TAX COURT OPINION

Case: City Stage Company, Inc.
Docket Number: 20241-12L
Judge: Marvel
Opinion Type: bench
Filed: 11/18/2013
Pages: 16

UNITED STATES TAX COURT WASHINGTON, DC 20217 CITY STAGE COMPANY, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, ) ) ) ) ) Docket No. 20241-12L ) Respondent. ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioner and to respondent a copy of the pages of the transcript of the proceedings of the above case before Judge L. Paige Marvel at Boston, Massachusetts, on November 6, 2013, containing the Court's oral findings of fact and opinion. In accordance with the oral findings of fact and opinion, an order directing remand will be issued. (Signed) L. Paige Marvel Judge Dated: Washington, D.C. November 18, 2013 SERVED NOV 1 9 2013 Capital Reporting Company 3 1 2 Bench Opinion by Judge L. Paige Marvel November 6, 2013 3 City Stage Company, Inc. v. Commissioner 4 5 6 7 8 Docket No. 20241-12L THE COURT: The Court has decided to render oral findings of fact and opinion in this case and the following represents the Court's Oral Findings of Fact and Opinion. The Oral Findings of Fact and 9 Opinion shall not be relied upon as precedent in any 10 11 12 13 14 15 16 17 18 19 20 21 22 other case. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986 as amended and Rule 152 of the Tax Court Rules of Practice and Procedure. Hereinafter in this bench opinion, unless otherwise indicated, section references are to the Internal Revenue Code of 1986 as amended. Rule references are to the Tax Court Rules of Practice and Procedure. Larry Coen -- and that's C-o-e-n -- (an officer) appeared on behalf of Petitioner. Patrick F. Gallagher appeared on behalf of Respondent. 23 Petitioner's principle place of business was in 24 Massachusetts when it petitioned this Court. 25 The parties have stipulated some of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 relevant facts, which we incorporate herein by this reference. We also find facts on the basis of the stipulated exhibits, and to the extent we find it credible and relevant, sworn testimony. Pursuant to section 6330 (d), Petitioner appeals Respondent's determination to proceed by levy to collect a late-filing penalty of $10,000 pursuant to section 6652(c) for Petitioner's taxable year ended August 31, 2008 (2008 taxable year). Facts Petitioner is a nonprofit corporation that is exempt from taxation under section 501(c) (3). It provides theatrical performances for cultural and educational organizations that educate students and the public in the arts. Its mission includes bringing the theatrical arts to low-income students who might not otherwise be exposed to performances by professional actors of classic works. Petitioner offers interactive performance experiences in the public schools, museums, and other places. Petitioner's operating funds come from grants, some contract work, and from funds supplied by EdVestors -- and that's capital E-d, capital 24 V-e-s-t-o-r-s. Petitioner utilizes a fiscal year 25 ending on August 31, and reports its income and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 expenses using the cash basis method of accounting. On August 31, 2007, Petitioner's executive director, who had been with the organization for 33 years, retired. In September 2007 Petitioner hired Larry Coen, an actor who had worked with Petitioner from approximately 1982, as its new Artistic Director and Executive Director. When Mr. Coen was hired he did not know about Petitioner's return filing obligations and did not take steps to ensure that 10 Petitioner's annual Form 990, Return of Organization 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Exempt From Income Tax, was timely filed. Although the record is not clear regarding Petitioner's compliance history, it appears that Petitioner's Forms 990 for the taxable years ended August 31, 2007 (2007 taxable year) and 2008 were not prepared and filed timely although an extension of time to file for the 2008 taxable year was prepared and mailed, presumably to the Internal Revenue Service (IRS), on December 18, 2008. The IRS assessed a $10,000 penalty under section 6652(c) (1) (A) for each of the 2007 and 2008 taxable years. However, only the assessment with respect to the 2008 taxable year is at issue in this case. Respondent sent to Petitioner Letter 1058, Final Notice of Intent to Levy and Your Right to a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 Hearing, dated April 10, 2012, with respect to the 2 penalty assessment for the 2008 taxable year. 3 Petitioner timely submitted Form 12153, Request for a 4 Collection Due Process or Equivalent Hearing, in 5 which Petitioner requested a hearing. Petitioner 6 7 8 9 10 11 12 requested that Respondent consider both an installment agreement and an offer-in-compromise as collection alternatives and further alleged that "We do not believe we are responsible for the penalties or that they are properly asserted in this case." The Form 12153 was signed by Simon Gonzalez, an enrolled agent with the firm of M. Stanley Metz -- 13 M-e-t-z -- & Co., Inc., Tax Consultants. 14 15 16 17 18 Petitioner's section 6330 administrative appeal was assigned to Respondent's Memphis Campus Appeals Office, which sent Mr. Gonzalez a letter dated May 15, 2012, confirming receipt of the appeal. By letter dated May 21,.2012, Settlement Officer 19 Cheryl Lewis advised Petitioner that she had 20 21 22 23 24 scheduled a telephone conference for June 11, 2012, and that the call would be Petitioner's "primary opportunity to discuss with me the reasons you disagree with the collection action and/or to discuss alternatives to the collection action." Settlement 25 Officer Lewis informed Mr. Gonzalez that Petitioner 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 could request a face-to-face conference at a convenient locatio warned him that Petitioner "must be in full compliance and submit financial information with a request for a face-to-face hearing." She also stated that she needed a completed Collection Information Statement but that if Petitioner wanted to submit an offer-in- compromise, it should submit Form 656 "in lieu of Form 433A." She set a deadline of June 6, 2012 for the submission of the requested information and forms. By letter dated May 21, 2012, Mr. Gonzalez requested a face-to-face conference. By letter dated May 24, 2012, Settlement Officer Lewis responded acknowledging receipt of the May 21, 2012 letter, but stating that she needed Form 433B in order to process the request for a face-to-face hearing. On June 11, 2012, Settlement Officer Lewis held a telephone conference with Frederic -- and that's F-r-e-d-e-r-i-c -- H. Behr -- B-e-h-r -- of the Metz firm. In conjunction with the telephone conference, Mr. Behr faxed to Settlement Officer Lewis a signed Form 656, Offer in Compromise. Included as part of the offer-in-compromise were an attachment, which confirmed that the offer was 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 submitted based on doubt as to collectability and exceptional circumstances that included undue hardship, a copy of Petitioner's profit and loss statement through April 2012, and a copy of 5 Petitioner's balance sheet as of April 30, 2012. The 6 profit and loss statement showed that Petitioner's 7 8 9 10 11 12 13 14 15 16 operating expenses exceeded its income from all sources by $20,114.42. The balance sheet showed tm: (si accounts with a net negative balance, total assets (consisting of depreciable equipment) of $5,900.69, and total liabilities (excluding any assessed tax liabilities) of $1,425.80. The offer- in-compromise (including all attachments) was signed and submitted under penalty of perjury. Settlement Officer Lewis forwarded the offer-in-compromise to Respondent's Centralized 17 Offer-in-Compromise Unit, which rejected it because 18 Petitioner did not submit the $150 application fee 19 20 21 and did not make the payment equal to 20 percent of $1,000, the total amount offered, required by section 7122. Settlement Officer Lewis apparently advised 22 Petitioner's representative of the action taken on 23 24 25 the offer-in-compromis did not give Petitioner an opportunity to rectify the problems before closing the case. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 Respondent's Appeals Office issued a notice of determination dated July 11, 2012, sustaining the proposed levy. As reasons for the determination, the notice recite.d that (1) the Settlement Officer "never got the requested financial information" and as a result, she could not determine if Petitioner qualified for any collection alternative; and (2) the offer-in-compromise could not be processed because the application fee, the required 20 percent payment, and the Form 433B were not included with the offer. The notice of determination also erroneously stated that Petitioner did not dispute its liability for the penalty. Discussion The Secretary of the Treasury is authorized to collect tax by levy upon a taxpayer's property if any taxpayer liable to pay any tax neglects or refuses to pay such tax within 10 days after notice and demand for payment. Sec. 6331(a). Section 6330(a) and (b) requires the Secretary to send 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 written notice to the taxpayer of the taxpayer's 22 23 24 25 right to request a section 6330 hearing before a levy is made. If the taxpayer makes a timely request for a hearing, a hearing is held by the IRS Office of Appeals. Sec. 6330(b). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 At a section 6330 hearing a taxpayer may raise any relevant issue, including challenges to the appropriateness of the collection action and collection alternatives, such as an OIC or an installment agreement. Sec. 6330 (c) (2) (A). 6 Additionally, the taxpayer may contest the validity 7 8 9 10 11 of the underlying tax liability, but only if the taxpayer did not otherwise have an opportunity to dispute the tax liability. Sec. 6330(c) (2) (B); Sego v. Commissioner, 114 T.C. 604, 609 (2000). Following a hearing, the Appeals Office 12 must issue a notice of determination regarding the 13 14 15 16 17 18 19 20 21 22 appropriateness of the proposed collection action. The Appeals Office is required to take into consideration: (1) verification presented by the Secretary that the requirements of applicable law and administrative procedure have been met, (2) relevant issues raised by the taxpayer, and (3) whether the proposed collection action appropriately balances the need for efficient collection of taxes with the taxpayer's concern regarding the intrusiveness of the proposed collection action. Sec. 6330(c) (3); 23 Wadleigh v. Commissioner, 134 T.C. 280, 287-288 (2010). 24 25 Pursuant to section 6330(d) (1), we have 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 jurisdiction to review the Appeals Office's determination. See Murphy v. Commissioner, 125 T.C. 301, 308 (2005) , 69 F. 3d 27 (1s t Cir . 2006). Where the validity of the underlying tax liability is properly at issue, we review the determination regarding the underlying tax liability de novo. Sego v. Commissioner, 114. T.C. at 610; Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). 9 Where the validity of the underlying tax liability is 10 11 12 13 14 15 not properly at issue, we review the Appeals Office's determination for abuse of discretion. Sego v. Commissioner, 114 T.C. at 610; Goza v. Commissioner, 114 T.C. at 182. In reviewing for abuse of discretion, we must uphold the Appeals Office's determination unless it is arbitrary, capr1clous, or 16 without sound basis in fact or law. See, e.g., 17 Murphy v. Commissioner, 125 T.C. at 320; Taylor v. 18 19 20 21 22 23 24 25 Commissioner, T.C. Memo, 2009-27, 97 T.C.M. (CCH) 1109, 1116 (2009). However, we can uphold the Appeals Office's determination only on grounds actually relied upon by the Appeals officer in the notice of determination. See SEC v. Chenery Corp., 318 U.S. 80, 93-95 (1943); Antioco v. Commissioner, T.C. Memo. 2013-35, at *24-*25; Jones v. Commissioner, T.C. Memo. 2012-274, at *22-*23. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 9 10 11 Respondent concedes that Petitioner was entitled to contest the validity of the underlying liability for the penalty because it has not had a prior opportunity to contest the underlying liability. Accordingly, we have jurisdiction to review the Appeals Office's determination with respect to the underlying liability for the penalty, and we review that determination de novo. We also review for abuse of discretion Respondent's determination to proceed with the collection by levy of Petitioner's 2008 section 6652(c) penalty. 12 Underlying Section 6652(c) Penalty 13 14 15 16 17 18 19 20 21 22 23 With exceptions not relevant here, every organization that is exempt from taxation under section 501(a) must file "an annual return, stating specifically the items of gross income, receipts, and disbursements, and her information as the Secretary may by forms or regulations prescrib Sec. 6033 (a) (1) . Section 6652 (c) (1) (A) imposes a penalty on any organization that fails to comply with this filing requirement or fails to include complete or correct information on the return. For organizations with gross receipts not exceeding $1 24 million, the penalty is $20 for each day late with a 25 maximum penalty of the lesser of $10,000 or 5 percent 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 of the organization's gross receipts for the year. Sec. 6652(c) (1) (A) (ii). The penalty does not apply if it is shown that the failure giving rise to the penalty is due to reasonable cause. Sec. 6652(c) (4). The administrative record shows that 6 Petitioner contested the underlying section 6652(c) 7 8 9 10 11 penalty during the section 6330 hearing. Petitioner contended that the penalty was not properly calculated or assessed and also requested abatement due to reasonable cause. While there is some passing reference in the case activity report that Settlement 12 Officer Lewis may have considered reasonable cause, 13 14 15 16 17 18 19 there is nothing indicating the basis for the analysis she may have made. The notice of determination erroneously states that Petitioner did not dispute its liability. Accordingly remand on this issue is appropriate. See Chenery, 318 U.S. at 93-95; Antioco v. Commissioner, at *24-*25; Jones v. Commissioner, at *22-*23. 20 Collection Alternatives 21 22 23 24 25 Petitioner submitted, under penalties of perjury, detailed financial information in the form of a profit and loss statement and a balance sheet that were a part of the offer-in-compromise. Although the information was not transferred to the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 3 4 5 6 7 8 9 10 11 12 Form 433B, it did contain much of the information that the Form 433B requested. At a minimum the Settlement Officer should have analyzed the information, given Petitioner some warning that the financial information it submitted with the offer-in- compromise was not sufficient (and the reasons why it was not sufficient), and provided Petitioner with some reasonable opportunity to cure whatever defects existed. Additionally, the instructions that Settlement Officer Lewis gave to Petitioner's representatives were confusing and perhaps even 13 misleading. Although Settlement Officer Lewis 14 15 16 17 18 19 20 21 requested that Petitioner submit Form 433B, she also advised Petitioner's representative in the letter dated May 21, 2012, that if Petitioner submitted an offer-in-compromise, a Form 433A was not necessary. It is not clear from the letter whether the reference to the Form 433A also included the Form 433B, and it is possible that Petitioner's representative believed that if he submitted the offer-in-compromise form 22 with supporting financial information, he did not 23 24 have to submit the Form 433B. The administrative record confirms that 25 Petitioner through its representative made a good 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 7 8 9 10 11 faith effort to submit an offer-in-compromise with supporting financial information in order to obtain a review of its claim that the assessed penalty would cause it operational and financial hardship and would jeopardize its educational m1ssion. The necessary conversation never occurred and in our view it should have. Petitioner, a section 501(c) (3) organization that provides valuable education in the performing arts to low-income children,. has asserted that the assessed penalty would imperil its ability to operate and cannot be paid out of its normal funding sources. 12 Petitioner's position, if supported by its financial 13 14 15 16 17 18 19 20 information, warrants consideration. We are particularly disturbed by the lack of acknowledgement or analysis in the administrative record of the financial information Petitioner submitted with its offer-in-compromise to support its hardship and inability to pay claims. Petitioner's failure to comply with the technical requirements for a valid offer-in-compromise could have been cured and 21 Petitioner should have been given an opportunity to 22 23 24 25 cure those defects before the notice of determination was issued, particularly since Petitioner was represented by a power of attorney who obviously did not know about or negligently disregarded the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 4 5 6 requirements. "Although we cannot substitute our judgment for that of the *** [Settlement Officer], see Goza v. Commissioner, 114 T.C. at 181-182, our review of the overall record leaves us with a firm sense that Petitioner has not been treated in a fair and rational manner." Szekely -- and that's 7 S-z-e-k-e-1-y -- v. Commissioner, T.C. Memo, 2013- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 227, at *11-*12. Accordingly, we conclude that remand on this issue is appropriate. See Kelby v. Commissioner, 130 T.C. 79, 86 n.4 (2008). We also believe that a remand is appropriate here because the administrative record does not indicate that Petitioner's financial information and its related claim that it could not afford to pay the assessed penalty and/or that payment would cause it extreme hardship and jeopardize its educational mission were ever considered and analyzed by the Appeals Office nor does the administrative record adequately explain why the analysis did not occur. See Chenery, 318 U.S. at 93- Antioco v. Commissioner, at *24-*25; Jones v. Commissioner, at *22-*23. Upon remand the Appeals Office should provide Petitioner with an explanation of why the financial information it submitted with its offer-in- 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 2 3 4 5 6 compromise was inadequate and give Petitioner a reasonable opportunity to submit a valid offer-in- compromise with any necessary fees or deposits. We have considered the rema1n1ng arguments made by the parties, and to the extent not discussed above, we conclude those arguments are irrelevant, 7 moot, or without merit. To reflect the foregoing, an appropriate order will be issued. This concludes the Court's Oral Findings of Fact and Opinion in this case. (Whereupon, at 10:25 a.m., the above- entitled matter was concluded.) 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com