Opinion
10833-19L
10-19-2021
Kirk E. Heaton, Petitioner v. Commissioner of Internal Revenue, Respondent
ORDER
David Gustafson, Judge
This case is a "collection due process" ("CDP") appeal brought by petitioner, Kirk E. Heaton, pursuant to section 6330(d)(1). Mr. Heaton filed a timely petition (Doc. 1) in this Court on June 24, 2019, asking us to review a notice of determination issued by the IRS Office of Appeals ("IRS Appeals") sustaining a notice of intent to levy to collect Mr. Heaton's unpaid income tax liability for the 2006 tax year. Pending before us is petitioner's motion for leave to file an amended petition (Doc. 12) pursuant to Rule 41 (which motion we will resolve in this order) and a motion for summary judgment filed by respondent, the Commissioner of Internal Revenue ("the Commissioner") (for which motion we will order additional filings). The Commissioner filed an objection (Doc. 18) to Mr. Heaton's motion for leave, to which Mr. Heaton filed a reply (Doc. 21). We will grant Mr. Heaton's motion for leave.
Unless otherwise indicated, all section references are to the Internal Revenue Code (26 U.S.C.) in effect at the relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. Dollar amounts are rounded.
On July 1, 2019, the IRS Appeals Office was renamed the "Internal Revenue Service Independent Office of IRS Appeals". See Taxpayer First Act, Pub. L. No. 116-25, sec. 1001(a), 133 Stat. at 983 (2019). Some of the events in this case predate that renaming. We use the term "IRS Appeals" without distinction to refer to the office both before and after the name change.
Background
Petitioner's employment and medical history
Mr. Heaton worked as a pipeline welder for most of his adult life. (Doc. 8 at 72). Mr. Heaton alleges that, due to the harsh nature and conditions of his profession, he suffers progressively worsening cervical and lumbar spondylosis in addition to shortness of breath, heart palpitations, high blood pressure, and a spot on his lung suspicious of asbestosis. Id. at 73. Mr. Heaton states he has undergone two neck fusion surgeries, the latest in 2013, which negatively impacted his ability to work. Id. Mr. Heaton alleges that, in 2017, when he was age 56, his doctor recommended that he end his career as a welder and apply for disability. Id. at 72. Mr. Heaton states he did not want to stop working, and instead enrolled himself in training courses to continue working in the pipeline welding industry as an inspector. Id. However, Mr. Heaton claims his employment is inconsistent throughout the year and he often receives unemployment benefits for approximately three to four months per year. Id. at 73.
Petitioner's 2006 income tax liability
Mr. Heaton filed a Form 1040, "U.S. Individual Income Tax Return", for 2006 on August 11, 2008, reporting a balance due of $1,731. (Doc. 1 at 10). On April 11, 2011, as a result of an examination of Mr. Heaton's income tax returns for the 2005-2008 years, the IRS Examination Department assessed additional taxes against Mr. Heaton for the 2006 year, increasing his total balance owed for that year to $27,788, exclusive of penalties and interest. Id. Starting October 2011, Mr. Heaton made regular voluntary payments averaging $500 on an approximate monthly basis until June 2018. (Doc. 8 at 43-50). As of March 20, 2019, Mr. Heaton's 2006 liability, which gave rise to the CDP hearing at issue, was $11,132. Id. at 31. Mr. Heaton does not dispute the existence or amount of his 2006 liability. (Doc 1 at 11).
As of March 20, 2019, Mr. Heaton owed $249,011 in total for tax years 2005-2008. (Doc. 8 at 31).
The CDP hearing
On July 18, 2018, the IRS sent Mr. Heaton a "Notice of intent to levy and notice of your right to a hearing," notifying Mr. Heaton of his balance owed for the 2006 tax year, the possibility of enforced collection by levy pursuant to section 6331, and his right to request a CDP hearing before IRS Appeals under section 6330(a). (Doc. 8 at 27). Mr. Heaton timely submitted a Form 12153, "Request for a Collection Due Process or Equivalent Hearing," on August 14, 2018, requesting a CDP hearing for the 2006 tax year and proposing a collection alternative of an offer in compromise. On Mr. Heaton's Form 12153 he checked only boxes for "Offer in Compromise" and "I Cannot Pay Balance." Id. at 52. Administration of Mr. Heaton's CDP hearing was assigned to Settlement Officer Carol Pugh ("SO Pugh"), who sent Mr. Heaton a Letter 8437, "IRS Appeals Received Your Request for a Collection Due Process Hearing", on November 6, 2018, scheduling the hearing for January 10, 2019. Id. at 59. However, the CDP hearing was rescheduled for March 20, 2019, because of the federal government shutdown from December 22, 2018, to January 28, 2019. Id. at 16.
Prior to the CDP hearing, Mr. Heaton provided a Form 433-A, "Collection Information Statement for Individuals", to SO Pugh reporting his current income, expenses, assets, and liabilities for the purposes of determining his reasonable collection potential. Id. at 16. In a letter dated January 29, 2019, Mr. Heaton, through counsel, proposed a $500 per month installment agreement and further stated "[i]n the alternative, he could retire now and be considered currently not collectible." Id. at 73. This letter was the first time Mr. Heaton proposed "currently not collectible" ("CNC") status as a collection alternative.
At the CDP hearing, SO Pugh stated that she could not grant a $500 per month installment agreement because his Form 433-A showed an ability to pay more than that. Id. at 19. Consistent with his prior letter, Mr. Heaton responded (for the second time) that, if his installment agreement proposal could not be accepted, then, in the alternative, he could quit his job, apply for disability, and be considered currently not collectible. Id. However, Mr. Heaton further stated that he did not prefer the CNC option because he wanted to continue working. Id. SO Pugh scheduled a second hearing for April 17, 2019, to permit Mr. Heaton more time to provide proof of payment for his health insurance and out-of-pocket health care expenses. Id. Mr. Heaton alleges he was under the impression from SO Pugh that if he substantiated his medical costs then an installment agreement of $1,849 could be approved. (Doc. 1 at 5-6). Mr. Heaton provided documentation showing monthly health insurance premiums of $261 and the total amount of his out-of-pocket health care expenses for 2018 which averaged to $492 per month; however, SO Pugh did not allow the health insurance expense because Mr. Heaton's non-liable spouse paid the premiums from a bank account in her name only, and SO Pugh did not allow the monthly out-of-pocket health care expense because Mr. Heaton did not provide proof of payment. Instead, SO Pugh allowed the 2019 national standard for out-of-pocket health care costs of $55 per month. (Doc. 8 at 19).
Based on Mr. Heaton's adjusted Form 433-A, SO Pugh proposed a partial pay installment agreement of $2,796 per month and indicated to Mr. Heaton that if he could not accept her proposal, then the levy would be sustained. Id. at 21. SO Pugh held the CDP hearing open until April 24, 2019, for Mr. Heaton to respond to her installment agreement proposal. Id. Mr. Heaton did not respond to SO Pugh's proposal, and she subsequently issued a notice of determination sustaining the notice of intent to levy because she and Mr. Heaton were "not able to come to an agreement on an alternative collection resolution." Id. Neither SO Pugh's case activity record printout nor her notice of determination addressed the CNC alternative. Id. at 7-21.
Petition to Tax Court
Mr. Heaton timely petitioned this Court to review IRS Appeals' determination. In his petition, Mr. Heaton alleges that IRS Appeals abused its discretion by "not allowing proven medical expenses," "by not considering that the taxpayer is only able to work a few months out of the year," "by proposing a completely unsustainable installment agreement," and "by not accepting the revised proposed partial payment installment agreement of $1,849 [per month]." (Doc. 1 at 2). However, Mr. Heaton's petition did not explicitly address SO Pugh's failure to consider CNC status as an alternative collection resolution.
Respondent's motion for summary judgment
The Commissioner filed a motion for summary judgment (Doc. 7) arguing that there is no genuine dispute of material fact regarding whether SO Pugh abused her discretion in making her determination to reject Mr. Heaton's installment agreement proposal and sustain the notice of intent to levy. (Doc. 7 at 9). The Commissioner asserts that SO Pugh did not abuse her discretion for the following reasons: (1) she followed all statutory and administrative guidelines; (2) she accurately determined Mr. Heaton's monthly income and expenses; (3) Mr. Heaton's original installment agreement proposal of $500 per month was not approvable even if his medical expenses were allowed; and (4) the alleged subsequent proposal of $1,849 per month was not approvable because Mr. Heaton did not substantiate his medical expenses. Mr. Heaton filed a response to the Commissioner's motion, and it is still pending before us.
Petitioner's motion for leave to file amended petition
At the same time Mr. Heaton filed his response to the motion for summary judgment, he filed his motion for leave to amend the petition (Doc. 7), pursuant to Rule 41(a), to include an additional argument that SO Pugh had abused her discretion "by not considering Petitioner's proposed alternative collection resolution of currently not collectible status upon his disability retirement." (Doc. 12 at 2). The Commissioner filed an objection to the motion for leave (Doc. 18), and Mr. Heaton filed his reply (Doc. 21).
Discussion
I. Motions for Leave to Amend
Rule 41(a) states that, after a responsive pleading has been served, "a party may amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires." It is within our discretion to allow a party to amend its pleadings, and our discretion is guided by the following factors: (1) whether an excuse for the delay exists; (2) whether the opposing party would suffer unfair surprise, disadvantage, or prejudice if the motion to amend were granted; and (3) whether granting the motion would result in issues being presented in a seriatim fashion. See Estate of Grant v. Commissioner, 77 T.C.M 1762 (1999); Estate of Quick v. Commissioner, 110 T.C. 172, 178 (1998). Leave to amend may be inappropriate in cases where there is: (1) undue delay; (2) bad faith or dilatory motive on the part of the movant; (3) repeated failure to cure deficiencies by amendments previously allowed; (4) undue prejudice to the opposing party by virtue of allowance of the amendment; or (5) futility of the amendment. See Foman v. Davis, 371 U.S. 178, 182 (1962).
II. Analysis
a. Petitioner's Reason for Amending
Rule 41(a) requires that "[a] motion for leave to amend a pleading shall state the reasons for the amendment and shall be accompanied by the proposed amendment." Mr. Heaton asserts that he raised the CNC status issue with IRS Appeals both in the letter to SO Pugh dated January 29, 2019, and in the CDP hearing, and that SO Pugh's determination did not address the CNC status issue at all. Mr. Heaton further explains that he intended to include the failure to address currently not collectible status as an additional abuse of discretion but inadvertently left it out of the petition because it was not addressed in the notice of determination. (Doc. 21 at 3). Mr. Heaton claims that he remembered the CNC status issue while preparing his response to the Commissioner's motion for summary judgment and immediately filed his motion for leave to amend his petition. Id. at 4. Mr. Heaton's proposed amendment is "separately set forth and consistent with the requirements of Rule 23." See Rule 41(a). Accordingly, Mr. Heaton's motion meets the requirements of Rule 41(a) and should be granted unless the Commissioner shows that granting the motion would be inappropriate in this case.
b. Respondent's Objections
The Commissioner opposes Mr. Heaton's motion for leave to file amended petition on the following grounds: (1) unexcused delay; (2) bad faith and dilatory motive; and (3) futility. (Doc. 18 at 5-8). We will address each of these contentions.
i. Excuse for Delay
The Commissioner's objection makes two principal arguments regarding Mr. Heaton's delay: first, that Mr. Heaton "does not offer any excuse for the delay in raising the additional argument"; and second, that Mr. Heaton's "motion was filed months after he filed his petition and weeks after the Commissioner filed a motion for summary judgment." (Doc. 18 at 6). We interpret the Commissioner's position as asserting that Mr. Heaton's delay is both unexcused and undue. We find that Mr. Heaton's reason for the amendment, that he inadvertently omitted the currently not collectible issue from the petition because it was not discussed at all in the notice of determination, excuses his delay for purposes of granting leave to amend, and that any inconvenience to the Commissioner in permitting the amendment is outweighed by the justice of allowing Mr. Heaton to advance all allegations of abuse of discretion regarding the notice of determination because the Commissioner has adequate time to respond to the currently not collectible issue.
ii. Bad Faith
The Commissioner argues that Mr. Heaton "seeks to insert a new issue and new facts into his petition in order to defeat the Commissioner's motion for summary judgment" and that Mr. Heaton's "late filing, after a trial date was set and after the Commissioner moved for summary judgment, also evidences his bad faith." (Doc. 18 at 6). We do not view Mr. Heaton's motion for leave to file amended petition as evidencing bad faith because Mr. Heaton immediately moved for leave to amend his pleadings upon realizing his omission. However, we will tailor the relief granted herein so we may evaluate the Commissioner's motion for summary judgment on the basis of Mr. Heaton's amended pleadings.
iii. Futility
The Commissioner argues that Mr. Heaton's proposed amendment would be futile because "only information available to the Settlement Officer at the time of the hearing would be relevant to whether the Commissioner abused his discretion in denying petitioner's collection alternative" and because "petitioner's collection alternative is not one which the settlement officer would have been able to consider since petitioner was not on disability retirement at the time of the hearing, and still does not seem to be on disability retirement, even at the time of the filing of petitioner's motion." (Doc. 18 at 7-8). We do not agree that Mr. Heaton's proposed amendment is futile because the amendment asserts that SO Pugh's failure to consider CNC status at all was an abuse of discretion. Because the notice of determination does not discuss CNC at all, we cannot know if there was a factual basis for failing to consider currently not collectible status as a collection alternative. Mr. Heaton appears to have had a good faith basis to request CNC status as a collection alternative on the basis of his excessive medical bills, irregular employment, and reliance on limited unemployment benefits during periods where he was not working, see IRM 5.16.1.2.9(6), and he raised the CNC issue both before and during the CDP hearing.
Based on these facts and circumstances, we can assume that whether Mr. Heaton could qualify for CNC status warranted at least some consideration by Appeals and some discussion in the notice of determination, and that failure to consider the issue could conceivably be an abuse of discretion. In our view, justice favors allowing Mr. Heaton to advance all allegations of abuse of discretion by IRS Appeals, and whether Mr. Heaton could have qualified for CNC status on the basis of the information provided to SO Pugh is a merits issue that we would rather consider not under a motion for leave but under the Commissioner's motion for summary judgment.
c. Conclusion
We hold that justice favors granting Mr. Heaton's motion for leave to file amended petition to enable him to assert all allegations of abuse of discretion regarding the notice of determination issued by IRS Appeals, and that our review of the Commissioner's pending motion for summary judgment should include argument on Mr. Heaton's amended pleadings.
In view of the foregoing, it is
ORDERED that petitioner's motion (Doc. 12) for leave to file amended petition is granted, and that the amended petition(Doc. 11), shall be filed as of the date of this order. It is further
ORDERED that respondent shall file a reply to petitioner's response to motion for summary judgment by November 15, 2021, which shall include argument on the amended pleadings. In the alternative, the Commissioner may file a supplement to his motion for summary judgment (in which event we would order a response and a reply). It is further
ORDERED that no later than December 15, 2021, petitioner shall file a sur-reply to respondent's reply to response to motion for summary judgment (or, if the Commissioner files a supplement to his motion, then a supplemental response to that motion as supplemented), which shall include argument on the amended pleadings. It is further
ORDERED that, if the Commissioner files a supplement to his motion and Mr. Heaton files a supplemental response, then no later than January 18, 2022, the Commissioner shall file a reply to Mr. Heaton's response as supplemented. It is further
ORDERED that, no later than January 10, 2022, the parties shall consult with each other to determine whether, based on available information, there is a basis for potential settlement of the issues presented in this case. The filing deadlines set forth in this order may upon motion (see Rule 50(a)) be postponed in the event such conference is productive and conducive to settlement.