125 T.C. No. 9
UNITED STATES TAX COURT
GREGORY DRAKE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20454-03L. Filed October 12, 2005.
Prior to a scheduled sec. 6330, I.R.C., hearing with P, R’s settlement officer received a memorandum from R’s insolvency unit advisor that questioned the credibility and motives of P’s counsel in a prior court proceeding. P was not provided an opportunity to participate in the ex parte communication.
Held: The memorandum constitutes a prohibited ex parte communication pursuant to Rev. Proc. 2000-43, 2000-2 C.B. 404, and therefore the instant case will be remanded to R’s Appeals Office for a new hearing.
Timothy J. Burke, for petitioner.
Louise R. Forbes, for respondent. - 2 -
OPINION
WELLS, Judge: Respondent’s Appeals Office determined that a
proposed levy should be sustained against petitioner, who timely
filed a petition for review of the determination. We review the
determination for abuse of discretion. Unless otherwise
indicated, all section references are to the Internal Revenue
Code, as amended, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are
incorporated herein by this reference.
Petitioner Gregory Drake and Barbara Drake are husband and
wife. At the time of the filing of the petition, petitioner
resided in South Yarmouth, Massachusetts.
As of August 19, 1997, respondent had filed Notices of
Federal Tax Lien against petitioner for income tax liabilities
for 1991, 1992, and 1995. On that date, Barbara Drake and
petitioner filed a joint bankruptcy petition under chapter 13 of
the Bankruptcy Code with the U.S. Bankruptcy Court for the
District of Massachusetts. In the bankruptcy proceedings,
Barbara Drake and petitioner received authority to sell three
properties which were subject to Federal tax liens. The
properties were sold free and clear of the tax liens, with a tax - 3 -
lien attaching to the sale proceeds.1 Subsequently, the
bankruptcy trustee filed a motion to dismiss the case for failure
to file a repayment plan,2 and Barbara Drake and petitioner filed
a Motion for Authority to Disburse Funds.3 The court granted the
motion to dismiss and issued an order mooting the Motion for
Authority to Disburse Funds. Upon the dismissal of the case on
June 30, 1999, the attorney representing Barbara Drake and
petitioner in the bankruptcy proceedings distributed to Barbara
Drake and petitioner sale proceeds in the amount of $151,139.74.4
Petitioner subsequently transferred, for no consideration, the
sale proceeds to his sons, Darren Drake and Gregory Drake, Jr.
On October 6, 1999, Notices of Federal Tax Lien were filed
against Barbara Drake and petitioner with respect to their 1994,
1995, and 1997 tax years.
On July 19, 2000, respondent mailed to Barbara Drake and
petitioner a Final Notice, Notice of Intent to Levy and Notice of
Your Right to a Hearing, with respect to their 1991, 1992, 1994,
1 The sale yielded proceeds of $161,250.65. 2 Pursuant to 11 U.S.C. sec. 1321 (2000), a debtor in a ch. 13 case must file a repayment plan. Pursuant to 11 U.S.C. sec. 1307, the bankruptcy court may dismiss a case for failure to file a timely repayment plan. 3 The motion provided for sale proceeds to be distributed to creditors, including respondent. 4 This amount represented the sale proceeds less legal fees and expenses. We note that Barbara Drake and petitioner were represented in the bankruptcy proceedings by Neal E. Satran, who is not involved petitioner’s sec. 6330 proceedings. - 4 -
1995, and 1997 tax years. The notice asserted an unpaid tax of
$121,478.17 and penalties and interest of $88,607.27. Pursuant
to a power of attorney, Timothy J. Burke (Mr. Burke) submitted a
timely Form 12153, Request for a Collection Due Process Hearing,
on behalf of Barbara Drake and petitioner. Subsequently, on
behalf of Barbara Drake, Mr. Burke submitted a Form 8857, Request
for Innocent Spouse Relief, with respect to each of the years in
dispute.
Settlement Officer Eugene O’Shea was assigned to conduct the
requested section 6330 hearing, and he determined from Internal
Revenue Service records that petitioner had previously filed for
bankruptcy protection. On January 30, 2002, prior to the section
6330 hearing, Settlement Officer O’Shea conferred with Advisor
Sid Gordon of the Internal Revenue Service Insolvency Unit
regarding the bankruptcy case and requested related
documentation. On the same date, Advisor Gordon faxed to
Settlement Officer O’Shea a copy of Advisor Gordon’s prior
memorandum to respondent’s counsel Louise R. Forbes (Attorney
Forbes).5 In the memorandum, dated October 5, 1999, Advisor
Gordon stated that proceeds from the prior sale of the three
properties subject to Federal tax liens had been distributed to
Barbara Drake and petitioner, that the proceeds should have been
5 Louise R. Forbes, senior attorney in respondent’s Office of Chief Counsel, represents respondent in the instant case. - 5 -
distributed to the creditors of Barbara Drake and petitioner, and
that Advisor Gordon believed that the attorney of Barbara Drake
and petitioner had “used the Court to bypass the Federal tax
Lien.” The memorandum further stated:
According to the settlement sheets the debtor received $161,094.73 from the three sales. Although the Bankruptcy Court approved the sales under 11 USC 363 the IRS received nothing. Attorney Satran had knowledge of the Internal Revenue Service Federal Tax Liens due to the considerable litigation involved in this case. In fact Attorney Satran filed a motion with the Court to disburse the funds including [sic] the IRS liens. It is a mockery to the integrity [of the] Bankruptcy Court if an Attorney can use it to defeat a Federal Tax Lien allowing a Debtor to walk away with the proceeds. The Bankruptcy Code was used because 11 USC 363 was authorized by the Court.
I informed Attorney Campobasso that Attorney Satran had previously been suspended by the Bankruptcy Court. Chief, US Bankruptcy Court Judge Carol J Keener suspended attorney Satran from 01/30/1996 through 11/29/1996. The action of Attorney Satran in a Chapter 11 case [involving] Paula Wyner, Carlton House of Brockton, Inc. was the cause of the suspension. I think the Court should be informed of the conduct of Attorney Satran in this case.
On January 30, 2002, Mr. Burke attended a meeting with
Settlement Officer O’Shea, who did not inform petitioner of his
communications with Advisor Gordon. Mr. Burke provided a copy of
Form 433-A, Collection Information Statement for Wage Earners and
Self-Employed Individuals, and Form 433-B, Collection Information
Statement for Businesses. A Form 656, Offer-in-Compromise, had
been completed but was not submitted to Settlement Officer O’Shea
for consideration. Petitioner concedes that the parties - 6 -
informally suspended consideration of any offer-in-compromise
pending a determination of Barbara Drake’s request for innocent
spouse relief, which would influence whether petitioner filed an
individual offer-in-compromise or a joint offer-in-compromise.
By letter dated February 5, 2002, respondent made a
preliminary determination denying Barbara Drake’s request for
innocent spouse relief, and she appealed the determination to
respondent’s Appeals Office. The Appeals Office assigned Appeals
Officer Jeffrey Kaplan to the case.
On September 4, 2002, petitioner submitted to respondent’s
Appeals Office an “amended” Form 656, Offer-in-Compromise,
offering to pay $5,500 in satisfaction of petitioner’s tax
liabilities for 1991, 1992, 1993, 1994, 1995, 1997, and 1999.6
In a letter to petitioner dated September 4, 2002, Settlement
Officer O’Shea acknowledged receiving the amended offer-in-
compromise but noted that consideration of the original offer-in-
compromise had been informally suspended by the parties pending
the determination of Barbara Drake’s request for innocent spouse
relief. Accordingly, Settlement Officer O’Shea informed Mr.
Burke that no original offer-in-compromise had been submitted for
consideration and returned the amended Form 656 to Mr. Burke.
Petitioner concedes that the reason for returning the Form 656
was to avoid any administrative confusion.
6 The tax years 1993 and 1999 were not within the scope of the proposed levy nor part of the initial request for a sec. 6330 hearing. - 7 -
On January 17, 2003, the section 6330 matter was transferred
from Settlement Officer O’Shea to Appeals Officer Kaplan,7 who
subsequently advised Mr. Burke that no offer-in-compromise was
presently before the Appeals Office, as no original offer-in-
compromise had been submitted for consideration and the amended
offer-in-compromise had been returned to Mr. Burke. Appeals
Officer Kaplan informed Mr. Burke that any offer-in-compromise
should be larger than the $5,500 amount of the amended offer-in-
compromise submitted on September 4, 2002. Appeals Officer
Kaplan also noted that the former residence of Barbara Drake and
petitioner was now owned by their son and that the transfer
appeared questionable.
In a conversation on June 16, 2003, Mr. Burke informed
Appeals Officer Kaplan that Darren Drake, the son of Barbara
Drake and petitioner, had foreclosed upon and bought petitioner’s
house. Appeals Officer Kaplan requested documentation related to
the foreclosure and transfer.
In a letter dated July 2, 2003, Appeals Officer Kaplan
informed Mr. Burke that he would proceed with the section 6330
determination against Barbara Drake and petitioner. The letter
made the following request, reproduced verbatim, for the
production of documents:
7 As noted above, Appeals Officer Kaplan had been assigned to Barbara Drake’s innocent spouse relief appeal. - 8 -
1. Documentation regarding what was done with the funds received by the taxpayers from the sale of property as part of their bankruptcy proceedings, along with how much was actually received.
2. Documentation of the value of the property located at 40 Keel Cape Drive, South Yarmouth, MA, prior to the foreclosure.
3. Documentation of the foreclosure.
4. Documentation regarding the amount owed on the mortgage by the taxpayers at the time of the foreclosure.
5. Documentation regarding the entity that acquired the mortgage from the prior mortgage holder prior to the foreclosure.
6. Copies of the mortgage.
7. Documentation of the acquisition of the property by Darren Drake.
8. An updated Collection Information Statement for Mr. and Mrs. Drake.
9. Completed Offer-in-Compromise Questionnaire.
10. An updated Collection Information Statement for their businesses.
Appeals Officer Kaplan informed Mr. Burke that he would make a
section 6330 determination based on information already within
his possession unless Mr. Burke submitted the requested documents
by July 30, 2003. In addition, Appeals Officer Kaplan informed
Mr. Burke that any offer-in-compromise should also be submitted.
In August of 2003, Mr. Burke provided respondent’s Appeals Office - 9 -
with numerous documents. However, Appeals Officer Kaplan
informed Mr. Burke that he had not received all of the requested
information.
On September 30, 2003, Barbara Drake filed a bankruptcy
petition under chapter 13 of the Bankruptcy Code with the U.S.
Bankruptcy Court for the District of Massachusetts. In October
of 2003, Mr. Burke advised Appeals Officer Kaplan that Barbara
Drake had filed a bankruptcy petition under chapter 13 of the
Bankruptcy Code, that the automatic stay of 11 U.S.C. sec. 362
applied to petitioner as well as Barbara Drake, and that 11
U.S.C. sec. 1301 precluded any collection action against either
Barbara Drake or petitioner. On October 27, 2003, Appeals
Officer Kaplan requested legal advice from Attorney Forbes
concerning the preclusion of any collection action against
petitioner. Attorney Forbes advised that 11 U.S.C. sec. 1301 did
not preclude the collection action against petitioner.8
8 11 U.S.C. sec. 1301(a) (2000) provides:
Sec. 1301 Stay of action against codebtor
(a) Except as provided in subsections (b) and (c) of this section, after the order for relief under this chapter, a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor, or that secured such debt, unless--
(1) such individual became liable on or secured such debt in the ordinary course of such individual’s business; or (continued...) - 10 -
Consequently, on October 27, 2003, Appeals Officer Kaplan advised
Mr. Burke that the collection action could and would proceed
against petitioner. In addition, Appeals Officer Kaplan advised
Mr. Burke that information previously requested had not been
received by the Appeals Office and that the Appeals Office would
close the case and issue a determination based on information
already in its possession unless Mr. Burke submitted the
information immediately. Appeals Officer Kaplan did not receive
the requested information and closed the case file on October 29,
2003. Subsequently, respondent sent petitioner a notice of
determination (notice of determination), determining that all
statutory administrative and procedural requirements had been met
and that available information did not establish that an offer-
in-compromise was a viable collection alternative. On January
29, 2004, the Appeals Office issued to Barbara Drake a Final
Notice of Determination Concerning Your Request for Relief from
Joint and Several Liability under I.R.C. sec. 6015, denying the
requested relief. This Court dismissed Barbara Drake’s
8 (...continued) (2) the case is closed, dismissed, or converted to a case under chapter 7 or 11 of this title.
Respondent contends that tax debt is not considered consumer debt for purposes of 11 U.S.C. sec. 1301(a). In re Stovall, 209 Bankr. 849 (Bankr. E.D. Va. 1997); In re Dye, 190 Bankr. 566 (Bankr. N.D. Ill. 1995). Consequently, respondent contends that the stay of 11 U.S.C. sec. 1301(a) did not preclude the collection action against petitioner. In the instant case, petitioner does not dispute respondent’s contention that the stay did not preclude collection against petitioner. - 11 -
subsequent petition for innocent spouse relief. See Drake v.
Commissioner, 123 T.C. 320 (2004). Petitioner timely petitioned
this Court for judicial review of the notice of determination.9
Discussion
Section 6330(a) provides that no levy may be made on any
property or right to property of a person unless the Secretary
first notifies the person in writing of the right to a hearing
before the IRS Office of Appeals (Appeals Office).10 Section
6330(c)(1) provides that the Appeals officer must verify at the
hearing that applicable laws and administrative procedures have
been followed.11 Sec. 6330(c)(1). At the hearing, the person
9 On Dec. 1, 2003, petitioner filed a timely Petition for Levy Action Under Section 6330. Petitioner submitted an amended petition on Jan. 18, 2005. 10 SEC. 6330 NOTICE AND OPPORTUNITY FOR HEARING BEFORE LEVY.
(a) Requirement of Notice Before Levy.--
(1) In general.--No levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made. * * *
* * * * * * *
(b) Right to Fair Hearing.--
(1) In general.--If the person requests a hearing * * *, such hearing shall be held by the Internal Revenue Service Office of Appeals. 11 Sec. 6330(c)(1) provides:
Requirement of investigation.--The appeals officer shall at (continued...) - 12 -
may raise any relevant issue relating to the unpaid tax or the
proposed levy, including appropriate spousal defenses, challenges
to the appropriateness of collection actions, and collection
alternatives. Sec. 6330(c)(2)(A). The person may challenge the
existence or amount of the underlying tax liability, however,
only if the person did not receive any statutory notice of
deficiency for such tax liability or did not otherwise have an
opportunity to dispute such tax liability. Sec. 6330(c)(2)(B).12
In the instant case, petitioner does not contest the underlying
tax liability, and, consequently, we review the Appeals officer’s
determination for abuse of discretion. See Goza v. Commissioner,
114 T.C. 176, 181-182 (2000); Sego v. Commissioner, 114 T.C. 604,
610 (2000).
Petitioner contends, inter alia, that Settlement Officer
O’Shea and Appeals Officer Kaplan did not conduct the
administrative review in good faith, as evidenced by the ex
parte communication between Settlement Officer O’Shea and Advisor
11 (...continued) the hearing obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met. 12 Sec. 6330(c)(2)(B) provides:
(B) Underlying liability.--The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability. - 13 -
Gordon on January 30, 2002. As discussed above, on that date,
Advisor Gordon faxed to Settlement Officer O’Shea a copy of a
prior memorandum from Advisor Gordon to Attorney Forbes, dated
October 5, 1999, which discussed the distribution of proceeds
from the sale of petitioner’s three properties subject to Federal
tax liens upon dismissal of petitioner’s bankruptcy case.
Respondent contends that the ex parte communication between
Settlement Officer O’Shea and Advisor Gordon was inconsequential
because Settlement Officer O’Shea received no factual information
not already known to petitioner. Additionally, respondent
contends that petitioner was provided with the opportunity to
discuss the distribution of sale proceeds, as demonstrated by the
letter from Appeals Officer Kaplan to Mr. Burke dated July 2,
2003.
The Internal Revenue Service Restructuring and Reform Act of
1998, Pub. L. 105-206, sec. 1001(a), 112 Stat. 689, directed the
Commissioner of Internal Revenue to develop a plan to prohibit ex
parte communications between Appeals officers and other employees
of the Internal Revenue Service that appear to compromise the
independence of the Appeals officers:
The Commissioner of the Internal Revenue shall develop and implement a plan to reorganize the Internal Revenue Service. The plan shall * * * (4) ensure an independent appeals function within the Internal Revenue Service, including the prohibition in the plan of ex parte communications between appeals officers and other Internal Revenue Service employees to the extent that such communications appear to compromise the - 14 -
independence of the appeals officers.
To fulfill that congressional mandate to ensure an
independent Appeals Office, respondent issued Rev. Proc. 2000-43,
2000-2 C.B. 404, which is effective for communications between
employees of the Appeals Office and other Internal Revenue
Service employees taking place after October 23, 2000. See
Harrell v. Commissioner, T.C. Memo. 2003-271. Rev. Proc. 2000-
43, sec. 3, Q&A-1, 2000-2 C.B. at 405, provides the following
general description of the prohibition on ex parte
communications:
For the purposes of this revenue procedure, ex parte communications are communications that take place between Appeals and another Service function without the participation of the taxpayer or the taxpayer’s representative (taxpayer/representative). While the legislation refers to “appeals officers,” the overall intent of the ex parte provision is to ensure the independence of the entire Appeals organization. Ex parte communications between any Appeals employee, e.g., Appeals Officers, Appeals Team Case Leaders, Appeals Tax Computation Specialists, and employees of other Internal Revenue Service offices are prohibited to the extent that such communications appear to compromise the independence of Appeals.
Rev. Proc. 2000-43, 2000-2 C.B. 404, provides that an
Appeals officer may not engage in ex parte discussions of the
strengths and weaknesses of the issues of a case that would
appear to compromise the Appeals officer’s independence and must
give the taxpayer an opportunity to participate in any
discussions concerning matters that are not ministerial,
administrative, or procedural in nature. Rev. Proc. 2000-43, - 15 -
sec. 3, Q&A-6, 2000-2 C.B. at 406. The revenue procedure
specifically prohibits ex parte discussions of the “originating
function’s perception of the demeanor or credibility of the
taxpayer or the taxpayer’s representative” during the course of
the preliminary review of a newly assigned case.13 Rev. Proc.
2000-43, sec. 3, Q&A-5, 2000-2 C.B. at 405-406.
In the instant case, the memorandum faxed by Advisor Gordon
to Settlement Officer O’Shea on January 30, 2002, runs afoul of
Rev. Proc. 2000-43, sec. 3, Q&A-5, 2000-2 C.B. at 405-406. The
memorandum was not ministerial, administrative, or procedural in
nature. By questioning the credibility and motives of
petitioner’s counsel in the bankruptcy proceedings, the
memorandum may have had the effect of damaging petitioner’s
credibility in the administrative proceedings before Settlement
Officer O’Shea, who neither informed petitioner of the
communications with Advisor Gordon nor provided petitioner with
the opportunity to participate in the ex parte communication.
13 Rev. Proc. 2000-43, sec. 3, Q&A-5, 2000-2 C.B. 404, 405- 406, expressly applies to communications with the “originating function”. The IRS Insolvency Unit does not appear to be an originating function for purposes of the revenue procedure. See Rev. Proc. 2000-43, sec. 3, Q&A-20, 2000-2 C.B. at 408. However, Rev. Proc. 2000-43, sec. 3, Q&A-6, 2000-2 C.B. at 406, provides that the ex parte communications prohibition also applies to Appeals consideration of cases that originated in the Collection function. Such cases that originate in the Collection function include collection due process appeals. Id. Consequently, the ex parte communications prohibition applies to the instant collection due process appeal. - 16 -
Rev. Proc. 2000-43, Q&A-21, 2000-2 C.B. at 408, defines the
phrase “opportunity to participate” as follows:
It means that the taxpayer/representative will be given a reasonable opportunity to attend a meeting or be a participant in a conference call between Appeals and the originating function when the strengths and weaknesses of issues or positions in the taxpayer’s case are discussed. The taxpayer/representative will be notified of a scheduled meeting or conference call and invited to participate. * * *
Because petitioner was not given an opportunity to participate in
a meeting or conference call with Advisor Gordon, we conclude
that petitioner did not have an opportunity to participate in the
ex parte communication for purposes of Rev. Proc. 2000-43, supra.
Based on the foregoing, we conclude that the communication
between Advisor Gordon and Settlement Officer O’Shea constituted
a prohibited ex parte communication that may have damaged
petitioner’s credibility before Settlement Officer O’Shea and
Appeals Officer Kaplan.14 Consequently, we hold that Appeals
Officer Kaplan abused his discretion and shall remand the instant
case to respondent’s Appeals Office for a new section 6330
hearing with an independent Appeals officer who has received no
communication relating to the credibility of petitioner or
14 The record reveals that the memorandum from Advisor Gordon to Attorney Forbes became a part of respondent’s administrative file and was ultimately reviewed by Appeals Officer Kaplan. The record further reveals that Appeals Officer Kaplan did not provide petitioner with a copy of the memorandum. - 17 -
petitioner’s representative.15
To reflect the foregoing,
An appropriate order will
be issued.
15 Petitioner also contends that the ex parte communication between Appeals Officer Kaplan and Attorney Forbes on Oct. 27, 2003, demonstrates that Appeals Officer Kaplan did not conduct the administrative review in good faith. In light of our holding above, we need not decide whether the communication between Appeals Officer Kaplan and Attorney Forbes constitutes a prohibited ex parte communication for purposes of Rev. Proc. 2000-43, supra. We note, however, that Attorney Forbes was the recipient of the original memorandum from Advisor Gordon which questioned the credibility of petitioner’s counsel in the bankruptcy proceeding.
In addition to petitioner’s contentions with respect to the ex parte communications, petitioner contends that petitioner’s Fifth Amendment right to due process was violated by the absence of “recognizable” procedures to be followed in the sec. 6330 hearing; that petitioner did not receive a sec. 6330 hearing before an impartial officer; that the proposed collection alternative was “viable”; that Appeals Officer Kaplan’s request that petitioner submit financial documentation without investigating prior statements demonstrates his bias; and that respondent did not balance the need for the efficient collection of taxes with the legitimate concern that the collection be no more intrusive than necessary. Because we remand the instant case to respondent’s Appeals Office for a new hearing, we need not consider the aforementioned contentions.