Judgment summary
The United States Tax Court considered the Commissioner's Motion for Partial Summary Judgment in a consolidated collection due process (CDP) case involving James Haber and the Diversified Group, Inc. The Motion addressed four issues arising from section 6707 penalties assessed against the petitioners.
The Court held that the Commissioner's offer of a conference with IRS Appeals was an opportunity for the petitioners to dispute their penalty liabilities within the meaning of I.R.C. section 6330(c)(2)(B). Because of that prior opportunity, the petitioners were precluded from challenging their liabilities at their CDP hearings and before the Tax Court, following Lewis v. Commissioner, 128 T.C. 48, 62 (2007).
The Court further held that Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), did not require a different result, that the settlement officer who conducted the CDP hearings was properly appointed, that no Fifth Amendment due process challenge had been clearly raised so a ruling was unnecessary, and that the petitioners could not challenge the penalties on Eighth Amendment grounds because they were precluded from challenging their underlying liability.
The Court granted the Commissioner's Motion in part.
Background
Mr. Haber founded Diversified and served as its president. When the Petitions were filed, Mr. Haber resided in New York and Diversified had its principal place of business in New York.
Between 1999 and 2002, Mr. Haber and Diversified marketed and sold certain tax avoidance strategies to clients. The strategies included transactions that, in their own words, were designed to result in noneconomic tax losses for clients and others. They did not register the transactions as tax shelters pursuant to section 6111.
On or about March 14, 2002, the IRS sent Mr. Haber a letter notifying him that it was examining Diversified's tax shelter activities pursuant to I.R.C. sections 6707 and 6708. The examination continued for more than 11 years. On May 9, 2013, the IRS sent Forms 5701, Notice of Proposed Adjustment (NOPA), dated May 8, 2013. The NOPAs asserted that between 1999 and 2002 the petitioners had organized and sold more than 190 transactions substantially similar to Son-of-BOSS tax shelter transactions described in I.R.S. Notice 2000-44, and proposed penalties of approximately $41.2 million under section 6707, with the petitioners jointly liable.
On August 29, 2013, the petitioners sent a letter purporting to waive all IRS Appeals rights other than rights to a CDP hearing, and requested that the matter be referred for technical advice, a request that was ultimately denied.
On December 16, 2013, the IRS sent letters notifying the petitioners of penalties of $24,920,904 under section 6707. These letters offered a post-assessment conference with the IRS Appeals Office if the petitioners did not agree. On February 11, 2014, the IRS again notified the petitioners of the penalties by letter, stating they could request consideration by the Appeals Office. The IRS assessed Diversified's penalty on March 3, 2014, and Mr. Haber's penalty on March 10, 2014.
On or about February 28, 2014, the petitioners each paid what they thought were divisible portions of their penalties and filed refund claims, then filed suit in the U.S. Court of Federal Claims on July 18, 2014. That court dismissed the action for lack of subject matter jurisdiction in September 2015, holding the penalty was not divisible. The U.S. Court of Appeals for the Federal Circuit affirmed on November 10, 2016, and rehearing was denied on January 18, 2017.
On May 6, 2014, the IRS mailed Notices of Federal Tax Lien Filing under IRC 6320, and the petitioners requested CDP hearings on June 2, 2014. Those hearings were suspended while the Court of Federal Claims suit was pending. On May 3, 2017, the IRS sent Notices of Intent to Levy. Settlement Officer Eric Feinman conducted the CDP process. On July 31 and August 7, 2018, he issued Notices of Determination to Diversified and Mr. Haber respectively, sustaining the collection actions and determining that the petitioners were barred by section 6330(c)(2)(B) from challenging their underlying liabilities.
Core dispute
The central question was whether Mr. Haber and Diversified were precluded from challenging their section 6707 penalty liabilities at their CDP hearings and before the Tax Court. The petitioners had refused offers to confer with IRS Appeals during and after the examination, and argued that because they had declined such conferences they had not had a prior opportunity to dispute their liabilities under section 6330(c)(2)(B).
The Commissioner also sought summary judgment on whether the settlement officer was required to be appointed under the Appointments Clause, whether a postexamination hearing with IRS Appeals would have violated the petitioners' Fifth Amendment due process rights, and whether the section 6707 penalties violated the Excessive Fines Clause of the Eighth Amendment.
Court findings
The Court found that section 6330(c)(2)(B) permits a taxpayer to challenge the underlying liability only if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the liability. The conditions operate independently and a taxpayer is precluded if either applies.
The Court found that Treasury Regulation section 301.6330-1(e)(3), Q&A-E2, provides that an opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals offered before or after assessment. The Court upheld this regulation in Lewis v. Commissioner, 128 T.C. 48, 61 (2007), and multiple courts of appeals have adopted or concurred with that reasoning.
The Court found that a taxpayer who declines an offer to meet with IRS Appeals is still barred from challenging the underlying liability, because section 6330(c)(2)(B) speaks to opportunities to dispute liability, not opportunities actually exercised. The December 16, 2013, and February 11, 2014, letters each authorized the petitioners to request consideration by IRS Appeals, which presented an opportunity to dispute within the meaning of the statute.
The Court rejected the argument that the opportunity was not meaningful, holding that because the petitioners preemptively declined a conference, no conference took place and the Court could not assess how meaningful it would have been. The petitioners could not decline a conference and then demand a trial about what might have happened.
The Court rejected the semantic argument that the offers were not offers of a conference with Appeals, noting that Appeals conferences are informal and need not be formal meetings. It rejected the Chenery argument because Chenery applies to deferential review, not de novo review. It rejected arguments under the Administrative Procedure Act, holding the letters were not final agency action, and under section 6303, holding that timeliness was irrelevant to the effect under section 6330(c)(2)(B).
The Court held that IRS Appeals officers are not Officers of the United States within the meaning of the Appointments Clause, following Tooke v. Commissioner, 164 T.C. 16 (2025), and Tucker v. Commissioner, 135 T.C. 114.
The Court held that Loper Bright Enterprises v. Raimondo did not require a different result, because Loper Bright does not call into question prior cases that relied on the Chevron framework, and because Lewis and related cases suggested the regulation was the best reading of the statute rather than merely a permissible one.
The Court held that no Fifth Amendment due process challenge was clearly raised, and that because the petitioners were precluded from disputing their underlying liabilities, their Eighth Amendment argument, which went to the underlying liability, was moot.
Outcome
The Court granted the Commissioner's Motion for Partial Summary Judgment with respect to the preclusion of challenges to the underlying penalty liabilities under section 6330(c)(2)(B) and with respect to the status of Settlement Officer Feinman under the Appointments Clause. The Court declined to rule on the Fifth Amendment due process issue and denied the Motion as moot with respect to the Eighth Amendment Excessive Fines issue. An appropriate order was to be issued.
Major issues / areas of contention
- Whether the offer of a conference with IRS Appeals constituted an opportunity to dispute the underlying liability within the meaning of I.R.C. section 6330(c)(2)(B).
- Whether taxpayers who declined offered IRS Appeals conferences were precluded from challenging their section 6707 penalty liabilities at their CDP hearings and before the Tax Court.
- Whether the opportunity to dispute had to be meaningful, and whether declining a conference created a triable issue on that question.
- Whether the settlement officer who conducted the CDP hearings was required to be appointed under the Appointments Clause.
- Whether Loper Bright Enterprises v. Raimondo required reconsideration of the regulation upheld in Lewis v. Commissioner.
- Whether a postexamination hearing with IRS Appeals would have violated the petitioners' Fifth Amendment due process rights.
- Whether the section 6707 penalties violated the Excessive Fines Clause of the Eighth Amendment.