Opinion
15731-23L
05-13-2024
DELTA INVESTMENTS INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Elizabeth A. Copeland Judge
Currently pending before the Court is Respondent's Motion for Summary Judgment (Motion), filed February 14, 2024. Respondent seeks to sustain a September 5, 2023, Notice of Determination Concerning Collection Actions under Section 6320 or 6330 of the Internal Revenue Code (notice of determination) upholding a Notice of Federal Tax Lien (NFTL) filing for unpaid employment tax liabilities for the periods ending September 30, 2016, June 30, 2017, September 30, 2020, December 31, 2020, and September 30, 2022, as well as unemployment tax liabilities for the 2019 tax year (periods and year at issue). This case is calendared for trial on May 16, 2024, at the Trial Session of the Court in Omaha, Nebraska.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
Background
The following background is derived from the pleadings, the Administrative Record and attached Exhibits, and the Exhibits attached to Respondent's Motion. It is stated solely for the purpose of ruling on the Motion and not as findings of fact. Petitioner, Delta Investments Inc. (DI), is an S Corporation with a principal place of business in South Dakota. DI operates Noids Gaming Parlor, a video lottery establishment. Douglas Hendriks was DI's president and sole shareholder at the time the Petition was filed.
I. DI's Tax Liabilities
A. September 30, 2016
DI made federal employment tax deposits totaling $5,855.86 for its tax period ended September 30, 2016, but never filed Form 941, Employer's Quarterly Federal Tax Return. On May 27, 2022, the Internal Revenue Service (IRS) prepared a Substitute for Return (SFR) pursuant to section 6020(b) for DI and assessed $5,929.24 in tax on October 17, 2022. On that same date, the IRS assessed additions to tax under section 6651(a)(1) and (2) and statutory interest in the amounts of $16.51, $18.35, and $25.74, respectively. The IRS then sent DI a Statutory Notice of Balance Due, i.e., notice of demand for payment. A Form 4340, Certificate of Assessments, Payments, and Other Specified Matters, for the tax period ended September 30, 2016, indicates that as of January 2, 2024, DI owed employment taxes of $133.98.
I.R.C. § 6651(a)(1) imposes upon a taxpayer an addition to tax for failure to timely file a return and I.R.C. § 6651(a)(2) imposes an addition to tax for failure to timely pay the amount shown as due on a return.
B. June 30, 2017
DI made federal employment tax deposits totaling $1,994.62 for its tax period ended June 30, 2017, but did not timely file Form 941. On December 7, 2021, DI filed a delinquent Form 941 for the quarter reporting tax due of $4,155.44. On October 31, 2022, the IRS assessed DI's self-reported tax, additions to tax under section 6651(a)(1) and (2), and statutory interest in the amounts of $4,155.44, $486.18, $540.20, and $665.45, respectively, and sent DI a notice of demand for payment. On February 13, 2023, the IRS assessed a failure to deposit penalty pursuant to section 6656 in the amount of $341.94 and sent DI another notice of demand for payment. The IRS sent DI a third notice of demand for payment on March 6, 2023. A Form 4340 for the tax period ended June 30, 2017, indicates that as of January 2, 2024, DI owed employment taxes of $4,194.59.
C. September 30, 2020
DI made federal employment tax deposits totaling $5,234.79 for its tax period ended September 30, 2020, but did not timely file Form 941. On May 27, 2022, the IRS prepared an SFR for DI's tax period ended September 30, 2020, and assessed $8,741.11 in tax on October 17, 2022. On that same date, the IRS assessed additions to tax under section 6651(a)(1) and (2) and statutory interest in the amounts of $1.87, $420.76, and $301.16, respectively, and sent DI a notice of demand for payment. DI late-filed Form 941 on January 23, 2023. The IRS then abated tax in the amount of $3,498.01, the addition to tax for failure to pay, and the statutory interest on March 13, 2023. A Form 4340 for the tax period ended September 30, 2020, indicates that as of January 2, 2024, DI owed employment taxes of $12.42.
D. December 31, 2020
Respondent concedes that DI owes no employment tax for its tax period ended December 31, 2020, despite its inclusion in the notice of determination. Respondent abated employment taxes it had assessed for the period after accepting and processing DI's late-filed Form 941 in 2023. Although Respondent indicated in the Motion for Summary Judgment that he was "no longer pursuing any collection activity related to [the December 31, 2020, tax period]," he has not released the lien as to that period.
E. September 30, 2022
DI made federal employment tax deposits totaling $5,809.13 for its tax period ended September 30, 2022, but did not timely file Form 941. On December 1, 2022, DI filed a delinquent Form 941 for the quarter reporting tax due of $5,809.13. On December 26. 2022, the IRS assessed DI's self-reported tax, additions to tax under section 6651(a)(1) and (2), and statutory interest in the amounts of $5,809.13, $76.04, $4.00, and $1.76, respectively. The IRS then sent DI a notice of demand for payment. A Form 4340 for the tax period ended September 30, 2022, indicates that as of January 2, 2024, DI owed employment tax of $81.80.
F. December 31, 2019
On May 27, 2022, DI late-filed its Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, for the year ended December 31, 2019. DI made a single FUTA tax deposit for the year on February 4, 2020, in the amount of $308.07. The IRS assessed DI's self-reported FUTA tax of $5,466.08 on October 3, 2022. On that same date, the IRS assessed additions to tax under section 6651(a)(1) and (2), a failure to deposit penalty, and statutory interest in the amounts of $1,156.05, $847.77, $519.95, and $635.37, respectively. The IRS then sent DI a notice of demand for payment. On November 7, 2022, the IRS assessed a failure to deposit penalty in the amount of $256.90, an addition to tax under section 6651(a)(2) in the amount of $25.69, and statutory interest of $47.87 and sent DI a second notice of demand for payment. On various dates ranging from October 3, 2022, through March 13, 2023, the IRS assessed fees and collection costs, abated tax, abated additions to tax under section 6651(a)(1) and (2), abated statutory interest, and applied overpayment credits to DI's balance. A Form 4340 for the year ended December 31, 2019, indicates that as of January 2, 2024, DI owed FUTA tax in the amount of $69.84.
II. Collections Due Process (CDP) Proceeding
DI faxed the IRS a completed Form 2848, Power of Attorney and Declaration of Representative, on January 17, 2023, authorizing Ryan Fuller to represent DI before the IRS regarding DI's Form 941 employment taxes from March 31, 2015, through December 23, 2023 [sic], and its Form 940 FUTA taxes for 2016-23. On February 2, 2023, the IRS sent DI a Letter 3172, Notice of Federal Tax Lien [NFTL] Filing and Your Right to a Hearing Under IRC 6320 (lien notice), regarding DI's tax liabilities for the periods and years in issue. The lien notice indicated that the NFTL was filed on February 2, 2023; however the NFTL attached to the lien notice and submitted as a part of the administrative record is dated January 23, 2023.
The IRS apparently received Form 2848 while the examination process was ongoing. We note that while Mr. Fuller is a representative of the taxpayer as its in-house counsel, he has not signed any of the pleadings nor entered an appearance in this proceeding.
The lien notice did not reflect the tax, additions to tax, and penalties abated by the IRS between February 2, 2023 (the date of the lien notice), and January 2, 2024 (the date the IRS generated the Forms 4340 discussed above).
DI responded to the lien notice by timely submitting Form 12153, Request for a Collection Due Process or Equivalent Hearing by mail, which the IRS received on February 20, 2023. On Form 12153 DI indicated that it was not liable for the tax the IRS was trying to collect, that it had made payments that were not applied to its taxes, that it wanted the NFTL withdrawn, and that it was unable to pay in full and would like a collection alternative. DI further asserted in its request that the NFTL was filed prematurely because it included several tax periods for which SFRs were prepared and for which corrected returns had been filed. DI checked the Installment Agreement (IA) box in the proposed collection alternative section.
On April 27, 2023, as reflected on Form 14461, Transmittal of CDP/Equivalent Request Hearing, DI's CDP request was forwarded to the IRS Independent Office of Appeals (Appeals). In the Summary of Issues section on Form 14461 the boxes for taxpayer requesting Offer in Compromise (OIC) alternative, taxpayer requesting IA alternative, taxpayer raising NFTL issue, unable to reach resolution/impasse reached, and taxpayer raising doubt as to liability issue were all checked. The IRS assigned Appeals Officer (AO) Gregory Clark to DI's case.
AO Clark recorded his preliminary review of DI's CDP case in the case activity record on June 23, 2023. Step twelve of his nineteen enumerated preliminary review steps reads "Did taxpayer raise Underlying Liability? N," and step 14 reads "Issue(s) raised on CDP hearing request: ia, payment applicatin [sic], withdrawal." Nowhere in his preliminary review did AO Clark recognize DI's challenge to the underlying liability as reflected on Forms 12153 and 14461.
AO Clark sent DI a letter dated June 27, 2023, acknowledging its request for a CDP hearing. In the letter, AO Clark scheduled a telephonic CDP hearing for July 13, 2023, and asked DI to provide him with (1) a completed Form 433-B, Collection Information Statement for Businesses, (2) signed Forms 1120, U.S. Corporation Income Tax Return, for its 2020-22 tax years, (3) bank statements for the then most recent six months, (4) a complete copy of DI's then most recently filed federal corporate income tax return, and (5) a written list of payments by DI that were not applied to its taxes to be itemized by the amount paid, the date paid, the method of payment, and third-party payment documentation (e.g. bank or credit card statements). DI did not provide any of the requested documents prior to the July 13, 2023, CDP Hearing.
It appears that at the time of this letter AO Clark was unaware of DI's status as an S corporation.
The CDP hearing commenced as scheduled with Mr. Fuller and AO Clark in attendance. AO Clark recorded a summary of the meeting in the case activity record. The two began by discussing the delinquent DI returns requested by AO Clark. Mr. Fuller explained that the returns were complete but unsigned because Mr. Hendriks had been traveling. Mr. Fuller then indicated that DI was interested in an IA and possible NFTL withdrawal. AO Clark informed Mr. Fuller that DI did not meet the criteria for NFTL withdrawal pursuant to the limited circumstances set forth in section 6323(j), such as where a withdrawal will facilitate the collection of tax. At the conclusion of the meeting, Mr. Fuller indicated that he would file the requested returns and propose an IA including the amount and frequency of IA payments. AO Clark informed him that if DI was pursuing the NFTL withdrawal request, DI would need to provide him with a written summary of the quarters involved, the assessment amounts, and the adjustment amounts along with an explanation and the requested financial documents. AO Clark set a deadline of July 27, 2023, for DI to provide the requested materials.
Mr. Fuller sent DI's signed Forms 1120-S, U.S. Income Tax Return for an S Corporation, for its 2020 and 2021 tax years to the IRS by certified mail on July 25, 2023. He faxed AO Clark a letter, copies of the returns, and the certified mail receipts on July 27, 2023. Mr. Fuller explained in the letter that he would send a separate fax containing the remaining requested documents later that day. On July 31, 2023, Mr. Fuller faxed AO Clark another letter with attachments including an unsigned Form 433-B, an asset listing, and DI's profit and loss statement for January through June 2023. Mr. Fuller indicated that he would get Mr. Hendriks to sign a copy of the Form 433-B the next time the two met. On August 23, 2023, Appeals Team Manager Vicki Burback-Koranda instructed AO Clark to call Mr. Fuller and make a final request for DI's IA proposal and signed Form 433-B. The record is unclear as to when AO Clark made the call to Mr. Fuller, but Respondent represented that Mr. Fuller did not return the call. AO Clark closed the case on August 28, 2023.
AO Clark noted in the case activity record "[n]o response from [Mr. Fuller]. Closing case back to [Appeals Team Manager] for approval of determination per [Appeals Team Manager's] instructions." AO Clark did not make an entry in the case activity record regarding a phone call made to Mr. Fuller.
AO Clark issued his notice of determination on September 5, 2023, sustaining the NFTL filing. In the notice of determination, AO Clark acknowledged that DI had contested the underlying liability in its CDP hearing request. AO Clark then explained that during the telephonic CDP hearing Mr. Fuller stated that he was not contesting the underlying liability. In its petition DI contends that "[a]t the time of appeal, it was [DI's] belief that the taxes for 2016 and 2017 had been paid." Respondent addressed this in his Motion stating "Respondent understands 'at the time of appeal' to refer to when the [CDP hearing request] was first submitted by [DI]." In its response to the Motion, DI states both that it "does not dispute the amount of the tax liability," and that the IRS filed the NFTL prior to processing corrected tax returns in its possession thereby putting the "liability itself at the center of this case." The response was signed by Mr. Hendriks, as he is the representative of Petitioner.
Discussion
I. Summary Judgment
Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). Generally, we 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(a)(2); see also 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 view the factual materials and inferences drawn from them in the light most favorable to the nonmoving party. See Sundstrand Corp., 98 T.C. at 520 (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)).
II. Standard of Review for CDP Cases
Sections 6320(c) and 6330(d)(1) grant this Court jurisdiction to review an Appeals officer's determination in connection with a CDP hearing. Section 6330(c)(2) prescribes the matters that a taxpayer may raise at a CDP hearing, including spousal defenses, challenges to the appropriateness of the collection action, and collection alternatives. A taxpayer may challenge the existence or amount of its underlying tax liability in a CDP case only if it "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute [it]." I.R.C. § 6330(c)(2)(B). "[T]he term 'underlying tax liability' . . . include[s] any amounts owed by a taxpayer pursuant to the tax laws," including a tax deficiency, any penalties and additions to tax, and statutory interest. Katz v. Commissioner, 115 T.C. 329, 338-39 (2000); Duy Duc Nguyen v. Commissioner, T.C. Memo. 2020-97, at *7.
"A taxpayer is precluded from disputing the underlying liability if it was not properly raised in the CDP hearing." Thompson v. Commissioner, 140 T.C. 173, 178 (2013). However, a taxpayer's failure to present evidence on this point may be excused if the Appeals officer erroneously informs the taxpayer that it is ineligible to present an underlying liability challenge, or if the Appeals officer otherwise improperly refuses to consider such a challenge. In that event, the issue is preserved if the taxpayer files a Tax Court petition that includes a challenge to its underlying tax liability. See Perkins v. Commissioner, 129 T.C. 58, 64 (2007); Shaddix v. Commissioner, T.C. Memo. 2022-11, at *8-9.
If the validity of the underlying tax liability is properly at issue, the Court will review the taxpayer's liability de novo. Sego v. Commissioner, 114 T.C. 604, 609-10 (2000). Where the validity of the underlying liability is not properly at issue, the Court will review the Appeals officer's determination for abuse of discretion only. Id. at 610. Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006).
In determining whether an Appeals officer abused his discretion, we turn to section 6330(c)(3), which requires the officer to (1) verify that the requirements of applicable law and administrative procedure have been met, (2) consider issues raised by the taxpayer, and (3) consider whether the proposed collection action balances the need for the efficient collection of taxes with the taxpayer's legitimate concern that any collection action be no more intrusive than necessary. Thompson, 140 T.C. at 178-179.
III. Review of AO Clark's Determination
DI indicated on its CDP hearing request that it was not liable for the underlying tax liability. AO Clark mentioned the underlying liability in the case activity record only once, when he erroneously stated in his preliminary review that DI had not raised it as an issue. AO Clark first acknowledged DI's challenge to the underlying liability in the notice of determination but asserted that Mr. Fuller stated during the CDP hearing that DI was not contesting the underlying liability. There is no mention of Mr. Fuller conceding the liability issue in the case activity record. AO Clark's representations in the case activity record and notice of determination are at least inconsistent with one another if not contradictory.
In its Petition DI contends that "[a]t the time of the appeal" it believed that certain of its tax liabilities had been paid. Respondent interprets DI's statement to refer only to its request for a CDP hearing. We do not agree with Respondent's interpretation. Claims in a petition "should be broadly construed so as to do substantial justice" and a petition filed by a pro se litigant, as is the case here, "should be liberally construed." Gray v. Commissioner, 138 T.C. 295, 298 (2012). We interpret DI's statement to mean that it challenged the underlying liability not only in the CDP hearing request but during the hearing itself. The administrative record does not support AO Clark's assertion in the notice of determination that DI abandoned its challenge to the underlying liability. We conclude, based on discrepancies in the administrative record, that there is a genuine dispute as to whether DI properly challenged the underlying liability during the CDP hearing and whether AO Clark improperly refused to consider the issue. Summary judgment is therefore not appropriate in this case.
Moreover, as noted by Respondent in his Motion for Summary Judgment, "Pursuant to I.R.C. § 6330(c)(3), the determination of an appeals officer must take the following into consideration: (A) the verification that the requirements of applicable law and administrative procedures have been met; (B) relevant issues raised by the taxpayer; and (C) whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection be no more intrusive than necessary." Although it is Respondent's position that AO Clark considered all three matters, the record is unclear and contradictory regarding the verification requirement. The NFTL is dated January 23, 2023, and the lien notice was sent eight business days later on February 2, 2023. The lien notice claims the NFTL was filed on February 2, 2024, but there is contrary evidence in the administrative record. Section 6320(a)(2) requires that the lien notice be sent within five business days of filing the NFTL. Thus, there is an additional issue of material fact as to whether the lien notice was timely and the requirements of applicable law were met.
Based on these two genuine disputes of material fact, we are denying Respondent's Motion for Summary Judgment.
To reflect the foregoing, it is
ORDERED that Respondent's Motion for Summary Judgment, filed February 14, 2024, is denied.