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Case Not Moot Where IRS Reserves Right to Reassess Penalties at a Later Date

(Parker Tax Publishing August 2017)

The Tax Court denied an IRS motion to dismiss a taxpayer's petition on the grounds of mootness. The court found that the case was not moot because the IRS did not concede the taxpayer's liability for penalties under Code Sec. 6702 and the IRS reserved the right to reassess those penalties later. Vigon v. Comm'r, 149 T.C. No. 4 (2017).

From June 2010 through July 2011, Dean Vigon submitted a total of nine Forms 1041, U.S. Income Tax Return for Estates and Trusts, on behalf of the Dean M. Vigon Trust - two for tax year 2007, three for tax year 2008, and four for tax year 2009. Three of the Forms 1041 (one for each year) were marked as amended returns. Three others were unsigned, incomplete photocopies of others of the nine forms, and they were sent to the IRS via fax and were not mailed. The IRS treated these as nine separate returns and determined that the positions reflected on the Forms 1041 were frivolous. The IRS therefore assessed nine $5,000 penalties under Code Sec. 6702 for the supposed filing of nine frivolous Forms 1041, filed a notice of federal tax lien (NFTL), and also assessed interest.

Vigon challenged the NFTL by filing a Form 12153, Request for a Collection Due Process or Equivalent Hearing. No collection alternatives were specified on the Form 12153 and an attachment to the form indicated that Vigon was a Canadian citizen and he did not owe any of the taxes, penalties, or interest that had been assessed. During a collection due process (CDP) hearing, Vigon challenged, under Code Sec 6330(c)(2)(B), his underlying liability for the penalties. The IRS Appeals Office sustained the filing of the NFTL. Vigon timely filed a petition with the Tax Court under Code Sec. 6330(d)(1), appealing the determination of the IRS Appeals Office.

As the scheduled Tax Court trial date approached, a motion for continuance was filed on behalf of Vigon, explaining that he was incarcerated in Canada. The court granted the continuance but the IRS subsequently discovered that written managerial approval, as set forth in Code Sec. 6751(b)(1), had not been obtained before the Code Sec. 6702 penalties were assessed and it was not clear whether an exception to obtaining managerial approval otherwise applied. The IRS therefore moved to remand the case to the IRS Appeals Office for a supplemental hearing, during which verification of compliance with Code Sec. 6751(b)(1) would be obtained. The Tax Court granted the IRS motion and, after the supplemental hearing, the IRS once again sustained the filing of the NFTL.

In December 2016, the IRS filed a motion for summary judgment, which the Tax Court denied, identifying genuine disputes of fact about the number of returns filed and about the supervisory approval of penalty assessments under Code Sec. 6751(b)(1).

The IRS subsequently moved for a continuance, explaining that (1) the IRS would abate the penalties at issue; (2)) the process of abating those liabilities was almost complete; (3) the process of releasing the liens at issue had been initiated; and (4) once those processes had been completed, the IRS intended to file a motion to dismiss the case on grounds of mootness. The court granted the motion for continuance but ordered that, if the IRS filed a motion to dismiss on grounds of mootness, then it had to explain how such a motion would give adequate relief to Vigon.

The IRS then filed a motion to dismiss the case on grounds of mootness. The motion stated that "the frivolous return penalties for taxable years 2007, 2008 and 2009 have all been abated and the federal tax liens for all three years have been released." However, the filing by which this ostensible release was made stated that "[w]ith respect to each assessment below, unless notice of lien is refiled by the date in column(e) [i.e., dates in 2021 and 2022], this notice shall constitute the certificate of release of lien as defined in IRC 6325(a)."

The Tax Court denied the IRS's motion to dismiss on grounds of mootness. According to the court, despite the IRS's abatement of the penalties and release of the lien, the CDP case was not moot, in light of Vigon's liability challenge under Code Sec. 6330(c)(2)(B) and the IRS's non-concession as to liability and the IRS's reserving the right to reassess the penalties. The Tax Court noted that ordinarily, once the IRS concedes that there is no unpaid liability for a disputed year upon which a collection action can be based, a proceeding filed in the Tax Court pursuant to Code Sec. 6330 is moot. However, the court said, where a CDP hearing may involve not only collection issues but also challenges to the existence or amount of the underlying tax liability, the IRS's contention that withdrawal of the NFTL by itself moots the entire case was incorrect.

For a discussion of IRS collection procedures and penalties relating to frivolous tax submissions, see Parker Tax ¶260,500 and ¶262,145, respectively.

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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