Zuch decision sets boundaries for Tax Court jurisdiction

Commissioner of Internal Revenue v. Jennifer Zuch, No. 24-416., 2025 BL 202534 (U.S. June 12, 2025) involves the jurisdiction of the United States Tax Court over appeals from collection due process hearings when there is no longer an ongoing levy.

Background

Jennifer Zuch and Patrick Gennardo were married from 1993 to 2014. On Sept. 12, 2012, they filed late separate income tax returns for the 2010 tax year. The couple made a $20,000 estimated tax payment to the IRS in June 2010, and in January 2011, Gennardo made a $30,000 estimated tax payment. The $50,000 was applied by the IRS to offset solely Gennardo's 2010 tax liability. On the same day the returns were filed, Gennardo filed an offer in compromise ("OIC") to settle his tax debts for tax years 2007 through 2011.

Subsequently, Zuch filed an amended income tax return for the 2010 tax year in November 2012. The return reported additional income for the 2010 tax year due to a retirement account distribution. On said amended return, Zuch applied the same $50,000 of estimated tax payments to pay her income tax due, but the IRS did not adjust her balance due or apply a credit.

In March 2013, Gennardo amended his 2010 income tax return in part to notify the IRS that the $50,000 in estimated tax payments should have been allocated to Zuch. The IRS declined to modify the allocation.

In August 2013, the IRS issued Zuch a final notice of intent to levy and notice of your right to a hearing. Zuch timely requested a collection due process (CDP) hearing. The Appeals Officer sustained the levy. Thereafter, Zuch petitioned the U.S. Tax Court.

While the matter was pending in Tax Court, and throughout the years Zuch was disputing her tax liability, the IRS was taking tax refunds Zuch was owed in subsequent tax years and applying them to Zuch's asserted tax liability. In 2019, a final tax refund of Zuch's was used to bring Zuch's 2010 asserted tax liability to $0.

Because there was no remaining tax on which to execute a levy, the IRS moved to dismiss the case. Zuch opposed the motion, but the Court dismissed the case as moot and determined there was no longer a live controversy because there was "no unpaid liability... upon which a levy could be based," and the IRS was "no longer pursuing the proposed collection action."  Zuch v. Commissioner, 97 F.4^th 81, 91 (3d Cir. 2024).

On appeal to the 3rd Circuit, the issue was "whether, in the midst of litigation over a contested tax liability, the IRS is free to deprive the Tax Court of jurisdiction by the expedient of taking the taxpayer's tax refunds and applying them to that liability."  Id. The 3rd Circuit determined it could not and held, "The IRS's arrogation to itself of the power to eliminate pre-deprivation judicial review of liability by seizing a taxpayer's money to cover a disputed debt is not supported by relevant statute, common law (incorporated into statute), or mootness principles."  Id. at 92.

The 3rd Circuit determined the Tax Court originally had jurisdiction to hear Zuch's claim, including whether the estimated payments were allocated correctly pursuant to §6330. Further, the 3rd Circuit determined Zuch's claim was not moot by analyzing the characterization of Zuch's claim as either a "Challenge to Liability" or a challenge to unpaid tax and ultimately determines Zuch's claim is a challenge to liability. The 3rd Circuit also indicated that the IRS's setoffs of the asserted tax liability with subsequent tax refunds were invalid. Furthermore, the "right of setoff (also called 'offset') allows [parties] that owe each other money to apply their mutual debts against each other, thereby avoiding 'the absurdity of making A pay B when B owes A.'"  Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 18 (1995). Further, it states, "The right to apply mutual debts to offset each other does not apply when the debts are disputed [Emphasis added]. Accordingly, a creditor cannot set off a disputed debt with an undisputed one. That is a matter of black letter law. Setoff, Black's Law Dictionary (11th ed. 2019). Id. at 96.

The 3rd Circuit vacated the Tax Court's order for dismissal and remanded for a determination of whether Zuch was entitled to a credit for any amount of the estimated tax payments at issue. The Supreme Court case followed.

The Supreme Court's decision

For the U. S. Supreme Court, the issue was simply whether the Tax Court had jurisdiction to hear Zuch's appeal once the possibility of a levy was off the table. The Supreme Court determined it did not.

The Court indicated that §6330 grants the Tax Court jurisdiction to "review" an appeals officer's "determination" in a collection due process hearing."  The Court agreed with the IRS that "determination" refers to the binary decision whether a levy may proceed. Commissioner of Internal Revenue v. Jennifer Zuch, No. 24-416., 2025 BL 202534 (U.S. June 12, 2025).

The Supreme Court indicated that the dispute about the estimated tax payments was an input into the "determination," but the ultimate determination was the appeals officer's decision upholding the IRS's decision to levy. The Court seemed to agree that the Tax Court has authority to issue injunctive relief against a levy necessarily includes the ability to make declarations about the validity of the tax obligations underlying it. "But not when there is no levy."  Id. at 6.

Once Zuch no longer owed taxes, there was no basis for a levy and thus no relevant "determination" to review. Zuch's recourse for alleged tax overpayments is to file a refund suit.

Justice Neil Gorsuch's dissent

Justice Gorsuch indicates Zuch spent more than a decade challenging her asserted tax liability. Just as the Tax Court was in a position to rule, the IRS moved to dismiss Zuch's case, but not because it admitted to making a mistake by crediting Gennardo's payment to the wrong account. Instead, the IRS unilaterally decided to apply Zuch's subsequent tax overpayments to her 2010 disputed tax debt. Because the IRS made an end-run around the Tax Court case and took Zuch's subsequent tax overpayments, it no longer needed a levy.

The dissent states, "[T]he Court's decision hands the IRS a powerful new tool to avoid accountability for its mistakes in future cases like this one." Id. at 7.

The dissent indicates that the Court upholds a view in its decision and at the IRS's urging, that the Tax Court is powerless to resolve a §6330 case once the IRS abandons a levy. However, the dissent wholly rejects the IRS's three arguments, which the Court has adopted.

The IRS's first argument is that the word "determination" in §6330(d)(1) "refers to a binary decision whether a levy may proceed," which the dissent rejects because "Congress said that the Tax Court may review the full scope of a 'determination,' including its resolution of a taxpayer's 'unpaid tax' or her 'underlying tax liability.'  §§6330(c)(2), (d)(1)." Id. at 10.

The second argument is that the Tax Court's jurisdiction must be limited to assessing levies because the only remedy it can issue is an order directing the government not to pursue a levy. The dissent rejects this by referring to §6330(e)(1), which permits the Tax Court to enjoin any action by the IRS relating to the "unpaid tax or the proposed levy."   Id.

The third argument is that Congress intended §6330 proceedings in the Tax Court to be rare and few, and for most "[c]hallenges to the assessment of a tax" to be brought in "post-payment refund suits" or "pre-payment deficiency actions" in federal district court. The dissent rejects this by stating that no one disputes that Congress afforded taxpayers a new way of disputing their tax when it adopted §6330. Id. at 11.

Finally, the dissent views the Supreme Court's indication that Zuch can pursue a remedy through a claim for refund is a "trap for the unwary."  Id. IRS claims for refund must be submitted within three years of the time the return was filed or two years from the time the tax was paid, whichever period ends later.

Here, by the time Zuch submitted a claim for refund to district court, it was too late for her to pursue a refund for some (but not all) of the years for which her refunds were kept by the IRS. The dissent contends, "So the IRS's invitation for Ms. Zuch to 'start over' really turns out to be little more than an effort to deprive her of complete relief."  Id.

The dissent concludes by saying, "The short of it all is this. The IRS seeks, and the Court endorses, a view of the law that gives that agency a roadmap for evading Tax Court review and never having to answer a taxpayer's complaint that it has made a mistake. After today, §6330 proceedings are essentially risk-free for the IRS."  Id. at 12.