151 T.C. 8
T.C.2018Background
- David and Audrey Melasky owed multiple unpaid federal income tax liabilities dating back to 1995.
- On January 27, 2011, they hand-delivered an $18,000 check to the IRS and asked it be applied to their 2009 tax liability; IRS posted the payment the same day.
- On January 31, 2011, the IRS issued a levy to the Melaskys’ bank; the bank freeze or levy caused the check to bounce, and IRS reversed the posted payment.
- The IRS collected the bank funds via levy and applied the proceeds to the Melaskys’ 1995 liability on February 28, 2011, and assessed a $360 bad-check penalty under I.R.C. § 6657.
- The IRS issued a notice of intent to levy listing primarily later years (2001, 2002, 2004, 2006, 2008, and 2009); the Melaskys requested a CDP hearing and appealed the application of payments.
- The settlement officer concluded the levy proceeds were involuntary payments the IRS could apply as it wished; the Melaskys petitioned the Tax Court and cross-moved for summary judgment.
Issues
| Issue | Melasky’s Argument | Commissioner’s Argument | Held |
|---|---|---|---|
| Proper standard of review for IRS application of payments in CDP case | Melasky argued the 2009 payment issue should be reviewed de novo because they contend they fully paid 2009 | Commissioner contended payment-application disputes are not challenges to underlying liability and should be reviewed for abuse of discretion | Court held review of payment-crediting is for abuse of discretion (not de novo) where underlying liability is not being challenged |
| Whether the dispute over the 2009 check is a challenge to the underlying tax liability | Melasky: check constituted a voluntary payment extinguishing the 2009 liability | Commissioner: dispute concerns crediting/payment application (i.e., whether liability remained unpaid), not the amount imposed by the Code | Court held Melaskys were not challenging the underlying 2009 tax liability; issue is application of payment and treated as unpaid-liability question |
| Whether IRS could apply involuntary levy proceeds to older liabilities | Melasky: funds were tendered voluntarily for 2009 and should not be reallocated by levy | Commissioner: levy produced involuntary payment that IRS could apply to older liabilities | Court deferred to the Appeals Office under abuse-of-discretion review (no de novo reversal) |
| Entitlement to CDP hearing for older years (1995, 1996, 1999, 2000–04) | Melasky sought broader review | Commissioner: taxpayers already had notices for those years; only one CDP hearing per tax year | Court agreed taxpayers weren’t entitled to CDP hearing for those earlier listed years |
Key Cases Cited
- Goza v. Commissioner, 114 T.C. 176 (Tax Ct. 2000) (establishing abuse-of-discretion standard for CDP determinations)
- Landry v. Commissioner, 116 T.C. 60 (Tax Ct. 2001) (discussing post-assessment computation and credits)
- Matassarin v. Lynch, 174 F.3d 549 (5th Cir. 1999) (equating arbitrary-and-capricious review with abuse of discretion)
- Flaherty v. Bryson, 850 F. Supp. 2d 38 (D.D.C. 2012) (discussing standards and scope of review for administrative determinations)