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Keller Tank Services II, Inc. v. Commissioner of Internal Revenue

United States Court of Appeals, Tenth Circuit

February 21, 2017

KELLER TANK SERVICES II, INC., Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

         APPEAL FROM THE COMMISSIONER OF INTERNAL REVENUE (CIR No. 11611-14 L)

          A. Lavar Taylor, A. Lavar Taylor Law Offices, Santa Ana, California (Jonathan T. Amitrano, A. Lavar Taylor Law Offices, Santa Ana, California; Allen J. White, Allen J. White & Associates, Downers Grove, Illinois; and William Wise, Wise & Stracks, Chicago, Illinois, with him on the briefs), appearing for Appellant.

          Jennifer M. Rubin, Attorney, Tax Division (Caroline D. Ciraolo, Principal Deputy Assistant Attorney General; Diana L. Erbsen, Deputy Assistant Attorney General; Gilbert S. Rothenberg, Attorney, Tax Division; and Michael J. Haungs, Attorney, Tax Division, with her on the brief), United States Department of Justice, Washington, DC, appearing for Appellee.

          Before HOLMES, MATHESON, and McHUGH, Circuit Judges.

          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 jurisdiction under 26 U.S.C. § 7482(a)(1), we affirm.

         I. BACKGROUND

         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.

         A. Terms, Statutes, and Regulation

         1. Key Terms

         The following terms are used throughout the opinion and first appear in the order presented here.[1]

Commissioner: the Commissioner of Internal Revenue is nominated by the President and confirmed by the Senate, and has the duty to administer, manage, conduct, direct, and supervise the execution and application of internal revenue laws. Lawsuits by and against the IRS are conducted in the name of the Commissioner, and are litigated by counsel of the IRS.
Liability: amount owed by a taxpayer under the tax laws. As used in this opinion, a liability may be a penalty or deficiency.
Deficiency: the amount by which the tax value imposed by the IRS exceeds the amount reported by the taxpayer on its return. The IRS's determination of a deficiency is a provisional determination. Accordingly, a notice of deficiency affords the taxpayer a right to prepayment judicial review by the Tax Court before the IRS assesses and collects the liability. The IRS cannot attempt to collect the deficiency until the notice of deficiency has been mailed to the taxpayer and the taxpayer has been given 90 days to file a petition in the Tax Court. 26 U.S.C. § 6213.
Penalty: imposed on taxpayers by the IRS to encourage compliance with tax laws. Certain penalties are considered assessable, which means the IRS may assess them without providing an opportunity for prepayment judicial review by the Tax Court. The penalty provision relevant to this case is § 6707A, which imposes a penalty for failing to report transactions classified as "reportable, " including "listed" transactions. 26 U.S.C. § 6707A(b)(2). A § 6707A penalty may be imposed for failure to report regardless of whether a deficiency results. Internal Revenue Manual 4.32.4.1.1 ¶ 3.
Reportable Transaction: a transaction that must be disclosed on a taxpayer's return because the Secretary of Treasury ("Secretary") has determined that type of transaction has potential for tax avoidance or evasion. The maximum penalty for failure to report a reportable transaction, other than a listed transaction, is $50, 000 for a corporation. 26 U.S.C. § 6707A(b)-(c).
Listed Transaction: a type of reportable transaction that is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction. The Secretary identifies listed transactions in notices or other published guidance. The maximum penalty for failing to report a listed transaction is $200, 000 for a corporation. 26 U.S.C. § 6707A(b)-(c).
Assessment: the formal recording and establishment of a taxpayer's liability, fixing the amount owed by the taxpayer. The assessment is effectively a judgment and triggers the IRS's ability to collect on the liability via lien or levy.
Levy: after a liability has been assessed, certain procedural requirements have been met, and the taxpayer has neglected or refused to pay the assessed tax, the IRS may attach, or encumber, the taxpayer's property to seize and sell it as "a prompt and convenient method for satisfying delinquent tax claims." United States v. Nat'l Bank of Commerce, 472 U.S. 713, 736 (1985) (quotations omitted). This process is called a "levy."
Rescission Request: the taxpayer may request the Commissioner to rescind all or part of a penalty imposed under § 6707A for a non-listed reportable transaction if doing so would promote compliance with the tax laws and effective tax administration. The Commissioner, however, may not rescind a penalty for a listed transaction. The IRS Appeals Office hears a taxpayer's request to rescind. No judicial review is available for the decision to grant or deny rescission. 26 U.S.C. § 6707A(d)(2).
IRS Appeals Office: the administrative dispute resolution body of the IRS that resolves tax controversies without litigation. The 1998 IRS Restructuring and Reform Act emphasized that the Appeals Office must be an independent bureau of the IRS and be impartial to the government and taxpayer. See Robert v. United States, 364 F.3d 988, 990 (8th Cir. 2004).
Collection Due Process ("CDP") Hearing: the procedure created by the 1998 IRS Restructuring and Reform Act to control overreaching in the IRS's collection activities. When the IRS decides to collect a liability through a lien or levy, taxpayers first receive an opportunity to contest the collection through an administrative CDP hearing before a CDP hearing officer (an independent employee of the Appeals Office). The CDP hearing officer must have had no prior involvement with the taxpayer. Section 6330 outlines the CDP hearing procedures required before a levy may be made. 26 U.S.C. § 6330.
Tax Court: a specialized court established by Congress under Article I of the Constitution to conduct prepayment judicial review of deficiencies. The Tax Court also may review certain other administrative determinations by the IRS. See, e.g., 26 U.S.C. § 6330.
Refund suit: a lawsuit brought by a taxpayer seeking a refund of a paid liability alleged to be unlawfully collected. To challenge the IRS's assessment in a refund suit, the taxpayer must first pay the full amount of the tax liability and file a claim for refund with the IRS. If the IRS issues an adverse decision, the taxpayer may then institute a tax refund suit in either a federal district court or the U.S. Court of Federal Claims.

         2. Key Statutes and Regulation

         The following statutes and regulation are the primary legal materials applicable to this appeal.

         a. 26 U.S.C. § 6707A: Penalty for failure to include reportable transaction information with return

         (a)Imposition of penalty

Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b).
(b) Amount of penalty
(1) In general Except as otherwise provided in this subsection, the amount of the penalty under subsection (a) with respect to any reportable transaction shall be 75 percent of the decrease in tax shown on the return as a result of such transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes).
(2) Maximum penalty
The amount of the penalty under subsection (a) with respect to any reportable transaction shall not exceed-
(A) in the case of a listed transaction, $200, 000 ($100, 000 in the case of a natural person), or
(B) in the case of any other reportable transaction, $50, 000 ($10, 000 in the case of a natural person).
(3) Minimum penalty
The amount of the penalty under subsection (a) with respect to any transaction shall not be less than $10, 000 ($5, 000 in the case of a natural person).
(C) Definitions
For purposes of this section:
(1) Reportable transaction
The term "reportable transaction" means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.
(2) Listed transaction
The term "listed transaction" means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.
(d) Authority to rescind penalty
(1) In general
The Commissioner of Internal Revenue may rescind all or any portion of any penalty imposed by this section with respect to any violation if-
(A) the violation is with respect to a reportable transaction other than a listed transaction, and
(B) rescinding the penalty would promote compliance with the requirements of this title and effective tax administration.
(2)No judicial appeal
Notwithstanding any other provision of law, any determination under this subsection may not be reviewed in any judicial proceeding.
b. 26 U.S.C. § 6330: Notice and opportunity for [a CDP] hearing before levy
26 U.S.C. § 6330(c)(2)(B) ("¶ (c)(2)(B)"): (c) Matters considered at hearing In the case of any hearing conducted under this section-
(2) Issues at hearing
(A) In general
The person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy, including-(i) appropriate spousal defenses;
(ii) challenges to the appropriateness of collection actions; and
(iii) offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in- compromise.
(B) Underlying liability
The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person 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)(4)(A) ("¶ (c)(4)(A)"):
(c) Matters considered at hearing
In the case of any hearing conducted under this ...

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