TAX COURT OPINION

Case: Douglas Anthony Herndon
Docket Number: 8793-11SL
Judge: Laro
Opinion Type: bench
Filed: 01/18/2013
Pages: 15

SEC UNITED STATES TAX COURT WASHINGTON, DC 20217 DOUGLAS ANTHONY HERNDON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 8793-11SL. ) ) ) ) ) O R D E 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge David Laro at Phoenix, Arizona, containing his findings of fact and opinion rendered at the trial session at which this case was heard. In accordance with the Oral Findings of Fact and Opinion, an Order and Decision will be issued granting respondent's Motion for Summary Judgment. (Signed) David Laro Judge Dated. Washington, D.C. January 18, 2013 SERVED Jan 23 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 25 Bench Opinion by Senior Judge David Laro December 10, 2012 Douglas Anthony Herndon v. Commissioner Docket No. 8793-11SL THE COURT: The Court has decided to render Oral Findings of Fact and Opinion in this case, and the following are the Court's oral findings of fact and opinion. This bench opinion is made pursuant to the authority granted by section 7459 (b) and Rule 152. This case was heard pursuant to the provisions of section 7463. Pursuant to the provisions of 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. Unless otherwise indicated, section references are to the Internal Revenue Code, and Rule references are to the Tax Court Rules of Practice and Procedure. Petitioner refers to Douglas Anthony Herndon, SO Baker refers to Settlement Officer Paul Baker, SO Padua refers to Settlement Officer Kristine Padua. IRS refers to the Internal Revenue Service, and Appeals refers to the IRS Office of Appeals. Petitioner resided in Arizona when he filed the petition. This case is now before the Court on 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 respondent's motion for summary judgment under Rule 121. The Court ordered petitioner to respond to the 3 motion, but he failed to do so. The record shows 4 5 6 7 8 9 10 11 there is no genuine dispute of material fact and a decision may be rendered as a matter of law. We will grant respondent's summary judgment motion. Background On or around September 27, 2007, petitioner and respondent entered into an Offer in Compromise (OIC) agreement to compromise unpaid 2003 and 2004 tax liabilities totaling $11,565.96 for $3,000. In 12 October 2008, respondent issued two tax refund checks 13 14 15 16 17 18 19 20 21 22 23 24 25 for 2007 to petitioner in the aggregate amount of $2,0017.78. Despite the fact that the OIC and a letter from the IRS accepting the compromise offer clearly stated that petitioner must return to the IRS any tax refund for tax periods extending through 2007, petitioner kept the checks and deposited them into his bank account. On or about February 2, 2009, respondent sent a potential default letter to petitioner, warning petitioner that the OIC agreement would default if he did not return the tax refunds. By a letter sent on or about April 3, 2009, respondent determined that petitioner defaulted on the OIC because petitioner had not returned the two 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 tax refund checks. Petitioner contends he did not receive either letter. Consequently, respondent reinstated the original 2003 and 2004 tax liabilities less the amount petitioner had paid for those years. On or about August 10, 2010, respondent filed a,Notice of Federal Tax Lien (NFTL) with the 7 Maricopa County Recorder to secure payment of the 8 outstanding tax liabilities and sent to petitioner a 9 Notice of Federal Tax Lien Filing and Your Right to a 10 Hearing under IRC 6320. In response, petitioner 11 submitted a Request for a Collection Due Process or 12 Equivalent Hearing (CDP request). The CDP request 13 14 15 16 17 18 did not propose a collection alternative or request another form of relief, but stated only that petitioner could prove he had already paid his taxes for 2003 and 2004. After the Collection Due Process hearing (CDP hearing), conducted by SO Padua, respondent sustained the filing of the NFTL in a 19 Notice of Determination Concerning Collection 20 Action(s) under Section 6320 and/or 6330 dated March 21 22 23 18, 2011 (Notice of Determination). On April 13, 2011, petitioner filed a petition with this Court, asking us to review the 24 Notice of Determination. The petition alleged that 25 petitioner had conformed to the conditions stated in 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 the OIC agreement for 2003 and 2004 and that he did not know about the default until SO Padua explained during a telephone conference on February 8, 2011, why petitioner's failure to return the refund checks caused the OIC agreement to default and respondent to reinstate the original tax liabilities less the amounts petitioner had already paid for those years. OØn January 20, 2012, the Court remanded the case to Appeals in order to further consider whether the OIC agreement should have defaulted. After the conclusion of this second CDP hearing (second CDP hearing), conducted by SO Baker, respondent issued a Supplemental Notice of Determination on May 17, 2012, and again sustained the filing of the NFTL, finding that the OIC agreement was properly terminated. Discussion Summary judgment may be granted with respect to all or any part of the legal issues in controversy where the record establishes "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). As the moving party, respondent bears the burden of proving that there is no genuine dispute of material fact, and factual inferences are viewed in the light most favorable to petitioner as 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 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 the nonmoving party. Where a motion for summary judgment is made, an adverse party "must set forth specific facts showing that there is a genuine dispute for trial." In the instant proceeding, respondent supported the motion with the pleadings, a declaration from SO Baker, and various exhibits. Despite the Court's order, petitioner did not respond to respondent's motion. Accordingly, we conclude that this case is ripe for summary judgment. Because petitioner's underlying tax liability is not properly at issue, the Court reviews respondent's determinations in the CDP hearing only for abuse of discretion. Giamelli v. Commissioner, 129 T.C. 107, 111 (2007). That is, whether the determinations were arbitrary, capricious, or without sound basis in fact or law. There are two issues for decision. First, 18 whether respondent abused his discretion when he 19 20 21 22 23 24 25 terminated the OIC agreement for 2003 and 2004 and reinstated the original tax liabilities for those years. Second, if respondent properly terminated the OIC agreement, whether he abused his discretion when he sustained the filing of the NFTL. We conclude that he did not abuse his discretion in either instance. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 I. Respondent did not abuse his discretion when he terminated the OIC agreement upon petitioner's default An agreement compromising unpaid taxes is a contract governed by legal principles applicable to contracts. The cardinal rule of contract interpretation is to ascertain and give effect to the contracting parties' intention ln a manner consistent 9 with established legal principles. When the language 10 11 12 13 14 in a contract "is so precise, and the intention which it manifests is so evident," courts must effectuate that intention by, in the case of a breach of contract, providing a remedy to which the injured party is entitled under the terms of the contract. 15 United States v. Lane, 303 F.2d 1, 4 (5th Cir. 1962). 16 17 18 19 20 The language in the OIC could not have spelled out petitioner's obligations clearer. In pertinent parts, it states: "As additional consideration beyond the amount of my/our offer, the IRS will keep any refund, including interest, due to 21 me/us because of overpayment of any tax or other 22 23 24 25 liability, for tax periods extending through the calendar year in which the IRS accepts the offer." It then goes on to say, "I/We will return to the IRS any [such] refund." Petitioner made the OIC based on 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 "doubt as to collectibility" and presumably submitted the necessary financial information to support his offer. The parties must then have reached the settled amount based on petitioner's reasonable collection potential known at the time but without respondent having the benefit of knowing any tax refunds that the IRS had yet to determine or issue. See Internal Revenue Manual 5.8.5.1 (09-23-2008). The contracting parties' intention is thus abundantly clear: respondent was willing to settle the unpaid taxes of over $11,000 for (1) $3,000 directly out of 12 petitioner's pocket and (2) whatever refund to which 13 petitioner would have been entitled through 2007. 14 Without the refunds as the additional consideration, 15 petitioner would have been able to compromise more 16 17 18 19 20 21 22 23 24 25 than $11,000 of unpaid tax liability for $998.22 (the $3,000 payment less the $2,001.78 in tax refunds), an exchange that is clearly not what respondent had bargained for. Hence, the additional consideration goes to the essence of the contract, and petitioner's failed performance is material, discharges respondent from further performance, and entitles him to remedies provided in the OIC. Trout v. Commissioner, 131 T.C. 239, 252 (2008); Williston on Contracts, § 63:3 (4th ed.). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 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 The OIC also specifically states what the remedies would be if petitioner failed to perform. In the case of nonperformance, the OIC provides for four possible remedies, one of which is that respondent may "file suit or levy to collect the original amount of the liability, without further notice of any kind." The filing of the NFTL is such remedy. Any claim by petitioner that he was unaware of his contractual obligations is untenable. By the time he signed the OIC that respondent accepted, he had already submitted two other OICs that respondent had previously rejected, and those OICs contained the identical language recited above. In addition, respondent's letter accepting petitioner's offer also stated clearly that respondent would retain any refunds or credits through 2007, including those received in 2008. It further provided that respondent may file suit or levy to collect the original amount of tax liability without having to give any further notice. Petitioner was charged with knowing the terms and conditions of the OIC and learning the contents of the written instrument before he signed it. If petitioner failed to read the contract or otherwise learned its contents, he 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company signed the contract under the peril of being bound by 11 that which he signed. Williston on Contracts, § 70:113 (4th ed.). Petitioner complained that he would have returned the refund checks if he had actually received the potential default letter or the actual default letter. This argument misses the point because under the terms of the OIC, respondent was not obligated to warn petitioner about potential default as the OIC clearly stated that he may terminate the OIC and pursue to collect the compromised liability "without further notice of any kind." Thus, petitioner's nonperformance may not be excused simply because he did not receive respondent's potential default and actual default letters. See United States v. Feinberg, 372 F.2d 352, 357-358 (3rd Cir. 1967). Because petitioner's obligation to return his 2007 tax refunds goes to the essence of the OIC agreement, his nonperformance is material and entitles respondent to the remedies provided in the contract. Under the contract, respondent may terminate the OIC agreement without notice to petitioner. Accordingly, we conclude that respondent did not abuse his discretion when he terminated the 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.CapitaIReportingCompany.com Capital Reporting Company 12 contract and reinstated petitioner's original tax liabilities for 2003 and 2004. II. Respondent did not abuse his discretion when he sustained the filing of the NFTL Our conclusion that respondent did not abuse his discretion in terminating the OIC agreement does not end our analysis here. See Trout v. Commissioner, 131 T.C. at 254. Section 6330 (c) (3) (A) required respondent to verify that all applicable law and administrative procedure had been met, and section 6330(c) (3) (B) required respondent to address any issues petitioner raised during the CDP hearing regarding any appropriate spousal defenses, the appropriateness of the collection action, and any collection alternatives petitioner proposed. In addition, section 6330(c) (3) (C) required respondent to balance the need for the efficient collection of taxes with the legitimate concern that collection be no more intrusive than necessary. We are satisfied that respondent has met his obligations under section 6330(c) (3). The Supplemental Notice of Determination showed that SO Baker had verified all legal and procedural requirements in terminating the OIC. SO Baker reviewed the contents of the OIC and 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 respondent's acceptance letter. He inspected the two cancelled checks and verified that petitioner signed. and deposited them. SO Baker also verified that petitioner had not returned the tax refunds to the .13 IRS. In sustaining the NFTL, SO Baker's considered petitioner's claim during the second CDP hearing that the remaining compromised liability may not be collectible. During the hearing, SO Baker offered to place the collection action in currently- not-collectible (CNC) status if petitioner would provide a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and supporting financial documents. But petitioner never provided the requested form or information. Thus, SO Baker justifiably determined that CNC status would not be an appropriate relief for petitioner. During the second CDP hearing, petitioner requested that the unreturned 2007 tax refunds be taken from his first time home buyer credit to which he was entitled in 2010, that his 2003 and 2004 tax liabilities be considered paid in full based on the OIC, and that the tax lien be removed. Construing the request in the light most favorable to 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 petitioner, petitioner might have very well attempted 14 to propose a collection alternative whose terms included respondent reviving the OIC. But to properly propose any collection alternative, petitioner must submit a Form 656, Offer in Compromise, with any necessary documentation. But petitioner never submitted such form or provide any information necessary for respondent to consider any collection alternative. Thus, the issue was not properly before Appeals, and respondent need not consider it. Finally, SO Baker determined that the filing of the NFTL balanced the need for the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 efficient collection of taxes with the concern that 15 16 17 18 19 it be no more intrusive than necessary. The record shows respondent did not terminate the OIC agreement lightly. Respondent first waited three months after petitioner breached the contract to send petitioner a potential default letter. Respondent waited for two 20 more months for a response from petitioner before he 21 22 23 24 determined the OIC agreement was in default and terminated it. Respondent then allowed more than a year to go by before he sought to collect the outstanding liability through the filing of the NFTL. 25 While petitioner claims that he never received the· 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 potential default and the actual default letters, we cannot deny the fact that respondent had made a good faith effort to bring the OIC out of default. While it was still well within SO Baker's discretion to · 5 excuse petitioner's breach and reinstate the OIC 6 7 8 9 10 11 12 13 14 15 agreement, he was justified in not doing so because after having terminated the OIC agreement, respondent could reinstate it only as a collection alternative. But he was unable to do so because petitioner failed to provide any information that would paint a clearer picture of petitioner's then ability to pay. Thus, we do not see any abuse of respondent's discretion.in sustaining the filing of the NFTL. See Trout v. .Commissioner, 131 T.C. at 255. We hold that Appeals did not act 16 arbitrarily, capriciously, or without sound basis in 17 18 19 20 21 22 23 'fact or law in sustaining the termination of the OIC agreement and the filing of the NFTL. We will therefore issue an Order and Decision granting .respondent's motion for summary judgment, sustaining Appeals' determination, and allowing respondent to proceed with the collection action that is the subject of this proceeding. This concludes the 24 Court's Oral Findings of Fact and Opinion in this 25 case. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company . (Whereupon, at 11:18 a.m., the above- entitled matter was concluded.) 16 1 2 3 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