commissioner, 122 T.C. 1, 9 (2004); Treas. Reg. § 301.6320-1(e)(1). ↑
- See Perkins v. Commissioner, 129 T.C. 58, 67 (2007). ↑
- See Mason v. Commissioner, 132 T.C. 301, 320 (2009). ↑
- See Lepore v. Commissioner, T.C. Memo. 2013-135. ↑
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