124 T.C. No. 6
UNITED STATES TAX COURT
JUANITA AND EMMANUEL KENDRICKS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3430-03L. Filed March 9, 2005.
At the conclusion of a collection due process hearing (hearing), R’s Appeals Office (Appeals) determined to proceed by levy to collect unpaid assessments of tax. Ps ask us to review that determination. Among other errors, Ps claim that Appeals erred in not allowing them to raise at the hearing the tax liabilities underlying the unpaid assessments because they had not had the opportunity to dispute those liabilities in a bankruptcy proceeding instituted by them.
1. Held: The bankruptcy proceeding instituted by petitioners afforded them the opportunity to dispute the underlying liabilities within the meaning of sec. 6330(c)(2)(B), I.R.C., and, as a result, Ps were precluded from raising those liabilities during the hearing.
2. Held, further, because Ps neither raised collection alternatives during the hearing nor properly made an offer in compromise, Appeals did not err in - 2 -
determining to proceed by levy to collect the unpaid assessments of tax.
Neal Weinberg, for petitioners.
Brianna Basaraba Taylor, for respondent.
OPINION
HALPERN, Judge: This case is before the Court to review
determinations made by respondent’s Appeals Office (Appeals) that
respondent may proceed to collect by levy amounts assessed but
unpaid with respect to petitioner Juanita Kendricks’s 1982
through 1984 taxable (calendar) years and petitioners Juanita and
Emmanuel Kendricks’ 1985 taxable (calendar) year (collectively,
the unpaid assessments).1 We review the determinations pursuant
to section 6330(d)(1).2 Petitioners (individually, Mr. or Mrs.
Kendricks) assign error to the determinations on the grounds that
(1) they did not receive notices of deficiency for the years in
issue in time to file a petition in the Tax Court, and,
therefore, Appeals should not have denied them the opportunity to
1 For 1982 through 1984, Mrs. Kendricks made separate returns of income; for 1985 petitioners made a joint return of income. Mr. Kendricks’s 1982 through 1984 taxable years are not before us. 2 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. - 3 -
dispute the underlying tax liabilities for those years; (2)
Appeals abused its discretion in determining that collection by
levy was the most appropriate course of action when petitioners
wished to submit collection alternatives and an offer in
compromise was pending; and (3) Appeals would not, in connection
with petitioners’ claims, consider the claims of two nominee
corporations (nominees of Mrs. Kendricks), Foxy Investments,
Inc., and J & K Trucking Co., Inc. (the nominee corporations).
By order dated March 17, 2004, we, in effect, disposed of
petitioners’ third ground, by granting respondent’s motion to
dismiss for lack of jurisdiction (and to obtain certain other
relief) with respect to the nominee corporations.3 With respect
to petitioners’ remaining two grounds, respondent moves for
summary judgment in his favor (the motion). Petitioners object.
Rule 121 provides for summary judgment. Summary judgment
may be granted with respect to all or any part of the legal
issues in controversy "if the pleadings, answers to
interrogatories, depositions, admissions, and any other
acceptable materials, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that a
decision may be rendered as a matter of law." Rule 121(a) and
(b). When a motion for summary judgment is made and properly
3 We based our order on our finding that the nominee corporations were not persons liable to pay the unpaid assessments and, therefore, were not proper parties to this case. - 4 -
supported, the adverse party may not rest on mere allegations or
denials of the pleadings but must set forth specific facts
showing that there is a genuine issue for trial. Rule 121(d).
We are satisfied that there is no genuine issue as to any
material fact and that a decision may be rendered as a matter of
law. For the reasons that follow, we shall grant the motion.
Background
Introduction
We draw the following facts from the pleadings and the
declaration of respondent’s counsel, Brianna Basaraba Taylor, as
to (1) the documents contained in respondent’s administrative
files concerning the hearing accorded petitioners pursuant to
section 6330, (2) the documents in respondent’s possession
concerning petitioners’ bankruptcy proceeding, and (3) additional
documents in respondent’s files relating to petitioners’ case.
We believe the following facts to be undisputed and so find for
purposes of disposing of the motion.4
Residence
At the time the petition was filed, petitioners resided in
Albany, Ga.
4 All dollar amounts have been rounded to the nearest dollar. - 5 -
Respondent’s Determinations of Deficiencies and Assessments
On March 24, 1995, respondent mailed to petitioners
statutory notices of deficiency (notices) determining the
deficiencies in, and additions to, tax that underlie the unpaid
assessments. Petitioners failed to petition the Tax Court in
response to the notices, and, as a result, respondent assessed
the deficiencies and additions to tax that he had determined.
Bankruptcy Case
On September 13, 1996, petitioners filed a voluntary
petition in bankruptcy under Chapter 13 of the Bankruptcy Code,
11 U.S.C. ch. 13 (“Adjustment of Debts of an Individual with
Regular Income”), in the United States Bankruptcy Court for the
Middle District of Georgia (the bankruptcy case and the
bankruptcy court, respectively). On October 21, 1996,
petitioners filed with the bankruptcy court both a Chapter 13
plan and a statement of financial affairs, which listed the
Internal Revenue Service (IRS) as a secured creditor with a total
claim of $338,571, of which $206,073 was listed as secured. On
October 22, 1996, the IRS filed a claim against petitioners
(called a “proof of claim” in bankruptcy parlance) for $428,780,
on the basis of unpaid taxes for 1982 through 1985, all of which
amount was listed as secured. On November 14, 1996, petitioners
filed an objection to the IRS’s proof of claim on the basis “that
the claim is not owed”, and, on November 15, 1996, petitioners - 6 -
filed a motion to determine the secured status of the IRS’s
claim. On December 16, 1996, the bankruptcy court granted
petitioners’ motion to convert the bankruptcy case from a case
under Chapter 13 of the Bankruptcy Code to a case under Chapter
11 of the Bankruptcy Code, 11 U.S.C. ch. 11 (“Reorganization”).
Between December 1996 and November 1997, petitioners and the IRS
(the bankruptcy parties) engaged in discovery regarding
petitioners’ objection to the IRS’s proof of claim, and, on
November 10, 1997, the bankruptcy court entered an order setting
petitioners’ objection for trial on February 11, 1998. On
February 3, 1998, the bankruptcy court entered an order
continuing the trial until April 13, 1998. On March 31, 1998,
the bankruptcy parties filed a stipulation of dismissal,
dismissing without prejudice both petitioners’ objection to the
IRS’s proof of claim and petitioners’ motion to determine secured
status. On June 5, 2000, the bankruptcy case was dismissed upon
motion of the IRS when petitioners did not object.
Notices of Intent To Levy and Right to Hearing
By letter dated October 24, 2001, respondent sent Mrs.
Kendricks a notice of intent to levy and a notice of her right to
a hearing under section 6330 (a collection due process hearing)
with respect to her 1982, 1983, and 1984 tax years, claiming
unpaid taxes, penalties, and interest for those years totaling
$530,908. - 7 -
Also by letter dated October 24, 2001, respondent sent
petitioners a notice of intent to levy and a notice of their
right to a collection due process hearing with respect to their
1985 tax year, claiming unpaid tax, penalties, and interest for
that year of $110,676.
Collection Due Process Hearing
On November 20, 2001, respondent received timely requests
for collection due process hearings from Mrs. Kendricks for her
1982, 1983, 1984, and 1985 tax years and from petitioners for
their 1985 tax year. In attachments to the requests, petitioners
state that they dispute the liabilities underlying the unpaid
assessments (sometimes, the underlying liabilities) and have not
yet had an opportunity to contest those liabilities. They also
claim that any levy would cause them hardship.
In response to the requests, on September 18, 2002,
petitioners and their counsel were afforded a 2-hour, face-to-
face conference with Appeals Officer Allen D. Powell. At the
conference, petitioners admitted that they had received the
notices but, nevertheless, wished to dispute the underlying
liabilities. Appeals Officer Powell informed petitioners that
the Internal Revenue Code prohibited them from raising the
underlying liabilities when they had received a notice of
deficiency or otherwise had an opportunity to dispute the tax
liability. Appeals Officer Powell then asked whether petitioners - 8 -
wished to submit collection alternatives, and petitioners stated
that they did not.
On or about September 19, 2002, petitioners submitted an
Offer in compromise (offer) to the IRS’s centralized offer in
compromise unit in New York. The offer related to the unpaid
assessments, and the basis of the offer was “doubt as to
liability”. Petitioners did not provide a copy of the offer to
Appeals Officer Powell. By letter dated January 15, 2003, the
offer was returned to petitioners by the IRS because it could not
be processed in the form submitted. A second offer was submitted
by petitioners’ counsel to the IRS by facsimile transmission on
January 30, 2003.
On January 29, 2003, Appeals sent Notices of Determination
Concerning Collection Action(s) Under Section 6320 and/or 6330 to
petitioners’ counsel (the notices of determination). The summary
of determinations section of each of those notices of
determination states:
During Appeals consideration of your case, you were informed that you could not raise the issue of your tax liability because you had an opportunity to dispute the issue and failed to do so. No collection alternatives were explored because you chose not to submit financial information to evaluate the collection alternatives.
The section concludes:
Appeals has obtained verification from the Secretary [of the Treasury] that the requirements of any applicable law or administrative procedure have been met, considered any relevant issues relating to the unpaid tax raised at the hearing, and taken into - 9 -
consideration whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary. Therefore, it is the determination in this case [that] the proposed levy action is sustained.
On March 3, 2003, petitioners filed the petition.
Discussion
I. Collection Due Process
If any person liable for Federal tax liability neglects or
refuses to make payment within 10 days of notice and demand, the
Commissioner is authorized to collect the tax by levy on that
person's property. See sec. 6331(a). As a general rule, at
least 30 days before taking such action, the Commissioner must
provide the person with a written final notice of intent to levy
that describes, among other things, the administrative appeals
available to the person. See sec. 6331(d).
Upon request, the person is entitled to an administrative
review hearing before Appeals. Sec. 6330(b)(1). The Appeals
officer conducting the hearing must verify that the requirements
of any applicable law or administrative procedure have been met.
Sec. 6330(c)(1). Section 6330(c)(2) prescribes the relevant
matters that a person may raise at the Appeals hearing, including
spousal defenses, the appropriateness of respondent's proposed
collection action, and possible alternative means of collection.
A taxpayer may contest the existence or amount of the underlying
tax liability at an Appeals Office hearing if the taxpayer did - 10 -
not receive a statutory notice of deficiency with respect to the
underlying tax liability or did not otherwise have an opportunity
to dispute that liability. Sec. 6330(c)(2)(B).
Following the hearing, the Appeals officer must determine
whether the collection action is to proceed, taking into account
the verification the Appeals officer has made, the issues raised
by the taxpayer at the hearing, 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).
We have jurisdiction to review such determinations where we have
jurisdiction over the type of tax involved in the case. Sec.
6330(d)(1)(A); see Iannone v. Commissioner, 122 T.C. 287, 290
(2004). Where the underlying tax liability is properly at issue,
we review the determination de novo. E.g., Goza v. Commissioner,
114 T.C. 176, 181-182 (2000). Where the underlying tax liability
is not properly at issue, we review the determination for abuse
of discretion. Id. at 182. When faced with questions of law, as
we are here (e.g., determining whether the bankruptcy proceeding
instigated by petitioners afforded petitioners the opportunity to
dispute the tax liability), the standard of review makes no
difference. Whether characterized as a review for abuse of
discretion or as a consideration "de novo" (of a question of
law), we must reject erroneous views of the law. See Cooter & - 11 -
Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990); Abrams v.
Interco, Inc., 719 F.2d 23, 28 (2d Cir. 1983) (stating that it is
not inconsistent with the abuse of discretion standard to decline
to honor a purported exercise of discretion that is infected by
an error of law); Swanson v. Commissioner, 121 T.C. 111, 119
(2003).
II. Arguments of the Parties
Respondent argues that summary judgment is appropriate
because the bankruptcy files and the administrative files
concerning the collection due process hearing (the hearing files)
are not in dispute and establish the material facts of the case,
so that a decision may be rendered as a matter of law.
Respondent claims that petitioners are precluded from challenging
the underlying liabilities because they had a prior opportunity
to dispute those liabilities and that, given petitioners’ failure
to present collection alternatives or the offer to Appeals,
Appeals did not abuse its discretion in deciding that the
proposed levy should be sustained.
Petitioners argue that summary judgment is not appropriate
because, among other things, there are material issues of fact in
this case, viz, whether petitioners received the notices in time
to file petitions with the Tax Court and whether the bankruptcy
case presented an adequate opportunity to dispute the underlying
liabilities. Petitioners concede that collection alternatives - 12 -
were not raised at the conference they had with Appeals Officer
Powell on September 18, 2002, but deny that they had a collection
due process hearing because they were not allowed to challenge
the underlying liabilities. Finally, petitioners argue that
there is an offer in compromise pending with respect to those
liabilities.
III. Discussion
A. Material Issues of Fact
There is no dispute with respect to the bankruptcy files and
the hearing files. Those files establish most of the facts
material to this case. Because petitioners argue that, although
they received the notices, they did not receive them in time to
petition the Tax Court, respondent does not rely on receipt of
the notices as the reason petitioners were precluded at their
conference with Appeals Officer Powell from raising challenges to
their liabilities for the unpaid assessments. Rather, respondent
relies on the opportunity presented to petitioners by the
bankruptcy case to dispute those liabilities. Since the relevant
facts with respect to the bankruptcy case are not in dispute, we
are faced with the question of whether, as a matter of law, the
bankruptcy case presented petitioners the opportunity to dispute
the underlying liabilities. We need make no finding as to when
petitioners received the notices. - 13 -
B. The Bankruptcy Case
While we have yet to consider whether, when the IRS submits
a proof of claim for an unpaid Federal tax liability in a
taxpayer’s bankruptcy action, the taxpayer has the opportunity to
dispute the liability, within the meaning of section
6330(c)(2)(B), at least two other courts have answered that
question in the affirmative. Johnson v. United States, 92 AFTR
2d 2003-7233, 2003-2 USTC par. 50721 (N.D. Ga. 2003); PCT Servs.,
Inc. v. United States, 92 AFTR 2d 2003-5234, 2003-2 USTC par.
50536 (N.D. Ga. 2003); Triad Microsystems, Inc. v. United States,
90 AFTR 2d 2002-7332, 2003-1 USTC par. 50106 (E.D. Va. 2002). We
agree with those courts.
When the IRS submits a proof of claim for unpaid Federal tax
liabilities in a taxpayer's bankruptcy proceeding, the taxpayer
and trustee may object to the IRS’s proof of claim. Under 11
U.S.C. sec. 505(a), a bankruptcy court may, with certain
restrictions, determine: “the amount or legality of any tax, any
fine or penalty relating to a tax, or any addition to tax,
whether or not previously assessed, whether or not paid, and
whether or not contested before and adjudicated by a judicial or
administrative tribunal of competent jurisdiction.” We think
that, when the procedure described provides the taxpayer the
opportunity to object to the IRS’s proof of claim for an unpaid
Federal tax liability, the taxpayer is afforded an opportunity to - 14 -
dispute the liability, as contemplated by Congress in section
6330(c)(2)(B).
In the bankruptcy case, petitioners did in fact file an
objection to the IRS’s proof of claim, as well as a motion to
determine the secured status of the IRS’s claim. They were
accorded discovery against the IRS for a period of approximately
11 months. Before the hearing scheduled to hear the objection
was held, however, petitioners stipulated to the dismissal
without prejudice of the objection to the IRS’s proof of claim
and the motion to determine secured status of the IRS’s claim.
Clearly, petitioners had the opportunity to dispute the
underlying liabilities.5 Petitioners’ argument that they did not
5 Since the bankruptcy court did not allow the IRS’s proof of claim, the doctrine of res judicata does not apply to the underlying liabilities. Where a bankruptcy court has allowed a tax claim, the doctrine of res judicata bars relitigation of the underlying tax liability in this court. Fla. Peach Corp. v. Commissioner, 90 T.C. 678 (1988) (dismissal of bankruptcy proceeding did not vacate judgment allowing tax claims; effect of judgment was res judicata); Strong v. Commissioner, T.C. Memo. 2001-103 (allowance of tax claim by bankruptcy court was res judicata). Sec. 6330(c)(2)(B), while overlapping the doctrine of res judicata, see Wooten v. Commissioner, T.C. Memo. 2003-113, is a broader prohibition because, for one thing, it prohibits a taxpayer from raising in a collection due process hearing (and in any resulting court review under sec. 6330(d)(1)) her underlying tax liability if she failed to file a deficiency suit in response to a timely received notice of deficiency. A taxpayer who so defaults is no more prevented by res judicata from suing for a tax refund than are petitioners on account of the bankruptcy case’s being dismissed without any adjudication of the IRS proof of claim. It may well be that the policy behind sec. 6330(c)(2)(B) is to consign to a refund suit a taxpayer who forgoes a prepayment forum, be it the Tax Court (in a deficiency (continued...) - 15 -
have an “adequate” opportunity to challenge the IRS’s proof of
claim, because they did not have access to records that had been
seized by the IRS during its criminal investigation of Mrs.
Kendricks, and never returned to them, is to no avail. With
respect to the burden of proof in connection with tax claims in
bankruptcy cases, the rule is that, in the absence of
modification expressed in the Bankruptcy Code, the burden of
proof with respect to a tax claim in bankruptcy remains where the
substantive tax law puts it. Raleigh v. Ill. Dept. of Revenue,
530 U.S. 15, 26 (2000). The Bankruptcy Code makes no provision
for altering the burden of proof with respect to a tax claim, id.
at 22, and, in general, where the Commissioner has determined a
deficiency in tax, the taxpayer bears the burden of proving facts
that show that determination to be incorrect, see Rule 142.
Welch v. Helvering, 290 U.S. 111, 115 (1933); Feldman v.
Commissioner, 20 F.3d 1128, 1132 (11th Cir. 1994), affg. T.C.
Memo. 1990-532. Under the Federal Rules of Evidence, “the
inability to produce a record which is unintentionally lost,
5 (...continued) suit) or the bankruptcy court (where the action is dismissed without resolving the IRS’s claims). See Aguirre v. Commissioner, 117 T.C. 324, 327 (2001). But cf. Montgomery v. Commissioner, 122 T.C. 1, 9 (2004) (sec. 6330(c)(2)(B) permitted taxpayers to challenge the existence or amount of the tax liability reported on their original income tax return because they had not received a notice of deficiency for the year in question and they had not otherwise had an opportunity to dispute the tax liability in question). - 16 -
whether by the petitioner, the Commissioner, or by a third party,
alters the type of evidence which may be offered to establish a
fact, but the rule does not affect the burden of proving a fact.”
Fed. R. Evid. 1004; Malinowski v. Commissioner, 71 T.C. 1120,
1125 (1979). Petitioners do not claim that their tax records
were intentionally lost. In the course of the bankruptcy case,
they had approximately 11 months to conduct discovery, and any
relief that they thought they deserved on account of the absence
of their records they could have requested from the bankruptcy
court. We see no merit to their claim that they had an
inadequate opportunity to challenge the IRS’s proof of claim.
C. No Abuse of Discretion
In response to their requests for collection due process
hearings, petitioners and their counsel were afforded a 2-hour,
face-to-face conference with Appeals Officer Powell. Petitioners
complain that the conference did not amount to a proper hearing
because they were not allowed to raise the underlying
liabilities. Since they had no right to raise the underlying
liabilities, that complaint is without merit. Petitioners argue
that the Appeals Office abused its discretion by issuing the
notices of determination while an offer in compromise was
pending. Apparently, petitioners did submit an offer in
compromise to someone at the IRS, but not to the Appeals Office
conducting their collection due process hearing. Moreover, that - 17 -
offer was returned to petitioners as not processable in the form
submitted. A second offer (we assume corrected) was sent to the
IRS the day after the notices of determination were sent. Since
there was no offer in compromise before Appeals, there was no
abuse of discretion in Appeals’ failing to consider an offer in
compromise. Finally, petitioners can raise no issue here that
they did not raise during their collection due process hearing.
See Magana v. Commissioner, 118 T.C. 488, 493 (2002); secs.
301.6320-1(f)(2), Q&A-F5, and 301.6330-1(f)(2), Q&A-F5, Proced. &
Admin. Regs.
D. Conclusion
Petitioners have failed to show any error in Appeals’
determination to proceed to collect by levy the unpaid
assessments.
IV. Conclusion
As stated, we shall grant the motion.
An appropriate order and
decision will be entered for
respondent.