Tax Court Bars Challenges to Penalties After Declined IRS Appeals Opportunity

The $41 Million Gamble: Tax Shelter Promoters Lose Penalty Challenge

The Tax Court delivered a resounding affirmation of its authority to limit liability challenges under § 6330(c)(2)(B); a provision that bars taxpayers from re-litigating tax liabilities they previously had the chance to dispute. In a decisive ruling, the court precluded petitioners from challenging $41.2 million in § 6707 penalties because they declined the IRS’s offer of an Appeals conference, a move that effectively forfeited their right to later contest the penalties in Tax Court. The decision underscores the Tax Court’s willingness to enforce procedural gatekeeping, even in high-stakes cases involving aggressive tax avoidance schemes.

The Scheme: How Haber and Diversified Marketed Tax Avoidance Strategies

Between 1999 and 2002, James Haber and his company, Diversified Group, Inc., built a lucrative business peddling tax avoidance strategies to high-net-worth clients. The core of their pitch revolved around transactions explicitly described in court filings as “designed to result in noneconomic tax losses for clients and others.” These were not garden-variety deductions; they were sophisticated financial maneuvers engineered to generate paper losses that could be used to offset unrelated income, all while carrying minimal economic risk. The IRS later classified many of these transactions as variations of the notorious “Son-of-BOSS” shelter, a designation that would carry severe penalties for promoters who failed to comply with disclosure rules.

The transactions were marketed under confidentiality agreements, a hallmark of reportable transactions under Section 6011, which requires taxpayers to disclose participation in certain tax avoidance schemes. Yet Haber and Diversified never filed the required Form 8886, nor did they register these transactions with the IRS as tax shelters under Section 6111, which mandates that promoters of reportable transactions must disclose their involvement to the IRS. This failure to register was not an oversight; it was a calculated omission. By avoiding registration, they evaded the IRS’s early detection systems, allowing the scheme to proliferate unchecked for years.

The IRS caught on in March 2002, when the agency sent Haber a letter notifying him that Diversified’s “tax shelter activities” were under investigation. The examination dragged on for over a decade, culminating in May 2013 when the IRS issued Notices of Proposed Adjustment (NOPA) proposing penalties of approximately $41.2 million under Section 6707. The penalties stemmed from the promoters’ failure to register the transactions as required by law. The IRS alleged that Haber and Diversified had organized and sold more than 190 transactions substantially similar to those described in IRS Notice 2000-44, which warned of the abusive nature of such shelters.

Throughout the examination, Haber and Diversified’s counsel adopted a defiant posture. In August 2013, they sent a letter to the IRS Examination team declaring that “IRS Appeals consideration is not a meaningful option and might arguably foreclose any judicial review.” They formally waived their right to an Appeals conference, arguing that such proceedings were “precooked” and would not provide a fair opportunity to challenge the penalties. Their strategy was clear: by refusing to engage with IRS Appeals, they sought to preserve their right to later contest the penalties in Tax Court, where they believed they could mount a more robust defense. This gamble; betting that procedural maneuvering would shield them from liability; would ultimately backfire, but at the time, it seemed like a calculated risk to avoid what they viewed as a rigged process.

The Standoff: IRS Appeals vs. Strategic Refusal

The IRS extended a clear lifeline to Haber and Diversified, offering multiple opportunities to challenge the § 6707 penalties before they were assessed. On December 16, 2013, the IRS sent modified Letter CP-215 notices to both parties, explicitly stating that they could request a post-assessment conference with IRS Appeals if they disagreed with the penalties. The letters were not generic bureaucratic notices; they were tailored to provide an unequivocal opportunity to dispute the liability under Section 6330(c)(2)(B), which allows taxpayers to challenge the underlying tax liability in a CDP hearing only if they did not previously have a meaningful opportunity to do so.

The IRS doubled down on this offer on February 11, 2014, sending another letter that reiterated the right to seek consideration by the Appeals Office. The language was unambiguous: “If you believe you have reasonable cause why this penalty should not be imposed, or if you otherwise believe you are not liable for this penalty, you may request consideration by our Appeals Office.” This was not a hollow invitation. Under Treasury Reg. § 301.6330-1(e)(3), Q&A-E2, an Appeals conference constitutes a prior opportunity to dispute the liability, meaning that declining to participate would foreclose the ability to raise the issue later in Tax Court.

Haber and Diversified, however, refused to take the bait. They argued that the Appeals conferences were “precooked” and would not provide a fair opportunity to challenge the penalties. Their strategy was clear: by refusing to engage with IRS Appeals, they sought to preserve their right to later contest the penalties in Tax Court, where they believed they could mount a more robust defense. This gamble; betting that procedural maneuvering would shield them from liability; would ultimately backfire, but at the time, it seemed like a calculated risk to avoid what they viewed as a rigged process.

The IRS, undeterred by their refusal, assessed the penalties in March 2014. The agency’s position was straightforward: the letters offered a clear opportunity to dispute the penalties, and by declining to participate, Haber and Diversified waived their right to later challenge the liability in Tax Court. The standoff had been set; the question now was whether the Tax Court would honor their strategic refusal or enforce the IRS’s procedural rules.

The CDP Hearing: A Last-Ditch Effort to Challenge Penalties

The IRS’s collection machinery had already ground forward by the time Haber and Diversified sought refuge in the Collection Due Process (CDP) hearing. In May 2014, the agency mailed Notices of Federal Tax Lien Filing and a right to a CDP hearing under § 6320, which grants taxpayers the opportunity to contest liens before they attach to property. The statute, a cornerstone of taxpayer protections, requires the IRS to verify that all legal prerequisites for lien filing have been met and to consider any relevant issues raised by the taxpayer. Haber and Diversified responded by filing Forms 12153, formally requesting the hearing, but then declined to participate in the scheduled Appeals conferences. The IRS assessed penalties in March 2014, and the agency’s position hardened: by opting out of the Appeals process, the taxpayers had forfeited their chance to litigate the penalties later.

The dispute crystallized in 2017 when the IRS issued new collection notices, including a $5.4 million “Additional Penalty” that the agency later admitted was an administrative error. Settlement Officer Eric Feinman, tasked with reviewing the CDP requests, found himself at the center of a procedural quagmire. The IRS argued that § 6330(c)(2)(B); which permits challenges to underlying tax liabilities in a CDP hearing only if the taxpayer did not receive a statutory notice of deficiency or otherwise have an opportunity to dispute the liability; barred Haber and Diversified from contesting the penalties. The IRS contended that declining an Appeals conference constituted a waiver of the right to later challenge the liability, a position rooted in Treasury Reg. § 301.6330-1(e)(3), which clarifies that an Appeals conference is an “opportunity to dispute” the liability for purposes of § 6330(c)(2)(B).

Haber and Diversified countered that their refusal to engage in the Appeals process did not equate to a waiver of their right to challenge the penalties in the CDP hearing. They argued that the IRS’s interpretation of § 6330(c)(2)(B) was overly restrictive, effectively punishing taxpayers for exercising their right to decline participation in what they viewed as an adversarial process. The IRS, however, stood firm: the CDP hearing was not a second bite at the apple, but a final opportunity to raise collection-related disputes. The stage was set for a legal showdown over the boundaries of taxpayer rights in the CDP framework.

The IRS Strikes Back: Four Key Arguments for Preclusion

The IRS’s Motion for Partial Summary Judgment landed like a tax lien on the taxpayers’ doorstep, deploying four constitutional and statutory defenses that, if accepted, would bar the penalties from ever being litigated. The government argued that the taxpayers’ penalty liabilities were already resolved; or at least conclusively barred; by their prior interactions with the IRS, leaving no room for a second bite at the apple in Tax Court. The IRS’s arguments hinged on statutory preclusion, constitutional appointments, due process limits, and constitutional proportionality, each designed to foreclose the taxpayers’ challenges before they could even begin.

First, the IRS invoked Section 6330(c)(2)(B), which limits taxpayers’ ability to challenge underlying tax liabilities in a Collection Due Process (CDP) hearing if they had a prior opportunity to dispute them. The IRS contended that the taxpayers’ receipt of IRS Appeals conference letters; even if declined; constituted a "prior opportunity to dispute" under Treasury Regulation § 301.6330-1(e)(3), Q&A-E2. The regulation explicitly states that an Appeals conference offer, whether accepted or not, counts as an opportunity to challenge the liability. The IRS relied on Lewis v. Commissioner, where the Tax Court held that a taxpayer who ignored an audit notice and later sought to challenge the liability in a CDP hearing was precluded under the same provision. The IRS argued that the taxpayers’ refusal to participate in the Appeals process did not rewrite the statute; it merely confirmed that they had already forfeited their right to litigate the penalties.

Second, the IRS defended the constitutional legitimacy of the settlement officer’s appointment under the Appointments Clause of the Constitution. The IRS asserted that the officer conducting the CDP hearing was an "inferior officer" properly appointed by the IRS Commissioner, a "Head of Department" authorized by Congress under Article II, Section 2, Clause 2. The government pointed to Lucia v. SEC, where the Supreme Court ruled that SEC administrative law judges were unconstitutionally appointed, but distinguished IRS settlement officers as falling within the IRS Commissioner’s appointment authority. The IRS argued that its internal delegation of authority complied with constitutional requirements, leaving no basis for the taxpayers’ challenge.

Third, the IRS rejected the taxpayers’ Fifth Amendment due process claim, arguing that even if they had skipped an Appeals conference, their right to a fair hearing was not violated. The government contended that the CDP hearing itself provided sufficient procedural safeguards, including the right to present evidence and challenge the penalties. The IRS cited United States v. Balanovski, where the Second Circuit held that a taxpayer’s failure to participate in an Appeals conference did not deprive them of due process, as the CDP hearing served as an adequate substitute. The IRS framed the taxpayers’ argument as a hypothetical; no actual due process violation occurred because the CDP hearing remained available, regardless of whether they engaged with Appeals earlier.

Finally, the IRS addressed the Eighth Amendment’s Excessive Fines Clause, dismissing the claim that the penalties were unconstitutionally punitive. The government argued that the penalties were remedial, not punitive, designed to compensate for lost tax revenue rather than punish wrongdoing. The IRS pointed to United States v. Bajakajian, where the Supreme Court established that a fine is excessive only if it is "grossly disproportional" to the offense. The government asserted that the penalties; though substantial; were proportional to the taxpayers’ failure to disclose reportable transactions under Section 6707, a statutory scheme intended to deter tax avoidance schemes. The IRS framed the penalties as a necessary tool to enforce compliance, not an arbitrary or disproportionate punishment.

The IRS’s arguments were not just legal defenses; they were a strategic blockade, designed to prevent the taxpayers from ever reaching the merits of their penalty challenges. By invoking preclusion, constitutional appointments, due process limits, and proportionality, the government sought to foreclose every potential avenue of attack, leaving the taxpayers with no legal path forward. The stage was set for the court to decide whether the IRS’s four-pronged defense would hold; or whether the taxpayers could slip through the cracks.

The Taxpayers Fight Back: Creative but Unavailing Arguments

With the IRS’s four-pronged defense erecting an impenetrable legal fortress, Mr. Haber and Diversified launched a counteroffensive of creative but ultimately doomed arguments, each designed to chip away at the foundation of the government’s position. Their legal defenses bordered on the frivolous, stretching statutory interpretation, constitutional doctrine, and administrative law beyond reasonable limits. Yet the court’s eventual response would reveal that even the most imaginative legal theories cannot overcome the plain text of the Internal Revenue Code; or the taxpayers’ own strategic missteps.

The petitioners’ first line of attack centered on the meaningfulness of the Appeals opportunity under I.R.C. § 6330(c)(2)(B), arguing that any conference offered by the IRS was inherently flawed due to alleged systemic bias. They claimed that IRS Appeals had sustained § 6707 penalties 100% of the time since 2014, operating under a regime of "secret law" developed in collaboration with Examination teams to guarantee unfavorable outcomes. The petitioners pointed to the Examination team’s refusal to waive Appeals rights, its refusal to seek technical guidance, and its alleged "doctoring" of correspondence as evidence of a coordinated effort to deny meaningful review. Yet the court was unconvinced. Prior precedent in Goddard had already established that a notice of proposed § 6707 penalties provides a meaningful opportunity to dispute, and the petitioners’ speculative claims about preordained outcomes failed to create a genuine dispute of fact. More damning, the petitioners had declined the opportunity entirely, leaving the court with no record to evaluate their allegations of bias. As the court noted, "We will never know how the conference would have played out because Mr. Haber and Diversified did not see the process through."

Next, the petitioners advanced semantic arguments, contending that the December 16, 2013, and February 11, 2014, letters did not offer a "conference with Appeals" as required by Treasury Reg. § 301.6330-1(e)(3), Q&A-E2. They insisted that a "conference" must be a formal, scheduled meeting with an Appeals officer, complete with submissions of information; none of which, they claimed, was provided. The court dismissed this as "bordering on frivolous." Prior decisions, including Estate of Sblendorio, had explicitly held that informal communications and telephone conferences suffice under the regulation. The petitioners’ insistence on a rigid, formalistic definition ignored both precedent and common sense. Even if a formal meeting were required, the court observed, the petitioners had no evidence that such a meeting would not have been granted had they pursued the opportunity. Their refusal to engage left them in no position to dictate the terms of the process they now sought to invalidate.

The petitioners then invoked the Chenery doctrine, arguing that the court could not consider the February 11, 2014, letter because the settlement officer did not mention it in the Notices of Determination. Under SEC v. Chenery Corp., 332 U.S. 194 (1947), courts reviewing agency action are generally limited to the reasons given by the agency. Yet the court found this argument misplaced. The Chenery doctrine applies only in deferential review contexts, and the Tax Court’s review of § 6707 penalties is conducted de novo. The petitioners’ attempt to shoehorn a deferential review standard into a de novo proceeding was a legal nonstarter. Moreover, even if Chenery applied, the February 11, 2014, letter alone provided a prior opportunity to dispute the penalties, as both parties were well aware of its existence and purpose. The petitioners’ reliance on Chenery was, at best, a creative misapplication of the doctrine.

The Administrative Procedure Act (APA) became the next battleground, with the petitioners arguing that the February 11, 2014, letters were untimely or invalid under I.R.C. § 6303 and the APA. They claimed the letters were issued in violation of the APA’s notice-and-comment requirements and were sent before the penalties were assessed, rendering them untimely. The court rejected this wholesale. The APA’s judicial review provisions apply only to "final agency action"; and the letters in question were proposed actions, not final. The petitioners cited no authority for the proposition that an untimely notice under § 6303 nullifies an otherwise valid opportunity to dispute under § 6330(c)(2)(B). To the contrary, Treasury Reg. § 301.6330-1(e)(3), Q&A-E2 explicitly provides that an opportunity to dispute includes prior opportunities offered before or after assessment. The petitioners’ APA argument was a red herring, distracting from the core issue: they had been offered a chance to contest the penalties, and they had declined it.

Constitutional challenges followed, with the petitioners invoking the Appointments Clause to argue that any hypothetical Appeals conference would have been conducted by an improperly appointed officer. They speculated that IRS Appeals officers, in the context of § 6707 penalties, were "Officers of the United States" requiring presidential appointment under U.S. Const. Art. II, § 2. The court was deeply skeptical of this claim, noting that prior decisions, including Tucker and Tooke, had already rejected similar arguments. The Appointments Clause does not apply to IRS Appeals officers, who are inferior officers appointed by the IRS Commissioner. The petitioners’ attempt to revive this argument; despite its repeated rejection; was a desperate last stand.

Finally, the petitioners seized on the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), to argue that Treasury Reg. § 301.6330-1(e)(3), Q&A-E2 was invalid post-Chevron. They claimed that the regulation’s interpretation of "opportunity to dispute" was no longer entitled to deference, and thus the court should reconsider prior cases upholding it. The court, however, was unmoved. Loper Bright explicitly preserved prior holdings that relied on Chevron, and the regulation’s interpretation of § 6330(c)(2)(B) was not merely a permissible reading but the best reading of the statute. The petitioners’ attempt to use Loper Bright as a sword to strike down settled law was creative in the extreme, but ultimately unavailing.

Each of these arguments, while inventive, suffered from the same fatal flaw: the petitioners had declined the very opportunity they now sought to invalidate. The court made this clear: "A taxpayer who declines to participate in an Appeals conference cannot later claim that he did not have an opportunity to dispute the liability." The petitioners’ legal creativity could not obscure the simple truth that they had chosen not to engage; and in tax law, as in life, opportunities once declined are opportunities lost.

The Court's Verdict: No Second Bite at the Apple

The Tax Court’s ruling in The Diversified Group Incorporated and James Haber v. Commissioner delivered a blunt rebuke to the petitioners’ attempts to relitigate their penalty liabilities, affirming the IRS’s authority to preclude challenges under § 6330(c)(2)(B). The court’s reasoning hinged on a single, decisive principle: a taxpayer who declines an Appeals conference forfeits the right to later contest the liability in a CDP hearing. This holding not only reinforced the IRS’s enforcement power but also underscored the Tax Court’s willingness to enforce statutory limits on taxpayer challenges; even when those challenges are framed as constitutional or procedural objections.

The court first addressed the core issue: whether the IRS’s offer of an Appeals conference constituted a “prior opportunity to dispute” the penalty liabilities under § 6330(c)(2)(B). Section 6330(c)(2)(B) allows taxpayers to challenge the underlying tax liability in a CDP hearing only if they did not previously have an opportunity to dispute it. The IRS had sent letters to Haber and Diversified explicitly offering a post-assessment conference with IRS Appeals to contest the § 6707 penalties. The court held that these letters clearly satisfied the statutory requirement; they were not vague or conditional, but rather unambiguous offers of a meaningful opportunity to dispute the penalties.

The petitioners’ semantic arguments; that the letters did not constitute a “meaningful” opportunity; fell flat. The court rejected this line of reasoning outright, noting that Haber and Diversified had declined the very conference they now sought to invalidate. As the court emphasized, a taxpayer cannot later claim a lack of opportunity after choosing not to engage. This principle, first articulated in Lewis v. Commissioner, 128 T.C. 48 (2007), and its progeny, was reaffirmed here with particular force. The court made clear that § 6330(c)(2)(B) is not a technicality to be circumvented by creative legal arguments; it is a bright-line rule that bars liability challenges where a prior opportunity existed, regardless of whether the taxpayer availed themselves of it.

The petitioners also argued that the IRS’s regulation interpreting § 6330(c)(2)(B); Treas. Reg. § 301.6330-1(e)(3), Q&A-E2, which explicitly states that an Appeals conference qualifies as a prior opportunity; was invalid under Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024). The court swiftly dismissed this contention, holding that the regulation was the best reading of the statute and that Loper Bright did not require a different result. The court’s deference to the regulation, even in the post-Loper Bright era, signals its continued reliance on agency interpretations where the statute is ambiguous; a stance that may surprise some observers given the Supreme Court’s recent skepticism of Chevron deference.

On the Appointments Clause issue, the court granted summary judgment in favor of the IRS, following its precedent that settlement officers conducting CDP hearings are properly appointed. The petitioners had argued that the officer lacked constitutional authority, but the court found no merit in this claim, reinforcing the IRS’s procedural defenses in collection matters.

The court’s ruling was uncompromising: because Haber and Diversified had declined the Appeals conference offered by the IRS, they were precluded from challenging their penalty liabilities in the CDP hearing or in Tax Court. This outcome was not a close call; it was a direct application of statutory text and precedent, leaving little room for future taxpayers to argue around the rule. The Tax Court’s message was clear: opportunities once declined are opportunities lost, and the IRS’s enforcement authority under § 6330(c)(2)(B) remains a formidable barrier to second-guessing penalties.

The Aftermath: What This Means for Tax Shelter Promoters and CDP Hearings

The Tax Court’s ruling in Haber v. Commissioner delivers a clear warning to tax shelter promoters: opportunities to avoid penalties are finite, and declining IRS Appeals conferences is not a viable strategy. The court’s preclusion ruling under Section 6330(c)(2)(B); which allows taxpayers to challenge underlying tax liabilities in a Collection Due Process (CDP) hearing only if they lacked a prior opportunity to dispute them; reinforces the IRS’s enforcement authority while closing a long-standing loophole exploited by promoters.

For tax shelter promoters, the decision underscores the irreversible consequences of declining IRS Appeals conferences. Section 6330(c)(2)(B) does not require actual participation in a conference; it merely requires that the taxpayer had the opportunity to engage. The court held that declining an offer of an Appeals conference; even without attending; bars later challenges to penalty liabilities. This means promoters can no longer gamble on avoiding penalties by refusing to engage with the IRS Appeals process. The IRS’s ability to impose Section 6707 penalties; which impose strict liability for failure to register reportable transactions; is now bolstered by judicial imprimatur, making these penalties far more difficult to contest.

For taxpayers navigating CDP hearings, the ruling clarifies that declining an Appeals conference is a procedural death knell for liability challenges. Treasury Regulation § 301.6330-1(e)(3), Q&A-E2 explicitly treats an Appeals conference as an "opportunity to dispute" the liability, and the Tax Court’s application of this regulation leaves little room for argument. The court’s preclusion ruling aligns with long-standing precedent, including Lewis v. Commissioner, which established that taxpayers cannot "sandbag" the IRS by withholding arguments until a CDP hearing if they had prior opportunities to raise them. This shifts the burden to taxpayers to engage early; ignoring IRS notices or Appeals offers is no longer a viable strategy.

For tax practitioners, the decision is a call to action. The court’s strict interpretation of Section 6330(c)(2)(B) means that declining an Appeals conference is effectively a waiver of future challenges, even if the taxpayer never attended the conference. Practitioners must now document all interactions with the IRS and advise clients to participate in Appeals conferences or risk losing the ability to challenge liabilities later. The IRS’s enforcement posture, combined with the Tax Court’s deference to statutory text, creates a high-stakes environment where procedural defaults are fatal.

The Tax Court also reaffirmed its judicial power in this ruling, clarifying its role in interpreting Section 6330(c)(2)(B) and limiting liability challenges. By precluding constitutional and other non-precedential arguments; such as claims under the Appointments Clause or the Excessive Fines Clause; the court demonstrated its willingness to exercise independent judgment in tax disputes, particularly in light of Loper Bright Enterprises v. Raimondo (2024), which overruled Chevron deference. This reinforces the Tax Court’s authority to define the scope of taxpayer rights in CDP hearings without deferring to IRS interpretations.

The broader implications are stark: tax shelter promoters can no longer rely on procedural maneuvers to avoid penalties, and taxpayers must engage with the IRS Appeals process or forfeit their right to challenge liabilities. The IRS’s enforcement authority under Section 6707 is now entrenched, and the Tax Court’s preclusion rule ensures that second chances are a thing of the past. For practitioners and taxpayers alike, the message is unambiguous: opportunities once declined are opportunities lost, and the IRS’s collection and penalty regimes remain a formidable barrier to tax avoidance.