TAX COURT OPINION

Case: Cresencia Deleon Banzuela
Docket Number: 170-14L
Judge: Holmes
Opinion Type: bench
Filed: 03/13/2015
Pages: 14

UNITED STATES TAX COURT WASHINGTON, DC 20217 CRESENCIA DELEON BANZUELA, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) Docket No. 170-14L. ) ) ) ORDER 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Mark V. Holmes at Los Angeles, California, on February 24, 2015, 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, a decision will therefore be entered for Respondent in this case. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. March 13, 2015 SERVED MAR 1 3 20f5 Capital Reporting Company 1 Bench Opinion by Judge Mark V. Holmes 2 Cresencia Deleon Banzuela v. Commissioner 3 3 Docket No. 170-14L 4 February 24, 2015 5 In the case of Cresencia Deleon Banzuela, 6 Docket Number 170-14L, the Court has decided to 7 8 render oral findings of fact and opinion, and the following is the Court's oral findings of fact and 9 opinion: 10 This bench opinion is made pursuant to the 11 authority granted by Section 7459(b) of the Internal 12 Revenue Code of 1986, as amended, and Rule 152 of the 13 Tax Court's Rules of Practice and Procedure. 14 The background facts in this case are a 15 little bit complicated. Dr. Banzuela is an M.D. who 16 practices through an S corporation. Most of the 17 relevant facts in this case begin in the 2004 tax 18 year, when Dr. Banzuela's S corporation adopted a 19 single-employer welfare benefits plan. 20 This plan operated between 2004 and 2006, 21 taking deductions for contributions to a plan. The 22 plan provided -- such plans were promoted heavily to 23 small businesses and professionals at that time. 24 The operation of the plan is somewhat 25 complicated, but the gist of it was that it allowed - (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 - or purported to allow -- current deductibility at the corporation level, which then would reduce the income tax owed by the owner of the corporation. The contributions would then go to purchase life insurance policies, which would generate tax- free income payable to the beneficiary upon death, typically, the idea being that you get a deduction for paying what was in essence a personal expense. The IRS caught wind of this in the middle 10 part of the last decade and put an end to it in IRS 11 Notice 2007-83 in November of 2007. Dr. Banzuela's S 12 corporation, once she learned of this IRS notice, 13 immediately did the right thing and quickly 14 terminated the plan. 15 The problem for her, however, is that the 16 single-employer welfare benefit plans became listed I 17 18 transactions. Listed transactions is a term of art under the Code, and in 6707A of the Code, Congress 19 has decided to impose a penalty on "any person who 20 fails to include on any return or statement any 21 information with respect to a reportable transaction 22 which is required under section 6011 to be included 23 with such return or statement." IRC section 24 6707A(a). 25 The amount of this penalty is substantial; (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 1 2 it's 75 percent of the decrease in tax shown on the return as a result of the transaction. And 6707A(c) . 5 3 defines reportable transaction to mean "any 4 5 6 7 transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type 8 which the Secretary determines is having a potential 9 for tax avoidance or evasion." 10 That, of course, is precisely what the 11 Secretary here did in November of 2007 by issuing his 12 notice. 13 Now, the key fact or the key consequence of 14 becoming a lis transaction is that those who engage 15 in that transaction have to report it. This is done 16 on an IRS form called Form 8886, and Dr. Banzuela's S 17 corporation did timely report, on a Form 8886 that 18 was attached to the S corporation's return, its 19 participation in this listed transaction. 20 Also for the 2007 year the S corporation 21 took no deductions although it had made contributions 22 before the IRS notice came out. 23 However -- and this is the utterly key fact 24 in this case -- Dr. Banzuela, on her individual 25 return, did not attach a Form 8886. In other words, (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 6 1 2 3 4 she was not reporting her participation in a reportable transaction. The IRS then audited her for her 2006 through 2008 tax years and, most importantly here, on 5 March 17, 2011, assessed a 6707A penalty of over 6 7 $65,000 against her. How, one might ask, does the IRS assess a 8 penalty while somebody is still under audit? The 9 answer for this question is in section 6671(a), which 10 provides that "the penalties and liabilities provided 11 by this subchapter, which includes 6707A, shall be 12 paid upon notice and demand by the Secretary and 13 shall be assesseg and collected in the same manner as oL taxes." 14 15 What this means is that the usual rule that 16 the IRS has to give a taxpayer a notice of deficiency 17 does not apply with regard to 6707A penalties; they 18 go straight into the IRS's records as a liability, 19 and the IRS can then begin to collect. 20 Well, that of course is what the IRS 21 immediately began to do with Dr. Banzuela's penalty, 22 and in August of 2011 -- August 8 of 2011, to be 23 precise -- it sent her a final notice of intent to 24 levy to collect this rather extraordinary penalty. 25 However, Dr. Banzuela did not request a (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 1 collection due process hearing when she got that 2 notice of intent to levy. Meanwhile, that summer her 7 3 audit of the '06, '07, and '08 years ended with no 4 deficiency determination being found for the 2007 5 6 7 8 year, though there were some income changes as well as a penalty under 6662(a) for the '06 year. She still had not paid the 6707A penalty that had been assessed a few months before, and the 9 next year, in July of 2012, the IRS sent a notice of 10 filing of a federal tax lien. This is another means 11 that the IRS has to collect overdue taxes. 12 In response to this notice, Dr. Banzuela 13 did request a collection due process hearing under 14 section 6320. Her grounds for doing so were "the 15 basis of civil penalty had been satisfied by final 16 agreement and the IRS filed lien prematurely and did 17 not follow procedures." I 18 A little bit of fractured English, but the 19 gist of it was that she was challenging the IRS's 20 procedures and, mostly importantly, challenging her 21 liability for this penalty in the first place. 22 She had her collection due process hearing 23 before the IRS in 2012 and 2013, and it culminated in 24 a notice of determination in December of 2013 that 25 rejected her ability to challenge her liability for (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 8 1 the 6707A penalty because she had previously had an 2 opportunity to challenge that penalty when she got 3 her notice of intent to levy and did not ask for a 4 collection due process hearing at that time. 5 6 She filed a timely petition in response to this notice of determination from the IRS and in that 7 petition she made two basic arguments: One is that 8 she didn't owe the penalty; after all, in 2007 she 9 hadn't taken any deductions, and she had disclosed 10 the plan at least at the S corp level, and also that 11 the statute of limitations had run out on assessment, 12 because her agreement with the IRS did not apply to 13 this particular penalty, which had been assessed 14 before the conclusion of her audit. 15 My standard of review here, where the 16 underlying tax liability is properly at issue, is to 17 18 19 review the administrative determination regarding that underlying liability on a de novo basis. And more importantly here, since the first 20 question I have to answer is whether the underlying 21 tax liability is at issue, the question of whether 22 the appeals officer's determination that the 23 underlying tax liability can be challenged is also 24 subject to the de novo standard of review. See Sego 25 v. Commissioner, 114 T.C. 604, 610 (2000). (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company So to be clear, my standard here is de novo 9 on the specific question of whether Dr. Banzuela is 1 2 3 precluded from challenging her underlying tax 4 5 6 7 8 9 liability, as the appeals officer found. Dr. Banzuela's argument is tied to the readings of the documents in her case and the construction of the reportable transactions regulations, but the problem here is that she did get this notice of intent to levy first; that was the 10 only question asked of her by the Court at trial. 11 And she did not challenge that notice of intent to levy. 12 13 There is a regulation on point here, 26 14 C.F.R. section 301.6320-1(e)(3)Q-E7"What issues may a 15 taxpayer raise in a CDP hearing under section 6320 if 16 the taxpayer previously received notice under section 17 6330 with respect to the same tax and tax period and 18 did not request a CDP hearing with respect to that 19 notice?" 20 That is precisely the situation that Dr. 21 Banzuela finds herself in, having got one of these 22 section 6330 notices of intent to levy before she got 23 her notice of the filing of the federal tax lien 24 notice under section 6320. 25 Well, the regulations go on with an answer (866) 448 - DEPO www.Capita1ReportingCompany.com 2015 Capital Reporting Company 10 1 to this question. "The taxpayer may raise 2 appropriate spousal defenses, challenges to the 3 appropriateness. of the NFTL filing,. and offers of 4 collection alternatives. The existence or amount of 5 6 7 8 9 the underlying liability for any tax period specified in the CDP notice may be challenged only if the taxpayer did not have a prior opportunity to dispute the tax liability. "If the taxpayer previously received a CDP 10 notice under section 6330 with respect to the same 11 tax and tax period and did not request a CDP hearing 12 with respect to that earlier CDP notice, the taxpayer 13 had a prior opportunity to dispute the existence or 14 amount of the underlying tax liability." 15 The language here speaks for itself in the 16 regulation and precludes Dr. Banzuela from arguing 17 that she doesn't owe the 6707A penalty in this case. 18 But we've said that the language means what 19 the language says in our own cases previously. For 20 instance, see Daniel v. Commissioner, T.C. Memo 2009- 28 at *4. 21 22 Now, it's true that the appeals officer did 23 go in at some length to rebut the arguments that Dr. 24 Banzuela made during the CDP hearing about her 25 liability for the 6707A penalty, but we've also held (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 11 1 2 3 4 -- and there is again a regulation that addresses this situation -- that when an appeals officer tries to explain to a taxpayer why he or she is losing a case on the merits, even when the appeals officer has 5 decided that the merits don't have to be addressed 6 7 because somebody has had an opportunity to challenge the underlying tax liability before, that does not 8 give us at the Tax Court jurisdiction to review those 9 merits. 10 11 Here the relevant regulation is 26 C.F.R. section 301.6320-1(e)(3)Q-E11. "If an appeals 12 officer considers the merits of taxpayer's liability 13 in a CDP hearing when the taxpayer had previously 14 received...an opportunity to dispute the liability 15 prior to the NFTL, will the appeals officer's 16 determination regarding those liability issues be 17 18 considered part of the notice of determination? "Answer. No. Even if a decision 19 concerning such precluded issues is referred to in 20 the notice of determination, it is not reviewable 21 by...the Tax Court because the precluded issue is not 22 properly part of the CDP hearing." 23 And we held that this regulation means what 24 it says in a case called Behling v. Commissioner, 118 25 T.C. 572, 579 (2002), in which we concluded, "We hold (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 12 1 in this case that Respondent's decision to permit 2 Petitioner to offer information at the appeals office 3 hearing relevant to the existence or amount of his 4 underlying tax liability did not result in a waiver 5 6 7 by Respondent of the restrictions set forth in section 6330 (c) (2) (B) . So my conclusion is that on this part of 8 Dr. Banzuela's case, preclusion does apply, and she 9 has no ability to challenge in this case on appeal to 10 Tax Court the underlying tax liability that the IRS 11 assessed against her under section 6707A. 12 Now, there is one possible exception to 13 this rule of preclusion, and this is the second 14 section of the analysis. Under section 6330(c)(1), 15 made applicable to lien hearings by section 6320, I 16 there is a requirement that the appeals officer 17 verify "the requirements of any applicable law or 18 administrative procedure have been met. " 19 It is possible that the includes the rules 20 regarding the statute of limitations. See Freije v. 21 Commissioner, 125 T. C. 14, 36 (2005) , in which we 22 held that an opportunity to dispute liability doesn't 23 cure an assessment that was otherwise invalid. 24 I'll assume here that an assessment in 25 violation of the relevant statute of limitations is (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 13 1 2 3 4 5 6 7 invalid in this context where an assessable penalty is involved, so that even if that applies here, there's a problem for Dr. Banzuela. Remember that she and her husband filed a timely return for their '07 tax year on April 15, 2008. That means that under 6501(a), the statute of limitations ran, assuming it's not a weekend or 8 holiday, on April 15, 2011. The assessment of the 9 penalty under 6707A was made on March 17, 2011. 10 Now, she cites to section 6501(c)(10). 11 That section, 6501(c) (10), states "if a taxpayer 12 13 fails to include on any return or statement for any taxable year any information with respect to a listed 14 transaction as defined in section 6707A(c) (2), which 15 is required under section 6011 to be included with 16 such return or statement, the time for assessment of 17 18 any tax imposed by this title with respect to such transaction shall not expire before the date which is 19 one year after the earlier of, A, the date on which 20 the Secretary is furnished the information so 21 required or, B, the date that a material advisor 22 meets the requirements of section 6112 with respect 23 to a request by the Secretary under section 6112 (b) 24 relating to such transaction with respect to such 25 taxpayer." (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company The problem with even approaching and 14 trying to construe this somewhat hard-to-understand language in dealing with the facts that we're 1 2 3 4 presented in the pretrial memo and, in part, in the 5 stipulation in this case is the phrase in section 6 6501(c)(10) that the statute of limitations "shall 7 not expire before the date" which is one year after 8 9 the two possibilities here. That rings a bell. This language occurs in 10 other sections of the Code, and what it means is not 11 that the statute of limitations for failure to report 12 13 14 a listed transaction is shrunk to one year, so that somebody who is assessed,the penalty within the three-year normal statute of limitations can 15 successfully claim protection of a shrunken statute 16 of limitations. 17 Instead, what the phrase "shall not expire 18 before the date which is one year" means is that the 19 IRS gets the benefit of an extension of the statute 20 of limitations, so that even if the three-year period 21 has run, they still can wait until up to one year 22 after the two events listed in 6501(c)(10). 23 24 This was determined in the partnership tax context in a very important case called Rhone-Poulenc 25 Surfactants v. Commissioner, 114 T.C. 533, 542 (866) 448 - DEPO www.CapitalReportingCompany.com 2015 Capital Reporting Company 15 1 2 3 4 5 (2000), in which we construed that identical phrase to mean exactly what I said it is here, which is it serves at most as an extension of the statute of limitations for assessment, not a contraction. And here of course Dr: Banzuela, as I had 6 already said, was assessed this penalty within the 7 8 9 normal three-year statute, so she does not win on that issue either. Decision will therefore be entered for 10 Respondent in this case. This concludes the Court's 11 oral findings of fact and opinion. (Whereupon, at 10:51 a..m., the above- entitled matter was concluded.) 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2015