Opinion
2287-21L
04-01-2024
SUZANNE M. FROST, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Elizabeth A. Copeland, Judge.
By Order dated August 8, 2022, the Court struck this collection due process (CDP) case from the September 26, 2022, Las Vegas, Nevada trial session, continued the case, and retained jurisdiction. On December 2, 2022, pursuant to Rule 121,Petitioner, Suzanne Frost, filed a Motion for Summary Judgment (Ms. Frost's Motion), the Declaration of Chris Sheldon in Support of Motion for Summary Judgment, and supporting Exhibits which included the Affidavit of Suzanne Frost. On February 6, 2023, Respondent filed an Opposition to Petitioner's Motion for Summary Judgment, a Cross-Motion for Summary Judgment (Respondent's Motion), the Declaration of John Brewer in Support of Motion for Summary Judgment, and the Declaration of Adria Vondra in Support of Motion for Summary Judgment.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. Some dollar amounts are rounded.
For the reasons set forth below, we will deny Ms. Frost's Motion, grant Respondent's Motion in part, and deny Respondent's Motion in part.
Background
The following background is derived from the parties' pleadings and motion papers, including the attached Declarations and Exhibits. It is stated solely for the purpose of ruling on both Ms. Frost's Motion and Respondent's Motion and not as findings of fact. Ms. Frost resided in Arizona when the Petition was filed.
I. Ms. Frost's Tax Liabilities
A. Examination of Ms. Frost's 2007 and 2008 Returns
Ms. Frost was married to William Goforth during 2007 and 2008. The couple divorced on October 6, 2009. They filed their Forms 1040, U.S. Individual Income Tax Return, for 2007 and 2008 choosing married filing jointly status. The 2007 return was filed while married; the 2008 return was filed after their divorce was final. Neither return was timely filed. Their 2007 Form 1040 was due April 15, 2008, but was filed sometime between November 18, 2008, (the date signed) and December 5, 2008, (the date received by the Internal Revenue Service (IRS)). It reported negative adjusted gross income of $171,490 and a refund due of $311. Their 2008 Form 1040 was due by the extended due date of October 15, 2009, but was filed sometime between January 20, 2010, and February 16, 2010, (the date received by the IRS). It reported negative adjusted gross income of $115,998 and a refund due of $11,940.
The 2008 Form 1040 listed a handwritten date of January 20, 2009, (rather than January 20, 2010), next to Petitioners' signatures which was clearly a scrivener's error. The Certified Public Accountant (CPA) who prepared the return signed it on July 7, 2009, making it impossible to have been signed and mailed to the IRS by Petitioners on January 20, 2009. The fact of the error is further supported by the proximity that a January 20, 2010, mailing date has to the February 16, 2010, date that the IRS received the return.
On May 18, 2010, the Internal Revenue Service (IRS) opened an examination of the 2007 and 2008 tax returns. The IRS assigned Revenue Agent William Zielinski (RA Zielinski) to the case. Of particular interest to RA Zielinski during his examination was Vizor, LLC (Vizor), a construction business reported on Schedule C, Profit or Loss from Business, included with Mr. Goforth and Ms. Frost's 2007 Form 1040. In conducting the examination, RA Zielinski first spoke with Mr. Goforth regarding Vizor and other matters by telephone on October 18, 2010. During that call, Mr. Goforth indicated that Vizor was the only business he was operating during 2007 and 2008 and that he had virtually no business records. As a result, RA Zielinski requested records from outside parties such as Mr. Goforth and Ms. Frost's CPA and financial institutions used by Vizor. Mr. Zielinski ultimately summonsed bank account information on 11 separate accounts related to Vizor.
The record contains only page 2 of Forms 1040 for both 2007 and 2008. It is unclear whether Mr. Goforth and Ms. Frost also reported income or expenses from Vizor on Schedule C of their 2008 return. RA Zielinski made no Schedule C related adjustments to income from their 2008 return.
In connection with the 2007 and 2008 examination, RA Zielinski completed a "Civil Penalty Approval Form" indicating his intention to assert additions-to-tax against Mr. Goforth and Ms. Frost under sections 6651(a)(1) and (2) (which additions did not require managerial approval) and a negligence penalty as defined under section 6662(c) (which did require managerial approval). RA Zielinski's Group Manager George Lydford (GM Lydford) signed the penalty approval form on November 19, 2010. On the same day, the IRS sent a Letter 950 (commonly referred to as a "30-day letter") to "WILLIAM A & SUZANNE M GOFORTH" at a Phoenix, Arizona, address; that 30-day letter only asserted the failure to file and negligence penalties.
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. I.R.C. § 6662(a) imposes an accuracy-related penalty for, among other actions, negligence or disregard of rules or regulations (I.R.C. § 6662(b)(1)) as further defined in I.R.C. § 6662(c).
RA Zielinski obtained Ms. Frost's Chandler, Arizona, address when she filed her then-most recent tax return (her 2009 Form 1040). RA Zielinski first spoke with Ms. Frost by telephone on November 24, 2010. During the telephone conversation, Ms. Frost asked for instructions and forms for filing information requests and for requesting innocent spouse relief. That same day, after confirming her current mailing address, RA Zielinski sent Ms. Frost a Form 8857, Request for Innocent Spouse Relief, including the related instructions.
RA Zielinski received an incomplete Form 8857 from Ms. Frost on December 10, 2010. He called her that day and left a message requesting a call back. On December 12, 2010, RA Zielinski received a Freedom of Information Act (FOIA) request from Ms. Frost that was deficient for unspecified reasons. He then sent her a document providing instructions on the proper method for submitting a FOIA request. On December 21, 2010, RA Zielinski noted in the Examining Officer's Activity Record (Activity Record) that he received an "[i]nadequate protest" from Mr. Goforth regarding the 30-day letter. Also on December 21, 2010, RA Zielinski received three items from Ms. Frost that he referred to in the Activity Record as (1) "an inadequate protest," (2) "an inadequate request under the FOIA," and (3) "an incomplete request for Innocent Spouse Relief under IRC section 6015(c)."
On December 22, 2010, RA Zielinski received a FOIA request from Mr. Goforth with wording that was identical to the FOIA request received from Ms. Frost the day before, and that had the same defects. RA Zielinski noted that he would send Mr. Goforth the requirements for submitting a proper FOIA request later that day. On January 4, 2011, RA Zielinski mailed Mr. Goforth Letter 1025, Letter of Protest, informing him that his protest regarding the 30-day letter was inadequate. RA Zielinski did not send a Letter 1025 to Ms. Frost because, as he wrote in his Activity Record, "she has stated she knows nothing about the case and has no information" and "[i]t would no [sic], therefore, be possible for her to perfect her protest." He completed his review of Ms. Frost's innocent spouse claim on January 18, 2011, finding that the information available was not adequate to establish relief for Ms. Frost under section 6015(b), (c), or (f). RA Zielinski concluded his work on Ms. Frost's case on the same day.
The IRS sent both Mr. Goforth and Ms. Frost a Notice of Deficiency for tax years 2007 and 2008 by certified mail on May 5, 2011. The IRS sent Ms. Frost's copy to the Chandler, Arizona, address. The Notice of Deficiency indicated that the last day to petition this Court was August 3, 2011. In the Notice of Deficiency, the Commissioner determined for 2007 an income tax deficiency of $1,352,406, a section 6651(a)(1) addition to tax of $338,024, and a section 6662(a) accuracy-related penalty of $270,481. The 2007 deficiency stemmed primarily from Schedule C adjustments related to Vizor. For 2008, the IRS determined a deficiency of $15,031, a section 6651(a)(1) addition to tax of $773, and a section 6662(a) accuracy-related penalty of $3,006. The 2008 deficiency is the result of the IRS's determination of unreported cancellation of debt income and the disallowance of a net operating loss carryforward based on RA Zielinski's examination of tax year 2007. The Notice of Deficiency also stated that the IRS "denied relief to [Ms. Frost] under IRC section 6015(b), (c), or (f), from the joint and several liability in this Notice of Deficiency" and that the IRS would "send a separate letter to each spouse regarding [its] decision to deny relief." There is no copy of the Letter 3279, Requesting Spouse Final Determination (final determination letter) in the administrative file, but the Certified Mailing List (CML) indicates that it was mailed to Ms. Frost on May 5, 2011. Ms. Frost claims to have not received either the Notice of Deficiency nor the letter denying her relief from joint and several liability; she did not petition this Court on either. Likewise, Mr. Goforth did not file a petition with this Court regarding his Notice of Deficiency. On October 31, 2011, the IRS assessed the 2007 and 2008 deficiencies, additions to tax, and accuracy-related penalties and apparently sent Ms. Frost a notice and demand for payment although that notice is likewise not included in the administrative record.
The IRS transcripts show "Notice Issued CP 0022" on October 31, 2011, but there is no further information regarding this notice in the administrative record for this case.
B. Bankruptcy Proceedings
Ms. Frost had large outstanding debts following her divorce from Mr. Goforth. On November 14, 2011, she filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. In her petition to the U.S. Bankruptcy Court for the District of Arizona (bankruptcy court), Ms. Frost reported the IRS as a creditor with a claim for income taxes in the amounts of $2,200,000 and $20,000 for years 2007 and 2008, respectively. Her bankruptcy attorney told her, and she believed, that tax debt resulting from Mr. Goforth's assets and businesses were dischargeable in the bankruptcy proceeding. On February 23, 2012, the bankruptcy court issued a Notice Fixing Last Date to File Claims on or before May 23, 2012. On February 28, 2012, Ms. Frost was granted a discharge of debt by the bankruptcy court. As will be discussed, the bankruptcy court order discharging Ms. Frost's debt under Chapter 7 states on the second page that "[s]ome of the common types of debts which are not discharged in a chapter 7 bankruptcy case" include "[d]ebts for most taxes." During the bankruptcy proceedings Ms. Frost did not challenge her 2007 or 2008 tax liabilities or the IRS's refusal of her innocent spouse relief claim. The IRS filed a Proof of Claim for Internal Revenue Taxes, listing $1,593,728 of unsecured priority claims and $713,198 of unsecured general claims on March 8, 2012. Several years went by with no contact between Ms. Frost and the IRS.
C. Collection Due Process (CDP) Proceeding
On April 30, 2019, the IRS mailed Ms. Frost Letter 1058, Final Notice of Intent to Levy and Notice of You Rights to a Hearing (levy notice). Ms. Frost responded on May 6, 2019, through her attorney, Chris Sheldon, with a completed Form 2848, Power of Attorney and Declaration of Representative, a completed Form 12153, Request for a Collection Due Process or Equivalent Hearing, and Form 911, Request for Taxpayer Advocate Service Assistance. On Form 12153 she indicated that she was seeking a collection alternative, checking the boxes for Installment Agreement, Officer in Compromise, and I Cannot Pay Balance. In addition, she checked the box for Innocent Spouse Relief on Form 12153. Mr. Sheldon sent the IRS a letter dated July 3, 2019, describing in detail why Ms. Frost was entitled to innocent spouse relief pursuant to section 6015(b), (c), or (f), and an accompanying Form 8857 for 2007 and 2008.
The IRS Independent Office of Appeals assigned Settlement Officer J. C. Sellers (SO Sellers) to Ms. Frost's case. In preparation for the case, SO Sellers contacted Linda Kittrell, a bankruptcy specialist within the IRS, to determine whether any of Ms. Frost's tax liabilities were discharged during bankruptcy. Ms. Kittrell responded that neither the 2007 nor the 2008 tax liabilities were discharged because they were both priority taxes. As for the penalties, she indicated that the 2007, but not the 2008, penalties should have been abated because Ms. Frost's 2007 tax return was due more than three years prior to the date her bankruptcy petition was filed. Ms. Kittrell's statement about the discharge of the 2007 penalties was consistent with the IRS's proof of claim in Ms. Frost's bankruptcy proceeding that listed $713,198 of unsecured general claims, which amount approximates the additions to tax, penalties and related interest accrual from 2007.
The unsecured general claims amount listed in the proof of claim appears to also include the extremely small amount of 2008 additions to tax, penalties and related interest.
SO Sellers sent Ms. Frost a letter dated August 9, 2019, acknowledging her request for a CDP hearing. In the letter, SO Sellers scheduled a telephonic CDP hearing for September 24, 2019, and asked Ms. Frost to provide him with (1) a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, (2) proof that estimated tax payments were made in full for the year to date, and (3) bank statements for May through August 2019, a list of all assets with proof of encumbrances and proof of payment, and a list of all monthly expenses with proof of payment. SO Sellers sent another letter dated September 16, 2019, indicating that the IRS had received Ms. Frost's Form 8857 and that the scheduled CDP hearing was cancelled while her request for innocent spouse relief was under reconsideration.
On February 7, 2020, SO Sellers received an email from his superior, John Brewer. Mr. Brewer instructed SO Sellers to proceed with Ms. Frost's CDP hearing without regard to her innocent spouse claim because the IRS had already issued a final determination letter on the matter on August 29, 2011; and, according to Mr. Brewer, she could not raise the issue during her CDP hearing or in a subsequent proceeding with this Court. On February 11, 2020, the IRS sent Ms. Frost a letter denying her request for innocent spouse relief under section 6015(b), (c), and (f). In that letter, the IRS stated that it treated Ms. Frost's May 6, 2019, innocent spouse relief request as one for reconsideration of the January 18, 2011, determination, and stated that she did not qualify for reconsideration because she did not provide new information that had not been previously considered. Attached to that letter was a complete copy of the Innocent Spouse Relief Lead Sheet dated January 18, 2011, but no copy of the final determination letter. Mr. Sheldon responded by letter dated February 26, 2020, in which he asserted that there was never a final determination of Ms. Frost's original innocent spouse claim and thus the IRS should not have treated her request as one for reconsideration. He further stated that Ms. Frost's most recent request contained eleven exhibits and, therefore, included additional information not contained in the original January 18, 2011, request that should be considered. SO Sellers responded by letter dated June 4, 2020, reiterating that Ms. Frost's claim for innocent spouse relief was precluded from the CDP hearing because it was previously considered. He stated that he would only consider whether the levy notice was procedurally correct and whether Ms. Frost qualified for a collection alternative. The CDP hearing was rescheduled for June 17, 2020.
This date differs from the date shown on the CML, May 5, 2011.
This is the date Ms. Frost filed Form 12153, checking the Innocent Spouse Relief box. She later submitted Form 8857 with an accompanying letter dated July 3, 2019.
This is the date the RA Zielinski completed his review of Ms. Frost's innocent spouse relief request.
The CDP hearing commenced with Mr. Sheldon and SO Sellers in attendance. Mr. Sheldon raised three issues at the hearing. First, he disputed the denial of innocent spouse relief. SO Sellers advised Mr. Sheldon that he could not consider Ms. Frost's request for innocent spouse relief because a final determination letter was issued on January 18, 2011. The parties disagreed about SO Sellers's ability to consider Ms. Frost's innocent spouse claim. Second, the parties discussed whether the 2007 and 2008 tax liabilities were discharged in bankruptcy. Third, Mr. Sheldon stated that the 2007 and 2008 assessments were invalid because Ms. Frost never received a notice of deficiency. In addition, Mr. Sheldon stated that he had filed a FOIA request to obtain a copy of the Notice of Deficiency and of the CML showing mailing of the Notice of Deficiency. While Mr. Sheldon had received a copy of the Notice of Deficiency, he was still waiting for the CML. SO Sellers agreed to search for the CML and told Mr. Sheldon that he would contact him once he finished his search. In addition, SO Sellers informed Mr. Sheldon that a collection alternative could not be granted because Ms. Frost had provided none of the requested financial information. In addition to their discussions during the CDP hearing, Mr. Sheldon sent various emails to SO Sellers during 2019 and 2020 in which he stated that the 2007 and 2008 tax liabilities were discharged in bankruptcy, requested audit reconsideration for 2007 and 2008, stated that Ms. Frost could raise the underlying tax liabilities as an issue during the appeals process, stated that SO Sellers had jurisdiction to review the innocent spouse relief request (in particular the request under section 6015(f)), requested penalty and interest abatement for 2007 and 2008, and confirmed his receipt of the CML but reiterated his concern that the Notice of Deficiency was never issued to Ms. Frost.
We note that this is the date RA Zielinski completed his review of Ms. Frost's innocent spouse request. The final determination letter was mailed on May 5, 2011, according to the CML, or on August 29, 2011, according to Mr. Brewer.
On March 15, 2023, the IRS sent Ms. Frost a Notice of Determination Concerning IRS Collection Actions under Internal Revenue Code Section 6320 or 6330 (notice of determination), sustaining the levy notice. In the notice of determination, SO Sellers explained that Ms. Frost's innocent spouse claim could not be considered during the CDP hearing because she had had a prior opportunity to contest that matter. He stated that the final determination letter was issued to Ms. Frost on August 29, 2011, the date provided by Mr. Brewer in his February 7, 2020, email to SO Sellers. SO Sellers then addressed Ms. Frost's FOIA request for IRS records relating to Vizor, stating that they were denied because Vizor was solely owned by Mr. Goforth and she therefore had no right to the records.
SO Sellers also determined that the 2007 and 2008 tax liabilities were not discharged in bankruptcy. He then acknowledged Ms. Frost's claim that she never received the Notice of Deficiency. SO Sellers explained that the IRS produced copies of the Notice of Deficiency and the CML and that, as a result, whether the assessment was incorrect was a precluded issue. In addition, SO Sellers stated that Ms. Frost must have received the Notice of Deficiency because she listed the 2007 and 2008 tax liabilities on her bankruptcy petition dated November 14, 2011; he did not address whether she may have received that information in the October 31, 2011 notice and demand that was also sent to her attention. SO Sellers also noted that the bankruptcy proceeding might have constituted a prior opportunity to dispute the underlying tax liability. He then addressed Ms. Frost's requests for penalty and interest abatement. SO Sellers denied the penalty abatement request because (1) she did not qualify for first-time penalty abatement, as she had neither paid nor arranged to pay the tax currently due, and (2) according to him, there were no grounds for reasonable cause penalty abatement. He denied the interest abatement request because she did not satisfy section 6404(e)(1). SO Sellers reasoned that Mr. Sheldon continued to raise new issues after the initial telephone conference which lengthened the CDP process and therefore delayed the IRS's collection of interest.
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
Our standard of review in CDP cases depends on whether the validity of the underlying tax liability is properly at issue. Taxpayers who did not receive a notice of deficiency or did not otherwise have a prior opportunity to contest their tax liability may contest that liability, including a self-assessed liability, at their CDP hearing. I.R.C. § 6330(c)(2)(B); Montgomery v. Commissioner, 122 T.C. 1, 9 (2004). In that instance, we review the notice of determination de novo. Goza v. Commissioner, 114 T.C. 176, 181-82 (2000). Otherwise, we review the notice of determination for abuse of discretion only. Id. Absent an agreement to the contrary, our decision in this case is appealable to the U.S. Court of Appeals for the Ninth Circuit. See § 7482(b)(1)(G)(i), (2). That court has held that, where de novo review is not applicable, the scope of review in a CDP case is confined to the administrative record. See Keller v. Commissioner, 568 F.3d 710, 718 (9th Cir. 2009), aff'g in part T.C. Memo. 2006-166, and aff'g in part, vacating in part decisions in related cases. For the reasons discussed below, de novo review is not available in this case.
A. Ms. Frost's Challenge to the Underlying Tax Liabilities
Ms. Frost contends that she never received the Notice of Deficiency and was thus unaware of her 2007 and 2008 tax liabilities. She therefore asserts that she lacked the opportunity to contest the underlying tax liability. However, we need not determine whether Ms. Frost received the Notice of Deficiency to resolve this issue because the bankruptcy proceeding constituted a prior opportunity to contest the underlying 2007 and 2008 tax liabilities.
Federal bankruptcy courts may consider the amount or legality of taxes, including penalties and interest. 11 U.S.C. § 505(a); Son Gee Wine & Liquors, Inc. v. Commissioner, T.C. Memo. 2013-62, at *11; Sabath v. Commissioner, T.C. Memo. 2005-222, 90 T.C.M. (CCH) 315, 317. Where a taxpayer has filed a bankruptcy action and the Commissioner has submitted a proof of claim for unpaid federal tax liabilities in that action, we have held that the taxpayer has had the opportunity to dispute the liabilities for purposes of section 6330(c)(2)(B). See Kendricks v. Commissioner, 124 T.C. 69, 77 (2005); Son Gee Wine & Liquors, Inc., T.C. Memo. 2013-62, at *11; Sabath, 90 T.C.M. (CCH) at 317.
In Ms. Frost's bankruptcy proceeding, the IRS submitted a proof of claim, including an unsecured priority claim of $1,593,728 and an unsecured general claim of $713,198, for Ms. Frost's unpaid 2007 and 2008 income tax liabilities. Ms. Frost, represented by counsel, did not file an objection to the tax liabilities. Accordingly, at her CDP hearing she was precluded from challenging those liabilities. See Salazar v. Commissioner, T.C. Memo. 2008-38, 95 T.C.M. (CCH) 1149,1156, aff'd, 338 Fed.Appx. 75 (2d Cir. 2009). We will deny Ms. Frost's Motion and grant Respondent's Motion as to this issue. We will review the actions of SO Sellers for abuse of discretion only.
III. Abuse of Discretion
In reviewing for abuse of discretion, we must uphold a notice of determination unless it is arbitrary, capricious, or without sound basis in fact or law. See, e.g., Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006); Taylor v. Commissioner, T.C. Memo. 2009-27, 97 T.C.M. (CCH) 1109, 1116. We consider whether SO Sellers (1) properly verified that the requirements of any applicable law or administrative procedure have been met; (2) considered any relevant issues raised by Ms. Frost; and (3) determined whether "any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of [Ms. Frost] that any collection action be no more intrusive than necessary." I.R.C. § 6630(c)(3); Ludlam v. Commissioner, T.C. Memo. 2019-21, at *9-10, aff'd per curiam, 810 Fed.Appx. 845 (11th Cir. 2020).
A. Verification
Before issuance of a notice of determination, an appeals officer is required to verify that all requirements of applicable law and administrative procedure have been met. I.R.C. § 6330(c)(1), (3)(A). We have the authority to review satisfaction of this requirement regardless of whether the taxpayer raised a verification issue at the CDP hearing. See Hoyle v. Commissioner, 131 T.C. 197, 200-03 (2008), supplemented by 136 T.C. 463 (2011).
1. Validity of the Assessment
Per section 6212(a) and (b), the IRS must send a notice of deficiency to the taxpayer's last known address by certified mail or registered mail before it assesses liability for unpaid taxes. Actual receipt of the notice by the taxpayer is not required to establish the validity of the assessment. See Ruddy v. Commissioner, T.C. Memo. 2017-39, at *9, aff'd per curiam, 727 Fed.Appx. 777 (4th Cir. 2018). The IRS must prove it complied with the mailing requirement by competent and persuasive evidence. Coleman v. Commissioner, 94 T.C. 82, 90 (1990). If the IRS fails to prove that it properly mailed a notice of deficiency, any tax assessment based on that notice is invalid. I.R.C. § 6213(a) (requiring the IRS to notify the taxpayer of a deficiency and permit timely petition for redetermination before assessing tax liability); Hoyle, 131 T.C. at 205. Copies of postal service forms certifying that a notice of deficiency was mailed are highly probative and sufficient in the absence of contrary evidence. United States v. Zolla, 724 F.2d 808, 810 (9th Cir. 1984).
Respondent has produced a copy of the Notice of Deficiency addressed to Ms. Frost in Chandler, Arizona, and dated May 5, 2011. Respondent has also produced a copy of the CML that indicates that the Notice of Deficiency was mailed to Ms. Frost at the same Chandler, Arizona, address and on the same date. Ms. Frost admits that Respondent produced the CML but contends that SO Sellers abused his discretion by determining that the 2007 and 2008 assessments were valid. To support her contention, she asserts that she never received the Notice of Deficiency, that Respondent has not produced Postal Service Form 3811, Domestic Return Receipt, that the certified mailing number found on the CML is not on the Notice of Deficiency, and that the United States Postal Service (USPS) has no records related to the certified mailing number. Contrary to Ms. Frost's arguments, the CML represents direct documentary evidence of the date and fact of mailing to her of the Notice of Deficiency for 2007 and 2008. See Clough v. Commissioner, 119 T.C. 183, 187-88 (2002); Coleman, 94 T.C. at 90; Magazine v. Commissioner, 89 T.C. 321, 324 (1987); see also Hoyle v. Commissioner, 136 T.C. 463, 468 (2011) (noting that the CML in that case appeared to include the same information found on Postal Service Form 3877); Bobbs v. Commissioner, T.C. Memo 2005-272, 2005 WL 3157919, at *2 (noting, among other things, that a CML is similar to and appears to serve the same function as Postal Service Form 3877). The CML shows Ms. Frost's name, the Chandler, Arizona, address, and the certified mail number for the Notice of Deficiency. The CML further bears a USPS postmark and is signed by a USPS employee. Cf. Bobbs v. Commissioner, 2005 WL 3157919, at *2.
There is "no authority that establishes that a Notice of Deficiency sent by certified mail must bear the certified mail number." Garrett v. Commissioner, T.C. Memo. 2015-228, at *6.
Ms. Frost's Motion included attached Exhibits. Exhibit C appears to show results of an online search on a webpage titled "USPS Tracking" for the USPS tracking number assigned to the notice of deficiency on the CML. Ms. Frost's search apparently returned a result of "Status Not Available." This is unsurprising because, according to the current USPS website, tracking records for certified mail are stored in the USPS system for two years. https://faq.usps.com/s/article/USPS-Tracking-The-Basics. It appears that Ms. Frost performed the internet search substantially more than two years after the CML tracking number associated with Ms. Frost's notice of deficiency was generated.
In Bobbs we found that the CML submitted by the Commissioner was incomplete and did not give rise to a presumption of proper mailing because (unlike here) it was missing a postal employee's signature or initials and failed to specify the total number of certified mail pieces received by the post office. Nonetheless, we noted in Bobbs that the CML had a USPS postmark date, the address recorded on the CML was the same address used on the taxpayer's correspondence with the Commissioner, and the taxpayer did not dispute that the address recorded on the CML was the taxpayer's last known address (all of which apparently are likewise true in the instant case). Therefore, in Bobbs we held that the Commissioner had established by a preponderance of the evidence that the notice of deficiency was mailed to the taxpayer's last known address. Id. at *2-3.
A notice of deficiency that is mailed to the taxpayer's last known address in accordance with the procedures under section 6212(b)(1) is valid even if it is never actually received by the taxpayer. Pyo v. Commissioner, 83 T.C. 626, 632 (1984). Generally, a taxpayer's last known address is the address appearing on the taxpayer's most recently filed and properly processed federal tax return unless the IRS is given clear and concise notification of a different address. See Treas. Reg. § 301.6212-2(a). The taxpayer has the burden of proving that the notice of deficiency was not sent to her last known address. Yusko v. Commissioner, 89 T.C 806, 808 (1987). Ms. Frost has failed to show that the Chandler, Arizona, address to which the IRS mailed the Notice of Deficiency was not her last known address. SO Sellers did not abuse his discretion by determining that the 2007 and 2008 assessments were valid. Ms. Frost is not entitled to summary judgment on this issue. We will grant Respondent's Motion as to the validity of the assessment.
2. Section 6751(b)(1) Compliance
Section 6751(b)(1) provides that "[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination." In Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1074 (9thCir. 2022), rev'g and remanding 154 T.C. 68 (2020), the U.S. Court of Appeals for the Ninth Circuit held that section 6751(b)(1) does not require written supervisory approval at any particular time before the assessment of the penalty, so long as the relevant supervisor "retains discretion whether to approve the penalty assessment." Absent stipulation to the contrary appeal of this case would lie to the Ninth Circuit, I.R.C. § 7482(b)(1)(A), and we thus follow its on-point precedent. Golsen v. Commissioner, 54 T.C. 742, 756-57 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
Respondent contends that supervisory approval was timely obtained prior to assessment of the penalties at issue and that it is thus entitled to summary judgment on this issue. In her Motion, Ms. Frost contends that "Respondent's administrative file does not claim any evidence that supervisory approval was sought or given prior to asserting penalties for the tax years at issue" and that the penalties should therefore be abated. However, attached to Ms. Frost's Motion is a copy of the penalty approval form that includes the section 6662 penalty at issue and that was signed by GM Lydford on November 19, 2010. In addition, GM Lydford signed the 30-day letter that was mailed on the same day. RA Zielinski was the examiner who recommended assertion of these penalties. RA Zielinski's name appears as the "Examiner" at the top of the penalty approval form, and his case activity record also shows that he was the lead examiner in the audit of Mr. Goforth and Ms. Frost's 2007 and 2008 tax returns. GM Lydford signed the penalty approval form as RA Zielinski's "Group Manager" below the box captioned "Group Manager Approval to Assess Penalties."
The section 6651(a)(1) and section 6651(a)(2) additions to tax listed on the Civil Penalty Approval Form do not require managerial approval. See I.R.C. § 6751(b)(2).
Under our caselaw, a 30-day letter demonstrates that an initial determination of penalties has been made, see Clay v. Commissioner, 152 T.C. 223, 249 (2019), aff'd, 990 F.3d 1296 (11th Cir. 2021), and, if signed by a manager, is sufficient to prove compliance with section 6751(b)(1) in the absence of contrary evidence.
The record demonstrates that GM Lydford was RA Zielinski's "immediate supervisor" within the meaning of section 6751(b)(1). See Sand Inv. Co., LLC v. Commissioner, 157 T.C. 136, 141-42 (2021). Both the penalty approval form and the 30-day letter were signed prior to the issuance of the Notice of Deficiency to Ms. Frost, at a time when GM Lydford still possessed the discretion to withhold approval. See Laidlaw's Harley Davidson Sales, Inc., 29 F.4th at 1071. As this Court has repeatedly held, "a manager's signature on a civil penalty approval form, without more, is sufficient to satisfy the statutory requirements" of section 6751(b)(1). See Salacoa Stone Quarry, LLC v. Commissioner, T.C. Memo. 2023-68, at *6. On the record before us, we cannot say that SO Sellers failed to verify that the 2007 and 2008 section 6662 penalties were properly approved. Respondent is entitled to summary judgment on this issue. We will therefore deny Ms. Frost's Motion as to penalty approval.
B. Issues Raised
A Settlement Officer is also required to consider any relevant issues raised by the taxpayer during a CDP hearing. I.R.C. § 6330(c)(2)(A), (c)(3)(B). Ms. Frost contends that SO Sellers abused his discretion by (1) ignoring the bankruptcy discharge of the 2007 and 2008 tax related liability, (2) refusing to consider her request for interest abatement, (3) refusing to consider her request for innocent spouse relief pursuant to section 6015(f), and (4) denying her FOIA request for return information that she needed for submitting an offer in compromise (OIC) and application for audit reconsideration. We will address each issue in turn.
1. Tax Liabilities, Penalties, and Interest Discharged in Bankruptcy
In her Petition, Ms. Frost contends that her 2007 and 2008 tax, penalty, and interest liabilities were discharged in her Chapter 7 bankruptcy proceeding. Respondent contends that SO Sellers correctly determined those tax related liabilities were not discharged in her Chapter 7 bankruptcy proceeding. In a CDP proceeding under section 6330(d)(1), such as the present case, the Court has jurisdiction to determine whether a bankruptcy proceeding has discharged a taxpayer from unpaid liabilities. See Washington v. Commissioner, 120 T.C. 114, 120-21 (2003); Swanson v. Commissioner, 121 T.C. 111, 117 (2003). If SO Sellers' determination was based on an erroneous view of the law and Ms. Frost's liabilities for 2007 and 2008 were discharged in bankruptcy, then we must reject Respondent's views and find that there was an abuse of discretion. Swanson 120 T.C. at 119. A taxpayer's assertion that her tax related liabilities were discharged in bankruptcy amounts to a challenge to the appropriateness of the collection action under section 6330(c)(2)(A). Bussell v. Commissioner, 130 T.C. 222, 236 (2008); Ashmore v. Commissioner, T.C. Memo. 2017-233, at *19.
A debtor's discharge under Chapter 7 does not include debts for taxes of the kind and for the periods specified in 11 U.S.C. § 507(a)(8)(A). 11 U.S.C. § 523(a)(1)(A). Taxes that are not dischargeable under 11 U.S.C. § 523(a)(1)(A) are called "priority debts" and include (1) income tax which became due within three years before the date the bankruptcy petition was filed, (2) income tax assessed within 240 days of the date the bankruptcy petition was filed, and (3) income tax not assessed before the bankruptcy petition was filed but still assessable thereafter. 11 U.S.C. § 507(a)(8)(A); see also Young v. United States, 535 U.S. 43, 46 (2002) ("If the IRS has a claim for taxes for which the return was due within three years before the bankruptcy petition was filed, the claim . . . is nondischargeable in bankruptcy under [11 U.S.C.] § 523(a)(1)(A)."). Similarly, under 11 U.S.C. § 523(a)(1)(B) a debtor's debts for taxes are not dischargeable if the tax return was never filed, or was filed late and within the two years immediately preceding the date the bankruptcy petition was filed. See, e.g., Washington 120 T.C. at 121-22. Further, under Title 11 U.S.C. § 523(a)(7), any debt that is a "fine, penalty, or forfeiture" for the benefit of a governmental unit that is not compensation for actual pecuniary loss is nondischargeable, unless the debt is a tax penalty relating to a tax that is not a priority debt or is "imposed with respect to a transaction or event that occurred" more than three years before the bankruptcy petition was filed.
Ms. Frost's 2007 income taxes were due on April 15, 2008, and her 2008 income taxes were originally due on April 15, 2009 and extended to October 15, 2009. See I.R.C. §§ 6151(a), 6072(a). The IRS assessed the 2007 and 2008 tax liabilities, additions to tax, penalties, and interest on October 31, 2011. Ms. Frost filed her bankruptcy petition on November 14, 2011. Accordingly, neither Ms. Frost's 2007 tax liabilities nor her 2008 tax liabilities were discharged because they were assessed within 240 days of the date that she filed her bankruptcy petition. The interest on those nondischargeable tax debts was likewise nondischargeable. See Leathley v. Commissioner, T.C. Memo. 2010-194, 2010 WL 3489554 at *4.
We note that Ms. Frost's 2008 income tax liability is nondischargeable for two additional reasons. First, her 2008 income tax liability became due less than three years prior to her filing her bankruptcy petition. See 11 U.S.C. §§ 507(a)(8)(A)(i), 523(a)(1)(A). Second, her 2008 return was late-filed between January 20, 2010, and February 16, 2010, which is within the two years immediately preceding the date she filed her bankruptcy petition. See 11 U.S.C. § 523(a)(1)(B)(ii).
As to the additions to tax and penalties, as stated above under 11 U.S.C. § 523(a)(7), a tax penalty that is for the benefit of a governmental unit and is not compensation for an actual pecuniary loss is generally nondischargeable. Our Court has agreed that additions to tax for failure to timely file a return and accuracy-related penalties "do not compensate the IRS for 'actual pecuniary loss.'" Barnes v. Commissioner, T.C. Memo. 2021-49, fn. 3.- Thus, the penalties can be nondischargeable. However if they relate to a tax that is not priority debt or were imposed with respect to a transaction or event that occurred more than three years before the date Ms. Frost filed her bankruptcy petition, they can be discharged. We have already determined that Ms. Frost's 2007 and 2008 tax liabilities were priority debts. Therefore, the question becomes whether the additions-to-tax and accuracy- related penalties arose in a transaction or event less than three years prior to the bankruptcy filing. This question is easily addressed when evaluating the 2008 tax year, as such additions and penalties clearly arose in a transaction or event less than three years prior to the bankruptcy filing (e.g. the tax due date, or extended due date, of the 2008 return). This is so because the three-year period for discharge would have accrued by 2012 and the bankruptcy filing was in 2011. However, the same is not true for the 2007 tax year. Those additions to tax and penalties relate to a transaction or event that began on April 15, 2008 (e.g. the due date of the 2007 return) which date is more than three years from the November 14, 2011, bankruptcy filing. As noted by Ms. Kittrell, such additions to tax and penalties were dischargeable in Ms. Frost's bankruptcy and so discharged. See also McKay v. United States, 957 F.2d 689, 693-94 (9th Cir. 1992). It was clearly an abuse of discretion to approve a levy as to the 2007 additions to tax and penalty. Thus, we agree with Respondent's Motion only as to the non-dischargeablity of the 2007 tax liability and interest, and the non-dischargeability of the 2008 tax liability, additions to tax, penalties, and interest.
The meaning of "transaction or event" in 11 U.S.C. § 523(a)(7)(B) has been interpreted differently by Federal district and bankruptcy courts. See Wilson v. United States (In re Wilson), 527 B.R. 635 (Bankr. N.D. Cal. 2015) (holding that a section 6651(a)(1) failure to file penalty accrued on April 15 of the year following the tax year at issue for purposes of 11 U.S.C. § 523(a)(7)(B)) rev'd, United States v. Wilson, No. 15-cv-01448-VC, 2016 (N.D. Cal. Jan. 21, 2016) (holding that because the taxpayer had obtained an extension to file his tax return the section 6651(a)(1) failure to file penalty accrued "on October 16, 2009, when it was clear [the taxpayer] had failed to file by the extended deadline"). The result for Ms. Frost is identical under either of the two analyses for both her 2007 and 2008 tax years.
We note that no filing extension request was made related to the 2007 Form 1040.
2. Interest Abatement
Ms. Frost contends that SO Sellers abused his discretion by determining that Ms. Frost was not entitled to interest abatement under section 6404. Section 6404(e)(1)(A) authorizes the Commissioner to abate an assessment of interest on "any deficiency attributable . . . to any unreasonable error or delay by an officer or employee of the Internal Revenue Service . . . in performing a ministerial or managerial act." Ms. Frost contends that the "seven-year delay [following Ms. Frost's bankruptcy proceeding] before any effort to communicate with [Ms. Frost] in any form that a tax deficiency was due to the IRS constitutes an unreasonable delay and error by an officer or employee of the IRS as defined by IRC § 6404(e)(1)(a) [sic]." Respondent contends that "[Ms. Frost] herself caused most of the delay through her initial innocent spouse request and her bankruptcy filing and did not qualify under the criteria listed under I.R.C. § 6404(e)(1)." Because of these divergent factual positions, there remain genuine issues of material fact relevant to the parties' interest abatement dispute, so we find it inappropriate for summary judgment. We will deny both Ms. Frost's Motion and Respondent's Motion with respect to the issue of interest abatement under section 6404.
3. Request for Innocent Spouse Relief
Ms. Frost contends that SO Sellers abused his discretion by failing to consider her request for innocent spouse relief pursuant to section 6015(f). SO Sellers determined, and Respondent contends, that Ms. Frost was precluded from raising the issue of innocent spouse relief during her CDP hearing because the IRS had already made a final determination on the matter, as conveyed in the Notice of Deficiency and in the final determination letter. Ms. Frost maintains in her Reply to Response to Motion for Summary Judgment that she never received either and she therefore "had no reason to know that her claim for innocent spouse relief was denied and did not have an opportunity to challenge that denial." It is not clear from the record whether Ms. Frost received the final determination letter, the mailing of which is reflected on the CML. Neither party has produced a copy of the final determination letter; and, because of that, there are genuine issues of material fact relevant to the parties' innocent spouse relief dispute. Thus, we will deny both Ms. Frost's Motion and Respondent's Motion as to this issue.
Respondent further contends in his Motion that Ms. Frost's bankruptcy proceedings constituted a prior opportunity to contest whether she was entitled to innocent spouse relief. Respondent relies on In re Bowman, 632 B.R. 64 (Bankr. E.D. La. 2021), to support his contention that bankruptcy courts have subject matter jurisdiction to hear innocent spouse cases. See also Pendergraft v. U.S. Dep't of the Treas. I.R.S. (In re Pendergraft), No. 16-33506, 2017 WL 1091935, at *4 (Bankr.S.D.Tex. Mar. 22, 2017). We note that shortly after Respondent filed his Motion in this case, another bankruptcy court reached the opposite conclusion. See Geary v. United States (In re Geary), 650 B.R. 486 (Bankr. W.D. Pa. 2023) (granting the government's motion to dismiss for lack of subject matter jurisdiction where the debtor sought innocent spouse relief under section 6015(f)).
In his Motion, Respondent contends that Ms. Frost's actual receipt of either the Notice of Deficiency or the final determination letter is unnecessary "to limit [her] from raising a spousal defense as the claim does not dispute the existence of the liability." Respondent cites no caselaw to support his position.
4. Mrs. Frost's Request for 2007 and 2008 Return Information
During her CDP hearing, Ms. Frost requested from SO Sellers unredacted copies of all documents related to her 2007 and 2008 examination. She reiterated this issue in her Petition. In particular, Ms. Frost sought bank and business records for Vizor for the purpose of submitting an OIC and requesting audit reconsideration.She filed a FOIA request to obtain those documents to no avail. Her request was denied because Vizor was solely owned by Mr. Goforth. SO Sellers subsequently denied Ms. Frost's record request because he believed it was a stalling tactic, and because her FOIA request was denied. Ms. Frost contends that SO Sellers abused his discretion in doing so.
A grant of audit reconsideration is discretionary with the IRS and is conducted outside the CDP process; an SO's determination on this point is not subject to judicial review. See Daniel v. Commissioner, T.C. Memo. 2009-28, 97 T.C.M. (CCH) 1120, 1121 (describing audit reconsideration as a proceeding "separate and apart from the instant CDP collection case"); Jones v. Commissioner, T.C. Memo. 2007-142 (holding that the IRS did not abuse its discretion by declining to wait for the results of audit reconsideration before sustaining collection action).
A person's jointly filed tax return shall be open to her inspection or disclosed to her upon written request. See I.R.C. § 6103(e)(1)(B). A "'return' means any tax or information return . . . filed with the Secretary by, on behalf of, or with respect to any person." I.R.C. § 6103(b)(1). A person's return information may be open to her inspection or disclosed to her so long as she is authorized to inspect the return under Section 6103(e) and "if the Secretary determines that such disclosure would not seriously impair Federal tax administration." I.R.C. § 6103(e)(7). "Return information" is defined as
Sec. 6103(b)(2)(A). [A] taxpayer's identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether the taxpayer's return was, is being, or will be examined or subject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or the amount thereof) of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition, or offense.
Records related to Vizor constitute return information under Section 6103(b)(2)(A), and nothing in the record indicates that SO Sellers considered whether Section 6103(e)(7) had any effect on Ms. Frost's request for the Vizor business records. However, we note that this Order forecloses a dispute in this forum as to the underlying tax liability and would need further briefing to explain how such records would relate to the specific disputes remaining in this case after the issuance of this Order (e.g. the innocent spouse claims and interest abatement). We will allow Ms. Frost to further develop the record on this point in preparation for trial if she chooses. We further note that Respondent can always obtain assurances that the information will only be used for purposes of the current proceeding and can request to seal any such records from public viewing if Respondent so desires.
C. Balancing
In her Petition, Ms. Frost contends that SO Sellers abused his discretion by determining that the "proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of [Ms. Frost] that any collection action be no more intrusive than necessary." I.R.C. § 6330(c)(3)(C). As discussed above, there are several issues that must be resolved before we conduct the Section 6330(c)(3)(C) balancing test.
IV. Conclusion
As discussed above, there remain several issues in this case for which summary judgment is improper.
Accordingly, it is
ORDERED that Ms. Frost's Motion for Summary Judgment, filed December 2, 2022, is denied. It is further
ORDERED that Respondent's Cross-Motion for Summary Judgment, filed February 6, 2023, is granted in part to the extent set out above regarding Ms. Frost's challenge to the underlying 2007 and 2008 tax liabilities, the validity of the assessment, section 6751(b)(1) compliance, and the non-dischargeability in bankruptcy of all but the 2007 additions to tax and penalties. Respondent's motion is otherwise denied.