Opinion
CIVIL ACTION NO. 1:02-CV-2085-BBM
May 19, 2003
ORDER
This action is before the court on the Internal Revenue Service's motion for summary judgment [Doc. No. 11-1].
I. Factual and Procedural Background
On July 29, 2002, PCT Services, Inc. ("PCT"), a company in the business of providing janitorial and cleaning services to federal hospitals and military institutions, filed the instant lawsuit against the United States Internal Revenue Service ("IRS"), asking the court to review the IRS's decision to recover PCT's unpaid employment taxes through the filing of a federal tax lien. PCT's unpaid tax obligations have a long history. From 1991 through 1995, PCT operated throughout the United States, but paid virtually no employment taxes to the IRS. For the controverted period, PCT accrued tax liabilities totaling approximately $2.5 million.
Due to PCT's extended nonpayment, significant penalties and interest attached to these corporate tax liabilities.
Through various enforcement efforts, the IRS collected around $1.5 million from PCT in June 1995. As a result of the IRS's enforcement actions, PCT filed for Chapter 11 bankruptcy protection. During the bankruptcy proceedings, the IRS filed a proof of claim for PCT's unpaid taxes. The IRS's claim was incorporated into PCT's reorganization plan, which the bankruptcy court confirmed on February 14, 1997. From that date until 1999, PCT made payments to the IRS under the reorganization plan. However, in June 1999, PCT defaulted on its payments to the IRS.
Upon PCT's default, the outstanding employment tax liabilities were referred to the Collection Division of the IRS, and appropriate default notices were mailed to PCT. Thereafter, the IRS decided to pursue PCT's unpaid liabilities through the levy and lien process. On September 6, 2001, the IRS filed a notice of federal tax lien. By letter dated September 11, 2001, the IRS advised PCT that the notice of federal tax lien had been filed. The IRS also advised PCT of its right to seek a collection due process hearing ("CDP hearing") to review the filing of the federal tax lien. PCT timely requested a CDP hearing. In its request, PCT claimed that the federal tax lien was inappropriate because: (1) PCT had the capability of performing under its reorganization plan; (2) the IRS incorrectly computed the amount PCT actually owed the IRS; and (3) the bankruptcy court had jurisdiction to determine any disputes arising under the terms of the reorganization plan.
The CDP hearing was held on May 6, 2002. IRS settlement officer Patricia Kukla ("Kukla") conducted the hearing and made several determinations. First, Kukla determined that the IRS had complied with all applicable law and procedures in the course of filing the notice of federal tax lien. Second, Kukla determined that, for the five quarters immediately preceding the hearing, PCT had not complied with its federal employment tax obligations. After making these findings, Kukla balanced the need for efficient collection of taxes with PCT's concern that the collection action be no more intrusive than necessary. In light of PCT's delinquencies in meeting its employment tax obligations, Kukla declined to consider collection alternatives and upheld the federal tax lien. Kukla issued a notice of determination regarding her decision to uphold the lien on June 29, 2002.
PCT timely filed an appeal of Kukla's determination with this court. In its complaint, PCT presents two grounds upon which the IRS's decision to file a lien was erroneous. The first count asks the court to review and overturn the IRS's determination that PCT is currently noncompliant with its employment tax obligations. The second count alleges that the IRS has incorrectly determined the appropriate amount of the federal tax lien. The IRS filed an answer on September 30, 2002, urging the court to uphold Kukla's determination regarding the tax lien. Thereafter, the parties engaged in four months of discovery. Finally, on March 19, 2003, the IRS filed a motion for summary judgment [Doc. No. 11-1]. The court now reviews the IRS's outstanding motion.
II. Summary Judgment Standard of Review
Summary judgment is proper "if . . . there is no genuine issue as to any material fact" and "the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). In considering a motion for summary judgment, "[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor."Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). The court is mindful that "[c]redibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge." Id. at 255. However, the plaintiff must do more than "simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). "The mere existence of a scintilla of evidence in support of the plaintiffs position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff." Anderson, 477 U.S. at 252. Accordingly, the plaintiff may not avoid summary judgment with evidence that is "merely colorable or is not significantly probative." Raney v. Vinson Guard Serv., Inc., 120 F.3d 1192, 1196 (11th Cir. 1997).
III. IRS Notice of Determination
Section 6321(a) of the Internal Revenue Code provides that:
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.26 U.S.C. § 6321(a). Accordingly, by law, the United States has an automatic lien on the property of taxpayers with unpaid tax liabilities.Id. This lien is effective against other creditors, however, only upon filing of a notice of federal tax lien, as provided for in section 6323(f). Id. at § 6323. Within five days of filing a notice of federal tax lien, the IRS must notify the taxpayer in writing about the lien filing and the taxpayer's right to a CDP hearing to review the appropriateness of the lien. Id. at § 6320.
If a taxpayer elects a CDP hearing, an IRS appeals officer must verify that the requirements of any applicable law or administrative procedure have been met. Id. at § 6330(c)(1). At the hearing, the taxpayer may raise "any relevant issue relating to the unpaid tax."Id. at § 6330(c)(2)(A). The taxpayer may also raise challenges to the existence or amount of the underlying tax liability, "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."Id. at § 6330(c)(2)(B). Following the CDP hearing, the IRS officer must determine whether the lien is appropriate, taking into account the verification the officer has made, the issues raised by the person requesting the hearing, and "whether any 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." Id. at § 6330(c)(3). The IRS officer must inform the taxpayer of its decision in an official notice of determination.
If a taxpayer disagrees with the IRS officer's ultimate determination, the taxpayer may, within thirty days of the determination, appeal to a federal district court. Id. at § 6330(d)(1). Although the statute does not prescribe the standard of review that a district court is to apply in examining the IRS administrative determination, the subject is addressed in detail in the legislative history of section 6330. Goza v. Commissioner, 114 T.C. 176 (2000); see also MCRA Info. Servs. v. United States, 145 F. Supp.2d 194 (D. Conn. 2000); Sego v. Commissioner, 114 T.C. 604 (2000). Specifically, Congress noted in a conference report that:
The determination of the appeals officer may be appealed to the Tax Court or, where appropriate, the Federal district court. Where the validity of the tax liability was properly at issue in the hearing, and where the determination with regard to the tax liability is part of the appeal, no levy may take place during the pendency of the appeal. The amount of tax liability in such cases will be reviewed by the appropriate court on a de novo basis. Where the validity of the tax liability is not properly part of the appeal, the taxpayer may challenge the determination of the appeals officer for an abuse of discretion. In such cases, the appeals officer's determination as to the appropriateness of the collection activity will be reviewed using an abuse of discretion standard of review.
IRS Restructuring Reform Act of 1998, H.R. Conf. Rep. No. 105-599, at 266 (1998). Accordingly, where the validity of the underlying tax liability is properly at issue, the district court must review the matter on a de novo basis. However, the court must review issues in the IRS's administrative determination, other than the validity of the underlying tax liability, for an abuse of discretion. Sego, 114 T.C. at 604. Issues not raised or addressed at the CDP hearing cannot be reviewed on appeal. Loofbourrow v. Commissioner, 208 F. Supp.2d 698, 706 (S.D. Tex. 2002); Konkel v. Commissioner, No. 6:99-CV-1026-ORL-31C, 2000 WL 1819417, at *3 (M.D. Fla. Nov. 6, 2000).
A. PCT's Compliance with Current Employment Tax Obligations
At the CDP hearing, Kukla explained that, if PCT could demonstrate that it was in compliance with its current employment tax obligations, the IRS would consider tax collection alternatives to the federal tax lien. Such collection alternatives allow the IRS to release the federal tax lien and recoup the unpaid taxes through other means. See 26 U.S.C. § 6630(c)(2)(A)(iii). However, at the CDP hearing, Kukla found that PCT was not in current compliance with its employment tax obligations. Without proof of present compliance, Kukla declined to consider collection alternatives.
In Count I of its complaint, PCT challenges Kukla's finding that it was, at the time of the hearing, noncompliant with its existing payroll tax reporting and deposit requirements. Because Count I of PCT's complaint challenges an issue other than the validity of the underlying tax liability, the court must apply an abuse of discretion standard of review. Sego, 114 T.C. at 604; see also Pelliccio v. United States, No. 3:01CV601 AHN, 2003 WL 1549397, at *4 (D. Conn. Feb. 4, 2003). Where an employer is not in current compliance with its federal employment tax obligations, a settlement officer does not abuse his or her discretion by declining to consider settlement alternatives. Polmar Int'l, Inc. v. United States, No. CIV.COO-2045MJB, 2002 WL1354955, at *4 (W.D. Wash. 2002);Kitchen Cabinets, Inc. v. United States, No. Civ.A.3:OOCV0599M, 2001 WL 237384, at *3 (N.D. Tex. 2001); Berkey v. Department of Treasury, No. OO-CV-75149, 2001 WL 1397680, at *5 (E.D. Mich. 2001);TTK Mgmt.v. United States, No. SA CV 99-1542, 2000 WL 33122706, at *2 (C.D. Cal. 2000).
Employers, such as PCT, who are required to pay federal employment taxes, must timely file returns on a quarterly basis and make deposits of employment taxes throughout the quarter. 26 U.S.C. § 6302; 26 C.F.R. § 31.6011(a)-1, 31.6071(a)-1, 31.6302-1. The appropriate timing for deposits depends on the aggregate amount of the taxpayer's employment tax during the preceding year. Id. at § 31.6302-1. Where the total employment tax is not paid fully through deposits during the quarter, it must be paid by the due date of the return. Id. at § 31.6151-l(a).
In the five quarters preceding the CDP hearing, PCT did not meet its deposit obligations. For the first quarter of 2001, PCT did not timely file its employment tax return, make timely deposits, or fully pay its tax liabilities by the return's due date. For the second quarter of 2001, PCT did not pay any of its federal employment tax or timely file its tax returns. Likewise, for the third and fourth quarters of 2001, PCT did not make appropriate deposits of its federal employment tax. PCT attempts to avoid the consequences of these delinquencies by arguing that it filed monthly returns, rather than quarterly returns, in 2002. However, an employer should only file returns on a monthly basis when the IRS directs the employer to do so. 26 C.F.R. § 31.6011(a)5. Each monthly return filed by PCT was improperly filed on PCT's own initiative. Moreover, even if PCT had been directed to file its returns on a monthly basis in 2002, PCT still failed to meet its semi-weekly deposit obligations.Id. at § 31.6302-1(b). In response to the IRS's motion for summary judgment, PCT concedes all of these facts.
Given these undisputed facts, it is apparent that PCT was not in compliance with its employment tax obligations at the time of the CDP hearing with Kukla. There was no abuse of discretion in Kukla's finding as such. Because PCT was not presently compliant with its tax obligations, Kukla did not abuse her discretion in declining collection alternatives. Polmar lnt'l, Inc., 2002 WL1354955, at *4;Kitchen Cabinets, Inc., 2001 WL 237384, at *3;Berkey, 2001 WL 1397680, at *5; TTK Mgmt., 2000 WL 33122706, at *2. Accordingly, there is no genuine issue of material fact regarding Count I of PCT's complaint The IRS is entitled to summary judgment on Count I.
B. Calculation of Underlying Tax Obligation
Count II of PCT's complaint challenges the amount of the federal tax lien. Specifically, PCT alleges that the IRS has not properly credited the company for payments made to the IRS during the past eight years. In its motion for summary judgment, the IRS responds that PCT did not raise this issue at the CDP hearing, and as such, cannot raise the issue now. As a secondary argument, the IRS asserts that, even if all payments have not yet been properly accounted for, PCT admits that a significant liability is still outstanding. With this admission, the IRS believes the notice of federal tax lien may stand, even if the amount is not properly recorded.
In evaluating Count II of PCT's complaint, the court must determine the applicable standard of review. To begin with, the court notes that issues not raised at the CDP hearing cannot be reviewed on appeal.Loofbourrow, 208 F. Supp.2d at 706; Konkel, 2000 WL1819417, at *3; Miller v. Commissioner, 115 T.C. 582 (2000);see also Pelliccio, 2003 WL 1549397, at *3 Dean v. United States, No. 3:01-CV-430/LAC, 2002 WL 31662299, at *4 (N.D. Fla. Oct. 23, 2002). Further, as noted above, where the validity or amount of the underlying tax liability is properly part of the taxpayer's appeal from the CDP hearing, the court must apply a de novo standard of review. Goza, 114 T.C. at 176; see also MCRA Information Servs., 145 F. Supp.2d at 194; Sego, 114 T.C. at 604. However, the validity or amount of the underlying tax liability may only be challenged at the CDP hearing, and thus, on appeal, "if the [taxpayer] did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." 26 U.S.C. § 6330(c)(2)(B). Where a taxpayer has been given a prior opportunity to dispute the tax liability, the taxpayer may not raise that issue at the CDP hearing. Id. This rule applies, whether or not the taxpayer took advantage of his or her prior opportunity to dispute the tax liability. Maton v. Commissioner, No. 02 C 6609, 2003 WL 1860514, at *2 (N.D. I11. Apr. 10, 2003). Therefore, PCT could be barred from raising the issue of its underlying tax liability on appeal, if it did not raise the issue at the CDP hearing, or if it had a prior opportunity to challenge the amount of liability. Otherwise, the court must conduct a de novo review of Kukla's determination regarding the amount of the underlying liability.
Despite the IRS's arguments, this matter cannot be resolved on summary judgment. Genuine issues of material fact remain outstanding. First, this court can only consider issues raised at the CDP hearing.Miller, 115 T.C. at 589 n. 2 (holding that "we would not consider . . . [the taxpayer's] alternative request . . . because the record does not establish that he raised that issue at his Appeals Officer hearing"); see also 26 C.F.R. § 301.6330-1(f), Q-F5 (2002). Kukla testifies by declaration that, "[a]t the collection due process hearing, no representative of PCT Services asserted that the Internal Revenue Service had failed to account for payments made by or on behalf of PCT Services for the federal employment tax liabilities shown on the notice of federal tax lien giving rise to the collection due process hearing." She goes on to declare that PCT provided no documentary evidence "before, during, or after the collection due process hearing" substantiating PCT's claim that the IRS had not properly credited PCT for payments rendered. In the face of Kukla's declarations, Melvin Johnson ("Johnson"), the corporate comptroller of PCT, testifies in an affidavit that the issue of proper credit for its payments to the IRS "was raised at the Collection Due Process Hearing conducted by Revenue Officer Patricia Kukla." Likewise, counsel for PCT clearly indicated in his Request for a Collection Due Process Hearing that "[t]he service has not correctly computed the amount owing under the terms of the proposed levy." Accordingly, the parties have submitted directly contradictory evidence regarding the matters broached at the CDP hearing. Because only issues actually raised at the CDP hearing can be challenged on appeal, a genuine issue of material fact exists as to whether the matter is properly before this court. If the issue of proper credit was not raised at the CDP hearing, Count II of PCT's complaint must be dismissed, as the issue is not available for review on appeal. Loofbourrow, 208 F. Supp.2d at 706; Konkel, 2000 WL1819417, at *3;Miller, 115 X.C. at 589 n. 2; see also Pelliccio, 2003 WL 1549397, at *3 Dean, 2002 WL 31662299, at *4.
The court, on summary judgment, may consider a declaration executed in accordance with 28 U.S.C. § 1746 as an affidavit.United States v. Four Parcels of Real Prop., 941 F.2d 1428, 1444 n. 36.
Further, even if Johnson questioned PCT's underlying tax liability at the CDP hearing, a genuine issue of material fact remains as to whether that issue was properly before Kukla. Importantly, the statute provides that the validity or amount of the underlying tax liability may only be challenged at the CDP hearing, and thus, on appeal, "if the [taxpayer] did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." 26 U.S.C. § 6330(c)(2)(B). If PCT had a prior opportunity to challenge the underlying liability, the issue would not be properly before Kukla or this court. Maton, 2003 WL1860514, at *2.
The record indicates that PCT may have had several prior opportunities to challenge the amount of the underlying tax liability. The first such opportunity most likely arose during the bankruptcy proceedings, when the IRS filed a proof of claim for PCT's unpaid taxes. Another opportunity possibly arose in June 1999, when the IRS mailed default notices to PCT for its failure to pay under the Chapter 11 reorganization plan. Also, the transcripts of account provided by the IRS indicate that, for each quarter at issue, the IRS sent PCT an "Intent to Levy Collection Due Process Notice" on December 18, 2000. If PCT received those notices, but failed to challenge the amount of tax liability, then PCT would not have been permitted to challenge its underlying tax liability at the instant CDP hearing.
Therefore, the record evidence presents a genuine issue of material fact as to whether the challenge to PCT's underlying tax liability was available for review at the CDP hearing. If PCT had no right to raise the issue at the hearing, then Kukla's determination must stand, whether or not Johnson raised the issue. On the other hand, if PCT had a right to raise the issue at the hearing, and Johnson did so, then this court must conduct a de novo review of PCT's underlying tax liability.
Finally, even if the issue had been properly raised at the CDP hearing, the court could not resolve this dispute on summary judgment. During discovery, PCT produced thirty-seven checks to the IRS for which PCT believes it has not been afforded proper credit. Kukla traced the application of these funds and located most of PCT's payments. PCT accepts Kukla's tracking of the funds. However, the IRS admits that Kukla cannot currently account for $49,277.19. Kukla is undertaking additional steps to account for this money. Without confirmation as to whether these funds have been applied to PCT's tax obligations, genuine issues of material fact remain as to the proper amount of the underlying tax liability. For this additional reason, summary judgment on the issue of PCT's outstanding tax liability is inappropriate. IV. Summary
The court notes that the CDP hearing process and judicial review is structured so that an IRS settlement officer will have an opportunity to review tax issues prior to the referral of the issue to a federal district court. 26 U.S.C. § 6330(d). In some cases, where an issue was most appropriately addressed by an IRS settlement officer prior to any consideration by a judge, courts have remanded the appeal to the IRS for an additional CDP hearing. See Silver v. Smith, No. 01-CV-61931, 2002 WL 31367926 (W.D.N.Y. Sept. 5, 2002); Herycyk v. United States, No. 4:01CV00058, 2001 WL 1836194 (N.D. Oh. Dec. 11, 2001); Mesa Oil Inc. v. United States, No. Civ.A. 00-B-851, 2000 WL 1745280 (D. Colo. Nov. 21, 2000). Here, the court believes that full consideration by a settlement officer of these issues in the context of a CDP hearing would be helpful prior to any further judicial review.
Based on the foregoing, the IRS's motion for summary judgment [Doc. No. 11-1] is GRANTED IN PART and DENIED IN PART. Count I of PCT's complaint is hereby DISMISSED. However, outstanding issues of fact remain on Count II of PCT's complaint. To resolve these outstanding issues of fact, the court ORDERS the parties TO BE AND APPEAR before the court on June 5, 2003 at 2:00 P.M. At this hearing, the court will resolve the following issues through the parties' presentation of evidence and argument:
1. Whether the matter of PCT's underlying tax liability and proper credit for PCT's payments to the IRS was raised at the collection due process hearing.
2. Whether the issue of PCT's underlying tax liability was properly before the hearing officer.
3. Whether PCT has received proper credit for the payments it has submitted to the IRS.
The parties are ORDERED to bring all necessary witnesses, documents, and other evidence to this hearing.
IT IS SO ORDERED, this 19th day of May, 2003.