Opinion
7909-19L
02-28-2022
MICHAEL S. WRIGHT, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
Emin Toro Judge
In this collection due process (CDP) case, petitioner, Michael S. Wright, seeks review pursuant to sections 6320(c) and 6330(d)(1) of a notice of determination by the Internal Revenue Service Independent Office of Appeals (IRS Appeals), dated April 11, 2019. That notice of determination sustained the filing of a Notice of Federal Tax Lien with respect to Mr. Wright's unpaid federal income tax liability for the taxable year 2016.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code (I.R.C. or Code), Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent, the Commissioner of Internal Revenue, has moved for summary judgment under Rule 121 contending that IRS Appeals' determination sustaining the proposed collection action was proper as a matter of law. Concluding that IRS Appeals reached the right answer with respect to the sole issue disputed by Mr. Wright, we will grant the Commissioner's motion.
Background
The following facts are drawn from the parties' pleadings and the Commissioner's motion papers, including the declaration and exhibits attached thereto. See Rule 121(b). Mr. Wright resided in California when he filed his petition.
I. Mr. Wright's 2016 Tax Return
In 2016, Mr. Wright was engaged in divorce proceedings in California state court. During that year, he received a cash distribution from his individual retirement account (IRA). For purposes of resolving the motion before us, we assume, consistent with Mr. Wright's assertions, that Mr. Wright gave half of that distribution to his former wife. Mr. Wright received a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reflecting the distribution. He timely filed Form 1040, U.S. Individual Income Tax Return, for the 2016 taxable year, reporting the entire amount of the IRA distribution, but failed to pay the full amount of tax due shown on the return.
II. Respondent's Collection Efforts and CDP Proceedings
A. Notice of Federal Tax Lien Filing
In an effort to collect Mr. Wright's outstanding liability, the IRS filed a notice of federal tax lien and notified him of the filing and his right to a hearing under section 6320.
Mr. Wright timely mailed the IRS a request for a CDP hearing by submitting Form 12153, Request for a Collection Due Process or Equivalent Hearing (CDP Hearing Request). In the CDP Hearing Request, Mr. Wright checked a box stating "I Cannot Pay Balance" and explained that he was going through a divorce proceeding, that his assets had been frozen by the state court overseeing the divorce proceeding, and that he had a hearing scheduled to "work towards settlement and division of assets." He also challenged his underlying tax liability, stating that his former wife received half of the net proceeds to which the unpaid tax liability related and that she was responsible for half of the tax liability.
B. CDP Proceedings
1. Initial Evaluation of Mr. Wright's Case
Mr. Wright's CDP case was assigned to a settlement officer in the IRS Appeals office in Holtsville, New York. The settlement officer reviewed Mr. Wright's administrative file and confirmed that the tax liabilities in question had been properly assessed and that all other requirements of applicable law and administrative procedure had been met. The settlement officer mailed Mr. Wright a letter confirming IRS Appeals' receipt of the CDP Hearing Request.
The letter explained that, for the settlement officer to consider an alternative collection method, Mr. Wright needed to submit a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and a completed Form 656, Offer in Compromise, along with all required attachments and supporting documentation. The letter also scheduled a telephone hearing, which was subsequently rescheduled.
2. IRS Appeals Hearing
At the hearing, Mr. Wright again stated that his former wife was "responsible for half [of] the [unpaid] balance." He said he had a court order to support that position. The settlement officer's notes reflect that she "advised [Mr. Wright] that he filed married, filing separately] and that he is the only one responsible for the taxes and [that the] IRS does not go by the court order," and that "he is to get the funds from his [former wife] to pay" the IRS.
Mr. Wright and the settlement officer also discussed collection alternatives, including an installment agreement. The settlement officer requested that Mr. Wright provide her with additional documentation in order to consider whether a collection alternative would be acceptable to the IRS.
3. Notice of Determination
The settlement officer and Mr. Wright held further discussions concerning collection alternatives, but Mr. Wright never returned the documentation the settlement officer requested. On April 11, 2019, the settlement officer issued the notice of determination now under review.
In the notice of determination, the settlement officer noted that Mr. Wright "requested the collection alternative of cannot pay" and that he disputed whether he was responsible for half of the tax liability. The settlement officer construed Mr. Wright's assertion that he was responsible for only one-half of the tax liability as a challenge to his underlying tax liability under section 6330(c)(2)(B), but she concluded that Mr. Wright was responsible for the entire underlying liability. She noted that "he filed married, filing separately] and that he is the only one responsible for the taxes and . .. that the IRS does not go by the court order, " and that if a court ordered his former wife to pay half of the liability, his recourse is as to her, not as to the government. She concluded the notice of determination by stating that Mr. Wright's former wife was "not responsible for the tax liability as [Mr. Wright] filed marrie[d, ] filing separately."
It is not entirely clear whether, in making the statements regarding Mr. Wright's filing status, the settlement officer meant to make a determination on the merits of his arguments or whether she instead believed that Mr. Wright could not even raise the issue of his tax liability. For instance, in the "Collection Due Process Checklist" that the settlement officer completed, she indicated that the issue of Mr. Wright's underlying liability was raised, but that it was not properly raised and drew an arrow pointing to a handwritten note saying "[Filing Status 3:] married separate." It is not clear to us what that notation was intended to mean. Given our determination below, however, we need not determine the notation's precise meaning.
III. Tax Court Proceedings
Mr. Wright timely petitioned the Court for review of the notice of determination. The petition stated:
The [IRA] these funds were withdrawn from [is] considered "community property" in California. The amounts withdrawn were equally divided between my wife and me during 2016. I dutifully reported the [amounts] on my [2016] tax returns, [believing one-half] of this tax liability would be borne by my wife through a divorce [proceeding], currently being heard in San Bernardino Superior Court in California. It is my contention my wife should share [one-half] of this liability as she received [one-half of] the cash benefit.
The petition also stated that one-half of the cash withdrawn from the IRA in question was deposited in an account of Mr. Wright's now-former wife and that she "should have reported [one-half] of these deposits as income on her [Form] 1040 for tax year 2016," noting that Mr. Wright "supplied her with the [relevant Forms 1099-R] for her reference."
The Commissioner moved for summary judgment on March 5, 2020. By Order served March 10, 2020, Mr. Wright was directed to file a response to the Commissioner's motion on or before March 30, 2020. He did not file a response.
The Court held a conference call with the parties on June 18, 2020. During the conference call, Mr. Wright stated that he would like additional time to discuss the case with the Commissioner's counsel in view of the ongoing divorce proceedings. The Court agreed to allow the parties additional time to pursue a resolution.
Counsel for the Commissioner subsequently filed multiple status reports describing the status of the case. On December 15, 2021, counsel for the Commissioner filed a status report stating that she had not heard from Mr. Wright for approximately two months and requesting that the Court act on the Commissioner's motion for summary judgment. By Order served December 20, 2021, the Court again provided Mr. Wright an opportunity to respond to the Commissioner's motion for summary judgment. To date, the Court has received no response by or on behalf of Mr. Wright. We could rule against him for that reason alone. See Rules 121(d) and 123(b). We will nevertheless consider the arguments we glean from his petition on their merits.
Discussion
We must decide whether the settlement officer erred in determining that Mr. Wright is responsible for the entire federal income tax liability resulting from the IRA distribution in 2016. Mr. Wright raised no other issues in his petition. For the reasons discussed below, we conclude that the settlement officer reached the right result-that is, that Mr. Wright is responsible for the entire tax liability resulting from the IRA distribution in 2016.
Issues not raised in an assignment of error in the petition are deemed conceded. Rule 331(b)(4). See DAF Charters, LLC v. Commissioner, 152 T.C. 250, 266 (2019) (holding that, when a taxpayer raised only the issue of underlying liability in its petition, any potential issues pertaining to IRS Appeals' administrative decision were deemed conceded).
I. General Legal Principles
A. CDP Principles
Under section 6321, the Federal Government obtains a lien against "all property and rights to property, whether real or personal" of any person liable for federal tax upon demand for payment and failure to pay. See Iannone v. Commissioner, 122 T.C. 287, 293 (2004). The lien arises when the assessment is made. See I.R.C. § 6322. The IRS files a notice of federal tax lien to preserve priority and put other creditors on notice. See I.R.C. § 6323. But section 6320(a)(1) requires the IRS to provide a taxpayer written notice of the filing of a notice of federal tax lien upon that taxpayer's property. The notice of filing must inform the taxpayer of the right to request a hearing with IRS Appeals. I.R.C. § 6320(a)(3)(B), (b)(1).
Subsections (c), (d) (other than paragraph (2)(B) thereof), and (e) of section 6330 govern the conduct of a hearing requested under section 6320. I.R.C. § 6320(c); see also Moosally v. Commissioner, 142 T.C. 183, 187 (2014). As relevant here, at the hearing, the taxpayer may raise any relevant issues including challenges to the appropriateness of collection actions and collection alternatives. I.R.C. § 6330(c)(2)(A). The taxpayer may challenge the underlying tax liability at the hearing if the taxpayer did not receive a statutory notice of deficiency or otherwise have an opportunity to dispute the tax liability. I.R.C. § 6330(c)(2)(B). See also Moosally, 142 T.C. at 187; Weber v. Commissioner, 138 T.C. 348, 354 (2012).
B. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party (here, Mr. Wright). Id. at 520. However, the nonmoving party may not rest upon mere allegations or denials in his pleadings, but instead must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986); see also Sundstrand Corp., 98 T.C. at 520. If the nonmoving party fails to set forth such facts, the Court may enter a decision against that party, if appropriate. Rule 121(d).
C. Standard of Review
Neither section 6320(c) nor section 6330(d)(1) prescribes the standard for the Court to apply in reviewing IRS Appeals' administrative determination in a CDP case. The framework for that review is set out in our cases.
When the validity of the underlying tax liability is properly at issue in a collection review proceeding, the Court will review the matter de novo. Giamelli v. Commissioner, 129 T.C. 107, 111 (2007); Perkins v. Commissioner, 129 T.C. 58, 63, 67 (2007). When the underlying liability is not properly before us, we review IRS Appeals' determination for abuse of discretion. Giamelli, 129 T.C. at 111; Goza v. Commissioner, 114 T.C. 176, 182 (2000).
II. Application to Mr. Wright's Case
We agree with the Commissioner that no material facts are in dispute and, therefore, summary adjudication is appropriate.
A. Mr. Wright's Underlying Tax Liability
1. Standard of Review
In his motion for summary judgment, the Commissioner argues that Mr. Wright's underlying liability is not properly before us in this proceeding because he did not properly raise it during his CDP hearing. The Commissioner is mistaken. Mr. Wright asserted in his CDP Hearing Request and in multiple conversations with the settlement officer that his wife was liable for one-half of the disputed tax liability. See Background Part II.A above. These assertions constitute a clear challenge to Mr. Wright's underlying liability, and the settlement officer acknowledged them as such, both in the notice of determination and in the administrative materials she prepared.
Additionally, Mr. Wright's challenge to his underlying liability during the CDP proceedings was proper. See I.R.C. § 6330(c)(2)(B) (A taxpayer "may also raise at the [CDP] hearing challenges to the existence or amount of the underlying tax liability for any tax period if [he] did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.") Mr. Wright did not receive a statutory notice of deficiency, nor did he have a prior opportunity to challenge the tax liability. And we have held that the mere filing of a tax return in which the disputed liability was self-assessed is not a "prior opportunity" within the meaning of section 6330(c)(2)(B). See Montgomery v. Commissioner, 122 T.C. 1, 5, 8-9 (2004). Because Mr. Wright properly raised the issue of his underlying liability at his CDP hearing, it is subject to de novo review in this proceeding. Giamelli, 129 T.C. at 111; Perkins, 129 T.C. at 67.
2. Mr. Wright's Underlying Liability
Mr. Wright contends that the settlement officer erred when she determined that he was responsible for the entire tax liability resulting from the IRA distribution in 2016. Mr. Wright notes that the assets in the IRA were community property under California law, and he alleges that his former wife should be responsible for one-half of the tax liability generated by the distribution. The settlement officer determined that Mr. Wright is responsible for the entire tax liability. We agree with the settlement officer's conclusion.
Section 408 sets out the rules regarding the taxability of distributions from IRAs. Under section 408(d)(1), "any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be." Neither the Code nor the applicable regulations define the terms "payee" or "distributee." But we resolved this question in Bunney v. Commissioner, 114 T.C. 259, 262 (2000), holding that an IRA participant who receives a distribution according to the account's terms is the distributee. See also Darby v. Commissioner, 97 T.C. 51, 58 (1991) (holding that for distributions from a pension plan under section 402 the distributee "ordinarily is the participant or beneficiary who, under the plan, is entitled to receive the distribution").
Applying Bunney here, Mr. Wright is the distributee for purposes of section 408(d)(1) because he was the IRA participant and received the distribution according to the terms of his IRA. Similarly, Mr. Wright's former wife is not a distributee because she was not the IRA participant and did not receive the funds as a designated beneficiary. Thus, the distribution is taxable entirely to Mr. Wright.
Mr. Wright's arguments regarding community property do not change this result, because section 408(g) provides that "[t]his section shall be applied without regard to any community property laws." See also Bunney, 114 T.C. at 262-63 ("[S]ection 408(g) requires that section 408 be applied without regard to community property laws "); Powell v. Commisioner, 101 T.C. 489, 496 (1993) (the distribution of a community property interest in a retirement plan is taxed one-half to each spouse except where Congress has specified otherwise, e.g., in section 408(g)). Nor did Mr. Wright avail himself of the special rules in section 408(d)(6), which allow for the tax-free transfer of an interest in an IRA account as part of a taxpayer's divorce or separation. See Bunney, 114 T.C. at 264-265.
To summarize, Mr. Wright's contentions are inconsistent with both the statute governing the taxability of IRA distributions and our case law. Mr. Wright is responsible for the entire tax liability because he was the "distributee" of his IRA distribution within the meaning of section 408(d)(1), and section 408(g) precludes the application of community property principles. He must therefore include the entire distribution from his IRA in his gross income for the taxable year 2016.
Having reviewed de novo Mr. Wright's arguments regarding his underlying liability, we reach the same conclusion the settlement officer reached: Mr. Wright is responsible for the entire tax liability resulting from the IRA distribution.
To the extent Mr. Wright might have argued that the settlement officer erred by refusing to consider the issue of his underlying liability, see discussion supra note 2, any such error (assuming it occurred) would have been harmless and would not warrant a remand. See Whistleblower 21276-16W v. Commissioner, 155 T.C. 21, 28-29 (2020) (discussing the exception to ordinary remand rule and collecting authorities); Perkins, 129 T.C. at 71 (declining to remand a CDP case even though IRS Appeals incorrectly refused to allow the taxpayer to challenge the underlying liability when the arguments that the taxpayer would have raised on the underlying liability were without merit).
B. Other CDP Issues
Mr. Wright did not assign any other error to the settlement officer's actions in the petition. Issues not raised in an assignment of error in the petition are deemed conceded. Rule 331(b)(4). See DAF Charters, 152 T.C. at 266. In any event, based on our review of the record, we perceive no abuse of discretion.
We note that Mr. Wright is free to submit to the IRS at any time, for its consideration and possible acceptance, a collection alternative in the form of an offer-in-compromise or an installment agreement supported by the documentation necessary for the Commissioner to properly consider it.
III. Conclusion
Based on the foregoing, we conclude that the Commissioner is entitled to judgment as a matter of law.
Accordingly, upon due consideration, it is hereby
ORDERED that the Commissioner's Motion for Summary Judgment filed March 5, 2020, is granted. It is further
ORDERED AND DECIDED that the Notice of Determination Concerning Collection Actions Under IRC Section 6320 or 6330 of the Internal Revenue Code, dated April 11, 2019, upon which this case is based, is sustained.