Today’s lesson is about §7345, created by Congress in 2015. The idea behind §7345 is simple. If you owe taxes and the government threatens to take your passport, you are more likely to pay up. But its operation is complex. It requires the IRS to first certify to the State Department that a taxpayer has a “seriously delinquent tax debt.” Then the State Department is authorized to take certain actions based on that certification. Section 7345 permits taxpayers to seek Tax Court Review of IRS Certifications.
The Tax Court does not get many passport cases. According to the Court’s FY 2024 Budget Request, of the 29,000 petitions filed in 2022, only 25 were §7345 petitions. For those who are interested in learning more about the Court’s budget request, Keith Fogg posted this great review over on Procedurally Taxing.
So when the Tax Court gets a passport case, it often uses it to shape its §7345 jurisprudence by issuing precedential Tax Court opinions. Today’s case is one of those. Blake M. Adams v. Commissioner, 160 T.C. No. 1 (Jan. 24, 2023) (Judge Toro), teaches two lessons. First, the Court holds that it will not look behind the IRS certification to redetermine the merits of the tax liabilities that make up the certification. Second, the Court also decides it lacks authority to determine whether the assessment underlying the Certification was procedurally defective.
Note that this is a case where the taxpayer was unrepresented. While the Court’s desire to settle important §7345 issues is understandable, I question whether doing so in a pro-se case is desirable. Next week we will see a case where the Court wrote a much stronger opinion after first suggesting that the pro se taxpayer find counsel (who then filed briefed the issue) and also accepting an amicus brief. I offer my thoughts on this below the fold.
Law: The Passport Revocation Process
In §32101 of the Fixing America’s Surface Transportation ("FAST") Act, 129 Stat. 1312, Congress created a new two-step procedure to enforce a taxpayer’s obligation to pay an assessed tax. Congress codified Step One as §7345. It codified Step Two over in 22 U.S.C. §2714a(e). For why that matters, see Lesson From The Tax Court: Passport Revocation Act Differs From Codification, TaxProf Blog (April 5, 2021).
The procedure is complex. To start with, 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. Easy lesson there: keep your passport up to date! Finally, the statute also provides that when a taxpayer no longer has the statutory “seriously delinquent tax debt” the IRS must send another certification to the State Department to decertify a taxpayer. The agencies have worked out a process you can read about if you care to in this TIGTA Report from September 2019.
A second complexity comes in defining what constitutes “a seriously delinquent tax debt” and that is what today’s lesson addresses.
Section 7345(b)(1) tell us that a seriously delinquent tax debt is an “unpaid, legally enforceable Federal tax liability” which (A) “has been assessed,” (B) “is greater than $50,000,” and (C) for which either (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.”
You can see from the above definition that Congress did not think all assessed tax liabilities should be counted. It excludes tax liabilities from the definition until after the IRS has tried to collect them through its liens and levy powers, and thus only after the taxpayer has had the opportunity for a CDP hearing to work out a collection alternative.
Treasury has not issued regulations but the IRS has written extensive instructions to IRS employees on how to implement §7345. You can now find them in IRM 5.19.25.
In some ways, the IRM provisions are taxpayer friendly. Section 184.108.40.206, for example, lists eight different types of tax liabilities that usually won’t count towards the magic $50,000 number. (but sometimes will!), including CNC accounts, pending OICs and IAs, liabilities subject to the bankruptcy automatic stay, etc.
In other ways, the IRM is government friendly. First, the IRS says 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. 220.127.116.11(2). I am not aware of anyone arguing that this is contrary to the plain text of the statute which defines the phrase in the singular (“the term ‘seriously delinquent tax debt’ means an unpaid, legally enforceable Federal tax liability of an individual.” ) (Emphasis added).
Second, the IRS will keep adding new 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 18.104.22.168.1. The IRS will then send the taxpayer a new notice. But it will not send a new certification to the State Department because that taxpayer is already on the State Department’s list.
Third, however, the IRS will not de-aggregate to account for a taxpayer paying off some of the liabilities that aggregate to over $50,000. That is, paying off some of the underlying liabilities will not trigger a de-certification. IRM 22.214.171.124(2). Ya gotta pay ‘em all off.
You see how this implementation creates a one-way ratchet? New liabilities are added as a basis for certification, but pay-down, 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 in it are satisfied.
When the IRS certifies a tax debt as seriously delinquent, it sends the taxpayer a Notice CP508C. That is the ticket to judicial review. Section 7345(e) permits taxpayers who have received notice to file suit either in federal district court or in Tax Court. There is no time limit. 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, “then the court may order the Secretary to notify the Secretary of State that such certification was erroneous.” Id. This structure has led to the strange situation that I call “Cheshire Cat” jurisdiction because if the IRS decertifies the taxpayer, that act will deprive the courts of subject matter jurisdiction. But then if the IRS later certifies the taxpayer and sends the taxpayer another CP508C, the taxpayer has the right to go back to court and the court can hear the case. I blogged about that in Lesson From The Tax Court: Cheshire Cat Jurisdiction Over Passport Revocation Petitions, TaxProf Blog (June 29, 2020).
Mr. Adams was a non-filer for eight years between 2007 and 2015. The IRS prepared Substitutes For Returns (SFR) and assessed the resulting liabilities, totaling $1.2 million. Mr. Adams did not pay. The IRS gave Mr. Adams both his lien and levy CDP notices. Mr. Adams took no action in response. We have no idea about the accuracy of the SFRs but if your experience is anything like mine, there is a non-trivial chance that they are incorrect, maybe even wildly incorrect.
On March 16, 2020, the IRS sent the State Department a certification that Mr. Adams had a seriously delinquent tax debt. Eventually, Mr. Adams noticed and asked the Tax Court to order the IRS to de-certify. Notice that unlike many other taxpayers opportunities, §7345 imposes no time limitations on taxpayer to seek Tax Court review. Here, Mr. Adams filed his petition some nine months after the IRS Certification.
Proceeding pro-se Mr. Adams argued that (1) he did not actually owe some of the tax liabilities that had been assessed and (2) even if he did, the assessments had not been properly made and so those amounts should not count towards the $50,000 threshold. The Tax Court rejected both arguments. Let’s see why.
Lesson 1: Tax Court Will Not Review Merits of Tax Liabilities Making Up A Certification.
In 2020, the Tax Court issued what it meant to be a precedential opinion in Ruesch v. Commissioner, 154 T.C. 289 (2020). There, the Court rejected the same argument Mr. Adams raised here. It refused to allow a taxpayer to argue the merits of the unpaid tax liabilities underlying the IRS certification to the State Department. While the case was pending, however, the IRS on its own (well...likely through the good efforts of Ms. Ruesch’s lawyer Frank Agostino) decided its certification had been in error and so decertified the taxpayer. As a result, the Tax Court still ruled on the argument that it could look behind the certification but then dismissed as moot what it characterized as Ms. Ruesch’s remaining claims: that the certification was improperly issued and that the IRS must decertify her. On appeal, the 4th Circuit Court of Appeals held that once the case had become moot because of the IRS decertification action the Tax Court lost its power to rule on any other issue in the case, because the only relief she was entitled to get under §7345 was an order for the IRS to do exactly what it had done on its own. 25 F.4th 67 (4th Cir. 2021). Thus the 4th Circuit said the Tax Court opinion needed to be “VACATED and REMANDED in part with instructions to the Tax Court to dismiss all the remaining claims as moot insofar as it dismissed those claims for lack of statutory jurisdiction.” Id. at 72.
That is why we will now cite to today’s case from now on for the proposition that the Tax Court has no jurisdiction to review the tax liabilities underlying the IRS certification to the State Department. It’s likely why the Tax Court issued this as a precedential T.C. opinion.
But there is another holding in this opinion.
Lesson 2: Tax Court Will Not Review Whether Assessments Were Properly Made
In today’s case we once again we have a pro-se taxpayer who may or may not really understand what is going on. We've seen how this puts the Tax Court in a delicate position because its job is not to be the taxpayer’s advocate. See Lesson From The Tax Court: The Tax Court Is Not Your Advocate, TaxProf Blog (Feb. 6, 2023). In that Lesson I looked at the variety of ways different Tax Court judges have dealt with pro-se taxpayers.
In today’s case, Judge Toro’s approach is generous to the taxpayer in the sense that he squints really hard to decide that Mr. Adams maaaaybeeee making a second argument: that the certification was based on illegal assessments. “Because Mr. Adams is representing himself, we construe his submissions liberally and will address each interpretation of his....argument.” Op. at 10. As liberally construed, the argument is that the SFR assessments were improperly done “because they failed to comply with certain procedural requirements,” Id. such as the failure to properly mail a Notice of Deficiency to the taxpayer’s last known address. We have no idea about the merits of Mr. Adam’s arguments but, again, if your experience is anything like mine, you know that last known address issues are neither uncommon nor trivial.
Judge Toro then says Tax Court will not review the legality of the assessment action. It will not consider whether the NODs were properly mailed. It will not consider whether the IRS violated §6303, which some courts have held will invalidate as assessment’s ability to support administrative collection actions. See e.g. Behren v. U.S., 764 F.Supp. 180 (S.D. Fla. 1991).
Judge Toro gives two reasons for this result.
First and foremost he takes a highly textualist approach to the statute. So let’s take another look at that text.
Section 7345(b)(1) tell us that a seriously delinquent tax debt is an “unpaid, legally enforceable Federal tax liability” which (b)(1)(A) “has been assessed,” (b)(1)(B) “is greater than $50,000,” and (b)(1)(C) for which either (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.”
Judge Toro starts by noting that the (b)(1)(A) “requires simply that the liability ‘has been assessed,’ not that the liability ‘has been properly assessed.’” Op. at 13 (emphasis in opinion). He then goes on to try and contrast that language with the text in (b)(1)(C) where Congress instructs that only tax liabilities for which an NFTL has been filed “pursuant to section 6323” or a levy has been made “pursuant to section 6331.” Because the text in (b)(1)(A) did not have any such “pursuant to” language, Judge Toro says “[w]e therefore will not read the word “properly” into the text of [(b)(1)(A).” Op. at 14.
Judge Toro offers a second reason: to allow Mr. Adams this opportunity to contest the appropriateness of the assessment process would be inconsistent “with the Code’s overall structure for assessments and collections.” Op. at 15. Judge Toro explains all of the different opportunities Mr. Adams had to challenge the merits of the assessments and the procedures used. Curiously, Judge Toro leaves out one of the biggest opportunities that Mr. Adams forwent: the opportunity to actually file his own returns! After all, don’t forget that he was a non-filer.
Bottom line for Judge Toro: “Given these prior opportunities for administrative and judicial review, it is entirely reasonable for [§7345] not to offer yet another avenue for challenging whether an assessment has been properly made, but to require only that the assessment has been made.” Op. at 15.
Comment 1: The Bad Taste of Textualism
I was a bit startled that Judge Toro decided the word “assessment” did not mean a proper assessment! After all, it is an elementary proposition of tax procedure that a proper assessment is required before the IRS can administratively collect the tax liability, either by enforcing the §6321 tax lien with a Notice of Federal Tax Lien filed pursuant to §6323, or by exercising its powers of levy pursuant to §6331. Hey, if you don’t believe me, go read Stallard v. United States, 12 F.3d 489 (1994)(invalid assessment of §6672 penalty required judgment for taxpayer on refund suit and release of federal tax lien). See also, Saltzman & Book, IRS Practice and Procedure (2023 revised edition) ¶10.01, page 10-4 (sorry, no free link).
Thus, if an assessment is illegal or improperly made, the resulting NFTL or levy would not have been made under the “pursuant to” language in §7345(b)(1)(B) and (b)(1)(C) that Judge Toro places so much weight on. That pretty much cuts in exactly the opposite direction than the one Judge Toro was going. So I do not believe there is really any textualist base to read the word “assessment” the way Judge Toro reads it.
I agree with Judge Toro’s bottom line. However, I think the better way to get there is to create an irrebuttable presumption that all assessments underlying a certificate to the State Department are proper. An irrebuttable presumption is just a court's way of saying "we're not going there here." As an initial matter, the Supreme Court has long told us that an assessment is the equivalent of a court judgment. Bull v. United States, 295 US 247, 260-261 (1935). Just as courts do not look behind the judgments of other courts, they should not look behind an assessment, unless a statute explicitly authorizes it (such as §6330(c), which permits a review of the assessment process).
More importantly, a presumption that an assessment was a proper assessment protects the prior process. It makes a taxpayer rely on prior opportunities to raise that issue. Judge Toro’s second line of reasoning reflects this: Mr. Adams had multiple prior opportunities to help the IRS assess the proper liabilities. And if he believed the assessment was procedurally defective, he had multiple opportunities to bring that to the attention of both the IRS and the Tax Court. Absent clearer instruction from Congress, the Court should be reluctant to create yet another bite at that apple.
The purpose of judicial review of the IRS certification process is not, at least in my little mind, to give taxpayers another opportunity to contest their tax liabilities or the predicate procedures but is instead to ensure the certification process itself: did the IRS follow the rules for which kinds of tax liabilities counted towards the $50,000 total?
Thus, the Tax Court can indeed review a taxpayer’s claim that the IRS has improperly counted towards the “seriously delinquent tax debt” a liability for which the taxpayer had not yet received their CDP hearing, or for which the IRS had levied when it was prohibited from doing so. See e.g. Belton v. Commissioner, T.C. Memo. 2023-13 (Jan. 24, 2023), where Judge Toro does exactly this: he carefully reviews the IRS transcripts to conclude that some of the liabilities included in the IRS certification were improperly included based on levies made when the IRS was prohibited from levying.
But the Tax Court should not be reviewing taxpayer’s claims that the result of their CDP hearing was wrong or that the IRS levy was not on their property or rights to property. ....Or that the assessments were procedurally invalid.
Yeah, mine is not a textualist reading of the statute. It’s a contextualist reading. But text, without context, can become pretext.
Comment 2: Issuing Precedential Opinion When Taxpayer Is Pro-Se
The high number of pro-se litigants makes the Tax Court’s job tricky. On the one hand, under the traditional adversarial model of judging, it’s not a Court’s job to consider issues or arguments not raised by either party. On the other hand, the Tax Court does not fit neatly into the traditional adversarial model of judging as I will explore more in next week’s post on Innocent Spouse review. Too much to get into on today’s post.
Suffice to conclude with the thought that maybe the Court would benefit from receiving a robust exchange of arguments from experienced counsel before issuing a precedential opinion, rather than simply responding to the barest assertion of an argument that it generously reads into a pro-se litigant’s filings. For those who would like to read a more thorough exploration of that idea, they could not do better than Keith Fogg and Caitlin Hurd, Pro Se Precedent in the U.S. Tax Court: A Case for Amicus Briefs, Houston Business and Tax Law Journal (forthcoming 2023).
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return each Monday (or Tuesday if Monday is a federal holiday) to TaxProf Blog for another Lesson From The Tax Court.