Shafmaster v. USA

2012 DNH 091

Opinion

Shafmaster v . USA CV-09-238-PB 5/7/12 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Jonathan Shafmaster Carol Shafmaster

v. Civil N o . 09-cv-238-PB Opinion N o . 2012 DNH 091 United States of America

MEMORANDUM AND ORDER

The government seeks summary judgment with respect to the

Shafmasters’ claims for a refund of a failure-to-pay penalty.

The sole question raised by the present motion is whether a

Notice of Tax Lien that was sent to the Shafmasters satisfies

the notice and demand requirement that is a prerequisite for the

imposition of a failure-to-pay penalty under 26 U.S.C. §

6651(a)(3). For the reasons provided below, I determine that it

does, and I therefore grant the government’s motion for summary

judgment.

I. BACKGROUND1

A. History of Dealings Between Shafmasters & IRS

After an audit of the Shafmasters’ personal income tax

returns for the 1993 and 1994 tax years, the IRS issued notices

1 A more developed recitation of the facts of this case can be found in my order of September 3 0 , 2011. Doc. N o . 3 1 . of deficiency and proposed assessments. The Shafmasters

petitioned the tax court for a redetermination of the proposed

assessments. They were referred to an IRS appeals officer, with

whom they worked from 1999 until early 2001 to resolve their

objections. On March 1 9 , 2001, the Shafmasters entered into

three written Stipulations of Settlement. On April 2 5 , 2001 the

tax court issued two brief orders implementing the settlement

agreements. The tax court decisions and the settlement

agreements were both silent on the issue of whether the

Shafmasters would owe failure-to-pay penalties.

The government asserts that on September 1 0 , 2001, it sent

the Shafmasters a notice stating the amount they owed and

demanding payment. The Shafmasters assert that such document

was not sent to their address. On October 7 , 2002, a document

titled “Notice of Federal Tax Lien” was sent to the Shafmasters.

The contents of that document are described in some depth infra.

On January 6, 2004, the Shafmasters submitted a Form 870-

A D , in which they sought specific reductions in the amounts owed

for the 1992-1994 tax years based on net operating carryback

losses they had incurred subsequent to those years. The IRS

accepted the offer shortly after it was submitted.

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

an installment agreement establishing a schedule for payment of 2 the outstanding tax liabilities. The agreement identifies the

Shafmasters’ liability, sets a payment schedule, and states that

the Shafmasters agree to “pay the federal taxes shown, PLUS

PENALTIES AND INTEREST PROVIDED BY LAW.” Doc. N o . 25-1.

On April 1 7 , 2006, the IRS imposed a failure-to-pay penalty

for the 1994 tax year.

B. Procedural History

After paying off their balance in full, the Shafmasters

filed a refund claim on September 1 8 , 2008. They argued, inter

alia, that they were entitled to a refund of the failure-to-pay

penalty. The IRS filed a motion for summary judgment which I

granted in part and denied in part, Doc. N o . 3 1 .

I rejected the Shafmasters’ claim that certain

representations by IRS agents equitably estopped the government

from imposing the failure-to-pay penalty. I agreed with the

Shafmasters, however, that a triable issue of fact existed as to

whether the IRS had sent notice and demand to the Shafmasters’

last known address, a prerequisite to imposition of the penalty.

Although the government produced a Form 4340 indicating that

notice and demand had been properly sent on September 1 0 , 2001,

I determined that the presumption of correctness typically

accorded to that form had been sufficiently rebutted by the

Shafmasters’ submissions. In conjunction with their averments 3 that they never received the notice and demand, the Shafmasters

also presented a handwritten notation on a “Request for Quick or

Prompt Assessment” form, dated September 5 , 2001, that reads:

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

Doc. N o . 29-2. After considering the notation’s indication that

the IRS should not directly bill the Shafmasters, and in light

of the document’s temporal proximity to the date the IRS

contends notice and demand was issued, I concluded that a

reasonable factfinder could question whether notice and demand

had been properly sent.

Based on assertions that it could explain away the

notation, I permitted the government to again move for summary

judgment. After a second round of summary judgment filings,

however, I was again unable to conclude on the basis of the

government’s submissions that notice and demand was sent to the

Shafmasters on September 1 0 , 2001. Nonetheless, among its

submissions accompanying the motion, the government also

produced a Notice of Tax Lien form that was sent to the

Shafmasters on October 7 , 2002. The document appears on its

face to satisfy the notice and demand required by statute, and

the Shafmasters do not contest that the form was properly sent

4 to them. I directed the government to submit a third summary

judgment motion to fully articulate the argument that the Notice

of Tax Lien sent to the Shafmasters permits imposition of the

failure-to-pay penalty. That motion is the subject of this

order.

C. Notice of Tax Lien Form

The form relevant to this order is an IRS Form 668(Y)(c)

that is titled “Notice of Federal Tax Lien.” Notice of Tax

Lien, Doc. N o . 33-10 at 4 . The document indicates that it was

prepared on October 1 , 2002, and a cover page indicates that it

was sent to the Shafmasters on October 7 . Id. at 2 , 4 . The

form contains a table that lists dates and balances due for the

1993 and 1994 tax years. Id. at 4 . In the same row as the most

recent date of assessment for each year, the table states the

unpaid balance of assessment for that year. Id. For 1994, the

tax year in question, the unpaid balance was $2,156,919. Id.

A box toward the top of the document states, in bold type:

As provided by section 6321, 6322, and 6323 of the Internal Revenue Code, we are giving a notice that taxes (including interest and penalties) have been assessed against the following-named taxpayer. We have made a demand for payment of this liability, but it remains unpaid. Therefore, there is a lien in favor of the United States on all property and rights to property belonging to this taxpayer for the amount of these taxes, and additional penalties, interest, and costs that may accrue.

5 Id. Underneath, the Shafmasters’ names and address are listed.

Id. To the right, another box contains a series of bullet

points in small type, one of which reads: “IRS will continue to

charge penalty and interest until you satisfy the amount you

owe.” Id.

II. STANDARD OF REVIEW

A summary judgment motion should be granted when the record

reveals "no genuine dispute as to any material fact and that the

movant is entitled to judgment as a matter of law." Fed. R.

Civ. P. 56(a). The evidence submitted in support of the motion

must be considered in the light most favorable to the nonmoving

party, drawing all reasonable inferences in its favor. See

Navarro v . Pfizer Corp., 261 F.3d 9 0 , 94 (1st Cir. 2001).

A party seeking summary judgment must first identify the

absence of any genuine issue of material fact. Celotex Corp. v .

Catrett, 477 U.S. 3 1 7 , 323 (1986). The burden then shifts to

the nonmoving party to "produce evidence on which a reasonable

finder of fact, under the appropriate proof burden, could base a

verdict for i t ; if that party cannot produce such evidence, the

motion must be granted." Ayala-Gerena v . Bristol Myers-Squibb

Co., 95 F.3d 8 6 , 94 (1st Cir. 1996); see Celotex, 477 U.S. at

323. 6 III. ANALYSIS

The Shafmasters argue that the Notice of Tax Lien sent to

them by the IRS cannot constitute the notice and demand

necessary to impose a failure-to-pay penalty. They assert that

its status as notice and demand is invalidated by three

deficiencies: (1) its inaccuracy in stating the Shafmasters’

liability; (2) its failure to demand payment; and (3) its

issuance beyond 60 days after taxes were assessed.

Additionally, the Shafmasters contend that even if the Notice of

Tax Lien does qualify as notice and demand, the failure-to-pay

penalty was improperly imposed because the maximum penalty was

assessed prior to the date it would have fully matured.

A. Legal Background

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). When tax assessments of over $100,000

are not paid within 10 business days after notice and demand,

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

Id. The failure-to-pay penalty is capped at 2 5 % . Id.

The notice and demand requirement can be satisfied by

leaving the notice and demand at the taxpayer’s dwelling or

usual place of business. 26 U.S.C. § 6303(a). Alternatively, 7 the IRS can mail the notice and demand to the taxpayer’s last

known address, in which case it is effective even if never

actually received by the taxpayer. Id.; United States v . Zolla,

724 F.2d 8 0 8 , 810 (9th Cir. 1984). The form on which notice and

demand is made is irrelevant as long as it “gives notice to each

person liable for the unpaid tax, stat[es] the amount and

demand[s] payment thereof.” 26 U.S.C. § 6303(a); see United

States v . Roccio, 981 F.2d 5 8 7 , 591 (1st Cir. 1992) (noting that

26 U.S.C. § 6303(a) “does not mandate the use of any specific

form of notice”); Elias v . Connett, 908 F.2d 5 2 1 , 525 (9th Cir.

1990) (explaining that form of notice and demand “is irrelevant

as long as it provides the taxpayer with all the information

required under 26 U.S.C. § 6303(a)”). And although the

government must issue notice and demand within 60 days of the

assessment, 26 U.S.C. § 6303(a), “the failure to give notice

within 60 days does not invalidate the notice.” 26 C.F.R. §

301.6303-1(a).

B. Validity of Notice and Demand

1. Inaccuracy

The Shafmasters argue that the Notice of Tax Lien cannot

constitute notice and demand because the amount listed on the

document as their liability for the 1994 tax year is inaccurate.

Although presented as one argument, the Shafmasters actually 8 make two distinct claims. First, they assert that the amount

listed is inaccurate as the result of IRS error. Second, they

argue that both parties understood that the amount listed was

only a preliminary figure that was not representative of what

the Shafmasters would actually owe for the 1994 tax year. I

address each argument in turn.

The first claim is based on inconsistencies between the

liability listed for the 1994 tax year on the Notice of Tax Lien

and the liabilities listed for that year on other forms. The

Notice of Tax Lien, dated October 1 , 2002, states that the

Shafmasters had an unpaid balance for the 1994 tax year of

$2,156,919. Notice of Tax Lien, Doc. N o . 33-10 at 4 . The

account transcript for the 1994 tax year states that a liability

of $2,069,035.23 was imposed on September 1 0 , 2001. 2 Account

Transcript, Doc. N o . 33-3 at 3 . And a Form 3552, also dated

September 1 0 , 2001, puts the Shafmasters’ overall liability for

the 1994 tax year at $2,070,497.23.3 Form 3552, Doc. N o . 33-5.

2 This amount is the sum of three parts: (1) the additional tax assessment of $1,167,380; (2) a late-filing penalty of $49,545; and (3) interest that had accrued totaling $852,110.23. Account Transcript, Doc. N o . 33-3 at 3 . The former two numbers are the same amounts listed on the tax court’s order. See Tax C t . Decision for 1994 Tax Year at 1 , Doc. N o . 25-6. The tax court did not address the interest that would be due. Id. 3 As with the account transcript, see supra note 2 , the Form 3552 breaks the total liability into three component parts. Form 9 The Shafmasters argue that because these documents are

inconsistent, the Notice of Tax Lien must be inaccurate and

therefore cannot constitute an effective notice and demand.

It is apparent from the liability breakdown on the two 2001

forms that the discrepancy in the total between those documents

is due to a difference of $1,462 in the amount of the late-

filing penalty. I am unable to ascertain why these two

documents would contain slightly divergent penalty amounts. I

therefore assume, without deciding, that the Shafmasters have

satisfied their burden of showing an IRS error in regard to the

$1,462 divergence in amounts between the 2001 documents. See

United States v . Schroeder, 900 F.2d 1144, 1148 (7th Cir. 1990)

(noting that Commissioner’s tax deficiency determinations are

presumed correct and taxpayer has burden of production and

persuasion to show otherwise).

It is not surprising, however, that the Notice of Tax Lien,

prepared more than a year later, states an amount that is

substantially higher than the amounts stated on the 2001

documents. Interest would have continued to accrue between

September 2001 and October 2002, and the additional balance of a

little over $85,000 appears in line with what the interest would

3552, Doc. N o . 33-5. The additional tax and the interest on the Form 3552 are the same as on the account transcript, but the penalty amount is slightly higher. 10 have been on approximately 13 months of additional nonpayment on

the Shafmasters’ outstanding liability.4 By simply drawing

attention to an increase in liability in a situation where an

increase would be expected, the Shafmasters have not satisfied

their burden of showing IRS error. See id. Therefore, the

Shafmasters have failed to show any mistake in calculation

subsequent to September 1 0 , 2001.

I proceed on the assumption that the Shafmasters have shown

only that the $1,462 divergence in amounts between the 2001

documents may be inaccurate. Even assuming that this error was

unresolved by the time the IRS issued the 2002 Notice of Tax

Lien,5 however, an error of such a small magnitude would not

affect the document’s ability to serve as notice and demand.

See Sage v . United States, 908 F.2d 1 8 , 22 (5th Cir. 1990)

(“Clearly a notice of assessment and demand for payment that

contains a technical error will be held valid where the taxpayer

4 As a point of comparison, I note that the account transcript lists the interest charged as of February 2 3 , 2004 at $173,659.60. Account Transcript, Doc. N o . 33-3 at 4 . I take this figure to represent the entire interest accruing between September 1 0 , 2001 and February 2 3 , 2004, inclusive of the approximately $85,000 that had accrued as of October 2002. 5 Although I assume its truth, I am skeptical about the existence of any persistent IRS error. The Shafmasters have had a full opportunity to litigate their 1994 tax liability and its associated penalties, and have never claimed that an IRS calculation error is a distinct basis for a refund of some amount they have paid. 11 has not been misled by the error.”); Planned Inv., Inc. v .

United States, 881 F.2d 3 4 0 , 344 (6th Cir. 1989) (same); see

also Schroeder, 900 F.2d at 1148 (holding that taxpayers owed

the government the amount of their actual liability

notwithstanding the IRS notifying taxpayers that their liability

was $6,000 in excess of the approximately $125,000 they owed).

The Shafmasters have failed to produce any evidence that would

tend to show that the liability amount listed on the Notice of

Federal Tax Lien contained an error of material dimension.

The Shafmasters’ second argument is based on their mutual

understanding with the IRS that future calculations would reduce

their actual liability for the 1994 tax year. The IRS did not

finish calculating net operating loss carrybacks from the 1995-

1998 tax years until late 2003, and interest netting

calculations were not completed until the summer of 2004. Supp.

Burke Aff. ¶ 5-6, Doc. N o . 38-1. These calculations both

significantly altered the Shafmasters 1994 tax year liability.

At heart, the Shafmasters’ argument is that the 2002 Notice of

Tax Lien could not have stated the amount they owed, and

therefore could not demand payment of that amount, because both

the IRS and the Shafmasters were awaiting additional

calculations that would reduce the liability for the 1994 tax

year. 12 I find their argument unpersuasive. Framed differently,

the Shafmasters urge that they were entitled to further delay

payment for a tax assessment that was already nearly a decade

overdue because the final calculation of their taxes for

intervening years might eventually reduce the amount owed for

that year. The Shafmasters have not cited to any statute or

case law that supports that position, and my research has

revealed a number of cases that strongly weigh against their

contention. See, e.g., Simon v . Comm’r, 248 F.2d 869, 877 (8th

Cir. 1957) (“The carryback provision does not relieve the

taxpayer of the obligation to pay the tax in full when it falls

due, and cannot be interpreted as deferring taxpayer's duty to

pay the tax promptly.”); Olsen v . Comm’r, T.C. Memo. 1993-432

(1993) (holding that because “carrybacks reflect future events

that are unforeseeable at the time when tax liability is

initially determined, they may not be used to reduce the net

amount due” and cannot be used as a shield from a failure-to-

file penalty); Swafford v . Comm’r, T.C. Memo. 1973-122 (1973)

(“[T]he fact that there may be loss carrybacks which may

eliminate any tax for a particular year does not wipe out the

existence of a deficiency for the purpose of computing any

additions to tax.”).

13 In sum, I conclude that the Notice of Tax Lien fulfilled

the requirement of 26 U.S.C. § 6303(a) that a notice and demand

“stat[e] the amount” of a taxpayer’s liability. I reject the

Shafmasters’ arguments that putative inaccuracies in the Notice

of Tax Lien invalidate it as notice and demand.

2. Lack of Demand

The Shafmasters assert that the Notice of Tax Lien cannot

constitute notice and demand because it does not explicitly

demand payment. I disagree. A number of statements on the

document clearly direct the recipients to immediately pay their

outstanding balance. Notably, the form states, “We have made a

demand for payment of this liability, but it remains unpaid”;

and “IRS will continue to charge penalty and interest until you

satisfy the amount you owe.” Notice of Tax Lien, Doc. N o . 33-10

at 4 . I reject the argument that the form does not demand

payment.

3. Lateness of Notice

The Shafmasters note that the Notice of Tax Lien was issued

over a year after the date the taxes were assessed, well beyond

the 60-day period within which the government is supposed to

issue notice and demand. They concede, however, that notices

sent more than 60 days after the assessment are still effective

so long as the notice is otherwise valid. Pl.’s Mem. in Supp. 14 of O b j . to Summ. J. at 1 5 , Doc. N o . 3 8 ; see 26 C.F.R. §

301.6303-1(a). In conceding that lateness is not a distinct

basis for invalidating a notice and demand, the Shafmasters

essentially rely on their prior arguments, which I have already

rejected.

In conclusion, I determine that the Notice of Tax Lien

constitutes a valid notice and demand. The government was

therefore entitled to impose a failure-to-pay penalty on the

Shafmasters when they did not pay the amount due. The penalty

would have begun to accrue on October 1 7 , 2002, ten days after

the Notice of Tax Lien was sent. See 26 U.S.C. § 6651(a)(3).

C. Penalty Date Relating Back to Notice of Tax Lien

The final argument pressed by the Shafmasters is based on

the date the failure-to-pay penalty was assessed. The full

penalty was assessed on April 1 7 , 2006, but if notice and demand

was sent in October 2002 (when the Notice of Tax Lien was sent),

the full penalty would not have accrued until December 2006 (50

months from the date of notice and demand). Therefore, the

Shafmasters contend, “the penalty does not properly relate to

the notice of lien” and “there is a genuine issue of material

fact as to whether the penalty was properly assessed.” Pl.’s

Mem. O b j . to Summ. J. at 1 6 , Doc. N o . 3 8 . I disagree.

15 Clearly, the IRS based its imposition of the failure-to-pay

penalty on having sent notice and demand in September 2001, more

than a year prior to the time it sent the Notice of Tax Lien.

In my first order, I determined that the IRS had failed to prove

that it had properly sent such prior notice. The Shafmasters’

claim is nonetheless without merit, however, because the

Shafmasters did not satisfy their liabilities for the 1994 tax

year within fifty months of October 7 , 2002, the date I have

determined that notice and demand was sent. As such, although

the IRS may have assessed the penalty earlier than it should

have been assessed, the failure-to-pay penalty was still

justified. The Shafmasters present no argument that would

suggest the IRS must issue a refund under such circumstances.

IV. CONCLUSION

For the reasons stated above, I grant the government’s

motion for summary judgment (Doc. N o . 3 6 ) . The clerk shall

enter judgment accordingly and close the case.

SO ORDERED.

/s/Paul Barbadoro Paul Barbadoro United States District Judge May 7 , 2012 c c : James E . Higgins, Esq. James E . Brown, Esq. W . Damon Dennis, Esq.