TAX COURT OPINION

Case: Clifford E. Clayton & Joy S. Clayton
Docket Number: 28527-13L
Judge: Goeke
Opinion Type: bench
Filed: 07/08/2015
Pages: 14

UNITED STATES TAX COURT WASHINGTON, DC 20217 CLIFFORD E. CLAYTON & JOY S. CLAYTON, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) Docket No. 28527-13 L. ) ) ) ) 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 petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at New Orleans, Louisiana on June 19, 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, an appropriate decision will be entered. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. July 8, 2015 SERVED JUL - 9 2015 Capital Reporting Company 1 2 Bench Opinion by Judge Joseph Robert Goeke June 19, 2015 3 Clifford E. Clayton & Joy S. Clayton v. Commissioner 3 4 5 6 7 8 9 Docket No. 28527-13L 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 10 Opinion shall not be relied upon as precedent in any 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 other case. This opinion is rendered pursuant to Rule 152 of the Tax Court Rules of Practice and Procedure, and rule references hereinafter are to the Tax Court Rules of Practice and Procedure. This opinion is also authorized by Section 7459(b) of the Internal Revenue Code and section references hereinafter are to the Internal Revenue Code unless otherwise noted. This case is before the Court based upon our authority to review timely filed petitions seeking review of Respondent's determinations to proceed with pursuant to Section 6330 (d) . The procedural history of this case includes many taxable years and the Petitioners' previous failure to file income tax returns for those 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 years, which resulted in the criminal prosecution of 2 Petitioner husband for three of the years in 3 4 5 question. In large part the present dispute is related to restitution determined by the District 6 Court following the Petitioner's conviction for 7 8 9 10 11 12 13 14 15 16 17 18 19 20 failure to file income tax returns and the application of that restitution to Petitioner's tax liabilities by the Internal Revenue Service, akëhecgh "W+e PetitionerS hos made various general arguments about the misapplication of the amounts paid through the restitution, and also related to the fact that the restitution was improperly calculated and included amounts that should have been withheld to pay Petitioners' federal income tax liabilities for certain of the periods in question. The issues remaining for resolution at trial are focused on whether Respondent correctly determined an addition to tax under Section 6651(a)(2) for some of the years in question, and 21 whether Respondent's other determinations involving 22 23 24 25 the application of the restitution amounts and other additions to tax and interest computations are correct. We will try to first set forth the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 procedural history as background, so3to better $5 understand the somewhat ambiguous arguments e4- 3 Petitioners ae raised. 4 5 6 7 8 9 The periods for which Respondent is seeking to collect unpaid tax liabilities relative to income tax from the Petitioners is for the years 1998 through 2010. The total liabilities, not including up-to-date interest, exceed $1,178,000. We note initially that the question whether 10 Petitioner Joy S. Clayton is entitled to innocent 11 12 13 14 spouse relief, while initially alluded to before the settlement officer, was not properly raised before the settlement officer and is not properly before this Court. Therefore, we do not consider whether 15 Mrs. Clayton is entitled to any relief under Section 16 17 18 19 20 21 22 6015 in the context of the present matter. We do in addition to addressing the arguments Petitioner has made regarding the underlying liabilities, also address Petitioners' argument regarding the abatement of interest under Section 6404 hereinafter. For most of the years in question 23 Petitioner Clifford E. Clayton worked as a riverboat 24 pilot for the New Orleans Baton Rouge Steamship 25 Pilots Association, hereinafter referred to as the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 Pilots Association. 2 3 4 5 6 Petitioner worked as an independent contractor as a pilot and no withholding amounts were taken from the amounts of income he received as a riverboat pilot. The income he received as a pilot from the 7 Pilots Association was significant and varied from 8 9 10 11 $267,644 in 2004 to $724,304 in the year 2000. Although not initially filing federal income tax returns, Petitioners subsequently did file returns and at a prior hearing regarding Respondent's 12 motion for summary judgment Petitioners made clear 13 14 15 16 17 18 19 20 21 22 23 24 that they were not contesting the determinations of their tax liabilities that Respondent had made, although Petitioners were contesting whether additional interest could be asserted and whether Respondent had properly applied the restitution amounts to offset their tax liabilities. At trial Mr. and Mrs. Clayton asserted that their income tax liabilities were limited by the determinations made by the- District Court regarding the restitution amount, as affirmed by the Court of Appeals for the Fifth Circuit. We will address those arguments 25 hereinafter. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 In February of 2008 the United States prosecuted Mr. Clayton under Section 7203 for willful failure to file federal income tax returns for the years 1999, 2000 and 2001. In March, 2008 Mr. 5 Clayton pled guilty to these charges. He was 6 7 8 9 sentenced on March 4th, 2009. He subsequently was ordered to be incarcerated for 18 months and to pay restitution in the amount of $608,727. After his incarceration Mr. Clayton 10 resigned his position as a riverboat pilot with the 11 Pilots Association, and assumed inactive status. As 12 13 14 15 16 a result he received roughly $15,000 per month from the Pilots Association as opposed to the prior income amounts he had received. In May of 2009 the United States represented by the Department of Justice, applied for 17 writs of garnishment to be issued to the Pilots 18 Association and PanAmerican Life Insurance to collect 19 20 21 22 23 24 25 the restitution award. The District Court granted the United States' application for these writs of garnishment on May 20th, 2009. Mr. Clayton objected to the garnishment and subsequently argued that the garnishment amounts were exempt from income seizure because they were retirement funds. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 He brought these arguments pursuant to Section 6334(a)(9) and Title 15, U.S.C., Section 1673(a)(1). The District Court overruled Mr. 4 Clayton's objections to the writs of garnishment and 5 6 7 8 9 held that the restitution constituted a debt due for any state or federal tax, and was exempt from the provisions of Title 15, U.S.C., Section 1673(b)(1)(c). Mr. Clayton appealed the determination of 10 the District Court and on September 28th, 2010 the 11 United States Court of Appeals for the Fifth Circuit 12 13 14 affirmed the District Court's order and the rationale of the District Court. Between April, 2009 and March of 2012, the 15 District Court received $608,727 from the Petitioners 16 17 18 19 and the garnishment parties. On April 24th, 2012 the last of these funds was disbursed to Respondent and applied to the Petitioner's tax liabilities. On June 22nd, 2010 Respondent sent to the 20 Petitioners a notice of lien filing and right to 21 22 collection due process hearing for the years 1998 through 2004 and 2006 through 2008. At that time the 23 Petitioners did not request a collection due process 24 25 hearing and the lien filing was not altered. On July 9th, 2010 Petitioner submitted a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 Form 433-A dated June 29th, 2010. On July 20th, 2010 Respondent classified Petitioners tax liability accounts for the years 1998 through 2004 and 2006 through 2008 as currently not collectable. On November 28th, 2011 Respondent classified 6 Petitioners accounts for the years 1998 through 2004 7 8 and 2006 through 2008 as collectable. On April 23rd, 2012 Respondent sent 9 Petitioners a notice of intent to levy and a notice 10 11 12 13 14 15 of your right to a hearing regarding outstanding income tax liabilities for the years 1998 through 2004 and 2006 through 2010. On May 22nd, 2012 the Petitioners submitted a Form 12153, request for collection due process hearing, relative to this levy activity associated 16 with Respondent's notice of April 23rd, 2012. 17 18 19 20 21 22 23 24 On May 3rd, 2012 Respondent sent Petitioners a notice of federal tax lien filing and your right to a hearing under IRC Section 6320 regarding the collection of Petitioners outstanding income tax liabilities for the years 2009 and 2010. On June 11th, 2012 Petitioner submitted a Form 12153 regarding DistriuL lien filing. Subsequently on June 20th, 2012 Respondent classified 25 Petitioner's accounts for the years 1998 through 2004 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 and 2006 through 2010 as currently not collectable. A settlement officer was assigned to review 3 Petitioners' situation on April 16th, 2013 and the 4 5 6 7 8 9 10 11 12 13 14 settlement officer and the Petitioners exchanged correspondence. On November 6th, 2013 after the settlement officer completed her determination, Respondent issued a notice of determination concerning collection action under Section 6320 and/or 6330, hereinafter referred to as the notice of determination. This notice of determination addressed income tax liabilities of the Petitioners for the years 1998 through 2004 and 2006 through 2010. 15 Petitioners then filed a petition in this Court in a 16 17 timely fashion on December 5th, 2013. After the case was docketed before this 18 Court, Respondent filed a motion for summary judgment 19 20 21 22 23 24 25 and a hearing was held regarding that motion. After that hearing the Court issued an order dated October 2nd, 2014 which included the following language, in relationship to instructions to the Petitioners, "Specifically list the items in Respondent's computation that are incorrect, including his assertions that the remediation payments were not 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 properly allocated to his liabilities and refer to each such allocation." Petitioners failed to specifically respond to the Court's instruction relative to addressing any errors in Respondent's allocation of the remediation amounts, and the Court subsequently ordered that the specific allocation of those amounts could no longer be challenged by the Petitioner. Thus the trial of the case was focused on the issues previously described as the actual allocations made by the Respondent subsequent to the remediation payments bean received by Respondent from the Department of Justice are no longer at issue. We will first address Petitioners' generic arguments that the District Court's determination of the remediation amount limits the tax liability which Respondent can now collect. We note that the restitution determination is part of a criminal proceeding and a sanction related to that proceeding. It is not res judicata regarding the amount of civil liability and it's not a determination of the amount of civil liability. It has long been held by the Supreme Court and adopted by the Fifth Circuit Court of Appeals 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 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 Capital Reporting Company that sanctions in the civil case are not considered criminal penalties. Bickham, Lincoln-Mercury, Inc., v. United States, 168 F.3dx 790 (Fifth Circuit 1999) 72 citing Helvering v. Mitchell, 303 U.S. 391 (1938). 12 We also note that Title 26, U.S.C., Section 7203, does not require the District Court to determine a defendant's exact civil tax liability in the context of finding guilt for failure to file CL federal income tax return. Although in its analysis of Mr. Clayton's arguments on appeal the Fifth Circuit addressed his concerns about the garnishment of retirement amounts in the context of payments of tax, this was in the context of both the District Court's and the Court's of Appeals recognition that the restitution amounts would be used to offset the federal income tax liability, not a determination that the amount of the restitution was res judicata as to the entire amount of the tax liability, including interest and additions to tax, which might subsequently be determined in a civil case following the criminal case. Mr. Clayton offered us no convincing argument otherwise; and, therefore, we hold that his arguments that interest and the overall liabilities 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 cannot exceed the restitution amount is invalid. We will address, however, specific aspects of the liability, as it is noteworthy that 4 Petitioners did not receive a notice of deficiency 5 6 7 8 9 10 11 12 13 14 15 16 and they are entitled to have the liability considered in the context of the present collection due process case, including the liability for failure to pay under Section 6651(a)(2). Respondent knows that this is an issue and Respondent argues that there was no reasonable basis on which Petitioners failed to pay the tax liabilities in question for the years 2009 and 2010. This question turns on whether Mr. and Mrs. Clayton had sufficient funds to pay those liabilities timely in the years 2009 and 2010. We note that Mr. Clayton became incarcerated in 2009 and remained incarcerated 17 until August of 2010. 18 19 20 21 22 23 24 25 We also note that his retirement amounts were the subject of garnishment as a result of the restitution determination made by the District Court as previously described. Mr. Clayton testified that the only other amounts that might have been used to pay the tax liability would have required indebtedness which he and Mrs. Clayton were not in a position to repay. We 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 believe that this testimony was credible and we do find that there was reasonable cause for the 3 Petitioners to fail to timely pay in the years 2009 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and 2010, relative to this income tax liabilities for those two years, and that therefore we do not sustain the failure to pay penalty. However, in all other respects for the reasons described and for the Petitioners failure to raise any specific objections, we sustain the determinations that underlie Respondent's collection activity, including the addition to tax under Section 6654. Except in very limited circumstances not applicable in this case, as described in Section 6654(e)(3) (b), Section 6654 provides no exception for reasonable cause. Mendes v. Commissioner, 121 T.C. 308, 323 (2003). Therefore, we sustain the addition to tax under Section 6654 as asserted for the years in question, as well as all other amounts except for the failure to pay penalty for the years 2009 and 2010. Given our determination a decision will be entered in which we note the additions to tax for failure to pay for the two years in question, which has been asserted and assessed by the Respondent. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 7 8 And those amounts will be noted as amounts Respondent may not collect. However, they are relatively small amounts considering the overall liability and but for those amounts we will sustain Respondent's determination to proceed with collection activity, as we believe the settlement officer properly weighed the interest of the Government to collect4en the underlying liabilities with the imposition upon the 9 Petitioners necessary to collect those liabilities. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 11:15 a.m., the above-entitled matter was concluded.) 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.Capita1ReportingCompany.com