Tucker v. Commissioner

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 6, 2012 Decided April 20, 2012

No. 11-1191

LARRY E. TUCKER,

APPELLANT

v.

COMMISSIONER OF INTERNAL REVENUE,

APPELLEE

Appeal from the United States Tax Court

Carlton M. Smith argued the cause and filed the briefs for

appellant.

Teresa E. McLaughlin, Attorney, U.S. Department of

Justice, argued the cause for appellee. With her on the brief

were Tamara W. Ashford, Deputy Assistant Attorney General,

and Teresa T. Milton, Attorney.

Before: SENTELLE, Chief Judge, GRIFFITH, Circuit Judge,

and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge

WILLIAMS.

WILLIAMS, Senior Circuit Judge: Taxpayer Larry Tucker

appeals a judgment of the Tax Court rejecting two

2

contentions: first, a constitutional claim that certain

employees of the Internal Revenue Service’s Office of

Appeals are “Officers of the United States,” so that their

appointments must conform to the Constitution’s

Appointments Clause, art. II, § 2, cl. 2, and second, an

argument that the employees in question abused their

discretion in rejecting his proposed compromise of the

collection of his tax liability. Tucker v. Commissioner, 135

T.C. 114 (2010) (rejecting constitutional claim); Tucker v.

Commissioner, T.C. Memo. 2011-67, 2011 WL 1033849

(T.C. Mar. 22, 2011) (rejecting abuse of discretion claim and

issuing judgment for the Commissioner). Because the

authority exercised by the Appeals Office employees whose

status is challenged here appears insufficient to rank them

even as “inferior Officers,” we reject the constitutional claim.

And we find no abuse of discretion in those employees’

decision in this case.

* * *

Tucker underpaid his federal income taxes by a total of

over $24,000 over the period 1999-2003. With interest and

penalties, his liability grew to over $35,000 by 2004, when the

IRS sent him a “Notice of Federal Tax Lien Filing and Your

Right to a Hearing Under IRC 6320” for years 2000, 2001,

and 2002. Joint Appendix (“J.A.”) 7. The hearing in

question, called a collection due process or “CDP” hearing, is

provided for in the IRS Restructuring and Reform Act of

1998. Pub. L. No. 105-206, § 3401, 112 Stat. 685, 746

(codified at 26 U.S.C. §§ 6320 (lien actions), 6330 (levy

actions)). Such a hearing is an opportunity for a taxpayer to

challenge the propriety of a pending tax lien or levy, to verify

that a collection action against him is appropriate under the

law, and to offer alternatives, one of which is a so-called

offer-in-compromise or “OIC” (Tucker’s preferred outcome).

Id. §§ 6320(c), 6330(c)(2)(A). Challenges to underlying tax

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liability can also be raised at a CDP hearing, but only if the

taxpayer did not receive statutory notice of the liability or did

not otherwise have an opportunity to dispute it. Id.

§§ 6320(c), 6330(c)(2)(B).

The 1998 statute calls for CDP hearings to take place in

the Office of Appeals. Id. §§ 6320(b)(1), 6330(b)(1).

Although no statute created that office, its existence is now

reflected in various provisions of the Internal Revenue Code,

such as the ones governing CDP hearings. See Tucker, 135

T.C. at 135-36 & n.49 (noting additional references). Besides

providing for decision by an “officer or employee” of

Appeals, the statute, in the interest of assuring a measure of

independence between Appeals and other arms of the IRS, see

§ 1001(a)(4) of the 1998 Act, 112 Stat. at 689, specifies that

the decisionmaker will be one with no prior involvement with

the unpaid tax at issue, and directs the IRS to adopt rules

against ex parte communications. 26 U.S.C. §§ 6320(b)(3),

6330(b)(3); Rev. Proc. 2000-43, 2000-2 C.B. 404 (to be

superseded by Rev. Proc. 2012-18, effective May 15, 2012).

Despite the word “hearing” and these seemingly trial-like

features, the officer or employee does not adjudicate between

adversaries, but rather represents the IRS—we discuss the

procedures more below. A disappointed taxpayer can

challenge the CDP hearing outcome in the Tax Court. See 26

U.S.C. §§ 6320(c), 6330(d)(1).

In Tucker’s case the IRS was represented by a

“settlement officer” (one of two types of IRS workers who

conduct CDP hearings, the other type being “appeals

officers”). After the hearing, Tucker proposed an OIC instead

of the partial installment plan offered by the settlement

officer, but the latter rejected his proposal, and her decision

was approved by her “team manager”—a position tasked with

overseeing various Appeals functions, including CDP

hearings.

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Tucker appealed to the Tax Court. That court initially

remanded the matter back to Appeals for a supplemental CDP

hearing, in which a different settlement officer and team

manager again rejected Tucker’s OIC. The case then resumed

in the Tax Court, which rejected Tucker’s constitutional and

abuse of discretion arguments.

* * *

The Appointments Clause provides that

[The President] . . . shall nominate, and by and with the

Advice and Consent of the Senate, shall appoint . . .

Officers of the United States, whose Appointments are

not herein otherwise provided for, and which shall be

established by Law: but the Congress may by Law vest

the Appointment of such inferior Officers, as they think

proper, in the President alone, in the Courts of Law, or in

the Heads of Departments.

U.S. Const., art II, § 2, cl. 2. The clause plainly distinguishes

between “principal” and “inferior” officers, and its

requirements have no application to employees falling below

the “officer” threshold. See Freytag v. Commissioner, 501

U.S. 868, 880-81 (1991) (citing Buckley v. Valeo, 424 U.S. 1,

126 & n.162 (1976)). Although Tucker appeared to argue in

his briefs that the clause governed all Office of Appeals

workers involved in CDP hearings, at oral argument his

counsel limited the challenge to team managers, who oversee

the CDP determinations. Oral Arg. at 11:50-12:55. As our

analysis applies equally to team managers, settlement officers,

and appeals officers, however, we will use the term “Appeals

employees” to refer to all in the three groups. We review the

Tax Court’s decision on this issue de novo.

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The Supreme Court has often said that to be an “Officer

of the United States” covered by Article II, a person must

“exercis[e] significant authority pursuant to the laws of the

United States.” Buckley, 424 U.S. at 125-26; see also Free

Enterprise Fund v. Public Co. Accounting Oversight Bd., 130

S. Ct. 3138, 3160 (2010); Landry v. FDIC, 204 F.3d 1125,

1133 (D.C. Cir. 2000). In assessing Tucker’s claim, we look

not only to the authority that Appeals employees wielded in

Tucker’s case but to all their duties, or at least those to which

Tucker calls attention. Freytag, 501 U.S. at 882 (rejecting

government’s argument that an Appointments Clause

challenger may rely only on authorities exercised over him).

Most importantly, these duties include review of taxpayers’

underlying tax liability, even though Tucker’s liability was

never at issue before the Office of Appeals. Because Appeals

employees in CDP hearings exercise the most “significant”

authority in disposing of liability questions (which of course

they commonly address outside the CDP context), we will

address the authority involved in liability review first, and will

then return to the collection-related aspects of CDP review.

Before discussing how the authority of Appeals

employees compares with that of persons found to be

“Officers,” we first consider—and ultimately bypass—

whether, in the words of the clause, their positions were

“established by Law.” Landry, 204 F.3d at 1133. As we have

explained, no statute created positions in the Office of

Appeals, but the 1998 act entitled taxpayers to a hearing in

that office, 26 U.S.C. §§ 6320(b)(1), 6330(b)(1), and called

for a determination by the “appeals officer” on various issues

relating to a proposed collection and to tax liability, id.

§§ 6320(c), 6330(c); see also 26 C.F.R. §§ 601.103(c)

(providing taxpayers the general opportunity to contest tax

liability before Office of Appeals, outside of CDP context);

see generally id. § 601.106 (describing Office of Appeals

functions and procedures). Similarly as to regulations: 26

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C.F.R. § 601.106 may “establish” the Office of Appeals, and

the relevant Internal Revenue Manual provisions do delegate

various responsibilities to settlement officers, appeals officers,

and team managers, see, e.g., I.R.M. exh. 8.22.2-4, Delegation

Order Appeals-193-1 (Mar. 16, 2010) (formerly App 8-1

(Rev. 1)), but the parties have not pointed us to a regulation or

other agency authority in which these positions themselves are

“established” in any formal sense. Rather, they appear simply

to be types of employees used by the Commissioner pursuant

to his general hiring power. 26 U.S.C. § 7804(a); see Tucker,

135 T.C. at 116, 119.

Nonetheless, it would seem anomalous if the

Appointments Clause were inapplicable to positions extant in

the bureaucratic hierarchy, and to which Congress assigned

“significant authority,” merely because neither Congress nor

the executive branch had formally created the positions. See

Appellant’s Br. 35-36; Tucker, 135 T.C. at 158. See also DOJ

Office of Legal Counsel, Officers of the United States for

Purposes of the Appointments Clause, 2007 OLC LEXIS 3, at

*118 (Apr. 16, 2007) (“[T]he rule for which sorts of positions

have been ‘established by Law’ such that they amount to

offices subject to the Appointments Clause cannot be whether

a position was formally and directly created as an ‘office’ by

law. Such a view would conflict with the substantive

requirements of the Appointments Clause.”).

In any event, because we conclude below that Appeals

employees do not exercise significant authority within the

meaning of the Appointments Clause cases, we need not

resolve whether their positions were “established by Law” for

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purposes of that clause. 1 We therefore turn to the authority

they exercise.

Although the cases are not altogether clear, the main

criteria for drawing the line between inferior Officers and

employees not covered by the clause are (1) the significance

of the matters resolved by the officials, (2) the discretion they

exercise in reaching their decisions, and (3) the finality of

those decisions. In light of Freytag we can assume here that

the issue of a person’s tax liability is substantively significant

enough to meet factor (1), in which case degrees of discretion

and finality will ultimately be determinative. Thus the special

trial judges (“STJs”) found to be inferior Officers in Freytag

actually rendered the final decisions of the Tax Court in some

matters (specified declaratory judgment and limited-amount

tax cases), 501 U.S. at 882, while in others they played a less

final role, taking evidence and preparing proposed findings of

fact and opinions, id. at 880-81. Even when STJs acted in the

latter, seemingly ancillary role, they exercised discretion on

such matters as rulings on admissibility and enforcing

compliance with discovery orders, id. at 881-82, and their

factual findings were entitled to deference, being reversible by

the Tax Court only if clearly erroneous, Landry, 204 F.3d at

1133 (citing what was then Tax Court Rule 183(c), now

183(d), and Stone v. Commissioner, 865 F.2d 342, 344-47

(D.C. Cir. 1989)). In Landry, by contrast, we found the

absence of any authority to render final decisions fatal to the

claim that the administrative law judges at issue there were

Officers rather than employees. 204 F.3d at 1133-34.

1

We read Landry’s reference to the “established by Law”

question as a “threshold trigger,” 204 F.3d at 1133, to mean that

such an inquiry may but need not be the start of an Appointments

Clause analysis.

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The degree of discretion enjoyed by the officeholder is

clearly an element in the mix. Thus in Freytag the Court was

at pains to note that the STJs’ tasks were “more than

ministerial.” 501 U.S. at 881. If the tasks assigned a position

allowed the holder no choice, obviously, it would be pointless

to classify him as an “Officer” even though the consequences

of his ministerial decisions were both vital and final. And in

this case, in fact, we conclude that the lack of discretion is

determinative, offsetting the effective finality of Appeals

employees’ decisions within the executive branch.

Appeals employees’ discretion is highly constrained.

Before turning to the constraints, we note the characteristic of

Appeals’s powers that seems most significant. The office is

authorized to compromise disputed tax liability on the basis of

its probabilistic estimates of the hazards of litigation. Thus, if

Appeals estimates that the IRS’s chances of prevailing on a

disputed point of law are 60%, it may agree to accept only

60% of the liability that turns on the point. See 26 C.F.R.

§ 601.106(f)(2); see generally 26 U.S.C. § 1722.

But in reaching such decisions (and indeed in all its

decisions), Appeals is subject to consultation requirements, to

guidelines, and to supervision. First, the office is instructed in

the Internal Revenue Manual to “[r]equest legal advice from

an Associate Chief Counsel office on novel or significant

issues.” I.R.M. pt. 8.6.3.5 (Oct. 26, 2007). Second, the

Manual tells Appeals to seek a “Technical Advice

Memorandum” from the Chief Counsel’s Office “when a lack

of uniformity exists on the disposition of the issue or the issue

is unusual or complex enough to warrant consideration by the

Office of Chief Counsel.” Id. pt. 8.6.3.3(3) (July 15, 2010);

see also 26 C.F.R. § 601.106(f)(9). (The Chief Counsel is

appointed by the President with the advice and consent of the

Senate. 26 U.S.C. § 7803(b)(1).) Third, Appeals is required

to follow any established technical or legal IRS position that

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is favorable to the taxpayer. I.R.M. pt. 8.6.3.5.2; 26 C.F.R.

§ 601.106(f)(9)(viii)(c). Fourth, various regulations and the

Internal Revenue Manual impose detailed guidelines for what

settlements Appeals may accept. See, e.g., 26 C.F.R.

§ 601.106(f); I.R.M. pt. 8.23.1; see also 26 U.S.C.

§ 7122(d)(1) (requiring the Secretary to prescribe such

guidelines). Fifth, Appeals must obtain a favorable opinion

from the General Counsel for the Treasury for any

compromise in which the unpaid amount of tax is $50,000 or

more, and its compromises of smaller amounts are subject to

“continuing quality review by the Secretary.” 26 U.S.C.

§ 7122(b). The authority to provide a favorable opinion for

compromises of $50,000 or more has been delegated to the

Chief Counsel and redelegated to Division Counsel, see

I.R.M. pt. 33.3.2.1(3) (Nov. 4, 2010), but such delegations

could be revoked at the General Counsel’s discretion. Sixth,

any “closing agreement” relieving a taxpayer of liability must

be approved by the Secretary. 26 U.S.C. § 7121(b). As with

the General Counsel approval, that authority has been

delegated to the Commissioner, 26 C.F.R. § 601.202(a)(1),

and redelegated to others including some Appeals employees,

see Delegation Order 8-3, I.R.M. pt. 1.2.47.4 (Aug. 18, 1997)

(formerly Delegation Order No. 97 (Rev. 34)); I.R.M. pt.

8.13.1.1.6 (Nov. 9, 2007), but the Secretary remains free to

revoke it if he finds defects in practice under the delegations.

We noted earlier that Freytag had relied in part on the

STJs’ procedural powers, such as the authority to take

testimony and to rule on admissibility of evidence. See 501

U.S. at 881-82. Appeals does nothing of this sort. It does not

hold trials at all. It simply provides a chance for the taxpayer

(and his counsel) to use argument and information to claim

more favorable treatment than he has received from IRS

employees encountered earlier in the process. “Proceedings

before Appeals are informal,” and “[t]estimony under oath is

not taken,” although taxpayers are free to submit factual

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materials such as affidavits. 26 C.F.R. § 601.106(c). In cases

not yet docketed in Tax Court, the district director is

represented only if the district director and the Appeals

employees with settlement authority “deem it advisable.” Id.

Of course we do not understand Freytag to suggest that mere

informality of proceedings, or the absence of adversarial

procedures, could justify denying “Officer” status to one

whose powers would otherwise demand that classification.

But the Court in Freytag may have taken the presence of those

procedures as a signal from Congress of the weightiness of the

substantive powers granted. That signal is missing here.

Accordingly, we find even Appeals employees’ authority

over tax liability insufficient to rank them as inferior Officers.

This being so, it is plain that the authority they exercise in

the pure collections aspects of CDP hearings is not enough.

As to those functions, the government is simply a creditor,

and accordingly Appeals employees must make decisions

based largely on the same mundane and practical concerns

that any creditor faces. They include, of course, a potential

need to compromise even the amount to be collected, but

Appeals acts in such matters under the general duties

discussed above—to seek advice from the Office of Chief

Counsel or an Associate Chief Counsel, and to obtain review

from the General Counsel for any decisions involving

monetary compromise, and of course is subject to Secretarial

monitoring. Accordingly, the significance and discretion

involved in the decisions seem well below the level necessary

to require an “Officer.”

* * *

Tucker claims that even absent a constitutional

deficiency, the Office of Appeals’s failure to accept his

proposed OIC was an abuse of discretion. The Tax Court

11

rejected this claim, see Tucker, T.C. Memo. 2011-67, 2011

WL 1033849, at *14, and so do we.

Tucker’s primary argument is that the settlement officer

in his supplemental CDP hearing wrongfully counted as

“dissipated assets” some losses that he incurred in 2003 in day

trading on the stock market. The concept of “dissipated

assets” becomes relevant when Appeals considers a taxpayer’s

OIC proposal because of doubt about the collectability of a

taxpayer’s outstanding liability (the case here); Appeals is to

accept the OIC only where it reflects the taxpayer’s

“reasonable collection potential” (“RCP”). Rev. Proc. 2003-

71, § 4.02(2), 2003-2 C.B. 517. In calculating the RCP,

Appeals inflates it by the amount of “dissipated assets”—not

because they are in fact accessible to the taxpayer (they

obviously are not), but to discourage such dissipation. See

Tucker, T.C. Memo. 2011-67, 2011 WL 1033849, at *11. The

concept is defined as “assets (liquid or non-liquid) [that] have

been sold, gifted, transferred, or spent on non-priority items

and/or debts and are no longer available to pay the tax

liability.” I.R.M. pt. 5.8.5.4(1) (Sept. 1, 2005). Dissipated

assets can be included in computing RCP if they have been

dissipated “with a disregard” for outstanding tax liability. Id.

pt. 5.8.5.4(5). 2

Tucker does not dispute that at the time he placed the

$44,000 in his day trading account (January through April 3,

2003), leading to $22,645 in stock losses (accumulated by

April 21, 2003, the date he stopped trading), his accrued tax

liability (for years 1999, 2000 and 2001) was $14,945. See

Tucker, T.C. Memo. 2011-67, 2011 WL 1033849, at *11-12

2

The current version of the Manual addresses the inclusion of

dissipated assets in reasonable collection potential at I.R.M. pt.

5.8.5.16(7) (Oct. 22, 2010).

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& n.12. He also does not dispute that settlement officers can

include assets dissipated “with a disregard” for tax liability in

a taxpayer’s RCP. But he argues that the settlement officer

miscalculated the amount of his day trading losses when she

concluded that those losses exceeded his tax liability at the

time, and that therefore the Tax Court, after it corrected the

calculation, was barred by the principle of SEC v. Chenery

Corp., 332 U.S. 194 (1947), from upholding Appeals’s

determination. He also argues that his day trading losses

should not count against him at all because they were

investments made in a good faith attempt to earn more money

to pay off all of his debts. Neither argument has merit.

Regarding whether the amount of the dissipated assets

exceeded Tucker’s tax liability, the settlement officer in

Tucker’s supplemental CDP hearing concluded that “at the

least, the money deposited [in Tucker’s E-Trade account, i.e.

the $44,700] could be included in the reasonable collection

potential of an offer as dissipated cash assets. The amounts

deposited were sufficient to full [sic] pay the taxes.”

Attachment to Supplemental Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or

6330 (Sept. 12, 2006), J.A. 38. The Tax Court found that the

settlement officer erred in treating the whole $44,700 as

dissipated, because Tucker ultimately withdrew $22,000 from

the account and maintained that he spent that amount on basic

living expenses, making it excludable from RCP under I.R.M.

pt. 5.8.5.4(4). See Tucker, T.C. Memo. 2011-67, 2011 WL

1033849, at *12-13.

Nonetheless, the Tax Court found no abuse of discretion.

Given that Tucker’s $22,645 losses up to the date he stopped

trading (April 21, 2003) exceeded his then accrued tax

liability of $14,945, it found that the lost $22,000 was enough

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to pay his then due tax. 3 Accordingly, the court found the

settlement officer’s erroneous reliance on the full deposit

amount harmless. See id. at *12-13 & n.16.

On appeal Tucker argues that the Tax Court improperly

“rework[ed]” the settlement officer’s analysis in violation of

the Chenery principle, which requires a court reviewing an

agency action to “judge the propriety of such action solely by

the grounds invoked by the agency. If those grounds are

inadequate or improper, the court is powerless to affirm the

administrative action by substituting what it considers to be a

more adequate or proper basis.” 332 U.S. at 196.

But the Tax Court did judge the propriety of the

settlement officer’s consideration of dissipated assets solely

on the grounds invoked: that the amount of such assets “[was]

sufficient to full [sic] pay the taxes.” Attachment to

Supplemental Notice of Determination, J.A. 38; see also id.,

J.A. 39 (“Appeals has determined that you could have full

[sic] paid the balances already.”). That the settlement officer

incorrectly used the higher amount, Tucker’s initial placing of

funds, rather than just the amount of losses, does not change

its reasoning or conclusion that the amount dissipated

exceeded his outstanding tax liability at the time. We

therefore find no Chenery problem. See also PDK

Laboratories Inc. v. DEA, 362 F.3d 786, 799 (D.C. Cir. 2004)

(“If the agency’s mistake did not affect the outcome, if it did

not prejudice the petitioner, it would be senseless to vacate

and remand for reconsideration.”).

3

The Tax Court slightly fudged the issue of the exact date by

which his losses tipped over the $14,945 level, but it seems safe to

say that they must have done so before his 2002 taxes fell due on

April 15, 2003. In any event, Tucker makes no issue of this

potential discrepancy.

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Tucker’s second argument is that Appeals erred in

including his day trading losses as dissipated assets because

doing so in effect “requires all taxpayers to liquidate all assets

upon initial assessment of taxes to avoid potentially

‘dissipating’ an asset via decline in asset value prior to

payment. Under such a rule, a taxpayer would be required to

sell her house immediately upon assessment of a tax liability

for fear of a drop in its value.” Appellant’s Br. 54-55. But as

the Commissioner points out, a mere drop in value of an

existing asset would not count as dissipated because it would

not have been “transferred” or “spent.” We also find no abuse

of discretion in Appeals’s apparently finding Tucker’s day

trading to be more speculative than, e.g., buying or

refinancing a home, and therefore finding the former and not

the latter to qualify as “disregard” for one’s tax liability.

Finally, because we find no abuse of discretion in the

settlement officer’s reliance on dissipated assets, we need not

consider Tucker’s attack on the Commissioner’s alternative

defense of Appeals’s rejection of the OIC, namely that

Appeals may reject an OIC simply because it will be able to

collect more through a partial installment plan (under which

the IRS can periodically update the required installment

payments to reflect a taxpayer’s increase in income). We

note, however that the OIC guidelines appear to allow

rejection of an OIC “if it is believed that the liability can be

paid in full.” I.R.M. pt. 8.23.1.1(6) (Sept. 13, 2011). This is

essentially the position the settlement officer took here in

rejecting the OIC and preserving the IRS’s advantages under

the partial installment plan.

* * *

We conclude that Office of Appeals team managers,

settlement officers, and appeals officers are not inferior

Officers who must be appointed in conformity with the

15

Appointments Clause, and that there was no abuse of

discretion in the Office’s rejection of Tucker’s proposed offer-

in-compromise. The judgment of the Tax Court is therefore

Affirmed.