TAX COURT OPINION

Case: Howard K. Johnson & Debbie M. Johnson
Docket Number: 14818-11SL
Judge: Thornton
Opinion Type: bench
Filed: 07/17/2013
Pages: 18

UNITED STATES TAX COURT WASHINGTON, DC 20217 HOWARD K. & DEBBIE M. JOHNSON, ) Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) Docket No. 14818-11SL. ) ) ) ) ) ) ORDE R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED: That the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Michael B. Thornton at Nashville, Tennessee, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Michael B. Thornton Judge Dated: Washington, D.C. July 17, 2013 SERVED JUL 1 9 2013 Capital Reporting Company 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Bench Opinion by Judge Michael B. Thornton June 21, 2013 Howard K. & Debbie M. Johnson v. Commissioner Docket No. 14818-11SL 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. This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Except as otherwise provided by Rule 152(c) of the Tax Court Rules of Practice and Procedure, the oral findings of fact and opinion shall not be relied upon as precedent. This Bench Opinion is made pursuant to the authority granted by Section 7459(b) and Rule 152. Section references are to the Internal Revenue Code in effect for the taxable years at issue. Rule references are to the Tax Court Rules of Practice and Procedure. This case was tried on June 17, 2013, in 25 Nashville, Tennessee. Petitioner husband appeared 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 pro se; petitioner wife did not appear. John R. Bampfield represented respondent. Findi'ngs of Fact. When they filed their petition, petitioners lived in Alabama. They did not timely file Federal income tax returns for their 2000, 2001, or 2002 tax years. On October 19, 2005, the IRS received petitioners' 2000 and 2001 tax returns. On December 26, 2005, and January 2, 2006, respondent assessed petitioners' 2000 and 2001 taxes, respectively. Respondent prepared a substitute for return pursuant to section 6020 (b) for petitioners' 2002 tax year. Petitioners later jointly filed a 2002 Federal income tax return. Respondent accepted this return and assessed the amount shown on that return. On November 27, 2010, respondent sent to petitioners Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing. On December 15, 2010, respondent received from petitioners Form 12153, Request for a Collection Due Process or Equivalent Hearing. On their Form 12153, they indicated that they desired to make an offer-in- compromise. They also indicated that they disagreed 24 with the imposition of penalties and interest on 25 account of stated grounds of a lack of funds due to a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 bad investment, Mr. Johnson's being laid off from work, and Mrs. Johnson's medical conditions. On February 7, 2011, respondent's Appeals 4 Office sent petitioners an acknowledgement letter, 5 6 stating it had received their request for an Appeals hearing and scheduling a telephone conference for 7 March 8, 2011, at 10:00 a.m. The letter also 8 9 10 11 12 13 14 15 16 17 18 19 20 21 requested petitioners to send certain financial documentation within 14 days if they wanted to pursue collection alternatives. On March 8, 2011, respondent's settlement officer, Ann DeCaro (SO DeCaro) conducted the telephone conference with Mr. Johnson. After discussions with Mr. Johnson, SO DeCaro permitted an extension of time to allow petitioners an opportunity to provide the requested financial documentation. On March 22, 2011, SO DeCaro conducted a second telephone conference with Mr. Johnson. During this telephone conference, Mr. Johnson indicated that he was unable to file an offer-in-compromise because he lacked the funds necessary to accompany the offer. 22 Mr. Johnson indicated that he was two months behind 23 24 25 on his mortgage payments and proposed an installment agreement of $25 per month. SO DeCaro advised him that she would review the financial information he 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 submitted and contact him at a later date. SO DeCaro reviewed the Form 433-A, 3 Collection Information Statement for Wage Earners and 4 5 6 7 Self-Employed Individuals, which petitioners submitted and which showed that petitioners had a 401(k) plan with a listed fair market value of $8,000, a personal residence with a listed fair 8 market value of $177,000, and a mortgage of $156,000. 9 The Form 433-A indicated that petitioners had $5,229 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of gross monthly income and $5,139 of monthly expenses. Attached to petitioners' Form 433-A was a letter requesting penalty abatementf on account of / their belief that they had paid all of their underlying tax liabilities except for the "penalties" and that certain purported financial hardships had resulted in their inability to pay their taxes for the relevant years. SO DeCaro requested more information, including the terms and conditions of the 401(k) plan, three current months of banking statements, and a denial letter from petitioners' bank to indicate that petitioners were unable to use their home equity to satisfy their outstanding tax liabilities. SO DeCaro also proposed to petitioners an installment agreement of $289 per month. Petitioners rejected 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 that collection alternative. On April 18, 2011, Mr. Johnson contacted SO DeCaro and indicated that he would be unable to obtain the requested bank denial letter. In her case 5 activity records, SO DeCaro recorded that she was 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 going to sustain the proposed levy because the equity in petitioners' home was sufficient to fully pay their outstanding tax liability and that petitioners could not provide the requested financial information. On May 23, 2011, respondent sent to petitioners a notice of determination sustaining the proposed levy. The notice of determination determined that the proposed levy was proper because petitioners failed to forward a completed offer-in- compromise package, had failed to dispute their underlying liabilities, and had failed to put forth legitimate reasons for abating penalties and interest. In their petition, petitioners assert that the proposed levy would constitute a financial beDef hardship for them, that it was their belialf that their current financial situation was not considered at the Appeals conference, and that they had reasonable cause in failing to pay their taxes on 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 time and that therefore the penalties and interest should be abated. On December 7, 2011, respondent filed a 4 motion to remand this case to the Appeals Office. In 5 6 7 8 9 10 11 his motion, respondent indicated that there was a deficiency assessment for 2002, that there was no notice of deficiency in the administrative file, and that remanding the case would allow the settlement officer an opportunity to obtain a copy of the notice of deficiency and mailing of that notice. On December 12, 2011, this Court granted respondent's 12 motion to remand. 13 14 15 16 17 18 19 20 21 22 23 24 25 On April 17, 2012, respondent submitted a status report to this Court, indicating that although respondent had issued a substitute for return with respect to petitioners' 2002 tax year, petitioners had submitted a jointly filed return during the examination phase and that respondent had accepted that return. On May 4, 2012, the Appeals Office issued a supplemental notice of determination, once again determining that the proposed levy should be sustained. Discussion. Section 6330 requires the Secretary to furnish a person notice and opportunity for a hearing before making a levy on the person's 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 property. At the hearing, the person may raise any relevant issue relating to the unpaid tax or proposed levy, including spousal defenses, challenges to the appropriateness of the collection action, and offers of collection alternatives. Sec. 6330 (c) (2) (A). The person may challenge the existence or amount of the underlying tax liability for any period only if the person did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the liability. Sec. 6330 (c) (2) (B); Sego v. Commissioner, 114 T.C. 604, 609 (2000). "Underlying tax liability" as used in section 6330 includes the amounts that the Commissioner assessed for a particular tax period, including statutory interest, additions to tax, and penalties. See Montgomery v. Commissioner, 122 T.C. 1, 9 (2004); Downing v. Commissioner, 118 T.C. 22, 27 (2002). Once the Commissioner's Appeals Office issues a notice of determination, the person may seek judicial review in this Court. Sec. 6330 (d) (1). Petitioners challenge respondent's imposition of the·following additions to tax: section 6651(a) (1) failure to file, section 6651(a) (2) failure to timely pay, and section 6654 failure to pay estimated tax payments. Respondent concedes that petitioners are entitled to challenge 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 10 1 2 3 4 5 their additions to tax for their 2000, 2001, and 2002 tax years. We review de novo whether petitioners are liable for the additions to tax. See Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). Respondent bears the burden of production 6 with respect to the additions to tax. See sec. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446- 447 (2001). To meet his burden, respondent must produce sufficient evidence establishing that it is appropriate to impose the addition to tax. See Higbee v. Commissioner, 116 T.C. at 446 (2001). The burden of establishing reasonable cause remains with petitioners. See id. Section 6651(a) (1) imposes an addition to tax for failure to file timely a return. Respondent has met his burden of production by producing Forms 4340, Certificate of Assessments, Payments, and Other Specified Matters, showing that petitioners did not timely file their returns. See Davis v. Commissioner, 115 T.C. 35 (2000). A taxpayer will not be liable for an addition to tax under section 6651(a) (1) if the taxpayer can show that the failure to file was on account of reasonable cause and not due to willful neglect. See United States v. Boyle, 469 U.S. 241, 245-246 (1985). Reasonable cause 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 exists when a taxpayer exercises ordinary business care and prudence and is nonetheless unable to file his return by the date prescribed by law. Sec. 301.6651-1(c) (1), Proced. & Admin. Regs. During their Appeals Office hearing, petitioners did not argue any specific reasons for why they failed to timely file their 2000, 2001, and 2002 tax returns but stated that they should not be liable for "penalties" on account of a bad investment, Mr. Johnson's unemployment, and Mrs. Johnson's medical conditions. Reasonable cause for a failure to file may exist if the taxpayer's or a family member's illness or incapacity prevents the taxpayer from filing his or her tax return but not if the taxpayer is able to continue his or her business affairs despite the illness or incapacity. See Ruggeri v. Commissioner, T.C. Memo 2008-300 (and cases cited therein). We are not persuaded that Mrs. Johnson's 19 medical conditions, even if severe enough to prevent 20 her from filing a tax return herself, also prevented 21 Mr. Johnson from filing their joint income tax 22 23 24 25 return. We are also not persuaded that Mr. Johnson's bad investment or his unemployment constituted reasonable cause for their delay in filing their return. In addition, petitioners' pattern of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 9 noncompliance in failing to file their returns weighs against a finding of reasonable cause. See, eg., Judge v. Commissioner, 88 T.C. 1175, 1189-1191 (1987). Section 6651(a) (2) imposes an addition to tax for failure to pay timely the amount of tax shown on a return unless the failure is due to reasonable cause and not due to willful neglect. Respondent produced transcript records, Form 4340, Certificate 10 of Assessments, Payments, and Other Specified 11 Matters, establishing that petitioners did not pay 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the full amount of tax shown on their 2000, 2001, and 2002 returns. Respondent has met his burden of production, and petitioners bear the burden of proving reasonable cause. See sec. 6651(a) (2); Higbee v. Commissioner, 116 T.C. at 447. Petitioners argue that they should not be liable for the section 6651(a) (2) failure to timely pay addition to tax because they had reasonable cause on account of a bad investment and money owed to third parties, Mr. Johnson's being laid off from his job, and Ms. Johnson's medical conditions. The regulations provide that "A taxpayer has reasonable cause for failure to timely pay a tax if 'the taxpayer has made a satisfactory showing that he exercised ordinary 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship***if he paid on the due date.'" Sec. 301.6651(c) (1), Proced. & Admin. Regs. See also Valen Manufacturing Co. v. United States, 90 F. 3d 1190, 1193 (6th Cir. 1996). The regulations also state: "In determining whether the taxpayer was unable to pay the tax in spite of the exercise of ordinary business care and prudence in providing for payment of his tax liability, consideration will be given to all the facts and circumstances of the taxpayer's financial situation, including the amount and nature of the taxpayer's expenditures in light of the income (or other amounts) he could, at the time of such expenditures, reasonably expect to receive prior to the date prescribed for the payment of tax." Sec. 301.6651-1(c) (1), supra. Petitioners have failed to establish that paying their tax liabilities on the due dates of each return would have resulted in an undue hardship or that they were otherwise unable to pay their tax liabilities on those dates. See Shaw v. Commissioner, T.C. Memo, 2010-210 ("Petitioners have 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 14 1 provided only limited evidence regarding their 2 ability to pay as of the date payment was actually 3 4 5 6 7 8 9 10 11 due, and we are unable to presume that any such evidence would be favorable to petitioners."); Taylor v. Commissioner, T.C. Memo, 2009-27 (holding taxpayer liable for section 6651(a) (2) addition to tax where taxpayer failed to show how her investment's failure affected her ability to pay her taxes); Kowsh v. Commissioner, T.C. Memo 2008-204 (holding taxpayer liable for section 6651(a) (2) addition to tax where taxpayer failed to offer corroborating evidence of 12 medical illness and no doctors testified nor were any 13 medical professional affidavits offered). 14 Petitioners have introduced no documentary evidence 15 with respect to the state of their financial affairs 16 17 18 19 20 21 at the times when their 2000, 2001, and 2002 tax liabilities arose. The administrative record contains several doctor's billing statements co.rroborating Ms. Johnson's medial conditions but these billing statements are dated well after the date petitioners' tax liabilities were due. 22 Petitioners have failed to show reasonable cause and 23 24 25 lack of willful neglect. They are liable for the section 6651(a) (2) addition to tax, and respondent did not err in declining to abate that assessment. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Section 6654 (a) imposes an addition to tax 15 for an underpayment of estimated taxes. This addition to tax is mandatory unless the taxpayer proves an exception applies. See sec. 6654 (e); Lukovsky v. Commissioner, T.C. Memo 2010-117. A taxpayer must pay estimated income tax for a particular year only if that person has a "required annual payment" for that year. See Wheeler v. Commissioner, 127 T.C. 200, 211 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008). A "required annual payment" is the lesser of: (1) 90% of the tax shown on the return for the taxable year (or if no return is filed 90% of the tax for that year) or (2) 100% of the tax shown on the individual's return for the preceding taxable year. Sec. 6654 (d) (1) (B). Unlike sections 6651(a) (1) and (a) (2), section 6654 contains no provision relating to reasonable cause and lack of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 willful neglect. See McLaine v. Commissioner, 138 19 20 21 22 23 24 25 T.C. 228, 249 (2012). Section 6654 does contain certain exceptions, however, and the burden of proof is on petitioners to show they are covered by one of the relief provisions. See sec. 6654 (e). Respondent introduced into evidence Form 4340 for petitioners' 1999, 2000, 2001, and 2002 tax years. Respondent has met his burden of production 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 in showing the imposition of the section 6654 additions to tax was appropriate for petitioners' 2000, 2001, and 2002 tax years because these Forms 4340 together demonstrate that petitioners had a Federal income tax liability for 2000, 2001, and 2002, that they made no estimated income tax payments for 2000, 2001, and 2002, and that they filed 1999, 2000, and 2001 Federal income tax returns that showed a tax due for those relevant years. See Harris v. Commissioner, T.C. Memo 2012-312. Petitioners have failed to demonstrate that an exception pursuant to section 6654 (e) applies. Accordingly, we sustain respondent's determination of the addition to tax under section 6654 (a) for petitioners' 2000, 2001, and 2002 tax years. Petitioners also challenge the imposition of interest. The Commissioner is permitted to abate the assessment of interest on any deficiency attributable to any unreasonable error or delay by an officer or employee of the IRS in performing a 21 ministerial or managerial act. Sec. 6404 (e) (1) (A). 22 23 24 In enacting section 6404 (e), Congress did not intend abatement of interest to be granted routinely but rather where the failure to abate interest "would be 25 widely perceived as grossly unfair." H. Rept. 99- 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 2 3 4 5 6 7 8 9 426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844; S. Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208. We apply an abuse of discretion standard in reviewing the Commissioner's failure to abate interest. Woodral v. Commissioner, 112 T.C. 19, 23 (1999); Krugman v. Commissioner, 112 T.C. 230,239 (1999). In reviewing for an.abuse of discretion, we generally consider only the arguments, issues, and other matters that were raised at the hearing or 10 otherwise brought to the attention of the Appeals 11 Office. See Giamelli v. Commissioner, 129 T.C. 107, 12 13 14 15 16 17 18 19 20 21 22 23 24 25 115 (2007); Tinnerman v. Commissioner, T.C. Memo 2010-150, aff'd, 448 Fed. Appx. 73 (D.C. Cir. 2012). During their Appeals Office hearing, petitioners failed to raise any issues of alleged error or delay in ministerial or managerial acts performed by the IRS, and the record is devoid of any evidence of such acts. Respondent did not abuse his discretion in denying petitioners' request for abatement of interest. Petitioners generally argue that respondent abused his discretion in sustaining the proposed levy because the proposed levy would constitute an economic hardship. Respondent's notice of determination determined that the proposed levy was 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 1 2 3 4 appropriate because petitioners had failed to provide a "denial letter" from their bank that would show the equity they had in their home could not be used to pay off their outstanding tax liabilities. 5 Petitioners have not disputed that their equity in 6 7 8 9 10 11 12 13 14 their home was sufficient to cover the subject tax liabilities. SO DeCaro did not abuse her discretion in sustaining the proposed levy on account of petitioners' failure to provide the requested financial information. See Sullivan v. Commissioner, T.C. Memo 2012-337; see also sec. 301.6320-1(e) (1), Proc. & Admin. Regs. Petitioners' argument that the proposed levy would constitute an economic hardship on account of Ms. Johnson's medical issues is without 15 merit. Petitioners' submitted Form 433-A shows they 16 have health insurance and that their "Out of Pocket 17 Health Care Costs" are $103 per month. Even with 18 19 20 21 these monthly costs, which also include $967 for "Food, Clothing, and Misc." and $1,519 for "Housing and Utilities", petitioners' Form 433-A shows they have $90 more per month in income than expenses. 22 Accordingly, it was not an abuse of discretion for SO 23 24 25 DeCaro to determine that petitioners would not suffer economic hardship and to reject their proposed installment agreement of $25. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Decision will be entered for respondent, sustaining the proposed collection action. This concludes the Court's findings of fact and opinion in this case. 19 (Whereupon, at 4:21 p.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com