District court may consider underlying tax liability in government collection suits

Plain-English summary

Chief Counsel advised that a taxpayer’s underlying liability may be considered in a government suit to reduce an assessment to judgment or foreclose a federal tax lien. Sections 7402 and 7403, together with 28 U.S.C. §§ 1340 and 1345, give district courts broad authority to decide issues necessary to enforce the internal revenue laws and government liens. An assessment generally carries a presumption of correctness, so the taxpayer bears the burden of rebutting it. In practice, liability may not remain open in every case because the taxpayer may fail to overcome that presumption or because an earlier Tax Court decision has already resolved the issue.

Ruling snapshot

• Question: May a district court consider the underlying tax liability in a government judgment or lien-foreclosure action?
• Outcome: Advice given.
• Key authorities: IRC §§ 7401, 7402, 7403; 28 U.S.C. §§ 1340, 1345; Bailey v. United States, 415 F. Supp. 1305 (D.N.J. 1976).

Full text (IRS public release)

ID: CCA_2016042809245711
UILC: 7402.00-00

Number: 201621013
Release Date: 5/20/2016
From:
Sent: Thursday, April 28, 2016 9:24:58 AM
To:
Cc:
Bcc:
Subject: Question when liability can be challenged

Hi—I wanted to get back to you on your question about when the underlying liability can
be challenged in either a suit to reduce the liability/assessment to judgment or a lien
foreclosure suit.

I looked at the O’Conner case and also thought Bailey v. U.S., 415 F.Supp. 1305
(D.N.J. 1976) was helpful. Essentially, while I also did not find many cases or other
authority directly on point regarding raising liability challenges, I think that the analysis
discussed in Bailey supports the conclusion that underlying liability can be at issue in
either type of suit.

This comes from the broad grant of jurisdiction granted to district courts under sections
7402, 7403, and 28 USC 1340 and 1345, which give the district court jurisdiction to
decide all issues necessary for the enforcement of the internal revenue laws and for the
enforcement/collection of government liens. When the government brings suit to reduce
liability to judgment or foreclose a lien, there is generally an assessment (though a suit
to reduce liability to judgment can be brought without an assessment). There are
several cases under sections 7401, 7402 and 7403 addressing the position that the
assessment is given the presumption of correctness and the taxpayer then bears the
burden of disputing its validity. So the district court would have jurisdiction to consider
the liability, but the taxpayer would have to rebut that presumption of correctness of the
assessment. So I think underlying liability can properly be considered by the district
court in a judicial collection action brought by the government, but it may not be an
actual issue in a lot of cases because of that presumption given to the correctness of
the assessment, res judicata precluding dispute because the deficiency was already
determined in a Tax Court case before it was assessed, etc.

Hope that helps. Let me know if I can be of further assistance.