Opinion
5511-18L
08-05-2022
SEASHORE BROADCASTING CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Eunkyong Choi, Special Trial Judge
Pending before the Court is respondent's Motion for Summary Judgment, filed September 11, 2020. Respondent moves for adjudication in his favor on the issue of respondent's Notice of Determination, dated February 21, 2018, sustaining the Final Notice of Intent to Levy (Levy Notice) for petitioner's unpaid income tax liability for taxable year 2002. Arguing that the Court should grant him summary judgment, respondent relies on his motion memorandum and the Declaration of Settlement Officer Eric Feinman in support thereof, including any attached exhibits.
Pursuant to the Court's Order, filed September 14, 2020, directing petitioner to file a response to respondent's motion for summary judgment, petitioner filed its response on December 28, 2020. Arguing that the Court should deny respondent's motion for summary judgment because respondent's settlement officer failed to verify compliance with section 6751(b) and abused his discretion by upholding the rejection of petitioner's Offer in Compromise (OIC), petitioner relies on its motion memorandum and the Declaration of Jasper G. Taylor III in support thereof, including any attached exhibits, both filed December 28, 2020.
The Court's Order directed petitioner to file a response to respondent's motion for summary judgment by October 14, 2020. On September 21, 2020, petitioner filed a motion for extension of time to file its response, which the Court granted on September 22, 2020, giving petitioner until December 30, 2020, to file a response. In the interim, on October 16, 2020, petitioner filed on a motion to consolidate this case with docket numbers 22860-16L (Day Stores, Inc.), 23761-16L (Vance Finance and Holding Corp.), 23762-16L (The Markell Company, Inc.), 23763-16L (Humboldt Shelby Holding Corp.), and 3897-17L (Besicorp Group, Inc.). On November 9, 2020, the Court denied petitioner's motion to consolidate.
All statutory references are to the Internal Revenue Code in effect at all relevant times, and all rule references are to the Tax Court Rules of Practice and Procedure.
For the reasons set forth below, respondent's motion for summary judgment is denied in part and granted in part.
Background
The following facts are drawn from the parties' pleadings and motion papers, including the attached declarations and exhibits. See Rule 121. Petitioner was incorporated in New Jersey with its principal office in New York when it filed the petition in this case.
On January 8, 2016, the IRS mailed a Levy Notice to petitioner for taxable year 2002. In response to the Levy Notice, on February 3, 2016, petitioner's counsel timely mailed on behalf of petitioner a Form 12153, Request for a Collection Due Process or Equivalent Hearing, indicating that petitioner wanted to pursue an OIC. The case was assigned to Settlement Officer Eric Feinman (SO Feinman).
On April 19, 2016, SO Feinman reviewed petitioner's transcripts of account. He determined that all applicable procedures in IRM Part 5 and the Treasury Regulations relating to issuing the Levy Notice were followed. He found that a valid assessment was made for the tax on the CDP notice; notice of tax due and demand for payment were issued to petitioner's last known address; and there was a balancedue when the Levy Notice was issued.
As of February 6, 2018, petitioner's amount due for taxable year ending 2002, including penalties and interest, was $41,374,912.
On August 10, 2016, petitioner's counsel sent a letter to SO Feinman in response to a letter SO Feinman sent to petitioner's counsel on July 21, 2016 pertaining to several other taxpayers whose cases, at the request of petitioner's counsel, were also assigned to SO Feinman. The Auguust 10, 2016 letter noted petitioner's counsel's objections to the preliminary determinations to reject the OICs of these other taxpayers, his belief that the determinations were an abuse of discretion, and indicated that petitioner and the other taxpayers planned to increase their initial $1,000 offer amounts but only if Appeals agreed to a global settlement that included all of the taxpayers. In a letter dated October 5, 2016, petitioner's counsel stated that the global settlement amount "would be a substantial amount of money that would cover all [of the taxpayers] …" and more than he believed the IRS could collect via transferee liability proceedings.
The other taxpayers include the petitioners listed in footnote one and, presumably, any potentially liable third party.
On August 19, 2016, petitioner's counsel enclosed petitioner's OIC in a letter to SO Feinman, who forwarded the OIC to the IRS COIC Unit on August 25, 2016. Petitioner's OIC asserted doubt as to collectability, offered $1,000 to settle petitioner's income tax liability for taxable year 2002, and requested that "the IRS accept the offer amount listed in this offer application as payment in satisfaction of any claims by the IRS against any person, as an alter ego, agent, nominee, transferee or otherwise, for my outstanding tax debt."
Petitioner's OIC was assigned to OIC Specialist Jessica Abrams (OIC Specialist Abrams). OIC Specialist Abrams reviewed petitioner's OIC from December 8, 2016 through June 8, 2017, which included research on dissipated assets in relation to the proceeds from the tax shelter transaction in which petitioner participated and concluded that the OIC should be rejected because petitioner had the ability to fully pay its liability within the time provided by law.
On February 21, 2018, Appeals issued the Notice of Determination underlying this case. SO Feinman upheld the decision to reject petitioner's OIC and sustained the Levy Notice. In doing so, he noted that acceptance of the offer was not in the best interest of the government and that petitioner refused to increase its offer to include dissipated assets.
OIC Specialist Abrams determined that petitioner had dissipated assets of over $21 million. Petitioner asserts that including such dissipated assets in petitioner's reasonable collection potential was an abuse of the settlement officer's discretion. However, we do not reach the issue of whether it was an abuse of discretion for the settlement officer to consider dissipated assets in relation to petitioner's offer amount because it is not necessary for rendering a decision on respondent's motion.
On March 19, 2018, petitioner timely filed a petition disputing the Notice of Determination. The trial set for February 4, 2019, was continued on September 26, 2018. The parties reported on the status of the case from March 22, 2019 through March 18, 2022, during which time the parties engaged in informal discovery.
Discussion
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 (1988). Under Rule 121(b) 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. 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 inferences drawn from them in the light most favorable to the nonmoving party. Id. However, the nonmoving party may not rest upon the mere allegations or denials of its pleadings but instead must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
Where the validity of the underlying tax liability is properly in issue at a CDP hearing, the Court reviews respondent's determination de novo. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). A petitioner may not challenge the validity of the underlying tax liability at a CDP hearing where the petitioner received a statutory notice of deficiency or otherwise had an opportunity to dispute the tax liability. See Sec. 6330(c)(2)(B). Where the validity of the underlying tax liability is not properly in issue, the Court will review the settlement officer's administrative determination for abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 610 (2000). Abuse of discretion exists when a determination is arbitrary, capricious, or without a sound basis in fact for law. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006). The underlying tax liability in this case is the result of the litigation of a statutory notice of deficiency for taxable year 2002 in docket number 23058-06. Accordingly, we review the notice of determination for abuse of discretion in this case.
Prior to issuing a notice of determination, a settlement officer must verify that respondent has met the requirements of any applicable law or administrative procedure and consider any relevant issue relating to the unpaid tax, lien, or levy, including challenges to the appropriateness of the collection action and offers of collection alternatives, that petitioner raises at the CDP hearing. Sec. 6330(c)(1); Sec. 6330(c); see also Sec. 6320(c). The settlement officer must also balance the government's need for the efficient collection of taxes with the taxpayer's legitimate concern that the means of collection is no more intrusive than necessary. Id. Respondent asserts that the settlement officer performed the necessary verifications and considered any relevant issues prior to issuing the Notice of Determination sustaining the levy in this case and therefore did not abuse his discretion in determining to sustain the levy. Petitioner asserts that the settlement officer abused his discretion by failing to verify IRS compliance with section 6751(b), which petitioner argues was required by section 6330(c)(1), and by rejecting petitioner's OIC.
The Settlement Officer's Verification Under Section 6330(c)(1)
Petitioner asserts that as part of the verification the settlement officer was required to perform pursuant to section 6330(c)(1), the settlement officer was required to verify respondent's compliance with section 6751(b) in relation to the sections 6662(a), 6662(b)(3), 6662(e), and 6662(h) penalties respondent assessed.Respondent asserts that "[e]nsuring that the assessment of a penalty complied with the supervisory approval requirement of section 6751(b) is part of Appeals' verification duties in a CDP hearing unless collateral estoppel, res judicata, or section 6330(c)(4) preclusion applies." We disagree with respondent's assertion.
At the very least, to satisfy the verification section 6330(c)(1) requires, a settlement officer must verify that (1) respondent timely assessed the liability; (2) the taxpayer failed to pay the liability; (3) respondent gave the taxpayer notice and demand for payment of the liability; (4) respondent gave the taxpayer notice of the intent to levy, or notice of the filing of a federal tax lien, and notice of the taxpayer's right to a hearing. See Secs. 6201(a)(1), 6501(a), 6303, 6331(a), 6330(a)(1), 6331(d)(1), 6320(a)(1), 6320(a)(3)(B), 6330(a)(3)(B), 6331(d)(4)(c); see also Med. Practice Solutions, LLC v. Commissioner, T.C. Memo. 2009-214 at *5-6. If applicable, the settlement officer must also verify that respondent did not make an assessment prior to a valid notice of deficiency. See Secs. 6212(a), 6213(a); see also Pfetzer v. Commissioner, T.C. Memo. 2021-45 at *9. Petitioner does not assert that respondent has failed to satisfy any of these basic verification requirements and based on our review of the record in this case, the Court is satisfied that these basic requirements have been met.
Respondent further asserts that petitioner failed to raise the issue of the IRS' compliance with 6751(b) in both the CDP hearing and its petition to the Court. Petitioner was not required to raise this issue during the CDP hearing. See Dinino v. Commissioner, T.C. Memo. 2009-284 at *8 quoting Hoyle v. Commissioner, 131 T.C. 197, 202-203, supplemented by 136 T.C. 463 (2011) ("[i]n view of the mandatory nature of the verification requirement, this Court will review the Appeals officer's verification under section 6330(c)(1) without regard to whether the taxpayer raised it at the Appeals hearing") (internal quotations omitted); see also Rockafellor v. Commissioner, T.C. Memo. 2019-160 at *9. Whether the Court will consider an issue not raised in the petition "is a matter for the Court's discretion, taking into account the risk of prejudice to the opposing party." Toyota Town, Inc. v. Commissioner, T.C. Memo 2000-40 at *5 citing Ware v. Commissioner, 92 T.C. 1267, 1268 (1989), aff'd 906 F.2d 2 (2d Cir. 1990); Estate of Deputy v. Commissioner, T.C. Memo 2003-176 at *3-4 (respondent was prejudiced when petitioner first raised an issue in a posttrial brief). We consider the section 6630(c)(1)/6751(b) verification issue even though petitioner did not raise it in the petition because we find that doing so does not prejudice respondent. As evidenced by the fact that respondent addressed the issue in his Motion for Summary Judgment, respondent had sufficient notice of the issue to discover and present evidence relating to the issue.
While it may appear that petitioner is attempting to get a proverbial second bite at the apple by raising in the CDP hearing the issue of whether respondent complied with section 6751(b) when petitioner previously failed to do so at trial, this is not so. A final decision upholding the assessment of a penalty that is subject to section 6751(b) does not foreclose the possibility of a taxpayer raising the issue pursuant to section 6330(c)(1) in a CDP proceeding. See Pfetzer v. Commissioner, T.C. Memo. 2021-45 at *11 (a challenge of "proper verification is not a challenge to the underlying tax liability; [verification] is a stand-alone requirement in section 6330(c)(1)" citing Hoyle v. Commissioner, 131 T.C. 197, 200-203 (2008) supplemented by 136 T.C. 463 (2011)); see also Graev v. Commissioner, 147 T.C. 460, 484 n.22 (2016) superseded by 149 T.C. 485 (2017) ("[w]e do not foreclose the possibility that a taxpayer who believes that a penalty has been assessed in violation of sec. 6751(b)(1) might raise this issue in a post-assessment collection due process (CDP) proceeding"). Although a taxpayer may be liable for taxes or penalties, respondent is not free to collect such taxes or penalties by lien or levy without the taxpayer having the opportunity to challenge such collection. See Sec. 6320; Sec. 6330.
Respondent has recognized that liens and levies are intrusive collection tools. See Harper v. Commissioner, T.C. Memo. 2013-79 at *6; Peter D. Dahlin Attorney at Law, P.S. v. Commissioner, T.C. Memo. 2007-310 at *2; Chou v. Commissioner, T.C. Memo. 2007-102 at *6; Tashjian v. Commissioner, T.C. Memo. 2007-59 at *4. As the titles of sections 6320 and 6330 make clear, these code sections exist to ensure that taxpayers are not subjected to an intrusive means of collection without receiving the notice and opportunity to be heard that are essential to due process. The verification required under section 6330(c)(1) is one of the ways in which these statutes ensure taxpayers receive due process. If a settlement officer fails to verify that the IRS followed an applicable law or administrative procedure, then the taxpayer has not received the due process necessary for the IRS to proceed with a lien or levy. See Pfetzer v. Commissioner, T.C. Memo. 2021-145 at *13; Med. Practice Solutions, LLC v. Commissioner, T.C. Memo. 2009-214 at *5-6. Nevertheless, the IRS is not then barred from collecting the amount owed.
These code sections are titled "Notice and opportunity for hearing upon filing of notice of lien" and "Notice and opportunity for hearing before levy," respectively.
Prohibiting collection by lien or levy does not forestall the possibility of collection, as respondent may pursue collection by some other means, such as by reducing to judgment the amount owed. See Section 7402 ("[t]he district courts of the United States shall have such jurisdiction … to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws").
Section 6330(c)(1) provides that "[t]he appeals officer shall at the hearing obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met." This Court has found that "[w]here the supervisory approval requirement of section 6751(b)(1) applies, the Appeals officer should obtain verification that such approval was obtained." Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 154 T.C. 68, 77 (2020), rev'd on other grounds, 29 F.4th 1066 (9th Cir. 2022) quoting ATL & Sons Holdings, Inc. v. Commissioner, 152 T.C. 138, 144 (2019) (internal quotations omitted); see Rosendale v. Commissioner, T.C. Memo 2018-99 at *14. A settlement officer's verification of respondent's compliance with applicable law and administrative procedure as required by section 6330(c)(1) is adequate if there is supporting documentation in the administrative record relating to the administrative steps respondent took before assessing the underlying liability. Blackburn v. Commissioner, 150 T.C. 218, 222 (2018); Nestor v. Commissioner, 118 T.C. 162, 166-167 (2002); Lindsey v. Commissioner, T.C. Memo 2002-87, aff'd 56 Fed.Appx. 802 (9th Cir. 2003); Duffield v. Commissioner, T.C. Memo. 2002-53. A settlement officer's failure to perform the verification required by section 6330(c)(1) is an abuse of discretion. See Pfetzer v. Commissioner, T.C. Memo. 2021-145 at *13; Kearse v. Commissioner, T.C. Memo. 2019-53 at *15.
In Blackburn, the Court found that where a Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, was included in the administrative record, there was sufficient evidence to support the settlement officer's assertion of having performed the verification required by section 6330(c)(1) with regard to a trust fund recovery penalty under section 6672 if such a penalty was subject to the section 6751(b) supervisory approval requirement.
Respondent makes no effort to prove that the settlement officer verified IRS' compliance with section 6751(b) as required by section 6330(c)(1). After review of the record in this case, including the Declaration of Settlement Officer Eric Feinman (SO Feinman) and the documents attached thereto, we note that SO Feinman did not declare that he verified IRS's compliance with section 6751(b) and further note that we found no supporting documentation showing supervisory approval was obtained prior to the IRS' assessment of the sections 6662(a), 6662(b)(3), 6662(e), and 6662(h) penalties in this case. SO Feinman's failure to verify IRS' compliance with section 6751(b) was a failure to meet the verification requirement of section 6630(c)(1) and therefore was an abuse of discretion. Accordingly, respondent is not entitled to judgment as a matter of law regarding the settlement officer's Notice of Determination as it relates to the collection of the sections 6662(a), 6662(b)(3), 6662(e), and 6662(h) penalties by lien or levy.
The Settlement Officer's Rejection of Petitioner's OIC
Petitioner asserts that SO Feinman abused his discretion by refusing to consider petitioner's OIC in that he (1) did not undertake to negotiate with petitioner to reach an offer amount higher than the $1,000 petitioner originally offered and that he (2) did not use sound reasoning in considering the nature of petitioner's liability,which created the potential for collecting from a third-party, in determining that accepting petitioner's offer would not be in the best interest of the government. Respondent asserts that SO Feinman did not abuse his discretion in rejecting petitioner's doubt as to collectability OIC.
In the Notice of Determination, SO Feinman noted that petitioner's liability is the result of "intermediary transactions entered into by [petitioner] to avoid the payment of taxes" which creates the potential for transferee or third-party liability with respect to these taxes.
This Court does not independently review whether an OIC or other collection alternative is acceptable. Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27, (1st Cir. 2006). Our review is limited to whether the settlement officer's rejection of the offer was arbitrary, capricious, or without a sound basis in fact or law. Id. Section 7122 allows respondent to accept a taxpayer's offer to compromise, i.e., settle the taxpayer's debt under certain prescribed circumstances for a lesser amount. The offer must be made on Form 656 and none of the form's standard terms may be altered or stricken. Rev. Proc. 2003-71 § 4.01. Generally, the decision to accept or reject an offer are left to the discretion of the Commissioner. Sec. 301.7122-1(c)(1).
An offer may not "be rejected based solely on the amount of the offer without evaluating [the] offer under the provisions of [section 301.7122] and the Secretary's policies and procedures regarding the compromise of cases." Section 301.7122.-1(f)(3). IRS Policy Statement 5-89 provides that "an offer may be rejected for public policy reasons" and this is true even when "it is shown conclusively that the amounts offered are greater than could be collected in any other manner." I.R.M. 12.1.6.15 (July 26, 1960).
It is permissible for a settlement officer to consider third-party collection sources when considering a taxpayer's proposed collections alternative. See Hinerfeld v. Commissioner, 139 T.C. 277, 28990 (2012) (amounts collectible from a third party are includible in a taxpayer's reasonable collection potential); see also I.R.M. 5.17.14.2.3.5(5) (January 24, 2012) (participants to intermediary transaction tax shelters may be transferees from whom the IRS may collect).
Petitioner provides no support for the assertion that a settlement officer abuses his discretion when he considers the amount offered in Form 656 rather than negotiating with the taxpayer to reach a higher offer amount, and we likewise have found no support for this proposition. Instead, we found that this Court has upheld a settlement officer's decision to reject a corporate taxpayer's relatively low offer amount when the settlement officer determined that based on the facts and circumstances of the case, acceptance of the offer would not be in the best interest of the government. See Synergy Envtl., Inc. v. Commissioner, T.C. Memo 2016-99 at *2 (in accordance with IRS Policy Statement P-5-89, the settlement officer reasonably rejected the $600 doubt as to collectability OIC of a corporate taxpayer who owed a tax debt of more than $1.6 million and had no income, no assets, and no ability to make payments towards the past due amounts). The settlement officer did not abuse his discretion by refusing to accept petitioner's $1,000 offer because his refusal was not based solely on the amount of the offer but the totality of the circumstances underlying petitioner's case, including the relatively large amount of the liability and the effect that acceptance of the offer would have on the public and compliance with the tax laws.
Petitioner asserts that the possibility of respondent collecting from a third-party is practically non-existent and cites this as a reason that the settlement officer's consideration of transferee or third-party liability for rejecting the offer is arbitrary and capricious. However, the fact that petitioner altered Form 656 to include an additional term: "I also request that the IRS accept the offer amount listed in this offer application as payment in satisfaction of any claims by the IRS against any person, as an alter ego, agent, nominee, transferee or otherwise, for my outstanding tax debt," shows that respondent is prudent to consider the possibility of collecting from a third party. If it truly is unreasonable to believe that respondent may be able to collect from a third party in this matter, then petitioner would not have gone so far as to impermissibly add this additional term to Form 656. Petitioner's counsel previously indicated that petitioner is prepared to offer a "substantial amount of money" to settle its liability. This is so even though petitioner submitted an OIC showing that petitioner has $97 in assets and no income. The $1,000 offer amount, as well as any additional amount petitioner planned to negotiate, can only come from a third party. It is reasonable for respondent to refuse to accept petitioner's OIC based on the concern that doing so may foreclose collecting from a third party to the fullest extent possible.
Except as discussed above regarding collection of the sections 6662(a), 6662(b)(3), 6662(e), and 6662(h) by levy, we find that the settlement officer verified that the requirements of applicable law and procedure were met. We further find that the settlement officer balanced the government's need for efficient tax collection with the taxpayer's legitimate concern that the collection action be no more intrusive than necessary, and that the settlement officer did not abuse his discretion in rejecting petitioner's OIC as against public policy.
Upon due consideration, it is
ORDERED that respondent's September 11, 2020, Motion for Summary Judgment is denied as it relates to the settlement officer's determination to sustain the Levy Notice as it relates to the sections 6662(a), 6662(b)(3), 6662(e), and 6662(h) penalties assessed against petitioner. It is further
ORDERED that respondent's September 11, 2020, Motion for Summary Judgment is granted as it relates to the settlement officer's determination to reject petitioner's doubt as to collectability OIC and sustain the Levy Notice except as ordered above.