On February 21, 2017, the United States Court of Appeals for the Tenth Circuit in Keller Tank Services II, Inc. v. Commissioner, affirmed the Tax Court’s grant of summary judgment to the Commissioner and held that the taxpayer was precluded from challenging the imposition of a penalty under Section 6707A at a Collection Due Process hearing because the taxpayer had a prior opportunity to dispute the penalty before IRS Appeals.[1] Despite the fact that the taxpayer’s challenge to the penalty had not been addressed by any court, the Tenth Circuit agreed with the Tax Court that the taxpayer could not challenge the penalty in a CDP hearing. “This is an alarming rule and ruling that raises serious due process concerns in my view,” said Lawrence M. Hill, partner, Winston & Strawn, as reported in CCH, Federal Tax Day.[2]


Taxpayer Keller participated in an employee benefit program called the Sterling Benefit Plan (“Plan”), but did not report its participation on its tax return. The IRS concluded that the plan was a listed transaction and alleged that Keller’s failure to report the Plan violated Section 6707A. The IRS also claimed that Keller took improper deductions on its income tax returns related to its participation in the Plan. Following an audit, the IRS proposed a $57,781.50 penalty again for Keller under Section 6707A for tax year 2007. Keller filed a protest with the Appeal’s Office to seek rescission of the penalty. On June 20, 2013, the Appeal’s Office held a telephone conference with Keller. The Appeal’s Office reviewed the protest and heard Keller’s arguments, but concluded that Keller’s participation in the Plan was a listed transaction and held that the penalty should be sustained. Thereafter, the case was closed and the IRS sent Keller a final notice of intent to levy and of Keller’s right to a CDP hearing under Section 6330. The IRS letter stated that Keller must pay the assessed penalty, or appeal the levy notice by requesting a CDP hearing. Keller requested a CDP hearing, arguing that the penalty was assessed “without the opportunity to protest the determination of the underlying transaction… to be a listed transaction.”[3] Keller did not seek any collection alternatives or propose a payment. A CDP officer granted Keller’s request for a hearing and sent a letter scheduling a telephone conference. The CDP office explained that the telephone call would provide an opportunity to discuss the reasons Keller disagreed with the collection action or alternatives to the collection action. But tracking the language of Section 6330(c)(2)(B), the letter stated, “[y]ou are not able to dispute the (underlying tax) liability in your CDP hearing because: Our records show you had prior opportunity to dispute the penalty when you had a 6706A Appeals hearing for this tax period.”[4] The letter also outlined how Keller could raise the issue of alternative collection methods at the CDP hearing and said that if Keller did not agree with the CDP’s determination, “(it) may appeal the case to the United States Tax Court.”[5] During the CDP conference, Keller attempted to contest the tax liability, but the CDP officer said that Keller was precluded from challenging its liability because Keller contested the penalty under Section 6707A at the Appeals Office hearing. Because Keller raised no other arguments at the hearing, the CDP officer sustained the penalty.

Keller filed a petition with the Tax Court to challenge its liability for the penalty. The IRS moved for summary judgment and asserted that Keller was precluded from contending its liability under both Sections 6330(c)(2)(B) and 6330(c)(4)(A). The Tax Court granted summary judgment to the Commissioner and sustained the levy against Keller.[6] The Tax Court determined that Section 6330(c)(2)(B) precluded Keller from challenging its underlying liability because Keller was offered a prior opportunity to dispute its liability in its hearing before the Appeals Office. The Tax Court further held that Treas. Reg. § 301.6320-1(c)(3) was a reasonable interpretation of Section 6330(c)(2)(B). Keller filed two motions for reconsideration, which the Tax Court denied, and timely appealed the Tax Court’s order to the Tenth Court of Appeals.


On appeal, Keller argued that Section 6330(c)(2)(B) should not preclude his tax liability challenge in a CDP hearing or the Tax Court when, as here, the taxpayer’s prior opportunity to dispute its liability was in an administration hearing before IRS Appeals. Specifically, Keller claimed that Treas. Reg. § 301.6320-1, which specifies that a conference with the Appeal’s Office is a prior opportunity under Section 6330(c)(2)(B), is an unreasonable interpretation of the statute. The Tenth Circuit disagreed and held that the Tax Court properly held that Keller was precluded from challenging its liability at the CDP hearing under Section 6330(c)(2)(B).[7]

Applying the two-step Chevron test,[8] the Tenth Circuit concluded that Section 6330(c)(2)(B)’s reference to a prior “opportunity to dispute” is ambiguous and that Treas. Reg. § 301.6320, which includes an IRS Appeals conference as an opportunity to dispute a tax determination, is a reasonable interpretation of Section 6330(c)(2)(B). Under step one of the Chevron test, neither the court nor the parties disputed that Section 6330(c)(2)(B) does not define which prior “opportunity” to dispute a tax liability Congress intended to include. Accordingly, the court turned immediately to step two of the Chevron analysis to determine whether Treasury’s interpretation is based on a permissive construction of the statute. Section 6330(c)(2)(B) provides “the person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period of the person did not receive a statuary notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”[9] Focusing on the text, the court said:

Because the tax liability in this case is a penalty and not a deficiency, the key language is “did not otherwise have an opportunity to dispute such tax liability.” Nothing on the face of this text excludes an administrative proceeding from an “opportunity to dispute” a tax penalty. And nothing suggests that reading “opportunity to dispute” to include an administrative proceeding is unreasonable. The text of the statute therefore supports the reasonableness of the Treas. Reg. § 301.6330-1(c)(3)’s interpretation of (c)(2)(B).[10]

In addition to the text of (c)(2)(B), the Tenth Circuit looked at the statute’s broader context, (c)(4)(A), which prohibits taxpayers from raising an issue at a CDP hearing that was raised and considered in a judicial or administrative forum. Based on the statute’s broader context, the court determined that “[i]t is reasonable to conclude that Congress regarded an administrative hearing as adequate to preclude CDP hearing consideration under (c)(2)(B) as well.”[11] The court also found the Tax Court’s reasoning in Lewis v. Commissioner[12] persuasive. In Lewis, the court said that it would be “possible to interpret ‘otherwise have an opportunity to dispute’ to refer to those situations where a taxpayer was afforded one or the other, nondeficiency, avenues for prepayment judicial review.”[13] “But, after pointing out several problems with this interpretation, the court concluded it was “unlikely that this was Congress’s intent.”[14]

The court rejected Keller’s arguments that Treas. Reg. § 301.6330-1 is an unreasonable interpretation of (c)(2)(B) because it (1) impermissibly limits the jurisdiction of the Tax Court; and (2) is internally inconsistent. The court said that Keller’s argument failed to establish that the regulation under Chevron was unreasonable or “arbitrary, capricious, or manifestly contrary to the statute.”[15] Accordingly, the court concluded that Treas. Reg. § 301.6330-1(c)(3)’s explanation that a prior “opportunity to dispose” includes “a prior opportunity for a conference with Appeals that was offered either before or after the assessment of liability” is a reasonable interpretation of Section 6330(c)(2)(B).

Lawrence Hill recently commented, “This is a case that should warrant ‘en Banc’ review. An IRS Appeals Conference on the substantive issue of whether a taxpayer is subject to liability, in this case for promoter penalties, is not an administrative hearing in the customary sense. It is not a formal adjudication. There is no administrative law judge or finder of fact, for that matter; there is no transcript of the proceedings; there is neither discovery nor evidentiary rules and, statements made during the process are generally inadmissible under the Federal Rules of Evidence; there are no witnesses and, therefore, no opportunity to examine or cross-examine witnesses; there is no final decision on the merits and there is no potential argument that the IRS Appeals Officer abused his or her discretion in arriving at the settlement offer. It is merely a nonbinding, relatively informal, conciliation conference with an employee of the adversary, in this case an IRS employee, whose job is to attempt to, but is not required to settle the case. To consider this an administrative hearing, is like considering a defendant’s settlement meeting with the plaintiff, in civil litigation, a hearing. It is not. To preclude a taxpayer from seeking redress in court after an IRS Appeals conference prevents them from obtaining judicial review of the legal merits of the IRS’ tax assessment. This to me infringes upon their constitutional rights. If there is no ability to go to Tax Court after such a determination and the amount of the assessable penalty is exorbitant, so that they could not pay the penalty and sue for a refund, this could result in a deprivation of property without due process.”[16]