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Delossantos v. Comm'r of Internal Revenue

United States Tax Court
Nov 21, 2022
No. 12031-20L (U.S.T.C. Nov. 21, 2022)

Opinion

12031-20L

11-21-2022

MARVIN L. DELOSSANTOS & JENNIFER A. DELOSSANTOS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent


ORDER

David Gustafson, Judge

This is a "collection due process" ("CDP") case brought by petitioners, Marvin Delossantos and Jennifer Delossantos, pursuant to section 6330(d)(1). Marvin and Jennifer Delossantos filed a timely petition in this Court on October 5, 2020, seeking review of a notice of determination by the Office of Appeals ("Appeals") of the Internal Revenue Service ("IRS") to sustain a notice of intent to levy to collect taxes related to petitioners' cancellation of debt income and retirement income in 2014. Respondent, the Commissioner of the IRS, has filed a motion for summary judgment pursuant to Rule 121. We conclude there is a genuine dispute of material fact as to whether, under section 6201(d), petitioners made a "reasonable dispute" as to their alleged receipt of unreported income, and we will therefore deny the Commissioner's motion.

Unless otherwise indicated, statutory references are to the Internal Revenue Code ("the Code", Title 26 of the United States Code) as in effect at the relevant times; regulation references are to Title 26 of the Code of Federal Regulations ("Treas. Reg."), as in effect at the relevant times; and Rule references are to the Tax Court Rules of Practice and Procedure.

Background

The following facts are derived from the parties' pleadings and the declaration attached to the Commissioner's motion.

Petitioners' 2014 tax liability and the IRS collection action

Petitioners timely filed a joint Federal income tax return for 2014. On April 17, 2017, the IRS issued to petitioners a notice of deficiency ("NOD") as to tax year 2014 determining, on the basis of third-party reports to the IRS on Forms 1099, that petitioners had cancellation of debt income and taxable retirement income for 2014 that they had not reported on their 2014 tax return. For reasons explained below, we assume that petitioners did not receive the NOD; and they did not file a petition with this Court to dispute this deficiency.

On July 6, 2018, the IRS sent petitioners a notice of intent to levy as to both tax years 2013 and 2014. (For reasons explained below, the dispute as to 2013 has since then become moot, so we do not address it further here.)

CDP hearing before IRS Appeals

On July 31, 2018, the IRS received petitioners' timely Form 12153, "Request for a Collection Due Process or Equivalent Hearing." Petitioners disputed the IRS's deficiency determination, stating:

I do not know what the additional taxes are and contacted the IRS for more info. I have not received this info.

Appeals Settlement Officer Lee T. Martinez ("ASO Martinez") sent petitioners Letter 4837 dated March 1, 2019, to the New York address that had appeared on their Form 12153 and their 2014 tax return, but the letter was returned to the IRS as undeliverable. ASO Martinez acquired petitioners' new address in South Carolina by means of a phone call with Mr. Delossantos, and he then sent a revised Letter 4837 dated March 22, 2019, to petitioners' new address. ASO Martinez conducted the CDP hearing conference with Mr. Delossantos on June 27, 2019, informing the petitioners that because he could not confirm that they had received the NOD for 2014, they could challenge the 2014 underlying tax liability as part of the Appeals process. In a letter to petitioners dated June 28, 2019, ASO Martinez notified the petitioners in writing that they could submit a written statement and supporting evidence to dispute the 2014 liability.

On July 7, 2019, petitioners sent to the IRS Fresno Campus Appeals office a letter stating that they were unaware of the cancellation of debt and the retirement income reported to the IRS. The letter stated:

Looking at the documentation you provided, we are not aware of the items listed as cancellation of debt. We do not know what these items are and we have never had an account with the companies listed.
In addition, the retirement income distribution also does not look familiar to us. We have never had account with these institutions or employed by these institutions.

During a phone conversation with petitioners on September 4, 2019, ASO Martinez told petitioners that stating a lack of knowledge or stating that the accounts did not look familiar is not a valid dispute, and that he would write another letter to petitioners, giving them another opportunity to provide a written statement and documentation substantiating the specific issue they intended to dispute. His letters of September 6 and September 27, 2019, stated: "you are being allowed no later than 14 days . . . to submit to me the following information", including "[d]ocumentation to substantiate the specific issues you are disputing." Mr. Delossantos replied with a letter dated October 9, 2019, that again asserted that he was unaware of the accounts that had been reported by third-parties to the IRS, and that he had contacted these institutions for more information about these accounts. Specifically, the letter listed and commented on the accounts as follows:

National Financial Services LLC

Account number: 2001
Document type: 5498
Action: There are no details as to the type of earnings and I have contacted
National Financial Services to obtain more information.
JPMorgan Chase Bank
Account number: 5734 Document type: 1099-C
Action: In 2014 and the years before that, we did not have any accounts with JPMorgan Chase Bank or any institutions related to the bank. At the same time, we were not employed with JPMorgan Chase Bank or any institutions related to the bank. I have contacted JPMorgan Chase Bank to get details as to what the account is that has been associated with me so that we can start the dispute.
Department Stores National Bank
Account number: 7134
Document type: 1099-C
Action: According to the document, this was a credit card for Macy's. We have never had a credit card with Macy's. I have contacted Department Stores
National Bank to get details as to what the account is that has been associated with me so that we can start the dispute.
Capital One NA
Account number: 26493
Document type: 1099-C
Action: According to the document, this was for a credit card or a loan. We have never had a credit card or a loan with Capital One. I have contacted Capital One NA to get details as to what the account is that has been associated with me so that we can start the dispute.
National Financial Services LLC
Account number: 72001
Document type: 1099-R
Action: I have reached out to National Financial Services to get details as to what this disbursement is that is listed.
State Street Retiree Services
Account number: 7PLC
Document type: 1099-R
Action: I have contact State Street Retiree Services about this disbursement.
I previously worked for Barclays Capital but I have not received a disbursement from this account. I have asked for additional details on this disbursement action to dispute.
Great-West Trust Company LLC
Account number: 4275
Document type: 1099-R
Action: For the year 2014 or before, we have never had an account with Great-West Trust Company or FBO Putnam Investments. I have contacted them to get more details as to what this account is for dispute.

Petitioners did not provide documentation to substantiate the allegations in the letter.

In January, 2020, ASO Martinez left a voice message notifying petitioners that an Appeals Officer, Brett Ziegler ("AO Ziegler"), was assigned to hear the petitioners' dispute regarding their 2014 tax liability. AO Ziegler issued an Appeals Transmittal and Case Memo to petitioners in February 2020, which stated as follows:

The taxpayers provided a two-page statement listing the issuers of the Forms 1099-C and 1099-R, with descriptions of their disputes and actions they state they have initiated with them. No other substantiation has been provided to establish that the IRS was incorrect in their assessment of tax.
Included in the list is JPMorgan Chase Bank. This amount was not included in the Statutory Notice of Deficiency. It appears to have been a Home Lending Loan that was forgiven for $51.114. The taxpayers state they did not have any accounts with this bank, but it appears they had been making mortgage payments.
Assessments were also made to their 2012 account for unreported Retirement Income and to their 2013 account for unreported Cancellation of Debt. The taxpayers have also not filed tax returns for 2016-2018. The taxpayers have a history of not reporting income and lose credibility. Appeals does not have sufficient information to support reducing the assessed tax.
MY EVALUATION: The taxpayers disputed their tax liabilities for their 2014 tax return. They have not provided sufficient information/documentation to
support this position. I recommend continuing to disallow the request for an abatement of tax.

In a letter to petitioners dated February 21, 2020, ASO Martinez informed the petitioners that there had been no changes made to petitioners' 2013 and 2014 tax liabilities. As to collection alternatives, petitioners were told that they were ineligible for an installment agreement. To be considered for an installment agreement, petitioners were asked to submit within 14 days from the date of the letter (1) tax returns for the years 2016 to 2018, (2) a completed and signed Collection Information Statement (Form 433-A) with proper substantiation. Petitioners were also informed in the letter that if they opt to submit an Offer in Compromise, they must submit within 14 days from the date of the letter a completed and signed Form 656, Form 433-A, the appropriate application fee, and initial payment.

Petitioners subsequently requested additional time for gathering documents, which was approved by ASO Martinez, and the new deadline was extended to March 20, 2020. On March 19, 2020 the IRS Fresno Campus Appeals office received petitioners' married-filing-jointly tax returns for 2016 to 2018 without other documentation (such as Form 433-A) to support any collection alternative.

On September 15, 2020, the IRS issued notices of determination concerning collection action under section 6330 to both Mr. and Mrs. Delossantos, sustaining the IRS proposed collection action. The Appeals Office determined that (1) all appropriate requirements of law and administrative procedures for the proposed collection action had been met; (2) the proposed levy was not more intrusive than necessary because petitioners did not cooperate with Collections regarding unpaid taxes and did not provide information requested to formalize a collection alternative; and (3) the proposed levy was sustained and enforced collection may proceed.

Tax Court proceedings

Petitioners timely filed a petition with this Court on October 5, 2020, disputing the notice of determination. Petitioners resided in South Carolina when they filed their petition. The petition stated:

The additional taxable income that was brought to our attention was not something that we were aware of or own an account with. We filed a dispute and provided all the necessary information and documentation.
We disagree with the IRS's disallowance of our claim because we calculated our return correctly. Any kind of levy imposed on our wages will constitute a financial hardship for my family. . . .
All requested information were provided in a timely manner. We complied
with the scheduled telephonic hearings and answered all questions. At the same time, all documentation and evidence requested was provided.

In May 2021 we set this case for trial at a session in Columbia, South Carolina, beginning October 4, 2021. (Docs. 4-5.)

On July 2, 2021, the Commissioner filed a motion to dismiss tax year 2013 on the ground of mootness, because by then the 2013 liability had been fully paid. We granted the motion, and as a result only tax year 2014 remains at issue in this case.

On September 1, 2021, the Commissioner filed a motion to dismiss the case on the ground that petitioners had failed to properly prosecute their case. The motion stated that counsel for the Commissioner had reached out to petitioners through multiple letters and emails but had never received any response. Petitioners then filed a motion for a continuance, alleging unspecified medical issues. On September 29, 2021, we granted petitioners' motion for a continuance, struck the case from the calendar of the upcoming trial session, and ordered the filing of statute reports. We later ordered the Commissioner to file any supplement in support of his motion to dismiss for lack of prosecution or motion for summary judgment, which he did. We then ordered petitioners to file responses to the Commissioner's motion to dismiss and motion for summary judgment; and we ordered the Commissioner to file replies. Petitioners filed on March 15, 2022, a response consisting of one paragraph that stated in its entirety as follows:

As I have stated to Lee Martinez, and Corey Clapper and Tammy Grier, we are disputing the additional taxable income that was included in our tax year 2014. The accounts listed were not accounts that we had or opened. I had asked Lee Martinez to provide documentation about said accounts on numerous occasions, but we were never provided with the information that we requested. This is the reason why we submitted for this case to be reviewed by the United States Tax Court because we are being incorrectly taxed for wages and/or accounts that do not belong to us.

Respondent filed a reply to petitioners' response on March 25, 2021.

Discussion

I. Applicable Legal Principles

A. Unreported income

As we explained in Holland v. Commissioner, T.C. Memo. 2021-129, *5, aff'd, 2022 WL 1619849 (4th Cir. May 23, 2022):

Section 61(a) provides that "gross income means all income from whatever source derived," including "[c]ompensation for services." Sec. 61(a)(1). In
cases of unreported income, the Commissioner must generally establish an evidentiary foundation connecting the taxpayer to the income-producing activity, Weimerskirch v. Commissioner, 596 F.2d 358, 361 (9th Cir. 1979), rev'g 67 T.C. 672 (1977), or demonstrate that the taxpayer actually received income, Edwards v. Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1982). Information supplied to the IRS on Forms W-2 and 1099 is sufficient to meet this burden. See Hardy v. Commissioner, 181 F.3d 1002, 1005 (9th Cir. 1999), aff'g T.C. Memo. 1997-97. Once the Commissioner makes the required threshold showing, the burden shifts to the taxpayer to prove by a preponderance of the evidence that the Commissioner's determinations are arbitrary or erroneous. See Williams v. Commissioner, 999 F.2d 760, 763 (4th Cir. 1993), aff'g T.C. Memo. 1992-153.

However, the sufficiency of third-party "[i]nformation supplied to the IRS on Forms W-2 and 1099" is subject to an exception provided in section 6201(d):

In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary . . . by a third party and the taxpayer has fully cooperated with the Secretary (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested by the Secretary), the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.

B. Summary Judgment Standard

The purpose of summary judgment is to expedite litigation and avoid unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). We may grant a motion for summary judgment when there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b); Electronic Arts, Inc v. Commissioner, 118 T.C. 226, 238 (2002). The moving party bears the burden of showing that no genuine issue of material fact exists, and the Court will construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985).

C. Collection Due Process Procedures

If a taxpayer fails to pay any tax liability within 10 days after notice and demand, section 6331(a) authorizes the IRS to collect the tax by levy upon the taxpayer's property and rights to property. Before issuing such a levy, the IRS must send the taxpayer a written notice informing the taxpayer that levy will commence in 30 days and that the taxpayer has the right to request an administrative hearing ("the CDP hearing") before Appeals with respect to the levy. Secs. 6330(a), 6331(d). If the taxpayer requests such a hearing in writing and states the grounds for the requested hearing, the hearing shall be held by the IRS Independent Office of Appeals, conducted by an impartial officer who has had no prior involvement with respect to the unpaid tax. Sec. 6330(a)(3)(B), (b)(1), (b)(3).

In order to determine at the CDP hearing whether the IRS's proposed collection action may proceed, the appeals officer shall consider the following: (1) the verification obtained from the Secretary that the requirements of applicable law or administrative procedure have been met; (2) the issues raised by the taxpayer, including appropriate spousal defenses, challenges to the appropriateness of collection action, offers of collection alternatives, and underlying liability; and (3) whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary. Sec. 6330(c). Offers of collection alternatives may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise. Sec. 6330(c)(2)(A)(iii). Moreover, taxpayer may challenge the underlying liability 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." Sec. 6330(c)(2)(B).

Once Appeals issues its determination, the taxpayer may, within 30 days of a determination, "petition the Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter)." Sec. 6330(d)(1).

D. Tax Court Review

Section 6330(d)(1) does not provide the standard of review that this Court should apply in reviewing an IRS administrative determination in a CDP case. But this Court has decided that when the taxpayer's underlying tax liability is properly before us (as here), we review the IRS's determination de novo. Goza v. Commissioner, 114 T.C. 176, 181-82 (2000). Petitioner has the burden of proof regarding this underlying liabilities. See Thompson v. Comm'r, 140 T.C. 173, 178 (2013). In other respects, this Court reviews the IRS's action for abuse of discretion. Id. at 182.

II. Analysis

Petitioners have not made any challenge as to "verification" or "balancing" issues under section 6330(c)(1), (c)(3)(A), (c)(3)(C). We do not perceive in their concise submissions a contention that IRS Appeals abused its discretion in denying them a collection alternative; but if that were their contention, it would lack merit because of their failure to provide financial information about themselves on Form 433-A and to propose a specific installment agreement or other alternative. The issue that petitioners do press is their contention that they do not owe the underlying liability because they did not receive the income that the IRS determined on the basis of third-party reporting. On that "underlying liability" issue our review is de novo.

Generally speaking, where we try an issue de novo (whether in a deficiency case or, as here, in a CDP case), the taxpayer has the burden of proof; but as we noted above in Part I.A, where the issue is unreported income, the IRS has the prior obligation to demonstrate that the taxpayer received the income. The system thus does not impose on the taxpayer, in the first instance, a requirement to prove a negative (i.e., to prove that he did not receive income). The IRS can meet its obligation by third-party reporting (such as Forms 1099); but, as we noted, section 6201(d) provides that "if a taxpayer asserts a reasonable dispute with respect to any item of income" for which the IRS relies on third-party reporting, the IRS has "the burden of producing reasonable and probative information . . . in addition to such information return." The issue that this statute now prompts is whether "the taxpayer asserts a reasonable dispute".

The Commissioner did not discuss or cite section 6201(d) nor argue that petitioners failed to assert a reasonable dispute, but we can easily perceive that he would so argue. IRS Appeals concluded that petitioners lacked credibility. Petitioners did not provide documentation to substantiate their position (though substantiating the non-receipt of income sometimes involves the problems of proving a negative). Appeals asserted (though the Commissioner did not point us to the basis for the assertion) that petitioners denied the existence of a loan on which they had in fact been making payments. And Appeals alleged a history of non-compliance with filing requirements and of non-reporting in other years of amounts similar to those at issue here. We assume that such facts might undermine the existence of a "reasonable dispute" under section 6201(d).

However, we face this issue not at a trial but in a summary judgment motion filed under Rule 121, under which (as we explained above in Part I.B) we do not make findings of fact but rather only identify disputes of fact. Petitioners consistently, repeatedly, and in detail have denied their ownership of the relevant accounts and have denied their receipt of the unreported income. Admittedly, IRS Appeals' determination that petitioners lacked credibility does not appear to have involved any abuse of discretion, but here we review de novo, and not for abuse of discretion (as we explained above in part I.D).

Consequently, we will not decide this issue by summary adjudication under Rule 121. Instead, we hold that a genuine dispute of material fact exists as to whether petitioners have raised a reasonable dispute as to their non-receipt of the unreported income. On that assumption, and for purposes of the Commissioner's motion, he had the burden under section 6201(d) to produce "reasonable and probative information concerning such deficiency in addition to" the Forms 1099 (such as records from the third-party payors), but he did not do so.

It is therefore

ORDERED that the Commissioner's motion for summary judgment is denied. It is further

ORDERED that the motion to dismiss for failure to prosecute is denied without prejudice. It is further

ORDERED that, no later than December 19, 2022, the parties shall file a joint status report (or, if that is not expedient, then separate reports) recommending a schedule for further proceedings in this case.


Summaries of

Delossantos v. Comm'r of Internal Revenue

United States Tax Court
Nov 21, 2022
No. 12031-20L (U.S.T.C. Nov. 21, 2022)
Case details for

Delossantos v. Comm'r of Internal Revenue

Case Details

Full title:MARVIN L. DELOSSANTOS & JENNIFER A. DELOSSANTOS, Petitioner v…

Court:United States Tax Court

Date published: Nov 21, 2022

Citations

No. 12031-20L (U.S.T.C. Nov. 21, 2022)