Tax Court Can't Consider Refund Claim When IRS Collection Action No Longer Exists

(Parker Tax Publishing March 2022)

The Fourth Circuit affirmed a decision by the Tax Court that, after the IRS conceded in a collection due process hearing that a taxpayer had no tax liability and was entitled to removal of any lien or levy, the Tax Court did not have jurisdiction under Code Sec. 6330(d) to consider the taxpayer's argument that he overpaid and was a due a refund for the year at issue. The Fourth Circuit found that the phrase "underlying tax liability" in Code Sec. 6330(c)(2)(B) does not provide the Tax Court jurisdiction over independent overpayment claims when the collection action no longer exists. McLane v. Comm'r, 2022 PTC 19 (4th Cir. 2022).

Background

Brian McLane filed a tax return for 2008 claiming deductions for losses from his contracting business. The IRS denied almost all of those deductions and determined that he had underreported his liability by $23,615. The IRS mailed McLane a notice of deficiency advising him of the discrepancy but he never received the notice. When McLane did not attempt to pay or otherwise respond, the IRS informed him in a notice of federal tax lien that it would seek to collect the amount of the deficiency through a lien on his property.

McLane requested a collection due process (CDP) hearing before the IRS Independent Office of Appeals (Appeals Office). During the hearing, McLane presented enough information to substantiate the losses reported in his return. Based on the new evidence, the IRS conceded that McLane was entitled to deductions exceeding those he initially claimed and concluded that he owed the IRS $0. After the IRS removed the assessment of liability, McLane asserted for the first time, in a telephone call with the Tax Court, that he overpaid his taxes for the year 2008 and was due a refund. In McLane v. Comm'r, T.C. Memo. 2018-149, the Tax Court held that it did not have jurisdiction to determine if McLane was due a refund and thus dismissed McLane's case. McLane appealed to the Fourth Circuit.

A taxpayer who receives a notice of deficiency may petition the Tax Court to review the IRS's determination. If the Tax Court finds there is no deficiency, and the taxpayer instead overpaid, the Tax Court is authorized under Code Sec. 6512(b)(1) to determine the amount of the overpayment and order a refund to the taxpayer. If for any reason, including the failure to receive a notice of deficiency, the taxpayer does not timely file a petition for review, the IRS can place a lien on the taxpayer's property under Code Sec. 6321 or levy the property to satisfy the amount owed under Code Sec. 6331. However, the IRS can only do this after it notifies the taxpayer of its intent to do so and of the taxpayer's right to request a CDP hearing before the Appeals Office. In a CDP hearing, Code Sec. 6330(c)(2)(A) provides that a taxpayer may raise any relevant issue relating to an unpaid tax or a proposed levy. In addition, if the taxpayer did not receive a notice of deficiency and did not otherwise have an opportunity to dispute the tax liability, Code Sec. 6330(c)(2)(B) provides that the taxpayer may raise challenges to the existence or amount of the "underlying tax liability." The taxpayer may then appeal to the Tax Court. However, under Code Sec. 6330(d)(1), the Tax Court can review only the issues considered by the Appeals Office.

McLane argued on appeal that the Tax Court erred because the phrase "underlying tax liability" (a phrase Congress left undefined) conferred jurisdiction on the Tax Court to (1) determine that he overpaid his taxes, and (2) order a refund.

Analysis

The Fourth Circuit rejected McLane's argument and held that the Tax Court did not have jurisdiction over McLane's refund claim.

The court noted that under Code Secs. 6330 and 6320, a taxpayer has the right to a CDP hearing only when the IRS seeks to enforce collection of tax liability via lien or levy. If the taxpayer requests a CDP hearing, the Appeals Office must determine in the first instance whether the IRS's collection action may go forward. The court reasoned that when, as in McLane's case, the IRS has already conceded that a taxpayer has no tax liability and that the lien should be removed, any appeal to the Tax Court of the Appeals Office's determination as to the collection action is moot. No collection action remains, for which there is "underlying tax liability," to appeal. The court found that, when interpreting the phrase "underlying tax liability" in the specific context in which it is used - the IRS's attempt to collect via lien or levy - the phrase does not provide the Tax Court jurisdiction over independent overpayment claims when the collection action no longer exists. The court concluded that McLane was permitted to challenge the amount of his underlying liability in the CDP hearing only in the context of determining whether the collection action could proceed.

Observation: The Fourth Circuit observed in a footnote that the Tax Court relied on its prior decision in Greene-Thapedi v. Comm'r, 126 T.C. 1 (2006) in holding that the phrase "underlying tax liability" did not give it jurisdiction over McLane's refund claim. In Greene-Thapedi, the Tax Court rejected a taxpayer's request that it determine an overpayment and order a refund under Code Sec. 6330 on two bases. First, it held that, because the IRS had already acknowledged in that case that there was no unpaid liability for the year upon which a levy could be based, the proposed levy was moot and the taxpayer could no longer challenge the existence or amount of her underlying tax liability in that proceeding Second, it held that, "more fundamentally," Code Sec. 6330 never gives the Tax Court jurisdiction to determine an overpayment or to order a refund or credit of taxes paid. The Fourth Circuit said that it was unnecessary to decide that "more fundamental" question in this case, given that Code Sec. 6330 so clearly cannot confer such jurisdiction when no active collection action persists.

For a discussion of appeals of a CDP hearing determination, see Parker Tax ¶260,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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