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noting that the district court's jurisdiction was contingent upon the Tax Court lacking jurisdiction
Summary of this case from Thayer v. Internal Revenue ServiceOpinion
Civ. No. 04-1133 (HAA).
November 22, 2005
Jennifer L. Mellish, Esq., Frank Agostino, Esq., Calo Agostino, P.C., Hackensack, NJ, Attorneys for Plaintiff.
Christopher J. Christie, Esq., United States Attorney, Susan Steele, Esq., Assistant United States Attorney, Isaac D. Paxman, Esq., Trial Attorney, Tax Division, U.S. Department of Justice, Washington, D.C., Attorneys for Defendant.
OPINION AND ORDER
This matter comes before the Court on a motion by Defendant United States of America (the "Government") to dismiss the Complaint of Plaintiff Edward Garage ("Garage") or in the alternative for summary judgment. For the reasons discussed herein, the Government's motion to dismiss or for summary judgment is DENIED.
I. BACKGROUND
Plaintiff Garage is an individual residing in Wycoff, New Jersey who, in the early 1990s, was the president of a now-defunct corporation named Dell Ventures, Inc. ("DVI"). In 1994, the Internal Revenue Service ("IRS") assessed Garage a civil penalty pursuant to 26 U.S.C. § 6672 for DVI's unpaid trust fund taxes from Q4 1990 through Q1 1993. ( See Decl. of Isaac D. Paxman ("Paxman Decl."), Ex. A at 36.) An IRS notice of determination attached to the Complaint shows that Garage received his first notice of the penalty on August 2, 1994 and his fourth notice on December 24, 2001. (Compl., Ex. A at 2.)
On February 5, 2003 and again on June 23, 2003, the IRS issued Garage a Final Notice-Notice of Intent to Levy and Notice of Your Right to a Hearing ("First Final Notice" and "Second Final Notice," respectively, and "Final Notices," collectively). There is no dispute that Garage timely filed a request for a Collection Due Process ("CDP") hearing in response to each Final Notice. The parties also agree that subsequent telephone conversations occurred between Garage's attorney and various individuals at the IRS, including Appeals Officer Robert Lipuma, who had charge of Garage's appeal. Julia Moore, an associate working for Garage's attorney, allegedly requested a face-to-face hearing during each of these conversations.
In an October 14, 2004 telephone conversation, Lipuma advised Moore that Garage would need to supply additional proofs and information in support of his position. During this conversation, Lipuma informed Moore that the Final Notices arose from DVI's unpaid tax liabilities from Q4 1990 through Q1 1993. Lipuma also offered to consider collection alternatives. Garage contends that this offer was conditioned upon Garage agreeing to waive his right to appeal the Appeals Office's determination. There is no dispute that Garage never submitted an offer in compromise.
On December 12, 2003, Lipuma and Moore held a brief telephone conversation. Moore notes that she repeated her request for a face-to-face hearing. The IRS's notice of determination indicates that the IRS requested "direction as to how you want to proceed, and if no response were received we would close our case based on information available in the file." (Compl., Ex. A at 3; see also Paxman Decl., Ex. A at 21.) It is undisputed that Garage never provided the requested direction.
IRS records place the date of this telephone conversation at December 10, 2003. ( See Paxman Decl., Ex. A at 21.) For convenience and consistency, the Court will refer to this conversation as having occurred on December 12, 2003.
On February 9, 2004, the IRS Appeals Office issued its notice of determination of Garage's appeals. The Appeals Office found that the assessment against Garage was valid, and that Garage had not successfully refuted its applicability. In addition, the Appeals Office found that Garage's attorney had been advised in the October 14, 2003 telephone conversation that the assessment included periods from Q4 1990 through Q1 1993. Therefore, the Appeals Office concluded that "the required procedures have been followed and the Notice of Intent to Levy by Compliance is proper and appropriate." (Compl., Ex. A at 4.)
On March 8, 2004, Garage initiated this action seeking a redetermination of the Appeals Office's decision. Garage invokes 26 U.S.C. § 6330(d) as the basis for the Court's jurisdiction over this matter. The Government filed the instant motion on June 2, 2005, seeking dismissal of the Complaint, or in the alternative, summary judgment.
Despite the Government's characterization of its motion as a motion to dismiss or for summary judgment, this Court will follow the example of other courts in this district by construing the Government's motion as one for judgment, seeking affirmance of the Appeals Officer's determination. See, e.g., Cavanaugh v. United States, No. 03-250, 2004 WL 880442, at *1 (D.N.J. Mar. 23, 2004) ("[A] `motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure . . . makes no procedural sense when a district court is asked to undertake judicial review of agency action. . . ." (quoting MRCA Info. Servs. v. United States, 145 F. Supp. 2d 194, 195 n. 3 (D. Conn. 2000))).
II. ANALYSIS
A. Subject Matter Jurisdiction and Standard of Review
Section 6330 of Title 26 sets forth certain procedural safeguards that the IRS must satisfy before it may make a levy on any person's property or right to property. Subsection (b) guarantees such person a right to a fair hearing before an IRS Appeals Officer, and subsection (c) sets forth various considerations that may inform the Appeals Officer's determination. Subsection (d) provides that the person who is the subject of the Appeals Officer's determination may, within 30 days of such determination, file an appeal with the Tax Court, or, if the Tax Court lacks jurisdiction over the underlying tax liability, with a United States district court.
As an initial matter, this Court must determine whether it possesses subject matter jurisdiction to hear this case. A district court's subject matter jurisdiction to hear an appeal of an Appeals Office determination is contingent upon the Tax Court lacking jurisdiction. 26 U.S.C. § 6330(d)(1)(B). Where a plaintiff's income tax liabilities are at issue, jurisdiction resides in the Tax Court, and not in a district court. United States v. Summers, 254 F. Supp. 2d 589, 595 (E.D. Pa. 2003). However, the Tax Court lacks jurisdiction to determine taxpayer liability with respect to penalties imposed under Section 6672 of the Internal Revenue Code. Rustam v. Comm'r, No. 3316-04L, 2005 Tax Ct. Memo LEXIS 44, at *5 (Mar. 7, 2005) (citing cases). That section, which permits the IRS to assess a civil penalty on a responsible corporate official for unpaid employment or trust fund taxes, provides in relevant part that
[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.26 U.S.C. § 6672(a).
Examination of the Appeals Officer's notice of determination reveals that the IRS assessed the civil penalty against Garage pursuant to Section 6672. ( See Compl., Ex. A at 3.) Accordingly, this Court finds that the Tax Court lacks jurisdiction to determine Garage's liability for the trust fund penalty. See Rustam, 2005 Tax Ct. Memo LEXIS 44 at *7 (holding that Tax Court lacked jurisdiction to determine taxpayer's liability for trust fund penalty). The Court further finds that Garage timely filed the instant action within 30 days of the Appeals Officer's February 9, 2004 notice of determination. Therefore, pursuant to 26 U.S.C. § 6330(d)(1)(B), this Court possesses subject matter jurisdiction to hear the instant case.
Section 6672 imposes liability on a responsible person who willfully fails to "collect," "account for," or "pay over" employment or trust fund taxes. 26 U.S.C. § 6672; Cutaiar v. United States, No. 91-3526, 1992 WL 198927, at *5 (E.D. Pa. Aug. 11, 1992). It is a separate and distinct liability from the underlying tax liability. Datlof v. United States, 370 F.2d 655, 656 (3d Cir. 1966). The IRS need not assess discrete Section 6672 penalties for each quarter in which there are unpaid taxes, but may impose a single, "lump-sum" assessment, provided that the IRS notifies the taxpayer of the tax period from which the liability arises. Taylor v. Internal Revenue Serv., 69 F.3d 411, 418-19 (10th Cir. 1995) (citing Stallard v. United States, 12 F.3d 489, 495 (5th Cir. 1994)).
In an appeal from a CDP hearing, the standard of review that a court applies will depend on whether the underlying tax liability is properly in dispute. Where the underlying tax liability is not properly at issue, a district court reviews the determination of the Appeals Officer for abuse of discretion. Olsen v. United States, 414 F.3d 144, 150 (1st Cir. 2005); see also 144 Cong. Rec. H5100-01, H5168 (daily ed. June 24, 1998). Where the underlying tax liability is properly at issue, however, a district court's review is de novo. Danner v. United States, 208 F. Supp. 2d 1166, 1171 (E.D. Wash. 2002); see also 144 Cong. Rec. at H5168. An issue is properly a part of an appeal to a district court or the Tax Court when it has been previously raised in the taxpayer's CDP hearing. 26 C.F.R. § 301.6330-1(f)(2) (A-F5) ("In seeking Tax Court or district court review of Appeals' Notice of Determination, the taxpayer can only ask the court to consider an issue that was raised in the taxpayer's CDP hearing.").
This Court must therefore determine whether Garage raised DVI's underlying tax liability in his CDP hearing. In his opposition brief, Garage disputes the underlying tax liability and urges this Court to review the Appeals Officer's determination de novo. (Garage's Br. in Opp'n 15.) The Government responds by arguing that Garage waived any challenge to his tax liability when he failed to raise the issue before the Appeals Office, and that this Court therefore should review the Appeals Officer's determination for abuse of discretion. Furthermore, the Government concedes that DVI's tax liability has lapsed due to the running of the statute of limitations (Government's Reply Br. 2; Paxman Decl., Ex. A at 21, 22), but maintains that the Section 6672 penalty against Garage remains in effect.
The Government appears to take the position that the October 14, 2003 and December 12, 2003 telephone conversations between Lipuma and Moore, either individually or together, comprised Garage's CDP hearing.
The record reveals that Garage's March 7, 2003 request for a CDP hearing in response to the First Final Notice makes no mention of any dispute as to the underlying tax liability. Indeed, the accompanying letter from counsel merely notes that "[t]he taxpayer is unable to full pay this tax liability." (Decl. of Julia Moore, Ex. B at 2.) However, in Garage's July 17, 2003 request for a CDP hearing in response to the Second Final Notice, Garage's counsel represented Garage's position as being that all taxes had been paid for the assessed period. Garage's counsel further stated that "[a]s there is no additional tax due, in September 2002 we requested that all penalties and interest be abated." (Decl. of Julia Moore, Ex. D at 3.) Garage has submitted a copy of his September 2002 request for abatement, which indeed reflects Garage's representation that he had paid all taxes owed for the assessed period. Moreover, in his objections to the Governments statement of material facts, Garage contends that during the October 14, 2003 telephone conversation, Lipuma "further indicated that additional information was needed to support plaintiff's position that there was no tax due for the quarter ending March 31, 1993." (Garage's Br. in Opp'n 6.) Lipuma's records support Garage's contention that DVI's tax liability was discussed during that phone conversation. ( See Paxman Decl., Ex. A at 21, 22.)
Section 6330(c)(2)(B) prevents a taxpayer from raising the issue of his tax liability at a CDP hearing if he has previously been given an opportunity to dispute that liability. 26 U.S.C. § 6330(c)(2)(B). The Government has provided no evidence or argument that Garage was afforded an opportunity to dispute DVI's tax liability prior to the October 14, 2003 conversation between Lipuma and Moore.
Therefore, the Court finds that Garage raised the issue of DVI's underlying tax liability before the Appeals Office, and that this issue is now properly a part of Garage's appeal. The Court will exercise de novo review. See Tornichio v. United States, 263 F. Supp. 2d 1090, 1095 (N.D. Ohio 2002) (exercising de novo review where taxpayer challenged underlying tax liability in his request for CDP hearing and at CDP hearing).
Garage's Complaint evinces seven theories upon which he urges this Court to order a redetermination of the Appeals Officer's decision. The Court need only address one.
B. The Appeals Officer Erred in Denying Garage a Face-to-Face CDP Hearing
Garage argues that despite repeated requests, Lipuma refused to grant Garage a face-to-face CDP hearing. Regulations promulgated by the IRS expressly state that a CDP hearing, while required, need not consist of a face-to-face hearing.
CDP hearings . . . are informal in nature and do not require the Appeals officer or employee and the taxpayer, or the taxpayer's representative, to hold a face-to-face meeting. A CDP hearing may, but is not required to, consist of a face-to-face meeting, one or more written or oral communications between an Appeals officer or employee and the taxpayer or the taxpayer's representative, or some combination thereof.26 C.F.R. § 301.6330-1(d)(2) (A-D6). The same regulations, however, suggest a policy that favors, if not mandates, granting face-to-face hearings upon the taxpayer's request.
Q-D7. If a taxpayer wants a face-to-face CDP hearing, where will it be held? A-D7. The taxpayer must be offered an opportunity for a hearing at the Appeals office closest to taxpayer's residence or, in the case of a business taxpayer, the taxpayer's principal place of business.26 C.F.R. § 301.6330-1(d)(2) (Q-D7 A-D7) (emphasis added).
Several reported and unreported decisions of the Tax Court have held that a face-to-face hearing is not required. See, e.g., Leineweber v. Comm'r, No. 12161-01L, 2004 Tax Ct. Memo LEXIS 16, at *11 (Jan. 26, 2004); Mann v. Comm'r, No. 6263-00L, 2002 Tax Ct. Memo LEXIS 53, at *6 (Feb. 21, 2002); Katz v. Comm'r, 115 T.C. 329, 337-38 (2000); see also Konkel v. Comm'r, No. 6:99-CV-1026-ORL-31C, 2000 WL 1819417, at *4 (M.D. Fla. Nov. 6, 2000). Close examination of these decisions, however, reveals that in each case, a telephonic or correspondence hearing was conducted only after the taxpayer declined the Appeals officer's offer of a face-to-face hearing, either by objecting to the proposed location or by failing to appear at the appointed time. The Tax Court has also held that where a face-to-face hearing would be futile because the taxpayer could not prevail on any of the issues in dispute, a face-to-face hearing need not be held. Kozack v. Comm'r, No. 13381-04L, 2005 Tax Ct. Memo LEXIS 245, *8 (Oct. 24, 2005); Quigley v. Comm'r, No. 7752-04L, 2005 Tax Ct. Memo LEXIS 151, at *19 n. 10 (June 23, 2005); Corcoran v. Comm'r, No. 2947-01, 2002 Tax Ct. Memo LEXIS 18, at *6 (Jan. 18, 2002). Generally, however, the Tax Court bases such holdings on a determination that the taxpayer's position is "frivolous." See Kozack, 2005 Tax Ct. Memo LEXIS 245 at *8; Quigley, 2005 Tax Ct. Memo LEXIS 151 at *19 n. 10; Corcoran, 2002 Tax Ct. Memo LEXIS 18 at *6. But see Loofbourrow v. Comm'r, 208 F. Supp. 2d 698, 707 (S.D. Tex. 2002) (finding that face-to-face hearing would have been futile, but further finding that court lacked subject matter jurisdiction to review imposition of penalty on taxpayer for filing frivolous tax return).
Authorities from within this District are consistent with the above principles. In Gardner v. United States, No. 04-2686, 2005 WL 1155728 (D.N.J. Apr. 5, 2005), the court was faced with an action to set aside the Appeals Office's notice of determination with respect to a proposed levy. Based upon frivolous constitutional arguments advanced by the taxpayer, the appeals officer had expressly denied the taxpayer a face-to-face CDP hearing unless the taxpayer was willing to discuss legitimate alternatives to collection. When the taxpayer persisted in advancing his frivolous arguments, the Appeals Office issued a notice of determination without having ever held a face-to-face CDP hearing. The district court subsequently upheld this action. Although the court noted that the IRS generally will offer face-to-face hearings at the taxpayer's request, the court nevertheless found that because the taxpayer refused to discuss relevant issues, "he was not entitled to the indulgence of a face-to-face hearing." Id. at *3 (characterizing the taxpayer's arguments as "frivolous").
In Cavanaugh v. United States, No. 03-250, 2004 WL 880442 (D.N.J. Mar. 23, 2004), appeal dismissed, No. 04-2530 (3d Cir. July 2, 2004) (order dismissing with prejudice at request of parties), the IRS had assessed the taxpayer trust fund recovery penalties pursuant to Section 6672, and had attempted to levy upon his assets. The taxpayer requested a CDP hearing, and the appeals officer determined that the only issue in dispute had been decided in a previous hearing. Nevertheless, the appeals officer reportedly telephoned the taxpayer's attorney to schedule a CDP hearing and to express the IRS's position. As in the instant case, the taxpayer's attorney claimed to have requested a face-to-face hearing, which was denied. Less than three months later, the Appeals Office issued a notice of determination upholding the levy, whereupon the taxpayer appealed to the district court. The court found that "[the appeals officer's] refusal to grant [the taxpayer's] request for a face-to-face hearing — especially where it is disputed whether or not [the attorney] was even aware that the phone conversation [the appeals officer] took to be the hearing was the hearing — was an abuse of discretion." Id. at *6.
Turning to the instant case, this Court is troubled by Garage's uncontested assertion that "[a]t no time during the October 31, 2003 or the December 12, 2003 telephone calls, did Lipuma state that either telephone conversation was to be treated as a CDP Hearing." (Garage's Br. in Opp'n 7; Decl. of Julia F. Moore ("Moore Decl.") ¶ 10.) This assertion hews quite closely to the scenario seen in Cavanaugh. Although this Court recognizes the distinction between an attorney saying that he was not told that a phone conversation was the CDP hearing and that same attorney saying that he was not aware that a phone conversation was the CDP hearing, the Court nevertheless finds that any minor distinctions that may exist between this case and Cavanaugh do not override the general policy favoring face-to-face CDP hearings.
It has not escaped this Court's notice that Garage's attorney and the taxpayer's attorney in Cavanaugh are the same, thereby giving the Court pause to wonder whether in fact this highly capable attorney truly is caught unawares each time he finds himself in this predicament, or whether in fact he is deliberately exploiting the IRS's less-than-scrupulous practices.
The Government urges this Court not to remand this matter to the Appeals Office for a face-to-face hearing on two grounds. First, the Government argues that remand would be futile because Garage's arguments have no legal merit. Second, the Government contends that remand would serve only to reward Garage for his previous unresponsive behavior before the Appeals Office. This Court will address only the first argument.
As noted above, courts generally will deem a face-to-face CDP hearing "futile" in cases where a court can deem the taxpayer's legal arguments "frivolous." See, e.g., Kozack, 2005 Tax Ct. Memo LEXIS 245 at *8. This is not such a case. Garage's Complaint presents seven alleged grounds for relief: (1) the assessment is void for not specifying each applicable quarter; (2) the statute of limitations on collection has run; (3) the Appeals Officer did not verify the validity of the assessments; (4) the Appeals Office failed to mail a copy of the notice of determination to Garage's counsel; (5) the Appeals Office improperly denied Garage a face-to-face hearing; (6) the Appeals Officer never considered collection alternatives; and (7) Garage had reasonable cause for not making timely deposits. The Government argues that fully five of these seven grounds — numbers one, two, three, five, and seven — may not now be considered because Garage failed to raise them at his CDP hearing. Furthermore, for two of these five grounds — numbers two and seven — the Government summarily dismisses them as waived without attempting to address their merits. Yet, having provided this Court with little on which to base such a decision, the Government nevertheless urges this Court to find that even if this matter were remanded to the Appeals Office for a full hearing, such hearing would be futile. With respect to at least several of Garage's alleged grounds for relief, this Court is not now in a position to find that they lack legal merit, and is even less able to find that they are frivolous.
Accordingly, this Court finds that remanding this matter to the Appeals Office for a face-to-face hearing will allow Garage to develop his arguments fully. Not only is this result consistent with the holding in Cavanaugh, it also remedies the procedurally unfair result brought about when an IRS appeals officer ignores a taxpayer's requests for a face-to-face hearing, determines that a particular telephone conversation constitutes the CDP hearing but fails to inform the taxpayer of this fact, and later, after the taxpayer has filed an appeal to the district court, takes the position that the taxpayer has waived the majority of his arguments because he failed to raise them in the CDP hearing. Such circumstances, the Court finds, warrant remanding the matter for a face-to-face hearing.
III. CONCLUSION
For the foregoing reasons, it is hereby ORDERED, this 21st day of November, 2005, that
(1) the Government's motion to dismiss or for summary judgment is DENIED; and
(2) the case is REMANDED to the IRS Office of Appeals for a face-to-face collection due process hearing at which Edward Garage may present evidence in support of the grounds for relief alleged in the Complaint in this matter.