Supreme Court Weighs Tax Court Jurisdiction in Levy Disputes After Tax Payment

As tax practitioners, we are frequently faced with intricate collection matters and the nuances of taxpayer rights when the IRS seeks to enforce tax liabilities. The Supreme Court recently heard oral arguments in Commissioner of Internal Revenue v. Jennifer Zuch, No. 24-416, a case that could significantly impact the scope of Tax Court jurisdiction in Collection Due Process (CDP) proceedings under Internal Revenue Code (IRC) § 6330. This article will delve into the facts of the case, the lower courts’ analyses, and, most importantly, the critical issues raised by the Supreme Court Justices during oral arguments that appear central to the resolution of this dispute.

Background of Zuch v. Commissioner

Jennifer Zuch and Patrick Gennardo, married but filing separately for the 2010 tax year, both filed untimely returns. Zuch’s return showed an overpayment. However, a significant amount of estimated tax payments made were credited to Mr. Gennardo’s account. Subsequently, the IRS issued Zuch a Final Notice of Intent to Levy for an unpaid 2010 tax liability of approximately $36,000, prompting her timely request for a CDP hearing with the IRS Office of Appeals.

At the CDP hearing, Zuch argued that the $50,000 in estimated tax payments credited to her ex-husband should have been allocated to her, thereby eliminating her underlying tax liability. The IRS Office of Appeals sustained the proposed levy, stating it was "not in a position" to move the credits. Zuch then petitioned the Tax Court for review.

During the Tax Court proceedings, the IRS offset tax refunds owed to Zuch in later years and applied them to her 2010 tax liability. By April 15, 2019, the entire asserted 2010 liability was satisfied through these offsets. Consequently, the IRS moved to dismiss the Tax Court proceeding as moot, arguing that since there was no longer an unpaid tax or a proposed levy, the case was no longer justiciable.

Tax Court’s Decision: Reliance on Greene-Thapedi

The Tax Court, relying on its prior decision in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), granted the Commissioner’s motion to dismiss. The Tax Court reasoned that because the underlying liability had been paid and the IRS was no longer pursuing the proposed collection action, the case was moot. It further stated that it lacked jurisdiction in a § 6330 proceeding to determine an overpayment or order a refund.

Third Circuit’s Reversal: Focus on Underlying Liability

The Third Circuit Court of Appeals reversed the Tax Court’s dismissal in Zuch v. Commissioner, 97 F.4th 81 (3d Cir. 2024), holding that Zuch’s claim was not moot. The court emphasized the distinction in IRC § 6330(c)(2) between issues "relating to the unpaid tax or the proposed levy" under subsection (A) and "challenges to the existence or amount of the underlying tax liability" under subsection (B). Since Zuch had not received a notice of deficiency and thus had not had a prior opportunity to dispute her tax liability, she properly raised a challenge to the underlying liability in the CDP proceeding under § 6330(c)(2)(B).

The Third Circuit disagreed with the Tax Court’s reliance on Greene-Thapedi, finding its reasoning faulty. The appellate court reasoned that the Tax Court’s jurisdiction to review the Appeals Office’s determination regarding the underlying tax liability, once invoked, is not extinguished by the IRS’s unilateral action of satisfying the asserted liability through offsets. The Third Circuit also addressed the issue of setoffs, concluding that the IRS’s setoffs against a disputed liability violated common law principles and Article III mootness principles, rendering them invalid. The court further opined that a Tax Court determination of Zuch’s right to the estimated payments would not be an impermissible declaratory judgment. Ultimately, the Third Circuit remanded the case to the Tax Court to determine whether Zuch was entitled to credit for any amount of the disputed estimated tax payments.

Supreme Court Oral Arguments: Key Issues Raised by the Justices

The oral arguments before the Supreme Court highlighted several critical issues that the Justices appeared to find significant in deciding whether the Tax Court retained jurisdiction after the tax liability was satisfied.

  • The "Anchor" of the Levy for Tax Court Jurisdiction: Counsel for the Commissioner, Erica L. Ross, repeatedly argued that Tax Court jurisdiction under § 6330 is fundamentally tied to the proposed levy. She asserted that the levy serves as the "anchor" for jurisdiction, and once the levy is no longer in place (due to payment), the Tax Court lacks jurisdiction, even if underlying liability issues were raised. Justice Thomas directly questioned why the Tax Court wouldn’t have jurisdiction if a levy was in place at the beginning of the litigation. Ms. Ross responded that the jurisdiction is "very much tied to the levy".
  • The Meaning of "Determination" Under § 6330(d)(1): A significant portion of the argument revolved around the interpretation of "determination" in § 6330(d)(1), which grants the Tax Court jurisdiction to review the Appeals Office’s "determination". Ms. Ross contended that the determination is specifically about whether the levy may proceed, and while subsidiary issues like underlying liability are considered in making that determination, they do not provide an independent basis for Tax Court jurisdiction once the levy is moot. Conversely, Shay Dvoretzky, counsel for Zuch, argued that the Appeals Office’s determination encompasses all issues properly raised, including the underlying liability, and the Tax Court has jurisdiction to review that entire determination. Justice Gorsuch pressed Ms. Ross on whether the determination itself, which could include a contest of underlying tax liability, provides the statutory hook for jurisdiction.
  • The Availability of Other Remedies (Refund Suit): The Commissioner argued that even if the Tax Court lacked jurisdiction, Zuch could pursue a post-refund suit in district court. However, Zuch’s counsel pointed out the potential limitations issues with filing a refund claim, particularly if the Tax Court dismisses for lack of jurisdiction, and the possibility that some years might be time-barred. Justice Sotomayor inquired about the amount still in dispute, with counsel for Zuch indicating approximately $20,000 might be at issue.
  • The Purpose of § 6330 and Taxpayer Protections: Several Justices seemed concerned with the implications of allowing the IRS to effectively moot a Tax Court proceeding by unilaterally taking the taxpayer’s money. Justice Kavanaugh questioned how often this situation arises. Mr. Dvoretzky argued that Congress intended § 6330 to provide taxpayers with a forum to dispute collection actions and underlying liabilities before deprivation, and allowing the IRS to circumvent this process would undermine that purpose and force taxpayers to start over in a different forum.
  • The Tax Court’s Limited Jurisdiction and Remedial Authority: Ms. Ross emphasized that the Tax Court is a court of limited statutory jurisdiction and lacks general remedial authority, particularly the authority to order refunds in § 6330 proceedings. She distinguished Tax Court jurisdiction in deficiency proceedings under § 6512(b), which specifically grants overpayment authority, from the absence of such explicit authority in § 6330.
  • Mootness in the Context of an Executive Tribunal: Justice Gorsuch raised the interesting question of whether Article III mootness principles fully apply to the Tax Court, an executive branch tribunal. While both sides largely sidestepped a definitive answer, the question hints at a potential nuance in the Court’s analysis of whether the case remains a live "case or controversy."

Implications for Tax Practitioners

The Supreme Court’s decision in Commissioner v. Zuch will have significant implications for tax practitioners advising clients facing IRS collection actions. If the Court sides with the Commissioner, it could narrow the scope of Tax Court review in CDP proceedings, potentially requiring taxpayers whose liabilities are satisfied during litigation to pursue refunds in district court, even if underlying liability was the central issue in the Tax Court. Conversely, an affirmation of the Third Circuit’s decision would reinforce the Tax Court’s jurisdiction to resolve underlying liability disputes raised in CDP hearings, even after the specific levy action becomes moot due to payment.

The Justices’ questions during oral argument suggest a keen interest in the statutory language of § 6330, the intended purpose of CDP hearings, and the practical implications for taxpayers. The emphasis on whether the "determination" extends beyond the levy itself and the concerns raised about the IRS’s ability to unilaterally moot cases highlight the potential for a significant ruling that clarifies the interplay between pre-levy review and post-payment refund litigation. Tax professionals should closely monitor this case for a decision that will undoubtedly shape the landscape of tax collection disputes.

Prepared with the assistance of NotebookLM.

Commissioner v. Zuch (documents):