Opinion
12307-22L
02-03-2023
FRANK DANIEL KRESOCK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
Joseph W. Nega Judge
This collection due process (CDP) case was set for hearing at an in-person session of the Court that commenced January 23, 2023, in Las Vegas, Nevada. On November 2, 2022, respondent filed a Motion for Summary Judgment (respondent's motion) and a Declaration of Rollin G. Thorley in Support of Motion for Summary Judgment. On December 12, 2022, petitioner filed a Response to respondent's Motion for Leave to File First Amendment to Answer, which was separately styled by petitioner as a "Motion to DENY Respondent's motion for Summary Judgement [sic]." By Order issued December 22, 2022, the Court set respondent's motion for hearing. On January 23, 2023, both parties appeared before the Court and were heard on respondent's motion.
I. Background
The following facts are drawn from the parties' pleadings and motion papers, including the attached declaration and exhibits. See Rule 121.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
A. The Bankruptcy Case
In July 2016, petitioner filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Arizona. In August 2016, the Internal Revenue Service (IRS) filed a proof of claim for federal income tax liabilities owed by petitioner for tax years 2007 and 2010 through 2015. Petitioner objected to the claim.
The proof of claim listed an amount of $1,741.27 in unsecured priority claims and $78,695.86 in unsecured general claims.
In January 2017, upon a motion by the United States Trustee, the bankruptcy court converted petitioner's case to a Chapter 7 bankruptcy. In April 2017, petitioner filed with respondent Forms 1040, U.S. Individual Income Tax Returns, for tax years 2010 through 2015. In May 2018, the IRS filed an amended proof of claim for federal income tax liabilities owed by petitioner for tax years 2007 and 2010 through 2015; for tax years 2010 through 2015, the amended proof of claim listed the amount of tax self-reported by petitioner and asserted deficiencies. The amended proof of claim also included trust fund recovery penalties (TFRPs) under section 6672 for periods from March 31, 2010 through December 31, 2015. Petitioner objected to the amended claim.
In total, the amended proof of claim listed an amount of $650,850.47 in unsecured priority claims and $1,620,364.33 in unsecured general claims. The unsecured priority claim also included a small amount of excise tax liability totaling $325.
In November 2018, the IRS filed motions for summary judgment against petitioner and his then co-habitant, Janine Smith, with respect to their income tax and TFRP liabilities. In the motions for summary judgment, the IRS contended that petitioner underreported his income for the years at issue and willfully failed to pay over trust fund taxes for which he was a responsible person. In February 2019, the bankruptcy court issued a 21-page memorandum decision granting the motions for summary judgment and an accompanying order allowing the IRS's amended proof of claim and determining that petitioner was indebted to the United States in the amount of $2,293,059.32. The order stated in relevant part that the tax liabilities determined against petitioner were "res judicata and so may be immediately assessed under 26 U.S.C. § 6871(b)."
In July 2016, Ms. Smith had filed her own bankruptcy, which was consolidated with petitioner's case for trial on the contested federal tax matter, due to related factual and legal issues.
The U.S. Trustee then initiated an adversary proceeding against petitioner, seeking to deny petitioner's Chapter 7 discharge. In November 2020, the bankruptcy court granted the U.S. Trustee's motion for summary judgment and issued a memorandum decision and accompanying order denying petitioner a discharge.
In August 2021, the bankruptcy court entered a final judgment denying petitioner a discharge. In December 2021, the Bankruptcy Appellate Panel for the Ninth Circuit affirmed the bankruptcy court's decision denying petitioner a discharge.
B. The NFTL & CDP Proceeding
On March 30, 2021, respondent issued to petitioner a notice of federal tax lien filing (NFTL). The NFTL corresponded to petitioner's income tax liabilities for tax years 2010 through 2015. On May 6, 2021, petitioner submitted to respondent a Form 12153, Request for Collection Due Process or Equivalent Hearing. In the space provided on the Form 12153 for listing the tax periods shown on the NFTL, petitioner listed "1040 income" for periods 2010 through 2015. On May 11, 2021, respondent issued to petitioner a second NFTL, apparently corresponding to petitioner's TFRP liabilities. Petitioner submitted a separate Form 12153, which was received by respondent on June 30, 2021 and treated as untimely and qualifying petitioner for an equivalent hearing.
The record does not contain copies of the second NFTL, the second Form 12513, or a postmark-bearing envelope corresponding to the second Form 125131.
The CDP case was assigned to Settlement Officer (SO) Freddye Jimerson; SO Jimerson sent to petitioner a letter requesting that he provide his unfiled tax returns for tax years 2016, 2017, 2018 and 2020. SO Jimerson also scheduled a telephone conference with petitioner in December 2021. During the December telephone conference, petitioner stated that he was still in active bankruptcy; SO Jimerson requested proof of the active bankruptcy that could be forwarded to respondent's bankruptcy unit for verification. Petitioner never provided the requested proof. In March and April 2022, SO Jimerson twice attempted to contact petitioner via telephone but was unable to reach him or leave a voicemail message. SO Jimerson subsequently contacted respondent's bankruptcy unit and verified that petitioner's Chapter 7 discharge had been denied by the bankruptcy court in August 2021.
On April 19, 2022, SO Jimerson issued to petitioner a Notice of Determination Concerning Collection Actions Under IRS Sections 6230 or 6330 of the Internal Revenue Code (notice of determination). In the notice of determination, SO Jimerson stated that petitioner did not qualify for a collection alternative because he had failed to provide his unfiled returns for tax years 2016, 2017, 2018 and 2020. SO Jimerson further stated that petitioner had failed to provide a Form 433-A or Form 656, and thus petitioner's ability to pay or to qualify for an Offer in Compromise (OIC) could not be determined. Finally, SO Jimerson stated that petitioner had not provided documents showing that he was currently in bankruptcy; SO Jimerson again observed that petitioner's Chapter 7 discharge had been denied in August 2021.
On May 23, 2022, petitioner filed a Petition with this Court. In October 2022, respondent abated petitioner's TFRP liabilities and issued to petitioner a Certificate of Release of Federal Tax Lien with respect to the TFRP liabilities.
II. Discussion
A. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C 678, 681 (1998). The Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and draw inferences from them in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. However, the nonmoving party may not rest upon mere allegations or denials of his pleadings but, rather, must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see Sundstrand Corp., 98 T.C. at 520.
B. Standard & Scope of Review
Section 6330(d)(1) grants this Court jurisdiction to review the SO's determination in connection with a CDP hearing. Section 6330(c)(2) prescribes the matters that a taxpayer may raise at a CDP hearing, including spousal defenses, challenges to the appropriateness of the collection action, and collection alternatives. The existence or amount of the underlying tax liability may be contested at a CDP hearing only if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the tax liability. See § 6330(c)(2)(B); Sego v. Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114 T.C. 176, 180- 81 (2000).
If the validity of the underlying tax liability is properly at issue, the Court will review the taxpayer's liability de novo. See Sego, 114 T.C. at 609-10. Where the validity of the underlying tax liability is not properly at issue, the Court will review the SO's administrative determination for abuse of discretion. Id. at 610. Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006).
In the CDP proceeding and in his Petition, petitioner raised a challenge to his underlying liability. Respondent contends that petitioner is precluded from raising an underlying liability challenge (1) because he had a prior opportunity to dispute his liability in his bankruptcy case and (2) because res judicata bars petitioner from relitigating the bankruptcy court's final judgment on the merits of his income tax liability.
We agree with respondent on both grounds. The opportunity to object to an IRS proof of claim in a bankruptcy case constitutes a prior opportunity to dispute liability within the meaning of section 6330(c)(2)(B). See Kendricks v. Commissioner, 124 T.C. 69, 77 (2005). Petitioner did in fact object to both the proof of claim and the amended proof of claim during the bankruptcy case. Accordingly, petitioner was precluded from raising an underlying liability challenge during the CDP proceeding and before this Court. See, e.g., Everett Assocs. Inc. v. Commissioner, T.C. Memo. 2012-143, 2012 WL 1758662, at *7. In addition, the bankruptcy court's entry of judgment against petitioner for the income tax and TFRP liability was a final judgment on the merits, and petitioner is thus barred by res judicata from relitigating his income tax and TFRP liabilities. See Kendricks, 124, T.C. at 78 n.5; Fla. Peach Corp., 90 T.C. at 682-84; Son Gee Wine & Liquors, Inc. v. Commissioner, T.C. Memo. 2013-62, at *11-12.
Petitioner's underlying liability is thus not at issue, and we review any remaining issues only for abuse of discretion.
C. Verification & Balancing Obligations
Section 6330(c)(1) and (3) require that the settlement officer: (1) properly verify that the requirements of applicable law or administrative procedure have been met and (2) consider whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection be no more intrusive than necessary. See § 6320(c). As part of the former obligation, the settlement officer must verify that a valid assessment was made for liabilities at issue. See Ron Lykins, Inc. v. Commissioner, 133 T.C. 87, 97 (2009).
On the record before us, we are satisfied that SO Jimerson verified that petitioner's income tax liabilities were properly assessed. The record is less clear as to whether SO Jimerson verified that the TFRP liabilities were properly assessed; neither the notice of determination nor SO Jimerson's case activity notes evidence whether he verified compliance with section 6751(b)(1) (supervisory approval) and section 6672(b) (preassessment notice). See Chadwick v. Commissioner, 154 T.C. 84, 93-94 (2020) (concluding that section 6751(b)(1) applies to TFRPs); Lee v. Commissioner, 144 T.C. 40, 49 (2015) ("[T]he proper issuance of the Letter 1153 to petitioner is a requirement of law and administrative procedure whose execution the Appeals officer must verify."); see also Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1073 (9th Cir. 2022), rev'g and remanding 154 T.C. 68 (2020).
The record does not contain a copy of a Letter 1153, Proposed Trust Funds Recovery Penalty Letter Notification, issued to petitioner. In its order, the bankruptcy court described petitioner's total tax liability (which included the TFRPs) as able to be immediately assessed under section 6871(b), which, by its own terms, is applicable only to taxes that are otherwise subject to the deficiency procedures. See § 6871(b) (applying only to "tax imposed by subtitle A or B or by chapter 41, 42, 43, or 44"); § 6213(a). TFRPs are assessable penalties (imposed by section 6672, in subtitle F, chapter 68) and thus are not subject to the deficiency procedures. See, e.g., Kazmi v. Commissioner, T.C. Memo. 2022-13, at *6-7. We need not resolve the question of whether the filing (and service to a taxpayer-debtor's last known address) of a proof of claim in a bankruptcy case may constitute preassessment notice to the taxpayer within the meaning of section 6672(b)(1). But see Moore v. United States, 648 F.3d 634, 640 (8th Cir. 2011) ("Section 6672 does not require a particular form or procedure for giving notice or restrict the traditional principles of waiver.").
However, we need not resolve this verification issue, as this case is partially moot with respect to collection action on the TFRP liabilities; petitioner has established that respondent has recently abated the TFRP liabilities and released the corresponding federal tax lien. See First Rock Baptist Church Child Dev. Ctr. v. Commissioner, 148 T.C. 380, 388 (2017) (characterizing CDP case as partially moot due to withdrawal of NFTL by the Commissioner). Since petitioner's underlying liability is not at issue in this case, no other relief is available to petitioner with respect to collection action on the TFRP liabilities, and this case is thus partially moot. See Catlett v. Commissioner, T.C. Memo. 2019-86, at *12-13 (concluding that Commissioner's abatement of restitution-based assessment mooted CDP case where underlying liability was not at issue); cf. Vigon v. Commissioner, 149 T.C. 97, 107- 112 (2017) (concluding that dismissal for mootness due to penalty abatement and release of lien was inappropriate where underlying penalty liability was properly at issue and Commissioner reserved right to reassess).
Finally, given that petitioner was not in filing compliance and did not submit any financial documentation, SO Jimerson did not abuse his discretion in declining to consider a collection alternative. See, e.g., Wolfson v. Commissioner, T.C. Memo. 2022-46, at *6.
III. Conclusion
We will grant respondent's motion with respect to petitioner's income tax liabilities and, on our own motion, dismiss the case as moot with respect to petitioner's TFRP liabilities.
Upon due consideration and for cause, it is
ORDERED that respondent's Motion for Summary Judgment, filed November 2, 2022, is granted in part as to petitioner's income tax liabilities for tax years 2010, 2011, 2012, 2013, 2014, and 2015, and is denied in part as to petitioner's trust fund recovery penalty liabilities for the periods at issue. It is further
ORDERED that, on the Court's own motion, insofar as this case concerns collection actions with respect to the trust fund recovery penalty liabilities in the Notice of Determination Concerning Collection Actions Under Sections 6320 or 6330 of the Internal Revenue Code, dated April 19, 2022, the case is dismissed in part as moot. It is further
ORDERED AND DECIDED that the Notice of Determination Concerning Collection Actions Under Sections 6230 or 6330 of the Internal Revenue Code, dated April 19, 2022, upon which this case is based, is sustained, and respondent may proceed with the collection actions with respect to petitioner's income tax liabilities for tax years 2010, 2011, 2012, 2013, 2014, and 2015.