The Tax Court in Brief – February 28, 2022 – March 4, 2022

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Tax Litigation: The Week of February 28, 2022, through March 4, 2022

• Estate of Levine v. Comm’r, 158 T.C. No. 2 | February 28, 2022 | Holmes, J. | Dkt. No. 13370-13
• Shaddix v. Comm’r | TC Memo. 2022-11 | February 28, 2022 | Lauber, J. | Dkt No. 12683-20L

Estate of Kazmi v. Comm’r, T.C. Memo. 2022-13| March 1, 2022 | Paris, E. | Dkt. No. 5013-18L

Opinion

Short Summary: In this collection due process (CDP) case, the Tax Court sustained a notice of determination approving a notice of federal tax lien (NFTL) filed with respect to trust fund recovery penalties (TFRPs) assessed against petitioner Mohammad Kazmi. In his request for a CDP hearing and in his petition seeking review of the notice of determination, Kazmi made only one claim: that he was not liable for the TFRPs at issue because he was not a responsible person who willfully failed to pay over withholding taxes pursuant to IRC § 6672. Applying IRC § 6330(c)(2)(B), the appeals settlement officer determined that Kazmi was precluded from raising this liability issue during the CDP hearing because Kazmi received a properly mailed Letter 1153 providing him with a pre-assessment opportunity to dispute the merits of the proposed TFRPs at an Appeals conference. The Court agreed that the Letter 1153 gave Kazmi a “prior opportunity” for purposes of section 6330(c)(2)(B) and sustained the notice of determination for the NFTL filing without considering the merits of Kazmi’s liability claim.

Primary Holdings:

• Kazmi’s challenge to his status as a “responsible person” who is subject to TFRPs for willfully failing to collect and pay over employment taxes constituted a challenge to his underlying liability for the TFRPs within the meaning of section 6330(c)(2)(B).
• Kazmi’s receipt of a properly mailed Letter 1153, notice of proposed assessment of TFRPs and right to administrative hearing to dispute the proposed assessments, constituted a prior opportunity to dispute his liability for the TFRPs, thus barring him from challenging the liability during a subsequent CDP hearing and before the Tax Court in a judicial review proceeding under section 6330(d). IRC §§ 6330(c)(2)(B), 6672(a).

Key Points of Law:

• When wages are paid to an employee and the employer does not pay over the funds withheld from the employee’s pay, the IRS has no recourse against the employee. But, Section 6672 allows the IRS to impose a TFRP on certain persons who fail to withhold and pay over trust fund taxes. The penalty is equal to the total amount of tax not paid over.
• Section 6672(a) imposes the TFRP on any person required to collect, account for, and pay over any tax imposed under the Code who “willfully” fails to collect, account for and pay over such tax.
• The term “person” under section 6672, generally referred to as “responsible person,” includes an officer or employee of a business who is under a duty to collect, account for, and pay over withholding tax. See IRC § 6671(b). Factors to determine “responsible person” status include: owning interest in the business, holding corporate office, serving on the board of directors, having authority to sign checks, and having control over corporate financial affairs.
• A responsible person will be held liable for a TFRP only where the failure to pay the withholding tax was willful. IRC § 6672. ‘Willfulness’ is typically proven by evidence that a responsible person paid other creditors when withholding taxes were due to the federal government.
• Before assessing a proposed TFRP against an alleged responsible person, the IRS must notify the taxpayer in writing that it proposes to assess the TFRP. IRC § 6672(b). IRS Letter 1153 serves this purpose. Letter 1153 also confers appeals rights. A request for an administrative hearing before Appeals to dispute the proposed TFRP assessment must be mailed by the 60^th day (75^th day if the letter was addressed outside of the United States) from the date the IRS mailed the Letter 1153 to the taxpayer or the date of personal delivery.
• Section 6672(b) specifies that the required notice must be mailed to an address as determined under IRC § 6212(b) (the taxpayer’s “last known address”) or in person, and the IRS may not assess a TFRP for at least 90 days after mailing or delivering the notice required under section 6672(b). IRC § 6672(b)(3)(A).
• IRC § 6330(c)(2)(B) bars a taxpayer from raising in a CDP hearing an underlying liability challenge if he had a prior opportunity to challenge the liability.
• A properly mailed Letter 1153, which confers appeals rights, constitutes a prior opportunity to dispute liability for TFRPs.
• A taxpayer’s challenge to his status as a responsible person subject to a TFRP under IRC § 6672 constitutes an underlying liability challenge for purposes of section 6330(c)(2)(B).
• In reviewing a determination under section 6330(c)(2), the Court considers only issues properly raised during the CDP hearing. Treas. Reg. § 301.6320-1(f)(2), Q&A-F3, 301.6330-1(f)(2); Q&A-F3.

Insights: This case reminds us that the Tax Court is not a court of equity. In previous CDP cases involving a TFRP dispute, the Tax Court reached a similar result. Generally, the Court will follow precedent, even when it leads to a seemingly harsh result. Kazmi was a sympathetic taxpayer. He was a part-time bookkeeper for a company that failed to pay over employment taxes. He was not an officer of the company; he had no check writing authority and no authority to make payments on behalf of his employer. His employer Kazmi made a strong argument that he was not a responsible person who willfully failed to pay over withheld taxes. However, noting that the Tax Court is a court of limited jurisdiction, the Court did not reach that issue.

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