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Supplemental notice of determination didn’t confer Tax Court jurisdiction

 

LG Kendrick, LLC, (2016) 146 TC No. 2146 TC No. 2

The Tax Court has held that it didn’t have jurisdiction to review the filing of a notice of Federal tax lien (NFTL) for a taxpayer for a certain period, concluding that, where the original notice of determination was insufficient to confer jurisdiction on the Court, a supplemental notice of determination by IRS couldn’t cure this jurisdictional defect. For the periods over which the Tax Court did have jurisdiction to review the NFTL, the Court held that the taxpayer couldn’t challenge the underlying liabilities and that the Appeals Office didn’t abuse its discretion in sustaining the NFTL filing and a proposed levy action.

Background. Code Sec. 6320(a)(1) and Code Sec. 6330(a)(1) require IRS to give a taxpayer written notice when a NFTL is filed upon the taxpayer’s property or IRS intends to levy upon the taxpayer’s property. The notices must inform the taxpayer of the right to request an administrative (i.e. a Collection Due Process, or CDP) hearing in the Appeals Office. When making such a request, the taxpayer must state the grounds for the requested hearing. (Code Sec. 6320(b)(1), Code Sec. 6330(b)(1)) If a taxpayer makes a timely written request and states the grounds for the requested hearing, he is entitled to a fair hearing conducted by an impartial officer from the Appeals Office. (Code Sec. 6320(a)(3)(B), Code Sec. 6330(a)(3)(B))

After the administrative hearing is completed, the Appeals Office issues a written notice of determination indicating whether the NFTL should remain in effect and/or whether the proposed levy may proceed. (Code Sec. 6330(c)(3), Reg. § 301.6320-1(e)(3), Q&A E8, Reg. § 301.6330-1(e)(3), Q&A E8) A taxpayer may appeal the Appeals Office determination to the Tax Court within 30 days of the determination, and if an appeal is timely filed, the Court will have jurisdiction with respect to the matter. (Code Sec. 6330(d)(1), Reg. § 301.6330-1(f)(1))

Facts. LG Kendrick, LLC was a single-member LLC that operated a franchise business, “The UPS Store.” IRS determined that LG Kendrick had employees and had unpaid Federal employment taxes, i.e., unpaid withholding and Federal Insurance Contributions Act (FICA) tax liabilities with respect to its Forms 941 (Employer’s Quarterly Federal Tax Return), for the last three quarters of 2009 and all four quarters of 2010, and unpaid Federal Unemployment Tax Act (FUTA) tax liabilities with respect to its Forms 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return) for the 2009 and 2010 tax years (collectively, the periods at issue).

After processing substitutes for returns and assessing the employment taxes for the periods at issue, IRS mailed to LG Kendrick a notice of the filing of a NFTL and a levy notice with respect to the periods at issue. LG Kendrick timely requested and received a hearing with the IRS Appeals Office.

The Appeals Office subsequently issued two notices of determination sustaining the NFTL filing and the proposed levy for the periods at issue except the NFTL filing for LG Kendrick’s Dec. 31, 2010 Form 941 liability. Neither the first notice of determination nor the second notice of determination (together, original notices of determination) addressed the NFTL filing for the taxpayer’s Dec. 31, 2010 Form 941 liability.

The first notice of determination sustained the collection action for the liabilities at issue, except that it did not address the proposed levy or the NFTL filing for the taxpayer’s Dec. 31, 2010 Form 941 liability. The first page of the first notice of determination had a list titled “Tax Period(s) Ended”, which listed the tax periods to which the notice pertained and included the December 2010 tax period. The third page of the first notice of determination contained two tables detailing to which tax periods and collection activities the notice pertained. The first table included the proposed levy of the Form 941 liabilities for the quarters ending June 30, 2009, through Sept. 30, 2010, inclusive, and of the Form 940 liabilities for the tax periods “12/31/09” and “12/31/10”. The second table included the NFTL filing with respect to the Form 941 liabilities for the quarters June 30, 2009, through Sept. 30, 2010, inclusive, and with respect to the Form 940 liabilities for the tax periods “12/31/09” and “12/31/10.”

The second notice of determination sustained the proposed levy of the taxpayer’s Dec. 31, 2010 Form 941 liability. The first page of the second notice of determination listed the relevant tax period as December 2010. A table on the third page clarified that the notice pertained only to the proposed levy of the taxpayer’s Dec. 31, 2010 Form 941 liability.

LG Kendrick filed a petition disputing the Appeals Office’s determinations.

The Tax Court remanded the case on IRS’s motion because, during the administrative hearing, the settlement officer did not fully explain to the taxpayer the basis for the employment tax assessments, did not make a determination about whether the taxpayer was entitled to challenge the underlying liabilities, and did not include the NFTL filing for the taxpayer’s Dec. 31, 2010 Form 941 liability on either notice of determination. The Appeals Office subsequently issued a supplemental notice of determination which sustained the NFTL filing and the proposed levy for the periods at issue, including the NFTL filing for LG Kendrick’s Dec. 31, 2010 Form 941 liability.

The issue. The question before the Tax Court was whether the original notices of determination conferred jurisdiction over the NFTL filing for LG Kendrick’s Dec. 31, 2010 Form 941 liability, and if not, whether the supplemental notice of determination cured the jurisdictional defect.

IRS’s position. IRS contended that the Tax Court had jurisdiction to review the NFTL filing for the Dec. 31, 2010 Form 941 liability because its omission from the original notices of determination was an inadvertent clerical error. The taxpayer substantively received a hearing with respect to the collection action, and the supplemental notice of determination simply clarified that the hearing and determination with respect to the liability were embedded in the original notices of determination and hearing.

Tax Court’s conclusion. The Tax Court determined that the original notices of determination didn’t embody a determination to sustain, and so were invalid with respect to, the NFTL filing for LG Kendrick’s Dec. 31, 2010 Form 941 liability.

The Court found this case was distinguishable from cases where the jurisdictional notice contained a typographical or other minor error but still revealed on its face that IRS had made a determination with respect to a particular period. The tables within the original notices of determination listed all periods and collection activities for which the Appeals Office had made determinations. They did not include the NFTL filing for the taxpayer’s Dec. 31, 2010 Form 941 liability. Nothing in the remainder of the notices hinted that the Appeals Office made a determination with respect to the NFTL filing for that liability. The references to the tax period December 2010 on the first pages of the original notices of determination did not provide clarification because the notices addressed other collection activities with respect to that period. In short, the original notices of determination were devoid of any information from which a reasonable person could conclude that the Appeals Office had made a determination with respect to the NFTL filing for the Dec. 31, 2010 Form 941 liability.

The Tax Court reasoned that the fundamental purpose of a notice of determination, i.e., to notify the taxpayer of the Appeals Office’s determination to sustain a collection action for a particular tax period, was not fulfilled. The Court did not look behind the notice, as IRS urged it to do, to determine whether the taxpayers substantively received a hearing with respect to the Dec. 31, 2010 Form 941 liability. The Court found that It was the Appeals Office’s written determination, not the fact that an administrative hearing had occurred, that was the basis for its jurisdiction.

The Court further held that a supplemental notice of determination that sustains a collection action for a tax period couldn’t form the basis for the Court’s jurisdiction when the original notice of determination was invalid with respect to the collection action for that tax period. Accordingly, the Tax Court did not have jurisdiction to review the NFTL filing for LG Kendrick’s Dec. 31 2010 Form 941 liability.

The Court noted that a taxpayer is entitled to only one administrative hearing with respect to a tax period, which in turn yields only one lien or levy determination for each period. Although the initial determination may be supplemented following a remand, the supplemental determination notice is merely a supplement to the original determination notice and relates back to the original determination notice. It is not a new determination and does not provide the taxpayer any additional appeal rights. Because the Court lacked jurisdiction over the original notice of determination, it held that it similarly lacked jurisdiction over the determination as supplemented.

However, the Tax Court also found that LG Kendrick wasn’t entitled to challenge the underlying liabilities for the periods at issue over which the Court had jurisdiction. The Appeals Office’s determinations were sustained for the periods at issue over which the Court had jurisdiction.

References: For collection due process hearings with regard to levies, see FTC 2d/FIN ¶  V-5255  ; United States Tax Reporter ¶  63,304  ; TaxDesk ¶  902,505  ; TG ¶  71945  .

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