On May 3, 2017, the United States Court of Appeals for the Seventh Circuit in Our Country Home Enterprises Inc. v. Commissioner affirmed a Tax Court’s decision that a taxpayer was precluded from challenging the imposition of a penalty under Section 6707A at a Collection Due Processing Hearing (“CDP”) because the taxpayer had a prior opportunity to dispute the penalty before the IRS Office of Appeals.[1] The Seventh Circuit in Our Country Home is one of three circuit courts that have considered this issue, and all three have rejected the taxpayer’s argument. The Tenth Circuit rejected the taxpayer’s argument in Keller Tank Services II Inc. v. Commissioner [2],and the Fourth Circuit in Iames v. Commissioner[3] reached the same conclusion.

Background

The facts in Our Country Home are very similar to the facts presented in Keller. From 2003 through 2007, Our Country Home participated in an employee-benefit plan called the Sterling Plan. Thomas Blake was the only Our Country Home employee enrolled in this plan. Although the company took deductions on its tax returns for its payments into the plan, Blake claimed no income from the plan on his returns. The Service audited Old Country Home and concluded that the Sterling Plan was a tax shelter. The IRS proposed a Section 6707A reporting penalty for Our Country Home’s failure to report its participation in this plan on its 2007 tax returns. The Service also proposed deficiency penalties against Our Country Home, claiming that the company’s deductions for its payments into the Sterling Plan were improper; these penalties included a Section 6662(a) penalty and a Section 6662A penalty. Two contemporaneous proceedings followed, one concerning the reporting penalty and the other concerning the deficiency penalties. The Seventh Circuit appeal concerned only the reporting-penalty proceeding concerning the Section 6707A penalty.

The IRS offered Our Country Home an opportunity for a preassessment administrative hearing before the Appeals Office.[4] Our Country Home accepted the invitation and challenged its liability for the penalty, arguing that the IRS erred in computing the penalty amount and improperly classified participation in the Sterling Plan as a listed transaction. An appeals officer reviewed the relevant documents and held a conference with Our Country Home’s counsel. Thereafter, she issued a memorandum explaining that the IRS correctly computed the penalty and properly treated participation in the Sterling Plan as a listed transaction under Notice 2007–83. The Appeals Officer sustained the penalty in full and closed the case.

In 2013, the IRS assessed the Section 6707A penalty. A month later, the IRS issued a final notice of intent to levy under Section 6330, and informed Our Country Home of its right to a CDP hearing. Our Country Home requested a CDP hearing with the Appeals Office, again seeking to contest its liability for the Section 6707A penalty. An appeals officer reviewed the transcripts from the earlier preassessment administrative hearing. After determining that the Appeals Office had already considered a liability challenge to the same penalty, the appeals officer concluded that Section 6330(c)(2)(B) precluded Our Country Home from bringing another liability challenge to the Section 6707A penalty. For that reason, the Appeals Office issued a notice of determination dismissing Our Country Home’s challenge and sustaining the proposed levy action.

Our Country Home filed a petition in Tax Court seeking review of the Appeals Office’s decision to sustain the proposed levy action. The Government moved for summary judgment, arguing that because Our Country Home had a prior opportunity to dispute its liability with the Appeals Office, Section 6330(c)(2)(B) precluded a second liability challenge in the CDP hearing. The Government also sought dismissal of the petition under Section 6330(c)(4)(A). After a hearing, the Tax Court granted the Government’s motion, holding that Section 6330(c)(2)(B) barred Our Country Home’s petition.

Analysis

On Appeal, Our Country Home argued that it should have been permitted to challenge its liability for the Section 6707A penalty in its CDP hearing, which would then preserve the issue for review by the Tax Court. The Circuit Court disagreed and held that IRC §§ 6301(c)(2)(B) and 6330(c)(4)(A) precluded a taxpayer from challenging the Section 6707A penalty in the CDP hearing and thus liability for the penalty was not an issue for which the taxpayer could seek judicial review. Because Our Country Home could not raise the liability issue in the CDP hearing, the Seventh Circuit concluded that the Tax Court had nothing to review.[5]

Section 6330(c)(2)(B) allows a taxpayer to challenge the existence or amount of a tax liability at a CDP hearing so long as the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.” Because the Section 6707A penalty is not a deficiency, the IRS did not furnish (and never could have furnished) a notice of deficiency to Our Country Home. Thus, the issue decided by the Circuit Court was whether Old County Home’s liability challenge before the Appeals Office constituted a prior opportunity to dispute liability.

Old Country Home asserted that a prior “opportunity to dispute” means a prior judicial opportunity, which would provide Old County Home an opportunity to challenge its liability in Tax Court before paying the Section 6707A penalty. The Circuit Court reviewed Old Country’s position under the Chevron doctrine. The Chevron doctrine provides that “considerable weight should be accorded to an executive department’s construction of a statutory scheme it is entrusted to administer.”[6] Specifically, “[w]hen a statute is ambiguous, courts must defer to an agency’s reasonable interpretation of the statute.”[7]

The first step of the Chevron doctrine asks whether the statute is ambiguous, which requires an examination of the text of the statute—in this case, Section 6330. After inspection, the Circuit Court agreed with the tax court that Section 6330(c)(2)(B) is ambiguous. Indeed, as Our Country Home admitted, the statute “does not specifically state whether only a prior judicial opportunity to dispute the tax prevents a taxpayer from challenging the merits of a tax liability in a CDP case or whether a prior administrative opportunity” will suffice to preclude the second liability challenge. Our Country Home further conceded that “[t]here are two ways in which a taxpayer can dispute a tax liability: (1) administratively; and (2) judicially.” Thus, the Court found that the statute’s text is susceptible to competing interpretations.

Because Section 6330(c)(2)(B) is ambiguous, the Court turned to Chevron’s next step, which asks whether the IRS’s interpretation of this statute is reasonable. The Court noted that the IRS’s interpretation need not be the best interpretation from a textual or policy standpoint. So long as the IRS’s interpretation is reasonable, a court must apply it. The Seventh Circuit agreed with the tax court’s determination that the regulation reasonably interprets Section 6330(c)(2)(B)’s “opportunity to dispute” language to include prior conferences with the Appeals Office, excluding conferences prior to the IRS’s assessment of a tax subject to deficiency procedures.

The Court began by reviewing Section 6330(c)(2)(B)’s text, which allows a taxpayer to challenge his liability for a tax in a CDP hearing unless he had a prior “opportunity to dispute such tax liability.” Based on this language, the Court concluded that this text neither forecloses administrative opportunities nor suggests that including them is unreasonable. Thus, the Court found that there is nothing conspicuously wrong with the IRS’s interpretation.

Moreover, the Court looked to other provisions in the statute to lend support to the IRS’s interpretation. For example, Section 6330(c)(4)(A) precludes a taxpayer from raising an issue at a CDP hearing if “the issue was raised and considered at a ... previous administrative or judicial proceeding.” (Emphasis added.) Our Country Home could not explain why Congress considers an administrative proceeding to be an adequate forum for purposes of Section 6330(c)(4)(A) but not for Section 6330(c)(2)(B).

The Court surmised that Congress considers administrative proceedings to be an appropriate forum for most prepayment tax challenges. Indeed, Congress has enacted legislation to “ensure an independent appeals function within the Internal Revenue Service” and also sought to increase access to the Appeals Office and to ensure that taxpayers receive information about opportunities for prepayment administrative hearings. Thus, it appeared to the Court that Congress was concerned with providing taxpayers a meaningful process in Appeals in which they could resolve tax disputes with the Service. Because Our Country Home had a prior opportunity to contest its liability in his administrative forum, the Court held that the tax court properly granted the Government’s motion for summary judgment dismissing Our Country Home’s petition on Section 6330(c)(2)(B) grounds.