Opinion
12846-22L
03-08-2023
MICHAELENE J. FORMANACK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Ronald L. Buch Judge
This case is calendared for trial at the March 27, 2023, St. Paul, Minnesota trial session. In this collection case brought pursuant to section 6330, Michaelene J, Formanack seeks review of a notice of determination in which the Commissioner sustained a notice of intent to levy for unpaid frivolous tax submission penalties. Pending before us is the Commissioner's motion for summary judgment in which he asks us to conclude that the settlement officer did not abuse her discretion in sustaining the collection action. Although Ms. Formanack raises frivolous positions in response to the Commissioner's motion, because the Commissioner failed to provide sufficient information to support the application of the section 6702 penalties in the first instance, we must deny his motion for summary judgment. This case remains calendared for trial.
Unless otherwise indicated, all statutory references are to the Internal Revenue 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.
Background
The Commissioner determined frivolous tax submissions penalties pursuant to section 6702(a) for tax years 2012 and 2013 (years in issue). Initially, he assessed penalties for both 2012 and 2013. However, the 2013 penalty was later abated because the validity of the assessment could not be verified. The Commissioner separately assessed a frivolous tax submissions penalty for 2013 for Ms. Formanack's Form 843, Claim for Refund and Request for Abatement. The penalties for the 2012 and 2013 frivolous tax submissions received supervisory approval before they were assessed.
On December 30, 2019, the Commissioner sent Ms. Formanack a CP90, Notice of Intent to Seize Your Assets & Notice of Your Right to a Hearing, for the unpaid section 6702(a) penalties. Ms. Formanack timely requested a Collection Due Process (CDP) hearing in which she stated that her reason for the request was because "the notice of federal tax lien was filed prematurely or not in accordance with IRS procedures." At that time, she did not dispute her underlying liability.
Ms. Formanack's case was assigned to a settlement officer in the IRS Independent Office of Appeals. On January 13, 2022, the settlement officer sent a letter to Ms. Formanack scheduling a telephone conference for February 16, 2022. The letter also requested that Ms. Formanack provide a list of documents so that she could consider collection alternatives. Ms. Formanack did not respond to the letter or call for the conference. On February 17, 2022, the settlement officer sent a second letter to Ms. Formanack again requesting that she provide documentation for her to consider collection alternatives. The letter also notified Ms. Formanack that if she did not contact her within 14 days from the date of the letter, a notice of determination will be issued based on what was in the administrative file. Ms. Formanack responded to the second letter with a 32 page fax. In the fax she asserted that she never received the first letter sent on January 13th and demanded that the settlement officer provide proof that it was sent. She also asked for proof that her 2012 and 2013 returns were prepared incorrectly and proof of the evidence used to assess the frivolous penalties. Outside of these request, the letter mostly contained frivolous arguments and assertions.
On March 22, 2022, the settlement officer sent Ms. Formanack a reply to her fax. The reply enclosed the January 13th letter scheduling the CDP hearing, informed Ms. Formanack that because some of the information she requested was not a part of the CDP administrative file she would have to contact the IRS Disclosure Office for that information, and asked Ms. Formanack to contact her within 14 days if she wanted to conduct the CDP hearing. Having not received any documentation or heard from Ms. Formanack, the settlement officer determined that the levy notice was appropriate and closed the case.
On April 21, 2022, the Commissioner issued Ms. Formanack a notice of determination sustaining the collection action. While residing in Wisconsin, Ms. Formanack timely petitioned the Tax Court challenging the determination. She contends that her returns for the years at issue were not frivolous and disputes her underlying liability for the penalties.
Discussion
Before the Court is the Commissioner's motion for summary judgment in which he asks us to determine that the settlement officer did not abuse her discretion in sustaining the collection action. Ms. Formanack objects to the motion.
Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Under Rule 121(a), either party may move for summary judgment regarding all or any part of the legal issues in controversy. 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(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). The moving party bears the burden of showing that there is no genuine dispute as to any material fact. Sundstrand Corp., 98 T.C. at 520. A party opposing a motion for summary judgment may not rest on mere allegations or denials. Rule 121(d). Rather, the party's response must set forth specific facts showing there is a genuine factual dispute for trial. Id. In deciding whether to grant summary judgment, we view the facts and make inferences in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. For purposes of this motion, we make factual inferences in the light most favorable to Ms. Formanack, the nonmoving party.
Standard of Review
When the taxpayer's underlying liability is properly at issue, we determine the liability de novo. Sego v. Commissioner, 114 T.C. 604, 610 (2000). Where the underlying liability is not properly at issue, we review the Commissioner's collection determination for an abuse of discretion. Id. The phrase "underlying tax liability" includes the tax deficiency, any additions to tax or penalties, and statutory interest. Smith v. Commissioner, T.C. Memo. 2021-29, at *20-21 (citations omitted).
Whether the underlying liability may be raised in a collection proceeding (and therefore before the Court) turns on whether the taxpayer received a notice of deficiency or otherwise had a prior opportunity to dispute the liability. See I.R.C. § 6330(c)(2)(B); Lunsford v. Commissioner, 117 T.C. 183, 184 (2001). The liability in this case is a section 6702 penalty which is an assessable penalty that it is not subject to deficiency procedures. See I.R.C. § 6703(b); Clarkson v. Commissioner, T.C. Memo 2022-92, at *7. Because Ms. Formanack did not receive a statutory notice of deficiency or have a prior opportunity to dispute her liability, she was entitled to challenge the penalties during a CDP hearing. Therefore, as long as Ms. Formanack properly challenged her underlying liability during the CDP hearing, then the underlying liability is properly at issue before the Court.
Ms. Formanack's underlying liability is properly at issue. For the Court to consider a challenge to the underlying liability, the issue must have been properly raised in the taxpayer's CDP hearing. Treas. Reg. § 301.6330-1(f)(2) Q&A-F3; LG Kendrick, LLC v. Commissioner, 146 T.C. 17, 34 (2016), aff'd, 684 Fed.Appx. 744 (10th Cir. 2017); Giamelli v. Commissioner, 129 T.C. 107, 114 (2007). "An issue is not properly raised if the taxpayer fails to request consideration of the issue by Appeals, or if consideration is requested but the taxpayer fails to present to Appeals any evidence with respect to that issue after being given a reasonable opportunity to present such evidence." Treas. Reg. § 301.6330-1(f)(2) Q&A-F3. The Commissioner contends that the underlying liability is not at issue because Ms. Formanack failed to provide any information or documents to the settlement officer regarding the underlying liability. We disagree. While Ms. Formanack failed to dispute her liability on her CDP hearing request, in her March 1, 2022 fax, she disputed her liability by asking the settlement officer to provide proof as to how her tax returns were filed incorrectly. Furthermore, the settlement officer never informed Ms. Formanack on what evidence to present to dispute the liability. In the reply to Ms. Formanack's March 1, 2022 fax, in which she requested proof of frivolous filings, the settlement officer informed her to contact the IRS Disclosure Office for information regarding that issue because it was not in the CDP administrative file. Ms. Formanack properly challenged her underlying liability with respect to the section 6702 penalties. Therefore, we will determine the liability de novo.
Section 6702 Penalties
Section 6702(a) imposes a civil penalty of $5,000 for filing frivolous tax returns. When a section 6702(a) penalty is imposed, the Commissioner bears the burden of proving that it applies. I.R.C. § 6703(a); O'Brien v. Commissioner, T.C. Memo. 2012-326, at *13; Clarkson, T.C. Memo 2022-92, at *8. To satisfy this burden, the Commissioner must prove that (1) petitioner filed a document purporting to be a tax return; (2) the purported return "does not contain information on which the substantial correctness of the self-assessment may be judged" or "contains information that on its face indicates that the self-assessment is substantially incorrect; and (3) the petitioner's conduct in filing the purported return is "based on a position which the Secretary has identified as frivolous" or "reflects a desire to delay or impede the administration of Federal tax laws." I.R.C. § 6702(a); Clarkson, T.C. Memo 2022-92, at *8; O'Brien, T.C. Memo. 2012-326, at *13.
For purposes of the pending motion, the Commissioner failed to establish as a matter of law that the section 6702(a) penalties apply. Although he provided documentation to substantiate that the penalties were properly approved, he did not provide any evidence to substantiate that the penalties apply to Ms. Formanack's filings. Neither the tax returns nor the Form 843 that resulted in these penalties was provided as exhibits to the Commissioner's motion. We note that Ms. Formanack has put forth frivolous arguments in disputing whether the section 6702 penalties apply. However, her frivolous positions do not negate the Commissioner's obligation to provide support for the penalties, which he failed to do. Accordingly, it is
ORDERED that the Commissioner's motion for summary judgment filed January 25, 2023, is denied. It is further
ORDERED that the parties shall submit any proposed trial exhibits or a stipulation of facts by March 20, 2023. This case remains set for trial at the March 27, 2023, St. Paul, Minnesota trial session.