Supreme Court: Taxpayer's Refund Dispute with IRS Mooted When IRS Canceled Levy

(Parker Tax Publishing July 2025)

The Supreme Court reversed the Third Circuit and held that the Tax Court lacked jurisdiction to resolve a dispute between a taxpayer and the IRS when the IRS was no longer pursuing a levy on the taxpayer. The Court concluded that, while the Tax Court had jurisdiction to review an appeals officer's "determination" that a proposed levy by the IRS could proceed, once the taxpayer no longer owed the unpaid taxes at issue, nothing in Code Sec. 6330(e)(1) authorizes the Tax Court to order refunds or issue declaratory judgments. Comm'r v. Zuch, 2025 PTC 214 (S. Ct. 2025).

Background

In 2012, Jennifer Zuch and her then-husband Patrick Gennardo, each filed an untimely 2010 federal tax return. Gennardo subsequently submitted an offer in compromise to resolve outstanding tax liabilities. The offer noted that the couple had previously sent the IRS $50,000 in estimated tax payments and, following the offer, the IRS applied these payments to Gennardo's account. Subsequently, Zuch amended her 2010 tax return to report additional income, which resulted in an additional $28,000 in taxes due. Zuch, however, maintained that the IRS should have credited the couple's $50,000 payment to her account, entitling her to a $22,000 refund.

The IRS disagreed and, pursuant to Code Sec. 6331(a), placed a levy on Zuch's property to collect her unpaid taxes. Before a levy goes forward, however, Code Sec. 6330(a) and (b) give the taxpayer the right to a hearing at which the taxpayer can dispute issues relating to the levy. At the hearing, an appeals officer considers the taxpayer's arguments and, under Code Sec. 6330(c)(3), renders a "determination" about whether the levy can proceed. Code Sec. 6330(c)(3) requires the appeals officer to consider three things when making this "determination," including "issues raised" by the taxpayer.

Zuch requested a collection due process hearing to contest the levy. At the hearing, the appeals officer rejected her argument regarding the misapplied $50,000 tax payment and issued a Notice of Determination sustaining the levy action under Code Sec. 6330(c)(3).

Zuch appealed to the Tax Court under Code Sec. 6330(d)(1), which grants the Tax Court jurisdiction to review an appeals officer's "determination" in a collection due process hearing. During the multi-year proceedings that followed, Zuch filed several annual tax returns showing overpayments, which the IRS applied to her outstanding 2010 tax liability rather than issuing refunds. Once Zuch's liability reached zero, the IRS moved to dismiss the Tax Court proceeding as moot, arguing that the Tax Court lacked jurisdiction because the IRS no longer had a basis to levy on Zuch's property. The Tax Court agreed and dismissed the proceedings.

Zuch appealed to the Third Circuit, arguing that the Tax Court retained jurisdiction because the parties continued to have an interest in the case since the Tax Court could determine Zuch's right to a refund. In Zuch v. Comm'r, 2024 PTC 85 (3d Cir. 2024), the Third Circuit vacated the Tax Court's dismissal after concluding that the IRS's abandonment of the levy did not moot the Tax Court's proceedings. According to the Third Circuit, (1) the IRS's setoffs were invalid and without legal effect because the right to offset mutual debts does not apply when the debts are disputed, and (2) a taxpayer's right to challenge an underlying tax liability under Code Sec. 6330(c)(2)(B) where the taxpayer did not previously have an opportunity to dispute the tax liability does not become moot once the levy is no longer being enforced or the tax is satisfied.

Zuch appealed to the Supreme Court. The case presented a procedural twist in that, while Zuch's appeal was pending before the Tax Court, she overpaid her taxes and the IRS applied those overpayments against her alleged tax liability, thereby eliminating any justification for a levy. Yet Zuch wanted the appeal to continue because she still disputed the debt that prompted the levy, and she hoped that a victory before the Tax Court would force the IRS to refund her overpayments. The Supreme Court was thus asked to decide whether the Tax Court had jurisdiction to hear Zuch's appeal once the possibility of a levy was off the table.

Analysis

The Supreme Court, in an 8-1 decision, reversed the Third Circuit and held that the Tax Court lacked jurisdiction under Code Sec. 6330 to (1) hear Zuch's appeal, and (2) resolve disputes between a taxpayer and the IRS when the IRS is no longer pursuing a levy on the taxpayer. While Code Sec. 6330(d)(1) grants the Tax Court jurisdiction to "review" an appeals officer's "determination," the Court agreed with the government that the "determination" in this situation refers to the binary decision of whether a levy may proceed. Code Sec. 6330(c)(3), the Court noted, requires the appeals officer to consider three things when making this "determination," including "issues raised" by the taxpayer. Thus, the Court observed, the statute distinguishes between "consideration[s]" that inform the "determination" and the "determination" itself. Here, the Court found that Zuch's dispute about estimated tax payments was an input into the determination, i.e., an "issue raised" that the appeals officer was required to consider under Code Sec. 6330(c)(3)(B). The "determination," by contrast, was just the appeals officer's decision to sustain the levy.

The Court also concluded that the statutory context supported the government's position on the limited scope of the Tax Court's jurisdiction under Code Sec. 6330(d)(1). When a taxpayer wants to contest a tax liability, the Court said, Code Sec. 7421(a) provides a default rule which requires taxpayers to first pay the disputed tax before pursuing a challenge.

Had the IRS simply offset Zuch's overpayments without pursuing a levy, the Court observed, her only recourse would have been a refund suit in line with the default rule. However, the Court noted, the IRS's proposed levy triggered Zuch's right to a collection due process hearing under Code Sec. 6330(a)(1), but Code Sec. 6330 - titled "Notice and opportunity for hearing before levy" - focuses just on the proposed levy. According to the Court, the hearing's scope tracks its purpose: taxpayers may raise only levy-related issues. Given Code Sec. 6330's unwavering focus on levies and the default rule requiring post-payment suits, the Court concluded that it would be strange if a taxpayer could use a Code Sec. 6330 appeal to resolve tax disputes that no longer have any connection to an ongoing levy.

Dissenting Opinion

A dissenting opinion was filed by Justice Gorsuch who wrote that, given the majority's opinion, Code Sec. 6330 proceedings are essentially risk-free for the IRS because the IRS may pursue a levy and argue its case to the Tax Court and then, if the Tax Court seems likely to side with the taxpayer, the IRS can drop the levy and avoid an unfavorable ruling on the taxpayer's underlying tax liability. Doing so, he said, will often prove only a small setback for the IRS because it remains free to pursue other collection methods - including keeping, rather than refunding, a taxpayer's later overpayments. And, he observed, the taxpayer will often find him or herself without any way to challenge the IRS's error or prevent the agency from keeping more of a taxpayer's money than it is lawfully due.

For a discussion of IRS collection procedures involving levies, see Parker Tax ¶260,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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