TAX COURT OPINION

Case: Phillip S. Katz & Beverly L. Katz
Docket Number: 13587-16SL
Judge: Leyden
Opinion Type: bench
Filed: 12/15/2017
Pages: 19

UNITED STATES TAX COURT WASHINGTON, DC 20217 PA PHILLIP S. KATZ & BEVERLY L. KATZ, Petitioners, v. ) ) ) ) Docket No. 13587-16SL. COMMISSIONER OF INTERNAL REVENUE, 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 herewith to Petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Special Trial Judge Diana L. Leyden at Tampa, Florida, on November 27, 2017, containing her oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. Dated: Washington, D.C. December 15, 2017 (Signed) Diana L. Leyden Special Trial Judge SERVED Dec 15 2017 1 2 Bench Opinion by Special Trial Judge Diana L. Leyden November 28, 2017 3 Phillip S. Katz and Beverly L. Katz v. Commissioner of I 3 4 5 6 7 8 9 Internal Revenue Docket No. 13587-16SL I. 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 10 OPINION. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT 11 BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. See Rule 12 13 14 152(c), Tax Court Rules of Practice and Procedure. II. This proceeding was heard as a Small Tax Case 15 pursuant to the provisions of section 7463 of the Internal 16 Revenue Code, as amended, and Rules 170 through 175 of the 17 18 19 Tax Court Rules of Practice and Procedure. III. This bench opinion is made pursuant to the 20 authority granted by section 7459(b) of the Internal 21 Revenue Code, as amended, and Rule 152 of the Tax Court 22 Rules of Practice and Procedure. 23 24 25 Hereinafter in this bench opinion and unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, in effect at all cribers (973)406-2250|operations@escribersmet|www.escribers.net 4 relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. The Court uses the term "Internal Revenue Service " or "IRS" to refer to administrative actions taken outside of these proceedings. The Court uses the term "respondent" to refer to the Commissioner of Internal Revenue, who is the head of the IRS and is respondent in this case, and to refer to actions taken in connection with this case. IV. On June 13, 2016, petitioners filed a petition 1 2 3 4 5 6 7 8 9 10 11 12 to review IRS' Notice of Determination Concerning 13 Collection Action(s) Under Section 6320 and/or 6330 14 15 16 17 18 (notice of determination). The notice of determination sustained a notice of Federal tax lien filing with respect to petitioners' unpaid 2011 tax liability. This case is now before the Court on respondent's Motion for Summary Judgment (motion), filed 19 November 9, 2016, pursuant to Rule 121, and supported by a 20 declaration by Kristine Padua, IRS Office of Appeals 21 22 23 (Appeals Office) settlement officer. In his motion respondent states that petitioners object to the motion. By order dated November 17, 2016, the Court directed 24 petitioners to file a response, if any, to respondent's 25 motion by December 8, 2016. Petitioners did not file a (973)406-2250|operati ns@escriberonet|.ww escribetsmet 5 response. 1 2 By order dated August 2, 2017, respondent's 3 motion was set for a hearing in Tampa, Florida, on 4 5 6 7 8 9 10 11 November 27, 2017. The hearing was conducted as scheduled. Mark J. Tober appeared on behalf of respondent and argued in support of the motion. Petitioners appeared on their own behalf and opposed it. The Court has reviewed the motion, the declaration in support of the motion, the documents attached to the motion and declaration, and the parties' testimony at the hearing. The Court is satisfied that the 12 material facts in this case are not in dispute. For the 13 14 reasons summarized below, the Court concludes that respondent is entitled to a decision sustaining the notice 15 of Federal tax lien filing with respect to petitioners' 16 unpaid 2011 tax liability. 17 18 19 20 21 Petitioners resided in Florida at the time they filed the petition with the Court. V. Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. 22 Florida Peach Corp. v. Commissioner, 90 T.C. 678, 681 23 (1988). Either party may move for summary judgment upon 24 all or any part of the legal issues in controversy. Rule 25 121(a). The Court may grant summary judgment only "if the (973)406-2250|operati ns@escribersmet|www.escribers.net 1 6 pleadings, answers to interrogatories) depositions, admissions, and any other acceptable materials, together with the affidavits or declarations, if any, show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law." Rule 121(a) and (b); see Naftel v. Commissioner, 85 T.C. 527, 529 (1985). Respondent, as the moving party, bears the burden of proving that no genuine dispute exists as to any 1 2 3 4 5 6 7 8 9 10 material fact and that respondent is entitled to judgment 11 12 13 as a matter of law. See FPL Group, Inc. v. Commissioner, 115 T.C. 554, 559 (2000); Bond v. Commissioner, 100 T.C. i 32, 36 (1993); Naftel v. Commissioner, 85 T.C. at 529. In 14 deciding whether to grant summary judgment, the factual 15 materials and inferences drawn from them must be 16 considered in the light most favorable to the nonmoving 17 party. FPL Group, Inc. v. Commissioner, 115 T.C. at 559; 18 Bond v. Commissioner, 100 T.C. at 36; Naftel v. 19 Commissioner, 85 T.C. at 529. The party opposing summary 20 judgment must set forth specific facts which show that a 21 question of genuine material fact exists and may not rely 22 merely on allegations or denials in the pleadings. Rule 23 24 25 121(d); Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986); Grant Creek Water Works, Ltd. v. Commissioner, 91 T.C. 322, 325 (1988); King v. Commissioner, 87 T.C. 1213, cribers (973)406-2250|operations@escriberonet[www.escnbers.net 7 1217 (1986); Shepherd v. Commissioner, T.C. Memo. 1997- 555, 1997 Tax Ct. Memo LEXIS 645, at *7. Where the record viewed as a whole could not lead a reasonable trier of fact to find for the nonmoving party, there is no "genuine issue for trial". Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). VI. The following material facts are not in dispute. A. Underlying Tax Liability for 2011 Petitioners timely filed a Federal individual income tax return for 2011. In that tax return they reported an overpayment. The IRS, under its Automated Underreporter (AUR) program, subsequently issued petitioners a notice of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 deficiency dated May 12, 2014. In the notice of 16 deficiency the IRS proposed a deficiency but did not 17 propose any additions to tax or penalties. The proposed 18 deficiency stemmed from loans that petitioners took from a 19 single premium whole life insurance policy (policy) but 20 did not repay. Petitioner husband bought the policy by 21 22 paying a single premium of $30,000. The policy's insured value was $130,000. Petitioners took loans from the 23 policy totaling $56,000 to pay for their children's 24 tuition and petitioners' business expenses. It was 25 petitioners' understanding that they did not have to repay cribers 73)406-2250|operations@escribersmet|www.escribers.net 8 1 2 3 4 5 the loans. However, they later received correspondence from the insurance company that led them to decide to allow the policy to lapse, rather than repay the loans. The insurance company reported the unpaid loans with accrued interest as deemed distributions on a Form 1099-R, 6 Distributions From Pensions, Annuities, Retirement or 7 8 9 10 11 12 Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Petitioners did not report the deemed distributions on their 2011 tax return. Petitioners did not file a petition for redetermination of the deficiency. Petitioners contacted several functions within the IRS in hopes of finding out 13 why the IRS had proposed the deficiency. Petitioners 14 15 16 17 testified at the hearing that they did not understand the IRS letters and notices and never felt as though they received any explanation from the IRS concerning the proposed deficiency. After the time for filing a petition 18 with respect to the notice of deficiency had expired, the 19 IRS assessed an additional tax and interest for 2011 on 20 November 24, 2014. That same day the IRS mailed a notice 21 22 and demand for payment letter to petitioners for the assessments. Petitioners did not make any payments for 23 the unpaid 2011 tax liability. 24 25 At various times thereafter petitioners filed amended tax returns for 2011, but the IRS disallowed all BEEll (#73)406-2250loperations@escribersaletlwww.escribers.net 9 of the claims. On March 17, 2015, the IRS issued a Notice of Intent to Levy with respect to the unpaid 2011 tax liability. Petitioners did not request a collection due process (CDP) hearing to challenge that proposed levy. That proposed levy is not at issue in this case. B. Notice of Federal Tax Lien Filing and Request for CDP Hearing On December 15, 2015, the IRS issued a notice of Federal tax lien filing with respect to petitioners' unpaid 2011 tax liability. Petitioners subsequently filed a Form 12153, Request for a Collection Due Process or 1 2 3 4 5 6 7 8 9 10 11 12 Equivalent Hearing, in which they challenged the filed 13 notice of Federal tax lien. Petitioners checked the box 14 15 16 17 18 19 to request an equivalent CDP hearing but the record shows, and respondent does not dispute, that petitioners' Form 12153 was timely filed with the IRS. In the Form 12153 petitioners requested an installment agreement as a collection alternative and a lien withdrawal. In the "other" section petitioners 20 wrote: "I did not [r]eceive the income shown on the 21 original 1099 * * * and [t]herefore do not feel I should 22 pay tax on money my wife and I never [r]eceived." 23 C. CDP Hearing 24 25 Petitioners' CDP hearing request was assigned to settlement officer Kristine Padua (SO), who confirmed she (973)406-2250|operations@escribershet|www.escribersnet 10 1 2 3 4 5 6 7 8 9 did not have prior involvement with petitioners for the tax and tax year at issue in this CDP case. Before the CDP hearing, the SO verified that a proper assessment was made for 2011, that the notice and demand for payment letter was mailed to petitioners at their last known address, and that there was a balance due for 2011 when the notice of Federal tax lien was filed. The SO also verified that the notice of deficiency for 2011 was issued to petitioners at their last known address when it was 10 issued. 11 12 On March 30, 2016, the SO mailed petitioners a letter in which she scheduled a telephone CDP hearing for 13 May 3, 2016. In that letter the SO requested that 14 petitioners submit (1) a Form 433-A, Collection 15 16 17 18 19 20 21 22 Information Statement for Wage Earners and Self-Employed Individuals, (2) verification of income, (3) statements from a lending institution for all automobile and home loans petitioners were obligated to pay or rental/lease agreement if petitioners rented, (4) utility bill statements for the preceding three months, (5) documentation if their out-of-pocket health expenses exceeded $60, and (6) a signed copy of their 2015 tax 23 return or proof of a timely request for an extension for 24 the 2015 tax return. The SO requested this documentation 25 before April 20, 2016, in order to consider collection (973)406-2250|operations@escriberonet I www.escribers.net 11 1 2 3 4 5 6 7 8 9 alternatives during their scheduled CDP hearing. A telephone CDP hearing was held on May 4, 2016, after being rescheduled because petitioners were unaware and unprepared for the originally scheduled CDP hearing. The SO and petitioner husband participated in the CDP hearing. During the CDP hearing, the SO notified petitioner husband that petitioners could not raise the underlying tax liability for 2011 because they had a prior opportunity to dispute it when the notice of deficiency 10 was issued. Petitioner husband agreed that petitioners 11 12 13 14 15 had a prior opportunity to dispute the underlying tax liability but nonetheless raised the issue because he did not believe the deemed distributions were taxable. Petitioner husband also requested placement in currently not collectible status. The SO informed 16 petitioner husband where petitioners could download the 17 18 19 20 21 22 23 Form 433-A, reviewed it with him, and requested bank statements for the preceding three months and proof of income and expenses. The SO requested that a Form 433-A and documentation be sent to her by May 18, 2016. Petitioners sent the SO a letter dated May 10, 2016. In that letter petitioners confirmed they submitted a completed Form 433-A and bank statements for the 24 preceding three months. Petitioners also stated in that 25 letter that they were both retired and living on a limited (973)406-2250|operations@escribersnetlwww.escribers.net 12 1 2 3 4 5 6 7 8 9 fixed income with a small reserve for emergencies, that the collection action would cause severe financial hardship, that petitioner wife had disabling health issues, that petitioner husband was a disabled veteran, and that their divorced daughter had been diagnosed with breast cancer and had lost her employment and would require their financial assistance to meet her living expenses. Petitioners requested placement in currently not collectible status due to their financial hardship. 10 Petitioners also continued to dispute the tax assessment 11 arising from the deemed distributions from the policy. 12 13 14 15 The SO reviewed the Form 433-A and documentation and determined that petitioners had funds in their bank accounts and in investment accounts that could fully pay the 2011 tax liability. The SO also determined that 16 (cid:16)060w.payees'monthly income exceeded their monthly expenses 17 18 19 by $198, an amount she referred to as disposable monthly income. On May 11, 2016, the SO discussed her findings 20 with petitioner husband, who stated that he did not want 21 22 to withdraw funds from the IRA because of his financial circumstances and he would not have anything to live on. 23 The SO offered petitioner husband a tiered installment 24 agreement whereby petitioners would begin making payments 25 of $198 per month for the first year and then increase the (973)406-2250|operationseescritersmet|www.escribers et 1 monthly payment over time. Petitioner husband stated that 13 2 3 4 5 6 7 8 9 10 11 12 13 he could not later increase the monthly payment above $198 per month. D. Notice of Determination On May 23, 2016, the Appeals Office issued the notice of determination, sustaining the notice of Federal tax lien filing. The notice of determination stated that the Form 433-A reflected that petitioners had sufficient funds in bank accounts and equity in their investment accounts to pay the 2011 tax liability. It also stated that petitioners' monthly income exceeded their monthly expenses by $198. Petitioners timely filed a petition with this 14 Court for review of the notice of determination. In their 15 petition, petitioners argued that the SO did not take into 16 account their then-existing and future hardship. 17 Petitioners also continued to challenge the underlying tax 18 19 20 liability for 2011. VII. Section 6321 imposes a lien in favor of the 21 United States on all property and rights to property of a 22 23 taxpayer where there exists a failure to pay any tax liability after demand for payment. The lien generally 24 arises automatically at the time assessment is made. Sec. 25 6322. Section 6323(a), however, provides that the lien cribers (973)406-2250|operations@escribersnet|vanescribers.net 14 shall not be valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until the Commissioner files a notice of Federal tax lien with the appropriate public officials. Section 6320 sets forth procedures applicable to afford protections for taxpayers upon the filing of a notice of Federal tax lien. Section 6320(a)(1) establishes the requirement that the Commissioner notify in writing the taxpayer 1 2 3 4 5 6 7 8 9 10 described in section 6321 of the filing of a notice of 11 Federal tax lien under section 6323. This notice required 12 13 by section 6320 must be sent not more than five business days after the notice of Federal tax lien is filed and 14 must advise the taxpayer of the opportunity for 15 administrative review of the matter in the form of a CDP 16 hearing before the Appeals Office. Sec. 6320(a)(2)(C), 17 18 19 (3). If a CDP hearing is requested, section 6320(b) and (c) grants the taxpayer the right to a fair hearing 20 before an impartial Appeals Office officer, generally to 21 22 be conducted in accordance with the procedures described in section 6330(c), (d), and (e). At the CDP hearing the 23 Appeals Office officer conducting the hearing must verify 24 that the requirements of any applicable law or 25 administrative procedure have been met. Sec. 6330(c)(1); 73)406-2250|operations@escribersmet|wwwescribersnet 15 see sec. 6320(c). The taxpayer may raise at the hearing "any relevant issue relating to the unpaid tax", including appropriate spousal defenses, challenges to the appropriateness of the collection action, and offers of collection alternatives. Sec. 6330(c)(2) (A); see sec. 6320(c). Within 30 days after the Appeals Office issues a notice of determination the taxpayer may appeal the determination to the Court. Sec. 6330(d)(1); see sec. 6320(c). In reviewing an IRS administrative determination in a CDP case if the underlying tax liability is properly in dispute, the Court reviews the issue de novo. Goza v. 1 2 3 4 5 6 7 8 9 10 11 12 13 Commissioner, 114 T.C. 176, 181-182 (2000). The Court 14 15 reviews all other determinations for abuse of discretion. Id. at 182. 16 A. Underlying Tax Liability 17 18 19 Respondent argues that petitioners may not challenge the underlying tax liability for 2011 because they received a notice of deficiency and therefore had a 20 prior opportunity to challenge the underlying tax 21 22 23 liability. There are not any issues of material fact as to this issue. Taxpayers may challenge the existence or amount 24 of their underlying tax liability in a CDP hearing only if 25 they did not receive a notice of deficiency or otherwise (973)406-2250|operations@escriberssnet|www.escribers.net 16 1 2 3 4 5 6 7 8 9 have a prior opportunity to contest the underlying tax liability. Sec. 6330(c)(2) (:B); see Montgomery v. Commissioner, 122 T.C. at 8-10. The underlying tax liability for 2011 arises from the unreported deemed distributions as determined by the IRS' AUR program. The IRS issued a notice of deficiency for 2011 to petitioners on IMay 12, 2014. Petitioners did not seek redetermination of the IRS' proposed deficiency for 2011 by timely filing a petition 10 with this Court. Petitioners did not allege in the Form 11 12153, during the CDP hearing, in their petition, or 12 during the hearing on respondent's modion that they did 13 not receive the notice of deficiency or that it was not 14 mailed to their last known address. Petitioners therefore 15 16 17 18 19 20 21 had a prior opportunity to challenge the underlying tax liability for 2011 and may not challenge the underlying tax liability in this case. B. No Abuse of Discretion Where the validity of the underlying tax liability is not properly at issue, the Court reviews all other determinations by the Appeals Office for abuse of 22 discretion. Sego v. Commissioner, 114 T.C. 604, 610 23 (2000); Goza v. Commissioner, 114 T.C at 182. In 24 determining whether there was an abuse of discretion, the 25 Court considers whether the determination was arbitrary, (973)406-2250|operati ns@escribers.netlwwyr.eseribers.net capricious, or without sound basis in fact or law. See, e.g., Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006); Woodral v. 17 Commissioner, 112 T.C. 19, 23 (1999). 1. Collection Alternatives Petitioners requested an installment agreement in the Form 12153 and placement in currently not collectible status during the CDP hearing. In determining whether there was an abuse of discretion the Court does not conduct an independent review and substitute its judgment for that of the settlement officer. Murphy v. 1 2 3 4 5 6 7 8 9 10 11 12 Commissioner, 125 T.C. at 320. Rather, if the settlement 13 officer follows all statutory and administrative 14 guidelines and provides a balanced decision, the Court 15 will not reweigh the equities. Link v. Commissioner, T.C. 16 Memo. 2013-53, at *12. 17 18 19 The Internal Revenue Manual (IRM) provides guidance for determining whether a tax account should be placed in currently not collectible status. A tax account 20 may be placed in currently not collectible status for a 21 variety of reasons, including for hardship. See IRM pt. 22 23 24 25 5.16.1.2(1) (Jan. 1, 2016). "A hardship exists if a taxpayer is unable to pay reasonable basic living expenses." IRM pt. 5.16.1.2.9(1) (Aug. 25, 2014). A hardship determination is made on the basis of the BEREB 973)406-2250|operations@escribersaiet|vævnescribersnet 18 1 2 3 4 5 6 7 8 9 taxpayer's asset, equity in those assets, income, and expenses generally reported on Form 433-A. Id. Hardship cases generally involve taxpayers with no income or assets, no equity in assets, or insufficient income to make any payments without causing hardship. Id. The IRM further provides that "[a]n account should not be reported as CNC [(currently not collectible)] if the taxpayer has income or equity in assets, and enforced collection of the income or assets would not cause hardship." Id. 10 Here, on the basis of the information 11 petitioners reported in the Form 433-A, the SO determined 12 13 that petitioners did not qualify for placement in currently not collectible status because they had equity 14 in assets exceeding the 2011 tax liability as well as 15 disposable monthly income of $198. Instead the SO offered 16 17 to establish a tiered installment agreement starting at $198 per month, the difference between petitioners' then 18 monthly income and monthly expenses. The Court 19 understands the tiered installment agreement to be an 20 installment agreement where the amount of the installments 21 would start at $198 per month for the first year and would 22 23 24 later increase if petitioners' disposable monthly income increased. Petitioners rejected the proposed tiered installment agreement. Petitioners did not propose a 25 different installment agreement or a different per month cribers (973)406-2250|operations@escribersmet|www.escribers.net amount. The Court concludes that the Appeals Office did not abuse its discretion in denying petitioners' requests for placement their account in currently not collectible 19 and for an installment agreement. 2. Lien Withdrawal In the Form 12153 petitioners requested a lien withdrawal. In his motion respondent contends that petitioners failed to provide documentation and failed to raise the issue during the CDP hearing. The material facts as to this issue are not in dispute. The Court can 1 2 3 4 5 6 7 8 9 10 11 12 only consider on review an issue that was properly raised 13 at the CDP hearing. Sec. 301.6320-1(f)(2), Q&A-F3, 14 Proced. & Admin. Regs. Petitioners did not request a 15 withdrawal of the notice of Federal tax lien during the 16 17 CDP hearing and did not provide the SO with any documentation to support a withdrawal of the notice of 18 Federal tax lien filing. The SO therefore did not abuse 19 her discretion in denying petitioners' request for a 20 withdrawal of the notice of Federal tax lien filing. 21 22 23 C. Verification The Court concludes that the SO properly determined that the requirements of applicable law and 24 administrative procedure were met. The SO concluded that 25 the IRS' decision to file and not withdraw the notice of (973)406-2250|operations@escriberssnet|wwynescribers.net 20 1 2 3 4 5 6 7 8 9 Federal tax lien appropriately balanced the need for efficient collection of taxes with petitioners' concern regarding the intrusiveness of the collection action. Petitioners have not advanced any arguments or set forth specific facts that would allow the Court to conclude that the determination to sustain the IRS' decision to file and not withdraw the notice of federal tax lien was arbitrary, capricious, or without sound basis in fact. Accordingly, the Court holds that the Appeals Office did 10 not abuse its discretion in sustaining the IRS' decision 11 12 13 14 15 to file and not withdraw the notice of federal tax lien at issue in this case. VIII. The Court concludes that there is no genuine dispute of material fact in this case and that respondent 16 is entitled to a decision as a matter of law. 17 Respondent's motion will be granted and an appropriate 18 order will be entered to that end. 19 20 IX. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT 21 AND OPINION IN THIS CASE. (Whereupon, at 9:28 a.m., the above-entitled matter was concluded.) 22 23 24 25 cribers (973)406-2250|operations@escribersmetj www.escribersnet