Opinion
12128-19L
01-07-2022
Carol K. Vaughn & Charles M. Vaughn, Jr., Petitioners v. Commissioner of Internal Revenue, Respondent
ORDER AND DECISION
Elizabeth A. Copeland Judge
This is a collection due process (CDP) case filed by petitioners, Carol K. Vaughn and Charles M. Vaughn, Jr. (the Vaughns), pursuant to section 6330(d)(1). Pending before the Court are respondent's Motion for Summary Judgment and Declaration of Donna J. Connolly in Support of Motion for Summary Judgment, both filed on January 16, 2020. In opposition to respondent's motion, the Vaughns filed on April 11, 2021, a Notice of Objection to Respondent's Motion for Summary Judgment and three Affidavits in Support of Notice of Objection to Respondent's Motion for Summary Judgment. The issue before the Court is whether the Internal Revenue Service Office of Appeals (Appeals Office), through the actions of Settlement Officer Donna Connolly (SO or SO Connolly), abused its discretion in sustaining an enforcement action of collection by levy.
All section references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. All dollar amounts are rounded to the nearest dollar.
On July 1, 2019, the Office of Appeals was renamed as the Internal Revenue Service Independent Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, sec. 1001(a), 133 Stat. at 983 (2019). As the events in this case predate that change, we use the name in effect at the times relevant to this case, i.e., the Office of Appeals.
Respondent has moved for summary judgment under Rule 121, contending that there is no genuine dispute as to any material fact and that the Appeals Office did not abuse its discretion in sustaining the enforcement action set forth in a Notice CP90, Intent to seize your assets and notice of your right to a hearing, dated July 9, 2018 (notice of intent to levy). Respondent asserts that this case is ripe for summary adjudication. The Vaughns object.
Background
The following background is derived from the pleadings, the parties' motion papers, and the supporting exhibits attached thereto. We note that the background is stated solely for purposes of ruling on the pending motion for summary judgment and is not a finding of facts. The Vaughns resided in Connecticut when their petition was timely filed.
Mr. Vaughn maintained an individual retirement account (IRA) with Pershing, LLC (Pershing), the custodian of his IRA. The IRA held limited partnership interests in Harbor Drive Fund, LP (Harbor Fund). At some point not established by the record, Pershing decided that it could no longer continue being the custodian of the Harbor Fund investment because it no longer met Pershing's eligibility criteria. Therefore, Pershing contacted Harbor Drive Asset Management, LLC (Harbor Management), which was likely the general partner of Harbor Fund, and the firm that introduced the Harbor Fund investment to Pershing, CRT Capital Group, LLC (CRT), and requested that they provide information to show that the Harbor Fund investment met Pershing's eligibility criteria. Pershing did so prior to making any distribution of the Harbor Fund limited partnership interests. Neither Harbor Management nor CRT responded to Pershing's request.
Thus, on May 28, 2014, Pershing resigned as the custodian of the Harbor Fund investment and processed an in-kind distribution of the Harbor Fund investment to Mr. Vaughn (May 2014 Distribution). The distribution caused Pershing to issue a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to Mr. Vaughn reporting the May 2014 Distribution to the Internal Revenue Service (IRS).
For tax year 2014, the Vaughns sought and received an extension of time to file their tax return, extending their deadline from April 15, 2015, to October 15, 2015. They timely filed a joint income tax return on October 12, 2015. On that return, they did not report the May 2014 Distribution.
The discrepancy between their return for tax year 2014 and the information return documents the IRS received for that year led respondent's automated underreporter unit to issue a Notice CP2000, Changes to your 2014 Form 1040, to the Vaughns. The notice proposed adjusting the Vaughns' 2014 return to reflect several items of unreported income, including a $653,800 adjustment for the May 2014 Distribution. On February 6, 2017, the IRS issued the Vaughns a Notice of Deficiency. The Vaughns did not petition the Tax Court to contest the Notice of Deficiency and the IRS assessed the following amounts on June 26, 2017: (1) an income tax deficiency of $65,380; (2) a section 6662(a) accuracy-related penalty of $13,076; and (3) interest in the amount of $5,635.
Respondent conceded the section 6662(a) accuracy-related penalty in his Motion for Summary Judgment.
Approximately one year later, on July 9, 2018, the IRS mailed a notice of intent to levy to the Vaughns. Utilizing Form 12153, Request for a Collection Due Process or Equivalent Hearing, the Vaughns timely requested a CDP hearing on August 8, 2018. In their request, the Vaughns indicated that they were challenging both a lien and a proposed levy and requested a CDP hearing or an equivalent hearing to the extent that a CDP hearing was not available. With respect to collection alternatives, they checked the boxes labeled "Offer in Compromise" and "I Cannot Pay Balance." With respect to "Lien," they checked the box labeled "Withdrawal," but they left blank the space provided on the form's directive "Please explain." The Vaughns also challenged their tax liability for tax year 2014.
An equivalent hearing is an administrative hearing in the Appeals Office that may be requested by those who fail to timely request a CDP hearing. Secs. 301.6330-1(i)(1), 301.6320-1(i)(1), Proced. & Admin. Regs. Although similar to a CDP hearing, an equivalent hearing does not result in a determination subject to judicial review. See Craig v. Commissioner, 119 T.C. 252, 258-259 (2002); sec. 301.6330-1(i)(2), Q&A-I6, Proced. & Admin. Regs.
The Appeals Office sent the Vaughns a letter dated February 15, 2019, notifying them that: (1) their case had been assigned to SO Connolly; (2) a telephonic CDP hearing had been scheduled for March 12, 2019; (3) a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, needed to be submitted; (4) copies of their income tax returns for tax years 2016 and 2017 also needed to be submitted; and (5) proof of payment of estimated taxes for the year to date needed to be submitted.
As of the date of the letter, the Vaughns had yet to file their income tax returns for tax years 2016 and 2017.
The Vaughns did not submit the requested information, nor did they call-in for their CDP hearing on March 12, 2019. On April 17, 2019, the Vaughns spoke via telephone with the SO and informed the SO that they did not file tax returns for tax years 2016 and 2017 because they believed the Form 1099-R filed by Pershing for tax year 2014 was erroneously filed, and they had been trying to correct the issue since then. The SO told the Vaughns that they would still need to file their returns for tax years 2016 and 2017 and gave them three weeks to comply. By June 5, 2019, the SO had not received copies of the requested returns nor any financial information, so she issued a notice of determination sustaining the levy proposed in the July 9, 2018, notice of intent to levy. It should be noted that the Vaughns did file their 2016 and 2017 returns at some point, but the record is unclear as to when. Copies of the filed returns were never provided to the SO nor was she informed of their filing.
On June 28, 2019, the Vaughns timely filed a petition in this Court seeking review of the SO's determination. The motion for summary judgment currently before us followed in due course.
Discussion
I. Summary Judgment
Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). Generally, we may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(b); see also Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we view the factual materials and inferences drawn from them in the light most favorable to the nonmoving party, the Vaughns in this case. See Sundstrand Corp. v. Commissioner, 98 T.C. at 520 (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)). However, a nonmoving party may not rest upon the mere allegations or denials in its pleadings but must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
After reviewing respondent's summary judgment motion, the Vaughns' response, and all of the documents submitted in support of these filings, we find that this case is ripe for summary adjudication and that, for the reasons detailed below, respondent is entitled to judgment as a matter of law with respect to the levy action at issue here.
II. Jurisdiction and Standard of Review
A. Jurisdiction
On their Form 12153, the Vaughns indicated that one of the bases for their CDP hearing request was to challenge a "Filed Notice of Federal Tax Lien" and they requested a lien withdrawal. The SO noted that no tax lien had been filed and the Vaughns request for a CDP hearing concerning a lien was premature. Our review of the record confirms that fact; respondent had not executed any lien filings as to the Vaughns for tax year 2014.
Section 6320(a) requires respondent to furnish a taxpayer with written notification of the filing of a notice of lien no later than five business days after filing such notice. Section 6320(b) provides that a taxpayer may request a CDP hearing with respect to such filing and that the hearing is to be conducted consistent with the procedures set forth in section 6330. Generally, if respondent issues both a notice of Federal tax lien filing and a notice of intent to levy, then a taxpayer may request a combined lien/levy CDP hearing pursuant to both sections 6320(b) and 6330(b). If respondent has issued only one of the two notices, then the taxpayer may only request a CDP hearing for the particular notice issued to the taxpayer, under either section 6320(b) for liens or section 6330(b) for levies. Consequently, our jurisdiction to review the SO's determination depends on what statute applies. Section 6320(c), by way of cross-reference to section 6330(d), gives us jurisdiction to review a notice of determination concerning a tax lien filing; section 6330(d) gives us jurisdiction to review a notice of determination concerning a notice of intent to levy; and in the case where both a lien and levy are at issue, sections 6320(c) and 6330(d) conjoin to give us jurisdiction to review both collection methods.
Here, respondent did not file a lien; thus, for tax year 2014 there is no notice of determination concerning a tax lien for the Court to review. Additionally, because there is no lien there can be no lien withdrawal. If respondent issues a notice of Federal tax lien filing for tax year 2014 in the future, the Vaughns will have an opportunity to request a CDP hearing with respect to that filing and to petition this Court for review of the SO's determination with respect to the same. See secs. 6320(b), (c), 6330(d)(1); see also sec. 301.6320-1(b)(1), (f)(1), Proced. & Admin. Regs. In this instance, the operative statute that allowed the Vaughns to request a CDP hearing and petition this Court is section 6330. Accordingly, we will review only the SO's determination as related to the notice of intent to levy as there is no lien filing to be withdrawn. See secs. 6320(c), 6330(d)(1).
B. Standard of Review
Our standard of review in CDP cases depends on whether the validity of the underlying tax liability is properly at issue. A taxpayer who did not receive a statutory notice of deficiency or did not have a prior opportunity to contest their tax liability may contest such liability at the CDP hearing. Sec. 6330(c)(2)(B). In that instance, we review the SO's determination de novo. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). Otherwise, we review the SO's determination for abuse of discretion. Id.
The Vaughns dispute the validity of their underlying tax liability. The record contains a copy of the Vaughns' Notice of Deficiency and United States Postal Service Form 3877, Firm Mailing Book for Accountable Mail, showing that the Notice of Deficiency was mailed via certified mail to the same address the Vaughns used in their CDP hearing request and in their petition to this Court, which was the Vaughns' last known mailing address. Such mailing is in compliance with the requirements of section 6212. In fact, in their Notice of Objection to Respondent's Motion for Summary Judgment, the Vaughns admit that they "chose not to waste time and resources challenging respondent's claim of a 2014 tax liability." Because the Vaughns had a prior opportunity to dispute their underlying tax liability, they could not raise it as an issue at the CDP hearing and, therefore, we lack jurisdiction to consider it here. Consequently, we will review the SO's determination for abuse of discretion.
Respondent has conceded the section 6662(a) accuracy-related penalty; thus, our review here will not address the conceded penalty.
III. Abuse of Discretion
In reviewing for abuse of discretion, we must uphold the SO's determination unless it is arbitrary, capricious, or without sound basis in fact or law. See, e.g., Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006); Taylor v. Commissioner, T.C. Memo. 2009-27, 97 T.C.M. (CCH) 1109, 1116 (2009). In making our determination we consider whether the SO: (1) properly verified that the requirements of any applicable law or administrative procedure were met; (2) evaluated any relevant issues raised by the Vaughns; and (3) determined whether "any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the * * * [the Vaughns] that any collection action be no more intrusive than necessary." See sec. 6330(c)(3); Ludlam v. Commissioner, T.C. Memo. 2019-21, at *9-*10, aff'd per curiam, 810 Fed.Appx. 845 (11th Cir. 2020).
SO Connolly's Notice of Determination erroneously states that the Vaughns did not challenge their underlying tax liability even though they clearly did so on their Form 12153. However, the Vaughns are precluded from challenging their underlying tax liability here. Thus, this error is harmless as it does not affect our decision in this case. See Perkins v. Commissioner, 129 T.C. 58, 70-71 (2007); Watchman v. Commissioner, T.C. Memo. 2012-113, 2012 WL 1409276, at *5 ("Error is harmless when it causes no prejudice or does not affect the ultimate determination in the case."). A harmless error does not give rise to an abuse of discretion. See id.
A. Verification
Before issuance of a notice of determination, an SO is required to verify that all requirements of applicable law and administrative procedure have been met. Sec. 6330(c)(1), (3)(A). We have the authority to review satisfaction of this requirement regardless of whether the taxpayer raised a verification issue at the CDP hearing. See Hoyle v. Commissioner, 131 T.C. 197, 200-203 (2008), supplemented by 136 T.C. 463 (2011). Here, SO Connolly reviewed the Vaughns' file and IRS records and confirmed that their 2014 liability had been properly assessed. She confirmed that she had no prior involvement with the Vaughns "in either Appeals or any other IRS function for the types of taxes and tax years associated with * * * [the Vaughns'] CDP case." The Vaughns did not challenge SO Connolly's satisfaction of this requirement. Our review of the record confirms that SO Connolly satisfied the verification requirement.
B. Issues Raised
An SO is required to consider any relevant issue raised by a taxpayer during a hearing. Sec. 6330(c)(2)(A), (3)(B). On their Form 12153, the Vaughns checked the boxes marked "Offer in Compromise" and "I Cannot Pay Balance." In response to the Vaughns' request, the SO sent the Vaughns a letter dated February 15, 2019, requesting that, within 14 days, they complete and submit a Form 433-A, provide signed tax returns for 2016 and 2017, and provide proof that estimated tax payments had been made for the year to date. The Vaughns did not comply with any of these requests.
If a taxpayer requests a collection alternative, as the Vaughns did here, the taxpayer is "expected to provide all relevant information requested by Appeals, including financial statements, for its consideration of the facts and issues involved in the hearing." Sec. 301.6330-1(e)(1), Proced. & Admin. Regs. An SO may not consider a collection alternative unless the taxpayer has provided adequate financial information, such as a current Form 433-A with relevant financial documents attached. See Rev. Proc. 2003-71, sec. 4.03, 2003-2 C.B. 517, 518. In general, it is not an abuse of discretion for the SO to deny a collection alternative if the taxpayer did not provide financial information during the CDP hearing. Radeke v. Commissioner, T.C. Memo. 2012-319, at *10 (citing Olsen v. United States, 414 F.3d 144 (1st Cir. 2005)). The Vaughns failed to submit a Form 433-A, the unfiled returns, and proof that they were current on payment of estimated taxes. Thus, it was not an abuse of discretion for the SO to deny the Vaughns' request for collection alternatives because without the requested information, the SO was unable to ascertain the Vaughns' financial circumstances. See id. (citing Yoel v. Commissioner, T.C. Memo. 2012-222, at *8). It was also not an abuse of discretion for the SO to deny the Vaughns' request for collection alternatives because they were not in compliance with their tax filing obligations. See Chadwick v. Commissioner, 154 T.C. 84, 95 (2020).
A financial statement is not required where a taxpayer requests an offer-in-compromise based on doubt as to liability, as the Vaughns did here. See sec. 301.7122-1(d)(1), Proced. & Admin. Regs. However, in instances where a taxpayer had a prior opportunity to dispute their underlying tax liability, the taxpayer cannot make an offer-in-compromise based on doubt as to liability because that would be a challenge to the underlying tax liability precluded by section 6330(c)(2)(B). Baltic v. Commissioner, 129 T.C. 178, 183 (2007); Yesse v. Commissioner, T.C. Memo. 2008-157, 95 T.C.M. (CCH) 1615, 1617 (2008). Thus, in the Vaughns' case, they had to provide information as to their financial circumstances in order to be considered for an offer-in-compromise. See sec. 301.7122-1(b)(2), (3), (c)(2), (3), Proced. & Admin. Regs. They did not provide such financial information.
Most collection alternatives, such as an offer-in-compromise or an installment agreement request, require taxpayers to be in compliance with tax return filing requirements, which the Vaughns were not having failed to file their 2016 and 2017 income tax returns prior to the issuance of the notice of determination. See Internal Revenue Manual pts. 5.14.1.4.2(1), (4)-(5) (Jul. 16, 2018) (installment agreements), 5.8.2.4.1(4) (Sept. 22, 2020) (offers-in-compromise). We note that despite not being in compliance at the time of the CDP hearing, the Vaughns later compliance allows them to submit to the IRS at any time, for consideration and possible acceptance, a collection alternative in the form of an offer-in-compromise or an installment agreement, supported by the necessary financial information.
C. Balancing
The Vaughns did not allege in their petition or argue at any later point that SO Connolly failed to consider "whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of * * * [the Vaughns] that any collection action be no more intrusive than necessary." Sec. 6330(c)(3)(C). They have thus conceded this issue. See Rules 121(d), 331(b)(4) ("Any issue not raised in the assignments of error shall be deemed to be conceded."). In any event, our review of the record reveals nothing to disturb SO Connolly's conclusion that the proposed levy action balanced the need for efficient tax collection with any legitimate concerns of the Vaughns about intrusiveness.
IV. The Vaughns' Objection
The Vaughns asks us to determine the validity of their 2014 underlying tax liability and order respondent to refund their withheld tax overpayments for tax years 2016 and 2017. We are sympathetic to the Vaughns' situation, but we cannot do what the Vaughns asks us to do. We are not a court of equity, and we cannot ignore the law to achieve what may be an equitable end. Commissioner v. McCoy, 484 U.S. 3, 7 (1987); Stovall v. Commissioner, 101 T.C. 140, 149-150 (1993); Paxman v. Commissioner, 50 T.C. 567, 576-577 (1968), aff'd, 414 F.2d 265 (10th Cir. 1969).
The appropriate course of action would have been to challenge the 2014 tax liability by filing a petition with this Court within 90 days of receiving the February 6, 2017, Notice of Deficiency. See sec. 6213(a). Unfortunately, the time limit for filing such a petition has long passed. However, the Vaughns are not without recourse. They may pay the tax, file Form 843, Claim for Refund and Request for Abatement, and, if that claim is denied or six months has passed without any determination from the IRS, file a refund suit in the appropriate U.S. District Court or the U.S. Court of Federal Claims. See secs. 6532(a), 7422; Cohen v. United States, 297 F.2d 760, 772 (9th Cir. 1962) (noting that a taxpayer's failure to file a petition within 90 days of a notice of deficiency's mailing did not foreclose a potential refund suit); Budlong v. Commissioner, 58 T.C. 850, 854 n.2 (1972) (same). Additionally, as described above, the Vaughns can request a collection alternative at any time.
V. Conclusion
We have reviewed the record and do not find any indication that SO Connolly abused her discretion. Thus, respondent is entitled to a decision as a matter of law with respect to the levy action at issue here.
To reflect the foregoing, it is
ORDERED that respondent's Motion for Summary Judgment, filed on January 16, 2020, is granted. It is further
ORDERED AND DECIDED that respondent may proceed by levy with the collection of the Vaughns' Federal income tax liability for tax year 2014 (not including the $13,076 section 6662(a) accuracy-related penalty conceded by respondent), as set forth in the Notice of Determination dated June 5, 2019.