CCA 1247011: IRS advises that mitigation does not apply to refund claims raised during a CDP hearing

Plain-English summary

The IRS Office of Chief Counsel considered whether a taxpayer could raise mitigation and equitable recoupment arguments during a collection due process hearing. Counsel advised Appeals to consider whether mitigation applied because the claimed credits could affect the liability being collected, but concluded that the mitigation rules did not apply because the prior stipulated Tax Court decision was not sufficiently detailed to qualify as a determination under IRC § 1313(a)(1). Counsel also advised that equitable recoupment could not be raised in the CDP hearing because it challenged the underlying liability after the taxpayer had already had an opportunity to dispute it. The memorandum explains the limits of considering non-CDP years and does not itself grant or deny a refund or collection relief.

Ruling snapshot

• Question: Could mitigation or equitable recoupment be raised during a CDP hearing to address refund claims from other tax years?
• Outcome: Advice given
• Key authorities: IRC §§ 1311-1314, 6320, 6330, and 6331; Treas. Reg. §§ 301.6320-1 and 301.6330-1; 26 U.S.C. § 6110(k)(3)

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201247011
       Release Date: 11/23/2012
       CC:PA:06:
       POSTN-123032-12

UILC: 6320.00-00, 6330.00-00, 1313.01-00

date: August 01, 2012

 to:   Vivian Lai
       Appeals Officer
       Office of Appeals
       Field Operations West

from: Barbara M. Pettoni
Senior Technician Reviewer
(Procedure & Administration)

subject: Mitigation Claim During CDP Hearing

       Issues

          1. Whether the taxpayer may raise the issue of mitigation during this collection due
             process (CDP) hearing.

          2. Whether the mitigation provisions of the Internal Revenue Code apply such that
             the taxpayer’s refund claims for non-CDP years may be allowed despite the
             expiration of the statute of limitations for those years.

          3. Whether the taxpayer may raise the defense of equitable recoupment during this
             CDP hearing.

       Summary

          1. To avoid a potential remand by the Tax Court for abuse of discretion, Appeals
             should consider the issue of whether mitigation applies.

          2. The mitigation provisions do not apply because there was no determination as
             defined by IRC section 1313(a)(1).

POSTN-123032-12 2

3. The taxpayer may not raise the defense of equitable recoupment during this CDP
   hearing.

Background

     The taxpayer, ---------------------------------, is currently before Appeals for a CDP

hearing regarding the proposed collection of a tax liability for taxable year -------. The
taxpayer’s argument is that refunds for unrelated years may be used to offset the --------
liability and if those offsets are applied then there will be no amount left to collect.

     The taxpayer previously received a statutory notice of deficiency for tax year ------

--------and filed a timely petition with the Tax Court in response. The Tax Court docket
number for the deficiency case was -------------; the case concluded with a stipulated
decision entered by the Court on ------------------. The Tax Court’s decision finds
deficiencies for taxable years -----------------------------. While the Tax Court’s decision is
limited to the amount of deficiencies for the three taxable years at issue, there are
stipulation paragraphs found below the Judge’s signature. These paragraphs are
generally referred to as “below-the-line” stipulations.

     The below-the-line language in the stipulated decision states, in relevant part,

that: --------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

     The parties also filed a separate Stipulation of Settled Issues on ----------------------

-------. The Stipulation of Settled Issues stated that the parties agree to the following
regarding --------------------------------------------: ---------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------The Decision
and Stipulation of Settled Issues (final, unsigned version) are enclosed with this memo
for your reference.

    The taxpayer provided a letter dated April 10, 2012 addressed to Ms. Vivian Lai

in the IRS Office of Appeals. In this letter, the taxpayer argues that refund claims for
taxable years -------------------------------------------------------are not barred by the statute of
limitations due to the operation of the mitigation provisions in the Internal Revenue
POSTN-123032-12 3

Code. The taxpayer has separately appealed the denial of those refund claims, and
Appeals is currently reviewing those claims as well.

     The taxpayer provides additional relevant information in the April 10, 2012 letter.

According to the taxpayer’s letter, the issue during the Tax Court case for the --------------
----------------------years was the appropriate tax year in which the taxpayer should report
----------------------------. ---------were originally reported on the taxpayer’s return for --------
with losses carried back to --------forward. The IRS argued that the proper year was -----
--------------------.

  The taxpayer also presents the alternative argument that the doctrine of

equitable recoupment applies to allow relief in this case.

Discussion

1. Whether the taxpayer may raise the issue of mitigation during the CDP
   (Collection Due Process) hearing.

   Internal Revenue Code section 6330 provides that, before the IRS may make a
   

   levy on any property pursuant to section 6331, the taxpayer is entitled to a hearing
   before the IRS Office of Appeals (“Appeals”). I.R.C. § 6330(a) and (b). The hearing
   addresses the taxable period in which the unpaid tax specified in the notice of proposed
   levy relates. I.R.C. § 6330(b)(2). The taxpayer may raise “any relevant issue relating to
   the unpaid tax or the proposed levy.” I.R.C. § 6330(c)(2)(A). The taxpayer may also
   raise challenges to the existence or amount of the underlying tax liability at the hearing
   if the taxpayer did not receive a statutory notice of deficiency with respect to the
   underlying liability or did not other otherwise have an opportunity to dispute the liability.
   I.R.C. § 6330(c)(2)(B). The Appeals Officer conducting the hearing must determine
   whether and how to proceed with collection and shall take into account: (i) whether the
   requirements of any applicable law or administrative procedure have been met; (ii) the
   relevant issues raised by the taxpayer; (iii) challenges to the underlying liability by the
   taxpayer, where permitted; and (iv) whether any proposed collection action balances the
   need for the efficient collection of taxes with the legitimate concern of the taxpayer that
   the collection action be no more intrusive than necessary. I.R.C. § 6330(c)(3).

   The Tax Court has jurisdiction to review a CDP determination if the taxpayer
   

   timely files an appeal of the Appeals Officer’s determination with the Tax Court. The
   Tax Court may review issues that were properly at issue in the CDP hearing, sometimes
   including challenges to the underlying liability. I.R.C. § 6330; Treas. Reg. §§ 301.6320-
   1(f)(2) Q&A-F3, 301.6330-1(f)(2) Q&A-F3. In certain circumstances, Appeals may
   consider facts and issues in non-CDP years during a CDP hearing. See Freije v.
   Commissioner, 125 T.C. 14 (2005) (holding that the Tax Court had jurisdiction to
   consider facts and circumstances arising in non-CDP year that related to remittance
   POSTN-123032-12 4

taxpayer believed should be applied to CDP year).1 If a consideration of facts and
issues in non-CDP years is relevant to determining whether the “unpaid tax” that is the
subject of the proposed levy should have been satisfied by a remittance or available
credit, then those facts and issues may be included in the Appeals Officer’s review and
determination. See Freije at 26-27. The consideration of the non-CDP years extends
only “insofar as the tax liability for that year may affect the appropriateness of the
collection action for the [CDP] year.” Id. at 28. The Tax Court may consider a failure to
consider the factual circumstances of a non-CDP year overpayment that could eliminate
the CDP year liability to be an abuse of discretion on the part of Appeals. See Perkins
v. Commissioner, T.C. Memo. 2008-103 (holding that Appeals should have determined
whether limitations period should have been suspended because taxpayer was mentally
impaired such that overpayment arising in non-CDP year could be applied to satisfy
CDP liability). However, this consideration should only include “available credits,” such
as nonrefunded or not yet applied credits already determined by the IRS or a court, and
not merely claims of credits that have not yet materialized. See Weber v.
Commissioner, 138 T.C. No. 18 (2012) (holding that Tax Court did not have jurisdiction
to adjudicate a disputed refund claim that was distinct from and unrelated to the liability
at issue).

     The taxpayer, ---------------------------, is before Appeals for a CDP hearing relating

to a proposed collection of its tax liability for the taxable year -------. Only --------is at
issue in the CDP proceeding. ----------------------------received a statutory notice of
deficiency for the tax years ------------------------------and filed a timely petition. The Tax
Court case was resolved with a stipulated decision that found deficiencies for the
taxable years -----------------------------. The stipulated decision also included below-the-
line stipulations that the taxpayer had net operating losses in --------and --------and that
the taxpayer was entitled to a deduction in --------for --------------------------. Because -----
----------------------------had a prior opportunity to dispute the --------tax liability, it cannot
raise challenges to the existence or amount of the underlying tax liability at the CDP
hearing. However, the taxpayer is now arguing that mitigation would allow its refund
claims for --------and --------to potentially satisfy the tax liability for --------and that this
argument should be heard at the CDP hearing. This argument does not go to the
amount or existence of the underlying liability for --------through -------, but rather goes to
the amount that should be applied to satisfy the liability.

  ----------------------------mitigation argument should be considered in this CDP

hearing. In the stipulated decision for -----------------------------, the IRS agreed that the

1
In a recently issued Chief Counsel Notice, we discussed our disagreement with the holding of Freije:
“Freije is incorrectly decided to the extent it holds that a non-CDP period liability is a relevant issue in a
CDP hearing and that the Tax Court has jurisdiction to determine or otherwise review the taxpayer’s
liability for a non-CDP period. The availability of an overpayment from a non-CDP period as a source of
payment of the unpaid tax for the CDP period, however, may be raised as a relevant issue under section
6330(c)(2)(A) when the Service has already agreed that the taxpayer is entitled to the overpayment.” IRS
CCN CC-2011-021.
POSTN-123032-12 5

taxpayer had an available net operating loss and was entitled to a deduction for ----------
------------------------. Therefore, the Appeals Officer should consider the facts and issues
regarding the “available credit” that may be applied to satisfy the --------tax liability, even
though it involves a year that is not at issue in the CDP hearing. Like in Freije and
Perkins, Appeals should consider whether mitigation would allow the taxpayer’s refund
claims for the non-CDP years even though the limitations period has expired. This case
is not like Webster, in that the IRS has not disputed the credit, nor disallowed the refund
claims. The mitigation issue is a relevant issue relating to the unpaid tax and proposed
levy because, if allowed, the refund claims could eliminate the liability and negate the
need for the proposed levy. To avoid a potential remand by the Tax Court for abuse of
discretion, Appeals should consider the issue of whether mitigation applies.

2. Whether mitigation applies such that the taxpayer’s refund claims for barred
   years may be allowed and the amounts applied to the CDP year.

   The mitigation provisions, found at I.R.C. §§ 1311-1314, provide an exception to
   the restrictions against the allowing of a refund or an assessment in limited situations.
   Section 1311(a) provides that if a determination (as defined in section 1313) is
   described in one or more of the paragraphs of section 1312 and, on the date of the
   determination, correction of the effect of the error referred to in the applicable paragraph
   of section 1312 is prevented by the operation of any law or rule of law, other than this
   part and other than section 7122 (relating to compromises), then the effect of the error
   shall be corrected by an adjustment made in the amount and in the manner specified in
   section 1314. The mitigation provisions of the Code are limited to errors expressed in
   the statute and are not broadly available.

   Therefore, 1) there must be a “determination” as defined in section 1313(a); 2)
   

   the determination must be described by one of the circumstances of adjustment in
   section 1312; and 3) on the date of the determination, correction of the error must be
   barred by operation of law. Depending on which circumstance of adjustment applies,
   either the party who prevailed in the determination must have maintained a position that
   was adopted there and that was inconsistent with the erroneous treatment (I.R.C. §
   1311(b)(1)) or the party must have first maintained the erroneous position at a time
   when the correction would not have been barred (I.R.C. § 1311(b)(2)). Finally, the
   taxpayers must be in a relationship as defined by section 1313(c) and described in
   section 1311(b)(3). If all of the prerequisites for the mitigation provisions are met, then
   the rules for the amount and method of adjustment found in section 1314 are followed.

   The first requirement is the existence of a “determination” as defined by section
   

   1313(a). If there is no determination, then mitigation cannot apply. Section 1313(a)(1)
   defines determination as “a decision by the Tax Court ... which has become final.” In
   this case, a Tax Court decision was entered on -------------------and therefore became
   final on -------------------(the Tax Court docket does not indicate any post-decision
   motions or appeal). However, it was a stipulated decision. In order to base a mitigation
   adjustment on a stipulated decision, that stipulated decision must be sufficiently
   POSTN-123032-12 6

detailed. See Fong v. Commissioner, T.C. Memo. 1998-181; Anthony v. Commissioner,
T.C. Summ. Op. 2011-50.

    In Fong, the Service argued that a Tax Court decision based on a stipulation of

settled issues was a determination for purposes of section 1313(a). The Court found for
the petitioner, holding that: “[w]here ... a Tax Court case is settled and a decision is
entered based thereon, and where the specific underlying terms of the settlement
agreement between the parties are not reflected in the stipulation of settlement that is
filed with the Court and that serves as grounds for the decision that is entered, such a
Tax Court decision does not satisfy ... the determination requirement of section
1313(a).” T.C. Memo. 1998-181 at 13-14.

   The -------------------Tax Court decision does not satisfy the Fong requirement that

a stipulated decision be sufficiently detailed in order to operate as a determination for
purposes of the application of the mitigation provisions. While it is questionable whether
the separately filed Stipulation of Settled Issues may also be referenced for purposes of
this question, the analysis below assumes it does qualify as part of the decision and the
conclusion does not change. Therefore, there is no determination in this case.

    The stipulated decision and Stipulation of Settled Issues do not reference the

type of adjustment made to the years at issue, nor do they reference the adjustments
made to the --------and --------years. While a below-the-line stipulation does state that
the petitioner is entitled to a deduction in ----------------------for --------------------------, there
is no indication whether that deduction had been claimed in --------and whether the
decision disallows that claimed deduction. Because the tax years at issue before the
Court were -----------------------------, it is extremely unclear from the decision itself how
the Tax Court’s decision relates to any statement regarding tax year -------.

   The specific language of both the stipulated decision and Stipulation of Settled

Issues is important, as the taxpayer appears to be arguing that the Tax Court decision
created a right to file the amended returns (“The Internal Revenue Service denied the
claims citing the statute of limitations, notwithstanding the language in the Tax Court
decision.” Taxpayer’s April 10, 2012 letter, page 3.)

    The taxpayer has referenced the language of the Tax Court decision as relevant

to the refund claims. The Tax Court decision, however, consists of only the above-the-
line statements. Below-the-line statements are statements to which the parties agree
but they are not part of the actual court decision. A statement that the taxpayer is
entitled to a deduction in another taxable period does not reach the question of whether
the taxpayer may properly use that deduction.

   The Stipulation of Settled Issues further caveats that the petitioner does not

waive or forego rights to net operating losses “as are permitted by law.” If the taxpayer
cannot show that all of the requirements of the mitigation provisions are satisfied, then
the refunds remain barred. This analysis of the applicability of the mitigation provisions
POSTN-123032-12 7

does not reach the issue of whether the losses are properly claimed and is only a
determination that the years are closed.

    Without a determination, it is not possible to further analyze whether the facts of

the taxpayer’s case fall within the remainder of the mitigation requirements. Because
there is no determination, mitigation cannot apply to create an exception to the statute
of limitations barring the taxpayer’s refund claims.

3. Whether equitable recoupment provides an alternate ground for relief.

   “Equitable recoupment arises when a single ‘transaction, item or taxable event’ is

subject to two inconsistent taxes. The doctrine permits a party to a tax dispute to raise
a time barred claim in order to reduce or eliminate the money owed on the timely claim.”
Estate of Branson v. Commissioner, 264 F.3d 904, 909 (9th Cir. 2001) (internal citations
omitted).

     As discussed above, because the taxpayer had a prior opportunity to dispute the

--------tax liability, it cannot raise challenges to the existence or amount of the underlying
tax liability at the CDP hearing. Equitable recoupment is a defense against the
assessment of tax that goes to the amount of liability. Therefore, this argument is not
properly raised during the CDP hearing.2

2
If equitable recoupment could be raised during the CDP hearing, it would not be a successful argument.
Without analyzing the merits of the equitable recoupment argument in this case, it is clear that equitable
recoupment is a defensive doctrine that should have been raised during the Tax Court proceeding that
determined the deficiency amount. Further, the Ninth Circuit, where we believe this case would be
appealable, has held that when there is a statutory remedy provided in the mitigation sections of the
Code, equitable recoupment is not available. Wells Fargo Bank & Union Trust Co. v. United States, 245
F. 2d 524, 526 (9th Cir. 1957).