Shafmaster v. USA

• Court: District Court, D. New Hampshire
• Decided: September 30, 2011
• Docket: CV-09-238-PB
• Status: Published

Opinion

Shafmaster v. USA CV-09-238-PB 09/30/11 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Jonathan Shafmaster and Carol Shafmaster

v. Case No. 09-cv-238-PB Opinion No. 2 011 DNH 14 9 United States of America

MEMORANDUM AND ORDER

Jonathan and Carol Shafmaster seek a refund of interest

payments and a failure-to-pay penalty they incurred following an

audit of their tax returns for the 1993 and 1994 tax years.

They argue that they are entitled to recover interest payments

because the payments were the result of unreasonable delay by

the Internal Revenue Service ("IRS") in completing the audit.

They claim that the failure-to-pay penalty was improper both

because the IRS failed to issue a proper notice and demand for

payment of the underlying taxes and because the IRS agreed that

it would not seek to recover a failure-to-pay penalty from them.

The United States has filed a motion seeking either

dismissal for lack of subject matter jurisdiction or summary

judgment. I. BACKGROUND

The Shafmasters allege that the IRS commenced an audit of

their personal income tax returns for the 1993 and 1994 tax

years on November 19, 1996, Compl. 5 6 (Doc. No. 1), and issued

notices of deficiency and proposed assessments on April 17,

1998. (Doc. No. 24-5). Although approximately seventeen months

passed between the start of the audit and its completion, the

Shafmasters allege that the audit should have taken no more than

six months. Compl. 5 28 (Doc. No. 1); (Doc. No. 24-3).

The Shafmasters petitioned the tax court for a

redetermination of the proposed assessments, and the matter was

referred to Appeals Officer Robert Hamilton of the Portsmouth,

New Hampshire Appeals Office. Compl. 5 8 (Doc. No. 1). From

1999 until early 2001, Hamilton worked with the Shafmasters to

resolve their objections to the proposed assessments. Id. 5 9.

The parties ultimately entered into three written Stipulations

of Settlement, all dated March 19, 2001, and the IRS prepared a

Form 5278 reflecting the agreement. (Doc Nos. 24-15, 24-16, 24-

17, 24-18). On April 25, 2001, the tax court issued two brief

orders implementing the settlement agreements. (Doc. Nos. 25-5,

25-6) .

Two of the three settlement agreements address the subject

of penalties by stating that "[t]he respondent concedes that no

2 [accuracy-related penalty] is due under I.R.C. § 6662(a)."

(Doc. Nos. 24-16 5 17, 24-18 5 28). The third agreement states

that "[t]he petitioners concede the delinquency penalty under

I.R.C. § 6651(a)(1) and respondent concedes the accuracy-related

penalty under I.R.C. § 6662(a)." (Doc. No. 24-17 5 35). The

only penalty amount that is included in the Form 5278 is the

failure-to-flie penalty described in the third settlement

agreement. (Doc. No. 24-15). Neither the settlement agreements

nor the tax court decisions include any reference to failure-to-

pay penalties.

Although the Shafmasters did not raise the subject of

failure-to-pay penalties directly with Hamilton during the

discussions that led to the settlement agreements, they claim

that "Hamilton agreed that the Taxpayers would not have to pay

any other penalties for 1993, 1994, and 1995, on the basis that

the Taxpayers had reasonable cause to believe that no additional

taxes were due." (Doc. No. 24-9 5 16) (internal quotations

omitted). They also assert that they would not have agreed to

settle the tax court cases if the IRS had insisted on additional

penalties. (Doc. No. 24-8 4-6).

Shortly after the tax court issued its decisions, Hamilton

informed the Shafmasters' attorney during a meeting that "the

[IRS's] system would automatically impose a penalty under

3 Internal Revenue Code section 6651 for 'failure to pay' the tax

liability previously." (Doc. No. 24-9 5 21). He then stated

"that he could and would waive the penalty for 'reasonable

cause.'" Id. In a later meeting, Hamilton informed counsel

that he had entered a code into the IRS computer system that

would suppress any late payment penalty that otherwise would

have been assessed. Id. at 5 22.

The parties disagree as to whether notice and demand was

properly sent with respect to the taxes that the Shafmasters

agreed to pay for the 1993 and 1994 tax years. The IRS, relying

on Form 4340 certifications for both tax years, contends that

notice and demand was sent on September 10, 2001. (See Doc. No.

13-2 at 5, 11; Doc No. 13-3 at 5, 14). The Shafmasters deny

that they received notice and demand for either tax year at that

time. (Doc. No. 24-8 5 6) .

On January 6, 2004, the Shafmasters submitted an "Offer to

Waive Restoration on Assessments and Collection of Tax

Deficiency and to Accept Overassessment" ("Form 870-AD") in

which they sought specific reductions in the amounts they owed

for the 1992, 1993, and 1994 tax years based on net operating

carryback losses that they had incurred in later tax years.

(Doc. No. 24-20). Preprinted language on the second page of

Form 870-AD provides that, except in specified circumstances

4 that are not present here, "the case will not be reopened by the

[IRS] Commissioner" if he accepts the taxpayer's offer. Id.

IRS Appeals Team Manager, Kathleen Brown, signed the

Shafmasters' offer and thereby accepted it for the Commissioner

on January 13, 2004. (Doc. No. 25).

On August 4, 2004, the Shafmasters and the IRS entered into

an installment agreement establishing a payment schedule for the

Shafmasters' outstanding tax liabilities. (Doc. No. 25-1). The

agreement identifies the Shafmasters' tax liability, sets a

payment schedule, and states that the Shafmasters agree to "pay

the federal taxes shown above, PLUS PENALTIES AND INTEREST

PROVIDED BY LAW." Id. (emphasis in original).

On April 17, 2006, the IRS imposed a failure-to-pay penalty

of $261,189.50 for the 1994 tax year. (Doc. No. 25-7). It

based the penalty on the Shafmasters' failure to timely pay the

taxes identified in the September 10, 2001 notice and demand.

The Shafmasters filed a refund claim on September 18, 2008.

Compl. 5 22 (Doc. No. 1). The claim was denied on November 28,

2008. Id. 5 23. The Shafmasters filed a protest of the denial

on January 22, 2009, which was also denied on April 20, 2009.

Id. 5 27. Thereafter, they commenced this suit, wherein they

seek a refund of the allegedly erroneous late payment penalty

and its associated interest, as well as a refund of the excess

5 interest that accrued because of what they claim was

unreasonable delay in completing the audit.

II. STANDARD OF REVIEW

The standard that a district court must use in evaluating a

challenge to its subject matter jurisdiction will vary depending

upon the nature of the challenge. Here, the motion to dismiss

does not depend upon disputed facts. Thus, dismissal for lack

of subject matter jurisdiction will be warranted only if "the

facts alleged in the complaint, taken as true, do not justify

the exercise of subject matter jurisdiction." Muniz-Rivera v.

United States, 326 F.3d 8, 11 (1st Cir. 2003) .

A summary judgment motion should be granted when the record

reveals "that there is no genuine dispute as to any material

fact and the movant is entitled to judgment as a matter of law."

Fed. R. Civ. P. 56(a). A material fact "is one 'that might

affect the outcome of the suit under the governing law.'"

United States v. One Parcel of Real Prop, with Bldgs., 960 F.2d

200, 204 (1st Cir. 1992) (quoting Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 248 (1986) ) . In assessing whether a genuine

dispute exists, the evidence submitted in support of the motion

must be considered in the light most favorable to the nonmoving

party, with all reasonable inferences drawn in that party's

6 favor. See Navarro v. Pfizer Corp., 261 F.3d 90, 94 (1st Cir.

2001) .

Ill. ANALYSIS

The Shafmasters argue that they are entitled to a refund of

both a portion of the interest they paid on their 1993 and 1994

tax liabilities and the penalty that the IRS required them to

pay for failing to timely pay their taxes for the 1994 tax year.

I address the government's challenge to each claim in turn.

A. Interest

The Shafmasters base their claim for a refund of interest

on 26 U.S.C. § 6404(e)(1), which authorizes the Secretary of the

Treasury to abate interest on any deficiency that is

attributable to unreasonable delay by the IRS.

In Hinck v. United States, 550 U.S. 501, 503 (2007), the

Supreme Court held that a federal district court lacks

jurisdiction to consider a claim for abatement under § 6404(e)

because Congress has given the tax court exclusive jurisdiction

over such claims. See 26 U.S.C. 6404(h). Although the

Shafmasters attempt to distinguish Hinck by noting that they are

seeking a refund rather than an abatement, the Supreme Court

anticipated their argument and rejected it in dictum. Hinck,

550 U.S. at 507-08. The Shafmasters have failed to explain why

7 I should disregard the Supreme Court's recent guidance on the

subject and I am aware of no reason why I should do so in this

case. Accordingly, I dismiss the Shafmasters' claim for a

refund of interest for lack of subject matter jurisdiction.

B. Failure-to-Pay Penalty

A taxpayer who fails to pay taxes due after notice and

demand for payment is subject to a failure-to-pay penalty under

26 U.S.C. § 6651(a)(3). The penalty for tax assessments over

$100,000 that are not paid within ten business days after notice

and demand accrues at a monthly rate of 0.5% of the taxes owed.

26 U.S.C. § 6651(a)(3). The penalty is capped at 25%. Id.

The Shafmasters present two principal arguments to support

their claim that they are entitled to a refund of the failure-

to-pay penalty. First, they claim that the IRS failed to issue

a proper notice and demand for payment. Second, they invoke the

doctrine of equitable estoppel in arguing that the IRS

improperly collected the payment in any event because it

promised the Shafmasters that they would not be subject to a

failure-to-pay penalty.

1. Notice and Demand

As I have explained, a failure-to-pay penalty may be

asserted if tax liabilities are not paid within a specified time

after notice and demand. 26 U.S.C. 6303(a) provides that this requirement can be satisfied by leaving the notice and demand at

the taxpayer's dwelling or his usual place of business.

Alternatively, the IRS can mail the notice and demand to the

taxpayer at his last known address, in which case the notice and

demand is effective even if it is never actually received by the

taxpayer. 26 U.S.C. 6303(a); United States v. Zolla, 724 F.2d

808, 810 (9th Cir. 1984).

The IRS has relied on a Form 4340 certification in this

case to establish that it satisfied the notice and demand

requirement. "Certificates of assessments and payments are

generally regarded as being sufficient proof, in the absence of

evidence to the contrary, of the adequacy and propriety of

notices and assessments that have been made." Gentry v. United

States, 962 F.2d 555, 557 (6th Cir. 1992); Geiselman v. United

States, 961 F.2d 1, 6 (1st Cir. 1992); United States v.

Aivalikles, 278 F.Supp.2d 141, 143 (D.N.H. 2003) .

Because the Form 4340 at issue here states that notice and

demand was made, the Shafmasters must present evidence

sufficient to rebut the presumption of correctness that attaches

to the certification. To overcome the presumption, the

Shafmasters have both the burden of production and the burden of

persuasion. Long v. United States, 972 F.2d 1174, 1181 & n.9

(10th Cir. 1992); see also Hansen v. United States, 7 F.3d 137,

9 138 (9th Cir. 1993) (per curiam); Psaty v. United States, 442

F.2d 1154, 1160 (3d Cir. 1971). Without more, a taxpayer's

assertion that notice and demand were not received is

insufficient to create a triable question of fact. Hansen, 7

F.3d at 137.

The Shafmasters assert that neither they nor their attorney

ever received the notice and demand. Perhaps understanding that

such denials are insufficient by themselves to create a triable

issue of fact when a Form 4340 certification states that notice

and demand was made, see, e.g., id., they have also produced an

IRS record to buttress their claim. That record, a September 5,

2001 "Request for Quick or Prompt Assessment," includes a

handwritten notation that states:

SEND ALL COPIES OF BILL TO APPEALS ADDRESS ABOVE DO NOT BILL TAXPAYER IMMINENT STATUTE

(Doc. No. 29-2). Because this document appears to have been

prepared only a few days before the IRS claims notice and demand

was made, it is sufficient when considered with the other

evidence in the record to permit a reasonable factfinder to

question whether the IRS sent the notice and demand to the

Shafmasters' last known address as the statute requires.

Accordingly, I deny the government's request for summary

10 judgment with respect to the Shafmasters' claim for a refund of

the failure-to-pay penalty.

2. Equitable Estoppel

The Shafmasters alternatively rest their claim for a refund

of the failure-to-pay penalty on the doctrine of equitable

estoppel.

The elements of equitable estoppel are: (1) a

misrepresentation by one party who had reason to believe that

the other party would rely on the misrepresentation; (2)

detrimental reliance by the other party; and (3) reasonableness

of reliance, in that the relying party did not and should not

have known that the other party's conduct was misleading.

Ramirez-Carlo v. United States, 496 F.3d 41, 49 (1st Cir. 2007)

(citing Heckler v. Cmty. Health Servs., 467 U.S. 51, 59 (1984)).

An additional element must be proved when equitable estoppel is

asserted against the government. Akbarin v. INS, 669 F.2d 839,

842 (1st Cir. 1982). In such cases, the party invoking the

doctrine must demonstrate that it "reasonably relied on some

'affirmative misconduct' attributable to the sovereign." United

States v. Ven-Fuel, Inc., 758 F.2d 741, 761 (1st Cir. 1985)

(citing Akbarin, 669 F.2d at 842) .

The government challenges the Shafmasters' equitable

estoppel claim on several different grounds but I need only

11 explain why they could not have reasonably relied on the

statements on which their claim is based to resolve the issue in

the government's favor.

Congress has expressly limited the power of Treasury

Department officials to compromise tax claims. See 26 U.S.C. §§

7121, 7122. The Treasury Department regulations that implement

these statutes establish procedures that must be complied with

by taxpayers in order to bind the government to a settlement, 2 6

C.F.R. § 301.7122-1(d)- (e) , and ample case law clearly provides

that "the statutory procedure 'is the exclusive method by which

tax cases should be compromised.'" Luxton v. United States, 340

F.3d 659, 663 (8th Cir. 2003) (quoting Botany Worsted Mills v.

United States, 278 U.S. 282, 288-89 (1929)); Klein v. Comm'r,

899 F.2d 1149, 1152 (11th Cir. 1990); Brooks v. United States,

833 F .2d 1136, 1145-46 (4th Cir. 1987) .

The Shafmasters do not claim that any of the statements

they rely on meet the statutory requirements for a binding

settlement. Absent unusual circumstances that are not present

here, this dooms their equitable estoppel claim because, "those

who deal with the government are charged with knowledge of

applicable statutes and regulations." Boulez v. Comm'r, 810

F.2d 209, 218 n.68 (D.C. Cir. 1987) (dictum); see also Heckler,

467 U.S. at 64-65; Fed. Crop Ins. Corp. v. Merrill, 332 U.S.

12 380, 384-85 (1947). Accordingly, I agree with those courts that

have declined to apply equitable estoppel to enforce purported

settlements with the IRS that do not conform to statutory

settlement procedures. See Meyers v. Comm'r, 79 F.3d 1150

(table), 1996 WL 116818, at *2 (7th Cir. 1996); Heffelfinger v.

United States, 1994 WL 836368, at *5 (M.D.Pa. 1994); Delohery v.

IRS, 843 F.Supp. 666, 669 (D. Colo. 1994); Aken v. United

States, 31 Fed. Cl. 89, 97 (1994). Because the Shafmasters

could not reasonably have relied on the statements on which

their claim is based, their equitable estoppel claim necessarily

fails.1

IV. CONCLUSION

For the reasons set forth in this Memorandum and Order, the

government's motion to dismiss or in the alternative for summary

judgment (Doc. No. 19) is granted in part and denied in part.

The Shafmasters' claim for a refund of interest paid with

1 The Shafmasters attempt to repackage their equitable estoppel claim as a claim that they should not have had to pay the penalty because they had reasonable cause to delay payment. See 26 U.S.C. 6651(a)(3). This argument fails for the same reasons that they are not entitled to equitable estoppel. Moreover, to the extent that they claim reasonable cause that gives rise to the revised tax assessments, their argument is unsupported by precedent and is unpersuasive because their obligation to pay the specified taxes was fixed by the agreement between the parties that was later embodied in the tax court decisions.

13 respect to the 1993 and 1994 tax years is dismissed for lack of

subject matter jurisdiction. The government is entitled to

summary judgment with respect to the Shafmasters' claim that the

government is equitably estopped from subjecting them to a

failure to file penalty. The only issue that remains for trial

is the Shafmasters' claim that they are entitled to a refund of

the failure-to-pay penalty because the government failed to

issue a proper notice and demand for payment.

SO ORDERED.

/s/Paul Barbadoro Paul Barbadoro United States District Judge

September 30, 2011

cc: James E. Higgins, Esq. James E. Brown, Esq. W. Damon Dennis, Esq.