Opinion
793-22L
03-08-2024
ACCOLADE CONSTRUCTION GROUP, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber Judge
This collection due process (CDP) case was continued from the Court's January 22, 2024, New York, New York, trial session. On November 17, 2023, respondent filed a Motion for Summary Judgment, contending that there are no material facts in dispute and that he is entitled to judgment sustaining the proposed collection actions. Concluding that petitioner was not afforded an adequate opportunity to challenge its underlying tax liabilities for the years at issue, we will deny the Motion and remand this case to the IRS Independent Office of Appeals (Appeals) for further proceedings.
Background
The following facts are derived from the parties' pleadings, Motion papers, Declarations, and attached Exhibits, including the administrative record of the CDP proceeding. See Rule 121(c). Petitioner was a construction company with its principal place of business in New York. It ceased operations in 2018 and is now defunct. It filed delinquent employment tax returns for various periods during 2014-2018 but failed to pay the taxes reported on those returns. The IRS duly assessed the reported tax liabilities, generating an assessed liability for the years in issue (including additions to tax and penalties) that exceeds $85,000.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. We round monetary amounts to the nearest dollar.
On February 9, 2021, respondent mailed petitioner a Letter 3172, Notice of Federal Tax Lien and Your Right to a Hearing (lien notice). On May 17, 2021, respondent mailed to petitioner Letter 1058, Final Notice of Intent to Levy and Your Right to a Hearing (levy notice). Petitioner timely submitted Forms 12153, Request for a Collection Due Process or Equivalent Hearing. In each hearing request petitioner challenged its underlying tax liability and urged its entitlement to a collection alternative. It contended that it had "reasonable cause" for the delinquent filing of its Forms 940 and 941, as well as for non-payment of the employment taxes, because the general contractor for which it worked created cash flow shortfalls for petitioner by failing to pay invoices that culminated in the general contractor assuming petitioner's payroll. It contended that it was entitled to currently not collectible (CNC) status, or to another collection alternative, because it was a defunct corporation with no assets or income.
Petitioner's case was assigned to a settlement officer (SO) in the IRS Independent Office of Appeals (Appeals). On July 13, 2021, the SO sent petitioner Letter 4837, Appeals Received Your Request for a CDP Hearing. Therein the SO informed petitioner that it was ineligible to dispute its underlying liability because it had reported the employment tax liabilities on its returns.
A single CDP hearing was convened to address the levy and lien notices. On December 27, 2021, the SO issued petitioner a notice of determination sustaining the collection actions. Although petitioner was defunct, the notice denied its request for CNC status because its balance sheet showed "accounts receivable" that the SO thought might be collectible. In the notice the SO repeated her position that petitioner "may not dispute the liability within the [CDP] hearing" because "[t]hese assessments are the result of self-filed returns."
Petitioner timely petitioned this Court. It alleged that the IRS had erred in determining that it was ineligible for CNC status, in declining to withdraw the Federal tax lien, and in failing to collect the liabilities at issue from "other responsible persons." Petitioner also alleged that the SO had erroneously "denied petitioner's request to challenge the underlying liabilities because they were self-reported."
On August 30, 2022, respondent filed a motion for summary judgment (First Motion). Respondent admitted that the SO had erred in telling petitioner that it could not challenge its underlying tax liability. But he contended that the SO's error was "inconsequential" because petitioner "did not, in fact, challenge the existence or amount of the underlying liabilities" during the CDP hearing.
On October 7, 2022, petitioner filed an Objection to the First Motion, reiterating its contention that the SO had improperly refused to consider its underlying liability challenge. In its Objection petitioner referenced those parts of its hearing requests in which it contended that it had "reasonable cause" for failing to timely file and pay. It asked the Court to deny the First Motion and remand the case to Appeals for further consideration.
By Order served August 14, 2023, another Division of this Court denied the First Motion. It found that there existed a genuine dispute of material fact as to whether petitioner was afforded the opportunity to challenge the existence or amount of its underlying tax liabilities. See Rule 121(a)(2); § 6330(c)(2)(B). However, rather than remanding the case, that Order returned the case to the general trial docket.
On October 1, 2023, petitioner's counsel moved to withdraw from the case. Counsel represented that it was engaged in litigation against petitioner's sole shareholder for nonpayment of legal fees, creating a conflict of interest that rendered further representation of petitioner impossible. We granted that motion. No other attorney has entered an appearance for petitioner.
On November 17, 2023, respondent filed a second Motion for Summary Judgment (Second Motion), which is currently before the Court. The Second Motion makes no new factual allegations and is substantially identical to the First Motion. Unaided by counsel, petitioner did not respond to the Second Motion by our December 22, 2023, deadline. However, because respondent's two Motions are substantially identical, we will treat petitioner's Objection to the First Motion as responsive to both.
Discussion
A taxpayer may challenge the existence or amount of its underlying tax liability in a CDP case only if it "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute [it]." § 6330(c)(2)(B). "[T]he term 'underlying tax liability' . . . include[s] any amounts owed by a taxpayer pursuant to the tax laws," including a tax deficiency, any penalties and additions to tax, and statutory interest. Katz v. Commissioner, 115 T.C. 329, 338-41 (2000); Duy Duc Nguyen v. Commissioner, T.C. Memo. 2020-97, 119 T.C.M. (CCH) 1639, 1640.
"A taxpayer is precluded from disputing the underlying liability if it was not properly raised in the CDP hearing." Thompson v. Commissioner, 140 T.C. 173, 178 (2013). However, a taxpayer's failure to present evidence on this point may be excused if the Appeals officer erroneously informs the taxpayer that it is ineligible to present an underlying liability challenge, or if the Appeals officer otherwise improperly refuses to consider such a challenge. In that event, the issue is preserved if the taxpayer files a Tax Court petition that includes a challenge to its underlying tax liability. See Perkins v. Commissioner, 129 T.C. 59, 64 (2007); Shaddix v. Commissioner, T.C. Memo. 2022-11, 123 T.C.M. (CCH) 1056, 1059-60.
The SO refused to consider petitioner's underlying liability challenge, including its "reasonable cause" arguments, basing her refusal on the fact that the employment tax liabilities "were self-reported." Respondent has conceded (and we agree) that the SO erred in so concluding. As respondent notes, "[t]axpayers may, in fact, challenge underlying liabilities based on assessments from self-filed returns." See Montgomery v. Commissioner, 122 T.C. 1, 7-9 (2004).
Respondent nevertheless contends that the SO's error was "inconsequential" because petitioner "did not, in fact, challenge the existence or amount of the underlying liabilities" during the CDP hearing. But as noted above, a taxpayer's failure to present evidence regarding its underlying liability may be excused where (as here) the SO affirmatively refuses to consider that issue. In that event, the issue is preserved for judicial review under section 6330(c)(2)(B) so long as the taxpayer advances an underlying liability challenge in its petition to this Court.
The Petition in this case plainly alleged that the SO "erred in not allowing [petitioner] to dispute the underlying liabilities." Although the Petition does not contain an extensive description of the grounds upon which petitioner intended to base its liability challenge, we think its intentions were sufficiently clear given the content of its hearing requests. In those requests petitioner explained its intention to raise a "reasonable cause" defense to the assertion of penalties and additions to tax. Because we give broad construction to allegations raised in pleadings, see Rule 31(d) and Gray v. Commissioner, 138 T.C. 295, 298 (2012), we will treat the Petition's allegation concerning its underlying liability challenge as encompassing the "reasonable cause" arguments advanced in its hearing requests.
Finding that petitioner was denied an adequate opportunity to present its underlying liability challenge, we will deny respondent's Second Motion for summary judgment. In this situation remand is appropriate where a supplemental hearing would be "necessary or productive." Lunsford v. Commissioner, 117 T.C. 183, 189 (2001). We think it would be productive to return this case to Appeals for its consideration as to whether petitioner was entitled to relief from the penalties and additions to tax. Upon remand Appeals should also reconsider petitioner's entitlement to CNC status, given the fact that it is a defunct corporation whose only assets appear to consist of accounts receivable that arose before 2018, the collectability of which may now be doubtful.
In consideration of the foregoing, it is
ORDERED that respondent's Motion for Summary Judgment, filed November 17, 2023, is denied. It is further
ORDERED that this case is remanded to the IRS Independent Office of Appeals for a supplemental hearing consistent with this Order. It is further
ORDERED that respondent shall offer petitioner a supplemental administrative hearing at a reasonable and mutually agreeable date and time, but no later than July 8, 2024. It is further
ORDERED that respondent shall file a status report as to the then-current status of the case by August 5, 2024. It is further
ORDERED that jurisdiction of this case is retained by the undersigned. It is further
ORDERED that, if and when any supplemental notice of determination is issued to petitioner, respondent at that time shall file a status report and attach thereto a copy of the supplemental notice of determination.