Congress keeps expanding the Tax Court’s subject matter jurisdiction. A recent expansion came in 2015 in the cutesy-cutesy named Fixing America’s Surface Transportation Act (FAST Act, get it?), 129 Stat. 1312. There Congress created §7345 as a revenue offset. That new section authorizes the IRS to periodically give lists of seriously delinquent taxpayers to the State Department, who is then supposed to deny their passport applications or even yank their passports. Taxpayers upset at the IRS ratting them out to the State Department can seek judicial review either in the Tax Court or in a federal district court.
Section 7345 is simple in theory but complex in execution. Last week’s case of Vivian Ruesch v. Commissioner, 154 T.C. No. 13 (June 25, 2020) (Judge Lauber) teaches that the Tax Court’s §7345 jurisdiction is like the Cheshire Cat: it can appear and disappear multiple times with respect to the same taxpayer and the same tax liabilities. Details below the fold.
The Basic Structure of Certification and De-Certification
The idea behind §7345 is simple. If the government threatens to take your passport, you are more likely to pay up.
The operation of §7345, however, is complex. First, it involves coordinating actions of two federal agencies. Section 7345(a) requires the IRS to send certifications to the State Department when an individual taxpayer has “a seriously delinquent tax debt.” Then, leaving the Tax Code, 22 U.S.C. §2714a(e) says that (1) the State Department must deny any passport applications made by the certified delinquent taxpayer, and (2) the State Department may revoke any existing passports. But it’s up to the agencies to work out a joint process.
A TIGTA Report from September 2019 describes the initial process they worked out:
“If the State Department receives an application for a passport from a taxpayer who has been certified by the IRS, it sends the taxpayer a notice and holds the application for 90 calendar days. This is to allow the taxpayer time to make full payment of the tax debt, enter into a satisfactory payment alternative with the IRS, or resolve any erroneous certification issues to avoid their passport application being denied. For taxpayers who resolve their tax debt, the IRS reverses the certification (decertifies) and notifies the State Department. If the applicant has not been decertified by 90 calendar days, the State Department will notify the taxpayer that the passport application or renewal is denied due to the seriously delinquent tax debt not being resolved.”
A second level of complexity comes in that phrase I keep putting scare quotes around. The definition of “a seriously delinquent tax debt” is very complex, containing both statutory and non-statutory rules.
Section 7345(b)(1) defines the term. It says that a tax debt crosses the threshold into seriously delinquent territory when the assessed tax liability---including penalties and interest---goes over $50,000 (indexed for inflation). But the statute throws a ton of qualifiers around exactly which assessed but unpaid tax liabilities the IRS is supposed to count. First, the very definition in subsection (b)(1) contains exclusions. What counts is only assessed and unpaid liabilities for which “(i) a notice of lien has been filed pursuant to section 6323 and the administrative rights under section 6320 with respect to such filing have been exhausted or have lapsed, or (ii) a levy is made pursuant to section 6331.” §7345(b)(1)(C).
Then subsection (b)(2) creates three more exclusions. Tax liabilities that are covered by a current installment agreement or OIC don’t count. §7345(b)(2)(A). Tax liabilities for which the taxpayer has successfully triggered a CDP hearing don’t count. §7345(b)(2)(B). Tax liabilities from which the taxpayer has requested spousal relief under §6015 don’t count. §7345(b)(2)(C).
Naturally, Congress did not (and could not) possibility think through what other situations should disqualify an assessed but unpaid tax debt from being counted as “a seriously delinquent tax debt.” For example, sending over a certification for a tax debt that is the subject of a bankruptcy action would likely violate the automatic stay. And if the idea behind excluding liabilities that are part of a NFTL CDP hearing is that a taxpayer is trying to work out payment, why then perhaps liabilities for which taxpayers are trying to work things out otherwise ought not to count.
Treasury has not issued regulations but the IRS has written extensive instructions to IRS employees on how to implement §7345. You can find them in IRM 220.127.116.11. Section 18.104.22.168.4 lists eight different types of tax liabilities that usually won’t count (but sometimes will!), including CNC accounts, pending OICs and IAs, liabilities subject to the bankruptcy automatic stay, etc.
The third and most important factor complexifying the simple idea of §7345 is that a taxpayer’s tax debts fluctuate! Remember the idea: certification is to get taxpayers to pay up. So the statute also provides that when a taxpayer no longer has “a seriously delinquent tax debt” the IRS must send another certification to the State Department to decertify a taxpayer, if you will.
Notice the statutory phrase is in the singular. It says “the term ‘seriously delinquent tax debt’ means an unpaid, legally enforceable Federal tax liability of an individual.” (Emphasis added).
You might think that means each tax liability stands alone. So if a taxpayers owes $30,000 for 2017, 2018, and 2019, the taxpayer does not have a seriously delinquent tax debt. Reinforcing that singular idea is that one of the statutory exceptions references the NFTL CDP procedure which, of course, is keyed to each separate tax liability for which the IRS files an NFTL.
Nope. The IRS takes the position that the statutory term is cumulative of all a taxpayer’s tax liabilities, for all years and all types of taxes, not just the liability for one particular kind of tax for one particular period. Thus, for certification purposes, the IRM says, at that “The $50,000 threshold, which is indexed yearly for inflation, is the aggregate unpaid balance of assessment." 22.214.171.124.2(2). In my simplistic example above, that taxpayer would have a seriously delinquent tax debt within the statute’s meaning under the IRS’s interpretation because the aggregate liability exceeds the threshold.
I do not know why the IRS takes this interpretation nor will I predict how it will stand up in court. The IRS computers have a basic unit of accounting, called a tax module. A tax module is generally (although not always) tied to one kind of tax for one tax period. So all activity relating to your income taxes for 2018 would be tracked in one tax module and all activity relating to your income taxes for 2019 would be tracked in another. The IRS will put a computer Transaction Code (TC) in each of the three modules to reflect that the debt in each module has the status of being seriously delinquent.
The IRM adds later delinquencies to the total. That is, whenever the taxpayer incurs a new tax liability that would count towards a seriously delinquent status, the “the aggregate assessed balance is systemically recalculated” even if a prior certification has been sent to the State Department. IRM 126.96.36.199.7.1. The IRS will then send the taxpayer a new CP508C which may have a new total balance on it. But it will not send a new certification to the State Department because that taxpayer is already on the State Department’s list.
The same is not true for de-certification. That is, paying off some of the aggregate liability will not trigger a de-certification. IRM 188.8.131.52.2(2) says “Once the taxpayer is certified, paying the account below the $50,000 threshold (or the threshold amount indexed for inflation effective at the time of certification) will not result in decertification. Certification will not be reversed unless all certified modules for which notice of the certification have been sent have been fully satisfied (e.g. Status 12), become legally unenforceable, or meet the criteria for reversal in accordance with IRM 184.108.40.206.8.” (emphasis in the IRM)
You see how this process creates a one-way ratchet? New liabilities are added as a basis for certification, but paydown or the moving of listed liabilities into an exclusion category (OIC, bankruptcy, etc) does not trigger decertification. The IRS does not allow decertification until all certified tax modules meet the decertification criteria, whether statutory or IRM (payment, bankruptcy, combat zone, etc.). This is similar to how the IRS handles a NFTL. The IRS combines various liabilities into a single NFTL but will not withdraw an NFTL until all the liabilities listed are satisfied.
According to the 2019 TIGTA report, between January 18, 2018 and December 21, 2018 the IRS certified 306,988 taxpayers, involving 1,101,865 certified tax modules. During that same period the IRS decertified 68,764 taxpayers, involving 275,080 tax modules.
Notice CP508C and Judicial Review
At the same time the IRS certifies a tax debt as seriously delinquent, it sends the taxpayer a Notice CP508C. Section 7345(e) permits taxpayers who disagree with the certification to file suit either in federal district court or in Tax Court. The statute permits both courts to “determine whether the certification was erroneous or whether the Commissioner has failed to reverse the certification.” If the court determines the IRS either certified in error or failed to decertify, the statute “then the court may order the Secretary to notify the Secretary of State that such certification was erroneous.”
The CP508C seems to serve the same "ticket to the Tax Court" function as an NOD. Section 7345(e) says the taxpayer may petition for review only "after the Commissioner notifies [the taxpayer] under subsection (d)." The IRS uses CP508C to comply with the subsection (d) notice requirement.
Until last week there was some question on the breadth of judicial review. In Notice CC-2018-005, the IRS Office of Chief Counsel took the litigating position that taxpayers could not obtain judicial review of the merits of the assessed liabilities. That is, a certification would not be erroneous simply because the liabilities included in the certificate were wrongfully assessed. The review was limited to whether the IRS properly aggregated the proper liabilities to determine that the taxpayer has a “seriously delinquent tax debt.” Last week, the Tax Court agreed. When you combine that very limited scope of review with the third complexifying factor---the fluctuating factor---it makes the CP508C like the Cheshire cat: it’s a disappearing ticket to the Tax Court.
Facts of Ruesch
Ms. Ruesch apparently failed to file information returns required by §6058 for tax years 2005-2010. The assessed penalties aggregated to $160,000. In April 2018 Ms. Ruesch requested a CAP appeal in response to a CP504. It was mis-coded as a CDP request. In September 2018 the IRS filed an NFTL, sent Mr. Ruesch a CDP notice and she requested a CDP hearing. The IRS mis-coded that request as well. Notice that what we have here are six tax modules. It is not clear whether any one exceeds $53,000 (the current threshold).
In December 2018, as a result of these two IRS errors, the IRS certified the entire $160,000 as “a seriously delinquent tax debt” to the State Department. If the IRS had properly coded the CDP request, none of the liability would have counted, per the statutory exclusion in §7345(b)(2)(B).
Ms. Ruesch petitioned the Tax Court for review in April 2019, asking the Court to (1) reverse the penalty assessments, and thus (2) declare the certificate erroneous. During the pendancy of the case, the IRS flipped back and forth, decertifying the debt on May 13, 2019, then recertifying it on May 20, 2019, and sending Ms. Ruesch a new CP508C. Eventually, in September 2019, the Office of Chief Counsel attorney represented to the Tax Court that Ms. Ruesch “has now been offered the CDP hearing that she requested and that he underlying liability claims are currently pending before a settlement officer with the IRS Appeals Office in New York City.” (Op. at 7). Consistent with that representation, the IRS once again decertified the debt to the State Department. Poof! The ticket disappeared. The IRS therefore asked Judge Lauber to dismiss the case. He did.
Lesson 1: The Disappearing Jurisdiction
Ms. Ruesch argued that her CP508C ticket was still good even after the IRS decertified the debt. She argued that §7345 entitled her to a day in Tax Court to contest the merits of the §6058 assessment because that was the fundamental error in the original certification.
Judge Lauber made quick work of that by noting both the statutory text and context of that text.
As to the text, Judge Lauber noted that this jurisdiction was quite different than deficiency jurisdiction. Section 6214 gives the Tax Court the power to “redetermine” a proposed deficiency. It was also different than CDP jurisdiction where §6330(c)(2)(B) explicitly authorizes review of “challenges to the existence or amount of the underlying tax liability.” In contrast, “there is nothing in the text of section 7345 that authorizes us to redetermine petitioner’s underlying liability for the penalties the IRS has assessed.” (Op. at 12). Section 7345 gives the Tax Court only the power to order the IRS to tell the State Department that the certificate was erroneous.
As to context, Judge Lauber finds support in the legislative history of §7345 and in the structure of tax administration. Congress has not allowed taxpayers assessed a §6058 penalty to obtain pre-assessment judicial review. Congress has, however, allowed such taxpayers to obtain pre-collection review through the CDP process. To read into §7345 a jurisdiction to redetermine the merits of an assessment would run counter to the orderly system of remedies Congress has created.
Without jurisdiction to review of the merits of the assessments underlying the certified seriously delinquent tax debt Judge Lauber concluded that the only power he had in these types of cases was to tell the IRS to decertify the debt it had previously certified. However, the IRS had already done that during the course of the litigation. Since there was now nothing for the court to review, Judge Lauber concluded that, like the Cheshire Cat, Ms. Ruesch’s ticket had vanished.
Lesson 2: It’s Only Gone For Now, Not Gone For Good
The question then became whether the Tax Court could retain certification jurisdiction when the IRS voluntarily gave the taxpayer the same relief that the Court could give: correct an erroneous certification. Once the IRS here decertified Ms. Ruesch, she could not longer claim a non-existent certification to be erroneous, nor was there any longer a seriously delinquent tax debt to decertify. Accordingly, it moved to dismiss the petition for mootness.
Ms. Ruesch argued that the IRS might well commit later errors and send another erroneous certification to the State Department. So the Court should not dismiss her petition as moot.
The short answer from Judge Lauber was “then you can file a new suit.” He distinguished a CDP case, Vigon v. Commissioner, 149 T.C. 97 (2017) where the IRS decided it had assessed penalties against Mr. Vigon in error. It abated the penalties and moved to dismiss the CDP case as moot because there was no longer a liability it was trying to collect. Therefore the Court had lost jurisdiction even though the IRS explicitly reserved the right to re-assess the penalties in the future.
The Vigon Court disagreed and said it could keep jurisdiction. The Court was concerned that Mr. Vigon, who was incarcerated, would not be able to get back into Court, given how short and obscure the CDP petition window can be.
In contrast to Vigon, Judge Lauber pointed out that Ms. Ruesch faced no time constraints or difficulty to get back into court. If the IRS send another certification to the State Department, she would not face the same difficulties that Mr. Vigon faced. She would have a new CP508C and could easily petition for review.
This case gives a useful comparison of the Tax Court’s certification jurisdiction to its deficiency and CDP jurisdictions. The differences explain the Cheshire Cat nature of jurisdiction here.
First, the Court’s task in deficiency cases is to “redetermine” the IRS’s assertion of deficiency in the NOD. Thus, it is not the existence of a deficiency but the assertion of one in the NOD that provides the predicate for Tax Court jurisdiction. Hannan v. Commissioner, 52 T.C. 787, 791 (1969). Similarly, as Judge Lauber points out, the Court’s task in CDP cases is to review substantive IRS determinations on how to collect and, sometimes, on the merits of the underlying liability.
In contrast, the Court’s task in certification review is not to review any substantive IRS decision to assess or collect a tax. The Court’s review is limited to whether the IRS properly notified the State Department. It is much more like judicial review of a summons than judicial review of an NOD or CDP NOD. The ticket to Tax Court is an assertion that the IRS has properly shared information with the State Department. The court reviews that assertion and decides whether the IRS shared the information consistent with the law.
Second, and more importantly, taxpayers generally will get only one NOD for any given tax liability and it comes with a 90-day expiration date. See §6212(c), §6213. Similarly, taxpayers get only one CDP Notice of Determination for the NFTL and one for the levy. §6330(b)(2). Those tickets come with 30-day expiration dates. Thus, taxpayers get only one shot at judicial review pre-assessment or pre-collection. If they miss that shot, their only recourse is to pay and sue for refund.
In contrast, the CP508C comes with no expiration date and taxpayers get multiple shots at judicial review. That is because of the fluctuation complexity: the amount certified to the State Department can fluctuate. So while the certificate may not have been erroneous to start with, it may become erroneous over time and the taxpayer can ask either a federal district court or the Tax Court to order the IRS to decertify. That CD508C does not expire. For example, if a taxpayer wanted to contest the IRS’s position that it will not decertify even when the aggregate tax liability drops below the threshold, the taxpayer is not time limited in filing a petition. Or, as happened here, the taxpayer might receive multiple CP508C’s. Each one would be a ticket.
The Internal Revenue Code is, for many folks, like Alice in Wonderland. Both are logically written, but the logic is sometimes hard to discern and sometimes leads to strange results. I hope this post has revealed something useful about the logic behind the Tax Court’s §7345 jurisdiction: the CP508C may not expire, but like the Cheshire Cat, it may disappear for a while. When it does, the Tax Court loses jurisdiction.
Bryan T. Camp is the George H. Mahon Professor of Law at Texas T. University School of Law.