Tuesday, February 1, 2022

Second Circuit Affirms Tax Court that IRS Withdrawal of Certification of Seriously Delinquent Tax Debt to Secretary of State Makes § 7435 Proceeding Moot (2/1/22)

In Ruesch v. Commissioner, 25 F. 4th 67 (2d Cir. 1/27/22), GS here, the Court affirmed the Tax Court's holding that the § 7345 proceeding was moot where the IRS withdrew the "seriously delinquent tax debt" certification to the Secretary of State. The Tax Court opinion is Ruesch v. Commissioner, 154 T.C. 289 (2020), TC here at Dkt #25 and GS here.

In addition to holding that the § 7345 proceeding was mooted by the withdrawal of the certification, the Tax Court also held (from the syllabus):

Held: We do not have jurisdiction, under IRC sec. 7345 or otherwise, to consider in this case petitioner's challenge to her underlying liability for the penalties.

 The Second Circuit addressed that issue as follows (emphasis supplied by JAT):

   Even if the Tax Court had jurisdiction to assess the validity of Ruesch's underlying debt, Ruesch had already received the only relief she could obtain under the statute, namely, reversal of her certification as an individual with "seriously delinquent tax debt." See 26 USC § 7345(e)(2). Since there was no further relief the Tax Court could have provided under the statute, and since the statute provided Ruesch's only claimed basis for relief, it should have determined that Ruesch's remaining claims were mootn3
   n3 We note that Ruesch may yet have the chance to challenge her underlying liability in Court. That liability is currently the subject of an IRS appeals process that has still to run its course. See 26 USC § 6320. After receiving a final determination through that process, Ruesch will be able, if necessary, to "petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter)." Id. § 6330(d)(1); see id. § 6320(c). If Ruesch continues to object to the IRS's position regarding her underlying liability, she will eventually have her day in Court. For now, however, there is nothing further for our Court or the Tax Court to do.

 Two points about this:

1. This seems to reject the Tax Court's holding that there is no jurisdiction to consider the merits of the liability in a § 7345 proceeding. (See the bold face language. If that is right, what is the continuing viability of the Tax Court's holding? I suppose that the holding remains a holding and thus precedent in cases not appealable to the Second Circuit.  And, even in cases appealable to the Second Circuit which did not decide the issue, I suppose the Tax Court holding still applies.  Also, in Rowen v. Commissioner, 156 T.C. 101 (2021), GS here, the Court did consider whether the statute of limitation forecloses the tax liability.

2. In a similar vein, the Second Circuit seems to hold open the possibility that in a § 7345 proceeding that is not mooted, the Tax Court might consider the merits of the liability. See the "Even if" language at the start of the quoted paragraph. This may mean that it is just an open issue in the Second Circuit.

As an aside, in the Tax Court holding above, the holding is that there is no jurisdiction to consider the merits under IRC sec. 7345 or otherwise. I think the “or otherwise” is confusing. Certainly, in a deficiency proceeding the Tax Court has jurisdiction to consider the merits.

It is interesting that a similarly mooted CDP proceeding denied this taxpayer the opportunity to contest the merits of the § 6038(b) liability.  Ruesch v. Commissioner (2d Cir. Summary Order 2/12/20), GS here.

This blog entry is cross-posted on the Federal Tax Procedure Blog, here.

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