                                T.C. Memo. 2016-24



                         UNITED STATES TAX COURT



      CHARLES R. MANGUM AND ESTATE OF MARILYN MANGUM,
      DECEASED, CHARLES R. MANGUM, EXECUTOR, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 1288-12L.                           Filed February 16, 2016.



      Sallie W. Gladney, for petitioners.

      Thomas Lee Fenner and Paul Cooperman Feinberg, for respondent.



                           MEMORANDUM OPINION


      BUCH, Judge: This case comes before us on a petition for review of a

collection determination relating to a liability for former section 6621(c) tax-
                                         -2-

[*2] motivated transaction interest repealed for returns due after 1989.1 In

collection review cases, section 6330(c)(2)(B) provides that taxpayers cannot

challenge their underlying tax liability if they received a statutory notice of

deficiency or had a prior opportunity to challenge their underlying liability.

Pursuant to section 6330(d), the Mangums2 seek review of the Internal Revenue

Service’s (IRS) determination that sustained the filing of a notice of Federal tax

lien with respect to their 1983 tax year, and they raise various arguments disputing

the underlying tax liability attributable to section 6621(c) interest.3 Regardless of

the merits of their arguments about the underlying liability, the Mangums received

prior consideration in Appeals before their collection hearing requests.

Accordingly, they are statutorily barred from challenging their underlying liability,

and the IRS did not abuse its discretion by sustaining the lien.



      1
       Omnibus Budget Reconciliation Act of 1989 (OBRA), Pub. L. No. 101-
239, sec. 7721(b), 103 Stat. at 2395-2399.

       Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the relevant times, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
      2
      Mrs. Mangum died during this dispute with the IRS. In this case, her estate
appears through her husband as executor. For convenience, we will refer to Mr.
Mangum and his late wife or her estate collectively as “the Mangums”.
      3
          See sec. 6320(c).
                                         -3-

[*3]                                 Background

       This case was submitted without trial under Rule 122.

       Charles R. Mangum was a limited partner in Dillon Oil Technology

Partners. The Dillon Oil partnership was created ostensibly to invest in enhanced

oil recovery technology used to recover oil and natural gas.4 Dillon Oil was

subject to the partnership audit and litigation procedures found at sections 6221

through 6233, commonly referred to as TEFRA.5 Dillon Oil was one of the many

Elektra/Hemisphere tax shelter investment partnerships whose partnership items

were extensively litigated in Tax Court.6 Elektra and Hemisphere refer to the

names of the entities that purportedly licensed enhanced oil recovery technology

to investment partnerships, including Dillon Oil.7 There were over 2,000 related




       4
      See Krause v. Commissioner, 99 T.C. 132, 133-134 (1992), aff’d sub nom.
Hildebrand v. Commissioner, 28 F.3d 1024 (10th Cir. 1994).
       5
       TEFRA is short for the Tax Equity and Fiscal Responsibility Act of 1982,
Pub. L. No. 97-248, sec. 402(a), 96 Stat. at 648.
       6
           See Krause v. Commissioner, 99 T.C. at 133.
       7
       See Krause v. Commissioner, 99 T.C. at 140, 150, 152 (in this case the
non-TEFRA partnerships leased enhanced oil recovery technology from Elektra
Energy Corp., and the TEFRA partnerships leased enhanced oil recovery
technology from Hemisphere Licensing Corp., the successor corporation to
Elektra).
                                          -4-

[*4] Elektra/Hemisphere pre-TEFRA and TEFRA partnership cases with alleged

total tax deficiencies in excess of $2 billion.8

        Mr. Mangum’s flowthrough loss from Dillon Oil was $98,858 for 1983. He

and his wife, Marilyn, filed a joint Form 1040, U.S. Individual Income Tax

Return, and reported that loss on their Schedule E, Supplemental Income and

Loss.

I.      Dillon Oil FPAA and Tax Court Proceeding

        The liability the Mangums are challenging was determined as a result of a

proceeding involving Dillon Oil. The IRS examined Dillon Oil’s 1983 return and

issued a notice of final partnership administrative adjustment for the 1983

partnership taxable year. The IRS principally disallowed over $17 million of

Dillon Oil’s deductions. A petition was filed with respect to Dillon Oil and

several other similarly situated partnerships, and the case was captioned Vulcan

Oil Tech. Partners v. Commissioner, 110 T.C. 153 (1998), named for the lead

entity. Because of the large number of Elektra/Hemisphere cases before the Tax

Court, we consolidated two cases, Krause v. Commissioner and Hildebrand v.




        8
            Krause v. Commissioner, 99 T.C. at 133.
                                           -5-

[*5] Commissioner,9 and tried them as a test case for the other Elektra/Hemisphere

cases. We decided those cases in 1992, and the Court of Appeals for the Tenth

Circuit affirmed in 1994. In 1998 we issued an interlocutory Opinion in the Dillon

Oil proceeding holding that Krause v. Commissioner controlled and that section

6621(c) tax-motivated transaction interest applied.10

      Congress enacted tax-motivated transaction interest under section 6621(c)

into law in 198411 but later repealed it for returns due after 1989.12 Tax-motivated

transaction interest provided for interest at 120% of the normal rate and applied to

underpayments of tax greater than $1,000 that were attributable to a tax-motivated

transaction.13




      9
          Krause v. Commissioner, 99 T.C. 132.
      10
        Vulcan Oil Tech. Partners v. Commissioner, 110 T.C. 153, 154-155 (1998)
(interlocutory Opinion in Dillon Oil proceeding), aff’d sub nom. Tucek v.
Commissioner, 198 F.3d 259 (10th Cir. 1999), and aff’d sub nom. Drake Oil Tech.
Partners v. Commissioner, 211 F.3d 1277 (10th Cir. 2000).
      11
        Deficit Reduction Act of 1984, Pub. L. No. 98-369, sec. 144, 98 Stat. at
682 (initially codified as section 6621(d) but later changed to section 6621(c) by
the Tax Reform Act of 1986, Pub. L. No. 99-514, sec. 1511(c)(1)(A), 100 Stat. at
2744).
      12
           OBRA sec. 7721(b).
      13
           Sec. 6621(c) (repealed 1989).
                                        -6-

[*6] We eventually dismissed Dillon Oil’s case for lack of prosecution. The

decision entered on June 13, 2002, however, is silent on whether section 6621(c)

interest applies.

II.   IRS’ Determination That the Mangums Owe Additional Tax Because of the
      Dillon Oil Decision

      By letter dated February 7, 2003, the IRS notified the Mangums that they

owed additional tax and interest for 1983 because of the Dillon Oil partnership-

level decision. The IRS included with this letter a Form 4549A-CG, Income Tax

Examination Changes, which explained that the Mangums’ income would be

adjusted by $98,858 because of the Dillon Oil decision. This adjustment resulted

in a tax increase of $47,554. The total amount due for 1983 was $364,870.99,

consisting of $47,554 of tax, $215,666.93 in statutory interest pursuant to section

6601, and $101,650.06 in tax-motivated transaction interest pursuant to section

6621(c).

      On May 26, 2003, the IRS assessed and billed the Mangums $358,297.60

for tax year 1983 because of the Dillon Oil proceeding, which included $47,554 in

tax, $310,755.01 in interest, and an $11.41 credit to adjust a previously imposed

late payment penalty. This notice stated a lower balance due than the February 7

letter, and this lower amount is consistent with the IRS’ assessment listed on Form
                                        -7-

[*7] 4340, Certificate of Assessments, Payments, and Other Specified Matters, for

tax year 1983.

      A.       Rejection of the Mangums’ Offer-in-Compromise

      On November 25, 2003, the Mangums submitted an offer-in-compromise

challenging their liability for the section 6621(c) tax-motivated transaction

interest. They offered to pay $263,863.67 for tax year 1983 and included a check

for that amount. They argued that the Court of Appeals for the Fifth Circuit in

Copeland v. Commissioner14 had held that the Krause and Hildebrand analysis of

section 183 “was wrong as a matter of law and Elektra/Hemisphere partners who

are bound by the outcome in those cases are not subject to [section] 6621(c)

penalty interest.”

      The IRS rejected the Mangums’ offer-in-compromise in October 2004

because the Court in Krause v. Commissioner15 “made numerous findings of fact

conclusively establishing that the Elektra/Hemisphere transactions lacked

economic substance.” The IRS explained this was a sufficient basis to conclude

that the transactions were tax motivated because a tax-motivated transaction



      14
       290 F.3d 326 (5th Cir. 2002), aff’g in part, rev’g in part and remanding
T.C. Memo. 2000-181.
      15
           Krause v. Commissioner, 99 T.C. 132.
                                       -8-

[*8] includes any transaction that is a sham pursuant to section 6621(c)(3)(A)(v),

and courts have held that sham transactions include those determined to have no

economic substance. Further, the IRS stated that courts “can either inquire into

whether there were any non-tax economic effects or use the analysis under

[section] 183. The analysis is the same whether the terminology used is that of

‘economic substance,’ ‘sham,’ or section 183.” The IRS concluded that the

Mangums were liable for section 6621(c) tax-motivated transaction interest.

      B.    Appeals’ Rejection of the Mangums’ Offer-in-Compromise

      On November 24, 2004, the Mangums appealed the IRS’ decision to reject

their offer-in-compromise. The assigned Appeals officer notified the Mangums’

attorney that she was waiting for the IRS Office of Chief Counsel to advise her on

the section 6621(c) determination.

      Ultimately, the Appeals officer sustained the rejection of the Mangums’

offer-in-compromise. The Appeals officer left a message with the Mangums’

attorney that she would be sustaining the rejection of the Mangums’ offer. The

Appeals officer then spoke with the Mangums’ attorney by phone on February 28,

2007, explaining that she would sustain the rejection of the Mangums’ offer. That

same day, the Mangums’ attorney faxed the Appeals officer a copy of a notice of

intent to levy issued for 1983 that the Mangums had recently received, stating that
                                         -9-

[*9] her “help to get this stayed until the offer is officially rejected would be

greatly appreciated.” The Appeals officer ultimately sustained the rejection of the

offer.

         Later in 2007 Mrs. Mangum passed away, and Mr. Mangum was appointed

executor of her estate.

III.     IRS Notice of Intent To Levy to the Mangums

         The IRS sent the Mangums a Final Notice of Intent to Levy and Notice of

Your Right to a Hearing dated January 14, 2010. This notice was for tax year

1983 and showed a $90,913.17 balance due, as well as a late payment penalty of

$2,689.33.

         The Mangums submitted a Form 12153, Request for a Collection Due

Process or Equivalent Hearing, marking “Offer in Compromise” as a collection

alternative, which the IRS received on February 8, 2010. In it they argued that

“[n]umerous courts have held that IRS imposition of the [section] 6621(c) penalty

interest rate based on the Vulcan Oil Tax Court decision is improper as a matter of

law” and “the IRS erred in rejecting * * * [their] offer-in-compromise.”

         By letter dated May 24, 2010, the IRS rejected the Mangums’ collection due

process or equivalent hearing request. The IRS explained that the Mangums’

request was not timely because their Form 12153 was received more than one year
                                       - 10 -

[*10] after the IRS sent a notice of intent to levy to the Mangums on October 8,

2003. However, the IRS’ administrative file for the Mangums does not contain any

information from certified mail lists for any mailings between May 2002 and

October 2007.

      The IRS sent Mr. Mangum a Form 8519, Taxpayer’s Copy of Notice of

Levy, that was dated July 1, 2010, and explained that the IRS had levied on his

Wells Fargo bank account. The Mangums requested a stay on activity because the

IRS has not issued a formal notice of determination. Neither this notice nor any

that the IRS issued to the Mangums as of July 1, 2010, are before the Court.

IV.   IRS Notice of Federal Tax Lien to the Mangums

      The IRS sent the Mangums a Letter 3172, Notice of Federal Tax Lien Filing

and Your Right to a Hearing Under IRC 6320, on October 12, 2010. The letter

was for tax year 1983 for a $90,913.17 lien and stated the assessment date was

March 16, 1987.

      On November 3, 2010, the Mangums submitted a new Form 12153, marking

“Offer in Compromise” as a collection alternative. The Mangums again

challenged the section 6621(c), tax-motivated transaction interest.

      A settlement officer who had had no prior involvement with the unpaid

liability at issue was assigned the case. He determined that the Mangums could
                                        - 11 -

[*11] not challenge the underlying liability attributable to the section 6621(c)

interest because they had been given a prior opportunity to challenge it. He

explained this in a letter he sent June 10, 2011, and he scheduled a collection due

process hearing for July 12, 2011. The settlement officer met with the Mangums’

attorney on July 12, 2011, and he reiterated that the Mangums could not challenge

the underlying liability because the Appeals officer had sustained the rejection of

the Mangums’ offer-in-compromise based on doubt as to liability. The Mangums’

attorney told the settlement officer that the Mangums never received a closing

letter from Appeals and wished to file another offer-in-compromise. The

Mangums submitted an offer-in-compromise based on doubt as to liability for

1983 offering $100, which the IRS received on November 1, 2011.

      On December 15, 2011, the IRS sent the Mangums a notice of determination

sustaining the lien for tax year 1983. The IRS explained in this determination

letter that the Mangums could not challenge the section 6621(c) interest because

they had had a prior opportunity to challenge it when the Appeals officer

considered their offer-in-compromise. The IRS further explained that it would file

an amended notice of Federal tax lien to correct the assessment date on the

original filing, which it did on December 22, 2011. Mr. Mangum, while residing
                                         - 12 -

[*12] in Texas, timely petitioned in response to this notice of determination, which

sustained the lien for him and for his wife’s estate.

      The parties moved to submit the case fully stipulated under Rule 122 and

filed a stipulation of facts with exhibits. The Court granted their request.

                                      Discussion

      This case comes before us on a petition for review of the IRS’ determination

sustaining the lien for the 1983 tax year. The Mangums assert that the underlying

liability attributable to the section 6621(c) tax-motivated transaction interest is in

error. The IRS argues that the Mangums are barred from challenging the

underlying liability in this proceeding because of their prior opportunity to

challenge the underlying liability with Appeals.16

I.    Former Section 6621(c) Tax-Motivated Transaction Interest

      The IRS assessed section 6621(c) tax-motivated transaction interest on the

Mangums’ 1983 underpayment, which stemmed from the Dillon Oil partnership

proceeding. Former section 6621(c) applied to substantial underpayments


      16
        The IRS also argues that the Mangums are barred from challenging the
underlying liability because they had a prior opportunity to participate in the
partnership-level proceeding under section 6226(c). Because we find that the
Mangums had a prior opportunity to challenge their underlying liability with
Appeals, we do not need to address this additional partnership-level participation
argument.
                                         - 13 -

[*13] attributable to tax-motivated transactions and increased the rate of interest

on those underpayments to 120% of the standard underpayment interest rate found

in section 6621(a)(2).17 For this section, the Code defined a substantial

underpayment as an underpayment greater than $1,000.18 Tax-motivated

transactions included among other things “any sham or fraudulent transaction.”19

Further, Congress expressly provided that the Secretary could promulgate

regulations to specify which transactions would be considered tax motivated.20

II.   Collection Due Process Overview and Our Review of IRS’ Determination

      The Secretary must notify taxpayers in writing of their right to request a

hearing upon the filing of a notice of lien.21 These hearings are often called

collection due process, or CDP, hearings.22 In a CDP hearing taxpayers may raise

any issue that is relevant to an unpaid tax or a collection action, including




      17
           Sec. 6621(c)(1) (repealed 1989).
      18
           Sec. 6621(c)(2) (repealed 1989).
      19
           Sec. 6621(c)(3)(A)(v) (repealed 1989).
      20
           Sec. 6621(c)(3)(B) (repealed 1989).
      21
           Sec. 6320(a).
      22
           Sec. 6320(b) and (c).
                                         - 14 -

[*14] appropriate spousal defenses, challenges to the appropriateness of collection

actions, and offers of collection alternatives.23

      A.       Underlying Liability Challenges

      Taxpayers may challenge the existence or amount of the underlying tax

liability in their CDP hearing if they did not receive a statutory notice of

deficiency or did not otherwise have the opportunity to dispute the liability.24

While the term “underlying liability” is not defined in section 6320 or 6330, we

have interpreted this term “to include any amounts owed by a taxpayer pursuant to

the tax laws.”25 Further, we have previously upheld regulations promulgated by

the Secretary that define a prior opportunity to dispute the underlying liability to




      23
           Sec. 6330(c)(2)(A).
      24
           Sec. 6330(c)(2)(B).
      25
           Katz v. Commissioner, 115 T.C. 329, 339 (2000).
                                         - 15 -

[*15] include a prior “opportunity for a conference with Appeals”.26 Section

301.6320-1(e)(3), Q&A-E2, Proced. & Admin. Regs., provides:

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

Although petitioners argue that Lewis v. Commissioner, 128 T.C. 48 (2007), was

incorrectly decided, we are bound by our Court’s precedent.27


      26
         Lewis v. Commissioner, 128 T.C. 48, 61 (2007) (holding that because
“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”, sec. 301.6330-1(e)(3), Q&A-
E2, Proced. & Admin. Regs., is valid as a reasonable interpretation of section
6330(c)(2)(B)); see also Hassel Family Chiropractic, DC, PC v. Commissioner,
368 F. App’x 695 (8th Cir. 2010), aff’g T.C. Memo. 2009-127; Totten v. United
States, 298 F. App’x 579 (9th Cir. 2008); Mason v. Commissioner, 132 T.C. 301,
319 (2009); Perkins v. Commissioner, 129 T.C. 58, 63 (2007).
      27
           See Sec. State Bank v. Commissioner, 111 T.C. 210, 213 (1998) (“The
                                                                      (continued...)
                                        - 16 -

[*16] The record in this case is clear that the Mangums had a prior opportunity to

challenge their underlying liability. No one disputes that the Mangums had prior

consideration of their arguments related to their underlying tax liability in Appeals

before their CDP hearing requests. As a result, we are precluded from considering

the issues they raise.

      Because the Mangums had a prior opportunity with Appeals to challenge

their underlying liability, they are statutorily barred from challenging the existence

or amount of that liability in this proceeding.28 Currently the Mangums’ only

forum to challenge their tax would be to pay the underlying liability and sue for a

refund.29




      27
        (...continued)
doctrine of stare decisis generally requires that we follow the holding of a
previously decided case, absent special justification.”), aff’d, 214 F.3d 1254 (10th
Cir. 2000).
      28
           Sec. 6330(c)(2)(B), (d); Behling v. Commissioner, 118 T.C. 572, 579
(2002).
      29
           See secs. 7422, 6511(a).
                                        - 17 -

[*17] B.       Abuse of Discretion Review of IRS’ Determination

      Because the validity of the underlying liability is not properly at issue, we

review the IRS’ determination for abuse of discretion.30 An abuse of discretion

will be found where the determination was “arbitrary, capricious, or without sound

basis in fact or law.”31

      The IRS must take into consideration: (1) the verification that the

requirements of any applicable law or administrative procedure have been met; (2)

issues raised by the taxpayer; and (3) whether any proposed collection action

balances the need for efficient collection with the legitimate concern of the

taxpayer that any collection action be no more intrusive than necessary.32 The

settlement officer properly based his determination on these factors.

      First, the settlement officer verified that the requirements of applicable law

and administrative procedure were met. The Federal Government obtains a lien

against “all property and rights to property, whether real or personal” of any




      30
     See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.
Commissioner, 114 T.C. 176, 182 (2000).
      31
           Giamelli v. Commissioner, 129 T.C. 107, 111 (2007).
      32
           Sec. 6330(c).
                                        - 18 -

[*18] person liable for Federal taxes upon demand for payment and failure to

pay.33 The Secretary has the discretion to withdraw the notice of lien if certain

circumstances are present, such as the filing of the notice was premature, the

taxpayer entered into an agreement to satisfy the liability, withdrawal would

facilitate collection, or with the consent of the National Taxpayer Advocate,

withdrawal would be in the best interests of the taxpayer.34 The settlement officer

determined that none of the permissive circumstances for lien notice withdrawal

were present. He further determined that the IRS had sent the Mangums a bill for

the 1983 tax that had not been fully paid. Finally, although he determined that the

assessment date listed on the notice of Federal tax lien was incorrect, he explained

that this was a “non-fatal procedural error that * * * [would] be corrected with the

filing of an amended tax lien.” The IRS filed an amended tax lien notice and

notified Mr. Mangum.35 Further, the original notice of Federal tax lien, albeit with




      33
           Sec. 6321.
      34
           Sec. 6323(j).
      35
         See Cyman v. Commissioner, T.C. Memo. 2009-144, 2009 WL 1748863,
at *2, n.5 (“The notice of lien states incorrect assessment dates, but that error does
not invalidate the notice of Federal tax lien.”).
                                         - 19 -

[*19] an incorrect assessment date, was sufficient to give the Mangums notice as

required under section 6320.36

      Second, the settlement officer considered the only issue raised by the

Mangums. The Mangums submitted an offer-in-compromise as a collection

alternative, arguing that the portion of their liability attributable to the section

6621(c) tax-motivated transaction interest was in error. The settlement officer

investigated IRS’ records for the Mangums. He determined the Mangums were

precluded from challenging their underlying liability because they had a prior

opportunity to raise this issue with Appeals, which had sustained the rejection of

their offer-in-compromise.

      Third, the settlement officer determined that upholding the lien balanced the

Government’s need for efficient collection of tax with the Mangums’ concerns that

the collection action be no more intrusive than necessary.




      36
        Sage v. United States, 908 F.2d 18, 22 (5th Cir. 1990) (holding that a
notice of assessment that contained a technical error is still “valid where the
taxpayer has not been misled by the error” and had actual notice of the conduct
that was at issue); cf. Sanderling, Inc. v. Commissioner, 571 F.2d 174, 176 (3d
Cir. 1978) (“A notice of a deficiency, even if it contains error, may nonetheless be
valid where the taxpayer has not been misled as to the proper year involved or the
amounts in controversy.”), aff’g in part 66 T.C. 743 (1976) and 67 T.C. 176
(1976).
                                       - 20 -

[*20] Accordingly, the settlement officer did not abuse his discretion when he

sustained the lien.

III.   Conclusion

       The Mangums had a prior opportunity to challenge the underlying liability

attributable to the section 6621(c) tax-motivated transaction interest, and they

cannot further challenge their underlying liability here. Accordingly, our review

of the IRS’ determination is limited, and we find that the IRS did not abuse its

discretion in sustaining the lien.

       To reflect the foregoing,


                                                Decision will be entered for

                                       respondent.
