Oral Arguments Heard in Dispute Over Mootness of Tax Proceedings

The Supreme Court heard oral arguments in a case between the IRS and a taxpayer that poses the question whether a pre-levy proceeding before the Tax Court becomes moot when there is not a live controversy and the IRS stops pursuing the levy.

Background.

In Commissioner v. Zuch (No. 24-416), taxpayer Jennifer Zuch maintains that the IRS improperly credited $50,000 in overpayments to her now-ex-husband’s tax bill instead of hers as the couple was in the process of their divorce.

Zuch and Patrick Gennardo were married from 1993 to 2014. They sent the IRS two checks from their joint bank account totaling $50,000 to serve as estimated tax payments for tax year 2010. But the couple separated and filed untimely amended married-filing-separately 2010 returns in 2012.

Based on those returns, the IRS determined that Gennardo owed approximately $385,000. He opted to settle this balance through an offer-in-compromise with the IRS, which applied the full $50,000 pre-payments to the amount Gannardo owed.

Gennardo filed another amended return to notify the IRS that the $50,000 should be credited to Zuch instead, but the agency did not adhere to the requested allocation, as the checks only listed Gennardo’s name.

Zuch’s amended 2010 return reflected $71,000 in additional income attributable to a distribution from her retirement account, resulting in her owing over $27,600. She iterated that the $50,000 should offset her balance and leave her with a refund of just under $22,000.

Since the $50,000 was already credited to Gennardo’s account, the IRS in 2013 sent Zuch a notice of its intention to levy her property to collect her assessed bill for 2010. The IRS informed Zuch she had 30 days to request a collection due process hearing before the Office of Appeals.

Prior proceedings.

Zuch timely requested the hearing but claimed she did not receive a notice of deficiency in the first place and thus did not have an opportunity to dispute it pursuant to Code Sec. 6330(c)(2)(B).

This led to a years-long back-and-forth between Appeals Office and the Tax Court. Over time, the IRS applied refunds for later years towards her 2010 liability until it was satisfied. Because her liability became $0, the IRS moved for the Tax Court to dismiss the case as moot. The Tax Court granted the motion to dismiss and agreed it lacked jurisdiction over the case, reasoning that there was no unpaid liability that could be levied and therefore challenged in court.

The 3rd U.S. Circuit Court of Appeals vehemently disagreed, ruling that not only was the case not moot, but also the IRS should have allocated the $50,000 to Zuch’s account. “In short, there is nothing in the plain text of 6330 that suggests a taxpayer’s challenge to the tax liability at issue in an action under 6330(c)(2)(B) can be rendered moot by the unilateral action of the IRS,” read the 3rd Circuit’s opinion. (133 AFTR 2d 2024-1091)

It continued in saying “the IRS has not met its heavy burden to show that Zuch would have no relief whatsoever if the Tax Court were to declare she has a right to the estimated tax payments.”

The 3rd Circuit reversed the dismissal and remanded back to the Tax Court, but the Supreme Court granted the IRS’ cert petition appealing the Circuit’s ruling.

Arguments.

At oral arguments before the Supreme Court April 22, the government was represented by Erica Ross, the Department of Justice’s assistant to the solicitor general.

Ross in her opening statement said the Tax Court lacked jurisdiction because the “IRS no longer has a basis to enforce its proposed levy,” as if “the IRS had never proposed a levy at all.”

Justice Clarence Thomas asked Ross if the case is more of a matter of statutory jurisdiction rather than mootness, to which Ross responded that Section 6330 “is all about levies” and while “you can look at this case in a variety of ways you get to the same place.” Section 6330 “requires something that’s no longer present.”

Justice Neil Gorsuch told Ross he was “stuck” on the fact that “there is a dispute about the underlying tax liability,” which the government has not withdrawn. Ross supplied that the IRS is not bound by the determination of an Appeals Officer as its position in future litigation.

“But the statutory jurisdiction hooks on a determination,” Gorsuch pressed the government’s counsel. “We have a determination, and you can contest your underlying tax liability.”

Justice Ketanji Brown Jackson asked Ross what a determination specifically means in this instance, to which Ross explained it is “whether the levy can go forward… all we are saying here is that Section 6330 has no work left to do.”

Representing Zuch was Shay Dvoretzky, partner at Skadden, Arps, Slate, Meagher & Flom LLP. According to Dvoretzky, Congress gave the Tax Court jurisdiction to review both the proposed levy and the challenge to the tax assessment.

“So if a taxpayer disputes the Office’s resolution of her liability and unpaid tax, Section 6330 review isn’t moot just because the IRS stops pursuing a levy,” he said in his opening statement. “To the contrary, if the taxpayer wins, she is entitled to, and likely will receive, money.”

Jackson pushed back on what the statute says about determinations regarding jurisdiction. “It says such determination, such matter — singular, not plural,” she told the defense. (emphasis added) “[I]t’s pretty clear that the statute is about a particular determination, that is whether the levy will go forward. And Congress is providing people with notice and an opportunity to be heard with respect to that determination.”

In response, Dvoretzky said that the initial determination in this case “talks about how the Appeals Office reviewed both the tax payment transfer request and the request for penalty abate.” Further, the statute uses a “distinctive ‘or’ to distinguish between issues relating to the unpaid tax or the proposed levy,” he said.

Ross in her rebuttal urged the Court to not get hung up on the “dense” and “technical” aspects of the statute and reverse the 3rd Circuit simply because the Section 6330 pre-payment mechanism “just no longer” is “the right mechanism” for Zuch to seek a refund.

For more on Section 6330 and pre-levy collection due process hearings, see Checkpoint’s Federal Tax Coordinator ¶V-5255.1.