122 T.C. No. 22
UNITED STATES TAX COURT
WILLIAM F. URBANO AND FLOTA L. URBANO, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14466-02L. Filed June 10, 2004.
Following R’s audit of Ps’ 1993 through 1996 Federal income tax returns, R’s revenue agent (A) prepared a Form 4549-CG, Income Tax Examination Changes, that listed $7,556.09 as the total amount of Federal income taxes, penalties, and interest Ps owed for those years. Ps signed the form, consenting to R’s immediate assessment and collection of the $7,556.09 and waiving their right to challenge in this Court the findings of A contained in that form, and delivered the signed form to A with a check for the stated amount. Subsequently, R determined that A had understated the interest due for 1993 by prematurely taking into account net operating loss (NOL) carrybacks to that year in disregard of sec. 6601(d)(1), I.R.C. R determined that Ps were liable for recalculated interest of $39,558.63 for 1993, instead of $1,548.23 as originally calculated by A, and filed a notice of Federal tax lien to secure Ps’ payment of $31,455.49 of that interest considered by R still to be owed for 1993 as of the time of the lien’s filing. At the hearing - 2 -
held under sec. 6320(b), I.R.C., Ps challenged the existence and amount of the interest underlying the lien and, alternatively, requested an abatement of interest under sec. 6404(a)(1) and (e)(1), I.R.C. R’s Office of Appeals (O) upheld R’s recalculation of the interest as correct and sustained R’s filing of the lien as proper. Held: Ps’ waiver in the Form 4549-CG does not preclude Ps from challenging in this proceeding the existence and amount of interest underlying the lien. Held, further, under sec. 6330(c)(2)(B) and (d), I.R.C., as made applicable by sec. 6320(c), I.R.C., this Court has jurisdiction to decide Ps’ alternative claims that (1) R’s recalculation of interest for 1993 was incorrect and (2) R is precluded from collecting the amount reflected in the recalculation. Held, further, Ps’ interest for 1993 must be computed by taking their NOL carrybacks into account at the times set forth in sec. 6601(d)(1), I.R.C. The fact that A listed in the Form 4549-CG a lower amount of interest for 1993 and that Ps paid that lower amount does not preclude R from now collecting the proper amount of interest. Held, further, Ps do not qualify for an abatement of interest under sec. 6404(a)(1) or (e)(1), I.R.C.
William F. Urbano and Flota L. Urbano, pro sese.
Karen Nicholson Sommers, for respondent.
OPINION
LARO, Judge: This case is before the Court for decision
without trial. See Rule 122.1 Petitioners petitioned the Court
under section 6330(d)(1), as made applicable by section 6320(c),
1 Rule references are to the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, section references are to the applicable versions of the Internal Revenue Code. - 3 -
to review the determination of respondent’s Office of Appeals
(Appeals) sustaining respondent’s filing of a notice of Federal
tax lien (NFTL). Respondent filed the NFTL to secure the payment
of $31,455.49 shown in his records to be due from petitioners as
of March 25, 2002, with respect to their 1993 Federal income tax.
The $31,455.49 is all attributable to interest (disputed
interest) that respondent assessed on April 27, 1998.
Respondent’s records show that petitioners’ liability for 1993
has increased to $43,818.27 as of August 6, 2002, to reflect
(1) fees and collection costs of $16 which respondent recorded on
April 15, 2002, and (2) unassessed accrued interest of
$12,346.78.
Petitioners argue that they are not liable for the disputed
interest because they promptly paid respondent the $7,556.09 for
Federal income taxes, penalties, and interest that the revenue
agent who audited their 1993 through 1996 Federal income tax
returns had agreed with them was their total Federal income tax
liability for those years. The revenue agent had set forth the
$7,556.09 on a Form 4549-CG, Income Tax Examination Changes,
which petitioners promptly signed and returned to the revenue
agent with their payment. Respondent’s service center in Fresno,
California (service center), later concluded that the revenue
agent had understated the amount of interest petitioners owed by - 4 -
prematurely taking into account net operating loss (NOL)
carrybacks to 1993 in disregard of section 6601(d)(1).
We decide first whether petitioners may challenge in this
proceeding the existence and amount of the disputed interest.
We hold they may. We decide second whether we are empowered to
decide petitioners’ alternative claims that (1) the service
center’s recalculation of interest for 1993 was incorrect and
(2) respondent is precluded from collecting the amount reflected
in the recalculation. We hold we are. We decide third whether
the amount of the disputed interest, without consideration of any
abatement thereof, equals as of the time of the lien the amount
then sought by respondent. We hold it does. We decide fourth
whether any of the disputed interest qualifies for abatement
under section 6404(a)(1) or (e)(1). We hold it does not.
Background
The facts in this background section are obtained from the
parties’ stipulation of facts, the exhibits submitted therewith,
and the pleadings. Petitioners resided in Monarch Beach,
California, when their petition was filed.
Petitioners’ 1993 Federal income tax return reported for
that year that petitioners had negative total income of $113,381,
negative taxable income of $175,161, and Federal income tax of
zero. The return reported that the computation of total income
included interest income of $11,558, capital losses totaling - 5 -
$2,657, deductible rental and partnership losses totaling
$25,000, and NOL carryovers totaling $97,282.2 The return also
reported that petitioners had sold their home during 1993 at a
gain of $904,596 and that they planned on replacing the home
within the applicable period of section 1034. On or about June
4, 1996, petitioners amended their 1993 return primarily to
recognize $630,764 of the gain realized on the sale of their home
and to offset that gain by $604,345 of NOLs inclusive of (1) the
previously mentioned $97,282, (2) $25,000 reportedly from 1993,
(3) $171,055 reportedly from 1994, and (4) $311,008 reportedly
from 1995. The amended return reported that petitioners’ Federal
income tax liability for 1993 continued to be zero.
Respondent’s revenue agent audited petitioners’ 1993 through
1996 Federal income tax returns and concluded his audit on or
about February 3, 1998, with the issuance of a letter to
petitioners’ representative, Sam Bellavia, C.P.A. (Bellavia).
That letter was accompanied by a Form 4549-CG (with supporting
schedules) completed by the revenue agent as to his audit of
petitioners’ 1993 through 1996 tax returns. The letter and the
Form 4549-CG (inclusive of the supporting schedules) informed
Bellavia of the revenue agent’s adjustments to petitioners’ 1993
through 1996 tax returns and the revenue agent’s conclusion that
2 Of the $97,282, $38,891 was from 1990, $25,000 was from 1991, and $33,391 was from 1992. - 6 -
those adjustments resulted in the following additional tax,
penalties, and interest:
1993 1995
Alternative minimum tax $3,221.00 $1,510.00 Sec. 6662 accuracy-related penalty 644.20 302.00 Interest computed until Mar. 5, 1998 1,548.23 330.66 5,413.43 2,142.66
As to 1993, the revenue agent listed on the Form 4549-CG and the
supporting schedules that he had determined the following
adjustments as increases or decreases to the taxable income
petitioners reported on their 1993 return:
Capital gain $630,764 Sec. 465 limited at risk 6,880 Itemized deductions 1,983 NOL carryback from 1994 (166,364) NOL carryback from 1996 (301,269) 171,994
The revenue agent’s letter to Bellavia advised Bellavia to
discuss the adjustments with petitioners and, if acceptable to
them, to have them sign and date the Form 4549-CG and return it
to the revenue agent. The letter stated that “It would be
appreciated if they [petitioners] would remit the balance due of
$7,556.09 [$5,413.43 + $2,142.66] at that time.” On March 3,
1998, petitioners signed the Form 4549-CG and returned it to the
revenue agent with a check for $7,556.09. The Form 4549-CG
stated immediately above their signatures:
Consent to Assessment and Collection –- I do not wish to exercise my appeal rights with the Internal Revenue Service or to contest in United States Tax Court the findings in this report. Therefore, I give - 7 -
my consent to the immediate assessment and collection of any increase in tax and penalties, and accept any decrease in tax and penalties shown above, plus additional interest as provided by law. It is understood that this report is subject to acceptance by the District Director.
Subsequently, respondent transferred the case to the service
center for assessment. Following its review of the Form 4549-CG
and supporting schedules, the service center concluded that the
revenue agent had understated the amount of interest due for 1993
by prematurely netting the NOL carrybacks from 1994 and 1996
against the adjustments for 1993. The service center determined
that the deficiency and related interest for 1993 were $130,926
and $39,558.63, respectively.
On March 20, 2002, respondent filed the NFTL to secure the
payment of the disputed interest of $31,455.49 shown in his
records still to be due from petitioners as of March 25, 2002,
with respect to their 1993 Federal income tax.3 Respondent had
assessed all of this interest on April 27, 1998. Petitioners
requested a hearing under section 6320(b) as to this filing, and
Appeals later held that hearing with Bellavia. At the hearing,
petitioners challenged the existence and amount of the interest
3 The reduction in interest from $39,558.63 to $31,455.49 was attributable to (1) $1,548.23 of interest that was included in petitioners’ payment of $7,556.09, (2) $15.89 of overpayment credits that were applied from 1995 and 1998, and (3) $6,539.02 of interest abated on May 4, 1998, in connection with respondent’s same-day tax abatement of $79,726 from the 1996 NOL carryback. (Respondent on Apr. 27, 1998, had abated $47,979 of tax for the 1994 NOL carryback.) - 8 -
underlying the lien and sought an abatement of interest under
section 6404(a)(1) and (e)(1). Appeals concluded that the
interest underlying the lien was calculated correctly. Appeals,
without giving any consideration to petitioners’ request for an
abatement of interest, also concluded that the interest as
calculated was due and, accordingly, that the lien was proper.
Appeals noted in the notice of determination that petitioners
agreed with the revenue agent’s adjustments to their 1993 income
as originally reported, that these adjustments (exclusive of the
NOL carrybacks) resulted in a $130,926 deficiency for 1993, and
that the revenue agent had improperly applied the NOL carrybacks
in his calculation of statutory interest for 1993. In connection
with the hearing, Appeals delivered to Bellavia a statement
detailing respondent’s computation of the disputed interest and a
copy of section 6601(d)(1), the relevant statutory provision.
Discussion
We start our analysis with a discussion of our jurisdiction
to decide this case. Whether we have jurisdiction over the
subject matter of a case is an issue that either party thereto,
or this or an appellate court sua sponte, may raise at any time.
The failure to question our jurisdiction is not a waiver of the
right to do so, for if we lack jurisdiction over an issue, we do
not have the power to decide it. Ins. Corp. of Ireland, Ltd. v.
Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982); David - 9 -
Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268, 269-270
(2000), affd. 22 Fed. Appx. 837 (9th Cir. 2001).
The Internal Revenue Code provides for our jurisdiction, and
we may exercise our jurisdiction only to the extent authorized by
Congress. Neilson v. Commissioner, 94 T.C. 1, 9 (1990); Naftel
v. Commissioner, 85 T.C. 527, 529 (1985); see also sec. 7442.
Here, the relevant jurisdictional provision is found in section
6330(d)(1), by cross-reference from section 6320(c). Sections
6320(c) and 6330(d)(1) entitle taxpayers such as petitioners
whose property is subject to a Federal tax lien to appeal a
determination made by Appeals sustaining the propriety of that
lien. Section 6330(d)(1)(A) provides that the appeal shall be
“to the Tax Court (and the Tax Court shall have jurisdiction with
respect to such matter)”. Section 6330(d)(1)(B) provides that
the appeal shall be to a Federal District Court “if the Tax Court
does not have jurisdiction of the underlying tax liability”.
We have previously construed section 6330(d)(1) as granting
us jurisdiction over a lien case brought under section 6320 when
it involves a type of tax that we normally consider in a
deficiency case, even if the lien case does not involve a
deficiency in that type of tax. See Montgomery v. Commissioner,
122 T.C. 1 (2004). While the type of tax here is Federal income
tax, a tax that we normally consider in a deficiency case,
petitioners do not dispute their liability for the Federal income - 10 -
tax respondent determined for 1993. Petitioners dispute only
respondent’s assessment of the statutory interest related to the
tax. Respondent computed that interest under section 6601.
We generally lack jurisdiction over issues concerning
interest computed under section 6601. Med James, Inc. v.
Commissioner, 121 T.C. 147, 151 (2003). We have jurisdiction to
redetermine such interest primarily in two types of situations.
First, section 7481(c) authorizes the Court to redetermine an
overpayment of interest if a taxpayer timely petitions the Court
to do so. Id. at 151-153. Second, section 6404(h) authorizes
the Court to review for an abuse of discretion the Commissioner’s
refusal to abate interest under section 6404. Woodral v.
Commissioner, 112 T.C. 19, 22-23 (1999). As relevant herein,
section 6404(e)(1) gives the Commissioner the discretion to abate
the assessment of interest on: (1) Any deficiency attributable
to any error or delay by an officer or employee of the Internal
Revenue Service in performing a ministerial act, or (2) any
payment of any tax described in section 6212(a) to the extent
that any error or delay in payment is attributable to the
officer’s or employee’s being erroneous or dilatory in performing
a ministerial act.4 In addition, section 6404(a)(1) gives the
4 Sec. 6404(e) was amended by sec. 301(a)(1) and (2) of the Taxpayer Bill of Rights 2, Pub. L. 104-168, 110 Stat. 1457 (1996), to permit the Commissioner to abate interest with respect to an unreasonable error or delay resulting from managerial or (continued...) - 11 -
Commissioner the discretion “to abate the unpaid portion of the
assessment of any tax or any liability in respect thereof” that
is excessive in amount. As one limitation to the latter
provision, section 6404(b) provides that a taxpayer may not file
a claim for abatement “in respect of an assessment of any
[income, estate, or gift] tax imposed under subtitle A or B”.
Petitioners’ representative at the administrative hearing
was not an attorney, and they are appearing before this Court pro
sese. We understand them to have asserted at the administrative
hearing that they are not liable for the disputed interest
because: (1) The revenue agent forgave that interest in
settlement of their case and (2) respondent assessed that
interest without notifying them beforehand. We also understand
them to have asserted at the administrative hearing that, if they
are liable for the disputed interest, respondent should have
abated this interest under section 6404(a)(1) as inequitable and
unjust, or under section 6404(e)(1) as attributable to an error
or delay by the Internal Revenue Service in performing a
ministerial act. We understand petitioners to be making here
allegations similar to those that they made at the administrative
hearing. We conclude that petitioners’ petition to this Court is
4 (...continued) ministerial acts. That amendment does not apply here in that it is effective for interest accruing on deficiencies for taxable years beginning after July 30, 1996. Id. - 12 -
in part a request under section 6404(e)(1) for an abatement of
interest. Thus, given that we have jurisdiction to review a
taxpayer’s claim for any abatement of interest under section
6404, Woodral v. Commissioner, supra at 22-23, we hold that we
have jurisdiction in the instant case to review the determination
of Appeals as to petitioners’ underlying tax liability consisting
of the disputed interest, see Katz v. Commissioner, 115 T.C. 329,
340-341 (2000). We note in this regard that petitioners have
never received a notice of deficiency for 1993, nor have they
otherwise had a previous opportunity to challenge the disputed
interest.
Respondent argues that petitioners may not in this
proceeding challenge their underlying tax liability consisting of
the disputed interest. According to respondent, petitioners
waived their right to challenge this liability when they signed
Form 4959-CG. We disagree. The Form 4549-CG petitioners signed
states that they were waiving their right to contest in this
Court the findings set forth in that form. We read nothing in
the Form 4549-CG signed by petitioners that precludes them from
challenging in this proceeding respondent’s finding made after
the execution of Form 4549-CG that petitioners are liable for the
disputed interest of $39,558.63. Although the $39,558.63 was
“interest as provided by law”, it was not among the findings set - 13 -
forth on the form. To the contrary, $1,548.23 of interest was
listed on Form 4549-CG as due for 1993.
Respondent relies erroneously on Aguirre v. Commissioner,
117 T.C. 324 (2001). There, the taxpayers petitioned this Court
under section 6330(d)(1) requesting solely that we redetermine
their tax liability. The taxpayers had previously signed a Form
4549, Income Tax Examination Changes, waiving their right to
contest in this Court the Commissioner’s finding of that
liability. We held that the taxpayers were precluded from
challenging this finding by virtue of their waiver. Id. at 327.
Here, by contrast, the disputed interest was not a finding
included within the Form 4549-CG petitioners signed. The
disputed interest was not even known by either them or respondent
to have existed at that time.
We turn to the service center’s recalculation of the
disputed interest underlying the lien. Neither party has
challenged our jurisdiction to decide petitioners’ claim that the
amount of that interest is not the correct amount of interest
that accrued on petitioners’ deficiency for 1993. Nor has either
party challenged our jurisdiction to decide petitioners’ claim
that, if it is the proper amount, then respondent has compromised
that amount to the lesser amount of interest already paid by
petitioners for 1993. Still, we believe that it is incumbent
upon us to discuss our jurisdiction as to both of these matters. - 14 -
Petitioners are through their petition invoking the
jurisdiction that Congress provided to us in section 6330(d) as
made applicable by section 6320(c). Pursuant to section 6330(d),
we are empowered to redetermine the amount of an underlying tax
liability whenever that liability is properly at issue and is for
the type of tax that we normally consider in a deficiency
proceeding. Landry v. Commissioner, 116 T.C. 60, 62 (2001); see
also sec. 6330(c)(2)(B). Here, the type of “tax” at issue is
interest for which the parties, in part, dispute the
appropriateness of an abatement under section 6404(e).
The fact that we are not specifically authorized by section
6404(h) to redetermine interest, but are specifically empowered
only to decide the appropriateness of an abatement thereunder,
does not mean that we also lack jurisdiction under section
6330(d) to make such a redetermination in a lien proceeding such
as this. We have held that our jurisdiction under section
6330(d) allows us in a lien or levy proceeding to redetermine an
underlying tax liability that is entirely self-assessed, although
the liability is not a deficiency. Montgomery v. Commissioner,
122 T.C. 1 (2004); cf. sec. 6213(a). We do not read section 6330
as empowering us to decide only whether petitioners are entitled
to an abatement of interest, thus remitting them to a Federal
District Court lawsuit if they wish to challenge their interest
liability on another ground. Added expense would be borne by - 15 -
petitioners and respondent alike in connection with such a
subsequent lawsuit in a Federal District Court, and it would be
an inefficient use of the judiciary’s limited resources to
require that petitioners’ liability for interest be tried in two
courts instead of one.
Where as here the existence and amount of an underlying tax
liability is properly at issue in an appeal brought under section
6330(d)(1), we review the taxpayer’s liability de novo. Sego v.
Commissioner, 114 T.C. 604, 610 (2000). Petitioners do not in
their papers include any calculation of disputed interest but
simply set forth two reasons in support of their claim that their
interest liability is now zero. Petitioners argue first that the
Form 4549-CG conclusively determined their 1993 liability for
Federal income tax, inclusive of penalty and interest, and that
respondent is now barred from making any additional assessment
for that year. Petitioners argue second that the assessment for
the disputed interest is invalid in that they were not informed
about that interest before the assessment was made.
We disagree with both of petitioners’ arguments. As to the
first argument, it is firmly established that section 7121 sets
forth the exclusive means by which an agreement between the
Commissioner and a taxpayer concerning the latter’s tax liability
may be accorded finality. E.g., Hudock v. Commissioner, 65 T.C.
351, 362 (1975). Section 7121 authorizes the Commissioner to - 16 -
enter into a written agreement with any person with respect to
any tax for any taxable period and provides that such an
agreement shall be final and conclusive if approved by the
Secretary. See sec. 7121(a) and (b); see also sec.
7701(a)(11)(B). Section 301.7121-1(d), Proced. & Admin. Regs.,
provides that all such agreements shall be executed on forms
prescribed by the Internal Revenue Service. The Commissioner has
prescribed for this purpose two forms; namely, Form 866,
Agreement as to Final Determination of Tax Liability, and Form
906, Closing Agreement. Form 866 is used to determine
conclusively a taxpayer’s total tax liability for a taxable
period. Form 906 is used if an agreement relates to one or more
separate items affecting the tax liability of a taxpayer. Sec.
601.202(b), Statement of Procedural Rules.
Petitioners did not execute either a Form 866 or a Form 906.
They executed Form 4549-CG. Form 4549-CG is not an agreement
entered into under section 7121. See Hudock v. Commissioner,
supra at 362-363. Nor does the Form 4549-CG at hand contain any
language purporting to be respondent’s agreement concerning any
or all of petitioners’ 1993 liability for tax, penalty, or
interest. In fact, the Form 4549-CG petitioners signed does not
constitute an agreement by respondent to anything at all; it
merely reflects petitioners’ consent to respondent’s immediate
assessment and collection of the taxes, penalties, and interest - 17 -
included therein. Although we understand petitioners to contend
credibly that they believed that they were entering into an
agreement to settle their 1993 liability when they executed the
Form 4549-CG, such a unilateral belief on their part does not
satisfy the requirements of section 7121. Nor were the
requirements of that section met simply because respondent
accepted petitioners’ check in the amount listed on Form 4549-CG
as the total tax, penalties, and interest for 1993 and the other
3 years under audit. See Parks v. Commissioner, 33 T.C. 298
(1959); see also Bowling v. United States, 510 F.2d 112 (5th Cir.
1975); United States v. Hardy, 299 F.2d 600 (4th Cir. 1962).
We also disagree with petitioners’ second argument, that the
assessment for the disputed interest is invalid in that they were
not informed about that interest before it was assessed.
Petitioners concede that the assessment was timely; we find no
provision in the Internal Revenue Code that would require any
such prior notification.
Interest on a Federal income tax liability generally begins
to accrue from the last date prescribed for payment of that tax
and continues to accrue, compounding daily, until payment is
made. See secs. 6601(a), 6622. In the case of an income tax
deficiency that is later reduced or eliminated by a carryback of
an NOL, section 6601(d)(1) authorizes the Commissioner to collect
deficiency interest from taxpayers such as petitioners whose - 18 -
deficiencies are eliminated by NOL carrybacks. Section
6601(d)(1), which codifies the principle announced in Manning v.
Seeley Tube & Box Co., 338 U.S. 561 (1950), that a taxpayer is
liable for interest on a deficiency until the deficiency is paid
or otherwise abated, provides that a reduction in tax by reason
of a carryback of an NOL does not affect the computation of
statutory interest due for the period ending with the filing date
for the taxable year in which the NOL arose.
The revenue agent did not apply section 6601(d)(1) in his
computation of the disputed interest. The service center did.
In accordance with the mandate of section 6601(d)(1), the service
center computed petitioners’ interest for 1993 by treating the
carrybacks from 1994 and 1996 as if they had arisen on April 15,
1995 and 1997, respectively. We have reviewed the specifics of
the service center’s computation, and we agree with that
computation. Thus, absent an abatement of any or all of the
disputed interest, petitioners are liable for the amount of
interest determined by the service center.
Respondent argues that petitioners do not qualify for an
abatement of interest under section 6404. We agree. Petitioners
do not qualify for an abatement of interest under section
6404(a)(1), given that this case is one “in respect of an
assessment of * * * [income] tax imposed under subtitle A”.
See sec. 6404(b); see also Melin v. Commissioner, 54 F.3d 432 - 19 -
(7th Cir. 1995); Bax v. Commissioner, 13 F.3d 54, 58 (2d Cir.
1993); Asciutto v. Commissioner, T.C. Memo. 1992-564, affd. per
order 26 F.3d 108 (9th Cir. 1994). Petitioners also do not
qualify for an abatement of interest under the applicable version
of section 6404(e)(1). Such an abatement requires the occurrence
of a “ministerial act”, and the revenue agent’s disregard of
section 6601(d)(1) results not from a ministerial act but from a
misapplication of Federal tax law. See sec. 301.6404-4(b)(1) and
(2), Proced. & Admin. Regs.
In sum, we hold for respondent as to all of the substantive
matters in dispute. In so doing, we have considered all
arguments made by the parties and have found those arguments not
discussed herein to be irrelevant and/or without merit.
Accordingly,
Decision will be
entered for respondent.