Opinion
Civil No. EP-03-CA-303(KC)
May 18, 2004
ORDER
Plaintiff and defendant cross-move for summary judgment on the single issue presented in the present complaint. For the reasons set forth herein, plaintiff's motion is granted and defendant's motion is denied. As the remedy sought by plaintiff, specifically an order directing defendant to accept his offer in compromise, does not appear to be available, plaintiff shall notify this Court not later than June 7, 2004, of his intentions as to the final disposition of this case.
Plaintiff filed its response to defendant's motion but later moved to change the caption of the response to "Plaintiff's Response and Cross Motion for Summary Judgment." See Doc. No. 11. The response is therefore considered to be a separate motion for summary judgment.
I. BACKGROUND
The Internal Revenue Service, pursuant to section 6672 of Title 26, assessed a penalty of $41,074.85 for failure to pay payroll and employment taxes on plaintiff, the sole shareholder and president of E-C Trucking, Inc. On July 13, 2002 and September 11, 2002, defendant notified plaintiff that it was prepared to levy on his individual property rights to collect the penalty. On July 17, 2002, and September 16, 2002, defendant notified plaintiff that it was prepared to file tax liens. On July 19, 2002 and September 20, 2002, plaintiff, pursuant to 26 U.S.C. § 6330, requested a collection due process hearing.
The Internal Revenue Code imposes on employers an obligation to withhold personal income and Social Security taxes from the paychecks of employees. 26 U.S.C. § 7501(a). The funds withheld are characterized as "in trust for the United States." Should an employer forsake its obligation, § 6672 empowers the Government to collect the same amount directly from those individuals responsible for collecting the tax. United States v. Energy Resources Co., Inc., 495 U.S. 545, 547 (1990). Plaintiff does not contest his individual liability for taxes arising from his affiliation with E-C Trucking, nor does he contest the propriety of the proceedings prior to his offer in compromise.
On March 5, 2003, plaintiff offered $1,000 in compromise of the liability assessed, stating he was 68 years of age, had "heart complications and high blood pressure" and had commenced a bankruptcy proceeding under Chapter 11. Plaintiff indicated on his form that the offer was made solely for purposes of effective tax administration. The offer of compromise further provided that plaintiff's sole source of income would be social security and the value of his properties, and he was otherwise unable to work.
By letter dated April 3, 2003, Richard Wempe, a settlement officer for the Internal Revenue Service (IRS), indicated that the IRS would "be unable to consider the merits of [plaintiff's] offer. It is not processable under current policy and procedures." Complaint, Exh. A. Wempe noted that plaintiff is "President of Chavez Trucking," and as such plaintiff's business "must demonstrate current compliance with all tax obligations for a minimum of two consecutive quarters before an offer can be considered. [Plaintiff] has not made an employment tax deposit since prior to the year 2002." Id. Wempe added that plaintiff's "compliance record will probably be an obstacle to reaching agreement on any alternative plan of collection for both the corporation and [plaintiff] personally. Businesses and individuals alike must demonstrate profitability and an ability to honor an agreement before one is negotiated. Also, until the corporation can reach some agreement on how to proceed, [plaintiff] does not have a reliable source of future income. His ability to honor any proposed payment plan is in doubt." Id. The letter concludes with "[i]f you wish to make another proposal, I invite you to do so," but requiring such proposal within one week. Id.
On April 17, 2003, an appeals team manager, Chinchie Killfoil, sent a "Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330" in which it summarized the IRS determination as "[y]ou have proposed an offer in compromise as a solution to your unpaid penalty assessments. At this time, the Service cannot entertain an offer while your business continues to accrue additional tax liabilities." Complaint, Exh. B. In the Letter 3194, Notice of Determination, attached thereto, Killfoil restated plaintiff's factual basis for compromise and noted that plaintiff "submitted an Offer in Compromise in satisfaction of the unpaid penalty assessments." Id. Killfoil "advised [plaintiff] that, due to [his] current non-compliance with employment tax requirements, an offer could not be considered at this time. The expectation that a taxpayer be in compliance with all tax obligations is a Service-wide requirement for consideration of all offers in compromise. This requirement applies to individuals as well as the compliance of their corporate businesses." Id. Killfoil concluded that the lien would remain in place and that collection actions should resume, but added that "ultimately, an offer in compromise may be a solution for [plaintiff's] current financial dilemma." Id.
By way of facts, Killfoil noted the following. Plaintiff was seventy years of age and in failing health. Id. The taxes for which the penalty was assessed were unpaid employment tax liabilities from a defunct business, E-C Trucking, Inc. Id. Plaintiff was identified as the president of another company, Chavez Trucking, Inc. and was believed to still be employing individuals at the time of the notice but there was no record of a deposit of withheld employment taxes for his business during either 2002 and 2003, for which there was an outstanding tax in excess of $47,000. Id.
In its motion for summary judgment, defendant submits documents filed in In re Chavez Trucking, Inc., No. 01-33035(LEK) (W.D. Tex. Bankr.). The docket reveals that Eduardo Chavez, Sr. filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code on behalf of Chavez Trucking, Inc. on November 30, 2001. The Disclosure Statement for Plan of Reorganization filed in those proceedings for Chavez Trucking, Inc. reveals that plaintiff is the "sole shareholder" and further that he alone is "[t]he Director, Officer, and shareholder" of the company. The financial statements filed disclose "loan repayments to Mr. Chavez (officer)" between June, 2002 to November, 2002 in monthly amounts of $2,353.59, $3,979.64, $543.23, $3,899.21, $11,124.82 and $15,240.23. On February 28, 2003, the bankruptcy case was dismissed based on Chavez Trucking, Inc.'s ability to effect reorganization. The case was closed on September 18, 2003.
This Court assumes for purposes of this Order that the Eduardo Chavez, Sr. identified in the bankruptcy proceedings is plaintiff to the present proceedings.
This Court takes judicial notice of that electronic docket. United States v. Herrera-Ochoa, 245 F.3d 495, 500 (5th Cir. 2001).
The loan payments, apparently paid to plaintiff and made after the penalty was assessed but in close proximity to the July 2002 notice of levy, totals $37,140.72. It is not apparent that this transfer of capital to plaintiff was considered by defendant in its determination.
Plaintiff filed a complaint with the Tax Court contesting defendant's refusal to entertain his offer in compromise. Chavez v. United States, 007662-03L (Tax Court). The electronic docket reveals that plaintiff filed his petition with the Tax Court on May 22, 2003. On July 15, 2003, defendant moved to dismiss the petition for lack of jurisdiction. On July 18, 2003, the Tax Court dismissed the complaint for lack of jurisdiction stating that the underlying tax liability related to a Trust Fund Recovery Penalty and notified plaintiff that he had 30 days in which to appeal to a District Court.
On August 8, 2003, plaintiff filed the present complaint alleging only that defendant's refusal to accept the Offer was an abuse of discretion in violation of 26 U.S.C. § 6330(d)(1)(b) and 6320(c) and seeking an order requiring that defendant accept his offer.
II. DISCUSSION
The parties cross-move for summary judgment on plaintiffs claim that defendant abused its discretion in refusing his offer of compromise.
A. Standard
A party moving for summary judgment must establish that there are no genuine issues of material fact in dispute and that it is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In determining whether a genuine issue has been raised, all ambiguities are resolved and all reasonable inferences are drawn against the moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962); S W Enters., LLC v. Southtrust Bank, 315 F.3d 533, 537 (5th Cir. 2003). Summary judgment is proper when reasonable minds could not differ as to the import of evidence. Anderson, 477 U.S. at 251. The weight of evidence and the credibility of witnesses are not proper considerations in deciding a motion for summary judgment as such concerns are exclusively for the jury. Morris v. Covan World Wide Moving, Inc., 144 F.3d 377, 380 (5th Cir. 1998). On cross-motions for summary judgment, each party's motion is considered independently, viewing the evidence and inferences in a light most favorable to the nonmoving party. Ford Motor Co. v. Texas Dep't of Transp., 264 F.3d 493, 498 (5th Cir. 2001).
B. Analysis
As an initial matter, the present action is properly before this Court as a consequence of a grant of jurisdiction over appeals from IRS determinations following a hearing on levies. 26 U.S.C. § 6330(d). Offers in compromise are expressly provided for as an appropriate issue at the hearing. Id. § 6330(c)(2)(A)(iii). As such, this Court may review conduct on an offer in compromise raised in the course of such proceedings.
Section 6330(d)(1) provides as follows: "The person may, within 30 days of a determination under this section, appeal such determination . . . to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter); or . . . if the Tax Court does not have jurisdiction of the underlying tax liability, to a district court of the United States. If a court determines that the appeal was to an incorrect court, a person shall have 30 days after the court determination to file such appeal with the correct court." In the present case, the Tax Court concluded that it lacked jurisdiction because the matter involved a Trust fund Recovery Penalty, Moore v. Commissioner, 114 T.C. 171, 175(2000). As such, this Court has jurisdiction through negation of the Tax Court's jurisdiction.
As regards the particular determination in the present case, the rulings of the Commissioner of Internal Revenue and its representatives are presumed to be correct, and the burden is on plaintiff to prove contested rulings to be otherwise. Welch v. Helvering, 290 U.S. 111, 115 (1933); Hall v. Comm'r, 294 F.2d 82, 86 (5th Cir. 1961). Discretionary determinations of the Commissioner will be sustained unless proven to be unreasonable, arbitrary, or capricious. Id. at 87; Dillard-Waltermire, Inc. v. Campbell, 255 F.2d 433, 436 (5th Cir. 1958). An agency action that may only be described as "clearly improper" is an abuse of discretion. Beall v. United States, 336 F.3d 419, 424 (5th Cir. 2003); United States v. O'Neil, 709 F.2d 361, 372 n. 11 (5th Cir. 1983); see also Internal Revenue Serv. v. Blais, 612 F. Supp. 700, 704 (D. Mass. 1985) ("decisions must not be based upon invidious or legally improper criteria").
While section 6330 refers to an "offer in compromise," it includes no more than the bare reference. As such, this Court looks to the provision on offers in compromise found in section 7122 of the Internal Revenue Code. Under section 7122, any civil or criminal case arising under the internal revenue laws may be compromised by the Secretary of the Treasury or his or her delegate prior to reference to the Department of Justice for purposes of prosecution or defense. 26 U.S.C. § 7122(a); 26 C.F.R. § 301.7122-1(a). Section 7122 authorizes the Secretary to accept offers in compromise, 26 U.S.C. § 7122(a), imposes record keeping requirements, Id. § 7122(b), authorizes the establishment of guidelines for assessing offers in compromise, Id. § 7122(c)(1), and directs the establishment of procedures for administrative review of offers rejected, Id. § 7122(d). This statutory procedure is "the exclusive method by which tax cases [can] be compromised." Botany Worsted Mills v. United States, 278 U.S. 282, 288-89 (1929); Overseas Inns S.A. P.A. v. United States, 911 F.2d 1146, 1150 (5th Cir. 1990).
"Secretary" is defined as "the Secretary of the Treasury or his delegate." 26 U.S.C. § 7701(a)(11)(B). "Delegate" is defined to include "any officer, employee, or agency of the Treasury Department duly authorized by the Secretary of the Treasury directly, or indirectly by one or more redelegations of authority, to perform the function mentioned or described in the context." Id. § 7701(a)(12)(A)(i). Notwithstanding the use of "Secretary" rather than the more restrictive "Secretary of the Treasury," Id. § 7701(a)(11)(A) (limiting definition to "the Secretary of the Treasury, personally, and [does] not include any delegate"), section 7122(c), providing that "[t]he Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute," does not appear to delegate to the Commissioner of the Internal Revenue Service authority to prescribe self-governing guidelines as to consideration of offers in compromise. In any event, a subordinate agency would not be empowered to issue guidelines that conflicted with the Treasury Regulations.
After reference, the Attorney General or his or her delegate alone has the authority to compromise. 26 U.S.C. § 7122(a).
Pursuant to the authority conferred by § 7122, the Secretary promulgated 26 C.F.R. § 301.7122-1. The regulation details both standards and procedures for acceptance orrejection of an offer in compromise. Id. It further provides for appeal of a rejection of an offer in compromise to the Office of Appeals. Id. § 301.7122-1(f)(5). The regulation draws a distinction between offers in compromise rejected and those returned unprocessed. "An offer to compromise becomes pending when it is accepted for processing." Id. § 301.7122-1(d)(2). Once accepted for processing, the rules set forth particular grounds for compromise, Id. § 301.7122-1(b), and rules for evaluating offers in compromise Id. § 301.7122-1(c), one of which is that "[t]he determination whether to accept or reject an offer to compromise will be based upon consideration of all the facts and circumstances," Id. § 301.7122-1(c)(1). An offer in compromise will be returned as nonprocessable when (1) the case for which an offer is submitted to resolve has been referred to the Department of Justice for prosecution, (2) the offer contains insufficient information on which to make a determination and the taxpayer does not timely provide required information and (3) the offer was interposed solely to delay collection efforts or "was otherwise nonprocessable." Id. § 301.7122-1(d)(2).
If an offer is accepted for processing, grounds for compromise include (1) doubts as to liability, (2) doubts as to collectibility of tax liability and (3) promotion of effective tax administration. Id. § 301.7122-1(b)(3)(iii). Compromise on tax administration grounds is not possible where such compromise "would undermine compliance by taxpayers with the tax laws." Id. Compromise based on promotion of effective tax administration may be premised on either economic hardships imposed on a taxpayer through collection of full liability or the presence of sufficiently compelling public policy or equity considerations. 26 C.F.R. § 301.7122-1(b).
Plaintiff selected on "promotion of effective tax administration" as a basis for compromise, thus this Court's discussion is limited to that ground.
Factors supporting, but not conclusive, of a claim that collection would cause economic hardship include "[t]axpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition," "[a]lthough taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support" and "[a]lthough taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses." Id. § 301.7122-1(c)(3)(i). Factors supporting, but not conclusive, of a claim that collection would undermine compliance include "[t]axpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code," "[t]axpayer has taken deliberate actions to avoid the payment of taxes" and "[t]axpayer has encouraged others to refuse to comply with the tax laws." Id. § 301.7122-1(c)(3)(ii).
Given the record before this Court, there can be no genuine issue that plaintiff's offer in compromise was returned rather than rejected. The evidence aligns neatly with procedures prescribed in the Internal Revenue Manual, see Internal Revenue Manual § 5.1.9.3.7.1 (RIA 2004), available at WESTLAW, RIA-IRM database (May 12, 2004) (addressing procedures for evaluating offers in compromise presented during § 6630(d) proceedings), and the reference in the letters to compliance criteria marries with that set forth in section 5.7.8.3.2 applicable to in-business taxpayers, Id. § 5.7.8.3.2 ("[i]n-business taxpayers who want to submit an offer to compromise employment taxes must demonstrate compliance by timely filing and timely depositing in the preceding two quarters"), and in section 5.8.7.2 applicable to returns, Id. § 5.8.7.2(2) ("[a]n offer may . . . be returned . . . when the taxpayer fails to remain current with filing of tax returns [and] fails to make timely federal tax deposits for employment taxes").
While a court will defer to Treasury Regulations, no degree of deference is afforded the procedures contained within the Internal Revenue Manual, In re Carbon, 126 F.3d 915, 922 (7th Cir. 1997). The Internal Revenue Manual confers no rights on taxpayers, nor may it be construed as conferring obligations on taxpayers. See Id., see also Marks v. Comm'r, 947 F.2d 983, 986 n. 1 (D.C. Cir. 1991) ("that the provisions of the manual are directory rather than mandatory, are not codified regulations, and clearly do not have the force and effect of law"); United States v. Home, 714 F.2d 206, 207 (1st Cir. 1983) ("provisions . . . do not have the force and effect of law"). The procedures contained therein are intended only to aid in the internal administration of the IRS.
The Treasury Regulations set forth in section 301.7122-1 are fairly specific as to procedures applicable to offers in compromise. The only basis therein for return of an offer in compromise is that the offer is "otherwise nonprocessable." Id. § 301.7122-1(d)(2). Section 301.7122-1(b)(3)(iii) provides aground for rejection that mirrors the return standard set forth in the manual. If such a return were permissible, it would appear to preempt the fact-specific determination required by section 301.7122-1(c)(1), couching the response as a return rather than a rejection. It is not apparent how such a piecemeal approach would facilitate compromise, whereas the evident goal of section 301.7122-1 is to facilitate compromise where practicable. This provision has been construed as "imply[ing] a mandate to negotiate, to make the effort, to explore the potential for compromise before deciding unilaterally whether or not to refer." United States v. Garden State Nat'l Bank, 465 F. Supp. 437, 439-40 (D.N.J. 1979). As such, the rejection would be characterized as clearly improper and thus an abuse of discretion. Beall, 336 F.3d at 424.
Defendant also argues that the offer was submitted for purposes of delay but provides no evidence in support of this argument.
C. Remedy
While a finding that defendant abused its discretion in returning plaintiff's offer in compromise would appear to resolve the matter, such is not the case. Plaintiff does not ask that defendant be ordered to consider his offer under all the facts. If the remedy where limited to that request, this Court would be willing to do so. Plaintiff instead seeks an order directing that defendant "accept [his] [o]ffer in [c]ompromise."
Such is not surprising given the evidence offered by defendant. Plaintiff notified defendant of the pendency of his bankruptcy proceedings and it is apparent that defendant relied heavily on the documents filed with the Bankruptcy Court. In its Disclosure Statement for Plan of Reorganization filed in those proceedings, Chavez Trucking, Inc. indicated that plaintiff is the "sole shareholder," Disclosure Statement (Bankr. Proceeding Doc. No. 56) ¶ 1.1(a), sole director and sole officer, Id. ¶ 1.9(a). Plaintiff identified the company as employing twenty people. Id. ¶ 1.1(a). While the documents filed in Bankruptcy Court do not constitute judicial admissions for purposes of the present proceedings, they do constitute evidentiary admissions of plaintiff's involvement in Chavez Trucking, Inc. Kohler v. Leslie Hindman, Inc., 80 F.3d 1181, 1185 (7th Cir. 1996) (holding that statement in another suit operates as evidentiary admission, to be weighed with other evidence, not binding judicial admission).
Section 6672(a) provides that
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
Individual liability for failure to withhold employment taxes arises when the individual is a "responsible person" and such person acts "willfully" in not paying the taxes. Wood v. United States, 808 F.2d 411, 414 (5th Cir. 1987). An individual's status, duty, and authority determine whether he or he is a responsible person, and the criteria will be considered with a broad view of who may be appropriately characterized as responsible. Id. at 415. A person acts willfully with "a voluntary, conscious, and intentional act . . . [or] a reckless disregard of a known or obvious risk that trust funds may not be remitted to defendant." Id. (Internal quotation marks omitted). "A considered decision not to pay the taxes owed, evidenced by payments to other creditors with knowledge that withholding taxes are due, establishes willfulness." Id.
It is undisputed that plaintiff was assessed a penalty pursuant to section 6672 based on his relationship with E-C Trucking. Plaintiff further characterizes defendant's consideration of his relationship with Chavez Trucking, Inc. as irrelevant to the issue of his individual liability, involving instead the liability of a separate legal entity. Such a position disregards the history of the liability he wishes to compromise, which is premised on his history with employment tax payments. It further disregards a corporation that, by all appearances, is the purest example of the legal fiction of separate corporate identity with plaintiff himself the de facto corporation. Plaintiff also does not dispute allegations that he failed to pay employment taxes as the sole representative of that corporation. As such, all evidence appears to point toward a violation with Chavez Trucking, Inc. that mirrors the earlier violation by E-C Trucking, Inc. Given his past experience with the requirements of section 6672, it strains credulity to argue that defendant could not establish that the failure to pay employment taxes was not willful. As such, the failure of Chavez Trucking, Inc. to pay its employment taxes become his individual liability. Wood, 808 F.2d at 414; see also Londono v. Comm'r, NO. 11792-01L, 2003 WL 1844782 (U.S. Tax Ct. Apr. 9, 2003) ("summary judgment is appropriate on the ground that the undisputed fects establish that petitioner was not in current compliance with his Federal income tax liabilities").
In light of the foregoing, plaintiff has several options. First, he can elect to have this matter remanded to the IRS for full consideration of its offer, noting that if Chavez Trucking, Inc. has in fact failed to comply with it obligation to pay employment taxes as stated by defendant the likely outcome will be a rejection of the offer for the exact reasons already articulated by defendant. Second, plaintiff may show cause as to how this Court may order defendant to accept an offer, noting that "Congress has delegated to the [Secretary of the Treasury and his delegate, the] Commissioner [of Internal Revenue], not to the courts, the task of prescribing all needful rules and regulations for the enforcement of the Internal Revenue Code," Nat'l Muffler Dealers Ass'n v. United States, 440 U.S. 472, 477 (1979), and there is no rule or regulation expressly providing for the remedy sought. Plaintiff will further note that "[a]n `offer in compromise' is a settlement offer submitted by a debtor," Young v. United States, 535 U.S. 43, 53 (2002), and, as settlements are a creature of general contract principles, Treaty Pines Invs. P'ship v. Comm'r, 967 F.2d 206, 211 (5th Cir. 1992), a court will not order acceptance of the terms of an offer absent a firmly established principle of contract law requiring that it do so under law or equity. And finally, if none of the foregoing comport with plaintiff's objective for the present action, he shall notify this Court and judgment shall enter accordingly.
III. CONCLUSION
Defendant's motion for summary judgment (Doc. No. 7) is denied and plaintiff's motion for summary judgment (Doc. No. 10) is granted. Consistent with the foregoing, plaintiff shall file its response, not later than June 7, 2004, detailing the specific remedy sought and legal authority for the same. Defendant may file a reply to plaintiff's response not later than June 17, 2004.
SO ORDERED.