The Tax Court in Brief

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation: The Week of October 18 – October 22, 2021

Goldberg v. Comm’r, T.C. Memo. 2021-119 | October 19, 2021 | Paris, J. | Dkt. No. 12871-18L

Short Summary:  Mr. Goldberg was an investor and partner in two oil and gas partnerships.  The two partnerships were subject to TEFRA audits, and the IRS timely assessed taxes and penalties related to the TEFRA audits against Mr. Goldberg.  Later, the IRS issued notices of federal tax lien (NFTL) with respect to the taxes and penalties.  Mr. Goldberg failed to timely challenge the NFTL.  Later, after the IRS issued a notice of intent to levy, Mr. Goldberg timely filed a request for a Collection Due Process (CDP) hearing.  During the CDP hearing, Mr. Goldberg challenged the amount of taxes and penalties that he owed.

Key Issues:

  • Whether Mr. Goldberg is prohibited from challenging his underlying tax liabilities in the CDP hearing?

Primary Holdings:

  • Goldberg is prohibited from challenging his underlying tax liabilities in this CDP hearing because: (1) he failed to raise challenges to his underlying tax liabilities in a timely CDP hearing with respect to the NFTL; and (2) the FPAAs were validly issued, and Mr. Goldberg had actual notice of the TEFRA litigation and neither participated in nor made section 6223(e) elections to convert the proceedings to partner-level challenges.

Key Points of Law:

  • Summary judgment serves to “expedite litigation and avoid unnecessary and expensive trials.” Peach Corp. v. Comm’r, 90 T.C. 678, 681 (1988).  It is not, however, a substitute for trial and should not be used to resolve genuine disputes over issues of material fact.  Vallone v. Comm’r, 88 T.C. 794, 801-05 (1987).
  • Section 6630(d)(1) grants this Court jurisdiction to review a determination made by Appeals in a levy case. If the underlying tax liability is properly at issue, the Court reviews the determination of liability de novo.  Goza v. Comm’r, 114 T.C. 176, 181-82 (2000).  De novo review means that the Court reviews “without deferring to any prior administrative adjudication” and “entirely independent of the administrative proceedings.”  Morris v. Rumsfeld, 420 F.3d 287, 292 (3d Cir. 2005).
  • In Davidson v. Comm’r, T.C. Memo. 2019-26, aff’d, 805 F. App’x 259 (5th Cir. 2020), the Tax Court addressed whether a taxpayer may contest his underlying income tax liability in a CDP case to the extent that this liability was based on computational adjustments resulting from a TEFRA proceeding. See also Hudspath v. Comm’r, T.C. Memo. 2005-83, aff’d, 177 F. App’x 326 (4th 2006).  The Tax Court held that, pursuant to section 6330(c)(2)(B), a taxpayer is precluded from challenging the existence or amount of an underlying income tax liability where the taxpayer had the opportunity in a TEFRA proceeding to challenge the partnership items that were reflected on the FPAA.  Davidson, supra.
  • TEFRA requires that all partnership items be determined in a single partnership-level proceeding unless a partner makes a timely election to opt out of the TEFRA proceeding by having his items converted to nonpartnership items. 6221, 6223(e)(3).  In the absence of a timely election, the determination of partnership items in a TEFRA proceeding is binding on the partners and may not be challenged in a later partner-leve proceeding.  Sec. 6230(c)(4).
  • The Seventh Circuit (to which an appeal of this case would lie absent a stipulation to the contrary) has held that a challenge to the period of limitations is a challenge to the underlying liability which must be raised at the partnership level (e., in a TEFRA proceeding). See Kaplan v. U.S., 133 F.3d 469 (7th Cir. 1998).
  • Section 6223(a) provides that the “Secretary must give partners notice of beginning and completion of administrative proceedings [(NBAP)]. The Secretary shall mail to each partner whose name and address is furnished to the Secretary notice of . . . the beginning of an administrative proceeding at the partnership level with respect to a partnership item.”  See Taurus FX Partners, LLC v. Comm’r, T.C. Memo. 2013-168.  The Commissioner is required to issue an NBAP at least 120 days before he issues an FPAA.  6223(d)(1).
  • The IRS’ failure to timely issue an NBAP does not automatically convert partnership items to nonpartnership items nor invalidate an otherwise valid FPAA. See Bedrosian v. Comm’r, 143 T.C. at 95.  Rather, such a failure by the IRS gives rise to certain statutory rights under section 6223(e).  Bedrosian v. Comm’r, 143 T.C. at 95-96.  That section allows taxpayers to whom the IRS untimely mails notice of a proceeding, or fails to mail such notice, to opt to have their partnership items treated as nonpartnership items, so long as the TEFRA proceeding is still ongoing.
  • In reviewing for abuse of discretion, the Court must uphold the settlement officer’s determination unless it is arbibrary, capricious, or without sound basis in fact or law. See Murphy v. Comm’r, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st 2006).
  • Section 6330(c)(2)(B) provides that the existence and amount of the underlying tax liability can only be contested at a CDP hearing if the taxpayer did not receive a notice of deficiency for the tax in question or did not otherwise have an earlier opportunity to dispute such tax liability. See Goza v. Comm’r, 114 T.C. at 180-81.

Insight: The Goldberg case provides a helpful reminder to taxpayers to challenge the existence or amount of any underlying liabilities at the first CDP hearing.  If a taxpayer waits until the second CDP hearing to make such a challenge, the taxpayer will likely be barred from presenting the issue under federal tax law.

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