Tax Court in Brief | Middleton v. Commissioner | Trust Fund Recovery Penalty Assessment and Collection Due Process

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Apr 14, 2022

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Tax Litigation: The Week of April 4th, 2022, through April 8th, 2022

Middleton v. Comm’r, T.C. Memo. 2022-28 | April 4, 2022 |Kerrigan, J. | Dkt. No. 8158-19L

Short Summary: In 2007, Lineation Marketing Co. (Lineation) was a business entity. Luke Middleton was the managing officer and the only bank account signer for Lineation. In 2016, Lineation dissolved. The IRS undertook the collection of employment tax liabilities of Lineation for prior tax years. A Trust Fund Recovery Penalty Assessment (TFRP) was approved and notices of TFRP were sent to Middleton. After years of procedural due process, collections notifications, settlement efforts, and determinations as to the underlying tax liability, an IRS settlement officer verified all requirements of administrative procedures were met, and the Office of Appeals sustained the proposed levy action with respect to the TFRPs in issue. Middleton challenged the determination of his tax liability.

Primary Holdings:

The Tax Court may consider an underlying tax liability on review only if the taxpayer properly raised the issue during the CDP hearing. Here, appropriate notices of tax liability and of due process rights were mailed to Middleton at his last known address, and he did not respond to the letters or dispute his receipt of them during his administrative proceedings with the Office of Appeals. The record showed that all procedural and review requirements were met by the IRS and its settlement officers. The Office of Appeals did not abuse its discretion.

Key Points of Law:

Where a taxpayer’s underlying liabilities are not at issue, the Tax Court’s review of a notice of determination is for abuse of discretion. SeeSego v. Comm’r, 114 T.C. 604, 610 (2000). An abuse of discretion occurs if the Office of Appeals exercises its discretion “arbitrarily, capriciously, or without sound basis in fact or law.” Woodral v. Comm’r, 112 T.C. 19, 23 (1999). The settlement officer must consider the following during a CDP hearing: (1) whether the requirements of any applicable law or administrative procedure have been met; (2) any issues appropriately raised by the taxpayer; and (3) whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary. 26 U.S.C. § 6330(c)(3).
Section 6672(a) imposes a penalty for willfully failing to collect, account for, and pay over income and employment taxes of employees. This penalty is commonly referred to as a TFRP (for Trust Fund Recovery Penalty). These penalties are assessed and collected in the same manner as taxes against a “responsible person,” being a person who is “an officer or employee of a corporation . . . who as such officer, [or] employee . . . is under a duty to perform,” the duties to which section 6672 refers. 26 U.S.C. § 6671(a), (b).
Under certain circumstances a taxpayer may raise challenges in a CDP proceeding to the IRS’s determination of his or her underlying tax liabilities, including challenges to his or her status as a responsible person. See 26 U.S.C. § 6330(c)(2)(B). A taxpayer may challenge in a CDP proceeding the amount of the tax assessed by the IRS if the taxpayer did not receive a statutory notice of deficiency or did not otherwise have a prior opportunity to dispute the tax liability. at § 6330(c)(2)(B).
Where the assessments against the taxpayer are TFRPs, the IRS does not issue or mail a notice of deficiency. Instead, the IRS must provide the taxpayer with a notice of the TFRPs before assessment. at § 6672(b)(1). A Letter 1153 provides a taxpayer the opportunity to dispute liability for a TFRP by filing an appeal with the IRS. If a taxpayer receives a Letter 1153 and takes (or fails to take) the opportunity to dispute the underlying TFRP liability, then the taxpayer is precluded from challenging the underlying tax liability in a later CDP hearing. See 26 U.S.C. § 6330(c)(2)(B); Treas. Reg. § 301.6330-1(f)(2), Q&A-F3. Documentary evidence of mailing the Letter 1153 to the taxpayer’s last known address is sufficient that a notice of deficiency was properly mailed. See 26 U.S.C. §§ 6672(b)(1), 6212(b).
Where a taxpayer alleges that he or she never received a Letter 1153, the Appeals officer must examine underlying documents in addition to the tax transcripts, such as the taxpayer’s return, a copy of the notice of deficiency, and the certified mailing list.
When a settlement officer gives a taxpayer an adequate timeframe to submit requested items, it is not an abuse of discretion to move ahead if the taxpayer fails to submit the items within that timeframe. Pough v. Comm’r, 135 T.C. 344, 352 (2010).

Insights: A taxpayer in a collection due process case that involves a TFRP dispute must timely and appropriately challenge the “responsible person” status. A challenge to responsible person status is a challenge to the underlying tax liability. If the status as responsible person is not timely challenged, the taxpayer will be precluded from challenging the underlying TFRP tax liability established by the taxpayer’s status as deemed “responsible person.” The term “responsible person” may be broadly applied by the Tax Courts, so taxpayers who receive a notice of TFRP tax liability with respect to an employing entity should be prepared to show that the taxpayer does not have the duties referenced in Section 6672.

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