In a significant ruling for tax practitioners advising clients on Collection Due Process (CDP) proceedings and assessable penalties, the United States Tax Court recently issued an opinion in The Diversified Group Incorporated v. Commissioner and James Haber v. Commissioner, 166 T.C. No. 2 (Filed February 23, 2026). At the core of the Commissioner’s Motion for Partial Summary Judgment was whether the taxpayers could challenge massive I.R.C. § 6707 penalties during a CDP hearing after previously refusing to participate in an IRS Appeals conference. Judge Toro’s opinion provides critical guidance on I.R.C. § 6330(c)(2)(B) preclusion, the survival of Treasury Regulations post-Loper Bright, and the applicability of the Chenery doctrine in de novo Tax Court proceedings.

Facts of the Case

Between 1999 and 2002, James Haber and his corporation, The Diversified Group, Inc. (Diversified), marketed and sold tax avoidance strategies that were "designed to result in noneconomic tax losses for clients and others". Crucially, the taxpayers did not register these transactions as tax shelters with the IRS under I.R.C. § 6111.

The IRS initiated an examination of Diversified’s "tax shelter activities" in 2002. After an 11-year examination, the IRS issued Notices of Proposed Adjustment (NOPAs) in May 2013, asserting the taxpayers organized transactions substantially similar to "Son-of-BOSS" tax shelters and proposing joint I.R.C. § 6707 penalties of approximately $41.2 million.

Throughout 2013, the taxpayers’ counsel aggressively preempted the administrative appeals process. In an August 2013 letter, counsel purported to "waive all IRS Appeals rights" on the grounds that "IRS Appeals consideration is not a meaningful option and might arguably foreclose any judicial review". Despite these preemptive waivers, the IRS sent correspondence on December 16, 2013, notifying the taxpayers of the penalties and explicitly stating: "If you do not agree to the IRC § 6707 penalties, you can request a post-assessment conference with the IRS Appeals Office". The IRS sent another notification on February 11, 2014, offering "consideration by our Appeals Office".

The taxpayers ignored these offers, and the IRS formally assessed the penalties in March 2014. A subsequent attempt by the taxpayers to pay a divisible portion of the penalty and sue for a refund in the U.S. Court of Federal Claims was dismissed for lack of subject matter jurisdiction because the penalty was determined to be indivisible, violating the full-payment rule (Diversified Grp., Inc. v. United States, 123 Fed. Cl. 442 (2015), aff’d, 841 F.3d 975 (2016)).

Following the failed refund litigation, the IRS issued Notices of Federal Tax Lien Filing and Notices of Intent to Levy.

Taxpayers Request for Relief

In response to the IRS’s collection efforts, the taxpayers submitted Forms 12153, requesting CDP hearings. At their respective CDP hearings, the taxpayers argued that they were legally entitled to challenge the underlying tax liabilities—the I.R.C. § 6707 penalties—because they had preemptively and consistently declined prior conferences with IRS Appeals. Under their interpretation of I.R.C. § 6330(c)(2)(B), refusing to attend a conference meant they had not had a prior opportunity to dispute their liabilities.

The IRS Settlement Officer rejected this argument and issued Notices of Determination sustaining the collection actions and barring the underlying liability challenges. The taxpayers subsequently petitioned the Tax Court for relief.

Court’s Analysis of the Law

Judge Toro first established the standard of review, noting that whether the underlying tax liability is properly at issue in a CDP proceeding is reviewed de novo.

Under I.R.C. § 6330(c)(2)(B), a taxpayer may only challenge the existence or amount of the underlying tax liability if they "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability". The court relied heavily on Treas. Reg. § 301.6330-1(e)(3), Q&A-E2, which clarifies that an opportunity to dispute a liability "includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability". The Tax Court had previously upheld this regulation in Lewis v. Commissioner, 128 T.C. 48 (2007).

The taxpayers raised several technical and constitutional arguments to bypass the statute, all of which the court dismantled:

Meaningfulness of the Opportunity: The taxpayers argued that any conference with Appeals would have resulted in a "precooked result" and thus was not "meaningful". The court firmly rejected this, noting that taxpayers cannot refuse administrative remedies and later claim those remedies were inadequate. Citing multiple appellate decisions, Judge Toro wrote, "[W]e are left to guess at what might have happened at a hypothetical conference... Mr. Haber and Diversified may not prevent a record from developing by declining a conference and then demand a trial about what might have happened at the conference that did not take place".
The Chenery Doctrine: The taxpayers invoked SEC v. Chenery Corp., 332 U.S. 194 (1947), arguing that the Tax Court could not rely on the December 2013 IRS letter because the Settlement Officer did not explicitly cite it in the Notice of Determination. The court noted a fatal flaw in this argument: the Chenery doctrine only applies to deferential review of agency action. Because the preclusion issue is reviewed de novo, the Tax Court makes its own determinations. The judge noted that Chenery "[it] says nothing about circumstances in which Congress has authorized a court to make its own determinations".
Regulation Validity Post-Loper Bright: Attempting to weaponize the Supreme Court’s recent decision in Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244 (2024), the taxpayers argued the treasury regulation was invalid and that Lewis was wrongly decided. The court dismissed this by highlighting the statutory stare decisis preservation within Loper Bright itself, quoting the Supreme Court: "The holdings of those cases that specific agency actions are lawful . . . are still subject to statutory stare decisis despite our change in interpretive methodology". Furthermore, the court noted that past circuits have found the regulation to be the best reading of the statute, independent of Chevron deference.
Appointments Clause: The taxpayers theorized that even if they had attended the Appeals conference, it would have been unconstitutional because the Appeals officer was improperly appointed under Article II of the Constitution. Aligning with Tooke v. Commissioner, 164 T.C. 16 (2025) and Tucker v. Commissioner, 135 T.C. 114 (2010), the court reaffirmed that "IRS Appeals officers are not ’Officers of the United States’" within the meaning of the Appointments Clause.

Application of the Law to the Facts

In applying the law, the court found no material distinction between the taxpayers’ situation and precedent establishing that a mere offer from the IRS triggers preclusion. The December 2013 and February 2014 letters provided clear instructions on how to protest the penalties.

Judge Toro emphasized the objective nature of the statutory trigger: "Had Mr. Haber or Diversified followed the letters’ instructions, they could have challenged their liabilities before IRS Appeals. That is the essence of an ‘opportunity to dispute’ within the meaning of section 6330(c)(2)(B)".

The court also dismissed the taxpayers’ semantic claim that an offer for a "post-assessment conference" did not equate to a "conference with Appeals" under the regulations, stating, "Simply put, a conference with IRS Appeals need not be a ‘formal meeting’" and that correspondence or phone calls suffice. By electing to ignore the explicit correspondence offering Appeals consideration, the taxpayers legally surrendered their right to dispute the $41.2 million penalty in the CDP hearing.

Conclusions of the Court

The Tax Court granted the Commissioner’s Motion for Partial Summary Judgment in part. The court held that "R’s offer to Ps of a conference with IRS Appeals was an opportunity for Ps to dispute their penalty liabilities within the meaning of I.R.C. § 6330(c)(2)(B)".

Because of this prior opportunity, the court concluded that the taxpayers "were precluded under I.R.C. § 6330(c)(2)(B) from challenging their liabilities in their CDP hearings and are precluded from doing the same in this Court. Lewis v. Commissioner, 128 T.C. 48, 62 (2007), followed".

The court also granted summary judgment to the IRS on the Appointments Clause issue, holding that the settlement officer was properly appointed. The IRS’s motion regarding the Fifth Amendment due process claim was denied because the taxpayers did not clearly raise it, and the Eighth Amendment Excessive Fines Clause issue was denied as moot, given that the taxpayers were entirely barred from disputing the underlying liability.

Prepared with assistance from NotebookLM.