This matter is before us on Appellee's Motion to Amend Opinion to Clarify Authority of IRS Office of Appeals over Rescission of I.R.C. § 6707A Penalties. Upon careful consideration, the motion is granted. The court's February 21, 2017 opinion is withdrawn and replaced by the attached revised opinion.
MATHESON, Circuit Judge.
In this appeal, we address whether a taxpayer may challenge a tax penalty in a Collection Due Process hearing ("CDP hearing") after already having challenged the penalty in the Appeals Office of the Internal Revenue Service ("IRS").
Keller Tank Services II, Inc. ("Keller"), the taxpayer, participated in an employee benefit plan and took deductions for its contributions to the plan. The IRS notified Keller of (1) a tax penalty of $57,782 for failure to report its participation in the plan as a "listed transaction" on its 2007 tax return, and (2) an income tax deficiency and related penalties for improper deductions of payments to the plan. This case is about the $57,782 penalty and Keller's efforts to challenge it.
As more fully described below, Keller protested the tax penalty at the IRS Appeals Office. It then attempted to do so in a CDP hearing but was rebuffed because it already had challenged the penalty at the Appeals Office. Keller appealed the CDP decision to the Tax Court, which granted summary judgment to the Commissioner of Internal Revenue ("Commissioner"). Keller appeals that decision here. Exercising
To aid the reader, we provide definitions of various terms, set forth the pertinent statutes and regulation, and offer a brief overview of the relevant tax enforcement process and administrative structure. We then turn to the factual and procedural history of this case.
The following terms are used throughout the opinion and first appear in the order presented here.
The following statutes and regulation are the primary legal materials applicable to this appeal.
For purposes of this section:
The Internal Revenue Code ("Code" or "IRC") requires taxpayers to file returns in the manner prescribed by the IRS. 26 U.S.C. § 6011(a). The Code directs the Secretary — acting through the IRS — to determine, assess, and collect federal taxes. See id. §§ 6201(a), 6301. Under this authority, the Secretary has established a procedure for the IRS to assess and collect penalties and deficiencies, and methods for the taxpayer to dispute these liabilities.
Section 6707A of the Code, titled "Penalty for Failure to Include Reportable Transaction Information with Return," authorizes the imposition of a penalty on taxpayers who fail to disclose information on their tax returns regarding "reportable" transactions, including "listed" transactions. Id. § 6707A.
Penalties under § 6707A are not subject to the procedures the IRS has afforded for deficiencies because they do not depend upon a deficiency; they are imposed solely for the failure to disclose, even in cases involving an overpayment of tax. Smith v. Comm'r, 133 T.C. 424, 428-29 (2009). Because § 6707A penalties are not subject to deficiency procedures, the taxpayer may not directly appeal a penalty to the Tax Court. See Bartman v. Comm'r, 446 F.3d 785, 787 (8th Cir. 2006) (stating "[a] notice of deficiency issued by the IRS pursuant to § 6212 is the taxpayer's jurisdictional `ticket to the Tax Court.'" (citations omitted)); Spector v. Comm'r, 790 F.2d 51, 52 (8th Cir. 1986) (citing Laing v. United States, 423 U.S. 161, 165 n.4, 96 S.Ct. 473, 46 L.Ed.2d 416 (1976)) (stating "the determination of a deficiency and the issuance of a notice of deficiency is an absolute precondition to tax court jurisdiction").
Thus, contesting a § 6707A penalty takes a different course. Once an IRS examiner proposes and receives approval from the IRS Territory Manager to impose a penalty for failing to report a reportable transaction, the examiner issues a "30-day Letter" before formally assessing the penalty. Internal Revenue Manual at 4.32.4.4. The taxpayer has 30 days to agree to or protest the penalty to the
Once the IRS decides to levy to collect a penalty, it must notify the taxpayer in writing of the right to a hearing under § 6330(a)(1), called a CDP hearing. Congress created the CDP process as part of the 1998 IRS Restructuring and Reform Act, a "Taxpayer Bill of Rights" aimed to curb abuse of taxpayers. See Dalton v. Comm'r, 682 F.3d 149, 154 (1st Cir. 2012); Tucker v. Comm'r, 676 F.3d 1129, 1131 (D.C. Cir. 2012).
Before 1998, the IRS could reach a taxpayer's assets by lien or levy without providing the taxpayer any process before the amount owed by the taxpayer was assessed and collected. Dalton, 682 F.3d at 154. Congress created the CDP process to afford taxpayers a pre-deprivation opportunity to contest the lien or levy before the IRS proceeded with collection. Id. at 154-55. At the CDP hearing, the taxpayer may challenge the propriety of a pending lien or levy, verify that collection is appropriate, and offer alternatives to collection. Tucker, 676 F.3d at 1131.
CDP hearings take place in the Appeals Office. Id.; Gyorgy v. Comm'r, 779 F.3d 466, 472 (7th Cir. 2015). The Appeals Officer presiding over the hearing represents the IRS and must have had no prior involvement with the liability at issue. Tucker, 676 F.3d at 1131. CDP proceedings "are informal and may be conducted via correspondence, over the phone or face to face." Living Care Alts. of Utica, Inc. v. United States, 411 F.3d 621, 624 (6th Cir. 2005). No transcript, recording, or other direct documentation of the proceeding is required. Id.
At the hearing, the Appeals Officer must do three things:
Id. at 624-25 (emphasis omitted) (quoting 26 U.S.C. § 6330(c)(3)).
The 1998 IRS Restructuring and Reform Act lists the issues the taxpayer may raise at the CDP hearing. The taxpayer may challenge its underlying tax "liability" only if it "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." 26 U.S.C. § 6330(c)(2)(B) ("¶ (c)(2)(B)"). Notably, the taxpayer need only have received an opportunity to dispute its tax liability. Whether it took advantage of that opportunity is irrelevant. Thus, a taxpayer is precluded from challenging liability at a CDP hearing when the taxpayer was afforded, but failed to take advantage of, a prior opportunity to dispute the liability. See, e.g., Chandler v. Comm'r, 327 Fed. Appx. 763, 766 (10th Cir. 2009) (unpublished),
The taxpayer may raise any other relevant "issue" relating to the unpaid tax — including, but not limited to, challenges to the appropriateness of collection actions, and alternative collection options — so long as the issue was not raised and considered in a prior administrative or judicial proceeding where the taxpayer meaningfully participated. 26 U.S.C. § 6330(c)(4)(A) ("¶ (c)(4)(A)").
After the CDP hearing, the Appeals Office decides whether it is reasonable to proceed with the intended collection action and issues a notice of determination containing its findings and conclusions. Dalton, 682 F.3d at 155; Gyorgy, 779 F.3d at 472 (citing Treas. Reg. § 301.6330-1(e), Q & A-E8).
A taxpayer who is dissatisfied with the findings or conclusions of the CDP hearing can appeal the determination to the Tax Court. Gyorgy, 779 F.3d at 472 (citing 26 U.S.C. § 6330(d)(1)). The Tax Court may review a § 6707A penalty when it is appealed from a CDP proceeding under § 6330(d). Yari v. Comm'r, 143 T.C. 157, 162 (2014).
When the Tax Court receives an appeal from the CDP hearing, however, its review is limited to issues that were properly raised during the CDP hearing. See Goza v. Comm'r, 114 T.C. 176, 182-83 (2000); Perkins v. Comm'r, 129 T.C. 58, 67 (2007); Konkel v. Comm'r, 2000 WL 1819417, at *3 (M.D. Fla. Nov. 6, 2000); see also Treas. Reg. § 301.6330-1(f), Q & A-F3. Because liability challenges precluded by ¶ (c)(2)(B) and issues precluded by ¶ (c)(4)(A) cannot be heard at a CDP hearing, the taxpayer may not present them to the Tax Court on appeal from the CDP hearing. See Goza, 114 T.C. at 182-83. If the taxpayer still wishes to contest those issues, it must instead pay the asserted liability and file a refund suit in federal district court. See Gorospe v. Comm'r, 451 F.3d 966, 968 (9th Cir.2006).
Congress established the Tax Court, an Article I court within the Executive Branch, Samuels, Kramer & Co. v. Comm'r, 930 F.2d 975, 991 (2d Cir. 1991), to give taxpayers a method to challenge IRS liability assessments without first having to pay an alleged liability. Without this forum, the taxpayer's only alternative would be to pay the asserted liability and initiate a refund suit in federal district court. Bartman, 446 F.3d at 787.
The Tax Court's jurisdiction is limited and is generally conferred by § 7442, but other specific grants are interspersed throughout the Code. Internal Revenue Manual 35.1.1.1. Specifically, § 6213(a) confers jurisdiction on the Tax Court to redetermine deficiencies and § 6330(d) confers jurisdiction to review penalties challenged at a CDP hearing. As noted above, the Tax Court may only review issues that were properly before the CDP proceeding.
Because CDP hearings typically produce a "scant record," the Tax Court generally conducts a deferential review of CDP determinations. See Olsen v. United States, 414 F.3d 144, 150 (1st Cir. 2005). If the underlying tax liability was properly at issue in the CDP hearing, the Tax Court
The Tax Court's decision is subject to review in the appropriate circuit court of appeals. See 26 U.S.C. § 7482(a)(1).
Keller participated in an employee benefit plan called the Sterling Benefit Plan ("Plan"), but did not report its participation on its tax return. The IRS alleges Keller's failure to report violated § 6707A. The IRS also claims Keller took improper deductions on its income tax returns related to its participation in the Plan, resulting in a deficiency. As a result, Keller has faced two parallel proceedings in which the IRS has sought: (1) a penalty under § 6707A for Keller's failure to report its participation in the Plan,
The Commissioner proposed a $57,781.50 penalty against Keller under § 6707A for the 2007 tax year for Keller's failure to disclose its participation in a listed transaction. Keller filed a protest with the Appeals Office to seek rescission of the penalty under § 6707A(d). On June 20, 2013, the Appeals Officer, Ms. Espinoza, held a telephone conference with Keller. Keller sent no materials beyond its protest to Ms. Espinoza for consideration before the conference but faxed three forms during the conference. At the conference, Ms. Espinoza heard Keller's liability arguments, concluded Keller's participation in the Plan was a "listed transaction," and decided the penalty should be sustained. She sent a fax to Keller stating, "If taxpayer disagrees with the penalty and/or Appeals doesn't hear from [Keller] by 7/9/2013, Appeals will process the case for closure." J. App. at 35. Because the Appeals Office did not hear from Keller by July 9, 2013, it sustained the penalty and closed the case.
The IRS sent Keller a final notice of its intent to levy and of Keller's right to a CDP hearing under § 6330. The letter stated that Keller must pay the assessed penalty, make payment arrangements, or appeal the levy by requesting a CDP hearing. Keller requested a CDP hearing, arguing the penalty was assessed "without the opportunity to protest the determination of the underlying transaction ... [to be] a listed transaction." J. App. at 45. Keller did not seek any collection alternatives or propose payment arrangements.
A CDP Officer, Elizabeth DeAngelis, granted Keller's request for a hearing and sent a letter scheduling a telephone conference. Ms. DeAngelis explained that the call would provide an opportunity to discuss
Keller participated in a phone conference with Ms. DeAngelis on March 18, 2014. Keller attempted to contest its tax liability, but Ms. DeAngelis informed Keller's counsel that Keller was precluded from challenging its liability because Ms. Espinoza had reviewed and sustained liability at the Appeals Office hearing. Keller raised no other issues during the hearing. Ms. DeAngelis sustained the penalty. The IRS sent Keller a Notice of Determination, which specified that Keller's only arguments at the CDP hearing attempted to dispute its liability for the penalty, "however, you are unable to raise the liability within this hearing since you had a prior opportunity to dispute the liability when you had the IRC 6707A Appeals hearing for this same tax period. You raised no other issues." J. App. at 52-53, 55.
Keller filed a petition with the Tax Court to challenge its liability for the penalty.
The Tax Court granted summary judgment to the Commissioner on June 16, 2015. It determined that ¶ (c)(2)(B) precluded Keller from challenging its underlying liability because Keller was afforded a prior opportunity to dispute its liability in its hearing before the Appeals Office.
Keller timely appealed the Tax Court's June 16, 2015 order to this court.
The Commissioner argues that Keller's appeal is moot because Keller is collaterally estopped from challenging its liability. Keller argues that Treas. Reg. § 301.6320-1(e)(3) unreasonably interprets ¶ (c)(2)(B) to preclude liability challenges at the CDP hearing — and ultimately before the Tax Court — when the taxpayer had a prior opportunity to dispute its liability before the Appeals Office. We disagree with the Commissioner's mootness arguments and with Keller's arguments regarding the scope of the CDP hearing and affirm the Tax Court's grant of summary judgment.
The Commissioner's mootness argument, as more fully explained below, stems from Keller's stipulation to be bound in its deficiency proceeding by the Tax Court's decision in a related case called Our Country Home Enterprises, Inc., et al. v. Commissioner, 145 T.C. 1 (2015). In Our Country Home, the Tax Court addressed another taxpayer's participation in the same Sterling Benefit Plan and determined that participation in the Plan was a listed transaction. Based on Keller's stipulation, the Commissioner contends that the Tax Court's decision in Our Country Home that participation in the Plan was a listed transaction resolved all of Keller's issues in this appeal and that Keller is thereby collaterally estopped from challenging its liability, mooting this case. We disagree for three reasons: (1) The Commissioner's collateral estoppel argument concerns the merits of Keller's arguments, not our jurisdiction; (2) Keller's stipulation is binding only in Keller's deficiency proceeding, not the § 6707A penalty proceeding at issue in this appeal; and (3) even if Keller's participation in the Plan is a listed transaction, Keller contests other issues related to this appeal.
In the second parallel proceeding mentioned above — the deficiency proceeding — the Commissioner issued a notice of deficiency to Keller for its alleged improper deductions based on payments to the Plan between 2006-2008 and assessed penalties for that deficiency under § 6662(a) and § 6662A. Keller stipulated with the IRS that its liability for any deficiency based on improper income deductions for the tax years 2006, 2007, and 2008 would be resolved "on the same basis that similar issues are resolved by the final decision... of Our Country Home." Supp. App. at 16.
On July 13, 2015, the Tax Court published its decision in Our Country Home, concluding that participation in the Plan was a listed transaction, any deductions taken for payments to the Plan resulted in a deficiency, and this deficiency was subject to a penalty under § 6662A. The Tax Court entered its final order on February 8, 2016.
The "[c]onstitutional mootness doctrine is grounded in the Article III
A case may become moot while pending, including on appeal. United States v. De Vaughn, 694 F.3d 1141, 1157 (10th Cir. 2012) (quoting Church of Scientology v. United States, 506 U.S. 9, 12, 113 S.Ct. 447, 121 L.Ed.2d 313 (1992)). An "actual controversy must be extant at all stages of review, not merely at the time the complaint is filed .... If an intervening circumstance deprives the plaintiff of a personal stake in the outcome of the lawsuit, at any point during litigation, the action can no longer proceed and must be dismissed as moot." Brown, 822 F.3d at 1165 (citations and quotations omitted). "`Put another way, a case becomes moot when a plaintiff no longer suffers actual injury that can be redressed by a favorable judicial decision.'" Id. at 1166 (quoting Ind v. Colo. Dep't of Corr., 801 F.3d 1209, 1213 (10th Cir. 2015)). When a case is on appeal,
See Morganroth & Morganroth v. DeLorean, 213 F.3d 1301, 1309 (10th Cir. 2000), overruled on other grounds by TW Telecom Holdings, Inc. v. Carolina Internet Ltd., 661 F.3d 495 (10th Cir. 2011).
We review mootness de novo as a legal question. Brown, 822 F.3d at 1168.
Collateral estoppel, or issue preclusion, concerns the merits of a case. It is an affirmative defense that bars the re-litigation of an issue of law or fact after it is determined by a valid, final judgment. Stan Lee Media, Inc. v. Walt Disney Co., 774 F.3d 1292, 1297 (10th Cir. 2014).
The party invoking collateral estoppel must prove four elements: (1) the issue previously decided is identical to the present one; (2) the prior action was finally adjudicated on the merits; (3) the party against whom the doctrine is invoked was a party or in privity with a party to the previous adjudication; and (4) the party against whom the doctrine is raised had a full and fair opportunity to litigate the issue in the previous adjudication. Id. Regarding the third element, the Supreme Court generally holds that collateral estoppel does not apply to nonparties in the prior action. Taylor v. Sturgell, 553 U.S. 880, 893, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008). But "the [general] rule against non-party preclusion is subject to exceptions," including that "[a] person who agrees to be bound by the determination of issues in an action between others is bound in accordance with the [agreement's] terms." Id. (quoting 1 Restatement (Second) of Judgments § 40, p. 390 (1980)). The litigated issue must also be "essential to the judgment." Stan Lee Media, 774 F.3d at 1297 (quoting Arizona v. California, 530 U.S. 392,
This case is not moot for three reasons.
Smith v. SEC, 129 F.3d 356, 363-64 (6th Cir. 1997) (quotations omitted). The Commissioner cites no authority to the contrary.
For the reasons stated, this case is not moot.
Keller argues that ¶ (c)(2)(B) should not preclude liability challenges in a CDP hearing or the Tax Court when the taxpayer's prior opportunity to dispute its liability arose, as it did here, in an administrative setting.
"We review tax court decisions `in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.'" Katz v. Comm'r, 335 F.3d 1121, 1125-26 (10th Cir. 2003) (quoting Kurzet v. Comm'r, 222 F.3d 830, 833 (10th Cir. 2000); 26 U.S.C. § 7482(a)(1)). Thus, like our review of a district court's grant of summary judgment, we review the Tax Court's grant of summary judgment de novo. Scanlon White, Inc. v. Comm'r, 472 F.3d 1173, 1174 (10th Cir. 2006).
This section outlines the legal framework for analyzing treasury regulations, highlights the relevant portions of ¶ (c)(2)(B) and Treas. Reg. § 301.6330-1, and summarizes the Tax Court's analysis of Treas. Reg. § 301.6330-1 in Lewis v. Commissioner.
We defer to an agency's regulation that reasonably interprets an ambiguous statute. Chevron, U.S.A., Inc. v. Nat'l Res. Def. Council, Inc., 467 U.S. 837, 841-44, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). "[C]onsiderable weight should be accorded to an executive department's construction of a statutory scheme it is entrusted to administer." Id. at 844, 104 S.Ct. 2778; see also Hydro Res., Inc. v. EPA, 608 F.3d 1131, 1145-46 (10th Cir. 2010) (en banc) ("[C]ourts afford considerable deference to agencies interpreting ambiguities in statutes that Congress has delegated to their care, including statutory ambiguities affecting the agency's jurisdiction." (citations omitted)).
This deference applies to Treasury regulations. See Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, 55, 131 S.Ct. 704, 178 L.Ed.2d 588 (2011) (clarifying that Chevron applies "with full force in the tax context"). Here, the Secretary promulgated Treas. Reg. § 301.6330-1 pursuant to express general authority under 26 U.S.C. § 7805(a) after notice and comment. Id. § 7805(a) ("Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including
The Chevron-deference analysis proceeds in two steps. Zen Magnets, LLC v. Consumer Prod. Safety Comm'n, 841 F.3d 1141, 1160 (10th Cir. 2016). First, "[w]hen Congress has spoken to the precise question at issue, we must give effect to the express intent of Congress." Id. (citations and quotations omitted). Second, "[i]f the statute is silent or ambiguous, however, we defer to the agency's interpretation, if it is a permissible one." Id. (quotations omitted); see also Sierra Club, Inc. v. Bostick, 787 F.3d 1043, 1056-57 (10th Cir. 2015).
In the first step, we employ the "traditional tools of statutory construction" to determine whether the intent of Congress is clear from the statutory text and "whether the [statutory] language ... has a plain and unambiguous meaning with regard to the particular dispute." INS v. Cardoza-Fonseca, 480 U.S. 421, 446, 107 S.Ct. 1207, 94 L.Ed.2d 434 (1987); Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778; Robinson v. Shell Oil Co., 519 U.S. 337, 340, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997). The "plainness or ambiguity of statutory language is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Robinson, 519 U.S. at 341, 117 S.Ct. 843. If the statute is not ambiguous, our inquiry ends there. Id. at 340, 117 S.Ct. 843. But if the statute is "capable of being understood by reasonably well-informed persons in two or more different senses," we proceed to the second step of Chevron. McGraw v. Barnhart, 450 F.3d 493, 498 (10th Cir. 2006) (quotations omitted).
In the second step, if the statute is silent or ambiguous on the specific issue, we defer to the agency's interpretation if it is based on a permissible construction of the statute. Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778; Sierra Club, 787 F.3d at 1057. For a construction to be permissible, we need not conclude it was the only one the agency could reasonably have adopted or that we would have rendered the same interpretation if the question arose initially in a judicial context. Chevron, 467 U.S. at 843 n.11, 104 S.Ct. 2778. We look only to whether the implementing agency's construction is reasonable. Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 980, 125 S.Ct. 2688, 162 L.Ed.2d 820 (2005).
The Tax Court relied on ¶ (c)(2)(B) to determine that Keller was precluded from challenging its liability at the CDP hearing. As outlined above, ¶ (c)(2)(B) precludes a taxpayer from challenging the existence or amount of the underlying tax liability at a CDP hearing if the taxpayer had a prior "opportunity to dispute" that liability — i.e., the taxpayer received a statutory notice of deficiency or otherwise had an "opportunity to dispute" the underlying tax liability. When ¶ (c)(2)(B) precludes a taxpayer from challenging its liability at the CDP hearing, the Tax Court accordingly lacks authority to review the liability determination because that issue was not properly before the CDP hearing. Goza, 114 T.C. at 182-83.
In Treas. Reg. § 301.6330-1, the IRS explained that ¶ (c)(2)(B)'s reference to "opportunity to dispute" "includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability." This clarification was promulgated in response to public comment about the proposed regulation. Miscellaneous Changes to Collection Due Process Procedures Relating to Notice and Opportunity for Hearing Prior to Levy, 71 Fed. Reg. 60827-02, 60830 (Oct. 17, 2006) (to be codified at 26 C.F.R. pt. 301) ("For liabilities not subject to deficiency procedures, the offer of an Appeals conference prior to assessment constitutes an opportunity to dispute the liability under section 6330(c)(2)(B)."). The IRS rejected the suggestion to limit this restriction to prior judicial proceedings:
Id. (emphasis added).
The Tax Court applied Chevron deference to Treas. Reg. § 301.6330-1 in Lewis v. Commissioner and held the regulation was a reasonable interpretation of ¶ (c)(2)(B). In Lewis, like here, the Tax Court affirmed summary judgment for the Commissioner because the taxpayer had a prior opportunity to dispute his underlying tax liability in a conference with the Appeals Office. 128 T.C. at 62.
Applying the first step of Chevron, the Tax Court held that ¶ (c)(2)(B)'s "otherwise have an opportunity to dispute" language is ambiguous. See id. at 55. It noted that neither the 1998 IRS Restructuring and Reform Act nor the Code defined the phrase. Id. Moreover, the court said that the phrase could fairly be read to suggest different possible meanings, each finding support in the context of the statute: (1) it could include only judicial review or (2) it could also include challenges before the Appeals Office. Id. at 55-56.
Moving to Chevron step two, the Tax Court examined the possible meanings of the statute outlined above and concluded that Treas. Reg. § 301.6330-1's interpretation of ¶ (c)(2)(B) was reasonable. Id. at 61. Addressing the contrary view that ¶ (c)(2)(B) could be read to include only judicial review, the Tax Court said:
Id.
The Tax Court also offered several rationales to justify including administrative proceedings in the definition of prior "opportunities" that would bar a subsequent challenge of the underlying tax liability at a CDP hearing and thus found Treas. Reg. § 301.6330-1 to be a reasonable interpretation of ¶ (c)(2)(B).
The Tenth Circuit has not addressed whether ¶ (c)(2)(B) precludes a challenge to liability at a CDP hearing when the taxpayer's prior opportunity to dispute liability occurred at an administrative, non-judicial proceeding.
Applying the two-step Chevron test, we conclude, as the Tax Court did in Lewis, that ¶ (c)(2)(B)'s reference to a prior "opportunity to dispute" is ambiguous and that Treas. Reg. § 301.6330-1 is a reasonable interpretation of ¶ (c)(2)(B). We therefore affirm the Tax Court's grant of summary judgment.
In step one of the Chevron analysis, we determine whether the statute is ambiguous. Here, ¶ (c)(2)(B) is ambiguous on its face and when analyzed within the context of § 6330.
Keller and the Commissioner agree that the language of ¶ (c)(2)(B) does not define which prior "opportunities" to dispute tax liability Congress intended to include. The Tax Court in Lewis found that ¶ (c)(2)(B) was subject to competing interpretations. 128 T.C. at 55. Looking at the language of ¶ (c)(2)(B), we agree that what constitutes an "opportunity to dispute" is subject to more than one reasonable interpretation: it may refer only to judicial review, only to administrative review, or both.
Paragraph (c)(2)(B)'s surrounding text contributes to this ambiguity. Paragraph (c)(4)(A) expressly precludes consideration of issues at a CDP hearing that were raised and considered at any other "administrative or judicial proceeding" (emphasis added). In contrast, ¶ (c)(2)(B) refers to prior "opportunity to dispute" but is silent on what type of opportunity the phrase includes.
Paragraph (c)(2)(B)'s text is thus ambiguous. Neither the surrounding text of § 6330 nor the rest of the Code define what Congress intended by "otherwise have an opportunity to dispute." Accord Lewis, 128 T.C. at 55.
In step two of the Chevron analysis, we determine whether the agency's interpretation is based on a permissible construction of the statute. Here, we conclude that Treas. Reg. § 301.6330-1(e)(3)'s explanation that a prior ¶ (c)(2)(B) "opportunity to dispute" includes "a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability" is a reasonable interpretation of ¶ (c)(2)(B).
The word "hearing" refers to the CDP hearing. Because the tax liability in this case is a penalty and not a deficiency, the key language is "did not otherwise have an opportunity to dispute such tax liability." Nothing on the face of this text excludes an administrative proceeding from an "opportunity to dispute" a tax penalty. And nothing suggests that reading "opportunity to dispute" to include an administrative proceeding is unreasonable. The text of the statute therefore supports the reasonableness of Treas. Reg. § 301.6330-1(e)(3)'s interpretation of ¶ (c)(2)(B).
For example, the Tax Court observed that if Congress had intended to limit ¶ (c)(2)(B) to prior judicial review, it could simply have said "opportunity to seek judicial review." Id. at 57. Moreover, the judicial-only interpretation Keller proposes would "encourage a taxpayer to wait until a collection action begins before disputing [a nondeficiency] liability" to obtain judicial, rather than administrative, review of liability. Id. at 58. But this would minimize the role of the Appeals Office and contradict the purpose of the 1998 IRS Restructuring and Reform Act. Congress intended to provide the taxpayer a means to seek review of a liability through an informal conference with the Appeals Office, id. at 59 — "a meaningful process, short of litigation, in which [the taxpayer] could resolve tax disputes," id. at 60; see also Giamelli v. Comm'r, 129 T.C. 107, 114 (2007).
We agree with these points and the Tax Court's conclusion that "it is reasonable" to read ¶ (c)(2)(B) "to conclude that Congress intended not only to address those taxpayers who were previously provided an opportunity to litigate their liability, but also those provided an opportunity to dispute the liability short of litigation." 128 T.C. at 60. Thus, under ¶ (c)(2)(B), "[a]
Keller argues Treas. Reg. § 301.6330-1 is an unreasonable interpretation of ¶ (c)(2)(B) because it (1) impermissibly limits the jurisdiction of the Tax Court and the federal courts; and (2) is internally inconsistent. These arguments do not persuade us that the regulation is unreasonable or "arbitrary, capricious, or manifestly contrary to the statute," Chevron, 467 U.S. at 844, 104 S.Ct. 2778.
Keller argues that Treas. Reg. § 301.6330-1 impermissibly limits the jurisdiction of the Tax Court through a regulation and thus should not receive Chevron deference. We disagree.
Treas. Reg. § 301.6330-1 does not diminish the jurisdiction of any court. Section 6330(d) establishes the Tax Court's jurisdiction to review CDP proceedings. Treas. Reg. § 301.6330-1 limits only the scope of what may be heard at the agency's administrative CDP proceedings.
Moreover, Treas. Reg. § 301.6330-1 has no impact on the taxpayer's ability to file a refund suit in federal district court. The jurisdiction of federal courts remains available for a taxpayer to contest its liability.
Keller argues that Treas. Reg. § 301.6330-1 contains internal inconsistencies and is thus unreasonable. We disagree.
In short, Keller's internal inconsistency arguments fall short of showing that Treas. Reg. § 301.6330-1 is arbitrary, capricious, or manifestly contrary to the statute.
For the foregoing reasons, we affirm the Tax Court's grant of summary judgment.
