T.C. Summary Opinion 2020-11
UNITED STATES TAX COURT
FRIDAY O. JAMES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12911-15S L. Filed February 27, 2020.
Friday O. James, pro se.
Kirsten E. Brimer, for respondent.
SUMMARY OPINION
GUY, Special Trial Judge: This collection review case involving a Federal
tax lien was heard pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect when the petition was filed.1 Pursuant to section 7463(b),
1 All section references are to the Internal Revenue Code of 1986, as (continued...) -2-
the decision to be entered is not reviewable by any other court, and this opinion
shall not be treated as precedent for any other case.
This matter is before the Court on respondent’s motion for entry of default
judgment, as supplemented, filed pursuant to Rule 123(a). There was no
appearance by or on behalf of petitioner when this case was called for trial. As
discussed in detail below, the Court will grant respondent’s motion and enter a
decision sustaining the collection action.
Background
I. Petitioner’s Tax Return Preparation Activities
In 2000 Friday O. James immigrated to the United States from Liberia. He
initially worked as a mathematics teacher and later as a tax return preparer for
H&R Block and Liberty Tax Service.
Petitioner eventually started his own tax return preparation business,
operating under the name Frika Tax Services, where he and several employees
prepared and electronically filed Federal income tax returns on behalf of numerous
clients.
1 (...continued) amended, in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. -3-
In 2008 and 2009 (years in issue) petitioner prepared and signed
approximately 2,000 Federal income tax returns and amended tax returns. The
Internal Revenue Service (IRS) conducted audits and determined that
(1) approximately 150 of the tax returns included an erroneous claim for the first-
time homebuyer credit (FTH credit) and (2) many of the tax returns included
erroneous claims for deductions on Schedule A, Itemized Deductions, and
Schedule C, Profit or Loss From Business.
II. IRS Civil and Criminal Investigations
In September 2009 the IRS opened a civil investigation focused on
petitioner’s potential liability for civil penalties related to his work as a tax return
preparer. In September 2010 Revenue Agent Julie Hersh (RA Hersh) sent a letter
and a detailed information document request to petitioner informing him that the
IRS was investigating his potential liability for various penalties.
In the meantime, in early 2010 the IRS opened a criminal investigation and
interviewed several of petitioner’s clients. Some of those clients informed the IRS
that petitioner had ignored or altered tax information that they had provided to him
and improperly claimed the FTH credit and various deductions. -4-
III. Civil Injunction
In February 2011 the United States filed a civil action seeking to enjoin
petitioner from preparing or filing Federal income tax returns for other taxpayers.
On April 12, 2011, the U.S. District Court for the Eastern District of Pennsylvania
issued a detailed memorandum and an accompanying order granting the
Government’s request for a preliminary injunction enjoining petitioner from
preparing or filing Federal income tax returns for other taxpayers claiming the
FTH credit and deductions for Schedule A expenses and Schedule C expenses. In
the memorandum the District Court found that petitioner engaged in “conduct that
is subject to penalty under 26 U.S.C. [sec.] 6701.” On June 2, 2011, the District
Court entered a stipulated permanent injunction barring petitioner from “acting as
tax return preparer” and “engaging in conduct that substantially interferes with the
administration or enforcement of the internal revenue laws.”
IV. Criminal Conviction and Incarceration
In March 2012 petitioner was indicted and charged with willfully aiding or
assisting in the preparation of fraudulent or false Federal income tax returns under
section 7206(2). On October 30, 2013, following a jury trial, petitioner was found
guilty of 14 and 12 violations of section 7206(2) for the taxable years 2008 and -5-
2009, respectively. On January 2, 2014, petitioner began serving a term of 36
months in prison.
Petitioner filed an appeal challenging his criminal conviction. On October
20, 2015, the U.S. Court of Appeals for the Third Circuit affirmed petitioner’s
conviction and his sentence.
After completing his term of incarceration, petitioner was immediately taken
into custody by Immigration and Customs Enforcement personnel and was held in
detention pending deportation proceedings. In July 2018 petitioner was deported
to Liberia.
V. Assessment of Civil Penalties
On December 12, 2013, after the conclusion of petitioner’s criminal trial,
RA Hersh prepared, and her immediate supervisor signed, a Form 8278,
Assessment and Abatement of Miscellaneous Civil Penalties, authorizing the
assessment of penalties under section 6701. On March 14, 2014, RA Hersh sent a
letter to petitioner notifying him that the IRS had determined that he was liable for
section 6701 penalties for the years in issue and informing him that he could
provide a written rebuttal by April 11, 2014. On March 24, 2014, petitioner sent a
rebuttal letter to RA Hersh challenging the penalties in relevant part on the ground -6-
that the “Eastern District of Pennsylvania already considered the matter, and
concluded that [the] fine is zero and restitution not applicable.”
On July 28, 2014, respondent entered assessments against petitioner and
sent notices of penalty charge to him requesting that he pay section 6701 penalties
of $14,000 and $12,000 for the taxable years 2008 and 2009, respectively.
Petitioner failed to remit payment.2
VI. Collection Due Process Proceedings
On January 6, 2015, respondent sent a notice of Federal tax lien filing to
petitioner in respect of the unpaid penalties for the years in issue. On January 12,
2015, petitioner mailed a Form 12153, Request for a Collection Due Process or
Equivalent Hearing, to the IRS Office of Appeals (Appeals Office) requesting that
the lien be withdrawn. Petitioner attached to Form 12153 a copy of the response
that he had filed in opposition to respondent’s motion to dismiss for lack of
jurisdiction filed at docket No. 19956-14S, which in turn referred to his letter to
2 In August 2014 petitioner filed a petition with the Court at docket No. 19956-14S attempting to challenge the notices of penalty charge on the grounds that his criminal convictions were not final and sec. 6701 penalties are limited to $1,000 per taxable year. The Court granted respondent’s motion to dismiss that action because no notice of deficiency or notice of determination had been issued to petitioner that would permit him to invoke the Court’s jurisdiction. -7-
RA Hersh dated March 24, 2014 (summarized above). Petitioner did not propose
an alternative to the collection action or suggest that the lien was overly intrusive.
The Appeals Office informed petitioner that his administrative hearing
would take place by telephone on March 12, 2015. Petitioner was incarcerated at
the time and he did not call the Appeals Office as directed, nor did he submit any
other documents in support of his challenge to the lien.
On April 17, 2015, the Appeals Office issued a Notice of Determination
Concerning Collection Action(s) under Section 6320 and/or 6330 to petitioner
sustaining the lien filing. On May 18, 2015, petitioner filed a timely petition for
review with the Court.3
As previously mentioned, no appearance was entered by or on petitioner’s
behalf when this case was called for trial. Petitioner has not provided the Court
with his current address. Although the Court has mailed orders and notices to
petitioner at multiple addresses, he has not replied to respondent’s motion for
default judgment or otherwise made an effort to prosecute this case.
3 Although the notice of determination included a determination relating to petitioner’s unpaid Federal income tax for 2010, 2011, and 2012, petitioner subsequently paid those tax liabilities, and they are not at issue in this case. -8-
Discussion
Rule 123(a) allows the Court to enter a default judgment against a party
who “has failed to plead or otherwise proceed as provided by these Rules or as
required by the Court”. Rule 123(b) gives the Court even broader discretion to
dismiss a case “[f]or failure of a petitioner properly to prosecute or to comply with
these Rules or any order of the Court or for other cause which the Court deems
sufficient”. We have construed Rule 123 liberally to permit default or dismissal
consistent with our sound discretion and the interests of justice, see Stringer v.
Commissioner, 84 T.C. 693, 706 (1985), aff’d without published opinion, 789
F.2d 917 (4th Cir. 1986), and have invoked the Rule where a taxpayer fails to
appear at trial, see Ritchie v. Commissioner, 72 T.C. 126 (1979).
I. Collection Due Process
Section 6321 provides that if any person liable to pay any tax neglects or
refuses to pay the same after demand, the unpaid amount, including any interest,
addition to tax, or assessable penalty, shall be a lien in favor of the United States.
Although section 6322 provides that the lien imposed by section 6321 generally
arises when the tax is assessed, section 6323(a) explains that the lien imposed by
section 6321 is not valid as against certain of the taxpayer’s creditors until a notice
of lien is filed in accordance with section 6323(f). Section 6320(a) provides that -9-
the Commissioner shall notify a taxpayer in writing when a notice of lien is filed
under section 6323 and inform the taxpayer of the right to request an
administrative hearing with the Appeals Office. See sec. 6330(b).
If a taxpayer makes a timely request for an administrative hearing, the
hearing will be held before an impartial officer or employee of the Appeals Office.
Sec. 6330(b). When conducting administrative hearings in collection matters, the
Appeals Office must verify that the requirements of any applicable law or
administrative procedure have been met in processing the case. Sec. 6330(c)(1),
(3)(A). The Appeals Office also must consider any issues raised by the person
relating to the unpaid tax or proposed levy, including offers of collection
alternatives, appropriate spousal defenses, and challenges to the appropriateness of
the collection action. Sec. 6330(c)(2)(A), (3)(B). A person may challenge the
existence or amount of the underlying tax liability if the person did not receive a
notice of deficiency or did not otherwise have an opportunity to dispute such tax
liability. Sec. 6330(c)(2)(B). Finally, the Appeals Office must consider whether
the collection action balances the need for efficient collection against the person’s
concern that collection be no more intrusive than necessary. Sec. 6330(c)(3)(C).
The Court has jurisdiction under section 6330(d) to review the
Commissioner’s administrative determinations in lien and levy actions. Where the - 10 -
underlying tax liability is properly at issue, the Court will review the matter on a
de novo basis. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). Where the
underlying liability is not properly at issue, the Court will review the
administrative determination for abuse of discretion. Id. at 182. An abuse of
discretion occurs if the Appeals Office exercises its discretion “arbitrarily,
capriciously, or without sound basis in fact or law.” Woodral v. Commissioner,
112 T.C. 19, 23 (1999).
Section 6671(a) provides in relevant part that assessable penalties, including
section 6701 penalties, shall be assessed and collected in the same manner as
taxes. Inasmuch as section 6701 penalties are not subject to deficiency
procedures, see sec. 6703(b), petitioner was entitled to challenge his liability for
those penalties before the Appeals Office, see Kestin v. Commissioner, 153 T.C.
14, 23-24 (2019) (discussing penalties assessed pursuant to section 6702). With
regard to section 6701 penalties, the Commissioner has the burden of production
pursuant to section 7491(c) and normally bears the burden of proof under section
6703(a).
As a preliminary matter, however, a taxpayer must properly present an
underlying liability challenge at the Appeals Office administrative hearing in order
to preserve that challenge for judicial review. See Thompson v. Commissioner, - 11 -
140 T.C. 173, 178 (2013) (“A taxpayer is precluded from disputing the underlying
liability if it was not properly raised in the CDP hearing.”); Giamelli v.
Commissioner, 129 T.C. 107, 115 (2007) (“We hold today that we do not have
authority to consider section 6330(c)(2) issues that were not raised before the
Appeals Office.”); sec. 301.6330-1(f)(2), Q&A-F3, Proced. & Admin. Regs. (“An
issue is not properly raised if the taxpayer fails to request consideration of the
issue by Appeals, or if consideration is requested but the taxpayer fails to present
to Appeals any evidence with respect to that issue after being given a reasonable
opportunity to present such evidence.”).
A. Challenges to Underlying Liability
Giving petitioner the benefit of the doubt, his request for an Appeals Office
administrative hearing raised at best two challenges to his liability for the section
6701 penalties in issue.4 Specifically, he asserted that the assessments were
4 Sec. 6701(a) provides in relevant part as follows:
(a) Imposition of Penalty.--Any person--
(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document,
(2) who knows (or has reason to believe) that such portion will be used in connection with any material matter (continued...) - 12 -
improper because (1) he had filed an appeal challenging his criminal convictions
under section 7206(2) and (2) the penalty prescribed in section 6701 is limited to a
single penalty of $1,000 per taxable year.
4 (...continued) arising under the internal revenue laws, and
(3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person,
shall pay a penalty with respect to each such document in the amount determined under subsection (b).
(b) Amount of Penalty.--
(1) In general.--Except as provided in paragraph (2), the amount of the penalty imposed by subsection (a) shall be $1,000.
(2) Corporations.--If the return, affidavit, claim, or other document relates to the tax liability of a corporation, the amount of the penalty imposed by subsection (a) shall be $10,000.
(3) Only 1 penalty per person per period.--If any person is subject to a penalty under subsection (a) with respect to any document relating to any taxpayer for any taxable period (or where there is no taxable period, any taxable event), such person shall not be subject to a penalty under subsection (a) with respect to any other document relating to such taxpayer for such taxable period (or event). - 13 -
Petitioner’s argument that the IRS erred in assessing civil penalties under
section 6701 while the appeal in his criminal case was pending is misplaced.
Although the IRS took note of petitioner’s criminal convictions in support of its
determination to assess the section 6701 penalties, the latter assessments were not
directly dependent upon a finding that petitioner was criminally culpable under
section 7206(2). Stated differently, civil penalties under section 6701 and criminal
penalties under section 7206(2) are separate and distinct penalties. Although they
share some common elements, one can be established wholly independent of the
other. See, e.g., Kapp v. Commissioner, T.C. Memo. 2019-84, at *100-*101.
Petitioner’s argument that section 6701 penalties are limited to a single
penalty of $1,000 per year is likewise incorrect. Section 6701 provides for the
assessment of a penalty on any person who aids and abets another person in
understating his or her tax liability. In short, and as is relevant here, a tax return
preparer who is liable for a penalty under section 6701(a) may be assessed $1,000
for each document that would result in an understatement of a client’s tax liability,
subject to the limitation that only one penalty may be imposed on a tax return
preparer for an individual client for a particular taxable year. In this case the
cumulative assessments that respondent entered against petitioner for the years in
issue comply with the provisions of section 6701(a) and (b). - 14 -
B. Verification
As mentioned above, the Appeals Office must verify that the requirements
of any applicable law or administrative procedure were met in processing the
taxpayer’s case. Sec. 6330(c)(1). We review this verification requirement for
abuse of discretion, see Gardner v. Commissioner, 145 T.C. 161, 183 (2015),
aff’d, 704 F. App’x 720 (9th Cir. 2017), and do so without regard to whether the
taxpayer raised it at the Appeals Office hearing, see Hoyle v. Commissioner, 131
T.C. 197, 202-203 (2008), supplemented by 136 T.C. 463 (2011).
Under sections 7491(c) and 6751(b), respondent bears the burden of
producing evidence to show that before the section 6701 penalties were assessed
they were “personally approved (in writing) by the immediate supervisor of the
individual making such determination”. See Graev v. Commissioner, 149 T.C.
485, 492-493 (2017), supplementing and overruling in part 147 T.C. 460 (2016).5
The Court has held that section 6751(b) requires written approval of the initial
penalty determination before the date when the taxpayer is first sent written
notification of the penalties proposed. Clay v. Commissioner, 152 T.C. 223, 249
5 Respondent does not contend that sec. 6701 penalties fall within either of the statutory exceptions to the supervisory approval requirement under sec. 6751(b)(2). - 15 -
(2019); see also Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in
part, rev’g in part T.C. Memo. 2015-42.
The record shows that RA Hersh first notified petitioner in September 2010
that the IRS was investigating his potential liability for various civil penalties.
This tentative notification did not indicate that the IRS was proposing to impose a
specific penalty. See Belair Woods, LLC v. Commissioner, 154 T.C. ___, ___
(slip op. at 14-15) (Jan. 6, 2020) (holding that tentative proposed adjustments do
not constitute an “initial determination” within the meaning of section 6751(b)(1)).
In December 2013 RA Hersh prepared, and her immediate supervisor
signed, a Form 8278 authorizing the assessment of section 6701 penalties totaling
$26,000 against petitioner. Thereafter, in March 2014 RA Hersh sent a letter to
petitioner notifying him that the IRS had determined that he was liable for section
6701 penalties for the years in issue and informing him that he could provide a
written rebuttal by April 11, 2014. Although petitioner sent a rebuttal letter to RA
Hersh challenging the penalties in question, the IRS subsequently entered
assessments and sent notices to him requesting that he pay section 6701 penalties
of $14,000 and $12,000 for the taxable years 2008 and 2009, respectively.
In the light of the steps outlined above, respondent satisfied the
requirements of section 6751(b). RA Hersh’s immediate supervisor authorized the - 16 -
assessment of the penalties in dispute before petitioner was first informed that the
penalties would be imposed against him and before those penalties were actually
assessed. See Blackburn v. Commissioner, 150 T.C. 218, 223 (2018) (holding that
the existence of a penalty approval form in the record was sufficient to establish
the settlement officer’s verification of assessments when the administrative record
reflects compliance with administrative procedures); see also Kapp v.
Commissioner, at *94-*96.
II. Conclusion
Petitioner failed to appear at the trial of this case, file a response to
respondent’s motion for default judgment, or inform the Court of his current
address. Other than the misplaced challenges to the civil penalties underlying the
lien action (discussed above), petitioner did not raise any issue regarding the
collection action or propose an alternative such as an offer-in-compromise or an
installment agreement. The Appeals Office did not abuse its discretion in this case
and properly verified that the requirements of any applicable law or administrative
procedure were met in processing petitioner’s case. Consequently, the Court will
grant respondent’s motion for default judgment, as supplemented, and enter a
decision sustaining the notice of determination upon which this case is based. - 17 -
To reflect the foregoing,
An appropriate order and decision
will be entered.