                               T.C. Memo. 2017-46



                         UNITED STATES TAX COURT



                  PATRICK BITTER, JR., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 10462-15L.                        Filed March 20, 2017.



      Anthony V. Diosdi, for petitioner.

      Daniel J. Bryant, for respondent.



                           MEMORANDUM OPINION


      LAUBER, Judge: In this collection due process (CDP) case, petitioner

seeks review, pursuant to section 6330(d)(1),1 of the determination by the Internal

Revenue Service (IRS or respondent) to uphold a notice of intent to levy. For pe-


      1
       All statutory references are to the Internal Revenue Code in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure. We round all dollar amounts to the nearest dollar.
                                        -2-

[*2] titioner’s 2004, 2005, and 2006 tax years, the IRS assessed penalties under

section 6707A for failure to disclose on his Federal income tax returns his partici-

pation in a reportable transaction. The sole issue for decision is whether petitioner

was barred from raising at the CDP hearing his liability for these penalties because

he had had, and had availed himself of, a prior opportunity to challenge the

penalties at an earlier conference with the IRS Appeals Office. We agree with

respondent on this point and will accordingly sustain the proposed collection

action.

                                    Background

      The parties have submitted the case for decision under Rule 122, and all

relevant facts have been stipulated or otherwise included in the record. See Rule

122(a). The following facts are based on the parties’ pleadings and motion papers,

including the attached affidavits and exhibits. Petitioner resided in California

when he filed his petition.

      During the years in question, petitioner was the sole shareholder of Patrick

H. Bitter, Jr., M.D., P.C. (PC), an S corporation. Effective January 1, 2002, PC

adopted a defined benefit pension plan (Plan) in which petitioner was the only

participant. The Plan purchased a life insurance policy (Policy) on petitioner’s

life. The death benefit under the Policy was $4,728,718, but the death benefit
                                         -3-

[*3] under the Plan was only $701,300. The “excess death benefit” was thus

$4,027,418. For each of the years in question, PC deducted on its Form 1120S,

U.S. Income Tax Return for an S Corporation, its contributions to the Plan, which

were used to pay premiums on the Policy.

       On February 13, 2004, the IRS issued Rev. Rul. 2004-20, 2004-1 C.B. 546.

“Situation 2” in that revenue ruling describes a life insurance transaction resem-

bling that in which PC and the Plan engaged. The IRS ruled (among other things)

that

       [t]ransactions that are the same as, or substantially similar to, the
       transaction described in Situation 2 of this revenue ruling are
       identified as “listed transactions” * * * effective February 13, 2004
       * * * , provided that the employer has deducted amounts used to pay
       premiums on a life insurance contract for a participant with a death
       benefit under the contract that exceeds the participant’s death benefit
       under the plan by more than $100,000. [Id., 2004-1 C.B. at 549].

       On its Forms 1120S for 2004, 2005, and 2006, PC deducted contributions of

$225,422, $225,353, and $224,159, respectively, to the Plan, and these sums were

used to pay premiums on the Policy. On timely filed Forms 1040, U.S. Individual

Income Tax Return, for 2004, 2005, and 2006, petitioner claimed pass-through

deductions of $204,002, $203,934, and $224,159, respectively, on account of PC’s

contributions to the Plan. He did not disclose the life insurance transaction on
                                         -4-

[*4] those returns by including Form 8886, Reportable Transaction Disclosure

Statement, or otherwise.

      On June 26, 2012, the IRS notified petitioner that it proposed to assess

against him penalties under section 6707A for 2004, 2005, and 2006. The IRS

determined that the life insurance transaction in which PC and the Plan had en-

gaged was a “listed transaction” because it was “substantially similar” to that de-

scribed in Rev. Rul. 2004-20, Situation 2. See sec. 1.6011-4(b)(2), Income Tax

Regs. And it determined that petitioner had failed to disclose on his Forms 1040

his participation in that transaction as required by section 6011. See id. para.

(c)(3) (providing that a taxpayer “has participated in a listed transaction if the tax-

payer’s tax return reflects tax consequences” of the transaction or if he knows or

should know that his tax benefits “are derived directly or indirectly from tax con-

sequences” of a listed transaction).

      For penalties assessed after December 31, 2006, “the amount of the penalty

* * * with respect to any reportable transaction shall be 75 percent of the decrease

in tax shown on the return as a result of the transaction,” with a maximum penalty

of $100,000 per return for a listed transaction engaged in by a natural person. Sec.

6707A(b)(1) and (2)(A). The IRS determined that the “decrease in tax shown on

* * * [petitioner’s] return as a result of the transaction” was $68,967 for 2004,
                                        -5-

[*5] $73,519 for 2005, and $80,025 for 2006. It accordingly proposed assessing

penalties equal to 75% of each of those amounts, or $51,725, $55,139, and

$60,019, respectively.

      The IRS letter informed petitioner that if he did not agree with that proposed

assessment, he could “request a conference with our Appeals Office” by “forward-

[ing] a written protest.” Petitioner forwarded a timely protest dated July 24, 2012,

that advanced three contentions. First, he urged that the life insurance transaction

in which PC and the Plan had engaged was not a “listed transaction” because it

was not “substantially similar” to that described in Rev. Rul. 2004-20, Situation 2.

Second, while conceding that he had not made disclosure on his individual returns,

he noted that PC, as a protective measure, had attached to its Form 1120S for each

year a Form 8886 disclosing the transaction. He contended that this manner of

disclosure constituted substantial compliance with the regulations.

      Finally, if these threshold questions were resolved against him, petitioner

urged that the IRS had calculated the penalties incorrectly. In March 2011 PC had

executed a closing agreement with the IRS pursuant to which the Plan prospec-

tively changed its funding method and converted to a traditional defined benefit

plan covering all of PC’s eligible employees effective January 1, 2009. In connec-

tion with the closing agreement, an IRS actuary had prepared in February 2011 a
                                         -6-

[*6] memo that recalculated PC’s deductible contributions to the Plan for each

year in question as if the Plan had been “qualified” from its inception. Relying on

that memo, petitioner contended that the section 6707A penalty, if applicable at

all, should be calculated as 75% of the decrease in tax attributable to the disal-

lowed contributions as thus recalculated. If that approach were followed, petition-

er asserted that the penalties would be reduced to $14,280 for 2004, $26,201 for

2005, and zero for 2006.

      Petitioner in his protest requested a conference with the IRS Appeals Office,

and the case was assigned to Appeals Officer Paladini (AO Paladini). On Decem-

ber 19, 2013, AO Paladini sent to petitioner’s representatives an Appeals case

memorandum setting forth her preliminary findings. She concluded that the Plan

as originally conceived in 2002 was a “listed transaction” and that the regulations

required its disclosure on petitioner’s individual returns for 2004, 2005, and 2006.

See Soni v. Commissioner, T.C. Memo. 2013-30, 105 T.C.M. (CCH) 1216, 1218-

1219. And she rejected petitioner’s proposed recomputation of the penalties in

light of the 2011 closing agreement, noting the statutory requirement that the

penalty be computed as 75% of the decrease in tax “shown on the return” as a re-

sult of the transaction. See sec. 6707A(b)(1).
                                         -7-

[*7] Following a conference with petitioner’s representatives, AO Paladini in-

formed them on January 2, 2014, that “Appeals does not foresee any litigation

hazards on your case” and therefore “can offer no concession.” On January 23,

2014, the Appeals team manager notified petitioner that the Appeals Office had

upheld the proposed penalties and would proceed with assessment. On February

24, 2014, the IRS assessed section 6707A penalties as originally determined, i.e.,

in the amounts of $51,725, $55,139, and $60,019, for 2004, 2005, and 2006, re-

spectively.

      In an effort to collect these unpaid liabilities, the IRS on July 3, 2014, sent

petitioner a Notice of Intent to Levy and Your Right to a Hearing. He timely re-

quested a CDP hearing, and the case was assigned to Settlement Officer (SO) Fer-

nando, who scheduled a telephone CDP hearing for October 14, 2014. Before the

hearing, petitioner’s representative submitted a letter stating that “[t]he taxpayer

wishes to administratively contest the * * * [section 6707A] penalties through this

Collection Due Process Hearing.” In that letter he urged that the penalties be

abated in whole or in part, repeating the arguments he had advanced at the prior

Appeals Office conference. Petitioner did not seek a collection alternative and

provided none of the financial documentation that would be required for consider-

ation of a collection alternative.
                                         -8-

[*8] SO Fernando concluded that petitioner could not challenge his liability for

the penalties because he had had a prior opportunity to do so, an opportunity of

which he had taken advantage by filing his July 2012 protest with the IRS Appeals

Office. SO Fernando confirmed that the penalty for each year had been properly

assessed and that all other requirements of applicable law and administrative pro-

cedure had been met. On March 26, 2015, the IRS issued petitioner a notice of

determination sustaining the proposed collection action, and petitioner timely

sought review in this Court.

                                     Discussion

      The sole argument petitioner advances is that SO Fernando erred in declin-

ing to consider his demand that the section 6707A penalties be abated in whole or

in part. Where the validity of a taxpayer’s underlying tax liability is properly at

issue in a CDP case, the Court reviews the IRS’ determination de novo. Goza v.

Commissioner, 114 T.C. 176, 181-182 (2000). Where the taxpayer’s underlying

liability is not properly at issue, we review the IRS decision for abuse of discretion

only. Id. at 182. Abuse of discretion exists when a determination is arbitrary,

capricious, or without sound basis in fact or law. Murphy v. Commissioner, 125

T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).
                                         -9-

[*9] A taxpayer may raise a CDP challenge to the existence or amount of his un-

derlying tax liability only if he “did not receive any statutory notice of deficiency

for such tax liability or did not otherwise have an opportunity to dispute such tax

liability.” Sec. 6330(c)(2)(B). In determining whether the taxpayer had a prior

opportunity to dispute his liability, the regulations distinguish between liabilities

that are subject to deficiency procedures and those that are not. For liabilities sub-

ject to deficiency procedures, an opportunity for a post-examination conference

with the IRS Appeals Office does not bar the taxpayer (in appropriate circumstan-

ces) from contesting his liability in a later CDP proceeding. See sec. 301.6330-

1(e)(3), Q&A-E2, Proced. & Admin. Regs. On the other hand, where a liability is

not subject to deficiency procedures, “[a]n opportunity to dispute the underlying

liability includes a prior opportunity for a conference with Appeals that was of-

fered either before or after the assessment of the liability.” Ibid.

      As assessable penalties, section 6707A penalties are not subject to deficien-

cy procedures. See Smith v. Commissioner, 133 T.C. 424, 428-430 (2009). Not-

withstanding the absence of a notice of deficiency, a taxpayer may be able to dis-

pute his liability for such penalties (without paying them first) by resisting IRS

collection efforts through the CDP process and then seeking review in this Court.

See id. at 430 n.6 (citing Williams v. Commissioner, 131 T.C. 54, 58 n.4 (2008),
                                       - 10 -

[*10] and Callahan v. Commissioner, 130 T.C. 44, 48 (2008)); cf. Gardner v.

Commissioner, 145 T.C. 161 (2015) (upholding Tax Court jurisdiction to review

section 6700 penalties in the CDP context). But this route to prepayment judicial

review is available only if the taxpayer “did not otherwise have an opportunity to

dispute such tax liability.” Sec. 6330(c)(2)(B).

        For example, in Yari v. Commissioner, 143 T.C. 157 (2014), aff’d, __ F.

App’x __, 2016 WL 5940054 (9th Cir. Oct. 13, 2016), the IRS assessed a section

6707A penalty against the taxpayer and issued him a notice of intent to levy.

After receiving a notice of determination sustaining the levy, the taxpayer

petitioned our Court. There was no evidence in the record that the taxpayer had

received notice of the assessment, that he had been offered the opportunity to

protest the assessment, or (if so) that he had taken advantage of that opportunity.

Under these circumstances, we allowed the taxpayer to contest the amount of the

penalty because he had not had a prior opportunity to dispute it. Id., 143 T.C. at

162.2


        2
       Presented with similar facts, we reached similar results in CDP cases in-
volving liability for other assessable penalties. See Mason v. Commissioner, 132
T.C. 301, 318 (2009) (“a section 6672(b)(1) notice that was not received * * * by a
taxpayer does not constitute an opportunity to dispute that taxpayer’s liability”);
Callahan v. Commissioner, 130 T.C. 44, 50 (2008) (addressing sec. 6702 frivolous
return penalties).
                                        - 11 -

[*11] Under this framework, a taxpayer in a CDP case is entitled to challenge his

underlying liability for a section 6707A penalty only if he did not have a prior op-

portunity to dispute it. For this purpose, a prior opportunity includes “a prior op-

portunity for a conference with Appeals.” Sec. 301.6330-1(e)(3), Q&A-E2, Pro-

ced. & Admin. Regs. We have sustained the validity of this regulation even

though the taxpayer (as was also true here) had no right to judicial review of the

prior Appeals Office determination. See Lewis v. Commissioner, 128 T.C. 48, 60-

61 (2007).3 Since Lewis, we have consistently precluded a taxpayer from raising a

liability challenge in a non-deficiency CDP case when he had an opportunity to

present that challenge to the Appeals Office before the IRS commenced collection

action. See Smith v. Commissioner, T.C. Memo. 2016-186, at *11-*12; Mangum

v. Commissioner, T.C. Memo. 2016-24, 111 T.C.M. (CCH) 1099, 1102 (declining

to reconsider Lewis).4


      3
        Accord, Iames v. Commissioner, No. 16-1154, __ F.3d __, 2017 WL
908214, at *4 (4th Cir. Mar. 7, 2017) (finding the regulation to be a
“straightforward interpretation of [s]ection 6330(c)(2)(B)”); Keller Tank Servs. II,
Inc. v. Commissioner, No. 16-9001, __ F.3d __, 2017 WL 676503, at *15-*17
(10th Cir. Feb. 21, 2017); Hassell Family Chiropractic, DC, PC v. Commissioner,
368 F. App’x 695, 696 (8th Cir. 2010) (unpublished), aff’g T.C. Memo. 2009-127.
      4
       Federal District Courts reached similar conclusions in CDP cases over
which they had jurisdiction pursuant to former sec. 6330(d)(1)(B). See, e.g., Lee
v. IRS, 89 A.F.T.R.2d (RIA) 2002-1520 (M.D. Tenn. 2002) (“Plaintiff received
                                                                     (continued...)
                                        - 12 -

[*12] Petitioner had, and availed himself of, a prior opportunity to challenge the

section 6707A penalties by filing a protest with the IRS in July 2012. He was then

offered, and his representatives attended, a conference with the IRS Appeals Of-

fice. The Appeals Office considered and comprehensively addressed each of peti-

tioner’s arguments during a review process that lasted more than a year. This pro-

cess unquestionably afforded petitioner “a meaningful opportunity to dispute

* * * [his] underlying tax liability.” Lewis, 128 T.C. at 61.5

      Because petitioner availed himself of the “opportunity for a conference with

Appeals * * * before * * * the assessment of the liability,” sec. 301.6330-1(e)(3),

Q&A-E2, Proced. and Admin. Regs., he was barred by section 6330(c)(2)(B) from

disputing that liability again during the CDP hearing. And because he could not



      4
        (...continued)
notice of the excise tax assessments and actually availed himself of the opp-
ortunity to dispute the excise tax liability to the Appeals Office; therefore, the un-
derlying excise tax liability cannot be raised in the hearing[.]”); Adams v. United
States, 2002-1 U.S. Tax Cas. (CCH) para. 50,295 (D. Nev. 2002) (holding sim-
ilarly in the case of a civil penalty under sec. 6682).
      5
       Because petitioner requested a CDP hearing nine months after the IRS Ap-
peals Office completed its review of his protest and notified him of its conclusion
upholding the sec. 6707A penalties, he errs in relying on Perkins v. Commissioner,
129 T.C. 58 (2007). In that case the taxpayer requested a CDP hearing before the
Appeals Office conference on the underlying liability had been concluded. Con-
sequently, the Appeals Office conference in Perkins did not constitute a “prior
opportunity” to contest the underlying liability. See id. at 66-67.
                                        - 13 -

[*13] challenge his liability for the penalties at the CDP hearing, he is likewise

precluded from disputing the penalties here. See Giamelli v. Commissioner, 129

T.C. 107 (2007); Goza, 114 T.C. at 181-182.6

      Where there is or can be no challenge to the amount of a taxpayer’s under-

lying tax liability, we review the IRS determination for abuse of discretion only.

Goza, 114 T.C. at 181-182. In deciding whether SO Fernando abused his discre-

tion in sustaining the collection action we consider whether he: (1) properly veri-

fied that the requirements of applicable law and administrative procedure have

been met; (2) considered any relevant issues petitioner raised; and (3) considered

whether “any proposed collection action balances the need for the efficient collec-

tion of taxes with the legitimate concern of * * * [petitioner] that any collection

action be no more intrusive than necessary.” See sec. 6330(c)(3).

      Our review of the record establishes that SO Fernando properly discharged

all of these responsibilities. Petitioner did not request a collection alternative and

did not submit any of the financial information that would have been required for

      6
        As in Lewis, 128 T.C. 48, 61 n.9 (2007), we need not decide whether the
mere offer of a conference with Appeals in a sec. 6707A penalty case “is sufficient
* * * to preclude subsequent collection review consideration if the taxpayer dec-
lines the offer without participating in such a conference.” But cf. Thompson v.
Commissioner, T.C. Memo. 2012-87, 103 T.C.M. (CCH) 1470, 1472 (“A taxpayer
has the opportunity to dispute his liability for a trust fund recovery penalty when
he receives a Letter 1153.”).
                                       - 14 -

[*14] consideration of a collection alternative.7 Finding no abuse of discretion in

any respect, we will sustain the proposed collection action.8

      To reflect the foregoing,


                                                An appropriate decision

                                       will be entered.




      7
         Petitioner has no plausible claim that SO Fernando erred in declining to
“rescind” the penalties. Sec. 6707A(d) gives the IRS discretionary authority to
“rescind all or any portion of” a penalty, but only if “the violation is with respect
to a reportable transaction other than a listed transaction.” Sec. 6707A(d)(1)(A).
If petitioner participated in a listed transaction, as the IRS determined, he could
not have qualified for such relief. In any event, the IRS’ discretionary deter-
mination as to rescission of a penalty “may not be reviewed in any judicial pro-
ceeding.” Sec. 6707A(d)(2); see Yari v. Commissioner, 143 T.C. 157, 162 (2014);
Smith v. Commissioner, 133 T.C. 424, 428 (2009).
      8
       Although petitioner cannot contest his liability for the penalties in this CDP
case, he does have a judicial remedy. As the IRS informed him when sustaining
the penalties after the initial Appeals Office conference: “If you want to appeal
the penalty assessment, you must file a formal suit with either the United States
District Court or the United States Court of Federal Claims” after first paying the
balance due on the assessed penalties and filing a refund claim with the IRS. See
Smith, 133 T.C. at 430 n.6.
