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
 3

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.
 4

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.
 5

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
 6

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
 7

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.
 8

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
 9

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
 10

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).
 12

& 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
 13

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.
 14

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.