133 T.C. No. 10
UNITED STATES TAX COURT
ANTHONY G. MICHAEL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21341-07L. Filed October 8, 2009.
R assessed return preparer penalties of $35,000 under sec. 6694(b), I.R.C., against P in June 1995 for taxable years 1989, 1990, and 1991. P paid $5,250, the equivalent of 15 percent of the assessed sec. 6694, I.R.C., penalties, and R credited $1,000 toward 1989, $4,250 toward 1990, and nothing toward 1991. P filed a refund claim with the IRS, which was denied, and then commenced a suit for refund.
In August 1997 the parties to the refund suit reached a settlement agreement in which P agreed to pay $15,500 in satisfaction of his liabilities, minus the $5,250 payments already made plus interest under the settlement. P’s agreed liability for 1989 was $250. P did not pay the amount due under the settlement agreement. In April 2005 R issued a notice of intent to levy based on the assessment. P requested and received a CDP hearing in which the settlement officer determined that P was entitled to a reduction in accordance with the settlement agreement. - 2 -
On Aug. 22, 2007, R issued a notice of determination upholding the levy for taxable years 1989, 1990, and 1991.
R has filed a motion for summary judgment. P alternatively argues: (1) This Court lacks jurisdiction to sustain the levy; (2) R failed to make a valid assessment; (3) R failed to issue a notice and demand for payment for the settlement amount; and (4) a genuine issue of material fact exists.
Held: R’s determination to sustain the levy for 1989 was an abuse of discretion because the facts show that petitioner has overpaid his tax liability for that year according to the terms of the settlement agreement.
Held, further, R did not abuse his discretion with respect to the levy for the taxable years 1990 and 1991 and is entitled to summary judgment for the taxable years 1990 and 1991 as a matter of law because a levy is a permissible means for R to collect the amount in the settlement agreement.
David A. Salim, for petitioner.
A. Gary Begun, for respondent.
OPINION
GOEKE, Judge: This matter is before the Court on
respondent’s motion for summary judgment pursuant to Rule 121.1
The issue we must decide is whether respondent abused his
discretion in sustaining a levy to collect tax preparer penalties
under section 6694 for 1989, 1990, and 1991. Petitioner opposes
respondent’s motion for summary judgment and argues that the
1 Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code. - 3 -
Court should grant summary judgment in his favor. For the
reasons set forth below, we shall grant summary judgment in
petitioner’s favor for the taxable year 1989 and grant
respondent’s motion for summary judgment for the taxable years
1990 and 1991.
Background
At the time the petition was filed, petitioner resided in
Michigan.
In June 1995 respondent assessed tax preparer penalties
under section 6694(b) against petitioner of $1,000 per return for
recklessly or intentionally disregarding rules and regulations
with respect to 35 returns as follows:
Returns Penalty Year at Issue Sec. 6694
1989 1 $1,000 1990 25 25,000 1991 9 9,000 Total 35 35,000
Respondent assessed the penalties with statutory interest and
issued to petitioner statutory notices of assessment and demand
for payment. See sec. 6303(a). Petitioner paid $5,250 or 15
percent of the assessed section 6694 penalties, which he was
required to pay to file a refund claim. See sec. 6694(c)(1).
The Internal Revenue Service (IRS) credited $1,000 toward 1989
and $4,250 toward 1990. The IRS did not credit any portion of
petitioner’s payment toward 1991. The IRS’s crediting of - 4 -
petitioner’s $5,250 payment did not reflect his intended
allocation to the years at issue as reflected on Form 6118, Claim
of Income Tax Return Preparers. Petitioner filed a refund claim
for each year at issue, which respondent denied.
Petitioner commenced a refund suit in the District Court for
the Eastern District of Michigan alleging that he was not liable
for the section 6694(b) penalty for any of the years at issue.
The United States filed a counterclaim to collect the unpaid
balance of the section 6694(b) penalty assessments. In August
1997 the parties reached a settlement in which petitioner agreed
to pay the section 6694(b) penalty for a portion of the 35
returns and to pay a section 6694(a) penalty of $250 per return
for the remainder of the 35 returns for an understatement of tax
liability due to a position that does not have a realistic
possibility of being sustained on the merits. In total,
petitioner agreed to pay $15,500 in section 6694 penalties minus
any payments already made plus interest (the settlement
agreement) allocated as follows:
No. Returns No. Returns Subject to Subject to Penalties Year Sec. 6694(a) Sec. 6694(b) Sec. 6694(a) Sec. 6694(b)
1989 1 0 $250 -0- 1990 19 6 4,750 $6,000 1991 6 3 1,500 3,000 - 5 -
The parties read the terms of the settlement into the court
record at the final pretrial conference. The District Court
dismissed the complaint with prejudice. The District Court’s
dismissal order stated that “either party may reopen the matter
within sixty (60) days of the date of this order to enforce the
settlement agreement.” Petitioner did not pay the amount due
under the settlement agreement, and the Government did not seek
to reopen the case within the 60-day enforcement period.
On April 13, 2005, respondent issued a notice of intent to
levy for the years at issue to petitioner for amounts based on
the original assessments. The levy notice did not reflect the
terms of the settlement agreement. On May 5, 2005, respondent
received petitioner’s request for a collection due process
hearing (CDP hearing). At the CDP hearing petitioner argued that
the assessments are invalid because the District Court dismissed
the Government’s counterclaim in the refund suit with prejudice,
the parties did not enter a decision document in the refund suit,
and respondent failed to issue to petitioner a notice and demand
for payment that was based on the terms of the settlement
agreement. Petitioner did not propose any collection
alternatives during the CDP hearing.
Following the CDP hearing, the settlement officer determined
that petitioner is entitled to a reduction in the amounts
assessed against him in accordance with the terms of the - 6 -
settlement agreement. The settlement officer incorrectly
allocated the $15,500 settlement agreement to the years at issue
as follows:
Year Returns Penalty
1989 4 $1,000 1990 28 11,500 1991 3 3,000 Total 35 15,500
The settlement officer requested an adjustment to the assessments
against petitioner for 1990 and 1991 to reflect the settlement
agreement. The record establishes that petitioner’s payment
credited to 1989 exceeds his agreed-upon 1989 penalty. On August
22, 2007, respondent issued a notice of determination for the
taxable years 1989, 1990, and 1991 that granted relief from the
levy in part and sustained the levy in part.
Discussion
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Fla. Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). The Court may grant
summary judgment where there is no genuine issue of material fact
and a decision may be rendered as a matter of law. Rule 121(a)
and (b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520
(1992), affd. 17 F.3d 965 (7th Cir. 1994). The moving party
bears the burden of proving that there is no genuine issue of
material fact and the Court will view any factual inferences in a
light most favorable to the nonmoving party. Dahlstrom v. - 7 -
Commissioner, 85 T.C. 812, 821 (1985). Under Rule 121(d), where
the moving party properly makes and supports a motion for summary
judgment “an adverse party may not rest upon the mere allegations
or denials of such party’s pleading” but must set forth specific
facts, by affidavits or otherwise “showing that there is a
genuine issue for trial.”
Respondent has conceded that petitioner is not liable for
the amount of the original assessments in excess of the amount in
the settlement agreement. Petitioner challenges respondent’s
authority to collect the settlement amount by levy. Petitioner
is not entitled to challenge the merits of his liability for the
section 6694 penalties because he had an opportunity to dispute
his liability in the refund suit. See sec. 6330(c)(2)(B); Farley
v. Commissioner, T.C. Memo. 2004-168. Where the underlying tax
liability is not properly at issue, the Court reviews the
administrative determination regarding the collection action for
abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 610
(2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000). The
abuse of discretion standard requires the Court to decide whether
the Appeals officer’s determination was arbitrary, capricious, or
without sound basis in fact or law. Mailman v. Commissioner, 91
T.C. 1079, 1084 (1988). - 8 -
Upon issuance of a notice of levy, a taxpayer is entitled to
an administrative hearing before an impartial officer or employee
of the Appeals Office. Sec. 6330(b). At the hearing a taxpayer
may raise any relevant issue regarding the collection action,
including possible collection alternatives. Sec. 6330(c)(2)(A).
Following a CDP hearing, the Appeals officer must determine
whether to proceed with the collection action, after verification
that the requirements of applicable law and administrative
procedure have been met, considering any relevant issues the
taxpayer raised and whether the collection action balances the
need for the efficient collection of taxes with the legitimate
concern of the taxpayer that any collection action be no more
intrusive than necessary. Sec. 6330(c)(3). The settlement
officer assigned to petitioner’s case determined that all
requirements of applicable law and administrative procedure were
met, including that respondent made the assessments pursuant to
section 6201 and mailed a notice and demand for payment to
petitioner at his last known address within 60 days of the
assessments pursuant to section 6303.
Petitioner argues that respondent abused his discretion in
sustaining the levy for the years at issue. Petitioner argues:
(1) The Court lacks jurisdiction to sustain the levy; (2)
respondent failed to make a valid assessment against petitioner;
(3) respondent failed to issue a notice and demand for payment - 9 -
for the settlement amount; and (4) a genuine issue of material
fact exists because respondent failed to provide the settlement
agreement in support of his summary judgment motion.
I. Jurisdiction Argument
Petitioner argues that the Court lacks jurisdiction to
sustain respondent’s levy action because the District Court
dismissed the Government’s counterclaim for collection with
prejudice and this Court lacks jurisdiction to enforce the terms
of the settlement agreement, citing Kokkonen v. Guardian Life
Ins. Co. of Am., 511 U.S. 375 (1994). In Kokkonen, the Supreme
Court held that when a Federal District Court dismisses a case
with prejudice upon the basis of a settlement agreement in a
nontax case, the parties must bring an action for enforcement of
the settlement in State court rather than resorting to the
District Court for enforcement where the District Court did not
retain jurisdiction to enforce the settlement. Id. at 382. The
District Court in petitioner’s refund action limited the parties’
right to seek enforcement through the District Court to 60 days.
Section 6330(d) grants this Court exclusive jurisdiction to
review appeals from all section 6330 determinations made after
October 16, 2006, irrespective of the type of tax making up the
underlying tax liability. Sec. 6330(d)(1); Pension Protection
Act of 2006, Pub. L. 109-280, sec. 855, 120 Stat. 1019; see
Ginsberg v. Commissioner, 130 T.C. 88, 92 (2008). In a levy - 10 -
action under section 6330, the Court’s jurisdiction depends on
the issuance of a notice of determination and the taxpayer’s
timely filing of a petition. See Sarrell v. Commissioner, 117
T.C. 122, 125 (2001); Moorhous v. Commissioner, 116 T.C. 263, 269
(2001). The Government’s counterclaim in the refund suit does
not preclude the Court’s having jurisdiction to review section
6330 determinations. The statutory collection remedies available
to the Commissioner are separate from the Government’s right to
counterclaim for unpaid taxes in a refund action. Except as may
be required by the application of estoppel principles, the
District Court’s dismissal of the refund action with prejudice on
the basis of the settlement agreement does not render the
administrative statutory collection remedies unavailable. See
secs. 6321, 6331. Nor does the District Court’s retention of
jurisdiction for the 60-day enforcement period eliminate
respondent’s right to statutorily created collection remedies
such as a levy. Sec. 6331(a). Accordingly, we hold that the
Court has jurisdiction to review respondent’s determination to
sustain the levy and to determine whether respondent may collect
the unpaid section 6694 penalties by levy.
II. Validity of Assessment Argument
Respondent’s levy notice was based on the original
assessments. Petitioner argues that the levy is not based on a
valid assessment. According to petitioner, the settlement - 11 -
agreement invalidated the original assessments, and respondent
did not make a new assessment to reflect the terms of the
settlement agreement. Petitioner does not argue that the levy
notice was otherwise invalid.
Deficiency procedures do not apply to section 6694
penalties. Sec. 6696(b). The assessments at issue were valid
when made. Petitioner does not argue that the original
assessments were arbitrary or without sound basis in fact.
Petitioner’s argument is unconvincing. An assessment is not
invalid because the liability is afterwards reduced by
settlement. Section 6404(a)(1) authorizes the Secretary to abate
the unpaid portion of the assessment of any tax to the extent the
assessment may be excessive.
The reference in section 6404(a) to abating a portion of an
assessment implies that abatement is not an all-or-nothing
proposition. If a penalty under section 6694(a) or (b)
concerning a return or claim for refund has been assessed against
a preparer, and if it is established at any time in a final
administrative determination or a final judicial decision that
only a portion of the assessment is valid, then the excess
assessment must be abated. If an amount of the abated assessed
penalty was paid, that amount must be refunded, as if the payment - 12 -
were an overpayment of tax, without consideration of any period
of limitations. Sec. 1.6694-1(d), Income Tax Regs.
Section 301.6325-1(a), Proced. & Admin. Regs., provides that
a lien shall be released when the entire liability has been
satisfied and the lien has become legally unenforceable. Section
6325 does not apply because petitioner’s liability has not been
fully satisfied.
An incorrect assessment is not void. When a court is faced
with an incorrect but otherwise valid assessment, the proper
course is not to void the assessment but to determine what, if
anything, the taxpayer owes the Government. See Helvering v.
Taylor, 293 U.S. 507 (1935). As long as the assessment had any
foundation, the assessment would not be void. See Burns v.
United States, 974 F.2d 1064, 1066 (9th Cir. 1992); United States
v. Schroeder, 900 F.2d 1144, 1148-1149 (7th Cir. 1990).
Respondent was not required to issue a second or
supplemental assessment based on the terms of the settlement
agreement. See sec. 6204 (granting the Commissioner authority to
issue supplemental assessments); sec. 6404 (granting the
Commissioner authority to abate an assessment); sec. 1.6694-1(d),
Income Tax Regs. (requiring abatement of the assessment of a
section 6694 penalty where it is established that there was no
understatement of tax liability). The statutory requirement that - 13 -
the Commissioner abate the excessive amount of the assessment
clearly implies that the valid portion of the assessment will
stand. Accordingly, we hold that the assessments are valid and
provide a basis for the levy action.
III. Notice and Demand Argument
Petitioner argues that the IRS failed to provide notice and
demand for payment of petitioner’s agreed-upon tax liability
pursuant to the settlement agreement. Section 6331 authorizes
the IRS to collect unpaid assessments by levy where the taxpayer
fails to pay any tax liability within 10 days after notice and
demand for payment. The failure to provide the statutory notice
and demand may bar administrative collection actions such as a
levy. United States v. Berman, 825 F.2d 1053, 1060 (6th Cir.
1987); see also United States v. Chila, 871 F.2d 1015, 1019 (11th
Cir. 1989). Section 6303 requires the Secretary to give notice
and to demand payment within 60 days of assessment by leaving the
notice and demand at the taxpayer’s dwelling or usual place of
business or mailing it to the taxpayer’s last known address. See
sec. 1.6694-4(a)(2), Income Tax Regs. (requiring notice and
demand upon the assessment of section 6694 penalties); sec.
1.6696-1(a)(1), Income Tax Regs. Failure to provide notice and
demand within the 60-day period does not invalidate an otherwise
valid assessment. Sec. 301.6303-1(a), Proced. & Admin. Regs. - 14 -
Respondent issued to petitioner the notice and demand for
payment based on the original assessment as required by section
6303(a) on June 9, 1995. There is no requirement for respondent
to issue a second notice and demand for payment based on the
terms of the settlement agreement. See sec. 7122 (relating to
compromises of tax liability). Petitioner was not prejudiced by
not receiving a second notice and demand for payment because he
had an opportunity to contest the assessments on the merits.
Petitioner entered into the settlement agreement with full
knowledge that his liability was reduced to $15,500. Because
respondent satisfied the assessment and notice and demand
requirements, we reject petitioner’s argument that section 6331
forbids respondent to collect the unpaid section 6694 penalties
by levy.
IV. Failure To Provide Settlement Agreement Argument
Petitioner argues that the Court should deny respondent’s
summary judgment motion because respondent failed to provide a
transcript of the settlement agreement, creating a genuine issue
of material fact for trial. In support of the motion for summary
judgment, respondent presented the District Court’s transcript of
the pretrial conference where the parties entered the terms of
the settlement on the record. We find this evidence sufficient
to establish the terms of the settlement agreement. Petitioner
has not set forth specific facts with respect to the terms of the - 15 -
settlement agreement that show a genuine issue of material fact
exists for trial. Bare allegations will not avoid summary
judgment. Rauenhorst v. Commissioner, 119 T.C. 157, 176 (2002).
In addition, petitioner’s allegations that respondent failed to
provide his entire administrative file in response to his request
under the Freedom of Information Act does not necessitate a
denial of respondent’s summary judgment motion since petitioner
has not set forth specific facts that create a genuine issue of
material fact for trial.2
We hold that respondent’s determination to sustain the levy
for 1989 was an abuse of discretion because the facts show that
on the basis of the terms of the settlement agreement, petitioner
has overpaid his tax liability for that year. Accordingly, we
shall deny respondent’s motion for summary judgment for the
2 The petition raised the statute of limitations as a defense. However, petitioner did not raise the statute of limitations in his response to respondent’s summary judgment motion. The Commissioner may collect an unpaid tax liability by levy within 10 years after the assessment. Sec. 6502(a)(1). A CDP request suspends the running of the period of limitations for collection while the hearing and any appeals thereof are pending. Sec. 6330(e)(1); see also sec. 6694(c)(3). Respondent assessed the sec. 6694 penalties on June 9, 1995. Respondent received petitioner’s request for a CDP hearing on May 5, 2005, suspending the 10-year limitations period as of that date. Accordingly, the statute of limitations does not bar respondent from collecting petitioner’s tax liability. Petitioner’s filing of the refund action in District Court would also suspend the running of the period of limitations. See sec. 6694(c)(1), (3). - 16 -
taxable year 1989 and grant summary judgment in petitioner’s
favor for the taxable year 1989.
We find that respondent did not abuse his discretion with
respect to the levy for the taxable years 1990 and 1991. We hold
that there is no dispute of material fact with respect to the
taxable years 1990 and 1991, and respondent is entitled to
summary judgment for the taxable years 1990 and 1991 as a matter
of law.3
To reflect the foregoing,
An appropriate order and
decision will be entered.
3 In petitioner’s response to respondent’s motion for summary judgment, petitioner contends that the Court should grant costs and attorney’s fees to petitioner. We shall deny this request.