                                154 T.C. No. 7



                      UNITED STATES TAX COURT



JOSEPH THOMAS LANDER AND KIMBERLY W. LANDER, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



   Docket No. 25751-15L.                           Filed March 12, 2020.



           Ps seek relief from the filing of a notice of Federal tax lien.
   They maintain that the assessment of the underlying income tax
   liability for 2005 was invalid and that they did not have an
   opportunity to challenge the underlying tax liability before the
   hearing on the tax lien filing as described in I.R.C. sec.
   6330(c)(2)(B).

           Ps cannot challenge the underlying liability in a collection due
   process proceeding if they had a prior opportunity to dispute the tax
   liability. See I.R.C. sec. 6330(c)(2)(B). In Lewis v. Commissioner,
   128 T.C. 48 (2007), we applied secs. 301.6320-1(e)(3), Q&A-E2, and
   301.6330-1(e)(3), Q&A-E2, Proced. & Admin. Regs., and held that a
   conference with IRS Appeals after assessment of a tax liability which
   was not subject to deficiency procedures was such a prior
   opportunity. In Lewis v. Commissioner, 128 T.C. at 55 n.6, we
   declined to rule on the applicability of the prior opportunity question
   in cases requiring a notice of deficiency. Unlike in Lewis, Ps’
   liability is in income tax and they did not receive the notice of
                                          -2-

      deficiency. However, the notice was sent to the last address shown
      on their income tax returns. Subsequently, Ps filed a delinquent
      income tax return and an amended income tax return for 2005, and
      those returns were audited. Ps were then offered administrative
      review in Appeals, which they accepted. The Appeals officer
      relieved Ps of some of the income tax liability.

             Held: Ps had a prior opportunity to dispute the joint income
      tax liability for 2005, and the liability cannot be challenged in this
      case.

               Held, further, the assessment of the 2005 income tax liability is
      valid.



      Frank M. Smith, for petitioners.

      Jamie A. Schindler, for respondent.



                                       OPINION


      GOEKE, Judge: This case was assigned to and trial was conducted by

Special Trial Judge Guy pursuant to section 7443A(b)(4)1 and Rules 182(e) and

183. His recommended findings of fact and conclusions of law were filed and




      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) as amended and in effect at all relevant times, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                         -3-

served on the parties. Both parties filed responses, and respondent also filed a

reply to petitioners’ response.

      We are mindful in reviewing Special Trial Judge Guy’s recommended

findings of fact that Rule 183(d) provides that we shall give due regard to the

circumstance that the Special Trial Judge had the opportunity to evaluate the

credibility of witnesses and shall presume the findings of fact recommended by the

Special Trial Judge to be correct.

      We have reviewed the recommended findings of fact and conclusions of law

of Special Trial Judge Guy and the subsequent submissions by the parties pursuant

to section 7443A(b)(4) and Rules 182(e) and 183.

      We adopt Special Trial Judge Guy’s recommended findings of fact and

conclusions of law, which are shown below, as the Opinion of the Court.

                                     Background

      This case is an appeal from a notice of determination issued by the Internal

Revenue Service (IRS) Office of Appeals (Appeals Office) sustaining the filing of

a Federal tax lien related to petitioners’ unpaid Federal income tax for the taxable

year 2005. The issues for decision are (1) whether assessments that respondent

entered against petitioners for the taxable year 2005 are valid and, if so,
                                        -4-

(2) whether the Appeals Office erred in determining that petitioners are barred

from challenging their underlying tax liability pursuant to section 6330(c)(2)(B).

      The parties have stipulated some facts. Petitioners, husband and wife,

resided in Florida when the petition was filed.

I. Petitioners’ 2005 Tax Return

      On April 2, 2009, petitioners filed a delinquent joint Federal income tax

return for the taxable year 2005 (sometimes referred to as the year in issue). In

September 2009, shortly after the IRS had opened an examination of the tax

return, petitioners filed an amended tax return. The parties agree that the address

that petitioners entered on their original and amended tax returns, P.O. Box 2007,

Cross City, Florida (Cross City address), was their last known address at all times

pertinent to this case.

II. Mr. Lander’s Criminal Case

      In 2009 Mr. Lander, an attorney, was convicted by a jury in the U.S. District

Court for the Northern District of Florida on mail fraud and money laundering

charges, and he was sentenced to a term of incarceration beginning February 10,

2010. While Mr. Lander was incarcerated, Mrs. Lander acted as his attorney-in-

fact pursuant to a general durable power of attorney that he had executed in

November 2008.
                                          -5-

      The U.S. Court of Appeals for the Eleventh Circuit subsequently reversed

Mr. Lander’s convictions on 12 counts (mail fraud and money laundering charges

related to a real estate development transaction) but sustained his convictions on 4

counts (mail fraud related to misrepresentations that he made to investors in

GenSpec, LLC (GenSpec), a company that he had organized). See United States

v. Lander, 668 F.3d 1289 (11th Cir. 2012).

III. Initial Examination

      Revenue Agent Cassandra Sports (RA Sports), assigned to the IRS

examination unit in Gainesville, Florida (Gainesville examination unit), examined

petitioners’ 2005 tax return. On July 29, 2011, the IRS sent petitioners a so-called

30-day letter outlining proposed adjustments to their tax liability for 2005

including, in relevant part, the disallowance of a deduction for a flowthrough loss

of $174,588 attributable to GenSpec (GenSpec loss) and an adjustment to income

(i.e., an unreported capital gain) attributable to cash distributions that petitioners

had received from K3 Ventures, LLC (K3 Ventures capital gain).2




      2
       Petitioners’ amended return for the year in issue stated in pertinent part:
“Amended return * * * due to correction to K3 Ventures. Original return had K3
Ventures as Schedule C but company was a 2-person LLC and a 1065 has been
prepared for 2005.”
                                           -6-

      RA Sports summarized the K3 Ventures capital gain adjustment as follows:

      The taxpayers apparently created an entity in 2005 which they named
      K3 Ventures. The nature of the activity and/or the business purpose
      of the entity are unknown. Although the entity was a two-member
      LLC, it was originally reported as a Schedule C activity on the first
      Form 1040 filed for 2005. On the 09/29/2009 Form 1040X, the
      activity was included on Sch E as a flow-through entity. Also, F1065
      was filed for the activity which was consistent with the 1040X
      assertions.

      The K-1 information provided with the 1040X indicated the taxpayers
      each contributed $208,010 ($416,020 total) and each received a cash
      distribution of $202,394 ($404,787 total.) Based on the taxpayers’
      reported sources of income and other return information there were
      no sources which could explain the access to over $400,000 to
      contribute to K3 Ventures, LLC.

      *          *          *          *           *          *          *

      The taxpayers have failed to report and/or disclose any sources of
      taxable or non-taxable income to support the 2005, initial capital
      contribution to K3 Ventures LLC. Absent this documentation and
      substantiation of any amount of capital contributed, IRC [section]
      731(b) provides that the recognized gain shall be treated as a gain
      from the sale of the partnership interest. Since this is the first year of
      operation, the taxpayers’ gain will be treated as a short-term capital
      gain.

      On August 26, 2011, Mrs. Lander submitted to the Gainesville examination

unit a package titled “FORMAL PROTEST” in response to the 30-day letter. The

package comprised various records, including an October 2005 bank statement

listing deposits/credits and withdrawal/debits to an account that K3 Ventures
                                        -7-

maintained at Drummond Community Bank. The package included a typewritten

note signed by Mr. Lander, dated August 22, 2011, stating: “If you have any

further questions or if we can provide any additional information to you pursuant

to this communication, please contact Joseph Lander at: * * * P.O. Box 1000,

Morgantown, WV 26507.” The address is that of the Federal correctional

institution where Mr. Lander was incarcerated at that time and will be referred to

as the FCI Morgantown address.

      The IRS did not treat Mrs. Lander’s August 26, 2011, package as a proper

protest of the 30-day letter. Because petitioners had not agreed to extend the

period of limitations governing assessment for the year in issue, their

administrative file was forwarded to the IRS Technical Services Office in

Jacksonville, Florida (Jacksonville technical services office), for the preparation

and issuance of a statutory notice of deficiency.

IV. Notice of Deficiency

      Corey Campbell, group manager at the Jacksonville technical services office

in 2011, testified at trial. Mr. Campbell reviewed the documents in petitioners’

administrative file, summarized routine IRS practices and procedures concerning

the preparation and mailing of notices of deficiency, and described the various
                                         -8-

actions taken by IRS personnel who worked under his supervision as outlined

below.

        Revenue Agent Bonnie McElhattan (RA McElhattan), assigned to the

Jacksonville technical services office, prepared a joint notice of deficiency

determining that petitioners were liable for an income tax deficiency of $148,708

for the taxable year 2005, an addition to tax of $37,177 under section 6651(a)(1)

for failure to timely file a tax return, and an accuracy-related penalty of $29,742

under section 6662(a). In preparing the notice of deficiency RA McElhattan relied

on information in petitioners’ administrative file, including the 30-day letter. The

income tax deficiency was largely attributable to two adjustments: (1) the

disallowance of a deduction for the GenSpec loss and (2) the K3 Ventures capital

gain.

        After RA McElhattan had prepared the notice of deficiency, petitioners’

administrative file was forwarded to Tax Examiner Harvey McGhee (TE

McGhee), also employed at the Jacksonville technical services office, who was

responsible for mailing duplicate copies of the joint notice of deficiency to

petitioners by certified mail. In doing so TE McGhee first printed two or more

duplicate “blank” copies of the notice of deficiency (i.e., at least two copies each

of the notice of deficiency, one of which was addressed to the Cross City address
                                         -9-

and the other to the FCI Morgantown address). In both cases the notice of

deficiency was addressed to “Joseph T. & Kimberly W. Lander”. The copies were

blank in the sense that they had not been stamped with the date of mailing or the

last date for filing a timely petition for redetermination with the Court.

      Before mailing the notice of deficiency, TE McGhee stamped the date of

mailing, November 16, 2011, and the last date to file a timely petition for

redetermination, February 14, 2012, on the first page of the notice of deficiency

that would be mailed to petitioners. He then placed those same stamps on what

would become IRS file copies of the notice of deficiency. Because the date

stamps were placed on the file copies, independent of the date stamps placed on

the notice of deficiency mailed to petitioners, the file copies are not true duplicates

of the notice of deficiency.

      After placing the date stamps on the notice of deficiency, TE McGhee

prepared a U.S. Postal Service (USPS) Form 3877, Certified Mail List, which

shows that the joint notice of deficiency was mailed to petitioners at (1) the Cross

City address (assigned certified mail No. 7010 0290 0002 4450 1988) and (2) the

FCI Morgantown address (assigned certified mail No. 7010 0290 0002 4450

1995). The Form 3877 bears the initials of TE McGhee, initials in a space

designated for the USPS Postmaster, and a USPS postmark date of November 16,
                                         - 10 -

2011. The Form 3877 indicates that the IRS presented, and the USPS

acknowledged receipt of, seven items of mail bearing specific certified mail

numbers.

      USPS certified mail packages include a sticker bearing the certified mail

number unique to each package that the sender can retain for recordkeeping

purposes. It is the routine practice of the IRS to place the certified mail number

sticker on the top of the first page of a file copy of a notice of deficiency or to

write the number on the top of the file copy in the event that the sticker is

inadvertently damaged or is otherwise unusable.

      Petitioners’ administrative file includes a file copy of the notice of

deficiency mailed to the FCI Morgantown address that bears the date stamps

referred to above, as well as a certified mail sticker bearing No. 7010 0290 0002

4450 1988. The letter “W” is handwritten on the sticker, which Mr. Campbell

surmised was a shorthand reference to “wife” or Mrs. Lander. Petitioners’

administrative file likewise includes a file copy of the notice of deficiency mailed

to the Cross City address that bears the date stamps referred to above, as well as

handwritten certified mail No. 7010 0290 0002 4450 1995. Noting the

discrepancy between the certified mail numbers placed on the file copies of the

notice of deficiency and the certified mail numbers assigned to the notice of
                                         - 11 -

deficiency as recorded on Form 3877, Mr. Campbell speculated that TE McGhee

had inadvertently switched the certified mail numbers in the process of completing

his work on the file copies of the notice of deficiency.

      A. The Cross City Notice

      USPS.com track and confirm records show that the item of certified mail

bearing No. 7010 0290 0002 4450 1988 first entered the USPS delivery system at

Jacksonville, Florida, on November 16, 2011; it promptly arrived at the USPS unit

in Cross City, Florida; the USPS left notice that the item was available for pickup

on November 17, 2011; and the USPS treated the item as having been unclaimed

on December 6, 2011.

      The USPS returned the envelope bearing the Cross City notice of deficiency

to the IRS. After the Cross City notice of deficiency was returned, IRS personnel

opened the envelope, removed the notice of deficiency, and stapled it to the

envelope.3 Consistent with normal practice, the IRS retained the envelope and the

notice of deficiency in petitioners’ administrative file.

      Although they are partially obscured, the envelope bears USPS postage of at

least $4.30 and a postmark date of November 16. The face of the envelope

      3
       Respondent produced the original envelope and the notice of deficiency
mailed to the Cross City address at trial, and petitioners’ counsel inspected the
documents.
                                        - 12 -

includes handwritten dates as follows: “11-17-11”, “11-25”, and “12-2-11”,

evidently marking the dates that the USPS left notice for petitioners that an item of

certified mail was available for pickup. The face of the envelope is marked

“RETURN TO SENDER UNCLAIMED”.

      B. The FCI Morgantown Notice

      USPS.com track and confirm records show that the item of certified mail

bearing No. 7010 0290 0002 4450 1995 first entered the USPS delivery system on

November 16, 2011; it arrived at the USPS unit in Morgantown, West Virginia, on

November 22, 2011; and it was delivered that same day. In the meantime,

however, Mr. Lander had been discharged from FCI Morgantown on November

17, 2011, and he spent that day in transit to another Federal prison facility in

Pensacola, Florida, where he continued his term of incarceration later that day.

      Respondent acknowledges that petitioners did not receive either copy of the

notice of deficiency. Consequently, they did not have the opportunity to file a

petition for redetermination with the Court challenging the notice of deficiency.4




      4
        It is worth noting that on March 23, 2012, respondent issued to petitioners
a joint notice of deficiency for the taxable years 2006, 2007, and 2008. On June
20, 2012, petitioners filed a timely petition for redetermination with the Court
assigned docket No. 15807-12. The parties arrived at a basis for settlement, and
the Court entered a stipulated decision in that case on May 21, 2013.
                                         - 13 -

V. Assessment and Initial Collection Activity

      On July 2, 2012, the IRS entered assessments against petitioners for the tax,

addition to tax, and accuracy-related penalty determined in the notice of deficiency

for the taxable year 2005, and interest related thereto. On that same date the IRS

sent to petitioners a notice and demand for payment of $295,691--the balance due

on their account for the taxable year 2005. Petitioners did not remit payment.

      On July 23, 2012, the IRS sent to petitioners a CP504, Notice of Intent to

Levy, for 2005.5 On July 26, 2012, petitioners sent a letter to the IRS Taxpayer

Advocate Service (TAS) stating that, although they had never received a notice of

deficiency for 2005, nor any response to their protest to the 30-day letter, the IRS

had initiated collection activities for that year. In April 2013 the TAS sent an

Operations Assistance Request memorandum to the IRS Examination Division

recommending a reexamination of petitioners’ 2005 tax return.

VI. Audit Reconsideration

      On June 5, 2013, a supervisor at the Gainesville examination unit sent a

letter to petitioners stating that their August 26, 2011, letter did not qualify as a

formal protest under the Internal Revenue Manual. The letter (which effectively


      5
       This notice did not state that petitioners could request a collection due
process hearing with the Appeals Office.
                                        - 14 -

started the audit reconsideration process) was accompanied by an IRS rebuttal to

petitioners’ August 26, 2011, letter, invited them to submit a proper formal protest,

and identified Revenue Agent Femi Ayadi (RA Ayadi) as the person to contact.

      On July 1, 2013, petitioners forwarded to the IRS a protest and response to

the IRS rebuttal. Petitioners asserted that the period of limitations governing

assessment for 2005 had expired because the IRS had never issued a notice of

deficiency to them. To varying degrees petitioners also addressed the merits of the

adjustments related to the GenSpec loss and the K3 Ventures capital gain. With

regard to the K3 Ventures capital gain, petitioners stated in relevant part:

      Upon creation of the PARTNERSHIP * * * taxpayers made a tax
      free contribution into the entity. The source of those funds were from
      external resources with personal liability attached via personal
      guarantee(s) or securitization with other property. * * * Even if the
      funding came from a third party directly into the K-3 Ventures, LLC
      operating account(s), the spirit and intent - as well as contractual
      obligations (written or oral) - carry the day and are in accordance with
      IRC Sec 731(a)(1) and consistent with how taxpayer(s) reported the
      transactions(s).

Petitioners closed their letter with a request for Appeals Office review.

      On July 10, 2013, petitioners submitted an amendment to their protest

providing additional argument related to the K3 Ventures capital gain. Petitioners

asserted that they had previously provided Drummond Community Bank records
                                       - 15 -

showing “deposits in excess of $415,000 * * * [in October 2015] credited to the

taxpayer(s) respective capital account(s)”.

      On July 15, 2013, RA Ayadi sent a letter to petitioners responding to their

July 1, 2013, protest. Acknowledging that petitioners had requested Appeals

Office review, RA Ayadi provided a rebuttal to their protest and, citing the

requirements of section 6001, noted that they had not provided any documents or

records to substantiate the source of the funds that they purportedly contributed to

K3 Ventures. In response to petitioners’ claim that the IRS had failed to deliver a

notice of deficiency to them for the taxable year 2005, RA Ayadi stated: “This has

no bearing on the outcome of the audit findings. The Notice of Deficiency was

not sent by the Revenue Agent that was previously working the case.”

VII. Appeals Office Review

      Petitioners’ case was subsequently transferred to the Appeals Office in

Tampa, Florida, and assigned to Appeals Officer Thomas Bohné (AO Bohné).

About this same time, on September 17, 2013, Mr. Lander was released from

prison.

      On December 23, 2013, AO Bohné met with petitioners, and they renewed

the argument that the underlying assessments for 2005 were invalid because the

IRS had not issued a notice of deficiency to them.
                                        - 16 -

      By letter dated January 7, 2014, AO Bohné informed petitioners that a

notice of deficiency for 2005 had been “delivered to the Morgantown WV and the

Cross City FL addresses and were subsequently unclaimed.” He also invited

petitioners to meet with him if they wanted to continue the audit reconsideration

process.

      On January 21, 2014, petitioners sent a letter to AO Bohné challenging his

conclusion that a notice of deficiency had previously been mailed to them, citing

various factors, including the discrepancies between the certified mail numbers

appearing on IRS file copies of the notice of deficiency and USPS.com track and

confirm records. On February 3, 2014, AO Bohné wrote to petitioners and

reiterated that, although he disagreed with their assertion that the period of

limitations governing assessment had expired, he would continue to work with

them to arrive at a basis for settlement taking into account the hazards of litigation

confronting both parties.

      On March 10, 2014, petitioners met with AO Bohné a second time. On

March 24, 2014, they sent a letter to AO Bohné enclosing a portion of the

transcript from Mr. Lander’s criminal resentencing hearing held in August 2012.

The partial transcript was limited to the direct testimony of a witness that Mr.
                                        - 17 -

Lander had called to testify about petitioners’ interests in GenSpec and K3

Ventures.

        On May 9, 2014, AO Bohné sent a letter to petitioners stating in relevant

part:

               Your case was received in Appeals as a result of the Taxpayer
        Advocate requesting a [sic] Audit Reconsideration of the original
        audit. * * *

              As the result of the agreement reached for the subsequent years
        of 2006 through 2008 the GenSpec flow thru loss of $174,588 and
        IRC [section] 6662 Accuracy Penalty were abated. Nothing could be
        done with the Capital Gains adjustment of $397,937.

               Your contention was that there were adequate deposits made
        into the K-3 bank account in 2005 to cover the distributions and you
        are correct. However none of these monies were taxed to you, and
        hence could not provide you any basis. If the monies had not been
        classified as capital gains they would have had to be classified as
        unreported income and possibly be taxed at a greater rate.

             If you have any questions, please call me at the above phone
        number.

        AO Bohné’s letter was accompanied by an Appeals Case Memorandum

which provided a detailed explanation of the adjustments to petitioners’ tax

liability for 2005. With regard to the K3 Ventures capital gain, AO Bohné noted

that a Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., reported

that petitioners had organized K3 Ventures on October 6, 2005, and that they had
                                        - 18 -

contributed $416,020 to the entity and received cash distributions of $404,787 that

same year. AO Bohné explained that, although he considered the Drummond

Community Bank records and the partial transcript from Mr. Lander’s

resentencing hearing, he nevertheless concluded that the K-3 Ventures capital gain

adjustment should be sustained, as follows:

             Primary position: The taxpayers have failed to substantiate the
      capital contribution amount to K3 Ventures, LLC which would
      support continued treatment of the cash distributions as a nontaxable
      return of capital under IRC [section] 731(a)(1).

             The taxpayers have failed to report and/or disclose any sources
      of taxable or non-taxable income to support the 2005, initial capital
      contribution to K3 Ventures LLC. Absent this documentation and
      substantiation of any amount of capital contributed, IRC [section]
      731(b) provides that the recognized gain shall be treated as a gain
      from the sale of the partnership interest. Since this is the first year of
      operation, the taxpayers’ gain will be treated as a short-term capital
      gain.

             Alternative position: If the taxpayer substantiates the capital
      contribution amount and the source is not a non-taxable source, that
      amount should be included as other income under IRC [section] 61.
      The sources of income which the taxpayer has reported are
      significantly less than asserted amount of the capital contributions.
      The character of the income will be determined by the source of any
      substantiated amounts of capital contributions.

      On June 2, 2014, as a result of the audit reconsideration process the IRS

abated $61,318 of the tax assessed for 2005 and interest attributable thereto. The

IRS also abated the accuracy-related penalty of $29,742.
                                       - 19 -

VIII. Collection Due Process Proceedings

      On January 13, 2015, the IRS mailed to petitioners a Notice of Federal Tax

Lien Filing and Your Right to a Hearing Under IRC 6320 in respect of the

$183,057 balance then due on their account for 2005. Petitioners timely submitted

to the Appeals Office a Form 12153, Request for a Collection Due Process or

Equivalent Hearing, asserting that the underlying assessment was invalid because

a notice of deficiency was not mailed to them for the year in issue. Petitioners also

checked the following boxes on Form 12153: “I Cannot Pay Balance” and

“Innocent Spouse Relief”.6

      Petitioners’ case was assigned within the Appeals Office to Settlement

Officer Iris Reubel (SO Reubel). During the course of the Appeals Office

administrative process petitioners expressed disagreement with the amounts

assessed for the taxable year 2005 and asserted that they had never received a

notice of deficiency. SO Reubel’s case activity notes indicate that, rather than

focusing on the question whether petitioners had received a notice of deficiency,

she reviewed a TXMODA transcript of account and concluded that petitioners

were not entitled to challenge their underlying tax liability for 2005 because they


      6
      It does not appear that petitioners attached Form 8857, Request for
Innocent Spouse Relief, as Form 12153 directs.
                                        - 20 -

had previously settled the matter with the Appeals Office and agreed to a

reduction in the balance of tax due. Petitioners responded that they had not settled

the matter with the Appeals Office, which led SO Reubel to undertake a months-

long effort to retrieve IRS audit reconsideration records.

      On September 3, 2015, the Appeals Office issued to petitioners a notice of

determination sustaining the decision to file the Federal tax lien. Petitioners

invoked the Court’s jurisdiction under sections 6320 and 6330 by filing a timely

petition for review of the collection action.

      After filing an answer to the petition, respondent filed a motion to remand

the case to the Appeals Office for a further administrative hearing. Specifically,

respondent conceded that SO Reubel had erred in not addressing the question

whether a notice of deficiency had been issued to petitioners for the year in issue.

The Court granted respondent’s motion to remand, and the Appeals Office

ultimately concluded, in a supplemental notice of determination, that a notice of

deficiency had been properly mailed to both petitioners at their last known

address.

                                     Discussion

      Section 6321 imposes a lien in favor of the United States upon all property

and rights to property of a person liable for unpaid taxes after demand for
                                        - 21 -

payment. Section 6320(a) provides that, within five business days after the day a

notice of lien described in section 6323 is filed, the Secretary must notify the

person, in writing, that a tax lien was filed and inform the person of his or her right

to an administrative hearing in the Appeals Office before an impartial officer or

employee. Section 6320(c) provides that the Appeals Office hearing generally

shall be conducted consistent with the procedures set forth in section 6330(c), (d),

(e), and (g).

       In conducting the administrative hearing the Appeals Office must verify that

the requirements of any applicable law or administrative procedure have been met.

Sec. 6330(c)(1), (3)(A). The Appeals Office also must consider any issues raised

by the person relating to the unpaid tax or the disputed collection action, including

offers of collection alternatives, appropriate spousal defenses, and challenges to

the appropriateness of the collection action. Sec. 6330(c)(2)(A), (3)(B). A person

may challenge the existence or amount of his or her underlying tax liability if the

person did not receive a notice of deficiency or did not otherwise have an

opportunity to dispute such tax liability. Sec. 6330(c)(2)(B). Finally, the Appeals

Office must consider whether the collection action balances the Government’s

need for efficient collection of tax against the person’s concern that collection be

no more intrusive than necessary. Sec. 6330(c)(3)(C).
                                        - 22 -

      A person may invoke the Court’s jurisdiction and obtain judicial review of

the final administrative determination by filing a timely petition for review under

section 6330(d)(1). If the person’s underlying tax liability is in dispute, the Court

will review the matter de novo. Goza v. Commissioner, 114 T.C. 176, 181-182

(2000). Otherwise, the Appeals Office administrative determination is reviewed

for abuse of discretion. Id. at 182. An abuse of discretion occurs if the Appeals

Office exercises its discretion “arbitrarily, capriciously, or without sound basis in

fact or law.” Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

I. Validity of Assessments

      As a threshold matter, petitioners maintain that respondent failed to show

that the assessments entered against them for the taxable year 2005 are valid.

Specifically, petitioners aver that respondent failed to mail a notice of deficiency

to them before the assessments were entered in July 2012. The Appeals Office

determined, however, that respondent mailed a notice of deficiency to petitioners

by certified mail at their last known address in November 2011, no petition for

redetermination was filed with the Court, and therefore the assessments are valid.

      Section 6212(a) provides that if the Secretary determines that there is a

deficiency in a taxpayer’s income tax, he is authorized to send notice of the

deficiency to the taxpayer by certified or registered mail. Section 6212(b)(1)
                                         - 23 -

provides that it shall be sufficient if the notice of deficiency is mailed to the

taxpayer’s last known address. See August v. Commissioner, 54 T.C. 1535, 1536

(1970). The term “last known address” means the address that appears on the

taxpayer’s most recently filed and properly processed Federal tax return unless the

Commissioner is given clear and concise notification of a different address. Sec.

301.6212-2(a), Proced. & Admin. Regs.

      Section 6212(b)(2) provides that, in the case of a joint return, and where the

Commissioner is aware that spouses have established separate residences, a

duplicate original of a joint notice of deficiency shall be sent to each spouse. “It is

well settled that a notice of deficiency mailed to a taxpayer’s last known address is

valid even though the taxpayer does not receive it.” Yusko v. Commissioner, 89

T.C. 806, 810 (1987).

      The Commissioner bears the burden of proving proper mailing of a notice of

deficiency by competent and persuasive evidence. Cataldo v. Commissioner, 60

T.C. 522, 524 (1973), aff’d per curiam, 499 F.2d 550 (2d Cir. 1974); August v.

Commissioner, 54 T.C. at 1536-1537. The act of mailing may be proven by

evidence of the Commissioner’s mailing practices corroborated by direct

testimony or documentary evidence of mailing. Magazine v. Commissioner, 89

T.C. 321, 326 (1987); Cataldo v. Commissioner, 60 T.C. at 524; see Fed. R.
                                        - 24 -

Evid. 406. A Form 3877 reflecting that the USPS received an item of certified

mail from the Commissioner represents direct documentary evidence of the date

and the fact of mailing. Magazine v. Commissioner, 89 T.C. at 324, 326-327. A

properly completed Form 3877 also reflects compliance with IRS established

procedures for mailing a notice of deficiency. Keado v. United States, 853 F.2d

1209, 1212-1213 (5th Cir. 1988).

      Respondent offered the testimony of Corey Campbell, the group manager at

the Jacksonville technical services office, Exhibit 5-R (a copy of the envelope and

the notice of deficiency mailed to the Cross City address which the USPS had

returned to the IRS undelivered), Exhibit 6-R (a file copy of the notice of

deficiency mailed to the FCI Morgantown address), and Form 3877 to show that a

notice of deficiency was properly mailed to petitioners for the taxable year 2005.

Petitioners, however, reserved evidentiary objections (foundation, authentication,

hearsay, relevance, and materiality) to Exhibits 5-R and 6-R.7

      7
        Petitioners withdrew similar objections to other documents that respondent
offered into evidence (i.e., Exhibits 7-R to 11-R and 13-R). Oddly enough,
although petitioners reserved objections to Exhibit 6-R, they offered the same
document into evidence as part of Exhibit 12-P, which was admitted and made
part of the record. In any event the Court considers petitioners’ objections to
Exhibit 6-R to have been resolved at trial when respondent acknowledged that
another file copy of the notice of deficiency sent to the FCI Morgantown address
(which also is part of Exhibit 12-P) represents a “complete” file copy (i.e., it bears
                                                                       (continued...)
                                        - 25 -

      Petitioners’ objections to Exhibit 5-R are rooted in the fact that the certified

mail numbers assigned to the notice of deficiency on Form 3877 do not match the

certified mail numbers that TE McGhee placed on IRS file copies of those

documents. In particular Form 3877 shows that the copies of the notice of

deficiency mailed to the Cross City and FCI Morgantown addresses were assigned

certified mail Nos. 7010 0290 0002 4450 1988 and 7010 0290 0002 4450 1995,

respectively. In contrast, IRS file copies of the notice of deficiency show that TE

McGhee assigned certified mail number ending in 1995 to the notice mailed to the

Cross City address and certified mail number ending in 1988 to the notice mailed

to the FCI Morgantown address. Petitioners maintain that these discrepancies,

coupled with RA Ayadi’s statement that “[t]he Notice of Deficiency was not sent

by the Revenue Agent that was previously working the case”, casts doubt on the

proposition that the IRS mailed a notice of deficiency to them for the year in issue.

We disagree.

      Contrary to petitioners’ objections, respondent laid a proper foundation for

and authenticated Exhibit 5-R. The Court finds that the document is exactly what


      7
        (...continued)
a certified mail number placed on the document by TE McGhee). Under the
circumstances, petitioners’ evidentiary objections to Exhibit 6-R (if any remain)
are overruled.
                                       - 26 -

respondent claims it is: a copy of the original envelope and notice of deficiency

that respondent mailed to petitioners by certified mail at the Cross City address on

November 16, 2011. The record reflects that the USPS was unable to deliver the

Cross City notice of deficiency and returned it to the IRS.

      IRS personnel prepare and mail thousands of notices of deficiency to

taxpayers annually. In this case respondent established a proper foundation for

Exhibit 5-R through the testimony of Mr. Campbell, who reviewed the documents

in petitioners’ administrative file, explained the routine and standard procedures

that IRS personnel follow in preparing and mailing notices of deficiency, and

described the various recordkeeping activities that the IRS undertakes in

connection with notices of deficiency, including the preparation and retention of

both Form 3877 and file copies of notices of deficiency and the routine handling

of any notices of deficiency that the USPS returns to the IRS undelivered.

      Mr. Campbell identified Exhibit 5-R as a public record maintained in the

normal course by the Jacksonville technical services office, and petitioners’

counsel was permitted to inspect the original documents at trial. See Fed. R. Evid.

901(a), (b)(7). Mr. Campbell’s testimony established that Exhibit 5-R falls within

the exception to hearsay for records of a regularly conducted business activity set
                                        - 27 -

forth in rule 803(6) of the Federal Rules of Evidence. Exhibit 5-R is clearly

relevant and material to the matters in dispute in this case.

      The Court finds that the information recorded on Form 3877 and confirmed

by USPS.com track and confirm records is correct and accurate and that TE

McGhee inadvertently switched the certified mail numbers associated with the

Cross City and FCI Morgantown notices when he prepared the file copies in

question. Although TE McGhee’s error caused confusion, it does not undermine

the trustworthiness of the cumulative evidence related to the mailing of the notice

of deficiency by certified mail outlined above. Consistent with the foregoing,

petitioners’ objections to the admission of Exhibit 5-R are overruled.8

      In sum, the record contains ample and persuasive evidence that the IRS

mailed the notice of deficiency to petitioners by certified mail at the Cross City

and FCI Morgantown addresses. Respondent having carried his burden of proof

on this point, and there being no dispute that the Cross City address was




      8
       RA Ayadi’s statement that “[t]he Notice of Deficiency was not sent by the
Revenue Agent that was previously working the case”, although vague and
perhaps incomplete, is consistent with other documents in the record (summarized
above) which show that the notice of deficiency was prepared by RA McElhattan
and issued by TE McGhee, as opposed to RA Sports, who had conducted the
original examination.
                                        - 28 -

petitioners’ last known address, it follows that the assessments entered against

petitioners for the taxable year 2005 are valid.9

II. Challenge to the Underlying Tax Liability

      As is relevant here, section 6330(c)(2)(B) authorizes a taxpayer to challenge

“the existence or amount of the underlying tax liability” so long as the taxpayer

“did not receive any statutory notice of deficiency for such tax liability or did not

otherwise have an opportunity to dispute such tax liability.” Although the parties

agree that petitioners did not receive the notice of deficiency when it was mailed

to them in November 2011, respondent maintains that petitioners took advantage

of an opportunity to challenge their underlying tax liability before the Appeals

Office as part of a postassessment audit reconsideration process. Thus, respondent

contends that the Appeals Office correctly rejected petitioners’ attempt to

challenge their underlying tax liability a second time as part of the collection

review process under sections 6320 and 6330.

      Petitioners counter that they were not given a full and fair opportunity to

challenge their underlying tax liability during the audit reconsideration process,


      9
        The Court finds no fault with respondent’s effort to comply with sec.
6212(b)(2) by mailing a duplicate original of the joint notice of deficiency to Mr.
Lander at the FCI Morgantown address. Mr. Lander was in fact held at that
facility on the date that the notice of deficiency was mailed.
                                        - 29 -

that AO Bohné did not give full consideration to the matter, and, in any event, they

are entitled to an opportunity for prepayment judicial review.

      Although the phrase “opportunity to dispute” is not defined in the Code, the

Secretary has promulgated regulations regarding section 6330(c)(2)(B) pursuant to

the authority prescribed in section 7805(a). Consistent with the statute, section

301.6330-1(e)(1), Proced. & Admin. Regs., provides in pertinent part:

             (e) Matters considered at CDP hearing.--(1) In general. * * *
      The taxpayer also may raise challenges to the existence or amount of
      the underlying liability * * * for any tax period specified on the CDP
      Notice if the taxpayer did not receive a statutory notice of deficiency
      for that tax liability or did not otherwise have an opportunity to
      dispute the tax liability. * * *

Section 301.6330-1(e)(3), Q&A-E2, Proced. & Admin. Regs., illustrates the

provisions of paragraph (e) of the regulation in pertinent part as follows:

           Q-E2. When is a taxpayer entitled to challenge the existence or
      amount of the tax liability specified in the CDP Notice?

             A-E2. A taxpayer is entitled to challenge the existence or
      amount of the underlying liability for any tax period specified on the
      CDP Notice if the taxpayer did not receive a statutory notice of
      deficiency for such liability or did not otherwise have an opportunity
      to dispute such liability. Receipt of a statutory notice of deficiency
      for this purpose means receipt in time to petition the Tax Court for a
      redetermination of the deficiency determined in the notice of
      deficiency. An opportunity to dispute the underlying liability
      includes a prior opportunity for a conference with Appeals that was
      offered either before or after the assessment of the liability. An
      opportunity for a conference with Appeals prior to the assessment of
                                        - 30 -

      a tax subject to deficiency procedures is not a prior opportunity for
      this purpose.

      In Lewis v. Commissioner, 128 T.C. 48, 61 (2007), the Court upheld an

earlier version of this regulation as a reasonable interpretation of section 6330 in

the context of the assessment and collection of a tax not subject to the deficiency

procedures. The Courts of Appeals that have reviewed the regulation have

reached the same conclusion. See Our Country Home Enters., Inc. v.

Commissioner, 855 F.3d 773, 787 (7th Cir. 2017), aff’g 145 T.C. 1 (2015); Keller

Tank Servs. II, Inc. v. Commissioner, 854 F.3d 1178, 1199 (10th Cir. 2017); Iames

v. Commissioner, 850 F.3d 160, 164 (4th Cir. 2017).

      As the Court explained in Lewis v. Commissioner, 128 T.C. at 60-61:

              Ultimately, while it is possible to interpret section
      6330(c)(2)(B) to mean that every taxpayer is entitled to one
      opportunity for a precollection judicial review of an underlying
      liability, we find it unlikely that this was Congress’s intent. As we
      see it, if Congress had intended to preclude only those taxpayers who
      previously enjoyed the opportunity for judicial review of the
      underlying liability from raising the underlying liability again in a
      collection review proceeding, the statute would have been drafted to
      clearly so provide. The fact that Congress chose not to use such
      explicit language leads us to believe that Congress also intended to
      preclude taxpayers who were previously afforded a conference with
      the Appeals Office from raising the underlying liabilities again in a
      collection review hearing and before this Court.
                                        - 31 -

      Although the collection action at issue in Lewis concerned a tax for which

the Commissioner was not required to issue a notice of deficiency before

assessment, the Court’s reasoning and analysis in that case apply equally to the

facts at hand. The operative provisions of section 6330(c)(2)(B) are stated in the

disjunctive and require the Court to consider whether petitioners “did not receive

any statutory notice of deficiency for such tax liability or did not otherwise have

an opportunity to dispute such tax liability.” There is no question that petitioners

did not receive the notice of deficiency for the year in issue. Consistent with the

Court’s analysis in Lewis, however, we must also consider whether petitioners

were afforded a conference with the Appeals Office (i.e., “an opportunity to

dispute” the tax liability).

      The record shows that petitioners were afforded a postassessment

conference with the Appeals Office. After the IRS sent petitioners a notice and

demand for payment of the tax due for 2005, they requested a reexamination of

their tax liability. The audit reconsideration process that followed began with a

review of the matter by the Examination Division. When the Examination

Division reaffirmed the adjustments to petitioners’ tax liability as determined in

the notice of deficiency, they requested and were granted an independent review in

the Appeals Office. AO Bohné engaged with petitioners, took a fresh look at the
                                        - 32 -

record, conceded certain issues, and abated a significant portion of the tax

previously assessed against them. Only then did the IRS file the tax lien that led

to the additional collection review proceedings in the Appeals Office and this

action.

      Petitioners’ argument that they were not given a full and fair opportunity to

challenge their tax liability during the audit reconsideration process is belied by

the record. In early 2014 petitioners met with AO Bohné and submitted additional

documentation and written argument challenging the GenSpec and K3 Ventures

tax adjustments. In May 2014 AO Bohné sent a letter to petitioners, along with an

Appeals Case Memorandum, explaining that the IRS had conceded the GenSpec

adjustment, interest related to that adjustment, and the section 6662(a) penalty. He

went on to explain in detail, however, that after considering the information that

petitioners had provided regarding the K3 Ventures capital gain, he would sustain

that adjustment. Although AO Bohné invited petitioners to contact him with any

additional questions, they did not do so.

      The record shows that petitioners were fully engaged with AO Bohné, that

he reviewed the evidence and arguments that they presented to him, and that in the

end petitioners enjoyed a full and fair opportunity to challenge their underlying tax

liability before the Appeals Office during the course of the audit reconsideration
                                         - 33 -

process. Under the circumstances the Court is satisfied that the Appeals Office

correctly determined, within the context of the collection review process, that

petitioners had an opportunity to dispute their tax liability within the meaning of

section 6330(c)(2)(B).10

III. Remaining Issues

      As previously mentioned, petitioners checked the following boxes on Form

12153: “I Cannot Pay Balance” and “Innocent Spouse Relief”.11 SO Reubel

acknowledged in her case activity notes that petitioners had raised these two

issues, and she initially requested that petitioners submit financial records to show

that they were eligible for a collection alternative. Nevertheless, those issues were

put aside as the parties engaged in a prolonged debate and investigation as to

whether petitioners would be permitted to challenge the amount of their

underlying liability for the year in issue.




      10
        Petitioners are not left without an opportunity for judicial review.
Petitioners may pay the tax, file a claim for refund, and if that claim is denied, file
a refund suit in a Federal District Court or the Court of Federal Claims. See sec.
7422(a).
      11
        A taxpayer’s assertion that he or she cannot pay tax that is due, without
more, is normally considered a request that the account be placed in currently not
collectible status. See, e.g., Ragsdale v. Commissioner, T.C. Memo. 2019-33,
at *34-*35.
                                         - 34 -

      Petitioners alleged in their petition, inter alia, that their spousal relief claim

had not been considered by the Appeals Office and that they were interested in

making installment payments to satisfy their tax liability. Having resolved that

petitioners are barred from challenging the amount of their underlying liability in

this proceeding, the Court will remand the case to the Appeals Office for a

determination regarding petitioners’ claim for spousal relief and whether

petitioners are in a position to pay the balance due for the year in issue.

      To reflect the foregoing,


                                                  An appropriate order will be issued.
