Zuch v. Comm'r

97 F.4th 81

Jennifer ZUCH, Appellant v. COMMISSIONER OF INTERNAL REVENUE

No. 22-2244

United States Court of Appeals, Third Circuit

Argued April 26, 2023

Filed: March 22, 2024

On Appeal from the United States Tax Court (IRS 1:14-25125), Tax Court Judge: Honorable Lewis R. Carluzzo

Frank Agostino, Agostino & Associates, 14 Washington Place, Hackensack, NJ 07601, Jeffrey M. Dirmann [ARGUED], 4th Floor, Suite 17, 55 Madison Avenue, Morristown, NJ 07960, Counsel for Appellant

Julie C. Avetta [ARGUED], Jennifer M. Rubin, United States Department of Justice, Tax Division, 950 Pennsylvania Avenue NW, P.O. Box 502, Washington, DC 20044, Counsel for Appellee

Audrey Patten, Legal Services Center of Harvard Law School, 122 Boylston Street, Jamaica Plain, MA 02130, Court-Appointed Amicus Curiae^*

Before: JORDAN, KRAUSE, and BIBAS^*, Circuit Judges

OPINION OF THE COURT¹

JORDAN, Circuit Judge.

When Congress grants taxpayers the right to challenge what the Internal Revenue Service says is owed to the government, Congress's will prevails. The IRS cannot say that such a right exists only under the circumstances it prescribes. That ought to go without saying, but this case requires us to say it.

The IRS sent Jennifer Zuch a notice informing her that it intended to levy on her property to collect unpaid tax. She challenged the levy, arguing that she had prepaid the tax. The IRS Independent Office of Appeals (the "IRS Office of Appeals") sustained the levy, and Zuch petitioned the United States Tax Court for review of that decision. While the issue was being litigated in that Court over several years, the IRS withheld tax refunds owed to Zuch and applied them to what it said was her unpaid balance, satisfying it in full. When, according to the IRS's accounting, there was no more tax to be paid, the IRS filed a motion to dismiss the Tax Court proceeding for mootness, and the Court granted the motion.

Because Zuch's claim is not moot, we will vacate the dismissal and remand this matter to the Tax Court to determine whether Zuch's petition is meritorious.

I. BACKGROUND

A. Overview of Tax Court Proceedings

Some understanding of tax procedure is essential to the consideration of this case, so we begin with a brief summary of the two basic pathways by which taxpayers can dispute what they owe the government before the IRS collects: deficiency proceedings and collection due process hearings.² After addressing a key question related to these pathways - the distinction between unpaid tax and tax liability - we turn to the factual and procedural background that led to this appeal.

1. Deficiency Proceedings

When the IRS decides that a taxpayer owes more than the amount reported on her tax return, it mails the taxpayer a "notice of . . . deficiency."³ 26 U.S.C. § 6212(a).⁴ The taxpayer may challenge the IRS's tax determination before collection by filing a petition in the Tax Court within ninety days after the mailing of the notice of deficiency. § 6213(a). Such a petition commences a "deficiency proceeding[ ]." Cooper v. Comm'r, 718 F.3d 216, 223 (3d Cir. 2013). Deficiency proceedings are "[t]he Tax Court's principal basis for jurisdiction[.]" Sunoco Inc. v. Comm'r, 663 F.3d 181, 187 (3d Cir. 2011). In a deficiency proceeding, the Tax Court has jurisdiction to determine the correct amount of tax owed, § 6214(a), and to order that any overpayments be refunded to a taxpayer, § 6512(b)(1). The Tax Court's final order in a deficiency proceeding is subject to review by an Article III court. § 7482(a)(1).

2. Collection Due Process Proceedings

If a taxpayer does not pay the amount the IRS says is due, the IRS can levy - that is, seize and sell - a taxpayer's property to satisfy the tax liability. § 6331(a). But, before it does so, it must provide the taxpayer notice and an opportunity for a hearing to contest the levy. § 6330(a)(1). After the IRS sends notice to the taxpayer of its intent to levy, the taxpayer has thirty days to request a hearing. § 6330(a)(3)(B). That hearing, known as a Collection Due Process ("CDP") hearing, is "an administrative proceeding before an appeals officer with the [IRS Office of Appeals] in which a taxpayer may raise 'any relevant issue relating to the unpaid tax or the proposed levy.' " United States v. Weiss, 52 F.4th 546, 548 (3d Cir. 2022) (quoting § 6330(c)(2)(A)). Under § 6330(c)(2)(B), the taxpayer

may also raise at the [CDP] hearing challenges to the existence or amount of [his or her] underlying tax liability for any tax period if [he or she] did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.

This scheme makes good sense in light of potential due process concerns. "[S]ome form of hearing is required before an individual is finally deprived of a property interest[,]" Mathews v. Eldridge, 424 U.S. 319, 333, 96 S.Ct. 893, 47 L.Ed.2d 18 (1976), and a taxpayer who cannot challenge a levy before seizure and sale may wrongfully lose property without notice or the opportunity to be heard, see § 6330(c)(2)(A). Similarly, and particularly relevant here, a taxpayer who cannot challenge her underlying liability before collection may wrongfully lose money without notice or a hearing. § 6330(c)(2)(B); see generally S. Rep. No. 105-174, at 67 (1998) ("[T]he IRS should afford taxpayers adequate notice of collection activity and a meaningful hearing before the IRS deprives them of their property.").

So, to recap: If the taxpayer could have commenced a deficiency proceeding before the CDP hearing, the hearing provides a forum to challenge the unpaid tax and proposed levy only. But if the taxpayer had no opportunity to commence a deficiency proceeding, the CDP hearing provides a forum to challenge the unpaid tax, the proposed levy, and the underlying tax liability.

Once the IRS Office of Appeals makes a determination on the taxpayer's challenges, the taxpayer has thirty days to petition the Tax Court to review any issues that were properly raised at the CDP hearing. § 6330(d)(1). Again, the Tax Court's final order is subject to review by an Article III court. § 7482(a)(1).

3. Unpaid Tax Versus Tax Liability

Section 6330(c)(2)(B) of the Internal Revenue Code raises an important question: What is the difference between unpaid tax and tax liability? There must be some distinction, or else the language in § 6330(c)(2)(B) allowing a challenge to liability would be superfluous.⁵ Congress confined the right to raise a liability challenge to taxpayers who did not have a previous opportunity to do so, while at the same time granting all taxpayers in a CDP hearing the ability to raise issues relating to the unpaid tax or proposed levy. Hence, it is evident that Congress intended to grant to qualifying taxpayers some right in addition to the rights given to all taxpayers in a CDP hearing. See infra section II.C.3. On that basis, "unpaid tax" cannot be synonymous with "tax liability." See also United States v. Yung, 37 F.4th 70, 79 (3d Cir. 2022) ("Normally, where Congress uses different words, we read those words to have different meanings.").

There is indeed a distinction: West's Tax Law Dictionary defines "tax liability" as the "[t]otal amount of tax owed to the I.R.S. after the allowance of any proper credits." Tax Liability, West's Tax Law Dictionary § T830 (emphasis added). And it defines credit as "an allowance against the tax itself [including] [i]ncome tax withheld on wages, prepaid estimated taxes, [etc.]" Credit, West's Tax Law Dictionary § C4530 (emphasis added). Tax liability is therefore the net amount owed to the IRS: If you owe $20 to the IRS and have prepaid that $20, your tax liability - at least on these simple facts - is $0. Understanding "tax liability" in this way accords with the plain meaning of "liability." To say, "I have no liability" is to say, in effect, "I owe nothing." A "challenge" to liability under § 6330(c)(2)(B) means the taxpayer disputes what the IRS says he owes.

In contrast, "issue[s] relating to the unpaid tax" under § 6330(c)(2)(A) do not directly concern the amount and existence of the liability. Instead, such issues concern the IRS's proposed collection activity, as illustrated by the three examples Congress provides in the statute: "(i) appropriate spousal defenses [for a spouse who filed a joint tax return]; (ii) challenges to the appropriateness of collection actions; and (iii) offers of collection alternatives." § 6330(c)(2)(A). In each case, the focus is not on the liability itself, but is rather on the method the IRS will use to collect what it says is due to the government. See Treas. Reg. § 301.6330-1(e)(3), Q&A (E)(3) (2006) ("When a taxpayer asserts a spousal defense, the taxpayer is not disputing the amount or existence of the liability itself[.]").

Strictly speaking, then, unpaid tax means something different than tax liability. For example, assuming that the IRS has assessed $20 in taxes, your unpaid tax is just that: the $20 the IRS says you owe. But further proceedings can change that number. If a deficiency proceeding or a challenge under § 6330(c)(2)(B) in a CDP hearing establishes that the IRS should have credited $5 toward the $20 balance, your liability is $15, and, once fixed by those further proceedings, that sum also becomes your unpaid tax.

B. Factual Background⁶

Zuch and Patrick Gennardo⁷ were married from 1993 to 2014. On September 12, 2012, they filed separate, untimely tax returns for the 2010 tax year, each electing married-filing-separately status.⁸ Zuch's tax return showed adjusted gross income of $74,493 and an overpayment of tax of $731.⁹ Gennardo's tax return showed adjusted gross income of $1,077,213 and tax due of $385,393. On that same day, Gennardo filed an offer-in-compromise to settle his tax debts for the 2007 to 2011 tax years.¹⁰

All of this had been preceded in 2010 and 2011 by two prepayments of the couple's estimated tax liability for 2010. More specifically, in June...