Tax Court Offers Clarification on IRC Section 6330 Appeals Hearings

By Peter C. Barton, Clayton R. Sager, and Roy Weatherwax

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Background

IRC sections 6320 and 6330, enacted in 1998, provide taxpayers with due-process rights concerning lien and levy actions, including the right to a hearing before the IRS’s Office of Appeals. Under IRC section 6330(c)(2)(A), the hearing is limited to collection issues, including challenges to the appropriateness of collection actions, and to collection alternatives, such as an installment agreement or an offer in compromise (OIC). Underlying tax-liability issues can be raised at the hearing only if the taxpayer neither received a deficiency notice for, nor otherwise had an opportunity to dispute, the underlying tax liability [IRC section 6330(c)(2)(B)]. IRC section 6330(c)(3) requires the Appeals officer to make the efficient collection of taxes no more intrusive than necessary.

Treasury Regulations section 301.6330-1(d)(2) explains the Appeals hearing. The formal hearing procedures under the Administrative Procedure Act do not apply. The hearing is informal; it may be face to face, written, or oral. Transcripts of meetings or conversations are not required.

IRC section 6330(d)(1) allows taxpayers to appeal the determination made at the hearing to the Tax Court, but it does not specify the standard of review. Case law has established that the standard is “abuse of discretion,” unless the underlying tax liability is at issue, in which case the standard is de novo. Abuse of discretion means that the Tax Court cannot overturn the Appeals officer’s determination unless it is “arbitrary, capricious, clearly unlawful, or without sound basis in fact or law” [Ewing, 122 TC 32, 39 (2004)].

Finally, issues litigated in the Tax Court must have been raised at the Appeals hearing or otherwise brought to the attention of the Appeals officer by the taxpayer, because logically the Tax Court cannot review for abuse of discretion where the officer was not aware of the issue [Magana, 118 TC 488 (2002)].

Facts of Robinette

In 1995, James Robinette and the IRS reached an OIC whereby he paid $100,000 based on $989,475 in tax and statutory additions for the years 1983–1991. Robinette also agreed to timely file his returns and pay all his federal taxes for 1995–1999. He received extensions to obtain a Schedule K-1, and he filed his 1995–1999 returns on or about October 15, 1999. For 1995, he paid the tax due, and received refunds for 1996, 1997, and 1999. The IRS did not receive his 1998 return, however, which also showed a refund. The IRS sent Robinette a request for the 1998 return in February 2000, and again in March 2000. In April 2000, the IRS notified Robinette that if he did not file his 1998 return, it might reinstate the $989,475 compromise amount.

Instead of sending a copy of the 1998 return to the IRS, Robinette sent these notices to his tax preparer, Douglas Coy. In July 2000, the IRS sent Robinette a default notice for the OIC. In September 2000, the IRS sent Robinette a notice of intent to levy; Robinette requested a hearing.

Coy, who represented Robinette at an IRC section 6330 Appeals hearing conducted by telephone in January 2001, told Appeals officer Talbott that he had prepared Robinette’s 1998 return, obtained his signature, and mailed it on October 15, 1999, the extension deadline, using a private postage meter. Talbott would accept only a certified or registered mail receipt as evidence. He did not consider the consistent pattern of Robinette’s filing of his 1995, 1996, 1997, and 1999 returns, although he had this information. In February 2001, Coy sent Talbott a copy of Robinette’s 1998 return. Talbott concluded that the intent to levy was appropriate, and Robinette appealed to the Tax Court.

At the Tax Court trial, Robinette and Coy testified and the following documents were admitted into evidence: the 1995, 1996, 1997, and 1999 returns, and Coy’s postage-meter log and daily calendar for October 15, 1999. The IRS argued that the Tax Court’s review of the Appeals hearing determination for abuse of discretion should be limited to testimony and documents presented at the Appeals hearing. Robinette argued that because there is no formal record of Appeals hearings, what was said at the hearing is impossible to determine.

Tax Court Decision

The Tax Court rejected the IRS’s position and ruled that, when reviewing for abuse of discretion under IRC section 6330(d), any relevant evidence pertaining to issues raised at the Appeals hearing is admissible in Tax Court. The court gave several reasons for its ruling:

• It has admitted evidence not presented at the Appeals hearing since IRC section 6330 was enacted;
• The Administrative Procedure Act does not apply to the Tax Court;
• Because IRC section 6330 Appeals hearings are informal, the record compiled at the hearing is limited. Therefore, the court might need more evidence from both parties to render a decision; and
• The Tax Court has reviewed other determinations made by the IRS under an abuse-of-discretion standard for decades without having such restrictions on admissible evidence.

Next, the Tax Court ruled that Robinette, through Coy, had raised the issue of compliance with the OIC at the hearing, and the evidence admitted in Tax Court pertained to this issue. The Tax Court also ruled that the evidence must be relevant under the Federal Rules of Evidence, meaning that the evidence must tend to prove or disprove what the court is asked to decide. The court found that the testimony it heard and the documents it admitted were relevant because they tended to show that the Appeals officer abused his discretion.

Then the court ruled that Robinette did not timely file his 1998 return. This was not a material breach of the OIC, however, because he was due a refund. Finally, the court ruled that the Appeals officer had abused his discretion in proceeding with collection, because he did not properly consider all of the facts, and issues. Therefore, Robinette owed no additional taxes.

There were five concurring opinions in Robinette, which made the key point that the Tax Court may restrict evidence that it admits if the taxpayer did not cooperate with the Appeals officer’s request for evidence at the hearing.

Applying the Ruling

Robinette clarifies that the Tax Court’s standard of review for an IRC section 6330 Appeals hearing does not restrict the evidence the court can consider. This ruling would also apply when the standard of review is de novo. Taxpayers and preparers should make sure to raise all relevant issues at the Appeals hearing to ensure that evidence pertaining to these issues is admissible in Tax Court.