IRS Issuance of Notice of Determination Concerning Collection Action Violated Automatic Stay

The issuance by the IRS of a Notice of Determination Concerning Collection Action following the filing of a bankruptcy petition by the taxpayer was held by the Tax Court to be in violation of the automatic stay imposed by the Bankruptcy Code under 11 USC §362(a).  Therefore, in the case of Yuska v. Commissioner, TC Memo 2015-77, the Tax Court held that, given no valid notice being issued, it had no current jurisdiction in the case.

The IRS did not disagree with the Court’s lack of jurisdiction—but the agency did disagree with the reason, arguing that, instead that the taxpayer’s petition was the only item in violation of the automatic stay.  This was not a minor matter since, as the Court noted:

This case must be dismissed for lack of jurisdiction because the petition was filed in violation of the automatic stay provisions of 11 U.S.C. sec. 362(a)(8).  Prevo v. Commissioner, 123 T.C. at 331.  However, where the application of the automatic stay may act as an impediment to this Court’s jurisdiction, it is incumbent on the Court to determine the proper ground for dismissal.  Smith v. Commissioner, 124 T.C. 36, 40 (2005).  This principle is particularly compelling in the present case where the Court is confronted with two alternative grounds for dismissal, one of which will have the effect of denying petitioner the opportunity to obtain review of respondent’s notice of determination in this Court.

The key problem is that there is no tolling provision in the taxpayer’s right to petition the Tax Court for the review of the IRS’s administrative denial of relief from having a lien imposed, so that if the Court finds that the IRS issuance of the notice was not barred, the taxpayer would lose any right to challenge that finding in the Tax Court.

The Tax Court notes that the automatic stay provisions prohibit the continuing of administrative collection actions against the taxpayer.  The Court found that the IRS issuing the notice was a continuation of its administrative collection actions, thus was barred under the automatic stay, consistent with its ruling in the case of Smith v. Commissioner, 124 TC 43.

The IRS pointed out, though, that the Smith case involved a levy.  The IRS argued that a levy, unlike a lien, cannot be effected until after a final notice of intent to levy that provided administrative review rights was issued to the taxpayer.  A lien, such as in this case, is complete before the issuance of a notice of the lien filing and rights to a hearing to the taxpayer.  The IRS pointed out that in another case (Prevo v. Commissioner, 123 TC 327).

However the Court found that the continuation of the lien process was still clearly part of the IRS collection process.  The difference between the Prevo and Smith cases was not that one was a lien case while the other was a levy, but rather the exact sequence of events.

In Prevo the IRS first issued a notice of determination concerning collection action.  After that notice was issued, the taxpayer filed a bankruptcy petition and then filed the petition with the Tax Court.  In that case, since the notice had already been issued, the taxpayer’s filing of the bankruptcy petition cut off the ability to raise a challenge to the IRS holding in Tax Court.

However in both the Smith case and the one before the Court at this time, the bankruptcy petition was filed before the IRS issued its decision.  The IRS action after the petition was filed was the problem—the IRS had to delay action during the period of the automatic stay.  The fact that the taxpayer may have filed a request for administrative review under IRC §6320 before the bankruptcy petition was filed, the IRS did not issue a notice of determination before the filing.

As such, the notice was invalid and, as such, the time period had not yet begun during which a taxpayer would need to file a petition in Tax Court.