151 T.C. No. 8



                  UNITED STATES TAX COURT



 DAVID H. MELASKY AND AUDREY MELASKY, Petitioners v.
   COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 12777-12L.                       Filed October 10, 2018.



       R mailed Ps a notice of determination. Ps owed significant
back taxes dating to the mid-1990s. As payment for their more recent
taxes, Ps hand delivered a check to R and designated it for the 2009
tax year. Four days later, and before cashing the check, R levied on
their bank account. The check subsequently bounced when R applied
the levy proceeds to an earlier year.

      Held: A challenge to the proper crediting of a payment is not a
challenge to the underlying tax liability. We therefore review Ps’
dispute as to application of payments only for abuse of discretion.



Juan F. Vasquez, Jr., and Renesha N. Fountain, for petitioners.

Susan K. Greene, for respondent.
                                          -2-

                                        OPINION


      HOLMES, Judge: David and Audrey Melasky have had their fair share of

tax troubles and have owed money to the IRS going back to their 1995 tax year.

In 2011 they hand delivered a check for what they contend was the entire amount

of their 2009 tax bill to the IRS. No one at the IRS cashed it before the IRS levied

the checking account on which they wrote it. The IRS then sent them a notice of

its intent to levy upon their property to collect--among even older debts--the 2009

tax bill they thought they had paid.1

      In this Opinion we consider the question of whether we review the IRS’

application of payments to a liability for abuse of discretion or de novo.

                                    Background

      The Melaskys have outstanding tax liabilities for 1995, 1996, 1999,

2000-04, 2006, 2008, and 2009. On January 27, 2011, the Melaskys walked into

an IRS office with a check for $18,000. They asked to apply it to their 2009 tax


      1
        Taxpayers often prefer to pay more recent tax debts first, because there is a
ten-year statute of limitations for most tax debts, sec. 6502; see also sec. 6503, and
because tax debts older than three years generally can be discharged in
bankruptcy, 11 U.S.C. sec. 523(a)(1)(A) (2012); see 11 U.S.C. sec. 507(a)(8)
(2012); Severo v. Commissioner, 

, 165 (2007), aff’d, 

(9th Cir. 2009). All section references are to the Internal Revenue Code (Code) in
effect for the relevant times.
                                         -3-

liability. They assert that this would’ve paid their entire income tax liability for

that year, and the IRS admits that it got this check. IRS records show that it

posted the $18,000 payment to the Melaskys’ 2009 tax liability on that same day.

These records then show a reversal of that same amount because the check

bounced. Why did it bounce? Here we have an unusual, but undisputed, fact--on

January 31, the IRS sent a notice of levy to the Melaskys’ bank. This notice froze

their entire balance, and either that or the IRS’s execution of the levy sometime

after January 31 made the Melaskys’ check bounce. The IRS then applied the

entire balance that it got with the levy to the Melaskys’ 1995 tax liability on

February 28. The IRS also charged the Melaskys $360 as a penalty for writing a

bad check. See sec. 6657.

      On the same day the notice of levy was issued to the bank, the IRS sent the

Melaskys a notice of intent to levy that listed only the years 2001, 2002, 2004,

2006, 2008, and 2009. The Melaskys asked for a CDP hearing.

      The settlement officer (SO) assigned to their case reviewed IRS records and

determined that the Melaskys had already received notices for tax years 1995,
                                         -4-

1996, 1999, and 2000-04. He therefore concluded they weren’t entitled to a CDP

hearing for those years.2 The Melaskys don’t dispute this.

      In the notice of determination the SO concluded, among other things, that

the money the IRS got from the bank was procured through levy procedures and

therefore was an involuntary payment that the IRS was free to apply as it wished.

      The Melaskys, who were and remain Texas residents, timely filed a petition.

They argue that their check was a voluntary payment when tendered and that they

were free to apply it as they wished. The parties do not dispute the contents of the

administrative record and cross-moved for summary judgment.

      The case raises several issues. In this Opinion we address the first: What is

the appropriate standard of review for questions of crediting payments?

                                     Discussion

      We start with sections 6320 and 6330. These sections allow us to review a

determination made by the IRS Appeals Office to sustain proposed liens and


      2
        Taxpayers are entitled to only one CDP hearing under section 6330 per tax
year. The IRS can send multiple notices of intent to levy for any given year, but a
taxpayer’s right to a CDP hearing is based on timely filing a request for the
hearing based on the first notice of intent to levy that he got for that year. See sec.
301.6330-1(b)(2), Proced. & Admin. Regs. (Though note that there can be
separate hearings to review proposed collection by lien. Secs. 6320(b)(2),
6330(b)(2); see also Freije v. Commissioner, 

, 4 (2008), aff’d, 325 F.
App’x 448 (7th Cir. 2009).)
                                        -5-

levies. Secs. 6320(c), 6330(d)(1). They do not, however, specify a standard of

review. We filled this gap ourselves with an analysis of the legislative history, and

held that our standard of review for CDP cases would normally be abuse of

discretion. Goza v. Commissioner, 

, 181-82 (2000). This means that

we look to see if the Commissioner’s decision was based on an error of law, or

rested on a clearly erroneous finding of fact, or whether he ruled irrationally. See

Antioco v. Commissioner, T.C. Memo. 2013-35, at *13-*14; see also Matassarin

v. Lynch, 

, 563 (5th Cir. 1999) (noting “‘arbitrary and capricious’

review amounts to an abuse-of-discretion standard”); Flaherty v. Bryson, 850 F.

Supp. 2d 38, 47 (D.D.C. 2012). We review CDP determinations de novo,

however, when the underlying tax liability is appropriately before us. Goza, 114

T.C. at 182.

      Both parties agree that we should review the determination for tax years

2006 and 2008 for abuse of discretion, but review the determination for tax year

2009 de novo because the Melaskys argue that they had no 2009 tax liability. The

Commissioner cites Landry v. Commissioner, 

 (2001). Landry was

about the computation of the amount owed under the Code after taking into

account overpayment credits that the taxpayer was entitled to. The question for

the Melaskys’ 2009 tax year is about whether the IRS properly applied a check. A
                                         -6-

question about whether the IRS properly credited a payment is not a challenge to a

tax liability; i.e., the amount of tax imposed by the Code for a particular year. It is

instead a question of whether the liability remains unpaid. Section 6330(c)(2)(A)

allows a taxpayer to raise at a CDP hearing “any relevant issue relating to the

unpaid tax,” whereas section 6330(c)(2)(B) says a taxpayer may challenge “the

existence or amount of the underlying tax liability” (emphasis added) only if he

didn’t receive a notice of deficiency or otherwise have an opportunity to do so.

See Kovacevich v. Commissioner, T.C. Memo. 2009-160, 

, at

*6. We therefore hold here that the Melaskys aren’t challenging their underlying

liability for 2009. See also Chief Counsel Notice CC-2014-002 (May 5, 2014)

(announcing similar IRS position).

      Our standard of review for these specific facts is therefore abuse of

discretion for all years.