One of the most often requested (if not the most often requested) relief in a CDP is to contest the underlying tax liability. Taxpayers’ batting averages in Tax Court are far from encouraging in that respect.

Most often the response from Tax Court is “you didn’t petition the SNOD.” And where the amount sought to be collected comes straight from the taxpayer’s own return, the response is “you said it and you’re stuck with it.”

But here’s one where the taxpayer said it, and gets a chance to contest it. It’s George H. & Felomina F. Patton, Docket No. 16365-12L, filed 7/1/13, another Judge Laro off-the-bencher.

I am indebted to Judge Laro for printing the transcripts of the off-the-benchers. I know you can’t cite them and they aren’t precedent, but they offer a valuable insight into what Tax Court Judges think.

Anyway, George & Felomina filed their returns for the years at issue, but didn’t pay the taxes shown. IRS filed an NFTL, and George & Felomina asked for a CDP.

Here’s George’s story, in his own words, as told to Judge Laro: “I am 67 yrs. In August 2011, permanently disabled public safety officer since 1984 living on pension. paid medical insurance since retired not given credit for. Spouse paid withholding not given credit for. Government placed us in a hardship condition with its continuous trespass with water on our commercial property. it destroyed our tax record and made us unable to ascertain our deductions and correct amount of tax. File states abatement being considered. (emphasis added). “Decision, at p. 5.

George & Felomina claimed the NFTL should be withdrawn because “Responsible [sic] for correct amount of tax never ascertained.”  Decision, at p. 5.

George & Felomina got their CDP, but “(T)he settlement officer’s Case Activity Record, which would contain the settlement officer’s notes of what transpired during the CDP hearing, is not part of the record.” Decision, at p. 5. Of course, this is a motion  for summary judgment, so IRS claims George and Felomina never gave the SO the financial information requested until after the CDP, but when the SO tried to contact them with an installment offer, they didn’t respond.

Thus IRS’ position is the usual: they had their chance and they blew it, so abuse-of-discretion is the only thing to decide.

Judge Laro: “Contrary to respondent’s assertion, petitioners contested their underlying liabilities in their CDP request. The CDP request clearly stated that petitioners believed they were not given credits or deductions for certain tax withholdings and medical payments. The CDP request also claimed that petitioners’ tax records were destroyed by the ‘continuous trespass with water’, preventing petitioners from ascertaining their deductions and correct amount of tax. These statements together clearly show that petitioners believed the tax liabilities that they reported on their returns to be incorrect. Because ‘underlying tax liability’ referred to in section 6330 (c) (2) (B) encompasses self-assessed tax liability, petitioners were entitled to challenge the liabilities underlying respondent’s NFTL even though they had reported them on their own returns. Montgomery v. Commissioner, 122 T.C. 1, 7-8 (2004).

“Even when a taxpayer has made the underlying liability an issue in his CDP request, he is deemed to have abandoned the claim if he fails to pursue it in his CDP hearing. Schwartz v.  Commissioner, T.C. M:emo. 2008-117, 95 T.C.M. (CCH) 1427, 1430 n.9, aff’d, 348 Fed. Appx. 806 (3d. Cir., 2009). Here, respondent has failed to submit the Case Activity Record as an exhibit to his motion. This is problematic because the Case Activity Record would have allowed us to determine whether petitioners pursued the liability issue and presented evidence to support their claim during their CDP hearing. Viewing the facts in the light most favorable to petitioners as the nonmoving party here, we conclude petitioners properly raised the issue at their CDP hearing.”  Decision, at pp. 8-9.

Looks good for George & Felomina, right? Not quite.

They were late with their financial information and didn’t get back to the SO to discuss collection alternatives. So IRS wasn’t wrong when they refused to consider removing the NFTL or giving George & Felomina any collection alternatives. Those are off the table.

So, George & Felomina, it’s all about liability.