In the movie Cool Hand Luke, the consequences of an alleged failure to communicate fell on the prisoner Paul Newman. Here’s the clip. It was a meme before memes were memes. Last week, the Tax Court decided the consequences of a failure to communicate will fall on IRS.
The lesson is on the meaning of the word “opportunity” in §6330(c)(2)(B), which allows taxpayers to contest the merits of an assessed tax liability in a CDP hearing if they did not “otherwise have an opportunity to dispute such tax liability” before the assessment.
In Rickey B. Barnhill v. Commissioner, 155 T.C. No. 1 (July 21, 2020) (Judge Gustafson) the Court held that mere receipt of Letter 1153—giving the taxpayer a pre-assessment opportunity to contest a proposed Trust Fund Recovery Penalty—would not automatically prevent a taxpayer from contesting the merits of that liability in a later CDP hearing. As a result, so long as the taxpayer alleges a failure to communicate during the pre-assessment administrative hearing, the question of who was at fault for failure must be decided by trial, at which the IRS would have the burden to prove it was not at fault.
While the case will not likely become a movie, or even a gif, it is an important decision to know about. It seems to give taxpayers a potentially explosive expansion of their CDP rights.
Law: Taxpayer Rights To Pre-Payment Hearings
One true story about the history of taxation in the United States is a story about ever-expanding rights of taxpayers to contest threatened assessment or collection of taxes before having to pay. Today’s case adds to that story of expansion. Big time.
The first, and so far largest, expansion came in 1924 when Congress created the deficiency procedures that, for the first time, gave taxpayers an pre-assessment opportunity to contest a threatened imposition of income, estate, or gift taxes. Once the assessment was made, however, taxpayers could not contest the merits of the liability unless they fully paid the assessed tax and sued for a refund. Flora v. United States, 362 U.S. 145 (1960).
The deficiency procedures did not apply to assessment of taxes other than income, estate, or gift. Notably, excise taxes and assessable penalties could be immediately assessed and taxpayers would have to pay first, litigate later. That was generally not onerous for many such taxes because they were divisible into small chunks.
Over time, Congress has mandated pre-assessment administrative opportunities for some of taxes not subject to deficiency procedures. Today's case involves an assertion of the Trust Fund Recover Penalty (TFRP) found in §6672. As relevant for today’s case, §6672(b) requires that before the IRS assesses the TFRP, it must give the taxpayer 60 days notice. The IRS does so using Letter 1153. IRM 220.127.116.11. During those 60 days the IRS will offer the taxpayer the opportunity to protest the threatened assessment in the Independent Office of Appeals (Appeals), without having to pay it. IRM 18.104.22.168.3. If the taxpayer makes a timely and proper response, Appeals will hear the case. IRM 8.25.2.
The second largest expansion came in 1998 when Congress created the Collection Due Process (CDP) procedures. For the first time taxpayers had a pre-payment opportunity to contest the IRS proposed method of collecting an assessment. For those with time to waste, I’ve before explained the CDP process in detail here, here, here, and here.
For this case, however, all you need to know about CDP is that it sometimes allows a taxpayer to do more than contest the IRS’s proposed collection decision. Taxpayers can sometimes contest the very merits of their tax liability and thus get Tax Court review of the liability decision. Specifically, §6330(c)(2)(B) allows a taxpayer to contest the merits when the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.” (emphasis supplied; I want you to remember the “or”).
Let’s see how that works out in today’s case, which interprets the phrase “otherwise have an opportunity.”
Law: Summary Judgement Posture of the Case Is Key
To understand why I think this case is a very broad expansion of taxpayer rights, you need to understand the procedural posture of this opinion.
The IRS moved for partial summary judgment on the question of whether Mr. Barnhill was entitled to argue the merits of his TFRP in the CDP hearing.
Tax Court Rule 121 is the Summary Judgment (SJ) rule. It provides that if the materials before the court at the time a party moves for SJ “show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law.” This language is the same as what the Supreme Court has put in Federal Rule of Civil Procedure 56 on SJ, and of course the Tax Court interprets it the same since it must answer to the Supreme Court the same as any other federal court.
When I teach SJ to my Civil Procedure students, I emphasize that the trick is to identify who has the burden at trial to prove the issue that is the subject of the SJ motion. If the party moving for SJ (“the movant”) has the burden at trial, then to win SJ that party must deploy what I call a “Shock And Awe” motion. It needs to make sure that all the materials before the court leave no other conclusion than that the movant would would win at trial. However, if burden of proof is on the party resisting SJ (the non-movant), then the movant can deploy what I call an “Emperor Has No Clothes” motion. That is, all the movant need do is point out that the materials before the court are naked of any evidence that proves what the non-movant has to prove at trial.
The classic case on this is Celotex Corp. v. Catrett, 477 U.S. 317 (1986). That is the case where the Supreme Court approved the “Emperor Has No Clothes” bomb. There the Supreme Court held that if the non-movant bears the ultimate burden of persuasion at trial, it cannot avoid summary judgment by mere allegations or repetition of mere allegations made in the pleadings. Wrote the Court, at p. 322-323:
“In our view, the plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. In such a situation, there can be "no genuine issue as to any material fact," since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial.”
Bottom line: when a Court denies a SJ motion, it is saying that there is some material fact in dispute. the resolution of which is necessary to whichever party has the burden of proof at trial on the issue for which SJ is sought.
Facts of the Case:
Mr. Barnhill was the director of a company that failed to pay over income taxes it had withheld from its employees for 10 quarters in 2010-2012. The IRS determined he was a responsible person and so proposed to hit him with a $160,000 TFRP.
On November 16, 2017, in compliance with the statute, the IRS sent Mr. Barnhill Letter 1153. Mr. Barnhill filed a timely protest to Appeals on January 17, 2017. That means he sent in a bunch of information on why he should not be held liable.
On April 5, 2017, Appeals sent a letter to Mr. Barnhill scheduling a hearing for May 9, 2017. Mr. Barnhill made no response. He did not call or contact Appeals, either before or at the time of the scheduled conference.
On May 11, 2017, Appeals sent him another letter saying that since he had not shown up, it was returning his file to collection so they could assess. Mr. Barnhill made no response to that letter either. He did not call or write.
At a time not disclosed in the Court’s opinion, the IRS assessed the $160,000. Eventually the IRS sent Mr. B. a CDP notice. Mr. Barnhill did respond to that notice, and asked Appeals to review the merits of the IRS assessment. Appeals did not do so because, it said, Mr. Barnhill had a prior opportunity.
Mr. Barnhill petitioned the Tax Court. He alleged he had never received the April 5th scheduling letter and presumably he submitted an affidavit to that effect. The IRS moved for SJ, arguing that the only material fact was that Mr. Barnhill had actually received Letter 1153, and had responded to it. That constituted his opportunity to contest the merits of the TFRP assessment. A subsequent failure to communicate was not a material fact.
Lesson: Mere Receipt of Letter 1153 Does Not Preclude Raising Merits in CDP Hearing
Judge Gustafson denied summary judgment because, he said, the question of whether Mr. Barnhill actually received the scheduling letter was a material fact and Mr. B's allegation that he had not received notice about the scheduled TFRP hearing created a genuine dispute as to that martial fact. Therefore, the Judge would not agree that Mr. Barnhill was, as a matter of law, precluded from contesting the merits of the assessment in a CDP hearing.
You can ignore the stuff on pages 13-15 where Judge Gustafson discusses Mr. Barnhill’s allegations as to the merits of his TFRP assessment. Those are totally irrelevant to the SJ issue, which is whether Mr. Barnhill has the requisite “opportunity” before the CDP hearing to raise his merits arguments. It does not matter whether Mr. Barnhill is a saint or a slimeball. Both saints and slimeballs deserve the same “opportunity” to be heard. That is all that the SJ motion tests. So all the stuff about Mr. Barnhill's substantive complaint about the TFRP is filler.
As to the actual question presented, Judge Gustafson first explains how the Court has long described the Letter 1153 as a short-hand for the opportunity it represents. Sometimes, the Letter 1153 itself constitutes the “opportunity” referenced in §6330(c)(2)(B). For example, in Bletsas v. Commissioner, T.C. Memo 218-128, the taxpayer had actually received the Letter 1153 but had chosen not to respond. The Court said too bad, so sad, but that there was your opportunity. (Bletsas is, in addition, a great illustration of how the TFRP works. I blogged about here.) Similarly, when a taxpayer refused delivery of Letter 1153, the Tax Court has said that the Letter 1153 was itself the “opportunity” for §6332(c)(2)(B) purposes. Giaquinto v. Commissioner, T.C. Memo 2013-150.
But, teaches Judge Gustafson, that short-hand does not apply once taxpayers actually respond to the Letter 1153. He writes that once the taxpayer makes a timely and proper protest, “the opportunity to challenge a TFRP liability plainly takes place in the Appeals hearing: it is the hearing that constitutes the opportunity.” Op. at 25 (quotes omitted). That is, “receipt of the Letter 1153 is required not for the sake of receipt itself but rather for the opportunity it is supposed to deliver.” Op. at 31.
The IRS countered with a poorly reasoned harmless error argument. Since Appeals had been able to consider and review Mr. Barnhill’s protest and attachments, the failure to communicate at a hearing did not matter. Wait ... what? That sounds like the IRS was arguing Appeals had pre-judged the matter and it did not matter what information Mr. Barnhill would provide at a hearing! I do not think that is a very strong argument. Judge Gustafson easily rejected it.
Judge Gustafson then finds there was a genuine dispute as to a material fact. The genuine dispute was who was at fault for the “truncated” and “incomplete” TFRP hearing. The material fact was whether Mr. B. had actually received the scheduling letter. The Court said that dispute would be resolved by trial.
Comment: An Easy Out for Taxpayers?
Judge Gustafson’s opinion creates two difficulties for the IRS, one legal and one practical. They may not be of concern to the government. But then again they might. Let’s look at them.
First, I think the opinion creates a significant tension in §6330(c)(2)(B). Remember the “or”? For those who did not, here it is again: §6330(c)(2)(B) allows a taxpayer to contest the merits when the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”
The “or” creates two circumstances that preclude a taxpayer from contesting liabilities in a CDP hearing, On one side of the “or” is when the taxpayer “did not receive” an NOD. As Judge Gustafson notes on p. 26, that circumstance seems to have nothing to do with the sufficiency of the resulting opportunity to go to Tax Court. Assume a taxpayer properly receives an NOD and properly petitions Tax Court. That’s it. That’s the opportunity. As far as I know the Tax Court does not ask, as Judge Gustafson asked here, on page 22: “whether a taxpayer who pursues the [Tax Court] conference but, through no fault of his own, is prevented from participating in it is also precluded under section 6330(c)(2)(B) from later raising a liability challenge in a CDP hearing.” Nope. You gets your NOD and that’s the end of it.
On the other side of the “or” is when the taxpayer did not “otherwise” have “an opportunity” to contest the liability. Judge Gustafson says “reading these subparagraphs in tandem suggests that the opportunity referenced....is different from the receipt of the notice.....” Op. p. 26.
I’m not so sure. His reading does not, actually, read the two subparagraphs “in tandem.” “Tandem” means “a group of two or more arranged one behind the other or used or acting in conjunction” (Merriam Webster). Judge Gustafson instead reads the “or” as creating two unconnected circumstances. That is indeed what “or” generally means. However, here, we have the word “otherwise” which seems to link the two circumstances back together so that if receipt of the NOD is an “opportunity” (no matter what happens after the receipt), so would be receipt of other notices of opportunities (no matter what happens after the receipt). Contrariwise, if mere receipt of a notice of opportunity is not sufficient, then neither should an NOD.
What's good for the NOD goose should be good for the Letter 1153 gander. They are linked and the interpretation of one should be consistent with the interpretation of the other. Even as Judge Gustafson says the two clauses should be read "in tandem," he does not, actually, do that.
Today's lesson creates an uncomfortable inconsistency between the clauses. The lesson is that mere receipt of the Letter 1153 is not enough to preclude taxpayers from raising a merits issue in a CDP hearing. That is in tension with the case law saying mere receipt of an NOD IS enough.
In effect, Judge Gustafson eliminates the word “otherwise” and interpolates the word “sufficient” into the statute, so that it reads “did not receive any statutory notice of deficiency for such tax liability or did not have a sufficient opportunity to dispute such tax liability.”
That’s a different statute, folks. It’s not what Congress wrote. One can totally respect Judge Gustafson’s laudable instincts for fairness. Who does not like a decision that says the taxpayer must receive a “sufficient” opportunity, or “real” opportunity, that the opportunity must be more than just a formal delivery of a document. Well, apparently Congress because it did not write those words. But, putting that aside, if the Tax Court is really serious about this, then it will need to apply that same standard to itself, to the first circumstance described in §633(c)(2)(B), to NODs. That’s the point of the word “otherwise” in the statute.
So if taxpayers come before the Court in a CDP case and merely alleges---as this taxpayer merely alleged—that their prior opportunity in Tax Court was not sufficient through “no fault of their own,”—because of COVID, because of mail delay, because they never actually received the notice of trial, because of whatever excuse sincere and fertile brains can devise—then the logic of today’s lesson is that they should not be precluded from contesting the merits of their liabilities in a later CDP hearing unless the Court holds an evidentiary hearing to determine whether, in fact, the taxpayer received a sufficient opportunity after receiving the NOD.
That brings us to the second potential problem: even if the Court does not now apply the same “sufficient opportunity” standard to NOD taxpayers, this decision creates perverse incentives for taxpayers to make allegations that they did not receive a sufficient prior administration hearing in their Tax Court petitions. This is not a case where the IRS screwed up. It’s not a case like Cosio v. Commissioner, T.C. Memo 2020-90, that I blogged here a few weeks ago. There, you will recall, the Appeals officer erroneously closed out a CDP case where the taxpayer was actively contesting his liability. The error was in the record at the summary judgment stage and was not merely an allegation. The record at the summary judgment stage there showed that the taxpayer’s allegation of IRS error did indeed have clothes.
What we have here is a failure to communicate. We do not know who is at fault. There is only the allegation that “I did not receive the scheduling letter.” Even if that is true, who bears responsibility for that failure to communicate? Must the IRS now guarantee that taxpayers receive every letter it sends? Hear every voicemail it leaves? Open every email? Have proper access to its website? Judge Gustafson’s opinion necessarily puts it all on the IRS because he finds that if Mr. Barnhill’s allegation that he did not receive the letter is true, then Mr. Barnhill now gets to contest the merits of his TFRP in the CDP proceeding. That's quite the expansion of rights.
Thus, the opinion necessarily requires the IRS to prove the negative in the upcoming hearing: that neither it nor any other third party caused the taxpayer here to miss the scheduled hearing. After all, if the burden is on the taxpayer to prove that the IRS caused the failure, then the SJ motion should have been decided in favor of the IRS. All that was in the record was the allegation, presumably supported by affidavit. The opinion reflects no allegation (much less evidence) of IRS error, as in Cosio. The opinion reflects no allegation (much less evidence) that Mr. Barnhill made any efforts after sending in the protest material. This would be fatal if Mr. Barnhill had the burden of proof at trial because that party cannot stand on its pleadings in the face of a SJ motion. Celotex.
Thus, the only reason Judge Gustafson would deny summary judgment here, consistent with Celotex, is because Mr. Barnhill will NOT bear the burden of proof as to whether or not he received a “sufficient opportunity”—as Judge Gustafson has revised the statute—to contest his TFRP liability. That necessarily means the IRS bears the burden to show how Mr. Barnhill received a “sufficient opportunity” over and beyond receipt of Letter 1153.
Good luck with that. Feel free to write me a letter if you disagree with my analysis. I will tell you now, however, that I will not actually receive it.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites you to visit TaxProf Blog every Monday for a new Lesson From the Tax Court.