Opinion
Civil Action No. H-00-1962
November 22, 2002
MEMORANDUM AND ORDER
The Court was recently informed that an order (Document # 32) contained a typographical error. On the final page of the order, instead of referring to 26 U.S.C. § 6621(c), the Court mistakenly referred to § 6641(c). The following order corrects that typographical error. In all other respects the order is identical.
Pending before the Court is Plaintiffs' motion for summary judgment (Instrument No. 18) and Defendant's cross motion for summary judgment (Instrument No. 17). After reviewing the record and the applicable law, the Court concludes that Plaintiffs' motion should be DENIED and Defendant's motion should be GRANTED.
I. Background.
Frank W. Smith and Janice M. Smith ("the Smiths") were limited partners in Barrister Equipment Associates Series 166 ("Barrister") during the years 1983 and 1984. During those years Barrister reported ordinary losses. The Smiths' share in those reported losses was $20,955 in 1983 and $27,108 in 1984. Also during 1983 and 1984 Barrister reported a basis in recovery property and $27,108 in 1984. Also during 1983 and 1984 Barrister reported a basis in recovery property subject to an investment tax credit, of which the Smiths' share was $465,005 and $174,615 respectively.
On April 14, 1984 the Smiths filed a joint income tax return for 1983 which included the loss of $20,955 and basis in recovery property of $465,005. The following year, the Smiths filed a joint return for 1984 which included the $27,108 loss and the $174,615 basis.
On September 5, 1989 the Internal Revenue Service ("IRS") issued notices of Final Partnership Administrative Adjustment ("FPAA") to Barrister for 1983 and 1984. In the notices the IRS disallowed the claimed losses and basis in recovery property subject to the investment tax credit. In response, Barrister filed a petition in the United States Tax Court seeking review of the disallowance. On February 17, 1995, upon agreement of the parties, Tax Court entered an agreed order in which all of Barrister's losses and basis in recovery property subject to the investment tax credit were disallowed.
As a result of the disallowance, on February 22, 1996 the IRS notified the Smiths that the Barrister disallowance would affect their individual tax liability for 1983 and 1984. The letter included a Form 870 report regarding the assessment of § 6659 penalties with the words "Settlement Position" written at the top. The letter explained that the form reflected the government's settlement position and constituted a "fair method of resolving this matter." The Smiths signed and returned the form as requested and paid the increased tax liability and penalties assessed by the IRS for 1983 and 1984.
On April 2, 1996 the IRS issued notices of Deficiency to the Smiths for their 1983 and 1984 years asserting alternative penalties. The Smiths, through their attorney, objected to the Notice of Deficiency asserting that the settlement position agreement prevented the IRS from imposing any further penalties.
On March 25, 1998 the Smiths filed refund claims with respect to the additional taxes, penalties, and interest paid for 1983 and 1984. On July 11, 1998 the IRS denied the refund claims.
The Smiths filed the above-referenced action on June 9, 2000 arguing that the IRS improperly denied their refund claim. Presently before the Court is Plaintiffs' motion for summary judgment and Defendant's cross motion for summary judgment. The Smiths contend that they are entitled to summary judgment against the United States for refunds based on recovery of penalties and interest under 26 U.S.C. § 6659 and § 6621(c). The Smiths state that "[t]hese partial refunds are all that remain in issue. The Smiths have conceded all other bases for recovery of their original claims, including their statute of limitations defense." (Pls.' Mot. for Summ. J., p. 1). Accordingly, in addressing the instant motions, the Court will restrict its consideration to whether Plaintiffs are permitted to seek a refund of the penalties and interest assessed by the IRS under 26 U.S.C. § 6659 and 6621(c).
II. Standard of Review
Under Rule 56(c) of the Federal Rules of Civil Procedure, the moving party is entitled to summary judgment as a matter of law when the pleadings and record evidence show that no genuine issue of material fact exists and that, as a matter of law, the movant is entitled to judgment. Byers v. Dallas Morning News, Inc. 209 F.3d 419, 424 (5th Cir. 2000) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). If the non-movant bears the burden of proof at trial, however, the movant for summary judgment need not support the motion with evidence negating the opponent's case. Instead, the movant may satisfy its burden by showing that there is an absence of evidence to support the non-movant's case. See id.
All evidence is considered in the light most favorable to the non-moving party. See id. However, the non-movant may not rely on mere allegations in the pleadings. Particular facts must be set forth indicating that there is a genuine issue for trial. See Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986)). If, after the non-movant has had an opportunity to raise a genuine factual issue, no reasonable juror could find for the non-movant, the court will grant summary judgment. See Id. (citing Celeotex Corp., 477 U.S. at 322).
III. Discussion
A. § 6659
Title 26 U.S.C. § 6659 permits the IRS to impose penalties if an individual overstates the value of property or the adjusted basis in property. In the present case, the IRS imposed § 6659 penalties on the Smiths due to the tax credits claimed by Barrister on the basis in recovery property. Initially, the Smiths appear not to have contested the imposition of § 6659 penalties. The Smiths paid the amount imposed by the IRS and signed a form entitled "Settlement Position" and "Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment" with respect to the penalties. Nearly two years later, however, the Smiths filed refund claims, asserting, in part, that they were not liable for any penalties under § 6659. In response, the United States asserts that the Smiths specifically agreed to the assessment of the penalties and, therefore, cannot now obtain a refund.
The crucial question, therefore, is whether the Smiths settled their liability for § 6659 penalties. The letter from the IRS dated February 22, 1996 notified the Smiths that the Barrister disallowance would alter their individual tax liability for 1983 and 1984. The letter also contained a paragraph which stated:
Please note that there are two penalty reports enclosed reflecting both the Government's settlement position and litigating position being proposed for all Barrister investors. We ask that you sign the penalty report for the settlement position as this would provide both you and the Government with a fair method of resolving this matter. If you choose not to [accept] the settlement position or if we do not hear from you within 30 days from the date of this letter, we will have no alternative other than to issue a Statutory Notice of Deficiency to you asserting the Government's litigating position.
(Pls.' Mot. for Summ. J., Ex. 8). The first words on the § 6659 penalty report, referred to in the letter, were "Settlement Position" written by hand. The report itself was entitled "Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of overassessment." Immediately above the Smiths' signatures the form stated:
I consent to this immediate assessment and collection of any deficiencies (increase in tax and penalties) and accept any overassessment (decrease in tax and penalties) shown above, plus any interest provided by law. I understand that by signing this waiver, I will not be able to contest these years in the United States Tax Court, unless additional deficiencies are determined for these years.
(Pls.' Mot. for Summ. J., Ex. 9). The date following the Smiths' signatures was March 21, 1996.
The Smiths argue that the penalty report was merely a consent to waive the notice requirements for assessing penalties, not a settlement agreement. The Court disagrees. The letter accompanying the report clearly states that the penalty report is part of an overall settlement position which, if signed, would resolve the matter between the Smiths and the United States. Furthermore, the penalty report states that by signing the report, "I will not be able to contest these years in the United States Tax Court, unless additional deficiencies are determined for these years." By signing the report the Smiths waived their right to contest the IRS's assessment of § 6659 penalties for 1983 and 1984. This waiver is hardly consistent with the Smiths' current assertion that they always planned to contest the imposition of overstatement penalties.
Moreover, the Smiths' conduct after signing the penalty report is consistent with a settlement. Before the IRS received the Smiths' signed penalty report the IRS inadvertently issued notice that additional penalties would be imposed. In response, the Smiths wrote an urgent letter to the IRS stating that:
In direct contravention of the solicitation of the Forms 870, the Internal Revenue Service, nevertheless, on April 2, 1996, issued formal notices of deficiency for penalties probably (when computed) in excess of $125,000. This appears to either be a simple error on the part of the Internal Revenue Service or, alternatively, a complete breach of the agreement pursuant to which the Forms 870 were solicited and tendered . . .
(Pls.' Mot. for Summ. J., Ex. 9). The Smiths' assertion that additional penalties were in "contravention of the solicitation of the Forms 870" demonstrate that they understood the form to constitute more than a waiver of notice. In fact, in the Smiths' letter they sought to enforce the terms of the agreement limiting the penalties to those contained in the earlier agreement.
Accordingly, the Court concludes that the Settlement Position form signed by the Smiths' constituted a settlement agreement which specifically limited the Smiths' right to contest the imposition of § 6659 penalties. Therefore, the Court concludes that the United States is entitled to summary judgment on the issue of whether the Smiths are entitled to seek a refund of the § 6659 penalties paid to the IRS.
B. § 6621(c)
Section 6621(c), as applicable to 1983 and 1984, imposes a penalty rate of interest on tax deficiencies directly attributable to a deduction that is disallowed because it resulted from a "tax motivated transaction" as that term is defined by the Tax Code and applicable regulations. A tax motivated transaction includes "any valuation overstatement (within the meaning of section 6659(c))." 26 U.S.C. § 6621 (c)(3)(A)(i).
In the present case, the Smith's agreed to the assessment of § 6659 penalties in the Settlement Petition signed on March 21, 1996. Therefore, by definition, the Smiths conceded that the misstatements on their 1983 and 1984 tax returns were "tax motivated transactions." Interest under § 6621(c) is, accordingly, recoverable by the IRS. The Court must grant the United States' motion for summary judgment.
IV. Conclusion
The Settlement Position signed by the Smiths on March 21, 1996 was a settlement agreement as to the imposition of § 6659 penalties. The Court bases this conclusion on the letter from the IRS characterizing the form as a settlement position which would resolve the matter between the parties, the binding nature of the agreement itself, and the Smiths' own characterization of the agreement afterwards. These factors convince the Court that the 870 Penalty Agreement was meant to settle the imposition of § 6659 penalties between the United States and the Smiths. Moreover, in reaching this conclusion, the imposition of § 6621(c) is unavoidable. Interest on deficiencies is recoverable under § 6621(c) if there was an overstatement under § 6659(c). In this case the Court concluded that there was such an overstatement. Therefore, § 6621(c) interest penalties are recoverable.
Accordingly, the Court
ORDERS that Plaintiffs' motion for summary judgment is DENIED. The Court further
ORDERS that Defendant's motion for summary judgment is GRANTED.