Tax Court Upholds IRS Certification of Taxpayer's Seriously Delinquent Tax Debt

(Parker Tax Publishing February 2023)

The Tax Court held that (1) it did not have jurisdiction to review a taxpayer's substantive challenge to liabilities underlying an IRS certification under Code Sec. 7345 of the taxpayer's unpaid taxes as seriously delinquent tax debt, and (2) the IRS did not need to "properly" assess the taxpayer's deficiency before certifying it as seriously delinquent. The court further held that it did not have jurisdiction to review the constitutionality of passport-related actions taken by the Secretary of State. Adams v. Comm'r, 160 T.C. No. 1 (2023).

Background

Blake Adams failed to file federal income tax returns for 2007, 2009, 2010, 2011, 2012, 2013, 2014, and 2015 (the relevant years), and the IRS prepared a substitute for return for each year. In due course, the IRS assessed the tax shown in the substitutes for returns together with penalties and interest. In total, the IRS assessed more than $1.2 million in federal income tax, including interest and penalties, for the relevant years. But Adams did not pay the assessed amounts.

Aiming to collect Adams's substantial outstanding liabilities, the IRS filed a notice of federal tax lien (NFTL) for each of the relevant years. As required by Code Sec. 6320, the IRS notified Adams of the filing of the NFTLs and of his rights under Code Sec. 6320, including the right to request a collection due process (CDP) hearing. Adams did not request a CDP hearing for any of the relevant years. The IRS's collection efforts proved unsuccessful, and in March 2020, the IRS certified to the Secretary of State that Adams had a "seriously delinquent tax debt," which at the time of certification totaled $1,206,083 for the relevant years. Adams petitioned the Tax Court to review the IRS's certification pursuant to Code Sec. 7345(e)(1).

Congress enacted Code Sec. 7345 as part of the 2015 Fixing America's Surface Transportation Act (FAST Act) (Pub. L. 114-94, Sec. 32101(a)). Under Code Sec. 7345(a), if the IRS certifies that a taxpayer has "a seriously delinquent tax debt," such certification must be transmitted to the Secretary of State for action with respect to denial, revocation, or limitation of the taxpayer's passport. The term "seriously delinquent tax debt" is defined in Code Sec. 7345(b) as an unpaid, legally enforceable federal tax liability of an individual (1)which has been assessed, (2) which is greater than $50,000 (adjusted for inflation), and (3) with respect to which (i) an NFTL has been filed and the administrative rights under Code Sec. 6320 with respect to such filing have been exhausted or have lapsed, or (ii) a levy is mad pursuant to Code Sec. 6331.

Under Code Sec. 7345(b)(2)(B), a seriously delinquent tax debt does not include a debt with respect to which collection is suspended because a CDP hearing is requested or pending or because innocent spouse relief is sought under Code Sec. 6015. Additionally, under Code Sec. 7345(b)(2)(A), no debt that is being paid in a timely manner under an installment or compromise agreement is a seriously delinquent tax debt. If a certification is found to be erroneous or if the certified debt is fully satisfied or ceases to be seriously delinquent because of one of the exceptions, then Code Sec. 7345(c)(1) and (d) provide that the IRS must reverse its certification and notify the Secretary of State and the taxpayer.

Under Code Sec. 7345(e)(1), a taxpayer who has been certified as having a seriously delinquent tax debt to petition the Tax Court to determine whether the certification was erroneous or whether the IRS has failed to reverse the certification. If the Tax Court finds that a certification was erroneous, it may order the IRS to notify the Secretary of State that such certification was erroneous. The statute specifies no other form of relief that the Tax Court may grant.

Adams represented himself before the Tax Court. In a motion for summary judgment, he argued that the IRS's Code Sec. 7345 certification was erroneous because the IRS did not show that the tax liabilities for the relevant years were properly assessed. Adams further argued that declining to renew his passport was an unconstitutional denial of his right to international travel. The IRS responded in its own summary judgment motion that Adams's outstanding liabilities qualified as "seriously delinquent tax debt" as of the time of the certification. Specifically, the IRS contended that by then, the IRS had assessed more than $1.2 million in federal tax liabilities, including penalties and interest, for the relevant years, meeting the requirements of Code Sec. 7345(b)(1)(A) and (B) and (f). Those liabilities remained unpaid and were legally enforceable. In addition, for each of the relevant years, the IRS had properly filed an NFTL pursuant to Code Sec. 6323, and Adams had allowed his CDP rights under Code Sec. 6320 to lapse, meeting the requirements of Code Sec. 7345(b)(1)(C)(i).

Analysis

The Tax Court denied Adams's motion for summary judgment and granted summary judgment for the IRS. The court agreed with the IRS that the certification of Adams's outstanding liabilities as seriously delinquent tax debt was not erroneous. The court also noted that in Ruesch v. Comm'r, 154 T.C. 289 (2020), aff'd in part, vacated and remanded in part, 2020 PTC 61 (2d Cir. 2022), the Tax Court held that it did not have jurisdiction to review the underlying liabilities. Although the Second Circuit vacated for mootness the portion of the Tax Court's order in Ruesch resolving the jurisdictional question, the Tax Court found that the Second Circuit cast no doubt on the Tax Court's substantive analysis of the jurisdictional issue. The court therefore readopted its holding in Ruesch and concluded that it does not have jurisdiction to review the liabilities underlying the certification of a seriously delinquent tax debt.

Next, the Tax Court found that, to the extent Adams argued that the assessments were improper because they failed to comply with certain procedural requirements - such as the rule in Code Sec. 6213(a) that no assessment of a deficiency may be made until, among other things, a notice of deficiency has been mailed to the taxpayer - that argument was refuted by the text of Code Sec. 7345. The court noted that Code Sec. 7345(b)(1)(A) requires only that the liability "has been assessed" and imposes no requirement that the liability has been "properly" assessed. The court further reasoned that the text of Code Sec. 7345(b)(1)(C) supported its position. Each clause of Code Sec. 7345(b)(1)(C) contemplates that the filing of a notice of lien or the making of a levy must have been "pursuant to" a relevant Code provision (Code Sec. 6323 in the case of liens and Code Sec. 6332 in the case of levies). By contrast, Code Sec. 7345(b)(1)(A) contains no "pursuant to" language qualifying the phrase "which has been assessed." The court explained that, when specific words are included in one statutory provision and excluded from a neighboring provision, courts assume that Congress did so intentionally.

Further, the court reasoned that its conclusion was consistent with the Code's overall structure for assessments and collections. Before receiving the certification, the court noted, Adams had multiple opportunities to challenge the assessments of tax for the relevant years. He could have challenged the notices of deficiency in the Tax Court and, even if he did not receive the notices, he could have challenged the propriety of the assessments in CDP proceedings. If he had been dissatisfied with the outcome of those proceedings, Adams could have sought further review in the Tax Court. Given these prior opportunities for administrative and judicial review, the court said it was entirely reasonable for Code Sec. 7345(b)(1)(A) not to offer yet another avenue for challenging whether an assessment has been "properly" made, but to require only that an assessment has been made.

The court rejected Adams's argument that the certification under Code Sec. 7345 violated his constitutional right to international travel, noting that this argument was considered and rejected in Rowen v. Comm'r, 156 T.C. 101 (2021). The court further found that, to the extent Adams raised a broader constitutional challenge to the authority given to the Secretary of State by Section 32101(e) of the FAST Act to deny or revoke the passports of individuals with seriously delinquent tax debts, that challenge also failed because the Tax Court did not have jurisdiction to review the constitutionality of the Secretary of State's passport-related actions. The court found that Code Sec. 7345(e)(1) authorizes the Tax Court to determine whether a certification was erroneous or whether the IRS failed to reverse a certification. Code Sec. 7345(e)(1) makes no mention of the Secretary of State's passport actions or Section 32101(e) of the FAST Act, and provides no authority for the Tax Court (or the district courts) to review those actions or to issue any orders to the Secretary of State with respect to passport actions.

For a discussion of revocations or denials of a passport in cases of seriously delinquent tax debts, see Parker Tax ¶262,190.

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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