Schultz v. U.S.

Full title: DONALD W. SCHULTZ and ASDIS J. SCHULTZ, Plaintiffs, v. UNITED STATES OF…

Court: United States District Court, W.D. Michigan, Southern Division

Date published: Mar 23, 2005

Case No. 4:04-cv-92 (W.D. Mich. Mar. 23, 2005)

Opinion

Case No. 4:04-cv-92.

March 23, 2005

OPINION AND ORDER

WENDELL MILES, Senior District Judge

This matter is before the court on the United States of America's ("Defendant") Motion to Affirm and Dismiss (Dkt. # 6), and Donald and Asdis Schultz's ("Plaintiffs") Motion to Proceed on Complaint Filed June 28, 2004 (Dkt. # 7). Plaintiffs, who are proceeding without benefit of counsel, ask the court to declare the ruling of the Internal Revenue Service ("IRS") Appeals Office invalid and to award them their costs and punitive damages. Defendant asks the court to dismiss this action under Federal Rule of Civil Procedure 12(b)(6) for failing to state a claim upon which relief may be granted, and to affirm the determination of the IRS Appeals Office. For the reasons discussed below, the court denies the Plaintiffs' Motion to Proceed on Complaint Filed June 28, 2004; grants the Defendant's Motion to Affirm and Dismiss; and dismisses this action.

Background

In 2000 and 2001, Plaintiffs filed tax forms which reported that they had received no income during those years. The 2000 form indicated that $4,750 federal income tax had been withheld, and the 2001 form indicated that $3,225 had been withheld. With each filing, Plaintiffs submitted a letter contending that the Internal Revenue Code does not establish a tax liability for individuals and, based upon the Supreme Court's definition of "income," Plaintiffs had no income in the relevant years. As to each return, they claimed they were entitled to a refund of the money that had been withheld, and was being wrongfully held by the Internal Revenue Service.

On March 27, 2002, and January 9, 2003, the IRS assessed a penalty of $500 against the Plaintiffs pursuant to Section 6702 of the Internal Revenue Code. Plaintiffs did not pay the penalty, and on November 18, 2003, the IRS sent a final notice of intent to levy. Plaintiffs requested a face-to-face collection due process hearing ("CDP hearing"), and set forth several grounds for claiming that the taxes the IRS claimed were due and the penalty that had been assessed, were illegal. The IRS responded by letter, advising Plaintiffs that the grounds they mentioned had been ruled frivolous or groundless by the courts, and would not be considered by the Appeals Office. In addition, a face-to-face hearing would be provided only if Plaintiffs were prepared to discuss issues relevant to paying their tax liability. (Ex. E to Complaint).

The CDP hearing was eventually held on May 7, 2004. Subsequently, the IRS notified Plaintiffs that:

The determination of the Appeals Office is that the Notice of Intent to Levy sent to you by the Internal Revenue Service was appropriate and the collection action is sustained.

(Exhibit A to Complaint).

Plaintiffs filed their complaint claiming that the CDP hearing and the determination of the Appeals Office were both invalid. Plaintiffs contend that the Appeals Office wrongfully refused to address their positions in regard to tax liability and the definition of income. Plaintiffs also argue that because the CDP hearing was not conducted in accordance with 26 U.S.C. 6330 or Treasury Regulation 301.6330-1, the determination made on the basis of the hearing is invalid. Plaintiffs ask the court to declare the determination invalid, and award the Plaintiffs their costs in bringing this suit and punitive damages.

Standard of Review

Sections 6320 and 6330 of the Internal Revenue Code require the IRS to provide a taxpayer an opportunity for a CDP hearing upon the filing of a notice of federal tax lien or before the IRS issues a levy. These sections also provide for a limited judicial review of the CDP hearing. 26 U.S.C. § 6320(c) and § 6330(d). The Code does not specify the standard of review a district court should apply to an appeal of a Notice of Determination by the IRS Appeals Office. Reviewing the legislative history, the courts have held that where the underlying tax liability is not on appeal, the court reviews the determination for an abuse of discretion. Abu-Awad v. United States, 294 F. Supp. 2d 879, 887 (S.D. Tex., 2003); Tornichio v. United States, 263 F. Supp. 2d 1090, 1095 (N.D. Ohio, 2003); Rennie v. IRS, 216 F. Supp. 1078, 1080 (E.D. Cal., 2002). Under the abuse of discretion standard, "a determination will be affirmed unless the court determines with a `definite and firm conviction' that a clear error of judgment has been committed." Carroll v. United States, 217 F. Supp. 2d 852, 856 (W.D. Tenn. 2002), quoting Cincinnati Ins. Co. v. Byers, 151 F. 3d 574, 578 (6^th Cir. 1998).

Discussion

It is well established that without an express waiver, the doctrine of sovereign immunity bars a plaintiff's claim for money damages against the United States, its agencies, and its officers in their official capacities. United States v. Mitchell, 445 U.S. 535, 538, 100 S. Ct. 1349, 63 L. Ed. 607 (1980); Blakely v. United States, 276 F. 3d 853, 870 (6^th Cir. 2002). Because the United States has not waived immunity in this context, Plaintiffs' claim for monetary damages against the defendant is barred by sovereign immunity.

In addition, the United States Tax Court has exclusive jurisdiction to review deficiency assessments. Because deficiency procedures do not apply to the assessment or collection of frivolous tax return penalties, 26 U.S.C. § 6703, this court has jurisdiction to review penalties that can be assessed without a notice of deficiency. Marino v. Brown; 357 F.3d 143, 146 (1^st Cir. 2004); Gillette v. United States, 233 F. Supp. 2d 874, 884 (W.D. Mich. 2002); Danner v. United States, 208 F. Supp. 2d 1166, 1171 (E.D. Wash. 2002). Thus, this court has subject matter jurisdiction over Plaintiffs' challenge to the $500 tax penalty, but not over any claim Plaintiffs may be asserting that they have no tax liability for the years 2000 and 2001.

Title 26 U.S.C. § 6702 provides that if:

(1) any individual files what purports to be a return of the tax imposed by subtitle A but which —

(A) does not contain information on which the substantial correctness of the self-assessment may be judged; or

(B) contains information that on its face indicates that the self-assessment is substantially incorrect: and

(2) the conduct referred to in paragraph (1) is due to —

(A) a position which is frivolous; or

(B) a desire (which appears on the purported return) to delay or impede the administration of Federal income tax laws,

then such person shall pay a penalty of $500.

If Plaintiffs filed returns based on a position that was frivolous, they are subject to the section 6702 penalty. Despite the "zero" income reported by Plaintiffs, the returns established that Plaintiffs had received wages during the relevant years, as income taxes had been withheld by an employer. Thus, the returns filed by the Plaintiffs showed on their face that the self-assessment was substantially incorrect, satisfying section 6702(1)(A).

Title 26 U.S.C. § 6330(c)(2) provides that the "person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy. . . ." However, during the appeals process the hearing officer is not required to consider moral, religious, political or Constitutional issues. 20 C.F.R. § 601.106.

Plaintiffs claimed that the Internal Revenue Code does not establish a tax liability. Section 61 of the Code imposes a tax on persons' "taxable income," and section 7805 gives the Secretary of the Treasury broad discretion to prescribe all "needful rules and regulations" for the enforcement of the tax laws. 26 U.S.C. § 7805(a). C.I.R. v. Engle, 464 U.S. 206, 226-227, 104 S.Ct. 597, 609 (U.S.,1984). The Supreme Court recognized that the sixteenth amendment authorizes a direct tax upon United States citizens. Brushaber v. Union Pac. R.R., 240 U.S. 1, 12-19, 36 S. Ct. 236, 239-242, 60 L. Ed. 493 (1916). Arguments to the contrary have been sanctioned as frivolous.See United States v. Collins, 920 F. 2d 619, 629 (10^th Cir. 1990) (citations omitted); United States v. Mundt, 29 F. 3d 233, 237 (6^th Cir. 1994). Moreover, in other contexts, the Supreme Court has noted the obligation to pay taxes. See e.g, Toll v. Moreno, 458 U.S. 1, 44, 102 S. Ct. 2977, 3000 (1982) (finding immigrants share "the normal burdens of citizenship, such as a duty to pay taxes. . . .").

Plaintiffs also claimed that they had no income according to the Supreme Court's definition of income. However, section 61(a) defines as income "all income from whatever source derived" including, under § 61(a)(1), "[c]ompensation for services." The identical argument was made by the plaintiff in Perkins v. Commissioner of Internal Revenue, 746 F. 2d 1187 (6^th Cir. 1984). The Perkins court agreed with the defendant that the argument was "patently frivolous." Id. at 1188. In Conner v. Commissioner of Internal Revenue, 770 F. 2d 17 (2d Cir. 1985), the court noted that the argument that wages are not income "has been rejected so frequently that the very raising of it justifies the imposition of sanctions." Id. at 19; and see United States v. Conner, 898 F. 2d 942, 943-944 (3d Cir. 1990);Sizemore v. United States, 797 F. 2d 268, 271 (6^th Cir. 1986).

Courts have consistently found the arguments made by Plaintiffs, or ones very similar, in support of an all zero return to be frivolous. Kelly v. United States, 789 F. 2d 94, 97 (1^st Cir. 1986); Davis v. United States Government, 742 F. 2d 171, 173 (5^th Cir. 1984); Yuen v. United States, 5 Supp 2d 1220, 1224 (D. Nev. 2003). Thus, the arguments the Plaintiffs wished to make to the Appeals Office had no merit, and Plaintiffs were not entitled to raise them, or have them considered, at the CDP hearing.

Plaintiffs also challenge the appeals process, claiming the CDP hearing was not conducted in accordance with 26 U.S.C. § 6330 or Treasury Regulation 301.6330-1. Title 26 U.S.C. § 6320(b) affords the taxpayer the right to a fair hearing before an impartial appeals officer. According to Plaintiffs, the hearing officer did not produce at the hearing "verification from the Secretary that requirement of any applicable law or administrative procedure have been met," as required by section 6330(c)(1). The notice of determination contained a section entitled "Verification of Legal and Procedural Requirements," establishing that the required verification occurred. Section 6330(c)(1) does not require the appeals officer to rely on a particular form to satisfy the verification requirement, nor does it require the appeals officer to provide the taxpayer with a copy of the verification upon which the officer relied. Roberts v. Commissioner of Internal Revenue, 329 F. 3d 1224, 1228 (11^th Cir. 2003); Ray v. United States, 291 F. Supp. 2d 1179, 1181 (D. Nev. 2003);Nestor v. Commissioner, 118 T.C. 162, 166 (2002). Nonetheless, the notice of determination, under "Summary and Recommendation," clearly states that "Form 4340 Record of Assessments was provided to you at the Hearing." These forms serve as appropriate verification that the assessments are valid and that the requisite Notice and demand was issued.

A Form 4340 is presumptive proof of a valid assessment and notice. Long v. United States, 972 F. 2d 1174, 1181 (10^th Cir. 1992); Geiselman v. United States, 961 F. 2d 1, 6 (1^st Cir. 1992); Rocovich v. United States, 933 F. 2d 991, 993 (Fed. Cir. 1991); United States v. McCallum, 970 F. 2d 66, 71 (5^th Cir. 1992). This presumption places the burden of proof on the taxpayer to show that the IRS's determination is invalid.Helvering v. Taylor, 293 U.S. 507, 515, 55 S. Ct. 287, 79 L.Ed. 623 (1935). As discussed above, the Plaintiffs offered only arguments without legal merit to challenge the validity of the assessed tax penalty.

Plaintiffs claim that the appeals officer violated section 7401 of Title 26, by failing to produce proof that "the Secretary authorized the instant collection action. . . ." Section 7401 provides that:

No civil action for the collection or recovery of taxes, or of any fine, penalty, or forfeiture, shall be commenced unless the Secretary or his delegate authorizes or sanctions the proceedings.

26 U.S.C. 7401. The provision authorizes the United States to bring civil suits for the collection of taxes "where there has been a refusal or neglect to pay any tax, or discharge any liability in respect thereof." 26 U.S.C. 7403(a). Accordingly, it does not apply to a CDP hearing.

Plaintiffs also argue that the hearing was defective because the hearing officer failed to produce documentation proving that those who imposed the penalty were authorized to do so. This is simply not documentation the hearing officer is required to produce. Borchardt v. C.I.R., 338 F. Supp. 2d 1040, 1043 (D. Minn. 2004); Hart v. United States, 291 F. Supp. 2d 634, 645-646 (N.D. Ohio 2003); Gillett v. United States, 233 F. Supp. 2d 874, 883 (W.D. Mich. 2002), citing Hoffman v. United States, 209 F. Supp. 2d 1089, 1093 (W.D. Wash. 2002); Rennie v. Internal Revenue Service, 216 F. Supp. 2d 1078, 1082 (E.D. Cal. 2002). Nor must the hearing officer produce, as Plaintiffs argue, the official job description of the IRS employee who imposed the penalty, or the Regulation that allowed the employee to impose the penalty. Hughes v. United States, 953 F. 2d 531, 539 (9^th Cir. 1992); Kelly v. United States, 209 F. Supp. 2d 981, 989 (E.D. Mo. 2002); Gillett, 233 F. Supp. at 883.

Conclusion

For the reasons discussed above, the court finds the tax returns filed by the Plaintiffs for the years 2000 and 2003 were substantially incorrect, were based upon a frivolous position, and satisfy section 6702 of the Internal Revenue Code. Plaintiffs had an opportunity to participate in a collection due process hearing, although they persisted in asserting arguments that the courts have consistently found to have no merit. All the required procedures were adhered to by the hearing office.

Accordingly, the court denies the Plaintiffs' Motion to Proceed on Complaint Filed June 28, 2004, grants the Defendant's Motion to Affirm and Dismiss, and dismisses this case.

So ordered.